Hastie Group Ltd (In Liq) v Bourne

[2017] NSWSC 709

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:

Hastie Group Ltd (in liq) v Bourne; Hastie Group Ltd (in liq) v Moore [2017] NSWSC 709

Hearing dates:

7 and 8 April 2017

Decision date:

06 June 2017

Jurisdiction:

Common Law

Before:

Ward CJ in Eq

Decision:

In each proceeding:
(1) Dismiss the plaintiffs’ application for leave to file the proposed amended commercial list statement annexed to the affidavit of their solicitor.
(2) The plaintiffs to pay the defendants’ costs of the proceeding to date.
(3) Liberty to the parties to apply on 3 business days’ notice.
(4) Stand the matter over to directions in the Commercial List on 13 October 2017.

and in relation to the Auditors’ Proceeding,

 

(5) Dismiss the proceeding insofar as it makes claims in relation to the 2010 audit.
(6) Direct the plaintiffs to serve any further proposed amended commercial list statement in relation to the 2011 audit by no later than 3 October 2017 and, if there is objection by the defendants to leave being granted for the filing of that document, to file any application for leave to file such a document by no later than 6 October 2017 to be returnable in the Commercial List on 13 October 2017.

and in relation to the Directors’ Proceeding:

 

(5)   Dismiss the proceeding insofar as it makes claims against any of the defendants that would be statute-barred if the proceedings were now to be commenced.

(6)   Direct the plaintiffs to serve any further proposed amended commercial list statement in relation to claims that are not yet statute-barred by no later than 3 October 2017 and, if there is objection by the defendants to leave being granted for the filing of that document, to file any application for leave to file such a document by no later than 6 October 2017 to be returnable in the Commercial List on 13 October 2017.

Catchwords:

PRACTICE AND PROCEDURE – pleadings – amendment – application to amend commercial list statement pursuant to s 64 of the Civil Procedure Act 2005 (NSW) – whether leave to replead should be granted

Legislation Cited:

Civil Liability Act 2002 (NSW), s 5B
Civil Procedure Act 2005 (NSW), ss 56, 57, 58, 59, 64, 65
Civil Procedure Act 2010 (Vic)
Corporations Act 2001 (Cth), ss 9, 180, 286, 344
Uniform Civil Procedure Rules 2005 (NSW), rr 14.7, 15.1

Cases Cited:

Abela v Giew (1964) 81 WN (Pt 1) (NSW) 344
ACN 074 971 109 v The National Mutual Life Association of Australasia Ltd [2010] VSC 186
Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (1995) 58 FCR 26
Antoniadis v TCN Channel Nine Pty Ltd (1998) 44 NSWLR 682
Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; [2009] HCA 27
Arthur Andersen Corporate Finance Pty Ltd v Buzzle Operations Pty Ltd (in Liq) [2009] NSWCA 104
Barnes v Forty Two International Pty Limited (2014) ALR 408; [2014] FCAFC 152
Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243
Bishopsgate Insurance Australia Ltd (in Liq) v Deloitte Haskins & Sells [1999] 3 VR 863
Brambles Australia Ltd t/as CHEP Australia v Tatale Pty Ltd [2006] NSWSC 204
Bond Corp Pty Ltd v Thiess Contractors Pty Ltd (1987) 14 FCR 215
Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541
Caason Investments Pty Ltd v Cao (2015) 236 FCR 322; [2015] FCAFC 94
CA & CA Ballan Pty Ltd v Oliver Hume (Australia) Pty Ltd [2017] VSCA 11
Clough and Rogers v Frog (1974) 4 ALR 615 at 618; 48 ALJR 481
Commissioner for Railways v Bielewicz [1963] NSWR 482; [1963] SR (NSW) 466
Commonwealth v McLean (1996) 41 NSWLR 389
Commonwealth Bank of Australia v ZYX Learning Centres Limited [2014] NSWSC 1676
Dare v Pulham (1982) 148 CLR 658; [1982] HCA 70
Dey v Victorian Railway Commissioners (1949) 78 CLR 62; [1949] HCA 1
General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125; [1964] HCA 69
Grosvenor Hill (Qld) Pty Ltd v Barber (1994) 48 FCR 301; [1994] FCA 921
Hastie Group Limited (in Liquidation) v Moore [2016] NSWSC 1682
HFPS Pty Limited (Trustee) v Tamaya Resources Limited (in Liq) (No 2) [2016] FCA 446
Horton v Jones (No 2) (1939) 39 SR (NSW) 305
Hoxton Park Residents Action Group Inc v Liverpool City Council [2012] NSWSC 1026
Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Market Ltd (2008) 73 NSWLR 653; [2008] NSWCA 206
Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2004] NSWSC 1219
Leotta v Public Transport Commission (NSW) (1976) 9 ALR 437; 50 ALJR 666
McGuirk v University of New South Wales [2009] NSWSC 1424
Middleton v O’Neill (1943) 43 SR (NSW) 178; 60 WN (NSW) 101
Mitanis v Pioneer Concrete (Vic) Pty Ltd (1997) ATPR 41-591
New Cap Reinsurance Corporation v Reaseguros Alianza SA (2004) 186 FLR 175; [2004] NSWSC 787
PPK Willoughby Pty Ltd v Roads and Maritime Services [2014] NSWSC 407
Renowden v McMullin (1970) 123 CLR 584; [1970] HCA 24
Research in Motion Ltd v Samsung Electronics Australia Pty Ltd (2009) 176 FCR 66; [2009] FCA 320
Riverina Wines Pty Limited v Tetra Pak Marketing Pty Limited [2007] NSWSC 1014
S1 v The Trustees of Marist Brothers [2016] NSWSC 970
Steiner v Strang [2016] NSWSC 9
Tamaya Resources Limited (in Liq) v Deloitte Touche Tohmatsu (A Firm) [2015] FCA 1098
Tamaya Resources Limited (in Liq) v Deloitte Touche Tohmatsu (a Firm) (2016) 332 ALR 199; [2016] FCAFC 2
Ucak v Avante Developments Pty Ltd [2007] NSWSC 367
Weldon v Neal (1887) 19 QBD 394
Wentworth v Rogers (No. 5) (1986) 6 NSWLR 534
Weston v Publishing and Broadcasting Limited (2012) 88 ACSR 80
Wride v Schulze [2004] FCAFC 216

Category:

Procedural and other rulings

Parties:

2015/00378222
Hastie Group Limited (in liq) and 7 others (Plaintiffs)
Trevor Bourne and 9 others (Defendants)

  2016/00253555
Hastie Group Limited (in liq) and 43 others (Plaintiffs)
Bruce Ivan Moore trading as Deloitte Touche Tohmatsu and 422 others (Defendants)

Representation:

Counsel:

 

