Mercedes Holdings Pty Limited v Waters

First issue: Whether Fund members may recover compensation under s 1325(2) of the Act from officers of the former responsibility entity for breaches of civil penalty provisions 7 The Fund constituted a managed investment scheme to which the provisions of Chapter 5C of the Act applied. That chapter made provisions for the imposition of duties upon officers of a responsible entity. Under the Act there appears to be three different paths to obtaining compensation for breaches of such duties. The first is contained in Part 9.4B of the Act and provides for compensation where what the Act terms "civil penalty provisions" have been breached. The second is contained in Part 9.5 and, more particularly in s 1325(2), and permits recovery from persons who have, inter alia, breached Chapter 5C. The third is contained in s 601MA and permits members of a Fund to sue the responsible entity for a breach of Chapter 5C. The first regime is applicable only to civil penalty provisions and compensation is only available to the responsible entity (s 1317H). The second regime, by contrast, can be sought by any person who suffers loss or damage as a result of a contravention of Chapter 5C and the contraventions need not be of "civil penalty provisions". The third regime is available to fund members but only against the responsible entity. The proposed pleading seeks to recover compensation from the responsible entity's former directors under the second regime contained in s 1325(2). To put the matter plainly, that claim is neither made by the responsible entity nor does it rest on any allegation that a civil penalty provision has been breached. 8 The sixth, seventh and ninth defendants (all of whom were directors of MFSIM) submitted that, as a matter of statutory interpretation, the compensation regime applicable in the case of a breach of a civil penalty provision in Part 9.4B and the availability of a claim under s 601MA meant that a claim under s 1325(2) was not available. This was because those two regimes were to be seen as the exclusive and exhaustive methods of recovering compensation for a breach of Chapter 5C. The plaintiffs resisted this argument on two bases: first, the breaches of Chapter 5C upon which they relied (contained in s 601FD(1)) were not breaches of civil penalty provisions and thus the compensation regime in Part 9.4B could not be applicable; secondly, they denied in any event, that that the compensation regimes contained in Part 9.4B and s 601MA were exhaustive statements of the circumstances in which compensation could be recovered.

Second issue: The claims against the auditors under s 601HG(3) 9 The proposed pleading alleges that the auditors breached s 601HG(3) by failing to carry out an audit to ensure compliance with the Fund's compliance plan. The proposed pleading alleges that to carry out the audit the auditors were bound to perform 52 specific duties and that Ms Waters, the relevant partner of the auditing firm KPMG, failed to carry out 41 of them in the 2005 financial year, 42 of them in the 2006 financial year and 39 of them in the 2007 and 2008 financial years. The auditors submitted that even if this were true it would not mean that no audit had been conducted but instead only that the audit had not been conducted in accordance with the alleged duties. The plaintiffs submitted that this was a question of fact.

Third issue: The claims against the auditor under s 601HG(4) 10 Part of the plaintiffs' case against the auditors turned on s 601HG(4) of the Act which required that an auditor inform ASIC in the event of becoming "aware" of particular specified circumstances. The case put by the plaintiffs was that the auditors were aware of these circumstances because certain documents pointed to them and either they had read those documents or they ought to have read them. The auditors submitted that one could not make good an allegation that they were aware of a circumstance by alleging that it was revealed in something which should have been read. The plaintiffs contended that they may allege that the auditors read the document and that they were aware therefrom. Further, they submitted that parties may be "aware" of a circumstance if they wilfully shut their eyes to it. 11 The auditors launched a separate attack on the claim made under s 601HG(4). They contended that the failure to inform the regulator had to be deliberate; so much flowed, they said, from the provision's status as an offence which was not one of strict liability. The plaintiffs submitted that the consequence of the provision's breach in the criminal law was irrelevant to its construction.

Fourth issue: The claims against the auditors in negligence 12 In addition to the claim made by the plaintiffs for compensation from the auditors for breaches of Chapter 5C, they also contended for the existence of a common law duty of care owed by the auditors directly to the unit holders. The auditors argued that no such duty could arise and that, even if it could, the standing to bring such a claim rested with the responsible entity as trustee. The plaintiffs, in response, submitted that a duty could arise and that there was an exception which permitted beneficiaries of a trust to sue third party tortfeasors when the trustee itself refused to sue. In that regard, they pointed to a contractual arrangement which they had reached with the present responsible entity under which it agreed not to commence proceedings relating to the subject matter of the present claim.

Fifth issue: Causation issues in the 2008 financial year 13 The auditors submitted that none of the claims against them arising from the audit for the 2008 financial year could succeed. This was because the Fund did not enter into any impugned transactions after 30 June 2008 which could have been prevented by any conduct of the auditors. It was also submitted that MFSIM was removed as the responsible entity on 15 October 2008 and if the auditors had of properly performed their duties, ASIC would have been informed at the earliest by 29 October 2008.

Sixth issue: Inadequate particularisation 14 The fifth defendant, supported by the other defendants, submitted that the proposed pleading was run through with the device of alleging the non-occurrence of specified events supported by a particular of the plaintiffs' ignorance of the event's occurrence which, as it stood, did not disclose a case. The plaintiffs argued that this was a mere deficiency in particulars. 15 It is useful to consider these issues in turn.

First issue: Whether relief available under s 1325(2) 16 Chapter 5C is entitled "Managed Investment Schemes" and sets out detailed provisions regulating the management of such schemes and the responsibilities attendant thereon. The chapter is divided into parts. Part 5C.2 deals with the position of the responsible entity and is itself broken down into divisions. Division 1 is headed "Responsibilities and Powers". Contained within that division is s 601FD which specifies the duties imposed upon the officers of a responsible entity. The plaintiffs' proposed pleading alleges against the former responsible entity's officers that they failed to comply with the duties imposed upon them by this provision. The duties are of the characteristic kind one might expect to be cast upon those in a fiduciary position of trust. Nevertheless, it is worth setting it out. Section 601FD provides: Duties of officers of responsible entity (1) An officer of the responsible entity of a registered scheme must: (a) act honestly; and (b) exercise the degree of care and diligence that a reasonable person would exercise if they were in the officer's position; and (c) act in the best interests of the members and, if there is a conflict between the members' interests and the interests of the responsible entity, give priority to the members' interests; and (d) not make use of information acquired through being an officer of the responsible entity in order to: (i) gain an improper advantage for the officer or another person; or (ii) cause detriment to the members of the scheme; and (e) not make improper use of their position as an officer to gain, directly or indirectly, an advantage for themselves or for any other person or to cause detriment to the members of the scheme; and (f) take all steps that a reasonable person would take, if they were in the officer's position, to ensure that the responsible entity complies with: (i) this Act; and (ii) any conditions imposed on the responsible entity's Australian financial services licence; and (iii) the scheme's constitution; and (iv) the scheme's compliance plan. (2) A duty of an officer of the responsible entity under subsection (1) overrides any conflicting duty the officer has under Part 2D.1. (3) A person who contravenes, or is involved in a contravention of, subsection (1) contravenes this subsection. (4) A person must not intentionally or recklessly contravene, or be involved in a contravention of, subsection (1). 17 Chapter 5C does not provide any machinery by which compensation may be awarded to a person who suffers loss or damage by reason of a breach by an officer of one of the duties imposed on him by s 601FD. It does, however, permit the members of a registered scheme to recover loss from the responsible entity (but not its officers or advisors) if it contravenes the requirements of Chapter 5C: s 601MA. That provision is of no assistance to the plaintiffs in their claims against MFSIM's officers or the auditors. 18 It is, therefore, to provisions lying outside Chapter 5C which a person must turn to in order to recover damages from an officer of the responsible entity for a breach of the duties imposed upon him by s 601FD. Many hundreds of pages later in the Act there appears Chapter 9 which is entitled "Miscellaneous" and which is also divided into parts. One of these is Part 9.4B which is entitled "Civil Consequences of Contravening Civil Penalty Provisions". Section 1317E is contained within that part and it sets out a list of provisions which are said to be "civil penalty provisions". One consequence of a provision being a civil penalty provision is the ability of ASIC under s 1317J(1) to apply for the imposition of a civil penalty of up to $200,000: s 1317G(1). Another consequence is the ability of a responsible entity of a managed investment scheme to apply for a compensation order, a concept elucidated by s 1317H(1), which relevantly provides: Compensation orders--corporation/scheme civil penalty provisions Compensation for damage suffered (1) A Court may order a person to compensate a corporation or registered scheme for damage suffered by the corporation or scheme if: (a) the person has contravened a corporation/scheme civil penalty provision in relation to the corporation or scheme; and (b) the damage resulted from the contravention. The order must specify the amount of the compensation. Damage includes profits 19 This must be read with s 1317J(2) which provides: Who may apply for a declaration or order … (2) The corporation, or the responsible entity for the registered scheme, may apply for a compensation order. 