Sienkiewicz (As Trustee for the Sienkiewicz Superannuation Fund) v Salisbury Group Pty Limited

THE COURT DIRECTS THAT: 7. The proceedings be listed for directions at 9.30am on Wednesday 30 October 2013. 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 864 of 2012

BETWEEN: HENRY SIENKIEWICZ (AS TRUSTEE FOR THE SIENKIEWICZ SUPERANNUATION FUND)

ANNE SIENKIEWICZ (AS TRUSTEE FOR THE SIENKIEWICZ SUPERANNUATION FUND)

A.T. MELVILLE PTY LTD (AS TRUSTEE FOR THE AT MELVILLE RETIREMENT FUND)

JUDGE: ROBERTSON J DATE: 30 SEPTEMBER 2013 PLACE: SYDNEY

Introduction 1 By a further amended interlocutory application filed on 13 September 2013 the applicants seek to have joined as respondents certain insurers under insurance policy WP120250b (the Policy) (Insurers): see rule 9.05 of the Federal Court Rules 2011 (Cth). 2 Shortly stated, it was the business of the first respondent to provide financial and investment advice. The second and third respondents were authorised representatives of the first respondent. The second and third respondents gave the applicants financial advice which, the applicants allege, was given in breach of the legal obligations of those respondents and which caused the applicants financial loss. The applicants claim from each of the first, second and third respondents damages; equitable damages or equitable compensation; damages under s 953B(2) of the Corporations Act 2001 (Cth); and damages under s 12GF of the Australian Securities and Investments Act 2001 (Cth). 3 It was common ground, at least for the purposes of the present application, that the first respondent had been placed into administration on 6 May 2013 and, at a creditors meeting on 11 June 2013, was placed into liquidation. The applicants do not have leave to proceed against the first respondent but expect to apply for leave to proceed against it in the future. 4 It was also common ground that neither the second respondent nor the third respondent had any significant assets in their own names to the effect that the applicants would have very limited, if any, prospects of recovering any damages from the second respondent or the third respondent "having regard to their personal financial situation …". 5 On 21 June 2013 the insured under the Policy (Insured) were notified that Underwriters' position in relation to the proceedings was that there was no cover available for the proceedings under the Policy. 6 The major question is whether the applicants have an arguable case against the Insurers to support the joinder of them: see Bupa Australia Pty Ltd v iSelect (No 2) [2012] FCA 1277 at [23]. 7 The relevant rule, r 9.05(1)(b)(iii) of the Federal Court Rules 2011, provides that a party may apply to the Court for an order that a person be joined as a party to the proceeding if the person is a person who should be joined as a party in order to enable determination of a related dispute and, as a result, avoid multiplicity of proceedings. 8 The nature of the case the applicants seek to make against the Insurers appears from the applicants' proposed amended originating application claiming as follows: 6. A declaration that the insurance policy WP120250b (Policy) issued by the fourth to seventh respondents (Insurers) to the first respondent responds to the claim made by the applicants in these proceedings against each of the first, second and third respondents. 7. A declaration that pursuant to the Policy, the Insurers are liable and obliged to indemnify the first, second and third respondents for any judgment in favour of the applicants in these proceedings subject to any applicable excess. 9 The proposed claim against the Insurers is in the following terms: 202A. The Policy provides: (a) in a schedule that forms part of the Policy (the Schedule) that in consideration of the payment of the premium specified, the Insurers agree to provide insurance to the extent [sic] in the manner set out in the Policy; (b) in Cl 1.1 that the Insurers will pay on behalf of the Insured (a defined term) the Loss (a defined term) which the Insured is legally liable to pay in respect of a Claim (a defined term) alleging an act or omission of the insured in the performance of the Professional Services (a defined term); (c) in its Endorsement No. 1 that Insured means inter alia the Named Insured (a defined term) and any Authorised Representative (a defined term); (d) in the Schedule that [sic] Salisbury Group is 'a Named Insured'; (e) in its Endorsement No. 1 that Authorised Representative means any person or company included on the ASIC AFS Authorised Register who has or had a written contract with the Named Insured under which the Named Insured engages the Authorised Representative to act for or on behalf of the Named Insured in the performance of Professional Services (a defined term); (f) in its Endorsement No. 11, that it is agreed between the Insurers and the Insured that Professional Services means inter alia financial planning encompassing advice on approved investment products and life insurance products; (g) in its Endorsement No. 2 that Loss means inter alia damages or claimant's costs or both payable by the Insured pursuant to an award or judgment entered against the Insured; (h) in Cl 7.3 that claim means any written demand or legal proceedings for compensation first made against the Insured during [t]he Policy Period and reported to the Insurers during the Policy period; (i) the Schedule defines Policy Period as 30 April 2012 to 30 April 2013. 202B. The inception date of the Policy was 17 May 2012. 202C. The premium as identified in the Policy was paid within 60 days of 17 May 2012. 202D. The allegations and claim [sic] made in the present proceedings were first made against the Insured during the Policy Period. 202E. The first to third respondents notified the Insurers of the claims in the present proceeding prior to 30 April 2013 and during the Policy Period. 202F. The giving of the following advice by either (as pleaded) Mr Todd or Mr Martin was in each instance a Professional Service as defined by the Policy: (a) the advice identified in paragraph 37; (b) the Ventracor Advice; (c) the GPS Advice; (d) the Marinate Floating Note Advice; (e) the advice at paragraph 79; (f) the advice at paragraph 97; (g) the advice at paragraph 126; (h) the advice at paragraph 146; (i) the advice at paragraph 151; (j) the advice in paragraph 180-182; (k) the advice in paragraph 192-193. 202G. In the premises (paragraphs 202A-F), and subject to any applicable excess identified in the Policy, the Insurers are liable to the first to third respondents in the amount of any sum in damages or costs for which the first to third Respondents are liable pursuant to a judgment in this proceeding.

