Ogenic Ltd v Deloitte Touche Tohmatsu
[1997] FCA 1021
•3 OCTOBER 1997
FEDERAL COURT OF AUSTRALIA
C A T C H W OR D S
PRACTICE AND PROCEDURE - security for costs - impecunious corporate applicant - merits of case - case facing difficulties but arguable - risk management nature of security for costs order - authority to bring action - requisite number of directors ratifying initiation of proceedings - pleadings - superfluous paragraphs raising false issue.
Fair Trading Act 1987 (WA)
Corporations Law
OGENIC LIMITED (ACN 009 205 805) v DELOITTE TOUCHE TOHMATSU
JUDGE: FRENCH J
DATE OF ORDER: 3 OCTOBER 1997
WHERE MADE: PERTH
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
3009 of 1997
BETWEEN:
OGENIC LIMITED (ACN 009 205 805)
APPLICANTAND:
DELOITTE TOUCHE TOHMATSU
RESPONDENTJUDGE:
FRENCH J
DATE OF ORDER:
3 OCTOBER 1997
WHERE MADE:
PERTH
MINUTES OF ORDER
THE COURT ORDERS THAT:
The applicant provide security for the respondent’s costs of the application by way of bank guarantee or in such other form as is acceptable to the Registrar in an amount of $60,000, $25,000 of which is to be provided on or before 24 October 1997 and the balance within 21 days of an appointment being made for the matter to be listed for trial.
The application be stayed if security is not provided by 24 October 1997 or within 21 days of an appointment being made for the matter to be listed for trial.
There be liberty to apply.
Paragraphs 5 and 10.1 of the statement of claim be struck out.
The motion is otherwise dismissed.
The applicant is to pay one-quarter of the respondent’s costs of the motion. The costs of the motion be otherwise reserved.
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
3009 of 1997
BETWEEN:
OGENIC LIMITED (ACN 009 205 805)
APPLICANTAND:
DELOITTE TOUCHE TOHMATSU
RESPONDENT
JUDGE:
FRENCH J
DATE:
3 OCTOBER 1997
PLACE:
PERTH
REASONS FOR JUDGMENT ON MOTION FOR SECURITY FOR COSTS AND OTHER ORDERS
This application was commenced on 27 May 1997. Ogenic Limited (Ogenic), formerly known as Broadbanx Investments Limited sues Deloitte Touche Tohmatsu (Deloittes), a firm of Chartered Accountants. The causes of action depend in essence upon allegations that Deloittes made misleading statements about the financial performance of a company called PKE Limited (PKE) in a report prepared by it for Ogenic in connection with Ogenic’s takeover of PKE.
Ogenic says it signed a contract on 24 February 1994 to purchase all of the issued shares in PKE in consideration of the issue of 14 million of its own shares to Vendor shareholders in PKE. The contract was subject to the approval of the purchase by Ogenic’s shareholders and Ogenic’s satisfaction with the financial affairs of PKE after a due diligence enquiry.
Ogenic’s shareholders were also required to procure, after the acquisition, the transfer of a proportion of their shares to achieve a shareholder spread complying with Rule 1A(3)(b)(ii) of the ASX Listing Rules. In connection with that disposition it was necessary for Ogenic to register a prospectus with the Australian Securities Commission.
Ogenic says it engaged Deloittes on 3 March 1994 to prepare an independent accountant’s report for inclusion in the prospectus. This was of course a prospectus to prospective acquirers of shares in Ogenic.
There was evidence before the court that in seeking a quotation from Deloittes on 21 February 1994 Ogenic (then Broadbanx) had identified three distinct assignments. The first was the preparation of an Investigating Accountant’s Report for inclusion in a prospectus to be issued by Ogenic in March 1994. The second sought a confirmation that the transaction was fair and reasonable for the minority shareholders of Ogenic. The third was a Valuation Report on PKE. In the event it was in relation to the first assignment that Deloittes was engaged.
Ogenic alleges that the Deloittes report (delivered in draft on 23 March 1994) was misleading or deceptive or likely to mislead or deceive contrary to s 10 of the Fair Trading Act 1987 (WA) and s 994 of the Corporations Law. It is also said that the statements were made negligently or in breach of an implied term of the Deloittes’ contract to use reasonable care in the preparation of the drafts of and the final report and in making statements to Ogenic. The statements complained of related to the sales and profit and loss performance of PKE. There were also said to have been oral representations by a representative of Deloittes that the PKE shares were worth at least $0.35 each and that information provided by PKE was good or better than normally expected.
Ogenic says the statements were incorrect and that it relied upon them:-
“... in concluding its due diligence investigations into the affairs and financial circumstances of PKE, in declaring the agreement unconditional in securing the quotation of the applicant’s shares on the official list of the ASX and settling the agreement.”