20 The list of civil penalty provisions in s 1317E(1) includes s 601FD(3). The text of s 601FD is set out above. A comparison with it shows that it is not, however, s 601FD(3) which imposes any duties upon the officers of a responsible entity. The substantive duties are imposed by s 601FD(1). Section 601FD(3) assumes that s 601FD(1) has been contravened; it says as much. It then declares that a person contravening s 601FD(1) also contravenes s 601FD(3). This is a curious statement in some ways. "Contravene" means to infringe or to disobey. Subsection (3) establishes no rule or norm susceptible to disobedience. That entails that "contravenes" must really mean "is taken to contravene" and, in that light, s 601FD(3) appears in its true light as a deeming provision. 21 The sixth, seventh and ninth defendants submitted that the compensation regime revealed by Part 9.4B is an exhaustive code setting out all and the only ways in which compensation may be recovered for a breach of a civil penalty provision. Below I set out my reasons for rejecting that proposition. However, even if I were otherwise disposed to accept that argument it would not avail the sixth, seventh and ninth defendants. The plaintiffs submit, and I accept, that the proposed pleading does not allege that the officers in question contravened the civil penalty provision, s 601FD(3). The contraventions alleged are set out in paragraph 298 (at page 382) and they are contraventions of s 601FD(1) not s 601FD(3). 22 I cannot read the reference to s 601FD(3) in s 1317E as a reference to s 601FD(1). The legislative decision to make some, but not all, contraventions of the Act civil penalty contraventions is very far from the kind of obvious slip or error which might justify a different reading: cf. Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297 at 304-305 per Gibbs CJ, 310-311 per Stephen J and 320 per Mason and Wilson JJ. Indeed, the legislative decision seems to have been a deliberate one whose end was the confinement of the serious and quasi-criminal consequences of contraventions of civil penalty provisions to a tightly controlled list. In that circumstance, I find it is textually impossible to resist the plaintiffs' argument that since they are not alleging a contravention of a civil penalty provision, a compensation order could not be obtained under s 1317J(2). The exhaustive nature of Part 9.4B, even if established, is irrelevant. 23 Mr Jackman SC, who appeared for the sixth, seventh and ninth defendants, described the plaintiffs' submission in paragraph 21 above as one of purest formalism and accused the plaintiffs of hair-splitting and that, I suppose, is true. But formality - even of a pure kind - is not without its place in curial proceedings and what is one person's hair-splitting is another's important distinction. 24 Mr Jackman also submitted that every breach of s 601FD(1) was also a breach of s 601FD(3); that the proposed pleading should have alleged the full legal consequences of the facts which were alleged; that those full legal consequences included breaches of both ss 601FD(1) and (3); and that the proposed pleading could not avert the consequences of pleading s 601FD(3) simply by excising any reference to it. 25 I accept the first step in this argument but I regret I cannot accept the balance. There is no particular reason why the plaintiffs must be bound to allege a breach of s 601FD(3) which has no relevance to their allegations since they are not seeking compensation for a breach of a civil penalty provision under s 1317J(2). In any event, the remedial provision pursuant to which they seek compensation - s 1325(2) - specifically permits them to seek compensation for "a contravention of Chapter 5C" which might ordinarily be thought to encompass a contravention of s 601FD(1) as a part of Chapter 5C. It was not explained how the reference to Chapter 5C should be construed so as to exclude references to contraventions of Chapter 5C which might happen to overlap with contraventions of other civil penalty provisions. An attempt to formulate such a construction shows why. The expression "a contravention of Chapter 5C" would have to mean something like "a contravention of Chapter 5C except a contravention of a non-civil penalty provision where the same facts would also make out a breach of a civil penalty provision". This is too far from the text to be plausible. 26 In those circumstances, I reject the sixth, seventh and ninth defendants' contention that Part 9.4B means that the plaintiffs cannot sue because Part 9.4B is not engaged on the plaintiffs' case. In effect the sixth, seventh and ninth defendants' argument is that the plaintiffs lack standing to make an allegation which they do not make. 27 I turn then to the argument based on s 601MA which provides: Civil liability of responsible entity to members (1) A member of a registered scheme who suffers loss or damage because of conduct of the scheme's responsible entity that contravenes a provision of this Chapter may recover the amount of the loss or damage by action against the responsible entity whether or not the responsible entity has been convicted of an offence, or has had a civil penalty order made against it, in respect of the contravention. (2) An action under subsection (1) must be begun within 6 years after the cause of action arises. (3) This section does not affect any liability that a person has under other provisions of this Act or under other laws. 28 This provision is contained within Chapter 5C and was said by the sixth, seventh and ninth defendants to be the sole civil remedy conferred by the Act on fund members for a contravention of Chapter 5C. However, s 1325(2) of the Act provides: The Court may, on the application of a person who has suffered, or is likely to suffer, loss or damage because of conduct of another person that was engaged in in contravention of Chapter 5C, 6CA or 6D or Part 7.10, or on the application of ASIC in accordance with subsection (3) on behalf of such a person or 2 or more such persons, make such order or orders as the Court thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention (including all or any of the orders mentioned in subsection (5)) if the Court considers that the order or orders concerned will compensate the person who made the application, or the person or any of the persons on whose behalf the application was made, in whole or in part for the loss or damage, or will prevent or reduce the loss or damage suffered, or likely to be suffered, by such a person. 29 This provision, on its face, appears to confer a right to compensation on a person who has suffered loss and damage by reason of a contravention of Chapter 5C. The sixth, seventh and ninth defendants submitted, however, that s 1325(2) was to be seen as a general provision which yielded to the more specific provision of s 601MA. At the outset it might be observed that the submission sits uncomfortably with the terms of subsection (3) which, on one view, exhibit a legislative intention that s 601MA should not derogate from any other right of recovery conferred by the Act. 30 There is authority for the proposition that s 1325 cannot be utilised where some other, more specific, compensation regime is available under the Act. In Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 39 NSWLR 128 the plaintiff who was a shareholder in the defendant sought an injunction to restrain a director of the defendant from breaching the director's duties imposed upon her by the then s 232 of the Corporations Law. Her entitlement to that injunctive relief was said to lie in s 1324(1) of the Corporations Law which provided, at that time, that where a person has engaged, is engaging, or is proposing to engage, in conduct which is a contravention of the Law, the court may, on the application of the Commission, "or of a person whose interests have been, are or would be affected by the conduct" grant an injunction on such terms as the Court things appropriate. At the time that Mesenberg was decided s 232 was, by virtue of s 232(6B) a civil penalty provision. Compensation for breaches of civil penalty provisions was then, as now, dealt with under Part 9.4B. The second defendant argued that the availability of a remedy under Part 9.4B excluded the availability of a remedy pursuant to s 1324. Young J accepted this argument (at 137) in these terms: In my view, except in so far as s 1324 can be used by the Commission in aid of its right under Pt 9.4B, or a delegate of the minister is a person affected, there is no longer any right for a person affected (not being the Commission or person referred to in s 1317EB) to seek an injunction in respect of an alleged contravention of s 232. 31 Mr Jackman very properly brought to my attention the decision of Einfeld J in Airpeak Pty Ltd v Jetstream Aircraft Ltd (1997) 73 FCR 161 in which his Honour declined to follow this aspect of Young J's decision in Mesenberg (at 167). I do not, however, think it necessary to determine whether or not Mesenberg should be followed. This is for two reasons. First, unlike Mesenberg this case does not concern an attempt to use s 1325 to seek a remedy for contravention of a civil penalty provision. Secondly, unlike the then s 1317HA in Mesenberg,s 601MA(3) contains a textual indication that it does not seek to effect the existence of other remedies. 32 Since Mesenberg does not control the resolution of the issue, an assessment of the sixth, seventh and ninth defendants' argument requires one to begin with the relevant provisions. These are s 601FD(1), s 601FD(3), s 601MA and s 1325(2). This much is plain: s 601MA confers a right upon the member of a managed investment scheme to pursue a civil remedy against a responsible entity for a contravention of Chapter 5C. It is also plain that the language of s 1325(2) confers a right upon an aggrieved person to claim damages for a contravention of Chapter 5C. The terms of Part 9.4B which permit the responsible entity to recover compensation for a contravention of a civil penalty provision likewise means that there is a remedy under that part for a breach of s 601FD(3). 33 If the matter is attended to purely as a question of the written words which appear on the page then, it seems to me, the sixth, seventh and ninth defendants' argument cannot succeed. That argument is, put at its simplest, that there is a negative implication from s 601MA which requires s 1325(2) to be construed as not extending to provide a remedy in the case of contraventions of Chapter 5C. That argument is to be rejected for two reasons. First, assuming in the argument's favour that there can be otherwise located some material from which such a negative implication might be discerned, that implication would be directly inconsistent with the express words used in s 1325(2) which provides for a remedy for a contravention of Chapter 5C. Secondly, the suggested negative implication is inconsistent with s 601MA(3) which appears to have as its express purpose the precise suppression of such an implication. 