Ryan Wealth Holdings Pty Ltd v Baumgartner

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”).

Ryan Wealth Holdings Pty Ltd (“the plaintiff”) is the trustee of the Super Fund. The sole shareholder and director of the plaintiff is, and has always been, Ms Trudy Crittle.

The defendants were David Keith Baumgartner (“the first defendant”) and KJ Equities Pty Ltd (“the second defendant”). The first and second defendants commenced business in partnership under the name “Baumgartner Partners” from mid-2001 and maintained that business at all relevant times for the purpose of these proceedings (the first and second defendants shall be referred to collectively, when appropriate, as “the defendants”). The business of that partnership included the provision of accounting and auditing services.

The first defendant was a chartered accountant from 2006. He was licenced and qualified to conduct audits of SMSFs. He was an approved auditor for the purposes of the Superannuation Industry (Supervision) Act 1993 (Cth) (“the SIS Act”).

The second defendant was not an approved auditor and was not appointed as auditor of the Super Fund.

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:

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

The first audit, for the purposes of these proceedings, concerned the financial year ending 30 June 2007 and was undertaken pursuant to a letter of engagement, bearing the letterhead “Baumgartner Partners”, dated 7 March 2008 (“the 2007 audit”).

The letter of engagement had a formal closing of “Yours Faithfully, Baumgartner Partners” and provided a space for signature above the typed words: “David Baumgartner”. The letter was signed by the first defendant in that space. Mr Christopher Moylan, a financial advisor and accountant to the plaintiff, signed the letter on behalf the plaintiff (Mr Moylan’s involvement is described at [28] below).

By this means, an agreement was entered into and an auditor was retained to perform duties under the audit contract, the terms of which were specified by that letter of engagement (the audit contract for the 2007 audit shall hereinafter be referred to as “the 2007 retainer”): see, for example, Simonius Vischer & Co v Hold & Thompson [1979] 2 NSWLR 322 at 340C (per Samuels JA, with whom Moffitt P and Reynolds JA agreed) and Meerkin & Apel v Rossell Pty Ltd [1998] 4 VR 54 at 62 (per Charles JA, with whom Callaway JA and Batt JA agreed) (a dispute as to whether the second defendant was a party to an audit contract shall be dealt with later in this judgment).

On or about 15 May 2008, the first defendant, as the approved auditor, issued an audit report in respect of the financial year ending 30 June 2007 (“the 2007 audit report”).

The second audit, for the financial year ending 30 June 2008, was undertaken pursuant to an undated letter of engagement bearing the same formal closing, namely, “Yours Faithfully, Baumgartner Partners” and provision for the first defendant’s signature (“the 2008 audit”).

The undated letter of engagement was signed by the first defendant and Ms Crittle in about May 2009 (this audit contract for the 2008 audit shall hereinafter be referred to as “the 2008 retainer”).

On or about 3 June 2009, the first defendant issued an audit report in respect of the financial year ending 30 June 2008 (“the 2008 audit report”).

The third audit, for the financial year ending 30 June 2009, was undertaken pursuant to another undated letter of engagement bearing the same formal closing and signature provision for the first defendant (as described above, with respect to the letters of engagement as to the 2007 and 2008 audits) (“the 2009 audit”).

The letter of engagement was signed in about May 2010 (this audit contract shall be referred to as “the 2009 retainer”). (Collectively, the 2007, 2008 and 2009 retainers will be referred to as “the retainers”).

On or about 28 June 2010, the first defendant issued an audit report in respect of the financial year ending 30 June 2009 (“the 2009 audit report”). (Collectively, the 2007, 2008 and 2009 audit reports will be referred to as “the audit reports”).

In each of the audit reports, the auditor gave an unqualified opinion that the trustee of the Super Fund had complied, in all material respects, with the requirements of various provisions of the SIS Act and the Superannuation Industry (Supervision) Regulations 1994 (“the SIS Regulations”), and that the financial reports of the Super Fund presented fairly, in all material respects, the financial position of the Super Fund as at the end of the relevant financial year.

The plaintiff’s essential proposition in these proceedings was that as result of the failures of the auditor, in the respective financial years, irregularities went undetected for many years and, when ultimately those irregularities were discovered, the opportunity to redeem many of the loans and investments of the Super Fund, or to pursue recovery action against those on whose advice the loans and investments had initially been made, had been lost.

By a second further amended statement of claim filed with leave in Court on 31 August 2017 (“second further ASOC”), the plaintiff claimed, inter alia, that the defendants’ conduct was:

The defendants made certain admissions as to breaches of their duties and representations in its defence to the further amended statement of claim (“the amended defence”) filed in Court on 28 August 2017 (“the admitted breaches”) but otherwise denied the alleged breach of their duties, any misleading and deceptive conduct and contravention of obligations under the SIS Act (collectively, “the non-admitted breaches”). The defendants also contested causation as to both admitted and non-admitted breaches.

In the broad, the issues in the proceedings are twofold. First, there was an issue as to causation for the admitted breaches by the defendants. Secondly, as to the non-admitted breaches, the issues concerned whether there existed duties and, if so, whether the pleaded breaches had been made out – together with an issue as to whether there is a causal link with respect to those breaches.

The defendants’ ultimate position was that, notwithstanding the admitted breaches, the plaintiff has not demonstrated causation or loss. In the result, the defendants contended that the plaintiff was only entitled to an award of nominal damages of $300 in total for the admitted breach of the retainers.

That overview does not purport to comprehensively digest the issues emerging from the parties’ contentions. That task may only properly occur in the context of close attention being paid to the pleadings and the submissions of the parties (see under the heading “Issues” below from [222]).

Before the Court embarks upon that course, it is necessary to set out the factual background.

As earlier mentioned, the sole shareholder and director of the plaintiff is Ms Crittle.

In 2006, following a family law settlement with her former husband, Ms Crittle had a sum of money to invest. Ms Crittle was of retirement age and had no investment or accounting training, experience or knowledge, having worked exclusively as a homemaker since 1969.

Ms Crittle sought advice from a financial adviser, Mr Moylan, who was a director, shareholder and the authorised representative of a financial planning firm known as The Retirement Planning Specialists Pty Limited (later known as Moylan Retirement Solutions Pty Limited and shall hereinafter be referred to as “Moylan Retirement Solutions”).

Moylan Retirement Solutions held an Australian Financial Services Licence. Mr Moylan worked from offices in Charlestown, near Newcastle. Ms Crittle had been introduced to Mr Moylan by Mr Kenneth Michael Hill, her long time solicitor of 30 years, of Turnbull Hill Lawyers. Mr Moylan’s office was on the same floor as Turnbull Hill Lawyers. Ms Crittle placed great trust and weight in recommendations made to her by Mr Hill.

In early 2006, Ms Crittle established the Super Fund, with the plaintiff appointed as trustee, and transferred sums exceeding $7 million to be “invested” in accordance with Mr Moylan’s advice. I now turn to those investments.

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, dated 10 February 2006, was between:

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.

The Pacific General Facility Agreement, dated 23 February 2006, was between:

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”).

The MCD Holdings Facility Agreement, dated 14 March 2006, was between:

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.

The Tomkins Facility Agreement, dated 12 May 2006, was between:

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”.

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:

These investments referred to in [31]-[40] shall be referred to as “the loan investments”.

There is no claim, as such, made against MCD Holdings.

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

In May 2006, the sum of $400,000 was invested in the Cartel Investments Unit Trust (“the Cartel Trust”). The trustee was MCD Holdings.

The Cartel Trust was heavily invested in the property venture associated with the Pacific General Facility Agreement.

On 3 July 2006, the sum of $100,000 was invested in the Limeburners Creek Unit Trust (“the Limeburners Trust”). The trustee was Limeburners Creek Investments Pty Limited (“Limeburners Creek”).

The Limeburners Trust had made significant loans to River Island and MCD Holdings.

Despite some initial dispute, the defendants accepted, correctly, in my view, that the weight of the evidence supported a finding that $100,000 was advanced by the plaintiff for investment in the Limeburners Trust. I note, in that respect, that for each relevant financial year, the Super Fund recorded a $100,000 investment in the Limeburners Trust and the plaintiff’s bank statements showed a $100,000 cheque withdrawal on 5 July 2006; the plaintiff’s general ledger also recorded an investment in the Limeburners Trust in the amount of $100,000 made that same day.

The investments in the respective unit trusts will be collectively referred to as “the non-loan investments”.

The loan investments and the other investments shall be collectively referred to throughout this judgment as “the loans and investments”.

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:

In reply, the defendants submitted:

A short time after meeting with Mr Moylan, Ms Crittle received a letter from Mr Moylan dated 1 February 2006 (“the 2006 correspondence”). By that correspondence, Mr Moylan recommended the establishment of the Super Fund. Mr Moylan knew the asset position of Ms Crittle at that time. One of the benefits of establishing the Super Fund, as stated in the 2006 correspondence, was that Ms Crittle could “stay in control”. Another advantage was the flexibility offered by the superannuation arrangements.

At the bottom of the first page of the 2006 correspondence, Mr Moylan stated, on behalf of Moylan Retirement Solutions, that he would “assist” Ms Crittle with the following:

The 2006 correspondence did not go into any detail as to what was involved in giving assistance. During cross-examination, Ms Crittle was asked whether she “left that sort of detail up to [Mr Moylan]”, she gave the following evidence: “I placed myself in his hands at that moment on the advice of Michael Hill, as you've said, the lifelong friend, and I would have always referred back to Michael for any advice. That was the reason I did it, I travelled this road”.

In the 2006 correspondence, Mr Moylan recommended that “the aim was… to stay very flexible” over the next 6-12 months; to have enough “ready” cash in a bank, building security or credit union and the balance of the assets on the “short term” to be invested in “cash, fixed interest or property”. After the short term period, the plaintiff’s investment portfolio could be appropriately structured to include “shares, etc”.

Mr Moylan then stated:

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

During cross-examination, Ms Crittle gave evidence that she had appointed Mr Moylan “to be my adviser under the umbrella of Turnbull and Hill” and when initially asked if she controlled the investment decisions made she said, “yes, but as – control and being advised, I’m not quite sure if you want to know the difference”.

Throughout the cross-examination of Ms Crittle, it was suggested that she had control over the investment decisions. She consistently maintained, however, that the decisions she made, in exercising that control, were the subject of “advice”. Her evidence, in that respect, was as follows:

At this juncture, I interpose to note that I accept the submission of the plaintiff that Ms Crittle gave her evidence candidly and was concerned to tell the truth and recall matters to the best of her ability. My observations of the witness and the transcript of her evidence reveal Ms Crittle to be a truthful and reliable witness.

As to the loans and investments made by Mr Moylan, Ms Crittle was aware of the following facility agreements (having personally signed the facility agreements):

As to the Pacific General Facility Agreement, she stated that she did not know what she would have done had she been aware that Mr Moylan had a personal involvement. This was because Ms Crittle, on her evidence, “totally trusted both these people” (being a reference to Mr Moylan and Mr Hill).

As to the Tomkins Facility Agreement, Ms Crittle agreed the funds were disbursed without her direction or permission.

She was not aware of the following loan investments:

She had not heard of the Limeburners Trust or the Cartel Trust until 2013 and 2014, respectively.

It is plain that Ms Crittle did not exercise effective “control” or “direction” in making the loans and investments (or providing the loans).

In addition to the aforementioned discussion of the evidence, that finding is supported by the following facts:

It is true that Mr Moylan as the authorised representative of an investment advisory company; made a representation that he would advise by the 2006 correspondence; and was appointed as an advisor with a specific function to give investment advice. However, those facts, in and of themselves, do not demonstrate that he did, in fact, advise Ms Crittle as to the loans and investments, even though each one of those considerations is relevant to resolving that question.

It is also true, as I have found, Ms Crittle was unaware of or had never heard of most (but not all) of the loans and investments (and funds were dispersed without her knowledge).

It follows, as a matter of logic, that she did not directly receive advice or recommendations about the loans and investments of which she was unaware. It does not follow, however, that the loans and investments occurred other than upon Mr Moylan’s advice, even if a specific recommendation was not made to Ms Crittle about each such investment.

Ms Crittle trusted Mr Moylan to look after her affairs and in doing so she placed the plaintiff in the hands of Mr Moylan. As the 2006 correspondence disclosed, his function was to make investment recommendations. The arrangement was never that investments would, necessarily, be made by funds being provided on an investment-by-investment basis after the provision of advice or recommendation, as to each such investment, but upon a very substantial sum being placed into trust, which was to be drawn upon “after consultation” with Ms Crittle. I agree with the submission of the plaintiff that the “investments were not made in a vacuum”. Mr Moylan made such investments and, as the plaintiff submitted, not as an office holder of the plaintiff. It must follow that he was making the loans and investments in his role as a financial advisor to the plaintiff.

Whilst his advice was not communicated, as such, it does not follow that the loans and investments were not made on his advice – in the sense that the funds held on trust had been placed in his hands to make investments as a professional financial advisor. The notion of “advice” is wide enough to encompass, in this context, the result of the “consultation, determination, plan”, even if Ms Crittle was unwise in her decision to allow Mr Moylan such a licence in handling her investments.

Whilst it is unnecessary to resolve that question, it would appear Mr Moylan’s actions would fall within the meaning of “financial product advice” within the Corporations Act 2001 (Cth).

Chapter 7 of the Corporations Act regulates financial services and markets. Under that Act, the terms “financial product” and “financial product advice” are defined at s 763A(1) and s 766B(1), respectively. Those definitions are extracted below:

The only plausible explanation for Ms Crittle entering the facility agreements, of which she was aware, is that she received advice to do so, from Mr Moylan, and having regard to Mr Moylan’s capacities, in that respect, she relied upon his advice. That is consistent with the evidence of Ms Crittle given with respect to the Pacific General Facility Agreement.

It is true that Mr Moylan’s perceived involvement in the loans and investments (which will be discussed further, below) may offer a possible alternative for the loan investments that Ms Crittle was not aware. It does not, however, account for loan investments and other investments of which she was aware.

However, the principle stated in Commercial Union Assurance, relied upon by the defendants, cannot operate in circumstances where the “proof” lies not only from inferences which may be drawn from the surrounding circumstances, but the evidence of Ms Crittle for the plaintiff, albeit under cross-examination. Hence, I consider that Ms Crittle did rely on Mr Moylan’s advice.

Unbeknownst to Ms Crittle, Mr Moylan, whilst he was a chartered accountant, had a personal interest or involvement in a number of the property development ventures encompassing the loans and investments.

The following illustrates that involvement:

Additionally, specifically with respect to Mr Moylan’s involvement with MBS, the following should be noted:

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:

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

The 2007 financial statement was prepared by “Moylans” and signed by Ms Crittle on 12 February 2007 (it should be noted, that date appears to be a mistake and should have been dated “2008”).

The following appeared in the 2007 financial statement under the heading, “Notes to the Financial Statements for the period 1 July 2006 to 30 June 2007”:

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 included the following under the heading, “Notes to the Financial Statements for the Year Ended 30 June 2009”:

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

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

The 2007 investment strategy was signed by Ms Crittle on 10 February 2008, and included the following:

The 2008 and 2009 investment strategies were in similar terms.

As previously mentioned, Mr Moylan arranged for “Baumgartner Partners” to conduct an audit of the Super Fund, in respect of the relevant financial years, pursuant to the retainers.

The terms of the retainers, which were in similar but not identical terms, are addressed below.

Following the audits, as previously mentioned, the first defendant issued the audit reports.

In each audit report, the first defendant recorded, inter alia, that:

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:

In early 2013, the professional indemnity policies of insurance formerly held by Moylan Retirement Solutions lapsed.

On 30 August 2013, professional indemnity policies of insurance formerly held by MBS lapsed.

In mid-2013, Ms Crittle received a letter from another unit holder in the Limeburners Trust expressing concerns about the financial position of the trust and its assets and proposing that an independent forensic accountant be appointed to investigate the affairs of the trust.

Ms Crittle arranged for the plaintiff to engage a forensic accountant, Ms Joanne Phillips, and a firm of solicitors, RBHM Commercial Lawyers, to assist the plaintiff to uncover what may have occurred.

Ms Phillips subsequently obtained the first defendant’s files and, on 5 May 2014, sent the first defendant an email with a detailed list of questions concerning the financial position of the Super Fund and the state of its records.

As at 5 May 2014, the status of the relevant persons and entities was as summarised above at [96].

The plaintiff took steps to recover the loans and investments of the Super Fund by initiating legal action against the relevant borrowers or guarantors (that were still solvent) and third parties. As a result of those steps, the plaintiff made the following recoveries:

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

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).

The 2007 retainer recorded:

It further recorded:

In addition, the 2007 retainer included the following:

Under the heading “Audit of SIS Compliance”, it stated:

Under the heading “Audit Scope”, the 2008 and 2009 retainers recorded the following:

The 2007 retainer included the following:

The 2007 retainer also provided:

The 2007 retainer also, relevantly, provided:

Again, in similar terms to the 2007 retainer, the 2008 and 2009 retainers included the following terms under the heading “Audit Objectives and Approach”:

Further, the 2008 and 2009 retainers recorded:

The 2007 retainer included the following:

Similarly, the 2008 and 2009 retainers record:

The 2008 and 2009 retainers included an additional heading:

Each of the retainers, with respect to fees, stipulated:

The relevant statutory framework, comprising of the SIS Act and the SIS Regulations, informed the terms of the audit contract for the relevant financial years, and is also relevant to the plaintiff’s claims for damages under s 315(11) of the SIS Act by reason of contraventions of the SIS Act.

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

The object of the SIS Act was to make provision for the prudent management of certain superannuation funds, approved deposit funds and pooled superannuation trusts and for their supervision by the Australian Prudential Regulation Authority (“APRA”), the Australian Securities and Investments Commission (“ASIC”) and the Commissioner of Taxation: s 3(1).

The SIS Act provides the following definitions in s 10:

“Self-managed superannuation fund” was defined in s 17A. It was not in dispute that the Super Fund was at all relevant times a SMSF pursuant to the SIS Act.

The Super Fund was a “regulated superannuation fund” (as defined in s 19) and therefore a “superannuation entity” for the purpose of the SIS Act.

As a superannuation entity, it was not disputed, that the Super Fund was subject to the requirements of the SIS Act with respect to the preparation of accounts, statements and audits.

Prior to 24 September 2007, those requirements were set out in Pt 13 of the SIS Act. As explained below, although Pt 13 was repealed on 24 September 2007, it continued to apply to years of income prior to that date and so applied to the audit that was undertaken of the Super Fund in respect of the year ended 30 June 2007.

The requirements, as prescribed by the SIS Act at that time, were as follows:

Section 113 provided:

The “approved form” of audit report, referred to in s 113, was published by the ATO. The approved form in force at the time of the 2007 audit identified various provisions of the SIS Act and the SIS Regulations in respect of which the auditor under s 113(3)(b) was required to form and express an opinion as to whether there had been compliance (it shall hereinafter be referred to as “the 2007 approved form”).

Among the provisions of the SIS Regulations that were identified in the 2007 approved form was reg 4.09. That regulation is set out in [136] below.

Part 16 of the SIS Act set out rules relating to “Actuaries and Auditors of Superannuation Entities”.

Within Pt 16, ss 129 and 130 imposed reporting obligations on auditors in certain circumstances. The relevant parts of those sections are extracted below:

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.

Regulation 1.04 provided as follows:

Regulation 4.09 provided as follows:

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:

On 24 September 2007, the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007 (Cth) (“the 2007 Act”) received Royal assent and, as a result, Pt 13 of the SIS Act was repealed and a new Pt 4 was inserted into the SIS Act.

Among other things, the new Pt 4 included s 35C (set out below) which replaced the previous s 113 relating to audits. However, s 35C only applied in respect of financial years ending 30 June 2008 and following. It is common ground that s 113 of the SIS Act, as it stood prior to the enactment of the 2007 Act, continued to apply in respect of the 2007 audit.

I turn to the SIS Act at the time of the 2008 and 2008 audits. Sections 35A and 35B (in the new Pt 4) contained very similar requirements, relating to the keeping and maintaining of accounting records and preparation of financial accounts and statements, as had been previously been contained in Pt 13, specifically, ss 111 and 112, prior to its repeal.

Section 35C related to the “audit of accounts and statements” and was in substantially similar terms to the former s 113. The requirements as to the contents of the auditor’s report were set out in s 35C(5)(c) in the following terms:

As had previously been the case, the auditor was required to give the report to each trustee of the entity within the prescribed period after the end of the year of income (s 35C(6)), and failure to do so was an offence (s 35C(7) and (8)).

Sections 129 and 130 of the Act, set out above, continued to apply at the time of the 2008 and 2009 audits (save for the amendment of the words “as soon as practicable” to “immediately” in ss 129(3) and 130(2)). This was also the case for regs 4.09, 9.03 and 9.04 of the SIS Regulations.

As was the case for the financial year ending 30 June 2007, the approved form prescribed for the purposes of the financial years ending 30 June 2008 and 30 June 2009 identified reg 4.09 of the SIS Regulations as a provision about which the auditor was required to express an opinion as to whether there had been compliance. (Those approved forms shall hereinafter be referred to as “the 2008 approved form” and “the 2009 approved form”, respectively).

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

Section 9 provides the following definitions:

A “small proprietary company” is defined in s 45A(2) and is extracted below:

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

Section 292 is in the following terms:

Part 2M.5 deals with “Accounting and Auditing Standards”. “Accounting standards” are dealt with under s 334 and are issued by the Australian Accounting Standards Board (“the AASB”). “Auditing standards” are issued by the Auditing and Assurance Standards Board (“AUASB”) pursuant to s 336.

Sections 336 and 337 are extracted below:

Before considering which auditing standards applied to the audits of the Super Fund, it is necessary to consider the concept of “financial reports”.

As mentioned above, the Corporations Act regulates “financial reports” in Pt 2M.3. The plaintiff satisfied the definition of a “small proprietary company” pursuant to s 45A of the Corporations Act, and did not fall within other categories specified in s 292(2) of that. The plaintiff was not, therefore, obliged to prepare a “financial report” complying with requirements of Pt 2M.3 (including the requirement to comply with “accounting standards” pursuant to s 296): see 292(2).

It follows that any references to “financial reports” in the auditing standards issued pursuant to s 336 of the Corporations Act, must be consistent with the meaning under Ch 2M. That is because s 337 requires that the “expressions used in the standard have the same meaning”.

No definition of a “special purpose financial report” or “special purpose financial statement” was provided by the parties to the Court. For the purposes of these proceedings, special purpose financial reports or statements are not “financial reports” for the purposes of Pt 2M.3 of the Corporations Act. Further, the plaintiff was not a “reporting entity”, and the financial statements prepared for the audits were not “general purpose financial statements” (see “Statements of Accounting Concepts SAC 1 (Definition of Reporting Entity)” which recognises the concept of differential reporting).

As the defendant submitted, what is relevant for the purposes of special purpose financial statements is that their mode of preparation is expressly defined on their face for the purpose identified. The financial statements that were audited were introduced by the words “these financial statements are a special purpose financial report prepared for distribution to members to satisfy the accountability requirements of [the SIS Act] and the trust deed. The trustee(s) have determined that the fund is not a reporting entity”.

It should also be noted that the plaintiff’s expert witness, Mr Brian Morris, accepted in cross-examination that the financial statements in these proceedings were “special purpose financial reports”. The plaintiff properly conceded that there was no dispute that the plaintiff was not a reporting entity and did not need to prepare general purpose financial statements or a financial report under Ch 2M of the Corporations Act.

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

“ASA 800 The Auditor’s Report on Special Purpose Audit Engagements” (version dated June 2007) (“ASA 800”) was an exhibit in these proceedings.

Pursuant to cl 1(b), ASA 800 applied to the audit of a special purpose financial report.

The expression “special purpose financial report” was not defined in the applicable version of ASA 800. (ASA 800 has since been amended to include a definition: see cl 6 of “ASA 800 Special Considerations – Audits of Financial Reports Prepared in Accordance with Special Purpose Frameworks” (version dated May 2017)).

Clause 4 outlined the purpose of ASA 800, namely, to establish mandatory requirements in connection with “special purpose audit engagements”, which included the following:

Clause 7 of ASA 800 required an auditor to ensure there was an agreement for the audit in the following terms:

Clause 9 set out the basic elements and ordinary layout of an auditor’s report on a special purpose audit engagement.

“ASA 200 Objective and General Principles Governing Audit of a Financial Report (version dated April 2006)” (“ASA 200”) and “ASA 240 The Auditor’s Responsibility to Consider Fraud in an Audit of a Financial Report (version dated April 2006)” (“ASA 240”) were also referred to in these proceedings. There was controversy between the parties as to whether those auditing standards applied to the audits in the relevant financial years.

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

ASA 200, ASA 240 and ASA 260 all included an “Application” section which were all in the same terms:

I do not accept the plaintiff’s submission that ASA 200 and ASA 240 applied to the audit of the “special purpose financial reports” by virtue of cl 1(a) of the application section because, as discussed above, the meaning of “financial report” has the same meaning within Ch 2M of the Corporations Act.

However, pursuant to cl 2 of the application section, it is appropriate for ASA 200 and ASA 240 to be applied to the audits because the AUASB had indicated, through a “guidance statement”, that the ASA standards should be applied to the audit of a SMSF’s special purpose financial reports.

That guidance statement was noted in a list within Mr Morris’ fourth report: “Guidance Statement 009 Auditing Self-Managed Superannuation Funds (October 2008 version)” (“the guidance statement”).

The AUASB issued the guidance statement pursuant to s 227B of the Australian Securities and Investments Commission Act for the purposes of providing guidance on procedural auditing and assurance matters. (It should be noted that the guidance statement has been updated three times since being issued).

The “Application” section of the guidance statement provides as follows:

Under the heading “Auditor’s Responsibilities” and subheading “Conduct the Financial Audit in Accordance with ASAs”, the guidance statement noted that:

The guidance statement then listed 25 key ASA standards which are relevant to the conduct of the financial audit of a SMSF (without limitation), including, inter alia, ASA 200 and ASA 240.

In addition to the guidance statement, there was a previous indication from the former body of AUASB that suggested it is appropriate to apply auditing standards to the audit of a superannuation fund as discussed below in relation to “Audit Guide No 4 The Audit of Superannuation Funds (2004 Edition)” (“AUG 4”) (see below at [180]).

AUG 4 was issued by the Auditing and Assurance Standards Board of the Australian Accounting Research Foundation (“the former board”). The former board was later reconstituted as the AUASB under the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth).

AUG 4 was published to provide assistance to auditors of superannuation funds in implementing Australian Auditing and Assurance Standards. Both parties relied on and referred to this instrument.

Under the heading “Auditor’s Responsibilities”, AUG 4 said “the audit must be conducted in accordance with Australian Auditing and Assurance Standards issued by the Auditing Assurance Standards Board”.

Chapter 3 of AUG 4 concerned the planning of an audit of a superannuation fund. Under the heading “Compliance”, it stated:

Chapter 7 of AUG 4 addressed auditing investments of a superannuation fund. Under the heading “Auditing Objectives”, AUG 4 stipulated:

Under the heading “Existence and Ownership”, AUG 4 stated:

Under the heading “Valuation of Assets”, AUG 4 stated:

As to the application of “AAS 25 Financial Reporting by Superannuation Plans” (“AAS 25”) for valuation, AUG 4 stated the following:

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:

ASA 200 then provided the following explanation as to “professional scepticism”:

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:

By way of background, these proceedings were initially brought by a statement of claim filed 5 December 2014. The plaintiff amended its pleadings on three subsequent occasions: 14 November 2016, 16 May 2017 and 31 August 2017.

As earlier mentioned, the second further ASOC was filed in Court on 31 August 2017 in accordance with the rulings of this Court made on 29 August 2018 (which will be discussed further below). As such, the following outline of the respective pleadings of the parties will refer to the plaintiff’s second further ASOC and the amended defence.

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

The plaintiff pleaded that on or about March 2008, the plaintiff as trustee of the Super Fund entered into a contract with the first defendant, or alternatively the first and second defendants, to act as auditor of the Super Fund, and, in that capacity, express an opinion on financial statements of the Super Fund and on compliance with the SIS Act and Regulations with respect to the financial year ending 30 June 2007. (The pleading as to the retainers for the years ending 30 June 2008 and 30 June 2009 were in similar terms).

In response, the defendants pleaded that it was the first defendants who was engaged by the plaintiff to provide the audit reports. Specifically, the defendant confined what it contended were the purposes of the audit reports in the below extract:

The plaintiff pleaded that:

The defendants pleaded that the first defendant disclaimed any assumption of responsibility for reliance on the audit reports, or the financial statements to which it related, to any person other than the members of the Super Fund or for any purpose other than that for which it was prepared.

As to the terms of the retainers, the plaintiff pleaded the following:

As to duties in common law and tort, the plaintiff pleaded the following:

The defendants responded as to the terms of the retainers:

The defendants then made an admission as to the first defendant’s duty, albeit limited, in the following terms:

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:

In response to the plaintiff’s pleading regarding representations, the defendants pleaded:

As to breach of contract and duty, the plaintiff pleaded:

It should be noted that para 16(e)(vi) was previously para 16(g)(xix) in the former version of the second further ASOC (namely, the further amended statement of claim filed 16 May 2017).