Ogenic says it has suffered loss and damage which is particularised as follows:-
“18.1Issue of 14 million fully paid shares in the applicant to the Vendors at consideration of acquisition of the Vendors’ shares in PKE which were of a lesser value.
18.2Loans of $3,852,041 made by the applicant to PKE which PKE is unable to repay.”
Deloittes moves for orders that the action be “set aside as irregular”, that Ogenic pay security for Deloittes’ costs of the action in the sum of $158,931 and that paras 5 and 10.1 of the statement of claim be struck out.
As to the first limb of the motion the point is made that when the application was instituted Ogenic had only two directors instead of the three required by article 79 of its Articles of Association and s 221 of the Corporations Law. Notwithstanding the absence of a minute of the meeting I am satisfied that the point is met by the affidavit evidence of Neil Graham that he was reappointed a director of Ogenic on 1 July 1997 and agreed with the other two directors, Deryck Graham and Paul Rangel, to ratify their earlier decision to institute the present proceedings.
On the question of security for costs there seems to be little dispute that Ogenic is impecunious. Mr Neil Graham states in his affidavit that the company has no resources and its directors have no funds available to meet any application for security. He says that the “liquid assets” of Ogenic were paid into PKE as part of the merger and acquisition of PKE by way of the loans totalling $3,852,041 which, since June 1994, have not been repaid as PKE is unable to repay them. Ogenic’s financial position is said to have arisen as a result of its decision to acquire PKE which in turn was based on the report prepared by Deloittes and the oral representations made by Mr Jones of that firm on 13 April 1994.
It is not immediately apparent that the advance of monies to PKE was a necessary consequence of the merger. The statement of claim does not expose the factual basis upon which the loans are said to be related to the conduct on the part of Deloittes which is said to have induced the merger.
The merit of the claim is a relevant factor in deciding whether or not to make an order for security for costs. There was extensive affidavit evidence put before the court on each side of the argument going to the merits. On an application of this kind, however, a judgment as to the merits must be provisional and based upon incomplete and largely untested material.
It is reasonably clear, however, that the claim obviously faces some difficulties. In particular the work which Deloittes was commissioned to carry out was for the purpose of the disposition of Ogenic’s shares to the public to achieve the requisite spread of shareholders. Deloittes was not required to advise Ogenic in relation to the acquisition of PKE, the value of its shares or to participate in a due diligence review. Its quotation to carry out a valuation was not accepted. That work was given to another firm, Stanton Partners. Stanton Partners’ report in draft was prepared after Deloittes was retained and before it supplied its report to Ogenic.
Deloittes takes issue on the question of reliance and reference is made in the evidence to the express deletion from a statement concerning PKE’s liabilities that the directors of Ogenic had relied upon the Deloittes report in the acquisition of PKE.
The preceding observations are neither exhaustive nor conclusive of the merits of the case. Despite the limited purpose for which the Deloittes report was obtained and the use of other advice in relation to the acquisition it may be arguable that a case is made for reliance upon that report. Nevertheless the case faces sufficient difficulty that the merits militate in favour of an order for security.
The making of an order for security for costs is to some extent an exercise in risk management. It involves balancing the risk that an impecunious applicant may be prejudiced in its ability to pursue a legitimate case against the risk that an innocent respondent may be left, after a successful defence, with no ability to recover its costs.
Two proforma bills of costs have been proffered, one by Deloittes, the other by Ogenic. The Ogenic bill contemplates a 10 day trial with senior counsel with a costs total of $158,000. The Ogenic bill contemplates a total of $61,948 on a 7 day trial with senior counsel. I note that Ogenic’s solicitors appear to have been retained on the basis that they will be paid the costs of the action if successful.
Ogenic has submitted that if an order for security for costs is made it should be payable at various steps of the proceedings on a phased basis.
In my opinion an order for security should be made, initially for an amount which will cover interlocutory processes to the point of hearing with further security to be provided before the matter goes to trial. In my opinion an appropriate global amount is $60,000, $25,000 of which should be provided now and $35,000 prior to entry for trial. The security can be provided by way of bank guarantee.
On the objections to the statement of claim Ogenic’s counsel concedes that par 5 is superfluous. As to par 10.1, I accept that it involves a representation which is nowhere said to be false. It conceivably raises a false issue and should be struck out. There will be orders accordingly.
I certify that this and the preceding four (4) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice FRENCH J
Associate:
Dated: 3 October 1997
Counsel for the Applicant: Mr T H Brickhill Solicitor for the Applicant: Brickhill & Hanbury Counsel for the Respondent: Mr P G McGowan Solicitor for the Respondent: Phillips Fox Date of Hearing: 26 September 1997 Date of Judgment: 3 October 1997
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