Smart v AAI Ltd; JRK Realty Pty Ltd v AAI Ltd

1. [1]

   This judgment concerns two proceedings brought against an insurer under s 601AG of the Corporations Act 2001 (Cth)

2. [2]

   Between July 2007 and October 2007 the plaintiff in proceedings No 030193 of 2013, Mr Nathan Smart, transferred $176,000.00 in four tranches to the bank account of Q1 Financial Services Pty Ltd (the “four Smart loans” and “Q1” respectively). Between December 2007 and April 2008 the plaintiff in proceedings No 144336 of 2013, JRK Realty Pty Ltd (“JRK”) transferred $91,000.00 in four tranches to Q1’s account (the “four JRK loans”).

3. [3]

   Q1 was a finance broker. Its sole director was Mr George Carthy. Each of Mr Smart and JRK’s sole director, Robyn Kanters, were persuaded to transfer the funds by Q1’s general manager, Mr Damian Lynch. Mr Lynch told them that the funds would be used to make loans to clients of Q1, although there is a significant dispute about the nature of the transaction that he represented was being effected.

4. [4]

   Neither Mr Smart nor JRK recovered the funds they transferred, although they received what each of them understood were “interest” payments. For the reasons set out below I am satisfied that Mr Lynch never intended to make those funds available to clients of Q1 and that he misappropriated the funds.

5. [5]

   Q1 has been wound up and deregistered. However, it was party to a claims made insurance policy underwritten by the defendant, AAI Ltd, formerly known as Vero Insurance Ltd, for the period 31 May 2007 to 31 May 2008 (the “policy” and “Vero” respectively).

6. [6]

   Each of Mr Smart and JRK bring proceedings against Vero under s 601AG of the Corporations Act which enables direct recourse against an insurer. To invoke s 601AG each of them must establish, firstly, that immediately before its deregistration Q1 was liable to each of them, and, secondly, that as at that time the policy “covered” that liability.

7. [7]

   In relation to the first matter there was no substantial dispute that Q1 had a liability to each of JRK and Mr Smart but there was a dispute as to the nature of that liability. I find that each of JRK and Mr Smart agreed with Q1 via Mr Lynch that they would provide funds to Q1, and that it promised to lend those funds to one of its clients and direct repayment of the loan to JRK and Mr Smart. However there was no such client and no intention on the part of Mr Lynch to lend the funds. This renders Q1 liable to each of JRK and Mr Smart for damages for breach of contract. For the reasons that are explained below, Vero cannot invoke any contributory negligence on the part of JRK or Mr Smart, or the proportionate liability provisions of either the Trade Practices Act 1974 (Cth) (“TPA”) or the Civil Liability Act 2002 (“CLA”) to diminish the quantum of that liability. In addition, each of JRK and Mr Smart pressed and established a liability on the part of Q1 for engaging in false and misleading conduct contrary to former s 52 of the TPA. For the reasons explained below, it is not necessary to address Vero’s claims of contributory negligence or reliance on the proportionate liability in relation to this cause of action because they do not affect the quantum of Q1’s liability in contract.

8. [8]

   In relation to the second matter, Vero contended that the liability of Q1 is not “covered” by the policy for five separate reasons. I uphold three of those reasons and reject the balance. The three reasons are as follows. First, in the events that I find happened, I am not satisfied that either JRK or Mr Smart made a “claim” as defined upon Q1 on or before 31 May 2008 so as to engage the insuring clause of the policy. Second, Vero established that the liability of Q1 was excluded from cover because it arose directly or indirectly from a liability that Q1 assumed “outside the normal course of the Professional Services” as defined in the policy. Third, Vero established that Q1’s liability was not covered because of an exclusion clause in the policy concerning dishonest and fraudulent acts of the insured. Although, there was a write back to this clause for the dishonest or fraudulent acts of Q1’s employees, it was not engaged because I am not satisfied that Mr Lynch was an employee of Q1.

9. [9]

   The balance of these reasons explains these conclusions. They are structured as follows:

(1) Approach to contested evidence

1. [10]

   At the outset it is necessary to outline the approach that will be adopted to resolve the contested issues of fact. Mr Lynch did not give evidence, however each of Mr Smart, Ms Kanters and Mr Carthy did. It was not disputed that Mr Smart and JRK transferred the funds referred to in [2] to Q1, that both did so at the urging of Mr Lynch and that both received some payments but not a repayment of their principal. However, broadly, four aspects of Ms Kanters’, Mr Smart’s and Mr Carthy’s evidence were in dispute, namely (i) whether Mr Carthy attended some initial meetings with Mr Smart in May 2007 in which Mr Lynch promoted private lending to Mr Smart, (ii) the particular dealings that each of Mr Smart and Ms Kanters had with Mr Lynch that led to funds being transferred to Q1’s bank account, (iii) Mr Smart and Ms Kanters’ assertions that they entered into a loan direct with Q1’s clients, and (iv) their evidence as to exactly when they contacted Mr Carthy after the deals soured, and what form of demand, if any, they made upon Q1 and Mr Carthy for the return of their funds.

2. [11]

   For the reasons that follow I have reservations concerning the reliability of Ms Kanters’ and Mr Smart’s evidence. I have fewer reservations about Mr Carthy’s evidence and accept it on most topics. Generally I attribute most weight to the contemporary documents and significant weight to the evidence of witnesses not directly associated with the parties. Thus, in relation to the first issue in [10], where Mr Smart’s evidence is supported by other witnesses, I accept his evidence to that extent. In relation to the second issue, I generally accept the evidence of Mr Smart and Ms Kanters as to the dealings they had with Mr Lynch. In relation to the third issue, I attribute little or no weight to each of Mr Smart’s and Ms Kanters’ subsequent attempts to characterise the transactions that Mr Lynch promoted, except so far as their attempts bear (adversely) upon their credit. In relation to the fourth issue, I accept Mr Carthy’s evidence in preference to that of Mr Smart and Ms Kanters.

3. [12]

   A significant aspect of Vero’s attack on each of Ms Kanters’ and Mr Smart’s credibility was to the effect that each of them altered their versions of events to support a characterisation of the transactions promoted to them by Mr Lynch as loans direct to Q1’s clients rather than loans to Q1. It was submitted that they did this to support a characterisation of Q1’s activities as a “broker” in order to bring them within the cover provided by the policy.

4. [13]

   On 30 November 2009 and in October 2010 Ms Kanters and Mr Smart respectively swore affidavits in Federal Court proceedings that each of JRK and Mr Smart commenced against Q1 in 2009 (the “2009 affidavit” and the “2010 affidavit”). Also, on 7 July 2008 Ms Kanters swore an affidavit in support of a statutory demand issued to Q1.

5. [14]

   According to Vero, in the 2009 and 2010 affidavits, Ms Kanters and Mr Smart attributed to Mr Lynch statements that supported a characterisation of the transaction that was entered into as a loan by JRK or Mr Smart to Q1, whereas they did not do that in their principal affidavits sworn in these proceedings (Ms Kanters’ “2013 affidavit” and Mr Smart’s “2013 affidavit”). Vero noted that, in his 2010 affidavit, Mr Smart recorded Mr Lynch commencing each discussion about the second and third Smart loans with the words “[w]e need [a particular] sum to fund a loan that just came in” and the fourth loan with the words “I need [a particular sum] to fund a loan that just came in” whereas no words to that effect are to be found in his 2013 affidavit. In her 2009 affidavit Ms Kanters records Mr Lynch commencing each discussion about a loan with the words “I need [a particular sum]” or “I need a [particular sum] to fund a loan” whereas no words that that effect are to be found in her 2013 affidavit except in relation to the third JRK loan (see [89]).

6. [15]

   In the end result I do not attach the significance to the versions recorded in the 2009 and 2010 affidavits that Vero sought. However the differences between those affidavits and the 2013 affidavits, and my observation of each of their attempts to explain them gave rise to concerns about their reliability as witnesses. I will mention one matter in relation to each of Mr Smart and Ms Kanters that highlights this concern.

7. [16]

   In his 2013 affidavit Mr Smart said that he first met Mr Lynch and Mr Carthy at a meeting in early May 2007. He said that at one point during the meeting when Mr Lynch and another person, Mr Skinner, were present and before Mr Carthy had joined the meeting, Mr Lynch referred to Q1 having funding available to it from “20 private lenders at any one time”. In his 2010 affidavit Mr Smart refers to this meeting but does not attribute this statement to Mr Lynch. Instead he recounts that, at a meeting on 7 June 2007, Mr Carthy said to him, inter alia, “I am also a private lender to Q1 finance clients. Q1 Finance has approximately 20 such private lenders”. Mr Smart’s 2013 affidavit makes no reference to any meeting on 7 June 2007.

8. [17]

   In her 2008 affidavit sworn in support of the statutory demand issued to Q1 by JRK Ms Kanters asserted that she lent funds to Q1 (and not to its clients). Thus she stated that Q1 owed $99,833.00 to JRK “relat[ing] to the following loans made by [JRK] to [Q1] … [a] further loan of $25,000.00 made on the 21 December 2007 pursuant to an agreement … as set out in annexure 2 hereto”. (Annexure 2 is the document referred to in [84] below.) Ms Kanters was asked about this in her oral evidence as follows:

9. [18]

   The inconsistencies between the various affidavits sworn by Ms Kanters and Mr Smart and my observation of the manner in which they addressed them in cross-examination has given me reason to be cautious before accepting their evidence on any matter concerning their dealings with Mr Lynch and Mr Carthy where it is not supported by other material or witnesses. To that end Vero contended that the Court should have first regard to “contemporary materials, objectively established facts and the apparent logic of events” (Fox v Percy [2003] HCA 22; 214 CLR 118 at [31] per Gleeson CJ, Gummow and Kirby JJ). I agree. However, there is an irony in this because, for the reasons set out below, the truly contemporaneous materials are inconsistent with the contention that JRK and Mr Smart lent funds to Q1 and favour the general tenor of the conversations with Mr Lynch recounted by each of Mr Smart and Ms Kanters in their 2013 affidavits. Otherwise I do not attribute much weight to the subsequent attempts by them to characterise the transactions they entered, except to the extent they reflect on their credit in the manner outlined.

10. [19]

    Many aspects of Mr Carthy’s evidence were contested. However his evidence was generally consistent with the documentary record and he was not seriously tackled on his answers in cross-examination. I do not have the same level of reservation about accepting his evidence as I have with the plaintiffs. Nevertheless, contrary to his evidence, I am satisfied that throughout 2007 to 2008 Mr Carthy was aware that Mr Lynch was pursuing various private sources of funding for broking short term loans, including Mr Smart. However I am not satisfied that he was aware that Mr Lynch was procuring the funds be transferred to Q1 for it to (supposedly) disburse or that there was an absence of documentation of these deals. For the sake of completeness I note that there is no suggestion, and no evidence to support any suggestion, that Mr Carthy was complicit in any fraud perpetrated by Mr Lynch.

(2) Q1’s business

1. [20]

   Q1 was incorporated on 6 October 2006. Its short and somewhat miserable life as a company ended with its deregistration on 4 March 2011. As noted, its only Director was Mr Carthy. Mr Carthy and Mr Lynch each held half of the shares in Q1.

2. [21]

   Mr Carthy described Mr Lynch as the “manager of Q1” and described his duties as preparing loan applications, managing loan writers contracted to Q1 and arranging for the payment of wages and accounts. In his affidavit sworn 31 July 2014 Mr Carthy explained that there was no (written) contract of employment between Mr Lynch and Q1, he was not paid a wage, superannuation, sick leave or annual leave and was not issued with group certificates.

3. [22]

   In his affidavit sworn 23 November 2013 in the JRK proceedings Mr Carthy described Q1's business as “mortgage broking". He explained that its clients were “people or businesses that wanted loans, which Q1 arranged from banks and non-bank lenders with whom, through an aggregator, Q1 was accredited”. Q1's aggregator was the Australian Finance Group Pty Ltd ("AFG"). He denied any knowledge of Q1 acting as a borrower or lender, a mortgage manager, holding any funds other than its own including “client” funds or inviting clients to “invest” in Q1. Consistent with the observations in [19] I accept that evidence.

