In the matter of Orix Australia Corporation Limited

By Originating Process filed on 12 June 2020, the Plaintiff, Orix Australia Corporation Ltd (“Orix”) seeks compensation orders, declaratory relief and other orders as against the First and Second Defendants, in respect of alleged breaches of duties under ss 181 and 182 of the Corporations Act 2001 (Cth) and alleged breaches of fiduciary duties. Orix subsequently filed a Statement of Claim on 27 July 2020, which is a lengthy document of some 108 pages, and the First Defendant, Mr Carter, filed a Defence on 28 September 2020. Mr Ashhurst, with whom Mr Mackay appears for Mr Carter, points out that these proceedings involve serious allegations against Mr Carter, including claims for breach of director’s duties, breach of fiduciary duty and knowing involvement in breach of fiduciary duty, fraudulent misrepresentation, misleading or deceptive conduct and breach of contract.

By way of background, Mr Carter is the former managing director of Orix and he was dismissed on 22 June 2015, after issues had arisen as to payments made or benefits given by Orix to employees of certain of its clients. It appears that criminal proceedings were subsequently brought against Mr Carter but the Director of Public Prosecutions has not proceeded with the prosecution.

By Amended Interlocutory Process dated 13 November 2020, notwithstanding the earlier filing of his Defence, Mr Carter seeks to strike out numerous paragraphs of the Statement of Claim under r 14.28 of the Uniform Civil Procedure Rules. Mr Carter relied on the affidavit dated 13 November 2020 of his solicitor, Mr Zwar, which did no more than annex correspondence between the parties ventilating Mr Conway’s complaints as to the pleadings. Orix relied on the affidavit dated 20 November 2020 of its solicitor, Mr Moore, which referred to the process adopted by Orix for signing off its annual reports for the financial years 2012–2014, including the audit process, and the receipt of a representation letter from Mr Carter, in his capacity as Orix’s managing director, on behalf of management to Orix’s board of directors regarding the audit of the annual financial report. That evidence was relevant to Mr Carter’s application to strike out certain claims in respect of those representation letters. I also had the benefit of detailed written submissions by Mr Carter, written submissions in response by Orix, further written submissions in reply by Mr Carter (which I have had regard to, although there was no order for them where the matters would otherwise have been addressed orally); oral submissions by Mr Ashhurst and Mr Bolster (who appears for Orix); and further written submissions, by leave, in respect of the issue whether certain conduct was in trade or commerce for the purposes of the principles established by Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594; [1990] HCA 17.

There is little controversy as to the applicable principles in a strike out application, although I was taken in submissions to a number of cases. Mr Ashhurst refers to my summary of the applicable principles in Iacullo v Iacullo [2013] NSWSC 1517 at [53]-[59] as follows:

Mr Ashhurst also fairly recognises that the power to strike out pleadings should be exercised in only plain and obvious cases, and the Court should not undertake an interim inquiry as to the merits of the Plaintiff’s case: Brimson v Rocla Concrete Pipes Ltd [1982] 2 NSWLR 937.

Mr Carter characterises the first area of complaint as relating to “irrelevant” references to certain criminal proceedings. This issue concerns several references in the Statement of Claim to criminal proceedings commenced against Mr Carter or the Second Defendant, Mr Georgiou or a third party, Mr Pereira. Paragraph 14 of the Statement of Claim, to which an objection was not pressed at the hearing, pleads the service and execution by the police of a search warrant upon Orix’s premises and the arrest of an employee of one of Orix’s clients on 25 March 2015. Paragraph 15, to which Mr Carter maintains his objection, pleads the arrest of the Second Defendant and the laying of charges against him and the suspension of his employment with Orix on 31 March 2015. Paragraph 16 pleads the arrest of Mr Carter, the laying of charges against him and the subsequent suspension of his employment with Orix on 2 April 2015. Those paragraphs are then referred to in paragraph 113 of the Statement of Claim which provides that, following the arrests, on 30 October 2015, a major client of Orix commenced a tender process for future fleet arrangements and confirmed to Orix that it was not invited to participate in that tender. Orix then pleads, in paragraphs 156ff of the Statement of Claim, that Mr Carter breached statutory and other duties by the pleaded conduct and, in paragraph 169ff, that it suffered loss and damage arising from Mr Carter’s breach of duties.

