Mercedes Holdings Pty Ltd v Waters

Date of hearing: 18-19 July 2011

Place: Sydney

Division: GENERAL DIVISION

Category: Catchwords

Number of paragraphs: 172

Counsel for the Applicants Mr N C Hutley SC, Mr G M Drew, Mr R D Glover

Solicitor for the Applicants: HWL Ebsworth (Johnson Winter & Slattery from 21 November 2011)

Counsel for the First and Second Respondents: Mr J Lockhart SC, Mr J A Arnott

Solicitor for the First and Second Respondents: Allens Arthur Robinson

Counsel for the Fifth Respondent: Mr A Coleman SC, Mr D A Hughes

Solicitor for the Fifth Respondent: Kennedys

Counsel for the Sixth, Seventh and Ninth Respondent: Mr I Jackman SC, Mr C Colquhoun

Solicitor for the Sixth, Seventh and Ninth Respondent: Minter Ellison

Solicitor for the Eighth Respondent: Mr B T Cohen of Brian Bartley & Associates

Counsel for the Tenth Respondent: Mr M A Jones

Solicitor for the Tenth Respondent: Wotton Kearney

Counsel for the Eleventh Respondent: Mr S A Goodman

Solicitor for the Eleventh Respondent: Kelly & Co Lawyers

Solicitor for the Twelfth and Fourteenth Respondent: Mr M Horton of RBHM Commercial Lawyers

Counsel for the Thirteenth Respondent: Mr D Piggott

Solicitor for the Thirteenth Respondent: Tucker & Cowen Solicitors

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 324 of 2009

JUDGE: PERRAM J DATE OF ORDER: 14 DECEMBER 2011 WHERE MADE: SYDNEY

1. The parties bring in short minutes of order by 31 January 2012 giving effect to these reasons and setting a timetable for the closing of pleadings. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 324 of 2009

JUDGE: PERRAM J DATE: 14 DECEMBER 2011 PLACE: SYDNEY

REASONS FOR JUDGMENT I. Introduction [1] II. The claim against the auditors [6] (a) The definition of the group lacks clarity [7] (b) The pleading of the duty of care [11] (c) The duty of care alleged to be owed to future unit holders [29] (d) The action for breach of statutory duty [32] (e) The compliance failures [53] (f) Causation and loss and damage [66] (g) Conclusions in relation to the auditors [74] III. The proposed proceedings against Mr Whateley, Mr Diamond and Ms Beale [75] (a) Problems with the group definition [80] (b) Standing [81] (c) Knowledge of transactions and loans made prior to appointment as directors [82] (d) Whether unsecured loans are authorised investments [108] (e) Loans and investments without approval of members of Fund [109] (f) Miscellaneous matters [112] IV. The submissions of the fifth respondent, Mr Hutchings [125] (a) The pleading of the MFS Living and Leisure loans [127] (b) The MFS Pacific Finance Participation Payments [131] (c) The MFS Maximum Yield investment [136] (d) The MFS Pacific Finance Payment Transaction [138] (e) The related party transactions [140] (f) Causation [143] (g) Conclusions [144] V. The position of Mr White [145] VI. The position of Mr Kyling [153] VII. The position of Mr Price [154] VIII. The position of Mr King [155] IX. The position of Mr Hiscock and Mr Manka [165] X. The Question of Terms [166] XI. Orders [171]

I. Introduction 1 These proceedings were commenced in 2009 as a class action relating to the collapse of the former MFS Premium Income Fund (the 'Fund'). The respondents include the Fund's former auditors, its former responsible entity and a number of its former officers. The proceedings have had a tortured procedural history involving two substantive attempts to amend the form of the pleading. The first sought leave to put on a pleading of some 571 pages which was declined: Mercedes Holdings Pty Ltd v Waters (No 2) (2010) 186 FCR 450 (Mercedes (No 2)). A second attempt to introduce an even longer version which filled two lever arch folders was also declined: Mercedes Holdings Pty Ltd v Waters (No 3) [2011] FCA 236 (Mercedes (No 3)). These reasons should be read with those reasons. On the occasion of Mercedes (No 3) I indicated I was disposed to permit the applicants to pursue a claim in negligence against the auditors, but none of the other respondents, and granted them permission to seek leave to pursue such a claim provided it did not exceed 50 pages in length. I directed that this proposed pleading was to be delivered in one tranche (and not in multiple versions over several months as had occurred in the past) and that this be done 'come what may'. No leave was extended to apply to amend against any other party. At the same time, I granted leave to the various respondents to bring applications to dismiss the balance of the proceedings which by that time remained on foot. 2 All of those applications have now been made. For their part the applicants have applied for leave to file amended pleadings and for the respondents' part they have sought the dismissal of the proceedings. 3 The leave extended to the applicants related to the bringing of a negligence suit against the Fund's auditors. In Mercedes (No 3) I had concluded that no other claim was viable. Despite that stricture the applicants have now applied for leave to pursue amended proceedings against all of the other respondents. 4 The issues which arise therefore are, in the broad, as follows: (a) whether the newly formulated claim against the auditors should be permitted; (b) whether, despite the terms of my earlier orders, an application to amend against the other respondents should be entertained; (c) if it should, whether it ought to be acceded to; and (d) if it be acceded to, the terms upon which that is to occur. 5 It is convenient to deal with these in that order.

II. The claim against the auditors 6 The applicants' most recent attempt to articulate a claim against the auditors is contained in Exhibit RGJ-2 to the affidavit of Robert Guy Johnston. The auditors object to it on six bases. I deal with each in turn.

(a) The definition of the group lacks clarity 7 Paragraph 4 of the proposed pleading alleges: The Group Members to whom this proceeding relates (the "Group Members") are all those persons and entities who were registered holders of units in the Fund in the period from 1 January 2007 until 15 October 2008 and who suffered loss and damage by reason of the conduct of the Respondents as pleaded in this Amended Statement of Claim. 8 The auditors submit that it is unclear whether, to qualify as a group member, a person has to have held units for the entire period or merely at any time during that period. The applicants, on the other hand, argue that no ambiguity arises for two reasons. First, the expression 'in the period' means at any point during the period, as distinct from, for example, 'throughout' or 'for' the period. Secondly, the pleading alleges at paragraphs 8, 9 and 10 that redemptions were not possible on or after 29 January 2008 by reason of a moratorium on redemptions and that on 16 October 2008 the units were listed on the stock exchange. Prior to 29 January 2008 it is alleged that the units could be redeemed for $1.00 (their face value) which was the same price for which they had been originally subscribed. The consequence of this was that any unit holder who redeemed their units prior to 29 January 2008 would suffer no loss recovering one dollar for each dollar invested; at the same time, there could be no redemptions between 29 January 2008 and 15 October 2008 at all. The significance of this lay in the limitation in paragraph 4 that the membership of the class was limited to those unit holders who had suffered loss. So viewed, the auditors' concern could not arise because the only unit holders who could have disposed of their units in the class were those who did so prior to 29 January 2008 and they could not have suffered any loss. 9 Paragraphs 7-10 of the proposed pleading allege: 7. Up to 29 January 2008, the Group Members and each of them: (a) acquired their units in the Fund by paying to MFSIM an application price of $1.00 for each unit; and (b) were entitled to redeem their units in the Fund at a redemption price of $1.00 for each unit. 8. On 29 January 2008, the period for the processing and payment of redemptions of units in the Fund was deferred to 180 days. 9. On or about 10 March 2008, the period for the processing and payment of redemptions of units in the Fund was extended to 360 days. 10. At a meeting of Fund members on 15 October 2008 it was resolved to modify the Fund's constitution so as to extinguish the rights of members to redeem their units and to list the Fund's units on the National Stock Exchange. The listing occurred on 16 October 2008. 10 No uncertainty arises and the applicants' submission should be accepted. Whilst it is possible to imagine persons who were unit holders for some limited period between 1 January 2007 and 15 October 2008 none of these persons can have suffered loss for the redemption price will have been the same as the original subscription price ($1.00) in the period before 29 January 2008. Insofar as the period on and after 29 January 2008 is concerned there can be no unit holders who redeemed during that period. The class definition problem is, therefore, elusive.

