Supreme Court New South Wales

• Medium Neutral Citation: Peter Davis & Ors v Halliday Financial Management Pty Limited & Ors [2014] NSWSC 1371
• Hearing dates: 3 October 2014
• Decision date: 03 October 2014
• Jurisdiction: Equity Division
• Before: Kunc J

Decision

Statement of claim struck out in part with leave to replead

• Catchwords: PRACTICE - Pleadings - Sufficiency - Requirement to plead material facts to support allegation of actual knowledge
• Legislation Cited: Australian Securities and Investments Commission Act 2001 (Cth); Civil Procedure Act 2005 (NSW)
• Cases Cited: Addenbrooke Pty Ltd v Duncan (No 2) [2013] FCA 820; Young Investments Group Pty Ltd v Mann & Ors [2012] FCAFC 107; (2012) 293 ALR 537
• Category: Interlocutory applications
• Parties: Peter Davis (First Plaintiff); Marlene Davis (Second Plaintiff); Albatross Investments Pty Ltd (Third Plaintiff); Zambo Pty Ltd as trustee for The William Cook Superannuation Fund (Fourth Plaintiff); Nick Falloon and Diane Falloon as trustee for the Falloon Family Trust (Fifth Plaintiff); Mann SuperCo Pty Ltd as trustee for the Mann Family Superannuation Fund (Sixth Plaintiff); Trivett Investments Pty Ltd as trustee for Classic Car Centre Superannuation Fund (Seventh Plaintiff); Halliday Financial Management Pty Limited ACN 079 962 100 (First Defendant); Michael Halliday (Second Defendant); John Hart (Third Defendant); Harvi Chugh (Fourth Defendant); Gary Loffhagen (Fifth Defendant); Paul Crowne (Sixth Defendant)
• Representation: Counsel: M.W. Young SC (Plaintiff); C. Bova (Third and Fourth Defendants); K.C. Morgan (Fifth and Sixth Defendants); Solicitors: Dixon Holmes Lawyers (Plaintiffs); Sparke Helmore (First, Fifth and Sixth Defendants); Watson Mangioni (Third and Fourth Defendants)
• File Number(s): 2014/49773
• Publication restriction: No

EX TEMPORE Judgment

1 HIS HONOUR: These proceedings were commenced by a statement of claim filed on 17 February 2014. The plaintiffs sue the defendants in relation to investment advice said to have been given by the first defendant to the plaintiffs in relation to a particular investment which ultimately, it appears, proved to be most unsuccessful for the plaintiffs.

2 The advice is alleged to have been given by the first defendant. That advice is said to have included representations to the effect that the particular investment was suitable to an investor with a low to medium risk profile and that the investment was a suitable investment for the plaintiffs to make.

3 The third and fourth defendants were directors and employees of the first defendant. The fifth and sixth defendants were employed by the first defendant in the capacity as financial advisers.

4 As matters now stand, the plaintiffs will allege that the representations which are said to have formed part of the advice were variously made by the third, fourth, fifth and sixth defendants. Except where it is necessary to draw a distinction, in these reasons I shall refer to the third to sixth defendants (inclusive) as "the defendants".

5 Each of the third and fourth defendants, for whom Mr C. Bova of Counsel appears, and the fifth and sixth defendants, for whom Ms K.C. Morgan of Counsel appears, move by notice of motion for orders that the proceedings against them be dismissed or, in the alternative, that particular paragraphs of the statement of claim be struck out. In relation to the latter course, the defendants all oppose the granting of leave to replead if the Court is not disposed to dismiss the proceedings.

6 It is not necessary for me to set out in any detail the requests for particulars that passed between the defendants and the plaintiffs. It suffices to be said that, as a result of various issues raised in correspondence by the defendants with the plaintiffs, the matter proceeded today by reference to a proposed amended statement of claim which was recently provided to the defendants. Mr M.W. Young of Senior Counsel, who appeared for the plaintiffs, informed the Court that the proposed amended statement of claim was, if the Court was not satisfied with the pleading of the statement of claim, the form of pleading upon which the plaintiffs would proceed. In practical terms the application before me was conducted as an application for leave to amend. So viewed, the defendants responded that the pleading in its proposed amended form suffered from the same vices as the statement of claim that has been filed.

7 I will approach the matter by reference to the proposed amended statement of claim. It seems to me to be quite clear that the various paragraphs complained of in the statement of claim are inadequate and ought to be struck out as failing to disclose a reasonable cause of action. The causes of action sought to be alleged are accessorial liability under the provisions of the Australian Securities and Investments Commission Act 2001 (Cth) or, in the alternative, of the Australian Consumer Law to the effect that the defendants were involved in contraventions of the provisions of what might be loosely referred to as the consumer protection provisions of those pieces of legislation.

8 The paragraphs of the proposed amended statement of claim that have been the subject of argument before me are (the amendments are underlined):

38. The Third Defendant is a person involved with the contravention of s 12DA of the ASIC Act (or, in the alternative, the contravention of s 18 of the Australian Consumer Law) in relation to the First to Sixth Plaintiffs because the Third Defendant:

(a) Was a director and an employee of the First Defendant;

(b) Had as part of his duty as a director and employee of the First Defendant oversight of the First Defendant's promotion of investment in the Trust; and

(c) Was one of the persons who, on behalf of the First Defendant, made the Representations to the First to Sixth Plaintiffs;

(d) Had actual knowledge that the Representations made to the First to Sixth Plaintiffs were untrue; and

(e) Had actual knowledge that there was no reasonable basis to make the Representation set out in subparagraph (c) of paragraph 15 to the First to Sixth Plaintiff.

39. The Fourth Defendant is a person involved with the contravention of s 12DA of the ASIC Act (or, in the alternative, the contravention of s 18 of the Australian Consumer Law) in relation to the Sixth Plaintiff because the Fourth Defendant:

(a) Was a director and an employee of the First Defendant; and

(b) Had as part of his duty as a director and employee of the First Defendant oversight of the First Defendant's promotion of investment in the Trust; and

(c) Was one of the persons who, on behalf of the First Defendant, made the Representations to the Sixth Plaintiff;

(d) Had actual knowledge that the Representations made to the Sixth Plaintiff were untrue; and

(e) Had actual knowledge that there was no reasonable basis to make the Representation set out in subparagraph (c) of paragraph 15 to the Sixth Plaintiff.

40. The Fifth Defendant is a person involved with the contravention of s 12DA of the ASIC Act (or, in the alternative, the contravention of s 18 of the Australian Consumer Law) in relation to the Sixth and Seventh Plaintiffs because the Fifth Defendant:

(a) Was employed as a financial adviser by the First Defendant; and

(b) Was one of the persons who, on behalf of the First Defendant, made the Representations to the Sixth and Seventh Plaintiffs;

(c) Had actual knowledge that the Representations made to the Sixth and Seventh Plaintiffs were untrue; and

(d) Had actual knowledge that there was no reasonable basis to make the Representation set out in subparagraph (c) of paragraph 15 to the Sixth and Seventh Plaintiff.

41. The Sixth Defendant is a person involved with the contravention of s 12DA of the ASIC Act (or, in the alternative, the contravention of s 18 of the Australian Consumer Law) in relation to the Fourth Plaintiff because the Sixth Defendant:

(a) Was employed as a financial adviser by the First Defendant; and

(b) Was one of the persons who, on behalf of the First Defendant, made the Representations to the Fourth Plaintiff;

(c) Had actual knowledge that the Representations made to the Fourth Plaintiff were untrue; and

(d) Had actual knowledge that there was no reasonable basis to make the Representation set out in subparagraph (c) of paragraph 15 to the Sixth and Seventh Plaintiff.

9 The central issue for determination today is whether it is sufficient as a matter of pleading for the plaintiffs to allege that the relevant defendant had actual knowledge in the way the proposed amendments set out above have now done.

10 There was no dispute about the legal principles underlying what had to be demonstrated to make out accessorial liability of the kind sought to be alleged in the proposed amended statement of claim. It is sufficient for me to refer to the judgment of Jacobson J in Addenbrooke Pty Ltd v Duncan (No 2) [2013] FCA 820:

4. Thus, what is required to give rise to accessorial liability in the present case is actual knowledge of the falsity of the representation comprising the primary contravention and intentional participation in the contravention. These are essential matters which must be alleged and pleaded: Quinlivan v Australian Competition and Consumer Commission (2004) 160 FCR 1 at [10]-[15]; SAS Financial Services Pty Ltd v Trew [2006] WASCA 252 at [12].

5. Where, as in the present case, the primary contravention is alleged to involve a misrepresentation as to a future matter it is necessary for a plaintiff or applicant to allege that the accessory had actual knowledge that the person alleged to have made the representation had no reasonable grounds for making it: Quinlivan at [15].

6. It is important to bear in mind that the concept of accessorial liability under s 79 of the Corporations Act and its analogues imports quasi criminal standards in imposing civil liability: Yorke v Lucas at 667-669.

7. Thus, while I accept that pleadings are a means to an end and that technical objections to pleadings are now received with less enthusiasm than in the past, the authorities to which I have referred make it clear that the essential elements of the claim must be properly pleaded.

8. Observations made by judges as to the blurring of the distinction between a pleading of material facts and a statement of particulars have little or no application to claims of the type made against Mr Kinghorn in the present proceeding: cf Beach Petroleum NL v Johnson (1991) 105 ALR 456 at 466; Australian Automotive Repairers' Association v NRMA Insurance Ltd [2002] FCA 1568 at [13]- [17].

11 That authority was the starting point of the arguments put by Mr Bova on behalf of his clients, which were also adopted by Ms Morgan on behalf of hers.

12 Mr Bova relied upon the decision of the Full Court of the Federal Court in Young Investments Group Pty Ltd v Mann [2012] FCAFC 107; (2012) 293 ALR 537:

7. A statement of claim must allege a cause of action with sufficient particularity and not simply make allegations in general terms. The adequacy of a statement of claim is to be assessed by reference to whether the cause of action is pleaded at a level of particularity that is sufficient to define the issues and inform the other party of the case that it has to meet, in the context of the particular allegations. A respondent or defendant is entitled to know the factual foundation for the case that is being alleged, so that the respondent or defendant can prepare to meet that case at trial. In order to disclose a reasonable cause of action, a statement of claim must contain an allegation of all of the relevant facts necessary to support any allegation made in it. A pleading that simply pleads a conclusion is embarrassing and should not be permitted to stand.

13 Without any disrespect to the careful way in which Mr Bova put his submissions, his essential point was that in this case the mere pleading of an allegation of actual knowledge and nothing more was insufficient. He further submitted that the facts alleged in the subparagraphs leading to the allegations of actual knowledge could not, in and of themselves, lead to an inference of actual knowledge of the matters alleged.

14 Mr Bova also submitted that the particulars that had been provided in response to earlier correspondence took the matter no further. Reference was also made to more recent reliance by the plaintiffs on the affidavit of their solicitor which, in answer to complaint about the lack of particularity in relation to the allegations of actual knowledge, said:

7. Sparke Helmore and Watson Mangioni have raised with me in correspondence attached to (sic) Mr Cameron and Mr Robinson's affidavit the question of the plaintiff's case with regard to the knowledge of the third, fourth, fifth and sixth defendants that the advice provided to the such of the plaintiffs with whom each of those defendants dealt was misleading and deceptive as pleaded in the Statement of Claim. In this regard the plaintiffs will be relying upon the fact that through acting as the advisors to those plaintiffs the defendants in question knew of the plaintiff's risk profiles and what investments were suitable or unsuitable for the plaintiffs, and as professional financial advisors would have known whether the 100x investment fell within that category and whether the third defendant was investing in it.

15 Mr Bova submitted that even taking into account what the solicitor's affidavit had said, that also did not take the matter any further. The fundamental vice of the amended pleading remained the paucity of an allegation confined to actual knowledge unsupported by anything else.

16 Finally, he submitted that it was clear that the plaintiffs had been given every opportunity to, as it were, put their best foot forward on this question. Mr Young confirmed to the Court that the proposed amended statement of claim and the solicitor's affidavit were indeed all that the plaintiffs proposed to rely upon. Mr Bova submitted that if there was nothing else, then the Court should go further than merely striking out the offending paragraphs but also take the next step of dismissing the claims against the defendants because if that was all there was, the plaintiffs could not possibly succeed.

17 In that context, Mr Bova drew to the Court's attention the seriousness of the allegations being made and the fact that the third to sixth defendants' only role in the proceedings was by virtue of the claim for accessorial liability. He submitted that it was a very serious matter to make such an allegation against individuals and for them to be drawn into litigation of this kind. In those circumstances, if the plaintiffs had nothing more, then this was a case for the Court to exercise its discretion to dismiss the proceedings with the result that the third to sixth defendants would not be further vexed by this litigation.

18 As I have said, Ms Morgan adopted Mr Bova's submissions on behalf of her clients. She helpfully took the Court to the relevant parts of the proposed amended statement of claim which were directed to her clients. It was clear from that exercise that all of the points made by Mr Bova applied to the proposed statement of claim insofar as it was directed to her clients.

19 On behalf of the plaintiffs, Mr Young submitted that the material fact, namely actual knowledge, had now been pleaded. He said that, as a matter of pleading, all that was required to be done had been done. This was not a case where any further material fact was required to be alleged to stand behind the fact which his client ultimately wished to prove at trial, namely the allegation of actual knowledge.

20 However, Mr Young went on to contend that if anything more was required that would be in the nature of the evidence. He said that the solicitor's affidavit had volunteered what that evidence would be, so that the defendants could be in no doubt as to the case which they would have to meet. Insofar as it was objected by the defendants that the paragraphs of the amended statement of claim would be difficult to plead to, Mr Young submitted that could not be the case. There was a plain allegation of fact, he said, of actual knowledge on the part of those defendants. It would be a simple and appropriate matter for them to respond by denying the allegation if that was to be their case.

21 Finally, Mr Young submitted that if the Court was minded to strike out the statement of claim and not grant leave to file the amended statement of claim, his clients ought to be given an opportunity to prepare a further draft amended statement of claim with the advantage, if it be thought such, of the Court's reasons in dealing with the present applications.

22 The relevant paragraphs of the amended statement of claim ought to be struck out and leave should not be granted to file the proposed amended statement of claim in its current form. However, I do not propose to accept the defendants' invitation that the plaintiffs' claims against the third to sixth defendants should be dismissed. The plaintiffs should be given one final opportunity to replead their case, to the extent they are able, against the third to sixth defendants. The reasons for which I have reached these conclusions are as follows.

23 In exercising the Court's discretion to strike out any part of the pleading and to permit repleading, I first observe that the discretion must be exercised having regard to the overriding purpose set out in s 56 of the Civil Procedure Act 2005 (NSW). That is to say that the Court's power to strike out must be exercised in a way that brings about the just, quick and cheap resolution of the real issues in dispute between the parties.

24 Next, I accept Mr Bova's submissions as to the correct approach at law to be taken to pleading a case such as the present one. There is no doubt that to make out accessorial liability of the kind which the plaintiffs contend for in this case, "actual knowledge of the falsity of the representation comprising the primary contravention and intentional participation in the contravention" need to be alleged and pleaded (to quote Jacobson J in Addenbrooke Pty Ltd).

25 However, as was set out by the Full Court of the Federal Court in Young Investments Group Pty Limited, the inquiry as to the whether an allegation has been sufficiently made does not stop at the point of identifying that a bare factual allegation of the kind the law requires to be made has been pleaded. A further inquiry needs to be answered, namely "whether the cause of action is pleaded at the level of particularity that is sufficient to define the issues and inform the other party of the case that it has to meet, in the context of the particular allegations." It is against that further inquiry that the proposed amended statement of claim fails.

26 There will be cases where the mere allegation of actual knowledge by a defendant will be sufficient as a matter of pleading. The circumstances of that case will make it obvious how it can be said that a defendant had actual knowledge of something. This does not seem to me to be such a case.

27 As I raised with counsel in the course of argument, actual knowledge can be proven in a number of ways. There may be cases where it is done by direct evidence, that somebody told the defendant of the particular matter which was said to be the subject of the actual knowledge. In other cases, which it seems to me this will be one, an allegation of actual knowledge will be sought to be made out by inviting the Court to infer that there was such knowledge from other objectively provable facts. The reason I say that this case seems to be one of the latter is because of what is said in the solicitor's affidavit. The solicitor's affidavit, in what seems to me still to be, with respect, an inchoate way refers to facts from which the plaintiffs will apparently urge the Court to infer that actual knowledge of the kind alleged was possessed by the defendants.

28 If the plaintiffs are to make out the allegation of accessorial liability, any further pleading will need to do more than just allege that the relevant defendants had actual knowledge of the matters alleged. In a case of this kind the material facts which are required to be pleaded must extend to pleading those facts by reason of which it will be alleged that the defendants had the relevant actual knowledge. I do not regard that as a matter of mere particulars. They will be material facts which will need to be proved in their own right.

29 It may be that whatever material facts the plaintiffs can properly allege that find their way into a further version of the amended statement of claim may still be insufficient to sustain the inference that the defendants had the actual knowledge sought to be alleged against them. That will be a matter which may have to be considered when leave is sought, as it will have to be, to file any further proposed amended statement of claim.

30 Given today's result Mr Young properly did not seek to be heard against the defendants being awarded their costs. I will ask the parties to bring in short minutes of order giving effect to these reasons, setting out a timetable for any further draft pleading to be considered and for the plaintiffs to pay the defendants' costs of today's motions.

Decision last updated: 08 October 2014