Mr Bolster submits that these pleadings are material because they represent introductory background to allegations which follow, and contends that allegations may be material or relevant to a claim although not necessary to establish the cause of action: Archer v Channel Seven Perth Pty Ltd [2002] WASC 160 at [39]; PakeFX Pty Ltd v Dickson [2014] NSWSC 1424 at [31]. Mr Bolster also contends that these matters are material to the loss claimed in paragraphs 169-171 and 187-188 of the Statement of Claim, involving contracts lost to Orix after the conduct alleged against Mr Carter became known to its clients and are also relevant to a limitation defence raised by Mr Carter.

Mr Ashhurst in turn submits that the test for relevant “introductory” material, as articulated in Archer v Channel Seven Perth Pty Ltd above related to the question whether evidence could be led at trial to support that material. It seems to me that Orix would be entitled to rely, at trial, on the charges laid against the First and Second Defendants, as distinct from the ultimate outcome of those charges, as matters that contributed to its loss of client contracts and the costs which it has incurred in investigations and in dealings with police inquiries. Accordingly, I would not strike out those paragraphs. I do not consider it necessary to address the additional questions of causation raised by Mr Ashhurst, purportedly in reply, which do not undermine the factual relevance of these allegations.

The Plaintiffs also challenged a reference, in the particulars to paragraphs 30, 45(b) and 53 of the Statement of Claim to certain statements made in agreed facts in criminal proceedings involving a third party. There is a question whether it is necessary or appropriate to particularise the evidence on which a party will rely to establish the matters pleaded; there is also a question whether it is an appropriate use of a strike out application to engage in a debate as to the content of particulars. In any event, it is not necessary to address these questions, because Mr Ashhurst has confirmed that Mr Carter does not require particulars of the source of the allegations made in paragraphs 30, 45(b) and 53 of the Statement of Claim in order to understand the case against him, and Mr Bolster has confirmed that the particulars need not be provided where Mr Carter does not require them. These particulars will be deleted in an amended draft of the Statement of Claim which is presently under discussion between the parties and it is not necessary to address them further.

Mr Carter characterises the second area of complaint as relating to allegations in the Statement of Claim that are vague, ambiguous and/or lack precision and therefore should be struck out. Mr Carter contended that many paragraphs of the Statement of Claim fell in that category. First, Mr Carter challenges the use of the word “illegitimate” in describing payments pleaded in paragraphs 57, 73, 110(a)-(b), 172(a)-(c) and 194 of the Statement of Claim and contends that term is ambiguous and that it is unclear whether it is alleged that the payments were unlawful, or that something more is alleged. Mr Bolster responds, generally, to the criticisms of terminology on the basis that they fail to have regard to the context of surrounding allegations. He contends that the use of the term “illegitimate” describes something which is “not legitimate” and “has no legitimate basis”. He refers to the matters specifically pleaded in paragraph 57 of the Statement of Claim to support a contention that the payments were illegitimate. He in turns contends that the allegation of “illegitimate” payments in paragraph 73 is derived from matters pleaded in paragraphs 63 and 69 which support a finding of illegitimacy for the payments. He submits that the payments referred to in paragraphs 110(a)-(b) were illegitimate on the same basis as the conduct referred to in paragraphs 57 and 73 and that the use of the term in paragraphs 172 and 194 corresponds to the use of the term in paragraph 110.

In reply, Mr Ashhurst submits that it is unclear whether the word “illegitimate” used in the several paragraphs means “illegal” or has some other meaning or whether it is intended to have the same meaning in each of the relevant paragraphs and that Mr Carter “cannot determine from this context whether it is being alleged that the payments were illegal or if not illegal then in breach of some directions, standards or protocols” maintained by Orix or, if not, on what basis it is alleged the payments were “illegitimate”.

It initially seems to me that the use of the term “illegitimate” may be surplusage, because Orix’s case is that the particular payments were improper by reference to circumstances pleaded in other paragraphs, referenced by the unhelpful introductory phrase “in the premises” in paragraph 57, or “by reason of the foregoing” in paragraph 110 or “by that conduct” in paragraph 194. However, Mr Bolster did not accept that the term “illegitimate” was either surplusage or merely a descriptive term attached to pleaded conduct that was alleged to amount to a breach of duty by reference to the circumstances in which it occurred. Mr Bolster contended that the term “illegitimate” added content to the paragraphs, by reference to the circumstances referred to in respect of each of the paragraphs, although it did not have the same meaning in each of the challenged paragraphs. If that is the intended effect of the pleading, then it seems to me that neither Mr Carter nor the Court could know, in respect of each of these paragraphs, what were the particular factors that gave rise to the illegitimacy of the payments, or what that characterisation added to the allegation, beyond the matters pleaded elsewhere. Where Mr Bolster contends that the term adds something to the allegations, but it is not apparent what it is, it seems to me that those paragraphs must be struck out in their present form, with leave to replead these claims in permissible form.

