Johnston v McGrath

Supreme Court of NSW|2008-06-25|Before: Barrett J, Mr J

Background 1 By order made on 1 August 2007, the plaintiff in these consolidated proceedings was required to serve an amended statement of claim by 13 September 2007; and it was noted that the plaintiff would require leave to file that amended statement of claim. 2 Now before me for determination is the plaintiff's application for leave to file an amended statement of claim in the form of Exhibit A to the affidavit of his solicitor, Mr Dennis, sworn on 19 October 2007.

3 The grant of leave is opposed. Indeed, I also have before me for determination an application by the defendants for an order that the proceedings be dismissed.

4 Both applications were argued before me on 1 April 2008. By leave, subsequent written submissions were filed on 1 May 2008 and 27 May 2008. The plaintiff's claim 5 The substantive claims sought to be advanced by the plaintiff in the consolidated proceedings are brought under s 1321 of the Corporations Act 2001 (Cth). Each is an appeal in respect of a decision of the defendants, Mr McGrath and Mr Honey, as liquidators of a particular company. The companies (which it will be convenient to call "the HIH subsidiaries") are HIH Casualty and General Insurance Ltd, CIC Insurance Ltd, FAI Insurance Ltd, World Marine & General Insurance Pty Ltd, HIH Underwriting and Insurance (Australia) Pty Ltd and FAI General Insurance Company Ltd. Each of these companies is (and was at all material times) a wholly owned subsidiary of HIH Insurance Ltd ("HIH"). 6 The decision of the liquidators that the plaintiff seeks, in each case, to challenge is a decision to reject a proof of debt or claim submitted by him in the winding up of the particular HIH subsidiary. The several proofs are exhibited to the affidavit of the liquidators' solicitor, Mr Ryan, sworn on 9 November 2007. 7 The claim the plaintiff sought to prove in the winding up of each of the HIH subsidiaries is a claim for damages for breach of one or more of s 52 of the Trade Practices Act 1974 (Cth), s 42 of the Fair Trading Act 1987 and s 995 of the Corporations Law as in force at a relevant past time. Statutory causes of action are said to arise because the HIH subsidiaries were complicit in misleading or deceptive conduct of HIH which was causative of a decision by the plaintiff to buy on the stock market 40,000 ordinary shares in HIH for a price of $10,269.20, which shares were, at the time, in reality worthless.

The defendants' contentions 8 The defendant liquidators say that there are three bases on which the court should refuse the leave needed by the plaintiff to file the new statement of claim. The first goes to a number of distinct aspects of the pleading that are said to be embarrassing. Second, the defendants say that the claims sought to be advanced by the proposed amended statement of claim differ materially from those advanced in the several proofs. Third, the defendants say that the pursuit of the claims as a whole represents an abuse of process because of a prior adjudication, being that of Gzell J on 23 November 2005 in proceedings 6644/04, Johnston v McGrath [2005] NSWSC 1183; (2005) 195 FLR 101. I shall refer to the proceedings determined by Gzell J as "the 2004 proceedings". 9 The liquidators' contention that the proceedings should be terminated relies on the second and third of these propositions. 10 Because the outcome on the liquidators' application to have the proceedings terminated may make it unnecessary to consider the aspects of the pleading said to be embarrassing, it will be convenient to proceed first to a consideration of the second and third propositions. The proposed amended statement of claim 11 It is necessary to set out in summary form the central allegations in the proposed amended statement of claim. They are as follows: 1. The plaintiff bought the 40,000 shares in HIH on the stock market on 2 January 2001 for $10,269.20. 2. The six HIH subsidiaries were subsidiaries of HIH. 3. HIH and the six HIH subsidiaries, together with others, constituted an "economic entity" for the purposes of the accounting standard AASB1024. 4. That "economic entity" was a "reporting entity" for the purposes of that accounting standard, and had HIH as its "parent entity". 5. The general purpose financial report of the economic entity for the year ended 30 June 2000 ("the Report") was prepared by combining the financial accounts of all the companies in the economic entity. 6. Provisional liquidators of HIH and the six HIH subsidiaries were appointed on 15 March 2001 and all of them later went into liquidation. 7. The Report was "submitted" by "the economic entity" to Australian Securities and Investments Commission, Australian Stock Exchange Ltd (as it then was) and shareholders of HIH and "was available and accessible to members of the public". 8. The Report contained financial information about the financial position of the economic entity. 9. That financial information was misleading and deceptive or likely to mislead or deceive in that it failed to disclose the true position which was that the economic entity had sustained a loss for the year ended 30 June 2000; and the quality of the financial information was such as to entail contravention of s 52 of the Trade Practices Act or s 42 of the Fair Trading Act or s 995 of the Corporations Law . 10. The "misrepresented and false profit" was "achieved by using 'so called' reinsurance contracts", particulars of several of which are pleaded, all of the HIH subsidiaries being parties to each such contract. 11. One of the HIH subsidiaries (HIH Casualty and General Insurance Ltd) "credited $141,800 false recoveries pursuant to" the contracts. 12. Another (FAI General Insurance Company Ltd) "credited $178,042 false recoveries pursuant to" the contracts. 13. The HIH subsidiaries had common directors and were aware "through" them of the false nature of the Report. 14. The HIH subsidiaries were "at all material times directly or indirectly knowingly concerned [sic] or have aided, abetted, consulted [sic] or procured contraventions by HIH (by making the representations in the Report) and consequently contravened s 75B of the Trade Practices Act and s 61 of the Fair Trading Act . 15. By reason of these matters, the HIH subsidiaries are liable for the contraventions of HIH in accordance with s 75B and s 61. 16. The misleading and deceptive conduct caused the plaintiff loss and damage. 17. The loss and damage is the plaintiff's acquisition cost of the shares less the true value of the shares at the time of acquisition.