4. [23]

   Mr Carthy identified the type of loans brokered by Q1 as home loans, home deposit loans, personal loans, commercial finance and so called “private funding”, which he described as “short term bridging finance … from non-bank lenders”. It appears that all but the last of these categories of loan were submitted through AFG. With respect to private funding, Mr Carthy identified one source of funding for Q1’s clients as Alternative Credit Facilities Pty Ltd (“ACF”). Most if not all the loan applications submitted by Q1 on behalf of its clients to ACF were arranged by Mr Lynch.

5. [24]

   The Plaintiffs read an affidavit from the principal of ACF, Anthony Fleming. Mr Fleming stated that in mid to late 2006 he was approached by Mr Lynch, who described himself as a “broker with Q1 Finance” and that he had a “client looking for a private finance deal” being a “short term loan”. In his oral evidence Mr Fleming explained that Q1 submitted documentation in support of the application to ACF and, if it was approved, ACF would receive signed loan documentation including security documents from the borrower prior to advancing funds. He stated that the funds were advanced to the borrower according to their directions and not to Q1. ACF paid Q1 their commission direct.

6. [25]

   Mr Fleming also recalled attending Q1’s office and being introduced to Mr Carthy by Mr Lynch as “Tony … from Alternative Credit Facilities who we have been putting our private [finance] deals through”. Mr Carthy could not recall but did not deny that conversation. I accept that it occurred.

7. [26]

   In May 2007 Mr Carthy submitted an application for renewal of professional indemnity insurance to Vero. The renewal form was entitled the “Mortgage Industry” but otherwise did not expressly specify the insured’s business. Mr Carthy included a breakdown of the business activities as “80% residential/investment property loans, 15% low docs loans/margin lending/non-conforming loans, and 5% vehicle financing/personal”.

8. [27]

   It is not disputed that Vero provided cover from 31 May 2007 to 31 May 2008 even though the policy schedule was not signed on behalf of Vero until 22 October 2007. I will refer to its terms in more detail later but it suffices to note at this point that the insured were named as Mr Carthy, Q1 Financial Services Pty Ltd and Q1 Finance Pty Ltd, that it was a claims made policy and the “professional services” described in the policy schedule were “Mortgage Broker / Finance Broker / Mortgage Originator / Mortgage Management / Debt Reduction. Vero did not provide cover after 31 May 2008.

(3) 2007 – Mr Skinner’s loans

1. [28]

   In 2007 Peter Skinner lived in the same building as Q1’s offices on the Gold Coast. He became friendly with Mr Lynch and Mr Carthy. In his affidavit he stated that some time while he was having a drink at Q1’s offices Mr Lynch said to him words to the effect:

2. [29]

   That part of Mr Skinner’s affidavit in which he said Mr Carthy was present when this was stated was rejected, but in his oral evidence Mr Skinner reiterated that Mr Carthy was present when this was said. Mr Carthy denied being present during any such conversation. I prefer Mr Skinner’s evidence on this topic. Mr Carthy was aware that Mr Fleming via ACF was providing funding for loans being brokered by Q1 and Mr Lynch suggested a similar arrangement to Mr Skinner.

3. [30]

   Mr Skinner also said that in June 2007, after this conversation, Mr Lynch spoke to him about a “client” who was “looking for a short term loan of $45,000.00 for a term of 3 months”. Mr Lynch stated that the interest rate was 3% and the “client is a good client and will pay all the costs”. Mr Skinner’s affidavit did not mention Mr Carthy being present during this conversation. In his oral evidence Mr Fleming wavered in his certainty regarding whether Mr Carthy was present when this was discussed. He relayed a “belief” that Mr Carthy was present. He accepted that he did not record Mr Carthy’s presence in his affidavit but added “he was definitely there on a quite a number of occasions when the money lending was discussed” and later stated he had a “vivid recollection” of Mr Carthy being present “when … money matters were discussed”. Mr Carthy was not specifically asked about this conversation in his oral evidence. I am not satisfied that he was present during this conversation between Mr Skinner and Mr Lynch.

4. [31]

   Mr Skinner deposited $45,000.00 into Q1’s bank account. He said the loan was repaid in October 2007. This repayment appears to have been made around the same time as Mr Smart transferred $51,000 to Q1 (see [57]).

5. [32]

   In his oral evidence Mr Skinner explained that there was no documentation recording the loan and agreed it was “just sort of, a handshake”. He stated that he thought he had lent money to a third party, but after some months he pressed Mr Lynch for payment and he became “very suspicious as to what’s actually going on”.

6. [33]

   Mr Carthy stated that after he “found out about Mr Lynch’s conduct” (in 2008) he had a conversation with Mr Skinner in which the latter stated, inter alia, “You know I lent Damian $45,000. Thank Christ I got it back because I was getting pretty worried”. Mr Skinner accepted he may have told Mr Carthy about his concerns about recovering his money, but stated he “wouldn’t have said” that he lent the funds to Mr Lynch. I am not satisfied that Mr Skinner stated those words to Mr Carthy.

(4) The four Smart loans – May 2007 to October 2007

1. [34]

   Mr Smart is a commercial pilot. During 2006 he received the proceeds of his inheritance from his mother’s estate. At a time he described as “early 2007” he was referred by Mr Skinner to Q1. He recalled Mr Skinner stating that he was on his “3rd loan” and the first two had been repaid on time. The inconsistency between this statement and Mr Skinner’s evidence was not taken up with Mr Skinner.

2. [35]

   In his 2013 affidavit Mr Smart stated that in about May 2007 he accompanied Mr Skinner to Q1’s offices and met Mr Lynch. He says he spoke to Mr Lynch in the presence of Mr Skinner “about short term lending”. He recalled Mr Lynch stating that the “normal type of person” who needs such a loan needed “funds to complete [a] construction or people who needed funds to settle a purchase whilst they arrange for bank finance at a lower rate”, and the rate of interest was 4% per month which reduced to 3% per month if the payments were made on time. As noted, he recounted Mr Lynch stating that Q1 had “20 or so” private lenders that it called upon and the loans were secured via a second mortgage.

3. [36]

   Mr Smart recalled Mr Carthy joining the meeting. He said that Mr Lynch introduced him to Mr Carthy stating “Nathan is a client that is looking to get into short term private funding with Q1 and who also requires Q1 to help him with investment property finance”. Mr Smart recalled that after Mr Carthy left he said to Mr Lynch:

4. [37]

   Mr Smart recalled Mr Lynch stating that no private lending deals were available at that time.

5. [38]

   In his affidavit Mr Skinner recalled taking Mr Smart to a meeting with Mr Lynch and Mr Carthy at Q1’s offices sometime around “mid-2007”. Neither in his affidavit or oral evidence did he elaborate upon what was discussed.

6. [39]

   Mr Carthy denied meeting Mr Smart in 2007 and stated that he first met him in “late May or possibly early June 2008”.

7. [40]

   Having regard to Mr Skinner’s evidence I accept that Mr Carthy met Mr Smart at a meeting at Q1’s offices around mid-2007. I also accept that Mr Carthy understood that Mr Smart was considering putting forward funds for private lending brokered by Q1. This was not unusual for Q1. No other reason for Mr Smart meeting Mr Lynch and Mr Carthy is apparent. Otherwise I accept that Mr Lynch generally outlined a proposal for private funding in the terms outlined in [35] and [36] although I am not satisfied that he (or Mr Carthy) mentioned “20 or so private lenders”.

(ii) The first Smart loan

1. [41]

   In his 2013 affidavit Mr Smart stated that on or about the morning of 5 June 2007 he received a telephone call from Mr Lynch offering him the opportunity to participate in a “deal” which required $45,000 to complete a settlement. He recalled asking who the “client” was and seeking “details of the loan”. He said that Mr Lynch stated that the “client” was a “developer by the name of GDM”, who required $45,000, that the loan was for three months with the client having an option to extend for a further month, and the interest terms were as noted above in [35]. Mr Lynch referred to Mr Smart receiving the “mortgage documents” when the deal settled. He recalled asking Mr Lynch to send something in writing and receiving the response:

2. [42]

   On the same day Mr Lynch sent an email to Mr Smart that commenced “[f]urther to our discussion this morning, the advance to GDM is proceeding”. The email specified that the amount required from him was $45,000, the term of the loan was three months “with a month extension if required” and interest was 3% per month. The email requested the transfer of the funds to Q1’s bank account. Mr Smart transferred the funds that day. He spoke to Mr Lynch who told him the funds had been disbursed “as per the client’s instructions” and asked him to come to Q1’s offices the next day to collect the paperwork.

3. [43]

   On 6 June 2007 Mr Smart attended at Q1’s office and signed a document. It was on Q1 letterhead and dated 5 June 2007. It stated:

4. [44]

   Mr Smart said that he then had a conversation with Mr Lynch as follows:

5. [45]

   Mr Smart said that he received an “interest” payment into his bank account on 5 July 2007. He said that later that month he spoke to Mr Lynch about drawing down funds on his home loan to “invest” that is “lend … on short term private funding from time to time arranged by Q1”. He made arrangements to increase the limit by obtaining a line of credit facility.

6. [46]

   In cross-examination Mr Smart was taken to the much shorter version of this conversation in his 2010 affidavit. In that affidavit he recorded Mr Lynch stating that “Q1 Finance has been asked to fund $45,000.00” and being told that he “need[ed] to pay $45,000.00 into Q1 Finance’s bank account so that we can make it available to the borrower”.

7. [47]

   I accept that Mr Smart’s recollection as noted in [41] to [42] properly reflects the effect of what Mr Lynch stated to him. It is consistent with the contemporaneous material and its effect is not inconsistent with what he recorded in his 2010 affidavit although the words are different. In that regard, three features of the deal that was outlined should be noted. First it was proposed that the funds would be advanced to a third party borrower namely “GDM”. Q1 was a broker and it was known to both Mr Lynch and Mr Smart that it was in the business of arranging loans for its clients. If the identity of the borrower had not been discussed between Mr Lynch and Mr Smart then Mr Lynch’s email noted in [42] would have made no sense. To that end the reference to “borrower” in the document noted in [43] was not intended to be a reference to Q1 but to the “client”, that is GDM, as referred to by Mr Lynch. The document was on Q1’s letterhead. If Q1 was intended to be the borrower it would state that.

8. [48]

   Second, nothing in the exchanges or the documentation records any promise by Q1 to repay Mr Smart. To the contrary, the document at [43] refers to the “placement” of his funds by Q1 rather than the funds being borrowed by Q1. This suggests that Q1 was “placing” funds on behalf of Mr Smart with a borrower and not borrowing from Mr Smart.

9. [49]

   Third, the two documents in [42] and [43] are silent as to who is the lender to the “client”. The exchange recorded by Mr Smart at [44] suggests that Q1 was to be the legal entity that lent funds to the “client” although it was doing so “on behalf of the lenders” being the parties such as Mr Smart who provided funds. This feature of the transaction is consistent with what Mr Smart recorded in his 2010 affidavit, namely that Q1 was raising funds to fund a loan by it to a client.

10. [50]

    In his 2013 affidavit Mr Smart stated that on or about 23 July 2007 he was contacted by Mr Lynch about “another private funding deal” for $40,000 on similar terms to the first loan. He told Mr Lynch that he only had $20,000 available on a line of credit secured over his home, but had applied for an increase. Mr Lynch suggested he pay $20,000 initially and the balance when the increase was approved. Mr Smart agreed and requested he send an email with particulars of the loan. He said he asked whether he would be the “only lender” or whether there would be others and whether he would receive the mortgage documents. He said that Mr Lynch confirmed both matters. In cross examination Mr Smart was taken to his 2010 affidavit. In that affidavit he provided an abbreviated version of this conversation and stated that it occurred on 25 July 2007. He recalled that Mr Lynch’s opening words were “we need $40,000 to fund a loan that just came in”.