Mr Carter next complains of the use of the words “were disproportionate to” in paragraph 57(b)(i) of the Statement of Claim in a contention that introducer fees paid to a third party “were disproportionate to” the services provided by that party. Mr Carter contends that he does not know what this allegation means and the allegation cannot be pleaded to, because he does not know what proportion he needs to plead to. Mr Bolster in turn responds that the use of the word “disproportionate” in paragraph 57(b) relates to the payment of fees in excess of those warranted by any legitimate brokerage services rendered by relevant parties. It seems to me that the words “were disproportionate to” have a plain meaning and sufficiently identify the claim which Mr Carter has to meet. I would not strike out this paragraph.

Mr Carter criticises the words “intended by Mr Ward and Mr Pereira to be paid” in paragraph 57(a) of the Statement of Claim as having “no meaning”. I do not accept that submission and would not strike out that paragraph.

Mr Carter initially contended that the use of the language “no entitlement” in paragraph 60 of the Statement of Claim, in a claim that a third party had no entitlement to be paid any part of “introducer fees” associated with certain transactions, is not sufficiently clear, but did not press his objection to that paragraph.

Mr Carter criticises the reference to an “implied authorisation” in paragraphs 61, 82, 92, 93, 103-104, 108, 111, 135, 140 (in particulars) and 156 of the Statement of Claim and contends, oddly, that the words “implied authorisation” have no meaning. The pleading in paragraph 61 is supported by particulars of the matters which are said to give rise to the relevant authorisation, whether expressly or impliedly, and it seems to me that Mr Carter will be able to identify the case he has to meet raised by that paragraph. Paragraph 82 is also particularised, albeit more briefly; paragraph 92 is extensively particularised; paragraph 93 is sufficiently particularised; paragraphs 103 and 104 are sufficiently particularised; paragraph 108 is particularised by reference to matters relied on to support the relevant authority; paragraph 111 is cross-referenced to and derivative of the earlier pleadings, and supported by the particulars to those earlier pleadings; and paragraph 135 is cross-referenced to paragraphs 127 and 134 which are in turn particularised by the matters said to establish the relevant authority. The particulars to paragraph 140 cross-reference earlier paragraph 156 is in turn cross-referenced to earlier pleadings, albeit they are not identified specifically, but only by reference to “Part D of the pleading”. On balance, I would not strike out any of these paragraphs.

Mr Carter challenges the use of the words “permitted” or “or otherwise permitted” in paragraphs 82, 111, 135, 174, 179, 184, 193-194 and 197 of the Statement of Claim and submits that it is not clear what those words mean. Particulars are provided of that allegation in paragraphs 82, but not in paragraph 111, 135, 174, 179, 184, 193-194 and 197. He also challenges the use of the words “otherwise permitting” in the particulars to paragraphs 140 and 144 and “or permitting” in paragraphs 210(a)-(b), apparently on the same basis. Mr Carter contends that the use of the word “permitted” is ambiguous in an allegation in paragraph 156(b) that he authorised or permitted Orix to pay particular fees and also challenged the use of the words “or permitting” in paragraphs 169 and 170 of that Statement of Claim on the basis that it was unclear what amounted to “or permitting”. Mr Bolster responds that:

It seems to me that the phrase “permitted” or “otherwise permitted” is sufficiently clear to allow Mr Carter to know the allegation that he has to meet, namely that he permitted the conduct to take place. It would be open to Mr Carter to seek particulars of the facts, matters and circumstances which gave rise to his permitting that conduct, on his part, if he wishes to do so, but it does not seem to me that the pleading should be struck out because he has apparently not sought, and therefore has not been provided with, such particulars.

