A Ponzi scheme, moral culpability, statutory interpretation and disagreeing Federal Court judges.  Those were the ingredients that lead the High Court in Selig v Wealthsure Pty Ltd [2015] HCA 18 (Selig) to consider the proportionate liability regime for just the second time since the legislation was introduced more than 10 years ago.
 
The High Court, in an unanimous decision by French CJ, Kiefel, Bell, Gageler and Keane JJ, determined that the only cause of action that is apportionable under theCorporations Act is the civil liability arising from the misleading or deceptive conduct prohibited by s1041H (a general prohibition on misleading or deceptive conduct in relation to a financial product or a financial service, the contravention of which leads to civil liability only). 
 
In doing so, the High Court settled a lingering inconsistency between two previous Federal Court decisions.
 
Wealthsure Pty Ltd v Selig [2014] FCAFC 64 (Wealthsure)
 

In Wealthsure, the decision appealed in Selig, the Full Court of the Federal Court found that so long as there had been a contravention of s1041H of the Act, other causes of action (including various other breaches of theCorporations Act and the ASIC Act) which gave rise to the same loss could also be apportioned.  The Court made that finding notwithstanding the legislation only making specific reference to contraventions of s1041H as being apportionable and not to any other cause of action (s1014L(1)). 
 
The Full Federal Court determined that once the threshold requirement is satisfied (that is that s1041H has been breached), s1041L(2) of the Corporations Act applies, which provides that:
 
there is a single apportionable claim in proceedings in respect of the same loss or damage even if the claim for the loss or damage is based on more than one cause of action (whether or not of the same or a different kind)”.
 
Accordingly, it was held that if the loss or damage suffered by a plaintiff is caused by a contravention of s1041H, then all other claims in respect of that same loss or damage will also be apportionable.  That is, the existence of an ‘apportionable claim’ is to be determined by reference to the type of loss or damage suffered by the plaintiff rather than by reference to the nature of the cause of action.
 
ABN AMRO Bank NV v Bathurst Regional Council[2014] FCAFC 65 (ABN AMRO)

In ABN AMRO, a differently constituted Full Court of the Federal Court held that an ‘apportionable claim’ exists only where there has been a contravention of s1041H of the Corporations Act, and that proportionate liability doesnot apply where a plaintiff also proves a contravention of another statutory action (in this case, a breach of s1041E which relevantly deals with the making of false and misleading statements when the person making the statement does not care about the truth of the statement or knows or ought to know that the statement is false).  
 
The Court’s interpretation of the legislation in ABN AMROwas influenced by a policy consideration that defendants should not be given the benefit of proportionate liability where they have contravened provisions that include a mental element of moral culpability constituting an offence. 

The High Court’s reasons

The High Court’s unanimous decision cuts across the conflict between Wealthshure and ABN AMRO

It has now been determined that ‘an “apportionable claim” for the purposes of Div 2A is, relevantly, a claim based upon a contravention of s 1041H. The term does not extend to claims based upon conduct of a different kind.’[1]
 
The High Court, while preferring the decision in ABN AMRO, does not apply the same reasoning as the Full Federal Court in that judgment.  In ABN AMRO, the Full Federal Court interpreted the legislation by reference to public policy, finding that contraventions of theCorporations Act which include an element of knowledge or recklessness should not be ‘apportionable claims’. 
 
In contrast, the High Court in Selig held that it was not necessary to resort to a consideration of legislative purpose to explain the confinement of apportionment to contraventions of s1041H because ‘the terms of the relevant provisions of Div 2A are clear’.
 
In making its finding, the High Court dismissed submissions by the respondents which were consistent with the Full Federal Court’s reasoning in Wealthsure that the following two aspects of s1041L(2) of the Corporations Act were critical to an understanding of what constitutes an ‘apportionable claim’, namely:

a) the requirement that the loss or damage the subject of the causes of action be the same; and

b) the acknowledgement that there may be more than one cause of action and that they may be of different kinds.

The High Court, applying the well-settled rules of construction, considered that the respondents’ submissions gave rise to inconsistencies with the definition of ‘claim’ in section 1041L(1) and 1041L(2) of the Corporations Act.  They said that a ‘claim’ under section 1041L(1) is only a claim for damages under s 1041I caused by conduct in contravention of s 1041H. 
 
Responding to the respondents’ submissions that it was unlikely that the legislature intended for there to be different assessments of claims for the same loss or damage, the High Court noted that Div 2A clearly accepts that there will be such circumstances, as s1041N(2) provides that liability for an apportionable claim is to be determined in accordance with Div 2A and liability for non-apportionable claims should be determined by reference to the legal rules relevant to them.

What does this mean?

The proportionate liability regime was introduced to avoid the ‘deep-pocket syndrome’ whereby professionals with insurance were being targeted for 100% of a plaintiff’s loss, when they were only responsible for a portion of that loss. 

The High Court’s decision means that those in contravention of sections of the Corporation Act (or theASIC Act) giving rise to civil liability, other than for contraventions of s1041H, will not get the benefit of apportionment.  For insurers who adopted or were minded of adopting underwriting practices on the back ofWealthsure, the effect of the High Court’s decision is that they will be once again hampered in their ability to underwrite risks with accuracy, which might discourage them from offering better rates.

For plaintiffs, the High Court’s decision means that they can recover 100% of their loss from any one wrongdoer for those causes of action that are not ‘apportionable claims’.  Plaintiffs intending to recover 100% from a single defendant will however need to set their sights on proving more onerous contraventions of the Corporations Act, such as a breach of s10141E.