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

Mr Moylan and His Clients

1. Many of Mr Moylan's clients were recommended to his firm by a solicitor, Mr Michael Hill, a partner of the Hunter Valley legal firm, Turnbull Hill Lawyers, which practised from Charlestown, a suburb of Newcastle. For more than 20 years Mr Michael Hill had been the solicitor for D & S Fabrications Pty Ltd ("D & S Fabrications"), the corporate vehicle for the steel fabrication business that Mr Dallas Davey and Mr Peter Smith had operated over many years. As the company's directors and shareholders, Mr Davey and Mr Smith, acting on behalf of D & S Fabrications, had retained Mr Hill as the company's solicitor since the early 1980s.
2. In October 2005, Mr Smith and Mr Davey were looking for advice to structure their financial affairs in anticipation of their retirement. Mr Michael Hill recommended Mr Moylan to them, with the description "he is very capable". Mr Moylan's advisory practice operated out of the same building in Charlestown as Turnbull Hill Lawyers.
3. The Daveys and the Smiths followed Mr Michael Hill's advice and consulted Mr Moylan. In July 2006, Mr Moylan took steps to set up the D & S Davey Family Retirement Fund under the trusteeship of Esined No. 9 and the P & V Smith Family Retirement Fund under the trusteeship of Esined No. 10.
4. Mr Moylan had also known the Kauters and the Mannings for longer than the Daveys and the Smiths. Since the early 1990s he had given financial advice from time to time to both Paul and Stephen Kauter and had created the Kauter Family Retirement Fund with Kauter Investments as its trustee.
5. The Mannings had also been Mr Moylan's clients since the early 1990s. They, and their superannuation trustee, Jalin, had long retained Mr Moylan to assist them with financial advice when required.
6. The Kauters and the Mannings reposed great trust and confidence in Mr Moylan. And Mr Michael Hill's recommendation of Mr Moylan to the Smiths and the Daveys was sufficient for them to quickly develop a similar relationship with him.

Mr Moylan's Business Structures

1. The various business structures that Mr Moylan used to advise his clients changed over the years and they differed depending upon the kind of advice that he was giving to clients.
2. MRS, the principal original defendant in these proceedings, evolved out of an early association between Mr Moylan and Mr Michael Hill. In August 2004 Mr Moylan and Mr Michael Hill incorporated and became the first directors and shareholders of HunterFP. In October 2005 HunterFP changed its name to Acuity Retirement Planning Specialists Pty Limited ("Acuity"). A short time later, Acuity changed its name to Retirement Planning Specialists Pty Ltd which by May 2007 had again changed its name to its final title, MRS.
3. Prior to January 2006, Mr Moylan had been an AFSR of Matrix operating under its AFSL. In June 2005, Mr Moylan resigned as a director of Matrix and as one of its authorised representatives. He wanted to establish his own company with its own AFSL. MRS obtained an AFSL (Licence XX40) on 30 January 2006. On 16 February 2006, Mr Moylan was appointed as the AFSR for MRS. Mr Moylan held this licence throughout the period that he gave the relevant financial advice complained of in these proceedings.
4. Mr Moylan provided accounting and taxation services (as distinct from financial advice) to his clients, including the plaintiffs, through a number of entities, the names of which changed from time to time. In May 2004, Mr Moylan and Mr Michael Hill incorporated Hunter Accounting and Taxation Services Pty Limited, the directors of which were Mr Moylan and Mr Michael Hill. In October 2005, Hunter Accounting and Taxation Services changed its name to Moylan Business Solutions Pty Limited ("Moylan Business Solutions") from October 2005 Moylan Business Solutions was the principal entity through which Mr Moylan provided accounting services and taxation advice to clients.
5. Each of Mr Moylan and Mr Michael Hill remained directors and shareholders of Moylan Business Solutions until it was wound up in June 2013. Moylan Business Solutions was a trustee of the Moylan Business Solutions Unit Trust, a trust in which Mr Moylan and Mr Michael Hill each also held units.
6. Mr Moylan and Mr Michael Hill also incorporated another company to provide specialised financial planning advice to the corporate trustees of his clients' SMSFs. Its name was Moylan's Business Solutions Pty Limited (Moylan's Business Solutions"), a confusingly similar name to Moylan Business Solutions. The precise borderline between any financial advice Moylan's Business Solutions gave to SMSFs and financial advice that MRS gave to retirees and superannuation funds was obscure. But it seems to have been quite distinct from the accounting and taxation services that were provided through Moylan Business Solutions.
7. Incorporated as another entity in 1999, Moylan's Business Solutions was so named from 1 September 2001. Its shareholders and directors were at all times Mr Michael Hill and Mr Moylan. But it was controlled by Mr Moylan and his father, Mr Derrick Moylan.
8. Between 1 August 2001 and 8 September 2005, Moylan's Business Solutions was also the trustee of the Cartel Investment Unit Trust ("Cartel Investment UT").
9. Later in its life, Moylan's Business Solutions changed its name to MCD Holdings Pty Limited ("MCD Holdings"). MCD Holdings was wound up by an order of this Court in June 2013.

The Recommended Investments

1. Later in these reasons the Court must examine in some detail each of the transactions which Mr Moylan recommended in order to assess his liability to the plaintiffs and to assess whether their circumstances engaged the insuring clause of the policies, any policy extension, or policy exclusion. This involves a fact-specific consideration of each recommended transaction.
2. But in order to place each transaction in its overall context, an overview of the various investment structures into which Mr Moylan recommended that his clients invest should be given. Mr Moylan's various recommendations, that are said to create a liability in MRS, raise common patterns of conduct and common issues. It is useful therefore to look first at the various investment structures he used, then analyse the individual transactions through which he recommended that his clients channel their money into these investment structures.
3. The investments Mr Moylan recommended fall into four broad groups: 1. Advances made to MIG, as loans or otherwise, from which monies were in turn: 1. applied to the Bolwarra Heights Property Trust or to the Wallalong Investment Trust; or 2. misapplied contrary to the clients' (specifically the Mannings') instructions; and 1. Investments made into the Regional Land Property Fund; 2. Loans to Ms Crittle; and 3. Other minor investments.
4. These investment channels and destinations are dealt with in more detail below.
5. (1) MIG - The Main Investment Channel. Mr Moylan's company, MIG, was incorporated in July 2006. Mr Moylan was its sole director and shareholder throughout its existence. Its funds were advanced into several other investment vehicles. MIG was the recommended recipient of loans from all the plaintiffs.
6. (1)(a) The Bolwarra Heights Property Trust. Principal among MIG's investments was some 41 hectares of land at Bolwarra Heights, a northern suburb of the city of Maitland. In about mid-2006, MIG was appointed the trustee of the Bolwarra Heights Investment Trust. In its capacity as the trustee of the Bolwarra Heights Investment Trust, MIG entered into a funding facility agreement with Charlestown Consulting Pty Ltd ("Charlestown Consulting"), an entity controlled by an associate of Mr Moylan, Mr Kenneth Hill, who was its principal director and shareholder.
7. In June 2006, Charlestown Consulting entered into a contract for sale of land to purchase the Bolwarra Heights land for $1.75 million. The purchase was completed in November 2006. At the time of entering into the purchase, Charlestown Consulting was appointed a trustee of the Bolwarra Heights Property Trust. The main function of the Bolwarra Heights Property Trust was to hold and develop the Bolwarra Heights land.
8. MIG as trustee of the Bolwarra Heights Investment Trust advanced the funding for the development of the Bolwarra Heights land. On 1 August 2006 the Bolwarra Heights Investment Trust agreed to advance to Charlestown Consulting, as trustee of the Bolwarra Heights Property Trust, the sum of $2 million. The interest on this advance was agreed to be capitalised and no principal or interest was required to be repaid before 1 August 2011. This five year loan capitalisation was to permit development of the Bolwarra Heights land to take place before repayments were required.
9. When purchased by Charlestown Consulting, the Bolwarra Heights land comprised undeveloped broad acres. Before subdivision was possible the land required a successful application to the Maitland City Council for the re-zoning of the land, followed by a grant of development consent. The Bolwarra Heights land was mortgaged by Charlestown Consulting to assist in funding the subdivision development. But Maitland Council neither re-zoned the land, nor granted the necessary development consent. As a result, Charlestown Consulting, as trustee of the Bolwarra Heights Property Trust, was unable to repay the advance to MIG as the trustee of the Bolwarra Heights Investment Trust.
10. Charlestown Consulting completed the purchase of the Bolwarra Heights land with funding of $1 million advanced from Suncorp Metway Limited and secured by mortgage over the subject land. In March 2010, Charlestown Consulting refinanced Suncorp Metway's first mortgage and obtained further advances totalling $1.6 million secured by a mortgage to a private lender, Kiriwina Investments Pty Ltd ("Kiriwina Investments"). Later the same year, on 22 August 2010, Kiriwina Investments assigned its mortgage over the Bolwarra Heights land to a solicitor, Mr Ralph Keith Ward. Finally, on 31 October 2012 Mr Ward assigned his mortgage to a company he controlled Durndrax Pty Ltd.
11. MIG was wound up on 11 September 2011. Charlestown Consulting was wound up on 17 February 2012. The Bolwarra Heights land was ultimately taken out of Charlestown Consulting's control and sold by the mortgagee in possession on 23 December 2013. After the mortgagee was paid out, no surplus was left available to Charlestown Consulting in its role as trustee of the Bolwarra Heights Property Trust. None of MIG's advances as trustee of the Bolwarra Heights Investment Trust to Charlestown Consulting were secured and none were repaid.
12. (1)(a) The Wallalong Investment Holdings Land. Another corporate investment vehicle that received funds from MRS' clients, through MIG, was Wallalong Investment Holdings Pty Limited ("Wallalong Investment Holdings") as trustee for the Wallalong Investment Trust. Wallalong Investment Holdings was previously known as River Island Property Holdings Proprietary Limited ("River Island"), a company of which Mr Moylan and a Ms Ellen Tompkins were directors. Its sole shareholder was Ellen V Tomkins Pty Ltd.
13. In June 2005, River Island contracted to purchase for consideration of $10 million contain land at Wallalong near Port Stephens in the Hunter region of this State. A deposit of $1 million was payable and was released to the vendor. On completion, special condition 9 of the contract for sale required the vendor to provide vendor finance in the sum of $9 million secured by first mortgage over the Wallalong land. In August 2005, the contract for sale was varied, extending the date for completion to 9 May 2006 on conditions which included the purchaser paying the interest rate of 26% per annum on the amount outstanding from 9 August 2005. The directors of River Island, Mr Moylan and Ms Tompkins, guaranteed the obligations of River Island to the vendor.
14. River Island changed its name to Wallalong Investment Holdings in March 2008 and was made trustee of the Wallalong Investment Trust. Wallalong Investment Trust did not complete the purchase of the Wallalong land and on 15 February 2010, the vendor issued a notice to complete requiring completion to take place on 12 March 2010. But the Wallalong Investment Trust did not complete and the vendor terminated the contract for sale on 10 May 2010.
15. In proceedings in the Equity Division of this Court, the notice of termination was declared to be invalid because the notice to complete failed to provide a reasonable period of notice. But the outcome of the proceedings was that Wallalong Investment Holdings, Mr Moylan and Ms Tomkins, the latter as guarantors of Wallalong Investment Holdings, became liable for the agreed interest on the varied contract for sale.
16. The Wallalong Investment Holdings' purchase of the Wallalong land was never completed. And Wallalong Investment Holdings' obligations to the vendor were never satisfied either directly, or by the guarantors, Mr Moylan and Ms Tompkins. Wallalong Investment Holdings was wound up on 8 February 2013.
17. (1)(b) The Mannings' Misapplied Funds. Some of the advances made to MIG from the Mannings through MRS were misapplied by Mr Moylan. On MRS' advice, the Mannings agreed to invest in the BT Financial Group ("BT") and in financial products marketed by Macquarie Bank ("Macquarie"). In contrast to MIG, these were proposed investments in well-known public financial institutions.
18. To facilitate the Mannings' investment, Mr Moylan recommended that they deposit their investment funds with MIG, which would in turn invest those funds in the BT and Macquarie products Mr Moylan had recommended. The Mannings deposited monies with MIG. But MIG failed to invest the monies as agreed and used the monies for its own purposes. MRS did not tell the Mannings that it had not invested the funds as they had instructed.
19. Mr Moylan disregarded a series of instructions from the Mannings between October 2010 and March 2011, a period during which his principal investments were already under a high degree of financial stress. For example, MIG ceased paying any interest to clients by about October 2009.
20. These instructions were the following. In October 2010, the Mannings instructed Mr Moylan to return a payment of $215,000 to a BT Wrap Account in which it had originally been invested but was withdrawn by Mr Moylan. In March 2011, the Mannings instructed him to invest $350,000 in a cash management account at Macquarie but he failed to do so. The same month, March 2011, Mr Moylan was instructed on behalf of Mrs Manning's parents, Roy and Joan Maytom, to invest $225,000 in a cash management account at Macquarie and he failed to do so.
21. Instead, ignoring these instructions, Mr Moylan, acting through MRS, advanced those monies to MIG on an unsecured basis. The Mannings' and the Maytoms' misapplied funds were never recovered from MIG.
22. (2) The Regional Land Property Fund. Prior to December 2005 a unit trust known as the Hardie Estates Joint Venture, held land for residential subdivision in Muswellbrook, Singleton and other sites in country New South Wales. In December 2005, the first tranche ('tranche one") of another unit trust, the Hardie Estates Property Fund was established. Tranche one of the Hardie Estates Property Fund was completed by converting the unit holders in the Hardie Estates Joint Venture, into tranche one unit holders in the Hardie Estates Property Fund. After December 2005, when tranche one of the Hardie Estates Property Fund closed, further investors were issued units in what became tranche two of the Hardie Estates Property Fund.
23. At the same time as tranche one was created, in December 2005, the Hardie Estates Property Fund became a managed investment scheme under the Corporations Act, Part 5C, and was given a scheme number under Corporations Act, s 601EB(2). Complicating the recognition of these funds and recognising a change in its management, the Hardie Estates Property Fund changed its name in July 2007 to the Regional Land Property Fund.
24. The responsible entity of the Hardie Estates Property Fund was Pacific General Services Limited. It in turn retained a company called Hardie Estates Management Pty Limited ("Hardie Estates Management") to manage the residential subdivision of the Singleton and Muswellbrook land. Hardie Estates Management changed its name to Regional Land Pty Limited in July 2007 ("Regional Land"), in parallel with the change of name of the managed investment scheme to Regional Land Property Fund.
25. The investment business of this fund remained throughout those changes the development of land for residential subdivision in Muswellbrook, Singleton and other sites in country New South Wales. But this development was unsuccessful. In May 2010, BankWest Ltd, the mortgagee of Regional Land Property Fund's land, appointed receivers and managers over all the land in tranche two of the Regional Land Property Fund. Finally, on 4 April 2011, both tranches one and two of the Regional Land Property Fund were wound up by its responsible entity.
26. (3) Loans to Ms Trudy Crittle. The Mannings allege that MRS advised that they should make a loan of $120,000 to a Ms Trudy Crittle, who was described by Moylan as "…a client of mine who is purchasing a unit at McMahons Point, Sydney". Moylan is said to have represented that the loan would be for a term of "about two years", would earn a rate of interest of 13.5% to be paid "at the expiration of the loan" and "will be quite safe and secure as I will hold the deed".
27. The Mannings entered into a loan agreement on 31 October 2006 and advanced the sum requested. Mrs Manning produces documents to show that the loan was rolled over for a further 12 months in late 2006. But the evidence is unsatisfactory as to whether the money advanced was ever actually lent to Ms Crittle. She did purchase a property in November 2006 and sold it on 12 December 2012. But the Mannings never received payment principal or interest on the loan.
28. (4) Other Minor Investments. Two other very minor property developments into which MIG's funds were channelled should be mentioned to complete the overall picture of Mr Moylan's recommended investments. Only peripheral reference is made to these minor property developments in the evidence.
29. The Algona Road Property. Some of the funds channelled through MIG were invested into a property development comprising two adjoining lots in Algona Road, Gateshead, a suburb of Newcastle ("the Algona Road property"). Title to the Algona Road property was held by Algona Road Pty Ltd ("Algona Road"), a company controlled by Mr Kenneth Hill and Mr Justin O'Brien, a real estate agent.
30. M & J Development Enterprises Pty Ltd ("M & J Development") was incorporated in May 2005 to develop the Algona Road property. Mr Kenneth Hill and Mr O'Brien were the directors of M & J Development and its shares were held respectively by the Hill family trust and the O'Brien family trust. Algona Road was also the trustee of the Algona Road Property Trust.
31. In July 2007 MIG entered into a facility agreement with M & J Development pursuant to which MIG agreed to advance $300,000 to M & J Development to assist in its development of the Algona Road property. Mr Kenneth Hill and Mr O'Brien guaranteed M & J Development's obligations under that facility.
32. The Lawson Road Property. The final significant development into which MIG funds were channelled was certain development lands in Lawson Road, Macquarie Hills, a residential suburb of the City of Lake Macquarie ("the Lawson Road property"). Cimneth Pty Ltd was the registered proprietor of the Lawson Road property and the trustee of the Lawson Road Unit Trust.
33. In July 2006, MIG entered into a facility agreement to advance $1.2 million to Cimneth as trustee for the Lawson Road unit trust, to assist in development of the Lawson Road property.
34. Cinmeth's development of the Lawson Road property did not proceed and MIG's advances to it were never repaid.
35. As can be seen from this brief survey, all of these various investment vehicles into which MIG channelled funds were property developments. Their wisdom as investments generally depended upon factors such as gaining development approval, the financial viability of the developments taking into account total building and development costs and the likelihood of sales of developed property, and the timing of cash flows during the development process.
36. The main investment structures that appear in the narrative below have now been introduced. MIG monies were channelled into some other investments upon Mr Moylan's advice. But these will be mentioned in the course of the narrative of facts when specific findings are made in each of the actions below.

Findings in the Esined Action against MRS

1. The Esined proceedings were brought on behalf of the SMSFs of the Davey and the Smith families, Esined No. 9 and Esined No. 10 respectively.

The Daveys and the Claim of Esined No. 9

1. Mr Dallas Davey gave evidence on behalf of the Davey family and Esined No. 9. He was a direct, honest and engaging witness who did not prevaricate or qualify his answers. He made admissions against interest when that required a truthful answer. He was astute and alert and conceded he had enough knowledge to make some judgments about what constituted financially risky investments. His testimony was reliable in almost all matters.
2. Mr Davey's impressive directness and honesty extended, for example, to acknowledging without qualification that he understood the effect of guarantees. Mr Davey agreed he understood that the security being offered for Charlestown Consulting Investments by the personal guarantee of its directors was only as good as the assets of the company's four directors.
3. But an important factor emerges with Mr Davey that is also a feature of other plaintiffs' witnesses' evidence. Honest man that he was, he saw other people in the same image. He came across as a person with well-developed empathy, as a man expecting from his professional advisers, such as Mr Moylan, the same candour with which he himself spoke. He consequently placed great trust in Mr Moylan, who ultimately entirely moulded the Daveys' perception of the investment risks they were undertaking.
4. Mr Davey was closely cross-examined about his own capacity for and knowledge of financial risk. But a dominant feature of his outlook, in my view, was that whatever his perception of risk, Mr Moylan's assurances about risk displaced them and he deferred to them.
5. Mr Davey and his wife Sandra live in Wallsend, a suburb of Newcastle. They are both directors of the plaintiff, Esined No. 9. He left school at the age of 15 after completing his intermediate certificate and pursued an apprenticeship as a boilermaker at the BHP Steelworks in Newcastle. He remained employed by BHP Steelworks until about 1979, leaving that year to work for P&J Welding as a boilermaker. He reunited in this workplace with a teenage friend, Mr Peter Smith.
6. Work brought them even closer together. In 1981, when Mr Davey was 37, he and Mr Smith decided to venture out on their own and start up the business known as D&S Fabrications in the industrial area of Tomago. Initially D&S Fabrications comprised just Mr Smith and Mr Davey but at its peak it employed approximately 50 people on three rotating shifts, mainly servicing the aluminium smelter in Tomago. In the midst of the advice which is the subject of these proceedings, in 2010, Mr Smith and Mr Davey sold D&S Fabrications and retired. At that time Mr Davey, who was born in 1944, was aged 66.
7. Mr Davey did not have any formal education or vocational training after completing his apprenticeship in 1964. But he and Mr Smith did develop a practical capacity to read financial accounts so they could run D&S Fabrications. Mr Davey acknowledged he needed assistance from the business accountant of D&S Fabrications to understand the finer details of financial accounting.
8. The favourable business environment in which D&S Fabrications operated ended up limiting Mr Davey's business experience. For over 30 years the major customer of D&S Fabrications was the Tomago aluminium plant, which is located in the same suburb and has continuously employed about 1200 people in the production of aluminium, through good economic times and bad. Consequently D&S Fabrications had very few bad debts and Mr Davey and Mr Smith had little experience of actual financial risk impacting directly upon their small business.
9. In mid-2005, when Mr Davey was 61, he and Mr Smith began to give detailed consideration to their retirement plans and the need to increase their available superannuation. Mr Davey and Mr Smith took the view that the company accountant for D&S Fabrications did not have the right skill-set to advise on superannuation, so they looked elsewhere.
10. Mr Smith suggested to Mr Davey that they both speak to Mr Michael Hill, of Turnbull Hill Lawyers of Charlestown. This seemed logical to Mr Davey as Mr Michael Hill had acted as the lawyer advising the companies and trusts associated with D&S Fabrications for many years since its establishment in 1981. Mr Davey saw Mr Michael Hill as a successful solicitor and businessman, who was well known in the Newcastle business community. Mr Davey valued Mr Michael Hill's opinion and was ready to listen to that opinion about where he and Mr Smith should go for good superannuation advice.
11. Scratchley's on the Wharf is a popular harbourside seafood restaurant in Newcastle. In September 2005, Mr Davey and Mr Smith met Mr Michael Hill for lunch there to discuss where they should look for good superannuation advice. Mr Michael Hill had the answer, "Yes I know a financial planner who can help you. He knows his stuff". He then gave them Mr Moylan's contact details.
12. Mr Davey and Mr Smith met Mr Moylan a short while later, in October 2005 at the Tomago offices of D&S Fabrications. They briefed Mr Moylan about their business history, gave him copies of some of the company and trust accounts for the entities behind D&S Fabrications, including a joint superannuation fund "The D&S Fabrications Superannuation Fund". Mr Moylan explained that his plan was that they should each start to separate out their individual interests from their joint interests in the D&S Fabrications Superannuation Fund and then, set up two other superannuation funds, one for each family. At Mr Moylan's suggestion, they supplied to Moylan Business Solutions more detailed company accounts for the various entities associated with D&S Fabrications.
13. When they first met together, Mr Moylan was still working as an AFSR representative of Matrix. But in January 2006, Mr Moylan separated from Matrix and obtained his own AFSL in the name of Retirement Planning Services, later changed to MRS. In February 2006, he sent out to the Daveys a letter and enclosed an Introductory Financial Services Guide to introduce Retirement Planning Specialists.
14. The other plaintiffs received this letter early in their relationship with Mr Moylan. The letter announced that a new licence had been obtained and explained: "Having our own license now means we can concentrate on the holistic financial advising approach to high net worth individuals just like you who also have their own Self-Managed Superannuation Fund. It also means that we can now easily introduce you to more complex, non-traditional financial products, which we were not able to do so under the old license."
15. The Introductory Financial Services Guide further explained under the heading "the business" that "our business purpose is to provide outstanding accounting, technical, taxation and financial planning advice for trustees of self-managed superannuation funds". And under the heading "our philosophy", that Retirement Planning Services "is a place where the genuine financial care of our client is our highest mission. We pledge the finest technical service to our clients who will also enjoy a warm, relaxed, yet professional ambience is when dealing with us."
16. Other relevant qualities of Retirement Planning Services, and by inference later MRS, were set out in the introductory financial services guide under the heading "our commitment to you" as follows: "You are assured of professional advice…Honesty, integrity and confidentiality are given in our business relationship…The highest quality strategies to maximise retirement savings…We can direct you to other professional advisers should they be required".
17. Under the heading "our approach", the Introductory Financial Services Guide declared that "our approach is to provide professional advice and services in a productive and exceptional manner to our clients to meet their needs" which relevantly included "investment strategy and review" and "financial plan for the fund".
18. MRS' claim to professionalism, promoting the best interests of the client, and integrity, emphasised in these representations, was repeated in various ways throughout subsequent documents distributed to the clients and reinforced orally by Mr Moylan.
19. The plaintiffs' directors did read these documents and accepted the claims within them, which is a matter relevant to the Court's inference that MRS assumed both a fiduciary position, and a duty to take reasonable care to give advice, with respect to all the plaintiffs.
20. The Introductory Financial Services Guide explained the role of the principal actors on behalf of MRS that feature in these proceedings. Mr Moylan was described as the "authorised representative" and "part owner" and with other biographical information concluding that he is a chartered accountant who "holds the coveted designation 'CA financial planning specialist'". The guide also introduced Mr Alan Spicer as an accountant to provide tax, accounting, financial and strategic planning advice. The other employee, Ms Amanda Sweeney, was described as an administrative assistant to the firm.
21. It took a little while for this early contact with Mr Moylan to mature into investment advice. But that process began in late May or early June 2006 in Mr Moylan's offices in Charlestown. As Mr Davey and Mr Smith were trusted business partners, they took these first steps together. At this meeting, Mr Moylan explained to Mr Davey and Mr Smith and their wives how the retirement plans for each of their families would evolve from the present company structure, essentially by paying the present excess cash balance of the D&S Fabrications Superannuation Fund and future superannuation balances in that fund into the new individual superannuation entities that he would set up for them. He explained that once there were sufficient funds in the two separate family SMSFs, that he would start to give them investment advice.
22. In the meantime, he asked them to complete documents, including a questionnaire, to inform him about their respective risk profiles and then he explained that his "retirement planning specialist", as he described it, would give them a statement of advice and make recommendations as to how they could achieve their investment goals.
23. At this early meeting, Mr Smith said to all present: "Chris [Moylan], all of us are cautious people. We have all worked very long and hard. We don't want to lose what we have put together. We are not interested in shares or any risky investments. Although we would like our investments to grow, we only want one is which are safe and secure. We do not want to lose what we have."
24. To this, Mr Moylan responded, "I understand". That reassured Mr Davey and Mr Smith. Their joint thinking about risk, as Mr Smith had just explained to Mr Moylan, was uppermost in each of their minds and fundamental to their decision to take Mr Moylan's advice. In their minds this was what they thought was a mutually understood covenant with Mr Moylan: that they were not at risk of losing "what we have".
25. Mr Moylan made his first recommendations at this meeting, recommendations which first exhibited a pattern which was to be repeated on many occasions subsequently to them and to the other plaintiffs in these proceedings. Through a number of companies D&S Fabrications and its superannuation fund owned investment property, known as the Laman Street property, and the D&S Fabrications business premises in Tomago. Mr Moylan explained to them all: "From my examination of your assets you appear to be overweight in shares through your holding in D&S Fabrications Superannuation Fund. In my view you are also overweight in property. That is in large measure because of your ownership of the land at Lamar Street and the business premises at Tomago. Do not think you need any more property or shares. However once you have completed the questionnaire we will discuss with you further what investments we think are appropriate. However the best thing to do at present is for you to invest in fixed interest products. That will assist in providing a better balance to your portfolio."
26. This was an important statement which Mr Moylan reiterated many times afterwards and that defined the Daveys' and the Smiths' outlook on investments by their superannuation funds. Mr Moylan was apparently recommending to them that they invest in "fixed interest products". That was their focus then, and remained their focus.
27. Before the statement of advice was received, Mr Moylan suggested that Mr Davey and Mr Smith should create a Macquarie Investment Management Ltd Cash Management Trust account (refer to in these reasons as the "Macquarie CMT" or the "CMT") to take the excess funds from the D&S Fabrications Superannuation Fund on an equal basis and that any further superannuation contributions for each of Mr Davey and Mr Smith would go into the new accounts to be held by the new super funds, when they were created.
28. Both couples filled out the pro forma questionnaires and the account opening forms. They were invoiced by Moylan Business Solutions for these services.
29. In early July 2006, Mr and Mrs Davey re-attended at Mr Moylan's office and signed the documents necessary to set up the Davey Superannuation Fund with Esined No. 9 as its trustee. Moylan Business Services provided the new entities with tax file numbers and Australian business numbers. On 3 July 2006, they opened a Macquarie CMT, known as account 4982, in the name of Esined No. 9, as trustee of the D&S Davey Family Retirement Fund.
30. Mr Moylan had still not yet completed the statement of advice that he had promised the Daveys and the Smiths, when in December 2006 he first recommended to them an investment in MIG. By then the Daveys had $300,000 in cash in the Macquarie CMT in the name of Esined No. 9. Mr Moylan said the following: "C. Moylan: I know that we have not yet completed your statement of advice, however there is presently near $300,000 in cash in your Macquarie CMT. Whilst we are finishing the statement of advice I recommend that you invest some of those monies. D. Davey: What do you suggest? C. Moylan: I suggest that you invest some of the funds in Moylan Investment Group, a company which I own and manage. D. Davey: What does Moylan Investment Group do? C. Moylan: It is a company that invests money in property developments. It pays a good rate of interest of 9% per annum quarterly. D. Davey: How long will the investment be for? C. Moylan: It will be for 12 months. As it is an investment in residential land development it will be quite safe. It is a company you should invest in. D. Davey: If we need the money back how long will it take? C. Moylan: Not long, only a week or so. D. Davey: Do you recommend that we invest that sort of money in MIG? C. Moylan: Yes. D. Davey: Very well."
31. Mr Moylan's characterisation of the investment was important. It created Mr Davey's mindset that this was a fixed interest investment in MIG, a company that invested in other companies but one that Mr Moylan characterised and recommended simply as a fixed interest investment. Mr Davey assumed, based on his previous conversations with Mr Moylan, that Mr Moylan was recommending investments in which he and his wife would not lose their capital.
32. Mr and Mrs Davey signed the loan and other documents to authorise the loan advance of $100,000 to MIG on or around 5 December 2006. But they did not read the terms of the loan or the documents. They were not given sufficient time to do so. They followed Mr Moylan's recommendation to sign the loan agreement between Esined No. 9 and MIG. They did not receive a copy of that agreement until April 2009. The terms of the loan agreement were not explained to them. So far as Mr Davey could see, no one witnessed his and his wife's signatures.
33. Why did they not ask for a copy? They completely trusted Mr Moylan. They did not perceive him as being on the other side of any transaction. He was seen as their trusted advisor acting in their interest. The incidental effect of not having a copy was that it was difficult for them to work out when the capital was due to be repaid to them. The loan agreement was an unremarkable document provided for a 12 month loan term, and the payment of 9% interest. It purported to charge all the assets of MIG, such as they were, in favour of the lender. All the subsequent loan agreements that the Daveys signed were in the same form and followed the same pattern of execution and retention by MRS.
34. On the same day they signed an authority, authorising the transfer of the $100,000 from Esined No. 9's CMT account, account 4982, to another CMT held by MIG.
35. Esined No. 9 pleads that at approximately this time, in December 2006, that an oral contract was made between MRS and Esined No. 9 for MRS to provide a range of investment advisory and ancillary services to Esined No. 9 for consideration payable by Esined No. 9 to MRS. Based on what was exchanged in the several preceding conversations and the mutual conduct that followed, including the payment from time to time of MRS invoices for advisory fees, the Court concludes substantially in accordance with Esined No. 9's contention, that such a contract was made and applied to all services subsequently provided. The more detailed terms of this contract are dealt with in the analysis of the first limb issues below.
36. Esined No. 9's superannuation account was replenishing rapidly with cash from D&S Fabrications. In early March 2007, Mr Moylan rang Mr Davey, mentioning again that "[w]e haven't yet finished your statement of advice" but suggesting that they make a "further investment". They were invited into his office and came in on 12 March 2007, when the following conversation between them took place: "C. Moylan: Dallas and Sandra, we haven't yet finished your Statement of Advice, we are still working on it. However I have noticed that the CMT account has quite a large sum of money sitting in it. I suggested to Dallas the other day that you should make a further investment. D. Davey: What sort of investment do you think we should make? C. Moylan: As there is over $250,000 in the account I think you should invest another $100,000 in MIG, $50,000 with UBS Property Securities Fund, $50,000 with City Pacific Mortgage Trust and $50,000 with Credit Suisse Australian Fixed Interest Fund. D. Davey: Who are they? C. Moylan: Each of them are registered funds which are secure and pay a good rate of interest. Here is a copy of the Lonsec Report for City Pacific Mortgage. As you can see it is a well-recognised fund. It is secure and will give you a good rate of return. All of these are products which are recommended by us. D. Davey: Do you think that each of them are good investments? C. Moylan: Yes. Do you want me to make those investments for you? D. Davey: Yes."
37. The centrepiece of this conversation was Mr Moylan's recommendation that each of these destinations for the Daveys' money was a "good investment". That was certainly true of some of the $150,000 recommended to be invested in the entities other than MIG but not the $100,000 earmarked for MIG. But the Daveys were not cognisant of the differences between MIG and the other destinations of their funds. Mr Moylan lumped them all together as being of the same quality, effectively equating MIG with other larger better scrutinised deposit taking institutions.
38. Mr Alan Spicer was also present at this meeting on 12 March 2007. The Court accepts that Mr Moylan also said on this occasion that the investment products that were being recommended were "each approved products of Retirement Planning Services" Mr Moylan did explain to the Daveys that a company by the name of Lonsec reviewed their investment products. Mr Moylan gave the Daveys some Lonsec reports in relation to the City Pacific mortgage trusts and the Credit Suisse Australian Fixed Interest Fund.
39. The Daveys were probably also provided at the March 2007 meeting with a document describing the investment activities of MIG. It is possible but less likely that this document was given to them as early as December 2006, or even as late as June 2007. The document included a description of investments in residential subdivision, including the developments at Algona Road and Lawson Road.
40. On 12 March 2007, the Daveys paid $100,000 to MIG once again, executing documents for the transfer of funds out of Esined No. 9's CMT account 4982. About the same time, on 14 March 2007, they were told that MRS was the renamed entity now advising them about their superannuation in place of Retirement Planning Specialists.
41. Mr Moylan was closely watching the accumulation of funds into the Macquarie CMT being operated by Esined No. 9. As will be seen, this was the pattern of his conduct with the other plaintiffs. In late April or early May 2007, whilst explaining again that their statement of advice was still not complete, Mr Moylan suggested that the Daveys invest a further $100,000 in MIG, and at the same time, that they advance $50,000 to the Bolwarra Heights Investment Trust. Mr Moylan explained that MIG was the trustee of the Bolwarra Heights Investment Trust, which was "developing some land" at Bolwarra Heights.
42. The Daveys received the following assurances from Mr Moylan at this time about the Bolwarra Heights Investment Trust: "D. Davey: Is it a safe investment? C. Moylan: Yes, it is quite safe. You will receive the same interest, being 9% quarterly. D. Davey: How long will it be for? C. Moylan: The same as the other loans to MIG, 12 months. D. Davey: Very well."
43. A few days later, on 4 May 2007, these further investments into MIG of $100,000, and into the Bolwarra Heights Investment Trust of $50,000, were documented, with the Daveys signing the loan and account transfer documentation, according to the usual pattern. All the investments the Daveys had made so far were made without any written statement of advice being given to Esined No. 9. The Daveys wholly trusted Mr Moylan's word and were content to proceed without a written statement of advice.
44. A month later, further investments were recommended to the Daveys. On 20 June 2007, they attended a meeting at the offices of MRS in Charlestown. By then the statement of advice for Esined No. 9 had been completed. The statement of advice dated 20 June was given to them. It described them as "cautious investors" and made recommendations about investments which Mr Moylan described verbally in this way: "it is important to note that the products which we recommend are all part of our approved product list." Mr Moylan encouraged the Daveys to take advantage of the Australian government's "one-off" opportunity to contribute a large sum to their superannuation fund in FY07, free of the 15% superannuation contribution levy. He pointed to the availability to them of $470,000 from D&S Fabrications and their capacity to borrow money.
45. The statement of advice, which was dated 20 June 2007, included a representation that Retirement Planning Specialists (now MRS) operated from an "approved list put together by an external research committee, Lonsec, and is regularly reviewed." The Daveys, like most of the other plaintiffs, did not ask for a copy of this list, because they trusted Mr Moylan.
46. The statements of advice provided to the Daveys and each of the other plaintiffs were in a substantially similar form. They set out the financial position of each plaintiff and made particular recommendations that reflected the court's findings about the oral recommendations made to each plaintiff.
47. MRS assessed most of the plaintiffs as having a similar cautious risk profile and offered to provide them with similar services. The statement of advice given to the Daveys was not the first one given to the plaintiffs; for example a statement of advice was provided to the Smiths on 20 March 2007. But it is convenient now to highlight some relevant common features of the statements of advice by reference to the one given to the Daveys in June 2007.
48. The covering letter of the statement of advice recommended investment "in Fixed Interest products, such as Moylan Investment Group, Citipacific Mortgage Trust and MFS will balance up your portfolio and provide you with capital security". Then followed a set of more detailed recommendations.
49. The statement of advice examined each plaintiff's risk profile, on the basis of the questionnaire distributed to them, and assessed them all. Given what the clients had said to MRS; the Daveys were each assessed as "a cautious investor", who desires "capital stability".
50. The thrust of the investment strategy set out in the statements of advice was that the Daveys, and indeed the other plaintiffs, should invest in fixed interest products and a diverse range of managed investments involving such products. The statements of advice explained the benefits of this as being: investing in "the asset class of fixed interest", which would help bring the clients' asset "allocation in line with your benchmark". And they implied that the strategy and the products recommended would be properly evaluated and were, as a result, appropriate to each client's risk profile.
51. Under the heading, "Do I guarantee the managed funds I have recommended", MRS stated, "No. By law, the managed funds I have recommended must be 'appropriate' for you. However, I do not guarantee that those managed funds are the best for you or that they will perform in a particular way". But Mr Moylan's technique in dealing with his clients was to get them to focus on what he said and he gave little prominence to their reading the documents he gave them. They were steered away from focus or cautions such as this.
52. The statements of advice also emphasised the need for regular review. They promised continued ongoing attention to the clients' financial affairs after the initial investments so as to ensure their appropriateness. "An important objective of our review process is to compare your actual position to the projected position. We will identify any departures from the plan, establish why this has occurred in either make adjustments to your plan, or investment program to provide coaching to help you get back on track. We will ensure that your plan continues to meet your needs. As part of our ongoing service to you we will closely review your situation every six months. Your six monthly reviews will involve: reassessment of your goals and objectives… Review of your investment portfolio to ensure it remains appropriate to your situation".
53. The plaintiffs' breach of contract case contends that these reviews did not take place, or if they did that they did not conform to these assurances in the original statements of advice. Later portfolio reviews, portfolio valuations and statements of advice were given to each of the plaintiffs. But a common feature of all them was that they did not recommend that the plaintiffs reduce their exposure to MIG or the other recommended investments the subject of these proceedings.
54. The plaintiffs were briefly offered consideration of "alternative strategies" in the original statements of advice but these were not discussed in any detail. Nor were alternative strategies recommended in the later portfolio reviews, portfolio valuations and statements of advice.
55. Once their assent to further superannuation investments was secured, the conversation continued in the following terms about where the Daveys' superannuation money should be invested: "D. Davey: Very well. What do you propose that we invest the money in? C. Moylan: Once we have transferred the money into the CMTI we recommend that you invest $300,000 in Hardie Estates Property Trust and a further $200,000 in MIG. D. Davey: We know what MIG is but what is Hardie Estates Property Trust? I have not heard of them before. C. Moylan: Hardie Estates Property Trust is managed by Duncan Hardie. Duncan Hardie is a very successful businessman who has done a lot of residential property development. He is in fact one of the largest residential property developer in New South Wales. The Fund consists of Tranche 1 and Tranche 2. Tranche 1 is nearly complete and has been extremely profitable. Tranche 2 involves the development of land at Muswellbrook, Singleton, Tamworth and Bellbird. It is anticipated that Tranche 2 will be even more successful than Tranche 1. D. Davey: I am not sure about investing in real estate. C. Moylan: You should look at it as this is an opportunity to invest in real property but without having to deal with builders or subcontractors. It is an excellent investment. In my view it is both safe and secure and you won't have to deal with builders or contractors. D. Davey: What sort of investment is it? C. Moylan: They pay interest at 15% per annum paid quarterly. There is also the opportunity of receiving on completion a bonus. D. Davey: As you know we are only interested in secure, safe investments. C. Moylan: This is a secure, safe investment."
56. Mr Moylan repeated his overall recommendation and then specifically recommended that they invest another $90,000 in MIG and $60,000 into the Bolwarra Heights Investment Trust, making their total investment in the Bolwarra Heights Investment Trust $110,000 up to that point.
57. The Daveys were comfortably receptive to Mr Moylan's broad assurances of equal investment safety across all categories of recommended investment. Based on these recommendations, the Daveys assumed that their investment in the Bolwarra Heights Investment Trust was safe.
58. In early July 2007, Mr Moylan told the Daveys that the Hardie Estates Property Fund had changed its name to the Regional Land Property Fund as at 1 July 2007. But they were assured there was no difference in the funds and that the new fund was still "a good secure investment". On the basis of that assurance, they proceeded to invest in the fund.
59. A few days later, on 11 July 2007, the Daveys signed the necessary documentation in front of Mr Moylan's office assistant according to the usual pattern. This was a further loan agreement from Esined No. 9 to MIG in the sum of $90,000, and another loan agreement from Esined No. 9 to MIG as trustee for the Bolwarra Heights Investment Trust in the sum of $60,000. And on 5 July 2007, they had authorised the payment of $300,000 to the Hardie Estates Property Fund. MRS invoiced Esined No. 9 for the statement of advice, which was paid.
60. The Daveys' investment in the Regional Land Property Fund was not accompanied by any advice from Mr Moylan that such investment was only possible if Esined No. 9 and the Daveys qualified as a "wholesale" client. The Court also accepts that the Daveys would have stoutly resisted the idea of being classified as wholesale rather than retail clients of MRS. They simply did not see themselves that way. No information memorandum for the Regional Land Property Fund was left with them.
61. Later, in July 2007, after the Daveys had invested the $300,000 in the Hardie Estates Property Fund, they received information from that fund that Mr Duncan Hardie had sold his interests in it. The Daveys say, and the Court accepts, that had they been aware of this at the time they were contemplating investment in the fund, they would not have invested in it.
62. Mr Moylan introduced the Wallalong Investment Trust to the Daveys about 12 months later. In early August 2008, at a time well into the global financial crisis, Mr Moylan telephoned Mr Davey and had the following conversation with him: "C. Moylan: Dallas there is a parcel of land being developed at Wallalong. It is a residential property development. As you are not dealing with builders or contractors there is no risk. It will provide a good rate of return. D. Davey: What is the interest rate? C. Moylan: The same as usual, 9%. D. Davey: How long will the money be invested for? C. Moylan: Two years. D. Davey: All right, l m happy with that. C. Moylan: l also suggest that you invest another $100,000 in MIG. D. Davey: What are the terms of that? C. Moylan: They are the same as before. D. Davey: Do you still recommend we make these investments? C. Moylan: Yes. Each of them is a safe and secure investment which will provide you with a good return. D. Davey: Very well. C. Moylan: I will have to bring some more documents around for you to sign. D. Davey: Very well."
63. This conversation is remarkable at several levels. In the first place, although the global financial crisis was well underway, it is not mentioned in the conversation. Mr Davey did not obviously associate the global financial crisis with the stability of any of these investments; nor did Mr Moylan warn the Daveys about these financial storm clouds when recommending a property development related investment.
64. Esined No. 9 invested on this recommendation. The Daveys signed documents on the assurance that they were the "same as you have formerly signed for MIG". They signed documentation on 22 July 2008 authorising the withdrawal of $110,000 from Esined No. 9's CMT, and its loan of $100,000 to MIG, according to the usual pattern. The $110,000 was transferred to MIG on 28 July 2007.
65. Mr Davey expected that the $100,000 was going to be on lend to the Wallalong Investment Trust in addition to the $110,000 to be lent to MIG. But in early September 2008, on reviewing his bank statements for Esined No. 9's account 4982, Mr Davey noted that in addition to the withdrawal of the $110,000, not one but two withdrawals of $100,000 had been made on 7 August 2008. One withdrawal was directed to Wallalong Investment Trust and one by cheque to MIG. He was concerned that $200,000 rather than $100,000 had been withdrawn contrary to his instructions.
66. He contacted Mr Moylan's office and complained. Both withdrawals were later reversed and a single $100,000 withdrawal was made on 4 November 2008. On questioning about these changes, Mr Moylan disclaimed any knowledge of them and attributed the alteration to some issue at Macquarie Bank. Mr Davey did not follow this up because the reversals of the earlier transactions and the final single $100,000 withdrawal reflected his and his wife Sandra's instructions.
67. Between December 2008 and March 2009, Esined No. 9 received a number of documents from MIG and from the manager of the Regional Land Property Fund, Regional Land.
68. Mr Moylan attended at the Daveys' home on 24 or 25 April 2009. He gave them two letters from Moylan Business Solutions addressed to Mr and Mrs Davey. They did not have time to read the letters before the following conversation ensued: "C. Moylan: Following a review of the MIG Loan Agreements with the Davey Super Fund it has become apparent that in order to protect everyone's interests the terms of each of those loan agreements needs to be changed. I have brought with me Deeds to vary each of those agreements. D. Davey: How does it change the terms of the agreement? C. Moylan: As all the projects are running well, all it does is extend the loan but does not otherwise affect it. All of the directors' guarantees remain in place. You will continue to receive 9% on the moneys invested. D. Davey: How long does this extend the loan? C. Moylan: It extends the time to 31 December 2011. D. Davey: Do you recommend that we sign them? C. Moylan: Yes, just sign where I have indicated."
69. Mr Moylan then placed what became known as the "supplemental deed" documentation before each of Sandra and Dallas Davey. Neither of them had an opportunity to read or consider the contents of these documents or to look at the loan agreement so they could consider how their terms were being changed by the supplemental deed. This lack of opportunity to read documents being signed had occurred with the Daveys' previous signings. So far as Mr Davey could see, no one witnessed his and his wife's signatures and no copies of the signed supplemental deed documents were provided to them until a much later date.
70. An equivalent of the supplemental deed was signed by all the plaintiffs, apart from the Kauters, at about this time. All the signings were in circumstances and similar to those that were made on this occasion to the Daveys. Statements such as those made here typically preceded the signing of all the supplemental deeds. The broader financial picture of these investments, analysed below, shows that these statements fell well short of giving true situational awareness to the clients.
71. This conversation, and the supplemental deed conversations with the other plaintiffs, are remarkable for what Mr Moylan does not say. Mr Moylan does not lay out and review with his clients the advantages and disadvantages of calling up the loans at this time. He does not discuss possible alternative investments. He just steers them back into the same loan investments.
72. Mr Alan Spicer, who was employed by MRS until August 2009, explained why Mr Moylan needed these supplemental deeds in April 2009: MIG faced a cash flow crisis.
73. Mr Moylan needed to have all his clients' loan agreements with MIG extended in April 2009. He admitted to Mr Spicer shortly before the supplemental deeds were drafted that all the existing loan agreements with MIG had "expired which means we will either have to pay the money back or get them extended". Mr Moylan said to Mr Spicer that he would achieve that by preparing a supplemental deed for each loan agreement. In a significant indicator of Mr Moylan's then financial desperation, to Mr Spicer's question "what happens if the people won't sign them", Mr Moylan responded, "I'll just have to convince them to do it, because we haven't got the money to pay them back".
74. Mr Spicer's account of this conversation shows that Mr Moylan was well aware that MIG was insolvent by April 2009. What Mr Moylan said to Mr Spicer in these conversations was not shared with any of the plaintiffs. Instead, they were sprinkled with misleading euphemisms about the need for the supplemental deeds. These were statements like "all it does is extend the loan but does not otherwise affect it" (to the Daveys), or that these deeds were 'to protect everyone's interests" (to the Smiths).
75. Mr Spicer saw the supplemental deeds before they were given to the clients. He was surprised at what he saw: the loans were being extended for more than two a half years. He expressed doubt to Mr Moylan that "the clients will agree" to this. But Mr Moylan said to Mr Spicer that the approach was to be "just get it done".
76. Mr Spicer did not try to distance himself from his involvement in these or other events the subject of these proceedings. He was conscious of his own potential liability to the plaintiffs but to his credit it did not colour the quality of his evidence. He was an honest and generally reliable witness. He was attacked in cross-examination on the basis he had participated in frauds upon the plaintiffs. But he was careful enough to keep some contemporaneous documents to be able to defend himself later. He thought Mr Moylan might cast blame on him to the clients. He feared these clients might then sue him. Mr Spicer ultimately left MRS because he was uncertain about what Mr Moylan was saying to clients and he did not trust him.
77. By this time, Mr Spicer had also often witnessed the monthly MIG bank account reconciliations conducted by an MRS staff member, Ms Stephanie Hinds. At the end of these account reconciliations Ms Hinds would commonly report to Mr Moylan that the reconciliation showed "[MIG] hasn't got enough money to pay the interest on all the loans". To this Mr Spicer says Mr Moylan would frequently respond, "Leave it with me. I will have to talk to some of my clients". Mr Spicer recalls that Mr Moylan would usually go on to explain to Mr Spicer that the shortfall that had been identified would be made up by clients investing an amount to make up the deficiency at MIG. He would then usually request Mr Spicer to "get a loan agreement prepared".
78. Mr Spicer was only involved in these processes until July 2009. Mr Spicer judged Mr Moylan's conduct to be so unprofessional and potentially damaging to clients that he decided to terminate his employment with Moylan Business Solutions.
79. The Court infers from Mr Moylan's statements that MIG had a liquidity crisis at the time and could not meet its existing loan obligations without the plaintiffs being persuaded to extend their existing loans on the basis of inadequate information.
80. The letters the Daveys were given that day did reveal to them the extent to which monies they had lent to MIG had been on lend to particular residential developments. Only then did the Daveys become aware that Mr Kenneth Hill and the Charlestown Riverside agent, Mr Justin O'Brien, had guaranteed the repayment obligations for moneys invested in property development associated with them.
81. Esined No. 9's final investment on Mr Moylan's recommendation came in October/November 2009. Many years earlier, Mr Davey had established a small separate superannuation investment with Colonial Mutual. He informed Mr Moylan that he was redeeming this fund, which on maturity would pay out about $83,000. Later that month, Mr Moylan called Mr Davey with an idea about investing this money: "C. Moylan: You know that money you have redeemed from the Colonial Mutual? Why don't you invest it in a land development project? You need to move quickly as there is only a short window of opportunity to invest. D. Davey: Do you recommend it? C. Moylan: Yes."
82. When the Colonial Mutual superannuation fund had matured, Mr Moylan had temporarily placed the $83,000 on deposit with $7,000 of his own money. On or about 2 November 2009, the total of $90,000 was withdrawn and placed in account 4982. It was then withdrawn from account 4982. But the account did not show the payee. This puzzled Mr Davey who telephoned Mr Moylan's office at least half a dozen times on 20 December 2009 and in early August 2010 seeking to know the recipient of these funds.
83. He did not get a clear answer from Mr Moylan. His queries were deflected to Mr Moylan's personal assistant, Ms Amanda Sweeney. Mr Moylan did not return his calls. The fact he kept ringing throughout this period showed he still had sufficient trust in Mr Moylan that he thought he would give him the explanation he was seeking.
84. MIG's financial distress broke into the open in October 2009. Esined No. 9's interest payments stopped that month. Mr Davey pursued Mr Moylan's office. He complained on the telephone to Ms Sweeney: "Amanda, I am not being paid by interest. What is going on? I have not received any interest since October 2009. I also want to know where the $90,000 that was withdrawn from the account on 4 November 2009 has gone. Can you please let me know what is also happening with Wallalong?"
85. Neither Mr Moylan nor Ms Sweeney called him back. They plainly had nothing reassuring that they could say to him at that time. Mr Davey pursued Mr Moylan by email on 29 April 2010 about the $90,000 withdrawn from account 4982 but he had no further response until months later in August 2010, when a meeting was held at Mr Moylan's office.
86. Mr Davey was complaining by October 2009. And he continued to do so. His complaints were about non-payment of interest and about the misapplication of funds. These were serious complaints that are highly likely to have come to Mr Moylan's attention. Indeed, the pattern of lack of contact between the Daveys, for example, and Mr Moylan for some time after October 2009 is indirect evidence that he was made aware by October 2009 of the substance of the complaints and did not have anything useful to say to them. In the Court's view, he remained well aware of their substance and of the fact that he was not responding to them right up until he advanced the proposals for the insurances the subject of these proceedings. .
87. But by mid-2010, the Daveys' patience had run out. Mr Moylan's failure to return phone calls that were seeking answers to understandable questions about non-payment of interest, and the ultimate destination of the $90,000 in investment funds, led the Daveys to terminate the retainer of Moylan Business Services or to undertake any further accounting services including the preparation of income tax returns for Esined No. 9 and the other Davey family entities for FY2010.
88. None of the monies that Esined No. 9 advanced at Mr Moylan's recommendation were refunded.
89. In summary, in the Esined proceedings, Esined No. 9 atf the D & S Davey Family Retirement Fund claims it has lost $1,100,000. It claims damages for the losses it made on the advice of Mr Moylan on behalf of MRS in the following categories: 1. Loans to MIG and/or MIG atf Bolwarra Heights Investment Trust (referred to for convenience in this table as "BHIT") and to Wallalong Investment Trust (referred to for convenience in this table as "WIT") : Date Amount 5 December 2006 (MIG) $100,000 12 March 2007 (MIG) $100,000 4 May 2007 (MIG) $100,000 4 May 2007 (BHIT) $50,000 11 July 2007 (MIG) $90,000 11 July 2007 (MIG atf BHIT) $60,000 28 July 2007 (MIG) $110,000 4 November 2008 $100,000 (to be amended from WIT to MIG) 4 November 2009 (MIG) $90,000 Total $800,000

