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[2018] NSWSC 1502
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Ryan Wealth Holdings Pty Ltd v Baumgartner [2018] NSWSC 1502 (8 October 2018)
Last Updated: 17 October 2018
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Supreme Court
New South Wales
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Case Name:
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Ryan Wealth Holdings Pty Ltd v Baumgartner
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Medium Neutral Citation:
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Hearing Date(s):
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28-31 August; 12 October 2017
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Date of Orders:
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8 October 2018
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Decision Date:
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8 October 2018
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Jurisdiction:
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Common Law
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Before:
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Walton J
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Decision:
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The Court makes the following directions:
(1) The plaintiff
shall file and serve within 14 days of the date of this judgment short minutes
of order reflecting this judgment.
(2) The plaintiff shall file and
serve within 28 days of this judgment a submission as to any disputed questions
as to the short minutes
of order, interest and costs together with the terms of
any orders proposed with respect to costs.
(3) The defendants shall
file and serve a submission in reply as to any disputed questions as to the
short minutes of order, interest
and costs together with the terms of any
proposed orders in that respect, within 14 days after being served with the
submissions
in (2) above.
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Catchwords:
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AUDIT of a self-managed superannuation fund – Superannuation Industry
(Supervision) Act 1993 (SIS Act) – auditing standards framework –
construction of audit contracts – parties to the audit
contracts EVIDENCE – expert witness – weight attached
to expert opinion BREACH OF DUTY AND CONTRACT– admitted
breach of contract and duty – non-admitted breaches of contract and duty
–
failure to enquire into and report on compliance with investment
strategy – reg 4.09 – failure to bring serious misdescriptions,
misstatements and other factors (including conflict of interest of accountant)
to the plaintiff’s attention – failure
to form and express certain
opinions – failure to exercise reasonable care and skill – the
defendants breached retainers
and common law duties owed to the
plaintiff SIS ACT – contravention of the SIS Act –
obligations under the Act – whether damages available under the
Act MISLEADING AND DECEPTIVE CONDUCT – representations
– s 42 of the Fair Trading Act (NSW) – s 52 of the Trade Practices
Act – representations within audit reports – representations by
silence – representations by auditor constituted
misleading and deceptive
conduct CAUSATION – causation as a result of admitted
breaches, non-admitted breaches and misleading and deceptive conduct
– LOSS AND DAMAGES – loss of the chance or opportunity
– additional recoveries – exercise of rights under facility
agreement – claims against insured parties – exclusion clauses
within insurance policies – conflict of interest
exclusion clauses –
dishonesty and fraud exclusion clauses – insurance policy would have
responded to one of plaintiff’s
claims – partial recovery of some
investments not proved – loss of the chance or opportunity to make
recoveries earlier
in time – defendant failed to adduce evidence that
parties from whom recoveries were made had inferior financial capacity in
2008
than at time recoveries were made – damages – plaintiff entitled to
damages for loss of a chance or opportunity
to make recoveries beyond recoveries
actually made – plaintiff entitled to lost interest on amounts already
recovered AFFIRMATIVE DEFENCES – professional standards
legislation and professional standards scheme – limitation on damages
–
federal jurisdiction exercised by the Supreme Court – choice of
law in tort – plaintiff’s claim in negligence governed
by the law of
Victoria – choice of law in contract – contract governed by law of
Victoria – choice of law rules
for tort apply to contravention of s 52 of
the Trade Practices Act – no jurisdiction of a court exercising federal
jurisdiction
in NSW to award damages under the Fair Trading Act
(Vic) AFFIRMATIVE DEFENCES– contributory negligence –
plaintiff lacked financial sophistication – auditor was engaged
to prevent
kind of loss that occurred – plaintiff’s damages reduced for
contributory negligence AFFIRMATIVE DEFENCES – proportionate
liability – concurrent liability of accounting firm which prepared
financial reports
– auditor had higher culpability than accounting firm
(MBS) – plaintiff’s loss apportioned to MBS – previous
auditor
not concurrently liable – plaintiff’s damages not reduced by reason
of sole director’s concurrent liability
to the plaintiff – same acts
of sole director resulted in reduction of damages for contributory
negligence |
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Legislation Cited:
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Cases Cited:
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Texts Cited:
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M Davies, A S Bell and P L G Brereton, Nygh’s Conflict of Laws in
Australia (LexisNexis Butterworths, 9th ed, 2014)
C Hollander QC and S
Salzedo QC, Conflicts of Interest (Sweet & Maxwell, 4th ed, 2001)
J Leow
and S Murphy, Australian Master Superannuation Guide (Wolters Kluwer, 21st ed,
2017/18)
LexisNexis, Cross on Evidence (at 13 September 2018)
Thomson
Reuters, Woodman & Nettle: Torrens System in NSW (at 16 August 2018)
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Category:
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Principal judgment
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Parties:
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Ryan Wealth Holdings Pty Ltd (Plaintiff)
David Keith Baumgartner (First
Defendant)
KJ Equities Pty Ltd (Second Defendant)
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Representation:
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Counsel:
A Harding and A Avery-Williams (Plaintiff)
M A Jones SC and
M F Newton (Defendants)
Solicitors:
Holman Webb Lawyers (Plaintiff)
HWL
Ebsworth Lawyers (Defendants)
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File Number(s):
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2014/00358648
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TABLE OF CONTENTS
INTRODUCTION -
paragraph 1
The Parties -
paragraph 2
The Audits -
paragraph 6
The 2007 audit -
paragraph 8
The 2008 audit -
paragraph 12
The 2009 audit -
paragraph 15
Overview: The Parties’ Positions - paragraph 19
FACTUAL BACKGROUND
- paragraph 26
The Investments
The loan investments - paragraph 31
The River Island Facility Agreement - paragraph 32
Pacific General Facility Agreement - paragraph 34
MCD Holdings Facility Agreement - paragraph 36
Tomkins Facility Agreement - paragraph 38
Overview: Monies advanced - paragraph 40
The other investments - paragraph 43
The Cartel Investments Unit Trust - paragraph 44
The Limeburners Creek Unit Trust - paragraph 46
Advice from Mr Moylan - paragraph 51
Personal involvement of Mr Moylan - paragraph 79
Status of the Loans and Investments as at 30 June
2008 - paragraph 82
The Financial statements
The 2007 financial statement - paragraph 84
The 2008 financial statement - paragraph 86
The 2009 financial statement - paragraph 87
The Investment Strategy - paragraph 89
The 2007 investment strategy - paragraph 90
The 2008 and 2009 investment strategies - paragraph 91
The Defendants and the Audits of the Super
Fund - paragraph 92
The Financial Collapses - paragraph 96
Lapse of professional indemnity policies held by
Moylan companies - paragraph 97
Recoveries -
paragraph 99
LETTERS OF ENGAGEMENT - paragraph 105
Scope
The 2007 retainer -
paragraph 106
The 2008 and 2009 retainers - paragraph 110
Audit Objectives and Approach
The 2007 retainer -
paragraph 111
The 2008 and 2009 retainers - paragraph 114
Reporting on Significant/Compliance Matters
The 2007 retainer -
paragraph 116
The 2008 and 2009 retainers - paragraph 117
Fees - paragraph
119
THE STATUTORY FRAMEWORK - paragraph 120
The 2007 Audit
SIS Act - paragraph
122
SIS Regulations -
paragraph 135
The repeal of Pt 13
- paragraph 138
The 2008 and 2009 Audits
The SIS Act -
paragraph 140
The Corporations Act - paragraph 145
THE AUDITING STANDARDS FRAMEWORK
Financial Reports -
paragraph 152
Auditing Standards
- paragraph 158
The AUASB auditing standards - paragraph 159
The ASA Standards -
paragraph 160
ASA 800 - paragraph
161
ASA 200, ASA 240 and ASA 260 - paragraph 167
The guidance statement - paragraph 172
AUG 4 - paragraph
178
Mandatory requirements under the ASA Standard
ASA 200 - paragraph
186
ASA 240 - paragraph
188
PLEADINGS -
paragraph 189
Duties in contract and tort - paragraph 192
Representations -
paragraph 200
Breach of contract and duty - paragraph 202
Causation, loss and damage - paragraph 205
Breaches of the SIS Act - paragraph 207
Misleading and deceptive conduct - paragraph 211
Loss and damage -
paragraph 220
ISSUES - paragraph
222
Contract -
paragraph 225
Duties in Contract and in Tort - paragraph 227
Admitted Breaches of Contract and Duty - paragraph 230
Non-admitted Breaches of Contract and Duty - paragraph 234
Failure to inquire and report as to compliance with
the investment strategies, including matters set out in reg 4.09(2) - paragraph 235
Failure to audit the Super Fund by forming an
opinion as to whether the trustee had complied with the requirements of the SIS
Act
and the SIS Regulations - paragraph 239
Failure to bring serious misdescriptions and
misstatements and other facts and circumstances to the plaintiff’s
attention - paragraph 241
Failure, acting reasonably, to form and express
certain opinions - paragraph 244
Failure to exercise reasonable care and skill - paragraph 247
Misleading and deceptive conduct - paragraph 251
Contraventions of the SIS Act and Regulations - paragraph 255
Breach of statutory duty - paragraph 257
Causation -
paragraph 260
Loss - paragraph
265
Defences -
paragraph 268
WRITTEN SUBMISSIONS OF THE PARTIES - paragraph 270
CONSTRUCTION OF THE AUDIT CONTRACTS - paragraph 272
The Terms of the Retainers - paragraph 278
PARTIES TO THE AUDIT CONTRACTS - paragraph 320
WITNESSES
Plaintiff’s Witnesses - paragraph 326
Mr Morris -
paragraph 329
Errors in reports -
paragraph 334
Form of the reports
- paragraph 335
Failure to refer to ASA 800 - paragraph 337
Statement of obligation - paragraph 341
Qualifications and Expertise - paragraph 362
Conclusion as to Mr Morris - paragraph 377
Mr Sheppard -
paragraph 385
Investment in Limeburners Trust - paragraph 390
Ability of the Regional Land Fund to pay claims and
net assets - paragraph 392
Reference to value of real estate - paragraph 401
Defendants’ Witness - paragraph 406
Failure to call Mr David Baumgartner - paragraph 408
COMMON LAW DUTIES OWED BY THE DEFENDANTS - paragraph 411
BREACH OF CONTRACT AND DUTY
The admitted breach of contract and duty - paragraph 417
Non-admitted breaches of contract and duty - paragraph 444
Failure to enquire and report as to compliance with
reg 4.09 (second further ASOC at para 16(a) and at [284]-[294] above) - paragraph 446
Failure to audit the Super Fund to be able to form
the opinion that the trustee had complied with the requirements of the SIS Act
and SIS Regulation (second further ASOC at para 16(b) and [280] above) - paragraph 474
Failure to bring serious misdescriptions and
misstatements and other facts and circumstances to the plaintiff’s
attention (second
further ASOC at para 16(c) and [299]-[311] above) - paragraph 477
Failure, acting reasonably, to form and express
certain opinions (second further ASOC at para 16(d) and [312]-[317] above) - paragraph 509
Failure to exercise reasonable care and skill
(second further ASOC at para 16(e) and [318]-[319] above) - paragraph 517
Existence of assets and securities - paragraph 520
Value of assets -
paragraph 531
Failure to identify and report that the assets were
non-performing and financial statements were materially inaccurate (second
further
ASOC at para 16(e)(v)-(vi)) - paragraph
544
Conclusion: Breach of Contract and Duty - paragraph 546
CONTRAVENTION OF THE SIS ACT AND REGULATIONS
Sections 113 and 35C of the SIS Act - paragraph 547
Sections 129 and 130 of the SIS Act - paragraph 551
Damages under s 315(11) of the SIS Act - paragraph 557
MISLEADING AND DECEPTIVE CONDUCT - paragraph 571
Relevant Principles
- paragraph 574
Representations and further representations - paragraph 578
First set of representations - paragraph 579
Further representations - paragraph 597
Conclusion: Misleading and Deceptive Conduct - paragraph 602
CAUSATION -
paragraph 608
Breach of Contract and Duty
The admitted breach of contract and duty - paragraph 609
The non-admitted breaches of contract and duty - paragraph 626
Misleading and Deceptive Conduct - paragraph 628
Contravention of the SIS Act - paragraph 631
Conclusion: Causation - paragraph 632
LOSS - paragraph
633
Relevant Principles
- paragraph 638
Application of the Principles - paragraph 663
Category 1: Exercise of Rights to Obtain
Recovery - paragraph 671
Rights under Pacific General Facility
Agreement - paragraph 672
Claims against insured parties Mr Moylan and/or his
Related Companies - paragraph 678
Issues of insurance
- paragraph 688
Conflict of interest and exclusion clauses - paragraph 697
Dishonesty and fraud and prior knowledge
exclusions - paragraph 725
Partial recoveries
- paragraph 739
Rights under the River Island Facility
Agreement - paragraph 740
Rights under the Tomkins Facility Agreement - paragraph 751
Cartel Trust -
paragraph 758
Limeburners Trust -
paragraph 760
Claim against Turnbull Hill Lawyers - paragraph 762
Category 2: Delayed Exercise of Right - paragraph 763
Claim against partners of Turnbull Hill
Lawyers - paragraph 766
Claim against guarantors at Pacific General Facility
Agreement - paragraph 784
Tomkins Facility Agreement - paragraph 789
Conclusion
Delay - paragraph
803
Loss - paragraph
805
DAMAGES - paragraph
806
Loss Assuming Full Recovery as at 30 June 2008
Damages Claim #1 -
paragraph 812
Damages Claim #2 -
paragraph 817
Category 1:
Loss of chance to make recoveries beyond those that
were actually achieved - paragraph 823
Category 2:
Lost interest on amounts in fact recovered - paragraph 836
Conclusion: Damages
- paragraph 839
AFFIRMATIVE DEFENCES
Professional Standards Legislation – limits on
damages? - paragraph 843
Federal jurisdiction - paragraph 849
Choice of law in tort - paragraph 861
Claim in Contract -
paragraph 882
Questions (2)-(4) -
paragraph 888
Question (5) – claim for contravention of s 52
of the TPA - paragraph 896
The second defendant - paragraph 906
The Victorian Scheme - paragraph 910
State Fair Trading Acts - paragraph 914
Conclusion as to State Fair Trading Acts - paragraph 920
Conclusion as to Professional Standards Scheme
Cap - paragraph 929
Contributory Negligence - paragraph 930
Conclusion as to contributory negligence - paragraph 953
Proportionate Liability - paragraph 954
MBS - paragraph
960
Mr Moylan -
paragraph 985
Ms Crittle -
paragraph 999
Conclusion as to apportionment - paragraph 1002
CONCLUSION -
paragraph 1003
DIRECTIONS -
paragraph 1008
JUDGMENT
INTRODUCTION
- HIS
HONOUR: These proceedings concern audits of a self-managed superannuation
fund (“SMSF”), Ryan Holdings Retirement Fund (“the
Super
Fund”) in three successive financial years, being the financial years
ending 30 June 2007, 30 June 2008 and 30 June 2009
(“the relevant
financial years”).
The Parties
- Ryan
Wealth Holdings Pty Ltd (“the plaintiff”) is the trustee of the
Super Fund. The sole shareholder and director of
the plaintiff is, and has
always been, Ms Trudy Crittle.
- The
defendants were David Keith Baumgartner (“the first defendant”) and
KJ Equities Pty Ltd (“the second defendant”).
The first and second
defendants commenced business in partnership under the name “Baumgartner
Partners” from mid-2001
and maintained that business at all relevant times
for the purpose of these proceedings (the first and second defendants shall be
referred to collectively, when appropriate, as “the defendants”).
The business of that partnership included the provision
of accounting and
auditing services.
- The
first defendant was a chartered accountant from 2006. He was licenced and
qualified to conduct audits of SMSFs. He was an approved
auditor for the
purposes of the Superannuation Industry (Supervision) Act 1993 (Cth)
(“the SIS Act”).
- The
second defendant was not an approved auditor and was not appointed as auditor of
the Super Fund.
The Audits
- In
each of the relevant financial years, an audit of the Super Fund’s
financial statements was carried out and an audit report
issued in which an
unqualified audit opinion was expressed as to two matters:
- (1) the
presentation of the Super Fund’s financial report; and,
- (2) the Super
Fund’s compliance with the SIS Act.
- A
brief outline of the three audits, the subject of these proceedings, is set out
below.
The 2007 audit
- The
first audit, for the purposes of these proceedings, concerned the financial year
ending 30 June 2007 and was undertaken pursuant
to a letter of engagement,
bearing the letterhead “Baumgartner Partners”, dated 7 March 2008
(“the 2007 audit”).
- The
letter of engagement had a formal closing of “Yours Faithfully,
Baumgartner Partners” and provided a space for signature
above the typed
words: “David Baumgartner”. The letter was signed by the first
defendant in that space. Mr Christopher
Moylan, a financial advisor and
accountant to the plaintiff, signed the letter on behalf the plaintiff (Mr
Moylan’s involvement
is described at [28] below).
- By
this means, an agreement was entered into and an auditor was retained to perform
duties under the audit contract, the terms of
which were specified by that
letter of engagement (the audit contract for the 2007 audit shall hereinafter be
referred to as “the
2007 retainer”): see, for example, Simonius
Vischer & Co v Hold & Thompson [1979] 2 NSWLR 322 at 340C (per
Samuels JA, with whom Moffitt P and Reynolds JA agreed) and Meerkin &
Apel v Rossell Pty Ltd [1998] 4 VR 54 at 62 (per Charles JA, with whom
Callaway JA and Batt JA agreed) (a dispute as to whether the second defendant
was a party to an
audit contract shall be dealt with later in this
judgment).
- On
or about 15 May 2008, the first defendant, as the approved auditor, issued an
audit report in respect of the financial year ending
30 June 2007 (“the
2007 audit report”).
The 2008 audit
- The
second audit, for the financial year ending 30 June 2008, was undertaken
pursuant to an undated letter of engagement bearing the
same formal closing,
namely, “Yours Faithfully, Baumgartner Partners” and provision for
the first defendant’s signature
(“the 2008 audit”).
- The
undated letter of engagement was signed by the first defendant and Ms Crittle in
about May 2009 (this audit contract for the 2008
audit shall hereinafter be
referred to as “the 2008 retainer”).
- On
or about 3 June 2009, the first defendant issued an audit report in respect of
the financial year ending 30 June 2008 (“the
2008 audit
report”).
The 2009 audit
- The
third audit, for the financial year ending 30 June 2009, was undertaken pursuant
to another undated letter of engagement bearing
the same formal closing and
signature provision for the first defendant (as described above, with respect to
the letters of engagement
as to the 2007 and 2008 audits) (“the 2009
audit”).
- The
letter of engagement was signed in about May 2010 (this audit contract shall be
referred to as “the 2009 retainer”).
(Collectively, the 2007, 2008
and 2009 retainers will be referred to as “the retainers”).
- On
or about 28 June 2010, the first defendant issued an audit report in respect of
the financial year ending 30 June 2009 (“the
2009 audit report”).
(Collectively, the 2007, 2008 and 2009 audit reports will be referred to as
“the audit reports”).
- In
each of the audit reports, the auditor gave an unqualified opinion that the
trustee of the Super Fund had complied, in all material
respects, with the
requirements of various provisions of the SIS Act and the Superannuation
Industry (Supervision) Regulations 1994 (“the SIS Regulations”),
and that the financial reports of the Super Fund presented fairly, in all
material respects,
the financial position of the Super Fund as at the end of the
relevant financial year.
Overview: The Parties’
Positions
- The
plaintiff’s essential proposition in these proceedings was that as result
of the failures of the auditor, in the respective
financial years,
irregularities went undetected for many years and, when ultimately those
irregularities were discovered, the opportunity
to redeem many of the loans and
investments of the Super Fund, or to pursue recovery action against those on
whose advice the loans
and investments had initially been made, had been
lost.
- By
a second further amended statement of claim filed with leave in Court on 31
August 2017 (“second further ASOC”), the
plaintiff claimed, inter
alia, that the defendants’ conduct was:
- (1) in breach
of their duties in contract and in tort;
- (2) in
contravention of their obligations as auditors under the SIS Act
- (3) misleading
and deceptive; and
- (4) in breach
of Commonwealth and State legislation.
- The
defendants made certain admissions as to breaches of their duties and
representations in its defence to the further amended statement
of claim
(“the amended defence”) filed in Court on 28 August 2017 (“the
admitted breaches”) but otherwise
denied the alleged breach of their
duties, any misleading and deceptive conduct and contravention of obligations
under the SIS Act
(collectively, “the non-admitted breaches”). The
defendants also contested causation as to both admitted and non-admitted
breaches.
- In
the broad, the issues in the proceedings are twofold. First, there was an issue
as to causation for the admitted breaches by the
defendants. Secondly, as to the
non-admitted breaches, the issues concerned whether there existed duties and, if
so, whether the
pleaded breaches had been made out – together with an
issue as to whether there is a causal link with respect to those breaches.
- The
defendants’ ultimate position was that, notwithstanding the admitted
breaches, the plaintiff has not demonstrated causation
or loss. In the result,
the defendants contended that the plaintiff was only entitled to an award of
nominal damages of $300 in total
for the admitted breach of the retainers.
- That
overview does not purport to comprehensively digest the issues emerging from the
parties’ contentions. That task may only
properly occur in the context of
close attention being paid to the pleadings and the submissions of the parties
(see under the heading
“Issues” below from [222]).
- Before
the Court embarks upon that course, it is necessary to set out the factual
background.
FACTUAL BACKGROUND
- As
earlier mentioned, the sole shareholder and director of the plaintiff is Ms
Crittle.
- In
2006, following a family law settlement with her former husband, Ms Crittle had
a sum of money to invest. Ms Crittle was of retirement
age and had no investment
or accounting training, experience or knowledge, having worked exclusively as a
homemaker since 1969.
- Ms
Crittle sought advice from a financial adviser, Mr Moylan, who was a director,
shareholder and the authorised representative of
a financial planning firm known
as The Retirement Planning Specialists Pty Limited (later known as Moylan
Retirement Solutions Pty
Limited and shall hereinafter be referred to as
“Moylan Retirement Solutions”).
- Moylan
Retirement Solutions held an Australian Financial Services Licence. Mr Moylan
worked from offices in Charlestown, near Newcastle.
Ms Crittle had been
introduced to Mr Moylan by Mr Kenneth Michael Hill, her long time solicitor of
30 years, of Turnbull Hill Lawyers.
Mr Moylan’s office was on the same
floor as Turnbull Hill Lawyers. Ms Crittle placed great trust and weight in
recommendations
made to her by Mr Hill.
- In
early 2006, Ms Crittle established the Super Fund, with the plaintiff appointed
as trustee, and transferred sums exceeding $7 million
to be
“invested” in accordance with Mr Moylan’s advice. I now turn
to those investments.
The Investments
The loan investments
- In
2006, the plaintiff entered into a series of investments by way of unsecured
loans pursuant to a series of facility agreements.
They are set out, in turn,
below.
The River Island Facility Agreement
- The
River Island Facility Agreement, dated 10 February 2006, was
between:
- (1) the
plaintiff, as lender; River Island Property Holdings Pty Limited (“River
Island”), as borrower; and
- (2) Leonard
Tomkins and Mr Moylan, as guarantors.
- By
that facility agreement, the plaintiff agreed to lend up to $2.17 million
“to assist...in the development of certain properties
located at Clarence
Town and Wallalong”. Whilst the River Island Facility Agreement was
executed by Mr Moylan as a guarantor,
he also executed the agreement on behalf
of the plaintiff – even though he was not a director of the
company.
Pacific General Facility Agreement
- The
Pacific General Facility Agreement, dated 23 February 2006, was
between:
- (1) the
plaintiff, as lender;
- (2) Pacific
General Securities Limited (“Pacific General”) (the responsible
entity for the Hardie Estates Property Fund,
later known as the Regional Land
Property Fund (“the Regional Land Fund”)), as borrower; and
- (3) Charlestown
Consulting Pty Ltd, Keller Civil Engineers Pty Ltd, Hardie Holdings Pty Ltd, Mr
Duncan Hardie, Mr Hill and Mr Alan
Keller, as guarantors;
- By
that facility agreement, the plaintiff agreed to lend up to $2.5 million
“to assist... in the construction of residential
lots” at
Muswellbrook, Singleton, Tamworth and Bellbird. (It should be noted, at this
juncture, that the loan relating to Pacific
General was referred to by different
names during the proceedings, including “Pacific General”,
“Regional Land”
and “Hardie
Estates”).
MCD Holdings Facility Agreement
- The
MCD Holdings Facility Agreement, dated 14 March 2006, was
between:
- (1) the
plaintiff, as lender; and
- (2) MCD
Holdings Pty Limited (“MCD Holdings”) (formerly known as
“Moylan’s Business Solutions Pty Limited”),
as
borrower.
- Pursuant
to the facility agreement, the plaintiff agreed to advance up to $1.2 million
“as a line of credit for the Business,
MCD Holdings Pty Ltd”. The
agreement was executed by Mr Moylan on behalf of MCD Holdings, and also by Mr
Moylan purportedly
on behalf of the plaintiff.
Tomkins Facility
Agreement
- The
Tomkins Facility Agreement, dated 12 May 2006, was between:
- (1) the
plaintiff, as lender; and
- (2) Mr Leonard
Tomkins, L & V Tomkins Pty Limited, Mr Andrew Tomkins and Ms Deborah
Tomkins, as borrowers.
- Pursuant
to the facility agreement, the plaintiff agreed to advance up to $616,795
“to provide capital... as a means of satisfying
debts incurred in the
operation of L & V Tomkins Pty Limited and related
entities”.
Overview: Monies advanced
- The
following table sets out a summary of the monies advanced as loans by the
plaintiff, pursuant to each facility agreement, as well
the respective period in
which each advance was
made:
|
Facility Agreement
|
Loan
|
Period
|
|
River Island Facility Agreement
|
$2,165,813
|
February 2006 to January 2007
|
|
Pacific General Facility Agreement
|
$2,500,000
|
23 February 2006
(or around that date)
|
|
MCD Holdings Facility Agreement
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$850,000
|
14 March 2006
(or around that date)
|
|
Tomkins Facility Agreement
|
$616,795
(This advance was made in two tranches of $400,000 and $216,795,
respectively)
|
12 May 2006 and
9 August 2006
|
- These
investments referred to in [31]-[40] shall be referred to as “the loan
investments”.
- There
is no claim, as such, made against MCD Holdings.
The other
investments
- In
2006, the plaintiff also invested in the following unit
trusts:
The Cartel Investments Unit Trust
- In
May 2006, the sum of $400,000 was invested in the Cartel Investments Unit Trust
(“the Cartel Trust”). The trustee was
MCD Holdings.
- The
Cartel Trust was heavily invested in the property venture associated with the
Pacific General Facility Agreement.
The Limeburners Creek Unit
Trust
- On
3 July 2006, the sum of $100,000 was invested in the Limeburners Creek Unit
Trust (“the Limeburners Trust”). The trustee
was Limeburners Creek
Investments Pty Limited (“Limeburners Creek”).
- The
Limeburners Trust had made significant loans to River Island and MCD
Holdings.
- Despite
some initial dispute, the defendants accepted, correctly, in my view, that the
weight of the evidence supported a finding
that $100,000 was advanced by the
plaintiff for investment in the Limeburners Trust. I note, in that respect, that
for each relevant
financial year, the Super Fund recorded a $100,000 investment
in the Limeburners Trust and the plaintiff’s bank statements
showed a
$100,000 cheque withdrawal on 5 July 2006; the plaintiff’s general ledger
also recorded an investment in the Limeburners
Trust in the amount of $100,000
made that same day.
- The
investments in the respective unit trusts will be collectively referred to as
“the non-loan investments”.
- The
loan investments and the other investments shall be collectively referred to
throughout this judgment as “the loans and
investments”.
Advice from Mr Moylan
- There
was a dispute as to whether or not the loans and investments were made on Mr
Moylan’s advice or that he recommended the
relevant property development
ventures, albeit associated with the loans and investments, to the plaintiff.
The primary factors relied
upon by the plaintiff in support of a finding as to
the former were as follows:
- (1) the fact
that Moylan Retirement Solutions was the holder of an Australian Financial
Securities Licence and Mr Moylan was its authorised
representative;
- (2) Mr
Moylan’s initial correspondence with Ms Crittle, by which he indicated
that he would assist her in making “appropriate
investment
recommendations” and advised Ms Crittle to transfer funds to Turnbull Hill
Lawyers trust account so that he could
“then organise the investment of
funds from this account after consultation with you on all
investments” (emphasis added);
- (3) Ms
Crittle’s evidence in cross-examination, that she placed herself in Mr
Moylan’s hands, appointed him as her advisor
and understood Mr Moylan
would advise on investment decisions; and
- (4) an absence
of any other plausible explanation as to why the loans and investments were made
and the fact that Mr Moylan had a
personal interest in the loans and investments
(this issue will be discussed further below at [79]).
- In
reply, the defendants submitted:
- (1) The
plaintiff’s submissions were altogether inconsistent with the evidence at
trial.
- (2) The
following evidence of Ms Crittle, in that respect, was
highlighted:
- (a) she had
signed the Pacific General Facility Agreement and the Tomkins Facility
Agreement, by this fact, Ms Crittle was aware of
those two loan
investments;
- (b) she was not
aware of the balance of the loan investments or the other investments;
- (c) she did not
receive any advice concerning the prudence (or otherwise) of entering into a
facility agreement, specifically, with
River Island or providing loans to it or
in other respects;
- (d) she had
never heard of the Limeburners Trust until mid-2013; and
- (e) she had
never head of the Cartel Trust or MCD Holdings until 2014.
- (3) In light of
that evidence, it was simply not open to the plaintiff, it was submitted, to
contend that those loan investments and
other investments – that Ms
Crittle said she had no knowledge of – were on advice and recommendation
of Mr Moylan. The
Court should not draw inferences favourable to the plaintiff
on matters where no attempt was made to prove them by direct evidence:
Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd
(1991) 22 NSWLR 389 (“Commercial Union Assurance”) at 418
(per Handley JA).
- (4) As to the
loan investments that Ms Crittle was aware, namely, the Pacific General Facility
Agreement and the Tomkins Facility
Agreement, it was contended, as she gave no
evidence of specific advice or recommendation from Mr Moylan, with respect to
those facility
agreements, the Court should not infer that such advice or
recommendation was received.
- (5) Further,
although aware of the Tomkins Facility Agreement, Ms Crittle did not give
consent for amounts of $216,795 to be drawn
down under that agreement. Ms
Crittle gave evidence that she gave the Commissioner of Taxation a truthful
account in that respect.
- (6) None of the
matters referred to by the plaintiff can overcome the plaintiff’s failure
to adduce evidence of advice or recommendation.
It was contended, the inferences
called for by the plaintiff’s submissions are not available. In
particular, the defendants
submitted the following facts do not demonstrate Mr
Moylan provided advice as submitted by the plaintiff:
- (a) the fact
that Mr Moylan was the authorised representative of an investment advisory
company;
- (b) the fact
that he had earlier represented that he would advise;
- (c) his
appointment as adviser; and
- (d) Ms
Crittle’s understanding that he would advise.
- (7) Turning
then to the submission by the plaintiff that the advice and recommendation from
Mr Moylan was the only plausible explanation
as to why the loans and investments
came to be made. The defendants submitted that such a contention was untenable
as it entirely
ignored or overlooked two factors:
- (a) First, Ms
Crittle’s evidence that she was unaware of and had never heard of a number
of the loans and investments and that
funds were disbursed without her knowledge
or authority.
- (b) Secondly,
that the next matter referred to in plaintiff’s closing submissions as
outlined in [51(4)]
above — “the fact that Mr Moylan had a personal interest in the
investments” — provides a “perfectly plausible”
explanation for the occurrence of these events unbeknownst to Ms Crittle. The
plaintiff identified that explanation in the course of submitting that there was
no explanation.
- A
short time after meeting with Mr Moylan, Ms Crittle received a letter from Mr
Moylan dated 1 February 2006 (“the 2006 correspondence”).
By that
correspondence, Mr Moylan recommended the establishment of the Super Fund. Mr
Moylan knew the asset position of Ms Crittle
at that time. One of the benefits
of establishing the Super Fund, as stated in the 2006 correspondence, was that
Ms Crittle could
“stay in control”. Another advantage was the
flexibility offered by the superannuation arrangements.
- At
the bottom of the first page of the 2006 correspondence, Mr Moylan stated, on
behalf of Moylan Retirement Solutions, that he would
“assist” Ms
Crittle with the following:
2. Administering [the Super Fund] including all taxation and statutory matters
each year.
3. Make appropriate investment recommendations.
- The
2006 correspondence did not go into any detail as to what was involved in giving
assistance. During cross-examination, Ms Crittle
was asked whether she
“left that sort of detail up to [Mr Moylan]”, she gave the following
evidence: “I placed
myself in his hands at that moment on the advice of
Michael Hill, as you've said, the lifelong friend, and I would have always
referred
back to Michael for any advice. That was the reason I did it, I
travelled this road”.
- In
the 2006 correspondence, Mr Moylan recommended that “the aim was... to
stay very flexible” over the next 6-12 months;
to have enough
“ready” cash in a bank, building security or credit union and the
balance of the assets on the “short
term” to be invested in
“cash, fixed interest or property”. After the short term period, the
plaintiff’s
investment portfolio could be appropriately structured to
include “shares, etc”.
- Mr
Moylan then stated:
To assist this process I am recommending you transfer your funds to Turnbull
Hill Lawyers Trust account. Michael and I can then organise
the investment of
funds from this account after consultation with you on all
investments.
- Shortly
afterwards, having accepted the recommendation of Mr Moylan, Ms Crittle
transferred $7.3 million to the Turnbull Hill Lawyers
trust account.
- During
cross-examination, Ms Crittle gave evidence that she had appointed Mr Moylan
“to be my adviser under the umbrella of
Turnbull and Hill” and when
initially asked if she controlled the investment decisions made she said,
“yes, but as –
control and being advised, I’m not quite sure
if you want to know the difference”.
- Throughout
the cross-examination of Ms Crittle, it was suggested that she had control over
the investment decisions. She consistently
maintained, however, that the
decisions she made, in exercising that control, were the subject of
“advice”. Her evidence,
in that respect, was as
follows:
Q. You put the money into that trust account on the expectation that you would
stay in control of investment decisions?
A. He advised and make [sic] a decision –
Q. It would be your decision?
A. – along with the person and the people that I was being advised
by.
- At
this juncture, I interpose to note that I accept the submission of the plaintiff
that Ms Crittle gave her evidence candidly and
was concerned to tell the truth
and recall matters to the best of her ability. My observations of the witness
and the transcript
of her evidence reveal Ms Crittle to be a truthful and
reliable witness.
- As
to the loans and investments made by Mr Moylan, Ms Crittle was aware of the
following facility agreements (having personally signed
the facility
agreements):
- (1) The Pacific
General Facility Agreement; and
- (2) The Tomkins
Facility Agreement.
- As
to the Pacific General Facility Agreement, she stated that she did not know what
she would have done had she been aware that Mr
Moylan had a personal
involvement. This was because Ms Crittle, on her evidence, “totally
trusted both these people”
(being a reference to Mr Moylan and Mr
Hill).
- As
to the Tomkins Facility Agreement, Ms Crittle agreed the funds were disbursed
without her direction or permission.
- She
was not aware of the following loan investments:
- (1) The River
Island Facility Agreement; and
- (2) The MCD
Holdings Facility Agreement.
- She
had not heard of the Limeburners Trust or the Cartel Trust until 2013 and 2014,
respectively.
- It
is plain that Ms Crittle did not exercise effective “control” or
“direction” in making the loans and investments
(or providing the
loans).
- In
addition to the aforementioned discussion of the evidence, that finding is
supported by the following facts:
- (1) Ms Crittle
did not conceive of the loans and investments;
- (2) the funds
were invested from the Turnbull Hill Lawyers trust account;
- (3) Ms Crittle
had no investment or accounting experience, training or knowledge and, as
mentioned earlier, worked exclusively as
a “home maker” since 1969;
and
- (4) Her
evidence during cross-examination made clear that she was, at the time of the
transactions (and perhaps even at the time of
giving her evidence), unworldly as
to financial affairs.
- It
is true that Mr Moylan as the authorised representative of an investment
advisory company; made a representation that he would
advise by the 2006
correspondence; and was appointed as an advisor with a specific function to give
investment advice. However, those
facts, in and of themselves, do not
demonstrate that he did, in fact, advise Ms Crittle as to the loans and
investments, even though
each one of those considerations is relevant to
resolving that question.
- It
is also true, as I have found, Ms Crittle was unaware of or had never heard of
most (but not all) of the loans and investments
(and funds were dispersed
without her knowledge).
- It
follows, as a matter of logic, that she did not directly receive advice or
recommendations about the loans and investments of which
she was unaware. It
does not follow, however, that the loans and investments occurred other than
upon Mr Moylan’s advice, even
if a specific recommendation was not made to
Ms Crittle about each such investment.
- Ms
Crittle trusted Mr Moylan to look after her affairs and in doing so she placed
the plaintiff in the hands of Mr Moylan. As the
2006 correspondence disclosed,
his function was to make investment recommendations. The arrangement was never
that investments would,
necessarily, be made by funds being provided on an
investment-by-investment basis after the provision of advice or recommendation,
as to each such investment, but upon a very substantial sum being placed into
trust, which was to be drawn upon “after consultation”
with Ms
Crittle. I agree with the submission of the plaintiff that the
“investments were not made in a vacuum”. Mr Moylan
made such
investments and, as the plaintiff submitted, not as an office holder of the
plaintiff. It must follow that he was making
the loans and investments in his
role as a financial advisor to the plaintiff.
- Whilst
his advice was not communicated, as such, it does not follow that the loans and
investments were not made on his advice –
in the sense that the funds held
on trust had been placed in his hands to make investments as a professional
financial advisor. The
notion of “advice” is wide enough to
encompass, in this context, the result of the “consultation,
determination,
plan”, even if Ms Crittle was unwise in her decision to
allow Mr Moylan such a licence in handling her investments.
- Whilst
it is unnecessary to resolve that question, it would appear Mr Moylan’s
actions would fall within the meaning of “financial
product advice”
within the Corporations Act 2001 (Cth).
- Chapter
7 of the Corporations Act regulates financial services and markets. Under
that Act, the terms “financial product” and “financial product
advice”
are defined at s 763A(1) and s 766B(1), respectively. Those
definitions are extracted below:
763A General definition of financial product
(1) For the purposes of this Chapter, a financial product is a facility
through which, or through the acquisition of which, a person does one or more of
the following:
(a) makes a financial investment (see section 763B);
(b) manages financial risk (see section 763C);
(c) makes noncash payments (see section 763D).
This has effect subject to section 763E.
766B Meaning of financial product advice
(1) For the purposes of this Chapter, financial product advice means a
recommendation or a statement of opinion, or a report of either of those things,
that:
(a) is intended to influence a person or persons in
making a decision in relation to a particular financial product or class of
financial
products, or an interest in a particular financial product or class of
financial products; or
(b) could reasonably be regarded as being intended to have such an
influence.
- The
only plausible explanation for Ms Crittle entering the facility agreements, of
which she was aware, is that she received advice
to do so, from Mr Moylan, and
having regard to Mr Moylan’s capacities, in that respect, she relied upon
his advice. That is
consistent with the evidence of Ms Crittle given with
respect to the Pacific General Facility Agreement.
- It
is true that Mr Moylan’s perceived involvement in the loans and
investments (which will be discussed further, below) may
offer a possible
alternative for the loan investments that Ms Crittle was not aware. It does not,
however, account for loan investments
and other investments of which she was
aware.
- However,
the principle stated in Commercial Union Assurance, relied upon by the
defendants, cannot operate in circumstances where the “proof”
lies not only from inferences which may be drawn from the surrounding
circumstances, but the evidence of Ms Crittle for the plaintiff, albeit under
cross-examination. Hence, I consider that Ms Crittle
did rely on Mr
Moylan’s advice.
Personal involvement of Mr Moylan
- Unbeknownst
to Ms Crittle, Mr Moylan, whilst he was a chartered accountant, had a personal
interest or involvement in a number of
the property development ventures
encompassing the loans and investments.
- The
following illustrates that involvement:
- (1) Mr Moylan
was a director and shareholder of MCD Holdings. From 5 September 2006, he was
the sole director of MCD Holdings. It
is relevant to note that company
was:
- (a) a
shareholder in River Island;
- (b) the
borrower under the MCD Holdings Facility Agreement;
- (c) the trustee
of the Cartel Trust as well as (at the same time) a beneficiary of that trust.
This was a trust the plaintiff invested
in; and
- (d) a founding
unit holder and investor in the Hardie Estates Property Fund / Regional Land
Fund property venture.
- (2) Mr
Moylan’s company, Moylan Business Solutions Pty Limited
(“MBS”) (of which Mr Moylan was also a director and
shareholder, the
other director and shareholder being Mr Hill of Turnbull Hill Lawyers), was a
joint-venture partner with Turnbull
Hill Lawyers in the property investment
deriving from the Pacific General Facility Agreement.
- (3) Mr Moylan
was a director of River Island. He was also a personal guarantor under the River
Island Facility Agreement.
- (4) Mr Moylan
was a former director and shareholder in Limeburners Creek, which was the
trustee of the Limeburners Trust, and the
principal assets of the trust were
loans advanced to MCD Holdings and River Island.
- (5) Mr Moylan
was associated with L & V Tomkins Pty Ltd.
- Additionally,
specifically with respect to Mr Moylan’s involvement with MBS, the
following should be noted:
- (1) Through
MBS, Mr Moylan provided accounting and taxation services to clients, including
the plaintiff.
- (2) MBS
prepared accounts for the Super Fund for the financial year ending 30 June 2006
and the relevant financial years, inclusive.
- (3) MBS was
also the accountant for the Limeburners Trust and the Cartel Trust.
- (4) The
registered office of MBS was at Suite 5, 29 Smith Street, Charlestown. That same
address was listed as the registered office
and principal place of business for
River Island, L & V Tomkins and Limeburners
Creek.
Status of the Loans and Investments as at 30
June 2008
- By
30 June 2008, the principal and interest outstanding on the loans and
investments, save for the MCD Holdings Facility Agreement,
were recorded in the
plaintiff’s accounts as follows:
- (1) Pacific
General Facility Agreement – $838,298;
- (2) River
Island Facility Agreement – $2,806,091;
- (3) Tomkins
Facility Agreement – $787,325;
- (4) Cartel
Trust – $400,000;
- (5) Limeburners
Trust – $132,209.
- By
that same date, the principal was unpaid and there was interest receivable of
$32,909.59.
The Financial statements
The 2007 financial statement
- The
2007 financial statement was prepared by “Moylans” and signed by Ms
Crittle on 12 February 2007 (it should be noted,
that date appears to be a
mistake and should have been dated “2008”).
- The
following appeared in the 2007 financial statement under the heading,
“Notes to the Financial Statements for the period
1 July 2006 to 30 June
2007”:
1. Statement of Significant Accounting Policies
These financial statements are a special purpose financial report prepared for
distribution to members to satisfy the accountability
requirements of the
Superannuation Industry (Supervision) Act 1993 and the trust deed. The
trustee(s) has determined that the fund is not a reporting entity.
The financial statements have been prepared in accordance with the requirements
of the following Australian Accounting Standards:
AASB 112: Income Taxes
AASB 1031: Materiality
AASB 110: Events After the Balance Sheet Due
No other Australian Accounting Standards, Urgent Issues Group Interpretations or
other authoritative pronouncements of the Australian
Accounting Standard Board
have been applied.
...
a. Measurement of Investments
Investments of the fund have been measured at net market values after allowing
for costs of realisation. Changes in the net market
value of assets are brought
to account in the operating statement in the periods in which they occur.
Net market values have been determined as follows:
i. shares and other securities listed on the Australian
Stock Exchange by reference to the relevant market quotations at the reporting
date;
ii. mortgage loans by reference to the outstanding principal of the loans;
iii. units in managed funds by reference to the unit redemption price at the
reporting date;
iv. insurance policies by reference to the surrender value of the policy;
and
v. property, plant and equipment at the trustees’ assessment of their
realisable value.
The 2008 financial statement
- The
2008 financial statement included similar terms to that of the 2007 financial
statement and, to avoid repetition, will not be
extracted.
The
2009 financial statement
- The
2009 financial statement included the following under the heading, “Notes
to the Financial Statements for the Year Ended
30 June
2009”:
1. Statement of Significant Accounting Policies
The trustees have prepared the financial statements on the basis that the fund
is a non-reporting entity because there are no users
dependant on general
purpose financial reports. This financial report is therefore a special purpose
financial report that has been
prepared in order to meet the needs of
members.
The financial report has been prepared in accordance with the significant
accounting policies disclosed below, which the directors
have determined are
appropriate to meet the needs of members. Such accounting policies are
consistent with the previous periods unless
stated otherwise.
...
a. Measurement of Investments
Investments of the fund have been measured at net market values after allowing
for costs of realisation. Changes in the net market
value of assets are brought
to account in the operating statement in the periods in which they occur.
Net market values have been determined as follows:
i. shares and other securities listed on the Australian
Stock Exchange by reference to the relevant market quotations at the reporting
date;
ii. units in managed funds by reference to the unit redemption price at the
reporting date;
iii. insurance policies by reference to the surrender value of the policy;
and
iv. investments properties [sic] at the trustees’ assessment of their
realisable value.
- Collectively,
the 2007, 2008 and 2009 financial statements will be referred to as “the
financial statements”.
The Investment Strategy
- An
investment strategy for the Super Fund was prepared with respect to each of the
relevant financial years.
The 2007 investment strategy
- The
2007 investment strategy was signed by Ms Crittle on 10 February 2008, and
included the following:
This investment strategy has been developed by the trustees of the fund having
regard to the following factors, among other things:
1. investing in such a way as to maximise member returns taking into account the
risk associated in holding the investment;
2. appropriate diversification in a long term investment strategy;
3. the ability of the superannuation fund to pay benefits as well as other costs
of the superannuation fund as they become due and
payable;
4. members age and risk profile.
Trustee Discretion
The investment principles outlined in this statement are guidelines only. The
trustee retains discretion in relation to all investment
decisions.
Subject to the trustee having a reasonable basis for actions involving
investments of the fund, the trustee shall not be bound to
adhere to the
guidelines contained in this statement.
Risk and Return
The principle objective of superannuation funds is to provide retirement
benefits for members. In consideration of this, the trustees
shall take a long
term view when selecting investments.
The trustees shall have regard to the number and type of members of the fund and
their profiles, including ages, separate assets
and personal investment
preferences, if any, nominated by them. The trustees shall consider the effect
on other members of the fund
and of any investment direction by a member and
retains discretion as to whether to comply with any such direction, in whole, or
in part.
Liquidity and Cash Flow
Access to substantial amounts of cash or cash type investments is not required.
However, investments shall normally be of the type
convertible to cash within 90
days. The trustees will also maintain a minimum cash reserve sufficient to pay
the expenses of the
firm as they fall due.
Where some assets are not readily converted to cash then at least 50% of the
fund assets shall be invested in assets which are convertible
to cash within 90
days, unless certain assets represent particular direction from the members.
Diversification
Consistent with portfolio investment theory, risk shall be minimised by
investing in a spread of investments. This may be achieved
by either:
- investing directly in different types of assets, e.g. cash and fixed interest
securities, shares and equities and property, either
in Australia or overseas;
or
- investing with fund managers in their master funds and trusts so as to obtain
a spread of underlying investment types.
Diversification and Asset Allocation
A normal investment range for each type of investment shall be:
- Australian equities 0 to 100%
- Australian property 0 to 100%
- Australian fixed interest 0 to 100%
- Cash and short term securities 0 to 100%
The 2008 and 2009
investment strategies
- The
2008 and 2009 investment strategies were in similar terms.
The
Defendants and the Audits of the Super Fund
- As
previously mentioned, Mr Moylan arranged for “Baumgartner Partners”
to conduct an audit of the Super Fund, in respect
of the relevant financial
years, pursuant to the retainers.
- The
terms of the retainers, which were in similar but not identical terms, are
addressed below.
- Following
the audits, as previously mentioned, the first defendant issued the audit
reports.
- In
each audit report, the first defendant recorded, inter alia,
that:
- (1) the audit
evidence he had obtained was sufficient and appropriate to provide a basis for
his audit opinion;
- (2) the
financial report, for the relevant financial year, presented fairly in all
material respects, in accordance with the accounting
policies described in the
notes to the financial statements, the financial position of the Super Fund at
the relevant financial year
end date and the results of its operations for that
year then ended; and
- (3) the trustee
of the Super Fund had complied, in all material respects, with the requirements
of the SIS Act and the SIS Regulations
specified in the
report.
The Financial Collapses
- Over
the period 2012-2014, a number of the persons and entities associated with the
property ventures, with respect to the loans and
investments, were placed into
bankruptcy or liquidation. In particular:
- (1) Mr Hill was
made bankrupt on 16 March 2012;
- (2) Limeburners
Creek was deregistered on 2 December 2012;
- (3) Charlestown
Consulting Pty Ltd (a guarantor of the Pacific General Facility) was placed into
liquidation on 17 December 2012 and
subsequently deregistered;
- (4) Pacific
General was placed into liquidation;
- (5) Moylan
Retirement Solutions apparently ceased business by early 2013 (when insurance
policies held by that company lapsed for
non-payment of premiums); the company
was subsequently deregistered in August 2014;
- (6) River
Island was placed into liquidation on 8 February 2013 and subsequently
deregistered;
- (7) Leonard
Tomkins was made bankrupt on 6 March 2013;
- (8) Mr Moylan
was made bankrupt on 10 April 2013; and
- (9) MCD
Holdings and MBS were both placed into liquidation on 19 June 2013 and
subsequently deregistered.
Lapse of professional
indemnity policies held by Moylan companies
- In
early 2013, the professional indemnity policies of insurance formerly held by
Moylan Retirement Solutions lapsed.
- On
30 August 2013, professional indemnity policies of insurance formerly held by
MBS lapsed.
Recoveries
- In
mid-2013, Ms Crittle received a letter from another unit holder in the
Limeburners Trust expressing concerns about the financial
position of the trust
and its assets and proposing that an independent forensic accountant be
appointed to investigate the affairs
of the trust.
- Ms
Crittle arranged for the plaintiff to engage a forensic accountant, Ms Joanne
Phillips, and a firm of solicitors, RBHM Commercial
Lawyers, to assist the
plaintiff to uncover what may have occurred.
- Ms
Phillips subsequently obtained the first defendant’s files and, on 5 May
2014, sent the first defendant an email with a detailed
list of questions
concerning the financial position of the Super Fund and the state of its
records.
- As
at 5 May 2014, the status of the relevant persons and entities was as summarised
above at [96].
- The
plaintiff took steps to recover the loans and investments of the Super Fund by
initiating legal action against the relevant borrowers
or guarantors (that were
still solvent) and third parties. As a result of those steps, the plaintiff made
the following recoveries:
- (1) In respect
of the River Island Facility Agreement, in January 2016, the sum of $2,061,414
(net of legal costs) was recovered.
That amount comprised of the settlement
proceeds received following the settlement of proceedings in this Court against
Turnbull
Hill Lawyers.
- (2) In respect
of Pacific General Facility Agreement, in June 2016, the sum of $561,435 (net of
legal costs). That sum was recovered
following the settlement of proceedings in
this Court against the guarantors Mr Keller, Keller Civil Engineers Pty Limited,
Mr Hardie
and Hardie Holdings Pty Limited.
- (3) In respect
of the Tomkins Facility Agreement, in March 2017, the sum of $438,141.43 (net of
legal and other enforcement costs).
That amount was recovered after obtaining
judgment against L & V Tomkins in this Court and the subsequent sale of a
property
pursuant to an equitable mortgage declared by the Court in those
proceedings.
- (4) Additionally,
in respect of the Tomkins Facility Agreement, the plaintiff also recovered a
further sum of $216,795 by way of repayment
from the Australian Taxation Office
(“ATO”) in December 2013.
- The
plaintiff achieved no recoveries in respect of the other
investments.
LETTERS OF ENGAGEMENT
- As
earlier stated, the retainers were in similar terms, particularly the 2008 and
2009 retainers, but they were not in identical terms.
The relevant parts of the
retainers are extracted below (the issue of construction of “the audit
contract” shall be dealt
with separately, under a heading directed to that
topic).
Scope
The 2007 retainer
- The
2007 retainer recorded:
Further to your request for me to act as auditor of Ryan Holdings Retirement
Fund I hereby consent to my appointment and would like
now to set out my
understanding of the terms of this engagement.
My audit will be conducted in accordance with the Superannuation Industry
(Supervision) Act 1993 (“SIS”) with the objective of expressing and
opinion on the financial statements and on compliance with the Act and the
Regulations thereto.
- It
further recorded:
In accordance with Section 113 of SIS, the financial statements of a regulated
superannuation fund must be audited by an approved
auditor. The auditor must
give the trustees a report on the financial statements in the approved form
within the prescribed time
after the year of income to which the financial
statements relate.
- In
addition, the 2007 retainer included the following:
In forming my opinion on the financial statements, my staff will perform
sufficient tests to obtain reasonable assurance as to whether:
(i) the underlying accounting records are reliable and
adequate as a basis for the preparation of the financial statements; and
(ii) the financial position of the fund at balance date the results for the year
then ended are properly disclosed in the financial
statements.
(Those terms were not included in the 2008 and 2009 retainers).
- Under
the heading “Audit of SIS Compliance”, it
stated:
For the year ended 30 June 2007, I am required to form an opinion in respect of
compliance with certain aspects of SIS. My report
must refer to the following
Sections and Regulations: ...
Regulations: 4.09 ...
The 2008 and 2009 retainers
- Under
the heading “Audit Scope”, the 2008 and 2009 retainers recorded the
following:
In accordance with Section 35C of the Superannuation Industry (Supervision) Act
1993 (‘SIS”) we are required to give you a report, in the approved
form, on the operations of the fund for each financial
year for which we are
appointed. More specifically, our report must include an opinion on the special
purpose financial report of
the fund, as well as the fund’s compliance
with the following specific sections of SIS and the [SIS Regulations]: ...
Regulations: 4.09...
Our procedures with respect to regulation 4.09 will include testing that you
have an investment strategy and that you have given
consideration to risk,
return, liquidity and diversification and that the fund’s investments are
made in line with that investment
strategy. No opinion will be made on the
investment strategy or its appropriateness to the fund
members.
Audit Objectives and Approach
The 2007 retainer
- The
2007 retainer included the following:
The work undertaken by my staff and I to form an opinion is determined by
judgment, in particular regarding the nature, timing and
extent of the audit
procedures for gathering of audit evidence and the drawing of conclusions based
on the audit evidence gathered.
In addition, there are inherent limitations in
any audit, and these include the use of testing, the inherent limitations of any
internal
control structure, the possibility of collusion to commit fraud, and
the fact that most audit evidence is persuasive rather than
conclusive. As a
result, my audit can only provide reasonable – not absolute –
assurance that the financial statements
are free from material
misstatement.
- The
2007 retainer also provided:
My audit will be planned and conducted primarily to enable me to express my
professional opinion as to whether the financial statements
comply with
Australian Accounting Standards and other mandatory professional reporting
requirements but, also, so as to have reasonable
expectations of detecting those
material misstatements arising as a result of irregularities which would have a
material effect on
the financial statements. Unless otherwise agreed with you, I
assume no responsibility to design audit procedures to identify matters
that may
be appropriate to report to you. However, if I encounter matters during the
course of my audit that I believe should be
brought to your attention, I will
communicate these matters to you. You should not assume that any matters
reported to you, or that
a report that there are no matters to be communicate
[sic], indicates that there are no additional matters that you should be aware
of in meeting your responsibilities.
- The
2007 retainer also, relevantly, provided:
As part of my audit process, I may request from the trustees written
confirmation concerning representations made to my staff or
I in connection with
the audit.
We will randomly check shareholdings and generally accept third party written
documentation as evidence of ownership of assets. We
will also accept your
valuations were applicable unless otherwise requested.
The
2008 and 2009 retainers
- Again,
in similar terms to the 2007 retainer, the 2008 and 2009 retainers included the
following terms under the heading “Audit
Objectives and
Approach”:
Our audit of the financial report will be planned and conducted primarily to
enable us to express our professional opinion as to
whether the financial
statements comply with Australian Accounting Standards and other mandatory
professional reporting requirements,
so as to have reasonable expectations of
detecting those material misstatements arising as a result of irregularities
which would
have a material effect on the financial statements. Unless otherwise
agreed with you, we assume no responsibility to design audit
procedures to
identify matters that may be appropriate to report to you. However, if we
encounter matters during the course of our
audit that we believe should be
brought to your attention, we will communicate these matters to
you.
- Further,
the 2008 and 2009 retainers recorded:
The work undertaken by us to form an opinion is determined by judgement, in
particular regarding the nature, timing and extent of
the audit procedures for
the gathering of audit evidence and the drawing of conclusions based on the
audit evidence gathered. In
addition, there are inherent limitations in any
audit, and these include the use of testing, the inherent limitations of any
internal
control structure, the possibility of collusion to commit fraud, and
the fact that most audit evidence is persuasive rather than
conclusive. As a
result, our audit can only provide reasonable – not absolute –
assurance that the financial statements
are free from material misstatement.
The report provided at the completion of the audit shall not be inferred or used
for any purpose other than for which it was specifically
prepared.
Reporting on Significant/Compliance Matters
The 2007 retainer
- The
2007 retainer included the following:
Report on Significant Matters
Under Section 129 of SIS I am required to report to you in writing, if during
the course, or in connection with, my audit, I become aware of any contravention
of the Act or Regulations which I believe has occurred, is occurring or may
occur, I am also required under Section 130 to report
to you if I believe the
fund may be, or be about to become, in an unsatisfactory financial position.
Where the contravention was
of such a nature that it may affect the interests of
the members or beneficiaries then I am also obliged to report the matter to
the
Australian Tax Office.
The 2008 and 2009 retainers
- Similarly,
the 2008 and 2009 retainers record:
Report Compliance Matters
Under Section 129 of SIS, we [are] required to report to you in writing if
during the course or in connection with our audit, we
become aware of any
contravention of SIS or SISR which we believe has occurred, is occurring or may
occur. We are also required under
Section 130 of SIS to report to you if we
believe the fund may be, or be about to become, in an unsatisfactory financial
position.
Where the contravention is of such a nature that it meets the
reporting criteria established by the Australian Tax Office, then we
are also
obliged to report the matter to the Australian Tax Office by way on an Auditor
contravention report.
- The
2008 and 2009 retainers included an additional heading:
Report on Other Matters
As well as reporting to you any compliance matters that may have arisen during
the audit, we may also report to you any matters arising
from the financial
audit and any other issues we believe should be brought to you attention. You
should not however assume that any
management letter issued will indicate all
matters that you should be aware of in meeting your responsibilities.
Accordingly if there are no matters for us to report to you, we will not provide
a management letter.
Fees
- Each
of the retainers, with respect to fees, stipulated:
The fees are based on the degree of responsibility, skill involved and the time
necessarily occupied by the work and as such the
audit fee will differ between
audits depending on the complexity of each fund.
THE STATUTORY
FRAMEWORK
- The
relevant statutory framework, comprising of the SIS Act and the SIS Regulations,
informed the terms of the audit contract for
the relevant financial years, and
is also relevant to the plaintiff’s claims for damages under s 315(11) of
the SIS Act by
reason of contraventions of the SIS Act.
- The
relevant provisions in force at the time of each audit are considered in
turn.
The 2007 Audit
SIS Act
- The
object of the SIS Act was to make provision for the prudent management of
certain superannuation funds, approved deposit funds
and pooled superannuation
trusts and for their supervision by the Australian Prudential Regulation
Authority (“APRA”),
the Australian Securities and Investments
Commission (“ASIC”) and the Commissioner of Taxation: s 3(1).
- The
SIS Act provides the following definitions in s 10:
- (1) “approved
auditor” means: is “
a person included in a class of persons specified in
regulations made for the purposes of this definition, but does not include a
person in respect of whom a disqualification order is in force under section
131.
(2) “superannuation entity” means
(a) a regulated superannuation fund; or
(b) an approved deposit fund; or
(c) a pooled superannuation trust.
(3) “market value”, in relation to an asset, means:
the amount that a willing buyer of the asset could
reasonably be expected to pay to acquire the asset from a willing seller if the
following assumptions were made:
(a) that the buyer and the seller dealt with
each other at arm’s length in relation to the sale;
(b) that the sale occurred after proper marketing of the asset;
(c) that the buyer and the seller acted knowledgeably and prudentially in
relation to the sale.
- “Self-managed
superannuation fund” was defined in s 17A. It was not in dispute that the
Super Fund was at all relevant
times a SMSF pursuant to the SIS Act.
- The
Super Fund was a “regulated superannuation fund” (as defined in s
19) and therefore a “superannuation entity”
for the purpose of the
SIS Act.
- As
a superannuation entity, it was not disputed, that the Super Fund was subject to
the requirements of the SIS Act with respect to
the preparation of accounts,
statements and audits.
- Prior
to 24 September 2007, those requirements were set out in Pt 13 of the SIS Act.
As explained below, although Pt 13 was repealed
on 24 September 2007, it
continued to apply to years of income prior to that date and so applied to the
audit that was undertaken
of the Super Fund in respect of the year ended 30 June
2007.
- The
requirements, as prescribed by the SIS Act at that time, were as
follows:
- (1) each
trustee of a superannuation entity was required to ensure that such accounting
records as correctly record and explain the
transactions and financial position
of the entity were kept and maintained: s 111.
- (2) each
trustee of a SMSF was required to prepare various financial accounts and
statements in respect of each year of income of
the entity: s 112.
- (3) each
trustee of a superannuation entity to ensure that an approved auditor was
appointed to give the trustee a report in the approved
form of the operations of
the entity for that year: s 113 (extracted below).
- Section
113 provided:
113 Audit of accounts and statements
(1) For each year of income, each trustee of a superannuation entity must ensure
that an approved auditor is appointed to give the
trustee, or the trustees, a
report, in the approved form, of the operations of the entity, and the RSE
licensee (if any) of the entity,
for that year. The appointment must be made
within whichever of the periods set out in the regulations that apply to the
entity.
(1A) If an auditor requests, in writing, a trustee of a superannuation entity to
give the auditor a document, each trustee of the
entity must ensure that the
document is given to the auditor within 14 days of the request being made. Only
documents that are relevant
to the preparation of the report may be
requested.
...
(3) Without limiting the generality of subsection (1), an approved
form:
...
(a) must, if it is approved for a superannuation entity that is a self managed
superannuation fund—either:
(i) relate solely to the audit of the
accounts and statements referred to in subsection 112(1) and prepared in respect
of a year of
income; or
(ii) relate not only to the audit of those accounts and statements, but also to
the audit of such other accounts and statements,
prepared in respect of a year
of income, as are identified in the form;
and
(b) must include a statement by the auditor as to
whether, in the opinion of the auditor, each trustee of the entity and the RSE
licensee
(if any) of the entity has complied with the provisions of this Act and
the regulations and the Financial Sector (Collection of Data) Act 2001,
identified in the form, during that year of income; and
...
(4) The auditor must give the report to each trustee of the entity within the
specified period after the end of the year of income.
The period is specified in
the regulations.
(5) The auditor is guilty of an offence if the auditor contravenes subsection
(4).
...
(6) The auditor is guilty of an offence if the auditor contravenes subsection
(4). This is an offence of strict liability.
...
- The
“approved form” of audit report, referred to in s 113, was published
by the ATO. The approved form in force at the
time of the 2007 audit identified
various provisions of the SIS Act and the SIS Regulations in respect of which
the auditor under
s 113(3)(b) was required to form and express an opinion as to
whether there had been compliance (it shall hereinafter be referred
to as
“the 2007 approved form”).
- Among
the provisions of the SIS Regulations that were identified in the 2007 approved
form was reg 4.09. That regulation is set out
in [136] below.
- Part
16 of the SIS Act set out rules relating to “Actuaries and Auditors of
Superannuation Entities”.
- Within
Pt 16, ss 129 and 130 imposed reporting obligations on auditors in certain
circumstances. The relevant parts of those sections
are extracted
below:
129 Obligations of actuaries and auditors—compliance
When section applies
(1) This section applies to a person in relation to a superannuation entity
if:
(a) the person forms the opinion that it is likely that
a contravention of this Act or the regulations of the Financial Sector
(Collection of Data) Act 2001 may have occurred, may be occurring, or may
occur, in relation to that entity; and
(b) the person formed the opinion in the course of, or in connection with, the
performance by the person of actuarial or audit functions
under this Act or the
regulations or the Financial Sector (Collection of Data) Act 2001 in
relation to the entity.
...
Trustee and Regulator to be told about the matter
(3) Subject to subsection (3A), the person must, as soon as practicable after
forming the opinion mentioned in paragraph (1)(a):
(a) tell a trustee of the entity about the matter in
writing; and
...
(c) if the superannuation entity is a self managed superannuation fund and the
matter is specified in the approved form—tell
the Regulator about the
matter in the approved form.
...
No civil liability for telling about a matter
(4) A person to whom this section applies is not liable in a civil action or
civil proceeding in relation to telling the Regulator,
or a trustee of the
entity, about a matter as required by this section.
Offences
(5) A person is guilty of an offence if the person contravenes subsection
(3).
Penalty: 50 penalty units.
(6) A person is guilty of an offence if the person contravenes subsection (3).
This is an offence of strict liability.
Penalty: 25 penalty units.
...
130 Obligations of actuaries and auditors—solvency
When section applies
(1) This section applies to a person in relation to a superannuation entity
if:
(a) the person forms the opinion that the financial
position of the entity may be, or may be about to become, unsatisfactory;
and
(b) the person formed the opinion in the course of, or in connection with, the
performance by the person of actuarial or audit functions
under this Act or the
regulations or the Financial Sector (Collection of Data) Act 2001 in
relation to the entity.
Regulator and trustee to be told about the financial position
(2) Subject to subsection (2A), the person must, as soon as practicable after
forming the opinion mentioned in paragraph (1)(a),
tell the Regulator, and a
trustee of the entity, about the matter in writing.
...
No civil liability for telling about a matter
(3) A person to whom this section applies is not liable in a civil action or
civil proceeding in relation to telling the Regulator,
or a trustee of the
entity, about a matter as required by this section.
Offences
(4) A person is guilty of an offence if the person contravenes subsection
(2).
Penalty: 50 penalty units.
(5) A person is guilty of an offence if the person contravenes subsection (2).
This is an offence of strict liability.
Penalty: 25 penalty units.
...
When financial position is unsatisfactory
(7) For the purposes of this section, the financial position of an entity is
taken to be unsatisfactory if, and only if, under the
regulations, the financial
position of the entity is treated as unsatisfactory.
- As
appears from the above, the trustee’s compliance with the SIS Act and the
SIS Regulations was a matter that arose for the
auditor’s consideration
when forming the opinion required by s 113(3) of the SIS Act in the context of
the reporting obligation
under s 129.
SIS Regulations
- Regulation
1.04 provided as follows:
1.04 Prescribed matters (Act, s 10)
(1) The purpose of this regulation is to prescribe matters for the purposes of
various definitions in section 10 of the Act.
Approved auditor
(2) For the purposes of the definition of approved auditor
in section 10 of the Act, the following class of persons is specified,
namely, individuals each of whom:
(a) in the case of an auditor of a self managed
superannuation fund:
(i) is, under Division 2 of Part 9.2 of the
Corporations Act 2001, registered, or taken to be registered, as an
auditor; or
(ii) is associated with a professional organisation specified in Schedule 1AAA
in the manner specified, in respect of that organisation,
in that Schedule;
or
(iii) is the Auditor-General of the Commonwealth, a State or Territory, or is a
delegate of the Auditor-General; and
(b) in the case of an auditor of a superannuation entity
other than a self managed superannuation fund:
(i) is, under Division 2 of Part 9.2 of the
Corporations Act 2001, registered, or taken to be registered, as an
auditor; or
(ii) is the Auditor-General of the Commonwealth, a State or Territory, or is a
delegate of the Auditor-General.
....
- Regulation
4.09 provided as follows:
4.09 Operating standard — investment strategy
(1) For the purposes of subsections 31 (1), 32 (1) and 33 (1) of the Act, the
standard stated in subregulation (2) is applicable
to the operation of
superannuation entities.
(2) The trustee of the entity must formulate and give effect to an investment
strategy that has regard to all the circumstances of
the entity, including in
particular:
(a) the risk involved in making, holding and realising,
and the likely return from, the entity’s investments, having regard
to its
objectives and expected cash flow requirements;
(b) the composition of the entity’s investments as a whole, including the
extent to which they are diverse or involve exposure
of the entity to risks from
inadequate diversification;
(c) the liquidity of the entity’s investments, having regard to its
expected cash flow requirements;
(d) the ability of the entity to discharge its existing and prospective
liabilities.
(3) An investment strategy is taken to be in accordance with subregulation (2)
even if it provides for a specified beneficiary or
class of beneficiaries to
give directions to the trustee where the directions:
(a) relate to the strategy to be followed by the trustee
in relation to the investment of a particular asset or assets of the entity;
and
(b) are given in the circumstances covered by regulation
4.02.
- For
the purposes of s 130 of the SIS Act, the circumstances in which the financial
position of a superannuation entity “may
be, or may be about to become,
unsatisfactory” (s 130(1)(a)), or “is taken to be
unsatisfactory” (s 130(7)), were
prescribed by regs 9.03 and 9.04 of the
SIS Regulations. Those regulations were in the following
terms:
9.03 Subsection 130 (1) of the Act etc — obligations of actuaries and
auditors
(1) In forming an opinion for the purposes of paragraph 130(1)(a) of the Act or
subregulation 9.31 (3) whether the financial position
of a defined benefit fund
may be about to become unsatisfactory, a person must consider whether, at the
end of the 3-year period
immediately following the date at which the
person’s calculations are done, the value of the assets of the fund is
likely (based
on the expectations referred to in subregulation (2)) to be
inadequate to meet the value of such of the liabilities of the fund as
relate to
the benefits vested in the members of the fund.
(2) For the purposes of subregulation (1), the likelihood of the value of assets
being inadequate must be based;
...
(b) if the person considering the matter is an auditor
— on the reasonable expectation of an actuary on whose advice the auditor
has relied in relation to the matter.
(3) Nothing in subregulations (1) and (2) is to be taken to affect the meaning
of paragraph 130(1)(a) of the Act.
...
(5) For the purposes of paragraph 130(1)(b) of the Act, if an auditor in the
course of performing a function for an entity under
the Act or these regulations
obtains sufficient information to enable the auditor to assess the financial
position of the entity,
the auditor is taken to have performed an audit function
under the Act or these regulations in relation to the entity.
9.04 Subsection 130 (7) of the Act — unsatisfactory financial position
For the purposes of subsection 130 (7) of the Act and subregulation 9.31 (3),
the financial position of an entity is treated as unsatisfactory
if, in the
opinion of a person performing an actuarial or audit function in relation to the
entity:
...
(b) in the case of an entity that is an accumulation fund —
either:
(i) the assets of the fund are inadequate to
cover the aggregate benefit accounts of members of the fund; or
(ii) the value of the assets of the fund is inadequate to cover the value of the
liabilities of the fund in respect of benefits accrued
to members of the
fund;
...
The repeal of Pt 13
- On
24 September 2007, the Financial Sector Legislation Amendment (Simplifying
Regulation and Review) Act 2007 (Cth) (“the 2007 Act”) received
Royal assent and, as a result, Pt 13 of the SIS Act was repealed and a new Pt 4
was inserted
into the SIS Act.
- Among
other things, the new Pt 4 included s 35C (set out below) which replaced the
previous s 113 relating to audits. However, s 35C
only applied in respect of
financial years ending 30 June 2008 and following. It is common ground that s
113 of the SIS Act, as it
stood prior to the enactment of the 2007 Act,
continued to apply in respect of the 2007 audit.
The 2008 and
2009 Audits
The SIS Act
- I
turn to the SIS Act at the time of the 2008 and 2008 audits. Sections 35A and
35B (in the new Pt 4) contained very similar requirements,
relating to the
keeping and maintaining of accounting records and preparation of financial
accounts and statements, as had been previously
been contained in Pt 13,
specifically, ss 111 and 112, prior to its repeal.
- Section
35C related to the “audit of accounts and statements” and was in
substantially similar terms to the former s 113.
The requirements as to the
contents of the auditor’s report were set out in s 35C(5)(c) in the
following terms:
(5) Without limiting subsection (1), an approved form:
...
(c) must include a statement by the auditor as to whether, in the
auditor’s opinion, each trustee of the entity and the RSE
licensee (if
any) of the entity has, during the year of income, complied with the provisions
of:
(i) this Act and the regulations; and
(ii) if the entity is a registrable superannuation entity—the Financial
Sector (Collection of Data) Act 2001, the Corporations Act 2001 and
the regulations under that Act;
that are identified in the form;
...
- As
had previously been the case, the auditor was required to give the report to
each trustee of the entity within the prescribed period
after the end of the
year of income (s 35C(6)), and failure to do so was an offence (s 35C(7) and
(8)).
- Sections
129 and 130 of the Act, set out above, continued to apply at the time of the
2008 and 2009 audits (save for the amendment
of the words “as soon as
practicable” to “immediately” in ss 129(3) and 130(2)). This
was also the case for
regs 4.09, 9.03 and 9.04 of the SIS Regulations.
- As
was the case for the financial year ending 30 June 2007, the approved form
prescribed for the purposes of the financial years ending
30 June 2008 and 30
June 2009 identified reg 4.09 of the SIS Regulations as a provision about which
the auditor was required to express
an opinion as to whether there had been
compliance. (Those approved forms shall hereinafter be referred to as “the
2008 approved
form” and “the 2009 approved form”,
respectively).
The Corporations Act
- Reference
also needs to be made to the provisions of the Corporations Act.
- Section
9 provides the following definitions:
financial report means an annual financial report or a halfyear
financial report prepared under Chapter 2M.
Note: Section 295 deals with the contents of annual financial reports and
section 302 deals with the contents of halfyear financial reports.
...
small proprietary company has the meaning given by subsection
45A(2).
- A
“small proprietary company” is defined in s 45A(2) and is extracted
below:
Small proprietary company
(2) A proprietary company is a small proprietary company for a financial year if
it satisfies at least 2 of the following paragraphs:
(a) the consolidated gross operating revenue for the
financial year of the company and the entities it controls (if any) is less than
$10 million;
(b) the value of the consolidated gross assets at the end of the financial year
of the company and the entities it controls (if any)
is less than $5
million;
(c) the company and the entities it controls (if any) have fewer than 50
employees at the end of the financial year.
Note: A small proprietary company generally has reduced financial reporting
requirements (see subsection 292(2)).
- Chapter
2M of the Corporations Act is concerned with “Financial Reports and
Audit”. Part 2M.3is concerned with “Financial Reporting”.
- Section
292 is in the following terms:
292 Who has to prepare annual financial reports and directors’
reports
(1) A financial report and a directors’ report must be prepared for each
financial year by:
(a) all disclosing entities; and
(b) all public companies; and
(c) all large proprietary companies; and
(d) all registered schemes.
Note: This Chapter only applies to disclosing entities incorporated or formed in
Australia (see subsection 285(2)).
Small proprietary companies
(2) A small proprietary company has to prepare the financial report and
directors’ report only if:
(a) it is directed to do so under section 293 or 294;
or
(b) it was controlled by a foreign company for all or part of the year and it is
not consolidated for that period in financial statements
for that year lodged
with ASIC by:
(i) a registered foreign company; or
(ii) a company, registered scheme or disclosing
entity.
The rest of this Part does not apply to any other small proprietary
company.
- Part
2M.5 deals with “Accounting and Auditing Standards”.
“Accounting standards” are dealt with under s 334 and are issued by
the Australian Accounting Standards Board (“the AASB”).
“Auditing standards” are issued
by the Auditing and Assurance
Standards Board (“AUASB”) pursuant to s 336.
- Sections
336 and 337 are extracted below:
336 Auditing standards
AUASB’s power to make auditing standards
(1) The AUASB may, by legislative instrument, make auditing standards for the
purposes of this Act. The standards must not be inconsistent
with this Act or
the regulations.
(3) An auditing standard applies to financial reports in relation
to:
(a) periods ending after the commencement of the
standard; or
(b) periods ending, or starting, on or after a later date specified in the
standard.
(4) If:
(a) the AUASB makes an auditing standard; and
(b) the standard applies to financial reports in relation to particular periods
under subsection (3); and
(c) an auditor is conducting an audit of a financial report in relation to a
period that occurs before the start of the earliest
of those
periods;
the auditor may elect to apply the auditing standard to that audit unless the
standard says otherwise. The election must be recorded
in the audit report.
337 Interpretation of accounting and auditing standards
In interpreting an accounting or auditing standard, unless the contrary
intention appears:
(a) expressions used in the standard have the same
meanings as they have in this Chapter; and
(b) the provisions of Part 1.2 apply as if the standard’s provisions were
provisions of this Chapter.
THE AUDITING STANDARDS FRAMEWORK
Financial Reports
- Before
considering which auditing standards applied to the audits of the Super Fund, it
is necessary to consider the concept of “financial
reports”.
- As
mentioned above, the Corporations Act regulates “financial
reports” in Pt 2M.3. The plaintiff satisfied the definition of a
“small proprietary company” pursuant to s 45A of the Corporations
Act, and did not fall within other categories specified in s 292(2) of that.
The plaintiff was not, therefore, obliged to prepare a “financial
report” complying with requirements of Pt 2M.3 (including the requirement
to comply with “accounting standards” pursuant to s 296): see
292(2).
- It
follows that any references to “financial reports” in the auditing
standards issued pursuant to s 336 of the Corporations Act, must
be consistent with the meaning under Ch 2M. That is because s 337 requires that
the “expressions used in the standard have the same meaning”.
- No
definition of a “special purpose financial report” or “special
purpose financial statement” was provided
by the parties to the Court. For
the purposes of these proceedings, special purpose financial reports or
statements are not “financial
reports” for the purposes of Pt 2M.3
of the Corporations Act. Further, the plaintiff was not a
“reporting entity”, and the financial statements prepared for the
audits were not “general
purpose financial statements” (see
“Statements of Accounting Concepts SAC 1 (Definition of Reporting
Entity)” which
recognises the concept of differential reporting).
- As
the defendant submitted, what is relevant for the purposes of special purpose
financial statements is that their mode of preparation
is expressly defined on
their face for the purpose identified. The financial statements that were
audited were introduced by the
words “these financial statements are a
special purpose financial report prepared for distribution to members to satisfy
the
accountability requirements of [the SIS Act] and the trust deed. The
trustee(s) have determined that the fund is not a reporting
entity”.
- It
should also be noted that the plaintiff’s expert witness, Mr Brian Morris,
accepted in cross-examination that the financial
statements in these proceedings
were “special purpose financial reports”. The plaintiff properly
conceded that there
was no dispute that the plaintiff was not a reporting entity
and did not need to prepare general purpose financial statements or
a financial
report under Ch 2M of the Corporations Act.
Auditing
Standards
- The
auditing standards that applied to the audits were not fully outlined or defined
by the parties in these proceedings. The following
summary has been constructed
from parts of the submissions of the parties, exhibits in the proceedings,
statutory provisions and
the applicable auditing guidelines.
The
AUASB auditing standards
- The
AUASB is the Commonwealth body and its functions and powers are set out in the
Australian Securities and Investments Commission Act 2001 (Cth). It has
the responsibility, as earlier mentioned, of issuing statutory auditing
standards. Those standards are legal instruments
under s 336 of the
Corporations Act (see J Leow and S Murphy, Australian Master
Superannuation Guide (Wolters Kluwer, 21st ed, 2017/18) at [15-650]). The
AUASB’s.
I will now turn to the relevant standards issued by the
AUASB.
The ASA Standards
- The
AUASB issued a series of auditing standards known as “the ASA
standards”, some of which are relevant to these
proceedings.
ASA 800
- “ASA
800 The Auditor’s Report on Special Purpose Audit Engagements”
(version dated June 2007) (“ASA 800”)
was an exhibit in these
proceedings.
- Pursuant
to cl 1(b), ASA 800 applied to the audit of a special purpose financial
report.
- The
expression “special purpose financial report” was not defined in the
applicable version of ASA 800. (ASA 800 has since
been amended to include a
definition: see cl 6 of “ASA 800 Special Considerations – Audits of
Financial Reports Prepared
in Accordance with Special Purpose Frameworks”
(version dated May 2017)).
- Clause
4 outlined the purpose of ASA 800, namely, to establish mandatory requirements
in connection with “special purpose audit
engagements”, which
included the following:
a component of a general purpose or special purpose financial report, such as a
single financial statement, specified accounts, elements
of accounts, or items
in a financial statement.
- Clause
7 of ASA 800 required an auditor to ensure there was an agreement for the audit
in the following terms:
Before undertaking a special purpose audit engagement, the auditor shall ensure
there is agreement with the client as to the exact
nature of the engagement and
the form and content of the report to be issued.
- Clause
9 set out the basic elements and ordinary layout of an auditor’s report on
a special purpose audit engagement.
ASA 200, ASA 240 and ASA
260
- “ASA
200 Objective and General Principles Governing Audit of a Financial Report
(version dated April 2006)” (“ASA 200”) and “ASA
240 The Auditor’s Responsibility to Consider Fraud in an Audit of a
Financial Report
(version dated April 2006)” (“ASA
240”) were also referred to in these proceedings. There was
controversy between the parties as to whether those auditing standards applied
to the audits in the relevant financial
years.
- The
defendant also referred to “ASA 260 Communication of Audit Matters with
Those Charged With Governance (version dated April
2006)” (“ASA
260”).
- ASA
200, ASA 240 and ASA 260 all included an “Application” section which
were all in the same terms:
1. This Auditing Standard applies to:
a. an audit of a financial report for a financial year,
or an audit of a financial report for a half-year, in accordance with Part 2M.3
of the Corporations Act 2001; and
b. an audit of a financial report for any other
purpose.
2. This Auditing Standard also applies, as appropriate, to an audit of other
financial information.
[Emphasis added.]
(“the application section”).
- I
do not accept the plaintiff’s submission that ASA 200 and ASA 240 applied
to the audit of the “special purpose financial
reports” by virtue of
cl 1(a) of the application section because, as discussed above, the meaning of
“financial report”
has the same meaning within Ch 2M of the
Corporations Act.
- However,
pursuant to cl 2 of the application section, it is appropriate for ASA 200 and
ASA 240 to be applied to the audits because
the AUASB had indicated, through a
“guidance statement”, that the ASA standards should be applied to
the audit of a SMSF’s
special purpose financial
reports.
The guidance statement
- That
guidance statement was noted in a list within Mr Morris’ fourth report:
“Guidance Statement 009 Auditing Self-Managed
Superannuation Funds
(October 2008 version)” (“the guidance statement”).
- The
AUASB issued the guidance statement pursuant to s 227B of the Australian
Securities and Investments Commission Act for the purposes of providing
guidance on procedural auditing and assurance matters. (It should be noted that
the guidance statement
has been updated three times since being issued).
- The
“Application” section of the guidance statement provides as
follows:
1. This Guidance Statement has been formulated by the Auditing and Assurance
Standards Board (AUASB) to provide guidance to auditors
conducting:
(a) the audit of a Self-Managed Superannuation
Fund’s (SMSF’s) special purpose financial report (financial
audit); and
(b) the audit of a SMSF’s compliance with the Superannuation Industry
(Supervision) Act 1993 (SISA) and the Superannuation Industry
(Supervision) Regulations 1994 (SISR) (compliance
audit).
[Emphasis added. Footnotes omitted.]
- Under
the heading “Auditor’s Responsibilities” and subheading
“Conduct the Financial Audit in Accordance with
ASAs”, the guidance
statement noted that:
The auditor complies with all of the requirements in each of the ASAs relevant
to the financial audit in determining the audit procedures
to be performed in
conducting an audit in accordance with the ASAs.
- The
guidance statement then listed 25 key ASA standards which are relevant to the
conduct of the financial audit of a SMSF (without
limitation), including,
inter alia, ASA 200 and ASA 240.
- In
addition to the guidance statement, there was a previous indication from the
former body of AUASB that suggested it is appropriate
to apply auditing
standards to the audit of a superannuation fund as discussed below in relation
to “Audit Guide No 4 The Audit
of Superannuation Funds (2004
Edition)” (“AUG 4”) (see below at [180]).
AUG
4
- AUG
4 was issued by the Auditing and Assurance Standards Board of the Australian
Accounting Research Foundation (“the former
board”). The former
board was later reconstituted as the AUASB under the Corporate Law Economic
Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth).
- AUG
4 was published to provide assistance to auditors of superannuation funds in
implementing Australian Auditing and Assurance Standards.
Both parties relied on
and referred to this instrument.
- Under
the heading “Auditor’s Responsibilities”, AUG 4 said
“the audit must be conducted in accordance with
Australian Auditing and
Assurance Standards issued by the Auditing Assurance Standards
Board”.
- Chapter
3 of AUG 4 concerned the planning of an audit of a superannuation fund. Under
the heading “Compliance”, it stated:
Where the results of audit procedures reveal a breach of a SIS or the CA
requirement, this must be reported to the Trustees in writing
in accordance with
S129 of SIS, regardless of materiality.
- Chapter
7 of AUG 4 addressed auditing investments of a superannuation fund. Under the
heading “Auditing Objectives”, AUG
4
stipulated:
The audit objectives in respect of investments are:
- existence and ownership: The auditor should establish that investments
exist and are registered in the name of the Trustees or custodian
- completeness and recording: The auditor should ensure that investments
have been recorded at the correct amounts and in the correct period
- disclosure: The auditor should ensure that investments are classified
and disclosed correctly in accordance with [AAS 25 Financial Reporting
by
Superannuation Plans]
- compliance: The auditor should ensure that investments comply with the
terms of the governing rules, the Trustees’ investment strategy
and the
SIS requirements and
- valuation: The auditor should ensure that all investments are valued at
net market value in accordance with AAS 25.
- Under
the heading “Existence and Ownership”, AUG 4
stated:
The assets of a superannuation fund vest in the Trustees. Assets may be
registered in the name of the Trustees or another body as
custodian. In either
case, the auditor should establish these assets are in fact being held on behalf
of the fund, and not in any
capacity other than as Trustee or
custodian.
- Under
the heading “Valuation of Assets”, AUG 4
stated:
AAS 25 requires the assets of the fund to be carried at net market value, being
the amount, which could be expected to be received
from a disposal in an orderly
market after deducting costs of disposal.
...
The auditor will have to exercise judgement in assessing the reasonableness of
the value disclosed.
- As
to the application of “AAS 25 Financial Reporting by Superannuation
Plans” (“AAS 25”) for valuation, AUG
4 stated the
following:
Given AAS 25 applies to Reporting Entities only, it has been argued that
Self-Managed Superannuation Funds (SMSFs) that are classified
as non-reporting
entities do not need to comply with AAS 25 and therefore not valuing their
assets at net market value.
Regardless of this the ATO’s preference is that SMSFs should use
net market value reporting for their financial statements and this should be
done on an annual basis. A view that is shared by APRA. This is particularly
important when a benefit is to be paid from the fund or the fund has in-house
assets.
If the auditor is unable to form an opinion in assessing the reasonableness of
the valuation because of the uncertainty, and no expert
valuation can be
obtained, the auditor should consider qualification of the audit report...
[Emphasis added.]
Mandatory requirements under the ASA
Standard
ASA 200
- The
purpose of ASA 200 was to establish mandatory requirements and to provide
explanatory guidance on the objective and general principles
governing an audit
of a financial report. ASA 200 imposes the following mandatory
standards:
Conduct of an Audit of a Financial Report
9. The auditor shall conduct an audit in accordance with Auditing Standards.
...
Professional Judgement and Professional Scepticism
20. The auditor shall plan and perform an audit by exercising professional
judgement.
21. The auditor shall plan and perform an audit with an attitude of professional
scepticism recognising that circumstances may exist
that cause the financial
report to be materially misstated.
...
Reasonable Assurance
24. The auditor shall obtain reasonable assurance as to whether the financial
report taken as a whole is free from material misstatement,
whether due to fraud
or error, when conducting an audit in accordance with Auditing
Standards.
- ASA
200 then provided the following explanation as to “professional
scepticism”:
23. An attitude of professional scepticism means the auditor makes a critical
assessment, with a questioning mind, of the validity of audit evidence obtained
and is alert to audit
evidence that contradicts or brings into question the
reliability of documents and responses to enquiries and other information
obtained
from management and those charged with governance. For example, an
attitude of professional scepticism is necessary throughout the audit process
for the auditor to reduce the risk
of overlooking unusual circumstances, of over
generalising when drawing conclusions from audit observations, and of using
faulty
assumptions in determining the nature, timing and extent of the audit
procedures and evaluating the results thereof. When making
enquiries and
performing other audit procedures, the auditor is not satisfied with
less-than-persuasive audit evidence based on a
belief that management and those
charged with governance are honest and have integrity. Accordingly,
representations from management
and those charged with governance are not a
substitute for obtaining sufficient appropriate audit evidence to be able to
draw reasonable
conclusions on which to base the auditor’s opinion.
[Emphasis added].
ASA 240
- The
purpose of ASA 240 was to establish mandatory requirements and to provide
explanatory guidance on the auditor’s responsibility
to consider fraud in
an audit of a financial report. ASA 240 imposed, inter alia, the
following mandatory requirements:
6. In planning and performing the audit to reduce audit risk to an acceptably
low level, the auditor shall consider the risks of
material misstatements in the
financial report due to fraud.
...
27. The auditor shall maintain an attitude of professional scepticism throughout
the audit, recognising the possibility that a material
misstatement due to fraud
could exist, notwithstanding the auditor’s past experience with the entity
about the honesty and
integrity of management and those charged with
governance.
PLEADINGS
- By
way of background, these proceedings were initially brought by a statement of
claim filed 5 December 2014. The plaintiff amended
its pleadings on three
subsequent occasions: 14 November 2016, 16 May 2017 and 31 August 2017.
- As
earlier mentioned, the second further ASOC was filed in Court on 31 August 2017
in accordance with the rulings of this Court made
on 29 August 2018 (which will
be discussed further below). As such, the following outline of the respective
pleadings of the parties
will refer to the plaintiff’s second further ASOC
and the amended defence.
- I
will now turn to the claims brought by the plaintiff and the respective response
by the defendants.
Duties in contract and tort
- The
plaintiff pleaded that on or about March 2008, the plaintiff as trustee of the
Super Fund entered into a contract with the first
defendant, or alternatively
the first and second defendants, to act as auditor of the Super Fund, and, in
that capacity, express
an opinion on financial statements of the Super Fund and
on compliance with the SIS Act and Regulations with respect to the financial
year ending 30 June 2007. (The pleading as to the retainers for the years ending
30 June 2008 and 30 June 2009 were in similar terms).
- In
response, the defendants pleaded that it was the first defendants who was
engaged by the plaintiff to provide the audit reports.
Specifically, the
defendant confined what it contended were the purposes of the audit reports in
the below extract:
10. In answer to paragraph 10 of the Further Amended Statement of Claim, the
Defendants:
a. say that on or about 7 March 2008, the First
Defendant was engaged by the Plaintiff to provide a report, in the form approved
for
the purposes of s 113(1) of the Superannuation Industry (Supervision) Act
1993 (Cth) (SIS Act), of the operations of the Super Fund for the
financial year ending 30 June 2007; and...
b. otherwise do not admit the paragraph.
10A. In answer to paragraph 10A of the Further Amended Statement of Claim, the
Defendants:
a. say that in or about May 2009, the First Defendant
was engaged by the Plaintiff to provide a report, in the form approved for the
purposes of s 35C of the SIS Act, of the operations of the Super Fund for the
financial year ending 30 June 2008; and
b. otherwise do not admit the paragraph.
10B. In answer to paragraph 10B of the Further Amended Statement of Claim, the
Defendants:
a. say that in or about May 2010, the First Defendant
was engaged by the Plaintiff to provide a report, in the form approved for the
purposes of s 35C of the SIS Act, of the operations of the Super Fund for the
financial year ending 30 June 2009; and
b. otherwise do not admit the paragraph.
- The
plaintiff pleaded that:
12. By reason of the matters pleaded at paragraphs 2 to 11 above, the plaintiff
was dependent upon and relied upon the defendants
to carry out the 2007 Audit
Retainer, the 2008 Audit Retainer and the 2009 Audit Retainer (together "the
Audit Retainers") in accordance
with the terms of those retainers (as set out in
paragraph 13 below), and was vulnerable to suffer loss and damage if the Audit
Retainers
were not performed in accordance with those terms.
- The
defendants pleaded that the first defendant disclaimed any assumption of
responsibility for reliance on the audit reports, or
the financial statements to
which it related, to any person other than the members of the Super Fund or for
any purpose other than
that for which it was prepared.
- As
to the terms of the retainers, the plaintiff pleaded the
following:
13. It was a term of each of the Audit Retainers that the first defendant, or
alternatively the first and second defendants would,
in respect of the relevant
audit year:
(a) act as auditor of the Super Fund;
(b) conduct the audits of the Super Fund in accordance with the SIS Act and the
Superannuation Industry (Supervision) Regulations 1994 (Cth) ("SIS
Regulations");
(c) inquire into and report accurately as to whether each investment by the
Super Fund as recorded in the financial statements was
made in accordance with
an investment strategy that had regard to all of the circumstances of the Super
Fund, including in particular
the matters set out in regulation 4.09(2) of the
SIS Regulations;
(d) audit the Super Fund in a manner so as to be able to reasonably form the
professional opinion of an auditor as to whether the
Super Fund and/or the
plaintiff as a trustee of the Super Fund had complied, in all material respects,
with the requirements of the
SIS Act and the SIS Regulations the period set out
in the financial statements;
...
(f) bring to the plaintiff's attention, by way of notation or qualification or
other suitable communication, any serious misdescription
or misstatement in the
financial statements of the Super Fund or any fact or circumstance arising from
the audit which any competent
chartered accountant acting in the capacity of an
auditor would bring to the attention of the plaintiff;
(g) inquire into and, acting reasonably, form and express an opinion as to
whether:
(i) the financial statements of the Super
Fund complied with the SIS Act, SIS Regulations, Australian Accounting Standards
and other mandatory professional reporting requirements;
(ii) the underlying accounting records of the Super Fund were reliable and
adequate for the preparation of the financial statements
of the Super Fund;
(iii) the financial position of the Super Fund at balance date and the results
for the year then ended were properly disclosed in
the financial statements of
the Super Fund;
(iv) the financial statements of the Super Fund were free from material
misstatements arising as a result of irregularities which
would have a material
effect on the financial statements;
(h) at all times in the performance of their services
under the Audit Retainer, exercise due care and skill to the standard expected
of someone qualified and experienced in performing audit services in Australia
of the nature required under the Audit Retainer.
[Particulars
omitted.]
- As
to duties in common law and tort, the plaintiff pleaded the
following:
14. By reason of the matters pleaded in paragraphs 10 to 13 above, at all
material times the first defendant, or alternatively the
first and second
defendants owed the plaintiff duties at common law that were coextensive with
the terms of the Audit Retainers set
out in paragraph 13 above.
- The
defendants responded as to the terms of the retainers:
13. In answer to paragraph 13 of the Further Amended Statement of Claim, the
Defendants:
a. refer to and repeat paragraphs 10,10A, 10B and 11
above;
b. admit that it was a term of the purported engagement or-engagements pleaded
in paragraphs 10a,10Aa and 10Ba above that the First
Defendant would exercise
reasonable care and skill in the performance of those engagements;
c. say that there were terms of the engagement pleaded in paragraph 10a above
that the First Defendant was to provide a report in
the approved form but was
otherwise not obliged to:
i. design audit procedures to identify
matters that may be appropriate to report to the Plaintiff; and
ii. communicate matters to the Plaintiff unless the First Defendant encountered
them during the course of the purported engagement
and believed they should be
brought to the Plaintiff's attention;
d. say that the approved form of report for the
purported engagement pleaded in paragraph 10a above provided that the auditor
disclaimed
any assumption of responsibility for any reliance on the report, or
on the financial statements to which it related, to any person
other than
members of the superannuation fund or for any purpose other than that for which
it was prepared;
e. in the premises, say that it was a term of the engagement pleaded in
paragraph 10a above that the purported engagement had no
purpose other than that
for which the report in the approved form was to be prepared;
f. say that the approved form of report for the engagement pleaded in
paragraph 10a above provided that the auditor expressed no opinion on the
investment strategy of the superannuation fund or its appropriateness
to the
fund members;
g. in the premises, say that it was a term of the engagement pleaded in
paragraph 10a above that the First Defendant was not obliged
to, and would not,
express any opinion on the investment strategy of the Super Fund or its
appropriateness to the fund members;
h. say that there were terms of the engagement pleaded in paragraph 10Aa above
that the First Defendant was to provide a report in
the approved form but was
otherwise not obliged to:
i. design audit procedures to identify
matters that may be appropriate to report to the Plaintiff; and
ii. communicate matters to the Plaintiff unless the First Defendant encountered
them during the course of the engagement and believed
they should be brought to
the Plaintiff's attention;
i. say that it was a term of the engagement pleaded in
paragraph 10Aa above that the report in the approved form was not to be used
for
any purpose other than that for which it was specifically prepared;
j. say that the approved form of report for the engagement pleaded in paragraph
10Aa above provided that the auditor disclaimed any
assumption of responsibility
for any reliance on the report, or on the financial statements to which it
related, to any person other
than members of the superannuation fund or for any
purpose other than that for which it was prepared;
k. in the premises, say that it was a term of the engagement pleaded in
paragraph 10Aa above that the engagement had no purpose other
than that for
which the report in the approved form was to be specifically prepared;
l. say that the approved form of report for the engagement pleaded in paragraph
10Aa above provided that the auditor expressed no
opinion on the investment
strategy of the superannuation fund or its appropriateness to the fund
members;
m. in the premises, say that it was a term of the engagement pleaded in
paragraph 10Aa above that the First Defendant was not obliged
to, and would not,
express any opinion on the investment strategy of the Super Fund or its
appropriateness to the fund members;
n. say that there were terms of the engagement pleaded in paragraph 10Ba above
that the First Defendant was to provide a report in
the approved form but was
otherwise not obliged to:
i. design audit procedures to identify
matters that may be appropriate to report to the Plaintiff; and
ii. communicate matters to the Plaintiff unless the First Defendant encountered
them during the course of the purported engagement
and believed they should be
brought to the Plaintiff's attention; and
o. say that it was a term of the engagement pleaded in
paragraph 10Ba above that the report in the approved form was not to be used
for
any purpose other than that for which it was specifically prepared;
p. say that the approved form of report for the engagement pleaded in paragraph
10Ba above provided that the auditor disclaimed any
assumption of responsibility
for any reliance on the report, or on the financial statements to which it
related, to any person other
than members of the superannuation fund or for any
purpose other than that for which it was prepared;
q. in the premises, say that it was a term of the engagement pleaded in
paragraph 10Ba above that the engagement had no purpose other
than that for
which the report in the approved form was to be specifically prepared;
r. say that the approved form of report for the engagement pleaded in paragraph
10Ba above provided that the auditor expressed no
opinion on the investment
strategy of the superannuation fund or its appropriateness to the fund
members;
s. in the premises, say that it was a term of the engagement pleaded in
paragraph 10Ba above that the First Defendant was not obliged
to, and would not,
express any opinion on the investment strategy of the Super Fund or its
appropriateness to the fund members; and
t. otherwise do not admit the paragraph.
[Particulars omitted.]
- The
defendants then made an admission as to the first defendant’s duty, albeit
limited, in the following terms:
14. In answer to paragraph 14 of the Further Amended Statement of Claim, the
Defendants:
a. refer to and repeat paragraphs 10 to 13 above;
b. admit that the First Defendant owed the Plaintiff a duty to exercise
reasonable care and skill in the performance of engagements
pleaded in paragraph
10a, 10Aa and 10Ba above; and
c. otherwise do not admit the paragraph.
Representations
- The
heading “Representations” in the second further ASOC was initially
“Breach of contractual and common law duties”,
the content of which
seemed to have two functions: first, to identify the representations within the
retainers to correlate to the
following section on breach and, secondly, to
identify representations for a further claim of misleading and deceptive
conduct. The
plaintiff pleaded the following:
Representations
15. The audit reports issued by the first and/or second
defendants in connection with the 2007 Audit Retainer, the 2008 Audit Retainer
and the 2009 Audit Retainer contained representations (Representations) by the
first and/or second defendants that, in respect of
the relevant audit year:(a)
in the opinion of the first and/or second defendants, the Super Fund's financial
report presented fairly
in all material respects in accordance with the
accounting policies described in the notes to the financial statements and the
financial
position of the fund at year end and the results of its operations for
the year then ended;
(b) in the opinion of the first and/or second defendants, the first and/or
second defendants had confirmed by testing that the trustee
had given
appropriate consideration to risk, return, liquidity and diversification and
that the Super Fund's investments were made
in line with that investment
strategy;
(c) in the opinion of the first and/or second defendants, the Super Fund and/or
the plaintiff as trustee of the Super Fund had complied,
in all material
respects, with the requirements of the SIS Act and the SIS Regulations as
specified in the audit reports;
(d) the audit evidence that had been reviewed by the first and/or second
defendants was a sufficient and appropriate basis for the
opinions stated in the
audit report;
(e) the first and/or second defendants, when carrying out the audit for the
relevant year, and in reaching and stating the opinions
stated in the audit
report for that year, had acted in accordance with the duties owed to the
plaintiff under the Audit Retainers
and at common law, as set out in paragraph
13 above.
15A. The first and/or second defendants made the Representations knowing and
intending they would be relied on by the plaintiff.
15B. The first and/or second defendants owed a duty to the plaintiff to
communicate to the plaintiff directly the opinions stated
in the audit reports
issued in connection with the 2007 Audit Retainer, the 2008 Audit Retainer and
the 2009 Audit Retainer respectively,
including (in each case) the opinions set
out in paragraphs 15(a)-(d) above.
15C. The first and/or second defendants failed to communicate to the plaintiff
directly the opinions stated in the audit reports
issued in connection with the
2007 Audit Retainer, the 2008 Audit Retainer and the 2009 Audit Retainer,
including the opinions set
out in paragraphs 15(a)-(d) above.
15D. In the premises set out in paragraphs 15, 15A, 15B and 15C above, the first
defendant and/or second defendants, by his or their
silence, made to the
plaintiff the Representations set out in paragraph 15 above.
15E. In reliance on the Representations, the plaintiff took no steps to redeem,
close out or otherwise recover, by appropriate action
against the borrowers
and/or third parties, the loans which had been made by the Super Fund to third
parties as recorded in the financial
statements for the Super Fund.
[Particulars omitted.]
- In
response to the plaintiff’s pleading regarding representations, the
defendants pleaded:
Alleged representations
15. In answer to paragraph 15 of the Further Amended Statement of Claim, the
Defendants:
a. admit that in the FY2007 Report, FY2008 Report and
FY2009 Report, the First Defendant represented that he held the opinion pleaded
in subparagraph 15(a);
b. admit that in the FY2007 Report, FY2008 Report and FY2009 Report, the First
Defendant represented that he held the opinion that
for the year of income the
trustee of the Super Fund had complied, in all material respects, with the
requirements of the SIS Act
or the SIS Regulations as specified in those
Reports;
b1. admit that each of the FY2007 Report, FY2008 Report and FY2009 Report
impliedly represented that the opinions expressed in them
were the product of
the exercise of reasonable skill and care; and
c. otherwise deny the paragraph.
15A. In answer to paragraph 15A of the Further Amended Statement of Claim, the
Defendants:
a. refer to and repeat paragraph 15 above; and
b. otherwise do not admit the paragraph.
15B. The Defendants deny paragraph 15B of the Further Amended Statement of
Claim.
15C. The Defendants deny paragraph 15C of the Further Amended Statement of
Claim.
15D. The Defendants deny paragraph 15D of the Further Amended Statement of
Claim.
15E. The Defendants deny paragraph 15E of the Further Amended Statement of
Claim.
Breach of contract and duty
- As
to breach of contract and duty, the plaintiff pleaded:
16. In carrying out the 2007 Audit Retainer, 2008 Audit Retainer and 2009 Audit
Retainer the first defendant, or alternatively the
first and second defendants,
breached the duties owed to the plaintiff under the Audit Retainers and at
common law, which are set
out in paragraph 13 above, in that for each relevant
audit year they:
(a) failed to inquire into and report accurately as to
whether each investment by the Super Fund as recorded in the financial
statements
was made in accordance with an investment strategy that had regard to
ail of the circumstances of the Super Fund, including in particular
the matters
set out in regulation 4.09(2) of the SIS Regulations;
(b) failed to audit the Super Fund in a manner so as to be able to reasonably
form the professional opinion of an auditor as to whether
the Super Fund and/or
the plaintiff as a trustee of the Super Fund had complied, in all material
respects, with the requirements
of the SIS Act and the SIS Regulations for the
period set out in the financial statements;
(c) failed to bring to the plaintiff's attention, by way of notation or
qualification or other suitable communication, serious misdescriptions
and
misstatements in the financial statements of the Super Fund and facts and
circumstances arising from the audit which any competent
chartered accountant
acting in the capacity of an auditor would bring to the attention of the
plaintiff:
(d) failed, acting reasonably, to form and express the opinion
that:
(i) the financial statements of the Super
Fund did not comply with the SIS Act, SIS Regulations, Australian Accounting
Standards and other mandatory professional reporting requirements;
(ii) the underlying accounting records of the Super Fund were not reliable and
were not adequate for the preparation of the financial
statements of the Super
Fund;
(iii) the financial position of the Super Fund at balance date and the results
for the year then ended were not properly disclosed
in the financial statements
of the Super Fund;
(iv) the financial statements of the Super Fund contained material misstatements
arising as a result of irregularities which would
have a material effect on the
financial statements;
(e) failed in the performance of their services under
the Audit Retainer to exercise due care and skill to the standard expected of
someone qualified and experienced in performing audit services in Australia of
the nature required under the Audit Retainer.
Particulars
The plaintiff relies upon the breaches of duty identified in the expert reports
of Mr Morris. ...
...
(vi) Failed to identify and report that the Super Fund's financial statements
for 2007, 2008 and 2009 (as applicable) were materially
inaccurate.
[Some particulars omitted.]
- It
should be noted that para 16(e)(vi) was previously para 16(g)(xix) in the former
version of the second further ASOC (namely, the
further amended statement of
claim filed 16 May 2017).
- The
defendants made certain admissions as to breaches of contract and duty. The
extent of the defendants admissions are extracted
below:
16. In answer to paragraph 16 of the Further Amended Statement of Claim, the
Defendants:
a. admit that as at each of 30 June 2007, 30 June 2008
and 30 June 2009, the Super Fund's asset in the form of a loan to River Island
Holdings Pty Limited (River Island) supported by guarantees and
indemnities granted by Leonard Tomkins and Christopher Moylan was, in substance,
worthless or of substantially
compromised value;
b. admit that:
i. as at each of 30 June 2007, 30 June 2008
and 30 June 2009, the Super Fund's asset in the form of a unit entitlement in
the Cartel
Investments Unit Trust was, in substance, worthless or of
substantially compromised value; and
ii. the financial statements of the Super Fund for each of those financial years
should have been prepared on the basis that the
value of the asset was wholly
impaired or of no value;
c. admit that as at each of 30 June 2007, 30 June 2008
and 30 June 2009, the Super Fund's asset in the form of a loan to MCD Holdings
Pty Limited was, in substance, worthless or of substantially compromised
value;
d. admit that as at each of 30 June 2007, 30 June 2008 and 30 June 2009, the
Super Fund's asset in the form of a loan to Leonard
Tomkins, L & V Tomkins
Pty Limited, Andrew Tomkins and Deborah Tomkins (Tomkins Loan) was, in
substance, worthless or of substantially compromised value;
e. admit that:
i. as at each of 30 June 2007, 30 June 2008
and 30 June 2009, the Super Fund's asset in the form of a unit entitlement in
the Limeburners
Creek Unit Trust was, in substance, worthless or of
substantially compromised value; and
ii. the financial statements of the Super Fund for each of those financial years
should have been prepared on the basis that the
value of the asset was wholly
impaired or of no value;
f. as to subparagraph 16(g)(xix), admit that the Super
Fund's financial statements for the financial years ending 30 June 2007, 30
June
2008 and 30 June 2009 were each materially inaccurate;
g. admit that the Super Fund's special purpose financial reports for the
financial years ending 30 June 2007. 30 June 2008 and 30
June 2009 did not
present fairly the financial position of the Super Fund at the relevant year
end;
h. admit that the material available to the First Defendant at the time of the
preparation of the FY2007 Report. FY2008 Report and
FY2009 Report did not
support the expression of an unqualified opinion in the terms pleaded in
paragraph 15(a) of the Further Amended
Statement of Claim;
i. in the premises, admit that the First Defendant failed to exercise reasonable
care in the preparation of the FY2007 Report, FY2008
Report and FY2009 Report;
and
j. otherwise do not admit the paragraph.
[Particulars omitted].
Causation, loss and damage
- As
to loss and damage under breaches of contract and duties, the plaintiff
pleaded:
17. The plaintiff only became aware of the breaches pleaded and particularised
in paragraph 16 above in 2014 and, as a consequence,
lost the ability to redeem,
close out or otherwise recover, by appropriate action against the borrowers
and/or third parties, the
... amounts in connection with the assets recorded in
the 2007, 2008 and 2009 accounts...
- The
defendants denied that the breaches caused the plaintiff’s
loss:
b. [The defendants] further say that:
i. had the breaches admitted in paragraph 16 above not
occurred; or
ii. if it is found, as alleged, that the Defendants or either of them breached
contractual obligations or common law duties owed
to the Plaintiff in any other
respects (which is not admitted), then had those alleged breaches not
occurred,
the Plaintiff would not, by 30 June 2008, have recovered any amounts in
connection with assets recorded in the accounts of the Super
Fund or elsewhere
in circumstances where:
iii. the First Defendant was first engaged by the
Plaintiff on 7 March 2008; and
iv. the FY2007 Report was dated 15 May 2008;
c. say that by reason of the matters pleaded in subparagraphs 16a, 16b, 16c and
16e above, as at 15 May 2008 the Plaintiff had already
lost any ability to
recover various amounts which it had lent or
invested.
Breaches of the SIS Act
- Further,
and in alternative, the plaintiff pleaded the defendants contravened ss 35C, 129
and 130 of the SIS Act. The defendants denied
contravening those sections.
- The
pleadings with regard to contravention of the SIS Act were the subject of
substantial submissions and will be dealt with later
in this judgment.
- As
to loss and damage resulting from a contravention of the SIS Act, the plaintiff
pleaded:
33. As a result of the contraventions pleaded at paragraphs 26, 29 and 32, the
plaintiff has suffered loss and damage, which it is
entitled to recover from the
first and/or second defendants:
(a) under section 315(11) of the SIS Act; and/or
(b) at common law for breach of statutory duty.
- The
defendants denied that any alleged contravention of the SIS Act caused the
plaintiff’s loss:
33. In answer to paragraph 33 of the Further Amended Statement of Claim, the
Defendants:
a. deny the paragraph;
b. further say that this is not a case in which the Court would order the
payment of damages under s 315(11) of the SIS Act even
if it is found, as
alleged, that the Defendants or either of them contravened the SIS Act (which is
denied); and
c. further say that if it is found, as alleged, that the Defendants or either of
them contravened the SIS Act (which is denied),
then had those alleged
contraventions not occurred the Plaintiff would not, by 30 June 2008, have
recovered any amounts in connection
with assets recorded in the accounts of the
Super Fund in circumstances where:
i. the First Defendant was purportedly-first
engaged by the Plaintiff on
7 March 2008; and
ii. the FY2007 Report was dated 15 May
2008;
d. say that by reason of the matters pleaded in
subparagraphs 16a, 16b, 16c and 16e above, as at 15 May 2008 the Plaintiff had
already
lost any ability to recover various amounts which it had lent or
invested.
Misleading and deceptive conduct
- Further,
and in alternative, the plaintiff also pleaded misleading and deceptive conduct
by the defendants as follows:
36. The materials available to the first and/or second defendants in connection
with the performance of the 2007 Audit Retainer,
the 2008 Audit Retainer and the
2009 Audit Retainer respectively were such as would have given rise to a
reasonable and soundly based
concern on the part of any competent chartered
accountant acting in the capacity of an auditor of the Super Fund
that;
(a) doubts attended the recoverability of the assets
reported in the financial statements for the Super Fund;
(b) the lending and investment decisions of the Super Fund had not been made or
may not have been made on a fully informed basis;
(c) the lending and investment decisions of the Super Fund did not meet or may
not meet the investment criteria of the plaintiff;
(d) investment decisions of the plaintiff had been affected or may have been
affected by a breach of duty arising from a conflict
of interest on the part of
the Super Fund's accountant and former auditor, Mr
Moylan.
37. The first and/or second defendants owed to the plaintiff a duty to report to
the plaintiff directly each of the matters set out
in paragraph
36.
- As
to the plaintiff’s pleadings in para 36, the defendants referred to and
repeated para 16 of the amended defence (which included
certain admissions as to
breach extracted at [204] above), but otherwise did not admit the
paragraph.
- The
plaintiff further pleaded:
38. At no time did the first defendant or the second defendant report to the
plaintiff any of the matters set out in paragraph 36.39.
In the premises set out
in paragraphs 36 to 38, the first and/or second defendants by his or their
silence at the time of carrying
out the 2007 Audit Retainer, the 2008 Audit
Retainer and the 2009 Audit Retainer respectively, made to the plaintiff
representations
that, on the materials available to the first and/or second
defendants:
(a) there was no reason to doubt the recoverability of
the assets reported in the financial statements for the Super Fund;
(b) the lending and investment decisions of the Super Fund had been made on a
fully informed basis (or alternatively, there was no
reason to doubt that
fact);
(c) the lending and investment decisions of the Super Fund met the investment
criteria of the plaintiff (or alternatively, there
was no reason to doubt that
fact);
(d) investment decisions of the plaintiff had not been affected by any breach of
duty arising from a conflict of interest on the
part of the Super Fund's
accountant and former auditor, Mr Moylan (or alternatively, there was no reason
to doubt that fact),
(the Further Representations).
- The
defendants denied paras 37 and 39 but admitted that the defendants did not
report any of the matters in para 36.
- The
plaintiff then pleaded:
40. In reliance on the Further Representations, the plaintiff took no steps to
redeem, close out or otherwise recover, by appropriate
action against the
borrowers and/or third parties, the loans which had been made by the Super Fund
to third parties as recorded in
the financial statements for the Super Fund.
41. The Representations and Further Representation were made in trade or
commerce.
42. The Representations were misleading and deceptive, or likely to mislead and
deceive, in that:
(a) the audit evidence that had been reviewed by the
first and/or second defendants in connection with the 2007 Audit Retainer, the
2008 Audit Retainer and the 2009 Audit Retainer respectively did not form a
sufficient or appropriate basis for the opinions stated
in the audit report for
the relevant financial year that:
(i) the Super Fund's financial report
presented fairly in all material respects in accordance with the accounting
policies described
in the notes to the financial statements and the financial
position of the fund at year end and the results of its operations for
the year
then ended;
(ii) the first and/or second defendants had confirmed by testing that the
trustee had given appropriate consideration to risk, return,
liquidity and
diversification and that the Super Fund's investments were made in line with
that investment strategy;
(iii) the Super Fund and/or the plaintiff as trustee of the Super Fund had
complied, in all material respects, with the requirements
of the SIS Act and the
SIS Regulations as specified in the audit
report;
(b) the first and/or second defendants, when carrying
out the audit for the relevant year, and in reaching and stating the opinions
stated in the audit report for that year, had not acted in accordance with the
duties owed to the plaintiff under the Audit Retainers
and at common law, as set
out in paragraph 13 above.
43. The Further Representations were misleading and deceptive, or likely to
mislead or deceive, for the reasons set out in paragraph
36
above.
- In
response to the plaintiff’s pleading that the
“Representations” (extracted at [200] above) were misleading and deceptive, or likely to
mislead or deceive, the defendant pleaded:
42. In answer to paragraph 42 of the Further Amended Statement of Claim, the
Defendants:
a. refer to and repeat paragraph 16 above;
b. admit that the representation pleaded in paragraph 15b1 above was accordingly
misleading; and
c. otherwise deny the paragraph.
- The
defendants also denied that the “Further Representations” (extracted
at [213] above) were
misleading or deceptive, or likely to mislead or deceive.
- As
to contraventions of consumer legislation, the plaintiff pleaded the
following:
44. In the premises set out in paragraphs 15 to 15E and 36 to 43
above:
(a) the first defendant contravened section 9 of the
Fair Trading Act 1999 (Vic) and/or section 42 of the Fair Trading Act
1987 (NSW) [as in force before the commencement of the Australian Consumer
Law (Schedule 2. Competition and Consumer Act 2010 (Cth); and/or
(b) the first defendant and second defendant contravened section 52 of the
Trade Practices Act 1974 (Cth) [as in force before the commencement of
the Australian Consumer Law].
- The
defendants admitted that the first defendant contravened the elements of the
nominated exceptions, except that the specified representation
was made in trade
or commerce:
43. In answer to paragraph 44 of the Further Amended Statement of Claim, the
Defendants:
a. refer to and repeat paragraphs 15 to 15E and 36 to 43
above;
b. by reason only of the matters pleaded in paragraph 42 above, admit all of the
elements of a contravention by the First Defendant
of s42 of the Fair Trading
Act 1987 (NSW) and s 52 of the Trade Practices Act 1974 (Cth) (as in
force at the relevant time), save that they do not admit that the representation
pleaded in paragraph 15b1 above was
made in trade or commerce;
c. say that s 18 of the Australian Consumer Law does not apply to conduct
that occurred before 1 January 2011; and
d. otherwise deny the paragraph.
Loss and damage
- As
to loss and damage occurred by the contravention of the relevant legislation,
the plaintiff pleaded the following:
45. By reason of the contraventions pleaded in paragraph 44, the plaintiff has
suffered loss and damage.
- The
defendant denied the above paragraph and further said:
b. ... that if it is found, as alleged, that the Defendants or either of them
engaged in statutory contraventions, then had those
alleged contraventions not
occurred the Plaintiff would not, by 30 June 2008, have recovered any amounts in
connection with assets
recorded in the accounts of the Super Fund in
circumstances where:
i. the First Defendant was first engaged by the
Plaintiff on
7 March 2008; and
ii. the FY2007 Report was dated 15 May 2008.
c. say that by reason of the matters pleaded in subparagraphs 16a, 16b, 16c and
16e above, as at 15 May 2008 the Plaintiff had already
lost any ability to
recover various amounts which it had lent or
invested.
ISSUES
- The
parties provided the Court with a list of issues in dispute. That list has
formed the foundation of the following summary of the
issues along with
refinements as identified in the parties’ submissions as well as the
pleadings.
- The
issues will be addressed, in turn, under the following headings:
- (1) Contract;
- (2) Duties in
Contract and in Tort;
- (3) Admitted
Breaches of Duty;
- (4) Non-admitted
Breached of Duty and Contract;
- (5) Causation;
- (6) Loss;
and
- (7) Defences.
- What
follows is an overview of some of the primary issues for consideration under the
aforementioned headings. The full exposition
of the issues and their resolution
will occur under the various sections of the judgment corresponding to those
same headings.
Contract
- The
matter proceeded on the basis that the first defendant was retained to conduct
an audit for the plaintiff (as trustee of the Super
Fund) of its financial
statements or reports for the relevant financial years. Two issues are of a
global significance:
- (1) whether the
second defendant was retained for each financial year, namely as a party to
retainers (and caught by common law duties
in that respect); and
- (2) how the
terms of the retainers should be construed.
- Those
general issues pervade the issues below at [320]-[325] but for brevity will not be repeated (for that
reason I shall refer to the defendants as to each issue).
Duties
in Contract and in Tort
- The
following issues arose from the plaintiff’s pleadings as to duties, being
whether the defendants were required to:
- (1) conduct the
audits of the Super Fund in accordance with the SIS Act and the SIS Regulations
(para 13(b) of the second further ASOC);
- (2) inquire
into and report accurately as to whether each investment by the Super Fund as
recorded in the financial statements was
made in accordance with an investment
strategy that had regard to all of the circumstances of the Super Fund,
including in particular
the matters set out in regulation 4.09(2) of the SIS
Regulations (para 13(c) of the second further ASOC);
- (3) bring to
the plaintiff's attention any serious misdescription or misstatement in the
financial statements of the Super Fund or
of any fact or circumstance arising
from the audit which should have been brought to the attention of the plaintiff
(see para 13(f)
of the second further ASOC); and
- (4) at all
times in the performance of their services under the retainers, exercise due
care and skill under the retainer, including
to:
- (a) establish
the existence of the Super Fund's investment assets as recorded in the financial
statements;
- (b) establish
the Super Fund's ownership of the investment assets as recorded in the financial
statements by reference to supporting
documents;
- (c) obtain and
review evidence of any security held for any loan transactions in which the
Super Fund was the lender, and any valuations
in respect of that security;
- (d) consider
the existence of valuations to support the statements of value of the investment
assets recorded in the financial statements
or to report that other independent
expert advice should be obtained; and
- (e) inquire
into and report upon any unusual exposures to a particular company, person,
class of assets, region or any other unusual
feature in the Super Fund's
investment portfolio (see para 13(h) of the second further
ASOC).
- As
to the plaintiff’s contention at [227(2)] and [227(3)], the defendants disputed that those were, in fact,
terms of the contract. The defendants contended:
- (1) The
approved form of reports provided that the auditor expressed no opinion on the
investment strategy of the superannuation fund
or it’s appropriateness for
members. In the result, the defendants pleaded that it was a term of the
retainers that the first
defendant was not obliged to, and would not, express
any opinion on the investment strategy of the Super Fund or its appropriateness
to the to the fund members (see paras 13(d), (e), (f), (g), (l) and (m) of the
amended defence).
- (2) Further,
the first defendant was not obliged to:
- (a) design
audit procedures to identify matters that may be appropriate to report to the
plaintiff; and
- (b) communicate
matters to the plaintiff unless the first defendant encountered them during the
course of the purported engagement
and believed they should be brought to the
plaintiff's attention.
- As
to the plaintiff’s contention at [227(4)], the defendants admitted that was a term of the
retainers, namely, that the first defendant would exercise reasonable care and
skill
in the performance of the engagements (albeit not to the extent pleaded by
the plaintiffs) (see para 13(b) of the amended defence).
Admitted
Breaches of Contract and Duty
- As
mentioned above, the defendants made admissions at para 16 of its amended
defence, with respect to the breach of the retainers
and duty. That admitted
breach, to which I now turn, was limited in its scope.
- The
defendants made admissions that the defendant failed to exercise reasonable care
in the preparation of the audit reports because:
- (1) the
nominated assets were in substance worthless or of substantially compromised
value;
- (2) the Super
Fund’s financial statements for the relevant financial years were each
materially inaccurate;
- (3) the Super
Fund’s special purpose financial reports for the relevant financial years
did not fairly present the financial
position of the Super Fund at the relevant
year end; and
- (4) the
material available to the first defendant at the time of the preparation of the
audit reports did not support the expression
of an unqualified opinion in that
the Super Fund’s financial reports were fairly presented in all material
respects.
- In
their submissions, the defendants sought to limit that admission by contending
that it is not up to an auditor to form a definite
conclusion about value and
contended their admission was limited to the following: the material available
to the first defendant
did not support the expression of the unqualified opinion
which he gave regarding the financial statements. In other words, the defendants
submitted that the admission was only that the opinion in the audit reports
ought to have included a qualification.
- The
plaintiff submitted that such a narrow interpretation of the admissions was not
available because the pleaded admission spoke
for
itself.
Non-admitted Breaches of Contract and Duty
- Beyond
the admitted breach of contract and duty, there remained other breaches, pleaded
by the plaintiff, which needed to be resolved.
Those pleaded breaches (and the
extent of the impact of the admissions on those breaches) are addressed in
turn.
Failure to inquire and report as to compliance with the
investment strategies, including matters set out in reg 4.09(2)
- This
breach, pleaded at para 16(a) of the second further ASOC, relates to the duty
pleaded at para 13(c). Essentially, the plaintiff
contended that the defendants
breached their duty to inquire into and to report as to whether each investment
made by the Super Fund,
as recorded in the financial statements, was made in
accordance with an investment strategy. The plaintiff made particular reference
to reg 4.09 of the SIS Regulations in that respect.
- In
their submissions, the defendants contended that the first defendant was not
obliged to provide an opinion on the investment strategy
or its appropriateness
for members. The defendants made further submissions in answer to this breach
(discussed below).
- There
is an intersection between this breach and the admissions pleaded in the amended
defence in para 16, notwithstanding the defendants’
contention that they
are not relevant to this breach.
- The
defendants also argued they were denied procedural fairness with regard to this
breach.
Failure to audit the Super Fund by forming an opinion as
to whether the trustee had complied with the requirements of the SIS Act
and the
SIS Regulations
- This
breach, pleaded at para 16(b) of the second further ASOC, corresponds with the
duty pleaded at para 13(d). Considering the nature
of this pleading (namely, the
lack of compliance with the SIS Regulations), the plaintiff relied on the
submissions it made as to the breach detailed above from [235].
- The
defendants took the same approach and relied upon their submissions summarised
under the previous heading: “Failure to inquire
and report as to
compliance with the investment strategies, including matters set out in reg
4.09(2)” (see above).
Failure to bring serious
misdescriptions and misstatements and other facts and circumstances to the
plaintiff’s attention
- This
breach, pleaded at para 16(c) of the second further ASOC, corresponds with the
duty pleaded by the plaintiff at para13(f). The
plaintiff contended that the
defendants did not draw certain concerns to the plaintiff’s attention, by
way of notation or qualification
in the audit reports, despite the first
defendant’s undertaking in the retainers to communicate to the plaintiff
any matters
which he believed ought to be brought it its attention. The
plaintiff contended a reasonably competent auditor would have done so.
- The
defendants disputed that this obligation arose from the retainers (see the
corresponding discussion of duties at [299]-[311]). The defendants’ admissions in para 16 also
interact with this breach. Specifically, the defendant admitted that the
material
available to the first defendant did not support the expression of an
unqualified opinion (see 16(h) of the amended defence). However,
the admissions
did not correspond to the full extent of the breach as pleaded by the
plaintiff.
- The
defendants submitted that there was no obligation on the first defendant to
positively communicate matters, namely, Mr Moylan’s
conflicts of interest
to the plaintiff.
Failure, acting reasonably, to form and express
certain opinions
- This
breach, pleaded at para 16(d) of the second further ASOC, relates to the duty
pleaded at para 13(g). Those opinions were that:
- (1) the
financial statements of the Super Fund did not comply with the SIS Act and the
SIS Regulations, Australian Accounting Standards and mandatory professional
reporting requirements;
- (2) the
underlying accounting records of the Super Fund were not reliable or adequate
for the preparation of the financial statements;
- (3) the
financial position of the Super Fund at balance date and the results for the
year then ended were not properly disclosed in
the financial statements;
and
- (4) the
financial statements contained material misstatements arising as a result of
irregularities which would have a material effect
on the financial
statements.
- The
plaintiff contended that the defendants’ breach in this respect followed
from the admissions made in the amended defence
(at para 16).
- The
defendants denied that such a conclusion could come out of the admissions and
contended that there was a conceptual difference
between qualification of the
audit opinion (which the defendants admit was needed) and the formation of an
affirmative opinion that
the financial report misstated the financial position
of the Super Fund.
Failure to exercise reasonable care and
skill
- This
breach, pleaded at para 16(e) of the second further ASOC, concerns the duty
pleaded at para 13(h). The plaintiff pleaded that
the defendants failed in the
performance of their services under the retainers to exercise due care and skill
to the expected standard.
- The
defendants’ admissions interact with this issue because, as the plaintiff
correctly identified, this breach of duty goes
beyond the breach admitted by the
defendant.
- The
plaintiff contended that the failure to exercise reasonable care and skill in
the performance of services included, inter alia, matters such as the
failing to verify the existence of reported assets, failing to establish the
value of assets recorded in the
financial statements and failing to identify and
report that the assets were non-performing and the financial statements were
materially
inaccurate.
- The
defendants contended, inter alia, that the assets did, in fact, exist and
that it was not the job of an auditor to affirmatively value or establish the
value of assets.
Misleading and deceptive conduct
- The
claim for misleading and deceptive conduct was expressed as further to and, in
the alternative to the plaintiff’s claims
in contract, negligence and for
breach of the SIS Act.
- The
plaintiff alleged that the defendants made two sets of representations to the
plaintiff (the representations extracted at [200] above and the further representations extracted at
[213] above) that were
misleading and deceptive, or likely to mislead or deceive, upon which the
plaintiff had relied (the defendants
argued that there was no evidence of
reliance).
- The
plaintiff pleaded that the first defendant contravened s 9 of the Fair
Trading Act 1999 (Vic) (“FTA (Vic)”) and/or s 42 of the Fair
Trading Act 1987 (NSW) (“FTA (NSW)”) and the defendants
contravened s 52 of the Trade Practices Act 1974 (Cth)
(“TPA”).
- The
defendants admitted that the representation expressed in the audit reports,
namely, that the opinions were the product of the
exercise of reasonable care
and skill, was misleading. However, the defendant then pleaded that that
representation was not made
in trade and commerce.
Contraventions
of the SIS Act and Regulations
- The
plaintiff pleaded that, further and in the alternative to the claims in contract
and negligence, the defendants contravened s
113 (in respect of the 2007 audit),
s 35C (in respect of the 2008 and 2009 audits) and ss 129 and 130 of the SIS
Act. In the result,
the plaintiff pleaded that it was entitled to damages under
s 315 of the SIS Act.
- The
defendants contended that the only obligation imposed by ss 113 and 35C on an
auditor was a timing obligation and that all other
obligations of the auditor
were governed by the appointment or retainer.
Breach of statutory
duty
- The
plaintiff argued that if the Court did not have the power under s 315 of the SIS
Act to order the defendants to pay damages to
the plaintiff, then the plaintiff
claimed damages for breach of statutory duty.
- The
defendants contended that a claim for breach of statutory duty would not be
maintainable where the legislation evinces a different
intention to a
correlative private right, which they contended was the case for the SIS
Act.
- It
should be noted that this issue, as a result of findings below, became
unnecessary to resolve.
Causation
- The
issue of causation concerned both the admitted and non-admitted breaches of
contract and duty.
- As
to the admitted breaches, the plaintiff contended that, had there been no breach
of duty and no misleading and deceptive conduct,
the plaintiff would have been
made aware of the irregularities in the financial reports of the Super Fund in
2008 and would have
taken action to make recoveries of those investments.
- The
defendants contended that a qualified report, of the kind admitted by the
defendants as being required, would not have stated
that the assets were
worthless because the auditor could not have formed that view. Further, the
defendants contended that the Court
could not be satisfied, on the balance of
probabilities, that had a qualified audit report been issued in 2008, or the
subsequent
years, the plaintiff would have “called in” the loans and
investments.
- The
plaintiff further submitted, had the defendants not breached the pleaded
non-admitted duties, the plaintiff would have been made
aware, by qualification,
notation or other suitable communication in each audit report,
of:
- (1) actual or
suspected non-compliance with the investment strategy and with the SIS Act and
SIS Regulations;
- (2) the
majority of the loans and investments were worthless and the financial reports
contained serious misdescriptions and misstatements;
and
- (3) the high
degree of risk associated with the loans and investments.
- It
was contended by the plaintiff that, if Ms Crittle had been contacted by the
defendants, or even reviewed a qualified audit report,
an alarm would have been
raised and Ms Crittle would have taken action. Again, the defendants contended
that the Court cannot be
satisfied of this causation
element.
Loss
- The
plaintiff contended that, by reason of the defendants’ negligence and
breach of duty, the plaintiff did not discover the
true position of the loans
and investments until 2013/2014. The plaintiff submitted that it accordingly had
lost:
- (1) in respect
of monies it did recover, the benefit of making those recoveries at an earlier
point in time and thus the loss of the
use of the monies up to the time the
recoveries were achieved; and
- (2) in respect
of monies it did not recover, the opportunity to pursue and to obtain the
recovery of those monies in 2008 when many
of the borrowers and guarantors were
still solvent and when Moylan Retirement Solutions and MBS were covered by
professional indemnity
insurance.
- The
defendants pleaded that, had the admitted breaches or any other alleged breaches
of contract or duty occurred, the plaintiff would
not have recovered any amounts
in connection with the assets recorded in the accounts of the Super Fund, by 30
June 2008, in circumstances
where the first defendant was first engaged on 7
March 2008 and the 2007 audit report was dated 15 May 2008.
- The
defendants further pleaded that as at 15 May 2008, the plaintiff had already
lost any ability to recover various amounts which
it had lent or
invested.
Defences
- It
is sufficient to note at this stage that the defendants raised three
defences:
- (1) limitations
under the Institute of Chartered Accountants in Australia (NSW) Scheme
(“the NSW Scheme”) under the Professional Standards Act 1994
(NSW) (“the NSW Act”);;
- (2) contributory
negligence by the plaintiff; and
- (3) proportionate
liability as to MBS, Mr Moylan (as former auditor) and Ms
Crittle.
- Those
defences will be explored under their respective
headings.
WRITTEN SUBMISSIONS OF THE PARTIES
- The
above issues were ventilated in a substantial volume of written submissions from
the plaintiff and the defendants as well as closing
oral submissions taken over
one day. The written submissions consisted of the following:
- (1) Opening
submissions other than defences:
- (a) Plaintiff’s
outline of opening submissions dated 23 August 2017 (“the
plaintiff’s opening submissions”)
(185 paragraphs over 50 pages);
and
- (b) Overview
submissions of the defendants dated 23 August 2017 (“the defendants’
overview submissions”) (188 paragraphs
over 38 pages).
- (2) Closing
submissions other than defences:
- (a) Plaintiff’s
closing submissions in chief dated 15 September 2017 (“the
plaintiff’s closing submissions”)
(295 paragraphs over 95 pages);
and
- (b) Closing
submissions of the defendants dated 22 September 2017 (“the
defendants’ closing submissions”) (342 paragraphs
over 113
pages);
- (c) Defendants’
skeleton outline produced to accompany the defendants’ oral submissions on
12 October 2017 (“the
defendants’ skeleton outline”) (11
points over 9 pages);
- (d) Plaintiff’s
submissions in reply to defendants’ closing submissions and to
‘rejoinder submissions’ dated
12 October 2017 (the rejoinder
submissions concern the defendants’ affirmative defences) (“the
plaintiff’s submissions
in reply”) (156 paragraphs over 42
pages);
- (e) Final reply
submissions of the defendants dated 17 October 2017 (“the
defendants’ final reply submissions”)
(47 paragraphs over 10 pages);
and
- (f) Plaintiff’s
submissions in reply to defendants’ closing oral submissions and to final
reply submissions of the defendants
dated 20 October 2017 (“the
plaintiff’s final reply submissions”) (37 paragraphs over 8
pages).
- (3) Submissions
as to affirmative defences:
- (a) Closing
submissions of the defendants in relation to their affirmative defences dated 15
September 2017 (“the defendants’
affirmative defences
submission”) (127 paragraphs over 50 pages”);
- (b) Plaintiff’s
submission in reply to defendants’ submissions on their affirmative
defences dated 22 September 2017 (“the
plaintiff’s reply to the
defendants’ affirmative defences submission”) (111 paragraphs over
27 pages); and
- (c) Rejoinder
submissions of the defendants dated 11 October 2017 (“defendants’
rejoinder submissions”) (20 paragraphs
over 6
pages).
- It
is not practicable to adumbrate the entirety of those submissions. Rather, they
will be addressed, as appropriate, under the discussion
of the issues in the
proceedings, and in the resolution thereof, under the various headings of this
judgment.
CONSTRUCTION OF THE AUDIT CONTRACTS
- As
mentioned above, the 2007 retainer was signed by Mr Moylan, and the 2008 and
2009 retainers were signed by the plaintiff. The retainers,
after being signed,
were returned to the auditor (there was a dispute as to whether only the first
defendant was retained for the
relevant financial years, which will be discussed
in the next section of this judgment).
- The
retainers were in the form of a “letter of engagement” (and titled
the same) which stipulated the bases upon which
the auditor provided audit
services to the Super Fund for a specified fee for service.
- The
retainers, thereby, constituted audit contracts whereby the auditor, for a fee,
agreed to conduct an audit of the Super Fund in
respect of the relevant
financial years.
- The
written terms of the retainers have been earlier set out at [105]-[119] above. They are in
relatively similar terms.
- There
was considerable dispute about the terms of the retainers. The dispute primarily
revolved around the proper construction of
the audit contracts, including a
question of whether the retainers incorporated the approved forms (pursuant to
the SIS Act and as
published by the ATO) (“the approved forms”) and,
if so, what the auditor undertook to do or not to do in consequence.
- What
follows is a discussion as to the construction of the terms of the retainers,
which will traverse the contentions of the parties
in that respect (and without
necessarily a full summary of their respective arguments). The terms of the
retainers will be approached
globally unless a relevant distinction is necessary
to draw. I shall refer to the corresponding pleading of breach in the second
further ASOC in the course of construing the retainers.
The Terms
of the Retainers
- By
the retainers, the auditor was required to conduct an audit of the Super Fund in
accordance with the SIS Act and the SIS Regulations.
- The
objective of the audit was to express an opinion as to:
- (1) the
financial statements; and
- (2) compliance
with identified provisions of the SIS Act and the SIS
regulations.
- The
auditor was required, in the performance of the audit, to form an opinion, with
reasonable care and skill, as to whether the Super
Fund complied with the
requirements of the SIS Act and SIS Regulations within the relevant financial
years (see second further ASOC at para 16(b)).
- The
defendants made various submissions as to the relevant legal connection between
the retainers and the approved forms. It was variously
said that the approved
forms “conditioned” the retainers, or the retainers
“effectively incorporated” the
approved forms. Thus, the retainer
letters were “best understood”, it was contended, as identifying the
engagement as
one to give a report in the approved form in accordance with s
113(1) of the SIS Act, for the financial year ending 2007, and s 35C(1),
for the
financial years ending 2008 and 2009.
- However,
neither the 2007 retainer nor the 2008 and 2009 retainers limited the scope of
the auditor’s obligations in the fashion
contended for by the
defendants.
- It
is true, the 2007 retainer referred at the outset to a requirement that the
audit be conducted “in accordance with [the SIS
Act]” (at para 2
extracted at [106]
above) and, on the second page, referred to the obligation to represent a report
in “the approved form”. The 2008 and
2009 retainers, in accordance
with s 35C of the SIS, also provided that the auditor was required to give a
report “in the approved
form”. The retainers, in that respect,
required the defendants to issue an audit report in the approved form. However,
the
provisions do not thereby have the effect of confining attention to s 113(1)
(or s 35C(1)) of the SIS Act. For example, the retainers
expressly required the
audit reports to address the requirements of ss 129 and 130 of the SIS Act.
Nothing in the approved form constrained
the auditor from meeting those
requirements.
- The
plaintiff submitted that the defendants were required: “[to inquire into
and report] accurately as to whether each investment
by the Super Fund as
recorded in the financial statements were made in accordance with an investment
strategy that had regard to
all of the circumstances of the Super Fund,
including the matters set out in regulation 4.09 of the SIS Regulations”
(see second further ASOC paras 13(c) and 16(a)). Reliance, in that respect, was
placed upon the entries under the heading:
“Audit of SIS
Compliance”, in the 2007 retainer (extracted below), and the entries under
the heading: “Audit Scope”,
in the 2008 and 2009 retainers.
- It
is useful to extract here a relevant passage from the 2007 retainer under the
heading, “Audit of SIS Compliance”:
For the year ended 30 June 2007, I am required to form an opinion in respect of
compliance with certain aspects of SIS. My report
must refer to the following
Sections and Regulations.
[Specific sections and regulations are therein listed.]
- The
defendants contended that, by the 2007 retainer, the auditor only undertook to
“refer to” reg 4.09 in the 2007 audit
report and what was to be done
by the auditor and the nature of the “reference” that would be found
in his “audit
report” was “identified” by the approved
form. The defendant also disputed the remainder of the plaintiff’s
submission in this respect contending retainers expressly provided that the
auditor was not required to provide on opinion as to
the investment strategy or
its appropriateness to fund members.
- I
accept the plaintiff’s submission, in this respect, for the reasons I now
turn to.
- I
do not consider the 2007 retainer, when properly construed, requires a lesser
obligation than the 2008 and 2009 retainers. In particular,
I do not consider
the retainer only imposes an obligation on the auditor to simply
“refer” to reg 4.09 in the sense,
as the defendant contended, of
mentioning or alluding to.
- The
sentence immediately preceding the words “refer to”, in the above
extract from the 2007 retainer, provides that the
auditor must form an opinion
in respect of compliance with “certain aspects of SIS”. Reading the
two sentences together
results in the comfortable conclusion that, by the second
sentence, the retainer uses the words “refer to” to indicate
those
provisions against which compliance will be tested or examined. Whilst
“SIS” is earlier defined as “the Act”,
it is plain, in
my view, the parties intended the obligation to extend to the SIS Regulations,
as well as the SIS Act, because the list of provisions to which the auditor must
regard included provisions of the SIS Act and the
SIS Regulations.
- For
completeness, I note the defendants accepted that the incorporation of the
approved form was made more explicit by the 2008 and
2009 retainers. In those
retainers, the auditor, in reporting in the approved form, must specifically
include an opinion as to the
Super Fund’s compliance with the SIS Act and
the SIS Regulations, specifically, for present purposes, reg 4.09.
- The
defendants were correct to submit that the terms of the 2008 and 2009 retainers
expressly eschew the auditor expressing an opinion
as to the investment strategy
adopted for the Super Fund or its appropriateness to the Super Fund members.
This obligation was wider
than that relied upon by the defendants and provided
that the auditor would not express an opinion about the investment strategy
per se, or its appropriateness for members, as opposed to whether
that strategy (regardless of its appropriateness) had been given effect
in the
relevant financial year.
- The
2008 and 2009 retainers required the auditor to express an opinion about
compliance with, inter alia, reg 4.09. In that respect, those retainers
expressly provided that the auditor would test that there exists an investment
strategy
and that “you have given consideration to risk, return, liquidity
and diversification and that the fund’s investments
are made in line with
the investment strategy”.
- Whilst
the “approved form” was not expressly incorporated as a term of the
2007 audit contract, with respect to the audit
of “SIS Compliance”,
the 2007 audit report on the financial statements was required to be produced in
the approved form
(see under the heading “Audit of Financial
Statements” in the 2007 retainer). The relevant provisions of that form
aligned
with the above construction of the 2008 and 2009 retainers and included
the following:
My procedures with respect to regulation 4.09 included testing that the fund
trustee has an investment strategy, that the trustee has given consideration to
risk, return, liquidity
and diversification and that the fund’s
investments are made in line with that investment strategy. No opinion is made
on the
investment strategy or its appropriateness to the fund
members.
- That
provision made it clear that the auditor’s opinion was required as to
whether the Super Fund’s investments were made
in line with the investment
strategy adopted by the Super Fund.
- The
auditor may request from the trustee written confirmation concerning
representations made to his staff or himself in connection
with the audit.
- Third
party written documentation will be generally accepted as evidence of ownership
of assets.
- The
trustee’s valuations will be accepted where applicable unless otherwise
requested.
- Unless
otherwise agreed, the auditor assumed no responsibility to design audit
procedures to identify matters that may be appropriate
to report to the
trustee.
- The
plaintiff contended that certain provisions within the retainers brought an
obligation upon the auditor to bring to the plaintiff’s
attention, by way
of notification or qualification or other suitable communication, “any
serious misdescription or misstatement
in the financial statements” of the
Super Fund or of any fact or circumstance arising from the audit which any
competent chartered
accountant acting in the capacity of an audit would bring to
the attention of the plaintiff (see second further ASOC at para 16(c)).
- The
provisions relied upon by the plaintiff may be illustrated by reference to the
2008 and 2009 retainers which stated:
- (1) “however,
if we encounter matters during the course of our audit that we believe should be
brought to your attention, we
will communicate these to you”; and
- (2) “as
well as reporting to you any compliance matters that may have arisen during the
audit, we may also report to you any
matters arising from the financial audit
and any other issues we believe should be brought to your
attention”.
- The
defendants submitted that the pleaded term could only be found in the retainers
if the precise language, which was the subject
of the construction proposed by
the plaintiff, was found in the words in the retainers. It was contended that
such terms could not
be implied as the retainers expressly provided that
“I assume no responsibility to design audit procedures to identify matters
that may be appropriate to report to you”. The provisions of the retainers
relied upon by the plaintiff limit the auditor’s
obligation to report in
circumstances where the auditor encountered them during the course of the
engagement and believed they ought
to be brought to the plaintiff’s
attention. The defendants contended, the auditor did not have a free standing
reporting obligation
that would have positively concluded error or recast the
financial reports.
- The
plaintiff replied by contending its construction of that particular term should
be accepted, for three following reasons.
- First,
the plaintiff’s construction was consistent with the auditor’s
obligation to exercise reasonable care and skill
in performing the obligations
under the retainers. That obligation “conditioned” and
“applied” to the auditor’s
express obligation to communicate
matters encountered during the audit. Thus, the duty was engaged where the
auditor, acting with
reasonable care and skill, “ought” to have
encountered and “ought” to have brought them to the
plaintiff’s
attention. The defendants’ construction, in that
respect, was too narrow and literal; requiring only which was subjectively
encountered and believed.
- Secondly,
the construction relied upon by the plaintiff was merely to give context to and
identify, with greater precision, the “matters”
which the defendants
expressly undertook to communicate to the plaintiff.
- Thirdly,
the duty for which the plaintiff contended was supported by authority:
Pacific Acceptance Corporation v Forsyth (1970) 92 WN (NSW) 29 at 53C
(“Pacific Acceptance Corporation”) (per Moffitt J).
- The
defendant was correct to submit that the term contended for by the plaintiff
cannot be found “literally” in the language
used in the
retainers.
- I
consider there is a proper basis to draw an implication as widely as proposed in
the plaintiff’s submissions; such that, the
duty is engaged when the
auditor, acting with reasonable care and skill, “ought to have encountered
matters and ought to have
brought those matters to the plaintiff’s
attention”. The defendants’ submissions conflated the obligation to
bring
irregularities (by misdescription or misstatement) to the
plaintiff’s attention with the express exclusion, in the 2007 retainer,
to
do the same with respect to “design audit procedures to identify matters
that may be appropriate to report to you”.
- The
terms of the provision (as extracted from the 2007 retainer) were as
follows:
... Unless otherwise agreed with you, I assume no responsibility to design audit
procedures to identify matters that may be appropriate
to report to you.
However, if I encounter matters during the course of my audit that I believe
should be brought to your attention,
I will communicate these matters to
you.
- The
inclusion of the word “However”, relevantly, conditioned a
disclaimer by reference to matters encountered during the
audit falling within,
it may be added, the exercise of reasonable care and skill by the auditor.
- Thus,
this construction is consistent with the auditor’s obligation to exercise
reasonable care and skill in performing the
obligations under the retainers.
This must involve the objective consideration of what ought to have been
detected and identified
as well as acting upon what was actually found. The
‘promise to audit’ as stated by Moffitt J in Pacific Acceptance
Corporation at 53A involved some incidental duties which may involve
frank disclosure by the auditor to management of any relevant matters.
- This
conclusion is consistent with the requirement falling upon the auditor, as
reflected in the approved form, to stipulate any qualification
that properly
arose from the retainers and the approved form. For example, the defendants
accepted (albeit in a different context)
that the auditor, in the exercise of
reasonable skill and care, ought to have realised that, on the material provided
to the auditor,
there was some doubt as to whether the carrying value of the
loans and investments appropriately reflected amounts recoverable for
them. The
auditor, exercising reasonable care and skill should not have, as was accepted
by the defendants, simply relied upon the
management representation that the
policy valuation adopted was “reasonable in the light of the present
circumstances”
and ought to have taken steps to enquire further into
present circumstances beyond that representation or qualified the opinion
recorded.
- The
plaintiff contended at para 95(e) of its closing submissions that a further term
of the retainers was as follows (see also second
further ASOC at para
16(d)):
e. inquire into and, acting reasonably, form and express an opinion as to
whether:
i. the financial statements of the Super Fund complied
with the SIS Act, SIS Regulations, Australian Accounting Standards and other
mandatory professional reporting requirements;
ii. the underlying accounting records of the Super Fund were reliable and
adequate for the preparation of the financial statements
of the Super Fund;
iii. the financial position of the Super Fund at balance date and the results
for the year then ended were properly disclosed in
the financial statements of
the Super Fund; and
iv. the financial statements of the Super Fund were free from material
misstatements arising as a result of irregularities which
would have a material
effect on the financial statements.
[Footnotes omitted].
- The
plaintiff relied upon certain parts of the retainers to sustain those
obligations, to which I now turn.
- In
the 2007 retainer, the defendants said: “my staff will perform sufficient
tests to obtain reasonable assurance as to whether:
(i) the underlying
accounting records are reliable and adequate as a basis for the preparation of
the financial statements; and (ii)
the financial position of the fund at balance
date the results for the year then ended are properly disclosed in the financial
statements”.
- In
the 2008 and 2009 retainers, the defendants stated: “[t]he work undertaken
by us to form an opinion is determined by judgement,
in particular regarding the
nature, timing and extent of the audit procedures for the gathering of audit
evidence and the drawing
of conclusions based on the audit evidence
gathered”.
- In
addition, the defendants’ quality control form (index for SMSF audit
working papers), prepared by the auditor under the heading
of “Baumgartner
Partners” for the year ending 30 June 2007 (“the quality control
form”), stated: “[t]he
approach to auditing will be of a substantive
nature. Assets will be verified to proper supporting documentation ...
Liabilities,
income and expenses will be verified to source documentation where
appropriate as well as being reviewed for reasonableness”.
- The
defendants were correct to submit there was no separate obligation to “act
reasonably” in the retainers. As to the
matters referred to in para
95(e)(i)-(iv) of the plaintiff’s closing submissions, the following may be
concluded:
- (1) Paragraph
95(e)(i) conforms with the requirements of the 2007 retainer (see extracted at
[107] and [112] above) and the 2008
and 2009 retainers (extracted at [110] and [114] above);
- (2) The
expression of opinion referred to in para 95(e)(ii) and (iii) only appears
expressly in the 2007 retainer (see extracted at
[108] above). However, it may
be observed that the 2008 and 2009 retainers indicated that the auditor would
give a report in the
approved form and that the report must include an opinion
on the special purpose financial report of the Super Fund. The approved
form
stated that the auditor’s responsibility was to evaluate the
appropriateness of the accounting policies used and the reasonableness
of the
accounting estimates made by the trustees as well as evaluating the overall
presentation of the financial report.
- (3) The
plaintiff was correct to submit the auditor was required to express the opinion
referred to under para 95(e)(iv) For example,
the 2008 and 2009 retainers
provided that “our audit of the financial report will be planned and
conducted primarily to enable
us to express a professional opinion as to whether
the financial statements comply with the Australian Accounting Standards... so
as to have reasonable expectations of detecting those material misstatements
arising as a result of irregularities that would have
a material effect on the
financial statements”. Those same words are reflected in the 2007 retainer
and, in effect, are stated
as the auditor’s responsibility in the approved
form.
- In
para 16(e) of the second further ASOC, the plaintiff pleaded a failure by the
defendants in the performance of their services under
the retainers to exercise
due care and skill to the standard expected of someone qualified and experienced
in performing audit services
in Australia of the nature required under the
retainer. The defendants submitted that the contention that the term, which was
implied
in this pleading, constituted a conflation of the relevant contractual
term to exercise reasonable care and skill (which was admitted)
and the standard
of performance required under the term.
- The
dispute may be shortly resolved for two reasons. First, the contention by the
plaintiff plainly reflected the obligation falling
upon the defendants under the
retainers. Secondly, in a later submission on “breach”, the
plaintiff particularised the
particular instances of failure to comply with that
obligation all of which, in my view, are relevantly comprehended (that is, as
to
the obligation) under the retainers.
PARTIES TO THE AUDIT
CONTRACTS
- The
defendants were correct to submit that the first defendant undertook the audit
of the operations of the Super Fund as an approved
auditor for the relevant
financial years pursuant to s 113(1) and/or 35C(1) of the SIS Act (s 113(1)
falls within Pt 13 and sets
out rules about the accounts, statements and audits
for such funds, and s 35C falls within Pt 4).
- An
auditor conducting an audit under s 113(1) bears a personal obligation as a
qualified professional auditor. Section 10 of the SIS
Act defined an
“approved auditor” as “a person” including a class of
“persons” specified in the
SIS Regulations. Regulation 1.04 of the
SIS Regulations limited the class of persons to “individuals” within
specified categories. The use of the word “individual”
denotes
“natural persons”: s 2B of the Acts Interpretation Act 1901
(Cth). An offence against s 113(4) of the SIS Act by the auditor attracts a
maximum penalty of 6 months imprisonment; a penalty only
consistent, having
regard to the statutory scheme, with the auditor having a personal duty. (It may
be noted that by the third appointment,
pursuant to the 2009 retainer, the
plaintiff expressly resolved to appoint the first defendant as the auditor for
the financial year
ending 2009).
- The
first defendant made the necessary declarations and certifications as auditor in
issuing the audit reports.
- It
is equally true that, as previously discussed, the corporate second defendant
could not have audited the Super Fund pursuant to
the SIS Act as it was not an
approved auditor.
- I
accept the submission of the plaintiff, however, that issue raised by the
parties, namely, whether the second defendant was a party
to the retainers, is
not determined by those abovementioned considerations. That question must be
resolved by the terms of the retainers
themselves. The plaintiff’s
illustration of a company liquidator, in that respect, was apposite.
- In
my view, it should be concluded that the second defendant was a party to the
audit contracts and thereby assumed responsibility
for the manner in which they
were conducted for the following reasons:
- (1) The
relevant question is “whether, from the communications that passed in the
course of formation of the putative contract
and knowledge of relevant
background information, the objective bystander would conclude that one of the
people involved in the transaction
was purporting to act on behalf of the
partnership”: Seiwa Australia Pty Ltd v Beard (2009) 75 NSWLR 74;
[2009] NSWCA 240 at [203] per Campbell JA (with whom Allsop P and Macfarlan JA
agreed).
- (2) It is true,
the 2007 retainer used the singular personal pronoun “I” and the
singular possessive pronoun “my”,
whereas the 2008 and 2009
retainers used the plural pronoun “we” and the plural possessive
pronoun “our”.
Notwithstanding that difference, the submission by
the defendants that the use of plural references in the 2008 and 2009 retainers
was a reference to “staff from the firm” that assisted the first
defendant cannot be accepted. The consent to conduct
the audit in the opening
paragraphs of the 2008 and 2009 retainers was expressed in the plural “we
hereby consent”. Later,
the retainers refer to an obligation to report as
“we are required to report to you in writing” and under the heading
”Confirmation of Terms and Conditions” it was stated “this
letter will be effective for future years unless we
advise you of its
amendment”. The word “us” is similarly employed to describe
the designation of the entity itself
that is undertaking the audit. For example,
it was stated: “Our audit of the financial report will be planned and
conducted
primarily to enable us to express our professional opinion”.
Even more significantly, the opening paragraph of the 2008 and
2009 retainers
referred to “our firm” acting as auditor for the Super Fund.
- (3) As a matter
of substance, the retainers were issued by Baumgartner Partners. The letters of
engagement were under Baumgartner
Partners letterhead. The correspondence did
not state in the signature section or use the words “on behalf of”
or “per”,
but by the use of the words first appearing,
“Baumgartner Partners” made clear the authors’ intention that
the
first defendant was executing each retainer on behalf of Baumgartner
Partners. I agree with the plaintiff that nomenclature and branding
cannot be
seen as merely decorative.
- (4) Post-contractual
conduct is admissible upon the question of whether a contract has been formed
(including the parties thereto):
Brambles Holdings Ltd v Bathurst City
Council (2001) 53 NSWLR 153; [2001] NSWCA 61 at [25]- [26] and Damien v
JKAM Investments Pty Ltd [2015] NSWCA 368 at [28] (per Tobias AJA, with whom
Gleeson JA and Simpson JA agreed). Each of the audit reports and invoices, in
relation to the audit reports,
were issued by Baumgartner Partners albeit, as
may be expected, the certificate or declaration made for the purposes of the SIS
Act
was only signed by the first defendant. There was no dispute that the second
defendant was the beneficiary of the professional indemnity
insurance policy
operating during the time of the relevant financial reports.
- (5) No
questions of vicarious liability arise here. If the contract was entered by the
first defendant on behalf of the partnership,
the partnership is relevantly
liable.
- (6) By becoming
a party to the audit contracts, each of the defendants jointly, as partners of
Baumgartner Partners, agreed to make
available the audit services of the first
defendant as appointed auditor to the Super Fund. They also jointly assumed
liability for
the proper performance of those services (in exchange for which
Baumgartner Partners would receive payment – and they did).
By assuming
this liability, the second defendant did no more than formalise and give effect
to the position at general law and under
statute that partners act as agents for
each other and are, therefore, jointly and severally liable both in tort and
contract: Partnership Act 1892 (NSW), ss 10(1) and 12 and Polkinghorne
v Holland [1934] HCA 28; (1934) 51 CLR 143 at 156. Both parties are bound by the contract:
s 5 of the Partnership Act.
WITNESSES
Plaintiff’s Witnesses
- The
plaintiff called the following lay witnesses:
- (1) Ms
Crittle;
- (2) Mr Robert
Gorczyca; and
- (3) Ms Joanne
Phillips.
- Of
those witnesses, only Ms Crittle was called for cross-examination.
- The
plaintiff also called expert evidence from Mr Morris and Mr Peter Sheppard.
There were significant issues raised regarding Mr
Morris’ evidence, to
which I now turn.
Mr Morris
- There
was substantial challenge to Mr Morris’ evidence, which broadly fell into
two categories:
- (1) as to
errors in his reports; and
- (2) as to his
alleged lack of experience and expertise in superannuation
auditing.
- It
should be noted, at the outset, that during the hearing the defendants did not
object to Mr Morris’ evidence as a whole;
in the sense that they objected
to his capacity to give opinions per se pursuant to s 79 of the
Evidence Act 1995 (NSW). Rather, the defendants made objections as to
particular aspects of the reports with respect to which rulings were made.
- Mr
Morris was a qualified auditor. From 1971-1991, he primarily conducted audits
and from 1983-1991, he was responsible for the audit
practice of Edwards
Marshall, a mid-sized firm located in Adelaide. Since 1991, he continued to be
consulted on technical issues
in audit engagements at Edwards Marshall. From
1991-1995 he was a member of the Auditing Standards Board and a member of the
Companies
Auditors and Liquidators Disciplinary Board from 2000-2010. He
continued to be, at the time of his evidence, a registered company
auditor.
- Mr
Morris produced four reports for these proceedings dated,
respectively:
- (1) 27 January
2015 (“the first report”);
- (2) 26 August
2016 (“the second report”);
- (3) 6 September
2016 (“the third report”); and
- (4) 3 July 2017
(“the fourth report”).
- Mr
Morris expressed, inter alia, the following opinions:
- (1) the audits
undertaken by the first defendant were not of the standard of a reasonably
competent auditor;
- (2) the
material examined by Mr Morris (which included documents provided to the
defendants for the purpose of the audits, such as, the financial
statements and documents regarding mortgage loans) would not have sufficiently
informed a reasonably competent auditor
about the assets and income of the Super
Fund to enable the auditor to express an opinion as to whether the financial
statements
and operating statements of the Super Fund presented fairly the state
of affairs of the Super Fund in the relevant financial years;
- (3) a
reasonably competent auditor would have:
- (a) recognised
the loan investments were of such a high magnitude and made to entities that
represented a high level of risk of non-recovery.
They were inconsistent with
the types of investments that would ordinarily be made by a superannuation fund,
particularly a fund
having a single beneficiary in Ms Crittle’s
circumstances;
- (b) undertaken
further enquiries about the entities to whom loans had been made and the trusts
in which the Super Fund held units;
and
- (c) would have
sought to engage with the plaintiff and its sole director Ms
Crittle;
- (4) in all the
circumstances, the auditor did not obtain sufficient appropriate audit evidence
to express an informed decision on
the financial statements of the Super
Fund;
- (5) the auditor
had a duty to:
- (a) express a
modified opinion on the financial statements; articulating concerns that should
have been held regarding the auditor’s
inability to form an opinion of the
recoverability of the reported assets of the Super Fund; and
- (b) inform the
plaintiff of the reservations that should have been held regarding the
recoverability of the reported assets and the
likelihood that the investment
decisions of the plaintiff had been affected by Mr Moylan’s conflicts of
interest; and
- (6) the
purported “investment strategy”, in respect of the Super Fund, was
wholly inadequate;
Errors in reports
- The
defendants contended that the plaintiff’s reliance on Mr Morris, as an
expert on the performance of an auditor of a SMSF,
was problematic because of a
“litany of errors” within his reports. Those alleged errors will be
considered in the below
categories.
Form of the reports
- The
defendants contended that Mr Morris did not consider whether the form of the
audit reports satisfied the requirements of the SIS
Act. They submitted that he
did not report on the form of the opinion in his reports, nor any qualifications
or limitations contained
within them.
- The
plaintiff’s response to this submission, that there was no suggestion that
the form of the opinion was not that required
by the ATO in the approved forms,
was plainly correct. Mr Morris' evidence focused on whether the material
available to the auditor
supported the opinions that were actually expressed
within the audit reports. In so doing, Mr Morris set out, in detail, why the
auditor did not have sufficient materials available to him to express the
opinions that he did. Criticism of the form of the opinions
themselves could
advance the matter no further.
Failure to refer to ASA
800
- The
defendants submitted that Mr Morris made no reference in any of his reports to
ASA 800, which had specific application to special
purpose financial
statements. The defendants contended the relevance of ASA 800 was that it
imposed a mandatory requirement that a retainer be entered into which
specified
the nature of the engagements for an audit and the form and content of the
report to be issued.
- In
the result, the defendants contended that Mr Morris proceeded upon the basis of
a “generalised view” of audit and not
by reference to the tasks that
had actually been agreed to be performed in the retainers. The defendants
submitted this rendered
his views irrelevant because he was expressing an
opinion from the wrong starting point.
- The
plaintiff submitted that the defendants did not identify any impact that a
consideration of the terms of the audit contracts would
have had on Mr
Morris’ evidence. The plaintiff also contended that Mr Morris was not
providing an opinion based on the terms
of the retainer; that question was for
the Court to decide.
- Further,
the plaintiff submitted that the defendants have not shown how or why ASA 800
was important in this case, or how it undermined
any of the analysis within Mr
Morris’ reports. The plaintiff submitted that no distinction between Mr
Morris’ “generalised
view” and any specific tasks identified
in the retainers had been established by the defendants. I accept that
submission in
light of my earlier conclusions made with regard to the terms of
the retainers.
Statement of obligation
- The
defendants further contended that Mr Morris made various statements of
obligation which bore no relationship to the audits in
question. Those
statements of obligation are considered below.
Section 128F
- I
accept the submission of the defendants that Mr Morris mistakenly ascribed s
128F of the SIS Act as being the obligation falling
upon the auditor and, in the
result, concluded the auditor was required to comply with any auditing standards
issued by the AUASB.
The opinion was erroneous because that provision was not
operative until 2012.
- The
plaintiff contended that, despite that mistake, that criticism does not affect a
conclusion that the auditing standards applied
to the audits. This leads to the
consideration of the defendants’ next contention, namely, that Mr Morris
incorrectly relied
on accounting and auditing standards
generally.
Reliance on accounting and auditing standards
generally
- The
defendants contended that Mr Morris incorrectly relied upon accounting and
auditing standards generally and had no appreciation
of the lack of the role of
those standards in relation to an audit of special purpose financial
statements.
- The
defendants provided detailed submissions as to the nature of special purpose
financial statements. That issue was dealt with above
under the heading
“The Auditing Standards Framework”. I have already found that the
financial statements of the Super
Fund were “special purpose financial
reports”, the financial statements were not required to be prepared
pursuant to
Ch 2M of the Corporations Act, and the plaintiff was not a
reporting entity (see discussion above at [152]-[157]).
- The
defendants, in this light, also referred to a number of mistakes or omissions by
Mr Morris, namely, that:
- (1) he did not
recognise that a special purpose financial report was not a “financial
report” as defined by the Corporations Act, or that it was not
governed by Pt 2M.3 of that Act;
- (2) he did not
appreciate the impact of the definition of “financial reports” in
the Corporations Act, which would remove the applicability of
auditing standards;
- (3) he did not
recognise that a special purpose financial report was not a general purpose
financial report; and
- (4) he did not
consider the application sections of accounting and auditing
standards.
- As
mentioned above, I accept the defendants’ submission that accounting
standards generally do not apply to audits of special
purpose financial
reports.
- The
auditing standards which did apply to the audits were discussed in detail above
under the heading “Auditing Standards”.
The defendants’
criticism of Mr Morris, in this respect, incorrectly limited the scope and
application of the auditing standards
that were applicable to audits of SMSFs.
Despite Mr Morris’ “failure” to identify certain aspects as
outlined above,
it did not make a difference to a substantial number of his
conclusions because, as I have found, ASA 200 and ASA 240 (which he heavily
relied upon) did apply to the audits undertaken by the defendants as a result of
the application sections of those auditing standards.
- Further,
I accept the plaintiff’s submission that each audit report contained the
representation that the audit had “been
conducted in accordance with
Australian Auditing Standards”.
- However,
the defendants’ criticism is warranted where the failures of Mr Morris led
him to apply inapplicable accounting standards
and criterions, which will be
dealt with below.
True and fair view
- Linked
to the above factor was the defendants’ contention that Mr Morris’
criticism was based upon the need for the special
purpose financial statements
to present a “‘true and fair view”, and that was an
inapplicable criterion. The defendants
correctly contended, in that respect,
that that collocation of words was found in s 297 in Pt 2M.3 of the
Corporations Act and did not apply to special purpose financial
reports.
- Further,
the defendants referred to the “Auditor’s Opinion” contained
in the audit reports which relevantly recorded
that “the financial report
presents fairly in all material respects in accordance with the
accounting policies described in the notes” (emphasis added) and was not
expressed
in terms of a “true and fair view”.
- The
defendants, therefore, contended that establishing a “true and fair
view” (and the idiosyncratic view of Mr Morris
to do so) was a
“false criterion” and that the premise for his analysis had a false
starting point.
- I
accept the defendants’ submission that a “true and fair view”
was a criterion that did not apply to the financial
statements of the Super
Fund. I do not accept the plaintiff’s submission that these criticisms, by
the defendants as to Mr
Morris, had neither not been demonstrated to have any
material significance to, nor undermined any of the reasoning or conclusions
in
any of Mr Morris’ reports. Mr Morris did, however, make some conclusions
based upon the need for the auditor to express
an opinion as to a “true
and fair view” and those aspects of his conclusions will thereby have
diminished weight.
Applying inapplicable standards
- The
defendants contended that Mr Morris sought to deploy inapplicable auditing
standards, specifically with reference to ASA 200 and
ASA 240.
- It
should be noted at the outset that Mr Morris relied heavily on the standards
within ASA 200 and ASA 240 in his reports; they informed
a significant
proportion of his opinions.
- The
defendants’ contention, in this respect, was incorrect. It is appropriate
that both ASA 200 and ASA 240 apply to the audits
undertaken by the defendants
(as I have previously found, above).
AASB 139 and RG85
- The
defendants contended that Mr Morris approached “his consideration of the
auditor’s role in this case from the premise
that the auditor had to
perform his role by reference to all of the relevant parts of accounting
standards dealing with recognition and measurement” (emphasis
added).
- It
was contended that Mr Morris’ principle criticism of the audit appeared to
be directed to the lack of work undertaken by
the auditor in order to be
satisfied that the carrying values for various loans or investments were
appropriate due to impairment
issues. The defendant submitted that the
performance of such would require the application of “AASB 139 Financial
Instruments:
Recognition and Measurement” (“AASB 139”)
concerned with the measurement and impairments of assets. Despite referring
to AASB 139 in his reports, Mr Morris accepted in cross-examination
that AASB
139 was not “directly applicable” to the financial statements in the
relevant financial years.
- Mr
Morris also referred to “Regulatory Guide RG85 Reporting requirements for
non-reporting entities” (“RG85”)
which was issued by ASIC, a
different regulator than the ATO, when considering recognition and measurement
of assets, liabilities
and income.
- The
plaintiff did not respond to this point. I accept the defendants’
submission that Mr Morris erroneously relied on AASB 139
and RG85. However, I
note, in this respect, that this does not alter the fact that the valuation
requirements under AUG 4 still applied
to the audits, as well as the requirement
in the retainers to bring any serious misdescriptions or misstatements in the
financial
statements to the attention of the
plaintiff.
Qualifications and Expertise
- The
defendants submitted that reliance on Mr Morris’ evidence was problematic
due to his lack of experience. They contended
that (other than this
case):
- (1) Mr Morris
had not been involved in forensic or sufficient observational work involving the
audit of a SMSF;
- (2) he was
never registered as an auditor of a SMSF;
- (3) he had no
experience in auditing SMSFs under either the SIS Act or its predecessor
legislation;
- (4) there was
no reference in his curriculum vitae to an understanding of undertaking an audit
of a special purpose financial report;
and
- (5) Mr
Morris’ lack of experience was evident from the mistakes made in his
reports as discussed above.
- In
the result, the defendants contended that Mr Morris’ evidence should not
be used beyond the admitted case. The defendants
submitted:
... Mr Morris disqualified himself by his absence of relevant experience,
coupled with the errors and omissions which probably were partly a consequence
of that
lack of experience. They were probably partly due to overreach
associated with an assumption of an advocate’s role.
[Original emphasis.]
- The
plaintiff contended that Mr Morris had many years’ experience supervising
an audit practice, he continued to be a qualified
company auditor and he
continued to have involvement on the Auditing Standards Board and the Companies
Auditors and Liquidators Disciplinary
Board. Further, the plaintiff contended
that for the relevant financial years, the concept of an approved self-managed
superannuation
fund auditor did not exist and at the relevant time, a registered
company auditor (a qualification held by Mr Morris) was an approved
auditor for
a SMSF.
- On
the face of the material, it was correct that Mr Morris did not have experience
in auditing SMSFs. However, it was not suggested
by either party that Mr Morris
was not experienced as an auditor, nor was it suggested that he did not have the
forensic ability
to examine the work of auditors generally (indeed, this was, as
I will later discuss, relied upon by the defendants). It is clear
from his
curriculum vitae that Mr Morris had audit experience in a broad range of
activities, particularly with relation to company
auditing.
- The
question raised by the defendants is whether Mr Morris’ qualifications are
applicable to the audit of a SMSF. The premise
of the defendants’
contentions was that in order to give an expert opinion on the audit of the
Super Fund, an expert should
have had a unique understanding of the accounting
standards which applied to a special purpose financial report, and the auditing
standards which applied to the audit of those reports of a SMSF as opposed to a
general understanding of audits.
- Again,
it should be noted that there was no objection to the admissibility of Mr
Morris’ evidence on the basis of s 79 of the Evidence Act. In
Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588; [2011] HCA 21, French CJ,
Gummow, Hayne, Crennan, Kiefel and Bell JJ held (at [32]):
[32] To be admissible under s 79(1) the evidence that is tendered must satisfy
two criteria. The first is that the witness who gives the evidence “has
specialised
knowledge based on the person’s training, study or
experience”; the second is that the opinion expressed in evidence
by the
witness “is wholly or substantially based on that
knowledge”.
- In
Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705; [2001] NSWCA
305 (“Makita”), Heydon JA discussed the requirements for
expert evidence at [85]:
[85] In short, if evidence tendered as expert opinion evidence is to be
admissible, it must be agreed or demonstrated that there
is a field of
“specialised knowledge”; there must be an identified aspect of that
field in which the witness demonstrates
that by reason of specified training,
study or experience, the witness has become an expert; the opinion proffered
must be “wholly
or substantially based on the witness’s expert
knowledge”; so far as the opinion is based on facts “observed”
by the expert, they must be identified and admissibly proved by the expert, and
so far as the opinion is based on “assumed”
or
“accepted” facts, they must be identified and proved in some other
way; it must be established that the facts on which
the opinion is based form a
proper foundation for it; and the opinion of an expert requires demonstration or
examination of the scientific
or other intellectual basis of the conclusions
reached: that is, the expert’s evidence must explain how the field of
“specialised
knowledge” in which the witness is expert by reason of
“training, study or experience”, and on which the opinion
is
“wholly or substantially based”, applies to the facts assumed or
observed so as to produce the opinion propounded.
If all these matters are not
made explicit, it is not possible to be sure whether the opinion is based wholly
or substantially on
the expert’s specialised knowledge. If the court
cannot be sure of that, the evidence is strictly speaking not admissible,
and,
so far as it is admissible, of diminished weight. And an attempt to make
the basis of the opinion explicit may reveal that it is not based on specialised
expert knowledge, but, to
use Gleeson CJ’s characterisation of the
evidence in HG v The Queen (at 428 [41]), on “a combination of
speculation, inference, personal and second-hand views as to the credibility of
the complainant,
and a process of reasoning which went well beyond the field of
expertise”.
[Emphasis added.]
- Weinberg
and Dowsett JJ considered that paragraph of Makita in Sydneywide
Distributors Pty Ltd v Red Bull Australia Pty Ltd (2002) 234 FCR 549; [2002]
FCAFC 157 (“Sydneywide Distributors”) and
held:
[87] The use of the phrase “strictly speaking” in the last
sentence should not be overlooked. It may well be correct to say
that such
evidence is not strictly admissible unless it is shown to have all of the
qualities discussed by Heydon JA. However, many of those qualities involve
questions of degree, requiring the exercise of judgment. For this reason it
would be very rare indeed for a court at first instance to reach a decision as
to whether tendered expert evidence
satisfied all of his Honour's requirements
before receiving it as evidence in the proceedings. More commonly, once the
witness's
claim to expertise is made out and the relevance and admissibility of
opinion evidence demonstrated, such evidence is received. The various
qualities described by Heydon JA are then assessed in the course of determining
the weight to be given to the evidence.
There will be cases in which it
would be technically correct to rule, at the end of the trial, that the evidence
in question was not
admissible because it lacked one or other of those
qualities, but there would be little utility in so doing. It would probably lead
to further difficulties in the appellate process.
[Emphasis added.]
- There
is a justifiable criticism about how Mr Morris approached some parts of his
analysis. That criticism adversely affects the weight
given to his opinions
influenced by those mistakes: Makita at [85] and Sydneywide
Distributors at [87].
- Mr
Morris failed to recognise that some accounting standards, such as AASB 139, did
not apply to special purpose financial reports.
He also sought to employ a
regulatory guide from ASIC – the wrong regulator. This affects the weight
of those opinions, which
were impacted by such mistakes.
- Further,
Mr Morris failed to refer to ASA 800, which was an auditing standard directly
applicable to the audit of the Super Fund and,
as a result, he did not refer to
the terms of the retainers or analyse what the engagement of the auditor
required.
- However,
where the retainers brought in concepts and issues which were akin to those
applicable in the standards employed by Mr Morris,
the defendants’
argument as to Mr Morris’ qualifications, in that respect, is without
foundation.
- The
mistakes made by Mr Morris do not affect his qualifications to express an
opinion where he had correctly applied the auditing
standards. Since the
auditing standards, such as ASA 200 and ASA 240, did apply to the audit, then it
would be illogical to argue
that Mr Morris did not have the qualifications to
generally apply those auditing standards to the audit of special purpose
financial
reports of a SMSF.
- Mr
Morris had specialised knowledge of auditing standards. His opinions on what the
defendants were required to do pursuant to the
applicable auditing standards
were wholly or substantially based on his specialised knowledge.
- Therefore,
the defendants’ contention that Mr Morris was not qualified or trained to
give an opinion beyond the admitted breaches
stretched too far. This may explain
why there was no objection to Mr Morris’ evidence as a whole as to his
reports.
Conclusion as to Mr Morris
- It
is true that in his reports, Mr Morris made a number of mistakes. First, he
failed to recognise that the financial statements of
the Super Fund as special
purpose financial reports required different treatment to financial reports or
general purpose financial
reports. He thereby applied some inapplicable
standards such as AASB 139 and RG85, and inapplicable criterions such as
“true
and fair view”.
- Secondly,
Mr Morris failed to recognise the need to fix upon the retainers in the context
of special purpose financial reports insofar
as the retainers specified the
nature of the special purpose engagements for the audits pursuant to ASA
800.
- Considered
at such a level of analysis, one could rapidly come to the conclusion that the
weight to be attached to Mr Morris’
opinions would be significantly
reduced, both generally and particularly, in the subject areas where the
criticisms of the defendants
had substance.
- However,
such analysis is overly simplistic. Some aspects of the defendants’
critique were wrong (for example with regard to
the application of ASA 200 and
ASA 240 and to the form of the reports) and the attack on his opinions
overlooked the fact that many
of the requirements contained within the retainers
which governed the audit of the Super Fund had counterparts in the relevant
standards.
For example, the requirements to exercise professional judgment and
scepticism in ASA 200 were consistent with the terms of the retainers
outlined
in [284]-[294], [299]-[311] and [312]-[317] above. In other
words, whilst Mr Morris’ opinions may have been based on some incorrect
inquiries, in substance, they were
significantly hinged upon, when corresponding
to a counterpart term of the retainers, the applicable auditing standard or
benchmark.
- A
similar conclusion may be reached as to the attack on Mr Morris’
qualifications and experience.
- Whilst
it was a valid critique that Mr Morris had no experience auditing SMSFs, which
accounted for the mistakes he made, Mr Morris
was qualified to act as an auditor
(and it was not suggested otherwise). His experience enabled him to critique
audits, noting that
he was a member of the Companies Auditors and Liquidators
Disciplinary Board and had many years’ experience supervising an
audit
practice.
- The
critique of Mr Morris’ qualifications and experience, by the defendants,
does not account for the fact that a review of
whether a proper or sufficient
audit was completed against what was required to be done within the terms of the
retainers fitted
within Mr Morris’ qualifications and experience. His
analysis traversed, albeit without specific acknowledgement to the specific
terms of the retainers, the same or very similar requirements for the conduct of
audits as found in the retainers, particularly with
reference
to:
- (1) bringing
serious misstatements and misdescriptions to the plaintiff’s
attention;
- (2) inquiring
into and forming opinions as to certain matters; and
- (3) exercising
reasonable care and skill.
- On
balance, the acceptance and application of Mr Morris’ opinions requires
considerable care or caution to ensure that his opinions
were based upon areas
within his qualifications and expertise. Where that alignment does not occur or
there are clear errors, the
opinions are of substantially diminished weight.
Otherwise, I consider Mr Morris’ opinions are of considerable weight,
albeit
diminished to a degree by his failure to expressly recognise that the
task he was to undertake concerned special purpose audit engagements
where the
retainers were crucial to any evaluation of a breach of duty in the audit
reports.
Mr Sheppard
- Mr
Sheppard was a chartered accountant specialising in insolvency, reconstruction,
investigation and forensic accountancy.
- Mr
Sheppard produced three affidavits in these proceedings, dated:
- (1) 11 December
2015 (“Mr Sheppard’s first affidavit”);
- (2) 29 August
2016 (“Mr Sheppard’s second affidavit”); and
- (3) 23 May 2017
(“Mr Sheppard’s third affidavit”).
- He
undertook the following task:
- (1) review of
the plaintiff’s books and records (including bank statements) to identify
repayments or distributions received
and recoveries made after 30 June
2008;
- (2) a
mathematical calculation of recoveries made net of legal costs (after review of
tax invoices for legal costs); and
- (3) a
mathematical calculation of the plaintiff’s claimed loss and
damage.
- The
plaintiff noted, whilst the mathematical calculations could have been undertaken
by the Court, the purpose of Mr Sheppard’s
evidence, in that respect, was
to relieve the Court of that task.
- The
defendants contended that Mr Sheppard’s evidence included, in addition to
mathematical calculations, a presentation of factual
material which they argued
was infected by a degree of partisanship. The defendants’ attack on the
credibility of Mr Sheppard
was threefold as detailed below. The plaintiff
contended that no conclusion should be drawn that Mr Sheppard was acting as an
advocate
in preparing his reports.
Investment in Limeburners
Trust
- The
first attack on Mr Sheppard’s credibility by the defendants was that Mr
Sheppard made an unqualified statement that the
plaintiff issued a cheque for
$100,000 payable to the Limeburners Trust. The defendants contended that
statement was made in the
context of giving the impression of direct evidence
when there was none. The submission by the defendants was hollow given there
was
evidence that the amounts were paid and, as noted at [46]-[48] above, the defendants
eventually accepted that the weight of the evidence supported a finding that
$100,000 was paid for investment
in the Limeburners Trust.
- I
accept the submission of the plaintiff that the defendants’ criticism of
the wording of Mr Sheppard’s report, in that
respect, was unwarranted
because Mr Sheppard was not concerned with the nuances of language. Mr
Sheppard’s task was mathematical
and he made reference to the documents
upon which he relied.
Ability of the Regional Land Fund to pay
claims and net assets
- The
defendants’ second attack on Mr Sheppard’s credibility was that he
only referred to net assets of the Regional Land
Fund without reference to any
other aspect of the financial report or indicia as to solvency.
- In
Mr Sheppard’s third affidavit, he made reference to the financial report
to the Regional Land Fund as at 30 June 2008. The
defendants contended the
purpose in doing so was to present such facts as may be relevant to the ability
of the Regional Land Fund
to pay claims at that time. Mr Sheppard referred to
the fund having positive net assets of $6,222,501 as at 30 June 2008. He made
no
reference to any other aspect of the financial report or indicia as to
solvency.
- The
defendants contended that, when Mr Sheppard was invited to explain why he had
made reference to net assets and nothing else, he
gave a nonsensical response
which pointed to Mr Sheppard not being a reliable or credible witness. Mr
Sheppard’s response was
that the net asset position is the most pertinent
indicator of a debtor’s immediate capacity to meet a liability; even
though
Mr Sheppard said so without regard to the concept of current and
non-current assets and liabilities. The defendants contended that
such an answer
must be nonsense to a person professing to have some insolvency exposure.
- Mr
Sheppard was then taken through a number of indicia in the reports. The first
matter raised with him was the “quick ratio”.
Mr Sheppard was aware
of this concept and described the ratio in terms of comparing cash and accounts
receivable on the one hand
and current liabilities on the other. The described
integers made plain that it addressed what liquid assets were available to meet
current liabilities. Having been taken to the relevant figures, Mr Sheppard
agreed that the Regional Land Fund had a very low quick
ratio and agreed that
such a ratio indicated that the Regional Land Fund might struggle to meet its
short term liabilities and was
largely illiquid.
- However,
I accept the plaintiff’s submission that the "quick ratio" is not an
indicium of the ability of that entity to pay
any claim made against it. First,
the highest use of the quick ratio can rise is to establish liquidity. Even if
the Regional Land
Fund was illiquid, it does not follow that it could not have
(after liquidating assets or raising finance) repaid the plaintiff’s
loan.
Relevantly, the Regional Land Fund had total current assets of $8.1 million and
positive net assets of $6.2 million. Secondly,
it would not seem unusual for a
land development company (which Pacific General was) to have significant
assets tied up in land and, thus, to present as largely illiquid (or perhaps
have a current or working capital
ratio of less than one).
- The
second matter that Mr Sheppard was taken to in cross-examination was the current
or working capital ratio, which he agreed compared
current assets to current
liabilities and agreed the ratio of the Regional Land Fund was less than one at
30 June 2008. I accept
the defendants’ submission that that ratio would
have to be a more pertinent indicator of the immediate capacity to meet a
liability than the net assets figure adhered to by Mr Sheppard in his oral
testimony. The defendants submitted it was apparent that
the answer Mr Sheppard
gave, as to selection of the net assets figure, was nonsense.
- The
plaintiff responded to that submission, contending that criticism was
unwarranted because the net asset position of Pacific General
(as responsible
entity of the Hardie Estates Property Fund / Regional Land Fund) is largely
irrelevant, given the concession made
by the defendants’ expert, Ms
Michelle Jones, a chartered accountant and registered company auditor, that it
is likely that
the plaintiff would have recovered the full amount of the loan
($838,299) from the guarantors in May 2008 (with the result that it
would not
have needed to proceed against the borrower, Pacific General).
- However,
the plaintiff’s submission does not address the defendants’
contention that Mr Sheppard should have used other
indicia for the purposes of
considering the ability of the Regional Land Fund to pay claims to the
plaintiff.
- I
consider Mr Sheppard’s use of the net assets affected the weight that may
be given to his evidence. It also affected his reliability
as a witness.
However, whilst there is doubt about using the net asset position to calculate
the ability of the Regional Land Fund
to pay (as will be considered later in
this judgment), I do not consider that Mr Sheppard was taking on an
advocate’s role
in coming to his conclusions.
Reference to
value of real estate
- A
third attack by the defendants on Mr Sheppard was that in his third affidavit,
Mr Sheppard made reference Mr Tomkins’ claim
as to the value of some real
estate.
- Mr
Sheppard claimed to have made that reference to indicate that Mr Tomkins may
have had the capacity to meet a liability in circumstances
where what he put
forward was, as the defendants contended, an incomplete picture. Mr Sheppard did
not to refer to Mr Tomkins’
unsecured creditors of $3 million and he did
not to make reference to the trustee in bankruptcy’s investigations of Mr
Tomkins’
claims, which led the trustee to the conclusion that Mr
Tomkins’ claims as to value could not be supported.
- In
cross-examination, Mr Sheppard claimed that he did not make reference to the
investigation of the trustee in bankruptcy that indicated
that the land value
only approximated the secured debt because he considered the statement of
affairs of Mr Tomkins more informative
than the trustee’s views. The
defendants submitted that attempted justification did Mr Sheppard “no
credit at all”
and it ought to be rejected. It should be noted that the
plaintiff did not respond to that point.
- I
consider whilst Mr Sheppard’s reference to Mr Tomkins’ claim to the
value of real estate did not give the complete picture
of whether Mr Tomkins as
guarantor had the capacity to meet a liability, the mistake made by Mr Sheppard
goes to the weight of some
of his evidence.
- Overall,
I consider the mistakes made by Mr Sheppard significantly reduced the weight
which may be attached to his evidence. However,
I do not consider that Mr
Sheppard was, as the defendants submitted, partisan in giving his
evidence.
Defendants’ Witness
- The
defendants only called one witness, Ms Jones She was instructed only to address
whether the loans and investments were recoverable,
in full, as at 15 May 2008.
She was not instructed to provide (and did not provide) any opinion on the
audits conducted by the defendants.
The defendants called no expert evidence in
the fields of opinions traversed by Mr Morris.
- The
plaintiff did not contend that Ms Jones made any inaccurate calculations within
the scope of her instructions. It was contended,
however, the issue with Ms
Jones’ evidence was the limited scope of the instructions provided to her.
Those matters will be
addressed later in this judgment.
Failure
to call Mr David Baumgartner
- No
evidence was called from the first defendant. Although affidavits from him were
served and appeared in the index to the Court Book,
no such affidavits were
ultimately read.
- The
plaintiff submitted the failure to call the first defendant supports an
inference that his evidence would not have assisted the
defendants’ case
on questions of liability outside the matters admitted: Jones v Dunkel
[1959] HCA 8; (1959) 101 CLR 298. It was also contended the failure to call the first
defendant allowed the Court to draw, with greater confidence, any inference
unfavourable
to the defendants if that uncalled witness appears to be in a
position to cast light on whether the inference should be drawn: Kuhl v
Zurich Financial Services Australia Ltd (2011) 243 CLR 361; [2011] HCA 11 at
[63] per Heydon, Crennan and Bell JJ; Manly Council v Byrne [2004] NSWCA
123 at [51].
- In
this case, the plaintiff contended the first defendant was in a position to cast
light on whether inferences relevant to liability
should be drawn. The plaintiff
invited the Court to draw particular inferences upon the basis the first
defendant may have given
relevant evidence in the sections under the headings:
“Existence of assets and securities”, “Value of assets”,
and “Causation”. I will deal with that topic further
below.
COMMON LAW DUTIES OWED BY THE DEFENDANTS
- The
defendants admitted that the first defendant owed a common law duty to exercise
reasonable care and skill in the performance of
his engagement to provide an
audit report in each of the relevant financial years.
- It
is trite to note that a professional person owes a duty to his client
concurrently and co-extensively in tort and contract: Johnson v Perez
[1988] HCA 64; (1988) 166 CLR 351 at 363. The defendants owed to the plaintiff duties at
common law that were co-extensive with the terms of the retainers set out
above.
- The
basic duty of an auditor has always been to audit accounts with reasonable care
and skill: Pacific Acceptance Corporation at 73-74.
- In
Frankston and Hastings Shire v Cohen [1960] HCA 6; (1960) 102 CLR 607
(“Frankston”), Fullagar J accepted (at 618) that, although
the Local Government Act 1946 (Vic) only required the auditor to
“audit the accounts”, it was, in fact, “just as much concerned
with protecting
[the entity whose accounts were the subject of the audit] from
fraud as with ensuring that the [entity] itself keeps within the law”.
His
Honour held that the auditor “must be subject to a duty to exercise
reasonable care in carrying out his audit of the accounts”.
- Fullagar
J held (Frankston at 617):
An audit may be said to be a skilled examination of such books, accounts and
vouchers as will enable the Auditor to verify the Balance
Sheet. The main
objects of any audit are: (a) To certify to the correctness of the financial
position as shown in the Balance Sheet,
and the accompanying revenue statements.
(b) The detection of errors. (c) The detection of fraud. The detection of fraud
is generally
regarded as being of primary importance.
- The
duties owed by an auditor to its client are high in the sense that the auditor
holds himself or herself out as practising a highly
skilled and exacting
profession: Daniels v Anderson (1995) 37 NSWLR 438 at
480B.
BREACH OF CONTRACT AND DUTY
The admitted breach of contract and duty
- The
defendants admitted that the material available to the first defendant at the
time of the preparation of the audit reports did
not support the expression of
an unqualified opinion in the terms pleaded in para 15(a) of the second further
ASOC, namely, that
the Super Fund’s financial reports presented fairly in
all material respects, in accordance with accounting policies described
in the
notes of the financial reports, the financial position of the Super Fund at year
end and the results of its operations for
the year then ended (see amended
defence at 16(h)).
- Further
admissions were made which I described earlier in this judgment. It is
sufficient to note, for present purposes, that the
following was
admitted:
- (1) various
parts of the Super Fund’s assets were, in substance, worthless or of
substantially compromised value;
- (2) the Super
Fund’s financial statements for the relevant financial years were
“materially inaccurate”; and
- (3) the special
purpose financial reports for the relevant financial years did not present
fairly the financial position of the Super
Fund at the end of the relevant
year.
- The
culmination of those factors resulted in the admissions that the first defendant
failed to exercise reasonable care in the preparation
of the audit reports.
- Nonetheless,
there remained a dispute as to the appropriate form of any such qualification if
the auditor had, in accordance with
the obligations falling upon him in that
role in law, expressed a qualified opinion.
- As
to the loan investments where there was audit evidence available, the defendants
contended that the qualification would only go
to the appropriateness of the
adopted basis for valuing the loan assets. Reliance was placed upon the evidence
of Mr Morris in cross-examination,
even though Mr Morris did not identify in his
report any form of qualification of the opinion, as such, relating to the
financial
reports.
- As
to the other investments where it was said there was no evidence to establish
that the other investments were not being carried
at appropriate amounts, the
defendants submitted that the first defendant had no basis for qualifying his
opinion. It was contended
that the first defendant did not have the task to
positively ascertain values and that it was not his role to assess the financial
statements against the application of accounting standards.
- Reference
was made, in that respect, to the retainers which provided that the auditor may
request from the trustees written confirmation
of certain representations. In
the case of the financial statements in question, there was a representation to
the effect that the
adopted accounting policies were appropriate for the Super
Fund and a specific representation as to the existence of all assets.
These
representations, it was submitted, provided the audit with a basis for
proceeding in the absence of evidence to the contrary.
- As
to the loan investments, Mr Morris agreed, in cross-examination, that a
reasonable auditor would query the appropriateness of maintaining
a basis for
valuation recorded in the notes to the special purpose financial reports and, if
provided no further information to remove
the uncertainty as to whether the
method was appropriate, an available outcome would be to qualify the audit to
cover the remaining
uncertainty.
- Those
qualifications, however, were not volunteered by Mr Morris but derived from an
affirmative response from him with respect to
the River Island Investments. Mr
Morris’ evidence was that the qualification put to him in
cross-examination was “one
outcome”. It was not put to him that
there was any other form of qualification that might be available or
appropriate. More
significantly, the effect of Mr Morris’ evidence was
that the irregularities in the audit material and apparent conflicts of
interest
involving Mr Moylan were so significant and concerning that the auditor should
have attempted to communicate directly with
Ms Crittle.
- I
accept the submission of the plaintiff that the documents provided to the
defendants for each of the relevant financial years revealed
that, with respect
to Mr Moylan:
- (1) Mr Moylan
had prepared the accounts which were being audited;
- (2) Mr Moylan
had executed the River Island Facility Agreement and the MCD Holdings Facility
Agreement on behalf of the plaintiff.
The sole director of the plaintiff, Ms
Crittle, had not attested to those facility agreements in any way;
- (3) Ms Crittle
had provided to Mr Moylan a power of attorney dated 12 February 2007, that is,
after entry into the River Island Facility
Agreement and MCD Holdings Facility
Agreement. In any event, the power of attorney given by Ms Crittle, as an
individual, did not
empower Mr Moylan to act on her behalf as director of the
plaintiff;
- (4) Mr Moylan
had personal interests in the loans and investments as set out in [80]-[81] above; and
- (5) a number of
the Super Fund’s other investments were apparently connected to Mr Moylan
(for example, both Mr Tomkins and
Mr Moylan had guaranteed the River Island
Facility Agreement), which suggested they had some association; and Limeburners
Creek had
made loans to River Island and MCD Holdings).
- As
to those matters, Mr Morris opined that the auditor had a duty to report to the
trustee concerns about the obvious conflict of
interest of Mr Moylan and the
high level of risk associated with the loans and investments.
- It
is unnecessary to deal with the further submission advanced by the plaintiff
that the narrow qualifications, for which the defendants
contended, were not
available given the failure to call the first defendant as a witness, with
respect to the type of qualification
that might be given by the auditor, but
there is some substance to that submission.
- I
accept that there is a relevant distinction, as contended for by the defendants,
between an accountant and an auditor and, more
particularly, their role and
functions. It is true the auditor is not a guarantor of a fair presentation of
the financial reports
per se. However, the admissions made by the
defendants were that the Super Fund’s financial statements were materially
inaccurate
and did not present fairly the financial position of the Super Fund.
The accounts should have been prepared on the basis that the
value of the loans
to River Island, MCD Holdings and the Tomkins were, in substance, worthless or
of substantially compromised value.
- I
agree with the submission of the plaintiff that any meaningful qualification
would have needed to at least to state those matters
– if not explain the
reasons for the qualifications: Re London & General Bank (No 2)
[1895] 2 Ch 673 (“Re London & General Bank”) at
685.
- It
does not automatically follow, as contended by the plaintiff, that where the
accounts were materially inaccurate or did not present
fairly the financial
position by virtue of the failing of the accountant who prepared the accounts,
the auditor was in breach. However,
having regard to the nature of the
admissions made, and the nature of the irregularities, I consider that such a
conclusion must
flow in the present case. That conclusion is a fortiori
in light of my further discussion of the non-admitted breaches of contract and
duty, which appear below.
- Turning
to the other investments, it might be noted at the outset that the
defendants’ pleadings drew no distinction as to those
assets.
- It
is true, as contended by the defendants, that Mr Morris’ criticism, so far
as it was directed to a positive obligation relied,
at least in part, upon the
audit being conducted pursuant to AASB 139. I have earlier discussed why that
standard is not appropriate,
and therefore attach little weight to Mr
Morris’ evidence in that respect.
- However,
this approach puts out of account the requirements of AUG 4 which stipulated
that the auditor should ensure that investments
were carried in the accounts at
net market value, being the amount which could be expected to be received from a
disposal in an orderly
market after deducting costs of the proposal (see
extracts at [182]-[185] above). Despite the
defendants’ contention that the auditor did not have to positively
ascertain values, it follows that the
defendants failed to ensure that the
investments were valued at net market value pursuant to AUG 4, Ch 7 at 84 and
85.
- That
brings attention to the letter dated 3 April 2008 from “The Trustee of
Ryan Wealth Holdings Retirement Fund”, with
respect to the 2007 audit
(“the representation letter”), which the defendants contended
provided a safe basis for the
auditor to proceed, in the absence of evidence to
the contrary. The plaintiff’s reply, in this respect, was in the following
terms:
- (1) First of
all, the representation letter was not provided by the plaintiff at all. It was
not signed by the plaintiff; it was signed
by Mr Moylan purportedly on behalf
the plaintiff, but without authority. Although Mr Moylan held a power of
attorney on behalf of
Ms Crittle personally, this did not authorise him to act
on her behalf as director of the plaintiff: Mancini v Mancini [1999] VSC 227; (1999) 17
ACLC 1,570 at 1,577-1,578; Saad v Doumeny Holdings Pty Ltd [2005] NSWSC
893 at [17]. The defendants did not suggest to Ms Crittle in cross-examination
that she had authorised or approved the representation letter
in any way.
- (2) Far from
offering comfort to the defendants, the representation letter provided further
reason for concern regarding Mr Moylan's
involvement with the Super Fund and his
personal interest in the loans and investments made by it.
- (3) Implicit in
the defendants' submissions was an assumption that the first defendant in fact
relied upon the representation letter
as providing a basis for the conclusions
in the 2007 audit report. However, the first defendant’s decision to not
give evidence
meant that there was no available basis for this assumption.
- (4) In any
event, reliance on the representation letter was contradicted by the defendants'
own records; for example, the quality
control form stated: "No reliance has been
placed on internal controls of the trustee(s). The approach to auditing will be
of a substantive
nature. Assets will be verified to proper supporting
documentation...".
- I
do not consider that the first two points of the plaintiff’s submission,
in that respect, are met by the defendants’
contention that the submission
involved hindsight reasoning having regard to the material before the defendants
regarding the conduct
of Mr Moylan set out at [426] above. I will return
to that point below.
- As
to the third paragraph of their submission, the defendant made reference to the
2007 retainer which recorded “As part of
my audit process, I may request
from the trustees written confirmation concerning representations...”,
emails requesting and
sending the representation letter, and notes on the
defendants’ quality control form that “request trustee rep letter
– received”. The plaintiff responded by submitting that it was the
defendants who sought to place reliance on the representation
letter, and that
they have failed to prove (a) that the defendants relied on the letter, and (b)
they were justified in doing so.
I agree with the plaintiff’s submission
considering the representation letter was not signed by the trustee.
- As
to the fourth proposition, I do not consider that the quality control form is
irrelevant as contended by the defendants.
- In
all, I consider that the four propositions advanced by the plaintiff have
substance. The quality control form was employed as part
of the audit and was an
instrument used to guide the formation of the first defendant’s
opinions.
- The
plaintiff further submitted that reliance upon the representation letter
entirely overlooked the plethora of evidence to the contrary
being evidence
suggesting the other investments had no value. The defendants replied by
submitting that the knowledge now that the
loans and investments were worthless
was an entirely different thing from a conclusion that the auditor should have
formed that conclusion
based on the material available to him at the time. The
submission was repeated that it was not the role of the auditor to form an
opinion as to the value. He was not a trustee. However, that submission
overlooked the effect of AUG 4 and the fact that the material
available to the
defendants made plain that the loans and investments ought to have been recorded
in the accounts as being worthless.
- The
investments in the Cartel Trust and the Limeburners Trust were of no value and
the first defendant admitted that he failed to
exercise reasonable care in
expressing the financial report opinion as it lacked any basis. The admission
was that the financial
statements of the Super Fund for those investments for
the relevant financial years should have been prepared on the basis that the
value of the assets was wholly impaired or of no value. I agree with the
submission of the plaintiff that it must follow from that
admission that the
defendants failed to establish the value of those assets as recorded in the
financial statements in conducting
the audit in each relevant year –but
would add – as required by AUG 4. I also agree with the submission of the
plaintiff
that it must follow from that admission that the defendants failed to
ensure that all investments were valued at net market value
and failed to
exercise appropriate judgement in assessing the reasonableness of the value
disclosed pursuant to AUG 4, Ch 7 at 84
and 85.
- In
any event, there was evidence before the auditor as to lack of value as
follows:
- (1) The
Limeburners Trust Annual Report, provided to the defendants, revealed that the
Limeburners Trust was owed money by River Island
and MCD Holdings; those
companies had also failed to pay interest on the loans; as at 30 June 2007, no
profit distributions to unit
holders had been paid for two years; by 2009, it
was apparent there was a history of not paying accrued interest in distributions
to unit holders.
- (2) In the case
of the Cartel Trust, the defendants were only provided with a unit certificate
and trust distribution statement. The
defendants were not provided with any
financial statements or other information about the Cartel Trust in 2007; by
2008, such financial
information as had been provided to the auditor indicated
that the trust had accumulated losses of $771,072 as at 30 June
2008.
- It
follows that I reject the submission of the defendants that the other
investments should not have been the subject of a qualification
because of the
representation letter.
Non-admitted breaches of contract and
duty
- The
plaintiff relied upon five breaches of duties and contract and common law, each
of which corresponded to the pleadings in para
16 of the second further ASOC and
the corresponding discussion of the construction of the retainers earlier in
this judgment. The
five areas were as follows:
- (1) failed to
inquire into and report accurately as to whether the loans and investments of
the Super Fund were made in accordance
with an investment strategy that had
regard to all of the circumstances of the Super Fund and the matters set out in
reg 4.09;
- (2) failed to
audit the Super Fund so as to be able to reasonably form the opinion as to
whether there had been compliance, in all
material respects, with the
requirements of the SIS Act and SIS Regulations;
- (3) failed to
bring to the plaintiff’s attention, by notation, qualification or other
communication, serious misdescriptions
and misstatements in the financial
statements of the Super Fund and other facts and circumstances which any
competent auditor would
bring to the plaintiff’s attention;
- (4) failed,
acting reasonably, to form and express certain opinions; and
- (5) failed to
exercise due care and skill in a number of respects beyond the failure admitted
by the defendants.
- I
propose to deal with these propositions under a short form heading dealing with
each one and identifying the relevant passage of
the plaintiff’s pleadings
and the paragraph of this judgment dealing with the issue of
construction.
Failure to enquire and report as to compliance with
reg 4.09 (second further ASOC at para 16(a) and at [284]-[294] above)
- The
Court found, by reference to the construction of the retainers, that the
defendants had a duty under each retainer and at the
general law as pleaded in
this respect. Regulation 4.09 has been earlier extracted in this judgment at [136].
- The
investment strategy document for the financial year ending 30 June 2007 has also
been extracted in this judgment at [90] and was amongst the documents provided to the
defendants. The plaintiff submitted that it was clear from the terms of that
document
and the material available to the auditor that it was or should have
been obvious that the plaintiff had not given effect to the
requirements of that
investment strategy with respect to any of the specified matters in reg
4.09(2).
- The
plaintiff made a detailed and cogent submission in support of that essential
proposition, which I extract below (save for the
table demonstrating that of the
total assets (of approximately $6.5 million) approximately 97% were not
convertible into cash within
90 days: a proposition I accept from that
table):
110.1. As to the requirement in regulation 4.09(2)(a) (risk involved in making,
holding and realising...the entity’s investments, having regard to its
objectives and expected cash
flow requirements):
a. the 2007 Investment Strategy identified the
“principal objective” of the Super Fund as being to
“provide retirement benefits for its members”. It stated that
“[i]n consideration of” the principal objective,
“the trustees shall take a long term view when selecting
investments” and “have regard to the number and type of
members of the fund and their profiles, including ages, separate assets and
personal investment
preferences, if any, nominated by them”. In terms
of those matters, there was only one member, Ms Crittle, who was aged 59, not
working and living off her pension.
The auditors knew this because it was
recorded in their notes: see CB Vol 9 3843. There was no evidence before the
auditors of any
separate assets held by Ms Crittle, other than her
superannuation monies;
b. the substantial loans made by the Super Fund were identified by the auditors
as being “high risk” loans to Mr Moylan
for property development: CB
Vol 9 p. 3848;
c. there was nothing in the material available to the auditors in connection
with the 2007 audit that would support a conclusion
that in deciding to invest
in such high risk loans to Mr Moylan for property development, the plaintiff had
had regard to the Super
Fund’s principal objective of providing retirement
benefits for its members, as required by the 2007 Investment Strategy, or
that
in making such investments it had taken a “long term view”, as also
required by the 2007 Investment Strategy;
d. nor was there anything in the materials available to the auditors that would
support a conclusion that in deciding to invest in
such high risk loans for
property development the trustee had had any regard to the fact that the Super
Fund’s sole member,
was aged 59, retired and dependent on her
superannuation monies for her livelihood, as required by the 2007 Investment
Strategy;
e. nor was there anything in the materials available to the auditors that would
support a conclusion that in deciding to invest in
such high risk loans, the
trustee had had regard to the expected cash flow requirements of the Super Fund,
as required by the 2007
Investment Strategy;
f. there was accordingly no basis for a conclusion that the plaintiff had given
effect to an investment strategy that had regard
to the risk involved in making
and holding the Super Fund’s loans and investments, having regard to the
Super Fund’s
objectives and expected cash flow requirements, as required
by regulation 4.09(2)(a);
g. Mr Baumgartner’s decision not to give evidence in the proceedings means
that the Court may infer that he was unable to give
evidence that would have
assisted the defendants’ case on these matters; it also means that the
Court may more comfortably
draw the conclusions in paragraphs c, d, e and f
above: see the authorities referred to at par 60
above.
110.2. As to the requirement in regulation 4.09(2)(b) (composition of ...
investments as a whole, including the extent to which they ... involve exposure
... to risks from inadequate
diversification):
a. the 2007 Investment Strategy, under the heading
“Diversification” [CB Vol 9 p. 3508], required that “risk
shall be minimised by investing in a spread of investments” and, in
particular, by “investing directly in different types of
assets”;
b. instead, however, the Super Fund’s assets were overwhelmingly
concentrated in high risk property development ventures: 90%
of total assets
were invested in ‘mortgage’ loans (in fact the loans were unsecured)
and interest receivable on those
loans, and the remaining assets, the Cartel
Trust and the Limeburners Trust, had significant exposure to the same property
development
ventures to which the loans related. Mr Morris correctly identified
that there were a small number of highly concentrated investments;
c. a further aspect of concentration was the fact that the property development
ventures were predominantly in the same geographical
area of the Hunter region
of New South Wales;
d. there was accordingly no basis, on the materials available to the auditor,
for a conclusion that risk had been “minimised by investing in a spread
of investments” as required by the 2007 Investment Strategy;
e. nor was there any basis, on the materials available to the auditor, for a
conclusion that the Super Fund had invested in a “spread of different
types of assets” as required by the 2007 Investment Strategy;
f. there was accordingly no basis for a conclusion that the plaintiff had given
effect to an investment strategy that had regard
to the “composition
of...investments as a whole, including the extent to which they...involve
exposure...to risks from inadequate diversification” as required by
regulation 4.09(2)(b);
g. Mr Baumgartner’s failure to give evidence in the proceedings means that
the Court may infer that he was unable to give evidence
that would have assisted
the defendants’ case on these matters; it also means that the Court may
more comfortably draw the
conclusions in paragraphs d, e and f above: see the
authorities referred to at par 60 above.
110.3. As to the requirement in regulation 4.09(2)(c) (the liquidity of the
entity’s investments, having regard to its expected cash flow
requirements):
a. the 2007 Investment Strategy, under the heading
“Liquidity and Cash Flow” [CB Vol 9 p. 3508], required
that:
... investments shall normally be of the
type convertible to cash within 90 days ... Where some assets are not readily
converted to
cash within 90 days, then at least 50% of the fund assets shall be
invested in assets which are convertible to cash within 90 days,
unless certain
assets represent particular direction from the
members.”
b. the Super Fund had not complied with the requirement
of having at least 50% of its assets convertible to cash within 90 days. In
fact, of total assets of approximately $6.5 million, approximately 97%
($6,331,304) was not convertible to cash within 90 days, as
appears from the
table below:
[Table omitted.]
c. there was accordingly no basis for a conclusion that at least 50% of the
Super Fund’s assets were convertible to cash within
90 days, as required
by the 2007 Investment Strategy;
d. there was accordingly no basis for a conclusion that the plaintiff had given
effect to an investment strategy that had regard
to liquidity of the
entity’s investments, having regard to its expected cash flow
requirements, as required by regulation 4.09(2)(c);
e. Mr Baumgartner’s failure to give evidence in the proceedings means that
the Court may infer that he was unable to give evidence
that would have assisted
the defendants’ case on these matters; it also means that the Court may
more comfortably draw the
conclusions in paragraphs c and d above: see the
authorities referred to at par 60 above;
110.4. As to the requirement in regulation 4.09(2)(d) (the ability of the entity
to discharge its existing and prospective liabilities):
a. the only existing liability of the Super Fund was a
liability to pay accrued benefits to its sole member, Trudy Crittle. The quantum
of this liability as at 30 June 2017 was $6.5 million: CB Vol 9 p. 3479;
b. the defendants admit that the vast bulk of the loans and investments made by
Super Fund (totalling $4,813,696) were, in substance,
worthless or of
substantially compromised value: see CB Tab 3 pp. 89-90 (Amended Defence
[16]);
c. that this was or should have been apparent to the defendants from the
materials available to them is clear from the matters set
out in the table in
paragraph 110.3.b above;
d. there was thus no basis for a conclusion by the defendants that the Super
Fund had given effect to an investment strategy that
had regard to the ability
of the entity to discharge its existing and prospective liability to Ms Crittle,
as required by regulation 4.09(2)(d);
e. Mr Baumgartner’s failure to give evidence in the proceedings means that
the Court may infer that he was unable to give evidence
that would have assisted
the defendants’ case on these matters; it also means the Court may more
comfortably draw the conclusions
in paragraphs c and d above: see the
authorities referred to at par 60 above.
[Footnotes omitted.]
- Both
the 2008 and 2009 investment strategies (not extracted in this judgment)
contained materially identical requirements to those
set out in the 2007
investment strategy. Nothing in the materials available to the auditor, with
respect to financial years ending
30 June 2008 and 30 June 2009, provided any
basis for a conclusion that the trustee had given effect to the requirements of
the 2008
or 2009 investment strategies that are identified in reg 4.09(2).
- In
the 2007 audit report, under the heading “Compliance”, the
defendants stated the following:
- (1) “I
have conducted tests in accordance with Australian Auditing Standards as
necessary to provide reasonable assurance whether
the trustee of the fund has
complied, in all material respects, with ... Regulation 4.09 [of the SIS
Regulations]”;
- (2) “My
procedures with respect to regulation 4.09 included testing that the fund
trustee has an investment strategy, that the trustee has given consideration to
risk, return, liquidity
and diversification and that the fund’s
investments are made in line with that investment strategy”; and
- (3) “In
my opinion the trustee of the fund has complied, in all material respects, with
the requirements of [reg 4.09]”.
- The
defendants did not challenge the submissions of the plaintiff as to the failure
to give effect to the requirements of the 2007
investment strategy per
se, but rather raised a number of issues of a broader character which are
discussed below.
- First,
the defendants submitted that in order to go beyond the admission, it was
necessary to accept Mr Morris’ views as to
this topic as a reliable basis
upon which the Court may act. I do not accept that submission for two
reasons:
- (1) Many of the
aforementioned submissions asserted by the plaintiff, as to non-compliance with
reg 4.09 (which I have accepted),
were not necessarily sustained by Mr
Morris’ evidence. Thus, reliance was placed upon the investment summary
document, the
material available to the auditors, and the various factual bases
for the plaintiff’s submissions which have been extracted
above.
- (2) In any
event, for reasons I have earlier given, Mr Morris’ evidence has not been
rejected as being wholly unreliable. Having
regard to my earlier assessment of
his evidence, it is available for the conclusion that no objective basis existed
for the formation
of an opinion on the part of the defendants that the plaintiff
had complied with reg 4.09 of the SIS Regulations and that a reasonably
competent auditor would have formed the opinion that a contravention of reg 4.09
may have occurred in relation
to the Super Fund.
- Further,
in oral submissions, the defendants specifically referred to the investment
strategy and argued that the plaintiff’s
submission presupposes mandatory
compliance with the investment strategy. The defendants contended that if the
“Liquidity and
Cash Flow” and the “Diversification”
sections were not mandatory, then the plaintiff’s submission as to reg
4.09 went “nowhere”.
- The
defendants referred to the words under the heading “Trustee
Discretion” which stated: “[t]he investment principles
outlined in
this statement are guidelines only. The trustee retains discretion in relation
to all investment decisions”. It
was contended that this removed the
argument that adherence with the investment strategy was mandatory. The
plaintiff contended that
such an argument was wrong on three levels and advanced
the following submissions:
- (1) The
defendants’ submission involved an impermissible attempt to reverse the
onus of proof. The plaintiff contended that
the defendants formed and expressed
the opinion that there had been compliance with reg 4.09 which involved a
conclusion on the defendants’
part that the plaintiff had in fact
“given effect to” an investment strategy. The plaintiff contended
that, if the defendants
wished to establish that those requirements did not
apply, they had the evidentiary onus – which they had failed to
discharge.
- (2) The
evidence overwhelming demonstrated that there was not a reasonable basis for the
loans and investments.
- (3) Even if the
matters in the investment strategy were not requirements and were guidelines,
they were still not adhered to.
- I
accept the first and second contentions, in that respect, of the plaintiff.
- The
defendants turned again to the “Liquidity and Cash Flow” section.
That section included, it was submitted, various
technical concepts, such as
“convertible to cash within 90 days” for which Mr Morris offered no
assistance. Further,
within that section, the defendants contended that a
condition precedent existed in the words “[w]here some assets are not
readily converted to cash”. Thus, it was submitted the question is,
therefore, whether that condition precedent was satisfied.
- It
was also contended, in that respect, that the word “unless” in the
condition precedent paragraph provided a proviso:
“then at least 50% of
the fund assets shall be invested in assets which are convertible to cash within
90 days”. The
defendants again contended that proviso was not established
and placed reliance on the representation letter which stated: “investment
transactions and investments held are in accordance with the investment strategy
which has been determined with due regard to risk,
return, liquidity and
diversity”. This argument was made in oral submissions and was not replied
to by the plaintiff.
- As
to “Diversification” section, the defendants submitted that the
section which followed listed the normal investment
range for each type of
investment as “0 to 100%” and, thus, obliterated the need for
diversification under the investment
strategy. I do not accept that submission.
The asset bands on the second page of the investment strategy do not negate or
gainsay
the requirements for diversification. The two parts of the documents
must be read together, and the requirements under the heading
“Diversification” must be given effect with the asset bands read in
that light. Further, reg 4.09(2) required that effect
must be given to the
investment strategy having regard to “the extent to which [the loans and
investments] are diverse or involve
exposure of the entity to risks from
inadequate diversification”.
- I
agree with the plaintiff’s submission that the defendants’
aforementioned contention, as to the “Diversification”
section, has
no application to the 2008 and 2009 investment strategies, both of which had
narrower investment bands and limited the
investment in property to 60% of the
portfolio (a requirement which was not met).
- Next,
the defendants submitted that there is no obligation under the retainer which
corresponded to this alleged failure. I have earlier
negatively dealt with that
submission. The defendants recognised that the plaintiff’s claim may be
available under the “legally
correct” formulation that the auditor
failed to exercise reasonable care and skill in the performance of his
engagement. However,
it was submitted that the approved form made clear that no
part of the auditor’s function was to provide “an opinion
on the
investment strategy or its appropriateness to the fund members” and that
the effect of the plaintiff’s submission
was that “the auditor
should have advised on the appropriateness of the strategy to the fund
members”.
- The
difficulty with that submission is the foundation for the breach asserted by the
plaintiff, in this respect, is not a failure
to enquire into the appropriateness
of the strategy to the Super Fund’s members, but whether each investment
made by the Super
Fund, as recorded in the financial statements, was made in
accordance with the investment strategy with respect to the specified
matters in
reg 4.09.
- It
is true that reg 4.09 does not specify any particular standard of strategy and
that the plaintiff had at all relevant times adopted
an investment strategy that
was in writing, but the contention, as advanced by the plaintiff, was that any
investment entered into
fell outside the strategy contained within the document
by reference to its relationship to reg 4.09.
- In
substance, the defendants’ challenge, in this respect, was based on a
complaint of procedural unfairness because the plaintiff’s
case about reg
4.09(2) was neither pleaded nor particularised. I will deal with that below and
reject that submission. However, one
particular point needs to be dealt with at
this juncture.
- The
defendants submitted that Mr Morris provided four reports and that there was no
evidence by him that the auditor ought to have
concluded or inferred the matters
described in the extracted submission from the plaintiff above at [448]. It is submitted
that in the absence of Mr Morris’ evidence, as to those matters, the
proper inference was that his evidence
would not have supported those
assertions. Mr Morris was cross-examined upon the evidence he gave in his
reports in that respect.
However, as the plaintiff correctly submitted, even
though Mr Morris confined his analysis to deficiencies in the formulation of
the
investment strategy document itself, that evidence cannot constitute a pleading.
Rather, the question was whether the plaintiff
has discharged the onus falling
upon it to prove the alleged failure. The plaintiff was correct to submit that
it was entitled to
rely on all aspects of the evidence in support of its pleaded
case and not just on the evidence of Mr Morris.
- Finally,
reference may be made to the defendants’ submission that the failure of Mr
Morris to address these issues, referred
to by the defendants in the preceding
paragraph of the judgment, may result in an inference that his evidence would
not have supported
the assertions: Commercial Union Assurance at 418E-J
(per Handley JA).
- That
case was concerned with whether a Jones v Dunkel inference could be drawn
where there had been a failure to ask a lay witness about a certain matter. In
this case, the question asked
of Mr Morris (an expert witness) was consistent
with the pleaded case of the plaintiff and did not omit any relevant matter. Mr
Morris
answered that question in the negative. The fact that, in doing so, he
focused upon only one particular reason (the deficiencies
in the investment
strategy document) does not preclude the plaintiff from relying on other
evidence to establish breach; nor does
it offer any support for a Jones v
Dunkel inference as contended for by the defendants.
- As
to procedural fairness, the defendants contended that the pleadings went no
further than re-stating reg 4.09, and the plaintiff’s
identification in
its closing submissions of various respects in which the defendants failed to
give effect to reg 4.09 was not touched
upon in the pleadings or expert
evidence. Further, they contended that they never had the opportunity to answer
the allegation that
the findings of fact should be made and that certain matters
were obvious or apparent to an auditor.
- The
defendants’ complaint must be rejected. I accept the plaintiff’s
submission that this issue was pleaded, particularised
and exposed in the
opening address. More specifically, I accept the following:
- (1) Paragraph
16(a) of the second further ASOC pleaded a failure to inquire into and report
accurately as to whether "each investment
by the Super Fund as recorded in the
financial statements was made in accordance with an investment strategy
that had regard to all of the circumstances of the Super Fund, including in
particular the matters set out
regulation 4.09(2) of the SIS Regulations"
(emphasis added). Regulation 4.09 required the plaintiff to "formulate and
give effect to" an investment strategy that had regard to the matters
enumerated in subreg (2) (emphasis added).
- (2) Paragraph
16(a) of the second further ASOC then particularised failures to inquire into
and report as to whether the Super Fund
had “given effect to an investment
strategy” in regard to matters enumerated within reg 4.09.
- (3) Further,
reference should also be made to paras 16(b) and 24 of the second further ASOC,
which picked up compliance with reg 4.09
as part of compliance with the SIS
Regulations, and para 26(b)(ii), which further made the plaintiff’s case
clear that it alleged the defendants failed to state the requisite
opinion based
on the material available to the defendants, in particular, with regard to reg
4.09.
- (4) The
plaintiff’s case in respect of reg 4.09 was stated in the opening address,
which was met by the defendants in both oral
submissions and written submissions
in reply.
- (5) In any
event, the defendants engaged with the plaintiff’s submissions, with
respect to reg 4.09 in closing oral submissions
and in the defendants’
final reply submissions.
- The
defendants were squarely on notice of the case that the plaintiff was intending
to put with regard to this pleaded breach in the
second further ASOC. The
defendants also elected to make oral submissions on this point,
saying:
Can I just come to the investment strategy point which my friend has developed
and put the pressure on me to deal with not in rejoinder,
which is okay.
I’ll deal with it now.
- The
plaintiff objected to such submissions being made, however the Court allowed
senior counsel for the defendants to develop his
point in that regard, points of
which were included in the defendants’ skeleton outline. His submissions,
in that respect,
have already been dealt with above. Hence, the defendants had
the opportunity to deal with the plaintiff’s case on compliance
with reg
4.09 and there was no failure to give a hearing on the matter. The highest that
the defendants’ contention could have
gone is that they could have
cross-examined Mr Morris on that question and called the first defendant to give
evidence. That contention,
and any forensic choices made by the defendants in
assuming without a proper basis that this matter was not in issue, cannot
constitute
procedural unfairness considering the matters discussed above,
particularly in relation to the pleaded case.
- In
the circumstances, I accept the submission of the plaintiff that the unqualified
expression of opinion in the 2007 audit report,
as described above, was
unsupported by the material available to the defendants and that the defendants,
in expressing that opinion,
failed to exercise reasonable care and skill.
- I
also consider that, had reasonable care and skill been exercised, the defendants
would have:
- (1) formed the
opinion that a contravention of reg 4.09 may have occurred or may be occurring,
and therefore would have been under
a statutory obligation under s 129(3) of the
SIS Act to report the suspected non-compliance to the plaintiff and to the
regulator;
and
- (2) qualified
their audit report appropriately to refer to the non-compliance with reg
4.09.
- The
same conclusions are available with respect to the 2008 and 2009 audit reports.
The compliance statements in the 2008 and 2009
audit reports contained virtually
identical statements as found in the 2007 audit report and the material
available to the auditor,
with respect to the 2008 and 2009 audit reports, did
not provide any basis for a conclusion that the trustee had given effect to
the
requirements of the 2008 and 2009 investment strategies.
Failure
to audit the Super Fund to be able to form the opinion that the trustee had
complied with the requirements of the SIS Act
and SIS Regulation (second further
ASOC at para 16(b) and [280] above)
- Both
parties relied upon their submissions with respect to the pleading in second
further ASOC at para 16(a).
- In
substance, the plaintiff pleaded, in this respect, that the defendants had a
duty under each retainer and the general law to audit
the Super Fund in a manner
so as to be able to reasonably form the opinion as to whether the Super Fund had
complied in all material
respects with the requirements of the SIS Act and the
SIS Regulations. In reply, the defendants accepted that this failure
corresponded with their admission that they were obliged to exercise reasonable
care in the performance of their engagements.
- For
the reasons given in relation to the failures identified under the preceding
heading, the plaintiff has made good its contentions
in this
respect.
Failure to bring serious misdescriptions and
misstatements and other facts and circumstances to the plaintiff’s
attention (second
further ASOC at para 16(c) and [299]-[311] above)
- The
parties’ competing contentions as to this alleged failure traversed a
number of considerations as follows:
- (1) the
construction of the retainers;
- (2) the subject
matter of the admissions insofar as they intersected with this question;
- (3) the
significance of handwritten notations on the quality control form prepared for
the year ending 30 June 2007;
- (4) the
auditor’s obligation to identify and report on conflict; and
- (5) the
defendants’ obligations to communicate with the plaintiff.
- The
issue which occupied the majority of the parties’ written and oral
submissions, in this respect, concerned the conflicts
of interest by Mr Moylan
and the obligations of the auditor to report upon the same. Before turning to
that topic, however, some
preliminary matters should be addressed.
- First,
the Court has earlier addressed the construction of the retainers insofar as it
bears upon this issue. I agree with the submission
of the plaintiff that the
defendants’ admission that the loan and other investments were of
substantially no value must result
in a conclusion that there was a serious
misdescription or misstatement in the financial statements upon which the
auditor should
report to the extent that the loans and investments were
described, as they were, in the Super Fund’s financial reports as
having
value.
- Secondly,
the factual foundation for the plaintiff’s submissions as to the conflict
of interest issue consisted of two parts.
The first part concerned documents
provided to the auditor, for each of the relevant financial years, which
revealed various aspects
of Mr Moylan’s actions and interests which were
previously set out in this judgment at [426].
- The
second factual foundation was the quality control form, which had handwritten
notations in the following terms:
- (1) Against the
entry “Statement of Members Entitlements” and “All
contributions and fund earnings for the year
have been preserved”, there
was a handwritten notation “member is 59 and in pension phase – she
is no longer working.
She lives off her pension”. This was
cross-referenced to the heading “Payment of Benefits: Benefits have been
paid in
accordance with the Act (Reg 6.17)”.
- (2) At the
conclusion of the quality control form were a number of entries each proceeded
by a hyphen. The first was: “Partner
Review??”. The next entry was:
“Client has lent money to Moylan for property development. The client will
be looking
to get back at someone if it all goes wrong”. The third entry
was: “Quote for this one?”.
- (3) Adjacent to
these entries was a further handwritten entry “I’m happy with this
one. It is high risk, but it is also
high interest”.
- It
might be noted that there is no evidence as to the author of the handwritten
notes but the entry appears, as noted above, under
the heading of
“Baumgartner Partners” in their quality control form for the
relevant period.
- The
plaintiff contended that the actual knowledge of Mr Moylan’s involvement
with investments by the defendants is sufficient
to demonstrate the failure
under this aspect of the pleadings as no such concern was brought to the
plaintiff’s attention.
- The
defendants submitted that the notation from the quality control form did not
involve the defendants expressing a concern with
the fact of money having been
lent to Mr Moylan. Whilst that is correct, it does not answer the
plaintiff’s case in this respect.
In the quality control form, the
defendants recognised that the plaintiff had made loans to Mr Moylan for
property, considered the
loans and investments were high risk and acknowledged
there was a risk that it could “all go wrong”. The defendants were
also aware and recorded in their notes that the pension from the Super Fund was
Ms Crittle’s sole source of income.
- When
those assessments are combined with the first defendant’s failure to give
evidence in the proceedings, it may be readily
found that the defendants held a
level of concern about Mr Moylan’s personal involvement with the loans and
investments the
Super Fund had made and acknowledged those investments were high
risk.
- Mr
Morris’ evidence was that having regard to the documents held by the
defendants, as described at [426] above (namely, that
Mr Moylan had prepared the
accounts being audited, he had executed agreements on behalf of the plaintiff,
and he had personal interests
in the loans and investments), that a reasonably
competent auditor would have met with Ms Crittle, sought to engage with her and
report to the plaintiff concerns about the obvious conflict of interest. He also
gave evidence that the auditor had a duty to report
to the plaintiff, as
trustee, concerns above the obvious conflict of interest of Mr Moylan and the
high level of risk associated
with the loans and investments. This opinion was
within Mr Morris’ area of expertise (noting his extensive experience
supervising
an audit practice and that his findings, in this respect, were
consistent with the requirements under the retainers). I will return
to the
question of communication momentarily.
- The
defendants’ answer, in this respect, was predicated upon procedural
fairness issues. It was submitted the inference that
the defendants were, in
fact, concerned about Mr Moylan’s personal involvement with the loans and
investments could not be
drawn unless aid was derived from the first defendant
not giving evidence on the question. It was submitted that the plaintiff had
expressly disavowed a case based on the first defendant’s state of mind
and that the plaintiff was limited to maintaining a
case that the auditor ought
to have concluded or ought to have been concerned about something and failed to
draw it to the plaintiff’s
attention.
- I
am satisfied that the plaintiff did not disavow any case at all based on the
first defendant’s state of mind in the passages
of transcript relied upon
by the defendants. The plaintiff disavowed a case that the auditor dishonestly
stated an opinion that he
did not hold and was limited to the pleading of breach
of statutory duty. The submission regarding the failure of the first defendant
to give evidence in this context was open to the plaintiff.
- There,
nonetheless, remains the question as to whether the plaintiff failed to
explicitly present a case based on the first defendant’s
state of mind
and, in the result, the defendants made forensic choices which cannot now be
reversed and led to, if this part of the
plaintiff’s case were to be
accepted, a denial of procedural fairness to the defendants.
- The
pleading is wide enough to encompass what the first defendant’s state of
mind, as it were, concerned knowledge about Mr
Moylan’s personal
involvement with the loans and investments, and therefore conflicts of interest.
The wording of para 16(c)
was that the defendants “failed to bring to the
plaintiff’s attention... facts and circumstances arising from the audit
which any competent chartered accountant acting in the capacity of an auditor
would bring to the attention of the plaintiff”.
Further, in particulars to
para 16(e) of the second further ASOC, the plaintiff particularised that the
defendants:
(iv) Failed to identify and report that the Super Fund’s assets had an
unusual exposure to persons, companies or entities which
were related or
associated to the Super Fund’s financial advisor, current accountant and
prior auditor (Mr Moylan), and who
was thereby in a position of conflict with
the interests of the Super Fund (and its principle member).
- It
cannot, therefore, be contended that the defendants were denied procedural
fairness when the issue was pleaded in the proceedings.
- Before
turning to the question of communication, it is appropriate to mention the
contentions advanced by the defendants if the Court
was not minded to find
actual knowledge of Mr Moylan’s involvement (or excluded that
consideration on procedural fairness grounds).In
this alternative argument, the
defendants submitted that the plaintiff’s complaint was effectively
reduced to a complaint that
the auditor “ought” to have been aware
that Mr Moylan was conflicted and was thereby obliged to communicate that
directly
to the plaintiff. Having found that actual concern as to Mr
Moylan’s involvement, it is strictly unnecessary to address these
contentions. However, for completeness, I will briefly turn to that issue.
- It
was contended by the defendants that the management of conflicts was a matter of
internal control. In that respect, the approved
forms stated that the auditor
“considers internal control relevant to the trustee’s preparation
and fair presentation
of the financial report in order to design audit
procedures that are appropriate in the circumstances but not for the purposes of
expressing an opinion as to the effectiveness of the trustee’s internal
control”.
- The
defendants then turned to the consideration of internal control for the purposes
of determining audit procedure and, in that respect,
contended that Mr Morris
accepted that:
- (1) The
planning of an audit requires assessment of control risk;
- (2) if an
auditor proceeds on the basis that there is a high control risk, the auditor
would undertake an audit in a manner that does
not require reliance on an
assumption that controls are effective;
- (3) for a SMSF,
one would proceed on the basis of a high control risk (see also AUG 4); and
- (4) from the
perspective of audit design for a SMSF, one would not need to look further into
the subject matter of control to design the audit.
- It
was submitted, in this light, that the peculiar facts of the case have no
bearing upon audit design beyond that, objectively, the
audit was of a SMSF.
That being the case, it was contended Mr Morris’ evidence was thereby
reduced to a criticism that the
auditor did not express an opinion of the
effectiveness of the trustee’s internal control; even though the auditor
made plain
he was not reporting on that subject matter nor looking at internal
controls for that purpose.
- It
was not contended that Mr Morris, in his analysis, agreed with this limitation
but that there was a demonstration that he failed
to recognise the precise forms
of the retainers.
- I
agree with the defendants’ submission that, insofar as the plaintiff
complained about a failure to express an opinion on the
effectiveness of the
trustee’s internal control, that is not a matter falling within the
obligations of the auditor under the
retainers.
- Before
concluding the matter, I turn to the question of communication.
- I
will put aside, in this respect, the question of valuation which was dealt with
earlier in this section of the judgment. The defendants’
admission and Mr
Morris’ evidence at [486] above must result in a conclusion that one outcome
available for a reasonably competent auditor exercising reasonable care and
skill
was to qualify the audit report to cover the uncertainty as to the basis
of valuation of the Super Fund’s assets.
- As
to the question of conflict, and as mentioned earlier, Mr Morris’ opinion
was to the effect that, whilst a registered office
and principal place of
business of the plaintiff company were recorded at Mr Moylan’s offices,
having regard to Mr Moylan’s
intimate involvement with the loans and
investments and the matters to be drawn to the plaintiff’s attention
vis-à-vis Mr Moylan’s involvement, it was appropriate that
the issues be communicated with the sole director.
- The
defendants replied to this contention by indicating that Mr Morris accepted that
the registered office and principal place of
business were identified on the
ASIC register as Mr Moylan’s office to identify the destination relevant
communications with
an entity were to be sent and agreed that sending
correspondence to that place would be unexceptional. Mr Morris was said to have
placed reliance upon the Australian Auditing Standards in this respect pointing
to ASA 240 and ASA 260. The defendants contended
that ASA 240 did not apply and
that Mr Morris had agreed it was directed to the presence of fraud (which was
not suggested in this
case). As to ASA 260, it was contended that the standard
speaks generally about communication with those responsible for governance
and
does not deny the reality of the parties (the auditor and those responsible for
governance) may arrange their affairs as to the
way that communication will take
place.
- As
earlier found, ASA 240 did apply in relation to the audits of the Super Fund. I
agree with the submission by the plaintiff that
it was not suggested that Mr
Morris said that his opinions based on ASA 240 were somehow dependent upon there
being an indicia of
fraud. Further, AUG 4 stated that it is not the
auditor’s responsibility to make a legal determination as to whether fraud
has occurred. In the absence of any countervailing considerations arising out of
the retainers or the standards, it appears to me
that there is a proper basis to
accept Mr Morris’ opinion as to why the communication should have been
made directly to the
sole director of the plaintiff, namely, Ms Crittle. (I note
the earlier discussion in this judgment as to that question).
- That
conclusion does not ultimately resolve the questions arising in relation to this
pleaded failure. The defendant made the following
further submissions in
reply:
135. The premise for this part of the plaintiff’s case is not only that
the auditor ought to have been concerned about conflict
on the part of Mr
Moylan, but also that he ought to have been concerned that it was an
undisclosed conflict. That is to say, a premise is that the auditor ought
to have assumed that the plaintiff was unaware of the counterparties
to its
loans and/or investments (including guarantors), where those parties were Mr
Moylan or his companies or entities. A further
premise is that the auditor ought
to have taken on for himself the role of identifying whether any more indirect
connections existed
between Mr Moylan and those parties, again on the assumption
that the plaintiff was not aware of any such connections.
136. The reality is that the plaintiff’s case in this regard is infected
by erroneous hindsight reasoning, having regard to
what is now known about Mr
Moylan. The inquiry as to breach of duty must be approached prospectively and
not retrospectively: Vairy v Wyong Shire Council [2005] HCA 62; (2005) 223 CLR 422 at
[124], per Hayne J. The usual performance by the plaintiff of its own duties as
trustee would produce the consequence that it was aware
of its own investments:
See Affirmative Submissions at [64]-[79]. The plaintiff had represented as much
to the auditor. The expectation
that potential plaintiffs will exercise
reasonable care for in their own interests is a matter relevant to the
assessment of breach
of duty in every case: Roads and Traffic Authority of
New South Wales v Dederer (2007) 234 CLR 330 at [45]. Consistent with the
representation made to him by the plaintiff, the auditor was entitled to expect
that was the case. Viewed
prospectively, there is no proper basis for concluding
that the auditor ought to have assumed the representations made to him were
false and that the plaintiff did not in fact know who it was invested with.
137. Moreover, as mentioned above, Mr Morris was not of the view that there was
any indicia of fraud in the material provided to
the auditor (T170/48). To the
extent that the plaintiff, as a responsible trustee, would not know certain
information in the ordinary
course, there was no basis for the auditor to be
concerned that Mr Moylan was withholding information from the plaintiff.
Therefore the premises or assumptions, on which this part of the
plaintiff’s case rests, cannot
be sustained.
138. But there is a further step on which the plaintiff’s case depends and
which also involves hindsight error. It is that
not only should the plaintiff
have assumed that Mr Moylan was withholding information from the plaintiff, but
also that he would
withhold the audit opinion from the plaintiff. That would be
conduct of the most serious and egregious kind in circumstances where
the
plaintiff was under a statutory obligation to obtain an annual audit opinion.
And yet that is the logical consequence of the
plaintiff’s case in a
context in which the witness called by the plaintiff agrees there was no indicia
of fraud in the material
provided to the auditor (despite what is now known
about Mr Moylan).
- It
should be made clear that the aforementioned conclusion that a communication
should have been made directly by the defendants to
Ms Crittle was not
predicated upon a determination that Mr Moylan would withhold the audit opinion
from the plaintiff if it was sent
to him. Whilst there may be a basis for
concluding some information was withheld, having regard to the matters described
in [426] (and no
conclusion is made in that respect), based upon Mr Morris’ evidence, the
plaintiff was correct to contend that the
more prudent course – in all the
circumstances – would have been for the defendants to communicate with Ms
Crittle directly
as to the concerns and anomalies about the audits and any
qualification of the audit opinion, having regard to the risk that those
matters
might not be conveyed by Mr Moylan.
- Turning
to the defendants’ submission on “hindsight reasoning”, I do
not consider that the plaintiff’s contention
that the auditor ought to
have been concerned about the conflict on the part of Mr Moylan (whether
disclosed or otherwise) may be
properly described as “hindsight
reasoning” or affected by a false premise that the auditor ought to have
assumed that
the plaintiff was unaware of the counterparties to the loans and
investments, particularly, where those parties were Mr Moylan or
his companies.
I have taken into account, in this respect, the judgment of the High Court in
Roads and Traffic Authority of New South Wales v Dederer (2007) 234 CLR
330; [2007] HCA 42 at [45] (per Gummow J) as to the expectation that
potential plaintiffs will exercise reasonable care for their own interests.
- There
are two bases for this conclusion. The first is that the material relied upon by
the plaintiff to support its allegations of
breach is the same material which
was available to the defendants at the time of conducting the audits. Secondly,
I accept the submission
that it does not follow that the suggestion materials
were available to the defendants somehow demonstrated that the plaintiff
“was
aware of its own investments” when regard is had to the four
factors pointed to by the plaintiff. Those were as follows:
- (1) the River
Island Facility Agreement and the MCD Facility Agreement had not been executed
by the plaintiff;
- (2) the
representation letter (relied on by the defendants in this respect) was not
executed by the plaintiff but rather by Mr Moylan;
- (3) the
defendants never took any steps to confirm with the plaintiff its knowledge of
the loans and investments; and
- (4) the
plaintiff was, in fact, not aware of many of the loans and investments and the
connection to Mr Moylan.
- There
is a third factor and that is the defendants’ submissions do not address
the evidence that is suggestive of undisclosed
conduct to which I have earlier
referred at [426].
- In
my view, the defendants breached an obligation of the retainers in failing to,
in any way, bring to the attention of the plaintiff
by qualification, notation
or suitable communication Mr Moylan’s involvement with the high-risk loans
and investments; including
the information as to such matters which were in the
actual knowledge of the defendants as recorded in the quality control
form.
Failure, acting reasonably, to form and express certain
opinions (second further ASOC at para 16(d) and [312]-[317] above)
- I
have earlier made rulings on the question of construction in this respect. I
have also dealt with this question, broadly, in the
scope of admissions. The
following analysis is directed to the four obligations which were discussed in
the context of the construction
of the retainers at [312]-[317] of this
judgment.
- For
convenience, I will repeat the terms of the failures asserted by the
plaintiff:
- (1) the
financial statements of the Super Fund did not comply with the SIS Act, the SIS
Regulations, Australian Accounting Standards and other mandatory professional
reporting requirements;
- (2) the
underlying accounting records of the Super Fund were not reliable and were not
adequate for the preparation of the financial
statements of the Super Fund;
- (3) the
financial position of the Super Fund at balance date and the results for the
year then ended were not properly disclosed in
the financial statements of the
Super Fund; and
- (4) the
financial statements of the Super Fund contained material misstatements arising
as a result of irregularities which would
have a material effect on the
financial statements.
- As
to failures (2)-(4), set out at above, inclusive, the plaintiff
submitted:
131. First, the defendants admit that the Super Fund’s financial
statements for each year were materially inaccurate because
a number of the
investments were of substantially no value and that, accordingly, the financial
reports did not present fairly the
financial position of the Super Fund for each
relevant year end. It follows that the underlying accounting records of the
Super Fund
were not reliable. It also follows that the financial position of the
Super Fund was not properly disclosed in the financial statements
and that the
financial statements of the Super Fund contained misstatements. The defendants
thus breached their duty to form, and
express, the opinions set out in
paragraphs 129.b, c and d above.
132. Secondly, the defendants also admit that the material available to the
first defendant at the time of preparation of the audit
reports in each year did
not support the expression, by him, of an unqualified Financial Report Opinion.
It follows that the defendants
breached their duty to form and express the
opinion set out in paragraphs 129.b and d129.d above.
- The
defendants submitted it does not follow that the underlying accounting records
were unreliable simply because the financial statements
were materially
inaccurate. Nor did it follow that the auditor ought to have formed such an
opinion about the record. It was submitted
that there was no evidence to support
the abovementioned propositions as to failures and that the submissions, by the
plaintiff,
failed to appreciate the difference between the qualification of the
audit reports and the formation of an affirmative opinion that
the financial
report misstated the financial position of the Super Fund. As mentioned above,
the defendants’ submissions, in
this respect, cannot be accepted because
the defendants were required to ensure that the investments were valued at net
market value
and, in doing so, exercise judgment in assessing the reasonableness
of the value disclosed.
- As
to the failure (1), outlined above, the plaintiff made the following
submission:
133. Further, the materials that were provided to the auditor for each audit
year were such that a reasonably competent auditor would
have formed, and
expressed, the opinion identified in paragraph 129.a above. The defendants admit
that the financial statements for
each year were materially inaccurate (because
the loans to River Island, MCD Holdings and Tomkins, and the investments in the
Cartel
Trust and Limeburners Trust were of substantially no value). It follows
from that admission (and from the matters set out in par
139 below regarding the
non-existence of the so-called ‘mortgage loans’) that those
statements did not comply with Australian
Accounting Standards: those loans and
investments having been inaccurately recognised as ‘assets’ of the
Super Fund and
some value having been measured and ascribed to them. That is
consistent with Mr Morris’ evidence that special purpose financial
statements must be prepared adopting the recognition and measurement framework
from Australian accounting standards.
- The
defendants contended that submission represented the same error committed by Mr
Morris that, without the application of those
parts of the accounting standards
dealing with recognition and measurement, the financial statements could not
present a “true
and fair view” of the financial position. Reference
was also made to Mr Morris’ position that all the applicable accounting
standards had to be applied as they relate to recognition and measurement so as
to present a “true and fair view”. Further,
Mr Morris was said to
have proceeded from the premise that the auditor had to perform his role by
reference to all of the relevant
parts of the accounting standards dealing with
recognition and measurement. This may be explained, it was submitted, because
his
criticism was directed at the claimed lack of work undertaken to be
satisfied that the carrying values for the various loans and
investments were
appropriate due to impairment issues. That wrongly applied AASB 139. It was
submitted that the recognition and measurement
framework contained within the
Australian Accounting Standards did not apply to special purpose financial
reports of the Super Fund.
- The
effect of Mr Morris evidence in cross-examination was that he was wrong in
applying AASB 139 to the financial statements of the
Super Fund (as special
purpose financial reports) and, as mentioned above, the defendants were not
required to determine whether
the financial statements presented a “true
and fair view” pursuant to s 297 of the Corporations Act. The
defendants were required to express an opinion as to whether the financial
reports presented fairly the financial position of
the Super Fund. Therefore, Mr
Morris’ evidence, in this respect, should be given little weight.
- However,
the defendants’ submission once again fails to give effect to AUG 4, which
required the defendants to ensure that all
investments are valued at net market
value in accordance with AAS 25, namely, the accounting standard relating to
financial reporting
by superannuation plans. As noted above, whilst not directly
applicable to non-reporting entities, AUG 4 stated that SMSF’s
still
should have used net market value in the financial
reports.
Failure to exercise reasonable care and skill (second
further ASOC at para 16(e) and [318]-[319] above)
- The
plaintiff relied upon a number of discrete factors here. I shall not repeat to
them but refer to them in a shorthand form.
- The
first such item concerned investment in accordance with the investment
strategies. Both parties relied upon their submissions
in relation to compliance
with reg 4.09 in that respect. In the result, my earlier conclusions as to
ensuring compliance with reg
4.09 will hold in relation to that matter.
- The
second item concerned the existence of assets and security. It was submitted the
auditor had two duties in this respect. First,
the obvious duty of verifying the
existence of reported assets. The second duty was to enquire into the reported
value of the assets.
It was submitted that Mr Morris was cross-examined
extensively as to the second question but not the
first.
Existence of assets and securities
- It
was contended that the defendants failed as to the first obligation, which was
reflected in AUG 4, by failing to verify the ownership
of assets to proper
supporting documentation (in accordance with the defendants’ quality
control form). As mentioned above,
under the heading “Auditing
Objectives”, AUG 4 stated that “the auditor should establish that
investments exist
and are registered in the name of the Trustees or
custodian”. The plaintiff contended this obligation was self-evident and
was also reflected in the defendants’ quality control form which
identified the defendants would verify the ownership of assets
to “proper
supporting documents”.
- The
basis for the plaintiff’s submission was that, whilst a number of the
loans were described as “mortgage loans”
in the 2007 financial
statements, no mortgage loans existed because the loans were unsecured by any
mortgage. Further, the material
provided to the auditor contained no basis upon
which the auditor could conclude that any security in the form of a registered
mortgage
existed. Nor were any enquiries undertaken by the defendants to verify
the existence of any mortgage in this respect.
- It
was submitted that, having undertaken to verify assets to “proper
supporting documentation”, an auditor, acting reasonably,
would at the
very least, have confirmed the existence of “mortgage loans”.
- The
defendants contended the Super Fund’s “assets” existed in an
accounting sense, which was described by Mr Morris
as being an entitlement to
future economic benefits. The defendants contended that the plaintiff was
entitled to future economic
benefits under its facility agreements or as a unit
holder in unit trusts. The defendants’ answer to the plaintiff’s
contention was that all assets existed, and that a registered mortgage is not a
separate asset, rather it goes to the value of the
asset.
- The
plaintiff responded by submitting that the assets did not exist “as
described”, namely that an asset described as
a “mortgage
loan” did not exist. The absence of registered mortgages rendered the
assets different to what was described
in the financial statements. The
plaintiff referred to Queensland Premier Mines Pty Ltd v French (2007)
235 CLR 81; [2007] HCA 53 (“Queensland Premier Mines”) at
[10]-[12] per Kirby J and [53]-[55] per Kiefel J to support the proposition that
a registered mortgage was a separate
asset to the underlying loan agreement (or
facility agreement) which the mortgage secures. The defendant sought to
distinguish that
case because it was concerned with statutory construction of
Queensland Torrens legislation and was therefore irrelevant. I accept
the
plaintiff’s submission based upon Queensland Premier Mines, which I
do not consider is relevantly distinguishable as contended for by the
defendants. Kirby J specifically referred to the approach
in Butt, Ticehurst and
Hughes, Woodman & Nettle: The Torrens System in NSW, 2nd ed,
12,104-12,105 [52.60] with approval which dealt with the equivalent section
under the Real Property Act 1900 (NSW). Kirby J relevantly quoted (at
[10]):
[It would appear that in New South Wales, as in Victoria], registration of a
transfer of mortgage does not automatically vest in
the transferee the right to
sue under a (separate) loan agreement or facility agreement. Rights under those
agreements would need
to be separately assigned.
(See also
Thomson Reuters, Woodman & Nettle: Torrens System in NSW (at 16
August 2018), [RPA.52.30]).
- The
rights under the mortgage are, therefore, separate from the rights under the
facility agreements. This is consistent with Kiefel
J’s finding that
“the instrument of mortgage is the source of [the interest in land] and of
the rights to sue for and
recover moneys owing under it” (at [55]).
- The
defendants also submitted that it was pointless to quibble about whether the
audit material would answer the description of “proper
supporting
documentation” going to existence of assets because the audit file
contained evidence of the existence of the assets,
namely, the unregistered
mortgage in support of the Tomkins Facility Agreement.
- The
plaintiff relied on Pacific Acceptance Corporation at 81-82 per Moffitt J
which I agree offers a rejoinder to that proposition. I do not accept the
defendants’ contention that
no general proposition as to what was required
could be taken from that case. Moffitt J considered the duty of an auditor
regarding
the vouching of securities “in a general way, in any finance
company” (at 81C). His Honour held that “the general
question is,
having regard to certain general circumstances, what type of procedure by way of
programme or otherwise should have
been laid down for the clerks to apply”
(at 81D). Further, Moffitt J held that “to discharge their duty the
auditors
should satisfy themselves by some proper means that the securities for
each of the material loans during the audit year... have as
promised been
executed and registered” (at 81G-82A).
- The
general circumstances in have been outlined extensively in this judgment and
include a substantial number of investments in the
form of “mortgage
loans”.
- In
those circumstances, the defendants should have satisfied themselves that the
loans were properly secured by registered mortgages.
That conclusion was
supported by Mr Morris’ opinion that a reasonably competent auditor would
have sought evidence of the existence
of the security that was given. Mr Morris
was not cross-examined on that evidence and the defendants did not lead any
evidence to
contradict it. The plaintiff contended, correctly, in my view, that
Mr Morris’ evidence should therefore be accepted: Precision Plastics
Pty Ltd v Demir [1975] HCA 27; (1975) 132 CLR 362 at 371.
- I
accept the plaintiff’s submissions that the loans were not properly
described as “mortgage loans” and there was
no mortgage held with
respect of them. The River Island Facility Agreement had not, in fact, been
executed by the plaintiff leaving
doubt about that matter.
Value
of assets
- As
outlined above at [182]-[185], pursuant to AUG 4, the defendants should have
ensured that all investments were valued at net market value, “being the
amount
which could be expected to be received from a disposal in an orderly
market after deducting costs of disposal”. Market value
was similarly
defined in s 10 of the SIS Act which was also extracted earlier in this
judgment. In determining the net market value
of an asset, AUG 4 required an
auditor to exercise judgment in assessing the reasonableness of the value
disclosed.
- At
the outset, it should be noted that AUG 4 used AAS 25 as establishing the
requirement for assets to be carried at net market value
and stated that AAS 25
only applied to reporting entities. AUG 4 continued by stating, “SMSFs
[being non-reporting entities]
should use net market value reporting for their
financial statements”.
- AUG
4 also gave examples of the determination of net market value, including,
inter alia, that a mortgage loan should be valued “by reference to
the outstanding principal of the loans”. The plaintiff submitted
that,
despite that example, an auditor, exercising judgment in this case would not
have considered that determination to be a reasonable
indicator of the market
value of the loans made by the Super Fund.
- The
defendants again contended that it was not the role of an auditor to establish
the value of assets in the financial statements.
That submission must be
rejected when looking at the requirements of AUG 4.
- The
defendants referred to the evidence of Mr Morris who was critical of adopting
the determination of value by reference to the outstanding
principal of the
loans (despite that method being consistent with what is recorded in AUG 4).
During cross-examination, Mr Morris
conceded that he did not have that section
of AUG, or the example methods set out therein, in his mind when he made that
statement
in his report. The defendants contended that Mr Morris’s
complaint was not as to the meaning of the accounting policy (valuing
by
reference to outstanding principal) but to the application in the circumstances
in the present case.
- I
accept the defendants’ submission that Mr Morris’ complaint does not
progress the matter further. However, the question
remains whether the
defendants failed to exercise reasonable care in valuing the assets in
accordance with AUG 4.
- I
consider that the defendants failed to exercise reasonable care in determining
the net market value of the assets and failed to
exercise judgement in assessing
the reasonableness of the values for the loan investments disclosed in the
financial statements for
the following reasons:
- (1) The loan
investments were not “mortgage loans”. They were unsecured and,
therefore, determining the net market value
by reference to the outstanding
principal of the loans, as stated in AUG 4, was not sufficient.
- (2) The
defendants admitted that the loans to River Island, MCD Holdings, L & V
Tomkins, and the investments in the Cartel Trust
and Limeburners Trust were of
no value and that the first defendant failed to exercise reasonable care in
expressing the financial
report opinion, as it lacked any basis. I accept the
submission of the plaintiff that it follows that the defendants failed to
establish
the value of those assets recorded in the financial statements as
required by AUG 4.
- (3) The
defendants were not provided with any financial statements for River Island,
or any other information about its assets, liabilities, profitability or
state of affairs, or any financial information about the
guarantors.
- (4) In relation
to the Tomkins Facility Agreement, L & V Tomkins had failed to make any
repayments of interests to the plaintiff
and by 30 June 2007 the loan was in
default (the term of the loan having expired on 12 May 2007). By the time of the
2009 audit,
interest not been paid for four consecutive years.
- (5) The
defendants were not provided with financial statements for the persons named as
borrowers in the Tomkins Facility Agreement
or for the Tomkins Unit Trust or any
other information about the assets, liabilities, profitability or affairs of the
borrowers or
the Tomkins Unit Trust. At this juncture, it should be noted that
the financial statements of the Super Fund recorded the loan pursuant
to the
Tomkins Facility Agreement as a loan to the “Tomkins Unit Trust”.
Hence, it should be further noted there was
no information to establish that the
borrowers under the Tomkins Facility Agreement were the trustees of the Tomkins
Unit Trust.
- (6) The loan to
Pacific General was in default, as it was required to be repaid by 23 August
2006, pursuant to the Pacific General
Facility Agreement.
- (7) The
defendants were not provided with financial statements or financial information
for Pacific General or any of the guarantors
that would have enabled the auditor
to make an assessment as to whether the borrower or the guarantors would be able
to service the
loan to Pacific General.
- In
addition, the plaintiff submitted that in the case of the River Island Facility
Agreement, the maximum amount of the loan had been
exceeded (the facility
agreement providing for a maximum loan commitment of $2.17 million, and the
Super Fund recorded the principal
and interest outstanding as being an amount
exceeding $2.5 million), which was an event of default under the terms of the
agreement.
- The
defendants contended that the maximum loan commitments under the Pacific General
Facility Agreement ($2.5 million) and the River
Island Facility Agreement ($2.17
million) were maximum principal commitments, not covering capitalised interest.
It was contended
that it could not be said that the auditor ought to have formed
an incorrect view of the loan entitlements.
- The
plaintiff contended that despite the loans being in default they had been
recorded as assets worth the full value of the principal
in the
plaintiff’s financial statement. In circumstances where the defendants
were aware that the pension from the Super Fund
was Ms Crittle’s sole
source of income, a matter that would cause an auditor, acting with reasonable
care and skill and exercising
judgment in assessing the reasonableness of the
values disclosed, to undertake further enquiries about the capacity of the
borrowers
or guarantors to those transactions. The defendants’ audit files
do not reveal that any such enquiries were made.
- The
plaintiff correctly submitted that, if the defendants had acted with reasonable
care and skill, those matters would have, at the
very least, been raised as
requiring further enquiry as to the value of the loans being “the amount
that could be expected
to be received from a disposal in an orderly market after
deducting costs of disposal” as required by AUG 4. That finding is
supported by Mr Morris’ evidence. Upon such enquiry, it would have
been obvious that the loans and investments had not been recorded in the account
at their net market
value.
- A
similar conclusion can be reached in respect of the other investments based on
the following:
- (1) The
Limeburners Trust Annual Report, provided to the defendants, revealed that the
Limeburners Trust was owed money by River Island
and MCD Holdings, and those
companies had failed to pay interest on the loans; as at 30 June 2007 no profit
distributions to unit
holders had been paid for two years; by 2009 it was
apparent there was a history of not paying accrued interest in distributions
to
unit holders.
- (2) In the case
of the Cartel Trust, the defendants were only provided with a unit certificate
and trust distribution statement. The
defendants were not provided with any
financial statements or other information about the Cartel Trust in 2007; by
2008, such financial
information as had been provided to the auditor indicated
that the trust had accumulated losses of $771,072 as at 30 June
2008.
- In
the result, the defendants failed to exercise reasonable care and skill to
ensure that the investments were valued at net market
value, and failed to
exercise judgement in assessing the reasonableness of the values
disclosed.
Failure to identify and report that the assets were
non-performing and financial statements were materially inaccurate (second
further
ASOC at para 16(e)(v)-(vi))
- The
plaintiff submitted failures particularised at para 16(e)(v)-(vi) of the second
further ASOC must be admitted by the defendants,
as a consequence of their
admissions in para 16 of the amended defence that:
- (1) the loans
to River Island, MCD Holdings and L & V Tomkins Pty Ltd, and the investments
in the Cartel Trust and Limeburners
Trust were of no value; and
- (2) the Super
Fund’s financial reports were materially inaccurate.
- I
do not accept that defendants’ submission that the plaintiff conflated the
qualification or an audit opinion and the formation
of an affirmative opinion
that the financial statements misstated the financial position of the Super
Fund. That conclusion is consistent
with what I have already found at
[306]-[311] and [479] that the defendants ought to have reported on
misdescriptions and misstatements
in the financial
statements.
Conclusion: Breach of Contract and Duty
- For
the above reasons, I find that, in carrying out the audits under the retainers
for each of the relevant financial years, the defendants
breached, as discussed
in the aforementioned considerations, the audit contracts and their common law
duties to take reasonable care
in the performance of their engagement to provide
the audit reports for the relevant financial years.
CONTRAVENTION
OF THE SIS ACT AND REGULATIONS
Sections 113 and 35C of the SIS Act
- The
plaintiff contended that, pursuant to s 113 of the SIS Act, as it applied to the
2007 audit, and s 35C of the SIS Act, as it applied
to the 2008 and 2009 audits,
the defendants were required to give the plaintiff, in connection with each
audit, a report in the approved
form that included a statement as to whether, in
the opinion of the auditor, the trustee of the fund had, during the relevant
year
of income, complied with the provisions of the SIS Act and SIS Regulations
that were identified in the approved form. The approved form, it was contended,
drew particular attention to reg 4.09 of the SIS
Regulation.
- It
was submitted that the obligation on an auditor under s 113 of the SIS Act (and
s 35C of the same Act) was to form and express
and opinion that could not be
satisfied by the making of a mere ipse dixit.
- Having
regard to the purpose of the legislation, the obligations falling upon the
auditor under those sections were, it was contended,
as follows:
- (1) make the
statement of opinion required by the section after making reasonable inquiry and
exercising reasonable care with respect
to the matters to be opined upon;
and
- (2) state a
genuine opinion (being an opinion which had a reasonable basis); that is, the
opinion must be based on the materials available
to the auditor and the
auditor’s inquiries, with respect to the matters to be opined upon, and be
reasonably open to the auditor
from those materials and
inquiries.
- I
do not accept the plaintiff’s submissions, in this respect, for the
following reasons:
- (1) It is an
erroneous construction of ss 35C(6) and 113(4) to contend that the provisions
direct attention to qualitative aspects
of the preparation of the report. Those
provisions confine the obligation of the auditor to the giving of the report to
the trustee
within a specified time. The ordinary meaning of the word
“give” in the context in which it appears in those sections
is
directed at imparting or communicating. The words “the reports” are
not defined but, as a matter of construction,
it is “the report”
described in ss 113(1) and s 35C(1) being “a report, in the approved form,
of the operations
of the entity for that year”.
- (2) Sections
113(3) and 35C(5) stipulate what an approved form must do. It is a statutory
command to the ATO, as to what is to be
contained in that form, which has the
delegated power to approve. It is not a command to the auditor. Those provisions
identify mandatory
inclusions for the approved form, which relate to subject
matter (what the form must relate to), a statement of independence by the
auditor and a statement of expression of opinion as to compliance. There is no
reference to, as the defendant correctly submitted,
“the anterior quality
of action on the part of the auditor in the preparation of the report”.
The word “relate”
in ss 113(3)(a) and 35C(5)(b) does not diminish
that conclusion but rather enhances it.
- (3) Sections
113(1) and 35C(1) are commands to the trustee to ensure that an auditor is
appointed to give a report in an approved
form. The scheme, thus, requires of
the trustee that an auditor be appointed to give a report in an approved
form.
- (4) Overall,
the only obligation which ss 113 and 35C impose upon an auditor is to produce a
report within a specified time frame.
Other obligations are governed by his or
her appointment or retainer. I agree with the submission of the defendants that
the essential
problem with the plaintiff’s contention is that it seeks to
convert obligations under the retainer into obligations under statute.
- (5) Reliance
was placed by the plaintiff upon the judgment of Olsson J in State of South
Australia v Peat Marwick Mitchell & Co (1997) 24 ACSR 231 at 240.
However, that authority does not assist the plaintiff in the contentions
advanced, in this respect, for two reasons:
- (a) The
statement attributed by the plaintiff to his Honour that the State Bank of
South Australia Act 1983 (SA) envisaged the formation of opinions by the
auditor reasonably arrived at after due investigation and assessment of the
relevant
facts and circumstances would not appear to actually represent his
Honour’s opinion, but rather his Honour’s summary
of the facts which
were common ground or constituted the plaintiff’s relevant factual
averments under the broader heading “Relevant
Factual and Statutory
Background”.
- (b) In
distinguishing the judgment in Byrne v Australian Airlines Ltd (1995) 185
CLR 410; [1995] HCA 24, Olsson J observed that the statutory provisions there
under consideration, merely required what was a “fairly typical audit
responsibility which, on the face of it, is quite consistent with what are said
to be Australian Auditing Standards” (State of South Australia v Peat
Marwick Mitchell & Co at 261). His Honour further observed that
“the primary duty of maintaining true and fair accounts is that of the
bank itself
and the audit provisions do not purport to impose any specific
standard of audit – they merely define its scope”. The
remedy, his
Honour observed, lay in contract and tort for any breach by an auditor of his
duties.
- (6) The
plaintiff also referred to Mercedes Holdings Pty Ltd v Waters (No 5)
[2011] FCA 1428 at [41] (per Perram J). However, I agree with the
defendants’ contention that the relevant distinction from the present
proceedings
is that, unlike ss 113 and 35C of the SIS Act, it was the
Corporations Act itself which “erect[ed] the obligations to conduct
an audit” as an obligation of the auditor and stipulated what was
required.
Sections 129 and 130 of the SIS Act
- It
is convenient to deal with the plaintiff’s case under these provisions
together as similar submissions were advanced.
- As
to s 129 of the SIS Act, the plaintiff contended that, by the proper
construction of the provision, the auditor was required to:
- (1) form an
opinion, based on the materials available to the auditor and the auditor’s
inquiries with respect to the superannuation
entity, and being an opinion
reasonably open from those materials and inquiries, as to whether it was likely
that a contravention
of the SIS Act or the SIS Regulations may have occurred,
may be occurring or may occur in relation to the superannuation entity; and
- (2) make such
inquiries and take such steps as were necessary to enable the formation of the
opinion referred to in subparagraph (1).
- Similarly
with respect to s 130 of the SIS Act, it was contended, on a proper construction
of the provision, the auditor was required
to:
- (1) form an
opinion, based on the materials available to the auditor and the auditor’s
inquiries with respect to the fund under
review, and being an opinion reasonably
open from those materials and inquiries, as to whether the financial position of
the superannuation
entity may be, or may be about to become, unsatisfactory;
and
- (2) make such
inquiries and take such steps as were necessary to enable the formation of the
opinion referred to in (1) above.
- I
consider that the submissions in reply by the defendants, in this respect,
cogently demonstrate the flaw in the construction proposed
by the plaintiff and
why the pleadings based on contravention of these provisions must fail.
- Those
sections of the defendants’ reply are as follows:
175. Sections 129 and 130 of the SIS Act ‘apply to a person’
if the person forms the relevant opinion and forms the opinion in the course or
in connection with
the performance of the audit function. This has a number of
features.
176. First, if the person does not form the opinion, the section simply does not
‘apply’ to them. The plaintiff’s
argument involves the
asserted application of a provision to a person whom, by its express terms, it
does not apply. No process of
statutory construction can achieve the application
contended for by the plaintiff.
177. Secondly, the obligation is tied to the performance of audit functions. As
mentioned, the relevant audit function is to give
the trustee a report in the
approved form. It is only if the auditor forms the opinion in the course of or
in connection with the
performance of those tasks that he or she becomes a
person to whom the ss 129 and 130 of the SIS Act apply. Those provisions do not
add to the audit function, but impose a free-standing regulatory obligation on a
person who forms an opinion in performing the audit
function. For example, it
does not, by reason of s 130, become part of the auditor’s task to form an
opinion as to whether
the financial position of the entity may be, or may be
about to become, unsatisfactory.
178. This identifies probably the most basic problem with the plaintiff’s
argument. The problem is that the argument contends
that the provisions require
the formation of an opinion (SFASC, [28], [31]). They do not. The opinions that
are required to be formed
are determined by the audit function, not by ss 129
and 130. Those provisions do not alter or expand the audit function, contrary
to
the effect of the plaintiff’s argument. They create different obligations
incidental to the audit function if and only if
certain opinions are formed in
the performance of that function. And yet the plaintiff’s case is that the
defendants failed
to form the opinions (SFASC, [29], [32]).
- It
may be noted that the plaintiff replied to para 177 of the above extracted
submission by placing reliance on reg 9.03(5) of the
SIS Regulations, which
contained, it was submitted, a deeming provision. By this submission, the
plaintiff contended the auditor was carrying out
the required function for the
purposes of s 130 of the SIS Act. However, reg 9.03(5) deems an auditor to be
performing an audit function
in circumstances which it identified. The issue
raised by the defendants was not that the auditor was performing an audit
function
but concerned its scope.
Damages under s 315(11) of the
SIS Act
- It
is strictly unnecessary to deal with the plaintiff’s submissions under
this section in the light of the abovementioned conclusions.
However, it is
possible to briefly state why the plaintiff’s submissions in this respect
should be rejected.
- Section
315(11) of the SIS Act confers on the Court a power to order a person to pay
damages if the Court would otherwise have power
under s 315 to grant an
injunction. The power to grant injunctive relief under s 315 is a necessary
precondition to an order for
damages.
- Section
315(1) sets out the circumstances in which the Court may grant an injunction. It
provides:
Restraining injunctions
(1) If a person (the perpetrator) has engaged, is engaging or is proposing to
engage, in conduct that constituted, constitutes or
would
constitute:
(a) a contravention of this Act; or
(b) attempting to contravene this Act; or
(c) aiding, abetting, counselling or procuring a person to contravene this Act;
or
(d) inducing or attempting to induce, whether by threats, promises or otherwise,
a person to contravene this Act; or
(e) being in any way, directly or indirectly, knowingly concerned in, or party
to, the contravention by a person of this Act; or
(f) conspiring with others to contravene this Act;
the Court may grant an injunction in accordance with subsection
(2).
- Under
s 315(7) and (8), the power of the Court to grant an injunction, whether
prohibitive or mandatory, is exercisable whether or
not it appears to the Court
that the person intends to engage again, or to continue to engage, in conduct of
that kind and whether
or not there is an imminent danger of substantial damage
to any person.
- After
referring to authority to the effect that statutory provisions conferring
jurisdiction or power in a court should not be construed
as subject to any
limitation which is not required by the language and purpose of a provision and
that s 315 conferred on the Court
the widest possible injunctive powers devoid
of traditional constraints (subject to the power being exercised judicially and
sensibly),
the plaintiff contended that, if the Court found the defendants had
engaged in conduct that constituted breach of ss 113/35C, 129
and/or 130, the
Court’s power to grant an injunction is enlivened. It was submitted it was
not necessary for the Court to have
actually granted injunctive relief but only
that it could have (that is, the power is enlivened): Jaggard v Sawyer
[1995] 2 All ER 189; [1995] 1 WLR 269 at 284; Wentworth v Woollahra
Municipal Council [1982] HCA 41; (1982) 149 CLR 672 at 677-679; Mills v Ruthol Pty Ltd
(2004) 61 NSWLR 1; [2004] NSWSC 547 at [61] and the authorities there
cited.
- Assuming,
against the earlier conclusions that a breach may be found under the SIS Act and
SIS Regulations, I conclude that no power may be exercised in this case under s
315 for the following reasons:
- (1) Section
315(11) of the SIS Act is a clear analogue of s 1324(10) of the Corporations
Act in a materially similar context and would be construed no differently
from the Corporations Act provision;
- (2) There is
authority of this Court that damages under s 1324(10) of the Corporations
Act can only be awarded in proceedings where an injunction is actually
sought: Polon v Dorian [2014] NSWSC 571 (“Polon”) at
[783]-[800] (per Hall J). That first instance decision accorded with what
Bathurst CJ recently described as the “predominant
view” that
damages can only be awarded in proceedings where an injunction is actually
sought: Dungowan Manly Pty Limited v McLaughlin [2012] NSWCA 180 at [5].
No injunction is sought by the plaintiff in this case.
- It
should be observed, in relation to the conclusions in the immediately preceding
paragraph of this judgment, that the plaintiff
sought on 28 August 2017, on the
first day of the trial, to amend the then further amended statement of claim in
various respects
including claims for injunctive relief. Orders were sought
pursuant to s 315(1) of the SIS Act (whereby the defendants were restrained
from
issuing audit reports with respect to the Super Fund which contained statements
as to compliance with the SIS Act unless in
conformity with certain conditions:
para 2(a) and s 315(3) of the SIS Act (an order was sought requiring the
defendants to notify
the regulator, as defined in the SIS Act, of certain
contraventions of that Act with respect to the relevant financial years: para
2(b).
- The
plaintiff contended, inter alia, that the amendment was necessary as the
defendants had contended in the defendants’ overview submissions that the
power to
award damages under s 315(11) would not be engaged because no
application for injunctive relief had been sought by the plaintiff
(a claim for
damages under that section had been made in the further amended statement of
claim).
- On
29 August 2017, the Court rejected the amendment to the further amended
statement of claim so far as it concerned the injunctive
relief sought by the
plaintiff but otherwise granted leave to amend the further amended statement of
claim (hence, the Second Further
ASOC). It was indicated that reasons for the
refusal would be given in due course.
- Given
the ultimate conclusion reached under this heading, those reasons may be stated
briefly.
- There
was considerable force in the defendants’ submission that the amendment
appeared to be advanced not for the purposes of
seeking the claimed injunctive
relief per se, but for the purpose of enlivening the jurisdiction of the
Court to grant damages under the SIS Act.
- The
injunctive relief was sought very late and related to the audits the subject of
these proceedings. No explanation was provided
for the lateness of the
amendment.
- The
framing of the first prayer for relief (para 2(a)) underlined these difficulties
as it sought to restrain audit reports issued
many years earlier in time. At the
very least, the application raised significant issues as to utility. The relief
claimed in para
(2)(b) required the defendants to advise the plaintiff of
contraventions of the SIS Act in circumstances where, at the time the relief
was
sought, the plaintiff had already pleaded breaches of the SIS Act in the very
areas to which the injunctive relief sought to
operate.
- In
the circumstances, it is unnecessary to resolve the question of breach of
statutory duty otherwise raised by the plaintiff.
MISLEADING AND
DECEPTIVE CONDUCT
- The
plaintiff alleged that the defendants made two sets of representations to the
plaintiff that were misleading and deceptive, or
likely to mislead and deceive,
in contravention of:
- (1) in the case
of the first defendant, s 42 of the FTA (NSW) or, alternatively, under s 9 of
the FTA (Vic); and
- (2) in the case
of the defendants, s 52 of the TPA.
- As
the relevant conduct occurred prior to the commencement of the Australian
Consumer Law on 1 January 2011, it is the provisions
of the FTA (NSW) and the
TPA that are relevant (see Schedule 2 to the Competition and Consumer Act
2010 (Cth)).
- The
defendants admitted that each of the audit reports contained an implied
representation that the opinions expressed within them
were the product of the
exercise of reasonable skill and care (amended defence at para 15(b1)). The
defendants admitted that this
representation was misleading (amended defence at
para 42(b)). The defendants further admitted all of the elements of a
contravention
by the first defendant of s 42 of the FTA (NSW) and s 52 of the
TPA, in respect of this admission, save that they did not admit that it was made
in trade or commerce
(amended defence para 44(b)). It should also be noted that
the defendants contended, in their affirmative defence submission, that
the
FTA (Vic) was incompetent in the present proceedings. I will turn to that
issue when dealing with the affirmative defences.
Relevant
Principles
- Section
42 of the FTA (NSW) (like its TPA analogue) is contravened if the acts,
omissions, statements and/or silence of the defendant, taken
as a whole and
considered in light of all relevant circumstances, are misleading or deceptive
or are likely to mislead or deceive:
Campbell v Backoffice Investments Pty
Ltd (2009) 238 CLR 304; [2009] HCA 25 (“Campbell”) at
[102], Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; [2004]
HCA 60 (“Butcher”) at [104]. Conduct is misleading if it
induces, or is capable of inducing, error (Parkdale Custom Built Furniture
Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191 at 198; Rhone-Poulenc
Agrochomie SA v UIM Chemical Services Pty Ltd [1986] FCA 218; (1986) 12 FCR 477 at 490-491;
Campbell at [25]; Butcher at [111]), and is likely to mislead or
deceive where there is a real (or not remote) chance or possibility that the
conduct will have
that effect (Global Sportsman Pty Ltd v Mirror Newspapers
Pty Ltd (1984) 2 FCR 82 at 87).
- Whether
conduct has a tendency to lead into error is an objective question of fact to be
determined on the basis of the conduct of
the defendants as a whole viewed in
the context of all relevant surrounding facts and circumstances: Campbell
at [102], citing Butcher at [109]. The inquiry is an objective one,
the focus being on the objective tendency of the conduct to induce an erroneous
assumption
on the part of a hypothetical individual, but taking into account the
respective positions of the parties, including such matters
as their knowledge
of each other from previous dealings and their respective familiarity with the
subject matter: Sutton v AJ Thompson Pty Ltd (In Liq) (1987) 73 ALR 233
at 240. The objective nature of this inquiry means that a finding that conduct
is misleading or deceptive is not avoided merely because
a plaintiff could, by
proper inquiries, have discovered the misleading or deceptive conduct:
Butcher at [111]; Henjo Investments Ply Ltd v Collins Marrickville Pty
Ltd (No 1) [1988] FCA 40; (1988) 39 FCR 546.
- Where
silence is relied upon as conduct giving rise to a contravention of the FTA
(NSW) or TPA, the effect of the silence is considered in light of the
relevant surrounding circumstances. An important question in this context
is
whether the plaintiff was reasonably entitled in all the circumstances to expect
that the defendants would make a positive disclosure:
OXS Pty Ltd v Sydney
Harbour Foreshore Authority [2016] NSWCA 120 at [178] and the authorities
there cited, see also Street v Luna Park Sydney Pty Limited (2009) 223
FLR 245; [2009] NSWSC 1 at [180]; Perpetual Trustee Company Ltd v Ishak
[2012] NSWSC 697 at [96].
- As
Gummow J said in Demagogue Pty Ltd v Ramensky [1992] FCA 557; (1992) 39 FCR 31 at 41
(quoting Kimberly NZI Finance Ltd v Torero Pty Ltd [1989] ATPR (Digest)
53,193 at 53,195):
... unless the circumstances are such as to give rise to the reasonable
expectation that if some relevant fact exists it would be
disclosed, it is
difficult to see how mere silence could support the inference that the fact does
not exist.
Representations and further representations
- The
plaintiff relied upon two sets of representations. The first set of
representations were based upon the terms of each audit report.
The second set
of representations were based upon what was said in each audit report or
otherwise disclosed to the plaintiff. I will
deal with each set of
representations below.
First set of representations
- The
plaintiff contended that the following representations were derived from the
terms of the audit reports considered in the context
in which the report was
delivered:
- (1) in the
opinion of the auditor:
- (a) the Super
Fund’s financial report presented fairly in all material respects, in
accordance with the accounting policies
described in the notes to the financial
statements, the financial position of the fund at year end and the results of
its operations
for the year then ended;
- (b) the auditor
had confirmed by testing that the plaintiff had given appropriate consideration
to risk, return, liquidity and diversification
and that the Super Fund’s
investments were made in line with that investment strategy;
- (c) the Super
Fund and/or the plaintiff as trustee of the Super Fund had complied, in all
material respects, with the requirements
of the SIS Act and the SIS Regulations
as specified in the audit report (“representation
1”);
- (2) the audit
evidence that had been reviewed by the auditor was a sufficient and appropriate
basis for the opinions stated in the
audit report (including the opinions set
out in (1)(a)-(c) above) (“representation 2”);
- (3) the
auditor, when carrying out the audit for the relevant financial year, and in
reaching and stating the opinions stated in the
audit report for that year, had
acted in accordance with the duties owed to the plaintiff under the audit
contract and at common
law, as set out in the plaintiff’s submissions on
common law duties owed by the defendants and breaches of contract and duties
(“representation 3”),
(Collectively,
representations 1, 2 and 3 shall be hereinafter referred to as “the
representations”).
- The
plaintiff contended, with respect to each of the representations, the
following:
- (1) as to
representation 1, the representations were express;
- (2) as to
representation 2, the representation was partly express and partly implied
(noting that the plaintiff relied upon the auditor’s
stated belief in each
audit report that the audit evidence he had received was “sufficient and
appropriate to provide a basis
for my audit opinion”); and
- (3) as to
representation 3, the representation was implied.
- The
defendants contended that the Court should limit findings as to representations
to those found in its admissions contained in
the amended defence, but the
defendants made no submissions directly going to representation 1. In my view,
and having regard to
the analysis found earlier in this judgment, the audit
reports conveyed the representation in representation 1.
- As
to representation 2, the defendant contended that the audit report represented
that the auditor had a belief to the relevant effect
– it did not
represent a fact. However, I accept the submission of the plaintiff, in this
respect, that, whilst the audit report
did represent that the auditor had a
belief to the relevant effect, it also represented impliedly that the audit
evidence that had
been reviewed by the auditor and that evidence was a
sufficient and appropriate basis for the opinion stated. As the plaintiff
contended,
an auditor is paid for bringing to bear their qualifications and
skill in forming and stating their opinions and, it followed, that
by stating
those opinions, the auditor impliedly represented that he or she had exercised
those qualifications and skills when forming
the stated opinion and, thus, the
stated opinions had a proper basis. It may be noted, in that respect, that each
audit report expressly
stated that the audit evidence had been reviewed and was
sufficient and appropriate to provide a basis for the audit opinions.
- The
defendants submitted that representation 3 was an “absurd
allegation” when one had regard to the ambit of the content
of the alleged
duties in contract and at common law. Whether representation 3 should be
labelled “absurd”, it nonetheless
has such a broad ambit it cannot
be found that it constituted a representation conveyed by the audit
reports.
- What
was central to the defendants’ resistance to this part of the
plaintiff’s case was the question of reliance. Mention
should be made, in
that respect, of a disclaimer within the audit reports which
recorded:
I disclaim any assumption of responsibility for any reliance on this report, or
on the financial statements to which it relates,
to any person other than the
members, or for any purpose other than that for which it was
prepared.
- The
plaintiff advanced its case, in respect of reliance, as having two elements
reflected in the following two submissions:
- (1) Each report
was addressed and sent to “Moylans” (in the case of the 2007 audit
report) and “Moylans Business
Solutions” (in the case of the 2008
and 2009 audit reports). However, Ms Crittle signed resolutions adopting the
audit reports.
It was not suggested to Ms Crittle that she had not been
physically presented with the audit reports at the time of signing the
resolutions
by which they were adopted, or that she had not read them, or that
she had not relied on them.
- (2) Mr Moylan,
as the plaintiff’s accountant, was under a duty to convey the audit
reports or their contents to the plaintiff.
That being so, it can be inferred
(in the absence of any contrary evidence) that the duty was duly discharged:
Sargent v ASL Developments Ltd (1974) 131 CLR 634
(“Sargent”) at 658-659; LMI v Baulderstone [2001]
NSWSC 886 (“LMI”) at [86].
- The
first proposition advanced by the plaintiff as to reliance upon the
representations is flawed. Ms Crittle did sign the resolutions
adopting the
audit reports which were addressed and sent to “Moylans” (in the
case of the 2007 audit report) and “Moylans
Business Solutions” (in
the case of the 2008 and 2009 audit reports), but the resolutions purporting to
adopt the first defendants’
audit reports were signed before the first
defendant had issued them. In those circumstances, I accept the
defendants’ submission
that it did not need to suggest to Ms Crittle that
she had not been physically presented with the reports at the time of signing
those resolutions.
- As
to the second contention, in support of reliance, the starting point must be a
recognition that the onus of proving reliance upon
a representation rested with
the party seeking relief. In this respect, it must be observed that Ms Crittle
gave no evidence that
she read or relied on the first defendant’s reports,
although the plaintiff made reference to the fact that Ms Crittle had
a poor
recollection of events from the relevant time which is almost 10 years ago.
- This
brings attention to the two authorities relied upon by the plaintiff, namely
Sargent and LMI.
- I
do not accept the submission of the plaintiff that these authorities support
that an inference may be drawn that Mr Moylan, as the
plaintiff’s
accountant, duly discharged his duty to convey the audit reports and their
contents to the plaintiff. The passage
in Sargent relied upon by the
plaintiff was concerned with whether a counterparty can rely on attribution of
knowledge of an agent to his principal
(see at 659). Similarly, LMI was
concerned with whether a counterparty can rely on attribution of knowledge of
company officer to the company itself. I agree with
the submission of the
defendants that neither principle permits a party to attribute knowledge to
itself in support of its own case
in circumstances where it could have adduced
direct evidence of its knowledge.
- The
defendants sought to apply the principles stated by Handley JA in Commercial
Union Assurance. However, their submissions as to the application of
them were not entirely clear. In Commercial Union Assurance,
Handley JA found that the principles of Jones v Dunkel may be applied
where a party fails to ask questions of a witness in chief, namely, when a party
fails to examine a witness in chief
on some topic; the most natural inference in
those circumstances being that they may be afraid to do so because it may have
exposed
facts unfavourable to the party (at 418). His Honour referred to the US
authority of Milliman v Rochester Ry Co 3 App Div 109; 39 NYS 274 (1896)
where the opinion of Follett J was to the effect that the omission to
interrogate a friendly witness in respect of facts “presumably
within his
knowledge is more significant than the failure to call such a person as a
witness, and that the presumption that the testimony
would not have been
favourable to the party’s case is stronger than one which arises from the
failure to produce such a person
as a witness”.
- The
application of the principles in Jones v Dunkel in this instance may be
doubted because of the poor recollection of events of Ms Crittle which was
expanded consistently during her
evidence.
- This
brings attention to the plaintiff’s reliance upon the authority in
Gould v Vaggelas (1985) 157 CLR 215 at 236. This matter concerned a
fraudulent representation between contract parties for entry into a contract.
The passage of the
judgment of Wilson J relied upon was as
follows:
2. If a material representation is made which is calculated to induce the
representee to enter into a contract and that person in
fact enters into the
contract there arises a fair inference of fact that he was induced to do so by
the representation.
3. The inference may be rebutted, for example, by showing that the representee,
before he entered into the contract, either was possessed
of actual knowledge of
the true facts and knew them to be true or alternatively made it plain that
whether he knew the true facts
or not he did not rely on the
representation.
- The
plaintiff submitted that the representations in the audit reports were made with
the intent that they would be relied upon, namely,
the representations that were
made were calculated to induce an assumption that all was well with the Super
Fund. It was submitted
that the inference arises that Ms Crittle relied upon
that assumption because she did not take investigative steps until 2013. Whilst
the inference may be rebutted by showing the representee did not, in fact, rely
upon the representations, there was no rebuttal evidence
led here.
- The
purpose of the audit of the Super Fund was that identified in Frankston
by Fullagar J extracted above at [415]. The concept that the sole purpose of appointing an
auditor was confined to safeguarding members of the fund against a default by
the trustee cannot be accepted in the case of SMSFs where the members and
trustees are the same persons albeit through a corporate
vehicle in the present
case. I agree with the submission of the plaintiff that it had sought, by
engaging the defendants, to protect
against the very risk which was realised,
namely, the risk that the financial statements of the Super Fund may be
incorrect or the
risk that there had been non-compliance with the SIS Act.
- Finally,
it is difficult to reconcile the defendants’ contention that may be
inferred that Mr Moylan passed the audit reports
to the plaintiff, and the
concession that the defendants “[did] not contend that Ms Crittle would
not have read the reports
passed to her by Mr Moylan”, with the contention
that plaintiff did not rely on the reports. It was not suggested by the
defendants
that Ms Crittle did not receive the audit reports.
- In
the result, I find that an inference may be drawn that the plaintiff did rely
upon the audit reports.
Further representations
- The
defendants correctly contended that it was well established that representations
by silence are found only where the circumstances
were such as to give rise to a
reasonable expectation that matters would be disclosed.
- The
plaintiff pleaded a second set of representations in para 39 of the second
further ASOC as follows:
- (1) there was
no reason to doubt the recoverability of the assets reported in the financial
statements for the Super Fund;
- (2) the lending
and investment decisions of the Super Fund had been made on a fully informed
basis (or alternatively, there was no
reason to doubt that fact);
- (3) the lending
and investment decisions of the Super Fund met the investment criteria of the
plaintiff (or alternatively, there was
no reason to doubt that fact);
- (4) investment
decisions of the plaintiff had not been affected by any breach of duty arising
from a conflict of interest on the part
of the Super Fund's accountant and
former auditor, Mr Moylan (or alternatively, there was no reason to doubt that
fact).
(The above listed representations shall be,
collectively, referred to as “the further representations”).
- In
resisting the further representations, the defendants raised the following
matters:
- (1) the
plaintiff had not identified the relevant surrounding circumstances, nor had it
disclosed what relevant facts exist that would
have been disclosed;
- (2) there could
be no reasonable expectation of disclosure of a fact unless the fact was known
to the person said to be obliged to
disclose it;
- (3) quite apart
from what was in the mind of the auditor, if reference was made to the second
further representation, the audit material
did not objectively disclose that
lending and investment decisions of the Super Fund had not been made on a fully
informed basis;
and
- (4) the
plaintiff was not reasonably entitled to expect disclosure of matters that the
defendant was reasonably entitled to expect
the plaintiff “already
knows”.
- There
is some force in the plaintiff’s submissions in reply that, based upon the
principal that the relevant enquiry is an objective
one, the resolution of this
issue does not depend on what was in the mind of the auditor. In the present
case, it was reasonable
to expect that the auditor would exercise reasonable
care and skill when conducting the audit and reasonable to expect that, if the
auditor, exercising such reasonable care and skill, became appraised of the
matters referred to in the further representations, then
he would have
communicated to the plaintiff. Take for example the representation at [598(2)]
above, the evidence suggested that the
loans had not been made on a fully
informed basis and suggested a conflict of interest on the part of Mr
Moylan.
- Whilst
the defendants’ final aspect of its submission concerned what the auditor
was reasonably entitled to expect the plaintiff
to know, this does not support
an inference that Ms Crittle, in fact, knew of those matters particularly when
that suggestion was
not put to her in
cross-examination.
Conclusion: Misleading and Deceptive
Conduct
- When
these conclusions are combined with the earlier conclusions as to breach, the
conclusion must be reached that the representations
(excluding representation 3)
and the further representations were misleading and deceptive, or likely to
mislead or deceive. I so
find.
- Both
sets of representations were made in trade or commerce. The representations and
the further representations were made in the
audit reports and by the
defendants’ failure to disclose that which they had a duty to disclose as
auditors. That conduct occurred
in the course of their commercial
operations:
- (1) the
defendants carried on business as accountants and auditors in partnership under
the name “Baumgartner Partners”;
- (2) each letter
of engagement was on the letterhead of “Baumgartner Partners” and
was signed by the first defendant on
behalf of “Baumgartner
Partners”; and
- (3) each audit
report was issued on the letterhead of “Baumgartner
Partners”.
- The
first defendant personally made the representations and the further
representations and, by doing so, contravened s 42 of the
FTA (NSW).
- The
defendants admitted all of the elements of a contravention by the first
defendant of s 52 of the TPA, insofar as the audit reports
impliedly represented
that the opinions expressed in them were the product of the exercise of
reasonable care and skill, save that
they did not admit the representation was
made in trade or commerce.
- As
the representations were made using postal services, s 6(3) of the TPA was
engaged. That section extended the operation of the
TPA to persons whose conduct
involved postal or telegraphic services (see the discussion of s 6(3) in
Australian Competition and Consumer Commission v Global Prepaid
Communications Pty Ltd [2006] FCA 146 at [51] per Gyles J). Hence, by making
the representations, the first defendant also contravened s 52 of the TPA. The
admission made by the
defendants that, all bar one of the elements of a
contravention by the first defendant of s 52 of the TPA were made out, carried
with it a further admission that the first defendant was subject to obligations
under the TPA.
- The
admitted representations were contained in each of the audit reports which
reports were issued in the course of the first defendant’s
commercial
dealings.
CAUSATION
- As
with earlier parts of the submissions, the parties approached the question of
causation by separating attention between the admitted
breach of contract and
duty and the non-admitted breaches of contract and duty. The Court will adopt
that scheme in the disposition
of this issue.
Breach of Contract
and Duty
The admitted breach of contract and duty
- The
central question raised by the parties, in this respect, was whether the
qualification of the audit report admittedly required
by the defendants would
have made the plaintiff aware of irregularities in the financial reports. The
question had two subsidiary
elements: first, whether
“irregularities” would have been identified by such qualification,
and secondly, whether the
qualification would have been communicated to the
plaintiff, and in particular, Ms Crittle.
- The
first subsidiary issue has been earlier resolved in this judgment. In short
summary, I found that any meaningful qualification
needed to have stated the
loan investments were worthless or of substantially compromised value, and if
not, explain the reasons
for the qualifications at [429] and, further, that
the other investments should have been the subject of a qualification at [443].
- In
any event, I accept the submission of the plaintiff that, even if the
qualification were in the narrow form postulated by the defendants
(the
appropriateness of the adopted basis for valuing loan assets), there was a
requirement that the qualification be clearly communicated
to the plaintiff, as
earlier found, in terms of the admission that the Super Fund’s financial
statements for each year were
materially inaccurate, did not present fairly the
financial position of the Super Fund and the accounts should have been prepared
on the basis that the value of the other investments were, in substance,
worthless or of a substantially compromised value. It follows
that, at least on
this basis, the irregularity in the basis for valuation would have come to the
plaintiff’s attention (subject
to issues of communication discussed
further below).
- The
basis for the valuation adopted in the case of the loans, exposed in the notes
to the financial statements, was that they were
"mortgage loans" and, therefore,
valued by reference to the outstanding principal (in accordance with AUG 4 as
noted at [533] above).
However, as discussed at [537] above, those loans were not "mortgage loans" –
there were, in fact, no mortgages (in the case of the Tomkins Facility
Agreement,
an equitable mortgage was declared but only after the plaintiff took
legal proceedings). Hence, even adopting the narrow form of
qualification
contended for by the defendants, the qualification once communicated to the
plaintiff would have exposed that none of the loans were secured by a
registered mortgage; and in the case of the River Island Facility Agreement, the
lender did not even
own the land. These facts, once communicated, would most
likely have provoked serious concern and alarm.
- The
defendants contended that the plaintiff did have a mortgage (albeit
unregistered) to secure the obligations under the Tomkins
Facility Agreement
which was in the material available to the auditor and that it was incorrect for
the plaintiff to contend that
no mortgage existed until an equitable mortgage
was declared following legal proceedings. I accept the plaintiff’s
submission,
however, that the equitable mortgage was only declared after legal
proceedings. This is consistent with the finding above at [529] that the defendants
were required to ensure that the loans were secured by registered
mortgages.
- The
question then becomes whether the plaintiff would have become aware of the
irregularity in consequence of the first defendant
propounding a qualified audit
report or, as was reflected in debates discussed earlier in this judgment, sent
directly to Ms Crittle.
- Turning
to the second of those considerations, the plaintiff submitted that it is likely
that any qualified report would have been
sent directly to the plaintiff rather
than Mr Moylan, and it was further submitted that a qualified report would be
sent to Ms Crittle.
- In
supplementation of the earlier contentions advanced by the defendants, it was
submitted that:
- (1) It was not
open to the plaintiff to assert “now” that the auditor, in fact,
held concerns. I earlier rejected that
argument at [485].
- (2) Even
according to that premise, the argument “did not make sense”. If the
existence of such concerns would have concerned
the auditor to send the report
directly to the plaintiff, then the defendants asked “why was the report
not sent directly to
the plaintiff?”. It was submitted that the
plaintiff’s submission reduced to a contention that the position may have
been different in the event of a qualified report, namely, that the fact of
qualification caused the report to be re-directed. That,
it was argued, assumed
the auditor would recognise the qualification as a matter of concern to Mr
Moylan and secondly, form a view
that Mr Moylan might egregiously breach his
professional duty by failing to communicate the qualified audit opinion to his
client.
- It
is true that the defendants did not, in fact, pursue the actual concern that
they had noted in their quality control form. However,
that was in a context
where the defendants issued an unqualified audit report in breach of their duty.
In a context where the defendants
acted in accordance with their obligations to
issue a qualified report, and where the reasons for the qualification were that
the
assets were worthless and Mr Moylan had a conflict of interest, it is
probable that the defendants would have issued their qualified
report directly
to Ms Crittle at her home address (being the address for Ms Crittle noted on
ASIC reports for the plaintiff). That
inference is more readily drawn given the
failure of the first defendant to give evidence at all about these matters
– even
though he was uniquely placed to do so.
- In
written submissions, the defendants contended that it was not open to the Court
draw such an inference “for the reasons already
submitted”. Those
reasons were predicated on the question of procedural fairness and, it would
appear, the connection between
procedural fairness (as previously discussed in
this judgment) and this issue, although the submission was not clear. In oral
submissions,
the defendants contended that no Jones v Dunkel inference
could arise because the case in these proceedings was maintained on what the
auditor ought to have known, rather than what was actually known to the
first defendant (it is clear that the defendants’ submissions in
this
respect were not directed to a case based on what the defendants actually knew).
The case on what ought to have happened would
not require, it was contended, the
defendants to call the first defendant. Further, the defendants contended that
there was no relevant
factual dispute between the first defendant and any other
witness which would require him to be called to deal with the factual dispute.
In those circumstances, the defendants submitted that no Jones v Dunkel
inference could apply.
- That
submission must be rejected because the first defendant was the only person in
these proceedings who was in a position to give
evidence on whether or not he
would have sent a qualified report to Ms Crittle. The question of whether or not
Ms Crittle would have
been sent a copy of the qualified report is critical to
the question of causation and the defendants were plainly on notice of that
point. Thus, the inference can readily be drawn.
- I
previously found that the defendants had an obligation (which they breached) to
bring to the plaintiff’s attention to Mr Moylan’s
conflicts of
interests and high level of risk associated with the loans and investments at
[502]-[508]. That finding was
supported by the evidence of Mr Morris which I have earlier accepted at [502], noting that the
basis upon which Mr Morris formed his opinion, namely, ASA 240 and ASA 260,
applied to the audits.
- I
do not accept the defendants’ contention that the plaintiff’s
submission assumes that the first defendant would recognise
the qualification as
a matter of concern for Mr Moylan. I have earlier dealt with that point, namely
that the conclusion that a communication
should have been made directly to Ms
Crittle was not predicated on a determination that Mr Moylan would withhold the
audit opinion
from the plaintiff at [504] above. I also do not accept the
contention that the plaintiff’s submission assumes that the auditor
would
have formed a view that Mr Moylan would egregiously breach his professional duty
by failing to communicate the qualified audit
opinion to the plaintiff. The
proper conclusion is not based on what Mr Moylan might have done, but on what
the defendants should
have done in the circumstances.
- Having
regard to those conclusions, it will only be necessary to deal briefly with the
alternative submission of the plaintiff predicated
upon a qualified audit report
being sent to the plaintiff but care of “Moylans”.
- The
plaintiff’s submissions, in this alternate submission, had a number of
elements and are set out, including reference to
the certain contentions raised
by defendants, below:
- (1) The Court
could and should find that the report would have been passed to the
plaintiff.
- (2) Mr Moylan,
as the plaintiff’s accountant, was plainly under a duty to convey any
qualified audit report to the plaintiff.
The defendants accepted that such a
conclusion should be reached by the Court.
- (3) It was
likely that Ms Crittle would have read a qualified audit report given to her by
Mr Moylan. The plaintiff submitted that
Ms Crittle signed resolutions adopting
the actual audit reports and it was not suggested to Ms Crittle that she had not
been physically
presented with the audit reports at the time of signing the
resolutions, or that she had not read them, or that she had not relied
on them.
The available evidence suggested that all of these occurred (although Ms
Crittle’s recollection of events at that
time was very limited).
- (4) It may be
noted that in relation to misleading and deceptive conduct, the Court earlier
discussed the submission by the defendants
that the resolutions purporting to
adopt the first defendant’s audit reports were signed before he had issued
them. However,
nothing turned upon that issue here as the defendants accepted
that Ms Crittle would have read the audit reports and that Mr Moylan,
in passing
them to her, would have provided some explanation. The plaintiff accepted that
Mr Moylan, as the financial advisor and
accountant to the Super Fund, was under
a duty to properly explain any such qualification. It was also submitted that it
may be inferred
that the duty would be discharged, and, if given an honest and
proper explanation of the qualification, the plaintiff would have
had serious
cause for concern about its investments and financial position of the Super
Fund. Those propositions do not seem to be
in serious dispute and I accept
them.
- (5) If Ms
Crittle had received a qualified audit report (directly from the auditor or via
Mr Moylan), she would have sought advice
in respect of it from Mr Hill, her
solicitor. The defendants accepted that Ms Crittle would have required
assistance to understand
the audit qualification. However, it was contended the
submission that assistance to understand them would have been sought from
Mr
Hill was convenient fiction; it was an accounting matter and the appropriate
source of assistance was the Super Fund’s accountant
Mr Moylan.
- (6) The
defendants submitted that it was inherently likely that Mr Moylan would have
volunteered an explanation of the qualification
at the time he provided the
audit report and that Ms Crittle would not have needed to actively seek his
assistance or the assistance
of Mr Hill. Ms Crittle had no reason to distrust Mr
Moylan at the time and the qualification would not have disclosed any such
reason.
Further, it was submitted that the overwhelming likelihood was that Mr
Moylan would have explained away the qualification. There
is no reason for the
auditor to think that he might do so but on the facts now known that is what
would have occurred and the Court
should so find.
- (7) I do not
accept the defendants’ submissions in this respect. Ms Crittle would have
required assistance to understand the
audit qualification she received from the
auditor. In my view, she would have, on the balance of probabilities, sought
advice from
Mr Hill or Turnbull Hill Lawyers. Her unchallenged evidence was that
she always sought advice from Mr Hill. That is exactly the step
she took in 2013
when she received correspondence that alerted her to a potential problem with
just one of her investments. There
was no evidence or basis to infer either
generally or based on the 2013 experience that Mr Hill, or Turnbull Hill
Lawyers, would
not have acted in accordance with their professional
responsibilities as officers of this Court to explain the effect of the
qualification
to Ms Crittle. There is no need to embark upon speculation,
conjecture or guess work as to what Ms Crittle would have then done as
the sure
guide to her subsequent conduct was how she actually acted in 2013: HTW
Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004]
HCA 54 at [44]- [45]; McCrohan v Harith [2010] NSWCA 67
(“McCrohon”) at [56]; Golden Strait Corporation v Nippon
Yusen Kubishka Kaisha [2007] UKHL 12; [2007] 2 AC 353 (“Golden Strait
Corporation”) at 371F; P E Kafka Pty Ltd v The Hermitage Motel Pty
Ltd [2009] FCAFC 94 at [16]. As Lord Bingham put it in Golden
Strait Corporation at 371G, “you need not gaze into the crystal ball
when you can read the book”.
- (8) The
defendants submitted that what Ms Crittle discovered in 2013 and 2014 did not
remotely resemble what would have become known
to her upon receipt of a
qualified audit opinion. Neither did Ms Crittle’s evidence (as to
causation on the plaintiff’s
statutory counts) address a hypothesis that
remotely resembles the receipt by her of an audit opinion qualified in the way
described
in (5) above. The evidence went to the hypothetical disclosure of
information about anterior lending practices not the subject of
the audit.
- (9) I do not
accept the defendants’ submissions in this respect. It is unnecessary to
conclude that the auditor’s report
alone would have revealed to Ms Crittle
the full extent of the issues only as, the plaintiff submitted, that it would
have certainly
“sparked” the very same chain of enquiry or a
relevantly equivalent line of enquiry as later occurred in 2013 and 2014.
The
discoveries made in those years came about by reason of the engagement of Ms
Philips which was undertaken by Ms Crittle. I accept
the plaintiff’s
submissions that she would thus have learned of the very same matters that were
discovered in 2013 and 2014,
albeit through a different pathway.
- (10) That
conclusion takes account of the potential for Mr Moylan to have attempted to
explain away the effect of the qualification.
It is clear that Ms Crittle would
have nonetheless made further enquiries, again, because, when Ms Crittle
received the letter regarding
Limeburners Creek, she undertook further enquiries
despite Mr Moylan having told her that it was not a matter of concern and it was
an asset “that [Ms Crittle] was no longer involved in”. This also
occurred at a time when Ms Crittle had no reason to
distrust Mr Moylan.
- (11) Again,
based upon what actually occurred from 2013, I consider that a conclusion should
be reached that the issuing of a qualified
audit report to the plaintiff in 2008
would have resulted in Ms Crittle, after making investigations, calling in the
loans and securities
to which the Super Fund was entitled and making claims
against Mr Moylan and his related entities (including Moylan Retirement
Solutions
and MBS), which were, at the time, insured. When, in 2014, Ms Crittle
discovered the true position, she brought proceedings against
those parties
which were still solvent and, as a result, made actual recoveries. She attempted
to make a claim against Mr Moylan
and his companies by way of notification to
“DUAL Insurance”.
- For
the claims in tort and contract, this Court must determine what Ms Crittle would
have done subjectively in the light of all relevant
circumstances: s 5D(3) of
the Civil Liability Act 2002 (NSW). In respect of the statutory claims,
while the Court has Ms Crittle’s evidence, the inferences drawn from the
surrounding
circumstances, other objective facts and the probabilities are often
a preferable guide to assertions by a party of how it would
otherwise have
acted: Baiyai Pty Ltd v Guy [2009] NSWCA 65 at [56] (citing Seaton v
Burnand [1900] AC 135 at 140; Cackett v Keswick [1902] 2 Ch 456 at
463-464; Rosenberg v Percival [2001] HCA 18; (2001) 205 CLR 434 at 443-434; [2001] HCA
18).
- In
an overall sense, I accept the plaintiff’s submissions that the
defendants’ case on causation was, whilst the defendants
had a duty to
qualify their audit reports, that qualification would have been ineffective to
convey to Ms Crittle its meaning and
would not have caused her any disquiet (or,
it may be added, the taking of any action). That essential proposition must be
rejected.
The Court is satisfied that, on the balance of probabilities, had a
qualified audit report been issued in 2008 or in subsequent years,
the plaintiff
would have “called in” the loans and investments so far as it was
available to the plaintiff to do so at
the relevant time.
The
non-admitted breaches of contract and duty
- The
plaintiff further submitted that going beyond the defendants’ admitted
breach of duty, had there been no breach of the other
duties upon which the
plaintiff relied, the plaintiff would have been made aware, by qualification,
notation or other suitable communication
in, or in addition to, each audit
report of the following:
- (1) actual or
suspected non-compliance with the 2007 investment strategies, and the reasons
for that actual or suspected non-compliance;
- (2) actual or
suspected non-compliance with the SIS Act and SIS Regulations (particularly reg
4.09):
- (3) the
majority of the loans and investments of the Super Fund were worthless and that
the financial reports contained serious misdescriptions
and misstatements to the
extent that they otherwise ascribed value to those assets; and
- (4) the high
degree of risk associated with the loans and investments and the likelihood that
the investment decisions of the trustee
had been affected by Mr Moylan’s
breach of duty arising from his conflicts of interest.
- The
Court has earlier made findings of a failure by the first defendant to make
qualifications, notations or other suitable communications
(including in the
case of (4) above a communication) to Ms Crittle directly. The reliance upon
these matters by the plaintiff did
not significantly advance beyond the previous
conclusions reached by the Court as to the admitted breaches, except that it may
be
accepted that Ms Crittle’s attention would have been drawn to a
significantly greater number of anomalies (by direct communication)
which would
necessarily have raised greater alarm. I do not conclude, however, that likely
course taken by Ms Crittle in that event
would have been any different than the
admitted breaches, save for the possible acceleration of the steps taken by
her.
Misleading and Deceptive Conduct
- The
submissions of the parties in this respect significantly overlap with the
submissions earlier referred to in this judgment bearing
upon this question (see
at [571]-[607]). The conclusions of the Court in that respect apply with equal
force to the consideration
of causation as to this matter.
- In
Travel Compensation Fund v Tambree (2005) 224 CLR 627; [2005] HCA
69, Gleeson CJ (with whom Gummow, Hayne and Callinan JJ agreed) said (at
[35]):
[35] The answer to the problem of causation in the present case is to be found,
not in a value judgment, but in an accurate identification
of the nature of the
risk against which the appellant sought protection and of the loss it suffered,
considered in the light of the
kind of wrongful conduct in which the first and
second respondents engaged.
- In
the light of the earlier conclusions of the Court, with respect of the
representations and the further representations, and of
the consideration in
[594] above, it may be concluded that those representations were a cause of the
plaintiff’s failure to
discover the true position regarding the Super Fund
and, thus, a cause of loss.
Contravention of the SIS Act
- Having
regard to the earlier conclusions of the Court as to this matter, it is
unnecessary to pass upon the plaintiff’s submissions
as to causation in
this respect.
Conclusion: Causation
- I
find that the breaches of contract and duty, and the misleading and deceptive
conduct by the defendants caused the plaintiff’s
loss.
LOSS
- The
plaintiff’s pleadings for loss and damage are extracted in [205] and [220]
of this judgment. The plaintiff’s case
was that it did not discover the
true position of the loans and investments until 2013/2014. The assets referred
to in the pleadings
concerned monies that had been leant to or invested with
parties who had guaranteed the obligations of others to the plaintiff. The
reference to third parties in the pleadings appeared to be a reference to the
guarantors of loans as well as Mr Moylan, his financial
advisory practice Moylan
Retirement Solutions and his accountancy practice MBS.
- After
2013/2014, the plaintiff obtained recoveries with respect to several of the
loans and investments (see [103] of this judgment) but many of the lenders and
guarantors, by that time, were bankrupt, in liquidation or de-registered.
- Further,
the plaintiff contended that Moylan Retirement Solutions and MBS no longer
possessed policies of professional indemnity insurance.
- The
plaintiff’s claimed losses fell into two categories:
- (1) Category 1:
the loss of the opportunity to make additional recoveries beyond the recoveries
which it had already made. In this
category, the plaintiff contended it would
have recovered close to 100% of the outstanding amounts on the loans and
investments in
2008 or shortly thereafter, and in particular:
- (a) as to the
Pacific General Facility Agreement: a 100% recovery which was not disputed by
the defendants in this respect; and
- (b) as to the
River Island and Tomkins Facility Agreements and Cartel and Limeburners
Trusts:
- (i) there was a
strong prospect of recovering the full value of the loans (and costs) by demand
and/or action against insured parties
Mr Moylan, Moylan Retirement Solutions and
MBS; and, supplementary to that,
- (ii) if
necessary, by further action to achieve at least partial recoveries on the loans
and investments against the borrowers and
guarantors.
- (2) Category 2:
the loss of the opportunity to recover earlier (in 2008 or shortly thereafter)
those monies which the plaintiff did,
in fact, recover after 2014; by action
against the borrowers, guarantors and third parties.
- The
plaintiff identified these claimed losses as being for the loss of a chance or
an opportunity. The principles relevant to cases
of that character are described
below.
Relevant Principles
- In
the case of breach of contract, the innocent party is to be put in the same
position, so far as money can do it, in which he or
she would have been had the
contract been performed: Gates v City Mutual Life Assurance Society Ltd
(1986) 160 CLR 1 at 11-12; The Commonwealth v Amann Aviation Pty Ltd
[1991] HCA 54; (1994) 174 CLR 64 (“Amann”) at 80, 98, 116, 134, 148 and
161.
- The
law awards damages for deprivation of any commercial opportunity, whether
arising from breach of contract, tort or statutory contravention:
Sellars v
Adelaide Petroleum NL (1994) 179 CLR 332 (“Sellars”) at
355 (per Mason CJ, Dawson, Toohey, Gaudron JJ) and 364 (per Brennan J).
- I
accept the defendants’ submission that a finding of causation of loss and
assessing damages which were said to flow from proved
loss were separate issues
which should not be confused: Badenach v Calvert (2016) 257 CLR 440;
[2016] HCA 18 (“Badenach”) at [38] (per French CJ, Kiefel and
Keane JJ).
- Section
5D(1)(a) of the Civil Liability Act contains a requirement of factual
causation. As the High Court observed in Badenach at [36], as with other
statutory tests of that kind, it requires the application of a “but
for” test of causation. The
Court in that matter continued to discuss the
approach to causation in matters predicated upon a loss of opportunity or chance
as
follows (at [38]-[41]):
[38] It has been explained that to speak of loss as the loss of a
“chance” distorts the question of causation. It involves
the
application of a lesser standard of proof than is required by the law and, it
follows, by s 13(1)(a). It confuses the issue of the loss caused with the issue
of assessing damages which are said to flow from that loss. In that assessment
a
chance may be evaluated.
[39] The respondent’s case on causation is not improved by seeking to
equate the chance spoken of with an opportunity lost.
It may be accepted that an
opportunity which is lost may be compensable in tort. But that is because the
opportunity is itself of
some value. An opportunity will be of value where there
is a substantial, and not a merely speculative, prospect that a benefit will
be
acquired or a detriment avoided.
[40] It remains necessary to prove, to the usual standard, that there was a
substantial prospect of a beneficial outcome. This requires
evidence of what
would have been done if the opportunity had been afforded. The respondent has
not established that there is a substantial
prospect that the client would have
chosen to undertake the inter vivos transactions. Therefore, the
respondent has not proven that there was any loss of a valuable opportunity.
[41] The onus of proving causation of loss is not discharged by a finding that
there was more than a negligible chance that the outcome
would be favourable, or
even by a finding that there was a substantial chance of such an outcome. The
onus is only discharged where
a plaintiff can prove that it was more probable
than not that they would have received a valuable opportunity. To the extent
that
the majority in Allied Maples Group Ltd v Simmons & Simmons (a
Firm) holds that proof of a substantial chance of a beneficial outcome is
sufficient on the issue of causation of loss, as distinct from
the assessment of
damages, it is not consistent with authority in Australia and is contrary to the
requirements of s 13(1)(a) of the Civil Liability Act.
[Footnotes omitted.]
- Reference
should also be made to the judgment of Gordon J in Badenach. Her Honour
observed (at [94], [95] and [98]):
[94] Regardless of how the relevant loss is defined, s 13(1)(a) of the CL Act
imposes a requirement of “factual causation”
for a negligence claim
to be successful – whether “the breach of duty was a necessary
element of the occurrence of the
harm”. Section 14 provides that
“[i]n deciding liability for breach of a duty, the plaintiff always bears
the onus of
proving, on the balance of probabilities, any fact on which the
plaintiff wishes to rely relevant to the issue of causation”.
Section 14
reflects the “general standard of proof” discussed in Tabet v
Gett.
[95] Those provisions require Mr Calvert to prove, on the balance of
probabilities, that but for the appellants’ breach of
duty, he would have
received the entirety (or at least a greater portion) of the testator’s
estate. That “inquiry directs
attention to all the circumstances” at
the time the appellants were retained and failed to undertake the work, the
preparation
of the will, with reasonable care.
...
[98] It is for that reason that issues of the sufficiency or value of the
“opportunity” purportedly lost do not arise
for consideration
– the first and necessary step of proving, on the balance of
probabilities, a causal relationship between
the tortious conduct and the
purported “loss of opportunity”, before any assessment of the amount
of the loss, was absent.
This can be directly contrasted with the position in
Sellars v Adelaide Petroleum NL. There, it was found, on the balance of
probabilities, that the contract would have been entered into but for the
impugned conduct.
Here, Mr Calvert could not prove, on the balance of
probabilities, what the testator would have done had there not been a breach
of
duty (assuming such a duty existed). In particular, Mr Calvert could not prove,
on the balance of probabilities, that the testator
would have taken steps
necessary for him to have acquired a better outcome than in fact happened, such
as receiving the entirety
(or at least a greater portion) of the
testator’s estate.
[Footnotes omitted.]
- Where
a claim is made for damages for loss of a valuable opportunity, the initial
question is whether the breach of contract, negligence
or breach of statute
caused the loss of an opportunity answering the description of a valuable one.
That question is decided on the
balance of probabilities: Hart Security
Australia Pty Ltd v Boucousis [2016] NSWCA 307 (“Hart
Security”) at [131] per Meagher JA (with Bathurst CJ and
Beazley P agreeing).
- The
question of what the plaintiff would have done, had the conduct complained of
not occurred, is also decided on the balance of
probabilities: Sellars at
353; Hart Security at [133].
- As
stated by Brennan J in Sellars (at 368):
Where a loss is alleged to be a lost opportunity to acquire a benefit, a
plaintiff who bears the onus of proving that a loss was
caused by the conduct of
the defendant discharges that onus by establishing a chain of causation that
continues up to the point when
there is a substantial prospect of acquiring the
benefit sought by the plaintiff. Up to that point, the plaintiff must establish
both the historical facts and any necessary hypothesis on the balance of
probabilities. A constant standard of proof applies to the
finding that a loss
has been suffered and to the finding that that loss was caused by the
defendant's conduct, whether those findings
depend on evidence of historical
facts or on evidence giving rise to competing hypotheses.
- As
Meagher JA said in Hart Security with reference to that passage at [138],
the requirement of proof on the balance of probabilities remains even where it
is necessary
to advert to hypotheses as to past events when determining the
issue of causation.
- The
defendants submitted that the requirement for proof on the balance of
probabilities applied with no less force where the issue
was not only what the
plaintiff would have done, but also involved questions as to what other persons
would have been disposed to
do in relation to reaching an agreement with the
plaintiff: Gore (t/as Clayton Utz) v Montague Mining Pty Limited [2000]
FCA 1214 (“Gore”) at [64]-[70], per Hill, Carr and Sundberg
JJ.
- However,
I agree with the submission of the plaintiff that the defendants’ reliance
upon Gore, in this matter, is misplaced. The plaintiff in that case would
not have required the counterparties to the loans (being the borrowers
or
guarantors) to agree to anything: as the loans were in default, a demand for
repayment could have been made as of right under
the terms of the facility
agreements.
- Damages
have been recognised as available for loss of opportunity to prosecute a
litigious claim: Darvall McCutcheon v H K Frost Holdings Pty Ltd (in liq)
(2002) 4 VR 570; [2002] VSCA 85 at [69] (provided that such a claim was
viable); Radosavljevic v Radin [2003] NSWCA 217 at [25]- [26] and [88].
Damages have also been recognised as available for the deprivation of a chance
of avoiding loss: Daniels v Anderson at 538-539 (consequent upon breach
of duty by auditors).
- In
this respect, it is not necessary to establish that the chance would probably
have been realised – loss of a chance is compensable
even if its
realisation is unlikely on the balance of probabilities, and even as low as 1%:
Malec v J C Hutton Pty Ltd [1990] HCA 20; (1990) 169 CLR 638
(“Malec”) at 643; Amann at 92-94.
- Once
the existence and loss of a chance have been established, damages are to be
assessed by reference to the Court’s assessment
of the degree of
likelihood that the commercial opportunity would have yielded success had it
been pursued. The value of an opportunity
that has been lost is to be
ascertained by reference to the “degree of probabilities or
possibilities”.
- I
extract below the relevant passage from the judgment of Mason CJ, Dawson, Toohey
and Gaudron JJ in Sellars at 355:
Notwithstanding the observations of this Court in Norwest, we consider
that acceptance of the principle enunciated in Malec requires that
damages for deprivation of a commercial opportunity, whether the deprivation
occurred by reason of breach of contract,
tort or contravention of s 52(1),
should be ascertained by reference to the court's assessment of the prospects of
success of that
opportunity had it been pursued. The principle recognized in
Malec was based on a consideration of the peculiar difficulties
associated with the proof and evaluation of future possibilities and past
hypothetical fact situations, as contrasted with proof of historical facts. Once
that is accepted, there is no secure foundation
for confining the principle to
cases of any particular kind.
On the other hand, the general standard of proof in civil actions will
ordinarily govern the issue of causation and the issue whether
the applicant has
sustained loss or damage. Hence the applicant must prove on the balance of
probabilities that he or she has sustained
some loss or damage. However,
in a case such as the present, the applicant shows some loss or damage
was sustained by demonstrating that the contravening conduct caused the loss of
a commercial opportunity which had
some value (not being a negligible
value), the value being ascertained by reference to the degree of probabilities
or possibilities. It
is no answer to that way of viewing an applicant's case to
say that the commercial opportunity was valueless on the balance of
probabilities
because to say that is to value the commercial opportunity by
reference to a standard of proof which is inapplicable.
[Original emphasis.]
- Reference
can also be made to the judgment of Meagher JA in Hart Security which
quoted Sellars (at [134]):
[134] However, once it is established on the balance of probabilities that such
a valuable opportunity has been lost, its value is
to be ascertained by
reference to the “degree of probabilities or possibilities” and
“it is no answer to that way
of viewing an applicant’s case to say
that the commercial opportunity was valueless on the balance of probabilities
because
to say that is to value the commercial opportunity by reference to a
standard of proof which is inapplicable” (at 355).
- I
accept the plaintiff’s submissions as to the correct approach to
quantification, as outlined below.
- Mere
difficulty in estimating damages does not relieve a court from the
responsibility of estimating them as best it can: Fink v Fink [1946] HCA 54; (1946) 74
CLR 127 at 143; Amann at 83; Sellars at 349. Uncertainty in
quantification does not prevent an assessment provided some broad estimate can
be made or a broad-brush approach
taken: Durban Roodepoort Deep Limited v
Newshore Nominees Pty Ltd [2005] WASCA 231 (“Durban”) at
[36], citing Rosser v Marine Ministerial Holdings Corp [1999] NSWCA 72 at
[65]. Damages need not be proved with mathematical exactitude and the Court will
use its best endeavours to arise at a fair figure: McRae v Commonwealth
Disposals Commission [1951] HCA 79; (1951) 84 CLR 377 at 411-412; Chaplin v Hicks
[1911] 2 KB 786 at 792. Where precise evidence is not available, the Court
must do the best it can: Amann at 83.
- One
category of case in which precise evidence is not available is where the loss is
hypothetical, such as the loss of a chance: Malec at 643; Durban
at [39]; Troulis v Vamvoukakis (Unreported, New South Wales Court of
Appeal, 27 February 1998) (“Troulis”) at 13 (per Gleeson CJ).
In such cases “estimation, if not guesswork, may be necessary in assessing
the damages to be
allowed”: Placer (Granny Smith) Pty Ltd v Theiss
Contractors Pty Ltd (2003) 77 ALJR 768; [2003] HCA 10 at [38];
McCrohon at [124]-[125]; Jones v Schiffmann [1971] HCA 52; (1971) 124 CLR 303
(“Schiffmann”) at 308; Enzed Holdings Limited v Wynthea
Pty Ltd ([1984] FCA 373; 1984) 57 ALR 167; [1985] ATPR 40-507 at 46,062.
- In
a loss of chance case, the inquiry “is thus an imprecise and indeterminate
one to be carried out within very broad parameters.
The trier of fact may have
to form conclusions on “slender material”: State of New South
Wales v Moss [2000] NSWCA 133; (2000) 54 NSWLR 536 at [71] and see, further, at [87].
- The
point is well illustrated by the seminal case of Chaplin v Hicks. The
jury awarded the plaintiff ₤100 damages for the loss of a chance to win a
prize. The Court of Appeal, in refusing to disturb
this verdict, said that, had
the jury chosen to award one shilling, that verdict would not have been
disturbed either. In Schiffmann at 308, Menzies J referred to those
aspects of Chaplin v Hicks as supporting the proposition that
“[t]he assessment of damages, whether by a judge or a jury, does
sometimes, of necessity,
involve what is guess work rather than
estimation”.
- The
reference in those authorities to guesswork should not be understood as
detracting from the obligation of the judge to adopt a
rational reasoning
process – based on the materials that are available to the court –
rather than random selection: McCrohon at [126].
- The
Court should “assess the compensation in a robust manner, relying on the
presumption against wrongdoers, the onus of proof,
and resolving doubtful
questions against the party “whose actions have made an accurate
determination so problematic”:
Houghton v Immer (No 155) Pty Ltd
(1997) 44 NSWLR 46 at 59; Chep v Bunnings [2010] NSWSC 301 at [226];
State of NSW v Burton [2008] NSWCA 319 at [108].
- The
defendants submitted that the aforementioned principles were qualified where
damages were susceptible of evidentiary proof by the plaintiff, but were
not proved by evidence: see McCrohon at [118]-[126], per McColl JA (with
Campbell JA and Handley AJA agreeing) and JLW (Vic) Pty Ltd v Tsiloglou
[1994] VicRp 16; [1994] 1 VR 237. The defendants further submitted that where there is “an
absence of the raw material to which good sense may be applied ...
[j]ustice
does not dictate that ... a figure should be plucked out of the air”:
McCrohon at [123], quoting Gleeson CJ in Troulis.
- I
accept the submission of the plaintiff; that submission, however, ignores the
acceptance of courts of high authority outlined above
at [556], namely, that loss
of a chance is a category of case in which precise evidence is often not
available.
Application of the Principles
- As
to the aforementioned particularisation of the plaintiff’s case, the
defendants made two broad submissions. First, it was
contended the
particularisation of the plaintiff’s closing submissions as to a temporal
limitation – “in 2008 or
shortly thereafter” – involved
a qualification of the pleaded case which was that recoveries would have been
made by
“30 June 2008”. (That formulation derived from the claim for
loss and damage in the second further ASOC where the claims
for loss of monies
(or the use of those monies) were expressed to operate for the period
“from 30 June 2008” to the date
of recovery or judgment).
- The
defendants also contended that there was no evidence which would allow the Court
to conclude that there would have been any recoveries
in the approximate six
week period pleaded by the plaintiff, namely, between the issue of the 2007
audit report and 30 June 2008.
Such evidence as existed, it was submitted,
demonstrated the recoveries that were made took a good deal longer than six
weeks. The
claim under the Tomkins Facility Agreement was used as an
illustration.
- There
is no doubt substance in the defendants’ contentions in this respect. It
may be doubted that the recoveries could be obtained
by 30 June 2008 and the
plaintiff pleaded its claim as being for losses “from” that date.
However, this contention was
ultimately not developed by the defendants as a
pleading point. The issue of loss was fully argued upon the basis of whether
rights
could have been exercised to obtain recoveries in the manner as discussed
below. Further, I accept the submission of the plaintiff
that the temporal
adjustment to its case may be accommodated by an adjustment to the calculation
as to damages performed by the experts
by pushing back the date of recovery for
each investment to whatever date the Court considered appropriate or,
alternatively, an
accommodation being made by a discount to the overall damages
sum. I propose to take the latter rather than the former course.
- Secondly,
in a number of parts of the defendants’ closing submissions, there were
contentions concerning whether the loss of
the opportunity of making recoveries
actually made at an earlier time (category 2) may properly constitute loss of a
chance or opportunity
in accordance with the principles governing such claims.
For example, the defendants submitted the loss of a benefit associated with
being able to make recoveries earlier was “swallowed up” by the
opportunity to pursue and obtain further recoveries.
- In
part, it is unnecessary to resolve that question because the findings in this
judgment as to the existence of a loss of a chance
or opportunity in each
category corresponds to findings the monies associated with the subject
investment were, in fact, recoverable.
Further, the evidence sustained that a
claim for lost chance may properly arise in those circumstances for interest
lost in not being
able to recover from an earlier time (whether with respect to
sums actually recovered or sums which were found recoverable by the
judgment).
- The
methodical approach of the plaintiff to loss and damages, whereby the claims
were assessed by reference to two aforementioned
categories is both logical and
provides for clearer analysis, provided that care is taken, as later noted in
this judgment, to avoid
double counting.
- The
defendants’ expert, Ms Jones, gave the following evidence as to the time
value of money relevant to the determination or
settlement of
proceedings:
Q. If you assume that the moneys that the plaintiff has in fact recovered since
2014 could and would have been recovered in 2008
but for the negligence of the
defendants, do you follow that assumption?
A. Yes.
Q. On that assumption, you would accept that part of the plaintiffs loss is the
loss of the use of those moneys or recoveries from
July 2008 to the date of the
recoveries, that's right, isn't it?
A. Sorry, there's a number of implicit assumptions underlying all of that, but -
but mathematically, if you brought that settlement
forward to 2008 and then you
assume that the plaintiff has lost use of that money, then that - that would be,
yeah, an extra compensation
of interest on that money.
- It
may be noted that the defendants raised a further broad question, with respect
of loss, associated with category 2 which is referred
to and dealt with from [769]
below).
Category 1: Exercise of Rights to Obtain Recovery
- The
plaintiff was correct to submit that the defendants’ submissions, in this
respect, essentially traversed two considerations.
The first was whether the
plaintiff would have exercised its rights in relation to each investment or
recovery subsequently made
in 2008. I have earlier dealt with this issue under
the heading of “Causation” to find that the plaintiff would have
sought to exercise legal rights under the respective loans, investments or
guarantees. I will deal with the particular aspects of
those rights below. The
second question was what the response of the exercise of such rights, on the
balance of probabilities, would
have been.
Rights under Pacific
General Facility Agreement
- The
Pacific General Facility Agreement was earlier described in this judgment. It
consisted of an agreement dated 23 February 2006
for a loan of up to $2.5
million for a term of 6 months from the date of the initial draw down notice. It
may be inferred that the
loan was fully drawn down on or about 24 February 2006.
It follows that the loan fell due in August 2006 and the plaintiff could
have,
prima facie, exercised rights against both borrower and guarantors to
seek recovery of the loan from that time.
- The
defendants submitted that the Court could not be satisfied there was the
substantial prospect that a benefit would be acquired
from the exercise of
rights against the borrower under the agreement for two reasons:
- (1) The funds
were advanced to the borrower in its capacity as the responsible entity for the
Hardie Estates Property Fund, later
known as the Regional Land Property Fund
(“Regional Land Fund”) (as earlier mentioned);
- (2) There was
limited information available to the Court as to the ability and preparedness to
pay (found in Ex 9 in the proceedings).
The evidence showed that at the material
time, a demand for payment was made upon the responsible entity for the Regional
Land Fund
and the amount that was extracted was the amount that could be paid,
namely, $697,951.50 (paid on 19 June 2008). The plaintiff’s
case required
proof, it was contended, of a substantial prospect of a greater immediate
recovery if demand had been made. What occurred
with the demand in 2008 was less
than full recovery. The defendants draw support from the financial statements of
the Regional Land
Fund for the year ending 30 June 2008. Reference was made to
the earlier submissions concerning Mr Sheppard’s evidence.
- I
accept the submission of the defendants that the plaintiff failed to discharge
its onus of proving the loss of an opportunity of
value with regard to the
borrower under the Pacific General Facility Agreement. I have come to this view
for the following reasons:
- (1) The
defendant was correct to submit that the limited evidence in Ex 9 raised real
doubts as to the prospect of a greater immediate
recovery than that paid by the
Regional Land Fund in 2008. In particular, it may be noted that there was a
suggested repayment to
the plaintiff of $650,000 raised by Mr Moylan on 27 May
2008. The financial controller recorded an understanding that the loan had
been
converted to equity but also noted that such payment would leave “no funds
to carry on business” until new finance
was accessed. In discussions on 28
May 2008, the commercial purpose of paying an amount of $695,000 was discussed
and in that context,
insolvency was raised as an issue as there were “no
funds to pay a full $1.2m”.
- (2) I have
earlier expressed reservations about the use by Mr Sheppard of net assets as an
indicator of the immediate capacity of
the Regional Land Fund to pay loans (see
the discussion at [400] above). That is buttressed by two financial ratios
which Mr Sheppard did not rely upon. Those ratios did not positively indicate
any ability to meet liability out of the financial statement of the Regional
Land Fund for the year ending 30 June 2008. The bulk
of the principal current
asset, namely inventory, was comprised of land development rights and land
development costs which were
slow moving in terms of sales depending upon market
conditions which were not particularly favourable in 2008. Further, the Regional
Land Fund was recorded as not making a profit but suffering losses, even after a
substantial amount of land was sold.
- (3) The
plaintiff relied upon the following passage of Mr Sheppard’s evidence to
indicate that there was a capacity of the borrower
to repay more, and that it
had in 2008:
Q. May I suggest to you that having gone through these
other matters, this would indicate to anyone looking at these financials, that
this fund would have had difficulties in meeting any substantial debt repayment
at that time?
A. I don't think that that's in fact a conclusion that can be arrived at from
the - from these financial statements alone. It may
have been the case, but I
don't think the financial statements show it.
(4) However, whatever the position of the financial statements, it would appear
that Mr Sheppard recognised that the Regional Land
Fund would have difficulties
in meeting any substantial debt repayment as at 30 June 2008.
(5) Finally, I do not consider that the total current asset standing of the
Regional Land Fund warrants any alteration to this conclusion.
The use of
positive net assets is, as earlier discussed, of doubtful value. Total assets
were only of value if they could be liquidated
or used to raise
finance.
- However,
this is not the end of consideration of Pacific General Facility Agreement. The
defendant accepted that the plaintiff had
valuable rights against guarantors
under the Pacific General Facility Agreement. The defendants’ expert, Ms
Jones, considered
it likely that the plaintiff would have recovered the full
amount of $838,299 from the guarantors in May 2008 without significant
cost.
- Ms
Jones was not provided with financial accounts for the fund for the year ending
30 June 2008 which she accepted was necessary for
her to undertake a correct
approach in analysing the Regional Land Fund.
- The
defendants contended that the plaintiff did, in fact, exercise its rights
against the guarantors and that it could not be said
that the opportunity to
pursue the guarantors was lost by reason of the auditor’s conduct. This
gives rise to a question as
to whether there was a loss as a result of a lost
valuable opportunity to exercise the rights at an earlier time. I will return to
that question in relation to the issue of delay.
Claims against
insured parties Mr Moylan and/or his Related Companies
- Since
it has been established that loan investments made with respect to the Regional
Land Fund would have been recoverable, this
next section relates to claims with
respect to the River Island Facility Agreement, the Tomkins Facility Agreement,
the Cartel Trust
and the Limeburners Trust. The plaintiff’s primary
submissions in this respect may be summarised as follows:
- (1) There was a
lost opportunity to pursue and make recoveries against Mr Moylan, Moylan
Retirement Solutions (the financial planning
firm) and MBS (the accountancy
practice);
- (2) The claims
rose out of the financial, investment and accountancy advice given the Super
Fund;
- (3) In 2008,
current policies of insurance were held by Moylan Retirement Solutions and MBS
which policies remained in force until
2013 when they lapsed;
- (4) Moylan
Retirement Solutions held a QBE Professional Indemnity insurance policy for the
period of 5 January 2008 to 5 February
2009 (“the MRS 2008 policy”)
and similar policies with DUAL Australia for subsequent years. As the holder of
an Australian
Financial Services License, Moylan Retirement Solutions was
required by law to hold insurance (s 912B of the Corporations Act and reg
7.6.02AA of the Corporations Regulations 2001 (Cth)). Moylan Retirement
Solutions ceased holding an Australian Financial Services License in May 2013
and was subsequently deregistered.
- (5) There was a
real prospect that the policies, whilst in force, would have responded to claims
brought by the plaintiff in connection
with the negligent financial advice it
received and acted upon (in the case of Moylan Retirement Solutions) and/or the
negligent
preparation of the accounts of the Super Fund (in the case of
MBS).
- (6) Ms Jones
accepted that the existence of policies of insurance held by Mr Moylan and his
associated entities, which may have responded
to a claim by the plaintiff, was a
relevant matter when assessing the recoverability of the loans in 2008 and thus
the plaintiff’s
loss.
- The
defendants raised three broad submissions in reply as follows:
- (1) the
plaintiff did not adduce evidence of or maintain a claim that it received and
acted upon advice in making the loans and investments;
- (2) no attempt
has been made to formulate a claim relating to the making of the loans and
investments by reference to the actual evidence
in the case; and
- (3) although
the plaintiff’s claim against MBS has been inchoately formulated in its
submissions, it may be taken as accepted
that the plaintiff agreed with the
formulation of such a claim as contained in the amended defence (at paras 49 and
51).
- Putting
aside issues of insurance momentarily, there were two particular submissions of
the defendants, in this respect, as follows:
- (1) What the
actual evidence in this case demonstrates was that the plaintiff would have had
claims against Mr Moylan and/or Moylan
Retirement Solutions for misappropriation
of funds put under the control of Mr Moylan and/or MBS for falsely reporting on
the status
of loans and investments and falsely accounting for them.
- (2) As to the
claims against Mr Moylan and/or Moylan Retirement Solutions, Ms Crittle’s
evidence is that, in respect of each
and every transaction referred to in her
affidavit, Mr Moylan held no permission to disburse any money for any of them.
In particular,
reference was made to the Pacific General Facility Agreement (and
the Regional Land Fund), River Island Facility Agreement, Limeburners
Trust,
Cartel Trust and Tomkins Facility Agreement.
- Out
of these submissions sprung the contention of the defendants that the nature of
the claim that was available by the plaintiffs,
with respect to Mr Moylan and
Moylan Retirement Solutions, was much the same as the claim the plaintiff
brought against the partners
of Turnbull Hill Lawyers, namely, a claim for
equitable compensation in respect of unauthorised payments of a fiduciary or
alternatively
the return of those funds. From these submissions, the defendants
contended that the Court could not be satisfied that there was
a substantial,
and not a merely speculative, prospect that a benefit would be acquired from the
exercise of rights against Mr Moylan
unless he had the benefit of insurance
policies responding to that claim.
- The
defendants’ contentions in this respect may be further distilled to two
primary propositions:
- (1) the claims
available to the plaintiff were essentially confined to misappropriation of
funds and falsely reporting the status
of loans and investments (and falsely
accounting for them), giving rise to a claim for equitable compensation;
and
- (2) the
plaintiff did not have a viable claim in negligence against Mr Moylan and Moylan
Retirement Solutions because the plaintiff
had not demonstrated that it had
relied upon the financial advice given to it by Mr Moylan in respect of all the
loans and investments
that were made.
- As
to the first proposition, I accept the submission of the plaintiff that there is
no warrant for confining the available claim in
the way that the defendants
sought to do. It is highly unlikely that those representing the plaintiff would
have formulated claims
such as misappropriation of funds and/or false reporting
if the effect of those claims was to enliven a relevant exemption under
a policy
of insurance.
- It
seems to me that the defendants have put out of account in those submissions the
plaintiff’s contention that it had available
to it a claim against Moylan
Retirement Solutions and Mr Moylan (as authorised representative of and as a
director of Moylan Retirement
Solutions) based upon the fact that advice given
to it to enter into the loans and investments was given negligently in breach of
professional duty.
- Without
repeating the earlier parts of findings in this judgment, I note the following
elements of negligence identified by the plaintiff,
with which I agree, that
form part of a claim that the advice to enter into the loans and investments was
given negligently in breach
of professional duty as follows:
- (1) the loans
and investments were too high risk for the plaintiff, having regard to the
circumstances of its sole director, Ms Crittle
(aged 59 and reliant on her
pension to survive);
- (2) the loans
and investments were unduly concentrated by asset class; by geographic region;
by industry sector and by connection
of the management of the debtors;
- (3) the loans
were unsecured, despite provision having been made for security to be taken;
and, in the case of the River Island loan,
it was incapable of being secured by
mortgage as the company did not own the land; and
- (4) the loans
were of substantially no value.
- That
gives rise to the second consideration raised by the defendants that the
plaintiff did not have a viable claim in negligence
against those entities. This
was centred upon the proposition that the plaintiff had not demonstrated that it
relied upon the financial
advice given by Mr Moylan, with respect to all of the
loans and investments that were made, notwithstanding the loans and investments
made by the Super Fund all had their genesis in Mr Moylan and Moylan Retirement
Solutions (the plaintiff’s financial advisors
at the relevant time). For
the reasons earlier given at [51]-[78] above, I do not accept the defendants’
submissions in this respect.
- The
viability of the claims identified by the defendants do not depend upon the
plaintiff being able to establish that each investment
was made in reliance on a
specific recommendation given by Mr Moylan. It is sufficient that the plaintiff
demonstrate that, but for
Mr Moylan acting as its financial advisor, the loans
and investments would not have been made. I note my earlier finding that, whilst
Ms Crittle did not directly receive advice or recommendations on a one for one
basis about investments of which she was unaware,
it did not follow that the
loans and investments occurred other than upon Mr Moylan’s advice (see at
[51]-[78]) above). In respect
of the loans and investments which Ms Crittle knew about, I found that Ms
Crittle received Mr Moylan’s
advice and she relied upon it (see, in
particular, [76]
above).
Issues of insurance
- The
defendants submitted that the Court could not be satisfied that there was a
real, and not merely speculative, prospect that a
benefit would be acquired from
the exercise of rights against Mr Moylan unless he had the benefit of insurance
policies responding
to that claim.
- It
was said at the outset of the defendants’ submission that there was an
absence of evidence as to what, if any, insurance
monies would have been
available under the policies at the relevant time. It was submitted that the
policy limit is not evidence
of the availability of monies as the limit may have
been eroded by other claims. The defendants contended that the Court should not
infer in favour of the plaintiff that any insurance monies would have been
readily available in the absence of evidence of the insurer’s
likely
attitude to the claim.
- As
to the defendants’ overview submissions, I consider that the plaintiff was
correct to refer to the principle (being applicable
in this case) that an
insurer bears the onus of showing an exclusion clause applied.
- Had
the plaintiff been able to pursue the opportunity of bringing a claim against Mr
Moylan, or one or more of his insured companies,
it would have been for the
insurer to establish that an exclusion applied, not for the plaintiff to
establish that it did not apply.
- The
defendants’ submissions as to the availability of insurance claims were
predicated upon the proposition that the claims
available to the plaintiff were
claims for misappropriation of funds, conflict of interest and/or false
reporting.
- I
have earlier rejected the contention that the plaintiff’s claims were
confined to that of misappropriation of funds and false
reporting at [683] above. Conflict of
interest, dishonesty and fraud and the impact of exclusion clauses require
separate attention.
- There
was no dispute as to the following summary by the plaintiff of the insurance
policies. In the MRS 2008 policy held by Moylan
Retirement Solutions, the
profession was defined as “financial planning, investment advice and life
insurance broking”.
The policy provided for a limit of indemnity of $5
million for any one claim. The policy wording revealed that Moylan Retirement
Solutions was insured against civil liability for compensation arising from any
claim first made and notified during the period of
cover as a result of a breach
of professional duty in the conduct of the insured’s profession. In short,
it was defined to
include not only the company but also as directors and
employees while acting in the course of business. This included Mr Moylan.
- In
addition, MBS also held QBE Professional Indemnity Insurance policy for the
period from 30 August 2007 to 30 August 2008, which
was renewed to 30 August
2009 (“the MBS policy”). The profession was defined as
“accountants and management/business
consultants”. The MBS policy
provided for a limit of indemnity of $2 million for any one claim. Like the MRS
2008 policy (described
above), this policy also defined “insured” as
including directors acting in respect of the work performed whilst a director,
thus this policy also included Mr Moylan as an insured.
- Similarly,
the MBS policy wording revealed that to be a policy which indemnified MBS
against civil liability for compensation arising
from any claim first made and
notified in the policy period as a result of a breach of professional duty and
in the course of the
insured’s profession. The plaintiff submitted that it
had an available claim that the accounts were prepared negligently in
breach of
professional duty.
Conflict of interest and exclusion
clauses
- At
the outset, it should be made clear that there were two potential avenues for
insurance claims:
- (1) claims
against Moylan Retirement Solutions for negligent advice in breach of
professional duty; and
- (2) claims
against MBS for the negligent preparation of accounts.
- Further,
as noted above, the MRS 2008 policy, which responded to claims against Moylan
Retirement Solutions, applied for the period
from 5 January 2008 to 5 February
2009. Thereafter, from 5 February 2009, the DUAL insurance policy applied.
- For
claims against MBS, the MBS policy covered the period from 30 August 2007 to 30
August 2009. Thereafter, from 30 August 2009,
MBS was covered by the DUAL
insurance policy.
- Attention
should be directed, in that respect, to the MRS 2008 policy. The policy wording
stated that it provided coverage “for
compensation”. Exclusion cl
4.4 was headed “Conflict” and provided that QBE shall not be liable
in respect of any
claim against any insured directly or indirectly based upon,
attributable to, or in consequence of a “Conflict”.
“Conflict”
was defined in the policy in both commonly understood
senses:
Conflict shall mean:
(a) a conflict of duty and duty, where an insured acts for a client whilst being
subjected to a contrary interest, being an interest
of another client; or
(b) a conflict of interest and duty, where an insured acts for a client whilst
being subjected to a contrary interest, being a personal
advantage
interest.
- Exclusion
cl 4.6 related to “Financial Interest” and provided that QBE shall
not be liable under the policy to provide
indemnity in respect of a claim
against any insured directly or indirectly based upon, attributable to, or in
consequence of, inter alia, any actual or alleged service provided by an
insured regarding investment in, or lending to, including:
- (1) any entity
operated or controlled by an insured; and
- (2) any entity
in which an insured or any subsidiary, nominee of an insured, trustee of an
insured or family member has a direct or
indirect interest other than a
‘Minor Interest’ (as defined).
- Exclusion
cl 4.8 was headed “Fraud and dishonesty” and provided that QBE shall
not be liable under the policy to provide
indemnity in respect of a claim
against any insured directly or indirectly based upon, attributable to, or in
consequence of, inter alia, any actual or alleged dishonest act or
omission of an insured or wilful breach of any statute, contract or duty by an
insured.
- Exclusion
cl 4.14(b), under the heading “Prior or pending”, provided that QBE
shall not be liable under the policy to
provide indemnity in respect of a claim
against any insured:
directly or indirectly based upon, attributable to, or in consequence of any
fact or circumstance:
(i) of which written notice has been given, or ought reasonably to have been
given, under any previous policy; or
(ii) of which an Insured first became aware prior to the Period of cover, and
which such Insured knew or ought reasonably to have
known had potential to give
rise to a Claim under the Policy.
- Reference
should then be made to the DUAL Financial Planner’s professional indemnity
policy (in respect of claims against Moylan
Retirement Solutions) and the DUAL
Accountant’s professional indemnity policy (in respect of claims against
MBS).
- The
DUAL policy wording contained an insuring clause that provided coverage for any
claim for compensation.
- The
policy included a prior knowledge exclusion clause (see cl 7.1). It
stipulated:
We will not cover the INSURED, including for DEFENCE COSTS or other loss, in
respect of:
(a) Any CLAIM arising from or in connection with a fact or circumstance that the
INSURED knew or ought reasonably to have known prior
to the INSURANCE PERIOD
might or could give rise to a CLAIM.
- It
also included a fraud and dishonesty exclusion clause (see cl 7.14), which
provided:
We will not cover the INSURED, including for DEFENCE COSTS or other loss, in
respect of:
(a) Any CLAIM arising from or directly or indirectly attributable to or in
consequence of any actual or alleged act or omission by
the INSURED, its
consultants, sub-contractors or agents which was reckless, fraudulent,
dishonest, malicious or criminal.
(b) Any CLAIM arising from or directly or indirectly attributable to or in
consequence of any wilful breach of any statute, regulation,
contract or duty by
the INSURED, its consultants, sub-contractors or agents.
- The
wording further contains a Conflict of Interest exclusion (cl 7.19 in the
Financial Planner’s policy and cl 7.20 in the
Accountant’s policy)
which provides:
We will not cover the INSURED, including for DEFENCE COSTS or other loss, in
respect of:
Any CLAIM or liability arising from or directly or indirectly attributable to or
in consequence of:
(a) any failure of any INSURED (or any of its agents) to disclose or adequately
disclose any (i) conflict of interest ...
- The
defendants submitted that, insofar as there was a pleaded case concerning the
appropriation of trust funds against Moylan Retirement
Solutions, or false
reporting against MBS, and insofar as Ms Crittle has given evidence, it was
self-evident that “these exclusions
would apply in relation to each
appropriation of funds”. The existence and lack of disclosure of conflicts
formed part of the
plaintiff’s case. This was illustrated by the following
references:
- (1) Payment
under the Pacific General Facility Agreement (and the/ Regional Land
Fund):
- (a) The case
maintained by the plaintiff includes that recorded in the Schedule to the second
further ASOC at paras (a)(iii), (a)(vi),
(g)(iii) and (g)(vi), all of which
identify the “conflict”. See also additional references in Ex 9
pointing to the relationship
between Mr Moylan and the Regional Land Fund.
- (b) Ms Crittle
gave evidence that she was never advised that Messrs Hill and Moylan had
personal involvement with the Pacific General/Regional
Land Fund.
- (2) Payment
under the River Island Facility Agreement (and the River Island
investments):
- (a) The case
maintained by the plaintiff included that recorded in the Schedule to the second
further ASOC at paras (b)(v), (b)(vi),
(h)(v) and (h)(vi), all of which identify
the “conflict”.
- (b) There was
evidence in these proceedings that:
- (i) MCD
Holdings (of which Mr Moylan was a shareholder and director as mentioned above)
was a shareholder of River Island;
- (ii) Mr Moylan
was a director of River Island; and
- (iii) Mr Moylan
was a personal guarantor of the River Island Facility Agreement.
- (c) Ms Crittle
gave evidence that she was never informed that Mr Moylan was personally involved
in the transaction and would not have
gone ahead with it had she been aware. She
also agreed that had she been aware of the fact that Mr Moylan had personal
involvement
she would have immediately taken the trust funds away from his
control. This evidence not only had significance for the direct issue
of any
claim against Mr Moylan in relation to River Island, but went further due to the
“indirect” relational criteria
contained in the Conflict exclusion.
It had the consequence that there becomes a sufficient indirect relationship
between “Conflict”,
the keeping of control of the trust funds by Mr
Moylan, and any misappropriation of those funds by Mr Moylan thereafter. Since
this
was the first misappropriation and all other misappropriations occurred
thereafter, the exclusion operated to deny all claims for
coverage.
- (3) Payment in
relation to Limeburners Creek Unit Trust:
- (a) The case
maintained by the plaintiff included that recorded in the Schedule to the second
further ASOC at paras (f)(ii) and (l)(ii),
both of which identify the
“conflict”.
- (b) The
evidence in the proceedings revealed that Mr Moylan was a shareholder and former
director of Limeburners Creek.
- (c) Ms Crittle
also claimed (correctly) that the cash management account into which funds were
disbursed may have been controlled
by Mr Moylan. She maintained her case that
money was disbursed without her knowledge or authority. She had never heard of
the trust
until receipt of a letter in 2013. Given Ms Crittle had never heard of
the trust until mid-2013, she plainly was not aware of Mr
Moylan’s
involvement with it.
- (4) The Cartel
Trust:
- (a) The case
maintained by the plaintiff included that recorded in the Schedule to the Second
Further ASOC, paras (c)(ii) and (i)(ii),
both of which identify the
“conflict”.
- (b) The
evidence in these proceeding revealed that MCD Holdings was the trustee and a
beneficiary of the Cartel Trust.
- (c) Ms Crittle
also claimed that the cash management account into which funds were disbursed
may have been controlled by Mr Moylan.
Ms Crittle maintained her case that money
was disbursed without her knowledge or authority. She had never heard of the
Trust until
2014. Given Ms Crittle had never heard of the Trust until many years
later, she plainly was not aware of Mr Moylan’s involvement
with
it.
- (5) Tomkins
Facility Agreement:
- (a) The case
maintained by the plaintiff includes that recorded in the Schedule to the second
further ASOC at paras (e)(iii), (e)(v),
(k)(iii) and (k)(v), all of which
identify the “conflict”.
- (b) Ms Crittle
gave evidence that she was never told that Messrs Tomkins and Moylan were
business associates in respect of other investments
or investment entities to
which the plaintiff had loaned monies (and that there would have been no
disbursement if she had known
of their relationship). Ms Crittle maintained her
case that money was disbursed without her knowledge or authority; see also
statements
to similar effect to the Commissioner of Taxation recorded in Ex
3.
- The
defendants submitted in that light that the combination of conflict in all of
those circumstances and the actuating activity by
Mr Moylan in 2006 had wider
ramifications for the potential of any coverage under the relevant professional
indemnity policy.
- The
plaintiff’s response to the conflict of interest submissions by the
defendants were, in summary, as follows:
- (1) insofar as
the defendants’ submissions fix upon the accountant’s professional
indemnity policy, there was nothing
to suggest that a claim based on negligent
preparation of accounts (for example, in relation to the adoption of an
inappropriate
method of valuation) could in any way fall within the
exclusion;
- (2) with
respect to the policy of insurance held by Moylan Retirement Solutions conflict
of interest is not defined but it was accepted
that the policy would likely
require there to be some incompatibility between the plaintiff’s interests
and those of Mr Moylan
or Moylan Retirement Solutions;
- (3) it was
accepted that Mr Moylan executed certain facility agreements but there was no
evidence of his interest in the developments
or loans or investments identified
in the proceedings, nor was there evidence of any personal advantage that he was
to receive; and
- (4) the
plaintiff would not have needed to frame its cause of action based on conflict
interest.
- I
do not accept the plaintiff’s submission that the conflict of interest
exclusion clauses do not apply to the claims with respect
to River Island
Facility Agreement (or investments), the Cartel Trust and the Limeburners Trust.
The multitude of examples, extracted
above at [709], make clear the
plaintiff had pleaded parts of its case based on the existence and lack of
disclosure of conflicts of interests.
To suggest otherwise is largely
inconsistent with the plaintiff’s case.
- Further,
there is evidence within these proceedings which showed that conflicts of
interest did exist, most relevantly (as noted above):
- (1) as to River
Island, Mr Moylan was a director of that company. In addition, Mr Moylan was a
personal guarantor of the facility
agreement and MCD Holdings (of which Mr
Moylan was a shareholder and director) was a shareholder;
- (2) as to
Limeburners, Mr Moylan was a shareholder; and
- (3) as to the
Cartel Trust, MCD Holdings was the trustee and also a
beneficiary.
- In
that light, any claim with respect to River Island would have been caught by
exclusion cl 4.6 because the claim would have been,
at least, indirectly in
consequence of a service provided by Mr Moylan (as an insured under the policy)
for lending to a company
which he controlled.
- The
same exclusion clause would apply to any claim with respect to the Limeburners
Trust because such a claim would be directly or
indirectly in consequence of a
service regarding investment in the trust in which Mr Moylan had a direct
financial interest.
- As
to the Cartel Trust, again exclusion cl 4.6 would apply to claims against Moylan
Retirement Solutions and MBS because Mr Moylan
(as an insured) had a direct or
indirect financial interest in the trust because MCD Holdings was a beneficiary
of the trust.
- I
do not accept the plaintiff’s contention that the conflicts of interest
exclusions do not apply to the negligent preparation
of accounts by MBS because
Mr Moylan’s conflict of interests were so closely linked with and evident
in the accounts.
- However,
the position with regard to any claims relating to the Tomkins Facility
Agreement is different from the other investments.
- It
was pleaded by the plaintiff that Mr Moylan was a promoter of the borrower under
that agreement, and that the borrower was associated
with Mr Moylan. The
defendants referred to those pleadings (namely, paras (e)(iii) and (v), and
(k)(iii) and (v) in the Schedule
to the second further ASOC) when the defendants
made subsequent submissions about Mr Moylan and his related entities being
“associated”
with L & V Tomkins.
- The
defendants pointed to no evidence as to what Mr Moylan’s relationship was
to the borrowers under this facility agreement,
or any benefit he derived from
the loan, other than that Ms Crittle was never told that Messrs Tomkins and
Moylan were “business
associates”, the common ground that Mr Moylan
arranged for the loan investment to be made and that Ms Crittle signed the
facility
agreement.
- However,
the evidence revealed that MBS was the registered office for L & V Tomkins
from 2006 to 2012. From that, the logical
inference was that L & V Tomkins
was a client of MBS. I note that the Court was not asked to draw this inference,
though the
reference to that evidence was taken from an earlier reference in the
plaintiff’s closing submissions.
- A
conflict existed where MBS acted for the plaintiff whilst being subject to the
interests of its other client, L & V Tomkins
(see exclusion cl 4.4(a) of the
MRS 2008 policy). This would then exclude any claim by the plaintiff against MBS
for the negligent
preparation of accounts. I note here that a claim against MBS
would also be excluded under the later DUAL policy because it is well
established that existing client conflicts are considered conflicts of
interests: see C Hollander QC and S Salzedo QC, Conflicts of Interest
(Sweet & Maxwell, 4th ed, 2001) at [1-002] and [17-006].
- However,
on the evidence, similar conclusions as to the nature of what personal
interests, if any, Mr Moylan and Moylan Retirement
Solutions had in regard to
the loan made in relation to the Tomkins Facility Agreement were not established
by the defendants. There
was no evidence that any of the borrowers under the
facility agreement were clients of Moylan Retirement Solutions, and therefore
it
cannot be concluded that a conflict of interest arose.
- Thus,
the defendants have failed discharge their onus on the evidence that the
existence of a conflict of interest which would trigger
the exclusion clause in
the insurance policy with regard to a claim against Moylan Retirement Solutions
for negligent advice in breach
of professional duty with regard to the Tomkins
Facility Agreement.
Dishonesty and fraud and prior knowledge
exclusions
- Considering
the findings above, the following discussion is only relevant to any claims with
regard to the Tomkins Facility Agreement.
- It
may be noted that the defendants’ development of submissions concerning
dishonesty exclusion were a precursor to the development
of broader submissions
regarding misconduct. Thus, it was submitted that dishonesty exclusions in the
respective policies, discussed
above, would exclude cover for any
misappropriation claim. Conduct which amounts to dishonesty involves the
consideration of the
knowledge, belief and intention of the person whose conduct
is impugned: Harle v Legal Practitioners Liability Committee [2003] VSCA
133 at [29]; McCann v Switzerland Insurance Ltd (2000) 203 CLR 579;
[2000] HCA 65 (“McCann”) at [55]-[56]; Paradis v
Settlement Agents Supervisory Board (2007) 33 WAR 361; [2007] WASCA 97 at
[69].
- It
was submitted the qualifying state of mind generally requires deliberate
intention to deceive or cheat according to the standards
of ordinary, decent
people, or the ordinary standards of reasonable and honest people. Insofar as
one makes statements, a dishonest
statement will include one made knowing there
is a risk of inaccuracy but makes it with reckless indifference (i.e. not
knowing if
the statement is true or false at the time made): HG & R
Nominees Pty Ltd v Fava [1997] 2 VR 368 at 421.
- After
referring to McCann, the defendants submitted that the case maintained by
the plaintiff, as disclosed in the evidence of Ms Crittle, was of an even more
extreme level of dishonesty than exhibited by Mr Powles in
McCann.
- In
most instances, Mr Moylan did not even advise Ms Crittle of his use of the trust
moneys. In all cases where security was required
to support the disbursement of
funds, he disbursed those funds without having in place the agreed security. In
all cases where the
party to whom the funds were directed had relevant
association with him personally or with his associates, he did not inform Ms
Crittle
of those facts. What was involved, it was submitted, was a gross
misappropriation of large sums of money, on a continuing basis,
in disregard of
the plaintiff’s interests, and in pursuit of conflicting interests. It was
contended that Mr Moylan’s
conduct was self-evidently dishonest and
probably also fraudulent, insofar as the 2006 correspondence (discussed earlier)
represented
to Ms Crittle that she would remain in control.
- It
was then further submitted this dishonest conduct has the obvious direct result
that the exclusion for dishonesty under the professional
indemnity policies
would engage and any claim bearing direct or indirect relationship to that
conduct would not be covered.
- The
defendants further made a contention that the fact of misconduct on the part of
Mr Moylan occurring in 2006 had broader ramifications
than exciting the
exclusion clauses in the insurance contracts. It was contended that the conduct
was self-evidently known to Mr
Moylan prior to the inception of any relevant
policy that could possibly respond to claims against him or his entities. The
issue
for consideration of the Court is the operation of exclusion cl 4.14(b)(i)
of the QBE policy (a fact or circumstance which ought
have previously been given
under a prior policy) and the obligation of the proponent for new insurance
cover to make relevant disclosure
by virtue of s 21 of the Insurance
Contracts Act 1984 (Cth).
- Out
of those contentions, it was submitted that on the face of the case before the
Court, there could be “no serious dispute”
that Mr Moylan, as the
proponent of insurance, would be well aware of the facts constituting his
misconduct. Further, it was contended
no reasonable person could fail to
understand the relevance of such facts to an insurer of a professional indemnity
risk. The available
inference was that a failure to bring such matters to the
insurer’s attention would, itself, be fraudulent.
- It
was also submitted that the financial reports of the Super Fund were dishonestly
prepared by MBS.
- In
a final analysis, the defendants submitted that there was no prospect,
whatsoever, that any of the professional indemnity policies,
identified by the
plaintiff in evidence, could ever respond to the subject matter of the present
proceedings.
- As
to the contentions of the defendants regarding dishonesty exclusions, the
plaintiff submitted that proof of actual fraud or dishonesty
in dispersing funds
would be required to be proved to the Briginshaw standard (see
Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336). That standard, it was
submitted, had not been met in these proceedings.
- As
to the defendants’ submissions as to knowledge of circumstances, it was
correctly submitted by the plaintiff that the defendants
did not plead that Mr
Moylan was in fact dishonest or knowingly failed to disclose matters
constituting misconduct to the insurer.
- Actual
fraud or dishonesty in the context of any claim regarding the Tomkins Facility
Agreement, as well as in the context of knowingly
failing to disclose matters of
misconduct to the insurer, were very serious allegations and ones which could
not be accepted unless
pleaded and proved to the Briginshaw standard.
That standard has not been met. The defendants have neither pleaded nor led any
sufficient evidence to the requisite standard
to demonstrate the propositions
for which they contend, including that the insurer would not have provided
coverage if faced with
a disclosure of such past conduct. In particular, there
was no evidence that Mr Moylan deliberately intended to deceive or cheat
the
plaintiff; especially in a context where it was not proven that Mr Moylan had an
affirmative interest in that particular facility
or loan investment.
- In
the absence of such evidence and specific pleading, the defendants’
submissions as to the applicability of dishonesty and
fraud and prior knowledge
exclusions should be rejected.
Partial recoveries
- It
is, therefore, relevant to consider if by further action to achieve at least
partial recoveries on the River Island and the other
investments against the
borrowers and guarantors.
Rights under the River Island Facility
Agreement
- This
loan was made pursuant to the River Island Facility Agreement dated 10 February
2006 providing for a loan of up to $2.17 million
for a term of 2 years from the
date of the initial draw down notice. The loan was partly drawn down by 30 June
2006 and the loan
had fallen due by the time the first defendant provided the
2007 audit report dated 15 May 2008.
- The
borrower, River Island, was placed in liquidation in February 2013. There were
two guarantors. The first was Mr Tomkins. I have
earlier made observations as to
his financial standing prior to 2012. The other guarantor was Mr Moylan who was
placed into bankruptcy
in April 2013. However, as the defendants correctly
submitted based on the aforementioned principles, the financial position of
borrowers
and guarantors at a particular time is a historical, not a
hypothetical, fact which was required to be proved in the usual way.
- Similarly,
the plaintiff could have exercised rights against both borrower and guarantors
from the date of a non-negligent audit report
on 15 May 2008 but, as discussed
above, it was necessary to prove on the balance of probabilities that the rights
would have been
exercised (as I have earlier found in this judgment) and there
was a substantial, and not a merely speculative, prospect that a benefit
would
be acquired from the exercise of those rights (as I will discuss below).
- The
plaintiff has failed to discharge the onus upon it to prove, on the balance of
probabilities, that there would have been a response
to the plaintiff’s
exercise of its legal rights in this respect.
- The
plaintiff invited the Court to draw an inference that Mr Tomkins had a source of
income, or access to borrowings available to
extend to the exercise of the
plaintiff’s rights because he was servicing his debts apparently without
difficulty (those difficulties
arose in 2012). A creditor’s report
revealed that fact and Ms Jones agreed that Mr Tomkins was not having
difficulties servicing
his existing debts in 2008 and that this was a relevant
factor is assessing his ability in 2008 to meet other debts.
- However,
that does not permit an inference to be drawn that Mr Tomkins had capacity to
pay the amounts sought to be claimed by the
plaintiff. I accept the
defendants’ submission that the matters referred to by the plaintiff were
little more than speculation
as to the relevant entities’ response to an
exercise of rights with regard to the River Island Facility Agreement. I also
note
my earlier findings in respect of Mr Sheppard’s evidence that his
reference to the value of Mr Tomkins’ real estate did
not give the
complete picture of Mr Tomkins’ capacity to meet liabilities.
- To
this may be added that the plaintiff has not established how the same source of
funds may also provide a basis for a response to
the exercise of rights under
the Tomkins Facility Agreement (under which Mr Tomkins was a borrower).
- In
addition, it must be observed that the plaintiff later made recoveries with
respect to this loan and, further, the recovery of
River Island was not against
the borrowers but against Turnbull Hill Lawyers.
- There
was a further submission by the defendants based upon the fact that it was
purportedly common ground that the plaintiff’s
asset in the form of the
loan to River Island, supported by guarantees, was in substance worthless or of
substantially compromised
value. The defendants referred to the pleadings in the
schedule to the second further ASOC and the amended defence and contended
that
it was not open to the plaintiff to make submissions to the contrary. That
submission has substance.
- The
plaintiff submitted that its acceptance of value in its pleadings was that, in
the financial statements, the asset should have
been recorded as being worthless
or of no value, namely, that it was of no value in accordance with accounting
principles and that
the commercial reality of recoveries was not confined to
accounting standards as to recognition and value.
- I
reject the defendants’ submission for the following reasons. The Schedule
to the second further ASOC stated that the financial
statement for the Super
Fund should have recorded the value of the assets as wholly impaired or of no
value. The key to that pleading
(and the counterpart pleading in the amended
defence) was the reference to the financial statement for the Super Fund and, in
particular,
that the particular asset should have been recorded as nil value.
However, the issue that the defendants raised (which this section
of the
judgment is dealing with) was whether the plaintiff may have achieved
recovery with respect to this loan in 2008.
Rights under the
Tomkins Facility Agreement
- Although
it is unnecessary to resolve whether partial recovery could have been achieved
with respect to the Tomkins Facility Agreement,
I briefly note the
following.
- The
Tomkins Facility Agreement was an agreement dated 12 May 2006 for a loan of up
to $616,795 for a term of one year from the date
of an initial draw down notice.
An advance of $400,000 was made on 12 May 2006, the date given to the facility
agreement. A second
advance of $216,795 was made on 9 August 2006.
- The
defendants accepted that the plaintiff had rights under the Tomkins Facility
Agreement and, in fact, exercised them to the plaintiff’s
benefit. Again,
the defendants recognised that the issue was whether a valuable opportunity was
lost to exercise those rights at
an earlier time.
- However,
it was contended by the defendants that, in fact, the plaintiff’s
prospects of recovering the loan must have improved
with the passage of time and
that the plaintiff was better off taking action later because, it was contended,
there was common ground
that at each of the relevant financial years, the asset
represented by the Tomkins Facility Agreement was, in substance, worthless
or of
substantially compromised value. It was submitted that it was not open to the
plaintiff to submit to the contrary. I note my
findings, in that respect, above
at [750].
- Mr
Tomkins was the borrower under this facility agreement. I earlier discussed his
financial standing prior to 2012. None of the other
borrowers, namely L & V
Tomkins, Mr Andrew Tomkins and Ms Deborah Tomkins were bankrupt.
- However,
I make the same conclusions as to this facility agreement as were made in regard
to the River Island Facility Agreement,
namely, that it cannot be inferred that
Mr Tomkins could have utilised his income, borrowings or funds to repay at least
part of
the loan or that there was sufficient funds to do so.
- I
note that the parties made submissions with regard to recoveries made from the
ATO, however, in light of the above findings, that
issue is unnecessary to
resolve.
Cartel Trust
- The
financial statements of the trust disclosed that it had current assets of
$1,325,847 as at 30 June 2008. Ms Jones did not express
an opinion one way or
the other as to the ability or inability of the Cartel Trust to repay in full
the investment as to 30 June
2008.
- However,
I consider that the plaintiff has not discharged its onus of proving the loss of
a valuable opportunity of exercising any
rights as the unit holder of the Cartel
Unit Trust for the following reasons:
- (1) There is in
evidence a Unit Certificate of MCD Holdings, as trustee for the Cartel Trust,
dated 16 June 2006, stated that the
plaintiff was the registered holder of
400,000 T2 class units in the Trust. There is no evidence of what rights the
plaintiff would
have enjoyed as a holder of T2 class units in that trust. It
cannot be assumed that the plaintiff was entitled to simply redeem its
investment whenever it chose to do so. The plaintiff has accordingly failed to
prove that it could have made a cognisable claim as
a unit holder in the Cartel
Trust.
- (2) It is
meaningless to refer to the book value of assets of the trust as supporting
recoverability without identifying the character
of those assets in
circumstances where the plaintiff relied on the unsatisfactory character of
those assets in its liability case.
Limeburners
Trust
- The
financial statements disclosed current assets of $1,814,706 as at 30 June 2008.
However, the evidence included material showing
that the plaintiff was recorded
as the registered holder of two ordinary class units in the trust. I agree with
the submission of
the defendants that there is no evidence of what rights the
plaintiff would have enjoyed as a holder of ordinary class units in that
trust.
I further accept that it cannot be assumed that the plaintiff was entitled to
simply redeem its investments whenever it chose
to.
- The
plaintiff has accordingly failed to prove that it could have made a
“cognisable claim” as a unit holder in the Limeburners
Creek Unit
Trust and, thereby, has failed to prove how any such claim would have been
received. Thus, as with the Cartel Trust, the
book value of the assets of the
Limeburners Trust cannot support recoverability without identifying the
character of those assets
and in circumstances where the plaintiff relies on the
unsatisfactory character of those assets in its liability
case.
Claim against Turnbull Hill Lawyers
- The
defendants accepted that the plaintiff had valuable rights and exercised them
against the partners of Turnbull Hill Lawyers. It
was contended that it could
not, therefore, be said that the opportunity to pursue the partners at Turnbull
Hill Lawyers was lost
by the plaintiff by reason of the auditor’s conduct.
This was accepted by the plaintiff. The dispute was as to the loss of
a valuable
opportunity to exercise rights at an earlier time. That brings up the question
of the delayed exercise of rights.
Category 2: Delayed Exercise
of Right
- Before
considering this next issue, I emphasise that there should be no double counting
for the amounts that are recoverable under
category 1 of loss with any findings
as to loss under this heading. The amounts claimed in that respect were for
recoveries beyond
the recoveries which it had already made. This second
category, namely, the loss of the opportunity to recover earlier those monies
which the plaintiff recovered after 2014, will be considered in this next
section.
- It
is not clear whether the premise of the plaintiff’s case, in this respect,
was that delay in the exercise of legal rights
was, of itself, a form of loss or
damage. The plaintiff’s case is that it lost, in respect of money that it
did recover, the
benefit of making those recoveries at an earlier point in time
(in 2008 or shortly thereafter) and, thus, the loss of the use of
monies up to
the time the recoveries were achieved. It was contended that such a claim was
consistent with the recognition by the
common law that awards of interest are
inherently compensatory in character and, therefore, of themselves, are in the
nature of damages:
Fire & All Risks Insurance Co Ltd v Callinan
[1978] HCA 31; (1978) 140 CLR 427 at 431; Haines v Bendall [1991] HCA 15; (1991) 172 CLR 60 at 66.
Nonetheless, the defendants are correct to submit that the plaintiff was
required to show some detrimental difference to the
plaintiff’s economic
interests in order to discharge the onus of proof falling upon it.
- I
shall deal with each category of claim debated, in that respect,
below.
Claim against partners of Turnbull Hill Lawyers
- On
3 November 2014, proceedings were commenced against the partners of Turnbull
Hill Lawyers. The plaintiff sought equitable compensation
in respect of
unauthorised payments of $2.7 million out of trust funds and, alternatively, the
return of those funds. The unauthorised
payments occurred in February 2006. The
plaintiff also sought compound interest on all sums payable as equitable
compensation or
by way of return of trust property.
- On
18 December 2015, the proceedings were settled for $2.3 million which
represented a substantial compromise on the claim plus almost
10 years of
compound interest. The costs pursuing the claim were $238,586.
- It
was common ground that it was not available to the Court to conclude that the
plaintiff’s return from the prosecution of
the claim was diminished or
reduced because the claim was brought later rather than sooner. The plaintiff
confirmed so in oral submissions.
The defendants’ contention within a
Schedule titled “Defendants’ table in relation to claimed loss and
damage”
(“the defendants’ table on loss”) that there was
no evidence adduced by the plaintiff that the return from the
prosecution of a
claim was diminished or reduced because it was brought later in time, does not
require, therefore, resolution.
- What
was in dispute was whether the Court could infer that, had the plaintiff brought
the same claim in 2008, it would have made the
same recovery (albeit at an
earlier point in time). The defendants submitted that whether the timing of the
claim affected the ultimate
return was a matter of pure speculation and not a
matter about which the Court, in the absence of direct evidence, would draw an
inference. The proper inference, it was contended, was that any evidence
available would not have assisted the plaintiff’s
case.
- Before
turning to the evidence on this question, it is instructive to consider some
authority bearing upon the drawing of inferences
to such a contest.
- A
presumption or inference that the plaintiff could have made the same recoveries
earlier in time is supported by the principle explained
by Isaacs J in
Cloverdell Lumber Co Pty Ltd v Abbott [1924] HCA 4; (1924) 34 CLR 122 at
137-138:
There is also a presumption of evidence that comes in aid of the defendants. The
present existence of facts does in some cases operate
retrospectively as
evidence of former condition (see Phipson on Evidence, 6th ed., at p.
104). It is not necessary to do more than cite three authorative examples. One
is Bristow v Cormican where Lord Blackburn said “The acts of
ownership done in Lord O’Neill’s time from 1837 to 1872 along his
demesne
would justify the jury in drawing an inference that similar acts had
been done during the long interval from 1661 to 1837”.
The next is
Sanders v Sanders where the Court of Appeal held that payment of rents
from 1864 to 1877 was, in the absence of evidence to the contrary, sufficient
to
support the inference of prior payments from 1833 to 1864. The third is even
more direct, Doe v Fuchau, where the insufficiency of a distress on a
certain date was prima facie evidence of an insufficient distress on an earlier
date.
Substitute “sufficiency” for “insufficiency” and
“a sufficient” for “an insufficient,”
and the case is
directly in point.
[Footnotes omitted.]
- The
above passage was applied by Handley JA in State of New South Wales v
Julianne Higgins by her tutor David Benedict O’Shea; Barnardos Australia v
Julianne Higgins [2005] NSWCA 244 at [21], where his Honour also noted at
[22] that the principle remained applicable under the Evidence Act. It
was also applied by Handley JA (with whom Kirby J agreed) in Pace Farm Egg
Products Pty Ltd v Newcastle City Council (2006) 151 LGERA 260;
[2006]
NSWCCA 403 
at [61] and by Handley JA (with whom Tobias JA agreed) in Murphy v
Dorman (2003) 58 NSWLR 51; [2003] NSWCA 249 at [30].
- The
authors of LexisNexis, Cross on Evidence (at 13 September 2018) at [1125]
prefer to describe the presumption of continuance as “a process of logic
or reasoning involving
the drawing of inferences from established facts”.
Where by that process of reasoning a fact may be inferred, the party proving
that fact is “likely to win on the issue to which the presumed fact
relates, in the absence of evidence to the contrary adduced
by the other
party”: Cross on Evidence at [7215]; and see also the reference in
Cloverdell to “in the absence of evidence to the contrary”
(extracted above).
- The
one question which arises in this context is whether the parties against whom
recoveries were made had the same ability to pay
those amounts in 2008 as they
did in 2014-16.
- I
accept the submission of the plaintiff that the defendants failed to adduce any
evidence that the parties against whom recoveries
were made (being Turnbull Hill
Lawyers, the guarantors of the Pacific General Facility Agreement and L & V
Tomkins and the ATO)
had an inferior financial capacity in 2008 than they did at
the time of the actual recoveries that occurred after 2014. Having regard
to the
earlier mentioned presumption of evidence, it may be concluded, therefore, that
the asset position of those parties in 2008
was no worse than it was when the
recoveries were made in 2014.
- Some
further considerations arise with respect to Turnbull Hill Lawyers.
- The
evidence with regard to the claim against Turnbull Hill Lawyers revealed that,
in the settlement of the claim, the plaintiff not
only failed to recover the
full principal sum but made no recovery on account of interest although interest
had been claimed.
- So
far as the drawing of an inference is concerned then the further question
becomes whether the Court should draw an inference that
the same settlement that
was reached in 2015 would have been reached in or about 2008.
- There
is direct evidence that a claim was brought and settled for the sum identified
absent any component for interest. There is nothing
about the subject matter of
the claim or its legal foundation, which would suggest that the approach to its
prosecution would have
been different if it was brought earlier (after the
issuing of a qualified report) than when the claim was, in fact, pressed by the
plaintiff. That leaves in the remainder a question as to the settlement
itself.
- Whilst
not put in relation to the Turnbull Hill Lawyers claim, in the subsequent
submissions concerning the Pacific General Facility
Agreement, the defendants
contended that there was no evidence as to the reasons why the claim against the
guarantors was settled
for the amount that was settled and that the plaintiff
bore the onus to establish any objective reasons why the claim was settled
for
the discounted amount and showing those reasons would have obtained in 2008 with
a consequence that there would have been no
corresponding discount at that
time.
- However,
the defendants did not plead or make any submission that the plaintiff acted
unreasonably in reaching a settlement or failed
in any way to mitigate its loss.
I consider that it is a reasonable inference to draw that same settlement would
have been reached
in or about 2008 than was reached at the later point in
time.
- The
plaintiff failed to recover the full principal sum and made no recovery on
account of interest (although interest had been claimed).
In these
circumstances, the plaintiff was correct to submit that the natural inference
was that, had the plaintiff brought the same
claim for recovery of the $2.7
million in 2008, it would have made the same recovery (of $2.3 million), but at
an earlier point in
time. (It was also contended that was a safer course than
attempting to reach a conclusion that the ultimate return would have been
higher
or lower than the amount in fact recovered, in which case the plaintiff conceded
would be "a matter of pure speculation").
- In
the circumstances, I am satisfied that there was a substantial and not merely
speculative prospect that the plaintiff would have
been financially better off
exercising rights against Turnbull Hill Lawyers in 2008 than in
2014/15.
Claim against guarantors at Pacific General Facility
Agreement
- I
have earlier found that the plaintiff would have recovered the amount of the
loan if it had exercised its rights against the guarantors
pursuant to category
1 of loss. I note, in this respect, there will be no double counting for the
findings for this facility agreement
under category 2.
- As
earlier mentioned, the financial accounts of the plaintiff recorded the
outstanding principal interest associated with this loan
as being $38,298 as at
30 June 2008.
- On
30 June 2014, the plaintiff commenced proceedings in this Court against
guarantors under the Pacific General Facility Agreement.
It claimed judgment for
$826,701.01, being the outstanding loan balance following the most recent
repayment, as well as interest
under the agreement from that time. The evidence
is that, by 31 December 2015, the time value of money had increased the
plaintiff’s
claim to approximately $1.7 million.
- The
guarantee proceedings were fixed for a trial commencing on 1 June 2016. On the
second day of the trial, 2 June 2016 the claim
settled for $850,000. The net
recovery made by the plaintiff was $571,660. This represented, as submitted by
the defendants, a substantial
compromise on the face value of the claim. There
was no amount in the settlement identified as being connected to recovery of the
amount claimed for interest.
- The
same issues arose with respect to the Turnbull Hill Lawyers proceeding (noting
that the Court referred, in that respect, to part
of the defendants’
submissions in this area). I make the same finding with respect to the Pacific
General Facility Agreement
as made with respect to Turnbull Hill
Lawyers.
Tomkins Facility Agreement
- On
13 July 2014, the plaintiff brought Supreme Court proceedings against various
parties in respect of this loan. It claimed judgment
for outstanding principal
and interest under the Tomkins Facility Agreement.
- On
29 February 2016, following a trial, the plaintiff obtained a judgment against L
& V Tomkins in the sum of $1,452,490.86 (calculated
on a principal sum of
$787,324).
- The
plaintiff subsequently exercised its rights under a second mortgage to appoint a
receiver to sell land owned by L & V Tomkins
Pty Ltd. The land was
sold.
- Ultimately
the plaintiff’s return from this claim was $438,141.43 (which was less
than the principal sum amount of the claim).
- The
defendants contended that there was no evidence that the plaintiff was
financially better off exercising rights under the Tomkins
Facility Agreement in
2008 rather than in 2014 (and thereafter achieving recovery in 2016). The
defendants advanced two arguments,
in this respect, in the defendants’
table on loss.
- First,
the defendants submitted that it followed from the “agreed fact”
that the plaintiff would, in fact, have been worse
off taking action with regard
to this facility agreement in 2008. The “agreed fact” appeared to be
a reference to the
pleadings that the asset represented by the Tomkins Facility
Agreement was, in substance, worthless or of substantially compromised
value. I
have earlier rejected a contention advanced on that basis at [750]. I accept the
submission of the plaintiff that the actual recovery made belies the contention
that the loan was “worthless”
even though, as a matter of accounting
practice, it ought to have been recorded on the accounts as being
worthless.
- Secondly,
the defendants submitted that the contention at [794] above was consistent
with Ms Jones’ evidence that L & V Tomkins did not have the capacity
to repay the loan if action
had been brought against it in 2008.
- It
should be noted that the defendants’ table on loss referred to a large
section of Ms Jones’ report of 3 August 2016,
which related to the
recoverability of the loan (see from para 165 to 178 of that report). Within
that report (at para 171), Ms Jones
expressed an opinion that L & V Tomkins
would not have been able to repay the debt owed to the plaintiff from operating
cash
flows or the realisation of unencumbered assets in 2008. Neither party pin
pointed that paragraph of the report, nor made any submissions,
as such, as to
that aspect of Ms Jones’ opinions in that respect.
- The
difficulty with the defendants’ contentions is neither the
defendants’ submissions nor the evidence upon which they
appear to be
based grappled with the financial position of L & V Tomkins between
2008-2016 where recoveries were, in fact, made
or why the prospect of recovery
would be less likely in 2008 (or the period soon thereafter) than 2016.
- The
defendants have failed to demonstrate that the asset position of L & V
Tomkins in 2008 was worse than in was when the recoveries
were made in 2016. Ms
Jones’ evidence did not deal with that question. Her evidence went to the
position in 2008 only.
- In
my view, the plaintiff is entitled to the lost interest of the amounts recovered
but the amounts recovered on this basis will be
considerably reduced by the
virtue of the potential that recovery may not have been obtained in the year
2008. In other words, the
discount for this factor referred to at [665] above would operate
with greater force in this respect. That conclusion will be factored in the
deduction from the overall damages
awarded on that basis.
- The
defendants made an additional submission in defendants’ final reply
submissions that the Court could not be satisfied that
the plaintiff
“would have” sought partial recovery from the ATO of $216,795 in
2013 on a “stolen money” basis
having regard to the way the
plaintiff’s claim against L & V Tomkins was ultimately resolved. The
basis for that proposition
was that the plaintiff had a contractual claim for
the whole of the outstanding amount under the facility agreement, and the
plaintiff
would not have had to have sought partial recovery from the ATO. I
reject that submission on the basis that it involves mere speculation.
There was
no explanation from the defendants as to why the plaintiff’s approach
would have been different if its claim against
L & V Tomkins was brought
earlier in time. The recovery from the ATO had no relevant relationship to the
recovery from the litigation
(and was dealt with in that way by the experts in
their calculation of damages).
- As
to the balance of the defendants’ submissions, for the most part they
follow the same course as the contentions relating
to claims against the
partners of Turnbull Hill Lawyers and claims against the guarantors under the
Pacific General Facility Agreement. In that regard the same conclusion,
as previously reached by the Court, should be applied in this case.
- Again,
I am satisfied that there was a substantial and not merely speculative prospect
that the plaintiff would have been financially
better off exercising rights in
relation to the Tomkins Facility Agreement in 2008 than in 2014/15, and that the
plaintiff should
have access to the time value of money with respect to the
recoveries made from both the ATO and L & V
Tomkins.
Conclusion
Delay
- In
the circumstances, the plaintiff has proved, on the balance of probabilities,
that it suffered loss and damage by reason of any
delay in the exercise of the
legal rights that it, in fact, exercised in 2014 in connection with claims
against Turnbull Hill Lawyers,
the guarantors of the Pacific General Facility
Agreement and claims in relation to the Tomkins Facility Agreement.
- From
15 May 2008, the plaintiff had an available claim against the borrowers and
guarantors for recovery of the funds which had been
loaned (as evidenced by the
causes of action, which were viable and resulted in the plaintiff recovering
monies once Ms Crittle had
discovered the true position of the Super Fund in
2013/14). If the recovery action had been commenced in 2008 rather than in
2013/14,
there was a real and substantial – not merely speculative –
prospect the plaintiff would have made the recoveries at
an earlier point in
time, which properly results in compensatory loss of the use of those monies
from 2008 (noting the earlier observations
as to the commencement date and
adjustments to damages in that light) to the date the recoveries were
made.
Loss
- In
summary, I have found with respect to loss:
- (1) Category 1:
The plaintiff lost the opportunity to recover the unrecovered monies relating to
the Pacific General Facility Agreement
from the guarantors. The plaintiff also
lost the opportunity to recover unrecovered monies relating to the Tomkins
Facility Agreement
through a claim against Moylan Retirement Solutions through
its insurers. It was found that the plaintiff had not proved that unrecovered
monies relating to the River Island Facility Agreement, Cartel Trust and
Limeburners Trust were recoverable.
- (2) Category 2:
The plaintiff lost the benefits of obtaining, earlier in time, recoveries
actually made from claims against Turnbull
Hill Lawyers, the guarantors of the
Pacific General Facility Agreement, and recoveries made in relation the Tomkins
Facility Agreement.
DAMAGES
- The
Court has earlier referred to the principles relating to the assessment of
damages for approved loss of valuable opportunity.
- The
plaintiff’s submissions for damages were predicated upon the assessment of
loss assuming a full recovery as at 30 June 2008.
The starting point of this
analysis was to quantify the loss on the assumption that it was a certainty that
the pursuit of recovery
actions in 2008 would have “yielded a full
recovery at that time” (noting that the plaintiff’s submissions on
loss
were that it would recover “close to 100% of the outstanding amount
on the loans and investments”). In that respect,
the plaintiff’s
expert, Mr Sheppard performed two alternative calculations of loss:
“Damages Claim #1” and “Damages
Claim #2” (counterpart
calculations were undertaken by Ms Jones in relation to those assessments and a
joint report produced).
- In
order to make good this analysis, it was necessary to assign a degree of
probability to the prospect that the plaintiff would have
been able to sooner
achieve recoveries of monies it never recovered (see discussion of category 1
below) and achieve the recoveries
it in fact made (see discussion of category 2
below).
- The
description of those categories of loss upon which damages were to be assessed
were as follows:
- (1) Loss of
chance to make recoveries beyond those that were actually made. These
assessments are predicated on the notion that, if
the plaintiff had pursued
recovery action in 2008, there was a real (not negligible) prospect that it
would have been able to make
some recoveries over and above the recoveries that
it did in fact achieve as set out earlier in this judgment (this section
corresponds
to category 1 of loss).).
- (2) Lost
interest on amounts in fact recovered. The rationale for these calculations was
to suppose that if the plaintiff had commenced
the same recovery action sooner,
it would have made the same recoveries sooner. This assumes that the parities
against whom recoveries
were made had the same ability to pay those amounts in
2008 as they did in 2014-16 (this section corresponds with category 2 of
loss).
- Before
proceeding further, to repeat, I have found that the plaintiff suffered the loss
of a chance or opportunity to make recoveries
for amounts it did not, in fact,
recover, and loss of a chance or opportunity to obtain the benefit of recovering
earlier in time
recoveries actually made. As to category 1 of loss, the
plaintiff lost the opportunity to recover unrecovered monies relating to
the
Pacific General Facility Agreement and Tomkins Facility Agreement. The other
investments were not proved to have been recoverable.
As to category 2 of loss,
the plaintiff lost time value of amounts recovered for claims in relation to
Turnbull Hill Lawyers, the
Pacific General Agreement and the Tomkins Facility
Agreement.
- I
will commence by discussing the calculation of loss assuming full recovery as
calculated in Damages Claim #1 and Damages Claim #2.
Loss
Assuming Full Recovery as at 30 June 2008
Damages Claim #1
- The
Court was provided with a number of calculations prepared by Mr Sheppard and Ms
Jones with respect to the calculation of damages.
- The
first calculation assumed that but for the breaches of duty the plaintiff in 30
June 2008 would have made a full recovery on amounts
of principal and interest
under the loans and investments. Amounts actually recovered are then subtracted.
This method of calculation
– upon which Mr Sheppard and Ms Jones conferred
and produced a joint report – produced a figure (including interest up
to
August 2017) of $4,426,120.
- Whilst
Ms Jones and Mr Sheppard are not ad idem as to the assumptions underlying
this calculation (in particular the assumption that the plaintiff would have
recovered the total
book value of the loans and investments as at 30 June 2008,
and the assumption that the initial investment in Limeburners was $100,000),
they agree on the mathematics of it.
- Notwithstanding
that there was an agreement as to the mathematics performed by Mr Sheppard, Ms
Jones also performed an alternative
calculation based upon the incorrect premise
(as I have found) that the initial investment in Limeburners was $35,000 and not
$100,000
and the plaintiff received receipts in respect of Limeburners after 30
June 2008 of $32,909.
- After
the conclave, Ms Jones prepared a further report dated 24 August 2017. The
plaintiff accepted the assumption adopted by Ms Jones
third report
(vis-à-vis the Cartel Trust) and hence, it was submitted by the
plaintiff, that the Court may proceed on the basis that the correct calculation
of the Damages Claim #1 is either:
- (1) $4,350,448
(as at 31 August 2017 and subject to an adjustment for interest after that date)
– if the initial investment
in Limeburners was $100,000 as assumed by Mr
Sheppard (which was, as noted above, accepted by the Court at [48] above); or
- (2) $4,172,022
(as at 30 April 2017, and subject to adjustment for interest after that date)
– if the Court, nonetheless, concluded
that the initial investment in
Limeburners was $35,000 as assumed by Ms Jones.
Damages
Claim #2
- As
to the second calculation, Mr Sheppard calculated:
- (1) first,
foregone interest on the recoveries that were actually made, assuming the full
amount of those recoveries had been made
in June 2008 – from June 2008
until the recoveries were achieved, at court rates of interest;
- (2) secondly,
as to investment amounts that were never recovered, those amounts plus foregone
interest on those amounts from 30 June
2008 up to the date of trial (at court
rates).
- The
plaintiff correctly contended that the benefit of the alternative calculation
was that it enabled the Court to differentiate between
the opportunity to
achieve sooner the actual recoveries that were in fact made, and the opportunity
to achieve recoveries in respect
of monies that were never recovered, and to
make a separate assessment in each case as to the likelihood the plaintiff would
have
realised that commercial opportunity in June 2008.
- Ms
Jones performed an alternative calculation to that was performed by Mr Sheppard
in that respect was contained in a spread sheet
upon which Mr Sheppard was
cross-examined. She agreed with Mr Sheppard’s calculations but made
calculations based upon alternative
assumptions with respect to the Cartel Trust
and Limeburners Trust. Her calculations were as to the two elements in the
second damages
claim:
- (1) lost
interest on amounts recovered $1,934,106; and
- (2) unrecovered
amounts and interest thereon $2,364,114.
- The
plaintiff accepted Ms Jones’ calculation of Damages Claim #2. Having
regard to that position and the benefits of differentiation
discussed (see at
[668] above), the
Court’s calculation of damages will be based upon Ms Jones’ Damages
Claim #2 (Ex 14 in the proceedings),
provided that ultimately, as the defendants
correctly submitted, recovery of lost interest must be calculated only upon
those investments
for which the Court found recovery may be obtained by the
plaintiff.
- As
noted above, the plaintiff recognised that a further step was required to assign
a degree of probability to the prospect that the
plaintiff would have realised
the commercial opportunity to either achieve sooner the actual recoveries that
were, in fact, made
and to achieve recoveries of monies that were never in fact
recovered. Because these opportunities raise separate issues and potentially
different probabilities of realisation the plaintiff squarely undertook that
task with respect to the two categories of loss.
- I
will return to those methods of calculation below.
Category
1:
Loss of chance to make recoveries beyond those that were actually
achieved
- As
earlier mentioned, the plaintiff submitted that the its loss of opportunity to
make additional recoveries should be quantified
on the basis that the plaintiff
would have recovered close to 100% of the outstanding amounts on the loans and
investments in circumstances
where:
- (1) for the
loan to Pacific General, the probability of a 100% recovery was not
disputed;
- (2) for the
remaining loans (River Island and L & V Tomkins) and investments, there was
a very strong prospect of recovering the
full value of the loans and investments
(and costs) by demand and/or action against the insured parties Moylan, Moylan
Retirement
Solutions and MBS, and (if necessary) by further action against the
borrowers, guarantors and (in the case of the unit trusts) trustees.
The
plaintiff accepted it would not have recovered the same loss from each of the
borrower/guarantor/trustee and the insurance policy
but the availability to
pursue each option led to the conclusion that a greater recovery was more
likely.
- Ms
Jones concluded there was a real prospect that the plaintiff would have made a
full recovery in respect of the Pacific General
Facility Agreement. Accordingly,
I earlier concluded that the plaintiff lost the chance to recover the full book
value of the principal
and accrued interest on that loan as at 30 June 2008.
Allowing for recoveries that were, in fact, made in respect of that investment
(which are then deducted), the loss to the plaintiff for the unrecovered amount
is $267,085: see Damages Claim #2 – “Regional
Land” –
column headed “Sub Total” (the same figure is derived by both Mr
Sheppard and Ms Jones). Having regard
to this conclusion, it was unnecessary to
consider, in this respect, claims against Mr Moylan and his related
entities.
- As
to the claim against Moylan Retirement Solutions and Mr Moylan in regard to the
Tomkins Facility Agreement, I have already noted
that the plaintiff had a claim
that advice given to it to enter into the loans and investments was given
negligently in breach of
professional duty. The plaintiff submitted, and the
Court accepted, that, on its face, the MRS 2008 Policy would have responded to
a
claim brought by the plaintiff. It was submitted that it was highly likely that
such a claim would have succeeded in full, and
that the plaintiff would have
recovered (by demand, settlement or litigation) any costs of the recovery as
well.
- It
may be noted that the Court has found any claims against Moylan Retirement
Solutions and Mr Moylan with regard to the River Island
Facility Agreement,
Cartel Trust and Limeburners Trust would not have been responded to by the
insurance policies.
- In
relation to claims against MBS vis-à-vis the River Island Facility
Agreement, Cartel Trust, Limeburners Trust and Tomkins Facility Agreement, I
have earlier found that any
available claim by the plaintiff for the negligent
preparation of accounts was excluded by the conflict of interest exclusion
clauses
within the insurance policies.
- The
plaintiff submitted that there was a prospect of the plaintiff achieving at
least a partial recovery on the loans and investments
in 2008 by demands and
actions against the borrowers and guarantors. I note at this juncture, that I
rejected the contention that
the plaintiff could have made partial recoveries
with regard to the River Island Facility Agreement and the Cartel and
Limeburners
Trusts. No finding was necessary, in this respect, with regard to
the Tomkins Facility Agreement (although discussed briefly by the
Court).
- The
defendants submitted that the mathematical calculations of Mr Sheppard assumed
that the plaintiff would have incurred no legal
costs in making recoveries in
2008. It was submitted that assumption was not made good on the evidence and was
falsified by the legal
costs, which the plaintiff actually incurred in making
recoveries in the period 2014-2016.
- In
reply, the plaintiff correctly submitted that the its claim in category 1, as
calculated by Ms Jones, was limited to the loss of
the use of those monies from
30 June 2008 to the date the recoveries were made, net of legal costs. That is,
the posited earlier
recovery assumed that plaintiff would have incurred legal
costs in the same amount as they, in fact, occurred. However, the defendants
are
also correct to submit that the consequence of “netting off” those
legal costs was to reduce the net return from
those claims and thereby increase
the remaining outstanding balance of the loans for the purposes of the claim in
category 2. The
aggregate effect is consistent with Mr Sheppard’s
assumption of the plaintiff incurring no legal costs.
- As
to the category 1, I accept the plaintiff’s submission
that:
- (1) There was a
good prospect that the loan under the Pacific General Facility Agreement would
have been recovered without the need
for the plaintiff to expend any significant
legal costs. Ms Jones opined that the guarantors of the Pacific General Facility
Agreement
had the capacity to repay the full amount of the loan in June 2008
"and that the matter would have been resolved without significant
legal costs".
That opinion should be accepted.
- (2) As to the
claim for the Tomkins Facility Agreement where it was necessary for the
plaintiff to incur some legal costs, a claim
for the recovery of those costs
would have been made in any claim against Mr Moylan or Moylan Retirement
Solutions. Thus, if for
example the plaintiff had successfully pursued a claim
to which one of the insurance policies would have responded, the plaintiff
would
also have recovered a substantial portion of its costs.
- (3) There is,
therefore, no warrant for reducing the damages award that relates to amounts
that were never recovered, on account of
legal costs.
- The
defendants further submitted that the plaintiff’s damages calculations do
not account for the fact that a debt claim under
a loan agreement is quite
different from the remedies that could have been pursued against Mr Moylan or
his related companies/entities.
Amounts paid under a loan agreement can be
accounted for as interest with the consequence that the whole of the principal
remains
outstanding. For the purposes of restitution or damages against Mr
Moylan or his related companies, payments received from the borrower
or unit
trust have to be brought to account as reducing the quantum of the
plaintiff’s loss.
- Thus,
on the evidence $2.5 million was advanced under the Pacific General Facility
Agreement and more than that amount ($2,516,239)
was received back from
responsible entity for the Regional Land Fund, even before the plaintiff
recovered the further sum of $850,000
from guarantors.
- The
defendants expanded upon that submission in reply as
follows:
46. [PRS 149]. The defendants’ submission was that $2,516,239 was received
in respect of the Pacific General Facility Agreement
(even before the guarantor
recovery), not $2.5M (amount advanced). The last such payment was received on 30
July 2009 (Plaintiff’s
chronology, item 59) and, in the case of the
$123,845 periodically received from the Cartel Investments Unit Trust, the last
payment
was on 6 January 2009 (Plaintiff’s chronology, item 47). As to
whether those payments, or earlier instalments, would have been
“received
by the plaintiff prior to the date on which any claim by the plaintiff against
Mr Moylan or his related companies”,
the Court is left to guess. This is a
further illustration of a point that was being made at DRCS [339]-[341] and also
made elsewhere
— to this day, the Court has not been provided with any
proper formulation by the plaintiff of what the claims against Mr Moylan
or his
related companies would have been (including their amount).
47. The premise of the plaintiff’s case is essentially that what it
actually did from about mid-2013, it would have done approximately
five years
earlier, from mid-2008. It started bringing litigation from about mid-2014:
Gorczyca 8/7/16, [10], [25] (Ex 1, tab 13).
If claims against Mr Moylan or his
related companies had been pursued from mid-2009 (five years earlier), it is
plain that payments
received up to 30 July 2009 would have needed to be brought
to account.
- I
accept the defendants’ submissions that payments received up to 30 July
2009 would need to be brought to account in any claim
against Mr Moylan or his
related entities. However, I have found that the plaintiff could have recovered
the full amount for Pacific
General without making a claim against Mr Moylan or
his related entities, and therefore that reduction does not need to be made.
The
reduction for the Cartel Trust is also unnecessary because the plaintiff failed
to demonstrate loss in that respect.
Category 2:
Lost interest on amounts in fact recovered
- The
Court has earlier found at [783], [788] and [802] that the plaintiff would have been financially
better off if it exercised its rights for recovery at an earlier point in
time.
- In
the circumstances, the plaintiff has proved, on the balance of probabilities,
that it suffered loss and damage by reason of the
delay in the exercise of the
legal rights that it in fact exercised in 2014 in connection with claims against
Turnbull Hill Lawyers,
the guarantors of the Pacific General Facility Agreement,
and claims in relation to the Tomkins Facility Agreement.
- It
follows that the Court may proceed on the basis that the plaintiff would, in all
likelihood, have made the same recoveries in 2008
that it did in fact make after
2014. Ms Jones’ calculation for this amount in Damages Claim #2 (Ex 14)
was $1,934,106, which
assumed all the losses were proved. That sum needs to be
discounted to accord with my earlier findings where loss has not been
proved.
Conclusion: Damages
- Before
making the calculations under categories 1 and 2, I note that columns 6 and 7 of
Damages Calculation #2 represent the unrecovered
amounts for the loans and
investments and the lost interest on amounts already recovered, respectively
(with the total being the
addition of those columns).
- Adjusting
these figures to align with my earlier findings, I reach the following
conclusions:
- (1) As to the
Pacific General/Regional Land Fund, I found that [824] that the loss to the
plaintiff (exclusive of interest) was $267,085 (see column 6 of Damages
Calculation #2). The total claim for
Pacific General (being the unrecovered
amount ($267,085) and interest on amounts recovered ($345,973)) is
$613,058.
- (2) As to the
Tomkins Facility Agreement, the plaintiff is entitled to unrecovered amounts
($181,267) and interest on the amounts
recovered ($387,351), totalling
$568,618.
- (3) As to the
River Island Facility Agreement, the plaintiff is not entitled to unrecovered
amounts, but is entitled to interest on
amounts actually recovered, being those
amounts recovered from a claim against Turnbull Hill Lawyers, being
$1,197,419.
- (4) As to the
Cartel and Limeburners Trusts, the plaintiff failed to prove that it had a
cognisable claim in regard to either of them,
and therefore had not proved loss
in respect of those other investments. Therefore, the plaintiff is not entitled
to any damages
in those respects.
- Accommodation
will need to be made to those amounts by a discount to the overall damages sum
as a result of my finding at [665] above (and noting that the plaintiff accepted loss
would be close to 100%).
- I
find that damages in the sum of $2,260,140.
AFFIRMATIVE
DEFENCES
Professional Standards Legislation – limits on damages?
- In
the defendants’ overview submissions, an affirmative defence was raised
that, by reason of the application of the Institute
of Chartered Accountants in
Australia (NSW) Scheme (“the NSW Scheme”) under the Professional
Standards Act 1994 (NSW) (“the NSW Act”), any liability of the
defendants for damages, interest or costs in relation to any cause of action
under State law or for contravention of s 52 of the TPA is limited to
$500,000.
- The
defendants aptly identified in the defendants’ overview submissions that
that issue gave rise to five subsidiary issues
which were expressed in the form
of questions which appear below:
- (1) Does the
NSW Scheme apply to the facts of the case?
- (2) If the NSW
Scheme applies, does the requirement to give notification of the limitation of
liability operate as a pre-requisite
to reliance upon the Scheme?
- (3) Do separate
caps apply to the audit opinions for each of the financial years?
- (4) Does each
transaction addressed by each audit opinion give rise to a separate
“claim”?
- (5) Is the
plaintiff able to avoid the consequences of the scheme by maintaining its claim
for breach of the SIS Act, breach of s
52 of the TPA or for breach of statutory
duty?
- A
further issue later arose as to whether the NSW Scheme was capable of applying
to any of the causes of action against the second
defendant. I will describe
that issue as “question 6”.
- In
the plaintiff’s reply to the defendants’ affirmative defences
submission, the plaintiff contended that the NSW Scheme
did not apply with
respect to its claims in contract. The plaintiff contended that the law of the
place of the commission of the
tort was Victoria and so was the proper law of
the audit engagement. That issue shall be dealt with, subject to the question of
federal
jurisdiction to which I return to momentarily, under the first
question.
- The
plaintiff also contended that the NSW Scheme was not available to limit the
defendants’ liability under the TPA because
of choice of law rules of that
Act. That will be dealt with under the fifth question. I note, in that respect,
that the fifth question
also raises the question of the breach of the SIS Act or
breaches of statutory duty which are unnecessary to resolve in the light
of
earlier findings in this judgment.
- Lastly,
an issue emerged as to whether this Court has jurisdictional power to determine
the plaintiff’s claim under the FTA (Vic). I shall deal with that
issue as the seventh question. A related issue was to whether, in the event that
the Professional Standards Act 2003 (Vic) applied, a cap would
operate.
Federal jurisdiction
- There
is no dispute in this matter that this was a case in federal jurisdiction. I
accept the parties concurrence in this respect
for two reasons:
- (1) the
proceedings involve a “matter” between residents of difference
states within the meaning of s 75(iv) of the Australian Constitution;
and
- (2) the matter
involves claims arising under both the TPA and the SIS Act which could be the
subject of a conferral of original jurisdiction
upon the High Court under s 76
of the Australian Constitution. This Court is invested with federal
jurisdiction in the matter: s 39(2) of the Judiciary Act 1903 (Cth) and s
86 of the TPA.
- The
“matter” is not the proceeding but the subject of the controversy
which is amenable to judicial determination in the
proceeding: Croome v
Tasmania [1997] HCA 5; (1997) 191 CLR 119 at 124-125. The “matter” is wider
than the cause or causes of action sued upon and embraces the whole controversy
comprised
of a substratum of facts and claims. All of the plaintiff’s
claims are part of the same matter. Once a matter is within federal
jurisdiction, the whole of the controversy (including claims under State law) is
in federal jurisdiction. There is but one matter
and that matter is entirely
within federal jurisdiction, as distinct from State jurisdiction: Rizeq v
Western Australia (2017) 344 ALR 421; [2017] HCA 23
(“Rizeq”) at [55] per Bell, Gageler, Keane, Nettle and Gordon
JJ.
- That
conclusion concerns the source of the Court’s authority to adjudicate. It
is not a statement about the law that is to be
applied in the exercise of that
authority and, therefore, it is necessary to identify the law that is to be
applied in the exercise
of jurisdiction.
- It
is a simple matter to identify the law applying to the plaintiff’s claims
under the TPA and the SIS Act. Those Acts are laws
of the Commonwealth and apply
of their own force in federal jurisdiction.
- The
Commonwealth of Australia is a single law area, with respect to matters within
federal jurisdiction, and the jurisdiction of a
court exercising federal
jurisdiction is Australia-wide: John Pfeiffer Pty Ltd v Rogerson (2002)
203 CLR 503; [2000] HCA 36 (“John Pfeiffer”) at [18] and [53]
per Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ. It follows that, if all
acts or events in a federal
matter occur within Australia, they all occur within
the jurisdiction. Strictly speaking, the questions which arise in federal
jurisdiction
involve the identification of the applicable law but, that said, an
inquiry as to the applicable law may, nonetheless, involve the
identification of
a choice of law: Blunden v Commonwealth (2003) 218 CLR 330; [2003] HCA 73
(“Blunden”) at [10] per Gleeson CJ, Gummow, Hayne and Heydon
JJ. The applicable law may be determined by reference to ss 79 and 80 of the
Judiciary Act.
- Section
80 of the Judiciary Act enables the application of the common law (as
modified by statute) in the exercise of federal jurisdiction. It is through the
application
of s 80 that common law rules for choice of law may enter the
inquiry as to the applicable law in federal jurisdiction. Section 80 directs the
application of those common law rules, subjected to any modification by the
Constitution or by the statute law in force in the State or Territory where the
court is exercising jurisdiction: Blunden at [18] per Gleeson CJ, Gummow,
Hayne and Heydon JJ, and John Pfeiffer at [55] per Gleeson CJ, Gaudron,
McHugh, Gummow and Hayne JJ.
- As
the common law rules for choice of law have not been relevantly modified by New
South Wales statute (see Hamilton v Merck and Co Inc; Hutchinson v Merck
Sharp and Dohme (Australia) Pty Ltd (2006) 66 NSWLR 48; [2006] NSWCA 55
at [14] per Spigelman CJ, Tobias JA agreeing), those rules (if applicable)
govern this Court in this case.
- The
more general consequence of s 80 is that, subject to choice of law rules, the
applicable common law as modified by New South Wales statute governs the Court
in the
exercise of jurisdiction in this case. These consequences are expressed
to be subject to choice of law rules, because those rules
may require the
application of the law of some other jurisdiction in a particular case. That is
why the application of s 80 must begin with choice of law rules.
- The
application of s 80 of the Judiciary Act is necessarily anterior to the
application of s 79, at least for the reason that s 80 is one of the laws of the
Commonwealth that s 79 is subject to: Blunden at [16]-[17].
- Because
there is but one common law in Australia which is declared by the High Court as
the final court of appeal (Lange v Australian Broadcasting Corporation
[1997] HCA 25; (1997) 189 CLR 520 at 563), it follows that the reference in s 79(1) to the
"laws of each State" can only meaningfully encompass the statutory laws
of each State. There is no common law of a State on which the section could
operate:
Rizeq at [78].
- Section
79 operates to apply the text of State laws conferring or governing powers that
State courts have when exercising State jurisdiction
to, inter alia,
those State courts when exercising federal jurisdiction: Rizeq at [87].
As the defendants submitted (by reference to relevant authority)
that:
- (1) includes
State laws conferring powers to grant remedies (Rizeq at [88] and
Forge v Australian Securities and Investments Commission (2006) 228 CLR
45; [2006] HCA 44 at [112] per Gummow, Hayne and Crennan JJ (with whom Gleeson
CJ, Callinan and Heydon JJ relevantly agreed), barring the court from
entertaining
a claim by reason of the effluxion of time or conferring authority
on the court in specified circumstances to make orders conferring
or declaring
or altering rights or status (Rizeq at [89]); and
- (2) does not
include State laws having application independently of anything done by a court,
which are within State legislative competence
(Rizeq at
[105]).
- As
the Court in this case is exercising federal jurisdiction in the State of New
South Wales, s 79 of the Judiciary Act has the effect that (subject to
any anterior operation of s 80), the statutory laws of New South Wales
conferring powers on the Court or governing how or in what circumstances those
powers are
to be exercised are binding upon the Court in all cases to which such
laws are applicable. Section 79 does not make binding on this Court laws of that
character enacted by any other State or Territory.
Choice of law
in tort
- In
John Pfeiffer, the High Court decided that the law of the place of the
commission of the tort (or lex loci delicti) should be applied as the law
governing all questions of substance to be determined in a proceeding arising
from a tort which has
interstate elements. The Court further decided that laws
that bear upon the existence, extent or enforceability of remedies, rights
and
obligations should be characterised as substantive and not as procedural laws
(at [102]). These include the application of any
limitation period, whether
barring the remedy or extinguishing the right and all questions about the kinds
of damage, or amount of
damages that may be recovered: John Pfeiffer at
[100].
- Hence,
the lex loci delicti will determine the law that is applicable to the
plaintiff’s negligence claim. So much was common ground between the
parties.
- The
common law test for determining the place of the tort is “to look back
over the series of events ... and ask ... where in
substance did this cause of
action arise?”: Distillers Co (Biochemicals) Ltd v Thompson [1971]
AC 458 at 468; Voth v Manildra Flour Mills Pty Ltd [1990] HCA 55; (1990) 171 CLR 538
(“Voth”) at 567; Dow Jones & Co Inc v Gutnick
(2002) 210 CLR 575; [2002] HCA 56 (“Dow Jones”) at [43].
This approach has been described as ascertaining, in a common sense way, what is
the place of “the act on the part
of the defendant which gives the
plaintiff his cause for complaint”: Jackson v Spittall (1870) LR 5
CP 542 at 552, see also Voth at 567.
- In
contending that the plaintiff’s claim in negligence was governed by the
law of Victoria, significant reliance was placed
by the plaintiff on the
judgment of the plurality in Voth. It was contended that, based upon
Voth (at 569) and Agar v Hyde [2000] HCA 41; (2000) 201 CLR 552 at 591; [2000]
HCA 41, that it was well established that, if negligence consisted of a failure
to provide services or advice without proper care, the tort
is committed in the
place where the services were or ought to have been rendered. It was contended
that the circumstances in Voth may be properly characterised as one of
negligent omission, namely, failure to do various things. Thus, in that matter,
even though
the accounting statement had been transmitted from Missouri to
Australia, the place at which the representation was received was
not
determinative of the issue as the act of providing accounting services had been
initiated and completed in Missouri.
- The
defendants sought to distinguish Voth. Attention was initially directed
to the facts in Voth in the defendants’ affirmative defences
submission as follows:
It was a case in which two companies incorporated and resident in New South
Wales sued an accountant who was at all material times
a citizen and resident of
the United States of America, practising in the State of Missouri. The plaintiff
companies sued in negligence;
neither claimed to have been a client of the
defendant accountant. Neither of them carried on business in the United States.
However,
they were part of a group of companies which included a company
operating there and established under the laws of the State of Kansas
(M.M.C.).
M.M.C. was a wholly owned subsidiary of one of the plaintiff companies. It was
M.M.C. who was the client of the defendant
accountant. It was to M.M.C. that the
defendant accountant provided accounting, auditing and related services,
including acting as
taxation agent and preparing taxation returns for that
company.
[Footnotes omitted.]
- It
was further submitted that MCC became indebted to the first plaintiff for
products MCC obtained from other companies in the group
and resold in the United
States. Interest was payable or capitalised on that debt. The Internal Revenue
Code of the United States
made the first plaintiff liable to income tax on that
interest income and imposed an obligation upon MMC to deduct and withhold that
tax from interest which it paid to the first plaintiff. As it happened, it was
contended, MMC did not make the deductions or payments
of withholding tax. It
was alleged that this was the fault of the defendant accountant or those for
whom he was responsible.
- From
this footing, the defendants advanced the following
submission:
32. The plaintiff companies alleged that the defendant accountant owed them
duties of care in respect of the services which he rendered
to M.M.C. The
pleaded negligence involved a failure to inform M.M.C. and other companies in
the group of M.M.C.'s obligation to pay
the withholding tax. That alleged
failure or omission occurred in a context in which the defendant was providing
professional accountancy
services on the basis that withholding tax was not
payable. In that context, the plurality in Voth concluded that, in
substance, the cause of complaint was the act of providing the professional
accountancy services on an incorrect
basis. The act of providing accountancy
services was an act complete in itself, or, if not complete in itself, one that
was initiated
and completed in the one place. That place was Missouri.
33. By contrast, the plaintiffs' characterisation of their claim as involving a
failure to inform was, in those circumstances, a
matter of form rather than
substance. The plurality's characterisation of the matter suggests that the
incorrect basis of accounting
adopted by the defendant accountant may have had
effect without any real communication with M.M.C, as might be the case where a
tax
agent submits a tax return for his or her client. There is no suggestion of
any direct communication or representation. And if there
was, then it seems that
initiation of the act (the incorrect accounting) and its completion (for
example, any communication to seek
approval of the accounting treatment) all
occurred in Missouri in any event.
34. For those reasons, the plurality in Voth stated at 569.5 that the act
which was the cause of complaint was in no way comparable to an act which passes
across space to be completed
in some place different from the place where it was
initiated. Their Honours thus expressly distinguished the case from cases
involving
representations. As their Honours stated, the relevant principle in
those cases is that if a statement is directed from one place
to another place
where it is known or even anticipated that it will be received by the plaintiff,
there is no difficulty in saying
that the statement was, in substance, made at
the place to which it was directed.
[Footnotes omitted.]
- It
was said, therefore, that Voth was a very different factual case from the
present because it was not treated by the plurality as a representation case
because the
act of incorrect accounting could be seen as an act complete in
itself. The plurality referred the substance of the matter because,
as a matter
of classification, the act will be treated as equivalent to a representation. In
the present case, the plaintiff’s
case was not equivalent to a
representation, it was a representation case. Further, in Voth, the
incorrect accounting was not complete in itself for the relevant act was
initiated and pleaded in the same jurisdiction, namely
Missouri. In the present
case, it was submitted, representations were made from Victoria to NSW.
- I
do not consider that the decision in Voth can be distinguished from the
present matter.
- Reference
should be made to two passages of the judgment of the plurality. First, at 567,
the plurality stated:
One thing that is clear from Jackson v. Spittall and from
Distillers is that it is some act of the defendant, and not its
consequences, that must be the focus of attention. Thus, in Distillers
the act of ingestion of the drug Distaval by the plaintiff's mother was ignored,
the place of that act being treated like the place
of the happening of damage,
as one that might have been "quite fortuitous".
- Further,
reference should be made to the passage of the plurality’s judgment at 569
as follows:
And it would seem that that is also the present case, for, in a context in which
the appellant was providing professional accountancy
services on the basis that
withholding tax was not payable, the failure to draw attention to the
requirement that it be paid was,
for all practical purposes, equivalent to a
positive statement that it was not payable. When the case is approached on that
basis
it is clear that, in substance, the cause of complaint is the act of
providing the professional accountancy services on an incorrect
basis. The same
is true if the matter is approached as an omission, for the omission takes its
significance from that same act of
providing those services. That act is in no
way comparable to an act, such as that in Diamond and in The
''Albaforth'', which passes across space to be completed in some place
different from the place where it was initiated. The act of providing
accountancy
services was an act complete in itself, or, if not complete in
itself, one that was initiated and completed in the one place. That
place was
Missouri. The fundamental significance of that simple fact is not diminished
merely because it may be possible, for the
purpose of legal classification, to
treat that act as equivalent to a statement that was received or acted upon in
Australia.
- In
this case, the consequences of the conduct, which I will discuss further below,
were felt in NSW rather than where the defendants
acted in Victoria. However,
Voth stands as authority for the following propositions that were
advanced by the plaintiff (which are reflected in the above
passages):
- (1) In cases of
negligence, where some quality of the defendants’ conducts is critical, it
is usually very important to look
at where the defendant acted and not where the
consequences of the conduct were felt: see also Chubb Insurance Company of
Australia Ltd v Moore (2013) 302 ALR 101; [2013] NSWCA 212
(“Chubb”) at [151] and M Davies, A S Bell and P L G Brereton,
Nygh’s Conflict of Laws in Australia (LexisNexis Butterworths, 9th
ed, 2014) at [20.12].
- (2) It is
necessary to determine where the essential acts and omissions occurred that
initiated the complaint and underpin the allegations
made. The essential enquiry
is to where, in substance, the act or omission giving rise to the complaints
took place: Voth at 567-569, cited for this proposition in Dow Jones
at [43] and Chubb at [151]. The focus is not on all elements of the
claim or cause of action, or where the cause of action became complete: Dow
Jones at [43]; Chubb at [151].
- The
essential flaw in the defendants’ contention as to the distinction between
this matter and Voth is, in my view, that they sought to characterise the
plaintiff’s case in negligence as a representation case. Such a case was
not pleaded by the plaintiff. The substance of the plaintiff’s case at
trial, as earlier discussed in this judgment, was the
failure of the defendants
to conduct a proper audit and to bring to the plaintiff’s attention
certain matters with respect
to the relevant financial years. The alleged acts
of negligence were concerned with the auditor’s opinion and not its
receipt.
Whether the complaint could be properly characterised as a failure to
advise (an omission) or as a negligent misstatement of fact
(a positive act), as
in Voth, the result is the same – the basis for action was the act
of providing professional accountancy services on an incorrect basis
and that
act was initiated and completed in Voth in Missouri and in this case, in
Victoria.
- The
defendants also sought to distinguish Voth on the basis that, in that
case, neither respondent was a client of the overseas accountant. That fact,
while true, was irrelevant
to the majority’s reasoning or conclusion.
Their Honours’ decision turned on the proper characterisation of the
respondents’
claim that the accountant owed to them directly a duty of
care in negligence; that duty was alleged to arise despite the existence
of a
contract or retainer with the accountant; and it was that duty, and its breach,
that was the focus of the Court’s decision
in Voth.
- Further
I accept the plaintiff’s submission that even if, contrary to this
approach, the present case was a representation case,
the substance of the
plaintiff’s complaint remains the negligent failure of the auditor to
carry out the audits properly. That
failure occurred in Victoria and the
“fundamental significance” of that fact is not diminished merely
because it is possible,
for the purposes of legal classification, to treat the
act as equivalent to a statement that was received or acted upon in NSW.
- I
note that my conclusions in this respect are confined to the question of
negligence. I accept that statutory claims of misleading
and deceptive conduct
were advanced by the plaintiff but they are not presently relevant.
- Lastly,
the defendants relied upon two authorities to suggest that Voth was to be
construed in the manner argued for in its submissions and this was how Voth
was “invariably applied”. Reference was made, in that respect,
to Telesto Investments Ltd & v UBS AG (2012) 262 FLR 119; [2012]
NSWSC 44 (“Telesto”) at [197]-[204] (per Ward J) and
Australian Competition and Consumer Commission v Valve Corp (No 3) (2016)
337 ALR 647; [2016] FCA 196 (“Valve Corp”) at
[165]-[188] (per Edelman J). I do not accept that submission.
- Telesto
was concerned with the determination of an application for a permanent stay
of proceedings in NSW having regard to the existence of
separate proceedings in
Singapore between the same parties (at [2]). The plaintiff in those proceedings
opened an investment account
with the Singapore branch of the defendants. In the
NSW proceedings, the plaintiff contended that investment transactions were
entered
into by the defendant without the plaintiff’s authority, that the
defendant breached a duty of care and/or engaged in misleading
or deceptive
conduct (see at [40] and [43]). Contrary to the defendants’ contention,
Ward J’s application of Voth is consistent with the conclusion
reached in this case (noting below the Court’s findings that the law of
NSW applies in the
misrepresentation case). Her Honour held (at
[204]):
[204] An assessment of the three groups of factors leads me to the conclusion
that the most significant connection is with Singapore
(that being where the
account was opened, the banking services were provided and the place
contemplated in the transaction documents
as the non-exclusive place for
resolution of disputes). The alleged misrepresentations or misleading and
deceptive conduct were,
however, received in New South Wales and, on the
authorities referred to above, acted upon by the giving of instructions in New
South Wales.
- In
any event, Ward J’s decision suggests that the case turned on its own
facts and circumstances.
- Valve
Corp concerned proceedings commenced by the Australian Competition and
Consumer Commission (“ACCC”) against the defendant for
misrepresentations contrary to the Australian Consumer Law. It was
concerned with interpreting Voth and Dow Jones for claims under
the Australian Consumer Law only (see at [175]). In any event, Edelman J
recognised (at [173]):
[173] ... Their Honours were considering whether the negligence of the
accountant was committed outside Australia, and rejecting
the suggestion that
the substance of the tort of negligent misstatement is always committed where
the statement is received and acted
upon. They said that there was no such
general rule, “for a statement may be received in one place and acted upon
in another”
(at 568).
- It
follows that the plaintiff’s claim in negligence is governed by the law of
Victoria.
Claim in Contract
- There
was no dispute as to the relevant test or rule to be applied in this context.
The relevant rule is that the Court needs to consider
is the system of law (and
not simply the place) that has the “closest and most real
connection” to the contract: Bonython v Commonwealth [1950] UKPCHCA 3; (1950) 81 CLR
486 at 498. It might be noted that the rule has application in the present case
because the retainers do not expressly select the proper
law.
- Thus,
the issue again becomes the application of the test or rule in the circumstances
of this case.
- The
underlying facts were briefly discussed in relation to the question of tort at
[873] above but may be
more fully outlined in this context as follows:
- (1) the
plaintiff resides in NSW;
- (2) the
defendants had their place of business in Victoria;
- (3) the parties
contemplated the audit would be carried out in Victoria although the audit was
of books and records ordinarily maintained
in NSW;
- (4) the audit
was, in fact, carried out in Victoria; and
- (5) the
retainer was concluded by email exchange by the parties.
- The
place of preparation of the contract and the place of residence of the person
who prepared it was Victoria: see Fleming v Marshall (2011) 279 ALR 737;
[2011] NSWCA 86 (“Fleming”) at [86] per Macfarlan JA
(Spigelman CJ and Sackville AJA agreeing).
- However,
it should be noted that the plaintiff accepted that the place of contract was a
neutral factor.
- If
the rule or test is to be seen as requiring an inquiry into the place where the
contract has “its natural seat or centre
of gravity” (Re United
Railways of the Havana and Regla Warehouses Ltd [1960] Ch 52 at 91; Akai
Pty Ltd v People’s Insurance Co Ltd (1996) 188 CLR 418 at 437), I
consider that the following factors should result in the conclusion that the
contract would be governed by the law of
Victoria:
- (1) The fact
that one party resides or carries on business in Victoria and the other resides
or carries on business in NSW ultimately
results in those locations becoming
neutral factors. However, in this case, for reasons set out in (2) below, the
evidence supports
the inference that the contract was prepared in Victoria by
persons who had their place of business in Victoria: Fleming at
[86].
- (2) The parties
agreed that the place contemplated for contractual performance was of most
significance (this may be contrasted to
where the audit work was carried out).
It was also agreed that this test must be considered as an objective one.
- (3) It is clear
that the defendants resided and carried on their business as auditors in
Victoria, and that is where they carried
out the audit in the present case. The
defendants contended that the plaintiff’s characterisation of audit work
sought to abstract
the communication of the audit opinion from the steps
anterior to the formation of the audit opinion. Reference was made to the
possibility
of the work being performed elsewhere than the ordinary place of
residence and business of the defendants. Emphasis was placed in
this respect
upon the delivery of the audit opinion.
- (4) However,
each retainer referred to the conduct of the audit, the work being undertaken by
the defendants (or the auditor and their
staff), the testing and investigations
that would be undertaken by the auditors, the audit process itself and the
formation of opinions
in the course of the work conducted. The objective
inference is that the parties intended that work under contract would be carried
out at the place where the auditors had their registered office and carried out
their business as auditors in Victoria. The final
communication of the audit
opinions were a step in a process which originated in Victoria. Applying the
test or rule, the receipt
of the ultimate audit advice in NSW does not have the
effect of shifting the natural seat or centre of gravity of the contract to
that
State. I agree with the submission of the plaintiff that the defendants’
approach is artificial and does not reflect the
work actually contemplated by
each retainer.
- (5) The nature
and subject matter of the contract are also relevant but the same factors as (2)
above are applicable in that respect.
- (6) A final
relevant factor is the existence of co-extensive duties owed by the defendants
in tort. As the claim in tort falls to
be determined by the law of Victoria, it
follows that, when the parties contracted, they contemplated that the
defendants’
liability in contract would likewise be governed by Victorian
law.
Questions (2)-(4)
- It
is strictly unnecessary to answer these questions (see above at [844]) in the
light of the above conclusions. I will briefly deal
with the subject matter for
completeness.
- I
accept the submission of the defendants that whilst a failure to give notice of
the relevant scheme limiting liability under s 33(1)
of the NSW Act, a failure
to do so is an offence which does not destroy the professional’s
entitlement to limit liability in
accordance with the scheme provisions.
- I
note the NSW Act limits occupational liability in respect of a “cause of
action”. Section 28(1) provides:
a scheme limits occupation liability, in respect of a cause of action founded on
an act or omission occurring during the period when
the scheme is in force, of
any person to whom the scheme applied at the time when the act or omission
occurred.
- I
do not accept the plaintiff’s contention that, if any cap applies, it
applies to “each, several, cause of action (in
respect of each several
audit)”.
- The
meaning of “cause of action” has been understood as:
- (1) “the
fact or combination of facts which gives rise to a right to sue” (per
Wilson J in Do Carmo v Ford Excavations Pty Ltd [1984] HCA 17; (1984) 154 CLR 234 at
245); and
- (2) being a
factual situation “which entitled one person to obtain from the court a
remedy against another person” (per
Diplock LJ in Letang v Cooper
[1964] EWCA Civ 5; [1965] 1 QB 232 at 242-243).
The defendants correctly
submitted that there are three causes of action in the sense described above,
being one for each audit engagement.
- The
NSW Act then introduces a limitation of the amount of damages which may be
awarded for “single claim” (which is different
from a “cause
of action”). Section 29(1) provides:
A limitation imposed by a scheme in force under this Act of an amount of damages
is a limitation of the amount of damages that may
be awarded for a single claim
and is not a limitation of the amount of damages that may be awarded for all
claims arising out of
a single event.
- The
defendants contended that a single claim may be capable of being supported by
multiple causes of action, because a claim is the
remedy, relief or object
sought (whereas the cause of action is the basis for the remedy, relief or
object sought): see generally
West Wake Price & Co v Ching [1957] 1
WLR 45 at 57.
- In
this case, it was contended there was one claim for unliquidated damages. The
defendants submitted that whilst there are three
claims in reality (being claims
in respect of each audit), if the factual outcome for breach for the 2007 audit
was that all assets
would have been sought to be recovered, there would be no
scope for awarding damages for the following years. I accept (although
it is
unnecessary to decide) the defendants’ submission that the Court is
dealing with the alternative claims.
Question (5) – claim
for contravention of s 52 of the TPA
- Section
87AB(3) of the TPA prescribed the manner in which the Court must resolve that
question. The plaintiff accepted that, in applying
the choice of law rule for
torts in relation to alleged contraventions of s 52, the Court must consider the
conduct that contravened
s 52, which is analogous to the act or omission that
gives the cause for complaint (that is, the relevant conduct for the rule in
tort). The effect of s 87AB(3) of the TPA is that the Court must consider where
the misleading and deceptive conduct occurred, that
being the choice of law
test, without exception, in relation to tort.
- The
defendants contended that for the purposes of the TPA, the representation is the
opinion. It was submitted this was received in
NSW and hence the relevant
legislation was the NSW Scheme.
- The
plaintiff divided its submissions in this respect between the admitted and
non-admitted representations.
- As
to the admitted representations, the defendants accepted that the audit reports
contained an implied representation that the opinions
expressed in them were the
product of the exercise of reasonable care and skill and that that
representation was misleading.
- For
the purposes of determining the proper law for misleading conduct, the place
where the representations were acted upon, and the
jurisdiction where damage
accrues, are not relevant: Telesto at [197] citing Hunter Grain Pty
Ltd v Hyundai Merchant Marine Co Ltd [1993] FCA 133; (1993) 117 ALR 507 (“Hunter
Grain”) (the relevant passage of Hunter Grain is also extracted
in Telesto at [203]). In Voth, the majority said (at
568):
But in every case the place to be assigned to a statement initiated in one place
and received in another is a matter to be determined
by reference to the events
and by asking ... where, in substance, the act took place.
- Similarly,
French J said of s 5 of the TPA in Paper Products Pty Ltd v Tomlinsons
(Rochdale) Ltd (No 2) [1993] FCA 430; (1993) 44 FCR 485 at 493, “[i]t is necessary to
consider not where the cause of action arose but where the conduct relied upon
took place”.
- As
stated by Edelman J in Valve Corp at [172]-[174], the majority in
Voth rejected the suggestion that the substance of the tort of negligent
misstatement is always committed where the statement is received
and acted upon.
His Honour then continued at [175] to remark that, in the statutory context of
the TPA, there should be no requirement
that a statement be
‘directed’ from one place to another: such that there can be no
general rule to the effect that the
place where the conduct occurred is where
the representation was received.
- The
defendants contended that the “conduct” occurs where the
representation is communicated to, and referred to [174],
[176]-[177] and [188]
of Valve Corp. However, that submission should be rejected because at
[178], Edelman J found that the conduct relied upon by the ACCC in that case
did
not occur in Washington State, rather the background to the conduct involved a
significant Australian context.
- The
cause of the complaint and background in this case, as I have found, was the act
of providing professional auditing services on
an incorrect basis, which was
initiated and completed in Victoria. It is that conduct which gives rise to the
contravention of s
52 of the TPA.
- As
to the non-admitted representations, having regard to the findings earlier made
in this judgment (see at [602] above), the conduct under consideration is not
limited to the publication of the report but concerned the provision of auditing
services. The choice of law rules for a tort would apply to Victorian law in
relation to the defendants’ conduct in this case
insofar as the conduct
contravened s 52 of the TPA.
The second defendant
- The
plaintiff made a separate submission as to why the NSW Scheme, if it operated,
did not apply to the second defendant.
- The
submission advanced in support of this proposition was as
follows:
- (1) Clause 2 of
the NSW Scheme sets out the persons to whom the scheme applies. Those persons
are relevantly set out in cll 2.2 and
2.3, which are in the following
terms:
2.2 All members who hold a current Certificate of Public
Practice issued by the Institute and affiliate members of the Institute,
other
than financial services licensees.
2.3 All practice entity members of the Institute, other than financial services
licensees.
(2) There is no evidence that at any relevant time the second defendant
was:
- (a) a member of
the Chartered Accounts in Australia (“the Institute”) and held a
current Certificate of Public Practice
issued by the Institute;
- (b) an
affiliate member of the Institute; or
- (c) a practice
entity member of the Institute.
- In
reply, the defendants contended that submission ignored cl 2.1 of the NSW Scheme
which provided that, in addition to “participating
members, the scheme
applied to “all persons to whom the scheme applied at the time of the
relevant act or omission”.
That provision, it was submitted, directed
attention to ss 18 and 19 of the NSW Act as indicated by the NSW Scheme footnote
(1).
Section 18(2) was the relevant provision that provides that “[i]f a
scheme applies to a person, the scheme also applies to
each partner of the
person”.
- I
accept the defendants’ submissions in this respect as summarised
above.
The Victorian Scheme
- Findings
that the Victorian law applied brings into consideration the Professional
Standards Legislation in Victoria, the Professional Standards Act 2003
(Vic) (“the Victorian Act”) and a similar scheme approved under
that legislation (“the Victorian Scheme”).
The plaintiff accepted
the scheme had potential application in this case. However, the Victorian Scheme
only applied where the professional
has given to the client a notification in
the form required by the Victorian Act (see s 30(2)). The plaintiff contended
that neither
the first or second defendants ever gave such a notification to the
plaintiff in respect of the 2007 audit.
- The
defendants made no pleading in this respect but I accept their submission that
the defendants put the Victorian Scheme in issue
in the proceedings. The
defendants submitted that the limitation of liability under the Victorian Scheme
applied because a statutory
notification was given. The defendants relied upon
email communications in the plaintiff’s chronology being items 34 and 35
as described below.
- I
do not accept the defendants’ submission in this respect. The first
defendant did not give either Mr Moylan or the plaintiff
disclosure in the form
required by the Victorian Act. The email communications (items 34 and 35 of the
plaintiff’s chronology)
relied upon by the defendants do not assist them.
The first email was sent on 6 May 2008 from Mr David Burrows to Mr Stuart
Peberdy
of Moylan Business Solutions and was not provided by the relevant
professional, namely the auditor, the first defendant. The email
was sent by Mr
Burrows. There was no evidence as concerning Mr Burrows’ employment or
engagement. The first defendant was not
copied into the email nor was there
evidence that the email was sent to the plaintiff. It was sent to Moylan
Business Solutions.
- Further,
the defendants did not demonstrate that Moylan Business Solutions was an agent
for the plaintiff for the purposes of receiving
notification about such
limitations of liability. I also accept the plaintiff’s submission the
email was sent after the conduct
of the audit had commenced. The conduct of the
audit was the act giving rise to the claims. As to the second email of 15 May
2008
from Mr Burrows to Ms Stephanie Hinds, the same conclusions may be
reached.
State Fair Trading Acts
- The
plaintiff accepted that the NSW Scheme applied to limit the defendants’
liability under the FTA (NSW).
- However,
the plaintiff contended that this Court had jurisdiction to hear and determine a
claim for relief under the FTA (Vic) and further that the NSW Scheme did
not apply to limit the defendants’ liability under that Act by virtue of s
11 of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth)
(“CVA”).
- The
defendants contended that the Court had jurisdiction to determine a claim under
the FTA (Vic) but did not have the power to grant
relief under that Act.
- The
defendants’ acceptance of the existence of jurisdiction is predicated upon
the following (some of which overlaps with the
earlier discussion of the
conferral upon this Court in the present matter of a federal
jurisdiction):
- (1) Once the
matter is within federal jurisdiction, the whole of the controversy is in
federal law. There is but one matter, and that
matter is entirely within federal
jurisdiction.
- (2) The
plaintiff placed reliance upon the “accrued” jurisdiction of the
Federal Court had these proceedings been maintained
in that forum but that
expression is best avoided: Rizeq at [55]. A court exercising federal
jurisdiction has authority to decide claims under State law forming part of the
one matter with
claims under Federal law. The authority of a court exercising
federal jurisdiction to decide claims under State law is not to be
found in the
common law or the State statute but this Court has (Federal) jurisdiction with
respect to the plaintiff’s claim
under the FTA (Vic).
- (3) The
plaintiff’s acceptance that, but for s 4(1) of the CVA, this Court would
not have jurisdiction with respect to a claim
under the FTA (Vic) is wrong.
- (4) As is
apparent from Poignand v NZI Securities Ltd [1992] FCA 369; (1992) 37 FCR 363
(“Poignand”) at 368, s 4(1) of the CVA does not operate where
there is already an investment of jurisdiction in the Supreme Court. This
Court
has jurisdiction by operation of s 86 of the TPA. So far as claims under State
law are concerned, those powers are identified
by the application of ss 79 and
80 of the Judiciary Act.
- (5) While it
can be accepted that the norm of conduct under s 9 of the FTA (Vic) applied to
the defendants’ conduct in NSW,
it is a different thing altogether to say
that the power to award damages under s 159 of that Act could apply of its own
force to
a NSW court exercising State jurisdiction. What gives courts the
authority to decide a matter is the law of the polity of the courts
concerned
not some attempted conferral of jurisdiction on those courts by the legislature
of another polity. Hence, s 159 of the
FTA (Vic) is to be properly interpreted
as applying to a Victorian court only, and only when exercising State
jurisdiction: Rizeq at [104].
- (6) However, a
combination of s 4 of the Jurisdiction of Courts (Cross-Vesting) Act 1987
(Vic) and s 9 of the Jurisdiction of Courts (Cross-Vesting) Act 1987
(NSW) mean that a NSW court could exercise the power under s 159 of the FTA
(Vic) through cross-vested jurisdiction.
- (7) Section
79(1) of the Judiciary Act applies without any anterior operation of s
80.
- (8) As
explained in Rizeq, where the court is sitting in NSW, the statutory laws
of that State conferring powers on courts or governing how or in what
circumstances
those powers are to be exercised are binding upon that court in
all cases to which such laws are applicable. Hence, s 68 of the FTA (NSW) (in
the form of the section as it applied to the offence) is picked up and applied
as a Commonwealth law in this
matter. By contrast, Victorian laws conferring
powers on courts are not picked up by s 79(1) of the Judiciary Act. As a
consequence, neither the right of action under s 159 of the FTA (Vic), nor the
associated power to award damages, are picked
up as forming part of the law to
be applied by this Court exercising federal jurisdiction. The right of action
under s 159 is relevantly
inseparable from the power to award damages, in the
same way that a right to recover contribution is inseparable from the power to
order contribution (even if located in different provision of an Act): Rizeq
at [100]. Neither provision is capable of applying in federal jurisdiction
of its own force (as State law). They only apply, if at
all, by force of s 79 of
the Judiciary Act.
- (9) It follows
that there is no action for damages available under s 159 of the FTA (Vic) in a
court exercising federal jurisdiction
in NSW. The plaintiff’s claim to
relief under that Act is incompetent and must be dismissed. This result is a
consequence of
the fact, recognised by the High Court in John Pfeiffer at
[58], that where a court is exercising Federal jurisdiction, the existence,
extent and enforceability of rights and obligations
of the parties may be
significantly affected by where the court sits.
- The
plaintiff attached significant reliance in its reply to the defendants’
affirmative defences submission on s 11 of the CVA.
Section 11(1) is in the
following terms:
(1) Where it appears to a court that the court will, or will be likely to, in
determining a matter for determination in a proceeding,
be exercising
jurisdiction conferred by this Act or by a law of a State relating to
cross-vesting of jurisdiction:
(a) subject to paragraphs (b) and (c), the court shall,
in determining that matter, apply the law in force in the State or Territory
in
which the court is sitting (including choice of law rules);
(b) subject to paragraph (c), if that matter is a right of action arising under
a written law of another State or Territory, the
court shall, in determining
that matter, apply the written and unwritten law of that other State or
Territory; and
(c) the rules of evidence and procedure to be applied in dealing with that
matter shall be such as the court considers appropriate
in the circumstances,
being rules that are applied in a superior court in Australia or in an external
Territory.
- The
plaintiff submitted that this Court was exercising the jurisdiction conferred
under s 4 of the CVA and, as the claim under the
FTA (Vic) is a right of action
arising under a written law of Victoria, this Court must apply the written and
unwritten law of Victoria
in determining the claim. It was submitted that NSW
law, including NSW Professional Standards Legislation, had no
application.
Conclusion as to State Fair Trading Acts
- The
FTA (Vic) applied to the defendants’ conduct outside Victoria in
consequence of the operation of s 6 of that Act because
the defendants were
residents of Victoria. As submitted by the defendants, their residency provides
the requisite connection between
the subject matter of the legislation in the
State of Victoria.
- The
FTA (Vic) prescribes a “norm” or standard of conduct (see s 9). That
is, the law has application independently of
anything done by a Court: Rizeq
at [150].
- The
power to award damages under s 159 of the FTA (Vic) by, inter alia,
“any court of competent jurisdiction” does not extend, by its own
force, to this Court when exercising State jurisdiction:
Re Wakim; Ex parte
McNally (1999) 198 CLR 511; [1999] HCA 27 at [108] per Gummow and Hayne JJ;
Chubb at [201] per Emmett JA and Ball J (with Bathurst CJ, Beazley P and
Macfarlan JA agreeing).
- The
power under s 159 of the FTA (Vic), so far as the exercise of State jurisdiction
is concerned, may only be exercised by a Victorian
court of competent
jurisdiction.
- As
I have found, the Court in this matter is exercising federal jurisdiction and,
in that respect, s 80 of the Judiciary Act does not direct the
application of any choice of law rule for this statutory claim. By way of
expansion of my earlier considerations,
in relation to this affirmative defence,
I consider that s 79(1) of the Judiciary Act does apply such that, as the
Court is sitting in NSW, the statutory laws of that State conferring powers on
courts or governing how
or in what circumstances those powers are exercised are
binding upon the Court when exercising federal jurisdiction. In the result,
s 68
of the FTA (NSW) is “picked up” and applied as a Commonwealth law in
this matter.
- By
the same reasoning, the Victorian laws under the FTA (Vic) are not picked up by
s 79 and, in consequence, neither a right of action under s 159 of the FTA
(Vic), nor the associated power to award damages, are picked
up as part of the
law to be applied by this Court exercising federal jurisdiction. I agree with
the submission of the defendant that
the right of action under s 159 was
relevantly inseparable from the power to award damages in the same way as a
right to recover
contribution is inseparable from a power to order contribution,
even if located in a different provision of an Act: Rizeq at [100].
Neither provision is capable of applying federal jurisdiction of its own force
as a State law and may only apply by the
operation of s 79 of the Judiciary
Act.
- The
plaintiff contended that this Court had jurisdiction by virtue of s 4(1) of the
CVA. However, I agree with the defendants that
the premise of this argument is
this Court does not have jurisdiction without the operation of s 4(1) of that
Act. As I have found,
this Court does have jurisdiction by virtue of s 86(2) of
the TPA and s 39(2) of the Judiciary Act. Section 4 of the CVA does not
operate where there is already an investment of jurisdiction in the Supreme
Court: see Poignand at 368 (also referred to, with approval, in R v
Wilcox; Ex parte Venture Industries Pty Ltd [1996] FCA 1497; (1996) 66 FCR 511 at 521). There
is no room for the operation of s 4(1) of the CVA in those circumstances.
- The
reliance by the plaintiff upon the accrued jurisdiction of the Federal Court
does not assist the case for the plaintiff in this
respect. The High Court
warned against the use of the expression “accrued jurisdiction” in
Rizeq at [55]. The Court having federal jurisdiction has authority to
decide claims under State law forming part of one matter with claims
under
Federal law but must separately identify the powers that are available to be
exercised in the federal jurisdiction –
in this case, those powers are
identified by application of s 79 of the Judiciary Act.
- In
the result, the plaintiff’s claim for relief under the FTA (Vic) is
incompetent.
Conclusion as to Professional Standards Scheme
Cap
- In
summary, the Court has reached the following conclusions with respect to this
affirmative defence:
- (1) the
relevant conduct occurred in Victoria and, as such, the relevant law to the
claim in tort is the law of Victoria;
- (2) the claim
in contract is to be governed by the law of Victoria;
- (3) hence, the
NSW Scheme does not apply to those claims;
- (4) the conduct
which gave rise to a contravention of s 52 of the TPA occurred in Victoria and,
therefore, the choice of law rules
for a tort apply to Victorian law in relation
to the defendants’ conduct in contravention of s 52;
- (5) the
Victorian Scheme did not apply because the defendants did not give notification
in the form required; and
- (6) the
plaintiff’s claim for relief under the FTA (Vic) is
incompetent.
Contributory Negligence
- After
the Court reserved judgment in this matter, the plaintiff (with consent from the
defendants) provided, for the Court’s
assistance, a judgment of the New
South Wales Court of Appeal delivered 23 May 2018: Cam & Bear Pty Ltd v
McGoldrick [2018] NSWCA 110 (“Cam & Bear”).
- No
doubt that judgment attracted attention because the appeal arose out of the
determination of a claim for damages for negligence
and misleading and deceptive
conduct brought by the trustee of a SMSF (for the benefit of a Dr Bear and his
wife) against the respondent
who was an accountant auditing the accounts of that
fund. It was alleged at first instance that the respondent had breached his duty
of care and engaged in misleading and deceptive conduct by failing to qualify
the audit reports as to the possibility that the assets
described in the
fund’s financial statements as “cash” may not be recoverable
as they, in fact, concerned unsecured
loans to a company associated with a
friend of Dr Bear’s. The decision below also concerned a statement in the
audit reports
to the effect that the financial statements presented fairly the
financial position of the fund and the results of its operations
and its cash
flows.
- Like
this matter, the judgment of Macfarlan JA (with whom McColl AP and White JA
agreed) proceeded upon the basis that neither of
the parties had suggested the
appropriate approach to contributory negligence was dependent upon which cause
of action succeeded.
As a result, his Honour derived the relevant principles for
the determination of the matter from the principles applicable to an
action at
law for damages for negligence. In the broad, I propose to adopt the same
approach drawing substantially from his Honour’s
description the relevant
principles and, in part, from his reasoning as to contributory negligence.
- His
Honour initially directed attention (as did the defendants in this matter) to s
9 of the Law Reform (Miscellaneous Provisions) Act 1965 (NSW), s 5R(1) of
the Civil Liability Act as well as the judgment of the High Court in
Astley v Austrust Ltd (1999) 197 CLR 1; [1999] HCA 6
(“Astley”). Those passages of the judgment in Cam &
Bear were as follows (at [80] and [81]):
[80] Section 9 of the Law Reform (Miscellaneous Provisions) Act 1965
(NSW) provides that if a claimant for damages in a negligence action is
guilty of contributory negligence, its damages are to be “reduced
to such
extent as the court thinks just and equitable having regard to the
claimant’s share in the responsibility for the damage”.
Section
5R(1) of the Civil Liability Act 2002 (NSW) (“the CLA”)
provides that the principles applicable to determining whether a defendant has
been negligent also apply
to determining whether a claimant has been
contributorily negligent in failing to take precautions against the risk of harm
to the
claimant. Section 5R(2) stipulates that the relevant standard is that of
a reasonable person in the position of the claimant and is to be applied on the
basis of what the claimant knew or ought to have known at the time.
[81] In Astley v Austrust Ltd (1999) 197 CLR 1; [1999] HCA 6 at [23], the
majority justices referred to earlier decisions suggesting that
“contributory negligence cannot be made out in circumstances
where the
very purpose of the duty owed by the defendant was to protect the
plaintiff’s property”. They proceeded however
at [29] and [30] to
hold that there was no rule that apportionment legislation did not operate in
such circumstances. As an example,
they said that “a plaintiff who
carelessly leaves valuables lying about may be guilty of contributory
negligence, calling for
apportionment of loss, even if the defendant was
employed to protect the plaintiff’s valuables”. Their Honours stated
that, whilst there was no “absolute rule”, the “duties and
responsibilities” of the defendant were to be
taken into account in
determining whether, and to what extent, the plaintiff was guilty of
contributory negligence. Their Honours
found that the plaintiff in that case, a
public trustee company, had been guilty of contributory negligence (in failing
to inquire
whether certain borrowings and interest could be repaid),
notwithstanding that that subject matter fell within the defendant
solicitors’
retainer to provide advice to the plaintiff. Their Honours did
not proceed to quantify the extent of the plaintiff’s responsibility
for
its own loss as their Honours held that contributory negligence was not
available as a defence in light of the statutory provisions
(since amended)
applicable in the circumstances of that case.
- It
is convenient to refer to a passage of the judgment in Astley in the
present context (at [30]) where the majority (per Gleeson CJ, McHugh, Gummow and
Hayne JJ):
[30] A finding of contributory negligence turns on a factual investigation of
whether the plaintiff contributed to his or her own
loss by failing to take
reasonable care of his or her person or property. What is reasonable care
depends on the circumstances of
the case. In many cases, it may be proper for a
plaintiff to rely on the defendant to perform its duty. But there is no absolute
rule. The duties and responsibilities of the defendant are a variable factor in
determining whether contributory negligence exists
and, if so, to what degree.
In some cases, the nature of the duty owed may exculpate the plaintiff from a
claim of contributory negligence;
in other cases the nature of that duty may
reduce the plaintiff's share of responsibility for the damage suffered; and in
yet other
cases the nature of the duty may not prevent a finding that the
plaintiff failed to take reasonable care for the safety of his or
her person or
property. Contributory negligence focuses on the conduct of the plaintiff. The
duty owed by the defendant, although
relevant, is one only of the many factors
that must be weighed in determining whether the plaintiff has so conducted
itself that
it failed to take reasonable care for the safety of its person or
property.
[Footnote omitted.]
- In
Cam & Bear, Macfarlan JA then turned to the provisions of s 5R(2)(a)
of the Civil Liability Act as follows (at [83]):
[83] In considering contributory negligence, s 5R(2)(a) (quoted in [80] above)
requires regard to be had to how a reasonable person “in the position
of” the claimant would have
acted. There is no doubt that this provision
permits the application of the common law principle stated in Rogers v
Whitaker [1992] HCA 58; (1992) 175 CLR 479 at 487; [1992] HCA 58 that “the standard
of care to be observed by a person with some special skill or competence is that
of the ordinary skilled
person exercising and professing to have that special
skill”. The extent to which it allows or requires a plaintiff’s
disabilities to be taken into account when considering contributory negligence
has however been the subject of discussion (see for
example Boral Bricks Pty
Ltd v Cosmidis (No 2) (2014) 86 NSWLR 393; [2014] NSWCA 139 at [87]- [88];
T & X Company Pty Ltd v Chivas [2014] NSWCA 235 at [48]- [56]; [2014] NSWCA 235; (2014)
67 MVR 297, in each case per Basten JA, referring in particular to Joslyn v
Berryman (2003) 214 CLR 552; [2003] HCA 34 at [32]- [39] per McHugh
J).
- In
the consideration of Cam & Bear, it is worth noting that both parties
accepted that the standard of care required in an assessment of whether a
plaintiff has failed
to take reasonable care is that of a “reasonable
person in the position of the plaintiff... on the basis of what the plaintiff
knew or ought to have known at the time”: see T & X Company Pty Ltd
v Chivas [2014] NSWCA 235 at [4] (per Beazley P).
- In
the application of those principles, Macfarlan JA commenced by reviewing some of
the particular circumstances of that matter which
resonate in the present case.
His Honour stated (at [84]):
[84] The issue does not arise in the present case as Dr Bear did not have any
relevant disability. Certainly, he lacked any special
expertise in financial
matters but that simply results in it being necessary to treat him as a person
of ordinary capabilities in
considering the standard of care he ought to have
attained. I add that the appellant, correctly, did not contend that it was not
responsible for any default on the part of its directors. No doubt, it was so
responsible, either because the directors were effectively
acting as the company
itself or the directors were persons for whom the appellant was vicariously
liable (see Daniels v Anderson (1995) 37 NSWLR 438 at
570).
- Further,
Macfarlan JA held (at [89]):
[89] In making an apportionment based on a plaintiff’s contributory
negligence, the Court must consider “the degree of
departure from the
standard of care of the reasonable man” and “the relative importance
of the acts of the parties in
causing the damage” (Podrebersek v
Australian Iron & Steel Pty Ltd [1985] HCA 34; (1985) 59 [ALR 529 at
532-3]).
- The
reference by Macfarlan JA to Podrebersek v Australian Iron & Steel Pty
Ltd [1985] HCA 34; (1985) 59 ALR 529 (“Podrebersek”) at 532-533 is
extracted below:
The making of an apportionment as between a plaintiff and a defendant of their
respective shares in the responsibility for the damage
involves a comparison
both of culpability, ie of the degree of departure from the standard of care of
the reasonable man (Pennington v Norris [1956] HCA 26; (1956) 96 CLR 10 at 16) and of
the relative importance of the acts of the parties in causing the damage:
Stapley v Gypsum Mines Ltd [1953] UKHL 4; [1953] AC 663 at 682; Smith v McIntyre
[1958] TASStRp 11; [1958] Tas SR 36 at 42–49 and Broadhurst v Millman [1976] VicRp 15; [1976] VR 208 at
219 , and cases there cited.
- The
plaintiff also relied upon the following passage from Polon at [877] (per
Hall J):
[877] In determining contributory negligence, a comparison is required of the
degree of fault or culpability on the part of each
of the parties. That
consideration occurs in the context of a comparison between the lack of care of
one party with the lack of care
of the other and then a determination, having
assessed the culpability and the causal potency of the relevant acts, of the
degree
of contributory negligence on the part of the plaintiff: see
Podrebersek v Australian Iron & Steel Pty Ltd [1985] HCA 34; (1985) 59 ALR 529 at
523; Ghunaim v Bart [2004] NSWCA 28 per McColl JA at [71]. As the High
Court observed in Podrebersek, it is the whole of the conduct of each
negligent party in relation to the circumstances of the case that must be
subjected to comparative
examination.
- In
Daniels v Anderson, Clarke and Sheller JJA observed (at
568):
The role of the auditor ... will, almost certainly, be relevant in considering
questions of apportionment and it may be appropriate,
in particular
circumstances, to make a finding that it is just and equitable that, for
instance, the auditor bear all the damages
despite the fault of the
client.
- Ms
Crittle was a homemaker of retirement age who had no investment or accounting
training, experience or knowledge. After receiving
a substantial sum of money,
she sought financial advice from Mr Moylan because he was recommended to her by
Mr Hill. As earlier found,
Mr Hill was a long term friend and solicitor whom she
trusted. Ms Crittle then transferred over $7 million to the Turnbull Hill
Lawyers
trust account to be invested in accordance with Mr Moylan’s
advice. As mentioned above, one of the reasons for establishing
the Super Fund
was to “stay in control” of the investments. When cross-examined,
the effect of Ms Crittle’s evidence
was that she had control over the
investments, but that control was subject to advice.
- Ms
Crittle only knew about the Pacific General Facility Agreement and the
investment of $2.5 million in accordance with that agreement.
Whilst she knew
about the Tomkins Facility Agreement, those funds were disbursed without her
direction or permission (although this
is not to say that the plaintiff’s
loan pursuant to that agreement was other than on Mr Moylan’s advice, and
further
that there was any dishonesty or fraud in the giving of that advice).
That left a significant sum of investments of which Ms Crittle
did not know of
or inquire about.
- A
more experienced and astute investor would have been concerned to know what
investments were being made with the money that she
had transferred to the
Turnbull Hill Lawyers trust account, and whether those investments were sound.
Ms Crittle’s understanding
was not at this level of sophistication, no
doubt partly because she had great confidence in Mr Hill and his recommendation
of Mr
Moylan. Of equal importance, however, is that Ms Crittle lacked the
experience and expertise to grapple with the concepts involved
in
investing.
- On
the other hand, the first defendant was a very experienced accountant and
auditor; who was engaged for the purpose of protecting
the Super Fund and its
trustee against financial risks that included the very types of risks that
eventuated (see finding above at
[594]), namely, that the investments were not in
accordance with the investment strategies and that they were worthless or of
substantially
compromised value.
- For
the reasons given earlier in relation to breach, the defendants were negligent
in, inter alia, failing to exercise reasonable care in the preparation of
the audit reports (including and beyond the admissions), failing to inquire
and
report into whether the investments were made in accordance with an investment
strategy that had regard to all the circumstances
of the Super Fund, and failing
to report serious misdescriptions and other circumstances to the plaintiff.
- As
to the ”degree of departure from the standard of care of the reasonable
[person]”, I consider the plaintiff, through
its sole director Ms Crittle,
did depart from the standard of care that a reasonable person would have applied
to protect his or
her own interests; but the departure from that standard was
very limited. Even a person with Ms Crittle’s lack of financial
sophistication or relevant occupational experience, should reasonably have
considered the prudence of supplying significant amounts
of money to Turnbull
Hill Lawyers to be invested by Mr Moylan without further inquiry (see Cam
& Bear at [89]).
- It
should be noted that in Cam & Bear, there was evidence that Dr Bear
relied on the supply of audited accounts. I have found above at [587] that there was an
inference that Ms Crittle relied on the audit reports (see at [596]). Further, Ms
Crittle knew that the Super Fund was required to have an auditor; she thought
their job was to scrutinise what work
the accountants did; and her limited
knowledge of the role gave her great comfort). Nonetheless, the lack of
sophistication and her
reliance upon the advice of Mr Moylan and Mr Hill limits
the criticism that can be made of her.
- On
the other hand, the first defendant’s departure from the standards of a
reasonable person in his position, being an experienced
accountant and auditor,
was significant. The defendants’ breaches were not contributed by having
inadequate internal controls
upon which the first defendant could reasonably
place any reliance. (See the above discussion which rejected the
defendants’
contention as to the reliance upon the representation letter
as a safe basis to proceed upon the audit from [435]-[439]. See also Cam
& Bear at [89]). Rather, the defendants defaulted in their performance
of multiple aspects of the duties they undertook to perform.
- As
to the “relative importance of the acts of the parties in causing the
damage”, the defendants’ negligence “should...
be regarded as
of significantly greater importance in causing the damage than the low-level
negligence” of the plaintiff: Cam & Bear at [90]. As I have
found above at [623(11)] with regard to causation, had the defendants
qualified the audit report, Ms Crittle would have made further enquiries and
then taken
steps to recover the loans and investments.
- I
do not consider the contention by the defendants that Ms Crittle’s
omission to undertake an examination of the financial reports
prepared by the
accountants before signing the declaration significantly impacts on the relative
importance of Ms Crittle’s
actions in causing the negligence. The evidence
was to the effect that when Ms Crittle was made aware about a problem, she acted
upon it. Further, it still remains that Ms Crittle did not have the financial
skills or understanding to interpret a financial report.
There was nothing on
the face of the financial reports which would have indicated to Ms Crittle that
there was a problem with the
loans and investments. It was the auditor’s
role to audit the financial statements to, inter alia:
- (1) enquire and
report on compliance with the investment strategy for the relevant financial
years;
- (2) bring
serious misdescriptions and other facts and circumstances such as Mr
Moylan’s conflict of interest to the plaintiff’s
attention; and
- (3) exercise
reasonable care and skill to verify the existence and value of the
assets.
- In
the result, I consider that the acts of the defendants were relatively more
important as a matter of degree to the acts of the
plaintiff, particularly
considering the “causal potency” of those acts (see Polon at
[877]).
Conclusion as to contributory negligence
- Taking
these matters into account and giving particular (although not determinative)
significance to the fact that it was amongst
the defendants’ duties to
protect the plaintiff against the harm that it suffered, I consider the loss
should be apportioned
10% to the plaintiff and 90% to the
defendants.
Proportionate Liability
- The
causes of action in negligence and breach of contract are “apportionable
claims” under Pt 4 of the Civil Liability Act.
- As
to the relevant provisions of Pt 4 of the Civil Liability Act, I again
refer to the judgment of Macfarlan JA in Cam & Bear where his Honour
observed at [93] and [94] the following:
[93] Section 35(1)(a) of the CLA provides:
“35 Proportionate liability for apportionable
claims
(1) In any proceedings involving an apportionable claim:
(a) the liability of a defendant who is a concurrent wrongdoer in relation to
that claim is limited to an amount reflecting that
proportion of the damage or
loss claimed that the court considers just having regard to the extent of the
defendant’s responsibility
for the damage or loss
...”
[94] Section 34(2) defines a “concurrent wrongdoer” as “a
person who is one of two or more persons whose acts or omissions (or act
or
omission) caused, independently of each other or jointly, the damage or loss
that is the subject of the claim”. Section 35(3) provides that in
apportioning responsibility the damage or loss in relation to which the
plaintiff is contributorily negligent is
to be excluded and that the court may
have regard to the comparative responsibility of any current concurrent
wrongdoer who is not
a party to the proceedings. To be a concurrent wrongdoer, a
person must be (or have been) liable in law to the plaintiff in respect
of the
same damage as that for which the defendant is liable (Perpetual Trustee
Company Ltd v Milanex Pty Ltd (in liq) [2011] NSWCA 367 at [94];
Wingecarribee v Lehman Brothers at [1083]; D Villa, Annotated Civil
Liability Act 2002 (NSW) (3rd ed, 2018) at 502-3).
- The
causes of action for misleading and deceptive conduct are apportionable under Pt
VIA of the TPA for the claim under the TPA, and Pt 4 of the Civil Liability
Act for the claim under the FTA (NSW).
- The
plaintiff’s claim for damages under the SIS Act is not apportionable but
that claim has been rejected by the Court.
- The
defendants bear the onus of pleading and proving each of the statutory elements
of their defence, including a failure to take
reasonable care: Dartberg Pty
Ltd v Wealthcare Financial Planning Pty Ltd (2007) 164 FCR 450; [2007] FCA
1216 at [31]; Meandarra Aerial Spraying Pty Ltd v GEJ Geldard Pty Ltd
[2013] 1 Qd R 319; [2012] QCA 315 at [60].
- The
defendants have nominated three concurrent wrongdoers: MBS, Ms Crittle and Mr
Moylan (in his capacity as the Super Fund’s
former
auditor).
MBS
- MBS
provided accounting and financial services to the plaintiff for the relevant
financial years and the plaintiff accepted that MBS
prepared the financial
reports for the Super Fund in each of those years.
- In
the defendants’ amended defence, the following pleadings were made with
respect to MBS as a concurrent wrongdoer under the
heading
“Apportionment”:
- (1) MBS
prepared the financial reports of the Super Fund for each of the financial years
ending 2006-2009;
- (2) in doing
so, MBS assumed a responsibility to prepare reports that fairly presented the
financial position of the Super Fund;
- (3) in the
premises, MBS owed the plaintiff a duty to exercise reasonable care and skill;
and
- (4) Mr Moylan,
who was a director of MBS, was aware (or ought to have been aware) that the
financial reports did not fairly present
the financial position of the Super
Fund. Accordingly, MBS was also aware (or ought to have been aware) of that
matter and failed
to inform the plaintiff.
- As
mentioned above, the plaintiff accepted that MBS prepared the financial reports
for the Super Fund in each of the relevant financial
years and that those
accounts were poorly prepared in that they ascribed value to loans and
investments which were, in fact, substantially
worthless.
- It
follows that the Court is concerned with apportionment. In this respect, the
submissions of the defendants’ may be accepted
that in determining the
relative responsibility of concurrent wrongdoers for a loss, it is necessary to
compare the blameworthiness
and causative potency of the conduct of each of
them: Reinhold v New South Wales Lotteries Corporation (No 2) [2008]
NSWSC 187 at [50]- [53] (per Barrett J); Kayteal Pty Ltd v Dignan (2011)
15 BPR 29,515; [2011] NSWSC 197 (“Kayteal”) at [71]
(per Brereton J).
- I
also accept the defendants’ submissions that the factors relevant to the
assessment of blameworthiness and causative potency
include, but are not limited
to, which of the wrongdoers was more actively engaged in the activity causing
loss and which was more
able effectively to prevent the loss: Yates v Mobile
Marine Repairs Pty Ltd [2007] NSWSC 1463 at [93]- [97] (per Palmer J).
- The
parties developed submissions bearing upon the relative responsibilities of MBS
and the auditor as to loss. However, I do not
propose to summarise those
submissions insofar as they intersect with findings already made by the Court as
to the respective responsibilities
of the entities in question.
- After
repeating submissions as to the extent of the auditor’s responsibility to
exercise reasonable care and skill in a manner
consistent with that which the
Court has earlier recorded (including submissions as to Mr Morris’
evidence), the defendants
drew a comparison between the role of the auditor (in
providing a qualified audit opinion recording that the adopted method of asset
evaluation may not be appropriate) and MBS which, it was suggested, was
responsible for the preparation of special purpose financial
reports and was
responsible for the inappropriate method of valuation which they adopted.
Reference was also made to the relationship
between Mr Moylan and principal of
MBS and various investments. For example, reference was made to Mr Moylan being
an investor in
and promoter of the Hardie Estates Property Fund (later, the
Regional Land Fund), the River Island investment and was
“associated”
with L & V Tomkins to whom the plaintiff had leant
monies.
- From
this submission, the defendants contended that Mr Moylan knew that the loans
were in default and had not been serviced or repaid
and that, knowing those
things, MBS must necessarily have had a high degree of culpability in adopting
for the special purpose financial
reports an inappropriate method of valuation
of loans. It was submitted that MBS had a high degree of culpability in
preparing financial
reports which were materially inaccurate and did not present
fairly the financial position of the Super Fund at the relevant financial
year.
- The
defendants went further and submitted that the conduct of Mr Moylan and MBS
could not only be characterised as conduct well below
a reasonable standard, but
as dishonest. This resulted in the submission that the evidence compels “a
finding that MBS prepared
the special purpose financial reports of the Super
Fund on a dishonest basis”. Even without dishonesty, it was contended that
“it could not on the evidence seriously be contended that MBS was not more
blameworthy and not more culpable than the auditor”.
- The
Court has earlier dealt with the issue of dishonesty above. The plaintiff
submitted that there was no evidence that Mr Moylan
was aware that the financial
reports did not fairly present the financial position of the Super Fund. Whilst
that contention may
be doubted, the allegation advanced by the defendants, as
pleaded, is tantamount to one of fraud, and the Court has already found
the
Briginshaw standard has not been met (at [737]). There was no basis
on the material before the Court for a finding of dishonesty or fraud on the
part of Mr Moylan. So far, as
the defendants sought to contend for such an
inference, it could only be by reference to the material in the auditor’s
files
(which are in evidence); however that material provided no basis for a
finding of dishonesty on the part of Mr Moylan.
- The
parties’ submissions as to the relative responsibilities of MBS and the
auditor’s role in reviewing the accounts as
an auditor returned to the
familiar debate in their submissions as to the true role of the respective
entities.
- The
plaintiff contended that the auditor’s specific roles was to review the
accounts that had been prepared by MBS and determine
whether those accounts were
true and correct; a proposition denied by the defendants.
- The
plaintiff further submitted that:
- (1) an auditor
is required to have a higher degree of training and experience than an
accountant (see for example reg9.2.01 of the
Corporations Regulations 2001
(Cth), which requires 3,000 hours' supervised experience to become a
"Registered Company Auditor"); and
- (2) the auditor
had power under the SIS Act to request such documents as they needed to
undertake the audit: see s 113(1A) (in relation
to the 2007 audits); s 35C(2)
(in relation to the 2008 and 2009 audits). The first defendant did, in fact,
request some documents.
- (3) There was
no rejoinder, in this respect, to either of the above propositions by the
defendants.
- Reference
was also made by the plaintiff to the remarks by Lindley LJ regarding the role
of an auditor in Re London & General Bank at
682-683:
His business is to ascertain and state the true financial position of the
company at the time of the audit, and his duty is confined
to that. But then
comes the question, [h]ow is he to ascertain that position? The answer is, [b]y
examining the books of the company.
But he does not discharge his duty by doing
this without inquiry and without taking the trouble to see that the books
themselves
show the company’s true position. He must take reasonable care
to ascertain that they do so. Unless he does this his audit
would be worse than
an idle farce.
- Reference
was also made to Frankston as extracted at [415] above. Out of
Frankston, the plaintiff submitted the main objects of the audit
were:
- (1) to certify
to the correctness of the financial position;
- (2) the
detection of errors; and
- (3) the
detection of fraud.
- The
defendants contended, in this respect, that this level of abstraction was
unhelpful because the scope and purpose of the audit
was to be obtained from the
particular audit retainers.
- Further,
the defendants contended that, even where a wrongdoer was engaged by the
plaintiff specially for the purpose of guarding
against a fraudster, it will
inevitably be found to be less responsible for a loss than the fraudster was.
(The defendant relied
on Kayteal at [71] to support that proposition,
however that passage can be distinguished because the references contained
within it all involved
intervening fraud, which is not the same as in this
case).
- I
do not accept that the role of the auditor was to determine whether the accounts
were “true and correct”. I note particularly
that the criterion of
“true and fair view”, a phrase from Pt 2M.3 of the Corporations
Act, does not apply to special purpose financial reports (see above at [351]). However, I earlier
found at [531]-[543] above that the
auditor was required to ensure that the investments were valued at net market
value. It was also the auditor’s
role, inter alia, to inquire into
and report accurately as to whether the investments were made in accordance with
an investment strategy which had
regard to all the circumstances of the Super
Fund (at [284]-[294]) and to bring to the
plaintiff’s attention serious misdescriptions and misstatements in the
financial statements (at [299]-[311]).
- The
defendants then contended that the MBS was more actively engaged in the activity
causing the loss – being, it was submitted,
the concealment of the fact
that the loans and investments were variously worthless or of a substantially
compromised value or wholly
impaired or of no value, and that MBS was more able
to effectively prevent such loss by directly advising the plaintiff of the facts
known to MBS. The auditor, it was submitted, was only to express an audit
opinion, whether qualified or unqualified.
- However,
there was no evidence in these proceedings of the fact that MBS actually
concealed that the investments were worthless. As
to the ability of MBS to
effectively prevent the loss by advising the plaintiff, care needs to be taken
considering the absence of
their actual retainers in the evidence in these
proceedings.
- The
defendants accepted, however, that the question of relative responsibility may
partly turn on the proper characterisation of the
auditor’s omission
(albeit their submission was directed to conclusions reached by Mr Morris). In
that respect, I accept the
plaintiff’s submission that the defendants had
a significant ability to prevent loss based upon the following factors, all
of
which were consistent with conclusions earlier reached in this judgment. The
defendants:
- (1) recognised
that the loans and investments had been made to entities connected with Mr
Moylan, were high risk and that it might
“all [go] wrong” (see above
at [484]);
- (2) were aware
that the pension from the Super Fund was Ms Crittle’s sole source of
income (also above at [484]);
- (3) admitted
that the material available to the first defendant did not support an expression
of an unqualified opinion that the Super
Fund’s financial report for each
financial year presented fairly in all material respects (see above at [417]); and
- (4) had
insufficient material to be able to form and express an unqualified opinion as
to compliance with the SIS Act and SIS Regulations (see [476]
above).
- The
Court also accepts the summary given by the plaintiff as to the nature of the
failures of the defendants in that respect, given
again that they conform with
the earlier findings in this judgment, namely that the
defendants:
- (1) expressed
an unqualified opinion as to compliance with the SIS Act and SIS
Regulations;
- (2) expressed
an unqualified opinion that the Super Fund’s financial report for each
financial year presented fairly in all
material respects; and
- (3) failed to
make any statement, notation, qualification or other communication as to the
concerns held about Mr Moylan’s involvement.
- MBS
may have had a duty to communicate matters to the plaintiff and even if it be
assumed that Mr Moylan was aware of inaccuracies
in the accounts (contrary to
what was found in [969] above), the terms of the MBS retainers were not
before the Court to draw any particular conclusions in that respect. on the
other
hand, the defendants had available to them all materials that would and
should have exposed the matters referred to in [980(2)] and 980(3)]. It may be
recalled in this respect, albeit in short form, the findings that the defendants
breached an obligation within the retainers
by failing to bring to the attention
of the plaintiff Mr Moylan’s involvement with the loans and investments
(see [508]
above).
- The
absence of the MBS retainers means that the Court cannot identify whether there
was any express or relevant disclaimer of responsibility.
- I
accept the submission of the plaintiff that the defendants had a far higher
degree of culpability than MBS. Had the defendants performed
their role
competently, the deficiencies in the accounts and operations of the Super Fund
would have been exposed. The defendants’
failure to undertake this task
was, to accept further submission of the plaintiff, “the immediate, patent
cause of the loss”.
In my view, the plaintiff’s loss should be
apportioned to MBS in the amount of 20%.
Mr Moylan
- The
defendants submitted that Mr Moylan’s audit of the 30 June 2006 special
purpose financial report of the plaintiff involved
him in wrongdoing. The
defendants contended that audit report was causative of the loss and damage
claimed against the defendant
when that loss and damage is understood to be loss
of opportunity to recoup the loans and investments. It was contended that it was
immaterial that some or all of the loans had not reached maturity by 30 June
2006 because the relevant point in time was not the
balance date but the date of
the audit opinion (which was 9 March 2007) and the proper performance of the
audit function would have
resulted in the plaintiff seeking to recoup those
loans when they fell due.
- Further,
reliance was placed upon the plaintiff’s contention that the opportunity
to recover the loans and investments had not
been lost by the time the first
audit report was provided by the defendants. Hence, it was contended the same
opportunity was lost
at the same time by Mr Moylan’s wrongful opinion of
the year before.
- The
pleadings of the defendants, in this respect, in the amended defence were as
follows:
- (1) Mr Moylan
was engaged to provide a report, in the form approved for the purposes of s 113
of the SIS Act, in respect of the financial
year ending 30 June 2006;
- (2) Mr Moylan
provided such a report to the plaintiff;
- (3) Mr Moylan
owed a duty to exercise reasonable care and skill in doing so;
- (4) Mr Moylan
was in a position of conflict with the interests of the Super Fund (and its
principal member); and
- (5) Mr Moylan
was aware (or ought to have been aware) that the financial reports for the year
ending 30 June 2006 did not fairly present
the financial position of the Super
Fund and failed to inform the plaintiff.
- There
was no dispute that Mr Moylan conducted an audit in respect of the 2006
financial year (the 2006 audit report by Mr Moylan was
in evidence). However,
unlike the audit opinion contained in the defendants’ audit reports, Mr
Moylan did not issue an audit
opinion with respect to the presentation of the
financial report of the Super Fund. His opinion in the 2006 audit report was
only
that the plaintiff had complied, in all material respects, with the
requirements of the SIS Act or the SIS Regulations.
- It
is true that the plaintiff alleged the defendants failed to audit the Super Fund
so as to be able to reasonably form the opinion
as to whether there had been
compliance with the SIS Act and SIS Regulations in the relevant financial years.
However, the plaintiff’s allegations founded upon the investment strategy
for the fund for
those years (see [474]-[476] above). In contrast, the 2006 investment strategy,
which was relevant to Mr Moylan’s 2006 audit opinion, was not in
evidence.
- I
agree with the contention of the plaintiff that there is no basis on the
evidence to conclude that Mr Moylan’s audit opinion
was inadequate with
respect to reg 4.09 because the investment strategy for that year was not in
evidence.
- It
may be recalled that, in order for the provisions of s 34(2) of the Civil
Liability Act to apply with respect to Mr Moylan, the damage or loss that is
the subject of the plaintiff’s claim must be the same loss and
damage that
was contributed to by the wrongdoer.
- Mr
Moylan’s conduct of the audit in the 2006 financial year as to compliance
with the SIS Act and SIS Regulations did not cause the same loss having regard
to the description of the operation of s 34(2) in Hunt & Hunt Lawyers v
Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613; [2013] HCA 10. In that
judgment, French CJ, Hayne and Kiefel JJ described the evident purpose of Pt 4
of the Civil Liability Act as follows (at [16]):
[16] The evident purpose of Pt 4 is to give effect to a legislative policy that,
in respect of certain claims such as those for economic loss or property damage,
a defendant should be liable only to the extent of his or her responsibility.
The court has the task of apportioning that responsibility
where the defendant
can show that he or she is a “concurrent wrongdoer”, which is to say
that there are others whose
acts or omissions can be said to have caused the
damage the plaintiff claims, whether jointly with the defendant’s acts or
independently of them. If there are other wrongdoers they, together with the
defendant, are all concurrent wrongdoers.
- Further,
their Honours observed at [18]:
[18] It is not disputed that Mitchell Morgan’s claim against Hunt &
Hunt is an “apportionable claim” within
the meaning of s 34(1)(a).
The claim was based upon Hunt & Hunt’s breach of an implied term of
its retainer that it exercise proper skill, diligence
and care. Section 34(1A)
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 of the same or a different kind. There is
no express limitation
on the nature of the claim which might have been brought
by the plaintiff against a concurrent wrongdoer, except the requirement
of s
34(2) that the acts or omissions of all concurrent wrongdoers have caused the
damage in question.
- As
to the question of causation raised by the defendants, I accept the following
submission of the plaintiff:
55. The plaintiff’s loss and damage in this case is the inability to
pursue the recovery of its investments against borrowers,
guarantors, Mr Moylan
and his companies on and from May 2008. That loss is to be assessed at a
particular point in time. Indeed,
the timing is vital as it informs (a) whether
there was an opportunity at all; (b) the nature and scope of the opportunity and
(c)
the quantum of the loss arising from the loss of the opportunity.
56. Mr Moylan’s conduct did not contribute to the plaintiff’s loss
of opportunity in this case because the Super Fund
was in a significantly
different financial position as at 30 June 2006, such that, as at that date,
there was no opportunity that
was lost.
57. Specifically, as at 30 June 2006:
(a) the Super Fund had over $1 million in cash;
(b) none of the loans had reached maturity or were in default. In contrast to
the position as at 30 June 2007, when each of the relevant
loans was in default,
as at 30 June 2006 none of the dates for repayment of principal and interest on
the loans had passed;
(c) the investment in Limeburners Creek Unit Trust had not yet been made;
and
(d) the Super Fund had been in existence for less than 6 months and the relevant
investments had only existed for about 4 months.
[Footnotes omitted.]
- Further,
I reject the defendants’ submission that it was immaterial that some of
the loans and investments had not reached maturity
as at the 30 June 2006
balance statement. In considering whether Mr Moylan (as past auditor)
contributed to the same loss, the relevant
point in time is the financial year
in respect of which Mr Moylan carried out his audit. He could not be expected to
audit the financial
report for the year ending 30 June 2006 by reference to
subsequent events: his role was to confirm compliance with the SIS Act and
SIS
Regulations as at 30 June 2006.
- Further,
the defendants contended, if the opportunity for the plaintiff to recover
investments was lost after 15 May 2008 (as it was
after the defendants issued
the 2007 audit report), it must also result in the conclusion that that
opportunity was lost after Mr
Moylan’s audit in respect of the financial
year ending 30 June 2006.
- While
apparently having a logical basis, that contention suffers from the fact that
the proposition does not take into account the
fact that the plaintiff’s
ability to recover the loan investments it had made from the borrowers and
guarantors only arose
from the time when those loan investments were in default.
That was not the position as at 30 June 2006.
- In
the result, no apportionment will be made in respect of Mr Moylan’s 2006
financial year audit.
Ms Crittle
- The
defendants submitted that Ms Crittle was obliged to exercise a reasonable degree
of care and diligence to be aware of the financial
position or performance of
the Super Fund and in forming an opinion on behalf of the plaintiff that the
special purpose financial
reports of the Super Fund presented fairly its
financial position and performance. It was accepted, however, that the Court
would
not take into account both contributory negligence and concurrent
wrong-doing by Ms Crittle in order to reduce any damages which
may be awarded
against the defendants.
- The
Court has accepted the defendants’ argument that the plaintiff was guilty
of contributory negligence and that its damages
should be reduced accordingly.
Its negligence in this respect was, however, constituted by its responsibility
for the acts and omissions
of Ms Crittle. In my view, there is no material
difference in the relevant considerations pertaining to the findings in
contributory
negligence and those submitted by the defendants pertaining to Ms
Crittle as a concurrent wrongdoer. As accepted by the defendants,
the
plaintiff’s damages cannot be reduced for this reason as it would involve
an inequitable double discount for the damages
by reason of the same acts or
omissions: Cam & Bear at [101].
- In
the result, I do not consider that the proportionate liability provisions of the
Civil Liability Act or the TPA entitle the defendants to an apportionment
of the plaintiff’s damages with respect to Ms
Crittle.
Conclusion as to apportionment
- It
follows that a comparative exercise as required by the authorities, results in a
relative apportionment of 20% to MBS and 80% to
the
defendants.
CONCLUSION
- In
the second further ASOC the plaintiff claimed the following
relief:
RELIEF CLAIMED
1. Damages.
2. Damages pursuant to section 315(11) of the Superannuation Industry
(Supervision) Act 1993 (Cth).
3. As against the first defendant, damages pursuant to:
(a) section 68 of the Fair Trading Act 1987 (NSW)
and/or section 159 of the Fair Trading Act 1999 (Vic) [as in force before
the commencement of the Australian Consumer Law (Schedule 2, Competition and
Consumer Act 2010 (Cth))]; and/or
(b) section 82 of the Trade Practices Act 1974
(Cth).
4. As against the second defendant, damages pursuant to section 82 of the
Trade Practices Act 1974 (Cth).
5. Damages for loss of use of money.
6. Interest.
7. Costs.
- In
paras 17(a)(iii), (b)(iii), (c)(iii), (e)(v) and (f)(iii) of the second further
ASOC, the plaintiff pleaded that it was seeking
interest as prescribed by s 100
of the Civil Procedure Act 2005 (NSW).
- Damages
Calculation #2 calculated interest up until 31 August 2017. The plaintiff
submitted that damages should be awarded including
interest thereon from 31
August 2017.
- The
Court has found that for the aforementioned reasons, the plaintiff should have
an award of damages (save for damages pursuant
to s 315(11) of the SIS Act and s
159 of the FTA (Vic)) from the defendants who are jointly and severally liable
(see finding above
at [325(6)]) for a sum of $2,260,140 exclusive of any claim for
interest from 31 August 2017. That amount is to be apportioned 10% to the
plaintiff
and 90% to the defendants for the contributory negligence of the
plaintiff. Further, that amount is to be apportioned 20% to MBS
and 80% to the
defendants for the proportionate liability of MBS.
- In
addition, the Court has not heard the parties on interest (from 31 August 2017)
and costs. In the result, the Court proposes to
make directions for the
plaintiff to provide short minutes of order reflecting this judgment. If there
is an agreed position as to
interest that position may be reflected within the
short minutes of order. The Court will make provision to resolve any dispute as
to the short minutes of order. Otherwise, the Court will receive submissions on
both interests and costs in accordance with those
directions.
DIRECTIONS
- The
Court makes the following directions:
- (1) The
plaintiff shall file and serve within 14 days of the date of this judgment short
minutes of order reflecting this judgment.
- (2) The
plaintiff shall file and serve within 28 days of this judgment a submission as
to any disputed questions as to the short minutes
of order, interest and costs
together with the terms of any orders proposed with respect to costs.
- (3) The
defendants shall file and serve a submission in reply as to any disputed
questions as to the short minutes of order, interest
and costs together with the
terms of any proposed orders in that respect, within 14 days after being served
with the submissions
in (2) above.
Amendments
17 October 2018 - Typographical and grammatical errors corrected.
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