(b) The pleading of the duty of care 11 I have now twice held that the applicants' allegation that a common law duty of care was owed to unit holders is sufficiently tenable to permit it to proceed. I so held in Mercedes (No 2) at 471 [89] and again in Mercedes (No 3) at [80]. At paragraph 4 of their written submissions the auditors submit that what the applicants have sought to plead 'would mean that a compliance plan auditor owes a duty of care which is indeterminate and therefore unknown to the law'. In light of Brimaud v Honeysett Instant Print Pty Ltd (1988) 217 ALR 44 at 46 per McLelland J I decline to revisit the general question of whether the auditors could owe a duty of care to the unit holders which, at the level of pleading, has been determined against the auditors. 12 I will, however, entertain so much of their submissions as relate to what might be called pure pleading points. In that regard, the auditors make five complaints about the form of the duty of care of pleading. 13 The first relates to paragraph 29 which is thus: 29. Ms Waters held herself out as a registered company auditor with the necessary knowledge, skills and experience to carry out an audit of, and report upon, MFSIM's compliance with the Compliance Plan in accordance with s 601HG(3)(b) & (c) of the Act. 14 The complaint is that the pleader has not identified the person to whom Ms Waters held herself out. The applicants submit Ms Waters held herself out to the world by permitting her name to be entered in the register of auditors kept by ASIC pursuant to s 1285 of the Corporations Act 2001 (Cth). That allegation is neither pleaded nor is there any evidence that it is particularised that way. However, this is a mere matter of particulars which can be overcome by imposing a condition on the grant of leave that paragraph 29 be particularised in that way. 15 The second complaint relates to paragraph 30 which is in these terms: 30. Ms Waters by voluntarily accepting the Compliance Audit Engagement, and KPMG by permitting the acceptance of that engagement by Ms Waters, accepted a general professional responsibility to ensure that the task of carrying out an audit of, and reporting upon, MFSIM's compliance with the Compliance Plan was undertaken with reasonable care, skill and diligence. 16 The auditors say that this paragraph does not identify to whom it was that Ms Waters assumed any responsibility. The applicants, on the other hand, submit that the identity of the person to whom the responsibility is assumed is not the relevant material fact which is instead the fact of the assumption itself. The applicants point to Caltex Refineries (Qld) Pty Ltd v Stavar (2009) 75 NSWLR 649 at 676 [103] where Allsop P set out a list of 17 'salient features' which were to be seen as affecting the existence of a duty of care in a novel case. The list was to be seen as providing 'a non-exhaustive universe of considerations' (at 676 [104]) and was certainly not to be seen as compulsory shopping list (at 690 [172] per Basten JA). Item (f) on the list was 'any assumption of responsibility by the defendant'. 17 The auditors submitted that a bare allegation of an assumption of responsibility would not suffice and that other material facts needed to be pleaded citing Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 at 263 per Toohey and Gaudron JJ, 281 per McHugh J and 296 per Gummow J. Granted that be so it does not follow that those other material facts need include an allegation about the identity of the person to whom the responsibility was assumed. More importantly, paragraph 30 of the pleading is not a lone allegation but sits amidst a raft of allegations from paragraphs 27-33 which contain a number of other allegations relating to the duty issue. Mr Hutley SC, who appeared for the applicants with Messrs Drew and Glover of counsel, submitted that Australian law did not include as a mandatory element in a duty context a doctrine of known reliance - citing Caltex. I accept this. I do not think that paragraph 30 is defective in a pleading sense because it fails to identify the person to whom the responsibility was assumed. 18 The third paragraph complained about was paragraph 35 which is thus: 35. Ms Waters as the auditor of MFSIM's compliance with the Compliance Plan was in a situation of particular advantage to know or ascertain whether MFSIM had complied with the Compliance Plan. 19 The auditors argued that the paragraph was defective because it did not identify the person with respect to whom the particular advantage existed. That argument ignores paragraph 36: 36. The Group Members and each of them (whether a member of the Fund as at 30 June 2004 or who subsequently became a member prior to 15 October 2008) were not at any time in a position to undertake, or cause to be undertaken, the same or corresponding task of carrying out an audit of MFSIM's compliance with the Compliance Plan. 20 When read together it is quite clear what the applicants are putting. To this the auditors rejoined that the way in which the case was pleaded meant that the knowledge of the unit holders was the same as that of the auditors so that an advantage of the kind alleged in paragraph 35 could not exist. To illustrate this submission the auditors pointed to paragraph 42 and the first set of particulars subscribed to it: 42. Throughout the period from 1 September 2004 to 20 March 2009, MFSIM failed to comply with the Compliance Plan on many and repeated occasions (each such failure to comply being an "MFSIM Compliance Failure" and collectively, the "MFSIM Compliance Failures"). PARTICULARS A. Related Party Transactions (a) MFSIM failed to comply with clauses 2.7 and 19 of the Compliance Plan in making each of the transactions set out in paragraphs (b) to (r) below ("Related Party Transactions") in that: (i) a financial benefit was given by MFSIM out of the Fund property to an entity which was a related party of MFSIM within the meaning of s 228 (as modified by s 601LA) of the Act; (ii) without the approval of the members of the Fund in the way set out in s 217 to 227 (as modified by s 601LA) of the Act, and therefore, each of the Related Party Transactions was also made in contravention of s 208(1) (as modified by s 601LC) of the Act. 21 The point was that the unit holders would know the matters in (a)(i) and (ii). Contrary to the auditors' submissions, however, this paragraph is silent on the position of the unit holders viz à viz that of the auditors in terms of knowledge. It is the auditors' written submissions which put it that way: 'Ms Waters had no "particular advantage" because as auditor, like the unitholders and unlike the directors, she was involved in considering transactions only after they had taken place and were reported in the published financial statements of the Fund.' But the short of the matter is that this is not what paragraph 42 alleges. It may be a matter which the auditors wish to plead in their defence but is not a defect in the pleading. Further, as the applicants correctly submit, the pleading makes at least two allegations demonstrative of particular advantages possessed by the auditors. Those are paragraphs 32-33: 32. Ms Waters had exclusive control over the carrying out of an audit of, and report upon, MFSIM's compliance with the Compliance Plan in accordance with s 601HG(3)(b) & (c) of the Act during the relevant financial years. 33. Ms Waters, pursuant to s 601HG(5) of the Act had a right of access to [sic] all reasonable times to the books of the Fund and could require an officer of MFSIM to give her information and explanations for the purposes of the audit. 22 The fourth complaint concerned paragraph 37(a): 37. The Group Members and each of them (whether a member of the Fund as at 30 June 2004 or who subsequently became a member of the Fund prior to 15 October 2008): (a) were vulnerable in that they were unable to protect themselves from the consequences of Ms Waters not exercising reasonable care and skill in carrying out an audit of, and reporting upon, MFSIM's compliance with the Compliance Plan in accordance with s 601HG(3)(b) & (c) of the Act; 23 How, the auditors asked, was one to determine why the group members were vulnerable; more so they submitted when the unit holders 'were in as good a position as Ms Waters to assess' whether the transactions contravened the Corporations Act. That latter proposition is, of course, the auditors' contention and not one contained in the pleadings: cf. paragraphs 32-33. With all due respect, paragraph 37(a) makes perfectly plain the source of the vulnerability in the four lines following the words 'in that they…'. Nor do I think that the auditors' argument is advanced by observing that Ms Waters' knowledge of the matters in paragraph 37(a) is alleged in paragraph 38 to be constructive. 24 Allied to this submission was a further contention whose substance was that the auditors could not owe a duty of care to the applicants. For the reasons I have already given I do not propose to entertain that point which I have already determined adversely to them at the level of a pleading debate. 25 The fifth complaint related to paragraph 37(b): 37. The Group Members and each of them (whether a member of the Fund as at 30 June 2004 or who subsequently became a member of the Fund prior to 15 October 2008): … (b) could suffer loss and damage if Ms Waters did not exercise reasonable care and skill in carrying out an audit of, and reporting upon, MFSIM's compliance with the Compliance Plan in accordance with s 601HG(3) (b) & (c) of the Act. 26 According to the auditors the 'mechanism by which the possibility of loss is said to arise is not clear'. I do not think the applicants are bound to plead any such mechanism. All paragraph 37(b) alleges is that if the auditors did not do their job properly those who invested in the enterprise audited might lose money. 27 I therefore reject all of the auditors' attacks on the manner in which the applicants have pleaded of the duty of care. 28 I turn then to the next group of complaints.

(c) The duty of care alleged to be owed to future unit holders 29 The parties have been jousting about this issue for the last two iterations of the various proposed pleadings (cf Mercedes (No 2) at 471 [92]ff and Mercedes (No 3) at [71]ff) and their enthusiasm for it continued unabated during the present hearing. The reasons for its continuing popularity elude me. This time the auditors complained that a purchaser of units in December 2006 would be a unit holder on the present class definition and that, at least, is uncontroversial. But, so it was said, the auditors had done their work for the financial year ending on 30 June 2005. The auditors submitted that the theory of the applicants' case was that if the 2005 audit had been done non-negligently then the responsible entity would have been prevented in the future from entry into the various transactions which thereafter generated losses to the Fund. Why? Because ASIC would have been notified of the non-compliance and its intrusion into the affairs of the Fund would have hailed in a new era of corporate compliance in which entry into suspect related party transactions would not have been celebrated as a cardinal civic virtue. So much is pleaded at paragraphs 48-64 in terms which are, I think, demonstrably clear. 30 But, apparently, not clear enough. The auditors now pose this question: if the auditor had taken those steps and those subsequent transactions had never occurred 'would persons who were not unitholders of the Fund at that time still have purchased their units…'. This question, so it was submitted, the pleading leaves unanswered thereby generating an unacceptable lacuna. 31 There is about this submission the setting-up of a straw man. The pleading alleges a counterfactual - the improvident transactions would not have occurred. It makes no allegation that the unit holders would not have purchased their units. The auditors' complaint operates by ignoring the counterfactual which is alleged and focussing on defects in the one which is not. So viewed, the complaint is without substance. The auditors submit that if permitted to stand this will mean that the auditors owed a duty to as yet unidentified persons - i.e. those who had not yet acquired units - and that there lingers behind that concept the menace of a duty owed to the world at large. I am not disposed to accept this: the class of persons who will in the future acquire units is not the same as the world at large. It is a precisely identifiable class of inchoate membership whose crystallisation into an actual class occurs not on the suffering of loss but on the acquisition of units simpliciter.

(d) The action for breach of statutory duty 32 In addition to their claims in negligence the applicants also allege a breach of statutory duty. The allegation is contained in paragraph 40 in these terms: 40. Further and alternatively: (a) Ms Waters had a statutory duty to exercise reasonable care and skill and diligence in carrying out an audit of, and reporting upon, MFSIM's compliance with the Compliance Plan in accordance with s 601HG(3)(b) & (c) of the Act; and (b) any person who suffered loss, or was likely to suffer, loss or damage because of a breach of that duty was entitled to compensation in respect of that loss or damage. Particulars This right to compensation by way of damages for breach of statutory duty is implied on a proper construction of, respectively, s 601HG(3) and s 1325(2) of the Act. 33 The auditors submitted that this allegation should not be permitted because: (a) the grant of leave extended to the applicants related to a negligence case and a claim for breach of statutory duty does not fall within that rubric; and (b) the claim was foredoomed to fail because ss 601HG(3) and 1325(2) could give rise to no such implied right to compensation. 34 As to (a), the applicants claimed the allegations to be within the grant of leave or, if it were not, they now applied for leave. As to (b) they submitted that the question was a difficult one of statutory construction inapt for resolution in the arena of a pleading debate. 35 It is convenient to deal with the second contention first. The auditors submit that the question at hand is purely a legal one depending in no wise on how the facts at trial fall out. They invoke the sentiment that inspired Dixon J to observe in Dey v Victorian Railways Commissioners (1949) 78 CLR 62 at 91 that 'The fact that a transaction is intricate may not disentitle the court to examine a cause of action alleged to grow out of it for the purpose of seeing whether the proceeding amounts to an abuse of process'. Of course the present question is not identical fixed, as it is, on the question of whether leave should be permitted to advance such a case but in substance similar issues arise. 36 When it is said that a case is legally foredoomed this may be for disparate reasons. The question may, for example, be directly determined by High Court authority. In such a case, a Court will commit no error in summarily disposing of the matter. As French CJ and Gummow J observed in Spencer v Commonwealth (2010) 241 CLR 118 at 132 [25]: …Where the success of a proceeding depends upon propositions of law apparently precluded by existing authority, that may not always be the end of the matter. Existing authority may be overruled, qualified or further explained. Summary processes must not be used to stultify the development of the law. But where the success of proceedings is critically dependent upon a proposition of law which would contradict a binding decision of this Court, the court hearing the application under s 31A could justifiably conclude that the proceedings had no reasonable prospect of success. 37 Of course, the High Court was there talking of the different standard erected by s 31A of the Federal Court of Australia Act 1976 (Cth) (that of 'no reasonable prospects of success') but I do not apprehend the standard at play in the present application - whether the proposed amendments would be struck out as not disclosing a reasonable cause of action - is any stricter in that regard and, indeed, the prevailing view is that it is looser. Section 31A seems not to require what Hayne, Crennan, Kiefel and Bell JJ referred to in Spencer as 'demonstrated certainty of outcome' (at 140 [55]-[56]). 38 There is no High Court authority which establishes that s 601HG(3) does not generate the duty for which the applicants contend. For completeness, s 601HG(3) provides: 601HG Audit of compliance plan … (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. 39 Indeed, the authority of no other court establishes the negative proposition for which the auditors contend about s 601HG(3). Lacking direct authority, they fall back on three other principles: (a) the question is whether the Parliament has intended that there should be such a cause of action. Where the Corporations Act provides for compensation through other means this shows that Parliament did not intend that the right to pursue a claim for breach of statutory duty should exist; (b) the existence of a criminal penalty was also an indication that Parliament did not intend the cause of action to exist; and (c) it was held in Florgale Uniforms Pty Ltd (Receiver and Managers Appointed) (in liq) v Orders (2004) 11 VR 54 that although s 420A of the Corporations Act obliged a 'controller' to take reasonable care in the sale of company property it did not separately erect a cause of action of a right to damages. Section 420A was to be seen as analogous to s 601HG(3) from which it followed that no reasonable cause of action was disclosed. 40 The question at hand 'is one of the construction of the statute': Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 424 per Brennan CJ, Dawson and Toohey JJ. Contrary to the submissions of the auditors no question of 'reading-in' is involved and the principles relating to that issue flowing from authorities such as R v Young (1999) 46 NSWLR 681 (CCA) at 687 per Spigelman CJ have little to do with a case concerning an alleged breach of statutory duty. As Dixon J observed in O'Connor v SP Bray Ltd (1937) 56 CLR 464 at 477-478 an examination of the statute 'will rarely yield a necessary implication positively giving a civil remedy'. Indeed, what is involved is not the ordinary process of statutory construction at all. In Sovar v Henry Lane Pty Ltd (1967) 116 CLR 397 Kitto J described it this way (at 405): The legitimate endeavour of the courts is to determine what inference arises, on a balance of considerations, from the nature, scope and terms of the statute, including the nature of the evil against which it is directed, the nature of the conduct prescribed, the pre-existing state of the law, and, generally, the whole range of circumstance relevant upon a question of statutory interpretation…It is not a question of the actual intention of the legislators, but of the proper inference to be perceived upon a consideration of the document in the light of all its surrounding circumstances. 41 About such questions, dogmatism is generally implausible. I accept that the existence of an express civil remedy in s 1325(2) favours the auditors. Mr Lockhart SC, who appeared with Mr Arnott of counsel for the auditors, made the argument that s 1325(2) gave a remedy in damages if s 601HG(3) was not complied with. But non-compliance with s 601HG(3) would occur when the matter prescribed by it did not occur; in particular, an infringement would arise if no audit of compliance with the compliance plan was conducted. What s 1325 would not countenance was any suit for recovery where it was alleged that an audit was carried out albeit with a want of care. The reason for that was that s 1325 was concerned only with whether an audit had occurred. If this view be correct then the effect of s 601HG(3) is to erect an obligation to conduct an audit disconnected from any obligation to conduct it competently. That seems to me an unlikely outcome but I do not exclude the possibility that that is how the provision operates. 42 It is also true that a breach of s 601HG(3) is a criminal offence. So much flows from s 1311 which makes it an offence for a person not to do something which the Act requires (with some presently irrelevant exceptions). The applicable penalty for the offence contained in s 601HG(3) is a fine of 5 penalty units, that is, $550. So much flows from s 1311(5) and s 4AA of the Crimes Act 1914 (Cth). The question then is whether Parliament intended these two alternate routes of enforcing the duty erected by s 601HG(3) - through civil process under s 1325 or a $550 fine under s 1311(5) - should exhaust the universe of remedies. The argument based on the $550 fine is anaemic. Fines have long been imposed by industrial legislation for breach by employers of provisions designed to protect the health and safety of their employees. The argument that the existence of those fines has the effect of preventing the action for breach of statutory duty from arising has attracted little support. It failed, for example, in the Court of Appeal in Groves v Lord Wimborne [1898] 2 QB 402. There Rigby LJ put the matter this way (at 414): …That being so, the only question seems to be whether the provisions of the Act with regard to the imposition of fines for neglect of the duty created by the section reasonably lead to the conclusion that the Legislature intended that such fines should be the only remedy for breach of that duty. I think that, when those provisions are examined, it is impossible to arrive at that conclusion. The maximum fine that can be imposed in any case, however serious the injury caused may be, is one of 100l. It seems monstrous to suppose that it was intended that in the case of death or severe mutilation arising through a breach of the statutory duty, the compensation to the workman or his family should never exceed 100l. 43 The attitude of A.L Smith LJ and Vaughan Williams LJ was no different. Groves was referred to without disapproval not only by the House of Lords in R v Deputy Governor of Parkhurst Prison; Ex parte Hague [1992] 1 AC 58 at 158 per Lord Bridge of Harwich, with whom Lord Ackner and Lord Goff of Chieveley agreed, and at 168-169 per Lord Jauncey of Tullichettle; but by the High Court in Byrne at 424 (in a passage expressly invoked by the auditors in their submissions). Indeed, the failure of fines to have that effect has often enough been adverted to in Australia: O'Connor at 478 per Dixon J; Sovar at 405-406 per Kitto J; Tassone v Metropolitan Water, Sewerage and Drainage Board [1971] 1 NSWLR 207 at 212 (CA). Further, as the applicants correctly submitted that principle has ranged well beyond merely industrial settings: West Wiltshire District Council v Garland [1995] Ch 297 (local government finance); Rickless v United Artists Corporation [1988] QB 40 (copyright); Gama v Qantas Airways Ltd (2006) 195 FLR 475 (anti-discrimination); Cubillo v Commonwealth (1999) 89 FCR 528 (Aboriginal welfare); Lubrano v Proprietors of Strata Plan No 4038 (1993) 6 BPR 13,308 and Seiwa Australia Pty Ltd v Owners of Strata Plan No 35042 (2006) 12 BPR 23,673 (strata legislation). 44 Nor does the auditors' analogy with s 420A of the Corporations Act assist when regard is had to its content and the context in which it appears. Section 420A specifies the standard expected of a controller of company property, a familiar example of which will be a mortgagee exercising a power of sale. For a long period there was a debate as to whether the standard expected of a mortgagee was merely that it act honestly in conducting the sale or whether there was a duty to take reasonable care to obtain a proper price. In Australia, the mortgagor had an entitlement in equity to the taking of accounts where the sale involved a want of good faith: Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676. In Canada and the United Kingdom a view was expressed in some quarters that the mortgagee had to exercise reasonable care: McHugh v Union Bank of Canada [1913] AC 299 (PC); Cuckmere Brick Co Ltd v Mutual Finance Co Ltd [1971] Ch 949. The ebbing and flowing of this enduringly popular question is usefully traced, with respect, by the Victorian Court of Appeal in MBF Investments Pty Ltd v Nolan [2011] VSCA 114 at [65]-[84]. 45 The relevance of all this is that when s 420A was enacted a controversy arose as to: (a) whether it was intended to operate on the pre-existing equitable remedy of account, leaving that remedy in place but changing the standard by which it was enlivened; (b) whether it was intended to enliven the statutory remedy of compensation under s 1325; or (c) whether other, new, claims were countenanced. The divergent views were explored by Bryson J in GE Capital Australia v Davis (2002) 180 FLR 250 and by Young CJ in Eq in Ultimate Property Group Pty Ltd v Lord (2004) 60 NSWLR 646, the former believing s 420A altered pre-existing general law remedies (at 266 [53]) and the latter that a fresh cause of action was conferred (at 659). 46 The auditors referred me to Florgale Uniforms Pty Ltd where Dodds-Streeton J reviewed the position and concluded that the views of Bryson J were persuasive (at 73 [388]). 47 I do not think any of this assists the auditors. The context of s 420A is a longstanding debate about the nature of the taking of accounts against a mortgagee which has no direct analogy with the present circumstance of s 601HG(3). The closest analogy would be to say that in equity the unit holders could not have maintained the present suit since they lacked standing: see Ramage v Waclaw (1988) 12 NSWLR 84. Upon that could then be built the proposition that s 601HG(3) would not have been intended to outflank that rule by means of an action for breach of statutory duty. The problem with that argument is that I have already held that the principle in Ramage is inapplicable (at the level of a pleading debate) to the claim by unit holders in their own right: Mercedes (No 2) at 475 [107]. Consequently, I do not think the principle is apt to assist in the present circumstance. 48 Further I do not regard the position under s 420A as settled. The decision of Young CJ in Eq in Ultimate Property Group suggests less than full unanimity by first instance judges about the operation of s 420A. 49 In all those circumstances, it cannot be said that the applicants' statutory duty claim should be barred from proceeding because it does not disclose a reasonable cause of action. 50 That leaves then the auditors' first point that the applicants were given leave only to seek to put on a negligence claim. This issue is one of taxonomy: is a claim for breach of statutory duty a claim in negligence? On this minds have differed. Some have seen the statutory requirements of legislation as setting the parameters of what reasonable care at common law requires: cf. Martin v Herzog 228 NY 164 (1920) at 168/170 per Cardozo J; David v Britannic Merthyr Coal Co [1909] 2 KB 146 at 164 per Fletcher Moulton LJ; Carolyn Sappideen and Prue Vines, Fleming's The Law of Torts (Lawbook Co, 10th ed, 2011) at 7.190 (pp 149-150). In England and Australia the better view seems to be that the tort involved is separate from the tort of negligence. In Downs v Williams (1971) 126 CLR 61 at 74 Windeyer J was content to rely upon Lord Wright's statement in London Passenger Transport Board v Upson [1949] AC 155 at 168 that 'The statutory right has its origins in the statute, but the particular remedy of an action for damages is given by the common law… It is not a claim in negligence in the strict or ordinary sense… whatever the resemblances, it is essential to keep in mind the fundamental differences of the two classes of claim'. This led Windeyer J to describe it as 'a sui generis tort'. 51 I think I should proceed on the same basis. It follows that the applicants were not granted leave to file their present application insofar as it concerns a breach of statutory duty. It is then necessary to determine whether that leave should now be granted (in all likelihood nunc pro tunc). Two matters are significant. First, it will be apparent from what I have already said that the claim is viable. It is to be distinguished therefore from the desultory congregation of remaining claims considered in Mercedes (No 3). Secondly, because the statute of limitations has not yet run the applicants could simply file the same claim as a fresh proceeding. Since such a claim would be against respondents who were already before the Court it is difficult to identify any procedural saving which might be achieved by the taking of that course. 52 In those circumstances, I propose to permit the applicants to pursue their amendment application in relation to the claim for breach of statutory duty.