The submissions 10 In order to understand what was at the centre of the dispute between the applicants and the Insurers on this application it is necessary to refer to some of the provisions of the Policy. 11 By cl 1.1, being the first of the insuring clauses, it was provided as follows: 1.1 Professional Liability Underwriters will pay on behalf the Insured the Loss which the Insured is legally liable to pay in respect of a Claim alleging an act, error or omission of the Insured in the performance of Professional Services. 12 By Endorsement No 11, it was agreed between Underwriters and the Insured that Professional Services mean: Financial planning encompassing advice on approved investment products …. 13 By cl 7.12 Policy was defined to mean the policy wording, any endorsements to it, the Schedule and the Proposal. 14 "Proposal" was defined in cl 7.16 to mean the proposal form and any other information submitted by the Insured in proposing for this insurance. 15 Question 50 of the Professional Indemnity Insurance Proposal Form For Financial Planners, under the heading Approved Products, said "Please provide by attachment a copy of the approved product listing." In evidence was a copy of an approved product list which Ms Crichton, solicitor for the Insurers, said on information and belief was submitted to the Insurers through the brokers at or about the same time as the proposals. 16 Question 51 asked to be provided by attachment a copy of the criteria which must be met in order for a product to be deemed as acceptable for inclusion in the Approved Product Listing. Question 52 asked whether the Proposer had an investment committee which approved the products for the listing and this question was answered "yes", with five members of the committee being listed. 17 The applicants submitted that the purpose of joining the Insurers was to seek against them declarations that the Policy issued to the respondents responded to the claim made in the proceedings. There was likely to be significant evidentiary overlap in the proceedings against the respondents and the Insurers. The disputes were related and joinder would avoid a multiplicity of proceedings (most obviously because if joinder was refused the applicants would commence separate proceedings against the Insurers - which they had an unqualified right to do - and many of the same witnesses would be required to give evidence on the same or similar and overlapping issues). The applicant submitted there was authority in the Federal Court supporting the joinder of insurers to proceedings commenced against insured persons for the purpose of seeking such declarations. Reliance was placed on Employers Reinsurance Corporation v Ashmere Cove Pty Ltd (2008) 166 FCR 398, affirming Ashmere Cove Pty Ltd v Beekink (No 2) (2007) 244 ALR 534 per French J. 18 The applicants submitted that the Insurers had denied indemnity. The denial of indemnity turned upon the construction of the insuring promise and the Insurers' contention that the claim lay outside the scope of the Policy. That required the characterisation of the claim that would be adjudicated in the proceedings against the respondents. Other factual questions also arose, including whether or not particular investments were "approved". 19 The Insurers accepted for present purposes the authority of Employers Reinsurance Corporation v Ashmere Cove Pty Ltd (2008) 166 FCR 398 supporting the applicants' claim for declarations as third parties to the Policy but submitted that the applicants had not articulated why the Policy responded, or arguably responded, to the applicants' claims in the proceedings. 20 The Insurers submitted that it was essential to the cover provided by cl 1.1 that the claim alleged an "act, error or omission of the Insured in the performance of Professional Services." The term "Professional Services" was defined in Endorsement No 11. It meant (relevantly), "Financial planning encompassing advice on approved investment products". The word "encompassing", the Insurers submitted, was not a word of inclusion but a word of limitation and it meant that the cover was confined to the things referred to in Endorsement No 11. If the word meant "including" then the subclause could have stopped with the words "financial planning" because it would add nothing to say "including advice on approved investment products". 21 The Proposal completed by the Insured, which formed part of the Policy (cll 7.12 & 7.16), addressed the subject of approved products at questions 50 to 56, including by requiring the provision of an approved product list. 22 When the Policy referred to the concept of approved investment products, the Insurers submitted, the context was that the proposals forming part of the Policy went through and identified a process for approving products and putting them on a list. The phrase "approved investment products" was understood by the parties negotiating and concluding the insurance contract as a product which had been approved and put on an approved product list over which the investment committee had oversight. And that was why the Court would be satisfied that approved investment products meant, to the contracting parties, a product that appeared on a list, approved by the investment committee and not removed in the meantime by the investment committee in the way that the manual contemplated could occur. 23 After the proceedings were commenced, the Insurers submitted, the Insurers sought to ascertain whether the products referred to in the Statement of Claim were "approved investment products" for the purposes of the Policy. Following those enquiries, only two of the products referred to in the Statement of Claim were identified as potentially being "approved investment products" at the time the relevant acts or omissions occurred. However, even assuming those two products were "approved", the amounts allegedly invested in them by the applicants when combined were $200,000 which did not exceed the deductible under the Policy, being $350,000. 24 Pursuant to an order of the Court made on 26 July 2013, the Insurers had provided the applicants with the relevant documents, including "any additional information or documents supplied to Norton Rose that might confirm that 'any of the investment products referred to in the proceeding were or are approved investment products'". The Insurers submitted that the applicants had not submitted that those documents, or any other evidence, would justify a conclusion that more than two of the products referred to in the Statement of Claim were "approved investment products". 25 It followed, the Insurers submitted, that the applicants had not shown that there was an arguable case that the Insurers were liable to indemnify the respondents in respect of their claim. Absent facts capable of proving that the products referred to in the Statement of Claim were "approved investment products" for the purposes of the Policy there was no reasonable prospect of the applicants obtaining the proposed declarations and that was sufficient reason to dismiss the joinder application. 26 The Insurers also submitted that a further discretionary reason existed why the application should be refused: the second and third respondent accepted and the liquidators of the first respondent did not intend to challenge, the Insurers' position that the Policy did not respond to the applicants' claims. Thus there was no legal controversy between the contracting parties: Interchase Corporation (in liq) v FAI General Insurance Co Ltd [2000] 2 Qd R 301. 27 The Insurers submitted, as going to discretion rather than power, that there was no existing controversy as between the Insurers and the insured on the question of indemnity. The Insurers' position was accepted by the second and third respondents and the position of the liquidators was that they did not intend to challenge. 28 In relation to the second and third respondents that position of acceptance did not obtain in Employers Reinsurance Corporation v Ashmere Cove Pty Ltd (2008) 166 FCR 398 and it did give rise to a question as to whether there was a real controversy as between the contracting parties as to the proper construction or application of the Policy, that being the subject of the declarations proposed to be sought by the applicants. 29 The position of the liquidator was more ambivalent and it was a position which did appear to have obtained in Employers Reinsurance Corporation v Ashmere Cove Pty Ltd (2008) 166 FCR 398. In that case the liquidator took the position that he was not prepared to contest the declinature. However in the present case the applicants did not presently have leave to proceed against the company in liquidation so that that company was not before the Court and the proceedings against it were really stayed and could not be continued until leave was granted. 30 In oral submissions, the applicants submitted that the Insurers' case was that the effect of Endorsement No 11 was to exclude any claim in relation to advice that was not advice in respect of an approved investment product. It was a necessary integer of the Insurers' position that "encompassing" had to be given an exclusive sense, such that any advice given that was not advice about an approved investment product was excluded from the Policy. 31 The applicants submitted that there were three alternatives, any one of which defeated the Insurers' submission that the joinder should not be made for absence of an arguable case against the Insurers. 32 The first alternative was that the word "encompassing" in the expression "Financial planning encompassing advice on approved investment products …" in Endorsement No 11 meant "including". 33 The second alternative was that the evidence that was put forward as to which investment products were "approved" was insufficient, to the requisite standard, because it was no more than a solicitor proffering that which her client had given her and did not purport to be the result of a complete investigation of the position pertaining to approval. 34 The third alternative was that the evidence did not demonstrate that the investments were not "approved": it demonstrated that at the very moment the advice was given the investments did not appear on a then published list. Some of the investments were on published lists immediately after the date the advice was given. Some of the investments were apparently the subject of express approval and others the subject of an implicit approval, a subset of that latter category was the position in relation to investments at Hervey Bay. It was submitted that it was at least arguable that the Hervey Bay development was carried on by the Salisbury Group and thus that the Salisbury Group had approved the investment. 35 As to the Insurers' contention that the application should be refused because the second and third respondents accepted the Insurers' position that the Policy did not respond to the applicants' claims, the applicants submitted, first, that the contention should be treated with some cynicism in light of the letter stating that they could not be expected to make any contribution to a judgment in the case. The applicant also submitted that it did not matter what they thought since if they were unable to meet a judgment in the case, if judgment was given against them, they would become insolvent and it would be open to a trustee in bankruptcy to take a different approach to the availability of rights under the Policy and in that circumstance the applicants would have an interest in those proceeds under s 117 of the Bankruptcy Act 1966 (Cth). 36 Under that section where a bankrupt was insured under a contract of insurance against liabilities to third parties and a liability against which he was so insured has been incurred the right of the bankrupt to indemnity under the policy vests in the trustee and any amount received by the trustee from the insurer under the policy in respect of the liability shall be paid in full forthwith to the third party to whom it has been incurred. 37 Therefore, the applicants submitted, if they could establish a right in those two individuals to indemnity under the Policy then irrespective of their attitude to it the applicants had an interest in the declarations or at least there was a real prospect that the applicants would gain some benefit from the declarations being made and that was sufficient to support the exercise of discretion to allow the applicants to bring the claim.

Consideration 38 I approach the question of whether the application for joinder shows an arguable case against the Insurers with caution and on the basis that joinder should not be refused unless it is clear that there is no real question to be tried in the sense that there needs to be a high degree of certainty about the ultimate outcome of the proceeding. 39 In my opinion, the meaning of the word "encompassing" in Endorsement No 11 of the Policy is not a sufficiently clear word of limitation to warrant the dismissal of the applicants' joinder application. In certain contexts, it seems to me, the word means "including". In other contexts the word means "containing". The word may mean "being" or "confined to" but it is not appropriate, on a joinder application, to foreclose to the applicants the opportunity of contending for a construction of the word in a concrete, specific and real factual context. 40 Further, I am also not persuaded that it is beyond argument that an investment product needed to be approved by being on a list and at the time the advice was given in order to answer the description "advice on approved investment products" in Endorsement No 11. 41 Lastly, by analogy with Spencer v Commonwealth (2010) 241 CLR 118, it seems to me there are factual issues capable of being disputed and in dispute. Necessarily, the applicants' case against the Insurers is at a very early stage in terms of both pleadings and the usual interlocutory processes which the applicants have not, as yet, been in a position fully to use. 42 Even if I had formed the view that the applicants were unlikely to succeed on the factual issues that does not mean that joinder should be refused. For example, it seems to me it is arguable both that the Hervey Bay development was carried on by the Salisbury Group and thus that the investment product was approved. 43 I turn to the discretionary consideration contended for by the Insurers that there should be no joinder because there was no existing controversy as between the Insurers and the insured on the question of indemnity: the Insurers' position was accepted by the second and third respondents and the position of the liquidators was that they did not intend to challenge the Insurers' position. As I have indicated at [19] above, the Insurers otherwise seemed to accept that the discretionary considerations taken into account by the primary judge in Ashmere Cove Pty Ltd v Beekink (No 2) (2007) 244 ALR 534 and endorsed by the Full Court in Employers Reinsurance Corporation v Ashmere Cove Pty Ltd (2008) 166 FCR 398, that is, the utility in the declaration sought against the insurer; the insurers' denial of liability and the legal controversy thereby arising; the availability of s 562 of the Corporations Act 2001 (Cth) (and here s 117 of the Bankruptcy Act 1966) where there was insolvency or likely insolvency; and the overlap of factual issues. 44 In my opinion, the utility of the joinder is not denied by the consideration contended for by the Insurers that there was no existing controversy as between the Insurers and the insured on the question of indemnity. 45 First, although there is said to be no existing controversy I treat that with circumspection because, although the context has not been fully explored, it seems likely to be linked to the negligible or non-existent exposure of those respondents given their apparent financial positions. 46 Further, the approach of the Full Court in Employers Reinsurance Corporation v Ashmere Cove Pty Ltd (2008) 166 FCR 398 does not suggest that the absence or present absence of a dispute between the parties to the Policy derogates from the controversy involving one of the contracting parties (the Insurers) and a third party (investors, being the applicants). 47 In considering whether an injustice would flow from the discretionary order made by the primary judge, the Full Court said the most that could be said was that the insurers would be required to defend their decision not to afford indemnity to the insured under the policy in the proceedings brought by the investors against the company which was the responsible entity for the registered management scheme and the former directors of the company, unless the insurers chose the risky course of not presenting any defence to the investors' claim for a declaration. 48 Their Honours said that the primary judge found that the joinder of the insurers in the proceedings would have practical utility and there was no error in that finding. If the investors succeeded in obtaining a declaration the fact that would bind the insurers (as between them and the investors) would be likely to lead to the investors being able to take advantage of the indemnity available to the insured company under the policy. 49 It is to be recalled that in that case the company had no money and it could be assumed that it had a legal right to claim against insurers but that right may or may not have been of any value as the insurers may have had a good defence to it. But it was only through a successful claim against the insurers that the company would be able to meet any judgment against it in favour of the applicants. The company's liquidator had no interest in pursuing any claim against the insurers even if indemnified against an adverse costs order by the applicants. Nor did the liquidator have the funds to defend the action against the company if leave to bring such an action were to be granted. 50 For these reasons I make orders 1, 1A and 1B in the further amended interlocutory application filed on 13 September 2013.

Costs 51 The Insurers submitted that the applicants wholly abandoned their application under s 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) and to the extent the Insurers incurred costs in preparing for that application which they would not otherwise have incurred then they should have those costs. The Court should order the applicants to pay the Insurers' costs thrown away by reason of the amendments to the interlocutory process. Otherwise the costs of the joinder application should follow the event. 52 The applicants submitted that the Insurers and the respondents sought their costs of the s 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 application thrown away by the amendment to the interlocutory process but those applications were ill-founded. 53 The applicants submitted there should be no costs orders consequent upon the further amendment of the amended interlocutory application. In the alternative, the costs order should be that the Insurers' costs thrown away should be their costs in the cause of the proceedings. 54 As to the costs of the further amended interlocutory application, the applicants submitted they should be costs in the cause of that application: if the orders for joinder were made then both the Insurers and the respondent's should pay the applicants' costs of the application. The applicants referred to CGU Insurance Ltd v Bazem Pty Ltd [2011] NSWCA 81 at [37]. They submitted that in the present matter there was the additional relevant factor that the Insurer had no entitlement to be heard on the application for joinder. In the present case they were parties to the application because they were a necessary party to the application under s 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946. Once the interlocutory application was amended to exclude reliance on that provision the Insurers were not a necessary party. If they chose to appear and oppose joinder, and were unsuccessful, they should be liable for any costs incurred. 55 In my opinion, the appropriate costs order on the joinder application is that the Insurers should pay the applicants' costs of the further amended interlocutory application and that there should be no order for the costs of the second respondent and of the third respondent who appeared at the interlocutory hearing but made no submissions, whether written or oral. 56 As to the amendment to the amended interlocutory application, whether or not the respondents or the Insurers incurred any additional costs does not seem to me to be to the point as the usual order in these circumstances is that the amending party pay to the party or parties affected the costs, if any, thrown away by the amendment. In my opinion, that is the appropriate order to be made in the present case and I shall so order.

Conclusion 57 I shall make orders giving effect to my conclusions in [50], [55] and [56] above. I certify that the preceding fifty-seven (57) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Robertson.