Patrick v Capital Finance Corporation

REASONS FOR JUDGMENT 1 This proceeding is brought as a representative proceeding under Pt IVA of the Federal Court of Australia Act 1976 (Cth) (the Act). At the first directions hearing on 16 July 2001 counsel for the various respondents indicated that they wished to contend that the proceeding should not continue under Pt IVA. Since this is a question turning on the nature of the claim as revealed in the application and statement of claim and not on evidence (still less, as the applicant then suggested, an issue which required discovery), I adjourned the summons for directions to 2 August 2001 to enable this submission to be argued. I also gave directions for pleadings. These directions were given by consent on the basis that even if the matter did not continue as a representative proceeding, pleadings would be necessary in respect of Mr Patrick's claim. Pursuant to those directions defences will be due on 16 August 2001. 2 In broad terms the group members are investors in a theatrical production "Crazy For You" (the Production). For the purpose of their investment they borrowed funds from companies in the Capital Group (the first three respondents) who are controlled by Mr Kerrod Park, the fourth respondent. Those loans were as assigned to Overseas-Chinese Banking Corporation Limited (OCBC), the fifth respondent. The "representative" of the investors was Mr Christopher Coote, the sixth respondent. The seventh respondent, Phillip Emanuel Productions Limited, was the producer. The complaint is that, according to the prospectus, the investors' funds were to be applied to the running costs of the Production. Instead, they were used to purchase certain term bonds for providing security for a return to investors. The Australian Taxation Office has disallowed claims for the investments and subsequent interest payments on loans because the monies invested were used to acquire a capital asset (i.e. the security) and were not paid on income account. It is said that but for the representations as to the use of the investment monies the investors would not have made their investment. They seek to have the loans set aside and other related relief. 3 As required by s 33H(1) of the Act the group members were described or identified in par 2 of the application in the following terms: "The group members to whom this proceeding relates are all persons who as at the date of the filing of this Application had purchased or acquired prescribed interests in the Crazy For You Fund ("the Participants"), as defined in the Statement of Claim accompanying this Application, in reliance upon a prospectus issued on or about 22 April 1996 and who, for the purposes of purchasing the prescribed interests, had entered into loan agreements with the First, Second and Fifth Respondents and suffered loss and damage thereby as referred to in paragraph 1 of the Statement of Claim." 4 In par 3 of the application the nature of the claims, essentially as already mentioned were set out. 5 In par 4, as required by s 33H(1)(c), questions of law or fact common to the claims of the group members were set out as follows: "4 The question of law or fact common (to) the claims of the group members are: (a) Whether as a matter of law and fact the prospectus representations referred to in paragraph 37 of the Statement of Claim were misleading; (b) Whether as a matter of law the Sixth and Seventh Respondents breached the terms of the Investment Deed as referred to in paragraph 32 of the State of Claim; (c) Whether as a matter of law the First and/or Second Respondents breached the terms of the Loan Agreements as referred to in paragraphs 34 of the Statement of Claim; (d) Whether as a matter of law and fact the First and/or Second, Third, Fourth, Sixth and Seventh Respondents did; (i) aid, abet, counsel or procedure a contravention of ss. 51A and 52 of the Trade Practices Act (Cth) and/or ss. 10A and 11 of the Fair Trading Act (Vic) and ss. 41 and 42 of the Fair Trading Act (NSW). (ii) induce a contravention of ss. 51A and 52 of the Trade Practices Act (Cth) and/or ss. 10A and 11 of the Fair Trading Act (Vic) and ss. 41 and 42 of the Fair Trading Act (NSW). (iii) were, directly or indirectly, knowingly, concerned in or a party to a contravention of ss. 51A and 52 of the Trade Practices Act (Cth) and/or ss.10A and 11 of the Fair Trading Act (Vic) and ss. 41 and 42 of the Fair Trading Act (NSW). (f) Whether as a matter of law the Sixth Respondent breached his fiduciary duties to the Participants as referred to in paragraph 44 of the Statement of Claim; (g) Whether as a matter of law and fact each of the Loan Agreements referred to in the Statement of Clam (sic) were procured by fraud on the part of the First and/or Second, Third and/or Fourth Respondents; (h) Whether as a matter of law and fact the Participants suffered loss and damage; (i) Whether as a matter of law the Loan Agreements are void as against the First and/or Second and Fifth Respondents; (j) Whether as a matter of law the Loan Agreements are void ab initio pursuant to s. 87 of the Trade Practices Act (Cth) and/or s. 72 of the Fair Trading Act (NSW) or s. 41 of the Fair Trading Act (Vic); (k) Whether as a matter of law, the payments made by the Participants are held on constructive trust by the First and/or Second and Fifth Respondents; (l) Whether as a matter of law the First and/or Second and Fifth Respondents are estopped from relying on the Loan Agreements and demanding monies due under the Loan Agreements." 