2015/0037822
PB Murdoch QC with N Frenkel (Plaintiffs)
JR Williams (1st, 4th to 8th Defendants)
V Whittaker (2nd Defendant)
A Campbell (Solicitor) (3rd Defendant)
F Roughley (9th Defendant)
P Holmes (10th Defendant)

 

2016/00253555
PB Murdoch QC with N Frenkel (Plaintiffs)
RG McHugh SC, A Shearer, VL O’Halloran (Defendants)

 

Solicitors:

 

2015/00378222
Hall & Wilcox (Plaintiffs)
King & Wood Mallesons (1st, 4th to 8th defendants)
Quinn Emanuel Urquhart & Sullivan (2nd defendant)
Gilbert + Tobin (3rd defendant)
Lander & Rogers (9th defendant)
Clyde & Co Australia (10th defendant)
Macpherson Kelley Lawyers (11th defendant)

    2016/00253555
Hall & Wilcox (Plaintiffs)
Clifford Chance (Defendants)

File Number(s):

2015/00378222; 2016/00253555

Publication restriction:

Nil

INDEX

JUDGMENT
Introduction				[1]
Background
General	[7]
Commencement of proceedings against Deloitte in 2014/2015	[12]
Present proceedings				[22]
Directors’ Proceeding				[23]
Auditors’ Proceeding				[30]
Overview of the respective proceedings				[36]
Applications for leave to amend				[45]
Claims as proposed now to be made in the respective proceedings				[55]
Directors’ Proceeding
Claims made against the Hastie directors – Section C – [26]-[281]			[62]
Identification of the content of the alleged duties of care and diligence			[63]
Identification of statutory obligations of Hastie in relation to its financial accounts [28]-[35]			[66]
The Construction Contracts – [36]-[159]			[67
Allegations as to divisional reporting – [160]-[174]; financial misreporting – [175]-]231]; and write-offs – [232]-[234]			[76]
Defaults – [235]-[238]			[80]
Dividend – [239]-[246]			[83]
Loans – [247]-[265]			[85]
Breach of duties of care and diligence – [266]-[270]			[89]
Loss and damage – [271]-[272]			[90]
Alternative claim for breach of s 344 of the Corporations Act – [273]-[281]			[92]
Claims made against Messrs Hammond and Galvin the Hastie directors – Sections D and E			[93]
Auditors’ Proceeding				[99]
Hastie’s obligations – [19]-[30]				[100]
Deloitte’s contractual/statutory obligations – [31]-[34]/[35]-[36]				[101]
Construction contracts – [37]-[129]				[102]
Financial reporting allegations – [130]-[172]				[106]
Write-offs – [173]-[175]; dividends – [176]-180]; loans – [181]-[183]				[111]
Negligence and breach of contract – [184]-[199]; [207]-[220]				[113]
Misleading and deceptive conduct – [200]-[206]; [221]-[225]				[123]
Loss and Damage – [228]-[238]				[127]
Complaints as to adequacy of respective proposed amended commercial list statements				[136]
The Construction contracts ([36]-[159] in the Directors] Proceeding; [37]-[129] in the Auditors’ Proceeding)				[139]
Financial misreporting claims (Directors’ Proceeding – [175]-[238], [271]-[272]; Auditors’ Proceeding – [173]-[183]				[158]
Defaults (Directors’ Proceeding – [235]-[238]; Breach of section 344 (Directors’ Proceeding – [272]-[281])				[170]
Dividend claim (Directors’ Proceeding – [239]-[246], [271]-[272]; Auditors’ Proceeding – [176]-[180])				[173]
Inter-company loans (Directors’ Proceeding – [247]-[265]; [271]-[272]				[176]
The position of Mr Harris and Mr Woodward				[181]
The position of Mr Hammond				[183]
The position of Mr Galvin				[199]
Auditors’ Proceeding – claim for negligence and breach of contract – [184]-[200]; [207]-[220]				[204]
Misleading and deceptive conduct – [200]-[[206]; [221]-[227]				[216]
Causation – [228]-[232]; [233]-[237]				[217]
The plaintiffs’ response on the pleading deficiencies				[223]
Power to grant leave to amend				[228]
Determination on pleading issues				[234]
Discretionary matters				[255]
Plaintiffs’ submissions as to leave to re-plead		[267]
Determination				[272]
Costs				[279]
Orders				[280]
Appendix				[280]

Judgment

1. HER HONOUR: The plaintiffs (all companies in the Hastie Group of companies (the Hastie Group)), which are now in liquidation have, through the liquidators appointed to them, brought two separate proceedings following the collapse in 2012 of the Hastie Group. Both sets of proceedings are now in the Commercial List of the Equity Division and the applications before me are brought by the plaintiffs for leave to amend their commercial list statements in those proceedings. There is a substantial overlap in the allegations made in the respective proceedings and, as a result, the amendment applications were heard together on 7 and 8 April 2017. I directed that, on the present applications, evidence in each proceeding shall be evidence in the other.

2. The first of the said proceedings (2015/00378222), to which I will refer as the Directors’ Proceeding, brings claims against various individuals who occupied executive, non-executive or managerial roles in one or more of the companies forming part of the Hastie Group at particular times.

3. The second of the said proceedings (2016/00253555), to which I will refer as the Auditors’ Proceeding, brings claims against the partners at relevant times of the firm of accountants (Deloitte) which was engaged by the holding company of the group, Hastie Group Limited (Hastie), to perform audit services for the Hastie Group. As commenced, this proceeding was confined to claims in respect of the audits of the Hastie Group in respect of the 2010 financial year. The proposed amendment would introduce similar claims for the 2011 financial year. Earlier proceedings against the auditors in relation to the 2008 and 2009 financial years were dismissed by Ball J in November 2016 (Hastie Group Limited (In Liquidation) v Moore [2016] NSWSC 1682; see [18] below).

4. Each amendment application is opposed and the defendants in both proceedings seek orders, if leave to amend is not granted, for the dismissal of the respective proceedings on the basis of the conceded deficiencies in the existing filed commercial list statements. The defendants submit that discretionary considerations weigh strongly against the grant of liberty to re-plead.

5. For the reasons that follow, I am of the view that leave should not be granted for the filing of the respective proposed amended commercial list statements but that a further opportunity should be allowed to the defendants to rectify the deficiencies identified in the existing commercial list statement in each proceeding, limited (in the case of the auditors) to claims in relation to the 2011 audit period and (in the case of the defendants in the Directors’ Proceeding) limited to claims that would not be statute barred if now commenced. Unless there is a proper identification of the basis on which defendants such as Mr Harris and Mr Woodward are said to be liable for losses on inter-company loans made after they had left the Hastie Group, or on which Mr Hammond and Mr Galvin are said to be liable for losses incurred in relation to construction projects where the relevant work was performed prior to the time at which they had any divisional responsibility for the relevant contracting entity, no such claims should be included in any proposed further amended commercial list statement.

6. The plaintiffs should pay the defendants’ costs of the proceedings to date in circumstances where the application for leave to file the now proposed amended commercial list statements have been unsuccessful and the existing commercial list statements are acknowledged to have been defective.

Background

General

7. Prior to its entry into administration, Hastie, through its various subsidiaries, carried on business in the construction industry. Hastie did not itself provide construction services. Rather, its subsidiaries entered into sub-contracts on various construction projects for the provision of mechanical, electrical and plumbing services in a number of countries including, relevantly for present purposes, countries in the Middle East as well as Australia. The Hastie Group had approximately 7,000 employees and an annual turnover in excess of $1.8 billion.

8. On 28 May 2012, voluntary administrators were appointed to Hastie and 43 of its subsidiaries. On the same day, receivers were appointed to a number of the companies by a banking syndicate which had provided secured funding to the group (the Banking Syndicate).

9. In the course of the administrators’ investigation into the affairs of the Hastie Group, an analysis was conducted of the group’s financial statements by independent accountants - Saward Dawson Chartered Accountants (Saward Dawson), who were retained by the administrators in around July 2012. A report (the Saward Dawson Report) was provided by those accountants on or around 31 August 2012, identifying what were described as potentially significant issues with the Hastie Group’s audit procedures, accounting records and internal controls (see [26] of the affidavit sworn 13 February 2015 by one of the liquidators, Mr Crosbie, in support of a notice of motion filed by the Hastie Group which sought an extension of time for the service of the statement of claim in proceeding commenced against Deloitte in 2014). A copy of this affidavit was tendered by Deloitte on the present applications, for the admissions contained in it.

10. By January 2013, all of the companies in the Hastie Group had been placed in liquidation. As a result of the liquidator’s investigations and the Saward Dawson Report, the liquidators formed the view around that time that there were arguable causes of action against Deloitte in relation to the audit reports for the 2008 to 2011 financial years by reason of Deloitte’s failure to address various specified matters - including potentially overstated trade and other receivables, for at least the 2010 and 2011 financial years, and potentially significantly overstated inventories, since at least the 2009 financial year (see [29(c)-(d)] of Mr Crosbie’s affidavit). The view was formed that the audit process in each of the 2008 to 2011 financial years was likely to have been substantially similar and that, by extrapolation, the “inherent deficiencies” identified in the 2010 and 2011 audits would extend to the 2008 and 2009 audits; hence the view that the Hastie Group had arguable causes of action against Deloitte in relation to those earlier audits (see Mr Crosbie’s affidavit at [29]; [31]).

11. Although Mr Crosbie’s affidavit (which was sworn in the context of the then proceedings in relation to the auditors) did not in terms address the point at which the view was formed that there were potential claims against the former directors and officers of the Hastie Group, it seems reasonable to assume that this was at or around the same time, since Mr Crosbie deposed that Saward Dawson had been engaged in around July 2012 to assist the liquidators to determine whether the Hastie Group “may have any potential causes of action arising out of the management or financial reporting of the Hastie Group” (see [25] of Mr Crosbie’s affidavit) and the enquiries subsequently carried out by the liquidators encompassed potential claims against not only the auditors but also the former directors and officers. Mr Crosbie accepted (in cross-examination before Ball J) that the focus of the liquidators’ efforts at first was on the potential claim against the directors and officers of the Hastie Group (see T 68.19-29; 10 November 2016).

Commencement of proceedings against Deloitte in 2014/2015

12. In 2014, on the eve of the expiry of the applicable limitation period for claims in relation to the 2008 audit (and before any public examinations had been undertaken), proceedings were commenced in the Common Law Division of this Court (the 2014 auditors’ proceeding) against those persons who had then been identified as partners of Deloitte as at August 2008, alleging negligence and misleading and deceptive conduct.

13. It was conceded by Mr Crosbie (in the proceedings before Ball J) that as at the time the 2014 auditors’ proceeding was commenced he knew that the pleading was not properly pleaded (see T 124.49; 11 November 2016) and he accepted that there “wasn’t any basis for any of the claims for [i.e., by] any of the plaintiffs” (see T 124.42). As I read the transcript, in context this concession seems to relate to the acceptance in 2015 that the position in 2014 was that there was no basis for claims to be made by all of the plaintiffs, in that it was not known at that time which of the 44 plaintiffs did have a claim, though it was considered that some at least had a claim. It was accepted that by the time of service of the commercial list statement on Deloitte, 36 of the 43 Hastie subsidiaries had no claim at all against Deloitte and, further, that the claim was not properly pleaded. That was in essence the position as explained to Moshinsky J in the proceedings in the Federal Court in October 2016 by Mr Frenkel of Counsel, when the plaintiffs sought approval of funding arrangements for the litigation (though it was a proposition resisted by the plaintiffs’ solicitor when the matter was before me – see T 55.28-35). In any event, on Mr Crosbie’s evidence the 2014 auditors’ proceeding was issued in the form that it then was (naming 44 plaintiffs the majority of whom it is now accepted had no claim at all) in order to preserve a cause of action (see [61] of Mr Crosbie’s affidavit).

14. As at February 2015, when Mr Crosbie swore the affidavit to which I have above referred, the liquidators considered it necessary for public examinations to be conducted of up to 20 key Hastie Group and Deloitte personnel, among other things to identify potential causes of action against both the directors and the auditors of the Hastie Group (Mr Crosbie’s affidavit at [32]-[34]). They had earlier (from about November 2012) unsuccessfully sought funding from the Banking Syndicate for the purpose of conducting those examinations. However, Mr Crosbie deposed that at times during the course of the liquidation (ex hypothesi prior to February 2015) there were funds available with which to conduct public examinations but the liquidators had chosen (for the reasons he there gave) not to do so (affidavit at [44]). Again, the plaintiffs’ solicitor on the present applications took issue with that proposition.

12. Successive extensions of time for the service of the statement of claim in that proceeding were sought, and obtained, on an ex parte basis in the period from February 2015 to December 2015.

13. Prior to the second ex parte extension application in relation to the 2014 auditors’ proceeding, the liquidators commenced further proceedings against the auditors (the 2015 auditors’ proceeding), these relating to the 2009 audit. An extension of time for the service of the statement of claim in that proceeding was sought and obtained, again on an ex parte basis, in February 2016.

14. It was not until April 2015 that the liquidators first sought access to Deloitte’s review audit papers. Thereafter, in the period from May 2015 to October 2015, public examinations were conducted: first of former directors and officers of the Hastie Group and then of certain of the partners and employees of Deloitte. Following access to Deloitte’s electronic audit files, an audit expert (Westworth Kemp) conducted a review of the Deloitte audit files.

Dismissal of 2014/2015 auditors’ proceedings

18. In July 2016, both the 2014 and 2015 auditors’ proceedings were transferred to the Commercial List. In November 2016, on the application of the Deloitte defendants, Ball J held that the various ex parte extensions of time that had been granted in respect of the service of the pleadings in those proceedings should not have been granted. His Honour discharged the relevant orders and dismissed both the 2014 and 2015 auditors’ proceedings with costs.

19. Relevantly, I note that the Banking Syndicate had refused to provide funding for the public examinations, or the claims themselves, and had given its consent to the bringing of proceedings by the liquidators only on the basis that it not be involved in those proceedings. Senior Counsel then appearing for the plaintiffs before Ball J (Mr Newlinds SC) informed his Honour that there was no realistic prospect that any creditor would benefit from the proceedings other than the Banking Syndicate (and Mr Crosbie conceded that the Court had not previously been told that this was the case) (see T 23.21-37; 10 November 2016). Mr Crosbie also accepted that it was obvious to the liquidators in 2014 that the main creditors who would benefit from the proceedings were the banks, who had the funds to run the case but had no desire to run it themselves (T 31.4-32.19; 10 November 2016).

20. In his affidavit of February 2015, Mr Crosbie estimated (at [37]) that the Hastie Group had creditors of approximately $966.6 million, comprising secured creditors (the Banking Syndicate) of approximately $529.9 million, priority creditors of approximately $47 million and unsecured creditors of approximately $390 million. The liquidators at that stage held approximately $6.2 million in funds of which $1.4 million had been quarantined for distribution to priority creditors (at [40]). The liquidators’ understanding was that the Banking Syndicate would suffer a shortfall on its debts exceeding $100 million ([38]).

21. I have referred to Mr Crosbie’s evidence in the proceedings before Ball J (relied on by Deloitte for the admissions there made) because in the proceedings before me Deloitte pointed to inconsistency between that evidence and certain of the evidence given by the plaintiffs’ solicitor, Mr Kelcey, on the present applications. On the scenario as deposed to by Mr Crosbie in February 2015, it can readily be seen that there is no realistic prospect that unsecured creditors will benefit at all from the present proceedings and that the likelihood is that the only creditors to benefit would be the Banking Syndicate.

Present proceedings

22. That brings me to the two sets of proceedings presently on foot, in respect of which leave to amend the commercial list statements is now sought.

Directors’ Proceeding

23. The Directors’ Proceeding was commenced on 24 December 2015 in the Corporations List of the Equity Division by the filing of an originating process dated 23 December 2015 and an affidavit in support sworn by Mr Crosbie on 22 December 2015. The originating process was not served at that time. On 4 February 2016, an order extending the time for service of the originating process to 3 June 2016 was made on an ex parte basis. Most of the defendants were served with the originating process by that date (the exceptions being the sixth defendant (Mr Boon), who was served shortly thereafter and instructed his solicitors to accept service, and the eleventh defendant (against whom the proceedings were discontinued with no order as to costs in September 2016).

24. The first commercial list statement in the Directors’ Proceeding was filed on 9 September 2016. Following complaint as to the adequacy of that document, the plaintiffs consented to orders for an amended commercial list statement to be filed by 20 January 2017. The first proposed amended commercial list statement was filed on 27 January 2017. There was again complaint as to the adequacy of that document. On 10 February 2017, orders were made requiring the plaintiffs to provide a further version of the proposed amended commercial list statement by 14 February 2017 and for any opposition to the filing of that document to be heard on 6 April 2017. A second proposed amended commercial list statement was served on 15 February 2017. When the defendants again complained as to defects in the pleading, the plaintiffs sought a further opportunity to amend the pleading (and unsuccessfully sought the vacation of the 6 April 2017 hearing). The final (i.e., third) version of the proposed amended commercial list statement was served on 31 March 2017.

25. There are in effect two groups of defendants in the Directors’ Proceeding. The first group (to which I will refer collectively as the Hastie directors), referred to (at [25]) in the proposed amended commercial list statement as the Hastie Board, is comprised of those defendants who were directors of Hastie itself (and, in some cases, also of one or more Hastie subsidiaries who are also plaintiffs in these proceedings - the Subsidiary Plaintiffs), whether in an executive capacity (Mr Harris and Mr Woodward) or as a non-executive director (Messrs Bourne, Anderson, Gaskell, Boon, and Martin). The second group is comprised of two former directors of some or all of the Subsidiary Plaintiffs who occupied managerial roles with responsibility for particular divisions within the Hastie Group at various times (Mr Hammond and Mr Galvin).

26. Each of Mr Harris, Mr Woodward, Mr Hammond and Mr Galvin was separately represented. Apart from some submissions directed to the particular position of each in certain respects, they broadly adopted the submissions made on behalf of the non-executive Hastie directors as to the deficiencies in the proposed amended commercial list statement in the Directors’ Proceeding (and the submissions of both Deloitte and the non-executive Hastie directors on the exercise of discretion).

27. The particular roles of the respective defendants in the Directors’ Proceeding (leaving aside the eighth defendant, in whose favour judgment was entered by consent at the outset of the hearing of the present applications) are identified in the now proposed amended commercial list statement as follows:

1. the first defendant, Mr Bourne, was a director of Hastie and its chairman for the period from 4 February 2005 to 15 February 2012; and a member of its Audit and Risk Management Committee (ARMC) in that period ([15]);

2. the second defendant, Mr Harris, was the managing director of Hastie and its chief executive officer for the period from 1 June 2007 to 7 October 2011; and a director of the Subsidiary Plaintiffs at specified times ([16]);

3. the third defendant, Mr Woodward, was a director of Hastie and its chief financial officer for the period from 1 June 2007 to 25 October 2011; and was a director of the Subsidiary Plaintiffs at specified times ([17]);

4. the fourth defendant, Mr Anderson was a director of Hastie for the period from 9 February 2005 to 28 May 2012; the chairman of Hastie for the period from 16 February 2012 to 28 May 2012; and the chairman of the ARMC from about 9 February 2005 to 28 May 2012 ([18]);

5. the fifth defendant, Mr Gaskell, was a director of Hastie for the period from 15 August 2008 to 28 May 2012 ([19]);

6. the sixth defendant, Mr Boon, was a director of Hastie for the period from 9 February 2005 to 25 May 2012, and a member of its ARMC for about that period ([20]);

7. the seventh defendant, Mr Martin, was a director of Hastie for the period from 4 February 2005 to 3 November 2011 ([21]);

8. the ninth defendant, Mr Hammond, was a director of each of the Subsidiary Plaintiffs for the periods specified (at [23(a)]). He was the chief executive of the Electrical Division of the Hastie Group for the period from 5 September 2006 to 30 June 2010 and of its Mechanical, Electrical and Plumbing Division for the period from 1 July 2010 to 28 May 2012 ([23(c) and (d)]); (as will be seen in due course, the period in which he held the relevant managerial positions is of significance when considering the claims brought against him); and

9. the tenth defendant, Mr Galvin, was a director of the Subsidiary Plaintiffs, with the exception of Heyday Group Pty Ltd, (for the periods specified at [24](a)]). He was the chief executive of the Air-Conditioning Installation/Mechanical and Hydraulics Division of the Hastie Group from 1 January 2006 to 7 July 2010; (as I understand it, Mr Hammond took over Mr Galvin’s managerial responsibilities when the latter left the Hastie Group, at which time the relevant division was renamed and/or re-structured - again, the period in which Mr Galvin had divisional responsibility is of significance when considering the claims brought against him).

28. Each of the non-executive Hastie directors (i.e., the first and fourth to seventh defendants) is alleged to have been a director or officer, within the meaning of those terms in s 9 of the Corporations Act 2001 (Cth), of each of the Subsidiary Plaintiffs (i.e., what is colloquially referred to as a shadow director), for the period from the incorporation of that subsidiary or otherwise from the date on which he was appointed a director of Hastie. Complaint is made by them, and I accept, that the proposed amended commercial list statement does not adequately particularise the facts, matters and circumstances by reference to which the allegation is made that they were shadow directors and/or officers of the relevant companies; the particulars simply asserting, in effect, the test to be applied in that regard (see for example the particulars to [15(c)]).

29. Mr Hammond is alleged (at [23(b)]) to have been a shadow director of one of the Subsidiary Plaintiffs (Hastie International Pty Ltd (HIP)) for a period from 1 July 2010 to 30 November 2010. Part of that period overlaps with the period in which he is alleged to have been an appointed director of HIP, thus it is seemingly alleged that for a particular period he was both an appointed and a shadow director of HIP at the same time (unless this was intended to be pleaded as an alternative) (see [23(b)]). It is not alleged that Mr Galvin was a shadow director of any of the Subsidiary Plaintiffs.

Auditors’ Proceeding

30. The Auditors’ Proceeding (that being the only currently subsisting proceeding against the auditors following the decision of Ball J to which I have earlier referred), was commenced in the Commercial List on 23 August 2016 by the filing of a summons and commercial list statement. As noted earlier, when they were commenced, the proceedings concerned only the audit performed by Deloitte of the Hastie Group for the financial year 2009/10. However, the proposed amended commercial list statement for which leave is now sought introduces similar claims in respect of the subsequent year’s audit (i.e., for the financial year 2010/11).

31. The commercial list statement in the Auditors’ Proceeding was served on 9 September 2016. Since then (and following various objections raised by the Deloitte defendants as to the adequacy of the commercial list statement, and subsequent proposed amendments thereto, as well as the making of directions by the Court), successive iterations of a proposed amended commercial list statement have been provided to the defendants.

32. First, a proposed amended commercial list statement was provided by letter dated 28 November 2016. Then on 3 February 2017 a further proposed amended commercial list statement was provided, with the subsequent provision on 7 February 2017 of the schedules referred to in that version of the proposed amended commercial list statement. On 2 March 2017, a number of typographical errors that had been identified upon review of the further proposed amended commercial list statement were notified to the defendants. Next, on 3 March 2017 the defendants’ consent was sought to the filing and serving of notices of discontinuance by 36 (of the then) plaintiffs by whom no cause of action was sought to be maintained in the further proposed amended commercial list statement. Finally, on 31 March 2017, the plaintiffs served a further version of the amended commercial list statement, that being the document for which leave to amend is now sought.

33. As is the case in the Directors’ Proceeding, there have therefore already been a number of iterations of the proposed amended commercial list statement in this proceeding though, as the plaintiffs point out in their submissions, this is the first actual amendment application to have been made in either of the proceedings.

34. The relevant retainers in respect of the audit engagement for the financial years ended 30 June 2010 and 30 June 2011 were entered into by Deloitte with Hastie for the provision of audit services in relation to the consolidated entity (proposed amended commercial list statement at [13] and [14]). The first retainer agreement the subject of any claim in these proceedings is that alleged to have been entered into on 3 February 2010 ([29]). The first financial report provided by Deloitte to the ARMC in the course of that retainer was provided on 24 August 2010 ([130]).

35. Deloitte argues that it can only be liable from the time the 24 August 2010 audit report was signed (since the complaint is that it never identified the problems in relation to the construction contracts, not that it identified but failed to report those problems) and points out that the claim against the directors raises complaints from a much earlier time. It complains that there has been no attempt to distinguish the claims against the directors (going back to February 2009) and the work that Deloitte performed for the relevant audit periods (2010 and 2011). The plaintiffs do not accept that audit work carried out prior to the August 2010 report is irrelevant and argue, as I understand it, that Deloitte: was obliged to notify the Hastie Board of any deficiencies as soon as they became aware of them; failed in its duty to detect the deficiencies throughout the audit period; and hence failed to notify the Board of the deficiencies at all times during the period in which it performed audit work. Whatever the merits of the opposing contentions in this regard, it throws up the deficiency in the pleading as to what audit work was (or was not, and should have been) done in the relevant periods by reference to which a breach is alleged (and how that led, as a matter of causation, to the claimed loss).

Overview of the respective proceedings

36. By way of overview, the plaintiffs complain that the Hastie Group’s internal control processes and systems were deficient; that the directors should have caused proper procedures and controls to be put in place (so as to ensure compliance with the approval procedures for variation works under the relevant construction contracts); and that the auditors should have identified and reported on the said deficiencies.

37. The particular deficiencies identified in the Hastie Group’s internal control processes and systems are twofold: first, the lack of preparation (or any requirement for the preparation) by Subsidiary Plaintiffs, in respect of any significant construction project on which that Subsidiary Plaintiff was engaged, of a contract administration manual tailored to the particular terms of the relevant contract and containing particular provisions; and, second, the lack of standardised monthly reports by the Subsidiary Plaintiffs to the Hastie Board of matters in relation to variation works under the said construction contracts (the plaintiffs say that in only one of the projects was there a contract administration manual and then only from about January 2012, referring to the CSB/IPU contracts to which I refer at [75(ii)] below). In oral submissions (but not in terms in the pleadings) the complaint is that Deloitte failed to report the “endemic” failure of the Hastie Group entities to obtain approval for variation works as required under the terms of the particular construction contracts (which differed from project to project).

38. The significance attributed by the plaintiffs from an accounting perspective to the lack of internal control processes or systems of the kind they contend should have been put in place relates to the manner in which variation claims could properly be booked as revenue in the relevant company’s accounts. The plaintiffs contend that, in the absence of written variation approvals (obtained in accordance with the terms of the respective contracts) and the proper recording of variation approvals, it could not be said that it was probable that the variation claims would be paid; and thus that those amounts should not have been booked as revenue in the accounts.

39. On that basis (and also having regard to complaints made as to the time at which certain provisions for doubtful debts were ultimately made in relation to particular projects) the plaintiffs argue that the 2010 and 2011 accounts did not demonstrate the true and fair position of the Hastie Group companies and hence that a dividend payment made by Hastie to its shareholders in 2010 should not have been made, nor should certain inter-company loans have been made in the period from 2011/2012 from one subsidiary (Hastie Holdings Pty Ltd - HHPL) to another (HIP) in relation to the group’s Middle Eastern business.

40. The claim against the Hastie directors (and Messrs Hammond and Galvin) broadly relates to their failure to put in place and/or ensure compliance with internal controls and processes of the kind identified as required to have been put in place; and their failure to ascertain the true financial position of the Hastie Group.

41. The claim against the auditors is broadly that they should have ascertained the inadequacy in the Hastie Group’s internal controls, should have notified this to the Hastie Board, and should have concluded that the relevant accounts did not demonstrate the true and fair position of the Hastie Group companies. In written submissions in reply on the present applications (in the context of their submission that it was not practical for them to plead each of the 488 unpaid or part-paid variations in the proposed amended commercial list statements), the plaintiffs (at [14(a)]) assert that:

In essence, the plaintiffs’ claim against Deloitte in relation to the variations is that Hastie Group had no adequate internal controls to ensure that they had written approval from a customer before performing variation works, and that revenue was booked in relation to those works notwithstanding the absence of customer approval. Deloitte failed to inform Hastie Group of that failure. [my emphasis]

42. Pausing there, Deloitte argues that, insofar as the essence of the claim based on losses sustained on the construction contracts is a failure by it to inform the Hastie Group as to the existence of unapproved variations, this is manifestly hopeless because the existence of unapproved variations, and the future risk to earnings this posed, was expressly disclosed in reports to the Hastie ARMC at the relevant times (see for example the notes to the 24 August 2010 ARMC report). Somewhat surprisingly (given its obvious relevance to the claims made against Deloitte) the plaintiffs’ solicitor said in cross-examination, when taken to that report, that he was then looking at it for the first time – T 38.10. Nevertheless, he was prepared to accept that an allegation of a failure by Deloitte to notify the directors of unapproved variations would be wrong in light of that report – see T 39.11. The plaintiffs do, however, cavil with Deloitte’s characterisation of their submissions in relation to the Variation Loss Claim and of the way the claim has been pleaded. They argue that the failure on the part of Deloitte in this regard was to notify the Hastie Board that the failure to obtain the requisite approval was endemic (see T 118) and as to the potential consequences of the deficiencies in internal controls. They say that the obligation of Deloitte did not start at the point of investigating business processes but, rather, started at the point of identifying each of the contracts which were material – it being obliged to enquire into and satisfy itself as to matters that might affect the profitability of the group (and these contracts all being for material amounts).

42. In relation to the non-recovery of expenses incurred in the performance of unapproved variation or out of scope works performed under the relevant contracts, it is contended by the plaintiffs against the directors that, had the directors complied with their alleged duties of care and diligence those losses would not have been suffered and, against Deloitte, that, had the deficiencies in internal control processing been identified by Deloitte and notified to Hastie, then remedial action would have been taken by the directors to prevent or mitigate those losses.

43. The loss identified as having been suffered by the plaintiffs as a result of the respective alleged breaches (by both directors and auditors) is threefold: first, the non-recovery of amounts claimed for variation works under various construction contracts (to which I will refer as the Variation Loss); second, the amount paid out by Hastie in 2010 by way of dividend – $9,590,000 (the Dividend Loss); and, third, the amount paid out by way of inter-company loans by HHPL to HIP in the relevant period (the Loans Loss). Only the first of those categories of loss is claimed against Messrs Hammond and Galvin.

Applications for leave to amend

45. The respective amendment applications are made pursuant to s 64 of the Civil Procedure Act 2005 (NSW), which provides, relevantly, that:

64(1)   At any stage of proceedings, the court may order:

(a)   that any document in the proceedings be amended, or

(b)   that leave be granted to a party to amend any document in the proceedings.

(2) Subject to s 58, all necessary amendments are to be made for the purpose of determining the real questions raised by or otherwise depending on the proceedings, correcting any defect or error in the proceedings and avoiding multiplicity of proceedings.

…

46. In Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; [2009] HCA 27, French CJ (at [14]) noted the distinction between the discretion of a court to allow a party to amend its pleading on that party’s motion and the requirement to make all such amendments as may be necessary to determine the real questions in controversy (the latter engaging with the authority conferred on the court to make amendments of its own motion).

47. Subject to any rights to amend without leave given to the parties by the rules of court, the question of further amendment of a party’s claim is dependent upon the exercise of the court’s discretionary power; which must be in accordance with s 64(2) of the Civil Procedure Act and must adhere to the “dictates of justice” (ss 56, 57 and 58 of the Civil Procedure Act). In Aon the factors to be weighed in the exercise of this discretion were said (at [102]) to include: the nature and importance of the amendments to the plaintiffs; the effect of the proposed amendments on the defendants; the delay in making the amendments; and, where there is delay in applying for amendment, whether an adequate explanation for the delay has been given.

48. The plaintiffs contend that the amendments sought to be made are necessary for the purpose identified in s 64(2) of the Civil Procedure Act, acknowledging that the existing filed commercial list statements are defective (by reason of a lack of pleading of material facts, particularly in relation to causation and loss). They argue that the introduction of claims in relation to the 2011 audit period will avoid a multiplicity of proceedings.

49. The plaintiffs characterise (unfairly in my view) the defendants’ position on the present applications as raising an “arid debate” about the difference between material facts and particulars; and baldly assert that all the defendants know the case they have to meet. Their response to various of the pleading deficiencies that have been identified by the defendants is, in effect, that the pleading is perfectly adequate as it is (an assertion largely made simply by reference back to the very paragraphs of the documents containing conclusory statements about which complaint is made), but that any deficiency is capable of being cured by further amendment, including the provision of further particulars.

50. In cross-examination on the present applications, the solicitor with the present carriage of the case accepted that the present iteration of the proposed amended commercial list statement in the Auditors’ Proceeding (and also, it might be assumed, the corresponding document in the Directors’ Proceeding) represented the best commercial list statement his firm could prepare to address the concerns that had been identified by Deloitte in its written submissions (see T 59.5). That said, the position adopted by Senior Counsel for the plaintiff was that any deficiency in the pleading could be remedied.

51. As to the question of delay, the plaintiffs point to the position of disadvantage that it is commonly recognised is suffered by liquidators in litigation because they do not have direct contemporaneous knowledge of the circumstances of the companies to which they were appointed (referring to Grosvenor Hill (Qld) Pty Ltd v Barber (1994) 48 FCR 301 at 306-7; [1994] FCA 921). They say that the reconstruction of a number of large construction projects undertaken by the plaintiffs in the Middle East and Australia, and the reconstruction of the financial position of the Hastie Group during particular periods of time, is and has been a very difficult task, hampered for a period by delay in obtaining litigation funding. They maintain that there has been no significant default in compliance with court orders. They point out that (unlike the position in Aon) the application is made at an early stage of the respective proceedings and say that the present case bears no resemblance to that considered in either Aon or Tamaya Resources Limited (in Liq) v Deloitte Touche Tohmatsu (a Firm) (2016) 332 ALR 199; [2016] FCAFC 2.

52. The plaintiffs expressly reject the findings made by Ball J as to the lack of a satisfactory explanation for the delay in the investigation and commencement of the earlier proceedings (see their reply submissions at [7]), even though there was no appeal from his Honour’s dismissal of those proceedings nor any challenge to the findings made by his Honour in that (or any other) respect. They also argue that they are not responsible for delay caused in the present proceedings while security for costs applications were pursued in the proceedings and complain that the defendants have not been co-operative in the process of the plaintiffs’ attempts to produce an acceptable pleading.

53. The plaintiffs refer to various authorities for the proposition that leave to amend should generally be granted if the application is made in a timely manner and for a proper purpose (Clough and Rogers v Frog (1974) 4 ALR 615 at 618; 48 ALJR 481; Horton v Jones (No 2) (1939) 39 SR (NSW) 305 at 309; Leotta v Public Transport Commission (NSW) (1976) 9 ALR 437; 50 ALJR 666; Commissioner for Railways v Bielewicz [1963] NSWR 482; [1963] SR (NSW) 466; Abela v Giew (1964) 81 WN (Pt 1) (NSW) 344; Antoniadis v TCN Channel Nine Pty Ltd (1998) 44 NSWLR 682 at 690-5; Commonwealth v McLean (1996) 41 NSWLR 389 at 396E-397D); and argue that leave to amend a pleading will generally be allowed if it is sought at an early stage in the proceedings (referring to Middleton v O’Neill (1943) 43 SR (NSW) 178 at 185; 60 WN (NSW) 101).

54. As to the question of prejudice if leave is not granted, in their written submissions the plaintiffs maintain (at [39]) that the claims are made for the benefit of creditors. That submission does not provide a complete picture, given the acceptance by Mr Crosbie, when the 2014 and 2015 auditors’ proceedings were before Ball J, that realistically the proceedings (if successful) would benefit only the Banking Syndicate (see [19] above). Significantly, there is nothing to warrant any different conclusion in relation to the present proceedings against both the directors and the auditors. I will come back to this issue in due course.

Claims as proposed now to be made in the respective proceedings

55. Before summarising the complaints made as to the adequacy of the proposed amended commercial list statements in the respective proceedings, it is convenient to set out a summary of the claims now proposed to be made in each set of proceedings. Unfortunately, given the length of the documents, that will not be a short task.

56. The structure in each of the proposed amended commercial statements is similar. After introductory sections dealing with the identification of the parties, Hastie’s statutory obligations and, in the case of the Auditors’ Proceeding, the articulation of various accounting standards and allegations as to Deloitte’s statutory and contractual obligations, both the proposed amended commercial list statements contain: a section headed “Construction Contracts”, in which allegations are made as to seven particular construction projects in which one of the Subsidiary Plaintiffs in each case was involved; sections dealing with: alleged financial misreporting and the making of write-offs by the Hastie Board, the making of the 2010 dividend payment, and the making of the inter-company loans in 2011/2012 by HHPL to HIP; and then sections dealing with alleged breach of duty and breach of s 344 of the Corporations Act (in the case of the directors) and with alleged breach of contract, negligence and misleading and deceptive conduct in the case of the auditors. In the Directors’ Proceeding there are separate sections containing the allegations about each of Mr Hammond and Mr Galvin, the claims against each being limited to the Variation Loss (albeit for the whole of that loss).

57. The claimed loss and damage is pleaded in substantially similar terms in both of the proposed amended commercial list statements. In each, the Variation Loss is particularised in respect of each of the seven construction contracts by reference to separate attachments listing a number of unpaid or partly-paid variation works for which it is said claims have “or ought to have” been made.

58. The plaintiffs have pointed to the provisions in the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) as to the requisite contents of a commercial list statement: namely, that it be in summary form and that the plaintiffs’ contentions should: avoid formality, state the allegations made with adequate particulars and identify the legal grounds for the relief claimed (referring to UCPR rr 14.7 and 15.1; Practice Note SC Eq 3 at [8] and [9]). They maintain that what they have served satisfies those requirements.

59. Nevertheless, it is also necessary to bear in mind the observations by Bergin J (as her Honour then was) in Brambles Australia Ltd t/as CHEP Australia v Tatale Pty Ltd [2006] NSWSC 204 (at [9]) to the effect that statements of contentions in commercial list statements serve essentially the same purposes as pleadings and that the requirements of the Practice Note are intended to ensure that each party knows the case made against it, such commercial list statements defining the limits within which the trial will be conducted. (See also, albeit there in the context of the traditional form of pleadings, what was said in Dare v Pulham (1982) 148 CLR 658 at 664; [1982] HCA 70 (Murphy, Wilson, Brennan, Deane and Dawson JJ).)

60. In Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243, Allsop P, as his Honour then was, emphasised (at [160]-[165]), the need for clarity and precision in delineating the issues in a long and complex trial in the Commercial List and the requirement for there to be a “clear and full enunciation of issues for trial”. (See also what was said by Ipp JA in Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Market Ltd (2008) 73 NSWLR 653; [2008] NSWCA 206 at [418] as to the operation of the Commercial List being on the basis of an expectation that, in pleading their cases, the parties will “comply fully with the surprise rule and … lay their cards on the table in the clearest possible way”.)

61. I turn then to the way in which the claims are articulated in the now proposed amended commercial list statements in each proceeding.

Directors’ Proceeding

Claims made against the Hastie directors – Section C – [26]-[281]

62. The claims made against the Hastie directors are set out in Section C of the proposed amended commercial list statement. The claims are for alleged breaches of duties of care and diligence owed to each of the plaintiffs of which the relevant defendant was a director or officer (or shadow director) pursuant to s 180(1) of the Corporations Act and for breach of the “substantially identical” duties in tort and equity ([26]). Each of the three categories of loss is sought to be recovered from these defendants.

Identification of the content of the alleged duties of care and diligence

63. The articulation at [27] of what the duties of care and diligence allegedly required of the Hastie directors is the foundation for the allegations of breach in relation to the various construction projects in respect of which the Variation Loss is claimed, as well as the claims for the Dividend Loss and Loans Loss. Given its foundational significance, I have set it out in full in the appendix to these reasons.

64. A number of the sub-paragraphs of [27] are framed in terms of a duty requiring the said defendants not merely to cause the Subsidiaries to do something (such as (b)) or to take all reasonable (though unidentified) steps to ensure that the Subsidiaries did certain things (such as (c)), but rather to “ensure” certain arrangements were in place (such as that each Subsidiary had certain processes or systems and controls in place – see (i), (k)-(l), (o)-(r) – and that each Subsidiary followed such processes, systems or controls – see (j), (n)).

65. The duties of care and diligence said to have been owed by each of these defendants also include the requirement that they: “ensure that Hastie Group’s financial reports for the 2008, 2009, 2010 and 2011 were true and fair” (see (t)); pay a dividend to Hastie’s shareholders only where it was reasonable to do so (see (u)); and permit loans to be made by the Subsidiary Plaintiffs or Hastie only in certain specified circumstances (see (v)-(y)).

Identification of statutory obligations of Hastie in relation to its financial accounts – [28]-[35]

66. At [28]-[35], certain statutory obligations of Hastie in relation to its financial accounts are set out, by reference to s 286(1) of the Corporations Act and to particular Australian Accounting Standards (including AASB 118 Revenue; AASB 136 Impairment of Assets; AASB 139 Financial Instruments: Recognition and Measurement; AASB 111 Construction Contracts, and AASB 101 Presentation of Financial Statements).

The Construction contracts – [36]-[159]

67. The “Construction Contracts” section (from [36]-[159]) sets out details in relation to a series of construction contracts entered into by the Hastie Group in the United Arab Emirates and Australia (for sums ranging from $20-$30 million to $140 million). Broadly speaking, the claim made in relation to these contracts is for losses sustained when amounts claimed (or which it is said ought to have been claimed) in respect of variation works were not recovered by the relevant Subsidiary Plaintiff which carried out the work. The plaintiffs emphasise that each of the contracts contained different provisions as to the circumstance in which the contract work could be varied by the sub-contractor and the circumstances in which the sub-contractor would be permitted to make claims for payment in relation to the cost of such works.

68. The first basis on which liability on the part of the Hastie directors is said to arise for those losses is that these defendants were (at varying times specified for each) obliged, in effect, to cause the relevant contracting entity (a Subsidiary Plaintiff) to prepare and maintain relevant internal controls and processes (and to ensure that those processes were followed); that they failed to do so; and that, had they done so, either the relevant variation (or out of scope) works would either not have been carried out at all or approval for those works would have been obtained such that the risk of non-recovery of the expenses in relation to those works would have been reduced or eliminated. I refer to this as the “internal controls allegation”.

69. The required contents of the manual that it is said these defendants were obliged to cause to be prepared by the relevant Subsidiary Plaintiff (see [27(a)]) include: a checklist of the procedures for making variation claims; templates for variation claim documents; a template variation register; and a direction to project managers to comply with the contractual procedures for variations and separately to record the costs of variation works in “Pronto”, the Hastie Group’s internal electronic accounting system.

70. The further or alternative basis on which liability for the Variations Loss is alleged to have arisen (to which I will refer as the “monthly reporting allegation”) is that the said defendants were obliged (again at varying times specified for each): to cause the provision by the relevant contracting entity (a Subsidiary Plaintiff) to the Hastie Board of “standardised monthly reports” in respect of the projects containing particular information; to ensure that the costs incurred in respect of variation (or out of scope) works were identified in Pronto as costs being incurred in respect of variation works; and to understand the true financial position of the project and of the contracting entity in question.

71. It is alleged that the Hastie directors failed to do those things and that, had they done so, the Hastie Board (defined by reference to the Hastie directors): would have been aware that expenses had been incurred in respect of variation works without first obtaining written approval and that it was not probable that any revenue would be realised from those variation works; and would have prevented the contracting entity from incurring any further expenses in respect of variation works without written approval first being obtained.

72. It is further alleged that, but for those matters, the contracting entity would not have performed further variation works without written approval and would not have incurred expenses in respect of unapproved variation works in a specified sum; or alternatively would have obtained written approval before incurring the expenses and the specified sum would have been paid to the contracting entity. The loss claimed is the sum attributed to the unpaid amount (including project margin) for the variation works in question.

73. Pausing there, Deloitte emphasises – and Senior Counsel for the plaintiffs, Mr Murdoch QC at times appeared to accept – that the alleged requirements for a contract administration manual (said to be de rigueur in the construction industry) and for standardised monthly reporting of valuations are not alleged to be accounting controls or processes in the sense of being controls or processes required by any particular accounting/audit standard, as opposed to what might be referred to as internal business or managerial processes (see T 65-66). In reply submissions Mr Murdoch did not accept the proposition that use of a contract administration manual was an internal “business” control (see T 118.25) but then seemed to accept that it was (T 120.25) though adding that compliance with such a control would affect the ability of the auditor to express an opinion as to whether the accounts expressed a true and fair view. The confusion in this regard (as to whether the plaintiffs accept that the deficiencies which they say Deloitte should have identified might best be described as deficiencies in internal business/managerial controls or processes as opposed to deficiencies in internal controls required for accounting/audit purposes) highlights the criticisms that the defendants make as to the lack of identification of the particular audit/accounting standards by reference to which it is asserted that such controls should have been in place and that the lack of such controls should have been identified by Deloitte and notified to Hastie.

d   the directors of the plaintiffs would have taken steps to prevent or mitigate the losses which arose from the Contracts:

e   the directors of Hastie would not have made the Resolution

f   Hastie would not have paid the Dividend; and

g   the directors of the plaintiffs would have taken steps to prevent or mitigate the need for payment of the Loans and would not have made the Loans.

• For the 2011 year

236   If Deloitte had informed the directors of the plaintiffs of the matters, and taken the steps it should have taken, as referred to in paragraph 235 above, the directors of the plaintiffs would have:

a   realised that the representation of the financial position of Hastie Group in the 2011 Financial Report was neither true nor fair;

b. realised that the 2011 Financial Report was not presented fairly and in accordance with the Corporations Act. Australian Accounting Standards orthe mandatory financial reporting requirements;

c.   taken remedial action, including (but not limited to):

i   to correct errors and misstatements in the 2011 Financial Report and subsequent Reports;

ii.   to conduct impairment reviews;

iii.   to significantly write-down the value of assets, including the goodwill on the businesses acquired in the year ended 30 June 2011 and receivables and/or WIP on construction contracts; and

iv.   to reform the reporting framework, accounting policies and commercial governance and practices of Hastie Group;

d.   taken steps to prevent or mitigate the losses which arose from the Contracts: and

e.   taken steps to prevent or mitigate the need for payment of the Loans and would not have made the Loans.

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Decision last updated: 17 April 2018