Solicitors:
Clyde & Co (Plaintiff)
McMahon Clarke (Defendant)
Colin Biggers & Paisley (First Respondent)
File Number(s): 2020/205707
[2]
Judgment
The plaintiff, Count Financial Limited ("Count"), brings these proceedings against Mr Inderasan Pillay alleging that:
1. Count holds an Australian Financial Services Licence under the Corporations Act 2001 (Cth); [1]
2. Mr Pillay is an Australian Chartered Accountant [2] and its authorised representative under its AFSL; [3]
3. Mr Pillay provided "accounting services and taxation advice" to identified clients ("the Clients") "with respect to strategies for reduction of tax liabilities including accounting and tax aspects of" identified agribusiness products ("the Products"); [4]
4. In reliance on the "accounting services and tax advice" provided by Mr Pillay, each of the Clients entered into the Products; [5]
5. The Products failed and each of the Clients suffered loss; [6]
6. By reason of ss 917A and 917B of the Corporations Act 2001 (Cth), Count was responsible, as between Mr Pillay and the Clients, for Mr Pillay's conduct, whether or not within authority "relating to the provision of financial services"; [7]
7. Each of the Clients made a claim against Count in relation to that loss [8] that Count, without admissions, resolved by paying to the Clients a total of some $15.3 million; [9]
8. In these circumstances, Mr Pillay "owed Count a duty to exercise reasonable care and skill in conducting his accounting and taxation practice" to "avoid economic loss to Count"; [10]
9. In breach of that duty, Mr Pillay failed to exercise such reasonable care and skill in that, amongst other things, he failed to ensure that the Clients understood the risks of entering into the Products [11] and failed to take reasonable steps to ensure the Clients received independent advice concerning the risks associated with entering the Products; [12] and
10. By making the payments referred to at (g), Count has suffered loss which it seeks to recover from Mr Pillay. [13]
Now, by notice of motion filed on 28 October 2020, Count seeks to join Mr Pillay's insurers ("the Underwriters") to the proceedings under his professional indemnity policy ("the Policy"), pursuant to s 5(1) of the Civil Liability (Third Party Claims Against Insurers) Act 2017 ("the Act").
The Act replaces the now repealed Law Reform (Miscellaneous Provisions) Act 1946 (NSW).
Section 4 of the Act provides:
Claimant may recover from insurer in certain circumstances
(1) If an insured person has an insured liability to a person (the "claimant"), the claimant may, subject to this Act, recover the amount of the insured liability from the insurer in proceedings before a court.
(2) The amount of the insured liability is the amount of indemnity (if any) payable pursuant to the terms of the contract of insurance in respect of the insured person's liability to the claimant.
(3) In proceedings brought by a claimant against an insurer under this section, the insurer stands in the place of the insured person as if the proceedings were proceedings to recover damages, compensation or costs from the insured person. Accordingly (but subject to this Act), the parties have the same rights and liabilities, and the court has the same powers, as if the proceedings were proceedings brought against the insured person.
(4) This section does not entitle a claimant to recover any amount from a re-insurer under a contract or arrangement for re-insurance.
Section 5 of the Act provides:
Leave to proceed
(1) Proceedings may not be brought, or continued, against an insurer under section 4 except by leave of the court in which the proceedings are to be, or have been, commenced.
(2) An application for leave may be made before or after proceedings under section 4 have been commenced.
(3) Subject to subsection (4), the court may grant or refuse the claimant's application for leave.
(4) Leave must be refused if the insurer can establish that it is entitled to disclaim liability under the contract of insurance or under any Act or law.
In order to be granted leave to proceed against the Underwriters, Count must demonstrate that:
1. it has an arguable case against Mr Pillay;
2. there is a real possibility that if judgment is obtained against Mr Pillay, he will not be able to meet it; and
3. it has an arguable case that the Policy responds to Count's claim against Mr Pillay. [14]
Even if these matters are established, there is a residual discretion to refuse leave. The purpose of that discretion is to "insulate insurers from exposure to untenable claims" [15] and to "ensure that insurers are not exposed unnecessarily to claims against them". [16]
By reason of s 5(4) of the Act, leave must be refused if the insurer can establish an entitlement to disclaim liability under the policy.
