James Shipley and Patricia Shipley v Masu Financial Management Pty Limited

James Shipley and Patricia Shipley v Masu Financial Management Pty Limited - [2008] NSWSC 252 - NSWSC 2008 case summary — Zoe

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1817/2007 JAMES SHIPLEY and PATRICIA SHIPLEY (in their own right and as representatives for the persons in schedule A) -V- MASU FINANCIAL MANAGEMENT PTY LIMITED JUDGMENT Introduction 1 HIS HONOUR: By Further Amended Statement of Claim filed on 31 January 2008 ("the statement of claim") the plaintiffs, Mr and Mrs Shipley, in their own right and as representatives of another 22 persons or entities have instituted proceedings against the defendant in respect of advice given and recommendations made by authorised representatives or agents of the defendant in relation to the investment by the plaintiffs in three companies ("the Mezzanine Companies") in the Westpoint Group. 2 Rule 7.4 of the Uniform Civil Procedure Rules ("UCPR") concerns proceedings carried on by or against any one or more persons representing one or more of them. Since 9 November 2007, that rule has been in the following terms: "7.4 Representation of concurrent interests (cf SCR Part 8, rule 13; DCR Part 7, rule 15) (1) Subject to subrule (5), this rule applies to any proceedings concerning: (a) any matter in which: (i) numerous persons have claims against the same person, and (ii) the claims of all those persons are in respect of, or arise out of, the same, similar or related circumstances, and (iii) the claims of all those persons give rise to a substantial common issue of law or fact, or (b) any matter in which numerous persons have the same liability. (2) Proceedings to which this rule applies may be commenced and, unless the court orders otherwise, carried on by or against any one or more persons as representing any one or more of them. (2A) Any such proceedings may be commenced: (a) whether or not the relief sought: (i) is, or includes, equitable relief, or (ii) consists of, or includes, damages, or (iii) includes claims for damages that would require individual assessment, or (iv) is the same for each represented person, and (b) whether or not the proceedings: (i) are concerned with separate contracts or transactions between the defendant in the proceedings and individual represented persons, or (ii) involve separate acts or omissions of the defendant done or omitted to be done in relation to individual represented persons. (3) At any stage of the proceedings, the plaintiff may apply to the court for an order appointing one or more of the defendants or one or more of the other persons to represent any one or more of them. (4) If a person who is not a party to the proceedings is appointed as referred to in subrule (3), that person must be joined as a party under rule 6.24. (4A) If it appears to the court that determination of the issue or issues common to all the represented persons will not finally determine the claims of all the represented persons, the court may give directions in relation to the determination of the remaining issues. (4B) Without limiting subrule (4A), the court may direct that notice be given to some or all of the represented persons in the proceedings in respect of any matter. (4C) A represented person, whether or not joined as a party, is taken to have brought proceedings on the day on which the person became a represented person on all of the person's causes of action that may be determined by judgment in the proceedings. (5) This rule does not apply to proceedings concerning: (a) the administration of a deceased person's estate, or (b) property the subject of a trust." 3 There are three motions before the Court. 4 The first is by the defendant (or "Masu" as the case may be) for an order that these proceedings be no longer carried on by the plaintiffs as representing the group members, or that the proceedings be stayed or dismissed in so far as they purport to relate to a "representative action", or further alternatively that the statement of claim be struck out in so far as it purports to plead a "representative action". 5 Unless otherwise indicated, references to "the plaintiffs" will be references collectively to Mr and Mrs Shipley and the group members.

