Findlay v Next Financial Limited [2012] FCA 1350 | Case summary

ruling on discovery 1 In each of these proceedings the same solicitors and counsel have the carriage of the proceeding for the applicants and the respondent respectively. 2 In each proceeding, the applicants allege they invested in a scheme operated by the respondent, and, in broad terms, allege that because the scheme was a "managed investment scheme" as defined by the Corporations Act 2001 (Cth) (Act), it was required to be registered under the provisions of the Act and to comply with Ch 5C of the Act, but was not so registered and did not so comply; and indeed was not registrable. 3 The applicants also plead that the interests acquired in each scheme, which were termed "Instalments", were not "warrants" as that term is defined in r 1.0.02(1) of the Corporations Regulations 2001 (Cth) (Corporations Regulations) or, if they were, then r 6D.5.01 of the Corporations Regulations does not apply to them. 4 The applicants further allege that the scheme at all material times was required to comply with Ch 6D of the Act and did not do so. 5 Finally, the applicants allege that the respondent engaged in conduct in contravention of Ch 5C or alternatively Ch 6D of the Act and that each of them has suffered or is likely to suffer loss or damage. In WAD 413 of 2011, the applicants claim loss and damage totalling $828,148.32, as well as interest and costs. In WAD 104 of 2012, the applicants claim loss and damage totalling $6,084,349.95, as well as interest and costs. 6 In the statement of claim in its amended form in each proceeding the applicants plead the features of scheme they say are apparent from the constituent documents they refer to: In WAD 413 of 2011, the documents particularised are a product disclosure statement (PDS) dated 29 February 2008, a supplementary product disclosure statement (SPDS) dated 26 May 2008, rate sheet for the applicants, and a document called "Instalment Deed - Next Financial Instalments" (instalment deed) dated 29 February 2008. In WAD 104 of 2012, the documents particularised are a product disclosure statement (PDS) dated 28 November 2003, a supplementary product disclosure statement (SPDS) dated 8 October 2004 and rate sheets for the applicants. 7 The proceedings, which have run along a similar line towards trial, have now reached the point where the pleadings are well advanced. At a directions hearing on 9 October 2012 the respondents proposed that the Court should facilitate a commercial mediation of the matters in dispute at an early date preceded by an exchange of statements of intended evidence, but without any prior discovery. Discovery before mediation, it was said, would be a time consuming and expensive process and not justified before mediation. The applicants opposed the proposed mediation on this basis and considered that discovery before mediation be appropriate. In the event, I considered that while the matters should proceed to mediation, given the nature of the matters in dispute mediation would be assisted by the earlier completion of discovery. 8 It then remained for the parties to confer and if possible resolve the basis upon which discovery might be exchanged. On 2 November 2012 I made orders by consent concerning the filing of submissions about discovery by categories, when the parties were unable to agree as to how discovery should be given between the applicants and the respondent in each proceeding. 9 On 22 November 2012, I heard the parties on the best way forward in relation to discovery. The applicants propose that discovery be given by categories. The respondent submits that standard discovery should be ordered. 10 On the applicants' side attention is drawn to the issues they say are raised by the allegation, which has been denied, that each of the schemes was a "managed investment scheme" as defined by s 9 of the Act. It is understood that such a scheme must exhibit the following features: people contributed money or money's worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights were actual, prospective or contingent and whether they were enforceable or not) (s 9(a)(i)); and any of the contributions were to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members), who held interests in the scheme (whether as contributors to the scheme or as people who had acquired interests from holders) (s 9(a)(ii)). A particular concern of the applicants is to prove that by each scheme their investments were "to be pooled". 11 In Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147; (2009) 180 FCR 11 (ILFP) at 35, Sundberg and Dowsett JJ in a joint judgment considered that the pooling contemplated in para (a)(ii) of the s 9 definition creates a focus not upon physical pooling, such as that which occurs with water or blood, but rather upon pooling with a purpose. In their Honours view the definition would be satisfied if contributions were available, and known to be available, for a relevant purpose, regardless of physical location. In the case before the Full Court their Honours considered pooling was effected by group members of the alleged scheme - a litigation funder and a firm of solicitors - making their individual promises available, ultimately for the funder's benefit, but in the meantime for the purpose of the scheme and the benefit of the scheme members. That benefit was the role played by promises in inducing the funder to make its promises and to honour them. In the event, their Honours allowed the appeal of the appellant that there was a managed investment scheme as defined. 12 Justice Jacobson, however, dissented and would have dismissed the appeal. As to the meaning of the word "pooled" in the expression "to be pooled" Jacobson J made a reference to what was said by Pullin J in Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 339 at [46] where, in relation to the phrase "to be pooled", Pullin J considered it implied that the intention must be to pool the contributions and, by the use of the pool, produce benefits. Justice Jacobson noted that this statement was cited with apparent approval by Barrett J in Australian Securities and Investments Commission v Takaran Pty Ltd [2002] NSWSC 834; (2002) 170 FLR 388 at [13]. His Honour also noted that the same approach was adopted in the Western Australian Court of Appeal in Burton v Arcus [2006] WASCA 71; (2006) 32 WAR 366 (Burton v Arcus) at [60]-[66]. 13 Justice Jacobson, at [266], noted that the expression "to be pooled" has a purposive element, which was made clear by the observations of Pullin J and from the language of that limb of the definition. His Honour noted that the contributions "are to be pooled to produce benefit for the members; they are to be used for the purposes they contemplate". His Honour here referred to Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd [2000] QCA 452; [2003] 1 Qd R 13 (ASIC v Enterprise Solutions 2000) at [9]; Burton v Arcus at [61]; Australian Securities and Investments Commission v Emu Brewery Mezzanine Ltd [2004] WASC 241; (2004) 187 FLR 270 at [101] (Simmonds J). 14 In the view of Jacobson J, the purpose of the individual group members in giving their contractual undertakings was not to produce financial (or other) benefits from the pooling of contributions, but rather, as his Honour noted at [269] their purpose was to deal with the financial benefits consisting of the realisation of the members' claims for compensation if and when produced. 15 The question of the circumstances in which or the process by which the relevant intention to pool for the purposes of para (a)(ii) of s 9 is to be discerned was not the subject of special focus in the decisions just cited. However, it was dealt with directly in National Australia Bank Ltd v Norman [2009] FCAFC 152; (2009) 180 FCR 243 (Norman), a decision handed down by a Full Court of this Court (Spender, Graham and Gilmour JJ) some 10 days after handing of the Full Court decision in ILFP. 16 In Norman the respondent was one of a number of investors who deposited funds with an accountant for investment. The accountant deposited all funds into a trust account. However, instead of complying with each individual's instructions as to how their funds were to be invested, he misappropriated them to his own use. The primary judge declared that the scheme operated by the accountant was a "managed investment scheme" and as it was not registered, made a winding up order under s 601EE of the Act and appointed liquidators. 17 All members of the Full Court agreed that the scheme operated by the accountant was not a managed investment scheme as defined as there was no evidence that the statutory features from either s 9(a)(i) or s 9(a)(ii) were present. Justice Gilmour (with whose reasons in this regard Spender J agreed) noted discussion of the matter of pooling in Burton v Arcus, Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd [1999] QSC 387; (1999) 33 ACSR 403 and ASIC v Enterprise Solutions 2000. At [141], Gilmour J discussed what is involved in the identification of a relevant scheme as defined. His Honour observed that a scheme involves "members" who attach themselves to the programme or plan which must be capable of being objectively discerned. His Honour accepted, however, that it is conceivable that persons may become members of a scheme by making contributions to obtain interests without full or indeed any appreciation of the particular programme or plan. His Honour accepted they may not appreciate that the funds contributed are to be pooled with those of other contributors. His Honour did not regard that as fatal to a conclusion that there was a managed investment scheme in a particular case, "so long as the features set out in s 9 are demonstrated". 18 At [148], Gilmour J emphasised that the phrase "contributions are to be pooled" in para (a)(ii) require an intention, objectively discerned, forming part of the "scheme" and formed prior to the making of contributions, that the contributions are to be pooled. His Honour added that the intention may be discerned objectively and variously from documents, discussions or conduct. His Honour also stated that the subjective evidence of members as to what, and by what means, they understood was the scheme prior to making their contributions would be relevant but not necessarily determinative of this question. 19 Accordingly, at [152], Gilmour J found that absent proof of such intention that they are to be pooled, he did not think that the mere fact that moneys were collected into one bank account (as was the case in Norman) met the definition of a "scheme" for the purposes of s 9. He also added, at [153], that he did not regard the mere fact that moneys are placed into one bank account by a person with the intention that they be used according to the individual arrangements reached with each person who provided the moneys as constituting evidence of the relevant intention under para (a)(ii). Justice Gilmour did not consider that anything fell from Buss JA in Burton v Arcus should be understood to the contrary. 20 I mention these authorities on the pooling question because the applicants in their approach to discovery perceive that the respondent may be adopting a different view of what evidence, and so what documents may bear upon the question whether the investments made by each of the applicants were "to be pooled". The applicants say they are entitled to have discovery of documents that show how funds were in fact used in order to establish the relevant intention to pool. However, I would broadly accept at this point, for present discovery ruling purposes, the argument of the respondent, that evidence relating to the way individual investments were actually used, without more, (as in Norman) is insufficient to prove an intention to pool. 21 As noted above, Norman stands for the proposition that the necessary intention may be discerned both objectively and subjectively. The intention may be discerned objectively and variously from documents, discussions or conduct. Subjective evidence of members as to what they understood of the scheme may also be relevant, but not necessarily determinative. It cannot be ruled out in these circumstances, that evidence of how contributions were actually used may possibly be relevant in determining whether there was a relevant intention to pool when the contributions were made if they help explain or confirm other evidence to that effect, although of itself it may be considered not to be determinative of any such intention. 22 In this regard, the applicants say that they should be entitled on any standard discovery to have discovery of any draft documents, the final versions of which became the pleaded constituent documents, because it would be open to the applicants to contend that, having regard to any description therein of how a scheme was intended to operate, and then observing the way the funds were actually used, an intention to pool may possibly be discerned. 23 For me, presently, the difficulty with this proposition is that if the only documents the applicants were aware of when their investments were made were the constituent documents pleaded, then it would not seem open, adopting an objective approach, to regard draft materials that were not, to the contributor's knowledge, part of the investment arrangement. It would, at least at this stage of the proceeding, appear difficult to see how an argument could successfully be mounted that evidence of how investments were actually used when combined with draft documents that were never circulated and were apparently never finally adopted by the scheme operator could disclose a relevant intention of members to pool. 24 For present purposes, however, I do not need finally to rule on the proposition, and I do not. I think it is sufficient to say in relation to the current discovery proposals, that the discovery of draft documents of the kind that the applicants have asked for in the categories they have identified would appear not to fall under standard discovery. Whether or not the occasion may later arise to consider this discovery issue but presently it should be left to one side. 25 In my view the proceeding will best be advanced at this stage by the respondent giving the applicants in each proceeding standard discovery, under R 20.14 of the Federal Court Rules 2011 (Cth) (Rules) on the understanding that drafts of constituent documents (unless, as senior counsel for the respondent acknowledged, they had been communicated to an applicant) need not be part of the standard discovery. 26 While at one point at least the applicants expressed a concern that the respondent might not adequately be able to fulfil its obligations to give standard discovery by reason of the volume of the materials that need to be regarded, I am satisfied that is not an issue. Senior counsel for the respondent has made it clear that the respondent fully understands its standard discovery obligations and they will be met. 27 In my view this is one of those cases where standard discovery is most likely to advance case management of a proceeding. I comprehend that to order discovery by categories in this case may actually frustrate the realisation of the overarching purpose of civil practice and procedure in the Court as it is stated in s 37M of the Federal Court of Australia Act 1976 (Cth), namely, to facilitate the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible. 28 Nonetheless it is agreed between the parties and I will order that the applicants will give discovery by categories previously agreed between the parties. 29 While there was, prior to the hearing, some difference of view as to the period in which discovery should be given, it seems that there is general agreement that it should be provided by the last working day in April 2013. This seems reasonable given the apparent size of the discovery, even under the standard discovery rules. 30 I consider that the debate over discovery is not one where it can reasonably be said that one party has had something in the nature of a victory over the other that should lead to it having the costs of the hearing. The discovery regime needed to be resolved. There has been a degree of toing and froing about how discovery should be given. In the end the Court has resolved the blockage. Costs of the discovery hearing should be in the cause. 31 I would therefore order as follows in each proceeding: 1. The respondent provide standard discovery under the Federal Court Rules 2011 (Cth) by 26 April 2013. 2. The applicants give discovery by categories as previously agreed by the parties. 3. Costs of the discovery hearing of 22 November 2012 be in the cause. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Barker.

Findlay v Next Financial Limited

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