Pilmer v Duke Group Ltd (In Liq)

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HIGH COURT OF AUSTRALIA

McHUGH, GUMMOW, KIRBY, HAYNE AND CALLINAN JJ

ANGUS CLAYMORE PILMER & ORS  APPELLANTS

AND

THE DUKE GROUP LIMITED
(IN LIQUIDATION) & ORS  RESPONDENTS

Pilmer v The Duke Group Limited (in liq) [2001] HCA 31
31 May 2001
A46/1999

ORDER

1.   Appeal allowed with costs.

2.   Set aside pars 2, 7, 9 and 10 of the orders made by the Full Court of the Supreme Court of South Australia on 13 August 1999 but only to the extent that those orders affect the parties to the appeal to this Court.

3.   Remit the matter to the Full Court of the Supreme Court of South Australia for the making of orders consistent with this Court's reasons for decision.

On appeal from the Supreme Court of South Australia

Representation:

A J Myers QC with P Zappia for the appellants (instructed by Phillips Fox) at the hearing on 7 April 2000

T A Gray QC with R J Whitington QC, S J Lipman and S J Doyle for the first respondent (instructed by Fisher Jeffries) at the hearing on 7 April 2000

A J Myers QC with G T Pagone QC and P Zappia for the appellants (instructed by Phillips Fox) at the hearing on 23 November 2000

R J Whitington QC with S J Lipman and S J Doyle for the first respondent (instructed by Fisher Jeffries) at the hearing on 23 November 2000

No appearance for the second to seventh respondents.

Notice:  This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.

  1. McHUGH, GUMMOW, HAYNE AND CALLINAN JJ.   The first respondent, The Duke Group Limited, was formerly called Kia Ora Gold Corp NL and it is convenient to refer to it as "Kia Ora".  Kia Ora was incorporated in South Australia in 1954 and, at the times which are now relevant, its shares were listed on the Australian Stock Exchange.  It became insolvent and, in July 1989, the Supreme Court of South Australia ordered that it be wound up by the Court.  The appellants are (or are the personal representatives of) those whom Kia Ora alleged and the trial judge found[1] were, at material times, the members of a partnership which carried on practice as accountants in Perth under the name "Nelson Wheeler".

  2. The appeal to this Court concerns limited aspects of complex litigation brought by Kia Ora in the Supreme Court of South Australia against the appellants and (among others) persons who were alleged to have been directors of Kia Ora at the relevant times (the second, third and fourth respondents to this appeal).  It is convenient to refer to these respondents as "the Kia Ora directors".  The litigation arose out of a successful takeover bid by Kia Ora for a company called Western United Ltd.  By its takeover offers, Kia Ora offered alternative forms of consideration to the shareholders of Western…

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Details
Case
[2001] HCA 31
Decision Date

CaseChat Overview and Summary

The High Court of Australia considered an appeal from the Full Court of the Supreme Court of South Australia concerning a claim for damages arising from a breach of contract and duty of care. The plaintiff, Kia Ora Limited (in liquidation), had engaged the appellants, accountants, to provide an independent valuation report for a takeover bid. Kia Ora alleged that the appellants breached their duty of care and contractual obligations by providing an incompetent valuation, which led Kia Ora to proceed with the takeover, resulting in loss. The appellants admitted to breaching their duty of care to Kia Ora but denied owing a duty to Kia Ora's shareholders.

The central legal issues before the High Court were whether the appellants owed a duty of care to Kia Ora, the extent of that duty, and how damages should be calculated for the breach. Specifically, the court had to determine if the damages awarded should include the market value of shares issued by Kia Ora as part of the consideration for the takeover, and whether the company suffered a loss by issuing these shares. The court also considered the principles of causation in equity and the assessment of equitable compensation, including any reduction for contributing fault.

The High Court allowed the appeal, setting aside parts of the orders made by the Full Court of the Supreme Court of South Australia. The court's reasoning focused on the calculation of damages. It held that a company does not suffer a loss simply by issuing its own shares, even if those shares are issued at a discount to their market value, as the company receives consideration for those shares. The court remitted the matter to the Full Court of the Supreme Court of South Australia for the making of orders consistent with its reasons, indicating a reassessment of the damages awarded to Kia Ora.

Orders

Orders of the court

1. Appeal allowed with costs.

2. Set aside pars 2, 7, 9 and 10 of the orders made by the Full Court of the Supreme Court of South Australia on 13 August 1999 but only to the extent that those orders affect the parties to the appeal to this Court.

3. Remit the matter to the Full Court of the Supreme Court of South Australia for the making of orders consistent with this Court's reasons for decision.

Background

Background to the litigation

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Evidence

Evidence Before The Court

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Decision

Reasons for decision

HUGH, GUMMOW, HAYNE AND CALLINAN JJ
Kia Ora alleged that the appellants owed a duty of care to it, and its shareholders, to exercise all reasonable care, skill and diligence that a reasonably competent accountant would exhibit in carrying out the retainer to prepare such a report. By their pleading, the appellants admitted that they owed a duty of care to Kia Ora (among other things) to carry out their instructions with all reasonable care, skill and diligence but denied owing any duty to the shareholders of Kia Ora. At trial, the appellants sought to withdraw the admission that they owed a duty to Kia Ora and to amend their pleading to deny any duty of care to Kia Ora in tort but acknowledge a common law duty only to those shareholders of Kia Ora who were not associates of the Kia Ora directors[9]. The trial judge held that the appellants did owe Kia Ora a common law duty of care and a like duty under the contract of retainer[10]. Kia Ora's shareholders not being party to the action, it was not necessary to decide whether the appellants owed any duty to the shareholders, or any group of shareholders. The trial judge rejected Kia Ora's claim that the appellants breached a fiduciary duty, holding that it was not shown that there was a fiduciary relationship between Kia Ora and the appellants[11].[9](1998) 27 ACSR 1 at 266.[10](1998) 27 ACSR 1 at 355.[11](1998) 27 ACSR 1 at 378.The decisions at trial and in the Full Court In the course of final submissions at the trial, counsel for the appellants conceded that the report (and the valuation of Western United that it incorporated) had been prepared incompetently and in breach of the duty of care owed to Kia Ora[12]. The trial judge found that the extent of the incompetence was "a very substantial departure from the standards which [the appellants] were required to observe"[13]. Among other things, the report made unjustifiably favourable projections of future maintainable earnings of Western United[14] and used price earnings multiples which were inappropriate[15]. Obvious checks which were readily available and which, if used, would have revealed what the trial judge described as the "absurd over valuation of Western United"[16] were not made.[12](1998) 27 ACSR 1 at 269.[13](1998) 27 ACSR 1 at 294. See also Bennett v Minister of Community Welfare (1992) 176 CLR 408 at 426‑427; Maguire v Makaronis (1997) 188 CLR 449; cf United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1; Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371.[14](1998) 27 ACSR 1 at 275-280.[15](1998) 27 ACSR 1 at 280-285.[16](1998) 27 ACSR 1 at 285. The trial judge found that the Kia Ora directors were in breach of fiduciary and statutory duties[17]. He gave judgment for Kia Ora against the appellants and the Kia Ora directors for $93,863,796.81 (including interest)[18]. That sum was calculated by allowing an amount equal to the cash which Kia Ora had paid shareholders of Western United (more than $26 million) and an amount of $30.55 million for the value of the shares which Kia Ora had issued and allotted "measured by having regard to their value at the time they were allocated" (found to be 45 cents per share)[19]. This figure of 45 cents per share was found to be the share market price of Kia Ora shares after the new issue had been made under the takeover scheme[20]. To the sum of these amounts was added an amount of $600,000 for damages for loss of use of money[21] and an amount of $6,439,339 was deducted as the true value of the shares in Western United obtained by the takeover. Pre‑judgment interest was allowed pursuant to s 30C of the Supreme Court Act 1935 (SA) to give the judgment sum of more than $93.8 million.[17](1998) 27 ACSR 1 at 329.[18](1998) 27 ACSR 1 at 495.[19](1998) 27 ACSR 1 at 412.[20](1998) 27 ACSR 1 at 399, 412.[21](1998) 27 ACSR 1 at 416.

Ratio Decidendi

Legal Principle Established

Established by: HUGH, GUMMOW, HAYNE AND CALLINAN JJ

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