Gaps in the pleading 12 This description shows that certain misconceptions are manifested by the pleading. For example, it is not sensible to speak of a contravention of s 75B of the Trade Practices Act or s 61 of the Fair Trading Act. Each of those sections merely gives meaning to the expression "person involved in" when used in relation to contravention of certain other provisions. 13 It also appears that the claim based on s 995 of the Corporations Law is not carried through to its logical conclusion since the equivalent, in that context, of s 75B of the Trade Practices Act and s 61 of the Fair Trading Act (being s 79 of the Corporations Law) is not mentioned. 14 In the later paragraphs of the above description, there are references to statutory contraventions by HIH. Complicity in HIH's contraventions by the six HIH subsidiaries is then alleged. At an earlier stage, however, it is pleaded that it was the "economic entity" that "submitted" the financial report to ASIC, ASX and shareholders of HIH (it is also said, without mentioning any actor, that the report "was available and accessible to members of the public"). The "economic entity" is defined as consisting of HIH and the six HIH subsidiaries, together with other companies unnamed. Having regard to s 295(2)(d) of the Corporations Law it was HIH itself that was required to produce consolidated financial statements; and under s 219, it was HIH itself that was required to lodge those financial statements with ASIC. Lodgment with ASX was also the responsibility of HIH alone, it being the company that was admitted to ASX's official list and was required to provide information relevant to the maintenance of an informed market. 15 I therefore assume, for the purposes of considering the liquidators' dismissal application, that the intention is to plead that, while HIH "submitted" the financial report, each of the HIH subsidiaries was knowingly concerned in or aided, abetted, counselled or procured the submitting. 16 It may also be noted that the pleaded case does not appear to deal explicitly with the matter of reliance by the plaintiff on the faulty information and the causal link between that information and his loss or damage. Rather, there seems to be intended resort to a presumption of reliance generated by a duty to keep the market properly informed. This was referred to by Finkelstein J in P Dawson Nominees Pty Ltd v Multiplex Ltd [2007] FCA 1061; (2007) 242 ALR 111 at [11] as follows: "It may also be argued that there is a rebuttable presumption of reliance (if it is necessary to establish reliance) on the existence of an open and efficient market for Multiplex securities. In the United States this is referred to as the fraud-on-the-market theory. In Basic Inc v Levinson (1988) 485 US 224 the Supreme Court of the United States held that securities class action plaintiffs are entitled to a presumption of reliance that the market for the securities in question was efficient and that the plaintiffs traded in reliance on the integrity of the market price for those securities. The fraud-on-the-market presumption is rebuttable. The defendant bears the burden of establishing that the presumption should not apply. There are usually three ways a defendant can rebut the presumption. They are: (1) that the non-disclosures did not affect the market price; (2) that the plaintiffs would have purchased a stock at the same price had they known the information that was not disclosed; and (3) that the plaintiffs actually knew the information that was not disclosed to the market: Fine v American Solar King Corporation 919 F 2d 290 at 299 (5th cir, 1990)." 17 Young CJ in Eq made reference to this theory in his judgment in the Court of Appeal when Gzell J's decision in the 2004 proceedings came before it: see Johnston v McGrath [2007] NSWCA 231. After referring to the fact that the matter had been mentioned by Finkelstein J, his Honour said at [38]: "This doctrine has not (yet) been successfully invoked locally, and has been downplayed by Blanchard J in New Zealand in Boyd Knight v Purdue [1999] 2 NZLR 278, 292 (CA). However, even if it has validity in Australia, the present case does not raise it." Approach to the question whether the proceedings should be terminated 18 The several shortcomings in the pleaded case will be relevant to the plaintiff's application for leave to file the amended statement of claim, if the point of considering that application is reached. In addressing the liquidators' contention that the proceedings should be terminated, however, I overlook the shortcomings and proceed on the footing that the plaintiff's case is, in substance, that: (a) the financial report "submitted" by HIH was deficient in such a way that the "submitting" of it constituted conduct by HIH that was misleading or deceptive; (b) HIH thereby contravened one or more of s 52 of the Trade Practices Act , s 42 of the Fair Trading Act and s 995 of the Corporations Law ; (c) the plaintiff suffered loss or damage "by" that contravention on the part of HIH; (d) each of the HIH subsidiaries was, in terms of each of s 75B of the Trade Practices Act , s 61 of the Fair Trading Act and s 79 of the Corporations Law (as applicable), "involved in" the contravention by HIH; and (e) the plaintiff is accordingly entitled to recover the amount of the loss or damage by action against each of HIH subsidiaries. 19 The entitlement in (e) would, in the Trade Practices Act context, arise from s 82(1) which, omitting a presently irrelevant qualification, provides that: "… a person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV, IVA, IVB or V or section 51AC may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention." 