34 Even if that were not so, however, the other materials from which the suggested negative implication is to be drawn are too meagre to justify its existence. 35 Mr Jackman sought to support the existence of the negative implication by reference to the legislative history of s 601MA and the secondary materials surrounding its introduction. The duty of a court is to give effect to the intention of Parliament as expressed by the words which it has used: CTM v The Queen (2008) 236 CLR 440 at 498 [203] per Heydon J. No doubt, this requires one to commence ("in the first instance") with a consideration of the context in which the legislation was passed: CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408 per Brennan CJ, Dawson, Toohey and Gummow JJ. Section 601MA was introduced into the then Corporations Law upon the passage of the Managed Investments Act 1998 (Cth). Mr Jackman submitted that the explanatory memorandum which was circulated during the debate on the bill in the House of Representatives and the debate which subsequently ensued in the Senate showed, in terms which were unusually plain, that it was Parliament's intention that the provisions in s 601MA should be an exhaustive statement of the circumstances in which a member of a managed investment scheme might pursue a statutory remedy under the Corporations Law for a contravention of Chapter 5C. The explanatory memorandum contained, inter alia, the following statement (at paragraph 14.2): The right to bring a statutory action will not extend to actions against other persons involved in the operation of the scheme (such as directors, compliance committee members or any entity engaged by the responsible entity to have custody of scheme property). A member's right to bring an action against these persons will depend on the general law and will not be set out in the Law. This will preserve the concept of a single responsible entity responsible to members for the operation of a scheme. 36 One view of the operation of this proposal was that it would decrease the responsibility of individuals involved in the management of a scheme because such persons would no longer find themselves liable to suit under the Law at the hands of members. In the Senate this was pointed out in debate by Senator Margetts who sought to amend the bill to overcome this perceived effect of s 601MA. The Senator said (Hansard 23 June 1998 p. 3835): Under the current law both scheme managers and independent trustees are directly liable to investors if they breach their duty of care or trust. Directors and officers of responsible entities of public offer superannuation schemes are directly accountable to investors under the SI(S) Act. This outcome is not, however, achieved under this bill for managed investments. It is contrary to the fundamental rationale of the bill. Protections currently provided to investors would not be weakened but strengthened. The bill, as it stands, would give the ordinary investor no direct right of action against the director who was negligent. The bill proposes that only the responsible entity or the regulator, but not the investor who suffers the loss, may sue the directors and officers of the responsible entity. Investors must rely on the responsible entity or the regulator to sue for compensation if loss is suffered due to failure to exercise proper care and diligence in meeting all requirements of the law. 37 The government and opposition of the day combined to defeat Senator Margett's proposed amendments. A member of the government, Senator Campbell, said (p. 3836): The coalition will not support this amendment. The main reason is that by making other entities responsible in this way you diminish the responsibility of the responsible entity by definition. This amendment would quite specifically make other entities - other persons - responsible directly to investors. In so doing it would specifically and quite clearly reduce the responsibility of the responsible entity to investors. (emphasis added) 38 Senator Cook, the Deputy Leader of the Opposition in the Senate said (p. 3838): [The amendment] … [t]o be taken in the body of the bill… means that people can sue individual elements, be they a director, a secretary or an executive officer of the responsible entity. Frankly, I think that is a wrong view to take. 39 How the reduction in the responsibilities of directors and officers to members of a scheme increased their responsibility is not a matter calling for consideration by this Court. The point to be made, so it was submitted, was that these materials showed very clearly indeed that Parliament fully understood and intended s 601MA to be an exhaustive statement of the circumstances in which a scheme member would have a statutory right of damages under the Act. What Parliament thought it was doing by including s 601MA(3) is, therefore, obscure. That obscurity is augmented rather than dispelled by other events accompanying the passage of s 601MA. 40 On 30 June 1998, s 1063(2) of the Corporations Law provided: The provision of this Law relating to securities shall, in their application in relation to securities being prescribed interests, have effect with such modifications (if any) as are necessary or as are prescribed by the regulations. 41 This section was repealed on 1 July 1998 by the Managed Investments Act 1998 (as per s 143 of Schedule 2). 42 Section 22 of the Corporations Act 1989 (Cth) provided (in part): The Governor-General may make regulations, not inconsistent with this Act or the Law, prescribing matters: (a) required or permitted by the Law to be prescribed by regulations within the meaning of the Law; or (b) necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Law; … 43 That power therefore authorised the Governor-General on the advice of the Executive Council to make regulations altering the meaning of specified provisions of Chapter 7 of the Corporations Law. The day before the Managed Investments Act 1998 came into force (and the day before s 1063(2) was repealed) the Governor-General made the Corporations Regulations (Amendment) 1998 (No 186 of 1998) which included in the Corporations Regulations a new regulation 5C.11.07 in the following terms: A reference in section 1325 to Part 7.12 of the Corporations Law is taken to include a reference to Chapter 5C of the Law. 44 At that time s 1325(2) of the Corporations Law provided: The Court may, on the application of a person who has suffered, or is likely to suffer, loss or damage because of conduct of another person that was engaged in in contravention of Part 7.11 or 7.12, or on the application of the Commission in accordance with subsection (3) on behalf of such a person or 2 or more such persons, make such order or orders as the Court thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention (including all or any of the orders mentioned in subsection (5)) if the Court considers that the order or orders concerned will compensate the person who made the application, or the person or any of the persons on whose behalf the application was made, in whole or in part for the loss or damage, or will prevent or reduce the loss or damage suffered, or likely to be suffered, by such a person. 45 The immediate effect of that regulation was to ensure that s 1325 operated as if it included a reference to Chapter 5C. The passage of this regulation was inconsistent with the approach taken to the meaning of s 601MA in the debate in Parliament although it is consistent with the remedy preserving nature of s 601MA(3). The matter is complicated by the fact that the Minister who appears to have been responsible for announcing the regulation - Senator Campbell - was also the same person who explained the exclusivity of s 601MA in the Senate debate. Subsequently on 8 March 2000 the reference to Chapter 5C was removed from the Corporations Regulations (as a result of the Corporations Amendment Regulations 2000 (No 1)) and, by reason of the Corporate Law Economic Reform Program Act 1999 (Cth), included directly into the text of s 1325(2) where, in substance, it now remains. 46 Mr Jackman's argument was that it was evident that the original regulation had gone astray and that the present reference in s 1325(2) of Chapter 5C was to be seen, in effect, as a descendant of that error. There are, I think, at least two reasons for rejecting this argument. First, there is no inconsistency between the promulgated regulation and s 601MA because s 601MA(3) explicitly contemplates the existence of other remedies. The real conflict is between the text of the law as passed by Parliament and its cognate regulation, on the one hand, and the author of the explanatory memorandum and the Senators who spoke during the debate, on the other hand. 47 Secondly, assuming in Mr Jackman's favour that the reference to Chapter 5C in the original regulation could somehow be disregarded, that would provide no principled basis now to ignore the explicit references to Chapter 5C in s 1325(2). The Parliament in 1999 reckoned upon such an amendment to s 1325. What happened under an antecedent regulation attending the passage of a different act, the Managed Investments Act 1998, does not seem to be a legitimate interpretative tool in that process. 48 Thirdly, when Parliament decided to insert s 601MA it must be taken to have done so knowing not only that it was also introducing s 601MA(3) but also of the potential application of the regulation making power. The true question which arises is not whether there is any inconsistency between the regulation and s 601MA but, rather, whether there is any inconsistency between that provision and the regulation making power. There may be cases in which a regulation made pursuant to a regulation making power is invalid because it is inconsistent with other provisions in an Act. However, the second, seventh and ninth defendants did not submit that the regulation originally promulgated in 1998 was an invalid regulation: cf State of New South Wales v Law (1992) 45 IR 62; Combined State Unions v State Services Co-ordinating Committee [1982] 1 NZLR 742. Once it be accepted that the regulation was valid the inevitable consequence is that the interpretative task becomes one in which one seeks to discern what is meant by s 601MA and that regulation. Despite the clarity of the expressions of view in the debate as to the exclusive or exhaustive nature of s 601MA ultimately these are unable to stand in the face of s 601MA(3) and the altered operation of s 1325(2). 49 In those circumstances, I cannot accept that the plaintiffs are prevented from relying upon s 1325(2) of the Corporations Act. The sixth, seventh and ninth defendants' challenge to the standing of the plaintiffs to pursue them for breaches of Chapter 5C, therefore, fails.

