22 May, 2015
In Brief
The High Court’s recent decision in Selig v Wealthsure Pt Ltd [2015] HCA 18 (Selig v Wealthsure) put to rest uncertainty that had arisen following two inconsistent decisions of the Full Federal Court in relation to the proportionate liability regime in the Corporations Act 2001 (Cth) (Corporations Act). In a unanimous judgment, the High Court confirmed that apportionable claims under Div 2A of the Corporations Act only applied in relation to a breach of the misleading and deceptive conduct provision, s 1041H, and did not extend to other claims.
This finding overturned the Full Federal Court’s ruling in Wealthsure Pty Ltd v Selig[2014] FCAFC 64 and has upheld the approach taken in ABN Amro Bank v Bathurst Regional Council [2014] FCAFC 65 (ABN Amro).
Background
The appellants, Mr and Mrs Selig, acted on the financial advice of David Bertram, a financial adviser and authorised representative of Wealthsure, and invested AUD 450k in Neovest Ltd. The scheme proposed by Neovest was, in effect, a 'Ponzi scheme'. Neovest became insolvent. Mr and Mrs Selig lost their investment and suffered consequential losses.
Mr and Mrs Selig commenced proceedings against several persons, including Mr Bertram and Wealthsure. They relied upon a number of causes of action, including:
- the misleading and deceptive conduct provisions relating to a financial product or financial service in the Corporations Act and Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) (namely s 1041H Corporations Act and s 12DA ASIC Act),
- s 1041E of the Corporations Act for false or misleading statements inducing a person to apply for, acquire or dispose of financial products,
- the now repealed s 945A and s 945B of the Corporations Act which required financial advisers to have a reasonable basis for the advice provided to their client, and
- breach of duty for failing to exercise reasonable skill and care, both in contract and in negligence.
Questions regarding proportionate liability
At first instance, judgment was entered against Wealthsure, Mr Bertram and two directors of Neovest, Mr Norton and Mr Townley, in the sum of AUD 1,760,512. Lander J held that the solvent defendants (Wealthsure and Mr Bertram) were liable for the whole of that loss, even though other defendants were also liable for the same loss and damage suffered by the Seligs.
This was because Lander J held that:
- the solvent defendants (Wealthsure and Mr Bertram) were found liable under sections other than 1041H, and
- the proportionate liability provisions applied only in respect those causes of action based on s 1041H, and not to the other statutory causes of action.
His Honour nevertheless made findings of apportionment and contributory negligence as follows:
- the Seligs’ were contributorily negligent to the extent of 15%,
- of the remaining 85% culpability:
- 60% of that 85% (or 51% overall) was apportioned to Wealthsure and Mr Bertram,
- 25% of that 85% was apportioned to Mr Norton and Norton Capital, and
- 15% of that 85% was apportioned to the other directors of Neovest.
The first instance decision was appealed, with a key question being whether the proportionate liability provisions applied.
The majority of the Full Federal Court (Mansfield and Besanko JJ) held that proportionate liability provisions applied so that the claims should be apportioned with respect to all causes of action against the respondents. Mansfield J said that the primary focus of proportionate liability provisions is whether the claims are in respect of the same loss and damage, and not the nature of the claim itself. Even though Wealthsure and Mr Bertram committed contraventions other than the contravention of s1041H, the claim was an apportionable claim because the conduct giving rise to that loss or damage was conduct in contravention of s 1041H(1).
White J dissented, preferring the reasoning of Lander J at first instance with respect to the application of the proportionate liability provisions. Further, shortly after the Full Court's judgment, a differently constituted Full Court delivered its judgment in ABN Amro, in which that Court agreed with the view taken by Lander and White JJ.
The conclusion of Mansfield and Besanko JJ was then appealed to the High Court.
The Decision Of The High Court In Selig v Wealthsure
The appeal to the High Court focused solely on whether Div 2A applied so that the Seligs’ loss and damage should be apportioned between the respondents in respect of all of the Seligs’ claims or whether Div 2A was limited in its application to the claims based on contraventions of s 1041H. The High Court stated that the answer to that question was to be found in the meaning given to an 'apportionable claim' in section 1041L.1
The High Court found that the terms of the proportionate liability provisions of Div 2A were clear. An 'apportionable claim' for the purposes of Div 2A meant a claim based upon a contravention of s 1041H. The term did not extend to claims based upon conduct of a different kind (such as other statutory causes of action).
Interestingly, the High Court noted the observation made by the Full Federal Court inABN Amro that other provisions in Div 2 of the Corporations Act (such as s 1041E 'False or misleading statements' and s 1041G 'Dishonest conduct'), which involve a higher level of moral culpability, were purposefully not chosen as being capable of being the subjects of an apportionable claim under 1041L. The High Court concluded that the fact that apportionment is 'of benefit to wrongdoers' may have played a factor in the decision of lawmakers to limit apportionable claims to those involving conduct falling within s 1041H.
End Result And Implications
The end result of this litigation is that the solvent defendants bore 100% of the losses suffered by the investors, even though the Court concluded that:
- the investors themselves were negligent and were culpable for 15% of their own losses,
- other parties were also in breach of their obligations to the plaintiffs and were culpable for 40% of the balance of the losses, and
- accordingly the solvent defendants were only culpable for 51% of the losses, but bore 100% of the liability.
The implications of the High Court’s decision are that:
- where there are breaches outside s 1041H and the equivalent provision of the ASIC Act, the proportionate liability regime will not apply,
- plaintiffs will continue to rely on multiple causes of action (in addition to relying on s 1041H) in order to circumvent the applicability of the proportionality regime (a regime perceived to be beneficial for 'deep pocket defendants'), and
- solvent defendants will be more likely to be liable for 100% of the plaintiff’s loss even if they are only partly responsible for that loss.
End Notes:
For further information, please contact:
Hugh Paynter, Partner, Herbert Smith Freehills
hugh.paynter@hsf.com
