FEDERAL COURT OF AUSTRALIA
Davis v Wilson [2025] FCA 108
File number(s): NSD 862 of 2018 Judgment of: SHARIFF J Date of judgment: 21 February 2025 Date of publication of reasons: 24 February 2025 Catchwords: REPRESENTATIVE PROCEEDINGS – shareholder class action – misleading or deceptive conduct – where applicants alleged they acquired shares in publicly listed company at an inflated price due to misleading or deceptive conduct on part of managing director and auditor of company – where allegedly misleading statements concerned reported value of company’s principal cash generating assets, being Indian Sandalwood trees (biological assets) – where company adopted discounted cash flow model (DCF Model) to value biological assets – where applicants alleged that two inputs in DCF Model were unrealistic, namely assumptions as to expected “heartwood yield” from biological assets and costs of processing sandalwood oil – where biological assets required to be measured at fair value in accordance with Australian Accounting Standards (Accounting Standards) – where respondent director alleged to have made representations in company’s financial reports that accounts complied with Accounting Standards and gave true and fair view of financial position and performance of company, and as to net assets and post-tax profits of company in relevant financial years – where applicants alleged that those representations carried implied representations that opinions were held on reasonable basis and were product of application of reasonable care and skill – where applicants alleged that those representations were misleading because respondent director did not have reasonable grounds for opinions expressed or because opinions were not product of application of reasonable care and skill – where applicants alleged that this was so because assumptions adopted in DCF Model were not assumptions that reasonable market participant would assume, and that this had effect of materially overstating accounts – where respondent director denied making representations and denied that applicants had made out factual predicates of misleading conduct alleged – where respondent auditor alleged to have made representations in company’s financial reports that accounts complied with Corporations Act 2001 (Cth) (Corporations Act), including by giving true and fair view of company’s financial position and performance and complying with Accounting Standards – where applicants alleged that by issuing those opinions, respondent auditor made implied representations that opinions were held on reasonable basis and product of application of reasonable care and skill and formed after auditor had conducted audit in accordance with Australian Auditing Standards (Auditing Standards) – where applicants alleged that those representations were misleading because respondent auditor did not have a reasonable basis for opinions expressed or because opinions were not product of application of reasonable care and skill – where applicants alleged that this was so because respondent auditor did not take steps that reasonable auditor in its position would have taken in conducting audits – where respondent auditor denied making implied representations and denied that applicants had made out factual predicates of misleading conduct alleged – where applicants alleged that as a…
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- AGLC
- Davis v Wilson [2025] FCA 108
- Case
- [2025] FCA 108
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CaseChat Overview and Summary
The court was tasked with deciding several legal issues, including whether the conduct of the director and auditor constituted misleading or deceptive conduct under the Corporations Act, whether the director's and auditor's representations were misleading, and whether the applicants could establish causation and damages for their claims. The court also had to consider the interpretation and application of the Australian Accounting Standards and Auditing Standards in the context of the alleged misleading conduct.
The court found that the applicants had not established their claims against the director and auditor. The court held that the director did not contravene the Corporations Act as the applicants failed to prove that the director's opinions were not held on a reasonable basis or were not the product of reasonable care and skill. Regarding the auditor, the court found that the auditor's conduct engaged in trade or commerce but did not contravene the Corporations Act or the ASIC Act. The court also held that the applicants had not established the necessary causation and damages required for their claims, as they could not prove the specific assumptions that should have been adopted in the company's financial reports.
The court concluded that the applicants' claims were not established on the evidence presented, and therefore, no liability was found against the director or the auditor. The applicants were ordered to provide consent orders by a specified date, and the parties were directed to confer on the appropriate costs order to be made. If the parties could not reach an agreement on the costs order, they were to make and oppose applications for costs in accordance with the outlined procedures.
Orders
Orders of the court
1. On or by 7 March 2025 the parties are to provide to the Associate to Shariff J consent orders, including answers to the Common Questions, giving effect to the reasons for judgment dated 21 February 2025 and, if consent cannot be reached, each party is to by that time provide its competing set of orders (including their respective answers to the Common Questions).
2. The parties are to confer as to the appropriate costs order to be made and, if consent cannot be reached:
(a) any party wishing to make an application for costs must make such an application by sending an email to that effect to the Associate to Shariff J on or by 7 March 2025 and, at the same time, file and serve on each affected party any affidavits and submissions in support of that application (with such submissions not to exceed five pages in length);
(b) on or by 21 March 2025, any party that opposes the costs orders sought by the party that has made an application for costs under Order 2(a) file and serve on each other affected party any affidavits and submissions in support of its position (with such submissions not to exceed five pages in length);
(c) on or by 28 March 2025, the parties are to file any affidavits and submissions in reply to each other, if they consider it necessary to do so (with such submissions not to exceed three pages in length).
3. Unless the Court considers a hearing is necessary, or a party so requests with good reason, any applications for costs will be determined on the papers.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
Background
Background to the litigation
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Evidence
Evidence Before The Court
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Decision
Reasons for decision
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Ratio Decidendi
Legal Principle Established
The proceedings concern alleged contraventions of the Corporations Act 2001 (Cth) (Corporations Act) by Mr Wilson. They also concern alleged contraventions of the Corporations Act and the general law by Ernst & Young (EY), the auditor of Quintis’ accounts in the financial years ending 30 June 2015 and 30 June 2016 (together, FY15 and FY16). Initially, the applicants in the proceedings also claimed against Quintis itself, however, as a result of a settlement between the Davis Applicants and Quintis approved by Lee J on 1 July 2022 (see Davis v Quintis Ltd (Subject to a Deed of Company Arrangement) [2022] FCA 806), the remaining active respondents are Mr Wilson and EY (together, the Respondents). The proceedings were heard concurrently with another set of representative proceedings brought against the Respondents by Excel Texel Pty Ltd (as trustee for the Mandex Family Trust) (Excel Texel) and Mr Andrew John Wyma (NSD1983/2017, or the Excel Texel Proceedings). On 16 July 2024, after the conclusion of evidence but before closing submissions had been heard, my chambers were informed that the parties to the Excel Texel Proceedings had executed a deed containing a proposed settlement of those proceedings, and an application for approval of the settlement under s 33V of the FCA Act was thereafter allocated to the docket of Wigney J. I took no further part in the Excel Texel Proceedings. In short, the Davis Applicants alleged that they (and the Davis Group Members) acquired Quintis shares, either on market or via a share purchase plan, between 31 August 2015 and 15 May 2017 at an inflated price due to misleading or deceptive statements made in Quintis’ financial reports for FY15 and FY16 (respectively, the FY15 and FY16 Financial Reports). Those allegedly misleading statements centre on the value of Quintis’ principal cash generating asset, sandalwood trees, which were referred to in Quintis’ financial statements as its “biological assets”. The Davis Applicants alleged that Quintis materially overstated the value of its biological assets in the FY15 and FY16 Financial Reports by reason of various inputs adopted in the discounted cash flow model (DCF Model) which it used to value those assets. These inputs were assumptions which Quintis made for the purposes of measuring and reporting the fair value of its assets, as required by the Corporations Act and the Australian Accounting Standards (Accounting Standards or AASBs). The allegations of misleading conduct against Mr Wilson (as contained in the Davis Applicants’ Fifth Further Amended Statement of Claim (FFASOC)) can be summarised as the conduct engaged in by him, as a director of Quintis, by joining in the resolutions of the directors of Quintis in each of the FY15 and FY16 Financial Reports, of representing that he was of the opinion that:(a)the Financial Reports had: (i) been prepared in accordance with the requirements of the Corporations Act, including that they complied with the Accounting Standards; and (ii) gave a true and fair view of the financial position and performance of Quintis; and that those opinions were held on a reasonable basis and were the product of the application of reasonable care and skill by Mr Wilson (together, the Wilson FY15 and FY16 Financial Report Representations);(b)Quintis had: (i) in FY15, total assets of $1,173,335,000 and net assets of $574,523,000; and (ii) in FY16, total assets of $1,491,958,000 and net assets of $747,222,000; and that those opinions resulted from the application of the Accounting Standards and were held on a reasonable basis and were the product of the application of reasonable care and skill by each director of Quintis, including Mr Wilson (together, the Wilson FY15 and FY16 Assets Representations); and(c)Quintis had post-tax profit: (i) for FY15 of $113,021,000; and (ii) for FY16 of $90,143,000; and that those opinions resulted from the application of the Accounting Standards and were held on a reasonable basis and were the product of the application of reasonable care and skill by Mr Wilson (together, the Wilson FY15 and FY16 Profit Representations),(collectively, the Wilson Representations).