Harris Scarfe Ltd (Receivers & Managers Appointed) (in Liq) v Ernst & Young (No 8) - [2006] SASC 317

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
HARRIS SCARFE LTD (RECEIVERS & MANAGERS APPOINTED) (IN LIQ) & ORS v ERNST & YOUNG & ORS (No 8)
[2006] SASC 317
Reasons for Ruling of The Honourable Justice Bleby
10 October 2006
PROCEDURE - SUPREME COURT PROCEDURE - SOUTH AUSTRALIA - PROCEDURE UNDER RULES OF COURT - DISCONTINUANCE AND WITHDRAWAL
Application by plaintiffs for leave under Rule 52.01 to discontinue proceedings against first defendant - Application by first defendant for leave to discontinue counterclaim against plaintiffs - Factors relevant to exercise of Court's discretion to grant leave - Whether prejudice to second and third defendants - Leave granted.
Supreme Court Rules 1987 (SA) r 52.01, r 52.02; Trade Practices Act 1974 (Cth) s 52A, s 75B, s 87(1A), s 87(2)(d), referred to.
Trade Practices Commission v Manfal Pty Ltd (No 3) (1991) 33 FCR 382, distinguished.

HARRIS SCARFE LTD (RECEIVERS & MANAGERS APPOINTED) (IN LIQ) & ORS v ERNST & YOUNG & ORS (No 8)
[2006] SASC 317
BLEBY J:

The plaintiffs claim damages against two sets of auditors for negligence and related breaches of duty in respect of periods for which they conducted the audits of the Harris Scarfe group. The plaintiffs’ case as pleaded is that at the end of each relevant accounting period, had the directors been aware of the true financial position of the companies, a controller would have been appointed and the companies placed in liquidation. The plaintiffs claim by way of loss the difference in the net asset position at each of those times compared with the net asset position when a controller was eventually appointed in April 2001.
Ernst & Young (“EY”) were the auditors responsible for the 1996 and 1997 financial years. Coopers & Lybrand and PricewaterhouseCoopers (together referred to as “PwC”) were responsible for the audits for the 1998 and 1999 financial years. The plaintiffs have reached agreement with EY in settlement of the action against EY and now seek leave to discontinue the proceedings against EY.
In the absence of consent of the parties, no one sought to suggest that the discontinuance could be other than by leave of the court granted under rule 52.01 of the Supreme Court Rules. EY consents to the discontinuance and seeks leave to discontinue its counterclaim against the plaintiffs. PwC does not consent to the discontinuance and opposes the granting of leave to discontinue.
In the proceedings, a contribution notice has been served by PwC against EY, but PwC has not pleaded to the allegations of the plaintiffs against EY. The plaintiffs have also given notice of withdrawal of pleadings in the statement of claim pursuant to rule 52.02 those pleadings being, in essence, the pleadings to which PwC has not pleaded. They include the allegations that, if the true facts had been known by the plaintiffs, a controller would have been appointed to the companies following the financial years for which EY conducted the audits.
As Lee J acknowledged in Trade Practices Commission v Manfal Pty Ltd (No 3),[1] an application for leave to discontinue proceedings against a respondent will normally be granted. However, PwC relies on what Lee J also said in Manfal (No 3):[2]
… The court will give consideration to the need to refrain from compelling a party to litigate against its will but will also consider the extent to which the proceedings have developed and whether discontinuance against one respondent may impose injustice on another respondent by removing an advantage that respondent may otherwise enjoy in the proceedings or by imposing a disadvantage. In considering the undesirability of an applicant being forced to continue litigation unwillingly, it is relevant to have regard to whether the discontinuance would make any difference to the burden of litigation undertaken by the applicant and whether the application to discontinue results from a conclusion that the litigation cannot succeed against that respondent or is inspired by other reasons.
[1] (1991) 33 FCR 382 at 383.
[2] Ibid at 383-384.
PwC complain that the discontinuance will work an injustice on them by removing the advantage that they otherwise enjoy in having the plaintiffs prove that, as a result of the negligence of EY, a controller would have been appointed following the financial years 1996 or 1997. This will affect the burden of the litigation in that PwC will now have to prove against EY, whom they now propose to join as third parties, the allegations made by the plaintiffs against EY in the present statement of claim. They seek to rely on the plaintiffs’ pleading as an admission by the plaintiffs in favour of PwC that a controller would have been appointed had the true facts been known following each of the audits conducted by EY. They will therefore be disadvantaged by the discontinuance against EY.
The short answer is that the pleadings concerned are pleadings only against EY to which PwC has not pleaded. They are not admissions in favour of PwC. Furthermore, if the claim against EY were not discontinued, there would be no obligation on the part of the plaintiffs to prove that a controller would have been appointed if the true facts had been known following the EY audits. The court cannot force the plaintiffs to prove matters which they may choose not to.
The alternative submission of PwC was that leave to discontinue should only be granted on certain conditions, including a condition that allegations made by the plaintiffs against EY be taken as established unless EY, in their intended capacity as third parties, prove otherwise. This would amount to a substantial reversal of the onus of proof and could not be contemplated.
Although PwC claims to have been disadvantaged by the turn of events and the intended discontinuance of the plaintiffs’ action against EY, it would appear always to have been part of PwC’s case on the contribution notice that the allegations by the plaintiffs against EY should succeed, bring allegations central to their contribution proceedings.
Although Lee J in Manfal (No 3) spoke of a discontinuance imposing a possible injustice on another respondent or removal of an advantage that that respondent might otherwise enjoyed in the proceedings or the imposition of a disadvantage by a notice of discontinuance, the type of injustice and disadvantage contemplated by Lee J was of a different order, and that case is to be distinguished.
It involved a claim by the Trade Practices Commission under sections 87(1A) and (2)(d) of the Trade Practices Act1974 (Cth) for remedial orders on behalf of particular consumers for loss and damage suffered by them by reason of Manfal having allegedly engaged in a contravention of section 52A of the Trade Practices Act. Also joined in the proceedings were natural persons who were claimed to be jointly and severely liable with Manfal for the loss and damage. Those persons were not persons to whom section 52A of the Act applied. The remedy against them was as persons involved in the contravention as defined in section 75B of the Trade Practices Act. Their liability depended upon proof of a contravention of section 52A by Manfal, and their respective liability, according to the pleadings, would have been a joint liability with that of the company.
Manfal had been placed in liquidation. The Trade Practices Commission sought leave to discontinue the action against Manfal. Manfal’s defence to the claim was germane to the defence of all the individuals. If Manfal succeeded, the claim against the other defendants would fail. If the case against Manfal was discontinued, and the case proceeded against the others based on Manfal’s contravention, satisfaction of the judgment by an individual or individuals would constitute a bar to further action against Manfal. It was argued that if leave were given to discontinue the action, there would need to be further proceedings for leave to issue cross-claims by the individuals against Manfal, being cross-claims of uncertain nature, leading to substantial delay of the proceedings. However, if the pleadings stood and the Trade Practices Commission succeeded, there would be joint liability on the part of all respondents, and the discharge of the judgment of an individual would provide a foundation for a right of contribution against the company, which would not be the case if the action were discontinued.
I have recounted sufficient of the facts to show the substantial distinction between that case and this. No prejudice, in the sense discussed in Manfal (No 3), will be suffered by PwC in this case if leave is given to discontinue the action against EY. PwC, after extensive interlocutory proceedings, is fully aware of the nature of the case which the plaintiffs have alleged against EY. That has always been part of PwC’s case in the contribution proceedings against EY. I have no doubt it will be the case in the third party proceedings they propose against EY.
Nothing has been put which would justify the refusal of leave to the plaintiffs to discontinue against EY and the plaintiffs will have leave accordingly. Leave will also be granted to EY to discontinue their counterclaim against the plaintiffs.
Whatever consequence that may have for the commencement of the trial scheduled for next Monday is a matter for further argument.