Esined No 9 Pty Limited v Moylan Retirement Solutions Pty Ltd; P&S Kauter Investments Pty Ltd ATF the Kauter Superannuation Fund v Moylan Retirement Solutions Pty Ltd; Graeme Manning v Arch Underwriting At Lloyds Limited on Behalf of Syndicate 2012

Solicitors: Michael Nolan, Nolan Commercial Law Practice (first plaintiff) Peter Mackenzie, Mackenzie Thomas Law (second defendant) Lisa-Marie McKechnie, Mills Oakley (third defendant) Veronica Chapman, Kennedys (Australasia) Pty Ltd (fourth, fifth and seventh defendants) Tricia Hobson, Norton Rose Fulbright Australia (sixth defendant)

(2015/252310) Counsel: J. S. Drummond (first, second and third plaintiffs) J. Sexton SC with S. Kanagaratnam (first, second and third defendants) M. Jones SC with E. Anderson (fourth defendant)

Solicitors: Michael Nolan, Nolan Commercial Law Practice (first, second and third plaintiffs) Veronica Chapman, Kennedys (Australasia) Pty Ltd (first, second and third defendants) Tricia Hobson, Norton Rose Fulbright Australia (fourth defendant) File Number(s): (2012/374893); (2013/314260); (2015/252310) Publication restriction: No

Judgment

1. The Court is hearing three related sets of proceedings brought by the former clients of an investment adviser, Molan Retirement Solutions Pty Ltd ("MRS"). Since the commencement of some of these proceedings in 2012 and 2013, MRS was deregistered in November 2014. After deregistration, the plaintiffs joined the underwriters under professional indemnity insurance policies held by MRS as defendants in place of the deregistered MRS. In further proceedings commenced in 2015, other former clients of MRS joined the underwriters directly.
2. The plaintiffs advance all these proceedings against underwriters pursuant to Corporations Act 2001, s 601AG.
3. Argument has arisen about the admissibility of certain evidence which the plaintiffs seek to adduce against the underwriter defendants. The evidence consists of certain statements made by the principal of MRS, Mr Chris Moylan, to some of the plaintiffs. The defendants contest the admissibility of these statements made by Mr Moylan. This judgment concludes that the statements are admissible and will be admitted into evidence for the reasons which follow.

Background

1. Detailed background is not required to resolve the present issue. The following is sufficient for present purposes.
2. Mr Moylan, the principal financial adviser acting on behalf of MRS, gave financial advice to each of the plaintiffs as a result of which they invested by way of loan and other forms of investment into certain corporate investment vehicles. Mr Moylan controlled one of these, Moylan Investment Group Pty Ltd ("MIG"). The monies that the plaintiffs advanced to MIG were then disbursed on Mr Moylan's recommendation to other investments, which were largely concerned with property development of various kinds, including the subdivision of land.
3. Each of these investments failed and the relevant companies were placed into liquidation. None of the monies were repaid to the plaintiffs. Mr Moylan was made bankrupt and MRS was deregistered in November 2014.
4. The plaintiffs could not recover their investments from MRS, MIG or the entities into which their funds were invested. So they now pursue the insurers of MRS under Corporations Act, s 601AG for the loss that they have allegedly suffered.
5. The defendant underwriters contend that most of the plaintiffs' investments were ultimately channelled into investment vehicles in which Mr Moylan either had a direct or indirect beneficial interest, or with whom Mr Moylan or MRS had a business relationship or some other beneficial interest. The underwriters' contentions in the proceedings are that Mr Moylan, at the time he gave this financial advice to these plaintiffs, was aware that his own beneficial interests in these investments were already at risk, in part due to the illiquidity of those investments and that he was aware of his position of conflict of interest and without disclosing it to the plaintiffs he gave them advice which preferred his own interests over theirs.
6. The sole basis for the plaintiffs' claim against underwriters is Corporations Act, s 601AG. Section 601AG provides as follows: "Claims against insurers of deregistered company A person may recover from the insurer of a company that is deregistered an amount that was payable to the company under the insurance contract if: (a) the company had a liability to the person; and (b) the insurance contract covered that liability immediately before deregistration."
7. There is no other connection between the plaintiffs and underwriters other than through that section. In order to make a successful claim against the underwriters, the plaintiffs are required to establish two matters, representing each limb of s 601AG: 1. that MRS had a liability to each plaintiff immediately prior to its deregistration and if such a liability existed, what is the quantum of that liability (s 601AG(a)); and 2. the relevant policies of insurance entered into by the underwriters covered the liability referred to in sub-paragraph (a) (s 601AG(b)).
8. Corporations Act, s 601AG has received judicial consideration. The liability referred to in s 601AG(a) must subsist as at the date of the company's deregistration, which for relevant purposes here is November 2014: Almario v Allianz Australia Workers Compensation (NSW) Insurance Limited; Almario v Allianz Australia Workers Compensation (NSW) Insurance Limited (2005) 62 NSWLR 148; [2005] NSWCA 19 ("Almario"). Immediately before the company's deregistration the policy referred to in s 601AG(b) must cover the deregistered company's liability to the plaintiffs: Smart v AAI Ltd; JRK Realty Pty Ltd v AAI Ltd [2015] NSWSC 392 at [136].
9. The underwriters are defending these three proceedings under both limbs of s 601AG. First, the underwriters are contesting that MRS had any liability to the plaintiffs prior to its de-registration. For example, the underwriters argue that the plaintiffs were well aware of the risks that were associated with the investments they were undertaking and that there was no causal connection between any financial advice MRS gave and any loss the plaintiffs suffered, which were merely the predictable results of market forces.
10. Second, the underwriters also put in contest that their policies covered any liability that MRS might be found to have had to the plaintiffs prior to its deregistration. The underwriters deny liability under the policy on several separate grounds. Two groups of underwriters are joined as defendants. Their defences differ to some extent but those differences are not material for the present issue. The Insurers deny liability on several grounds: no notification of any claim for civil liability was reported during the relevant insurance periods; the insurance cover is said to be limited to retail clients and the plaintiffs are wholesale clients; and MRS is said to be guilty of material non-disclosure and failure to comply with its duty of disclosure under Insurance Contracts Act 1984, s 21.
11. The two groups of insurers cover the two relevant policy years 2012-2013 and 2013-2014. The underwriters seek to take advantage of a number of exclusions in their common policy wording. One of these has direct relevance to the issue of the admissibility of the evidence objected to. The insurers contend that a conflict of interest exclusion applies. They contend that MRS' conduct came within a fraud and dishonesty exclusion and within an exclusion applicable to circumstances of a failure to provide financial services guide.
12. But of particular relevance here is the approved product list exclusion which relevantly excludes cover for any claim or liability "directly or indirectly based upon or attributable to or in consequence of any… Financial products or instruments not contained in the INSURED'S approved product list at the time the advice was given". There is contest in the proceedings as to what was and was not on MRS' approved product list. The insurers contend that the investment vehicles into which the plaintiffs' funds were directed were not on the MRS approved product list and, as a result, the exclusion applies. But the plaintiffs contend the investments were on the approved product list and the exclusion does not apply. The admission of the present evidence at least relates to this issue.
13. The material objected to is of a similar character. It comes from the evidence of each of the plaintiffs in the three proceedings. For example, a statement said to have been made to Mr Peter Smith by Mr Moylan was "here is a report on MIG for you to consider. These reports are done so that we can approve the product as we can only recommend products that have been approved by us or by an external company like Lonsec". A statement allegedly made to Mrs Smith was that the relevant investments "form part of our approved products" and statements allegedly made by Mr Moylan to Mr Dallas Davey were, "it is important to note that the products which we recommend are all part of our approved product list" and again, "they are each approved products of RPS". All of these statements are objected to.
14. In my view, the evidence should be admitted as evidence of the truth of what is asserted for the following reasons.
15. The plaintiffs seek to rely upon statements submitted by them to Mr Moylan for their hearsay purpose. Prima facie, Evidence Act, s 59(1) makes them inadmissible. But the plaintiffs seek to rely upon several exceptions to the hearsay rule. The first exception relied upon is Evidence Act, s 64(2) that it would not be reasonably practicable to call the person who made the representation to give evidence. But the plaintiffs have not complied with Evidence Act, s 67(1) by giving reasonable notice of their intention to adduce the evidence as an exception to the hearsay rule. They now seek to be excused from that non-compliance.
16. But in my view, it is too late for that. This is particularly so as the insurers are in no position now to make a late decision to call Mr Moylan or take other steps to deal with this evidence. In response to this consideration, the plaintiffs contend that the requirements of Evidence Act, ss 64 and 67 should be waived under Evidence Act, s 190.
17. But in my view, the Court should not absolve the plaintiffs from compliance with Evidence Act, s 67, particularly in a complex case such as this. If particular statements in lengthy affidavits are to be isolated as relied upon as exceptions to the hearsay rule then they need to be identified clearly in advance.
18. The insurers also advance an argument that these words are not relevant to the claim made under s 601AG(a) but only to s 601AG(b). But in my view, that is not correct. Whilst the statements objected to primarily go to the issue of the application of the exemptions to the policies, the words are capable of being used in the plaintiffs' case to establish MRS' liability. They are in the nature of offering reassurance of the quality of the investments to the plaintiffs, which would, if established, tend to induce reliance by the plaintiffs upon the representations made.
19. But in my view, the statements are admissible as admissions under Evidence Act, s 81. They are undoubtedly made by a person with authority to make them, given Mr Moylan's position as a principal within MRS: Evidence Act, s 87. The insurers also contest that they were admissions against interest within s 81 but to the extent they are relevant to the first limb of s 601AG, as they clearly are, they are certainly capable of assisting admissions the plaintiffs' case against MRS and therefore qualify as admissions.
20. But the underwriters argue they are not admissions made by a party to the proceedings as is required by the definition of "admission" in the Evidence Act Dictionary being "a previous representation that is… made by a person who is or becomes a party to a proceeding…".
21. In my view, the answer to that contention is the reasoning in Almario and Murdock v Lipman [2012] NSWSC 983 ("Murdock").
22. The relevant principles arising from these cases may be shortly stated. Almario was based on a purposive construction of s 601AG. Ipp JA said in Almario (at [34]): "34. In my view, the purpose of the legislature in inserting s 601AG in the Corporations Act is to require the insurer of a deregistered company to stand in the shoes of the company to the extent necessary to allow creditors of the company to recover from the insurer whatever amounts they were entitled, by force of law, to recover from the company had it not been deregistered. This purpose is discernible from the section as a whole and the Explanatory Memorandum. The notion that a person may "recover" from the insurer of a deregistered company "an amount that was payable" supports this inference. These words convey the idea of a creditor being entitled to recover that which was payable to him or her. Paragraph (a) of s 601AG is not inconsistent with this idea."
23. In Almario, Hodgson JA agreed with Ipp JA's explanation of the purposive construction of s 601AG and added as follows (at [2]): "2. I would add that, in my opinion, under the purposive construction proposed by Ipp JA, s.601AG of the Corporations Act in effect deems the insurer to be the employer for the purposes of s.151D(2) of the Workers Compensation Act. I am inclined to think also that, in the event that there is recovery from the insurer under s.601AG on the basis that money was payable to the company because the company was liable as a tortfeasor in respect of damage, s.601AG would in effect deem the insurer to be a tortfeasor liable in respect of damage within the meaning of s.5 of the Law Reform (Miscellaneous Provisions) Act 1946, so as to enable it to recover contribution in an appropriate case."
24. Drawing upon these statements, s 601AG has received judicial consideration by Justice McCallum in this Court in Murdock. Her Honour said the following at [54] and [55] in making clear that the insurer is subrogated to the rights of the deregistered insured company in defending the claim: "54. The decision in Almario thus acknowledged some bifurcation in the position of an insurer responding to a claim under s 601AG. In its own right the insurer is responding to a claim for indemnity under the contract of insurance. For that purpose, the plaintiff is subrogated (by the statute) to the rights of the deregistered insured and must establish the insured's entitlement to cover under the insurance contract. However, the insurer also stands, in effect, as the keeper of the cause of action in tort against its deregistered insured. For that purpose, the insurer is subrogated to the rights of the deregistered insured in defending the claim at the suit of the plaintiff. An insurer can adopt that position by consent, if it accepts indemnity. Alternatively, it can be substituted for the deregistered company by order of the court, preserving its right to contest indemnity. 55. The submissions made on behalf of Australis in the present application assumed that the nature of the cause of action against it must be either a claim in tort for damages for personal injury or a claim under the statutory cause of action for recovery under s 601AG recognised in Almario at [19]. As the foregoing analysis reveals, that is a false dichotomy. The proceedings potentially entail elements of both."
25. Justice McCallum's decision has been favourably commented on by the Full Court of the Supreme Court of Tasmania in Allianz Australia insurance Ltd v Mercer (2014) 309 ALR 154; [2014] TASFC 3 at [109] to [122] and, in my view, can be applied here.
26. In two of the three cases being conducted in these proceedings, MRS was actually once a party and the insurers were substituted for it. But in the third case, the insurers were substituted for the deregistered company MRS. In my view, by becoming so substituted in the name of MRS the underwriters are subrogated to all of MRS' rights to defend the proceedings as if MRS were a party. But their right to contest indemnity is of course preserved as McCallum J explains. Insurers are able to speak in the name of MRS as if it were a party to contest the issue under 601AG(a) that, "the company had a liability to the person". They do that by accepting party status in the name of the deregistered company, under the statutory authority of s 601AG. In my view, the use of MRS' name and rights in this way gives sufficient status to statements made on behalf of MRS to be admissions in the proceedings by virtue of the operation of s 601AG.
27. The matter can be tested. Because the insurers are subrogated to MRS' position, they could certainly call Mr Moylan on behalf of MRS to give defence evidence under the authority s 601AG(a) confers upon them. When cross-examined, Mr Moylan's statements would be admissions for the purposes of s 601AG(a) liability. The fact that Mr Moylan's previous representations here are made out of Court makes them no less able to be characterised as admissions.
28. The Court will admit this material into evidence as an admission. It is not excluded by the hearsay rule.
29. Of course this ruling is only as to the admissibility of these statements. Even admitted on the basis that they are, there is a live contest in the proceedings as to their reliability and their strengths and weaknesses as admissions.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 12 November 2018