ZHANG & ANOR v MINOX SECURITIES PTY LTD & ORS; LIU & ORS v MINOX SECURITIES PTY LTD & ORS

CATCHWORDS: INSURANCE - liability insurance - whether claimants should have leave to commence proceedings against the insurer - whether arguable case. - INSURANCE - composite policy - construction of exclusion clause for unauthorised acts - whether exclusion denied cover for innocent employer.

Corporations Act LEGISLATION CITED: Financial Services Reform Act 2001 Law Reform (Miscellaneous Provisions) Act 1946

Federation Insurance Limited v Watson (1987) 163 CLR 303 General Accident Fire and Life Assurance Corporation Ltd v Midland Bank Ltd [1940] 2 KB 388 CA 405-6 CASES CITED: Gilmore v AMP General Insurance Co. Ltd (1996) 67 SASR 387 FC. Lombard Australia Ltd v NRMA Insurance Limited (1968) 72 SR (NSW) 45 CA McCann v Switzerland Insurance Australia Ltd [2000] HCA 65 203 CLR 579 Oswald v Bailey (1987) 11 NSWLR 715CA

(1) Ding Yang Zhang and Mei Li - Claimants PARTIES: Minox Securities Pty Ltd (formerly Quantum Securities Pty Ltd) (Administrator Appoined) (ACN 064 185 897) - respondent (2) Jun Liu and Lan Liu - Claimants Minox Securities Pty Ltd (formerly Quantum Securities Pty Ltd) (Administrator Appointed) (ACN 064 185 897) - Respondent

COUNSEL: Mr N Hutley SC and Mr A J Abadee - Appellants Mr McArthur SC and Mr P Rooney - Respondent

Slater & Gordon - Appellants SOLICITORS: Wotton & Kearney - Respondent

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): SC (1) 1815/07; (2) 1816/07

LOWER COURT MEDIUM NEUTRAL CITATION: [2008] NSWSC 689

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL 40234/08 40235/08

HODGSON JA MACFARLAN JA HANDLEY AJA

7 JULY 2009 ZHANG & ANOR v MINOX SECURITIES PTY LTD & ORS LIU & ORS v MINOX SECURITIES PTY LTD & ORS

INSURANCE - liability insurance - whether claimants should have leave to commence proceedings against the insurer - whether arguable case.

INSURANCE - composite policy - construction of exclusion clause for unauthorised acts - whether exclusion denied cover for innocent employer.

Investors, who had lost money from investing in promissory notes issued by companies in the Westpoint Group, brought two actions against the employer of the financial adviser who had recommended these investments for breaches of the Corporations Act. Sections 917B, 917E and 917F imposed vicarious liability on the employer for the acts of the adviser although it may not have been vicariously liable under the general law. The investors applied under s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 for leave to commence proceedings against the insurer which had issued two insurance policies to the employer that allegedly responded to their claims. The primary judge held that the investors had not established an arguable case that either policy responded to their claims and refused leave. The investors applied for leave to appeal. HELD: granting leave and allowing the appeals in part (1) the professional indemnity policy was a composite policy which prima facie covered both the employer and the financial adviser in respect of the subject claims. An exclusion clause applied to claims against an insured in respect of investments in financial products which were outside the authority conferred by the employer; (2) the exclusion did not apply to claims against an innocent employer who was otherwise insured under the policy. Leave to commence proceedings against the insurer in respect of this policy was therefore granted; (3) the financial institutions policy contained an exclusion in respect of claims based upon advice usually provided by a financial planner; (4) the investors' draft statement of claim alleged that the financial adviser had provided the investors with "professional financial planning services and advice"; (5) those allegations brought the investors' claims within the relevant exclusion in the financial institutions policy and the primary judge had been correct in refusing leave to commence proceedings in respect of this policy.

ORDERS (1) Leave to appeal granted. (2) Claimants to file and serve their draft notice of appeal within 10 days. Further compliance with the rules dispensed with. (3) Appeal allowed in part. (4) Orders one and two in the Equity Division set aside, and in lieu thereof grant leave to the appellants to commence proceedings against QBE Insurance (Australia) Ltd to enforce their rights under s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 in respect of the Professional Indemnity policy the subject of these proceedings. (5) Appeal otherwise dismissed. (6) Respondent is to pay the appellants' costs of the appeal and of the relevant proceedings in the Equity Division.

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL 40234/08 40235/08

HODGSON JA MACFARLAN JA HANDLEY AJA

7 JULY 2009 ZHANG & ANOR v MINOX SECURITIES PTY LTD & ORS LIU & ORS v MINOX SECURITIES PTY LTD & ORS

Judgment 1 HODGSON JA: I agree with the orders proposed by Handley AJA and with his reasons. 2 Paragraph (i) of the Financial Planners Endorsement refers to "the Approved Product List of the entity which has issued the Insured with a proper authority to deal in financial products"; and it applies in its terms only to an Insured to which such an authority has been issued by an "entity". In this case, the only relevant "entity" was Quantum, and Quantum did not issue any such authority to itself. Thus the only "Insured" to whom this exclusion could relevantly apply was Mr Chan. 3 It was submitted that "the Insured" in paragraph (i) must mean the same as "the Insured" in the chapeau of the Endorsement, and thus must include any Insured against whom a claim is made. 4 It is true that, when considering whether the Financial Planners Endorsement applies to exclude liability in respect of a claim against Quantum, one must read "the Insured" in the chapeau as referring to Quantum; but in my opinion this does not require that one read "the Insured" in paragraph (i) as referring to Quantum, in circumstances where it cannot reasonably do so because Quantum was not issued with a proper authority to deal in financial products by any entity having an Approved Product List. The only reasonable conclusion, in my opinion, is that paragraph (i) applies to exclude liability only for claims against an Insured falling within the terms of paragraph (i), and thus does not exclude liability in respect of a claim against Quantum. 5 MACFARLAN JA: I agree with Handley AJA. 6 HANDLEY AJA: The claimants and the other investors in these representative proceedings (the investors) invested in promissory notes issued by Mount Street Mezzanine Pty Ltd and Bayshore Mezzanine Pty Ltd which were part of the now insolvent Westpoint Group. The promissory notes were financial products within s 763A of the Corporations Act as amended by the Financial Services Reform Act 2001. Each of those companies are now in a creditor's voluntary winding up and the investors are unlikely to receive any dividend. 7 The investments were procured by Mr Andy Chan, an authorised representative of Quantum Securities Pty Ltd (later Minox Securities Pty Ltd) (Quantum) which is also subject to a creditor's voluntary winding up. The investors sued Quantum alleging breaches by Chan of numerous sections of the Act imposing civil liabilities for which Quantum is vicariously liable, whether or not it would be liable under the general law. 8 Quantum had obtained from QBE Insurance (Australia) Ltd (QBE) a Professional Indemnity Policy and a Financial Institutions Policy which were in force at the material time. These are probably the only assets from which the investors might recover some of their losses. They applied under s 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 for leave to commence proceedings against QBE to enforce their statutory rights under the policies and for leave to join it as a defendant in the proceedings against Quantum. 9 Barrett J. dismissed the applications because the investors did not have an arguable case that the policies responded to any liability of Quantum. A positive finding on this question is necessary before leave can be granted under s 6(4): Oswald v Bailey (1987) 11 NSWLR 715CA. His Honour provisionally resolved many questions in favour of the investors, but held that cover was denied by exclusion clauses in both policies. 10 The investors applied for leave to appeal seeking to have those orders set aside and orders made under s 6(4) granting leave in respect of either or both policies. 11 At the material times Quantum held an Australian Financial Services Licence under s 911A of the Act and Mr Chan was its representative authorised under s 916A to provide specified financial services on its behalf. It was not suggested that Mr Chan was the representative of any other Financial Services Licensee. 12 Accordingly ss 917B, 917E and 917F were applicable. They relevantly provided: "Section 917B If the representative is the representative of only one financial services licensee, the licensee is responsible, as between the licensee and the client, for the conduct of the representative, whether or not the representative's conduct is within authority. Section 917E The responsibility of a financial services licensee under this Division 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 representative's conduct. Section 917F(1) (1) If a financial services licensee is responsible for the conduct of their representative under this Division, the client has the same remedies against the licensee that the client has against the representative.

(2) The licensee and the representative … are … jointly and severally liable to the client in respect of those remedies." 13 It is not necessary to set out the terms of ss 941A, 945A, 946A and 1012A which Mr Chan is alleged to have contravened by failing to give the investors the documents required by those sections on or before he gave them relevant advice. These contraventions, if established, would impose civil liabilities on Mr Chan and Quantum pursuant to ss 953B and 1022B which, subject to relevant exclusions, would be covered by the policies. 14 The only question argued on the leave application, heard as an appeal, was whether endorsements to the policies excluded from their respective covers any liability on the part of QBE to indemnify Quantum against these claims. There was no other challenge to the findings of Barrett J. 15 The nature and scope of the investors' claims against Quantum are outlined in Ex F, a proposed amended originating process, and Ex B, a proposed statement of claim. The former incorporated the latter. Paragraph 2 of the draft statement of claim alleged that the investors received "professional financial planning services and advice" from Mr Chan and para 3(b) alleged that they could not make "informed investment decisions without the assistance of professional financial planning advice."

Professional Indemnity Policy 16 This was a claims made policy which indemnified Quantum "against civil liability for compensation … as a result of a breach of professional duty in the conduct of the Insured's Profession." The "Insured" as defined in cl 7.12 included Quantum and relevantly: "(c) any person who is, during the Period of Cover, an Employee of the Named Insured but only in respect of work performed while an Employee of the Named Insured." 17 The policy schedule defined the Insured's Profession as "Financial Planning and Insurance Broking". The Financial Planners Authorised Representatives Endorsement relevantly provided: "Definition 7.12 Insured shall also include the following: (i) any person who is, during the Period of Cover, an Authorised Representative of the Named Insured but only in respect of work performed while an Authorised Representative of the Named Insured … For the purposes of this endorsement Authorised Representative shall mean representatives of licensed dealers or investment advisers holding a 'proper authority' to advise and/or deal in financial products on behalf of that securities dealer … or investment adviser who holds an Australian financial services … licence and who's name has been advised to ASIC for inclusion on ASIC Authorised Representative registers." 18 There was no dispute that Mr Chan was within this language. 19 The Financial Planners Endorsement relevantly provided: "QBE shall not be liable under this Policy to provide indemnity in respect of any Claim against the Insured arising directly or indirectly based upon, attributable to, or in consequence of an actual or alleged act, error or omission in respect of: (i) any financial or investment product that at the time the actual or alleged act, error or omission occurred is not listed on the Approved Product List of the entity which has issued the Insured with a proper authority to deal in financial products … (Approved Product List shall mean written document outlining the financial products that have been investigated, assessed and approved for dealing by a Financial Services Licensee)". 20 Promissory notes of the Mezzanine companies were not included in Quantum's Approved Product List at the relevant times. The only issue in relation to this policy therefore is whether, given that fact, the investors' claims are excluded by this Endorsement. 21 Barrett J after disposing of other arguments on behalf of the investors which are no longer pressed, said (para [34]-[35]): " … The focus of the product list exclusion is not upon the person who performed or committed the 'actual or alleged act, error or omission'. It is upon the person against whom the 'Claim' is brought. That in the present context is Quantum, not Mr Chan. 35 The matter just mentioned is, in my opinion, fatal to any contention that the product list exclusion does not apply. Once it is accepted that, whether or not Mr Chan was an Insured, Quantum was clearly an Insured and that the plaintiffs are proceeding against Quantum alone, the situation is one in which there is a 'Claim' … 'in respect of a financial or investment product … which at the time of the act, error or omission, was not on Quantum's approved product list." 22 On this basis his Honour held that "there is no arguable basis for contending that the professional indemnity policy provides indemnity for Quantum in respect of the matters alleged against it in these proceedings." 23 Mr Hutley SC, who appeared for the claimants with Mr Abadee, focused on the precise language of para (i) of this Endorsement which referred to "the Approved Product List of the entity which has issued the Insured with a proper authority to deal in financial products." It was common ground that Quantum was not obliged by the Corporations Act or Regulations, or otherwise to obtain the approval of ASIC or any other public authority to its Product List. Quantum was therefore the entity which issued the relevant "Approved Product List," and issued it to Mr Chan who was also an Insured. 24 In Mr Hutley's submission Quantum, as the entity referred to, did not issue its Approved Product List to itself. Thus, although it was an Insured, claims against it did not fall within this exclusion. The purpose of the exclusion he said was to deny cover to Insureds, such as Mr Chan who acted outside their normal authority by marketing financial or investment products which were not on their Approved Product list, but not to deny cover to innocent employers such as Quantum. 25 This policy is a composite one and, for legal purposes, it embodied as many separate policies as they were separate Insureds: General Accident Fire and Life Assurance Corporation Ltd v Midland Bank Ltd [1940] 2 KB 388 CA, 405-6; Lombard Australia Ltd v NRMA Insurance Limited (1968) 72 SR (NSW) 45 CA; Federation Insurance Limited v Watson (1987) 163 CLR 303; Gilmore v AMP General Insurance Co. Ltd (1996) 67 SASR 387 FC. 26 This exclusion clearly applies to deny Mr Chan indemnity, but fairly construed it has no application to Quantum as the entity issuing the Approved Product list and a separate Insured. It is common for composite policies to contain exclusion clauses which deny cover to one Insured while preserving it for another. Gilmore v AMP General Insurance Co Limited (above) and the cases cited there by Cox J provide examples. The exclusion clause in the Professional Indemnity Policy which denied cover to the innocent partners in McCann v Switzerland Insurance Australia Ltd [2000] HCA 65, 203 CLR 579 was in a different form. That clause expressly excluded the liability of all insured from the cover on proof of dishonest or fraudulent acts and omissions by any insured partner. 27 Mr McArthur SC who appeared for QBE had no real answer to these submissions that could be anchored in the text. The Court is not entitled to give effect to any supposed intention lying behind this exclusion that is not reflected in its language. In my judgment therefore the investors' submissions on this policy should be accepted. It seems that this argument was not put to Barrett J, or not put with any clarity, because his Honour does not refer to it.

The Financial Institutions Policy 28 The investors' case on this claims made policy was barely pressed by Mr Hutley, and it was rapidly demolished by Mr McArthur. The claims on Quantum were within its general provisions, but they were excluded by the Financial Planning exclusion which relevantly provided: "QBE shall not be liable under this Policy to provide indemnity in respect of any Claim against the Insured: … Financial Planning Directly or indirectly based upon, attributable to, or in consequence of the provision by or on behalf of the Insured of any advice usually provided by a Financial Planner." 29 The Professional Indemnity Policy relevantly defined the Insured's Profession as "Financial Planning". The evident purpose of the Financial Planning exclusion in the second policy was to deny cumulative cover for the same claims under both policies. Cover for financial planning claims was to be provided, if at all, under the Professional Indemnity Policy and not under the Financial Institutions Policy. 30 The draft statement of claim alleges that Mr Chan gave the investors "professional financial planning services and advice". This must be "advice usually provided by a Financial Planner." The statement of claim brings the investors' claims against Quantum squarely within this exclusion, and they have no arguable case in respect of that policy which could support the grant of leave under s 6(4) of the 1946 Act. 31 In my judgment therefore the application for leave to appeal in respect of the Financial Institutions Policy should be dismissed. The following orders should be made:

Zhang & Anor v Minox Securities Pty Limited No. CA40234 of 2008

(2) The claimants are to file and serve their notice of appeal within 10 days. Further compliance with the rules dispensed with.

(4) Orders 1 and 2 in the Equity Division set aside and in lieu thereof grant leave to the appellants to commence proceedings against QBE Insurance (Australia) Ltd to enforce their rights under s6 of the Law Reform (Miscellaneous Provisions) Act 1946 in respect of the Professional Indemnity policy the subject of these proceedings.

(6) Respondent to pay the appellant's costs of the appeal and of the relevant proceedings in the Equity Division. Liu & Anor v Minox Securities Pty Limited No. CA40235 of 2008

(2) Claimants to file and serve their draft notice of appeal within 10 days. Further compliance with the rules dispensed with.

(4) Orders one and two in the Equity Division set aside, and in lieu thereof grant leave to the appellants to commence proceedings against QBE Insurance (Australia) Ltd to enforce their rights under s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 in respect of the Professional Indemnity policy the subject of these proceedings.

(6) Respondent is to pay the appellants' costs of the appeal and of the relevant proceedings in the Equity Division.

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