11. [51]

    On 24 July 2007 Mr Lynch sent Mr Smart an email advising of Q1’s bank account details and stating:

12. [52]

    The next day, 25 July 2007, Mr Smart transferred $20,000 to Q1. He emailed Mr Lynch confirming the transfer. Mr Lynch replied the same day stating “All settled”.

13. [53]

    On 31 July 2007 Mr Smart transferred a further $20,000 to Q1’s account. On that day he said he met Mr Lynch in the foyer of the building which housed Q1’s offices. Mr Lynch handed him a one page document and requested he sign. Mr Smart signed but asked “is this all I am getting”. He recalled Mr Lynch responded that “the rest of the paperwork will be coming in next week once the lawyers have issued the documents”. The document was dated “26 June 2007” and was otherwise in identical terms to the document noted at [43] except that the principal was $40,000 and the term of the loan was stated to be “Three (5) months with one (o) month extension option” (sic).

14. [54]

    Mr Smart said he queried the date on the document with Mr Lynch and was assured that a replacement would be issued. Further, in early August 2007 he said he contacted Mr Lynch seeking the “security documents” and was told the “deal ha[d] become a bit more complicated” and that, as a consequence:

15. [55]

    This aspect of the transaction is consistent with the observation in [49]. Otherwise, as is the case with the first Smart loan, I accept Mr Smart’s account of events concerning the second Smart loan as set out in his 2013 affidavit.

16. [56]

    On 31 August 2007 $1,200 was paid into Mr Smart’s bank account which he understood to be the first interest payment on the second loan. On 5 September 2007 Mr Lynch told Mr Smart that the “client” had exercised the option to extend the date for repayment of the first loan for another month. On 6 September 2007 Mr Smart received a payment of $1,350.00. He understood it to be the third interest payment on the first loan.

17. [57]

    In his 2013 affidavit, Mr Smart stated that on or about 5 October 2007 Mr Lynch telephoned him about another “private funding deal” for $51,000 for a three month term with an option to extend for 1 month with interest payable at 3% if paid on time. Mr Smart said that he inquired about receiving the “security documents” and again requested the “first two loan security documents”. He said he was assured they would be sent. Mr Smart transferred $51,000 on that day. In the corresponding part of his 2010 affidavit Mr Smart recalled being told “We need $51,000 to fund a loan that just came in”.

18. [58]

    On 8 October 2007 Mr Lynch received a payment of $2,550 which he understood to be the sum of the fourth interest payment on the first loan and the second interest payment on the second loan.

19. [59]

    Around this time Mr Lynch asked Mr Smart to sign a one page document concerning the third loan, which he did. It was similar to the document noted in [43] above. It recorded the principal of the loan as $51,000 and the term of the loan as “Three (5) months with one (0) month extension option” (sic). Mr Smart stated that at the time he signed he asked for the corrected version of the equivalent document for the second loan (see [53]). He also said that later he rang Mr Lynch about the wording of the loan document just noted. He was assured that it would be “fixed”.

20. [60]

    Mr Smart stated that on or about 25 October 2007 he telephoned Mr Lynch about repayment of the first and second loans. He was told the “client” for the second loan had exercised the option to extend the time for repayment and that the first loan had “come back”, but that Mr Lynch had “rolled it straight over into another loan” on the same terms.

21. [61]

    I accept Mr Smart’s account of events concerning the third Smart loan as set out in his 2013 affidavit.

22. [62]

    In his 2013 affidavit Mr Smart stated that on or about 29 October 2007 he received a telephone call from Mr Lynch inquiring about the funds he had left on his line of credit. He told Mr Lynch that he had $50,000 remaining. In his 2013 affidavit he said Mr Lynch stated:

23. [63]

    Mr Smart says that he again requested copies of "security documents" this time for the first, second and third loans. He says he was assured they would be provided.

24. [64]

    The emphasised portion of the extract in [62] is consistent with the observation in [49]. For Q1 to be the “holder of the security” it would usually have to be the lender. In cross-examination Mr Smart initially maintained that his understanding was that "Q1 was just setting up the loan for these people and we were still lending him the money directly". However, when pressed as to whether he “thought in October 2007” that “if … the fourth loan went bad … you would still get your interest from Q1”. Mr Smart accepted that it would not come “from Q1, no”.

25. [65]

    The conversation set out in [62] is different to what Mr Smart set out in his 2010 affidavit in which he stated that there the opening words by Mr Lynch were that “I need $40,000 to fund a loan that just came in”. Notwithstanding the differences, I accept Mr Smart’s account of events concerning the fourth Smart loan as set out in his 2013 affidavit.

26. [66]

    On 29 October 2007 Mr Smart transferred $40,000 to Q1's bank account (the "fourth Smart loan"). He says he rang Mr Lynch the next day asking for the "paperwork". He recalled that Mr Lynch said that he was travelling to Thailand but he would “catch up when I get back next week”.

27. [67]

    On 31 October 2007 $4,080 was paid into one of Mr Smart’s accounts. He understood that it represented the fifth interest payment on the first loan, the third interest payment on the second loan and the first interest payment on the third loan.

28. [68]

    Mr Smart stated that twice in December 2007 he contacted Mr Lynch about the non-payment of interest on his four loans. On 21 December a payment of $5,280 was paid into his account which he understood represented interest payments on his four loans.

29. [69]

    Mr Smart stated that in early January 2008 he again rang Mr Lynch to complain about “paperwork” for the loans and was again assured that it would be provided.

30. [70]

    In January 2008 and February 2008 Mr Smart and Mr Lynch exchanged emails about late interest payments. On 1 February 2008 Mr Smart received a payment of $5,280 which he understood represented interest payments on his four loans. On 25 February 2008 two amounts totalling $5,280 were paid into his account.

(5) The JRK loans – December 2007 to April 2008

1. [71]

   In 2007 Ms Kanters contacted Q1 seeking work as a contract mortgage broker. Some time around November 2007 she met with Mr Carthy and Mr Lynch. On or about 27 November 2007 she signed a contractor’s agreement with Q1.

2. [72]

   In her 2013 affidavit Ms Kanters stated that in December 2007 she was in Mr Lynch’s office with another contracted mortgage broker. She recalled that Mr Lynch stated:

3. [73]

   Ms Kanters recalled Mr Lynch stating the loans were “watertight”, that they were a form of bridging finance with a “guaranteed exit strategy”, that “legal contracts” had been drawn up for the loans and that the “usual loan” was for a three month period with an option for an extension of one month and an interest rate of 3%. She also recalled Mr Lynch stating:

4. [74]

   Ms Kanters recalled telling Mr Lynch that, as he had assured her that there was “no risk whatsoever”, she “would like to be offered the opportunity to provide private funding”.

5. [75]

   In her 2009 affidavit Ms Kanters recounted a conversation that was similar to that noted in [72] but did not contain any reference to the matters described in [73] and [74]. In cross-examination she explained that she omitted those matters from her 2009 affidavit because she was told it was not necessary to include the entire discussion. Nevertheless, I accept that she was told words to the effect of those set out in [72] to [74].

6. [76]

   In her 2013 affidavit Ms Kanters recalls that on or around 11 December 2007 Mr Lynch telephoned her and told her he had a “$37,000 deal”. He said the “client [was] a long standing client of Q1” and a “good client”. The proposed terms were similar to those noted above in [73]. He said the funds needed to be transferred the next morning. Ms Kanters said the funds would come from JRK.

7. [77]

   On 12 December 2007 Ms Kanters received a facsimile from Q1 that “advised the details of the loan”. She identified the facsimile as pages 6 to 8 of the exhibit to her 2013 affidavit. She states that she then transferred $37,000 from JRK’s bank account to Q1. Next she states she received a facsimile “purporting to confirm the terms of the loan” which is annexed at page 11 of the exhibit to her 2013 affidavit. However the facsimile headers on pages 6 to 8 and 11 confirm that they were in fact pages 2 to 4 and 1 respectively of a four page facsimile sent at around 9.28 am on 12 December 2007, and I so find. Ms Kanters transferred JRK’s funds after she received that facsimile.

8. [78]

   Page 1 of the facsimile was similar to the document sent to Mr Smart noted in [43] although the principal was different (ie $37,000) and the account details for repayments was JRK’s bank account. Pages 2 to 4 of the facsimile were on Q1 letterhead and relevantly stated as follows:

9. [79]

   The balance of the document made provision for acceptance by the borrower and guarantor affixing their signatures. The document was unsigned.

10. [80]

    Payments corresponding with the monthly interest payable on this loan, namely $1,110, were paid into JRK’s account on 18 January 2008, 22 February 2008, 28 March 2008 and 28 May 2008. Ms Kanters said that in mid-March 2008 Mr Lynch advised that the client had extended the period for repayment by one month. She recalled that in April 2008 she spoke to Mr Lynch and told him that she was “happy for the client to rollover in accordance with the terms of the contract”.

11. [81]

    In her 2009 affidavit Ms Kanters recounted the conversation in [76] in terms that commenced with Mr Lynch stating “I need $37,000 to fund a loan” and that he needed to “access the money in time for settlement in the afternoon”. Ms Kanters struggled to explain the discrepancies between the 2009 and 2013 affidavit. Nevertheless the version in [76] is far more consistent with the documentary material than any suggestion that Mr Lynch or Q1 were borrowing money from JRK to fund a loan to one of its clients. As was the case with Mr Smart, those documents suggested that the proposed transaction would have three features, namely that the funds would be advanced to a third party borrower being ‘Irongrow’, that there was no express promise by Q1 to repay JRK or Ms Kanters and that the lender to the client was Q1 and not JRK direct. The letter set out in [78] clearly identified the lender to Irongrow as Q1 (‘we are able to make an advance to you’). The balance of the document suggested that Q1 held the security and was the entity able to enforce it.

12. [82]

    In her 2013 affidavit Ms Kanters recalled that around 20 December 2007 Mr Lynch approached her about a “private funding deal … for $25,000”. He said it was for a “really good client” and requested the funds be sent the next morning. She asked him to “send … the documents”. He agreed.

13. [83]

    Ms Kanters recalls receiving a document on that day attached to an email. The email was not tendered but the attachment was. The document was on Q1 letterhead. It was similar to the document at [78] except that the name of the borrower was “Jaybee International Pty Ltd”, the principal was $25,000, the penalty interest rate was handwritten as 4% and not 10%, the method of payment was by direct credit to Q1’s bank account and not JRK’s and the term of the loan was stated to be “six (3) months from date of advancing of monies”. Clause 8 omitted any reference to a guarantor, however the execution part of the document referred to a “Neil Williams” as the guarantor.

14. [84]

    On the morning of 21 December 2007 Ms Kanters transferred $25,000 to Q1’s account. She said that after the transfer she received an email from Mr Lynch attaching a document signed by him similar to the document noted above (at [43]). The account details listed on that document were for JRK’s account.

15. [85]

    Payments corresponding with the monthly interest payable on this loan, namely $750, were paid into JRK’s account on 29 January 2008, 10 March 2008, 26 March 2008 and 20 May 2008.

16. [86]

    Ms Kanters states that some time in “early 2008” she showed Mr Carthy the “documents” for the first and second loans and queried with him the appropriate interest rate. She said that Mr Carthy referred her to Mr Lynch. Mr Carthy denied being shown the documents or having any discussion about JRK’s first and second loans prior to 19 May 2008. I accept his denial.

17. [87]

    In her 2009 affidavit Ms Kanters recounted the conversation in [82] in terms that commenced with Mr Lynch stating that “I need $25,000 to fund a loan” that needs to settle on the afternoon of 21 December 2007. Even allowing for the difficulties she experienced in explaining the discrepancies between the 2009 and 2013 affidavit, I accept her account of her dealings with Mr Lynch in relation to the second JRK loan as set out in her 2013 affidavit.