The Underwriters have denied liability to indemnify Mr Pillay under the Policy and on 20 July 2020 formally declined indemnity.
The Underwriters accept that Mr Pillay would likely not be able to meet a judgment were it to be obtained against him and did not contest the proposition that Count had an arguable case against Mr Pillay.
The argument before me focused on the question of whether the Policy would respond to Count's claim against Mr Pillay, assuming it was successful.
The Policy included the following terms:
1. Clause 1.1 (Insuring clause) :
Underwriters shall indemnify the Insured against any Claim first made and Notified during the Policy Period and which arises out of the conduct of the Insured's Business by reason of any civil liability incurred by the Insured or by any other person, firm or company directly appointed by and acting for or on behalf of the Insured.
1. "Insured's Business" was defined in clause 7.10 to mean "the professional services performed or the advice given by the Insured in relation to those activities declared in the Proposal".
2. The Proposal identified Mr Pillay's business as being 75% personal taxation and 25% accounts preparation/ bookkeeping.
3. Clause 4 contained the following exclusion:
Underwriters shall not have any liability under this policy for, or directly or indirectly arising out of, or in any way involving:- …
4.12 Investment Related
Any …
(c) the provision of any financial service by the Insured where the Insured is required to be authorised or licensed in accordance with Part 7 of the Corporations Act 2001; …
and/or
(e) any investment introduced or recommended by the Insured, or where the Insured has given advice in respect of any investment … "
Argument before me focused on exclusion 4.12(e) and, in particular, the second limb of that exclusion, namely any liability arising directly or indirectly or in any way involving [17] a circumstance:
"… where the insured has given advice in respect of any investment".
It is clear from the wording of exclusion 4.12(e) that the second limb extends beyond advice actually to make the investment in question; such advice is excluded in terms by the first limb of the exclusion which is directed to liability arising (indirectly and so on) from "any investment introduced or recommended by the Insured".
The simple point advanced before me by Mr Muston SC and Ms Thrift for the Underwriters was that if Count makes out its pleaded case it must follow that the exclusion in the second limb of exclusion 4.12(e) was engaged because:
1. Count's case is that Mr Pillay gave the Clients advice "with respect to" "accounting and tax aspects" of the Products; [18]
2. such advice must necessarily be advice "in respect of" the Products and thus "in respect of any investment" for the purposes of the exclusion.
I think this is correct.
The point is emphasised by Count's description in its List Statement of "The Nature of the Dispute":
"This dispute arises out of accounting and taxation services provided by [Mr Pillay] to a number of his clients in respect of certain agribusiness products which failed, resulting in losses by the clients". [19] (My emphasis)
The words used here replicate the words of the second limb of exclusion 4.12(e).
And in their reply submissions, Mr Archibald QC and Ms Bathurst who appeared for Count said:
" … [Count's] case is that Mr Pillay provided accounting and personal taxation advice to his Clients in relation to the relevant agribusiness Products". (My emphasis)
Those words also echo, albeit not precisely ("in relation to" rather than "in respect of") the words of the exclusion.
Mr Archibald and Ms Bathurst also drew attention to Mr Pillay's List Response in which he states that he provided:
" … Clients with general financial product advice with respect to proposed investments in agribusiness products for the purpose of tax minimisation". [20] (My emphasis)
Thus, Mr Pillay's description of his conduct also replicates the words of the exclusion.
The point is also emphasised by Count's plea that the Clients entered the products "in reliance on" the accounting services and tax advice given by Mr Pillay. [21] This plea, essential for Count's case, is that Mr Pillay's conduct was the cause, or an effective cause, of the Clients entering the Products. If Count proves this is so, it will have proved that Mr Pillay gave the Clients advice "in respect of" the Products.