1. Investment in Regional Land Property Fund referred to for convenience in this table as "RLPF": Date Amount 5 July 2007 $300,000 Total $300,000

1. The defendants dispute Esined No. 9's primary case against MRS in a number of ways that can now be analysed.
2. Challenges to the Daveys' Case. Mr Davey was cross-examined to suggest that he and his wife knew they were taking financial risks in investing on Mr Moylan's recommendations. But the Court does not accept that was Mr Davey's or his wife's state of mind when being advised by Mr Moylan. All the plaintiffs were cross-examined to a similar pattern, although their individual circumstances were different.
3. Mr Davey was cross-examined about the statement of advice he and his wife Sandra received on or shortly after 21 June 2007. The cross examination starkly exposed Mr Davey's lack of financial sophistication. He was not clear on what the stock market index S&P/ASX200 was. He had never heard of banks such as Credit Suisse or the Union Bank of Switzerland ("UBS") until Mr Moylan mentioned them.
4. He said that he read carefully the documents that he received. Undoubtedly he did. But whether he really understood them is an entirely different question. He struck the Court as someone who preferred oral face-to-face explanations. The Court is doubtful that without clear oral explanation that anything in the documents that he was given warning of risk, really came home to him and his wife.
5. His statement that he and his wife were only interested in "risk-free investments" was challenged. Whilst he appreciated "everything has got a risk", he had no real conception of the trade-off between risk and return, certainly at its lower end; for example he had little appreciation of any underlying risk difference between a 5% return on investment, as against a 9% return.
6. Under the heading "your risk profile" in the Daveys' 20 June 2007 statement of advice, risk was described as "the probability or likelihood of not getting your expected return". At one level that looks like a warning to be noticed. But in the Court's view, what mattered to Mr and Mrs Davey was in the square box on the same page: that they desired "capital stability" and Mr Moylan's oral statements gave them all the assurance of that that outcome that satisfied them.
7. Although Mr Davey said he appreciated that nothing short of investment in Australian Government bonds or a deposit in one of the four major banks was "absolutely safe", the statement of advice recommending investment in MIG classified it with other large named mortgage trusts and was influential in the Daveys' understanding that it would provide them "with capital stability".
8. Mr Davey accepted in cross-examination that there was some "risk in any investment" and that theoretically an investment returning 15% was riskier than one returning 5%. But in the Daveys' mind that is why they engaged Mr Moylan: he was only going to direct them into secure investments even if they were returning up to 15%. To the Daveys, like most of the other plaintiffs what they perceived as relatively minor variations in the rate of return were underwritten by Mr Moylan's assurance of investment safety.
9. Although at one point in his cross examination Mr Davey seemed to concede that he was aware that the residential subdivision investments of the Hardie Estates Property Fund, the Rural Land Property Fund and MIG, as communicated through their Introductory Financial Services Guide, were "not safe and secure risk-free investments", he misunderstood the question. Immediately afterwards he declared that if he had been told that MIG was not a fixed interest investment but a real property investment he would not have invested money in it.
10. Cross-referenced to the expert report of Mr Maxwell Weston, the expert financial planner called in the plaintiffs' case, the defendants sought in final submissions, with the Daveys, to show that Mr Moylan had disclosed certain matters, for example, that "land subdivision was high risk", and that the Daveys would have proceeded because they knew anyway these were not safe or risk free investments. But such cross-examination was based entirely in the documents supplied without adequate allowance for the parallel verbal assurances that Mr Moylan was giving these clients which the Court has found were so influenced. So the Court does not infer that they would have proceeded with such limited disclosure.
11. He was clear, and the Court accepts, that if he had been told by an independent advisor, that MIG was not a fixed interest investment but was a property investment, he would not have invested money in MIG. But ultimately he and his wife were prepared to suspend judgment about gradations of risk, because of Mr Moylan's assurances. They made their investment judgments together.

The Smiths and Esined No. 10

1. The Smiths' story complements the Daveys' story. It was principally told through Mrs Smith, who was an excellent witness. Mrs Smith's full name is Veronica Lucille Smith, although the evidence shows that she goes by the name "Lucy". She had secretarial training. This had allowed her to write shorthand notes of her and her husband's conversations with Mr Moylan when she was present, which she used to revive her memory, and help her prepare her affidavit. The Court almost entirely accepts her account of events and of her state of mind at the various times about which she gives evidence. Her notetaking had been excellent. Her evidence, corroborated by that of Mr Smith, is a principal source of the Court's findings in relation to Esined No. 10.
2. Mrs Smith and her husband Peter have been directors of Esined No. 10 since 1981. She was raised in Newcastle and attended Hunter Girls High School, leaving with the Intermediate Certificate in her mid-teens. She undertook a one-year secretarial course. This is the extent of her post school formal education. She commenced secretarial employment with a Newcastle pipe making firm, Stewart and Lloyds, and then at the Hunter District Water Board. She left remunerative employment outside the home upon the birth of her first child in April 1971. She had their second child in 1976 and returned to external employment in 1978 with the University of Newcastle, where she remained in full-time employment until 2000.
3. She also undertook part-time employment for D&S Fabrications along with Mrs Sandra Davey. As a result of this general bookkeeping experience, she was able to compile a simple balance sheet and profit and loss statement. But bookkeeping experience does not equal financial sophistication. Mrs Smith does not claim any financial sophistication and the Court accept she has none.
4. Mrs Smith's husband, Peter, was the other partner in D&S Fabrications with Mr Dallas Davey. The Smiths were starting to plan for retirement when Mr Smith was turning 60 in 2005.
5. Mrs Smith had known the solicitor, Mr Michael Hill, since primary school days. Mr Smith knew him for almost as long. They had engaged Mr Michael Hill as the legal advisor for D&S Fabrications and as their personal legal advisor. In the course of legal advice that Mr Michael Hill was giving the Smiths in 2005, he recommended Mr Moylan to them for any "advice about superannuation" that they needed. This then led to the previously mentioned lunch at Scratchley's on the wharf, where Mr Michael Hill recommended Mr Moylan as a superannuation advisor to both Mr Smith and Mr Davey. Mrs Smith recalls her husband describing Mr Michael Hill as recommending Mr Moylan as "a top fellow in the investment field and that we should get him involved".
6. Mrs Smith recalls that a meeting took place in mid-October 2005 at D&S Fabrications between Mr Moylan, Mr Davey and Mr Smith. Her recollection of what her husband said he was told at this meeting by Mr Moylan is very similar to Mr Davey's account of the same meeting and need not be repeated. Mr Smith described Mr Moylan to his wife as "a pretty cluey bloke. He seems to know what he is doing."
7. Mr Smith was impressed. Mr Moylan's message for the Smiths was the same as that given to the Daveys: they should separate from the jointly constructed D&S Fabrication superannuation fund and set up their own fund. Like the Daveys, that is the direction that the Smiths decided to go.
8. The Smiths provided their tax returns and financial statements to Mr Moylan. By July 2006, Esined No. 10 had been incorporated and appointed as trustee for the P&V Smith Family Retirement Fund. Moylan Business Solutions provided the services to the Smiths in setting up this structure.
9. Mrs Smith also recalls the Daveys and the Smiths jointly attending a meeting at the offices of Retirement Planning Specialists, the predecessor of MRS, in late May or early June 2006. Her recollection of this meeting is substantially the same as that of Mr Davey. She recalls, and the Court accepts, that at one point her husband and Mr Moylan had the following exchange: "P. Smith: Chris we are cautious people. We have worked long and hard for what we have. We are not interested in shares or any other risky investments. Of course we want our investments to grow but we only want safe and secure ones. We do not want to lose what we have. C. Moylan: I understand."
10. Like the Daveys, the Smiths clearly communicated to Mr Moylan that they did not want to risk their capital and assumed that Mr Moylan's acceptance of that position meant that he would only recommend investments that met that description. These early assurances from Mr Moylan coloured their perception of all the subsequent advice that Mr Moylan gave to them. In my view, they would not have been comfortable to stay with Mr Moylan as their advisor unless they were confident that he understood this fundamental investment assumption on their part.
11. Again, like the investment scenario presented to the Daveys, Mrs Smith recalls Mr Moylan recommending investment in "fixed interest products so as to better balance your asset allocation" away from listed shares and real property.
12. Mrs Smith set up two Macquairie Bank cash management trust accounts (CMTs) for the Daveys and for the Smiths. The CMT account she set up in the name of Esined No. 9, as trustee for the D&S Davey Retirement Fund, was account 4982. The CMT account she set up in the name of Esined No. 10 as trustee for the P&V Smith Family Retirement Fund, was CMT account 4990. She transferred excess funds from D&S Fabrication into these two accounts.
13. In late November 2006, the Smiths attended the offices of Retirement Planning Solutions. Mr Alan Spicer was present. At this meeting, Mr Moylan noted to the Smiths that there was presently $300,000 in cash in Esined No. 10's CMT and that he had not yet completed their statement of advice. Mr Moylan went on to make the following recommendation to the Smiths: "We recommend that you invest some of those funds in Moylan Investment Group, a company which I own and manage. Moylan Investment Group invests in short-term money lending. It pays a good rate of interest of 9% per annum. It is a company you should invest in. Any investment in MIG is safe and secure. I recommend that you invest $100,000 in MIG."
14. Mr Moylan repeated his recommendation of MIG as an appropriate destination for the Smiths to make a 12 month investment of $100,000. The Smiths proceeded with this investment on 1 December 2006, signing the necessary loan documents on behalf of Esined No. 10 to advance the $100,000 to MIG and authorise the transfer.
15. The loan agreement between Esined No. 10 and MIG was, like the MIG loan agreements signed by the Daveys, an unremarkable 12 month loan agreement, the term of which was capable of extension, and which also purported to give a fixed and floating charge over the assets of the borrower, MIG. The charge does not seen to have been formalised in any other way outside the loan agreement. But like every other loan agreement signed by the Smiths after that, they were not given sufficient time to read this Esined No. 10-MIG loan agreement and they were not left with a copy. This had the incidental effect of making it more difficult for them to calculate when the date for repayment of principal fell due and made the de facto extension of the loan more likely. The $100,000 was transferred from Esined No. 10's account 4990 to MIG on 1 December 2006.
16. As was the case with Esined No. 9, it is pleaded on behalf of Esined No. 10 that from approximately this time, in December 2006, that an oral contract was made between MRS and Esined No. 10 for MRS to provide a range of investment advisory and ancillary services to Esined No. 10 for consideration payable by Esined No. 10 to MRS. From this conversation, the conversations which preceded it, and the fact that MRS continued to provide further services, the Court concludes such a contract was made. MRS invoiced Esined No. 10 for advisory fees, and Esined No. 10 paid them on a regular basis.
17. Mr Moylan's statement of advice for the Smiths was still not ready by February 2007. But Mr Moylan and Mr Spicer met the Smiths in early February 2007. Mr Moylan noted they still had a balance of $200,000 in the CMT account and he recommended that they invest $100,000 of those funds in two entities, City Pacific, and MFS Investment Management ("MFS"), which he described respectively as: "[City Pacific] a listed fund that invests in property development. It has been highly successful. It represents a good, sound and safe investment. They pay a good rate of interest. [MFS] it is much the same as City Pacific. It is a listed mortgage fund. It is a good and sound investment. It also plays a good rate of interest quarterly. I recommend that you invest in both of them. Here is a sheet on MFS. It is also one of the products that we recommend."
18. As with the other plaintiffs, Mr Moylan was propounding the attractive idea to otherwise naturally conservative clients that it was still possible to get an attractive rate of return on fixed deposit investments without risking one's capital. This seductive message was ultimately illusory. But the Smiths, like the Daveys, completely accepted it, partly because they fully trusted Mr Moylan's assurances.
19. Upon Mr Moylan's further recommendations that City Pacific and MFS were "safe and secure", the Smiths authorised the release of $100,000 to the Public Trustee of Queensland.
20. Then something strange happened. The Smiths received a letter from Retirement Planning Services that indicated that $100,000 had been invested in the Cartel Investment Unit Trust, in addition to the $100,000 paid to each of City Pacific and MFS. The Smiths realised that they had never authorised such an investment. Mrs Smith queried this with Mr Moylan and he told her, "Don't worry about that. It is just a mistake. The $100,000 is the money you invested in MIG last December." This was an early sign that Mr Moylan was a poor adherent to client instructions. But this was not enough to disturb the Smiths' then faith in the financial planner that their highly trusted solicitor had recommended to them. Mr Michael Hill never expressed any doubts about Mr Moylan to his long-standing friends, the Smiths. With little reason to doubt Mr Moylan, the Smiths continued to place their trust in him.
21. In March 2007, Mr Moylan noted that the Smiths had accumulated another $100,000 in Esined No. 10's Macquarie CMT. Mr Moylan recommended that they invest "in MIG as before" because it will "provide you with a better rate of interest", in this case 9% per annum paid quarterly. The Smiths agreed with the recommendation and executed a further loan agreement on 8 March 2007 with MIG. Like the Daveys, they were again not given a copy of the executed agreements or sufficient time to read them. They accepted this, because they trusted Mr Moylan. Although this agreement only authorised a single loan of $100,000 to MIG, it appears from the bank statements of Esined No. 10, account 4990, that two identical amounts were withdrawn about three weeks apart. One amount of $100,000 was withdrawn on 9 March 2007 and another withdrawal of the same amount took place on 29 March 2007. The evidence does not satisfactorily explain why two identical amounts were withdrawn, but the Court is satisfied that they were both advanced to MIG. Esined No. 10 was not investing such sums elsewhere at this time.
22. The Smiths signed a "draft" statement of advice on 20 March 2007. But by 3 April 2007, Mr Moylan had finally completed the statement of advice for the Smiths. Mr Moylan gave it to them. Their statement of advice came in the form of a letter dated 3 April 2007, which was accompanied by more detailed recommendations. Their statement of advice was in substantially identical form to that given to the Daveys, insofar as its general warnings and structure is concerned. It contained detail about their separate financial circumstances and recommended in writing the investments that Mr Moylan was recommending to them orally at that time. The Smiths' statement of advice included Lonsec reports about City Pacific and MFS, who Mrs Smith understood as both substantial and secure.
23. The first part of the statement of advice referred to the $300,000, the disposition of which had previously been recommended and had been undertaken. Mrs Smith queried that this statement of advice continued anomalously to refer to the Cartel Investments Unit Trust. She astutely observed that this was not an entity in which they had authorised any investment on behalf of Esined No. 10 up to that point.
24. But Mr Moylan gave her the brush off: "Don't worry about that Lucy. As I told you before, that money has been incorrectly described as going to the Cartel Investments Unit Trust. That money was invested with MIG."
25. Mrs Smith was not financially sophisticated. She did not understand all that Mr Moylan said and what he put in his various statements of advice. She accepted what he said and did not persist in her questioning of what she had thought was his failure to follow her and her husband's instructions, which did not authorise any investment in the Cartel Investments Unit Trust. Her lack of financial sophistication, despite her precise secretarial capability, was probably quite apparent to Mr Moylan. The Smiths still trusted him and he took advantage of that trust and of his knowledge that Mrs Smith's capacity and willingness to question him was ultimately limited by her lack of financial experience.
26. But the second part of the statement of advice to the Smiths on 20 March 2007 dealt with another $350,000 that was coming into their superannuation fund from D&S Fabrications. Mr Moylan recommended that $50,000 of this additional money go to City Pacific, $50,000 to MFS and $50,000 to the Colonial First State Income Fund and the balance of $200,000 to MIG, "on the same terms and conditions as before".
27. The Smiths were unfamiliar with and queried Colonial First State as a potential investment, but were reassured that it was: "one of our recommended products and is a listed income fund that is involved in property development. It has been highly successful. It pays interest of at least 5% per annum and is a good sound and secure fund to invest in."
28. Mr Moylan was mixing his recommendation of MIG with more deeply scrutinised fixed interest investments, giving the impression that MIG was their equivalent. He was able to give the Smiths a document produced by Lonsec analysing the Colonial First State fund. Upon Mr Moylan's further recommendation and assurance that all these investments were "safe and secure", the Smiths proceeded on 23 March 2007 to authorise the investment of a further $300,000, with $100,000 of this additional fund going to MIG, and parcels of $50,000 each going to MFS, City Pacific, Colonial First State and again to MFS by early April that year. MRS billed Esined No. 10 for this advice.
29. Mr Moylan had more recommendations for the Smiths in May 2007. He noted that they had accumulated another $100,000 in their Macquarie CMT and recommended its investment in MIG. Once again, arrangements were made for a loan agreement with MIG to be signed in what had, by then, become a standard form on 4 May 2007 and for the funds to be transferred from Esined No. 10 to MIG.
30. The Smiths commonly received incorrect summaries of their investments from MRS. Mrs Smith picked up on these errors and raised them with Mr Moylan. She noticed a repetition of previous errors in a letter from MRS on 9 May 2007, which showed a portfolio update of the Esined No. 10 portfolio, as continuing to wrongly include $100,000 as having been invested in the Cartel Investment Unit Trust and wrongly indicating that Esined No. 10 had invested only $200,000 in MIG, rather than what Mrs Smith correctly calculated as an investment of $400,000 in MIG by that time. In the meantime, MRS continued to bill Esined No. 10 for its superannuation advice.
31. About six weeks later, on 21 June 2007, the Smiths met Mr Moylan and Mr Spicer at the offices of MRS. Mr Moylan explained that at the end of this financial year there was an opportunity to invest unlimited amounts in superannuation free of the otherwise prevailing 15% superannuation contribution levy. Based on the available funds from D & S Fabrications, he encouraged them to make a large contribution for the FY07.
32. The conversation then continued between them as follows: "P. Smith: Chris, Lucy and I read the statement of advice that you sent to us. You have classified us as cautious investors. But l want to make it clear that we are not interested in shares. C. Moylan: It's okay. I understand. That is why our recommendation is for fixed interest as you are overweight in Australian shares and property. P. Smith: How much do you think we should put in? C. Moylan: I think you should contribute up to about $470,000.00. We can take it out of the D & S Fabrications' Macquarie CMT account. Once the funds are in place the tax on any income will only be 15%. In my view you should take up this opportunity. P. Smith: Okay. C. Moylan: Once the money is in Macquarie CMT I recommend that you invest $300,000.00 in Hardie Estates Property Trust and a further sum of $200,000.00 in MIG. P. Smith: What is Hardie Estates Property Trust? I've not heard of them. C. Moylan: Hardie Estates Property is managed by Duncan Hardie. Duncan Hardie is a very successful businessman and residential property developer. He is one of the largest residential property developer in New South Wales. Tranche 1 of Hardie's estate has been extremely profitable. Tranche 2 involves the development of residential land at Muswellbrook Tamworth, Singleton and Bellbird. Tranche 2 will be even more successful than Tranche 1. This is an opportunity to invest in real property but without having to deal with builders or subcontractors. It is an excellent safe and secure project for you to invest in. It pays an interest or coupon rate of 15% per annum, paid quarterly. On completion you will also receive a bonus. P. Smith: Is it a safe and secure investment? C. Moylan: Yes. P. Smith: Do you recommend that we invest in it? C. Moylan: Yes. P. Smith: Are you also recommending that we invest a further sum of $200,000 in MIG? C. Moylan: Yes. P. Smith: What would be the terms of that investment? C. Moylan: The same terms as before. P. Smith: Very well, we will proceed with that. C. Moylan: I will place the investment in Hardie Estates Property Trust Fund once the additional funds have been deposited into the account. I will also prepare a document for the advance to MIG. Once it is prepared I will let you know and bring it over to you. P. Smith: Thank you."
33. After the meeting on 21 June 2007, the Smiths were given a copy of an November 2005 information memorandum for the Hardie Estates Property Fund. The Smiths were challenged in cross-examination as to what they took from this document but in Court's view their comprehension of it was limited.
34. The Smiths decided to proceed largely because they continued to see investments in MIG as "safe and secure" and in their minds, because of Mr Moylan's assurances and presentations, the equivalent of largely institutional deposit takers. As a result of Mr Moylan's advice on this occasion, $472,000 was transferred into Esined No. 10's account 4990 on 27 June 2007. Loan agreements were signed on 4 July 2007 and on 5 July 2007 and $300,000 was transferred to the Hardie Estates Property Fund and $200,000 to MIG.
35. But like the Daveys, Mr Moylan had sold the Smiths on the idea of the Hardie Estates Property Fund in part because of Mr Duncan Hardie's involvement. But again, like the Daveys at this time, Mr Moylan failed to tell the Smiths that Mr Duncan Hardie had sold his interests in this fund to a Mr Matt Somers and that Mr Hardie was no longer involved in the management company of that fund, Hardie Estates Management. The Smiths found out all of this from correspondence sent to them by the renamed Regional Land Property Fund on 31 July 2007.
36. Misleading conduct like this might have caused some clients to abandon faith in their financial adviser. But the Smiths, like the Daveys, were people who accepted the integrity of what they were being told by people who they regarded as trusted advisors and, as a result, they thought that what they were investing in was "safe and secure".
37. The MRS portfolio update for Esined No. 10 that was sent to the Smiths on 5 September 2007 repeated the errors in summarising their investments that had been made previously. This update still showed an investment of $100,000 in the Cartel Investments Unit Trust. And it incorrectly showed $400,000 invested in MIG. An investment of $700,000 was more accurate by that time.
38. On 1 November 2007, Mrs Smith received assurances from Mr Moylan that if the Smiths wanted to withdraw funds from MIG that "it will only be about one week generally". Then, once again, he treated MIG as an equivalent of other or independent and well scrutinised deposit taking funds, saying to Mrs Smith "that should be the same for the City Pacific, MFS and Colonial First State but I would have to check on it."
39. He saw at the time of this conversation that the Smiths had further funds in their Macquarie CMT account and he recommended a further investment of $100,000 in MIG, so that they could earn 9% on their money rather than the 5.72% being paid by Macquarie CMT. This in turn resulted in the Smiths executing another standard form loan agreement between Esined No. 10 and MIG with following bank transfers on 2 November 2007.
40. In early 2008, Mr Moylan pushed the Smiths to invest more money in MIG. By 4 January 2008, Mr Moylan had finally corrected the error about the $100,000 invested in the Cartel Investments Unit Trust. Yet he was still making a mistake about $200,000 being invested in MFS, rather than the $100,000, which was the reality. But impressing the Smiths with the desirability of a higher yield, Mr Moylan persuaded them to invest another $80,000 in MIG, expressly overcoming their concerns about safety and security: "C. Moylan: As you can see the current value of your investments in City Pacific, MFS and Colonial First State are up. You presently have a balance of $117,194 in Macquarie CMT account. I recommend that you invest $80,000.00 of that in MIG thereby leaving a balance to meet necessities. If you invest that money in MIG you will receive 9%. It will be on the same terms as before. That interest rate is better than what you are getting from Macquarie. P. Smith: Do you recommend that we do that because we already have $700,000.00 invested in MIG? C. Moylan: Yes it is a safe and secure investment and one which provides you with a good return. P. Smith: Very well, we will do that. C. Moylan: I will now prepare the document and have it sent over to you for signing. P. Smith: Okay."
41. They took Mr Moylan's advice and on 3 March 2008 they signed the documents to authorise the transfer of the further $80,000 to MIG.
42. The Smiths continued to be paid interest on their investments in MIG, which reassured them that what Mr Moylan was saying to them about the security of their MIG investment was correct.
43. In about August 2008, whilst Mrs Smith was querying Mr Moylan's loan summary about the amount which Esined No. 10 had invested with MFS, Mr Moylan recommended to the Smiths that they should use the recently topped-up balance held by Esined No. 10 in account 4990, which had been transferred over from D&S Fabrications, to invest a further $110,000 in MIG and a further $100,000 in the Hardie Estates Property Fund. They followed his advice in September that year, executing the loan documentation, followed by the corresponding bank transfers on 26 September 2008.
44. The first signs of trouble with MRS appeared to the Smiths in October 2008. They noticed that their bank statement for account 4990 recorded a withdrawal of $100,000 on 26 September 2008 in favour of the Wallalong Investment Trust. Mrs Smith rang the offices of MRS and queried this as an unauthorised investment. Her understanding was that the $100,000 was to be invested in the Hardie Estates Property Fund. But Mr Moylan did not return her call. She kept ringing MRS over the next two to three months, trying to talk to Mr Moylan about this unauthorised transaction.
45. Eventually in about March 2009, Mrs Smith was telephoned back by a staff member who sought to placate her with the knowledge that the deposit would earn an interest rate of 9% that the trust was developing land at Wallalong and that Mr Moylan could provide further information. But Mrs Smith was still concerned that the transfer of their funds to the Wallalong Investment Trust was unauthorised. On 1 April 2009 she queried Mr Moylan on the telephone: "L. Smith: What is this investment in Wallalong Investment Trust? We know nothing about Wallalong Investment Trust. You were not authorised to make that investment. As well we have not received any interest. C. Moylan: It's a good secure investment. Wallalong Investment Trust is developing land at Hinton. It will pay you interest at 9% annually. L. Smith: How long is the investment for? C. Moylan: One year. L. Smith: Why did you make that investment? You agreed only to make investments that Peter and l approved. C. Moylan: I thought it was a good investment for you to make."
46. The Smiths discussed this between themselves and decided not to question Mr Moylan further. They left the money that had been advanced to the Wallalong Investment Trust, where it was. In the Court's view, they did so because they still had faith in Mr Moylan's assurances that their monies were "safe and secure", even though the investment trust was a different one from that which Mr Moylan had initially recommended. They assumed the other trust was just as safe and secure.
47. But initiating unauthorised transfers breached MRS' duties to the Smiths. The Smiths' accounts of these conversations being accepted, it can only properly be inferred that Mr Moylan understood the intended destination for these funds (the Hardie Estates Property Fund) and equally understood that he was misapplying them (to the Wallalong Investment Trust). Mr Moylan's unapologetic "I thought it was a good investment for you to make", without even seeking to excuse himself on the basis of a claimed mistake, shows that he intended to unilaterally countermand their instructions on this transaction and apply the funds in accordance with his preferences, not theirs. This shows an uncommon degree of insouciance towards the separate interests of his clients. It is not surprising that Mrs Smith found it difficult to contact him between October 2008 and March 2009 about this matter: the only reasonably available inference is that he was reluctant to acknowledge that he had knowingly misapplied his clients funds. A number of other examples of the misapplication of funds by Mr Moylan are found in this narrative. They generally represent the same intentional indifference to the wishes of his clients and single-minded determination to apply the money as he thought he (not they) needed.
48. On 24 April 2009, Mr Moylan came to the Smiths' home and had a very similar conversation with them to the one that he had with the Daveys on the same date. He told them that "to protect everyone's interests" that the existing terms of the MIG loan agreements needed to be changed. He recommended and persuaded them that day to sign a supplemental deed extending the term of all the existing MIG loans they had signed on 1 December 2006, 8 March 2007, 4 July 2007, 2 November 2007, 3 March 2008 and 26 September 2008.
49. The Smiths still had faith in Mr Moylan. So much so, that when he rang them again in May 2009 and recommended that they invest $120,000 in a loan at 9% interest to MCD Holdings (the old Moylan'sBS), which he said was conducting residential property development, without questioning they agreed to do so.
50. But MRS withdrew $125,000, not $120,000, from Esined No. 10's Macquarie CMT account and prepared a loan agreement to MCD Holdings, reflecting a loan of this higher sum. Initially, Mr Moylan dismissed the difference to Mrs Smith as a "typing mistake" but then persuaded the Smiths to leave the figure at $125,000. They ultimately signed documents to reflect the actual withdrawal of $125,000 that had already occurred. But as with previous signings of loan agreements, they were not given time to read the documentation, nor were they left with copies. This was the last money that the Smiths advanced at Mr Moylan's suggestion.
51. This so-called "typing mistake" is a blinking indicator of Mr Moylan's mindset. If it really was a mistak,e it was one in MRS' favour, to which the correct and professional solution was to immediately refund the $5,000 which had been taken without authorisation from the Smiths. But Mr Moylan did not want to surrender any opportunity to keep control of his clients' funds. So he talked the still compliant Smiths into giving up the extra $5,000, so he could retain it for his purposes. It is a demonstration that that even in small matters self-interest trumped professionalism with Mr Moylan.
52. The Smiths noticed that they did not receive any interest payments from the Regional Land Property Fund for the first quarter of the calendar year 2009. In June 2009 they queried Mr Moylan about the absence of interest payments from that source and were told that the Regional Land Property Fund "are going through a management change with a new responsible entity appointed." They also queried the loss of value of MFS and were told that the global financial crisis had caused this and that MFS was "working their way through the problems and everything will soon be back to normal."
53. But by now the Smiths had lost faith in Mr Moylan. Mrs Smith noticed that MCD Holdings was not paying interest either. But she did not have a copy of the loan agreements. She and her husband had trusted Mr Moylan to keep them. She asked Mr Spicer for a copy and he forwarded to her all the MIG loan agreements and the MCD Holdings loan agreement.
54. When she received the MCD Holdings loan agreement in about August 2009, Mrs Smith noted that it required repayment of the advance to MCD Holdings on 1 August 2009. So in early August 2009 she rang the offices of MRS seeking to speak to Mr Moylan and demand payment. He did not return her calls. Later that month she was informed by letter that Mr Spicer had left the employ of MRS. She continued right through until October 2009 to try to speak to Mr Moylan, but without success.
55. By early October 2009, the Smiths' patience with Mr Moylan was running out. When requested that month, the Smiths declined to roll over the $125,000 that Esined No. 10 had loaned to MCD Holdings. It was repaid to them in October 2009 together with interest.
56. Mrs Smith eventually got through by telephone to Mr Moylan in mid-October 2009. She requested the interest payments on the MIG loans which had stopped since May. She queried the lack of payment of interest or capital from the Wallalong Investment Trust and expressed her concern again about the decline in value of their investment in MFS. She also drew attention to the lack of interest coming from the Regional Land Property Fund. She generally received inconsequential answers from Mr Moylan, who suggested that all the entities in which they had invested remained "sound" and they had "plenty of assets". He otherwise parried their queries.
57. But her enquiries bore some fruit. They triggered MRS to send the Smiths a letter on 19 October 2009 apparently repaying interest of $21,204.25 on some of the loans that had been made to MIG. But the Smiths' capital was still outstanding from MIG.
58. Why was Mr Moylan so slow to respond? His conduct here repeats the pattern evident with all the plaintiffs about this time of doubling down and not returning phone calls and not explaining himself to them, when they started to question him. The only sensible inference to be drawn from this conduct, as widespread as it was, is that he was not answering their questions because he knew that he had no answer to give that was likely to satisfy them. Whilst on its own this may not be a basis to infer that he had been knowingly misleading his clients into these investments and did not want to be discovered, this behaviour with all the plaintiffs, together with a number of other indicators, does enable that inference to be drawn.
59. But between October and December 2009, the Smiths received correspondence in relation to the Regional Land Property Fund, MFS and City First Pacific suggesting that these entities were under investigation by the Australian Securities and Investments Commission ("ASIC"). All their trust in Mr Moylan was by now gone. The Smiths began to focus on the recovery of the money that had been invested through Esined No. 10.
60. Mrs Smith continued to chase Mr Moylan. She got through to him in February 2010 when he made promises: that MIG interest would be paid; that interest payments for the Regional Land Property Fund would resume in May; and that the other investments would come good. As will be seen, Mr Moylan had little proper basis for making these statements. But by then the Smiths did not believe him anyway.
61. In mid-April 2010, Mr Moylan went through the charade of informing the Smiths that he had prepared cheques for interest payments from MIG ready to give them and that all that was required was for Mr Michael Hill to return from leave to sign them. The Smiths did not believe this. It must have been a charade because no cheques were ever paid to the Smiths, long after Mr Michael Hill had returned. But it shows that Mr Moylan was prepared to parry his clients' legitimate enquiries with falsehoods, a small indication of what he was prepared to do at other times.
62. The Smiths demanded MIG's financial statements for FY09. And in late April they moved all their and Esined No. 10's accounting work from Moylan Business Solutions to a new business run by Mr Alan Spicer, Growth Wise.
63. The Smiths eventually questioned Mr Michael Hill, the original source of the recommendation to them of Mr Moylan, about all of these events. They complained to Mr Michael Hill about Mr Moylan. But Mr Michael Hill also assured them that "your investments are safe" and volunteered to go and speak to Mr Moylan. But after further conversations, some of them in the Smiths' home, relations between them and Mr Michael Hill also broke down entirely.
64. The Smiths were informed in late October 2011 that a liquidator had been appointed to MIG. None of their advances were repaid other than as are indicated above.
65. In summary, in the Esined Proceedings, Esined No. 10 atf the P & V Smith Family Retirement Fund claims the sum of $1,290,000. This claim is made up as follows: 1. Loans to MIG: Date Amount 1 December 2006 $100,000 9 March 2007 $100,000 29 March 2007 $100,000 4 May 2007 $100,000 5 July 2007 $200,000 2 November 2007 $100,000 3 March 2008 $80,000 26 September 2008 (to be swapped from WIT to MIG) $110,000 26 September 2008 $100,000 Total $990,000