Mr Carter also takes objection to paragraph 99 of the Statement of Claim which contains an allegation that a “CCA Accrual Interest” spreadsheet was funded primarily from particular sources. Mr Carter takes the point, which seems logical enough, that a spreadsheet is not a bank account or other fund that was capable of being funded. Orix in turn responds, in submissions, that the funding which was referred to has a notional character. There may well be force in Mr Carter’s criticism of the logic of the paragraph, but it does not seem to me to give rise to any difficulty in his understanding of the case that he has to meet, and it is not to the point that he considers it is not well-founded. If the spreadsheet was not funded from the specified sources, then Orix will not establish an allegation in this form, but that would be Orix’s difficulty rather than Mr Carter’s difficulty. In the course of submissions, Mr Bolster rightly accepted that it may be desirable for this paragraph to be clarified, in the further pleading which is under discussion between the parties, but I would not strike it out.

An objection by Mr Carter to paragraph 124 of the Statement of Claim was not pressed at the hearing (T32).

Mr Carter also contends that certain matters particularised to paragraph 134 of the Statement of Claim should be pleaded as material facts. Mr Bolster responds that the particulars provided in this paragraph are particulars of Mr Carter’s knowledge of the Second Defendant’s conduct described in paragraphs 129 and 130 and that knowledge is properly particularised by reference to UCPR r 15.10(2). I accept that submission. It also does not seem to me that that matter would have supported a strike-out allegation, in a pleading of some length and complexity, where the Courts have become less technical, in recent years, as to the distinction between pleadings and particulars, so long as a defendant has fair notice of the case that he or she must meet. I would not strike out that paragraph.

Mr Carter challenged the use of the phrase “lawfully entitled” in paragraph 141 of the Statement of Claim in respect of bonuses and Orix accepted that the word “lawfully” should be deleted from that phrase.

Mr Carter objected to the phrasing of an allegation in paragraph 156(b)(ii) of the Statement of Claim that “he knew, or would have known had he turned his mind to it” that another person had a material or beneficial interest in the receipt of “introducer fees” by a third party. He submits that the words “or would have known had he turned his mind to it” in that paragraph are “obscure and embarrassing” and should be struck out. Mr Bolster responds to the criticism of the language “would have known had he turned his mind to it” by contending that a director can have a duty to inquire into a matter, when his or her knowledge of particular matters would give rise to suspicion that something is amiss, relying on Australian Securities and Investments Commission v Flugge [2016] VSC 779. I accept that the language “would have known had he turned his mind to it” is not a common formulation of a form of constructive knowledge, but it seems to me to convey the allegation that Orix seeks to put and whether that is sufficient to establish this aspect of the case is a matter properly left to a hearing on the merits.

Mr Carter initially challenged an allegation in paragraph 162 of the Statement of Claim that certain conduct amounted to bribery, but that objection was not pressed.

Mr Ashhurst contends that paragraphs 169 (particulars 7 and 8) and 170 plead causation but fail to meet the test described in s 1317H of the Act, which requires that damage have “resulted from” the contravention. He refers to the criticism of a pleading of causation in Barnes v 42 International Profit (2014) 316 ALR 408 at [83] and contends that the relevant damages would not be recoverable at law. It seems to me that question will depend on the facts found at trial and that the paragraph should not be struck out.

Mr Carter challenged a pleading in paragraphs 201-205 of the Statement of Claim that certain representations (defined as the “Accounts Representations”) in representation letters given by Mr Carter to Orix’s board in 2012-2014 were misleading or deceptive within the meaning of s 18 of the Australian Consumer Law and were made in trade or commerce in contravention of that section. Mr Carter contends that the letters relied on for this allegation are internal communications between Orix and its group financial controllers and directors, and he relies on the observation of the majority in Concrete Constructions (NSW) Pty Ltd v Nelson above at 604-605 that conduct, in that case by a communication by a company’s foreman to an employee in the course of their ordinary activities in the construction of a building, was not conduct in “trade or commerce” and would not, if established, constitute a contravention of the then s 52 of the Trade Practices Act 1974 (Cth). Mr Carter seeks to strike out those paragraphs, and the consequential claim for loss, on the basis that that conduct was internal conduct and not in trade or commerce for the purposes of that section.

In correspondence, Orix has contended that the relevant information was provided to its external auditors and referred to paragraphs 189ff of the Statement of Claim in that respect. Mr Bolster submits that the references to the board representation letters should be understood in the context of paragraphs 189-200 of the Statement of Claim which plead that the relevant information was required to be provided to Orix’s auditors, in connection with the audit of its financial report for each of the relevant years; that the representation letters were provided to Orix’s directors regarding the audit of the annual financial reports and were a necessary step in the board approving those reports and signing representation letters to the auditors, and the auditors issuing audit reports; and were “fundamentally concerned with providing assurance to the Board as to the veracity of information provided to the external auditors … for the purpose of executing their annual audit function”. Mr Bolster in turn contends that the process by which a corporation engages with an auditor is an activity in trade or commerce and information provided to the auditors as part of that process were also made in trade or commerce.

