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[2012] FCAFC 107
respondent. The appeal be dismissed. The appellants pay the respondents' costs of the appeal, to be taxed if not agreed.
The Full Federal Court upheld the strike-out of claims against directors of two financial services companies. The clients alleged the directors knew their companies had made misleading promises about how they would handle investments and had breached fiduciary duties through excessive unauthorised trading, causing millions in losses. The Court ruled the court documents did not properly spell out how the directors actually knew the key facts, what exactly they knew, or how their knowledge made them legally responsible. Because knowledge is the critical link for holding directors personally liable, and the pleading could not be fixed, the claims against them were dismissed.
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The appellants comprised three corporate entities controlled by the fourth appellant, Beverley Lorraine Young, together with Ms Young herself. Each corporate appellant was a retail client for the purposes of Chapter 7 of the Corporations Act 2001 (Cth). They entered into separate but similar advisory agreements with Stripe Capital Pty Ltd in 2006 and 2007. Stripe was an authorised representative of Australian Stockbrokers & Advisory Services Limited (ASANDAS), the holder of an Australian financial services licence. The agreements were said to contain an implied term that Stripe would exercise reasonable skill, care and diligence, which in turn gave rise to eight specific "Stripe Duties" mirroring obligations under s 912A(1) of the Corporations Act.
Prior to entering the agreements, Stripe was alleged to have made a "Duties Representation" that it would fulfil those duties, and a consequent "Disclosure Representation" that it would inform the clients if the Duties Representation became untrue. The statement of claim asserted that the Duties Representation was misleading or deceptive in contravention of s 1041H because Stripe lacked adequate procedures to ensure honest and fair conduct, conflict management, compliance with financial services laws, competency, supervision and risk management. Between June 2007 and June 2008 Stripe engaged in trading activity on the appellants' accounts with a notional turnover of approximately $123 million on funds of approximately $8 million. The pleading described this activity as "exceptional and extraordinary" because it involved single trades exceeding $50,000, daily trading exceeding $500,000, unauthorised discretionary trades, unauthorised securities including options and derivatives, high-volume trading to generate commissions, undisclosed commissions from a margin lender (Leveraged Equities), and drawings on a margin loan facility without authority.
The appellants pleaded two causes of action against the directors of Stripe and, in parallel terms, against the directors of ASANDAS. The first was that the directors were involved in Stripe's contravention of s 1041H by aiding, abetting, counselling or procuring it or by being knowingly concerned in it. The second was that the directors were knowingly concerned in Stripe's breaches of fiduciary duties owed to the clients, relying on the second limb of Barnes v Addy (1874) LR 9 Ch App 244. Both causes of action turned on allegations that the directors knew of the representations, knew that the volume and nature of trading rendered the representations untrue, and failed to cause Stripe to disclose the change or to cease the conduct.
The primary judge had struck out an earlier version of the pleading in 2010 and, after a further iteration filed in August 2011, struck out the claims against the directors and dismissed the proceeding against them in October 2011. The Full Court (Emmett, Bennett and McKerracher JJ) heard the appeal on 14 May 2012 and delivered joint reasons on 14 August 2012. The appeal was dismissed with costs. The Court held that the statement of claim did not adequately particularise the directors' actual knowledge, did not identify the causal connection between that knowledge and the alleged contraventions or breaches, and did not disclose an arguable case. No application for further leave to re-plead had been made, and senior counsel for the appellants did not suggest on appeal that any amendment could cure the deficiencies.
The Court began by accepting, for the purpose of the strike-out application, that all facts alleged in the statement of claim were true. It nevertheless concluded that the pleading was embarrassing and failed to disclose a reasonable cause of action because it did not fulfil the basic functions of identifying the issues and apprising the respondents of the case they had to meet.
The critical deficiency was the pleading of knowledge. Rule 16.43(1) of the Federal Court Rules 2011 required particulars of the facts on which an allegation of a condition of mind, including knowledge, is based. The statement of claim asserted at paragraph 29.1 that the Stripe directors "knew" that Stripe had made the Duties Representation and the Disclosure Representation. Yet it pleaded no facts showing how any director became aware of the statements made by Mr King to Ms Young, the content of the written materials, or the implied terms of the agreements that were said to give rise to those representations. The Disclosure Representation itself was said to be implied from the forward-looking nature of the Duties Representation; no facts were pleaded that could have put the directors on notice of that implied representation.
A further layer of inference was attempted in paragraphs 29.4 to 29.6. The magnitude of trading was said to be "exceptional and extraordinary" and therefore to indicate that it was unauthorised, inappropriate and for the improper purpose of generating commission. From that it was said to be inferred that the directors were informed of and knew the trading activity and knew its character. The Court observed that no criteria were pleaded by which the trading could be judged exceptional—no comparison with past trading by these clients, no reference to their financial position, no industry benchmark. The pleading therefore left an unexplained gap between the raw figures and the conclusion that the directors must have known the trading was improper.
The alternative plea based on absence of an adequate reporting system was equally problematic. It asserted that if no system existed the directors had wilfully shut their eyes, been reckless, or failed to make enquiries an honest person would have made. That language echoed the first three categories of knowledge discussed in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [160] and [174]. However, the Court noted that the statement of claim did not plead that the directors knew that the absence of a system would itself breach the Duties Representation, nor did it plead facts that would fix them with knowledge of the specific breaches later listed in paragraph 29.9 (unauthorised trades, improper securities, undisclosed commissions, unauthorised margin drawings). The result was circular: the directors were said to be liable because they were knowingly concerned, but the facts said to constitute that knowing concern were not identified.
The Court further held that an essential integer of the appellants' case appeared to be a novel duty owed by directors directly to the company's clients. Paragraph 29.2 asserted that, because loss to clients was foreseeable, the directors had a duty to take reasonable care to cause Stripe to fulfil the representations. The Court described this as "curious" and "somewhat novel". It suggested the pleader may have intended only to allege a practical imperative that competent directors would implement monitoring systems, but that is not what was pleaded. Without a properly articulated legal foundation for that duty, the inference of knowledge could not stand.
In relation to the Barnes v Addy claim, the Court reiterated that the second limb requires knowledge of a dishonest and fraudulent design. The statement of claim alleged unauthorised discretionary trading, high-volume commission-churning and unauthorised margin drawings as the design, but did not plead facts showing that the directors knew those acts were dishonest rather than merely negligent or mistaken. The same gaps in particularisation of knowledge therefore doomed both causes of action.
Finally, the Court noted that there had been two successful strike-outs and several informal attempts to re-plead over nearly two years. The appellants had not identified any additional material facts that could be pleaded to cure the deficiencies, nor had they appealed on the basis that further leave should have been granted. In those circumstances dismissal of the proceeding against the directors was the appropriate order. The appeal was therefore dismissed with costs.
Before this decision the law on director liability for corporate wrongs was already settled in several respects. Yorke v Lucas (1985) 158 CLR 661 had established that accessorial liability under consumer protection provisions (then s 75B of the Trade Practices Act, now mirrored in the Corporations Act) requires actual knowledge of the essential elements of the contravention; constructive knowledge or mere suspicion is insufficient. Giorgianni v The Queen (1985) 156 CLR 473 had confirmed that wilful shutting of eyes to the obvious can constitute knowledge in criminal complicity, but Pereira v Director of Public Prosecutions (1988) 63 ALJR 1 had distinguished actual knowledge of suspicious circumstances from a failure to inquire. Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 had clarified the five categories of knowledge for the second limb of Barnes v Addy, emphasising that the first three involve actual knowledge while the last two are constructive, and that liability requires knowledge of a dishonest and fraudulent design, not merely a breach of duty.