1. Investment in RLPF: Date Amount 5 July 2007 $300,000 Total $300,000

1. The defendants dispute Esined No. 9's primary case against MRS in a number of ways that can now be analysed.
2. Challenges to the Smiths' Case. Mrs Smith was cross-examined to suggest that she and her husband knew what they were doing when investing in MIG. But the Court does not accept that she can be characterised as financially sophisticated.
3. The Court accepts for example that, as she says, she would not have signed up as a wholesale client of MRS had she known what that meant, compared with being a retail client. Mr Moylan did not explain the wholesale/retail client distinction in the form that he had his clients sign. He was misleading about other things. He was likely to have been deceptive about this as well. It was in his interests for them not to ask questions about it.
4. Mrs Smith was not interested in risky investments. She says she did not appreciate that land subdivision was risky and the Court accepts that as her honest opinion. Mrs Smith is to be accepted in all she says about what Mr Moylan did not tell her about these various investments. Had he given her more information, she is the kind of person who would have sought greater understanding and questioned him at a deeper level than she did.
5. Mrs Smith was cross-examined about the statement of advice that she and her husband received on 20 March 2007. She accepted in cross-examination that she understood the "risk/reward trade-off" referred to in the statement of advice and that growth assets brought with them more risk. But like Mr Davey, she and her husband regarded themselves as being well protected by Mr Moylan in cleaving to their objective of maintaining "capital stability" as "cautious investors", the risk category into which the Smiths were placed in the statement of advice.
6. Mrs Smith was cross-examined about a MIG "property update" said to have been provided to her and her husband in March 2009. She believes that she was given similar MIG investment documents for 2007. But the Court doubts this. The Court accepts her evidence on most matters. She did receive the 2009 MIG property update. But she is a very precise person. Is she and her husband had received similar documents in 2007 it is very likely that she would have kept them.
7. The MIG March 2009 property update told her that MIG was a vehicle used for investing in the projects at the Lawson Road property, the Algona Road property and in Charlestown Consulting. She was confronted in cross-examination with the apparent disconnect between the information in this property update showing that MIG was not a fixed interest fund like the other substantial funds identified in the statement of advice to the Smiths,and that MIG was conducting a residential subdivision development. It is clear from Mrs Smith's answers that she did not appreciate that disconnect at the time. She said "I can see that now, yes" but Mr Moylan's assurances made her believe "there would not be any problems with monies in case something went wrong". The Court accepts her evidence that Mr Moylan's recommendation made the investment for her "a different concept altogether" from property development and something that instead was "safe and secure". Mr Moylan's strategy was to de-risk these investments in the eyes of these clients and he succeeded. And it is consistent with that strategy the would not have given his client documents such as the March 2009 MIG property update before that date.
8. Nor did Mrs Smith address her mind as to whether or not MIG had the benefit of mortgage security. She felt she did not need to think about that kind of security because she had Mr Moylan's "safe and secure" assurance. After all Mr Moylan had been recommended to her by Mr Michael Hill. She said she would have "trust[ed] Mr Michael Hill", her solicitor, with "her life". Mrs Smith explained her philosophy about taking advice from professionals such as Mr Moylan this way: "Why do you go to someone for advice if you don't take it".
9. Mrs Smith was confronted in cross-examination with the Hardie Estates Property Fund information memorandum she received in March 2007, promising an annual return of 15%, and a further share of 50% of net distributable profits and conveying that the investment was dependent upon land development for success. But she explained and the Court accepts it as undoubtedly true in her case, "you believe what you were told by the person who is placing your money for you". To a large extent whatever was said in these documents came a distant second to her faith in Mr Moylan.
10. It was suggested to Mrs Smith that she appreciated that the document she received in March 2007 as recommending investment for "sophisticated investors". But in 2007, and at the time of hearing, she genuinely had no idea what a "sophisticated investor" was. It is clear that Mr Moylan did not convey to her what a "sophisticated investor" actually was. It was certainly never made clear to Mrs Smith, or indeed to the other plaintiffs, that by signing the sophisticated investor wholesale investor certificates, that they were being steered out of safer approved financial products and into other riskier products.
11. Mrs Smith agreed that she was given the Hardie Estates Property Fund information memorandum in March 2007. She was asked whether she read various parts of the documents that she signed certifying that she qualified as a wholesale client of the firm for the purposes of the Corporations Act. Mrs Smith doubted that the part of this information memorandum containing a wholesale client certificate was with the document that she signed. Whether or not it was with the document, it may as well not have been. Mr Moylan did not explain to her, or indeed any other plaintiffs, what "sophisticated investors" were. Had he done so, the Smiths, and the other plaintiffs in similar circumstances, would have remembered such an explanation because they would have baulked at such a description of themselves.
12. And Mrs Smith, being the precise witness that she was, would certainly have remembered such an explanation. The Court accepts that she did not personally tick any of the boxes in any property fund information memorandum to acknowledge that she was a "sophisticated investor". In the Court's view Mr Moylan was not anxious to point out to any of these clients that the gateway to these investments was that he would have to classify them as "sophisticated investors".
13. It is true that Mr Moylan had sufficient control of them as clients,due to their trust in him, that he probably could have talked them into almost anything however improbable. But none of them remember being apprised of and assenting to the concept of them being "sophisticated investors". This in the Court's view, is a sure sign, with witnesses as reliable as these plaintiffs, that no such explanation was given.

The Kauter Action

1. The Kauter family have operated Maitland Ready Mixed Concrete Pty Ltd ("MRMC") on the New England Highway at Rutherford (just west of Maitland) since late 1965. In the 1960s, MRMC was operated by Bernard Patrick Kauter and his wife, Nona Ellen Kauter, the parents of Mr Paul Bernard Kauter (Paul), and Mr Stephen Kauter (Stephen), who control Kauter Investments, the plaintiff in the Kauter action.
2. Mr Paul Kauter gave evidence in the Kauter action. He was clearly an honest, hardworking and dedicated businessman. He had done well financially through building up, along with his brother Stephen, the MRMC business that their parents had started. But Mr Kauter was not financially sophisticated in relation to stocks and shares. He did not have a real understanding of financial markets, as distinct from the private business with which he and his brother were experienced. For such sophisticated ideas he looked to Mr Moylan, his financial adviser. After meeting Mr Moylan in 2003, in time Mr Paul Kauter came to completely trust him. And his brother Stephen shared that trust.
3. Despite his obvious honesty, Mr Paul Kauter showed a degree of uncertainty and hesitation in the witness box. He was at times slow to comprehend and answer the questions asked of him. He often asked for questions to be repeated, because he could not follow the financial, legal or grammatical concepts in them. On the one hand, this made assessing his credibility difficult at times. But on the other hand, it strongly but indirectly confirmed his claim to lack of financial sophistication.
4. Mr Paul Kauter completed his secondary schooling in 1965 in Armidale and immediately commenced full-time work at MRMC. His brother, Stephen, completed his secondary schooling in 1981 and also joined MRMC straight after leaving school. In the early years, they helped their parents run the business. But their father died in 1998, followed by their mother in 2001. Since then, the two brothers have been the only two directors of MRMC and have continued to conduct its business together.
5. The Kauter brothers have not undertaken any other tertiary training since leaving school. They have a limited capacity to read financial accounts, sufficient for the operation of MRMC but not beyond that. They rely upon professional accountants to complete their financial accounts and tax returns.
6. Mr Moylan commenced giving financial advice to Mr Paul Kauter and his wife, Elaine, in the 1990s. After the Kauter brothers' parents died, Mr Moylan advised both Paul and Stephen Kauter about acquiring the land on which MRMC conducted its business through a superannuation fund to be set up solely for their and their families' benefit.
7. Until April 2003, MRMC was the trustee of the MRMC Superannuation Fund, which provided for the superannuation of all employees of MRMC. In that month a new superannuation fund was established on Mr Moylan's advice, the Kauter Superannuation Fund, with MRMC as its initial trustee. A Macquarie CMT was set up in the name of the Kauter Superannuation Fund. Mr Moylan commenced advising the Kauter Superannuation Fund on its investments. Some of these were directed towards a company Mr Moylan recommended by the name of Matrix Planning Solutions Pty Ltd ("Matrix"). Eventually Kauter Investments was incorporated in June 2004 and was appointed trustee of the Kauter Superannuation Fund.
8. The first transaction relevant to these proceedings, in which Kauter Investments was involved, was in August 2005 when Mr Moylan recommended an investment by Kauter Investments in the Regional Land Property Fund. Based on Mr Moylan's recommendation, the Kauter brothers proceeded to authorise an investment of $150,000 in the Regional Land Property Fund.
9. Mr Moylan recommended this investment to Paul and Stephen Kauter at the offices of MRMC in August 2005 in the following terms: "C. Moylan: It is a property fund run by Duncan Hardie. He is one of the biggest residential property developers in New South Wales. Hardie Estates Property Fund is developing land throughout the Hunter Valley and beyond. They are developing land at Tamworth, Armidale, Muswellbrook and other locations. An investment in Hardie Estates Property Fund will return 15%, which you will not get anywhere else. You will also receive in addition to the 15%, a profit on completion. P. Kauter: If we put in money, how long will it be tied up for? C. Moylan: Your money will be tied up for about 3 years but you can get it out earlier if you need to. I think you should invest about $150,000.00. lf you are happy to make that investment I will forward the paperwork to you to sign. P. Kauter: Is an investment in Hardie Estates Property Fund a safe and secure investment? C. Moylan: Yes, it is a safe and secure investment. It is an investment in land but you do not have to deal with either builders or sub-contractors. P. Kauter: Very well."
10. Mr Paul Kauter was comforted by Mr Moylan's assurance that this was a "safe and secure" investment. Mr Moylan saw Mr Paul Kauter as a naturally conservative investor. But on this occasion Mr Stephen Kauter said "I want equity guaranteed. I do not want to risk our equity."
11. On 15 August 2005, after a further statement from Mr Moylan that this "is a good and safe investment", the Kauter brothers signed the necessary paperwork with Mr Moylan's offsider at Moylan's Business Solutions for MRMC as trustee for the P & S Kauter Superannuation Fund to invest $150,000. The documentation showed that the P & S Kauter Superannuation Fund was authorising the transfer of the funds to Moylan's Business Solutions as trustee for the Cartel Investment Unit Trust, to acquire 150,000 ordinary class units in that unit trust. But the relationship between the Cartel Investment Unit Trust and the Hardie Estates Property Fund, into which the Kauter brother thought they were investing, was obscure, as will be seen from an enquiry subsequently made on the Kauter brother's behalf.
12. Mr Moylan's verbal advice was sufficient for Kauter Investments to make this investment. The Kauter brothers did not ask for, receive or expect further financial statements for the Hardie Estates Property Fund because they trusted what Mr Moylan said about the fund.
13. Kauter Investments plead that from approximately this time, in September 2006, that MRS and Kauter Investments orally contracted for MRS to provide a range of investment advisory and ancillary services to Kauter Investments for consideration payable to MRS. The Court concludes from the conversations up to this point of time, and the several invoices subsequently issued by MRS, that such a contract was made. Its terms are set out in the later analysis of the first limb issues.
14. But not long after the Kauter brothers made this investment, their long-standing accountant, Farrow Wyatt, queried the relationship between the Cartel Investment Unit Trust and the Hardie Estates Property Fund. It appeared that the trust deeds of the Cartel Investment Unit Trust entitled the Kauter brothers, as unit holders in the Cartel Investment Unit Trust, to the income from the Hardie Estates Property Fund, but investors were not obviously entitled to a return of capital.
15. Farrow Wyatt never received a satisfactory answer to their very proper query. Lack of proper definition of the relationship between the Cartel Investment Unit Trust and the Hardie Estates Property Fund was a talisman of Mr Moylan's often sloppy paperwork. On the Kauter brothers' instructions, Farrow Wyatt followed this up and fixed it. But Mr Moylan refused to take responsibility for the financial cost of the rectification, leading to a fracture in the Kauter brothers' relationship with Mr Moylan.
16. In October 2006, MRMC made a loan of $300,000 to Ms Trudy Crittle. This loan does not constitute one of the claims in the Kauter action, because ultimately it was repaid, although not before problems had been encountered in recovering accrued interest over several years. The loan to Ms Trudy Crittle had been discussed on a number of occasions before it was finally made.
17. In August 2006, Mr Moylan introduced the Kauter brothers to the idea of an investment in MIG in its role as trustee of the Bolwarra Heights Investment Trust. At a meeting at the offices of MRMC, Mr Moylan spoke on the following terms to the Kauter brothers on this subject: "C. Moylan: Moylan Investment Group Pty Ltd is my company of which l am a director and shareholder. MIG is the Trustee of the Bolwarra Heights Investment Trust. Through that trust l am involved in a property development located at Mount Harris near Bolwarra Heights. The land comprises approximately 41 hectares and involves a 3 stage residential land development. Both my father and I have invested money in the development. It would be a good investment for your super fund to invest in. As you would be investing in real property through MIG you would have no need to worry about having to deal with builders or sub-contractors. [And upon Mr Moylan showing a plan of the proposed subdivision] S. Kauter: How much would you recommend that we invest? C. Moylan: As the return you are presently receiving from Matrix is only X%, I suggest that you invest $500,000.00. P. Kauter: What interest would MIG pay and how long will the monies need to be invested? C. Moylan: MIG will pay interest at 9% per annum paid quarterly. Your money will only need to be invested for a period of 12 months, but it can be extended if you wish but it will only need to be invested for a maximum of 2 years. P. Kauter: What is MIG? C. Moylan: MIG is a company which I have created. I am its sole director and shareholder. As l said before it is the Trustee of a Trust which will invest in Bolwarra Heights. That is why it is called the Bolwarra Heights Investment Trust. P. Kauter: How secure is it? C. Moylan: Your investment will be secure as there will be directors' guarantees. P.Kauter: Do you recommend we invest in it? C. Moylan: Yes, I think you should invest $500,000.00 as it will give you a much better return on your investment than you are presently getting. P. Kauter: Our account only has about $320,000.00 in it, which is what we have already discussed is going to Trudy Crittle. C. Moylan: Yes but what I suggest you do is to withdraw monies out of the Matrix account and use that money to invest in this development. P. Kauter: Very well if you think it's a good investment. C. Moylan: Yes I do. I think you should do it."
18. Although Mr Moylan's explanation at this meeting included reference to there being directors' guarantees as security for the investment, the Kauter brothers did not understand the potential insecurity of a personal guarantee, being limited by the assets of the directors. Rather, they saw Mr Moylan's fundamental personal assurance of security as being bolstered by the personal guarantees being mentioned.
19. This conversation prompted Kauter Investments to make two advances to the Bolwarra Heights Investment Trust: one very small one on 31 August 2006 and a more substantial one on 20 October 2006.
20. The earlier investment is little mentioned in the evidence other than through the document that records it, a loan agreement between Kauter Investments and the Bolwarra Heights Investment Trust. This loan agreement stands out from all other documents advanced by the plaintiff in the three actions. Dated 31 August 2006, it is signed by Mr Moylan himself on behalf of the Bolwarra Heights Investment Trust, rather than by MIG, the trustee of that trust.
21. The terms of this 31 August 2006 document barely resemble a conventional loan agreement. The document records that the Bolwarra Heights Investment Trust as borrowing the sum of $6,739.53 from Kauter Investments. But the "termination date" under the contract is not a fixed term. Instead, it is defined as "on completion of the project between Bolwarra Heights Investment Trust and Bolwarra Heights Property Trust". The borrower acknowledges that Kauter Investments is entitled to charge the borrower for "the repayments in accordance with the terms of this agreement". The "repayments" are in turn defined as meaning "the payment made on the termination of the line consisting of the initial $6,739.53 plus interest of $93,260.47". Thus for an initial investment of $6,739.53 Kauter Investments is entitled to a spectacular return, provided it will wait out the development phase of the Bolwarra Heights land.
22. Mr Kauter must have appreciated that this was a speculative investment rather than a loan. Little is said about it in the evidence. Its existence might be thought to damage the plaintiffs' case against MRS. It is very different in character from all the other transactions and involves a very small amount of money compared to all the Kauters' other investments. It tends to strengthen the Kauter Investments case that the Kauters were not prepared to invest significant sums in anything they regarded as speculative. But they must have regarded this investment as speculative, known the risks fully and been prepared to proceed on the basis they might lose their money. They can hardly be said to have depended upon Mr Moylan's advice in respect of this sum. Given the expected rate of return, the inference could not be otherwise. For these reasons this sum will be disallowed and cannot be recovered in the Kauter Investments case.
23. Shortly after this August 2006 conversation about the Bolwarra Heights Investment Trust, in mid-October 2006, Mr Paul Kauter instructed Matrix to withdraw $500,000 to be paid to the Bolwarra Heights Investment Trust. This transaction went through on 20 October 2006, the same day that a loan agreement was signed in which Kauter Investments advanced $500,000 to the Bolwarra Heights Investment Trust.
24. The Court accepts Mr Paul Kauter's evidence that at the time of signing this loan documentation that MIG was not mentioned on it; that it only referred to the Bolwarra Heights Investment Trust; and that it was unsigned on behalf of that counterparty. The Kauter brothers were not given an opportunity to read the loan agreement, or to keep a copy. They did not obtain a copy until 2008.
25. By April 2008, the Kauter brothers became dissatisfied with aspects of Mr Moylan's advice. They took the view that poor documentation of the loans he had recommended had cost MRMC, and the Kauter brothers themselves additional accounting fees, for which they sought recovery. But after being verbally pressed in August 2008 to reimburse MRMC for these costs Mr Moylan at first apparently agreed to do so. But he ultimately did not take responsibility for reimbursement. As a result, the relationship between Mr Moylan and the Kauter brothers deteriorated.
26. It is not surprising therefore that in April 2009 the Kauter brothers closed the Macquarie CMT. And on 1 May 2009, Mr Moylan sought to have the Kauter brothers sign supplemental deeds to amend the existing loan agreements, as he had with the Daveys and the Smiths. But the Kauter brothers had lost trust in Mr Moylan by then and refused to do so.
27. Kauter Investments did not receive any payments of interest on its advances either to MIG or the Regional Land Property Fund after October 2009. Nor have the capital sums advanced been repaid.
28. In the Kauter action, P & S Kauter Investments atf the Kauter Superannuation Fund claim the sum of $666,739.53. But the Court has disallowed the sum of $6,739.53, otherwise allowing the rest of the claim. The total claim, but showing what has been disallowed, is set out below: 1. Loans to MIG or BHIT: Date Amount 31 August 2006 MIG atf BHIT $6,739.53 20 October 2006 BHIT $500,000 Less Disallowed claim -$6,739.53 Total $500,000

1. Investments in in RLPF: Investment Date Amount 16 August 2005 $150,000 Total $150,000

1. The total amount claimed by Kauter Investments in these proceedings, and allowed by the Court, correctly adding the components of the Kauter claim, is therefore $650,000. There is also a claim for unpaid interest and costs.
2. The defendants attempt to dispute the Kauters' primary case against MRS in a number of ways that ultimately failed but can now be analysed.
3. Challenges to the Kauters' Case. In a defence approach similar to that fielded against the other plaintiffs, Mr Paul Kauter was cross-examined to suggest that he and his brother, Stephen, well knew what risks they were taking when they invested in MIG and the Regional Land Property Fund.
4. Mr Paul Kauter had only a vague understanding of Mr Moylan's advisory relationships. Early in his cross-examination Mr Paul Kauter was asked about his understanding of Mr Moylan separating his business from Matrix. Mr Paul Kauter showed little appreciation of what that involved and whether Mr Moylan had continued to be involved with Matrix when advising Mr Paul Kauter and his wife.
5. Mr and Mrs Kauter received a statement of advice dated 30 June 2006 from Retirement Planning Specialists. It advised them to invest in an instalment warrant product called "Next Instalment", which used the mechanism of instalment warrants to provide the degree of leverage for the purchase of a portfolio of the 20 largest companies on the ASX over a five-year period.
6. Mr Paul Kauter was cross-examined about this document. It made what turned out to be exaggerated claims about Mr Paul Kauter's financial sophistication. It said for example: "Your risk profile suggests you can accept a significant equity (shared) based solution.You tend to have a positive view of the Australian sharemarket and in particular, the leading stocks. You are now familiar with the concepts of leverage/gearing.You understand the fundamental concepts of leveraged financial instruments such as instalments and warrants as derivative instruments.You have already taken steps to gain exposure to other forms of growth style investments. You are prepared to accept some extra risk to improve the potential efficiency of your investments in order to achieve your objectives, particularly if there is some protection for your position."
7. Although Mr Paul Kauter's investment history and outlook suggested he was open to investment in the stockmarket, documents such as this did not truly describe his financial competence, which his cross-examination showed was far less sophisticated. He did agree at the theoretical level that he would accept "some extra risk" to improve investment efficiency. But he was never given any clear idea of the actual level of risk associated with the investments Mr Moylan was recommending here, which were not at all consistent with "some protection for your position".
8. Mr Paul Kauter admitted in cross-examination that he did understand that Mr Moylan was not personally guaranteeing the performance of investments that he recommended to clients such as the Kauters, nor was he guaranteeing that there would not be a downturn in the property market. But this kind of cross-examination of Mr Paul Kauter and the other witnesses is of limited value. It does not establish that they would have proceeded with these investments had they understood their true risks after full disclosure. Instead Mr Paul Kauter proceeded on limited knowledge, because "we trusted the man".
9. The cross-examination of Mr Paul Kauter also sought to establish that with respect to Kauter Investments' advances to MIG as trustee the Bolwarra Heights Investment Trust that Mr Paul Kauter was aware that it was a different kind of riskier investment, only supported by directors' guarantees. He gave a number of answers acknowledging his appreciation of higher risk but they were all qualified by his statement, "but he guaranteed that'd be a safe investment and that is what we went on". Mr Paul Kauter's outlook was that Mr Moylan's guarantees implicitly underwrote these investments. Mr Paul Kauter accurately and honestly described his outlook on Mr Moylan's assurances in this way: "He gained our confidence and I am not into this type of stuff myself, I am a truck driver, we work hard, work 24 hours a day, eight days a week, we put our money aside, we pay our bills and we trust other people to do that type of work experts… This is beyond me, it is over my head".
10. Mr Paul Kauter did understand in general terms that some investments were riskier than others and that banking institutions were less risky than investing in small ventures, such as residential property subdivisions, and that to get a better return he would have to accept higher risk. This was always qualified by a deep trust that Mr Moylan would never steer him into any investment involving substantial risk.
11. The defendants also point out that in the Kauter action, Mr Paul Kauter did not have the benefit of an express promise that the investments that he was advised to go enter were "safe and secure". But he was told that the recommended investments were "a good investment" and in the context in which Mr Moylan was advising Mr Paul Kauter, Mr Paul Kauter was entitled to assume that the investments recommended were low risk.
12. The point is also taken by the defendants in relation to proof of causation in the Kauter action that the early investments made by the Mr Paul Kauter may not necessarily have been other than a "good investment" at the time they were made. But the defendants' own case really answers that submission. The structure of the investments made by all plaintiffs to MIG was that Mr Moylan was recommending short term loans to MIG which were then on lent to speculative property investments on which return would only be realised, if at all, in the long term. The likelihood of repayment of the short-term MIG loans was always a risk because of the on lending to the property projects. This structural problem existed in these recommended investments right from the beginning.

The Manning Action

1. Mr Graeme and Mrs Nancy Manning have long conducted a business in Maitland Road, Sandgate, through a company, Sandgate Autos Pty Ltd ("Sandgate Autos"), which specialises in the purchase and sale of second-hand motor vehicles. After leaving school in 1970, Mr Manning undertook employment as an apprentice, then qualified as a trade motor mechanic. He and a business partner acquired the business of Sandgate Autos in 1983 but his partner sold out to Mrs Manning in 1990. Thereafter the Mannings worked together as husband and wife business partners in the business.
2. In May 1994, the Mannings set up the Sandgate Autos Superannuation Fund, with Sandgate Autos as its trustee. Mr and Mrs Manning are, and have always been, the only members of the Sandgate Autos Superannuation Fund.
3. The Mannings also control Jalin, which they incorporated in 1996. When the Mannings were preparing to retire and to sell Sandgate Autos to their son, they arranged for Sandgate Autos to retire as trustee of the Sandgate Autos Superannuation Fund and for it to be replaced by Jalin.
4. Jalin is also the registered proprietor of a number of investment properties in its capacity as the trustee of the Manning Unit Trust. All the issued units in the Manning unit trust are held by the Sandgate Autos Superannuation Fund.
5. Mrs Manning completed the school certificate in 1970. She did not pursue tertiary education, but from 1990, she returned actively to assist her husband in the conduct of the Sandgate Autos business. Both Mr and Mrs Manning relied on the services of professional accountants to prepare the financial statements for Sandgate Autos.
6. Both Mr and Mrs Manning gave evidence in these proceedings. They were most impressive witnesses. Over a number of years, they sought after the best available financial advice. Their need to seek more specialist superannuation and investment advice had led them to Mr Moylan in the early 1990s.
7. Mr Manning was an honest, helpful and direct witness whose evidence the Court can almost entirely rely upon. He made appropriate admissions that recognised that MIG was different from other widely marketed institutional investments. Mr Manning was quite candid in admitting that he was aware of the possibility that he might lose his capital if the risks associated with his investments were realised. And he understood that there were risks involved in the staged development of residential land during the global financial crisis. But he, like the other clients of Mr Moylan, had a high degree of trust in Mr Moylan's advice and he did not conceive that Mr Moylan would give advice that would place his family in a situation that might involve any investment risk.
8. Mrs Manning was an honest and reliable witness who was always ready to try and assist the Court. Although she had been involved in the book keeping side of Sandgate Autos, her knowledge of financial markets and broader investment risks and strategies was quite limited. She only had a bare conception of the trade-off between risk and return. In a general sense, she was aware that all investments carry some risk. But her fundamental mindset was that she and her husband trusted that Mr Moylan would never give advice that would place at risk her or her family's property or investments.
9. The Mannings had initially consulted Mr Moylan when he was giving investment advice at Matrix Planning Solutions in the 1990s. But in mid-2005, some dissatisfaction with the performance of their previous accountant led them to transfer all the accounting for Sandgate Autos to Moylan Business Solutions. Mr Moylan told them about his setting up of Retirement Planning Specialists and being the authorised representative, later to become MRS, to give specialised financial planning advice under an Australian Financial Services Licence.
10. Jalin's Loan to Ms Crittle. The Mannings' first investment at Mr Moylan's suggestion was in early 2006, a loan to Ms Trudy Crittle. In or about early 2006, the Mannings met with Mr Moylan at the MRS Charlestown office. In the course of that meeting, the following exchange occurred: "C. Moylan: You have over $120,000 in surplus funds in your super account. I can get you a rate of interest of 13.5% which is better than what you are getting from your bank. The loan will be for a client of mine who is purchasing a unit at McMahons Point, Sydney. She has the funds to cover the purchase but she has a number of investments where she is getting a higher rate of interest than she will be paying you. She does not want to break that investment - because she will lose some of the interest. G. Manning: How long will the loan be for? C. Moylan: About two years. G. Manning: What security will there be? C. Moylan: The loan will be quite safe and secure as I will hold the deeds. G. Manning: When will interest be paid? C. Moylan: As you don't need it presently it will all be paid to you at the expiration of the loan. G. Manning: Do you think it's a good investment? C. Moylan: Yes, I do. G. Manning: How much should we invest? C. Moylan: I would suggest that the superfund invest $120,000. G. Manning: Okay. What do we need to do? C. Moylan: I will need to prepare a loan agreement which you will need to sign. You will also need to pay $120,000 into Turnbull Hill Lawyers trust account as they are the solicitors acting for her on the purchase. G. Manning: Very well. C. Moylan: I will let you know when it's ready and you can come in, and sign it. You can bring a cheque in then. G. Manning: Okay."
11. The pleadings in the Manning action contend that from approximately April 2006, MRS orally contracted with the Mannings, Jalin and the Maytoms, for MRS to provide a range of investment advisory and ancillary services to them for consideration payable to MRS. Based on the existing relationship of these parties with MRS, the conversation up to this point of time and subsequent invoicing practices, the Court infers that the contracts alleged were made from about this time.
12. On 31 October 2006, the Mannings signed loan documentation to advance the $120,000 to Ms Crittle for a term of 24 months at 13.5% interest; and the sum was transferred out of the Sandgate Autos Superannuation Fund Account maintained by Jalin on 1 November 2006. When the Mannings signed, Mr Manning asked about the "backup security" for the loan and was told again by Mr Moylan "this loan is safe and secure" and that he would have the deeds to the property. The loan document to Ms Crittle is wrongly dated 13 October 2006. The Court accepts it was signed on the day that the Mannings say that it was signed, on 31 October 2006. In a pattern which is already familiar with the other plaintiffs, the Mannings were not given an opportunity to read the document, nor were they left with a copy.
13. The loan to Ms Crittle was not secured. But from what they were told, the Mannings were entitled to infer that it was. Mr Moylan was, in substance, representing that there was an equitable mortgage being taken over Ms Crittle's property due to his retention of Ms Crittle's title deeds. But the loan agreement itself says nothing about any security being taken over Ms Crittle's property and the Court is in no position to infer on the evidence that Mr Moylan did actually take possession of Ms Crittle's title deeds. In later financial statements, MRS treated the loan as unsecured. And on the available evidence, that appears to be the true situation. But that is not what the Mannings believed. MRS sent portfolio review documents to them from time to time that recorded the loan to Ms Crittle as unsecured, but the Court accepts that they did not notice this anomaly and continue to believe on the basis of what they had been told: that the loan was secured.
14. Approximately 24 months later, Mr Moylan persuaded the Mannings to roll the loan over and to capitalize the outstanding interest. By 28 February 2009, their portfolio review showed that the principal and interest, in the sum of $146,985, was outstanding on the Crittle loan.
15. The Crittle loan was never repaid despite the Mannings' attempts at recovery. A person by the name of Ms Trudy Crittle did purchase a property in McMahon's Point in November 2006 but it was sold in December 2012. How the proceeds of sale were applied is unknown.
16. Jalin Invests in the Regional Land Property Fund. The Mannings' next substantial investment, based on Mr Moylan's recommendations, was an advance into the Regional Land Property Fund in October 2007. The investment was broached in discussion, when they met Mr Moylan at his Charlestown office: "C. Moylan: You presently have some excess funds in your super fund account. I suggest that you invest some of that money in the Hardie Estate Property Fund which is buying and developing residential land at Branxton and other places in the Hunter Valley, Grafton near the highway bypass, Tamworth and Singleton. An investment in Hardie Estate will provide a return of 15% as well as a profit on completion of the project. l and my father Derek have already invested in it although my father has put in a lot more money than l have. G. Manning: Okay, but is it secure? C. Moylan: Yes, it's a secure investment in land. Not only does it provide a good rate of return, but a rate of return much better than you are getting from Matrix or the bank. It is also an investment in real property but without having to deal with builders or subcontractors. G Manning: How much do you suggest we invest? C. Moylan: As you presently have approximately $200,000 in your super account with more following the distributions in the near future l would suggest that you put $200,000 into Hardie Estate's which is now known as Regional Land Property Fund. G. Manning: If you think it's a good investment then we will go ahead. C. Moylan: Yes, I think you should do that. I will prepare the application."
17. Mr Moylan's assurance of security was important to the Mannings with the return of 15% and was the reason they proceeded with this investment. They signed an application form on behalf of Jalin on 23 October 2007 to acquire 200,000 units for $200,000 in the Regional Land Property Fund. The $200,000 was transferred out of Jalin's account on 26 October 2007.
18. Shortly after completion of the Mannings' first investment in the Regional Land Property Fund, Mr Moylan persuaded them to take out a line of credit in their own names with the ANZ Bank in the sum of $900,000. Mr Moylan explained to them that this was on the basis that they would be paying interest at 6% to the bank but would be able to earn more than that rate of interest on the investments that he was recommending, so they would be able to profit on the margin. In February 2008, they proceeded with this structure, drawing down $600,000 and investing it with BT.
19. In February 2008, the Mannings were discussing with Mr Moylan their potential superannuation contribution for FY08, when he suggested that Jalin should invest another $150,000 into the Regional Land Property Fund. He assured them that this "investment will be on the same terms as before", implicitly referencing again his previous assurances of security of their capital. They gave Mr Moylan a cheque for $150,000. This was not a Jalin cheque but was drawn on the line of credit. In substance, it represented a superannuation contribution of $150,000 to Jalin and a simultaneous authorisation for Jalin to invest this sum in the Regional Land Property Fund.
20. The Mannings signed an application form but once again, in the usual pattern, they were not given time to read the application form, nor were they left with a copy. They did not acquire copies of these application forms until 2012, when they discussed with Mr Moylan the return of their investments. As will be seen, in relation to the second limb issues, they made discoveries about false information that Mr Moylan had put in these application forms.
21. Sandgate Auto Superannuation Fund received expected distributions of interest from the Regional Land Property Fund until January 2009, but no further payments were received after that. Throughout 2009, the Mannings queried as to why no interest had been received and they were told "everything is fine". Mr Moylan blamed the global financial crisis as making "things more difficult" but recommended that they "just leave it as it is". They did not seek to retrieve their investment at that point, largely because of their continuing trust in Mr Moylan.
22. Even a further series of letters from the manager of the fund, Regional Land, in December 2009 and May 2010, identifying cash flow difficulties in the fund, and ultimately the appointment of a receiver to Regional Land, still resulted in assurances from Mr Moylan that it was "a good investment… you have to hold on" and "do not worry". That they did hold or is testament to their continuing trust in Mr Moylan, even then.
23. But on 22 November 2010, Regional Land forwarded to Jalin a notice of a proposal to terminate and wind up the Regional Land Property Fund. The Mannings became concerned that they would lose their investment. It was at this point that Mr Moylan revealed to the Mannings for the first time that he and his father were also investors in the Regional Land Property Fund. He encouraged them to keep faith, saying, "[s]it tight. Dad and I have money in there as well. The land is still there."
24. Jalin Invests in Wallalong Investments. Despite the non-payment of interest by the second half of 2009 from the Mannings' Regional Land Property Fund investment, Mr Moylan was still recommending further investments to them. When they were signing their tax returns at the Charlestown offices of MRS in early September 2009, Mr Moylan made the following recommendation to them: "C. Moylan: I have been reviewing the position of the super fund. You have some excess funds in its bank account. I can get you a good rate of interest better than you are getting from the bank. Wallalong Investments has purchased a parcel of land at Wallalong near Hinton. It is a staged development of residential land. They need to get development consent and they need money to get on with it. The development application is presently with Council. The adjoining parcel of land has already been approved so there is no reason why this DA won't be approved. It is a secure investment as we hold the deeds. G. Manning: What is the interest that it will pay? C. Moylan: Wallalong will pay 13.5% per annum paid quarterly. I think the super fund should invest $100,000. It is not a long term investment as you will get your money back by the end of January next year. The interest will be capitalised and paid at termination. G. Manning: Do you recommend it? C. Moylan: Yes, it is a good and safe investment from which you will earn a good return. You should invest $100,000. G. Manning: Okay, go ahead. C. Moylan: Very well. I'll prepare the necessary documents."
25. Once again, the Mannings focused on Mr Moylan's promise of security which was central to their decision to proceed. On 15 September 2009, the loan agreement from Jalin to Wallalong Investments was signed in the usual pattern of events. Although the funds were paid out of the Mannings' line of credit account with the ANZ Bank, they were a superannuation contribution which Jalin then advanced to Wallalong Investments.
26. The loan was unsecured, and provided for the payment of interest at 13.5% and provided for the repayment of the loan by 31 January 2010. Although this interest rate was higher than was obtainable through bank deposits, the Mannings were comforted by Moylan's assurances of the security of their capital despite the higher interest rate agreed.
27. The Mannings were expecting their Wallalong Investments loan to be repaid as promised on 31 January 2010. But upon the assurance that it was a "good investment" and things were just taking "a little longer to get underway", they gave authority to rollover the investment until January 2011. Once again in January 2011, they were induced to roll it over again. They still maintained faith in Mr Moylan. Proof of that is the fact, as will be seen below in the next section, that later in 2011 they were still prepared to make advances to MIG upon Mr Moylan's recommendation.
28. Jalin and the Mannings Make Advances to MIG. As with the other plaintiffs, the Mannings made substantial loan advances to MIG. Only one of these was made through Jalin, the first, in the sum of $75,000 on 20 March 2009. The Mannings made the balance of the loans to MIG, in the total sum of $720,000, directly between April 2010 and March 2011.
29. In March 2009, when the Mannings were seeking advice from Mr Moylan at the Charlestown office, he pointed out that Jalin had in excess of $75,000 in the superannuation fund which could be invested in MIG to achieve a return of 9% quarterly. To the Mannings' query about what MIG was he said: "MIG is my company. It lends money out on short term secured loans for residential property development. As such it is a good safe investment in land whilst you do not have to deal with developers or builders."
30. Mr Moylan reinforced his description of MIG lending on security to third parties several times in the conversation, emphasising: "[i]t is a secure loan. I will have the deeds to the land. If it ever gets into problem or falls over you will have access to a three blocks that you can sell off. You can then recoup your money out of those blocks."
31. The Mannings agreed to proceed and signed the documentation on 20 March 2009 in the usual pattern of events, without the Mannings having time to read the document and without them being left with a copy at the time.
32. From April 2010 to March 2011, the Mannings made four more advances totalling $720,000 to MIG, namely on 14 April 2010 ($90,000), on 23 December 2010 ($65,000), on 25 October 2010 ($215,000), and on 21 March 2011 ($350,000). Among all the plaintiffs' advances, these loans to the Mannings were remarkable because they were made so late, well after MIG was in financial distress.
33. On most of these occasions, the Mannings signed a loan agreement between themselves and MIG to authorise the advance to MIG in a similar form to the loan agreements that had been signed by other plaintiffs, when making advances to MIG. In each case the Mannings advanced the money themselves under these loan agreements.
34. These other loan agreements were signed in similar circumstances in which the usual pattern of events concerning the signing of the documents was repeated. They were for varying terms but all for an interest return of 9%. But the signing of the agreements, Mr Moylan provided a reaffirmation that they were a "good, safe and secure investment". This reaffirmation was either express or implied from previous representations made to them. The 14 April 2010 loan agreement for $90,000 was preceded by a discussion in which Mr Moylan reassured them that this investment would be "the same as for your investment of $75,000 late last year". The Mannings expected that all the subsequent investments were being recommended on the same basis and were each a "good, safe and secure investment".
35. The same occurred with the next investment of $65,000 on 23 December 2010 ($65,000). But on 25 October 2010, when funds were unexpectedly returned to the Mannings by their son and daughter-in-law, they accepted Mr Moylan's recommendation that they invest a further $215,000 from a BT Wrap Account in MIG. On this occasion they did so without signing any loan agreement.
36. The final investment they made in MIG was consequent upon the sale of an apartment they owned at Hawks Nest on coastal New South Wales. In March 2011, Mr Moylan advised them to set aside some of the proceeds of sale of the Hawks Nest apartment, so they could be ready to pay capital gains tax, which would not be due until May or June 2012 at the earliest. As by March 2011 the couple had experienced problems with the Regional Land Property Fund, Mr Manning, not surprisingly, thought that these proceeds should go in "a big secure bank". Mr Moylan indeed recommended to them that the funds be deposited with Macquarie Bank.
37. But Mr Moylan persuaded them on 21 March 2011 to "make the cheque to MIG" on the spurious grounds (which the Mannings nevertheless accepted) that: "Macquarie Bank is a commercial bank and any investment in it has to be through a business. MIG will invest your money with Macquarie Bank."
38. So they went ahead and transferred $350,000 from their own names to MIG. They did so in the expectation that the money would be applied by MIG and placed on deposit with Macquarie Bank. No loan agreement appears to have been signed with respect of this investment either, but it may be inferred it was an unsecured loan to MIG in the sum of $350,000 for the stated purpose.
39. Mr Moylan did not cause MIG to deposit the $350,000 with Macquarie Bank. Instead, without telling the Mannings, he applied the funds to invest in residential property at Clarencetown. In the Court's view, this was a deliberate misapplication of these funds. Mr Moylan's calculated representation that the money would be placed with an authorised deposit taking institution, such as Macquarie Bank, was a significant inducement for the Mannings to advance this money, as they did.
40. The Mannings did not find out this is where the money had gone until a face-to-face meeting they arranged with Mr Moylan on 1 November 2012. The Mannings and their son and daughter-in-law confronted Mr Moylan at this meeting in the MRS offices about what happened with the $350,000, the $90,000, the $215,000 and the $75,000 they had invested in MIG together with other monies that had been invested on behalf of Mrs Manning's parents. Mr Moylan did not have a satisfactory answer for them, but he kept implausibly denying that the funds had been lost. This meeting is dealt with in more detail below.
41. The possibility of investment in property development had certainly been mentioned to the Mannings in relation to the $75,000, the first sum they advanced to MIG. But their conversations with Mr Moylan about the subsequent advances were non-specific and Mr Moylan must have appreciated that they were assuming from their previous statements to him that their money was safe and secure and not being deployed on any basis other than that their principal would be readily available to them when required.
42. The Maytoms' Estates Make Advances to MIG. Mrs Manning's parents, Roy and Joan Maytom, were sufficiently elderly in 2004 for the Mannings to assume control of their financial affairs pursuant to an enduring power of attorney executed in 2003. Mrs Maytom was admitted to a nursing home in 2010 and her husband in 2013. But there were nursing home fees to pay and increased care expenses for both of them. The Mannings wanted to wisely and safely invest the Maytoms' money during this period of uncertainty.
43. They went to Mr Moylan in March 2011 seeking advice on investments on behalf of the Maytoms. Not surprisingly, in respect of this money the Mannings specifically insisted that "any investment is secure". Mr Moylan agreed and said that MIG would take $125,000 for a deposit into Macquarie Bank. This was done on the pretext of an investment in MIG first, as he had done with the other monies he said would be invested with Macquarie Bank. The funds were deposited with MIG on 21 March 2011.
44. A further, $100,000 was deposited on 23 May 2011 on the same basis, along with the same promises of security and Mr Moylan's recommendation that this was an appropriate investment for them which would give a good return. The Mannings signed loan agreements in the usual form to send this money to MIG. But the money was misapplied and not deposited with Macquarie Bank.
45. The Mannings' Final Demands. At the 1 November 2012 meeting, Mr Moylan admitted to the Mannings what he had known all along: that the $350,000 had gone from MIG into a property development at Clarencetown. Mr Moylan explained that the remaining funds invested in MIG, the $90,000, the $215,000 and the $75,000, had all gone into the Bolwarra Heights land. Mr Manning reminded Mr Moylan that he had wanted the "money to be kept liquid, so I could get it".
46. This was a hostile meeting; one Mr Moylan could not have forgotten for a long time. Mr Manning was demanded information about the $350,000 from the sale of Hawks Nest, pointing out that the Mannings' mandate to MRS was "it should have gone to Macquarie Bank. You told us it was going to Macquarie Bank and the interest was to paid to us". Mr Manning then followed up, "Where is it?", expressing concern that he could not see any bank account with that money in it. Then he asked "Where is the interest?", as the Mannings had been planning to pay their capital gains tax on the sale of Hawks Nest from the interest. In response to an assurance from Mr Moylan that "each transaction is documented", Mr Manning expressed overt scepticism "I can't see it here".
47. Then Mrs Manning demanded "Where is my parents' money?". She too complained about Mr Moylan's breach of instructions, saying "It was supposed to go into Macquarie Bank with the interest to be paid quarterly to meet their living expenses". She was concerned that no interest had been received to meet those expenses. Mr Moylan assured her that the $125,000 "was taken to invest". Mrs Manning responded quickly, "No way. I wouldn't do that with my father's money. It was all meant to be in Macquarie Bank earning interest".
48. Mr Manning also said at the 1 November meeting, "I am told that our investment in Regional Land has gone" and "I am told that MIG has folded and that we have lost all our money that we invested in it". To that Mr Moylan explained that on MIG's liquidation MCD has been appointed as the new trustee to replace MIG and their investments would be protected from MIG's liquidator. Mr Manning was unconvinced and responded "Well we want our money back".
49. No one in Mr Moylan's position could have left this meeting without understanding that the Mannings were directly accusing him of misapplying their funds, contrary to their instructions and apparently doing so deliberately. The meeting lasted 2 hours in part because Mr Moylan was not providing satisfactory answers.
50. At the end of the 1 November meeting Mr Manning said he wanted to come back to the office, "to see all the documents". That subsequent meeting took place on 5 November. This time Mr and Mrs Manning went without their son and daughter-in-law. This second 2 hour meeting was equally hostile.
51. Mr Manning made direct demands for payment at this 5 November meeting. The Mannings demanded back the money advanced to Ms Trudy Crittle and were told "We have a mortgage over the property" and "You will have your money within 28 days". There is no evidence of there being a mortgage in the Mannings' favour over any of Ms Crittle's land and the Court infers that one was never executed.
52. The Mannings escalated their questions to Mr Moylan at this meeting. Mr Manning asked about what had happened to each of their advances. That culminated in the following exchange: "G. Manning: What happened to the $75,000? C. Moylan: That went to MIG and into the Algona Road development. G. Manning: The liquidator has told me I will be lucky to get 22 cents in the dollar. What happens if this money is not paid? C. Moylan: Then I have a PI policy and presumably there will be a class action against me."
53. The Mannings continued to pay intense attention to Mr Moylan. On 7 November 2012 they telephoned him demanding certain documents that he had promised them. Mr Moylan said Ms Sweeney would be organising them. The Mannings came in the next day, 8 November and spoke to Ms Sweeney but she had only a few unhelpful documents to give them.
54. In the week commencing Monday 12 November the Mannings again arranged to go to the MRS offices in Charlestown and meet Mr Moylan. They repeated their demands. Mr Moylan promised them various moneys by the end of November. The following important exchange admitting the funds had been misapplied occurred at this third meeting: "G. Manning: You told us this money was going into Macquarie Bank but it went sideways into these deals. C. Moylan: I apologise for that. G. Manning: We thought it was invested. We couldn't' afford to lose it. C. Moylan: It's not lost. It is secured by the land. Some of it is sitting in a trust account. G. Manning: It's supposed to be sitting in a bank. C. Moylan: You wouldn't have made as much. G. Manning: We didn't know anything about it. N. Manning: We trusted you."
55. On 28 December 2012 the Mannings received the sum of $100,000 being repayment of certain loans to MBS, which are not the subject of claims in these proceedings. And then in early February a sum of $7,131 in interest was received. But apart from that none of the other promised money had been received. From no later than the first week of February 2013 Mr Manning continued to telephone Mr Moylan to enquire about repayment but could not get through. The Court infers that Mr Moylan was aware of these phone calls and was deliberately not making himself available on the telephone.
56. When Mr Manning eventually got through to Mr Moylan in March 2013, he arranged what was to be a final meeting at Mr Moylan's office, which took place on 13 March 2013. The meeting was unsatisfactory. Mr Moylan, among other things, said to the Mannings at this meeting "the NAB has taken action against two of my companies as well as me personally. It is likely that I will be made bankrupt. I assume that action will be taken against MCD and it will be wound up in 3 to 6 months. I have put my insurer on notice of a potential claim".
57. By November/December 2012, all the plaintiffs in these proceedings had made complaints to Mr Moylan about the non-return of their capital, about non-payment of interest and some about the misapplication of funds. Importantly, at no time in these confrontations did Mr Moylan ever explain his various misapplications of funds on some plausible innocent basis. The Court infers no such explanation existed. The combined volume of these complaints and Mr Moylan's lack of capacity to satisfy them could not have been forgotten by the time in January 2013 he notified certain circumstances to the defendant underwriters with the proposal for the 2013/2014 policies.
58. In summary, in the Manning action, the Mannings, as the first and second plaintiffs, claim the sum of $720,000. This comprises the following claims: 1. Loans to MIG: Date Amount 14 April 2010 $90,000 25 October 2010 $215,000 21 March 2011 $350,000 23 December 2011 $65,000 Total $720,000

1. In the Manning action, Jalin atf the Sandgate Auto Superannuation Fund claims the sum of $645,000, which is made up as follows: 1. Loan to Trudy Crittle: Date Amount 13 (31) October 2006 $120,000 Total $120,000

1. Loans to MIG: Date Amount 20 March 2009 $75,000 Total $75,000

1. Investment in RLPF: Date Amount 26 October 2007 $200,000 20 February 2008 $150,000 Total $350,000

1. Loan to Wallalong Investments atf the Wallalong Investment Trust: Date Amount 15 September 2009 $100,000 Total $100,000

1. Thus the total amount claimed Jalin in the Manning action is $645,000.
2. Finally, in the Manning action, Graeme and Nancy Manning, as the Executors of the Estate of the Late Roy and Joan Maytom, the parents of Nancy Manning, claim $225,000 from the following loans to MIG: Date Amount 21 March 2011 $125,000 23 May 2011 $100,000 Total $225,000

1. The defendants dispute Esined No. 9's primary case against MRS in a number of ways that can now be analysed.
2. Challenges to the Mannings' Case. In a defence approach similar to that fielded against the other plaintiffs, the Mannings were cross-examined to suggest that they knew what they were doing when investing in MIG. Mr and Mrs Manning's cross-examination first revealed their lack of financial sophistication. For example Mr Manning did not understand moderately complex financial market terms such as "listed property".
3. Mr Manning accepted in cross-examination that he always understood the loan to Ms Crittle was not an investment in a financial institution but was in the nature of a personal loan to another client of Mr Moylan. But he nevertheless saw it as secure.
4. Mr and Mrs Manning discussed their investment decisions together. Mr Manning understood that investment risk meant risk of losing capital not just the risk of not getting a return; and that when Mr Moylan gave his opinion about a safe investment, Mr Manning appreciated that he was still "taking a risk". And he also conceded that he and Mrs Manning were looking for a better return than that which had been available to their superannuation fund up until about 2006. But in the Court's view, Mr and Mrs Manning would not have taken what they thought were well-controlled risks without Mr Moylan's express recommendation.
5. When shown MIG's March 2009 property update, Mr Manning acknowledged understanding that it meant that MIG was investing in residential property development projects. But he also made clear that, at the time, he saw matters as simply as "I lent it to MIG" but "I was not told" about the other projects. He is to be accepted when he says this, because Mr Moylan was careful to not emphasise orally MIG's on-lending to these projects, or that repayment solely depended upon the success of those projects. Mr Manning was theoretically aware from documents, such as MIG's March 2009 property update, that an investment in MIG would be on-lent to property investors but he was still able genuinely to say "I was not told" of that on-lending, illuminating that what his advisor Mr Moylan was telling him about security was his primary source of comfort rather than the documents that he was given.
6. Mrs Manning demonstrated a rudimentary understanding of the relationship between risk and return. She had less financial sophistication than her husband. But she was aware of the differences between MIG and larger institutional investments, such as the City Pacific Mortgage Trust. When cross-examined on statements in documents pointing out some risks, rather like her husband, she expressed trust in Mr Moylan's verbal recommendations, saying "I am more of a listener than a reader". And that was both her and her husband's outlook. Mr Moylan's recommendation was sufficient assurance of investment security for her.
7. But the other details in these investments were not made clear to her beyond Mr Moylan's bare statements, which she and her husband were encouraged to rely upon as their principal source of guidance. And like the other plaintiffs and her husband she did so rely. Had the details been made clear, she would not have invested; particularly if she had known, for example, that what Mr Moylan was recommending really resembled a Ponzi Scheme, or if she had known repayment of the MIG loans depended on the successful subdivision of the residential land.
8. The cross-examination also showed that, like some other plaintiffs, Mr and Mrs Manning were generally aware that Mr Moylan had invested in the Regional Land Property Fund himself. But they had no idea that the investment was as much as $700,000, or that the success of his investment in tranche one of that fund depended on getting new investors for tranche 2.
9. Some of Mr Manning's re-examination showed that the Mannings may have been willing to continue to invest had Mr Moylan given proper disclosure of some particular matters. However, in the Court's view, the Mannings made decisions together and, had they had full disclosure of all of Mr Moylan's interests, the couple would not have proceeded with further investments.

Analysis of Corporations Act, s 601AG(a): First Limb Issues

1. The first limb of Corporations Act, s 601AG concerns the liability of MRS to each of the plaintiffs: s 601AG(a). It is evident from the findings above in each action that Mr Moylan engaged in misleading and deceptive conduct and gave negligent advice to each of the Daveys, the Smiths the Kauters and the Mannings.
2. In each of the three actions in these proceedings, the plaintiffs structure their cases by pleading substantially the same causes of action either against MRS, or directly against the underwriter defendants under s 601AG(a). The common causes of action fielded against the defendants in each action can now be discussed together.
3. The defendants put in issue, in their defences and their submissions, that the plaintiffs had not established any liability under s 601AG(a). In the first limb issues, the pleaded causes of action do not raise difficult questions of legal principle. So these reasons state as required the legal principles applicable to each cause of action with only limited reference to legal authority for the claims being made against MRS.
4. The plaintiffs have pleaded a fertile range of causes of action against MRS. The plaintiffs contend that if these various causes of action are made out, that MRS would be liable to the plaintiffs in damages, or equitable or statutory compensation.
5. The following is a summary overview of these causes of action that is sufficient for the present analysis. Not every cause of action identified here was pleaded by every plaintiff against MRS.
6. The Court's conclusions here make out the principal pleaded causes of action, based on the narrative of findings earlier in these reasons, but in a narrower compass than the pleaded facts in the statements of claim. As a result of the Court's findings, the plaintiffs are demonstrably successful in the first limb across a broad range of causes of action. Every alternative path to success on the first limb therefore need not be considered.
7. Misleading and Deceptive Conduct. The plaintiffs allege that Mr Moylan made, on behalf of MRS, the following classes of misleading and deceptive representations (including on the basis that they were representations with respect to future matters made by Mr Moylan without reasonable grounds) in contravention of the Competition and Consumer Act 2010 (Cth), Schedule 2 ("Australian Consumer Law"), s 18, Fair Trading Act 1987, s 42 and a number of other statutory equivalents: 1. that MRS (through Mr Moylan) was well qualified and experienced; 2. that investments such as MIG, including in its capacity as trustee of the Bolwarra Heights Investment Trust, the Regional Land Property Fund, the Wallalong Investment Trust, and the various other investments, recommended by MRS were safe and secure, and were recommended for short-term investment in real property and would pay the various rates of interest that were promised; and 3. that MRS had undertaken a portfolio review of each of the investments held by the plaintiffs and that given their financial situation, needs and objectives, the plaintiffs should retain, and not seek to reduce, their existing investments, given the financial circumstances of those investments.
8. The Court has found that Mr Moylan made all the representations alleged against him. All the pleaded representations were made in his role as the authorised representative of MRS under its AFSL. The representations were made either expressly in advance of every investment made by the plaintiffs, or implicitly representations were repeated on the obvious mutual assumption that the plaintiffs believed previous representations also applied to currently recommended investments. The pleaded representations are all established by the Court's findings. All the representations that the investments were "safe and secure" were representations about future matters in the sense that they were statements about the future prospects of return of capital to the plaintiffs from these investments.
9. The representations were misleading and deceptive because of the true financial position of each of these investments. They were misleading and deceptive because they misstated the nature of the investments at the time they were made. They were also misleading and deceptive in relation to the representations as to future matters because the defendants have not established that MRS had reasonable grounds for making these representations.
10. All the plaintiffs relied upon the pleaded representations and they would not have invested as they did, unless the representations had been made. The defendants' various contentions that the plaintiffs were prepared to take on the risk that was involved in these investments are not persuasive. Because of their trust in everything that Mr Moylan said, the plaintiffs never appreciated the degree of risk involved in what they essentially saw as fixed interest bank-like investments with bank-like stability and security. Had they not had that understanding, they would never have proceeded to make these investments. To these conclusions there is but one exception: the Kauter Investments loan of $6,737.53 on 31 August 2006.
11. The correct measure of damages for this misleading and deceptive conduct is the loss occasioned by making the investments. There is no suggestion that the plaintiffs would have lost their capital in ventures other than those in which they invested at MRS. They are entitled, against MRS, to damages occasioned by its misleading and deceptive conduct measured by the loss of their capital together with interest either at the rates available on the investments they would otherwise have made, not the interest rate promised by Mr Moylan. They would have been entitled to a costs order against MRS as well.
12. Negligent Breach of a Duty to Advise. The plaintiffs allege that, when acting as an advisor to the plaintiffs, MRS owed them a duty to take reasonable care: in preparing their statements of advice, in the selection of the financial products in which they should invest, in giving oral financial advice, and in regularly reviewing previous investment selections and advice to them. The plaintiffs allege MRS negligently breached this duty failing to exercise all reasonable care and skill and diligence.
13. MRS was acting in the position of a paid financial advisor professing specialist skill to unskilled lay clients in a formal context in which it was clear to Mr Moylan that the plaintiffs, as clients, intended to rely upon his advice in a matter of serious financial consequence to them. Mr Moylan's advisory role was a classic exemplar of a relationship in which the advisor assumes a duty to take reasonable care in giving advice: San Sebastian Pty Ltd v The Minister Administering the Environment Planning and Assessment Act 1979 and Another (1986) 162 CLR 340; (1986) 68 ALR 161; (1986) Aust Torts Reports 80-060; [1986] HCA 68, at 372 and Tepko Pty Ltd and Ors v The Water Board (2001) 206 CLR 1; (2001) 178 ALR 634; Aust Torts Reports 81-606; [2001] HCA 19. MRS' and Mr Moylan's relationship with each of the plaintiffs was the same in this respect and the duty of care exists in the relationship with each of them.
14. MRS breached its duty to take reasonable care in advising the plaintiffs. The evidence of that breach of duty is much the same in each action as the evidence that establishes that the statements Mr Moylan made were misleading and deceptive in relation to the Australian Consumer Law causes of action. But of greater significance with this cause of action is the ongoing advisory duty to regularly review previous investment selections and give up-to-date advice to the plaintiffs upon that review. All the plaintiffs received was correspondence in which they were told that such reviews would take place. Rollovers of the plaintiffs' existing investments, particularly the mass rollover that took place in April 2009 with all the plaintiffs except for the Kauters, were not accompanied by any satisfactory review. But there was little separate loss caused by the failure to undertake a satisfactory review. By the time the later reviews should have been done the plaintiffs' investments were probably worthless. Any damage from failure to conduct reviews would probably only be confined to investments made before late 2007 or early 2008.
15. The plaintiffs have established their reliance on MRS' advice for the making of every advance. Issues of causation, and the calculation of damage, are the same for the causes of action for negligent advice as for the causes of action for misleading and deceptive conduct.
16. Breach of Fiduciary Duty. The plaintiffs plead that in MRS' role in providing financial advice to the plaintiffs, in arranging and placing investments on their behalf, and in monitoring the plaintiffs' MRS-recommended investments, that MRS owed the plaintiffs' a fiduciary duty. The plaintiffs plead that MRS breached its fiduciary duty by: 1. advising and arranging with the plaintiffs to make the advances to MIG; 2. preferring and benefiting the interests of MIG in its various capacities, the interests of Wallalong Investments and the interests of the Regional Land Property Fund over those of the plaintiffs; and 3. preferring and benefiting the interests of MRS over those of the plaintiffs.
17. The plaintiffs' case of breach of fiduciary duty was modified after the plaintiffs first filed their statements of claim. The plaintiffs originally pleaded, and later withdrew, a series of allegations that MRS breached its fiduciary duty by not disclosing various alleged conflicts of interest to the plaintiffs. The withdrawn allegations generally were express pleas that Mr Moylan had a shareholding in, directorship of or other interest in the recommended investments.
18. But although the plaintiffs have withdrawn these allegations, the defendants took up substantially the same contentions and argued that the Court should make findings of undisclosed conflicts of interest that enliven the conflicts of interest exclusion in the policies.
19. The relationship of professional advisor and client is not uncommonly a fiduciary one: Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371; 65 ALR 193; (1980) 60 ALJR 371; (1986) 4 ACLC 283; [1986] HCA 25; Hadid v Lenfest Communications Inc [1999] FCA 1798; Aequitas Ltd v Sparad No 100 Ltd (formerly Australian European Finance Corp Ltd) (2001) 19 ACLC 1006; [2001] NSWSC 14. Here, the superior professional financial expertise of Mr Moylan, the lack of relevant financial expertise of the plaintiffs, the very high degree of trust the plaintiffs had in Mr Moylan, which he must have recognised, are all a basis for the Court to infer a fiduciary relationship.
20. Once a fiduciary relationship is established, this case should be analysed as a situation of self-dealing. As has been seen, Mr Moylan derived a financial benefit from the investments he recommended to the plaintiffs. Where a fiduciary acts for a client/beneficiary in a matter in which the fiduciary has a personal interest, there is an obligation on the fiduciary to disclose his interest to the client/beneficiary and if the fiduciary fails to do so, the transaction, however favourable, may be set aside at the client's instance.
21. Equity intervenes (particularly, for example, where the fiduciary is a solicitor) not so much to recoup the loss suffered by the client, but to hold a fiduciary to, and vindicate, the very high duty owed to the client: Warman International Ltd v Dwyer (1995) 182 CLR 544; (1995) 128 ALR 201; (1995) 69 ALJR 362; [1995] HCA 18, at 557-558 ("Warman"). Whilst significant, the inadequacy or other improvidence of the transaction is not determinative of Equity's intervention: Maguire v Macaronis (1997) 188 CLR 449; (1997) 144 ALR 729; (1997) 71 ALJR 781; [1997] HCA 23, at 465 ("Maguire"). Long-standing authority states that those in a fiduciary position who enter into transactions with those to whom they owe fiduciary duties have "labour under a heavy duty to show the righteousness of the transactions": CIBC Mortgages Plc v Pitt (1994) 1 AC 200; [1993] 4 All ER 43; [1993] 3 WLR 802, at 209 and Maguire, at 465.
22. To escape an adverse finding of breach of fiduciary duty, and consequential remedies, it is necessary for the fiduciary to show, by way of defence, a fully informed consent to the fiduciary acting with divided loyalty: Maguire, at 466. To ensure a fully informed consent, the circumstances may include, for example, independent and skilled advice from a third party: Commonwealth Bank of Australia v Smith (1991) 42 FCR 390; (1991) 102 ALR 453; (1991) ATPR (Digest) 46-077, at 393 ("Smith") and Maguire, at 466. What is required to give fully informed consent is a question of fact in all circumstances of the case: Spellson v George (1992) 26 NSWLR 666; [1992] NSWCA 254, at 669-670, 673-675, and 680 and Maguire, at 466. It is important to appreciate that there is no duty to obtain an informed consent from the client; but rather the existence of an informed consent goes to negate what would otherwise be a breach of fiduciary duty from the entry into a forbidden transaction: Maguire, at 467.
23. The appropriate remedy in such cases is one for the plaintiff to select depending on the circumstances. The delinquent fiduciary may be required to replace any property improperly acquired from the client, or to provide equitable compensation, if that is not possible: McKenzie v McDonald [1927] VLR 134; (1926) 33 ALR 51, at 146, Bartlett v Barclays Trust Co [Nos 1 and 2] (1980) Ch 515; [1980] 1 All ER 139; [1980] 2 All ER 92; [1980] 2 WLR 430 ("Bartlett") and Maguire, at 470. And if the loss suffered by the plaintiff exceeds the profits made by the errant fiduciary, the plaintiff may elect to have a compensatory remedy against the fiduciary: Warman at 559. That, in substance, is what has happened here.
24. Until restitution is made, it is presumed that the fiduciary's default continues: Bartlett, at 543. A fiduciary cannot be heard to maintain that the disclosure would not have altered the client's decision to proceed with the transaction, because the client's action would have been determined by some other factor: Smith, at 394.
25. Echoes of that issue exist in this case. The plaintiffs were strongly cross-examined to suggest they had an appreciation of many of the financial risks they were taking with these MRS-recommended investments and that they would have proceeded anyway with this transaction. But the Court's findings put an end to that case in two ways. First, the plaintiffs never received full disclosure sufficient to answer the breach arising from Mr Moylan's and MRS' conflicts of interest. Second, had full disclosure taken place and a proper explanation of the true financial risks associated with these investments, all these plaintiffs would have chosen more conservative investments than the ones into which MRS directed them.
26. The various forms of pleaded breach of fiduciary duty are made out. Mr Moylan and MRS preferred Mr Moylan's and MRS' interests in recommending investments in MIG in its various capacities, the interests of Wallalong Investments and the interests of the Regional Land Property Fund, over those of the plaintiffs. But the mechanism of preferring MIG's, MRS' and the other interests over those of the plaintiffs was non-disclosure of the substance of Mr Moylan's and MRS' conflicts of interest and the true risk of the investments.
27. The non-disclosure led directly to the plaintiffs' investments. Had proper disclosure been made of Mr Moylan's interests in these various investments, the plaintiffs would not have invested. The plaintiffs are entitled to equitable compensation to restore their lost investments made as a result of the breach.
28. Breach of Contract. The plaintiffs plead a case in contract. They contend that 1. they each entered into a contract with MRS in which Mr Moylan agreed on behalf of MRS, to provide various forms of financial advice as to an appropriate mix of safe and secure investments to maximise wealth creation, for which investments were to be reviewed on a regular basis to decide which investments should be retained or reduced to meet prevailing economic circumstances; and 2. it was an implied term of each such contract that Mr Moylan would, on behalf of MRS, exercise all reasonable care, skill and diligence in providing the advice and monitoring the investments held by the plaintiffs; and 3. in breach of the implied term, Mr Moylan failed to exercise all reasonable care, skill and diligence in providing the advice and monitoring the investments held by the plaintiffs whereby the capital and interest from those various investments was lost.
29. There was undoubtedly a contractual relationship of the kind pleaded between MRS and each of the plaintiffs. MRS provided financial services for reward. The financial services were provided and MRS invoiced the plaintiffs for them and the invoices were paid.
30. The express terms the plaintiffs have pleaded in these contracts are justified by the conversations that the Court has found took place between Mr Moylan and the plaintiffs and the documents that Mr Moylan gave to the plaintiffs. The Court's findings, that each of the plaintiffs commonly requested Mr Moylan to guide them into safe and secure investments, are a sound basis for the express term that MRS was to give them advice for an "appropriate mix of safe and secure investments to maximise wealth creation". And the relationship of contractual advisor and client ordinarily attracts the implied terms of due care skill and diligence that the plaintiffs have pleaded.
31. These express and implied terms were breached here by MRS' failure to recommend an appropriate mix of safe and secure investments to maximise wealth creation. The breach is ultimately evidenced by the financial insecurity of the investments in which Mr Moylan placed the plaintiffs. But MRS breached the contract by failing to undertake a proper evaluation analysis, or provide an explanation to the plaintiffs that brought home to them the financial risk involved in making loans to MIG and the other investment products that are the subject of these proceedings. These investments were not appropriate and did not accord with the plaintiffs risk profiles.
32. Those breaches were not only evident at the time of the initial recommendation of the plaintiffs' investments, but they recurred at every review conducted by MRS in which no recommendation was made for the plaintiffs to exit these investments. And they recurred on every occasion that Mr Moylan advised the plaintiffs to extend the loans to these investment entities and facilitated those extensions. The later these reviews occurred, the stronger is the inference of breach, because of the continuing deterioration in the financial position of the investments. Although that deterioration also means that the later the reviews the weaker is the causal link to the plaintiffs' loss.
33. The measure of damages for this breach is the position in which the plaintiffs would have been in had the contract been performed. In this case, the performance of the contract would have involved the provision of appropriate advice. None of these investments were appropriate for the plaintiffs, who wanted safe and secure investments. Had they been offered the choice of safe and secure investments, compared with these investments, they would all have taken the former, even if at a lesser interest rate than that offered on these investments. The appropriate measure of damages for breach of contract is the loss of the plaintiffs' capital and the loss of interest which they would have earned in an alternative secure investment.
34. Statutory Unconscionability. The plaintiffs allege that in its role in providing financial advice to the plaintiffs, in arranging and placing investments on behalf of the plaintiffs, and in monitoring the recommended investments made by the plaintiffs, MRS engaged in unconscionable conduct within the meaning of Australian Consumer Law, s 20 and the Fair Trading Act, s 43, and other statutory equivalents.
35. The same findings that justify the Court's conclusions that MRS breached its fiduciary duty to each of the plaintiffs, also justify the conclusion that MRS engaged in unconscionable conduct in relation to the plaintiffs. Each of the plaintiffs was in a position of special disadvantage in relation to MRS in relation to the financial advice the subject matter of that relationship. In contrast to Mr Moylan's sophisticated expert knowledge, the plaintiffs each had a markedly inferior understanding of financial markets and investment risk. Mr Moylan was at all times well aware of the plaintiffs' position of special disadvantage and he knowingly took advantage of it throughout his advisory relationship with the plaintiffs in order to achieve their assent to his recommendations.
36. Contravention of Corporations Act, s 912A. The plaintiffs allege that in its roles in providing financial advice to the plaintiffs, in arranging and placing investments on behalf of the plaintiffs, and in monitoring investments made by the plaintiffs, MRS failed to do all things reasonably necessary to ensure that the financial services provided by MRS, covered by its AFSL, were provided efficiently, honestly and fairly, and thereby MRS acted in contravention of Corporations Act, s 912A(1).
37. The defendants contend that Corporations Act s 912A does not found a statutory cause of action against MRS, permitting an award of statutory compensation.
38. And the plaintiffs have pleaded other more complex alternative statutory causes of action based on the Corporations Act. These causes of action are dealt with when the same Corporations Act provisions are discussed among the s 601AG(b), second limb issues below.

Are the Plaintiffs' Claims Apportionable Claims?