(e) The compliance failures 53 The auditors submitted that the manner in which the applicants had pleaded a breach by them of the Compliance Plan was deficient. The deficiency arose from paragraph 42. This paragraph is 7 pages long and consists almost entirely of particulars which are grouped into two classes: class A which is headed 'Related Party Transactions' and class B which is headed 'Imprudent Loans'. Under each heading particulars are then given of specified transactions. For example, the first related party transaction is entitled 'MFS Pacific Finance Loans' and the particulars describe the making of three loans referred to in the financial statements for the Fund. The main body of paragraph 42 without its particulars is as follows: Throughout the period from 1 September 2004 to 20 March 2009, MFSIM failed to comply with the Compliance Plan on many and repeated occasions (each such failure to comply being an "MFSIM Compliance Failure" and collectively, the "MFSIM Compliance Failures"). (Emphasis in original). 54 The auditors complain that the expression 'on many and repeated occasions' lacks particularity. In circumstances where the allegation is accompanied by 7 pages of particulars this is a difficult proposition to maintain. A reasonable reading of paragraph 42 - as opposed to one focussed on over-zealous discovery of ambiguity - is that the pleader intended the particulars to relate to the paragraph. I so read it. 55 The next complaint concerns the particulars given under the heading 'Related Party Transactions'. The way these are particularised in general is dealt with as follows: A. Related Party Transactions (a) MFSIM failed to comply with clauses 2.7 and 19 of the Compliance Plan in making each of the transactions set out in paragraphs (b) to (r) below ("Related Party Transactions") in that: (i) a financial benefit was given by MFSIM out of the Fund property to an entity which was a related party of MFSIM within the meaning of s 228 (as modified by s 601LA) of the Act; (ii) without the approval of the members of the Fund in the way set out in s 217 to 227 (as modified by s 601LA) of the Act, and therefore, each of the Related Party Transactions was also made in contravention of s 208(1) (as modified by s 601LC) of the Act. There then follow particulars for individual transactions. 56 The difficulty is said to be in the proposition that there was a breach of s 208(1) (as modified by s 601LA). Section 208(1) applies to corporations and s 601LA extends its operation to managed investment schemes. Section 208(1) provides: 208 Need for member approval for financial benefit (1) For a public company, or an entity that the public company controls, to give a financial benefit to a related party of the public company: (a) the public company or entity must: (i) obtain the approval of the public company's members in the way set out in sections 217 to 227; and (ii) give the benefit within 15 months after the approval; or (b) the giving of the benefit must fall within an exception set out in sections 210 to 216. … 57 These exceptions are varied but include, for example, a transaction with a related party which was on arm's length terms (s 210). The auditors submit that the pleading is defective because the related party particulars do not allege that the exceptions in ss 210-216 did not apply; by contrast, the applicants submit that if the auditors wish to say the transactions fall within the exceptions this is a matter for them to plead as a defence if they wish. 58 Those who pass the hours reading Federal Court judgments will experience a certain sense of déjà vu (and in all likelihood ennui) in reading this submission. In Mercedes (No 2) at 467-468 [73]-[75] I said this: 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 Ch 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 to 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 to 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 Australian Securities and Investments Commission (2004) 213 ALR 574 at [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 [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 to 216 but rather for the auditors. The suggested pleading deficiency is not established. 59 Of the proposition that this issue had already been resolved against them, the auditors said: A similar objection was made by Ms Waters and KPMG to the form of the pleading considered in [Mercedes (No 2)] and, at [73]-[75] of the judgment, the objection was not accepted. However, the circumstances of the current pleading are different. Now, the applicants directly allege a construction of the Corporations Act which is not correct. 60 The incorrect construction is said to be the failure of the particulars set out above to refer to the exceptions in ss 210-216. That has no relevant impact, however, on the reasoning in [73]-[75] of Mercedes (No 2) which remains applicable. This issue has already been determined and should not, therefore, have been raised. 61 The final complaint about the alleged compliance failures turned on cll 1.4 and 3.2 of the compliance plan. It was alleged in the pleading that cl 1.4 required that: …all investments of the Fund were required to be invested in a range of mortgage assets and other authorised investments that were selected for their ability to minimise risk and provide consistent investment performance; 62 Particular (s) to paragraph 42 alleges that this clause was breached in a series of six identified transactions as each of them 'was not selected for its "ability to minimise risk" because it was unsecured…'. The auditors submit that this has two difficulties the first of which they say is a want of logic. It is quite possible, so the argument runs, for an unsecured investment to minimise risk and they instance government bonds as an example. 63 That, however, is not a problem of logic. Rather it is an example where the standing of the debtor provides a buffer against risk. The question will be whether the unsecured loans alleged minimised risk. If the entities to whom the money was extended turn out to have the qualities of some sovereign debtors then the auditors will make good their point. If the debtors turn out to be of a somewhat lower grade a different result may ensue. In either event, what is involved is a triable issue not a pleading point. 64 The second difficulty identified by the auditors was the notion that it was nowhere alleged that the Fund could not make unsecured advances. In the currently propounded case against the remaining parties an argument that the Fund was not permitted to make unsecured loans is advanced. However, despite that the argument does not seem to be advanced against the auditors. The case against them is instead based on cl 1.4 and its limitation on investments selected for their 'ability to minimise risk'. Granted that that be so, the correct question is not whether the Fund could make unsecured advances but rather whether an unsecured advance to any particular debtor infringed cl 1.4. There is a difference between investing in unsecured 90-day paper issued by a reputable bank and paper issued by a company with little in the way of assets or cashflow. Whether the advances which were made to the parties in question were selected for their ability to minimise risk in circumstances where they were not secured is therefore a triable issue depending, for its resolution, on the standing of the recipients of the funds. 65 In any event, there are arguable reasons to doubt whether the Fund was permitted to make unsecured advances. I discuss the issue below at [94]-[99]. Regardless, I do not think that the present debate provides an appropriate vehicle to determine whether the Fund was permitted to make unsecured loans. This is an issue to be tried in the presence of evidence. The auditors advanced essentially the same argument in relation to cl 3.2 and particular (t) to paragraph 42 which I also reject. 66 The auditors' arguments based on the manner in which breaches of the compliance plan have been pleaded should be rejected.

(f) Causation and loss and damage 67 The auditors submit that the pleading of causation is defective in three ways. The first concerns paragraph 48(a) which alleges: If Ms Walters [sic] had exercised reasonable care, skill and diligence in carrying out each of the Compliance Audits and in preparing and completing the Compliance Audit Reports: (a) she would have detected some or all of the MFSIM Compliance Failures for each of the financial years ending 30 June 2005, 30 June 2006 and 30 June 2007; 68 The auditors submit that this is defective because it does not make clear why the failures would have been detected. Why? Because (a) a proper audit would not necessarily have detected every issue and (b) the paragraph needs to identify why it is that reasonable care would have detected the compliance failures. 69 I reject this submission. The paragraph is perfectly clear. The applicants will contend that a competently conducted audit would have brought the problems to light. I am unable to discern in such an allegation any difficulties. 70 The second complaint concerns paragraphs 49, 54 and 59. These paragraphs are in very similar terms and paragraph 49(a) may serve as a representative of the others. It alleges: If within 3 months or thereabouts after 30 June 2005, Ms Waters had given to MFSIM a report of the kind referred to in paragraph 48(f) above: (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;… 71 The auditors submit that 'the allegations appear to be that the directors were unaware that they were breaking the compliance plan and the Corporations Act when they committed the responsible entity to the transactions complained of'. This matters because the applicants also seek leave to pursue a case against the directors in which, so the auditors submit, the applicants allege the directors knew of the breaches. 72 The applicants invite me to reject this submission on the basis that what is actually pleaded is that the directors ought to have been aware of the breaches. I will not set the relevant paragraphs of that pleading out; it suffices to observe that constructive knowledge of the breaches is alleged and that, in my opinion, is sufficient to dispose of the point. Quite apart from that, the alleged inconsistency arises from the assumption the auditors make that the allegation in 49(a) is that the directors were unaware of the breaches. However, this is not what it says. 73 The third complaint concerns the possibility of ASIC's intervention. At paragraph 52, for example, it is alleged: If ASIC had been notified of any of the matters referred to in paragraph 50 and 51 above, ASIC as the responsible regulatory body would have examined the conduct of MFISM [sic] and forthwith, or within a reasonable period, taken steps to ensure that MFSIM complied with its obligations under the Act and the Compliance Plan. 74 The auditors' difficulty is twofold. The paragraph does not identify what steps ASIC would have taken nor how those steps would have prevented the responsible entity from acting in breach of the compliance plan. Compendiously the auditors demand 'clarity and precision… in the counterfactual world' - a worthy sentiment, no doubt. The applicants submit that the material fact is that ASIC would have taken steps to ensure that MFSIM complied and that how that allegation is proved is a matter of evidence. I agree.

(g) Conclusions in relation to the auditors 75 The applicants should be granted leave to proceed against the auditors in the form of their proposed pleading subject to the particulars I have mentioned. They must pay the costs thrown away by reason of the amendment. The auditors filed an application to dismiss the applicants' proceedings which, in view of the conclusion at which I have arrived, must be dismissed with costs.

III. The proposed proceedings against Mr Whateley, Mr Diamond and Ms Beale 76 These three directors of the former responsible entity of the Fund were represented by Mr Jackman SC with Mr Colquhoun of counsel. Mr Jackman SC had three points. His first was as follows: the conclusion in Mercedes (No 3) was that the applicants should not be permitted to reformulate any case against his clients. The grant of leave which had been extended to the applicants in that decision was limited in its application to the claims against the auditors and even this had been limited to their claims in negligence. The Court's prior order that the applicants were to reformulate their case against the auditors by 22 April 2011 (subsequently extended to 27 April 2011) 'come what may' was an indication that, at least so far as Mr Jackman SC's clients were concerned, the terminal threshold had been surpassed. That being so the Court should simply not even entertain the applicants' present attempts to formulate a new case. 77 Elements of this argument are very seductive but I believe its charms should be resisted. As I will shortly explain the applicants have now formulated a coherent case against Mr Jackman SC's clients. As the record of the Court presently stands the applicants have proceedings on foot against Mr Jackman SC's clients and whilst it is true that they have now applied for judgment under s 31A of the Federal Court of Australia Act I am bound not to grant that relief if the applicants have a real case warranting trial. Since I am of that view it follows that judgment may not be entered against them. 78 Should they then be prevented from amending their case to raise this new case? If I did not accede to the amendment application the proceedings would be consigned to a procedural limbo where they could not advance to trial nor be consigned to judgment. The only device by which this stalemate might be broken is through the notion of want of prosecution but the facts of the history of this case show that such a contention is untenable. Furthermore, this is not a case like Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175 where questions of case management have arisen in the shadow of a trial. Here the defences are not even filed and what all sides now steal themselves for is a long and drawn out procedural Stalingrad in which no quarter will be given. Case management no doubt has its role to play in such an affair but I think it is subsidiary, at this stage, to the concept of a real case proceeding to trial. The expense and delay involved may, I think, be redressed in the current case by appropriate costs orders. 79 Accordingly, I will permit the applicants to apply to amend their proceedings against Mr Jackman SC's clients. 80 This brings one to Mr Jackman SC's second argument that the applicants should not be granted leave to file their proposed pleading against his clients due to its defective nature. There were five objections which I deal with separately.

