(5) PARAGRAPHS 2(F) AND 2(H) - LOSS OR DAMAGE
66 These two paragraphs (2(f) and 2(h)) will be considered together because they both concern the pleading of ASIC's case that Storm was exposed to the risk of "adverse legal outcomes". "[A]dverse legal outcomes" is a general expression ASIC has used in its written submissions to describe the various kinds of proceedings that, it alleges, may have been commenced against Storm as a result of the operation of the Storm Model.
67 The nature and degree of this risk exposure is central to ASIC's case against the Cassimatises. This can be seen from the concluding paragraphs of ASIC's FASC where it draws together the main planks of its case against the Cassimatises. Again, using Mr and Mrs Dodson as the examples, those paragraphs (2301 to 2305) state:
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 the first respondent and the second respondent:
(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 subparagraphs of 2301 proceed along similar lines for each of the alleged breaches of ss 1041E and 912A of the Corporations Act and the alleged breaches of retainer and duty of care in relation to the other Part E investors and for the Part F investors the alleged breaches of s 945A(1)(b) of the Corporations Act.]
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)
68 The kind of proceedings to which paragraph 2(f) allegedly relates are civil proceedings under s 953B of the Corporations Act. In relation to the Part E investors, the exemplar paragraph for this category is paragraph 1994 (specifically subparagraph 1994(b)(iii) which is emphasised below) as follows:
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.
(Emphasis added)
69 In relation to the Part F investors, the exemplar paragraph for this category is paragraph 2228 (again, specifically subparagraph 2228(b)(iii), which is emphasised below) as follows:
In the premises, by creating advice in accordance with the process pleaded in paragraphs 44 to 61 above and paragraphs 71 to 83 above and providing that advice to the Part F Investors, Storm:
(a) breached s.945A(1)(b) 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 the Part F Investors 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 risks were foreseeable.
(Emphasis added, underlining and struck out passages omitted)
70 The kind of proceedings to which paragraph 2(h) allegedly relates are civil proceedings for breach of Storm's retainer with, and duty of care to, each of the Part E investors. This aspect of ASIC's case is pleaded in Part I of its FASC, which is entitled "Negligence and breach of retainer by Storm". While the only exemplar paragraph within Part I is paragraph 2289, for contextual purposes, it is appropriate to set out all of the paragraphs in that Part (paragraphs 2284 to 2291). They are as follows (using Mr and Mrs Dodson as examples):
2284 Storm provided the advice contained in each of the Statements of Advice and the Statements of Additional Advice pleaded in respect of the Part E Investors pursuant to a retainer entered into between Storm and each of the Part E Investors who received the Statements of Advice and the Statements of Additional Advice.
2285 The retainer between Storm and each of the clients is to be inferred from the following steps in the process of investing in accordance with the Storm Model which were common to all of the clients:
(a) attendance by the client at a Storm education seminar;
(b) the completion by the client of a confidential financial profile at a meeting with an authorised representative or employee representative of Storm;
(c) the provision of Storm's Financial Services Guide to the client;
(d) the attendance by the client at a meeting with an authorised representative or employee representative of Storm to review and approve the cashflow analysis prepared by the head office of Storm;
(e) the attendance by the client at a meeting with an authorised representative or employee representative of Storm to receive a Statement of Advice prepared by the head office of Storm;
(f) the completion by the client of the authority to implement the investment recommended in the Statement of Advice.
2286 It was an implied term of each of those retainers, the term being implied at law, that Storm would exercise reasonable care and skill in the provision of financial advice to the client who received the Statement of Advice or Statement of Additional Advice.
2287 Further:
(a) to the knowledge of Storm, each of the Part E Investors relied upon the financial advice provided by Storm as set out in the Statements of Advice and Statements of Additional Advice pleaded above:
Particulars
(A) Reliance by Mr and Mrs Dodson on the financial advice provided by Storm is to be inferred from the facts pleaded in paragraphs 194 to 196, 203 to 204 and 209 above;
[The remaining particulars of 2287(a) proceed along similar lines in relation to each of the other 9 Part E investors.]
(b) Storm assumed responsibility to each of the Part E Investors for the financial advice it provided to those clients;
(c) it was reasonably foreseeable that Part E Investors would suffer loss in the event that Storm failed to exercise reasonable care and skill in the provision of financial advice to those clients;
(d) in the premises, Storm owed a duty to Part E Investors to exercise reasonable care and skill in the provision of financial advice to those client (sic).
2288 In breach of both the implied term of the retainer with each of the Part E Investors and the duty which Storm owed to each of those clients, Storm provided advice to each of those clients which:
(a) did not have any, or any appropriate, regard to the personal circumstances of the client to whom the advice was addressed as pleaded in:
(i) paragraphs 1992, 1997 and 2002 above in respect of Mr and Mrs Dodson;
[The remaining subparagraphs of 2288(a) proceed along similar lines in relation to each of the other 9 Part E investors.]
(b) was not appropriate to the personal circumstances of the client to whom it was addressed as pleaded in:
(i) paragraphs 1993, 1998 and 2003 above in respect of Mr and Mrs Dodson;
[The remaining subparagraphs of 2288(b) proceed along similar lines in relation to each of the other 9 Part E investors.]
(c) a reasonably competent and prudent financial adviser would not have given to those client.
2289 Each of the Part E Investors suffered loss as a consequence of Storm's breach of retainer and breach of duty.
Particulars
(A) The loss suffered by Mr and Mrs Dodson is pleaded in paragraph 217 above. Further particulars of loss will be provided prior to trial.
[The remaining particulars of 2289 proceed along similar lines in relation to each of the other 9 Part E investors.]
2290 In the premises pleaded in paragraphs 2284 to 2289 above, by providing the advice contained in the Statements of Advice and the Statements of Additional Advice pleaded in respect of the Part E Investors, Storm became liable to a foreseeable risk of civil proceedings for negligence and breach of contract being instituted by each of the Part E Investors.
2291 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.
71 At this point it is convenient to note that there is an important difference between the first two exemplar paragraphs above and the third, in relation to the treatment of the issue of loss or damage. That is that neither paragraph 1994 (at [68] above), nor paragraph 2228 (at [69] above), contains any allegation that any of the investors concerned suffered any loss or damage as a result of Storm's alleged breaches of s 945A(1)(b) (or (1)(c)) of the Corporations Act. In other words, it is the alleged breach of that section alone that is claimed to give rise to the risk of exposure to civil proceedings under s 953B of the Corporations Act. By comparison, paragraph 2289 expressly pleads that each of the Part E investors suffered loss as a consequence of Storm's breach of retainer and duty of care and particulars of that loss are given by reference to earlier paragraphs of the FASC. Using Mr and Mrs Dodson as an example, the pleading in relation to their loss is contained in paragraph 217 as follows:
In consequence of the following the (sic) recommendations made by Storm, as more particularly pleaded in paragraphs 191 to 207 above, Mr and Mrs Dodson:
(a) lost their Colonial First State managed investment of approximately $65,000.00;
(b) are indebted to BOQ for approximately $287,000.00 on the home loan and a further sum of approximately $27,000.00 on the line of credit;
(c) hold approximately $197,000.00 in a home loan offset account.
72 Furthermore, the particulars section of paragraph 2289 states that "[f]urther particulars of loss will be provided prior to trial".
73 As at November 2007, s 953B of the Corporations Act relevantly provided:
(1) This section applies in the following situations:
(a) a person:
(i) is required by a provision of this Part to give another person (the client) a disclosure document or statement (the required disclosure document or statement); and
(ii) does not give (within the meaning of section 940C) the client anything purporting to be the required disclosure document or statement by the time they are required to do so; or
(b) a person:
(i) gives another person (the client) a disclosure document or statement that is defective in circumstances in which a disclosure document or statement is required by a provision of this Part to be given to the client; or
(ii) is a financial services licensee and gives, or makes available to, another person (the client) a disclosure document or statement, being a Financial Services Guide or a Supplementary Financial Services Guide, that is defective, reckless as to whether the client will or may rely on the information in it; or
(c) a person contravenes section 945A, 945B, 949A or 949B.
In paragraph (b), give means give by any means (including orally), and is not limited to the meaning it has because of section 940C.
(2) In a situation to which this section applies, if a person suffers loss or damage:
(a) if paragraph (1)(a) applies--because the client was not given the disclosure document or statement that they should have been given; or
(b) if paragraph (1)(b) applies - because the disclosure document or statement the client was given was defective; or
(c) if paragraph (1)(c) applies - because of the contravention referred to in that paragraph;
the person may, subject to subsection (6), recover the amount of the loss or damage by action against the, or a, liable person (see subsections (3) and (4)), whether or not that person (or anyone else) has been convicted of an offence in respect of the matter referred to in paragraph (a), (b) or (c).
…
74 It should be recorded that none of the exceptions identified in sub-s (6) is presently relevant and it does not appear to be in dispute that, as a financial services licensee, Storm was a "liable person" under sub-s (3).
75 In relation to paragraph 2(f), the Cassimatises began by underscoring the observation set out in [71] above, viz that there is no allegation in the FASC that any of the Part E or Part F investors suffered any loss or damage as a result of any of the alleged breaches of s 945A(1)(b) or (1)(c) such as to found any proceedings under s 953B of the Corporations Act. Since loss or damage is an essential element of any civil proceedings under s 953B(2), the Cassimatises submitted that these parts of ASIC's case cannot be maintained against them.
76 In relation to paragraph 2(h), the Cassimatises made a number of criticisms of the way in which the alleged loss has been pleaded. In no particular order, they submitted that no causative link is pleaded between the alleged breaches of retainer and duty of care and the loss that has been particularised in paragraph 2289. Further, they claimed that no attempt is made in the FASC to quantify the loss allegedly sustained. Finally, they submitted that ASIC has pleaded a global loss claim when such a claim is impermissible. That is so, they submitted, because a global loss claim is only available when the alleged breach is the only material cause of the loss and, in this case, ASIC will not be able to exclude the aftermath of the Global Financial Crisis as a material cause of the loss.
77 In response to the Cassimatises' submission in relation to paragraph 2(f), ASIC submitted that its claim is directed to the risk to which Storm was exposed of, among other things, having civil proceedings commenced against it as a result of its breaches of s 945A(1) of the Corporations Act. It submitted that if it can establish that the alleged breaches occurred, the existence and degree of the risk in question will fall to be determined by the likelihood of some, or all, of the Part E and Part F investors commencing civil proceedings against Storm. It submitted that it does not need to allege that those investors suffered actual loss or damage to make this allegation. Specifically, ASIC submitted it does not need to plead loss or damage as an essential element of any civil proceeding that could be brought against Storm under s 953B of the Corporations Act.
78 In response to the Cassimatises' submission on paragraph 2(h), ASIC submitted that it is not seeking to recover loss in these proceedings, nor plead any such claim for loss. Instead, it claims that Storm was exposed to a risk that one or more of the Part E investors would issue proceedings to recover the loss they sustained by reason of the breach of retainer and duty of care. ASIC submitted that it was only required to plead the facts which "led to a reasonable inference" that the acts complained of and the later event have a relationship of cause and effect. It submitted that it does not therefore need to plead the actual loss the Part E investors suffered, nor quantify that loss in its FASC.
79 The words of s 953B(2): "… if a person suffers loss or damage … because of the contravention … the person may … recover the amount of the loss or damage by action against the, or a, liable person …", plainly enough create a statutory cause of action. As with analogous statutory causes of action, loss or damage is the gist of it: see, for example, Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 (Wardley) at 525. Further, the words: "… because of the contravention …" also introduce notions of causation similar to those raised by terminology to like effect in analogous statutory provisions: see Wardley at 525. It follows that, for present purposes, the statutory cause of action under s 953B has three essential elements to it. They are:
(a) a contravention of s 945A(1): see s 953B(1)(c);
(b) a person suffers loss or damage: see s 953B(2); and
(c) that loss or damage was suffered because of the contravention of s 945A(1): see s 953B(2)(c).
80 It does not appear to be in dispute in this matter that the second and third of these three essential elements are not pleaded as material facts in paragraph 1994, or paragraph 2228, or anywhere else in the FASC for that matter. Without the Storm investors concerned having allegedly suffered some loss or damage and/or without the contravention of s 945A(1) by Storm having allegedly caused those investors to suffer that loss or damage, I do not consider any civil proceedings could be commenced against Storm under s 953B(2) of the Corporations Act. If no such civil proceedings could be commenced against Storm, it necessarily follows, in my view, that ASIC cannot maintain its allegations in subparagraphs 1994(b)(iii) and 2228(b)(iii) that Storm was exposed to a risk of such civil proceedings.
81 It necessarily follows from this conclusion that I do not accept ASIC's submission that these material facts about loss or damage and causation are, in effect, incorporated in its plea that Storm breached s 945A(1), on the premise that any such breach by Storm must carry with it the risk of loss or damage being caused to the investors concerned. There are, in my view, two difficulties with this submission. The first is that it is not directed to the risk that is pleaded in subparagraphs 1994(b)(iii) and 2228(b)(iii). The risk pleaded in those subparagraphs is the risk of the nominated civil proceedings being commenced against Storm. Of course, the existence of that risk is, in turn, dependent upon all the elements of those civil proceedings being present, or at least at this pleadings stage of these proceedings, being alleged in the FASC. It therefore seems that this submission is really directed to those elements, viz that the investors concerned suffered loss or damage because of Storm's breach of s 945A(1). On this, ASIC propounds that Storm's breach of that section must carry with it the risk of that loss or damage being caused to those investors. Whether a risk of suffering loss or damage is sufficient to establish the essential elements of the civil proceedings described in s 953B, in the circumstances of this case, is not a question that falls to be determined on this interlocutory strike out application. Instead, the question is whether ASIC has pleaded the material facts necessary to establish those elements. In my view, ASIC's reliance on the mere allegation of breach of s 945A(1) is not sufficient for that purpose.
82 For these reasons, I do not consider ASIC has pleaded all the material facts necessary to make out the essential elements of the statutory cause of action underpinning the civil proceedings pleaded in subparagraphs 1994(b)(iii) and 2228(b)(iii) such that it can allege that there was a risk of those civil proceedings being commenced against Storm. I will therefore order that those subparagraphs of the FASC be struck out. The question then is whether ASIC should be given leave to replead those subparagraphs. As noted earlier in these reasons, the Cassimatises have opposed any such leave being granted. For the reasons that follow, I do not consider that opposition should prevail. The civil proceedings described in subparagraphs 1994(b)(iii) and 2228(b)(iii) are just one of five forms of proceedings pleaded in those subparagraphs, each of which is alleged to be an independent source of the risk of adverse legal outcomes to which ASIC claims Storm was allegedly exposed. The other four proceedings are proceedings under sections: 1311, 915C, 920A and 1101B of the Corporations Act: see [68] and [69] above. Thus, the removal of the s 953B civil proceedings described in subparagraphs 1994(b)(iii) and 2228(b)(iii) from that group of five proceedings, for reasons peculiar to the way in which the allegations about those proceedings are pleaded in the FASC, does not logically affect ASIC's entitlement, or ability, to pursue the other four forms of proceedings as sources of the risk to which Storm was allegedly exposed.
83 From the Cassimatises' perspective, if they already have to meet that case in relation to those other four forms of proceedings, there will be no obvious unfairness or injustice involved in them having to meet that case in relation to the civil proceedings under s 953B described in those subparagraphs, should ASIC be able to amend them to remedy the defect described above. This lack of unfairness or injustice to the Cassimatises is reinforced by the fact that ASIC has already pleaded similar material facts (albeit in relation to two different causes of action) in Part G of the FASC, specifically paragraph 2289, in relation to another source of adverse legal outcomes to which Storm was allegedly exposed, namely proceedings being commenced against it by the Part E investors for alleged breaches of retainer and duty of care (see [71] above). For these reasons, I consider that ASIC should be given leave to replead this particular aspect of its case against the Cassimatises, if it wishes to do so. To refuse leave would, in my view, allow a deficiency of form in ASIC's pleading to defeat what may be an important aspect of its substantive case against the Cassimatises. In reaching this conclusion, I have taken into account the considerations discussed by the High Court in Aon Risk Services v Australian National University (2009) 239 CLR 175; [2009] HCA 27 and, in that regard, it should be noted that, at this stage, the trial of these proceedings is not due to commence until some 12 months hence.
84 As I have alluded to immediately above, the position in relation to paragraph 2(h) is quite different. Paragraph 2289 follows on from a series of allegations to the effect that Storm breached its retainer with, and duty of care to, each of the Part E investors. In that paragraph, ASIC alleges that each of the Part E investors "suffered loss as a consequence of Storm's breach of retainer and breach of duty": see at [70] above. The loss allegedly suffered is then particularised. In the case of Mr and Mrs Dodson, the particularisation is undertaken by reference to paragraph 217 of the FASC where three items of loss are set out (see at [71] above). Furthermore, as noted above (at [72]), ASIC has given notice in paragraph 2289 that further particulars of loss will be provided prior to the trial of these proceedings. It follows that, unlike with subparagraphs 1994(b)(iii) and 2228(b)(iii), the material facts going to the issues of loss, and causation of that loss, have been expressly pleaded. Whether those allegations of fact can be established by evidence is a question that will have to be determined at the trial of these proceedings. However, it is not appropriate to determine those sorts of issues in this interlocutory strike out application.
85 As to questions the Cassimatises have raised about the pleading of the quantification of loss in paragraph 2289, I consider ASIC has made a valid point. In these proceedings, ASIC does not seek to recover the loss allegedly suffered by the Part E investors. It does not therefore need to prove the full extent of the loss suffered by, for example, Mr and Mrs Dodson, as if it were standing in their place pursuing civil proceedings against Storm for that loss. Instead, ASIC seeks to establish that sufficient loss was caused by Storm's alleged breaches that there was "a foreseeable risk of civil proceedings for negligence and breach of contract being instituted by each of the Part E investors" (see paragraph 2290 of the FASC at [70] above). Thus, ASIC only needs to establish that, for example, Mr and Mrs Dodson suffered sufficient loss from Storm's alleged breaches of retainer and duty of care that they may have taken civil proceedings against Storm to recover that loss.
86 In oral submissions, Mr Cooper did not shirk from the proposition that ASIC may seek to prove that sufficient loss by employing a "global loss" approach of the kind criticised by the Cassimatises in their submissions. Assuming ASIC pursues that approach, it will probably become necessary to give pre-trial directions to ensure that this aspect of the trial proceeds efficiently. These may include directions setting a time frame for the provision of the further particulars of the loss ASIC has already proffered in the particulars to paragraph 2289 (see at [72] above). They may also include appropriate directions to ensure that any expert evidence that is to be given in support of this approach is efficiently managed at trial. Nonetheless, I do not consider that Mr Cooper's intimation provides any justification for giving those kinds of directions at this stage of these proceedings, much less do I consider it provides any justification for striking out the allegations in paragraph 2289 of the FASC. For these reasons, I reject the Cassimatises' challenge under paragraph 2(h).
87 I should add that in making these observations about paragraphs 1994, 2228 and 2289, I am not expressing a view on whether, for the purposes of ultimately establishing that the Cassimatises breached s 180(1), it is necessary for ASIC to plead that the Part E and/or Part F investors actually suffered loss, as distinct from pleading that the Cassimatises knew at the time Storm allegedly contravened s 945A (or breached its retainer and duty of care with the investors) that, as a result, there was a risk that the investors would suffer loss. That issue, in my view, is one that should be determined at the trial of these proceedings.