1. The defendants contend further in the alternative that all the plaintiffs' claims are "apportionable claims" for the purposes of Civil Liability Act 2002, ss 34(2) and 35(1). They submit that MIG itself, MIG as trustee of the Bolwarra Heights Investment Trust and Wallalong Investment Holding as trustee of the Wallalong Investment Trust are concurrent wrongdoers with MRS. They contend that the primary cause of the plaintiffs' losses was not the negligence of their insured, MRS, but the failure of these various non-MRS parties to repay loans made to them.
2. It is necessary for the defendants to establish that the failure to repay the loans is the same loss as the loss the subject of the plaintiffs' claim: Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613; (2013) 296 ALR 3; (2013) 87 ALJR 505; [2013] HCA 10 ("Hunt & Hunt") at 631-5; [2013] HCA 10 (at [41] and [45] - [51]).
3. Civil Liability Act, s 34 applies here. The plaintiffs' claims are claims for economic loss or damage to property arising from the failure to take reasonable care and for relief under the Australian Consumer Law for contravention of s 18: Civil Liability Act, s 34(1). And as result of the Court's earlier reasoning, MRS is a s 34(2) "concurrent wrongdoer" with the various persons identified by the defendants, as the plaintiffs are "one of two or more persons whose acts or omissions (or act or omissions) caused, independently of each other or jointly, the damage or loss that is the subject of the claim".
4. The question to be posed under Civil Liability Act, s 34(2) is whether the acts of MIG, MIG as trustee for the Bolwarra Heights Investment Trust and Wallalong Investment Holdings independently of MRS caused plaintiffs' damage. The plaintiffs submitted that the failure to repay by MIG, Wallalong Investment Holdings and MIG as trustee of the Bolwarra Heights Investment Trust of the loans advanced to them is a loss "distinctly different from the loss caused by the negligent advice provided by MRS". But in the Court's view, the damage caused by the defaults of these non-MRS actors is identical, with that caused by MRS. The conduct of these other parties did cause that same damage: Hunt & Hunt (at [46]).
5. In those circumstances, the duty of the Court is to apply Civil Liability Act, s 35(1), which provides as follows: "35 Proportionate liability for apportionable claims (1) In any proceedings involving an apportionable claim - (a) the liability of a defendant who is a concurrent wrongdoer in relation to that claim is limited to an amount reflecting that proportion of the damage or loss claimed that the court considers just having regard to the extent of the defendant's responsibility for the damage or loss, and (b) the court may give judgment against the defendant for not more than that amount.
6. The Court's findings show that Mr Moylan's control, through MRS, of all the plaintiffs was so complete in respect of all the advances from which they suffered loss that it is difficult to separate out the responsibility of the non-Moylan defendants.
7. This is not a case where there were any persons other than Mr Moylan who were associated with the non-MRS concurrent wrongdoers who had any influence upon the conduct of the plaintiffs. It is quite unlike, for example, Hunt & Hunt where there were active fraudsters influencing the making of loans by plaintiffs who suffered loss and where solicitors' negligence was just one feature of the transactions.
8. Here the non-MRS entities were wholly passive recipients of funds procured through Mr Moylan's active role as the principal of MRS. All the loans arose from his various breaches of duty. For these reasons, the Court would apportion the responsibility of the non-MRS concurrent wrongdoers at no more than 5% and would therefore give judgment for the plaintiffs in an amount representing only 95% of their claim: Civil Liability Act, s35(1)(b).

Conclusion

1. In the result, the plaintiffs have been successful on the first limb but not in the whole of the amount claimed. In these three actions the plaintiffs have been successful in establishing that MRS is liable to Esined No. 9 in the sum of $1,100,000, to Esined No. 10 in the sum of $1,290,000, to Kauter Investments in the sum of $650,000, and to the respective Manning plaintiffs in the following sums - $720,000 to Mr and Mrs Manning, $645,000 to Jalin, and $225,000 to the executors of the late Roy and Joan Maytom, totalling $1,590,000. The total liability of MRS to all plaintiffs exclusive of interest and costs is $4,630,000. This sum should then be discounted by 5% to $4,398,500 to reflect the Court's reasoning with respect to the apportionment of claims under the Civil Liability Act.

Analysis of Corporations Act, s 601AG(b): Second Limb Issues

1. For this case Corporations Act, s 601AG(b) poses the question whether the 2012/2013 policy or the 2013/2014 policy respond to the plaintiffs' claims against MRS. The s 601AG second limb issues generally concern: whether notification has occurred within the terms of the policies; whether any misrepresentation or non-disclosure occurred at the inception of the policies; whether the plaintiffs' claims come within the insuring clauses of the policies; and, whether any exclusion clause otherwise defeats the plaintiffs' claims. This first requires exposition of the principal policy documents and the materials the plaintiffs say were notification to underwriters in accordance with the policy terms.

The Policies for the 2012/2013 and 2013/2014 and the Claimed Notification

1. The principal relevant terms of the 2012/2013 and 2013/2014 policies are not in issue. The documents the plaintiffs say constitute first notification of their claims to underwriters, are a letter from MRS to DUAL dated 15 January 2013, with enclosures.
2. The Policy Documents. MRS entered into the 2012/2013 and 2013/2014 policies with DUAL as agent for the respective subscribing underwriters in each of these two policy years. The policies were in identical terms, apart from their policy number and period of cover. They were each based on proposals, relevant parts of which are set out later in these reasons, when the contest relating to alleged non-disclosure is addressed.
3. The 2012/2013 policy provided cover for the insurance period 5 February 2012 to 5 February 2013. The 2013/2014 policy provided cover for the insurance period 5 February 2013 to 5 February 2014. The 2012/2013 policy is used for convenient analysis in these reasons.
4. The 2012/2013 policy consists of a PI policy schedule and certificate ("the schedule"), a general policy wording for financial planners insurance of some 11 sections ("the financial planners policy wording" or, the "policy wording"), and what is labelled as a "150PI Financial Planners Endorsement" ("the 150PI endorsement"). The policy wording (clause 5.4) requires that "all policy documents will be read together as one contract and any word or expression to which a specific meaning has been attached shall bear the same meaning wherever it may appear". And clause 6.13 of the policy wording defines the "policy" as meaning "the policy wording, the Schedule, the proposal and any endorsement attaching to and forming part of the policy either at commencement or during the insurance period".
5. The Policy Schedule. The schedule identified MRS as the insured: the schedule, item 2. The policy wording (clause 6.11) expands the definition of the insured to include as follows: "INSURED means (a) the person partnership company, subsidiary or other entity specified as the insured in the schedule; and (b) any person who is during the insurance period a principal, partner, director or employee of the person, partnership, company, subsidiary or other entity specified as the insured in the schedule, but only while acting in the course of the professional business."
6. The "indemnity limit" identified in the schedule is $5 million for "any one claim and in the aggregate during the insurance period": the schedule, item 1. The "professional business" of the insured is "Financial Planning as per AFSL 295440": the schedule, item 2. The "insurance period" is from 5 February 2012 to 5 February 2013: the schedule, item 3. And for the 2013/2014 policy this is noted as 5 February 2013 to 5 February 2014. The deductible including defence costs by the insured for each claim is $10,000: the schedule, item 4. The "retroactive date" is "1 July 2005 - Excluding any known claims or circumstances": the schedule, item 6. The date of the proposal for insurance is noted in the schedule as 23 January 2012: the schedule, item 7. And for the 2013/2014 policy the proposal date is noted as 15 January 2013. The schedule identifies a series of automatic extensions: the schedule, item 8. The relevant policy wording is identified in the schedule as the "Dual Australia Financial Planners Wording 1209" (which is a reference to the same wording as "the financial planners policy wording" identified above): the schedule, item 10. And the endorsement attached at the inception of cover in each policy year was the "150PI Financial Planners Endorsement - Costs Inclusive" (referred to above as the "150PI endorsement"): the schedule, item 11.
7. The Policy Wording. The financial planners policy wording contains the following insuring clause, at clause 2.1: "We [DUAL] agree to indemnify the INSURED [MRS] for any CLAIM for compensation first made against the INSURED and reported to DUAL, during the INSURANCE PERIOD in respect of any civil liability resulting from any breach of professional duty by the INSURED in its conduct of its PROFESSIONAL BUSINESS [Financial Planning as per AFSL 295440]."
8. Clause 6.1 of the 2012/2013 policy defines "claim" to mean: "(a) any civil proceeding brought by a third party against the insured for compensation; or (b) a written demand by a third party for monetary damages."
9. The financial planners' policy wording includes a series of automatic extensions (section 3) and exclusions (section 7). A number of clauses of the financial planners' policy wording were the subject of argument between the parties. Some of the more prominent ones are mentioned here.
10. Automatic extension 3.1 in the policy wording is as follows: "3.1 Fraud and Dishonesty WE agree to provide cover in respect of any CLAIM which would otherwise be excluded because of fraud and dishonesty in Exclusion 7.14 of the POLICY provided that WE will not provide cover in respect of any: (a) person committing or condoning any act, omission or breach excluded by Exclusion 7.14 of the POLICY. (b) CLAIM arising from or directly or indirectly attributable to or in consequence of: (i) any loss of money, negotiable instruments, bonds, coupons, currency, bank notes, stamps, cheques, bills of exchange, letters of credit or other instruments whether negotiable or not or whether matured or not or securities or documents evidencing title to or ownership of land or any other property; or (ii) any actual or alleged fraudulent or dishonest instruction or direction; or use of electronic equipment, including but not limited to telephony or the internet; resulting in: …"
11. Exclusion 7.14 of the standard form policy wording provides part of the defence case that cover is excluded in respect of fraud, as follows: "(a) Any CLAIM arising from or directly or indirectly attributable to or in consequence of any actual or alleged act or omission by the INSURED, its consultants, sub-contractors or agents which was reckless, fraudulent, dishonest, malicious or criminal. (b) Any CLAIM arising from or directly or indirectly attributable to or in consequence of any wilful breach of any statute, regulation, contract or duty by the INSURED, its consultants, sub-contractors or agents."
12. Two other clauses in the policy wording are prominent: a disclosure of commissions/conflicts of interest clause (clause 7.19) and an approved product and product disclosure clause (clause 7.20). The latter of these was modified by the150PI endorsement but the former was not.
13. Clause 7.19 provides as follows: "WE will not cover the INSURED, including for DEFENCE COSTS or other loss, in respect of…any CLAIM or liability arising from or directly or indirectly attributable to or in consequence of…any failure of any INSURED (or any of its agents) to disclose or adequately disclose any…conflict of interest."
14. The 150PI Endorsement to the Policy. The 150PI endorsement, which has a sub-title, "Australian Financial Services Licensees and Claims by Retail Clients", is the other significant policy document. The 150PI endorsement, as its full title implies, is an endorsement tailored to cover obligations relevant to AFSL licensees.
15. The Court infers that DUAL offered the 150PI endorsement to provide coverage to serve the object of Corporations Act, s 912B(1), which requires that AFSL licensees "providing a financial service to persons as retail clients" have "arrangements for compensating those persons for loss or damage suffered because of breaches of the relevant obligations" under Chapter 7 of the Corporations Act, the chapter in which s 912B appears. Corporations Act, s 912B(2) permits the regulations to "specify requirements that are applicable to all arrangements" and that those arrangements must satisfy the requirements so specified.
16. And Corporations Regulations 2001 (Cth), Reg 7.6.02AAA(1) requires an AFSL licence holder, such as MRS, to have in place, "professional indemnity insurance cover that is adequate", having regard to a range of considerations. These considerations include the likely quantum of claims that have the potential to arise against the AFSL licence holder, the type of clients and the volume and class of business of the licence holder.
17. The insuring clause within the 150PI endorsement is moulded to achieve this purpose, reiterating the coverage requirement of a "breach of professional duty" but expressly indemnifying an AFSL licencee meeting claims for compensation by retail clients, as follows. "On the terms and conditions of this endorsement but subject otherwise to the terms and conditions of the policy, we agree to indemnify any insured entity which is an Australian Financial Services Licensee ("Licensee") for any claim for compensation by a retail client (within the meaning of chapter 7 of the Corporations Act and applicable regulations) which is first made against that insured, and reported to us, in the insurance period in respect of any civil liability resulting from any breach of professional duty in the conduct of the professional business by it or any person or entity for which such insured is legally liable."
18. One contested issue is whether the plaintiffs were retail or wholesale clients of MRS. The defendants say the plaintiffs were not retail clients of MRS and that they are not entitled to cover under the policies including the 150PI endorsement. The factual contest about the plaintiffs' retail/wholesale status is considered elsewhere. But the related issues that arise concerning the construction of the policy are considered immediately below.

The Proper Construction of the Contracts of Insurance

1. A contest about the scope of the policies and the proper interpretation of the 150PI endorsement arises from clauses 1 and 4 of the endorsement. It is convenient to set out these provisions here together with a related provision, clause 5. Clause 1 of the 150PI endorsement provides: "1. The policy covers any claim by a retail client for compensation for breach of the professional duty of an insured licensee in the conduct of the professional business and which is a breach of its obligations under chapter 7 of the Corporations Act."
2. Clause 2 of the 150PI endorsement provides as follows: "2. Fraud and Dishonesty Automatic Extension 3.1 of the policy is amended as follows: Claim by a Retail Client against an Insured Licensee would otherwise be excluded by Exclusion 7.14 and which is first made during the Insurance Period and results from a fraudulent or dishonest act or omission by any Insured, or for which the Licensee is liable, occurring or committed in the conduct of the Professional Business in connection with: (a) any loss of money, negotiable Instruments, bonds, coupons, currency, bank notes, stamps, cheques, bills of exchange, letters of credit or other instruments whether negotiable or not or whether matured or not or securities or documents evidencing title to or ownership of land or any other property; or (b) any actual or alleged fraudulent or dishonest instruction or direction; or use of electronic equipment , Including but not limited to, telephony or toe Internet; resulting in: (i) any unauthorised transfer, delivery or payment of, or dealing with, any money, land or other property; (ii) any unauthorised reduction in the amount of any funds or other assets held by any person with any bank, building society or other institution or person having a responsibility for the maintenance or care of such funds or assets; or (iii) any adverse effect upon any right of any person to the payment of money. This extension will only apply where: a) at least one principal, partner or director and one authorised signatory signed any cheques or funds transfer Instructions; and b) the Insured's bank accounts were not reconciled by any person who had the authority to operate those bank accounts. We will not cover any person committing or condoning any act, omission or breach excluded by Exclusion 7.14 of the Policy."
3. And clause 4 of the 150PI endorsement provides: "4. The policy shall not exclude our liability to indemnify solely by reason of the fact that the claim: (a) arises from the conduct of representatives generally; (b) arises from fraud or dishonesty by any agent or representative; (c) arises from misrepresentation of its services; (d) involves notification to the Australian Securities and Investments Commission ('ASIC') by the licensee legally required of any matter which may be the subject of a claim under the Policy."
4. Clause 5 of the 150PI endorsement provides: "5. It is agreed that clause 7.20 Approved Product and Product Disclosure of the Policy is deleted in its entirety and replaced with the following: Any claim or liability directly indirectly based upon, altributable to, or any consequence of any: (a) financial products or instruments not contained in the insured's approved product list at the time the advice was given, unless the advice is in respect of switching from an existing product not in the insured's approved product list to a product in the insured's approved product list, or (b) interest in a scheme operating or allegedly operating in breach of the Managed Investment Scheme provisions; or (c) failure to provide a financial services guide, a product disclosure statement or statement of advice in breach of the FSR Provisions; or (d) repayment of a debt or money deposited with or lent to a body including, but not limited to, under a promissory note, debenture or similar instrument which is not regulated by the Managed Investment Scheme provisions or the Fundraising Disclosure Provisions and which body is not an authorised deposit-taking institution for the purpose of the Banking Act; or (e) financial products or instruments not requiring disclosure on offers for issue or sale under the Fundraising Disclosure Provisions and not requiring a product disclosure statement or statement of advice under the FSR Provisions save for those financial products or instruments regulated by the Managed Investment Scheme Provisions or approved by Us in writing."
5. Clauses 4(a) and 5 of the Endorsement. The plaintiffs contend that there is a "clear ambiguity" between the operation of clause 4(a) of the 150PI endorsement and the various provisions in clause 5, and that to overcome that ambiguity, it is necessary for clause 4(a) to be read contra proferentem so it can "take precedence over and override" each of the other exclusion clauses found in the 150PI endorsement, and indeed elsewhere in the policy wording.
6. The plaintiffs submit that the ambiguity arises because upon the proper construction of clause 4(a), the underwriters may not refuse to indemnify in circumstances where the conduct of the licensee or its representative, in this case Mr Moylan, was either a direct or an indirect cause of the claim. That construction is said to be required by the words "arising from" and "generally", which precede and follow the words, "conduct of the representative" in clause 4(a). The plaintiffs submit that each of those words enlarges the conduct of the representative of the insured, such that where that conduct is either a direct or an indirect cause of the claim, the underwriters may not refuse to indemnify.
7. The plaintiffs argue that this means that even if a claim might otherwise be excluded by reason of the operation of clause 5 of the 150PI endorsement, the exclusionary effect of clause 5 will be overridden by the command in clause 4 that the policy "shall not exclude our liability to indemnify", because the conduct of representatives is involved.
8. The plaintiffs contend that this construction of the endorsement is consistent with the intent of ASIC's 2011 Regulatory Guide 126, which provides guidance as to the scope, terms and exclusions to be contained in PI insurances for the holders of an AFSL serving retail clients. They further contended that RG 126.44 and RG 126.45 of the Regulatory Guide 126 discourage exclusion clauses in insurance policies having the effect of reducing cover to retail clients.
9. This construction of the 150PI endorsement is not compelling. Were it to be adopted it would produce the unlikely conclusion that the insured would be given a free pass to indemnity, even where a principal of the insured was knowingly involved in fraud or dishonesty, provided only that it could be established that there was "conduct of representatives generally" within clause 4(a) of the 150PI endorsement, or "dishonesty by any agent or representative" of the insured, within clause 4(b).
10. The plaintiffs' construction does not give sufficient attention to the whole phrase "solely by reason of the fact" in clause 4(a). The word "solely" means not involving anything else. The use of the word "solely" makes clear that the various sub-paragraphs of clause 4 of the 150PI endorsement do not operate to exclude the insurer's liability, if the claim also arises on some basis other than what is identified in these sub paragraphs. Thus, even if the claim arises from the conduct of representative(s) generally, or from fraud or dishonesty by an agent or representative, provided there is some other basis from which the liability claimed is said to arise, clause 4 of the endorsement will not operate to neutralise the exclusions in the policy. And here although the claims are said to arise from the conduct of Mr Moylan as a representative, he was also a principal of MRS who had knowledge of and condoned dishonest conduct. The extent of his dishonest knowledge is dealt with elsewhere in these reasons.
11. The wording of clause 4(a) is not well crafted to achieve the results for which the plaintiffs contend. The words "arise from the conduct of representatives generally" are far more apt to refer to a systemic or cultural problem in a larger organisation rather than specific instances of conduct by a sole representative of an insured such as Mr Moylan.
12. The opening words of indemnity in the 150PI endorsement constrain its operation in relation to the policy as a whole. The indemnity in the 150PI endorsement is "on the terms and conditions of this endorsement but subject otherwise to the terms and conditions of the policy". Thus, to the extent a conflict exists between the policy wording and the 150PI endorsement, as the plaintiffs contend, the latter is subordinated to the former. The text of clause 5 of the endorsement fully replaces clause 7.20 of the financial planners policy wording. Thus it becomes part of the policy wording, to which in turn the operation of clause 4 is subordinated. That resolves the tension which the plaintiffs claim exists between clause 4(a) and clause 5 of the 150PI endorsement.
13. The true scope of clause 4 is coverage of matters that are unknown to the principals of the business being insured, such as for example: representatives of the business as a class generally ignoring instructions, or the individual dishonesty of an agent that is not known to the principal. And construing the scope of clause 4 that way is also consistent with the operation of clause 2 of the endorsement which expressly excludes cover for "any person committing or condoning any act, omission or breach excluded by clause 7.14 of the policy".
14. The Policies Insure the Professional Business. The 150PI endorsement, clause 1, requires a "claim by a retail client for compensation" which must fulfil two other characteristics. First, it must be a "breach of the professional duty of an insured licencee in the conduct of the professional business". And secondly, it must also be "a breach of [the insured licencee's] obligations under Chapter 7 of the Corporations Act". To the extent that the plaintiffs have submitted that they need only satisfy the first of these requirements, the 150PI endorsement, clause 1 directly answers the submission.
15. The Court's findings in the first limb show that the plaintiffs have made out causes of action in contract, tort, misleading and deceptive conduct and breach of fiduciary duty fully, which satisfy the first of these two requirements of clause 1. But to satisfy the second requirement, so the insurance cover responds, the plaintiffs must show that MRS has breached its obligations under Chapter 7 of the Corporations Act.
16. The 150PI endorsement only applies to retail clients. Its insuring clause makes that clear. Insurance cover is "in respect of any civil liability resulting from any breach of professional duty in the conduct of the professional business". This also reflects the terms of the insuring clause in the policy wording, clause 2.1, where exactly the same clause is used. Policy wording clause 6.15 defines "professional business" to mean "the professional activity set out in the Schedule". As earlier indicated, Item 2 of the Schedule defines "professional business" as "financial planning as per AFSR XXX440". That must mean, in substance, financial planning services provided in accordance with AFSL XXX440.
17. The policies' reference to the terms of AFSL XXX440, under which MRS carried on business between 30 January 2006 and 22 February 2011, creates important limitations on the coverage of MRS. An extract of the relevant terms of AFSL is set out below: "1. This licence authorises the licensee to carry on a financial services business to: (a) provide financial product advice for the following classes of financial products: (i) deposit and payment products limited to: (A) basic deposit products; (B) deposit products other than basic deposit products; (ii) debentures, stocks or bonds issues or proposed to be issued by a government; … (iv) interests in managed investment schemes including: … (vi) securities; and (vii) superannuation; and (b) deal in a financial product by: (i) applying for, acquiring, varying or disposing of a financial product on behalf of another person in respect of the following classes of products: … 2. deposit products other than basic deposit products; … (D) interests in managed investment schemes including: (F) securities; and (G) superannuation; to retail clients"
18. All of these various services authorised under AFSLXXX440 are qualified by the words "to retail clients". The licence permits the business to service retail clients and that therefore is the scope of what is covered by the insurance - retail clients.
19. The plaintiffs point out, that the insuring clauses in the policy wording, clause 2.1 and the equivalent insuring clause in the 150PI endorsement, are not on their face limited to retail clients. But the use of the word "professional business" in both insuring clauses are enough in each case to limit the insurance coverage to retail clients.

Have the Defendants Elected Not to Contest Section 601AG(b) Issues?

1. The plaintiffs take a preliminary point that the defendants are disabled from agitating any issues under s 601AG(b). They first argue that the defendants have undertaken the defence on behalf of the notional insured MRS and exercised their right of subrogation pursuant to their contracts of insurance without reserving their rights to deny indemnity. It follows, the plaintiffs submit, that the defendants are now precluded by way of election or estoppel from continuing the defence of these claims under s 601AG(b). The success of this argument depends upon the proper construction of s 601AG and the contents of the correspondence when the underwriter defendants were joined into the proceedings. On both these matters the Court is not persuaded that the plaintiffs' arguments are sound.
2. The proper construction of s 601AG. The plaintiffs submit that when an insurer, such as Arch or Liberty, is proposed to be joined as a defendant in proceedings under s 601AG, it faces a choice under its contract of insurance, whether to deny liability or to subrogate to the interest of the insured and defend the claim by the third party. By electing to defend the claim on behalf of the insured, the insurer accepts that the contract of insurance is valid and binding to indemnify the insured. The insurers alternative is to elect to deny indemnity under the contract of insurance.
3. The plaintiffs rely upon Fullagar J's decision in Hansen v Marco Engineering (Aust) Pty Ltd [1948] VLR 198; [1948] 2 ALR 17 ("Hansen") and Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305; [1920] HCA 64 ("Craine") as standing for the proposition that once the insurer has asserted a right which it did not have except under and by virtue of the policy, the principle is attracted that the insurer, having exercised that right to the possible prejudice of the insured, cannot later take up a position which involves a denial that it had that right and is estopped from doing so. The principle as stated by Fullagar J is that "insurers exercise a right which only exists on the basis of a certain assumption and it would be unjust to permit it to depart from that assumption".
4. The plaintiffs submit that when they were thought to be joined as defendants, the underwriter defendants were required here to elect between these two inconsistent rights or to expressly reserve to themselves the right to defend under the policy, if they also wish to defend the third party claim.
5. The defendants submit in reply that s 601AG creates a sui generis statutory cause of action against an insurer and is not required to make such an election, as it might have had the insured existed and in the absence of s 601AG. The defendants' argument is the more persuasive for the following reasons.
6. There are logical difficulties in superimposing the common law concepts of waiver and estoppel based on Craine and Hanson onto the statutory s 601AG action. Section 601AG creates a new cause of action and the action is not a claim for damages: it is a claim "for an amount that was payable to the deregistered company under the relevant insurance contract": Almario at [18].
7. A s 601AG claim is subject to two conditions: proof that a deregistered company had a liability and that the insurance contract covered that liability. The Court of Appeal in Almario points out these two conditions are expressed in the past tense (at [20]): "[20] The two conditions are expressed in the past tense. The inference is that the time for determining whether the deregistered company had a liability to the person claiming, and whether the insurance contract covered that liability, is "immediately before deregistration" (being the phrase qualifying condition (b)). This was not disputed."
8. The relevant time to consider the merits of a s 601AG claim is "immediately before deregistration". In the case of MRS, deregistration was in August 2014, before the election which the plaintiffs are suggesting took place here. It is difficult to see how events that occur after MRS' deregistration can make any difference to the insurer's liability position. Whether the underwriters here reserved liability or not, when they were joined in these proceedings in March 2015, makes no difference because whether or not they are liable on the statutory cause of action is to be determined at the earlier date. All the insurer has to do is to indicate clearly in its pleadings in due course that it is contesting liability under s 601AG(b).
9. These logical difficulties are compounded when attempting to apply the doctrine of election to a deregistered company. At common law election is concerned with the choice between inconsistent alternative rights or remedies, where one cannot be enjoyed without the extinction of the other: Sargent v ASL Developments (1974) 131 CLR 634; (1974) 4 ALR 257; (1974) ALJR 410; [1974] HCA 40, at 655 and Commonwealth v Verwayen (1990) 170 CLR 394; (1990) 95 ALR 321; (1990) 64 ALJR 540; Aust Torts Reports 81-036; [1990] HCA 39, at 408-409. In the law of insurance, the doctrine prevents the insurer from resiling from a choice which the insurer has represented by its conduct to the insured (that the claim comes within the ambit of the policy), in order to avoid prejudice to the insured, who has relied upon the insurer's representation that the insurer will provide coverage under the policy. But here the insured, MRS, does not exist and did not exist at any time at which the underwriter defendants were proposed to be joined to the proceedings or were said to be conducting proceedings on its behalf. It is logically impossible to apply any concept of reliance by, or to measure prejudice to, a non-existent company in the insurer's conduct of proceedings on its behalf.
10. The Court of Appeal's construction of s 601AG in Almario at [34] and [41] also shows why this argument cannot succeed. There the Court of Appeal (Ipp JA, with whom Hodgson JA and Hunt AJA agreeing) agreed said: "[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. … [41] In my view, s 601AG should not be textually construed. Rather, it should be construed so that the opening words read: 'A person may recover from the insurer of a company that is de-registered (as if the insurer was the deregistered company) an amount that was payable to the company under the insurance contract. …'."
11. This reveals the way this section operates: "as if the insurer was the deregistered company". So construed, s 601AG deems the insurer to be the deregistered company, but only to the extent of the responding insurance contract between the deregistered company and the insurer. Such a statutory deeming process by-passes all notions of election: the requirement for the insurer to make an election against the insured disappears, because the statutory deeming collapses the one into the other to facilitate s 601AG recovery. The Court of Appeal's analysis shows that the insurer of a deregistered company simply chooses whether it will defend under s 601AG(a) or (b) or both, as if it were the deregistered company.
12. The plaintiffs cite the decision of McCallum J (as her Honour then was) in Murdock v Lipman (2012) NSWSC 983 ("Murdock") as authority for the proposition that under s 601AG an insurer is put to the election for which they contend and must formally elect to contest liability when the insurer is joined as a the defendant. But Murdock does not deal with the issue of election argued in this case. The plaintiffs point to what McCallum J said about the operation of section 601AG, at [54]: "[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."
13. In this passage and other statements at [60] - [62] and [67] - [68], her Honour indicates that an insurer can stand in the shoes of a deregistered company without disputing its liability under s 601AG(b), if it so chooses. That can be achieved by the insurer expressly conceding that the claim comes within the ambit of the policy and then standing in the shoes of the deregistered company to contest the company's liability under section 601AG(a). That would presumably lead to the insurer admitting in its defence the s 601AG(b) allegations made against it. But once an insurer is joined as a defendant to the proceedings it will always have to decide which of the two limbs of s 601AG it will put in contest on the pleadings, and here the defendants contested the plaintiffs' s 601AG(b) allegations. But nothing in this passage or the other reasoning in Murdock assists the plaintiffs' argument here that an insurer is put to an additional election at general law at the point it is joined into the proceedings.
14. The March 2015 Joinder Correspondence. Even if the foregoing construction of s 601AG is not accepted, the correspondence from Kennedys at the time the plaintiffs applied to join the underwriter defendants into these proceedings in March 2015, sufficiently reserved the rights of the underwriter defendants under the policies that they cannot be said to have elected by their conduct to have agreed to indemnify MRS.
15. Questions of election between insurer and insured have been said to each be determined upon their own special facts: Soole v Royal Insurance Co Ltd [1971] 2 Lloyd's Rep 332, at 340. Answering such questions really comes down to deciding whether the insurer has unequivocally represented by its conduct that it regards the claims that the insurer is defending on behalf of the insured, as within the ambit of the contract of insurance.
16. Such a representation cannot be teased out of the correspondence in this case. From the first moment that the underwriter defendants were engaged, their solicitors firmly denied liability on both the 2012/2013 and 2013/2014 policies and reserved their rights in unmistakable terms. Moreover, even before they were joined as defendants, the proposed defendant underwriters went to some lengths in their correspondence to the solicitors for the plaintiff to explain the reasons why they contended that the policies did not respond in either policy year. This initial correspondence highlighted many of the same arguments that have been deployed at the hearing and are considered in these reasons.
17. In February 2015 DUAL was served with a notice of motion for joinder of the underwriter defendants. The motion was listed for hearing on 17 April 2015. Ms Veronica Chapman, a partner at Kennedys, the law firm acting for the Arch defendants, wrote on 26 March 2015 in relation to the Esined action and the Kauter action, to Nolan Commercial Law Practice stating their position in response to the motion. Ms Chapman's letter also enclosed for the reference of the plaintiffs a letter from Kennedys to Ms Margaret Aspinall of NAS Insurance Brokers ("NAS") of 17 March 2015. NAS was the broker for MRS. The letter from Kennedys to Nolan Commercial Law Practice stated, "for the reasons set out in the NAS letter underwriters have declined indemnity to MRS in relation to the claims made against it in the Kauter proceedings and the Esined proceedings". Ms Chapman's 26 March 2015 letter continued as follows: "Per Section 601AG (b), the insurance contract in question must cover the liability as a precondition of recovery. If exclusions apply, the contract will not cover liability and the insurer cannot be liable. Given that Section 601AG is the basis for the joinder of underwriters, and given the matters set out in the NAS letter regarding the 2013/2014 Policy response, we invite your clients to reconsider their application for joiner. In the event that your clients elect to proceed with their application for joinder, we reserve underwriters' rights to rely upon this correspondence in relation to an appropriate costs application, either with respect to the Notice of Motion or the substantive proceedings."
18. The Kennedys letter of 26 March 2015 enclosed their letter to Ms Aspinall of NAS of 17 March 2015. After going through issues with the insuring clause, non-disclosure and the exclusion clauses, this letter repeatedly stated that underwriters denied coverage to the insured for each of the Esined claims and the Kauter claims. This letter concluded with a final reservation of position in paragraph [30]: "Underwriters' position with respect to the Esined Claims and Kauter Claim is based upon the information received to date. It is thus subject to review as further information becomes available. Underwriters thus expressly reserve their rights under the Policy and at law should further information become available which impacts upon coverage."
19. The position with respect to the Arch defendants in the Manning action is the same.
20. Liberty did not write similar correspondence to the plaintiffs. But once joined Liberty, like Arch, made clear in its pleadings that it contested the plaintiffs' action under s 601AG(b). The Arch and Liberty defendants' pleadings themselves were sufficient indication that indemnity was denied.
21. At one point Mr Drummond, counsel for the plaintiffs, submitted that it was necessary for the defendants to formally reserve their position in the orders joining them as defendants. But the defendants did not expressly consent to being joined as parties. And the absence of a formal reservation of rights in the orders joining them confused no one in this case, because the prior correspondence and the subsequent pleadings show clearly that both limbs of s601AG were in contest.
22. The plaintiffs' election argument fails.
23. Whilst the operation of s 601AG(a) and (b) is discussed, another related sub-issue can be resolved. The plaintiffs submitted that the rule in Jones v Dunkel (1959) 101 CLR 298; [1959] ALR 367; (1959) 32 ALJR 395; (1959) 76 WN (NSW) 278 ("Jones v Dunkel") operates against the defendants in this case such that the Court should draw and inference against the defendants for failing to call Mr Moylan as a witness. It is true that it was theoretically open to the defendants to call Mr Moylan. It was not established in the proceedings of Mr Moylan was unavailable to give evidence. So the Court is entitled to assume that he was available.
24. But the analysis in this section also is a basis to infer that a Jones v Dunkel inference cannot easily be drawn in this s 601AG action. A difficult element in applying the Jones v Dunkel principal is how the rule should be applied to the calling of a non-party witness such as Mr Moylan. As a Glass JA explained in Payne v Parker (1976) 1 NSWLR 191, at 201 - 202, "the missing witness would be expected to be called by one party rather than another". If the witness is "equally available to both sides, for example, a police officer, the condition, generally speaking stands unsatisfied". In defending MRS under s 601 AG (a) the defendants might perhaps be expected to call Mr Moylan. But when propounding a case under section 601 AG (b) it might be expected that the plaintiffs would call him. These inferences neutralise one another and the Court declines in this case to draw any Jones v Dunkel inference against either side.

A Breach of Corporations Act, s 912B?