20 The analogous provisions of the Fair Trading Act and the Corporations Law are s 68 and s 1005 respectively. In all three cases, the statute allows recovery of the relevant loss or damage from both the person who contravened and a person "involved in" the contravention. The relevant concept of involvement is substantially the same in each case and it is sufficient, for present purposes, to set out s 75B(1) of the Trade Practices Act: "(1) A reference in this Part to a person involved in a contravention of a provision of Part IV, IVA, IVB, V or VC, or of section 75AU, 75AYA or 95AZN, shall be read as a reference to a person who: (a) has aided, abetted, counselled or procured the contravention; (b) has induced, whether by threats or promises or otherwise, the contravention; (c) has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) has conspired with others to effect the contravention." The first ground - different claims 21 I turn now to the liquidators' contention that the present proceedings should be terminated because the claims sought to be advanced by the proposed amended statement of claim differ materially from those in the proofs of debt. 22 Despite the underlying substance and the allegations of statutory misconduct, the amended statement of claim sought to be propounded by the plaintiff is not, in the usual way, a means by which the plaintiff pleads a case in support of a claim that the court should award him damages. It is, rather, a vehicle by which he seeks to give substance and particularity to a claim he has already advanced in the form of a proof of debt. More particularly, it is a means by which the plaintiff seeks to make a case in support of the acceptance of his proof of debt, so that the court, acting under s 1321, may direct that the claim in question be admitted to proof despite the previous rejection of it by the liquidators of each of the HIH subsidiaries. 23 The claims set out in the proposed amended statement of claim differ in certain respects from those submitted by way of proof. In particular, the proofs referred to information published by way of media release, as well as financial report; and the proofs also alleged specific reliance on the press release, the financial report and media reports based on them. 24 This is the first basis on which it is submitted that the proceedings should be terminated - in essence, that the case advanced by the proposed amended statement of claim is, in reality, not an appeal at all; and that the several departures from the basis on which the proofs were submitted mean that the proposed amended statement of claim should not be allowed to act as the vehicle by which the appeal under s 1321 proceeds. I do not accept that submission. The ultimate contention of the plaintiff remains that the debt or claim advanced by way of each rejected proof should be recognised as a debt or claim entitled to participate under the particular winding up. Each proof was in a stated sum ("$10,400.00 plus interest"). The plaintiff, in terms of participation in the winding up, seeks, through the proposed amended statement of claim, nothing more than recognition by the court of the proposition he advanced by submitting his proofs, that is, that he is entitled to participate as a creditor for "$10,400.00 plus interest" in each winding up. 25 It does not matter, in my view, that the plaintiff may be changing the basis for his alleged right to be regarded as a creditor for "$10,400.00 plus interest". As was pointed out by Brennan J and Dawson J in Tanning Research Laboratories Inc v O'Brien [1990] HCA 8; (1990) 169 CLR 332 at CLR 341, proceedings of the kind now pending at the suit of the plaintiff, "though often referred to as an 'appeal' from the liquidator's decision to reject, are originating proceedings which the court hears de novo". Their Honours also said: "The issue in the proceedings is whether the liability referred to in the proof of debt is a true liability of the company enforceable against it." 26 To enable that inquiry to be pursued, a plaintiff must, clearly enough, present on appeal a case which identifies an alleged debt or liability corresponding with that originally sought to be conveyed by proof of debt. But a plaintiff is not, in my view, confined strictly to each and every allegation and proposition by which that plaintiff originally sought to advance the claim. As long as the claim remains the original claim, some change in the explanation of the way in which it is said to be a true liability of the company enforceable against it is permitted. Support for this view comes from the judgment of Campbell J in Re Jay-O-Bees Pty Ltd; Rosseau Pty Ltd v Jay-O-Bees Pty Ltd [2004] NSWSC 818; (2004) 50 ACSR 565 to which Mr Dennis referred in submissions on behalf of the plaintiff. In that case, it was held that a claim said to arise from a deed could, on an appeal under s 1321, be approached by the court as if the deed had been rectified, where the issue of the availability of rectification was raised on appeal. 27 In the present case, the claim was advanced as, broadly speaking, a claim that the particular HIH subsidiary was complicit in the making of false or misleading statements by HIH. In each proof of debt, the complicity was put on the footing of joint action with HIH or action in concert with HIH. And, as I have said, there was in each original claim an allegation of knowledge and reliance. While both these elements are absent from the form in which the claim is intended to be advanced through the proposed amended statement of claim (or appear in modified form), the basic fact of identity of the claim pursued by the proposed amended statement of claim with the claim advanced by way of proof of debt remains.

28 The first ground of objection raised by the liquidators does not warrant termination of the present proceedings. Second ground - prior adjudication 29 I consider next the alternative contention advanced by the liquidators in support of the proposition that the present s 1321 appeals should be terminated. They rely on the prior adjudication in the 2004 proceedings to which I have referred. The parties to those proceedings were the present plaintiff as plaintiff, the liquidators of HIH as first defendants and HIH itself as second defendant. The plaintiff had lodged a proof of claim with the liquidators of HIH in respect of a claim for the loss of the value of the 40,000 shares, relying on breach of s 52 of the Trade Practices Act and s 995 of the Corporations Law. The liquidators of HIH rejected the proof and the plaintiff appealed to the court, thereby initiating the 2004 proceedings. 30 In the 2004 proceedings, the plaintiff complained about statements in the financial report central to his claims against the HIH subsidiaries, as well as statements in a media release, both of which were issued by HIH and became the subject of press reports. It was accepted that the media release and financial report substantially overstated the consolidated profit of the HIH Group and that HIH had engaged in conduct that was misleading and deceptive within the meaning of s 52 of the Trade Practices Act (the claim under s 995 of the Corporations Law was not pursued before Gzell J). The issue, therefore, was whether the plaintiff had suffered loss or damage "by" the contravening conduct of HIH so as to give rise to a right of action for damages under s 82 (see paragraph [19] above). Gzell J held that the plaintiff had not established that the contravening conduct was a materially contributing cause of his purchase of the shares so as to give rise to an entitlement to damages. His Honour also held that even if any of the elements of the conduct of HIH remained causative, the plaintiff's conduct in ignoring repeated warnings in the printed media was so dominant as to cut the causal chain. 31 Gzell J's decision became the subject of an application for leave to appeal. Leave was refused: see Johnston v McGrath [2007] NSWCA 321 mentioned above. A subsequent application for special leave to appeal to the High Court was dismissed: Johnston v McGrath [2008] HCA Trans 115. 32 In considering the effect of the prior adjudication in the context of the present s 1321 appeal, it is necessary to bear in mind the basic principle stated as follows by Brennan J and Dawson J in Tanning Research Laboratories Inc v O'Brien (above) at CLR 340: "For present purposes, the relevant consideration is that no liability which is unenforceable against the company by the general law can found a debt admissible to proof in a winding up." 33 That observation was made at a time when claims for damages and other unliquidated claims were not cognisable in a winding up. But the general principle remains applicable. When s 553(1) of the Corporations Act lays down the general rule that "all debts payable by, and all claims against" the company having the particular characteristics there stated are "admissible to proof against the company", it speaks of debts and claims that are legally enforceable by action against the company. It follows that if circumstances are such that, ignoring the winding up and the embargo it places upon legal proceedings against the company, the person seeking to prove is not able to sue for the debt or claim, there is in reality no debt or claim of the kind with which s 553(1) is concerned. It also follows that if a court entertaining an action for the debt or claim would stay or dismiss the action as an abuse of process, there is no debt or claim within s 553(1). 34 The adjudication in the 2004 proceedings on which the liquidators of the HIH subsidiaries seek to rely did not arise in proceedings brought by the plaintiff against HIH in which judgment was entered for HIH as defendant, so that the alleged debt or claim became the subject of a judicial determination inter partes warranting a conclusion that it had no legal substance and was not legally enforceable. Rather, the present plaintiff lodged a proof of debt or claim in the winding up of HIH, the liquidators of HIH rejected the proof, the plaintiff resorted to s 1321 and the court dismissed the appeal brought by him under that section. There was, by that means, a judicial decision that the supposed debt or claim was not, in relation to HIH, within the s 553(1) description "all debts payable by, and all claims against" the company. And that decision operated for the purpose of fixing participation entitlements in the insolvent estate of HIH. The case law 35 In advancing their application now before me in relation to the winding up of each of the HIH subsidiaries, the liquidators rely on reasoning of the kind employed by the Court of Appeal in Rippon v Chilcotin Pty Ltd [2001] NSWCA 142; (2001) 53 NSWLR 198. That case concerned the sale of a business. The purchasers sued the vendor in the Supreme Court for breach of warranty in the sale agreement as to the amount of the profit of the business for the most recent financial year. There was also a claim for damages for contravention of s 52 of the Trade Practices Act based on alleged deficiencies in accounts for that financial year annexed to the contract. Those accounts had been prepared by external accountants. The claim in contract was upheld and damages were awarded, but the claim based on s 52 failed. The court was not satisfied that the purchasers had relied on the particular representations or that they had been misled or deceived. The purchasers later sued the accountants by whom the accounts annexed to the contract had been prepared, alleging negligent misrepresentation. Those proceedings were brought in the District Court and extended not only to the accounts for the most recent financial year but also those for three preceding years which also formed part of the contract. 36 The accountants filed a motion seeking to have the District Court proceedings stayed or dismissed as an abuse of process. They claimed, in substance, that the purchasers were seeking to relitigate in the District Court the issue of reliance on which they had failed in the Supreme Court. The motion was dismissed and the accountants appealed. The Court of Appeal allowed the appeal, holding that pursuit of the District Court proceedings amounted to an abuse of process. The judgment of the court was delivered by Handley JA (Mason P and Heydon JA concurring). His Honour said (at [15]): "The accountants were not parties to the action in the Supreme Court, nor were they privies of the vendor, and they cannot claim the benefit of any cause of action estoppel or issue estoppel. See James Hardie & Co Pty Ltd v Barry (2000) 50 NSWLR 357, 362 per Spigelman CJ. However in Reichel v Magrath (1889) 14 App Cas 665 the House of Lords held that a defence which was not barred by res judicata estoppel may nevertheless be struck out as an abuse of process. Lord Halsbury said at 668: '… it would be a scandal to the administration of justice if, the same question having been disposed of by one case, the litigant were to be permitted by changing the form of the proceedings to set up the same case again … There must be an inherent jurisdiction in every Court of Justice to prevent such an abuse of its procedure …'." 37 Handley JA then analysed the matter before him by the following steps: 1. The issue of reliance or causation was an essential constituent of the purchasers' cause of action against the vendor for misleading or deceptive conduct. 2. The finding in the Supreme Court that the purchasers had not relied on the vendor's representations in the accounts for the most recent financial year related to an ultimate fact, fundamental to the decision, which formed part of the right in issue. 3. If, as the Supreme Court held, the purchasers had not relied on the representations in those accounts, it would not have been accepted that they relied on the figures in the accounts for the earlier years. 4. Fresh claims for misleading or deceptive conduct against the vendor based on the earlier figures would not be barred by cause of action or issue estoppel because those claims were not litigated. 5. But, in terms of the joint judgment of Gibbs CJ, Mason J and Aickin J in Port of Melbourne Authority v Anshun Pty Ltd [1980] HCA 41; (1981) 147 CLR 589 at CLR 602, those claims were "so relevant to the subject matter of the first action that it would have been unreasonable not to rely on [them]" and they would therefore be barred by the wider form of estoppel applied in that case. 6. The purchasers could have been expected to bring forward in the Supreme Court proceedings any claims against the vendor based on the figures for the earlier years so that all relevant issues could be determined in the one proceeding. Moreover, a judgment in favour of the purchasers based on the figures for the earlier years would conflict with the judgment in favour of the vendor based on the figures for the immediately preceding year because the judgments would declare inconsistent rights in respect of the same transaction. 7. The Supreme Court decision therefore barred all causes of action against the vendor based on the representations in all the annexed accounts. 8. The purchasers could have included their claim against the accountants, based on the figures for the most recent year, in the Supreme Court proceedings. Reliance, falsity and damage would have been common issues. "If the claims based on the earlier figures were not worth pursuing against the vendor they were not worth pursuing against the accountants either". 9. The claims against the accountants were so relevant to the subject matter of the Supreme Court action that it was unreasonable for the purchasers not to rely on them in that action. 10. That close connection was relevant in considering whether the subsequent District Court action was an abuse of process. 38 Handley JA's conclusion was stated thus at [28]: "The present proceedings are an attempt to litigate or re-litigate issues which were either decided in or are barred by the earlier proceedings. In substance, ignoring the camouflage, the purchasers are attempting to re-litigate the issue of reliance on the 1991 figures which they lost. If they cannot succeed against anyone in respect of the 1991 figures because they did not rely on them, they could hardly succeed in establishing reliance on the earlier figures." 39 His Honour added at [30]: "The substance of the matter therefore is clear. The purchasers, disappointed with their bargain, sued their vendor in contract and in misrepresentation. They lost their case in misrepresentation and were disappointed with their modest recovery in contract. A few weeks before the expiration of the limitation period they sued the accountants for what is in substance the same misrepresentations. In the first proceedings they had to prove that they relied upon those misrepresentations. This turned on the evidence of Mr Hoefl, the contemporary documents, and the surrounding circumstances. The purchasers lost that issue and seek to re-litigate it against the accountants on substantially the same evidence in the hope that this time Mr Hoefl will be believed." 40 The conclusion (at [36] and [37]) was that, although there was no question of oppression and unfairness (the accountants not being parties to the earlier proceedings), the subsequent proceedings in the District Court "threaten the integrity of the administration of justice and raise the prospect of conflicting judgments" and were therefore an abuse of process in the sense referred to by Lord Halsbury LC in Reichel v Magrath (1889) 14 App Cas 665 (at 668) in the passage quoted by Handley JA (see paragraph [36] above). 41 The fact that a later proceeding raises issues already determined in an earlier proceeding is not of itself determinative of the question whether the later proceeding is an abuse of process. In I-Achieve Technology Ltd v Barton Capital Securities Pty Ltd [2001] NSWSC 1003, Hunter J noted (at [41]) that, even though the plaintiff before him sought to put in issue matters that had been the subject of findings adverse to it in the prior proceedings, it was capable of succeeding regardless of the outcome on those matters. As his Honour put it at a later point (at [45]), it was open to that plaintiff to succeed in the instant proceedings "in the face of findings made in the prior proceedings". 42 Hunter J observed that, in Rippon v Chilcotin Pty Ltd (above), the Court of Appeal quoted with approval the following passage in the judgment of Giles CJ CommD in State Bank of New South Wales Ltd v Stenhouse Ltd (1997) Aust Tort Rep 81-423 (at 64,089): "The guiding considerations are oppression and unfairness to the other party to the litigation and concern for the integrity of the system of administration of justice, and amongst the matters to which regard may be had are - (a) the importance of the issue in and to the earlier proceedings, including whether it is an evidentiary issue or ultimate issue; (b) the opportunity available and taken to fully litigate the issue; (c) the terms and finality of the finding as to the issue; (d) the identity between the relevant issues in the two proceedings; (e) any plea of fresh evidence, including the nature and significance of the evidence and the reason why it was not part of the earlier proceedings; ... (f) the extent of the oppression and unfairness to the other party if the issue was relitigated and the impact of the relitigation upon the principle of finality of judicial determination and public confidence in the administration of justice; and (g) an overall balancing of justice to the alleged abuser against the matters supportive of abuse of process." 43 It is pertinent to set out also a short passage from the judgment of Morritt VC in Secretary for State for Trade and Industry v Bairstow [2004] Ch 1 at [38] quoted with approval by the Court of Appeal in Cleary v Jeans [2006] NSWCA 9; (2006) 65 NSWLR 355 : "If the parties to the later civil proceedings were not parties to or privies of those who were parties to the earlier proceedings then it will only be an abuse of the process of the court to challenge the factual findings and conclusions of the judge or jury in the earlier action if (i) it would be manifestly unfair to the later proceedings that the same issues should be relitigated or (ii) to permit such relitigation would bring the administration of justice into disrepute."

