Reported Decision : [2000] 36 ACSR 394 New South Wales Supreme Court CITATION : BHAGAT V. AUSTRALIAN SECURITIES COMMISSION & ANOR [2000] NSWSC 1160 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 4626/94 HEARING DATE(S) : 16-20 October 2000 JUDGMENT DATE : 13 December 2000 Hari Bhagat - plaintiff PARTIES : Australian Securities Commission - 1st defendant Westpac Custodian Nominees Ltd. - 2nd defendant JUDGMENT OF : Hodgson CJinEq at 1 COUNSEL : Mr. Bhagat appeared in person Mr. N. Hutley SC with Dr. A.S. Bell for defendants SOLICITORS : Australian Government Solicitor for defendants CATCHWORDS : CORPORATIONS - TRUSTS - Unit trusts - Mortgage trust - Trust deed authorising assignment of proportionate shares of mortgages - Amendment of deed to authorise trustee to give priority to assignees - Approval of amendment by Corporate Affairs Commission - Whether duty ofcare to unitholders - Whether breach of that duty - Whether damages shown - Whether ASIC correct defendant - Whether ASIC has statutory defence. LEGISLATION CITED : National Companies & Securities Commisison Act s.41(4) Australian Securities & Investment Commission Act ss.5, 259, 262. DECISION : See end of judgment IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORAM: HODGSON, CJ in Eq. Wednesday 13th December 2000 NO. 4626 OF 1994 BHAGAT V. AUSTRALIAN SECURITIES COMMISSION & ORS. JUDGMENT 1 As at March 1990, units in four of the six "Estate Mortgage" unit trusts, having a redemption value of just over $1 million, were held by the second defendant Westpac Custodian Nominees Limited in trust for the plaintiff Hari Bhagat. On or about 22nd March 1990, the Victorian Corporate Affairs Commission (CACV) as delegate of the National Companies & Securities Commission (NCSC), approved amendments to the deeds of trust relating to those unit trusts. In these proceedings, the plaintiff claims damages against the third defendant Australian Securities & Investments Commission (ASIC), as successor to the NCSC, on the basis that this approval was in breach of a duty of care owed by the CACV and/or the NCSC to unit holders, resulting in damage to the plaintiff. OUTLINE OF FACTS 2 I will commence with an outline of facts that are either clearly proved or not in dispute. 3 Commencing in 1976, a number of unit trusts were established using the name "Estate Mortgage": the ones most relevant to these proceedings are Estate Mortgage Income Trust No.1 (established in 1976), Estate Mortgage Investment Trust (established in 1982), Estate Mortgage Depositors Trust No.3 (established in 1988), and Estate Mortgage Depositors Trust No.4 (established in 1989). All these trusts were created to invest primarily in registered first mortgages, with income to be distributed regularly to unit holders. 4 After 1987, all the trust deeds in relation to these trusts contained a provision conferring power on the trustee to assign fractional parts of mortgages. This provision was contained in the definition of "authorised investment" in the relevant deeds, which (with immaterial variations) was in the following terms: 1.1.1 "Authorised Investment" (subject always to the provision of Clause 21.1.6 hereof) means: 1.1.1.1 a loan made upon security of a first mortgage of freehold land situate in any State or Territory of the Commonwealth of Australia PROVIDED THAT 1.1.1.1.1 such mortgage shall be registered under:- 1.1.1.1.1.1 the Transfer of Land Act 1958 of the State of Victoria when the subject land is situate in that State, or 1.1.1.1.1.2 the Act or Ordinance of the place where the subject land is situate relating to the registration and regulation of land and dealing therewith; 1.1.1.1.2 the title for the subject land is under the operation of:- 1.1.1.1.2.1 The Transfer of Land Act, 1958 of the State of Victoria where the subject land is situate in that State, or 1.1.1.1.2.2 the Act or Ordinance of the place where the subject land is situate relating to the registration and regulation of land and dealing therewith; 1.1.1.2 a loan made upon the security by way of first mortgage, or charge of any other real or personal property; PROVIDED FURTHER THAT where the amount advanced pursuant to sub-Clause 1.1.1.1 or 1.1.1.2 of this definition exceeds two thirds of the value of the security the amount of such excess shall be the subject of a contract of insurance with a company approved of by the Trustee covering the risk of any default by the mortgagor, chargor, transferor, or assignor, as the case may be; PROVIDED FURTHER THAT the Trustee may at any time or from time to time assign a fractional part or parts of any Mortgage or Charge referred to in sub-Clause 1.1.1.1 or 1.1.1.2 of this definition upon condition that:- 1.1.1.2.1 the assignment is for a price not less than the principal sum secured by the Mortgage or Charge multiplied by the fractional part assigned; 1.1.1.2.2 the Trustee retains the right and power to exercise at all times all rights and remedies under the Mortgage or Charge; and the Trustee may enter into Deeds with any one or more of the assignees of a fractional part or parts of such Mortgage or Charge fixing the priority of the Trustee and of such assignee or assignees between themselves in relation to such Mortgage or Charge. 1.1.1.3 the purchase or other acquisition of first mortgages or charges by way of transfer or assignment of the mortgagees or chargees benefit and interest thereunder and in any policy of insurance relating thereto complying in all respects with the provisions of sub-Clause 1.1.1.1 or 1.1.1.2 of this definition and subject always to the provisions of Clause 4 and 6 of this Deed. 1.1.1.4 an investment (hereinafter called "a Trustee Investment") in any State or Territory of the Commonwealth of Australia which for the time being is by the law of that State or Territory an investment in which trustees may lawfully invest; 1.1.1.5 Cash; 1.1.1.6 a deposit with a corporation that is declared by the Commission pursuant to Section 97(7)(b) of the Code to be an authorised dealer in the short term money market; 1.1.1.7 an Instrument of Deposit or Investment with a bank as defined in Section 5 of the Banking Act 1959 of the Commonwealth of Australia; 1.1.1.8 the purchase of any bill of exchange endorsed or accepted by a banking corporation as defined in Section 5 of the Banking Act, 1959 of the Commonwealth of Australia; and 1.1.1.9 land or any other real or personal property which comes into the possession ownership or control of the Trustee by virtue of the exercise by it of the powers authorities and discretions vested in it by the Secured Investment pursuant to which it is mortgagee chargee, transferee or assignee as the case may be (hereinafter called "Controlled Property"). 1.1.1.10 units, sub-units or other interest (subject to the provision of Clause 21.1.9) in any Unit Trust or similar undertaking or scheme operating in Australia in respect of which the Deed and the appointment of the Trustee has been approved under the Code or corresponding legislation; PROVIDED THAT no moneys available for investment under this Trust Deed shall be invested either in the purchase of land fee simple (other than Controlled Property as defined in Clause 1.1.1.9 hereof) or in a prescribed interest under the Code being an investment scheme constituted as a unit trust in which capital contributed by investors is used primarily to acquire real property (such investment scheme commonly called a "property trust"). 5 Clause 21.1.6, referred to in that definition, prohibited investment in or lending to the Manager or the Trustee or companies related to them. 6 Each deed contained provision for making variations to the deed, in the following terms (apart from immaterial variations): Subject to the prior approval of the Commission the Trustee and the Manager shall be entitled by deed supplemental hereto to alter modify add to substitute or cancel all or any of the provisions of this Deed (including if thought fit this present Clause) in such manner and to such extent as may be expedient in the interests of the Unit Holders or as may be required to comply with or avoid the effects of any judicial decision whether or not the Trustee and the Manager or either of them were parties to the proceedings in respect of which any such decision may be made or to satisfy the requirements of any statute ordinance rule regulation or by-law which may be now or hereafter in force and which affects trusts of the nature of the Trust or to enable the provisions hereof to be more conveniently advantageously profitably or economically administered or managed or for any other purpose deemed by the Trustee and the Manager to be desirable for the more effective operation of the Trust PROVIDED THAT where in the opinion of the Trustee the rights of the Unit Holders may be adversely affected by any such alteration, modification, addition, substitution or cancellation, then such alteration, modification, addition substitution or cancellation may be affected only with the consent of the Unit Holders given at a meeting convened and conducted in accordance with the provisions of Clause 27.1 of this Deed. 7 Prospectuses for the trust issued after 1987 contained the following statement in relation to authorised investments and investment policy: The following are the Authorised Investments as stated in the Trust Deed. 1. (a) Loans made upon the security of first mortgage of freehold land situated in any State or Territory of the Commonwealth of Australia and under Certificate of Title and registered either under the Transfer of Land Act 1958 of the State of Victoria or the appropriate Act or Ordinance relating to such registration where the land is situated outside Victoria; (b) Loans made upon the security of first mortgage of any other real or personal property; PROVIDED THAT in the case of (a) or (b) where the advance exceeds 66% of the valuation, the excess shall be insured by a corporation approved by the Trustee. 2. The acquisition of first mortgages or charges described in paragraph 1 (and subject to the proviso therein contained) by way of transfer or assignment of the mortgagees' or chargees' benefit and interest therein and any contract of insurance relating thereto. 3. An investment in any State or Territory in the Commonwealth of Australia, which for the time being is by the law of that State or Territory, an investment in which trustees may lawfully invest. 4. Cash. 5. A deposit with a Corporation that is declared by the Commission pursuant to the Companies (Victoria) Code to be an authorised dealer in the short term money market. 6. A deposit with a Bank as defined in section 5 of the Banking Act 1959 of the Commonwealth of Australia. 