Green v Barzen Pty Ltd

REASONS FOR JUDGMENT 1 To bring a representative proceeding certain conditions must be satisfied. One condition is that the claims of the represented group "give rise to a substantial common issue of law or fact": Federal Court of Australia Act 1976 (Cth), s 33C(1)(c). This application questions the possibility of satisfying the commonality requirement in what is essentially a misrepresentation case. 2 The action is one of many that has arisen following the collapse of the Westpoint group. The group was involved in the construction of large commercial and retail developments. It financed the developments by loans from banks and money raised from the public. Two companies were used for each development. One company (the development company) borrowed funds from an institution and undertook the development. The other company (referred to as a mezzanine company) raised the balance needed from small investors by issuing promissory notes (in the pleadings they are called "Westpoint products") and lent the money to the development company. 3 Following the group's collapse, most if not all group companies were placed into liquidation. Investors stand to recover very little in the windings up. As a result, many of them have begun proceedings against those who advised them to invest funds with the group. This is one such action. 4 Here the applicant and group members purchased Westpoint products issued by a Westpoint mezzanine company. It is alleged that they did so on the advice of the first respondent, Barzen Pty Ltd, (formerly Dukes Financial Services Pty Ltd) (DFS), Mr Dukes or a representative of DFS. Mr Dukes was a director with sole responsibility for the management of the business of DFS. According to the statement of claim, the investment advice was provided by several representatives of DFS, including Mr Dukes. The number of representatives involved is not given. Nor is the content of the advice that was proffered, save in very general terms. 5 The causes of action that are pleaded are these. There is a claim in negligence. The alleged acts of negligence are: (a) failing to investigate the risk of an investment in Westpoint products before placing those products on its approved product list (a list of investments which its representatives were authorised to recommend); (b) placing the products on the list; (c) failing to place restrictions on recommendations its representatives could make; (d) failing to warn that Westpoint products were high risk investments; (e) advising group members to invest in Westpoint products. 6 There is also a claim for misleading conduct in contravention of s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth). That section proscribes misleading representations in relation to financial services. The alleged representations are: (a) Westpoint products were appropriate investments; (b) group members should invest in one or other Westpoint product; (c) group members would likely receive the benefits (interest and capital) specified in the promissory notes; (d) Westpoint products were sufficiently secure to make them a reasonable investment; (e) DFS had undertaken a review of those products before placing them on the approved product list. 7 The representations are said to be oral, in writing and to be implied. In so far as the representations are in writing, reference is made in the particulars to written advice given to group members, but no further description is provided. Nor are any details given of any oral representations. The representations are to be implied from the placement of the products on the approved product list in combination with the failure of representatives to advise group members not to invest in the products. 8 There is a claim for negligent misstatement. The same representations are relied upon. 9 Next there are two statutory claims which do not depend upon representations having been made to group members. The first is based on the former s 851 of the Corporations Act 2001 (Cth). That section provided that a securities adviser making securities recommendations must do so on a reasonable basis. This involves giving reasonable consideration to, and conducting reasonable investigation of, the securities recommendation. It is alleged that in breach of s 851 DFS failed to properly consider Westpoint products before placing them on the approved product list and advising or allowing its representatives to advise group members to invest in them. 10 The second statutory claim asserts that the issue of promissory notes by a Westpoint company constituted a managed investment scheme and that when group members were advised to invest in the scheme, a financial product disclosure statement was required to be given by reason of s 1012B of the Corporations Act. It is alleged (and may even be common ground) that no disclosure statement was given. If it had, it is said investors would have been advised of the risk of investing in the promissory notes and also that they were investing in an unregistered managed investment scheme. If that advice had been given it is alleged that investors would not have purchased the notes. 11 On the basis of the pleading as it presently stands, the following is likely to be the case in relation to the claims founded on misrepresentation. First, the representations may be oral or in writing or both. Second, there is likely to be material variations in the representations made. Third, there is likely to be material variations in the degree of reliance upon the representations. 12 In the negligence claim there are also factors that are not common. The existence and extent of the duty (if any) that is owed to each individual investor will differ having regard to the investor's individual characteristics and the circumstances in which advice was given. 13 The fact that representations and issues of reliance raise questions that are not common does not mean that the misrepresentation case or the action based on negligence is not suited to a representative proceeding. First of all, while there will be some factual variations, it does not follow that s 33C(1)(c) is not satisfied. It will be enough if there is at least a common nucleus of operative facts or legal issues. It will also suffice if what is alleged in substance amounts to a common course of conduct directed toward a particular group (for example clients). 14 The questions of law or fact said to be common to the claims of all investors number 41. They range from the trivial (that DFS was incorporated) through to the uncontroversial (that advice was given to investors to invest in Westpoint products) to those where commonality is unlikely (whether particular representations were made to each group member). 15 This is not sufficient to take the case outside the commonality requirement. All that is necessary to show commonality is that there are some substantial common issues, that is to say, common issues that are serious and significant. The issues need not be determinative of the claims of the applicant or any group member. Put another way, the commonality requirement does not involve looking at the quantity of the common issues alleged but at their quality. On the other hand, the quantity of common issues as well as their quality may be relevant in an application under s 33N that a proceeding be ordered to no longer continue as a representative proceeding. 16 Despite raising many points of law and fact that are not common this action is a good vehicle for a class complaint. First, while there may well be variations in the representations and in the degrees of reliance on those representations, there is an important common thread to the complaints. At its base this case is about a financial adviser that it is alleged chose to recommend to its clients an investment that no reasonable adviser would suggest. It may be true that the manner in which the recommendation was made differed from client to client, but the substantial point remains the same. And, as regards that point, several substantial common questions of law and fact do arise, including, the practices and procedures involved in maintaining DFS's approved product list, the circumstances in which the Westpoint products were placed on the list, the provision of financial services or securities recommendations by Mr Dukes, DFS or DFS's representatives to the group members, and the actual or constructive knowledge of Mr Dukes, DFS or DFS's representatives about the Westpoint products. 17 The statutory causes of action also raise common questions. They include in broad terms whether there was a reasonable basis for placing the Westpoint products on the approved product list, whether there was a managed investment scheme within the meaning of s 9 of the Corporations Act, whether the Westpoint products were financial products within the meaning of s 764A of the Act and whether the advice given in relation to the Westpoint products was financial product advice within the meaning of s 766B of the Act. It is true that when one comes to look at inducement and damages, individual issues will arise. But there are serious common questions that must be resolved to finalise these claims. 18 The respondents also make complaint about the pleadings. In substance the complaint is that insufficient information about the case is given in the pleading and particulars. There is something to this complaint. I propose, however, to defer ruling on it because the applicant has promised to amend the statement of claim. It may be that those amendments will overcome the deficiencies in the pleadings. If not, the respondents should notify me and I will rule on any outstanding issues. 19 For the time being I will simply stand over the motion and reserve the costs pending the resolution of the pleading points. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.