Supreme Court
New South Wales
Case Name:
Ryan Wealth Holdings Pty Ltd v Baumgartner
Medium Neutral Citation:
Hearing Date(s):
28-31 August; 12 October 2017
Date of Orders:
8 October 2018
Decision Date:
8 October 2018
Jurisdiction:
Common Law
Before:
Walton J
Decision:

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.

Catchwords:

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

Legislation Cited:

Acts Interpretation Act 1901 (Cth)

Australian Constitution

Australian Securities and Investments Commission Act 2001 (Cth)

Civil Liability Act 2002 (NSW)

Civil Procedure Act 2005 (NSW)

Competition and Consumer Act 2010 (Cth)

Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth)

Corporations Act 2001 (Cth)

Corporations Regulations 2001 (Cth)

Evidence Act 1995 (NSW)

Fair Trading Act 1987 (NSW)

Fair Trading Act 1999 (Vic)

Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007 (Cth)

Insurance Contracts Act 1984 (Cth)

Judiciary Act 1903 (Cth)

Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth)

Jurisdiction of Courts (Cross-Vesting) Act 1987 (NSW)

Jurisdiction of Courts (Cross-Vesting) Act 1987 (Vic)

Law Reform (Miscellaneous Provisions) Act 1965 (NSW)

Local Government Act 1946 (Vic)

Partnership Act 1892 (NSW)

Professional Standards Act 1994 (NSW)

Professional Standards Act 2003 (Vic)

Real Property Act 1900 (NSW)

State Bank of South Australia Act 1983 (SA)

Superannuation Industry (Supervision) Act 1993 (Cth)

Superannuation Industry (Supervision) Regulations 1994 (Cth)

Trade Practices Act 1974 (Cth)

Cases Cited:

Agar v Hyde (2000) 201 CLR 552[2000] HCA 41

Akai Pty Ltd v People’s Insurance Co Ltd (1996) 188 CLR 418

Astley v Austrust Ltd (1999) 197 CLR 1; [1999] HCA 6

Australian Competition and Consumer Commission v Global Prepaid Communications Pty Ltd [2006] FCA 146

Australian Competition and Consumer Commission v Valve Corporation (No 3) (2016) 337 ALR 647[2016] FCA 196

Badenach v Calvert (2016) 257 CLR 440[2016] HCA 18

Baiyai Pty Ltd v Guy [2009] NSWCA 65

Blunden v Commonwealth (2003) 218 CLR 330; [2003] HCA 73

Bonython v Commonwealth [1950] UKPCHCA 3(1950) 81 CLR 486

Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153;[2001] NSWCA 61

Briginshaw v Briginshaw [1938] HCA 34(1938) 60 CLR 336

Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592[2004] HCA 60

Byrne v Australian Airlines Ltd (1995) 185 CLR 410; [1995] HCA 24

Cackett v Keswick [1902] 2 Ch 456

Cam & Bear Pty Ltd v McGoldrick [2018] NSWCA 110

Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304[2009] HCA 25

Chaplin v Hicks [1911] 2 KB 786

Chep v Bunnings [2010] NSWSC 301

Chubb Insurance Company of Australia Ltd v Moore (2013) 302 ALR 101;[2013] NSWCA 212

Cloverdell Lumber Co Pty Ltd v Abbott [1924] HCA 4(1924) 34 CLR 122

Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd(1991) 22 NSWLR 389

Croome v Tasmania [1997] HCA 5(1997) 191 CLR 119

Damien v JKAM Investments Pty Ltd [2015] NSWCA 368

Daniels v Anderson (1995) 37 NSWLR 438

Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd (2007) 164 FCR 450[2007] FCA 1216

Darvall McCutcheon v H K Frost Holdings Pty Ltd (in liq) (2002) 4 VR 570;[2002] VSCA 85

Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588[2011] HCA 21

Demagogue Pty Limited v Ramensky [1992] FCA 557(1992) 39 FCR 31

Distillers Co (Biochemicals) Ltd v Thompson [1971] AC 458

Do Carmo v Ford Excavations Pty Ltd [1984] HCA 17(1984) 154 CLR 234

Dow Jones & Co Inc v Gutnick (2002) 210 CLR 575; [2002] HCA 56

Dungowan Manly Pty Limited v McLaughlin [2012] NSWCA 180

Durban Roodepoort Deep Limited v Newshore Nominees Pty Ltd [2005] WASCA 231

Enzed Holdings Limited v Wynthea Pty Ltd [1984] FCA 373(1984) 57 ALR 167[1985] ATPR 40-507

Fink v Fink [1946] HCA 54(1946) 74 CLR 127

Fire & All Risks Insurance Co Ltd v Callinan [1978] HCA 31(1978) 140 CLR 427

Fleming v Marshall (2011) 279 ALR 737[2011] NSWCA 86

Forge v Australian Securities and Investments Commission (2006) 228 CLR 45[2006] HCA 44

Frankston and Hastings Shire v Cohen [1960] HCA 6(1960) 102 CLR 607

Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1

Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82

Golden Strait Corporation v Nippon Yusen Kubishka Kaisha [2007] UKHL 12[2007] 2 AC 353

Gore (t/as Clayton Utz) v Montague Mining Pty Limited [2000] FCA 1214

Gould v Vaggelas (1985) 157 CLR 215

Haines v Bendall [1991] HCA 15(1991) 172 CLR 60

Hamilton v Merck and Co Inc; Hutchinson v Merck Sharp and Dohme (Australia) Pty Ltd (2006) 66 NSWLR 48[2006] NSWCA 55

Harle v Legal Practitioners Liability Committee [2003] VSCA 133

Hart Security Australia Pty Ltd v Boucousis [2016] NSWCA 307

Henjo Investments Ply Ltd v Collins Marrickville Pty Ltd (No 1) [1988] FCA 40(1988) 39 FCR 546

HG & R Nominees Pty Ltd v Fava [1997] 2 VR 368

Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46

HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640;[2004] HCA 54

Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613[2013] HCA 10

Hunter Grain Pty Ltd v Hyundai Merchant Marine Co Ltd [1993] FCA 133;(1993) 117 ALR 507

Jackson v Spittall (1870) LR 5 CP 542

Jaggard v Sawyer [1995] 2 All ER 189; [1995] 1 WLR 269

JLW (Vic) Pty Ltd v Tsiloglou [1994] VicRp 16[1994] 1 VR 237

John Pfeiffer Pty Ltd v Rogerson (2002) 203 CLR 503[2000] HCA 36

Johnson v Perez [1988] HCA 64(1988) 166 CLR 351

Jones v Dunkel [1959] HCA 8(1959) 101 CLR 298

Jones v Schiffmann [1971] HCA 52(1971) 124 CLR 303

Kayteal Pty Ltd v Dignan (2011) 15 BPR 29,515; [2011] NSWSC 197

Kimberly NZI Finance Ltd v Torero Pty Ltd [1989] ATPR (Digest) 53,193

Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361[2011] HCA 11

Lange v Australian Broadcasting Corporation [1997] HCA 25(1997) 189 CLR 520

Letang v Cooper [1964] EWCA Civ 5[1965] 1 QB 232

LMI v Baulderstone [2001] NSWSC 886

Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705[2001] NSWCA 305

Malec v J C Hutton Pty Ltd [1990] HCA 20(1990) 169 CLR 638

Mancini v Mancini [1999] VSC 227(1999) 17 ACLC 1,570 at 1,577-1,578

Manly Council v Byrne [2004] NSWCA 123 Sydneywide Distributors Pty Ltd v Red Bull Australia Pty Ltd (2002) 234 FCR 549[2002] FCAFC 157

McCann v Switzerland Insurance Ltd (2000) 203 CLR 579[2000] HCA 65

McCrohon v Harith [2010] NSWCA 67

McRae v Commonwealth Disposals Commission [1951] HCA 79(1951) 84 CLR 377

Meandarra Aerial Spraying Pty Ltd v GEJ Geldard Pty Ltd [2013] 1 Qd R 319[2012] QCA 315

Meerkin & Apel v Rossell Pty Ltd [1998] 4 VR 54

Mercedes Holdings Pty Ltd v Waters (No 5) [2011] FCA 1428

Milliman v Rochester Ry Co 3 App Div 109; 39 NYS 274 (1896)

Mills v Ruthol Pty Ltd (2004) 61 NSWLR 1[2004] NSWSC 547

Murphy v Dorman (2003) 58 NSWLR 51[2003] NSWCA 249

OXS Pty Ltd v Sydney Harbour Foreshore Authority [2016] NSWCA 120

P E Kafka Pty Ltd v The Hermitage Motel Pty Ltd [2009] FCAFC 94

Pace Farm Egg Products Pty Ltd v Newcastle City Council (2006) 151 LGERA 260[2006] NSWCCA 403

Pacific Acceptance Corporation v Forsyth (1970) 92 WN (NSW) 29

Paper Products Pty Ltd v Tomlinsons (Rochdale) Ltd (No 2) [1993] FCA 430(1993) 44 FCR 485

Paradis v Settlement Agents Supervisory Board (2007) 33 WAR 361[2007] WASCA 97

Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44;(1982) 149 CLR 191

Perpetual Trustee Company Ltd v Ishak [2012] NSWSC 697

Placer (Granny Smith) Pty Ltd v Theiss Contractors Pty Ltd (2003) 77 ALJR 768[2003] HCA 10

Podrebersek v Australian Iron & Steel Pty Ltd [1985] HCA 34(1985) 59 ALR 529

Poignand v NZI Securities Ltd [1992] FCA 369(1992) 37 FCR 363

Polkinghorne v Holland [1934] HCA 28(1934) 51 CLR 143

Polon v Dorian [2014] NSWSC 571

Precision Plastics Pty Ltd v Demir [1975] HCA 27(1975) 132 CLR 362

Queensland Premier Mines Pty Ltd v French (2007) 235 CLR 81[2007] HCA 53

Radosavljevic v Radin [2003] NSWCA 217

Re London & General Bank (No 2) [1895] 2 Ch 673

Re United Railways of the Havana and Regla Warehouses Ltd [1960] Ch 52

Re Wakim; Ex parte McNally (1999) 198 CLR 511; [1999] HCA 27

Reinhold v New South Wales Lotteries Corporation (No 2) [2008] NSWSC 187

Rhone-Poulenc Agrochomie SA v UIM Chemical Services Pty Ltd [1986] FCA 218(1986) 12 FCR 477

Rizeq v Western Australia (2017) 344 ALR 421[2017] HCA 23

Roads and Traffic Authority of New South Wales v Dederer (2007) 234 CLR 330[2007] HCA 42

Rosenberg v Percival (2001) 205 CLR 434[2001] HCA 18

Rosser v Marine Ministerial Holdings Corp [1999] NSWCA 72

Ryan Wealth Holdings Pty Ltd v L&V Tomkins Pty Ltd [2016] NSWSC 136

Saad v Doumeny Holdings Pty Ltd [2005] NSWSC 893

Sargent v ASL Developments Ltd (1974) 131 CLR 634

Seaton v Burnand [1900] AC 135

Seiwa Australia Pty Ltd v Beard (2009) 75 NSWLR 74[2009] NSWCA 240

Sellars v Adelaide Petroleum NL (1994) 179 CLR 332

Simonius Vischer & Co v Hold & Thompson [1979] 2 NSWLR 322

State of New South Wales v Julianne Higgins by her tutor David Benedict O’Shea; Barnardos Australia v Julianne Higgins [2005] NSWCA 244

State of New South Wales v Moss [2000] NSWCA 133(2000) 54 NSWLR 536

State of NSW v Burton [2008] NSWCA 319

State of South Australia v Peat Marwick Mitchell & Co (1997) 24 ACSR 231

Street v Luna Park Sydney Pty Limited (2009) 223 FLR 245[2009] NSWSC 1

Sutton v AJ Thompson Pty Ltd (In Liq) (1987) 73 ALR 233

Telesto Investments Ltd v UBS AG (2012) 262 FLR 119[2012] NSWSC 44

The Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54(1994) 174 CLR 64

Travel Compensation Fund v Tambree (2005) 224 CLR 627[2005] HCA 69

Troulis v Vamvoukakis (Unreported, New South Wales Court of Appeal, 27 February 1998)

Voth v Manildra Flour Mills Pty Ltd [1990] HCA 55(1990) 171 CLR 538

Wentworth v Woollahra Municipal Council [1982] HCA 41(1982) 149 CLR 672

West Wake Price & Co v Ching [1957] 1WLR 45

Yates v Mobile Marine Repairs Pty Ltd [2007] NSWSC 1463

Texts Cited:

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)

Category:
Principal judgment
Parties:

Ryan Wealth Holdings Pty Ltd (Plaintiff)

David Keith Baumgartner (First Defendant)

KJ Equities Pty Ltd (Second Defendant)

Representation:

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)

File Number(s):
2014/00358648

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

  1. 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

  1. 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.
  2. 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.
  3. 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”).
  4. The second defendant was not an approved auditor and was not appointed as auditor of the Super Fund.

The Audits

    1. 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:
        <li “=””>(1) the presentation of the Super Fund’s financial report; and,

<li “=””>(2) the Super Fund’s compliance with the SIS Act.

  1. A brief outline of the three audits, the subject of these proceedings, is set out below.

The 2007 audit

  1. 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”).
  2. 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).
  3. 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).
  4. 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

  1. 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”).
  2. 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”).
  3. 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

  1. 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”).
  2. 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”).
  3. 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”).
  4. 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

    1. 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.
    2. 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:
        <li “=””>(1) in breach of their duties in contract and in tort;

<li “=””>(2) in contravention of their obligations as auditors under the SIS Act<li “=””>(3) misleading and deceptive; and<li “=””>(4) in breach of Commonwealth and State legislation.

  1. 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.
  2. 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.
  3. 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.
  4. 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]).
  5. Before the Court embarks upon that course, it is necessary to set out the factual background.

FACTUAL BACKGROUND

  1. As earlier mentioned, the sole shareholder and director of the plaintiff is Ms Crittle.
  2. 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.
  3. 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”).
  4. 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.
  5. 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

  1. 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

    1. The River Island Facility Agreement, dated 10 February 2006, was between:
        <li “=””>(1) the plaintiff, as lender; River Island Property Holdings Pty Limited (“River Island”), as borrower; and

<li “=””>(2) Leonard Tomkins and Mr Moylan, as guarantors.

  1. 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

    1. The Pacific General Facility Agreement, dated 23 February 2006, was between:
        <li “=””>(1) the plaintiff, as lender;

<li “=””>(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<li “=””>(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;

  1. 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

    1. The MCD Holdings Facility Agreement, dated 14 March 2006, was between:
        <li “=””>(1) the plaintiff, as lender; and

<li “=””>(2) MCD Holdings Pty Limited (“MCD Holdings”) (formerly known as “Moylan’s Business Solutions Pty Limited”), as borrower.

  1. 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

    1. The Tomkins Facility Agreement, dated 12 May 2006, was between:
        <li “=””>(1) the plaintiff, as lender; and

<li “=””>(2) Mr Leonard Tomkins, L & V Tomkins Pty Limited, Mr Andrew Tomkins and Ms Deborah Tomkins, as borrowers.

  1. 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

  1. 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
$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
  1. These investments referred to in [31]-[40] shall be referred to as “the loan investments”.
  2. There is no claim, as such, made against MCD Holdings.

The other investments

  1. In 2006, the plaintiff also invested in the following unit trusts:

The Cartel Investments Unit Trust

  1. In May 2006, the sum of $400,000 was invested in the Cartel Investments Unit Trust (“the Cartel Trust”). The trustee was MCD Holdings.
  2. The Cartel Trust was heavily invested in the property venture associated with the Pacific General Facility Agreement.

The Limeburners Creek Unit Trust

  1. 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”).
  2. The Limeburners Trust had made significant loans to River Island and MCD Holdings.
  3. 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.
  4. The investments in the respective unit trusts will be collectively referred to as “the non-loan investments”.
  5. The loan investments and the other investments shall be collectively referred to throughout this judgment as “the loans and investments”.

Advice from Mr Moylan

      1. 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:
          <li “=””>(1) the fact that Moylan Retirement Solutions was the holder of an Australian Financial Securities Licence and Mr Moylan was its authorised representative;

    <li “=””>(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

    1. ” (emphasis added);<li “=””>(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<li “=””>(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

      1. ]).

      2. In reply, the defendants submitted:
          <li “=””>(1) The plaintiff’s submissions were altogether inconsistent with the evidence at trial.

    <li “=””>(2) The following evidence of Ms Crittle, in that respect, was highlighted:

        • <li “=””>(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;<li “=””>(b) she was not aware of the balance of the loan investments or the other investments;<li “=””>(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;<li “=””>(d) she had never heard of the Limeburners Trust until mid-2013; and<li “=””>(e) she had never head of the Cartel Trust or MCD Holdings until 2014.

    <li “=””>(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

    1.  (“

Commercial Union Assurance

      1. ”) at 418 (per Handley JA).<li “=””>(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.<li “=””>(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.<li “=””>(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:

        • <li “=””>(a) the fact that Mr Moylan was the authorised representative of an investment advisory company;<li “=””>(b) the fact that he had earlier represented that he would advise;<li “=””>(c) his appointment as adviser; and<li “=””>(d) Ms Crittle’s understanding that he would advise.

    <li “=””>(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:

      • <li “=””>(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.<li “=””>(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.
  1. 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.
  2. 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.

  1. 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”.
  2. 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”.
  3. 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.

  1. Shortly afterwards, having accepted the recommendation of Mr Moylan, Ms Crittle transferred $7.3 million to the Turnbull Hill Lawyers trust account.
  2. 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”.
  3. 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.

    1. 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.
    2. 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):
        <li “=””>(1) The Pacific General Facility Agreement; and

<li “=””>(2) The Tomkins Facility Agreement.

    1. 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).
    2. As to the Tomkins Facility Agreement, Ms Crittle agreed the funds were disbursed without her direction or permission.
    3. She was not aware of the following loan investments:
        <li “=””>(1) The River Island Facility Agreement; and

<li “=””>(2) The MCD Holdings Facility Agreement.

    1. She had not heard of the Limeburners Trust or the Cartel Trust until 2013 and 2014, respectively.
    2. It is plain that Ms Crittle did not exercise effective “control” or “direction” in making the loans and investments (or providing the loans).
    3. In addition to the aforementioned discussion of the evidence, that finding is supported by the following facts:
        <li “=””>(1) Ms Crittle did not conceive of the loans and investments;

<li “=””>(2) the funds were invested from the Turnbull Hill Lawyers trust account;<li “=””>(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<li “=””>(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.

  1. 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.
  2. 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).
  3. 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.
  4. 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.
  5. 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.
  6. 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).
  7. 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.

  1. 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.
  2. 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.
  3. 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

    1. 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.
    2. The following illustrates that involvement:
        <li “=””>(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:

        • <li “=””>(a) a shareholder in River Island;

<li “=””>(b) the borrower under the MCD Holdings Facility Agreement;<li “=””>(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<li “=””>(d) a founding unit holder and investor in the Hardie Estates Property Fund / Regional Land Fund property venture.<li “=””>(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.<li “=””>(3) Mr Moylan was a director of River Island. He was also a personal guarantor under the River Island Facility Agreement.<li “=””>(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.<li “=””>(5) Mr Moylan was associated with L & V Tomkins Pty Ltd.

    1. Additionally, specifically with respect to Mr Moylan’s involvement with MBS, the following should be noted:
        <li “=””>(1) Through MBS, Mr Moylan provided accounting and taxation services to clients, including the plaintiff.

<li “=””>(2) MBS prepared accounts for the Super Fund for the financial year ending 30 June 2006 and the relevant financial years, inclusive.<li “=””>(3) MBS was also the accountant for the Limeburners Trust and the Cartel Trust.<li “=””>(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

    1. 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:
        <li “=””>(1) Pacific General Facility Agreement – $838,298;

<li “=””>(2) River Island Facility Agreement – $2,806,091;<li “=””>(3) Tomkins Facility Agreement – $787,325;<li “=””>(4) Cartel Trust – $400,000;<li “=””>(5) Limeburners Trust – $132,209.

  1. By that same date, the principal was unpaid and there was interest receivable of $32,909.59.

The Financial statements

The 2007 financial statement

  1. 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”).
  2. 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

  1. 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

  1. 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.

  1. Collectively, the 2007, 2008 and 2009 financial statements will be referred to as “the financial statements”.

The Investment Strategy

  1. An investment strategy for the Super Fund was prepared with respect to each of the relevant financial years.

The 2007 investment strategy

  1. 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

  1. The 2008 and 2009 investment strategies were in similar terms.

The Defendants and the Audits of the Super Fund

    1. 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.
    2. The terms of the retainers, which were in similar but not identical terms, are addressed below.
    3. Following the audits, as previously mentioned, the first defendant issued the audit reports.
    4. In each audit report, the first defendant recorded, inter alia, that:
        <li “=””>(1) the audit evidence he had obtained was sufficient and appropriate to provide a basis for his audit opinion;

<li “=””>(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<li “=””>(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

    1. 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:
        <li “=””>(1) Mr Hill was made bankrupt on 16 March 2012;

<li “=””>(2) Limeburners Creek was deregistered on 2 December 2012;<li “=””>(3) Charlestown Consulting Pty Ltd (a guarantor of the Pacific General Facility) was placed into liquidation on 17 December 2012 and subsequently deregistered;<li “=””>(4) Pacific General was placed into liquidation;<li “=””>(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;<li “=””>(6) River Island was placed into liquidation on 8 February 2013 and subsequently deregistered;<li “=””>(7) Leonard Tomkins was made bankrupt on 6 March 2013;<li “=””>(8) Mr Moylan was made bankrupt on 10 April 2013; and<li “=””>(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

  1. In early 2013, the professional indemnity policies of insurance formerly held by Moylan Retirement Solutions lapsed.
  2. On 30 August 2013, professional indemnity policies of insurance formerly held by MBS lapsed.

Recoveries

    1. 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.
    2. 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.
    3. 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.
    4. As at 5 May 2014, the status of the relevant persons and entities was as summarised above at [96].
    5. 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:
        <li “=””>(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.

<li “=””>(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.<li “=””>(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.<li “=””>(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.

  1. The plaintiff achieved no recoveries in respect of the other investments.

LETTERS OF ENGAGEMENT

  1. 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

  1. 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.

  1. 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.

  1. 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).

  1. 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

  1. 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

  1. 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.

  1. 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.

  1. 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

  1. 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.

  1. 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

  1. 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

  1. 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.

  1. 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

  1. 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

  1. 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.
  2. The relevant provisions in force at the time of each audit are considered in turn.

The 2007 Audit

SIS Act

  1. 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).
  2. The SIS Act provides the following definitions in s 10:
      <li “=””>(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.

    1. “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.
    2. 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.
    3. 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.
    4. 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.
    5. The requirements, as prescribed by the SIS Act at that time, were as follows:
        <li “=””>(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.

<li “=””>(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.<li “=””>(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).

  1. 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.

  1. 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”).
  2. 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.
  3. Part 16 of the SIS Act set out rules relating to “Actuaries and Auditors of Superannuation Entities”.
  4. 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.

  1. 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

  1. 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.

….

  1. 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.

  1. 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

  1. 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.
  2. 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

  1. 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.
  2. 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;

  1. 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)).
  2. 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.
  3. 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

  1. Reference also needs to be made to the provisions of the Corporations Act.
  2. 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).

  1. 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)).

  1. Chapter 2M of the Corporations Act is concerned with “Financial Reports and Audit”. Part 2M.3is concerned with “Financial Reporting”.
  2. 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.

  1. Part 2M.5 deals with “Accounting and Auditing Standards”. “Accounting standards” are dealt with under s 334and 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.
  2. 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

  1. Before considering which auditing standards applied to the audits of the Super Fund, it is necessary to consider the concept of “financial reports”.
  2. 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).
  3. 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”.
  4. 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).
  5. 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”.
  6. 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

  1. 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

  1. 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

  1. The AUASB issued a series of auditing standards known as “the ASA standards”, some of which are relevant to these proceedings.

ASA 800

  1. “ASA 800 The Auditor’s Report on Special Purpose Audit Engagements” (version dated June 2007) (“ASA 800”) was an exhibit in these proceedings.
  2. Pursuant to cl 1(b), ASA 800 applied to the audit of a special purpose financial report.
  3. 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)).
  4. 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.

  1. 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.

  1. 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

  1. “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.
  2. The defendant also referred to “ASA 260 Communication of Audit Matters with Those Charged With Governance (version dated April 2006)” (“ASA 260”).
  3. 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”).

  1. 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.
  2. 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

  1. 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”).
  2. 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).
  3. 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.]

  1. 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.

  1. 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.
  2. 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

  1. 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).
  2. 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.
  3. 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”.
  4. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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

  1. 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.

  1. 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

  1. 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

  1. 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.
  2. 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.
  3. I will now turn to the claims brought by the plaintiff and the respective response by the defendants.

Duties in contract and tort

  1. 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).
  2. 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.

  1. 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.

  1. 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.
  2. 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 theSuperannuation 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.]

  1. 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.

  1. 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.]

  1. 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

  1. 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.]

  1. 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

  1. 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.]

  1. 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).
  2. 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

  1. 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…

  1. 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

  1. 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.
  2. 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.
  3. 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.

  1. 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

  1. 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.

  1. 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.
  2. 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).

  1. The defendants denied paras 37 and 39 but admitted that the defendants did not report any of the matters in para 36.
  2. 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 theSIS 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.

  1. 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.

  1. The defendants also denied that the “Further Representations” (extracted at [213] above) were misleading or deceptive, or likely to mislead or deceive.
  2. 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].

  1. 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 52of 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

  1. 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.

  1. 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

    1. 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.
    2. The issues will be addressed, in turn, under the following headings:
        <li “=””>(1) Contract;

<li “=””>(2) Duties in Contract and in Tort;<li “=””>(3) Admitted Breaches of Duty;<li “=””>(4) Non-admitted Breached of Duty and Contract;<li “=””>(5) Causation;<li “=””>(6) Loss; and<li “=””>(7) Defences.

  1. 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

    1. 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:
        <li “=””>(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

<li “=””>(2) how the terms of the retainers should be construed.

  1. 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

      1. The following issues arose from the plaintiff’s pleadings as to duties, being whether the defendants were required to:
          • <li “=””>(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);

    <li “=””>(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)

    1.  of the

SIS Regulations

    1.  (para 13(c) of the second further ASOC);<li “=””>(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<li “=””>(4) at all times in the performance of their services under the retainers, exercise due care and skill under the retainer, including to:

      • <li “=””>(a) establish the existence of the Super Fund’s investment assets as recorded in the financial statements;<li “=””>(b) establish the Super Fund’s ownership of the investment assets as recorded in the financial statements by reference to supporting documents;<li “=””>(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;<li “=””>(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<li “=””>(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).
    2. 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:
        <li “=””>(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).

<li “=””>(2) Further, the first defendant was not obliged to:

    • <li “=””>(a) design audit procedures to identify matters that may be appropriate to report to the plaintiff; and<li “=””>(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.
  1. 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

    1. 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.
    2. The defendants made admissions that the defendant failed to exercise reasonable care in the preparation of the audit reports because:
        <li “=””>(1) the nominated assets were in substance worthless or of substantially compromised value;

<li “=””>(2) the Super Fund’s financial statements for the relevant financial years were each materially inaccurate;<li “=””>(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<li “=””>(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.

  1. 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.
  2. 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

  1. 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)

  1. 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.
  2. 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).
  3. 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.
  4. 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

  1. 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].
  2. 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

  1. 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.
  2. 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.
  3. 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

    1. 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:
        • <li “=””>(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;

<li “=””>(2) the underlying accounting records of the Super Fund were not reliable or adequate for the preparation of the financial statements;<li “=””>(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<li “=””>(4) the financial statements contained material misstatements arising as a result of irregularities which would have a material effect on the financial statements.

  1. The plaintiff contended that the defendants’ breach in this respect followed from the admissions made in the amended defence (at para 16).
  2. 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

  1. 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.
  2. 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.
  3. 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.
  4. 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

  1. 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.
  2. 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).
  3. 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”).
  4. 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

  1. 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.
  2. 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

  1. 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.
  2. 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.
  3. It should be noted that this issue, as a result of findings below, became unnecessary to resolve.

Causation

    1. The issue of causation concerned both the admitted and non-admitted breaches of contract and duty.
    2. 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.
    3. 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.
    4. 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:
        • <li “=””>(1) actual or suspected non-compliance with the investment strategy and with the SIS Act and

      SIS Regulations

        ;

<li “=””>(2) the majority of the loans and investments were worthless and the financial reports contained serious misdescriptions and misstatements; and<li “=””>(3) the high degree of risk associated with the loans and investments.

  1. 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

    1. 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:
        <li “=””>(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

<li “=””>(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.

  1. 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.
  2. 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

    1. It is sufficient to note at this stage that the defendants raised three defences:
        • <li “=””>(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”);;

<li “=””>(2) contributory negligence by the plaintiff; and<li “=””>(3) proportionate liability as to MBS, Mr Moylan (as former auditor) and Ms Crittle.

  1. Those defences will be explored under their respective headings.

WRITTEN SUBMISSIONS OF THE PARTIES

    1. 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:
        <li “=””>(1) Opening submissions other than defences:

        • <li “=””>(a) Plaintiff’s outline of opening submissions dated 23 August 2017 (“the plaintiff’s opening submissions”) (185 paragraphs over 50 pages); and

<li “=””>(b) Overview submissions of the defendants dated 23 August 2017 (“the defendants’ overview submissions”) (188 paragraphs over 38 pages).<li “=””>(2) Closing submissions other than defences:

      • <li “=””>(a) Plaintiff’s closing submissions in chief dated 15 September 2017 (“the plaintiff’s closing submissions”) (295 paragraphs over 95 pages); and<li “=””>(b) Closing submissions of the defendants dated 22 September 2017 (“the defendants’ closing submissions”) (342 paragraphs over 113 pages);<li “=””>(c) Defendants’ skeleton outline produced to accompany the defendants’ oral submissions on 12 October 2017 (“the defendants’ skeleton outline”) (11 points over 9 pages);<li “=””>(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);<li “=””>(e) Final reply submissions of the defendants dated 17 October 2017 (“the defendants’ final reply submissions”) (47 paragraphs over 10 pages); and<li “=””>(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).

<li “=””>(3) Submissions as to affirmative defences:

    • <li “=””>(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”);<li “=””>(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<li “=””>(c) Rejoinder submissions of the defendants dated 11 October 2017 (“defendants’ rejoinder submissions”) (20 paragraphs over 6 pages).
  1. 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

  1. 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).
  2. 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.
  3. 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.
  4. The written terms of the retainers have been earlier set out at [105]-[119] above. They are in relatively similar terms.
  5. 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.
  6. 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

    1. 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.
    2. The objective of the audit was to express an opinion as to:
        <li “=””>(1) the financial statements; and

<li “=””>(2) compliance with identified provisions of the SIS Act and the SIS regulations.

  1. 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)).
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.]

  1. 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.
  2. I accept the plaintiff’s submission, in this respect, for the reasons I now turn to.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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”.
  8. 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.

    1. 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.
    2. The auditor may request from the trustee written confirmation concerning representations made to his staff or himself in connection with the audit.
    3. Third party written documentation will be generally accepted as evidence of ownership of assets.
    4. The trustee’s valuations will be accepted where applicable unless otherwise requested.
    5. Unless otherwise agreed, the auditor assumed no responsibility to design audit procedures to identify matters that may be appropriate to report to the trustee.
    6. 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)).
    7. The provisions relied upon by the plaintiff may be illustrated by reference to the 2008 and 2009 retainers which stated:
        <li “=””>(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

<li “=””>(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”.

  1. 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.
  2. The plaintiff replied by contending its construction of that particular term should be accepted, for three following reasons.
  3. 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.
  4. 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.
  5. 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).
  6. 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.
  7. 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”.
  8. 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.

  1. 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.
  2. 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.
  3. 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.
  4. 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].

    1. The plaintiff relied upon certain parts of the retainers to sustain those obligations, to which I now turn.
    2. 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”.
    3. 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”.
    4. 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”.
    5. 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:
        • <li “=””>(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);

<li “=””>(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.<li “=””>(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.

  1. 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.
  2. 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

      1. 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).
      2. 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 RegulationsRegulation 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).
      3. The first defendant made the necessary declarations and certifications as auditor in issuing the audit reports.
      4. 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.
      5. 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.
      6. 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:
          • <li “=””>(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).

    <li “=””>(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.<li “=””>(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.<li “=””>(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

    1. ;

[2001] NSWCA 61

    1.  at

[25]

[26]

    1.  and

Damien v JKAM Investments Pty Ltd [2015] NSWCA 368

    1.  at

[28]

    1.  (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.<li “=””>(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.<li “=””>(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 

    1. (NSW),

ss 10(1)

    1.  and

12

    1.  and

Polkinghorne v Holland [1934] HCA 28

    1. ;

(1934) 51 CLR 143

    1.  at 156. Both parties are bound by the contract:

s 5

    1.  of the

Partnership Act

    .

WITNESSES

Plaintiff’s Witnesses

    1. The plaintiff called the following lay witnesses:
        <li “=””>(1) Ms Crittle;

<li “=””>(2) Mr Robert Gorczyca; and<li “=””>(3) Ms Joanne Phillips.

  1. Of those witnesses, only Ms Crittle was called for cross-examination.
  2. 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

      1. There was substantial challenge to Mr Morris’ evidence, which broadly fell into two categories:
          <li “=””>(1) as to errors in his reports; and

    <li “=””>(2) as to his alleged lack of experience and expertise in superannuation auditing.

      1. 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 79of the Evidence Act 1995 (NSW). Rather, the defendants made objections as to particular aspects of the reports with respect to which rulings were made.
      2. 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.
      3. Mr Morris produced four reports for these proceedings dated, respectively:
          <li “=””>(1) 27 January 2015 (“the first report”);

    <li “=””>(2) 26 August 2016 (“the second report”);<li “=””>(3) 6 September 2016 (“the third report”); and<li “=””>(4) 3 July 2017 (“the fourth report”).

      1. Mr Morris expressed, inter alia, the following opinions:
          <li “=””>(1) the audits undertaken by the first defendant were not of the standard of a reasonably competent auditor;

    <li “=””>(2) the material examined by Mr Morris (which included documents provided to the defendants for the purpose of the audits, such as

,

    1.  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;<li “=””>(3) a reasonably competent auditor would have:

      • <li “=””>(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;<li “=””>(b) undertaken further enquiries about the entities to whom loans had been made and the trusts in which the Super Fund held units; and<li “=””>(c) would have sought to engage with the plaintiff and its sole director Ms Crittle;

<li “=””>(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;<li “=””>(5) the auditor had a duty to:

      • <li “=””>(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<li “=””>(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

<li “=””>(6) the purported “investment strategy”, in respect of the Super Fund, was wholly inadequate;

Errors in reports

  1. 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

  1. 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.
  2. 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

  1. 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 statementsThe 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.
  2. 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.
  3. 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.
  4. 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

  1. 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

  1. 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.
  2. 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

      1. 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.
      2. 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 Actand the plaintiff was not a reporting entity (see discussion above at [152]-[157]).
      3. The defendants, in this light, also referred to a number of mistakes or omissions by Mr Morris, namely, that:
          • <li “=””>(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;

    <li “=””>(2) he did not appreciate the impact of the definition of “financial reports” in the

Corporations Act

    1. ,

 

    which would remove the applicability of auditing standards;<li “=””>(3) he did not recognise that a special purpose financial report was not a general purpose financial report; and<li “=””>(4) he did not consider the application sections of accounting and auditing standards.

  1. As mentioned above, I accept the defendants’ submission that accounting standards generally do not apply to audits of special purpose financial reports.
  2. 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.
  3. 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”.
  4. 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

  1. 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.
  2. 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”.
  3. 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.
  4. 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

  1. The defendants contended that Mr Morris sought to deploy inapplicable auditing standards, specifically with reference to ASA 200 and ASA 240.
  2. 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.
  3. 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

  1. 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).
  2. 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.
  3. 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.
  4. 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

    1. The defendants submitted that reliance on Mr Morris’ evidence was problematic due to his lack of experience. They contended that (other than this case):
        <li “=””>(1) Mr Morris had not been involved in forensic or sufficient observational work involving the audit of a SMSF;

<li “=””>(2) he was never registered as an auditor of a SMSF;<li “=””>(3) he had no experience in auditing SMSFs under either the SIS Act or its predecessor legislation;<li “=””>(4) there was no reference in his curriculum vitae to an understanding of undertaking an audit of a special purpose financial report; and<li “=””>(5) Mr Morris’ lack of experience was evident from the mistakes made in his reports as discussed above.

  1. 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.]

  1. 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.
  2. 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.
  3. 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.
  4. 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”.

  1. 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.]

  1. 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.]

  1. 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].
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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

    1. 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”.
    2. 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.
    3. 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.
    4. 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.
    5. A similar conclusion may be reached as to the attack on Mr Morris’ qualifications and experience.
    6. 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.
    7. 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:
        <li “=””>(1) bringing serious misstatements and misdescriptions to the plaintiff’s attention;

<li “=””>(2) inquiring into and forming opinions as to certain matters; and<li “=””>(3) exercising reasonable care and skill.

  1. 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

    1. Mr Sheppard was a chartered accountant specialising in insolvency, reconstruction, investigation and forensic accountancy.
    2. Mr Sheppard produced three affidavits in these proceedings, dated:
        <li “=””>(1) 11 December 2015 (“Mr Sheppard’s first affidavit”);

<li “=””>(2) 29 August 2016 (“Mr Sheppard’s second affidavit”); and<li “=””>(3) 23 May 2017 (“Mr Sheppard’s third affidavit”).

    1. He undertook the following task:
        <li “=””>(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;

<li “=””>(2) a mathematical calculation of recoveries made net of legal costs (after review of tax invoices for legal costs); and<li “=””>(3) a mathematical calculation of the plaintiff’s claimed loss and damage.

  1. 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.
  2. 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

  1. 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.
  2. 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

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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).
  6. 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.
  7. 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).
  8. 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.
  9. 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

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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

  1. 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.
  2. 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

  1. 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.
  2. 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].
  3. 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

  1. 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.
  2. 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.
  3. The basic duty of an auditor has always been to audit accounts with reasonable care and skill: Pacific Acceptance Corporation at 73-74.
  4. 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”.
  5. 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.

  1. 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

      1. 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)).
      2. Further admissions were made which I described earlier in this judgment. It is sufficient to note, for present purposes, that the following was admitted:
          <li “=””>(1) various parts of the Super Fund’s assets were, in substance, worthless or of substantially compromised value;

    <li “=””>(2) the Super Fund’s financial statements for the relevant financial years were “materially inaccurate”; and<li “=””>(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.

      1. 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.
      2. 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.
      3. 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.
      4. 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.
      5. 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.
      6. 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.
      7. 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.
      8. 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:
          <li “=””>(1) Mr Moylan had prepared the accounts which were being audited;

    <li “=””>(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;<li “=””>(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;<li “=””>(4) Mr Moylan had personal interests in the loans and investments as set out in [

80

    1. ]-[

81

    1. ] above; and<li “=””>(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).

    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. Turning to the other investments, it might be noted at the outset that the defendants’ pleadings drew no distinction as to those assets.
    8. 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.
    9. 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.
    10. 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:
        • <li “=””>(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.

<li “=””>(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.<li “=””>(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.<li “=””>(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…”.

    1. 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.
    2. 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.
    3. As to the fourth proposition, I do not consider that the quality control form is irrelevant as contended by the defendants.
    4. 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.
    5. 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.
    6. 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.
    7. In any event, there was evidence before the auditor as to lack of value as follows:
        <li “=””>(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.

<li “=””>(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.

  1. 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

      1. 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:
          <li “=””>(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;

    <li “=””>(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

    ;<li “=””>(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;<li “=””>(4) failed, acting reasonably, to form and express certain opinions; and<li “=””>(5) failed to exercise due care and skill in a number of respects beyond the failure admitted by the defendants.

  1. 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)

  1. 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].
  2. 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).
  3. 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 objectivethe 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.]

      1. 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).
      2. In the 2007 audit report, under the heading “Compliance”, the defendants stated the following:
          • <li “=””>(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

          ]”;

    <li “=””>(2) “My procedures with respect to

regulation 4.09

      1.  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<li “=””>(3) “In my opinion the trustee of the fund has complied, in all material respects, with the requirements of [reg 4.09]”.

      2. 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.
      3. 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:
          <li “=””>(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.

    <li “=””>(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

      1.  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.

      2. 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”.
      3. 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:
          <li “=””>(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.

    <li “=””>(2) The evidence overwhelming demonstrated that there was not a reasonable basis for the loans and investments.<li “=””>(3) Even if the matters in the investment strategy were not requirements and were guidelines, they were still not adhered to.

      1. I accept the first and second contentions, in that respect, of the plaintiff.
      2. 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.
      3. 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.
      4. 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”.
      5. 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).
      6. 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”.
      7. 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.
      8. 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.
      9. 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.
      10. 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.
      11. 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).
      12. 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.
      13. 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.
      14. 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:
          • <li “=””>(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).

    <li “=””>(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.<li “=””>(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.<li “=””>(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.<li “=””>(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.

  1. 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.

    1. 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.
    2. 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.
    3. I also consider that, had reasonable care and skill been exercised, the defendants would have:
        <li “=””>(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

<li “=””>(2) qualified their audit report appropriately to refer to the non-compliance with reg 4.09.

  1. 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)

  1. Both parties relied upon their submissions with respect to the pleading in second further ASOC at para 16(a).
  2. 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 theSIS 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.
  3. 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)

    1. The parties’ competing contentions as to this alleged failure traversed a number of considerations as follows:
        <li “=””>(1) the construction of the retainers;

<li “=””>(2) the subject matter of the admissions insofar as they intersected with this question;<li “=””>(3) the significance of handwritten notations on the quality control form prepared for the year ending 30 June 2007;<li “=””>(4) the auditor’s obligation to identify and report on conflict; and<li “=””>(5) the defendants’ obligations to communicate with the plaintiff.

    1. 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.
    2. 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.
    3. 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].
    4. The second factual foundation was the quality control form, which had handwritten notations in the following terms:
        <li “=””>(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)”.

<li “=””>(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?”.<li “=””>(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”.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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).

      1. It cannot, therefore, be contended that the defendants were denied procedural fairness when the issue was pleaded in the proceedings.
      2. 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.
      3. 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”.
      4. 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:
          <li “=””>(1) The planning of an audit requires assessment of control risk;

    <li “=””>(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;<li “=””>(3) for a SMSF, one would proceed on the basis of a high control risk (see also AUG 4); and<li “=””>(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.

  1. 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.
  2. 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.
  3. 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.
  4. Before concluding the matter, I turn to the question of communication.
  5. 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.
  6. 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.
  7. 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.
  8. 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).
  9. 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).

    1. 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.
    2. 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.
    3. 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:
        <li “=””>(1) the River Island Facility Agreement and the MCD Facility Agreement had not been executed by the plaintiff;

<li “=””>(2) the representation letter (relied on by the defendants in this respect) was not executed by the plaintiff but rather by Mr Moylan;<li “=””>(3) the defendants never took any steps to confirm with the plaintiff its knowledge of the loans and investments; and<li “=””>(4) the plaintiff was, in fact, not aware of many of the loans and investments and the connection to Mr Moylan.

  1. 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].
  2. 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)

    1. 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.
    2. For convenience, I will repeat the terms of the failures asserted by the plaintiff:
        • <li “=””>(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;

<li “=””>(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;<li “=””>(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<li “=””>(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.

  1. 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.

  1. 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.
  2. 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.

  1. 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.
  2. 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.
  3. 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)

  1. The plaintiff relied upon a number of discrete factors here. I shall not repeat to them but refer to them in a shorthand form.
  2. 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.
  3. 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

  1. 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”.
  2. 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.
  3. 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”.
  4. 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.
  5. 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]).

  1. 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]).
  2. 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.
  3. 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).
  4. The general circumstances in have been outlined extensively in this judgment and include a substantial number of investments in the form of “mortgage loans”.
  5. 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.
  6. 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

      1. 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.
      2. 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”.
      3. 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.
      4. 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.
      5. 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.
      6. 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.
      7. 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:
          <li “=””>(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.

    <li “=””>(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.<li “=””>(3) The defendants were not provided with any financial statements for River Island,

 

    1. or any other information about its assets, liabilities, profitability or state of affairs, or any financial information about the guarantors.<li “=””>(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.<li “=””>(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.<li “=””>(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.<li “=””>(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.

    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. A similar conclusion can be reached in respect of the other investments based on the following:
        <li “=””>(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.

<li “=””>(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.

  1. 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))

    1. 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:
        <li “=””>(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

<li “=””>(2) the Super Fund’s financial reports were materially inaccurate.

  1. 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

  1. 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

      1. 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.
      2. 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.
      3. Having regard to the purpose of the legislation, the obligations falling upon the auditor under those sections were, it was contended, as follows:
          <li “=””>(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

    <li “=””>(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.

      1. I do not accept the plaintiff’s submissions, in this respect, for the following reasons:
          <li “=””>(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”.

    <li “=””>(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.<li “=””>(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.<li “=””>(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.<li “=””>(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

    1.  at 240. However, that authority does not assist the plaintiff in the contentions advanced, in this respect, for two reasons:

      • <li “=””>(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”.<li “=””>(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.

    <li “=””>(6) The plaintiff also referred to

Mercedes Holdings Pty Ltd v Waters (No 5) [2011] FCA 1428

    1.  at

[41]

    1.  (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

    1. It is convenient to deal with the plaintiff’s case under these provisions together as similar submissions were advanced.
    2. As to s 129 of the SIS Act, the plaintiff contended that, by the proper construction of the provision, the auditor was required to:
        • <li “=””>(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

<li “=””>(2) make such inquiries and take such steps as were necessary to enable the formation of the opinion referred to in subparagraph (1).

    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:
        <li “=””>(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

<li “=””>(2) make such inquiries and take such steps as were necessary to enable the formation of the opinion referred to in (1) above.

  1. 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.
  2. 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]).

  1. 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

  1. 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.
  2. 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.
  3. 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).

      1. 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.
      2. 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.
      3. 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:
          • <li “=””>(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;

    <li “=””>(2) There is authority of this Court that damages under

s 1324(10)

    1.  of the

Corporations Act

    1.  can only be awarded in proceedings where an injunction is actually sought:

Polon v Dorian [2014] NSWSC 571

    1.  (“

Polon

    1. ”) 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

    1.  at

[5]

    . No injunction is sought by the plaintiff in this case.

  1. 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).
  2. 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).
  3. 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.
  4. Given the ultimate conclusion reached under this heading, those reasons may be stated briefly.
  5. 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.
  6. 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.
  7. 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.
  8. In the circumstances, it is unnecessary to resolve the question of breach of statutory duty otherwise raised by the plaintiff.

MISLEADING AND DECEPTIVE CONDUCT

    1. 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:
        <li “=””>(1) in the case of the first defendant, s 42 of the FTA (NSW) or, alternatively, under s 9 of the FTA (Vic); and

<li “=””>(2) in the case of the defendants, s 52 of the TPA.

  1. 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)).
  2. 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

  1. 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).
  2. 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.
  3. Where silence is relied upon as conduct giving rise to a contravention of the FTA (NSW) or TPAthe 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].
  4. 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

  1. 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

      1. 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:
          <li “=””>(1) in the opinion of the auditor:

          • <li “=””>(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;

    <li “=””>(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;<li “=””>(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”);<li “=””>(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”);<li “=””>(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”).

    1. The plaintiff contended, with respect to each of the representations, the following:
        <li “=””>(1) as to representation 1, the representations were express;

<li “=””>(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<li “=””>(3) as to representation 3, the representation was implied.

  1. 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.
  2. 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.
  3. 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.
  4. 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.

      1. The plaintiff advanced its case, in respect of reliance, as having two elements reflected in the following two submissions:
          <li “=””>(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.

    <li “=””>(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 

    1. (1974) 131 CLR 634 (“

Sargent

    1. ”) at 658-659;

LMI v Baulderstone [2001] NSWSC 886

    1.  (“

LMI

    ”) at [86].

  1. 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.
  2. 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.
  3. This brings attention to the two authorities relied upon by the plaintiff, namely Sargent and LMI.
  4. 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.
  5. 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”.
  6. 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.
  7. 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.

  1. 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.
  2. 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.
  3. 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.
  4. In the result, I find that an inference may be drawn that the plaintiff did rely upon the audit reports.

Further representations

    1. 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.
    2. The plaintiff pleaded a second set of representations in para 39 of the second further ASOC as follows:
        <li “=””>(1) there was no reason to doubt the recoverability of the assets reported in the financial statements for the Super Fund;

<li “=””>(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);<li “=””>(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);<li “=””>(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”).

    1. In resisting the further representations, the defendants raised the following matters:
        <li “=””>(1) the plaintiff had not identified the relevant surrounding circumstances, nor had it disclosed what relevant facts exist that would have been disclosed;

<li “=””>(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;<li “=””>(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<li “=””>(4) the plaintiff was not reasonably entitled to expect disclosure of matters that the defendant was reasonably entitled to expect the plaintiff “already knows”.

  1. 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.
  2. 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

    1. 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.
    2. 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:
        <li “=””>(1) the defendants carried on business as accountants and auditors in partnership under the name “Baumgartner Partners”;

<li “=””>(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<li “=””>(3) each audit report was issued on the letterhead of “Baumgartner Partners”.

  1. The first defendant personally made the representations and the further representations and, by doing so, contravened s 42 of the FTA (NSW).
  2. 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.
  3. 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.
  4. 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

  1. 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

      1. 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.
      2. 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].
      3. 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).
      4. 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.
      5. 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.
      6. 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.
      7. 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.
      8. In supplementation of the earlier contentions advanced by the defendants, it was submitted that:
          • <li “=””>(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

          ].

    <li “=””>(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.

      1. 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.
      2. 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.
      3. 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.
      4. 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.
      5. 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.
      6. 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”.
      7. 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:
          <li “=””>(1) The Court could and should find that the report would have been passed to the plaintiff.

    <li “=””>(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.<li “=””>(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).<li “=””>(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.<li “=””>(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.<li “=””>(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.<li “=””>(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

    1. ;

[2004] HCA 54

    1.  at

[44]

[45]; McCrohan v Harith [2010] NSWCA 67

    1.  (“

McCrohon

    1. ”) at [56];

 Golden Strait Corporation v Nippon Yusen Kubishka Kaisha [2007] UKHL 12

    1. ;

[2007] 2 AC 353

    1.  (“

Golden Strait Corporation

    1. ”) at 371F;

 P E Kafka Pty Ltd v The Hermitage Motel Pty Ltd [2009] FCAFC 94

    1.  at

[16]

    1. 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”.<li “=””>(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.<li “=””>(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.<li “=””>(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.<li “=””>(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”.

  1. 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).
  2. 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

      1. 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:
          <li “=””>(1) actual or suspected non-compliance with the 2007 investment strategies, and the reasons for that actual or suspected non-compliance;

    <li “=””>(2) actual or suspected non-compliance with the SIS Act and

SIS Regulations

     (particularly reg 4.09):<li “=””>(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<li “=””>(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.

  1. 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

  1. 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.
  2. 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.

  1. 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

  1. 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

  1. I find that the breaches of contract and duty, and the misleading and deceptive conduct by the defendants caused the plaintiff’s loss.

LOSS

    1. 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.
    2. 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.
    3. Further, the plaintiff contended that Moylan Retirement Solutions and MBS no longer possessed policies of professional indemnity insurance.
    4. The plaintiff’s claimed losses fell into two categories:
        <li “=””>(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:

        • <li “=””>(a) as to the Pacific General Facility Agreement: a 100% recovery which was not disputed by the defendants in this respect; and

<li “=””>(b) as to the River Island and Tomkins Facility Agreements and Cartel and Limeburners Trusts:

      • <li “=””>(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,<li “=””>(ii) if necessary, by further action to achieve at least partial recoveries on the loans and investments against the borrowers and guarantors.

<li “=””>(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.

  1. 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

  1. 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.
  2. 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).
  3. 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).
  4. 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.]

  1. 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 inSellars 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.]

  1. 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).
  2. 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].
  3. 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.

  1. 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.
  2. 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.
  3. 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.
  4. 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).
  5. 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.
  6. 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”.
  7. 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 hadsome 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.]

  1. 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).

  1. I accept the plaintiff’s submissions as to the correct approach to quantification, as outlined below.
  2. 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.
  3. 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 3731984) 57 ALR 167[1985] ATPR 40-507 at 46,062.
  4. 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].
  5. 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”.
  6. 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].
  7. 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].
  8. The defendants submitted that the aforementioned principles were qualified where damages weresusceptible 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.
  9. 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

  1. 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).
  2. 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.
  3. 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.
  4. 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.
  5. 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).
  6. 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.
  7. 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.

  1. 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

  1. 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

      1. 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.
      2. 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:
          <li “=””>(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);

    <li “=””>(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.

      1. 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:
          <li “=””>(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”.

    <li “=””>(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.<li “=””>(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.

  1. 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.
  2. 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.
  3. 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

      1. 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:
          <li “=””>(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);

    <li “=””>(2) The claims rose out of the financial, investment and accountancy advice given the Super Fund;<li “=””>(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;<li “=””>(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

    1.  of the

Corporations Act 

    1. and reg 7.6.02AA of the

Corporations Regulations 2001 

    1. (Cth)). Moylan Retirement Solutions ceased holding an Australian Financial Services License in May 2013 and was subsequently deregistered.<li “=””>(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).<li “=””>(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.

    2. The defendants raised three broad submissions in reply as follows:
        <li “=””>(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;

<li “=””>(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<li “=””>(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).

    1. Putting aside issues of insurance momentarily, there were two particular submissions of the defendants, in this respect, as follows:
        <li “=””>(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.

<li “=””>(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.

    1. 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.
    2. The defendants’ contentions in this respect may be further distilled to two primary propositions:
        <li “=””>(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

<li “=””>(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.

    1. 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.
    2. 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.
    3. 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:
        <li “=””>(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);

<li “=””>(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;<li “=””>(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<li “=””>(4) the loans were of substantially no value.

  1. 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.
  2. 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

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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

    1. At the outset, it should be made clear that there were two potential avenues for insurance claims:
        <li “=””>(1) claims against Moylan Retirement Solutions for negligent advice in breach of professional duty; and

<li “=””>(2) claims against MBS for the negligent preparation of accounts.

  1. 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.
  2. 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.
  3. 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.

    1. 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:
        <li “=””>(1) any entity operated or controlled by an insured; and

<li “=””>(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).

  1. 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.
  2. 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.

  1. 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).
  2. The DUAL policy wording contained an insuring clause that provided coverage for any claim for compensation.
  3. 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.

  1. 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.

  1. 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 …

    1. 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:
        <li “=””>(1) Payment under the Pacific General Facility Agreement (and the/ Regional Land Fund):

        • <li “=””>(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.

<li “=””>(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.<li “=””>(2) Payment under the River Island Facility Agreement (and the River Island investments):

        • <li “=””>(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”.<li “=””>(b) There was evidence in these proceedings that:

          • <li “=””>(i) MCD Holdings (of which Mr Moylan was a shareholder and director as mentioned above) was a shareholder of River Island;<li “=””>(ii) Mr Moylan was a director of River Island; and<li “=””>(iii) Mr Moylan was a personal guarantor of the River Island Facility Agreement.

      <li “=””>(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.

<li “=””>(3) Payment in relation to Limeburners Creek Unit Trust:

      • <li “=””>(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”.<li “=””>(b) The evidence in the proceedings revealed that Mr Moylan was a shareholder and former director of Limeburners Creek.<li “=””>(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.

<li “=””>(4) The Cartel Trust:

      • <li “=””>(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”.<li “=””>(b) The evidence in these proceeding revealed that MCD Holdings was the trustee and a beneficiary of the Cartel Trust.<li “=””>(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.

<li “=””>(5) Tomkins Facility Agreement:

      • <li “=””>(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”.<li “=””>(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.
    1. 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.
    2. The plaintiff’s response to the conflict of interest submissions by the defendants were, in summary, as follows:
        <li “=””>(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;

<li “=””>(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;<li “=””>(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<li “=””>(4) the plaintiff would not have needed to frame its cause of action based on conflict interest.

    1. 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.
    2. Further, there is evidence within these proceedings which showed that conflicts of interest did exist, most relevantly (as noted above):
        <li “=””>(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;

<li “=””>(2) as to Limeburners, Mr Moylan was a shareholder; and<li “=””>(3) as to the Cartel Trust, MCD Holdings was the trustee and also a beneficiary.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. However, the position with regard to any claims relating to the Tomkins Facility Agreement is different from the other investments.
  6. 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.
  7. 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.
  8. 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.
  9. 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].
  10. 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.
  11. 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

  1. Considering the findings above, the following discussion is only relevant to any claims with regard to the Tomkins Facility Agreement.
  2. 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 97at [69].
  3. 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.
  4. 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 inMcCann.
  5. 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.
  6. 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.
  7. 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).
  8. 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.
  9. It was also submitted that the financial reports of the Super Fund were dishonestly prepared by MBS.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
  14. 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

  1. 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

  1. 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.
  2. 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.
  3. 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).
  4. 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.
  5. 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.
  6. 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.
  7. 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).
  8. 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.
  9. 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.
  10. 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.
  11. 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

  1. 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.
  2. 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.
  3. 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.
  4. 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].
  5. 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.
  6. 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.
  7. 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

    1. 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.
    2. 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:
        <li “=””>(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.

<li “=””>(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

  1. 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.
  2. 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

  1. 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

  1. 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.
  2. 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.
  3. I shall deal with each category of claim debated, in that respect, below.

Claim against partners of Turnbull Hill Lawyers

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.]

  1. 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].
  2. 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).
  3. 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.
  4. 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.
  5. Some further considerations arise with respect to Turnbull Hill Lawyers.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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”).
  12. 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

  1. 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.
  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.
  3. 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.
  4. 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.
  5. 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

  1. 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.
  2. 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).
  3. 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.
  4. Ultimately the plaintiff’s return from this claim was $438,141.43 (which was less than the principal sum amount of the claim).
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. 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).
  13. 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.
  14. 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

  1. 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.
  2. 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

    1. In summary, I have found with respect to loss:
        <li “=””>(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.

<li “=””>(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

    1. The Court has earlier referred to the principles relating to the assessment of damages for approved loss of valuable opportunity.
    2. 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).
    3. 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).
    4. The description of those categories of loss upon which damages were to be assessed were as follows:
        <li “=””>(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).).

<li “=””>(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).

  1. 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.
  2. 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

    1. The Court was provided with a number of calculations prepared by Mr Sheppard and Ms Jones with respect to the calculation of damages.
    2. 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.
    3. 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.
    4. 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.
    5. 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:
        • <li “=””>(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

<li “=””>(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

    1. As to the second calculation, Mr Sheppard calculated:
        <li “=””>(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;

<li “=””>(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).

    1. 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.
    2. 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:
        <li “=””>(1) lost interest on amounts recovered $1,934,106; and

<li “=””>(2) unrecovered amounts and interest thereon $2,364,114.

  1. 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.
  2. 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.
  3. I will return to those methods of calculation below.

Category 1:

Loss of chance to make recoveries beyond those that were actually achieved

    1. 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:
        <li “=””>(1) for the loan to Pacific General, the probability of a 100% recovery was not disputed;

<li “=””>(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.

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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).
    6. 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.
    7. 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.
    8. As to the category 1, I accept the plaintiff’s submission that:
        <li “=””>(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.

<li “=””>(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.<li “=””>(3) There is, therefore, no warrant for reducing the damages award that relates to amounts that were never recovered, on account of legal costs.

  1. 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.
  2. 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.
  3. 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.

  1. 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

  1. 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.
  2. 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.
  3. 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

    1. 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).
    2. Adjusting these figures to align with my earlier findings, I reach the following conclusions:
        • <li “=””>(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.

<li “=””>(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.<li “=””>(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.<li “=””>(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.

  1. 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%).
  2. I find that damages in the sum of $2,260,140.

AFFIRMATIVE DEFENCES

Professional Standards Legislation – limits on damages?

    1. 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.
    2. 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:
        <li “=””>(1) Does the NSW Scheme apply to the facts of the case?

<li “=””>(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?<li “=””>(3) Do separate caps apply to the audit opinions for each of the financial years?<li “=””>(4) Does each transaction addressed by each audit opinion give rise to a separate “claim”?<li “=””>(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?

  1. 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”.
  2. 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.
  3. 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.
  4. 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

      1. 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:
          • <li “=””>(1) the proceedings involve a “matter” between residents of difference states within the meaning of s 75(iv) of the

        Australian Constitution

          ; and

    <li “=””>(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

    1. This Court is invested with federal jurisdiction in the matter:

s 39(2)

    1.  of the

Judiciary Act 1903 

    1. (Cth) and

s 86

      1.  of the TPA.

      2. 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.
      3. 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.
      4. 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.
      5. 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.
      6. 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.
      7. 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.
      8. 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.
      9. 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].
      10. 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].
      11. 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:
          • <li “=””>(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

    <li “=””>(2) does not include State laws having application independently of anything done by a court, which are within State legislative competence (

Rizeq 

    at [105]).

  1. 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

  1. 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].
  2. 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.
  3. 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 defendantwhich gives the plaintiff his cause for complaint”: Jackson v Spittall (1870) LR 5 CP 542 at 552, see also Voth at 567.
  4. 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.
  5. 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.]

  1. 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.
  2. 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.]

  1. 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.
  2. I do not consider that the decision in Voth can be distinguished from the present matter.
  3. 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”.

  1. 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.

      1. 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):
          • <li “=””>(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].

    <li “=””>(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 

    1. at 567-569, cited for this proposition in

Dow Jones 

    1. at [43] and

Chubb 

    1. 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 

    1. at [43];

Chubb 

    at [151].

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.

  1. In any event, Ward J’s decision suggests that the case turned on its own facts and circumstances.
  2. 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).

  1. It follows that the plaintiff’s claim in negligence is governed by the law of Victoria.

Claim in Contract

    1. 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.
    2. Thus, the issue again becomes the application of the test or rule in the circumstances of this case.
    3. 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:
        <li “=””>(1) the plaintiff resides in NSW;

<li “=””>(2) the defendants had their place of business in Victoria;<li “=””>(3) the parties contemplated the audit would be carried out in Victoria although the audit was of books and records ordinarily maintained in NSW;<li “=””>(4) the audit was, in fact, carried out in Victoria; and<li “=””>(5) the retainer was concluded by email exchange by the parties.

    1. 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).
    2. However, it should be noted that the plaintiff accepted that the place of contract was a neutral factor.
    3. 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:
        • <li “=””>(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].

<li “=””>(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.<li “=””>(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.<li “=””>(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.<li “=””>(5) The nature and subject matter of the contract are also relevant but the same factors as (2) above are applicable in that respect.<li “=””>(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)

  1. 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.
  2. 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.
  3. 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.

      1. 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)”.
      2. The meaning of “cause of action” has been understood as:
          • <li “=””>(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

    <li “=””>(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

    1. ;

[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.

  1. 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.

  1. 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.
  2. 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

  1. 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.
  2. 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.
  3. The plaintiff divided its submissions in this respect between the admitted and non-admitted representations.
  4. 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.
  5. 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.

  1. 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”.
  2. 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.
  3. 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.
  4. 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.
  5. 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

  1. The plaintiff made a separate submission as to why the NSW Scheme, if it operated, did not apply to the second defendant.
  2. The submission advanced in support of this proposition was as follows:
      <li “=””>(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<li
(c) a practice entity member of the Institute.

  1. 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”.
  2. I accept the defendants’ submissions in this respect as summarised above.

The Victorian Scheme

  1. 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.
  2. 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.
  3. 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.
  4. 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

    1. The plaintiff accepted that the NSW Scheme applied to limit the defendants’ liability under the FTA (NSW).
    2. 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”).
    3. 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.
    4. 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).
      1. (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.

 

      1. (4) As is apparent from

Poignand v NZI Securities Ltd [1992] FCA 369

      1. ;

(1992) 37 FCR 363

      1.  (“

Poignand

      1. ”) 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

      1.  and

80

      1.  of the

Judiciary Act

      1. (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 

      1. at [104].

 

      1. (6) However, a combination of

s 4 

      1. of the

Jurisdiction of Courts (Cross-Vesting) Act 1987 

      1. (Vic) and

s 9

      1.  of the

Jurisdiction of Courts (Cross-Vesting) Act 1987 

      1. (NSW) mean that a NSW court could exercise the power under s 159 of the FTA (Vic) through cross-vested jurisdiction.|

 

      1. (7)

Section 79(1) 

      1. of the

Judiciary Act 

      1. applies without any anterior operation of

s 80.

      1. (8) As explained in

Rizeq, 

      1. 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

      1.  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)

      1.  of the

Judiciary Act

      1. . 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 

      1. 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 

      1. of the

Judiciary Act

      1. (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 

    1. 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.
  1. 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.

  1. 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

  1. 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.
  2. 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].
  3. 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).
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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” inRizeq 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.
  9. In the result, the plaintiff’s claim for relief under the FTA (Vic) is incompetent.

Conclusion as to Professional Standards Scheme Cap

    1. In summary, the Court has reached the following conclusions with respect to this affirmative defence:
        <li “=””>(1) the relevant conduct occurred in Victoria and, as such, the relevant law to the claim in tort is the law of Victoria;

<li “=””>(2) the claim in contract is to be governed by the law of Victoria;<li “=””>(3) hence, the NSW Scheme does not apply to those claims;<li “=””>(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;<li “=””>(5) the Victorian Scheme did not apply because the defendants did not give notification in the form required; and<li “=””>(6) the plaintiff’s claim for relief under the FTA (Vic) is incompetent.

Contributory Negligence

  1. 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”).
  2. 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.
  3. 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.
  4. 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.

  1. 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.]

  1. 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).

  1. 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).
  2. 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).

  1. 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]).

  1. 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.

  1. 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.

  1. 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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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]).
  7. 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.
  8. 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.
  9. 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.
  10. 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<li “=””>(3) exercise reasonable care and skill to verify the existence and value of the assets.
  11. 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

  1. 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

  1. The causes of action in negligence and breach of contract are “apportionable claims” under Pt 4 of the Civil Liability Act.
  2. 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, 2018at 502-3).

  1. 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).
  2. The plaintiff’s claim for damages under the SIS Act is not apportionable but that claim has been rejected by the Court.
  3. 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].
  4. The defendants have nominated three concurrent wrongdoers: MBS, Ms Crittle and Mr Moylan (in his capacity as the Super Fund’s former auditor).

MBS

  1. 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.
  2. 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.
  3. 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.
  4. 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).
  5. 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).
  6. 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.
  7. 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.
  8. 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.
  9. 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”.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
  14. 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.

      1. Reference was also made to Frankston as extracted at [415] above. Out of Frankston, the plaintiff submitted the main objects of the audit were:
          <li “=””>(1) to certify to the correctness of the financial position;

    <li “=””>(2) the detection of errors; and<li “=””>(3) the detection of fraud.

    1. 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.
    2. 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).
    3. 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]).
    4. 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.
    5. 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.
    6. 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
      (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).
    1. 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<li “=””>(3) failed to make any statement, notation, qualification or other communication as to the concerns held about Mr Moylan’s involvement.

  1. 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).
  2. The absence of the MBS retainers means that the Court cannot identify whether there was any express or relevant disclaimer of responsibility.
  3. 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

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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 Regulationsin 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.
  6. 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.
  7. 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.
  8. 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.

  1. 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.

  1. 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.]

  1. 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.
  2. 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.
  3. 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.
  4. In the result, no apportionment will be made in respect of Mr Moylan’s 2006 financial year audit.

Ms Crittle

  1. 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.
  2. 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].
  3. 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

  1. 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

  1. 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.

  1. 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).
  2. 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.
  3. 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.
  4. 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

  1. 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.