SUDGMENT NO. wnclat Sod saci IN Tage: #MPERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. G381 of 1994 ) GENERAL DIVISION ) BETWEEN: ALLSTATE LIFE INSURANCE CO. & OTHERS Applicants AND: AUSTRALI NEW ZE. D BANKIN ROUP L OTHERS Respondents CORAM: BEAUMONT J. DATE: 6 DECEMBER 1994 ERE 3 SYDNEY MINUTES OF ORDER R IRDERS : 1. Notice of Motion is dismissed. 2. Costs reserved. ~8 DEC 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW TH WALES DISTRICT REGISTRY GENERAL DIVISION No. G381 of 1994 wee eee ws BETWEEN: ALLSTATE LIFE IN E A & OTHERS Applicants AND: AUSTRAL EW E. D BANKIN ROUP IMITED OTHERS Respondents CORAM: BEAUMONT J. DATE: 6 DECEMBER 1994 REASONS FOR JUDGMENT (No. 4) nm application by Freehills to strike out paras. 78- and 165-8 of the amended statement of claim INTRODUCTION Before the Court is a notice of motion by Freehills, the fifty-fourth respondent, to strike out paras. 78-9 and 165-8 of the amended statement of claim. It is Freehills' contention that these paragraphs of the pleading fail to disclose, even on an arguable basis, the existence of the causes of action pleaded. The general nature of the case pleaded in the statement of claim is described in my earlier judgments in these proceedings. I there also stated the test to be applied in a motion to strike out a pleading of the present kind. In order to understand the challenged parts of the pleading in their context, it will be necessary to describe some of the earlier allegations in the statement of claim as follows. By paras. 10-25 of .the pleading (annexed..to these reasons), it is alleged, inter alia, that Freehills were retained by Linter Textiles to act, and did act, as its Australian solicitors in connection with the proposed debenture issue in the circumstances there pleaded. The allegations of contravention of the Fair Trading Act 1987 leaded aras. 78- Paras. 78-9 are as follows: "78. In the premises, by the failure to speak or alternatively by failing to correct the draft Prospectus so as to disclose the release and reinstatement proposal, Freehills has within New South Wales, in trade or commerce, engaged in conduct which was misleading or deceptive or likely to mislead or deceive in contravention of section 42 of the Fair Trading Act 1987 (NSW). 78. As a result of the conduct of Freehills alleged in paragraph 78, the applicants have suffered loss and damage. Particulars (a) The debentures are worthless as senior indebtedness as defined by the Indenture and the Priority Deed substantially exceeds the value of the assets of Linter Textiles and the subsidiaries, and accordingly the applicants have lost the price paid for the debentures. (b) The applicants have been deprived of the sums of money respectively paid out by them for the debentures such loss being measured by market interest rates from time to time since the date upon which each of the applicants acquired their debentures, pursuant to the principle in Hungerfords v Walker." (The reference in para. 78 to "the failure to speak" is a reference to para. 56 which is as follows: "56. Each of the subsidiaries, the Linter. officers, Linter Group, Freehilis and the _ initial participant banks neglected and failed to advise or warn persons contemplating the purchase of debentures or the Underwriter or the SEC of the facts, matters and circumstances within their respective knowledge as alleged in paragraphs 52 and 53 (the 'failure to speak')." By s.42 of the Fair Trading Act, it is provided as follows: "42. (1) A person shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. (2) Nothing in this Part shall be taken as limiting by implication the generality of subsection (1)." By s.4(1), "trade or commerce" is defined to include "any business or professional activity". On behalf of Freehills, it is submitted that, by virtue of a solicitor's implied duty to respect' the confidences of the client, there can be no basis upon which a person dealing with a party offering debentures can expect the solicitor for the offeror to inform that person of any matter learnt by the solicitor in the course of the retainer. It follows, the argument runs, that paras. 78-9 fail to disclose any arguable claim. I have difficulty accepting the latter argument even if I accept the former argument that a solicitor has an obligation to respect a client's confidences. That obligation arises under the general law. But the present allegations are grounded in statute and it will be, in essence, a question of fact whether, in all the circumstances, there was misleading conduct, whatever duties the general law may impose in other respects. Freehills further contended that the reasons (No. 3) for striking out the primary violation alleged in para. 75 were equally applicable here. I cannot agree. As has been seen, the allegations made against Freehills in paras. 10-25, including the claims of their retainer and the performance of that retainer, distinguish their position from that of the banks where no primary role on their part was asserted. Another argument was put on behalf of Freehills that the failure to speak took place in the United States where "in substance" the cause of action arose (cf. Voth v Manildra Flour Mills Pty. Ltd. (1990) 171 CLR 538 at 567) and, it said, the Fair Trading Act could have no such extra-territorial operation. At the level of a strike out application, I cannot accept that the contrary is not reasonably arguable. It is apparent, as in the case of para. 135 (see reasons No. 3), that the international aspects of the allegations in para. 78- 9, taken in context, raise difficult questions of private international law even if the difficult threshold question of where, first resolved. for trial. e "in substance", the.cause of .-action alleged arose was In my opinion, paras. 78-9 raise arguable questions allegations of negligence aras. 165- Paras. 165-8 are as follows: "165. Freehills knew: 166. (a) (b) (¢) (d) that persons contemplating purchase of the debentures either on issue or subsequently would rely upon the representations in the prospectus; that the representations in the prospectus were misleading, inaccurate and untrue having regard to the release and reinstatement proposal; that the release and reinstatement proposal had not been disclosed in the prospectus or otherwise disclosed to persons intending to purchase debentures; and that the circumstances were such as _ to make it reasonable for persons contemplating the purchase of debentures to rely upon the prospectus including the representations. By reason of the matters referred to in paragraph 165, Freehills owed a duty to the applicants to exercise reasonable skill, care and diligence - (a) in preparing and settling the prospectus; 167. 168. (b) to ensure that the prospectus prepared by them and furnished to Linter Textiles for publication did not contain misleading information. (c) to ensure that the prospectus prepared by them and lodged for registration with the SEC did not contain misleading information. (d) to ensure that the prospectus prepared by them disclosed matters relating to the true amount of senior indebtedness owed by Linter Textiles and the subsidiaries; (e) to disclose the release and reinstatement Proposal to prospective purchasers of the debentures. In breach of the duties referred to in paragraph 166 above, Freehills failed to exercise reasonable skill, care and diligence - (a) in preparing and settling the prospectus; (b) to ensure that the prospectus prepared by them and furnished to Linter Textiles for publication a prospectus did not contain misleading information; (c) to ensure that the prospectus prepared by them and lodged for registration with the SEC did not contain misleading information; (d) to ensure that the prospectus prepared by them disclosed matters relating to the true amount of senior indebtedness owed by Linter Textiles and the subsidiaries; (e) to disclose the release and reinstatement proposal to prospective purchasers of the debentures. Particulars The prospectus prepared and settled by Freehills contained the representations without disclosing the release and reinstatement proposal. In consequence of the said negligence of Freehills the applicants have suffered loss and damage. Particulars (a) The debentures are worthless as senior indebtedness as defined by the Indenture and the Priority Deed substantially exceeds the value of the assets of Linter Textiles and the subsidiaries, and accordingly the applicants have lost the price paid for the debentures. (b) The applicants have been deprived of the sums of money respectively paid out by them for the debentures such loss being measured by market interest rates from time to time since the date upon which each of the applicants acquired their debentures, pursuant to the principle in Hungerfords v Walker." On behalf of Freehills, it is submitted that no duty of care was even arguably created in the circumstances Pleaded. There is no allegation, it is said, of an assumption of responsibility to the applicants nor of their known reliance in the sense explained in Hawkins v Clayton (1988) 164 CLR 539 and 576. Again, at the strike-out level, I cannot agree. Both the assumption and the reliance required are, in my view, sufficiently pleaded. Reliance is also placed by Freehills upon a disclaimer expressed in their letter dated 13 October 1990 to Drexel Burnham Lambert Incorporated and United States Trust Company of New York as follows: "(x) We have not verified, do not express any opinion upon and do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or of any schedule or other financial and statistical data or notes thereto included or referred to therein other than those statements with respect to the laws of the State of New South Wales or of the Commonwealth of Australia set out in: (i) the section headed 'Enforceability of Certain Civil Liabilities' on page 2; (ii) .the section headed 'Changes in Australian Federal Government Trade Protection Policy' on page 9; (iii) the section headed 'Defaults and Remedies' on page 46; (iv) the section headed 'Enforceability of Judgments' on pages 47 and 48; (v) the section headed 'Australian Tax Considerations' on pages 49 and 50." Whilst this statement may be taken into account as a relevant circumstance, it does not follow, in my view, that it is decisive of the issues tendered by paras. 165-8; they require a consideration of all the relevant circumstances. In my view, paras. 165 to 168 raise arguable issues for trial. ORDERS The notice of motion is dismissed, with costs reserved. I certify that this and the preceding seven (7) pages are a true copy of the Reasons for Judgment herein of his Honour Justice Beaumont. __ Marr Associate bbe. AG Dated: 6 December 1994 Counsel and Solicitors Mr. A.R. Emmett Q.C. instructed for applicants: by Sly & Weigall Counsel and Solicitors Mr. P.M. Jacobson Q.C. for 54th respondent: instructed by Norton Smith & Co. Date of hearing: 6 December 1994 Date judgment delivered: 6 December 1994 ' RE: ALLSTATE LIFE INSURANCE CO. & OTHERS v. AUSTRALIA & NEW ZEALAND BANKING GROUP LIMITED & OTHERS - No. G 381 of 1994. ANNEXURE TO JUDGMENT No. 4 10. In or about July 1988 and at all material times thereafter, Linter Textiles retained Freehills to act as its Australian solicitors in tonnection with the proposed debenture issue and, in particular, to. (a) (b) (4) (e) ® (g) prepare drafts of the Indenture and of the prospectus to be incorporated in the registration statement; consider, comment upon and settle drafts of the Indenture and of the registration statement and the prospectus incorporated therein prepared by the US attorneys retained by Linter Textiles ("Skadden Arps"), consider, comment upon and advise Linter Textiles and Skadden Arps in relation to requisitions from the SEC and answers thereto concerning the registration statement and the prospectus incorporated therein, provide an opinion for inclusion in the prospectus concerning the validity and enforceability of the proposed Indenture and the proposed debentures according to Australian law, communicate and liaise with Skadden Arps in relation to matters arising under United States and Australian law concerning the proposed debenture issue, provide advice for furnishing to USTC and the initial participant banks concerning the priority of those bankers' debts guaranteed or to be guaranteed by the subsidiaries and concerning the validity and enforceability of the proposed Indenture according to Australian law; advise Linter Textiles and communicate and hase with Skadden Arps in relation to the proposal referred to in paragraph 20 below (The retainer is hereafter reterred to as "the Freehills retainer" ) ll 12. Particulars The Freehills retainer was made expressly and by implication. Insofar as it was made expressly, it was constituted by written communications between Linter Group, Linter Textiles and Freehills engaging Frgehills as Linter Textiles' Australian solicitors in connection with the proposed debenture issue. The documents constituting the said communications are in the possession of Freehills, Linter Group and Linter Textiles. Copies of those documents will be provided after discovery. Insofar as the Freehills retainer was implied, it is to be implied from the facts that Freehills entered upon and performed the retainer and did the acts.referred to in paragraphs 11, 12, 13, 14, 15, 16, 17, 19, 21, 25 and 35 below. Further particulars may be given after discovery. Pursuant to their retainer, Freehills. (a) prepared drafts of the Indenture and of the prospectus to be :ncorporated in the registration statement; (b) considered and commented upon drafts of the Indenture and of the prospectus which had been prepared by Skadden Arps, (c) considered and commented upon drafts of the other documents prepared by Skadden Arps; (d) corresponded with Skadden Arps concerning the contents and terms of the Indenture and Prospectus, (e) gave an opinion dated 23 September 1988 as to the validity and enforceability of the Indenture and debentures in Australia for the purpose of being included as an exhubit to the registration statement, (f) acted in relation to the proposed debenture issue as described in paragraphs 12-17, 19, 21, 25 and 35 Between July 1988 and September 1988 Freehills participated in drafting the prospectus for inclusion in the registration statement required by United States law to be lodged with the SEC for approval and registration 14. 3. Particulars The drafts are in writing. Copies of some of those drafts are in the possession of the solicitors for the applicants and may be inspected at the offices of those solicitors by appointment. - In relation to the question of senior indebtedness of Linter Textiles, the 28 July 1988 draft of the prospectus reviewed by Freehulls stated "As of , 1988, the Company had no Senior Debt outstanding. Ranking .. Subordinated to all Senior Debt (as defined) As of , 1988, the Company had no Senior Debt outstanding. Subordination Payments to the holders of the Debentures will be subordinated to all Senior Debt (as such term 1s defined in the Indenture). Upon completion of the offering of the Debentures, there will be approximately $A million (US$ million) of Senior Debt outstanding to which the Debentures will be subordinated in nght of payment If the Company does borrow funds pursuant to such lines of credit then such funds will rank senior to the Debentures. As of , 1988 the Company had no Semor Indebtedness (as defined herein) " In relation to the statement in the 28 July 1988 draft of the prospectus that "As of, 1988 the Company had no Senior Indebtedness", Freehills knew, at the latest by 8 August 1988 that Linter Group had such semor debt and might have given to its lenders, as security for that debt, charges or mortgages over the subsidiaries or their assets 4. Particulars Freehills informed Skadden Arps in writing. A copy of the relevant document is in the possession of the solicitors for Applicants and may be inspected at the offices of those solicitors by appointment. . In relation to the question of senior indcbtedness of Linter Textiles, the 17 August 1988 draft of the prospectus reviewed by Freehulls stated "Ranking . Subordinated to all Senior Indebtedness (as defined). As of June 30, 1988, after giving effect to the Re-organisation, the Company would have had no Senior Indebtedness. The Indenture places no limitation on the amount of Indebtedness (as defined), including Senior [ndebtedness, that can be incurred by the Company " In relation to the statement in the 17 August 1988 draft of the prospectus quoted in paragraph 15, Freehills noted and informed Skadden Arps on 18 August 1988 as follows "A statement ts made that as of 30 June 1988 alter giving elfect to the Re-organisation the Company would have no Senior Indebtedness. Although this 18, strictly speaking, correct (given that Linter Group Limited at present 1s that only borrower for all Linter companies) should this statement be qualified or at least some reference be made for the need or intention of Linter Textiles Corporation Limited to immediately obtain working capital facilities?" Particulars Freehills informed Skadden Arps in writing. A copy of the relevant document is in the possession of the solicitors for the Applicants and may be inspected at the offices of those solicitors by appointment. In July and August 1988, Freehills requested Skadden Arps to provide it with a memorandum of advice upon the civil liabilities of the issuers of a prospectus under United States law, including under the Securities Act of 1933 and the Securities Exchange Act of 1934 and upon the types of judgments or remedies that might be awarded thereunder 18. 20. Particulars The requests are in writing. Copies of some of the requests are in the possession of the solicitors for the Applicants and may be inspected at the offices of those solicitors. On 4 August 1988, Skadden Arps sent to Freehills a memorandum and matertals, including the text of sections 11 and 12 of the Securities Act 1933 and section 10(b) of the Securities Exchange Act 1934 and Rule 10b-5 promulgated thereunder, describing the civil liabilities of the :ssuer of a prospectus which arise under United States law and the types of judgments and remedies that might be awarded thereunder Particulars The memorandum and materials are in writing and are in the possession of Frechills. Freehills considered the memorandum and materials torwarded to it by Skadden Arps, including the text of sections 11 and 12 of the Securities Act 1933 and section 10(b) of the Securities Exchange Act 1934 and Rulel0b-5 promulgated thereunder including textbook and journal articles relating to the said Acts and Rule for the purpose of expressing an opinion, to be included in the prospectus, upon the enforceability of civil liabilities under these laws in Australian courts At some time in 1988 but at the latest by 21 September 1988, Linter Group proposed to the initial participant banks that they should, prior to the issue of the debentures, release the guarantees (as defined in paragraph 31) on condition that (a) prior to such release. r() Linter Group and Linter Textiles would give to initial participant banks a conformed copy of the Underwriting agreement between Linter Textiles and the underwriter, (11) Linter Textiles would irrevocably undertake to pay the net proceeds of the rssue to Linter Group. and (ii) | Linter Group would undertake to keep the net proceeds received from Linter Textiles on deposit until the matters set out in (b) below were implemented, and 21. 22. (b) after the issue of the debentures, Linter Textiles would guarantee Linter Group's liabilities to the initial participant banks and the subsidiaries would guarantee Linter Textiles' liabilities to the initial participant banks, including the habilities under the first mentioned guarantees (The proposal is hereinalter reterred to as "the release and reinstatement proposal" ) At al} material times, Freehills were aware of the release and reinstatement proposal and had advised upon and formulated the same Particulars The knowledge is to be inferred from the facts referred to in paragraphs 10-20 above and, in particular, from the fact that Skadden Arps and Freehills correspond with each other concerning the release and reinstatement proposal and gave opinions to the initial participant banks at the request of Linter Textiles, as hereafter referred to. Freehills also drafted the undertakings (as defined in paragraph 33). Further particulars may be given after discovery. As at early September 1988, the draft prospectus incorporated in the draft registration statement, which had been prepared and considered by Freehills and lodged by Skadden Arps with the SEC, stated "Payments to the holders of the Debentures will be subordinated to all Senior Indebtedness (as such term is defined in the Indenture). As of June 30, 1988, after giving effect to the Reorganisation, the Company would have had no Senior Indebtedness The Indenture places no limutation on the amount of Senior Indebtedness that can be incurred by the Company," On 26 September 1988, Skadden Arps informed Freehills that the SEC had made a number of requisitions on the draft prospectus incorporated 1n the draft registration statement and that the SEC had requested that Linter Textiles should respond to these requisitions by filing an interim amended registration statement and prospectus One of the requisitions related specitically to the statement in the draft prospectus set out in paragraph 22 and read "State whether or not the Company has any current plans or intentions to issue any Senior Indebtedness If so, describe such plans " 24. 25. Particulars Skadden Arps so informed Freehills in writing. A copy of the relevant document is in the possession of the solicitors for Applicants and may be inspected at the offices of those solicitors by appointment. . On 28 September 1988, Skadden Arps forwarded to Freehills an amended registration statement incorporating an amended prospectus purporting to deal with the requisitions of the SEC. The passage in the draft prospectus quoted in paragraph 22 above had been amended to read as follows. "As of June 30, 1988, alter giving effect to the Re-organisation, the Company had no Senior Indebtedness Senior Indebtedness and other Indebtedness (as such term 1s defined in the Indenture) may be incurred by the Company, from time to time, subject to certain restrictions in the Indenture The Company expects to arrange senior bank facilities in the ammount of A$50 mullion to cover working capital needs and a facility of up to A$75 mullion to be used for capital expenditures on a stand-by basis. Pending the arrangement of such facilities, working capital will be provided to the Company by LGL In the event that LGL borrows from third party lenders to provide such working capital, the Company may guarantee such borrowings by LGL . " On 29 September 1988, Freehills informed Skadden Arps that it had reviewed the latest draft of the registration statement of 28 September 1988. Freebills made no comment to Skadden Arps concerning the statement in the prospectus quoted in paragraph 24. Particulars Freehills so informed Skadden Arps in writing. A copy of the relevant document is in the possession of the solicitors for Applicant and may be inspected at the offices of those solicitors by appointment.