Ryan Wealth Holdings Pty Ltd v Baumgartner

[2018] NSWSC 1502

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

Ryan Wealth Holdings Pty Ltd v Baumgartner [2018] NSWSC 1502

Hearing dates:

28-31 August; 12 October 2017

Date of orders:

08 October 2018

Decision date:

08 October 2018

Jurisdiction:

Common Law

Before:

Walton J

Decision:

The Court makes the following directions:

 

(1) The plaintiff shall file and serve within 14 days of the date of this judgment short minutes of order reflecting this judgment.

 

(2) The plaintiff shall file and serve within 28 days of this judgment a submission as to any disputed questions as to the short minutes of order, interest and costs together with the terms of any orders proposed with respect to costs.

 (3) The defendants shall file and serve a submission in reply as to any disputed questions as to the short minutes of order, interest and costs together with the terms of any proposed orders in that respect, within 14 days after being served with the submissions in (2) above.

Catchwords:

AUDIT of a self-managed superannuation fund – Superannuation Industry (Supervision) Act 1993 (SIS Act) – auditing standards framework – construction of audit contracts – parties to the audit contracts

 

EVIDENCE – expert witness – weight attached to expert opinion

 

BREACH OF DUTY AND CONTRACT– admitted breach of contract and duty – non-admitted breaches of contract and duty – failure to enquire into and report on compliance with investment strategy – reg 4.09 – failure to bring serious misdescriptions, misstatements and other factors (including conflict of interest of accountant) to the plaintiff’s attention – failure to form and express certain opinions – failure to exercise reasonable care and skill – the defendants breached retainers and common law duties owed to the plaintiff

 

SIS ACT – contravention of the SIS Act – obligations under the Act – whether damages available under the Act

 

MISLEADING AND DECEPTIVE CONDUCT – representations – s 42 of the Fair Trading Act (NSW) – s 52 of the Trade Practices Act – representations within audit reports – representations by silence – representations by auditor constituted misleading and deceptive conduct

 

CAUSATION – causation as a result of admitted breaches, non-admitted breaches and misleading and deceptive conduct –

 

LOSS AND DAMAGES – loss of the chance or opportunity – additional recoveries – exercise of rights under facility agreement – claims against insured parties – exclusion clauses within insurance policies – conflict of interest exclusion clauses – dishonesty and fraud exclusion clauses – insurance policy would have responded to one of plaintiff’s claims – partial recovery of some investments not proved – loss of the chance or opportunity to make recoveries earlier in time – defendant failed to adduce evidence that parties from whom recoveries were made had inferior financial capacity in 2008 than at time recoveries were made – damages – plaintiff entitled to damages for loss of a chance or opportunity to make recoveries beyond recoveries actually made – plaintiff entitled to lost interest on amounts already recovered

 

AFFIRMATIVE DEFENCES – professional standards legislation and professional standards scheme – limitation on damages – federal jurisdiction exercised by the Supreme Court – choice of law in tort – plaintiff’s claim in negligence governed by the law of Victoria – choice of law in contract – contract governed by law of Victoria – choice of law rules for tort apply to contravention of s 52 of the Trade Practices Act – no jurisdiction of a court exercising federal jurisdiction in NSW to award damages under the Fair Trading Act (Vic)

 

AFFIRMATIVE DEFENCES– contributory negligence – plaintiff lacked financial sophistication – auditor was engaged to prevent kind of loss that occurred – plaintiff’s damages reduced for contributory negligence

  AFFIRMATIVE DEFENCES – proportionate liability – concurrent liability of accounting firm which prepared financial reports – auditor had higher culpability than accounting firm (MBS) – plaintiff’s loss apportioned to MBS – previous auditor not concurrently liable – plaintiff’s damages not reduced by reason of sole director’s concurrent liability to the plaintiff – same acts of sole director resulted in reduction of damages for contributory negligence

Legislation Cited:

Acts Interpretation Act 1901 (Cth)
Australian Constitution
Australian Securities and Investments Commission Act 2001 (Cth)
Civil Liability Act 2002 (NSW)
Civil Procedure Act 2005 (NSW)
Competition and Consumer Act 2010 (Cth)
Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth)
Corporations Act 2001 (Cth)
Corporations Regulations 2001 (Cth)
Evidence Act 1995 (NSW)
Fair Trading Act 1987 (NSW)
Fair Trading Act 1999 (Vic)
Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007 (Cth)
Insurance Contracts Act 1984 (Cth)
Judiciary Act 1903 (Cth)
Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth)
Jurisdiction of Courts (Cross-Vesting) Act 1987 (NSW)
Jurisdiction of Courts (Cross-Vesting) Act 1987 (Vic)
Law Reform (Miscellaneous Provisions) Act 1965 (NSW)
Local Government Act 1946 (Vic)
Partnership Act 1892 (NSW)
Professional Standards Act 1994 (NSW)
Professional Standards Act 2003 (Vic)
Real Property Act 1900 (NSW)
State Bank of South Australia Act 1983 (SA)
Superannuation Industry (Supervision) Act 1993 (Cth)
Superannuation Industry (Supervision) Regulations 1994 (Cth)
Trade Practices Act 1974 (Cth)

Cases Cited:

Agar v Hyde (2000) 201 CLR 552; [2000] HCA 41
Akai Pty Ltd v People’s Insurance Co Ltd (1996) 188 CLR 418
Astley v Austrust Ltd (1999) 197 CLR 1; [1999] HCA 6
Australian Competition and Consumer Commission v Global Prepaid Communications Pty Ltd [2006] FCA 146
Australian Competition and Consumer Commission v Valve Corporation (No 3) (2016) 337 ALR 647; [2016] FCA 196
Badenach v Calvert (2016) 257 CLR 440; [2016] HCA 18
Baiyai Pty Ltd v Guy [2009] NSWCA 65
Blunden v Commonwealth (2003) 218 CLR 330; [2003] HCA 73
Bonython v Commonwealth (1950) 81 CLR 486
Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61
Briginshaw v Briginshaw (1938) 60 CLR 336
Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; [2004] HCA 60
Byrne v Australian Airlines Ltd (1995) 185 CLR 410; [1995] HCA 24
Cackett v Keswick [1902] 2 Ch 456
Cam & Bear Pty Ltd v McGoldrick [2018] NSWCA 110
Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25
Chaplin v Hicks [1911] 2 KB 786
Chep v Bunnings [2010] NSWSC 301
Chubb Insurance Company of Australia Ltd v Moore (2013) 302 ALR 101; [2013] NSWCA 212
Cloverdell Lumber Co Pty Ltd v Abbott (1924) 34 CLR 122
Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389
Croome v Tasmania (1997) 191 CLR 119
Damien v JKAM Investments Pty Ltd [2015] NSWCA 368
Daniels v Anderson (1995) 37 NSWLR 438
Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd (2007) 164 FCR 450; [2007] FCA 1216
Darvall McCutcheon v H K Frost Holdings Pty Ltd (in liq) (2002) 4 VR 570; [2002] VSCA 85
Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588; [2011] HCA 21
Demagogue Pty Limited v Ramensky (1992) 39 FCR 31
Distillers Co (Biochemicals) Ltd v Thompson [1971] AC 458
Do Carmo v Ford Excavations Pty Ltd (1984) 154 CLR 234
Dow Jones & Co Inc v Gutnick (2002) 210 CLR 575; [2002] HCA 56
Dungowan Manly Pty Limited v McLaughlin [2012] NSWCA 180
Durban Roodepoort Deep Limited v Newshore Nominees Pty Ltd [2005] WASCA 231
Enzed Holdings Limited v Wynthea Pty Ltd (1984) 57 ALR 167; [1985] ATPR 40-507
Fink v Fink (1946) 74 CLR 127
Fire & All Risks Insurance Co Ltd v Callinan (1978) 140 CLR 427
Fleming v Marshall (2011) 279 ALR 737; [2011] NSWCA 86
Forge v Australian Securities and Investments Commission (2006) 228 CLR 45; [2006] HCA 44
Frankston and Hastings Shire v Cohen (1960) 102 CLR 607
Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1
Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82
Golden Strait Corporation v Nippon Yusen Kubishka Kaisha [2007] 2 AC 353
Gore (t/as Clayton Utz) v Montague Mining Pty Limited [2000] FCA 1214
Gould v Vaggelas (1985) 157 CLR 215
Haines v Bendall (1991) 172 CLR 60
Hamilton v Merck and Co Inc; Hutchinson v Merck Sharp and Dohme (Australia) Pty Ltd (2006) 66 NSWLR 48; [2006] NSWCA 55
Harle v Legal Practitioners Liability Committee [2003] VSCA 133
Hart Security Australia Pty Ltd v Boucousis [2016] NSWCA 307
Henjo Investments Ply Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546
HG & R Nominees Pty Ltd v Fava [1997] 2 VR 368
Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54
Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613; [2013] HCA 10
Hunter Grain Pty Ltd v Hyundai Merchant Marine Co Ltd (1993) 117 ALR 507
Jackson v Spittall (1870) LR 5 CP 542
Jaggard v Sawyer [1995] 2 All ER 189; [1995] 1 WLR 269
JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237
John Pfeiffer Pty Ltd v Rogerson (2002) 203 CLR 503; [2000] HCA 36
Johnson v Perez (1988) 166 CLR 351
Jones v Dunkel (1959) 101 CLR 298
Jones v Schiffmann (1971) 124 CLR 303
Kayteal Pty Ltd v Dignan (2011) 15 BPR 29,515; [2011] NSWSC 197
Kimberly NZI Finance Ltd v Torero Pty Ltd [1989] ATPR (Digest) 53,193
Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361; [2011] HCA 11
Lange v Australian Broadcasting Corporation (1997) 189 CLR 520
Letang v Cooper [1965] 1 QB 232
LMI v Baulderstone [2001] NSWSC 886
Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705; [2001] NSWCA 305
Malec v J C Hutton Pty Ltd (1990) 169 CLR 638
Mancini v Mancini (1999) 17 ACLC 1,570 at 1,577-1,578
Manly Council v Byrne [2004] NSWCA 123 Sydneywide Distributors Pty Ltd v Red Bull Australia Pty Ltd (2002) 234 FCR 549; [2002] FCAFC 157
McCann v Switzerland Insurance Ltd (2000) 203 CLR 579; [2000] HCA 65
McCrohon v Harith [2010] NSWCA 67
McRae v Commonwealth Disposals Commission (1951) 84 CLR 377
Meandarra Aerial Spraying Pty Ltd v GEJ Geldard Pty Ltd [2013] 1 Qd R 319; [2012] QCA 315
Meerkin & Apel v Rossell Pty Ltd [1998] 4 VR 54
Mercedes Holdings Pty Ltd v Waters (No 5) [2011] FCA 1428
Milliman v Rochester Ry Co 3 App Div 109; 39 NYS 274 (1896)
Mills v Ruthol Pty Ltd (2004) 61 NSWLR 1; [2004] NSWSC 547
Murphy v Dorman (2003) 58 NSWLR 51; [2003] NSWCA 249
OXS Pty Ltd v Sydney Harbour Foreshore Authority [2016] NSWCA 120
P E Kafka Pty Ltd v The Hermitage Motel Pty Ltd [2009] FCAFC 94
Pace Farm Egg Products Pty Ltd v Newcastle City Council (2006) 151 LGERA 260; [2006] NSWCCA 403
Pacific Acceptance Corporation v Forsyth (1970) 92 WN (NSW) 29
Paper Products Pty Ltd v Tomlinsons (Rochdale) Ltd (No 2) (1993) 44 FCR 485
Paradis v Settlement Agents Supervisory Board (2007) 33 WAR 361; [2007] WASCA 97
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191
Perpetual Trustee Company Ltd v Ishak [2012] NSWSC 697
Placer (Granny Smith) Pty Ltd v Theiss Contractors Pty Ltd (2003) 77 ALJR 768; [2003] HCA 10
Podrebersek v Australian Iron & Steel Pty Ltd (1985) 59 ALR 529
Poignand v NZI Securities Ltd (1992) 37 FCR 363
Polkinghorne v Holland (1934) 51 CLR 143
Polon v Dorian [2014] NSWSC 571
Precision Plastics Pty Ltd v Demir (1975) 132 CLR 362
Queensland Premier Mines Pty Ltd v French (2007) 235 CLR 81; [2007] HCA 53
Radosavljevic v Radin [2003] NSWCA 217
Re London & General Bank (No 2) [1895] 2 Ch 673
Re United Railways of the Havana and Regla Warehouses Ltd [1960] Ch 52
Re Wakim; Ex parte McNally (1999) 198 CLR 511; [1999] HCA 27
Reinhold v New South Wales Lotteries Corporation (No 2) [2008] NSWSC 187
Rhone-Poulenc Agrochomie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477
Rizeq v Western Australia (2017) 344 ALR 421; [2017] HCA 23
Roads and Traffic Authority of New South Wales v Dederer (2007) 234 CLR 330; [2007] HCA 42
Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18
Rosser v Marine Ministerial Holdings Corp [1999] NSWCA 72
Ryan Wealth Holdings Pty Ltd v L&V Tomkins Pty Ltd [2016] NSWSC 136
Saad v Doumeny Holdings Pty Ltd [2005] NSWSC 893
Sargent v ASL Developments Ltd (1974) 131 CLR 634
Seaton v Burnand [1900] AC 135
Seiwa Australia Pty Ltd v Beard (2009) 75 NSWLR 74; [2009] NSWCA 240
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332
Simonius Vischer & Co v Hold & Thompson [1979] 2 NSWLR 322
State of New South Wales v Julianne Higgins by her tutor David Benedict O’Shea; Barnardos Australia v Julianne Higgins [2005] NSWCA 244
State of New South Wales v Moss (2000) 54 NSWLR 536
State of NSW v Burton [2008] NSWCA 319
State of South Australia v Peat Marwick Mitchell & Co (1997) 24 ACSR 231
Street v Luna Park Sydney Pty Limited (2009) 223 FLR 245; [2009] NSWSC 1
Sutton v AJ Thompson Pty Ltd (In Liq) (1987) 73 ALR 233
Telesto Investments Ltd v UBS AG (2012) 262 FLR 119, [2012] NSWSC 44
The Commonwealth v Amann Aviation Pty Ltd (1994) 174 CLR 64
Travel Compensation Fund v Tambree (2005) 224 CLR 627; [2005] HCA 69
Troulis v Vamvoukakis (Unreported, New South Wales Court of Appeal, 27 February 1998)
Voth v Manildra Flour Mills Pty Ltd (1990) 171 CLR 538
Wentworth v Woollahra Municipal Council (1982) 149 CLR 672
West Wake Price & Co v Ching [1957] 1WLR 45
Yates v Mobile Marine Repairs Pty Ltd [2007] NSWSC 1463

Texts Cited:

M Davies, A S Bell and P L G Brereton, Nygh’s Conflict of Laws in Australia (LexisNexis Butterworths, 9th ed, 2014)
C Hollander QC and S Salzedo QC, Conflicts of Interest (Sweet & Maxwell, 4th ed, 2001)
J Leow and S Murphy, Australian Master Superannuation Guide (Wolters Kluwer, 21st ed, 2017/18)
LexisNexis, Cross on Evidence (at 13 September 2018)
Thomson Reuters, Woodman & Nettle: Torrens System in NSW (at 16 August 2018)

Category:

Principal judgment

Parties:

Ryan Wealth Holdings Pty Ltd (Plaintiff)
David Keith Baumgartner (First Defendant)
KJ Equities Pty Ltd (Second Defendant)

Representation:

Counsel:
A Harding and A Avery-Williams (Plaintiff)
M A Jones SC and M F Newton (Defendants)
Solicitors:
Holman Webb Lawyers (Plaintiff)
HWL Ebsworth Lawyers (Defendants)

File Number(s):

2014/00358648

TABLE OF CONTENTS

INTRODUCTION - paragraph 1

The Parties - paragraph 2

The Audits - paragraph 6

The 2007 audit - paragraph 8

The 2008 audit - paragraph 12

The 2009 audit - paragraph 15

Overview: The Parties’ Positions - paragraph 19

FACTUAL BACKGROUND - paragraph 26

The Investments

The loan investments - paragraph 31

The River Island Facility Agreement - paragraph 32

Pacific General Facility Agreement - paragraph 34

MCD Holdings Facility Agreement - paragraph 36

Tomkins Facility Agreement - paragraph 38

Overview: Monies advanced - paragraph 40

The other investments - paragraph 43

The Cartel Investments Unit Trust - paragraph 44

The Limeburners Creek Unit Trust - paragraph 46

Advice from Mr Moylan - paragraph 51

Personal involvement of Mr Moylan - paragraph 79

Status of the Loans and Investments as at 30 June 2008 - paragraph 82

The Financial statements

The 2007 financial statement - paragraph 84

The 2008 financial statement - paragraph 86

The 2009 financial statement - paragraph 87

The Investment Strategy - paragraph 89

The 2007 investment strategy - paragraph 90

The 2008 and 2009 investment strategies - paragraph 91

The Defendants and the Audits of the Super Fund - paragraph 92

The Financial Collapses - paragraph 96

Lapse of professional indemnity policies held by Moylan companies - paragraph 97

Recoveries - paragraph 99

LETTERS OF ENGAGEMENT - paragraph 105

Scope

The 2007 retainer - paragraph 106

The 2008 and 2009 retainers - paragraph 110

Audit Objectives and Approach

The 2007 retainer - paragraph 111

The 2008 and 2009 retainers - paragraph 114

Reporting on Significant/Compliance Matters

The 2007 retainer - paragraph 116

The 2008 and 2009 retainers - paragraph 117

Fees - paragraph 119

THE STATUTORY FRAMEWORK - paragraph 120

The 2007 Audit

SIS Act - paragraph 122

SIS Regulations - paragraph 135

The repeal of Pt 13 - paragraph 138

The 2008 and 2009 Audits

The SIS Act - paragraph 140

The Corporations Act - paragraph 145

THE AUDITING STANDARDS FRAMEWORK

Financial Reports - paragraph 152

Auditing Standards - paragraph 158

The AUASB auditing standards - paragraph 159

The ASA Standards - paragraph 160

ASA 800 - paragraph 161

ASA 200, ASA 240 and ASA 260 - paragraph 167

The guidance statement - paragraph 172

AUG 4 - paragraph 178

Mandatory requirements under the ASA Standard

ASA 200 - paragraph 186

ASA 240 - paragraph 188

PLEADINGS - paragraph 189

Duties in contract and tort - paragraph 192

Representations - paragraph 200

Breach of contract and duty - paragraph 202

Causation, loss and damage - paragraph 205

Breaches of the SIS Act - paragraph 207

Misleading and deceptive conduct - paragraph 211

Loss and damage - paragraph 220

ISSUES - paragraph 222

Contract - paragraph 225

Duties in Contract and in Tort - paragraph 227

Admitted Breaches of Contract and Duty - paragraph 230

Non-admitted Breaches of Contract and Duty - paragraph 234

Failure to inquire and report as to compliance with the investment strategies, including matters set out in reg 4.09(2) - paragraph 235

Failure to audit the Super Fund by forming an opinion as to whether the trustee had complied with the requirements of the SIS Act and the SIS Regulations - paragraph 239

Failure to bring serious misdescriptions and misstatements and other facts and circumstances to the plaintiff’s attention - paragraph 241

Failure, acting reasonably, to form and express certain opinions - paragraph 244

Failure to exercise reasonable care and skill - paragraph 247

Misleading and deceptive conduct - paragraph 251

Contraventions of the SIS Act and Regulations - paragraph 255

Breach of statutory duty - paragraph 257

Causation - paragraph 260

Loss - paragraph 265

Defences - paragraph 268

WRITTEN SUBMISSIONS OF THE PARTIES - paragraph 270

CONSTRUCTION OF THE AUDIT CONTRACTS - paragraph 272

The Terms of the Retainers - paragraph 278

PARTIES TO THE AUDIT CONTRACTS - paragraph 320

WITNESSES

Plaintiff’s Witnesses - paragraph 326

Mr Morris - paragraph 329

Errors in reports - paragraph 334

Form of the reports - paragraph 335

Failure to refer to ASA 800 - paragraph 337

Statement of obligation - paragraph 341

Qualifications and Expertise - paragraph 362

Conclusion as to Mr Morris - paragraph 377

Mr Sheppard - paragraph 385

Investment in Limeburners Trust - paragraph 390

Ability of the Regional Land Fund to pay claims and net assets - paragraph 392

Reference to value of real estate - paragraph 401

Defendants’ Witness - paragraph 406

Failure to call Mr David Baumgartner - paragraph 408

COMMON LAW DUTIES OWED BY THE DEFENDANTS - paragraph 411

BREACH OF CONTRACT AND DUTY

The admitted breach of contract and duty - paragraph 417

Non-admitted breaches of contract and duty - paragraph 444

Failure to enquire and report as to compliance with reg 4.09 (second further ASOC at para 16(a) and at [284]-[294] above) - paragraph 446

Failure to audit the Super Fund to be able to form the opinion that the trustee had complied with the requirements of the SIS Act and SIS Regulation (second further ASOC at para 16(b) and [280] above) - paragraph 474

Failure to bring serious misdescriptions and misstatements and other facts and circumstances to the plaintiff’s attention (second further ASOC at para 16(c) and [299]-[311] above) - paragraph 477

Failure, acting reasonably, to form and express certain opinions (second further ASOC at para 16(d) and [312]-[317] above) - paragraph 509

Failure to exercise reasonable care and skill (second further ASOC at para 16(e) and [318]-[319] above) - paragraph 517

Existence of assets and securities - paragraph 520

Value of assets - paragraph 531

Failure to identify and report that the assets were non-performing and financial statements were materially inaccurate (second further ASOC at para 16(e)(v)-(vi)) - paragraph 544

Conclusion: Breach of Contract and Duty - paragraph 546

CONTRAVENTION OF THE SIS ACT AND REGULATIONS

Sections 113 and 35C of the SIS Act - paragraph 547

Sections 129 and 130 of the SIS Act - paragraph 551

Damages under s 315(11) of the SIS Act - paragraph 557

MISLEADING AND DECEPTIVE CONDUCT - paragraph 571

Relevant Principles - paragraph 574

Representations and further representations - paragraph 578

First set of representations - paragraph 579

Further representations - paragraph 597

Conclusion: Misleading and Deceptive Conduct - paragraph 602

CAUSATION - paragraph 608

Breach of Contract and Duty

The admitted breach of contract and duty - paragraph 609

The non-admitted breaches of contract and duty - paragraph 626

Misleading and Deceptive Conduct - paragraph 628

Contravention of the SIS Act - paragraph 631

Conclusion: Causation - paragraph 632

LOSS - paragraph 633

Relevant Principles - paragraph 638

Application of the Principles - paragraph 663

Category 1: Exercise of Rights to Obtain Recovery - paragraph 671

Rights under Pacific General Facility Agreement - paragraph 672

Claims against insured parties Mr Moylan and/or his Related Companies - paragraph 678

Issues of insurance - paragraph 688

Conflict of interest and exclusion clauses - paragraph 697

Dishonesty and fraud and prior knowledge exclusions - paragraph 725

Partial recoveries - paragraph 739

Rights under the River Island Facility Agreement - paragraph 740

Rights under the Tomkins Facility Agreement - paragraph 751

Cartel Trust - paragraph 758

Limeburners Trust - paragraph 760

Claim against Turnbull Hill Lawyers - paragraph 762

Category 2: Delayed Exercise of Right - paragraph 763

Claim against partners of Turnbull Hill Lawyers - paragraph 766

Claim against guarantors at Pacific General Facility Agreement - paragraph 784

Tomkins Facility Agreement - paragraph 789

Conclusion

Delay - paragraph 803

Loss - paragraph 805

DAMAGES - paragraph 806

Loss Assuming Full Recovery as at 30 June 2008

Damages Claim #1 - paragraph 812

Damages Claim #2 - paragraph 817

Category 1:

Loss of chance to make recoveries beyond those that were actually achieved - paragraph 823

Category 2:

Lost interest on amounts in fact recovered - paragraph 836

Conclusion: Damages - paragraph 839

AFFIRMATIVE DEFENCES

Professional Standards Legislation – limits on damages? - paragraph 843

Federal jurisdiction - paragraph 849

Choice of law in tort - paragraph 861

Claim in Contract - paragraph 882

Questions (2)-(4) - paragraph 888

Question (5) – claim for contravention of s 52 of the TPA - paragraph 896

The second defendant - paragraph 906

The Victorian Scheme - paragraph 910

State Fair Trading Acts - paragraph 914

Conclusion as to State Fair Trading Acts - paragraph 920

Conclusion as to Professional Standards Scheme Cap - paragraph 929

Contributory Negligence - paragraph 930

Conclusion as to contributory negligence - paragraph 953

Proportionate Liability - paragraph 954

MBS - paragraph 960

Mr Moylan - paragraph 985

Ms Crittle - paragraph 999

Conclusion as to apportionment - paragraph 1002

CONCLUSION - paragraph 1003

DIRECTIONS - paragraph 1008

Judgment

INTRODUCTION

1. HIS HONOUR: These proceedings concern audits of a self-managed superannuation fund (“SMSF”), Ryan Holdings Retirement Fund (“the Super Fund”) in three successive financial years, being the financial years ending 30 June 2007, 30 June 2008 and 30 June 2009 (“the relevant financial years”).

The Parties

2. Ryan Wealth Holdings Pty Ltd (“the plaintiff”) is the trustee of the Super Fund. The sole shareholder and director of the plaintiff is, and has always been, Ms Trudy Crittle.

3. The defendants were David Keith Baumgartner (“the first defendant”) and KJ Equities Pty Ltd (“the second defendant”). The first and second defendants commenced business in partnership under the name “Baumgartner Partners” from mid-2001 and maintained that business at all relevant times for the purpose of these proceedings (the first and second defendants shall be referred to collectively, when appropriate, as “the defendants”). The business of that partnership included the provision of accounting and auditing services.

4. The first defendant was a chartered accountant from 2006. He was licenced and qualified to conduct audits of SMSFs. He was an approved auditor for the purposes of the Superannuation Industry (Supervision) Act 1993 (Cth) (“the SIS Act”).

5. The second defendant was not an approved auditor and was not appointed as auditor of the Super Fund.

The Audits

6. In each of the relevant financial years, an audit of the Super Fund’s financial statements was carried out and an audit report issued in which an unqualified audit opinion was expressed as to two matters:

1. the presentation of the Super Fund’s financial report; and,

2. the Super Fund’s compliance with the SIS Act.

7. A brief outline of the three audits, the subject of these proceedings, is set out below.

The 2007 audit

8. The first audit, for the purposes of these proceedings, concerned the financial year ending 30 June 2007 and was undertaken pursuant to a letter of engagement, bearing the letterhead “Baumgartner Partners”, dated 7 March 2008 (“the 2007 audit”).

9. The letter of engagement had a formal closing of “Yours Faithfully, Baumgartner Partners” and provided a space for signature above the typed words: “David Baumgartner”. The letter was signed by the first defendant in that space. Mr Christopher Moylan, a financial advisor and accountant to the plaintiff, signed the letter on behalf the plaintiff (Mr Moylan’s involvement is described at [28] below).

10. By this means, an agreement was entered into and an auditor was retained to perform duties under the audit contract, the terms of which were specified by that letter of engagement (the audit contract for the 2007 audit shall hereinafter be referred to as “the 2007 retainer”): see, for example, Simonius Vischer & Co v Hold & Thompson [1979] 2 NSWLR 322 at 340C (per Samuels JA, with whom Moffitt P and Reynolds JA agreed) and Meerkin & Apel v Rossell Pty Ltd [1998] 4 VR 54 at 62 (per Charles JA, with whom Callaway JA and Batt JA agreed) (a dispute as to whether the second defendant was a party to an audit contract shall be dealt with later in this judgment).

11. On or about 15 May 2008, the first defendant, as the approved auditor, issued an audit report in respect of the financial year ending 30 June 2007 (“the 2007 audit report”).

The 2008 audit

12. The second audit, for the financial year ending 30 June 2008, was undertaken pursuant to an undated letter of engagement bearing the same formal closing, namely, “Yours Faithfully, Baumgartner Partners” and provision for the first defendant’s signature (“the 2008 audit”).

13. The undated letter of engagement was signed by the first defendant and Ms Crittle in about May 2009 (this audit contract for the 2008 audit shall hereinafter be referred to as “the 2008 retainer”).

14. On or about 3 June 2009, the first defendant issued an audit report in respect of the financial year ending 30 June 2008 (“the 2008 audit report”).

The 2009 audit

15. The third audit, for the financial year ending 30 June 2009, was undertaken pursuant to another undated letter of engagement bearing the same formal closing and signature provision for the first defendant (as described above, with respect to the letters of engagement as to the 2007 and 2008 audits) (“the 2009 audit”).

16. The letter of engagement was signed in about May 2010 (this audit contract shall be referred to as “the 2009 retainer”). (Collectively, the 2007, 2008 and 2009 retainers will be referred to as “the retainers”).

17. On or about 28 June 2010, the first defendant issued an audit report in respect of the financial year ending 30 June 2009 (“the 2009 audit report”). (Collectively, the 2007, 2008 and 2009 audit reports will be referred to as “the audit reports”).

18. In each of the audit reports, the auditor gave an unqualified opinion that the trustee of the Super Fund had complied, in all material respects, with the requirements of various provisions of the SIS Act and the Superannuation Industry (Supervision) Regulations 1994 (“the SIS Regulations”), and that the financial reports of the Super Fund presented fairly, in all material respects, the financial position of the Super Fund as at the end of the relevant financial year.

Overview: The Parties’ Positions

19. The plaintiff’s essential proposition in these proceedings was that as result of the failures of the auditor, in the respective financial years, irregularities went undetected for many years and, when ultimately those irregularities were discovered, the opportunity to redeem many of the loans and investments of the Super Fund, or to pursue recovery action against those on whose advice the loans and investments had initially been made, had been lost.

20. By a second further amended statement of claim filed with leave in Court on 31 August 2017 (“second further ASOC”), the plaintiff claimed, inter alia, that the defendants’ conduct was:

1. in breach of their duties in contract and in tort;

2. in contravention of their obligations as auditors under the SIS Act

3. misleading and deceptive; and

4. in breach of Commonwealth and State legislation.

21. The defendants made certain admissions as to breaches of their duties and representations in its defence to the further amended statement of claim (“the amended defence”) filed in Court on 28 August 2017 (“the admitted breaches”) but otherwise denied the alleged breach of their duties, any misleading and deceptive conduct and contravention of obligations under the SIS Act (collectively, “the non-admitted breaches”). The defendants also contested causation as to both admitted and non-admitted breaches.

22. In the broad, the issues in the proceedings are twofold. First, there was an issue as to causation for the admitted breaches by the defendants. Secondly, as to the non-admitted breaches, the issues concerned whether there existed duties and, if so, whether the pleaded breaches had been made out – together with an issue as to whether there is a causal link with respect to those breaches.

23. The defendants’ ultimate position was that, notwithstanding the admitted breaches, the plaintiff has not demonstrated causation or loss. In the result, the defendants contended that the plaintiff was only entitled to an award of nominal damages of $300 in total for the admitted breach of the retainers.

24. That overview does not purport to comprehensively digest the issues emerging from the parties’ contentions. That task may only properly occur in the context of close attention being paid to the pleadings and the submissions of the parties (see under the heading “Issues” below from [222]).

25. Before the Court embarks upon that course, it is necessary to set out the factual background.

FACTUAL BACKGROUND

26. As earlier mentioned, the sole shareholder and director of the plaintiff is Ms Crittle.

27. In 2006, following a family law settlement with her former husband, Ms Crittle had a sum of money to invest. Ms Crittle was of retirement age and had no investment or accounting training, experience or knowledge, having worked exclusively as a homemaker since 1969.

28. Ms Crittle sought advice from a financial adviser, Mr Moylan, who was a director, shareholder and the authorised representative of a financial planning firm known as The Retirement Planning Specialists Pty Limited (later known as Moylan Retirement Solutions Pty Limited and shall hereinafter be referred to as “Moylan Retirement Solutions”).

29. Moylan Retirement Solutions held an Australian Financial Services Licence. Mr Moylan worked from offices in Charlestown, near Newcastle. Ms Crittle had been introduced to Mr Moylan by Mr Kenneth Michael Hill, her long time solicitor of 30 years, of Turnbull Hill Lawyers. Mr Moylan’s office was on the same floor as Turnbull Hill Lawyers. Ms Crittle placed great trust and weight in recommendations made to her by Mr Hill.

30. In early 2006, Ms Crittle established the Super Fund, with the plaintiff appointed as trustee, and transferred sums exceeding $7 million to be “invested” in accordance with Mr Moylan’s advice. I now turn to those investments.

The Investments

The loan investments

31. In 2006, the plaintiff entered into a series of investments by way of unsecured loans pursuant to a series of facility agreements. They are set out, in turn, below.

The River Island Facility Agreement

32. The River Island Facility Agreement, dated 10 February 2006, was between:

1. the plaintiff, as lender; River Island Property Holdings Pty Limited (“River Island”), as borrower; and

2. Leonard Tomkins and Mr Moylan, as guarantors.

33. By that facility agreement, the plaintiff agreed to lend up to $2.17 million “to assist…in the development of certain properties located at Clarence Town and Wallalong”. Whilst the River Island Facility Agreement was executed by Mr Moylan as a guarantor, he also executed the agreement on behalf of the plaintiff – even though he was not a director of the company.

Pacific General Facility Agreement

34. The Pacific General Facility Agreement, dated 23 February 2006, was between:

1. the plaintiff, as lender;

2. Pacific General Securities Limited (“Pacific General”) (the responsible entity for the Hardie Estates Property Fund, later known as the Regional Land Property Fund (“the Regional Land Fund”)), as borrower; and

3. Charlestown Consulting Pty Ltd, Keller Civil Engineers Pty Ltd, Hardie Holdings Pty Ltd, Mr Duncan Hardie, Mr Hill and Mr Alan Keller, as guarantors;

35. By that facility agreement, the plaintiff agreed to lend up to $2.5 million “to assist… in the construction of residential lots” at Muswellbrook, Singleton, Tamworth and Bellbird. (It should be noted, at this juncture, that the loan relating to Pacific General was referred to by different names during the proceedings, including “Pacific General”, “Regional Land” and “Hardie Estates”).

MCD Holdings Facility Agreement

36. The MCD Holdings Facility Agreement, dated 14 March 2006, was between:

1. the plaintiff, as lender; and

2. MCD Holdings Pty Limited (“MCD Holdings”) (formerly known as “Moylan’s Business Solutions Pty Limited”), as borrower.

37. Pursuant to the facility agreement, the plaintiff agreed to advance up to $1.2 million “as a line of credit for the Business, MCD Holdings Pty Ltd”. The agreement was executed by Mr Moylan on behalf of MCD Holdings, and also by Mr Moylan purportedly on behalf of the plaintiff.

Tomkins Facility Agreement

38. The Tomkins Facility Agreement, dated 12 May 2006, was between:

1. the plaintiff, as lender; and

2. Mr Leonard Tomkins, L & V Tomkins Pty Limited, Mr Andrew Tomkins and Ms Deborah Tomkins, as borrowers.

39. Pursuant to the facility agreement, the plaintiff agreed to advance up to $616,795 “to provide capital… as a means of satisfying debts incurred in the operation of L & V Tomkins Pty Limited and related entities”.

Overview: Monies advanced

40. The following table sets out a summary of the monies advanced as loans by the plaintiff, pursuant to each facility agreement, as well the respective period in which each advance was made:

Facility Agreement	Loan	Period
River Island Facility Agreement	$2,165,813	February 2006 to January 2007
Pacific General Facility Agreement	$2,500,000	23 February 2006 (or around that date)
MCD Holdings Facility Agreement	$850,000	14 March 2006 (or around that date)
Tomkins Facility Agreement	$616,795 (This advance was made in two tranches of $400,000 and $216,795, respectively)	12 May 2006 and 9 August 2006

41. These investments referred to in [31]-[40] shall be referred to as “the loan investments”.

42. There is no claim, as such, made against MCD Holdings.

The other investments

43. In 2006, the plaintiff also invested in the following unit trusts:

The Cartel Investments Unit Trust

44. In May 2006, the sum of $400,000 was invested in the Cartel Investments Unit Trust (“the Cartel Trust”). The trustee was MCD Holdings.

45. The Cartel Trust was heavily invested in the property venture associated with the Pacific General Facility Agreement.

The Limeburners Creek Unit Trust

46. On 3 July 2006, the sum of $100,000 was invested in the Limeburners Creek Unit Trust (“the Limeburners Trust”). The trustee was Limeburners Creek Investments Pty Limited (“Limeburners Creek”).

47. The Limeburners Trust had made significant loans to River Island and MCD Holdings.

48. Despite some initial dispute, the defendants accepted, correctly, in my view, that the weight of the evidence supported a finding that $100,000 was advanced by the plaintiff for investment in the Limeburners Trust. I note, in that respect, that for each relevant financial year, the Super Fund recorded a $100,000 investment in the Limeburners Trust and the plaintiff’s bank statements showed a $100,000 cheque withdrawal on 5 July 2006; the plaintiff’s general ledger also recorded an investment in the Limeburners Trust in the amount of $100,000 made that same day.

49. The investments in the respective unit trusts will be collectively referred to as “the non-loan investments”.

50. The loan investments and the other investments shall be collectively referred to throughout this judgment as “the loans and investments”.

Advice from Mr Moylan

51. There was a dispute as to whether or not the loans and investments were made on Mr Moylan’s advice or that he recommended the relevant property development ventures, albeit associated with the loans and investments, to the plaintiff. The primary factors relied upon by the plaintiff in support of a finding as to the former were as follows:

1. the fact that Moylan Retirement Solutions was the holder of an Australian Financial Securities Licence and Mr Moylan was its authorised representative;

2. Mr Moylan’s initial correspondence with Ms Crittle, by which he indicated that he would assist her in making “appropriate investment recommendations” and advised Ms Crittle to transfer funds to Turnbull Hill Lawyers trust account so that he could “then organise the investment of funds from this account after consultation with you on all investments” (emphasis added);

3. Ms Crittle’s evidence in cross-examination, that she placed herself in Mr Moylan’s hands, appointed him as her advisor and understood Mr Moylan would advise on investment decisions; and

4. an absence of any other plausible explanation as to why the loans and investments were made and the fact that Mr Moylan had a personal interest in the loans and investments (this issue will be discussed further below at [79]).

52. In reply, the defendants submitted:

1. The plaintiff’s submissions were altogether inconsistent with the evidence at trial.

2. The following evidence of Ms Crittle, in that respect, was highlighted:

1. she had signed the Pacific General Facility Agreement and the Tomkins Facility Agreement, by this fact, Ms Crittle was aware of those two loan investments;

2. she was not aware of the balance of the loan investments or the other investments;

3. she did not receive any advice concerning the prudence (or otherwise) of entering into a facility agreement, specifically, with River Island or providing loans to it or in other respects;

4. she had never heard of the Limeburners Trust until mid-2013; and

5. she had never head of the Cartel Trust or MCD Holdings until 2014.

3. In light of that evidence, it was simply not open to the plaintiff, it was submitted, to contend that those loan investments and other investments – that Ms Crittle said she had no knowledge of – were on advice and recommendation of Mr Moylan. The Court should not draw inferences favourable to the plaintiff on matters where no attempt was made to prove them by direct evidence: Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 (“Commercial Union Assurance”) at 418 (per Handley JA).

4. As to the loan investments that Ms Crittle was aware, namely, the Pacific General Facility Agreement and the Tomkins Facility Agreement, it was contended, as she gave no evidence of specific advice or recommendation from Mr Moylan, with respect to those facility agreements, the Court should not infer that such advice or recommendation was received.

3. Further, although aware of the Tomkins Facility Agreement, Ms Crittle did not give consent for amounts of $216,795 to be drawn down under that agreement. Ms Crittle gave evidence that she gave the Commissioner of Taxation a truthful account in that respect.

4. None of the matters referred to by the plaintiff can overcome the plaintiff’s failure to adduce evidence of advice or recommendation. It was contended, the inferences called for by the plaintiff’s submissions are not available. In particular, the defendants submitted the following facts do not demonstrate Mr Moylan provided advice as submitted by the plaintiff:

1. the fact that Mr Moylan was the authorised representative of an investment advisory company;

2. the fact that he had earlier represented that he would advise;

3. his appointment as adviser; and

4. Ms Crittle’s understanding that he would advise.

7. Turning then to the submission by the plaintiff that the advice and recommendation from Mr Moylan was the only plausible explanation as to why the loans and investments came to be made. The defendants submitted that such a contention was untenable as it entirely ignored or overlooked two factors:

1. First, Ms Crittle’s evidence that she was unaware of and had never heard of a number of the loans and investments and that funds were disbursed without her knowledge or authority.

2. Secondly, that the next matter referred to in plaintiff’s closing submissions as outlined in [51(4)] above — “the fact that Mr Moylan had a personal interest in the investments” — provides a “perfectly plausible” explanation for the occurrence of these events unbeknownst to Ms Crittle. The plaintiff identified that explanation in the course of submitting that there was no explanation.

53. A short time after meeting with Mr Moylan, Ms Crittle received a letter from Mr Moylan dated 1 February 2006 (“the 2006 correspondence”). By that correspondence, Mr Moylan recommended the establishment of the Super Fund. Mr Moylan knew the asset position of Ms Crittle at that time. One of the benefits of establishing the Super Fund, as stated in the 2006 correspondence, was that Ms Crittle could “stay in control”. Another advantage was the flexibility offered by the superannuation arrangements.

54. At the bottom of the first page of the 2006 correspondence, Mr Moylan stated, on behalf of Moylan Retirement Solutions, that he would “assist” Ms Crittle with the following:

2. Administering [the Super Fund] including all taxation and statutory matters each year.

3. Make appropriate investment recommendations.

55. The 2006 correspondence did not go into any detail as to what was involved in giving assistance. During cross-examination, Ms Crittle was asked whether she “left that sort of detail up to [Mr Moylan]”, she gave the following evidence: “I placed myself in his hands at that moment on the advice of Michael Hill, as you've said, the lifelong friend, and I would have always referred back to Michael for any advice. That was the reason I did it, I travelled this road”.

56. In the 2006 correspondence, Mr Moylan recommended that “the aim was… to stay very flexible” over the next 6-12 months; to have enough “ready” cash in a bank, building security or credit union and the balance of the assets on the “short term” to be invested in “cash, fixed interest or property”. After the short term period, the plaintiff’s investment portfolio could be appropriately structured to include “shares, etc”.

57. Mr Moylan then stated:

To assist this process I am recommending you transfer your funds to Turnbull Hill Lawyers Trust account. Michael and I can then organise the investment of funds from this account after consultation with you on all investments.

58. Shortly afterwards, having accepted the recommendation of Mr Moylan, Ms Crittle transferred $7.3 million to the Turnbull Hill Lawyers trust account.

