New South Wales Supreme Court CITATION : Ingot & Ors v Macquarie & Ors [2004] NSWSC 1136 HEARING DATE(S) : 9 November 2004 JUDGMENT DATE : 30 November 2004 JUDGMENT OF : McDougall J at 1 DECISION : See paras [88]-[90] of judgment CATCHWORDS : PRACTICE AND PROCEDURE - application for leave to amend cross-claims - Barnes v Addy (1874) LR 9 Ch App 244 - whether cross-claims properly plead case of knowing and dishonest assistance in breaches of fiduciary duty - whether pleading of knowledge sufficiently set out material facts as to knowledge - no issue of principle LEGISLATION CITED : Corporations Law Barnes v Addy (1874) LR 9 Ch App 244 Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 Arthur Young & Anor v Tieco International & Ors (1995) 182 LSJS 367 NCR Australia v Credit Connection Pty Ltd [2004] NSWSC 1 CASES CITED : Baden v Societe Generale [1993] 1 WLR 509 Consul Development Pty Limited v DPC Estate Pty Limited (1975) 132 CLR 373 Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360 Ampolex Ltd v Perpetual Trustee Company (Canberra) Ltd (1996) 20 ACSR 649 PARTIES : Ingot Capital Investments Pty Limited & Ors (Plaintiffs) Macquarie Equity Capital Markets Limited & Ors (Defendants) FILE NUMBER(S) : SC 50169/01 COUNSEL : S G Finch SC/L McCallum (for cross-claimant on 33rd and 36th cross-claims) M A Pembroke SC/L P Menzies (for 1st and 2nd cross-defendants to the 33rd amended cross-claim) SOLICITORS : Henry Davis York (NCRA) TressCox (Guy Carpenter) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST McDOUGALL J 30 November 2004 50169/01 INGOT CAPITAL INVESTMENTS PTY LIMITED & ORS v MACQUARIE EQUITY CAPITAL MARKETS LIMITED & ORS JUDGMENT 1 HIS HONOUR: This judgment concerns three procedural applications in a complex litigious saga. There is an application for leave to amend; an application for leave to proceed against a cross-defendant served outside the jurisdiction; and an application by that cross-defendant to set aside service on it or the cross-claim against it. Background 2 These proceedings arise out of the collapse of New Cap Reinsurance Corporations Holdings Limited ("NCRH"). NCRH, a company incorporated in Bermuda and registered as a foreign corporation in Australia, was listed on the Australian Stock Exchange. It carried on business as an international reinsurance underwriter. In late 1998, NCRH determined to raise capital through an issue of converting notes. The issue proceeded, and the plaintiffs, by various means and in various capacities, acquired a large number of the converting notes that were issued. Shortly after the issue was completed, NCRH collapsed. The plaintiffs say that the notes are valueless and that they have lost the full value of their investment. In these proceedings, they sue a number of parties connected with the notes issue to recover their losses. 3 Many cross-claims have been filed. Three of them, the 30th, 31st and 32nd, have been brought against New Cap Reinsurance Corporation Limited ("NCRA"). NCRA was the reinsuring entity, ie, the company in the New Cap Group that carried out reinsurance activities. It is subsidiary of NCRH and, like its parent, is in liquidation. 4 NCRA, having been joined as a cross-defendant, has itself filed cross-claims. One of those, the 33rd cross-claim, is brought against Guy Carpenter & Company Pty Limited and Guy Carpenter & Company Limited. I shall refer to them jointly as "Guy Carpenter" and, where I need to refer to them separately, as "Guy Carpenter Australia" and "Guy Carpenter UK" respectively. The other cross-claim, the 36th, is brought against Messrs Azmin Firoz Daya, Udayan Daniel Ghose, Paul Laurence Williams, William David Peck and Peter Aroney. The first four of those gentlemen were directors of NCRA (and the first two of them and, for a time, the fourth of them, were also directors of NCRH). Mr Aroney was the secretary and chief financial officer of NCRA. 5 At the end of the hearing of the applications, NCRA intimated a desire to revise the draft further amended 33rd cross-claim and the draft amended 36th cross-claim in respect of which the application for leave to amend was brought. It did so. Guy Carpenter made written submissions in respect of those revised drafts and NCRA made written submissions in reply. In these reasons, unless the contrary appears, I will refer to the revised drafts of those documents. The 33rd and 36th cross-claims 6 The 33rd and 36th cross-claims have at their heart two contracts of reinsurance made between NCRA and General Cologne Reinsurance Australasia Limited ("GCRA"). The parties referred to those as the "first leg" and the "second leg" of cover, and I shall do likewise. In very broad outline, NCRA says that the contracts were entered into to enable it to bring to account in the accounting period ended 30 June 1998 discounted net recoveries of USD5.675 million under the first leg, without bringing to account a certain loss, in a substantially similar amount, under the second leg. Thus, NCRA says, the purpose and result were to understate its loss and overstate its net assets by the AUD equivalent of USD5.675 million. NCRA says that the further purpose and result of that transaction were to enable those figures to be incorporated, on consolidation, into the financial statements of NCRH for the same accounting period. The significance of the particular transaction is that NCRH was required, under covenants with its bankers, to have net assets of at least USD125 million. Unless the impact of the first leg were brought to account in the manner just described, it could not have achieved this; nor could it have achieved this if the effect of the second leg were also brought to account as, NCRA says, should have been done. 7 The case that NCRA seeks to make against its former directors (although Mr Aroney was not a director, I will include him in this term unless it is necessary to distinguish his position from those who were in truth directors) is that they "caused and permitted" NCRA to enter into the first and second legs and that in so doing they breached the fiduciary duties, and duties under ss 232(2), (4) of the then Corporations Law, owed by them to NCRA. (A further claim, framed in negligence, can be put to one side.) 8 NCRA says against the directors that their breaches of fiduciary duty were part of what it calls "the dishonest and fraudulent design". That is described, in substance, as a scheme under which the directors utilised the first and second legs (called collectively "the GCRA Transaction") to enable NCRA falsely to overstate assets and understate loss in its half yearly accounts, with the result that the half yearly accounts of the New Cap Group likewise falsely disclosed, on consolidation, the overstated assets and understated losses of NCRA. (See para 53 of the revised draft amended 36th cross-claim.) 9 The claim against Guy Carpenter is brought on two bases: knowing and dishonest assistance in the alleged breaches of fiduciary duty, and involvement in the alleged contraventions of s 232. The former is based on the celebrated statement of Lord Selborne LC in Barnes v Addy (1874) LR 9 Ch App 244, 251-252, where his Lordship explained that the second of two ways in which strangers might be made constructive trustees was if "they assist with knowledge in a dishonest and fraudulent design on the part of the trustees." The notices of motion 10 Guy Carpenter UK was served outside New South Wales. By notice of motion filed 8 October 2004, it seeks orders pursuant to Pt 10 r 6A, or alternatively pursuant to Pt 11 r 8, that service on it be set aside, that the 33rd cross-claim and amended 33rd cross-claim be set aside, or that the Court decline, as a matter of discretion, to exercise jurisdiction against it. 11 NCRA, by notice of motion filed on 1 October 2004, seeks an order under Pt 10 r 2 granting it leave to proceed against Guy Carpenter UK on the 33rd cross-claim. 12 Further, by notice of motion filed on 3 September 2004, NCRA seeks leave to amend both the amended 33rd cross-claim and the 36th cross-claim. 13 The three notices of motion to which I have referred were heard together. The parties agreed that, logically, their disposition would turn on the fate of NCRA's application for leave to amend, because: (1) The 33rd cross-claim, if further amended as sought, would incorporate by reference and plead against Guy Carpenter many of the allegations that would be made against the directors in the 36th cross-claim if amended. (2) The allegations made against Guy Carpenter in the amended 33rd cross-claim (ie, without the benefit of the further amendments now propounded) were relevantly identical to allegations made against it in a draft amended statement of claim propounded by NCRA and its liquidator in proceedings No. 2371 of 2002 in the Equity Division of this Court. (3) Young CJ in Eq heard an application to amend that statement of claim on 22 July 2004. In reasons given on 26 August 2004 ([2004] NSWSC 781), his Honour said (para [67]) "that I should decline to give leave to amend the first statement of claim further, and I should strike out the claim as against the second defendant.". (The second defendant was Guy Carpenter Australia. Although Guy Carpenter UK was also a party, as third defendant, it had not been served and did not participate in the hearing before Young CJ in Eq.) (4) On 3 November 2004, Young CJ in Eq ordered that those proceedings be dismissed against Guy Carpenter Australia. (5) Accordingly, it was said, if the application for leave further to amend the 33rd cross-claim failed, the amended 33rd cross-claim must suffer the same fate as the relevantly identical amended statement of claim that was the subject of the decision and orders of Young CJ in Eq. 14 Although I have referred to the draft amended statement of claim considered by Young CJ in Eq as being relevantly identical to the amended 33rd cross-claim, it should be borne in mind that the directors were not parties to the proceedings before his Honour. The issues 15 Mr Finch SC, who appeared with Ms McCallum of counsel for NCRA, submitted that the amendments proposed to the 36th cross-claim, the incorporation of those amendments by reference into the 33rd cross-claim, and the further amendments proposed to the 3rd cross-claim, overcame the problems identified by Young CJ in Eq. Mr Pembroke SC, who appeared with Mr Lachlan Menzies of counsel for Guy Carpenter, submitted that they did not. 16 NCRA and Guy Carpenter accepted that the fundamental point was whether the revised draft further amended 33rd cross-claim, incorporating as it would allegations made against the directors in the draft amended 36th cross-claim, properly pleaded a case of knowing and dishonest assistance in breaches of fiduciary duty. However, Mr Pembroke submitted, there were two further points: (1) Whether what might be called the "trading losses" or "but for" claim (relevantly for his clients, the claim presently pleaded by para 44(a) of NCRA's statement of contentions in the amended 33rd cross-claim, and proposed to be pleaded in apparently identical terms by para 51(a) of the contentions in the draft further amended 33rd cross-claim) was in law arguable; and (2) As to Guy Carpenter Australia only, whether a claim of dishonest and knowing assistance could be sustained against it bearing in mind that the last item of knowledge pleaded against it (in either version) related to events that occurred on 9 July 1998, whereas the decision to enter into the first leg was apparently taken on 24 August 1998 and the policy document was signed on 17 September 1998. 17 In respect of the principal point, Mr Pembroke relied heavily on the decision of Young CJ in Eq. (He did not do so in relation to his subsidiary points, no doubt because his Honour had considered the equivalent points and had indicated that, of themselves, they would not have justified the declining of leave to amend or the striking out of the statement of claim against Guy Carpenter Australia.) It is therefore necessary to give some attention to his Honour's decision. 18 The parties in their submissions (written and oral) referred to the "pleadings". Strictly speaking, that is not correct. It is not appropriate, bearing in mind the relevant provisions of Practice Note 100 (to which I refer in para [45] below), to refer to summonses, defences, cross-claims and defences to cross-claims in proceedings entered in the Commercial List as "pleadings". Nonetheless, both because it was the usage of the parties and because it is convenient to do so, I shall adopt that terminology. The decision of Young CJ in Eq 19 Young CJ in Eq set out the background to the interlocutory applications before him in paras [1] to [8]. He summarised the nature of the proceedings before him, and the claims against Guy Carpenter Australia, in paras [10] to [14]. In this last paragraph, he noted that the case pleaded against Guy Carpenter Australia "is based on its alleged knowing assistance to the directors of NCRA creating an equitable obligation to pay equitable compensation under what is known as the second limb in Barnes v Addy … ". 20 In para [15], his Honour, citing Jacobs' Law of Trusts in Australia (6th edition, Butterworths, 1997) at para [1339], summarised the elements of a claim under the second limb in Barnes v Addy as follows: "(1) The existence of a fiduciary duty; (2) A dishonest and fraudulent design by the fiduciary; (3) The assistance by the third party in that design; (4) With knowledge." 21 In paras [16] and following, his Honour dealt with the principles to be considered in such a case. His Honour referred at para [18] to the judgment of Peter Gibson J in Baden v Societe Generale [1993] 1 WLR 509, where his Lordship at 575 [250] and following referred to, discussed and appears to have adopted a fivefold classification of mental states that amount to, or are from time to time equated to, knowledge: "(i) actual knowledge; (ii) wilfully shutting the eyes to the obvious; (iii) wilfully and recklessly failing to make such enquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; (v) knowledge of circumstances which would put an honest and reasonable man on enquiry." 22 At para [19], Young CJ in Eq noted that, under Australian law, the mental states falling within categories (i) to (iv) might amount to "knowledge" for the purposes of the second limb of Barnes v Addy, but not the mental state within category (v). 23 His Honour then discussed at some length the decision of the High Court of Australia in Consul Development Pty Limited v DPC Estate Pty Limited (1975) 132 CLR 373. He concluded at [23] that "when the second limb of Barnes v Addy is relied upon the pleading must allege that there is a fiduciary, the fiduciary has breached his or her fiduciary duty and that the defendant has assisted with knowledge in a dishonest and fraudulent design on the part of the fiduciary." That having been said, his Honour noted at para [24] that "Lord Selborne's statement is not to be construed as if it was a statute or as exhaustively stating the reach of equity over fraudsters." 24 After discussing other cases, and learned writings, his Honour turned to the attacks that Guy Carpenter Australia made on the draft pleading propounded before him by NCRA. The first attack was based on the proposition that the relevant fiduciary duty was not identified; it was not said to whom it was owed; nor were the acts relied upon as a breach of that duty (assuming, by implication, that this was what was relied upon) properly pleaded. His Honour agreed. He said, relevantly: "38 However, there is no allegation that entering into Legs One and Two was a breach of duty. Nor is there any pleading as to how it came about that the directors of the holding company came to their decision as to the structure of their accounts, nor is it pleaded that the directors of the company participated in that decision. … 39 The kernel of the plaintiffs' complaint is that the board of the holding company resolved in September 1998 to adopt the accounting treatment. However, there is no pleading that the three directors of the company voted in favour of it. 40 Assuming it was alleged by implication that there was a fiduciary duty and that the fiduciary duty was to the company, it would still be necessary to look at each director's position separately: … … 44 … as the case of Mr Peck would, at least seem to be different from the case concerning the others. 45 … what they did was to further the company's interest, at least in the thinking of the time, and the case does not fall into either of the categories considered earlier." 25 The next complaint concerned the pleading of knowledge. The relevant paragraph before his Honour read (as it reads presently in the amended 33rd cross-claim): "Circumstances were known to Guy Carpenter Australia that would have indicated to an honest and reasonable person that a fraud was being committed or attempted." 26 That allegation was followed by a series of particulars, which set out communications that, it was said, showed the circumstances alleged to have been known. 27 His Honour held that this was an inadequate pleading of knowledge. He said: "50 First, the statement in 33 "circumstances were known to Guy Carpenter Australia that would have indicated to an honest and reasonable person that a fraud was being committed or attempted" seems to fall between the fourth and fifth class of Peter Gibson J's classification in Baden v Societe Generale . Further, the words "committed or attempted" are quite nebulous. None of the overt acts alleged against Guy Carpenter Australia occurred after 9 July 1998. 51 In my view the paragraphs insufficiently set out the material facts as to the vital element of knowledge said to be possessed by the second defendant." 28 His Honour then turned to the attack on what I have called the trading losses case. This is in substance the subsidiary point that I have identified in para [16(1)] above. It appears that his Honour was referred, as I was referred (among many other authorities), to Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310. His Honour did not find the pleading of this head of damage "helpful". However, he concluded that it should not be struck out. He said: "55 I do not consider that this pleading is helpful. Equitable compensation differs from legal and equitable damages and looks not so much to the loss suffered as to what is required to restore the trust fund. It would be difficult to make that assessment from the facts pleaded. 56 I would not consider that I should strike out these paragraphs as it was probably sufficient merely to plead that equitable compensation is required to atone for the fiduciary breach with particulars." 29 The last complaint was based on the circumstance that the last particular of knowledge alleged against Guy Carpenter Australia referred to something that happened 6 weeks or more before the relevant decision was taken. This is in substance the subsidiary point that I have identified in para [16(2)] above. His Honour did not think that this point was "vital on a strike-out application". He concluded: "62 I appreciate these arguments, but in my view they are not strong enough to lead to striking out." 30 His Honour then noted the submissions for NCRA that the complaints were "virtually all … as to particulars"; that the material facts were pleaded; and that lack of particularity was not fatal. 31 Young CJ in Eq appeared sympathetic to the last proposition, but said (para [65]) "that the defects in the pleadings go deeper than that. It is essential to plead the elements of the second limb in Barnes v Addy and this the pleading has not done." He then said in para [66] that "the pleading does not … set out the material facts as to the duty and breach of dealing: the failing goes further than a mere matter of particulars." 32 In substance, then, his Honour held that leave to amend should be refused, and the statement of claim should be struck out, for two reasons. The first was that the fiduciary duty, knowing and dishonest assistance in the breach of which was alleged against Guy Carpenter Australia, had not been properly pleaded. The second was that the case of knowledge, an essential ingredient in a claim for knowing and dishonest assistance, had not been properly pleaded. 33 I now turn to the attempted repleading of those elements in the documents propounded before me. The pleading of breach of fiduciary duty 34 The revised draft amended 36th cross-claim alleges clearly and in the requisite detail the fiduciary duties that the directors are said to have owed. Thus, both the beneficiaries and the content of those duties are clearly set out. Indeed, Guy Carpenter did not submit otherwise. 35 The attack that was made was on the pleading of breach. That is alleged in para 53 (which is the paragraph already summarised in part in para [8] above). I set it out in full: "In causing or permitting NCRA to enter into the GCRA transaction in the circumstances set out in paragraphs 36 to 52 inclusive hereof, the Cross-Defendants were acting in breach of their fiduciary duties to NCRA, pursuant to a dishonest and fraudulent design (" the dishonest and fraudulent design") which was to enable the 1998 half-yearly accounts and the USA GAAP 1998 half-yearly accounts to falsely overstate assets and understate loss, with the result that the 1998 half-yearly accounts issued on behalf of the New Cap Group falsely disclosed that, on a consolidated basis, the New Cap Group had: (a) Net claims incurred of US$6.675million less than would otherwise have been reported; (b) An Underwriting Result of US$5.675million less than would otherwise have been reported; (c) an Accumulated Loss at the end of the period of US$5.675million less than would otherwise have been reported; (d) additional retrocession recoveries receivable of US$5.675million; (e) additional Net Assets of US$5.675million; and the US GAAP 1998 half-yearly accounts falsely disclosed that on a consolidated basis the New Cap Group had additional Net Assets of US$6.5 million in circumstances where: (f) Leg One was not entered into until after 30 June 1998; (g) the certain loss NCRA accrued under Leg Two was not accounted for; and (h) the existence of Leg Two was deliberately concealed from the auditors and external actuaries . Particular of falsity (i) Leg One and Leg Two were, in substance, one transaction and accordingly AAS1001 required that they be accounted for according to their substance rather than their form. It was false, therefore, to account for Leg One in the 1998 half yearly accounts without also accounting for Leg Two. (ii) Leg One and Leg Two were interdependent and therefore should have been accounted for together. It was false, therefore, to account for Leg One in the 1998 half yearly accounts without also accounting for Leg Two. (iii) Because Leg Two was certain to result in a loss to the limit of its cover and because it was part of the same transaction as, or was interdependent with, Leg One, neither Section 1 of Leg One nor Leg Two involved any transfer of risk and hence neither were reinsurance contracts under which the proceeds of any claim which could be claimed as reinsurance proceeds. (iv) Because Section 1 of Leg One did not involve any transfer of risk it was false to claim the proceeds under Section 1 of Leg One as an asset (that is, as reinsurance recoveries) when, in substance, those proceeds were an advance with an attached repayment obligation constituted by Leg Two. (v) Because Leg One was entered into after 30 June 1998 it should not have been accounted for in the 30 June 1998 half yearly accounts." 36 That formulation is among the paragraphs referred to and repeated in the revised draft further amended 33rd cross-claim (see para 13). (It is also, in substance, repeated, with its particulars, in para 39 of that cross-claim.) 37 Mr Pembroke submitted that the paragraphs (prior to revision) did not make it clear how the breach of fiduciary duty was said to have occurred. He said that they combined, and confused, two separate entities and that they appeared to suggest in substance that the fiduciary duty was one owed to NCRH, and that the breach was a breach caused by NCRH and not by the directors. 38 Mr Finch submitted that, on a fair reading, the paragraphs did allege a breach of fiduciary duty by the directors of NCRA in that capacity, by their act in causing or permitting NCRA to enter into the first and second legs with the consequence that its accounts were artificially and fraudulently overstated. The consequence of this was that the accounts of NCRH, on consolidation, were likewise fraudulently overstated. 39 Guy Carpenter maintained its attack on the revised draft further amended 33rd cross-claim. It submitted that the "central allegation now made is that the directors of NCRA acted in breach of their duties so as to enable the consolidated financial statements published by NCRH to falsely state the financial position and performance of the Group" (supplementary written submissions dated 17 November 2004, para 5). However, it submitted, the cross-claim did not allege "that the directors of NCRH breached their duty in causing the Leg 1 contract to be entered into by NCRA and in resolving to give the Leg 1 contract the contentious accounting treatment … " (ibid, para 6). 40 Further, Guy Carpenter submitted, the central allegation of knowledge – para 40 – "which ought, whether by way of particulars or otherwise, [to] set out the material facts to enable the Guy Carpenter parties to identify and investigate precisely what they are supposed to have known" was afflicted by ambiguity because it referred "in each relevant particular to a non-legal description which does not identify any specified legal entity" (ibid, paras 10 to 12). It submitted that this technique "is deliberately evasive and is obviously intended to avoid facing up to the difficulties identified in argument", and that it should not be permitted (ibid, para 13; the complaint was repeated, in slightly different words, in paras 14 to 16). 41 It is convenient to deal with these points before I return to the central issue of the adequacy of the pleading of knowledge. The revised draft further amended 33rd cross-claim maintains the distinction between NCRA and NCRH. The fiduciary duty that is alleged against the directors is a fiduciary duty said to be owed to NCRA. The breach of that duty that is alleged against the directors is their causing or permitting NCRA to enter into the first and second legs, and to cause or permit it to undertake the accounting treatment of which complaint is made (including in this, the failure to bring to account at 30 June 1998 the allegedly certain outcome of the second leg). However, the dishonest and fraudulent design that is alleged is the false overstatement of the net assets of NCRH on consolidation. It is the equally false overstatement of the net assets of NCRA (the result of the directors' breach of fiduciary duty) that is said to achieve the dishonest and fraudulent design, on consolidation of the accounts of NCRH with its subsidiaries. I do not see any relevant confusion in this. 42 Guy Carpenter submitted that (on the material facts pleaded by NCRA) it was apparent that it was NCRH that caused NCRA to enter into the first and second legs, and to undertake the relevant accounting treatment. That may be so; but it is not the case that NCRA seeks to make against the directors. It may also be, as Guy Carpenter submitted, that those of the directors who were also directors of NCRH breached their fiduciary duties to it. But that is not something in respect of which NCRA can complain; nor does it do so in these proceedings. I do not see in these complaints any basis for rejecting the application for leave to amend. 43 Nor do I see any substance in the criticisms of the terminology used in the allegations of knowledge in para 40. It is quite clear, when one reads the particulars, that the use of the various expressions of which complaint is made (New Cap Re, New Cap, NCR and the Board) is a use that reflects directly the particular expressions used in the documents that are particularised. Where no documents are particularised, or where on the face of things the particulars do not purport to quote from a document, orthodox expressions (for example, NCRH, the New Cap Group and NCRA) are used. The "technique" of which Guy Carpenter complains is no more evasive than the documents that are relied upon in the particulars; and many of those documents are Guy Carpenter documents. 44 I return to the main point. Consideration of this point, and of the parties' submissions on it, needs to recognise a number of factors. The first is that one of the functions of pleadings (using that word in its proper sense) is to enable the party against whom the pleading is propounded to understand the nature of the claim, or defence, that is propounded and to prepare to meet it. Thus, pleadings are part of the process whereby procedural fairness is afforded to litigants, although this of course is not the sole function of pleadings. The same function is served by the quasi pleadings utilised in the Commercial List. 45 The second point is that this application does not concern pleadings in the strict sense. The proceedings are brought in the Commercial List. They are governed by Practice Note 100. One of the principal purposes of the Commercial List is to facilitate the just, quick and cheap disposal of the proceedings. To that end, the parties' contentions are required, among other things, to avoid formality whilst, at the same time, identifying the material facts relied upon (and giving adequate particulars) and the legal grounds for relief. See paras 6(2), 7(2) (relating to plaintiff and defendant respectively) and 17 (applying the requirements of the Practice Note to cross-claims and defences to cross-claims under para 16). 46 The third point is that, particularly because of the second point, it is appropriate to approach this issue bearing in mind what Lander J said in Arthur Young & Anor v Tieco International & Ors (1995) 182 LSJS 367, 370 (bearing in mind that his Honour was speaking of a system of pleadings properly so called): "Whether the material facts and whether sufficient particulars have been pleaded must depend upon the cause of action, the complexities of the case and the whole of the circumstances of the case. None of those matters can be considered in isolation any more than each of the paragraphs of the pleading can be considered in isolation. When the Court considers a pleading it will not consider the pleading with the same degree of scrutiny which the courts are required to give to an Act of Parliament. With the complexities of modern litigation, a pleader can usually point to some deficiency in the opponent's pleadings. One can usually, if one approaches the matter with a critical eye, identify some failing in a pleading. But that is not the approach that in this age ought to be adopted. A court would not sit down in the manner of a nineteenth century pleader seeking to find an error capable of sending a party away to re-plead his claim or defence. Such a technical approach is inconsistent with modern litigation and inconsistent with the court's function which is to try to arrive at a just result. A successful result, if arrived at, after too great an expense may not be considered by even the successful party to be a just result. A court ought to approach a consideration of the adequacy of a pleading seeking to answer the ultimate question; does the pleading give fair notice of the case to be made against the other party at trial, thereby minimising the risk of injustice resulting from surprise". 47 Even taking into account the revisions to the proposed amendments, I have some sympathy with the proposition that the pleading of the breach of fiduciary duty in the paragraphs in question is less than clear. However, on analysis and on a fair reading, I think that they are to be construed in substance as Mr Finch submitted. That is so, particularly, when one considers them in context (including not only the particulars that are given, but also the preceding allegations of the material facts leading up to and including the making of the first and second legs). 48 When one looks at the relevant pleading context (and, for this purpose, it is convenient to consider para 53 of the revised draft amended 36th cross-claim), it is tolerably clear that the allegations that are being made include that: (1) The defendants as directors of NCRA caused or permitted it to enter into the first and second legs. (2) At the time of entry into the first leg, it was the fact, and the directors knew, that GCRA was certain to become liable to pay NCRA an amount of USD7.5 million gross under section 1 of the first leg; (3) That recovery (from NCRA's perspective) discounted to its net present value as at 30 June 1998 and netted off against the premium due would be brought to account by NCRA and, on consolidation, by NCRH, for the financial year ending 30 June 1998. (4) The directors, as directors of NCRA, caused or permitted it to enter into the second leg. (5) At the time NCRA entered into the second leg it was the fact, and the directors knew, that NCRA would become liable to GCRA in an amount of USD11 million, payment of which was not to be made until 1 January 2003. (6) It was the fact, and the directors knew, that the total of the payments that GCRA was or would become liable to make to NCRA under the first leg, and the total of the payments that NCRA would become liable to make to GCRA under the second leg, when discounted to present values, were substantially the same and would be netted off. (7) It was not intended that NCRA or, on consolidation, NCRH should account for the certain loss under the second leg as at 30 June 1998 and the directors knew this. (8) In substance, as the directors knew and intended, the first and second legs were one transaction; NCRA would obtain no benefit from entering into the first leg; and NCRA would incur an expense by reason of the difference between the premium payable by it under the first leg and the premium payable to it under the second leg. (9) The purpose of entry into the first leg was to allow "the New Cap Group to make false statements in the 1998 half year accounts", so that the only purpose of the transaction was to achieve a false accounting benefit for NCRH. 49 Clearly, it is at the very least arguable that if the circumstances referred to in the preceding paragraph are made good, then the purpose of entry into the first leg was not a proper purpose of NCRA, so that the directors, in causing or permitting NCRA to enter into the first leg, breached their fiduciary duties to it; and, equally, that they breached their fiduciary duties to NCRA by causing or permitting it to undertake the accounting treatment of which complaint is made. 50 The allegations in para 53 may be broken down as follows: (1) the directors caused or permitted NCRA to enter into the first and second legs; (2) that was a breach of their fiduciary duties to NCRA; (3) that breach was undertaken pursuant to the dishonest and fraudulent design (a defined term which has the meaning attributed to it in para [8] above); (4) the purpose was to enable NCRA falsely to overstate its assets and understate its loss by the net discounted amount receivable under the first leg without bringing to account, as it should have done, the net discounted amount that would necessarily become payable under the second leg; and (5) in turn, the New Cap Group on consolidation was able to make the equivalent false disclosures. 51 That analysis is confirmed by paras 43 and 43A, which between them make it clear that the essence of the dishonest and fraudulent design was to enable the New Cap Group falsely to claim the benefits of the first leg without bringing to account the offsetting liability under the second leg. Thus, I think, it is tolerably clear that although it was the fiduciary duties owed to NCRA that were breached, the dishonest and fraudulent design, of which the acts and omissions constituting that breach formed part, extended beyond NCRA to NCRH and the New Cap Group. 52 Paragraph 53(g) alleges specifically that the circumstances in which the transaction occurred included that "the certain loss NCRA accrued under Leg Two was not accounted for": something that makes it clear that the first and second legs were to be brought to account in NCRA and, on consolidation rather than directly, in NCRH. 53 Paragraph 54 then alleges that the purpose for which the first and second legs were entered into was not a proper company purpose – clearly, as that paragraph is drafted, of NCRA. Paragraph 55 makes it clear (if it were not already clear) that the directors carried out the dishonest and fraudulent design by authorising NCRA to enter into the first and second legs. Thus, in para 56, it is claimed that the directors breached their fiduciary and statutory duties "in recommending or procuring NCRA to enter into Legs One and Two" where it derived no benefit and the purpose was only to enable NCRH to publish false accounts. 54 As I have indicated, the case sought to be made by NCRA could be more clearly pleaded. However, comparing what is pleaded (in relation to the Barnes v Addy case) against the elements that must be pleaded as identified by Young CJ in Eq (see para [20] above), I think that the pleading does state, with sufficient clarity and particularity, the first two elements identified. There can be no doubt that the existence of the fiduciary duties owed by the directors, and the entity to whom those duties were owed, is pleaded (and it was not submitted otherwise). Likewise, the dishonest and fraudulent design is pleaded. For the reasons that I have given, I think that there is a sufficient identification of the steps taken by the directors to further that dishonest and fraudulent design, and why it is that those steps breached the fiduciary duties owed by them to NCRA. 55 Mr Pembroke submitted that certain of the particulars given suggested that it was the Board of NCRH, rather than the directors in their capacity as directors of NCRA, that caused NCRA to enter into the first and second legs. I do not accept that submission. Although I agree (as I have indicated more than once) that the relevant allegations could have been pleaded more clearly, I do think that, looking at the proposed pleading overall, it is clear that the allegation that is made is that it was the directors, in their capacities as directors of NCRA, who caused, or permitted, or recommended, or procured, it to enter into the first and second legs. 56 I should mention that both Mr Pembroke and Mr Finch referred me to a number of documents that, they said, supported the positions of their respective clients. Those documents included (but I do not think were limited to) the documents referred to in the particulars in one or other of the drafts. In the result, I have not found it necessary to give detailed consideration to those documents. The question is whether the material facts as pleaded, and the particulars given of them, sufficiently show the cause of action relied upon. If they do, then nothing is gained by looking at the documents. If they do not, it is not legitimate to supplement them by reference to those documents. 57 Mr Pembroke submitted further that it was necessary to consider the position of the individual directors. That may be acknowledged; but, again, I do not think that it is dispositive of the issues that I am required to decide. It is sufficient, in this context, to note that the draft amended 36th cross-claim does allege, against each of the directors, the relevant duties and acts that are said to constitute breaches of those duties. It may very well be, as Mr Pembroke submitted, that on analysis of the facts and documents, it will be shown that individually, some of the directors stand in different positions to others. But that does not bear upon the adequacy of the pleading. The pleading of knowledge 58 The remaining questions relating to the principal point are the third and fourth matters identified by Young CJ in Eq: assistance and knowledge. The question of knowledge in turn involves the categorisation by Peter Gibson J in Baden (see para [21] above). 59 As I understand the submissions for Guy Carpenter, it was not put that the material facts relating to its alleged assistance in the alleged dishonest and fraudulent design were not adequate pleaded. The attack was on the pleading of knowledge: although, obviously enough, this may involve some overlap with the previous category. 60 Mr Pembroke referred to the judgments of Gibbs and Stephen JJ in Consul Development in support of the proposition that what was required was actual knowledge. Thus, at 399, Gibbs J indicated that what was required was actual knowledge of breach of duty or actual knowledge of facts that to an honest man would show breach of duty. His Honour expressed the same test slightly differently at 400 when he referred to actual knowledge, or reason to believe, that the alleged fiduciary was violating his duty; and he added the rider that "in the circumstances an honest and reasonable man would not have thought it necessary to inquire further." 61 Stephen J (with whom Barwick CJ agreed) made it clear at 407 that the knowledge required must go beyond a belief that the actions of the alleged fiduciary were "somehow wrong". That sense of wrongdoing, as his Honour pointed out, was not related to an awareness of breach of fiduciary duty, and could not establish knowledge of that breach. 62 The views of Stephen J were, I think, crystallised in his citation with approval at 410 of the dissenting judgment of Jacobs P in the Court of Appeal ([1974] 1 NSWLR 443, 459). Jacobs P said: " … The point of the difference between the person receiving trust property and the person who is made liable, even though he is not actually a recipient of trust property, is that in the first place knowledge, actual or constructive, of the trust is sufficient, but in the second place something more is required, and that something more appears to me to be the actual knowledge of the fraudulent or dishonest design, so that the person concerned can truly be described as a participant in the fraudulent dishonest activity." 63 Stephen J commented that it was not clear "why there should exist this distinction between the case where trust property is received and dealt with by the defendant and where it is not … ". However, it appears from what his Honour said at 411 that he accepted the distinction. 64 Thus, at 413, Stephen J concluded that in the circumstances proved, "a reasonable, honest man would not … have had knowledge of circumstances telling of breach of fiduciary duty … . This being the furthest extent to which any possible doctrine of constructive notice may go in such a case it follows that the doctrine, even if applicable, cannot impute to Consul the knowledge necessary to render it liable to the plaintiff." His Honour therefore concluded that the appellant was not liable under the second limb of Barnes v Addy. 65 Mr Finch relied on the decision of Austin J in NCR Australia v Credit Connection Pty Ltd [2004] NSWSC 1. In that case, an allegation was made that the directors of the defendant were liable under the second limb of Barnes v Addy. Austin J considered the relevant principles at [161] and following. He pointed out at [164] that in Australia, the current law is to be found in the decision in Consul Development and said, "it is sufficient for me to be guided by the judgments in that case." I respectfully agree. 66 His Honour then dealt with the judgments of Gibbs and Stephen JJ and concluded at [168] and [169]: "168 What seems to emerge from these observations is that liability arises where the defendant has assisted in the trustee's dishonest and fraudulent design and: · has actual knowledge of the dishonest and fraudulent design; or · has deliberately shut his or her eyes to such a design; or · has abstained in a calculated way from making such inquiries as an honest and reasonable person would make, where such inquiries would have led to discovery of the dishonest and fraudulent design; or · as actual knowledge of facts which to a reasonable person would suggest a dishonest and fraudulent design. 169 But there is no liability if the defendant merely knows facts that would have been investigated by a reasonable person acting diligently, thereby discovering the truth, where the defendant has innocently but carelessly failed to make the appropriate investigations." 67 Again, I respectfully agree. His Honour's conclusions as to the elements of knowledge required to make a person liable under the second limb in Barnes v Addy are entirely consistent with the analysis of Young CJ in Eq referred to in paras [20] and following above. 68 Mr Pembroke submitted that the pleading of his clients' knowledge did not set out sufficiently the material facts as to their knowledge. He said that his clients were entitled to know how the decision (to cause NCRA to act in the way it did) was made; by whom that decision was made, and how his clients were said to have knowledge of these matters. That submission was repeated, and developed, in the supplementary submissions (see paras [39] and[40] above). 69 I have set out in para [25] above the prior pleading of knowledge. In the revised draft further amended 33rd cross-claim, knowledge was pleaded as follows: "40 Circumstances were known to Guy Carpenter UK which to an honest and reasonable person would suggest a dishonest and fraudulent design." 70 There were then very substantial particulars given of the circumstances, and particulars of the dishonest and fraudulent design said to be indicated by those circumstances. 71 Although Mr Pembroke focussed his attack on para 40, it is I think helpful to look at the pleading of the statutory count of knowing assistance or involvement. That is alleged in paras 41 and 42 as follows (omitting particulars and, in the case of para 42, omitting the details of the alleged assistance and involvement): "41 Further or in the alternative to the preceding paragraph, Guy Carpenter UK was aware that those directors and officers of NCRA who were involved in causing or permitting NCRA to enter into Leg One and Leg Two were not acting honestly in the exercise of their powers and discharge of their duties to NCRA (in breach of Corporations Law s 232). 42 Guy Carpenter UK, knowing of the circumstances referred to in the preceding paragraph 41 , assisted in the dishonest and fraudulent design and further or in the alternative involved itself in the contravention of s 232 by: [details omitted]". 72 The Barnes v Addy pleading against Guy Carpenter Australia (para 43) is in identical terms to that against Guy Carpenter UK, although the particulars of circumstances known are different. The basic pleading of assistance or involvement in the statutory contraventions (paras 44 and 45) is likewise in identical terms, although the particular acts of assistance or involvement are different. 73 Mr Finch submitted that the amended pleading met the difficulties identified by Young CJ in Eq. 74 When one analyses his Honour's reasons on this point, it appears that he saw two problems in the pleading of knowledge (see para [27] above). First, he said, the former pleading did not allege a mental state that was capable of amounting to knowledge for the purposes of the second limb in Barnes v Addy. As his Honour said, it "seems to fall between the fourth and fifth class [sic] of Peter Gibson J's classification … ". The second problem was related to the "quite nebulous" words "committed or attempted". 