Bill Express Ltd v Pitcher Partners (a Firm)
[2014] VSC 482
•26 September 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PROFESSIONAL LIABILITY LIST
S CI 2011 5152
| BILL EXPRESS LIMITED (IN LIQUIDATION) | Plaintiff |
| v | |
| PITCHER PARTNERS (A FIRM) & ORS | Defendants |
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JUDGE: | MACAULAY J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 15 September 2014 |
DATE OF RULING: | 26 September 2014 |
CASE MAY BE CITED AS: | Bill Express Ltd v Pitcher Partners (a Firm) & Ors |
MEDIUM NEUTRAL CITATION: | [2014] VSC 482 |
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PRACTICE AND PROCEDURE – opposed application for reference of questions to a special referee in a claim against auditors – proposed questions involving construction of Australian Accounting Standards – whether appropriate to refer questions that involve questions of law – whether risk of re-litigation – whether proposed procedure for the conduct of the reference would be unfair - consideration of justice, efficiency, timeliness and cost effectiveness – Supreme Court (General Civil Procedure) Rules2005 (Vic) r 50.01 – Civil Procedure Act 2010 (Vic) ss 7, 8 - Talacko v Talacko [2009] VSC 98 - Matthews v SPI Electricity & Ors (Ruling No 19) [2013] VSC 180.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M B J Lee SC with Mr W A D Edwards | Johnson Winter Slattery |
| For the First Defendant | Mr P D Crutchfield QC with Mr R G Craig | Arnold Bloch Leibler |
| For the Eighth Defendant | Mr C M Scerri QC with Ms P A Neskovcin | Allens |
HIS HONOUR:
Introduction and summary
Bill Express Limited, a company in liquidation, sues its former auditors, Pitcher Partners and KPMG, each of whom audited the company’s financial statements in different financial years. It claims damages from each firm due to their allegedly defective conduct of those audits.
By this application, Bill Express has applied (by its liquidators) under Rule 50.01 of the Supreme Court (General Civil Procedure) Rules 2005 (Rules) for an order referring questions to a special referee – an accountant[1] − for the determination of an aspect of the dispute. The questions that Bill Express wants referred concern the correct application of the Australian Accounting Standards, made pursuant to s 334 of the Corporations Act 2001 (Cth), to the accounting treatment of particular computer terminals in the company’s financial statements.
[1]Bill Express proposed either of two accountants: Mr Bruce Porter and Mr Christopher Westworth. Should the application be granted, the auditors indicated they would not oppose Mr Westworth’s appointment as special referee.
The application is opposed by both Pitcher Partners and KPMG.
Bill Express argued that, in the circumstances of this case, the appointment of a special referee is not only appropriate but entirely consonant with the overarching purpose to which this Court must seek to give effect in the exercise of its powers, including those derived from any rules of the court.[2] As required by the Civil Procedure Act 2010, the overarching purpose is to facilitate the just, efficient, timely and cost effective resolution of the real issues in dispute in civil proceedings.[3]
[2]Civil Procedure Act 2010 s 8(1) (‘CP Act’).
[3]CP Act s 7.
For their part, Pitcher Partners and KPMG urged me to find that the appointment of a special referee would be inimical to every element of the overarching purpose.
The proceeding commenced in 2011. It is undoubtedly a large and complex piece of litigation. Although not formally pleaded, one estimate of the damages sought by Bill Express is in excess of $200 million. Reputations of a number of auditors are at stake. At this stage, no party has served any expert evidence concerning the key accounting and auditing issues on which the dispute turns. The parties’ rival positions have, so far, only been set out in pleadings, notices to admit and the responses thereto. It follows that the full extent of dispute about the accounting and auditing issues has not been fully illuminated. Further, although it might seem to be some time away, the court has recently indicated to the parties that the trial of the proceeding can be heard in February 2016 (on an estimate of 8-9 weeks of trial).
For reasons which I will explain more fully, I am not persuaded that it is appropriate to refer questions to a special referee. In summary, although there is much to be said in favour of such a reference and the arguments are much more finely balanced than any of the submissions to me would suggest, in the end I have concluded that the risk that the process will cause more delay and cost than it would avoid is real and not merely hypothetical.
Further, and significantly, the issue which Bill Express wishes to have decided by an expert accountant involves, at root, a question of law: what is the proper construction of the Accounting Standards which have the force of law by virtue of s 334 of the Corporations Act? In my view, to the extent that question is ultimately contentious it is more appropriate that a judge determine it, rather than a special referee.
Background
Bill Express carried on the business of selling pre-paid telephone cards, and developing and/or providing electronic bill payment facilities, through terminals located on the premises of various merchants. Customers who used those services paid fees for doing so. The terminals used by Bill Express to facilitate both pre-paid telephone sales and bill payment services were known as Express Shop Terminals (ESTs). Each EST comprised what was called a Cadmus terminal together with other hardware and operational software.
The terminals were the subject of a series of transactions (the EST transactions). The EST transactions assume some importance in connection with the issue that Bill Express wishes to have referred. A simplified version of those transactions is as follows.
(a) The Cadmus terminals were alleged to have been sold by Bill Express to entities within a group of companies known as the TB Group, which included Technology Business Services Pty Ltd (TBS) and Technology Business International Pty Ltd (TBI).
(b) The TB Group bundled the terminals with further hardware and operational software to create the ESTs used in the Bill Express business.
(c) The TB Group entered into rental agreements with merchants in respect of the ESTs.
(d) The TB Group then sold the rights to the income stream from those rental agreements to financiers.
(e) The TB Group then sold the ESTs back to Bill Express, with the consideration for that sale being provided by way of a reduction in TB Group’s loan account with Bill Express.
Having regard to those transactions, Bill Express accounted for the ESTs acquired from TB Group as assets (plant and equipment) in its financial statements for the 2005, 2006 and 2007 financial years. Those assets represented a very substantial amount on Bill Express’s balance sheet – approaching $50 million. It is the treatment of those ESTs as assets in the financial statements of Bill Express that is the subject of the proposed reference.
Bill Express went into liquidation on 12 August 2008.
Pitcher Partners audited the Bill Express financial statements for the financial year ending 30 June 2005 and 30 June 2006. KPMG audited the financial statements for the financial year ending 30 June 2007 (and it also performed a half year review for the period 1 July 2006 to 31 December 2006).
Issues in the proceeding
Essentially, Bill Express makes the same set of allegations in respect of each of the audits:
(a) first, the financial accounts prepared by the company did not comply with the Australian Standards and/or contained various material misstatements;
(b) secondly, in breach of their duties, the auditors misrepresented, in their respective audit reports, that the financial statements did comply with the applicable standards and that they gave a true and fair view of the financial performance of Bill Express; and
(c) thirdly, the auditors’ breaches caused to the company to suffer loss. On the premise that but for those breaches the company would have been placed into external administration (and ceased trading) well before the date it was placed into liquidation, the loss is the difference between the company’s net asset surplus or deficiency at the date when it would have ceased trading and its net asset or surplus at the date it went into liquidation.
Relevantly, Bill Express alleged that its financial reports, prepared by its own accountants but audited by the two firms, contained five ‘material misstatements’. As a result, it alleged, the accounts did not give a true and fair view of the financial performance of the company. The accounts allegedly misstated the true position in that they:
(a) failed to disclose the true nature of the relationship between Bill Express and the TB Group: namely, that Bill Express exercised ‘control’ over TB Group, within the meaning of the relevant Accounting Standard, such that it was required to prepare consolidated accounts, or that Bill Express and TB Group were ‘related parties’;
(b) ascribed a carrying value to the computer assets (ie. ESTs) and to the plant and equipment when, because the economic interest in the computer assets rested with persons other than Bill Express, according to the relevant Accounting Standard no carrying value should have been ascribed to those assets, and the carrying value of the plant and equipment should have been reduced;
(c) capitalised certain research and development costs as an asset when, having regard to the relevant Accounting Standards, they should have been expensed because, among other reasons, the expense was not recoverable beyond reasonable doubt;
(d) treated certain loans owing to Bill Express as recoverable when, pursuant to the relevant Accounting Standards, they ought not to have been so treated; and
(e) classified certain liabilities in respect of loans owed by Bill Express to financiers as non-current when, pursuant to the relevant Accounting Standards, they ought not to have been so classified.
Proposed questions for special reference
Of those five alleged misstatements, the questions which Bill Express seeks to refer to the special referee specifically relate to the second: the treatment of the ESTs as assets of Bill Express in its financial reports. The rival positions with respect to that alleged misstatement, put simply, are these: Bill Express, now by its liquidators, alleges that the ESTs should not have been represented in Bill Express’ balance sheet as its own assets (ie as plant and equipment) whereas both Pitcher Partners and KPMG deny that proposition.
In that regard, the critical issue is whether, on the proper application of the applicable Accounting Standards (and any other relevant rules), the ESTs were required to be represented in Bill Express’s accounts as its assets and, if so, at what carrying value.
Bill Express tendered an expert report from Professor David Boymal dated 19 June 2014 in support of its application. Professor Boymal’s experience and qualifications as an expert auditor were not in dispute.
In his report, Professor Boymal explained that:
So far as assets are concerned, their presentation in the balance sheet follows a number of implied assertions that are fundamental to their presentation. These assertions (referred to in the professional literature as Financial Report Assertions) are:
(a) That the asset exists at a given date;
(b) That the asset pertains to the entity at a given date;
(c) That the transaction relating to the asset actually took place;
(d) That the asset is complete and there are no undisclosed items;
(e)That the asset is properly disclosed, classified and described in accordance with financial reporting framework and accounting rules/standards;
(f) That the asset is recorded at an appropriate carrying value; and
(g)That any revenue or expense associated with the asset is allocated to the correct accounting period.[4]
[4]Report of Professor David Boymal dated 19 June 2014, exhibit DGB-1, [19] (‘Boymal Report’)
The questions proposed to be referred to a special referee are designed to elicit an expert opinion or determination as to the treatment of the ESTs as assets of Bill Express in its financial reports. Bill Express proposed two forms of the questions: a simple form, and a detailed form. It preferred the simpler form but the detailed form helpfully exposes the subsidiary questions that need to be addressed in order to form a conclusion on the ultimate issue.
The simplified version is:
1Whether or not the EST Transactions were accounted for in accordance with Australian Accounting Standards in BXP's financial reports for the 2004, 2005, 2006 and 2007 financial years and the 2006 half year?
2 If the answer to question 1 for any of the BXP financial reports is “no”:
(a) Why not?
(b)What changes would have been required to have been made to the relevant BXP financial report for it to account for the EST Transactions in accordance with Australian Accounting Standards?
The more detailed version of the questions is:
1Did the Express Shop Terminal (EST) transactions between Bill Express Limited (in liquidation) (BXP) and Technology Business Systems Pty Ltd (TBS) (EST Transactions) transfer any of the below economic benefits, with economic benefits as defined in:
(a) for the 2004 and 2005 financial year:
(i)Statement of Accounting Concepts entitled “Definition and Recognition of the Elements of Financial Statements” (SAC 4);
(b) for the 2006 half year, 2006 and 2007 financial years;
(i)“Framework for the Preparation and Presentation of Financial Statements” AASB July 2004; and
(c)any other applicable Australian Accounting Standard for the 2004 to 2007 financial years and the 2006 half year,
to BXP at the date of the EST Transactions that BXP did not possess before the date of the EST Transactions:
(d)rental revenue stream payable by merchants for the rental of ESTs;
(e) physical usage of ESTs;
(f)income from BXP products sold or processed through ESTs; and/or
(g)any other economic benefit which equat4es to the monetary amount of the EST Transactions.
2 Did BXP control, with control as defined in:
(a) for the 2004 and 2005 financial year:
(i) SAC 4;
(ii) AASB1015;or
(b) for the 2006 half year, 2006 and 2007 financial years:
(i)“Framework for the Preparation and Presentation of Financial Statements” AASB July 2004; and
(c)any other applicable Australian Accounting Standard for the 2004 to 2007 financial years and the 2006 half year,
the ESTs after the date of the EST Transactions to the extent that they could deny third parties the following economic benefits embodied in the ESTs:
(d) rental revenue stream to financiers; and/or
(e) physical usage of the ESTs by merchants.
3Did the item(s) acquired by BXP through the EST Transactions qualify as an “asset” in terms of the definition in:
(a) for the 2004 and 2005 financial year:
(i) paragraph 14 and 15 of SAC 4;
(ii) paragraph 12.1 of AASB 1015;
(iii) paragraph 9.1 of AASB 1 01 0; or
(b) for the 2006 half year, 2006 and 2007 financial years:
(i)paragraph 49 and 51 of “Framework for the Preparation and Presentation of Financial Statements” AASB July 2004;
(ii) paragraph 8 of AASB 138; and
(c)any other applicable Australian Accounting Standard the 2004 to 2007 financial years and the 2006 half year.
4Did the item(s) acquired by BXP through the EST Transactions, qualify for “recognition of an asset” as defined in:
(a) for the 2004 and 2005 financial years:
(i) paragraph 38 of SAC 4; or
(b) for the 2006 half year, 2006 and 2007 financial years:
(i)paragraph 83 of “Framework for the Preparation and Presentation of Financial Statements”;
(ii) paragraph 7 of AASB 116;
(iii) paragraph 21 of AASB 138; and
(c)any other applicable Australian Accounting Standard the 2004 to 2007 financial years and the 2006 half year.
