Kernahan v ACN 003 134 475 Pty Ltd

Supreme Court of NSW|2010-02-02|Before: Hammerschlag J

INTRODUCTION 1 HIS HONOUR: The plaintiff on his own behalf and as representative of a group has sued the defendants for compensation claimed to have been suffered by conduct on the part of the defendants alleged to have been in contravention of provisions of the Trade Practices Act 1974 (Cth), the Australian Securities and Investments Commission Act 2001 (Cth) and the Superannuation Industry (Supervision) Act 1993 (Cth) ("the SIS Act"). 2 The suit is scheduled to go to trial in September this year. 3 Questions have arisen with respect to the use of evidence proposed to be adduced at the trial by the plaintiff. The evidence concerned is a report dated 28 January 2003 prepared by Mr Joseph John Catanzariti pursuant to provisions of the SIS Act ("the Report"). 4 The parties seek rulings and findings in advance of the trial. Section 192A of the Evidence Act 1995 enables the Court to give rulings and to make findings in relation to questions about the use of evidence proposed to be adduced, or the operation of a law in relation to it, before the evidence is adduced in the proceedings. FACTUAL BACKGROUND 5 Under s 265(1) of the SIS Act, (which is part of Division 4), the Regulator, the Australian Prudential Regulation Authority ("APRA"), may conduct investigations of the whole or part of the affairs of a superannuation entity. The first defendant is such an entity. 6 In about May 2002 APRA approached Mr Catanzariti, solicitor and partner in the law firm Clayton Utz, with a view to appointing him an inspector for the purposes of conducting investigations pursuant to s 265(1) of the SIS Act. APRA invited Clayton Utz to make a submission with a view to taking such an appointment. 7 On 7 June 2002 Clayton Utz, under the lead of Mr Catanzariti, nominated a team to be appointed as "the Inspectorate". The team included Mr David Edwards, Managing Director and Actuary of Edwards Benefits Advisors. Mr Edwards was described as an experienced expert in all actuarial and accounting matters relating to superannuation and life insurance schemes. 8 Clayton Utz produced for APRA's consideration an Investigation Plan for a proposed investigation into the affairs of the first defendant. The Investigation Plan included a proposed schedule for the activities to be undertaken, including the preparation of a preliminary report by Mr Edwards and the integration of that report and his findings into a report to be produced by Mr Catanzariti. 9 Section 4 of the Investigation Plan, under the heading Costs, recorded as follows: "In order to conduct the investigation we will be relying on the following staff at the following charge out rates: Joe Catanzariti, Partner: $470 plus GST Yaseen Shariff, Solicitor: $270 plus GST David Edwards, Actuary: $370 plus GST David Edwards will invoice Clayton Utz and his fees will be attached as disbursements. When we work on the Investigation for an entire day, we will only charge for 7.5 hours for that day even though our actual work on that day may have exceeded 7.5 hours. We will not charge for photocopying, faxes, stationery (including folders and dividers which may be necessary), word processing, taxi fares and other similar disbursements. We will also rely on APRA's Investigation Unit for resources and support services where required. Based on our assessment of the tasks involved, we expect our legal fees (inclusive of David Edwards' fees) will amount to: (i) Between $40,000 to $60,000 for the first stage of the Investigation (stage 1 under the beading 3 "Proposed Schedule" above); and (ii) Between $110,000 to $140,000 for the second and third stages of the Investigation (stages 2 and 3 under the heading 3 "Proposed Schedule" above). However, in order to provide certainty we will set a maximum limit to the fees at an amount agreed with you. We will provide you with updates to our costs as we proceed and we can of course advise you if we form the view that the Investigation should cease. In such instances, only costs to date will be charged. We note that the our estimates of schedules and costs above assume that the relevant persons, LML, PL and AM will be co-operative and no resort will be had to injunctive or other obstructive proceedings." 10 Mr Louis Serret, an APRA officer, made some changes to the Investigation Plan and based upon it, on 8 July 2002 communicated to Clayton Utz APRA's acceptance of Clayton Utz's terms. 11 A formal written agreement ("the Agreement") between APRA, Clayton Utz and Mr Catanzariti was prepared. An unsigned copy of this Agreement was in evidence. There is no issue that it was entered into in mid to late July 2002. 12 The Agreement described Mr Catanzariti as "the inspector" and defined "consultants" to mean "the inspector and Clayton Utz either jointly or separately". 13 The Agreement contained the following recitals: A. APRA requires the services relating to an investigation into the whole of the affairs of the AM Pooled Superannuation Trust under division 4 of Part 25 of the Superannuation Industry) (Supervision) Act 1993 (" the SIS Act "); B. APRA may engage consultants to perform services for it under section 47 of the Australian Prudential Regulation Authority Act 1988 ( the "APRA Act"); C. Clayton Utz have fully informed themselves of all aspects of the services required to be performed and has submitted a quote which forms the basis for the prices in Schedule 2 and a copy has been attached. D. The inspector is willing and able to be appointed as an inspector under subsection 265(1) of the Superannuation (Industry) Supervision Act 1993 ("SIS") to be an inspector for the purposes of the conduct of investigations under Division 4 of Part 25 of SIS in relation to the affairs of superannuation entities. Further the inspector has satisfied himself that appropriate employees (Specified Personnel) of Clayton Utz are available to assist him in providing the services required of him as inspector; E. Clayton Utz agrees to the inspector being appointed as inspector and also to make the Specified Personnel available to assist the inspector in completing the services on the basis of the prices set out in Schedule 2; F. APRA wishes to engage the inspector and Clayton Utz under section 47 of the APRA Act, and requires them to perform the Services in accordance with the terms and conditions of this Agreement.

14 Clauses 1, 2, 3 and 4 of the Agreement were in the following terms:

The services: 1.1 The consultants are engaged under section 47 of the APRA Act to perform the Services. The consultants shall do so in accordance with Schedule 1 at a high standard, and at the times and in the manner specified in Schedule 1. 2. Fees 2.1 Subject to the performance of the Services to the reasonable satisfaction of APRA, APRA shall pay the consultants the fees specified in Schedule 2. 2.2 APRA may delay payment or any instalment of fees until such time as the consultants have completed to the reasonable satisfaction of APRA, that part of the Services to which the payment relates. 2.3 The consultants shall submit invoices for payment in the manner specified in Schedule 1. 3. Entire Agreement and Variation 3.1 This agreement is the entire agreement between us. It supersedes all communications, negotiations, arrangements and agreements, either oral or written, between us. 3.2 If we want to vary this Agreement, shall do so in writing and both sign the variation. 4. Specified Personnel and Subcontracting 4.1 Clayton Utz shall ensure that the Specified Persons undertake work in respect of the Services. If the Specified Persons are unable to do the work, or do not perform the work to the reasonable satisfaction of APRA, Clayton Utz shall provide replacement Specified Persons, approved by APRA, to APRA at the earliest opportunity and at no additional charge. 4.2 The consultants' inability to comply with 4.1 is a ground for APRA to terminate the Agreement. 4.3 If the consultants want to subcontract any part of the Services, the consultants shall obtain APRA's written approval, which APRA may give with or without conditions. 15 Clause 14 was in the following terms: Negation of Employment Partnership and Agency 14.1 The consultants will not, by virtue of this Agreement be, or, for any purpose be deemed to be, an officer, employee, subcontractor, agent or partner of APRA other than for the purposes of section 47 of the APRA Act.

16 Paragraphs 1.1 and 1.2 of Item 1 of Schedule 1 to the Agreement were in the following terms: 1.1 Nature Joseph John Catanzariti, a partner in Clayton Utz, has been appointed inspector under subsection 265(1) of the Superannuation Industry (Supervision) Act 1993 ("SIS Act") for the purposes of the conduct of an investigation under Division 4 of Part 25 of the SIS Act in relation to the affairs of the AM POOLED SUPERANNUATION TRUST (SFN 50963/360/12) ("the Fund"). 1.2 Specific Tasks The inspector, with the assistance of Clayton Uz's specified personnel, shall investigate the Fund to determine whether the actions, conduct and/or omissions of the directors of LifeTrack Management Limited ACN 003 135 475 of Level 15 O'Connell House 15 Bent Street Sydney in the State of New South Wales 2000 as approved trustee of the Fund may have resulted in: (a) a breach of their respective duties and any other breaches of the Superannuation Industry (Supervision) Act 1993; and/or (b) the need to freeze the assets within the Diversified Traded Policy Fund of superannuation investors from October 2001 to June 2002 and caused a loss to members. Further information as to the services are set out in the Investigation Plan provided to APRA by Clayton Utz (copy attached). 17 Item 4 of Schedule 1 was as follows: Specified Personnel Yaseen Shariff David Edwards 18 On 31 July 2002 Mr Catanzariti executed an instrument entitled "Delegation by Inspector" which was in the following terms: " DELEGATION BY INSPECTOR I, Joseph John Catanzariti, an inspector appointed by a delegate of the Australian Prudential Regulation Authority, under subsection 266(1) of the Superannuation Industry (Supervision) Act 1993 (the "Act"), DELEGATE to David Antony Edwards, a member of the staff of the Australian Prudential Regulation Authority, all my powers under Division 4 of Part 25 of the Act, but only for the purpose of the conduct of an investigation under Division 4 of Part 25 of the Act in relation to the affairs of the LifeTrack Management Limited. Dated 31/07/02 Joseph John Catanzariti " 19 On 28 January 2003 Mr Catanzariti produced the Report. Mr Catanzariti made certain findings of potential breaches by the first defendant of provisions of the SIS Act. 20 Incorporated in the Report as Schedule 1 (Chapter 10) is an expert's report by Mr Edwards, who himself made certain findings about potential breaches of the SIS Act. Mr Catanzariti's own findings make reference to, and in some cases, on one view of things, either rely upon or adopt conclusions of Mr Edwards.

The SIS Act 21 Section 10 of the SIS Act provides that unless the contrary intention appears, "member of staff" in relation to APRA means a person who is an APRA staff member within the meaning of the Australian Prudential Regulation Authority Act 1998 (Cth). 22 Section 266(1) of the SIS Act is in the following terms: An inspector may, by signed writing, delegate to a member of the staff of the Regulator any of the inspector's powers under this Part. 23 Section 266(3) of the SIS Act is in the following terms: A reference in this Part to an inspector includes a reference to a delegate of an inspector.

24 Section 295 of the SIS Act provides as follows: Subject to section 296, if a copy of a report under Division 6 purports to be certified by the Regulator as a true copy of such a report, the copy is admissible in a proceeding (other than a criminal proceeding) as prima facie evidence of any facts or matters that the report states an inspector to have found to exist.

25 Section 265(1) of the SIS Act, which is in Division 4, is in the following terms: The Regulator may, in writing, appoint a member of the staff of the Regulator, or a member of the staff of the other Regulator, to be an inspector for the purposes of the conduct of investigations under this Division in relation to the affairs of superannuation entities.

26 Section 312 (1), (2), (5) and (8) if the SIS Act are in the following terms: (1) In this section: procedural irregularity includes: (a) the absence of a quorum at a meeting of: (i) trustees of a superannuation entity; or (ii) direc tors of a corporate trustee of a superannuation entity; or (iii) beneficiaries in a superannuation entity; or (iv) members of a policy committee of an employer-sponsored fund; or (b) a defect, irregularity or deficiency of notice or time. proceeding under this Act means any proceeding, whether a legal proceeding or not, under this Act. (2) A proceeding under this Act is not invalidated because of any procedural irregularity unless the Court: (a) is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court; and (b) by order declares the proceeding to be invalid. (5) Subject to the remainder of this section, but without limiting any other provision of this Act, the Court may, on application by any interested person, make all or any of the following orders (either unconditionally or subject to any conditions imposed by the Court): (a) an order declaring that: (i) any act, matter or thing purporting to have been done; or (ii) any proceeding purporting to have been instituted or taken; under this Act or in relation to a superannuation entity is not invalid because of any contravention of a provision of: (iii) this Act; or (iv) the governing rules of a superannuation entity; (b) an order relieving a person in whole or in part from any civil liability in respect of a contravention mentioned in paragraph (a); (c) an order: (i) extending the period for doing any act, matter or thing or for instituting or taking any proceeding under this Act or in relation to a superannuation entity (including extending a period if it ended before the application for the order was made); or (ii) shortening the period for doing such an act, matter or thing or for instituting or taking such a proceeding. (8) The Court must not make an order under this section unless it is satisfied: (a) in the case of an order referred to in paragraph (5)(a): (i) that the act, matter or thing, or the proceeding, referred to in that paragraph is essentially of a procedural nature; or (ii) that the person or persons concerned in or party to the contravention or failure acted honestly; or (iii) that it is in the public interest that the order be made; and (b) in the case of an order referred to in paragraph (5)(b)--that the person subject to the civil liability concerned acted honestly; and (c) in every case--that no substantial injustice has been or is likely to be caused to any person. The APRA Act 27 Section 3(1) of the Australian Prudential Regulation Authority Act 1998 (Cth) ("the APRA Act") provides as follows: In this Act, unless the contrary intention appears: "APRA staff member" means any of the following: (a) a person appointed by APRA under section 45; or (b) a person assisting APRA under section 46; or (c) a person engaged by APRA under section 47. 28 Section 47 of the APRA Act, at the relevant time, provided as follows: (1) APRA may engage consultants or other people to provide advice to it or perform services for it. (2) The terms and conditions of engagement (including as to remuneration) are to be determined by the Board.

THE RULING REQUIRED 29 The matter upon which the Court at this stage is required to rule is whether the Report is admissible in the proceedings as prima facie evidence of any fact or matter that the Report states Mr Edwards to have found to exist. 30 A ruling on that question will not resolve whether any particular thing in the report amounts to a finding by Mr Edwards that any fact or matter exists. It will also not resolve whether any findings by Mr Edwards are part of any finding by Mr Catanzariti and thereby attract the operation of s 265(1) of the SIS Act in any event.

31 It emerged during submissions that there may be live issues between the parties whether things said in the Report (by Mr Catanzariti or by Mr Edwards or both) amount to findings of the existence of facts or matters. 32 In the circumstances, whatever ruling the Court makes at this point, there will be a direction (which the plaintiff seeks and the defendant does not oppose) that the plaintiff specify each fact or matter which it says an inspector has found to exist so as to attract the operation of s 265(1) of the SIS Act.. THE PARTIES' CONTENTIONS

33 The defendants, for whom Mr J Hogan-Doran of Counsel appeared, put that the Report does not attract the operation of s 265(1) of the SIS Act in relation to any fact or matter found by Mr Edwards to exist. This is because Mr Edwards: a had not been engaged by APRA to provide advice to it or perform services for it within the provisions of s 47(1) of the APRA Act; b was therefore not a member of staff of APRA; c was therefore not eligible to be the object of a delegation from Mr Catanzariti under s 266(1) of the SIS Act; d therefore did not become an inspector within the meaning s 295(1) read with s 266(3) of the SIS Act. 34 He put that the engagement of a consultant or other person under s 47(1) of the APRA Act required a direct contractual relationship between APRA and the engaged person and that the Agreement did not, and was not intended to, achieve this outcome. He put that under the Agreement, the object of the engagement was Clayton Utz, not Mr Edwards. 35 An initial contention that Mr Catanzariti himself was not properly appointed was abandoned. 36 The plaintiff, for whom Mr D Williams of Senior Counsel appeared, put firstly that s 47(1) of the APRA Act does not require a direct contractual relationship between APRA and the person engaged and that all that is required is an engagement on APRA approved terms and conditions. He put that there is no impediment to the "indirect engagement" of consultants or other persons, provided that APRA agrees to the terms and conditions of the engagement. He put that APRA engaged Mr Edwards through the conduit of Mr Catanzariti and/or Clayton Utz. Reliance was placed on the fact that Mr Edwards was one of the specified persons under the Agreement who was to perform part of the services contemplated by it. 37 Secondly, the plaintiff put that if, for the reason that the arrangements did not result in the engagement of Mr Edwards within the meaning of s 47(1) of the APRA Act, Mr Catanzariti's delegation was ineffective, this constituted a procedural irregularity under s 312(1) of the SIS Act which did not invalidate the delegation. 38 Thirdly, the plaintiff put that the Court should make an order under s 312(5) of the SIS Act declaring that the purported delegation was not invalid. 39 Mr P Braham of Counsel appeared for APRA. APRA, in effect, adopted the plaintiff's submissions. CONSIDERATION "Engaged"?

40 Whether Mr Edwards was eligible to be the object of Mr Catanzariti's delegation depends upon whether he was, at the time, a member of the staff of APRA. This turns on whether he was engaged by APRA under s 47(1) of the APRA Act to provide advice to APRA or perform services for it. 41 The parties did not refer the Court to any pertinent authority on the meaning of the terms 'engage' or 'engaged'.

42 In Benninga Mitcham Ltd v Bijstra [1946] KB 58 at [62], MacKinnon LJ was concerned with the meaning of the phrase "some person engaged in his whole-time employment". His Lordship's view (and I respectfully agree) was that "[t]he word 'engaged' is deplorably ambiguous." 43 However, his Lordship went on to say the following: "An employer engages a servant when he makes an agreement with him for his services. The workman is 'engaged' on work when he is actually carrying it out. In fact, 'engage' of a master has an entirely different meaning to 'engaged in' of a workman. In the phrase we are concerned with the use is of the workman." 44 It seems to me that the terms 'engaged' and 'engage' in s 3(1) and s 47(1) of the APRA Act have the meaning first described by his Lordship, that is, a person is engaged by APRA, or APRA engages that person, to provide advice to APRA or to perform services for it when APRA makes an agreement with the person for their services. 45 In my view Mr Edwards was not engaged by APRA. APRA made no agreement with him. He was engaged by Clayton Utz. APRA determined, not the terms and conditions of the engagement of Mr Edwards, but the terms and conditions of the engagement of Clayton Utz. One of those terms was that Clayton Utz would ensure that Mr Edwards would undertake work in respect of the services Mr Catanzariti and Clayton Utz would provide. 46 It was undoubtedly the case that Mr Edwards was 'engaged' in the provision of services to APRA in the second meaning of the word described by McKinnon LJ, and for which, it appears to me, the plaintiff contends. If one were concerned, as was his Lordship, with "the use…of the workman", rather than a relationship of engagement, the requirements of s 3(1) and s 47(1) of the APRA Act would have been met. But that is not the case here.

47 It was put by Mr Williams that both APRA and Mr Catanzariti must have considered that Mr Edwards was a member of the staff of APRA, given that Mr Catanzariti purported to make the delegation in favour of Mr Edwards with the knowledge and consent of APRA and that this was relevant in considering whether APRA engaged Mr Edwards. 48 It seems to me, however, that whether there was an engagement depends on the intention of the parties objectively ascertained: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [179-80].

49 The contractual instruments, so viewed, did not bring about an engagement as contemplated by s 3 and s 47(1) of the APRA Act. Mr Edwards was accordingly not a member of the staff of APRA and Mr Catanzariti's delegation to him was ineffective because Mr Edwards was not eligible to be appointed.