18. [88]

    In her 2013 affidavit Ms Kanters states that on 15 April 2008 Mr Lynch called her and invited her to participate in “another one of the private funding deals for $17,000”. He said “I need the $17,000 at very short notice”. In cross-examination Ms Kanters was referred to the equivalent part of her 2009 affidavit in which she recorded Mr Lynch stating “I need $17,000. I need to transfer the funds to the client this afternoon”. There is no relevant difference in the accounts. I accept Ms Kanters’ evidence concerning this loan as recorded in the 2013 affidavit.

19. [89]

    Ms Kanters agreed to Mr Lynch’s proposal. Later that day she transferred that sum from JRK’s account to Q1’s account. She said that she asked Mr Lynch to send her the “paperwork for the 3rd loan” and he agreed to do so when he had a “spare moment”. However she did not receive any documentation concerning that loan.

20. [90]

    In her 2013 affidavit Ms Kanters stated that in “mid-April 2008” she spoke with Mr Lynch indicating she may need access to all of her funds “that I have so far lent to clients of Q1 Finance”. She recalled him responding:

21. [91]

    Her evidence concerning this conversation was not challenged. I accept it occurred. It reinforces the third feature of the transactions noted above at [49].

22. [92]

    In her 2013 affidavit Ms Kanters states that on 30 April 2008 Mr Lynch told her that he had a client who needed $15,000 and asked if she had funds available. She told him that she needed to keep her funds but Mr Lynch stated that “I need your assistance with this loan” and that it was for “one week only”. She told him that if she will be “paid back next week with interest then I can lend $12,000”. In cross-examination she was referred to her 2009 affidavit in which she recounted Mr Lynch stating “I need $15,000 by 30 April 2008”. Despite the difficulties she had in explaining the discrepancies I accept the version recounted in her 2013 affidavit. The context of the conversations was established by the documents provided in relation to the first and second JRK loans and they clearly indicate that Mr Lynch was (supposedly) procuring funds to advance to a “client” of Q1.

23. [93]

    Ms Kanters transferred $12,000 on 30 April 2008. She did not receive any documentation from Mr Lynch in relation to this loan.

24. [94]

    Ms Kanters stated that between 9 May 2008 and 14 May 2008 she repeatedly attempted to contact Mr Lynch but was unable to reach him. Eventually she spoke to him on 14 May 2008 to complain about the failure to repay the fourth loan, the outstanding interest payments and the absence of documentation for the third and fourth loans. She says he assured her that she would be paid that week. I accept that evidence.

(6) March to July 2008 – Mr Smart’s dealings with Mr Carthy

1. [95]

   There is a sharp dispute between Mr Smart and Mr Carthy about what Mr Smart said to Mr Carthy in the period March to July 2008 and when it was stated. The dispute is potentially significant given that the relevant insuring clause of the policy required that any claim be made on the insured prior to the expiration of the policy on 31 May 2008 (see below).

2. [96]

   In his 2013 affidavit Mr Smart stated that in March 2008 he purchased an investment property. He said he requested Mr Lynch assist him in obtaining finance. He said he attempted to contact Mr Lynch but was unable to do so. He said he then contacted Mr Carthy “and requested that he get Mr Lynch to call me back concerning my loans and my application for finance”. He said that Mr Carthy “took over” his application for finance and submitted it to the Commonwealth Bank. He annexed a response from the Commonwealth Bank acknowledging the application dated 23 April 2008.

3. [97]

   On 1 April 2008 a payment of $5,280 was made into Mr Smart’s bank account. It was the last payment he received.

4. [98]

   Mr Smart stated that in early April 2008 he repeatedly attempted to contact Mr Lynch but to no avail. He said he settled on the purchase of the investment property by drawing down all his available finance including credit cards. He said that on 14 April 2008 “upon completion of the purchase of the investment property” he rang Mr Carthy complaining that Mr Lynch would not return his calls. He said that he told Mr Carthy:

5. [99]

   Mr Smart said that he attended a meeting with Mr Carthy in mid April 2008 and handed him the three documents noted in [43], [53] and [59]. He recalled Mr Carthy saying he had never seen those documents previously but assuring him that his money was “secure”. He said that he followed up with Mr Carthy but he advised him that he could not contact Mr Lynch.

6. [100]

   After the meeting with Mr Carthy that he said occurred in April 2008, Mr Smart said that he sought help from his accountant who provided him with a “blank form 509(h) statutory demand” which he completed and sent to Q1’s offices on 5 May 2008. A copy of the demand was annexed to Mr Smart’s 2013 affidavit. It was addressed to Q1 and asserted that the “company [ie Q1] owes Nathan Smart … as at 5 May 2008 the amount of $181,280 being the total amount of the debts”. Mr Smart explained that that figure comprised the principal of $176,000 and one month’s interest of $5,280.

7. [101]

   Mr Smart’s accountant, Mr Kenny Nham, swore an affidavit. He recalled having a telephone conversation with Mr Smart “in early 2008” in which Mr Smart said to him “I have lent money on some short term loans through a company called Q1” and that Mr Smart wanted assistance in recovering his money. Mr Nham told Mr Smart that “if it is a company that owes you money, the best way to get them to pay is to issue a Statutory Demand”. He recalled Mr Smart asking about a statutory demand. Mr Nham agreed to send him a copy of the relevant form.

8. [102]

   Mr Smart recalled Mr Carthy contacting him shortly afterwards complaining about the demand and stating that he had been trying to contact Mr Lynch. Mr Smart says he stated “I want my money back now”.

9. [103]

   Mr Carthy denied speaking to Mr Smart in mid-March 2008. He agreed that he submitted a loan application to the CBA for Mr Smart on 22 April 2008.

10. [104]

    Mr Carthy denied speaking to Mr Smart in April 2008 and denied that at any time in April or May 2008 Mr Smart said that he wanted Q1 to repay money that had been “lent to Q1’s clients”. Instead Mr Carthy said he first spoke with Mr Smart in “late May or possibly early June 2008” after he overheard Q1’s receptionist telling Mr Smart that she had passed on his messages for Mr Lynch. According to Mr Carthy this occurred “approximately a week to a week and half after he” spoke and met with Ms Kanters on or around 19 May 2008 (referred to below at [120]).

11. [105]

    Mr Carthy recalled Mr Smart stating that he was “wondering when my interest payment will be made on my investment with Q1”, that he “invested a lot of money with Damian Lynch” and that he “invested it in short term lending”. He recalled asking Mr Smart to bring his documents to a meeting shortly afterwards and it was during that meeting that he was shown the documents noted in [43], [53] and [59] above.

12. [106]

    Mr Carthy said that immediately after this meeting he attempted to contact Mr Lynch but was unsuccessful. He said he spoke to him the next day. He told Mr Lynch about his meeting with Mr Smart and he queried the “paperwork” shown to him by Mr Smart with Mr Lynch. He recalled Mr Lynch stating:

13. [107]

    Mr Carthy said they arranged to meet that night. During that meeting he said Mr Lynch stated:

14. [108]

    Mr Lynch said that he contacted Mr Smart the next day and said:

15. [109]

    Mr Carthy denied seeing the statutory demand and denied speaking to Mr Smart in early May 2008 about it. He denied that at any time prior to 31 May 2008 Mr Smart asked Mr Carthy “to pay him the money that he had lent”. These assertions were qualified in his oral evidence as follows:

16. [110]

    In re-xamination Mr Carthy was taken back to these questions and asked:

17. [111]

    These answers are of potential significance to whether a claim was made under the Policy prior to 31 May 2008. I address that issue below (at [186]).

18. [112]

    In June 2012 he sent Mr Smart an email attaching a copy of the statutory demand. His email stated “look what I found while hunting through documents from Q1”.

19. [113]

    My misgivings about Mr Smart’s reliability assumes real significance at this point. An illustration of the difficulties with Mr Smart’s narrative concerns the conversation he contends occurred on 14 April 2008 after he completed the sale of his property (see [98]). The documentary evidence confirms that the sale occurred on 7 May 2008.

20. [114]

    I have set out my observations of Mr Carthy’s evidence in [19] above. Subject to one matter, in relation to the disputed evidence between Mr Smart and Mr Carthy in this period I accept Mr Carthy’s evidence as recounted at [103] to [108]. Mr Smart’s estimate of the timing of the conversation referred to in [104] and the answers he gave in the above extract are such that I am satisfied it took place prior to 31 May 2008.

21. [115]

    The one matter of exception concerns whether Mr Smart raised with Mr Carthy recovering the entirety of the amounts he advanced or just the interest payments. In light of the concession noted in [109] I accept that Mr Smart made Mr Carthy aware that he was seeking the recovery of the entirety of the sums he advanced. This is supported by the chronology of events, Mr Carthy’s evidence places the timing of their conversations in late May 2008. The later the conversations occurred the greater the likelihood that Mr Smart sought recovery of all the amounts that were advanced. This is reinforced by the terms of the conversations that Mr Carthy recounts he had with Mr Lynch in which the latter repeatedly referred to Mr Smart having “all” of his money returned (see [106] and [107]). However, subject to considering the effect of Mr Carthy’s concessions (see [186]), I am not satisfied that Mr Smart asserted that Q1 was obliged to repay the four Smart loans.

22. [116]

    Further, consistent with the approach noted in [18], I accept that Mr Smart sent the statutory demand to Q1’s registered office on or about the date it bears, namely 5 May 2008, and Q1 received it. Mr Smart’ evidence was that he sent the statutory demand by ordinary mail. It was never expressly put to Mr Smart that it was not sent. Mr Carthy stated that Mr Lynch collected Q1’s mail. It is likely that he received it but did not show it to Mr Carthy at the time. Mr Lynch’s statements to Mr Carthy about Mr Smart recovering all of his money suggest that at least he, that is Mr Lynch, was aware that Mr Smart was seeking recovery of all of his funds.

(7) May 2008 – Ms Kanters and Mr Carthy

1. [117]

   On 15 May 2008 Ms Kanters sent Mr Lynch an email about the outstanding “interest” payments. In her 2013 affidavit she states that on 19 May 2008 she rang Mr Carthy telling him that she had difficulty contacting Mr Lynch. She says she told Mr Cathy that she made “4 loans to clients of Q1”, that the interest payments he had promised had not been paid, that the principal of the fourth loan had not been repaid, and that “I want all my money back”.

2. [118]

   Ms Kanters recalled Mr Carthy stating that he would speak to Mr Lynch and have him call her back. At 8.20am on that day she forwarded her email of 15 May 2008 to Mr Carthy. At 7.22pm that evening Mr Lynch sent an email response in which he stated, inter alia, that her “account will be replenished Wednesday”.

3. [119]

   Ms Kanters checked JRK’s account on 22 May 2008 but no further payments had been received. On 27 May 2008 she sent an email to Mr Lynch. Her email stated:

4. [120]

   Mr Carthy recalled Ms Kanters contacting him on 19 May 2008 asking about “interest payments” and that he said “What interest payments”. He states the conversation continued as follows:

5. [121]

   Mr Carthy said he spoke to Mr Lynch about his conversation with Ms Kanters including stating “[Ms Kanters] says that she is owed interest on short-term loans you organised”. He says that Mr Lynch advised him that it was “all in hand”, the “loans have been placed with Irongrow and JB” and that she would be “repaid shortly”.

6. [122]

   Mr Carthy stated that he met Ms Kanters the next day and Ms Kanters showed him some “paperwork”. He stated he told her that he did not understand the loans, that “it’s not something that Q1 does” and that he would speak to Mr Lynch. In her affidavit sworn 9 December 2013, Ms Kanters denied that Mr Carthy stated this but otherwise did not address whether the meeting occurred.

7. [123]

   Mr Carthy stated that he spoke to Mr Lynch who assured him that it was “all secured” and that Ms Kanters would be repaid soon. He stated that he then spoke to Ms Kanters and passed on Mr Lynch’s assurance and stated that he was “going to keep investigating to see if I can work out what has happened”. He stated that at no time prior to 31 May 2008 did Ms Kanters or JRK “ask me to pay her the money that, through Damian, she had lent”.