7. The purchase of any bill of exchange (accepted or endorsed by a banking corporation as defined in Section 5 of the Banking Act 1959 of the Commonwealth of Australia). 8. Land, or other real or personal property, which comes into the possession, ownership or control of the Trustee by virtue of the exercise by it of the powers, authorities and discretions vested in it by a mortgage investment pursuant to which it is mortgagee ("Controlled Property"). 9. Units in any unit trust or similar scheme where the deed and the appointment of the trustee have been approved under the Companies (Victoria) Code or corresponding legislation. The Trust Deed provides that moneys from the Trust Fund shall not be invested either in the purchase of land in fee simple (other than controlled land) or in any property trust being a prescribed interest under the Companies (Victoria) Code. The Trust Deed further provides that under no circumstances may advances from the Trust Fund be made to the Manager or the Trustee or to any company which is deemed to be related to the Manager or the Trustee by virtue of Section 7(5) of the Companies (Victoria) Code or to any person who is associated with the Manager or the Trustee within the meaning of Section 6 of the Securities Industry (Victoria) Code or Section 9 of the Companies (Victoria) Code. The Trustee may assign part of parts of any first mortgage comprised in the Authorised Investments of the Trust Fund and fix the priorities of any assignee(s) for such assignment(s). Lending proposals are subject to evaluation based on an assessment of the ability of the borrower to repay, supported by independent property valuations and subject to the approval of the Trustee. 8 In December 1989, it appears that the NCSC had some concern about the liquidity ratio of some management companies in Victoria, including the manager of these trusts, namely Estate Mortgage Management Limited (EMM). It appears that between December 1989 and February 1990, officers of the CACV met with the trustee of the Estate Mortgage trusts, Burns Philp Trustee Co. Limited (BPTC) on a number of occasions. 9 In the first half of February 1990, Richard Cockburn, Deputy Commissioner (Policy & Compliance) with the CACV was informed that there had been a delay in sending out cheques to unit holders of the Estate Mortgage trusts. On 16th February 1990, Mr. Cockburn signed a direction under s.53 of the Security Industries (Victoria) Code, directing EMM to furnish to the CACV, on a forty-eight hour basis, audited statements of (i) redemptions, (ii) funds received and (iii) monthly projections. 10 Between 19th February 1990 and 12th April 1990, EMM furnished such statements to the CACV. These statements were examined by Frank Varga, a member of Mr. Cockburn's staff, and reports were provided to Mr. Cockburn by Mr. Varga and by Peter Jamieson, another member of Mr. Cockburn's staff. 11 On 28th February 1990, Mr. Jamieson prepared a written report on the matter, in the following terms: By virtue of a direction pursuant to Section 53 of the Securities Industry (Victoria) Code dated 16th February, 1990, EMM has been directed to furnish on a 48 hourly basis, an audited statement of redemptions, funds received and monthly projections. To date we have received the following details regarding redemptions and funds received: FUNDS RECEIVED Redemptions Applications Other 19 February 7,646,417 683,592 228,691 20 February 3,430,914 520,157 1,581,783 21 February. 3,033,489 540,751 386,869 22 February 2,206,803 1,058,001 4,274,171 23 February 2,379,935 1,041,468 697,619 Projections for the next week reveal that the combined trusts will have a net cash deficit of $6,716,000 on 5th March, 1990. However, the projections for the period between 8-14 days reveal that the deficit will be extinguished and a surplus of $2.04 million arise. The major cause of this surplus is the discharge and assignment of mortgages totalling $26.5 million for the period. The projections for the period of 31 - 60 days reveal that the combined trust cash position would improve to a surplus of $128.15 million. This is mainly due to the discharge of Mortgages totalling $130.6 million. RECOMMENDATIONS On the basis of the figures provided it appears that redemptions are slowing, however we should continue to monitor the position on a 48 hourly basis due to cash problem forecasted over the next week. 12 It appears that no redemptions were made of units in the Estate Mortgage trusts in respect of any applications for redemption received after 8th March 1990. 13 On 19th March 1990, the CACV received a letter from EMM enclosing supplemental deeds for variation of the six Estate Mortgage trusts, including the four concerned in this case. This letter was in the following terms: In the authorised investments of the above Trust Funds, specific powers are conferred on the Trustee in respect of the assignment of fractional parts of mortgages forming part of the Trusts' investments. These powers were conferred by supplemental deeds dated 7th July, 1987 in respect of the Estate Mortgage Income Trust No.1, Estate Mortgage Investment Trust and Estate Mortgage Depositors Trust. They were incorporated in the principal deeds of the Estate Mortgage Depositors Trusts Nos. 2, 3 and 4 when these were registered after this date. Prior to this time, the assignment function was undertaken under the Trustee's discretionary powers. The purpose of mortgage syndications and partial assignments is to: (a) facilitate the liquification of Trust assets to accommodate their varying prudential liquidity requirements from time to time; and (b) enhance security by limiting Trust lending exposure to any one borrower without losing the security benefits of cross collateralization. Recent scrutiny of the deeds by solicitors acting for banks and other institutions with whom the Trusts share mortgage positions has resulted in criticism concerning the lack of clarity of the specific powers referred to. Currently, we are in the midst of syndicating and assigning a number of mortgages in order to increase the Trusts' liquidity and we have undertaken to appropriately amend the deeds to incorporate the degree of clarity required. The wording of the proposed amendments herein has been drafted by Messrs. Mallesons, Stephen Jaques in consultation between their Melbourne and Sydney partners and has the recommendation of our Trustee's solicitors. In respect of the Estate Mortgage Income Trust No. 1, the amendment is slightly broader in order to bring the Trust into line with the five other Estate Mortgage Trusts. It should be noted that the amendments clarify existing practice only and do not alter the same. We have also taken the opportunity of adding the expression "No.1" to the Estate Mortgage Depositors Trust to remove confusion with the other three Trusts in the Depositors series all of which have numbers after their names. In the above context therefore, would you please peruse the deeds and let us have any requisitions at your very earliest convenience to allow the expeditious creation of additional liquidity for the Trusts. We enclose our cheque for $480.00 being the required fee of $80 for each of the supplemental deeds attached hereto. 14 The relevant clause of each amending deed was in the following terms (with immaterial variations): 2.3 The definition of 'Authorised Investment' in clause 1.1.1 shall be amended by the deletion of clause 1.1.1.2.2 and clause 1.1.1.3 and replaced with the following, namely:- "1.1.1.2.2 (i) All rights and remedies under the Mortgage or Charge following the assignment of a fraction or part or parts of any Mortgage or Charge are exercisable by the assignee, or if more than one the assignees and the Trustee acting jointly. (ii) In the event that the assignee, or if more than one the assignees, and the Trustee are unable to jointly agree on the method or manner in which the rights and remedies under the Mortgage or Charge are to be exercised then in such event those of the aforesaid assignee, assignees or Trustee who alone or together own a majority interest in the Mortgage or Charge shall have the right to determine and direct the manner or method of exercising the rights and remedies available to the Mortgagee under the Mortgage or Charge. In assigning a fractional part or parts of any Mortgage or Charge the Trustee shall in addition to the powers of the Trustee elsewhere contained in this Deed have the power to enter into the following agreements, namely:- (a) An agreement with the assignee or assignees, as the case may be, to the effect that should the Trustee consider that the manner or method of the exercising of such rights and remedies by the aforesaid party or parties who own a majority interest in the Mortgage or Charge is not in the best interests of the Unit Holders of the Unit Trust the Trustee shall be entitled but not obliged to require the assignee or the assignees, as the case may be, or any one or more of them, to sell to the Trustee the whole of the assignee's or the assignees', as the case may be, right, title and interest in the Mortgage or Charge for a price not more than the aggregate of the principal sum secured by the Mortgage or Charge multiplied by the fraction or part purchased or acquired together with any interest or other monies owing to the assignee or the assignees, as the case may be, in respect of the assignee's or the assignees' interest in the Mortgage or Charge, and/or (b) An agreement with the assignee or the assignees, as the case may be, of a fractional part or parts of such Mortgage or Charge (provided always such Mortgage or Charge complies in all respects with clause 1.1.1.1 or clause 1.1.1.2 hereof) to fix the priority or ranking of the Trustee and of such assignee or assignees between themselves within such mortgage or Charge including but without limiting the generality of the foregoing to fix the priority or ranking of the Trustee ahead of or behind the assignee or the assignees or any one or more of them. Wherever the expression 'Mortgage or Charge' shall appear in this clause it shall mean a mortgage or charge of the kind referred to in clause 1.1.1.1 or clause 1.1.1.2 and shall be deemed to include the benefit of all guarantees of money secured by such a mortgage or charge, the benefit of all securities collateral to such mortgage or charge, the loan agreement advances pursuant to which are secured by such mortgage or charge together with all policies of insurance relating to the loan secured by such mortgage or charge 1.1.1.3The purchase or other acquisition of first Mortgages or Charges by way of transfer or assignment of the mortgagee's or chargee's benefit and interest thereunder and the purchase or other acquisition of any