Mercedes Holdings Pty Limited v Waters [2013] FCA 601 | Case summary

(a) Mr White's Stay Application 2 Mr White is being sued by the Australian Securities and Investments Commission ('ASIC') in the Supreme Court of Queensland. Those proceedings are listed for hearing on 4 November 2013 for seven weeks. 3 Mr White is not the only defendant. Four of the transactions which relate to Mr White in those proceedings are also at issue in these proceedings. ASIC's proceedings are civil penalty proceedings so that Mr White is entitled to certain procedural advantages such as not being liable to give discovery or to propound a defence in advance of ASIC's case. 4 On 12 December 2012 Jacobson J granted the plaintiffs leave to discontinue against Mr White but on 13 December 2012 I ordered that he (and other parties) be rejoined to the proceedings at the moment any discontinuance was filed pursuant to r 9.05 of the Federal Court Rules 2011 (Cth) ('the Rules') for the purposes only of KPMG's apportionment defence under the Wrongs Act 1958 (Vic) ('the Wrongs Act'). The effect of this joinder is that he is a party although no relief is claimed against him. This unusual procedure is necessary because under the Wrongs Act unless Mr White is a party to the proceedings there can be no apportionment of liability in favour of KPMG. Since no actual relief is now claimed against Mr White I excused him from further participation. 5 It is likely that even as a non-participating defendant, an issue estoppel will arise as to the share of responsibility that Mr White has for the plaintiffs' losses - certainly as against KPMG and possibly as against other parties too. As he pointed out in his submissions, he is a party even though he has been excused and is presumably bound by the outcome: P&V Industries Pty Ltd v Secombes (a firm) [2008] VSC 209 at [10] per Judd J. If he wished to be heard, there is no doubt he is entitled to be heard on the question of his share of responsibility for the plaintiffs' losses under the Wrongs Act (although no other issue). 6 Mr White says that if he wishes to exercise his right to take part in these proceedings that will undermine his privileged position in the ASIC proceedings. What, he asks, is the point of having his various privileges in ASIC's proceedings if he is compelled now to show his hand in these proceedings? Further, if he takes any active step in these proceedings it may well assist ASIC in its proceedings. Because it may, in fact, be in his interests to take active steps in these proceedings this puts him, so it was said, in an intolerable position where he either compromises his proper defence of ASIC's proceedings by making his position known before ASIC's case closes or he compromises his defence of these proceedings by not taking steps to defend himself when it might well be in his interest so to do. The solution, so it was submitted, was a stay of these proceedings until the ASIC proceedings are concluded. 7 In principle, I accept this is a valid concern. I do not, however, believe it justifies a stay of these proceedings, at least not at this stage. 8 ASIC's case will begin on 4 November 2013. For practical reasons I do not think Mr White will be placed in a position in these proceedings where the problem he adverts to will arise. The pleadings in this case have not yet closed and Mr White has not been directed to file a defence. Given the existence of the ASIC proceedings I would not be inclined to direct him to deliver a defence or to put on his evidence until the final judgment in the ASIC case has been reserved and, indeed, no party seeks that he should. I do not think, if that course is taken, that he loses the potential to defend himself (if he choses) in these proceedings. In due course, and well after the ASIC case is finished, he will have that opportunity should he so wish. If some particular difficulty arises, the present application may be renewed. 9 The application will be dismissed with costs.