Second Issue: Claims against the auditors under s 601HG(3) 50 The plaintiffs' proposed pleading alleges that the auditors were bound to carry out an audit of the Fund's compliance with its compliance plan and that this they failed to do. The allegation rests upon s 601HG(3) which provides: (3) Within 3 months after the end of a financial year of the scheme, the auditor of the compliance plan must: (a) examine the scheme's compliance plan; and (b) carry out: (i) if the scheme has only had one responsible entity during the financial year--an audit of the responsible entity's compliance with the compliance plan during the financial year; or (ii) if the scheme has had more than one responsible entity during the financial year--an audit of each responsible entity's compliance with the compliance plan during that part of the financial year when it was the scheme's responsible entity; and (c) give to the scheme's current responsible entity a report that states whether, in the auditor's opinion: (i) the responsible entity, or each responsible entity, complied with the scheme's compliance plan during the financial year or that part of the financial year when it was the scheme's responsible entity; and (ii) the plan continues to meet the requirements of this Part. 51 The pleading works as follows. Paragraph 424 contends that To carry out an audit of MFSIM's compliance with the Compliance Plan, Ms Waters in her capacity as a partner of KPMG should have undertaken at least the following activities: (a) obtain a knowledge of the Fund's business sufficient to enable her to identify and understand the events, transactions and practices that, in her judgment, may have had a sufficient effect on each audit and audit report; … (zz) review the register of related party transactions of the Fund. 52 Paragraph 424 contains 52 separate allegations, spread over 19 pages of the proposed pleading, of what the auditor was required to do. I have omitted 50 of them from the quote above. Little is to be gained by reading them and still less by setting them out in these reasons. 53 Paragraph 425 then alleges that Ms Waters … failed to carry out an audit of MFSIM's compliance with the Compliance Plan for the period from 1 September 2004 to 30 June 2005 … in that she: (a) failed to obtain a knowledge of the Fund's business sufficient to enable her to identify and understand the events, transactions and practices that, in her judgment, may have had a significant effect on each audit and audit report; … (oo) failed to review the register of related party transactions of the Fund. 54 The paragraph contains a list of 41 of the auditor's alleged defaults during the 2005 financial year of which I have only set out the first and the last. Paragraph 425, therefore, alleges that the auditor failed to comply with 41 of the 52 duties alleged in paragraph 424 and, for that reason, did not carry out any audit at all. Essentially identical allegations are made for each financial year 2006 to 2008 in paragraphs 426-428. 55 The auditors complain that this pleading is deficient. First, they say that paragraph 424 is an impermissible gloss on the meaning of s 601HG(3). Secondly, they say that it does not follow that just because the auditors failed to carry out 41 of the 52 obligations alleged in paragraph 424 that there was no audit within the meaning of s 601HG(3). The plaintiffs, on the other hand, argue that the question of whether there was an audit or not is a question of fact. 56 I accept that paragraph 424 is a gloss on the meaning of s 601HG(3). However, accepting that does not warrant the proposition that the pleading is untenable. There are no particular conceptual difficulties with an allegation that a provision of a statute has a particular effect. 57 The auditors are correct to submit that establishing breaches of the various duties alleged in paragraph 424 does not of necessity lead to the conclusion that there was no audit. It is quite possible that at trial the plaintiffs may demonstrate all of the breaches alleged in paragraph 425 and yet fail to make good their point that an audit was not carried out. Ultimately, they might only succeed in showing that an audit was carried out poorly which would still be, so far as s 601HG(3) is concerned, an audit. 58 The reason that is so, however, is because the plaintiffs are correct in their contention that the question of whether an audit took place, or not, is a question of fact: there either was an audit as required by s 601HG(3) or there was not. That observation does, however, highlight the inadequate way in which the matter has been pleaded. As currently expressed paragraphs 424 and 425 (and likewise paragraphs 426-428) simply do not allege in a proper way what the material facts are. The relevant material fact is that there was no audit. What presently appears in the turgid innards of paragraph 425 are, effectively, particulars for that allegation of fact. 59 Accordingly, I reject the auditors' basic complaints about the manner in which the claim under s 601HG(3) is formulated. However, the proposed form of the pleading is inadequate. A grant of leave would, however, be appropriate to an allegation that s 601HG(3) required an audit and that no audit occurred accompanied by particulars in substance reflecting the present contents of proposed paragraph 425.

Third issue: The claims against the auditors under s 601HG(4) 60 For the current proceeding, the plaintiffs contend that the auditors were aware that the Fund had entered into a number of related party transactions which required member approval and that the auditors knew that such approval had not been obtained. Despite that, say the plaintiffs, the auditors did not notify ASIC of the circumstances of which they had become aware. As a matter of law this allegation is based upon s 601HG(4) of the Act which provides: Contravention by individual auditor (4) An individual auditor conducting an audit of a compliance plan contravenes this subsection if: (a) the auditor is aware of circumstances that: (i) the auditor has reasonable grounds to suspect amount to a contravention of this Act; or (ii) amount to an attempt, in relation to the audit, by any person to unduly influence, coerce, manipulate or mislead a person involved in the conduct of the audit (see subsection (12)); or (iii) amount to an attempt, by any person, to otherwise interfere with the proper conduct of the audit; and (b) if subparagraph (a)(i) applies: (i) the contravention is a significant one; or (ii) the contravention is not a significant one and the auditor believes that the contravention has not been or will not be adequately dealt with by commenting on it in the auditor's report or bringing it to the attention of the directors; and (c) the auditor does not notify ASIC in writing of those circumstances as soon as practicable, and in any case within 28 days, after the auditor becomes aware of those circumstances. 61 Relevantly for this proceeding, the provision has three substantive elements. The first is the requirement of subsection (a) that the auditor be "aware" of particular circumstances; the second, the requirement of subsection (b) that the contravention in question objectively either be significant or, if it be not significant, that it be regarded by the auditor as not being adequately dealt with by a comment in the auditor's report; and the third, contained in subsection (c), that there be a failure by the auditor to notify ASIC of the circumstances in question within a period of 28 days. 62 The plaintiffs' pleading operates in the following fashion. First, in paragraph 431 it is alleged that the auditor performed the duties alleged in paragraph 424 in each of the compliance audits for the financial years 2005-2008. It will be recalled that paragraph 424 contains the 52 allegations which the plaintiffs say are the requirements of an audit within the meaning of s 601HG(3). Paragraph 432 then alleges that the auditors "read or ought to have read" a number of documents (set out at pages 547-551 of the proposed pleadings) which contained information, broadly speaking, regarding certain related party transactions into which MFSIM had entered into on behalf of the Fund. Paragraph 433 then alleges that the auditors were well aware that those transactions had been entered into with schemes conducted by related entities. Paragraph 435 alleges that the auditors had read "or ought to have read" the quarterly certifications produced by the Fund. These quarterly certifications, so it is alleged, did not disclose that any of the related party transactions had been approved by the members of the Fund. Paragraph 436 then alleges that the auditors were aware of the circumstances described in s 601HG(4)(a)(i) that is, the circumstances giving rise to reasonable grounds to suspect contraventions of the Act and, more particularly, contraventions by the Fund of the provisions dealing with related party transactions. 63 Paragraph 431-436 therefore constitute, in globo, an allegation that the circumstances in s 601HG(4)(a)(i) were satisfied, that is, that the auditors were aware of circumstances that they had reasonable grounds to suspect amounted to a contravention of the Act. 64 The second step is at paragraph 440 which then alleges that each contravention by the Fund of the related party transaction provisions was either significant or was thought by the auditors not to be able to be adequately dealt with by a comment in their report. This paragraph, naturally enough, is an allegation that the matter in s 601HG(4)(b) was satisfied. 65 The third step is at paragraph 441 which then alleges that the auditors were thus required to tell ASIC of the circumstances of which they had become aware and failed to do so. This is the requirement set out in s 601HG(4)(c). 