The defendants made certain admissions as to breaches of contract and duty. The extent of the defendants admissions are extracted below:

As to loss and damage under breaches of contract and duties, the plaintiff pleaded:

The defendants denied that the breaches caused the plaintiff’s loss:

Further, and in alternative, the plaintiff pleaded the defendants contravened ss 35C, 129 and 130 of the SIS Act. The defendants denied contravening those sections.

The pleadings with regard to contravention of the SIS Act were the subject of substantial submissions and will be dealt with later in this judgment.

As to loss and damage resulting from a contravention of the SIS Act, the plaintiff pleaded:

The defendants denied that any alleged contravention of the SIS Act caused the plaintiff’s loss:

Further, and in alternative, the plaintiff also pleaded misleading and deceptive conduct by the defendants as follows:

As to the plaintiff’s pleadings in para 36, the defendants referred to and repeated para 16 of the amended defence (which included certain admissions as to breach extracted at [204] above), but otherwise did not admit the paragraph.

The plaintiff further pleaded:

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

The plaintiff then pleaded:

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:

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

As to contraventions of consumer legislation, the plaintiff pleaded the following:

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:

As to loss and damage occurred by the contravention of the relevant legislation, the plaintiff pleaded the following:

The defendant denied the above paragraph and further said:

The parties provided the Court with a list of issues in dispute. That list has formed the foundation of the following summary of the issues along with refinements as identified in the parties’ submissions as well as the pleadings.

The issues will be addressed, in turn, under the following headings:

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.

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:

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).

The following issues arose from the plaintiff’s pleadings as to duties, being whether the defendants were required to:

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:

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).

As mentioned above, the defendants made admissions at para 16 of its amended defence, with respect to the breach of the retainers and duty. That admitted breach, to which I now turn, was limited in its scope.

The defendants made admissions that the defendant failed to exercise reasonable care in the preparation of the audit reports because:

In their submissions, the defendants sought to limit that admission by contending that it is not up to an auditor to form a definite conclusion about value and contended their admission was limited to the following: the material available to the first defendant did not support the expression of the unqualified opinion which he gave regarding the financial statements. In other words, the defendants submitted that the admission was only that the opinion in the audit reports ought to have included a qualification.

The plaintiff submitted that such a narrow interpretation of the admissions was not available because the pleaded admission spoke for itself.

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.

This breach, pleaded at para 16(a) of the second further ASOC, relates to the duty pleaded at para 13(c). Essentially, the plaintiff contended that the defendants breached their duty to inquire into and to report as to whether each investment made by the Super Fund, as recorded in the financial statements, was made in accordance with an investment strategy. The plaintiff made particular reference to reg 4.09 of the SIS Regulations in that respect.

In their submissions, the defendants contended that the first defendant was not obliged to provide an opinion on the investment strategy or its appropriateness for members. The defendants made further submissions in answer to this breach (discussed below).

There is an intersection between this breach and the admissions pleaded in the amended defence in para 16, notwithstanding the defendants’ contention that they are not relevant to this breach.

The defendants also argued they were denied procedural fairness with regard to this breach.

This breach, pleaded at para 16(b) of the second further ASOC, corresponds with the duty pleaded at para 13(d). Considering the nature of this pleading (namely, the lack of compliance with the SIS Regulations), the plaintiff relied on the submissions it made as to the breach detailed above from [235].

The defendants took the same approach and relied upon their submissions summarised under the previous heading: “Failure to inquire and report as to compliance with the investment strategies, including matters set out in reg 4.09(2)” (see above).

This breach, pleaded at para 16(c) of the second further ASOC, corresponds with the duty pleaded by the plaintiff at para13(f). The plaintiff contended that the defendants did not draw certain concerns to the plaintiff’s attention, by way of notation or qualification in the audit reports, despite the first defendant’s undertaking in the retainers to communicate to the plaintiff any matters which he believed ought to be brought it its attention. The plaintiff contended a reasonably competent auditor would have done so.

The defendants disputed that this obligation arose from the retainers (see the corresponding discussion of duties at [299]-[311]). The defendants’ admissions in para 16 also interact with this breach. Specifically, the defendant admitted that the material available to the first defendant did not support the expression of an unqualified opinion (see 16(h) of the amended defence). However, the admissions did not correspond to the full extent of the breach as pleaded by the plaintiff.

The defendants submitted that there was no obligation on the first defendant to positively communicate matters, namely, Mr Moylan’s conflicts of interest to the plaintiff.

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:

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

The defendants denied that such a conclusion could come out of the admissions and contended that there was a conceptual difference between qualification of the audit opinion (which the defendants admit was needed) and the formation of an affirmative opinion that the financial report misstated the financial position of the Super Fund.

This breach, pleaded at para 16(e) of the second further ASOC, concerns the duty pleaded at para 13(h). The plaintiff pleaded that the defendants failed in the performance of their services under the retainers to exercise due care and skill to the expected standard.

The defendants’ admissions interact with this issue because, as the plaintiff correctly identified, this breach of duty goes beyond the breach admitted by the defendant.

The plaintiff contended that the failure to exercise reasonable care and skill in the performance of services included, inter alia, matters such as the failing to verify the existence of reported assets, failing to establish the value of assets recorded in the financial statements and failing to identify and report that the assets were non-performing and the financial statements were materially inaccurate.

The defendants contended, inter alia, that the assets did, in fact, exist and that it was not the job of an auditor to affirmatively value or establish the value of assets.

The claim for misleading and deceptive conduct was expressed as further to and, in the alternative to the plaintiff’s claims in contract, negligence and for breach of the SIS Act.

The plaintiff alleged that the defendants made two sets of representations to the plaintiff (the representations extracted at [200] above and the further representations extracted at [213] above) that were misleading and deceptive, or likely to mislead or deceive, upon which the plaintiff had relied (the defendants argued that there was no evidence of reliance).

The plaintiff pleaded that the first defendant contravened s 9 of the Fair Trading Act 1999 (Vic) (“FTA (Vic)”) and/or s 42 of the Fair Trading Act 1987 (NSW) (“FTA (NSW)”) and the defendants contravened s 52 of the Trade Practices Act 1974 (Cth) (“TPA”).

The defendants admitted that the representation expressed in the audit reports, namely, that the opinions were the product of the exercise of reasonable care and skill, was misleading. However, the defendant then pleaded that that representation was not made in trade and commerce.

The plaintiff pleaded that, further and in the alternative to the claims in contract and negligence, the defendants contravened s 113 (in respect of the 2007 audit), s 35C (in respect of the 2008 and 2009 audits) and ss 129 and 130 of the SIS Act. In the result, the plaintiff pleaded that it was entitled to damages under s 315 of the SIS Act.

The defendants contended that the only obligation imposed by ss 113 and 35C on an auditor was a timing obligation and that all other obligations of the auditor were governed by the appointment or retainer.

The plaintiff argued that if the Court did not have the power under s 315 of the SIS Act to order the defendants to pay damages to the plaintiff, then the plaintiff claimed damages for breach of statutory duty.

The defendants contended that a claim for breach of statutory duty would not be maintainable where the legislation evinces a different intention to a correlative private right, which they contended was the case for the SIS Act.

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

The issue of causation concerned both the admitted and non-admitted breaches of contract and duty.

As to the admitted breaches, the plaintiff contended that, had there been no breach of duty and no misleading and deceptive conduct, the plaintiff would have been made aware of the irregularities in the financial reports of the Super Fund in 2008 and would have taken action to make recoveries of those investments.

The defendants contended that a qualified report, of the kind admitted by the defendants as being required, would not have stated that the assets were worthless because the auditor could not have formed that view. Further, the defendants contended that the Court could not be satisfied, on the balance of probabilities, that had a qualified audit report been issued in 2008, or the subsequent years, the plaintiff would have “called in” the loans and investments.

The plaintiff further submitted, had the defendants not breached the pleaded non-admitted duties, the plaintiff would have been made aware, by qualification, notation or other suitable communication in each audit report, of:

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.

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:

The defendants pleaded that, had the admitted breaches or any other alleged breaches of contract or duty occurred, the plaintiff would not have recovered any amounts in connection with the assets recorded in the accounts of the Super Fund, by 30 June 2008, in circumstances where the first defendant was first engaged on 7 March 2008 and the 2007 audit report was dated 15 May 2008.

The defendants further pleaded that as at 15 May 2008, the plaintiff had already lost any ability to recover various amounts which it had lent or invested.

It is sufficient to note at this stage that the defendants raised three defences:

Those defences will be explored under their respective headings.

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:

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.

As mentioned above, the 2007 retainer was signed by Mr Moylan, and the 2008 and 2009 retainers were signed by the plaintiff. The retainers, after being signed, were returned to the auditor (there was a dispute as to whether only the first defendant was retained for the relevant financial years, which will be discussed in the next section of this judgment).

The retainers were in the form of a “letter of engagement” (and titled the same) which stipulated the bases upon which the auditor provided audit services to the Super Fund for a specified fee for service.

The retainers, thereby, constituted audit contracts whereby the auditor, for a fee, agreed to conduct an audit of the Super Fund in respect of the relevant financial years.

The written terms of the retainers have been earlier set out at [105]-[119] above. They are in relatively similar terms.

There was considerable dispute about the terms of the retainers. The dispute primarily revolved around the proper construction of the audit contracts, including a question of whether the retainers incorporated the approved forms (pursuant to the SIS Act and as published by the ATO) (“the approved forms”) and, if so, what the auditor undertook to do or not to do in consequence.

What follows is a discussion as to the construction of the terms of the retainers, which will traverse the contentions of the parties in that respect (and without necessarily a full summary of their respective arguments). The terms of the retainers will be approached globally unless a relevant distinction is necessary to draw. I shall refer to the corresponding pleading of breach in the second further ASOC in the course of construing the retainers.

By the retainers, the auditor was required to conduct an audit of the Super Fund in accordance with the SIS Act and the SIS Regulations.

The objective of the audit was to express an opinion as to:

The auditor was required, in the performance of the audit, to form an opinion, with reasonable care and skill, as to whether the Super Fund complied with the requirements of the SIS Act and SIS Regulations within the relevant financial years (see second further ASOC at para 16(b)).

The defendants made various submissions as to the relevant legal connection between the retainers and the approved forms. It was variously said that the approved forms “conditioned” the retainers, or the retainers “effectively incorporated” the approved forms. Thus, the retainer letters were “best understood”, it was contended, as identifying the engagement as one to give a report in the approved form in accordance with s 113(1) of the SIS Act, for the financial year ending 2007, and s 35C(1), for the financial years ending 2008 and 2009.

However, neither the 2007 retainer nor the 2008 and 2009 retainers limited the scope of the auditor’s obligations in the fashion contended for by the defendants.

It is true, the 2007 retainer referred at the outset to a requirement that the audit be conducted “in accordance with [the SIS Act]” (at para 2 extracted at [106] above) and, on the second page, referred to the obligation to represent a report in “the approved form”. The 2008 and 2009 retainers, in accordance with s 35C of the SIS, also provided that the auditor was required to give a report “in the approved form”. The retainers, in that respect, required the defendants to issue an audit report in the approved form. However, the provisions do not thereby have the effect of confining attention to s 113(1) (or s 35C(1)) of the SIS Act. For example, the retainers expressly required the audit reports to address the requirements of ss 129 and 130 of the SIS Act. Nothing in the approved form constrained the auditor from meeting those requirements.

The plaintiff submitted that the defendants were required: “[to inquire into and report] accurately as to whether each investment by the Super Fund as recorded in the financial statements were made in accordance with an investment strategy that had regard to all of the circumstances of the Super Fund, including the matters set out in regulation 4.09 of the SIS Regulations” (see second further ASOC paras 13(c) and 16(a)). Reliance, in that respect, was placed upon the entries under the heading: “Audit of SIS Compliance”, in the 2007 retainer (extracted below), and the entries under the heading: “Audit Scope”, in the 2008 and 2009 retainers.

It is useful to extract here a relevant passage from the 2007 retainer under the heading, “Audit of SIS Compliance”:

The defendants contended that, by the 2007 retainer, the auditor only undertook to “refer to” reg 4.09 in the 2007 audit report and what was to be done by the auditor and the nature of the “reference” that would be found in his “audit report” was “identified” by the approved form. The defendant also disputed the remainder of the plaintiff’s submission in this respect contending retainers expressly provided that the auditor was not required to provide on opinion as to the investment strategy or its appropriateness to fund members.

I accept the plaintiff’s submission, in this respect, for the reasons I now turn to.

I do not consider the 2007 retainer, when properly construed, requires a lesser obligation than the 2008 and 2009 retainers. In particular, I do not consider the retainer only imposes an obligation on the auditor to simply “refer” to reg 4.09 in the sense, as the defendant contended, of mentioning or alluding to.

The sentence immediately preceding the words “refer to”, in the above extract from the 2007 retainer, provides that the auditor must form an opinion in respect of compliance with “certain aspects of SIS”. Reading the two sentences together results in the comfortable conclusion that, by the second sentence, the retainer uses the words “refer to” to indicate those provisions against which compliance will be tested or examined. Whilst “SIS” is earlier defined as “the Act”, it is plain, in my view, the parties intended the obligation to extend to the SIS Regulations, as well as the SIS Act, because the list of provisions to which the auditor must regard included provisions of the SIS Act and the SIS Regulations.

For completeness, I note the defendants accepted that the incorporation of the approved form was made more explicit by the 2008 and 2009 retainers. In those retainers, the auditor, in reporting in the approved form, must specifically include an opinion as to the Super Fund’s compliance with the SIS Act and the SIS Regulations, specifically, for present purposes, reg 4.09.

The defendants were correct to submit that the terms of the 2008 and 2009 retainers expressly eschew the auditor expressing an opinion as to the investment strategy adopted for the Super Fund or its appropriateness to the Super Fund members. This obligation was wider than that relied upon by the defendants and provided that the auditor would not express an opinion about the investment strategy per se, or its appropriateness for members, as opposed to whether that strategy (regardless of its appropriateness) had been given effect in the relevant financial year.

The 2008 and 2009 retainers required the auditor to express an opinion about compliance with, inter alia, reg 4.09. In that respect, those retainers expressly provided that the auditor would test that there exists an investment strategy and that “you have given consideration to risk, return, liquidity and diversification and that the fund’s investments are made in line with the investment strategy”.

Whilst the “approved form” was not expressly incorporated as a term of the 2007 audit contract, with respect to the audit of “SIS Compliance”, the 2007 audit report on the financial statements was required to be produced in the approved form (see under the heading “Audit of Financial Statements” in the 2007 retainer). The relevant provisions of that form aligned with the above construction of the 2008 and 2009 retainers and included the following:

That provision made it clear that the auditor’s opinion was required as to whether the Super Fund’s investments were made in line with the investment strategy adopted by the Super Fund.

The auditor may request from the trustee written confirmation concerning representations made to his staff or himself in connection with the audit.

Third party written documentation will be generally accepted as evidence of ownership of assets.

The trustee’s valuations will be accepted where applicable unless otherwise requested.

Unless otherwise agreed, the auditor assumed no responsibility to design audit procedures to identify matters that may be appropriate to report to the trustee.

The plaintiff contended that certain provisions within the retainers brought an obligation upon the auditor to bring to the plaintiff’s attention, by way of notification or qualification or other suitable communication, “any serious misdescription or misstatement in the financial statements” of the Super Fund or of any fact or circumstance arising from the audit which any competent chartered accountant acting in the capacity of an audit would bring to the attention of the plaintiff (see second further ASOC at para 16(c)).

The provisions relied upon by the plaintiff may be illustrated by reference to the 2008 and 2009 retainers which stated:

The defendants submitted that the pleaded term could only be found in the retainers if the precise language, which was the subject of the construction proposed by the plaintiff, was found in the words in the retainers. It was contended that such terms could not be implied as the retainers expressly provided that “I assume no responsibility to design audit procedures to identify matters that may be appropriate to report to you”. The provisions of the retainers relied upon by the plaintiff limit the auditor’s obligation to report in circumstances where the auditor encountered them during the course of the engagement and believed they ought to be brought to the plaintiff’s attention. The defendants contended, the auditor did not have a free standing reporting obligation that would have positively concluded error or recast the financial reports.

The plaintiff replied by contending its construction of that particular term should be accepted, for three following reasons.

First, the plaintiff’s construction was consistent with the auditor’s obligation to exercise reasonable care and skill in performing the obligations under the retainers. That obligation “conditioned” and “applied” to the auditor’s express obligation to communicate matters encountered during the audit. Thus, the duty was engaged where the auditor, acting with reasonable care and skill, “ought” to have encountered and “ought” to have brought them to the plaintiff’s attention. The defendants’ construction, in that respect, was too narrow and literal; requiring only which was subjectively encountered and believed.

Secondly, the construction relied upon by the plaintiff was merely to give context to and identify, with greater precision, the “matters” which the defendants expressly undertook to communicate to the plaintiff.

Thirdly, the duty for which the plaintiff contended was supported by authority: Pacific Acceptance Corporation v Forsyth (1970) 92 WN (NSW) 29 at 53C (“Pacific Acceptance Corporation”) (per Moffitt J).

The defendant was correct to submit that the term contended for by the plaintiff cannot be found “literally” in the language used in the retainers.

I consider there is a proper basis to draw an implication as widely as proposed in the plaintiff’s submissions; such that, the duty is engaged when the auditor, acting with reasonable care and skill, “ought to have encountered matters and ought to have brought those matters to the plaintiff’s attention”. The defendants’ submissions conflated the obligation to bring irregularities (by misdescription or misstatement) to the plaintiff’s attention with the express exclusion, in the 2007 retainer, to do the same with respect to “design audit procedures to identify matters that may be appropriate to report to you”.

The terms of the provision (as extracted from the 2007 retainer) were as follows:

The inclusion of the word “However”, relevantly, conditioned a disclaimer by reference to matters encountered during the audit falling within, it may be added, the exercise of reasonable care and skill by the auditor.

Thus, this construction is consistent with the auditor’s obligation to exercise reasonable care and skill in performing the obligations under the retainers. This must involve the objective consideration of what ought to have been detected and identified as well as acting upon what was actually found. The ‘promise to audit’ as stated by Moffitt J in Pacific Acceptance Corporation at 53A involved some incidental duties which may involve frank disclosure by the auditor to management of any relevant matters.

This conclusion is consistent with the requirement falling upon the auditor, as reflected in the approved form, to stipulate any qualification that properly arose from the retainers and the approved form. For example, the defendants accepted (albeit in a different context) that the auditor, in the exercise of reasonable skill and care, ought to have realised that, on the material provided to the auditor, there was some doubt as to whether the carrying value of the loans and investments appropriately reflected amounts recoverable for them. The auditor, exercising reasonable care and skill should not have, as was accepted by the defendants, simply relied upon the management representation that the policy valuation adopted was “reasonable in the light of the present circumstances” and ought to have taken steps to enquire further into present circumstances beyond that representation or qualified the opinion recorded.

The plaintiff contended at para 95(e) of its closing submissions that a further term of the retainers was as follows (see also second further ASOC at para 16(d)):

The plaintiff relied upon certain parts of the retainers to sustain those obligations, to which I now turn.

In the 2007 retainer, the defendants said: “my staff will perform sufficient tests to obtain reasonable assurance as to whether: (i) the underlying accounting records are reliable and adequate as a basis for the preparation of the financial statements; and (ii) the financial position of the fund at balance date the results for the year then ended are properly disclosed in the financial statements”.

In the 2008 and 2009 retainers, the defendants stated: “[t]he work undertaken by us to form an opinion is determined by judgement, in particular regarding the nature, timing and extent of the audit procedures for the gathering of audit evidence and the drawing of conclusions based on the audit evidence gathered”.

In addition, the defendants’ quality control form (index for SMSF audit working papers), prepared by the auditor under the heading of “Baumgartner Partners” for the year ending 30 June 2007 (“the quality control form”), stated: “[t]he approach to auditing will be of a substantive nature. Assets will be verified to proper supporting documentation … Liabilities, income and expenses will be verified to source documentation where appropriate as well as being reviewed for reasonableness”.

The defendants were correct to submit there was no separate obligation to “act reasonably” in the retainers. As to the matters referred to in para 95(e)(i)-(iv) of the plaintiff’s closing submissions, the following may be concluded:

In para 16(e) of the second further ASOC, the plaintiff pleaded a failure by the defendants in the performance of their services under the retainers to exercise due care and skill to the standard expected of someone qualified and experienced in performing audit services in Australia of the nature required under the retainer. The defendants submitted that the contention that the term, which was implied in this pleading, constituted a conflation of the relevant contractual term to exercise reasonable care and skill (which was admitted) and the standard of performance required under the term.

The dispute may be shortly resolved for two reasons. First, the contention by the plaintiff plainly reflected the obligation falling upon the defendants under the retainers. Secondly, in a later submission on “breach”, the plaintiff particularised the particular instances of failure to comply with that obligation all of which, in my view, are relevantly comprehended (that is, as to the obligation) under the retainers.

The defendants were correct to submit that the first defendant undertook the audit of the operations of the Super Fund as an approved auditor for the relevant financial years pursuant to s 113(1) and/or 35C(1) of the SIS Act (s 113(1) falls within Pt 13 and sets out rules about the accounts, statements and audits for such funds, and s 35C falls within Pt 4).

An auditor conducting an audit under s 113(1) bears a personal obligation as a qualified professional auditor. Section 10 of the SIS Act defined an “approved auditor” as “a person” including a class of “persons” specified in the SIS Regulations. Regulation 1.04 of the SIS Regulations limited the class of persons to “individuals” within specified categories. The use of the word “individual” denotes “natural persons”: s 2B of the Acts Interpretation Act 1901 (Cth). An offence against s 113(4) of the SIS Act by the auditor attracts a maximum penalty of 6 months imprisonment; a penalty only consistent, having regard to the statutory scheme, with the auditor having a personal duty. (It may be noted that by the third appointment, pursuant to the 2009 retainer, the plaintiff expressly resolved to appoint the first defendant as the auditor for the financial year ending 2009).

The first defendant made the necessary declarations and certifications as auditor in issuing the audit reports.

It is equally true that, as previously discussed, the corporate second defendant could not have audited the Super Fund pursuant to the SIS Act as it was not an approved auditor.

I accept the submission of the plaintiff, however, that issue raised by the parties, namely, whether the second defendant was a party to the retainers, is not determined by those abovementioned considerations. That question must be resolved by the terms of the retainers themselves. The plaintiff’s illustration of a company liquidator, in that respect, was apposite.

In my view, it should be concluded that the second defendant was a party to the audit contracts and thereby assumed responsibility for the manner in which they were conducted for the following reasons:

The plaintiff called the following lay witnesses:

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

The plaintiff also called expert evidence from Mr Morris and Mr Peter Sheppard. There were significant issues raised regarding Mr Morris’ evidence, to which I now turn.

There was substantial challenge to Mr Morris’ evidence, which broadly fell into two categories:

It should be noted, at the outset, that during the hearing the defendants did not object to Mr Morris’ evidence as a whole; in the sense that they objected to his capacity to give opinions per se pursuant to s 79 of the Evidence Act 1995 (NSW). Rather, the defendants made objections as to particular aspects of the reports with respect to which rulings were made.

Mr Morris was a qualified auditor. From 1971-1991, he primarily conducted audits and from 1983-1991, he was responsible for the audit practice of Edwards Marshall, a mid-sized firm located in Adelaide. Since 1991, he continued to be consulted on technical issues in audit engagements at Edwards Marshall. From 1991-1995 he was a member of the Auditing Standards Board and a member of the Companies Auditors and Liquidators Disciplinary Board from 2000-2010. He continued to be, at the time of his evidence, a registered company auditor.

Mr Morris produced four reports for these proceedings dated, respectively:

Mr Morris expressed, inter alia, the following opinions:

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.

The defendants contended that Mr Morris did not consider whether the form of the audit reports satisfied the requirements of the SIS Act. They submitted that he did not report on the form of the opinion in his reports, nor any qualifications or limitations contained within them.

The plaintiff’s response to this submission, that there was no suggestion that the form of the opinion was not that required by the ATO in the approved forms, was plainly correct. Mr Morris' evidence focused on whether the material available to the auditor supported the opinions that were actually expressed within the audit reports. In so doing, Mr Morris set out, in detail, why the auditor did not have sufficient materials available to him to express the opinions that he did. Criticism of the form of the opinions themselves could advance the matter no further.

The defendants submitted that Mr Morris made no reference in any of his reports to ASA 800, which had specific application to special purpose financial statements. The defendants contended the relevance of ASA 800 was that it imposed a mandatory requirement that a retainer be entered into which specified the nature of the engagements for an audit and the form and content of the report to be issued.

In the result, the defendants contended that Mr Morris proceeded upon the basis of a “generalised view” of audit and not by reference to the tasks that had actually been agreed to be performed in the retainers. The defendants submitted this rendered his views irrelevant because he was expressing an opinion from the wrong starting point.

The plaintiff submitted that the defendants did not identify any impact that a consideration of the terms of the audit contracts would have had on Mr Morris’ evidence. The plaintiff also contended that Mr Morris was not providing an opinion based on the terms of the retainer; that question was for the Court to decide.

Further, the plaintiff submitted that the defendants have not shown how or why ASA 800 was important in this case, or how it undermined any of the analysis within Mr Morris’ reports. The plaintiff submitted that no distinction between Mr Morris’ “generalised view” and any specific tasks identified in the retainers had been established by the defendants. I accept that submission in light of my earlier conclusions made with regard to the terms of the retainers.

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.

I accept the submission of the defendants that Mr Morris mistakenly ascribed s 128F of the SIS Act as being the obligation falling upon the auditor and, in the result, concluded the auditor was required to comply with any auditing standards issued by the AUASB. The opinion was erroneous because that provision was not operative until 2012.

The plaintiff contended that, despite that mistake, that criticism does not affect a conclusion that the auditing standards applied to the audits. This leads to the consideration of the defendants’ next contention, namely, that Mr Morris incorrectly relied on accounting and auditing standards generally.

The defendants contended that Mr Morris incorrectly relied upon accounting and auditing standards generally and had no appreciation of the lack of the role of those standards in relation to an audit of special purpose financial statements.

The defendants provided detailed submissions as to the nature of special purpose financial statements. That issue was dealt with above under the heading “The Auditing Standards Framework”. I have already found that the financial statements of the Super Fund were “special purpose financial reports”, the financial statements were not required to be prepared pursuant to Ch 2M of the Corporations Act, and the plaintiff was not a reporting entity (see discussion above at [152]-[157]).

The defendants, in this light, also referred to a number of mistakes or omissions by Mr Morris, namely, that:

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

The auditing standards which did apply to the audits were discussed in detail above under the heading “Auditing Standards”. The defendants’ criticism of Mr Morris, in this respect, incorrectly limited the scope and application of the auditing standards that were applicable to audits of SMSFs. Despite Mr Morris’ “failure” to identify certain aspects as outlined above, it did not make a difference to a substantial number of his conclusions because, as I have found, ASA 200 and ASA 240 (which he heavily relied upon) did apply to the audits undertaken by the defendants as a result of the application sections of those auditing standards.

Further, I accept the plaintiff’s submission that each audit report contained the representation that the audit had “been conducted in accordance with Australian Auditing Standards”.

However, the defendants’ criticism is warranted where the failures of Mr Morris led him to apply inapplicable accounting standards and criterions, which will be dealt with below.

Linked to the above factor was the defendants’ contention that Mr Morris’ criticism was based upon the need for the special purpose financial statements to present a “‘true and fair view”, and that was an inapplicable criterion. The defendants correctly contended, in that respect, that that collocation of words was found in s 297 in Pt 2M.3 of the Corporations Act and did not apply to special purpose financial reports.

Further, the defendants referred to the “Auditor’s Opinion” contained in the audit reports which relevantly recorded that “the financial report presents fairly in all material respects in accordance with the accounting policies described in the notes” (emphasis added) and was not expressed in terms of a “true and fair view”.

The defendants, therefore, contended that establishing a “true and fair view” (and the idiosyncratic view of Mr Morris to do so) was a “false criterion” and that the premise for his analysis had a false starting point.

I accept the defendants’ submission that a “true and fair view” was a criterion that did not apply to the financial statements of the Super Fund. I do not accept the plaintiff’s submission that these criticisms, by the defendants as to Mr Morris, had neither not been demonstrated to have any material significance to, nor undermined any of the reasoning or conclusions in any of Mr Morris’ reports. Mr Morris did, however, make some conclusions based upon the need for the auditor to express an opinion as to a “true and fair view” and those aspects of his conclusions will thereby have diminished weight.

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

It should be noted at the outset that Mr Morris relied heavily on the standards within ASA 200 and ASA 240 in his reports; they informed a significant proportion of his opinions.

The defendants’ contention, in this respect, was incorrect. It is appropriate that both ASA 200 and ASA 240 apply to the audits undertaken by the defendants (as I have previously found, above).

The defendants contended that Mr Morris approached “his consideration of the auditor’s role in this case from the premise that the auditor had to perform his role by reference to all of the relevant parts of accounting standards dealing with recognition and measurement” (emphasis added).