The pleading principles were also well established. Fox v H Wood (Harrow) Ltd [1963] 2 QB 601 and Smith v Littlemore (1996) 15 WAR 289 had long required particulars of facts said to show that a party "ought to have known" something. Ritter v North Side Enterprises Pty Ltd (1975) 132 CLR 301 had allowed knowledge itself to be pleaded as a material fact in some fraud cases, but the Court here observed that where allegations are analogous to fraud, as accessorial liability and knowing assistance are, more specific particulars are required.
This judgment did not change those principles. It applied them rigorously to a complex corporate and financial services context. Its contribution lies in illustrating the high standard of particularity demanded when the allegation is that non-executive directors had actual knowledge of specific representations made by officers or employees and of the improper character of trading activity. After the decision, practitioners drafting claims against directors under ss 917A, 917B, 917E or for knowing concern in fiduciary breaches must plead the precise pathway by which each director is said to have acquired the relevant knowledge—whether by board papers, management reports, specific communications or otherwise—and must link that knowledge to the exact elements of the contravention or dishonest design. The decision also confirms that a generalised assertion that directors "must have known" because the trading was large will not suffice unless the pleading explains why the size or pattern was objectively indicative of impropriety and why that indicator was known to the directors.
The judgment leaves open whether a different pleading, with additional material facts, could succeed. It expressly notes that it is not deciding that no arguable case exists, only that the particular statement of claim did not disclose one. It also records that the doctrines of res judicata or issue estoppel in any fresh proceeding would be a matter for another day.
Paragraph [11]: "Proving a director's actual knowledge of the essential ingredients of a contractual or tortious breach or statutory contravention is a prerequisite to the director's personal liability. For statutory breaches, it is well established that, in order to be an accessory or to be knowingly involved in a contravention, a person must have intentionally participated, having knowledge of the essential matters constituting the contravention (see Yorke v Lucas (1985) 158 CLR 661). That is not imputed or constructive knowledge but, rather, actual knowledge."
Plain-English translation: You cannot make a director personally pay for what the company did wrong unless you can prove the director actually knew the important facts that made the company's conduct illegal or a breach of duty. Guessing that the director "should have known" is not enough.
Paragraph [41]: "An essential element in the pleading of knowledge on the part of the Stripe Directors is the duty allegedly owed by the Stripe Directors to Stripe's clients to cause Stripe to fulfil the obligations of Stripe, either statutory or fiduciary. The duty is said to arise merely from the knowledge that the relevant representations had been made or that fiduciary obligations were owed, coupled with knowledge of the foreseeability of loss by reason of the representation being false or the duties being breached. That appears to be a somewhat novel proposition."
Plain-English translation: The clients' lawyers seemed to be saying that once a director knows his company has promised to do something, and knows clients could lose money if the promise is broken, the director automatically owes the clients a duty to make sure the company keeps its promise. The Court thought this was a new and doubtful legal idea that had not been properly explained.
Paragraph [52]: "It is impossible to discern from the allegations made in the Statement of Claim what is alleged to be the causal connection between the involvement of the Stripe Directors in the alleged contravention, on the one hand, and the trading losses alleged to have been suffered by the Corporate Appellants, on the other. Thus, the Statement of Claim makes no assertion as to the time when it is alleged that the Stripe Directors knew, or are to be fixed with knowledge of, the fact that trading activities were being undertaken that were unauthorised, inappropriate and for the purpose of earning commission for Stripe, such that, having acquired that knowledge, they should have intervened to prevent further trading activity of that character or at least to give notice that there was a change of circumstances."
Plain-English translation: The Court could not understand from the document how the directors' supposed knowledge actually caused the clients' losses. It was never said when the directors first knew the trading was wrong, so it was impossible to know whether they should have stopped it earlier or told the clients sooner.
Paragraph [58]: "Directors are not personally liable for the wrongs of the company merely because of the office they hold. Something more is required, and there have been many different formulations in various jurisdictions as to what more is required before a director will be liable for the company's wrongful conduct."
Plain-English translation: Just being a director does not make you liable for everything the company does wrong. The law requires something extra—some personal involvement or specific conduct—and the Court listed the different legal tests that have been used in past cases.
This precedent is triggered whenever a claimant seeks to impose personal liability on directors for corporate contraventions of the Corporations Act (particularly misleading conduct under s 1041H or breaches of licence obligations under s 912A) or for knowing concern in equitable breaches of fiduciary duty, and the claim rests on an allegation that the directors had actual knowledge of the essential facts.
It applies with particular force in financial services litigation where clients of an authorised representative seek to "pierce the corporate veil" and sue the individuals behind the licensee or the representative. The fact pattern typically includes: (1) representations made by the company or its officers about compliance with statutory or fiduciary obligations; (2) subsequent conduct said to render those representations false (for example, inadequate compliance systems, unauthorised trading, commission churning or undisclosed benefits); (3) allegations that directors knew of the representations and of the true position; and (4) a causal link between the directors' failure to act on that knowledge and the client's loss.
The judgment makes clear that the precedent will defeat a claim that relies on generalised assertions of "exceptional" trading volumes without pleading the benchmark against which the trading is said to be exceptional, or that pleads an inference of knowledge without identifying the specific documents, reports or communications that conveyed the knowledge to the directors. It is also engaged where the pleading introduces a direct duty owed by directors to clients based solely on foreseeability of loss; such a duty must be separately justified in law and fact.
Because the decision turned on r 16.43 and the principles in Yorke v Lucas and Farah Constructions, it is relevant to any pleading of "knowingly concerned", "involved in a contravention", or second-limb Barnes v Addy liability, whether under the Corporations Act, the Australian Consumer Law or in equity.
The judgment itself carefully positions its reasoning within the existing authorities rather than announcing new doctrine. It treats Yorke v Lucas, Giorgianni, Pereira and Farah Constructions as authoritative statements of the knowledge requirement and applies them without qualification. The discussion at [55]-[56] of the five categories of knowledge from Farah Constructions is presented as the orthodox framework for analysing the second limb of Barnes v Addy, and the judgment notes that the first three categories involve actual knowledge while the last two are constructive. The Court expressly leaves open which of the various formulations of director liability summarised at [58] (drawing on Pioneer Electronics and Keller) should be preferred, stating that it is unnecessary to decide because the statement of claim relied on none of them.
Subsequent references within the reasons to Ritter v North Side Enterprises and Smith v Littlemore are used to support the proposition that, while knowledge itself may sometimes be pleaded as a material fact, the present allegations—being analogous to fraud—required more specific particulars. The judgment therefore reinforces rather than departs from the pre-existing authorities. It does not overrule or distinguish any of the cited decisions but treats them as setting the minimum standard that the appellants' pleading failed to meet.
The Court's observation at [62] that "there may yet be an arguable case against the Stripe Directors and the ASANDAS Directors" if material facts could be added is a deliberate limitation on the precedent's scope. It signals that the dismissal is procedural, not substantive, and that a differently drafted claim might succeed. That qualification has been important in later procedural applications where courts have cited the decision as an example of the strictness with which knowledge must be pleaded, while still allowing amendment where a plaintiff can identify the missing particulars.
The judgment leaves several questions unresolved. First, it does not decide whether directors of a financial services licensee or authorised representative owe any direct duty of care to retail clients of the representative. The pleading asserted such a duty arose from knowledge of representations plus foreseeability of loss, but the Court described this as novel without expressing a concluded view. Whether such a duty exists in tort, equity or under statute therefore remains open.
Second, the precise content of the "something more" required for director liability is not determined. The Court lists at [58] a range of formulations drawn from Pioneer Electronics and Keller—procuring or directing the wrong, making the act the director's own, assuming responsibility, standing apart from the company—but expressly declines to choose among them. Future cases will need to resolve which test applies in the Corporations Act accessorial liability context.
Third, the judgment notes that the appellants did not plead actual knowledge of suspicious circumstances in the Pereira sense. It is therefore unclear whether a properly particularised plea of knowledge of circumstances that would put an honest director on inquiry could support accessorial liability for a s 1041H contravention. The Court appears to doubt that constructive knowledge suffices, but does not foreclose the point.
Fourth, the interaction between the statutory responsibility imposed on a licensee by ss 917A, 917B and 917E and the personal liability of the licensee's directors is not explored. The pleading treated the Stripe directors and the ASANDAS directors in parallel, but the Court did not analyse whether the statutory deeming of responsibility alters the knowledge requirement for directors.
Finally, the Court expressly reserves the question whether res judicata or issue estoppel would prevent the appellants from commencing a fresh proceeding that cures the pleading deficiencies. That procedural issue is left for another day, as is the question whether, on different facts or with different particulars, an inference of actual knowledge could be drawn from trading volumes alone.
These open questions mean that while the decision sets a high bar for pleading, it does not close the door on well-particularised claims against directors in the financial services sector. The judgment's emphasis on the need for "the factual foundation for the case that is being alleged" will continue to govern interlocutory disputes about the adequacy of pleadings in this area.
Counsel for the appellants: DR Williams QC, NDC Dillon
Solicitor for the appellants: McKinlay Solicitors
Counsel for the first and second respondents: G Donaldson SC
Solicitor for the first respondents: Gadens Lawyers
Solicitor for the second respondents: Tottle Partners
IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION WAD 431 of 2011
BETWEEN: YOUNG INVESTMENTS GROUP PTY LTD ACN 078 020 309
AND: JAMES JEFFREY MANN, MICHAEL CHARLES BOWDEN, ANTHONY CHRISTOPHER KENNY, TIMOTHY LEONARD WEIR, STEPHEN EDWARD WOOD, ROBERT PHILIP GRANT
ANGELA CLAIRE HAYWARD, ANTIGONI LIKOUDIS, MARK EVANS MORRIS and ALEXANDER BURT
JUDGES: EMMETT, BENNETT AND MCKERRACHER JJ DATE OF ORDER: 14 AUGUST 2012 WHERE MADE: PERTH
IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION WAD 431 of 2011
BETWEEN: YOUNG INVESTMENTS GROUP PTY LTD ACN 078 020 309
AND: JAMES JEFFREY MANN, MICHAEL CHARLES BOWDEN, ANTHONY CHRISTOPHER KENNY, TIMOTHY LEONARD WEIR, STEPHEN EDWARD WOOD, ROBERT PHILIP GRANT
ANGELA CLAIRE HAYWARD, ANTIGONI LIKOUDIS, MARK EVANS MORRIS and ALEXANDER BURT
JUDGES: EMMETT, BENNETT AND MCKERRACHER JJ DATE: 14 AUGUST 2012 PLACE: PERTH
REASONS FOR JUDGMENT INTRODUCTION [1] RELEVANT LEGAL PRINCIPLES [6] ALLEGATIONS IN THE STATEMENT OF CLAIM [12] Involved in Contravention of the Corporations Act [18] Knowingly Concerned in Breach of Fiduciary Duties [35] THE DEFICIENCIES IN THE STATEMENT OF CLAIM [40] The Directors' Duty to Stripe Clients [41] Involved in Contravention of the Corporations Act [46] Knowingly Concerned in Breach of Fiduciary Duties [55] CONCLUSION [58]
INTRODUCTION 1 The question in this appeal is whether the appellants have demonstrated, as a matter of pleading, an arguable case against the directors of companies with which three of the appellants had contractual arrangements. The appellants seek to recover damages from those directors on the basis that the directors were involved in contraventions by their companies of the Corporations Act 2001 (Cth) (the Corporations Act), and were knowingly concerned in breaches by their companies of fiduciary duties owed by their companies. The allegations of being involved in contraventions and being knowingly concerned in breaches of duty arise out of much the same factual circumstances. 2 A judge of the Court concluded that, in circumstances where, over a period of almost two years, the appellants had failed to bring in an arguable pleading as against the directors, the proceeding should be dismissed as against the directors (see Young Investments Group Pty Ltd v Stripe Capital Pty Ltd [2011] FCA 1147). Accordingly, on 7 October 2011, his Honour ordered that the proceeding be dismissed as against the directors. Following the grant of leave to appeal, notice of appeal from that order was filed on 31 October 2011. The directors are the only respondents to the appeal. 3 By their notice of appeal, the appellants seek an order in the following terms: The judgment to strike out the appellants' application against the first and second respondents herein… be dismissed. The language of that proposed order is somewhat curious. The Full Court has dealt with the appeal on the assumption that the appellants seek an order that the order of 7 October 2011 be set aside. 4 The appeal has been argued on the basis that the primary judge erred in concluding that the most recent statement of claim filed on behalf of the appellants failed to disclose an arguable case against the directors. There is no ground of appeal alleging that the discretion of the primary judge miscarried in not granting the appellants a further opportunity to re-plead their case against the directors. That question is addressed below. 5 The appellants' most recent iteration of their statement of claim was filed on 24 August 2011 (the Statement of Claim), pursuant to leave, following an earlier order that parts of the appellants' pleading against the directors, as it then stood, be struck out as disclosing no reasonable cause of action (see Young Investments Pty Ltd v Stripe Capital Pty Ltd [2010] FCA 996). It will be necessary to set out in some detail the allegations made against the directors in the Statement of Claim. However, before doing so, it is desirable to state some relevant legal principles.
RELEVANT LEGAL PRINCIPLES 6 It was common ground that the applicable principles in relation to an application to strike out the whole or part of a statement of claim were as stated by the primary judge in an earlier successful strike out application in the proceeding (see Young Investments Group Pty Ltd v Stripe Capital Pty Ltd [2010] FCA 996). Those principles can be stated shortly. In an application to strike out a pleading, all of the facts alleged in the relevant pleading are to be accepted as true, and it is to be taken for granted that, on all other points, the pleading is unassailable. Provided that a pleading fulfils its basic function of identifying the issues, disclosing an arguable cause of action and apprising the other party of the case that it has to meet at trial, the pleading should be allowed to stand and the proceeding should be allowed to go to trial. Further, a court of first instance should be careful not to risk stifling the development of the law by summarily dismissing a claim where there is a reasonable possibility that, as the law develops, a cause of action may be held to lie. The power to dismiss summarily is to be used only in cases that are unarguable and for which there is no reasonable prospect of success. 7 A statement of claim must allege a cause of action with sufficient particularity and not simply make allegations in general terms. The adequacy of a statement of claim is to be assessed by reference to whether the cause of action is pleaded at a level of particularity that is sufficient to define the issues and inform the other party of the case that it has to meet, in the context of the particular allegations. A respondent or defendant is entitled to know the factual foundation for the case that is being alleged, so that the respondent or defendant can prepare to meet that case at trial. In order to disclose a reasonable cause of action, a statement of claim must contain an allegation of all of the relevant facts necessary to support any allegation made in it. A pleading that simply pleads a conclusion is embarrassing and should not be permitted to stand. 8 More specifically, r 16.43(1) of the Federal Court Rules 2011 provides that a party who pleads a condition of mind must state in the pleading particulars of the facts on which the party relies. Under r 16.43(3), condition of mind for a party includes knowledge. In addition, under r 16.43(2), if a party pleads that another party ought to have known something, the first party must give particulars of the facts and circumstances from which the other party ought to have acquired the knowledge. The question of knowledge on the part of the directors is critical to the causes of action sought to be pleaded against them by the appellants. 9 It has long been the case, in various jurisdictions, that particulars are to be provided of facts and circumstances relied upon to support a plea that something ought to have been known (see Fox v H Wood (Harrow) Ltd [1963] 2 QB 601 at 604 and Smith v Littlemore (1996) 15 WAR 289 at 300). Knowledge itself has usually been treated differently. Knowledge of, or recklessness towards falsity, by way of example, may usually be pleaded as the material fact without particularisation (see Ritter v North Side Enterprises Pty Ltd (1975) 132 CLR 301 at 304). Allegations of fraud, or the involvement of persons in statutory breaches sufficiently analogous to allegations of fraud, on the other hand, have required the provision of quite specific particulars. 10 The reason for not being required to particularise knowledge is not fully explained in the cases. It may be assumed that, on the one hand, there is the obvious difficulty of knowing what is inside another's mind. On the other hand, there may be instances where the evidence to be relied upon to establish knowledge could be identified by particulars. That evidence might be an admission or a communication, written or oral, that could only give rise to the relevant state of mind. In appropriate cases, the provision of particulars has been ordered when sought. 11 There are sound reasons for requiring knowledge to be particularised, at least in relation to the kind of allegations made in the Statement of Claim. Proving a director's actual knowledge of the essential ingredients of a contractual or tortious breach or statutory contravention is a prerequisite to the director's personal liability. For statutory breaches, it is well established that, in order to be an accessory or to be knowingly involved in a contravention, a person must have intentionally participated, having knowledge of the essential matters constituting the contravention (see Yorke v Lucas (1985) 158 CLR 661). That is not imputed or constructive knowledge but, rather, actual knowledge. It would not usually be sufficient to establish a statutory breach to show that a person said to be an accessory to such a breach wilfully shut his or her eyes to the obvious (see Giorgianni v The Queen (1985) 156 CLR 473). Actual knowledge of suspicious circumstances and failure to make enquiry may be different (see Pereira v Director of Public Prosecutions (1988) 63 ALJR 1 at 3). However, actual knowledge of suspicious circumstances is not pleaded in the Statement of Claim in the sense required for accessorial liability.
ALLEGATIONS IN THE STATEMENT OF CLAIM 12 The fourth appellant, Ms Beverley Young, was at all material times a director of the other three appellants, Young Investments Group Pty Limited (Young Investments), Rastus Group Pty Limited (Rastus) and Reid Park Investments Pty Limited (Reid Park). Young Investments acted as an investment company for Ms Young, Rastus acted as a trustee for superannuation funds for Ms Young and her family, and Reid Park acted as a trustee for an investment trust controlled by Ms Young. Each of Young Investments, Rastus and Reid Park (together the Corporate Appellants) was, for the purposes of Chapter 7 of the Corporations Act, a retail client in relation to financial product services. 13 Australian Stockbrokers & Advisory Services Limited (ASANDAS) was the holder of an Australian financial services licence under Chapter 7 of the Corporations Act, and carried on business as the provider of financial services by way of providing financial product advice and dealing in financial products. Stripe Capital Pty Limited (Stripe) carried on business as the provider of financial services, including by way of providing financial product services and dealing in financial products within the meaning of the Corporations Act. It provided those services as the authorised representative of ASANDAS. 14 As a financial services licensee, ASANDAS had certain obligations under s 912A(1) of the Corporations Act. ASANDAS owed, to parties dealing with it or with its authorised representatives, a duty to fulfil those obligations (the ASANDAS Duties). Under the provisions of ss 917A(1), 917B and 917E of the Corporations Act, ASANDAS was responsible for the conduct of Stripe in relation to the provision of financial services by Stripe. 15 The first respondents to the appeal, James Mann, Michael Bowden, Anthony Kenny, Timothy Weir, Stephen Wood and Robert Grant (the Stripe Directors), were the directors of Stripe at relevant times. The second respondents, Angela Hayward, Antigoni Likoudis, Mark Morris and Alexander Burt (the ASANDAS Directors), were the directors of ASANDAS at relevant times. 16 There are two counts pleaded against the Stripe Directors and two counts pleaded against the ASANDAS Directors. The counts against the Stripe Directors are pleaded in substantially the same terms as the counts against the ASANDAS Directors. The first count is an allegation that the relevant directors were involved in contraventions of the Corporations Act by their companies. The second is that they were knowingly involved in breaches of fiduciary duties owed by their companies to the Corporate Appellants. The second count is based on the second limb of Barnes v Addy (1874) LR 9 ChApp 244. Much the same criticisms are levelled at each count. Accordingly, it is necessary to deal with only the counts against one set of directors. It is convenient to deal with the counts against the Stripe Directors. 17 In July 2006, Rastus entered into an agreement with Stripe (the Rastus Agreement), whereby Rastus appointed Stripe as its financial advisor to provide financial services, including financial product advice. In June 2007 Young Investments entered into an agreement with Stripe (the Young Investments Agreement) whereby Young Investments appointed Stripe as its financial advisor to provide financial services, including financial product advice. In June 2007, Reid Park entered into an agreement with Stripe (the Reid Park Agreement) whereby Reid Park appointed Stripe as its financial advisor to provide financial services, including financial product advice.