Procedural Irregularity? 50 I turn then to whether, notwithstanding Mr Edwards' ineligibility, the delegation is saved by s 312(2) of the SIS Act. 51 There was no issue that the delegation is a proceeding under the SIS Act within the meaning of s 312(1). 52 The delegation will have been saved if the defect with which it is infected, namely the ineligibility of the delegatee, is a procedural irregularity within the meaning of s 312(1) of the SIS Act. 53 The defect is not one of the procedural irregularities expressly specified in s 312(1) of the SIS Act. 54 It may nevertheless be a procedural irregularity within the general meaning of the term. 55 The parties did not direct the Court to any authority on what distinguishes a procedural irregularity from a substantive one. 56 A default that goes only to timing of a step that should have been taken earlier would undoubtedly be procedural; see Re Centennial Coal Co Ltd (2006) 56 ACSR 698 at 703 [16]. 57 It seems to me, however, that if the particular act or proceeding could not have validly been done by the actor, even if he, she or it had done it differently, then it is not procedural, but rather substantive.

58 In my view, the defect (or irregularity) in Mr Edwards' appointment is not procedural because Mr Catanzariti could not have effected a valid delegation howsoever he had done it. 59 What was needed was an engagement by APRA of Mr Edwards. 60 Section 312(2) of the SIS Act does not save the delegation. Should the Court make an order under s 312(5) of the SIS Act? 61 The defendants did not contest that if the delegation is invalid, it is because of a "contravention of the provision of" the SIS Act as contemplated by s 312(5)(a). The defendants also did not contest that the requirements of s 312(8)(a) of the SIS Act have been met. They put that the Court should not make an order because I should not be satisfied that no substantial injustice has been, or is likely to be caused, to any person as contemplated by s 312(8)(c) of the SIS Act. 62 I am not satisfied that no substantial injustice is likely to be caused to the defendants by an order under s 312(5) of the SIS Act.

63 There are undoubtedly policy reasons why an inspector may not under s 266(1) of the SIS Act delegate his powers to anyone but a member of the staff of APRA. 64 The effect of the order would be to give to the plaintiff the significant forensic advantage of the presumption provided in s 295 of the SIS Act in relation to facts or matters that the report states Mr Edwards (not a member of the staff of APRA) has found to exist, which advantage the plaintiff otherwise would not have. 65 The terms of the Agreement between APRA, Mr Catanzariti and Clayton Utz were comprehensive. The Agreement was between sophisticated parties and there is no basis for me to conclude that arrangements on a different basis may have been concluded between APRA, Mr Catanzariti, Clayton Utz or Mr Edwards. 66 In the all of the circumstances, I do not consider that I should exercise my discretion to make an order under s 312(5) of the SIS Act and I decline to do so. CONCLUSION 67 I rule that the Report is not admissible under s 295 of the SIS Act in the proceedings as prima facie evidence of any fact or matter by reason only that the Report states Mr Edwards to have found it to exist.

68 I direct the plaintiff to provide to the defendants within 21 days, a list identifying each fact or matter which the plaintiff will contend at the hearing, the Report states an inspector to have found to exist, and in respect of which he will contend that the Report is admissible as prima facie evidence. 69 I order that the costs of both motions be costs in the cause. 70 The exhibits are to be returned. **********

23/02/2010 - the wording in brackets should read: (which the plaintiff seeks and the defendant does not oppose) - Paragraph(s) 32

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.

Industry (Supervision) Act 1993(Cth)

Trade Practices Act 1974(Cth)

(Cth), the Australian Securities and Investments Commission Act 2001(Cth)

CITATION : Kernahan v ACN 003 134 475 Pty Ltd [2010] NSWSC 51 This decision has been amended. Please see the end of the judgment for a list of the amendments.

Benninga Mitcham Ltd v Bijstra [1946] KB 58 CASES CITED : Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 Re Centennial Coal Co Ltd (2006) 56 ACSR 698

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