(c) Controversial Amendments - Joinder of Proceedings and Preliminary Determination of Standing 17 The plaintiffs sought leave to include additional statutory claims of misleading and deceptive conduct under the Fair Trading Act 1999 (Vic), the Corporations Act 2001 (Cth) ('the Corporations Act'), the Australian Securities and Investments Commission Act 2001 (Cth) and the Trade Practices Act 1974 (Cth). This was opposed by KPMG but not Mr Price, Mr Kyling or Mr Hutchings. The disposition of this application is entwined with the issues of whether the proceeding should be heard with the Wellington Capital proceeding and whether there should be a preliminary determination of the plaintiffs' standing to bring these proceedings. 18 If the matter of these amendments were considered in isolation, I would have little hesitation in refusing them. The amendments raise a fresh case in circumstances where the plaintiffs have been adjusting their pleadings for four years. I would not put the remaining defendants to the task of meeting such a new case because the plaintiffs have had more than enough of an opportunity to put their house in order. There has to be a line drawn somewhere in this case about how the plaintiffs put their case and wherever it is drawn, the plaintiffs are, in my opinion, well south of it. 19 However, the application does not arise in a vacuum. There was commenced in this Court on 2 April 2013 a proceeding entitled Wellington Capital Ltd v Waters NSD 557 of 2013. Wellington Capital ('Wellington') is the responsible entity for the MFS Premium Income Fund. It sues KPMG for the same transactions as the plaintiffs do in these proceedings. Additionally, it pursues the statutory counts above. 20 What the plaintiffs seek is that I join the Wellington Capital proceeding to this case so that the two cases may be heard concurrently with evidence in one being evidence in the other. If that were to occur KPMG would have to meet the statutory counts in defending itself against Wellington. In that circumstance, as the plaintiffs put it, KPMG can suffer no prejudice if those claims are now added to their case. 21 On its face, this would appear to be correct. It would be productive of waste and expense for the Wellington Capital case to be heard separately from this one with all the additional attendant risks of conflicting findings of fact. Recognising, perhaps, the strength of that proposition KPMG sought to argue that I should forestall joining the two cases (and with it any consideration of the amendment application) until such time as I had determined, on a final basis, the standing of the plaintiffs to bring the present claim. If it transpired that they did not have standing the proceedings would be dismissed and the question of any amendment would become otiose. 22 The question of standing which KPMG sought to ventilate as a preliminary issue focussed on the fact, never disputed in four years until the hearing of the present application, that the plaintiffs' claim is for the diminution in the value of their units, that is, a reflective loss. KPMG has previously resisted amendments to the plaintiffs' earlier pleadings on the basis that unitholders have no standing to pursue claims which should be brought instead by the trustee (here, Wellington). However, I held in Mercedes Holdings Pty Ltd v Waters (No 2) (2010) 186 FCR 450; [2010] FCA 472 and then again in Mercedes Holdings Pty Ltd v Waters (No 3) (2011) FCA 236 that that principle, which is clearly established in the case of shareholders in a company, was not yet sufficiently clearly established in the case of unit trusts and therefore constituted a triable issue. KPMG now invites me to try the issue as a separate question before the balance of the trial. 23 Understandably, this course was greeted with little enthusiasm by the plaintiffs who made, in effect, two points against it. First, KPMG had had more than enough an opportunity on the reflective loss question already. It is, perhaps, a little too much for the plaintiffs in this proceeding to complain about the procedural behaviour of others but nevertheless the point was made. Secondly, and this was surprising, their claims now included claims which were not reflective. I say this was surprising because until the moment this was put during the present hearing such a contention had never been put in four years of this litigation. 24 As to the first matter, I do not accept that the fact that KPMG raised the argument as a basis for resisting an (unsuccessful) amendment application means that it cannot be raised as a separate question. To my mind, the critical questions (and their answers) lie not in a contemplation of the past but instead in a consideration of whether the separate question procedure is, or would be, feasible and whether trying it in that manner would assist in the orderly dispatch of these proceedings. 