General Reinsurance Australia Ltd v HIH Insurance Ltd [2008] NSWCA 12 | Case summary

Tuesday 19 February 2008 GENERAL REINSURANCE AUSTRALIA LIMITED ACN 008.427.450 v HIH INSURANCE LIMITED (IN LIQUIDATION) ACN 008.636.575 Judgment on application for leave to appeal 1 TOBIAS JA: On 22 June 2007, Einstein J dismissed an application by, amongst others, the claimants seeking to strike out a number of paragraphs of the opponents' Further Amended Statement of Claim (the FASC) alleging breaches by the first, second and third defendants (the defendants) of s 999 of the Corporations Law (Cth) (the Law) and s 52 of the Trade Practices Act 1974 (Cth) (the TPA). 2 Relevant to the present matter was an application by the claimant to strike out those paragraphs of FASC that asserted that they were involved within the meaning of s 75B of the TPA and the equivalent provision of the Law in conduct of the defendants which was alleged to be misleading or deceptive or likely to mislead or deceive. 3 The primary judge rejected the application essentially upon the following basis: "52. Here, the plaintiffs do not allege that [the claimant] knew precisely how misleading the material in the accounts ultimately turned out to be. Nevertheless, they are said to have known in advance that, based upon their own assistance , the relevant entries in the accounts and relevant information provided to the auditors would be misleading and deceptive; i.e. they are said to have known that the net profits and assets entered in the draft and final accounts would be overstated. I accept that that is enough to permit the pleading of the 'broad' contravention to go forward. They are said to have known that the reinsurance recoveries would similarly be overstated. I accept that that is enough to permit the pleading of the 'middle' contravention to go forward." (Emphasis provided) 4 The essence of the strikeout application related to the preparation and publishing by the defendants of the Financial Statements of the FAI Group (the Group) in respect of the financial year ending 30 June 1998. The FASC pleaded in paras 295 and 296 that in the period from July 1998 to 9 September 1998 each of the defendants contravened the Law and the TPA by materially misstating to the Group's auditors the financial performance of the Group during the year ending 30 June 1998 including its financial performance during and its financial position at the end of that year. 5 Particulars provided in relation to those paragraphs asserted that the misstatement occurred by reason of conduct of the defendants in three respects. The first alleged various failures with respect to the accounting treatment of what was referred to in the pleading as "the Second AXOL Contract". 6 The second alleged failure to disclose matters relating to what was referred to as "the NI Contract" and the third alleged a failure of the Financial Statements to make proper provision for outstanding claims and liabilities of companies within the Group under policies of insurance written by them (the under-provisioning). 7 The essence of the claimants' argument before his Honour and before this Court was that the decision of the High Court in Yorke v Lucas (1985) 158 CLR 661 rendered it necessary with respect to the allegation of accessorial liability against the claimants that it be alleged that they had actual knowledge of all the "essential matters" that constituted the relevant contravention by the defendants. In the present case it was accepted for the purposes of the strikeout application that the claimants were aware of two out of the three forms of conduct by the defendants which were particularised, namely, that relating to the Second AXOL Contract and that relating to the under-provisioning. It was common ground for this purpose that the claimant did not have knowledge of the NI Contract or its accounting treatment for the purposes of providing the auditors with information necessary to prepare the Group's Financial Statements for the relevant year. 8 It was therefore submitted that unless it was pleaded and established that the claimants were aware of the NI Contract and, therefore, of the conduct of the defendants relating thereto, then the requirements of Yorke v Lucas were not satisfied and the relevant paragraphs of the FASC alleging the accessorial liability of the claimant in relation to those contraventions which included conduct with respect to the accounting treatment of the NI Contract should be struck out. 9 One difficulty with the claimants' argument is that the contraventions pleaded in para 295 as well as in other paragraphs which mirror it to a greater or lesser degree, were alleged in general terms to the effect that each of the defendants materially misstated to the auditors the financial position of the Group during the year ending 30 June 1998 and its financial performance during and financial position as at the end of that year. It was only in the particulars to those paragraphs that the conduct resulting in the contravention was articulated. 