Hodges v Sandhurst Trustees Limited

statement of claim 14 The following facts are alleged in the statement of claim and particulars supplied by Mr Hodges' lawyers. 15 On or about 3 February 2000, Cardinal Financial Securities Limited ("Cardinal") as trustee for the debenture holders and LKM Capital entered into a trust deed. On or about 9 May 2000, LKM Capital and Cardinal entered into a registered deed of charge pursuant to which LKM Capital granted a floating charge over its assets and undertaking in favour of Cardinal to secure the trusts referred to in the trust deed. 16 The charge was assigned to Sandhurst by a deed of assignment of charge with an effective date of 1 October 2001. It is alleged that Sandhurst acted as trustee of the trust deed at all material times. 17 The trust deed was subsequently amended by deeds of amendment between LKM Capital and Sandhurst dated 1 July 2002, 28 September 2006 (two deeds) and 24 April 2009. 18 In summary, the trust deed required LKM Capital to: (1) Carry on and conduct its business in a proper and efficient manner ("conduct of business requirement"); (2) Invest moneys received in respect of issued debentures in loans secured by mortgages on real properties only where the amount advanced did not exceed 70% of the value of the real property as certified by an approved valuer ("LVR requirement"); (3) Invest moneys received in respect of issued debentures in real property only provided that no more than 10% (after 28 September 2006, no more than 30%) of the value of the issued debentures was invested in real property (respectively "10% real property requirement" and "30% real property requirement"); (4) Invest moneys received in respect of issued debentures only in a person or securities which had a credit rating issued by Standard & Poor's (Australia) Pty Ltd and its affiliates of "AA", "A" or higher for long term securities, or of "A1", "A2" or higher for short term securities ("S&P rating requirement"), although after 28 September 2006, this limitation did not apply to real property investments or business investments; (5) From and including 28 September 2006, comply with certain requirements when making equity investments in businesses ("business investment requirement"); (6) Ensure that it maintained sufficient liquid assets to meet redemptions of debentures from time to time ("liquid asset requirement"). 19 Clause 12 of the trust deed is relied upon by Mr Hodges. It relevantly provides: EVENTS OF ENFORCEMENT AND DEFAULT Upon the occurrence of any of the following events: … (f) if default is made by the Company in the performance or observance of any provision of this Deed and if such default is in the opinion of the Trustee capable of remedy, such default is not remedied within 14 days or such longer period as the Trustee may allow after notice specifying such default; then the Trustee may enforce the Charge pursuant to this Deed and the Moneys Hereby Secured shall at the option of the Trustee become immediately due and payable provided that the Trustee may take no action to enforce the Charge unless and until the Trustee serves on the Company a notice; (i) stating that a breach of this Clause has occurred or exists; and (ii) stating that it is a notice pursuant to this Clause; and without prejudice to the effect of any provision of or the exercise of any power arising under this Deed the Trustee may contemporaneously with the notice referred to in the preceding paragraphs (i) and (ii) convert any Charge into a fixed charge over all or any specified part of the Mortgaged Property 20 Mr Hodges also relies on clause 15.1 of the trust deed. That clause provides: Appointment Scope After an Enforcement Date the Trustee may by writing appoint or remove a Controller of the Mortgaged Property or several Controllers of several parts of the Mortgaged Property and in the case of the removal, retirement or death of any such Controller may appoint another in his place. In addition to and not in substitution for the rights and powers conferred upon Controllers and mortgagees by law (including the Corporations Act) in any place where any part of the Mortgaged Property may be situated the following provisions shall (to the full extent permitted by law) have effect: (a) the appointment of Controller may be made either before or after the Trustee enters into or takes possession of the Mortgaged Property; (b) the Controller may be invested by the Trustee with such of the powers, authorities and discretions as are conferred upon the Trustee by this Deed or the Charge which could be exercised by a Controller as the Trustee may think expedient; (c) unless specifically restricted by the Trustee the Controller may exercise as Controller all the powers, discretions and authorities vested in the Trustee by this Deed (including Clauses 14 and 17) and all the powers, discretions and authorities exercisable by a Controller pursuant to the Corporations Act or the Charge; (d) the Controller shall in the exercise of his powers, authorities and discretions comply with any directions given by the Trustee; …. 