Deloitte Touch Tohmatsu v Australian Securities Commission

DELOITTE TOUCHE TOHMATSU (formerly known as DELOITTE HASKINS and SELLS and
DELOITTE ROSS TOHMATSU) v. AUSTRALIAN SECURITIES COMMISSION
No. G286 of 1994
FED No. 780/94
Number of pages - 10
Administrative Law - Corporations
(1994) 54 FCR 284

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
LINDGREN J

CATCHWORDS

Administrative Law - Administrative Decisions Judicial Review Legislation - s. 5 (1) (b) - "procedures that are required by law to be observed in connexion with the making of" decision impugned - necessity of connection - whether sections 16 and 18 of Australian Securities Commission Act 1989 (Cth) prescribe "procedures" in connection with "the making of" decision by Australian Securities Commission under s. 50 of the Act.

Corporations - Administration of Companies Legislation - decision of Australian Securities Commission under Australian Securities Commission Act 1989 (Cth), s. 50, that proceedings be begun and carried on by company against auditors - order of review of decision applied for by auditors under Administrative Decisions (Judicial Review) Act 1977 (Cth) - no interim report by Australian Securities Commission under s. 16 of former Act - whether requirements of ss. 16 and 18 relating to interim report constituted in relation to Commission's decision under s. 50 "procedures in connexion with" that decision for purposes of s. 5 (1) (b) of AD(JR) Act

Australian Securities Commission Act 1989 (Cth) ss. 13, 16, 17, 18, 50
Administrative Decisions (Judicial Review) Act 1977 (Cth) s. 5 (1) (b)

HEARING

SYDNEY, 12 October 1994
#DATE 21:10:1994

Mr R A Conti QC instructed by Messrs Mallesons Stephen Jaques, solicitors for the applicant.

Mr T R Gray QC with Mr R J Whitington of counsel instructed by Valdemar Malinaric, solicitor for Australian Securities Commission, for the respondent.

ORDER

THE COURT ORDERS THAT:

1. The applicant be granted leave to amend the application by filing a Further Further Re-Amended Application for an Order of Review in the form of annexure "A" to the Reasons for Judgment excluding paragraph 4 in part D and paragraph 3 in part E with any alterations consequential upon those exclusions.

2. The question of costs of the motion be reserved.

NOTE: Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

NATURE OF PROCEEDINGS
LINDGREN J The applicant ("DTT") applies for an order of review under the Administrative Decisions (Judicial Review) Act 1977 ("the AD(JR) Act") in respect of a decision of the respondent ("the ASC") on 29 March 1994 that it was in the public interest to cause proceedings to be begun and carried on by The Adelaide Steamship Company Limited ("Adsteam") against, according to the application, Deloitte Haskins and Sells ("DHS") and Deloitte Ross Tohmatsu ("DRT") in the South Australian District Registry of the Court pursuant to s. 50 of the ASC Law. The ASC's decision referred to "the Auditor, Deloitte Ross Tohmatsu, formerly Deloitte Haskins and Sells". On 20 April 1994 proceedings were begun by Adsteam against, inter alia, DHS as 6th respondent and DRT as 7th respondent in the South Australian District Registry of the Court No. SG 3036 of 1994 ("the Proceedings").

The application is set down for hearing before me on 27 and 28 October 1994 for 1 to 2 days, the fixing of those dates having taken place on 5 August 1994. The ASC filed a notice of objection to competency on 6 June 1994. The most recent form of the application is a "Further Re-Amended Application for an Order of Review" filed on 2 August 1994. By notice of motion filed on 5 October 1994, DTT seeks leave to file and serve a Further Further Re-Amended Application for an Order of Review. A copy of that proposed pleading is, for convenience, annexed to these Reasons and marked "A".

(ANNEXURE A OMITTED)

