Southern Cross Airlines Holdings Ltd (in liq) v Arthur Andersen & Co

[1997] FCA 522

IN THE FEDERAL COURT OF AUSTRALIA  No QG 170 of 1996
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION

BETWEEN:SOUTHERN CROSS AIRLINES HOLDINGS LIMITED (IN LIQUIDATION) ACN 006 892 387

Applicant

AND:ARTHUR ANDERSEN & CO (A FIRM)

Respondent

AND:SIR LEO HIELSCHER, BRIAN HARVEY BADEN POWELL, LEONARD THOMAS GEORGE HEARD, DAME MARGARET GEORGINA CONSTANCE GUILFOYLE, LEIGH MASEL, DAVID SAMUEL COATS, JAMES GRAHAM AMBROSE TUCKER

First Cross-Respondent - Seventh Cross-Respondent

AND:WESTPAC BANKING CORPORATION

ARBN 007 457 113

Eighth Cross-Respondent

AND:GLEDHILL BURRIDGE & CATHRO

Ninth Cross-Respondent

AND:THE APOGEE FINANCE GROUP INC

Tenth Cross-Respondent

AND:GPA GROUP PLC

Eleventh Cross-Respondent

AND:TYROLEAN LIMITED

Twelfth Cross-Respondent

AND:IRISH AEROSPACE LIMITED

Thirteenth Cross-Respondent

CORAM:Drummond J

DATE:6 June 1997

PLACE:Brisbane

REASONS FOR JUDGMENT

I have before me an adjourned notice of motion seeking leave to serve cross-claims against Apogee Finance Group, Inc ("Apogee"), as one cross-respondent, and three related companies, which I will call Tyrolean, as another group of cross-respondents. Arthur Andersen, the applicant on the motion, has filed cross-claims against Apogee and Tyrolean claiming contribution under s 23B the Wrongs Act 1958 (Vic) and in equity from each with respect to any amounts it is liable to pay to Southern Cross.

The core of the first part of Southern Cross' claim against Arthur Andersen involves allegations that the prospectus on which Southern Cross was floated on 17 July 1992 allowed for an initial period of trading losses before Southern Cross commenced to trade profitably; that but for the misappropriations totalling $15.7M by Mr Douglas Reid, a director of Southern Cross, Southern Cross would have traded conformably with the prospectus; that by reason of the misconduct of Arthur Andersen it was not disclosed to Southern Cross that it did not have sufficient cash resources to sustain the initial trading losses and to trade profitably.

It is said that this misconduct consists of misleading or deceptive conduct and negligence by Arthur Andersen.  In particular, it is alleged that, had Arthur Andersen not been negligent, it would have discovered Reid's misappropriations and would have stopped the float from proceeding, with the result that trading would not have commenced and Southern Cross would not have suffered the losses pleaded.  The first part of the case of Southern Cross against Arthur Andersen also includes allegations that it lost an amount of approximately $48.5M as a result of its relatively short life of unsuccessful trading.

The second part of Southern Cross' case against Arthur Andersen involves a claim by the liquidator to a little over $23M, being part of the $48.5M I have already referred to.  The statement of claim alleges that Arthur Andersen negligently performed the June 1992 audit, that Southern Cross would, but for that negligence, have discovered Reid's misappropriation of the $15.7M and would have realised that it had insufficient cash resources to continue trading and would, in that event, have ceased to trade from 21 September 1992.  It is then said it would have avoided the $23.25M of losses that accrued in trading subsequent to 21 September 1992.

The misappropriations which it is alleged Reid made from Southern Cross moneys totalling $15.7M include a payment of about $4.4M to Apogee and a payment of an identical amount to Tyrolean or a related company.

The cross-claims against Apogee and against Tyrolean are both based on allegations that each knowingly accepted separate sums of $4.46M of misappropriated Southern Cross moneys from Reid in order to assist organisations associated with each to purchase additional shares in Southern Cross, which JB  Were & Son required to be taken up in connection with the sub-underwriting arrangements.

Paragraphs 28 and 29 of the cross-claims against Apogee allege that, as a result of the transaction involving the payment of $4.46M to Apogee or an associated company, the float proceeded, Southern Cross commenced trading without sufficient cash resources and it suffered the loss of $48.5M referred to in paragraph 35 of Southern Cross' amended statement of claim against Arthur Andersen.  In the alternative, it is said that, as a result of that transaction, the offer proceeded, the cash resources of Southern Cross were depleted by $4.46M and, by virtue of that deficiency of $4.46M, Southern Cross did not have sufficient cash resources to sustain the anticipated initial period of trading losses, it was placed in liquidation and it suffered again the loss of $48.5M.  Although in the latter part of the cross-claim no specific claim is made for the lesser sum of $23.25M, that is claimed in the alternative in paragraph 2 of the cross-claim.

The application is made under O 8 r 2(2) the Federal Court Rules.

I am satisfied that the Court has jurisdiction to deal with both cross-claims.  Each arises out of the action by Southern Cross against Arthur Andersen with which the Court has jurisdiction to deal and forms part of the whole matter that includes Southern Cross' claims against Arthur Andersen.

I am also satisfied that each cross-claim is a proceeding to which O 8 r 1(d) applies.

When the matter was first before me, I expressed concern as to whether Arthur Andersen had shown a prima facie case in the special sense in which that term is used in O 8 r 2(2) for any of the relief it seeks against either of Apogee or Tyrolean.  It is enough to explain why I was of that opinion with respect to the cross-claim that has been filed against Apogee.  For similar reasons, I was in doubt as to whether Arthur Andersen had established a prima facie case against Tyrolean.

As I have said, Arthur Andersen claims compensation from Apogee in respect of its liability to Southern Cross for $48.5M or $23.25M.  Arthur Andersen makes no claim to recover from Apogee the $4.46M which it is said Reid misappropriated from Southern Cross and paid to Apogee.  Southern Cross alleges that, but for Arthur Andersen's negligence and other misconduct in pre-float advice involving its failure to detect a total of $15.7M of misappropriation of company funds prior to the float, which included the $4.46M paid by Reid to Apogee, Southern Cross would not have commenced trading and thus would not have incurred the trading losses of $48.5M.

Arthur Andersen is entitled to contribution from Apogee in respect of this $48.5M, provided Apogee is a person who, if sued by Southern Cross, would be liable to pay it the $48.5M.  That is how the case is presented.  The only misconduct in which it is said Apogee participated is limited to its receipt of the $4.46M.  Arthur Andersen cannot show that Apogee is a person who would, if sued by Southern Cross, be liable to pay it the $48.5M unless it could show, among other things, that Apogee's misconduct in receiving the $4.46M created the situation in which the funds left to Southern Cross were insufficient to allow it to commence to trade with any hope of success, or that, while not of itself sufficient to deprive Southern Cross of the capacity to trade successfully, that was a material cause of that situation arising.

Evidence showing this is thus essential if Arthur Andersen is to make out a prima facie case against Apogee for the purposes of O 8 r 2. I was of the view, when the matter was last before me, that there was no evidence to suggest that, if Southern Cross sued Apogee under s 206(4) the Corporations Law in respect of the loss suffered by Southern Cross as a result of the transaction confined to the diversion to Apogee of company funds of $4.46M, that loss would have amounted to the $48.5M claimed by Southern Cross (or to that part of it comprising the $23.25M) with respect to which alone Arthur Andersen is seeking contribution from Apogee.  Nor was I satisfied that there was any evidence before me which would have enabled me to infer that the loss of the $4.46M could properly be described as a material cause, even if not the sole cause, of the $48.5M disaster.  I accordingly, at the request of the applicant on the motion, adjourned the matter to today and further evidence has been put before me.

I am satisfied, on the basis of this material and which is referred to in the written submissions presented by counsel which I will mark exhibit 1, that there is now a prima facie case made out by Arthur Andersen in relation to both Apogee and Tyrolean.

The material indicates that there was a likelihood that if Apogee had not purchased the additional shares which it was only prepared to purchase with moneys said to have been misappropriated from Southern Cross by Reid and paid to it for that purpose, the float would not have proceeded.  There is evidence from which I think an inference can be drawn that the underwriter, JB  Were & Son, may, in that event, have withdrawn from the underwriting agreement in circumstances in which only $27M had been raised from the public, but the directors of Southern Cross had indicated in the prospectus that they needed a minimum of $50M to enable the company to successfully trade.

The evidence before me indicates that the $4.46M paid to Apogee was raised by Reid procuring an overdraft in Southern Cross' name with Westpac Trading Bank. There were no other funds, on the evidence before me, to which Reid would have been able to have recourse to provide those moneys to Apogee. The evidence thus indicates that, given Southern Cross' very tight financial situation, if the $4.46M had not been paid to Apogee, the whole float may not have proceeded and Southern Cross would not have commenced to trade. By participating in the misappropriation of those moneys and using them as instructed by Reid to purchase shares in Southern Cross in breach of s 206(4) the Corporations Law, Apogee thus played a material part in causing the $48.5M loss which Southern Cross is seeking to recover from Arthur Andersen.

The evidence also shows that if the other $4.46M had not been paid to Tyrolean, the inference is open that the float may not have proceeded and, if the float had not proceeded then, according to the case sought to be made by Southern Cross against Arthur Andersen, Southern Cross would never have commenced trading and would not have suffered any of the losses it is seeking to recover from Arthur Andersen.

The United States of America, where it is proposed to serve the cross-claim on Apogee, is a non-convention country and the provisions of Division 3 of O 8 the Federal Court Rules require service to be effected through diplomatic channels.  Only if that is unsuccessful does O 8 r 16 permit the Court to make an order for substituted service.  However, the respondent has put before me evidence from the Attorney-General's Department to the effect as follows:

"A party in Australia who wishes to serve a party in the USA with process issued by an Australian court should employ a private agent in the USA to serve the documents.  Service through an agent does not breach US law and is not considered by the US Government to be a breach of its sovereignty."

The Attorney-General's advice goes on to say that Australian process can be served through diplomatic channels in the USA, but it is probable there would be a very long period of delay of the order of six to 12 months.  In view of the advice as to the acceptability to the US Government of service of Australian process in that country by non-official means, I think this is a proper case, having regard to the delays which would be involved by more orthodox service, to exercise the exempting power of the Court.

There will therefore be an order that the respondent have leave to serve outside the Commonwealth of Australia and in the United States of America, the cross-claim against Apogee Finance Group, Inc and against Tyrolean and its associated companies.  There will be a further order exempting the respondent from compliance with Division 3 of O 8 the Federal Court Rules and a direction that it be at liberty to serve the cross-claim on Apogee Finance Group, Inc in the United States of America by such private arrangement as it may think appropriate.

I will make a further order that, in relation to the mode of service of the cross-claims, the respondent is not required to comply with Division 3 of O 8 the Federal Court Rules.

I certify that this and the preceding eight
pages are a true copy of the reasons
for judgment herein of the Honourable
Justice Drummond.

Associate:

Date:6 June 1997