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6 The second motion is also by the defendant seeking to strike out particular paragraphs of the statement of claim on the basis that no reasonable cause of action is disclosed or, in the alternative, seeking further particulars. 7 The third motion is by the plaintiff to strike out portions of the defence which the defendant has filed in the statement of claim. The proceedings have progressed to, but not beyond, the filing of a defence. 8 If the first motion succeeds, the second and third become otiose. However, as will appear from what is said below, issues which arise in the second and third motions are pertinent to the disposition of the first. Features of the proceedings 9 The defendant was licensed to provide financial services and, it is alleged, promoted investment in the Mezzanine Companies. 10 Each Mezzanine Company was a vehicle for investment in a discreet property development known respectively as Bayview Heritage, York Street and Ann Street. 11 Each development was owned by a specifically incorporated entity and was financed partly by loans from the relevant Mezzanine Company which raised funds, amongst others, from the plaintiffs who were issued with promissory notes ("the notes") reflecting their investment. 12 The legal structure of each development was identical. 13 There are 23 plaintiffs who make 28 discreet claims. Each claim arises out of an individual investment in the notes. Some plaintiffs made more than one investment in a single development and some invested in more than one development. There are more than seven plaintiffs in respect of each of York Street and Bayview Heritage. There are only three in respect of Ann Street. 14 The statement of claim identifies six individuals who acted variously as the defendant's authorised representatives in the defendant's dealings with the plaintiffs. Each plaintiff dealt with one such representative. Each representative dealt with more than one plaintiff. One representative, Mr Martin Speiser, is asserted to have induced the investment by various plaintiffs in each of the three developments over a period from 5 December 2003 to 8 November 2005.

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15 Essentially, the plaintiffs plead two causes of action. 16 The first cause of action is an asserted contravention by the defendant of s 945A of the Corporations Act 2001 (Cth) ("the Act") (or a predecessor provision s 851 of the Act) which requires, in general terms, a financial services licensee to provide only personal advice to a retail client if it has a reasonable basis, having made reasonable inquiries in relation to the personal circumstances of the client, for doing so. The plaintiffs allege that advice was given by the defendant (through its authorised representatives) with respect to each of the plaintiffs' investments in the Mezzanine Companies, without having the required reasonable basis. I shall refer to this claim as "the advice claim". 17 In respect of the advice claim, the plaintiffs seek: "(a) A declaration that, by reason of s 917A and s 917E of the Corporations Act 2001 (Cth) the Defendant is liable to the Plaintiffs and Group members for loss or damage sustained as a result of conduct by its authorised representatives that contravened s 945A of that Act." 18 The second cause of action is an asserted contravention by the defendant of s 1012A of the Act which imposes on a financial services licensee and its authorised representatives an obligation, when giving financial product advice, to give the recipient of the advice a Product Disclosure Statement ("PDS"). The plaintiffs allege that the defendant was obliged to give each of them a PDS but failed to do so. I shall refer to this claim as "the PDS claim". 19 The PDS claim is pleaded in paragraphs 17-24 of the statement of claim in the following terms: "17. The Plaintiffs repeat paragraphs 10(b) and 12(b). 18. The Defendant's agents provided financial product advice to the Plaintiffs and Group members consisting of, or including, a recommendation that they acquire promissory notes issued by the Mezzanine Companies. 19. Following the supply of financial product advice and/or recommendations by the agents of the Defendant, the Plaintiffs and Group members acquired promissory notes issued by the Mezzanine Companies. 20. The financial product advice was: (a) provided to the Plaintiffs and Group members as retail clients; and (b) 'personal advice' to the Plaintiffs and Group members for the purposes of s 766B(3) of the Corporations Act . 21. In the premises, Masu or its agents were obliged to give to the Plaintiffs and Group members a Product Disclosure Statement at or before the time when the agents provided the financial product advice pursuant to s 1012A of the Corporations Act. 22. A proper Product Disclosure Statement of the kind that the Defendant and/or its agents were required to give to the Plaintiffs and Group members would have contained, inter alia: (a) information about any significant risks associated with holding promissory notes in the Mezzanine Companies (pursuant to s 1013D(1)(c) of the Corporations Act ); and (b) 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 promissory notes in the Mezzanine Companies (pursuant to 1013E of the Corporations Act ), including (without limitation) the fact that they were acquiring interests in managed investment schemes which were not registered but which should have been registered and accordingly were liable to be wound up. 23. In contravention of s 1012A of the Corporations Act , Product Disclosure Statements were not given to the Plaintiffs or Group members. 24. Masu is liable for loss or damage suffered by the Plaintiffs and Group members because of the contravention of s 1012A of the Corporations Act , pursuant to s 1022(4)(a) or (b) of the Corporations Act ." 20 Paragraphs 10(b) and 12(b) of the statement of claim are not relevant for present purposes.

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21 In respect of the PDS claim, the plaintiffs seek: "(f) A declaration that, by reason of s 1022B(4) of the Corporations Act , the Defendant is liable to the Plaintiffs and Group members for loss or damage sustained as a result of its failing to give Product Disclosure Statements for the promissory notes issued by the Mezzanine Companies to the plaintiff [sic] and group members, the Defendant's authorised representatives contravened s 1012A(3) of the Corporations Act ." 22 In relation to both the advice claim and the PDS claim, they seek: "(g) An order for damages pursuant to ss 953(B)(2) [sic] and 1022B(2) of the Corporations Act and/or s 852 of the old Corporations Act ." 23 It is not necessary for present purposes to deal separately with the claims made under the "old Corporations Act" because for present purposes those claims are indistinguishable from the claims made under the Act. 24 Mr and Mrs Shipley seek analogous declarations and orders separately in their own right. 25 Three subsidiary declarations are also sought to the effect that: a the issue of the notes by the respective three Mezzanine Companies constituted the issue of interests in managed investment schemes pursuant to s 9 of the Act; b the issue of the notes by the respective three Mezzanine Companies constituted the issue of interests in managed investment schemes pursuant to s 9 of the Act; c the managed investment schemes were required to be registered pursuant to s 601ED of the Act; and d the notes were financial products pursuant to ss 763A(1)(a), 763(B) [sic] and/or 764A(1)(ba) of the Act. 26 Each of ss 945A and 1012A is within Ch 7 of the Act. 27 Section 945A applies in relation to the provision of personal advice. 28 Personal advice (for the purposes of Ch 7) has the meaning given by s 766B(3) of the Act, which is financial product advice given or directed to a person where the provider of the advice has considered one or more of the person's objectives, financial situation and needs, or where a reasonable person might expect the provider to have considered one or more of those matters. 29 Financial product advice (for the purposes of Ch 7) has the meaning given by s 766B(1), which is a recommendation or statement of opinion, or a report of either of those things, that is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products, or could reasonably be regarded as intended to have such an influence. 30 Section 764A(1) of the Act provides that the following are financial products: a a security; and b an interest in a managed investment scheme that is not a registered scheme. 31 Section 9 of the Act provides that "securities" has the meaning given by s 92. Section 92(1) provides that securities includes debentures of a body and interests in a managed investment scheme. 32 The plaintiffs plead that the investment in the notes was both a security and an interest in an unregistered managed investment scheme as a precursor to pleading the causes of action that the advice given and non-provision of a PDS was a breach of ss 945A(1) and 1012A of the Act. 33 The defendant has filed a defence in which it denies that the notes were securities and does not admit that the financial product advice was personal advice to the plaintiffs for the purposes of s 766B(3) of the Act. The defendant also denies that the notes constituted the issue of interests in a managed investment scheme for the purposes of s 9 of the Act. 34 The defendant has also pleaded as a complete or partial defence to both the advice claim and the PDS claim, contributory negligence, relying on Pt 1A of the Civil Liability Act 2002. The legal principles applicable to whether representative proceedings may be brought and continued

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35 The requirements of r 7.4(1) are threshold ones and matters of jurisdiction: Carnie v Esanda Finance Corporation Ltd (1995) 182 CLR 398 at 427. 36 If the requirements are satisfied, the proceedings may be commenced and carried on unless the Court makes an order under r 7.4(2) that it is not in the interests of justice to permit the proceedings to be carried on as representative proceedings. This is a matter for discretion: Carnie v Esanda Finance Corporation Ltd at 427. 37 The term "substantial" in r 7.4(1)(a)(iii) is directed to issues which are "real or of substance": Wong v Silkfield (1999) 199 CLR 255 at [27] and following. 38 Whether there is compliance with r 7.4(1)(a)(iii) is to be assessed by reference to the claims made as articulated in the pleadings, not by reference to the true facts. A conclusion that the claims made do not give rise to a common question cannot be reached on the basis that the evidence is likely to be different in each case: Bright v Femcare Ltd (2002) 195 ALR 574 at [133] - [134]. 39 Rule 7.4(2A) expressly provides that the proceedings may be commenced whether or not the relief sought includes claims for damages that require individual assessment. This is so even where the relief is not the same for each represented person, and whether or not the proceedings are concerned with separate contracts or transactions or separate acts or omissions of the defendant in relation to the individual represented persons. 40 The bare fact that the claims made by those who are represented by the named plaintiff arise out of separate contracts does not necessarily deny the existence of a common interest between the represented parties and the defendant. A common issue of fact and law can be found to exist in deciding whether particular transactions are subject to particular legal principles. The fact that an issue may be simply resolved does not deny its existence and does not demonstrate that it is not an issue common to a number of claims arising out of separate contracts: Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386 at 420. 41 It is accordingly necessary firstly to consider whether the requirement of r 7.4(1)(a)(iii) of the UCPR - that all the claims of all the plaintiffs give rise to a substantial common issue of law or fact - has been met and then to consider whether, if it has, the proceedings should continue as representative ones. 42 Because that exercise requires an examination of what the issues are by reference to the pleadings, it is necessary first to have regard to what is validly pleaded. If the pleadings as presently constituted cannot stand because they are liable to be struck out, it is necessary first to consider whether all or any parts of them are so liable. 43 For this reason, I will deal firstly with the respective attacks of the parties on the pleadings of the other side. The defendant's application to strike out the PDS claim 44 Section 1012A(3) of the Act imposes the obligation on a regulated person to give a PDS if the requirements therein provided are met. It was not put in issue that the defendant was a regulated person. 45 Sections 1013C and 1013D provide what a PDS must contain. 46 Section 1013D(1)(c) provides that, subject to s 1013C(2), a PDS must contain information about any significant risks associated with holding the product. 47 Section 1013C(2)(a) provides that the information required by s 1013D need only be included in the PDS to the extent to which it is actually known to the responsible person. 48 The responsible person is, under s 1013A(3) of the Act, the person who, or on whose behalf, a PDS for a financial product is required to be prepared. The responsible person is either the issuer of the financial product or the person making the offer to sell the financial product. 49 The argument before me appeared to proceed on the basis that it was accepted that the defendant was such a responsible person. 50 The defendant put that it is essential for the plaintiff to plead in the PDS claim that the defendant (or its authorised representatives) had actual knowledge about: a significant risks associated with holding the product, that is, the notes; and b information that might be reasonably expected to have a material influence on the decision of a reasonable person as a retail client whether to acquire the notes;

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57 There is a difficulty with their claim that they have suffered loss or damage by reason of the defendant's alleged default. 58 Paragraph 24 of the statement of claim asserts that the defendant is liable for loss or damage suffered by the plaintiffs because of the contraventions of s 1012A. It does not assert that the plaintiffs suffered any such loss. 59 Paragraph 28 of the statement of claim is in the following terms: "28. The Plaintiffs and Group members suffered loss or damage because of the contraventions of s 945A and 1012A of the Corporations Act and s 851 of the old Corporations Act . Particulars (a) The Plaintiffs and Group members received, in consideration for the loaned monies to the Mezzanine Companies, promissory notes that have no substantial monetary value as a result of the Mezzanine Companies entering external administration. (b) The Plaintiffs and Group members claim repayment from the Defendant of the loan monies they paid to the Mezzanine Companies and expenses associated with the provision of the loan monies. (c) The Plaintiffs and Group members further claim damages for the loss of opportunity to obtain interest on the capital invested in the Mezzanine Companies. (d) The Plaintiffs and Group members also claim damages for the mental anguish and distress suffered as a result of the conduct of the Defendant's agents." 60 The statement of claim does not plead the material facts establishing the necessary causal relationship between the contravention and the loss or damage alleged. 61 Loss or damage as a consequence of the contraventions alleged by the plaintiffs is an element of their cause of action. Facts and circumstances must be set out that disclose the relationship of the loss suffered to the conduct which it is alleged brought it about: Bond Corporation Pty Ltd v Thiess Contractors Pty Ltd (1987) 71 ALR 615 at 621-622. 62 Although this was not the complaint made by the defendant, counsel for the plaintiffs appeared to me to properly concede that the statement of claim fell short in this respect, and he foreshadowed amendment of it to deal with the problem. 63 The problem is exacerbated because, even though the PDS claim is put as a failure to deliver any PDS at all, it seems to be inherent in the way the plaintiffs seek to put their claim that a loss was suffered because they would have acted differently had they been made aware of risks of which they should have been made aware of by information in a PDS. This involves, in turn, asserting what it was the PDS should have, but did not, contain. An assertion that a PDS should have contained particular information in turn involves an assertion of the requisite knowledge. If the plaintiffs wish to make out such a causal connection they would have to plead it and particularise it accordingly. 64 Even though the defendant's attack on the pleading was somewhat differently framed, having regard to the general difficulties with the pleading and the concession made (in my view, properly) as to its inadequacy, I consider that the appropriate course is that paragraphs 17 to 24 of the statement of claim be struck out as prayed, but to grant leave to replead. 65 It follows that there is no longer any support for the declaration sought based on those paragraphs. There is some difficulty with that declaration in its terms in any event. Even if the PDS claim were properly to be pleaded, its true nature is that there are numerous individual claims for damages separate for each person concerning separate conduct for each. It is not asserted that there were substantial common relevant circumstances between Mr and Mrs Shipley and group members or that there was substantial common information obtained from Mr and Mrs Shipley and group members. It is also not asserted that the form of the recommendation to invest was identical with respect to each of them. The leave to replead will obviously include leave to reformulate the form of the relief claimed should the plaintiffs be so advised. 66 Also, although the advice claim has survived unscathed so far, the declaration sought in that claim may have equivalent difficulties. The form and utility of a declaration in general terms which seeks to cover multifarious claims arising out of factually different circumstances may be a relevant consideration to be considered by the Court if, on some subsequent occasion, it is called upon to exercise its discretion under r 7.4(2). Similar considerations may apply to the terms of the declaration sought with respect to the PDS claim. The third motion

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advice or the advice itself; d if the defendant or its authorised representatives did not know of significant risks for the plaintiffs in holding their investments in any of the Mezzanine Companies or was not aware of information material to a reasonable investor's decision whether to acquire the promissory notes, to what extent this ignorance would affect the scope of the inquiry the defendant or its authorised representatives was obliged to make or the advice that was given; and e whether contributory fault is available as a defence to a claim for damages arising from breach of s 945A(1) of the Act. 82 The defendant's submissions did not make clear which of its contentions went to non-satisfaction of r 7.4(1) and which went to the exercise of the discretion in r 7.4(2). 83 The defendant's propositions may well be correct, but they do not address the question of whether or not the claims of the plaintiffs give rise to a substantial common issue of fact or law. That exercise involves identifying whether there are common issues of fact or law and then, if there are, consideration of whether they are substantial. They do, however, emphasise the differences (perhaps ultimately profound ones) between the positions of the numerous plaintiffs. 84 Except for the issues concerning whether the investments alleged were in managed investment schemes and whether contributory fault is available as a defence, the common issues as articulated by the plaintiffs are not immediately apparent as issues which can be discerned by an examination of the pleadings. They do, however, point to the likelihood that there will be fields of factual inquiry and contest which may span many if not all of the plaintiffs' claims. 85 The plaintiffs' articulation of the common issues equally did not evince a clear demarcation between issues of law and issues of fact. 86 It is, however, not necessary under the rules for the plaintiffs to have the same interest in the proceedings. 87 It sufficient if there is a community interest in the resolution of a substantial issue of law or fact arising in the proceedings: Carnie v Esanda at 408. 88 In my view, the defendant's denials or non-admissions raise substantial questions of law common to the claims; namely, whether an investment of the nature of the notes was a security interest or an interest in an unregistered management scheme, so as to enliven the provisions concerning personal advice and financial product advice relied on by the plaintiffs: see Campbells Cash & Carry at 420. 89 The structures are accepted by the defendant as being legally identical. The questions of law assume the existence of a structure having particular legal characteristics which is common to them all. 90 The defence of contributory negligence pleaded by the defendant to the advice claim also, in my view, gives rise to a substantial issue of law common to all of the claims; namely, whether Pt 1A of the Civil Liability Act 2002, which applies to a claim for damages for harm resulting from negligence regardless of whether the claim is brought in tort, in contract, under statute or otherwise, is available to a defendant to a claim for breach of s 945A of the Act. 91 For these reasons, I am of the view that the proceedings satisfy the requirements of r 7.4(1). 92 In drawing attention to the significant differences between the claims of the various plaintiffs, the defendant placed reliance on a concession by the plaintiffs in correspondence that the plaintiffs were not asserting any substantial common relevant personal circumstances between Mr and Mrs Shipley and other group members nor that there was substantial common information obtained from Mr and Mrs Shipley and the other group members.

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Judgment (28 paragraphs)

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Legislation Cited (1)

Cases Cited (7)

Cited By (4)