(a) Problems with the group definition 81 Mr Jackman SC advanced the same argument that Mr Lockhart SC advanced on behalf of the auditors in relation to the group definition. For the reasons I have already given this is to be resolved in the same way.

(b) Standing 82 Mr Jackman SC contends, as a mater of formality, that the applicants as unit holders lack standing to pursue his clients. Very properly he accepts that this issue is governed by the contrary ruling in Mercedes (No 2) at 463 [49].

(c) Knowledge of transactions and loans made prior to appointment as directors 83 The present form of the proposed pleading against the directors is at Exhibit RGJ-4 to Mr Johnston's second affidavit. Paragraph 229 is as follows: Upon their appointment as a director of MFSIM on 27 February 2007, or at least within a reasonable period thereafter, each of Ms Beale, Mr Whateley and Diamond should have been reasonably familiar with and understood the matters referred to in paragraph 36 above, including: (a) the Fund's financial statements for the year ended 30 June 2006; (b) the Fund's financial statements for the half-year ended 31 December 2006; PARTICULARS The applicants repeat the particulars at paragraph 36 above. 84 Paragraph 36(b) alleges the directors would have understood 'the financial status of the Fund by regular review of the Fund's financial statements'. Paragraph 230 then deals with what they should have gleamed from the financial statements for the year ended 30 June 2006. 85 In his written submissions, Mr Jackman SC pursued the line that the directors could not have been aware of these transactions, as paragraph 229 alleges, which had, after all, occurred prior to their appointment on 27 February 2007. That argument, however, lost much of its force in light of paragraph 36(b) which makes plain why it is alleged that they became aware of matters antedating their appointment. To the extent that the point was pressed I reject it. 86 In his address, Mr Jackman SC pursued a somewhat different line. The manner in which paragraph 36(b) operated tied the allegations made against the directors to that which could be gleamed from the 30 June 2006 financial statements. These statements were in evidence and the burden of Mr Jackman SC's submission was that a comparison between what was alleged and was contained in the statements revealed the pleading to be untenable. Paragraph 230 contains the allegations in question. It is long and detailed but in substance contains five substantive allegations. I propose to treat each of them separately for the sake of clarity. 87 Paragraph 230(a) alleges: 230. On 27 February 2007 or within a reasonable period thereafter, each of Ms Beale, Mr Whateley and Diamond knew that: (a) during the financial year ended 30 June 2005, MFSIM made or maintained unsecured loans out of the Fund's property to: (i) MFS Group Limited in the amount of $62,000,000; (ii) MFS Pacific Finance Limited unsecured notes in the amount of $5,000,000; (iii) MFS Optimiser One (formerly MFS Diversified Property Securities Trust) in the amount of $26,073,011; (iv) MFS Mirage Investment Trust in the amount of $20,000,000; with a monthly average balance in promissory and unsecured notes of $26,918,221; PARTICULARS (1) Each of Ms Beale, Mr Whateley and Diamond was a director of MFSIM. (2) These loans are recorded as notes, promissory and unsecured notes or debt units in notes 3, 9 and 16 to the Fund's financial statements for the year ended 30 June 2006. 88 The critical part of this allegation is that loans in question were 'unsecured'. This is pivotal to the allegation made subsequently by the applicants (in paragraph 231) that the loans referred to in paragraph 230(a) were not authorised (because they were not secured) and the subsequent allegation (in paragraph 232) that Mr Jackman SC's clients should have known they were not authorised. 89 Mr Jackman SC began with the unsecured loan of $62,000,000 apparently made to MFS Group Limited. Resort to note 16 in the financial statements revealed a section headed 'Investments in Related Parties' under which was an entry which recorded $62,000,000 as having been invested by the Fund in 'MFS Group Notes'. Mr Jackman SC submits that this entry does not say that the investment was unsecured so that the allegation in paragraph 230(a)(i) that there had been an unsecured loan of $62,000,000 to MFS Group Limited was unsupported. Mr Jackman SC submitted that this showed that 'the pleaders made that up'. Furthermore, so he submitted, it was difficult to understand how his clients should have understood merely from reading that entry that the Fund had made an unauthorised loan. 90 There are a number of skeins in this debate which needs must be separated: are unsecured loans 'investments'? What were the duties of the directors in coming to grips with what the Fund was obligated to invest in? What can arguably be drawn from the financial statements? Ultimately, is the applicants' case that the directors should have realised from the financial statements that the Fund had made unauthorised loans to related parties sufficiently arguable to permit it to advance to trial? 91 Starting at the beginning, the authorised investments permitted to the Fund were alleged in paragraph 38(c) to be as follows: (i) mortgage investments being a loan secured by a registered mortgage over a freehold estate or interest in real property in Australia; (ii) deposits at call or for a term with any authorised deposit taking institution authorised to undertake banking business ("Bank") as those terms are defined in section 5 of the Banking Act 1959 (Cth); (iii) bills of exchange (including commercial bills) issued, drawn accepted or endorsed by any Bank or negotiable certificates of deposit issued by any Bank; (iv) up to 14 December 2005, any mortgage investment scheme that was a registered managed investment scheme, including a managed investment scheme of which MFSIM was the responsible entity; (v) after 14 December 2005, subject to any exceptions contained in the Act or any ASIC relief (including any ASIC class orders) any managed investment scheme that was a registered managed investment scheme, including a managed investment scheme of which MFSIM was the responsible entity; or (vi) any investment authorised under section 21 of the Trusts Act 1973 (Qld) which MFSIM considered a prudent investment for the Fund; 92 It is tolerably clear, I think, that (i)-(v) would not embrace the making of unsecured loans to persons other than banks. But it was upon (vi) and its reference to s 21 of the Trusts Act 1973 (Qld) that Mr Jackman SC seized. It provides: A trustee may, unless expressly forbidden by the instrument creating the trust- (a) invest trust funds in any form of investment; and (b) at any time, vary an investment or realise an investment of trust funds and reinvest an amount resulting from the realisation in any form of investment. 93 Mr Jackman SC submitted that this was as broad as one could want. 94 The applicants, on the other hand, submitted that an unsecured loan could not be an 'investment' citing the Privy Council's decision in Khoo Tek Keong v Ch'ng Joo Tuan Neoh [1934] AC 529 at 536 and JD Heydon and MJ Leeming, Jacobs' Law of Trusts in Australia (Butterworths, 7th ed, 2006) at [1804]. Khoo Tek Keong is authority for the proposition that reference to an 'investment' in a testamentary trust does not encompass the making of unsecured loans. That case concerned a testamentary trust with a clause permitting trustees to make 'such investments as they in their absolute discretion think fit'. The trustees lent money without security to 'chetties' (which the Oxford English Dictionary describes as South Indian trading castes). The Privy Council tersely agreed with the Appellate Court for the Straits Settlements that these were not investments within the meaning of the investments clause since there was no security. 95 The learned authors of Jacobs' Law of Trusts think that a power to invest 'if sufficiently widely expressed, may not always require that a security be taken for the funds' and indeed, as they point out, there have been cases where extrinsic evidence has been permitted to show that the reference to 'investments' includes the purchase of shares: Re Mort (1904) 4 SR (NSW) 760; cf. Harris v Harris (No 1) (1861) 54 ER 567. 96 In the same vein, the High Court has described the class of authorised investments contemplated by s 21 as 'very broad': Willett v Futcher (2005) 221 CLR 627 at 635 [26]. The plurality in that case included one of the authors of Jacobs' Law of Trusts above. 97 It is perhaps a source of regret that the parties did not examine this question a little more closely. The history and effect of s 21 is considered three paragraphs after [1804] at [1807] in Jacobs' Law of Trusts. The authors note that the legislation is part of uniform legislation across Australia deriving from the new Part II of the Trustee Act 1956 (NZ) which, in turn, was inserted by the Trustee Amendment Act 1988 (NZ). The authors say of these provisions: In part, the legislation is a reaction to relatively conservative approaches to the meanings given to the words 'invest' and 'security' in trust instrument investment clauses discussed at [1804]. For that reason it is improbable that in the uniform legislation, unlike what preceded it, the expressions 'invest' and 'investment' will be construed as narrowly as they were in the investment clauses discussed at [1804]. (Footnotes omitted). 98 Paragraph [1804] is, of course, the paragraph relied upon by the unit holders and contains the reference to Khoo Tok Keong. I have not considered myself any of the materials to which the learned authors of Jacobs' Law of Trusts refer to ascertain whether the asserted legislative intention is borne out. However, Edelman J did consider the matter in Perpetual Trustee Company Ltd v Cheyne [2011] WASC 225. His Honour said this at [53]-[55]: 53 Section 17 is a provision which falls within pt III of the Trustees Act [1962 (WA)] which is entitled "Investments". The word "investment" is not defined anywhere in the Act. Section 17 was introduced by the Trustees Amendment Act 1997 (WA) s 6. It has been suggested that it was introduced, in part, as a reaction to conservative approaches to the meaning of "investment" at common law: Heydon JD & Leeming M, Jacobs' Law of Trusts in Australia (7th ed, 2006) 426 [1807]. An example of the previous common law approach is the decision in Khoo Tek Keong v Ch'ng Joo Tuan Neoh [1934] AC 529. In that case the Privy Council held that an unsecured loan was not an investment. 54 Section 17 has plainly expanded the definition of "investment" beyond the previous common law approach to include, for example, unsecured loans. But there is nothing in s 17, or pt III, which contemplates extending the meaning of "investment" beyond the boundaries of cases involving exchange, or purchase: see the definition in Re Wragg [1919] 2 Ch 58, 65 (Lawrence J). 55 The other provisions in pt III also clearly contemplate this core meaning of investment. For instance, s 18(3) imposes a requirement upon a trustee to review the performance of trust investments at least once a year. The assumption underlying this provision is that something will be received by the trustee in exchange for the disposition of trust funds. Similarly, s 19(1)(b) refers to a duty not to invest trust funds in investments which are speculative or hazardous. Section 26C refers to setting off losses against gains made by trust investments, again contemplating that an investment will involve an exchange. Other sections give examples of investments, all of which include receipts of something in exchange by the trustee which forms part of the trust fund: eg s 24(1) (a dwelling house); s 26 (a debt secured against property); s 26D (housing loans). 99 The first sentence of [54] will at some stage have to be confronted by the applicants. At the moment, however, the state of the law about s 21 does not require that I draw the conclusion that the claim is untenable. The ratio decidendi of no case requires the conclusion that s 21 permits unsecured loans; Jacobs' Law of Trusts and Willett indicate that s 21 is broad but that does not answer the question; Edelman J, in obiter, believes s 21 does extend to unsecured loans. For myself, the views of Edelman J appear to be preferable but the proper resolution of the question would require a consideration of the statutory history which no party attempted and which would be inappropriate in an application such as the present. 100 I proceed therefore on the basis that the applicants should be permitted to advance an argument that the Constitution of the Fund did not permit unsecured loans to persons not being banks. 101 What then of the second matter - what were the duties of the directors in relation to the authorised investments of the Fund? Mr Hutley SC referred me to s 601FD(1) of the Corporations Act which provides relevantly that Mr Jackman SC's clients were bound to '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:…(iii) the scheme's constitution'. Paragraph 35 of the proposed pleading invokes this provision to allege the existence of such a duty. 102 It followed, so Mr Hutley SC submitted, that Mr Jackman SC's clients should have known that unsecured loans to entities such as MFS Group Limited were not permitted. That brings one, perhaps at length, back to the question of what may legitimately be drawn from the financial statements. Mr Jackman SC says that it is not reasonable to expect that directors in the position of his clients should have realised from a mere reference to 'MFS Group Notes' of $62,000,000 that the Fund had engaged in unauthorised investments or even that the notes were unsecured. 103 The difficulty with this submission is the height at which it must be pitched in order to succeed. The present question is not whether the applicants' allegations are correct but whether they are triable. Once that is appreciated, as I think it must be, I am not prepared to say that one could not accept that the references to the 'MFS Group Notes' could not have indicated to a director complying with his or her duties under s 601FD(1) that there was a problem. If that be right then it must follow that Mr Jackman SC's volley against paragraph 230(a)(i) must be rejected. 104 A different argument was then advanced against paragraph 230(a)(ii) and its reference to $5,000,000 of unsecured notes in MFS Pacific Finance Limited. The financial statements in its case do refer to there being $5,000,000 in 'MFS Pacific Ltd unsecured notes' making impossible a suggestion that the accounts did not suggest an unsecured advance. Mr Jackman SC's point here was that they appeared under a heading describing them as 'Investments'. For reasons I have already given I do not accept, at the level of a pleading debate, that the contention that unsecured loans were not authorised is untenable. In the same way I do not accept that the directors can unarguably be said to have complied with their duty under s 601FD(1) by seeing the word 'investment' and thereafter eschewing reading any further. 105 Insofar as paragraph 230(a)(iii) was concerned, Mr Jackman SC submitted that the financial statements merely recorded an amount of $26,073,011 in the name of MFS Diversified Property Securities Trust which was not said to be unsecured. I reject this submission for the same reasons I have given in relation to paragraph 230(a)(i). Mr Jackman SC made a similar submission in relation to paragraph 230(a)(iv) which I reject for the same reasons. Before departing from paragraph 230(a) for the enticements of paragraph 230(b) he made a final parting submission that the reference to the 'monthly average balance in promissory and unsecured notes of $26,918,221' had to be understood as referring to the promissory and unsecured notes on p 24 of the financial statements and resort to it showed that they appeared under the heading 'Investments'. For reasons I have already given I reject this argument. The same submissions were made in relation to paragraph 230(c) and I reject them for the same reasons. 106 I move then to the submission put against paragraphs 230(b) and 230(d), which alleged loans and investments with related parties. With one exception these were identical to those made in relation to paragraph 230(a) and should be disposed of in the same way. There is no need to set them out in that circumstance. The one exception is that an additional submission was made that the section of the financial statements dealing with related party transactions contained, on p 28, the statement 'All transactions with related parties are conducted on normal commercial terms and conditions' so that any director reading the financial statements would have understood all of the related party transactions to have been arm's length transactions. This mattered because s 210 of the Corporations Act (as modified by s 601LA so as to apply to managed investment schemes) had the effect that member approval was not required even though the transaction was with a related party. 107 The applicants submitted that s 210 only dispensed with member approval in such a case if the terms of the transaction, to use the language of s 210, 'would be reasonable in the circumstances if the public company or entity and the related party were dealing at arm's length' - I do not think this is really an answer to the point. But, in any event, if the applicants be correct that unsecured loans are unauthorised the issue of their also being related party transactions is a distraction. The allegation in paragraph 230 operates even if the loans were made to unrelated parties. Perhaps more importantly, although the reference to the transaction being on ordinary commercial terms will no doubt assist the directors' defence, I do not think it necessarily defeats the applicants' case that the directors breached their duties under s 601FD. A critical question at trial will involve the extent to which the directors either read the financial statements or were entitled to rely upon them. They may well be on the correct side of that debate ultimately but whether that will be so will turn on the true status of the financial statements in the life of this Fund and that will require a great deal more knowledge about its operation than is available on a pleading debate. In those circumstances, I do not accept Mr Jackman SC's submission. It was also submitted that the accounts had been audited. I do not regard the fact that the accounts were audited as making the applicants' claims untenable. 108 The same points were made about paragraph 230(e) although it related to the financial statements for the half-year ending 31 December 2006. I reject those submissions for the same reasons.

(d) Whether unsecured loans are authorised investments 109 I have dealt with this issue above at [94]-[99]. It was submitted that paragraphs 230(a), (c), (e), 238(c), 237, 244 and 245 suffered from this problem. For reasons already given I reject this argument.

(e) Loans and investments without approval of members of Fund 110 The proposed pleading alleges in various places that the Fund entered into transactions with related parties (specifically paragraphs 230(b) and (d)). Paragraphs 233 and 234 allege: 233. To the knowledge of each of Ms Beale, Mr Whateley and Mr Diamond, each of the loans and investments referred to in paragraphs 230(b) & (d) above was made or acquired without approval by the members of the Fund. 234. MFSIM should not have made or acquired any of the loans and investments referred to in paragraphs 230(b) & (d) above with a related party of MFSIM without approval by the members of the Fund as required by s 208 (as modified by s 601LC) of the Act. 111 Here, the point was that the unit holders did not allege that the exceptions in ss 210-216 did not apply. For the reasons given in Mercedes (No 3) I reject this argument. I deal below with the argument advanced by several groups of respondents that the decision of Barker J in Leawell Pty Ltd v Watershed Premium Wines Ltd (No 2) (2009) 180 FCR 392 at 397-400 [24]-[43] requires me to depart from my prior conclusion in Mercedes (No 3) (even though that decision was not cited by any party at that time). 112 That observation disposes of the directors' submissions about the note in the related party transactions section of the financial statements to the effect that the transactions were on ordinary commercial terms: this is a matter for their defence. Whether that defence succeeds will no doubt turn on an examination of all the circumstances surrounding this board. That is a matter which only a trial will resolve.

(f) Miscellaneous matters 113 In his address Mr Jackman SC pursued some other disparate points. First, attack was made on paragraph 237. It alleges that if Mr Jackman SC's clients had complied with their duties they would have done five things which are then set out in subparagraphs (a)-(e). Dissatisfaction is expressed with each. It is useful to treat each separately. 114 Paragraph 237(a) alleges that if the directors had complied with their duties then they would have: (a) brought to the attention of the other directors of MFSIM that: (i) each of the unsecured loans referred to in paragraphs 230(a), (c) & (e) above: (1) was not an Authorised Investment, as required by clause 15 of the Constitution and clauses 2.7, 3.1, 3.2, 3.3, 19 and 35 of the Compliance Plans; (2) should not have been made by MFSIM; (ii) each of the transactions referred to in paragraphs 230(b) & (d) above (including each of the unsecured loans referred to in sub-paragraph (a)(i) above) should not have been made by MFSIM without approval by the members of the fund as required by s 208 (as modified by s 601LC) of the Act; PARTICULARS This obligation arises under s 601FD(1)(b) and (f) of the Act. 115 The submission about (a)(i) was that if this had been done 'the other directors, if they were generous towards us, they would have fallen about laughing. If any were not so charitable, they would have suggested we were utterly insane'. I am not sure why that would be so; in any event, it is certainly not sufficiently sure to render the allegation untenable. 116 The submission about (a)(ii) was that member approval was not necessary because the notes made clear that the transactions were on ordinary commercial terms. For reasons already given I reject this argument. 117 In paragraph 237(b) the unit holders allege that if the directors had complied with their duties then they would have: (b) advised the board of directors of MFSIM that they objected to the making or maintaining of any loan or investment that: (i) was not an Authorised Investment; or (ii) involved giving a financial benefit to a related party of MFSIM without approval by the members of the Fund as required by s 208 (as modified by s 601LC) of the Act; 118 As I apprehended the submission, this was too much to expect merely from reading the financial statements. If one accepts, as I have, that there is a triable issue as to whether reading the financial statements was sufficient to indicate to properly diligent directors that there were related party transactions which had not been approved, then I do not think (b) is unreasonable. Hence, I do not accept that it is not a proper pleading. 119 In paragraph 237(c) it is alleged that if the directors had complied with their duties they would have: (c) requested the board of directors of MFSIM to take all, or at least sufficient, steps to prevent MFSIM from thereafter approving any loan or investment: (i) that was not an Authorised Investment; or (ii) to or with a related party of MFSIM, without approval by the Fund members as required by s 208 (as modified by s 601LC) of the Act. 120 Mr Jackman SC submitted that the financial statements themselves disclosed that this was not wrongful. I do not understand this submission and hence cannot accept it. 121 In paragraph 237(d) it is alleged that if the directors had complied with their duties then they would have: (d) requested the board of directors to cause MFSIM to report to ASIC, in accordance with s 601FC(1)(l) of the Act, that it had breached s 601FC(1)(m) of the Act in making each of the unsecured loans that was not an Authorised Investment, as required by clause 15 of the Constitution; PARTICULARS (i) This obligation arises under s 601FD(1)(f) of the Act. (ii) The interests of members were materially adversely effected by reason that a substantial amount of the Fund's property had been lent without security of repayment and in breach of the Constitution. 122 Mr Jackman SC submitted that this paragraph was 'utterly outrageous'. I do not think the allegation outrageous or even unreasonable. Paragraph 237(e) escaped the label 'outrageous' but only at the price of being 'utter nonsense'. It alleged the directors should have: (e) requested the board of directors to take all, or at least sufficient, steps to cause MFSIM to: (i) recover each unsecured loan; and (ii) divest itself of each investment: that was not an Authorised Investment or that had been made to a related party of MFSIM without approval by the Fund members as required by s 208 (as modified by s 601LC) of the Act; 123 The nonsensical nature of the allegation was said, once again, to arise from the financial statements. For reasons I have already given I do not accept this argument. 124 All of the paragraphs thus far considered concern what should have been discovered from the financial statements for 30 June 2006. There were, in fact, another set of financial statements for the period ending 30 June 2007 and the pleading develops an analogous case against Mr Jackman SC's clients based on what should have been extracted from those accounts. It is contained in paragraphs 238-294. The same submissions were pursued against these paragraphs. I reject them all for the same reasons. 125 In principle I accept therefore that the applicants' claims against Mr Jackman SC's clients may proceed subject to appropriate terms. It will follow that the directors' application for summary relief must be dismissed with costs.