8. [124]

   I prefer and accept Mr Carthy’s evidence in relation to these discussions. His version is more consistent with the emails that were generated, especially Ms Kanters’ email of 27 May 2008 to Mr Lynch in which she referred to “funds which have been invested through you”.

9. [125]

   The concessions made in cross examination by Mr Carthy noted in [109] concern Ms Kanters as well as Mr Smart. I accept that Ms Kanters told Mr Carthy that she wanted her funds returned. This was the effect of her email sent on 27 May 2008 (see [119]). By this point she must have been concerned about their recoverability. However she conceded in cross-examination that she did not say to Mr Carthy words to the effect that “Q1 has to pay my money back”.

(8) Closure of Q1’s office

1. [126]

   Mr Smart stated that in June 2008 Mr Carthy rang him and said that he was closing Q1’s office. He told Mr Smart to “Leave it with me. I will get to the bottom of it and see what has happened to your money. I will go through the files and see if I can find where your money went”.

2. [127]

   Mr Carthy stated that any such conversation did not occur until late July 2008. He said that the lease of Q1’s office was in Mr Lynch’s name and that in early July 2008 he learnt the landlord was pressing for the payment of outstanding rent. He said that he pressed Mr Lynch but eventually he decided to move Q1 out of its offices on Friday, 25 July 2008. He denied assuring Mr Smart that he would see if he could find where the money went.

3. [128]

   Mr Smart said that in June 2008 he went to Mr Carthy’s home and Mr Carthy showed him boxes containing Q1’s files. Mr Carthy recalled Mr Smart and Ms Kanters coming to his home “three or four times” after July 2008 and that Mr Smart came with his father.

4. [129]

   Consistent with the approach outlined above, I accept Mr Carthy’s evidence in relation to these events.

5. [130]

   As noted, in July 2008 JRK’s then solicitors served a statutory demand upon Q1 for “the amount of $99,833 being the total of the amounts of the debts described in the schedule” to the demand. The schedule listed the details of the first, second, third and fourth JRK loans.

6. [131]

   Throughout August and September 2008 Ms Kanters exchanged emails with Mr Carthy and Mr Lynch in an effort to recover her funds. In an email dated 13 August 2008 to Mr Lynch, Ms Kanters recounts that her review of Q1’s bank statements revealed that Mr Lynch had not placed her funds with “clients” of Q1, that she had contacted the “clients” referred to in the documents noted in [78] and [83] above, and they “had no knowledge of the matters”. In cross-examination Ms Kanters suggested that her inquiries revealed the funds went to a person associated with Irongrow. I prefer and accept the contents of her email on this topic.

7. [132]

   Eventually each of Mr Smart and JRK commenced proceedings in the Federal Court against Q1, Mr Lynch and Mr Carthy in 2009. Default judgments were entered against Mr Lynch in March 2010. Mr Carthy was made bankrupt in February 2010. Both proceedings against Q1 were discontinued. It appears to be common ground that at some point Mr Lynch left Australia.

(9) Section 601AG

1. [133]

   As noted, each of the plaintiffs brings a claim against Vero under s 601AG of the Corporations Act. It provides:

2. [134]

   In Almario v Allianz Australia Workers Compensation (NSW) Insurance Ltd [2005] NSWCA 19; 62 NSWLR 148 at [21] Ipp JA (with whom Hodgson JA and Hunt AJA agreed) held that the liability referred to in s 601AG(a) must subsist at the date of company’s de-registration. In Tzaidas v Child [2009] NSWSC 465 (“Tzaidas”) McCallum J held that a “liability” for the purposes of s 601AG(a) need not be a liability that had been determined prior to de-registration but included a liability which, immediately before deregistration, was contingent or inchoate (at [24] to [27] and [33]).

3. [135]

   In this case all the events giving rise to the alleged liability on the part of Q1 to JRK and Mr Smart occurred prior to its de-registration on 4 March 2011. It follows that the first issue that arises is whether each of JRK and Mr Smart have established that Q1 had a liability to them at that date and, if so, the quantum of that liability.

4. [136]

   The second question that arises is whether immediately before Q1’s de-registration the policy “covered” Q1’s liability to JRK and Mr Smart. In Tzaidas McCallum J held that s 601AG(b) did not mean that the insurer was obliged to pay the liability of the deregistered company immediately before its de-registration. Instead, it need only be shown that the “scope of the policy extended to the risk that had manifested in the particular case” (at [44] to [45]).

(10) Liability of Q1 to JRK and Mr Smart

1. [137]

   There was no real dispute that Q1 was liable to each of JRK and Mr Smart, but there was a substantial amount of jockeying by the parties concerning the nature of that liability. The plaintiffs sought to weave through the defences of contributory negligence and proportionate liability and a variety of exclusion clauses in the policy.

2. [138]

   Each of Mr Smart’s and JRK’s Amended Statements of Claim pleaded causes of action for breach of contract, misleading and deceptive conduct contrary to former s 52 of the TPA, breach of fiduciary duty, deceit, and for moneys had and received. However in his written submissions Counsel for Mr Smart and JRK abandoned the last three claims. I will address the other two.

3. [139]

   The pleading of a breach of contract was the same for each loan. It was alleged that, on a certain date, Mr Lynch made representations to either Ms Kanters or Mr Smart that a “client of Q1” wanted to borrow a certain sum on various terms, that an offer was made “on behalf of Q1” for JRK or Mr Smart to “loan funds” in accordance with the representations, that on the basis of the representations and the offer either JRK or Mr Smart were induced to advance a sum “to Q1 which funds were to be lent” to the client and the offer was accepted giving rise to a “loan agreement”. Later parts of the pleadings assert that JRK or Mr Smart made a “demand upon Q1” for repayment of the principal advanced and that Q1 breached the terms of the loan agreements in that (i) the sum advanced was not lent to the client; (ii) the principal was not repaid to JRK or Mr Smart; (iii) interest was not paid; (iv) and there was no mortgage or personal guarantee to secure the repayment. The relief claimed is described as, inter alia, “[d]amages for the amount of the capital loss”.

4. [140]

   Vero (correctly) pointed out that the pleading was ambiguous as to whether it was pleading that the pleaded “loan agreement” involved a loan to Q1 or a loan to a client of Q1 arranged by Q1. This was more than a pleading quibble in that the characterisation of the type of transaction that Mr Lynch was spruiking was of potential significance to whether Q1’s liability was covered by the policy. Thus Vero contended that it only provided cover for broking activities and did not underwrite Q1’s loans.

5. [141]

   I have already adverted to three features of the transaction proposed to Mr Smart by Mr Lynch (see [47] to [49]). Those features are also applicable to the transaction he promoted to JRK. At no point did Mr Lynch promise that Q1 would repay any loan. However, he provided JRK with documents and made statements to both it and Mr Smart indicating that it was Q1 who was to act as the legal entity that lent funds to the client (see [78] and [83]). The participation of each of JRK and Mr Smart was treated as a “placement” of funds ([43]) or as an ”investment” ([119] and [120]). The agreement arrived at between each of JRK and Mr Smart on the one hand and Q1 on the other involved them “placing” funds with Q1 for it to lend on their behalf and other alleged lenders to Q1’s clients. In effect, Mr Lynch said that Q1 was to act as the lending entity and manager of the loans. As such it was obliged to account to JRK and Mr Smart for amounts received from the borrower but it did not promise to make those payments out of its own funds.

6. [142]

   The arrangement promoted by Mr Lynch to Mr Smart and JRK was broadly analogous to a managed fund in which Q1 pooled funds raised from investors for lending by it to its clients. Thus I accept that the plaintiffs established that form of agreement between themselves and Q1. Despite its shortcomings the plaintiffs’ statement of claim encompasses an agreement of that kind.

7. [143]

   What did Mr Lynch (and Q1) do with the funds received from Mr Smart and JRK? I am satisfied that they were not lent to any of Q1’s clients (including Irongrow or BDM) and that they were misappropriated by Mr Lynch. Four matters support this finding. First, there is the terms of Ms Kanter’s email dated 13 August 2008 (see [131]). Second, in his oral evidence Mr Smart stated that he and Ms Kanters reviewed Q1’s bank statements. He said they were able to trace the receipt by Q1 of the funds but “Damian had just gone and drawn out 20,000 of it in five lots at the bank and who knows where it went”. Third, the evasiveness of Mr Lynch in his dealings with Mr Smart and Ms Kanters, especially his repeated refusal to provide supporting documents, supports the conclusion that there was no “client” borrower and that he misappropriated the funds. This is also supported by the absence of documents for Mr Skinner’s loan. Fourth, all of Mr Smart, Ms Kanters and Mr Carthy have had access to Q1’s books and records yet nothing was tendered to demonstrate that the funds received by Q1 were lent to any third party “client”.

8. [144]

   I have set out the four pleaded allegations of breach of the contract between Q1 and each of JRK and Mr Smart in [139] above. It follows from the above analysis that the second and third allegations of breach fail. Q1 did not promise to repay the principal or interest. However the first allegation of breach is made out. It was a term of the various agreements that the funds would be lent to a third party client (or at least Q1 would endeavour to lend it). Q1 wholly failed to do so. In circumstances where there was no client and Q1 retained the funds (or they were used for Mr Lynch’s purposes) the appropriate measure of damages in contract for the breach is the amount wasted by the promise that there was a client borrower when there was not (McRae & Anor v Commonwealth Disposals Commission [1951] HCA 79; 84 CLR 377, at 414 to 415 per Dixon and Fullagar JJ). It is not necessary to consider the fourth alleged breach in circumstances where no loan to a third party client was arranged.

9. [145]

   As noted, each of the plaintiffs also pursued a claim for misleading and deceptive conduct contrary to former s 52 of the TPA. The pleadings had their deficiencies but the essence of the pleaded case in misleading conduct was the making of a representation that there was a client of Q1 seeking to borrow funds and that funds advanced to Q1 would be lent to that client when there was no such client and no intention on the part of Mr Lynch and thus Q1 to make any loan. Given the above findings, that case has been made out. Although it was not pleaded Q1 clearly was a trading corporation and, in any event, many of Mr Lynch’s representations were uttered over the telephone (TPA; s6(3)).

10. [146]

    Ms Kanters deposed that she advanced each tranche of funds to Q1 “relying on the words spoken to me by Mr Lynch”. Although I have not accepted all of Ms Kanters’ evidence, I accept that part to the extent that Mr Lynch told her that there was a client of Q1 to whom funds would be advanced. Mr Smart did not expressly address this issue but, given the findings I have made, the inference is overwhelming that, had Mr Lynch not represented that funds would be advanced to a client, Mr Smart would not have transferred funds to Q1.

11. [147]

    The amended statement of claim did not descend to identify the provision of the former TPA under which recovery was sought. Instead it only referred to recovering “damages”. The parties appear to have treated it as a claim under former s 82(1) of the TPA. Subject to what follows, the above findings suffice to establish an entitlement in each plaintiff to recover their lost principal from Q1 under former s 82(1) of the TPA.

12. [148]

    In its defence Vero pleaded that there should be reductions in any judgments in favour of the plaintiffs on account of contributory negligence by reason of the (alleged) carelessness of Mr Smart and Ms Kanters. Vero also pleaded that there should be a reduction on the basis that the plaintiffs’ claims were “apportionable claims” within the meaning of s 34 of the Civil Liability Act and former s 87CB of the TPA. In the case of JRK, Vero pleaded that the “concurrent wrongdoers” were said to be Ms Kanters as a director of JRK and Mr Lynch. In the case of Mr Smart the concurrent “wrongdoer” was said to be Mr Lynch.