1. The plaintiffs take another over-arching point. They submit that if the policies 2012/2013 and 2013/2014 do not respond for any reason then at the time of its deregistration, MRS was in breach of a statutory obligation under Corporations Act, s912B. They submit that s 912B requires an AFSL licensee to have in place arrangements to compensate retail clients and that those arrangements: must cover the licensee and its authorised representative for all breaches of their Corporations Act, Chapter 7 obligations. The plaintiffs' contention is that in the circumstances of this case the defendants cannot contend that the policies do not respond and deny liability under section 601AG(b) without breaching s 912B.
2. Corporations Act, s912B in Chapter 7, is headed "Compensation Arrangements if Financial Services Provided to Persons as Retail Clients" and relevantly provides as follows: "(1) If a financial services licensee provides a financial service to persons as retail clients, the licensee must have arrangements for compensating those persons for loss or damage suffered because of breaches of the relevant obligations under this Chapter by the licensee or its representatives. The arrangements must meet the requirements of subsection (2). (2) The arrangements must: (a) if the regulations specify requirements that are applicable to all arrangements, or to arrangements of that kind - satisfy those requirements; or (b) be approved in writing by ASIC."
3. Section 912B(2) requires that any "arrangements" made satisfy applicable regulations. Corporations Regulation 7.6.02AAA specifies requirements applicable to all "arrangements" as follows: "7.6.02AAA Compensation arrangements if financial services provided to persons as retail clients (Act s 912B) (1) For paragraph 912B(2)(a) of the Act, arrangements mentioned in subsection 912B(1) of the Act are, unless the financial services licensee is an exempt licensee, subject to the requirement that the licensee hold professional indemnity insurance cover that is adequate, having regard to: (a) the licensee's membership of the scheme mentioned in paragraph 912A(2)(c) of the Act, taking account of the maximum liability that has, realistically, some potential to arise in connection with: (i) any particular claim against the licensee; and (ii) all claims in respect of which the licensee could be found to have liability; and (b) relevant considerations in relation to the financial services business carried on by the licensee, including: (i) the volume of business; and (ii) the number and kind of clients; and (iii) the kind, or kinds, of business; and (iv) the number of representatives of the licensee." …"
4. Regulation 7.6.02AAA requires that the s 912B (1) "arrangements" are subject to the requirement that the AFSL licensee is "to hold professional indemnity insurance cover that is adequate" having regard to the specified matters. Just what "adequate" requires and what it does not require in this context, was the substance of the contest between the parties.
5. The plaintiffs' submissions. The plaintiffs argue that s 912B, by using the words "must have arrangements for compensating those [retail clients] for loss or damage", creates mandatory obligations to put such arrangements in place. And Regulation 7.6.02AAA requires those arrangements to be "adequate". The plaintiffs submit that to be "adequate", the "arrangements" must fully cover the compensation payable to retail clients for breaches by the licensee, or its authorised representative, of applicable obligations under Chapter 7.
6. The plaintiffs submit that given MRS undertook to advise high net worth individuals with their own SMSFs and to give advice regarding both more complex, non-traditional financial products, s 912B and regulation 7.6.02AAA required MRS to have arrangements through PI cover that is "adequate" to compensate all such retail clients for the breaches by it of its professional duty and Chapter 7 obligations. And the plaintiffs' submission is that "adequate" arrangements here, must mean arrangements that would fully compensate the plaintiffs.
7. It can be assumed for the purposes of this argument that each of the plaintiffs in the Esined, Kauter and the Manning actions were "retail clients", with respect to investments they made at the recommendation of MRS. The "insured business" of MRS was "financial planning as per AFSL XXX40", which was restricted to the provision of financial services and products to retail clients.
8. The plaintiffs submit in conclusion that the defendants' attempts in submissions to deny liability based on non-disclosure and misrepresentation, inadequate policy coverage, and the exclusion clauses would, if upheld, completely negative the purpose and operation of the 150PI endorsement, clause 4, which the plaintiffs submit is designed to give effect to s 912B and Regulation 7.6.02AAA.
9. The first part of this argument has already been answered. The Court has already found that the 150PI endorsement, clause 4(a) should not be construed in the manner for which the plaintiffs contend. But the plaintiffs develop their argument further, as follows, upon the assumption that the Court construes clause 4(a) and (b) of the 150PI endorsement contrary to their submissions and in the way that the Court has.
10. In the vent the Court disagreed with their submissions, the plaintiffs further submit that MRS has failed to put arrangements in place which afford adequate compensation to its retail clients, such as the plaintiffs, because the policies provide very limited cover to compensate retail clients if MRS, or its authorised representative, were to engage in fraudulent or dishonest conduct. And that failure was itself a breach of the professional duty that MRS owed to its retail clients. Moreover, this breach of professional duty was sufficient to engage the policy wording, clause 2.1 and the 150PI endorsement, clause 1.
11. But the plaintiffs argue it was also sufficient to constitute a breach of Corporations Act, Chapter 7, because the PI insurance that MRS obtained failed to meet the commercial purposes and the objects of s 912A, s 912B and the Regulatory Guide 126, "Compensation and Insurance Arrangements for AFS Licensees" published by ASIC, that adequate cover for retail clients be provided through a PI policy.
12. Section 912A(1)(a) requires the following of an AFSL licensee: "(1) A financial services licensee must: (a) do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly; and (aa) have in place adequate arrangements for the management of conflicts of interest that may arise wholly, or partially, in relation to activities undertaken by the licensee or a representative of the licensee in the provision of financial services as part of the financial services business of the licensee or the representative; and (b) comply with the conditions on the licence; and (c) comply with the financial services laws; …"
13. The plaintiffs submit that Regulatory Guide 126 is an "arrangement" which is "approved in writing by ASIC" within s 912B(2) and published by ASIC. Although the edition of Regulatory Guide 126 relied upon by the plaintiffs (Exhibit H) is dated August 2017, it was taken by the parties to be the latest iteration of the correct form of the Regulatory Guide 126 that was applicable to MRS.
14. The plaintiffs rely upon paragraph RG 126.29 of Regulatory Guide 126, which is in the following terms: "We consider the compliance with the compensation requirements is part of your (the licensee's) overall risk management process and your obligation in section 912A to provide services efficiently, honestly and fairly".
15. The plaintiffs also point to RG 126.19, RG 126.20, RG 126.22, RG 126.43, RG 126.44, RG 126.45 and RG 126.46. The plaintiffs argue that s 912A and the balance of Chapter 7, set out the obligations the AFSL licensee must comply with in order to conduct a financial services business under an AFSL. And the plaintiffs submit that RG 126.29 makes clear that compliance with proper compensation requirements under s 912B forms part of the "risk management process" of an AFSL licensee and is therefore integral to the licensee's "professional business" as defined within the policies.
16. Thus the plaintiffs' argument rather ingeniously seeks to define the licensee's obligation to obtain adequate PI cover as part of the licensee's professional business, such that the failure to obtain responding PI cover is a breach of the licensee's "professional duty" within the terms of the policies. But the failure to obtain adequate PI cover is also said to be a breach of s 912B, which falls within Chapter 7. And so the plaintiffs argue that the double requirement of the insuring clause and clause 1 of the 150PI endorsement (breach of professional duty and breach of Chapter 7) is satisfied here and the policy should therefore respond.
17. Put another way, the plaintiffs' argument is that any defendants' contention that successfully allows the Court to draw the conclusion that the policies do not respond, immediately enlivens the plaintiffs' further argument that the policies must respond to another breach of Chapter 7 (of failing to procure adequate policies compliant with Chapter 7), a breach occasioned by the first failure of the policies to respond.
18. The plaintiffs submit that if the licensee or its representatives, for example, failed to provide to a client a Product Disclosure Statement, a Financial Services Guide or a Statement of Advice, such that the 150PI endorsement clause 5(c) was engaged, the practical effect would be that the policies would rarely respond to any claim by a retail client because most licensees would be unlikely on all occasions to comply with all of the exacting requirements found in Chapter 7. So it is submitted for the plaintiffs, that this anomaly can be overcome because the obligation to provide full insurance cover is itself a Corporations Act, Chapter 7 obligation.
19. The Court does not find this argument persuasive. It is circular and involves a number of doubtful premises. The Court accepts a number of the defendants' submissions in reply on this issue, which are included in the Court's own analysis below of the plaintiffs' contentions on this issue.
20. Defendants' Submissions and the Court's Analysis. The defendants first submitted that regulatory Guide 126 has no legal status and that s 912B does not create a private right of action to the plaintiffs. Although the Court regards these contentions as doubtful, the Court does not have to decide these questions, because the plaintiffs' argument fails for several other reasons.
21. First, even if it be assumed in favour of the plaintiffs that Regulatory Guide 126 is given legal effect under section 912B(2)(b), close analysis of Regulatory Guide 126 does not support the plaintiffs' contention that its intent is to guarantee insurance cover to AFSL licensees' retail clients suffering loss in all circumstances. Indeed RG 126.25 says the contrary: "PI insurance is designed to protect the insured (in this case, the licensee) against certain risks; it is not designed to protect consumers and is not a guarantee that compensation will be paid. PI insurance is a way of reinforcing a licensee's ability to meet any consumer losses caused by negligence or a breach of duty by the licensee or its representatives by making funds available to the licensee under the terms of the insurance policy. Consumers generally have no direct right of access to these insurance policies."
22. Regulatory Guide 126 contains exhortations and offers general advice to licensees and does not at any stage state that insurance cover must be provided in all circumstances to be adequate. It recognises that adequate insurance depends upon what is practically available in the market at any given time: RG 126.33 and RG 126.34.
23. Regulatory Guide 126 does not assist the plaintiffs' contention that failure to provide insurance cover that responds to all claims because of exclusion clauses must be a breach of professional duty. RG 126.54 introduces a table of minimum requirements for policy features in order for the policy to be "adequate". Interestingly, the table prohibits exclusion clauses of various kinds but the prohibition does not extend to all the exclusion clauses which are relied upon by the defendants in these proceedings; for example, the approved product list exclusion clause, or the approved product exclusion clause.
24. The plaintiffs also point to RG 126.44 as supporting their case. It provides as follows: "Section 912B requires that the insurance must cover loss or damage suffered by retail clients due to breaches of its obligations under Chapter 7 by the licensee and its representatives. This obligation extends to all financial services covered by Chapter 7. Losses caused by negligent, fraudulent or dishonest conduct that amounts to breachea of Chapter 7 and give rise to a liability to retail clients must be covered."
25. But RG 126.44 must be read with RG 126.54 and table 4, which make clear for example, that the obligation to cover fraudulent or dishonest conduct does not include the requirement to insure principals of a financial planner who condone such conduct, as distinct from authorised representatives.
26. Table 4 of Regulatory Guide 126 sets out the "[f]eatures of adequate PI insurance cover for various policy features". When Regulatory Guide 126 deals with the policy feature of "exclusions" it sets out a number of minimum requirements as follows: "Minimum requirement: The policy must not have the effect of excluding: … * fraud and dishonesty by officers, employees and other representatives (although fraud cover is not required for sole traders or for companies that have one director who is also the company's only financial adviser or representative, the only shareholder and only employee of the company); …"
27. During the period in question here, Mr Moylan was the only AFSR for MRS. He was so identified in the MRS' AFSL. And by the 2012/2013 period Mr Moylan was the only director of MRS. Mr Michael Hill had resigned in May 2011. The only other person fulfilling the role of a financial adviser, Mr Spicer, had left in 2009. And he did not take an active role in advising any of the plaintiffs without Mr Moylan. MRS therefore comes within the description of "sole traders or…companies that have one director who is also the company's only financial adviser or representative". Regulatory Guide 126 recognises that fraud cover "is not required" for such company structures, because in those circumstances the principal will always be an actor in any dishonest conduct, and coverage of a fraudulent principal is not required.
28. So, even if Regulatory Guide 126 is given full force to assist the plaintiffs' case, its minimum requirement for fraud exclusions does not require insurance coverage for Mr Moylan's dishonest conduct at MRS.
29. Thus Regulatory Guide 126 is consistent with the Court's interpretation of the final sentence of the 150PI endorsement, clause 2: "We will not cover any person committing or condoning any act, omission or breach excluded by Clause 7.14 of the policy".
30. Thus the principal premise in the plaintiffs' argument is not established. There is nothing in d 912B, Regulation 7.6.02AAA, or Regulatory Guide 126 from which it can be inferred that retail clients must be compensated in all circumstances by insurers of AFSL licensees.
31. Second, the plaintiffs' argument does not follow its own logic through to its proper conclusion. If indeed a failure by MRS to obtain adequate insurance cover is a breach of Corporations Act, s 912B within Chapter 7, thereby coming within the insuring clause and the double requirements of the 150PI endorsement, clause 1, the only policies that can respond here are the ones that were in fact written here for each of the two relevant policy years. And both these policies still contain the exclusion clauses that they do and which would still exclude the defendants' liability as will be seen below. Corporations Act s 912B does not give a warrant to the plaintiffs to rewrite the 2012/2013 and 2013/14 policies.
32. Third, as the defendants argue, the policies would not respond to this rather novel alleged breach of Chapter 7, because the policies only insure the "professional business" of a financial planner. The plaintiffs are seeking to push what is really the professional work of an insurance broker into the "professional business" of a financial planner. Nothing in Regulatory Guide 126 redefines the business of a "financial planner" to include this. RG 126.29 does not go that far.
33. The analysis here accepts in the plaintiffs' favour that Regulatory Guide 126 is a document that is authorised under Corporations Act s 912B. It should be noted that the defendants contend otherwise. It is not necessary for the Court to resolve this issue because the plaintiffs' argument based upon Regulatory Guide 126 did not ultimately assist the plaintiffs' case even if the guide has the force of law.
34. Mr Jonathan Kelly, the expert underwriter called on behalf of the plaintiffs, offered the opinion that if the defendants' construction of the insurance policies is correct in excluding cover in the manner for which the defendants contend, then the issue of the policies constitute a breach of Corporations Act s 912B.
35. But Mr Kelly's reasoning is unsatisfactory. He makes no reference to the cost of alternative products which would not contain the exclusions which are in the defendants' policies. He does not address the mandatory considerations that are required by Corporations Regulations regulation 7.6.02AAA in order to assess the adequacy of insurance. And even if his analysis is otherwise to be accepted, the plaintiffs still face the difficulty of having this policy respond by somehow seeking to show that it is in breach of "professional duty" for the financial planner not to make sufficient arrangements to protect itself from the financial impact of claims.
36. The plaintiffs' s 912B breach argument fails.

Notification under the Policies

1. The MRS 15 January 2013 Letter to DUAL. The plaintiffs claim MRS notified their claims to underwriters when MRS lodged its proposal to renew insurance for the 2013/4014 policy year.
2. On 15 January 2013, Mr Moylan, on behalf of MRS, signed a covering letter to DUAL forwarding completed proposals applying for insurance for the 2013/2014 policy year. The covering letter gave a short description of the business of MRS and referred to a potential claim against the insured. But it did so reassuringly: "[i]n relation to the potential claim, at this stage it is just a potential possibility and no action has been brought."
3. Mr Moylan completed the accompanying proposal for the 2013/2014 policy year in his own handwriting, which was divided into sections. In Section 2: General Information, Question 2 of the proposal asked whether any claims had been made against the proposer "for professional negligence, error or omission in the last five years", to which Mr Moylan ticked "no". Question 3 of the General Information section of the proposal asked whether the proposer was aware "after enquiry of any circumstances or incident which may give rise to a claim", then invited the proposer to "provide further details" in the event of an affirmative answer. In answer to this Mr Moylan ticked "yes". Question 4 of the proposal asked, "[i]s the firm or any principal or authorised representative(s) aware of any circumstance which may result in the claim being made against the firm, or against any principal or authorised representative(s), or against any partnership or company of which any principal or authorised representative(s) is/was a partner, director, CEO or authorised representative?" In answer to this Mr Moylan also ticked "yes".
4. Section 3 of the proposal, entitled "Income Details", records information about the funds under management of MRS' clients. It declared the firm had 26 clients with funds under management. That information is set out elsewhere in these reasons. Section 3 also declared that, of the 26 clients, some 15 of them were investors approaching retirement or retirees, and another eight were over the age of 45.
5. Section 4 of the proposal sought information about the "product profile" of MRS' business. Question 1 requested the proposer to list, "your top five investment products that produced the most income to you in your previous financial year". A column under the heading "Investment Products" was then provided under which Mr Moylan, in his own handwriting, filled out the names of a number of large institutional products. He referred to MLC, Colonial First State, Macquarie Bank and many others. But the question went on to ask the following, "if you rebate commissions as a matter of policy, please list the top five investment products for which you provide rebates?" Underneath that part of the question, there was a space for five products to be mentioned under the heading, "Investment Products (Rebate Applicable)". The clear implication of the question was that the top five investment products might not be the same as the top five investment products in which a commission rebate was applicable, because two columns and numbers were provided admitting of the possibility that the products in answer to each question could be different.
6. Section 4 of the proposal continued with three other important questions. The first was, "do you disclose commission earned on each of the products recommended above to your clients?" to which Mr Moylan ticked "yes". Question 3 was, "do any of these institutions have a proprietary interest in your business?" to which Mr Moylan ticked "no". And Question 4 was, "do you have a financial or proprietary interest in any of the institutions/products listed above?" to which Mr Moylan ticked "no".
7. The proposal sought information in Section 5: "Remuneration" about the type of products and services that MRS provided to clients. To this, Mr Moylan answered, "predominantly fee for service". And in Section 6, "Business Activity Profile", Mr Moylan answered a question about the over-time variations in the funds under management of the business. To this, Mr Moylan answered, "Fewer clients, therefore less [funds under management]", giving the impression of a mature business with a reducing client base.
8. Section 12 of the proposal, "Risk Management", asked a series of questions, the answers to which were the foundation of several issues concerning disclosure and the operation of exclusion clauses. Question 2 asked, "do you have an Approved Products list?" to which the answer "yes" was ticked. In the event that "yes" was ticked, the proposal form asked, "please advise the process by which a product is approved/recommended". In handwriting, Mr Moylan had written, "Van Eyk Research in AA products and A rated products" and on the next line, "other select products". Nothing else was said about the "other select products". The form showed an interest, through questions 4 and 5, as to what actions were taken "when a product or investment is removed from your Approved Product List?". Mr Moylan declared that the client investment was reviewed "if appropriate".
9. Section 12 then dealt with compliance with Corporations Act, Chapter 7, procedural requirements for giving advice to clients. In Questions 6, 7, 8 and 9, Mr Moylan said the following: "6. Do you conduct a needs analysis for all financial planning portfolio management clients and always provide them with a Statement of Advice? Yes ☑ 7. Do you disclose the credit risk to your clients at all times when recommending an investment product? Yes ☑ 8. Do you provide all your clients with a copy of a Financial Services Guide? Yes ☑ 9. Do you always issue a Prospectus or Product Disclosure statement about the investment product you recommend to your client when required to by law? Yes ☑"
10. Finally, in Section 12, Mr Moylan declared that his last ASIC compliance audit was in July 2012. In answer to a question on whether any issues were identified, Mr Moylan said "some documentation missing".
11. The proposal concluded with a declaration signed by Mr Moylan, which relevantly provided: "[t]he undersigned declares that the statement and particulars in this proposal form are true and that no material facts have been misstated or suppressed after enquiry…. The undersigned agrees that this proposal, together with any other information supplied by us shall form the basis of any contract of insurance effected thereon."
12. As was contemplated by the answer to Question 3 in the proposal, Mr Moylan also completed DUAL's standard notification form, for the "Notification of a claim or circumstance out of which a claim may arise" and also forwarded it to DUAL with the 15 January 2013 letter. This notification form required answers to set questions and allowed for the giving of additional information in an appendix.
13. The notification form (in section 3) sought "general information" about the claim being notified, including the name of the claimant or potential claimant. Mr Moylan's handwritten answer to this question was "unknown". Mr Moylan's answers in section 4 of the form headed "details of insured's retainer/contract", were equally unhelpful to anyone seeking a profile of a particular claim. The question "[w]hat were you retained/contracted to do?" [for the claimant], elicited the answer "investment recommendations", an answer that could have readily described every retainer for every existing MRS client. The question "[w]as your retainer/contract for services evidenced in writing?" elicited the answer from Mr Moylan "unknown - depends on likely client to bring claim". The question "When did you perform the work out of which the claim arises or may arise?" elicited from Mr Moylan the answer "2008 - 2011". The name of the person performing the work relevant to the possible claim was identified as Mr Moylan, whose duties and title were described respectively as "financial advisor, managing director".
14. Appendix A to the notification form was in type script. It was in terms that were closely scrutinised in the parties' submissions: "A small number of clients have invested/lent funds to property investments and/or companies that have to date been unable to repay those funds in total. At the time of the investment all appropriate disclosures were made and clients invested/lent funds with full knowledge of the circumstances at the time. At this stage no loss has been crystallised and no claim or complaint has been formally lodged. We wish to advise the insurance company that there is a chance of a claim against Moylan Retirement Solutions in relation to any loss that may be incurred."
15. This notification form featured in several contests. Other parts of the proposal for the 2013/2014 policy year and the proposal for the previous policy year are set out, where relevant, later in these reasons.
16. The first preliminary question is whether or not the plaintiffs gave a valid notification under the 2012/2013 policy. The second preliminary question is whether Liberty, being only a supporting underwriter for the 2013/2014 policy year (and not for the preceding 2012/2013 year), is by reason of any defence available to it under the 2013/2014 policy, not liable to the plaintiffs.
17. Notification Under the 2012/2013 Policy. Both the 2012/2013 and the 2013/2014 policies are "claims made and notified" policies. The financial planners policy wording, clause 8.2(a) requires that "the insured shall notify us of any claim or loss as soon as practicable and within the insurance period". Different issues arise in each policy year.
18. The plaintiffs first contend that the MRS 15 January 2013 letter was valid notification under clause 8.2(a) of the 2012/2013 policy. The Arch defendants contend that the MRS 15 January 2013 letter was not a valid notice of a "claim" under the 2012/2013 policy. A "claim", as defined under the financial planners policy wording 6.1 is: "(a) any civil proceeding brought by a third party against insured for compensation; or (b) a written demand by third-party for monetary damages"
19. The MRS 15 January 2013 letter and enclosures were neither of these. By 15 January 2013, neither Esined No. 9 nor Esined No. 10 had made a written demand for monetary damages, or served any statement of claim in a civil action, such as the present action. Therefore notice of a "claim", as defined, was not given within the insurance period of the 2012/2013 policy.
20. Therefore, the only remaining pathway by which the plaintiffs could establish liability under the 2012/2013 policy is Insurance Contracts Act, s 40(3). The plaintiffs contend that the MRS 15 January 2013 letter was a form of "notice in writing of facts that might give rise to a claim" during the "insurance period" of the 2012/2013 policy. They submit this notice was sufficient to attract the operation of Insurance Contracts Act, s 40(3) to extend the insurer's liability to certain claims made after expiry of the 2012/2013 insurance period.
21. Insurance Contracts Act 1984, s 40 provides as follows: "(1) This section applies in relation to a contract of liability insurance the effect of which is that the insurer's liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiration of the period of the insurance cover provided by the contract. (2) The insurer shall, before the contract is entered into: (a) clearly inform the insured in writing of the effect of subsection (3); and (b) if the contract does not provide insurance cover in relation to events that occurred before the contract was entered into, clearly inform the insured in writing that the contract does not provide such cover. (3) Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made. …"
22. Whether the facts were notified "as soon as was reasonably practicable after the insured became aware of those facts" within s 40(3) was not in issue in this case.
23. The Arch defendants dispute they have any liability under the 2012/2013 policy. They deny the MRS 15 January 2013 letter was notice of "facts that might give rise to a claim against the insured", principally because they claim it is not notice of any "facts" within s 40(3). But Liberty contends, in common with the plaintiffs, that the MRS 15 January 2013 letter was a valid notice of "facts that might give rise to a claim" against the insured within s 40(3), so that the Arch defendants remain liable under the 2012/2013 policy.
24. The operation of Insurance Contracts Act, s40 may be shortly described. The provision is remedial in nature and "alters the balance of interests to ensure a fair operation of relationships between insurers, insureds and other members of the public": Newcastle City Council v GIO General Limited (1997) 191 CLR 85; (1997) 149 ALR 623; (1997) 72 ALJR 97; (1997) 9 ANZ Ins Cas 61-380; [1997] HCA 53, at 93 per Brennan CJ. A beneficial construction of the Act which achieves "its perceived purpose of protecting the insured" should be preferred over a "narrow or literal reading": FAI Insurance v Australian Hospital Care (2001) 204 CLR 641; (2001) 180 ALR 374; (2001) 75 ALJR 1236; (2001) 11 ANZ Ins Cas 61-497; [2001] HCA 38 at [50] per Kirby J.
25. Liberty and the plaintiffs argue that that Appendix A to the notification with the MRS 15 January 2013 letter identified, at least by general description, that clients of MRS had "invested/lent funds" that could accurately be described as in the nature of "property investments and/or companies", which were "unable to repay the funds in total". They submit that the loans the plaintiffs had made to MIG, the Regional Land Property Fund and Wallalong Investments readily fall into this category. And it is argued that the plaintiffs are "a small number of clients", a description that somewhat limits the number of potential client/claimants being described. The plaintiffs it is said, though not named individually, are a small group of clients, and indeed are retiree clients with higher amounts of funds under management with MRS.
26. In the Court's view, Arch's contrary submissions on this issue are persuasive. MRS' 15 January 2013 letter, and in particular Appendix A, of the notification form, did not identify "facts that might give rise to a claim against the insured", principally because it does not identify "facts". For s 40(3) to operate to extend time to notify a claim, there must be a recognisable correspondence between "facts that might give rise to a claim" given in writing to the insurer within the insurance period and "the claim, when made".
27. Neither the responses to the questions in the January 2013 notification form, nor its Appendix A, provide "facts that might give rise to a claim". First, the responses to the notification form questions are particularly spare instruments of communication. Calling the potential claimant "unknown" and declining to identify whether there was any written client retainer on the basis "unknown - depends on likely client to bring claim" is an important framing of everything which follows. What those answers say to the reader is that the author of the document is unable to identify a particular client who might bring a claim.
28. In the Court's view, the rest of Appendix A needs to be read in the light of that primary declaration. Although it is tempting to read the identity of the plaintiffs into the profile described by Appendix A, Mr Moylan himself was not prepared to attach a name to any of the claimants or give any firm indication by which they might be able to be identified by the insurer. It is important to understand that within s 40(3) the "facts" must be facts that "might give rise to a claim" [emphasis added]. The facts that are notified must at least point towards "a claim". The problem with these preliminary answers is that they give no information that would assist in identifying a particular claim as distinct from bare possibilities.
29. Appendix A does not improve the communication. The first sentence commencing, "A small number of clients…" gives no information. Read with the answers to the previous questions the proper inference is that Mr Moylan is not able to name the clients, perhaps upon the basis that he does not know which "small number of clients" will end up being unpaid and therefore he cannot identify which clients might be the claimants. But that being so, there is no identifiable relationship between "facts" and "a claim".
30. The statement in the second sentence, "all appropriate disclosures were made" adds nothing more. It is not client specific, transaction specific, or time specific. Nor does the statement in the third paragraph that "no loss has been crystalised" add anything extra. Nor does the statement that there is "a chance of a claim against MRS" in the last sentence. Appendix A conveys that no particular client, no particular transaction, no particular loss and no particular documents can be identified. This is not notification of "facts". It is only a notification of "possibilities". And more specifically it is not notification of "facts" that bear any relationship to a "claim".
31. Cases such TBI Pty Ltd v AON Financial Planning Limited (2004) 13 ANZ Ins Cas 61-601; [2004] VSC 40 illustrates the importance of the focus within s 40(3) upon "notification of facts that might give rise to a claim". Merely to identify circumstances in such vague terms is quite insufficient. And here the MRS covering letter of 15 January 2013 is important. So far as claims are concerned, the overall message it delivered was that they were just "a potential possibility".
32. The plaintiffs have not established that notification has taken place under the 2012/2013 policy.
33. Notification in Each Action Under the 2013/2014 Policy. The plaintiffs in the Esined action served their statement of claim on MRS on 23 May 2013 and then on DUAL on 8 July 2013. Arch and Liberty admit the Esined plaintiffs gave valid notification by July 2013 within the insurance period of the 2013/2014 policy.
34. Kauter Investments served a District Court statement of claim on MRS on 22 October 2013. The solicitors for the plaintiff in the Kauter action, Nolan Commercial Lawyers, served a written demand on DUAL on 21 January 2014. This qualified as a "claim" within clause 6.1 of the 2013/2014 policy and service within the insurance period of that policy. And Kauter Investments served the District Court statement of claim in the Kauter action upon DUAL, within the insurance period of the 2013/2014 policy. This was valid notification during the insurance period under the 2013/2014 policy, clause 8.2.
35. In the Manning action Nolan Commercial Lawyers served directly upon DUAL on 3 February 2014 a written demand for money damages dated 31 January 2014. It was necessary for this to be done directly, because MRS was inactive by this time and was subsequently deregistered in August that year. The Arch defendants admit they received such notification pursuant to clause 8.2(a) of the 2013/2014 policy. But Liberty does not admit that it received such notice within time. Notwithstanding that non-admission, the evidence supports the plaintiffs' case in the Manning action that service occurred as alleged. This service was a valid notification during the insurance period under the 2013/2014 policy, clause 8.2.

Specific Non-Disclosure and Misrepresentation: Clause 7.1(b) of the 2013/2014 Policy

1. Liberty uses the MRS letter to DUAL of 15 January 2013 and the accompanying notification form to deny liability under clause 7.1(b) of the 2013/2014 policy.
2. The exclusion on account of "prior knowledge" in clause 7.1 of the financial planners policy wording provides as follows: "We will not cover the insured, including for defence costs or other loss in respect of Prior Knowledge (a) any claim arising from or in connection with a fact or circumstance that the insured or ought reasonably to have known prior to the insurance period might or could give rise to a claim; (b) any claim arising from or incurred connection with a fact or circumstance which notice has been or reasonably should have been given under any previous insurance; (c) any claim that was first made, threatened or intimated against the insured prior to the insurance period."
3. Liberty contends that the plaintiffs' present claims are claims falling within clause 7.1(b) of the policy wording and are not covered under the 2013/2014 policy because they are claims "arising from or in connection with a fact or circumstances of which notice has been…given" under previous insurance, namely the 2012/2013 policy.
4. Arch contends the contrary on this issue. It says that notice has not "been given" under any previous insurance, and that Liberty cannot use clause 7.1 to avoid these claims in the 2013/2014 policy year.
5. Clause 7.1(b) of the financial planners policy wording in the 2013/2014 policy will be enlivened if the plaintiffs present claims are "in connection with" the notified "fact or circumstance of which notice has been… given". It is well-established that phrases such as "in connection with" are expressions of considerable width which will be satisfied by link or association or a relationship which may be summed up in the phrase "having to do with": Elkateb v Lawindi (1997) 42 NSWLR 396, at 402.
6. Like the analysis in the last section related to Insurance Contracts Act, s 40(3), the present analysis only requires an objective analysis of the relationship between the plaintiffs' present claims and the notification form. Inferences about what Mr Moylan's state of mind must have been at the time he put forward the notification form and Appendix A to underwriters are dealt with in the next section of these reasons, dealing with fraudulent misrepresentation.
7. Liberty submits that there is no necessary connection between the outcome of enquiry under Insurance Contracts Act, s 40(3) and the operation of the policy wording clause 7.1(b). Liberty is correct that it is not necessary, for example, for a claim to fall within clause 7.1(b) that "the previous insurance" had in fact responded to the giving of notice. All that is necessary is that "notice has been…given under any previous insurance".
8. Liberty submits that Insurance Contracts Act, s 40(3) "engages on a particular type of fact" whereas exclusion 7.1(b) does not require "a particular quality of fact"; it just needs to be a "fact". It very difficult to see the distinction. The claim 7.1(b) exclusion operates in respect of "any claim arising from…a fact…of which notice has been…given". And Insurance Contracts Act, s 40(3) operates where "the insured gave notice in writing…of facts that might give rise to a claim" and the claim was then made. Whilst it can be accepted that, for the purposes of clause 7.1(b) that the prior policy does not have to respond, it is difficult to distinguish the analysis between these two provisions. The Court does not accept that s 40(3) engages on a particular type of fact that is different from clause 7.1(b). The only obvious difference is that clause 7.1(b) refers to not just "a fact" but a "fact or circumstance" of which "notice has been…given". To that extent clause 7.1(b) provides for a slightly more generous area of operation than Insurance Contracts Act, s 40(3). But that does not make much difference here.
9. Whether facts may give rise to a claim should be assessed objectively: CGU Insurance Ltd v Porthouse (2008) 235 CLR 103; (2008) 248 ALR 240; (2008) 82 ALJR 1135; [2008] HCA 30. But applying such a standard here it is difficult to see how the January 2013 notification form treated as a whole is a "fact or circumstances of which notice has been…given".
10. All the same arguments fielded with respect to Insurance Contracts Act, s 40(3) above apply again. In particular it is to be emphasised that before the analysis even descends upon Appendix A, MRS had answered "unknown" in relation to the identity of possible claimants.
11. But in addition Appendix A itself does not identify any deficiency in performance on MRS' part, which might lead to the claim, be that a failure to give adequate advice or something else. And here there are no other external circumstances which would objectively indicate to the insurer what the deficiency would be.
12. Mr Jones SC correctly described the disclosure here as "fairly opaque". He submitted that it at least notified a period in which the MRS service was provided (2008 to 2011) and that the relevant service provider was Mr Moylan and that in a fairly general sense there was notification of the kinds of products involved.
13. But Mr Jones SC's analysis is not compelling. The four year period over which the services were said to be provided is virtually meaningless. For more than half of this time Mr Moylan was the only principal of MRS, Mr Spicer having resigned. So identifying Mr Moylan as the service provider is saying nothing more than the services are being provided by MRS. And to describe the products being provided to clients as "invested/lent funds to property investments and/or companies" describes every conceivable form of service that MRS would provide.
14. And the other answers Mr Jones SC points to take the matter no further. The lack of a return of funds to clients, "unable to repay those funds in total", does not inform whether there was capital or interest deficiency or both. Mr Moylan declares that he became aware of these matters in August 2012. But all he is really saying is that he became aware of them a few months before he filled out the notification form.
15. Finally, Mr Jones SC submitted that it should be remembered that the form should be approached on the basis the person filling it out was "trying to notify something". The Court draws the opposite conclusion: that Mr Moylan was trying to look like he was notifying something, without actually doing so.
16. Thus, Liberty cannot use clause 7.1(b) of the exclusions in the financial planners general wording in the 2013/2014 policy to deny coverage to the plaintiffs' claims.

Two Issues not Decided

1. The defendants fielded many alternative defences in these proceedings. The Court has dealt with most of them in these reasons. As will be seen, the Court finds that a number of them succeed. It is therefore not necessary for the Court to decide every legal permutation of the plaintiffs' and defendants' respective cases. Two issues not decided should be briefly mentioned.
2. The plaintiffs contended that as corporate trustees of superannuation funds, they were nevertheless retail clients of MRS, as were the non-corporate clients who made advances such as Mr and Mrs Manning. The plaintiffs claim that they have the benefit of the presumption that they are retail clients provided for Corporations Act s 761G. In the Court's view, the plaintiffs have a reasonable argument that they are retail clients, and for the reasoning in this judgment, the Court will proceed on the basis that they are retail clients, as they contend.
3. The other issue not decided is whether the loan agreements the subject of these proceedings are within AFSL XX440. The defendants contended that these loan agreements do not fall within AFSL XX440. But again, the Court is of the view, without elaborating the arguments, that the plaintiffs have a reasonable argument that the various loan agreements relied upon do fall within MRS' licence and proceeds on that basis.

Fraudulent Non-Disclosure and Misrepresentation - Insurance Contract Act s 28(2)

1. The defendants next contend that the MRS 15 January 2013 letter and the accompanying notification form with the proposal for the 2013/2014 policy, constituted material and fraudulent non-disclosure or misrepresentation. The plaintiffs dispute that contention.
2. Liberty and Arch plead in identical terms that MRS and Mr Moylan (a) made positive misrepresentations and (b) failed to disclose other matters, when advancing the proposal for the 2013/2014 policy ("the misrepresentations and non-disclosures"). Liberty and Arch further plead: that Mr Moylan and MRS were well aware that those misrepresentations and non-disclosures were, together and severally, relevant to the decision of underwriters whether or not to accept the risk; and, that MRS and Mr Moylan presented the risk in the manner that they did to the defendants, fraudulently and knowing that the risk presented a false and untrue position. As a result, the defendants seek to avoid the 2013/2014 insurance contract under Insurance Contracts Act s 28 (2).
3. In the alternative to the allegations of fraudulent misrepresentations and non-disclosures the defendants rely upon the same material as constituting misrepresentation under Insurance Contracts Act s 26 and material non-disclosure, which would entitle the defendants to reduce the claim by the amount that they would have been obliged to pay had there not been a misrepresentation. In this case the defendants contend that would be nil as the defendants would not have agreed to bind cover in those circumstances: Insurance Contracts Act s 28(3). These issues are dealt with in the succeeding section of these reasons. This section deals first with the fraud allegations.
4. The allegedly fraudulent misrepresentations and non-disclosures can be summarised separately. The misrepresentations alleged arise principally out of Annexure A to the 2013 notification form. Each of the statements in the notification form that "all appropriate disclosures were made" and that "no loss has been crystallised" is said to be misleading. And if not misleading, the statements are matters that the defendants allege MRS knew or reasonably ought to have known that could give rise to a claim and the 2013 notification form was misleading in not declaring that fact. These allegations are referred to in these reasons as "the 2013 notification form misrepresentations".
5. The non-disclosures relied upon are all matters that the defendants say that MRS had a duty to disclose to the defendants under Insurance Contracts Act s 21(1) and which the defendants pleaded MRS well knew to be matters relevant to the decisions by the defendants whether or not to accept the risk and that a reasonable person in the circumstances of the insured would be expected to know were relevant to acceptance of the risk.
6. The pleaded non-disclosures are repeated here in summary: Mr Moylan was a director and shareholder of MIG; significant amounts of MRS' funds under management had been invested in MIG at his recommendation; MIG did not possess sufficient funds to pay interest on the loans made to it by clients of MRS as and when those payments fell due; Mr Moylan knew that MIG and its assets were illiquid and were under significant distress and were of questionable value; but, he nevertheless continued to recommend to clients of MRS that they provide loans to MIG. MIG continued to pay interest on loans made to it by clients of MRS until about October 2009 but only until then. These are referred to in these reasons as "the MIG non-disclosures".
7. In the course of proposing cover with DUAL for the 2013/2014 policy MRS provided DUAL with a 2013 MRS approved product list containing van Eyk Research AA and A rated products. But this approved product list did not list any of MIG, the Regional Land Property Fund, the Wallalong Investment Trust, or the Bolwarra Heights Investment Trust products. The defendants contend that MRS knew that a significant amount of its funds under management had been invested in those products and that MRS and its directors and shareholders held interests in MIG, the Regional Land Property Fund, the Wallalong Investment Trust, or the Bolwarra Heights Investment Trust. These are referred to in these reasons as "the approved product list non-disclosures".
8. The plaintiffs allege Mr Moylan and MRS knew that the misrepresentations and non-disclosures presented a false and untrue position. They are said to have caused the defendants to enter into the 2013/2014 policy which can now be avoided.
9. Insurance Contracts Act, ss 21 and 28 state the insured's duty of disclosure and provide for the insurer's remedies for non-disclosure. Section 21 provides as follows: "21. The insured's duty of disclosure (1) Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that: (a) the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or (b) a reasonable person in the circumstances could be expected to know to be a matter so relevant, having regard to factors including, but not limited to: (i) the nature and extent of the insurance cover to be provided under the relevant contract of insurance; and (ii) the class of persons who would ordinarily be expected to apply for insurance cover of that kind. (2) The duty of disclosure does not require the disclosure of a matter: (a) that diminishes the risk; (b) that is of common knowledge; (c) that the insurer knows or in the ordinary course of the insurer's business as an insurer ought to know; or (d) as to which compliance with the duty of disclosure is waived by the insurer. (3) Where a person: (a) failed to answer; or (b) gave an obviously incomplete or irrelevant answer to; a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter."
10. The duty of disclosure under s 21 has been described by the Court of Appeal in Prepaid Services Pty Ltd & Ors v Atradius Credit Insurance NV (2013) 302 ALR 732; [2013] NSWCA 252 at [98], Meagher JA (Macfarlan and Emmett JJA agreeing) in the following terms: "The duty of disclosure under s 21(1) is a duty to disclose what is known to the insured "before the relevant contract of insurance is entered into". That is the time when the contract is made (s 11(9)), in this case 24 August 2007. The duty is to disclose every "matter that is known" which the insured also "knows to be a matter relevant" or which a reasonable person could be expected to know to be a matter relevant to the insurer. That relevance must either be to the decision of the insurer as to whether to "accept the risk" or as to the terms on which it will do so. The word "knows" means more than believes or suspects or even strongly suspects: Permanent Trustee at [30] (McHugh, Kirby and Callinan JJ). In this context "matter" describes anything which is known to the insured which also is known to be relevant, or that could be expected to be known to be relevant, in each case in the respects described above. This requirement directs attention to the state of mind of a reasonable person in the circumstances of the insured and protects the insurer against inadequate disclosure by an insured who is unreasonable, idiosyncratic or obtuse: CGU Insurance Ltd v Porthouse [2008] HCA 30; 235 CLR 103 at [52], [53] (Gummow, Kirby, Heydon, Crennan and Kiefel JJ)."
11. Section 28 of the Insurance Contracts Act provides as follows: "28. General insurance (1) This section applies where the person who became the insured under a contract of general insurance upon the contract being entered into: (a) failed to comply with the duty of disclosure; or (b) made a misrepresentation to the insurer before the contract was entered into; but does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into. (2) If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract. (3) If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made."
12. The Court concludes here that the notification form with the proposal for the 2013/2014 policy constituted fraudulent misrepresentation and material non-disclosure and that both the Liberty and the Arch defendants are entitled to avoid the 2013/2014 policy on those grounds under Insurance Contract Act, s 28(2).
13. The Court makes findings of serious misconduct against Mr Moylan in this section of these reasons. Such findings raise special considerations for the Court. In its consideration, the Court has applied the principles in Briginshaw v Briginshaw (1938) 60 CLR 336; [1938] ALR 334; (1938) 12 ALJR 100; [1938] HCA 34 ("Briginshaw") and has had regard to Evidence Act 1995, s 140(2). The Court does not lightly make findings that, on the balance of probabilities, a party to civil litigation has been guilty of serious misconduct, and the Court recognises that the strength of evidence necessary to establish such findings may vary according to the nature of what is sought: Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd & Ors (1992) 110 ALR 449; (1992) 67 ALJR 170; [1992] HCA 66 at 170 per Mason CJ, Brennan, Deane and Gaudron JJ; see also Amalgamated Television Services Pty Ltd v Marsden [2002] NSWCA 419 and Palmer v Dolman; Dolman v Palmer [2005] NSWCA 361.
14. Mr Moylan did not give evidence and therefore additional caution is warranted in drawing any inference that is adverse to him, particularly one which may involve fraud or active dishonesty. But sometimes, and this is such a case, the Court can be comfortably satisfied from the detailed picture provided by the available evidence, that such an inference is warranted.
15. The overall pattern in the evidence of what Mr Moylan has written, has advised and has constructed, and the vividly accurate accounts that the plaintiffs give of their encounters with him, all show that he is an individual of considerable intelligence and self-possession. He is one who in the Court's view is very likely to have had to mind all his dealings with the plaintiffs up to the point when he constructed the 15 January 2013 notification form.
16. The 2013 Notification Form Misrepresentations. The 2013 notification form contained the pleaded misrepresentations and Mr Moylan was well aware of their falsity.
17. The notification form was seriously misleading. Appendix A is the starting point for analysis. The first sentence of Appendix A was actively misleading. The words "unable to repay those funds in total" imply that only some part of the monies due to the clients had not been repaid. But the uncomfortable reality was: that no interest had been paid to most of the clients since late 2009 (but some a little later); and, that none of the principal advanced by the clients had been repaid. The words quoted here from Appendix A of the notification give false comfort to underwriters about the extent of existing defaults on investments previously recommended by MRS. The words quoted also give false comfort to underwriters by failing to state the combined size of the defaults to the plaintiffs. By that time, the gross amount not repaid to all plaintiffs was close to the $4.636 million claimed plus some years of accrued unpaid interest, at rates of between 9% and 13.5%. Mr Moylan had the loan agreements available to him to provide some of this financial information to underwriters to give an accurate picture, rather than the half-truth conveyed by these words. But with an ordinarily competent memory he would not even have needed copies of the loan agreements to remember the essentials of MIG's defaults to these plaintiffs, the need for the supplemental deeds, which had also expired, and the recent pressing demands from the Mannings in respect of what were in part misappropriated funds.
18. Second, the Court's findings show that the statement in the second sentence of Appendix A, that "at the time of the investment all appropriate disclosures were made" and that "clients invested/lent funds with full knowledge of the circumstances of the time" is also misleading. The Court's findings already show that no adequate disclosures were made about many matters. The extent of these non-disclosures have been elucidated elsewhere in these reasons: they cover undisclosed conflicts of interest for Mr Moylan and MRS in recommending these particular investments, undisclosed financial risks (including pre-existing financial defaults) associated with the investments being recommended, and the undisclosed misapplication of funds to destinations other than those authorised by the plaintiffs. The plaintiffs had far from "full knowledge" about any of these undisclosed circumstances and by virtue of this Appendix A, the defendants had none.
19. Moreover, Annexure A is particularly inadequate in its studied vagueness on this issue. To say "all appropriate disclosures were made", glides lightly over the pressing nature of the facts required to be disclosed, such as the very substantial conflicts of interest and the prior financial defaults, or the insolvency or near-insolvency of the entities being recommended for client investment.
20. Third, it is difficult to credit how Mr Moylan could possibly have said in January 2013 "at this stage no loss has been crystallised". By that time every one of the entities that had "been unable to repay those funds" to the plaintiffs was either in liquidation, or assessed objectively, already represented no realistic prospect of repayment to the plaintiffs. MIG, the single largest destination of advances from MRS clients (of $3.316 million) had been wound up 15 months earlier, on 11 September 2011 without repaying any principal or outstanding interest, and after ceasing interest repayments to creditors in April 2009. The next largest destination of MRS client funds (at $1.1 million) the Regional Land Property Fund, had ceased paying the required coupon rate of interest to investors in October 2009 and had been wound up on 26 June 2012, six months before this notification. It is evident from Mr Moylan's 1 November 2012 statement to the Mannings about the shifting of MIG's trusteeship to MCD Holdings, that he was well aware by then of MIG's liquidation.
21. And the remaining smaller investments of MRS client funds in Wallalong Investments ($100,000) and the loan to Ms Crittle ($120,000) were in a parlous state by mid-January 2013. Wallalong Investments had by then been in default on its loan obligations for years, requiring loan rollovers initiated by Mr Moylan, without him disclosing to the clients consenting to the rollovers that they were necessary because of Wallalong Investments' probable insolvency. Wallawong Investments was formally wound up on 8 February 2013, only three weeks after Mr Moylan submitted the 15 January 2013 letter to DUAL. Wallawong Investments had failed to complete the purchase of its development land as early as March 2010 after which its financial position continuously worsened. Moreover, from what is known about them, the loans to Ms Crittle were long overdue by January 2013.
22. Nor is it easy to understand how Mr Moylan could possibly say, as at January 2013 "no claim or complaint has been formally lodged" in respect of the various unpaid client investments. The findings on the first limb show that by no later than late 2012 Mr Moylan had engaged for months in increasingly acrimonious discussions with the Mannings in particular, who were seeking repayment of their capital and interest. But he had also had more limited, but nevertheless firm, discussions with each of the Daveys, the Smiths, and the Kauters, who were complaining about the same subject. These discussions must have been characterised in Mr Moylan's mind as "complaints". Technically it is true that nothing had been handed to MRS in writing that would qualify as a "claim" that was "formally lodged" by each of those groups of plaintiffs within clause 6.1 of the financial planners policy wording. But the Mannings for example had organised more than one formal meeting with Mr Moylan where there was only one item on the agenda for discussion: their complaints to him about the non-return of their capital and interest on the investments he had recommended. To say that no "complaint" had been "formally lodged" was a half-truth that omitted the formal presentation of complaints such as this to MRS.
23. Finally, it is difficult to credit how Mr Moylan could describe the claim by the plaintiffs in the covering letter of 15 January 2013 to DUAL in these terms: "in relation to the potential claim, at this stage it is only a potential possibility". The objective facts of default, plus the discussions that Mr Moylan had already held with the plaintiffs, plus his conscious misapplication of the Mannings' funds, should have indicated to a reasonable person in Mr Moylan's position that a potential claim was by then highly likely.
24. These misstatements could not have been negligent. There are too many to be accidental. Too much is omitted for an innocent explanation to have any persuasive power. Mr Moylan knew the information which showed the falsity of these incorrect statements. It must be inferred that he was aware that they were false when he approved them being put forward to underwriters on 15 January 2013. In the Court's view it should be inferred that MRS, through Mr Moylan, dishonestly concealed the true facts from DUAL, concerning the claims that the plaintiffs had already notified to MRS by then.
25. Mr Moylan was in a position to know the falsity of these misstatements concerning the defaults upon the plaintiffs' investments. He was the sole director and shareholder of MIG. He was a shareholder of MCD Holdings, which had, as trustee of the Cartel Investment Unit Trust, by that stage invested $728,927 into tranche one of the Regional Land Property Fund and $545,000 into tranche two. Mr Moylan would have been receiving the same correspondence as the plaintiffs in respect of the difficult financial position that Regional Land Property Fund then faced, and which indicated no return of capital was likely, correspondence about which the Mannings and the Smiths in particular gave evidence.
26. Between 5 August 1999 and 15 June 2013, Mr Moylan had been a director of Wallalong Investments, a party to the proceedings before McDougall J and was aware of the repeated calls for repayment from it that had been made, for example by Mr Davey and Mr Smith.
27. MIG was the trustee of the Bolwarra Heights Investment Trust, and was well aware of the unfulfilled demands for payment that had been made by various plaintiffs against that trust at that time. And Ms Trudy Crittle was a client of Mr Moylan's, and Mr Moylan had signed the loan agreement on behalf of Ms Crittle with the Mannings, who by 2012 had chased him up about that loan.
28. The inference of Mr Moylan's knowledge of these misrepresentations is further supported from the text of the MRS proposal of 15 January 2013 itself. The proposal includes a description of the firm's client and business activity profile. Mr Moylan declared that MRS had 26 clients. MRS was required to break down the 26 clients into bands showing the dollar value of funds under management for clients. It did so as shown in the following table: The Range of Funds Under Management (FUM) Per Client The Number of Clients with FUM within the Specified Range of FUM Gross Amount of Client FUM within that Range of FUM $0 - $280,000 18 $1,145,000 $280,001 - $500,000 5 $2,101,000 $500000 - $1,000,000 3 $1,772,000 Over $1,000,000 Nil Nil TOTAL 26 $5,018,000