It was contended that Mr Morris’ principle criticism of the audit appeared to be directed to the lack of work undertaken by the auditor in order to be satisfied that the carrying values for various loans or investments were appropriate due to impairment issues. The defendant submitted that the performance of such would require the application of “AASB 139 Financial Instruments: Recognition and Measurement” (“AASB 139”) concerned with the measurement and impairments of assets. Despite referring to AASB 139 in his reports, Mr Morris accepted in cross-examination that AASB 139 was not “directly applicable” to the financial statements in the relevant financial years.

Mr Morris also referred to “Regulatory Guide RG85 Reporting requirements for non-reporting entities” (“RG85”) which was issued by ASIC, a different regulator than the ATO, when considering recognition and measurement of assets, liabilities and income.

The plaintiff did not respond to this point. I accept the defendants’ submission that Mr Morris erroneously relied on AASB 139 and RG85. However, I note, in this respect, that this does not alter the fact that the valuation requirements under AUG 4 still applied to the audits, as well as the requirement in the retainers to bring any serious misdescriptions or misstatements in the financial statements to the attention of the plaintiff.

The defendants submitted that reliance on Mr Morris’ evidence was problematic due to his lack of experience. They contended that (other than this case):

In the result, the defendants contended that Mr Morris’ evidence should not be used beyond the admitted case. The defendants submitted:

The plaintiff contended that Mr Morris had many years’ experience supervising an audit practice, he continued to be a qualified company auditor and he continued to have involvement on the Auditing Standards Board and the Companies Auditors and Liquidators Disciplinary Board. Further, the plaintiff contended that for the relevant financial years, the concept of an approved self-managed superannuation fund auditor did not exist and at the relevant time, a registered company auditor (a qualification held by Mr Morris) was an approved auditor for a SMSF.

On the face of the material, it was correct that Mr Morris did not have experience in auditing SMSFs. However, it was not suggested by either party that Mr Morris was not experienced as an auditor, nor was it suggested that he did not have the forensic ability to examine the work of auditors generally (indeed, this was, as I will later discuss, relied upon by the defendants). It is clear from his curriculum vitae that Mr Morris had audit experience in a broad range of activities, particularly with relation to company auditing.

The question raised by the defendants is whether Mr Morris’ qualifications are applicable to the audit of a SMSF. The premise of the defendants’ contentions was that in order to give an expert opinion on the audit of the Super Fund, an expert should have had a unique understanding of the accounting standards which applied to a special purpose financial report, and the auditing standards which applied to the audit of those reports of a SMSF as opposed to a general understanding of audits.

Again, it should be noted that there was no objection to the admissibility of Mr Morris’ evidence on the basis of s 79 of the Evidence Act. In Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588; [2011] HCA 21, French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ held (at [32]):

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]:

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:

There is a justifiable criticism about how Mr Morris approached some parts of his analysis. That criticism adversely affects the weight given to his opinions influenced by those mistakes: Makita at [85] and Sydneywide Distributors at [87].

Mr Morris failed to recognise that some accounting standards, such as AASB 139, did not apply to special purpose financial reports. He also sought to employ a regulatory guide from ASIC – the wrong regulator. This affects the weight of those opinions, which were impacted by such mistakes.

Further, Mr Morris failed to refer to ASA 800, which was an auditing standard directly applicable to the audit of the Super Fund and, as a result, he did not refer to the terms of the retainers or analyse what the engagement of the auditor required.

However, where the retainers brought in concepts and issues which were akin to those applicable in the standards employed by Mr Morris, the defendants’ argument as to Mr Morris’ qualifications, in that respect, is without foundation.

The mistakes made by Mr Morris do not affect his qualifications to express an opinion where he had correctly applied the auditing standards. Since the auditing standards, such as ASA 200 and ASA 240, did apply to the audit, then it would be illogical to argue that Mr Morris did not have the qualifications to generally apply those auditing standards to the audit of special purpose financial reports of a SMSF.

Mr Morris had specialised knowledge of auditing standards. His opinions on what the defendants were required to do pursuant to the applicable auditing standards were wholly or substantially based on his specialised knowledge.

Therefore, the defendants’ contention that Mr Morris was not qualified or trained to give an opinion beyond the admitted breaches stretched too far. This may explain why there was no objection to Mr Morris’ evidence as a whole as to his reports.

It is true that in his reports, Mr Morris made a number of mistakes. First, he failed to recognise that the financial statements of the Super Fund as special purpose financial reports required different treatment to financial reports or general purpose financial reports. He thereby applied some inapplicable standards such as AASB 139 and RG85, and inapplicable criterions such as “true and fair view”.

Secondly, Mr Morris failed to recognise the need to fix upon the retainers in the context of special purpose financial reports insofar as the retainers specified the nature of the special purpose engagements for the audits pursuant to ASA 800.

Considered at such a level of analysis, one could rapidly come to the conclusion that the weight to be attached to Mr Morris’ opinions would be significantly reduced, both generally and particularly, in the subject areas where the criticisms of the defendants had substance.

However, such analysis is overly simplistic. Some aspects of the defendants’ critique were wrong (for example with regard to the application of ASA 200 and ASA 240 and to the form of the reports) and the attack on his opinions overlooked the fact that many of the requirements contained within the retainers which governed the audit of the Super Fund had counterparts in the relevant standards. For example, the requirements to exercise professional judgment and scepticism in ASA 200 were consistent with the terms of the retainers outlined in [284]-[294], [299]-[311] and [312]-[317] above. In other words, whilst Mr Morris’ opinions may have been based on some incorrect inquiries, in substance, they were significantly hinged upon, when corresponding to a counterpart term of the retainers, the applicable auditing standard or benchmark.

A similar conclusion may be reached as to the attack on Mr Morris’ qualifications and experience.

Whilst it was a valid critique that Mr Morris had no experience auditing SMSFs, which accounted for the mistakes he made, Mr Morris was qualified to act as an auditor (and it was not suggested otherwise). His experience enabled him to critique audits, noting that he was a member of the Companies Auditors and Liquidators Disciplinary Board and had many years’ experience supervising an audit practice.

The critique of Mr Morris’ qualifications and experience, by the defendants, does not account for the fact that a review of whether a proper or sufficient audit was completed against what was required to be done within the terms of the retainers fitted within Mr Morris’ qualifications and experience. His analysis traversed, albeit without specific acknowledgement to the specific terms of the retainers, the same or very similar requirements for the conduct of audits as found in the retainers, particularly with reference to:

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 was a chartered accountant specialising in insolvency, reconstruction, investigation and forensic accountancy.

Mr Sheppard produced three affidavits in these proceedings, dated:

He undertook the following task:

The plaintiff noted, whilst the mathematical calculations could have been undertaken by the Court, the purpose of Mr Sheppard’s evidence, in that respect, was to relieve the Court of that task.

The defendants contended that Mr Sheppard’s evidence included, in addition to mathematical calculations, a presentation of factual material which they argued was infected by a degree of partisanship. The defendants’ attack on the credibility of Mr Sheppard was threefold as detailed below. The plaintiff contended that no conclusion should be drawn that Mr Sheppard was acting as an advocate in preparing his reports.

The first attack on Mr Sheppard’s credibility by the defendants was that Mr Sheppard made an unqualified statement that the plaintiff issued a cheque for $100,000 payable to the Limeburners Trust. The defendants contended that statement was made in the context of giving the impression of direct evidence when there was none. The submission by the defendants was hollow given there was evidence that the amounts were paid and, as noted at [46]-[48] above, the defendants eventually accepted that the weight of the evidence supported a finding that $100,000 was paid for investment in the Limeburners Trust.

I accept the submission of the plaintiff that the defendants’ criticism of the wording of Mr Sheppard’s report, in that respect, was unwarranted because Mr Sheppard was not concerned with the nuances of language. Mr Sheppard’s task was mathematical and he made reference to the documents upon which he relied.

The defendants’ second attack on Mr Sheppard’s credibility was that he only referred to net assets of the Regional Land Fund without reference to any other aspect of the financial report or indicia as to solvency.

In Mr Sheppard’s third affidavit, he made reference to the financial report to the Regional Land Fund as at 30 June 2008. The defendants contended the purpose in doing so was to present such facts as may be relevant to the ability of the Regional Land Fund to pay claims at that time. Mr Sheppard referred to the fund having positive net assets of $6,222,501 as at 30 June 2008. He made no reference to any other aspect of the financial report or indicia as to solvency.

The defendants contended that, when Mr Sheppard was invited to explain why he had made reference to net assets and nothing else, he gave a nonsensical response which pointed to Mr Sheppard not being a reliable or credible witness. Mr Sheppard’s response was that the net asset position is the most pertinent indicator of a debtor’s immediate capacity to meet a liability; even though Mr Sheppard said so without regard to the concept of current and non-current assets and liabilities. The defendants contended that such an answer must be nonsense to a person professing to have some insolvency exposure.

Mr Sheppard was then taken through a number of indicia in the reports. The first matter raised with him was the “quick ratio”. Mr Sheppard was aware of this concept and described the ratio in terms of comparing cash and accounts receivable on the one hand and current liabilities on the other. The described integers made plain that it addressed what liquid assets were available to meet current liabilities. Having been taken to the relevant figures, Mr Sheppard agreed that the Regional Land Fund had a very low quick ratio and agreed that such a ratio indicated that the Regional Land Fund might struggle to meet its short term liabilities and was largely illiquid.

However, I accept the plaintiff’s submission that the "quick ratio" is not an indicium of the ability of that entity to pay any claim made against it. First, the highest use of the quick ratio can rise is to establish liquidity. Even if the Regional Land Fund was illiquid, it does not follow that it could not have (after liquidating assets or raising finance) repaid the plaintiff’s loan. Relevantly, the Regional Land Fund had total current assets of $8.1 million and positive net assets of $6.2 million. Secondly, it would not seem unusual for a land development company (which Pacific General was) to have significant assets tied up in land and, thus, to present as largely illiquid (or perhaps have a current or working capital ratio of less than one).

The second matter that Mr Sheppard was taken to in cross-examination was the current or working capital ratio, which he agreed compared current assets to current liabilities and agreed the ratio of the Regional Land Fund was less than one at 30 June 2008. I accept the defendants’ submission that that ratio would have to be a more pertinent indicator of the immediate capacity to meet a liability than the net assets figure adhered to by Mr Sheppard in his oral testimony. The defendants submitted it was apparent that the answer Mr Sheppard gave, as to selection of the net assets figure, was nonsense.

The plaintiff responded to that submission, contending that criticism was unwarranted because the net asset position of Pacific General (as responsible entity of the Hardie Estates Property Fund / Regional Land Fund) is largely irrelevant, given the concession made by the defendants’ expert, Ms Michelle Jones, a chartered accountant and registered company auditor, that it is likely that the plaintiff would have recovered the full amount of the loan ($838,299) from the guarantors in May 2008 (with the result that it would not have needed to proceed against the borrower, Pacific General).

However, the plaintiff’s submission does not address the defendants’ contention that Mr Sheppard should have used other indicia for the purposes of considering the ability of the Regional Land Fund to pay claims to the plaintiff.

I consider Mr Sheppard’s use of the net assets affected the weight that may be given to his evidence. It also affected his reliability as a witness. However, whilst there is doubt about using the net asset position to calculate the ability of the Regional Land Fund to pay (as will be considered later in this judgment), I do not consider that Mr Sheppard was taking on an advocate’s role in coming to his conclusions.

A third attack by the defendants on Mr Sheppard was that in his third affidavit, Mr Sheppard made reference Mr Tomkins’ claim as to the value of some real estate.

Mr Sheppard claimed to have made that reference to indicate that Mr Tomkins may have had the capacity to meet a liability in circumstances where what he put forward was, as the defendants contended, an incomplete picture. Mr Sheppard did not to refer to Mr Tomkins’ unsecured creditors of $3 million and he did not to make reference to the trustee in bankruptcy’s investigations of Mr Tomkins’ claims, which led the trustee to the conclusion that Mr Tomkins’ claims as to value could not be supported.

In cross-examination, Mr Sheppard claimed that he did not make reference to the investigation of the trustee in bankruptcy that indicated that the land value only approximated the secured debt because he considered the statement of affairs of Mr Tomkins more informative than the trustee’s views. The defendants submitted that attempted justification did Mr Sheppard “no credit at all” and it ought to be rejected. It should be noted that the plaintiff did not respond to that point.

I consider whilst Mr Sheppard’s reference to Mr Tomkins’ claim to the value of real estate did not give the complete picture of whether Mr Tomkins as guarantor had the capacity to meet a liability, the mistake made by Mr Sheppard goes to the weight of some of his evidence.

Overall, I consider the mistakes made by Mr Sheppard significantly reduced the weight which may be attached to his evidence. However, I do not consider that Mr Sheppard was, as the defendants submitted, partisan in giving his evidence.

The defendants only called one witness, Ms Jones She was instructed only to address whether the loans and investments were recoverable, in full, as at 15 May 2008. She was not instructed to provide (and did not provide) any opinion on the audits conducted by the defendants. The defendants called no expert evidence in the fields of opinions traversed by Mr Morris.

The plaintiff did not contend that Ms Jones made any inaccurate calculations within the scope of her instructions. It was contended, however, the issue with Ms Jones’ evidence was the limited scope of the instructions provided to her. Those matters will be addressed later in this judgment.

No evidence was called from the first defendant. Although affidavits from him were served and appeared in the index to the Court Book, no such affidavits were ultimately read.

The plaintiff submitted the failure to call the first defendant supports an inference that his evidence would not have assisted the defendants’ case on questions of liability outside the matters admitted: Jones v Dunkel (1959) 101 CLR 298. It was also contended the failure to call the first defendant allowed the Court to draw, with greater confidence, any inference unfavourable to the defendants if that uncalled witness appears to be in a position to cast light on whether the inference should be drawn: Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361; [2011] HCA 11 at [63] per Heydon, Crennan and Bell JJ; Manly Council v Byrne [2004] NSWCA 123 at [51].

In this case, the plaintiff contended the first defendant was in a position to cast light on whether inferences relevant to liability should be drawn. The plaintiff invited the Court to draw particular inferences upon the basis the first defendant may have given relevant evidence in the sections under the headings: “Existence of assets and securities”, “Value of assets”, and “Causation”. I will deal with that topic further below.

The defendants admitted that the first defendant owed a common law duty to exercise reasonable care and skill in the performance of his engagement to provide an audit report in each of the relevant financial years.

It is trite to note that a professional person owes a duty to his client concurrently and co-extensively in tort and contract: Johnson v Perez (1988) 166 CLR 351 at 363. The defendants owed to the plaintiff duties at common law that were co-extensive with the terms of the retainers set out above.

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

In Frankston and Hastings Shire v Cohen (1960) 102 CLR 607 (“Frankston”), Fullagar J accepted (at 618) that, although the Local Government Act 1946 (Vic) only required the auditor to “audit the accounts”, it was, in fact, “just as much concerned with protecting [the entity whose accounts were the subject of the audit] from fraud as with ensuring that the [entity] itself keeps within the law”. His Honour held that the auditor “must be subject to a duty to exercise reasonable care in carrying out his audit of the accounts”.

Fullagar J held (Frankston at 617):

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.

The defendants admitted that the material available to the first defendant at the time of the preparation of the audit reports did not support the expression of an unqualified opinion in the terms pleaded in para 15(a) of the second further ASOC, namely, that the Super Fund’s financial reports presented fairly in all material respects, in accordance with accounting policies described in the notes of the financial reports, the financial position of the Super Fund at year end and the results of its operations for the year then ended (see amended defence at 16(h)).

Further admissions were made which I described earlier in this judgment. It is sufficient to note, for present purposes, that the following was admitted:

The culmination of those factors resulted in the admissions that the first defendant failed to exercise reasonable care in the preparation of the audit reports.

Nonetheless, there remained a dispute as to the appropriate form of any such qualification if the auditor had, in accordance with the obligations falling upon him in that role in law, expressed a qualified opinion.

As to the loan investments where there was audit evidence available, the defendants contended that the qualification would only go to the appropriateness of the adopted basis for valuing the loan assets. Reliance was placed upon the evidence of Mr Morris in cross-examination, even though Mr Morris did not identify in his report any form of qualification of the opinion, as such, relating to the financial reports.

As to the other investments where it was said there was no evidence to establish that the other investments were not being carried at appropriate amounts, the defendants submitted that the first defendant had no basis for qualifying his opinion. It was contended that the first defendant did not have the task to positively ascertain values and that it was not his role to assess the financial statements against the application of accounting standards.

Reference was made, in that respect, to the retainers which provided that the auditor may request from the trustees written confirmation of certain representations. In the case of the financial statements in question, there was a representation to the effect that the adopted accounting policies were appropriate for the Super Fund and a specific representation as to the existence of all assets. These representations, it was submitted, provided the audit with a basis for proceeding in the absence of evidence to the contrary.

As to the loan investments, Mr Morris agreed, in cross-examination, that a reasonable auditor would query the appropriateness of maintaining a basis for valuation recorded in the notes to the special purpose financial reports and, if provided no further information to remove the uncertainty as to whether the method was appropriate, an available outcome would be to qualify the audit to cover the remaining uncertainty.

Those qualifications, however, were not volunteered by Mr Morris but derived from an affirmative response from him with respect to the River Island Investments. Mr Morris’ evidence was that the qualification put to him in cross-examination was “one outcome”. It was not put to him that there was any other form of qualification that might be available or appropriate. More significantly, the effect of Mr Morris’ evidence was that the irregularities in the audit material and apparent conflicts of interest involving Mr Moylan were so significant and concerning that the auditor should have attempted to communicate directly with Ms Crittle.

I accept the submission of the plaintiff that the documents provided to the defendants for each of the relevant financial years revealed that, with respect to Mr Moylan:

As to those matters, Mr Morris opined that the auditor had a duty to report to the trustee concerns about the obvious conflict of interest of Mr Moylan and the high level of risk associated with the loans and investments.

It is unnecessary to deal with the further submission advanced by the plaintiff that the narrow qualifications, for which the defendants contended, were not available given the failure to call the first defendant as a witness, with respect to the type of qualification that might be given by the auditor, but there is some substance to that submission.

I accept that there is a relevant distinction, as contended for by the defendants, between an accountant and an auditor and, more particularly, their role and functions. It is true the auditor is not a guarantor of a fair presentation of the financial reports per se. However, the admissions made by the defendants were that the Super Fund’s financial statements were materially inaccurate and did not present fairly the financial position of the Super Fund. The accounts should have been prepared on the basis that the value of the loans to River Island, MCD Holdings and the Tomkins were, in substance, worthless or of substantially compromised value.

I agree with the submission of the plaintiff that any meaningful qualification would have needed to at least to state those matters – if not explain the reasons for the qualifications: Re London & General Bank (No 2) [1895] 2 Ch 673 (“Re London & General Bank”) at 685.

It does not automatically follow, as contended by the plaintiff, that where the accounts were materially inaccurate or did not present fairly the financial position by virtue of the failing of the accountant who prepared the accounts, the auditor was in breach. However, having regard to the nature of the admissions made, and the nature of the irregularities, I consider that such a conclusion must flow in the present case. That conclusion is a fortiori in light of my further discussion of the non-admitted breaches of contract and duty, which appear below.

Turning to the other investments, it might be noted at the outset that the defendants’ pleadings drew no distinction as to those assets.

It is true, as contended by the defendants, that Mr Morris’ criticism, so far as it was directed to a positive obligation relied, at least in part, upon the audit being conducted pursuant to AASB 139. I have earlier discussed why that standard is not appropriate, and therefore attach little weight to Mr Morris’ evidence in that respect.

However, this approach puts out of account the requirements of AUG 4 which stipulated that the auditor should ensure that investments were carried in the accounts at net market value, being the amount which could be expected to be received from a disposal in an orderly market after deducting costs of the proposal (see extracts at [182]-[185] above). Despite the defendants’ contention that the auditor did not have to positively ascertain values, it follows that the defendants failed to ensure that the investments were valued at net market value pursuant to AUG 4, Ch 7 at 84 and 85.

That brings attention to the letter dated 3 April 2008 from “The Trustee of Ryan Wealth Holdings Retirement Fund”, with respect to the 2007 audit (“the representation letter”), which the defendants contended provided a safe basis for the auditor to proceed, in the absence of evidence to the contrary. The plaintiff’s reply, in this respect, was in the following terms:

I do not consider that the first two points of the plaintiff’s submission, in that respect, are met by the defendants’ contention that the submission involved hindsight reasoning having regard to the material before the defendants regarding the conduct of Mr Moylan set out at [426] above. I will return to that point below.

As to the third paragraph of their submission, the defendant made reference to the 2007 retainer which recorded “As part of my audit process, I may request from the trustees written confirmation concerning representations…”, emails requesting and sending the representation letter, and notes on the defendants’ quality control form that “request trustee rep letter – received”. The plaintiff responded by submitting that it was the defendants who sought to place reliance on the representation letter, and that they have failed to prove (a) that the defendants relied on the letter, and (b) they were justified in doing so. I agree with the plaintiff’s submission considering the representation letter was not signed by the trustee.

As to the fourth proposition, I do not consider that the quality control form is irrelevant as contended by the defendants.

In all, I consider that the four propositions advanced by the plaintiff have substance. The quality control form was employed as part of the audit and was an instrument used to guide the formation of the first defendant’s opinions.

The plaintiff further submitted that reliance upon the representation letter entirely overlooked the plethora of evidence to the contrary being evidence suggesting the other investments had no value. The defendants replied by submitting that the knowledge now that the loans and investments were worthless was an entirely different thing from a conclusion that the auditor should have formed that conclusion based on the material available to him at the time. The submission was repeated that it was not the role of the auditor to form an opinion as to the value. He was not a trustee. However, that submission overlooked the effect of AUG 4 and the fact that the material available to the defendants made plain that the loans and investments ought to have been recorded in the accounts as being worthless.

The investments in the Cartel Trust and the Limeburners Trust were of no value and the first defendant admitted that he failed to exercise reasonable care in expressing the financial report opinion as it lacked any basis. The admission was that the financial statements of the Super Fund for those investments for the relevant financial years should have been prepared on the basis that the value of the assets was wholly impaired or of no value. I agree with the submission of the plaintiff that it must follow from that admission that the defendants failed to establish the value of those assets as recorded in the financial statements in conducting the audit in each relevant year –but would add – as required by AUG 4. I also agree with the submission of the plaintiff that it must follow from that admission that the defendants failed to ensure that all investments were valued at net market value and failed to exercise appropriate judgement in assessing the reasonableness of the value disclosed pursuant to AUG 4, Ch 7 at 84 and 85.

In any event, there was evidence before the auditor as to lack of value as follows:

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.

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:

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.

The Court found, by reference to the construction of the retainers, that the defendants had a duty under each retainer and at the general law as pleaded in this respect. Regulation 4.09 has been earlier extracted in this judgment at [136].

The investment strategy document for the financial year ending 30 June 2007 has also been extracted in this judgment at [90] and was amongst the documents provided to the defendants. The plaintiff submitted that it was clear from the terms of that document and the material available to the auditor that it was or should have been obvious that the plaintiff had not given effect to the requirements of that investment strategy with respect to any of the specified matters in reg 4.09(2).

The plaintiff made a detailed and cogent submission in support of that essential proposition, which I extract below (save for the table demonstrating that of the total assets (of approximately $6.5 million) approximately 97% were not convertible into cash within 90 days: a proposition I accept from that table):

Both the 2008 and 2009 investment strategies (not extracted in this judgment) contained materially identical requirements to those set out in the 2007 investment strategy. Nothing in the materials available to the auditor, with respect to financial years ending 30 June 2008 and 30 June 2009, provided any basis for a conclusion that the trustee had given effect to the requirements of the 2008 or 2009 investment strategies that are identified in reg 4.09(2).

In the 2007 audit report, under the heading “Compliance”, the defendants stated the following:

The defendants did not challenge the submissions of the plaintiff as to the failure to give effect to the requirements of the 2007 investment strategy per se, but rather raised a number of issues of a broader character which are discussed below.

First, the defendants submitted that in order to go beyond the admission, it was necessary to accept Mr Morris’ views as to this topic as a reliable basis upon which the Court may act. I do not accept that submission for two reasons:

Further, in oral submissions, the defendants specifically referred to the investment strategy and argued that the plaintiff’s submission presupposes mandatory compliance with the investment strategy. The defendants contended that if the “Liquidity and Cash Flow” and the “Diversification” sections were not mandatory, then the plaintiff’s submission as to reg 4.09 went “nowhere”.

The defendants referred to the words under the heading “Trustee Discretion” which stated: “[t]he investment principles outlined in this statement are guidelines only. The trustee retains discretion in relation to all investment decisions”. It was contended that this removed the argument that adherence with the investment strategy was mandatory. The plaintiff contended that such an argument was wrong on three levels and advanced the following submissions:

I accept the first and second contentions, in that respect, of the plaintiff.

The defendants turned again to the “Liquidity and Cash Flow” section. That section included, it was submitted, various technical concepts, such as “convertible to cash within 90 days” for which Mr Morris offered no assistance. Further, within that section, the defendants contended that a condition precedent existed in the words “[w]here some assets are not readily converted to cash”. Thus, it was submitted the question is, therefore, whether that condition precedent was satisfied.

It was also contended, in that respect, that the word “unless” in the condition precedent paragraph provided a proviso: “then at least 50% of the fund assets shall be invested in assets which are convertible to cash within 90 days”. The defendants again contended that proviso was not established and placed reliance on the representation letter which stated: “investment transactions and investments held are in accordance with the investment strategy which has been determined with due regard to risk, return, liquidity and diversity”. This argument was made in oral submissions and was not replied to by the plaintiff.

As to “Diversification” section, the defendants submitted that the section which followed listed the normal investment range for each type of investment as “0 to 100%” and, thus, obliterated the need for diversification under the investment strategy. I do not accept that submission. The asset bands on the second page of the investment strategy do not negate or gainsay the requirements for diversification. The two parts of the documents must be read together, and the requirements under the heading “Diversification” must be given effect with the asset bands read in that light. Further, reg 4.09(2) required that effect must be given to the investment strategy having regard to “the extent to which [the loans and investments] are diverse or involve exposure of the entity to risks from inadequate diversification”.

I agree with the plaintiff’s submission that the defendants’ aforementioned contention, as to the “Diversification” section, has no application to the 2008 and 2009 investment strategies, both of which had narrower investment bands and limited the investment in property to 60% of the portfolio (a requirement which was not met).

Next, the defendants submitted that there is no obligation under the retainer which corresponded to this alleged failure. I have earlier negatively dealt with that submission. The defendants recognised that the plaintiff’s claim may be available under the “legally correct” formulation that the auditor failed to exercise reasonable care and skill in the performance of his engagement. However, it was submitted that the approved form made clear that no part of the auditor’s function was to provide “an opinion on the investment strategy or its appropriateness to the fund members” and that the effect of the plaintiff’s submission was that “the auditor should have advised on the appropriateness of the strategy to the fund members”.

The difficulty with that submission is the foundation for the breach asserted by the plaintiff, in this respect, is not a failure to enquire into the appropriateness of the strategy to the Super Fund’s members, but whether each investment made by the Super Fund, as recorded in the financial statements, was made in accordance with the investment strategy with respect to the specified matters in reg 4.09.

It is true that reg 4.09 does not specify any particular standard of strategy and that the plaintiff had at all relevant times adopted an investment strategy that was in writing, but the contention, as advanced by the plaintiff, was that any investment entered into fell outside the strategy contained within the document by reference to its relationship to reg 4.09.

In substance, the defendants’ challenge, in this respect, was based on a complaint of procedural unfairness because the plaintiff’s case about reg 4.09(2) was neither pleaded nor particularised. I will deal with that below and reject that submission. However, one particular point needs to be dealt with at this juncture.

The defendants submitted that Mr Morris provided four reports and that there was no evidence by him that the auditor ought to have concluded or inferred the matters described in the extracted submission from the plaintiff above at [448]. It is submitted that in the absence of Mr Morris’ evidence, as to those matters, the proper inference was that his evidence would not have supported those assertions. Mr Morris was cross-examined upon the evidence he gave in his reports in that respect. However, as the plaintiff correctly submitted, even though Mr Morris confined his analysis to deficiencies in the formulation of the investment strategy document itself, that evidence cannot constitute a pleading. Rather, the question was whether the plaintiff has discharged the onus falling upon it to prove the alleged failure. The plaintiff was correct to submit that it was entitled to rely on all aspects of the evidence in support of its pleaded case and not just on the evidence of Mr Morris.

Finally, reference may be made to the defendants’ submission that the failure of Mr Morris to address these issues, referred to by the defendants in the preceding paragraph of the judgment, may result in an inference that his evidence would not have supported the assertions: Commercial Union Assurance at 418E-J (per Handley JA).

That case was concerned with whether a Jones v Dunkel inference could be drawn where there had been a failure to ask a lay witness about a certain matter. In this case, the question asked of Mr Morris (an expert witness) was consistent with the pleaded case of the plaintiff and did not omit any relevant matter. Mr Morris answered that question in the negative. The fact that, in doing so, he focused upon only one particular reason (the deficiencies in the investment strategy document) does not preclude the plaintiff from relying on other evidence to establish breach; nor does it offer any support for a Jones v Dunkel inference as contended for by the defendants.

As to procedural fairness, the defendants contended that the pleadings went no further than re-stating reg 4.09, and the plaintiff’s identification in its closing submissions of various respects in which the defendants failed to give effect to reg 4.09 was not touched upon in the pleadings or expert evidence. Further, they contended that they never had the opportunity to answer the allegation that the findings of fact should be made and that certain matters were obvious or apparent to an auditor.

The defendants’ complaint must be rejected. I accept the plaintiff’s submission that this issue was pleaded, particularised and exposed in the opening address. More specifically, I accept the following:

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:

The plaintiff objected to such submissions being made, however the Court allowed senior counsel for the defendants to develop his point in that regard, points of which were included in the defendants’ skeleton outline. His submissions, in that respect, have already been dealt with above. Hence, the defendants had the opportunity to deal with the plaintiff’s case on compliance with reg 4.09 and there was no failure to give a hearing on the matter. The highest that the defendants’ contention could have gone is that they could have cross-examined Mr Morris on that question and called the first defendant to give evidence. That contention, and any forensic choices made by the defendants in assuming without a proper basis that this matter was not in issue, cannot constitute procedural unfairness considering the matters discussed above, particularly in relation to the pleaded case.

In the circumstances, I accept the submission of the plaintiff that the unqualified expression of opinion in the 2007 audit report, as described above, was unsupported by the material available to the defendants and that the defendants, in expressing that opinion, failed to exercise reasonable care and skill.

I also consider that, had reasonable care and skill been exercised, the defendants would have:

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.

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

In substance, the plaintiff pleaded, in this respect, that the defendants had a duty under each retainer and the general law to audit the Super Fund in a manner so as to be able to reasonably form the opinion as to whether the Super Fund had complied in all material respects with the requirements of the SIS Act and the SIS Regulations. In reply, the defendants accepted that this failure corresponded with their admission that they were obliged to exercise reasonable care in the performance of their engagements.

For the reasons given in relation to the failures identified under the preceding heading, the plaintiff has made good its contentions in this respect.

The parties’ competing contentions as to this alleged failure traversed a number of considerations as follows:

The issue which occupied the majority of the parties’ written and oral submissions, in this respect, concerned the conflicts of interest by Mr Moylan and the obligations of the auditor to report upon the same. Before turning to that topic, however, some preliminary matters should be addressed.

First, the Court has earlier addressed the construction of the retainers insofar as it bears upon this issue. I agree with the submission of the plaintiff that the defendants’ admission that the loan and other investments were of substantially no value must result in a conclusion that there was a serious misdescription or misstatement in the financial statements upon which the auditor should report to the extent that the loans and investments were described, as they were, in the Super Fund’s financial reports as having value.

Secondly, the factual foundation for the plaintiff’s submissions as to the conflict of interest issue consisted of two parts. The first part concerned documents provided to the auditor, for each of the relevant financial years, which revealed various aspects of Mr Moylan’s actions and interests which were previously set out in this judgment at [426].

The second factual foundation was the quality control form, which had handwritten notations in the following terms:

It might be noted that there is no evidence as to the author of the handwritten notes but the entry appears, as noted above, under the heading of “Baumgartner Partners” in their quality control form for the relevant period.

The plaintiff contended that the actual knowledge of Mr Moylan’s involvement with investments by the defendants is sufficient to demonstrate the failure under this aspect of the pleadings as no such concern was brought to the plaintiff’s attention.

The defendants submitted that the notation from the quality control form did not involve the defendants expressing a concern with the fact of money having been lent to Mr Moylan. Whilst that is correct, it does not answer the plaintiff’s case in this respect. In the quality control form, the defendants recognised that the plaintiff had made loans to Mr Moylan for property, considered the loans and investments were high risk and acknowledged there was a risk that it could “all go wrong”. The defendants were also aware and recorded in their notes that the pension from the Super Fund was Ms Crittle’s sole source of income.

When those assessments are combined with the first defendant’s failure to give evidence in the proceedings, it may be readily found that the defendants held a level of concern about Mr Moylan’s personal involvement with the loans and investments the Super Fund had made and acknowledged those investments were high risk.

Mr Morris’ evidence was that having regard to the documents held by the defendants, as described at [426] above (namely, that Mr Moylan had prepared the accounts being audited, he had executed agreements on behalf of the plaintiff, and he had personal interests in the loans and investments), that a reasonably competent auditor would have met with Ms Crittle, sought to engage with her and report to the plaintiff concerns about the obvious conflict of interest. He also gave evidence that the auditor had a duty to report to the plaintiff, as trustee, concerns above the obvious conflict of interest of Mr Moylan and the high level of risk associated with the loans and investments. This opinion was within Mr Morris’ area of expertise (noting his extensive experience supervising an audit practice and that his findings, in this respect, were consistent with the requirements under the retainers). I will return to the question of communication momentarily.

The defendants’ answer, in this respect, was predicated upon procedural fairness issues. It was submitted the inference that the defendants were, in fact, concerned about Mr Moylan’s personal involvement with the loans and investments could not be drawn unless aid was derived from the first defendant not giving evidence on the question. It was submitted that the plaintiff had expressly disavowed a case based on the first defendant’s state of mind and that the plaintiff was limited to maintaining a case that the auditor ought to have concluded or ought to have been concerned about something and failed to draw it to the plaintiff’s attention.

I am satisfied that the plaintiff did not disavow any case at all based on the first defendant’s state of mind in the passages of transcript relied upon by the defendants. The plaintiff disavowed a case that the auditor dishonestly stated an opinion that he did not hold and was limited to the pleading of breach of statutory duty. The submission regarding the failure of the first defendant to give evidence in this context was open to the plaintiff.

There, nonetheless, remains the question as to whether the plaintiff failed to explicitly present a case based on the first defendant’s state of mind and, in the result, the defendants made forensic choices which cannot now be reversed and led to, if this part of the plaintiff’s case were to be accepted, a denial of procedural fairness to the defendants.

The pleading is wide enough to encompass what the first defendant’s state of mind, as it were, concerned knowledge about Mr Moylan’s personal involvement with the loans and investments, and therefore conflicts of interest. The wording of para 16(c) was that the defendants “failed to bring to the plaintiff’s attention… facts and circumstances arising from the audit which any competent chartered accountant acting in the capacity of an auditor would bring to the attention of the plaintiff”. Further, in particulars to para 16(e) of the second further ASOC, the plaintiff particularised that the defendants:

It cannot, therefore, be contended that the defendants were denied procedural fairness when the issue was pleaded in the proceedings.

Before turning to the question of communication, it is appropriate to mention the contentions advanced by the defendants if the Court was not minded to find actual knowledge of Mr Moylan’s involvement (or excluded that consideration on procedural fairness grounds).In this alternative argument, the defendants submitted that the plaintiff’s complaint was effectively reduced to a complaint that the auditor “ought” to have been aware that Mr Moylan was conflicted and was thereby obliged to communicate that directly to the plaintiff. Having found that actual concern as to Mr Moylan’s involvement, it is strictly unnecessary to address these contentions. However, for completeness, I will briefly turn to that issue.

It was contended by the defendants that the management of conflicts was a matter of internal control. In that respect, the approved forms stated that the auditor “considers internal control relevant to the trustee’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances but not for the purposes of expressing an opinion as to the effectiveness of the trustee’s internal control”.

The defendants then turned to the consideration of internal control for the purposes of determining audit procedure and, in that respect, contended that Mr Morris accepted that:

It was submitted, in this light, that the peculiar facts of the case have no bearing upon audit design beyond that, objectively, the audit was of a SMSF. That being the case, it was contended Mr Morris’ evidence was thereby reduced to a criticism that the auditor did not express an opinion of the effectiveness of the trustee’s internal control; even though the auditor made plain he was not reporting on that subject matter nor looking at internal controls for that purpose.

It was not contended that Mr Morris, in his analysis, agreed with this limitation but that there was a demonstration that he failed to recognise the precise forms of the retainers.

I agree with the defendants’ submission that, insofar as the plaintiff complained about a failure to express an opinion on the effectiveness of the trustee’s internal control, that is not a matter falling within the obligations of the auditor under the retainers.

Before concluding the matter, I turn to the question of communication.

I will put aside, in this respect, the question of valuation which was dealt with earlier in this section of the judgment. The defendants’ admission and Mr Morris’ evidence at [486] above must result in a conclusion that one outcome available for a reasonably competent auditor exercising reasonable care and skill was to qualify the audit report to cover the uncertainty as to the basis of valuation of the Super Fund’s assets.

As to the question of conflict, and as mentioned earlier, Mr Morris’ opinion was to the effect that, whilst a registered office and principal place of business of the plaintiff company were recorded at Mr Moylan’s offices, having regard to Mr Moylan’s intimate involvement with the loans and investments and the matters to be drawn to the plaintiff’s attention vis-à-vis Mr Moylan’s involvement, it was appropriate that the issues be communicated with the sole director.

The defendants replied to this contention by indicating that Mr Morris accepted that the registered office and principal place of business were identified on the ASIC register as Mr Moylan’s office to identify the destination relevant communications with an entity were to be sent and agreed that sending correspondence to that place would be unexceptional. Mr Morris was said to have placed reliance upon the Australian Auditing Standards in this respect pointing to ASA 240 and ASA 260. The defendants contended that ASA 240 did not apply and that Mr Morris had agreed it was directed to the presence of fraud (which was not suggested in this case). As to ASA 260, it was contended that the standard speaks generally about communication with those responsible for governance and does not deny the reality of the parties (the auditor and those responsible for governance) may arrange their affairs as to the way that communication will take place.

As earlier found, ASA 240 did apply in relation to the audits of the Super Fund. I agree with the submission by the plaintiff that it was not suggested that Mr Morris said that his opinions based on ASA 240 were somehow dependent upon there being an indicia of fraud. Further, AUG 4 stated that it is not the auditor’s responsibility to make a legal determination as to whether fraud has occurred. In the absence of any countervailing considerations arising out of the retainers or the standards, it appears to me that there is a proper basis to accept Mr Morris’ opinion as to why the communication should have been made directly to the sole director of the plaintiff, namely, Ms Crittle. (I note the earlier discussion in this judgment as to that question).

That conclusion does not ultimately resolve the questions arising in relation to this pleaded failure. The defendant made the following further submissions in reply:

It should be made clear that the aforementioned conclusion that a communication should have been made directly by the defendants to Ms Crittle was not predicated upon a determination that Mr Moylan would withhold the audit opinion from the plaintiff if it was sent to him. Whilst there may be a basis for concluding some information was withheld, having regard to the matters described in [426] (and no conclusion is made in that respect), based upon Mr Morris’ evidence, the plaintiff was correct to contend that the more prudent course – in all the circumstances – would have been for the defendants to communicate with Ms Crittle directly as to the concerns and anomalies about the audits and any qualification of the audit opinion, having regard to the risk that those matters might not be conveyed by Mr Moylan.

Turning to the defendants’ submission on “hindsight reasoning”, I do not consider that the plaintiff’s contention that the auditor ought to have been concerned about the conflict on the part of Mr Moylan (whether disclosed or otherwise) may be properly described as “hindsight reasoning” or affected by a false premise that the auditor ought to have assumed that the plaintiff was unaware of the counterparties to the loans and investments, particularly, where those parties were Mr Moylan or his companies. I have taken into account, in this respect, the judgment of the High Court in Roads and Traffic Authority of New South Wales v Dederer (2007) 234 CLR 330; [2007] HCA 42 at [45] (per Gummow J) as to the expectation that potential plaintiffs will exercise reasonable care for their own interests.

There are two bases for this conclusion. The first is that the material relied upon by the plaintiff to support its allegations of breach is the same material which was available to the defendants at the time of conducting the audits. Secondly, I accept the submission that it does not follow that the suggestion materials were available to the defendants somehow demonstrated that the plaintiff “was aware of its own investments” when regard is had to the four factors pointed to by the plaintiff. Those were as follows:

There is a third factor and that is the defendants’ submissions do not address the evidence that is suggestive of undisclosed conduct to which I have earlier referred at [426].

In my view, the defendants breached an obligation of the retainers in failing to, in any way, bring to the attention of the plaintiff by qualification, notation or suitable communication Mr Moylan’s involvement with the high-risk loans and investments; including the information as to such matters which were in the actual knowledge of the defendants as recorded in the quality control form.

I have earlier made rulings on the question of construction in this respect. I have also dealt with this question, broadly, in the scope of admissions. The following analysis is directed to the four obligations which were discussed in the context of the construction of the retainers at [312]-[317] of this judgment.

For convenience, I will repeat the terms of the failures asserted by the plaintiff:

As to failures (2)-(4), set out at above, inclusive, the plaintiff submitted:

The defendants submitted it does not follow that the underlying accounting records were unreliable simply because the financial statements were materially inaccurate. Nor did it follow that the auditor ought to have formed such an opinion about the record. It was submitted that there was no evidence to support the abovementioned propositions as to failures and that the submissions, by the plaintiff, failed to appreciate the difference between the qualification of the audit reports and the formation of an affirmative opinion that the financial report misstated the financial position of the Super Fund. As mentioned above, the defendants’ submissions, in this respect, cannot be accepted because the defendants were required to ensure that the investments were valued at net market value and, in doing so, exercise judgment in assessing the reasonableness of the value disclosed.

As to the failure (1), outlined above, the plaintiff made the following submission:

The defendants contended that submission represented the same error committed by Mr Morris that, without the application of those parts of the accounting standards dealing with recognition and measurement, the financial statements could not present a “true and fair view” of the financial position. Reference was also made to Mr Morris’ position that all the applicable accounting standards had to be applied as they relate to recognition and measurement so as to present a “true and fair view”. Further, Mr Morris was said to have proceeded from the premise that the auditor had to perform his role by reference to all of the relevant parts of the accounting standards dealing with recognition and measurement. This may be explained, it was submitted, because his criticism was directed at the claimed lack of work undertaken to be satisfied that the carrying values for the various loans and investments were appropriate due to impairment issues. That wrongly applied AASB 139. It was submitted that the recognition and measurement framework contained within the Australian Accounting Standards did not apply to special purpose financial reports of the Super Fund.

The effect of Mr Morris evidence in cross-examination was that he was wrong in applying AASB 139 to the financial statements of the Super Fund (as special purpose financial reports) and, as mentioned above, the defendants were not required to determine whether the financial statements presented a “true and fair view” pursuant to s 297 of the Corporations Act. The defendants were required to express an opinion as to whether the financial reports presented fairly the financial position of the Super Fund. Therefore, Mr Morris’ evidence, in this respect, should be given little weight.

However, the defendants’ submission once again fails to give effect to AUG 4, which required the defendants to ensure that all investments are valued at net market value in accordance with AAS 25, namely, the accounting standard relating to financial reporting by superannuation plans. As noted above, whilst not directly applicable to non-reporting entities, AUG 4 stated that SMSF’s still should have used net market value in the financial reports.

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

The first such item concerned investment in accordance with the investment strategies. Both parties relied upon their submissions in relation to compliance with reg 4.09 in that respect. In the result, my earlier conclusions as to ensuring compliance with reg 4.09 will hold in relation to that matter.

The second item concerned the existence of assets and security. It was submitted the auditor had two duties in this respect. First, the obvious duty of verifying the existence of reported assets. The second duty was to enquire into the reported value of the assets. It was submitted that Mr Morris was cross-examined extensively as to the second question but not the first.

It was contended that the defendants failed as to the first obligation, which was reflected in AUG 4, by failing to verify the ownership of assets to proper supporting documentation (in accordance with the defendants’ quality control form). As mentioned above, under the heading “Auditing Objectives”, AUG 4 stated that “the auditor should establish that investments exist and are registered in the name of the Trustees or custodian”. The plaintiff contended this obligation was self-evident and was also reflected in the defendants’ quality control form which identified the defendants would verify the ownership of assets to “proper supporting documents”.

The basis for the plaintiff’s submission was that, whilst a number of the loans were described as “mortgage loans” in the 2007 financial statements, no mortgage loans existed because the loans were unsecured by any mortgage. Further, the material provided to the auditor contained no basis upon which the auditor could conclude that any security in the form of a registered mortgage existed. Nor were any enquiries undertaken by the defendants to verify the existence of any mortgage in this respect.

It was submitted that, having undertaken to verify assets to “proper supporting documentation”, an auditor, acting reasonably, would at the very least, have confirmed the existence of “mortgage loans”.

The defendants contended the Super Fund’s “assets” existed in an accounting sense, which was described by Mr Morris as being an entitlement to future economic benefits. The defendants contended that the plaintiff was entitled to future economic benefits under its facility agreements or as a unit holder in unit trusts. The defendants’ answer to the plaintiff’s contention was that all assets existed, and that a registered mortgage is not a separate asset, rather it goes to the value of the asset.

The plaintiff responded by submitting that the assets did not exist “as described”, namely that an asset described as a “mortgage loan” did not exist. The absence of registered mortgages rendered the assets different to what was described in the financial statements. The plaintiff referred to Queensland Premier Mines Pty Ltd v French (2007) 235 CLR 81; [2007] HCA 53 (“Queensland Premier Mines”) at [10]-[12] per Kirby J and [53]-[55] per Kiefel J to support the proposition that a registered mortgage was a separate asset to the underlying loan agreement (or facility agreement) which the mortgage secures. The defendant sought to distinguish that case because it was concerned with statutory construction of Queensland Torrens legislation and was therefore irrelevant. I accept the plaintiff’s submission based upon Queensland Premier Mines, which I do not consider is relevantly distinguishable as contended for by the defendants. Kirby J specifically referred to the approach in Butt, Ticehurst and Hughes, Woodman & Nettle: The Torrens System in NSW, 2nd ed, 12,104-12,105 [52.60] with approval which dealt with the equivalent section under the Real Property Act 1900 (NSW). Kirby J relevantly quoted (at [10]):

The rights under the mortgage are, therefore, separate from the rights under the facility agreements. This is consistent with Kiefel J’s finding that “the instrument of mortgage is the source of [the interest in land] and of the rights to sue for and recover moneys owing under it” (at [55]).

The defendants also submitted that it was pointless to quibble about whether the audit material would answer the description of “proper supporting documentation” going to existence of assets because the audit file contained evidence of the existence of the assets, namely, the unregistered mortgage in support of the Tomkins Facility Agreement.

The plaintiff relied on Pacific Acceptance Corporation at 81-82 per Moffitt J which I agree offers a rejoinder to that proposition. I do not accept the defendants’ contention that no general proposition as to what was required could be taken from that case. Moffitt J considered the duty of an auditor regarding the vouching of securities “in a general way, in any finance company” (at 81C). His Honour held that “the general question is, having regard to certain general circumstances, what type of procedure by way of programme or otherwise should have been laid down for the clerks to apply” (at 81D). Further, Moffitt J held that “to discharge their duty the auditors should satisfy themselves by some proper means that the securities for each of the material loans during the audit year… have as promised been executed and registered” (at 81G-82A).

The general circumstances in have been outlined extensively in this judgment and include a substantial number of investments in the form of “mortgage loans”.

In those circumstances, the defendants should have satisfied themselves that the loans were properly secured by registered mortgages. That conclusion was supported by Mr Morris’ opinion that a reasonably competent auditor would have sought evidence of the existence of the security that was given. Mr Morris was not cross-examined on that evidence and the defendants did not lead any evidence to contradict it. The plaintiff contended, correctly, in my view, that Mr Morris’ evidence should therefore be accepted: Precision Plastics Pty Ltd v Demir (1975) 132 CLR 362 at 371.

I accept the plaintiff’s submissions that the loans were not properly described as “mortgage loans” and there was no mortgage held with respect of them. The River Island Facility Agreement had not, in fact, been executed by the plaintiff leaving doubt about that matter.

As outlined above at [182]-[185], pursuant to AUG 4, the defendants should have ensured that all investments were valued at net market value, “being the amount which could be expected to be received from a disposal in an orderly market after deducting costs of disposal”. Market value was similarly defined in s 10 of the SIS Act which was also extracted earlier in this judgment. In determining the net market value of an asset, AUG 4 required an auditor to exercise judgment in assessing the reasonableness of the value disclosed.

At the outset, it should be noted that AUG 4 used AAS 25 as establishing the requirement for assets to be carried at net market value and stated that AAS 25 only applied to reporting entities. AUG 4 continued by stating, “SMSFs [being non-reporting entities] should use net market value reporting for their financial statements”.

AUG 4 also gave examples of the determination of net market value, including, inter alia, that a mortgage loan should be valued “by reference to the outstanding principal of the loans”. The plaintiff submitted that, despite that example, an auditor, exercising judgment in this case would not have considered that determination to be a reasonable indicator of the market value of the loans made by the Super Fund.

The defendants again contended that it was not the role of an auditor to establish the value of assets in the financial statements. That submission must be rejected when looking at the requirements of AUG 4.

The defendants referred to the evidence of Mr Morris who was critical of adopting the determination of value by reference to the outstanding principal of the loans (despite that method being consistent with what is recorded in AUG 4). During cross-examination, Mr Morris conceded that he did not have that section of AUG, or the example methods set out therein, in his mind when he made that statement in his report. The defendants contended that Mr Morris’s complaint was not as to the meaning of the accounting policy (valuing by reference to outstanding principal) but to the application in the circumstances in the present case.

I accept the defendants’ submission that Mr Morris’ complaint does not progress the matter further. However, the question remains whether the defendants failed to exercise reasonable care in valuing the assets in accordance with AUG 4.

I consider that the defendants failed to exercise reasonable care in determining the net market value of the assets and failed to exercise judgement in assessing the reasonableness of the values for the loan investments disclosed in the financial statements for the following reasons:

In addition, the plaintiff submitted that in the case of the River Island Facility Agreement, the maximum amount of the loan had been exceeded (the facility agreement providing for a maximum loan commitment of $2.17 million, and the Super Fund recorded the principal and interest outstanding as being an amount exceeding $2.5 million), which was an event of default under the terms of the agreement.

The defendants contended that the maximum loan commitments under the Pacific General Facility Agreement ($2.5 million) and the River Island Facility Agreement ($2.17 million) were maximum principal commitments, not covering capitalised interest. It was contended that it could not be said that the auditor ought to have formed an incorrect view of the loan entitlements.

The plaintiff contended that despite the loans being in default they had been recorded as assets worth the full value of the principal in the plaintiff’s financial statement. In circumstances where the defendants were aware that the pension from the Super Fund was Ms Crittle’s sole source of income, a matter that would cause an auditor, acting with reasonable care and skill and exercising judgment in assessing the reasonableness of the values disclosed, to undertake further enquiries about the capacity of the borrowers or guarantors to those transactions. The defendants’ audit files do not reveal that any such enquiries were made.

The plaintiff correctly submitted that, if the defendants had acted with reasonable care and skill, those matters would have, at the very least, been raised as requiring further enquiry as to the value of the loans being “the amount that could be expected to be received from a disposal in an orderly market after deducting costs of disposal” as required by AUG 4. That finding is supported by Mr Morris’ evidence. Upon such enquiry, it would have been obvious that the loans and investments had not been recorded in the account at their net market value.

A similar conclusion can be reached in respect of the other investments based on the following:

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.

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:

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.

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.

The plaintiff contended that, pursuant to s 113 of the SIS Act, as it applied to the 2007 audit, and s 35C of the SIS Act, as it applied to the 2008 and 2009 audits, the defendants were required to give the plaintiff, in connection with each audit, a report in the approved form that included a statement as to whether, in the opinion of the auditor, the trustee of the fund had, during the relevant year of income, complied with the provisions of the SIS Act and SIS Regulations that were identified in the approved form. The approved form, it was contended, drew particular attention to reg 4.09 of the SIS Regulation.

It was submitted that the obligation on an auditor under s 113 of the SIS Act (and s 35C of the same Act) was to form and express and opinion that could not be satisfied by the making of a mere ipse dixit.

Having regard to the purpose of the legislation, the obligations falling upon the auditor under those sections were, it was contended, as follows:

I do not accept the plaintiff’s submissions, in this respect, for the following reasons:

It is convenient to deal with the plaintiff’s case under these provisions together as similar submissions were advanced.

As to s 129 of the SIS Act, the plaintiff contended that, by the proper construction of the provision, the auditor was required to:

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:

I consider that the submissions in reply by the defendants, in this respect, cogently demonstrate the flaw in the construction proposed by the plaintiff and why the pleadings based on contravention of these provisions must fail.

Those sections of the defendants’ reply are as follows:

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.

It is strictly unnecessary to deal with the plaintiff’s submissions under this section in the light of the abovementioned conclusions. However, it is possible to briefly state why the plaintiff’s submissions in this respect should be rejected.

Section 315(11) of the SIS Act confers on the Court a power to order a person to pay damages if the Court would otherwise have power under s 315 to grant an injunction. The power to grant injunctive relief under s 315 is a necessary precondition to an order for damages.

Section 315(1) sets out the circumstances in which the Court may grant an injunction. It provides:

Under s 315(7) and (8), the power of the Court to grant an injunction, whether prohibitive or mandatory, is exercisable whether or not it appears to the Court that the person intends to engage again, or to continue to engage, in conduct of that kind and whether or not there is an imminent danger of substantial damage to any person.

After referring to authority to the effect that statutory provisions conferring jurisdiction or power in a court should not be construed as subject to any limitation which is not required by the language and purpose of a provision and that s 315 conferred on the Court the widest possible injunctive powers devoid of traditional constraints (subject to the power being exercised judicially and sensibly), the plaintiff contended that, if the Court found the defendants had engaged in conduct that constituted breach of ss 113/35C, 129 and/or 130, the Court’s power to grant an injunction is enlivened. It was submitted it was not necessary for the Court to have actually granted injunctive relief but only that it could have (that is, the power is enlivened): Jaggard v Sawyer [1995] 2 All ER 189; [1995] 1 WLR 269 at 284; Wentworth v Woollahra Municipal Council (1982) 149 CLR 672 at 677-679; Mills v Ruthol Pty Ltd (2004) 61 NSWLR 1; [2004] NSWSC 547 at [61] and the authorities there cited.

Assuming, against the earlier conclusions that a breach may be found under the SIS Act and SIS Regulations, I conclude that no power may be exercised in this case under s 315 for the following reasons:

It should be observed, in relation to the conclusions in the immediately preceding paragraph of this judgment, that the plaintiff sought on 28 August 2017, on the first day of the trial, to amend the then further amended statement of claim in various respects including claims for injunctive relief. Orders were sought pursuant to s 315(1) of the SIS Act (whereby the defendants were restrained from issuing audit reports with respect to the Super Fund which contained statements as to compliance with the SIS Act unless in conformity with certain conditions: para 2(a) and s 315(3) of the SIS Act (an order was sought requiring the defendants to notify the regulator, as defined in the SIS Act, of certain contraventions of that Act with respect to the relevant financial years: para 2(b).

The plaintiff contended, inter alia, that the amendment was necessary as the defendants had contended in the defendants’ overview submissions that the power to award damages under s 315(11) would not be engaged because no application for injunctive relief had been sought by the plaintiff (a claim for damages under that section had been made in the further amended statement of claim).

On 29 August 2017, the Court rejected the amendment to the further amended statement of claim so far as it concerned the injunctive relief sought by the plaintiff but otherwise granted leave to amend the further amended statement of claim (hence, the Second Further ASOC). It was indicated that reasons for the refusal would be given in due course.

Given the ultimate conclusion reached under this heading, those reasons may be stated briefly.

There was considerable force in the defendants’ submission that the amendment appeared to be advanced not for the purposes of seeking the claimed injunctive relief per se, but for the purpose of enlivening the jurisdiction of the Court to grant damages under the SIS Act.

The injunctive relief was sought very late and related to the audits the subject of these proceedings. No explanation was provided for the lateness of the amendment.

The framing of the first prayer for relief (para 2(a)) underlined these difficulties as it sought to restrain audit reports issued many years earlier in time. At the very least, the application raised significant issues as to utility. The relief claimed in para (2)(b) required the defendants to advise the plaintiff of contraventions of the SIS Act in circumstances where, at the time the relief was sought, the plaintiff had already pleaded breaches of the SIS Act in the very areas to which the injunctive relief sought to operate.

In the circumstances, it is unnecessary to resolve the question of breach of statutory duty otherwise raised by the plaintiff.

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:

As the relevant conduct occurred prior to the commencement of the Australian Consumer Law on 1 January 2011, it is the provisions of the FTA (NSW) and the TPA that are relevant (see Schedule 2 to the Competition and Consumer Act 2010 (Cth)).

The defendants admitted that each of the audit reports contained an implied representation that the opinions expressed within them were the product of the exercise of reasonable skill and care (amended defence at para 15(b1)). The defendants admitted that this representation was misleading (amended defence at para 42(b)). The defendants further admitted all of the elements of a contravention by the first defendant of s 42 of the FTA (NSW) and s 52 of the TPA, in respect of this admission, save that they did not admit that it was made in trade or commerce (amended defence para 44(b)). It should also be noted that the defendants contended, in their affirmative defence submission, that the FTA (Vic) was incompetent in the present proceedings. I will turn to that issue when dealing with the affirmative defences.

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) 149 CLR 191 at 198; Rhone-Poulenc Agrochomie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477 at 490-491; Campbell at [25]; Butcher at [111]), and is likely to mislead or deceive where there is a real (or not remote) chance or possibility that the conduct will have that effect (Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 at 87).

Whether conduct has a tendency to lead into error is an objective question of fact to be determined on the basis of the conduct of the defendants as a whole viewed in the context of all relevant surrounding facts and circumstances: Campbell at [102], citing Butcher at [109]. The inquiry is an objective one, the focus being on the objective tendency of the conduct to induce an erroneous assumption on the part of a hypothetical individual, but taking into account the respective positions of the parties, including such matters as their knowledge of each other from previous dealings and their respective familiarity with the subject matter: Sutton v AJ Thompson Pty Ltd (In Liq) (1987) 73 ALR 233 at 240. The objective nature of this inquiry means that a finding that conduct is misleading or deceptive is not avoided merely because a plaintiff could, by proper inquiries, have discovered the misleading or deceptive conduct: Butcher at [111]; Henjo Investments Ply Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546.

Where silence is relied upon as conduct giving rise to a contravention of the FTA (NSW) or TPA, the effect of the silence is considered in light of the relevant surrounding circumstances. An important question in this context is whether the plaintiff was reasonably entitled in all the circumstances to expect that the defendants would make a positive disclosure: OXS Pty Ltd v Sydney Harbour Foreshore Authority [2016] NSWCA 120 at [178] and the authorities there cited, see also Street v Luna Park Sydney Pty Limited (2009) 223 FLR 245; [2009] NSWSC 1 at [180]; Perpetual Trustee Company Ltd v Ishak [2012] NSWSC 697 at [96].

As Gummow J said in Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 41 (quoting Kimberly NZI Finance Ltd v Torero Pty Ltd [1989] ATPR (Digest) 53,193 at 53,195):

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.

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:

The plaintiff contended, with respect to each of the representations, the following:

The defendants contended that the Court should limit findings as to representations to those found in its admissions contained in the amended defence, but the defendants made no submissions directly going to representation 1. In my view, and having regard to the analysis found earlier in this judgment, the audit reports conveyed the representation in representation 1.

As to representation 2, the defendant contended that the audit report represented that the auditor had a belief to the relevant effect – it did not represent a fact. However, I accept the submission of the plaintiff, in this respect, that, whilst the audit report did represent that the auditor had a belief to the relevant effect, it also represented impliedly that the audit evidence that had been reviewed by the auditor and that evidence was a sufficient and appropriate basis for the opinion stated. As the plaintiff contended, an auditor is paid for bringing to bear their qualifications and skill in forming and stating their opinions and, it followed, that by stating those opinions, the auditor impliedly represented that he or she had exercised those qualifications and skills when forming the stated opinion and, thus, the stated opinions had a proper basis. It may be noted, in that respect, that each audit report expressly stated that the audit evidence had been reviewed and was sufficient and appropriate to provide a basis for the audit opinions.

The defendants submitted that representation 3 was an “absurd allegation” when one had regard to the ambit of the content of the alleged duties in contract and at common law. Whether representation 3 should be labelled “absurd”, it nonetheless has such a broad ambit it cannot be found that it constituted a representation conveyed by the audit reports.

What was central to the defendants’ resistance to this part of the plaintiff’s case was the question of reliance. Mention should be made, in that respect, of a disclaimer within the audit reports which recorded:

The plaintiff advanced its case, in respect of reliance, as having two elements reflected in the following two submissions:

The first proposition advanced by the plaintiff as to reliance upon the representations is flawed. Ms Crittle did sign the resolutions adopting the audit reports which were addressed and sent to “Moylans” (in the case of the 2007 audit report) and “Moylans Business Solutions” (in the case of the 2008 and 2009 audit reports), but the resolutions purporting to adopt the first defendants’ audit reports were signed before the first defendant had issued them. In those circumstances, I accept the defendants’ submission that it did not need to suggest to Ms Crittle that she had not been physically presented with the reports at the time of signing those resolutions.

As to the second contention, in support of reliance, the starting point must be a recognition that the onus of proving reliance upon a representation rested with the party seeking relief. In this respect, it must be observed that Ms Crittle gave no evidence that she read or relied on the first defendant’s reports, although the plaintiff made reference to the fact that Ms Crittle had a poor recollection of events from the relevant time which is almost 10 years ago.

This brings attention to the two authorities relied upon by the plaintiff, namely Sargent and LMI.

I do not accept the submission of the plaintiff that these authorities support that an inference may be drawn that Mr Moylan, as the plaintiff’s accountant, duly discharged his duty to convey the audit reports and their contents to the plaintiff. The passage in Sargent relied upon by the plaintiff was concerned with whether a counterparty can rely on attribution of knowledge of an agent to his principal (see at 659). Similarly, LMI was concerned with whether a counterparty can rely on attribution of knowledge of company officer to the company itself. I agree with the submission of the defendants that neither principle permits a party to attribute knowledge to itself in support of its own case in circumstances where it could have adduced direct evidence of its knowledge.

The defendants sought to apply the principles stated by Handley JA in Commercial Union Assurance. However, their submissions as to the application of them were not entirely clear. In Commercial Union Assurance, Handley JA found that the principles of Jones v Dunkel may be applied where a party fails to ask questions of a witness in chief, namely, when a party fails to examine a witness in chief on some topic; the most natural inference in those circumstances being that they may be afraid to do so because it may have exposed facts unfavourable to the party (at 418). His Honour referred to the US authority of Milliman v Rochester Ry Co 3 App Div 109; 39 NYS 274 (1896) where the opinion of Follett J was to the effect that the omission to interrogate a friendly witness in respect of facts “presumably within his knowledge is more significant than the failure to call such a person as a witness, and that the presumption that the testimony would not have been favourable to the party’s case is stronger than one which arises from the failure to produce such a person as a witness”.

The application of the principles in Jones v Dunkel in this instance may be doubted because of the poor recollection of events of Ms Crittle which was expanded consistently during her evidence.

This brings attention to the plaintiff’s reliance upon the authority in Gould v Vaggelas (1985) 157 CLR 215 at 236. This matter concerned a fraudulent representation between contract parties for entry into a contract. The passage of the judgment of Wilson J relied upon was as follows:

The plaintiff submitted that the representations in the audit reports were made with the intent that they would be relied upon, namely, the representations that were made were calculated to induce an assumption that all was well with the Super Fund. It was submitted that the inference arises that Ms Crittle relied upon that assumption because she did not take investigative steps until 2013. Whilst the inference may be rebutted by showing the representee did not, in fact, rely upon the representations, there was no rebuttal evidence led here.

The purpose of the audit of the Super Fund was that identified in Frankston by Fullagar J extracted above at [415]. The concept that the sole purpose of appointing an auditor was confined to safeguarding members of the fund against a default by the trustee cannot be accepted in the case of SMSFs where the members and trustees are the same persons albeit through a corporate vehicle in the present case. I agree with the submission of the plaintiff that it had sought, by engaging the defendants, to protect against the very risk which was realised, namely, the risk that the financial statements of the Super Fund may be incorrect or the risk that there had been non-compliance with the SIS Act.

Finally, it is difficult to reconcile the defendants’ contention that may be inferred that Mr Moylan passed the audit reports to the plaintiff, and the concession that the defendants “[did] not contend that Ms Crittle would not have read the reports passed to her by Mr Moylan”, with the contention that plaintiff did not rely on the reports. It was not suggested by the defendants that Ms Crittle did not receive the audit reports.

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

The defendants correctly contended that it was well established that representations by silence are found only where the circumstances were such as to give rise to a reasonable expectation that matters would be disclosed.

The plaintiff pleaded a second set of representations in para 39 of the second further ASOC as follows:

In resisting the further representations, the defendants raised the following matters:

There is some force in the plaintiff’s submissions in reply that, based upon the principal that the relevant enquiry is an objective one, the resolution of this issue does not depend on what was in the mind of the auditor. In the present case, it was reasonable to expect that the auditor would exercise reasonable care and skill when conducting the audit and reasonable to expect that, if the auditor, exercising such reasonable care and skill, became appraised of the matters referred to in the further representations, then he would have communicated to the plaintiff. Take for example the representation at [598(2)] above, the evidence suggested that the loans had not been made on a fully informed basis and suggested a conflict of interest on the part of Mr Moylan.

Whilst the defendants’ final aspect of its submission concerned what the auditor was reasonably entitled to expect the plaintiff to know, this does not support an inference that Ms Crittle, in fact, knew of those matters particularly when that suggestion was not put to her in cross-examination.

When these conclusions are combined with the earlier conclusions as to breach, the conclusion must be reached that the representations (excluding representation 3) and the further representations were misleading and deceptive, or likely to mislead or deceive. I so find.

Both sets of representations were made in trade or commerce. The representations and the further representations were made in the audit reports and by the defendants’ failure to disclose that which they had a duty to disclose as auditors. That conduct occurred in the course of their commercial operations:

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

The defendants admitted all of the elements of a contravention by the first defendant of s 52 of the TPA, insofar as the audit reports impliedly represented that the opinions expressed in them were the product of the exercise of reasonable care and skill, save that they did not admit the representation was made in trade or commerce.

As the representations were made using postal services, s 6(3) of the TPA was engaged. That section extended the operation of the TPA to persons whose conduct involved postal or telegraphic services (see the discussion of s 6(3) in Australian Competition and Consumer Commission v Global Prepaid Communications Pty Ltd [2006] FCA 146 at [51] per Gyles J). Hence, by making the representations, the first defendant also contravened s 52 of the TPA. The admission made by the defendants that, all bar one of the elements of a contravention by the first defendant of s 52 of the TPA were made out, carried with it a further admission that the first defendant was subject to obligations under the TPA.

The admitted representations were contained in each of the audit reports which reports were issued in the course of the first defendant’s commercial dealings.

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.

The central question raised by the parties, in this respect, was whether the qualification of the audit report admittedly required by the defendants would have made the plaintiff aware of irregularities in the financial reports. The question had two subsidiary elements: first, whether “irregularities” would have been identified by such qualification, and secondly, whether the qualification would have been communicated to the plaintiff, and in particular, Ms Crittle.

The first subsidiary issue has been earlier resolved in this judgment. In short summary, I found that any meaningful qualification needed to have stated the loan investments were worthless or of substantially compromised value, and if not, explain the reasons for the qualifications at [429] and, further, that the other investments should have been the subject of a qualification at [443].

In any event, I accept the submission of the plaintiff that, even if the qualification were in the narrow form postulated by the defendants (the appropriateness of the adopted basis for valuing loan assets), there was a requirement that the qualification be clearly communicated to the plaintiff, as earlier found, in terms of the admission that the Super Fund’s financial statements for each year were materially inaccurate, did not present fairly the financial position of the Super Fund and the accounts should have been prepared on the basis that the value of the other investments were, in substance, worthless or of a substantially compromised value. It follows that, at least on this basis, the irregularity in the basis for valuation would have come to the plaintiff’s attention (subject to issues of communication discussed further below).

The basis for the valuation adopted in the case of the loans, exposed in the notes to the financial statements, was that they were "mortgage loans" and, therefore, valued by reference to the outstanding principal (in accordance with AUG 4 as noted at [533] above). However, as discussed at [537] above, those loans were not "mortgage loans" – there were, in fact, no mortgages (in the case of the Tomkins Facility Agreement, an equitable mortgage was declared but only after the plaintiff took legal proceedings). Hence, even adopting the narrow form of qualification contended for by the defendants, the qualification once communicated to the plaintiff would have exposed that none of the loans were secured by a registered mortgage; and in the case of the River Island Facility Agreement, the lender did not even own the land. These facts, once communicated, would most likely have provoked serious concern and alarm.

The defendants contended that the plaintiff did have a mortgage (albeit unregistered) to secure the obligations under the Tomkins Facility Agreement which was in the material available to the auditor and that it was incorrect for the plaintiff to contend that no mortgage existed until an equitable mortgage was declared following legal proceedings. I accept the plaintiff’s submission, however, that the equitable mortgage was only declared after legal proceedings. This is consistent with the finding above at [529] that the defendants were required to ensure that the loans were secured by registered mortgages.

The question then becomes whether the plaintiff would have become aware of the irregularity in consequence of the first defendant propounding a qualified audit report or, as was reflected in debates discussed earlier in this judgment, sent directly to Ms Crittle.

Turning to the second of those considerations, the plaintiff submitted that it is likely that any qualified report would have been sent directly to the plaintiff rather than Mr Moylan, and it was further submitted that a qualified report would be sent to Ms Crittle.

In supplementation of the earlier contentions advanced by the defendants, it was submitted that:

It is true that the defendants did not, in fact, pursue the actual concern that they had noted in their quality control form. However, that was in a context where the defendants issued an unqualified audit report in breach of their duty. In a context where the defendants acted in accordance with their obligations to issue a qualified report, and where the reasons for the qualification were that the assets were worthless and Mr Moylan had a conflict of interest, it is probable that the defendants would have issued their qualified report directly to Ms Crittle at her home address (being the address for Ms Crittle noted on ASIC reports for the plaintiff). That inference is more readily drawn given the failure of the first defendant to give evidence at all about these matters – even though he was uniquely placed to do so.

In written submissions, the defendants contended that it was not open to the Court draw such an inference “for the reasons already submitted”. Those reasons were predicated on the question of procedural fairness and, it would appear, the connection between procedural fairness (as previously discussed in this judgment) and this issue, although the submission was not clear. In oral submissions, the defendants contended that no Jones v Dunkel inference could arise because the case in these proceedings was maintained on what the auditor ought to have known, rather than what was actually known to the first defendant (it is clear that the defendants’ submissions in this respect were not directed to a case based on what the defendants actually knew). The case on what ought to have happened would not require, it was contended, the defendants to call the first defendant. Further, the defendants contended that there was no relevant factual dispute between the first defendant and any other witness which would require him to be called to deal with the factual dispute. In those circumstances, the defendants submitted that no Jones v Dunkel inference could apply.

That submission must be rejected because the first defendant was the only person in these proceedings who was in a position to give evidence on whether or not he would have sent a qualified report to Ms Crittle. The question of whether or not Ms Crittle would have been sent a copy of the qualified report is critical to the question of causation and the defendants were plainly on notice of that point. Thus, the inference can readily be drawn.

I previously found that the defendants had an obligation (which they breached) to bring to the plaintiff’s attention to Mr Moylan’s conflicts of interests and high level of risk associated with the loans and investments at [502]-[508]. That finding was supported by the evidence of Mr Morris which I have earlier accepted at [502], noting that the basis upon which Mr Morris formed his opinion, namely, ASA 240 and ASA 260, applied to the audits.

I do not accept the defendants’ contention that the plaintiff’s submission assumes that the first defendant would recognise the qualification as a matter of concern for Mr Moylan. I have earlier dealt with that point, namely that the conclusion that a communication should have been made directly to Ms Crittle was not predicated on a determination that Mr Moylan would withhold the audit opinion from the plaintiff at [504] above. I also do not accept the contention that the plaintiff’s submission assumes that the auditor would have formed a view that Mr Moylan would egregiously breach his professional duty by failing to communicate the qualified audit opinion to the plaintiff. The proper conclusion is not based on what Mr Moylan might have done, but on what the defendants should have done in the circumstances.

Having regard to those conclusions, it will only be necessary to deal briefly with the alternative submission of the plaintiff predicated upon a qualified audit report being sent to the plaintiff but care of “Moylans”.

The plaintiff’s submissions, in this alternate submission, had a number of elements and are set out, including reference to the certain contentions raised by defendants, below:

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) 205 CLR 434 at 443-434; [2001] HCA 18).

In an overall sense, I accept the plaintiff’s submissions that the defendants’ case on causation was, whilst the defendants had a duty to qualify their audit reports, that qualification would have been ineffective to convey to Ms Crittle its meaning and would not have caused her any disquiet (or, it may be added, the taking of any action). That essential proposition must be rejected. The Court is satisfied that, on the balance of probabilities, had a qualified audit report been issued in 2008 or in subsequent years, the plaintiff would have “called in” the loans and investments so far as it was available to the plaintiff to do so at the relevant time.

The 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:

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.

The submissions of the parties in this respect significantly overlap with the submissions earlier referred to in this judgment bearing upon this question (see at [571]-[607]). The conclusions of the Court in that respect apply with equal force to the consideration of causation as to this matter.

In Travel Compensation Fund v Tambree (2005) 224 CLR 627; [2005] HCA 69, Gleeson CJ (with whom Gummow, Hayne and Callinan JJ agreed) said (at [35]):

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.

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.

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

The plaintiff’s pleadings for loss and damage are extracted in [205] and [220] of this judgment. The plaintiff’s case was that it did not discover the true position of the loans and investments until 2013/2014. The assets referred to in the pleadings concerned monies that had been leant to or invested with parties who had guaranteed the obligations of others to the plaintiff. The reference to third parties in the pleadings appeared to be a reference to the guarantors of loans as well as Mr Moylan, his financial advisory practice Moylan Retirement Solutions and his accountancy practice MBS.

After 2013/2014, the plaintiff obtained recoveries with respect to several of the loans and investments (see [103] of this judgment) but many of the lenders and guarantors, by that time, were bankrupt, in liquidation or de-registered.

Further, the plaintiff contended that Moylan Retirement Solutions and MBS no longer possessed policies of professional indemnity insurance.

The plaintiff’s claimed losses fell into two categories:

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.

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 (1994) 174 CLR 64 (“Amann”) at 80, 98, 116, 134, 148 and 161.

The law awards damages for deprivation of any commercial opportunity, whether arising from breach of contract, tort or statutory contravention: Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 (“Sellars”) at 355 (per Mason CJ, Dawson, Toohey, Gaudron JJ) and 364 (per Brennan J).

I accept the defendants’ submission that a finding of causation of loss and assessing damages which were said to flow from proved loss were separate issues which should not be confused: Badenach v Calvert (2016) 257 CLR 440; [2016] HCA 18 (“Badenach”) at [38] (per French CJ, Kiefel and Keane JJ).

Section 5D(1)(a) of the Civil Liability Act contains a requirement of factual causation. As the High Court observed in Badenach at [36], as with other statutory tests of that kind, it requires the application of a “but for” test of causation. The Court in that matter continued to discuss the approach to causation in matters predicated upon a loss of opportunity or chance as follows (at [38]-[41]):

Reference should also be made to the judgment of Gordon J in Badenach. Her Honour observed (at [94], [95] and [98]):

Where a claim is made for damages for loss of a valuable opportunity, the initial question is whether the breach of contract, negligence or breach of statute caused the loss of an opportunity answering the description of a valuable one. That question is decided on the balance of probabilities: Hart Security Australia Pty Ltd v Boucousis [2016] NSWCA 307 (“Hart Security”) at [131] per Meagher JA (with Bathurst CJ and Beazley P agreeing).

The question of what the plaintiff would have done, had the conduct complained of not occurred, is also decided on the balance of probabilities: Sellars at 353; Hart Security at [133].

As stated by Brennan J in Sellars (at 368):

As Meagher JA said in Hart Security with reference to that passage at [138], the requirement of proof on the balance of probabilities remains even where it is necessary to advert to hypotheses as to past events when determining the issue of causation.

The defendants submitted that the requirement for proof on the balance of probabilities applied with no less force where the issue was not only what the plaintiff would have done, but also involved questions as to what other persons would have been disposed to do in relation to reaching an agreement with the plaintiff: Gore (t/as Clayton Utz) v Montague Mining Pty Limited [2000] FCA 1214 (“Gore”) at [64]-[70], per Hill, Carr and Sundberg JJ.

However, I agree with the submission of the plaintiff that the defendants’ reliance upon Gore, in this matter, is misplaced. The plaintiff in that case would not have required the counterparties to the loans (being the borrowers or guarantors) to agree to anything: as the loans were in default, a demand for repayment could have been made as of right under the terms of the facility agreements.

Damages have been recognised as available for loss of opportunity to prosecute a litigious claim: Darvall McCutcheon v H K Frost Holdings Pty Ltd (in liq) (2002) 4 VR 570; [2002] VSCA 85 at [69] (provided that such a claim was viable); Radosavljevic v Radin [2003] NSWCA 217 at [25]-[26] and [88]. Damages have also been recognised as available for the deprivation of a chance of avoiding loss: Daniels v Anderson at 538-539 (consequent upon breach of duty by auditors).

In this respect, it is not necessary to establish that the chance would probably have been realised – loss of a chance is compensable even if its realisation is unlikely on the balance of probabilities, and even as low as 1%: Malec v J C Hutton Pty Ltd (1990) 169 CLR 638 (“Malec”) at 643; Amann at 92-94.

Once the existence and loss of a chance have been established, damages are to be assessed by reference to the Court’s assessment of the degree of likelihood that the commercial opportunity would have yielded success had it been pursued. The value of an opportunity that has been lost is to be ascertained by reference to the “degree of probabilities or possibilities”.

I extract below the relevant passage from the judgment of Mason CJ, Dawson, Toohey and Gaudron JJ in Sellars at 355:

Reference can also be made to the judgment of Meagher JA in Hart Security which quoted Sellars (at [134]):

I accept the plaintiff’s submissions as to the correct approach to quantification, as outlined below.

Mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can: Fink v Fink (1946) 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) 84 CLR 377 at 411-412; Chaplin v Hicks [1911] 2 KB 786 at 792. Where precise evidence is not available, the Court must do the best it can: Amann at 83.

One category of case in which precise evidence is not available is where the loss is hypothetical, such as the loss of a chance: Malec at 643; Durban at [39]; Troulis v Vamvoukakis (Unreported, New South Wales Court of Appeal, 27 February 1998) (“Troulis”) at 13 (per Gleeson CJ). In such cases “estimation, if not guesswork, may be necessary in assessing the damages to be allowed”: Placer (Granny Smith) Pty Ltd v Theiss Contractors Pty Ltd (2003) 77 ALJR 768; [2003] HCA 10 at [38]; McCrohon at [124]-[125]; Jones v Schiffmann (1971) 124 CLR 303 (“Schiffmann”) at 308; Enzed Holdings Limited v Wynthea Pty Ltd (1984) 57 ALR 167; [1985] ATPR 40-507 at 46,062.

In a loss of chance case, the inquiry “is thus an imprecise and indeterminate one to be carried out within very broad parameters. The trier of fact may have to form conclusions on “slender material”: State of New South Wales v Moss (2000) 54 NSWLR 536 at [71] and see, further, at [87].

The point is well illustrated by the seminal case of Chaplin v Hicks. The jury awarded the plaintiff ₤100 damages for the loss of a chance to win a prize. The Court of Appeal, in refusing to disturb this verdict, said that, had the jury chosen to award one shilling, that verdict would not have been disturbed either. In Schiffmann at 308, Menzies J referred to those aspects of Chaplin v Hicks as supporting the proposition that “[t]he assessment of damages, whether by a judge or a jury, does sometimes, of necessity, involve what is guess work rather than estimation”.

The reference in those authorities to guesswork should not be understood as detracting from the obligation of the judge to adopt a rational reasoning process – based on the materials that are available to the court – rather than random selection: McCrohon at [126].

The Court should “assess the compensation in a robust manner, relying on the presumption against wrongdoers, the onus of proof, and resolving doubtful questions against the party “whose actions have made an accurate determination so problematic”: Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 at 59; Chep v Bunnings [2010] NSWSC 301 at [226]; State of NSW v Burton [2008] NSWCA 319 at [108].

The defendants submitted that the aforementioned principles were qualified where damages were susceptible of evidentiary proof by the plaintiff, but were not proved by evidence: see McCrohon at [118]-[126], per McColl JA (with Campbell JA and Handley AJA agreeing) and JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237. The defendants further submitted that where there is “an absence of the raw material to which good sense may be applied … [j]ustice does not dictate that … a figure should be plucked out of the air”: McCrohon at [123], quoting Gleeson CJ in Troulis.

I accept the submission of the plaintiff; that submission, however, ignores the acceptance of courts of high authority outlined above at [556], namely, that loss of a chance is a category of case in which precise evidence is often not available.

As to the aforementioned particularisation of the plaintiff’s case, the defendants made two broad submissions. First, it was contended the particularisation of the plaintiff’s closing submissions as to a temporal limitation – “in 2008 or shortly thereafter” – involved a qualification of the pleaded case which was that recoveries would have been made by “30 June 2008”. (That formulation derived from the claim for loss and damage in the second further ASOC where the claims for loss of monies (or the use of those monies) were expressed to operate for the period “from 30 June 2008” to the date of recovery or judgment).

The defendants also contended that there was no evidence which would allow the Court to conclude that there would have been any recoveries in the approximate six week period pleaded by the plaintiff, namely, between the issue of the 2007 audit report and 30 June 2008. Such evidence as existed, it was submitted, demonstrated the recoveries that were made took a good deal longer than six weeks. The claim under the Tomkins Facility Agreement was used as an illustration.

There is no doubt substance in the defendants’ contentions in this respect. It may be doubted that the recoveries could be obtained by 30 June 2008 and the plaintiff pleaded its claim as being for losses “from” that date. However, this contention was ultimately not developed by the defendants as a pleading point. The issue of loss was fully argued upon the basis of whether rights could have been exercised to obtain recoveries in the manner as discussed below. Further, I accept the submission of the plaintiff that the temporal adjustment to its case may be accommodated by an adjustment to the calculation as to damages performed by the experts by pushing back the date of recovery for each investment to whatever date the Court considered appropriate or, alternatively, an accommodation being made by a discount to the overall damages sum. I propose to take the latter rather than the former course.

Secondly, in a number of parts of the defendants’ closing submissions, there were contentions concerning whether the loss of the opportunity of making recoveries actually made at an earlier time (category 2) may properly constitute loss of a chance or opportunity in accordance with the principles governing such claims. For example, the defendants submitted the loss of a benefit associated with being able to make recoveries earlier was “swallowed up” by the opportunity to pursue and obtain further recoveries.

In part, it is unnecessary to resolve that question because the findings in this judgment as to the existence of a loss of a chance or opportunity in each category corresponds to findings the monies associated with the subject investment were, in fact, recoverable. Further, the evidence sustained that a claim for lost chance may properly arise in those circumstances for interest lost in not being able to recover from an earlier time (whether with respect to sums actually recovered or sums which were found recoverable by the judgment).

The methodical approach of the plaintiff to loss and damages, whereby the claims were assessed by reference to two aforementioned categories is both logical and provides for clearer analysis, provided that care is taken, as later noted in this judgment, to avoid double counting.

The defendants’ expert, Ms Jones, gave the following evidence as to the time value of money relevant to the determination or settlement of proceedings:

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).

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.

The Pacific General Facility Agreement was earlier described in this judgment. It consisted of an agreement dated 23 February 2006 for a loan of up to $2.5 million for a term of 6 months from the date of the initial draw down notice. It may be inferred that the loan was fully drawn down on or about 24 February 2006. It follows that the loan fell due in August 2006 and the plaintiff could have, prima facie, exercised rights against both borrower and guarantors to seek recovery of the loan from that time.

The defendants submitted that the Court could not be satisfied there was the substantial prospect that a benefit would be acquired from the exercise of rights against the borrower under the agreement for two reasons:

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:

However, this is not the end of consideration of Pacific General Facility Agreement. The defendant accepted that the plaintiff had valuable rights against guarantors under the Pacific General Facility Agreement. The defendants’ expert, Ms Jones, considered it likely that the plaintiff would have recovered the full amount of $838,299 from the guarantors in May 2008 without significant cost.

Ms Jones was not provided with financial accounts for the fund for the year ending 30 June 2008 which she accepted was necessary for her to undertake a correct approach in analysing the Regional Land Fund.

The defendants contended that the plaintiff did, in fact, exercise its rights against the guarantors and that it could not be said that the opportunity to pursue the guarantors was lost by reason of the auditor’s conduct. This gives rise to a question as to whether there was a loss as a result of a lost valuable opportunity to exercise the rights at an earlier time. I will return to that question in relation to the issue of delay.

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:

The defendants raised three broad submissions in reply as follows:

Putting aside issues of insurance momentarily, there were two particular submissions of the defendants, in this respect, as follows:

Out of these submissions sprung the contention of the defendants that the nature of the claim that was available by the plaintiffs, with respect to Mr Moylan and Moylan Retirement Solutions, was much the same as the claim the plaintiff brought against the partners of Turnbull Hill Lawyers, namely, a claim for equitable compensation in respect of unauthorised payments of a fiduciary or alternatively the return of those funds. From these submissions, the defendants contended that the Court could not be satisfied that there was a substantial, and not a merely speculative, prospect that a benefit would be acquired from the exercise of rights against Mr Moylan unless he had the benefit of insurance policies responding to that claim.

The defendants’ contentions in this respect may be further distilled to two primary propositions:

As to the first proposition, I accept the submission of the plaintiff that there is no warrant for confining the available claim in the way that the defendants sought to do. It is highly unlikely that those representing the plaintiff would have formulated claims such as misappropriation of funds and/or false reporting if the effect of those claims was to enliven a relevant exemption under a policy of insurance.

It seems to me that the defendants have put out of account in those submissions the plaintiff’s contention that it had available to it a claim against Moylan Retirement Solutions and Mr Moylan (as authorised representative of and as a director of Moylan Retirement Solutions) based upon the fact that advice given to it to enter into the loans and investments was given negligently in breach of professional duty.

Without repeating the earlier parts of findings in this judgment, I note the following elements of negligence identified by the plaintiff, with which I agree, that form part of a claim that the advice to enter into the loans and investments was given negligently in breach of professional duty as follows:

That gives rise to the second consideration raised by the defendants that the plaintiff did not have a viable claim in negligence against those entities. This was centred upon the proposition that the plaintiff had not demonstrated that it relied upon the financial advice given by Mr Moylan, with respect to all of the loans and investments that were made, notwithstanding the loans and investments made by the Super Fund all had their genesis in Mr Moylan and Moylan Retirement Solutions (the plaintiff’s financial advisors at the relevant time). For the reasons earlier given at [51]-[78] above, I do not accept the defendants’ submissions in this respect.

The viability of the claims identified by the defendants do not depend upon the plaintiff being able to establish that each investment was made in reliance on a specific recommendation given by Mr Moylan. It is sufficient that the plaintiff demonstrate that, but for Mr Moylan acting as its financial advisor, the loans and investments would not have been made. I note my earlier finding that, whilst Ms Crittle did not directly receive advice or recommendations on a one for one basis about investments of which she was unaware, it did not follow that the loans and investments occurred other than upon Mr Moylan’s advice (see at [51]-[78]) above). In respect of the loans and investments which Ms Crittle knew about, I found that Ms Crittle received Mr Moylan’s advice and she relied upon it (see, in particular, [76] above).

The defendants submitted that the Court could not be satisfied that there was a real, and not merely speculative, prospect that a benefit would be acquired from the exercise of rights against Mr Moylan unless he had the benefit of insurance policies responding to that claim.

It was said at the outset of the defendants’ submission that there was an absence of evidence as to what, if any, insurance monies would have been available under the policies at the relevant time. It was submitted that the policy limit is not evidence of the availability of monies as the limit may have been eroded by other claims. The defendants contended that the Court should not infer in favour of the plaintiff that any insurance monies would have been readily available in the absence of evidence of the insurer’s likely attitude to the claim.

As to the defendants’ overview submissions, I consider that the plaintiff was correct to refer to the principle (being applicable in this case) that an insurer bears the onus of showing an exclusion clause applied.

Had the plaintiff been able to pursue the opportunity of bringing a claim against Mr Moylan, or one or more of his insured companies, it would have been for the insurer to establish that an exclusion applied, not for the plaintiff to establish that it did not apply.

The defendants’ submissions as to the availability of insurance claims were predicated upon the proposition that the claims available to the plaintiff were claims for misappropriation of funds, conflict of interest and/or false reporting.

I have earlier rejected the contention that the plaintiff’s claims were confined to that of misappropriation of funds and false reporting at [683] above. Conflict of interest, dishonesty and fraud and the impact of exclusion clauses require separate attention.

There was no dispute as to the following summary by the plaintiff of the insurance policies. In the MRS 2008 policy held by Moylan Retirement Solutions, the profession was defined as “financial planning, investment advice and life insurance broking”. The policy provided for a limit of indemnity of $5 million for any one claim. The policy wording revealed that Moylan Retirement Solutions was insured against civil liability for compensation arising from any claim first made and notified during the period of cover as a result of a breach of professional duty in the conduct of the insured’s profession. In short, it was defined to include not only the company but also as directors and employees while acting in the course of business. This included Mr Moylan.

In addition, MBS also held QBE Professional Indemnity Insurance policy for the period from 30 August 2007 to 30 August 2008, which was renewed to 30 August 2009 (“the MBS policy”). The profession was defined as “accountants and management/business consultants”. The MBS policy provided for a limit of indemnity of $2 million for any one claim. Like the MRS 2008 policy (described above), this policy also defined “insured” as including directors acting in respect of the work performed whilst a director, thus this policy also included Mr Moylan as an insured.

Similarly, the MBS policy wording revealed that to be a policy which indemnified MBS against civil liability for compensation arising from any claim first made and notified in the policy period as a result of a breach of professional duty and in the course of the insured’s profession. The plaintiff submitted that it had an available claim that the accounts were prepared negligently in breach of professional duty.

At the outset, it should be made clear that there were two potential avenues for insurance claims:

Further, as noted above, the MRS 2008 policy, which responded to claims against Moylan Retirement Solutions, applied for the period from 5 January 2008 to 5 February 2009. Thereafter, from 5 February 2009, the DUAL insurance policy applied.

For claims against MBS, the MBS policy covered the period from 30 August 2007 to 30 August 2009. Thereafter, from 30 August 2009, MBS was covered by the DUAL insurance policy.

Attention should be directed, in that respect, to the MRS 2008 policy. The policy wording stated that it provided coverage “for compensation”. Exclusion cl 4.4 was headed “Conflict” and provided that QBE shall not be liable in respect of any claim against any insured directly or indirectly based upon, attributable to, or in consequence of a “Conflict”. “Conflict” was defined in the policy in both commonly understood senses:

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:

Exclusion cl 4.8 was headed “Fraud and dishonesty” and provided that QBE shall not be liable under the policy to provide indemnity in respect of a claim against any insured directly or indirectly based upon, attributable to, or in consequence of, inter alia, any actual or alleged dishonest act or omission of an insured or wilful breach of any statute, contract or duty by an insured.

Exclusion cl 4.14(b), under the heading “Prior or pending”, provided that QBE shall not be liable under the policy to provide indemnity in respect of a claim against any insured:

Reference should then be made to the DUAL Financial Planner’s professional indemnity policy (in respect of claims against Moylan Retirement Solutions) and the DUAL Accountant’s professional indemnity policy (in respect of claims against MBS).

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

The policy included a prior knowledge exclusion clause (see cl 7.1). It stipulated:

It also included a fraud and dishonesty exclusion clause (see cl 7.14), which provided:

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:

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:

The defendants submitted in that light that the combination of conflict in all of those circumstances and the actuating activity by Mr Moylan in 2006 had wider ramifications for the potential of any coverage under the relevant professional indemnity policy.

The plaintiff’s response to the conflict of interest submissions by the defendants were, in summary, as follows:

I do not accept the plaintiff’s submission that the conflict of interest exclusion clauses do not apply to the claims with respect to River Island Facility Agreement (or investments), the Cartel Trust and the Limeburners Trust. The multitude of examples, extracted above at [709], make clear the plaintiff had pleaded parts of its case based on the existence and lack of disclosure of conflicts of interests. To suggest otherwise is largely inconsistent with the plaintiff’s case.

Further, there is evidence within these proceedings which showed that conflicts of interest did exist, most relevantly (as noted above):

In that light, any claim with respect to River Island would have been caught by exclusion cl 4.6 because the claim would have been, at least, indirectly in consequence of a service provided by Mr Moylan (as an insured under the policy) for lending to a company which he controlled.

The same exclusion clause would apply to any claim with respect to the Limeburners Trust because such a claim would be directly or indirectly in consequence of a service regarding investment in the trust in which Mr Moylan had a direct financial interest.

As to the Cartel Trust, again exclusion cl 4.6 would apply to claims against Moylan Retirement Solutions and MBS because Mr Moylan (as an insured) had a direct or indirect financial interest in the trust because MCD Holdings was a beneficiary of the trust.

I do not accept the plaintiff’s contention that the conflicts of interest exclusions do not apply to the negligent preparation of accounts by MBS because Mr Moylan’s conflict of interests were so closely linked with and evident in the accounts.

However, the position with regard to any claims relating to the Tomkins Facility Agreement is different from the other investments.

It was pleaded by the plaintiff that Mr Moylan was a promoter of the borrower under that agreement, and that the borrower was associated with Mr Moylan. The defendants referred to those pleadings (namely, paras (e)(iii) and (v), and (k)(iii) and (v) in the Schedule to the second further ASOC) when the defendants made subsequent submissions about Mr Moylan and his related entities being “associated” with L & V Tomkins.

The defendants pointed to no evidence as to what Mr Moylan’s relationship was to the borrowers under this facility agreement, or any benefit he derived from the loan, other than that Ms Crittle was never told that Messrs Tomkins and Moylan were “business associates”, the common ground that Mr Moylan arranged for the loan investment to be made and that Ms Crittle signed the facility agreement.

However, the evidence revealed that MBS was the registered office for L & V Tomkins from 2006 to 2012. From that, the logical inference was that L & V Tomkins was a client of MBS. I note that the Court was not asked to draw this inference, though the reference to that evidence was taken from an earlier reference in the plaintiff’s closing submissions.

A conflict existed where MBS acted for the plaintiff whilst being subject to the interests of its other client, L & V Tomkins (see exclusion cl 4.4(a) of the MRS 2008 policy). This would then exclude any claim by the plaintiff against MBS for the negligent preparation of accounts. I note here that a claim against MBS would also be excluded under the later DUAL policy because it is well established that existing client conflicts are considered conflicts of interests: see C Hollander QC and S Salzedo QC, Conflicts of Interest (Sweet & Maxwell, 4th ed, 2001) at [1-002] and [17-006].

However, on the evidence, similar conclusions as to the nature of what personal interests, if any, Mr Moylan and Moylan Retirement Solutions had in regard to the loan made in relation to the Tomkins Facility Agreement were not established by the defendants. There was no evidence that any of the borrowers under the facility agreement were clients of Moylan Retirement Solutions, and therefore it cannot be concluded that a conflict of interest arose.

Thus, the defendants have failed discharge their onus on the evidence that the existence of a conflict of interest which would trigger the exclusion clause in the insurance policy with regard to a claim against Moylan Retirement Solutions for negligent advice in breach of professional duty with regard to the Tomkins Facility Agreement.

Considering the findings above, the following discussion is only relevant to any claims with regard to the Tomkins Facility Agreement.

It may be noted that the defendants’ development of submissions concerning dishonesty exclusion were a precursor to the development of broader submissions regarding misconduct. Thus, it was submitted that dishonesty exclusions in the respective policies, discussed above, would exclude cover for any misappropriation claim. Conduct which amounts to dishonesty involves the consideration of the knowledge, belief and intention of the person whose conduct is impugned: Harle v Legal Practitioners Liability Committee [2003] VSCA 133 at [29]; McCann v Switzerland Insurance Ltd (2000) 203 CLR 579; [2000] HCA 65 (“McCann”) at [55]-[56]; Paradis v Settlement Agents Supervisory Board (2007) 33 WAR 361; [2007] WASCA 97 at [69].

It was submitted the qualifying state of mind generally requires deliberate intention to deceive or cheat according to the standards of ordinary, decent people, or the ordinary standards of reasonable and honest people. Insofar as one makes statements, a dishonest statement will include one made knowing there is a risk of inaccuracy but makes it with reckless indifference (i.e. not knowing if the statement is true or false at the time made): HG & R Nominees Pty Ltd v Fava [1997] 2 VR 368 at 421.

After referring to McCann, the defendants submitted that the case maintained by the plaintiff, as disclosed in the evidence of Ms Crittle, was of an even more extreme level of dishonesty than exhibited by Mr Powles in McCann.

In most instances, Mr Moylan did not even advise Ms Crittle of his use of the trust moneys. In all cases where security was required to support the disbursement of funds, he disbursed those funds without having in place the agreed security. In all cases where the party to whom the funds were directed had relevant association with him personally or with his associates, he did not inform Ms Crittle of those facts. What was involved, it was submitted, was a gross misappropriation of large sums of money, on a continuing basis, in disregard of the plaintiff’s interests, and in pursuit of conflicting interests. It was contended that Mr Moylan’s conduct was self-evidently dishonest and probably also fraudulent, insofar as the 2006 correspondence (discussed earlier) represented to Ms Crittle that she would remain in control.

It was then further submitted this dishonest conduct has the obvious direct result that the exclusion for dishonesty under the professional indemnity policies would engage and any claim bearing direct or indirect relationship to that conduct would not be covered.

The defendants further made a contention that the fact of misconduct on the part of Mr Moylan occurring in 2006 had broader ramifications than exciting the exclusion clauses in the insurance contracts. It was contended that the conduct was self-evidently known to Mr Moylan prior to the inception of any relevant policy that could possibly respond to claims against him or his entities. The issue for consideration of the Court is the operation of exclusion cl 4.14(b)(i) of the QBE policy (a fact or circumstance which ought have previously been given under a prior policy) and the obligation of the proponent for new insurance cover to make relevant disclosure by virtue of s 21 of the Insurance Contracts Act 1984 (Cth).

Out of those contentions, it was submitted that on the face of the case before the Court, there could be “no serious dispute” that Mr Moylan, as the proponent of insurance, would be well aware of the facts constituting his misconduct. Further, it was contended no reasonable person could fail to understand the relevance of such facts to an insurer of a professional indemnity risk. The available inference was that a failure to bring such matters to the insurer’s attention would, itself, be fraudulent.

It was also submitted that the financial reports of the Super Fund were dishonestly prepared by MBS.

In a final analysis, the defendants submitted that there was no prospect, whatsoever, that any of the professional indemnity policies, identified by the plaintiff in evidence, could ever respond to the subject matter of the present proceedings.

As to the contentions of the defendants regarding dishonesty exclusions, the plaintiff submitted that proof of actual fraud or dishonesty in dispersing funds would be required to be proved to the Briginshaw standard (see Briginshaw v Briginshaw (1938) 60 CLR 336). That standard, it was submitted, had not been met in these proceedings.

As to the defendants’ submissions as to knowledge of circumstances, it was correctly submitted by the plaintiff that the defendants did not plead that Mr Moylan was in fact dishonest or knowingly failed to disclose matters constituting misconduct to the insurer.

Actual fraud or dishonesty in the context of any claim regarding the Tomkins Facility Agreement, as well as in the context of knowingly failing to disclose matters of misconduct to the insurer, were very serious allegations and ones which could not be accepted unless pleaded and proved to the Briginshaw standard. That standard has not been met. The defendants have neither pleaded nor led any sufficient evidence to the requisite standard to demonstrate the propositions for which they contend, including that the insurer would not have provided coverage if faced with a disclosure of such past conduct. In particular, there was no evidence that Mr Moylan deliberately intended to deceive or cheat the plaintiff; especially in a context where it was not proven that Mr Moylan had an affirmative interest in that particular facility or loan investment.

In the absence of such evidence and specific pleading, the defendants’ submissions as to the applicability of dishonesty and fraud and prior knowledge exclusions should be rejected.

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.

This loan was made pursuant to the River Island Facility Agreement dated 10 February 2006 providing for a loan of up to $2.17 million for a term of 2 years from the date of the initial draw down notice. The loan was partly drawn down by 30 June 2006 and the loan had fallen due by the time the first defendant provided the 2007 audit report dated 15 May 2008.

The borrower, River Island, was placed in liquidation in February 2013. There were two guarantors. The first was Mr Tomkins. I have earlier made observations as to his financial standing prior to 2012. The other guarantor was Mr Moylan who was placed into bankruptcy in April 2013. However, as the defendants correctly submitted based on the aforementioned principles, the financial position of borrowers and guarantors at a particular time is a historical, not a hypothetical, fact which was required to be proved in the usual way.

Similarly, the plaintiff could have exercised rights against both borrower and guarantors from the date of a non-negligent audit report on 15 May 2008 but, as discussed above, it was necessary to prove on the balance of probabilities that the rights would have been exercised (as I have earlier found in this judgment) and there was a substantial, and not a merely speculative, prospect that a benefit would be acquired from the exercise of those rights (as I will discuss below).

The plaintiff has failed to discharge the onus upon it to prove, on the balance of probabilities, that there would have been a response to the plaintiff’s exercise of its legal rights in this respect.

The plaintiff invited the Court to draw an inference that Mr Tomkins had a source of income, or access to borrowings available to extend to the exercise of the plaintiff’s rights because he was servicing his debts apparently without difficulty (those difficulties arose in 2012). A creditor’s report revealed that fact and Ms Jones agreed that Mr Tomkins was not having difficulties servicing his existing debts in 2008 and that this was a relevant factor is assessing his ability in 2008 to meet other debts.

However, that does not permit an inference to be drawn that Mr Tomkins had capacity to pay the amounts sought to be claimed by the plaintiff. I accept the defendants’ submission that the matters referred to by the plaintiff were little more than speculation as to the relevant entities’ response to an exercise of rights with regard to the River Island Facility Agreement. I also note my earlier findings in respect of Mr Sheppard’s evidence that his reference to the value of Mr Tomkins’ real estate did not give the complete picture of Mr Tomkins’ capacity to meet liabilities.

To this may be added that the plaintiff has not established how the same source of funds may also provide a basis for a response to the exercise of rights under the Tomkins Facility Agreement (under which Mr Tomkins was a borrower).

In addition, it must be observed that the plaintiff later made recoveries with respect to this loan and, further, the recovery of River Island was not against the borrowers but against Turnbull Hill Lawyers.

There was a further submission by the defendants based upon the fact that it was purportedly common ground that the plaintiff’s asset in the form of the loan to River Island, supported by guarantees, was in substance worthless or of substantially compromised value. The defendants referred to the pleadings in the schedule to the second further ASOC and the amended defence and contended that it was not open to the plaintiff to make submissions to the contrary. That submission has substance.

The plaintiff submitted that its acceptance of value in its pleadings was that, in the financial statements, the asset should have been recorded as being worthless or of no value, namely, that it was of no value in accordance with accounting principles and that the commercial reality of recoveries was not confined to accounting standards as to recognition and value.

I reject the defendants’ submission for the following reasons. The Schedule to the second further ASOC stated that the financial statement for the Super Fund should have recorded the value of the assets as wholly impaired or of no value. The key to that pleading (and the counterpart pleading in the amended defence) was the reference to the financial statement for the Super Fund and, in particular, that the particular asset should have been recorded as nil value. However, the issue that the defendants raised (which this section of the judgment is dealing with) was whether the plaintiff may have achieved recovery with respect to this loan in 2008.

Although it is unnecessary to resolve whether partial recovery could have been achieved with respect to the Tomkins Facility Agreement, I briefly note the following.

The Tomkins Facility Agreement was an agreement dated 12 May 2006 for a loan of up to $616,795 for a term of one year from the date of an initial draw down notice. An advance of $400,000 was made on 12 May 2006, the date given to the facility agreement. A second advance of $216,795 was made on 9 August 2006.

The defendants accepted that the plaintiff had rights under the Tomkins Facility Agreement and, in fact, exercised them to the plaintiff’s benefit. Again, the defendants recognised that the issue was whether a valuable opportunity was lost to exercise those rights at an earlier time.

However, it was contended by the defendants that, in fact, the plaintiff’s prospects of recovering the loan must have improved with the passage of time and that the plaintiff was better off taking action later because, it was contended, there was common ground that at each of the relevant financial years, the asset represented by the Tomkins Facility Agreement was, in substance, worthless or of substantially compromised value. It was submitted that it was not open to the plaintiff to submit to the contrary. I note my findings, in that respect, above at [750].

Mr Tomkins was the borrower under this facility agreement. I earlier discussed his financial standing prior to 2012. None of the other borrowers, namely L & V Tomkins, Mr Andrew Tomkins and Ms Deborah Tomkins were bankrupt.

However, I make the same conclusions as to this facility agreement as were made in regard to the River Island Facility Agreement, namely, that it cannot be inferred that Mr Tomkins could have utilised his income, borrowings or funds to repay at least part of the loan or that there was sufficient funds to do so.

I note that the parties made submissions with regard to recoveries made from the ATO, however, in light of the above findings, that issue is unnecessary to resolve.

The financial statements of the trust disclosed that it had current assets of $1,325,847 as at 30 June 2008. Ms Jones did not express an opinion one way or the other as to the ability or inability of the Cartel Trust to repay in full the investment as to 30 June 2008.

However, I consider that the plaintiff has not discharged its onus of proving the loss of a valuable opportunity of exercising any rights as the unit holder of the Cartel Unit Trust for the following reasons:

The financial statements disclosed current assets of $1,814,706 as at 30 June 2008. However, the evidence included material showing that the plaintiff was recorded as the registered holder of two ordinary class units in the trust. I agree with the submission of the defendants that there is no evidence of what rights the plaintiff would have enjoyed as a holder of ordinary class units in that trust. I further accept that it cannot be assumed that the plaintiff was entitled to simply redeem its investments whenever it chose to.

The plaintiff has accordingly failed to prove that it could have made a “cognisable claim” as a unit holder in the Limeburners Creek Unit Trust and, thereby, has failed to prove how any such claim would have been received. Thus, as with the Cartel Trust, the book value of the assets of the Limeburners Trust cannot support recoverability without identifying the character of those assets and in circumstances where the plaintiff relies on the unsatisfactory character of those assets in its liability case.

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.

Before considering this next issue, I emphasise that there should be no double counting for the amounts that are recoverable under category 1 of loss with any findings as to loss under this heading. The amounts claimed in that respect were for recoveries beyond the recoveries which it had already made. This second category, namely, the loss of the opportunity to recover earlier those monies which the plaintiff recovered after 2014, will be considered in this next section.

It is not clear whether the premise of the plaintiff’s case, in this respect, was that delay in the exercise of legal rights was, of itself, a form of loss or damage. The plaintiff’s case is that it lost, in respect of money that it did recover, the benefit of making those recoveries at an earlier point in time (in 2008 or shortly thereafter) and, thus, the loss of the use of monies up to the time the recoveries were achieved. It was contended that such a claim was consistent with the recognition by the common law that awards of interest are inherently compensatory in character and, therefore, of themselves, are in the nature of damages: Fire & All Risks Insurance Co Ltd v Callinan (1978) 140 CLR 427 at 431; Haines v Bendall (1991) 172 CLR 60 at 66. Nonetheless, the defendants are correct to submit that the plaintiff was required to show some detrimental difference to the plaintiff’s economic interests in order to discharge the onus of proof falling upon it.

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

On 3 November 2014, proceedings were commenced against the partners of Turnbull Hill Lawyers. The plaintiff sought equitable compensation in respect of unauthorised payments of $2.7 million out of trust funds and, alternatively, the return of those funds. The unauthorised payments occurred in February 2006. The plaintiff also sought compound interest on all sums payable as equitable compensation or by way of return of trust property.

On 18 December 2015, the proceedings were settled for $2.3 million which represented a substantial compromise on the claim plus almost 10 years of compound interest. The costs pursuing the claim were $238,586.

It was common ground that it was not available to the Court to conclude that the plaintiff’s return from the prosecution of the claim was diminished or reduced because the claim was brought later rather than sooner. The plaintiff confirmed so in oral submissions. The defendants’ contention within a Schedule titled “Defendants’ table in relation to claimed loss and damage” (“the defendants’ table on loss”) that there was no evidence adduced by the plaintiff that the return from the prosecution of a claim was diminished or reduced because it was brought later in time, does not require, therefore, resolution.

What was in dispute was whether the Court could infer that, had the plaintiff brought the same claim in 2008, it would have made the same recovery (albeit at an earlier point in time). The defendants submitted that whether the timing of the claim affected the ultimate return was a matter of pure speculation and not a matter about which the Court, in the absence of direct evidence, would draw an inference. The proper inference, it was contended, was that any evidence available would not have assisted the plaintiff’s case.

Before turning to the evidence on this question, it is instructive to consider some authority bearing upon the drawing of inferences to such a contest.

A presumption or inference that the plaintiff could have made the same recoveries earlier in time is supported by the principle explained by Isaacs J in Cloverdell Lumber Co Pty Ltd v Abbott (1924) 34 CLR 122 at 137-138:

The above passage was applied by Handley JA in State of New South Wales v Julianne Higgins by her tutor David Benedict O’Shea; Barnardos Australia v Julianne Higgins [2005] NSWCA 244 at [21], where his Honour also noted at [22] that the principle remained applicable under the Evidence Act. It was also applied by Handley JA (with whom Kirby J agreed) in Pace Farm Egg Products Pty Ltd v Newcastle City Council (2006) 151 LGERA 260; [2006] NSWCCA 403 at [61] and by Handley JA (with whom Tobias JA agreed) in Murphy v Dorman (2003) 58 NSWLR 51; [2003] NSWCA 249 at [30].

The authors of LexisNexis, Cross on Evidence (at 13 September 2018) at [1125] prefer to describe the presumption of continuance as “a process of logic or reasoning involving the drawing of inferences from established facts”. Where by that process of reasoning a fact may be inferred, the party proving that fact is “likely to win on the issue to which the presumed fact relates, in the absence of evidence to the contrary adduced by the other party”: Cross on Evidence at [7215]; and see also the reference in Cloverdell to “in the absence of evidence to the contrary” (extracted above).

The one question which arises in this context is whether the parties against whom recoveries were made had the same ability to pay those amounts in 2008 as they did in 2014-16.

I accept the submission of the plaintiff that the defendants failed to adduce any evidence that the parties against whom recoveries were made (being Turnbull Hill Lawyers, the guarantors of the Pacific General Facility Agreement and L & V Tomkins and the ATO) had an inferior financial capacity in 2008 than they did at the time of the actual recoveries that occurred after 2014. Having regard to the earlier mentioned presumption of evidence, it may be concluded, therefore, that the asset position of those parties in 2008 was no worse than it was when the recoveries were made in 2014.

Some further considerations arise with respect to Turnbull Hill Lawyers.

The evidence with regard to the claim against Turnbull Hill Lawyers revealed that, in the settlement of the claim, the plaintiff not only failed to recover the full principal sum but made no recovery on account of interest although interest had been claimed.

So far as the drawing of an inference is concerned then the further question becomes whether the Court should draw an inference that the same settlement that was reached in 2015 would have been reached in or about 2008.

There is direct evidence that a claim was brought and settled for the sum identified absent any component for interest. There is nothing about the subject matter of the claim or its legal foundation, which would suggest that the approach to its prosecution would have been different if it was brought earlier (after the issuing of a qualified report) than when the claim was, in fact, pressed by the plaintiff. That leaves in the remainder a question as to the settlement itself.

Whilst not put in relation to the Turnbull Hill Lawyers claim, in the subsequent submissions concerning the Pacific General Facility Agreement, the defendants contended that there was no evidence as to the reasons why the claim against the guarantors was settled for the amount that was settled and that the plaintiff bore the onus to establish any objective reasons why the claim was settled for the discounted amount and showing those reasons would have obtained in 2008 with a consequence that there would have been no corresponding discount at that time.

However, the defendants did not plead or make any submission that the plaintiff acted unreasonably in reaching a settlement or failed in any way to mitigate its loss. I consider that it is a reasonable inference to draw that same settlement would have been reached in or about 2008 than was reached at the later point in time.

The plaintiff failed to recover the full principal sum and made no recovery on account of interest (although interest had been claimed). In these circumstances, the plaintiff was correct to submit that the natural inference was that, had the plaintiff brought the same claim for recovery of the $2.7 million in 2008, it would have made the same recovery (of $2.3 million), but at an earlier point in time. (It was also contended that was a safer course than attempting to reach a conclusion that the ultimate return would have been higher or lower than the amount in fact recovered, in which case the plaintiff conceded would be "a matter of pure speculation").

In the circumstances, I am satisfied that there was a substantial and not merely speculative prospect that the plaintiff would have been financially better off exercising rights against Turnbull Hill Lawyers in 2008 than in 2014/15.

I have earlier found that the plaintiff would have recovered the amount of the loan if it had exercised its rights against the guarantors pursuant to category 1 of loss. I note, in this respect, there will be no double counting for the findings for this facility agreement under category 2.

As earlier mentioned, the financial accounts of the plaintiff recorded the outstanding principal interest associated with this loan as being $38,298 as at 30 June 2008.

On 30 June 2014, the plaintiff commenced proceedings in this Court against guarantors under the Pacific General Facility Agreement. It claimed judgment for $826,701.01, being the outstanding loan balance following the most recent repayment, as well as interest under the agreement from that time. The evidence is that, by 31 December 2015, the time value of money had increased the plaintiff’s claim to approximately $1.7 million.

The guarantee proceedings were fixed for a trial commencing on 1 June 2016. On the second day of the trial, 2 June 2016 the claim settled for $850,000. The net recovery made by the plaintiff was $571,660. This represented, as submitted by the defendants, a substantial compromise on the face value of the claim. There was no amount in the settlement identified as being connected to recovery of the amount claimed for interest.

The same issues arose with respect to the Turnbull Hill Lawyers proceeding (noting that the Court referred, in that respect, to part of the defendants’ submissions in this area). I make the same finding with respect to the Pacific General Facility Agreement as made with respect to Turnbull Hill Lawyers.

On 13 July 2014, the plaintiff brought Supreme Court proceedings against various parties in respect of this loan. It claimed judgment for outstanding principal and interest under the Tomkins Facility Agreement.

On 29 February 2016, following a trial, the plaintiff obtained a judgment against L & V Tomkins in the sum of $1,452,490.86 (calculated on a principal sum of $787,324).

The plaintiff subsequently exercised its rights under a second mortgage to appoint a receiver to sell land owned by L & V Tomkins Pty Ltd. The land was sold.

Ultimately the plaintiff’s return from this claim was $438,141.43 (which was less than the principal sum amount of the claim).