59. During cross-examination, Ms Crittle gave evidence that she had appointed Mr Moylan “to be my adviser under the umbrella of Turnbull and Hill” and when initially asked if she controlled the investment decisions made she said, “yes, but as – control and being advised, I’m not quite sure if you want to know the difference”.

60. Throughout the cross-examination of Ms Crittle, it was suggested that she had control over the investment decisions. She consistently maintained, however, that the decisions she made, in exercising that control, were the subject of “advice”. Her evidence, in that respect, was as follows:

Q. You put the money into that trust account on the expectation that you would stay in control of investment decisions?

A. He advised and make [sic] a decision –

Q. It would be your decision?

A. – along with the person and the people that I was being advised by.

61. At this juncture, I interpose to note that I accept the submission of the plaintiff that Ms Crittle gave her evidence candidly and was concerned to tell the truth and recall matters to the best of her ability. My observations of the witness and the transcript of her evidence reveal Ms Crittle to be a truthful and reliable witness.

62. As to the loans and investments made by Mr Moylan, Ms Crittle was aware of the following facility agreements (having personally signed the facility agreements):

1. The Pacific General Facility Agreement; and

2. The Tomkins Facility Agreement.

63. As to the Pacific General Facility Agreement, she stated that she did not know what she would have done had she been aware that Mr Moylan had a personal involvement. This was because Ms Crittle, on her evidence, “totally trusted both these people” (being a reference to Mr Moylan and Mr Hill).

64. As to the Tomkins Facility Agreement, Ms Crittle agreed the funds were disbursed without her direction or permission.

65. She was not aware of the following loan investments:

1. The River Island Facility Agreement; and

2. The MCD Holdings Facility Agreement.

66. She had not heard of the Limeburners Trust or the Cartel Trust until 2013 and 2014, respectively.

67. It is plain that Ms Crittle did not exercise effective “control” or “direction” in making the loans and investments (or providing the loans).

68. In addition to the aforementioned discussion of the evidence, that finding is supported by the following facts:

1. Ms Crittle did not conceive of the loans and investments;

2. the funds were invested from the Turnbull Hill Lawyers trust account;

3. Ms Crittle had no investment or accounting experience, training or knowledge and, as mentioned earlier, worked exclusively as a “home maker” since 1969; and

4. Her evidence during cross-examination made clear that she was, at the time of the transactions (and perhaps even at the time of giving her evidence), unworldly as to financial affairs.

69. It is true that Mr Moylan as the authorised representative of an investment advisory company; made a representation that he would advise by the 2006 correspondence; and was appointed as an advisor with a specific function to give investment advice. However, those facts, in and of themselves, do not demonstrate that he did, in fact, advise Ms Crittle as to the loans and investments, even though each one of those considerations is relevant to resolving that question.

70. It is also true, as I have found, Ms Crittle was unaware of or had never heard of most (but not all) of the loans and investments (and funds were dispersed without her knowledge).

71. It follows, as a matter of logic, that she did not directly receive advice or recommendations about the loans and investments of which she was unaware. It does not follow, however, that the loans and investments occurred other than upon Mr Moylan’s advice, even if a specific recommendation was not made to Ms Crittle about each such investment.

72. Ms Crittle trusted Mr Moylan to look after her affairs and in doing so she placed the plaintiff in the hands of Mr Moylan. As the 2006 correspondence disclosed, his function was to make investment recommendations. The arrangement was never that investments would, necessarily, be made by funds being provided on an investment-by-investment basis after the provision of advice or recommendation, as to each such investment, but upon a very substantial sum being placed into trust, which was to be drawn upon “after consultation” with Ms Crittle. I agree with the submission of the plaintiff that the “investments were not made in a vacuum”. Mr Moylan made such investments and, as the plaintiff submitted, not as an office holder of the plaintiff. It must follow that he was making the loans and investments in his role as a financial advisor to the plaintiff.

73. Whilst his advice was not communicated, as such, it does not follow that the loans and investments were not made on his advice – in the sense that the funds held on trust had been placed in his hands to make investments as a professional financial advisor. The notion of “advice” is wide enough to encompass, in this context, the result of the “consultation, determination, plan”, even if Ms Crittle was unwise in her decision to allow Mr Moylan such a licence in handling her investments.

74. Whilst it is unnecessary to resolve that question, it would appear Mr Moylan’s actions would fall within the meaning of “financial product advice” within the Corporations Act 2001 (Cth).

75. Chapter 7 of the Corporations Act regulates financial services and markets. Under that Act, the terms “financial product” and “financial product advice” are defined at s 763A(1) and s 766B(1), respectively. Those definitions are extracted below:

763A General definition of financial product

(1) For the purposes of this Chapter, a financial product is a facility through which, or through the acquisition of which, a person does one or more of the following:

(a) makes a financial investment (see section 763B);

(b) manages financial risk (see section 763C);

(c) makes non‑cash payments (see section 763D).

This has effect subject to section 763E.

766B Meaning of financial product advice

(1) For the purposes of this Chapter, financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that:

(a) is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or

(b) could reasonably be regarded as being intended to have such an influence.

76. The only plausible explanation for Ms Crittle entering the facility agreements, of which she was aware, is that she received advice to do so, from Mr Moylan, and having regard to Mr Moylan’s capacities, in that respect, she relied upon his advice. That is consistent with the evidence of Ms Crittle given with respect to the Pacific General Facility Agreement.

77. It is true that Mr Moylan’s perceived involvement in the loans and investments (which will be discussed further, below) may offer a possible alternative for the loan investments that Ms Crittle was not aware. It does not, however, account for loan investments and other investments of which she was aware.

78. However, the principle stated in Commercial Union Assurance, relied upon by the defendants, cannot operate in circumstances where the “proof” lies not only from inferences which may be drawn from the surrounding circumstances, but the evidence of Ms Crittle for the plaintiff, albeit under cross-examination. Hence, I consider that Ms Crittle did rely on Mr Moylan’s advice.

Personal involvement of Mr Moylan

79. Unbeknownst to Ms Crittle, Mr Moylan, whilst he was a chartered accountant, had a personal interest or involvement in a number of the property development ventures encompassing the loans and investments.

80. The following illustrates that involvement:

1. Mr Moylan was a director and shareholder of MCD Holdings. From 5 September 2006, he was the sole director of MCD Holdings. It is relevant to note that company was:

1. a shareholder in River Island;

2. the borrower under the MCD Holdings Facility Agreement;

3. the trustee of the Cartel Trust as well as (at the same time) a beneficiary of that trust. This was a trust the plaintiff invested in; and

4. a founding unit holder and investor in the Hardie Estates Property Fund / Regional Land Fund property venture.

2. Mr Moylan’s company, Moylan Business Solutions Pty Limited (“MBS”) (of which Mr Moylan was also a director and shareholder, the other director and shareholder being Mr Hill of Turnbull Hill Lawyers), was a joint-venture partner with Turnbull Hill Lawyers in the property investment deriving from the Pacific General Facility Agreement.

3. Mr Moylan was a director of River Island. He was also a personal guarantor under the River Island Facility Agreement.

4. Mr Moylan was a former director and shareholder in Limeburners Creek, which was the trustee of the Limeburners Trust, and the principal assets of the trust were loans advanced to MCD Holdings and River Island.

5. Mr Moylan was associated with L & V Tomkins Pty Ltd.

81. Additionally, specifically with respect to Mr Moylan’s involvement with MBS, the following should be noted:

1. Through MBS, Mr Moylan provided accounting and taxation services to clients, including the plaintiff.

2. MBS prepared accounts for the Super Fund for the financial year ending 30 June 2006 and the relevant financial years, inclusive.

3. MBS was also the accountant for the Limeburners Trust and the Cartel Trust.

4. The registered office of MBS was at Suite 5, 29 Smith Street, Charlestown. That same address was listed as the registered office and principal place of business for River Island, L & V Tomkins and Limeburners Creek.

Status of the Loans and Investments as at 30 June 2008

82. By 30 June 2008, the principal and interest outstanding on the loans and investments, save for the MCD Holdings Facility Agreement, were recorded in the plaintiff’s accounts as follows:

1. Pacific General Facility Agreement – $838,298;

2. River Island Facility Agreement – $2,806,091;

3. Tomkins Facility Agreement – $787,325;

4. Cartel Trust – $400,000;

5. Limeburners Trust – $132,209.

83. By that same date, the principal was unpaid and there was interest receivable of $32,909.59.

The Financial statements

The 2007 financial statement

84. The 2007 financial statement was prepared by “Moylans” and signed by Ms Crittle on 12 February 2007 (it should be noted, that date appears to be a mistake and should have been dated “2008”).

85. The following appeared in the 2007 financial statement under the heading, “Notes to the Financial Statements for the period 1 July 2006 to 30 June 2007”:

1. Statement of Significant Accounting Policies

These financial statements are a special purpose financial report prepared for distribution to members to satisfy the accountability requirements of the Superannuation Industry (Supervision) Act 1993 and the trust deed. The trustee(s) has determined that the fund is not a reporting entity.

The financial statements have been prepared in accordance with the requirements of the following Australian Accounting Standards:

AASB 112: Income Taxes

AASB 1031: Materiality

AASB 110: Events After the Balance Sheet Due

No other Australian Accounting Standards, Urgent Issues Group Interpretations or other authoritative pronouncements of the Australian Accounting Standard Board have been applied.

…

a. Measurement of Investments

Investments of the fund have been measured at net market values after allowing for costs of realisation. Changes in the net market value of assets are brought to account in the operating statement in the periods in which they occur.

Net market values have been determined as follows:

i. shares and other securities listed on the Australian Stock Exchange by reference to the relevant market quotations at the reporting date;

ii. mortgage loans by reference to the outstanding principal of the loans;

iii. units in managed funds by reference to the unit redemption price at the reporting date;

iv. insurance policies by reference to the surrender value of the policy; and

v. property, plant and equipment at the trustees’ assessment of their realisable value.

The 2008 financial statement

86. The 2008 financial statement included similar terms to that of the 2007 financial statement and, to avoid repetition, will not be extracted.

The 2009 financial statement

87. The 2009 financial statement included the following under the heading, “Notes to the Financial Statements for the Year Ended 30 June 2009”:

1. Statement of Significant Accounting Policies

The trustees have prepared the financial statements on the basis that the fund is a non-reporting entity because there are no users dependant on general purpose financial reports. This financial report is therefore a special purpose financial report that has been prepared in order to meet the needs of members.

The financial report has been prepared in accordance with the significant accounting policies disclosed below, which the directors have determined are appropriate to meet the needs of members. Such accounting policies are consistent with the previous periods unless stated otherwise.

…

a. Measurement of Investments

Investments of the fund have been measured at net market values after allowing for costs of realisation. Changes in the net market value of assets are brought to account in the operating statement in the periods in which they occur.

Net market values have been determined as follows:

i. shares and other securities listed on the Australian Stock Exchange by reference to the relevant market quotations at the reporting date;

ii. units in managed funds by reference to the unit redemption price at the reporting date;

iii. insurance policies by reference to the surrender value of the policy; and

iv. investments properties [sic] at the trustees’ assessment of their realisable value.

88. Collectively, the 2007, 2008 and 2009 financial statements will be referred to as “the financial statements”.

The Investment Strategy

89. An investment strategy for the Super Fund was prepared with respect to each of the relevant financial years.

The 2007 investment strategy

90. The 2007 investment strategy was signed by Ms Crittle on 10 February 2008, and included the following:

This investment strategy has been developed by the trustees of the fund having regard to the following factors, among other things:

1. investing in such a way as to maximise member returns taking into account the risk associated in holding the investment;

2. appropriate diversification in a long term investment strategy;

3. the ability of the superannuation fund to pay benefits as well as other costs of the superannuation fund as they become due and payable;

4. members age and risk profile.

Trustee Discretion

The investment principles outlined in this statement are guidelines only. The trustee retains discretion in relation to all investment decisions.

Subject to the trustee having a reasonable basis for actions involving investments of the fund, the trustee shall not be bound to adhere to the guidelines contained in this statement.

Risk and Return

The principle objective of superannuation funds is to provide retirement benefits for members. In consideration of this, the trustees shall take a long term view when selecting investments.

The trustees shall have regard to the number and type of members of the fund and their profiles, including ages, separate assets and personal investment preferences, if any, nominated by them. The trustees shall consider the effect on other members of the fund and of any investment direction by a member and retains discretion as to whether to comply with any such direction, in whole, or in part.

Liquidity and Cash Flow

Access to substantial amounts of cash or cash type investments is not required. However, investments shall normally be of the type convertible to cash within 90 days. The trustees will also maintain a minimum cash reserve sufficient to pay the expenses of the firm as they fall due.

Where some assets are not readily converted to cash then at least 50% of the fund assets shall be invested in assets which are convertible to cash within 90 days, unless certain assets represent particular direction from the members.

975. However, there was no evidence in these proceedings of the fact that MBS actually concealed that the investments were worthless. As to the ability of MBS to effectively prevent the loss by advising the plaintiff, care needs to be taken considering the absence of their actual retainers in the evidence in these proceedings.

976. The defendants accepted, however, that the question of relative responsibility may partly turn on the proper characterisation of the auditor’s omission (albeit their submission was directed to conclusions reached by Mr Morris). In that respect, I accept the plaintiff’s submission that the defendants had a significant ability to prevent loss based upon the following factors, all of which were consistent with conclusions earlier reached in this judgment. The defendants:

1. recognised that the loans and investments had been made to entities connected with Mr Moylan, were high risk and that it might “all [go] wrong” (see above at [484]);

2. were aware that the pension from the Super Fund was Ms Crittle’s sole source of income (also above at [484]);

3. admitted that the material available to the first defendant did not support an expression of an unqualified opinion that the Super Fund’s financial report for each financial year presented fairly in all material respects (see above at [417]); and

4. had insufficient material to be able to form and express an unqualified opinion as to compliance with the SIS Act and SIS Regulations (see [476] above).

981. The Court also accepts the summary given by the plaintiff as to the nature of the failures of the defendants in that respect, given again that they conform with the earlier findings in this judgment, namely that the defendants:

1. expressed an unqualified opinion as to compliance with the SIS Act and SIS Regulations;

2. expressed an unqualified opinion that the Super Fund’s financial report for each financial year presented fairly in all material respects; and

3. failed to make any statement, notation, qualification or other communication as to the concerns held about Mr Moylan’s involvement.

982. MBS may have had a duty to communicate matters to the plaintiff and even if it be assumed that Mr Moylan was aware of inaccuracies in the accounts (contrary to what was found in [969] above), the terms of the MBS retainers were not before the Court to draw any particular conclusions in that respect. on the other hand, the defendants had available to them all materials that would and should have exposed the matters referred to in [980(2)] and 980(3)]. It may be recalled in this respect, albeit in short form, the findings that the defendants breached an obligation within the retainers by failing to bring to the attention of the plaintiff Mr Moylan’s involvement with the loans and investments (see [508] above).

983. The absence of the MBS retainers means that the Court cannot identify whether there was any express or relevant disclaimer of responsibility.

984. I accept the submission of the plaintiff that the defendants had a far higher degree of culpability than MBS. Had the defendants performed their role competently, the deficiencies in the accounts and operations of the Super Fund would have been exposed. The defendants’ failure to undertake this task was, to accept further submission of the plaintiff, “the immediate, patent cause of the loss”. In my view, the plaintiff’s loss should be apportioned to MBS in the amount of 20%.

Mr Moylan

985. The defendants submitted that Mr Moylan’s audit of the 30 June 2006 special purpose financial report of the plaintiff involved him in wrongdoing. The defendants contended that audit report was causative of the loss and damage claimed against the defendant when that loss and damage is understood to be loss of opportunity to recoup the loans and investments. It was contended that it was immaterial that some or all of the loans had not reached maturity by 30 June 2006 because the relevant point in time was not the balance date but the date of the audit opinion (which was 9 March 2007) and the proper performance of the audit function would have resulted in the plaintiff seeking to recoup those loans when they fell due.

986. Further, reliance was placed upon the plaintiff’s contention that the opportunity to recover the loans and investments had not been lost by the time the first audit report was provided by the defendants. Hence, it was contended the same opportunity was lost at the same time by Mr Moylan’s wrongful opinion of the year before.

987. The pleadings of the defendants, in this respect, in the amended defence were as follows:

1. Mr Moylan was engaged to provide a report, in the form approved for the purposes of s 113 of the SIS Act, in respect of the financial year ending 30 June 2006;

2. Mr Moylan provided such a report to the plaintiff;

3. Mr Moylan owed a duty to exercise reasonable care and skill in doing so;

4. Mr Moylan was in a position of conflict with the interests of the Super Fund (and its principal member); and

5. Mr Moylan was aware (or ought to have been aware) that the financial reports for the year ending 30 June 2006 did not fairly present the financial position of the Super Fund and failed to inform the plaintiff.

988. There was no dispute that Mr Moylan conducted an audit in respect of the 2006 financial year (the 2006 audit report by Mr Moylan was in evidence). However, unlike the audit opinion contained in the defendants’ audit reports, Mr Moylan did not issue an audit opinion with respect to the presentation of the financial report of the Super Fund. His opinion in the 2006 audit report was only that the plaintiff had complied, in all material respects, with the requirements of the SIS Act or the SIS Regulations.

989. It is true that the plaintiff alleged the defendants failed to audit the Super Fund so as to be able to reasonably form the opinion as to whether there had been compliance with the SIS Act and SIS Regulations in the relevant financial years. However, the plaintiff’s allegations founded upon the investment strategy for the fund for those years (see [474]-[476] above). In contrast, the 2006 investment strategy, which was relevant to Mr Moylan’s 2006 audit opinion, was not in evidence.

990. I agree with the contention of the plaintiff that there is no basis on the evidence to conclude that Mr Moylan’s audit opinion was inadequate with respect to reg 4.09 because the investment strategy for that year was not in evidence.

991. It may be recalled that, in order for the provisions of s 34(2) of the Civil Liability Act to apply with respect to Mr Moylan, the damage or loss that is the subject of the plaintiff’s claim must be the same loss and damage that was contributed to by the wrongdoer.

992. Mr Moylan’s conduct of the audit in the 2006 financial year as to compliance with the SIS Act and SIS Regulations did not cause the same loss having regard to the description of the operation of s 34(2) in Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613; [2013] HCA 10. In that judgment, French CJ, Hayne and Kiefel JJ described the evident purpose of Pt 4 of the Civil Liability Act as follows (at [16]):

[16] The evident purpose of Pt 4 is to give effect to a legislative policy that, in respect of certain claims such as those for economic loss or property damage, a defendant should be liable only to the extent of his or her responsibility. The court has the task of apportioning that responsibility where the defendant can show that he or she is a “concurrent wrongdoer”, which is to say that there are others whose acts or omissions can be said to have caused the damage the plaintiff claims, whether jointly with the defendant’s acts or independently of them. If there are other wrongdoers they, together with the defendant, are all concurrent wrongdoers.

993. Further, their Honours observed at [18]:

[18] It is not disputed that Mitchell Morgan’s claim against Hunt & Hunt is an “apportionable claim” within the meaning of s 34(1)(a). The claim was based upon Hunt & Hunt’s breach of an implied term of its retainer that it exercise proper skill, diligence and care. Section 34(1A) provides that there is a single apportionable claim in proceedings in respect of the same loss or damage even if the claim for the loss or damage is based on more than one cause of action, whether of the same or a different kind. There is no express limitation on the nature of the claim which might have been brought by the plaintiff against a concurrent wrongdoer, except the requirement of s 34(2) that the acts or omissions of all concurrent wrongdoers have caused the damage in question.

994. As to the question of causation raised by the defendants, I accept the following submission of the plaintiff:

55. The plaintiff’s loss and damage in this case is the inability to pursue the recovery of its investments against borrowers, guarantors, Mr Moylan and his companies on and from May 2008. That loss is to be assessed at a particular point in time. Indeed, the timing is vital as it informs (a) whether there was an opportunity at all; (b) the nature and scope of the opportunity and (c) the quantum of the loss arising from the loss of the opportunity.

56. Mr Moylan’s conduct did not contribute to the plaintiff’s loss of opportunity in this case because the Super Fund was in a significantly different financial position as at 30 June 2006, such that, as at that date, there was no opportunity that was lost.

57. Specifically, as at 30 June 2006:

(a) the Super Fund had over $1 million in cash;

(b) none of the loans had reached maturity or were in default. In contrast to the position as at 30 June 2007, when each of the relevant loans was in default, as at 30 June 2006 none of the dates for repayment of principal and interest on the loans had passed;

(c) the investment in Limeburners Creek Unit Trust had not yet been made; and

(d) the Super Fund had been in existence for less than 6 months and the relevant investments had only existed for about 4 months.

[Footnotes omitted.]

995. Further, I reject the defendants’ submission that it was immaterial that some of the loans and investments had not reached maturity as at the 30 June 2006 balance statement. In considering whether Mr Moylan (as past auditor) contributed to the same loss, the relevant point in time is the financial year in respect of which Mr Moylan carried out his audit. He could not be expected to audit the financial report for the year ending 30 June 2006 by reference to subsequent events: his role was to confirm compliance with the SIS Act and SIS Regulations as at 30 June 2006.

996. Further, the defendants contended, if the opportunity for the plaintiff to recover investments was lost after 15 May 2008 (as it was after the defendants issued the 2007 audit report), it must also result in the conclusion that that opportunity was lost after Mr Moylan’s audit in respect of the financial year ending 30 June 2006.

997. While apparently having a logical basis, that contention suffers from the fact that the proposition does not take into account the fact that the plaintiff’s ability to recover the loan investments it had made from the borrowers and guarantors only arose from the time when those loan investments were in default. That was not the position as at 30 June 2006.

998. In the result, no apportionment will be made in respect of Mr Moylan’s 2006 financial year audit.

Ms Crittle

999. The defendants submitted that Ms Crittle was obliged to exercise a reasonable degree of care and diligence to be aware of the financial position or performance of the Super Fund and in forming an opinion on behalf of the plaintiff that the special purpose financial reports of the Super Fund presented fairly its financial position and performance. It was accepted, however, that the Court would not take into account both contributory negligence and concurrent wrong-doing by Ms Crittle in order to reduce any damages which may be awarded against the defendants.

1000. The Court has accepted the defendants’ argument that the plaintiff was guilty of contributory negligence and that its damages should be reduced accordingly. Its negligence in this respect was, however, constituted by its responsibility for the acts and omissions of Ms Crittle. In my view, there is no material difference in the relevant considerations pertaining to the findings in contributory negligence and those submitted by the defendants pertaining to Ms Crittle as a concurrent wrongdoer. As accepted by the defendants, the plaintiff’s damages cannot be reduced for this reason as it would involve an inequitable double discount for the damages by reason of the same acts or omissions: Cam & Bear at [101].

1001. In the result, I do not consider that the proportionate liability provisions of the Civil Liability Act or the TPA entitle the defendants to an apportionment of the plaintiff’s damages with respect to Ms Crittle.

Conclusion as to apportionment

1002. It follows that a comparative exercise as required by the authorities, results in a relative apportionment of 20% to MBS and 80% to the defendants.

CONCLUSION

1003. In the second further ASOC the plaintiff claimed the following relief:

RELIEF CLAIMED

1. Damages.

2. Damages pursuant to section 315(11) of the Superannuation Industry (Supervision) Act 1993 (Cth).

3. As against the first defendant, damages pursuant to:

(a) section 68 of the Fair Trading Act 1987 (NSW) and/or section 159 of the Fair Trading Act 1999 (Vic) [as in force before the commencement of the Australian Consumer Law (Schedule 2, Competition and Consumer Act 2010 (Cth))]; and/or

(b) section 82 of the Trade Practices Act 1974 (Cth).

4. As against the second defendant, damages pursuant to section 82 of the Trade Practices Act 1974 (Cth).

5. Damages for loss of use of money.

6. Interest.

7. Costs.

1004. In paras 17(a)(iii), (b)(iii), (c)(iii), (e)(v) and (f)(iii) of the second further ASOC, the plaintiff pleaded that it was seeking interest as prescribed by s 100 of the Civil Procedure Act 2005 (NSW).

1005. Damages Calculation #2 calculated interest up until 31 August 2017. The plaintiff submitted that damages should be awarded including interest thereon from 31 August 2017.

1006. The Court has found that for the aforementioned reasons, the plaintiff should have an award of damages (save for damages pursuant to s 315(11) of the SIS Act and s 159 of the FTA (Vic)) from the defendants who are jointly and severally liable (see finding above at [325(6)]) for a sum of $2,260,140 exclusive of any claim for interest from 31 August 2017. That amount is to be apportioned 10% to the plaintiff and 90% to the defendants for the contributory negligence of the plaintiff. Further, that amount is to be apportioned 20% to MBS and 80% to the defendants for the proportionate liability of MBS.

1007. In addition, the Court has not heard the parties on interest (from 31 August 2017) and costs. In the result, the Court proposes to make directions for the plaintiff to provide short minutes of order reflecting this judgment. If there is an agreed position as to interest that position may be reflected within the short minutes of order. The Court will make provision to resolve any dispute as to the short minutes of order. Otherwise, the Court will receive submissions on both interests and costs in accordance with those directions.

DIRECTIONS

1008. The Court makes the following directions:

1. The plaintiff shall file and serve within 14 days of the date of this judgment short minutes of order reflecting this judgment.

2. The plaintiff shall file and serve within 28 days of this judgment a submission as to any disputed questions as to the short minutes of order, interest and costs together with the terms of any orders proposed with respect to costs.

3. The defendants shall file and serve a submission in reply as to any disputed questions as to the short minutes of order, interest and costs together with the terms of any proposed orders in that respect, within 14 days after being served with the submissions in (2) above.

Amendments

17 October 2018 - Typographical and grammatical errors corrected.

Decision last updated: 17 October 2018