Esanda Finance Corp Ltd v Peat Marwick Hungerfords

[1995] HCATrans 235

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Adelaide  No A50 of 1994

B e t w e e n -

ESANDA FINANCE CORPORATION LIMITED

Applicant

and

PEAT MARWICK HUNGERFORDS (REG)

Respondent

Application for special leave to appeal

DEANE J
GAUDRON J
McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT ADELAIDE ON MONDAY, 21 AUGUST 1995, AT 2.44 PM

Copyright in the High Court of Australia

MR M.L. ABBOTT, QC:   If the Court pleases, I appear with my learned friend, MR M.E. HAMILTON, for the applicant.  (instructed by Grope Hamilton)

MR T.F. BATHURST, QC:   If the Court pleases, I appear with MR R.J. WHITINGTON for the respondent.  (instructed by Finlaysons)

DEANE J:   Mr Bathurst, I think we might be assisted if we heard you first.

MR BATHURST:   For the applicants to succeed in the proceedings they have to establish, in our submission, these propositions:  firstly, that the auditor had a duty to take reasonable care in auditing the accounts so as to avoid loss that the applicants suffered arising out of three different parcels of transactions.  The first of those transactions were not transactions involving the company at all; rather they were loans to companies associated with the directors of the company, supported by mortgages and guarantees to directors.

That appears from paragraph 10 of the pleadings which is on page 3 of the book.  That is a sample of the first type of transaction.  The second class of transactions relates to what might be broadly called the purchase of animal leasing debts from the company which the respondents were auditing in circumstances where the respondents were guaranteeing the repayment - or indemnifying, more accurately - any loss suffered by the applicant in respect of non‑payment of those debts.  That class of transaction, along with the first class then, was again a transaction in which there was no direct advance made to the company but rather there was a transaction in respect of which the company gave a guarantee or an indemnity.  It is a closer relationship, we accept, than the first one, but it is still not a case of a direct loan.

The third category described in the statement of claim is what is described in the pleading as a revolving line of credit facility.  What that, in fact, involved the pleading makes clear, which was transactions wherein Esanda leased to Excel various motor vehicles which were then hired out to members of the public.  It was a leasing transaction rather than, again, a direct line of credit transaction.

If I could take the Court to our written submissions, we have set out there the paragraphs of the pleadings which are said to give rise to a duty of care.  The critical paragraphs relevantly, we say, are paragraphs 84C and 85 which appear on page 4 of our outline.  It is more convenient to go there than to go to the statement of claim.  If the Court would go to paragraph 84C, 84C we say is based solely on foreseeability while 85, which is the next relevant paragraph, refers to PMH owing Esanda a duty because Esanda was a member of a class of persons who might reasonably and relevantly rely upon the accounts.

It must follow in those circumstances that the duty propounded in this case would be owed by the auditor to any person having any commercial dealing with the company which might render the company liable either as a debtor or a contractor on a contract of indemnity and even further, might leave third parties, because of their loss of investment in a company, not to be able to meet liability to Esanda, because that is the first class of case to which the statement of claim relates.

It is our respectful submission that such a duty arguably does not arise.  There is no suggestion in the pleading that Esanda made known to the auditor that it proposed to rely on the accounts.  As a matter of historical fact these transactions as pleaded took place in 1990, the relevant financial year being 30 June 1989.  We would submit that on the authorities, even if they did make known that they were going to rely on it, that of itself would not impose a duty, but it does not matter in the present case.  Further, there is no suggestion, in our respectful submission, in the pleading that the auditors assumed any responsibility to Esanda in the preparation of the accounts.  That, we would submit, disposes of the paragraph 84C pleading because this Court, in our respectful submission, has consistently held in the case of pure economic loss that for a relevant duty to arise there would be either a relationship in proximity arising either out of known reliance, which is not pleaded here, or an assumption of responsibility.

Alternatively, it is put that Esanda belonged to a class which might rely on the accounts for the purpose of the entry to commercial transactions.  But it is not suggested in the pleading as, for example, was considered by this Court in San Sebastian, that the auditor prepared his accounts for the purpose of inducing the applicant or any member of the class of which the applicant formed one, to enter into commercial dealings in reliance upon the accounts.  All there was is a simple plea of forseeability.

We submit that having regard to what was said in San Sebastian, for a duty to arise in relation to an unknown class, particularly a class as broad as lenders and financiers as pleaded in this case, there has to be at least some intention to induce persons to rely on the accounts.  The only accounts that are relied upon to give rise to the duty are the statutory accounts of the 30 June 1989 year.  This Court is familiar, and I will not take the Court through it, with the structure of the relevant provisions of the Companies

Code, the obligation of the auditor to report and the requirements of the accounts and the auditor’s statement to be laid before the general meeting.

Whether or not what is said by the House of Lords in Caparo is correct - that the purpose of the accounts is solely to enable the members as a corporate whole to consider the stewardship of the company by the directors for the preceding financial year, or whether the duty is wider than that, it is no part of the statutory purpose in auditing accounts, in our submission, to enable them to be considered by anyone who wants to enter into any financial transaction with the company; even if it could be foreseen because those accounts are published they may well so be used.  If that is the case there is, in our respectful submission, no duty.

Those propositions, we submit, are consistent with the approach taken by the House of Lords in Caparo.  Caparo expressly rejected the proposition that an auditor would owe a duty to a lender without law.  It did that in accepting a judgment of Mr Justice Millett, as his Lordship then was, in Al Saudi Banque v Clark Pixley.  The Full Court of the Supreme Court of Victoria, in Lowe Lippman adopted the same propositions, and indeed in that case there was further material, namely that the representative of AGC, who was the financier in that case, had made known to the auditor that he was going to rely on the accounts.  That additional matter does not appear in the present case.

We submit that that approach is consistent with the approach that has been adopted by this Court as a matter of general principle in discerning the elements of proximity which arise and in rejecting mere foreseeability as the basis for a duty giving rise to pure economic loss.  For those reasons, we submit the Full Court was correct in striking out the statement of claim.  We submit the matter was unarguable.  Further, we say that it was an interlocutory application, it would be open, had the applicants wanted to, to amend their pleadings if they could to plead further additional facts to give rise to the statement of claim.

Finally, we say the application is some eight months out of time.  We have given reasons in our written submissions as to why we say that there is no justification for that, having regard to what the applicant said, although we accept that we cannot point to any prejudice by reason of that delay.  They are our submissions, if your Honours please.

DEANE J:   Mr Abbott, what is the position?  Do you need an extension of time?

MR ABBOTT:   Yes, we do.  If the Court pleases, pursuant to ‑ ‑ ‑

DEANE J:   Where is the draft order?

MR ABBOTT:   I do not know that there is one on the file, your Honour.  We have put in an application and I apologise if there is not a draft order.

DEANE J:   Where does the application for the extension appear?

MR ABBOTT:   It is to be found at pages 137 and 138 and thereafter at page 148.

DEANE J:   Yes, 137 is what I was looking for.  The Court need not trouble you, Mr Abbott.

In this matter there will be an order extending the time to the extent necessary for the filing of the application for special leave to appeal.  There will be a grant of special leave to appeal.

AT 2.57 PM THE MATTER WAS CONCLUDED