In the course of submissions, I raised the observations of Ball J in Armstrong Strategic Management and Marketing Pty Ltd v Expense Reduction Analysts Group [2011] NSWSC 704, where his Honour noted the undesirability of striking out a claim where that would prevent an issue where the law was unsettled being addressed on appeal. Mr Mackay, who appears with Mr Ashhurst for Mr Carter, refers in supplementary submissions to occasions on which judges have struck out claims for breach of s 18 of the Australian Consumer Law, on the basis that they did not involve conduct in trade or commerce. Mr Mackay also refers to the recent decision of the Court of Appeal in Aardwolf Industries LLC v Tayeh [2020] NSWCA 301 at [72]-[77] where Macfarlan JA referred to Concrete Constructions (NSW) Pty Ltd v Nelson above, in holding that the assignment of intellectual property had a trading or commercial character rather than being intra-corporate activity.

Mr Bolster responds that the Court cannot be satisfied that the claim in respect of the board representation letters is bound to fail, so as to strike it out under the principles recognised in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125. He also refers to the observations of the majority in Concrete Constructions that:

Mr Bolster submits that it will be open to Orix to contend, without necessarily challenging the correctness of Concrete Constructions, that formal representations made by a director to other directors for the sole purpose of enabling a board to sign off on a trading company’s financial accounts are in trade and commerce for the purposes of Concrete Constructions. Mr Bolster points out that, in a somewhat similar case, Hamill J declined to strike out a claim for misleading or deceptive conduct in respect of director’s declarations given in relation to a company’s financial statements in Commonwealth Bank of Australia v ZYX Learning Centres Ltd [2014] NSWSC 1676 at [184]-[186]. He also relies on Armstrong Strategic Management and Marketing Pty Ltd v Expense Reduction Analysts Group Pty Ltd above at [13]-[15] above, and contends that Orix’s claim here is less vulnerable to a strikeout application than the claim there made, because it is not inconsistent with the decision in Concrete Constructions.

There are also cases, to which the parties did not refer, which have considered the status of internal communications within corporate governance. In NRMA Ltd v Yates (2000) 18 ACLC 45; [1999] NSWSC 859, Santow J held that communications between a director of a company and its members about matters relevant to an election were made to influence the corporation’s future trade and commerce, and were within the scope of the prohibition on misleading or deceptive conduct; a different view was taken in Yates v Whitlam (1999) 32 ACSR 595; [1999] NSWSC 976 and the difference between the two approaches was noted by Austin J in Cleary v Australian Co-Operative Foods (No 2) (1999) 32 ACSR 701; [1999] NSWSC 1062 at 114. Those cases were considered in New Cap Reinsurance Corporation Ltd v Daya (2008) 66 ACSR 95; [2008] NSWSC 64 where Barrett J held that representations made during a board meeting by officers and employees of a company to its directors were wholly internal to the company and were not made “in trade or commerce”, but took a different view in respect of representations made to a due diligence committee meeting which involved persons external to the company. In Vanguard Financial Planners Pty Ltd v Ale (2018) 125 ACSR 1; [2018] NSWSC 314 at [202]ff, I held that certain representations as to accounts between shareholders in a company were not in trade or commerce.

It seems to me that the case law to which I have referred above demonstrates that, first, the determination as to whether conduct is in trade or commerce is sensitive to the particular facts and, second, that determination may involve questions of some subtlety. I am not satisfied that the Court should strike out this allegation, where the pleaded facts and the findings at a trial may establish a sufficient basis to find that the board representation letters, in the context of the audit of Orix’s accounts, were in trade or commerce.

For these reasons, the strike out application fails other than in respect of paragraphs 57, 73, 110(a)-(b), 172(a)-(c) and 194 of the Statement of Claim, which should be struck out by reason of the use of the term “illegitimate”, with leave to replead. Any amended pleading should also delete the entirely unhelpful introductory phrase “in the premises” to refer to previous paragraphs and, in each case it and similar phrases appear, refer to the particular paragraphs to which reference is intended. I will hear the parties, when the matter is next listed for directions on 14 December 2020, as to the time which will be required to file an Amended Statement of Claim and as to costs where the parties have had a mixed result.