Done v Financial Wisdom Limited

Background 3 The applications arise in the following way. The present proceeding was commenced by the applicants on 2 November 2007. The proceeding is of some complexity with the proposed further amended statement of claim running to some 118 pages and being over 550 paragraphs in length. The first-named applicant ("Mr Done") is a well-known Australian artist and the second applicant is his wife. The third through to eighth applicants are trustee companies which are associated with Mr and Mrs Done. It is apparent from the allegations which are made in the proposed further amended statement of claim that Mr Done has amassed a considerable fortune. 4 The proposed further amended statement of claim alleges that the Dones and their trustee companies retained the services of a financial adviser known as Financial Wisdom Limited ("Financial Wisdom"), who is the first respondent, and a firm of accountants, Bentley Barton, who is the third respondent. Financial Wisdom is a subsidiary of the Commonwealth Bank of Australia. Financial Wisdom's authorised representative who, it is alleged, dealt with Mr Done and his companies, was Mr Wayne Chen, and he is the second respondent in the proceeding. The particular accountant at Bentley Barton with whom Mr Done and his companies dealt is the fourth respondent, Mr Gary Taylor. 5 By the proposed further amended statement of claim, the applicants allege that Financial Wisdom and Bentley Barton, together with Mr Chen and Mr Taylor, were responsible for providing him with advice on the management of his fortune. Specifically it is alleged that an investment committee was formed to supervise that advice and that Mr Done gave a particular direction that there were to be no investments without his approval. The proposed amended statement of claim then goes on to allege, in considerable detail, a large number of financial transactions, termed in the pleadings "investments" or "loans", which it is contended were not authorised by Mr Done as his alleged direction required. 6 That allegation is put against Financial Wisdom, Bentley Barton, Mr Chen and Mr Taylor in a number of ways. For example, it is said to have been a breach of fiduciary duty, to have been negligent and to have involved misleading and/or deceptive conduct. The interests associated with Mr Done claim to have lost a sum of money in excess of $53 million by reason of the conduct which they seek to impugn. The allegations made are not straightforward. However, for present purposes, it is sufficient to observe that the proposed further amended statement of claim alleges that the investments or loans made on behalf of the applicants were done in circumstances which were contrary to the express instructions of Mr Done. 7 On 14 October 2005 Bentley Barton was placed in liquidation, having been placed in administration on 1 September 2005. On 27 September 2007 Mr Taylor was made bankrupt. The immediate effect of s 471B of the Corporations Actand s 58(3)(b) of the Bankruptcy Act is to require the applicants to obtain the leave of the Court to proceed against the insolvent estates. The question of whether those grants of leave should be extended to the applicants is intertwined with the question of whether leave to join Allianz should be granted. This is because it is claimed by the applicants that Allianz has issued a professional indemnity policy which covers both Bentley Barton and Mr Taylor in respect of the liabilities which the applicants now seek to impose on them. Obviously, if such a policy exists, that is a matter which is arguably relevant to whether leave to proceed should be granted. 8 The evidence discloses that Bentley Barton obtained an accountants professional indemnity policy issued by Allianz in respect of the periods from 4 pm on 16 January 2005 to 4 pm on 16 January 2006 ("the Policy"). The Policy is of a kind which is usually described as "claims made". The extent of the cover is $7 million. There is no dispute that during the relevant period of cover claims were made on the Policy. There is also no dispute, at least for the purposes of the present applications, that Bentley Barton and Mr Taylor are, generally speaking, entitled to cover in accordance with the terms of the Policy. 9 The application for leave to proceed against Bentley Barton and Mr Taylor was filed on 26 November 2007. Some time has been spent by the applicants in ascertaining, first, the existence of the Policy and then details of its terms. The applicants did not succeed in obtaining from the liquidator of Bentley Barton a copy of the Policy until 6 March 2008. Further, a copy of the schedule to the Policy was obtained from Allianz itself only on 10 April 2008.

Joinder of Allianz 10 The application to join Allianz was made pursuant to O 6 r 2 of the Federal Court Rules, s 562 of the Corporations Act and s 6(4) of the Law Reform Act. Allianz resisted joinder on only one ground. It contended that the Policy contained an exclusion which was applicable in the present circumstances so that the claim against it would inevitably fail. The clause upon which Allianz relied was entitled "Investment Performance Exclusion" (IPE). That clause provided: We are not liable to indemnify you in respect of any claim directly or indirectly based upon, attributable to, or in consequence of:

(a) depreciation (or failure to appreciate) in value of any investments, including but not limited to securities, commodities, currencies, options and futures transactions; or

(b) any actual or alleged representation, advice or guarantee provided by or on your behalf as to the performance of any such investments.

For the sake of clarity we agree that this exclusion does not apply to any claim arising directly out of your failure to effect a specific investment transaction pursuant to a specific instruction from a client of yours.

11 Allianz argued that all of the losses which were claimed by the applicants were connected with a depreciation of "investments". It was submitted that a necessary step in the applicants' pleaded case was that the value of their investments had decreased from which it must follow that the losses claimed fell squarely within the terms of the exclusion. The applicants on the other hand denied that the losses which were claimed by them could all necessarily be described as "investments". Further, they submitted that the clause, properly construed, applied only to "investments" which were authorised and that the investments which had been effected by Bentley Barton and/or Mr Taylor were contrary to Mr Done's express instructions. 12 The loss claimed from Bentley Barton is pleaded in paragraph 512 of the proposed further amended statement of claim. It says: 512. By reason of Bentley Barton's breach of its duty of care, each of the applicants has suffered loss and damage.

See particulars to paragraph 472 13 The loss claimed from Mr Taylor was set out in a number of paragraphs of the proposed pleading. These included paragraphs 526, 530, 534, 538, 541, 544 and 546. Each of those paragraphs was particularised by reference to the loss which was claimed in the particulars to paragraph 472, being the same losses claimed against Bentley Barton. The particulars to that paragraph were as follows: Full particulars of loss and damage will be provided. The applicants' current estimate of the amount that has been lost directly by reason of the investments and loans identified in this Statement of Claim is $26,336,972.00. If the respondents had invested funds held by entities and trusts in the Done Group in accordance with the Investment Strategy Instructions, the investment portfolio of the entities and trusts in the Done Group as at 30 September 2007 is likely to have had a net value (excluding real property and tax) of approximately $61,500,000.00. The actual net value of the investment portfolio of the entities and trusts in the Done Group (excluding real property) as at 30 September 2007 is approximately $8,057,000.00. The applicants claim loss and damages in excess of $53,443,000.00.

In addition the applicants claim the costs (and any interest calculated and payable) associated with:

(i) the investigations conducted by their solicitors and consultants into the transactions alleged at section G(a) -(w) and the conduct of the respondents and the Investment Committee more generally;

(ii) obtaining advice in relation to possible mitigation; and

(iii) the reasonable steps taken by or on behalf of the applicants to recover or attempt to recover the loss sustained as a result of the imprudent investments and transactions.

Full particulars of loss and damage will be provided. 14 There was a debate between the parties as to whether "loans" could be "investments" within the meaning of the Policy. It was also said that the costs of the investigations conducted by the solicitors and consultants could not themselves be "investments". In my opinion, the loans are investments within the meaning of the Policy. That expression is not defined in the Policy but it is reasonably apparent that the purpose to which the IPE clause is directed is one in which the notion of an investment is a broad one. This is apparent from the wording of sub-clause (a): … any investments, including but not limited to securities, commodities, currencies, options and futures transactions …

15 Those words were clearly sufficient to ensure that the notion of an investment included securities, but it was equally as plain that the definition was merely inclusive. I see no particular reason why investments would not be construed as including loans such as, for example, money on deposit. 16 The applicants, however, also submitted that the exclusion should be construed as applying only to authorised investments. This submission should be accepted. In Nissho Iwai Australia Ltd v Malaysian International Shipping Corporation, Berhad (1989) 167 CLR 219 at 227 a unanimous High Court adopted a passage from Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510 in these terms: … the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity.

17 The operation of that principle in the context of unauthorised investments was itself considered by the High Court in Darlington Futures Pty Ltd v Delco Australia Pty Ltd. In that case, a broker dealing on the commodity futures market entered into a written agreement with a client under which the broker was instructed to engage on behalf of the client in a form of commodity futures dealings known as tax straddles. An amount of trading occurred contrary to the client's instructions and in consequence heavy losses were sustained. Clause 6 of the written agreement between the broker and the client contained various acknowledgements about the exigencies of the market and concluded with the sentence: The Client finally acknowledges that the Agent will not be responsible for any loss arising in any way out of any trading activity undertaken on behalf of the Client whether pursuant to this Agreement or not, and that the Agent shall not be liable to account to the Client for any profit made by the Agent in any of the circumstances set out in clause 9 whether or not such circumstances result in a loss to the Client.

18 Having made the statement set out above, the Court then turned to the question of how that sentence was to be construed. The Court held (at 511 per Mason, Wilson, Brennan, Deane and Dawson JJ): Turning now to cl. 6 of the contract between the appellant and the respondent, the question is whether the relevant losses arose "in any way out of any trading activity undertaken on behalf of the Client whether pursuant to this agreement or not". Read in context these words plainly refer to trading activity undertaken by the appellant for the respondent with the respondent's authority, whether pursuant to the agreement or not. It can scarcely be supposed that the parties intended to exclude liability on the part of the appellant for losses arising from trading activity in which it presumed to engage on behalf of the respondent when the appellant had no authority so to do.

19 It is important to emphasise that the Court's conclusion directed attention to the status of the investments as authorised. That approach to the question of the construction of the exclusion clause was not surprising. The same result, effectively, had been achieved in the Court's prior decision in Council of the City of Sydney v West (1965) 114 CLR 481. In this case Mr West had driven his car into the Domain car park in Sydney. He had been handed a ticket by the attendant upon entering. It contained a clause which read: 1. The Council does not accept any responsibility for the loss or damage to any vehicle or for loss of or damage to any article or thing in or upon any vehicle or for any injury to any person however such loss, damage or injury may arise or be caused.

20 After the car was parked a rogue obtained, by deceit, a duplicate of the parking ticket for Mr West's vehicle and so armed, proceeded to drive Mr West's car to the exit where he was permitted by an attendant to drive away without further inquiry. The ticket also provided that it had to be presented for time stamping and payment before taking delivery of the vehicle. Barwick CJ and Taylor J held (at 489-490): The fact that the attendant at the exit through which the car was driven was negligent is of no consequence in the case; the act of delivery was one which was neither authorized nor permitted by the contract and in our view the appellant was not entitled to be exonerated by the exempting clause.

21 The application of that principle to the present facts is, it seems to me, straightforward. "Investments" within the meaning of the IPE clause should be construed to mean "authorised investments". Such a construction is consonant with the final words of the clause which show clearly that the clause was not intended to cover the situation where, contrary to instructions, the insured had failed to effect a particular investment. That demonstrates that the clause is concerned to make clear that the insurers are not underwriting the insured's investment advice business. However, the clause says nothing, in my opinion, about situations where the liability of the insured is said to arise, not from the execution of instructions in relation to investments, but rather from the expenditure of client funds contrary to instructions. If it were otherwise, the exclusion would apply wherever client money was misappropriated so long as the final destination of that money was in an "investment". 22 The proposed further amended statement of claim makes claims which are properly characterised as allegations that Bentley Barton and Mr Taylor carried out unauthorised investments. Paragraph 43 of the proposed pleading reads: 43. On or about 7 November 1994, Taylor requested that Chen prepare a proposal outlining the structure and operation of an investment committee to provide investment advice regarding funds held on behalf of Done and Judith Done. 23 Paragraph 54 of the pleading is as follows: 54. In or about May 2001, Done, on behalf of all the entities and trusts in the Done Group, provided specific instructions to Taylor in respect of future investments made by or on behalf of entities and trusts within the Done Group, to the effect that:

(a) no entity or trust within the Done Group of companies was to trade in any shares of which Done was not aware;

(b) speculative shareholdings by entities and trust within the Done Group were to be restricted to 5-10% of the total investment activity of entities within the Done Group, with all remaining shareholdings being holdings in "blue chip" shares; and

(c) all documents relating to investments by entities and trusts within the Done Group were to be double-signed.

… 24 Paragraph 58 is as follows: 58. From at least May 2001 until July 2005, the respondents caused Silkgrow, Kanilo, Ken Done & Associates and Done Nominees to engage in a pattern of investment that was highly and increasingly imprudent, and also:

(a) engaged in investment and trading activity which Done had not authorised and of which he was not aware;

… 25 Paragraph 525 alleges: 525. Taylor, in his capacity as a member of the Investment Committee breached the duties owed by him to Kanilo, Silkgrow, Done and Judith Done alleged in paragraph 524 above, by failing to exercise reasonable skill, care and diligence, to:

(e) comply with direct instructions provided by Done;

… 26 These pleadings allege that Taylor and Bentley Barton engaged in unauthorised investment activity. That being so it follows that a claim by them for indemnity in relation to those matters could not be met by Allianz with an invocation of the IPE clause. The exclusion therefore provides no basis upon which Allianz can avoid joinder to the present proceedings. 27 Joinder was sought by the applicants pursuant to O 6 r 2 of the Federal Court Rules. Relevantly, this rule provides: 2 Joinder of parties generally

Two or more persons may be joined as applicants or respondents in any proceeding:

(i) if a separate proceeding were brought by or against each of them, as the case may be, some common question of law or of fact would arise in all the proceedings; and

(ii) all rights to relief claimed in the proceeding (whether they are joint, several or alternative) are in respect of or arise out of the same transaction or series of transactions; or

28 In Employers Reinsurance Corporation v Ashmere Cove Pty Ltd (2008) 166 FCR 398 a Full Court considered a claim by investors involved with an insolvent investment firm for a declaration that the firm's insurer was liable to it under the terms of a professional indemnity policy. No claim was made by the liquidator of the firm against the insurer. At first instance, French J had utilised O 6 r 2 to join the insurer: Ashmere Cove Pty Ltd v Knightsbridge Managed Funds Ltd (in lid) [2007] FCA 1428. On appeal the insurer argued that there was no "matter" in the requisite constitutional sense since the liquidator was not making the claim. Heerey, Sackville and Siopis JJ rejected this submission (at 411-412 [61]-[62]) and held (at 414 [73]-[74]) that the seeking of such a declaration and consequent joinder pursuant to O 6 r 2 was an appropriate exercise of discretion by the primary judge. It seems to me that similar reasoning applies in this case. The making of a declaration that Allianz is liable to Bentley Barton and Mr Taylor under the terms of the Policy and the presence of Allianz in any such suit will, effectively, resolve in the most efficient fashion, all of the issues between the parties. Accordingly, Allianz should be joined pursuant to O 6 r 2. 29 For completeness, it is to be noted that precisely that form of declaration is sought in paragraph 549 of the proposed further amended statement of claim. It claims, inter alia: (i) a declaration that Allianz is obliged to indemnify Bentley Barton and Taylor, and the Liquidator of Bentley Barton, and the Trustee in Bankruptcy of Taylor, in regard to the claim made by the applicants herein up to the limit of $7 million in consequence of judgment being entered against Bentley Barton and/or Taylor; … 30 In their amended notice of motion, the applicants also sought leave to proceed against Allianz under s 562 of the Corporations Act and s 6(4) of the Law Reform Act. It is not necessary, having concluded that Allianz should be joined pursuant to O 6 r 2, to consider the issues raised by these applications.

Leave to proceed under the Corporations Act 31 I turn then to the question of whether leave should be granted pursuant to s 471B of the Corporations Act to proceed against Bentley Barton. Section 471B provides: 471B Stay of proceedings and suspension of enforcement process

While a company is being wound up in insolvency or by the Court, or a provisional liquidator of a company is acting, a person cannot begin or proceed with:

(a) a proceeding in a court against the company or in relation to property of the company; or

(b) enforcement process in relation to such property;

except with the leave of the Court and in accordance with such terms (if any) as the Court imposes.

32 The circumstances in which it would be appropriate to grant leave are not closed. In Ogilvie-Grant v East (1983) 7 ACLR 669 at 672 the following observation was made by McPherson J (with whom Campbell CJ and Sheahan J agreed): It, of course, follows that it is quite impossible to state in an exhaustive manner all the circumstances in which leave to proceed may be appropriate, but in the past they have been said to include factors such as the amount and seriousness of the claim, the degree of complexity of the legal and factual issues involved, and the stage to which the proceedings, if already commenced, may have progressed.

33 Here the proceeding is of considerable complexity. To require those claims to be dealt with by the liquidator on a proof of debt with the almost inevitable consequence of an appeal to a court in relation to any rejection of that proof of debt seems to me to be an inefficient way to proceed. More is this so where I have concluded that there is a potentially an insurance policy involved. Although the proceeding has not progressed far, it seems to me in all the circumstances that the complexity and seriousness of the proceeding, together with the existence of a potential insurance policy, justify a grant of leave pursuant to s 471B.

Leave to proceed under the Bankruptcy Act 34 I turn then to the question of whether leave should be granted to the Applicants to proceed against Mr Taylor pursuant to s 58(3)(b) of the Bankruptcy Act. In Re Rose; Ex parte Devaban Pty Ltd [1994] FCA 1082 (unreported, 7 October 1994, Hill J) it was held (at 3-4): On the other hand, the Act does contemplate that the Court will, in an appropriate case, grant leave. In that respect a case would be an appropriate case where the proceedings proposed against the bankrupt are proceedings to which other parties are involved and for the proper conduct of which it may be necessary for the bankrupt to become a party.

35 This principle was applied by Weinberg J in Re Sharp; Ex parte Tietyens Investments Pty Ltd (in liq) [1998] FCA 1367 at 6 and also by Burchett J in Sturdy Components Pty Ltd v Trustee of the Bankrupt Estate of Sturt [2000] FCA 884 at [3]-[4]. 36 The application of that principle in the current proceeding is straightforward. The affairs of Mr Taylor are intertwined with not only those of Bentley Barton but also those of Financial Wisdom and Mr Chen. The examination of the interplay between each of those parties is one which would be assisted by the presence of Mr Taylor in the proceedings. Not only that, but it seems pertinent that there is potentially an insurance policy involved. Accordingly, I propose to grant leave to proceed against Mr Taylor.

Amendment of pleadings 37 The amendments contained in the proposed further amended statement of claim contain allegations against Allianz which are designed to permit its joinder pursuant to O 6 r 2. Given that I propose to grant leave to join Allianz, leave to make the corresponding amendments should also be granted. There is no reason why costs should not follow the event. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.

Associate: Dated: 14 November 2008 Counsel for the Applicants: Ms EA Collins with Ms RC Higgins

Solicitors for the Applicants: Atanaskovic Hartnell

Solicitor for the First and Second Respondents: Ms N Nygh of Allens Arthur Robinson

Counsel for Allianz Australia Insurance Ltd: Mr G Curtin

Solicitors for Allianz Australia Insurance Ltd: Gilchrist Connell