REASONS FOR RULING

1                     The plaintiff as trustee of the Professional Capital Investments Equities Trust (the Trust), seeks declaratory orders that the first defendant, as the former trustee of the Trust, contravened ss 912A and 993C of the Corporations Act 2001 (Cth) (the Act) and reg 7.8.02(1) of the Corporations Regulations 2001 (Cth) (the Regulations).

2                     The Plaintiff also seeks declaratory orders that the third defendant, as the administrator of the fund of the Trust, contravened s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act), s 993C of the Act and reg 7.8.02(1) of the Regulations.

3                     The declaratory orders are sought together with equitable compensation against the first and second defendants or alternatively damages, costs and interest against each of the defendants.

4                     By notice of motion of 6 August 2010 the third defendant sought orders striking out paragraphs [55], [56], [94] and [98] of the plaintiff’s amended statement of claim.

5                     The plaintiff filed on 20 October 2010 proposed further amendments to the amended statement of claim in response to the matters raised in that motion. As a result of those proposed amendments, the third defendant no longer pressed its strike out application in relation to [55] and [56] of the proposed further amended statement of claim.

6                     The paragraphs that remain in contention are [94] and [98]. The third defendant contended that [94] and [98] do not disclose a reasonable cause of action, so as to satisfy O 11 r 16 of the Federal Court Rules (FC Rules) and alternatively that they are prejudicial and embarrassing.

The Pleaded Claims

7                     The Trust was established on 1 July 2005 as a fixed unit trust. It offered units to the public as a wholesale investment scheme by way of an Information Memorandum dated 30 April 2005 (IM). As a fixed price unit trust all units ranked equally in relation to both the income and the capital of the Trust.

8                     The Trust is governed by a constitution, dated 1 July 2005, which performs the function of the trust deed of the Trust (the Constitution). The Constitution imposed certain obligations on the first defendant as trustee, including as to the valuation of Trust assets for the purpose of determining redemption of units by unit holders.

9                     The first defendant at relevant times was the trustee of the Trust, and held an Australian Financial Services Licence (AFSL). On 16 March 2009 it was placed into voluntary administration. By order of the Supreme Court of South Australia on 31 March 2009 it was removed as the trustee. It was then placed into liquidation on 14 April 2009.

10                  The second defendant was the sole director, employee and member of the first defendant, as well as the director of three investee companies of the Trust, Firewire Limited (Firewire), CommStrat Limited and Haley (Australia) Pty Limited (Haley). He was declared bankrupt on 15 June 2009 on his own application.

11                  By written agreement, dated 31 May 2005 (the Agreement), the third defendant was engaged by the first defendant to provide administration, secretarial and accounting services necessary for reporting, financial controls and compliance with the first defendant’s obligations under the IM, the Constitution and the Act. From December 2005 the third defendant acted as agent of the first defendant in the provision of services in connection with the performance by the first defendant of its obligations as custodian of the Trust (as defined in reg 7.6.01(k) of the Regulations).

12                  In June 2007 the first defendant provided to the Australian Securities and Investments Commission (ASIC) an Enforceable Undertaking relating to failures to comply with its AFSL. Following the Enforceable Undertaking, the first defendant issued an updated IM dated 1 August 2007. From July 2007 the third defendant was engaged to advise the first defendant on its compliance with the Enforceable Undertaking and to monitor the level of Surplus Liquid Funds to ensure they complied with that undertaking. 

13                  On 30 December 2008 the Trust received a payment of $12,392,968.60 from the realisation of the sale of a Trust asset, being the Trust’s holding in Haley. The third defendant at that time was aware that the second defendant was planning to set up a second unregistered managed investment scheme with a business associate, who controlled the Trust’s largest investor Christie Qld Pty Ltd (Christie), and that the second defendant sought that investor’s participation in the proposed new scheme, and that, for that purpose, that investor was seeking to redeem Christie’s units in the Trust for $4,500,000.

14                  The third defendant in late December 2008 made payment of $4,500,000 from Trust funds to Christie, knowing the purpose of its redemption of units was to invest in the proposed new scheme, at an overvalue of the units, and more than Christie was entitled to receive for the redemption of the units. The third defendant made the payment in two tranches, first of $2,823,107.40 to another entity associated with the investor, per the second defendant’s direction, and not to Christie directly. The second tranche was a payment to Christie of $1,676,892.60.

