FAI General Insurance Co Ltd v McSweeney, Brian Albert & Ors & Travel Compensation Fund v FAI General Insurance Co Ltd (Part Iii)
[1998] FCA 357
•09 APRIL 1998
FAI GENERAL INSURANCE CO LIMITED v. BRIAN ALBERT MCSWEENEY, BRUCE WILLIAM PHILLIPS, JOHN WILLIAM BEALE, PAUL FREDERICK TURNER, TIMOTHY PATRICK CULLEN, MICHAEL JOHN GAERTNER, TAG PACIFIC LIMITED and TOIKAN HOLDINGS PTY LIMITED
TAG PACIFIC LIMITED and TOIKAN HOLDINGS PTY LIMITED (First Cross-Claimants) v. FAI GENERAL INSURANCE CO LIMITED (First Cross-Respondent)
BRIAN ALBERT MCSWEENEY and BRUCE WILLIAM PHILLIPS (Second Cross-Claimants) v. FAI GENERAL INSURANCE CO LIMITED (Second Cross-Respondent)
No. NG 312 of 1992
TRAVEL COMPENSATION FUND v. FAI GENERAL INSURANCE CO LIMITED
FAI GENERAL INSURANCE CO LIMITED (First Cross-Claimant) v. BRIAN ALBERT MCSWEENEY, PAUL FREDERICK TURNER, BRUCE WILLIAM PHILLIPS AND TIMOTHY PATRICK CULLEN (First Cross-Respondents)
BRIAN ALBERT MCSWEENEY, PAUL FREDERICK TURNER, BRUCE WILLIAM PHILLIPS and TIMOTHY PATRICK CULLEN (Second Cross-Claimants) v. FAI GENERAL INSURANCE CO LIMITED (Second Cross-Respondent)
No. NG 948 of 1992
FED No. 357/98
Number of pages - 81
Insurance
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
LINDGREN J
Insurance - claims made and notified policy - insured, a firm of accountants - "dishonesty extension" covering dishonest or fraudulent conduct, but not that of any person committing or condoning fraudulent act - client of the firm, a travel agent and member of the Travel Compensation Fund ("TCF") - audited accounts required to be lodged annually with TCF as a condition of membership - accounts not prepared and audited in time - insured firm applied for extensions of time within which travel agent was to file audited accounts citing, as reasons, "computer failure" and "change of ownership" - whether applications for extension were fraudulent due to deliberate suppression of travel agent's insolvency and the intermingling of its accounts with those of a related entity - no independent duty of disclosure pleaded, statutory or otherwise - whether applications fraudulently gave rise to an implied representation that the extensions of time were required only because of "unremarkable practical difficulties" or "ordinary and unalarming reasons" unconnected with travel agent's financial condition or its relation with another entity for which accounts had to be produced so that travel agent's own accounts could be produced - whether insolvency and intermingling of accounts were reasons why audited accounts were not able to be lodged by date due - identification of what representations of fact were made - whether implied representation was made - whether all elements of fraud made out - identification of what representations of fact were intended to be made by the insured - whether TCF acted in reliance on the representations - relevance of fact that no evidence led directed to the issue of inducement - relevance of other fraudulent conduct as similar fact evidence - whether evidence of "significant probative value", "striking similarity" or "underlying unity" - whether disclosure by insured firm of financial condition of client would have breached insured's professional obligation.
Travel Agents Act 1986 (NSW)
Evidence Act 1995 (Cth), s 97 (1)
Gould v Vaggelas (1985) 157 CLR 215 - appl.
San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340 - appl.
Derry v Peek (1889) 14 App Cas 337 - appl.
Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 - appl.
D F Lyons Pty Ltd v Commonwealth Bank of Australia (1991) 28 FCR 597 - appl.
Zaknic Pty Ltd v Svelte Corporation Pty Ltd (1995) 61 FCR 171 - appl.
SYDNEY, 5-9, 13-16, 19-23 and 26-30 June, 3-7 and 10-14 July, 23 and 25 August 1995 and 11 March 1996 (hearing), 9 April 1998 (decision)
Date of delivery of Part I: 12 March 1997
Date of delivery of Part II: 9 April 1998
#DATE 9:4:1998
Proceeding No. NG 312 of 1992
Counsel for the Applicant:
Mr J C Campbell QC with Mr P Liney (FAI) Solicitors for the Applicant: Colin Biggers and Paisley (FAI) Counsel for the Respondents: Mr P M Biscoe QC with Mr S Climpson appeared for the first, second, fourth and fifth respondents (McSweeney, Phillips, Turner and Cullen) Mr K Manion appeared (submitting) for the sixth respondent (Gaertner)
Solicitors for the Respondents: Gillis Delaney appeared for the first, second, fourth and fifth respondents (McSweeney, Phillips, Turner and Cullen) Mr D M Vaughan, solicitor, of Heaney, Richardson & Nemes appeared (submitting) for the third respondent (Beale)
Walters Solicitors, appeared (submitting) for the sixth respondent (Gaertner)
Proceeding No. NG 948 of 1992
Counsel for the Applicant:
Mr P Roberts with Mr M K Minehan (TCF) Solicitor for the Applicant: T G Hartmann & Associates (TCF) Counsel for the Respondent: Mr J C Campbell QC with Mr P Liney (FAI) Solicitors for the Respondents: Colin Biggers & Paisley (FAI).
LINDGREN J
TABLE OF CONTENTS
REASONS FOR JUDGMENT (PART III)
INTRODUCTION ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
2
General ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... 2
Application of the terms of the Chatswood and Gosford policies to those TCF facts which occurred in 1988........ ........ ........ ........ ........ ........ ........ ........ .....
4
Matters in Part B of the Schedule to FAI's Further Amended Defence ........ . 9
Findings of fact of Wilcox J ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
10 Proof by FAI of dishonesty and fraud ........ ........ ........ ........ ........ ........ ........ .......
11
FRAUD AND THE TCF FACTS ........ ........ ........ ........ ........ ........ ........ ........ ....... 11
Elaboration of TCF facts in 1988 ........ ........ ........ ........ ........ ........ ........ ........ ...... 11 Monthly cash statements showing need to reduce expenses ........ ........ ........ .....
11
Engagement of PMS to carry out the 1988 audit of Travel ........ ........ ........ ...... 12 The role of IBA ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
12 Business expansion ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
13 The computer system ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
13 PMS's Preliminary Amalgamated Statement of Assets and Liabilities of Wednesday 24 August ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
17
Gilbert's letter of Friday 26 August to the directors of Travel and Wheels and their response on Monday 29 August ........ ........ ........ ........ ........ ........ ........
18
PMS's draft letter to the Corporate Affairs Commission ........ ........ ........ ........
20 Draft Amalgamated Statement of Assets and Liabilities dated Wednesday 31 August ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
21
Beale's letters of Wednesday 31 August, entitled "FINANCIAL POSITION"
23 Meeting of McS, Cullen and Williams with solicitors on Thursday 15 September ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
27
PMS's understanding in September of the state of the accounting records of Travel ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
29
Meeting on Friday 16 September of McS, Cullen and Dunn ........ ........ ........ ... 29
Making of agreement for sale on Sunday 18 September ........ ........ ........ ........ ..
31
Assumption of control by IPG on Monday 19 September ........ ........ ........ ....... 32
McS's letter to the directors of Travel of Tuesday 20 September ........ ........ .... 33
The September audit plan ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . 37 Meeting of Dunn, Cullen and Beale on Friday 23 September ........ ........ ........ ..
39
Beale's letter to Travel's directors of Tuesday 27 September ........ ........ ........ .. 40
The first application (by Beale by telephone on 28 September) for an extension of time for the filing of audited accounts ........ ........ ........ ........ ........ .. 41
Three letters of Thursday 29 September ........ ........ ........ ........ ........ ........ ........ ... 42
PMS's memo of fees rendered to Travel on Friday 30 September ........ ........ ... 44
Meeting of IPG directors on Friday 7 October ........ ........ ........ ........ ........ ........ . 44
Two letters from IPG to PMS of Monday 10 October ........ ........ ........ ........ ..... 45
Travel's post-10 October client account ........ ........ ........ ........ ........ ........ ........ ... 45
TCF's letter to Travel of Thursday 13 October ........ ........ ........ ........ ........ ........ 46
McS's letter to Travel's directors of Friday 14 October and first Audit Review Committee Meeting on that date ........ ........ ........ ........ ........ ........ ........ .. 46
Dunn's two letters to PMS of Tuesday 18 October ........ ........ ........ ........ ........ .. 50
Second Audit Review Committee Meeting on Friday 21 October ........ ........ ... 53
Beale's letter to Krumbeck, received Tuesday 25 October ........ ........ ........ ...... 55
The second application (by Beale by telephone on 25 October and letter of 26 October) for an extension of time within which to file Travel's audited accounts ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... 55
Third Audit Review Committee Meeting on Thursday 27 October ........ ........ 59
Krumbeck's letter to Beale of 28 October ........ ........ ........ ........ ........ ........ ........ 61
McDougall's facsimile to Beale of Monday 31 October ........ ........ ........ ........ .... 61
Production of first draft of financial statements for Travel on Tuesday 1 November ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... 62
PMS's letter of Thursday 3 November to Travel relating to fees ........ ........ ..... 62
Work during November ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... 62
Fourth Audit Review Committee Meeting on Wednesday 16 November ........ 63
Fifth Audit Review Committee Meeting on Friday 25 November ........ ........ ... 64
Involvement of Short ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . 68
McS's letter of Wednesday 30 November to Dunn ........ ........ ........ ........ ........ ... 68
Contact between Beale and Short on Wednesday 30 November ........ ........ ..... 69
Application to TCF ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... 70 Early December ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
70
The final collapse of Travel ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
71
Fees owed to PMS by Travel ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
72
Making and notification of claims by IPG and TCF and purported avoidance ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
74
REASONING IN RELATION TO FRAUD AND THE TCF FACTS ......... .......
76
An overview of the reasons why audited financial statements could not be lodged with TCF by 30 September 1988 ........ ........ ........ ........ ........ ........ ........ ..
77
The first application (by Beale by telephone on 28 September) for an extension of time for the filing of audited accounts ........ ........ ........ ........ ........ .
81
1. A representation of fact, however made ............. ........ ........ ........
81
2. Falsity of the representation ............. ........ ........ ........ ........ ........ ..
84
3. That the maker of the representation does not
believe that it is true in the sense in which the
maker intends it to be understood ........ ........ ........ ........ ........ .......
85
4. That the maker of the representation intends a
person or class of persons to act in reliance on it ........ ........ .......
86
5. That the person or a person belonging to the class
of persons, acts in reliance on the representation ........ ........ .......
87
6. That loss or damage is suffered as a result of the
reliance on the representation ........ ........ ........ ........ ........ ........ ....
88
The second application (by Beale by telephone on 25 October
and letter of 26 October) for an extension of time to file Travel's
audited accounts, and the grant of it (by letter of 31 October) ........ ........ ......
