Milfull v Terranora Lakes Country Club Ltd

COOPERS & LYBRAND (A PARTNERSHIP) and COOPERS & LYBRAND (SECURITIES) LIMITED

REASONS FOR JUDGMENT 1 In these proceedings Mr Milfull represents a group of persons who were purchasers of redeemable preference shares in Terranora Leisuretime Resort Management Limited ("Management"). The shares had attached to them a right to use accommodation units in a resort to be developed. Each share entitled the owner to one week's accommodation per year until the year 2027 (the "timeshare rights"). 2 Management was owned as to 74 per cent by the first respondent, Terranora Lakes Country Club Limited ("Club") which also held 51 per cent of the shares in Terranora Timeshare Developments Pty Limited ("Developments"). Developments was to construct the accommodation units and resort. Part of the land upon which the development was to occur was leased by Management from Club. That lease and the companies' dealings with it is a key point in the litigation. 3 Whilst the lending bank initially loaned monies without requiring a mortgage of the lease, this was later requested and provided without, however, any mention of this to current or prospective shareholders or approval by them in meeting. This occurred against a background where the directors had been advised of the adverse effect the grant of securities over Management's assets would have and of the need, if that did occur, to disclose and draw the attention of investors to it. It also alleged that they were advised that it would then operate as a significant deterrent. Nevertheless, a release of the mortgage could have been obtained when a minimum subscription requirement for the shares was reached. It is alleged that that entitlement was lost when a relatively small increase in Management's overdraft, of some $25,000 was sought. The bank conditioned that advance to an extension of the securities to cover full repayment under the facility. There were alternative courses open and the right of release would have accrued shortly, given the extent of the subscription to that point. The bank later required Club, as guarantor, to repay the monies owing under the facility. It did so and in exchange it received an assignment of the securities over the lease and appointed receivers to Management. Management was wound up and Club eventually sold the land and the apartments upon it. 4 The applicant's case is that any investment in shares was subject to some "inherent risks" such as the creation of security interests superior to a shareholder's rights. The duties of Club, its directors and Management's directors are said to be referrable to these risks. 5 The actions of the second respondents (the Receivers) and the fifth respondents (the accounting firm which gave advices and the company through which it provided services) are also the subject of claims. I shall refer to them collectively as "the accountants". The receivers were also members of the partnership. The accountants prepared a report concerning the viability of the project to the lending bank, on the retainer of one of the companies and was later retained by each of Club, Management and Developments to advise in relation to the scheme. It is alleged that they advised that receivers be appointed, but that they did not consider the validity of the securities and that appointment; they did not advise of the means by which that could be avoided, including imposing a levy on the shareholders. Other aspects of the allegations of breach of duty are referred to below. Further specific representations are said to have been made by the receivers as to the options available and it is said these operated to dissuade the shareholders from pursuing a course namely to raise monies to pay the debt owed to Club.

The Claims against Club and the Directors 6 The duties identified as that owed by Club, its directors and Management's directors to prospective and current shareholders, which were breached, were those to ensure that a development represented in the prospectuses (one absent security) was maintained; to accurately describe the scheme in it; to ensure shareholders' rights were not adversely affected by securities provided; to ensure that Club's interests were not preferred to theirs; not to bring about Management's winding up; and to inform of the mortgage given and to give an opportunity to the investors to withdraw. In addition, it is alleged that in mortgaging the lease and continuing the securities Club and Management breached the contract with the shareholders. Compensation, for breach of the Companies (NSW) Code, is sought by reason of the non-disclosures by Club. It is sought against Club and both sets of directors. Damages are also sought for misleading and deceptive conduct on the part of Club, in which the directors were also involved, constituted by non-disclosures made in the context of other positive representations as to the security of the scheme. 7 The loss alleged to have been suffered by the shareholders arising from each of those claims is pleaded at two points, (paragraphs 47 and 60) of the statement of claim. The first-mentioned refers to payment of the price of the shares and borrowing charges on it (although it is included with matters which are not proper particulars of loss and damage). Paragraph 60 also refers to the loss of worth of the time share rights, which may refer to the value of the share and personal rights which attached with them. This paragraph, however, is expressed to refer only to the Trade Practices Act contraventions, but in submissions reliance was placed upon it for all of the abovementioned claims and I have taken it to so apply. The pleading requires correction.

Claims against the Accountants and the Receivers 8 It is not alleged that the receivers provided the report or advices relating to the steps to be taken. They are sued in connexion with these matters as partners. The report given and the advices later provided might be thought to involve different duties, by reason of their subject matter, but it appears from the description of the duty owed that it is said to arise from a combination of those services and the knowledge gained, or that which should have been gained, in the process, particularly so far as concerned the shareholders interests. The content of the duty is said to have required them to verify the validity of the appointment of the receivers; to investigate the applicants' rights and alternative avenues of repayment of Management's debts and advise the shareholders of them. The advices which should have been given included those with respect to the shareholders' possible control of the board of Management and their rights in connexion with the releases given up to that point by the bank. In addition it is alleged that, in breach of duty, the accountants and receivers advised Club to organise a creditor to seek Management's winding up and appoint the receivers as the liquidators. 9 As against the receivers a further claim is maintained. It is alleged that they were guilty of misleading and deceptive conduct in the making of representations as to the extent of Management's debts, in connexion with whether a levy of members was a feasible option. It is alleged that they discouraged the shareholders from taking steps which they might have undertaken to protect their interests by preventing the liquidation, including their payment of Management's debt. 10 The loss and damage alleged to have flowed from the accountants and the receivers' breach of duty, and also from the Trade Practices Act contraventions on the part of the receivers, are the same and extend to the value of the shares and the cost of the investment although in this part of the action the expenditure which would have been necessary to fund payment of Management's debts is to be deducted from the value of the shares. Management's Supreme Court Action 11 In late 1998, the liquidators of Management brought proceedings in the Supreme Court of Queensland against its receivers. The claims against the receivers are made in the background of allegations made against the directors of Management, that they were guilty of breach of fiduciary duty owed to the company in having it enter into the agreement with the bank which rendered the mortgage and charge security for repayment under the facility agreement. It is alleged that that was not in the company's interests, but in the interests of others. It is also alleged that Club and its directors were involved in such conduct. Relief is, however, only sought against the receivers who are alleged to have breached their duty to Management by failing to consider the validity of the claim, the demand for repayment against Management and the securities and failing to oppose the winding up. The losses alleged are the loss of the lease and the resort and the income it would have earned for the redeemable preference shareholders, and the expenses of the winding up. The Applications by the Accountants and Receivers 12 The accountants and the receivers seek an order that the action against them be stayed pending the determination of the proceedings brought by Management in the Supreme Court. The contention is that the loss suffered by the applicants, the value of their shares, is but a reflection of the loss suffered by the company. 13 A company is clearly the proper party where the harm was occasioned to its assets: Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 Ch 204, 210-211; Gould & Anor v Vaggelas & Ors (1985) 157 CLR 215, 219-20, 245; Stein v Blake [1998] 1 All ER 724, 727. The situation is the same regardless of whether the cause of action is founded upon contraventions of the Trade Practices Act: Morwood v Chemdata Pty Ltd (1995) ATPR 41-429, 40-837. It is otherwise where the loss suffered by the shareholder is separate and distinct from that suffered by the company, as was the case in Gould v Vaggelas where they had made their assets available to the company (at 220, 245 and Morwood v Chemdata 40,837). 14 The applicants do not dispute these propositions of law but submit that the loss suffered by group members does differ, not only because it extends to the cost of borrowings for the investment, but because they have lost the right to occupancy (the "timeshare rights") in addition to the value of the shares. It would further seem to me arguable that the Trade Practices Act claim here refers to wrongs done to the applicants and their economic interests. 15 So far as concerns the cost of borrowings these respondents submitted that this expenditure could only be referrable to pre-contractual conduct, such as is alleged against Club and the directors with respect to non-disclosures in the prospectuses, by which the shareholders were induced to believe their investment was safe and the company's borrowings had not required security. The duty alleged to be owed by the accountants and the receivers is connected with the protection of the investment they had already made. That submission appears to me to be correct. Paragraph 78(d) of the amended statement of claim should be struck out. 16 It seems to me quite possible that the right of occupancy attaching to the shares is able to be valued. Depending upon the provisions in the company's constitution in relation the shares, it is possible that it extends to the ability to deal with it by way of assignment or otherwise. I have not been referred to the provisions relating to Management's redemption of the shares which I assume is deferred to the timeshare period. The nature of the shares is however such that the personal right of occupancy is not able to be reflected in the price that will be paid to the shareholders when they are redeemed. 17 The accountants and receivers also contend that the claim brought against them in negligence is liable to be struck out. In summary, their contention is that the relationship between them and the shareholders, in connexion with the report and the advices given, was insufficient to give rise to a duty of care, and they referred to Caparo Industries PLC v Dickman [1990] 2 AC 605, 627. It was submitted that a reference to the retainer to report and the appointment to advise did not disclose anything which would attract a duty beyond that owed to the company. It may be observed that, in part, this submission reflects that earlier made with respect to the loss suffered. In the respondent's submission, it could not be said to be sufficient that the accountants and the receivers simply knew of the existence of the shareholders. 18 In Caparo v Dickman, 627, in submissions, Lord Bridge pointed out the scope of duty owed requires consideration of the damage suffered. In that case the question was whether a company's creditors could be liable to members of the public who had acted upon accounts as certified by them. It was held that there was not a sufficiently close relationship between them to give rise to such a duty. So far as concerned existing shareholders who purchased additional shares, they could not be placed in a category different from the public in connexion with any such loss. Although Lord Bridge (627) dealt with the argument on an assumption that the relationship between auditor and shareholder might be of sufficient proximity to give rise to a duty of care, nothing can be drawn from that approach. 19 It is established that in cases of pure economic loss a special relationship, that of proximity, between the parties needs to be established in addition to foreseeability of harm: Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241. In relation to the giving of information or advice, that will usually require there to have been an assumption of responsibility. 20 The duty here is alleged to have arisen "by reason of the retainer and the appointment and by reason of the matters referred to in paragraphs 61 to 68". Those paragraphs refer to all the facts which, presumably, should have come to the knowledge of these respondents. They include knowledge of the invalidity of the securities given or, alternatively, of the limited amount which they secured; of the possible course of action open to Management to levy its members; of the applicants' rights arising from the release signed by the bank on the occasion of their purchase and that they would, at a time shortly after the appointment of the receivers, be in a position to control the board of Management. No reference is made to any expectation on the part of the applicants that these respondents would advise them, nor how that could be said to arise, nor is it explained how the respondents took on that responsibility, save for the reference in paragraph 68(f) that the respondents knew "or ought to have known" that the applicants would rely upon them for their advice and assistance in avoiding the loss of their time share interests. The plea is insufficient. 21 It was also submitted for these respondents that the circumstances of this case were special and such as to take it out of the ordinary case of advisors with respect to company affairs. Particular reliance was placed upon paragraph 70(c) of the Statement of Claim. The paragraph is generally concerned with how the duties previously identified have been breached. Subparagraph (c) then provides that they were breached because they: "(c) between the date of their appointment and the date of winding up advised the Club that it should organise for a creditor to seek the winding up of Management and appoint the receivers as liquidators." 22 This particular does not appear to refer to any specified duty, although one may infer that it might be said that the receivers should have had the shareholders in mind when they so advised. It may also be indicative of some lack of good faith or collusion, having adverse effects upon the shareholders' economic interests, but such a tort is not spelled out. 23 In my view no cause of action in negligence is presently made out on the pleading. Some of paragraphs 61-70 are relied upon for the later plea in paragraphs 71-78 involving representations said to have been made by these respondents. Whilst those lastmentioned paragraphs are referred to in the Notice of Motions, their striking out was not pursued in submissions on this ground. In contrast they involve allegations that the accountants, in making positive representations as to courses of action available to the applicants, it was intended that they be relied upon. 24 Paragraph 70 will be struck out as will the reference to it in paragraph 78. The applicants are able to apply for further leave to amend with respect to a cause of action in negligence and with respect to any claim arising from the facts alleged in paragraph 70(c).

Club's Applications 25 Submissions with respect to the actions brought against Club, its directors and the directors of Management are made on behalf of the first respondent. Whether representation ought to be provided by Club to those directors who are also members of the Committee of Inspection appointed in its winding up, is the subject of an application brought under s 551(1) Corporations Law. It has been agreed that it be adjourned. The question whether this Court has jurisdiction to entertain it has not been gone into. 26 Club joins in the submission, made for the accountants and the receivers, that allegations of breach of duty are properly to be brought by the company. The relevant loss identified in its submissions was the opportunity for Management itself to secure the release of its lease from the mortgage to the bank. It accepts, however, that the allegations of misleading conduct on the part of Club, as promoter of the scheme and issuer of the prospectuses, may be brought by the applicants. Nevertheless, it submits there is sufficient commonality of issues between that case and that for breach of duty that they should be heard together. In that regard it contends the Supreme Court is the obvious Court to hear all the claims together. The result of the decision in Re Wakim (1999) 163 ALR 270 is that this Court may still transfer a pending proceeding to the Supreme Court. The proceedings in that Court could not be transferred, or brought in this Court, since there is no federal matter in them as presently constituted. 27 There is no doubt that it would be preferable to have the same Court hear and determine all matters arising out of the dealings with the securities. The proceedings in the Supreme Court are brought only against the receivers, whereas the applicants have joined the accountants, Club and the two sets of directors. Insofar as those claims involve wrongs done to and losses sustained by the company they can only be brought by it. The applicants would be left to the remedies available to them where a liquidator is reluctant to make further claims (see the discussion in Christianos v Aloridge Pty Ltd (1995) 59 FCR 273, 281-3) if they be so advised. 28 That leaves for the applicants to pursue in these proceedings their additional claim for loss of the occupancy rights. Liability in that connexion arises out of the same conduct identified as Management's proceedings. They are also able to pursue the claim for damages for misleading and deceptive conduct against Club; and the claim against the Receivers based upon their representations; whether it is necessary to pursue those claims might depend upon the success or otherwise of the action against the Receivers in the Supreme Court. This might suggest these proceedings should be deferred to that outcome. 29 The matter which most heavily weighs against an order for transfer to the Supreme Court is the difference in the provisions relating to representative proceedings. Even the recent Uniform Civil Procedure Rules do not provide for the same procedures and remedies as are contained in the Federal Court of Australia Act 1974 and the proceedings are here constituted differently. Whilst Wakim's case makes plain that State courts might be given the jurisdiction to grant the same remedies by a federal Act, it is not suggested that this has occurred. That was the position when Gummow J considered Poignand v NZI Securities Australia Ltd (1992) 109 ALR 213, 219-220. 30 The representative proceedings contemplated by the UCP Rules are themselves much more limited that those referred to in s 33C of the Federal Court Act. The UCP rules require that the persons to be represented have the same interest in the subject matter of the proceeding and could have been parties to it (r 75). These proceedings would have to be reconstituted in the Supreme Court and there are some 1400 group members. This Court is given power to manage litigation of this type, for example by giving directions as to the determination of issues remaining after the determination of the representative proceeding and the creation of sub-groups (s 33Q), as might here occur; and is given powers to make separate determinations and declarations or awards, which might facilitate the determination of all claims (s 33Z). I am not persuaded that the Supreme Court is able to exercise such powers under its powers to give directions, not the least because proceedings of this type are not provided for elsewhere in its Rules. Conclusion 31 The claims against the respondents for breach of duty, insofar as they concern the loss of the value of the shares, should not proceed further at this point. The claims for misleading and deceptive conduct, which are also alleged to give rise to that loss, are for wrongs committed against the applicants, but they too should await the outcome of the Supreme Court proceedings. There remain the claims for loss and damage personal to the applicants and whilst it would ordinarily be preferable to have them determined with the company's action it is not, in the context of these proceedings, appropriate to do so. Since these proceedings are managed and supervised, it is not necessary for me to make an order staying parts of the proceedings. I will nevertheless make the orders sought by the respondents raising the question of the applicant's standing. The claim in negligence will be struck out as will the claim in paragraph 78(d) of the Amended Statement of Claim. 32 In order to permit the parties time to consider whether any further steps should be taken in these proceedings and the question of costs, I will adjourn this matter for further hearing on that question, and for directions. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kiefel.

Associate: Dated: 16 July 1999 Counsel for the Applicant: Mr A Morris QC

Solicitor for the Applicant: Russell & Co

Counsel for the First Respondent: Mr G Brandis

Solicitor for the First Respondent: Phillips Fox

Counsel for the Second and Fifth Respondents: Mr P Morrison QC with him Mr T North

Solicitor for the Second and Fifth Respondents: Allen Allen & Hemsley

Date of Hearing: 9 July 1999

Date of Judgment: 16 July 1999