66 The paragraphs I have just referred to relate only to the 2005 financial year; similar allegations are also made for the financial years 2006-2008. The final step is at paragraphs 482-486 where it is alleged that the auditors should have notified ASIC, the corollary of which would have been action by the regulatory body preventing the Fund engaging in such conduct and, ultimately, the loss and damage suffered. 67 The auditors have five complaints about this pleading. They contend that: (i) the word "awareness" in s 601HG(4)(a)(i) requires actual knowledge and that the pleading in paragraphs 432 and 435 that the auditors "ought to have read" certain documents could not provide an adequate basis for an allegation of awareness within the meaning of the section; (ii) the pleading does not specify the basis upon which it is said that the transactions in question required member approval; (iii) the pleading that the auditors ought to have been aware that member approval had not been obtained is defective because it too depends upon an allegation that the auditors ought to have read certain documents; (iv) the auditors contend that, properly construed, s 601HG(4)(c) requires the auditors' failure to notify ASIC to be have been a deliberate one, which is not alleged; and (v) it is internally inconsistent and, hence, embarrassing for the plaintiffs to advance a case under s 601HG(4) about what the auditors should have done during the course of an audit whilst simultaneously contending that no audit took place by reason of their earlier argument that s 601HG(3) was not complied with. 68 It is convenient to deal with these in turn. (i) Awareness 69 The allegation in paragraph 432 is that the auditors "read or ought to have read" certain documents. That allegation leads one on to paragraph 436 which is in these terms: By reason of the matters referred to in paragraph 435, [the auditors] were aware of circumstances that [they] had reasonable grounds to suspect amounted to a contravention of s 208(1) as modified by s 601LC of the Corporations Act. 70 The auditors argued that one cannot be "aware" within the meaning of s 601HG(4)(c)(i) of matters of which one is not aware, a submission having ordinary English usage on its side. Merely because one ought to have read a document, so the argument runs, does not mean one has knowledge of the contents of that document. The auditors referred to the judgment of Mason, Deane and Dawson JJ in Deming No 456 Pty Ltd v Brisbane Unit Development Corporation Pty Ltd (1983) 155 CLR 129 at 150-151 where their Honours construed the word "aware" in s 49 of the Building Units and Group Titles Act 1980 (Qld)as strongly indicating that that statute was looking to the purchaser's actual knowledge in that case. That case assists the auditors because it confirms that the High Court thought that "aware" in that statute meant "aware". However, the question which arises is whether "aware" in s 601HG(4)(a)(i) means "aware". I think it plainly does. There is no doubt that the word "aware" in that provision connotes a state of actual knowledge. 71 The plaintiffs submitted that the words "ought to be aware" in paragraph 432 were "infelicitous" and what had really been intended by the pleader was an invocation of the kind of a constructive knowledge referred to by Lord Esher in English and Scottish Mercantile Investment Company Ltd v Brunton [1892] 2 QB 700 at 707-708: When a man has statements made to him, or has knowledge of facts, which do not expressly tell him of something which is against him and he abstains from making further inquiry because he knows what the result would be - or, as the phrase is, he "wilfully shuts his eyes" - then judges are in the habit of telling juries that they may infer that he did know what was against him. 72 I am prepared to assume in the plaintiffs' favour that such a principle might be able to be applied in a case concerning s 601HG(4)(a)(i). However, the difficulty is that the present form of the pleading makes no such allegation. It merely alleges that certain documents ought to have been read. If the dictum were actually to be invoked it would be necessary to allege a good deal more. For example, it would be necessary to allege that the auditors were actually aware of matters of such a kind that their subsequent non-reading of the documents in question could be seen as a deliberate course of conduct intended to avoid finding out more. The present form of the pleading does not make that kind of allegation. Paragraph 432 is, as the auditors submit, embarrassing. (ii) Whether the necessity for member approval needs to be pleaded 73 The auditors claim that the proposed pleading does not allege that the related party transactions required member approval. This, they say, is not a trivial point because not every related party transaction does require member approval. 74 Whether the related party transactions required approval turns upon the application of Chapter 2E as modified by s 601LA of the Act. Section 208 requires member approval for the giving of a financial benefit to a related party unless the giving of the benefit is governed by ss 210-216. A question arises as to whether the person who alleges that a breach of s 208 has occurred is bound to prove that the benefit in question did not fall within ss 210-216 or whether instead the onus lies on the opposing party to show that the exemptions apply. That question was answered by McColl JA in Forge v ASIC (2004) 213 ALR 574 at 640 [301] (Handley and Santow JJA agreeing) where her Honour accepted that the onus of proof lay upon the party asserting the applicability of the exemption under the related party provisions of the former Corporations Law. The same conclusion was reached in Orrong Strategies Pty Ltd v Village Roadshow Ltd (2007) 207 FLR 245 at 409-410 [713]-[715] per Habersberger J. 75 It follows that it is not for the plaintiffs to prove that the benefits are not covered by ss 210-216 but rather for the auditors. The suggested pleading deficiency is not established. (iii) Whether the pleading of the auditors' knowledge of the need for member approval is adequate 76 The auditors claim that the pleading of their awareness that the related party transactions had not been approved is inadequate. The relevant paragraph is 435 which is as follows: Further, by reason of the matters referred to in paragraph 432, Ms Waters in her capacity as a partner of KPMG was aware that the MFSIM Related Party Transactions had not been approved by members of the Fund for the purposes of s 208(1) of the Corporation Act as modified by s 601LC of the Corporations Act in that: (a) she read, or ought to have read, the quarterly certifications of compliance prepared by the Scheme Manager and provided to the Compliance Officer as required by clause 19 of the Compliance Plan pleaded in paragraph 31(z) above; and (b) those certifications of compliance did not disclose that any transaction had received member approval in the way set out in ss 217 to 227 as modified by s 601LA of the Corporations Act. 77 This paragraph depends again on the formula "read or ought to have read". For reasons already given in relation to paragraph 432 that formulation cannot form a proper basis for an allegation of awareness under s 601FG(4)(a)(i). (iv) Requirement that auditors' failure to inform ASIC of circumstances be intentional 78 The obligation to notify ASIC imposed upon the auditors springs from s 601HG(4)(c). The actual failure to notify is pleaded in paragraphs 441, 444, 447 and 450 for each of the financial years 2005-2008. The auditors submit that a failure to comply with a s 601HG(4) is a criminal offence by reason of s 1311(1)(b) which provides: A person who does not do an act or thing that the person is required or directed to do by or under a provision of this Act is guilty of an offence… 79 Neither s 601HG(4) nor s 1311(1) specify what is the mens rea for that offence. Section 5.6(1) of the Criminal Code (Cth) provides that if a law creating an offence "does not specify a fault element for a physical element that consists only of conduct, intention is the fault element for that physical element". Section 5.2(1) of the same code provides that: A person has intention with respect to conduct if he or she means to engage in that conduct. 80 It follows, so the auditors submit, that an intention not to inform ASIC is a necessary element of the claim based upon s 601HG(4). I reject this argument. The effect of s 5.2(1) and 5.6(1) of the Criminal Code is to specify the mental element of the offence created by s 1311. Section 601HG(4) is not, as the plaintiffs correctly submitted, a criminal offence and the Criminal Code says nothing about it. (v) Alternative inconsistent pleadings 81 Paragraph 431 alleges that the 52 duties alleged in paragraph 424 were performed and that, in the course of performing those duties, the auditors became aware of the matters said to enliven s 601HG(4). The auditors point out that paragraph 425 alleges that the auditors did not perform any of the duties alleged in paragraph 424. They submit that the pleading is, therefore, internally inconsistent because paragraph 431 alleges that the auditors did the things which paragraph 425 alleges they did not do. This is an unsurprising outcome: there is a clear inconsistency between alleging, on the one hand, that no audit took place contrary to s 601HG(3) and, on the other hand, alleging that during the course of that audit certain matters were unearthed which ASIC needed to be informed of pursuant to s 601HG(4). 82 Paragraph 431 is prefaced with the words "further and alternatively". Order 11 r 8(2) of the Federal Court Rules expressly permits alternative inconsistent pleadings and there can, therefore, be no complaint about the pleading of the case under s 601HG(3) and s 601HG(4) as alternatives. However, the auditors are correct to the extent that the word "further" suggests a case which is not an alternative case. If I were otherwise minded to grant leave it would need to be on terms that the word "further" was deleted.

Summary of conclusions on s 601HG(4) case 83 The case based upon s 601HG(4) cannot be permitted to go forward. It depends upon the formula "ought to have read" to establish an awareness of related party transactions which is insufficiently formulated and thus hopeless. It also relies upon the same formula to establish awareness on the auditors' part that member approval had not been obtained. The pleader has not attempted to address the serious questions which arise from a pleading of awareness. The defect revealed is not one just of particulars, as was submitted on the plaintiffs' behalf, but instead one which reveals the absence of a case. In those circumstances these allegations cannot be permitted to go forward. If I were of a different view I would regard the auditors' other complaints about this part of the case as unwarranted save for the attack upon the word "further" which is sound.

Fourth issue: Claims against auditors in negligence 84 In addition to the allegations made by the plaintiffs that the auditors breached ss 601FD(3) and (4) they also contend that the auditors committed the tort of negligence. I do not propose to set out in its full detail how this duty of care is pleaded. Instead, it is best summarised in the following terms. It is contended that the auditor was in a position of particular advantage to know whether or not the Fund complied with its compliance plan (paragraph 457). By contrast it is alleged that the members of the group did not have that advantage (paragraph 458). Accordingly, so it is said, the members of the group were vulnerable to the consequences of the auditors not properly conducting the audit process properly (paragraph 459) and this was known to them (paragraph 460). Therefore the auditors owed the group members a duty of care to exercise reasonable skill and diligence in carrying out their audit of the Fund's compliance with its compliance plan (paragraph 461). 85 This duty they breached, it is alleged, by failing to do all of the 52 things it is alleged that they should have done in paragraphs 425 to 428 (paragraph 462). By reason of that negligence, MFSIM is then said to have entered into a number of transactions on the Fund's behalf (paragraph 463) which it would not otherwise have entered into if the auditors had taken reasonable care. Consequently, so it is said, the Fund has suffered loss and damage (paragraph 465) totalling approximately $420 million. The final allegation is contained in paragraph 466: By reason of the matters referred to in paragraph 465 above, the value of the units in the Fund of each Group Member has been substantially diminished and/or rendered worthless, and the Group Members and each of them have suffered, and will continue to suffer, substantial loss and damage. 86 The auditors contend that no such pleading should be permitted for five reasons: (i) The existence of statutory duties owed by the auditors to the responsible entity and the potentially criminal nature of a breach of those duties counted against the imposition of a concurrent common law duty owed by the same auditors to the Fund's members. (ii) The definition of the class was such that it would include persons who were officers of MFSIM or other related parties. At least in the case of those persons the plaintiffs' contention that the class members were vulnerable to the actions of the auditors was untenable. (iii) Allied to that second point, the group members were persons who held units in the Fund between 1 January 2007 and 15 October 2008 and the class represented was those holding units on 29 January 2008. The auditors submitted that persons of that description could not have been vulnerable to the action of the auditors in the years 2005 and 2006 which necessarily antedated their unit holding. (iv) The manner in which the breaches of duty were particularised was said to be inadequate in a number of instances because they failed to allege in any substantial way what it was that the auditors should have done. (v) The auditors submitted that the plaintiffs' allegation in paragraph 465 that the loss and damage suffered by them was the diminution in the value of their units in the trust meant that they had no standing to pursue a common law claim. They submitted that any such cause of action was vested in the responsible entity as trustee. 87 It is convenient to deal with these in turn. (i) Exclusion of common law duty by reason of existing statutory duty 88 The auditors submitted that the purpose of s 601HG was to ensure compliance by the Fund with its compliance plan and to ensure that ASIC was informed of any difficulties which had arisen. So viewed, the beneficiaries of the statutory obligation erected by s 601HG were the responsible entity, whose compliance with the plan was the subject of the audit and, indirectly, ASIC, who might, in appropriate circumstances, receive a report from an auditor. The significance of the statutory obligation was further underscored by the criminal offence committed if it were breached by reason of s 1311. These two factors pointed, so the auditors submitted, to a conclusion that there could be no concurrent common law duty of care to the Fund members. The auditors invoked Caparo Industries Plc v Dickman [1990] 2 AC 605 at 652-653 and 661 per Lord Oliver of Aylmerton and Hercules Management Ltd v Ernst & Young [1997] 2 SCR 165 at [37], [49]-[57] per La Forest J (with whom the court agreed). 89 There may ultimately turn out to be some force in these observations. However, at the level of a pleading debate it would be premature to seek to determine whether or not a duty of care was owed. I would hesitate, without knowing the full facts of the matter, to enter into the very difficult questions attending whether auditors retained to examine a Fund's compliance with its compliance plan owed duties to the Fund's members. Clearly, the statutory obligations of the auditors will inform that debate but it is too early by far to determine whether their influence will be decisive. In any event, there are numerous statements to the effect that it will frequently be inappropriate to determine questions associated with breach of duty of care in an interlocutory forum and in advance of a trial: cf. Unit 11 Pty Ltd v Sharpe Partners Pty Ltd (2006) 150 FCR 405 at 420-421 [65] per Tamberlin J. (ii) Inclusion of officers of MFSIM and of related parties in the definition of the class 90 The auditors submitted that the group consisted of persons holding units between 1 January 2007 and 15 October 2008 and that the class was defined to be those persons holding units on 29 January 2008. Amongst that class were likely to be officers of MFSIM and the related parties. 91 The auditors did not explain why that proposition was necessarily true. However, it is convenient to proceed upon the basis that it is. It was then submitted that on no view of things could the auditors be alleged to have owed a duty of care to the officers of MFSIM or to the related entities since there could be no vulnerability on their part to the actions of the auditors. I am prepared to accept the correctness of that proposition. However, that does not lead to the conclusion that the duty of care alleged in paragraph 461 cannot arise. It may well be the case that in relation to a limited part of the class, as defined, the auditors have a defence. But to say that a defence is available to a subclass is not to show that the duty of care contended for does not arise to the class generally. Were it alleged that the class actually included officers of MFSIM then a different result might flow because then the defect would appear on the face of the pleading. At the moment, however, it is a mere surmise. (iii) Persons holding units on 28 January 2008 could not be owed duties by the auditors in the 2005 and 2006 financial years 92 It is true that many members of the class may have held units during the 2005 and 2006 financial years but that is not connected to the class definition. As things stand, there is no logical reason why the auditors in financial years 2005 and 2006 would owe duties to persons having no connexion with the Fund. It is possible, for example, that a unit holder may have acquired its units on 28 January 2008 at a deep discount, reflecting the loss suffered in those years. Without tying the class definition to some actual relationship with the auditors the claim cannot be permitted. (iv) Inadequate pleading of breach of duty 93 The allegation of breach of duty is contained in paragraph 462 of the proposed pleading. However, that paragraph merely takes one back to paragraphs 425 to 428. The auditors focused particularly on paragraph 425 which, it may be recalled, made an allegation of 52 different duties which a person conducting an audit of a fund's compliance with its compliance plan had to perform. A number of these alleged duties are couched in rather general terms which gives rise to the present point. The auditors attacked four sets of the duties. The first set was contained in paragraphs 425(a) and (b). There it was said in relation to the 2005 audit that the auditors: (a) failed to obtain a knowledge of the Fund's business sufficient to enable her to identify and understand the events, transactions and practices that, in her judgment, may have had a significant effect on each audit and audit report; (b) failed to ensure that assistants assigned to each audit engagement obtained sufficient knowledge of the business to enable them to carry out the audit work delegated to them. 94 The auditors submit that they cannot be expected to understand the case they have to meet from these two paragraphs. In particular they emphasise that the pleading fails to specify in any meaningful way what it is that the auditors should have done (in the case of subparagraph (a)) or what they should have ensured that their assistants did (in the case of subparagraph (b)). This has the consequence, so they submit, that paragraph 462, insofar as it picks up paragraph 425, has no real content. This, in turn, has the effect of denying them a fair opportunity to meet the allegation. Reliance was placed by the auditors on what Anderson J (with whom Wallwork J agreed) said in Boys v Geneva Finance Ltd (Receiver and Manager appointed) [2001] WASCA 376 at [10]: The shortfall allegation is, in effect, an allegation that the auditors, when auditing the accounts of the company, should have appreciated that the three loans in question were, or might be, inadequately secured. In my opinion, an allegation of that kind against auditors really should be particularised. The auditors are entitled to know, for example, whether it is said against them that they should have seen that no valuations had been obtained of the property put up as security, or whether the case against them is that they should have seen that the valuations which had been obtained were incompetent, or whether the case against them is that the securities on their face were less valuable than the borrowings which they purported to secure; or as the case may be. 95 The plaintiffs resisted this argument by contending that paragraph 425 was "adequately particularised". Alternatively they submitted that if it was not adequately particularised the remedy was an order for further particulars. 96 The submissions of the auditors are to be preferred. No person reading paragraph 425(a) or (b) could understand what it is alleged that the auditors failed to do. One does not know from it what the auditors did, what they should have done or in what respects they fell short. I reject the argument that the paragraph is adequately particularised; it is not particularised at all. It is true that where a pleading is shown to be inadequately particularised one course open is to order further particulars. But in this case I am not confronted with an actual pleading said to be defective by want of particularity. Instead, the plaintiffs apply for leave to put on a further pleading which is resisted upon the basis that it is inadequately particularised. It would be inappropriate to grant leave to amend in the form of an inadequately particularised pleading where objection is taken to that course. This is particularly so where the plaintiffs, confronted as they are with the suggestion that the proposed pleading is not adequately particularised, do not extend themselves to proffer the suggested further particulars on the application to amend. 97 The second category of inadequately particularised allegations of breach relied upon by the auditors consisted of paragraph 425(q). There it alleged that the auditors: Failed to obtain evidence that MFSIM management acknowledged its responsibility for establishing and maintaining MFSIM's internal control structure. 98 The auditors ask rhetorically what kind of evidence? My reading of this subparagraph is that it means any evidence. So construed, the deficiency relied upon by the auditors does not arise. 99 The third category of inadequately particularised allegations of breach consisted of paragraphs 425(y), (aa), (cc), (ff), (gg), (hh), (ii), (jj), (kk), (ll), (mm) and (nn). Each of these subparagraphs contained an allegation that the auditors had failed "to make enquiries". None are accompanied by any particulars. The auditors submitted that the paragraphs did not state the enquiries which the plaintiffs alleged were necessary or the identities of the persons to whom those enquiries should have been directed. In my opinion this submission is well founded and leave should be refused to amend in this form. 100 The final category of inadequately particularised allegations of breach of duty were said to lie paragraphs 425(v), (w), (x), (z), (bb), (dd) and (oo). In each of these cases the allegation is that the auditors failed to review certain documents. The auditors submit that the paragraphs do not allege what it is that the auditors would have learnt had they read the documents. In my opinion, this submission is also well founded. (v) Whether plaintiffs have standing to sue 101 The loss claimed at paragraph 487 consists solely of diminution in the value of the units held by the group members in the Fund. The duty which is said to have been breached is not a duty owed by the auditors to the trustee of the Fund but, rather, a duty owed to the members of the Fund themselves. So much is apparent from paragraph 461 of the pleading which is set out above. 102 The auditors submitted that the general rule was that, exceptional circumstances apart, a suit could not be brought by beneficiaries of a trust for harm done to their interests in that trust but that such a suit could only be maintained by the trustee. They denied that there were any relevant exceptional circumstances which might take the case outside that general principle. The plaintiffs, on the other hand, pointed out that the duty on which they relied at paragraph 461 was not a duty owed to the trustee but a duty owed to the members. Accordingly, they denied the applicability of the principle. If the principle did apply they submitted that there were exceptional circumstances. This was because they had entered into an agreement with the present responsible entity (Wellington Investment Management Ltd) under which it had agreed that it would not, during the pendency of these proceedings, commence any action against the auditors. The plaintiffs submitted that this meant that the present trustee had indicated that it would not sue the auditors and that this unwillingness on its part was properly to be characterised as an exceptional circumstance within the meaning of the rule. 103 The auditors, in response, then invoked a more general principle which they termed the principle of "reflective loss". They pointed to a number of cases concerning corporations where it was held that shareholders could not maintain claims against a third party for diminution in the value of their shares where a claim could also be maintained by the company against that party. These cases illustrated, so the auditors submitted, a more general principle that denied recovery where the only damage alleged was to an interest in some entity or arrangement which itself had a parallel entitlement to sue. They also denied that the deliberate agreement entered into between the plaintiffs and Wellington whereby the latter bound itself not to sue the auditors during the pendency of the current proceedings was a device which could not bring the case within the exceptional circumstances proviso. 104 By reason of s 601FC(2) the class members of the funds are beneficiaries of a trust of which the present responsible entity is the trustee. As such, they have the right to commence proceedings in Equity's exclusive jurisdiction to compel it to sue the auditors for breach of a duty of care allegedly owed by the auditors to the trustee (see Sharpe v San Paulo Railway Co (1873) LR 8 Ch App 597 at 609-610 per James LJ). Such an approach would, of course, result in two suits: one by the beneficiaries against the present trustee in equity; the other, by the present trustee against the auditors at common law (presuming the beneficiaries' suit was successful). It might well be thought that an action by the class members to compel the trustee to sue the auditors would be met with a defence that the class members had agreed that Wellington need not take that step. Although it is not presently material it might be observed that the class of beneficiaries of the trust is not necessarily co-extensive with the class of persons represented by the plaintiffs. 105 It has long been recognised that where a trustee refuses to institute proceedings relating to trust property the beneficiaries may, in certain circumstances, commence such a proceeding themselves. This is clear where the right of the trustee sought to be enforced is an equitable one. The beneficiaries may in such a case sue in their own name joining the trustee and any other beneficiaries as defendants but only where there are special circumstances: see Ramage v Waclaw (1988) 12 NSWLR 84 at 91 per Powell J; Alexander v Perpetual Trustees WA Ltd (2004) 216 CLR 109 at 129 [55] per Gleeson CJ, Gummow and Hayne JJ. Of course, what is involved in the present case is a common law duty of care. The sixth edition of Jacobs' Law of Trusts in Australia did not support (but did not deny either) the possibility that the effect of the Judicature Act reforms might be to permit beneficiaries to pursue common law rights otherwise vested in the trustee so long as the trustee was joined as a defendant. On this topic, however, Finn J said in Lidden v Composite Buyers Ltd (1996) 67 FCR 560 at 564: In the absence of any compelling reason in a Judicature Act system to limit the right of a beneficiary to claim equitable relief alone, in light of the approach taken in the authorities I have referred to, and given the undesirability of adhering to an approach which promotes multiplicity of suits, I am prepared to hold that, provided the other - the 'exceptional' or 'special' circumstances - requirement of the rule is met, it is not necessary in a Judicature Act system that the relief be equitable or equitable alone that is sought by the beneficiary instituting proceedings for a trust. 106 This was followed by Cohen J in Lamru Pty Ltd v Kation Pty Ltd (1998) 44 NSWLR 432 at 436-437. The most recent, seventh, edition of Jacobs' Law of Trusts in Australia has approved that conclusion, describing Finn J's statement as 'persuasively reasoned' (s 2303 at 622-623). Accordingly, I proceed on the basis that the principle extends to common law rights vested in a trustee. 107 There is no particular objection, therefore, to the fact that the rights in question are common law rights. However, what is plain from the above matters is that the rights which are governed by the principle are the rights of a trustee which are sought to be enforced by a beneficiary. That focus on the rights of the trustee brings into sharp relief the nature of the allegation in paragraph 461 and, in particular, its claim that the duty of care which the common law would recognise is a duty of care owed, not to the trustee, but to the beneficiaries themselves. Once that is appreciated, as I think it must be, it follows that the principle invoked by the auditors has no present application, for the plaintiffs do not seek to assert the rights of the trustee against them; rather, they seek to assert their own rights. It follows that the principle invoked by the auditors is inapposite. That makes it unnecessary to express a concluded opinion as to whether, if the rule did apply, an agreement between a trustee and a beneficiary that the trustee would not commence proceedings is sufficient to bring a case within the exceptional circumstances proviso. It is also unnecessary to inquire into whether all of the beneficiaries of the trust have been joined. 108 The auditors' alternative contention that there was a more general principle which barred claims for "reflective loss" should also be rejected. It is important to keep in mind that what is under discussion is not an attempt by the plaintiffs to bring a derivative action on behalf of the trustee, that is, to assert the trustees' rights. Such an assertion would bring the matter within what is sometimes referred to as the rule in Foss v Harbottle (1843) 2 Hare 461 which was conveniently described by the Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd [1982] Ch 204 at 210 per Cumming Bruce, Templeman and Brightman LJJ in these terms: A derivative action is an exception to the elementary principle that A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C. C is the proper plaintiff because C is the party injured, and, therefore, the person in whom the cause of action is vested. This is sometimes referred to as the rule in Foss v Harbottle (1843) 2 Hare 461 when applied to corporations, but it has a wider scope and is fundamental to any rational system of jurisprudence. The rule in Foss v Harbottle also embraces a related principle, that an individual shareholder cannot bring an action in the courts to complain of an irregularity (as distinct from an illegality) in the conduct of the company's internal affairs if the irregularity is one which can be cured by a vote of the company in general meeting. We are not concerned with this aspect of the rule. (emphasis added) 109 The auditors placed emphasis on the portion I have italicised in that quote. However, the general principle thereunder discussion is not one which has any application in the present proceeding for this case is not concerned with such a derivative action. The question here is not whether the plaintiffs are permitted to assert the trustees' rights against the auditors; rather it is whether the beneficiaries are entitled to sue on their own common law rights in circumstances which precisely overlap common law rights possessed by the trustee. That question, at least in the context of company law, has generated a reasonably clear answer. Where parallel rights are vested both in a corporation and in its shareholders against a third party, shareholders have not been permitted to recover loss arising from a diminution in the value of their shares in circumstances where the corporation has a right to recover identical damages for harm done to it: see Gould v Vaggelas (1985) 157 CLR 215 at 219-220 per Gibbs CJ, 245 per Wilson J, 253 per Brennan J and 269 per Dawson J. However, as the facts of that case illustrate, where the loss claimed by the shareholders is different to the loss claimed by the company, recovery may nevertheless be permitted: cf Prudential Assurance Co Ltd v Newman Industries Ltd [1982] Ch 204 at 222-224. 110 It is important to understand the basis of this principle. In Johnson v Gore Wood & Co [2001] 2 WLR 72 Lord Millett pointed out that it is associated with the maintenance of capital. If a shareholder is permitted to recover for the same matter for which the corporation might itself have recovered, then the capital of the corporation is depleted in favour of the shareholder. Lord Millett put it this way (at 121): The position is, however, different where the company suffers loss caused by the breach of duty owed both to the company and to the shareholder. In such a case the shareholder's loss, in so far as this is measured by the diminution in value of his shareholding or the loss of dividends, merely reflects the loss suffered by the company in respect of which the company has its own cause of action. If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company's creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder. These principles have been established in a number of cases, though they have not always been faithfully observed. 111 That emphasis on the need to maintain the capital of the corporation to my mind takes it outside the present situation which is concerned with a trust. The requirement of company law that a capital reduction not take place except in specified and regulated circumstances protects creditors against the risk of the surreptitious removal of capital. No such necessity arises in the case of a trust. Because a trust does not have a separate legal personality about which creditors need be concerned and because it is the trustee who at all times remains liable, the removal of 'capital' from a trust does not affect the position of creditors as against the trustee. This is particularly so because the trustee's liability to creditors is not limited to his own entitlement to indemnity out of the trust assets: cf In the matter of CSR Limited [2010] FCAFC 34 at [52] per Keane CJ and Jacobson J. 112 In those circumstances the principle of 'reflective loss' does not have any application outside a context in which there exists a prohibition on unauthorised capital reduction. For those reasons I do not accept the auditors' argument that the plaintiffs' direct suit on their own common law cause of action infringes the principle.

Fifth issue: Causation and the 2008 audit 113 Mr Lockhart SC, who appeared for the first and second defendants, submitted that all of the wrongful transactions which were impugned by the plaintiffs were entered into prior to 30 June 2008. The latest specified date of an impugned transaction was 13 February 2008. He accepted that there were a number of allegations that transactions were entered into "during" the 2008 financial year but, on any view, those transactions must themselves have taken place no later than 30 June 2008. The proposed pleading contained, he submitted, no allegations that inappropriate transactions were entered into after 30 June 2008. Mr Martin SC, who appeared on behalf of the plaintiffs, accepted that this argument was sound and that references to the 2008 compliance audit could not go forward.

Sixth issue: Pleading issues 114 The proposed pleading alleges against the defendants that they breached their respective duties by failing to do certain things. For example, in paragraph 154(r) it is said MFSIM failed properly to supervise and to monitor the activities of the Investment Sub-Committee in its dealings with a particular one of the 19 impugned transactions. The particular which has been provided for that allegation is thus: There is no record to the effect that MFSIM's board of directors gave any consideration to the activities of the Investment Sub-Committee in relation to those matters. 115 This structure - an allegation that something was not done accompanied by a particular to the effect that there is no record that it was - appears more than 400 times in the proposed pleading. A similar structure - consisting of an allegation that something was not done accompanied by a particular that there is no information that it was - appears somewhat less often but is nevertheless evident. Exhibit 5 before me was some correspondence between the solicitors for the plaintiffs and Mr Horton, the solicitor for two officers of MFSIM (Messrs Hiscock & Manka) in which the former said in answer to a request for particulars from the latter: The expression 'there is no record …' and 'no information of that kind' simply mean that the [plaintiffs] are not aware of the existence of any such record or recorded information. 116 Each of the defendants who were heard on the motion adopted a submission made on behalf of the fifth defendant, Mr Hutchins, that understood in the light of that response the proposed pleading did not disclose a case. A plaintiff could not win a case where it was alleged that something did not happen merely by his proving that he knew of nothing which would indicate that it had. The plaintiffs, on the other hand, contended that the factual allegations of non-feasance were clear and that what was complained of was a mere deficiency in particulars which could be cured by the provision of further particulars. 117 It is convenient to deal with first whether what the proposed pleading alleges is viable. Many times the proposed pleading alleges that a step or action was not taken. This is an allegation of fact to be proved in due course. Such allegations do not, however, occur in a vacuum but, on each occasion are accompanied by particulars. The purpose of the provision of particulars is to afford an element of procedural fairness to the opposing party by putting it on notice of the manner in which an allegation is to be proven. The provision of a particular is conceptually distinct from the provision or outlining of the evidence which will be used to make good the allegation. This reflects the underlying distinction between contentions, methods of proving contentions and proof of contentions. The endless stream of cases about particulars are a function, I venture to suggest, of the fact that all three can, from time to time, overlap. Sometimes explanation of how a contention will be made good naturally shades into a statement about the nature of evidence which will be relied upon. Thus, for example, where a plaintiff alleges a contract, the provision of a particular indicating that the contract was in writing and contained in a specified document may, in practice, be difficult to distinguish from a statement of the evidence which the plaintiff will rely upon. 118 Here the plaintiffs have, by their particulars, clearly indicated the manner in which they will go about proving that each step or action was not taken. They will make the allegations good by proving that they - the plaintiffs - are not aware that the step or action in question was taken (or on some occasions, that they have no information that it was taken). One can readily see how this strategy will play out at trial - it will fail. Unless accompanied by some other contention that makes the plaintiffs' ignorance of whether the step or action was taken forensically relevant (for example, because they might be expected to know that the step an action was taken) their ignorance is no more relevant than mine. 119 In this case, the allegation that the plaintiffs are not aware of any material or information which proves that each step or information was not taken could, therefore, only be relevant if it were also alleged that there was some reason why the plaintiffs might be expected in the ordinary course of events to know of such things. This issue was played out during oral argument. It was put on the plaintiffs' behalf that their solicitors had had the advantage of examining some documents belonging to the Fund - a core set, if you will - and that those documents did not disclose that any of the steps or actions alleged had been taken. 120 In principle, this approach can work. It would require the replacement of the particulars that the plaintiffs are not aware of the steps or actions having been taken with a particular to the effect that: (a) the plaintiffs' solicitors had been provided with a specified set of documents by the present responsible entity; (b) those documents do not disclose that any of the necessary steps or actions were taken; and (c) it is to be inferred from the range of documents specified - perhaps by reason of what was requested, perhaps by reason of what the responsible entity said it was producing - that the fact the steps or actions are not disclosed in the documents means that the steps or actions were not taken. 121 During the course of the hearing I extended to the plaintiffs an opportunity to provide further particulars along these lines. The opportunity was not, however, taken up. In those circumstances, the pleading cannot be permitted.

Conclusions 122 The motion should be dismissed with costs. I certify that the preceding one hundred and twenty-two (122) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.