Federal Court of Australia

Fuji Xerox Australia Pty Ltd v Whittaker [2020] FCA 1611

ORDERS

THE COURT ORDERS THAT:

1.    The applicants' amended interlocutory application filed 28 October 2020 is dismissed.

2.    The costs of the application as between the applicants and the second respondent be costs in the cause.

3.    The costs of the application as between the applicants and the third and fourth respondents be reserved.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

COLVIN J:

1    Fuji Xerox Australia Pty Ltd (FXA) and Fuji Xerox Finance Limited (FXF) (together, Fuji Xerox) raise claims against their former directors and auditors based upon alleged irregularities in the accounts for the 2015 and 2016 financial years. Relevantly for present purposes, the respondents include Mr Devlin Bell, a former director of both companies and employee of FXA, Ernst & Young (EY) the companies' former auditors and Mr EA Lang a partner of EY who is said to have been responsible for the audits of the financial reports for FXA for the 2015 and 2016 financial years.

2    Fuji Xerox seeks further and better particulars of certain paragraphs of Mr Bell's defence, alternatively orders striking out those paragraphs. Fuji Xerox also seeks orders that certain paragraphs of the defence of EY and Mr Lang be struck out.

3    After the filing of submissions in support of the applications, Mr Bell foreshadowed an application to amend his defence to deal with the objections raised to certain of the paragraphs. On that basis, the remaining issues as against Mr Bell concern the allegations in paragraphs 5(d) and 15(d) of Mr Bell's defence.

4    The application against EY and Mr Lang is opposed.

Particulars of Mr Bell's defence

5    Though cast in the alternative, the application in substance is an application for particulars. No matter other than a lack of particularisation is raised in support of the application to strike out. If there is a proper basis for ordering particulars then they should be ordered. If not, then there is no basis to strike out the contentious paragraphs.

6    In modern practice, pleading applications of the present kind are relatively rare. That is for good reason. The case management procedures adopted by the Court require parties to provide disclosure of their case by a supervised process that involves the provision of particulars or some other form of description of the issues raised, the exchange of expert reports and conferral between those experts, the provision of affidavits or the disclosure of the substance of the evidence that a witness is expected to give, the identification of documents to be relied upon at trial, a process of conferral and orders for written outlines of submissions.

7    Accordingly, the Federal Court Rules 2011 (Cth) now provide for flexible case management and orders for the provision of particulars of a pleading only where (a) the particulars that have been provided are inadequate; and (b) in the absence of further particulars the party seeking particulars could not conduct the party's case. The articulation of the second requirement is a significant change to past practice in relation to the provision of particulars. In deciding whether the second requirement is met the Court proceeds 'confident in the knowledge that other systems of pre-trial case management will exist and be implemented to aid in defining the issues and apprising the parties to the proceedings of the case that has to be met': Barclay Mowlem Construction Ltd v Dampier Port Authority [2006] WASC 281; (2006) 33 WAR 82 at [6]. The question is whether the particulars adequately define the issues to be tried and allow the other party an opportunity to know the case they are required to meet viewed in a context where further steps can, and will likely, be required to be undertaken as part of the pre-trial process that will disclose the nature of the case to be advanced by each party.

Paragraph 5(d)

8    In para 5 of his defence, Mr Bell admits that he was a director of FXA and FXF and that he signed a directors' report forming part of the 2015 statutory financial reports. As to a claim that between specified dates he was employed by FXA as its Chief Financial Officer and Executive General Manager - Business Services, Mr Bell pleads his case as to the roles in which he was employed and when, otherwise denies the allegations and then pleads in para 5(d) that 'at all material times, he was subordinate to, and was obliged to comply with the lawful directions and instructions issued by Mr Whittaker, his predecessor, other senior executives in the corporate hierarchy of Fuji Xerox corporate group, and the board of directors of FXA and FXF, in respect of the discharge of his employment obligations (which he did)'.

9    A plea in the form of para 5(d) does not indicate any claim by Mr Bell that he acted under any direction or instruction of a kind that was relevant to the particular allegations pleaded in detail in the amended statement of claim. The words in parenthesis at the end of the plea do not indicate any case that there was a particular respect in which Mr Bell discharged his employment obligations that is relied upon as part of his defence. It is merely a general allegation to the effect that Mr Bell gave effect to directions from his superiors. The paragraph raises a plea only as to Mr Bell's general position in the hierarchy of management within the company. To the extent that his position in that hierarchy is material to the claims made against him then that is a matter upon which he relies. In my view, a plea of that kind discloses no case beyond that. It certainly discloses no case to the effect that there was any particular direction or instruction that he was given that is relevant to the case alleged against him. The plea should not be taken to raise such a case.

10    Fuji Xerox is able to meet a case as to Mr Bell's alleged position in the hierarchy and, for those reasons, no further particulars are required.

Paragraph 15(d)

11    In para 15(d), Mr Bell responds to a plea as to the nature of his duties as an employee. In substance he admits the alleged duties and then makes a further plea in the following terms:

… compliance with any contractual obligation owed to FXA was subject to further or other instruction given to [Mr Bell], or waiver in respect of compliance, by FXA (including any instruction or waiver given by Mr Whittaker, his predecessor, other senior executives in the corporate hierarchy of the Fuji Xerox corporate group, and the board of directors of FXA and FXF, who had actual, apparent or ostensible authority in that regard (as to which see paragraph 5(d) above).

12    Again there is no plea that there was any particular instruction or any particular waiver of compliance of any kind that is relevant to the case alleged against Mr Bell. The plea simply identifies his case as to where he was within the management structure and his case as to the capacity that others had to provide him with instructions or release him from performance of his employment obligations. To the extent that his seniority bears upon the allegations made then that is his case. There is no case advanced by way of defence that there was any particular instruction given or waiver that occurred.

13    It follows that no further particulars are required of para 15(d).

14    I note that in the course of oral argument reference was made to para 43(e) of Mr Bell's defence. In response to a particular allegation in the amended statement of claim Mr Bell pleads in para 43(e) that he acted in accordance with the directions and instructions of the managing director, other senior executives in the corporate hierarchy and the board of directors of FXA and FXF. The allegation made in that form and context does indicate an affirmative case to the effect that there was some specific direction or instruction given concerning the matter to which para 43(e) responds. It appears that the application by Fuji Xerox was brought on the basis that the particulars sought to para 5(a) would provide the detail sought as to any specific directions or instructions relied upon. As was indicated to the parties in the course of oral argument, even if particulars are not required of para 5(a) (being the conclusion I have now reached) then the plea in para 43(e) ought to be the subject of particulars and the parties should confer about the provision of those particulars. If there remains an issue as to the provision of particulars of that paragraph then that is a matter that can be dealt with at a future case management hearing.

15    The application against Mr Bell should be dismissed. As to costs, I note that by a process of conferral the extent of particulars sought was confined. Given the concession made by Mr Bell after submissions were filed and the outcome on the balance of the application, the parties have each had a measure of success. More importantly, the costs associated with the application have advanced the process of elucidating the issues as between the parties. In those circumstances, the appropriate order is that the costs of the application be costs in the cause.

Application to strike out paragraphs of the defence of EY and Mr Lang

16    In very broad terms, the factual claim made by Fuji Xerox is that, in 2017, FXA and FXF each lodged statutory financial reports for the financial year ending 31 March 2017 which corrected errors in the 2015 and 2016 financial reports, that the extent of the errors were very substantial and that they occurred because of substantial accounting irregularities.

17    The case as pleaded in respect of each of FXA and FXF begins with a claim that the 2017 statutory financial report had the effect of correcting errors in the earlier reports. As to those pleas, EY and Mr Lang plead in their defence that they admit the reports but otherwise deny the allegation.

18    EY and Mr Lang submit that the pleas in the amended statement of claim are bundled up and conclusionary. It is said that a properly drawn plea by Fuji Xerox would have articulated each and every respect in which there were alleged errors in the earlier accounts. They say that any problem arises from the form of the pleading by Fuji Xerox because the case advanced in the amended statement of claim fails to specify the errors that are said to have been corrected and in those circumstances it is meaningless to respond to the plea. They say further that the allegation does not appear to be connected with the ultimate bases upon which EY and Mr Lang are alleged to be liable to Fuji Xerox.

19    It was accepted for Fuji Xerox that the plea as to the effect of the 2017 reports was not a claim as to their sole effect. It was a claim that an effect of the reports was to correct errors in the earlier reports. However, the errors themselves were not identified. It follows that an admission or denial of the allegation would be of little utility because it would not be known what errors were the subject of the responsive plea.

20    It is relevant to note that the amended statement of claim goes on to plead specific respects in which the 2015 and 2016 reports are said to have been defective. Therefore, detail as to the nature of the case alleged as to those matters is provided. In that context, the nature and extent of the allegation as to the alleged effect of the 2017 reports is vague and uncertain. It is not clear whether the errors that are alleged to have been corrected in 2017 were those pleaded in subsequent paragraphs. The parties are joined as to the issues raised by the subsequent paragraphs concerning defects in the 2015 and 2016 reports. In those circumstances, it is difficult to see why it is necessary in order for Fuji Xerox to know the nature of the defence being advanced by EY and Mr Lang to have a specific response to the overall generalised allegation about the case as to alleged correction of errors.

21    In those circumstances, EY and Mr Lang could have proceeded to strike out the plea. Instead they have simply maintained, in effect, that it is a plea made in a form to which a meaningful response cannot be pleaded beyond a general denial. I accept the position of EY and Mr Lang.

22    Later the amended statement of claim alleges that the statutory financial reports of FXA and FXF for the 2015 and 2016 financial years 'did not give a true and fair view of the financial position'. Particulars are given of the extent of the reduction in revenue and net profit that was effected by the 2017 reports. The allegations are denied. It is said that the denials of the negative allegations actually articulate an affirmative case. It is well established that a negative pleading by way of defence that conceals an affirmative case will not be able to stand without particularisation: Pinson v Lloyds and National Provincial Foreign Bank Ltd [1941] 2 KB 72 at 83-84. In this case, senior counsel for FXA and FXF maintains that there is no affirmative case.

23    It is my view that in the pleading as it presently stands, the defence is not pregnant with an affirmative case. This is not a case where an applicant says that something did not happen and that allegation is denied with the consequence that the defence, in substance, alleges that the particular event did happen. Rather, the pleading is a formulation of words that describes something that actually exists, namely the character and quality of the reports. It is said that, in fact, their content did not meet the required standard. A pleading of that kind will require Fuji Xerox to establish by affirmative evidence the particularised case that there was an understatement of revenue and profit in the reports. It is not a case that will be established by evidence that something did not happen.

24    As matters presently stand the response from EY and Mr Lang is a bare denial that the accounts were of the character alleged. They advance no particular matter in answer to the characterisation that Fuji Xerox alleges. The pleas in the defence are not a claim that the reports were true and fair. Rather, the pleas put Fuji Xerox to proof of their case that the 2015 and 2016 reports overstated the revenue and net profit to the extent particularised. If EY and Mr Lang wish to advance an affirmative case as to any matters that answer the claim as to the character and quality of the reports then they will need to expressly plead such a case. At present they do not do so.

25    A respondent will not be allowed to raise a positive case where the pleaded case is a bare denial. The respondent must plead the positive case: O'Brien v Komesaroff (1982) 150 CLR 310 at 318. Further, the Court may in appropriate circumstances require by case management direction a party to state which aspects of a case are admitted or denied: Fieldturf Inc v Balsam Pacific Pty Ltd [2003] FCA 809. In my view, the manner in which EY and Mr Lang have pleaded to the contentious paragraphs of the amended statement of claim the subject of the present application would foreclose any positive case being advanced in response to those allegations without leave to amend being sought and obtained.

26    In those circumstances, no basis has been demonstrated for the application to strike out the paragraphs in the defence.

27    I note that the view has been expressed that where a denial or putting to the proof would be inconsistent with the facts with which the pleader is instructed the pleader should admit the allegation in question: Unioil International Pty Ltd v Deloitte Touche Tohmatsu (a firm) (No 2) (1997) 18 WAR 190 at 193, applied in Gill v Ethicon Sarl (No 7) [2020] FCA 700 (Katzmann J). In any event, there is a duty upon counsel to expose the real issues and to carry out instructions to defend consistently with the performance of that duty: Dyczynski v Gibson [2020] FCAFC 120 at [214]-[220] (Murphy and Colvin JJ). I do not wish to be taken to be expressing a concern as to whether these duties are being performed in this case. There was no indication that they were not. However, having regard to the concerns that appear to have motivated the application by Fuji Xerox and the fact that Mr Bell, EY and Mr Lang propose to bring in minutes of proposed amended pleadings it is well that there be no ambiguity as to what is required.

28    As matters presently stand, the application against EY and Mr Lang should be dismissed. As I have indicated, EY and Mr Lang have foreshadowed that amendments will be sought to their defence. It is their position that the amendments will deal with issues that are unrelated to the present application. However, in circumstances where the final form of the pleadings is not yet settled I propose to reserve the costs on the application as against EY and Mr Lang.

Associate:

Dated:    5 November 2020