10 It was accepted by Mr Sackar QC for the clamaints that, for present purposes, the claimants were aware of conduct by the defendants with respect to the Second AXOL Contract and the under-provisioning which, standing on its own, involved a material misstatement which was deceptive or misleading resulting in a contravention of the Law and the TPA. The question whether it was necessary in order to establish accessorial liability with respect to the contravention which included the NI Contract for the claimant to also have knowledge of the defendants' conduct relating to that contract is one which in my view raises arguable issues with respect to the width of the requirement that the alleged accessory have actual knowledge of all the "essential matters" constituting the pleaded contravention. 11 In the present case it could be said, and ultimately will need to be determined, whether or not it is sufficient in order to meet the test laid down in Yorke v Lucas and cases that have followed it that the accessory has knowledge of the contravention and of some but not all of the conduct constituting that contravention. In other words, the question is whether the "essential matters" test is satisfied where the accessory is not aware of some conduct which affects only the degree or extent of the contravention. 12 Mr Sackar argued that it was necessary under the Yorke v Lucas principle that the accessory's knowledge must extend to all conduct which is said to be deceptive and misleading and which contributes to the pleaded contravention notwithstanding that some of that conduct only increases the extent or degree of that contravention. That proposition was said to involve an important question of law in respect of which it was appropriate for this Court to grant leave to appeal. That an important question of law is involved may be accepted. However, in my opinion it is not possible for the claimants to meet the relevant threshold test for the striking out of a pleading. Notwithstanding the manner in which the pleading is framed, it cannot be said that the proposition that the claimants can be liable as accessories in relation to two aspects of the conduct which constitute the relevant contravention even though they are unaware of the third is "obviously untenable". 13 At the end of the day Mr Sackar's submissions may be correct but in my view as the issue is arguable, as his Honour determined, it follows that the claimants have not met the high threshold necessary to justify, in a matter such as the present which is of significant complexity, the striking out of the challenged paragraphs of the FASC. 14 The second issue that arises concerns para 283 of the FASC which alleges that HIH Investments caused 70,012,364 shares in HIH Insurance to be issued in consideration for ordinary shares in FAI Insurances Ltd pursuant to the scrip components of the Takeover Offer (as defined in the pleading) and thereby incurred an obligation to pay HIH Insurance the sum of $142,125,098.92 in respect of the issue of those shares. 15 The particulars given in relation to that allegation relied upon a journal entry which was accepted for the purposes of the present application as being such as to enable an inference to be drawn that there was an obligation upon HIH Investments to pay HIH Insurance the amount alleged. However, it was submitted that the pleading was embarrassing as it did not plead any particular liability of itself and, further, that it did not indicate the terms of the alleged obligation of HIH Investments with respect to HIH Insurance and whether or not the amount had been paid or not paid and whether in fact HIH Insurance had incurred an actual loss of the amount claimed. 16 This is a matter which in my view is also arguable. The inferences that can be drawn from the journal entry may not be as confined as is asserted by the claimant. There being an obligation to pay the amount in question it is possible or at least arguable that it can be inferred from that fact that the amount was extant and, therefore, that HIH Insurance had incurred a loss in the amount which it was entitled to receive from HIH Investments but had not. In these circumstances in my view error has not been shown in the primary judge's approach to the issue of whether the necessary threshold had been reached to warrant the striking out of para 283. Like his Honour I do not consider that in the circumstances it is so embarrassing as to justify such a course. 17 Accordingly, given the nature of the interlocutory application in question as involving matters of practice and procedure, the complexity of the matter and the requirement that a pleading should not be the subject of a strikeout application unless the challenged paragraphs are obviously untenable, in my view the circumstances are not such as to justify a grant of leave to appeal in the present case. For these reasons I would propose that the summons for leave to appeal be dismissed with costs. 18 SPIGELMAN CJ: I agree. 19 BASTEN JA: I agree that leave to appeal should be refused with costs. I am not persuaded that the judgment of Einstein J reveals error of any kind sufficient to warrant the intervention of this court. I also agree with the reasons given by Tobias JA. 20 SPIGELMAN CJ: The order of the court is as indicated. **********

General Reinsurance Australia Ltd v HIH Insurance Ltd

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