fraction or part or parts of any such Mortgage or Charge which Mortgages or Charges comply in all respects with the provisions of clause 1.1.1.1 or 1.1.1.2 of this definition and the provisions of clauses 4 and 6 of this Deed but, in the case of a fraction or part or parts, only upon condition that:- 1.1.1.3.1 The acquisition is for a price not more than the principal sum secured by the Mortgage or Charge multiplied by the fraction or part purchased or acquired; and 1.1.1.3.2 (i) All rights and remedies under the Mortgage or Charge are, following the purchase or acquisition, exercisable by the assignor or if more than one the assignors and the Trustee acting jointly. (ii) In the event that the assignor, or if more than one the assignors, and the Trustee are unable to jointly agree on the method or manner in which the rights and remedies under the Mortgage or Charge are to be exercised then in such event those of the aforesaid assignor, assignors or Trustee who alone or together own a majority interest in the Mortgage or Charge shall have the right to determine and direct the manner or method of exercising the rights and remedies available to the Mortgagee under the Mortgage or Charge. In purchasing or acquiring a Mortgage or Charge the Trustee shall have the power to enter into the following agreements, namely:- (a) An agreement with the assignor or assignors, as the case may be, to the effect that in the event that the Trustee shall consider that the manner or method of the exercising of such rights and remedies by the aforesaid party or parties who own a majority interest in the Mortgage or Charge is not in the best interests of the Unit Holders of the Unit Trust then the Trustee shall be entitled but not obliged to purchase the whole or part of the abovementioned assignor's or the assignors' right, title and interest, or the right, title and interest of any one or more of them, in the Mortgage or Charge for a price not more than the aggregate of the principal sum secured by the Mortgage or Charge multiplied by the fraction or part purchased or acquired together with any interest or other monies owing to the assignor or the assignors in respect of the assignor's or assignors' interest in the Mortgage or Charge. (b) An agreement with the assignor or the assignors, as the case may be, of a fractional part or parts of such Mortgage or Charge (provided always such Mortgage or Charge complies in all respects with clause 1.1.1.1 or clause 1.1.1.2 hereof) to fix the priority or ranking of the Trustee and of such assignor or assignors between themselves within such Mortgage or Charge including but without limiting the generality of the aforegoing to fix the priority or ranking of the Trustee ahead of or behind the assignor or the assignors or any one or more of them. Wherever the expression "Mortgage or Charge" shall appear in this clause it shall mean mortgage or charge of the kind referred to in clause 1.1.1.1 or clause 1.1.1.2 and shall be deemed to include the benefit of all guarantees of money secured by such a mortgage or charge, the benefit of all securities collateral to such mortgage or charge, the loan agreement advances pursuant to which are secured by such mortgage or charge together with all policies of insurance relating to the loan secured by such mortgage or charge." 2.4 The Trust Deed shall in all other respects be confirmed. 15 On the same day, letters were received by the CACV from BPTC, in relation to all of the supplemental deeds, in identical terms, as follows: We wish to advise that we are willing to act as Trustee in relation to the Principal Deed as amended. We also advise that we have perused the Supplemental Deed and are satisfied that: 1. The prepared amendments to the Deed will not derogate from the Unit Holders existing rights or the performance of the Statutory Covenants. 2. It is not necessary to seek in general terms the Unit Holders' approval to the proposed amendments. 16 The task of reviewing the six supplemental deeds was allocated to Mr. Varga. 17 On 20th March 1990, there was a meeting between Mr. Cockburn and Mr. Jamieson of the CACV, and Eddie Forth and S. Kunstler of BPTC, at which Mr. Jamieson sought and received assurances that the mortgage lending ratio was not exceeding 66%. 18 On 21st March 1990, Mr. Varga issued requisitions to EMM concerning the supplemental deeds, as follows: 1. Require trustees' signing clause. 2. Recital A of each supp. deed - name of trust to be in " ". 3. All references to "mortgage or charges of the kind referred to in ..." should be clause ____ OR ____ (not and). 19 It appears that these requisitions were complied with, and the deeds appear to have been executed in their final form on 21st March 1990. 20 On or about 22nd March 1990, Mr. Varga discussed the supplemental deeds with Leslie Lacny, a Senior Corporate Analyst with the CACV, and also an Assistant Commissioner for Corporate Affairs, with delegated authority to approve trust deeds. On 22nd March, Mr. Lacny approved the six supplemental deeds. 21 On 26th March, Mr. Cockburn compiled a memorandum concerning EMM, in the following terms: PURPOSE To provide the Commissioner with a briefing on the current position of the Estate Mortgage Managers Ltd. BACKGROUND Estate Mortgage Managers Ltd has approximately $9 [corrected to 900] million in fund under management. The company invests the funds in mortgages where the mortgage loan amounts to not more than 662/3 of the sworn valuation of the property offered as security. The company operates a number of trusts which it opens and closes as interest rates move. I understand the mortgages are all variable rate mortgages, most of which are secured on large commercial property sites or developments. Following late payments of its quarterly distribution in December 1989 the company received some adverse publicity and experienced a run on its units. The trustee of the company, Burns Philip (sic) has taken steps to monitor the cash flow situation of the trust and has engaged its own auditors to make a number of independent checks. I understand it is currently in the process of reviewing the mortgage portfolio. In February 1990 I placed a request on the manager pursuant to the Securities Industry Code which requires it to provide every two days an audited cash flow statement of the funds going in and out of the trust. In general that has revealed that new applications are approximately 50% of redemptions. The difference has been made up largely by assignments of interests in the mortgages. These assignments are made to substantial financial institutions including Macquarie Bank and Merchantile (sic) Credits. The difference between redemptions and new applications has been slowly improving. The next critical test for the company relates to the distribution for the quarter ended 31 March. I understand the trustee has taken steps to ensure that the management company and its auditors will be adequately prepared to ensure that cheques go out on time. If cheques do not go on time further and more substantial runs can be expected. As a result of concerns about the trust's position I met with a representative of the trustee on 20 March. My concerns relate primarily to the following factors: 1. That under the terms of the partial assignments of mortgages the risk of non timely repayment or the possibility that the security will not cover the loan in the event of a mortgagees sale are borne by the trust and not the financial institution acquiring the interest in the mortgage. 2. That the task of assigning mortgages means that the financial institutions are only acquiring interests in the prime mortgages and the trust is left with the more risky mortgages. 3. Any substantial increase in mortgage rates will cause increased default and results in a substantial potential for loss. 4. The commercial property market is saturated to the extent that there are very few buyers and forced foreclosure poses a real risk of a shortfall on the realisation. The trustee is agreed to provide to me, after obtaining consent from the manager, copies of typical assignment documents to enable me to ascertain whether or not the risk does remain with the trust. If this is the case and the mortgages which are not being assigned are those where the risk element is significant, my principal concern is that investors who remain with the trust will bear the brunt of any loss. It may therefore be prudent to ensure that the distribution rate is reduced to somewhat to include provisions for such a possibility. This in itself carries some risks because a reduction in the return rate will decrease new applications and increase redemptions. The continued viability of this trust is dependent upon the willingness of financial institutions to acquire interests in commercial property mortgages. I understand that their desire to do so is decreasing as banks considered these securities are less attractive, notwithstanding the significant interest rate returns (21-22%). It may be necessary to consider requesting the Chairman of the NCSC to discuss this matter in broad terms with the Chairman of the Reserve Bank in an attempt to ensure that banks and others do not unnecessarily foreclose on properties and that they continue to support the secondary financial institutions by the purchase of interest in mortgages. I note that the concerns expressed above also extend to property trusts and in particular single property trusts. RECOMMENDATION That the Commissioner note the above briefing. 22 This memorandum refers to the provision of copies of typical assignment documents. On 27th March 1990, Mr. Jamieson was provided with a sample deed for the assignment of a part of a mortgage to a bank, providing that the bank should have priority over the mortgagee (that is, the trustee). Apparently, Mr. Jamieson subsequently informed Mr. Cockburn that he had been told that this deed was not representative, but the matter was apparently not pursued further. 23 At about the beginning of April 1990, Mr. Cockburn prepared a further memorandum, in the following terms: Background: 1. Estate Mortgage Managers Limited is a Victorian company holding a Dealers licence under the Securities Industry Code. It is the Manager of six mortgage trusts which have $700 million in funds. 2. The funds invest in mortgages over industrial and commercial property mainly along the East coast of Australia. It does not lend more than 66.2/3% of the valuation of the security. It assesses its quarterly profit only on interest actually received by the trust. It thus does not need to make provision for non-recovery of interest. Redemptions of units are required to be made within 21 days of request. 3. In late 1989 there were adverse comments made about the trusts by investment advisers. In early 1990 it was some two or three weeks late in making its dividend distribution to unitholders. A combination of those factors led to a moderate run on the trusts. Since mid February redemptions have exceeded applications for units by about $3/4 m to $1 m per day. Liquidity has generally been maintained by a negative pledge facility (currently $170 million) from a syndicate of eight banks, and recently by the assignment of interests in mortgages. 4. On 16/2/90 the Commissioner issued a direction to Estate Mortgage Managers Ltd. requiring it to produce an audited cashflow statement for the trusts each two days. Redemptions dropped from a high of $7.6 million on 19/2/90 to about $1.6 million per day by 27/2/90. New applications remained about $1/2 million per day. 5. Following a query from the Commissioner, on 30/3/90 the trustee, Burns Philp Trustee Company Limited advised the Commissioner that the manager had failed to redeem units within the 21 day period. No units have been redeemed in respect to applications received after 8/3/90. 6. The Commissioner met with the Manager and the Trustee. Following reassurances that additional liquidity was expected that week, action was withheld. The liquidity was to have come from the sale of interests in mortgage to the Hong Kong Bank (the manager's banker) and another institution. The settlements had been postponed from the previous week and ultimately did not occur. During that week the Manager failed to deliver the audited cashflow statements and the Trust's auditor failed to adequately respond to an inquiry from the Commissioner. 7 On 5/4/90 the Commissioner sent a letter to the Manager and trustee indicating an intention to take action on Monday 10th April 1990. Upon receipt of that letter, the Trustee issued a notice of default under the trust deed requiring that redemptions be met in accordance with the deed or it would call a meeting of unitholders. The Manager and Trustee communicated with the Commissioner's staff over the weekend. The Manager voluntarily withdrew its prospectus from the market. 8. On 9/4/90 a meeting of the Manager, the Trustee, the Commissioner and their respective legal advisers was held. A rescue package had been negotiated and finalization of the loans etc. could not occur on that day. It was agreed that upon receipt of an application under Section 215C of the Companies Code (to suspend redemptions and require a meeting of unitholders to be called to determine the future of the trust) action would be withheld till early Thursday, 13th April 1990 unless there was adverse publicity or events in the meantime. 9. The rescue package involves the sale of interests in mortgages to about $100 million to other unit trust industry managers This follows, I believe, action by the Unit Trust Association requesting its members to assist, $12 million sale to FAI Insurance, $39 million to a Hong Kong based company, and settlement of an $8.5 million mortgage are also expected. In addition, they hoped that the negative pledge lenders would increase by $52 million. 10. The commissioner was advised in the evening of the 9th April 1990 by legal advisers for the negative pledge lenders that they had not agreed to such an increase and would not support a rescue bid which involved a sale/assignment of the trusts mortgages. They appear to have engaged Mr. John Spark of the insolvency firm, Ferrier Hodgson & Co. to act for them. Financial Position 11. It is nearly impossible to refinance commercial mortgages at present. This appears to be a direct result of bank policy. The lack of liquidity in the market place means that defaults are increasing simply because no one will "rollover" loans and prices are depressed which discourages voluntary sales. Forced sales depress prices and further reduce the ability to refinance large projects. 12. To meet its minimum commitments, the trust needs $22 million by 12/4/90 and $30 million by 24/4/90 (the quarterly distribution) . To survive, the trust must hold significant liquid reserves, undertake a marketing campaign and look at new products to attract funds. If confidence cannot be restored the rescue will merely postpone its closure. Confidence will fail further if: - there is adverse press coverage - the dividend cheques are late - redemptions are not met on time (after 13/4/90) Discussion 13. There is no evidence of fraud or malpractice. The statutory safeguards (auditor and independent Trustee) appear to be working. The liquidification bid cannot proceed unless the Trustee is satisfied that sale of the mortgages will not prejudice unitholders. 14. The Manager has indicated a willingness to be the applicant to freeze the trusts if an adverse event occurs. The trustee is extremely conscious of its duty and will act if the Manager does not. 15. The Banks are not helpful and appear willing to destroy the trusts. They have concerns about the value of some securities. There is currently a $22 million shortfall between principal plus accumulated interest and current market value on the 26 defaulting loans advised to the Commissioner. Because interest not received by the trust is not taken to account for distribution purposes, materializing the loss will not effect the trusts position. If, however, a property realizes less than 66.2/3% of its original value, and there is a loss of principal it will be brought to account in that quarter. A loss of $30 million or so can be expected to wipe out any distribution in the period. This would cause a run on the trust. 16. There is a general uneasiness in the market place and lost confidence is not easily restored. The Banks appear to be using the opportunity to rationalize their non-bank competition and are contributing to a depressed commercial property market by not lending to that sector. The NCSC has advised the Reserve Bank of the possible consequences of this action particularly for this trust. 17. From a regulators point of view, it would be better for the Statutory investor protection elements to operate, rather than for the Commissioner to intervene prematurely. The Trustee has indicated a willingness to cooperate with the Commissioner if it is decided that the trusts should be frozen. 18. The Trustee and Commissioner will act if: - $22 million is not injected into the trust by 12/4/90 - a further $30 million is not injected into the trust by 24/4/90 - if there is adverse publicity for the trust - if the negative pledge bankers take action to call in their debt (probably before 24/4/90 if they intend to do so) Principle concerns are to ensure equality of treatment between unitholders. 19. Information on the liquidity position of other Victorian Mortgage trusts and property trusts has been requested of their managers. A failure of Estate Mortgage is expected to cause a run on other unit trusts exposed to the commercial development sector. There is a rumour that a large Melbourne development is in trouble, but I am not aware which one. 24 On 4th April 1990, Mr. Jamieson telephoned Eddie Forth, and advised him that EMM was not complying with the CACV's direction concerning the provision of figures, in that none had been received since 22nd or 23rd March. 25 On 5th April 1990, Mr. Cockburn sent a letter to EMM, requiring advice as to reserves and provisions, and indicating an intention that, unless satisfactory answers were received by 10am on 9th April 1990, the CACV would withdraw the present prospectus; and also indicating that the CACV was prepared to take necessary steps to suspend redemptions. 26 On 11th April 1990, the CACV formally suspended the redemption of units of the Estate Mortgage Trusts, pursuant to s.215C of the Companies Code, pending a meeting of unitholders to determine the future of the trusts. 27 In mid-April 1990, KPMG Peat Marwick were engaged by BPTC to investigate the financial affairs of the trusts. 28 On 11th June 1990, EMM gave notice of meetings to unitholders, the meeting dates being set for 11th and 12th July 1990. 29 Subsequently, it appears that EMM was removed as manager, and BPTC was removed as trustee. 30 In a confidential report by KPMG to BPTC dated 27th June 1990, there is the following material concerning assignments of mortgages: 1.22 A key assumption of the provisioning exercise is that any potential loss on mortgages involving partial assignment of 1st mortgage security will be borne by the Trusts. This is based on Corrs' initial findings that the assigned party has in most cases priority over the Trusts with respect to claims to principal and interest cash receipts (refer Section 7). It would appear from our review of the loan portfolio that the assignments of 1st mortgages relate to a number of instances to quality properties for which the assigned party bears little risk because of priority in ranking over the Trusts. In the current depressed property market typified by falling prices, the assignment activity has significantly increased the credit risk of the Trusts. 31 The mortgage register of the trusts as at August 1990 showed thirty seven partial assignments of mortgages, in which assignees had been given priority, with a total amount indicated of around $160 million. However, other material suggests that the relevant assignments might have totalled about $250 million. 32 There are in evidence a number of such assignments, namely the following: 3rd March 1988 to Mercantile Mutual Life Insurance Co. Ltd. (MML) 15th April 1988 to Lumley Life Limited 25 July 1989 to Farrow Finance Co. Limited 21st September 1989 to Hongkong Bank of Australia Limited (HKB) 18th September 1989 to ABN Australia Limited (re Dindori) 3rd November 1989 to ABN Australia Limited (re Dindori) 13th February 1990 to HKB 15th March 1990 to HKB 19th March 1990 to MML (re Continental Holdings) 19th March 1990 to MML (re Carlton Clock Tower) 30th April 1990 to Bank of Singapore (Australia) Limited 33 Finally, there are a "Property as to Mortgage" deed dated 27th March 1990, purporting to give HKB and MML priority over the Trustee in respect of the first $65 million available from what was called the Ozton Mortgage; and a "Confirmatory Deed of Assignment and Covenant" to MML dated 1st May 1990, purporting to confirm MML's priority in relation to a number of previous assignments of parts of mortgages to MML. 34 There is in evidence a report to unitholders made in June 1991 by the new manager of the trusts, Global Funds Management (NSW) Limited. It contains the following material in relation to assignments of mortgages: One of the practices of the previous manager and former trustee was to generate liquidity by selling parts of the Trusts' mortgages to third parties and giving these third parties priority in the repayment of the loans. The Trusts may therefore have been relegated from holding a first priority in the recovery of these loan funds to being in a secondary position behind these third parties. The value of the property securities has decreased substantially, so in many instances no recovery would be possible for unitholders if they rank second. Global and the Trustees' legal advice is it was a breach of the Trust Deeds for the former trustee to have entered into these assignments. The assignments placed the Unitholders effectively in the position of holding second mortgages instead of first mortgages, and second mortgages were not authorised investments under the Trust Deed. The bulk of the assignments (worth over $250m) relate to parts of mortgages sold to HKB (three assignments) and to the Mercantile Mutual Group (nine assignments). After examination of the various options for resolving these assignments, it was decided that the Trustees should commence legal action against the HKB and Mercantile Mutual to recover the Unitholders' first-ranking position. This action is currently underway. Notwithstanding the decision to pursue legal resolution, we continue to have detailed settlement discussions with HKB and Mercantile Mutual. Unitholders should be aware that there are three possible outcomes. (a) First priority: where the Trusts have first claim against the assets and the third parties with the assignments rank second; or (b) Pari-passu: where the Trusts rank equally (in proportion with the amounts claimed) with the assignees; or (c) Last: where the Trusts rank behind the assignees. Determining the outcome of these assignment cases is difficult because of the different facts surrounding each assignment transaction. As stated earlier, the deterioration in the value of the underlying property securities means that, unless the Trustees win these cases, Unitholders will suffer severe financial losses. Global and the Trustees have taken extensive legal advice and believe there are strong arguments to overturn many assignments. However, because there is no Australian precedent, no-one can predict the outcome with any certainty. We therefore believe that it is in the interests of the Trusts to pursue a settlement. Any such settlement would be ratified by the Courts and/or Unitholders (as appropriate). The first such case to be successfully concluded for Unitholders was the recent settlement on the Dindori development in Sydney (see page 11). 35 This material was objected to by Mr. Hutley on the ground that it was prepared in contemplation of litigation, so as not to be admissible as a business record under s.69 of the Evidence Act. However, it is in my opinion admissible under s.71, as going to the manager's beliefs and intentions at the time. 36 There does not appear to be any evidence before me as to the outcome of negotiations and legal proceedings referred to in that report. I believe I can take judicial notice of the fact that there were legal proceedings taken in Victoria concerning the Estate Mortgage Trusts, which resulted in recovery of a substantial amount. However, I cannot take judicial notice of any details as to who were the defendants, what were the causes of action, and what amounts were recovered. I do not appear to have any evidence as to the present value of the plaintiff's units, or as to whether he has received any other benefit in respect of that ownership. ISSUES 37 The following issues were raised in these proceedings. 38 First, there is the question of whether ASIC is the correct defendant. It was submitted by Mr. Hutley SC that, because the plaintiff's right of action did not arise under the Companies Code or the Corporations Law, the only possible defendant was the Commonwealth of Australia. As I set out in an interlocutory judgment in this matter on 16th October 2000, if this submission were otherwise successful, it could lead on to further questions concerning amendment and/or estoppel. In the event, since I have reached the view that the plaintiff must fail on other grounds, I do not need to finally decide this question. I will however briefly give my tentative views. 39 Second, there is the question whether the CACV and/or the NCSC owed to the plaintiff a relevant duty of care at the material time. This is a difficult question, which has not been adequately argued on behalf of the plaintiff; and again, because I have decided that the plaintiff must fail on other grounds, I will not finally decide it. I will in effect assume this question in the plaintiff's favour. 40 Third, there is the question of whether a breach of any duty has been proved. For reasons I will give, I am not satisfied that any breach of duty has been proved. 41 Fourth, there is the question whether, assuming a duty of care and breach of duty, has the plaintiff proved any damage or loss flowing from that breach. It is on this question in particular that the plaintiff's case totally fails. 42 Fifth, ASIC has raised a statutory defence, under s.41(4) of the National Companies & Securities Commission Act 1979. 43 Finally, I should also deal with the plaintiff's claim for exemplary damages. 44 It is convenient to deal first with question 4, the causation of damage. Then I will briefly consider the questions of duty of care, and the correct defendant. Then I will move on to consider the questions of breach of duty, the statutory defence, and exemplary damages. 45 The plaintiff was unrepresented in these proceedings. He has provided extensive written submissions, which are repetitious and are not always pertinent. These submissions contain allegations of dishonesty and recklessness, in circumstances where, by reason of lack of material justifying such allegations, it would not have been proper for a legal practitioner to make such allegations. It would not be possible, in the course of a judgment of manageable size, to deal in detail with every one of the plaintiff's submissions. However, the written submissions will be left with the papers, and a transcript has been taken of the oral submissions. In the course of the judgment, I will take full account of what I believe to be the pertinent submissions made by the plaintiff. CAUSATION OF DAMAGE 46 The hearing which I conducted was, despite a submission of the plaintiff to the contrary, not a hearing in which damages were to be assessed, but a hearing at which it was to be determined whether the plaintiff had made out a case which would justify an enquiry as to damages. Accordingly, there was no requirement that the plaintiff quantify damages with precision; but it was necessary that the plaintiff prove that loss had been suffered, sufficient to justify an enquiry as to damages, as a result of a breach of duty for which the NCSC was responsible. Accordingly, the plaintiff had to prove that there was at least some non-trivial loss caused by the approval of the amendments to the trust deeds given on 22nd March 1990. 47 This could be done by proving that the value of the plaintiff's units, in the events that happened, was less than what their value would have been if the approval had not been given. There is in fact no evidence of what the plaintiff's units are now worth, and there is no satisfactory evidence as to what they were worth at any time following the approval of the amendments. Nor is there any satisfactory evidence of what the plaintiff's units would have been worth if the amendments had not been approved. It would be possible to show loss justifying an enquiry by proving that, irrespective of what the value of the plaintiff's units is, and irrespective of what their value would have been, the approval of the amendments did make a substantial difference to their value. The plaintiff's case on damages in fact needs to be approached in that way. 48 In my opinion, in order to decide whether such a case has been made out, it is necessary first to focus on what if any differences were made by the amendments approved on 22nd March 1990. 49 Mr. Hutley submitted that, even prior to the amendment, the trustee had power to give assignees of fractional parts of a mortgage priority over the trustee. He submitted that otherwise, the reference in the relevant clause to the trustee "fixing the priority of the Trustee and of such assignee or assignees between themselves" would be otiose. Accordingly, he submitted, the amendment did no more than clarify what was already the effect of the trust deeds. 50 There is force in that submission, but the trust deeds do on their face place great importance upon the requirement that investments be upon a first mortgage security. On the whole, I think the better view is that the reference to fixing the priority of the trustee in the original deeds permits the trustee to be given priority either ahead of or equal to that of the assignee or assignees. That is, it makes it clear that, where there is an assignment, the priority of the trustee may be made absolutely first, or only equal first. In that way, the overall requirement of first mortgage security would be preserved. 51 The amendment, on that approach, does make it clear that, in cases of assignment of fractional parts of mortgages, the trustee can give priority to the assignees over the trustee; so that the provision for the assignment with priority thus becomes a clear exception to the requirement that investments be upon first mortgage. 52 The amendment also affects the trustee's position in that, under the original deeds, the trustee retained the right to exercise all remedies under the mortgage; whereas the effect of the amendment was to give assignees a role in that exercise, and possibly to give them power to control the exercise of remedies even contrary to the wishes of the trustee. 53 Accordingly, in my opinion, the amendment did make a significant change to the effect of the deeds; and in doing this, and in satisfying the requirements of solicitors for proposed assignees, it made more likely the entry into assignments of fractional parts of mortgages in which priority was given to assignees. 54 However, particularly where there remained a tension between the requirement that investments be upon first mortgage and the provision that, in cases of assignments of fractional parts of mortgages, assignees could be given priority, it is in my opinion appropriate not to give an excessively wide construction to the power to assign and to give such priority. 55 In the first place, priority can be given, under the amendment, only "in assigning a fractional part or parts of any Mortgage or Charge". This means, in my opinion, that any fixing of priority has to take place in conjunction with the assignment itself: the amendment does not empower a fixing of priority in relation to assignments made previously. 