Santa Trade Concerns Pty Limited v Robinson

WIGNEY J: 1 Kagara Limited was a listed public company which carried on business as a mining company until administrators were appointed in 2012. Its directors in the years prior to it being placed in administration included Mr Kim Robinson, Mr Geoffrey Day, Mr Joseph Treacy, Mr Flavio Garofalo, Mr Mark Ashley, Mr Ross Hutton, Mr John Linley and Mr Mark McConnell. In late 2011 and in April 2012, shortly before the appointment of the administrators to Kagara, Santa Trade Concerns Pty Ltd purchased shares in Kagara. Those shares are now effectively worthless. 2 Santa Trade has commenced representative proceedings against the directors of Kagara. It alleges that the directors contravened or were involved in contraventions of various provisions of the Corporations Act 2001 (Cth). Those contraventions relate to the making of alleged misleading or deceptive statements and the failure to disclose material information to the market. Santa Trade claims that the losses suffered by it and other persons who acquired Kagara shares between 29 September 2010 and 26 April 2012 were caused by those contraventions. 3 The representative proceedings are at an early stage. There have been some issues concerning the service of the originating process and statement of claim on the respondent directors. The application presently before the Court is an application for leave to serve the originating documents on Mr Ashley, who is the fifth named respondent, in the United States of America, pursuant to the Hague Convention. Separately, there is an application to amend the statement of claim to slightly change the description of the group members. 4 It is appropriate to deal with the application for leave to serve Mr Ashley in the United States first. Rule 10.43(2) of the Federal Court Rules 2011 (Cth) provides that: A party may apply to the Court for leave to serve an originating application on a person in a foreign country in accordance with a convention, the Hague Convention or the law of the foreign country. 5 Rule 10.43(3) provides that an application for leave under r 10.43(2) must be accompanied by an affidavit which states the name of the country where the person to be served is or is likely to be, the proposed method of service, and that the proposed method of service is permitted, relevantly, by the Hague Convention. Santa Trade's application for leave to serve Mr Ashley in the United States was accompanied by two affidavits sworn by its lawyer, Ms Valerie Faith Blacker, on 24 October 2016 and 28 October 2016 respectively. Those affidavits comply with r 10.43(3). They indicate that the country where Mr Ashley is to be served is the United States, that the proposed method of service is personal service by a process server authorised by the relevant authority in the United States, and that the proposed method of service is permitted by the Hague Convention. 6 Rule 10.43(4) provides that for leave to be granted, the court must be satisfied that it has jurisdiction in the proceeding, that the proceeding is of a kind mentioned in r 10.42 and that the party has a prima facie case for all or any of the relief claimed in the proceeding. 7 As for the first of those requirements, the Court plainly has jurisdiction in the proceeding because it has jurisdiction to hear claims relating to contraventions of the Corporations Act: see s 1337B of the Corporations Act. 8 As for the second requirement in r 10.43(4), the proceeding is of a kind mentioned in r 10.42. Amongst other things, it is a proceeding based on a cause of action arising in Australia (Item 1); a proceeding based on a contravention of an Act that is committed in Australia (Item 12); a proceeding based on a contravention of an Act, wherever occurring, seeking relief in relation to damage suffered wholly or partly in Australia (Item 13); and a proceeding seeking any relief or remedy under an Act, including the Judiciary Act 1903 (Cth) (Item 15). 9 In relation to the third requirement, in determining whether a prima facie case exists for the purposes of r 10.43, the court need not exercise the kind of scrutiny that it would exercise in deciding, for example, a no case to answer submission at the conclusion of an applicant's case at trial. Rather, it is sufficient that the material before the court is capable of supporting inferences which, if translated into findings of fact, would support the relief claimed: Perdaman Chemicals & Fertilisers v Griffin Coal Mining Co Pty Ltd [2011] FCA 1425 at [14]. The requirement of a prima facie case for the purposes of r 10.43 may be satisfied if the evidence shows that a controversy exists that warrants the use of the court's processes and justifies the involvement of a foreign respondent: Suzlon Energy v Bangad (No 3) [2012] FCA 123 at [35]. 10 Where there are multiple causes of action pleaded, it is generally sufficient for the purposes of r 10.43 to satisfy the court that there is a prima facie case in respect of at least one of those causes of action: Australian Competition and Consumer Commission v April International Marketing Services Pty Ltd (No 6) [2010] FCA 704; (2010) 270 ALR 504 at 526 [81]. 11 Having regard to those principles, Santa Trade has satisfied the requirement of a prima facie case for the purposes of r 10.43. It has adduced sufficient evidence to demonstrate that a controversy exists that warrants the use of the Court's processes and justifies the involvement of a foreign respondent. 12 It is unnecessary and perhaps undesirable in the circumstances to discuss the evidence in any great detail. At this stage, the evidence relevantly comprises the various documents detailed in the statement of claim which relate to the alleged misleading and deceptive statements and the alleged failure to disclose. 13 It is open to infer the following facts from the documents that have been tendered. 14 As already indicated, Kagara carried on business as a mining company which owned and had interests in mining tenements and associated property, plant and equipment in North Queensland and Western Australia. The performance of and future outlook for Kagara's business depended on, amongst other things, access to proven and probable mineral reserves. The fifth named respondent, Mr Ashley, was a non-executive director of Kagara from 1 November 1999 until 19 August 2011. During that period, Mr Ashley was also the Chairman of the Audit Committee of Kagara. 15 In September 2010, Kagara issued its 2010 Annual Report which included its financial statements for the year ended 30 June 2010. That report included a declaration by the directors, including Mr Ashley, that the financial statements were prepared in accordance with the Corporations Act, gave a true and fair view of Kagara's financial position and complied with applicable accounting standards. As would be expected, the financial statements included details concerning the value of Kagara's mining properties and other assets, as well as Kagara's expenses and net profit. 16 The crux of Santa Trade's case is that the financial statements were not prepared in accordance with the Australian Accounting Standards, were not prepared in accordance with the Corporations Act, and did not give a true and fair view of Kagara's financial position for the 2010 financial year. In particular, Santa Trade contends that Kagara's net assets were materially overstated, its expenses were understated and its net profits were overstated. Each of those allegations turns essentially on the allegation that Kagara's assets and expenses as recorded in the financial statements were affected by a particular policy that Kagara had adopted in relation to the amortisation of its mining assets. That policy was, in simple terms, to estimate or assume that all of Kagara's prospective mineral resources would convert to proven or probable mineral reserves at the rate of 100 per cent. The assumptions behind that so-called 100 per cent conversion policy are alleged to have been unreliable and improbable, that the policy accordingly should not have been adopted, and that it caused or resulted in an overstatement of Kagara's net assets and profits, or at the very least created a risk of such an overstatement. 17 There is at least prima facie support for Santa Trade's allegations concerning the unreliability or improbability of the 100 per cent conversion policy and its effects on Kagara's stated assets, expenses and profit position. A report prepared by Kagara's administrators in 2013 includes the following passages concerning Kagara's financial statements: 150. The statements at Schedule 3 evidence: … 150.7 assert impairment (write down) of $57.4M in FY09 and of $48.5M in FY11. According to the ASX announcement by Kagara Limited, the latter write down was a result of a more conservative view of legacy resources and reserves at Mr Garnet and Mungana by management. based on the Group's [the Kagara companies'] records, the amount of write down was established based on a change to the accounting estimate of its reserve/resource base used in the unit of production and amortisation of mine properties. At FY11, Kagara Limited changed the rate at which resources are estimated to convert to reserves (decrease from 100% to 70% on all resources) in deriving at the reserve/resource base. It appeared that historically the Group has been very optimistic about the ability and probability of converting its mineral resource to reserve. 150.8 While it is an acceptable industry practice to include in the reserve/resource base portion of indicated and measured resources which management is confident will be converted into reserves, it is difficult to justify including inferred mineral resources in the depreciation base as the tonnage, grade and mineral content of the inferred resources are usually estimated with a lower level of confidence. Although the conversion rate changed to 70% in FY11, applying a lower rate of conversion or even no conversion for inferred resource may have been more appropriate. If a more conservative rate was adopted, the asset impairment and loss for FY11 and FY12 (YTD [Year to Date] 30 April 12) would have been higher. Further analysis and investigation is required to determine if an inappropriate accounting treatment was adopted. 18 Further support, at least to the prima facie standard, may also be found in various passages of the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves - the so-called 'JORC' Code. 19 As a listed public company, Kagara was obliged to prepare its financial statements in accordance with the JORC Code. It is unnecessary for present purposes to identify the relevant passages of the Code. Suffice it to say that the Code contains detailed provisions concerning the appropriate way to report mineral resources and oil reserves. Those provisions would suggest that it would be highly unlikely that all prospective mineral resources would convert to proven oil reserves. 20 Also critical to Santa Trade's case is the allegation that the 100 per cent conversion policy was not disclosed in Kagara's financial statements, its annual report, or in any other material that Kagara disclosed to the ASX or the market generally. The non-disclosure of the policy may be inferred, again at least to the prima facie standard, both from Kagara's annual report and from the report prepared by Kagara's administrators. 21 Santa Trade alleged that the non-disclosure of the 100 per cent conversion policy was not only relevant to whether the financial statements provided a true and fair view of Kagara's financial position and the accuracy of the other statements made in the annual report. It also revealed that Kagara had failed to comply with its disclosure obligations under the ASX Listing Rules and the Corporations Act. As previously noted, Mr Ashley was not only a director of Kagara throughout the 2010 financial year and at the time of the issue of Kagara's 2010 annual report. He was also chairman of the audit committee. There was also evidence that he had extensive experience in the natural resources industry and was a management accountant. It is at least open to infer at the prima facie stage that Mr Ashley either knew, or ought reasonably to have known, that Kagara had adopted the 100 per cent conversion policy, the effect that the adoption of that policy had on Kagara's financial statements, and that the policy was based on unrealistic or improbable assumptions that were inconsistent with the JORC Code. It is also open to infer that Mr Ashley was aware that Kagara's adoption of the 100 percent conversion policy had not been disclosed to the ASX or the market generally. 22 The evidence tendered by Santa Trade in relation to Mr Ashley's position, Kagara's annual report and financial statements, the apparent adoption of the 100 per cent conversion policy, and the non-disclosure of that policy, is sufficient to establish a prima facie case against Mr Ashley in relation to the following contraventions of provisions of the Corporations Act. 23 First, a contravention of s 1041E, which concerns the making of false or misleading statements that are likely to induce persons to acquire financial products. The false and misleading statements were those contained in Kagara's published financial statements and annual report, including statements concerning Kagara's assets, liabilities and profit. The relevant financial products that persons were likely to have been inducted to acquire as a result of the alleged false or misleading statements were shares in Kagara 24 Second, a contravention of s 1041H of the Corporations Act and/or s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth), both of which concern engaging in conduct that was misleading or deceptive in relation to financial products or services. The misleading and deceptive conduct related to the making of the representations referred to in the context of the alleged contravention of s 1041E. 25 Third, a contravention of s 674(2A) of the Corporations Act relating to Mr Ashley's involvement in the contravention of Kagara's continuing disclosure obligations. The relevant non-disclosure concerned the 100 per cent conversion policy and the risk that Kagara's net assets and net profits were materially overstated as a result of the adoption of that policy. 