25 In my opinion, the procedure is feasible. The question is whether unitholders can bring a claim on their own behalf for diminution in the value of their units or whether, instead, it may only be brought by the responsible entity. On its face, the evidentiary field for such a debate consists of the pleadings and the trust deed or constitution. Mr Lee SC, for the plaintiffs, endeavoured to persuade me that the plaintiffs would seek to show at any such separate hearing how they had other claims which did not involve reflective loss. I do not think that that would be to the point, however. The only question which would be before the Court would be whether the claims for reflective loss were maintainable. That the plaintiffs had other non-reflective claims would not be to the point. I conclude, in those circumstances, that that separate question procedure would be feasible. 26 The fact that some of the plaintiffs' claims might not involve reflective loss is relevant, however, to the second question which is whether there would be any utility in deciding the standing question on a preliminary basis. If the plaintiffs have non-reflective claims, answering the question of their standing will not dispose of the proceedings. 27 To this end I invited Mr Lee to take me to that part of the proposal pleading where the non-reflective claims are made and was taken in response to paragraph 94 which is in these terms: 94. by reason of the matters referred to in paragraph 93 above, the value of 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. PARTICULARS (a) The particulars of paragraph 12 in respect of the Applicants, and Group Members Mr Manton and Ms Lynch are repeated. (b) The loss and damage of a capital nature sustained by the Applicants and Mr Manton & Ms Lynch will be the amount by which the unit price of $1.00 was diminished by the loss and damage pleaded and particularised at paragraph 93(a). (c) The loss and damage of an income nature sustained by the Applicants and Mr Manton & Ms Lynch will be the amount by which the income required to be distributed to unitholders by cl 12 of the Constitution of the Fund was reduced by the loss of income to the Fund pleaded and particularised at paragraph 93[b], which loss of income was suffered at least from the time the Fund was frozen as pleaded in paragraph 17 above. (c) the loss and damage sustained by Group Members other than the Applicants and Mr Manton & Ms Lynch will be provided after the trial of the applicants' claim. 28 This is not a pleading of non-reflective loss. The current form of the pleading is identical although it lacks the particulars (which form part of the unopposed amendments). The language of paragraph 94 is the language of reflective loss and I do not see in it any other claim. Nor do the proposed particulars help. This is not only because they cannot step outside what paragraph 94 alleges but also because they do not, in fact, do so. As to particular (a), I will not set out the particulars to paragraph 12 but it suffices to say that all that is there set out are the unit holdings of a Mr Manton and a Ms Lynch and the fact that they disposed of their units on 14, 21 and 28 November 2008. Neither (b) nor (c) contains any non-reflective element. I do not read the second subparagraph (c) as containing a claim outside the terms of paragraph 94 itself. 29 For that reason, the resolution of the standing issue in KPMG's favour will be likely to result in the dismissal of the plaintiffs' proceedings in this case. Against that, its trial would take time. Based on having heard the argument twice already, however, I would estimate that a half day would suffice. If successful, it will avert a trial of many months. 30 Mr Lee emphasised the difficulties associated with separate questions which must, I think, be frankly acknowledged. In this case, however, it seems to me that it is a useful endeavour and I propose to do as KPMG submits. There will be tried as a preliminary question in advance of the main trial the following separate questions: i. Do the plaintiffs have standing to pursue the claim? ii. Ought the plaintiffs' proceeding be dismissed? 31 Appropriate procedural directions will need to be made as to submissions, evidence and a hearing date. If the parties cannot resolve these consensually I will resolve them. 32 The fact that such a determination is to occur does not mean, however, that the two cases should not be heard together. If KPMG succeeds on the question then the proceedings will most likely be dismissed. On the other hand, if it fails the two cases should plainly be heard together. From a case management perspective their joint preparation should continue in parallel henceforward. Nor should that process be retarded whilst the separate questions remain unanswered. 33 This observation denudes KPMG's argument that the amendments ought not to be allowed at this point of much of what would otherwise be its force. Subject to one matter, the proposed statutory claims are for reflective loss and they will stand or fall with the rest of the pleading. The one exception concerns an allegation I deal with below that the general public was misled and, as Mr Lee developed the point, that therefore unitholders were misled. This would involve a direct claim by the unitholders. For reasons which follow below I will not permit that claim to advance. That being so I do not agree that the issue of whether leave to amend ought to be granted should be postponed. It should be decided now. 34 Against that possibility KPMG then argued that the proposed statutory counts were demurrable and ought not to be allowed. There were four bases to this. 35 The first was that there was no causal link between the representations made to Managed Investments Pty Ltd ACN 101 634 146 ('MFSIM') and the loss claimed. The representation alleged to have been made by KPMG is, putting it in a summary fashion, that it had done its audit work with reasonable competence. This representation is said to have been made both to MFSIM and ASIC. It is then said that if a report that MFSIM had not complied with its compliance plan had been received by it (or by ASIC) steps would have been take which would have averted the losses which were eventually suffered. 36 But this, as KPMG correctly points out, does not follow. One cannot deduce from a counterfactual in which KPMG had not represented its own competence that it would have informed MFSIM or ASIC that the compliance plan had not been complied with. This is a non sequitur. 37 The plaintiffs' response to this was to say that 'the true counterfactual' was that KPMG would not have made the misleading representation but would instead have corrected the deficiencies in the compliance plan audits, discovered the true position and reported it. The difficulty is that this true counterfactual is not pleaded. The relevant paragraphs are 97O and 97P which are as follows: 97O. By reason of the KPMG 2005 Contravening Conduct, KPMG 2006 Contravening Conduct and/or KPMG 2007 Contravening Conduct: (a) it was not reported to MFSIM that MFSIM had not complied with the Compliance Plan, within 3 months after the end of each financial year ended 30 June 2005, 30 June 2006 and 30 June 2007, or at all; and (b) ASIC was not notified in writing of any of the circumstances of the MFSIM Compliance Plan Failures as required by s 601HG(4)(c), by no later than the date which was 28 days later than the report referred to in paragraph 97O(a) above. 97P If within 3 months after the end of each financial year ended 30 June 2005, 30 June 2006 and/or 30 June 2007, a report of the kind referred to in paragraph 97O(a) above had been given to MFSIM; (a) each, or at least a majority, of the directors of MFSIM would have taken all, or at least sufficient steps that a reasonable person would take, if they were in the director's position to ensure that MFSIM complied with the Act and the Compliance Plan as required by s. 601FD(1)(f) of the Act; and (b) MFSIM would have been required to remedy system failings to ensure breaches did not recur, in accordance with clause 2.11 of the Compliance Plan dated 1 July 2004; and (c) MFSIM would have lodged that report with ASIC within 3 months or thereabouts after 30 June 2005, as required by s 601HG(7) of the Act. 38 What is needed to make the pleading logical is an intermediate allegation that if KPMG had not represented that it had conducted itself competently then it would, as a matter of fact, have had to have made the reports referred to in paragraph 97O(a) and 97O(b). 39 I therefore accept that the pleading is defective and I would not grant leave to file the claim in this form. The time and expense of the parties, however, ought not be wasted with a further amendment application. I will indicate that I would be disposed to grant leave (assuming all other problems can be surmounted) to a form of the pleading containing a form of the additional intermediate allegation I have mentioned. 40 Secondly, KPMG submitted that it could not have misrepresented to MFSIM that it had exercised reasonable care &c in carrying out the audit because MFSIM itself was aware of the fact of the related party transactions. This is not a persuasive point at the level of a pleading debate. MFSIM is alleged to have been aware of the related party transactions but it does not follow that it was aware that these constituted a breach of the compliance plan. 41 A third related point was made in relation to the claim that ASIC had also been misled pleaded in paragraph 97D(b). This was as follows: 97D Ms Waters and KPMG represented (KPMG 2005 Compliance Representations) to: (b) ASIC that or to the effect that as at the time of the signing of the letter by Ms Waters: (i) neither KPMG nor Ms Waters was aware of any circumstances that would give an auditor reasonable rounds to suspect amounted to a significant contravention of the Act: and/or (ii) there existed a reasonable basis for an auditor exercising reasonable care, skill and diligence and carrying out the engagement in accordance with all applicable auditing standards to not suspect that circumstances of which KPMG and Ms Waters was aware amounted to a significant contravention of the Act. 42 The point now made is that there is no allegation in the proposed pleading that would make this misleading. This was said to be so because it was nowhere alleged that Ms Waters had actual knowledge of circumstances giving rise to grounds to suspect the existence of a problem. 43 This involves, however, the setting up of a straw man so that he may be knocked over. It is true that if Ms Waters had had actual knowledge of the various related party transactions this would provide a basis for an allegation that the representation was made without reasonable grounds. However, the universe of matters which might afflict Ms Waters with a lack of reasonable grounds for making the representation is not limited to her having actual knowledge. She may also, so it seems to me, arguably have lacked reasonable grounds if she (and her staff) had failed, as a result of a lack of care, to conduct the audit of compliance adequately. This is what is in fact pleaded at paragraphs 97A - 97F. 44 KPMG claims that paragraph 97D(b)(ii) is impossible to understand. I would accept that it is certainly inelegant and not drafted with the comfort of the reader in mind. With effort, however, meaning can be extracted from its cumbersome bulk. The difficulty for the reader arises from reading paragraph 97D(b)(ii) separately from 97D(b)(i). Subparagraph (i) pleads a representation that the auditors were unaware of anything which might give them grounds to suspect a contravention. Subparagraph (ii) alleges a further representation that they had reasonable grounds for making the first representation. This onion-like allegation will eventually devolve into an inquiry as to whether what KPMG actually knew should have caused it to suspect the existence of contraventions. 45 So read there are no non-aesthetic difficulties. I strongly suspect (ii) adds nothing to (i). If Ms Waters was aware of a circumstance which should have given her pause for thought then (i) succeeds but so will (ii); the converse also appears to be true. This means that the legal behaviour of both allegations is probably the same. 46 I should say for completeness that I do not accept that the allegation is an attempt to revive a similar claim under s 601HG(4) of the Corporations Act previously rejected by me in Mercedes (No 2). The provision has a knowledge requirement which the present statutory provisions lack. 47 Fourthly, KPMG then took aim at paragraph 97D(c) which pleads that in 2005 KPMG: 97D Ms Waters and KPMG represented (KPMG 2005 Compliance Representations) to: (c) members of the public, the matters pleaded in subparagraphs (a) and (b) above PARTICULARS The KPMG 2005 Compliance Representations are partly express and partly implied. To the extent they are express, the representations are contained in the 2005 Compliance Audit Report dated 28 September 2005 (and filed with ASIC on 30 September 2005 in accordance with s 601HG(7) of the Act). To the extent they were implied, they are to be implied from the conduct of Ms Waters and KPMG in submitting the 2005 Compliance Audit Report (in the knowledge it would be lodged with ASIC) and not submitting a report to ASIC under s 601HG(4)(c) of the Act, in the context of the Compliance Audit Engagement, the obligations contained in s 601HG of the Act, and the matters pleaded in paragraph 54 to 69 above. 48 The representation to the public is to be deduced, according to this particular, from Ms Waters' knowledge that the report would be lodged with ASIC and from not submitting to ASIC a report of the difficulties which existed. In argument, the point made was that ASIC's records were publicly available. In the plaintiffs' written submissions, the utility of this allegation was said to lie in the fact that group members were members of the public so that, in effect, the representations were made to them. 49 I do not propose to allow this pleading. If the plaintiffs eventually wish to plead that group members had perused ASIC's records and were misled that will be another matter. I will not permit an unparticularised version of that allegation disguised as a representation to the public to go forward.

Mercedes Holdings Pty Limited v Waters

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Judgment (27 paragraphs)

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Legislation Cited (11)

Cases Cited (3)

Cited By (2)