56 Secondly, it was provided in the original deeds that any such assignment must be "for a price not less than the principal sum secured by the Mortgage or Charge multiplied by the fractional part assigned". This means, in my opinion, that the trustee must receive that price in actual money, or at worst in the form of some authorised investment. In my opinion, the trustee is not given any power to extend credit in relation to such assignments, or to accept anything which would not itself be an authorised investment. 57 The question then is whether, on that construction, the plaintiff has proved any loss flowing from approval of the amendments. 58 The only relevant transactions in evidence occurring after 22nd March 1990 are an assignment to the Bank of Singapore on 30th April 1990, and two deeds dated respectively 27th March 1990 and 1st May 1990, purporting to assign priority in respect of previous assignments. 59 In relation to the assignment to the Bank of Singapore, assignments of proportional parts of the relevant mortgage were expressed as taking effect only to the extent that advances of money were actually made to a borrower on the security of the mortgage. I believe that the advancing of money to a borrower would not count as a "price" within the relevant trust deed, in which case the assignment and fixing of priority would be invalid despite the amendments; but in any event, there is no evidence that money was relevantly advanced, or that, if money was advanced, it did not appropriately increase the value of the security in question. Accordingly, no loss to the trust from this transaction has been proved. 60 As regards the other two deeds, I have already held that the amendment did not authorise the granting of priority to assignees under previously-made assignments; so again, no loss to the trust has been proved. 61 The plaintiff submitted that, if the amendments had not been approved, then all previous assignments with priority granted to assignees would have been invalidated. He elaborated on this by submitting that, in that event, the CACV would have invalidated all previous assignments, the assignees would have called in the loans, and a new trustee would have been appointed. However, I have held that, under the original provision, priority could not validly be given to assignees, so that purported grantings of priority to assignees, prior to the approval of the amendments, were in my view invalid. The making of the amendments did not affect the validity of the previous grantings of priority one way or the other; and I have held that subsequent deeds, purporting to give that priority in relation to previous assignments, were invalid. The approval of the amendments therefore made no difference whatsoever in relation to previous purported grants of priority. 62 Next, the plaintiff submitted that, but for approval of the amendments, future assignments with priority granted to assignees would not have been made. I have already referred to the only future assignment of which there is evidence. 63 The plaintiff submitted a calculation in order to show how assignments with priority granted to assignees were detrimental to the trusts. He supposed a property valued at $45 million, in relation to which the trustee lent $30 million (66%) on first mortgage. He then supposed that the trustee assigned $20 million of the mortgage to an assignee, and granted priority to the assignee over the trustee. He then supposed that the property value reduced to $20 million, owing to the slide in the property market in the early 1990s. In those circumstances, the assignee, with its first priority, would get its $20 million out of the property, but the trustee would get nothing, and would lose $10 million. What this analysis ignores is that, even if the trustee had not assigned any part of the mortgage, but had retained a first mortgage for $30 million, it would have held security worth only $20 million after the slide in property values, and would in any event have lost the $10 million. This is not to say that a practice of assigning parts of mortgages, and giving the assignees priority, is not a practice which could cause loss to unit holders. For example, if the trustee dissipated some or all of the $20 million received from the assignee in the example given, or alternatively used it to redeem units for their full value, in circumstances where the value of the trust was insufficient to give full value to all unit holders, then in either event unitholders would be disadvantaged by the transaction. However, there is just no evidence that any loss of this kind was caused in this case. There were in fact, subject to what I say below in relation to MML, no redemptions at all in respect of applications received after 8th March 1990. 64 There is in evidence a report from an accountant, Peter Wyatt, dated 25th October 1996, suggesting that the plaintiff had lost $826,500.00 plus interest from 11th April 1990. However, this report is based on a number of assumptions, including the assumption that if the amending deeds had not been approved, then all assignments would have to be declared ultra vires, and the trusts would have been $225 million better off. As my previous discussion shows, that assumption has not been made good: the evidence does not establish that the trusts are any worse off at all by reason of the approval of the amending deeds. 65 There is one other piece of evidence to which I should refer specifically. In the confidential KPMG report to BPTC dated 27th June 1990, there is reference in paragraph 10.2 to assignments of mortgages totalling $20 million to MML. This was said to arise in circumstances where two mortgages, in which MML held a partial interest, had been discharged in late 1989, and MML's entitlements from the proceeds, namely $20 million, had been invested by EMM in units of some of the Estate Mortgage trusts, apparently without MML's consent. MML found out about this, and made strong representations to EMM and BPTC to redeem these units and pay it $20 million. It appears that repayment in cash was not possible, and so in March 1990, partial assignments of mortgage were made to MML to satisfy its claim for $20 million. 66 If such assignments had been made after 22nd March 1990, if they were valid, and if they had the effect of giving MML full value for its units when other unitholders were going to receive substantially less than the face-value of their units, there would be the possibility of loss by those other unitholders. However, the evidence shows only two assignments to MML in March 1990, namely those of 19th March 1990, before the approval of the amendments. It does appear that these two assignments, for amounts totalling about $12 million, are in relation to the proposed redemption of MML's $20 million of units. However, their validity or otherwise is unaffected by the approval of the amendments; so again no loss is shown to result from the amendments. 67 In relation to proof of damage, there is also the general point that the report to unitholders made in June 1991 by Global Funds Management (NSW) Limited adverts to problems caused by the assignments of mortgages and the granting of priority, and to the decision that the interests of the trusts should be pursued by legal action and possible settlement with assignees. No evidence has been led as to the outcome of such legal action and/or settlement, so that, even if there had been evidence supporting some loss arising out of the approval of the amendments, the Court would have been left to speculate as to whether that loss had or had not been recouped. It would have been incumbent upon the plaintiff to lead evidence about those matters, and this was not done. 68 I note that Mr. Hutley also submitted that if any loss had been caused, it would have been caused by the trustee's actions in making assignments and granting priority, not by the granting of approval to the supplemental deeds. In circumstances where one object of the regulation of such trusts is to protect investors from loss caused by the actions of trustees, I would not have upheld that submission. DUTY OF CARE 69 This question was discussed by McLelland CJ in Eq. in a judgment given on 4th April 1995, in which His Honour dismissed an application by the then defendant for an order striking out the plaintiff's Statement of Claim on the ground that it disclosed no reasonable cause of action. McLelland CJ in Eq. referred to a number of the relevant authorities, and concluded that the plaintiff's contention that there was a duty of care was not so clearly untenable as to justify peremptory termination of the proceedings. I agree with that; and in circumstances where it is not necessary to decide the question, and where the question has been argued on the plaintiff's side without the benefit of legal assistance, I think it is best not to decide the question, but to deal with other questions on the assumption that this question is decided in favour of the plaintiff. IS ASIC THE CORRECT DEFENDANT? 70 Mr. Hutley submitted that ASIC would not be liable for the breach of duty of care by the NCSC and/or the CACV alleged by the plaintiff. He pointed out that ASIC's liability for acts of the NCSC is provided by s.262(2) of the Australian Securities & Investment Commission Act, which relevantly provides: A right of action in favour of or against the NCSC existing immediately before the commencement (being a right of action arising under a relevant previous law of this jurisdiction) is, after the commencement, taken to be a right of action in favour of or against the Commission. 71 Section 5 of that Act does not define "relevant previous law". However, s.5(2) provides that "subject to this Act, an expression has the same meaning in this Act as in the Corporations Law of the Capital Territory". Section 9 of this Corporations Law defines "relevant previous law" in relation to a jurisdiction as meaning "a relevant Code within the meaning of the law of that other jurisdiction". Mr. Hutley submitted that it followed that ASIC was only a successor to the NCSC in relation to rights of action against the NCSC "arising under" a provision of the Companies Code. He submitted that none of the plaintiff's claims in this case arise under the Code, but are for common law negligence. Accordingly, Mr. Hutley submitted, s.259 of the Act meant that the proceedings should have been brought against the Commonwealth. 72 The plaintiff indicated that he relied on s.1336A of the Corporations Law; but it appears that that section also provides a similar test, in that it refers to "proceedings under this law" or proceedings "under a law of this jurisdiction". 73 In my opinion, the question is whether a right of action, based upon a duty said to arise because of the role given to the CACV or the NCSC by the Companies Code, is or is not a right of action arising under the Code. Again, because this matter has not been adequately argued for the plaintiff, and because it is not necessary for me to decide it, I will not do so. BREACH OF DUTY 74 I will approach the question of breach of duty on the assumption that the NCSC owed a duty of care to unitholders of the Estate Mortgage trusts, when exercising its power under s 166 of the Companies Code to grant approval to supplemental deeds relating to those trusts, namely a duty to take reasonable care to protect unitholders from suffering financial loss as a result of approval of the deeds. Submissions 75 The plaintiff submitted that Mr. Varga either knew or ought to have known that, if the supplemental deeds were approved, it was likely that the unitholders would suffer financial loss; and in those circumstances he should not have recommended to Mr. Lacny that the supplemental deeds be approved; at least not before obtaining the consent of the unitholders, because the amendments were such that "the rights of unitholders may be adversely affected" within the meaning of the relevant clauses authorising the variation of the trust deeds. 76 The plaintiff submitted that it was or ought to have been apparent to Mr. Varga that the supplemental deeds conferred a power on the trustee when assigning mortgages to fix the priority of an assignee ahead of the trustee; and that this would effectively mean the trust's investments would be reduced from investments secured by first mortgage to investments secured by second mortgage; and that this conflicted with primary trust deeds and the prospectus and relevant NCSC guidelines. If Mr. Varga did not appreciate these matters, it was because he omitted to do things which a reasonable person in his position would have done: (1) He did not read the supplemental deeds with proper care and in particular he did not read the new cl.1.1.1.2.2(b) in the supplemental deeds, which gave the trustee the power on assigning mortgages to fix the priority of an assignee ahead of the trustee. (2) Mr. Varga failed to give any or proper consideration to the ambiguities in the primary trust deed, and to whether the power conferred on the trustee by cl.1.1.1.2.2(b) was consistent with the definition of authorised investments in the primary trust deeds and the prospectus. (3) He failed to give any or proper consideration to whether the supplemental deeds complied with: (a) NCSC Guideline 5.05.05; (b) NCSC Release 123, 7(b)(i); (c) Other relevant NCSC Guidelines; (d) Section 2F of AASE Listing Requirements; (e) Section 168 of the Companies Code; (f) Schedule 5 and Schedule 6 of the Companies Code Regulations. As to following relevant guidelines, Mr. Varga claimed that he followed NCSC Guidelines 1 to 27, but he could not even identify what those guidelines were. No checklist was completed by Mr. Varga to indicate that he complied with the relevant guidelines. 77 The plaintiff submitted that the fact that Mr. Varga took just two days before recommending approval of the supplemental deeds suggested that he did not give them proper care and attention. If Mr. Varga had been aware of the existence of the power conferred on the trustee by cl.1.1.1.2.2(b) in the supplemental deeds, as he ought to have been, it would or should have been apparent to him that exercise of that power would have the effect of reducing the investments held by the trustee to second mortgage investments; and that approval of the supplemental deeds would therefore be likely to be detrimental to unitholders: the trustee was proposing to enter into assignments giving priority to the assignee and the property market was experiencing a downturn, so that it was likely that property relating to a partially assigned mortgage would decrease in value to less than the total amount secured, in which case, the trustee would not recover the full amount of its investment. Mr. Varga should have at least been concerned that the power being conferred on the trustee would derogate from the requirement in the primary deed and the prospectus to have first mortgage security; and he should have at least raised this concern with the manager and trustee, as well as with his superiors. 78 The plaintiff submitted that, even if it was not clear from reading the supplemental deeds that they would be detrimental to unitholders, other circumstances should have alerted Mr. Varga and the other relevant officers of the CACV to the fact that the deeds would be likely to have that effect. It was potential assignees who were insisting on having this amendment to the trust deeds, and the amendment was drafted by a firm of solicitors who acted for those assignees. Also, the trusts were suffering severe liquidity problems, which the trustee and manager were desperate to alleviate, and it was clear that the purpose of amending the deeds was so that the manager could enter into assignments to that end. In those circumstances, it was not reasonable for Mr. Varga to simply rely on the trustee's assurance that the supplemental deeds did not derogate from the interests of unitholders; nor for him to rely on the trustee exercising its power for the benefit of the unitholders. In any event, the trustee's assurance did not relieve the officers of the CACV from their duty to critically examine the supplemental deeds with a view to assessing whether they would be likely to be detrimental to unitholders. 79 The plaintiff also submitted that Mr. Lacny should not have granted approval to the supplemental deeds without taking steps to satisfy himself that Mr. Varga had carefully examined those deeds and followed the appropriate guidelines, and to satisfy himself that Mr. Varga had carefully considered the deeds and formed the opinion that they would not be likely to operate to the detriment of unitholders. Mr. Lacny did not satisfy himself of these matters, and the short time that Mr. Varga took to examine the supplemental deeds should have put him on notice that Mr. Varga may not have adequately performed his task. Nor did Mr. Lacny himself examine the supplemental deeds and their likely effect on unitholders. It was not appropriate for Mr. Lacny to rely on the assurance given by the trustee, particularly when it was apparent that the trustee was seeking to amend the trust deeds for its own benefit, namely, to alleviate the liquidity crisis facing the trust. 80 Finally, the plaintiff submitted that Mr. Cockburn's conduct amounted to a breach of duty. Mr. Cockburn was aware that the supplemental deeds had been submitted to the CACV for approval, and he was aware that approval was being sought at the urging of the assignees. Mr. Cockburn should not have relied on his staff to decide whether approval should be given, but should have himself read the deeds and assessed them to ensure they were not detrimental to unitholders. Alternatively, as was evident from Mr. Cockburn's memorandum of 26th March 1990, as at 20th March 1990 Mr. Cockburn was concerned that under the terms of partial assignments the risk that security would not cover the loan was being borne by the trust and not the assignees; and if the risky mortgages were not being assigned, investors who stayed with the trust would bear the brunt of the loss. Mr. Cockburn was waiting to receive from the manager of the trusts a copy of typical assignment documents to confirm whether that was the case. In light of Mr. Cockburn's concerns, he should have notified Mr. Varga that the supplemental deeds should not be approved until he had been provided with a copy of a typical assignment document. On about 27th March 1990, Mr. Cockburn became aware that a sample deed of assignment contained a provision fixing the priority of the assignee ahead of the trustee, so that his concern about the risk remaining with the trust was justified. Being aware that assignments were being made on that basis, Mr. Cockburn should have taken steps to revoke the NCSC's approval to the supplemental deeds. It was not sufficient to rely on Mr. Jamieson's subsequent statement that he had been told that the deed provided was not in fact a representative sample: Mr. Cockburn should have pursued the matter to ascertain the true position. 81 Mr. Hutley for ASIC submitted that in all likelihood Mr. Varga checked the supplemental deeds thoroughly and followed the relevant guidelines. Mr. Varga recalled confirming that there was power in the primary deed to effect the amendments, and that the contents of the deeds were in compliance with NCSC Policy Statement 128, Schedule 5 of the Companies Regulations and paragraph 5.06 of the NCSC Guidelines. It was Mr. Varga's invariable practice to follow the guidelines, and it was Mr. Lacny's invariable practice to ensure that this was done. Mr. Varga's inability to identify the guidelines that he relied upon was due to the events having happened so many years ago. Mr. Varga also said that he would have compared the supplemental deeds with the primary deeds, and that he believed that he would have noticed the differences between them. In addition, Mr. Varga said that he would have read the prospectus. Mr. Varga's requisition to the Manager about certain aspects of the supplemental deeds confirms that he read and thought about their contents. 82 Next, Mr. Hutley submitted that Mr. Varga's conduct in assessing the supplemental deeds had to be put in the right context. First, the supplemental deeds came to the CACV with letters from the manager and the trustee, with the trustee stating that, in its opinion, it was reasonable and appropriate to enter into the deeds, and that the trustee was willing to continue to act as the trustee in relation to the primary deed as amended. Second, the letter from the manager to the CACV indicated that the amendments would only clarify existing practice, over a substantial period of time, and that the solicitors for the trustee approved the wording of the amendments. Third, the concerns about the lack of clarity in the primary deed had been raised by solicitors acting for proposed assignees. Fourth, the CACV was being told by the manager that this request for clarity in the deed had arisen in the course of attempts to arrange a syndication of loans to increase liquidity for the trust - a transaction which the trustee considered might well be in the best interests of the trust. 