89
1. A representation of fact, however made ........ ........ ........ ........ ....
89
2. Falsity of the representation ............. ........ ........ ........ ........ ........ ..
93
3. That the maker of the representation does not
believe that it is true in the sense in which the
maker intends it to be understood ........ ........ ........ ........ ........ .......
94
4. That the maker of the representation intends a
person or class of persons to act in reliance on it ........ ........ ........
95
5. That the person, or a person belonging to the class
of persons, acts in reliance on the representation ........ ........ .......
97
6. That loss or damage is suffered as a result of the
reliance on the representation ........ ........ ........ ........ ........ ........ ....
99
Two specific submissions
(i) Relevance of McS's conduct as part of the TAG facts
to the TCF facts ........ ........ ........ ........ ........ ........ ........ ........ ........ .
99
(ii) Breach of professional obligations ........ ........ ........ ........ ........ ...... 100 CONCLUSION IN RELATION TO FRAUD AND THE TCF FACTS ........ .....
102
FRAUD AND THE TCF FACTS
INTRODUCTION
General
FAI alleges that PMS's conduct in obtaining from TCF, in the second half of 1988, extensions of time for the lodgment of audited accounts for Travel (in Part I, I adopted Wilcox J's abbreviations "Travel Abroad" and "Wheels Abroad", but henceforth, in view of the frequency of references to the companies, I shall use the abbreviations "Travel" and "Wheels") for the year ended 30 June 1988, was fraudulent. It alleges that:
"[n]either when requesting the extensions of time nor at any other time did PMS disclose to TCF that Travel was operating with a significant deficiency or that it was trading while insolvent or that the financial records of Travel and Wheels were intermingled, although it knew those matters were relevant to TCF's decision whether to extend time for filing accounts and whether or on what terms to permit Travel's continued participation in the travel compensation scheme." (par 17, Part B, Schedule to Further Amended Defence).
The submission is that as a result of PMS's fraudulent non-disclosure, Travel was allowed to continue to trade for a time, with a consequential increase in the amount of the final deficiency and of the loss borne by TCF.
But par 17 of Part B of the Schedule to FAI's Further Amended Defence ("Part B"), set out above, and a reference to "fraudulent non-disclosure" do not adequately reflect the way in which FAI put its case. Rather, its case was that the non-disclosure caused Beale's words by which he applied for each of the two extensions, to convey a representation that the extension was required only because of "unremarkable practical difficulties" or "ordinary and unalarming reasons", unassociated with Travel's financial condition or its relation with another entity for which accounts had to be produced in order that Travel's own accounts might be produced ("the Implied Representation"), and that the Implied Representation was made fraudulently.
Annexed is a "Dramatis Personae - Part II" which lists the individuals and companies involved in the TCF facts, the subject of the present Part (III) of these Reasons for Judgment. The content of the Dramatis Personae - Part II forms part of these Reasons.
I do not propose, at least generally, to distinguish between TCF's and PMS's submissions, and will, for convenience, generally use the form of words, "TCF and PMS submit". TCF's and PMS's submissions are in the same interest, although, in the case of TCF they are to be seen as having been made in support of its application for leave (see Part I). The cases for and against FAI's liability to indemnify are, respectively, also cases for and against the granting of leave to TCF. My treatment of the parties' cases and submissions on liability to indemnify, constitute further reasons relevant to TCF's application for leave, as well as reasons on the substantive issue as between FAI and PMS.
Application of the terms of the Chatswood and Gosford policies to those TCF facts which occurred in 1988
In the TCF proceeding, Wilcox J decided that TCF's loss resulted from PMS's negligence in connection with the audit of Travel's 1987 accounts, and, accordingly, that it was unnecessary for him to deal with the causes of action based on PMS's conduct in 1988.
In the present proceeding, the TCF insurance proceeding, FAI pleaded that PMS's conduct in both 1987 and 1988 was fraudulent. However, in the course of the hearing, it abandoned the allegation of fraud in relation to 1987. The amendment came about as follows. FAI originally pleaded that due to (all of) the matters referred to in Part B, TCF's claim against McS and Phillips was one for damages arising out of, or contributed to by, dishonest or fraudulent conduct of PMS; that McS committed dishonest or fraudulent acts himself or condoned such acts by Beale; and that, as a result, the Chatswood policy did not indemnify McS. Part B described conduct in both 1987 and 1988. Following the filing of FAI's Further Amended Defence on 23 June 1995, however, the alleged fraudulent conduct of McS and Beale became that described only in par 17 of Part B, set out above, "viewed in the light of the matters in paragraphs 8-16". Paragraphs 8-16 relate to conduct in 1988 alone. (Paragraphs 1-7 relate to the 1987 audit.)
TCF and PMS submit that FAI's obligation to indemnify arises from the TCF judgment; that that judgment was not based on conduct of McS or Beale in 1988; and that it follows that the allegedly fraudulent conduct in 1988 is irrelevant to the question of FAI's liability.
More elaborately, they submit that there was no finding by Wilcox J, and no evidence before me, that PMS's conduct in the second half of 1988 caused TCF to suffer loss; that FAI has not contested Wilcox J's finding of a causal link between PMS's performance of the 1987 audit and the whole of the loss suffered by TCF; that FAI has not led evidence on the present hearing directed to establishing a causal link between the events of 1988 and TCF's loss; and that, as a result, PMS's conduct in 1988 is irrelevant to the question of FAI's liability to indemnify, which is adequately supported by Wilcox J's findings in relation to the 1987 audit alone.
In response, FAI submits that while it has not contested Wilcox J's findings in relation to the 1987 audit, PMS's conduct in 1988 was an additional cause of TCF's loss. In this respect, it refers to the possibility of multiple causes of loss, as acknowledged in such cases as March v E & M H Stramare Pty Ltd (1991) 171 CLR 506. Indeed, FAI relies on certain findings of fact made by Wilcox J as themselves already establishing a causal link between PMS's conduct in 1988 and TCF's loss.
Dealing with these competing submissions requires reference to be made again to the standard terms of the FAI professional indemnity policy. The relevant insuring clause is in the form of a promise by FAI:
"[t]o indemnify the Insured against any claim or claims for compensation first made against the Insured during the period of cover specified in the Schedule and reported to the Company during the period of cover specified in the Schedule. a) for breach of professional duty in the conduct of the practice, ..." (emphasis supplied)
The dishonesty exclusion (Exclusion (b)) is in respect of any such claim "for alleged or actual dishonest, [or] fraudulent ... acts or omissions ...". The dishonesty extension (Extension 4), however, is as follows:
"Extension 4: Dishonesty If a limit for this extension is specified in the Schedule Exclusion (b) is deleted and subject to the limitations, terms and conditions this Policy is extended to indemnify the Insured in respect of claims for damages for breach of professional duty arising out of or contributed by the dishonest, fraudulent, criminal or malicious conduct of employees, fellow partners or co-directors. Provided that this Policy shall not provide indemnity to any person committing or condoning such dishonest, fraudulent, criminal or malicious act." (emphasis supplied)
Clearly, the notion of a "claim" is central to all three of the insuring clause, the dishonesty exclusion and the dishonesty extension. Definitions (2) and (4) are therefore relevant:
"2. The expression 'claim' shall mean the demand for compensation made by a third party against the Insured but shall not include the Insured's costs and expenses. Where an act, error or omission results in more than one claim against the Insured which may be the subject of indemnity hereunder, all such claims shall jointly constitute one claim under this policy (but subject always to Insuring Clause 3 hereof)." (emphasis supplied)
(Insuring Clause 3 provides for limits on the liability to indemnify.)
"4. A claim shall be deemed to be first made against the Insured when the Insured first receives an intimation from the third party that the Insured is being held responsible in part or in whole for a loss." (emphasis supplied)
I have reached the conclusion that the relevant question in the present case is whether the claim by TCF against McS or Phillips, against which FAI is said to be liable to indemnify, is a claim for damages or compensation in respect of loss which arises out of, or was contributed to by, the supposedly fraudulent conduct in 1988.
Before I seek to explain how, in my view, that question arises, certain preliminary observations may be made. It is not to be expected that a dishonesty exclusion will be able to be displaced for no reason other than that a claimant against the insured chooses not to allege fraud or dishonesty (cf Walton v National Employers' Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 at 78-9 per Kerr CJ and 83-4 per Bowen JA (Hardie JA not deciding, at 82)). To hold otherwise would be to allow a claimant, knowing of or suspecting dishonesty, at least in some situations to avoid attracting the exclusion, by, for example, confining its pleading to a legal cause of action not involving fraud, such as negligence. It is perhaps for this reason that PMS did not make a submission similar to the present one, in relation to their claim that FAI is liable to indemnify McS and Phillips in respect of the TAG judgment (TAG had not pleaded fraud against them in the TAG proceeding, but the fraud found by Olney J, and now alleged by FAI in the TAG insurance proceeding, was contemporaneous with, and part of, the TAG facts which gave rise to the TAG judgment). I suggest that it is similarly not to be expected, if there are two independent causes of the same loss, one fraudulent and the other not, that a dishonesty exclusion will be able to be displaced for no reason other than that the claimant chooses to rely only on the non-fraudulent one.
In my opinion, the present submission by TCF and PMS should not be accepted. Definitions (2) and (4) make it clear that for present purposes a "claim" is a demand for compensation for a loss, which expressly or impliedly asserts the Insured's responsibility at law to compensate for that loss. In the present case, TCF suffered loss following the collapse of Travel in December 1988. It made but one claim on PMS in respect of that loss: the demand for compensation made in December 1991. The single "claim" then made was distinct from the "causes of action" or "legal bases of liability" then said to establish liability.
As noted above, Insuring Clause 1 refers to a "claim or claims for compensation first made against the Insured during the period of cover specified in the Schedule and reported to [FAI] during the period of cover specified in the Schedule". TCF's claim in December 1991 was made within the period of cover from 23 May 1991 to 23 May 1992. By its application filed on 4 December 1991, TCF claimed against Phillips and McS damages for negligence, fraud, and pursuant to s 82 of the Trade Practices Act 1974 (Cth) ("the TP Act"). The accompanying statement of claim was not a model of clarity. It alleged the making of numerous misrepresentations in both 1987 and 1988. It pleaded causes of action in fraud, negligence, and misleading and deceptive conduct, arising in each year. However, counsel for TCF made it clear to Wilcox J that in relation to the 1987 audit, TCF would be content with a finding of negligence, and, as noted earlier, his Honour made only such a finding. But TCF had alleged that the whole of the loss for which it was demanding compensation, in fact flowed from the facts constituting each pleaded cause of action without distinction. There was but one "claim" for the purposes of the policy.
McS and Phillips reported TCF's demand for compensation to FAI and sought indemnity in respect of it. The facts that ultimately TCF did not press for a finding of fraud and that Wilcox J did not find it necessary, when delivering judgment, to deal with the events of 1988 as constituting independent causes of action, are, alike, irrelevant to the identification of the demand for compensation in respect of which McS and Phillips sought indemnity. The relevant demand for compensation was not one made by TCF against PMS following delivery of the TCF judgment; at a time, it may be noted, when the Chatswood and Gosford policies were no longer on foot.
I turn now to the non-definitional provisions of the then standard form of FAI's professional indemnity policy. The dishonesty exclusion subtracts from the claims referred to in Insuring Clause 1, claims "for alleged or actual dishonest, [or] fraudulent ... acts or omissions ...". In my opinion, and subject to the dishonesty extension next to be discussed, this provision excludes from cover a demand for compensation for loss which is alleged to have been caused by fraudulent acts or omissions. But, as well, and even in the absence of an allegation of fraud, the exclusion operates if the loss was actually caused by fraudulent acts or omissions.
The dishonesty extension operates if a limit for that extension is specified in the Schedule. Such a limit was specified here in both the Chatswood and Gosford policies. The first effect of the dishonesty extension is that the dishonesty exclusion (Exclusion (b)) is deleted. One is left with, relevantly, the Insuring Clause and the dishonesty extension. I need not discuss the latter's words of "extension". What is immediately important is that the relevant exclusion in relation to dishonesty is now to be found only in the proviso to the dishonesty extension set out earlier: for example, the Chatswood policy would not provide indemnity to McS if TCF's loss arose out of, or was contributed to by, McS's own dishonest or fraudulent conduct, or conduct by Beale of that kind, condoned by McS.
Wilcox J found a causal nexus between the conduct of the 1987 audit by PMS and the loss suffered by TCF following the collapse of Travel. His Honour concluded that if TCF had been provided with an accurate statement of the financial situation of Travel in 1987, it would have refused Travel continued participation in the Fund (necessary for Travel to continue to hold a licence), or granted it only if further security were furnished. No such statement was provided. Travel applied for the 1988 extensions of time in circumstances in which it had not been refused continued participation in the Fund, nor been required to provide further security. The alleged representations by Beale on the basis of which TCF granted the extensions in 1988 therefore had the capacity to be causes: of delay in Travel's being disqualified or in the suspension or cancellation of its licence; of concomitant prolongation of the period of TCF's exposure; and of the suffering of loss by TCF. In the result, they activate the proviso to the dishonesty extension.
Moreover, although Wilcox J made no positive finding of fraud, negligence or misleading or deceptive conduct in relation to PMS's conduct in 1988, his Honour found that that conduct formed part of a chain of causation between the 1987 negligence and the losses incurred by TCF in late 1988. I discuss his Honour's findings in relation to 1988 later.
Matters in Part B of the Schedule to FAI's Further Amended Defence
As noted earlier, pars 8-16 of Part B relate to the 1988 audit. They set out numerous factual matters, which are summarised below (all dates in this Part (III) of the Reasons are dates in 1988, unless otherwise stated):
PMS was retained to audit Travel's accounts for the year ending 30 June, in the knowledge that the accounts were to be submitted to TCF by 30 September. McS, Beale and Cullen were involved in the task (par 8). From at least 1 July, Wheels and Travel engaged in insolvent trading, having a significant cash deficiency of around $2 million or more (par 9). By 24 August, PMS had prepared a "Preliminary Amalgamated Statement of Assets and Liabilities" of Travel and Wheels [as at 30 June], which demonstrated that they were operating with a significant deficiency [a net deficiency of $1,153,433], and while insolvent (par 10).
On 31 August, Beale informed the directors of Travel that, in the opinion of PMS, Travel was insolvent (par 11).
On 18 September, IPG agreed to acquire all shares in Travel and Wheels for $200,000, with settlement to take place in 90 days. A net deficiency of approximately $1.1 million [in fact, $1,153,433] and a net cash deficiency (which took into account major creditors) of between $2.6 million and $3.3 million were disclosed to IPG (par 12).
On 20 September, McS wrote to Travel's new directors, and informed them that there had been a large number of transactions between Travel and Wheels, noted that the directors were presently unable to furnish him with full and complete details of those transactions, and recorded that he was concerned that the directors should establish to his satisfaction that Travel was not insolvent. He also noted that Travel was not able to pay professional fees to enable the preparation of accounts for audit, that he required particulars of any firm arrangements for refinancing of indebtedness or increase in issued capital, and that the directors should take legal advice with respect to the company's solvency (par 13).
On 27 September, Beale wrote to Travel's new directors informing them that PMS required confirmation and supporting evidence that the company could continue to trade and pay its debts as and when they fell due (par 14).
At the request of the new directors of Travel, at the end of September and twice in late October (in total, twice orally and once in writing), Beale sought and obtained from TCF extensions of time for filing the audited accounts, initially to the end of October, then to 14 November, and finally to 30 November. The only reasons given for the extensions sought were delays caused by computer problems, the change of ownership, and increased turnover (par 15).
McS, Beale and Cullen were in fact aware that the audit was delayed, or also delayed, by (a) Travel's insolvency, in that it had been unable to pay for its accounts to be prepared for auditing, and (b) the intermingling of Travel's and Wheels' accounts, which had proved difficult to sort out; both of which matters would have been of concern to TCF (par 16).
Paragraph 17 was set out at the beginning of this Part (III) of these Reasons.
TCF and PMS submit that there are matters alleged in Part B which have not been established or are contrary to the evidence, such as, that from at least 1 July, Travel and Wheels traded while insolvent with a significant cash deficiency in the vicinity of $2,000,000. They submit that the evidence indicates, on the basis of a Draft Amalgamated Statement of Assets and Liabilities referred to later, that only one or other or both of the two companies may have been engaging in insolvent trading up until the injection of funds by IPG. They maintain, however, that there is no evidence from which an inference can be drawn that both companies traded while insolvent during the whole period from 1 July, until, apparently, December.
Findings of fact of Wilcox J
FAI has contested none of Wilcox J's findings of fact in the TCF proceeding (substantial extracts from the TCF judgment were set out in Part I). It has, however, in its document filed pursuant to his Honour's orders, urged the Court to make additional findings of fact which are referred to in Part B and in FAI's cross-claim in the TCF insurance proceeding. Some of Wilcox J's findings and the additional findings of fact sought by FAI have been contested by TCF and PMS.
As I noted in Part II, the parties have sought to address in detail every conceivable aspect of the evidence for the purpose of supporting or negating an inference that McS or Beale or both were fraudulent in relation to the TCF facts in 1988. The evidence spans numerous volumes of transcript and affidavits in this present proceeding (the TCF insurance proceeding), the TCF proceeding, the IPG proceeding and the examinations of McS, Beale and Cullen under s 541 of the Companies Code. As well there are volumes of written submissions and other exhibited material. It is impracticable and unnecessary for me to address every submission, counter-submission, and piece of evidence to which reference has been made.
Proof by FAI of dishonesty and fraud
As noted earlier, in the TCF proceeding TCF pleaded fraud in relation to PMS's conduct in both 1987 and 1988, but did not press for a finding of fraud. FAI submits that TCF bears an onus in the present proceeding of explaining away its earlier pleading of fraud, in relation to, relevantly, PMS's conduct in 1988. I do not accept the submission. Assertions made in pleadings are not admissions of the truth of facts pleaded (cf Laws v Australian Broadcasting Tribunal (1990) 170 CLR 70 at 85-6 per Mason CJ and Brennan J; Jamieson v The Queen (1992-3) 177 CLR 574 at 579 per Deane and Dawson JJ), even if there could ever be an "admission" by A that B's conduct was fraudulent.
What I said in Part II about the standard of proof of dishonesty and fraud also applies in relation to the TCF facts.
FRAUD AND THE TCF FACTS
Elaboration of TCF facts in 1988
I adopt Wilcox J's account, in the extract from the TCF judgment set out in Part I, of the provisions of the Travel Agents Act 1986 (NSW) and regulations, and of his Honour's findings of fact, to the extent to which his Honour made them, in relation to the 1988 conduct, to the extent to which those findings have not been the subject of a notice of intention to contest. The TCF facts require further consideration, however, in view of the differences between the issues involved in the TCF proceeding and those in the present TCF insurance proceeding, and in the light of the additional findings of fact sought by FAI and contested by TCF and PMS.
Monthly cash statements showing need to reduce expenses
For a time in 1988, and certainly by March, PMS were producing monthly cash statements for the Lemon brothers, from the computer system of Travel and Wheels. McS saw those statements. They included cash flow figures. Around March the cash flow was negative. McS raised this with the Lemon brothers and recommended that they reduce expenses. Even at that early stage, McS thought that they were spending extraordinary amounts of money and that unless something drastic was done to reduce costs, the companies were headed for liquidation. The figures for monthly cash receipts and payments of Travel and Wheels continued to be provided to PMS up to 30 June, and apparently they continued to be supplied subsequently.
Engagement of PMS to carry out the 1988 audit of Travel
In July 1988, Travel engaged PMS to audit its financial statements for 1987-1988 (there is in evidence a letter of PMS "reconfirming" their engagement as auditor for Travel, dated 18 July). PMS knew that the audited statements had to be lodged with TCF by 30 September. But the audit was nowhere near ready to begin and was not to be so until mid to late October. Before the audit proper could begin in the usual way, the financial statements themselves had to be produced. PMS were also heavily involved in preparation of the financial statements for 1987-1988 for both companies, and were apparently engaged for that purpose by letters from the companies dated 25 July. Those letters are not in evidence.
PMS had in fact commenced work in the companies' offices on preparation of financial statements in June, and had access to all their records, including computer records. McS understood that he was ultimately responsible for the audit. He supervised Beale, who was a salaried partner in PMS from about July 1988 (having been a salaried partner of "PMS Lismore" from 1985), and who was not a registered company auditor. Beale, in turn, supervised Cullen, an employee of PMS. Cullen had the day-to-day involvement in the financial affairs of the companies but there was close contact and collaboration between the three men.
Later, from about August, PMS were to involve another firm, Bird Cameron, to assist them in the audit. McS said that PMS did this because of the growth in Travel's business, the limited resources of PMS, and McS's desire to maintain his independence in the sense of a distancing of himself from the issues. This last reason was challenged during his cross-examination.
The role of IBA
Westpac Banking Corporation ("Westpac") was the companies' banker. It suggested that IBA, a subsidiary of Westpac, review the financial affairs of Travel and Wheels. According to a letter dated 10 June from the IXT Leisure Group (which included Travel and Wheels) to the manager of the Mona Vale branch of Westpac, IBA was engaged to act as financial adviser to the IXT Leisure Group, of which the Lemon brothers were directors. IBA's role was to provide some accounting assistance, and included preparation of financial accounts for Travel and Wheels; review of their "management information systems", including the making of recommendations for improvement of their current systems; preparation of a business plan for the Group; review of the business structure of the companies within the Group; provision of financial advice on an ongoing basis for a period of 12 months; and "provision of advice on the implementation of new accounting software packages". The IBA officers involved were Pamela Gilbert (senior business consultant) and, to a lesser extent, Chris Hadley ("director and general manager"). By July, PMS were aware of IBA's involvement.
Business expansion
Gregory Lemon effectively managed the businesses of Travel and Wheels. In the 1987-88 financial year, Travel's business expanded greatly. Wilcox J gave an account of this by reference to the evidence of Juliana Rose, a travel consultant, who worked for Travel from November 1987 until its closure in December 1988. When she commenced employment, Travel and Wheels had a total staff of 20-22 people. During 1988, that number doubled to approximately 45. Rose stated that, during her employment, the volume of Travel's business increased dramatically. The rapid expansion in business began in about November 1987.
The computer system
Although FAI did not seek to establish that there had been no computer problem whatever, it is important to understand the general effect of the evidence touching Travel's and Wheels' computer system.
In November 1987, the Lemon brothers retained a computer consultant, Greg Corrigan, to commence the installation of a new computer system. In or about the same month, the existing Kalamazoo trust account system ceased to be used properly by the staff of Travel and Wheels. Apparently because of a substantial increase in the volume of sales beginning in about November 1987, the staff did not have time for proper receipting, let alone the entering up of client ledgers and making of reconciliations.
The Lemon brothers, either initially or only later, entertained the hope that the new computer system installed by Corrigan would do more than it proved to be capable of doing. In January or early February 1988, Nigel Lemon told Cullen that he wanted PMS "to provide back up support so that the computer can be made operative" and asked him to speak to Corrigan and Travel's manager, Mark Anderson. Following discussions with them, Cullen supervised substantial inputting of client data during February and March. The work had to be done manually. Nine of PMS's own staff assisted during February. According to Cullen's statement, because of the slackness and omissions in the offices of Travel and Wheels since November:
"it was necessary to manually go through the payment sheets, review booking information and on the basis of those bookings, allocate payments to individual clients and input that information into the computer."
Again, according to Cullen,
"[a] group of employees of Travel and [PMS] were organised as a 'costing team' to identify the costings by reference to each client. The costings were written up and were then inputted into the computer system."
Cullen gave evidence that in February 1988, Nigel Lemon complained to him that the costing of each transaction required considerable staff resources, and raised the possibility of programming the computer system so that it would "automatically cost" expenses at the time of the taking of bookings. Cullen discussed Nigel Lemon's suggestion with Corrigan, and, according to his evidence, "a considerable amount of time was spent in trying to develop this system", but implementation was found to be impossible. Accordingly, the concept of "automatic costing" was abandoned.
Of the computer system, Cullen said this:
"The new computer system could be used from about February 1988 for the purpose of taking bookings, identifying who was flying, and when and how much it was going to cost. It was useful as a management tool. However, from an accountant's perspective, the system had fundamental shortcomings because it was not possible to determine the details of the costs (airfare, accommodation and car hire) by reference to individual clients. The reason for this was because costings of such expenses had not been inputted into the system. The client ledgers were not complete and client balances could not therefore be ascertained. Without client balances, it was not possible to determine commissions. Commissions represented the income of the business and accordingly, without client ledgers in place, it was not possible to determine whether the company was operating at a loss or a profit. Whilst there was a system which identified cash receipts and cash expenses, this was not sufficient to determine profitability, particularly having regard to the nature of the business and the small profit margin that often applied to many sales. The client ledger was an integral part of determining Travel's debtors and creditors which I believed was essential to determine Travel's profitability." (emphasis supplied)
Although Cullen said that "from an accountant's perspective, the system had fundamental shortcomings," according to the evidence, the substantial problem was not the "computer system" itself, that is to say, the hardware or software, but Travel's more general method of business operation. In that regard, the problem was a failure by those responsible to expend the time and labour (and to bear the associated cost) required for the proper and prompt creation and entering up of data, and to train staff adequately in the use of the computer system.
In April 1988, Cullen was involved over several sessions, in training Travel's staff in the use of the computer system, and, in particular, in inputting data. Substantial difficulties were being experienced in relation to bank reconciliations and the obtaining of correct reports, because a large amount of data had not been correctly inputted originally. A substantial amount of time was spent in April and subsequently in correcting the erroneous inputting of the past and in training staff to ensure that it was not repeated.
It was not possible from the financial records that existed, to divide up bulk payments that had been made, into expenses paid on account of particular travellers. Therefore, it was not possible to tell what profit or loss had been made in respect of each traveller. McS's evidence was to the effect that the bulk payments problem was merely one of keeping up-to-date with the computer processing. But this understates the problem. From as early as November 1987, staff had not been completing receipts, ledgers and reconciliations at, or shortly after, the taking of bookings, from which costing information could be ascertained in relation to bulk payments and then fed into the computer.
The evidence of Cullen, who had close knowledge of Travel's business and of its accounts, does not accord with McS's as to the inadequacy of the computer system. The following passage appears in Cullen's cross-examination before me:
"Now, in paragraph 12 of your statement you talk about the new computer system and is it correct to say that the upshot of the difficulties with the computer was that you could not identify the commission earned in relation to each individual traveller?---At the end of the day that was the final conclusion but, I mean, that wasn't the problem. The problem was that there was no costings going on to the system so we didn't know the profit or loss on each transaction. So you could not work out the expenditure that related to each traveller, is that right?---That's correct. And, of course, being able to match expenditure to income is one of the most basic requirements for producing a set of accounts is it not?---The air fares were not income to - the [T]ravel [A]broad made commissions basically and that was their income. This was virtually money held in trust so the air fares were paid in - not just the air fares, the full booking money was paid in and then from that expenses were paid out. Travel [A]broad made its income from the commissions on that. Now, we couldn't determine the commission element of that so, therefore, the records would not - we were not in a sufficient state to be able to do an audit or to do any checking. But it was possible, notwithstanding that, to tell what the total cash inflow into the travel company was and what the total cash outflow was?---Yes, that's a very simplistic view point. There's not debtors or creditors. It's not just cash in or cash out that matter, it's just whether there was money still owed by travellers. Quite often they paid deposits. It's whether the airlines had been paid. So, the cash in doesn't represent and cash out doesn't tell you anything." (T 1901-2 - emphasis supplied)
When commenting on the computer system in his evidence-in-chief, Cullen said:
"Clients with similar names had their transactions mixed up and incorrectly recorded on the system. The payment of "bulk cheques" was causing major problems in relation to obtaining any meaningful accounting reports from the system. "Bulk cheques" refers to payments made for the booking of airfares. The problem was that payment would be made by Travel Abroad without "costing" the payment to particular clients. This meant that subsequently, an enormous amount of work was required to "allocate" the bulk cheque payment to various clients some of whom may not have paid for their airfares or indeed may have cancelled. Until an allocation or "costing" had been completed, it was not possible to obtain meaningful reports from the system." (emphasis supplied)
Beale was to inform TCF at the end of September and again at the end of October, that it had not been possible for audited financial statements for Travel to be lodged with TCF because of computer problems. In fact, attempts to make the recently installed computer system do certain things occupied considerable attention, including the attention of Cullen, in the first six months of 1988 and perhaps beyond. For example, Cullen says when referring to a report dated 29 June which referred to computer-related problems that were being experienced at that time, that "[t]he absence of information on the computer system for the period up to 1 July 1987 was causing difficulties with obtaining balances for particular clients". I accept this evidence. But so far as the evidence reveals, the existing hardware and software in fact functioned satisfactorily. TCF and PMS suggest that it was a "computer problem" that the computer system installed had proved incapable of being developed to record costings automatically. But if staff, of a sufficient number, had been properly trained and had collected and inputted data properly and promptly, it is difficult to accept that the notion that there were "computer problems" could have fairly occurred to anyone. It seems that the Lemon brothers were not prepared to devote the resources required to make this kind of efficiency possible.
The lack of reliable financial and accounting information relating to the businesses of Travel and Wheels did not come to an end in March. The problem continued much longer and its effect was felt throughout the year.
PMS's Preliminary Amalgamated Statement of Assets and Liabilities of Wednesday 24 August
In July/August, PMS realised that Travel was in serious financial difficulty. They understood that the Lemon brothers were interested in selling; that Richard Tenser, in association with a John Carr and a Brian Smillie, was trying to find a purchaser; and that he and his associates had been offered a small shareholding in the companies.
As at 4 July, Cullen was negotiating with the Australian Taxation Office for a deferral of Travel's obligation to pay $30,000 in tax owed "from 1987". Cullen said that he presumed that Travel was having difficulty raising the money.
Around 24 August, IBA and Cullen prepared a "Preliminary Amalgamated Statement of Assets and Liabilities" of Travel and Wheels as at 30 June. The document was soon, in fact only seven days later on 31 August, to be superseded by a Draft Amalgamated Statement of Assets and Liabilities. This document is discussed below. Cullen was involved in preparing both documents from information supplied by IBA. He prepared them in connection with Tenser's quest for a purchaser.
Gilbert's letter of Friday 26 August to the directors of Travel and Wheels and their response on Monday 29 August
On Friday 26 August, Gilbert wrote a most serious letter on behalf of IBA to the directors of both companies, in which she commented on the Preliminary Amalgamated Statement of Assets and Liabilities produced two days previously. McS, Beale and Cullen all saw the letter on, or within a few days after, its date. Gilbert advised the directors that the Preliminary Amalgamated Statement:
"... clearly shows that the 'group' is operating with a significant deficiency. At this stage, this deficiency cannot be accurately quantified. However, it is believed to be in excess of $2 million. Given the deficiency, along with continued delays in paying creditors, it is our opinion that the company is insolvent." (emphasis supplied)
After drawing attention to the effect of s 556 of the Companies Code (directors' liability for debts incurred during insolvent trading), Gilbert continued:
"As a consequence, we would strongly recommend that the following action be taken:- 1. If the company is to trade on, goods and/or services supplied to the company should be paid for on a "cash on delivery" basis. No further debts should be incurred by the company. 2. All deposits taken from customers be placed in a Solicitor's Trust Account identifying the payments as customer deposits. 3. Application be made for the appointment of a Provisional Liquidator. 4. The current negotiations with potential purchasers of the business be concluded as quickly as possible. 5. A copy of this letter be sent to your Solicitors and that you seek their advice also; 6. A copy of this letter and the Statement of Assets and Liabilities as prepared by your accountants be sent to Westpac immediately in order that they are fully informed of the Group's position. 7. An audited set of accounts for the year ended 30 June, 1988 be finalised as quickly as possible."
In an affidavit in the IPG proceeding, McS said that he had concurred in IBA's suggestion as to the steps to be taken immediately. According to a later Bird Cameron audit plan in September, IBA had, on the same day, 26 August, "pulled out" Gilbert. FAI submits that I should accept that this in fact happened and should infer that IBA stopped work immediately it saw that Travel was insolvent. TCF and PMS submit that there is no evidence to support this inference.
According to Beale, on the following Monday, 29 August, he and McS met with the Lemon brothers who protested that Travel and Wheels were not insolvent. But Beale was persuaded by the Preliminary Amalgamated Statement of Assets and Liabilities that they were. His evidence is that he told them that the companies appeared to be in a "serious financial situation"; that they should seek legal advice because they would be personally exposed if the companies continued to trade while insolvent; that they should consider trading on a "cash on delivery" basis so that no further debts were incurred; and that a trust account should be created into which deposits received from clients should be paid.
By a letter of the same date, 29 August, on the letterhead of the IXT Leisure Group faxed to Gilbert on 1 September, the Lemon brothers and Michael Hay responded to Gilbert's letter of 26 August. The letter included the following:
"We were obviously very disappointed that you decided to take the route of withdrawing your services in light of the commercial effect that this action may have with our Bank. We would therefore request that you do not remove your services and ask that you continue to provide these services on a cash basis. ... Should a definite acquirer not be identified by the 14th September, then the Directors would seek advice from their solicitors on the appointment of a provisional liquidator. The Directors I am sure need not remind you that you have been retained by the Wheels/Travel Abroad companies and although your absence will no doubt highlight a problem to the bank, we do not wish the bank being approached. As we have said earlier, we would like an IBA representative to return to these offices, being paid on a 'cash' basis, however if you still feel after what we have said in this letter that you cannot return on a full time basis, certainly Phillips McSweeney have said that they will require assistance from IBA on [sic - in] the short term to assist in preparing the accounts." (emphasis added)
McS saw this letter soon after its date. The letter shows that its authors understood that there was a threatened withdrawal arising from the insolvency and its implications for payment of IBA's fees. The evidence does not, however, establish that IBA in fact ceased work on 26 August or at all. The evidence on this matter is less than clear. Gilbert was certainly active in connection with the audit upon and following the establishment on 14 October of an "Audit Review Committee", comprising representatives of PMS, IPG, Bird Cameron and IBA. Gilbert apparently chaired five meetings of that committee held on and between 14 October and 25 November. Whether or not IBA actually ceased work, the views expressed by Gilbert in her letter of 26 August and by the authors of the reply dated 29 August, can only have endorsed the seriousness of the situation in the minds of McS, Beale and Cullen.
PMS's draft letter to the Corporate Affairs Commission
Just before the end of August, McS sought legal advice from Chris Brown of Gillis Delaney Brown (PMS's solicitors) about the affairs of Travel and Wheels. Brown prepared a draft letter for PMS to write to the Corporate Affairs Commission ("CAC"). It was as follows:
"CAC re: Travel Abroad P/L We are the auditors of the abovementioned company. In the course of the performance of our duties as auditor of the company, we have become satisfied that: (a) there has been a contravention of, or failure to comply with the provisions of the Companies (NSW) Code, insofar as: (i) we believe that the company is unable to pay its debts as and when they fall due (ii) the company has not kept since our last audit report in 1987, such accounting records as correctly record and explain the transactions and financial position of the company (b) the circumstances are such that in our opinion the above matters will not be adequately dealt with by bringing the matters to the notice of the directors of the company. We have advised the directors that [the] company should not incur any further indebtedness, and that an immediate application should be made for the appointment of a provisional liquidator of the company."
In fact the letter was never sent. FAI submits that the draft ought, nevertheless, be taken to reflect McS's state of mind at the time. McS said that "this draft was simply taking an extract from the Act for us to consider, should we move to this situation". In my opinion, for several reasons, but subject to one matter, the letter should be accepted as containing statements of fact, belief and opinion which reflected McS's state of mind at the time. The letter accorded with McS's understanding as revealed by other evidence. If Brown's purpose had been only to give PMS "an extract from the Act" as McS suggests, a more straightforward way of doing so would have been to supply a photocopy of the relevant provisions. Finally, the letter is in terms very similar to a letter dated 31 August which Beale wrote to the directors, soon to be discussed. The one qualification to which I referred is that obviously McS was reserving the possibility that the directors themselves would urgently take the necessary steps in response to advice which PMS were to give them, in which event it would become unnecessary for McS to send the letter in the form of the draft, which would, to that extent, have been falsified by that supervening event.
Draft Amalgamated Statement of Assets and Liabilities dated Wednesday 31 August
On 31 August, PMS produced a "Draft Amalgamated Statement of Assets and Liabilities as at 30th June 1988" in respect of Travel and Wheels. It was largely prepared by Cullen, although McS signed the accompanying Accountant's Report. It showed a net deficiency of $1,153,433 which Cullen drew to the attention of McS and Beale.
It was obvious on the face of the document that the true amount of the deficiency might well be greater than $1,153,433. Some of the assets shown were suspect. For example, the Draft included as current assets, "Research & Development" in a sum of $653,044. Note 3 to the Draft explained that this entry referred to expenditure on the computer system; that the amount was a cost figure supplied by the directors; and that the cost had not been amortised. The amount was of uncertain recoverability. Wilcox J described the research and development as "hardly a realisable asset", a description with which I respectfully concur.
Other assets included "Office Equipment, Furniture & Fittings (WDV)" ($160,856), "Leasehold Improvements (WDV)" ($43,076), and "Net Capitalised value of leases" ($502,243). In his Honour's view, as in mine, none of these assets were realisable, at least in the short term.
The full value of unsecured loans to the directors and companies associated with them ($742,011) was included as an asset, although these were also of uncertain recoverability. Note 6 to the Draft gave particulars of the amounts and debtors, adding, "[t]he directors have advised that their net equity in residential and investment property exceeds $900,000." There was no firm arrangement for repayment by the directors. His Honour noted:
"Apart from their own assertion, there was nothing to indicate that the directors held property capable of realising $742,011. Even if they did, there would inevitably be delay; the directors' property was substantially real estate. There was no reason to believe that the loan repayments would be available in time to pay the companies' debts as and when they fell due." (TCF judgment at 42)
Another asset was "Trade Debtors" of $2,564,220, but Note 5 to the Draft explained that this figure was, as to $1,428,890, an estimate.
On the Liabilities side, the figure for the companies' liability to "Trade Creditors" of $4,481,549 was also explained in a note to be an estimate, and part of the process of estimation involved deducting payments due to Wheels.
Wilcox J noted, as an important feature, that the Draft Amalgamated Statement of Assets and Liabilities was based on figures provided by the vendors, the Lemon brothers. In his view "[t]here was no reason to accept their estimates" and "it immediately became apparent to Ms Boyd that not even the vendors knew the true position" (TCF judgment at 38). Obviously, the vendors had an interest in understating the extent of any problem. Risk in this respect was later to be identified in an "audit plan" prepared in September by Bird Cameron and circulated to PMS.
Beale and Cullen accepted that one reason why an amalgamated statement for the two companies was appropriate was that it was difficult, without more work, to attribute certain expense items to one company rather than the other. Some of those items were expenditures for travel, air tickets and car hire, as well as joint overheads, such as payments for rent and staff.
Cullen saw that the Draft revealed that the companies had a "substantial deficiency", that "something would have to be done" and that "the group had financial problems". McS and Beale saw the document soon after it was produced and reached generally similar conclusions. They all knew that the Lemon brothers were anxious to sell. So far as they knew, the Draft continued to reflect the approximate amalgamated position of the two companies down to the sale by the Lemon brothers to IPG eighteen days later, on 18 September.
When the Draft was prepared, there had been no audit. According to Cullen, many of the figures had been provided, ultimately, by the Lemon brothers, although some, which did not accord with what he had learned, had been the subject of amendment by him. Of course, no-one claimed or understood that the figures had been audited and found correct. Cullen's position is that they were only his best guess at the time. It transpired that many were wrong and that the true amalgamated financial position of the companies was worse than that shown.
Beale's letters of Wednesday 31 August, entitled "FINANCIAL POSITION"
On 31 August, Beale wrote separate letters to the directors of Travel and of Wheels. McS had directed him to write them because he (Beale) was more familiar with the clients. The letters were similar, and in parts identical. Each expressed the opinion that the company in question was insolvent. They were not entirely in conformity with Gilbert's letter of 24 August or the draft letter to the CAC prepared by Brown. In particular, Beale's letter refrained from recommending that the directors immediately apply for the appointment of a provisional liquidator.
The terms of the letter to Travel were as follows:
"Following our review on the 30th August, 1988, of the Draft Amalgamated Statement of Assets and Liabilities for Travel Abroad Pty Limited and Wheels Abroad Pty Ltd as at 30th June, 1988, it is our opinion that the company is insolvent due to the company's exposure to Wheels Abroad Pty Limited. We are endeavouring to finalise the financial statements for Travel Abroad Pty Ltd for the year ended 30th June, 1988 so that we can ascertain the true position of the company. As Auditors of Travel Abroad Pty Ltd we wish to point out that pursuant to section 556(1) of the Companies (NSW) Code it is an offence to incur a debt with the knowledge that the company is insolvent. The directors should be aware of their responsibilities under the code as outlined in a letter from International Business Analysis Pty Ltd dated 26th August, 1988. We suggest the following steps should be taken immediately :- 1. If the company is to trade on, goods and/or services supplied to the company should be paid for a 'cash on delivery' basis. No further debts should be incurred by the company. 2. All deposits taken from customers be placed in a seperate [sic] Trust Account identifying the payments as customer deposits. 3. Arrangements should be made to discuss the position of the company regarding possible liquidation or alternatives as a matter of urgency. 4. The current negotiations with potential purchasers of the business be concluded as quickly as possible. 5. A copy of this letter be sent to your Solicitors and that you seek their advice. 6. An audited set of accounts for the year ended 30th June, 1988 be finalised as quickly as possible. We further point out that section 285(10) of the Companies (NSW) Code requires that in the course of the performance of our duties as auditor of the company, if we are satisfied that - (a) there has been a contravention of, or failure to comply with, any of the provisions of this code, and (b) the circumstances are such that in our opinion the matter has not been or will not be adequately dealt with in our report on the accounts or by bringing the matter to the notice of the directors of the company; We are required to report the matter to the National Companies Commission by notice in writing. In order that we can see that the matter has been adequately dealt with by the directors we request that you contract our Chatswood office to arrange a meeting."
It will be noted that the letter unequivocally expressed the opinion that Travel was insolvent, while reserving the position that the final financial statements would show "the true position". In my opinion, by the expression "the true position", Beale intended to refer, relevantly, to the true extent of the insolvency, and it was not in his contemplation that the true position might be that Travel was not insolvent after all.
The six steps which the letter advised should be taken were identical to the seven steps outlined in Gilbert's letter of 26 August set out earlier, except in two respects. Instead of her third recommendation, that an application definitely be made for the appointment of a provisional liquidator, the third step was less definite, and the previous sixth recommendation (that a copy of Gilbert's letter and the Preliminary Amalgamated Statement of Assets and Liabilities be sent to Westpac) was omitted.
McS knew and approved of the letters. He and Beale appreciated the seriousness of sending them. They also knew that members of the public were continuing to purchase travel packages from Travel. McS said in the course of his examination under s 541 of the Companies Code, that his intention was that if nothing changed between 31 August and 30 September, he would advise Travel to inform TCF of its position.
Notwithstanding the clear terms of Beale's letter of 31 August, McS said in cross-examination before me that he had not satisfied himself that Travel was insolvent and that the letter was a knee jerk reaction to IBA's letter to the directors of 26 August. I do not accept this evidence. It is true that Beale's letters of 31 August substantially copied Gilbert's letter of five days earlier. It is also true, as McS sought to emphasise, that the Draft Amalgamated Statement of Assets and Liabilities had not been the result of an audit. Finally, it is true also that in the absence of final figures, PMS ought not to represent that the detail of the Draft was, in all respects, to be relied upon . This point is made in the following passage from McS's cross-examination:
"But you were aware that writing a letter like this letter of 31 August was the sort of thing that could bring a company to its knees were you not?---Very much so. I was very aware of the fact that we were facing a major dilemma in that if in fact we - on the one hand we had to do sufficient to ensure that the matter was progressing to a resolution; on the other hand we had to make sure that we allowed the directors time to inform us properly so that we wouldn't be sued for deformation [sic - defamation] or for having closed the company down. I think that was on my mind as well. So what we were trying to do - and sought legal advice on this - was to give the appropriate notice under the Act to allow them to take appropriate action and come back to us. And then we would act in accordance with the law. This was a letter which was the initiation of that." (T 1556)
But whatever else may be said of this passage, it and the other considerations mentioned above do not, in my opinion, militate against a finding that McS and Beale were confident that Travel was insolvent. The insolvency revealed by the Draft was so clear that McS's refuge in its unaudited nature is not convincing. The Draft showed a deficiency of no less than $1,153,433, and it was so "small" only by reason of the inclusion of amounts on the assets side which were suspect and which were unlikely to be recoverable, as McS and Beale knew. I find that McS's and Beale's opinion as at 31 August was that Travel was insolvent and that Beale's letter of that date to the directors accurately reflected their opinion. I also find that they were confident that the deficiency of assets was likely to be greater than the figure of $1,153,433 shown in the Draft.
Beale recognised that it was a very serious thing, calling for careful consideration, for Travel's auditor to write this sort of letter to its directors. Like McS, however, he says that it was written as a reaction to IBA's letter of 26 August, and that the statement "it is our opinion that the company is insolvent" was "meant as something to give them a blast to satisfy us that they weren't [insolvent]", and to draw the directors' attention to the seriousness of trading while insolvent. Beale conceded that "...it [the view that Travel was insolvent] could easily be an opinion that I held but ... it was not necessarily the only opinion that could be held at that time".
The letter was written after, and in the light of, legal advice sought and obtained from Gillis Delaney Brown. The fact that legal advice was sought indicates the serious view that PMS were taking of the situation, and is further reason to think, as I find, that the letter did in fact reflect an assessment about which McS and Beale were fairly confident at the time.
I accept that there is a difference between the level of confidence that an auditor would wish to have in his or her assessment of a company as insolvent for the purpose of reporting to the company's directors, on the one hand, and that for the purpose of reporting to regulatory bodies on the other. Beale's letter implemented the sensible course of inviting the directors to discuss with PMS "the position of the company regarding possible liquidation or alternatives as a matter of urgency." There is evidence that they did so, at the same time effectively receiving further legal advice. Cullen's account of that meeting supports my finding as to PMS's view, seriously held, of Travel's insolvency as at 31 August and prior to the sale to IPG. Cullen gave evidence that "within a few days" of PMS's letter to Travel of 31 August, Gregory Lemon requested that he (Cullen) attend a meeting. Those present were Tenser, Tony Anisimoff (solicitor, of Davenport and Partners), and the Lemon brothers. Cullen thought, although he was uncertain, that Gilbert was also present. Cullen's belief was that the purpose of the meeting was to have a "general discussion" about the Draft Amalgamated Statement of Assets and Liabilities. He did not not understand that legal advisers would be present. His account of the meeting is as follows:
"After there had been general discussion concerning the financial difficulties that Travel Abroad and Wheels Abroad were in, there was then a discussion concerning the legal obligations that applied to the directors of those companies. I recall that Mr Anisimoff, solicitor, said words to the following effect: 'The directors really have three broad alternatives in relation to this situation. Firstly, they can liquidate the companies. Alternatively, the companies could proceed for a short time on the basis that it [sic] incurs no further debts and deals with all transactions on a cash basis. This would involve the creation of a trust account for your customers. The third alternative is to find a buyer who would be prepared to inject capital into the company.' I recall that Greg Lemon said words to the following effect: 'We are in active negotiation for a buyer. There are very positive indications from a buyer who has indicated they are prepared to inject substantial capital. I expect that we will reach agreement in principle within a matter of days.'"
Meeting of McS, Cullen and Williams with solicitors on Thursday 15 September
On 15 September, McS, Cullen and Williams consulted Brown, of Gillis Delaney Brown, because of their concern over the question of PMS's obligations as auditors of Travel in the light of its financial condition. McS made the following notes of the discussion:
"Travel Abroad P/L 15/9/88 [Illegible] Meeting R. Williams, C. Brown, T. Cullen Audit engagement letter 18/7/88 Accounting engagement letter 25/7/88 Letter withdrawing services on accounting engagement. Meeting Westpac for details of position and evidence of inability to continue to meet debts / in writing Meeting directors and legal advisers to confirm that action taken by directors to adequately deal. Is receipt of moneys on "Trust" Report by Auditor to CAC privileged not defamatory. Draft letter with ref to S285(9), S285(10) - matter of opinion. Satisfied breach not adequately dealt with by/comment in report / notice to notice [sic] directors Obligation to prepare accounts S. 267 Directors unable to take steps to enable payment of debts. [Illegible] QC Materiality - has loss been suffered Creditor action - remote sec 285(10) - not yet satisfied"
The evidence of McS, Cullen and Williams is that Brown advised them that it was the Companies Code that defined PMS's obligations as auditors; that PMS's primary obligation was to Travel's shareholders and directors; that the obligation of the latter was to prepare accounts and PMS's obligation was to audit them; that it was not PMS's obligation to determine whether Travel was insolvent; and that PMS should write a letter to Travel's directors putting them on notice as to their obligations to PMS, as the auditors, to satisfy PMS as to Travel's financial position.
Brown drafted some words to be incorporated in a letter to be written by PMS to the directors of Travel. In fact, the result was a letter written by McS to them on the following Tuesday 20 September, dealt with below.
PMS's understanding in September of the state of the accounting records of Travel
Beale conceded that he could have understood in September that Travel had not kept such accounting records as correctly recorded and explained its financial position. Evidence of McS in the IPG proceeding, tendered in this proceeding, indicates that he knew this at least as at 16 September:
"I also recall that Mr Dunn [of IPG - see below] was told 'there are problems in the incompleteness of records, in being able to accurately establish debtors and creditors.' ... (I do not recall whether words to that effect were said exclusively by me or by Timothy Cullen, although I do recall words to that effet [sic] being said to Mr Dunn.) ... ... we had substantial concerns as to the accuracy of the information contained in the Draft Amalgamated Statement due to the incompleteness of the Companies' records."
I find that in fact McS and Beale knew that the accounting records were deficient earlier than September. McS had informed PMS's solicitors, Gillis Delaney Brown, of the problem at the end of August. I infer that Cullen had informed both McS and Beale of it much earlier.
Meeting on Friday 16 September of McS, Cullen and Dunn
Since July/August, McS, Beale and Cullen had known that the Lemon brothers were anxious to sell. It was to that end that Cullen had prepared the Preliminary Amalgamated Statement of Assets and Liabilities on or about 24 August and the Draft Amalgamated Statement of Assets and Liabilities on or about 31 August. During September, notwithstanding the terms of Beale's letters of 31 August to the directors of Travel and Wheels, and the subsequent meeting requested by Gregory Lemon and attended by the Lemon brothers, Tenser, Anisimoff and Cullen, PMS continued to provide services to Travel and Wheels. McS said that those services consisted, predominantly, of getting the in-house accounting systems set up properly, and of efforts to try and "rationalise what the companies were doing" in this regard. Cullen was of the view in mid-September, that the companies were trading unprofitably, and had probably been doing so since at least the beginning of July. McS and Cullen agreed that they did not receive specific information after that time that Travel had changed its costings, although both made the point that from 18 September the businesses were being conducted by IPG, and, in particular, by Dunn. McS said that later, during the course of the audit, from 14 October onwards, Dunn gave him:
"assurances that they were keeping independent trust accounts and that the company was operating on a profitable basis, that he had cut back expenses fairly severely." (T 1547)
On 16 September, McS and Cullen met with Dunn at the request of Gregory Lemon and in the knowledge that IPG was interested in purchasing. They discussed the Draft Amalgamated Statement of Assets and Liabilities. According to McS and Cullen, one of them told Dunn that Travel or Wheels or both were insolvent and would require a substantial capital injection by any purchaser. McS also said that he or Cullen told Dunn that:
"... there are problems in the incompleteness of records, in being able to accurately establish debtors and creditors. Also, the way the loan account should be treated and the capitalization of research and development expenditures create problem areas ..." (emphasis supplied).
Before me, McS said at first that he did not believe that Dunn was told of the insolvency and of the need for a substantial capital injection, but when shown his affidavit of 5 October 1990 in the IPG proceeding, conceded that he must have believed it to be correct at the time when he had sworn that affidavit. FAI submits that this reflects poorly on McS's credit. I agree that it reflects on the reliability of his evidence, notwithstanding the terms of "belief" in which McS's evidence before me was couched. As I observed in Part II of these Reasons, however, it must be remembered that all witnesses were being asked to recall events, conversations and states of mind years previously.
McS's account of the meeting also includes the following passage:
"I suggest that when you wrote this letter it was a letter that was designed to hide from the Travel Compensation Fund some matters? - That's incorrect." (T 1826)
This is the most direct confrontation of Beale with the Implied Representation. I accept Beale's denial. I am not persuaded that Beale thought about the causes of delay beyond what he wrote. Of course, he might have written more - much more. Let it be accepted too, that even as a short summary, his words were carelessly chosen and gave a wrong impression. Nonetheless, I am not persuaded that he deliberately suppressed some matters so that his letter would convey a false impression, such as that inherent in the supposed Implied Representation.
There is another sequence of passages from Beale's cross-examination to which I should refer. It does not, however, address FAI's case of fraudulent misrepresentation by deliberate concealment. There was the following exchange:
" ... you understood after that conversation with Mr McDougal [sic] that you had to state the reasons for the extension in writing, did you not? --- Yes. And you understood that what was required to be stated was all of the reasons why an extension was necessary, is that right? --- Well, the reasons being all the reasons, yes." (T 1815 - emphasis supplied)
Senior counsel for PMS objected that the letter referred to "the reasons for the request" whereas the question referred to the "reasons why an extension of time [was] needed" saying "[t]here may be a distinction". This exchange then followed:
"MR CAMPBELL: You understood that what you were doing was explaining the reasons why an extension of time was needed, did you not?---I was substantiating the fact that we had not been provided with the financial statements at that time to audit and the reasons why we had not been provided were twofold: one, because there was a failure of the system to enable those figures to be collated and, secondly, there was a change of ownership which had substantially held up the process." (T 1816)
In the result, the evidence is not entirely clear whether Beale intended his letter to convey meaning (1) or (3). In context, his failure to answer the last question simply "yes", and the answer he in fact gave, can be seen to favour construction (3). Beale's intention is, of course, irrelevant to the issue of construction itself (Issue 1). Having particular regard to PMS's position as auditors, and the perspective referred to by Beale in the passage just set out, I think that he intended to convey meaning (3), not (1). Indirectly, the same evidence can also be seen, to the same extent, to lend support to the view that Beale did not intend to make the Implied Representation.
4. That the maker of the representation intends a person or class of persons to act in reliance on it
Beale intended TCF to act in reliance on those representations that he intended to make in the letter. But I have already concluded that he did not intend to make the Implied Representation. It follows that he did not intend TCF to rely upon it. As I noted when dealing with this element in connection with the first application for an extension, the present element of fraud is not established by a finding that Beale intended TCF to act in reliance on the representations that he intended to make in his letter, and a later conclusion by a court that the letter also conveyed a representation that he did not intend to make.
In cross-examination, Beale and McS made numerous concessions which FAI seeks to make relevant to the present issue. Beale conceded that he understood that if TCF was not told of any "cloud hanging over the solvency" of a travel agent, it would assume that there was no problem; that he was aware that there was in fact "probably a cloud" over Travel's solvency by the end of September; that he knew at the time that members of the public were paying money to Travel every day on a basis which made them unsecured creditors of Travel; that TCF was "an organisation that was designed to protect travellers against the risk of a travel agent becoming insolvent"; that travel agents were required to lodge audited accounts with TCF in a particular form; that TCF relied upon the accuracy of audited accounts to be able to regulate the industry; that he understood that a failure to file audited accounts within the time limit, absent an extension, would lead to cancellation of Travel's licence; that TCF reviewed the solvency and viability of travel agencies, and that if it was not satisfied on these matters, it could take steps to withdraw the agency's licence or grant a licence upon conditions, such as provision of extra capitalisation or security; that if it was brought to TCF's attention that there was a cloud over Travel's solvency, TCF may not have granted the extension; and that disclosure of insolvency and the interrelationship of Travel and Wheels would concern TCF, cause the extension to be refused, jeopardise Travel's participation in the Fund, and hence it's licence and ability to continue in business.
McS saw the letter of 26 October prior to Beale's submitting it to TCF. It was he who had, on 21 October, suggested that the application for a further extension be made. He raised no objection to its terms at the meeting on 27 October, when Gilbert asked for comments on it. In my view, he approved of the reasons in it. He had a similar state of knowledge and intention to that of Beale. As well he made concessions generally similar to those made by Beale. In particular, he conceded that he knew that if an extension were not granted, and audited accounts not submitted by the current deadline of 31 October, Travel's licence would be jeopardised; that a licence was necessary to carry on business as a travel agent; that participation in the Fund was required to qualify for a licence; that TCF had published review criteria for accounts which were to be submitted to it (in particular the "points check list") which he had read; that accounts were to be submitted to TCF in a particular form; that it was PMS's responsibility to give a true and fair picture of the running of the company; and that TCF relied on audited financial information for approval of continuation of membership in TCF.
But the various concessions of Beale and McS to which I have referred do not go to the question what actually passed through their minds at the time. It is one thing to concede that at a particular time in the past, one "knew" or "understood" or "was aware of" something; it is a different thing to concede that at that time that particular matter was present to one's mind. The evidence does not establish that McS or Beale in fact adverted to the cloud over Travel's solvency when requesting the second extension and I do not infer that they did.
I do not accept that Beale or McS intended TCF to act in reliance on the Implied Representation (or on the letter as bearing construction (1)).
5. That the person, or a person belonging to the class of persons, acts in reliance on the representation
FAI submits that it should be inferred that if the cloud over Travel's solvency and the intermingling of accounts had been disclosed to TCF, TCF would not have permitted Travel to trade for as long as it did. TCF and PMS rely on the fact that FAI called no witness from TCF to give evidence to this effect. They draw attention to what they call "uncontradicted evidence that TCF would have been 'ecstatic' or 'very comfortable' if it had been apprised of the circumstances known to the accountants including the presence of IPG on the scene". This "evidence" is, however, that of Beale. Beale's speculations about how TCF would have acted are of no probative weight.
TCF and PMS refer to TCF's failure to close down Travel even when TCF was told on 15 December that Travel and Wheels had a deficiency of over $5,000,000 and that IPG was not certain what course it would take (TCF judgment at 24-5). They point to the fact that TCF did not inform Travel on 16 December of the decision of the TCF Management Committee on that day not to approve a request for a further extension (made on 15 December), and say that this indicates that TCF was inclined to do nothing when faced with an admission of insolvency vastly in excess of that shown in the Draft Amalgamated Statement of Assets and Liabilities. They submit that if TCF was not prepared to act in that situation, it probably would have done nothing when faced with a much less serious picture of a "cloud" over Travel's solvency, particularly as long as there was then a chance that IPG would complete the purchase.
FAI submits, in reply, that the decision not to approve the extension shows that the TCF Management Committee was not prepared to await IPG's decision about what course it would take. FAI further submits, in reply, that the effect of the running out of the second extension on 30 November and the non-granting of the further extension requested, was that Travel was in breach of the conditions of its licence, and that TCF was entitled to believe that of its own volition it would not continue to trade. FAI submits that Wilcox J expressed himself in terms which indicated some doubt about whether the evidence before him was complete as to whether Travel was told of the decision which the Management Committee made on 16 December:
"... the Travel Compensation Fund Management Committee decided not to approve this request. But, surprisingly, no decisive action was taken by TCF. So far as appears, the trustees did not deal with the matter, nor did Mr Krumbeck inform Travel Abroad of the management committee's decision." (TCF judgment at 25)
In any event, FAI submits that there were only three working days between 15 and 21 December in 1988 (in fact, there were five if one includes 15 and 21 December), and that, although it may not have acted as fast as could be wished, it could not be said that the closure of Travel was slow after TCF was informed on 15 December. FAI submits, further, that the proper inference as to what TCF would have done if told the truth regarding Travel's situation earlier than 15 December, is that by no more than three working days after TCF was informed, Travel would have been closed.
Subject to two qualifications, I incorporate here the reasons which I gave in relation to the present issue (5) in the context of the first application for an extension. The first qualification is that the absence of any person from TCF to give evidence of reliance is not explained by the fact that the only TCF officer who could give the evidence cannot remember the incident. On this occasion the application was in writing and was considered and approved by the Trustees of the Fund. I do not know why one of the Trustees was not called by FAI to give evidence. The second qualification is that in the context of the second application (and not the first), written reasons were required at the insistence of TCF, a factor which, despite the lack of any evidence from FAI as to inducement, strengthens the view that it is a fair inference of fact that the Trustees were induced to grant the extension, by what Beale wrote.
6. That loss or damage is suffered as a result of the reliance on the representation
I repeat what I said under this heading (6) in the context of the first application for an extension.
Two specific submissions
(i) Relevance of McS's conduct as part of the TAG facts to the TCF facts
FAI submits that evidence of fraud by McS in the TAG facts, which I found in Part II, is probative of fraud in the context of the TCF facts. The submission is that such evidence of fraud by McS in the second half of 1987 in connection with the TAG acquisition, constitutes "similar fact evidence" and supports its allegations of fraud in relation to the applications to TCF in the second half of 1988 for extensions of time. FAI also submits that McS's earlier conduct is relevant to his credit in connection with his evidence relating to the TCF facts.
I accept that a finding that McS acted fraudulently on an earlier occasion is potentially relevant to his credit in respect of his evidence touching the TCF facts. But the nature of the earlier fraud in the present case must be understood. It is inherent in my finding in Part II that McS was prepared to issue accounts which spoke falsely, knowing that they did so and intending them to be relied upon, while believing that no harm would befall the relier (TAG) because of what he believed his client (Webber) would do to "make the representation good". I have not derived assistance from my finding of fraud of that kind in connection with the TAG facts, in assessing McS's evidence in relation to the different TCF facts.
Whether the evidence of McS's conduct as part of the TAG facts can be used as "similar fact evidence" depends on whether there is any striking similarity or underlying unity between the two sets of "facts", and even if there is, the similar fact evidence should be considered with caution and discretion (D F Lyons Pty Ltd v Commonwealth Bank of Australia (1991) 28 FCR 597 at 606-7 per Gummow J). In my opinion, the evidence of McS's conduct as part of the TAG facts does not satisfy the criteria of similar fact evidence, because there is no striking similarity or underlying unity between that conduct and McS's conduct in connection with the applications to TCF for an extension of time. The person who made both requests for an extension was not McS, but Beale. McS did not participate in the formulation of the terms in which either application was made, although he approved of the terms of the second application. Any similarity is simply at too general and abstract a level to merit the epithet, "striking". The evidence of McS's conduct in relation to the preliminary accounts and the audited accounts as part of the TAG facts does not have "significant probative value", either by itself or in conjunction with other evidence adduced, in relation to McS's "tendency" to act as he did in relation to the second application to TCF for an extension of time: cf s 97 (1) of the Evidence Act 1995 (Cth) discussed in Zaknic Pty Ltd v Svelte Corporation Pty Ltd (1995) 61 FCR 171 at 175-6 (Lehane J).
(ii) Breach of professional obligations
TCF and PMS submit that, absent a statutory duty of disclosure, PMS would have been in breach of a duty owed to their client if they had told TCF what they knew about Travel's financial condition without Travel's consent.
FAI replies that PMS's duty to their client, Travel, is no answer to FAI's case, for reasons along the following lines. The obligation of confidence on the part of an accountant is not an absolute one. The disclosure in issue is to TCF, a body established by statute for a public purpose to which information of the kind in question is of central concern, and to which PMS understood they were instructed by Travel to submit audited accounts revealing its true financial position. PMS knew that Travel was continuing to take payments from members of the public, and that to do this lawfully, it was required to hold a licence, for which participation in the compensation scheme was necessary. PMS's understood that failure to submit audited accounts by the deadline would result in cancellation of Travel's licence. They were also aware of the provisions of the Travel Agents Act 1986 (NSW), which provided (ss 20 and 21) that a licence could be cancelled or other disciplinary action taken where there were reasonable grounds to believe that a licensee did not have, or was not likely to continue to have, sufficient financial resources to enable the licensee to carry on business as a travel agent.
I do not find it necessary to deal with all aspects of these competing submissions. It is pertinent to observe that while the Travel Agents Act 1986 (NSW) obliged a person who carried on business as a travel agent, to keep financial records of a certain kind and to a certain standard, including records which would "enable profit and loss accounts and balance sheets for the business, to be conveniently and properly audited" (s 41 (c)), the Act did not oblige auditors to act as informant to TCF (cf the obligation to inform which was imposed on auditors in favour of the CAC by subss 285 (9), (10) of the Companies Code). PMS could, however, have indicated to TCF that there were further reasons for the delay which PMS were of the opinion they could not disclose without breaching any professional obligations to their client. By this means PMS would have honoured any obligation of confidence owed to their client, not misrepresented the causes of delay, and left TCF to take its own course. Again, PMS might have declined to have anything to do with Travel's application for an extension of time, leaving the matter in Travel's own hands. Further, they could have sought Travel's consent to disclosure. What PMS could not do, was, having taken upon themselves the task of applying for the extension and making out Travel's case for it, to make the supposed Implied Representation. For these reasons I do not accept the submission of TCF and PMS that PMS's obligation of confidence would somehow negate liability for the supposed Implied Representation.