26 It is also open to infer from the evidence that Santa Trade, or at least some group members, sustained losses as a result of Mr Ashley's alleged contraventions. There was evidence that Santa Trade acquired shares in Kagara in November 2011 and April 2012. Those acquisitions were somewhat removed in time from the alleged contraventions. Nevertheless, it is open to infer, at least to the prima facie standard for the purpose of r 10.43, that in acquiring the shares Santa Trade relied on Kagara's financial statements and annual report and the statements contained therein. Equally, it is open to infer that the price of the shares acquired by Santa Trade and other group members, particularly those shares that were acquired by group members in the months following the issue of the 2010 annual report, was influenced by the statements in that report and the non-disclosure of the 100 per cent conversion policy. 27 It must be emphasised that this is no more than a highly simplified summary of some aspects of Santa Trade's case and the evidence led by Santa Trade in support of its application for leave to serve Mr Ashley in the United States. Needless to say, at this stage the evidence has not been challenged tested in any way. It may ultimately be the case that the inferences that have been referred to will not be converted into findings of fact. At this stage, however, the evidence tendered on this application is sufficient to satisfy the Court that Santa Trade has a prima facie case in respect of at least some of the relief it claims in the proceedings for the purposes of r 10.43(4)(c) of the Rules. It follows that Santa Trade has satisfied all of the relevant requirements for the grant of leave to serve Mr Ashley in the United States. Orders will be made accordingly.

The amendment application 28 The statement of claim in its present form describes the group members in the representative proceeding in the following terms: This proceeding is commenced as a Representative Proceeding under Part IVA of the Federal Court of Australia Act 1976 (Cth) by the applicant on its own behalf and on behalf of other persons who or which: (a) at some time during the period between 29 September 2010 and 26 April 2012 (Relevant Period) acquired an interest in ordinary shares (Kagara Shares) in Kagara Ltd (in liquidation) (ACN 008 988 583) (Kagara); (b) suffered loss or damage by, or which resulted from, the conduct of the Respondents pleaded in this Statement of Claim; and (c) have as at 29 September 2016 entered into a litigation funding and management agreement with IMF Bentham Limited ACN 067 298 088. (emphasis in original) 29 The amendment proposed by Santa Trade is to change the date in paragraph 2(c) of the group member description from 29 September 2016 to 21 October 2016. The reason for the proposed amendment, and the effect that it will have, is explained in an affidavit sworn by one of Santa Trade's lawyers. In short, the effect of the amendment would be that two further entities that acquired Kagara shares during the relevant period would become members of the closed class. Those entities did not sign funding agreements with IMF Bentham on or before 29 September 2016, but did so by 21 October 2016. The reason those entities did not sign agreements by 29 September 2016, and the reason for the amendment was, in simple terms, administrative error or oversight. 30 The pleadings have not yet closed. Ordinarily, a party may amend a pleading once, at any time before pleadings close, without leave of the Court: see r 16.51. Given that the proposed amendment relates to the description of the group members, it is necessary to also have regard to s 33K of the Federal Court of Australia Act 1976 (Cth). Subsections 33K(1) and (4) provide as follows: 33K Causes of action accruing after commencement of representative proceeding (1) The Court may at any stage of a representative proceeding, on application made by the representative party, give leave to amend the application commencing the representative proceeding so as to alter the description of the group. … (4) Where the Court gives leave under subsection (1), it may also make any other orders it thinks just, including an order relating to the giving of notice to persons who, as a result of the amendment, will be included in the group and the date before which such persons may opt out of the proceeding. 31 Subsections 33K (2) and (3) are not presently relevant. 32 In City of Swan v McGraw-Hill Financial Inc (2014) 223 FCR 328, Rares J considered whether leave to amend a statement of claim in representative proceedings should be granted in circumstances where the effect of the amendment was to include persons who were not included in the definition of group members at the time the proceedings were commenced. Rares J concluded that ss 33K(1) and (4) gave the Court power to make such an amendment. His Honour rejected the submission that such an amendment was offensive to the policy of the legislation. His Honour said (at 332 [11] and 333 [13]): … First, the Court is given a broad discretion in s 33K(1) to grant leave to amend the originating application, at any stage of a representative proceeding, "so as to alter the description of the group". Secondly, s 33K(4) recognises that, when that is done, the new description can expand the membership of the group for the section says, in terms, that "persons who, as a result of the amendment, will be included in the group", can be the subject of orders relating to their being given notice of their right to opt out of the group. That could only occur because s 33K permitted the additional persons to whom such a notice could be given to have been included in the group, not originally, but only as a consequence of the amendment. … In my opinion, the only sensible operation that can be given to s 33K(1) and (4) is that those provisions permit an amendment such as that sought here to be made, provided that the amendment operates forthwith and, by doing so, closes the newly described class or identifies an already closed class in the same way as occurs when proceedings under Pt IVA initially are commenced. (emphasis in original) 33 The proposed amendment to the group member description may, if made, give rise to a potential issue concerning the relevant limitation period. That issue may depend on the date on which the amendment is taken to have effect. The issue may arise because one of the entities who will become a group member if the pleading is amended purchased a tranche of shares on 15 October 2010. The proceedings were commenced on 29 September 2016, just less than six years before that acquisition. If the proposed amendment takes effect on the date that leave is granted, or the amended pleading is filed, the amendment would take effect more than six years after that acquisition. 34 It may be in those circumstances that any claim by that entity in respect of the acquisition made on 15 October 2010 would be statute barred. It should also be noted, in that context, that other acquisitions of Kagara shares by the relevant entity were made on 10 November 2010 and the days that followed. Santa Trade wants to amend the pleadings before 10 November 2016 so as to avoid any further potential limitation issue in respect of those acquisitions. 35 One possible way that Santa Trade may seek to deal with the limitation issue is to apply for an order that the amendment be taken to have effect on the date the proceedings were commenced. An amendment of a pleading that is made under r 16.51 takes effect on the date the amendment is made: see r 16.54. The Court may, however, make any order that the Court considers appropriate in the interests of justice: see r 1.32. The Court may also make an order that is inconsistent with the Rules, in which event that order would prevail: see r 1.35. Santa Trade effectively foreshadowed that it may seek to invoke these rules and apply for an order that the amendment take effect from the date the proceedings were commenced. It would, however, be more appropriate for such an application to be made at a later stage when all respondents have been served and submissions can be made by all parties in respect of that issue. In the meantime, Santa Trade proposed an order to the effect that all questions relating to the limitation issue and the date from which the amendments take effect be reserved. 36 As has already been adverted to, not all of the respondents have been served. Only the fourth and sixth respondents appeared at the hearing of Santa Trade's application to amend. Counsel for both those respondents opposed the amendment. It was submitted, in effect, that the amendment should not be permitted until the full scope and effect of the amendment is clear. That presumably included any limitation issue that may arise as a result of the amendment. The fourth and sixth respondents also sought further time to consider their respective positions in relation to the amendment. 37 The submissions of the fourth and sixth respondents in opposition to the amendment application are rejected. The effect of the amendment is tolerably clear. The effect is to expand the definition of group member so that two additional entities will become group members. The only issue that remains unclear is whether one aspect of one of the new group members' claims may be statute barred. That may ultimately depend on the date on which the amendment is taken to have effect. The parties' position in relation to that issue is appropriately preserved by the order proposed by Santa Trade. There is no other basis to refuse the amendment. Leave should be granted sooner rather than later to avoid any further potential limitation issues that may arise. 38 Leave to amend the originating application and statement of claim should be granted. The other orders sought by Santa Trade should also be made. The costs of the application should be reserved. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Wigney.

SCHEDULE OF PARTIES NSD 1684 of 2016 Respondents Fourth Respondent: FLAVIO LINO GAROFALO Fifth Respondent: MARK JOHN ASHLEY Sixth Respondent: ROSS CLIVE HUTTON Seventh Respondent: JOHN GORDON LINLEY Eighth Respondent: MARK STEVEN MCCONNELL