83 Mr. Hutley also submitted that, having checked the primary deeds, it was not unreasonable for Mr. Varga to think that the primary deeds conferred on the trustee a power to give priority to assignees, so that what was being sought was just a technical amendment, that is, to make that power abundantly clear. However, even if there was some doubt about whether, under the primary deed, assignees could be granted priority over the trustee, approval of the supplemental deeds merely conferred a power on the trustee which it could choose to exercise; and it was reasonable for Mr. Varga to think that the trustee would act in accordance with its fiduciary duties to unitholders, and would only exercise its power if it was in their best interests. In fact, Mr. Varga had been told that the power was needed to allow for the syndication of loans, which was perceived to be in the best interests of unitholders; and Mr. Varga was not in a position to second guess the advice it was receiving from the entities responsible for managing the trust. Decision 84 In order to show that the CACV and/or the NCSC breached a duty owed to unitholders, it is not sufficient to show that what was done in some way fell short of what was desirable. It is also necessary to show that, if reasonable skill and care had been exercised, approval would not have been granted to the amending deeds. 85 My analysis on the question of damage does show that the exercise of a power to grant priority to assignees of proportionate parts of mortgages could be detrimental to the trusts. However, the operation of trusts of this kind depends very much on the ability to maintain liquidity, and assignment of mortgages or parts of mortgages is plainly one way in which liquidity might be maintained. If it were the case that assignees were willing to take assignments only if they were given priority, the question would arise as to whether the need for liquidity justified taking that step. This would be very much a question of judgment and balance, and one appropriate for careful consideration by the trustee if and when such a question arose. The question of whether it would be better to have a provision permitting the giving of priority, so that the trustee could exercise that kind of judgment, or whether it would be better not to have such a provision, so that the trustee would never have to face up to that kind of question, is itself a matter requiring an exercise of judgment by the CACV. I am certainly not satisfied that the exercise of reasonable skill and care would require that such a judgment be exercised by the CACV against the granting of such power. 86 The plaintiff placed much reliance on reference in the defendants' material to guidelines for approval of trust deeds and amendments thereto, and particularly on the reference to guidelines numbered 1 to 27, which the defendants and their witnesses were wholly unable to identify. 87 This does suggest some confusion as to the guidelines, and some deficiency in the defendants' procedures. However, as I have said, this would not itself give rise to a breach of duty, unless I were satisfied that the exercise of reasonable skill and care would have led to a different result, and I am not so satisfied. 88 Furthermore, in my opinion the evidence as to what Mr. Varga, Mr. Lacny and Mr. Cockburn actually did shows that they did, notwithstanding some deficiencies and confusion in the guidelines and procedures, exercise reasonable care and skill. 89 I accept that Mr. Varga read the supplemental deeds with appropriate care, and noted the changes they made to the original deeds. The requisitions which he raised, though not going to matters of great significance, confirm that he did take care. In my opinion, it was not unreasonable for Mr. Varga to rely on the explanation for the amendments given by EMM, and on the trustee's opinion that the amendments would not derogate from the rights of unitholders. 90 In my opinion, it was not unreasonable for Mr. Lacny to rely on Mr. Varga's having given appropriate consideration to the amendments; and the actions and memoranda of Mr. Cockburn indicate that he too was exercising appropriate care and skill in the matter. I do not think it was necessary in the circumstances that he read the supplemental deeds himself. It is true that he did not follow up the question of provision of typical assignment documents, but by about 9th April 1990 that question had in any case been overtaken by events. 91 One matter that causes me some concern is that approval of the supplemental deeds meant that postponement of the trustee's priority was made possible in certain circumstances; and in my opinion the prospectus did not appropriately disclose that this could happen. However, I do not think this is enough to make out a breach of duty by the CACV; and in any event, the relevant duty here would be to prospective investors who might rely on the prospectus after the amendment, rather than to existing unitholders who had invested in trusts which were disclosed as being subject to amendment in accordance with provisions in the trust deeds. STATUTORY DEFENCE 92 Section 41(4) of the National Companies & Securities Commission Act provides as follows: The Commission, a person appointed for the purposes of this Act or of any other prescribed Act, a member of the staff of the Commission or a person authorised to perform or exercise any function or power of the Commission or any function or power on behalf of the Commission is not liable to an action or other proceedings for damages for or in relation to an Act done or omitted to be done in good faith in performance or purported performance of any function, or an exercise or purported exercise of any power, conferred or expressed to be conferred by or under any Act or State Act. 93 Section 6(4) of the National Companies & Securities Commission (Victoria Provisions) Act 1981 is relevantly in the same terms. In the present case, the relevant acts were performed by the CACV as delegate of the NCSC, under s.45(1) of the National Companies & Securities Commission Act. Under s.45(6) of that Act, an act performed by a delegate "has the same force and effect as if it had been done by the Commission"; however, such an act "shall not be taken to have been done by the Commission for the purposes of any prescribed Act". The only prescribed Act was the Ombudsman Act 1976 (Cwth): see Reg.11A of the NCSC Regulations. 94 Mr. Hutley submitted that the evidence of officers of the CACV showed that the CACV and its officers acted in good faith in approving the supplemental deeds. In those circumstances, the onus was on the plaintiff to establish a relevant absence of good faith: Webster v. Lampard (1993) 177 CLR 607; Walsh v. Permanent Trustee Co. Limited (1977) 15 ACLC 1214 at 1220. Even gross negligence would be insufficient: Official Trustee v. Mitchell (1992) 38 FCR 364 at 371; Lamont v. Wyong Shire Council (unreported), Palmer, AJ, 13/12/91. 95 The plaintiff submitted that the relevant officers of the CACV acted with reckless indifference, and that this was inconsistent with good faith: see Zormora No.2 (1921) 1 AC 801 at 812-13. The plaintiff supported this by reference to what he submitted was a dishonest affidavit by Mr. Varga: he submitted that, having regard to the inability of Mr. Varga and the defendants through their solicitors to explain what was meant by guidelines numbers 1 - 27, Mr. Varga must have been dishonest in his claim that he acted in accordance with the guidelines. The plaintiff also submitted that the relevant guidelines and policy statements made it clear that mortgage investment trusts were trusts in which, relevantly, investments had to be made on first mortgage, and the amending deeds empowered investments to be made which were not investments on first mortgage; so that Mr. Varga and other officers of the CACV must have acted with reckless indifference in approving the amendments. 96 In my opinion, the understanding and true interpretation of the original deeds and the amending deeds are not easy matters, nor is it obvious that a power to assign parts of mortgages and to give assignees priority in respect of those parts is a breach of a requirement that investments be on first mortgage. I accept the evidence of all the CACV officers as to what they did; and I do not think that Mr. Varga's affidavit was dishonest. Although, as I have said, there appear to have been some deficiencies and confusions in the guidelines and their application, I am satisfied that all these officers acted in good faith; and even if I had found that the exercise of reasonable skill and care would have produced a different result, I would still be satisfied that the NCSC, and therefore ASIC, were entitled to the benefit of the statutory defence. EXEMPLARY DAMAGES 97 In circumstances where the plaintiff has not proved any entitlement to compensatory damages, it is questionable whether any question of exemplary damages can arise. In any event, my findings concerning the actions of the relevant officers of the CACV mean that there would be no question of exemplary damages in relation to those damages. 98 The plaintiff has also sought exemplary damages in relation to what he submitted was serious misconduct by the defendants' solicitors in relation to providing information concerning the relevant guidelines, and in particular the guidelines numbered 1 - 27. Even if that allegation were made out, it would not be in my opinion a matter for exemplary damages: it could possibly be a matter to be dealt with by way of grant of indemnity costs. I will consider this further shortly. conclusions 99 It follows from these reasons that the plaintiff's claim should be dismissed. 100 In relation to costs, this is a case in which very considerable costs have been incurred by the defendants, because a litigant in person has brought and pursued wide-ranging and extravagant claims. They were claims which, in the absence of any satisfactory evidence about damage, could not possibly have succeeded. The matter of absence of evidence of damages was not considered by McLelland CJ in Eq.: if the plaintiff had been represented, I have no doubt that the case would not have come to trial without some evidence of damages, and on the material before me, it is very difficult to imagine what that evidence might have been. 101 On the other hand, I think there is some force in the plaintiff's submissions that costs were incurred through unsatisfactory answers given to the plaintiff's questions about the relevant guidelines. My present view is that the plaintiff should be ordered to pay the defendants' costs of the proceedings, apart from the costs of the correspondence concerning those guidelines. ********** Last Modified: 12/14/2000 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.