CONCLUSION IN RELATION TO FRAUD AND THE TCF FACTS
FAI has not established that the claim for indemnity in respect of the TCF judgment is one in respect of a claim which arises out of, or is contributed to by, dishonest and fraudulent conduct committed by Beale and McS, or by Beale condoned by McS, in respect of either of the two applications for an extension. I will have occasion to consider the TCF facts further in relation to issues yet to be addressed, such as those of misrepresentation and non-disclosure to FAI.
DRAMATIS PERSONAE - PART II
ANNEXURE TO PART III OF REASONS FOR JUDGMENT
TCF FACTS
PARTNERS OF PMS
BEALE, John William ("Beale"): chartered accountant; employed by PMS in its Sydney office from 1982; became a salaried partner in June 1985 of an "associated firm", PMS Lismore; returned to the Sydney Office in about mid-1988 and became a salaried partner in PMS proper at that time; in mid-1990 ceased to be a partner of PMS to become a foundation partner in the firm Beale Gaertner Young; was actively involved in the 1988 TCF facts; was examined under s 541 in relation to the affairs of Travel and Wheels.
CULLEN, Timothy Patrick ("Cullen"): qualified as an accountant in New Zealand in 1980; moved to Australia in August 1980; became employed by PMS from 6 April 1985 and became a salaried partner on 23 May 1989; following the "split" with retrospective effect from 1 September 1990 (but for insurance purposes from 24 October 1990) became, with Phillips, a partner in PMS Gosford; as an employee, was actively involved in doing work for Travel and Wheels but played no part in the TAG facts; completed the proposal form dated 22 April 1991 for the renewal of the Gosford policy for 1991-1992 under which Phillips claims to be entitled to indemnity in respect of the TCF judgment; was examined under s 541 in relation to the affairs of Travel and Wheels.
GAERTNER, Michael John ("Gaertner"): became a salaried partner in PMS in May 1989; on 1 July 1990 ceased to be a partner in PMS to become a foundation partner in Beale Gaertner Young as from 23 July 1990; had no active role in either the TAG facts or the TCF facts.
McSWEENEY, Brian Albert ("McS"): chartered accountant; obtained first accountancy qualification in 1967; became a member of Australian Society of Accountants in 1969; with Phillips, "equity partner" in PMS from its establishment in August 1976 down to the "split" with retrospective effect from 1 September 1990 (but for insurance purposes as from 24 October 1990); from about 1976 was engaged as accountant by Webber and the Webber companies; was actively involved in the TAG facts and the TCF facts; of the sixteen Webber companies, held shares in eleven (in each case as trustee for a Webber interest) was a director of thirteen and secretary of fourteen; in particular, was a director and secretary of TIBG, TIIB, C & G, CJ & H, TKN and TFS, and although not a director or secretary of the joint venture companies Locna and Vana, held a 40 per cent interest in each of them; was a director and the secretary of the Webber family company, Dawlarnu and a director of other Webber family companies; was examined under s 541 in relation to the affairs of Travel and Wheels; following the "split" became, with Turner, a partner in PMS Chatswood; completed the proposal form dated 22 May 1989 for renewal of the PMS policy for 1989-1990 under which he and Phillips seek indemnity in respect of the TAG judgment; completed the proposal form dated 28 April 1991 for renewal of the Chatswood policy for 1991-1992 under which he seeks indemnity in respect of the TCF judgment; with Phillips, a respondent in TAG proceeding and TCF proceeding; PMS undertook the work associated with the annual accounts, tax returns and statutory returns for all sixteen Webber companies and the audit of the accounts of some of them; PMS prepared the annual financial statements of Travel and Wheels and undertook the audit of those of Travel.
PHILLIPS, Bruce William ("Phillips"): chartered accountant; "equity" partner with McS in PMS from its establishment in August 1976 down to the "split" with retrospective effect from 1 September 1990 (but for insurance purposes from 24 October 1990); following the "split", became, with Cullen, a partner in PMS Gosford; not involved in the TCF facts; at McS's request, auditor of TIIB, CJ & H and C & G of which McS was a director, and, as auditor, had some role in the TAG facts.
TURNER, Paul Frederick ("Turner"): accountant; apparently became a salaried partner of PMS in 1987; following the "split" with retrospective effect from 1 September 1990 (but for insurance purposes as from 24 October 1990), became, with McS, a partner in PMS Chatswood; not actively involved in the TAG facts or, except in a minor respect, the TCF facts.
OTHER THAN PARTNERS OF PMS
Individuals
ANDERSON, Mark ("Anderson"): office manager of Travel, succeeding Karen Marvell when she resigned; resigned during 1988 after IPG purchased Travel and Wheels.
BOYD, Julie ("Boyd"): administration manager of IPG during 1988; went to the Mona Vale premises of Travel and Wheels on 19 September 1988 with Dunn and remained there as administration manager until 21 December 1988 when Travel and Wheels ceased to trade.
BROWN, Chris ("Brown"): partner of Gillis Delaney Brown, solicitors to PMS; advised PMS in relation to their obligations as auditors in view of the apparent insolvency of Travel and Wheels.
CANNON, Sam ("Cannon"): manager of Travel in December 1988.
CORRIGAN, Greg ("Corrigan"): computer consultant retained by Travel and Wheels to commence installation of a new computer system in November 1987; regularly at the offices of Travel and Wheels until the system commenced operating in early February 1988.
DUNN, Craig Joseph ("Dunn"): director of IPG; became a director of Travel and Wheels immediately following IPG's purchase on 18 September 1988; was the director who, on and after the takeover, chiefly represented IPG, Travel and Wheels in dealings concerning the TCF.
GILBERT, Pamela ("Gilbert"): business consultant employed by IBA; chaired the Audit Review Committee meetings for Travel (and Wheels) in October and November 1988.
HADLEY, Chris ("Hadley"): managing director of IBA.
HAY, Michael Freeman ("Hay"): sales and marketing manager and director of Travel and Wheels; director of Travel and Wheels since January 1983.
HOFMEYER, Fiona ("Hofmeyer"): data operator employed in the businesses of Travel and Wheels.
KRUMBECK, Max William Paul ("Krumbeck"): administrator of TCF.
LEMON, Gregory: holder of 65 per cent of the shares in each of Travel and Wheels; with his brother, Nigel Lemon, effectively controlled both companies until their sale on 18 September to IPG.
LEMON, Nigel: holder of 25 per cent of the shares, in each of Travel and Wheels; with his brother, Gregory Lemon, effectively controlled both companies until their sale on 18 September to IPG.
McDOUGALL, James Kirk ("McDougall"): claims manager of TCF in 1988; from time to time assisted in dealing with requests for extensions of time for lodgment of financial statements in relation to renewal of participation in TCF; acceded to Beale's first application (by telephone on 28 September) for filing of audited accounts by granting an extension from 30 September to 31 October.
MARVELL, Karen ("Marvell"): manager and director of Travel from March 1985; resigned as director on 30 June 1988.
NICHOLAEFF, Mark ("Nicholaeff"): employee of Bird Cameron; involved in the audit of Travel from about August 1988.
ROSE, Juliana Mary ("Rose"): travel consultant; employed by Travel from November 1987 until 21 December 1988; office manager of Travel from May 1988.
SHARP-PAUL, Alistair Victor Nicholas ("Sharp-Paul"): non-executive director of IPG; became a director of Travel and Wheels immediately following the agreement between the sale by the Lemon brothers to IPG, on 18 September; remained director until 21 December 1988 when Travel and Wheels ceased to trade.
SHORT, Lewis ("Short"): substantial shareholder in, and consultant to (but not a director of) IPG; in late 1988 decided independently to prepare a statement of assets and liabilities of Travel and Wheels, and found that there were not books of account or records that could be used for this purpose so organised for several members of Travel and Wheels to work over a weekend at the end of November 1988 to compile information necessary to prepare a statement of assets and liabilities, which he completed in early December 1988, and which showed a net liability of $5,119,870.
TENSER, Richard ("Tenser"): management consultant; in conjunction with some associates, sought a buyer of Travel and Wheels in 1988.
WILLIAMS, Robert George ("Williams"): a partner of Bird Cameron; assisted PMS in the audit of Travel in 1988.
Companies and Firms
BIRD CAMERON: firm of accountants apparently formally retained by PMS on or around 14 October 1988 to supervise the audit of Travel.
GILLIS DELANEY BROWN: solicitors for PMS; advised them as to their obligations as auditors in view of the apparent insolvency of Travel.
INTERNATIONAL BUSINESS ANALYSIS PTY LIMITED ("IBA"): a subsidiary of Westpac which provided business consultancy services and was retained to provide advice and other services, to Travel and Wheels, and which was represented for that purpose mainly by Gilbert.
INTERNATIONAL PERFORMANCE GROUP LIMITED ("IPG"): contracted on 18 September 1988 to purchase from the Lemon brothers all the issued shares in Travel and Wheels for $200,000; due to complete the purchase on 18 December, but did not do so; its directors were Dunn, Sharp-Paul and Smith; applicant in NG 546 of 1989 against the Lemon brothers and PMS, which was settled.
IXT LEISURE GROUP PTY LTD ("IXT"): group of companies which included Travel and Wheels; IXT's directors were Nigel and Gregory Lemon.
TRAVEL ABROAD PTY LIMITED ("Travel Abroad" and "Travel"): incorporated in about 1983; travel agent licensed under the Travel Agents Act 1986 (NSW), its members and controllers were the brothers Gregory Lemon and Nigel Lemon; the company occupied adjoining space in premises at Mona Vale, Sydney, with Wheels, which was similarly owned and controlled; the main activity of Travel was the marketing of pre-paid tours to Europe; agreement for sale to IPG of Travel, together with Wheels, executed on 18 September 1988; following IPG's refusal to complete its purchase on 18 December, ceased trading on 21 December (see "Wheels Abroad Pty Limited").
VEREKERS & PARTNERS ("Verekers"): solicitors for IPG on its purchase from the Lemon brothers of all the shares in Travel and Wheels.
WHEELS ABROAD PTY LIMITED ("Wheels Abroad" and "Wheels"): a company engaged in the business of selling, in Australia, car hire in Europe; clients paid Wheels, in Australia, for their car hire, and Wheels made arrangements with European car hire companies so that upon the arrival of travellers in Europe, cars were made available to them without further payment; its members and controllers were the brothers Gregory Lemon and Nigel Lemon; the company occupied adjoining space in premises at Mona Vale, Sydney with Travel, which was similarly owned and controlled; Wheels never held a travel agent's licence nor participated in the TCF and, accordingly, its accounts did not have to be audited; agreement for sale to IPG of Travel, together with Wheels, executed on 18 September 1988; following IPG's refusal to complete its purchase on 18 December, ceased trading on 21 December (see "Travel Abroad Pty Limited").
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