Independent Audit Services Pty Ltd v Elite Aquatic School Pty Ltd

[2024] NSWSC 279

Supreme Court

New South Wales

Medium Neutral Citation:

Independent Audit Services Pty Ltd v Elite Aquatic School Pty Ltd [2024] NSWSC 279

Hearing dates:

14 March 2024

Decision date:

21 March 2024

Jurisdiction:

Equity - Commercial List

Before:

Ball J

Decision:

Application for leave to appeal be dismissed with costs

Catchwords:

APPEALS — Leave to appeal — Whether leave required — Interlocutory decisions — Principles governing — Application of Section 127(1) of the District Court Act 1973 (NSW)

APPEALS — From exercise of discretion — Disregard of relevant considerations — Whether Judicial Registrar of District Court failed to take into account relevant considerations

APPEALS — From exercise of discretion — Procedural decisions — Whether several cases with overlapping facts should be heard together

Legislation Cited:

Australian Consumer Law

Civil Procedure Act 2005 (NSW)

District Court Act 1973 (NSW)

Supreme Court Act 1970 (NSW)

Uniform Civil Procedure Rules 2005 (NSW)

Cases Cited:

Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170

House v The King (1936) 55 CLR 499

The Age Company Ltd v Liu (2013) 82 NSWLR 268; [2013] NSWCA 26

Category:

Principal judgment

Parties:

Independent Audit Services Pty Ltd (Plaintiff)
Elite Aquatic School Pty Ltd (First Defendant)
Cosmetique Studio Pty Ltd (Second Defendant)
Neerva Pty Limited (Third Defendant)
GH Corporation Pty Ltd (Fourth Defendant)
Forey Holdings Pty Ltd (Fifth Defendant)
Swim HS Pty Ltd (Sixth Defendant)
Splash Kids Pty Limited (Seventh Defendant)
Emma Kate and Paul Jeffrey Osborne (Eighth Defendants)
Ocean Training Pty Ltd (Ninth Defendant)
Lofty HTS Pty Ltd (Tenth Defendant)
HPMG Pty Ltd (Eleventh Defendant)
Geelong Swim Schools Pty Ltd (Twelfth Defendant)
High 5 Swim Safety Pty Ltd (Thirteenth Defendant)

Representation:

Counsel:
J Dooley (Plaintiff)
GJ Bateman (Defendants)

Solicitors:
Clyde & Co (Plaintiff)
Robert Bryden Lawyers (Defendants)

File Number(s):

2023/463901

Publication restriction:

None

JUDGMENT

Introduction

1. By a summons filed on 21 December 2023, the plaintiff, Independent Audit Services Pty Ltd (the Auditor), seeks leave to appeal and, if leave is granted, to appeal from orders of a judicial registrar of the District Court (the Judicial Registrar) the effect of which is said to be that 13 cases pending against the Auditor in the District Court will not be heard together.

Questions of jurisdiction

2. Section 127(1) of the District Court Act 1973 (NSW) confers a right of appeal from an order of a Judicial Registrar on the Supreme Court, but in the case of an interlocutory order only with leave of the Court.

3. Section 49 of the Supreme Court Act 1970 (NSW) (SCA) provides:

Subject to Part 7, proceedings in the Court which are not assigned to the Court of Appeal are assigned to the Divisions of the Court.

4. Section 48 of the SCA assigns to the Court of Appeal an appeal from a “specified tribunal” which is defined to include “the District Court or a Judge of the District Court (but not a Judicial Registrar of that Court)”. Appeals from a Judicial Registrar of the District Court are not assigned to the Equity Division. Therefore, they are assigned to the Common Law Division: see Uniform Civil Procedure Rules 2005 (NSW) r 1.18. However, proceedings may be retained in a Division whether or not proceedings are assigned to that Division: see SCA ss 54(2), 55. No objection was taken to the proceedings remaining in the Equity Division or this list.

5. It was common ground that the application for leave to appeal and the appeal itself should be heard together.

Background

6. Each of the 13 proceedings is brought by a franchisee of a failed swim school franchising business carried on by a corporate group the franchisor of which was Jump Loops Pty Ltd (Jump Loops) and the ultimate parent of which was Swim Loops Holdings Pty Ltd (Holdings) against the Auditor which provided an audit report in respect of the financial statements of Holdings for the year ended 30 June 2016 and the financial statements of Jump Loops for the year ended 30 June 2017. Seven of the proceedings concern the first audit report. The remaining six concern the second. All 13 plaintiffs are represented by the same firm of solicitors.

7. The pleadings in each case are substantially the same. Relevantly, in each case it is alleged that the Auditor owed prospective franchisees a duty to take reasonable care in performing its services as auditor of Holdings or Jump Loops as the case may be. In each case, the following particulars of negligence are given (using one of the claims against Holdings as an example):

(a)   Failed to conduct its audit in accordance with the Australian Auditing Standards.

(b)   Failed to make any proper investigation or verification of the director's statement of solvency.

(c)   Failed to make a proper assessment of the financial position of Swim Loops Holdings Pty Limited.

(d)   Failed to ensure that it had been given all necessary information, explanations and assistance for the conduct of the audit.

(e)   Failed to ensure that Swim Loops Holdings Pty Limited had kept financial records sufficient to enable a statement of solvency to be prepared and audited.

(f)   Failed to take steps to gain a complete understanding of Swim Loops Holdings Pty Limited and its financial relationship with the entities within the group.

(g)   Failed to complete an assessment of the risk of material misstatement due to error or fraud.

(h)   Failed to properly consider the classification and recoverability of assets recorded within Swim Loops Holdings Pty Limited's financial statements.

(i)   Failed to properly review the cashflow expectations for the year immediately following the audit.

(j)   Failed to obtain sufficient appropriate audit evidence to enable the Defendant to make an assessment of the director's solvency statement.

(k)   Provided an incorrect assessment of Swim Loops Holdings Pty Limited's financial position.

8. In each case, the plaintiffs allege that in reliance on the relevant audit report they entered into their respective franchise agreements. Each claims damages calculated by reference to the position it is in with the position it would have been in if it had not entered into the franchise agreement.

9. Relying on the same facts, each of the plaintiffs also alleges that the Auditor engaged in misleading and deceptive conduct in contravention of s 18 of the Australian Consumer Law.

10. In each case, the Auditor denies liability. It also pleads a proportionate liability defence naming the managing director of the corporate group, Mr Ian Campbell, as a concurrent wrongdoer and, in the case of the corporate plaintiffs, naming the directors of those plaintiffs as concurrent wrongdoers. The Auditor also pleads a defence of contributory negligence.

11. It is plain from this short outline that the 13 cases or subsets of them have a number of issues in common. In particular:

1. Seven of the cases raise the question whether the Auditor owed potential franchisees a duty of care in conducting the audit of Holdings and, if so, breached that duty in the ways alleged;

2. Six of the cases raise the question whether the Auditor owed potential franchisees a duty of care in conducting the audit of Jump Loops and, if it did, whether it was negligent in the ways alleged;

3. All of the cases raise the question whether Mr Campbell was a concurrent wrongdoer and, if he was, the degree of responsibility that can be attributed to him (which may differ in respect of the two audits).

12. Each of the cases will also raise overlapping or similar issues of facts and law, such as background facts concerning the franchise business and its collapse and legal principles relating to the law of negligence and the assessment of damages.

13. It is also plain that each case will raise issues unique to it, such as whether each plaintiff relied on the audited accounts, the loss each plaintiff suffered as a consequence of doing so and the degree to which directors of each of the corporate plaintiffs were concurrent wrongdoers.

14. In accordance with procedures that operate in the District Court, on 30 November 2023, the solicitors for the plaintiffs sent an email to the Judicial Registrar with a copy to the solicitors for the Auditor stating that at a directions hearing to be held on 5 December 2023 they would seek an allocation of a hearing date in 10 of the 13 matters and an order in those matters that the parties attend an informal settlement conference prior to 29 February 2024 in the case of two matters and prior to 29 March 2024 in the other eight matters. The other three matters had been set down for hearing earlier in the year, but the hearings had been vacated following a late amendment by the Auditor to its defence in each case. Those three matters are also waiting for the allocation of a new hearing date.

15. The solicitors for the Auditor responded on 4 December 2023 to the email dated 30 November 2023. Relevantly, they said:

The Defendant intends to seek an order that the various matters be case managed and all travel and be heard together. This will be elaborated on if contentious at the directions hearing, but in short is appropriate in circumstances in which:

•   All claims arise out of the same failed swim school franchise.

•   All Plaintiffs are represented by the one firm and have briefed the same Counsel.

•   The Defendant (the auditor of the failed franchise) is the same in each matter.

•   The Defendant's solicitor is the same in each matter and has briefed the same Counsel.

•   The plaintiff's liability expert (as to the audit work) is the same in each matter.

•   The impugned audit reports span two years and raise the same or almost the same issues in each matter.

In those circumstances, having the matters travel and be heard together will permit common questions of liability to be determined (and any other common questions). That is plainly appropriate because it will be far less expensive (with say 3 hearing days on liability happening once — rather than 13 occasions, so as to take up 39 sitting days) and avoid the highly unattractive possibility of inconsistent findings across 13 matters. Apart from costs, the efficient disposition of the business of the Court favours this approach. Once any common questions are determined, individual issues (such as causation and damages) could be determined.

This proposal will however be fully canvassed at the Directions listed on 5 December 2023.

16. There was a directions hearing on 5 December 2023 (at which the Auditor’s solicitor attended by telephone). Following lengthy submissions on the question whether the orders sought by the Auditor should be made, the hearing was adjourned until 11 December 2023.

17. On 8 December 2023, the solicitor for the plaintiffs sent an email to the Judicial Registrar which was copied to the solicitors for the Auditor. In that email, the plaintiffs provided lengthy submissions on why the matters should not be heard together.

18. On 11 December 2023, following further submissions, the Judicial Registrar delivered what he described as “short reasons for a determination of the management of these further matters moving forward towards hearing dates”. On the same day, the following orders were recorded against each matter:

1.   Parties to confer by 2/2/24 on:

i)    Further timetable for pleadings and evidence.

ii)   Mediation

iii)   Hg [Hearing] estimates for each individual case.

iv)    if any other case may be concurrently heard together.

v)    Available hearing dates from June 2023.

2.    CMLDH [Case Management List Directions Hearing] 12/2/24 10:30AM.

3.    Parties to complete HG [hearing] estimate sheet.

Relevant legal principles

19. Generally speaking it is appropriate to grant leave to appeal only in matters that involve issues of principle or questions of general public importance or where a reasonably clear injustice going beyond something that is merely arguable has occurred: The Age Company Ltd v Liu (2013) 82 NSWLR 268; [2013] NSWCA 26 at [13].

20. An appeal in this case would also involve an appeal in respect of the exercise of a discretion involving a matter of practice and procedure. An appeal of that type must satisfy the principles stated in House v The King (1936) 55 CLR 499. It is not sufficient that the appellate court considers that if it had been in the position of the court at first instance it would have arrived at a different conclusion. Rather, it must be satisfied that the court below has acted upon a wrong principle or taken into account irrelevant matters or has mistaken the facts or has failed to take into account a relevant matter or has reached a decision that is unreasonable or plainly unjust. Moreover, where the discretion concerns a matter of practice and procedure, the appellate court should be particularly reluctant to interfere with the decision appealed from: see Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170.

Consideration

21. There is a suggestion in some of the submissions made by the Auditor that the effect of the orders made by the Judicial Registrar was that each case would be set down and heard separately; and certainly, it appears that that was the position of the plaintiffs at the directions hearing before the Judicial Registrar. However, that is not the effect of the orders made by the Judicial Registrar. The only orders he made are those set out in paragraph [18] above, and they say nothing which would require each of the cases to be heard separately. Indeed, they require the parties to confer on whether some of the cases should be heard together.

22. It may be that the Judicial Registrar, in making the orders he did, also impliedly dismissed the Auditor’s application for an order that the 13 matters be heard together. However, I do not accept that the Judicial Registrar made any appellable error in making that order. One difficulty with an order that the 13 cases be heard together is that it is unclear what it entails. Was the intention of the order that evidence in one proceeding be evidence in the other? Or was the intention that all 13 cases would be listed to commence on the same day before a single judge and that that judge would hear the cases sequentially in an order determined by him or her, or was something else intended? The answer to those questions is not clear from the terms of the order or the submissions made to the Judicial Registrar, or indeed the submissions made to this Court.

23. Plainly, it is necessary for the 13 cases to be managed in a way that complies with the principles set out in s 57 of the Civil Procedure Act 2005 (NSW) (CPA), which requires proceedings to be managed having regard to the objects of a just determination of the proceeding, the efficient disposal of the business of the court, the efficient use of available judicial and administrative resources and the timely disposal of the proceedings at a cost affordable by the respective parties. One way in which that arguably might be achieved is for all the cases to be heard together and for there to be orders that evidence in one case be evidence in the others, or the evidence of some witnesses given in one case be evidence in the others. But there are other methods of achieving the same objective. In the present case, it might be thought to be more sensible to draw a distinction between cases concerning the 2016 audit and those concerning the 2017 audit, since there appears to be little overlap in the substantive issues raised in the two categories of case. Another approach is that the parties could agree that one case involving the 2016 audit and another case involving the 2017 audit could proceed as test cases in advance of the others and the parties could agree that they be bound by the findings in those cases in relation to the questions whether a duty of care was owed and, if so, breached, whether the Auditor engaged in misleading and deceptive conduct and whether and to what extent Mr Campbell was a concurrent wrongdoer. There may be other possibilities. And it may be that in this case the decision about what precisely should happen should await the outcome of the mediations contemplated by the orders the Judicial Registrar did make. But two points seem reasonably clear. First, the orders made by the Judicial Registrar do not exclude the various possibilities other than the possibility that all 13 cases be heard together. The exclusion of that possibility does not appear to be unreasonable given that the cases naturally fall into two categories corresponding to the two audits. Second, any orders for the concurrent hearing of two or more cases, or any other orders that are made concerning the hearing of the 13 cases so as to comply with the requirements of s 57 of the CPA, will need to spell out clearly how the hearings are to be conducted and how the evidence in one case is to be treated in the others. An order that the 13 cases be heard together without more would not have done that.

24. The Auditor submits that the Judicial Registrar, in delivering the reasons he did, failed to take into account relevant matters and took into account irrelevant ones. There is some force in that submission. In considering what appears to be the plaintiffs’ primary submission (that each case should be heard and determined separately) the Judicial Registrar does not appear to have considered the possibility of inconsistent verdicts. In addition, he does not appear to have considered the burden that will be placed on the individual or individuals who carried out the audits of having to give evidence 13 times, seven in relation to the 2016 audit and six in relation to the 2017 audit. The Judicial Registrar appears to have thought that in considering the question of costs and convenience, it was appropriate to assume that a representative of each plaintiff would be present in court throughout the whole of the hearing, and that those costs should be taken into account. However, those costs are not part of the costs of the proceedings, and it would be a matter for each plaintiff to decide whether it was necessary to give instructions to the solicitors and counsel conducting the case on behalf of the plaintiff through a person who was in court throughout the proceedings. Apart from the expert evidence to be given by the plaintiffs, it is doubtful that the evidence given by the plaintiffs will take any more or less time if the cases are heard together or separately. It is to be expected that the expert evidence will take less time if cases involving the same audits are heard together, since the evidence will only need to be given once.

25. The Judicial Registrar also appears to have thought that the primary place of business of the plaintiffs was relevant to whether the cases should be heard together, since he suggested that it may be appropriate to hear cases brought by plaintiffs who carry on business or reside in the same state to be heard in the same “batch”. By why that is so is not clear. It is unclear how hearing cases brought by plaintiffs from the same state would facilitate the efficient hearing of those cases.

26. None of those matters, however, were critical to the ultimate orders made the Judicial Registrar. As I have explained, at most all the Judicial Registrar did was reject the application for an order that all the cases be heard together. The Judicial Registrar recognised that it may be desirable that some cases be heard together and directed the parties to confer on various matters including whether any of the cases should be heard together. That did not involve any error of principle or clear injustice to the Auditor, particularly when it appears that the parties have not yet made any serious attempt to comply with the directions that were made.

Orders

27. It follows that the application for leave to appeal must be dismissed with costs.

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Decision last updated: 21 March 2024