Mr Hayes, QC and Mr Scerri

Solicitors for Applicants: Mallesons Stephen Jaques

Counsel for 1st named Mr Horton, QC with Mr Ryan

Respondents:

Solicitors for 1st named Messrs Phillips Fox

Respondents:

Counsel for 2nd named Mr Ellicot, QC with Mr Rares

Respondents:

Solicitors for 2nd named Allen Allen & Hemsley

Respondents:

On the Motion by Peat Marwick Mitchell & Co. notice of which is dated 28 July 1989 the Court orders that:-

The respondents Peat Marwick Mitchell & Co. have leave to file and serve an amended defence incorporating defences based upon s.128 of the Securities Industry Code and s.229 of the Companies Code as well as on the common law and equitable principles, such defences to be filed and served within 14 days of the date of this order.

Any request for further particulars of the amended defence to be made within 14 days after receipt of the amended defence and the further particulars to be delivered within 14 days of the request being made.

Any pleading to the amended defence to be filed and served within 14 days of the further particulars being served.

The respondents Peat Marwick Mitchell & Co. pay the applicants costs of the motion and any costs thrown away by reason of the leave being granted.

On the Motion by Sentry Corporation notice of which is dated 22 August 1989 the Court orders that:-

The respondents Sentry Corporation have leave to file and serve an amended defence incorporating defences based upon s.128 of the Securities Industry Code and s.229 of the Companies Code as well as on the common law and equitable principles, such defences to be filed and served within 14 days of the date of this order.

Any request for further particulars of the amended defence to be made within 14 days after receipt of the amended defence and the further particulars to be delivered within 14 days of the request being made.

Any pleading to the amended defence to be filed and served within 14 days of the further particulars being served.

The respondents Sentry Corporation pay the applicants costs of the motion and any costs thrown away by reason of the leave being granted.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

By motion notice of which is dated 28 July 1989, the respondent Peat Marwick Mitchell & Co. ("PMM") is seeking leave to amend its defence. By motion notice of which is dated 22 August 1989, the respondent, The Sentry Corporation ("Sentry"), is seeking leave to amend its defence. The two motions were heard concurrently on 28 August 1989.

2. In substance, PMM is seeking to raise a defence based upon breaches by officers of the applicants and of Sentry of the provisions of the relevant Companies Code and in particular the duties and liabilities imposed upon officers of corporations both by common law and equity and by s.229 of the Codes. On similar facts, Sentry is seeking to raise a defence based upon s.128 of the Securities Industries Code, the insider trading provisions as well as on the relevant Companies Codes. Counsel for PMM and for Sentry, after hearing the submissions of the other, each sought leave to include in their proposed amended defence, the defence based upon each of the Codes.

3. On the material before the Court and having regard to the amended statement of claim recently filed and served on behalf of the applicants; see reasons for judgment given by me on 30 March 1989; the subsequent orders made by Gummow J. and his reasons for judgment given on 6 July 1989, the existence of documents recently ascertained by PMM and the need to raise all issues in the pleadings, this is a case where PMM and Sentry normally should have leave to amend their defences; see O.13 of the Federal Court Rules and in particular, O.13 r.2.

4. Order 11 r.10 provides in substance that a respondent should plead any matter of fact or point of law including any fact showing illegality, that he alleges makes a claim of the opposite party not maintainable, if not pleaded specifically might take the other party by surprise, orraises issues of fact not arising out of the preceeding pleadings. Each of the proposed amended defences comes within each of these rules. In normal circumstances, leave to amend should be granted since the applicants can be compensated by costs thrown away by reason of leave being granted.

5. Normally in motions of this kind, it is not necessary to establish by affidavit facts upon which the motion is based. For the purpose of considering leave, the allegations of fact contained in the proposed defence are assumed to be established and the motion is to be determined accordingly. In the present case, documents are before the Court which, it is alleged, support the facts on which the proposed defences are based. Submissions were made on the law with respect to the effect of those facts. This course should not detract from the true nature of the motions before the Court. The Court should not be enticed into conducting a mini trial on separate issues under the guise of hearing and determining a motion for leave to amend a defence.

6. Order 11 r.16 empowers the Court to strike out any part of a defence which discloses no defence, has a tendency to cause prejudice, embarrassment or delay in the proceeding, or is otherwise an abuse of the process of the Court. Counsel for the applicants contended, in substance, that the proposed amendments disclose no defence, are an embarrassment and are an abuse of the process of the Court. It was suggested also that the proposed amendments were not sought bona fide for the purpose of raising a defence. Counsel for PMM and for Sentry each assert that the defences sought to be raised are bona fide defences and that each of them, as responsible counsel as well as being officers of the Court, have a duty to their clients to raise them on behalf of their respective clients. Further, there is material before the Court which suggests that the factual basis for the defences can be established. The Court is satisfied that, in seeking leave to amend the defences, counsel for the respondents are acting in good faith and in accordance with the nature of the duty imposed on counsel. It is apparent that in this case the parties are engaged in a bitter dispute in which the standard of professional activity by PMM is being questioned and in which every possible issue is sought to be raised by which the legal advisers of the parties consider will assist their clients case. This, by itself, however, is not evidence of mala fides.

7. In the reasons for judgment given on 30 March 1989 on a motion by the applicants for leave to amend the statement of claim, I expressed the opinion that it is undesirable, in interlocutory proceedings, to determine finally, questions of whether a pleading is so untenable, that leave to amend should not be granted to so plead because the amendment disclosed no reasonable cause of action. It is recognised that in some cases, it is necessary to consider the matter in detail; see for example General Steel Industries Inc. v. Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125. This is so especially where the facts are not in dispute and the motion disposes of the whole of the action. In the present case, neither of those factors are present. The facts upon which the proposed defences are based are in dispute and will be raised at the trial in any event. A refusal to grant leave to amend could result in leave being sought at the trial to argue the same issue now sought to be raised by the amended defences. A determination of the issues at this stage will not bring the proceedings to an end.

8. Great care must be exercised in applying principles relevant to striking out a statement of claim to a submission that a defence discloses no defence. In the present case, difficult questions of fact and of law arise. It is anticipated that the hearing will take many months. This by itself supports the view that the respondents should be allowed to raise the proposed defences. A respondent should not be deprived, on an interlocutory proceeding, from relying upon a defence except in the clearest of cases. Of necessity, the interlocutory proceedings can be determined only on the basis of an imperfect understanding of the facts and the law. The Court must be careful not to prevent unjustly a respondent raising a defence which, on further examination, constitutes a defence.

9. Many of the contentions made on behalf of the applicants were based on factual material contained in affidavits filed on behalf of the applicants. This, by itself, seems to suggest that the leave should be given since the perceived need to produce this material supports the view that disputed questions of fact will be raised by the proposed defences and that those questions should be raised at the trial.

10. During submissions, reference was made to many authorities to support different principles of law. On any view, I am of opinion that difficult questions of law are raised by the proposed amendments involving the proper construction and application of the statutory provisions referred to already as well as the effect of breaches of those provisions, the effect of illegality and the application of the common law and equitable duties imposed upon officers of corporations. This is so particuarly with respect to s.128 of the Securities Industry Code which is a difficult section to construe, which has not been the subject of many considered opinions by Courts and the boundaries of which remain unexplored.

11. The essence of the facts upon which the proposed amendments are based is a report dated 17 April 1986 given by PMM to Mr O'Kane the managing director of Sentry Holdings Ltd. which conducted the business of the Sentry group of companies in Australia. The report suggested that the value of the companies was of the order of $41M to $43M. Mr O'Kane disclosed this report to officers of the applicants with a suggestion that since he had a right of first refusal by the companies, the applicants or some of them should join with him in the financial satisfaction of each. The position is summarised in an office memo of National Mutual dated 28 April 1986 from HO P. Hanning-Lee, Div/Dept. Group Finance to HO E. Mayer, Div/Dept. Managing Director with copies to J. Kent and G.M. Hoskins. The subject of the memo is stated to be "Aide Memoire on Disco" and paragraphs 1 to 4 are set out:-

"1. Mr W. O'Kane, the managing director of Sentry

Holdings Ltd, proposes we buy the Sentry group

of companies in Australia.

2. The parent company, Sentry insurance a mutual

company based in Wisconsin, USA, is planning to

sell their Australian operation to the highest

bidder. However, Mr O'Kane says he had an

agreement, with Mr Joanis, the deceased

ex-chairman of Sentry insurance, for the right

of first refusal in the event of a sale.

3. Mr O'Kane proposes that he approaches Sentry

insurance with a bid, with us acting as his

backers. If he is successful we will end up

controlling the company. Mr O'Kane is hoping

to end up with perhaps 5% of the company,

although we may end up with some other

arrangement to secure his services.

4. Mr O'Kane thinks he can argue a price of around

$50m (we understand), using his key role in the

Australian operations as a lever, and a report

by Peat Marwicks, which values it at $43M. We

think the company is worth considerably more

than this in an open bid, perhaps as much as

$80-90M."

12. In addition, by its proposed amended defence, Sentry alleges facts relating to conduct of officers of the applicants and alleges these facts and inferences arising therefrom support the points of law raised.

13. On the motions for leave to amend the defences, it is impossible to consider all the ramifications resulting from allegations based on these facts and on related facts and on inferences to be drawn from them. The seller of the shares attempted to attract bids for the sale of its Australian subsidiaries. Officers of the applicants caused a bid to be made. Negotiations took place and the sale occurred. Some of the ramifications are discussed in the reasons for judgment given by me on 17 August 1989. Many other facts could be relevant including what knowledge the seller had of the conduct of O'Kane, the true nature of the activities of officers of the applicants in the proposal referred to as well as with respect to many other areas of investigation including the areas covered in the affidavits filed on behalf of the applicants.

14. The Court does not find it necessary to refer to the provisions contained in s.229 of the Companies Code and in s.128 of the Securities Industry Code. Nor does the Court find it necessary to refer to the many authorities referred to in submissions. The Court forms no opinion as to the proper construction of these sections and their application to the facts of this case. Such a course is premature. It is sufficient to say that the proposed defences raise serious issues of fact and law which, in reality, could constitute defences. In those circumstances, leave should be granted.

15. Accordingly, the Court makes similar orders on each motion namely that the respondents, respectively, have leave to file and serve an amended defence incorporating defences based upon s.128 of the Securities Industry Code and s.229 of the Companies Code as well as on the common law and equitable principles. The amended defences to be filed and served within 14 days.

16. Any request for further particulars of the amended defences to be made within 14 days after receipt of the amended defences and the further particulars to be delivered within 14 days of the request being made. Any pleading to the amended defences be filed and served within 14 days of the further particulars being served. The respondents, respectively, to pay the applicants costs of the motion and any costs thrown away by reason of the leave being granted.