Applying the principles to this case 44 As one approaches the question of the applicability of these principles to this case, a significant point of distinction is immediately apparent. The process by which the present plaintiff sought to establish liability of HIH for misleading or deceptive conduct contravening s 52 of the Trade Practices Act was lodgment of a proof of debt or claim in the winding up of HIH, followed by an appeal under s 1321 against rejection of the proof. That process was not capable of extension so as to include the question whether each of the HIH subsidiaries had, in the same factual context, been complicit in the alleged contravention by HIH. Only one question could be determined in consequence of lodgement of the proof of debt: whether there was a debt or claim provable in the winding up of HIH itself. This makes inapplicable to the present case those parts of the reasoning of Handley JA in Rippon v Chilcotin Pty Ltd (above) which are concerned with unreasonable failure to join the accountants as parties to the earlier action and to pursue the claims against them in company with the claims against the vendors. Ascertainment of provable debts and claims and decisions on admission of claims to proof are processes that, under the statutory scheme, are to be undertaken in respect of each company separately by means of decisions of the liquidators of that company alone, whether or not ultimately reviewed by the court under s 1321. 45 Substantial parts of the reasoning of Handley JA nevertheless remain pertinent to the present case. It is to those that I now turn. 46 There can be no doubt that the issue of causation and reliance was an essential element of the claim the present plaintiff sought to prove in the winding up of HIH and in respect of which he brought the s 1321 appeal determined by Gzell J in the 2004 proceedings. His Honour's finding that the admittedly misleading or deceptive conduct of HIH was not a materially contributing cause of the plaintiff's purchase of the shares on the stock market related to an ultimate fact central to the claim sought to be proved in the winding up of HIH. The question of reliance by the plaintiff and the related question of causation have thus been fully litigated, as between the plaintiff and HIH, with an outcome unfavourable to him. 47 The plaintiff did not, in the 2004 proceedings, seek to advance any form of "rebuttable presumption of reliance" by reference to "fraud-on-the-market theory" of the kind referred to by Finkelstein J in P Dawson Nominees Pty Ltd v Multiplex Ltd (above). Despite the reservations subsequently expressed by Young CJ in Eq about the viability of any such approach (see paragraph [17] above), it was clearly open to the plaintiff, in lodging his proof of debt with the liquidators of HIH and thereafter pursuing the 2004 proceedings, to seek to advance a "fraud-on-the-market" rebuttable presumption of reliance. He did not take that course. But that different way of seeking to establish an essential element of the claim he sought to prove in the winding up of HIH was so relevant to the attempt to establish that claim against HIH that it would have been unreasonable not to pursue it. The wider form of estoppel as applied in Port of Melbourne Authority v Anshun Pty Ltd (above) would therefore have barred any attempt by the plaintiff subsequently to pursue that course against HIH direct even if there had been no cause of action or issue estoppel (as there probably would have been, in any event). Any such attempt would have entailed the clear possibility of declarations of inconsistent rights in respect of the same facts and events. 48 It is thus clear that it is not now open to the plaintiff to prove in the winding up of HIH any claim for damages for statutory contravention based on a combination of the misleading or deceptive quality of information put into the marketplace by means of or as a result of the release of the financial report of the HIH "economic entity" and actual or presumed reliance by the plaintiff on that information in deciding to buy the 40,000 HIH shares that he in fact bought on the stock market on 2 January 2001. Nor could the plaintiff commence or proceed with an action for damages against HIH on that basis, even assuming that he had leave under s 471B to do so. 49 In pursuing the quite separate claims advanced against each of the HIH subsidiaries by reference to the "involved" aspect of s 82 of the Trade Practices Act, s 68 of the Fair Trading Act and s 1005 of the Corporations Law, the plaintiff cannot succeed unless he proves that HIH committed the statutory contravention in which the subsidiary is alleged to have been "involved"; and this is so even if, in the particular context, no claim is brought against HIH: Australian Competition and Consumer Commission v Black on White Pty Ltd [2001] FCA 187; (2001) 110 FCR 1 at [48]. A renewed attempt to prove statutory contravention by HIH does not have the potential to produce findings inconsistent with those made in the 2004 proceedings. The outcome before Gzell J was that HIH was found to have engaged in misleading or deceptive conduct caught by s 52 of the Trade Practices Act. It follows that the plaintiff, in pursuing against the HIH subsidiaries the contention that HIH engaged in conduct that was misleading or deceptive within that provision (and according to the relevantly indistinguishable concepts of misleading or deceptive conduct that apply for the purposes of s 42 of the Fair Trading Act and s 995 of the Corporations Law), would be seeking to uphold the finding on that aspect that was made in the 2004 proceedings.

50 But a further step will have to be taken by the plaintiff in order to make good the claim he seeks to make against each of the HIH subsidiaries. He will again be called upon to show that, in terms of s 82 of the Trade Practices Act (as well as the relevantly identical specifications in s 68 of the Fair Trading Act and s 1005 of the Corporations Law), he suffered loss or damage "by" the contravening conduct of HIH (not, it may be noted, any contravening conduct of the HIH subsidiaries). That was something that the plaintiff had to prove in the 2004 proceedings. He failed to do so. Express findings fatal to his contentions were made. May he now renew his attempt?

51 That question should be answered in the negative. To paraphrase what was said by Handley JA in Rippon v Chilcotin Pty Ltd (above) at [30], the plaintiff, having lost on the issue of causation and reliance when he claimed directly against HIH, now seeks to re-argue that issue in his claims against the HIH subsidiaries on substantially the same evidence in the hope that he will be successful on the second attempt. And to paraphrase what Lord Halsbury LC said in Reichel v Magrath (above) at 668, the plaintiff, having obtained an adverse decision in his first claim on the question of the causative effect of HIH's conduct, has changed the form of the proceedings to set up the same case again. The circumstances are not of the kind to which Hunter J referred in the I-Achieve Technology case, in that the plaintiff cannot succeed in the present s 1321 proceeding without obtaining findings on causation and reliance that are altogether inconsistent with the findings on that very matter made in the prior proceedings. The causation and reliance issue in the present case is exactly the same as that determined in the 2004 proceedings, relating as it does to the conduct of HIH. It is an issue of central importance that was fully litigated in the earlier case.