The principal amendment sought to be made appears in para 4 of part D ("Statement of Grounds") in annexure "A". By the proposed para 4 the applicant seeks to introduce as a ground for impugning the ASC's decision, the ground provided for in para (b) of sub-section 5 (1) of the AD(JR) Act. This is "that procedures that were required by law to be observed in connexion with the making of the decision were not observed." According to the proposed para 4, at the time of making the impugned decision on 29 March 1994 the ASC had, in the course of an investigation into the affairs of Adsteam and its subsidiaries, within the meaning of s. 16 of the ASC Law formed the opinion that a "serious contravention" of a State Law had been committed. If this was in fact so, the ASC Law required the ASC to prepare an interim report setting out its findings about the contravention and the evidence and other material on which those findings were based and give a copy of it to the Minister, and empowered it to give a copy of the whole or of part of the interim report to, relevantly, the auditors. According to the proposed para 4, the ASC did not prepare an interim report and so the applicant was deprived of the opportunity to make submissions to the ASC prior to the commencement of the Proceedings. It is implicit in the proposed para 4 that the requirements of ss. 16 and 18 of the ASC Law were "procedures that were required by law to be observed in connection with the making of the decision" under s. 50.
Order 13 Rule 2 empowers the Court to grant the leave to amend sought. A ground on which leave to amend is properly refused is that a proposed amendment is "obviously futile" or "plainly demurrable": Dennis v Brownlee (1963) 80 WN (NSW) 1239 (NSW/FC); Abela v Giew (1964) 81 WN (Pt1) (NSW) 344 (NSW/Taylor J). This is the ground on which the respondent submits that I should exercise my discretion against the applicant.
The respondent acknowledges that none of the amendments would prejudice it since they give rise only to questions of law and questions as to the effect of the evidence (which has all been filed), which would be able to be determined within the 1-2 days set aside for the hearing.
On the other hand, and no doubt for the same reasons, the applicant does not submit that it would be prejudiced by a determination of these questions now rather than on the final hearing.
The questions raised by the proposed para 4 have been fully argued before me on the hearing of the application for leave to amend and I am therefore as well placed to decide them now as I would be on the final hearing. It would be possible to take the view that since there would be no prejudice to the respondent, leave to amend should be granted and the questions raised by the amendments determined on the final hearing. If that course were to be followed, the parties could be expected to adopt as their submissions on the final hearing what they have said on the application for leave to amend. The alternative course is to determine now at least any of the proposed amendments which have been fully addressed and which I have time to determine, thereby saving some, though perhaps not much, time on the final hearing.
Notwithstanding the lack of prejudice to it, having regard to the fact that the Further Re-Amended Application for an Order of Review was filed as long ago as 2 August 1994 and so the Application for Leave to Amend is made comparatively late in the day, I think that the ASC has a case for my following the latter course, and I will do so. However, I will refuse leave to make any particular amendment only if it can be said at this stage that the amendment would be futile. I proceed accordingly.

PROVISIONS OF THE ASC LAW
9. Part 2 (ss. 7-12) of the ASC Law provides for the establishment, functions and powers of the ASC. Part 3 (ss. 13-93) provides for, inter alia, the making of investigations and gathering of information by the ASC in connection with the due administration of a "national scheme law", an expression which is defined in sub-section 5 (1) to mean, relevantly, the Corporations Act 1989 (Cth), the Corporations Law of the State or Territory in question, or the Australian Securities Commission Act 1989 (Cth), or a law of another jurisdiction that corresponds to any such Act or Law.

The following provisions of Division 1 (ss. 13-18) of Part 3 are relevant to the present application:

"13 (1) The Commission may make such investigation as it thinks expedient for the due administration of a national scheme law of this jurisdiction where it has reason to suspect that there may have been committed:

(a) a contravention of a national scheme law; or

(b) a contravention of a law of the Commonwealth or of a State or Territory, being a contravention that:

(i) concerns the management or affairs of a body corporate; or

(ii) involves fraud or dishonesty and relates to a body corporate, securities or futures contracts.

16 (1) Where, in the course of an investigation under this Division, the Commission forms the opinion that:

(a) a serious contravention of a law of the Commonwealth or a State or Territory has been committed;

(b) ........ ........ ........ ........ ........ ....

(c) ........ ........ ........ ........ ........ .... it shall prepare an interim report that relates to the investigation and sets out:

(d) if paragraph (a) applies - its findings about the contravention, and the evidence and other material on which those findings are based;

(e) ........ ........ ........ ........ ........ .....

(f) ........ ........ ........ ........ ........ ..... and such other matters relating to, or arising out of, the investigation as it thinks fit. 17 (1) At the end of an investigation under section 13 ... the Commission may prepare a report about the investigation and shall do so if the Minister so directs. 18 (1) As soon as practicable after preparing a report under this Division, the Commission shall give a copy of the report to the Minister.

(2) Where a report, or part of a report, under this Division relates to a serious contravention of a law of the Commonwealth or of a State or Territory, the Commission may give a copy of the whole or a part of the report to:

(a) the Australian Federal Police;

(b) the National Crime Authority;

(c) the Director of Public Prosecutions; or

(d) a prescribed agency.

(3) Where a report, or part of a report, under this Division relates to a person's affairs to a material extent, the Commission may, at the person's request or of its own motion, give to the person a copy of the report or of part of the report.

(4) The Minister may cause the whole or a part of a report under this Division to be printed and published."

Division 5 (ss. 49 and 50) in Part 3 empowers the ASC to cause legal proceedings of various kinds to be begun and carried on where certain matters appear to it, relevantly, "as a result of an investigation". In particular, s. 50 provides as follows:

"50 Where, as a result of an investigation or from a record of an examination (being an investigation or examination conducted under this Part or a corresponding law), it appears to the Commission to be in the public interest for a person to begin and carry on a proceeding for:

(a) the recovery of damages for fraud, negligence, default, breach of duty, or other misconduct, committed in connection with a matter to which the investigation or examination related; or

(b) recovery of property of the person; the Commission:

(c) if the person is a company - may cause; or

(d) otherwise - may, with the person's written consent, cause;

such a proceeding to be begun and carried on in the person's name."

FACTS
12. On 29 September 1992 the Commission decided to make an investigation into the affairs of Adsteam and its subsidiaries in relation to the year ended 30 June 1990. The investigation was into whether Adsteam's directors should have identified certain loans to subsidiaries as being bad or doubtful and made adequate provision against them.

On 29 March 1994, there was a meeting of the ASC at which a "Submission paper" by ASC staff was considered. The applicant referred me to passages in the Submission paper and in the minute of the ASC's deliberations on it on 29 March 1994 with a view to establishing that the ASC had, on or by that date, "formed the opinion" that a "serious contravention" of a law of a State had been committed.
The Submission paper asserted that the 1990 accounts of Adsteam disclosed a profit of $236 million, when in fact Adsteam had incorrectly and inappropriately treated various items and inter-company transactions, a correct treatment of which would have resulted in a declared loss of $224 million. On that basis, there would have been no profit available for payment of dividend, and no dividend could have been declared and paid, except in contravention of s. 565 of the Companies (South Australia) Code and Article 113 of Adsteam's articles of association. It was alleged in the Submission paper that Adsteam's directors and auditors had been negligent.
The Submission paper observed that the 1990 accounts showed an operating profit after income tax of $217 million and retained profits at the beginning of the year of $243 million, with a resultant sum of $460 million available for appropriation to dividend. The Submission paper asserted that all members of Adsteam's board and its auditors, DHS, were aware of the acts and omissions giving rise to the overstatement of Adsteam's profit by at least $539 million, in consequence of which Adsteam's assets were "grossly overvalued" (reference was made to an internal Adsteam valuation prepared in about August 1990 asserting a net value of Adsteam as $1.85 billion, in contrast to an external valuation as at December 1990 of between nil and $97 million).
The Submission paper identified (at para 27.2) breaches of the Corporations Law by the auditors as being "breach of retainer", "negligence", "negligent misstatement", "breach of statutory duty" and "being knowingly concerned in breaches by the directors".
The Submission paper referred (at paras 49 and 50) to s. 50 of the ASC Law, and said that it was proposed that proceedings be begun and carried on under the section. It dealt (at paras 51 and 52) with "the public interest" and referred, for example, in para 52.4 to the payment as dividend of $228 million by an "ailing public company (which) was not generating enough income to meet its operational needs" as "serious, negligent and irresponsible conduct on behalf of the directors and on behalf of Deloittes who condoned such conduct". Para 52.6 of the Submission paper was as follows:

"the conduct in question amounts to a gross breach of accounting rules. It contravenes fundamental principles of company law and management. It goes to the heart of audit practice. Adsteam was a substantial Australian public corporation;"

Para 68 acknowledged that the cost of major litigation such as that being proposed was "significant" but asserted that it was "commensurate with the seriousness of the conduct identified".
The ASC's resolution on 29 March 1994 was as follows:

"Resolution

The Commission, having regard to the debate: As a result of the investigation into the affairs of The Adelaide Steamship Company Limited (Adsteam) and its subsidiaries and upon consideration of and taking into account the matters set out in the Submission paper, the Commission has formed the opinion that it appears to the Commission to be in the public interest for Adsteam to commence civil proceedings, pursuant to section 50 of the ASC Law, against former directors of Adsteam, namely Messrs Spalvins, Kent, Branford, Russell and Gregg (the former directors) and the Auditor, Deloitte Ross Tohmatsu, formerly Deloitte Haskins and Sells (Deloittes), for the 1990 financial year for the recovery of damages and ancillary relief in respect of the matters arising out of the 1990 accounts and payment of dividends by Adsteam for the 1990 year.

RESOLVED that the Commission cause such proceedings to be begun and carried on in the name of Adsteam."

Following the minute of the resolution, certain matters were set out introduced by the words "Matters relevant to the public interest include: ... ". There followed paragraph 1 which was as follows:

"1. The investigation by the Commission into the affairs of Adsteam and its subsidiaries shows the 1990 financial year accounts disclosed profits of $236 million when on the information Adsteam had incorrectly and inappropriately treated various items and inter-company transactions. Correct treatment of these items in the accounts would have resulted in a declared loss of $244 million. The 1990 accounts were certified by Deloittes and the former directors of Adsteam as true and fair. Based on the 1990 accounts the former directors declared and paid a final dividend of 25 cents per share. The interim dividend and the final dividend totalled $228 million. Further, the alleged conduct as identified through the investigation disclosed gross negligence and a significant breach of accounting standards."

There followed 6 numbered paragraphs. Paragraph 7 read, "Matters outlined in the Submission paper, in particular in paragraph 52". I have earlier quoted from paras 52.4 and 52.6.
In the result the ASC caused the Proceedings to be begun and carried on in the name of Adsteam.
It was common ground that the investigation commenced on 29 September 1992 and was not completed when the ASC took its decision and when the Proceedings were begun, and indeed that the investigation is still ongoing. It was also common ground that no interim report relating to the investigation has ever been prepared by the ASC.

SUBMISSIONS
24. The submission of DTT proceeded along the following lines:

1. Within the meaning and for the purposes of s. 16 of the ASC Law, the ASC, in the course of its investigation, formed the opinion that a serious contravention of a law of a State had been committed and accordingly that section obliged it to prepare an interim report relating to the investigation and setting out its findings about the contravention, the evidence and other material on which those findings were based, and such other matters relating to, or arising out of, the investigation as it might think fit;

2. Since the interim report would have related to the auditors' affairs to a material extent, s. 18 of the ASC Law empowered the ASC at DTT's request or of its own motion to give DTT a copy of the interim report or of part of it;

3. By reason of the ASC's failure to observe the terms of ss. 16 and 18, DTT was deprived of the opportunity to make submissions relating to the interim report, and in particular, submissions as to why the ASC should not resolve that proceedings be begun and carried on in the name of Adsteam.

The submissions of the ASC proceeded along the following lines:

1. There has not been, within the meaning and for the purposes of s. 16, a forming of the opinion by the ASC that a serious contravention of a law of a State had been committed;

2. There is no connection between the provisions of ss. 13, 16 and 18 on the one hand and s. 50 on the other, and in particular, ss. 16 and 18 do not establish procedures required to be observed "in connexion with" the making of a decision under s. 50.

REASONS
26. The ASC did not in terms resolve that it had formed the opinion referred to in para (a) of sub-section 16 (1) of the ASC Law. The minute of its proceedings on 29 March 1994 was expressed by reference to s. 50. Yet it is arguable that at the time of passing its resolution on 29 March 1994, the ASC had, for the purposes of that provision, formed the opinion described in it. I refer in particular to the "matters relevant to the public interest" stated immediately following the ASC resolution quoted earlier.