The defendants contended that there was no evidence that the plaintiff was financially better off exercising rights under the Tomkins Facility Agreement in 2008 rather than in 2014 (and thereafter achieving recovery in 2016). The defendants advanced two arguments, in this respect, in the defendants’ table on loss.

First, the defendants submitted that it followed from the “agreed fact” that the plaintiff would, in fact, have been worse off taking action with regard to this facility agreement in 2008. The “agreed fact” appeared to be a reference to the pleadings that the asset represented by the Tomkins Facility Agreement was, in substance, worthless or of substantially compromised value. I have earlier rejected a contention advanced on that basis at [750]. I accept the submission of the plaintiff that the actual recovery made belies the contention that the loan was “worthless” even though, as a matter of accounting practice, it ought to have been recorded on the accounts as being worthless.

Secondly, the defendants submitted that the contention at [794] above was consistent with Ms Jones’ evidence that L & V Tomkins did not have the capacity to repay the loan if action had been brought against it in 2008.

It should be noted that the defendants’ table on loss referred to a large section of Ms Jones’ report of 3 August 2016, which related to the recoverability of the loan (see from para 165 to 178 of that report). Within that report (at para 171), Ms Jones expressed an opinion that L & V Tomkins would not have been able to repay the debt owed to the plaintiff from operating cash flows or the realisation of unencumbered assets in 2008. Neither party pin pointed that paragraph of the report, nor made any submissions, as such, as to that aspect of Ms Jones’ opinions in that respect.

The difficulty with the defendants’ contentions is neither the defendants’ submissions nor the evidence upon which they appear to be based grappled with the financial position of L & V Tomkins between 2008-2016 where recoveries were, in fact, made or why the prospect of recovery would be less likely in 2008 (or the period soon thereafter) than 2016.

The defendants have failed to demonstrate that the asset position of L & V Tomkins in 2008 was worse than in was when the recoveries were made in 2016. Ms Jones’ evidence did not deal with that question. Her evidence went to the position in 2008 only.

In my view, the plaintiff is entitled to the lost interest of the amounts recovered but the amounts recovered on this basis will be considerably reduced by the virtue of the potential that recovery may not have been obtained in the year 2008. In other words, the discount for this factor referred to at [665] above would operate with greater force in this respect. That conclusion will be factored in the deduction from the overall damages awarded on that basis.

The defendants made an additional submission in defendants’ final reply submissions that the Court could not be satisfied that the plaintiff “would have” sought partial recovery from the ATO of $216,795 in 2013 on a “stolen money” basis having regard to the way the plaintiff’s claim against L & V Tomkins was ultimately resolved. The basis for that proposition was that the plaintiff had a contractual claim for the whole of the outstanding amount under the facility agreement, and the plaintiff would not have had to have sought partial recovery from the ATO. I reject that submission on the basis that it involves mere speculation. There was no explanation from the defendants as to why the plaintiff’s approach would have been different if its claim against L & V Tomkins was brought earlier in time. The recovery from the ATO had no relevant relationship to the recovery from the litigation (and was dealt with in that way by the experts in their calculation of damages).

As to the balance of the defendants’ submissions, for the most part they follow the same course as the contentions relating to claims against the partners of Turnbull Hill Lawyers and claims against the guarantors under the Pacific General Facility Agreement. In that regard the same conclusion, as previously reached by the Court, should be applied in this case.

Again, I am satisfied that there was a substantial and not merely speculative prospect that the plaintiff would have been financially better off exercising rights in relation to the Tomkins Facility Agreement in 2008 than in 2014/15, and that the plaintiff should have access to the time value of money with respect to the recoveries made from both the ATO and L & V Tomkins.

In the circumstances, the plaintiff has proved, on the balance of probabilities, that it suffered loss and damage by reason of any delay in the exercise of the legal rights that it, in fact, exercised in 2014 in connection with claims against Turnbull Hill Lawyers, the guarantors of the Pacific General Facility Agreement and claims in relation to the Tomkins Facility Agreement.

From 15 May 2008, the plaintiff had an available claim against the borrowers and guarantors for recovery of the funds which had been loaned (as evidenced by the causes of action, which were viable and resulted in the plaintiff recovering monies once Ms Crittle had discovered the true position of the Super Fund in 2013/14). If the recovery action had been commenced in 2008 rather than in 2013/14, there was a real and substantial – not merely speculative – prospect the plaintiff would have made the recoveries at an earlier point in time, which properly results in compensatory loss of the use of those monies from 2008 (noting the earlier observations as to the commencement date and adjustments to damages in that light) to the date the recoveries were made.

In summary, I have found with respect to loss:

The Court has earlier referred to the principles relating to the assessment of damages for approved loss of valuable opportunity.

The plaintiff’s submissions for damages were predicated upon the assessment of loss assuming a full recovery as at 30 June 2008. The starting point of this analysis was to quantify the loss on the assumption that it was a certainty that the pursuit of recovery actions in 2008 would have “yielded a full recovery at that time” (noting that the plaintiff’s submissions on loss were that it would recover “close to 100% of the outstanding amount on the loans and investments”). In that respect, the plaintiff’s expert, Mr Sheppard performed two alternative calculations of loss: “Damages Claim #1” and “Damages Claim #2” (counterpart calculations were undertaken by Ms Jones in relation to those assessments and a joint report produced).

In order to make good this analysis, it was necessary to assign a degree of probability to the prospect that the plaintiff would have been able to sooner achieve recoveries of monies it never recovered (see discussion of category 1 below) and achieve the recoveries it in fact made (see discussion of category 2 below).

The description of those categories of loss upon which damages were to be assessed were as follows:

Before proceeding further, to repeat, I have found that the plaintiff suffered the loss of a chance or opportunity to make recoveries for amounts it did not, in fact, recover, and loss of a chance or opportunity to obtain the benefit of recovering earlier in time recoveries actually made. As to category 1 of loss, the plaintiff lost the opportunity to recover unrecovered monies relating to the Pacific General Facility Agreement and Tomkins Facility Agreement. The other investments were not proved to have been recoverable. As to category 2 of loss, the plaintiff lost time value of amounts recovered for claims in relation to Turnbull Hill Lawyers, the Pacific General Agreement and the Tomkins Facility Agreement.

I will commence by discussing the calculation of loss assuming full recovery as calculated in Damages Claim #1 and Damages Claim #2.

The Court was provided with a number of calculations prepared by Mr Sheppard and Ms Jones with respect to the calculation of damages.

The first calculation assumed that but for the breaches of duty the plaintiff in 30 June 2008 would have made a full recovery on amounts of principal and interest under the loans and investments. Amounts actually recovered are then subtracted. This method of calculation – upon which Mr Sheppard and Ms Jones conferred and produced a joint report – produced a figure (including interest up to August 2017) of $4,426,120.

Whilst Ms Jones and Mr Sheppard are not ad idem as to the assumptions underlying this calculation (in particular the assumption that the plaintiff would have recovered the total book value of the loans and investments as at 30 June 2008, and the assumption that the initial investment in Limeburners was $100,000), they agree on the mathematics of it.

Notwithstanding that there was an agreement as to the mathematics performed by Mr Sheppard, Ms Jones also performed an alternative calculation based upon the incorrect premise (as I have found) that the initial investment in Limeburners was $35,000 and not $100,000 and the plaintiff received receipts in respect of Limeburners after 30 June 2008 of $32,909.

After the conclave, Ms Jones prepared a further report dated 24 August 2017. The plaintiff accepted the assumption adopted by Ms Jones third report (vis-à-vis the Cartel Trust) and hence, it was submitted by the plaintiff, that the Court may proceed on the basis that the correct calculation of the Damages Claim #1 is either:

As to the second calculation, Mr Sheppard calculated:

The plaintiff correctly contended that the benefit of the alternative calculation was that it enabled the Court to differentiate between the opportunity to achieve sooner the actual recoveries that were in fact made, and the opportunity to achieve recoveries in respect of monies that were never recovered, and to make a separate assessment in each case as to the likelihood the plaintiff would have realised that commercial opportunity in June 2008.

Ms Jones performed an alternative calculation to that was performed by Mr Sheppard in that respect was contained in a spread sheet upon which Mr Sheppard was cross-examined. She agreed with Mr Sheppard’s calculations but made calculations based upon alternative assumptions with respect to the Cartel Trust and Limeburners Trust. Her calculations were as to the two elements in the second damages claim:

The plaintiff accepted Ms Jones’ calculation of Damages Claim #2. Having regard to that position and the benefits of differentiation discussed (see at [668] above), the Court’s calculation of damages will be based upon Ms Jones’ Damages Claim #2 (Ex 14 in the proceedings), provided that ultimately, as the defendants correctly submitted, recovery of lost interest must be calculated only upon those investments for which the Court found recovery may be obtained by the plaintiff.

As noted above, the plaintiff recognised that a further step was required to assign a degree of probability to the prospect that the plaintiff would have realised the commercial opportunity to either achieve sooner the actual recoveries that were, in fact, made and to achieve recoveries of monies that were never in fact recovered. Because these opportunities raise separate issues and potentially different probabilities of realisation the plaintiff squarely undertook that task with respect to the two categories of loss.

I will return to those methods of calculation below.

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:

Ms Jones concluded there was a real prospect that the plaintiff would have made a full recovery in respect of the Pacific General Facility Agreement. Accordingly, I earlier concluded that the plaintiff lost the chance to recover the full book value of the principal and accrued interest on that loan as at 30 June 2008. Allowing for recoveries that were, in fact, made in respect of that investment (which are then deducted), the loss to the plaintiff for the unrecovered amount is $267,085: see Damages Claim #2 – “Regional Land” – column headed “Sub Total” (the same figure is derived by both Mr Sheppard and Ms Jones). Having regard to this conclusion, it was unnecessary to consider, in this respect, claims against Mr Moylan and his related entities.

As to the claim against Moylan Retirement Solutions and Mr Moylan in regard to the Tomkins Facility Agreement, I have already noted that the plaintiff had a claim that advice given to it to enter into the loans and investments was given negligently in breach of professional duty. The plaintiff submitted, and the Court accepted, that, on its face, the MRS 2008 Policy would have responded to a claim brought by the plaintiff. It was submitted that it was highly likely that such a claim would have succeeded in full, and that the plaintiff would have recovered (by demand, settlement or litigation) any costs of the recovery as well.

It may be noted that the Court has found any claims against Moylan Retirement Solutions and Mr Moylan with regard to the River Island Facility Agreement, Cartel Trust and Limeburners Trust would not have been responded to by the insurance policies.

In relation to claims against MBS vis-à-vis the River Island Facility Agreement, Cartel Trust, Limeburners Trust and Tomkins Facility Agreement, I have earlier found that any available claim by the plaintiff for the negligent preparation of accounts was excluded by the conflict of interest exclusion clauses within the insurance policies.

The plaintiff submitted that there was a prospect of the plaintiff achieving at least a partial recovery on the loans and investments in 2008 by demands and actions against the borrowers and guarantors. I note at this juncture, that I rejected the contention that the plaintiff could have made partial recoveries with regard to the River Island Facility Agreement and the Cartel and Limeburners Trusts. No finding was necessary, in this respect, with regard to the Tomkins Facility Agreement (although discussed briefly by the Court).

The defendants submitted that the mathematical calculations of Mr Sheppard assumed that the plaintiff would have incurred no legal costs in making recoveries in 2008. It was submitted that assumption was not made good on the evidence and was falsified by the legal costs, which the plaintiff actually incurred in making recoveries in the period 2014-2016.

In reply, the plaintiff correctly submitted that the its claim in category 1, as calculated by Ms Jones, was limited to the loss of the use of those monies from 30 June 2008 to the date the recoveries were made, net of legal costs. That is, the posited earlier recovery assumed that plaintiff would have incurred legal costs in the same amount as they, in fact, occurred. However, the defendants are also correct to submit that the consequence of “netting off” those legal costs was to reduce the net return from those claims and thereby increase the remaining outstanding balance of the loans for the purposes of the claim in category 2. The aggregate effect is consistent with Mr Sheppard’s assumption of the plaintiff incurring no legal costs.

As to the category 1, I accept the plaintiff’s submission that:

The defendants further submitted that the plaintiff’s damages calculations do not account for the fact that a debt claim under a loan agreement is quite different from the remedies that could have been pursued against Mr Moylan or his related companies/entities. Amounts paid under a loan agreement can be accounted for as interest with the consequence that the whole of the principal remains outstanding. For the purposes of restitution or damages against Mr Moylan or his related companies, payments received from the borrower or unit trust have to be brought to account as reducing the quantum of the plaintiff’s loss.

Thus, on the evidence $2.5 million was advanced under the Pacific General Facility Agreement and more than that amount ($2,516,239) was received back from responsible entity for the Regional Land Fund, even before the plaintiff recovered the further sum of $850,000 from guarantors.

The defendants expanded upon that submission in reply as follows:

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.

The Court has earlier found at [783], [788] and [802] that the plaintiff would have been financially better off if it exercised its rights for recovery at an earlier point in time.

In the circumstances, the plaintiff has proved, on the balance of probabilities, that it suffered loss and damage by reason of the delay in the exercise of the legal rights that it in fact exercised in 2014 in connection with claims against Turnbull Hill Lawyers, the guarantors of the Pacific General Facility Agreement, and claims in relation to the Tomkins Facility Agreement.

It follows that the Court may proceed on the basis that the plaintiff would, in all likelihood, have made the same recoveries in 2008 that it did in fact make after 2014. Ms Jones’ calculation for this amount in Damages Claim #2 (Ex 14) was $1,934,106, which assumed all the losses were proved. That sum needs to be discounted to accord with my earlier findings where loss has not been proved.

Before making the calculations under categories 1 and 2, I note that columns 6 and 7 of Damages Calculation #2 represent the unrecovered amounts for the loans and investments and the lost interest on amounts already recovered, respectively (with the total being the addition of those columns).

Adjusting these figures to align with my earlier findings, I reach the following conclusions:

Accommodation will need to be made to those amounts by a discount to the overall damages sum as a result of my finding at [665] above (and noting that the plaintiff accepted loss would be close to 100%).

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

In the defendants’ overview submissions, an affirmative defence was raised that, by reason of the application of the Institute of Chartered Accountants in Australia (NSW) Scheme (“the NSW Scheme”) under the Professional Standards Act 1994 (NSW) (“the NSW Act”), any liability of the defendants for damages, interest or costs in relation to any cause of action under State law or for contravention of s 52 of the TPA is limited to $500,000.

The defendants aptly identified in the defendants’ overview submissions that that issue gave rise to five subsidiary issues which were expressed in the form of questions which appear below:

A further issue later arose as to whether the NSW Scheme was capable of applying to any of the causes of action against the second defendant. I will describe that issue as “question 6”.

In the plaintiff’s reply to the defendants’ affirmative defences submission, the plaintiff contended that the NSW Scheme did not apply with respect to its claims in contract. The plaintiff contended that the law of the place of the commission of the tort was Victoria and so was the proper law of the audit engagement. That issue shall be dealt with, subject to the question of federal jurisdiction to which I return to momentarily, under the first question.

The plaintiff also contended that the NSW Scheme was not available to limit the defendants’ liability under the TPA because of choice of law rules of that Act. That will be dealt with under the fifth question. I note, in that respect, that the fifth question also raises the question of the breach of the SIS Act or breaches of statutory duty which are unnecessary to resolve in the light of earlier findings in this judgment.

Lastly, an issue emerged as to whether this Court has jurisdictional power to determine the plaintiff’s claim under the FTA (Vic). I shall deal with that issue as the seventh question. A related issue was to whether, in the event that the Professional Standards Act 2003 (Vic) applied, a cap would operate.

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:

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) 191 CLR 119 at 124-125. The “matter” is wider than the cause or causes of action sued upon and embraces the whole controversy comprised of a substratum of facts and claims. All of the plaintiff’s claims are part of the same matter. Once a matter is within federal jurisdiction, the whole of the controversy (including claims under State law) is in federal jurisdiction. There is but one matter and that matter is entirely within federal jurisdiction, as distinct from State jurisdiction: Rizeq v Western Australia (2017) 344 ALR 421; [2017] HCA 23 (“Rizeq”) at [55] per Bell, Gageler, Keane, Nettle and Gordon JJ.

That conclusion concerns the source of the Court’s authority to adjudicate. It is not a statement about the law that is to be applied in the exercise of that authority and, therefore, it is necessary to identify the law that is to be applied in the exercise of jurisdiction.

It is a simple matter to identify the law applying to the plaintiff’s claims under the TPA and the SIS Act. Those Acts are laws of the Commonwealth and apply of their own force in federal jurisdiction.

The Commonwealth of Australia is a single law area, with respect to matters within federal jurisdiction, and the jurisdiction of a court exercising federal jurisdiction is Australia-wide: John Pfeiffer Pty Ltd v Rogerson (2002) 203 CLR 503; [2000] HCA 36 (“John Pfeiffer”) at [18] and [53] per Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ. It follows that, if all acts or events in a federal matter occur within Australia, they all occur within the jurisdiction. Strictly speaking, the questions which arise in federal jurisdiction involve the identification of the applicable law but, that said, an inquiry as to the applicable law may, nonetheless, involve the identification of a choice of law: Blunden v Commonwealth (2003) 218 CLR 330; [2003] HCA 73 (“Blunden”) at [10] per Gleeson CJ, Gummow, Hayne and Heydon JJ. The applicable law may be determined by reference to ss 79 and 80 of the Judiciary Act.

Section 80 of the Judiciary Act enables the application of the common law (as modified by statute) in the exercise of federal jurisdiction. It is through the application of s 80 that common law rules for choice of law may enter the inquiry as to the applicable law in federal jurisdiction. Section 80 directs the application of those common law rules, subjected to any modification by the Constitution or by the statute law in force in the State or Territory where the court is exercising jurisdiction: Blunden at [18] per Gleeson CJ, Gummow, Hayne and Heydon JJ, and John Pfeiffer at [55] per Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ.

As the common law rules for choice of law have not been relevantly modified by New South Wales statute (see Hamilton v Merck and Co Inc; Hutchinson v Merck Sharp and Dohme (Australia) Pty Ltd (2006) 66 NSWLR 48; [2006] NSWCA 55 at [14] per Spigelman CJ, Tobias JA agreeing), those rules (if applicable) govern this Court in this case.

The more general consequence of s 80 is that, subject to choice of law rules, the applicable common law as modified by New South Wales statute governs the Court in the exercise of jurisdiction in this case. These consequences are expressed to be subject to choice of law rules, because those rules may require the application of the law of some other jurisdiction in a particular case. That is why the application of s 80 must begin with choice of law rules.

The application of s 80 of the Judiciary Act is necessarily anterior to the application of s 79, at least for the reason that s 80 is one of the laws of the Commonwealth that s 79 is subject to: Blunden at [16]-[17].

Because there is but one common law in Australia which is declared by the High Court as the final court of appeal (Lange v Australian Broadcasting Corporation (1997) 189 CLR 520 at 563), it follows that the reference in s 79(1) to the "laws of each State" can only meaningfully encompass the statutory laws of each State. There is no common law of a State on which the section could operate: Rizeq at [78].

Section 79 operates to apply the text of State laws conferring or governing powers that State courts have when exercising State jurisdiction to, inter alia, those State courts when exercising federal jurisdiction: Rizeq at [87]. As the defendants submitted (by reference to relevant authority) that:

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.

In John Pfeiffer, the High Court decided that the law of the place of the commission of the tort (or lex loci delicti) should be applied as the law governing all questions of substance to be determined in a proceeding arising from a tort which has interstate elements. The Court further decided that laws that bear upon the existence, extent or enforceability of remedies, rights and obligations should be characterised as substantive and not as procedural laws (at [102]). These include the application of any limitation period, whether barring the remedy or extinguishing the right and all questions about the kinds of damage, or amount of damages that may be recovered: John Pfeiffer at [100].

Hence, the lex loci delicti will determine the law that is applicable to the plaintiff’s negligence claim. So much was common ground between the parties.

The common law test for determining the place of the tort is “to look back over the series of events … and ask … where in substance did this cause of action arise?”: Distillers Co (Biochemicals) Ltd v Thompson [1971] AC 458 at 468; Voth v Manildra Flour Mills Pty Ltd (1990) 171 CLR 538 (“Voth”) at 567; Dow Jones & Co Inc v Gutnick (2002) 210 CLR 575; [2002] HCA 56 (“Dow Jones”) at [43]. This approach has been described as ascertaining, in a common sense way, what is the place of “the act on the part of the defendant which gives the plaintiff his cause for complaint”: Jackson v Spittall (1870) LR 5 CP 542 at 552, see also Voth at 567.

In contending that the plaintiff’s claim in negligence was governed by the law of Victoria, significant reliance was placed by the plaintiff on the judgment of the plurality in Voth. It was contended that, based upon Voth (at 569) and Agar v Hyde (2000) 201 CLR 552 at 591; [2000] HCA 41, that it was well established that, if negligence consisted of a failure to provide services or advice without proper care, the tort is committed in the place where the services were or ought to have been rendered. It was contended that the circumstances in Voth may be properly characterised as one of negligent omission, namely, failure to do various things. Thus, in that matter, even though the accounting statement had been transmitted from Missouri to Australia, the place at which the representation was received was not determinative of the issue as the act of providing accounting services had been initiated and completed in Missouri.

The defendants sought to distinguish Voth. Attention was initially directed to the facts in Voth in the defendants’ affirmative defences submission as follows:

It was further submitted that MCC became indebted to the first plaintiff for products MCC obtained from other companies in the group and resold in the United States. Interest was payable or capitalised on that debt. The Internal Revenue Code of the United States made the first plaintiff liable to income tax on that interest income and imposed an obligation upon MMC to deduct and withhold that tax from interest which it paid to the first plaintiff. As it happened, it was contended, MMC did not make the deductions or payments of withholding tax. It was alleged that this was the fault of the defendant accountant or those for whom he was responsible.

From this footing, the defendants advanced the following submission:

It was said, therefore, that Voth was a very different factual case from the present because it was not treated by the plurality as a representation case because the act of incorrect accounting could be seen as an act complete in itself. The plurality referred the substance of the matter because, as a matter of classification, the act will be treated as equivalent to a representation. In the present case, the plaintiff’s case was not equivalent to a representation, it was a representation case. Further, in Voth, the incorrect accounting was not complete in itself for the relevant act was initiated and pleaded in the same jurisdiction, namely Missouri. In the present case, it was submitted, representations were made from Victoria to NSW.

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

Reference should be made to two passages of the judgment of the plurality. First, at 567, the plurality stated:

Further, reference should be made to the passage of the plurality’s judgment at 569 as follows:

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):

The essential flaw in the defendants’ contention as to the distinction between this matter and Voth is, in my view, that they sought to characterise the plaintiff’s case in negligence as a representation case. Such a case was not pleaded by the plaintiff. The substance of the plaintiff’s case at trial, as earlier discussed in this judgment, was the failure of the defendants to conduct a proper audit and to bring to the plaintiff’s attention certain matters with respect to the relevant financial years. The alleged acts of negligence were concerned with the auditor’s opinion and not its receipt. Whether the complaint could be properly characterised as a failure to advise (an omission) or as a negligent misstatement of fact (a positive act), as in Voth, the result is the same – the basis for action was the act of providing professional accountancy services on an incorrect basis and that act was initiated and completed in Voth in Missouri and in this case, in Victoria.

The defendants also sought to distinguish Voth on the basis that, in that case, neither respondent was a client of the overseas accountant. That fact, while true, was irrelevant to the majority’s reasoning or conclusion. Their Honours’ decision turned on the proper characterisation of the respondents’ claim that the accountant owed to them directly a duty of care in negligence; that duty was alleged to arise despite the existence of a contract or retainer with the accountant; and it was that duty, and its breach, that was the focus of the Court’s decision in Voth.

Further I accept the plaintiff’s submission that even if, contrary to this approach, the present case was a representation case, the substance of the plaintiff’s complaint remains the negligent failure of the auditor to carry out the audits properly. That failure occurred in Victoria and the “fundamental significance” of that fact is not diminished merely because it is possible, for the purposes of legal classification, to treat the act as equivalent to a statement that was received or acted upon in NSW.

I note that my conclusions in this respect are confined to the question of negligence. I accept that statutory claims of misleading and deceptive conduct were advanced by the plaintiff but they are not presently relevant.

Lastly, the defendants relied upon two authorities to suggest that Voth was to be construed in the manner argued for in its submissions and this was how Voth was “invariably applied”. Reference was made, in that respect, to Telesto Investments Ltd & v UBS AG (2012) 262 FLR 119; [2012] NSWSC 44 (“Telesto”) at [197]-[204] (per Ward J) and Australian Competition and Consumer Commission v Valve Corp (No 3) (2016) 337 ALR 647; [2016] FCA 196 (“Valve Corp”) at [165]-[188] (per Edelman J). I do not accept that submission.

Telesto was concerned with the determination of an application for a permanent stay of proceedings in NSW having regard to the existence of separate proceedings in Singapore between the same parties (at [2]). The plaintiff in those proceedings opened an investment account with the Singapore branch of the defendants. In the NSW proceedings, the plaintiff contended that investment transactions were entered into by the defendant without the plaintiff’s authority, that the defendant breached a duty of care and/or engaged in misleading or deceptive conduct (see at [40] and [43]). Contrary to the defendants’ contention, Ward J’s application of Voth is consistent with the conclusion reached in this case (noting below the Court’s findings that the law of NSW applies in the misrepresentation case). Her Honour held (at [204]):

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

Valve Corp concerned proceedings commenced by the Australian Competition and Consumer Commission (“ACCC”) against the defendant for misrepresentations contrary to the Australian Consumer Law. It was concerned with interpreting Voth and Dow Jones for claims under the Australian Consumer Law only (see at [175]). In any event, Edelman J recognised (at [173]):

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

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) 81 CLR 486 at 498. It might be noted that the rule has application in the present case because the retainers do not expressly select the proper law.

Thus, the issue again becomes the application of the test or rule in the circumstances of this case.

The underlying facts were briefly discussed in relation to the question of tort at [873] above but may be more fully outlined in this context as follows:

The place of preparation of the contract and the place of residence of the person who prepared it was Victoria: see Fleming v Marshall (2011) 279 ALR 737; [2011] NSWCA 86 (“Fleming”) at [86] per Macfarlan JA (Spigelman CJ and Sackville AJA agreeing).

However, it should be noted that the plaintiff accepted that the place of contract was a neutral factor.

If the rule or test is to be seen as requiring an inquiry into the place where the contract has “its natural seat or centre of gravity” (Re United Railways of the Havana and Regla Warehouses Ltd [1960] Ch 52 at 91; Akai Pty Ltd v People’s Insurance Co Ltd (1996) 188 CLR 418 at 437), I consider that the following factors should result in the conclusion that the contract would be governed by the law of Victoria:

It is strictly unnecessary to answer these questions (see above at [844]) in the light of the above conclusions. I will briefly deal with the subject matter for completeness.

I accept the submission of the defendants that whilst a failure to give notice of the relevant scheme limiting liability under s 33(1) of the NSW Act, a failure to do so is an offence which does not destroy the professional’s entitlement to limit liability in accordance with the scheme provisions.

I note the NSW Act limits occupational liability in respect of a “cause of action”. Section 28(1) provides:

I do not accept the plaintiff’s contention that, if any cap applies, it applies to “each, several, cause of action (in respect of each several audit)”.

The meaning of “cause of action” has been understood as:

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:

The defendants contended that a single claim may be capable of being supported by multiple causes of action, because a claim is the remedy, relief or object sought (whereas the cause of action is the basis for the remedy, relief or object sought): see generally West Wake Price & Co v Ching [1957] 1 WLR 45 at 57.

In this case, it was contended there was one claim for unliquidated damages. The defendants submitted that whilst there are three claims in reality (being claims in respect of each audit), if the factual outcome for breach for the 2007 audit was that all assets would have been sought to be recovered, there would be no scope for awarding damages for the following years. I accept (although it is unnecessary to decide) the defendants’ submission that the Court is dealing with the alternative claims.

Section 87AB(3) of the TPA prescribed the manner in which the Court must resolve that question. The plaintiff accepted that, in applying the choice of law rule for torts in relation to alleged contraventions of s 52, the Court must consider the conduct that contravened s 52, which is analogous to the act or omission that gives the cause for complaint (that is, the relevant conduct for the rule in tort). The effect of s 87AB(3) of the TPA is that the Court must consider where the misleading and deceptive conduct occurred, that being the choice of law test, without exception, in relation to tort.

The defendants contended that for the purposes of the TPA, the representation is the opinion. It was submitted this was received in NSW and hence the relevant legislation was the NSW Scheme.

The plaintiff divided its submissions in this respect between the admitted and non-admitted representations.

As to the admitted representations, the defendants accepted that the audit reports contained an implied representation that the opinions expressed in them were the product of the exercise of reasonable care and skill and that that representation was misleading.

For the purposes of determining the proper law for misleading conduct, the place where the representations were acted upon, and the jurisdiction where damage accrues, are not relevant: Telesto at [197] citing Hunter Grain Pty Ltd v Hyundai Merchant Marine Co Ltd (1993) 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):

Similarly, French J said of s 5 of the TPA in Paper Products Pty Ltd v Tomlinsons (Rochdale) Ltd (No 2) (1993) 44 FCR 485 at 493, “[i]t is necessary to consider not where the cause of action arose but where the conduct relied upon took place”.

As stated by Edelman J in Valve Corp at [172]-[174], the majority in Voth rejected the suggestion that the substance of the tort of negligent misstatement is always committed where the statement is received and acted upon. His Honour then continued at [175] to remark that, in the statutory context of the TPA, there should be no requirement that a statement be ‘directed’ from one place to another: such that there can be no general rule to the effect that the place where the conduct occurred is where the representation was received.

The defendants contended that the “conduct” occurs where the representation is communicated to, and referred to [174], [176]-[177] and [188] of Valve Corp. However, that submission should be rejected because at [178], Edelman J found that the conduct relied upon by the ACCC in that case did not occur in Washington State, rather the background to the conduct involved a significant Australian context.

The cause of the complaint and background in this case, as I have found, was the act of providing professional auditing services on an incorrect basis, which was initiated and completed in Victoria. It is that conduct which gives rise to the contravention of s 52 of the TPA.

As to the non-admitted representations, having regard to the findings earlier made in this judgment (see at [602] above), the conduct under consideration is not limited to the publication of the report but concerned the provision of auditing services. The choice of law rules for a tort would apply to Victorian law in relation to the defendants’ conduct in this case insofar as the conduct contravened s 52 of the TPA.

The plaintiff made a separate submission as to why the NSW Scheme, if it operated, did not apply to the second defendant.

The submission advanced in support of this proposition was as follows:

In reply, the defendants contended that submission ignored cl 2.1 of the NSW Scheme which provided that, in addition to “participating members, the scheme applied to “all persons to whom the scheme applied at the time of the relevant act or omission”. That provision, it was submitted, directed attention to ss 18 and 19 of the NSW Act as indicated by the NSW Scheme footnote (1). Section 18(2) was the relevant provision that provides that “[i]f a scheme applies to a person, the scheme also applies to each partner of the person”.

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

Findings that the Victorian law applied brings into consideration the Professional Standards Legislation in Victoria, the Professional Standards Act 2003 (Vic) (“the Victorian Act”) and a similar scheme approved under that legislation (“the Victorian Scheme”). The plaintiff accepted the scheme had potential application in this case. However, the Victorian Scheme only applied where the professional has given to the client a notification in the form required by the Victorian Act (see s 30(2)). The plaintiff contended that neither the first or second defendants ever gave such a notification to the plaintiff in respect of the 2007 audit.

The defendants made no pleading in this respect but I accept their submission that the defendants put the Victorian Scheme in issue in the proceedings. The defendants submitted that the limitation of liability under the Victorian Scheme applied because a statutory notification was given. The defendants relied upon email communications in the plaintiff’s chronology being items 34 and 35 as described below.

I do not accept the defendants’ submission in this respect. The first defendant did not give either Mr Moylan or the plaintiff disclosure in the form required by the Victorian Act. The email communications (items 34 and 35 of the plaintiff’s chronology) relied upon by the defendants do not assist them. The first email was sent on 6 May 2008 from Mr David Burrows to Mr Stuart Peberdy of Moylan Business Solutions and was not provided by the relevant professional, namely the auditor, the first defendant. The email was sent by Mr Burrows. There was no evidence as concerning Mr Burrows’ employment or engagement. The first defendant was not copied into the email nor was there evidence that the email was sent to the plaintiff. It was sent to Moylan Business Solutions.

Further, the defendants did not demonstrate that Moylan Business Solutions was an agent for the plaintiff for the purposes of receiving notification about such limitations of liability. I also accept the plaintiff’s submission the email was sent after the conduct of the audit had commenced. The conduct of the audit was the act giving rise to the claims. As to the second email of 15 May 2008 from Mr Burrows to Ms Stephanie Hinds, the same conclusions may be reached.

The plaintiff accepted that the NSW Scheme applied to limit the defendants’ liability under the FTA (NSW).

However, the plaintiff contended that this Court had jurisdiction to hear and determine a claim for relief under the FTA (Vic) and further that the NSW Scheme did not apply to limit the defendants’ liability under that Act by virtue of s 11 of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth) (“CVA”).

The defendants contended that the Court had jurisdiction to determine a claim under the FTA (Vic) but did not have the power to grant relief under that Act.

The defendants’ acceptance of the existence of jurisdiction is predicated upon the following (some of which overlaps with the earlier discussion of the conferral upon this Court in the present matter of a federal jurisdiction):

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:

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.

The FTA (Vic) applied to the defendants’ conduct outside Victoria in consequence of the operation of s 6 of that Act because the defendants were residents of Victoria. As submitted by the defendants, their residency provides the requisite connection between the subject matter of the legislation in the State of Victoria.

The FTA (Vic) prescribes a “norm” or standard of conduct (see s 9). That is, the law has application independently of anything done by a Court: Rizeq at [150].

The power to award damages under s 159 of the FTA (Vic) by, inter alia, “any court of competent jurisdiction” does not extend, by its own force, to this Court when exercising State jurisdiction: Re Wakim; Ex parte McNally (1999) 198 CLR 511; [1999] HCA 27 at [108] per Gummow and Hayne JJ; Chubb at [201] per Emmett JA and Ball J (with Bathurst CJ, Beazley P and Macfarlan JA agreeing).

The power under s 159 of the FTA (Vic), so far as the exercise of State jurisdiction is concerned, may only be exercised by a Victorian court of competent jurisdiction.

As I have found, the Court in this matter is exercising federal jurisdiction and, in that respect, s 80 of the Judiciary Act does not direct the application of any choice of law rule for this statutory claim. By way of expansion of my earlier considerations, in relation to this affirmative defence, I consider that s 79(1) of the Judiciary Act does apply such that, as the Court is sitting in NSW, the statutory laws of that State conferring powers on courts or governing how or in what circumstances those powers are exercised are binding upon the Court when exercising federal jurisdiction. In the result, s 68 of the FTA (NSW) is “picked up” and applied as a Commonwealth law in this matter.

By the same reasoning, the Victorian laws under the FTA (Vic) are not picked up by s 79 and, in consequence, neither a right of action under s 159 of the FTA (Vic), nor the associated power to award damages, are picked up as part of the law to be applied by this Court exercising federal jurisdiction. I agree with the submission of the defendant that the right of action under s 159 was relevantly inseparable from the power to award damages in the same way as a right to recover contribution is inseparable from a power to order contribution, even if located in a different provision of an Act: Rizeq at [100]. Neither provision is capable of applying federal jurisdiction of its own force as a State law and may only apply by the operation of s 79 of the Judiciary Act.

The plaintiff contended that this Court had jurisdiction by virtue of s 4(1) of the CVA. However, I agree with the defendants that the premise of this argument is this Court does not have jurisdiction without the operation of s 4(1) of that Act. As I have found, this Court does have jurisdiction by virtue of s 86(2) of the TPA and s 39(2) of the Judiciary Act. Section 4 of the CVA does not operate where there is already an investment of jurisdiction in the Supreme Court: see Poignand at 368 (also referred to, with approval, in R v Wilcox; Ex parte Venture Industries Pty Ltd (1996) 66 FCR 511 at 521). There is no room for the operation of s 4(1) of the CVA in those circumstances.

The reliance by the plaintiff upon the accrued jurisdiction of the Federal Court does not assist the case for the plaintiff in this respect. The High Court warned against the use of the expression “accrued jurisdiction” in Rizeq at [55]. The Court having federal jurisdiction has authority to decide claims under State law forming part of one matter with claims under Federal law but must separately identify the powers that are available to be exercised in the federal jurisdiction – in this case, those powers are identified by application of s 79 of the Judiciary Act.

In the result, the plaintiff’s claim for relief under the FTA (Vic) is incompetent.

In summary, the Court has reached the following conclusions with respect to this affirmative defence:

After the Court reserved judgment in this matter, the plaintiff (with consent from the defendants) provided, for the Court’s assistance, a judgment of the New South Wales Court of Appeal delivered 23 May 2018: Cam & Bear Pty Ltd v McGoldrick [2018] NSWCA 110 (“Cam & Bear”).

No doubt that judgment attracted attention because the appeal arose out of the determination of a claim for damages for negligence and misleading and deceptive conduct brought by the trustee of a SMSF (for the benefit of a Dr Bear and his wife) against the respondent who was an accountant auditing the accounts of that fund. It was alleged at first instance that the respondent had breached his duty of care and engaged in misleading and deceptive conduct by failing to qualify the audit reports as to the possibility that the assets described in the fund’s financial statements as “cash” may not be recoverable as they, in fact, concerned unsecured loans to a company associated with a friend of Dr Bear’s. The decision below also concerned a statement in the audit reports to the effect that the financial statements presented fairly the financial position of the fund and the results of its operations and its cash flows.

Like this matter, the judgment of Macfarlan JA (with whom McColl AP and White JA agreed) proceeded upon the basis that neither of the parties had suggested the appropriate approach to contributory negligence was dependent upon which cause of action succeeded. As a result, his Honour derived the relevant principles for the determination of the matter from the principles applicable to an action at law for damages for negligence. In the broad, I propose to adopt the same approach drawing substantially from his Honour’s description the relevant principles and, in part, from his reasoning as to contributory negligence.

His Honour initially directed attention (as did the defendants in this matter) to s 9 of the Law Reform (Miscellaneous Provisions) Act 1965 (NSW), s 5R(1) of the Civil Liability Act as well as the judgment of the High Court in Astley v Austrust Ltd (1999) 197 CLR 1; [1999] HCA 6 (“Astley”). Those passages of the judgment in Cam & Bear were as follows (at [80] and [81]):

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):

In Cam & Bear, Macfarlan JA then turned to the provisions of s 5R(2)(a) of the Civil Liability Act as follows (at [83]):

In the consideration of Cam & Bear, it is worth noting that both parties accepted that the standard of care required in an assessment of whether a plaintiff has failed to take reasonable care is that of a “reasonable person in the position of the plaintiff… on the basis of what the plaintiff knew or ought to have known at the time”: see T & X Company Pty Ltd v Chivas [2014] NSWCA 235 at [4] (per Beazley P).

In the application of those principles, Macfarlan JA commenced by reviewing some of the particular circumstances of that matter which resonate in the present case. His Honour stated (at [84]):

Further, Macfarlan JA held (at [89]):

The reference by Macfarlan JA to Podrebersek v Australian Iron & Steel Pty Ltd (1985) 59 ALR 529 (“Podrebersek”) at 532-533 is extracted below:

The plaintiff also relied upon the following passage from Polon at [877] (per Hall J):

In Daniels v Anderson, Clarke and Sheller JJA observed (at 568):

Ms Crittle was a homemaker of retirement age who had no investment or accounting training, experience or knowledge. After receiving a substantial sum of money, she sought financial advice from Mr Moylan because he was recommended to her by Mr Hill. As earlier found, Mr Hill was a long term friend and solicitor whom she trusted. Ms Crittle then transferred over $7 million to the Turnbull Hill Lawyers trust account to be invested in accordance with Mr Moylan’s advice. As mentioned above, one of the reasons for establishing the Super Fund was to “stay in control” of the investments. When cross-examined, the effect of Ms Crittle’s evidence was that she had control over the investments, but that control was subject to advice.

Ms Crittle only knew about the Pacific General Facility Agreement and the investment of $2.5 million in accordance with that agreement. Whilst she knew about the Tomkins Facility Agreement, those funds were disbursed without her direction or permission (although this is not to say that the plaintiff’s loan pursuant to that agreement was other than on Mr Moylan’s advice, and further that there was any dishonesty or fraud in the giving of that advice). That left a significant sum of investments of which Ms Crittle did not know of or inquire about.

A more experienced and astute investor would have been concerned to know what investments were being made with the money that she had transferred to the Turnbull Hill Lawyers trust account, and whether those investments were sound. Ms Crittle’s understanding was not at this level of sophistication, no doubt partly because she had great confidence in Mr Hill and his recommendation of Mr Moylan. Of equal importance, however, is that Ms Crittle lacked the experience and expertise to grapple with the concepts involved in investing.

On the other hand, the first defendant was a very experienced accountant and auditor; who was engaged for the purpose of protecting the Super Fund and its trustee against financial risks that included the very types of risks that eventuated (see finding above at [594]), namely, that the investments were not in accordance with the investment strategies and that they were worthless or of substantially compromised value.

For the reasons given earlier in relation to breach, the defendants were negligent in, inter alia, failing to exercise reasonable care in the preparation of the audit reports (including and beyond the admissions), failing to inquire and report into whether the investments were made in accordance with an investment strategy that had regard to all the circumstances of the Super Fund, and failing to report serious misdescriptions and other circumstances to the plaintiff.

As to the ”degree of departure from the standard of care of the reasonable [person]”, I consider the plaintiff, through its sole director Ms Crittle, did depart from the standard of care that a reasonable person would have applied to protect his or her own interests; but the departure from that standard was very limited. Even a person with Ms Crittle’s lack of financial sophistication or relevant occupational experience, should reasonably have considered the prudence of supplying significant amounts of money to Turnbull Hill Lawyers to be invested by Mr Moylan without further inquiry (see Cam & Bear at [89]).

It should be noted that in Cam & Bear, there was evidence that Dr Bear relied on the supply of audited accounts. I have found above at [587] that there was an inference that Ms Crittle relied on the audit reports (see at [596]). Further, Ms Crittle knew that the Super Fund was required to have an auditor; she thought their job was to scrutinise what work the accountants did; and her limited knowledge of the role gave her great comfort). Nonetheless, the lack of sophistication and her reliance upon the advice of Mr Moylan and Mr Hill limits the criticism that can be made of her.

On the other hand, the first defendant’s departure from the standards of a reasonable person in his position, being an experienced accountant and auditor, was significant. The defendants’ breaches were not contributed by having inadequate internal controls upon which the first defendant could reasonably place any reliance. (See the above discussion which rejected the defendants’ contention as to the reliance upon the representation letter as a safe basis to proceed upon the audit from [435]-[439]. See also Cam & Bear at [89]). Rather, the defendants defaulted in their performance of multiple aspects of the duties they undertook to perform.

As to the “relative importance of the acts of the parties in causing the damage”, the defendants’ negligence “should… be regarded as of significantly greater importance in causing the damage than the low-level negligence” of the plaintiff: Cam & Bear at [90]. As I have found above at [623(11)] with regard to causation, had the defendants qualified the audit report, Ms Crittle would have made further enquiries and then taken steps to recover the loans and investments.

I do not consider the contention by the defendants that Ms Crittle’s omission to undertake an examination of the financial reports prepared by the accountants before signing the declaration significantly impacts on the relative importance of Ms Crittle’s actions in causing the negligence. The evidence was to the effect that when Ms Crittle was made aware about a problem, she acted upon it. Further, it still remains that Ms Crittle did not have the financial skills or understanding to interpret a financial report. There was nothing on the face of the financial reports which would have indicated to Ms Crittle that there was a problem with the loans and investments. It was the auditor’s role to audit the financial statements to, inter alia:

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]).

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.

The causes of action in negligence and breach of contract are “apportionable claims” under Pt 4 of the Civil Liability Act.

As to the relevant provisions of Pt 4 of the Civil Liability Act, I again refer to the judgment of Macfarlan JA in Cam & Bear where his Honour observed at [93] and [94] the following:

The causes of action for misleading and deceptive conduct are apportionable under Pt VIA of the TPA for the claim under the TPA, and Pt 4 of the Civil Liability Act for the claim under the FTA (NSW).

The plaintiff’s claim for damages under the SIS Act is not apportionable but that claim has been rejected by the Court.

The defendants bear the onus of pleading and proving each of the statutory elements of their defence, including a failure to take reasonable care: Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd (2007) 164 FCR 450; [2007] FCA 1216 at [31]; Meandarra Aerial Spraying Pty Ltd v GEJ Geldard Pty Ltd [2013] 1 Qd R 319; [2012] QCA 315 at [60].

The defendants have nominated three concurrent wrongdoers: MBS, Ms Crittle and Mr Moylan (in his capacity as the Super Fund’s former auditor).

MBS provided accounting and financial services to the plaintiff for the relevant financial years and the plaintiff accepted that MBS prepared the financial reports for the Super Fund in each of those years.

In the defendants’ amended defence, the following pleadings were made with respect to MBS as a concurrent wrongdoer under the heading “Apportionment”:

As mentioned above, the plaintiff accepted that MBS prepared the financial reports for the Super Fund in each of the relevant financial years and that those accounts were poorly prepared in that they ascribed value to loans and investments which were, in fact, substantially worthless.

It follows that the Court is concerned with apportionment. In this respect, the submissions of the defendants’ may be accepted that in determining the relative responsibility of concurrent wrongdoers for a loss, it is necessary to compare the blameworthiness and causative potency of the conduct of each of them: Reinhold v New South Wales Lotteries Corporation (No 2) [2008] NSWSC 187 at [50]-[53] (per Barrett J); Kayteal Pty Ltd v Dignan (2011) 15 BPR 29,515; [2011] NSWSC 197 (“Kayteal”) at [71] (per Brereton J).

I also accept the defendants’ submissions that the factors relevant to the assessment of blameworthiness and causative potency include, but are not limited to, which of the wrongdoers was more actively engaged in the activity causing loss and which was more able effectively to prevent the loss: Yates v Mobile Marine Repairs Pty Ltd [2007] NSWSC 1463 at [93]-[97] (per Palmer J).

The parties developed submissions bearing upon the relative responsibilities of MBS and the auditor as to loss. However, I do not propose to summarise those submissions insofar as they intersect with findings already made by the Court as to the respective responsibilities of the entities in question.

After repeating submissions as to the extent of the auditor’s responsibility to exercise reasonable care and skill in a manner consistent with that which the Court has earlier recorded (including submissions as to Mr Morris’ evidence), the defendants drew a comparison between the role of the auditor (in providing a qualified audit opinion recording that the adopted method of asset evaluation may not be appropriate) and MBS which, it was suggested, was responsible for the preparation of special purpose financial reports and was responsible for the inappropriate method of valuation which they adopted. Reference was also made to the relationship between Mr Moylan and principal of MBS and various investments. For example, reference was made to Mr Moylan being an investor in and promoter of the Hardie Estates Property Fund (later, the Regional Land Fund), the River Island investment and was “associated” with L & V Tomkins to whom the plaintiff had leant monies.

From this submission, the defendants contended that Mr Moylan knew that the loans were in default and had not been serviced or repaid and that, knowing those things, MBS must necessarily have had a high degree of culpability in adopting for the special purpose financial reports an inappropriate method of valuation of loans. It was submitted that MBS had a high degree of culpability in preparing financial reports which were materially inaccurate and did not present fairly the financial position of the Super Fund at the relevant financial year.

The defendants went further and submitted that the conduct of Mr Moylan and MBS could not only be characterised as conduct well below a reasonable standard, but as dishonest. This resulted in the submission that the evidence compels “a finding that MBS prepared the special purpose financial reports of the Super Fund on a dishonest basis”. Even without dishonesty, it was contended that “it could not on the evidence seriously be contended that MBS was not more blameworthy and not more culpable than the auditor”.

The Court has earlier dealt with the issue of dishonesty above. The plaintiff submitted that there was no evidence that Mr Moylan was aware that the financial reports did not fairly present the financial position of the Super Fund. Whilst that contention may be doubted, the allegation advanced by the defendants, as pleaded, is tantamount to one of fraud, and the Court has already found the Briginshaw standard has not been met (at [737]). There was no basis on the material before the Court for a finding of dishonesty or fraud on the part of Mr Moylan. So far, as the defendants sought to contend for such an inference, it could only be by reference to the material in the auditor’s files (which are in evidence); however that material provided no basis for a finding of dishonesty on the part of Mr Moylan.

The parties’ submissions as to the relative responsibilities of MBS and the auditor’s role in reviewing the accounts as an auditor returned to the familiar debate in their submissions as to the true role of the respective entities.

The plaintiff contended that the auditor’s specific roles was to review the accounts that had been prepared by MBS and determine whether those accounts were true and correct; a proposition denied by the defendants.

The plaintiff further submitted that:

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:

Reference was also made to Frankston as extracted at [415] above. Out of Frankston, the plaintiff submitted the main objects of the audit were:

The defendants contended, in this respect, that this level of abstraction was unhelpful because the scope and purpose of the audit was to be obtained from the particular audit retainers.

Further, the defendants contended that, even where a wrongdoer was engaged by the plaintiff specially for the purpose of guarding against a fraudster, it will inevitably be found to be less responsible for a loss than the fraudster was. (The defendant relied on Kayteal at [71] to support that proposition, however that passage can be distinguished because the references contained within it all involved intervening fraud, which is not the same as in this case).

I do not accept that the role of the auditor was to determine whether the accounts were “true and correct”. I note particularly that the criterion of “true and fair view”, a phrase from Pt 2M.3 of the Corporations Act, does not apply to special purpose financial reports (see above at [351]). However, I earlier found at [531]-[543] above that the auditor was required to ensure that the investments were valued at net market value. It was also the auditor’s role, inter alia, to inquire into and report accurately as to whether the investments were made in accordance with an investment strategy which had regard to all the circumstances of the Super Fund (at [284]-[294]) and to bring to the plaintiff’s attention serious misdescriptions and misstatements in the financial statements (at [299]-[311]).

The defendants then contended that the MBS was more actively engaged in the activity causing the loss – being, it was submitted, the concealment of the fact that the loans and investments were variously worthless or of a substantially compromised value or wholly impaired or of no value, and that MBS was more able to effectively prevent such loss by directly advising the plaintiff of the facts known to MBS. The auditor, it was submitted, was only to express an audit opinion, whether qualified or unqualified.

However, there was no evidence in these proceedings of the fact that MBS actually concealed that the investments were worthless. As to the ability of MBS to effectively prevent the loss by advising the plaintiff, care needs to be taken considering the absence of their actual retainers in the evidence in these proceedings.

The defendants accepted, however, that the question of relative responsibility may partly turn on the proper characterisation of the auditor’s omission (albeit their submission was directed to conclusions reached by Mr Morris). In that respect, I accept the plaintiff’s submission that the defendants had a significant ability to prevent loss based upon the following factors, all of which were consistent with conclusions earlier reached in this judgment. The defendants:

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:

MBS may have had a duty to communicate matters to the plaintiff and even if it be assumed that Mr Moylan was aware of inaccuracies in the accounts (contrary to what was found in [969] above), the terms of the MBS retainers were not before the Court to draw any particular conclusions in that respect. on the other hand, the defendants had available to them all materials that would and should have exposed the matters referred to in [980(2)] and 980(3)]. It may be recalled in this respect, albeit in short form, the findings that the defendants breached an obligation within the retainers by failing to bring to the attention of the plaintiff Mr Moylan’s involvement with the loans and investments (see [508] above).

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

I accept the submission of the plaintiff that the defendants had a far higher degree of culpability than MBS. Had the defendants performed their role competently, the deficiencies in the accounts and operations of the Super Fund would have been exposed. The defendants’ failure to undertake this task was, to accept further submission of the plaintiff, “the immediate, patent cause of the loss”. In my view, the plaintiff’s loss should be apportioned to MBS in the amount of 20%.

The defendants submitted that Mr Moylan’s audit of the 30 June 2006 special purpose financial report of the plaintiff involved him in wrongdoing. The defendants contended that audit report was causative of the loss and damage claimed against the defendant when that loss and damage is understood to be loss of opportunity to recoup the loans and investments. It was contended that it was immaterial that some or all of the loans had not reached maturity by 30 June 2006 because the relevant point in time was not the balance date but the date of the audit opinion (which was 9 March 2007) and the proper performance of the audit function would have resulted in the plaintiff seeking to recoup those loans when they fell due.

Further, reliance was placed upon the plaintiff’s contention that the opportunity to recover the loans and investments had not been lost by the time the first audit report was provided by the defendants. Hence, it was contended the same opportunity was lost at the same time by Mr Moylan’s wrongful opinion of the year before.

The pleadings of the defendants, in this respect, in the amended defence were as follows:

There was no dispute that Mr Moylan conducted an audit in respect of the 2006 financial year (the 2006 audit report by Mr Moylan was in evidence). However, unlike the audit opinion contained in the defendants’ audit reports, Mr Moylan did not issue an audit opinion with respect to the presentation of the financial report of the Super Fund. His opinion in the 2006 audit report was only that the plaintiff had complied, in all material respects, with the requirements of the SIS Act or the SIS Regulations.

It is true that the plaintiff alleged the defendants failed to audit the Super Fund so as to be able to reasonably form the opinion as to whether there had been compliance with the SIS Act and SIS Regulations in the relevant financial years. However, the plaintiff’s allegations founded upon the investment strategy for the fund for those years (see [474]-[476] above). In contrast, the 2006 investment strategy, which was relevant to Mr Moylan’s 2006 audit opinion, was not in evidence.

I agree with the contention of the plaintiff that there is no basis on the evidence to conclude that Mr Moylan’s audit opinion was inadequate with respect to reg 4.09 because the investment strategy for that year was not in evidence.

It may be recalled that, in order for the provisions of s 34(2) of the Civil Liability Act to apply with respect to Mr Moylan, the damage or loss that is the subject of the plaintiff’s claim must be the same loss and damage that was contributed to by the wrongdoer.

Mr Moylan’s conduct of the audit in the 2006 financial year as to compliance with the SIS Act and SIS Regulations did not cause the same loss having regard to the description of the operation of s 34(2) in Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613; [2013] HCA 10. In that judgment, French CJ, Hayne and Kiefel JJ described the evident purpose of Pt 4 of the Civil Liability Act as follows (at [16]):

Further, their Honours observed at [18]:

As to the question of causation raised by the defendants, I accept the following submission of the plaintiff:

Further, I reject the defendants’ submission that it was immaterial that some of the loans and investments had not reached maturity as at the 30 June 2006 balance statement. In considering whether Mr Moylan (as past auditor) contributed to the same loss, the relevant point in time is the financial year in respect of which Mr Moylan carried out his audit. He could not be expected to audit the financial report for the year ending 30 June 2006 by reference to subsequent events: his role was to confirm compliance with the SIS Act and SIS Regulations as at 30 June 2006.

Further, the defendants contended, if the opportunity for the plaintiff to recover investments was lost after 15 May 2008 (as it was after the defendants issued the 2007 audit report), it must also result in the conclusion that that opportunity was lost after Mr Moylan’s audit in respect of the financial year ending 30 June 2006.

While apparently having a logical basis, that contention suffers from the fact that the proposition does not take into account the fact that the plaintiff’s ability to recover the loan investments it had made from the borrowers and guarantors only arose from the time when those loan investments were in default. That was not the position as at 30 June 2006.

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

The defendants submitted that Ms Crittle was obliged to exercise a reasonable degree of care and diligence to be aware of the financial position or performance of the Super Fund and in forming an opinion on behalf of the plaintiff that the special purpose financial reports of the Super Fund presented fairly its financial position and performance. It was accepted, however, that the Court would not take into account both contributory negligence and concurrent wrong-doing by Ms Crittle in order to reduce any damages which may be awarded against the defendants.

The Court has accepted the defendants’ argument that the plaintiff was guilty of contributory negligence and that its damages should be reduced accordingly. Its negligence in this respect was, however, constituted by its responsibility for the acts and omissions of Ms Crittle. In my view, there is no material difference in the relevant considerations pertaining to the findings in contributory negligence and those submitted by the defendants pertaining to Ms Crittle as a concurrent wrongdoer. As accepted by the defendants, the plaintiff’s damages cannot be reduced for this reason as it would involve an inequitable double discount for the damages by reason of the same acts or omissions: Cam & Bear at [101].

In the result, I do not consider that the proportionate liability provisions of the Civil Liability Act or the TPA entitle the defendants to an apportionment of the plaintiff’s damages with respect to Ms Crittle.

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.

In the second further ASOC the plaintiff claimed the following relief:

In paras 17(a)(iii), (b)(iii), (c)(iii), (e)(v) and (f)(iii) of the second further ASOC, the plaintiff pleaded that it was seeking interest as prescribed by s 100 of the Civil Procedure Act 2005 (NSW).

Damages Calculation #2 calculated interest up until 31 August 2017. The plaintiff submitted that damages should be awarded including interest thereon from 31 August 2017.

The Court has found that for the aforementioned reasons, the plaintiff should have an award of damages (save for damages pursuant to s 315(11) of the SIS Act and s 159 of the FTA (Vic)) from the defendants who are jointly and severally liable (see finding above at [325(6)]) for a sum of $2,260,140 exclusive of any claim for interest from 31 August 2017. That amount is to be apportioned 10% to the plaintiff and 90% to the defendants for the contributory negligence of the plaintiff. Further, that amount is to be apportioned 20% to MBS and 80% to the defendants for the proportionate liability of MBS.

In addition, the Court has not heard the parties on interest (from 31 August 2017) and costs. In the result, the Court proposes to make directions for the plaintiff to provide short minutes of order reflecting this judgment. If there is an agreed position as to interest that position may be reflected within the short minutes of order. The Court will make provision to resolve any dispute as to the short minutes of order. Otherwise, the Court will receive submissions on both interests and costs in accordance with those directions.

The Court makes the following directions: