FEDERAL COURT OF AUSTRALIA
Australian Securities and Investments Commission v Cassimatis [2013] FCA 641
IN THE FEDERAL COURT OF AUSTRALIA | |
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Applicant | |
AND: | First Defendant JULIE GLADYS CASSIMATIS Second Defendant |
DATE OF ORDER: | |
WHERE MADE: |
THE COURT ORDERS THAT:
1. Paragraph 1 of the application filed 21 February 2012 is dismissed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
QUEENSLAND DISTRICT REGISTRY | |
GENERAL DIVISION | QUD 574 of 2010 |
BETWEEN: | AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Applicant
|
AND: | EMMANUEL GEORGE CASSIMATIS First Defendant JULIE GLADYS CASSIMATIS Second Defendant
|
JUDGE: | REEVES J |
DATE: | 28 JUNE 2013 |
PLACE: | BRISBANE |
REASONS FOR JUDGMENT
A brief history of Storm and Mr and Mrs Cassimatis
1 Mr Emmanuel Cassimatis and Mrs Julie Cassimatis (the Cassimatises) were the sole executive directors of Storm Financial Limited (Storm). As well, the Cassimatises together held the beneficial ownership of all the shareholding in Storm. It should be noted that while Storm’s name bears the epithet “Limited”, that was a by-product of a proposal developed by the Cassimatises in late 2007 to list Storm as a public company on the Australian Stock Exchange. That proposal was abandoned in early 2008.
2 Storm was founded by Mr Cassimatis in the mid 1990s under the name Cassimatis Securities Pty Ltd. It changed its name to ozdaq Securities Pty Ltd in 2000 and to Storm Financial Pty Ltd in 2004. It was based in Townsville where the Cassimatises lived.
3 Storm met its ultimate fate in early 2009 when it was placed in liquidation on the application of the Australian Securities and Investments Commission (ASIC).
4 Before that time, it held an Australian financial services licence under the Corporations Act 2001 (Cth) and carried on business providing financial planning advice. Until early this century, its financial planning business was largely confined to north Queensland. However, during the six to eight years before 2009, Storm’s business expanded significantly so that, by the time it was placed in liquidation, it was conducting its financial planning business throughout most of Queensland and in many other parts of Australia. In that period, it attracted thousands of customers.
5 ASIC commenced these proceedings against the Cassimatises in late 2010. In them, ASIC seeks a series of declarations to the effect that the Cassimatises, as directors of Storm, each contravened their duties of care and diligence prescribed under s 180(1) of the Corporations Act by permitting Storm to provide financial product advice to 46 (couples or individuals) named Storm customers. ASIC also seeks orders under various provisions of the Corporations Act that the Cassimatises each: pay civil penalties to the Commonwealth; be disqualified from managing corporations; be restrained from holding an Australian financial services licence; and be restrained from providing financial services under such a licence.
The Cassimatises seek summary judgment under section 31A
6 After a successful application in 2011 to strike-out ASIC’s amended statement of claim, the Cassimatises have brought this application directed to ASIC’s case as it is pleaded in its further amended statement of claim (FASC). This application is in two parts. First, it seeks summary judgment in relation to the whole of the proceedings under s 31A(2) of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act). Secondly, and in the alternative, the Cassimatises have again applied to strike-out various parts of ASIC’s FASC. These reasons are confined to the former part of the application, the latter part having been adjourned to await the determination of the former.
The three grounds of the application
7 The Cassimatises contend that ASIC has no reasonable prospects of successfully prosecuting these proceedings. They have relied upon three broad grounds. First, they argue that a breach of s 180(1) of the Corporations Act cannot be established in circumstances where: Storm was at the relevant times solvent; there is no allegation that they conducted the company’s affairs in bad faith; and they conducted the company’s affairs in accordance with the wishes of Storm’s shareholders, viz themselves, as to how they should employ and risk the capital of the company. On this ground, the Cassimatises’ counsel, Mr Doyle SC, placed heavy reliance on the decision of Brereton J in ASIC v Maxwell (2006) 59 ACSR 373; [2006] NSWSC 1052 (Maxwell).
8 The Cassimatises’ second and third grounds rely, in part, upon a construction of s 31A of the Federal Court Act which they claim dictates a two-stage test being applied to their application. Under that two-stage test, the Cassimatises contend that they are first required to establish a prima facie case that ASIC has no reasonable prospects of success in these proceedings. If they are able to do that, they contend that ASIC is then required, in the second stage, to establish that there are specific factual or evidentiary disputes that respond to their prima facie case and therefore make it necessary to conduct a trial of the proceedings. In support of these grounds, the Cassimatises have each sworn affidavits which they claim establish that no reasonable director in their position at the relevant times would have been aware of the risks to Storm that are now pleaded against them by ASIC. In the alternative, as their third ground, the Cassimatises argue that even if ASIC is able to establish that a reasonable director in their position at the relevant times would have been aware of the pleaded risks to Storm, ASIC has no reasonable prospect of establishing that such a reasonable director would have concluded that those risks were unacceptably high.
ASIC’s response to the three grounds of the application
9 ASIC does not dispute that, during the period encompassing the allegations in its FASC, Storm was solvent. Furthermore, ASIC does not raise any allegation of bad faith against the Cassimatises, nor does it dispute that they were, at the relevant times, the sole executive directors of and beneficial shareholders in Storm. However, ASIC contends that the Cassimatises’ consent as the shareholders of the company to the course they took as its directors does not in and of itself absolve them of their statutory duties as directors under s 180(1) of the Corporations Act. Instead, ASIC contends this circumstance is but one of a large number of relevant factual circumstances that has to be considered by the Court in determining whether or not the Cassimatises breached their statutory duties under s 180(1) of the Corporations Act.
10 In response to the second and third grounds, ASIC contends there is no support in the authorities for a two-stage test under s 31A. It contends that the proposition advanced by the Cassimatises may arise in particular situations, but only where one party has adduced evidence of a fact that is critical to the other party’s success in the proceedings, for example an alibi, and the opposing party has failed to contradict that evidence. ASIC contends that situation does not arise in this application. To the contrary, it contends there is a multitude of facts in issue in these proceedings, including the involvement of the Cassimatises in establishing the Storm Model (as it is defined in the FASC: see [95] below) and permitting Storm to give advice in accordance with that model to the 46 investors identified in its FASC.
Three issues to be determined
11 Three broad issues therefore fall to be determined. They are:
(a) What does s 31A of the Federal Court Act require of the Cassimatises and ASIC in this application?
(b) Taking into account those requirements, does ASIC have reasonable prospects of successfully prosecuting these proceedings in light of the evidence provided by the Cassimatises in their affidavits?
(the second and third grounds of the application (see [8] above))
(c) Taking into account those requirements, does ASIC have reasonable prospects of successfully prosecuting these proceedings, viz to establish that the Cassimatises breached their statutory duties as directors under s 180(1) of the Corporations Act in circumstances where:
(i) it is accepted that Storm was at all relevant times solvent;
(ii) it is accepted that at all relevant times the Cassimatises were the sole executive directors of, and beneficial shareholders in, Storm; and
(iii) ASIC’s case is that the Cassimatises exposed Storm to the foreseeable risks of it contravening various provisions of the Corporations Act?
(the first ground of the application (see [7] above))
The first issue: section 31A of the Federal Court Act
12 Section 31A of the Federal Court Act provides:
(1) The Court may give judgment for one party against another in relation to the whole or any part of a proceeding if:
(a) the first party is prosecuting the proceeding or that part of the proceeding; and
(b) the Court is satisfied that the other party has no reasonable prospect of successfully defending the proceeding or that part of the proceeding.
(2) The Court may give judgment for one party against another in relation to the whole or any part of a proceeding if:
(a) the first party is defending the proceeding or that part of the proceeding; and
(b) the Court is satisfied that the other party has no reasonable prospect of successfully prosecuting the proceeding or that part of the proceeding.
(3) For the purposes of this section, a defence or a proceeding or part of a proceeding need not be:
(a) hopeless; or
(b) bound to fail;
for it to have no reasonable prospect of success.
(4) This section does not limit any powers that the Court has apart from this section.
(5) This section does not apply to criminal proceedings.
13 The terms of this section are reflected in rule 26.01 of the Federal Court Rules 2011. Save that s 31A(3) is not contained in rule 26.01(1), the section and the rule otherwise contain identical tests: see Zippo Manufacturing Co v Jaxlawn Pty Ltd [2011] FCA 1125 at [20] per Gordon J.
14 In determining the approach I should take to s 31A in the context of this application, I will:
consider the principles developed in the High Court authority of Spencer v Commonwealth (2010) 241 CLR 118; [2010] HCA 28 (Spencer);
review the relevant authorities of this Court on the operation of s 31A;
summarise the principles I consider to be applicable to this application; and
reach a conclusion regarding the two-stage test propounded by the Cassimatises.
Spencer v Commonwealth – The seminal authority
15 The seminal authority on the operation of s 31A of the Federal Court Act is Spencer. In Spencer, the High Court unanimously held that a proceeding that had been dismissed under s 31A should not have been so dismissed. Of the three judgments delivered, the two joint judgments each undertook a comprehensive analysis of s 31A. Heydon J delivered a separate judgment, but his Honour considered it unnecessary and undesirable to consider the correct approach to that provision (see at [62]).
16 While both ASIC and the Cassimatises relied on Spencer, ASIC placed greater reliance on the joint judgment of French CJ and Gummow J and the Cassimatises placed greater reliance on the joint judgment of Hayne, Crennan, Kiefel and Bell JJ. In particular, the Cassimatises pointed to the following paragraphs ([52], [53], [56], [58] and [60]) of the joint judgment of Hayne, Crennan, Kiefel and Bell JJ which, they submitted, emphasise the more relaxed test set under s 31A:
52. Second, effect must be given to the negative admonition in sub-s (3) that a defence, a proceeding, or a part of a proceeding may be found to have no reasonable prospect of successful prosecution even if it cannot be said that it is “hopeless” or “bound to fail”. It will be necessary to examine further the notion of “no reasonable prospect”. But before undertaking that task, it is important to begin by recognising that the combined effect of sub-ss (2) and (3) is that the inquiry required in this case is whether there is a “reasonable” prospect of prosecuting the proceeding, not an inquiry directed to whether a certain and concluded determination could be made that the proceeding would necessarily fail.
53. In this respect, s 31A departs radically from the basis upon which earlier forms of provision permitting the entry of summary judgment have been understood and administered. Those earlier provisions were understood as requiring formation of a certain and concluded determination that a proceeding would necessarily fail. That this was the basis of earlier decisions may be illustrated by reference to two decisions of this Court often cited in connection with questions of summary judgment: Dey v Victorian Railways Commissioners and General Steel Industries Inc v Commissioner for Railways (NSW).
…
56. Because s 31A(3) provides that certainty of failure (“hopeless” or “bound to fail”) need not be demonstrated in order to show that a plaintiff has no reasonable prospect of prosecuting an action, it is evident that s 31A is to be understood as requiring a different inquiry from that which had to be made under earlier procedural regimes. It follows, of course, that it is dangerous to seek to elucidate the meaning of the statutory expression “no reasonable prospect of successfully prosecuting the proceeding” by reference to what is said in those earlier cases.
…
58. How then should the expression “no reasonable prospect” be understood? No paraphrase of the expression can be adopted as a sufficient explanation of its operation, let alone definition of its content. Nor can the expression usefully be understood by the creation of some antinomy intended to capture most or all of the cases in which it cannot be said that there is “no reasonable prospect”. The judicial creation of a lexicon of words or phrases intended to capture the operation of a particular statutory phrase like “no reasonable prospect” is to be avoided. Consideration of the difficulties that bedevilled the proviso to common form criminal appeal statutes, as a result of judicial glossing of the relevant statutory expression, provides the clearest example of the dangers that attend any such attempt.
…
60. Rather, full weight must be given to the expression as a whole. The Federal Court may exercise power under s 31A if, and only if, satisfied that there is “no reasonable prospect” of success. Of course, it may readily be accepted that the power to dismiss an action summarily is not to be exercised lightly. But the elucidation of what amounts to “no reasonable prospect” can best proceed in the same way as content has been given, through a succession of decided cases, to other generally expressed statutory phrases, such as the phrase “just and equitable” when it is used to identify a ground for winding up a company. At this point in the development of the understanding of the expression and its application, it is sufficient, but important, to emphasise that the evident legislative purpose revealed by the text of the provision will be defeated if its application is read as confined to cases of a kind which fell within earlier, different, procedural regimes.
(Emphasis added to identify the particular parts relied upon by the Cassimatises and citations omitted)
17 On the other hand, ASIC relied upon the following paragraphs ([22], [24] and [26]) of the joint judgment of French CJ and Gummow J:
22. In the Federal Court and in the Court of Appeal of Queensland, the criterion of a “reasonable prospect” of success has been understood in analogous statutory settings to mean a “real” rather than “fanciful” prospect. This exegesis adds little to the words of s 31A. The section authorises summary disposition of proceedings on a variety of bases under its general rubric. It will apply to the case in which the pleadings disclose no reasonable cause of action and their deficiency is incurable. It will include the case in which there is unanswerable or unanswered evidence of a fact fatal to the pleaded case and any case which might be propounded by permissible amendment. It will include the class of case in the longstanding category of cases which are “frivolous or vexatious or an abuse of process”. The application of s 31A is not, in terms, limited to those categories.
…
24. The exercise of powers to summarily terminate proceedings must always be attended with caution. That is so whether such disposition is sought on the basis that the pleadings fail to disclose a reasonable cause of action or on the basis that the action is frivolous or vexatious or an abuse of process. The same applies where such a disposition is sought in a summary judgment application supported by evidence. As to the latter, this Court in Fancourt v Mercantile Credits Ltd said :
“The power to order summary or final judgment is one that should be exercised with great care and should never be exercised unless it is clear that there is no real question to be tried”.
More recently, in Batistatos v Roads and Traffic Authority (NSW) Gleeson CJ, Gummow, Hayne and Crennan JJ repeated a statement by Gaudron, McHugh, Gummow and Hayne JJ in Agar v Hyde which included the following:
“Ordinarily, a party is not to be denied the opportunity to place his or her case before the court in the ordinary way, and after taking advantage of the usual interlocutory processes. The test to be applied has been expressed in various ways, but all of the verbal formulae which have been used are intended to describe a high degree of certainty about the ultimate outcome of the proceeding if it were allowed to go to trial in the ordinary way.”
There would seem to be little distinction between those approaches and the requirement of a “real” as distinct from “fanciful” prospect of success contemplated by s 31A. That proposition, however, is not inconsistent with the proposition that the criterion in s 31A may be satisfied upon grounds wider than those contained in pre-existing Rules of Court authorising summary dispositions.
…
26. Where an application under s 31A requires consideration of apparently complex questions of fact, then the caution uttered by Lord Hope is relevant. The importance of those considerations is amplified if the case involves resolution of issues of law and fact, or mixed law and fact.
(Citations omitted)
18 ASIC submitted these paragraphs supported the following propositions and emphasised that, while the test for granting summary judgment or dismissal may have been relaxed under s 31A, it still requires a level of rigour and caution:
(a) the exercise of power to summarily terminate proceedings must always be attended with caution and is not to be exercised lightly;
(b) there must be a high degree of certainty about the ultimate outcome if the matter were to go to trial;
(c) summary judgment should never be exercised unless it is clear that there is no real question to be tried;
(d) complex factual cases are unlikely to be capable of being resolved by summary judgment without conducting a mini-trial on the documents without discovery and oral evidence. Summary judgment can be given in a case in which there is unanswerable or unanswered evidence of a fact fatal to the pleaded case.
(Emphasis in original)
19 The selective quotations from Spencer (above) may tend to suggest that there is a significant difference between the two joint judgments. In my view, the area of difference is quite confined. It is, in my view, this: the joint judgment of Hayne, Crennan, Kiefel and Bell JJ appears to discourage recourse to cases decided under earlier provisions for summary judgment in construing what is required by s 31A (see, for example, at [56]) and eschews any gloss being added to the text of s 31A itself (at [58]), while the joint judgment of French CJ and Gummow J appears to consider those cases to be of some continuing utility and relevance in that task (see, for example, at [24]). However, aside from this, both joint judgments emphasise the necessity for caution in dismissing proceedings summarily (see French CJ and Gummow J at [24] and Hayne, Crennan, Kiefel and Bell JJ at [60]). Furthermore, both joint judgments, in my view, emphasise that the decision is ultimately one for the judge hearing the application to determine in the particular circumstances of the case at hand. Indeed, the joint judgment of Hayne, Crennan, Kiefel and Bell JJ considered that context should be given to the provision “through a succession of decided cases” (see at [60]).
20 More importantly, all three judgments in Spencer ultimately came to the conclusion that the mixed questions of fact and law that were raised by Mr Spencer in those proceedings made it inappropriate for summary determination. The question of law involved the operation of s 96 of the Constitution in the peculiar factual circumstances of those proceedings. That question had been left open by the High Court in an earlier decision of ICM Agriculture Pty Ltd v The Commonwealth of Australia (2009) 240 CLR 140; [2009] HCA 51 (ICM). The ICM decision was delivered about nine months before Spencer and some time after the decisions of both the primary judge and the Full Court. The reasoning in each of the three judgments as to why the proceedings were inappropriate for summary determination is instructive as to the kinds of proceedings that may, or may not, be dealt with under s 31A rather than at a full trial. They are therefore set out in full hereunder as follows.
21 In the joint judgment of French CJ and Gummow J (at [34]):
In fairness to the primary judge and the Full Court, it must be acknowledged that their decisions were made before this Court delivered judgment in ICM. In the light of ICM, and even the current rather stunted version of Mr Spencer's pleading in relation to “scheme or device”, it could not be said, for the purposes of s 31A(2), that he has no reasonable prospect of successfully prosecuting the proceedings. The pleading in that respect raised the possibility of particularisation and/or amendment. That is not to say that, even on the proposed further amended statement of claim, he has a strong case. It is sufficient to say that it is not fanciful, and therefore not a case which he has no reasonable prospect of successfully prosecuting.
(Emphasis added)
22 In the joint judgment of Hayne, Crennan, Kiefel and Bell JJ (at [47]–[48]):
47. The decisions at first instance, and in the Full Court, proceeded from the premise that the existence of any arrangement or understanding of the kind apparently relied on by the applicant was constitutionally irrelevant. But, as has been pointed out, that question was expressly reserved for future consideration by three members of the majority in ICM, and cannot be regarded as foreclosed from argument. It is neither necessary nor appropriate to examine the strength of the argument. It is enough to say that neither the factual question that has been identified, nor the associated constitutional question, can or should be answered at this stage of the proceeding.
48. The factual question depends upon what evidence is adduced. What evidence is adduced may well be affected by what is revealed by further interlocutory processes in the proceeding. The constitutional question may be affected by, even depend upon, the resolution of the factual question. Even if it is not directly affected by what particular facts are found, it is not a question suitable for determination on a summary judgment application.
(Emphasis added and citations omitted)
23 And finally, in the judgment of Heydon J (at [61]):
… three members of the Court [in ICM] placed a question mark over the validity of legislation relating to an “informal arrangement” providing for Commonwealth funding to a State if it acquires property on unjust terms. The applicant has pleaded facts which might attract a conclusion favourable to him if that question is answered against validity. Discovery of documents might assist him to establish those pleaded facts.
(Citations omitted)
24 To not dissimilar effect, the Full Court of this Court recently observed that “the development of the law should not be stultified” by the use of the power to terminate proceedings summarily under s 31A: see Western Australia v Fazeldean (No 2) [2013] FCAFC 58 at [35] per Allsop CJ, Marshall and Mansfield JJ and see also Spencer at [25].
Various Federal Court decisions that have developed the principles on section 31A
25 Consistent with the observations of the joint judgment of Hayne, Crennan, Kiefel and Bell in Spencer, a series of decisions of this Court has developed the principles on the operation and requirements of s 31A. One of those decisions was a relatively recent judgment of Kenny J in Polar Aviation Pty Ltd v Civil Aviation Safety Authority (No 4) (2011) 203 FCR 293; [2011] FCA 1126. It should be noted that on appeal to the Full Court, her Honour’s observations about the approach to be taken to applications under s 31A were quoted with apparent approval: see Polar Aviation Pty Ltd v Civil Aviation Safety Authority (2012) 203 FCR 325; [2012] FCAFC 97 (Polar Aviation) at [51] and [93]. Following a careful review of Spencer, her Honour concluded with the following summary (at [17]):
Thus, in effect, no hard and fast rule can be laid down as to when summary judgment is available. Much depends on the case at hand. The critical question is that set by the statute — has the moving party persuaded the Court that the opposing party has no reasonable prospect of success?
26 As well as giving its approval to this approach, the Full Court in Polar Aviation made some helpful observations about the operation of s 31A where the proceedings at hand involved disputed questions of fact. It did that by referring to parts of the joint judgment of French CJ and Gummow J in Spencer as follows at [47]–[49]:
47. In Spencer, French CJ and Gummow J, in a joint judgment (on which the appellants particularly relied both before the primary judge and on appeal) stated (at [25]) that the Court must make “a practical judgment…as to whether the applicant has more than a ‘fanciful’ prospect of success [which] may be a judgment of law or of fact or of mixed law and fact”.
48. French CJ and Gummow J stated at [25]:
“Where there are factual issues capable of being disputed and in dispute, summary dismissal should not be awarded to the respondent simply because the court has formed the view that the applicant is unlikely to succeed on the factual issue.”
49. French CJ and Gummow J also stated at [26]:
“Where an application under s 31A requires consideration of apparently complex questions of fact, then the caution uttered by Lord Hope is relevant.”
27 The “caution uttered by Lord Hope” (mentioned in [26] of Spencer above) is a reference to the quotation from his Lordship’s opinion in Three Rivers District Council v Governor and Company of the Bank of England (No 3) [2003] 2 AC 1 at 260–1, which is set out earlier in the joint judgment of French CJ and Gummow J (at [21]) as follows:
The method by which issues of fact are tried in our courts is well settled. After the normal processes of discovery and interrogatories have been completed, the parties are allowed to lead their evidence so that the trial judge can determine where the truth lies in the light of that evidence. To that rule there are some well-recognised exceptions. For example, it may be clear as a matter of law at the outset that even if a party were to succeed in proving all the facts that he offers to prove he will not be entitled to the remedy that he seeks. In that event a trial of the facts would be a waste of time and money, and it is proper that the action should be taken out of court as soon as possible. In other cases it may be possible to say with confidence before trial that the factual basis for the claim is fanciful because it is entirely without substance. It may be clear beyond question that the statement of facts is contradicted by all the documents or other material on which it is based. The simpler the case the easier it is likely to be to take that view and resort to what is properly called summary judgment. But more complex cases are unlikely to be capable of being resolved in that way without conducting a mini-trial on the documents without discovery and without oral evidence. As Lord Woolf said in Swain v Hillman, … that is not the object of the rule. It is designed to deal with cases that are not fit for trial at all.
(Emphasis added)
28 This caution is further amplified in the concluding sentence of [26] of Spencer (not included in the quotation at [49] of Polar Aviation above) where French CJ and Gummow J added: “The importance of those considerations is amplified if the case involves resolution of issues of law and fact, or mixed law and fact.” However, as Bennett J noted in Expo-Net Danmark A/S v Buono-Net Australia Ltd (No 2) [2011] FCA 710 at [8], there was a:
… distinction drawn by Hayne, Brennan (sic Crennan), Kiefel and Bell JJ at [51] between the reference in the English Civil Procedure Rules 1998 to ‘no real prospects’ and s 31A’s criterion of ‘no reasonable prospect’...
29 In Jefferson Ford Pty Ltd v Ford Motor Company of Australia Ltd (2008) 167 FCR 372; [2008] FCAFC 60 (Jefferson Ford), a pre-Spencer Full Court addressed this issue about how a judge should deal with disputed questions of fact and law in a summary judgment application under s 31A. All three judges agreed that “real” questions of fact should generally be determined at a trial. There was less agreement on the treatment of questions of law.
30 On disputed questions of fact, Finkelstein J said (at [23]) that:
In other words, the section requires the judge to conduct what might loosely be described as a preliminary trial and look more closely than he would under an O 14 application to a party’s assertion that there is a real question of law or fact to be decided. Such an assertion is to be examined with a critical eye. The judge is to decide whether the opposing party has evidence of sufficient quality and weight to be able to succeed at trial. There will be cases where the asserted facts appear to be so improbable that there is no point in allowing them to go to trial. There will be others where the opposing party has not been able to show that the asserted facts are likely to be established at a trial.
31 On disputed questions of law, his Honour went on to say:
… the judge should conduct an inquiry into their merit, not for the purpose of resolving them (though this can be done – see Rosser v Austral Wine and Spirit Company Pty Ltd [1980] VR 313 at 320) and also not simply to determine whether the argument is hopeless, but in order to decide whether it is sufficiently strong to warrant a trial. If the judge is satisfied that he (or she) is able to resolve any contested legal issue at a summary hearing and without undue delay, it may be better all around if that be done. If not, then at least the merits must be tested. That will then give s 31A a substantial operation, which is what, it seems to me, was intended.
32 Rares J expressed a similar opinion, dealing with disputed questions of fact and law together, (at [74]) as follows:
Accordingly, if Jefferson Ford is able to establish that there was a real issue of fact or a real issue of law capable of being decided in its favour then, subject to the Court’s discretion to determine the question of law, the matter ought to be allowed to go to trial in the ordinary way.
33 While disagreeing with the other members of the Court about whether there was any discretion available under s 31A (see at [128]–[129]), the third member of the Court, Gordon J, generally agreed with the other members about disputed questions of fact, saying (at [130]):
A fifth principle is that where there is a real issue of fact relevant to a pleaded cause of action, it is unlikely that that part of the proceeding has no prospect of success: see Boston Commercial Services 236 ALR 720 at [44]. So, for example, if the pleadings, affidavits, and other materials considered in connection with the summary judgment motion, reveal a factual dispute and that factual dispute must be resolved to determine whether or not the claim succeeds, it cannot be said that the claim has “no reasonable prospect of success”: see Fortron Automotive Treatments Pty Ltd v Jones (No 2) [2006] FCA 1401 at [20] (stating that summary judgment should be made by reference to the pleadings, affidavits, and other evidence as appropriate under the circumstances) and Commonwealth Bank of Australia v ACN 000 247 601 Pty Ltd (in liq) [2006] FCA 1416 at [32]. On the other hand, if the factual contest is unnecessary to the resolution of the cause of action pleaded, then in the absence of other relevant material, there is nothing to prevent the court entering judgment on that claim.
(Emphasis in original)
34 And, on disputed questions of law, her Honour observed (at [131]):
By contrast, the existence of a real issue of law does not necessarily preclude summary judgment. This is so because, assuming that there is no relevant factual dispute (or if the relevance of the factual dispute depends, as in the instant case, on the resolution of the legal dispute), the court can generally hear and decide a disputed point of law without the need for a trial or evidentiary hearing. In such cases, the proper course for the court would be to accept submissions and hear argument from the parties in connection with the notice of motion hearing. Even under the earlier, different and more stringent test, “argument, perhaps even of an extensive kind” was permitted “to demonstrate that the case of [a party] is so clearly untenable that it cannot possible succeed”: General Steel Industries 112 CLR at 130. Once the court resolves the issue or issues of law, it will then be clear whether the opposing party has reasonable prospects of success and summary judgment can be granted or refused accordingly.
35 In Bond v Barry (2008) 173 FCR 110; [2008] FCAFC 115 (also pre-Spencer), another Full Court noted the divergent views in Jefferson Ford, but concluded it did not have to decide which views it preferred: see at [72]–[74]. However, the subsequent Full Court in Kowalski v MMAL Staff Superannuation Fund Pty Ltd (2009) 178 FCR 401; [2009] FCAFC 117 (Kowalski) (considered in more detail below at [38]–[40]) did address these divergent views.
36 Before going to Kowalski, it is worth mentioning the decision in J F Keir Pty Limited v Sparks [2008] FCA 611, where Graham J (subsequently a member of the Full Court in Kowalski) respectfully disagreed with the remarks of Gordon J in Jefferson Ford at [131] about disputed questions of law, stating (at [52]) that:
Where ‘real’, ‘difficult’, ‘serious’ or ‘important’ questions of law arise, orders for summary judgment or summary dismissal should not in my opinion be made under s 31A of the Federal Court of Australia Act (see also [7] and [8] above and Anderson Formrite Pty Ltd v Baulderstone Hornibrook Pty Ltd [2008] FCA 473 at [46]). With great respect, I disagree with the observations of Gordon J in Jefferson Ford at [131]. Section 31A is not in my opinion directed at displacing O 29 rr 2 – 4 of the Federal Court Rules.
37 The rules referred to in this passage (O 29 rr 2 – 4) were contained in the old Federal Court Rules and are the equivalent to rr 30.01 – 30.02 in the Federal Court Rules 2011. Rule 30.01 (O 29 r 2) provides for the hearing and determination of a question separately from the trial of proceedings. If the determination of that question renders a trial unnecessary, r 30.02 (O 29 r 3 – 4) provides that a party can apply to the Court for judgment or dismissal of the proceedings.
38 As alluded to above, the Full Court in Kowalski (also pre-Spencer) considered the operation of s 31A and the divergent views expressed in Jefferson Ford. The Court agreed (at [25]) that the effect of s 31A was to “soften” the test for both summary judgment and summary dismissal and had this to say about the kinds of disputed questions of fact that may be appropriate for summary dismissal under s 31A (at [29]):
The concept of ‘no reasonable prospect of successfully prosecuting’ a proceeding, which is a relevant issue where summary dismissal is sought under s 31A(2) of the Federal Court Act, was addressed by Rares J in Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd (2006) 236 ALR 720. At [43] his Honour said:
‘… The concept of a party having “no reasonable prospect of successfully prosecuting a proceeding” has some similarity to the test at common law for determining whether a jury properly instructed could reach a verdict for the plaintiff. …’
At [44] Rares J said:
‘[44] In a case to which s 31A applies, where there is a real issue of fact to be decided in the sense identified in the above principle [a reference to [43] and to Hocking v Bell (1945) 71 CLR 430 at 441-442], and, possibly, where there is a real issue of law of a similar kind, it is obviously appropriate that the matter goes to trial. …’
(Emphasis in original)
39 On the question whether a judge hearing an application under s 31A has any discretion, the Court in Kowalski considered the word “may”, used in both ss 31A(1) and (2), was permissive in its terms, rather than mandatory. Accordingly, it expressly disagreed with the observations of Gordon J in Jefferson Ford at [128], saying (at [28]):
However, in our respectful opinion, the preconditions for the exercise of the relevant power, which require value judgments to be made in the absence of a full and complete factual matrix and full argument thereon, lead us to the view that a discretion is reposed in the judge hearing the relevant application to grant summary judgment.
40 It added (at [31]) that:
It remains a matter for a judge hearing a summary dismissal application to exercise some discretion as to whether questions of law that have been raised are so difficult that they ought not to be decided summarily.
41 On the kinds of factual dispute that may be appropriate for summary determination under s 31A, the bracketed words referred to in the quote from [44] of the decision of Rares J in Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd (2006) 236 ALR 720; [2006] FCA 1352 (Boston) (at [38] above) are often quoted so it is worth setting them out in full. They are as follows (at [43] of Boston):
… Obviously, where there is a contested application under s 31A, both parties will be present to explain their case, but not in the context of a trial. The procedure envisaged by s 31A is summary. The concept of a party having ‘no reasonable prospect of successfully prosecuting a proceeding’ has some similarity to the test at common law for determining whether a jury properly instructed could reach a verdict for the plaintiff. That test was authoritatively stated by the Judicial Committee in Hocking v Bell (1947) 75 CLR 125 at 130-1; [1948] 1 ALR 85 at 87-8 (Hocking (1947)) , approving the following statement from the dissenting judgment of Latham CJ (Hocking v Bell (1945) 71 CLR 430 at 441-2 (Hocking (1945)):
If there is evidence upon which a jury could reasonably find for the plaintiff, unless that evidence is so negligible in character as to amount only to a scintilla, the judge should not direct the jury to find a verdict for the defendant, nor should the Full Court direct the entry of such a verdict. The principle upon which the section is based is that it is for the jury to decide all questions of fact, and therefore to determine which witnesses should be believed in case of a conflict of testimony. But there must be a real issue of fact to be decided, and if the evidence is all one way, so that only one conclusion can be said to be reasonable, there is no function left for the jury to perform, so that the court may properly take the matter into its own hands as being a matter of law, and direct a verdict to be entered in accordance with the only evidence which is really presented in the case.
…
(Emphasis in original)
42 Then, at [45] of Boston, Rares J continued on the same theme, observing that:
I am of opinion that in assessing what reasonable prospects of success are for the purposes of s 31A, the court must be very cautious not to do a party an injustice by summarily dismissing the proceedings where, in accordance with the principles in Hocking (1947), contested evidence might reasonably be believed one way or the other so as to enable one side or the other to succeed. As soon as the evidence may have such an ambivalent character prior to a final determination, I am of opinion that then, as a matter of law, at that point there are reasonable prospects of success within the meaning of s 31A. Unless only one conclusion can be said to be reasonable, the moving party will not have discharged its onus to enliven the discretion to authorise a summary termination of the proceedings which s 31A envisages. In moving the second reading of the bill introducing s 31A (the Migration Litigation Reform Bill 2005) the Attorney-General said that it strengthened ‘the power of the courts to deal with unmeritorious matters by broadening the grounds on which federal courts can summarily dispose of unsustainable cases’.
43 The role that the evidence may play was also the subject of some observations of Tamberlin J in Hicks v Ruddock (2007) 156 FCR 574; [2007] FCA 299 (Hicks). In that judgment, his Honour referred to the above observations of Rares J, stating that (at [13]):
In a case where evidence can give colour and content to allegations and where questions of fact and degree are important, the Court should be more reluctant to dismiss a proceeding on the face of a pleading: …. The underlying principle is that the need for a summary judgment must be clear before the court will intervene to prevent a plaintiff submitting a case for determination in the usual way. Once it appears that there is a real issue to be determined, whether it be of fact or law, and that the rights of the parties depend on it, the court should not terminate the action by way of summary judgment.
(Citations omitted)
44 A more recent Full Court in George v Fletcher (Trustee) [2010] FCAFC 53 (still pre-Spencer) made some observations about the kinds of disputed questions of fact that may be appropriate for summary judgment under s 31A. After quoting in full the remarks of Lindgren J in White Industries Aust Ltd v Commissioner of Taxation (2007) 160 FCR 298; [2007] FCA 511 (White Industries) (at [50] to [54]), the Court (at [75], per Ryan and Logan JJ) agreed with Lindgren J that s 31A had “lower[ed] the bar” on summary judgment applications. It then observed that a “trifling” factual controversy would not prevent a summary judgment under s 31A as follows (at [75]):
These remarks [those of Lindgren J in White Industries] have since frequently been cited with approval by various judges of this Court. They offer valuable guidance in relation to the background to the enactment, purpose and meaning of s 31A and its equivalent, s 17A. The suggestion made by Lindgren J (at [54]), with which we agree, that the intention of the legislature in enacting s 31A was to “lower the bar for obtaining summary judgment” does not carry with it the additional proposition that the intention was to remove the bar completely. True it is that s 31A is not concerned just with pleadings but with substance, not form. The mere presence of a factual controversy, however trifling, implausible, tenuous or tangentially relevant is not a bar to the exercise of the power conferred by s 31A to grant summary judgment. That would be inconsistent with the way in which the phrase “no reasonable prospect of success” is to be read in light of s 31A(3) (and s 17A(3)).
(Emphasis added)
45 Finally, two things should be emphasised. First, that s 31A is to be distinguished in its application from the power to strike-out pleadings under the Rules: see Spencer at [23] per French CJ and Gummow J. In White Industries, Lindgren J stated (at [50]) that s 31A was “concerned with the bringing and defending of proceedings, not just with pleadings; with substance, not just with form.” Secondly, the applicant on an application for summary judgment bears the onus of persuading the Court that that party is entitled to have the proceedings determined summarily: see Boston at [45] (set out at [42] above) and Hicks at [13] (set out at [43] above).
What section 31A requires in this application
46 It is apparent from these authorities that s 31A has lowered the bar, or softened the test, for summary judgment, or summary dismissal, as compared to that set by earlier summary judgment or summary dismissal regimes. At the same time, it sets a different inquiry from that required under those regimes. The critical question under s 31A in a summary dismissal application such as the present one is whether ASIC, the applicant, has “reasonable” prospects of successfully prosecuting these proceedings. As the moving party in this summary dismissal application, the Cassimatises bear the onus of persuading the Court of this criterion. These authorities reveal that the determination of a summary dismissal application therefore does not require a mini-trial based upon incomplete evidence to decide whether the proceedings are likely to succeed or fail at trial. Instead, it requires a critical examination of the available materials to determine whether there is a real question of law or fact that should be decided at trial. Each application for summary judgment or summary dismissal has to be determined according to its particular circumstances. What is required is a practical judgment of the case at hand. The relevant circumstances will partly depend upon the stage which the proceedings have reached. Among other things, this will affect the materials available to the Court considering the application, for example, whether pleadings have been exchanged, or discovery of documents has occurred.
47 Accepting there can be no “hard and fast” rule about this, as a general principle, these authorities show that the moving party on an application for summary dismissal of the present kind is likely to succeed on its persuasive onus if it is able to demonstrate to the Court that the applicant’s success in the proceedings relies upon a question of fact that can be truly described as fanciful, trifling, implausible, improbable, tenuous or one that is contradicted by all the available documents or other materials. Conversely, as a general principle, it is unlikely to succeed where, on a critical examination of all the available materials, the Court is satisfied that there appears to be a real question of fact to be determined between the parties. This is more likely to be the case where the available materials include pleadings that raise factual disputes that can be truly described as significant, substantial, plausible or weighty. A real question of fact is also more likely to exist where the question/s of fact concerned is/are complex, eg involving numerous different events or transactions over a long period of time.
48 Similarly, as a general principle, the moving party on an application for summary dismissal is likely to succeed on its persuasive onus if it is able to demonstrate to the Court that the applicant’s success in the proceedings relies upon a question of law that is straightforward and confined, or is trite in the sense that it is well settled on authority, such that the question can be resolved summarily without the necessity for a full trial. On the other hand, the moving party would be unlikely to succeed if the Court is satisfied that the applicant’s success in the proceedings relies upon a question of law that is serious or important, or is difficult and therefore likely to require lengthy argument for its resolution, or involves conflicting authority, or is apparently arguable, yet novel.
49 Then there are proceedings involving questions of fact and law, or mixed questions of fact and law. Because this combination or mixing of factual and legal questions usually gives rise to the sort of complexity that traditionally requires a trial, where the Court is satisfied that this combination or mixing exists in the proceedings, it should, as a general principle, be particularly cautious about ordering summary determination. In other words, the moving party on an application for summary dismissal would, as a general principle, need to show a substantial absence of merit on either of the question of fact or law concerned, or where the two questions are mixed, on the mixed question, before having any chance of success in persuading the Court that questions of these kinds should be resolved summarily.
50 Finally, these authorities show that there are at least two other factors that need to be borne in mind on a summary judgment application such as this. The first is that, in all the situations outlined above, the Court has a discretion as to whether to determine the proceedings summarily, or to refer them to trial. Of course, as with any such discretion, it has to be exercised judicially: see Latoudis v Casey (1990) 170 CLR 534 at 569 per McHugh J, quoting Donald Campbell and Co Ltd v Pollak [1927] AC 732 at 811–12 per Viscount Cave LC. Secondly, while s 31A sets a lower bar, or a softened test, for the summary determination of proceedings, any such summary determination still has to be approached with caution. This is so because a trial is the usual and accepted means by which disputed questions of fact are determined in this country.
Doubtful whether there is a two-stage test or a shifting onus under section 31A
51 Before turning to apply these principles in the particular circumstances of this summary dismissal application, it is convenient to first deal with a procedural, or evidentiary, issue that has been raised by the Cassimatises. That issue is summarised at [8] above and ASIC’s response to it is summarised at [10] above.
52 On this issue the Cassimatises placed particular reliance on the observations of Gordon J in Jefferson Ford at [131] (see at [34] above) and those in an earlier paragraph ([127] set out immediately below). First, they relied upon the observations at [131] of Jefferson Ford to support their contentions about the question of law raised by their first ground (see at [7] above). In this regard, it is convenient to digress briefly to dispose of a submission contained in Mr Doyle’s written submissions. It is to the effect that this Court has no discretion in deciding whether to determine that question of law on this application, relying upon what Gordon J said in Jefferson Ford at [128]. Mr Doyle did not appear to pursue this submission in his oral submissions, nonetheless, whether it is now pursued or not, it is a submission that can be rejected at once for the reasons given by the Full Court in Kowalski (see at [39] above).
53 Secondly, the Cassimatises relied upon her Honour’s observations at [127] to support their second and third grounds (see at [8] above) about the two-stage test required by s 31A and the onus ASIC bears as a consequence. Later in these reasons, I will return to the question of law raised by the first ground above. However, at this juncture, I will deal with the second and third grounds.
54 At [127] of Jefferson Ford, Gordon J observed:
Thirdly, each case must be considered separately. No particular hard and fast rules can be set down, only general principles. One principle is that the moving party bears the onus of persuading the court that the opponent has no reasonable prospect of success (see Crayford Freight Services Ltd v Coral Seatel Navigation Co (1998) 82 FCR 328 at 333). As noted earlier, however, s 31A has lessened the standard that must be met. In that regard, it must be emphasised that once a moving party has established a prima facie case that the opponent has no reasonable prospect of success, the opposing party must respond by pointing to specific factual or evidentiary disputes that make a trial necessary; general or non-particularised denials will be insufficient to defeat the motion: see Fortron Automotive Treatments Pty Ltd v Jones (No 2) [2006] FCA 1401 at [22]. In other words, it is inappropriate in defence of a claim for judgment under s 31A of the Federal Court Act to seek to defend by merely putting a claimant to formal proof: Vans Inc v Offprice.Com.Au Pty Ltd [2006] FCA 137 at [12]. This is not a new concept. It finds earlier reflection in ss 190(4) and 191 of the Evidence Act 1995 (Cth) and O 33, O 34 and O 34B of the Federal Court Rules 1979 (Cth).
(Emphasis added to identify the particular parts relied upon by the Cassimatises)
55 Based on the emphasised parts of these observations, Mr Doyle claimed that the evidence in the affidavits filed by Mr and Mrs Cassimatis established a prima facie case that a reasonable director in their position at the time would not have been aware of the risks to Storm pleaded by ASIC, or if he or she had been so aware, such a reasonable director would not have concluded those risks were unacceptably high. Further, having established this prima facie case, Mr Doyle submitted that ASIC had not discharged its onus to show that there was a real factual dispute on these issues that justified this case proceeding to trial.
56 To answer these contentions, ASIC’s counsel, Mr Flanagan SC, relied upon other observations of Gordon J in Jefferson Ford (at [130]), see at [33] above) and the two paragraphs of the decision of French J in Fortron Automotive Treatments Pty Ltd v Jones (No 2) [2006] FCA 1401 (Fortron) that are referred to by her Honour ([22] of Fortron at [127] of Jefferson Ford and [20] of Fortron at [130] of Jefferson Ford). In reverse order, those two paragraphs of Fortron are as follows:
20. In order to secure judgment under s 31A it must be shown that the party prosecuting or defending the proceeding has no reasonable prospect of success. This judgment can be made, by reference to pleadings, where there is a defect in the pleadings which cannot be cured. Alternatively, it may be a judgment made by reference to evidence put on in support of an application under s 31A which reasonably excludes the possibility that facts essential to the success of the claim or defence will be able to be established. For example, if a cause of action depends critically for its success upon the presence of the defendant at a particular place, at a particular time and the defendant is able to show, on affidavit, that he or she was not at that place at the particular time and there is no evidence to contradict that “alibi” then the judgment may be made that the proceeding has no reasonable prospect of success. In such a case judgment may be given for the defendant. Alternatively, if a defence is pleaded which depends critically for its success upon the defendant’s denial that it was a party to a contract, then an affidavit by the applicant exhibiting the contract with the defendant’s signature on it, supported by affidavits from witnesses to the execution of the contract by the defendant may be sufficient to support a judgment under s 31A. Of course, if the defendant were to file an affidavit in reply indicating that the material in the applicant’s affidavit evidence was disputed, then it is unlikely that a finding could be made that the defendant had no reasonable prospect of success.
…
22. In the present case the factual denials set out in the affidavits by Mr and Mrs Matthews do not descend to particulars or address the associated allegations made in the statement of claim about the use of their company’s name in Thailand. I do not consider that affidavits at this level of generality and essentially seeking to refute a particular of relevant knowledge go far enough to establish that the applicant has no reasonable prospect of success in the proceedings against them. For that reason I will dismiss their motion insofar as it seeks dismissal of the application. The bar is higher under O 20 r 2 and I will not dismiss the proceedings under that Rule.
57 It is important to note that Mr and Mrs Matthews (referred to in [22] of Fortron above) were respondents in those proceedings and the moving parties on the application for summary judgment under s 31A. Thus, they were in a similar position to the Cassimatises in this case. This is important to the Cassimatises’ submissions on this point because it means the criticisms that French J made of the Matthews’ affidavits, viz that they “do not descend to particulars or address the associated allegations made in the statement of claim” were in fact directed to deficiencies in their application for summary dismissal, and not to the adequacy of the response to that application by Fortron. That is, his Honour was observing that the evidence of the moving party for summary dismissal (the Matthews) was not directly responsive to the allegations of fact in the opposing party’s (Fortron’s) statement of claim and instead that evidence purported to deal with those allegations with general and non-particularised denials. His Honour was therefore not addressing a situation where the Matthews, as the moving party, had produced evidence which was specific and particularised and directly responsive to the critical allegations of fact contained in the statement of claim thereby constituting a prima facie case on that factual issue. Specifically, his Honour’s comments were not directed to the kind of response that is to be expected of the opposing party when confronted with such a prima facie case. It follows that in Fortron at [22], French J was actually addressing the inverse of the situation described by Gordon J in Jefferson Ford at [127].
58 However, this is not to say that the observations of Gordon J may not be applicable in a situation where the moving party for summary judgment has been able to establish a prima facie case on a factual issue in the proceedings. Indeed, numerous judges of this Court have since referred, with apparent agreement, to the observations of Gordon J at [127] in Jefferson Ford: see Adnunat Pty Ltd (ACN 005 816 268) v ITW Construction Systems Australia Pty Ltd (ACN 004 297 009) [2009] FCA 499 at [37] per Sundberg J; Kowalski v MMAL Staff Superannuation Fund Pty Ltd (ACN 064 829 616) (No 3) [2009] FCA 53 at [19] per Finn J; Pascoe v Boensch [2009] FCA 1240 at [103] per Graham J; Deputy Commissioner of Taxation v Chemical Trustee Ltd (2010) 81 ATR 237, [2010] FCA 1297 at [42] per Kenny J; Deputy Commissioner of Taxation v Hua Wang Bank Berhad (No 2) (2010) 81 ATR 40, [2010] FCA 1296 at [40] per Kenny J; Deputy Commissioner of Taxation v Southgate Investments Funds Ltd (2010) 81 ATR 220, [2010] FCA 1298 at [22] per Kenny J; QS Holdings Sarl v Paul’s Retail Pty Ltd (2011) 92 IPR 460, [2011] FCA 853 at [16] per Kenny J; Australian Motor Finance Ltd (Receivers and Managers appointed) v Angeleri (No 3) [2010] FCA 1431 at [10] per Tracey J; Helal v Mcconnell Dowell Constructors (Aust) Pty Ltd (2010) 193 FCR 213, [2010] FCA 1462 at [12] per Ryan J; Smartec Capital Pty Ltd v Centro Properties Ltd [2011] FCA 716 at [15] per Stone J; British American Tobacco Australasia Ltd v Taleb (No 3) [2013] FCA 80 (British American Tobacco) per Dodds-Streeton J at [23].
59 All these decisions appear to have taken her Honour’s observations as describing, as a general principle, the type of response required of an opposing party to an application for summary judgment under s 31A where the moving party has established such a prima facie case. The decision of Dodds-Streeton J in British American Tobacco provides a useful recent example. In that case, Dodds-Streeton J referred (at [23]) to the remarks of Gordon J at [127] of Jefferson Ford in deciding an application for summary judgment by the substantive applicant in the proceedings where the respondent’s response to the material relied upon by the applicant took the form of an affidavit from her solicitor based on her instructions to him, together with assertions about the applicant’s case made by her counsel during submissions. Her Honour concluded (at [40]–[41]) that the respondent did not point to any specific factual or evidentiary matter which would justify the matter proceeding to trial and therefore (at [42]) that the applicant had established that the respondent had no reasonable prospects of successfully defending the proceedings. For present purposes, the crux of her Honour’s reasoning was as follows (at [39]):
As recognised in Wallingford v Mutual Society (1880) 5 App Cas 685 on which some modern authorities rely, it is necessary in this context to satisfy the court not only that allegations are denied, but that there is a reasonable ground for the denial. The respondent is required to “condescend upon particulars” (at 704) and give “such an extent of definite facts” pointing to the defence as will satisfy the judge that in the particular case it is reasonable to permit the defence to be raised (at 704).
60 The House of Lord’s decision in Wallingford v Mutual Society (1880) 5 AC 685 (Wallingford) was often referred to in summary judgment applications under previous rules of court that allowed an applicant to depose that the respondent had no defence to the claim, or a part thereof, and to thereby require the respondent to show cause why judgment should not be entered against it. Indeed, given the similarity of expression, it may have been the provenance of the statement “descend to particulars” used by French J in Fortron at [22].
61 Dodds-Streeton J did not identify the “modern authorities” that her Honour had in mind, but the most recent example in this context in the High Court is Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87 (Fancourt). In that judgment, the Court said (at 98):
The question of the payment of the deposits to a dealer is, upon the material, left in the air. The appellants, of course, place on affidavit their belief that they have a good defence to the respondent’s claim but the particularity of that defence in relation to the payment of any deposits is confined to a denial of any payment of deposits to the respondent. Under O. 18, r. 3, the appellants are obliged, if they are to show cause by affidavit why summary judgment should not be entered against them, to state the sources and grounds of their belief. They must, as was said by Lord Blackburn in Wallingford v Mutual Society, “condescend upon particulars” and the affidavits filed on behalf of the appellants do not go the whole distance in establishing a defence based upon failure of the respondent to obtain from the appellants the deposits required by s 25(1) of the Hire-Purchase Act.
(Emphasis added and citations omitted)
62 Order 20 of the Federal Court Rules (as in force prior to the commencement of s 31A on 1 December 2005) was similar to O 18 r 3 of the Rules of the Supreme Court (Qld) that is mentioned in Fancourt (above).
63 The operation of O 20 was considered by Kenny J in Nokia Corporation v Cellular Line Australia Pty Ltd [2006] FCA 726 in relation to a proceeding that fell a few days short of the deadline for the application of s 31A to it (see at [33]). Accordingly, her Honour applied the pre-Spencer High Court authorities on summary judgment, such as Dey v Victorian Railways Commissioners (1949) 78 CLR 62; General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125; and Webster v Lampard (1993) 177 CLR 598 (see at [45]). In that context, her Honour also relied upon Wallingford as follows (at [46]):
Whether or not the Court is satisfied that that there is no real question to be tried (see Fancourt at 99) will depend entirely on the circumstances of the case. By its affidavits, Nokia is required to make out such facts as are necessary for its cause of action: see Rourke v Victorian Finance Guarantee and Share Co Ltd (1894) 20 VLR 8 at 11 and Evans Deakin & Co Pty Ltd v Kaiser Engineers and Constructors Inc [1968] Qd R 379 at 382. Once Nokia has filed the requisite affidavits, the respondents must place evidence before the Court that deals specifically with the Nokia’s claim, and state clearly what their defence is and what facts are relied on to support that defence. A mere general denial is usually not sufficient to avoid summary judgment: see Wallingford v The Mutual Society (1880) 5 AC 685 at 704; also O 11 r 13 of the Rules. Where the outcome of a case depends on the resolution of disputed facts, the Court should be especially cautious to order summary judgment: see Webster at 603 per Mason CJ, Deane and Dawson JJ. The Court should approach an application for summary judgment on the basis that the respondent’s evidence, if not inherently credible, will be accepted at trial, and on the basis that the Court should consider the material to determine whether it discloses either an arguable defence or material that might give rise to an arguable defence: see Webster at 603 and Geoffrey Inc v Luik (1997) 38 IPR 555 at 557 per RD Nicholson J. The Court retains discretion to refuse summary judgment, although that discretion must be exercised judicially.
(Emphasis added)
64 Unsurprisingly, all of the principles outlined by her Honour above are very similar to those contained in Spencer and the various pre and post Spencer decisions of this Court I have referred to above.
65 Even though rule 26 of the Rules, which has now replaced O 20, does not expressly provide for the form of show cause process previously prescribed in O 20, I can see no reason why an applicant for summary judgment under s 31A could not proceed along similar lines. In that event, given that s 31A involves a softened test, or a lowering of the bar for summary judgment, I can see no reason why the principle expressed in Wallingford and the other authorities mentioned above would not apply with equal, if not more force.
66 However, I doubt whether this process would, if followed, give rise to a two-stage test with notions of shifting onus, as contended for by the Cassimatises. Neither Gordon J in Jefferson Ford (at [127]), nor any of the numerous decisions that have referred to those observations (set out above) expressly mentioned a two-stage test, or a shifting evidentiary onus. Further, the authorities on the operation of s 31A I have referred to above eschew the need to conduct a mini-trial and that would seem to carry with it eschewing any consideration of the kinds of evidentiary issues that may arise at such a trial, including any shifting evidentiary onus. Some of the authorities on this question are cited by Campbell JA in Rockcote Enterprises Pty Ltd v FS Architects Pty Ltd [2008] NSWCA 39 at [78]. Moreover, the authorities on s 31A identify one relevant criterion in a summary dismissal application and make it clear that the moving party bears the persuasive onus on that question throughout, viz whether the opposing party has “reasonable” prospects of successfully prosecuting the proceedings. It would therefore seem to follow, in my view, that an application under s 31A only involves one “stage” and one unshifting persuasive onus.
67 However, as it turns out, it is unnecessary for me to determine whether the Cassimatises are correct in their contentions on these matters. That is so because, for the reasons I have set out below, the prima facie case situation described by Gordon J in Jefferson Ford (at [127]) does not arise in this application. Specifically, like the Matthews in Fortron, I do not consider the Cassimatises have by their affidavits established a prima facie case on the question or issue they have identified. Thus, as in Fortron, there is no obligation placed upon ASIC to respond to any such prima facie case, much less examine whether that response is sufficiently specific and particularised.
The second issue: the effect of the Cassimatises’ affidavits
68 To demonstrate why I consider the Cassimatises have failed to establish such a prima facie case, it is necessary to examine the affidavits they have filed in support of their summary judgment application. However, to understand the import of the various statements they have made in those affidavits, it is first necessary to describe in some more detail the factual and legal issues that arise in these proceedings. That requires an examination of the pleadings that have been exchanged between the parties.
The PLEADINGS
ASIC’s FASC
69 It is no exaggeration to describe the pleadings in these proceedings as voluminous. In total, they comprise approximately 1,100 pages (ASIC’s FASC – 683 pages, the Cassimatises’ defence – 323 pages and ASIC’s reply – 96 pages). However, in fairness to the authors of the FASC, it should be recorded that some part of the volume of that document is explained by the fact that a large number of pages of it have been struck out as part of earlier amendments in the document, but retained so as to comply with the Rules.
70 ASIC’s FASC is divided into 11 parts as follows:
Part A – Relevant parties
Part B – Obligations owed by [Cassimatises]
Part C – The Business of Storm
Part D – [Cassimatises’] responsibility for Storm’s Advice
Part E – Clients who invested in accordance with the Storm Model
Part F – Further clients who invested in accordance with the Storm Model
Part G – Breaches of section 945A by Storm
Part H – Breaches of section 1041E by Storm
Part I – Negligence and breach of retainer by Storm
Part J – Breach of section 912A by Storm
Part K – Breach of section 180 by the [Cassimatises].
The Part E investors (10 couples or individuals) and the Part F investors (36 couples or individuals) that are referred to frequently in the following paragraphs take those descriptors from the parts of the FASC which plead the details of the circumstances in which financial advice was provided to them by Storm.
71 In its written submissions, ASIC’s counsel provided the following summary of its case by reference to its FASC:
7. ASIC’s case against [the Cassimatises] begins with the allegation that they were each responsible for causing or permitting Storm to provide financial advice which advice had been created according to a process referred to as the Storm Model.
8. The material facts which ASIC relies upon to allege that [Mr Cassimatis] was responsible for the provision of financial advice by Storm in accordance with the Storm Model is pleaded in paragraphs 85 to 141 of the FASC under the following headings:
(a) responsibility for the management of Storm’s business;
(b) role in establishing Storm’s business;
(c) role in developing and implementing the Storm Model;
(d) role in developing an institutional relationship between Storm and fund managers who managed funds specifically created for Storm clients who were investing in accordance with the Storm Model;
(e) role in developing an institutional relationship between Storm and various banks who lent funds to Storm clients to be invested in accordance with the Storm Model;
(f) role in developing an institutional relationship between Storm and various margin lenders who lent funds to Storm clients to be invested in accordance with the Storm Model;
(g) role in integrating new offices and new authorised representatives into the Storm business.
9. The material facts which ASIC relies upon to allege that [Mrs Cassimatis] was responsible for the provision of financial advice by Storm in accordance with the Storm Model is pleaded in paragraphs 142 to 180 of the FASC under the following headings:
(a) responsibility for the management of Storm’s business;
(b) role in developing an institutional relationship between Storm and fund managers who managed funds specifically created for Storm clients who were investing in accordance with the Storm Model;
(c) role in developing an institutional relationship between Storm and various banks who lent funds to Storm clients to be invested in accordance with the Storm Model;
(d) role in developing an institutional relationship between Storm and various margin lenders who lent funds to Storm clients to be invested in accordance with the Storm Model;
(e) role in integrating new offices and new authorised representatives into the Storm business;
(f) role in implementing the Storm Model and monitoring compliance with Storm’s processes for the creation of financial advice.
10. The nature of the Storm Model of investment, as it applied to the 46 Storm clients who received the financial advice which is the subject of the proceeding, is pleaded in paragraphs 22 to 84 of the FASC. In summary, the Storm Model of investment involved the creation of financial advice in accordance with the following processes:
(a) the prospective client would attend an education seminar which introduced Storm’s investment philosophies, including the importance of using debt to fund investments in indexed share funds;
(b) the client would attend a meeting with a representative of Storm where a confidential financial profile, recording the client’s personal and financial information, was completed;
(c) the client would not be permitted to continue with the investment process unless that person marked boxes on the confidential financial profile which indicated a particular risk profile and investment time horizon;
(d) the information from the confidential financial profile was sent to a section of the head office of Storm called the cash flow section where it was input into an excel spreadsheet and used to prepare what was referred to as a cash flow presentation;
(e) the purpose of the cash flow presentation was, inter alia, to determine the amount the client could afford to invest under the Storm Model, the amount of the investment that could be funded by way of margin loan and the client’s capacity to borrow against the security of real property to fund the remaining part of the investment;
(f) the preparation of cash flow presentations was a process that was controlled by the head office of Storm and individual representatives were not permitted to alter the cash flow presentations;
(g) Storm then obtained quotes for clients seeking funding by way of bank loan;
(h) after finalisation of the cash flow presentation and obtaining of quotes for bank funding, Storm prepared a lengthy pro forma Statement of Advice setting out its investment recommendations for the client;
(i) the Statement of Advice was prepared by the head office of Storm using a template document and completing variables relating to:
(i) the total amount to be invested;
(ii) the index funds into which the funds were to be invested and the split between the various funds;
(iii) the sources of the investment funds;
(iv) investment assumptions used to prepare the cash flow presentation;
(j) Storm would then facilitate the investment, including all applications by the client for home loans, margin loans or investment into the index funds;
(k) upon settlement of the bank loan or margin loan, Storm arranged for the funds to be disbursed to:
(i) purchase units in the index funds;
(ii) create a cash dam used to service the client’s borrowings; and
(iii) pay Storm’s fees for the financial advice;
(l) Storm then recommended further investments, called “steps”, based upon movements in the stock market after the initial investment.
11. The proceedings against the [Cassimatises] are based upon the advice which Storm provided to investors, identified in the FASC. These 46 investors fall into two groups, namely the Part E Investors and the Part F Investors.
12. Paragraphs 179 to 783 of Part E of the FASC plead, in detail, the manner in which Storm provided financial advice in accordance with the Storm Model to 10 identified couples or individuals (the Part E Investors) and the investment by each of those investors in accordance with Storm’s recommendations.
13. Paragraphs 784 to 1986 of Part F of the FASC then plead Storm’s provision of financial advice to a further 36 couples or individuals and the investment by those investors (the Part F Investors).
14. In respect of each of the 10 Part E Investors, ASIC alleges that, in providing the financial advice to invest in accordance with the Storm Model, Storm:
(a) breached s.945A(1)(b) of the Corporations Act as it did not give such consideration to the subject matter of the advice and did not conduct such investigation of the subject matter of the advice as was reasonable in the circumstances;
(b) breached s.945A(1)(c) of the Corporations Act as it provided financial advice which was not appropriate to the investors having regard to the consideration and investigation that Storm ought to have undertaken, but did not undertake, of the subject matter of the advice;
(c) breached s.1041E(1) of the Corporations Act by making statements to the investor about the consideration which had been given to the investor‘s personal circumstances in creating the advice, which statements were misleading and deceptive;
(d) breached an implied term of the retainer between Storm and the investor and the duty which Storm owed to the investor to exercise reasonable care and skill in the provision of financial advice to the investor by providing advice which failed to have regard to the personal circumstances of the investor, was not appropriate to the personal circumstances of the investor and which a reasonably competent financial advisor would not have provided to the investor;
(e) breached s.912A(1)(a) and 912A(1)(c) of the Corporations Act in providing the financial advice to the investor;
(f) was exposed to a risk of adverse legal outcomes as a consequence of these breaches.
15. In respect of each of the Part F Investors, ASIC pleads that in providing the financial advice to invest in accordance with the Storm Model, Storm:
(a) breached s.945A(1)(b) of the Corporations Act in that having regard to the information obtained from the relevant investor in relation to their personal circumstances, Storm did not give such consideration to the subject matter of the advice and did not conduct such investigation of the subject matter of the advice as was reasonable in the circumstances;
(b) breached s.912A(1)(a) and 912A(1)(c) of the Corporations Act in providing the financial advice to the investor;
(c) was exposed to a risk of adverse legal outcomes as a consequence of these breaches.
16. ASIC then alleges that:
(a) the various risks to which Storm became exposed as a consequence of the advice provided to each of the Part E Investors and each of the Part F Investors was foreseeable; and
(b) the degree of risk to which Storm was exposed was greater than a director, exercising his or her powers and discharging his or her duties with the degree of care and diligence that a reasonable person would exercise if he or she were in the position of either [Mr Cassimatis] or [Mrs Cassimatis], would permit Storm to be exposed to;
(c) by causing or permitting Storm to provide advice to the Part E Investors and the Part F Investors to invest in accordance with the Storm Model, each of the [Cassimatises] exposed Storm to the risks identified above, and in doing so breached their obligations under s.180(1) of the Corporations Act.
(Emphasis in original)
72 Paragraph 16 of the above summary paraphrases five of the six concluding paragraphs of ASIC’s FASC: paras 2301 to 2305. Those paragraphs contain the crux of ASIC’s case against the Cassimatises. They are not lengthy so it is convenient to set them out in full, as follows:
2301 In causing and permitting Storm to provide advice to the Part E Investors and the Part F Investors in accordance with the Storm Model [Mr Cassimatis] and [Mrs Cassimatis]:
(a) exposed Storm to a foreseeable risk of harm in respect of its provision of advice to Mr and Mrs Dodson:
(i) in breach of ss.945A(1)(b) and 945A(1)(c) of the Corporations Act as pleaded in paragraphs 1994, 1999 and 2004 above;
[The remaining sub-paragraphs of 2301 proceed along similar lines for each of the alleged breaches of the other provisions of the Corporations Act and in relation to each of the other 45 Part E and Part F investors.]
2302 The degree of risk to which Storm was exposed (as pleaded in the preceding paragraph) was greater than a director, exercising his or her powers and discharging his or her duties with the degree of care and diligence that a reasonable person would exercise if he or she were in the position of [Mr Cassimatis] or [Mrs Cassimatis], would permit the company to be exposed to.
2303 In the premises pleaded in paragraphs 2301 and 2302 above, in causing and permitting Storm to provide advice to the Part E Investors and the Part F Investors in accordance with the Storm Model:
(a) [Mr Cassimatis] failed to exercise his powers and discharge his duties with the degree of care and diligence that a reasonable person would exercise if he or she were in the position of [Mr Cassimatis] and thereby breached his obligations as a director of Storm created by s. 180(1) of the Corporations Act;
(b) [Mrs Cassimatis] failed to exercise her powers and discharge her duties with the degree of care and diligence that a reasonable person would exercise if he or she were in the position of [Mrs Cassimatis] and thereby breached her obligations as a director of Storm created by s. 180(1) of the Corporations Act.
2304 At the times that [Mr Cassimatis] and [Mrs Cassimatis] was responsible for and permitted Storm to provide advice to the Part E Investors and the Part F Investors in accordance with the Storm Model, the relevant circumstances of Storm for the purposes of s. 180(1) of the Corporations Act were:
(a) the circumstances pleaded in paragraphs 2(d), 2(e), 2(f), 2(g), 2(h) and 2(j) above;
(b) the circumstances pleaded in paragraphs 3(d), 3(e), 3(f), 3(g), 3(h) and 3(j) above;
(c) the circumstances pleaded in paragraphs 4(b) and 4(c) above;
(d) the circumstances pleaded in paragraphs 85 to 172 above;
(e) the fact that, where the business of Storm was providing financial product advice, the provision of such advice by Storm in breach of the provisions of the Corporations Act or in breach of its duty of care would expose the company to the risks identified above.
2305 In the premises pleaded in paragraphs 2301, 2302, 2303 and 2304 above, the actions of [Mr Cassimatis] and [Mrs Cassimatis] in causing and permitting Storm to provide advice to the Investors to invest in accordance with the Storm Model:
(a) materially prejudiced the interests of Storm; and/or
(b) were serious.
(Struck out sections and underlining excluded)
73 As can be seen from the summary above, much of ASIC’s FASC is taken up with a detailed description of the manner in which Storm provided financial advice in accordance with the Storm Model to each of the 46 Part E and Part F investors (see paras 12 and 13 of the summary above at [71]) and the way in which the provision of that advice allegedly constituted contraventions of various provisions of the Corporations Act (as described in paras 14 and 15 of the summary above at [71]). In ASIC’s FASC, the allegations in relation to each of the 46 Part E and Part F investors and each of the correlated contraventions of the Corporations Act proceed along similar lines. To exemplify the content and detail of those allegations, it is helpful to set out a part of the FASC related to one of the occasions on which financial advice was allegedly provided to one of the Part E investors, Mr and Mrs Dodson (referred to at para 2301(a) of the FASC: at [72] above), and the way in which the provision of that advice is alleged to constitute a contravention of s 945A(1)(b) of the Corporations Act. That particular provision serves as a good example because it is the sole provision that is common to all of the 46 Part E and Part F investors.
74 The earlier paragraphs of the FASC that are identified in para 2301(a)(i) above (paras 1994, 1999 and 2004) plead the details of the written statements of advice and statements of additional advice that Storm provided to Mr and Mrs Dodson on 27 November 2007, 18 April 2008 and 5 September 2008 respectively. The circumstances of the advice that was provided on 27 November 2007 will suffice for the purposes of this example. They are as follows (at paras 1991 to 1995):
1991 The advice which Storm provided to Mr and Mrs Dodson in the Statement of Advice dated 27 November 2007, pleaded in paragraphs 188 to 191 above, to borrow funds to invest in the Storm Funds was personal advice within the meaning of s.944A of the Corporations Act on the bases pleaded In paragraphs 1987 to 1989 above.
1992 In creating the Statement of Advice dated 27 November 2007 in accordance with the process pleaded in paragraphs 44 to 61 above, having regard to the information obtained from Mr and Mrs Dodson in relation to their personal circumstances (as pleaded in Part E above), Storm did not give such consideration to the subject matter of the advice, and did not conduct such investigation at the subject matter of the advice, as was reasonable in all of the circumstances in that:
(a) the recommendations made in the Statement of Advice by Storm were so inappropriate to the personal circumstances of Mr and Mrs Dodson, that the recommendations themselves evidence that Storm did not give such consideration or investigation to the subject matter of the advice as was reasonable in all the circumstances;
(b) Storm’s primary consideration and investigation of the best way to continue Mr and Mrs Dodson’s wealth building was, in accordance with the processes pleaded in paragraphs 39 to 55 above, a consideration of and investigation into the capacity of Mr and Mrs Dodson to invest in accordance with the Storm Model;
(c) the primary consideration which Storm gave to the recommendations for the purpose of wealth building was the preparation of a cash flow in accordance with the processes pleaded in paragraphs 44 to 53 above;
(d) apart from –
(i) the cash flow annexed to the Statement of Advice,
(ii) the parts of the Statement of Advice which were generated from that cash flow; and
(iii) matters specific to the personal circumstances of Mr and Mrs Dodson,
the content of the Statement of Advice consisted of pro forma statements and did not constitute consideration or investigation of the subject matter of the advice as was reasonable in all the circumstances;
(e) the process by which Storm provided advice to Mr and Mrs Dodson as pleaded in paragraphs 33 to 84 above required Mr and Mrs Dodson to identify for themselves whether or not investment in accordance with the Storm Model was appropriate for their personal circumstances;
(f) the process by which Storm provided advice to Mr and Mrs Dodson as pleaded in paragraphs 33 to 84 above meant:
(i) the only investment strategy that Storm could recommend to Mr and Mrs Dodson would be the Storm Model regardless of whether or not the Storm Model was appropriate for them having regard to their personal circumstances;
(ii) Storm did not give such consideration to or investigation of whether the financial objectives of Mr and Mrs Dodson could be met by an alternative investment strategy that did not involve the risk associated with the geared nature of investing in accordance with the Storm Model as was reasonable in all the circumstances,
(g) any consideration or investigation set out in the Statement of Advice of any investment strategy other than investment in accordance with the Storm Model consisted of proforma statements and did not represent a consideration or investigation that had regard to the information obtained about the personal circumstances of Mr and Mrs Dodson.
1993 The advice contained in the Statement of Advice dated 27 November 2007 (consisting of the investment recommendations set out therein and pleaded in Part E above) was not appropriate to the personal circumstances of Mr and Mrs Dodson, having regard to the consideration and investigation of the subject matter of the advice that was reasonable in all of the circumstances, in that:
(a) the standard form of the Statement of Advice which Storm provided to Mr and Mrs Dodson recognised that where clients do not have regular income there was a need to be particularly careful when undertaking a strategy of investing in shares via gearing;
(b) while the Storm Model for investment did not advocate placing all of Mr and Mrs Dodson’s wealth in shares the effect of the investment strategy was to expose the non-share assets to movements in the share market by using them as security for the home loan and margin loan used to fund the investment in the Storm Funds;
(c) as Mr and Mrs Dodson were only a few years from retirement they had only a limited time in which to recoup assess in the event that the market fell and the investment needed to be sold at a loss;
(d) clients with limited income earning potential in the lead up to retirement may not have the capacity to meet interest costs on borrowed funds if the investment portfolio does not generate sufficient cash flow;
(e) Mr and Mrs Dodson were not prepared to accept a real risk that some of their assets might be irrecoverably lost;
(f) the geared nature of the recommended investment increased the chance that Mr and Mrs Dodson would suffer an irrecoverable loss of capital if markets fell in value due to short term volatility;
(g) capitalising interest and reinvesting income could compound the potential loss if markets fell and thereby increase the risk of the investment strategy,
(h) Mr and Mrs Dodson could have achieved their stated financial objectives without investing in accordance with the Storm Model by implementing an investment strategy based on:
(i) saving and salary sacrifice into superannuation until they each reached retirement age;
(ii) living on the earnings from their assets and the age pension once they each reached age pension age;
(iii) gradually drawing down their capital to cover any shortfall between their income and expenses.
1994 In the premises, by providing the recommendations contained in the Statement of Advice dated 27 November 2007 to Mr and Mrs Dodson, Storm:
(a) breached ss.945A(1)(b) and 945A(1)(c) of the Corporations Act;
(b) was thereby exposed to a risk of:
(i) being found guilty of an offence pursuant to s.1311 of the Corporations Act;
(ii) becoming liable, upon conviction, to be punished by a penalty not exceeding the penalty set out in item 270A of Schedule 3 of the Corporations Act;
(iii) civil proceedings brought by Mr and Mrs Dodson pursuant to s.953B of the Corporations Act;
(iv) ASIC taking action against it under:
(A) s.915C of the Corporations Act;
(B) s.920A of the Corporations Act;
(C) s.1101B of the Corporations Act;
(c) the aforesaid risk was foreseeable.
1995 The degree of risk to which Storm was exposed (as pleaded in the preceding paragraph) was greater than a director, exercising his or her powers and discharging his or her duties with the degree of care and diligence that a reasonable person would exercise if he or she were in the position of [Mr Cassimatis] or [Mrs Cassimatis], would permit the company to be exposed to.
(Struck out parts and underlining omitted)
75 In addition to allegations that there was foreseeable risk to Storm arising out of contraventions of the Corporations Act pleaded above, ASIC also alleges (at para 2290 of the FASC) that Storm was exposed to a foreseeable risk of being sued in proceedings for negligence and breach of contract by Mrs and Mrs Dodson and each of the Part E investors. Further, ASIC alleges (at para 2291) that:
The degree of risk to which Storm was exposed … was greater than a director, exercising his or her powers and discharging his or her duties with the degree of care and diligence that a reasonable person would exercise if he or she were in the position of [Mr Cassimatis] or [Mrs Cassimatis], would permit the company to be exposed to.
76 The first set of paragraphs referred to in 1991 above (paras 188 to 191), plead the manner in which the statement of advice dated 27 November 2007 was provided to Mr and Mrs Dodson. They are as follows:
188 On or about 27 November 2007, Mr Fullerton-Smith met with Mr and Mrs Dodson and presented them with the Statement of Advice prepared by the head office of Storm.
189 The Statement of Advice prepared for Mr and Mrs Dodson was in the standard form of advice produced by the head office of Storm.
190 The Statement of Advice prepared for Mr and Mrs Dodson, stated:
(a) on page 2 of 106:
(i) that the report had been prepared following investigation into the needs of Mr and Mrs Dodson;
(ii) that Storm had made recommendations to address the needs of Mr and Mrs Dodson based on the assumptions set out in the Statement of Advice;
(iii) that Storm had recommended a process that would help Mr and Mrs Dodson to achieve their goals;
(b) on page 20 of 106:
(i) that Mr and Mrs Dodson had provided Storm with information about their current financial position and any other relevant circumstances;
(ii) that Storm had used that information to evaluate the existing financial profile of Mr and Mrs Dodson and to prepare the recommendations in the Statement of Advice.
191 The Statement of Advice recommended that Mr and Mrs Dodson:
(a) take out a loan of $276,000.00 from the BOQ;
(b) take out a margin loan of $90,000.00 from Colonial;
(c) use their existing managed funds worth approximately $65,000.00 as security for the margin loan;
(d) using those borrowings to invest:
(i) $16,000.00 in the Storm Australian Technology Indexed Trust;
(ii) $202,000.00 in the Storm Australian Industrials Indexed Trust;
(iii) $97,000.00 in the Storm Australian Resources Indexed Trust;
(iv) pay Storm’s fees of $26,960.00 for the advice;
(v) the residue of approximately $21,000.00 in a Macquarie Investment Management Ltd Cash Management Trust Account.
(Struck out parts omitted)
77 The gist of the “bases pleaded in paragraphs 1987 to 1989” (also referred to in para 1991 above) is that the financial advice constituted “financial products” or was “financial product advice” within the terms of the relevant provisions of the Corporations Act.
78 The various “processes” that are referred to in: para 1992 (paras 44 to 61); 1992(b) (paras 39 to 55); 1992(c) (paras 44 to 53); and 1992(e) and (f) (paras 33 to 84) above, constitute the processes that were allegedly followed as a part of the Storm Model. Those processes are described in summary form in para 10 of the summary above (at [71]). They included:
(a) education seminars;
(b) the preparation of a confidential financial profile;
(c) a requirement for the client to indicate a particular risk profile and investment time horizon;
(d) the preparation of a cashflow presentation;
(e) obtaining quotes for bank loans;
(f) preparing a pro forma statement of advice; and
(g) making applications for home loans, margin loans or for investments in index funds.
79 Before leaving this example, it is important to emphasise that it relates to just one of the four provisions of the Corporations Act (see paras 14 and 15 of the summary at [71] above) that were allegedly breached in relation to just one of the three occasions when statements of advice were provided to Mr and Mrs Dodson. The Dodsons, in turn, are just one of the 46 couples or individuals that make up the Part E and Part F investors described in ASIC’s FASC. As is already noted above, all of these allegations are set out in Parts E and F of ASIC’s FASC. In all, those two parts of the FASC contain the details of more than 200 occasions when such statements of advice were provided. Indeed, those allegations account for approximately two-thirds of the total document.
80 Finally, it is necessary to identify, at least in summary form, the circumstances that ASIC pleads are relevant for the purposes of s 180(1) of the Corporations Act. They are identified at para 2304 of the FASC (see at [72] above). The first set of circumstances are those identified in particular subparagraphs of paras 2 to 4 inclusive of the FASC. It is convenient to set out the whole of those three paragraphs as follows:
Emmanuel Cassimatis
2 At all material times, [Mr Cassimatis]:
(a) held a masters degree in finance from the University of Western Sydney;
(b) was a qualified financial planner;
(c) had approximately 30 years experience as a financial planner;
(d) was an executive director of Storm Financial Limited (Storm);
(e) together with [Mrs Cassimatis], was one of only two executive directors of Storm;
(f) held the positions of Executive Chairman and Chief Executive Officer of Storm;
(g) from at least 1 March 2007, held the position of Joint Chief Executive Officer of Storm together with [Mrs Cassimatis];
(h) together with [Mrs Cassimatis], held the beneficial interest in all of the shareholding of Storm;
(i) was an authorised representative or employee representative of Storm pursuant to s.911A(2)(a) of the Corporations Act;
(j) together with [Mrs Cassimatis], managed the business conducted by Storm.
Particulars
This is to be inferred from the facts, matters and circumstances pleaded in paragraphs 2(d), 2(e), 2(f), 2(g) and 2(h) above.
Julie Cassimatis
3 At all material times, [Mrs Cassimatis]:
(a) held a masters degree in finance from the University of Western Sydney;
(b) was a qualified financial planner;
(c) had approximately 20 years experience as a financial planner;
(d) was an executive director of Storm;
(e) together with [Mr Cassimatis], was one of only two executive directors of Storm;
(f) held the positions of Managing Director of Storm and Head of Compliance of Storm;
(g) from at least 1 March 2007, held the position of Joint Chief Executive Officer of Storm together with [Mr Cassimatis];
(h) together with [Mr Cassimatis], held the beneficial interest in all of the shareholding of Storm;
(i) was an authorised representative or employee representative of Storm pursuant to s.911A(2)(a) of the Corporations Act;
(j) together with [Mr Cassimatis], managed the business conducted by Storm.
Particulars
This is to be inferred from the facts, matters and circumstances pleaded in paragraphs 3(d), 3(e), 3(f), 3(g) and 2(h) above.
Storm
4 At all materials times, Storm:
(a) was a duly incorporated company;
(b) carried on the business of providing financial services, financial product advice and financial products (as these terms are defined in Chapter 7 of the Corporations Act) to the public for reward as is more particularly set out below;
(c) held Australian financial services licence number 228905.
81 The other set of circumstances relied upon by ASIC are those pleaded in paras 85 to 172 of the FASC. They are conveniently summarised at paras 8 and 9 of the summary above (see at [71]). Within paras 85 to 172, the two central allegations are those contained in paras 85 and 142 relating to Mr Cassimatis and Mrs Cassimatis respectively. They are as follows:
85 [Mr Cassimatis] (together with [Mrs Cassimatis]) set up and structured Storm such that its business was that of advising its clients (including the Investors) to invest in accordance with the Storm Model and facilitating such investment.
Particulars
This is to be inferred from the facts, matters and circumstances pleaded in paragraphs 2(d), 2(e), 2(f), 2(g), 2(h) and 2(j) above and paragraphs 86 to 141 below with respect to:
(A) [Mr Cassimatis’] responsibility for the management of Storm’s business (see paragraphs 2(d), 2(e), 2(f), 2(g), 2(h) and 2(j) above and paragraphs 86 to 91 below).
(B) [Mr Cassimatis’] role in establishing the business of Storm (see paragraphs 92 to 96 below).
(C) [Mr Cassimatis’] role in developing and implementing the Storm Model (see paragraphs 97 to 103 below).
(D) [Mr Cassimatis’] role in developing Storm’s institutional relationship with fund managers managing the Storm Funds (see paragraphs 104 to 115 below).
(E) [Mr Cassimatis’] role in developing Storm’s institutional relationship with banks who lent to Storm clients (see paragraphs 116 to 123 below).
(F) [Mr Cassimatis’] role in developing Storm’s institutional relationship with margin lenders who lent to Storm clients (see paragraphs 124 to 138 below).
(G) [Mr Cassimatis’] role in integrating new offices and new authorised representatives into the Storm business (see paragraphs 139 to 141 below).
…
142 [Mrs Cassimatis] (together with [Mr Cassimatis]) structured Storm such that its business was that of advising the public to invest in accordance with the Storm Model and to facilitate such investment.
Particulars
This is to be inferred from the facts, matters and circumstances pleaded in paragraphs 3(d), 3(e), 3(f), 3(g), 3(h) and 3(j) above and paragraphs 143 to 178 below with respect to:
(A) [Mrs Cassimatis’] responsibility for the management of Storm’s business (see paragraphs 3(d), 3(e), 3(f), 3(g), 3(h) and 3(j) above and paragraphs 143 to 147 below).
(B) [Mrs Cassimatis’] role in developing Storm’s institutional relationship with fund managers managing the Storm Funds (see paragraphs 148 to 156 below).
(C) [Mrs Cassimatis’] role in developing Storm’s institutional relationship with banks who lent to Storm clients (see paragraphs 157 to 160 below).
(D) [Mrs Cassimatis’] role in developing Storm’s institutional relationship with margin lenders who lent to Storm clients (see paragraphs 161 to 168 below).
(E) [Mrs Cassimatis’] role in integrating new offices and new authorised representatives into the Storm business (see paragraphs 169 to 170 below).
(F) [Mrs Cassimatis’] role in implementing the Storm Model and monitoring compliance with Storm’s procedures (see paragraphs 171 to 178 below).
82 The paragraphs from 86 to 141 inclusive (re Mr Cassimatis) and from 143 to 178 inclusive (re Mrs Cassimatis) all plead facts to support these central allegations that the Cassimatises set up and/or structured Storm such that its business was that of advising its clients to invest in accordance with the Storm Model and to facilitate such investments.
The Cassimatises’ defence
83 It is then instructive to summarise how the Cassimatises responded to these various allegations in their defence. Save that an additional section has been added at the beginning and an additional part (“Further Matters of Defence: I–XIX”) has been added at the end, the Cassimatises’ defence is divided into the same Parts and employs the same headings for those Parts as are used in ASIC’s FASC. As with the FASC, Parts E and F deal with the detailed allegations made in relation to the various occasions upon which financial advice was allegedly provided to the 46 couples or individuals that make up the Part E and Part F investors. Accordingly, those parts of the Cassimatises’ defence also account for approximately two-thirds of the total document (cf the FASC at [79] above). Turning from these observations about the layout of the document, the first notable aspect of the Cassimatises’ defence is that the pivotal allegations in paras 2301 to 2305 of ASIC’s FASC are met with a broad denial (in para 1644) as follows:
The [Cassimatises] deny paragraphs 2301 to 2305, repeat and rely on paragraph 6 above and say that the true facts are pleaded in this Defence, including in Parts I to XV and XVIII below.
84 The first paragraph that is relied upon to support this denial (para 6 of the Cassimatises’ defence) raises a series of legal points. It is as follows:
6. By way of an overarching response to the matters pleaded in the Statement of Claim, the [Cassimatises] say that:-
(a) the ultimate issue in the proceeding is not whether Storm breached the Act or its duty to investors but whether the [Cassimatises] breached section 180 of the [Corporations] Act;
(b) section 180 is not concerned with any general obligation owed by directors at large to conduct the affairs of the company in accordance with law generally or the [Corporations] Act in particular but is concerned with duties owed to the company;
Particulars
ASIC v Maxwell (2006) 59 ACSR 373 at [104] per Brereton J.
(c) in a solvent company, the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise;
Particulars
Kinsela v Russell Kinsela Pty Ltd (In liq) (1986) 4 NSWLR 722 at 730 Street CJ, cited by Gummow and Hayne JJ in Angas v Carabelas (2005) 226 CLR 507 at [67].
(d) the solvency of Storm and the fact that the [Cassimatises] owned the shareholding in Storm are critical to any assessment of whether the [Cassimatises] contravened section 180 of the Act;
Particulars
Cf Angas v Carabelas (2005) 226 CLR 507 at [69] per Gummow and Hayne JJ.
(e) the [Cassimatises] did not contravene section 180 of the Act as they conducted the affairs of a solvent company in good faith and in accordance with the informed wishes of its shareholders - themselves.
85 The next set of paragraphs relied upon to support the denial (Parts I to XV and XVIII of the defence) contain a series of factual allegations that the Cassimatises rely upon as “Further Matters of Defence”. Those parts of the defence comprise approximately 40 pages, so it is difficult to provide a brief summary of them. However, the index headings to those parts do give some indication of the breadth of the “true facts” that the Cassimatises seek to rely upon. They are as follows:
FURTHER MATTERS OF DEFENCE 281
I. The Storm Business Model:- The [Cassimatises], with the
assistance of Storm’s other directors, established a business model
which featured clear and integral procedures for the operation of
the business of Storm 281
II:- Australian index funds are amongst the safest and least
volatile of equity investments 291
III:- Storm’s assumptions for investment performance were
consistent with ASIC’s website 292
IV:- The cases pleaded by ASIC are not representative of
Storm’s clients; ASIC interviewed hundreds of clients but only
chose to prosecute in relation to 46 of them 293
V:- Thousands of Storm clients invested successfully pursuant
to Storm’s advice through both falling and rising markets 294
VI:- No complaints from clients to Storm, ASIC or the
FPA through both falling and rising markets 295
VII:- ASIC was aware of the Storm Business Model and
held no concern 296
VIII:- No real risk of prosecution because ASIC investigated
and did not prosecute 306
IX:- Storm’s independent directors approved of the Storm
Business Model 307
X:- Storm’s independent auditor (which Storm
voluntarily engaged) approved of the Storm Business Model 310
XI:- Extensive due diligence revealed no concerns as to the
Storm Business Model 311
XII:- Independent expert academics (Professor Tom Valentine
and Professor Ian Harper) separately approved of Storm’s
practices and procedures 312
XIII:- Numerous Australian banks were aware of the Storm
Business Model and expressed no concern 313
XIV:- The Financial Planning Association of Australia expressed
no concern with the Storm Business Model 314
XV:- Storm had appropriate insurance against losses for
negligence and breach of contract and claims under
section 953B of the Act 316
XVI:- True cause of loss 317
XVII:- Section 1311 offences:- No sufficient facts alleged 318
XVIII:- Business judgment rule:- section 180(2) 322
XIX:- The [Cassimatises] ought fairly be excused:- section 1318 322
86 The Cassimatises’ response to the various allegations about the breach of s 945A(1)(b) of the Corporations Act comprising the example given above, viz the statement of advice provided to Mr and Mrs Dodson dated 27 November 2007 (see at [74] above), are contained in paras 1608 to 1609 of their defence as follows:
1608. The [Cassimatises] do not admit paragraph 1991 of the Statement of Claim.
1609. As to paragraphs 1992 to 2005 of the Statement of Claim, the [Cassimatises] say that:-
(a) these paragraphs proceed upon a misapprehension of the facts and a misunderstanding of the Storm Business Model and the circumstances of Mr and Mrs Dodson;
(b) the true facts are pleaded in Parts C, E and F above and Part I below as well as in the pleaded documents, which the [Cassimatises] will refer to at trial for their full terms, true meaning and effect;
(c) Storm was only obliged to investigate or consider the subject matter of the pleaded advice;
(d) the matters pleaded in paragraph 1992 go beyond the subject matter of such advice;
(e) the allegation pleaded in paragraph 1992(a) is argumentative and bereft of any plea of material fact;
(f) the cash flow analysis, while important, comprised only a fraction of the written advice pleaded;
(g) the allegation in paragraph 1992(d) - that the pleaded advice consisted of “matters specific to the personal circumstances of Mr and Mrs Dodson” and “pro forma statements” - is tautological and irrelevant;
(h) directors in the position of the [Cassimatises] would or could reasonably have assumed that investors such as Mr and Mrs Dodson understood the risks attending the subject matter of the advice, since:-
(i) prior to consulting Storm for the pleaded advice, they attended an education seminar;
(ii) the pleaded advice contained comprehensive information as to the risks attending the subject matter of the advice;
(iii) Mr and Mrs Dodson signed a statement at the foot of each page, acknowledging that they had read and understood the pleaded advice on that page;
(i) the [Cassimatises] do not admit 1996 and 2001; and
(j) the [Cassimatises] otherwise deny paragraphs 1992 to 2005.
87 The other paragraphs of the FASC that form a part of the example given above are dealt with elsewhere in the Cassimatises’ defence. First, as to paras 188 to 191, which plead the manner in which the statement of advice was provided to Mr and Mrs Dodson (see [76] above), the Cassimatises:
(a) admit para 188 and say that: “Storm gave the document called ‘The Business of Making Money (Statement of Advice), Financial Plan created for Paul and Valerie Dodson’ and dated 27 November, 2007 (‘Statement of Advice’) to Mr and Mrs Dodson on that date”;
(b) deny para 189 and say that: “the Statement of Advice prepared for Mr and Mrs Dodson was not in any standard form and no material facts are pleaded to establish the contrary allegation”; and
(c) do not admit paras 190 and 191 and claim that: (i) “the matters there pleaded are selective and paraphrased excerpts from the Statement of Advice”; and (ii) “the [Cassimatises] will refer to the Statement of Advice at trial for its full terms, true meaning and effect”.
88 Secondly, as to “the bases” pleaded in paras 1987 to 1989 inclusive (see at [77] above), the Cassimatises:
(a) deny para 1987 and say that: “(i) paragraph 1987 alleges that ‘investments’ in the pleaded index funds and cash management trust were financial products; (ii) section 763A of the Act relevantly defines ‘financial product’ as ‘a facility through which a person makes an investment’; (iii) in the premises, financial products are facilities rather than investments”;
(b) do not admit paras 1988 to 1990 and say that: “by virtue of paragraph 765A(1)(h) of the Act, a credit facility is not a financial product”.
89 Thirdly, the various “processes” that are together described in paras 33 to 84 of the FASC (see at [78] above) are dealt with separately in relation to each process but, with some exceptions, each relevantly contains the following standard form plea:
As to paragraphs … of the Statement of Claim:-
(a) the [Cassimatises] deny that Storm provided advice to the Investors in accordance with “the Storm Model”;
(b) the Storm Business Model is correctly identified in Part I of this Defence;
(c) the [Cassimatises] rely on Parts E and F of this Defence, in which the [Cassimatises] plead more particularly to the allegations as to the personal circumstances of the Investors, and the advice that Storm gave to the Investors;
90 Further, the Cassimatises raise a general plea in response to the processes alleged in paras 33 to 84 (para 30 of the defence) as follows:
Further, the [Cassimatises] deny the allegations made later in the Statement of Claim, that the process by which Storm provided advice to its clients, as pleaded in paragraphs 33 to 84 thereof meant that:-
(a) the only investment strategy that Storm could recommend would be the Storm Model regardless of whether or not the Storm Model was appropriate for clients;
(b) Storm did not give such consideration to or investigation of whether its clients’ financial objectives could be met by an alternative investment strategy that did not involve the risk allegedly associated with the geared nature of investing in accordance with the Storm Model as was reasonable in all the circumstances;
(c) any consideration or investigation set out in its written advice other than investment in accordance with the Storm Model consisted of pro forma statements and did not represent a consideration or investigation that had regard to the information obtained about the personal circumstances of its clients,
and the [Cassimatises] say that:-
(d) Storm’s business did not involve such features;
(e) in any event, the allegations in paragraphs 35, 39, 43, 51, 53, 55 and 62 are to the effect that prospective clients were given information as to the relevant features of and risks associated with borrowing money to fund the acquisition of units in index funds, sufficient to permit them to make an informed choice whether or not to continue investigation and consideration of, and to engage in, such transactions;
(f) in the material period of time referred to in the Statement of Claim, namely 2005 to 2008, Storm gave advice to numerous persons, other than advice only to acquire units in index funds with borrowed money, namely:-
(i) it advised numerous clients that their level of debt relative to their income and assets was such that they had no practical opportunity to improve their financial position other than by reducing their debt;
(ii) it recommended to numerous clients that they pursue an investment strategy that did not involve the acquisition of units in index funds with borrowed money;
(iii) it recommended to numerous clients that they pursue an investment strategy that involved the acquisition of units in index funds with borrowed money, and other investment strategies at the same time.
(g) at all material times, and, in particular, in the years 2005 to 2008, Storm gave advice, through staff who specialised in, or were engaged in, financial advice and financial products other than investments in index funds with borrowed money and cash management trusts (including by the staff in the traditional products division) namely:-
(i) salary sacrificing and salary packaging;
(ii) allocated pensions;
(iii) superannuation;
(iv) changing the balance of existing portfolios;
(v) savings plans, and private debt reduction programmes.
Particulars
The [Cassimatises] will provide further particulars after discovery
91 Turning next to the circumstances that ASIC pleads are relevant for the purposes of s 180(1) of the Corporations Act (see at [80] above), the Cassimatises have:
(a) admitted paras 2(a) to (h) inclusive, but denied para 2(j), viz that Mr Cassimatis managed the business conducted by Storm;
(b) admitted paras 3(a) to (h) inclusive, but denied para 3(j), viz that Mrs Cassimatis managed the business conducted by Storm; and
(c) admitted paras 4(a) and (c), also admitted that: “Storm’s business included the provision of financial services and financial product advice to the public for reward”, but denied that: “Storm’s business included the provision of financial products”.
92 As to the circumstances relied upon by ASIC, as pleaded in paras 85 to 172 of the FASC (see at [81] above), in their defence the Cassimatises deny the allegations contained in the central paragraphs within those paragraphs, viz paras 85 and 142.
93 Finally, it should be noted that the Cassimatises’ defence begins with a section entitled “Overarching Defence”. That section is quite lengthy, but it is worth setting out para 7 of it because that paragraph essentially foreshadows the matters the Cassimatises have set out in their affidavits in support of this application. Paragraph 7 of the Cassimatises’ “Overarching Defence” is as follows:
7. Further and alternatively:-
(a) the conduct of the [Cassimatises] must be considered as at the date it occurred and not with the benefit of hindsight;
(b) when the alleged conduct took place Storm had operated the Storm Business Model successfully for many years and the [Cassimatises] had little or no reason to suspect that this would not continue;
(c) many organisations and individuals had reviewed Storm’s practices and procedures without raising concerns;
(d) ASC and ASIC visited Storm’s premises and conducted reviews and audits on numerous occasions from 1993 to 2008;
(e) during 2006 to 2007, ASIC received four complaints in relation to Storm’s Statement of Advice and fee levels (although no complaints were received from Storm clients until after October 2008);
(f) on 6 November 2007, Storm lodged with ASIC a prospectus for its offer of 160 million shares to the public;
(g) the Storm Business Model was explained in Storm’s prospectus;
(h) ASIC reviewed Storm’s prospectus and met with Storm to discuss the prospectus and Storm’s practices and procedures;
(i) Storm’s practices and procedures were also reviewed, to a greater or lesser extent, by:-
(i) Paragem, who were independent auditors voluntarily engaged by Storm, and who provided audit reports biennially;
(ii) Peter Hutley, a director of Storm and a former director of KPMG’s Risk Advisory Service, who provided a report to Storm in 2007;
(iii) PricewaterhouseCoopers, who provided the board of Storm with a due diligence report in 2007;
(iv) Mallesons Stephen Jaques, who also provided the board of Storm with a due diligence report in 2007;
(v) various banks with whom Storm dealt, as pleaded in Part D of the Statement of Claim;
(vi) Professor Tom Valentine and Professor Ian Harper;
(vii) Storm’s insurers, who undertook due diligence enquiries in respect of Storm’s business practices before insuring it;
(j) Storm’s financial planning processes and controls were also commented upon favourably by Tony Butcher of the FPA;
(k) Storm successfully completed an FPA National Quality Assessment Program;
(l) despite dealing with Storm in the period relevant to the Statement of Claim, none of the above individuals or organisations reported to the board of Storm or the [Cassimatises]:-
(i) any substantial non compliance by Storm with any relevant financial services law;
(ii) any systemic problems of the nature and scale alleged in Parts G, H, I and J of the Statement of Claim; or
(iii) that Storm was being exposed to an unacceptable risk of harm by reason of matters such as those alleged in Parts G, H, I and J of the Statement of Claim;
(m) ASIC should not now contend that the [Cassimatises] ought to have been aware that Storm was contravening the Act and/or its duty to clients when:-
(i) ASIC itself did not believe (or was unaware of) such matters, despite being familiar with Storm’s practices and procedures; and
(ii) other individuals and organisations were unaware of such matters, despite being familiar with Storm’s practices and procedures and despite having greater expertise with financial services laws and compliance issues than the [Cassimatises];
(n) further, despite having well over 10,000 clients, Storm received only 10 complaints in the period from 2001 (the first complaint recorded in its Register of Complaints) to September, 2008 (the most recent [Statement of Additional Advice] pleaded in the Statement of Claim);
(o) only one of these complaints included matters to the effect that Storm’s advice had any of the features alleged in Parts G, H, I and J of the Statement of Claim;
(p) this complaint was externally investigated and then withdrawn;
(q) further, the risk of civil claims against Storm was addressed by Storm having insurance against the same;
(r) having regard to the matters set out above, and the further matters pleaded in Parts I to XV of this Defence, any reasonable director in the position of the [Cassimatises]:-
(i) would have concluded that it was in Storm’s interest to continue operating the Storm Business Model;
(ii) alternatively, could reasonably have reached this conclusion.
Particulars
Particulars of the above matters are provided in Parts I to XV below, under the general heading “Further Matters By Way of Defence”.
The Storm Model and the Storm Business Model
94 It will be noted that various paragraphs of the Cassimatises’ defence, including its “Overarching Defence” section immediately above, seek to draw a distinction between the “Storm Business Model” and the “Storm Model” which is central to the allegations in ASIC’s FASC (see, for example, 1609(a) of the defence at [86] above, [89(a) and (b)] above and 7(b) and (g) at [93] above). This distinction between the Storm Model and the Storm Business Model is highlighted by ASIC in its reply. It is therefore convenient, at this point, to describe the two concepts as they are defined in ASIC’s FASC and in the Cassimatises’ defence to identify the nature and importance of the distinction.
95 The Storm Model is defined in para 22 of ASIC’s FASC as follows:
At all material times, Storm recommended to each of the 10 investors referred to in paragraphs 179 to 783 below (the Part E Investors) and each of the 36 investors referred to in paragraphs 784 to 1986 below (the Part F Investors) (the Part E Investors and the Part F Investors being referred to collectively in this pleading as the Investors) that they invest in accordance with a model for investment (the Storm Model) which involved:
(a) advice to the Investors that they take out a bank loan secured by a mortgage over their real property (the home loan) in order to access the available equity in that property to invest in indexed funds recommended by Storm comprising shares in companies listed on the Australian Stock Exchange (Storm Funds);
(b) advice to the Investors, provided either in conjunction with the advice to take out the home loan or separately from that advice, that they take out a margin loan in order to access further funds to invest in Storm Funds;
(c) subsequent advice to Investors to undertake what were referred to as “steps”, by which the clients borrowed further money, either by way of increasing their margin loan or increasing the size of their home loan, to invest in Storm Funds.
96 The Storm Business Model is defined in the glossary to the Cassimatises’ defence (at para 1) as follows:
the business model of Storm, comprising the practices and procedures for the management and operation of its financial services business, as more particularly described in Part I of this Defence (under the general heading, “Further Matters of Defence”)
97 Then, Part I under the heading “Further Matters of Defence” begins by describing the Storm Business Model as follows:
I. The Storm Business Model:- The [Cassimatises], with the assistance of Storm’s other directors, established a business model which featured clear and integral procedures for the operation of the business of Storm
1645. Over the years in which the [Cassimatises] were directors of Storm, they (and the other directors) established numerous clear, written procedures for Storm’s operations, including the provision of financial advice to clients (“the Storm Business Model”).
1646. The principal practices and procedures for the Storm Business Model, relevant to the allegations in the Statement of Claim, were set out in the following documents, all of which were widely disseminated to all relevant staff of Storm, who were required to be familiar with, and to comply with such practices and procedures:-
…
98 The remainder of that paragraph of the defence (para 1646) sets out the details of a large number of compliance manuals, policy documents, board charters, codes of conduct and the like. It concludes with the statement:
The [Cassimatises] may refine and supplement these particulars of the documents setting out the relevant practices and procedures in the Storm Business Model, following discovery, including the data from Storm’s computer system in the hands of ASIC.
99 Paragraph 1648 of the Defence pleads that:
The Storm Business Model included the following principal elements of the financial services (including advice) that Storm gave to those who approached it for financial advice:-
…
Thereafter the details of the principal elements of the financial services are described in some 21 sub-paragraphs.
100 Similarly, para 1649 of the defence provides details of “Storm’s education seminars” and para 1650 describes “Storm’s investment philosophy, [as] imparted to its clients” during the period 2005 to 2008. Finally, para 1651 pleads that:
The results of the implementation of the practices and procedures in the Storm Business Model were that the average time from a prospective client’s first approach to Storm to it giving financial advice was approximately six months.
101 It will be immediately apparent from the above that, while they both describe various aspects of Storm’s business activities over the relevant period and, therefore, numerous components of them overlap, the Storm Model is described in ASIC’s FASC as the particular model for investment that was used to advise the Part E and Part F investors (see at [95] above) whereas the Storm Business Model is described by the Cassimatises’ defence as comprising the practices and procedures for the management and operation of Storm’s financial services business, including the provision of financial advice to clients (see at [96] and [97] above).
ASIC’s reply
102 To complete this examination of the pleadings, a number of aspects of ASIC’s reply require brief mention. First, the reply raises the distinction between the Storm Business Model and the Storm Model as delineated above. This is a constant theme throughout the reply, but the following will serve as an example:
4 As to paragraph 7(b) of the Defence, ASIC [see at [93] above]:
…
(b) says that the operation of the Storm Business Model (as that term is defined in the Defence) is not relevant to ASIC’s claim against the [Cassimatises] which is based upon the application of the Storm Model, the characteristics of which were pleaded in Part C of the Further Amended Statement of Claim, to the 46 investors the subject of Parts E and F of the Further Amended Statement of Claim.
103 The reply also identifies what it claims is a lack of particularity in many of the allegations set out in para 7 of the “Overarching Defence” section of the Cassimatises’ defence (see at [93] above). The following are of particularly pertinent for present purposes:
6 As to paragraph 7(d) of the Defence, ASIC:
…
(b) otherwise does not admit the allegation because the occasions on which ASC and ASIC are alleged to have visited Storm’s premises or conducted reviews and audits are not identified in that paragraph;
(c) says that at no stage did ASC or ASIC review the application of the Storm Model, as pleaded in Part C of the Further Amended Statement of Claim, to the 46 investors identified in Parts E and F of the Further Amended Statement of Claim or to any investors whose personal circumstances were relevantly similar to those pleaded investors;
…
9 As to paragraph 7(i) of the Defence, ASIC:
(a) does not admit the allegations because the practices and procedures of Storm which are alleged to have been reviewed are not identified in that paragraph;
(b) says that none of the entities in paragraph 7(i) reviewed the application of the Storm Model, as pleaded in Part C of the Further Amended Statement of Claim, to the 46 investors identified in Parts E and F of the Further Amended Statement of Claim or to any investors whose personal circumstances were relevantly similar to those pleaded investors;
...
10 As to paragraph 7(j) of the Defence, ASIC:
(a) does not admit the allegations because the paragraph does not identify the comments allegedly made by Mr Butcher;
(b) says that the FPA did not review the application of the Storm Model, as pleaded in Part C of the Further Amended Statement of Claim, to the 46 investors identified in Parts E and F of the Further Amended Statement of Claim or to any investors whose personal circumstances were relevantly similar to those pleaded investors;
…
11 As to paragraph 7(k) of the Defence, ASIC:
…
(b) otherwise does not admit the allegations because the paragraph does not adequately identify the program referred to;
(c) says that the FPA did not review the application of the Storm Model, as pleaded in Part C of the Further Amended Statement of Claim, to the 46 investors identified in Parts E and F of the Further Amended Statement of Claim or to any investors whose personal circumstances were relevantly similar to those pleaded investors;
…
13 As to paragraph 7(m) of the Defence, ASIC:
(a) does not admit the allegation in subparagraph (i) that ASIC was familiar with Storm’s practices and procedures because the Defence does not identify the practices and procedures to which reference is made;
(b) admits that, at the time of the conduct which is the subject of the Further Amended Statement of Claim, ASIC did not believe that, and was not aware that, Storm was contravening the Act and/or its duty to clients as alleged in the Further Amended Statement of Claim;
…
104 While it apparently did not consider it necessary to respond to every allegation made in the Cassimatises’ defence, ASIC’s reply did include the following responses that are of some significance for present purposes. First, in response to the “Further Matters of Defence” section of the Cassimatises’ defence (see at [85] above), ASIC denied or did not admit the particular allegations contained in Parts V (Thousands of Storm clients invested successfully pursuant to Storm’s advice through both falling and rising markets), VI (No complaints from clients to Storm, ASIC or the FPA through both falling and rising markets), VII (ASIC was aware of the Storm Business Model and held no concern), IX (Storm’s independent directors approved of the Storm Business Model), X (Storm’s independent auditor ... approved of the Storm Business Model), XII (Independent expert academics (Professor Tom Valentine and Professor Ian Harper) separately approved of Storm’s practices and procedures), XIV (The Financial Planning Association of Australia expressed no concern with the Storm Business Model) and XV (Storm had appropriate insurance against losses for negligence and breach of contract and claims under section 953B of the Act). As well, in most cases ASIC added a pleading to the following effect:
As to paragraph … of the Defence, ASIC:
(a) …
(b) says that, in any event:
(i) ASIC’s claim against the [Cassimatises] is concerned with the application of the Storm Model (identified in Part C of the Further Amended Statement of Claim) in the creation of the financial advice which Storm provided to the Part E Investors and the Part F Investors as pleaded in the Further Amended Statement of Claim;
(ii) Storm’s history of providing financial advice to clients other than the Part E Investors and the Part F Investors would not provide a basis upon which a reasonable director in the position of the [Cassimatises] could conclude that it was in Storm’s interest to provide financial advice to the Part E Investors and the Part F Investors in accordance with the Storm Model in circumstances where, in providing such advice, Storm:
(A) did not give reasonable consideration to, and did not conduct reasonable investigations of, the subject matter of the advice given to those identified investors;
(B) did not give advice which was appropriate to the particular circumstances of those identified investors.
(iii) a reasonable director in the position of the [Cassimatises] would not dismiss the risk of harm posed by Storm’s advice to the Part E Investors and the Part F Investors (as alleged in the Further Amended Statement of Claim) on the basis that Storm had not previously caused loss to other investors.
105 Secondly, in response to the allegation in the Cassimatises’ defence about the advice provided to Mr and Mrs Dodson on 27 November 2007 as pleaded in paras 1608 to 1609 of the defence (see [86] above), ASIC pleaded that:
524 As to paragraph 1609 of the Defence, ASIC:
(a) admits that:
(i) Mr and Mrs Dodson attended an education seminar;
(ii) the Statement of Advice dated 27 November 2007 contained information concerning the risks involved in making investment decisions and borrowing to invest (but denies that such information was comprehensive);
(iii) Mr and Mrs Dodson signed a statement at the foot of each page of the Statement of Advice dated 27 November 2007, acknowledging that they had read and understood the advice on that page;
(b) says that page 50 of the Statement of Advice dated 27 November 2007 informed Mr and Mrs Dodson that, provided they had the appropriate investment time frame, the investment plan recommended by Storm contained strategies to safeguard them, and to allow them to profit from volatility in their investment returns;
(c) further says that neither Storm’s explanation of investment risks nor Mr and Mrs Dodson’s understanding of such risks is capable of establishing that:
(i) Storm gave such consideration to the subject matter of the advice or conducted such investigation of the advice as was reasonable in all of the circumstances;
(ii) the advice which Storm gave to Mr and Mrs Dodson was appropriate to their personal circumstances;
(d) otherwise does not plead to paragraphs 1609(a) to 1609(h) because those paragraphs do not plead any material fact.
106 Thirdly, ASIC joined issue with the Cassimatises’ claim in their defence (see at [87(b)] above) on the issue whether the statement of advice prepared for Mr and Mrs Dodson was in standard form.
107 Fourthly, and finally, as to the standard form plea in the Cassimatises’ defence about the various processes involved in the Storm Model (see at [89] above), ASIC denied that:
[T]he process by which Storm provided financial advice to the Investors was the Storm Business Model (as defined in the Defence) because Storm applied the Storm Model (explained in Part C of the Further Amended Statement of Claim) when providing financial advice to those Investors;
108 Otherwise, ASIC denied almost all of the allegations about the processes involved in the Storm Model, including the general plea raised by the Cassimatises in relation thereto (see at [90] above). The balance of ASIC’s reply is comprised of numerous – over 627 paragraphs – of specific denials or admissions of particular allegations of fact in the Cassimatises’ defence. Fortunately, it is not necessary to examine them in any detail for the purposes of this application.
109 The pleadings in these proceedings therefore set out in enormous detail the history of the development of the Storm Model and its use to provide financial advice to an identified group of Storm customers. They cover a nine year period (approximately) from about 2000 to late 2008 (inclusive). Among the Part E and Part F investors who are the central focus of ASIC’s FASC are 46 couples or individuals comprising some 77 individuals in total (17 Part E investors and 60 Part F investors). Each such investor is alleged to have been involved in numerous occasions when financial advice was provided in accordance with the Storm Model. Each of these occasions is then alleged to have lead to breaches by Storm of various provisions of the Corporations Act, including: ss 912A(1)(a), 912A(1)(c), 945A(1)(b), 945A(1)(c) and 1041E(1). As is already noted above (at [79]), more than 200 such occasions are described in the FASC. Together, these occasions gave rise to hundreds of individual transactions. They also involved scores of individuals employed by Storm, or associated with a range of financial institutions that provided loans to those investors. For their part, the Cassimatises have in their defence raised a host of other factual issues that they claim are germane to their defence. In short, the factual and legal issues that are in dispute on the face of the pleadings in these proceedings are extensive, complex and, on the basis of the Cassimatises’ defence, widely contested.
The affidavits
Mr Cassimatis’ affidavit
110 Having set out the factual and legal issues that arise from the pleadings, I will next turn to examine the affidavits the Cassimatises have filed in support of this summary judgment application to show why I consider they have failed to establish the prima facie case they claim to have. Before doing so, it should be noted that since an application for summary judgment is interlocutory in nature, hearsay evidence is admissible in accordance with s 75 of the Evidence Act 1995 (Cth): see Kowalski at [40]–[43]; and see also Wills v Australian Broadcasting Corporation (2009) 173 FCR 284; [2009] FCAFC 6 at [15] and [23]–[30]; and s 24(1D)(b) of the Federal Court Act.
111 Mr Cassimatis’ affidavit is largely directed to the matters pleaded in para 7 of his defence (see at [93] above). He begins by deposing to the success of Storm over a period of more than 20 years and the ability of, what he describes as, the Storm Index Fund Clients, to withstand several events in the equity markets over that period, such as the Iraq war in 2003. He describes the arrangements he made with the Commonwealth Bank of Australia following the Iraq war to manage similar events in the future. He also deposes to the qualifications and experience of three independent directors on Storm’s board. In relation to them and others, he states (at para 18):
At no time during this period did ASIC, any of my fellow directors, or anyone else say, write, or otherwise communicate to me that Storm was or may have been contravening any provision of the Corporations Act 2001 (Cth) (“the Act”) or any other legal duty by providing its financial advice to clients (principally by way of Financial Service Guides, Statements Of Advice and Statements Of Additional Advice and to its clients).
112 Mr Cassimatis then gives details of a review of Storm’s compliance with “the financial services laws” conducted by two of Storm’s independent directors, Mr Hutley and Mr Nelson, following which he states (at para 20) that:
Neither Mr Hutley nor Mr Nelson:-
(a) Said (sic) to Julie or me (or, so far as I am aware, any other directors of Storm) that Storm was or might be contravening:-
(i) section 945A(1)(b) of the Act, as is now alleged by ASIC;
(ii) section 945A(1)(c) of the Act, as is now alleged by ASIC;
(iii) section 1041E(1) of the Act, as is now alleged by ASIC;
(iv) section 912A(1)(a) of the Act, as is now alleged by ASIC;
(v) section 912A(1)(c) of the Act, as is now alleged by ASIC;
(b) said to Julie or I (or any other directors of Storm) that Storm was or might be breaching its contractual obligations to clients;
(d) said to Julie or I (or any other directors of Storm) that Storm was or might be negligent in its advice to clients;
(e) expressed concern that Storm was exposed to an unacceptable (or any) risk of harm on any of the above counts.
(There is no para (c).)
113 And further (at para 21):
For the reasons summarised in this affidavit, I believe, and I have believed during the whole of the time when I was a director of Storm that:-
(a) Julie and I (and, when they were in office, the other directors of Storm) conducted ourselves as directors lawfully and in Storm’s best interests;
(b) Julie and I acted in good faith (and I do not understand ASIC to allege to the contrary);
(c) Storm conducted its business and affairs lawfully and in Storm’s best interests.
114 About one-third of Mr Cassimatis’ affidavit is taken up with describing how “ASIC visited Storm’s premises and conducted reviews and audits on numerous occasions”. In that part of his affidavit, he describes: a review conducted in 1993, following the publication of an article in the Townsville Bulletin newspaper; a review conducted in 1995 by Mr Peter Bell, an ASC inspection officer; an ASIC audit conducted in March 2005; and ASIC’s review of Storm’s prospectus in November 2007. In connection with the latter review, Mr Cassimatis deposes to a meeting conducted on 13 November 2007 when he claims a Ms Koromilas, an ASIC officer, “informed me that she (and ASIC) wished other advisors had procedures and processes that were as good as Storm’s”.
115 Mr Cassimatis concludes that section of his affidavit by stating, among other things, that:
43. I believe, for the reasons mentioned in this part of my affidavit, that when the officers of ASC and ASIC conducted their reviews and audits:-
(a) they had complete access to all of the documents used by Storm in giving financial advice to clients, including practice and procedure manuals, advice templates, cash flow analyses, client financial profiles, Storm’s Financial Services Guide and Statements of Advice; and
(b) they often required individual client files to be ready in advance of their visit.
44. I believe, for the reasons mentioned in this part of my affidavit, that ASC and ASIC thereby became familiar with:
(a) all aspects of Storm’s business relevant to the advice it was giving clients;
(b) the processes and procedures within Storm for the production of financial advice to clients, including advice templates, cash flow analyses, client financial profiles;
(c) the facts, matters and circumstances that ASIC alleges, in Part C of the Statement of Claim (where accurate).
45. Neither ASC nor ASIC informed me or, so far as I am aware, any other officer of Storm (including Julie) following any of their reviews or audits, or otherwise that what ASIC refers to as the Storm model contravened or might contravene any of the financial services laws, as now alleged in Parts G, H, I or J of the Statement of Claim. (sic)
46. All of ASC’s and ASIC’s communications with Storm, following such reviews and audits, were to the effect that Storm’s conduct was, in general, appropriate and lawful, subject only to minor matters that are not presently relevant.
116 Mr Cassimatis then refers to “the allegations as to the defects in Storm’s advice in the Further Amended Statement of Claim” and says:
I understand that a principal criticism of Storm’s advice the subject of these proceedings is that the investments that Storm recommended were attended by risk; and that its advice was in respect of an investment in Australian shares, via Australian Index Funds, over a period of five to seven years.
117 In partial response to these allegations, Mr Cassimatis deposes to having used a Risk and Return calculator on ASIC’s website in 2009 to test the appropriateness of the advice Storm gave to its clients and to having obtained results that approved of it.
118 In the remaining paragraphs of his affidavit, Mr Cassimatis deposes to: the lack of complaints from Storm clients; the absence of any concern about Storm’s practices and procedures from Storm’s independent auditor, Paragem; or from either PricewaterhouseCoopers or Mallesons Stephen Jaques following their due diligence inquiries in connection with the proposal to list Storm on the Australian Stock Exchange.
119 Mr Cassimatis also deposes to having received a favourable business reference dated 26 November 1999 from a Professor Thomas J Valentine and to having received a complimentary email sent in 1999 by Mr Tony Butcher of the Financial Planning Association of Australia.
120 Finally, Mr Cassimatis states that Storm had professional indemnity insurance with a cover ranging from $5,000,000 to $10,000,000 for any one claim and $10,000,000 in aggregate. He also claims the insurers concerned undertook due diligence inquiries in relation to Storm’s practices and procedures before issuing that insurance cover.
121 In the concluding paragraphs of his affidavit, Mr Cassimatis turns to state a series of beliefs in a section headed “My Belief”. First, he summarises the matters set out earlier in his affidavit (above), adding the following:
(a) many organisations and individuals, including financial advice quality auditors, and the Financial Planning Association of Australia, reviewed Storm’s practices and procedures without raising concerns;
…
(c) According to a submission by ASIC to the Joint Parliamentary Enquiry into Financial Products and Services in Australia, during 2006 to 2007, ASIC received (only) four complaints in relation to Storm’s Statements of Advice and fee levels;
…
(g) Storm’s practices and procedures were also reviewed by:-
…
(v) various banks with whom Storm dealt, as pleaded in Part D of the Statement of Claim;
…
122 Then, Mr Cassimatis states:
(j) despite dealing with Storm in the period relevant to the Statement of Claim, none of the above individuals or organisations reported to me or Julie or, so far as I know, the board of Storm:-
(i) any substantial non-compliance by Storm with any relevant financial services law;
(ii) any systemic problems of the nature and scale alleged in Parts G, H, I and J of the Statement of Claim; or
(iii) that Storm was being exposed to an unacceptable risk of harm by reason of matters such as those alleged in Parts G, H, I and J of the Statement of Claim;
123 Turning to the allegations contained in the FASC, Mr Cassimatis states these broad beliefs:
80. Storm advised its clients, including the Investors referred to in the Statement of Claim, in accordance [with] the practices and procedures alleged:-
(a) in paragraphs 1645 to 1651 of the Defence; and
(b) as more particularly alleged in Part E and Part F of the Defence in Response to the Allegations in the Statement of Claim.
…
83. As appears from the foregoing, and from the matters alleged particularly in paragraphs 1645 to 1664 and 1671 to 1744 of the Defence (which are all true) I informed myself in depth and over a period of many years about those matters and, I believe more than appropriately. (sic)
124 The paragraphs of the defence that are referred to in paras 80(a) and 83 of Mr Cassimatis’ affidavit above, encapsulate Parts I to III and V to XIV of the “Further Matters of Defence” section of the defence (see at [85] above).
125 Mr Cassimatis then concludes: “For the reasons summarised in this affidavit, I believe that those judgments and decisions were in the best interests of Storm.”
126 And further: “I believe that the matters pleaded in the Defence are true and correct to the best of my knowledge and belief.”
127 Finally, it should be noted that Mr Cassimatis also annexes numerous documents to his affidavit, including the Storm Prospectus lodged with ASIC (approximately 150 pages) and Appendix 4 of ASIC’s submission to the Joint Parliamentary Inquiry into Financial Products and Services in Australia.
Mrs Cassimatis’ affidavit
128 Mrs Cassimatis’ affidavit is considerably shorter than her husband’s. In part, that is achieved by her generally adopting most, if not all, of what her husband said in his affidavit and drawing similar general conclusions as he did. The following provide three examples of this approach:
12. I refer to paragraphs 52 to 57 of [Mr Cassimatis’] Affidavit. I confirm that, partly because of Storm’s record in relation to complaints from clients, I believed that its practices and procedures posed little risk of harm to Storm arising from contraventions of the [Corporations] Act or civil claims.
13. I refer to paragraph 60 of [Mr Cassimatis’] Affidavit. I confirm that on no occasion did Paragem report to me any of the matters mentioned in that paragraph. I believed that Storm’s use of Paragem’s services provided me with a proper basis to conduct the affairs of Storm as we had done over a period of many years up to October, 2008, and that, if Storm’s advice to its Index Fund Clients involved any substantial risk of loss, or infringement of the financial services laws, it would have identified those risks and infringements. Paragem never did so.
…
20. I refer to paragraph 81 of [Mr Cassimatis’] Affidavit. I too believe that, over the many years up to October, 2008, I informed myself in depth about Storm’s business practices – and in particular the procedures for giving financial advice to Storm’s Index Fund Clients – and that those practices, procedures and advice were proper and appropriate.
129 In addition to generally adopting various parts of her husband’s affidavit, Mrs Cassimatis makes a number of general statements of her belief, similar to those contained in her husband’s affidavit. The following are two examples:
8. I confirm that, during the whole of the time when I was a director of Storm that, I believed that I acted:-
(a) lawfully and in Storm’s best interests; and
(b) in good faith.
9. I also believed that Storm conducted its business and affairs lawfully and in Storm’s best interests. Indeed, I believed that Storm’s business was very well run, and that its advice to the Index Fund Clients was sound, well explained and well reasoned.
130 In relation to the ASIC officer, Ms Koromilas, and her involvement in the meeting of 13 November 2007, Mrs Cassimatis says:
10. I attended the meeting referred to in paragraphs 34 to 40 of [Mr Cassimatis’] Affidavit. Following the meeting:-
(a) I did indeed as Ms Koromilas if she was willing to review the sample Statement of Advice, and suggest any improvements;
(b) I did tell Ms Koromilas (as was the fact) that there had, over the years, been an occasional suggestion that Storm’s [Statement of Advices] might benefit from being shorter. I said to her (as was the fact) that our view was that it was difficult if not impossible to shorten the document and still comply with the law that required advice to be clear and concise;
(c) Ms Koromilas did say that she was happy to review Storm’s [Statement of Advice] for that purpose; and
(d) It is the case that she did not thereafter suggest any changes to Storm’s [Statement of Advice].
131 Mrs Cassimatis concludes her affidavit with a broad statement as to her belief, as follows: “For the reasons summarised in this Affidavit (and also in [Mr Cassimatis’] Affidavit, which I believe to be true in every respect) I believe that those judgments and decisions were in the best interests of Storm.”
132 Unlike her husband (see at [116] above), Mrs Cassimatis does not expressly address any of the allegations in ASIC’s FASC. Instead, she refers to her husband’s beliefs (as set out in his affidavit above) and states:
22. I too believe that the matters pleaded in the Defence are true and correct to the best of my knowledge and belief.
23. I too believe that ASIC has no reasonable prospect of successfully prosecuting the proceeding.
Mr Copley’s affidavit
133 In response to the Cassimatises’ affidavits, ASIC has filed an affidavit by Mr Hugh Copley. Mr Copley is a solicitor employed by ASIC. It is unnecessary for present purposes to provide more than a brief description of the contents of that affidavit and the documents that are annexed to it. First, Mr Copley deposes to being informed by Mr Bell, the ASC officer who conducted a surveillance visit to Storm’s offices on 9 October 1995 (see [114] above), that he (Mr Bell) has no independent memory of the purpose of that visit but, drawing on his experience from other similar surveillance visits conducted by the ASC around the same period, he believes “the surveillance visit on 9 October 1995 did not involve a comprehensive review of advice given to clients”.
134 Secondly, Mr Copley deposes to being informed by four ASIC officers about various aspects of their involvement in the review of Storm’s prospectus in November 2007. The officers concerned were: Mr Anderson, Ms Jong, Ms Korpi and Ms Koromilas. Among other things, Mr Copley states, on information from Ms Jong, that “ASIC’s principal concern with the [Storm] prospectus was … Storm’s treatment of trailing commissions”. Mr Copley also records, based on information from Ms Koromilas, her recollection of the meeting on 13 November 2007 that is described in the affidavits of Mr and Mrs Cassimatis (see at [114] and [130] above). Among other things, Ms Koromilas informed Mr Copley that “she believes that she did not tell [Mrs Cassimatis] (or any other Storm representative) that she would review the sample [Statement of Advice] (for any purpose), or that she would provide feedback to Storm, or any words to that effect”. And further, that “she has no recollection of informing either of the [Cassimatises] that she (or ASIC) wished other advisors had procedures and processes that were as good as Storm’s”.
135 Based on the information provided to him by these various ASIC officers, Mr Copley makes the following broad statement of belief:
[T]hat, prior to in or about October 2008:
(a) ASC and ASIC never investigated as to whether Storm, in its interactions with its clients, was or might be contravening sections 945A(1) or 1041E of the Corporations Act (or was conducting itself contrary to the requirements of those provisions), or was exposed to the risk of civil proceedings as alleged in the Further Amended Statement of Claim;
(b) ASC and ASIC never investigated as to whether Storm was or might be contravening the Corporations Act (or earlier legislative equivalents), generally, by the application of the Storm business model to particular clients or to a class of clients with similar personal circumstances, or whether this did or might expose Storm to the risk of civil proceedings as alleged in the Further Amended Statement of Claim;
(c) none of the complaints received by ASIC in relation to Storm were to the effect that Storm had failed to act as required by section 945A(1) of the Corporations Act, or that Storm was potentially liable to civil proceedings as alleged in the Further Amended Statement of Claim.
136 Finally, Mr Copley annexes to his affidavit a large quantity of documents. They include:
(a) the transcripts of two examinations of Mr Hutley and two examinations of Mr Nelson conducted by officers of ASIC after Storm’s collapse under s 19 of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act);
(b) the documents held in ASIC’s records in relation to the audit of Storm conducted in March 2005;
(c) the documents held in ASIC’s records in relation to Paragem’s role as an independent auditor of Storm; and
(d) copies of the due diligence reports prepared in relation to the Storm prospectus by PricewaterhouseCoopers and Mallesons Stephen Jaques. In relation to these reports, Mr Copley notes that neither Mr nor Mrs Cassimatis annexed them to their affidavits.
The Cassimatises have failed to establish a prima facie case
137 The ordinary meaning of the phrase “prima facie” is “at first sight; on the face of it; as appears at first sight without investigation”: see North Ganalanja Aboriginal Corporation v Queensland (1996) 185 CLR 595 at 616. The case the Cassimatises seek to establish on a prima facie basis has already been identified earlier in these reasons: see at [8] above. It is that no reasonable director in their position at the relevant times would have been aware of the risks to Storm that are now pleaded against them by ASIC, or alternatively that if such a reasonable director would have been aware of the pleaded risks to Storm, he or she would not have concluded that those risks were unacceptably high. It is, of course, necessary to keep firmly in mind that the Cassimatises’ broader purpose in seeking to establish this prima facie case is to show that ASIC has no reasonable prospects of successfully prosecuting these proceedings. So, the pertinent question at this point is whether the Cassimatises’ affidavit evidence, taken at first sight and without investigation, establishes a prima facie case on these issues.
138 The matters the Cassimatises have identified can be broadly described as the foreseeability issue pleaded in ASIC’s FASC. That issue encapsulates the kind, and degree or level, of the risk to which Storm was allegedly exposed. The kind of foreseeable risk concerned is pleaded throughout the FASC: see, for example, para 2301 to 2304 at [72] above; para 1994 at [74] above; and para 2290, which is paraphrased at [75] above. It has been described as the risk of “adverse legal outcomes” (see paras 14 and 15 in the summary at [71] above) posed to Storm from variously:
(a) being found guilty of, convicted and penalised for, a number of specified offences under the Corporations Act;
(b) being subjected to civil proceedings by one or more of the Part E or Part F investors under s 953B, or for negligence, or for breach of contract; and
(c) being subjected to regulatory proceedings at the suit of ASIC.
139 Thus, the foreseeability of that kind of risk depends upon the characterisation of Storm’s conduct on each of the 200 or more occasions on which the Storm Model was allegedly employed to provide financial advice to the 46 Part E and Part F investors: see at [73] and [79] above. It therefore calls for an assessment of that conduct in the particular circumstances that applied on each of those 200 or more occasions to determine whether one or more of the various provisions of the Corporations Act were breached as alleged; or the terms of the applicable contract were breached as alleged, or the relevant duty of care was negligently breached as alleged. For example, in relation to the alleged breaches of the provisions of the Corporations Act, that will require, with respect to the statement of advice dated 27 November 2007 provided to Mr and Mrs Dodson, determining at least the following questions:
(a) whether the Storm Model, including its concomitant processes (see at [78] above) was used to provide that financial advice;
(b) if it was used, whether by its use:
(i) Storm failed to conduct such consideration or investigation in relation to the subject matter of the advice as was reasonable in all the circumstances (see para 1992(a) at [74] above), or
(ii) Storm failed to provide advice that was appropriate to the personal circumstances of the Dodsons (see para 1993 at [74] above); and finally,
(c) if it was used, whether the Cassimatises were responsible for causing Storm to use it to provide that financial advice in that way.
140 Significantly, in their defence, the Cassimatises have put in issue many of these matters (above). This can be seen by reference to their response to the allegations made in respect of the statement of advice provided to Mr and Mrs Dodson dated 27 November 2007. They variously claim that those allegations proceed “upon a misapprehension of the facts and a misunderstanding of the Storm Business Model and the circumstances of Mr and Mrs Dodson”. They also variously rely upon “the true facts” pleaded elsewhere in their defence; the true meaning and effect of the documents concerned; whether the investments involved providing a “financial product”; and whether the advice was provided in accordance with the Storm Model (see at [83] to [92] above).
141 The other component of the foreseeability issue identified by the Cassimatises and pleaded in ASIC’s FASC is the degree or level of the risk of adverse legal outcomes posed to Storm: see, for example, para 1995 at [74] above and para 2291 at [75] above. That is, if the kind of risk alleged was foreseeable at all, whether the degree or level of that risk was such that a reasonable person in the position of the Cassimatises exercising his or her functions with due care and skill, would not have taken that risk. This degree or level of risk therefore falls to be determined by reference to the degree of care and skill that would have been employed by a reasonable person in the position of the Cassimatises, as directors of Storm. As Brereton J pointed out in Maxwell at [100]–[101], this requires a consideration of the circumstances in which both the company and the director concerned were placed, including (from [100] of Maxwell):
… the type of company, the provisions of its constitution, the size and nature of the company’s business, the composition of the board, the director’s position and responsibilities within the company, the particular function the director is performing, the experience or skills of the particular director, the terms on which he or she has undertaken to act as a director, the manner in which responsibility for the business of the company is distributed between its directors and its employees, and the circumstances of the specific case.
142 Consistent with these observations, the circumstances of both the Cassimatises and Storm that ASIC relies upon are pleaded in its FASC: see at [80]–[82] above. While most of those circumstances have been admitted by the Cassimatises in their defence (see at [91] above), it is significant that the central allegations about their role in managing Storm; and in setting up and/or structuring Storm such that its business was that of advising its clients to invest in accordance with the Storm Model, are denied: see at [91(a) and (b)] and [92] above.
143 It can be seen from this brief survey of the foreseeability issue as pleaded in ASIC’s FASC that this issue involves a complex set of factual issues involving, first, the circumstances that existed on each of the 200 or more occasions when financial advice was allegedly provided by Storm in accordance with the Storm Model to the 46 couples or individuals that make up the Part E and Part F investors, to determine whether that advice gave rise to the adverse legal outcomes as alleged. Secondly, it involves an equally complex set of factual issues bearing on the circumstances of Storm, as a company, and the Cassimatises, as its executive directors, to determine their role in, and responsibility for, those adverse legal outcomes. The scope, size and complexity of all these factual issues, as raised by the pleadings in these proceedings, is summarised at [109] above. All this serves to underscore the difficulty of the task the Cassimatises have undertaken in attempting to establish a prima facie case directed to this foreseeability issue.
144 Added to this difficulty is the broader purpose of this application mentioned above (at [137]), viz to show that ASIC has no reasonable prospects of successfully prosecuting these proceedings. That essentially means that the prima facie case the Cassimatises need to establish will have to serve as a means to the ultimate end of showing that there is no real question of fact to be determined in these proceedings on this foreseeability issue. As is already noted above, they could do that by showing that the questions of fact raised on the pleadings can truly be described as fanciful, trifling, implausible, improbable, et cetera, or that they are contradicted by all the available documents or other materials: see at [47] above. They could also achieve that end by showing that a critical question of fact raised on the pleadings is not maintainable, for example, by providing evidence of an alibi defence (see Fortron at [20]), or perhaps by providing evidence of a limitations defence. Having regard to the detail and substance of the allegations in ASIC’s FASC and to the fact that ASIC is pursuing these proceedings in its role as the regulator under the ASIC Act, I do not consider those allegations could be described as fanciful, trifling, implausible, improbable, et cetera. Indeed, I do not understand the Cassimatises to be advancing such a case on this aspect (the second and third grounds) of their summary judgment application. Instead, the Cassimatises appear to be claiming that the foreseeability issue is not maintainable because the foreseeability of the risk or, alternatively, the foreseeability of the degree of that risk, is contradicted by the whole history of the conduct of Storm’s financial advice business over the relevant period. So, with these observations in mind, it is now appropriate to turn to the Cassimatises’ affidavits to determine whether they have provided evidence, taken at first sight and without further investigation, that establishes a prima facie case of this character. In keeping with the nature of this inquiry as I have just described it, I will take the Cassimatises’ affidavits at their highest and ignore the evidence contained in Mr Copley’s affidavit.
145 As noted above, the prima facie case that the Cassimatises have sought to make out in their affidavits is directed to the foreseeability issue. From the content of their affidavits, it would appear the Cassimatises claim that this prima facie case is established by a combination of: their personal views as to their conduct as directors of Storm, viz that they acted lawfully and in Storm’s best interests throughout; the absence of any view being expressed by any of the numerous individuals and organisations, including any officer of ASIC itself, who had access to the details of Storm’s practices and procedures over more than 20 years of its business activities, to the effect that they may be exposing Storm to the kind, or degree, of risk alleged by the manner in which they caused Storm to give financial advice to any of its clients; and the “true facts” as stated in their defence, particularly Part I of the “Further Matters of Defence” section.
146 On the first part of this combination of factors, the Cassimatises make a number of broad assertions in their affidavits to the general effect that they did nothing to cause Storm to contravene any of the provisions of the Corporations Act and that, during the whole of the period of their directorships of Storm, they acted lawfully and in its best interests. These assertions are set out in full above and they therefore do not require repeating here: for Mr Cassimatis, see at [113] and [125] above and for Mrs Cassimatis, see at [129] and [131] above. In my view, these self-serving, very general assertions do nothing to address the particular factual circumstances that ASIC alleges gave rise to the foreseeability of the kind of risk concerned as described above, nor do they address the circumstances relevant to the foreseeability of the degree of that kind of risk, if it existed. They are, therefore, in my view, far too broad and non-specific to provide any support for the prima facie case the Cassimatises have sought to make out.
147 The second part of this combination of factors appears to be the main one relied upon by the Cassimatises to establish their prima facie case, viz that over the years no one said anything to alert them to the existence of the risk supposedly posed to Storm. On this point, it is important to briefly reiterate and summarise what is said above (at [139]–[142]) about the risk that is pleaded in the FASC. It is that the risk posed to Storm of adverse legal outcomes arose from it contravening various provisions of the Corporations Act, or breaching the terms of various contracts, or through its negligence by the manner in which Storm provided financial advice, on 200 or more specified occasions, to the 46 Part E and Part F investors, ie by using the processes constituting the Storm Model. Further, if it existed, the degree of ASIC’s pleaded risk is dependent upon, among other things, the Cassimatises’ roles as directors of Storm in managing, setting up and structuring Storm so that it used the Storm Model to provide that financial advice on each of those occasions.
148 To respond to these quite specific allegations about risk, the Cassimatises have sought, in their affidavits, to establish a prima facie case that no such risk existed because a large number of people who were associated with Storm, or who dealt with it in various capacities over the years, including ASIC itself, did not alert them to any risk that Storm’s practices and procedures may contravene any provisions of the Corporations Act and therefore pose any risk to Storm. In my view, this evidence in the Cassimatises’ affidavit does not establish the requisite prima facie case.
149 That is so for a number of reasons. First, none of the reviews, audits or reports that are described in the Cassimatises’ affidavits involved any of the 46 Part E or Part F investors identified in the FASC. For example, Mr Cassimatis says that during their reviews and audits, officers of ASIC “often required individual client files to be read in advance of their visit” (see at para 43(b) at [115] above). However, he does not say what individual client files were provided. In this respect, it may well be significant if one of those files had related to one of the Part E or Part F investors. That sort of specific and direct link between the Cassimatises’ evidence and the apposite allegations in the FASC about the 46 investors concerned is lacking.
150 Secondly, none of those reviews, audits or reports was directed to, or considered whether, the use of the Storm Model on any of the 200 or more occasions specified in the FASC may have resulted in financial advice being provided in breach of the nominated provisions of the Corporations Act, or of a binding contract, or of an applicable duty of care. To the contrary, on their face, all of the reviews, audits and reports described by Mr Cassimatis appear to have been general reviews of Storm’s practices and procedures, or were reviews, audits or reports that were conducted for unrelated regulatory or similar purposes. For example, the review conducted by Mr Hutley and Mr Nelson is said to have been a “review of Storm’s compliance with the ‘financial services laws’”. Mr Cassimatis does not say in his affidavit what particular financial services laws were involved in that review, how that review was conducted, when the review was conducted, or its precise purpose. Moreover, he does not say whether or not he asked either Mr Hutley or Mr Nelson to conduct a review in relation to any of the five sections of the Corporations Act identified by ASIC in its FASC (see above at [109]). On at least these two points the various criticisms set out in ASIC’s reply are pertinent and accurate (see at [103] above).
151 Thirdly, there is no evidence in the Cassimatises’ affidavits that any of the people who conducted these reviews or audits or prepared these reports were specifically asked to turn their minds to the specific issues raised in ASIC’s FASC. Instead, Mr Cassimatis makes broad statements about his belief based upon the construction he puts on the silence of these people, after they conducted their various reviews or audits, or submitted their reports. Thus, if any one of them had been asked directly about these matters, they may well have given an explanation for their silence other than the absence of a concern about an apprehended risk, the most obvious explanation being that “I was not asked to express a view about that matter”.
152 Fourthly, Mr Cassimatis says that he believes ASIC “became familiar with all aspects of Storm’s business relevant to the advice it was giving clients” (see at para 44(a) at [115] above). The only basis Mr Cassimatis provides for this belief is the unparticularised claims referred to above. Further, this claimed familiarity is directed to Storm’s business and its processes and procedures, rather than the Storm Model which is the central focus of the allegations in ASIC’s FASC. This is underscored by the fact that in the next paragraph of his affidavit (para 45 – see at [115] above), Mr Cassimatis mentions “what ASIC refers to as the Storm Model”. Mr Cassimatis does not therefore provide any direct evidence that any officer of ASIC had any familiarity with the critical features of the Storm Model that is central to the allegations in the FASC. On this aspect, I consider the criticisms in ASIC’s reply are valid (see at [103] and [104] above).
153 Fifthly, there is no evidence in the Cassimatises’ affidavits directed to any of the various statements of advice or statements of additional advice provided to any of the Part E or Part F investors. For example, there is not any evidence to support the assertion made in the Cassimatises’ defence that the statements of advice that were provided were not in a standard format (see [87(b)] above). I therefore do not consider that any of this evidence establishes a prima facie case that addresses the specific allegations about risk pleaded in the FASC.
154 On the third and last part of this combination of factors, the Cassimatises have again used broad and unparticularised assertions. They both claim that Storm advised its clients in accordance with the practices and procedures pleaded in the “Further Matters of Defence” section of their defence: for Mr Cassimatis, see at [123]–[124] above and for Mrs Cassimatis, less specifically, see at [132] above. On this aspect, the distinction highlighted above (at [94]–[101]) between the Storm Model as pleaded in the FASC and the Storm Business Model, or Storm’s practices and procedures, takes on a particular importance. This is so because, as with the assertions in para 44 of Mr Cassimatis’ affidavit (see at [115] above), it can be seen from the index headings to the “Further Matters of Defence” section of the Cassimatises’ defence (see at [85] above) that many of those matters of defence are directed to the latter, rather than the former. The consequence of this is that those matters are misdirected. This is aptly and accurately expressed in various paragraphs of ASIC’s reply: see at [104] and [107] above. Moreover, neither of the Cassimatises makes any attempt in their affidavits to explain how any of the facts pleaded in the pertinent parts of those 40 pages of that section of their defence, provide an answer to any of the allegations about risk made in ASIC’s FASC. Put differently, they have not engaged in the exercise of employing this evidence to respond directly to any of the specific factual allegations made by ASIC about the manner in which the financial advice was provided to any of the 46 Part E and Part F investors such that it establishes a prima facie case in response to the foreseeability issue as pleaded in ASIC’s FASC.
155 By way of example, the Cassimatises plead in their defence that the paragraphs of the FASC that set out the circumstances of the provision of the statement of advice to Mr and Mrs Dodson “proceed upon a misapprehension of the facts and a misunderstanding of the Storm Business Model and the circumstances of Mr and Mrs Dodson”: see para 1609(a) at [86] above. Then, in the next paragraph of their defence, the Cassimatises state that they will refer at trial to the “true facts” pleaded in, among other sections, Part I of the defence: see para 1609(b) at [86] above. Part I of the defence is included in the “Further Matters of Defence” section of that document mentioned above. Taken together, these statements clearly suggest that the Cassimatises believe that there are facts in that section of their defence that go to support their claim that ASIC has materially misapprehended the true position about the provision of the advice to Mr and Mrs Dodson and, once the true position is known, ASIC’s claim will fail. If this is so, one would have expected them to make some attempt in their affidavits in support of this summary judgment application to identify the particular facts in that section of their defence that provide that explanation and provide evidence to support those facts. The fact they have not done so further underscores the deficiencies in this evidence.
156 Similar observations can be made about the lack of any evidence in the Cassimatises’ affidavits to support some of the other more significant denials pleaded elsewhere in their defence. These include: their pleas about the true nature of the Storm Model’s “processes” (see at [89] and [90] above), their denials that either of them managed the business conducted by Storm (see at [91(a) and (b)] above), and their denials that either of them “structured Storm such that its business was that of advising its clients/the public to invest in accordance with the Storm Model” (see at [81] above, the denial of which is recorded at [92] above).
157 Finally, I do not consider the prima facie case that the Cassimatises seek to advance is any more discernible if the entire contents of their affidavits and all of the factors mentioned above are considered together. Even on that approach, the statements in the Cassimatises’ affidavits remain broad and unparticularised, or to the extent that they provide specific details of particular matters, those matters are not germane to the quite specific allegations in ASIC’s FASC. Some of the statements in the Cassimatises’ affidavits even fall into both categories. That is, they are both broad and unparticularised and also irrelevant. Examples of this occur in relation to Professor Valentine’s business reference, the complimentary email from the Financial Planning Association and the due diligence investigations conducted in providing Storm with its professional indemnity insurance cover (see at [119]–[120] above). Furthermore, at this broader level, the defective reasoning process employed by the Cassimatises to attempt to make out their prima facie case becomes even more apparent. That is, that because a range of people, including officers of ASIC, who have had different kinds of involvement with Storm’s business operations over the years, did not express any concerns about what they learned about those business operations, it necessarily follows that those people held positive views that the Cassimatises and Storm were complying with the Corporations Act in every respect. Furthermore, it also becomes apparent that the prima facie case the Cassimatises seek to make out is based on a non sequitur. That is, that the use of the Storm Business Model, or the Storm processes and procedures, or similar, to provide financial advice to other clients of Storm, on other occasions, in other circumstances, without that involving any detected contraventions of the law, necessarily establishes a prima facie case that the use of the Storm Model with its pleaded processes to provide financial advice to particular clients of Storm, on particular occasions, in particular circumstances, did not involve the particular adverse legal outcomes alleged by ASIC in its FASC.
158 I do not therefore consider that the Cassimatises’ affidavits establish a prima facie case on the foreseeability issue pleaded in ASIC’s FASC. Specifically, they do not establish a prima facie case that the pleaded risk was not foreseeable. Nor do they establish a prima facie case that, if that risk was foreseeable, the degree of it was, in all the circumstances, so low that a reasonable person in the Cassimatises’ position as directors of Storm would not have foreseen that it posed a risk to Storm. As with the Matthews in Fortron (see at [56] above), the Cassimatises have therefore not descended to particulars, nor addressed any of the pertinent factual matters on this issue as pleaded in ASIC’s FASC. For these reasons, I consider the Cassimatises have failed on their second and third grounds in this application for summary dismissal.
159 Before leaving this aspect of this application, I should make it clear that none of these conclusions should be taken as indicating that the Cassimatises may not ultimately be successful at the trial of these proceedings in using some, or all, of the facts pleaded in the “Further Matters of Defence” section of their defence, to defeat ASIC’s claims. Nor that their claims that, over the years, no one expressed the view to them that Storm could be contravening the Corporations Act in the manner in which it provided its advice to its clients, is not a relevant circumstance that may be taken into account in determining whether or not they have contravened s 180(1) of the Corporations Act. Whether or not they do succeed on either or both of these matters will depend entirely on how, or if, they are advanced at trial.
The third issue: identity of interest, solvency and no bad faith
160 Finally, it is necessary to turn to the remaining ground upon which the Cassimatises found this application for summary judgment. That is their first ground as set out at [9] above. In short, it is that, because of the particular circumstances identified – identity of interest between the shareholders and directors, the accepted solvency of the company and the absence of any allegation of bad faith – ASIC has no reasonable prospects of successfully prosecuting its claim that the Cassimatises have breached s 180(1) of the Corporations Act. Stated in this way, this ground appears to raise a separate and confined question of law. However, for the reasons that follow, I consider this ground, too, does not support the conclusion that these proceedings should be summarily dismissed.
Relevant law
161 Section 180(1) of the Act provides:
(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation’s circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
Note: This subsection is a civil penalty provision (see section 1317E).
162 On this first ground, both ASIC and the Cassimatises relied heavily on the decision of Brereton J in Maxwell. For this reason, before summarising the contentions of the parties, it is appropriate to set out the relevant passages from Maxwell in full. They are as follows:
100. In determining whether a director has exercised reasonable care and diligence, as s 180(1) expressly contemplates, the circumstances of the particular corporation concerned are relevant to the content of the duty. These circumstances include the type of company, the provisions of its constitution, the size and nature of the company’s business, the composition of the board, the director’s position and responsibilities within the company, the particular function the director is performing, the experience or skills of the particular director, the terms on which he or she has undertaken to act as a director, the manner in which responsibility for the business of the company is distributed between its directors and its employees, and the circumstances of the specific case.
101. Directors are not required to exhibit a greater degree of skill in the performance of their duties than may reasonably be expected for persons of commensurate knowledge and experience, in the relevant circumstances. And while directors are required to take reasonable steps to place themselves in a position to guide and monitor the management of the company, they are entitled to rely upon others, at least except where they know, or by the exercise of ordinary care should know, facts that would deny reliance.
102. The constitution of the corporation, and concomitantly the identity of those to whom the duty is owed, is of importance because the duties referred to in ss 180, 181 and 182 are not duties owed in the abstract, but duties owed to the corporation.
…
103. One consequence of this, of present significance, is that where there is an identity of interest between the directors and the shareholders, so that in effect the directors are the shareholders, the requirement to prevent self-interested dealing, constrain management and strengthen shareholder control — which is fundamental purpose and rationale of these duties — is much less acute. That is a circumstance which can impact considerably on the content of the duties. The significance of a correspondence between the identity of the directors and the shareholders is illustrated by the circumstance that, at general law, a fully informed general meeting can prospectively or retrospectively ratify the actions of directors of the company, though they involve negligence, breach of fiduciary duty or the exercise of the directors’ powers for an improper purpose...Where the directors and the shareholders are one and the same, ratification is implicit. Although the shareholders of a company cannot release the directors from their statutory duties imposed by ss 180, 181 and 182, their acquiescence in a course of conduct can affect the practical content of those duties, including any question of whether directors acted with a reasonable degree of care and diligence, and whether they made improper use of their position.
104. There are cases in which it will be a contravention of their duties, owed to the company, for directors to authorise or permit the company to commit contraventions of provisions of the Corporations Act. Relevant jeopardy to the interests of the company may be found in the actual or potential exposure of the company to civil penalties or other liability under the Act, and it may no doubt be a breach of a relevant duty for a director to embark on or authorise a course which attracts the risk of that exposure, at least if the risk is clear and the countervailing potential benefits insignificant. But it is a mistake to think that ss 180, 181 and 182 are concerned with any general obligation owed by directors at large to conduct the affairs of the company in accordance with law generally or the Corporations Act in particular; they are not. They are concerned with duties owed to the company.
…
105. … In my opinion, if a contravention of s 180(1) is to be established, it must be founded on jeopardy to the interests of the corporation, and not to protection of the interests of potential investors (though the interests of investors may be relevant to the interests of the corporation, as potential creditors).
…
110. Generally speaking, therefore, ss 180, 181 and 182 do not provide a backdoor method for visiting, on company directors, accessorial civil liability for contraventions of the Corporations Act in respect of which provision is not otherwise made. This is all the more so since the Corporations Act makes provision for the circumstances in which there is to be accessorial civil liability. Whether there were in this case breaches of the directors’ duties – and, in particular, of their duty of care and diligence - depends upon an analysis of whether and to what extent the corporation’s interests were jeopardised, and if they were, whether the risks obviously outweighed any potential countervailing benefits, and whether there were reasonable steps which could have been taken to avoid them.
…
144. As against all the remaining defendants except Coakleys, declarations of contravention pursuant to s 1317E are proposed; in the case of Mr Maxwell and Mr Malcolm Fortune, consequential pecuniary penalty orders are also proposed. The civil penalty provisions said to have been contravened are ss 180, 181 and (in the case of Mr Maxwell) 182. Broadly, the breaches of duty relied upon involve failures to prevent the relevant corporations from contravening other provisions of the Act (which other provisions are not civil penalty provisions). Above, I have explained that in my view it is not the role of the directors’ duties provisions to make officers liable for breaches by corporations of provisions that do not themselves provide for accessorial civil liability. However, I have acknowledged that a director or other officer may breach his or her duties by allowing the corporation to contravene provisions of the Corporations Act, if such contravention is likely to result in jeopardy to the interests of the corporation.
(Citations omitted)
Contentions
163 Since ASIC conceded that Storm was solvent at all material times, the Cassimatises contended that, as Storm’s only shareholders and executive directors, they were entitled to be regarded as the company for the purposes of s 180(1) of the Corporations Act, relying on Maxwell at [103] above. Mr Doyle submitted that, in such circumstances, provided Storm was not trading while insolvent, the Cassimatises could risk Storm’s capital as they wished. He submitted that, in doing so, they could not owe any duty under s 180(1) to avoid risks associated with Storm contravening the Corporations Act. He submitted that this identity of interests between the directors and the shareholders of Storm directly impacted the content of the Cassimatises’ duty under s 180(1). In addition to Maxwell, Mr Doyle relied, for these submissions, on the High Court’s decision in Angas Law Services Pty Ltd (in liquidation) v Carabelas (2005) 226 CLR 507; [2005] HCA 23 (Angas), particularly the joint judgment of Gleeson CJ and Heydon J at [25] and the joint judgment of Gummow and Hayne JJ at [69].
164 Mr Doyle submitted that, by alleging a breach of s 180(1) where the shareholders supported the directors’ conduct, ASIC was necessarily propounding that s 180(1) encompassed a duty owed to the public at large. He submitted that this position could not be maintained because the duty under s 180(1) was owed to the company alone, relying on Maxwell at [102], [104] and [105] above. Further, Mr Doyle pointed to the provisions of the Corporations Act that ASIC alleged Storm had breached and submitted that none of those provisions provided for accessorial liability, relying on Maxwell (particularly at [110]). Finally, it is important to record that Mr Doyle accepted that it was possible for a breach of s 180(1) to occur where the directors and the shareholders of a solvent company were the same. However, he did not provide any examples of any situation where such a breach might occur, nor outline any principle which would distinguish such situations from the circumstances applying to the Cassimatises.
165 Mr Flanagan submitted that there is ample authority for the proposition that, by exposing a company to regulatory action or civil proceedings, its directors can breach s 180(1), relying on: Maxwell at [104], [105] and [144] above; and also ASIC v Sydney Investment House Equities Pty Ltd (2008) 69 ACSR 1; [2008] NSWSC 1224; and ASIC v Macdonald (No 11) (2009) 256 ALR 199; [2009] NSWSC 287.
166 Mr Flanagan accepted that an identity of interest between the shareholders and the directors of a company could modify the content of the duty under s 180(1), noting Maxwell at [103]. However, he submitted that s 180(1) imposes a minimum standard of care and diligence on directors, regardless of the views of the shareholders of the company. He submitted that this minimum standard should be recognised as a matter of public policy. Mr Flanagan submitted that, in accordance with Maxwell at [100], the wishes of the shareholders was just one among many factors to be considered when determining the content of a directors’ duty under s 180(1). He submitted that s 180(1) served the public purpose of ensuring appropriate standards of corporate managerial conduct were maintained, and that public purpose was also reflected in the Court’s power to make orders for the disqualification of directors under s 206C of the Corporations Act. Further, he submitted that s 180(1) is a vehicle for ASIC to achieve its objectives as they are outlined in s 1(2) of the ASIC Act. Finally, he submitted that the Cassimatises’ interpretation of s 180(1) was inconsistent with the principle that the shareholders of a company cannot ratify the company’s contraventions of any civil penalty provisions of the Corporations Act, such as s 180(1).
Consideration
167 Maxwell certainly confines the operation of s 180(1) of the Corporations Act in the way described by Mr Doyle in his submissions. In particular, Brereton J makes it clear that the duty imposed on directors by that section is directed to a director’s conduct in jeopardising the interests of the company concerned, and not to making directors accessorily liable, by the back door, for contraventions of the Corporations Act by the company, where accessorial liability is not otherwise provided for. In this respect, Mr Doyle is also correct in his submission that none of the provisions identified in ASIC’s FASC provides for “front door” accessorial liability in this way.
168 However, as Brereton J also makes clear at [104], [105] and [144] of Maxwell, there remain situations where directors can be held liable under s 180(1) for embarking on, or authorising, a course of conduct that attracts the risk of exposing the company to actual or potential civil penalties or other liability under the Corporations Act. The number of occasions where Maxwell has since been applied to that effect demonstrate that these situations of director liability under s 180(1) exist: see the cases relied upon by ASIC at [165] above as well as ASIC v Warrenmang Ltd (2007) 63 ACSR 623, [2007] FCA 973; and ASIC v Citrofresh International Ltd (ACN 064 551 426) (No 2) (2010) 77 ACSR 69, [2010] FCA 27. Indeed, in Maxwell itself, Brereton J proceeded to consider (at [111]–[113]) whether, by his conduct, Mr Nahed (the director concerned in Maxwell) was in one of those situations. His Honour did that by examining at length all of the relevant circumstances, many of which were earlier identified by his Honour at [100]–[101].
169 Despite the fact that Mr Doyle accepted that these situations of director liability under s 180(1) may exist (see at [164] above), he submitted that in this particular case the three circumstances identified by him – identity of interest between the shareholders and directors, the accepted solvency of the company and the absence of any allegation of bad faith – are determinative of this particular issue. That being so, he submitted that ASIC has no reasonable prospect of successfully prosecuting these proceedings and they should therefore be dismissed.
170 As noted above, Mr Doyle relied upon Angas in support of these submissions. In Angas, the directors of the company were, like the Cassimatises, the sole directors and shareholders. The case concerned a mortgage transaction entered into by one of those directors. There was no dispute that at the time the company was solvent. In the joint judgment of Gummow and Hayne JJ at [69], their Honours observed: “The combination of these two factors, solvency and authorisation, indicates that the standards of propriety expected of the directors was not breached.” The joint judgment of Gleeson CJ and Heydon J at [25] was to similar effect.
171 Notwithstanding these remarks, I doubt whether Angas provides the support for Mr Doyle’s submission that he claims it does. The first thing to be noted about Angas is that the commercial context in which the mortgage transaction in issue occurred was the subject of “little investigation” at the trial (see Angas at [29]) and an attempt to raise that matter for the first time on appeal before the Full Court was rejected (see Angas at [21]). For these reasons, Gleeson CJ and Heydon J observed that the evidence on the issue was “thin” (at [29]). Nonetheless, their Honours considered that “the Full Court’s conclusion that … there was … no want of reasonable care, has not been shown to be in error” (at [29]). Because of this unusual background, it is debatable, in my view, whether Angas supports the proposition that the particular circumstances identified by the Cassimatises above are determinative of the question whether they breached their duties under s 180(1). It should also be noted that the primary focus of both joint judgments in Angas was the question whether the directors had contravened s 229 of the Companies (South Australia) Code. That section of the Code is different from s 180 of the Corporations Act because, among other things, it does not use the expression “care and diligence” and it does not express the degree of care and diligence by reference to that which a reasonable person would exercise if he or she was in the same circumstances and holding the same responsibilities as the director concerned: see s 180(1)(a) and (b) at [161] above.
172 Mr Doyle also relied upon the qualifications that Brereton J added to his observations (at [104] of Maxwell) about the circumstances in which one of these situations of director liability might arise. His Honour said: “[A]t least where the risk is clear and the countervailing potential benefits are insignificant”. His Honour reiterated these qualifications at [110]. Relying upon them, Mr Doyle pointed to the significant fee income Storm received from using the Storm Model to provide financial advice to its clients. I take this to mean that those financial benefits should be weighed against the risk that, by using the Storm Model in the way alleged in the FASC, Storm may have been involved in contraventions of the Corporations Act. Whether financial benefits of this kind can be offset against a possible breach of the law seems to me to offend public policy. It would, for example, mean that a director that causes a company to infringe another’s copyright could point to the significant profit made from the infringement to avoid liability under s 180(1). Moreover, it raises the question whether a director of a director/shareholder company risking the property of the company (as, for example, in Angas) can be treated in the same way as a director who engages in conduct which involves the risk of the company breaching the Corporations Act (as, for example, in Maxwell). If this distinction is valid, there may be much to be said for Mr Flanagan’s submissions that s 180(1) sets a minimum standard of conduct for directors in the latter situation quite divorced from any accessorial liability they may have for the company’s breaches of the Corporations Act.
173 Nonetheless, I do not consider I should decide this question of law raised by Mr Doyle on this application. That is so because I do not consider that it is the kind of question of law that should be determined summarily. It is, in my view, a real question of law, one that could truly be described as serious and not without difficulty. Conversely, it is not the kind of legal question that could be described as straight forward or well-settled: see the discussion at [48] above.
174 Further, the cases referred to above and, as noted above, Maxwell itself, suggest that the determination of this question could well involve questions of fact. For example, if the circumstances identified by Mr Doyle are not determinative as he claims and, as a matter of law, other circumstances are held to be relevant, the question will arise, as a matter of fact, whether any such circumstances exist in this case. If so, that would give rise to the type of mixed questions of fact and law that at least two members of the High Court in Spencer cautioned against determining summarily: see at [27] above. I consider that, in the circumstances of this case, I should heed that caution.
175 It follows that, in the exercise of my discretion, I am not prepared to grant summary dismissal on this ground.
Conclusion
176 The Cassimatises have therefore failed on all three grounds to discharge their onus to persuade me that ASIC does not have reasonable prospects of successfully prosecuting these proceedings. To the contrary, for the reasons I have set out above, I am satisfied on all the materials before me that these proceedings involve the sorts of complex and difficult factual and legal disputes that warrant them being determined at a trial.
177 Paragraph 1 of the application of the Cassimatises filed 21 February 2012 must therefore be dismissed.
I certify that the preceding one hundred and seventy-seven (177) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Reeves. |
Associate:
