Teakle Property Australia v Business Initiatives Pty Ltd

Federal Court of Australia|2021-01-22|Before: Mr P, Charlesworth J

The name of the first applicant be amended to include "Pty Ltd" following "Teakle Property Australia".
The applicants have leave to file and serve an amended statement of claim in the form of the proposed pleading comprising annexure LJCR-2 to the affidavit of Luke John Charlton Rowley sworn on 23 December 2020, provided that: (a) in proposed [23.1], the cross-references to [10C] and [10D] are to be deleted; (b) the allegation of knowledge in proposed [24] is to be confined to the categories of knowledge alleged at [24.2.4]; and (c) there be strictly consequential amendments to the numbering and wording of proposed [24.2.4] to reflect the deletion of the remainder of [24].
The amended statement of claim be filed and served on or before 25 January 2021. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

CHARLESWORTH J: 1 In this proceeding, the two applicant companies (together, the Teakle companies) claim that they each invested $500,000.00 in what they expected would culminate in a shopping centre development in the northern suburbs of Adelaide (the project). For their investment, the Teakle companies each received 500 units in a Trust. The corporate Trustee of the Trust is one of a number of companies in what is referred to as the Vidale Group. 2 Among other things, the applicants allege that their investments have been lost by virtue of what they say was a fraudulent design devised and conducted by the Trustee and its director, Mr Michael Vidale. The Trustee is not joined as a respondent. Nor is Mr Vidale. In these reasons they will be referred to together as the non-parties. 3 The first respondent, Business Initiatives Pty Ltd provided accounting services to companies in the Vidale Group in relation to the project, including the Trustee. Its sole director is the second respondent, Mr Matthew White. 4 The applicants apply for leave to file and serve an amended statement of claim in the form annexed to an affidavit of their instructing solicitor sworn on 23 December 2020 (the proposed pleading). Paragraph 22 of the proposed pleading alleges a dishonest design by the non-parties to procure money from investors to fund one or more members of the Vidale Group for purposes that were not related to the project, and in circumstances where the Trustee was not (at the time of the investments) "intending, or alternatively not in a position, to proceed with" the development of the project. 5 Paragraph 23 of the proposed pleading alleges that the respondents knowingly participated in that fraudulent and dishonest design and so is an attempt to allege a form of accessorial liability in equity commonly referred to as the second limb in Barnes v Addy (1874) LR 9 Ch App 244. 6 The respondents oppose the grant of leave to file the proposed pleading to the extent that it contains the plea at [23] and a related plea at [24] concerning their alleged states of mind. 7 For the reasons given below, I have concluded that those paragraphs are defective in part. The Teakle companies should be granted leave to file the proposed pleading, excluding the affected parts.

Liability under Barnes v Addy 8 In Barnes v Addy, Lord Selbourne explained the bases upon which the agent of a trustee may be liable for the trustee's defaults (at 251 - 252) as follows: Those who create a trust clothe the trustee with the legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. (emphasis added) 9 Accessorial liability under the emphasised second limb in Barnes v Addy extends to persons who knowingly assist in a dishonest and fraudulent design on the part of persons owing fiduciary duties other than under an express trust. 10 The elements of the claim to be established in this proceeding are: first, the existence of a fiduciary duty owed by the non-parties (or either of them); second, a dishonest and fraudulent design on the part of the fiduciary non-parties; third, assistance by the respondents in that design; and, fourth, knowledge on the part of the respondents of the circumstances constituting that design: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [160]; Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296 at [259]. For the purposes of the second element "… impugned conduct must be attended by circumstances that would attract a degree of opprobrium raising it above the level of a simple breach of trust or breach of a fiduciary duty": The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; 225 FLR 1 at [4727] (Owen J). The design alleged in this proceeding is capable of bearing that character. 11 The element of knowledge has customarily been analysed by reference to the various states of mind agreed between counsel in Baden v Société Générale pour Faouriser le Developpment du Commerce et de L'Indsutrie en France SA [1993] 1 WLR 509, [250] (Peter Gibson J). They were: (i) actual knowledge; (ii) wilfully shutting one's eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; and (v) knowledge of circumstances which would put an honest and reasonable man on inquiry. See Farah Constructions at [174]. 12 The third category (wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make) involves "such a calculated abstention from inquiry as would disentitle the third party to rely upon lack of actual knowledge of the trustee's or fiduciary's wrongdoing": Grimaldi at [261] (Finn, Stone and Perram JJ). 13 In Australia, the fifth category (knowledge of circumstances which would put an honest and reasonable person on inquiry) is not sufficient to sustain a knowing assistance claim: Farah Constructions at [175] - [178], citing Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 412 - 413 (Stephen J), 376 - 377 (Barwick CJ) (Gibbs J leaving the question unanswered at 398). In Farah Constructions at [177], the High Court said of the various judgments in Consul: The result is that Consul supports the proposition that circumstances falling within any of the first four categories of Baden are sufficient to answer the requirement of knowledge in the second limb of Barnes v Addy, but does not travel fully into the field of constructive notice by accepting the fifth category. In this way, there is accommodated, through acceptance of the fourth category, the proposition that the morally obtuse cannot escape by failure to recognise an impropriety that would have been apparent to an ordinary person applying the standards of such persons.

THE PURPOSE AND REQUIREMENTS OF PLEADINGS 14 The purpose of a statement of claim is to inform the respondent, with sufficient clarity, of the case it is required to meet: Dare v Pulham (1982) 148 CLR 658 at 664. 15 A pleading must be as brief as the nature of the case permits and must not be likely to cause prejudice, embarrassment or delay in the proceeding: Federal Court Rules 2011 (Cth), r 16.02(1)(b) and (d) and (2)(d). Rule 16.42 requires a party who pleads (relevantly) fraud or wilful default must state in the pleading particulars of the facts on which the party relies. In addition, r 16.43 provides: 16.43 Conditions of mind (1) A party who pleads a condition of mind must state in the pleading particulars of the facts on which the party relies. (2) If a party pleads that another party ought to have known something, the party must give particulars of the facts and circumstances from which the other party ought to have acquired the knowledge. 16 This Court has approved the robust approach to the resolution of pleading disputes applied by Martin CJ in Barclay Mowlem Construction Ltd v Dampier Port Authority (2006) 33 WAR 82: 7. In my view, it follows that provided a pleading fulfils its basic functions of identifying the issues, disclosing an arguable cause of action or defence, as the case may be, and apprising the parties of the case that has to be met, the court ought properly be reluctant to allow the time and resources of the parties and the limited resources of the court to be spent extensively debating the application of technical pleadings rules that evolved in and derive from a very different case management environment. 8. Most pleadings in complex cases, and this is a complex case, can be criticised from the perspective of technical pleading rules that evolved in a very different case management environment. In my view, the advent of contemporary case management techniques and the pre-trial directions, to which I have referred, should result in the court adopting an approach to pleading disputes to the effect that only where the criticisms of a pleading significantly impact upon the proper preparation of the case and its presentation at trial should those criticisms be seriously entertained. And see Australian Securities and Investments Commission v Cassimatis (No 2) [2013] FCA 1008; 96 ACSR 272 at [97] - [99] (Reeves J). 17 I consider that approach to be the most appropriate in the general run of cases, especially having regard to the manner in which the Court is to interpret and apply its case management provisions: Federal Court of Australia Act 1976 (Cth), s 37M. 18 Cases involving allegations of fraud call for a more rigorous approach, both because of the specific requirements of r 16.43 and because considerations of procedural fairness demand it. As French CJ, Gummow, Hayne and Kiefel JJ said in Forrest v Australian Securities and Investments Commission (2012) 247 CLR 486: 26 … It is fundamental, and long established, that if a case of fraud is to be mounted, it should be pleaded specifically and with particularity. … 27 The task of the pleader is to allege the facts said to constitute a cause of action or causes of action supporting claims for relief. Sometimes that task may require facts or characterisation of facts to be pleaded in the alternative. It does not extend to planting a forest of forensic contingencies and waiting until final addresses or perhaps even an appeal hearing to map a path through it. … (footnote omitted) 19 A plea that a defendant is liable as a knowing participant in a dishonest and fraudulent design is an allegation of the seriousness of which means it ought to be pleaded and particularised: Farah Constructions at [170]. As the Full Court said in Young Investments Group Pty Ltd v Mann (2012) 293 ALR 537, "a pleading that simply pleads a conclusion is embarrassing and should not be permitted to stand" (at [7]). Accordingly, where it is alleged that a respondent is liable under the second limb in Barnes v Addy, it will not be sufficient to plead a bare assertion of knowledge by reference to one or more of the five accepted states of mind categories in Baden. Each of those categories requires facts to be pleaded from which the possession of the alleged state of mind may reasonably be inferred. 20 In Webster (Trustee) v Murray Goulburn Co-operative Co. Ltd (No 2) [2017] FCA 1260, Beach J said that where the rules in relation to the pleading of a state of mind are not complied with, leave to re-plead ought not be granted if there is an absence of particulars necessary to support a plea concerning knowledge or belief. His Honour continued (at [6]): ... Of course, particularising the knowledge of another person has its difficulties. One does not know what is in the mind of that other person. But there may be an admission or communication that establishes or manifests such a state of mind. Further, such knowledge may also be able to be inferred from other facts and circumstances. In that scenario, particulars identifying the inferences and the facts and circumstances from which such inferences arise may be sufficient, providing that the inferences are reasonably arguable. Now such particulars may shade into evidence that is not usually required to be pleaded or particularised. But the fact that particulars of that type may have that duality is no excuse for not providing them where knowledge is sought to be established inferentially. I would make one other point. Given information asymmetry as between the parties concerning the state of mind of one of them, where the pleadings are at an early stage and before discovery, so long as some particulars of knowledge are given so as to demonstrate that the plea of knowledge is not wholly speculative, it may be appropriate to allow a plea of knowledge to go forward on the basis that full particulars of knowledge will be provided after discovery, reserving to the other party the right to seek a strike out or summary dismissal of the pleaded cause of action relying upon that knowledge at that later stage if that turns out not to be the case. 21 The asymmetry of knowledge to which his Honour referred does not relieve an applicant party from the responsibility to comply with the requirements of r 16.43. The rule is plainly drafted with the problem of asymmetry in mind. It is to be interpreted and applied having regard to the Rules as a whole, particularly the rules in relation to inter-parties and pre-action discovery. Of particular significance is r 7.23. It applies in circumstances where a prospective applicant reasonably believes (but does not know) that he or she may have a claim against a prospective respondent: Pfizer Ireland Pharmaceuticals v Samsung Bioepis AU Pty Ltd (2017) 257 FCR 62; Objectivision Pty Ltd v Visionsearch Pty Ltd [2014] FCA 1087; 108 IPR 244; BCI Media Group Pty Ltd v Corelogic Australia Pty Ltd [2020] FCA 1556. The rule is available to be utilised in cases where there is a deficiency of evidence in the hands of a pleading party sufficient to found a properly particularised case in fraud, certifiable under the Rules and having a proper evidentiary basis. The rules in relation to pre-action discovery permit some degree of fishing (that being embodied in their purpose), whereas the rules in relation to discovery after the commencement of the proceeding generally do not: Pfizer at [108] per Perram J; Australian Competition and Consumer Commission v Cornerstone Investment Aust Pty Ltd (No 2) [2017] FCA 393 at [5] respectively. Moreover, in this Court there is no entitlement to orders for inter-parties discovery after a proceeding has commenced. Whether or not there should be orders for discovery is a matter within the Court's discretion. What is not permitted is the pleading of speculative claims so as to erect a purported foundation for the giving of discovery to ascertain whether the speculative case exists: cf Adelaide Brighton Cement Ltd v Hallett Concrete Pty Ltd [2020] SASC 161 at [26] - [28] (Doyle J). The add-on "further particulars will be provided following discovery" cannot cure a defective plea of that vice.

PROPOSED PLEADING 22 The respondents submit that the pleas at [23] - [24] are objectionable, considered in the context of [22]. Those three paragraphs incorporate larger portions of the pleading by a labyrinth of cross-references within cross-references. There is no objection to the cross-referenced paragraphs insofar as they are relied upon in support of other causes of action. The principle complaint is that the impugned paragraphs, together with the cross-referenced paragraphs do not provide sufficient notice of the facts alleged in support of the state of mind pleas for the purposes of the Barnes v Addy claim.

The impugned paragraphs 23 Paragraph 22 is in the following terms: 22. The Trustee's conduct pleaded in paragraph [7], [10A], [13] and [15] as a whole or in combination: 22.1. Was part of a fraudulent and dishonest design ('the Design') to procure funding from investors in the Trust, including the Teakles, for purposes: 22.1.1. of funding one or more members of the Vidale Group, the indemnity [sic] of which is not known to the Teakles. 22.1.2. not related to the Development Project. 22.1.3. in circumstances where, at the time of the Investments, the Trustee was not intending, or alternatively not in a position, to proceed with the Proposed Development. 24 That plea refers to conduct "of the Trustee" pleaded elsewhere. As will be seen, the cross-referenced paragraphs do not contain direct allegations against the Trustee. They either allege conduct against the respondents, or contain allegations about the respondents' knowledge. There is also a temporal aspect to the alleged design, its purpose being to procure funding from investors. 25 The respondents' liability under the second limb of Barnes v Addy is alleged at [23] as follows: Participation in the Design 23. Initiatives, and White, participated in the Design with knowledge of the Design: 23.1. as to participation, Initiatives and White engaged in the conduct as pleaded in paragraphs [4.5], [7], [10B], [10C], [10D] and [12] to [13] herein; 23.2. as to knowledge, Initiatives and White had knowledge referred to in paragraph [24] herein. 26 That paragraph separately identifies the conduct upon which the applicants rely and the state of mind said to accompany that conduct: [23.1] and [23.2] respectively. 27 Paragraph 24 is as follows: Knowing Assistance of Initiatives and White 24. As related to the participation of Initiatives and White in the Design, White and Initiatives had the following knowledge of the Design: 24.1. At all material times Initiatives, through White, had knowledge ('the First Knowledge') of the conduct of the Trustee as pleaded in paragraphs [10A] and [15] herein. 24.2. The First Knowledge was: 24.2.1. Actual knowledge because of the matters pleaded in paragraphs [10C], [10D], [13.5B] and [13.5C] herein. 24.2.2. In the alternative to paragraph [24.2.1] herein was deemed knowledge because of the matters pleaded in paragraphs [10C], [10D], [13.5B] and [13.5C] herein. 24.2.3. In the further alternative to [24.2.1] to [24.2.2] herein was knowledge of Initiatives, through White, to be inferred because of the matters pleaded in paragraphs [10C], [10D], [13.5B] and [13.5C] herein. 24.2.4. In the further alternative to paragraphs [24.2.1] to [24.2.3] herein, was knowledge arising because Initiatives through White: 24.2.4.1. willfully shut its eyes to the facts and matters pleaded in paragraphs [10A] and [15] herein; and or in the alternative 24.2.4.2. willfully and recklessly failed to make enquiries as an honest and reasonable person would make that would have demonstrated that the Trustee was engaged in conduct which was dishonest and in breach of the Vidale Trustee Duties. 24.2.5. Yet further or in the alternative to the matters pleaded in paragraphs [24.2.1] to [24.2.4] herein, if, which is denied, Initiatives, through White, did not have the First Knowledge, Initiatives, through White, ought to have been aware of the facts and matters pleaded in paragraphs [10A] and [15] herein because of the matters pleaded in paragraphs [10C], [10D], [13.5B] and [13.5C] herein which would indicate to a reasonable person that the Trustee was engaged in conduct which was dishonest and/or otherwise in breach of the Vidale Trustee Duties. 24.2.6. Initiatives, through White, assisted the Trustee breach the Vidale Trustee Duties: 24.2.6.1. With the First Knowledge; and/or in the alternative 24.2.6.2. In the circumstances pleaded in paragraph [24.2.5] herein.

The cross-referenced pleas 28 Before considering the knowledge pleas it is necessary to have regard to the conduct that is alleged to constitute the respondents' participation. They are cross-referenced in [23.1] to include [4.5], [7], [10B] and [12] (which concern pre-investment conduct), [10C] and [10D] (which do not appear to allege conduct at all) and [13] (which alleges post-investment conduct). 29 The starting point is [4.5]. It alleges that Business Initiatives provided accounting services "to the Vidale Group" including to Mr Vidale and the Trustee as follows: 4.5.1. causing the Trustee to be incorporated as pleaded in paragraph [6] herein; 4.5.2. providing Information about the Development Project to investors and potential investors, including the Teakles, as pleaded in paragraph [7] herein. 4.5.3. assisting in the promotion of the Development Project (as defined in paragraph [5] herein) to investors and potential investors, including the Teakles, as referred to in paragraph [7] herein; 4.5.4. receiving moneys from investors in the Development Project, including from the Teakles, and then disbursing these moneys to Vidale Group entities as pleaded in paragraphs [7.4] and [13] herein; 4.5.5. Providing accounting services to the Trustee including the preparation of balance sheets and profit and loss statements for the Trust; 4.5.6. Communicating with investors as relates to the progress of the Development Project as pleaded in paragraph [13] herein. 30 To the extent that it contains allegations of conduct against any person, the plea at [7] is to the effect that Business Initiatives (through Mr White or otherwise) "disseminated information" about the project by way of an information memorandum (IM) and an Equity Participation Proposal (EPP) and by making oral representations endorsing and promoting the project: [7.1], [7.2]. 31 The oral representations alleged against Mr White (at [7.2.1.2], [7.2.2.2]) are that: (1) he was the accountant for the Vidale Group and was familiar with all of the financial affairs of Mr Vidale and the Vidale Group; (2) the Vidale Group had undertaken and completed a number of developments which had seen significant returns for investors; (3) he would continue to have involvement in the project as the accountant for the Trustee and the Trust; (4) Business Initiatives would oversee the receipt of funds and the payment of returns on investments in the project; (5) he had faith in Mr Vidale and the Vidale Group and he had successfully invested in developments undertaken by the Vidale Group himself or through his clients; and (6) the investment would represent a safe and successful investment for the Teakle companies by a suitably experienced and reputable property developer. 32 It is alleged that the IM and/or the EPP described the development project as having key features, as follows: (1) certain anchor tenancies were in place "or otherwise secured" ([9.2], [10A.2.2(b)]); (2) the expected return on investment would be 9.61% per annum, with a 5% bonus on redemption of units in the Trust ([9.5]); (3) investors in the project would be investing in a vehicle that would own the land upon which the shopping centre would be situated, and investors' funds would be used for the purpose of funding the project and for no other purpose ([10A.2.2(b)]); (4) construction of the project would be commenced and completed within specific time frames ([10A.2.3(c)]); and (5) development applications would be made and consents obtained within specific time frames ([10A.2.1]). 33 The IM and the EPP were alleged to have contained material inconsistencies concerning the identity of the anchor tenants, the terms of their leases and the dates for commencement and completion of the project ([10A.2.4]). 34 It is alleged that Business Initiatives assisted Mr Vidale in promoting the investment opportunity by a series of email communications by which it provided the Trust Deed (being the Deed that established the Trust) and prepared and facilitated the execution of documents, that it made its own trust account available for use by the Trust to receive investments in the project and directed the Teakle companies to deposit their investment into that trust account: [7.3], [7.4]. 35 The alleged information and representations are said to be false and misleading, including because the Trustee and Mr Vidale had not secured anchor tenancies (and had no basis to represent that they had), did not intend to own the land on which the project was to take place, intended to use investment money for purposes other than the project, and were not capable of achieving timeframes for the commencement and completion of the project: [10A.2.2], [10A.2.3]. 36 The pleas at [10C] and [10D] allege the state of mind accompanying the dissemination of the information in the EPP, the IM and the representations. They are expressed as follows: 10C. At the time that Initiatives disseminated the Information in the manner referred to in paragraph [7.2] herein: 10C.1 Initiatives did not care whether the Information was true or false; or in the alternative 10C.2 Initiatives knew, or ought reasonable to have known, that the information was false in a material particular or was materially misleading. Particulars 10C.2.1 Further particulars to be provided following discovery. 10D The knowledge of Initiatives pleaded in paragraph [10C.2] herein is to be inferred as follows: 10D.1 Initiatives was the accountant to the Vidale Group, with a scope and role referred to in paragraph [4.5] herein; 10D.2 Initiatives was promoting the potential for the Investment in the Development Project as referred to in paragraph [7] herein; 10D.3 a reasonably competent accountant and/or a reasonably competent promoter of an investment opportunity would have: 10D.3.1 read the IM and the EPP; 10D.3.2 sought and obtained an understanding of the Development Project and underlying facts upon which the IM and the EPP were based; 10D.3.3 identified that there were inconsistencies in the Information as referred to in paragraph [10A.2.4] herein; 10D.3.4 sought and obtained explanations for the inconsistencies in the Information; 10D.3.5 in consequence thereof, identified the maters referred to in paragraph [10A] herein. Particulars 10D.3.5.1 Further particulars to be provided following discovery. 37 The alleged post-investment conduct comprises the provision of "Investor Updates", the disbursement of money from the Business Initiatives trust account to entities in the Vidale Group and the preparation of financial statements in relation to the disbursements. By providing the Investor Updates, Business Initiatives is alleged to have "continued to represent" to the Teakle companies that the project would be completed or was likely to be completed and to represent that there was nothing known to Business Initiatives or the Trustee that would suggest that the investment would not be returned, that the project was not proceeding or that Mr Vidale had (as earlier alleged) diverted the funds from the investment for purposes other than for the benefit of the project. 38 The knowledge accompanying the post-investment conduct is alleged at [13.5B]. It contains the same "didn't care" and "knew or ought to have known" couplet as [10D]. The factual basis for the plea in [13.5B] is particularised in [13.5C]. It, too, incorporates cross-reference upon cross-reference, including a reference to [10D] (extracted above) and a forward reference to [13.6] - [13.7] (which concern the disbursement of money from the Business Initiatives trust account and the preparation of financial statements respectively). It is necessary to set the plea out in full: 13.5C The knowledge of Initiatives as pleaded in paragraph [13.5B] herein, is to be inferred from: 13.5C.1 the matters referred to in paragraph [10D] herein; 13.5C.2 the matters referred to in paragraphs [13.6] and [13.7] herein; 13.5C.3 a reasonable and honest person would, upon receiving instructions, to the effect referred to in paragraph [13.6] herein would have made further enquiries of Vidale as to: 13.5C.3.1 the lawfulness or otherwise of disbursing moneys that had been raised from investors to related parties of Vidale; 13.5C.3.2 what commercial benefit, if any, the Trustee would derive from the disbursement of moneys that had been raised from investors to related parties of Vidale; 13.5C.4 thereby ascertained that Vidale was acting in a manner: 13.5C.4.1 that would cause the Trustee to be in breach of duty to investors: 13.5C.4.2 that was in fraud of the investors; 13.5C.4.3 that would prevent the Trustee from having the funds necessary to complete the Development Project. 13.5C.5 prior to providing the Investor Updates, which contain statements as to the progress of the Development Project, a reasonable and honest person would have: 13.5C.5.1 made enquires as to the factual matters contained in the Investor Updates; 13.5C.5.2 sought and obtained confirmation that the statements were true; 13.5C.5.3 ascertained what in fact was happening with the Development Project; 13.5C.5.4 ascertained whether the funds available to progress the Development were available to the Trustee given the knowledge referred to in paragraph [13.6] herein. 13.5C.6 a reasonable and honest person in the position of Initiatives would have: 13.5C.6.1 ascertained the matters referred to in paragraph [15] below; 13.5C.6.2 disclosed to investors including, the Teakles, the matters referred to in paragraph [15] herein. Particulars 13.5C.6.2.1 Further particulars to be provided following discovery. 39 Finally for present purposes, at [15] it is alleged that the Trustee never purchased the land, never commenced the project, never caused the completion of the project, never secured any of the anchor tenancies and "caused funds invested in the Trust (including the Teakle companies' investment) to be disbursed to the benefit of other entities within the Vidale Group" for unknown purposes that were not related to the project.

SUBMISSIONS 40 The respondents submitted that the status of a person as an accountant and agent of a fiduciary could not of itself give rise to accessorial liability for the fiduciary's fraudulent wrongdoing. It was submitted that the pleas concerning their alleged knowledge for the purposes of the Barnes v Addy plea do not properly align with the alleged fraudulent design on the part of the non-parties. That design, they submitted, has the central characteristic that the non-parties at all times intended to procure funding "for one or more members of the Vidale group" and had no intention to proceed with the project at all. It was submitted that the pleading fails to identify any basis for the allegation that the respondents were in any better position than the Teakle companies to identify that the non-parties had the alleged fraudulent intent. It was submitted that the knowledge pleas are either circular or that they do not accord with the accepted state of mind categories in Baden. 41 The respondents further submitted that the disbursement of funds from Business Initiatives' trust account to members of the Vidale Group is not capable of supporting an inference that the respondents knowingly participated in the fraudulent design, for two reasons. First, the pleaded representations attributed to the respondents (particularly those extracted at [31] above) made it plain that the promotors of the investment included other companies within the Vidale Group. Second, the investment vehicle was a unit trust, and there is no pleading as to any terms of the Deed constituting the Trust that would prohibit the Trustee from directing its accountant to disburse the investment monies to third parties. Accordingly, it was submitted, the instruction to disburse the funds could not on any view have alerted the Trustee to the non-parties' dishonest design. 42 For the Teakle companies it was submitted that the conduct pleaded against the respondents goes beyond merely acting as a conduit for the provision of information to potential investors, but extends to actively promoting the benefits of the investment opportunity and endorsing its proponents. It was submitted that the nature and degree of the respondents' participation in the project took the case out of the realm of mere agent and accountant and that that circumstance was relevant in determining whether the pleaded facts were sufficient to support the knowledge allegations. They submitted that the pleading alleges each of the four accepted state of mind categories in Baden (read in the context of Farah Constructions) and that sufficient facts and circumstances were alleged to support each such plea. 43 The Teakle companies acknowledged that they presently do not know whether the respondents made any enquiries of the kind they allege ought to have been made so as to ascertain the facts they allege constitute the non-parties' fraudulent design. In oral submissions it was suggested that either the respondents did make enquiries and in fact ascertained the essential facts constituting the design (in which case the plea of actual knowledge would be made good) or they did not make the enquiries (in which case the other Baden categories would be made good). Which of the two alternatives applied may be clarified after discovery, so it was submitted. 44 The Teakle companies also emphasised that all of the cross-referenced pleas are not objected to per se, particularly as they relate to additional causes of action, including alleged contraventions of s 1041H of the Corporations Act 2001 (Cth) against both Business Initiatives and Mr White. Accordingly, it was submitted, the inclusion of the impugned paragraphs would not add to the burden of the discovery, nor to the body of evidence to be adduced at trial. They submitted that the Court should be slow to shut down a pleaded cause of action in circumstances where to do so would have little or no effect on the length or complexity of the trial.

CONSIDERATION 45 Counsel for the Teakle companies submitted that the various pleas at [24] were intended to reflect the accepted Baden state of mind categories. The pleas will be analysed against that submission.

The first Baden category 46 When asked what was meant by the expression "deemed knowledge" in [24.2.2] Counsel for the Teakle companies could not say. The Teakle companies have withdrawn their reliance on that paragraph. The "first knowledge" pleas at [24.2.1] and [2.4.2.3] are otherwise intended to invoke the first category in Baden, namely actual knowledge. 47 One is an allegation of actual knowledge "because of" the cross-referred matters. The other is an allegation of "knowledge … to be inferred because of" the same cross-referenced paragraphs. Ignoring the repetition, the pleas may fairly be understood as alleging actual knowledge within the first Baden category, such knowledge to be inferred from the cross-referenced facts and circumstances. 48 The difficulty arises because the cross-referenced paragraphs include [10C], which includes an allegation that the respondents "did not care whether the information was true or false" and an allegation that the respondents "ought reasonably to have known that the information was false in a material particular or was materially misleading". In my view, a plea of actual knowledge of facts is not capable of being sustained by an allegation that the respondent didn't care whether the facts existed or ought reasonably to have known the facts. The pleading is defective to the extent that it incorporates those parts of [10C] as the foundation for an inference of actual knowledge. 49 Subparagraph 10C.2 nonetheless includes the word "knew" and so it is necessary to have regard to the particulars of that plea in [10D]. There the reader finds (at [10D.3]) the first of a series of "would have" pleas. In my view, the language of that plea cannot be distinguished from the fifth category in Baden, a category of constructive knowledge that has not been accepted in Australia as a sufficient foundation for liability under the second limb in Barnes v Addy. On its terms, it is not a plea that the respondents in fact knew of circumstances which would indicate the facts to an honest and reasonable person so as to call in aid the fourth category. The plea does not particularise the circumstances known to the respondents which would indicate the facts to an honest and reasonable person in any event. The plea that the respondents acted as the non-parties' accountants and promoted the investment of itself does not serve to disclose the circumstances the respondents knew for the purposes of the fourth Baden category in any event. Even if it were a proper plea invoking the fourth category in Baden, it is unclear how such a plea (founded as it is upon a principle of constructive knowledge) could be capable of furnishing support for a plea of first category actual knowledge. I do not consider the plea to be intended to invoke the second or third categories in Baden. Those categories are expressly pleaded in terms reflecting the case law at [24.2.4]. 50 The reliance on [13.5B] (concerning the investor updates) is bad for the same reasons given in connection with [10D]. However, it too contains the word "knew" and so it is necessary to have regard to the matters said to support the inference in [13C]. They include the same matters pleaded at [10D], which do not illuminate the case for the reasons already given. There follows a series of "would have" pleas, each asserting the inquiries that a reasonable and honest person would have made. One of the circumstances said to trigger the obligation to inquire is the receipt of instructions to distribute money from Business Initiatives' trust account to members of the Vidale Group other than the Trustee. However, the pleading does not allege facts or circumstances that would indicate to Business Initiatives that the disbursements were in furtherance of a fraud. The terms of the Trust Deed that would render such an instruction a breach of trust are not pleaded. The existence of any such terms is not otherwise apparent, given that the Trust was in the nature of a unit trust and the asserted purpose of the Trust was to apply the investment monies for the construction of a shopping centre. To the extent that it is alleged that the Trustee had a duty to preserve and maintain investment monies in a particular account, the duty is not pleaded, nor is its source. Accordingly, the circumstance that Business Initiatives received instructions to disburse the funds to members of the Vidale Group, when considered in light of the pleading as a whole, does not provide a sufficient basis for the first category of knowledge or, for that matter, the remaining accepted state of mind categories. 51 In addition, the cross-referenced paragraphs do not culminate in an allegation that Business Initiatives had actual knowledge of the facts constituting the fraudulent design at the time that the particular acts of participation are said to have occurred, nor at the time that the investments were procured. 52 In summary, the cross-referenced pleas to not allege a proper factual foundation for the serious allegation of actual knowledge. As Counsel for the Teakle companies acknowledged, the companies do not know what the respondents actually knew, nor do they know whether the respondents made any enquiries of the kind they claim could, would or ought to have been made. The multiple alternatives embodied in [24.2.1] and [24.2.3] are the manifestation of that gap in their evidentiary base. The gap cannot be overcome by pleading speculative alternatives for the purpose of obtaining documents on discovery to ascertain which alternative (if any) is true. Nor can it be overcome by pleading what inquiries would or ought to have been made and what would have been discovered had they been made.

The second and third Baden categories. 53 As has been mentioned, the plea at [24.2.4] invokes the second and third categories. They do not cross-reference the same paragraphs upon which the actual knowledge plea was based. 54 In oral submissions, Counsel for the respondents did not articulate any specific complaint affecting that subparagraph. Counsel acknowledged that leave to file the proposed pleading would not have been resisted had the Barnes v Addy plea been confined to the categories pleaded there. For the purposes of the second Baden category, the claim may be assumed to include an allegation that the matters at [10A] and [15] (which allege the true state of affairs) were "obvious", even though that his not expressly stated.

The fourth Baden category 55 The fourth category in Baden is "knowledge of circumstances which would indicate the facts to an honest and reasonable man". There is an attempt to plead this category at [24.2.5]. The matters said to indicate the facts to an honest and reasonable person are those pleaded at [10D], [13.5B] and [13.5C], each of which has already been discussed. In my view, the plea is inadequate for the reasons given in the course of analysing the first knowledge category. In particular, there is an insufficient basis to plead that an instruction to disburse investment money to members of the Vidale Group constituted a breach of trust or was otherwise capable of indicating the facts to an honest and reasonable person. In addition (and most significantly) the pleas at their highest allege that there were circumstances that would put an honest and reasonable person on inquiry. To that extent, they are an invocation of the fifth category in Baden, which does not suffice under Australian law to found a second limb Barnes v Addy claim.

CONCLUSION 56 As the Teakle companies correctly submitted, the cross-referenced pleas are not themselves the subject of any complaint and the length and nature of the trial would not be affected by a grant of leave allowing the proposed pleading to include the defective pleas. Whilst that would be a weighty consideration in the usual run of cases, I do not consider permitting the introduction of defective pleas to be the appropriate course in a case involving allegations as serious as those alleged against the respondents. 57 I do not consider it appropriate to provide the Teakle companies with an opportunity to attempt to re-plead the knowledge allegations. They have had some months to get their case in order and there have been unacceptable delays in the progression of the matter to a hearing due to their previous defaults. In any event I am not satisfied that the Teakle companies presently have a proper evidentiary basis to support an allegation of actual knowledge, nor am I satisfied that the plea of actual knowledge should be allowed so as to provide a pleaded basis for discovery on that critical topic. 58 The plea at [24.2.4] will be allowed on the basis that the respondents raised no compelling objection to it. 59 There will be orders granting leave to file and serve the proposed pleading on the conditions that: (1) in [23.1], the cross-references to [10C] and [10D] are to be deleted; (2) the allegation of knowledge in [24] is to be confined to the categories of knowledge alleged at [24.2.4]; and (3) there be strictly consequential amendments to the numbering and wording of proposed [24.2.4] to reflect the deletion of the remainder of [24]. 60 I will hear the parties as to costs. I certify that the preceding sixty (60) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Charlesworth.

Federal Court Rules 2011(Cth)rr 7.23, 16.02, 16.42, 16.43

At a glance

Court

Decision date

Before

Source

Judgment (13 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (15)