52 The essential elements of the right to recover the amount of loss or damage suffered, as against the six HIH subsidiaries, are the essential elements of the right to recover as against HIH itself - plus the further elements going to the status of each subsidiary as a person involved in the contravention by HIH and other elements peculiar to the particular provision upon which reliance is placed (including, in the case of the Corporations Law, a relevant connection with a dealing in securities). Having failed to establish on the earlier occasion one of the essential elements common to both claims (the element concerning the causative effect of HIH's conduct), the plaintiff cannot be allowed to attempt to do so again. To afford him any such opportunity would be manifestly unfair to the liquidators of the HIH subsidiaries. It would countenance a collateral attack on the earlier decision involving the same issue and thus have the potential to undermine the integrity of that judgment. It would raise the very real prospect of conflicting judgments. And it would threaten the integrity of the administration of justice. Conclusion

53 For these reasons, I hold that the present appeals under s 1321 of the Corporations Act represent an abuse of the process of the court. The orders of the court are therefore as follows:

Order that each of the appeals under s 1321 of the Corporations Act 2001 (Cth) brought in these proceedings be permanently stayed.
Order that the plaintiff pay the defendants' costs of the proceedings. Footnote 54 I should mention for the sake of completeness that I have not overlooked the submission made on behalf of the plaintiff that, since the inception of the schemes of arrangement between each of the HIH subsidiaries and its creditors which were approved by the court in May 2006 (see Re HIH Casualty and General Insurance Ltd [2006] NSWSC 485; (2006) 200 FLR 243 and [2006] NSWSC 504; (2006) 58 ACSR 1), the liquidators are functus officio. There is no substance to the submission and there is no need to say more about it.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

Trade Practices Act 1974(Cth)

CITATION : Johnston v McGrath [2008] NSWSC 639

Australian Competition and Consumer Commission v Black on White Pty Ltd [2001] FCA 187; (2001) 110 FCR 1 Cleary v Jeans [2006] NSWCA 9; (2006) 65 NSWLR 355 I-Achieve Technology Ltd v Barton Capital Securities Pty Ltd [2001] NSWSC 1003 Johnston v McGrath [2005] NSWSC 1183; (2005) 195 FLR 101 Johnston v McGrath [2007] NSWCA 231 Johnston v McGrath [2008] HCA Trans 115 P Dawson Nominees Pty Ltd v Multiplex Ltd [2007] FCA 1061; (2007) 242 ALR 111 CASES CITED : Port of Melbourne Authority v Anshun Pty Ltd [1980] HCA 41; (1981) 147 CLR 589 Re HIH Casualty and General Insurance Ltd [2006] NSWSC 485; (2006) 200 FLR 243 and [2006] NSWSC 504; (2006) 58 ACSR 1 Reichel v Magrath (1889) 14 App Cas 665 Re Jay-O-Bees Pty Ltd; Rosseau Pty Ltd v Jay-O-Bees Pty Ltd [2004] NSWSC 818; (2004) 50 ACSR 565 Rippon v Chilcotin Pty Ltd [2001] NSWCA 142; (2001) 53 NSWLR 198 Secretary for State for Trade and Industry v Bairstow [2004] Ch 1 State Bank of New South Wales Ltd v Stenhouse Ltd (1997) Aust Tort Rep 81-423 Tanning Research Laboratories Inc v O'Brien [1990] HCA 8; (1990) 169 CLR 332

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