Hence, I think Mr Muston's and Ms Thrift's submission set out at [16] above is correct. It follows that I must refuse Count the leave it seeks [22] .
Alternatively, Mr Muston and Ms Thrift pointed to exclusion 4.12(c) [23] which excludes Underwriters' liability arising (indirectly and so on) from:
"… the provision of any financial service by the Insured".
As I have said, Count pleads that ss 917A and 917B of the Corporations Act imposed on it responsibility, as between it and the Clients, for Mr Pillay's conduct (whether or not within authority) relating to the provision of financial services. [24]
Sections 917A and 917B only apply to the conduct of a representative of a financial services licensee "that relates to the provision of a financial service". [25]
Mr Muston and Ms Thrift submitted that to make out its claim against Mr Pillay, Count must prove that it was obliged to pay the $15.3 million to the Clients and that:
1. to do this Count must prove that it was responsible for Mr Pillay's conduct;
2. that could only be by reason of ss 917A and 917B; and
3. it must follow that for Count to succeed against Mr Pillay it must prove he was providing a "financial service" and thus that exclusion 4.12(c) was enlivened.
Mr Archibald submitted that this submission misapprehended Count's case which was, in fact, that Count was not liable to the Clients.
Evidently, Count's case will be that it made the $15.3 million payment that it now seeks to recover from Mr Pillay without admission of liability and, to adopt Mr Archibald's words, because "it was put in [the] circumstance of confronting a multitude of claims and incurring the significant costs of defending them" and by reason of Mr Pillay not "ring-fencing" his tax practice, Count was "vulnerable to suffering unmeritorious claims". [26]
Thus, Count makes the allegations of duty and breach of duty set out above [27] and will seek to prove it has suffered damage by reason of Mr Pillay's breach of that alleged duty, notwithstanding that it was not liable to make payments to the Clients.
It is not appropriate that I make any comment about the prospects of that claim succeeding, save to say that I accept that, if it succeeds, it raises some doubt as to whether exclusion 4.12(c) would be enlivened.
However, it follows from my conclusion concerning exclusion 4.12(e) that the Underwriters have established an "entitlement to disclaim liability" under the policy and that leave must be refused on that basis.
Alternatively, my conclusion is that the Underwriters' arguments in that respect are so strong that, as a matter of discretion, leave should be refused.
For these reasons, I order that the plaintiff's notice of motion of 28 October 2020 be dismissed with costs.
I stand the proceedings over for further directions on 26 February 2021.
[3]
Endnotes
Commercial List Statement para C1 ("CLS").
CLS C2.
CLS C8.
CLS C3.
CLS C4.
CLS C5.
CLS C9.
CLS C6; evidently the claim was made through Financial Ombudsman Service Australia.
CLS C7 and see also A3.
CLS C10.
CLS C11, particular (A).
CLS C11, particular (B).
CLS C12 and C13.
Eg see Murphy, McCarthy & Associates Pty Ltd v Zurich Australian Insurance Ltd [2018] NSWSC 627 at [16] - [17] (Hammerschlag J) ("Murphy, McCarthy"); Zaki v Better Building Constructions Pty Ltd [2017] NSWSC 1522 at [27] (Campbell J).
Murphy, McCarthy at [16].
Opes Prime Stockbroking Ltd (in liq) (Scheme Administrators Appointed) v Stevens [2014] NSWSC 659 at [17] (Ball J), citing Oswald v Bailey (1987) 11 NSWLR 715 at 725 (Kirby P) and Tzaidas v Child (2004) 61 NSWLR 18; NSWCA 252 at [17] (Giles JA; who spoke of "unwarranted direct claims").
Incorporating the words in the chapeau to cl 4
CLS C3.
CLS at A1.
CLS at [C3(e)].
See [1 (d)] above.
Section 5(4) of the Act
Incorporating the words in the chapeau.
See 1(f) above.
Section 917A(1)(a).
T23.37 - 24.12.
See [1(h) and (i) above].
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Decision last updated: 17 February 2021