5What was the true nature of the item (asset, intangible asset, right or expense) embodied in the EST Transactions between BXP and TBS for the purposes of classification in the financial report as:
(a) for the 2004 and 2005 financial years:
(i)computer equipment under property, plant or equipment as defined in paragraph 9.1 of AASB 101 0;
(ii)an expense as defined in paragraph 117 of SAC 4, and/or paragraph 8.1 of AASB 1018;
(iii)an item of nature determined by the Referee if other than 5(a)(i) or 5(a)(ii) above; or
(b) for the 2006 half year, 2006 and 2007 financial years:
(i) an intangible asset as defined in paragraph 8 of AASB 138;
(ii)computer equipment under property, plant and equipment as defined in paragraph 6 of AASB 116;
(iii)an expense as defined in paragraph 70 of “Framework for the Preparation and Presentation of Financial Statements”; or
(iv)an item of nature determined by the Referee if other than 5(b )(i) or 5(b )(ii) above.
Either way, it can be seen from these questions that, at the heart of them, is a question concerning the proper meaning of certain terms as defined in the Accounting Standards. As revealed by the more detailed questions, those terms include: ‘Economic benefits’ (question 1); ‘control’ (question 2); ‘asset’ (question 3); ‘recognition of an asset’ (question 4); ‘computer equipment’; ‘expense’; and ‘intangible asset’ (question 5).
Proposed procedure for special reference
As well as proposing that the court refer particular questions to the special referee, Bill Express proposes that the court make a series of directions to govern the procedure to be adopted by the special referee. Those directions, if made, would limit the involvement of legal representatives in the process and would maximise the referee’s control of the conduct of the reference. For example, it is proposed that the directions include:
·that the referee may make inquiries by telephone or in writing;
·the referee may direct communication, without the intervention of lawyers, to any expert retained on behalf of a party; and
·the referee shall, unless the referee otherwise directs, receive evidence in relation to any findings of fact necessary to answer the questions by way of statement of agreed facts, documents provided by a party in accordance with the direction made by the referee and written (witness) statements only if the referee considers it necessary to receive them.
Further, in written and oral submissions Bill Express argued that the court should specifically direct that the rules of evidence not apply and that, unless the referee otherwise directs, there should be no legal representation, or submissions by legal representatives, before the referee, including that there not be cross-examination of any expert or other witness. Pitcher Partners and KPMG each vehemently resist any such restriction.
So, the dispute lies not only in relation to the reference itself but also in respect of the procedure for the reference. But one thing upon which the parties do agree is that if the reference is merely to be a mini-trial concerning the accounting treatment of the computer assets, complete with oral evidence, legal representation, cross-examination, rules of evidence applying etc, then the reference would serve no useful purpose in terms of time and cost efficiency.
Should the order be made?
Order 50 of the Rules provides that:
·a court may refer any question to special referee to either decide the question or to give an opinion with respect to it (50:01);
·the court may give directions for the conduct of the reference (50.02);
·upon receipt of the report of the referee, the court has certain powers with respect to it, including to vary it (50.03); and
·the court may adopt or decline to adopt the report in whole or in part (50.04).
In some previous decisions courts have held that it will not refer a question to a special referee on the application of a party where the opposing party opposes the reference.[5] No party before me pressed that position. In Talacko v Talacko[6] Kyrou J was not persuaded that the power to appoint a special referee over the objection of a party could only be exercised in special circumstances although his Honour acknowledged that the absence of consent by a party, and the reasons given for withholding consent, are clearly relevant to the exercise of the court’s to appoint a special referee.[7] With respect, I agree with his Honour’s approach.
[5]AT & NR Taylor & Sons Pty Ltd v Brival Pty Ltd [1982] VR 762, 765; Abigroup Contractors Pty Ltd v BPB Pty Ltd [2000] VSC 261 (‘Abigroup’).
[6][2009] VSC 98 (‘Talacko’).
[7]Ibid [27].
The principal issues debated before me, which in my view inform the proper resolution of the application, involve the following:
(a) whether there is any utility in the proposed special reference;
(b) the extent to which it will involve a legal question;
(c) the ‘importance’ of the issue in the scheme of the case, and any ‘entitlement’ that a party has to have such important issues determined by the court rather than by a referee;
(d) the extent to which the facts necessary to determine the reference are uncontroversial and, if not, how the referee is to determine the facts;
(e) the extent to which there is a risk there will be re-litigation of the same issues that are referred, having regard to the remaining matters in dispute and the prospect that the opinion of the referee will not be adopted by the court; and
(f) the impact of each of the above factors on justice, efficiency, timeliness and cost effectiveness.
I will deal with each of these issues in turn.