Involved in Contravention of the Corporations Act 18 Paragraph 15 of the Statement of Claim asserts that each of the three agreements described above was subject to an implied term that, in providing services under the agreement, Stripe would use all reasonable skill, care and diligence. The term was said to be implied as being necessary to give business efficacy to the agreements or, alternatively, to be implied by custom in agreements for the provision of financial services. It is alleged that, in using all reasonable skill, care and diligence, Stripe was subject to eight specific duties (the Stripe Duties). The Stripe Duties were: to act only on instructions; not to make any profit or commission without disclosing such profit or commission and accounting for any benefit received; to ensure its employees and officers acted efficiently, honestly and fairly; to have in place arrangements for the management of conflicts of interest that may have arisen in relation to the activities undertaken by its employees and officers in the provision of financial services; to ensure that its employees and officers complied with the financial services laws; to have adequate resources to provide financial services and to carry out supervisory arrangements; to ensure its employees and officers maintained sufficient competency to provide financial services; and to have risk management systems. 19 Paragraph 28.1 of the Statement of Claim alleges that, prior to each Corporate Appellant's entry into its agreement with Stripe, Stripe represented that it would fulfil the Stripe Duties (the Duties Representation). It is not alleged that the Duties Representation was made expressly. Rather, the Duties Representation is said to arise from the following facts: In July 2006, Mr Todd King, acting on behalf of Stripe, who was the second respondent named in the Statement of Claim, told Ms Young that he and a number of colleagues, who had formerly worked for the financial services advisor then engaged by the Corporate Appellants, had established Stripe as a full service financial services provider, that Stripe, as the authorised representative of ASANDAS, was authorised by ASANDAS to provide financial services and advice, including in relation to dealings with securities, and that, if the Corporate Appellants engaged Stripe, Stripe would provide financial services, including financial product advice, to them. Each of the Rastus Agreement, the Young Investments Agreement and the Reid Park Agreement stated that Stripe was the authorised representative of ASANDAS and that ASANDAS was the holder of an Australian financial services licence. Written material provided to Ms Young by Stripe stated that Stripe was an authorised representative of ASANDAS and that ASANDAS was the holder of an Australian financial services licence. 20 Paragraph 28.2 of the Statement of Claim asserts that the Corporate Appellants entered into their respective agreements with Stripe in reliance upon the Duties Representation. Paragraph 28.6 asserts that the Duties Representation was a representation in relation to the ongoing future conduct of Stripe, and that it follows from that fact that Stripe also represented that if, at any time, the Duties Representation became untrue, Stripe would disclose to the Corporate Appellants that change of circumstances (the Disclosure Representation). 21 Paragraph 28.3 asserts that, in contravention of s 1041H of the Corporations Act, the Duties Representation was misleading or deceptive, in that it was untrue because Stripe did not have any or any adequate procedures in place or in operation: to ensure Stripe employees, in relation to the provision of financial services, acted efficiently, honestly and fairly; to prevent Stripe from engaging in conduct in conflict with its duties to Rastus, Young Investments and Reid Park; to ensure that Stripe complied with the financial services law, including in relation to discretionary trading; to ensure that Stripe's employees maintained sufficient competency to provide financial services advice; to ensure that Stripe's employees provided financial services, and for Stripe to supervise the ongoing fulfilment of those obligations and duties; or to implement and give effect to risk management systems to ensure the risk of breach of client services agreements or breaches of statutory duty or duties at law did not occur. 22 Paragraph 29.1 of the Statement of Claim alleges that the Stripe Directors knew that Stripe had made the Duties Representation and the Disclosure Representation to the Corporate Appellants. Paragraph 29.2 then asserts that, given that it was reasonably foreseeable by the Stripe Directors that their failure to cause Stripe to fulfil the Duties Representation was likely to cause loss to Stripe's clients, the Stripe Directors had a duty, in order to avoid loss to Stripe's clients, to take reasonable care to cause Stripe to fulfil the Duties Representation. 23 That allegation is a curious one. It amounts to an assertion that the directors of a company have a duty to the clients of the company to take reasonable care to cause the company to perform its obligations, simply because the directors knew of the company's obligations and could reasonably foresee that the company's clients would suffer damage from breach of those obligations. As will become apparent, the existence of such a duty appears to be an essential element of the case pleaded by the appellants. 24 The Statement of Claim then alleges, in paragraph 29.3, that, to fulfil that duty, it was necessary for the Stripe Directors: to have knowledge from time to time of the extent of the trading in securities being undertaken on account of Stripe's clients by Stripe's brokers; to ensure that a system was imposed on Stripe's brokers that resulted in the Stripe Directors having access to information concerning, and being promptly informed of, the extent of the trading in securities on account of clients being undertaken by Stripe's brokers; and to have prompt knowledge of any exceptional or extraordinary trading undertaken or being undertaken by Stripe's brokers. 25 Paragraph 29.4 then alleges that the extent of the trading activity undertaken by Stripe on account of the Corporate Appellants was exceptional and extraordinary, in that: in approximately 12 months, using investment funds of approximately $8 million, trading in securities was undertaken to the value of $123,269,784; single trades were undertaken for which the consideration was greater than $50,000; and daily trading was undertaken in excess of $500,000. There is no assertion as to the criteria against which that trading activity was to be measured in order to determine that it was exceptional and extraordinary. For example, it might have been asserted that the trading was exceptional and extraordinary compared with past trading activity of the Corporate Appellants. Alternatively, it might have been asserted that it was exceptional and extraordinary for companies in the position of the Corporate Appellants. However, there is no allegation about the past activities or the financial position or other circumstances of the Corporate Appellants that might demonstrate why the trading activities alleged were extraordinary and exceptional. 26 Paragraph 29.5 of the Statement of Claim then asserts that the magnitude of the trading activity undertaken by Stripe indicated that that trading activity was: unauthorised; inappropriate; and for the purpose of earning commission for Stripe, rather than for a benefit for Rastus, Young Investments or Reid Park reasonably commensurate with the risks to which they were being exposed, contrary to their interests; such as required identification and report to the Stripe Directors promptly, so as to enable the Stripe Directors to fulfil their duty to take reasonable care to cause Stripe to fulfil the Duties Representation. There is no allegation as to what it was about the magnitude of the trading activity referred to in paragraph 29.5 that indicated that the trading was unauthorised, inappropriate and for an improper purpose. For example, the magnitude might be compared with the prior trading activity of the Corporate Appellants, or with their financial position or other circumstances. There is no allegation as to any such matter. 27 Next, the Statement of Claim asserts in paragraph 29.6 that it is to be inferred from the matters outlined above, meaning, presumably, the allegations in paragraphs 29.1 to 29.5, that the Stripe Directors were informed of and knew the trading activity undertaken by Stripe on account of the Corporate Appellants and that, accordingly, they knew that that trading activity was unauthorised, inappropriate and for the purpose of earning commission for Stripe, rather than for a benefit for the Corporate Appellants reasonably commensurate to the risks to which they were being exposed. Thus, there is an allegation of actual knowledge, on the part of the Stripe Directors, of the extent of the trading activity, and of the fact that it was unauthorised, inappropriate and for the purpose of earning commissions for Stripe. 28 The Statement of Claim asserts, in the alternative, that, if there was no adequate system implemented or maintained for reporting of trading as described in paragraph 29.3, in circumstances where the Stripe Directors knew that the Duties Representation and the Disclosure Representation had been made by Stripe, knew that their failure to take reasonable care to cause Stripe to fulfil those representations was likely to cause loss to Stripe's clients and knew that to fulfil the duty they had to avoid loss to Stripe's clients it was necessary to implement and maintain an adequate system for reporting of trading, then the Stripe Directors: wilfully shut their eyes to the extent of the trading activity undertaken by Stripe and the fact that the trading activity undertaken was unauthorised, inappropriate and was for the purpose of earning commission for Stripe; or were wilful and reckless in failing to implement and maintain such a system; or failed to undertake enquiries that would have been undertaken by an honest and reasonable person in order to identify such matters. 29 That assertion, based on the assumption that no adequate system for reporting trading was implemented or maintained, is said, in the part of the pleading dealing with knowing concern in breach of fiduciary duties, to lead to the result that the Stripe directors are fixed with knowledge of the fact that trading activity being undertaken by Stripe on account of the Corporate Appellants was unauthorised, inappropriate and was for the purpose of earning commissions for Stripe. It may be that this allegation was inadvertently omitted from paragraph 29 of the pleading. That is to say, it is, or was intended to be, alleged that the Stripe Directors are to be deemed in some way to have knowledge of the matters they would have known if they had had an adequate system in place. The language of that allegation is reminiscent of Barnes v Addy. 30 Paragraph 29.7 of the Statement of Claim then alleges that, since the Stripe Directors were possessed of the knowledge, either actual or deemed, that the trading activity conducted on behalf of the Corporate Appellants was unauthorised, inappropriate and for the purpose of earning a commission for Stripe, they knew that the Duties Representation had become untrue in whole or in part and, accordingly, had become misleading or deceptive. Paragraph 29.8 asserts that, notwithstanding that knowledge, the Stripe Directors, in breach of the Disclosure Representation, failed to cause Stripe to disclose to the Corporate Appellants the change of circumstances. 31 That allegation seems to say that there was a breach of the Disclosure Representation on the part of Stripe insofar as it failed to inform the Corporate Appellants that Stripe was no longer fulfilling the Stripe Duties. There is also an allegation that the Stripe Directors failed to cause Stripe to disclose to the Corporate Appellants that it was no longer fulfilling the Stripe Duties. 32 Next, paragraph 29.9 asserts that, as a result of that conduct on the part of the Stripe Directors, Stripe, between June 2007 and June 2008: bought and sold securities on behalf of Rastus, Young Investments and Reid Park without instructions; bought securities, including options and derivatives, on behalf of Rastus, Young Investments and Reid Park that were not authorised securities, being securities of a type to which Stripe had agreed to confine its recommendations under its agreements with the Corporate Appellants; without any authority to do so, undertook high volume trading of securities in order to effect transactions on which commissions would be earned by Stripe without any reasonably commensurate benefit being earned by Rastus, Young Investments or Reid Park; recommended to Young Investments and Reid Park that they enter into a margin loan agreement with the firm Leveraged Equities, the effect of which was to allow securities owned by Young Investments and Reid Park to be pledged as security for a loan facility to be drawn down upon for the dedicated purpose of purchasing further securities; received commissions from Leveraged Equities without disclosing those commissions to Young Investments or Reid Park and without accounting for benefits received; drew down funds under the agreement with Leveraged Equities without instructions or authorisation; and used the unauthorised funds drawn down from Leveraged Equities to undertake high volume trading in securities for the purposes of earning commission without any reasonably commensurate benefit being earned by Young Investments or Reid Park. 33 Paragraph 29.10 of the Statement of Claim then asserts that, in the premises, the Stripe Directors were involved in the contravention: by aiding, abetting, counselling or procuring the contravention; and by their omission to give notice of the change of circumstances, directly or indirectly, being knowingly concerned in or a party to the contravention. The Statement of Claim does state explicitly what is meant by the contravention. There is the earlier assertion in paragraph 28.3 of the Statement of Claim that, in making the Duties Representation, Stripe contravened s 1041H of the Corporations Act. That is probably the contravention to which reference was intended to be made in paragraph 29.10. However, it is not entirely clear. 34 Finally, paragraph 29.11 of the Statement of Claim alleges that, by reason of the involvement of the Stripe Directors in the contravention, the Corporate Appellants have suffered loss and damage. Rastus is alleged to have suffered trading losses of $1,820,290.06 and $1,917,757.67 from trading on behalf of superannuation funds. Young Investments is alleged to have suffered trading losses of $1,343,251.70. Reid Park is alleged to have suffered trading losses of $3,418,862.20 and $3,717,680.25. Paragraph 29.11 alleges further that the Corporate Appellants also lost the opportunity to have been competently advised on trading and securities and to have invested in and earned profits on trading and authorised securities, or by investing in alternative investments, or not investing.
Knowingly Concerned in Breach of Fiduciary Duties 35 The second count against the Stripe Directors is based on the assertion that they were knowingly concerned in breaches of fiduciary duties by Stripe, based on the second limb of Barnes v Addy. The assertions that the Stripe Directors were knowingly concerned in breaches of fiduciary duty by Stripe follow a pattern similar to that of the assertions that the Stripe Directors were involved in the contravention by Stripe. 36 Paragraph 34 of the Statement of Claim asserts that, as a result of entering into the Rastus Agreement, the Young Investments Agreement and the Reid Park Agreement, a relationship of trust and confidence existed as between Stripe, as financial advisor, on the one hand, and each of Rastus, Young Investments and Reid Park as clients, respectively, on the other hand. It alleges that, pursuant to that relationship, when providing advice in relation to, and in undertaking trading in, securities on account of its clients, Stripe was subject to fiduciary duties: to act in good faith and in the best interests of its clients; not to put itself in a position where its own interest conflicted with that of its clients; and not to act for its own benefit, save as authorised to do so. 37 Paragraph 34.3 alleges that, in breach of those fiduciary duties, Stripe undertook unauthorised discretionary trading that was not in the best interest of its clients, undertook high volume trading of securities in order to effect transactions on which commission would be earned by it, without instructions or authorisation, and, also without instructions or authorisation, made drawings on the facility with Leveraged Equities for the purpose of undertaking high volume trading in securities without any reasonably commensurate benefit to the risk to which Young Investments or Reid Park were being exposed, contrary to their interests. 38 Paragraph 36.1 alleges that the conduct alleged in paragraph 34.3 was in breach of the fiduciary duty pleaded, or, alternatively, was in furtherance of the dishonest and fraudulent design of Stripe to effect the alleged breaches of fiduciary duty. Next, paragraph 36.2 of the Statement of Claim alleges that the Stripe Directors knew that a relationship of trust and confidence existed as between Stripe, as financial advisor, on the one hand, and the Corporate Appellants, as clients, on the other hand, and that, when providing advice and undertaking trading in securities on account of its clients, Stripe was subject to the fiduciary duties described above. In addition, paragraph 36.3 alleges that it was reasonably foreseeable that the failure by the Stripe Directors to take reasonable care to cause Stripe to comply with its fiduciary duties was likely to cause loss to Stripe's clients and that, in those circumstances, the Stripe directors had a duty to take reasonable care to cause Stripe to comply with its fiduciary duties. That is similar to the duty to Stripe's clients alleged in paragraph 29.2. 39 Paragraphs 36.4 to 36.7 of the Statement of Claim repeat, in substance, the allegations made in paragraphs 29.3 to 29.6. Paragraph 36.8 then asserts that the Stripe Directors knew that Stripe was in breach of its fiduciary duties, and paragraph 36.9 asserts that, notwithstanding that knowledge, the Stripe Directors failed to cause Stripe to cease acting in breach of, or to cause Stripe to fulfil, Stripe's fiduciary duties. As a result of that conduct, Stripe was able to engage in the conduct described in paragraph 29.9 of the Statement of Claim. It is alleged that, in those circumstances, the Stripe Directors were knowingly concerned in the breaches of fiduciary duties, and, by reason of that conduct, the Corporate Appellants suffered the loss and damage described in paragraph 29.11.
THE DEFICIENCIES IN THE STATEMENT OF CLAIM 40 The deficiencies in the Statement of Claim about which complaint is made are principally concerned with the allegation of knowledge. It is convenient to deal with the deficiencies in relation to the Stripe Directors. The deficiencies described below apply equally to the counts against the ASANDAS Directors. Knowledge is an essential element in both causes of action. The Statement of Claim makes an effort to satisfy the Rules, insofar as it sets out some facts upon which the allegation of knowledge is based and some facts on the basis of which it is alleged that knowledge ought to have been acquired. The effort is not entirely satisfactory.
The Directors' Duty to Stripe Clients 41 An essential element in the pleading of knowledge on the part of the Stripe Directors is the duty allegedly owed by the Stripe Directors to Stripe's clients to cause Stripe to fulfil the obligations of Stripe, either statutory or fiduciary. The duty is said to arise merely from the knowledge that the relevant representations had been made or that fiduciary obligations were owed, coupled with knowledge of the foreseeability of loss by reason of the representation being false or the duties being breached. That appears to be a somewhat novel proposition. 42 It may be that that the pleader did not intend to allege that there was such a duty owed by the Stripe Directors to Stripe's clients. Rather, it may have been intended to allege no more than some practical imperative. That is to say, it may have been intended to allege only that any competent and diligent director would take steps to ensure that his or her company does in fact comply with all of its obligations, both statutory and fiduciary, and that a director who failed to do so would be wilfully shutting his or her eyes to the consequences, would be wilfully reckless, and would not be acting as an honest and reasonable person. 43 Thus, the alternative pleaded assertion that, if there was no system implemented or maintained for reporting of trading, the Stripe Directors wilfully shut their eyes, were wilful and reckless and failed to undertake enquiries that would have been made by an honest and reasonable person, may have been intended as no more than an assertion that such a practical imperative would have compelled the Stripe Directors to implement and maintain an appropriate system of reporting. On that basis, the assertion intended may have been that, since the Stripe Directors were competent and diligent, the practical imperative gives rise to the inference that they did, in fact, have arrangements in place to ensure that they could monitor the conduct of Stripe's business by its brokers and its employees and executives. 44 Thus, the Statement of Claim may have been intended to allege only that the inference should be drawn that the Stripe Directors had implemented and maintained an adequate system for reporting, because only a director who was wilfully blind, wilful and reckless or acting unreasonably and dishonestly would have failed to do so. That is to say, the Stripe Directors had in fact put in place a system that resulted in their having access to information concerning, and being promptly informed of, and accordingly they had actual knowledge of, the extent of the trading in securities on the account of clients that were undertaken by Stripe's brokers, as alleged in paragraph 29.3. 45 That, however, is not what is pleaded. Further, there is a real question as to whether the facts alleged could lead to the conclusion that an inference of knowledge on the part of the Stripe Directors can be drawn, as the Statement of Claim seeks to do.
Involved in Contravention of the Corporations Act 46 Under s 912A(1) of the Corporations Act, the holder of a financial services licence must: ensure that the financial services are provided efficiently, honestly and fairly; have in place adequate arrangements for the management of conflicts of interest that may arise in relation to activities undertaken; comply with the conditions on the licence; comply with the financial services laws; ensure that its representatives comply with the financial services laws; have available adequate resources to provide the financial services covered by the licence and to carry out supervisory arrangements; maintain the competence to provide financial services; ensure that its representatives are adequately trained and are competent to provide financial services; have a dispute resolution system if financial services are provided to persons as retail clients; and have adequate risk management systems. 47 There is a clear correlation between the terms of the Stripe Duties, as formulated in paragraph 15 of the Statement of Claim, and the obligations of the holder of a financial services licence under s 912A(1) of the Corporations Act. That is to say, the provisions of s 912A(1) are reflected in the terms of the specific duties said to constitute the Stripe Duties and in the particulars of the making of the Duties Representation. As the holder of a financial services licence, ASANDAS has the obligations referred to in that provision. Under s 917B, a licensee is responsible, as between the licensee and the client, for the conduct of the representative. Under s 917E, the responsibility of a holder of a financial services licence extends so as to make the licensee liable to the client in respect of any loss or damage suffered by the client as a result of the conduct of a representative of the licensee. 48 Thus, the provisions of the Corporations Act appear to have a significant part to play in the circumstances that are said to give rise to the making of the Duties Representation. The allegation is that Ms Young was informed that Stripe was an authorised representative of a licensed financial services provider, namely ASANDAS, and that Ms Young was informed that, if the Corporate Appellants engaged Stripe, Stripe would provide them with financial services including financial product advice. However, it is difficult to see how the alleged Duties Representation (that Stripe would fulfil the Stripe Duties) and the Disclosure Representation (that Stripe would disclose to its clients the fact that it would no longer fulfil the Stripe Duties) arise from the facts alleged in the Statement of Claim. 49 More significantly, however, paragraph 29.1 of the Statement of Claim asserts that the Stripe Directors knew that, prior to the parties entering into the Rastus Agreement, the Young Investments Agreement and the Reid Park Agreement, Stripe had made the Duties Representation. The Duties Representation is said to have been implied from statements made by Mr King to Ms Young, from the terms of the agreements between Stripe and the Corporate Appellants, and from written material provided to Ms Young by Stripe in July 2006 and June 2007. However, there is no allegation of knowledge of those facts on the part of the Stripe Directors. It is also unclear how the terms of the agreements are said to provide any basis upon which the Duties Representation, which preceded those agreements, could be implied. It is impossible to see, from the pleading, how the Stripe Directors are alleged to have known of the Duties Representation. 50 Paragraph 29.1 also asserts that the Stripe Directors knew that Stripe had made the Disclosure Representation. However, the Disclosure Representation is said to be implied from the fact that the Duties Representation was a representation in relation to the ongoing future conduct by Stripe. There is therefore no allegation of knowledge on the part of the Stripe Directors of facts that are said to give rise to the Disclosure Representation. 51 The deficiency in particulars of that knowledge of the Stripe Directors is compounded by the doubt adverted to above as to what is the contravention. As indicated above, the contravention is probably the contravention of s 1041H of the Corporations Act alleged in paragraph 28.3. That conduct is the making of the Duties Representation, in circumstances where it is alleged, in paragraph 28.3, that the Duties Representation was not true. However, paragraph 29.10 asserts that the Stripe Directors were involved in the contravention, inter alia, "by their omission to give notice of the change of circumstances, directly or indirectly, being knowingly concerned in or a party to the contravention". There is circularity in that assertion. It appears to be an allegation that the Stripe Directors were involved in the contravention because they were knowingly concerned in or a party to the contravention. There is no allegation of facts that constitute the Stripe Directors being concerned in or being a party to the contravention, in circumstances where the contravention was making a false representation that Stripe would fulfil the Stripe Duties. 52 It is impossible to discern from the allegations made in the Statement of Claim what is alleged to be the causal connection between the involvement of the Stripe Directors in the alleged contravention, on the one hand, and the trading losses alleged to have been suffered by the Corporate Appellants, on the other. Thus, the Statement of Claim makes no assertion as to the time when it is alleged that the Stripe Directors knew, or are to be fixed with knowledge of, the fact that trading activities were being undertaken that were unauthorised, inappropriate and for the purpose of earning commission for Stripe, such that, having acquired that knowledge, they should have intervened to prevent further trading activity of that character or at least to give notice that there was a change of circumstances. The Statement of Claim simply alleges that trading activity was engaged in over a period of approximately 12 months. There is nothing to indicate at what stage the trading activity was such that its magnitude indicated that it was unauthorised, inappropriate and for an improper use. That is a significant deficiency, in circumstances where it is alleged that the Stripe Directors knew of the failure by Stripe. 53 The Statement of Claim asserts that the mere magnitude of the trading activity undertaken by Stripe, being an extent of trading that was exceptional and extraordinary, indicated that the trading that was being undertaken was unauthorised, inappropriate and for the purposes of earning commission for Stripe. It is quite unclear how the matters alleged in paragraph 29.4 indicate that trading activity that was being undertaken was unauthorised, inappropriate and for the purposes of earning commission for Stripe. The allegation is simply that: in approximately 12 months, using investment funds of approximately $8 million, trading in securities was undertaken to the value of $123,269,784; single trades were undertaken for which the consideration was greater than $50,000; and daily trading was undertaken in excess of $500,000. 54 There is no allegation of knowledge on the part of the Stripe Directors of the matters alleged in paragraph 28.3 by reason of which it is asserted that the Duties Representation was not true. The most that appears to be asserted is that the Stripe Directors became aware of trading being undertaken that was unauthorised, inappropriate and for the purpose of earning commission for Stripe, and therefore that Stripe was in breach of the Disclosure Representation. There is no indication as to how the knowledge of trading that was unauthorised, inappropriate or for the purpose of earning commission constitutes aiding, abetting, counselling or procuring any contravention by Stripe of s 1041H, by making the Duties Representation, in circumstances where the Duties Representation is false.
Knowingly Concerned in Breach of Fiduciary Duties 55 Under the second limb of Barnes v Addy, a person is liable for breach of fiduciary duty if that person has knowledge of a dishonest and fraudulent design on the part of a fiduciary and that person assists the fiduciary to carry out that design. It is customary to analyse that requirement of knowledge by reference to the following five categories: actual knowledge; wilfully shutting one's eyes to the obvious; wilfully and recklessly failing to make such enquiries as an honest and reasonable person would make; knowledge of circumstances that would indicate the facts to an honest and reasonable person; and knowledge of circumstances that would put an honest and reasonable person on enquiry. The first three categories are generally taken to involve actual knowledge, as understood both at common law and in equity. The last two are generally taken as instances of constructive knowledge, as developed in equity. While there may be some doubt as to the utility of the categorisation, it may be helpful in identifying the different relevant states of knowledge for the purposes of a case based on the second limb of Barnes v Addy (see Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [160] and [174] (Farah Constructions)). 56 In order to succeed in a case based on the second limb, it must be established that the fiduciary embarked upon a dishonest and fraudulent design. It must also be established that the alleged assistor had knowledge, in one of the first four senses just described, of that dishonest and fraudulent design. While dishonest and fraudulent designs can include breaches of trust as well as breaches of fiduciary duty, any breach of trust or breach of fiduciary duty relied upon must be dishonest and fraudulent (see Farah Constructions at [177] and [179]). 57 The dishonest and fraudulent design alleged in the Statement of Claim is said to be undertaking unauthorised discriminatory trading, undertaking high volume trading without instructions, and making drawings down under the Leveraged Equities facility for those purposes without authority. That is alleged to be a design of Stripe. However, there is no allegation of facts that constitute dishonesty or fraud that was within the knowledge of the Stripe Directors in one of the senses outlined above, other than by reason of what is described above as the practical imperative for the Stripe Directors to have in place and maintain an adequate system of control.
CONCLUSION 58 Directors are not personally liable for the wrongs of the company merely because of the office they hold. Something more is required, and there have been many different formulations in various jurisdictions as to what more is required before a director will be liable for the company's wrongful conduct. The cases in which such formulations appear are summarised in Pioneer Electronics Australia Pty Ltd v Lee (2001) 108 FCR 216 and Keller v LED Technologies Pty Ltd (2010) 185 FCR 449. The formulations include the following: A director will be liable along with the company when he or she has procured or directed it to commit the tort. A director will be liable only if the director has made the wrongful act his or her own, as distinct from it being an act of the company. A director will be liable if he or she has assumed responsibility for the company's acts. A director is not liable for procuring the company to infringe the rights of others. For a director to be liable because he or she directs or procures his or her company to commit a wrong, the context must be such that the director is effectively standing apart from the company and directing or procuring it as a separate entity. The crucial distinction is between acts that are done for and in the service of the company and acts that, in addition, are done in the director's own personal capacity, or non-company capacity. Whichever formulation is adopted, the nature of participation in the breach must be identified. 59 There is considerable difference between those formulations, on the one hand, and, on the other, personal liability because of some limited knowledge being held by a director of relevant elements of a potential breach or statutory obligation. However in the end, it is unnecessary, on the present appeal, to determine which of the approaches is to be preferred, as the Statement of Claim relies on none of them. Without actual knowledge of the volume and frequency of trades, together with knowledge as to why it is that such volume and frequency of trades was known by the directors to be in breach of any representation or other obligation, liability on the part of the directors cannot be established, and the accessorial plea in the Statement of Claim cannot stand. 60 There have been two strike outs by the primary judge as well as, it has been asserted, several informal attempts to re-plead the case against the directors. It seems tolerably clear that the appellants are unable to plead the key material facts and particulars as to the directors' knowledge of both the volume and frequency of the trades and, importantly, why they knew such trades breached the pleaded representations or other obligations. Those matters lie at the heart of the case against the directors, as distinct from the respective companies they direct. It appears that that deficiency cannot be cured. 61 Curiously, however, the appellants did not suggest to the primary judge that any of the criticisms directed to the Statement of Claim could be cured by amendment. No specific leave to re-plead was sought. There was no suggestion that material facts or particulars could be provided to cure the deficiency if another opportunity were given. Further, there is no ground of appeal that the primary judge erred in failing to afford the appellants the opportunity to re-plead their claims against the Stripe Directors and the ASANDAS Directors. Indeed, senior counsel for the appellants did not suggest, on the hearing of this appeal, that any amendment could cure the deficiencies described above. 62 In the circumstances, the appeal should be dismissed with costs. Nevertheless, there may yet be an arguable case against the Stripe Directors and the ASANDAS Directors. If the pleading were clearly capable of being cured with the inclusion of material facts, then to deprive the appellants of an opportunity to advance a pleadable case may be unusual, despite the failed attempts to do so to date. However, as there is no suggested cure for the deficiency, and absent material facts, the respondent directors should not be required to have this litigation hanging over their heads. Whether the doctrines of res judicata or issue estoppel would bar the appellants from commencing a fresh proceeding that overcomes the deficiencies outlined above is a question for another day. I certify that the preceding sixty-two (62) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Emmett, Bennett and McKerracher.
Young Investments Group Pty Ltd
Mann
(2007) 230 CLR 89
(1985) 156 CLR 473
(2010) 185 FCR 449
(1988) 63 ALJR 1
(2001) 108 FCR 216
(1975) 132 CLR 301
(1996) 15 WAR 289
(1985) 158 CLR 661
The appeal be dismissed. The appellants pay the respondents' costs of the appeal, to be taxed if not agreed.