13. [149]

    Counsel for Mr Smart and JRK contended that the proportionate liability provisions did not apply to proceedings under s 601AG of the Corporations Act. Both he and Counsel for Vero referred to Almario. In Almario the Court of Appeal held that a former employee could obtain an extension of a limitation period provided for in s 151D(2) of the Workers Compensation Act 1987 in proceedings against the insurer of their deregistered employer under s 601AG of the Corporations Act (at [1] per Hodgson JA, at [42] per Ipp JA and at [48] per Hunt AJA). In so finding Ipp JA stated:

14. [150]

    As noted, Almario concerned the raising of a limitation defence in circumstances where the relevant legislation, namely the Workers Compensation Act 1987, did not expressly accommodate it being invoked by someone other than the employer (see Almario at [13]). The Court of Appeal departed from the express words of the text of s 601AG to accommodate that outcome, considering that it was consistent with a “purposive construction” (Almario at [43] per Ipp JA). The issue confronting the Court of Appeal in Almario was far more difficult than the issue raised at this point by Mr Smart and JRK. In this case, the raising of a defence of contributory negligence and reliance on the proportionate liability provisions are matters that go directly to the existence and quantum of the “liability” referred to in s 601AG(a), as well as the “amount that was payable to the company under the insurance contract”.

15. [151]

    In his written submissions Counsel for Mr Smart and JRK submitted that the above passages from Almario supported his submission that Vero cannot raise any defence under s 34 of the Civil Liability Act. He contended that “had the plaintiffs sued a solvent Q1 the actions would simply have been for a money count for recovery of a debt”. I confess to not understanding this submission. In any event the plaintiffs abandoned each of their money had and received counts and the entirety of their case in this Court involved an emphatic rejection of the suggestion that they were seeking to recover a debt.

16. [152]

    I am satisfied that s 601AG enables Vero to raise claims in contributory negligence and proportionate liability, assuming they are otherwise available to defeat or mitigate the causes of action that the plaintiffs had against Q1.

17. [153]

    The parties agreed that the relevant form of Part 4 of the Civil Liability Act was that brought into force by the Civil Liability Amendment Act 2003 (and prior to its amendment by clause 3.2 of schedule 3 of the Fair Trading Amendment (Australian Consumer Law) Act 2010). Within Part 4, s 34 of the Civil Liability Act provided:

18. [154]

    In Perpetual Trustee Company Ltd v CTC Group Pty Ltd (No 2) [2013] NSWCA 58 at [22] Macfarlan JA construed s 34(1)(a) as only applicable if “the absence of reasonable care was an element of the, or a, cause of action upon which the plaintiff succeeded”. In the same case at [42] Barrett JA posited a wider inquiry, namely:

19. [155]

    This reflected the approach in a previous decision of his Honour at first instance (Reinhold v NSW Lotteries Corporation (No 2) [2008] NSWSC 187 at [19] - [30]; “Reinhold”).

20. [156]

    It is not necessary to decide between these approaches. Whichever one is applied leads to the conclusion that the plaintiffs do not have “apportionable claims” against Q1 within the meaning of former s 34 of the CLA. The absence of reasonable care is not an element of their contract claim against Q1. Neither the manner in which that claim was pleaded or this Court’s findings warrants a conclusion that it involves an action for damages arising from a failure by Q1 to take reasonable care. Self evidently the claim under the TPA does not fall within the above version of s 34 of the CLA.

21. [157]

    The relevant form of the proportionate liability provision of the TPA was that in force from 26 July 2004 (following the enactment of the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004) until the commencement of the Competition and Consumer Act 2010 (Cth) on 1 January 2011. Those parts of the former TPA still have ongoing effect in respect of events that occurred prior to its repeal (Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010; Schedule 7; clause 6).

22. [158]

    The critical provision is former s 87CB which was similar to s 34 but needs to be set out in full:

23. [159]

    The application of this provision to this matter is not straightforward. The “claim” in contract does not fall within s 87CB(1) but the “claim” for damages under s 82(1) does. The question arises as to whether s 87CB(2) renders them a “single apportionable claim” for the purposes of applying Part VIA. In Selig & Anor v Wealthsure Pty Ltd [2015] HCA 18 the High Court held that the equivalent to s 87CB in the Corporations Act 2001 (Cth), namely s 1041L, only collates apportionable claims under the equivalent to s 52, namely s 1041H, into a “single apportionable claim” and does not collate an apportionable claim under that provision with non-apportionable claims under other provisions of the Corporation Act into a single apportionable claim (at [31] and [37] per French CJ, Kiefel, Bell and Keane JJ and at [54] per Gageler J).

24. [160]

    It follows that the proportionate liability provisions of the TPA are not available in respect of JRK and Mr Smart’s claims in contract. In light of that conclusion it is not necessary to consider their application to the claim under the TPA.

25. [161]

    A claim of contributory negligence can only be raised against a claim in contract if the relevant act or omission of Q1 “amounts to a breach of a contractual duty of care that is concurrent and co-extensive with a duty of care in tort” (Law Reform (Miscellaneous Provisions) Act 1965, s 8; otherwise see Astley v Austrust [1999] HCA 6; 197 CLR 1). The breach of contractual duty identified in [144] was not of that character.

26. [162]

    During argument the Court was referred to s 35(3)(a) of the Civil Liability Act as the source of the power to reduce either of the plaintiff’s claims on account of contributory negligence. Subsection 35(3)(c) is found within Part 6 of the Civil Liability Act dealing with proportionate liability. It provides that, in apportioning responsibility between defendants, there is to be an exclusion of the proportion of the damage or loss “in relation to which the plaintiff is contributorily negligent”. However that is qualified by the words “under any relevant law”. The “relevant law” referred to is some other law that enables a reduction in the plaintiff’s claim for contributory negligence (such as s 8 of the Law Reform (Miscellaneous Provisions) Act 1965): Selig at [34]. As there is no “relevant law” applicable to the plaintiff’s contract claim that allows a reduction for contributory negligence, it follows that s 35(3)(a) is not engaged even if the claim was otherwise an apportionable claim, which it is not.

27. [163]

    Although I was not referred to it, I note that with effect from 26 July 2004 former s 82(1B) of the TPA enabled a reduction in damages awarded under s 82(1) for the contributory negligence of a plaintiff (Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004, s 3; Schedule 3, item 5). Subsection 82(1B) was repealed with effect from the commencement of the Competition and Consumer Act 2010 (Cth) on 1 January 2011 but, as noted, it and the remainder of the former TPA still has ongoing effect in respect of events that occurred prior to its repeal.

28. [164]

    Even if s 82(1B) were otherwise applicable, it would not assist Vero because, as between the cause of action in contract and for breach of s 52 of the TPA, the plaintiffs are entitled to take the superior remedy (Perpetual Trustee Co Ltd v Milanex Pty Ltd (in liquidation) [2011] NSWCA 367 at [86] per Macfarlan JA). As noted their action in contract is not subject to any claim in contributory negligence.

29. [165]

    It follows that both JRK and Mr Smart have established a “liability” on the part of Q1 to them in contract that would entitle them to recover damages representing the lost principal on their loans less the interest “payments” that were made. The liability does not extend to recovering interest at the rates promoted by Mr Lynch as Q1 did not underwrite them, but they could recover interest at the rates prescribed in s 100 of the Civil Procedure Act 2005. They have also established a liability in the form of a right of recovery under s 82(1) of the TPA. The quantum of that liability could be affected by Vero’s allegations of contributory negligence and its invocation of proportionate liability provisions. However as Q1 is also liable in contract it is unnecessary to consider that further.

(11) Did the Policy cover Q1’s liability?

1. [166]

   There remains to consider whether the policy provided cover for the liability of Q1 to JRK and Mr Smart.

2. [167]

   The policy describes itself as a “Professional Indemnity Insurance Policy for the Mortgage and Finance Industry”.

3. [168]

   The Insuring Clause in the policy provides:

4. [169]

   The policy contains the following definitions:

5. [170]

   As noted the Schedule to the Policy defines Q1’s Professional Services as “Mortgage Broker / Finance Broker / Mortgage Originator / Mortgage Manager and Debt Reduction”.

6. [171]

   In addition to the "insuring clause", the clause entitled "Insurance Clarification" provides as follows:

7. [172]

   There are two relevant exclusions to the policy:

8. [173]

   The Policy includes a number of so called “Automatic Extensions” including a write back to the fraud exception just noted which is in the following terms:

9. [174]

   Vero contended that cover does not extend to any liability of Q1 to the plaintiffs for five reasons. First, it contended that the plaintiffs have not established a “civil liability for compensation” within the meaning of the insuring clause. Second, it contended that no “claim”, as defined, was made against the insured during the period of insurance. Third, it contended that the “matters pleaded” by the plaintiffs do not “result … from the conduct of the Professional Services”. Fourth, it contended that it was not liable to indemnify Q1 by reason of the assumption of liability exclusion clause. Fifth, it contended that it was not liable to indemnify Q1 by reason of the fraud exception and that it avoids the write back clause because Mr Lynch was not an employee of Q1.

10. [175]

    I will deal with each in turn.

(i) “Civil Liability for Compensation”

1. [176]

   Vero contended that neither JRK or Mr Smart sought to “establish a civil liability for compensation”. Instead it was contended that the “real cause of [their] loss was Lynch’s embezzlement” and that only gives rise “to a claim against Q1 for monies had and received, not for a claim for compensation [authority cited]”. Vero’s written submissions stated:

2. [177]

   The insuring clause in the policy provides cover for “civil liability for compensation” (as well as for claimant’s costs, etc). It does not provide cover for “claims”. The latter part of the above submission reverts to analysing the “claims”, whereas the present issue concerns the characterisation of the “liability” of Q1 to the plaintiffs. I will return to address the reference to “claim” in the insuring clause but it suffices to note at this point that the relevance of the definition of “claim” to the “liability” of Q1 is that there must be a connection between the “liability for compensation” and a “claim” (as defined) in that the “liability for compensation” must be “in respect of” a claim made and notified during that period.

3. [178]

   Further, even though the definition of “claim” also incorporates the concept of “compensation”, it does not mean that the liability established must precisely correlate with the claim that was first made and notified. The words “in respect of” allow significant latitude. This is for good reason because, as noted by Allsop J (as his Honour then was) in McCarthy v St Paul International Insurance Co Ltd [2007] FCAFC 28; 157 FCR 402 at [76]:

4. [179]

   Thus the critical question is to characterise the nature of the liability that has been established. This is determined by reference to the facts that give rise to the liability rather than the form of the liability (see Australia & New Zealand Bank Ltd v Colonial & Eagle Wharves Ltd; Boag (Third Party) [1960] 2 Lloyd’s Rep 241; 255). Even if one accepts the first part of Vero’s submission as to the “real cause” of the plaintiffs’ loss, that is not determinative of the nature of the liability. The liability of Q1 has its origins in the promise by Mr Lynch on behalf of Q1 that funds advanced by each of JRK and Mr Smart would be lent to a third party client of Q1, the failure of Q1 to undertake that because there was no such client, and its failure to repay because Mr Lynch misappropriated the funds. Adopting the language of Harper JA in Kyriackou at [51] to [52] quoted in the above passage, this has given rise to a liability to pay damages not a debt and “damages” are synonymous with “compensation”. The liability arises from a breach of a duty or an obligation namely the obligation to use the funds to effect the lending transaction. I am satisfied that the plaintiffs have established “a liability for compensation” within the meaning of the insuring clause.

5. [180]

   For the sake of completeness it is necessary to place the passage from Kyriackou cited by Vero in context. The appellant in Kyriackou was the respondent to proceedings brought by the Australian Securities Investment Commission that alleged that he contravened s 601ED of the Corporations Act by operating an unregistered managed investment scheme (at [13]). The details of the alleged scheme were not made available to the Court (at [13]) but it appears to have been alleged that he solicited funds for companies in a group he operated to provide emergency funding to land owners and builders (at [15] to [16]). ASIC sought declaratory and injunctive relief as well as an order that the scheme be wound up (at [9]). There was no claim that any investor “had suffered any civil damages” (at [15]). The proceedings were eventually discontinued (at [17]). The appellant sought recovery of his costs under a professional indemnity insurance policy that provided indemnity for any “[l]oss arising from any Claim in respect of civil liability for breach of a duty owed in a professional capacity” where “[l]oss” meant amounts payable “as civil compensation or civil damages” and included defence costs. A “[c]laim was defined as “… a written demand for, or an assertion of a right to, civil compensation or civil damages” arising out of the insured (or his firm’s) business (Kyriackou at [2] to [6]).