The expression "forms the opinion" in para 16 (1) (a) may denote a formal and deliberate process of developing and "formulating" an opinion with an eye to the provision. On the other hand it may denote merely an opinion formed in fact. According to the latter construction, whenever it can be said that the ASC has in fact formed the opinion described, the statutory duty to prepare an interim report arises. Whether "the ASC", on the facts of a particular case, had formed that opinion would be a mixed question of law and fact.
Even if the latter construction is correct, the ASC submits that the evidence does not establish that the ASC formed the requisite opinion. In this respect the ASC's submission (a) distinguished between the Submission paper and the minute of the proceedings of the ASC itself on 29 March, and (b) emphasised that both the Submission paper and the minute were, in terms and in substance, directed to s. 50 considerations as distinct from the opinion described in para 16 (1) (a).
I have not found it necessary to choose between the two constructions of "forms an opinion" to which I have referred, because I have come to a firm view in relation to the second question which enables me to determine the motion for leave to amend.
That question is whether ss. 16 and 18 stipulate "procedures that were required by law to be observed in connection with the making of the" decision under s. 50. In my opinion they do not.
Section 50 does not, expressly or by implication, refer to a report, whether interim or final, provided for in ss. 16 and 17 respectively. The omission appears to be deliberate. The opening words of s. 50 are "Where, as a result of an investigation or from a record of an examination ... ". This draws a distinction between an investigation and the record of an examination. Moreover, the opening words of the predecessor of s. 50, namely sub-s. 306 (11) of the Companies Code, were "If, from a report under this Part, or from the record of an examination under this Part, ... " (emphasis supplied). The reference in sub-s. 306 (11) is to Part VII, of the Code. Interim and final reports by inspectors on their investigations were provided for in s. 305 within Part VII. Accordingly there is a contrast between the reference to an investigation in s. 50 and the reference to a report on an investigation referred to in its predecessor.
Sections 16 and 18 have a different focus from that of s. 50. Sections 16 and 18 are concerned, relevantly, to provide for what is to happen in any case where the ASC, in the course of an investigation, forms the opinion that a serious contravention of any law of the Commonwealth, a State or a Territory has been committed. In any such case, the ASC must prepare an interim report, must give a copy to the Minister and may give a copy of the whole or of part of the interim report to, inter alia, certain authorities concerned with the enforcement of the criminal law. These provisions, are directed to ensuring that discovered violations of legal rules and prohibitions are drawn to the attention of appropriate authorities (on the meaning of "contravention" see Zalai v Col Crawford (Retail) Pty Ltd (1980) 32 ALR 187 (NSW/Rogers J) and Arturi v Zupps Motors Pty Ltd (1980) 33 ALR 243 (FCA/Brennan J). Section 50, on the other hand, is concerned to empower the ASC to cause a person to litigate for certain civil remedies in any case where, as a result of an investigation, it appears to the ASC to be in the public interest for the person to do so.
The condition precedent to the ASC's obligation under s. 16 to prepare an interim report is that it forms the opinion that a serious contravention "has been committed". Other states of mind of the ASC are described in ss. 49 and 50 as the "triggers" of its power to cause a prosecution to be begun and carried on (s. 49) and to cause proceedings in a person's name to be begun and carried on (s. 50).
The field covered by "a serious contravention of a law of the Commonwealth or a State or Territory" referred to in para 16 (1) (a) is not co-extensive with the field covered by "fraud, negligence, default, breach of duty, or other misconduct" referred to in para 50 (a).
For all these reasons, the description in para 5 (1) (b) of the AD(JR) Act, "procedures that were required by law to be observed in connection with the making of" a decision, is not an apt description of the obligations imposed on the ASC by ss. 16 and 18 of the ASC Law, by reference to the making of a decision by it under s. 50 of that law. It follows that even on the assumption in favour of DTT that the ASC formed the opinion referred to in para 16 (1) (a) and so had a duty to prepare an interim report, its failure to do so did not fall within para 5 (1) (b) of the AD(JR) Act.
If leave were granted to amend by introducing the proposed para 4, I would, for the foregoing reasons, dismiss the application in so far as it depended on the ground introduced by that paragraph. Accordingly, it would be futile to allow that amendment.
Amendments are also sought to be made by way of additions to the particulars in sub-para 2 (b) and in para 3 and by the inclusion of a new para 5 (all within the "Statement of Grounds" constituting part D of the application), as well as by the inclusion of a further paragraph in the "Relief" claimed (in part E of the application). These amendments were not the subject of extensive debate before me.
In relation to the additional particulars sought to be included as para (ii) within the particulars in sub-para 2 (b), the ASC submits that there is no factual basis for the allegation that it did not have regard to "any aspects of the public interest which did not favour" the commencement of the Proceedings. In my view this is a matter more appropriately left to the more extensive consideration of the evidence and debate which will take place on the final hearing, and this amendment should, accordingly, be allowed to be made.
The particulars sought to be included as para (iii) within the particulars in para 3 raise a question of law. The ASC submits that I should decide now that it did not lack "jurisdiction" to cause the Proceedings to be begun because the investigation was not complete. The issue of construction raised is whether the words "Where, as a result of an investigation" at the beginning of s. 50 signify that the section is addressing only what appears to the ASC to be in the public interest as a result of a completed or entire investigation. This question was not explored fully before me on the application for leave to amend and time has not permitted me to explore it fully since. Since I have not reached a view that it would be futile for this amendment to be allowed, leave to amend in this respect will be granted.
For the same reasons, I have not reached the view that it would be futile to allow amendment by the introduction of the proposed new para 5 and leave to amend in this respect will be granted.
In relation to the proposed additional head of relief, however, namely declarations that the ASC failed to comply with the mandatory requirements of either or both of ss. 16 and 18 of the ASC Law, the position is different. That head of relief is rendered otiose by my refusal of leave to amend to include the proposed new para 4.

CONCLUSION
42. The applicant will be granted leave to amend the application by filing a Further Further Re-Amended Application for an Order of Review in the form proposed, excluding para 4 in part D and para 3 in part E. The question of the costs of the applicant's motion for leave to amend will be reserved to the final hearing.

[1994] FCA 780

21 OCTOBER 1994