Utility
Professor Boymal explained that the accounting and auditing issues raised by the allegations in the statement of claim could be grouped into three categories:
(a) First, accounting issues, concerning whether, upon a proper application of the Accounting Standards, Bill Express’s financial statements were materially misstated;
(b) Secondly, a further accounting issue quantifying the effect of any errors arising from a material misstatement;
(c) Thirdly, auditing issues concerning whether a reasonably competent auditor would have identified the material misstatements in the financial accounts, and what steps would then have been taken by such an auditor.
In this application, the proposed questions to be referred to a special referee address the first of those three issues. Professor Boymal observed that those proposed questions (particularly the detailed version) appear to have been structured in the order that the Financial Report Assertions (see [19] above) needed to be dealt with in respect of the ESTs. Furthermore, following that logical sequence, he explained that early resolution of the first two assertions (existence of the asset and whether it pertains to the entity) could have the benefit of eliminating the need to consider the further assertions without proceeding to consider description, classification and valuation matters.
But, most significantly, Professor Boymal said this:
In my experience, where the correct accounting treatment remains in dispute between the parties in a proceeding concerning the conduct of auditors, this question initially dominates the proceedings as the Court has difficulty in addressing the actions and conduct of the auditors until the correct accounting treatment is resolved. Where both the accounting treatment and the actions of the auditors are combined in the one expert report, such report is often very complex containing numerous permutations and combinations of possible outcomes. In my opinion, if the question of the proper application of the Accounting Standards is able to be resolved first, this would reduce the need for an expert to address multiple such permutations and combinations of possible outcomes.[8]
[8]Boymal Report [25].
It was Professor Boymal’s opinion that if the correct accounting treatment could be initially and separately determined that would narrow the issues which an expert would subsequently have to deal with.[9]
[9]Boymal Report [26].
Professor Boymal identified eleven different issues arising from the statement of claim concerning the proper application of Accounting Standards.[10] Of those, the question of whether or not the ESTs were properly accounted for in accordance with the accounting standard was only one. Another was whether or not certain loans to TBG and ONQ (another company) were properly accounted for in accordance with those accounting standards. In his view, the resolution of the accounting issue with respect to the ESTs would likely have a consequential effect on the accounting issue in respect of the loans to TBG and ONQ. It did not appear to be Professor Boymal’s opinion that the resolution of the EST issue would have any particular bearing on the other nine accounting issues.
[10]Boymal Report [16].
There are, it seems to me, some obvious benefits in the proposed special reference, at least in principle. However, the utility of the approach needs to be placed in a wider context. As mentioned, Professor Boymal identified eleven issues within his first category of accounting issues. The determination of the EST accounting issue resolves or at least affects, at best, only two of those eleven issues. Although the dollar amount of the EST assets in the balance sheet appears to be significant, the overall significance of the EST issue amongst the constellation of issues is difficult to gauge. It is not suggested that the resolution of the EST accounting issue of itself will necessarily have a significant impact in the overall resolution of the case, although, as I mention below, it is claimed by Bill Express that it will reduce trial time to a significant degree.
But, in terms of the justification for a reference to a person with specialist accounting knowledge, there does not seem to be any special reason why this particular question concerning the application of accounting standards calls to be determined by a special referee given that the court will be left with a similar task in respect of at least nine other accounting issues. Put another way, if the court will need to grapple with technical accounting concepts for the purposes of resolving nine other accounting issues, the utility of referring out one such issue begins to lose something of its persuasive force.
In summary, the initial attraction to the proposition put forward by Professor Boymal is diluted by considering the need for determination, in any event, of the remaining issues, with a consequent bifurcation of the task of determining the full collection of accounting issues between the special referee, on the one hand, and the court, on the other.
The extent to which the reference involves a legal question
Section 296 of the Corporations Act provides that the financial report of a company for a financial year must comply with the accounting standards. As I have already mentioned, the Accounting Standards are those made pursuant to s 334 of the Act. They are made by the Australian Accounting Standards Board; they are made by legislative instrument; and they must not be inconsistent with the Act or the Regulations made thereunder.
There is nothing in principle to prevent a court referring a question of law to a special referee. So much is made clear by the definition of ‘question’, the subject of a reference under r 50.01. A ‘question’ under the Rules means ‘any question, issue or matter for determination by the Court, whether of fact or law or of fact and law… ‘.[11]
[11]Supreme Court (General Civil Procedure) Rules 2005 r 1.1.3.
However, whether it is appropriate to refer a question of law, or of fact and law, in any given case is another matter. The appropriateness of referring a question for determination by a special referee who has particular technical experience and expertise may be obvious where the litigation involves, for its proper understanding and resolution, having that technical expertise. For different reasons of efficiency, it may also be appropriate to refer to a special referee the detailed examination of a very large number of items, such as accounts, disputed invoices, billing items or the like.
But the appropriateness of referring out a question that involves the interpretation and construction of a legal standard before applying it to facts is less obvious. Even less so is a case which also involves the need to make findings of fact which depend upon decisions about the admissibility of evidence and the credit of witnesses. In each instance, the critical analytical tools to be deployed involve legal reasoning and forensic experience: the usual domain of a judge.
Moreover, as explained above, the final step in respect of a reference to a special referee is the decision of the court to adopt or decline to adopt the report, in whole or in part. At that point of the process, if dissatisfaction by a party with the report involves a question of law, or the application of legal standards to established facts, the proper exercise of discretion requires the judge to consider and determine that matter afresh.[12] In VUT v Wilson & Ors[13] Harper J stated the principle in this way:
If the dissatisfied party has identified error in law, then because there can be no implied authority to make such errors, the report may be set aside or remitted.[14]
[12]See BestCare Foods v Origin Energy [2012] NSWSC 574 [15]-[18] (‘BestCare’) in which McDougall J repeated and amplified his ‘Chocolate Factory principles’ derived from his decision in Chocolate Factory Apartments v Westpoint Finance [2005] NSWSC 784 – see in particular principle (4) to which his Honour referred.
[13][2006] VSC 186.
[14]Ibid [26]; recently applied by J Forrest J in Matthews v SPI Electricity & Ors (Ruling No 19) [2013] VSC 180 [27] (‘Matthews’).
Both KPMG and Pitcher Partners sought to illustrate the difference between a reference to a special referee in which no such legal questions arise, and the proposed reference in this case, by pointing to Kyrou J’s decision in Talacko. In Talacko his Honour favoured the appointment of a special referee to determine the value of properties in the Czech Republic, Slovakia and Germany. Along with other reasons, his Honour considered that it was appropriate to do so because the issues were capable of being determined without the need to conduct any form of hearing where complex legal issues or the credit of witnesses would be involved.[15]
[15]Talacko [25](h).
The extent to which the admissibility of evidence and credit of witnesses might be involved is a matter to which I will return briefly below. However, in my view the questions proposed to be referred to a special referee, as identified above, appear to involve, as a first step, the construction of a legislative instrument, namely the Accounting Standards. Quintessentially, that is a task that courts perform and are highly adapted to perform. There is no doubt that the application of those standards to the factual subject matter of this dispute will involve an understanding and knowledge of particular accounting concepts. But having to acquire an understanding and knowledge of accounting concepts is not a foreign experience for courts. Further, as I have already observed, the court will need to undertake this task in respect of the numerous remaining accounting issues in any event.
The extent to which the legal construction of the standards will be controversial is presently difficult to discern. Nevertheless, part of my task is to try to assess whether the reference procedure will be more or less efficient than having the court determine the question for itself. In that context, any real potential for questions of law to have to be determined on the reference, combined with the obligation of the court to determine that question for itself if a party is dissatisfied with the special referee’s resolution, significantly undermines the attraction of the reference procedure.
The ‘importance’ of the issue in the scheme of the case
In Matthews, J Forrest J listed a number of considerations which persuaded him that it was inappropriate to refer a particular issue to a special referee. He commenced by saying:
First, the cause of the failure is a critical issue in the case. It is to be contrasted to, say, a referral to a special referee to determine a question of quantum or a side issue. The cause of the failure and the role played by Aeolian vibration is central to SPI’s putative liability. In a case in which so much turns upon a resolution of this issue, I think I should be wary of abdicating responsibility for the determination unless absolutely persuaded as to the necessity of that course. Given, as I shall discuss in a moment, that I have the alternative course of seeking the assistance of an assessor or assessors, I think that referral to a special referee on this matter is less desirable.[16]
[16]Matthews [2013] VSC 180 [23].
Pitcher Partners noted that Bill Express had described the EST accounting issue as a ‘very significant’ issue in the context of the proceeding as a whole.[17] Both Pitcher Partners and KPMG urged me to apply similar reasoning as applied by J Forrest J in Matthews to conclude that it is inappropriate to refer such an important issue out to a special referee. In fact both parties went so far as to contend that they were ‘entitled’ to have a judge determine such an important issue.
[17]Plaintiff’s written submissions [3.13].
For my part, I am not so much assisted by the language of ‘entitlement’ when used in conjunction with the significance or otherwise of issues. It may well be that it is more appropriate, as the defendants have already submitted, that a matter of legal construction is determined by a court. But whether the ranking of significance of issues per se is a particularly persuasive consideration in deciding whether or not there should be a special reference, is less apparent to me.
Matters such as the expertise of a special referee; the technical or fact-dense nature of the issue; considerations of cost and efficiency; the saving of judge-time as a public resource; are all matters which seem to me to logically inform the exercise of discretion whether to refer a matter to a special referee. If, upon those considerations, a court determines that it is appropriate to refer a matter to a special referee, so be it. But, I am not persuaded that the fact that the matter is critical to the determination of the whole dispute should be a factor against the reference. I can envisage a situation where the critical nature of a technical question to the resolution of an entire dispute might be a very powerful factor in favour of the reference when proper regard is given to the imperative of the overarching obligation.
As Bill Express observed, there seemed to be an inconsistency in the auditors’ contentions. To diminish the utility of a reference, the auditors stressed that the EST accounting issue is only one of eleven accounting issues to be determined and has no significant impact on more than one of the other issues. Yet, when it came to considerations of fairness and justice the auditors emphasised the critical nature of the same issue.
Ultimately, I do not ignore the importance of the issue as a factor to take into account in conjunction with other matters; but I am not persuaded that, of itself, it has the potency that the auditors wish to place on it.
The need to determine controversial facts
Initially Bill Express advanced, as one of the reasons for ordering a special reference, the proposition that the facts had been agreed by the parties by means of a notice to admit. In fact that turned out to be mistaken and a great number of the facts have not been admitted and remain in dispute. Thereafter, Bill Express sought to downplay the significance of the facts that had to be determined. Bill Express produced a sophisticated table which runs to many pages in an endeavour to demonstrate that, not only have a number of facts been admitted, of those that have not been admitted (of which there seem to be a great many) there is a solid documentary basis for each of them. The defendant auditors, understandably, have criticised this approach.
Perhaps more significantly, to the extent that matters are in dispute, Bill Express proposes that the special referee be given wide and broad powers of an inquisitorial nature to resolve such disputed facts as I discussed above at [24] and [25]. This, the auditors say, only adds insult to injury. KPMG argued that it more or less guarantees that the result would be unjust.
I do not doubt that in appropriate cases a court has the power to make orders of the kind that Bill Express seeks, particularly having regard to the wide ranging powers given to the courts by the Civil Procedure Act and the imperative to achieve the overarching purpose.[18] I accept that a special referee in Victoria is not necessarily required to conduct a reference in the same manner as trials are conducted before a judge. The particular value of the reference procedure is that the special referee may not be so constrained.[19]
[18]EGC directions given under Rule 50.02 by Byrne J in Parker v Robertson (Supreme Court Victoria, 19 May 1994, unreported, BC9405718), extracted in Williams’ Civil Procedure,4907.
[19]Abigroup [2000] VSC 261 [14] (Byrne J).
That said, at this point the relative importance of the matter to the parties or to the proceeding as a whole seems to have a logical bearing on the question whether it is appropriate to permit traditional forensic processes to occur. Further, it is consistent with the principle of proportionality[20] that the greater the importance of the issue, the more latitude may be afforded to parties to engage in more forensically intensive, and potentially more time consuming and costly, processes to advance or defend their interests.
[20]CP Act s 9(1)(g).
Other matters which, it seems to me, are also relevant on this point include the extent to which matters are in controversy; the capacity of the parties to make effective representations to the referee in relation to matters in dispute without being afforded the traditional forensic processes; and the experience and qualification of the special referee in determining disputed factual matters.
Both KPMG and Pitcher Partners have complained that the process of discovery is at an early stage and that they are not apprised of all of the company’s documents. They assert that they may need to call their own witnesses and cross examine the witnesses for Bill Express, particularly its expert/s. For its part, Bill Express answers that the documents upon which it relies for its statement of agreed facts comes very substantially from the audit files of Pitcher Partners and KPMG. It argues that there should be no need to have witnesses give oral evidence or be cross examined: the referee should be permitted to obtain relevant information through direct engagement with the experts, without the intervention of lawyers, and by calling for documents and, if necessary, written statements of evidence.
It is difficult to resolve these rival contentions on the current evidence. Bill Express has attempted to persuade me by reference to its table, and from affidavit material, that the defendants’ concerns about the facts are more or less pretended and that the necessary facts will be very easily resolved. I am afraid that an analysis of the substantial table which has been produced does not comfort me. I am bound to take seriously the concerns expressed by the defendants that their rights to the proper determination of contentious facts are in danger of being overridden. I do not attempt to make a determination whether rights will be overridden by the processes which Bill Express propose; I merely take into account a seriously expressed concern that they may be.
Risk of re-litigation
Both KPMG and Pitcher Partners submit that notwithstanding a reference of the proposed questions to a special referee the trial judge will need to consider the same material and evidence to resolve remaining issues. More specifically, they submit that because the court will still need to determine whether the auditors failed to exercise reasonable care in relation to the audit, the determination of that issue will require the trial judge to consider such expert evidence as is produced by all parties in the light of the facts.
Those facts, they suggest, will include the circumstances of the particular audit including the conduct of Bill Express, its directors and officers in respect of that audit, and the practices and procedures adopted by the auditors in relation to the audit. They argue that the same issues will bear upon the accounting issues that the special referee is intended to determine. Alternatively, it is suggested that much of the material or evidence that will be put before the special referee will also be considered by the trial judge at a later time in respect of the questions of auditors’ negligence and causation.
I accept ‑ as Bill Express submits - that ordinarily the matters referred to the special referee for determination ought not to be re-litigated. It referred again to the Chocolate Factory principles[21] which include the following:
(7)Generally, the referee’s findings of fact should not be re-agitated in the Court. The Court will not reconsider disputed questions of fact, where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee enjoys an appropriate expertise. Thus, the Court will not ordinarily interfere with findings of fact by a referee where the referee has based his or her findings upon a choice between conflicting evidence.[22]
[21]Above n 11.
[22]BestCare [2012] NSWSC 574 [17].
The rival arguments of the company and the auditors on this issue were conducted at a fairly generic level. I suspect that was a consequence of an observation I made earlier, ie. that it appears the full extent of dispute about the accounting and auditing issues has not been fully illuminated. So, it is difficult to assess the extent to which choices will need to be made between different expert opinions on the questions to be referred. Similarly, it is difficult to predict the extent to which those opinions will also bear upon the task of deciding other matters that are not to be referred to the special referee. For example, the opinions placed before the special referee, or the facts which he must consider, may influence the determination of the other ten (or nine) accounting issues described by Professor Boymal. Or the referee’s findings might impinge upon findings the court will also need to make on issues of auditors’ negligence or causation of loss.
All that needs to be observed is that there is a potential risk that findings made by the special referee on the discrete questions Bill Express wants referred will also be relevant to facts which need to be decided for the resolution of questions which are not sent to the referee. And if those findings are made by a process that shuts out the auditors from conducting a full forensic testing of the relevant facts, the procedure could be productive of injustice. A related concern is the danger of inconsistent findings of fact by the referee, on the one hand, and the court, on the other.
But even putting those risks to one side, it seems to me that the determination of questions of breach (by the auditors) and apportionment of responsibility (between the auditors and company directors) - issues that are raised in the pleadings - will require the trial judge to have a deep understanding of the facts the subject of the special reference. Those issues may very well require the trial judge to hear evidence from the same experts and lay witnesses who may, in one form or another, need to give evidence at the proposed reference.
So whether or not there is a risk of re-litigation or of conflicting decisions, the need for the court to decide issues of breach, causation and apportionment flowing from the EST accounting issue will likely require the judge to cover the same or similar territory to that which the referee will cover. In my opinion, these considerations combine to make it preferable for the judge to determine all aspects of that ‘territory’ rather than refer an element of it out.
Impact on justice, efficiency, timeliness and cost effectiveness
The solicitor for Bill Express, Mr Buitendag, estimated that the time saving to be achieved by referring the proposed questions to a special referee, and adopting the procedure proposed by Bill Express, could be as much as one third of the time that would otherwise be needed for trial. I have no doubt that Mr Buitendag made that estimate in good faith, doing the best he can.
But that estimated time saving has to be considered against the present uncertainties about the degree of factual dispute or dispute between experts. Secondly, it assumes a process for the reference that I am not inclined to direct. Thirdly, the prospect of the reference process to be efficient has to be weighed against the prospect that it might produce greater inefficiencies.
Conclusion
The burden of persuasion in this application lies upon Bill Express. As I said earlier, there is some attraction to the course that is proposed, for reasons which I have already discussed. Nevertheless, for other reasons which I have also discussed;
·there is a real potential for questions of law to have to be determined on the reference that would be more appropriate for determination by a judge than a special referee;
·there are risks that the process will be less efficient and cost effective than if the court simply retained responsibility for determining the EST accounting issue along with the other accounting issues; and
·there is a potential for the method of conduct of the reference, as sought, to be unjust.
Those factors are sufficient to outweigh the factors in favour of the application. For these reasons, I refuse Bill Express’s application.
As a final observation, although it does not affect my conclusion in this case, I do not ignore the possibility that I have the power to appoint an assessor to assist me should the technicality of the accounting issues thrown up by rival expert views make it desirable to do so.
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