Australian Securities and Investments Commission v Storm Financial Limited

EX TEMPORE REASONS FOR JUDGMENT 1 Broadly speaking, these proceedings incorporate three separate sets of proceedings. The Richards proceedings: a class action, against Macquarie Bank Limited, involving approximately 230 members. The Sherwood proceedings: also a class action, against the Commonwealth Bank of Australia and another, involving approximately the same number of members. And the proceedings by the Australian Securities and Investments Commission ("ASIC") against the Commonwealth Bank of Australia, Bank of Queensland Limited and Macquarie Bank Limited. The ASIC proceedings are not a class action but, if ASIC is successful, it is its stated intention to allow any persons affected to use those proceedings to seek compensation against the three banks I just mentioned. Hereafter, I will refer to the three defendants in the ASIC proceedings as "the three banks". 2 At this stage it is not known precisely how many persons may wish to do that, but it could be a number in excess of 1,000 persons. The originating application in the ASIC proceedings was filed on 22 December 2010 and the original statement of claim was filed on 4 February 2011. 3 The central feature common to all proceedings is a company called Storm Financial Limited which operated various investment schemes. One of the main issues in all proceedings is whether those investment schemes were managed investment schemes that should have been registered under the Corporations Act 2001 (Cth) ("the Act"). If they were, another main issue is whether the three banks were knowingly concerned in those schemes. 4 I should add that the other defendant in the ASIC proceedings is Storm Financial Limited. It is in liquidation and the liquidator has indicated he does not seek to take any part in those proceedings. 5 Soon after the ASIC proceedings were issued, each of the three banks filed a notice of motion seeking to have those proceedings struck out. That happened in March 2011. Since the matter was allocated to my docket, I began to hear those strike-out applications. Early in that process, it became apparent that the issues in the ASIC proceeding significantly overlapped those in two class action proceedings: Richards and Sherwood. 6 It then became apparent that the most efficient way to proceed was for one judge to case manage the three sets of proceedings. That was agreed within the Court and arrangements were made to transfer the Sherwood proceedings from the Sydney Registry to this Registry, and to transfer the Richards proceedings from the docket of Dowsett J to my docket. 7 On 21 April 2011, I was then able to convene a directions hearing of all three proceedings. The main purpose in that directions hearing was to ascertain, in the terms of s 37M of the Federal Court of Australia Act 1976 (Cth), the most just, quick, inexpensive and efficient way to case manage the three sets of proceedings to resolution. 8 Not surprisingly, given the number of proceedings, the number of parties and the varying interests and issues involved, that directions hearing took some time. The end result of it was that I should first proceed to hear the strike-out applications by the three banks in the ASIC proceeding, and then determine the most efficient way in which to progress the three proceedings to a resolution. To that end, I gave directions for the filing and service of materials and outlines of submissions on the strike-out applications and set them down for hearing on 8 June 2011. 9 At the same time, I adjourned the directions hearing in the Richards and Sherwood proceedings to 9 June 2011, at or near the completion of the hearing of the strike-out applications. In the lead up to the hearing on 8 June 2011, and about six days ago, ASIC filed and served a notice of motion seeking to amend its originating application and statement of claim, to add the following paragraphs to both: An injunction under s 1324(1) of the Corporations Act 2001 (Cth) restraining the Second to Fourth Defendants from being knowingly concerned in, or being party to, the operation of the Storm Scheme. 10 ASIC's stated purpose in making this application was, to quote from its submissions: To put the soundness of the proceedings beyond doubt and thereby save the court and the parties from further disputes regarding the form of the proceedings. 11 Whether it has achieved the former remains to be determined, but the opposition to this application demonstrates that it has failed to achieve the latter: each of the banks has opposed ASIC's application to amend. 12 While all counsel made submissions, Mr Gleeson SC, for Macquarie Bank Limited, took the main role in outlining the grounds of opposition. In summary, and this is very much a brief summary, he submitted the application should be refused for these reasons. 13 First, he submitted the application was colourable. As I understand his submission on this aspect, it was that the amendment was a ploy to keep alive proceedings that were fundamentally unsound. On this aspect, Mr Gleeson sought to rely on a notice to produce that his client had caused to be served on ASIC, seeking the production of various documents that broadly related to the decision-making process ASIC had employed in deciding to pursue these proceedings and the proposed amendment to them. 14 Mr Derrington SC, for ASIC, opposed production under that notice on the ground that the documents sought were of no relevance to any issue in the strike-out applications. He submitted the sole relevant issue was whether ASIC had the power under the apposite legislation to issue the proceedings, not its motivations for their issue. 15 Secondly, Mr Gleeson submitted the proposed amendment seeks injunctive relief which is futile. He submitted it was futile because it does not advance ASIC's position in relation to the declarations it has sought. He said it seeks to enjoin the defendants from being knowingly concerned in the operation of the Storm Scheme when the company, Storm Financial Limited, is being wound up and all of the managed investments schemes have been too. He also submitted it does not serve any public interest because it will not serve to denounce any misconduct by the three banks, if there be any. 16 Thirdly, he submitted that ASIC had delayed some six months before making the application and it had offered no explanation as to why the application was being made at this late stage. Fourthly, he submitted the proposed amendment is defective in form because the expression, "The Storm Scheme," has not been defined in the application and the expression, "or being party," has been added, which is not mentioned in s 601ED or anywhere else in the relevant provisions of the Act. Finally, he submitted that the proposed amendment was not supported by any facts pleaded in the statement of claim. 17 Mr Payne SC, for the Commonwealth Bank of Australia, and Mr Crowe SC, for Bank of Queensland Limited, made similar submissions. I do not need to summarise those submissions for the purposes of disposing of this application. I will deal with Mr Gleeson's submissions in turn, picking up on Mr Derrington's submissions in response where appropriate. 18 First, to determine whether the application is colourable I need to determine first whether the proceedings are fundamentally unsound. If they are not, then the proposition the amendment is being made for the sole purpose of propping them up is obviously untenable. 19 To determine whether the proceedings are fundamentally unsound, I need to decide the very issue that is at the heart of the three banks' strike-out applications. Since I cannot do that until I have heard the submissions from all sides, I consider the only sensible response to this ground of objection is to allow the proposed amendment, and if the proceeding is, as Mr Gleeson says, fundamentally unsound, then the amendment will fall with the proceedings, in any event. Of course, if the proceedings are not so unsound, then the proposition that ASIC needed to prop them up by a colourable application will be shown to be unsustainable. 20 As to the notice to produce, I consider the better course in relation to it is to set that notice aside, to allow the amendment, and to proceed with the bank's strike-out application. The alternative would be to waste weeks, or months, pursuing what I consider is essentially a distracting side issue, at best. In other words, I do not consider the colourable allegation is likely to be so significant to the determination of the three banks' strike-out applications that this delay is warranted in relation to all these three proceedings. 21 The question whether the proposed amendment is futile is in a similar position, particularly insofar as Mr Gleeson submits that it does not address, what he says is, the fundamental defect in the proceedings, as presently constituted. Furthermore, as to the submission that an injunction would be futile in the circumstances where Storm and all the investment schemes have been wound up, I agree with Mr Derrington's submission, based upon the authorities that are conveniently summarised by Palmer J in Australian Securities and Investments Commission v Maver-Swisse Securities Ltd (2002) ACSR 605; [2002] NSWSC 741 at [36]. The effect of that paragraph is that s 1324 is a statutory provision that is not constrained by the usual equitable principles in relation to the grant of injunctions and it may be used to serve the purpose, among other things, of deterring others from engaging in similar conduct in the future, even though there may not be any real prospect of a repetition of the same conduct. 22 Whether that proves to be the case in these proceedings, is something that must wait to be determined once all the evidence and arguments of the parties have been heard. In other words, I do not consider it is so obviously unsustainable that the proposition should not be allowed to be considered, at all, in these proceedings. For these reasons I reject that ground of objection. 23 It is true that where a party is applying to amend like this, it is generally required to give an explanation. So much is clear from what was said in Aon Risk Securities Limited v Australian National University (2009) 239 CLR 175; [2009] HCA 27 ("Aon Risk") at [103]. The explanation given by Mr Derrington was that it became apparent to ASIC once it considered the submissions of the three banks on their strike-out applications that one way to meet their objections may be to seek to rely upon s 1324 of the Act. 24 In response, the three banks submitted that ASIC should have realised this from the outset. While that may be so, this explanation must be considered against the background to these proceedings, the stage they have presently reached and the terms of the proposed amendment. They include these: first, the amendment essentially involves a matter of law. Secondly, the amendment seeks to define the relief sought which, while it may affect the validity of the proceedings, is still a matter that usually comes to be considered at the end of the proceedings, rather than at the beginning. Thirdly, the amendment has been sought at a relatively early stage of these proceedings. As I said near the outset, these proceedings were issued about six months ago and the original statement of claim was only filed about four months ago. The proceedings are nowhere near a trial, as was the case in the Aon Risk decision. Finally, none of the three banks has claimed that it will suffer any relevant prejudice if the amendment is made. 25 For these reasons, I reject this ground of objection. As to the question of the form of the proposed amendment, I do consider there is merit in Mr Gleeson's criticisms of it. However, I also consider that is a matter that can be attended to in due course in the case management of the proceedings. I can assure the defendants I will deal with it, if ASIC does not attend to it voluntarily in the meantime. Nonetheless, I do not consider these matters of form are so significant that I should refuse to allow the proposed amendment at all. 26 Finally, I should mention a submission made by Mr Payne on behalf of the Commonwealth Bank. That is, if I were to allow the proposed amendment, I should do so on terms which require ASIC to plead the details of at least some representative claimants in the various categories of claims concerned, so that the ultimate potential beneficiaries of the ASIC proceedings are known from the outset. 27 Mr Payne submitted, if this is done, the Commonwealth Bank will not pursue its strike-out application. Mr Derrington opposed this course on the ground that s 1325 of the Act sets up a two step process and any involvement of such claimants only arises at the second step, after it has succeeded in the first. Attractive as this proposition is, I do not consider I can fairly impose it on ASIC at this point. To do so would be to pre-empt, at least in part, its opposition to the strike-out application that Mr Gleeson, on behalf of Macquarie Bank, still intends to pursue. Indeed, the two step process under s 1325 of the Act, propounded by Mr Derrington, is at the heart of ASIC's response to the three banks' strike-out applications. I therefore consider it would not be just to impose these conditions on ASIC in circumstances where at least one of the three banks still intends to proceed with its strike-out application. 28 Thus, as with all the other matters I have mentioned, I think this matter, too, has to await my determination of the three banks' strike-out applications. For these reasons, I propose to grant ASIC leave to make the amendments it has sought. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Reeves.