6 It is enough that there is one common question of fact or law. It was accepted that this particular requirement for Pt IVA jurisdiction was satisfied. 7 The procedural requirements for proceedings under Pt IVA are discussed by Sackville J (with whom Spender and Hill JJ agreed) in Philip Morris (Australia) Ltd v Nixon (2000) 170 ALR 487 at [123] - [137]. In the present case, much of the submissions of counsel for the various respondents were really complaints about alleged deficiencies in the statement of claim. For example, it was said that in relation to the element of reliance it was not pleaded that any of the investors read the prospectus, or that it conveyed any particular meaning or that the investors relied on that meaning. Further it was said that there were inadequate particulars of the allegation of fraud. 8 However, as is made clear in Philip Morris at [129] - [130], proceedings under Pt IVA are subject to the rules of pleading, like any other proceeding. Inadequacies in the pleadings do not necessarily mean that the matter cannot continue as a representative proceeding. In the present case there has been, prior to the date of the hearing on 2 August, no complaint as to the adequacy of the statement of claim as a matter of pleading. As already mentioned, on 16 July the respondents consented to a direction for the filing and serving of defences. I do not suggest that the respondents are estopped from raising any pleading difficulty or defect with the applicant and, if not satisfied, bringing an application to the Court. However, the way in which the matter has proceeded to date confirms my general impression that such pleading deficiencies as there are do not show that this is a matter which falls outside Pt IVA. 9 I was told that there are forty-one investors who have borrowed funds from the Capital Group and made the investment in the Production and thus fall within the description in par 2 of the application. It is of course not necessary for the purposes of s 33H(1) that group members be named or the number of them indicated. This is specifically provided by s 33H(2). There will be some classes of case, like product liability or other tort claims, where obviously it would be impossible to name all group members or give even an approximation of the number of the members in the group. The present case is different in that the number and identity of the group members is known with precision, and, one might infer, known to the Capital Group and OCBC, and probably the other respondents as well. In any event, counsel for the applicant indicated that there would be no difficulty in providing the respondents with a schedule setting out the names of the group members. 10 Another complaint of counsel for the respondents was that the proceeding did not involve a claim against all respondents: s 33C(1)(a), Philip Morris at [126]. It was suggested that there was no claim against OCBC. However this is not correct. It is alleged that OCBC became a constructive trustee of the loans: see statement of claim pars 54 and 60. 11 It was said that there would be prejudice to the respondents because they will be dealing not only with the present applicant Mr Patrick but with forty-one different claims. However that seems to be the whole purpose of representative proceedings. To the extent that respondents have lost the advantage which would have accrued if all investors had brought separate proceeding, with (as counsel for the Capital Group argued) the possibility that some might not be able to afford proceedings, that is a forensic advantage to respondents which Pt IVA seems designed to remove. 12 If it appears that costs of the representative proceeding are likely to exceed the cost of separate proceedings or that otherwise the proceeding has become inefficient or inappropriate, application can be made under s 33N at any time: see Wong v Silkfield (1999) 199 CLR 255 at [26]. However, counsel for all respondents made it clear that they were not at the moment seeking to rely on s 33N. 13 I am satisfied that this is an appropriate case for a representative proceeding under Pt IVA. Indeed it seems typical of the kinds of claim which the legislature probably had in mind (cf King v GIO Australia Holdings Ltd (2000) 174 ALR 715 (Moore J), [2000] FCA 1543 (Full Court)). The complaint of the investors revolves around the one prospectus and what is said to be misuse of funds invested in a way contrary to what the prospectus stated. It seems self-evidently desirable that these issues, which are strongly disputed, be resolved in one case rather than forty-one cases. And as far as OCBC is concerned, it would be obviously undesirable for the loans to be declared void in proceedings to which OCBC was not a party and then for OCBC to proceed against the borrowers in separate proceedings. 14 Accordingly the application that the proceeding not continue as a representative proceeding will be dismissed. The directions hearing will be adjourned to 20 August 2001 at 9.30 am. There will be an order that the respondents pay the applicant's costs of the hearing on 2 August. I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey.