Merchant v Ernst & Young (a firm) - [2023] QSC 259

SUPREME COURT OF QUEENSLAND

CITATION: Merchant & Ors v Ernst & Young (a firm) & Anor [2023]
QSC 259
PARTIES: GORDON STANLEY MERCHANT
(first plaintiff)
GORDON MERCHANT NO 2 PTY LTD AS TRUSTEE
FOR MERCHANT FAMILY TRUST
ACN 085 677 229
(second plaintiff)

GSM SUPERANNUATION PTY LTD AS TRUSTEE FOR GORDON MERCHANT SUPERANNUATION FUND
ACN 120 470 813
(third plaintiff)
GSM PTY LTD
ACN 074 508 124
(fourth plaintiff)
v
ERNST & YOUNG (A FIRM)
(first defendant)
IAN MICHAEL BURGESS
(second defendant)
FILE NO/S: BS No 9080 of 2020
DIVISION: Trial Division
PROCEEDING: Application for a stay
ORIGINATING Supreme Court at Brisbane
COURT:
DELIVERED ON: 15 November 2023
DELIVERED AT: Brisbane
HEARING DATE: 13 November 2023
JUDGE: Kelly J

ORDERS:

1.

This proceeding is stayed until 40 days after his Honour Justice Thawley delivers his judgments in the proceedings identified in Schedule 1 to the application filed 5 October 2023.
2. The parties have liberty to apply on 7 days’ notice.

3.

Once judgment has been delivered by his Honour Justice Thawley, the plaintiff must, within 2 business days, notify the Associate to Kelly J and the solicitors
for the defendants of delivery of judgment and
provide Honour Justice Thawley’s reasons to the
solicitors for the defendants.
4. Following the delivery of the judgments referred to in [1], the parties are to contact the Associate to Kelly J to arrange a review at the conclusion of the 40-day period.
5. The costs of and incidental to the application filed 5 October 2023 be costs in the proceeding.

CATCHWORDS:

PROCEDURE – STATE AND TERRITORY COURTS: JURISDICTION, POWERS AND GENERALLY – INHERENT AND GENERAL STATUTORY POWERS – TO
STAY OF DISMISS ORDERS OR PROCEEDINGS
GENERALLY – where the defendants seek a temporary stay

of the proceeding pending the final determination or resolution of three proceedings commenced in the Federal Court and three proceedings commenced in the Administrative Appeals
Tribunal – where the temporary stay is sought on the basis that
it is desirable that the Tax Appeals should first proceed to their
conclusion – where the plaintiffs resist the stay, contending

that it is unnecessary because there is no risk that the proceeding would be ready for trial before the final determination of the Tax Appeals and any stay would cause
intolerable delay in the resolution of the proceeding – where

the plaintiffs submitted that the refusal of a stay would be consistent with r 5 of the Uniform Civil Procedure Rules 1999
(Qld) – whether a temporary stay of the proceedings ought be
granted
Income Tax Assessment Act 1936 (Cth), s 177D, s 177E
Superannuation Industry (Supervision) Act 1993 (Cth)
Superannuation Industry (Supervision) Regulations 1994
(Cth)
Uniform Civil Procedure Rules 1999 (Qld), r 5
Michael Wilson & Partners Ltd v Emmott (2021) 396 ALR
497
NRNQ (alimited partnership) v MEQ Nickel Pty Ltd [1991] 2
Qd R 592
Shaw v Official Trustee in Bankruptcy of the Australian
Financial Security Authority [2022] FCA 775
Sterling Pharmaceuticals Pty Ltd v Boots Co (Australia)…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2023] QSC 259
Decision Date: 15 November 2023

CaseChat Overview and Summary

In the case of Merchant v Ernst & Young (a firm), the plaintiffs, including Mr Merchant, the Merchant Family Trust, the Gordon Merchant Superannuation Fund, and other associated companies, alleged that Ernst & Young and Mr Burgess breached their contractual and common law duties by providing inadequate advice, leading to significant financial losses. The plaintiffs sought damages for these breaches. Ernst & Young applied for a temporary stay of the proceedings pending the final determination of related proceedings in the Federal Court and the Administrative Appeals Tribunal. The plaintiffs opposed the stay, arguing that it was unnecessary and would cause significant delay.

The court considered the principles governing the exercise of discretion to grant a stay. The decision to grant a stay is fundamentally a matter of case management, aimed at ensuring proceedings are managed in a practical and fair manner, informed by the objects of the relevant procedural rules. The court noted that it is not necessary for the proceedings to involve identical parties or issues for a stay to be granted. The court should adopt a practical and common-sense approach to the exercise of the discretion, informed by the objects of the Uniform Civil Procedure Rules.

In exercising its discretion, the court found that a temporary stay was desirable. The overlap between the proceedings was substantial, and the outcomes of the Tax Appeals could materially affect the assessment of risks and the quantum of damages in the current proceeding. The court also noted that the potential impact on the quantum of loss and damage, as well as the elucidation of liability issues, supported the grant of a stay. Additionally, the court considered that expert evidence in the current proceeding would be better informed if the Tax Appeals were resolved first.

Accordingly, the court granted a temporary stay of the proceeding until 40 days after his Honour Justice Thawley delivers his judgments in the Tax Appeals. The parties have liberty to apply for further orders within seven days’ notice once judgment has been delivered in the Tax Appeals.

Orders

Orders of the court

This proceeding is stayed until 40 days after his Honour Justice Thawley delivers his judgments in the proceedings identified in Schedule 1 to the application filed 5 October 2023.

The parties have liberty to apply on 7 days’ notice.

Once judgment has been delivered by his Honour Justice Thawley, the plaintiff must, within 2 business days, notify the Associate to Kelly J and the solicitors

Background

Background to the litigation

Where there are two proceedings, it is not a requirement for a stay of one proceeding, that the two proceedings involve identical parties or issues. The authorities countenance a practical and common-sense approach to the exercise of the discretion, informed by the objects of r 5 of the UCPR.[5] [5] Sterling Pharmaceuticals Pty Ltd v Boots Co (Australia) Pty Ltd (1992) 34 FCR 287, 292; Shaw v Official Trustee in Bankruptcy of the Australian Financial Security Authority [2022] FCA 775, [24] and [25]. Background to, and issues in, this proceeding and the Tax Appeals The first plaintiff (“Mr Merchant”) is a director and sole shareholder of the second to fourth plaintiffs. The second plaintiff (“GM2”) is the trustee of the Merchant Family Trust (“the MFT”), a discretionary trust of which Mr Merchant is a member of the class of potential beneficiaries. The third plaintiff (“GSM Super”) is the trustee of a self-managed superfund known as the Gordon Merchant Superannuation Fund (“the Super Fund”). Mr Merchant is the sole member of the Super Fund. The fourth plaintiff (“GSM”), Tironui Pty Ltd (“Tironui”) and Kahuna No. 1 Pty Ltd as trustee for the Angourie Trust (“Angourie”) are companies within what might be called the Merchant Group of companies. GM2, as trustee of the MFT, owned all of the shares in Plantic Technologies Limited (“Plantic”), a company which carried on a business In this proceeding, the plaintiffs make allegations to the following effect: In 2016, the plaintiffs lodged income tax returns for the 2015 income year which were audited by the Commissioner of Taxation (“the Commissioner”). The Commissioner decided that Pt IVA of the Income Tax Assessment Act 1936 (Cth) (“the Income Tax Act”) applied to the transactions in the following two respects: The Commissioner cancelled the tax benefits that were otherwise afforded to the plaintiffs as a result of the transactions and imposed income tax liabilities, penalties and interest. The Commissioner also concluded that there had been various breaches of the Superannuation Industry (Supervision) Act 1993 (Cth) (“the SIS Act”) and the Superannuation Industry (Supervision) Regulations 1994 (Cth) (“the SIS Regulations”). That conclusion led to an administrative penalty and the In this proceeding, the plaintiffs sue Ernst & Young and Mr Burgess for breach of contract and in negligence. The plaintiffs allege that they should have been given different or further advice to the Initial Advice and the Later Advice. In particular, the plaintiffs allege that: The “advice to the effect pleaded in paragraph 67”, the “advice to the effect pleaded in paragraph 68”, the “advice that a reasonable person complying with the contractual and common law duties would have provided” and the alternative structure are presently undefined as the current version of the statement of claim makes clear that particulars defining the issues to be tried in respect of these matters are yet to be provided, and cannot be provided until after disclosure and the delivery of expert evidence.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

The defendants apply for a temporary stay of this proceeding pending the final determination or resolution of three proceedings commenced in the Federal Court and three proceedings commenced in the Administrative Appeals Tribunal (collectively those six proceedings will be referred to as “the Tax Appeals”). The temporary stay was sought on the basis that it was desirable that the Tax Appeals should first proceed to their conclusion. The plaintiffs resisted the stay, contending that it was unnecessary because there was no risk that this proceeding would be ready for trial before the final determination of the Tax Appeals and any stay would cause intolerable delay in the resolution of this proceeding. The plaintiffs submitted that the refusal of a stay would be consistent with r 5 of the Uniform Civil Procedure Rules 1999 (Qld) (“UCPR”). Matters of principle relevant to the discretionary judgment Whether a temporary stay should be granted is fundamentally a question of case management. In Michael Wilson & Partners Ltd v Emmott,[1] Brereton JA[2] relevantly described such a stay as a technique for the management of proceedings “where proceedings are pending in another court and it is desirable that those proceedings should proceed to their conclusion first”. His Honour observed that the discretionary decision as to whether to temporarily stay a proceeding is informed by “…practical considerations based on common-sense and fairness.”[3] [1] (2021) 396 ALR 497, [103]. [2] with whom Leeming JA and Emmett AJA agreed. [3] (2021) 396 ALR 497, [105]. In the earlier case of Sterling Pharmaceuticals Pty Ltd v Boots Co (Australia) Pty Ltd,[4] Lockhart J provided this classical statement of applicable principles: [4] (1992) 34 FCR 287, 290, 291 and 294. “The court has a general power to control its own proceedings, and that power extends to enable it to order a temporary stay of proceedings in various circumstances including the case where proceedings are pending in another court and it is desirable that those proceedings should proceed to their conclusion first … In my opinion relevant considerations to be taken into account in the present case include the following: Where there are two proceedings, it is not a requirement for a stay of one proceeding, that the two proceedings involve identical parties or issues. The authorities countenance a practical and common-sense approach to the exercise of the discretion, informed by the objects of r 5 of the UCPR.[5] [5] Sterling Pharmaceuticals Pty Ltd v Boots Co (Australia) Pty Ltd (1992) 34 FCR 287, 292; Shaw v Official Trustee in Bankruptcy of the Australian Financial Security Authority [2022] FCA 775, [24] and [25]. Background to, and issues in, this proceeding and the Tax Appeals The first plaintiff (“Mr Merchant”) is a director and sole shareholder of the second to fourth plaintiffs. The second plaintiff (“GM2”) is the trustee of the Merchant Family Trust (“the MFT”), a discretionary trust of which Mr Merchant is a member of the class of potential beneficiaries. The third plaintiff (“GSM Super”) is the trustee of a self-managed superfund known as the Gordon Merchant Superannuation Fund (“the Super Fund”). Mr Merchant is the sole member of the Super Fund. The fourth plaintiff (“GSM”), Tironui Pty Ltd (“Tironui”) and Kahuna No. 1 Pty Ltd as trustee for the Angourie Trust (“Angourie”) are companies within what might be called the Merchant Group of companies. GM2, as trustee of the MFT, owned all of the shares in Plantic Technologies Limited (“Plantic”), a company which carried on a business

Ratio Decidendi

Legal Principle Established

Between 6 April 2022 and 11 August 2022, the parties to this proceeding exchanged correspondence which discussed, among other issues, a potential stay of this proceeding. On 16 May 2022, the plaintiffs’ solicitors wrote to the defendant’s solicitors advising that, as at that time, the plaintiffs were “content to seek a stay of [this proceeding]…”. On 3 May 2023, an Amended Claim and Amended Statement of Claim were filed. On 28 June 2023, a Notice of Intention to Defend and Defence was filed. On 28 August 2023, the parties attended a conference with the Resolution Registrar about an initial document plan. In that context the question of a stay again emerged. On 30 August 2023, a Reply was filed. On 28 September 2023, the Commercial List Principal Judge, his Honour Justice Applegarth, placed this proceeding on the Commercial List. This proceeding was then allocated to me. Consideration The plaintiffs made appropriate and significant concessions. Relevantly, the plaintiffs accepted that: In my consideration, it is desirable and consistent with the objects of r 5 of the UCPR for this Court to grant a temporary or case management stay of this proceeding until such time as the Tax Appeals have been heard and determined by his Honour Justice Thawley. My reasoning may be set out as follows. First, there is a substantial or significant overlap between the proceedings. The outcome of the Tax Appeals may well have a material effect on this proceeding. There is an obvious potential impact in relation to the quantum of loss and damage. If the plaintiffs in this proceeding are successful in the Tax Appeals, there will be a radical and significant diminution in the quantum of the damages sought in this proceeding. However, the Tax Appeals have potential impact in relation to the elucidation of liability issues in this proceeding. There was consensus between counsel that, fundamentally, this proceeding is concerned with the assessment of risks inherent in the structure pursued and the structure available, but not pursued. That assessment will be better informed by the outcome of the Tax Appeals, at least to the extent that, as between the plaintiffs in this proceeding and the Commissioner, there are determinations regarding whether the decisions made about the character of the transactions were affected by “critical errors” and “a fundamental misunderstanding of the evidence and the legal tests”. Ultimately, the plaintiffs wish to call expert evidence in relation to what they style as the key issue in this proceeding, namely the advice that should have been given. Expert evidence about that key issue will necessarily involve opinion evidence and be offered for the benefit of, and under duties owed to, the Court. The opinion evidence on this key issue is likely to be better informed and less speculative if the Tax Appeals have been determined. Secondly, that the Tax Appeals may have a significant impact on the quantum of the loss and damage claimed in this proceeding is a significant consideration of itself. Any significant impact on quantum would likely influence the prospects of settlement of this proceeding. To now require the parties to incur the prohibitive costs of “extensive” disclosure, which is said to comprise a “very large exercise”, could be

CATCHWORDS:	PROCEDURE – STATE AND TERRITORY COURTS: JURISDICTION, POWERS AND GENERALLY – INHERENT AND GENERAL STATUTORY POWERS – TO
STAY OF DISMISS ORDERS OR PROCEEDINGS
GENERALLY – where the defendants seek a temporary stay
of the proceeding pending the final determination or resolution of three proceedings commenced in the Federal Court and three proceedings commenced in the Administrative Appeals
Tribunal – where the temporary stay is sought on the basis that
it is desirable that the Tax Appeals should first proceed to their
conclusion – where the plaintiffs resist the stay, contending
that it is unnecessary because there is no risk that the proceeding would be ready for trial before the final determination of the Tax Appeals and any stay would cause
intolerable delay in the resolution of the proceeding – where
the plaintiffs submitted that the refusal of a stay would be consistent with r 5 of the Uniform Civil Procedure Rules 1999
(Qld) – whether a temporary stay of the proceedings ought be
granted
Income Tax Assessment Act 1936 (Cth), s 177D, s 177E Superannuation Industry (Supervision) Act 1993 (Cth)
Superannuation Industry (Supervision) Regulations 1994
(Cth) Uniform Civil Procedure Rules 1999 (Qld), r 5
Michael Wilson & Partners Ltd v Emmott (2021) 396 ALR 497 NRNQ (alimited partnership) v MEQ Nickel Pty Ltd [1991] 2 Qd R 592
Shaw v Official Trustee in Bankruptcy of the Australian
Financial Security Authority [2022] FCA 775
Sterling Pharmaceuticals Pty Ltd v Boots Co (Australia)…