IV. The submissions of the fifth respondent, Mr Hutchings 126 The fifth respondent, another former director of the responsible entity, submitted first that the application by the unit holders to formulate a case against him should not be entertained at all for the same reasons advanced by Mr Jackman SC. For the same reasons I reject it. 127 Mr Hutching's attacks on the proposed pleading fell into seven categories which require separate treatment.

(a) The pleading of the MFS Living and Leisure loans 128 Part of the proposed claim against Mr Hutchings is that he knew that the Fund had acquired two short term loans to MFS Living and Leisure Management for $66.7 million. Paragraph 69 alleges the loan was unsecured. 129 Mr Hutchings submitted that s 21 of the Trusts Act was an answer to that point but for reasons already given I do not accept this. In his address Mr Coleman SC, who appeared for Mr Hutchings with Mr Hughes of counsel, referred to paragraph 179 of the pleading. It says: 179. On and about 21 September 2007, Mr Hutchings knew that: (a) the MFS Living and Leisure Loans would be unsecured; PARTICULARS The IAC [Investment Approval Committee] Submission dated 19 September 2007 presented to Mr Hutchings at the IAC meeting held on 21 September 2007. (b) MFS [Living and Leisure] Management as responsible entity of the MFS Living and Leisure Trust was a related party of MFSIM within the meaning of s 228 (as modified by s 601LA) of the Act. PARTICULARS The applicants repeat the particulars at sub-paragraph (a) above. 130 Resort to the Investment Approval Committee ('IAC') Submission referred to in (a) revealed this passage: Security on both the loans is by way of:- • A guarantee from MFS Limited; • A negative pledge over the assets of the MFS Living and Leisure Trust. 131 Indeed that matter is alleged by the unit holders at paragraph 65(b). Mr Coleman SC submitted that this demonstrated that the loan was secured. To this Mr Hutley SC rejoined that such personal covenants did not constitute security in the requisite sense because they were but personal covenants. I regard Mr Hutley SC's contention as at least arguable which will suffice for present purposes.

(b) The MFS Pacific Finance Participation Payments 132 The pleading alleges that the Fund advanced $62,500,000 to acquire rights in relation to a number of existing loan agreements between MFS Pacific Finance Limited and a number of third party borrowers. At paragraph 76 this advance is said not to have been an authorised investment because it was not secured. For reasons already given I reject Mr Hutchings' argument based on s 21 of the Trusts Act. 133 Additionally, however, the applicants also allege that this was an imprudent transaction. This appears in paragraph 185(b) where it is alleged that Mr Hutchings should have realised the payment 'was an imprudent payment for MFSIM to make, having regard to the degree of care and diligence that a reasonable person would exercise if they were in MFSIM's position as required by s 601FC(1)(b) of the Act'. 134 Mr Coleman SC submitted that it was not sufficiently exposed why the payments were imprudent. It seems to me that this must be rejected when regard is had to the terms of paragraph 185. Relevantly, it is there said: 185. By reason of the matters in paragraph 36 above, and with knowledge of the facts referred to in paragraph 184 above, Mr Hutchings ought to have known, that the MFS Pacific Finance Participation Payment:… 135 This directs the reader's attention to paragraph 184. 184. Mr Hutchings knew that: (a) MFSIM's rights to receive payments under the Loan Participation Agreement would be unsecured; (b) MFSIM's rights to be paid under the Loan Participation Agreement would be conditional upon the receipt of moneys by MFS Pacific Finance Limited from the borrowers; (c) the underlying loans were not secured by registered first mortgages; (d) MFSIM's rights of recourse under [the] Loan Participation Agreement were limited to MFS Pacific Finance Limited. PARTICULARS That information is contained in: (i) the minutes of an IAC meeting held on 23 November 2007 and attended by Mr Hutchings; (ii) the IAC Submission dated 20 November 2007 presented to Mr Hutchings at the IAC Meeting held on 23 November 2007; (iii) the Loan Participation Agreement signed by Mr Hutchings on or about 30 November 2007. (e) that MFS Pacific Finance Limited was a related party of MFSIM within the meaning of s 228 (as modified by s 601LA) of the Act; (f) that the Pacific Finance Participation Payment had not been approved by the members of the Fund. 136 It is clear in light of paragraph 184 why it is alleged in paragraph 185 that Mr Hutchings knew it was imprudent. Mr Coleman SC advanced a similar argument in relation to paragraphs 186-188 which he accepted should be disposed of the same way.

(c) The MFS Maximum Yield investment 137 The pleading alleges that on 23 November 2007 MFSIM approved a proposal to purchase from itself as responsibility entity for the MFS Maximum Yield Fund class A units in that fund for $85,000,000. At paragraph 189 it is alleged that Mr Hutchings knew this investment was a high risk and speculative investment. Particulars are provided: That information was disclosed at pages i, ii, iii, 1, 2, 4 and 10 of an Information Memorandum issued by MFSIM on 23 November 2007, which was presented to Mr Hutchings at the IAC meeting on 23 November 2007. 138 There is no doubt these references make good the proposition that it was a high risk investment. The memorandum was put into evidence. Mr Hutchings' point was that other pages in the memorandum painted a more nuanced picture. This is of no assistance in a pleading debate. I reject the argument.

(d) The MFS Pacific Finance Payment Transaction 139 Paragraphs 98-99 of the pleading allege: 98. On 24 December 2007, the chief financial officer of MFS Limited, David Anderson, told Mr White that MFS Pacific Finance Limited need $17.5 million to pay its debenture and noteholders by 11.00 am on 28 December 2007. PARTICULARS Email from Mr Anderson to Mr White on 24 December 2007 (1.26pm). 99. On 27 December 2007 Mr White told Mr Hutchings that MFS Pacific Finance Limited needed the $17.5 million MFS Pacific Finance Payment to pay its debenture and noteholders by 11.00am on 28 December 2007 PARTICULARS Email from Mr White to Mr Hutchings on 27 December 2007 (12.31pm). 140 Despite these allegations complaint is made by Mr Hutchings about paragraph 194(b)(ii) which alleges that Mr Hutchings 'at no time knew of any transaction which made the $17.5m MFS Pacific Finance Payment a proper payment out of the Fund's property, or provided any consideration, benefit or reward to the Fund in return for the $17.5m MFS Pacific Finance Payment'. I fail to perceive any problem with this. Another argument pursued in writing was that the pleading was defective because the applicants did not allege that MFS Pacific Finance did not promise to repay the money, or give any consideration. That, however, is a matter for Mr Hutchings' defence and not a defect in the pleading.

(e) The related party transactions 141 It was said that there needed to be the giving of a benefit to a related party before the necessity of member approval arose. So much may be accepted. The next step in the argument was that where the alleged related party was another responsible entity it did not receive the benefit of the transaction because it received only bare legal title. This was said to flow from the statutory trust created by s 601FC(2) of the Corporations Act. Further, in the context of considering financial benefits it was necessary to keep in mind s 229(1)(b) of the Corporations Act that in determining whether a financial benefit has been given 'the economic and commercial substance of the conduct is to prevail over its legal form'. It seems to me that the fact that a responsible entity holds the property it receives on trust does not mean that it has not received the benefit. In any event, the question is not whether that proposition is correct but whether it is arguable. It plainly is. Consequently I do not accept this aspect of Mr Hutchings' complaint. 142 It was also submitted that paragraph 194(c) was defective. This paragraph alleged that as at 27 December 2007 Mr Hutchings knew that 'MFS Pacific Finance Limited was a related party of MFSIM within the meaning of s 228'. This is said to be defective due to a want of particulars. Paragraph 32(c) pleads that MFS Pacific Finance Limited was a related party to MFSIM. It does so, inter alia, with the following particulars: (1) MFS Administration made decisions as to its day to day and investment activities pursuant to a written Management Agreement dated 24 July 2006, and its practice through the receipt of instructions and directions from Mr White and David Anderson of MFS Administration given to Jason Maywald and Nigel Lane of MFS Pacific Finance Limited, and (2) MFS made decisions as to its long to medium term policy and strategic direction through the receipt of instructions and directions from Mr King of MFS given to Jason Maywald and Nigel Lane of MFS Pacific Finance Limited. 143 Mr Hutchings submits that it needs to be alleged that he knew these matters. I do not agree. No doubt that could be alleged but the pleading is not defective because it is not alleged. Paragraph 194(c) alleges that Mr Hutchings, a director of MFSIM, knew that MFS Pacific Finance Limited was a related party. I fail to detect anything unreasonable in such an allegation nor any reasons why Mr Hutchings could not plead a defence to it.

(f) Causation 144 It was submitted that because the allegations of contravention made against Mr Hutchings were inadequate the claim for damages likewise must fail. The premise for this argument is not established.

(g) Conclusions 145 Each of Mr Hutchings' complaints fail. It follows that subject to the question of terms the amendments should be allowed. It will follow that the summary judgment application must fail.

V. The position of Mr White 146 Most of the submissions advanced on Mr White's behalf were advanced by other parties and have already been dealt with. For reasons I have already given I reject the following arguments: (a) the argument that the related party transactions had not been properly pleaded. Specifically, I do not accept that there is any defect in the manner in which Mr White is alleged to have known that the related party transactions were with related parties. (b) the argument that the unit holders must plead that ss 210-216 do not apply. I regard this question as already determined by Mercedes (No 2). Mr White (and other parties) sought to argue that the decision of Barker J in Leawell Pty Ltd v Watershed Premium Wines Ltd (No 2) at 397-400 [24]-[43] had not been cited to me in the first argument. Granted that be so, it provides no basis for revisiting a decision already made. In any event, unless persuaded that the Court of Appeal's decision in Forge v Australian Securities and Investments Commission (2004) 213 ALR 574 is plainly wrong I am bound to follow its interpretation of the related party transaction provisions. Paragraph [301] (at 640) of the reasons of McColl JA establishes that at trial it is for the defendant to prove that he, she or it falls within the exceptions. Mr Cohen, who appeared for Mr White, submitted that Forge had been concerned with the former s 243H of the former Corporations Law which was in different terms to s 208. This is true but both use the same machinery of exception - s 208 by use of the words 'must fall within the exceptions set out in sections 210 to 216'; s 243H by use of the words 'except as permitted by Part 2E.4 or 2E.5'. This does not seem to be, therefore, a material difference. I cannot accept that if a party bears the onus of proof on an assertion of fact that the opposing party can be bound to plead the non-existence of that fact. I accept that Barker J reached the opposite conclusion but it does not appear that his Honour referred to Forge in this context (although he did in another: 401 [54]). The proposition for which Mr White contends is therefore inconsistent with Forge and also, as I have previously noted, the views of Habersberger J in Orrong Strategies Pty Ltd v Village Roadshow Ltd (2007) 207 FLR 245. (c) the arguments relating to unsecured loans and authorised transactions. (d) the arguments as to whether leave to seek amendment should be entertained at all. 147 Without identifying any of the paragraphs of the pleading to which the complaint was addressed, Mr White's written submissions took issue with allegations that 'certain of the transactions were "imprudent"'. These unidentified 'certain' transactions were said to be 'embarrassing'. Why were these unidentified parts of the applicants' pleadings embarrassing? The answer appears in paragraph 20 of Mr White's written submissions: The eighth respondent's liability is said to rest upon his failures to prevent those transactions being entered. But it is not clear from the [pleading] whether it is the fact that the transaction was a related party transaction or the fact that the transaction was unsecured or the fact that it was imprudent which leads to the allegation that it ought not to have been approved or made. Consequently, it is not clear whether it is one or all or a combination of two of those things which the applicants wish to allege required the eighth respondent to take steps to prevent the transactions being entered. 148 Without some indication about which parts of the pleading this is addressed to I am not going to guess what is being sought to be submitted by this. If a party wishes to submit that a pleading is embarrassing it must at least bring itself down to the level of what is actually pleaded if it wishes the submission to be entertained. 149 Mr Cohen advanced two further arguments in his address. He submitted there was a defect in the way in which loss and damage was claimed. It was submitted that there was no causal link pleaded between the damage to the Fund property and the amount of the diminution in the value of the group members' units. I reject this submission. Paragraph 147 pleads loss to the Fund's property. Paragraph 148 then pleads: 148. By reason of the matters referred to in paragraph 147 above, the value of units in the Fund of each Group Member has been substantially diminished, and the Group Members and each of them have suffered, and will continue to suffer loss and damage. 150 The submission, as I understand it, was that one needed to identify the loss to the Fund resulting from each transaction and the consequent diminution in the value of the units for each transaction. I do not accept this. No doubt questions of quantification lie ahead but the only necessary pleading is that there has been loss or damage. There is nothing inappropriate about paragraph 148. 151 Lastly, it was submitted that the pleading that Mr White knew that the Fund did not derive any benefit from the $130 million MFS Administration Payment was defective. It appears in paragraph 137(b). The particular provided to the paragraph is this: Mr White orally directed Mr Anderson on 27 November 2007 that he (Mr Anderson) was to transfer the $130m MFS Administration Payment from the Fund to MFS Administration, and use $100m of that money to pay to a creditor of MFS Limited, being Fortress Credit Corporation (Australia) II Pty Ltd. 152 Mr Cohen submits that one cannot infer from this that Mr White knew that the Fund was not getting a benefit. I do not agree; it is obvious. 153 In those circumstances I do not accept Mr White's arguments as to why leave should not be granted. In a similar vein, I reject his claim for summary relief.

VI. The position of Mr Kyling 154 All of the submissions advanced on Mr Kyling's behalf were advanced by other parties. For reasons already given I reject them. Leave should be granted to the applicants on terms; there should not be summary judgment.

VII. The position of Mr Price 155 Counsel for Mr Price, Mr Goodman, adopted the submission of the other parties. His position is to be resolved accordingly. Leave will be granted to the applicants; there will be no summary judgment.

VIII. The position of Mr King 156 As was noted in Mercedes (No 3) at [111] Mr King entered into a personal insolvency agreement on 4 August 2009. The present proceedings will be blocked by that agreement and s 229(2) of the Bankruptcy Act 1966 (Cth) if the claims against Mr King are proveable in bankruptcy. The definition of proveable debts in s 82(1) is broad but is subject to the provisions of s 82(2): 82 Debts provable in bankruptcy … (2) Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy. 157 The critical question is whether the present claim against Mr King for relief under s 1325 of the Corporations Act and damages at general law can be characterised as being a claim in the nature of unliquidated damages for breach of trust. In Mercedes (No 3) I surveyed that question and concluded that the commencement by the applicants of their proceedings despite the agreement did not warrant an indemnity costs order. Left unresolved was whether the agreement did or did not bar the proceedings. This procedural quirk occurred because Mr King sought only to use the agreement to bar the applicants' prior amendment application and not for summary judgment. 158 The question now arises. Contrary to the submissions of the applicants the issue was not resolved in Mercedes (No 3). If the question were whether Mr King's case involved a breach of fiduciary duty then his position would be supported by Weinberg J's decision in Re Sharp; Ex parte Tietyens Investments Pty Ltd [1998] FCA 1367 and opposed by the decision of Bryson AJ in Auto Group Ltd v England (2008) 6 ABC(NS) 72. The question is whether a claim under s 1325 is a claim for breach of trust. The short answer is that it is not. It is an interesting question whether the claim is in the nature of a claim for breach of fiduciary duty but even that is not truly apposite for no such breach is here alleged. I do not accept that a breach of trust under s 82(2) is established by mere moral turpitude and in that regard I differ, respectfully, from the obiter dictum of Weinberg J in Re Sharp. The word 'trust' is a technical one having a well understood meaning in law. I prefer, therefore, the views of Bryson JA in Auto Group. For the reasons I gave in Mercedes (No 3) at [120] I do not regard Cummings v Claremont Petroleum NL (1996) 185 CLR 124 at 136-137 as requiring a different outcome. In addition, the allegations in this case are not ones of breach of fiduciary duty. 159 The short of the matter then is that an allegation of a breach of s 601FD of the Corporations Act is not an allegation of a breach of trust. Although Mr Piggott of counsel, who appeared for Mr King, sought to persuade me to the contrary view, I cannot ultimately escape the proposition that the rule laid down in s 601FD is a statutory rule and not a rule of the law of trusts. That it has the same content in practical terms does not alter its nature. 160 Mr Piggott made a second point on Mr King's behalf. The case against Mr King arose only in relation to a loan to MFS Pacific Finance Limited which had occurred on or about 29 June 2007. The pleading alleged that it was Mr King who signed both the unsecured note certificate which had been issued on 29 June 2007 by MFS Pacific Finance Limited and the prospectus dated 15 September 2006. It was his presence on that side of the transaction which permitted the pleading to allege Mr King's knowledge of the unsecured nature of the transaction. 161 But paragraph 30(a) alleged that Mr King ceased being a director of MFSIM on 27 February 2007 which was well before this transaction's occurrence on 29 June 2007. How then could he be in breach of s 601FD on 29 June 2007 as was alleged in paragraph 117? 162 The answer lay in the allegations in paragraph 30(b) which alleged against Mr King that: (b) at all other material times from 28 February 2007 was a director of MFSIM within the meaning of s 9 of that Act in that: (i) Mr White reported directly and frequently (on a daily or near-daily basis) to Mr King in the performance of his role in MFSIM, and customarily acted in accordance with Mr King's instructions or wishes in that role; (ii) Mr King saw his responsibility as, and acted as, overseer or supervisor of the entire business of MFSIM, so that Mr King had the capacity to affect significantly the financial standing of MFSIM; (c) a member of MFSIM's Investment Approval Committee from 1 September 2004 until 13 May 2005; (d) at all material times an officer of MFSIM. 163 During the course of Mr Piggott's address Mr Hutley SC clarified that the reference in (b) to 'director' should be 'officer'. The definition of 'officer' is contained in s 9 of the Corporations Act. It includes subsection (b) which is in these terms: "officer" of a corporation means: … (b) a person: (i) who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or (ii) who has the capacity to affect significantly the corporation's financial standing; or (iii) in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation); or … 164 It is, I think, clear that paragraph 30(b) of the pleading invokes (b)(ii). Mr Piggott endeavoured to demonstrate that as a pleading of (b)(i) or (b)(iii) paragraph 30(b) was inadequate and in this he was successful, if beside the point. The pleading invokes (b)(ii). 165 In those circumstances, subject to the word 'director' being changed to 'officer' in the pleading leave should be granted to amend against Mr King subject to terms. Summary judgment should be dismissed with costs.

IX. The position of Mr Hiscock and Mr Manka 166 No additional submissions were advanced on their behalves. Leave should be granted to amend against them subject to terms and their summary judgment application should be dismissed with costs.

X. The Question of Terms 167 All of the respondents submitted that the applicants had wasted a great deal of time and expense with the earlier forms of the pleadings. In this they are on sure ground. In effect the case now articulated is new and, although it is now properly pleaded, there is much to be said for the view that the last two years have been a waste of time. Plainly the applicants must pay the costs thrown away by reason of the amendments I now propose to allow. 168 Several of the respondents sought orders that these costs be payable forthwith and/or on an indemnity basis. Mr Hutley SC submitted that costs should await the outcome of the application but I do not see why that should be so. 169 This is a case where effectively the proceedings have been started afresh tabula rasa. Given the expense in getting to this point it would be unfair in my opinion for the applicants not to have to confront the consequences of what has been done on their behalf until the present application. 170 The principles to be applied are not in doubt. The ordinary rule is that costs follow the event. This is reflected in Order 62 rule 29 of the former Federal Court Rules 1979 which apply to this application (by r 1.04 of the Federal Court Rules 2011). Ordinarily a party may not have its costs taxed until the conclusion of the proceedings: O 62 r 3. The Court may dispense with that rule where the interests of justice so require: McKellar v Container Terminal Management Services Ltd [1999] FCA 1639 at [38] per Weinberg J. 171 The unfairness which presently exists, the severability of what has happened in the past and the very high degree of likelihood that a trial is a good way off provide a proper basis for departing from the ordinary practice. I do not think, however, that indemnity costs orders are justified. Although many things may be said against the earlier pleadings they have to be viewed in a context which includes the insurmountable difficulties encountered in obtaining any of the Fund's documents.

XI. Orders 172 In principle, subject to the minor matters which I have mentioned leave should be granted to proceed against the respondents in the form proposed. The two documents will need to be combined into one. The unit holders must bear the costs thrown away. The respondents' motions for summary relief must be dismissed with costs. The respondents should have leave to have all costs orders made to date taxed forthwith. The parties should provide short minutes of order by 31 January 2012 reflecting these reasons and setting a timetable for the filing and closing of pleadings. I certify that the preceding one hundred and seventy-two (172) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.