1. Assuming this declaration of funds under management represents an accurate profile of MRS' business, it shows that the plaintiffs, who are each claiming the return of more than $500,000 from Mr Moylan and whose assets have been identified in relation to the retail/wholesale client issue, were probably some of the more asset-rich clients of the MRS practice. Mr Moylan is unlikely to have forgotten such a group.
2. The MIG Non-Disclosures. The 2013 proposal contained the pleaded MIG non-disclosures summarised above. All of those non-disclosures are made out, as is Mr Moylan's knowledge of them, for much the same reasons as have been given in relation to the 2013 notification form misrepresentations.
3. The Approved Product List Non-Disclosures. A fuller analysis of the construction of the approved product list and what was included in the proposal is undertaken later in these reasons under the "does the clause 5(a) approved product list exclusion apply?" The facts found in that part of these reasons are relevant to the Court's determination of this issue here.
4. The plaintiffs contend that the products that caused the plaintiffs' loss the subject of these proceedings were identified and disclosed as "other select products" in the 2013 proposal form and the document therewith. But in the Court's view, that is not so. There was no clear direct reference to these products in the proposal. The indirect ways in which the plaintiffs say that the products would have been identified by DUAL are not persuasive.
5. But the Court is not prepared to draw the conclusion that this non-disclosure was fraudulent on the part of Mr Moylan. The conduct of the approved product list, the approval process, and the gathering of the lists of approved products was so unsatisfactory and disorganised that the non-inclusion in the 2013 proposal of a complete list of approved products is potentially explained by negligence rather than fraud. The Court is not prepared to draw the inference that it was fraudulent. Thus, the defendants' fraud case fails in this particular respect.
6. In general, the Court infers Mr Moylan withheld the information that he did from this proposal because he had reason to believe he would not obtain further insurance, if he had disclosed the true facts to underwriters. And if he did not obtain further insurance to satisfy the conditions of his AFSL his licensed business would be in immediate jeopardy.
7. It follows that the defendants are entitled under Insurance Contracts Act s 28(2), as they claim, to avoid the contract of insurance constituted by the 2013/2014 policy. This conclusion would be sufficient to end this case in the defendants' favour. But many other fact-rich alterative defences were raised and should be considered. The first is a general non-disclosure defence.

Breach of the Duty of Disclosure - Insurance Contracts Act s 28(3)

1. The defendants field as a complete alternative answer to the plaintiffs' case that MRS failed to comply with its duty of disclosure under Insurance Contracts Act 1984, s 21, and made misrepresentations before the insurance contract was entered into. They contend that as a result, even if they had not been entitled to a void the contract of insurance, their liability should be reduced to nil on the basis that "that would place the insurer in a position in which the insurer would have been if the failure [to comply with the duty of disclosure] had not occurred or the misrepresentation had not been made": Insurance Contracts Act, s 28(3).
2. The defendants contend that when MRS proposed cover with DUAL for the 2012/2013 policy and for 2013/2014 policy that it knew matters that it must have appreciated would be relevant to the defendants' decision whether or not they would accept the risk to be written or the terms on which they were likely to do so. Some of those matters were the following: 1. Mr Moylan had a beneficial interest in MIG; 2. a significant amount of MIG's funds under management had been invested on Mr Moylan's recommendation; 3. that MIG did not possess sufficient funds (or any other capability from its own resources) to pay interest on the loans between it and the clients of MRS (including the plaintiffs, with whom it had loan agreements) as and when those payments fell due; and 4. nevertheless, MRS continued to recommend to its clients that they provide loans to MIG.
3. The defendants' case is that MRS had actual knowledge of each of these four matters. And they contend that had proper disclosure taken place that they would not have written these policies.
4. In support of this defence, the defence called Mr Elias Karim, the underwriter responsible for writing both the 2012/2013 and 2013/2014 policies. Mr Karim was employed as a Financial Lines Senior Underwriter at DUAL between October 2009 and July 2015. He was predominantly responsible for underwriting risks in PI and directors and officers insurance. At the time of the hearing, he had about 14 years of experience as an underwriter. He received and assessed the proposals from MRS for insurance in the 2012/2013 year and the 2013/2014 year. In each of these years he authorised the offering of terms of insurance to MRS in accordance with the recommendations of his assisting underwriter, Ms Hung. In exercising this underwriting authority he was guided by the DUAL Professional Lines Underwriting Manual.
5. Mr Karim was an articulate, efficient professional, who was well across the detail of his underwriting task. The Court has no reason to doubt his testimony and accepts it as representing the likely conduct of underwriters in the hypothetical circumstances about which he gave evidence.
6. Mr Karim reviewed the contents of the 2013 notification form received from MRS. The Court accepts that from the 2013/2014 proposal and the notification form which he reviewed, Mr Karim formed the following views in February 2013 before agreeing to accept the risk: 1. MRS had 26 clients in total, most of whom were approaching retirement and held investments of less than $250,000. The average age of these clients indicated to Mr Karim they were likely to prefer conservative and low risk investment strategies, particularly after the Global Financial Crisis. 2. MRS appeared to Mr Karim to recommend a good spread of conservative investments with significant investments in cash management accounts. 3. Mr Karim formed the view that MRS had adopted a conservative approved product list. He thought that the approved product list provided in support of the 2013/2014 proposal had been prepared by a highly reputable research house, van Eyk Research, and that it contained only what Mr Karim described as "upper echelon" investments. The mention in the proposal of "other selected products" caused Mr Karim to assume that these would also be well researched conservative products similar to those on the approved product list that he had seen. 4. For the prior financial year MRS had generated a significant proportion of its income from well recognised investments. 5. Prior to making his determination, Mr Karim looked at a sample statement of advice to give some comfort that MRS was allocating appropriate risk profiles to its clients and was satisfied with the sample he saw.
7. The Court accepts Mr Karim's evidence that the matters set out in paragraph [61] and [62] of his principal affidavit of 31 January 2008 were not disclosed were highly relevant to his decision whether or not to accept the risk proposed in both the 2012/2013 proposal and the 2013/2014 proposal. Only the latter year is relevant now in light of the Court's findings. These matters as set out in paragraphs [61] and [62] of his affidavit are as follows: "61. In reviewing the documents set out at paragraph 60 above, I have observed that: (a) at various times between 2006 and 2011, Mr Moylan, in his capacity as authorised representative of MRS, recommended that the Plaintiffs make investments into, or provide loans to, the following: i) Moylan Investment Group Pty Ltd (MIG); ii) Moylan Business Solutions Pty Ltd (MBS); iii) The Cartel Investment Unit Trust (Cartel); iv) Wallalong Investments Pty Ltd (WIPL); v) The Wallalong Investment Trust (WIT); vi) Charlestown Consulting Pty Ltd (Charlestown); vii) The Bolwarra Heights Investment Trust (BHIT); viii) The Bolwarra Heights Property Trust (BHPT); ix) The Regional Land Property Fund (formerly the Hardie Estates Property Fund) (RLPF); and x) Ms Trudy Crittle (Ms Crittle). (b) Mr Moylan was: i) for the period 10 September 2004 to 15 June 2013, a director and shareholder of MRS; ii) for the period 25 July 2006 to 14 May 2013, a director and shareholder of MIG; iii) for the period 5 August 1999 to 15 June 2013, a director and shareholder of MBS; iv) for the period 5 August 1999 to 15 June 2013, a director of WIPL; and v) for the period 28 June 2007 to 15 July 2010, the company secretary of Regional Land Pty Ltd (RLPL). (c) Mr Kenneth Hill was: i) for the period 10 September 2004 to 13 May 2011, a director and shareholder of MRS; ii) a partner in a partnership trading as Turnbull Hill Lawyers (THL); iii) for the period 8 February 2001 to 24 February 2012, a director, secretary and shareholder of Charlestown; and iv) for the period 20 April 2005 to 15 July 2010, a director of RLPL. (d) MIG: i) was the trustee of BHIT; and ii) had entered into a facility agreement to loan money to Charlestown. (e) MBS: i) was a shareholder in WIPL; ii) was the trustee of Cartel; iii) was a joint venture partner of THL; and iv) carried out accounting services for RLPF, (f) Charlestown was: v) the trustee of BHPT; and vi) a shareholder in RLPL. (g) Cartel was a unit trust established to invest clients of MRS into RLPF. (h) RLPL was the operator and fund manager of RLPF. (i) THL was a material partner of RLPF. (j) BHIT was a unit holder in BHPT. (k) WlPL was the trustee of WIT. (l) Ms Crittle was, for at least the period 2006 to 2012, a client of MRS. (m) on or about 25 October 2010 Mr Moylan advised Graeme and Nancy Manning that they should invest $215,000.00 into their BT Wrap Account. Graeme Manning and Nancy Manning deposited the sum of $215,000.00 into MIG's account for the purpose of purchasing shares to form part of their BT Wrap Account. That never occurred. Those monies were retained by MIG and were used for its benefit. (n) between March 2011 and May 2011 Mr Moylan advised Graeme Manning (on behalf of himself and Nancy Manning) and Nancy Manning (on behalf of Roy Maytom and Joan Maytom) that they should invest a total of $575,000.00 into a Macquarie Bank Limited GMT Account. Graeme and Nancy Manning subsequently executed loan agreements with MIG and caused a total of $575,000.00 to be paid to MIG for the purpose of those monies being invested into a Macquarie Bank Limited GMT Account. That never occurred. Those monies were retained by MIG and were used for its benefit. (o) on 11 September 2011 MIG was wound up by order of the Supreme Court of New South Wales. (p) on 4 April 2011 the Responsible Entity of RLPF determined that it should be wound up, and notified ASIC of that winding up on 26 June 2012. (q) on 12 December 2012 Ms Crittle sold her McMahon Point property. (r) on 8 February 2013 WIPL was wound up by order of the Supreme Court of New South Wales. (s) on 15 September 2014 Charlestown was wound up by order of the Supreme Court of New South Wales. (t) on 1 May 2017 MBS was wound up by order of the Supreme Court of New South Wales. 62. From my review of the materials referred to at paragraph 60 above, and based upon the observations I make in paragraph 61 above, it appears to me that: Characteristics of MIG and RLPF (a) MIG had the following characteristics: i) it was a vehicle used for directly investing into property developments in the Hunter region; and ii) MIG had an ongoing business and financial relationship with Mr Moylan, MBS, and Mr Hill. (b) RLPF had the following characteristics: i) it was a managed investment scheme that operated as a unit trust; ii) the fees being charged by the fund manager were significant and above what I would ordinarily expect for a fund of this type; iii) Charlestown was a key development partner with equity invested into the scheme; and iv) the investment manager was RLPL, of whom Mr Hill was chairman. MIG as a distressed asset (c) clients of MRS who invested with MIG ordinarily did so by way of unsecured loan to MIG. (d) for the period from late 2006 to at least August 2009, MRS knew that MIG did not have sufficient monies to pay interest on the loans made to it. (e) despite knowing that MIG was a distressed asset, MRS nevertheless continued to recommend to its clients that they provide loans to MIG for the period from late 2006 to at least August 2009. Those recommendations appear to have been repetitive and systematic. MIG retaining monies intended for other purposes (f) MIG retained monies that were deposited or invested with it by clients of MRS; i) for MIG's own benefit; and ii) contrary to instructions provided to MRS regarding the purpose for which. The Approved Product List (g) the investment products set out at paragraph 61(a) above were not included on the Approved Product Lists provided to DUAL by MRS in support of either the 2012 Proposal or the 2013 Proposal. Funds Under Management (h) a significant proportion of MRS's funds under management were in fact being invested into direct property developments, which was not disclosed in the 2012 Proposal or the 2013 Proposal. Conflicts of Interest (i) Mr Moylan: i) held interests as set out at paragraph 61(b) above; and ii) as a result of those interests and the related interests set out at paragraphs 61(c)-(l), stood to receive a benefit from his advice to MRS's clients to invest in the products set out at paragraph 61 (a). (j) Mr Hill: i) held interests as set out at paragraph 61(c) above; ii) as a result of those interests and the related interests set out at paragraphs 61(c)-(l), stood to receive a benefit from advice provided to MRS's clients to invest in the products set out at paragraph 61 (a). (k) both Mr Moylan and Mr Hill: i) held interests in MIG as set out at paragraphs 61 (b) and (c) above; ii) advised clients of MRS to advance or loan monies to MIG as set out at paragraphs 61 (m) and (n), in circumstances where those monies were not subsequently invested by MRS and/or MIG in accordance with the instructions provided to MRS, but were instead kept by MIG for its own benefit; and iii) as a result of their interests in MIG, stood to receive a benefit from monies retained by MIG contrary to the instructions provided to MRS by its clients as set out at paragraphs 61 (m) and (n). (l) any advice that MRS provided to its clients to invest in the products set out at paragraph 61(a) above was clearly conflicted because of the relationships set out at paragraph 61(b)-(l) above."
8. The matters of fact identified in paragraph [61] of Mr Karim's affidavit are either justified by the Court's findings in these proceeding, or if not already the subject of express findings, are otherwise justified by the evidence before the Court. And the Court confirms they are facts upon which Mr Karim was entitled to act. Furthermore, Mr Karim's analytical observations in paragraph [62] are also justified by the findings the Court has already made or by the evidence before the Court and are inferences which the Court also draws. To the extent that Mr Karim's evidence deals with conflicts of interest, that issue is discussed in more detail below in relation to the conflicts of interest exclusion later in these reasons.
9. The Court accepts Mr Karim's evidence that had he had the undisclosed information in paragraphs [61] and [62] available to him at the time, he would have considered and done the following: 1. He would have formed the view in both policy years that MRS was providing conflicted advice that was contrary to its clients' interests, that was clearly unsuitable and was in breach of its professional duties to its clients; 2. With this undisclosed information, Mr Karim would have assessed a substantially increased risk of claims being made against MRS in the event that investment products suffered losses, his experience being that where conflicted advice was provided to financial advisers that resulted in a loss, clients invariably brought claims against the financial adviser for breach of duty; and 3. Noting that a significant proportion of client funds were being invested into direct property, which was a volatile product class, he would have considered such an investment to be speculative and unsuited to the risk adverse investors who made up MRS' clients.
10. The Court accepts that had the undisclosed matters been brought to Mr Karim's attention in both policy years, that, as Mr Karim says, he would not have recommended and DUAL would not have agreed to offer terms to MRS on the basis set out in either policy, or indeed at all. Upon proper disclosure of the undisclosed matters, this insurance proposal would never have proceeded past Mr Karim.
11. Mr Karim's evidence was challenged in cross-examination to suggest that he had not properly read the voluminous material attached to the 2013 proposal. A reasonably short time elapsed between when he received the email correspondence from the junior underwriter, Ms Hung, and when he made his decision as Financial Lines Senior Underwriter at DUAL to recommend cover based on the 2013 proposal and the notification form. The email traffic shows he had about 1 ¾ hours to read through what he had received from Ms Hung before submitting his recommendation.
12. But that was sufficient review time for a competent and experienced subject matter expert such as Mr Karim. Moreover, he and Ms Hung had a practice of holding discussions before his reviews to equip him to assess the risk effectively. He says, and the Court accepts, that he looked at the essential documents, the 2013 proposal form, the 2013 notification form, the proffered approved product list and other significant documents.
13. Mr Karim was further questioned to suggest that he decided to write this business in the 2013/2014 policy year without regard to clear indications of risk at MRS in the 2013 proposal form, which warranted further inquiry. The plaintiffs contend that Mr Karim's approach was to not make enquiries of MRS in response to the 2013 proposal before writing the cover because any additional risk would be accounted for by his decision to substantially increase the premium for the 2013/2014 year. The base premium in the 2012/2013 year was $10,500 which after calculating GST, stamp duty and other fees, produced a total premium for that year of $12,512.50. In the 2013/2014 policy year, the base premium was $15,000, which together with GST and similar fees, led to a total premium of $17,765 for that year.
14. Mr Karim answered this suggestion. He explained that the premium increase between the 2012/2013 and 2013/2014 policy years was due to DUAL making an across-the-board increase in the base premium for its financial planners underwriting business, which was not related to risk factors associated with MRS. Mr Karim had an excellent recollection of his reasons for increasing this premium. The DUAL financial planning portfolio at that time was "in distress". As Mr Karim explained, DUAL subsequently "pulled out of that market".
15. But the plaintiffs argued that the premium increase was difficult to explain in light of the fairly conservative business profile that MRS disclosed in the 2013/2014 proposal. They pointed out that MRS' funds under management had actually decreased from 2012/2013 ($13 million) to 2013/2014 ($5 million) and that MRS' clients were still assumed to be investing in conservative van Eyk type products. The plaintiffs submitted that Mr Karim could not reconcile why the base premium for 2013/2014 had increased given this information. But Mr Karim's answer is accepted: that the increase had nothing to do with the individual position of MRS but was associated with DUAL's overall underwriting portfolio for financial planners.
16. Mr Karim's evidence on this is also consistent with DUAL's online system recording the "Policy Detail" of the business written for MRS on this occasion (Exhibit 8). In the "Comments" section, the Policy Detail document says, "increased premium in line with Financial Planning strategy" with a side reference to Ms Hung. Mr Karim explained the "strategy" referred to here was DUAL's plan to deal with its poorly performing financial planners portfolio of business.
17. But any financial planning "strategy" document was not available. The plaintiffs called for any such "strategy" document. It was not produced. But that does not cause the Court to doubt Mr Karim's evidence on this subject. Moreover, another entry in the Policy Detail document for "loading/discounts detail" - which shows nil entries - confirms Mr Karim's evidence that no loadings were applied on account of any special risk associated with writing this business for MRS.
18. Mr Karim was further cross-examined to suggest that the products the subject of these proceedings had been disclosed as "other select products" in the 2013 proposal because some details of them was included in a "compliance audit" document which had been provided with the proposal for insurance in the 2012/2013 policy year. It was suggested to Mr Karim that he had not looked carefully enough at the actual disclosures of the products through this "compliance audit" document. This seemed to be advanced as an argument to show Mr Karim's lack of attention to detail because of a determination to write the insurance, and also based an argument that disclosure of these products in these proceedings had occurred.
19. Mr Karim conceded that he had looked at this compliance audit document in the course of assessing the 2012 proposal. But he was looking at it in order to check in the context of the proposal that actions that had been recommended in MRS' last compliance audit had in fact been taken. As might be expected, he concentrated on whether corrective action was taken. He is not to be criticised, in my view, for failing to pick up on the fact that the same compliance audit document mentioned a number of other products "Lime Burners, Bolwarra, MIG, Wellington, Macquarie, Pacific First", which appeared to be different from the van Eyk products referred to in the same compliance audit.
20. The fact that these were indeed "the other select products" referred to elsewhere in MRS' proposal was not at all clear. This was not least because the products such as MIG and Bolwarra were referred to in the compliance audit document as "unlisted products", a term that Mr Redfern tended to use, and which conveyed that they may not have been on any select product list at all. What is clear from the 2013 proposal is that there was no separate list presented to DUAL of "other select products".
21. The plaintiffs next argue that any misrepresentation or non-disclosure that the defendants now plead is accounted for by DUAL's own failure formulate proposal questions which made clear to MRS what disclosure was required and to ask appropriate follow-up questions.
22. The plaintiffs argue DUAL limited its inquiries. They submit that the form of DUAL's proposal (in Section 4) represented to MRS that the underwriters were only interested, as relevant to the risk, in whether MRS or Mr Moylan had a financial interest in any of the top five investment products that produced the most income to MRS in the last financial year.
23. The plaintiffs argue that by limiting Questions 1 and 2 in Section 4 of the 2013 proposal that the defendants made known to MRS that they were neither interested in, nor considered relevant, that MRS or Mr Moylan might have had financial interest in any other products recommended by MRS. Provided the products in which a financial interest were held were not one of the top five investment products producing the most income to MRS, the plaintiffs submit that DUAL's written questions represented to MRS that any financial interest outside the top five investment products could be ignored. The plaintiffs contend that it was open to DUAL to ask a wider question about whether MRS or its representatives had any financial or proprietary interest in any of the products that MRS recommended. Indeed, Mr Karim conceded that it was open to ask such a question. The plaintiffs submit that if such a question had been asked, it would have received a more forthcoming answer from Mr Moylan.
24. These contentions are not persuasive. First, for DUAL merely to ask a question about disclosure of financial interests in the top five income-earning investments does not bring with it the implication that underwriters are "not interested" in financial interests in other products MRS had recommended. If, for example, Mr Moylan had a very substantial interest in an investment other than a top five investment, Questions 1 and 2 should not be read as absolving MRS from an obligation to give disclosure with respect to that investment.
25. Second, Question 1 of Section 4 of the 2013 proposal actually asks two questions. These questions are not just about the five products "producing the most income for you in your previous financial year". The second question relates to "the top 5 investment products where you provide rebates". This is contrary to the plaintiffs' submissions. The double question indicates that DUAL is interested in a wider group of products; not just the top five income-earning products of the proposed insured.
26. Third, the general declaration at the end of the 2013 proposal that nothing has been suppressed by the proponent is not consistent with the plaintiffs' narrow construction of DUAL's questions. DUAL complied with Insurance Contract Act s 22, informing MRS in the proposal form of the nature and effect of the s 21 duty of disclosure. And the careful drafting of Appendix A to the 2013 notification form is indirect evidence that Mr Moylan was alert to how broad were his s 21 disclosure obligations.
27. Fourthly, risk is not assessed by reference to one question. The whole 2013 proposal is relevant. In the 2013 notification form (Appendix A), Mr Moylan declared that "all proper notifications have been made" to potential claimants. Mr Karim was also entitled to take statements such as this at face value as a basis to believe that MRS was not in the habit of holding undisclosed financial or proprietary interests in the products it was recommending. And in this context, the covering letter was reassuring not to ask further questions.
28. Then the plaintiffs point out how extensive was the plaintiffs' disclosure of the van Eyk AA and A rated products. They argued that there was no obligation under s 21 to disclose anything extra about the "other select products" referred to in the 2013 proposal. This was said to be on the basis that "the financial wellbeing or otherwise of a particular product therefore does not form part of the risk that DUAL is required to assess until a claim is made".
29. This argument is not persuasive. The argument uses the euphemism of the "financial wellbeing" of products when the reality was that the investment vehicles of several of these products, into which substantial client funds had been invested, were in liquidation and others were insolvent. That clearly was "a matter relevant to the decision of the insurer whether to accept the risk" within s 21(1).

The Plaintiffs' Waiver and Wilful Blindness Replies to the Defendants' Case

1. The plaintiffs further argue that the defendants have waived their right to complain of non-disclosure. The plaintiffs submit that an insurer can waive its right to complain that the insured has failed to fulfil its duty of disclosure: citing Anglo-African Merchants Ltd v Bayley [1971] 1 QB 311 at [320]. The plaintiffs argue in the alternative that the defendants have wilfully shut their eyes to the implications of material that had been disclosed, such that they should be taken to be on notice of the matters which they abstained from enquiring about: citing Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; (2007) 237 ALR 209; (2007) 81 ALJR 1107; [2007] HCA 22, the plaintiffs contended that wilfully shutting one's eyes to the obvious can lead to an inference of knowledge.
2. Leaving aside legal issues as to the availability of either of these doctrines, the facts do not warrant their application in the present case, for the reasons that follow. There was little in Mr Moylan's answers to the 2013 proposal which would prompt a search to investigate the matters which this case proves were not disclosed.
3. The plaintiffs' arguments are based upon a number of matters, the first of which is the 2013 notification form. The plaintiffs submit that the 2013 notification form contains sufficient material to put DUAL on inquiry. This submission was based in part upon the evidence of Mr Jonathan Kelly, an expert called by the plaintiffs. Mr Kelly, an insurance broker, was retained by the plaintiffs to give expert evidence in the proceedings. Mr Kelly's expertise was challenged. He was said to be only an insurance broker, rather than an underwriter. But his oral evidence in chief showed he had extensive underwriting experience.
4. But the Court has not found his evidence to be particularly helpful. Rather than being based upon the particular practices of underwriters, his report and testimony were in the nature of a commentary upon the appropriate legal conclusions to be drawn from the underlying materials in this case. Mr Kelly, for example, gives evidence about what materials should put an insurer in the position of the defendants "on inquiry". But that is ultimately an inference for the Court to draw based on the application of Insurance Contracts Act, Part IV. In the end, the Court accepted parts of Mr Kelly's reports into evidence. But other than to provide useful illustrations of issues, they did not add much to the Court's reasoning in its analysis of the misrepresentation and non-disclosure issues.
5. The plaintiffs' two main arguments draw upon Insurance Contracts Act s 21(2), the provision that excepts from a proposed insured's obligation of disclosure, matters (s 21(2)(c)) "that the insurer knows or in the ordinary course of the insurer's business as an insurer ought to know", or where compliance with a duty of disclosure is "waived by the insurer" (s 21(2)(d)). But before a question of waiver arises, there must be a fair presentation of the risk: Hitchens v Zurich Australia Ltd [2015] NSWSC 825; (2015) 18 ANZ Ins Cas 62-7076 ("Hitchens"). Ordinarily at common law, an omission to make an inquiry is not a waiver, if the insurers are not put on inquiry and a waiver is not to be easily presumed: Greenhill v Federal Insurance Co Limited [1927] 1 KB 65; (1926) 24 LI L Rep 383.
6. The plaintiffs' argument can be reduced to a number of essential propositions. It focused on the 2013 notification form and content. The argument contended that a number of elementary inquiries should have been made to further assess the risk and were suggested by the 2013 notification, especially Annexure A. These were said to be matters such as the following: the identity of the non-performing investment products; the statement of reliability of some products to repay interest or capital; the risk level of these products; the identity of the clients who had not received payment, or who might be intimating a possible claim; whether the products were part of the van Eyk Research list of "other select products"; how the products were approved and whether they formed part of MRS' approved product list; the circumstances under which MRS came to recommend that these particular clients invest; and whether Mr Moylan or MRS had a financial interest in any of the products in question.
7. The plaintiffs submit that had DUAL made only some of these enquiries, it is likely that Mr Moylan would have given truthful answers to them and the matters which Mr Karim says were not disclosed in paragraph [61] and [62] of his affidavit, would have, in all probability, been revealed. Instead, the plaintiffs argue that what Mr Karim did was to make a series of "unwarranted assumptions" which were either erroneous or were in conflict with the matters that MRS had in fact disclosed. The plaintiffs submit that the information provided in the 2013 notification form would have put an ordinary and careful insurer on inquiry and that the failure to inquire amounts to a waiver.
8. The plaintiffs' second argument is that the assumptions adopted by Mr Karim were so untenable that it must be inferred that he consciously refused to "examine, enquire or investigate any other matter" which might have caused him to become aware of worse information. The plaintiffs submit it should be inferred from Mr Karim's conduct that "no honest and reasonable insurer" put in the position that the defendants were, as informed by the 2013 notification form, would have refused to make such inquiries. It is submitted that the defendants' failure to make such inquiries shows such wilful blindness on the part of the insurer that it can be inferred that the insurer has actual knowledge of the facts which it now complains were not disclosed.
9. The plaintiffs' argument depends upon whether Mr Karim made the "unwarranted assumptions" and whether there was some other reasonable explanation for the course of conduct that he took. As White J said in Hitchens, before the question of waiver arises, there must be "a fair presentation of the risk". In this case, there was not a fair presentation of the risks. And the facts fall well short of being able to infer bad faith on the part of the insurers. When the proposal is looked at as a whole, it is not difficult to see why DUAL did not inquire further.
10. The plaintiffs contend that Mr Karim made four "inappropriate and unwarranted" assumptions. These were the following: 1. That the "other select products" referred to in the proposal were "conservative products", similar to that in the van Eyk list; 2. That the clients of MRS were elderly and near retirement and were therefore only likely to invest in "conservative products"; 3. That the statement in the 2013 notification form, Appendix A, that "no loss as crystallised" meant that no loss on the part of the client had crystallised, rather than no loss on the part of MRS; and finally 4. That the phrase in Appendix A, about the small number of clients, that "have invested/lent monies to property investments and/or companies" did not include debentures or corporate bonds and therefore did not form part of Category C found in the investment split document to which 65% of the funds under management of MRS had been disclosed, but rather to assume that loans to companies fell within Category Q, identified as "other", and for which no funds for management had been allocated.
11. In the Court's view, the assumptions made by Mr Karim were neither inappropriate nor unwarranted, thereby undermining the foundation for the plaintiffs' waiver argument.
12. As to the alleged unwarranted assumptions (1) and (2), there was every reason for Mr Karim to assume that the "other select products" were conservative. Mr Karim was entitled to approach the 2013 notification form on the assumption that the insured was giving honest answers. Nothing in the disclosure, particularly Annexure A, indicated that any of the products associated with non-payments were involved with risky investments. But, quite the contrary, DUAL was assured that "all appropriate disclosures were made". And the whole proposal confirmed that the business was compliant with Corporations Act, Chapter 7 procedural requirements and had therefore properly informed the clients of risk, and that it had an aging client base of retirees, who could be assumed to either have or would request conservative investment strategies. The large van Eyk list was itself conservative. The other products were "select" products in the sense that they were chosen to suit that client-base. It is not an unwarranted assumption that the older clients of this business would tend to invest in conservative products, or at least alternatively, that a competent financial planner would be directing these older clients into more conservative products. And nothing in the proposal suggested otherwise.
13. As to the alleged unwarranted assumption (3), in the Appendix A statement, "at this stage no loss has been crystallised and no claim or complaint has been formally lodged" (italics added), the italicised words are ambiguous. They could mean no loss has been crystallised by the client, as the plaintiffs submit. They could mean no loss has been crystallised by MRS. The making of a claim could indicate a crystallisation of a loss by either party. But even if the words are interpreted the way for which the plaintiffs contend, the assumption is neither inappropriate nor unwarranted. Appendix A, together with the covering letter, is carefully crafted to convey the idea that a loss is only a bare possibility, not a probability. The first sentence of Appendix A only communicates "that inability to repay funds is a state of affairs that has subsisted" to date. This conveys the idea that it may not be permanent.
14. As to the alleged unwarranted assumption (4), the assumption made was appropriate. The 2013 proposal sought information about the "investment split" (that is, placing the clients' investments into categories of risk) among clients of the business. Mr Moylan did not fill that part of the proposal out and it was separately requested and supplied on 4 February 2013. It placed the clients' investments into different categories of financial investments listed from "A" to "Q". Only some of these categories were relevant to this proposal. The 4 February 2013 investment split document Mr Moylan submitted is divided into investments on a "direct basis" and also "via platforms and other investments". In Mr Moylan's handwriting, the declarations on the direct basis were as follows: "Proposal Form: Professional Indemnity Insurance ... 4(a) Client Investment Split: A Australian/Foreign Equities on a direct basis 10% B Australian/Foreign Equities on a managed fund basis 5% C Cash/Fixed Interest Securities: 65% - Government Bonds - Debentures, Capital Notes - Corporate Bonds - Income Securities … E Life Insurance 5% … J Listed Property Trusts (LPTs) 5% … P Unlisted Property Trusts (e.g. syndicates) or direct property 10% Q Other % Direct Property SUB TOTAL 100%"
15. The same investments were also classified in a different way, "via platforms and other investments" as 65% "Wrap Accounts/Self-Managed Superannuation" and 35% "Master Trusts", a classification of less present relevance.
16. The current client investments split document supplied to Mr Hung on 4 February 2013 was requested because the questions about investments were not completed in the proposal form. The investment split communicated to Mr Karim was reassuring; it showed 65% of client investments in the equivalent of very conservative securities. But it was also reassuring about another relevant matter. The DUAL underwriters' manual guidance that Mr Karim followed indicated that high risk property investments in direct property were not to exceed 15% of the financial planners' portfolio. The February 2013 client investments split document indicated that it was only 10%.
17. It was suggested to Mr Karim in cross examination that "loans to companies" such as MIG fell within Category C, which is 65% of the portfolio of the MRS business, rather than Category Q, identified as "other", to which no client investments have been allocated. Mr Karim rejected this analysis. And a plain reading of the 2013 investment split document supports Mr Karim's analysis. The document actually indicates that there are no direct loans to companies, which would fall into Category Q. Rather it shows that 65% of the portfolio relates to products such as government bonds, or reliable fixed-interest securities. This was a comfortable indicator of low risk to Mr Karim. The MIG loans should have been in the "Other" category on any view, which gave Mr Karim false comfort.
18. There is no basis to conclude that Mr Karim should have made further inquiries based upon these assumptions. This part of the plaintiffs' case falls away. Neither the doctrine of waiver, nor the allegations of wilful blindness, has any factual foundation. Mr Karim was criticised for saying in his evidence at one point that, "I firmly believe that there is nothing more I could have asked that would have changed my opinion of the risk at that time. I believed that what was disclosed to me was completely honest". In the Court's view, in light of what Mr Karim was shown, that opinion is perfectly reasonable.
19. This reasoning is informed by wider circumstances. Neither Mr Karim nor Ms Hung were backward in making inquiries of this insured. Ms Hung actively corresponded with Ms Margaret Aspinall, the NAS broker, seeking an actual statement of advice, rather than a template, which had been provided. And she sought better information about the investment split which MRS was recommending. This resulted in an email from Ms Aspinall to Ms Hung on 4 February 2013, attaching the investment split considered here.
20. The addendum to the 2013 proposal reproduces the contents of the proposal itself. But the addendum requests the annexure of a range of documents by the proponent for insurance. These included, for example, the following: "a representative statement of advice", "a current approved product list", "a current copy of financial services guide", and "a copy of latest compliance audit". MRS did provide material answering these descriptions with the proposed addendum it submitted. Ms Hung carefully ensured that all of these were obtained and analysed on review.
21. And the documents Mr Karim created in the course of considering whether or not to write this business are consistent with a considered approach on his part. For example, on 5 February 2013, Mr Karim wrote to Ms Hung saying, "I am okay with the overall risk and agree with your terms" but he expressed concern that the sample statement of advice that had been provided by MRS was, "a little vague". And he asked her to confirm more about the nature of the "strategic" advice that MRS said it gave to clients, including its benefits and disadvantages.
22. And he wanted to know whether MRS discussed "alternative strategies" with clients. As it turns out, this was a highly relevant question in light of what happened in this case. A persistent default on the part of Mr Moylan was his failure to discuss "alternative strategies" when the loans to MIG came up for renewal. Ultimately, Mr Karim was satisfied with the response that he got through NAS. But none of this represents either a casual approach on his part, or a desire to underwrite this risk shutting his eyes to any potential problems.
23. In the Court's view, neither of the plaintiffs' waiver or wilful blindness arguments succeeds.
24. The plaintiffs also relied incidentally in their reply argument to the defendants' non-disclosure case on Insurance Contracts Act, s 26. Section 26 relevantly provides: "26. Certain statements not misrepresentations (1) Where a statement that was made by a person in connection with a proposed contract of insurance was in fact untrue but was made on the basis of a belief that the person held, being a belief that a reasonable person in the circumstances would have held, the statement shall not be taken to be a misrepresentation. (2) A statement that was made by a person in connection with a proposed contract of insurance shall not be taken to be a misrepresentation unless the person who made the statement knew, or a reasonable person in the circumstances could be expected to have known, that the statement would have been relevant to the decision of the insurer whether to accept the risk and, if so, on what terms. …"
25. There is no basis in this case for the application of these provisions in a manner that assists the plaintiffs, either to meet the fraudulent misrepresentation or non-disclosure case under s 28(2), or the alternative case under s 28(3). In the Court's view, Mr Moylan well knew that the matters that the Court has found he deliberately did not include in the 2013 proposal form and the 2013 notification form were relevant to the defendants' decision to accept the risk and on what terms.

Does the Fraud and Dishonesty Exclusion Apply?

1. The defendants contend that the circumstances of the plaintiffs' claims enliven the fraud and dishonesty exclusion in the policies. Clause 7.14 of the policy wording excludes claims arising out of the "reckless, fraudulent, dishonest, malicious or criminal" acts or omissions of the insured and its agents. Automatic Extension 3.1 countermands that exclusion but provides that underwriters "will not provide cover in respect of any…(a) person committing or condoning any act, omission, or breach excluded by exclusion 7.14 of the policy". As indicated earlier in these reasons, clause 2 of the 150PI endorsement amends clause 3.1 of the policy wording. These provisions are set out earlier in these reasons.
2. The 150PI endorsement is an amendment and not a replacement of policy wording clause 3.1, the amendment is confined to the subject matter of retail clients. Any wholesale clients covered by policy wording clause 3.1 would still be covered. Although for the reasons previously given coverage of the plaintiffs as retail clients under these policies can be assumed in any event.
3. The defendants contend this fraud and dishonesty exclusion most obviously applies in the Manning action, where Mr Moylan's conduct in disobeying his client's mandate to MRS and misapplying funds was clearly intentional.
4. Those contentions are well justified on the Court's findings. Mr Moylan on behalf of MRS provided advice to the Mannings that they should invest in BT Financial Group and Macquarie Bank Ltd CMT Accounts. The Mannings accepted that advice and Mr Moylan's recommendation that to facilitate the investment the Mannings must deposit monies into MIG for subsequent investment on their behalf.
5. The Mannings deposited monies with MIG. But contrary to their mandate MIG retained those monies for its own benefit and MRS failed to cause the deposited monies to be invested as agreed between Mr Moylan on behalf of MRS and the Mannings. Mr Moylan controlled MIG and MRS and was aware of the Manning's instructions about the investment of their funds, as they were given to him. He was in a position to carry out their instructions but he did not do so; conduct that could only be inferred was deliberate given the clear instructions that had come from the Mannings. Moreover, in another indicator of Mr Moylan's dishonesty he failed to inform the Mannings that MRS had not invested these funds in accordance with their instructions, until they directly challenged him about how he had applied the funds.
6. The Court's findings in relation to the Manning action have characterised Mr Moylan's conduct with respect to the Mannings' investment monies as dishonest. The Court accepts that the Mannings' claim for the loss of their misapplied investments is claim "arising from or directly or indirectly attributable to or in consequence" acts or omissions of Mr Moylan, as an agent of MRS, which were fraudulent or dishonest and excluded from cover on this additional ground.

Is the Conflict-Of-Interest Exclusion Enlivened?

1. The defendants also rely upon the conflict of interest exclusion in the policy wording, clause 7.19(a). The conflict of interest exclusion provides for the following exclusion from insurance coverage: "WE will not cover the INSURED, including for DEFENCE COSTS or other loss, in respect of…any CLAIM or liability arising from or directly or indirectly attributable to or in consequence of…any failure of any INSURED (or any of its agents) to disclose or adequately disclose any…conflict of interest."
2. Enlivening this exclusion requires the proof of three elements: 1. that the insured has a conflict of interest; 2. that the insured has not disclosed or adequately disclosed that conflict-of-interest; and 3. that the claim made against the insured must be in respect of a liability of the insured "arising from or directly or indirectly attributable to or in consequence of" the matters in (1) and (2).
3. As to element (1), the defendants contend that MRS (through Mr Moylan) had a direct or an indirect financial interest in each entity into which it recommended that the plaintiffs invest, including the loan investments and that by reason of those interests a conflict existed between the duty of MRS to give disinterested professional advice to its clients and the financial self-interest of MRS.
4. As to element (2), the defendants submit that MRS either did not, or did not adequately, disclose the conflict in (1) to any of the plaintiffs prior to their decision to loan the money or make the investments that it recommended through Mr Moylan. The defendants contend that the plaintiffs were not told at all or were given very superficial information about the nature of the interests of MRS and Mr Moylan in any of these entities.
5. As to element (3), the defendants contend (in the alternative to the submissions they put on the first limb): that the plaintiffs were left with no real understanding of MRS' and Mr Moylan's conflict-of-interest of MRS that Mr Moylan that were not revealed to them; but that had they been told the real facts, they would not have made any of the investments MRS had recommended, thereby establishing the necessary causal connection to satisfy element (3).
6. The defendants contend that these three elements are made out and the conflict of interest exclusion is enlivened in respect of losses arising from all the loans advanced to MIG, including those further advanced by MIG to the Wallalong Investment Trust and the Bolwarra Heights Investment Trust and the investments made in the Regional Land Property Fund. The plaintiffs dispute that this exclusion is enlivened mainly because there was adequate disclosure.
7. These reasons now address whether each of the three elements of the conflict of interest exclusion is made out.
8. Element (1) - the Conflicts of Interest. There were many relationships between Mr Moylan, MRS, Mr Hill, Wallalong Investments, the Wallalong Investments Trust, Moylan Business Solutions, Charlestown Consulting, MIG, the Bolwarra Heights Investment Trust, the Bolwarra Heights Property Trust, the Regional Land Property Fund and the Cartel Investments Unit Trust.
9. The most convenient summary of the conflicts of interest that Mr Moylan and MRS had is set out in paragraph [61] of Mr Karim's principal affidavit extracted earlier in these reasons. There was an extensive web of interrelationships demonstrated by that summary, which the Court has found to be accurate.
10. Element (2) - Adequacy of Disclosure. The defendants contend that it can comfortably be concluded that there was either no disclosure to the plaintiffs of the substance of the conflicts of interest or disclosure that was vastly inferior to that which was warranted in the circumstances. The Court has reached the view in this section that the defendants' contention is correct.
11. The plaintiffs' original pleadings were based upon the inadequacy of disclosure by MRS, leading to a consequent breach of fiduciary duty to the plaintiffs. Subsequent amendments have obscured that original pleading but the defendants still maintain that the facts support that conclusion thereby enlivening the conflict of interest exclusion.
12. Advances to MIG and Other Entities through MIG. The plaintiffs seek to show that Mr Moylan made some relevant disclosure of potential conflicts of interest with respect to the advances the plaintiffs made to MIG. There is some evidence of disclosure to the Smiths and the Mannings. The Court accepts the evidence of Mrs Smith and Mrs Manning that Mr Moylan mentioned his relationship with MIG. He said to Mrs Smith that MIG is, "a company which I own and manage". And Mr Moylan said to Mrs Manning that "MIG is my company".
13. But this understated the nature of Mr Moylan's relationship with MIG and with MRS. Such descriptions did not reveal: 1. that Mr Moylan was the sole director and shareholder of MIG; 2. MIG was the trustee for Bolwarra Heights Investment Trust; 3. Moylan, by reason of Moylan Investment Group being trustee for Bolwarra Heights Investment Trust, had a beneficial interest in Bolwarra Heights Investment Trust which was a unit holder in Bolwarra Property Investment Trust; 4. Moylan was a director of Wallalong Investments which was the trustee of Wallalong Investment Trust to which Moylan Investment Group had loaned monies; 5. Moylan was a director and shareholder of Moylan Business Solutions, which was a shareholder of Wallalong Investments; 6. Charlestown was a shareholder in Regional Land Pty Ltd (the operator and fund manager of Regional Land Property Fund); 7. Hill was a director and shareholder in Moylan Retirement Solutions and Charlestown Consulting and a director of Regional Land Pty Ltd (the operator and fund manager of Regional Land Property Fund); and 8. Moylan Investment Group had entered into a facility agreement to loan $2 Million to Charlestown Consulting.
14. Most plaintiffs say they received documents that were very similar to the "Moylan Investment Group Pty Ltd - Property Update March 2009" ("the MIG March 2009 Property Update") in which some disclosure of Mr Moylan's interests is made. But the plaintiffs say that they received these documents earlier than March 2009. This is one rare place where the Court does not accept the plaintiffs' evidence. But the Court does not accept such a document was ever given to them. Had it been given to them it is likely to have been kept. All the plaintiffs were careful people who kept good records of what Mr Moylan gave them.
15. Even if such a document had been given to them, and if it were to be assumed to be similar in content to what was in the MIG March 2009 Property Update it would still not have constituted adequate disclosure. The MIG March 2009 Property Update gives no hint of most of the conflicts that have been identified.
16. The MIG March 2009 Property Update was dealt with in the expert evidence of Mr McMaster. This expert evidence supports the Court's conclusion. The Revised McMaster Report assessed the adequacy of the MIG March 2009 Property Update as a disclosure of a conflict of interest. Mr McMaster was of the opinion that it was quite inadequate as a medium of such disclosure. The Court agrees.
17. The Regional Land Property Fund. Mr Moylan held the following undisclosed interests in and in relation to the Regional Land Property Fund that were in conflict with the duty of MRS to give dispassionate advice to its clients, the plaintiffs: 1. Mr Moylan was the company secretary of Regional Land, the corporate operator and fund manager of the Regional Land Property Fund; 2. Mr Moylan was a director and shareholder of Moylan Business Solutions, which provided accounting services to the Regional Land Property Fund; 3. Mr Moylan was a director and shareholder of MIG, which had entered into a facility agreement for $2 Million with Charlestown Consulting, a shareholder of Regional Land, the operator and fund manager of the Regional Land Property Fund; 4. Mr Michael Hill was a director of and shareholder in MRS and Charlestown Consulting and a director of Regional Land; and 5. Mr Michael Hill was a director and shareholder in Turnbull Hill Lawyers Pty Ltd, a declared "material partner" of the Regional Land Property Fund.
18. There was some disclosure in the letter attached to the July 2007 Information Memorandum, to the effect "MBS is a joint venture company with Turnbull Hill Lawyers, a material partner in the [Regional Land Property] Fund". However, as explained by Mr McMaster in his Revised Report (at [239] - [243]), this falls well short of meaningful disclosure of a conflict of interest.
19. Even if it were to be found that some limited form of disclosure was made to the plaintiffs prior to entering into loans or investments, such disclosure was inadequate to give the plaintiffs the full picture. For instance, there was no disclosure by Moylan of the precise relationship between Mr Moylan and Regional Land Property Fund, how that relationship might influence Mr Moylan, what direct benefits MRS and Mr Moylan, or another related entity, might gain as a result of the advice being taken up. Mr Moylan did not invite the plaintiffs to seek independent advice. Mr Moylan did not disclose to the plaintiffs the relationship between MIG, Charlestown Consulting, Bolwarra Heights Investment Trust and Bolwarra Heights Property Trust and the purpose for which the monies loaned by the plaintiffs to MIG were being applied.
20. MRS faced a high number of conflicts in dealing with the plaintiffs. But the limited disclosure it made to the plaintiffs did not give them any sense of how strongly Mr Moylan was financially motivated to give the advice that he did. They could only have gained that sense by understanding the depth of his own investment in all these entities, their then-precarious financial positions and the substantial indirect benefit that Mr Moylan would gain from their investment in these entities. They were never given that understanding.
21. Element (3) - Causation. All the plaintiffs were thoughtful people who had some understanding of business and secretarial matters and they all had common sense financial prudence. But they had little comprehension of financial markets or sophisticated investment products. The Court has already made observations about their honesty, reliability and credibility. They are all the kind of people who would have been cautious about investing in things that Mr Moylan had recommended, if he had appeared to them to benefit from their respective investments. They were prepared to trust him and they did. But that trust was not unlimited.
22. Had the plaintiffs known much more about the material facts, especially the depth of his financial involvement in these various ventures, and that their investments were making an important contribution to keeping the investments afloat, they would not have advanced any monies on Mr Moylan's and MRS' recommendation.

Does the Clause 5(a) Approved Product List Exclusion Apply?

1. The defendants seek to exclude liability for the plaintiffs' claims on the basis of the approved product list exclusion, in clause 5(a) of the 150PI Financial Planners Endorsement. The approved product list exclusion, 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."
2. This wording raises the questions: whether or not the loss that the plaintiffs claim is for a financial product or investment that was on MRS' approved product list; and for the purpose of answering that first question, what was the MRS approved product list for the purposes of clause 5(a). MRS' procedures for maintaining an approved product list were less than rigorous. What constituted its "approved product list" at any one time was disputed.
3. What was on the MRS Approved Product List? The defendants contended that no financial product involving MIG, the Wallalong Investment Trust, the Bolwarra Heights Investment Trust, the Bolwarra Heights Property Trust, the Regional Land Property Fund or the loans to Ms Crittle were on any approved product list of MRS when the relevant advice was given. The plaintiffs contended that all the investment products that MRS recommended to the plaintiffs were on MRS' approved product list. The plaintiffs sought to advance this case principally through the evidence of Mr Spicer.
4. Mr Spicer was involved in maintaining what he said was the approved product list of MRS. Mr Spicer says, and the Court accepts, that as at June 2007 MRS retained an approved product list. The Court has confidence in Mr Spicer as a witness and accepts his evidence about the maintenance of an MRS approved product list. The Court accepts his evidence that MRS retained Lonsec Fiscal Pty Ltd ("Lonsec") to provide investment product reports and on a quarterly basis to review what products would be included in the MRS approved product list: CB 4412 - 4496, 4814 - 4990. Lonsec provided reports on larger institutional investments such as the City Pacific First Mortgage Fund and Colonial First State First Choice Investments.
5. MRS' deregistration meant that a comprehensive audit of its filing systems has not been undertaken. It not surprising therefore that Mr Spicer was mostly only able to give secondary evidence about the contents of the MRS approved product list apart from what was in the Lonsec reports and some documents he produced in answer to a call.
6. But Mr Spicer is sure there was such a list and that most of the financial products the subject of these proceedings were on it and his evidence is accepted. Mr Spicer believed that he was participating in a genuine approval process, when he held regular meetings with Mr Moylan and confirmed the approval for particular approved products of Retirement Planning Services, and later MRS. Mr Moylan and Mr Spicer held these meetings together at which they reviewed the material presented and decided whether or not to approve a product as part of the approved products list.
7. At these meetings Mr Moylan and Mr Spicer approved as part of MRS' approved products the following: MIG, the Bolwarra Heights Investment Trust, the Hardie Estates Property Fund, the Cartel Unit Trust and the Regional Land Property Fund. Mr Spicer did not recall approving any products associated with the Wallalong Investment Trust or Ms Trudy Crittle and the Court finds that they were not on any MRS approved products list.
8. The practice within MRS, as described by Mr Spicer, was that Lonsec produced reports on Colonial First State, City Pacific and Octavia/Wellington and the larger institutional investment funds that Mr Moylan commonly recommended to clients, including the plaintiffs. The quarterly Lonsec reports were used to monitor the continuing position of these products on the approved product list.
9. It was Mr Spicer's belief that as a result of that process the approved products of MRS could be recommended to its clients. Mr Spicer was not the kind of person who would have participated in a product approval process which he regarded as a sham. He resigned from MRS in August 2009, when his own ethical standards were not being met by Mr Moylan. Despite the attacks on his evidence in cross-examination on the approved product list issue, it is accepted.
10. Mr Spicer particularly recalls MIG and the Regional Land Property Fund, as two of the prominent financial products on the MRS approved product list, which were also reviewed by Mr Gregory Redfern, a consultant at MRS. Both Mr Spicer, and Mr Redfern, say that Mr Redfern was engaged to review each investment product. Mr Spicer says that Mr Redfern provided a compliance certificate in respect of some financial products and once the certificate was obtained, the certified products were added to the MRS approved product list. According to Mr Spicer, this practice continued from June 2007 until the termination of Mr Spicer's employment in August 2009. Whilst some of the investments in these proceedings post-date Mr Spicer's departure from MRS the Court infers the process continued.
11. Mr Redfern gave evidence that he was indeed engaged to do the audits of MRS investment lists. He was a guarded and cautious witness, but one nevertheless who was mostly helpful. His recollection of some events was not strong. Mr Redfern was alert to the potential damage his answers in cross-examination might do to him and was careful in crafting them. He was overtly defensive, deliberately limiting his answers, or finding reasons why he could not give answers at all. Because of these features the Court has approached his evidence cautiously. But his and Mr Spicer's evidence about the product approval process largely coincide and the Court accepts them both on the subject.
12. Mr Spicer was also involved in preparing statements of advice for clients and in reviewing client files to respond to queries. The approved products list maintained within MRS was used for this process. Investment products that had not been approved by Lonsec were kept in a research folder. Upon each product being approved by Mr Moylan or Mr Spicer, they placed its research papers into this research folder. The approved products in the research folder were colloquially referred to within the MRS offices as the "white papers". Mr Spicer says he received updating reports about the contents of the white papers and attended meetings with Mr Moylan when they would discuss the updates, as the result of Mr Redfern's compliance reviews.
13. The written statements of advice issued to each of the Daveys and the Smiths stated that Retirement Planning Specialists (soon to become MRS) "can only recommend products on the Approved List. This means that I only looked at products on this list when I prepared your advice". The statements of advice explained that "the Approved List is put together by an external research committee, Lonsec, and is regularly reviewed". These written statements of advice offered the plaintiffs a copy of the list, if they were interested. None of them asked for one.
14. The Court was left with the impression that Mr Redfern's reviews of the white papers of non-Lonsec products did not involve overly rigorous scrutiny on his part. He had difficulty in articulating whether MIG was actually a "product" offering. He looked at the written updates that were provided by Mr Moylan, such as the March 2009 MIG property update and assessed their financial logic, but he did no independent investigation of the merits of such investments in a way which would be strongly protective of the MRS clients' interests.
15. His evidence was unsatisfactory about identifying whether there was of formal "list" of the non-Lonsec products. At times he called then "unlisted". But this merely seemed to express his doubts that that there was a single list created in one document as distinct from a folder of these products. That does not detract from the Court's inference that they were "approved products" and kept in a way that could be described as "a list". In the end the Court accepts his evidence that a lever arch file of the products he reviewed was kept with the products individually tabbed and a handwritten list was at the front. The way they were kept partly explains why they were not provided with the papers accompanying the 2013 proposal.
16. The Approved Product List and the Policy. The defendants argued that the "approved product list" referred to in clause 5(a) of the 150PI endorsement was the one attached to the 2013 proposal for that policy. The plaintiffs contend that it is the list actually kept in the insured's business from time to time.
17. An interesting feature of this argument is that there is no regulatory requirement under the Corporations Act to keep an approved product list. But it appears to be referred to in the 150PI endorsement because it is an aspect of industry practice.
18. There are several difficulties with the defendants' construction of the of the 150PI endorsement. First, the policy wording and the 150PI endorsement assume that the insured's approved product list is constructed, used and reviewed in a dynamic business environment. The proposal asks questions that make it quite clear that underwriters understand and convey to the proposed insured that in the financial planners underwriting portfolio, approved products are likely to enter and depart from an approved product list quite frequently during the year. The proposal accepts and probes about how the proposed insured will make adjustments in advising clients that to take into account changes that will occur from time to time in the insured's approved product list. It is quite inconsistent with such a background of assumed facts on both sides that the insured would be seen as representing to underwriters that the list enclosed with the proposal was the one would bind the insured throughout the year. The approved product list attached the proposal is therefore an unlikely candidate for being the one referred to in the policy.
19. Second, the text of the 150PI endorsement, clause 5(a) is inconsistent with the defendants' construction. The exclusion operates to deny liability in respect of financial products not contained in the insured's "approved product list at the time the advice was given" (emphasis added). This exclusion refers to the state of the insured's approved product list at the time of advising, which is well after the proposal is sent to underwriters.
20. Third, the proposal is consistent with the same construction. The addendum to the proposal only asks for the "current approved product list" (emphasis added) of the client. The proposal contemplates the obvious that that is all that the proposed insured can provide, because the list will change. The approved product list referred to in the policy is the one which can objectively be established was in existence within the insured's business at the time the advice was given which is complained of by client and leads to a claim.
21. But whether there was adequate disclosure in the 2013 proposal of the then current approved product list is a difficult question. The 2013 proposal had a list of the van Eyk Research AA and A rated products with it. But the only reference in the proposal to the other products was their description as "other select products".
22. In conclusion, the defendants cannot establish that the financial products the subject of the various actions in these proceedings were not on the MRS approved product list with the exception of the Wallalong Investment Trust and the loan to Ms Trudy Crittle. The approved product list exclusion is enlivened only with respect to advances to the Wallalong Investment Trust and the loan to Ms Trudy Crittle, but not otherwise.

Does the Clause 5(c) Statement of Advice Exclusion Apply?

1. The defendants contend that the statement of advice exclusion in the 150PI endorsement, clause 5(c) also applies to exclude all the plaintiffs' claims. Clause 5(c) operates to exclude: "Any CLAIM or liability directly or indirectly based upon or attributable to or in consequence of any…failure to provide a financial services guide, a product disclosure statement or statement of advice in breach of the FSR PROVISIONS (contained in Chapter 7 of the Corporations Act 2001)"
2. The statement of advice exclusion will exclude cover where the insured does not comply with the procedural requirements that Corporations Act, Chapter 7 imposes upon the insured when dealing with retail clients. The relevant procedural requirements are to provide financial services guides, product disclosure statements and statements of advice to clients when the clients are acquiring financial products through the services of an AFSL licensee. Compliance with these Chapter 7 procedural requirements will tend to alert clients to the true nature of the risks in any proposed investment. Failure to conform to these requirements is potentially a sign that an advisor has failed to convey the true risks of an investment to the client.
3. Corporations Act Part 7.7 - Financial Services Disclosure deals with the procedural requirements for the provision of financial services guides and statements of advice to clients. Corporations Act Part 7.9 deals with the preparation and content of product disclosure statements. The provisions of the legislation are complex and it is not necessary to set them out in full in these reasons.
4. The application of this exclusion can be assessed by reference to each class of regulatory documents that MRS was required to provide to the plaintiffs, the financial services guide, the statements of advice and product disclosure statements.
5. Financial Services Guides. An AFSL licensee must give a financial services guide to retail clients as soon as practicable after it is apparent to the licensee that financial services will be provided to the client: Corporations Act s 914A and s 914D. The financial services guide is required to be in writing: s 940C(1)(b). Subject to the regulations, the Corporations Act prescribes the contents of a financial services guide: s 942B(2). For present purposes, the relevant part of the prescribed content is s 942B(2)(e) and (f) which are as follows: "942B Financial Services Guide given by financial services licensee - main requirements (1) This section applies if the providing entity is a financial services licensee. (2) Subject to subsection (3) and to the regulations (see subsection (4)), the Financial Services Guide must include the following statements and information: … (d) information about any remuneration (including commission) or other benefits that any of the following is to receive that might reasonably be expected to be or have been capable of influencing the providing entity in providing the advice: (i) the providing entity; (ii) a related body corporate of the providing entity; (iii) a director or employee of the providing entity or a related body corporate; (iv) an associate of any of the above; (v) any other person in relation to whom the regulations require the information to be provided; and (e) information about the remuneration (including commission) or other benefits that any of the following is to receive in respect of, or that is attributable to, the provision of any of the authorised services: (i) the providing entity; (ii) a related body corporate of the providing entity; (iii) a director or employee of the providing entity or a related body corporate; (iv) an associate of any of the above; (v) any other person in relation to whom the regulations require the information to be provided; (f) information about any associations or relationships between the providing entity, or any related body corporate, and the issuers of any financial products, being associations or relationships that might reasonably be expected to be capable of influencing the providing entity in providing any of the authorised services;…"
6. The findings in the first limb show that a form of a financial services guide was provided to each of the plaintiffs near the outset of MRS providing them with financial services. It was a guide issued by Retirement Planning Services but it was understood on all sides that that company would be renamed as MRS.
7. But none of the financial services guides explained the depth of the conflicts of interest which have already been discussed in these reasons and they therefore did not comply with s 942B(2)(e) and (f). Prima facie there was a breach of Corporations Act Chapter 7 obligation to give a compliant financial services guide.
8. Statements of Advice. Some of the plaintiffs' investments attract this exclusion because they precede in time MRS giving the first written statement of advice to the plaintiffs. These investments are identified first. Different contests about the application of clause 5(c) arise concerning the plaintiffs' investments subsequent to the first statements of advice. But this first group of investments (that precede any statements of advice) can be identified for all plaintiffs.
9. Corporations Act Part 7.7, Division 3 deals with the provision of personal advice to clients as retail clients. The AFSL licensee must give the client a statement of advice, contemporaneously with any oral advice and the statement of advice must be in writing: s 940C(1)(b). The required contents of the statement of advice about disclosure of benefits received by the licensed advisor and information about other pecuniary interests are in substantially identical terms to those set out above in respect of the financial services guide: s 947B(2)(d) and (e).
10. In this case, there was very substantial non-compliance with MRS' obligations to provide statements of advice. This can be considered at three levels. No written statement of advice was given at all before certain dates, which are set out below in more detail below for each client. The Court's findings on the first limb show expressly find the very limited occasions in which a written statement of advice was given to each of the plaintiffs. On all other occasions, a written advice was not given. And one was required because personal advice to a retail client was being given. But even the written statements of advices that were given did not comply with s 947B(2)(d) and (e) in providing disclosures about receipt of related benefit and conflicting pecuniary interests.
11. The Daveys' Statement of Advice. On 21 June 2007, the Daveys attended a meeting with Mr Moylan and Mr Spicer at the offices of MRS. During the meeting, the Daveys were provided with their statement of advice. The Daveys did not execute an authority to proceed until 27 June 2007. Mr Davey had read the statement of advice by the time he and Mrs Davey signed the authority and invested the sum of $300,000 in Hardie Estates Property Fund on behalf of Esined No. 9. The Daveys returned both the executed statement of advice and the withdrawal form together to MRS.
12. By 27 June 2007, Esined No. 9 had invested $300,000 in MIG and $50,000 in the Bolwarra Heights Investment Trust. As this $350,000 preceded the Daveys' receipt of any written statement of advice, it immediately engages exclusion clause 5(c) to that extent.
13. The Smiths' Statement of Advice. On 20 March 2007, the Smiths attended a meeting with Mr Moylan and Mr Spicer at the offices of MRS and were provided with a draft statement of advice, signed that day. But Mr Moylan said, "I will forward it to you in final form when it is completed". By 20 March 2007, Esined No. 10 had already invested $200,000 in MIG.
14. The final form of the statement of advice was mailed to the Smiths under cover of a letter dated 3 April 2007. There is no basis for the Court to conclude that the final form received by the Smiths on 3 April 2007 differs from the draft they signed on 20 March 2007. But the earlier one was only described as a "draft", by which MRS was indicating it was not yet ready to be bound by it.
15. So, 3 April 2007 should be taken as the date of giving the written statement of advice to the Smiths. They had invested another $100,000 in MIG by then. Therefore, Esined No. 10 had invested a total of $300,000 before receiving a written statement of advice. And the clause 5(c) exclusion is immediately engaged to that extent.
16. The Kauters' Statement of Advice. A statement of advice was given on behalf of Retirement Planning Services to the Kauters on 27 January 2004. All of their lost investments were in the period of August 2005 to October 2005. The clause 5(d) exclusion is not engaged with respect to any of those investments on the basis that they preceded the giving of statements of advice.
17. The Mannings' Statement of Advice. The statement of advice given to the Mannings is dated 29 January 2008. However, it was not received by them until some time early in February 2008, when they signed and returned an authority to proceed.
18. By early February 2008, Jalin had invested $120,000 in the loan to Ms Trudy Crittle and $200,000 in the Regional Land Property Trust. Jalin invested another $150,000 in Regional Land Property Trust on 7 February 2008. But it is likely that its statement of advice had been received by then. Thus Jalin had invested a total of $320,000 before receiving the statement of advice, and clause 5(d) was immediately engaged to that extent.
19. Appendix 2 to the Revised August 2017 Report of Mr Wesley McMaster sets out a chronological history of the advice provided to each plaintiff and states whether or not a statement of advice was provided to each plaintiff. Mr McMaster's summary concerning the giving of the statements of advice is consistent with the Court's findings.
20. Product Disclosure Statements. Corporations Act Part 7.9 provides for obligations of AFSL licensees who are recommending the acquisition of a particular financial product to give a product disclosure statement to the retail client in respect of that financial product: s 1012A. The product disclosure statement must be in the form of a document: s 1013A. The contents of the product disclosure statement are provided for by Corporations Act s 1013D. A product disclosure statement must contain information about significant benefits and risks associated with holding the product: s 1013D(1)(b) and (c). A product disclosure statement is also required to provide detailed information concerning the cost of the product and the rate of return. Importantly, the product disclosure statement should also include information that "might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the product": s 1013E.
21. A product disclosure statement was required to be given here as Mr Moylan was recommending the acquisition of particular financial products. But no product disclosure statement was given to these plaintiffs in respect of any the products on which they claim losses in these proceedings. And none of the important content about the financial products was provided which would comply with s 1013E. Perhaps the closest document that came to a product disclosure statement was an information memorandum about the Hardie Estate Investments but no such documents were declared to be product disclosure statements.
22. The plaintiffs argue with respect to clause 5(c) that it should not be construed so that non-compliance with the content requirements of the Corporations Act Chapter 7 for the provisions of financial services guides, statements of advice and product disclosure statements should not engage this exclusion. There is some force in this argument because exclusion 5(c) refers to "failure to provide financial services guide, product disclosure statement or statement of advice in breach of the [Chapter 7 of the Corporations Act]" (emphasis added). The provision is focused upon the "failure to provide" and the plaintiffs' point is quite arguable that the exclusion attaches itself to the failure to provide a document rather than a document that is compliant with the regulated content in every respect. But even if that interpretation is accepted, except in very limited circumstances, statements of advice were not provided and no product disclosure statements were provided in respect of MRS' recommendations to the plaintiffs.

Does the Clause 5(d) Unregulated Loans Exclusion Apply?

1. The defendants also rely upon an exclusion relating to unregulated loans in the 150PI endorsement, clause 5(d). It excludes the following claims: "Any claim or liability directly indirectly based or attributable to or any consequence of any: … (d) repayment of a debt or money deposited with or lent to a body including, but not limited to, under a promissory note, debenture or similar instrument which is not regulated by the managed investment scheme provisions or the fundraising disclosure provisions and which body is not an authorised deposit-taking institution for the purpose of the Banking Act; ...
2. The unregulated loans exclusion will exclude informal loan investments from cover. Clause 5(d) describes a class of loans not made to authorised deposit-taking institutions under the Banking Act 1959 (Cth) and which also do not qualify for regulation under the managed investment scheme provisions in Corporations Act, Chapter 5C, or the fundraising disclosure provisions in Corporations Act, Chapter 6D. Such loans are more likely to be risky than those to authorised deposit-taking institutions.
3. The defendants say this exclusion applies to all the plaintiffs' investments. The application of the unregulated loans exclusion does not depend upon how the plaintiffs made each investment. Rather its application depends upon the characteristics of the corporate vehicles into which the plaintiffs' monies were invested.
4. In the Court's view this exclusion is effective in respect of the plaintiffs' claims in all three actions. But it is sufficient to consider here the plaintiffs' loans to MIG, by far the most frequent type of advance. They were not regulated by the managed investment scheme provisions in Corporations Act, Chapter 5C, or the fundraising disclosure provisions in Corporations Act, Chapter 6D. MIG is not an authorised deposit-taking institution for the purposes of the Banking Act.
5. The fundraising disclosure provisions in Corporations Act Chapter 6D do not apply to the offers Mr Moylan made for the clients to move the MIG loans. Corporations Act s 706 provides that an offer of securities for issue needs disclosure to investors under Part 6D "unless section 708 says otherwise". Corporations Act s 708(1) to (4) relevantly provides as follows: "708 Offers that do not need disclosure Small scale offerings (20 issues or sales in 12 months) (1) Personal offers of a body's securities by a person do not need disclosure to investors under this Part if: (a) none of the offers results in a breach of the 20 investors ceiling (see subsections (3) and (4)); and (b) none of the offers results in a breach of the $2 million ceiling (see subsections (3) and (4)). This subsection does not apply to an offer for sale to which subsection 707(3) (sale amounting to indirect issue) or (5) (sale amounting to indirect sale by controller) applies. … (2) For the purposes of subsection (1), a personal offer is one that: (a) may only be accepted by the person to whom it is made; and (b) is made to a person who is likely to be interested in the offer, having regard to: (i) previous contact between the person making the offer and that person; or (ii) some professional or other connection between the person making the offer and that person; or (iii) statements or actions by that person that indicate that they are interested in offers of that kind. (3) An offer by a body to issue securities: (a) results in a breach of the 20 investors ceiling if it results in the number of people to whom securities of the body have been issued exceeding 20 in any 12 month period; and (b) results in a breach of the $2 million ceiling if it results in the amount raised by the body by issuing securities exceeding $2 million in any 12 month period. (4) An offer by a person to transfer a body's securities: (a) results in a breach of the 20 investors ceiling if it results in the number of people to whom the person sells securities of the body exceeding 20 in any 12 month period; and (b) results in a breach of the $2 million ceiling if it results in the amount raised by the person from selling the body's securities exceeding $2 million in any 12 month period. …"
6. The defendants argue persuasively that all of Mr Moylan's offers to clients to invest were made to them individually on an ad hoc basis when they had available money, as part of a one off recommendation between Mr Moylan and the individual client. These were clearly personal offers that could only be accepted by each of the clients within s 708(2). None of what he offered to these plaintiffs was part of raising funds from multiple persons. Because the loans to MIG were individual offers, they do not satisfy the aggregation provisions in s 708(3) or (4). Section 708(1)(a) and (b) commence with the words "none of the offers results in a breach" of the 20 investors ceiling of the $2 million ceiling. As none of the offers made to the plaintiffs involve individual breaches of the ceilings set by s 708(1), disclosure is not required.
7. The loans to MIG do not fall within the definition of "managed investment scheme" within Corporations Act s 9. That means that the advances to MIG are unregulated by the Act and are all captured by exclusion 5(d).
8. For similar reasons, the unregulated loans exclusion also excludes the loan made to Ms Trudy Crittle. This informal one-off advance to Ms Crittle to complete a property purchase was not to an authorised deposit taking institution, nor did it require her to deposit money she was advanced into such an institution. Nor was the loan to her regulated under Corporations Act, Chapter 5C or 6D.

Conclusions and Orders

1. For these reasons, the defendants are successful in all three actions. Costs would normally follow the event. But one or other party may now seek a special costs order. For that reason the Court will not enter orders for costs on the ordinary basis in the defendants favour until 28 days has expired.
2. Before concluding this judgment the Court wishes to note three matters. First, although the plaintiffs have failed, this outcome is not from any want of detailed and careful preparation of their case on their behalf by their counsel and solicitor. The presentation of three actions on behalf four groups of plaintiffs in the one proceeding was a significant challenge, which added its own complexity to this litigation, as the length of these reasons shows. But the legal representatives on all sides commendably assisted the Court with the necessary detailed analysis of the facts and law.
3. Second, the Court's duty at times is to decide according to law which of two innocent parties will bear the financial consequences of fraud or other misconduct by an impecunious or bankrupt third-party. This is such a case. The Court's findings show that the plaintiffs are entirely to be believed that they were the innocent victims of Mr Moylan's calculated deception over several years. Mr Moylan was able to perpetrate the deception that he did in this case because the family members associated with the corporate plaintiffs were all hard-working people who looked upon other people positively and who were content to defer to the professional judgment of people like Mr Moylan, who they had been told they could trust totally. They assumed for a long time that Mr Moylan had the same personal qualities that they did it and was consequently worthy of their trust. Sadly they were gravely mistaken about this. The Court acutely understands that Mr Moylan's grave misconduct left them suffering a grievous financial plight. But despite that, for the reasons set out in this judgment, the law does not provide them with a remedy against these particular insurer defendants.
4. Third, the Court is not aware whether any regulatory or criminal action has been taken against Mr Moylan. The Court has made findings of serious misconduct against him in this case. The Court should not be seen as condoning contraventions of the law. It is appropriate therefore that the Court refer this judgment to a proper authority to investigate whether breaches of law have occurred by Mr Moylan, which may result either in criminal or other regulatory prosecution against him. For that the purpose the Court will provide a copy of these reasons to the Attorney General of New South Wales as first law officer of the Crown in this State.
5. The Court therefore makes the following notations and orders: 1. Note that in these orders the following actions, which were heard together, will be referred to by the following names: proceedings 2012/374893, as "the Esined action"; proceedings 2013/314260, as "the Kauter action"; and proceedings 2015/252310, as the "Manning action". 2. Judgment for the defendants in each the Esined action, the Kauter action and the Manning action; 3. Unless any party applies by motion within 28 days in accordance with the mechanism described in order (4) for a different order, the plaintiffs in each action are ordered to pay the defendants' costs in each action. 4. If any party in any of the three actions wishes to seek a special costs order they should do so by motion (together with any evidence in support) served on the other party and provided to my associate by email by Friday, 5 June 2020. 5. If a motion is filed in accordance with order (4), then subject to any party taking advantage of the liberty to apply granted under (6) below, including to seek an oral hearing of the motion, the following directions will apply: 1. the motion will be dealt with on the papers, without further opportunity for oral hearing; 2. the party opposing the motion shall provide any evidence in reply within a further seven days; and 3. thereafter the parties will exchange their submissions on the motion within a further seven days. 1. Grant liberty to apply. 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: 08 May 2020