75 What is in question is the adequacy of the pleading, against Guy Carpenter and Guy Carpenter UK, of the material fact of knowledge of the dishonest and fraudulent design of the directors. That design is clearly specified in the particulars. What is alleged is that the two companies knew of circumstances which would have suggested that dishonest and fraudulent design to an honest and reasonable person. In my judgment, that is clearly an allegation of a mental state in the fourth class of those identified by Peter Gibson J in Baden (see para [21] above). It is a mental state that is sufficient to amount to "knowledge" for the purposes of the second limb in Barnes v Addy, as Young CJ in Eq said (see para [22] above), and as Austin J concluded in NCR Australia (see para [66] above). 76 Further, when paras 40 and 43 (the "Barnes v Addy" paragraphs) are read in conjunction with, respectively, paras 41 and 42 and 44 and 45, it is clear that the allegation of knowledge is knowledge of the activities of the directors that amounted to breaches of duty (fiduciary and statutory) to NCRA. Paragraphs 43 and 43A of the revised draft amended 36th cross-claim (which are among those incorporated into the revised draft further amended 33rd cross-claim) likewise confirm this. 77 Thus, on a fair reading, I think that the revised draft further amended 33rd cross-claim does plead adequately the material fact of knowledge. Further, the circumstances that are said to give rise to that knowledge (because they are said to be of a kind that would suggest to an honest and reasonable person the dishonest and fraudulent design) are clearly set out. 78 It is certainly correct that Young CJ in Eq said, in para [50] of his reasons, that none of the circumstances alleged against Guy Carpenter Australia occurred after 9 July 1998. However, that was not, as I read his Honour's reasons, the basis upon which he concluded that the pleading of knowledge was insufficient. It was a supplementary point. That is made quite clear by what his Honour said, in relation to the first subsidiary point, in para [62] of his reasons (see para [29] above). Conclusion on the Barnes v Addy pleading 79 For these reasons, I conclude that the revised draft further amended 33rd cross-claim does adequately plead the material facts relating to NCRA's case against Guy Carpenter based on the second limb in Barnes v Addy. 80 I turn now to the subsidiary points. The trading losses claim 81 In para 51 of the revised draft further amended 33rd cross-claim, NCRA alleges that, not having gone into runoff on 3 September 1998 (as it says would have happened but for the directors' negligence), it has incurred losses including (sub para (a)) losses on new business underwritten after that date. This, Mr Pembroke submitted, was a "but for" claim of the kind rejected by the Court of Appeal in Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 and by the English Court of Appeal in Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360. Mr Pembroke referred to further authority in support of this submission. 82 It will be noted from what I have said in para [28] above that the same submission was made to Young CJ in Eq. His Honour, noting that NCRA claimed equitable compensation and noting that this differs in principle from legal and equitable damages, considered that he should not strike out the pleading in question. 83 I respectfully agree. No different test should be applied to an application for leave to amend. Further, I adopt, by analogy, the reasoning of Rolfe J in Ampolex Ltd v Perpetual Trustee Company (Canberra) Ltd (1996) 20 ACSR 649. A similar claim for damages was put in that case. His Honour considered it at 663 and following. He referred at 667 to the discussion of the "but for" testing Alexander and to the discussion of Alexander in Galoo. He concluded at 669 that "the commonsense approach [to causation] demands a factual finding and the authorities support the view that that should be made at the conclusion of all the evidence." Although that was not said in a Barnes v Addy context, the principle, in my respectful opinion, is both correct and applicable by analogy to the circumstances of this case. The limited allegations of knowledge against Guy Carpenter Australia 84 As I have noted, the last circumstance said to indicate knowledge on the part of Guy Carpenter Australia occurred on 9 July 1998. That was, so it was said, some 6 weeks before the decision was taken to commit NCRA to the first and second legs and 7 weeks or longer before the relevant contracts were signed. 85 These circumstances may mean that the case fails against Guy Carpenter. However, they do not amount to a sufficient basis for declining leave to amend. Young CJ in Eq concluded at [62] that the same point was not sufficient to lead to a striking out of the pleading (see para [29] above). I respectfully agree. It follows inevitably that the point is not strong enough to justify the refusal of leave to amend. The position of the directors 86 The directors were served with notice of the application to amend the 36th cross-claim. It would appear that they were given copies of the revised draft amended 36th cross-claim. They either did not appear, or appeared but neither consented to nor opposed the order. 87 Since there is no argument of prejudice, and since on my reading of the revised draft amended 36th cross-claim it alleges with sufficient clarity and particularity the material facts that support the relief claimed, I see no reason to refuse leave to amend the 36th cross-claim. Conclusion and orders 88 In my judgment, each of the challenges raised by Guy Carpenter to the further amendment of the 33rd cross-claim fails. There is no separate ground of opposition to the amendment of the 36th cross-claim. 89 I make the following orders: (1) I grant the cross-claimant in the 33rd and 36th cross-claims, New Cap Reinsurance Corporation Limited (in liquidation), leave further to amend its 33rd cross-claim and to amend its 36th cross-claim substantially in accordance with the revised drafts initialled by me and placed with the papers. (2) I direct the cross-claimant to file and serve the further amended and amended cross-claims by 4 pm on Wednesday 1 December 2004. (3) I direct the cross-defendants to those cross-claims to file and serve their defences by 4 pm on Friday 17 December 2004. (4) I order the cross-claimant to pay the costs of the cross-defendants to those cross-claims of, incidental to and thrown away by the amendments. (5) I make order 1 as sought in the cross-claimant's notice of motion filed on 1 October 2004. (6) I dismiss the notice of motion filed on 8 October 2004 by the second cross-defendant to the 33rd cross-claim. 90 It would seem to follow that, as between NCRA and Guy Carpenter, costs (with the exception of those identified in order (4) above) should follow the event of the various notices of motion; and that there should be no further order as to costs as between NCRA and the directors. I will, however, hear the parties on costs. ****** Last Modified: 12/15/2004 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.