15                  On 15 January 2009 the second defendant directed the third defendant to make a payment of $5,400,000 out of the Trust’s funds to the investor. This payment was recorded as a loan to the first defendant in its capacity as trustee of the second fund to be set up for the proposed new scheme. The third defendant was aware that the second fund had not been established, had no units, had no beneficiaries and had no property, and therefore had no capacity to repay this loan, that no loan or transaction documentation had been executed, and that the Trust would not have the liquidity to distribute income and pay out redemptions to other unit holders until the loan had been repaid.

16                  The plaintiff’s case against each of the first three defendants arises out of these two transactions: the redemption of Christie’s units in the Trust at a significant overpayment of $4,500,000; and, secondly the loan to the investor of $5,400,000.

17                  The plaintiff claims the third defendant redeemed the units of the unit holder Christie for $4,500,000 million, at an overvaluation of $773,901.36. It alleges that the overvaluation arose out of a failure to write down the value of the Trust’s investments in Firewire by $3,820,659 or 23 cents per unit, as required for the redemption of the Christie units to be carried out in accordance with the valuation methodology prescribed by the Constitution.

18                  The plaintiff further claims the third defendant paid out $5,400,000 of Trust funds directly to the investor’s bank account, the value of which was immediately lost. It is alleged that this payment served no proper commercial purpose for the Trust, was for the benefit of the first defendant and not the Trust, that there were no good grounds for believing that it could be repaid, and that it was unsecured.

19                  In summary, with respect to both of these transactions, it is alleged that the first defendant breached the Constitution, the Act, the Regulations, and committed a breach of trust. Further it is alleged that the third defendant breached the Agreement in implementing the redemption of the Christie units at the value paid and by implementing the payment to the investor on behalf of the first defendant, as both transactions were contrary to the requirements of the Constitution and the Act.

Consideration

20                  There is no issue about the principles to be applied in considering the third defendant’s motion.  The Court should proceed with caution before striking out a statement of claim, or any part of it: Murex Diagnositics Australia Pty Limited v Chiron Corporation (1995) 55 FCR 194.

21                  In Banque Commerciale SA, En Liquidation v Akhil Holdings Limited (1990) 169 CLR 279 at 286, Mason CJ and Gaudron J said:

The function of pleadings is to state with sufficient clarity the case that must be met.  In this way, pleadings serve to ensure the basic requirement of procedural fairness that a party should have the opportunity of meeting the case against him or her and, incidentally, to define the issues for decision. (Reference omitted.)

Weinberg J in McKellar v Container Terminal Management Services Ltd (1999) 165 ALR 409 at 417-421 has considered the terms of O 11 of the FC Rules and usefully discussed a number of decisions dealing with O 11. I respectfully adopt his Honour’s observations. Consequently, in considering the adequacy of the pleadings, the Court will adopt a sensible and robust approach.

22                  Paragraph [94] in essence contains two main allegations.

23                  The first allegation is that the third defendant was in breach of the Agreement as, while administering the Trust, the redemption payment was made without a valuation in conformity with the Constitution, and specifically the unit price calculation undertaken by the third defendant which was contrary to the requirements of the Constitution. The proposed amendments provide particulars that, had the unit price calculation been undertaken in accordance with the Constitution, the carrying value of the Firewire investment should have been reduced by $3,820,659 or 23 cents per unit before the redemption was paid, as particularised in the expert report of Mark Vartuli dated 30 September 2010. The second allegation is that the third defendant was in breach of the Agreement as it failed to inform the second defendant in writing, as required by clause 8.2 of the Agreement, that the payment of the redemption amount to Christie was without a valuation in breach of the Constitution and the Act.

24                  The third defendant contends that [94] is flawed because it really complains that the first defendant was responsible for the valuation of the net assets of the Trust, and that the plaintiff has not anywhere pleaded that the third defendant was responsible for the correctness of that valuation for the purposes of the redemption. It further complains that [94] does not plead material facts which would constitute a breach or breaches by it of a specific term or terms of the Agreement. It raises the following particular complaints in relation to each sub-paragraph of [94] and the sub-paragraphs cross-referenced therein:

·                    [94.1.1] and [94.1.2] do not correlate with the contractual obligations pleaded in respect of the clauses identified in [94.1.3], namely 5.2, 5.3(e) and 5.3(m); and that those sub-paragraphs do not plead that third defendant was obligated to obtain a valuation from an approved valuer prior to paying out a redemption, or how it was required under the Constitution to prepare a unit price calculation or how the price was calculated contrary to the Constitution;

·                    [94.2.1] and [79.4] do not plead any obligation to appoint an approved valuer, and [94.2.1] and [79.8] do not plead how unit holders were treated unequally and unfairly or how the first defendant did not exercise its powers in the best interests of the Trust;

·                    [94.2.2] and [82.1] do not plead how the first defendant acted dishonestly, unfairly or had inadequate resources or was incompetent;

·                    [94.2.3] does not plead how the redemption was in breach of s 993C of the Act;

·                    [94.3] does not identify what provision of the Constitution was breached by the third defendant or how;

·                    [94.4] does not identify which of the 11 requirements of s 912A of the Act was breached by the third defendant or how;

·                    [94.5] does not identify which of the 6 obligations imposed by reg 7.8.02(1) of the Regulations was breached by the third defendant or how;

·                    [94.6] to [94.8] are irrelevant because there is no plea of an obligation imposed by clauses 6.3(i), 6.1(a) or 6(c); and

·                    [94.9] and [94.10] do not plead how the third defendant acted negligently.

25                  In my view, as the plaintiff contended, [94] of the amended statement of claim clearly pleads that the payment of the redemption by the third defendant, while administering the Trust on behalf of the first defendant, was made without a valuation that was in conformity with the Constitution and specifically that the unit price calculation undertaken by it was contrary to the requirements of the Constitution. Elsewhere in the amended statement of claim, there is detail as to why the third defendant was obligated to provide administration services to the Trust which would conform to the Constitution, and to provide such services in a manner that would ensure the first defendant could comply with its obligations under the Constitution and the Act. Whether those allegations are made out is, of course, a matter later to be decided. I also consider that the pleading identifies the failure by the third defendant to warn the second defendant, as the director of the first defendant, that the payment of the redemption was made without a valuation in conformity with the Constitution and the Act constituting a breach of clause 8.2 of the Agreement.

26                  The plaintiff contends that the relevant provisions of the Constitution are pleaded at [7] and [8], and specific reasons of why those provisions are said to have been breached are pleaded at [79] and why the provisions of the Act are said to have been breached are pleaded at [82]. I accept that contention. In short, I am satisfied that [94] in relation to the first allegation (read together with [7], [8], [29.3], [29.4.2], [29.4.3] and [79]) discloses a reasonable cause of action, and is sufficiently clear and thus is not prejudicial or embarrassing. I am also satisfied that [94] in relation to the second allegation (read together with [7], [8], [29.7], [79] and [82]) discloses a reasonable cause of action, and is sufficiently clear and thus is not prejudicial or embarrassing.

27                  However, I think that [94] should be more specific in relation to two elements. The first is the reference in [94] to an obligation to appoint an ‘approved valuer’ to value the Trust’s assets before any redemption is made. Although the obligation to value the assets is clearly specified in [79], with reference to clause 17 of the Constitution (and [94] cross-references [79]), [79.4] refers to the obligation to appoint an approved valuer without pleading how this obligation arises. At [8.4] it is pleaded that the first defendant “shall have the right at any time to instruct an Approved Valuer.” This is not an express obligation as alluded to in [94]. This issue can be remedied by the plaintiff specifying which express (if any) or implied term of the Constitution gives rise to such an obligation.

28                  The second element is in relation to [94.2.3] which alleges that the third defendant has contravened s 993C of the Act. That section provides that it is an offence to contravene a requirement in the Regulations. It has not been specified which regulation or regulations have been contravened. The reference to regulation 7.8.02(1) at [94.5] may be the regulation to which the plaintiff refers. However this is not clear. The submissions do not clarify the plaintiff’s intention.  Again this can be remedied by the plaintiff specifying which regulation or regulations it claims to have been breached, thus putting the defendants on notice as to the claim under s 993C of the Act.

29                  As to [98], the third defendant contended that it discloses no reasonable cause of action and intermixes alleged breaches in a manner which is prejudicial and embarrassing.

30                  Paragraph [98] pleads that by the conduct referred to in [47] to [69] the third defendant failed to discharge duties or standards of care required of a custodian of the property of the Trust prescribed by:

·                    Part 7.8 Division 2, Subdivision A of the Act;

·                    Reg 7.8.01 and 7.8.02 of the Regulations; and

·                    ASIC Regulatory Guide 133.4;

as it:    

·                    failed to ensure property of the Trust was not exposed to unnecessary risks;

·                    failed to ensure efficient operational arrangements existed for holding and dealing with property of the Trust;

·                    failed to keep property of the Trust separate from assets and liabilities of other persons or entities;

·                    paid out Trust monies (for redemption) to which the party was not entitled; and

·                    paid out $5,400,000 of Trust monies in manner that first defendant was not authorised

31                  The conduct referred to in [47] to [69] relates to the circumstances of the redemption payment and the particulars of it, as well as the payment of $5,400,000 of Trust monies. The third defendant complains that [98] links these 22 paragraphs of conduct to five allegations of breaches of three instruments, one of which is an entire sub-division of the Act. It says this does not disclose a reasonable clause of action, and the intermixing of all these provisions, with reference to 22 paragraphs of conduct, is prejudicial and embarrassing and should be struck out.

32                  Part 7.8 Division 2, Subdivision A of the Act and reg 7.8.01 and 7.8.02 of the Regulations relate to obligations of financial services licensees. The third defendant complains first that it is not anywhere pleaded that third defendant is a financial services licensee, and second that it does not say what specific provisions and regulations are claimed to apply nor does it plead material facts relating to such provisions or regulations in a  clear way.

33                  ASIC Regulatory Guide 133.4 relates to standards of responsible entities in dealing with the property of a managed investment scheme. The third defendant complains that the plaintiff has not pleaded that third defendant is a responsible entity for the purpose of that clause of the regulatory guide.

34                  The plaintiff contends that [98] relates to breaches of statutory duties as sub-custodian of the property of the Trust and as agent of the AFSL holder. It says those duties, and the fact that it alleges the third defendant is a sub-custodian of the property of the Trust, is sufficiently pleaded at [35] and [36]. The allegations at [98.1] to [98.3] are incidents of the role of a sub-custodian to ensure trust monies are safely maintained, and [98.4] and [98.5] plead that trust money was paid out to parties who were not entitled to it. It says that the case against the third defendant is clear and confined to the redemption payment made at an overvaluation and to the payment whereby $5,400,000 of Trust assets were paid away.

35                  To some degree, I accept the contentions of the third defendant. Reference to Part 7.8 Division 2, Subdivision A, a sub-division of the Act, in my view does not give adequate notice of the particular provisions contravened. The plaintiff ought to specify which of the number of provisions in that sub-division apply. The third defendant is entitled to be notified as to what specific provisions in that sub-division are relied upon, in order to sufficiently know what case it has to answer. I also think the pleading in relation to ASIC Regulatory Guide 133.4 is not sufficient. That clause in the guide relates to the standards applicable to responsible entities, but it is not clearly pleaded that the third defendant is such a responsible entity and thus it is not clear how such a clause applies.  

36                  In my judgment, the appropriate course is to grant leave to the plaintiff to re-plead or refine its pleading to accommodate those concerns.

37                  In other respects I am of the view that [98] sufficiently pleads the case to be confronted. The application of the Regulations specified is clearly set out. At [35] and [36] it is pleaded that the third defendant is a sub-custodian of the trust property, and therefore due to that role it is required to meet the duties set out in those paragraphs. 

38                  I propose to refuse the third defendant’s application to strike out certain paragraphs of the plaintiff’s amended statement of claim but to give the plaintiff leave to file and serve a further amended statement of claim in the terms of its present amended statement of claim but incorporating:

·                    the proposed amendments in the terms provided in the document entitled ‘Plaintiff’s Proposed Amendments to its Amended Statement of Claim’ filed 20 October 2010;

·                    amendments to paragraphs [94.2.1] and or [79.4] specifying which clause of the Constitution it claims has been breached with respect to appointing an approved valuer;

·                    amendments to paragraph [94.2.3] specifying which regulations it claims have been breached;

·                    amendments to paragraph [98] specifying which sections of Part 7.8 Division 2 Subdivision A of the Act it claims have been breached and specifying how the third defendant is a responsible entity within the meaning of ASIC Regulatory Guide 133.4.

39                  The plaintiff in its submissions requested that an order for costs be made against the third defendant. The third defendant’s submissions do not address the issue of costs, but its notice of motion seeks an order that the plaintiff pay its costs of and incidental to the motion. 

40                  Section 43 of the Federal Court Act 1976 (Cth) gives the Court discretion to order costs. This discretion is unfettered, save only that it be exercised judicially and that it not be exercised against the successful party except for some reason connected with the case: Grey v Mango Pre Paid Calling Cards Pty Ltd [2005] FCA 362. The purpose of an order for costs is to compensate the party in whose favour the costs order is made for the costs of the application, and is not to punish the party against whom the order for costs is made: Latoudis v Casey (1990) 170 CLR 534 at 543, 563 and 567; Oshlack v Richmond River Council (1998) 193 CLR 72 at 96.

41                  Although I have refused the application to strike out parts of the amended statement of claim, as I have identified some inadequacies in it that need to be re-pleaded, I do not think it is appropriate to make an order for costs in favour of the plaintiff. Neither the plaintiff nor the third defendant was entirely successful in relation to the application. In the circumstances I consider it appropriate to make no order for costs of the motion.

Associate:

Dated:         19 November 2010