21 By letter dated 11 April 2007, the Australian Securities and Investments Commission ("ASIC") informed Sandhurst that it was concerned as to LKM Capital's ability to meet redemptions or payments for principal and interest to debentures ("April 2007 ASIC letter"). 22 On 1 April 2008, at the request of Sandhurst, LKM Capital engaged GHK Ferrier Green Krajci Silvia chartered accountants ("chartered accountants") to prepare an independent accountant's report on the affairs of LKM Capital. 23 On 24 April 2008, the chartered accountants provided to LKM Capital a report identifying six major areas of concern relating to the affairs of LKM Capital. 24 On 1 August 2008, the chartered accountants provided to Sandhurst a financial analysis report stating that they were of the opinion that, amongst other things: (1) LKM Capital had committed recent breaches of the financial covenants of the trust deed; (2) LKM Capital's cash flow projections indicated that it would commit further breaches of the financial covenants of the trust deed; (3) There was a high level of certainty that all debenture holders' debts would not be paid in full. 25 That day, Sandhurst appointed receivers and managers to the assets and undertaking of LKM Capital. Since their appointment, the receivers and managers have set about realising the assets of LKM Capital, resulting in a recovery to debenture holders of 25.5 cents in the dollar as at 13 December 2013. 26 Mr Martin SC, senior counsel for Mr Hodges, referred to various documents in support of the proposition that the alleged losses were suffered on or after 1 August 2008. This material included audited accounts of LKM Capital for the year ended 30 June 2007 and the six months ended 31 December 2007, as well as management reports prepared by or for LKM Capital for the quarter ended 30 June 2008. These documents were said to show that at all times prior to 30 June 2008, the net assets of LKM Capital exceeded liabilities. In the course of argument, it became clear that Mr Hodge's case is that no losses were suffered until after about 1 August 2008. 27 The significance of the first date on which the assets would not have exceeded or substantially covered all of LKM's liabilities (including the amounts owed to debenture holders) is that this may be the date when the plaintiff's cause of action crystallised against the defendant. If that date was before 7 May 2008, then the cause of action may be statute-barred because the limitation period for actions under s 283F is six years after the date on which the cause of action arose and the proceedings were commenced on 7 May 2014 .

Alleged duties 28 The statement of claim pleads duties owed by Sandhurst under s 283DA(a), (b)(ii), (c)(ii) and (e)(i) of the Corporations Act. Only breaches of s 283DA(b)(ii) are pleaded.

Alleged breaches 29 Mr Hodges alleges that LKM Capital committed breaches: (1) Of the LVR requirement on many and repeated occasions throughout the period from 7 August 2002 until 30 June 2007; (2) Of the 10% real property requirement on many and repeated occasions during the period from 1 October 2001 until 28 September 2006 (although the particulars appear to refer only to breaches from December 2005); (3) Of the 30% real property requirement on occasions during the period from 28 September 2006 until 30 June 2007; (4) Of the S&P rating requirement on many and repeated occasions throughout the period from 16 July 2002 until 30 June 2007; (5) Of the business investment requirement on many and repeated occasions throughout the period from 28 September 2006 until 30 June 2007; (6) Of the liquid asset requirement on many and repeated occasions during the period from 31 December 2006 until 30 June 2007; (7) Of s 283BB(a) of the Corporations Act by failing on many and repeated occasions throughout the period 1 October 2001 until 30 June 2007 to carry on and conduct its business in a proper or efficient manner. 30 Section 283BB(a) provides: The borrower must: (a) carry on and conduct its business in a proper and efficient manner; 31 In summary, the statement of claim alleges that Sandhurst failed to exercise reasonable diligence to ascertain whether the various alleged breaches by LKM Capital had been committed. Sandhurst's breaches are alleged to have occurred from October 2001 (see, for example paragraph 24 of the statement of claim) and to have continued until 30 June 2007. The failures on the part of Sandhurst are alleged to amount to contraventions of s 283DA(b)(ii) of the Corporations Act.

Causation 32 Facts relevant to causation are pleaded at paragraph 49 and following of the statement of claim. At paragraphs 49 and 50, it is alleged that, if Sandhurst had exercised reasonable diligence as required by s 283DA(b)(ii) of the Corporations Act, it would have taken various steps to ascertain LKM Capital's alleged breaches and thereafter to attempt to require LKM Capital to remedy the breaches. At paragraph 52, it is alleged, in effect, that if efforts to have the breaches remedied were unsuccessful, Sandhurst should have appointed an investigating accountant to investigate the affairs of LKM Capital. The statement of claim does not say when Sandhurst should have appointed an investigating accountant. Particulars provided by the plaintiff's solicitors state that a trustee exercising reasonable diligence in the position of Sandhurst would have appointed an investigating accountant "at or about the time that it ascertained that LKM Capital had failed to remedy one or more existing breaches within 14 days or such longer time as the trustee had allowed after service of the notice(s) that specified the default(s)". 33 Alternatively, paragraphs 54 and 55 of the statement of claim allege (in substance) that, upon receiving the April 2007 ASIC letter, a trustee exercising reasonable diligence in the position of Sandhurst would have made enquiries to ascertain all or many of LKM Capital's alleged breaches. By paragraph 56, it is alleged that, consequently, by not later than 30 June 2007, a reasonably diligent trustee in the position of Sandhurst would have appointed an investigating accountant to investigate the affairs of LKM Capital. 34 It is next alleged, by paragraph 57 of the statement of claim, that an investigating accountant duly appointed would have made appropriate enquiries and ascertained all or at least many of LKM Capital's alleged breaches. 35 Paragraph 58 alleges that, upon receiving an investigating accountant's report that identified all, or at least many of, the breaches, a reasonably diligent trustee in the position of Sandhurst would have served a notice on LKM Capital stating that it was a notice pursuant to clause 12 of the trust deed and a breach of clause 12 of the trust deed had occurred or existed. 36 Paragraph 59 of the statement of claim pleads: Upon serving on LKM Capital a notice under clause 12 of the trust deed, a trustee exercising reasonable diligence in the position of Sandhurst would have promptly appointed a receiver and manager to LKM Capital. 37 On Sandhurst's reading of the statement of claim, the receiver and manager referred to in paragraph 59 should have been appointed by mid-August 2007. By letter dated 14 July 2014 from Meridian Layers to Clyde & Co, the plaintiff identified the date when the appointment should have been made as "at or about the time that the relevant report was issued". As I read the letter, the "relevant report" would have been issued about 3.5 weeks after the appointment of an investigating accountant who would have been appointed "at or about the time that Sandhurst ascertained that LKM Capital had failed to remedy one or more of the breaches in respect of which a notice had been served". 38 Paragraph 60 of the statement of claim pleads: If Sandhurst had: (a) required LKM Capital to remedy all existing breaches…; and (b) ascertained that such breaches had been remedied by LKM Capital in a timely and efficient way…, or further and alternatively: (a) appointed a receiver and manager to LKM Capital… Then the Group Members would not have suffered any, or at least any substantial, loss of their debenture moneys. Particulars (i) If LKM Capital had remedied all breaches…in a timely and efficient manner, then the amount of each loan of debenture moneys would have been repaid or recovered in full. (ii) If a receiver and manager had been appointed to LKM Capital as pleaded in paragraph 59 above then the amount of each loan of debenture moneys would have been repaid or recovered in full. (iii) At all material times up to and including 30 June 2007 the value of the assets of LKM Capital that would have been realised by a receiver and manager would have exceeded, or at least substantially covered, all of LKM Capital's liabilities, including the amount of the debenture moneys. 39 During argument, Mr Martin SC clarified that particular (iii) to paragraph 60 of the statement of claim is not intended to imply that, if a receiver or manager had been appointed at any time after 30 June 2007, the value of assets of LKM Capital that would have been realised by that receiver would not have exceeded or substantially covered all of LKM Capital's liabilities (including the amounts owed to debenture holders). 40 Finally, paragraph 61 alleges that by reason of Sandhurst's contraventions of s 283DA(b)(ii), the group members and each of them have suffered loss and damage. The particulars to paragraph 60 are repeated in relation to this allegation.

Loss 41 The plaintiff's case, as revealed by the particulars to paragraph 61 of the statement of claim, is that the plaintiff and the group members suffered loss because the assets of LKM Capital were realised for an amount significantly less than the amount they should have been realised for if Sandhurst had not contravened s 283DA(b)(ii).

Alleged deficiencies of the statement of claim 42 Ultimately, Sandhurst complained about the statement of claim in two respects. Both complaints concerned the allegations of "historical events" which I took to refer at least to events pre-dating Mr Hodge's acquisition of debentures in January 2005. Sandhurst contended that these historical events are irrelevant to the pleaded claim and, if they remain, have the potential to substantially prolong and increase the cost of the proceedings. 43 First, Sandhurst argued that any loss suffered by Mr Hodges as a result of events occurring prior to his acquisition of debentures must have crystallised at the time of acquisition. In written submissions, Sandhurst submitted: Mr Hodges obtained debentures in January 2005. Had receivers and managers been appointed before January 2005 as a consequence of actions taken by a trustee exercising reasonable diligence, Mr Hodges would not have been able to obtain debentures. His loss, in those circumstances, would (broadly speaking) require a comparison of his actual position to the hypothetical position where he did not obtain debentures, and any damages payable to him would be the amount of any difference in those two positions (see, eg Sons of Gwalia Ltd (Subject to Deed of Company Arrangement) v Margaretic (2007) 231 CLR 160 at 225 [175] per Hayne J, Gummow J agreeing at 189 [46], Heydon J agreeing at 255 [261] and Crennan J agreeing at 255 [265] [("Sons of Gwalia")]). However, that case is not pleaded in the [statement of claim]. In the absence of such a case, events which are alleged to have occurred prior to Mr Hodges obtaining debentures cannot be relevant or have a bearing on the proceeding. 44 The particular passage from Sons of Gwalia on which Mr Pike SC relied is as follows: [175] The claims which Mr Margaretic makes under the [Corporations Act] that are founded on a breach of the continuous disclosure requirements, and the claims he makes under that and other Acts which are founded on allegations of misleading or deceptive conduct, are claims for damages. But had Mr Margaretic known what he now says are the relevant facts before SOG appointed administrators (assuming for the purposes of argument that his allegations are true) he would have had complete causes of action against SOG for identical relief under the various statutory provisions upon which he now relies. And the claims he could then have made would not have been contingent or future claims; they would have been present claims for damages representing the difference between what he had outlaid in buying the shares and the true value of what he bought as determined by a properly informed market. The appointment of administrators so soon after Mr Margaretic bought his shares reveals that the shares he bought would have been judged by a properly informed market to be worthless when he bought them and accordingly, he suffered loss when he bought the shares. 45 In my view, this passage from Sons of Gwalia is not determinative on a strike out application. It may turn out to be the case that Mr Hodges suffered loss on the acquisition of his debentures, because of Sandhurst's earlier breaches: cf HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 at [28]. It may turn out that the proper measure of any damages suffered by Mr Hodges is not the damages now claimed. However, I am not in a position to determine those matters at this stage of the proceedings. What is clear is that the kind of loss hypothesised by Mr Pike SC is different from the loss now claimed. 46 I was not taken to any relevant law about the causal link required to be proved under s 283F(1). However, it is not obvious on the face of the statute that recovery is limited to cases where the contravening conduct post-dates the creation of a debenture holder's interests. In a different context, in Fubilan Catering Services Ltd v Compass Group (Australia) Pty Ltd (No 2) [2004] FCA 1034 at [20], French J did not accept that, even if the first applicant were not formed or under the control of the second applicant at the time that alleged representations were made, it did not mean that the causal connection between those representations and loss or damage suffered by the first applicant could not be established. The issue did not arise in Sons of Gwalia. 47 Accordingly, I am not satisfied that the allegations of conduct prior to Mr Hodges's acquisition of debentures cannot hear a bearing on the alleged loss, so that they should be struck out simply on the basis that they pre-dated the acquisition. 48 More generally, Sandhurst complained that the statement of claim "does not make clear how, for example, a breach by Sandhurst in late 2001 could be causative of a loss suffered on 1 August 2008". In the absence of a clear articulation of how the alleged breaches caused the alleged loss, the allegations of breach should be struck out. 49 The written submissions lodged on Mr Hodges's behalf said: It is not alleged that the antecedent breaches (eg, 2001) were an operative cause of the loss subsequently suffered in 2008, but rather that the losses were suffered by reason of Sandhurst's failure at all times since 2001 to exercise reasonable diligence to ascertain and deal with any such breaches. That is, if Sandhurst had not breached its statutory duty then the debenture holders would not have suffered the alleged losses. 50 Mr Martin SC emphasised that the various breaches were "continuing" so that, for example, a breach of the LVR requirement in respect of a particular asset might have first occurred prior to Mr Hodges's acquisition of debentures but continued for so long as the LVR requirement was breached, including after the acquisition. He also submitted that the plaintiff's case is that the alleged breaches are cumulative. I understood the case to be, at least in part and at a high level of generality, that there was a systemic lack of compliance which ultimately caused loss. 51 Orally, Mr Pike SC, senior counsel for Sandhurst, focussed on the factual scenario of an appointment of receivers and managers, leading to the winding up of the trust at some unknown point in time. He submitted that, on the face of the statement of claim, breaches alleged to have been committed by LKM Capital required Sandhurst to have done something at or around the time of each breach. Next, he argued that the relevant counterfactual was the plaintiff's position in the hypothetical world in which Sandhurst did whatever was required to comply with its obligations. I did not understand Mr Martin SC to disagree with these propositions. 52 The causal relationship between the alleged breaches and the alleged loss can be expected to raise complex questions. There is likely to be an issue about when, acting properly, Sandhurst ought to have caused receivers and managers to be appointed. There may be issues about whether, if earlier breaches were remedied, subsequent breaches would have occurred. There may be an issue about whether, in the absence of any breaches, the group members would not have suffered losses. As the time between the alleged breach and the alleged loss increases, all things being equal, there is a greater likelihood of issues as to whether the loss was caused by some other intervening event. 53 I also accept Mr Pike SC's submission that the decisions in Commonwealth v Cornwall (2007) 229 CLR 519 and Sutherland Shire Council v Heyman (1985) 157 CLR 424 do not advance Mr Hodges's case because of their different contexts. In the former, the question was when loss arose under a Commonwealth statute. The latter case was not decided on a question of causation (three members of the High Court found there was no duty of care and two members found no breach of duty). 54 However, in my opinion, the statement of claim pleads sufficiently the facts relied upon for the primary case, that is, that the identified losses (74.5 cents in the dollar of the value of group member debentures) were suffered because of Sandhurst's ongoing failures, between 1 October 2001 and 30 June 2007, to require LKM Capital to remedy all the breaches allegedly committed by LKM Capital. In my view, this case is implicit in the allegation that, if the breaches had been remedied, the amount of each loan of debenture moneys would have been repaid or recovered in full. It is a matter for evidence whether the causal connection is established. 55 As to the alternative case, in my opinion it is also sufficiently pleaded. It is a matter for evidence whether LKM Capital's alleged breaches should have caused Sandhurst to appoint a receiver and manager and, if so when. Even so, in my view, Sandhurst is entitled to further particulars of the allegation that a receiver and manager should have been appointed in certain circumstances (paragraph 59 of the statement of claim). In my view, the plaintiff should identify (by date or approximate date) the occasion or occasions on which it is alleged that a receiver and manager should have been appointed. In particular, Sandhurst is entitled to know whether any case is put on the basis that, in certain events, a receiver and manager should have been appointed before January 2005 so that it can be fully informed of the alternative case of cases put by the plaintiff on causation. 56 If the evidence does not sufficiently inform Sandhurst of the case against it, then it may be appropriate to require further explanation from Mr Hodges before Sandhurst is required to serve its evidence.

conclusion 57 The plaintiff should supply further particulars of paragraph 59 of the statement of claim. 58 The amended interlocutory application should be dismissed with costs. 59 The matter should be listed for directions. I certify that the preceding fifty-nine (59) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.