FEDERAL COURT OF AUSTRALIA Sereika v Cardinal Financial Securities Ltd [2001] FCA 208 Federal Court of Australia Act (1976) ss 33C & 33H Federal Court Rules O 73 r 3 Phillip Morris (Australia) Ltd v Nixon (2000) 170 ALR 487 cited Bond Corporation Pty Limited v Thiess Contractors Pty Ltd (1987) 71 ALR 615 applied JOHN ANTHONY SEREIKA v CARDINAL FINANCIAL SECURITIES LIMITED (formerly INTEQ CUSTODIANS LIMITED), PHILLIP WASS, LYALL WILLIAMS, STEVEN SEREIKA, STAPLETON PARTNERS PTY LIMITED, COOPERS & LYBRAND LIMITED, AUSTRALIAN TEA TREE MANAGEMENT LIMITED, TEA TREE PLANTATION LIMITED AND FARM FINANCE AUSTRALIA LIMITED now known as LANDMARK FINANCE PTY LIMITED N 654 of 2000 TAMBERLIN J SYDNEY 9 MARCH 2001 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 654 OF 2000 BETWEEN: JOHN ANTHONY SEREIKA APPLICANT AND: CARDINAL FINANCIAL SECURITIES LIMITED formerly INTEQ CUSTODIANS LIMITED (ACN 058 560 212) FIRST RESPONDENT PHILLIP WASS SECOND RESPONDENT LYALL WILLIAMS THIRD RESPONDENT STEVEN SEREIKA FOURTH RESPONDENT STAPLETON PARTNERS PTY LIMITED (ACN 051 887 748) FIFTH RESPONDENT COOPERS & LYBRAND (Securities) LIMITED (ACN 003 311 617) SIXTH RESPONDENT AUSTRALIAN TEA TREE MANAGEMENT LIMITED (ACN 064 159 842) SEVENTH RESPONDENT TEA TREE PLANTATION LIMITED (ACN 175 869 402) EIGHTH RESPONDENT FARM FINANCE AUSTRALIA PTY LIMITED now known as LANDMARK FINANCE PTY LIMITED (ACN 076 073 017) NINTH RESPONDENT JUDGE: TAMBERLIN J DATE OF ORDER: 9 MARCH 2001 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The Motions to strike out the Amended Application and Amended Statement of Claim are allowed with costs. 2. Leave is granted to the Applicant to file and serve within six (6) weeks a Further Amended Application and Further Amended Statement of Claim. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 654 OF 2000 BETWEEN: JOHN ANTHONY SEREIKA APPLICANT AND: CARDINAL FINANCIAL SECURITIES LIMITED Formerly INTEQ CUSTODIANS LIMITED (ACN 058 560 212) FIRST RESPONDENT PHILLIP WASS SECOND RESPONDENT LYALL WILLIAMS THIRD RESPONDENT STEVEN SEREIKA FOURTH RESPONDENT STAPLETON PARTNERS PTY LIMITED (ACN 051 887 748) FIFTH RESPONDENT COOPERS & LYBRAND (Securities) LIMITED (ACN 003 311 617) SIXTH RESPONDENT AUSTRALIAN TEA TREE MANAGEMENT LIMITED (ACN 064 159 842) SEVENTH RESPONDENT TEA TREE PLANTATION LIMITED (ACN 175 869 402) EIGHTH RESPONDENT FARM FINANCE AUSTRALIA PTY LIMITED now known as LANDMARK FINANCE PTY LIMITED (ACN 076 073 017) NINTH RESPONDENT JUDGE: TAMBERLIN J DATE: 9 MARCH 2001 PLACE: SYDNEY REASONS FOR JUDGMENT 1 In this matter I have previously made orders that the Application and Statement of Claim be struck out as against all respondents but gave leave to the applicant to file and serve an Amended Application and an Amended Statement of Claim. This was done and has led to further applications to strike out by the first respondent ("Cardinal"), the fifth respondent ("Stapelton"), the sixth respondent ("Coopers"). Submissions have been made by the first, fifth and sixth respondents. To a large extent these submissions of the first respondent are adopted by the other respondents. Principles 2 The legislation and principles applicable to pleadings and procedure in representative proceedings were considered by the Full Court in Phillip Morris (Australia) Ltd v Nixon (2000) 170 ALR 487 at 496-499 and 510-517. There is no need to restate them here. The pleading must specify the material facts on which the claims of the principal applicant and group members are based. The application must comply with the pleading requirements of O 11 of the Federal Court Rules ("the Rules"). An essential requirement under s 33C of the Federal Court of Australia Act (1976) ("the FCA") is that the claims of all members of the group must give rise to a substantial common issue of fact. Under s 33H it is essential that the application or document filed in support of the application must: · describe or identify the group members; · specify the nature of the claims made on behalf of the group members and the relief claimed; and · specify the questions of law or fact common to the claims of the group members. The Pleadings as against Cardinal The amended application 3 The first submission by Cardinal is that the Amended Application ("the application") does not describe the group members as prescribed by s 33H(1)(a) of the FCA, O 73 r 3 of the Rules and Form 129. The application refers to group members being comprised of "all, or alternatively, any of such of the 780 person who purchased an interest in the tea tree oil business venture" and who satisfy a number of other conditions. The expression "group member" is defined in s 33A to mean "a member of a group of persons on whose behalf a representative proceeding has been commenced". In my view the description in the application does not sufficiently describe the group. It leaves unanswered the question of the identity of those referred to as "any". The application also, in par 2(d), seeks to identify the group by reference to breaches of the law or duty and this compounds the uncertainty. It is not clear whether pars (a), (b), (c) and (d) are cumulative or discrete requirements. I accept the submission of Cardinal on this point. 4 The second matter required by s 33H is that the application should specify the nature of the claims made on behalf of the group members and the relief claimed. In my opinion, clause A2 and clause B of the amended application do not sufficiently specify the nature of the claims made on behalf of the group members in that they do not identify the way the contraventions or breaches are said to have occurred. I also accept the submissions of Cardinal on this aspect. 5 The third matter raised is that the application does not specify the questions of law and fact common to the claims of the group members. This is of central importance. I agree with the respondents' submission on this point. Section C of the application does not frame any question but simply makes allegations of mixed fact and law in a general discursive way. In some instances it may be possible to glean by inference the type of question which underlies the application but this is not sufficient compliance with s 33H. 6 Accordingly, because the application does not satisfy the requirements of s 33H and the Rules it should be struck out. THE AMENDED STATEMENT OF CLAIM Par 2.1 7 Paragraph 2.1 of the Amended Statement of Claim ("the statement of claim") sets out causes of action and alleges that Cardinal is liable for damages arising out of breach of covenant, breach of fiduciary duty as Trustee and negligence but does not plead the material facts on which such duties are said to arise. Par 3.53 8 Paragraph 3.53 contains an allegation that Cardinal "was represented as a person or body who had consented to act as the Trustee for the growers in accordance with the terms of the Project Deed". It is said by Cardinal that this is not a material fact as the representor is not indicated and nothing subsequently in the statement of claim seems to turn on it. I agree with this submission. It is necessary for the statement of claim to set out a statement in summary form of the material facts on which the applicant relies: see O 11 r 2(a) of the Rules. Par 3.54 9 Paragraph 3.54 says that the first respondent executed the Project Deed and thereby evidenced its consent to act as trustee for reward. This is really a conclusion of law or a submission rather than a statement of material fact. Par 3.55 10 This sets out a series of contractual requirements contained in the Project Deed. However, Cardinal submits that when one comes to the allegations of breach of duty in par 3.59 the breaches do not correlate to the alleged obligations. A number of the requirements are not alleged to have been breached and to this extent they are irrelevant. Some of the breaches alleged in par 3.59 do not correspond to any alleged duty. The statement of claim should allege some breaches of the legal requirements or obligations raised. At present there is no correlation. Par 3.56 11 This paragraph refers to powers conferred by the Deed to collect money and commence proceedings but there is no legal duty or corresponding breach alleged. These powers do not appear to relate to any breach in par 3.59 except in the most general way. For example, by an allegation that there was a failure to collect, receive and get in all moneys required for the Project or to hold the moneys on trust that were paid to it. There are no particulars given: see par 3.59(j). Basically the breaches alleged in 3.59 concern a general failure to ensure that moneys were in fact paid out and a failure to keep books of account, make inquiries, or report, but the particular books, inquiries and reports are not specified. Pars 3.57 and 3.58 12 These paragraphs are of a general unparticularised nature in that they allege "a duty to adhere rigidly to the terms of the Trust" (emphasis added) on the part of Cardinal and that Cardinal "owed fiduciary duties to the Class members" (emphasis added) to avoid a conflict of interest. No details are given. There are no allegations of breach of these unparticularised general duties. Par 4.3 13 This paragraph contains an allegation of reliance to the effect that each member of the class claimed the purchase price as a tax deduction in reliance partly on the fact that a trustee had been appointed as a "watchdog" to protect the growers' interest and to ensure that the funds would be used for the represented purposes to enable a tax deduction to be properly claimed. The allegation is not adequately formulated or particularised. It appears to be the assertion that because the Trustee failed to protect the growers' interest and ensure compliance with the Project Deed there were adverse tax consequences to the class in relation to a tax penalty and an investment loss. Although it may be possible on these allegations to speculate as to the cause of action it is not properly formulated and requires a great deal more specificity. It is inadequate in its present form. Par 5.1 14 The expression "tax penalty" is defined in para 5.1 to mean "penalties imposed by the Australian Tax Office upon investors in the Project as a tax deduction." This does not make sense. Perhaps it may mean a tax penalty incurred as a result of claiming a tax deduction but the respondent should not be required to frame a defence based on speculation. Par 5.2 15 In addition, par 5.2 broadly alleges that in consequence of unspecified breaches of trust, damage occurred. There is no pleading of material facts which attempt to show any connection between the conduct complained of and the loss. It is insufficient to use a general formula such as "by reasons of" to properly plead a causal relationship: cf Bond Corporation Pty Limited v Thiess Contractors Pty Ltd (1987) 71 ALR 615 at 622. Par 5.3 16 This paragraph makes a claim in negligence and again baldly alleges that in consequence of Cardinal's negligence, (in respect of which there is neither duty nor breach alleged, or any facts pleaded to support such a claim), the applicant and the class has suffered actual and potential loss or damages. This also is inadequate. The Pleadings as against STapletons 17 Two claims levelled against Stapletons allege contraventions of ss 995 or 1006(1) of the Corporations Law. Another alleges negligent performance of its duty as auditor, or breach of contract, during the period 1997 through 1999. It is pointed out that the statement of claim does not plead or particularise any contraventions under the Corporations Law. The only claim of negligence alleged against it as auditor is in relation to 1997. There is also a claim in contract but there is no claim that damage flowed from breach of contract 18 Stapletons makes similar objections to the pleadings against it as those made by Cardinal. In addition it refers to two other matters. The first is that as against Stapletons, there is said to be no allegation of relevant reliance supporting the claims in negligence or under the Corporations Law. In par 4.3 there is an allegation that members of the class claimed the purchase price as a deduction in reliance on the fact that the project had an auditor and that Stapletons was the auditor. The way in which and the extent to which the reliance was placed on that fact is not spelt out. It is said that simply to allege that steps that were taken or omitted to be taken in reliance on the fact that Stapeltons was the auditor does not, without more, sufficiently spell out the extent of the reliance. I accept this submission. 19 The second additional matter relied on by Stapeltons is that there is no proper allegation of loss caused to the applicant as a result of the conduct of Stapeltons. Paragraph 2 of the application asserts that members, including the applicant, purchased their interests between December 1996 and December 1997. Evidence tendered indicates that the applicant bought his interest on 30 June 1997 so that his loss was not caused by any statement made in the 1997 audit certificate which was dated 15 September 1997. One head of loss claimed is for loss of opportunity in par 5.6. This is not properly set out. Nor is it stated how Stapletons was negligent in respect of the years 1998 and 1999 in that section of the Statement of claim dealing with loss and damage. THE PLEADINGS AS AGAINST COOPERS 20 The sixth respondent adopts the submission of the first respondent in relation to the application. In addition it submits that the limitations on the class by reference to breaches on contraventions of obligations makes the determination of the class even more uncertain. I agree with this. Coopers say that par 3.16, which refers to a duty owed by Coopers to members of the "public" to whom the prospectus was published, is too vague. This paragraph uses obscure language. Coopers are said to have had a duty to ensure that: "(a) the essential factual matters which the Australian Taxation office required to exist as a condition for allowing it as a deduction did in fact exist including …" The way in which Coppers should have "ensured" such a situation is not specified. The following paragraphs do not make any sense. 21 Reference is then made to various matters. It is impossible to understand what is meant by a duty to ensure that essential factual matters in fact existed. One might infer that the references to ensuring that a tax deduction would be likely to be secured refer to somehow checking the position or something of that nature but this is not the way in which the allegation is framed. Subparagraph 3.16(b) of the statement of claim alleges that Coopers had a duty to ensure that "(b) any significance to the Australian Taxation Office of the fact that both ATT and TTP were shelf companies without assets whose capacity to establish, promote and maintain the proposed tea tree plantation was dependent on raising on sufficient moneys from the prospectus as would realistically enable the aim to be achieved." 22 I agree with the submission that this paragraph is meaningless. This paragraph and par 3.16(a) should be struck out. 23 Paragraph 3.18 alleges that Coopers owed a continuing duty of care to the class of members who may rely on the prospectus and subscribed to the project between November 1996 and December 1997 and to advise of relevant changes. This is presumably meant to be an allegation of a duty not to be negligent, or a duty to take care. The breach alleged in par 3.19 is that Coopers failed to inform the subscribers that relevant changes had occurred and this is particularised by reference to the Taxation Office having disallowed several projects of "a like kind" for failing to meet its criteria. Again, no particulars are given for this allegation. The basis of a continuing duty is not spelt out and it is not suggested what reasonable action ought to have been taken or what advice ought to have been given. JURISDICTION 24 On behalf of Stapletons a submission is made that this Court has no jurisdiction because none of the claims made against it are federal claims. 25 As a consequence of the High Court decision in Re Wakim (1999) 163 CLR 270 it is said that this Court does not have jurisdiction under the Corporations Law. It is then said that this Court cannot exercise jurisdiction in relation to the negligence and breach of contract claims because these non-federal issues are "separate and dispirit" or distinct and unrelated to the Federal claim. 26 In view of the conclusion which I have reached as to the striking out of the present application and statement of claim and the need for total recasting of the case in a proper way, it is not appropriate to deal with the jurisdiction question at this stage. This is because the determination as to whether jurisdiction could depend on the way in which the case is formulated and the material facts which are raised in the Further Amended Application or the statement of claim. When this has been done and pleadings closed it will be possible to consider, in a more informed way, to what extent there is a common substratum of fact of law. Accordingly I do not propose to make any determination as to the jurisdiction of the court until pleadings are finalised and it is possible determine what are the material facts and issues. Submissions for the applicant 27 I have read the detailed submissions made for the applicant in this matter but they are really more in the nature of submissions or particulars as to what the case is perceived to be, rather than an answer to the attacks made on the application and statement of claim. This is not, in my view, an appropriate way to deal with an attack on pleadings which must be read on their face in order to see what is alleged. It is not appropriate to seek to rely on additional supplementary statements as to intention, or particulars, or explanations outside the pleadings in order to suggest that a pleading is adequate. Conclusion 28 Having regard to the nature and extent of the inadequacies in the pleadings outlined above it is my view that no useful function could be made by an amendment to the application or statement of claim. The application and statement of claim should be struck out. I once again grant leave to amend the pleadings to file a Further Amended Application and Further Amended Statement of Claim because it does appear that there may be a case which, if properly pleaded, could form the basis of a representative proceeding. However, it is unacceptable to require the Court to deal on numerous occasions with manifestly inadequate pleadings. In this case I am coming to the point where further inadequacies may require a striking out of the representative proceedings. 29 The order of the Court is that the Motion to strike out the Amended Application and the Amended Statement of Claim is granted with costs. Leave is granted to the applicants to file and serve within six weeks a Further Amended Application and Statement of Claim. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin. Associate: Dated: 9 March 2001 Solicitor for the Applicant: Dennis & Co Counsel for the First Respondent: S J Archer Solicitor for the First Respondent: Deacons Counsel for the Fifth Respondent: A S Bell Solicitor for the Fifth Respondent: Phillips Fox Counsel for the Sixth Respondent: D Williams Solicitor the Sixth Respondent: Coudert Brothers Date of Hearing: 2 February 2001 Date of Judgment: 9 March 2001