6. [181]

   Hence in the passage extracted in [176] Harper JA referred to the “available evidence” as only suggesting that any claims of the aggrieved investors were for restitution or debt due and payable. In Kyriackou there was no material suggesting any basis for an allegation of a breach of any duty owed to the investors. The return of investor funds is something that might be expected to flow from a finding that the insured was operating an unregistered managed investment scheme and an order that it be wound up. For the reasons already noted, in this case the nature of Q1’s liability flowed from a breach of a duty or obligation owed to the plaintiffs that sounds in damages.

(ii) Claims made on insured during the period of insurance

1. [182]

   To engage the insuring clause it is not only necessary that there be a “civil liability for compensation”, the liability must be “in respect of any Claim … first made against the insured and notified to the Insurer during the period of insurance” (resulting from the conduct of professional services). The period of insurance expired on 31 May 2008. The Plaintiffs contended, and Vero denied, that each of them made a claim, as defined, upon the insured, ie Q1, during the period of insurance.

2. [183]

   Counsel for the plaintiffs contended that it was sufficient that either of them required the “return of my funds” and made a “request for moneys for funds the equivalent of what [each] put in is a claim”. Absent the definition of claim that might be sufficient to constitute “claim” in that it usually means a “demand for something as due, assertion of a right to something” (Walton v National Employers’ Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 at p 82E per Bowen JA; “Walton”), although the mere invocation of a contractual right to recover something will not usually amount to a demand (Walton at p 83; Sutton on Insurance Law, 4th edition, Thomson Reuters at [23.300].)

3. [184]

   However in this case the definition of “claim” requires a demand “for compensation”. It follows from the above passage from Kyriackou that it is not sufficient to simply require the return of funds advanced in accordance with the arrangements that were agreed upon. However inelegantly expressed, it requires some form of assertion of a “breach of duty or obligation” (Kyriackou at [52]) or, as Allsop J stated in McCarthy, an “assertion of the insured’s responsibility for a disadvantageous position of the claimant” (see [76]; Walton at p 83C).

4. [185]

   Counsel for the plaintiff nominated two documents as recording the making of a demand upon Q1 within the relevant period, namely Mr Smart’s statutory demand sent on or about 5 May 2008 (see [100]) and Ms Kanters’ email of 27 May 2008 (see [119]). However neither of those documents made any assertion of a breach of a duty or obligation. Ms Kanters’ email of 27 May 2008 only sought repayment of certain amounts in apparent accordance with some agreed “investment” terms. Mr Smart’s statutory demand simply sought the repayment of an alleged debt.

5. [186]

   The policy does not require the demand be in writing. However I have generally accepted Mr Carthy’s version of the discussions in April and May 2008. With one possible exception his evidence does not support the contention that any oral claim was made upon Q1 prior to 31 May 2008. The possible exception is the concession he made in cross examination extracted at [109] above, especially the reference by Mr Carthy to “Q1 somehow [making] good”. While it is unclear, this appears to be a reference to what he stated in re-examination (see [110]), namely that both Mr Smart and Ms Kanters wanted assistance in ascertaining “whether their funds had gone and how they could get them returned”; ie the concept of “make good” involved Q1 assisting them recovering funds from the non-existent third party lenders. This is consistent with the concession given by Ms Kanters noted in [125]. The imprecision of the evidence on this topic has left me unsatisfied that Mr Carthy’s concessions establish that a demand for “compensation” was made on Q1 by either JRK or Mr Smart prior to 31 May 2008.

6. [187]

   Accordingly I am not satisfied that a “claim” was first made upon the insured by either of JRK or Mr Smart during the period of insurance. This has the consequence that their claims against Vero must fail. The policy does not cover the liability of Q1 to them and there is no amount “payable to the company [ie Q1] under the” policy (s 601AG).

7. [188]

   Two further matters should be noted.

8. [189]

   First, during the hearing the Court raised the possibility that the effect of the decision of Adamson J in Sciacca v Langshaw Valuations Pty Ltd [2013] NSWSC 1285 (“Sciacca”) was that, even if no claim was first made against Q1 within the policy period, the policy nevertheless “covered” Q1’s liability to the plaintiffs. Counsel for Vero correctly submitted that is not the effect of Sciacca.

9. [190]

   In Sciacca the insurer, also Vero, applied for summary dismissal of a claim against it on a claims made policy. The insuring clause provided cover for “Claims first made against the Insured and notified to the Insurer during the Period of Insurance” (at [9]). The period of insurance was from 31 May 2007 to 31 May 2008 (at [10]) although that was said to be “subject to exceptions” (at [20]). The insured was deregistered on 18 April 2009. The first written claim was made to Vero on 21 April 2011.

10. [191]

    Her Honour dismissed the application stating (at [58]):

11. [192]

    Read out of context the emphasised portion of this passage might be taken as supporting a proposition that a claims made policy “covers” a liability irrespective of whether the claim was made during the period of cover. However it appears that the period of cover in Sciacca did not expire on 31 May 2008. This is revealed by [60] of Sciacca which records a concession by Counsel for Vero that “… but for the deregistration of IMP, IMP would have been entitled to be indemnified by Vero …”. This concession could only have been made if the period of cover extended beyond 31 May 2008 through to the time of de-registration and beyond assuming that de-registration had not occurred. Hence Sciacca stands for the proposition that, with a claims made policy, s 601AG(b) does not require a claim to have been made at or before the time of deregistration provided it is made at a time when, assuming deregistration had not occurred, the policy would be engaged. Such an outcome represents a logical extension of the reasoning in Almario. It means that s 601AG does not impose any greater or lesser liability on an insurer than would be the case if the de-registered company had been resurrected under s 601AH.

12. [193]

    Otherwise I note that, acting on an understandable concern that the Court may take a different view of the effect of Sciacca, Vero sought to tender various exhibits from that case in this case in an endeavour to prove, inter alia, that the period of cover of the policy in that case extended beyond 31 May 2008. For the sake of completeness I record that I reject the tender. Evidence can only be tendered if it relates to a “fact in issue” (Evidence Act 1995; s 55(1)). The effect of Sciacca is not a fact in issue in these proceedings. Instead it is a legal question. It is to be ascertained from an analysis of the decision itself.

13. [194]

    Second, the insuring clause not only requires that the claim be notified to Q1 within the period of cover, but that it also be notified to Vero. Nevertheless Vero disclaimed reliance on the failure of Q1 to notify it of any claim within the policy period. This concession was not based on Sciacca. Instead it was intimated that it was made having regard to the effect of s 54 of the Insurance Contracts Act 1984 (Cth) upon the circumstance that the insured had been notified of a claim but failed to notify their insurer (see Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35; 188 CLR 652). In FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; 204 CLR 641, s 54 was found to have extended cover under a claims made policy to a claim made by a third party after the period of cover had expired. However, that was only because the relevant policy provided an extension of cover for circumstances falling short of claims that were known to the insured and notified to the insurer (at [14]). Section 54 was found to operate upon the omission of the insured to notify the insurer of the circumstance and precluded the insurer from relying on that omission (at [46] per McHugh, Gummow and Hayne JJ). There is no similar provision in the policy.

14. [195]

    I am not aware of any decision which has determined that, in proceedings under s 601AG, the plaintiff can respond to matters raised by the defendant insurer by pointing to rights that the de-registered company could have invoked under the Insurance Contracts Act if they had not been de-registered. While it is not necessary to decide that issue, there are a number of reasons to adopt that view. It is supported by the text of s 601AG. In particular the phrases “payable to the company under the insurance contract” and “covered that liability” are apt to include such modification of the insurer’s rights under the contract as may have occurred by reason of the operation of the Insurance Contracts Act. Further, it is consistent with the purpose of s 601AG as discussed in Almario. If the plaintiff in an action under s 601AG is precluded from invoking provisions of the Insurance Contract Act then they will be forced to re-register the company so it can invoke them.

(iii) Conduct of Professional Services

1. [196]

   Notwithstanding Vero’s success on the point just addressed, it is appropriate to address the balance of its contentions upon the hypothesis that each of JRK and Mr Smart made a claim within the policy period that had some connection to Q1’s liability. Vero submitted that the plaintiffs needed, but failed, to establish that “Q1 was (objectively) acting as a mortgage or finance broker”.

2. [197]

   Three aspects of the policy wording should be noted.

3. [198]

   The first is that part of the definition of “Professional Services” which refers to the “professional business described in the schedule, and no other”. The reference to the “business” requires a consideration of something more than just the individual services provided in the particular transaction that gave rise to the claim. It directs attention to the “business” of providing those services and only those services and requires that there be the relevant connection between that business and the “claim”.

4. [199]

   Second, the professional business described in the schedule was “Mortgage Broker/Finance Broker/Mortgage Originator/Mortgage Management/Debt Reduction”. Much effort was directed to the establishment of the meaning of the word “broker”. The Macquarie Dictionary defines broker as including a “middleman or agent” in the case of a noun, and “to negotiate” in the case of a verb. Its meaning in this context is plain enough namely the negotiation of a lending transaction between a lender and borrower. Little was said at the hearing about the concept of “Mortgage Management” but it appears to embrace Q1 managing a loan to a client secured by a mortgage on behalf of the lender. Read as a whole the definition of professional services encompasses the business of negotiating and facilitating lending transactions between borrowers and lenders and, at least in the context of a loan secured by mortgage, some ongoing supervision of the loan by the insured.

5. [200]

   Third, the relevant connection between the claim and the professional services is the words “resulting from”. This phrase is found within most of the clauses providing cover. The exclusion clauses use the phrase “arising directly from or in respect of” which is a wide phrase that generally only requires some causal or consequential relationship (Dickinson v Motor Vehicle Insurance Trust [1987] HCA 49; 163 CLR 500, 505). The phrase “resulting from” is narrower but still does not require that one matter be the proximate cause of the other; instead it requires “a common sense evaluation of the causal chain” (Kooragang Cement Pty Ltd v Bates (1994) 35 NSWLR 452 at 463G per Kirby P; QBE Insurance Ltd v Nguyen [2008] SASC 138 at [151]).

6. [201]

   The operation of this part of the insuring clause can be illustrated by comparing it to the clarifying clause in relation to libel or slander. This clause restricts cover for libel or slander to such torts committed “in the course of carrying on their Professional Services”. This requires a more direct connection to the delivery of actual broking services by the insured and its staff than the insuring clause which requires that the claim result from the business described in the schedule. This is reinforced by the assumption of liability clause addressed below. Its reference to liabilities assumed by Q1 “outside the normal course of the Professional Services” suggests that liabilities may result from the conduct of the Professional Services even though they were outside the normal course of the activities listed in the policy schedule.

7. [202]

   Q1 clearly carried on the professional business described in the schedule. Mr Lynch played a prominent part in it doing so. Each of JRK and Mr Smart dealt with Q1 on the basis that it was a loan broker. They were induced to enter into the particular transactions on the basis of Mr Lynch’s assurance that Q1 had a client who needed to borrow funds. Although the transactions he promoted to JRK and Mr Smart were variations on a typical broking transaction, in their initial stages the promotion of those deals was consistent with the professional business of broking loans. This suffices to establish that their claims result from Q1’s professional business.

8. [203]

   Counsel for Vero contended that Q1 was not objectively acting as a broker but instead Mr Lynch was perpetrating a fraud. It was submitted that there was in truth no borrower, there was no broking, and thus, in pursuing these particular transactions, Mr Lynch (and through him Q1) was not conducting professional services.

9. [204]

   Counsel for Vero placed significant reliance on the decision of the Manitoba Court of Appeal in Rice et al v Canadian Lawyers Insurance Association (1997) 141 DLR (4th) 706 (“Rice”). In Rice it was held that a lawyer who wrote a letter inducing persons to invest money and falsely stated that it was backed by adequate security in circumstances where he had an undisclosed financial interest in the investment was not indemnified under his professional indemnity policy. The letter purported to be an opinion provided by the lawyer to a company that controlled the investment. The letter was provided to potential investors. The trial judge held that the opinion was given in the context of a solicitor client relationship between the lawyer and his company (at p 710). However the Court of Appeal held that the lawyer only “pretended” to provide a legal opinion and (at p 711):

10. [205]

    Counsel for Vero submitted that this case was no different in substance, in that Mr Lynch only purported to act as a finance broker in effecting transactions for JRK and Mr Smart. He was perpetrating a fraud and no broking was being undertaken.

11. [206]

    I do not accept that the decision in Rice determines this aspect of the application of the policy. In Rice the policy provided cover for any act, error or omission “… which occurs in the performance of professional services for others”, where “professional services” was defined as “those services normally provided by a lawyer within the context of the usual solicitor-client relationship”. This could only be engaged if professional services as defined were in fact being provided in the very transaction or matter where the act, error or omission occurred. It was in this respect similar to the limitation on cover for libel and slander noted above. However under the policy the relevant claim only need to be one which “result[ed] from” the conduct of the professional business described in the schedule. This does not require the professional services to actually be provided in relation to the very transaction or matter that gave rise to the claim. In circumstances where the plaintiffs approached Q1 in its capacity as a broker and its manager initially promoted to them a form of broking transaction, that is sufficient to conclude that the claim results from Q1’s professional business of broking.

12. [207]

    In her written submissions Counsel for Vero also contended that the insuring clause was not engaged because a “true analysis” of what occurred was that the plaintiffs transferred money to Q1 but it failed to return it. Assuming for present purposes that is the “true analysis”, it does not matter at this point. Provided the relevant connection exists between the “claim” and the “professional services” that is sufficient and, at this point, it does not matter that the transaction itself was unusual (see Derrington and Ashton, The Law of Liability Insurance, 3rd ed at p 1153). Counsel for Vero also submitted that if the arrangement between Q1 and the plaintiffs was of the kind described at [141] then that had “nothing to do” with Q1’s activities as a mortgage broker or finance broker. It follows from what I have already stated that I reject that contention. However these contentions are relevant to the assumption of liability exclusion relied on by Vero and considered next.

(iv) Assumption of liability

1. [208]

   Vero contended that, even if the insuring clause was engaged, Q1’s liability was not covered by the policy because of the assumption of liability clause noted above (at [172]). Vero accepted that it carried the burden of proving the operation of any exclusion clause.

2. [209]

   Neither Counsel referred the Court to any decision interpreting an exclusion clause drafted in these terms. This is not a criticism. Derrington and Ashton’s comprehensive text does not cite any authorities dealing with such a clause. They note the existence of these types of exclusion clauses, but state that they have their origins in insurers excluding cover for contractual liabilities and are usually “qualified by an exception which is triggered if the insured’s liability would also be imposed by the law of tort” (at p 1917). However, in this case separate provision is made in the policy for contractual liabilities.

3. [210]

   Any exclusion clause is to be construed in accordance with the principles laid down by the judgment of the High Court in Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82; 161 CLR 500 at 510, namely:

4. [211]

   The opening words to the exception clauses fit awkwardly with the terms of the assumption of liability clause. Read literally, the exclusion provides that the “Insurer shall not be liable … in respect of any … Claim [or] liability … arising directly or indirectly from or in respect of any liability”. Each of the connecting phrases, namely “in respect of” and “arising directly or indirectly from or in respect of”, are of considerable width (see [200]). At least in this case the “liability assumed” by Q1 is the liability it assumed to JRK and Mr Smart by reason of it accepting the funds from them, promising to lend them to a client but failing to do so. The liability to Q1 which Vero seeks to exclude is a contractual liability and a liability for misrepresentation by reason of that conduct. This is more than sufficient to invoke this part of the assumption of liability clause.

5. [212]

   The remaining issue is whether the “liability” just identified was assumed by Q1 “outside the normal course of the Professional Services”. There was some debate as to whether this was a reference to the normal course of Q1’s professional business of broking, etc, or the normal course in which brokers generally conducted their business. Vero contended that it was latter. In my view it does not matter because on either view Q1 assumed a liability outside the normal course of its professional business described in the schedule.

6. [213]

   Vero adduced evidence from an experienced banker, Mr Dennis Roams. Mr Roams has more than forty years experience in banking with particular experience in lending/mortgage origination. He worked as a mortgage broker and dealt with mortgage and finance brokers on behalf of lending institutions. Mr Roams stated:

7. [214]

   I have already accepted Mr Carthy’s evidence that to his knowledge Q1 did not borrow money from its clients, did not hold funds for lending, did not lend money in its own right and did not invite clients to “invest” in Q1.

8. [215]

   Each of the transactions the subject of these proceedings commenced their life as a proposed broking transaction but developed into a proposed transaction whereby “investor” funds would be pooled with Q1 and then lent to clients, with Q1 returning the repayments to the “investors”. That was not a broking transaction. It is a transaction that involved a far greater level of attendant risk for the insured than a broking transaction, and in its final form was outside what was expected to be undertaken by a finance broker, including this finance broker. Even if Q1’s professional business extended to mortgage management that might embrace supervising the course of a loan but it would not embrace Q1 assuming the role of the lender. The liability that Q1 assumed to Mr Smart and JRK was outside the normal scope of Q1’s business and outside the normal scope of the business of a finance broker or other provider of the services specified in the schedule to the policy.

9. [216]

   Vero succeeds in establishing this exclusion.

(v) Dishonesty exclusion

1. [217]

   Vero also contended that any liability of Q1 to JRK or Mr Smart was not covered by the policy because it arose “directly or indirectly from [a] dishonest, fraudulent, criminal or malicious act or omission by the Insured” in the form of Mr Lynch. It follows from the above findings that I accept that contention. However the plaintiffs relied on the write back to this clause which provides cover in respect of such fraud, etc committed “by an employee occurring or committed in connection with the Professional Services”. The issue debated between the parties was whether Mr Lynch was an employee of Q1.

2. [218]

   In Hollis v Vabu Pty Ltd [2001] HCA 44; 207 CLR 21 at 39 Gleeson CJ, Gaudron, Gummow, Kirby and Hayne JJ noted the observation of Windeyer J in Marshall v Whittaker’s Building Supply Co (1963) 109 CLR 210 at 217 that the distinction between an employee and an independent contractor is “rooted fundamentally in the difference between a person who serves his “employer’s business, and a person who carries on a trade or business of his own”. Their Honours adapted this approach, holding that whether a person is, in reality in business on their own account as distinct from working on their employer’s account, is the ultimate test for whether the relevant enterprise is vicariously liable to third parties for injury occasioned by those persons (at [42]).

3. [219]

   Otherwise, a determination of whether a person is an employee requires a consideration of the totality of the relationship between the parties (Stevens v Brodribb Sawmilling Co Pty Ltd [1986] HCA 1; 1986 160 CLR 16 (at 29) per Mason J; Hollis v Vabu at [24]). A “significant” or “prominent” but not determinative factor “is the degree of control which the former can exercise over the latter” (Stevens v Brodribb Sawmilling Company Pty Ltd at p 24 per Mason J; Hollis at [43] to [45]). The importance of control is said to “lie not so much in its actual exercise, although clearly that is relevant, as in the right of the employer to exercise it” (Stevens v Brodribb id). However other factors can be significant. Thus in Stevens v Brodribb id Mason J added:

4. [220]

   As noted, Mr Carthy and Mr Lynch were equal shareholders of Q1, however only Mr Carthy was a director. Mr Carthy explained that when he and Mr Lynch formed Q1 Mr Lynch said to him:

5. [221]

   In relation to remuneration Mr Carthy said that each month Mr Lynch would approach him:

6. [222]

   Mr Carthy explained that the expenses would include his living expenses and he presumed that Mr Lynch was taking funds from Q1 on the same basis. Mr Carthy said that overall he and Mr Lynch agreed to a “fifty-fifty” share of everything.

7. [223]

   Counsel for Vero pointed to a number of matters which, consistent with the above passage from Stevens v Brodribb, were said to point away from the relationship between Q1 and Mr Lynch being that of employer and employee. Thus it was said Q1 was operated out of Mr Lynch’s private residence. I regard that as equivocal given that it was clear from the time the business commenced that they were Q1’s premises. Counsel also pointed to Mr Lynch’s remuneration arrangements and noted that he did not receive a salary, group certificate, sick leave, annual leave or superannuation. Q1 did not pay withholding tax or workers compensation insurance for Lynch. The weight to be attached to the absence of these matters is, however, diminished, by the fact that Q1’s business did not last long enough for any of its accounts to be prepared. This meant that the relevant players did not have to confront the nature of the legal relationships that they had created.

8. [224]

   Counsel for Vero submitted that Mr Lynch’s dishonest acts were undertaken by an “owner of the business who can be best described as a shadow director”. In relation to his alleged position as shadow director it was said that Mr Carthy “was accustomed to act in accordance with Lynch’s instructions or wishes”. There is no evidence to the effect that Mr Carthy acted in that way. To the contrary, the above evidence confirms that Mr Lynch accepted that it was Mr Carthy as Director of the company who would make “major decisions” for Q1. Alternatively it was submitted by Vero that Mr Carthy had no control or oversight of Mr Lynch “in his mode of work, his workings or holidays”. Mr Carthy agreed that he did not attempt to direct Mr Lynch as to these matters.

9. [225]

   The approach stated in Hollis v Vabu is directed to distinguishing between an employee and an independent contractor. In this case there is nothing to suggest that Mr Lynch was an independent contractor. He clearly identified with the business of Q1. However, the relevant distinction in this case is not between an employee or independent contractor, but between an employee and other persons who are furthering the business of Q1. Mr Lynch’s title of General Manager and his ceding of authority to Mr Carthy as a Director of Q1 to make “major decisions” point to him having the status of an employee. However his equal shareholding, and the method by which he agreed to and did draw income from Q1 strongly points away from that conclusion. The funds he drew had no direct correlation to the amount of work he performed as general manager. Instead they were similar to the drawings of a partner. They appear to have been withdrawn on an understanding that they would be offset against whatever was owing to him as a shareholder when the level of profits was determined or otherwise treated as a loan by Q1 to himself. The arrangements between Mr Carthy and Mr Lynch are suggestive of them operating Q1 as a quasi partnership pursuant to which they shared in its profits via their shareholding and would have been expected to contribute equally to any losses it incurred.

10. [226]

    In the end result I am satisfied that Mr Lynch did not work in the business of Q1 as an employee. He worked in the business as a half owner. He divided responsibilities for its management with Mr Carthy. He only expected to be paid out of profits in his capacity as half owner and the amounts he received were not directly related to any work he performed. In that sense there was no mutuality between the performance of work by Mr Lynch as general manager and the receipt of any income by him (see Forstaff Pty Ltd v Chief Commissioner of State Revenue [2004] NSWSC 573 at [90] to [91] per McDougall J).

11. [227]

    The write back for the dishonest acts of Q1’s employees is not engaged. Vero has succeeded in establishing that the policy does not cover Q1’s liability because of the dishonest acts of Mr Lynch.

(12) Conclusion

1. [228]

   It follows that each of the proceedings will be dismissed. I will order each of JRK and Mr Smart to pay Vero's costs. If either party seeks to vary that order they can apply to vary it within the time provided for in Uniform Civil Procedure Rule 36.16(3A).

2. [229]

   Accordingly in matter number 2013/030193 the Court orders that:

   1. (1)

      The proceedings be dismissed; and

   2. (2)

      The plaintiff pay the defendant's costs.

3. [230]

   In matter number 2013/144336, the Court orders that:

   1. (1)

      The proceedings be dismissed; and

   2. (2)

      The plaintiff pay the defendant's costs.