Southern Cross Airlines Holdings Ltd v Arthur Andersen and Co
[1998] FCA 280
•27 MARCH 1998
FEDERAL COURT OF AUSTRALIA
PRACTICE AND PROCEDURE - Application to set aside service of cross-claim outside Australia - whether prima facie right to relief claimed - claim for contribution - causation - whether wrongful conduct a practical, commonsense cause of loss and damage.
Law Reform Act 1995 (Qld) s 6
Wrongs Act 1958 (Vic) s 23B
Corporations Law s 205, s 206(4), s 206(5)
Federal Court Rules O 8 r 1, O 8 r 2(2), O 9 r 7
Tycoon Holdings Ltd v Trencor Jetco Inc (1992) 34 FCR 31 - Appl
Cell Tech Communications Pty Ltd v Nokia Mobile Phones (UK) Ltd (1995) 58 FCR 365 - Appl
Angus & Coote Pty Ltd v Qantas Airways Ltd [1979] 2 NSWLR 398 - Foll
Western Australia v Vetter Trittler Pty Ltd (in liq) (1991) 30 FCR 102 - Appl
Trade Practices Commission v The Gillette Company (No 1) (1993) 45 FCR 366 - Appl
Merpro Montassa Ltd v Conoco Speciality Products Inc (1991) 28 FCR 387 - Appl
Albion Insurance Co Ltd v Government Insurance Co of New South Wales (1969) 121 CLR 342 - Cited
Henderson v Amadio (No 1) (1995) 62 FCR 1 - Refd
Australia and New Zealand Banking Group Ltd v Turnbull & Partners Ltd (1991) 33 FCR 265 - Refd
McKain v R W Miller & Co (SA) Pty Ltd (1991) 174 CLR 1 - Refd
March v E & H Stramare Pty Ltd (1991) 171 CLR 506 - Cons/Appl
Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 - Appl
Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 - Cons/Appl
Galoo Ltd (in liquidation) v Bright Grahame Murray (a firm) [1994] 1 WLR 1360 - Cons/Appl
SOUTHERN CROSS AIRLINES HOLDINGS LIMITED v ARTHUR ANDERSEN & CO (A FIRM), 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 AND GEOFFREY ARTHUR COHEN BY ORIGINAL ACTION AND ARTHUR ANDERSEN & CO (A FIRM) v 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, WESTPAC BANKING CORPORATION, GLEDHILL BURRIDGE & CATHRO, THE APOGEE FINANCE GROUP INC, GPA GROUP PLC, TYROLEAN LIMITED AND IRISH AEROSPACE LIMITED BY CROSS-CLAIM
No QG 170 of 1996
COOPER J
BRISBANE
27 MARCH 1998
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
QG 170 of 1996
BETWEEN:
SOUTHERN CROSS AIRLINES HOLDINGS LIMITED
APPLICANTAND:
BETWEEN:
AND:
ARTHUR ANDERSEN & CO (A FIRM)
FIRST RESPONDENTSIR LEO HIELSCHER
SECOND RESPONDENTBRIAN HARVEY BADEN POWELL
THIRD RESPONDENTLEONARD THOMAS GEORGE HEARD
FOURTH RESPONDENTDAME MARGARET GEORGINA CONSTANCE GUILFOYLE
FIFTH RESPONDENTLEIGH MASEL
SIXTH RESPONDENTDAVID SAMUEL COATS
SEVENTH RESPONDENTJAMES GRAHAM AMBROSE TUCKER
EIGHT RESPONDENTGEOFFREY ARTHUR COHEN
NINTH RESPONDENTBY ORIGINAL ACTION
ARTHUR ANDERSEN & CO (A FIRM)
CROSS-CLAIMANTSIR 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 - SEVENTH CROSS RESPONDENTSWESTPAC BANKING CORPORATION
EIGHTH CROSS-RESPONDENTGLEDHILL BURRIDGE & CATHRO
NINTH CROSS-RESPONDENTTHE APOGEE FINANCE GROUP INC
TENTH CROSS-RESPONDENTGPA GROUP PLC
ELEVENTH CROSS-RESPONDENTTYROLEAN LIMITED
TWELFTH CROSS-RESPONDENTIRISH AEROSPACE LIMITED
THIRTEENTH CROSS-RESPONDENTBY CROSS-CLAIM
JUDGE:
COOPER J
DATE OF ORDER:
27 MARCH 1998
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
Service of the cross-claim of Arthur Andersen & Co pursuant to leave granted by Drummond J on 6 June 1997 on each of the eleventh, twelfth and thirteenth cross-respondents be set aside.
Leave to serve the cross-claim outside Australia on the eleventh, twelfth and thirteenth cross-respondents granted by Drummond J on 6 June 1997 be discharged.
The eleventh, twelfth and thirteenth cross-respondents cease to be parties to the cross-claim.
Arthur Andersen & Co pay the eleventh, twelfth and thirteenth cross-respondents’ costs of and incidental to the notice of motion, including reserved costs, if any, and of the joinder, to be taxed if not agreed.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
QG 170 of 1996
BETWEEN:
SOUTHERN CROSS AIRLINES HOLDINGS LIMITED
APPLICANTAND:
BETWEEN:
AND:
ARTHUR ANDERSEN & CO (A FIRM)
FIRST RESPONDENTSIR LEO HIELSCHER
SECOND RESPONDENTBRIAN HARVEY BADEN POWELL
THIRD RESPONDENTLEONARD THOMAS GEORGE HEARD
FOURTH RESPONDENTDAME MARGARET GEORGINA CONSTANCE GUILFOYLE
FIFTH RESPONDENTLEIGH MASEL
SIXTH RESPONDENTDAVID SAMUEL COATS
SEVENTH RESPONDENTJAMES GRAHAM AMBROSE TUCKER
EIGHT RESPONDENTGEOFFREY ARTHUR COHEN
NINTH RESPONDENTBY ORIGINAL ACTION
ARTHUR ANDERSEN & CO (A FIRM)
CROSS-CLAIMANTSIR 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 - SEVENTH CROSS RESPONDENTSWESTPAC BANKING CORPORATION
EIGHTH CROSS-RESPONDENTGLEDHILL BURRIDGE & CATHRO
NINTH CROSS-RESPONDENTTHE APOGEE FINANCE GROUP INC
TENTH CROSS-RESPONDENTGPA GROUP PLC
ELEVENTH CROSS-RESPONDENTTYROLEAN LIMITED
TWELFTH CROSS-RESPONDENTIRISH AEROSPACE LIMITED
THIRTEENTH CROSS-RESPONDENTBY CROSS-CLAIM
JUDGE:
COOPER J
DATE:
27 MARCH 1998
PLACE:
BRISBANE
REASONS FOR JUDGMENT
Introduction
On 6 June 1997, Drummond J granted leave to the first respondent, Arthur Andersen & Co (“Arthur Andersen”) to serve outside Australia and in Ireland, a cross-claim against GPA Group PLC (“GPA”), Tyrolean Limited (“Tyrolean”) and Irish Aerospace Limited (“Irish Aerospace”). Leave was granted pursuant to O 8 r 2 of the Federal Court Rules (“the Rules”). The cross-claim was served on Tyrolean on 19 June 1997 and on GPA and Irish Aerospace on 21 June 1997. On 21 July 1997, each of GPA, Tyrolean and Irish Aerospace entered a conditional appearance to the cross-claim. They became designated, respectively, as the eleventh, twelfth and thirteenth cross-respondents (referred to collectively in these reasons as the cross-respondents).
By notice of motion filed on 1 August 1997, within the fourteen day period prescribed by O 9 r 7 of the Rules, the cross-respondents moved the court for orders discharging Drummond J’s order granting leave and setting aside service of the cross-claim.
An application to set aside service brought pursuant to O 9 r 7 is not an appeal from an earlier exercise of discretion to grant leave, but is a re-hearing conducted on the basis of additional materials: Tycoon Holdings Ltd v Trencor Jetco Inc (1992) 34 FCR 31 at 33; Cell Tech Communications Pty Ltd v Nokia Mobile Phones (UK) Ltd (1995) 58 FCR 365 at 371. Before turning to the requirements laid down in O 8 r 1 and r 2 of the Rules and to whether the discretion to grant leave ought to be exercised, it is necessary to have close regard to the pleadings.
The Pleadings
The claim by Southern Cross against Arthur Andersen
The principal proceedings, between the applicant, Southern Cross Airline Holdings Limited (in liquidation) (“Southern Cross”), and Arthur Andersen, were commenced in the Supreme Court of Queensland by writ of summons filed and issued on 18 September 1995. Those proceedings were transferred to this Court by order of Dowsett J made on 9 September 1996, pursuant to s 5(1)(b) of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Qld).
In the principal proceedings, Southern Cross seeks from Arthur Andersen damages for breach of contract, damages in negligence and damages for contraventions of various provisions of the Corporations Act (Vic) (“the Corporations Law”) and the Fair Trading Act (Vic). The damages claimed, as particularised, amount to approximately $48.5m with respect to the breach of contract, negligence and Corporations Law claims, or alternatively, $23.25m with respect to the breach of contract, negligence and Fair Trading Act claims. The directors of Southern Cross at the relevant times have been joined as respondents and a separate statement of claim has been filed and served pleading causes of action against them. The issues as between Southern Cross and the directors are not relevant to the notice of motion before me. Nor are the issues between Arthur Andersen and the other cross-respondents.
The following is taken from the amended statement of claim between Southern Cross and Arthur Andersen (“the statement of claim”) and is not the recitation of any facts. Nor does it constitute the findings of any facts by me. It is a recitation of the case sought to be made out against Arthur Andersen by Southern Cross. References to monetary figures are, unless indicated otherwise, references to Australian dollars.
Between about August 1991 and 28 April 1992, Southern Cross was preparing to issue a prospectus inviting the public to subscribe for shares in it. A prospectus dated 28 April 1992 was lodged with the Australian Securities Commission (“the ASC”) on 6 May 1992. The prospectus invited the public to subscribe for 100,000,000 ordinary fifty cent shares in Southern Cross (“the share offer”). The share offer was underwritten by JB Were & Son (“JB Were”) and was sub-underwritten by, inter alia, Tyrolean. Allotment of shares occurred on 17 July 1992. Southern Cross commenced operation as a passenger airline on 1 September 1992 and was wound up by an order of the Supreme Court of Queensland made on 27 April 1993.
Upon lodging the prospectus with the ASC, Southern Cross became subject to certain obligations imposed by the Corporations Law. Those obligations are pleaded in paragraph 8 of the statement of claim as being to ensure, inter alia :-
“8......
(a)that the Prospectus and any supplementary prospectus contained all information of the kind that investors and their professional advisers would reasonably require and reasonably expect to find in the Prospectus, for the purpose of making an informed assessment of the assets and liabilities, financial position, profits and losses and prospects of the Applicant;
(b)there was no material statement in the Prospectus that was false or misleading;
(c)there was no material omission from the Prospectus;
(d)a supplementary Prospectus would be issued in the event there was a significant change affecting a matter included in the Prospectus or a significant new matter, the inclusion in the Prospectus of information about which would have been required by Part 7.12 of the Corporations Law if the matter had arisen when the Prospectus was prepared.”
On 9 October 1991, Southern Cross appointed a Due Diligence Committee (“the committee”) to monitor compliance by the prospectus with the obligations imposed by the Corporations Law. Douglas Edward Reid, a director and shareholder of Southern Cross, was a member of the committee. Arthur Andersen, a firm of chartered accountants, was engaged by Southern Cross in or about August 1991 to act as independent accountant in relation to the prospectus and to advise the committee. The terms of Arthur Andersen’s engagement are pleaded in paragraph 11 as follows :-
“11......
(a)examination of:
(i)the financial results of the Applicant in the pre-operational period;
(ii)the forecasted Balance Sheet, Profit and Loss and Cashflow Statements of the Applicant which were to form part of the Prospectus for the period to 30 June 1995;
(b)conducting the examinations referred to in subparagraph 11(a) in accordance with:
(i)applicable internationally accepted guidelines;
(ii)the requirements of the Corporations Law;
(c)evaluating:
(i)forecasts contained in the Prospectus;
(ii)the assumptions upon which those forecasts were based;
(d)presentation of forecasts for conformity with:
(i)nationally accepted presentation guidelines; and
(ii)the requirements of the Corporations Law;
(e)producing a Report for inclusion in the Prospectus;
(f)undertaking such further accounting enquires [sic], examinations and investigations as from time to time instructed by the Due Diligence Committee;
(g)advising the Due Diligence Committee upon matters the subject of the First Respondent’s said functions;
(h)investigate whether a significant new matter had arisen or a significant matter had occurred which affected any matter contained in the Prospectus.”
In pursuance of the terms of the engagement, Arthur Andersen performed a series of tasks and made a report, which was included in the prospectus, addressing various matters. Arthur Andersen, by Messrs Gooley and Wingreen, a partner and an employee respectively, attended meetings of the committee, gave advice to it and verified to it various parts of the prospectus which Arthur Andersen had authorised or caused to issue.
At a meeting of the committee on 9 July 1992, attended by Messrs Gooley and Wingreen, Mr Reid asserted that an additional $12m in security deposits for aircraft leases had been sought from Southern Cross. Arthur Andersen was retained to or undertook to investigate and to advise whether a supplementary prospectus should be issued. In the course of that investigation, Mr Wingreen met with Mr Reid on 13 July 1992 and was told that $9,460,679 had been paid to an American finance company for the purchase of aircraft and a further $1,427,000 remained to be spent, $1,187,000 had been paid for staff training and a further $200,000 remained to be spent and that an account conducted by Southern Cross with Westpac Banking Corporation in Melbourne (“the Melbourne account”) was overdrawn to the extent of $15,982,526. The signatories to the Melbourne account were Mr Reid and two of his employees who were not officers or employees of Southern Cross. It is alleged that between in or about June 1992 and 14 July 1992, Westpac, without the authority of Southern Cross, permitted the Melbourne account to become overdrawn to the extent of $16,117,242.81. It is also alleged that Arthur Andersen knew this and knew who the signatories to the Melbourne account were.
Mr Gooley wrote to the directors of Southern Cross on 14 July 1992 comparing forecast expenditure against actual expenditure to date and concluding that the additional cash expenditure or “overspend” was in the order of $3.5m and available cash balances were $31.2m.
It is alleged in paragraph 22 of the statement of claim that between 30 June 1992 and 17 July 1992 Mr Reid misappropriated $15,699,078.75 from the Melbourne account without the knowledge or authority of Southern Cross. Particulars of the alleged misappropriation are given, including, relevantly, that on or about 3 July 1992, Mr Reid withdrew $4,868,154.16 from the Melbourne account and caused $4,462,500 of that sum to be paid to Tyrolean and that Tyrolean paid $4,462,500 to acquire shares in Southern Cross in satisfaction of its obligations as a sub-underwriter of the share offer. It is said that the assertions made and information provided by Mr Reid to Mr Wingreen on 13 July 1992 were false and were intended by Mr Reid to conceal the transaction by which the alleged misappropriation occurred.
It is then said that the information conveyed to the directors in the letter of 14 July 1992 was false and misleading and constituted conduct in contravention of the Corporations Law because, amongst other things, the cash available to Southern Cross was not $31.2m, additional cash expenditure was not $3.5m, the estimates for expenditure in excess of forecasts on aircraft leases, training costs and security deposits were lower than the actual figures, which were capable of ascertainment at the time and the basis for the calculation of the overspend was not conveyed.
Paragraphs 27 and 28 of the statement of claim plead that Arthur Andersen was negligent and breached the terms of its engagement in undertaking the investigations and giving the advice contained in the letter of 14 July 1992 because certain enumerated matters, such as Arthur Andersen’s knowledge of the circumstances of the Melbourne account being overdrawn, required Arthur Andersen to conduct further investigations to verify the information provided by Mr Reid on 13 July 1992. The nature of those investigations are set out in paragraphs 27(b) and 27(c). The first limb of Southern Cross’ case, therefore, is that had Arthur Andersen made further investigation as to the matters set out in paragraph 27 and undertaken the inquiries set out in paragraphs 27(b) and 27(c), or otherwise obtained sufficient reliable information concerning the extent of the additional expenditure upon which to base proper advice to the creditors :-
(a)it would have been discovered and reported to Southern Cross that :-
(i)the information from Mr Reid was false;
(ii)cash shortfalls were significantly higher than the $3.5m assessed by Arthur Andersen;
(iii)Mr Reid had defrauded Southern Cross;
(b)transactions carried out by Mr Reid on 17 July 1992, the effect of which was that $1,600,500 was withdrawn from the Melbourne account and applied to the purchase of shares in Southern Cross on behalf of Mr Reid and his family and certain other persons, would have been prevented;
(c)the share offer would not have proceeded and Southern Cross would not have commenced trading and would not have suffered the loss and damage particularised in paragraph 35(d);
The loss and damage particularised in paragraph 35(d) is calculated by taking the excess of liabilities over assets in the liquidation of Southern Cross and deducting the estimated excess of liabilities over assets as at 17 July 1992 in the event that Southern Cross had not commenced operations.
It is then said that Arthur Andersen was negligent and in breach of the terms of its engagement in certain other respects, namely, in failing to convey to Southern Cross, and in particular to Mr Heard, a director, that in calculating the overspend, Arthur Andersen had proceeded on the erroneous basis that an amount of $10,887,000 had been spent on or committed to spare parts and in failing to inform Southern Cross that as at 13 July 1992, the Melbourne account was in overdraft to the extent of $16,117,242.81. Had Arthur Andersen not been negligent or breached the terms of its engagement in these respects, the share offer would not have proceeded, Southern Cross would not have commenced trading and would not have suffered the particularised loss and damage.
Certain allegations are pleaded against Arthur Andersen in addition to, or as alternatives to, those set out above, and are said to have the same causative effect on the loss and damage suffered. In summary, it is alleged that, if the contents of Arthur Andersen’s letter of 14 July 1992 were correct, the overspend of $3.5m was, inter alia, a significant new matter within Part 7.12 of the Corporations Law and rendered false material statements in the prospectus and rendered false certain representations in the Independent Accountants’ Report. Consequently, whether the overspend of $3.5m was correct or not, Arthur Andersen was negligent and in breach of contract in, inter alia, failing to consider, advise on and/or address the effect of the overspend, in failing to advise the directors or the committee that a supplementary prospectus should be issued and in failing to withdraw its consent to the prospectus pursuant to s 1032 of the Corporations Law. It is said additionally, or in the alternative, that Arthur Andersen engaged in misleading or deceptive conduct in contravention of the Corporations Law by, in essence, failing to discharge its tortious and contractual duties to Southern Cross as set out above and/or by being involved in a contravention of s 995 and s 996 of the Corporations Law.
Paragraph 35 of the statement of claim is of paramount significance to the issues to be resolved on the notice of motion :-
“35(a)The financial forecasts in the Prospectus in relation to the Applicant’s airline operations to 30 June 1995 anticipated the initial period of trading losses referred to in paragraph 20 before the Applicant commenced to trade profitably.
(b)But for the misappropriations by Reid referred to in paragraph 22 the Applicant would have traded conformably with the forecasts contained in the Prospectus.
(c)By reason of the matters referred to in paragraphs 24 to 34 inclusive it was not disclosed:
(i)to the Directors of the Applicant;
(ii)in the Prospectus,
that the Applicant did not have sufficient cash resources to sustain the anticipated initial period of trading losses and to trade profitably.
(d)Had the Directors of the Applicant been informed that the Applicant did not have sufficient cash resources for the purposes aforesaid or had such fact been disclosed in the Prospectus, the Offer would not have proceeded and the Applicant would not have commenced trading and would not have suffered loss and damage of $48,429,000, particularised below.”
Paragraphs 36 to 55 of the statement of claim plead against Arthur Andersen causes of action in negligence, for breach of contract and for contraventions of the Fair Trading Act (Vic) and the Corporations Law said to arise out of conduct of Arthur Andersen as auditor of Southern Cross and as Southern Cross’ accountants. The conduct complained of relates to, or primarily to, an audit of the financial statements for the year ended 30 June 1992 (“the June audit”) and an audit report submitted on or about 21 September 1992, the preparation of the financial statements for the 1992 Annual Report of Southern Cross, the preparation by Arthur Andersen of a report pursuant to s 244 of the Corporations Law in or about September 1992 (“the statutory report”) and to what might be called the general conduct of Arthur Andersen as the auditors and accountants of Southern Cross.
It is said that certain statements in the 1992 Annual Report dated 21 September 1992 with respect to the period ended 30 June 1992 concerning, inter alia, the amount of the current, non-current and total assets of Southern Cross and the state of indebtedness of Southern Cross to Mr Reid or the Reid Family Trust, were false and that the Annual Report failed to include references to the transactions making up the alleged misappropriation by Mr Reid. As a result, it is said, the Annual Report was misleading or deceptive and that the matters referred to above constituted conduct by Arthur Andersen which was misleading or deceptive in contravention of the Fair Trading Act (Vic) or that Arthur Andersen was involved in the contraventions. Similar complaint is made of a document entitled “independent audit report” prepared by Arthur Andersen and which formed part of the Annual Report.
With respect to the June audit, it is said that Arthur Andersen was negligent and breached the terms of the engagement as accountant, as auditor of Southern Cross and with respect to the statutory report in various enumerated respects. It is sufficient for present purposes to note that those matters include a failure to ascertain the fact of the misappropriation transactions, failure to properly investigate certain withdrawals from the Melbourne account, failure to properly investigate the loan of $481,874 described in the Annual Report as a loan payable to Mr Reid or the Reid Family Trust, failure to properly investigate a payment of $1m described in the Annual Report as having been made in accordance with what is called the “Compass acquisition agreement”, failure to report to the board of directors of Southern Cross that its accounting records and financial statements did not comply with the Corporations Law and were not properly drawn up having regard to the Corporations Law and to applicable accounting standards, reliance for information upon employees of Arthur Andersen who did the general accounting work for Southern Cross and upon Mr Reid so that there was a failure to act as an independent auditor and a failure to make inquiry of Westpac as to the overdraft on the Melbourne account. It is then pleaded in paragraph 52 that had Arthur Andersen not breached the terms of its engagement and not breached its duty of care, in the manner set out :-
“52. .....
(a)the Applicant would have ascertained facts and matters which would have:
(i)exposed Reid’s fraud;
(ii)caused the First Respondent to extend its audit procedures in relation to all transactions associated with Reid or in relation to which it had obtained information from Reid or in relation to which it had obtained information from Reid to confirm or dispel any suspicion that some fraud or error may have occurred;
(b)it would have been disclosed that the Applicant had insufficient cash resources to continue to trade;
(c)the Applicant would have ceased trading;
(d)the Applicant would not have incurred loss and damage of $23,250,000, ...”
The loss and damage, particularised as $23.5m, is calculated by taking the excess of liabilities over assets in the liquidation and deducting the estimated excess of liabilities over assets as at 21 September 1992 had Southern Cross ceased to trade on that date.
Finally, it is alleged that Arthur Andersen breached the terms of its engagement and was negligent with respect to the statutory report, with the same result as set out in paragraph 52 and/or that the statutory report was false in certain respects and constituted misleading or deceptive conduct by Arthur Andersen in contravention of the Fair Trading Act (Vic).
The cross-claim by Arthur Andersen
After reciting that Southern Cross has alleged that Arthur Andersen is liable to pay to it :-
(a)the sum of $54,679,000 (now $48,429,000) as damages for breach of contract, for negligence and pursuant to the Corporations Law;
(b)alternatively, the sum of $29,500,000 (now $23,250,000) for breach of contract, for negligence and pursuant to the Fair Trading Act,
Arthur Andersen cross-claims against the cross-respondents for contribution “pursuant to Section 23B of the Wrongs Act 1958 (Victoria) and Section 6 of the Law Reform Act 1995 (Queensland) and in equity” to the extent of an indemnity, or to such lesser extent as the court deems fit, “[i]f Arthur Andersen is liable to pay any of the amounts claimed by Southern Cross in its Statement of Claim.”
The cross-claim pleads various preliminary and formal matters, including that on 20 May 1992 Tyrolean entered into a sub-underwriting agreement with JB Were with respect to the Southern Cross share offer, and continues :-
“17. By letter dated 30 June 1992, JB Were & Son advised Tyrolean Limited that its obligation under its sub-underwriting agreement was to take up 8,925,000 shares on which application moneys of $4,462,500 were payable.
18. By letter dated 2 July 1992, signed by Reid and Collins, Southern Cross requested Westpac Banking Corporation to debit the account of Southern Cross for the cost of telegraphically transferring US$3,600,000 to Chase Manhattan Bank, New York, Swift Code CHAUS 33 for the account of Allied Irish Bank plc, account no 001-1-067899, for credit to Irish Aerospace Limited, account no 01-94335-37.
19. Those funds were transferred by Westpac Banking Corporation on or about 3 July 1992.
20. Those funds were received to the credit of Irish Aerospace.
21. Further or alternatively, those funds were received by Irish Aerospace to be held for the benefit of :-
(a)Tyrolean Limited, in whole or to the extent of the sum of $4,462,500; or
(b)GPA Group, in whole or to the extent of the sum of $4,462,500.
22. Of the funds referred to in paragraphs 18 - 21 hereof, the sum of $4,462,500 is alleged in Southern Cross’s statement of claim against Arthur Andersen to have been paid to Tyrolean Limited.
23. By letter dated 13 July 1992 to JB Were & Son, GPA Group (by Laurent Safar) advised that it had transferred the sum of $4,462,500 into the Overseas Trust Account of JB Were & Son.
24. Those funds were received by JB Were & Son on or about 14 July 1992.
25. On 14 July 1992, McElhinney:
(a)sent a letter on behalf of Tyrolean Limited to Southern Cross (by Reid) making enquiries about events concerning the sub-underwriting agreement;
(b)sent a letter on behalf of GPA Group to JB Were & Son which:
(i)enclosed a copy of his letter on behalf of Tyrolean;
(ii)requested JB Were & Son not to process Tyrolean’s application for shares until confirmation of certain matters was received.
26. By letter dated 17 July 1992, Hayes sent a letter on behalf of GPA Group to JB Were & Son which stated, inter alia:
‘Thank you for your letter of July 17 acknowledging receipt of our Share Application Form. I hope now that the allotment of shares and subsequent listing can take place. ...
With regard to the formal disclosure of our shareholding, ...’
27. On or about 17 July 1992, 8,925,000 shares in Southern Cross were issued to Tyrolean Limited.”
Paragraphs 28 to 33 of the cross-claim are directed to establishing that each of the cross-respondents was a “party” to, in the broad sense, the impugned transaction.
Finally, it is pleaded in paragraphs 33 and 34 that :-
“33. As a result of the engaging in of the transaction referred to in paragraphs 18 - 27 hereof:
(a)the Offer proceeded;
(b)Southern Cross commenced trading without sufficient cash resources;
(c)Southern Cross suffered the loss and damage alleged in paragraph 35 of Southern Cross’s statement of claim;
34. Alternatively, as a result of the engaging in of the transaction referred to in paragraphs 18 - 27 hereof:
(a)the Offer proceeded;
(b)the cash resources of Southern Cross were depleted by $4,462,500;
(c)by virtue of that deficiency by $4,462,500:
(i)Southern Cross did not have sufficient cash resources to sustain the anticipated initial period of trading losses;
(ii)Southern Cross was placed in liquidation;
(d)Southern Cross suffered the loss and damage alleged in paragraph 35 of Southern Cross’s statement of claim.”
Order 8 rules 1 and 2 of the Federal Court Rules
Order 8 of the Rules relevantly provides :-
“1. Subject to rule 2 and Divisions 2 and 3 of this Order, originating process may be served outside the Commonwealth in the following cases:
....(d)where the proceeding is for contribution or indemnity in respect of a liability enforceable by a proceeding in the Court;
....
2(2)Where the Court is satisfied of the following matters :-
(a)that the proceeding is a proceeding in which the Court has jurisdiction;
(b)that the proceeding is a proceeding to which rule 1 applies; and
(c)that the applicant has a prima facie case for the relief which he seeks,
the Court may, by order, grant leave to serve originating process outside the Commonwealth under this Order.”
Counsel for the cross-respondents did not press a submission contained in his written submissions that the Court lacked jurisdiction to determine the cross-claim because it involved no “federal element”. The Court’s jurisdiction to determine the cross-claim is conferred by the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth) (“the Cross-vesting Act”) and, in particular, by s 4 of that Act. There is no challenge made before me to the constitutional validity of the Cross-vesting Act or to any relevant section of it: see, in any event, Gould v Brown (1998) 2 Leg Rep 2. I am satisfied, therefore, that the cross-claim is a proceeding in which the Court has jurisdiction, within the meaning of O 8 r 2(2)(a) of the Rules.
Order 8 r 2(2)(b) requires that the proceeding be a proceeding to which O 8 r 1 applies. Counsel for Arthur Andersen submitted that the proceeding, ie the cross-claim, was for contribution or indemnity in respect of a liability enforceable by a proceeding in the Court (O 8 r 1(d)). It is not contested that the cross-claim is for contribution or indemnity within the meaning of that paragraph. However, it is contested that the proceeding is in respect of a liability enforceable by a proceeding in the Court.
The words “in respect of a liability enforceable by a proceeding in the court” appearing in O 8 r 1(d) are to be read so as to mean “in respect of a liability enforceable against the person seeking contribution or indemnity”, that is, Arthur Andersen in the instant case: Angus & Coote Pty Ltd v Qantas Airways Ltd [1979] 2 NSWLR 398 at 400 - 401 per Sheppard J. So read, O 8 r 1(d) plainly applies to the cross-claim. The liability of Arthur Andersen to Southern Cross, in respect of which liability contribution or indemnity is sought, is one enforceable by a proceeding in this Court for the reasons stated above. I am satisfied that the cross-claim falls within O 8 r 2(2)(b) of the Rules.
Order 8 r 2(2)(c) requires that Arthur Andersen has a prima facie case for the relief it seeks against the cross-respondents. A prima facie case, for the purposes of O 8 r 2(2)(c) will be established “if, on the material before the court, inferences are open, which if translated into findings of fact, would support the relief claimed.”: Western Australia v Vetter Trittler Pty Ltd (in liq) (1991) 30 FCR 102 at 110 per French J; Trade Practices Commission v The Gillette Company (No 1) (1993) 45 FCR 366 at 371. The question of whether a prima facie case is made out is to be considered having regard to the context of the application. In Merpro Montassa Ltd v Conoco Speciality Products Inc (1991) 28 FCR 387, Heerey J said (at 390) :-
“It need only be added that the requirement of O 8, r 2(2)(c) has to be met at the outset of the proceedings. It does not suggest the kind of scrutiny that would occur in a submission of no case to answer following the closure of an applicant’s case at trial. As a matter of practicality, one is here concerned with, in Sheppard J’s words, ‘evidence which discloses in a little detail what the facts are ...’ (Stanley Kerr). It may be therefore that a court at this stage might draw inferences more readily in favour of an applicant, bearing in mind, amongst other things, that the applicant will not have had the advantage of discovery, subpoena and other procedural aids to the making out of a prima facie case at trial.”
Prima facie case
The cross-claim against the cross-respondents claims contribution from them on three bases: pursuant to s 6 of the Law Reform Act 1995 (Qld) (“the Law Reform Act”), pursuant to s 23B of the Wrongs Act 1958 (Vic) (“the Wrongs Act”) and in equity. Before me, counsel for Arthur Andersen sought to support a right to contribution from the cross-respondents by reference to s 23B of the Wrongs Act alone. Counsel could not properly have done otherwise. The right of contribution conferred by s 6 of the Law Reform Act arises only between joint tortfeasors. The only basis relied upon for liability of the cross-respondents to Southern Cross is the statutory cause of action created by s 206(4) of the Corporations Law for contravention of s 205. Section 6 of the Law Reform Act has no application to the cross-claim. Similarly, with respect to the asserted right of contribution in equity, it was not suggested, and nor could it have been on the state of the pleadings set out in detail above, that Arthur Andersen and the cross-respondents were under “co-ordinate liabilities to make good the one loss” (Albion Insurance Co Ltd v Government Insurance Co of New South Wales (1969) 121 CLR 342 at 350) or that they were under a common obligation to Southern Cross. In the pleaded circumstances, no right of contribution in equity arises.
I am prepared to assume, without deciding the point, that s 23B of the Wrongs Act has a relevant operation in respect of the present proceedings and may in an appropriate case create enforceable substantive rights in favour of Arthur Andersen against the cross-respondents. However, there are serious questions as to whether the assumption is correct. If the provision is only procedural in that it is a remedy to enforce a right (Henderson v Amadio (No 1) (1995) 62 FCR 1 at 201; Australia and New Zealand Banking Group Ltd v Turnbull & Partners Ltd (1991) 33 FCR 265 at 277 - 278), rather than a provision which creates a substantive right where none exists (McKain v R W Miller & Co (SA) Pty Ltd (1991) 174 CLR 1), the assumption will fail as will Arthur Andersen’s claim for relief.
On the assumed basis therefore, is there disclosed on the material before me, a prima facie case, in the relevant sense, for the relief sought by Arthur Andersen against the cross-respondents?
It is necessary for Arthur Andersen to show that if Southern Cross brought proceedings against the cross-respondents, based on the causes of action pleaded in the cross-claim, the cross-respondents would be liable to pay to Southern Cross the damages sought from Arthur Andersen in respect of the causes of action pleaded against it.
The real issue on this application is whether any breach of s 205 of the Corporations Law was causative of the same damage which Southern Cross seeks to recover from Arthur Andersen.
Section 206 of the Corporations Law provides for the consequences of contravention of s 205. Relevantly for present purposes, s 206(4) and s 206(5) provide :-
“206(4) Where:
(a)a company makes or performs a contract, or engages in a transaction;
(b)the contract is made or performed, or the transaction is engaged in, in contravention of section 205 or the contract or transaction is related to a contract that was made or performed, or to a transaction that was engaged in, in contravention of that section; and
(c)the Court is satisfied, on the application of the company or of any other person, that the company or that other person has suffered, or is likely to suffer, loss or damage as a result of:
(i)the making or performance of the contract or the engaging in of the transaction;
(ii)the making or performance of a related contract or the engaging in of a related transaction;
(iii)the contract or transaction being void by reason of section 205 or having become void, or becoming void, under this section; or
(iv)a related contract or transaction being void by reason of section 205 or having become void, or becoming void, under this section;
the Court may make such order or orders as it thinks just and equitable (including, without limiting the generality of the foregoing, all or any of the orders mentioned in subsection (5)) against any party to the contract or transaction or to the related contract or transaction, or against the company or against any person who aided, abetted, counselled or procured, or was, by act or omission, in any way, directly or indirectly, knowingly concerned in or party to the contravention.
206(5) The orders that may be made under subsection (4) include:
(a)an order directing a person to refund money or return property to the company or to another person;
(b)an order directing a person to pay to the company or to another person a specified amount not exceeding the amount of the loss or damage suffered by the company or other person; and
(c)an order directing a person to indemnify the company or another person against any loss or damage that the company or other person may suffer as a result of the contract or transaction or as a result of the contract or transaction being or having become void.”
Counsel for the cross-respondents submitted that the expression “as a result of” contained in s 206(4) of the Corporations Law should be construed as taking up the common law practical or common sense concept of causation explained by the High Court in March v E & H Stramare Pty Ltd (1991) 171 CLR 506. The submissions made by counsel for Arthur Andersen, without conceding the point, accepted that this was so. In my view, the expression “as a result of” appearing in s 206(4) “clearly expresses the notion of causation without defining or elucidating it” (Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 525 per Mason CJ, Dawson, Gaudron and McHugh JJ) and is to be understood as importing into the section the common law practical or common sense concept of causation, as modified or supplemented by the provisions of the Corporations Law. As their Honours noted in their joint judgment in Wardley (at 525), “[h]ad Parliament intended to say something else, it would have been natural and easy to have said so.”
In March v Stramare a majority of the High Court (Mason CJ, Deane, Toohey and Gaudron JJ, McHugh J dissenting) rejected the “but for” or causa sine qua non test as all encompassing at common law. Their Honours allowed that a person may be responsible at law for damage when that person’s wrongful conduct is one of a number of conditions sufficient to produce that damage (at 509 per Mason CJ, with whom Gaudron J agreed; see also 529 - 530 per McHugh J). However, their Honours held that whether conduct was a cause of damage was a question of fact to be determined by applying commonsense to the facts of each particular case (per Mason CJ at 515) or “by a value judgment involving ordinary notions of language and common-sense” (per Deane J at 524). In rejecting the “but for” test as all encompassing, Mason CJ said (at 516) :-
“The ‘but for’ test gives rise to a well-known difficulty in cases where there are two or more acts or events which would each be sufficient to bring about the plaintiff’s injury. The application of the test ‘gives the result, contrary to common sense, that neither is a cause’: Winfield and Jolowicz on Tort, 13th ed (1989), p 134. In truth, the application of the test proves to be either inadequate or troublesome in various situations in which there are multiple acts or events leading to the plaintiff’s injury: see, eg, Chapman v Hearse; Baker v Wiloughby [1970] AC 467; McGhee v National Coal Board; M’Kew (to which I shall shortly refer in some detail). The cases demonstrate the lesson of experience, namely, that the test, applied as an exclusive criterion of causation, yields unacceptable results and that the results which it yields must be tempered by the making of value judgments and the infusion of policy considerations.”
To similar effect, Deane J said (at 523) :-
“... the mere fact that something constitutes an essential condition (in the ‘but for’ sense) of an occurrence does not mean that, for the purposes of ascribing responsibility of fault, it is properly to be seen as a ‘cause’ of that occurrence as a matter of either ordinary language or common sense. Thus, it could not, as a matter of ordinary language, be said that the fact that a person had a head was a ‘cause’ of his being decapitated by a negligently wielded sword notwithstanding that possession of a head is an essential precondition of decapitation. Again, the mere fact that a person makes a gift of money to another is not, in any real sense, a ‘cause’ of the damage sustained by that other person when his agent negligently loses the money notwithstanding that the loss would not have occurred ‘but for’ the original gift.”
The common elements of the alternative cases pleaded against the cross-respondents are that :-
(a)in consequence of the wrongful conduct the share offer proceeded;
(b)Southern Cross commenced trading without sufficient cash resources; and
(c)Southern Cross suffered the loss and damage alleged in paragraph 35 of the Southern Cross statement of claim against Arthur Andersen.
The additional elements of the alternative claim against the cross-respondents are :-
(a)in consequence of the wrongful conduct the cash resources of Southern Cross were depleted by $4,462,500;
(b)by virtue of that deficiency of $4,462,500 :-
(i)Southern Cross did not have sufficient cash resources to sustain the anticipated initial period of trading losses;
(ii)Southern Cross was placed in liquidation.
The alternative case requires a finding that the wrongful conduct caused a depletion of $4,462,500 in the cash resources of Southern Cross which carried over when trading commenced on 1 September 1992. It was this deficiency in the cash resources of Southern Cross which is alleged to have caused Southern Cross to be unable to sustain anticipated trading losses and which caused it to be placed into liquidation.
It is not in dispute that, on or about 14 July 1992, the cross-respondents subscribed for the requisite shares in Southern Cross and transferred $4,462,500 to JB Were for subscription monies. It is also not in dispute that, on 29 July 1992, the cross-respondents paid to Southern Cross the sum of US$2,773,571 as a refund of part of US$3.6m ($4,462,500) paid as aircraft lease commitment fees. The alternative case based on a depletion or shortfall in the cash resources of Southern Cross at or prior to the commencement of trading on 1 September 1992, in the face of this undisputed evidence, will fail. Southern Cross had both the subscription monies of US$3.6m ($4,462,500) and the refund of US$2,773,571 being part of the US$3.6m it is alleged was improperly paid to the cross-respondents at the time it commenced to trade. The balance of the sum not returned was, on the evidence, a fee properly incurred as an operating cost of Southern Cross referrable to the trading. Arthur Andersen fails to make out a prima facie case in respect of the alternative case pleaded in paragraph 34 of the statement of claim. Indeed, counsel for Arthur Andersen did not press the alternative case.
Arthur Andersen put the case against the cross-respondents on the basis that, but for the conduct of the cross-respondents in contravention of s 205 of the Corporations Law, Tyrolean would not have met its sub-underwriting obligations and subscribed for the requisite amount of shares, JB Were would then have terminated the underwriting agreement between it and Southern Cross, the share offer would not have proceeded and Southern Cross would not have commenced trading and would not therefore have suffered the loss and damage claimed against Arthur Andersen. This case is different to the primary case pleaded in paragraph 33 of the statement of claim. At a minimum, it abandons as a material allegation that Southern Cross commenced trading without sufficient cash resources. Counsel for Arthur Andersen did not seek leave to amend the cross-claim, nor was an application for leave to amend foreshadowed. However, no issue was taken by counsel for the cross-respondents and I will deal with the case now sought to be made out by Arthur Andersen.
Counsel for Arthur Andersen referred to evidence from which, it was submitted, it could be inferred that, absent the payment made to the cross-respondents or one of them on or about 3 July 1992 as part of Mr Reid’s alleged fraud and which was applied in contravention of s 205 of the Corporations Law, Tyrolean would not have subscribed for the requisite shares in accordance with its sub-underwriting obligations and the share offer would not have proceeded. Counsel further submitted that there was a close connection between the wrongful conduct of the cross-respondents and the relevant loss and damage. It was alleged that the wrongful conduct was calculated by the cross-respondents to enable Southern Cross to commence trading in circumstances where it would otherwise have been unable to do so if the share offer did not proceed. It was alleged that the cross-respondents, as the lessors to Southern Cross of four aircraft, had a substantial commercial interest in Southern Cross commencing to trade.
As can be seen, the submissions made by counsel for Arthur Andersen depend upon a conclusion that the, or a, cause of the trading losses incurred by Southern Cross, in the relevant sense, was that Southern Cross commenced to and did trade. In my view, the submission ignores the distinction which must be drawn, when adopting a practical, common sense conception of causation, between conduct which is a cause of relevant damage and conduct which is an occasion or opportunity for that damage.
In Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310, a majority of the New South Wales Court of Appeal (Mahoney and McHugh JJA, Glass JA dissenting) upheld an appeal from a judgment awarding substantial damages for breach of an audit contract. The auditors of Cambridge Credit Corporation Ltd had, in 1971, failed to note in the annual audit certificates that the financial statements did not show certain provisions which should have been made. Had the financial statements been properly noted, a receiver would most likely have been appointed. Rogers J, at first instance, held that, but for the breach of contract by the auditors, the company would have gone into receivership in 1971. His Honour awarded damages calculated by subtracting the amount by which liabilities exceeded assets in 1971 from the amount by which liabilities exceeded assets in 1974, when a receiver was appointed to the company. Mahoney JA, in allowing the appeal from the judgment of Rogers J said (at 333 - 334) :-
“I come now to consider whether the loss here claimed, viz, the fall in the net value of the company, was the result of the defendant’s breach of contract.
In the broadest sense, that loss was a result of the defendants’ breach. If a defendant promises to direct me where I should go and, at a cross-roads, directs me to the left road rather than the right road, what happens to me on the left road is, in a sense, the result of what the defendant has done. If I slip on that road, if it collapses under me, or if, because I am there, a car driving down that road and not down the right road strikes me, my loss is, in a sense, the result of the fact that I have been directed to the left road and not to the right road.
But, in my opinion, it is not everything which is a result in this broad sense which is accepted as a result for this purpose in the law. Thus, if, being on the left road, I slip and fall, the fact alone that it was the defendant’s direction, in breach of contract, which put me there will not, without more, make the defendant liable for my broken leg. I say ‘without more’: if there be added to the breach the fact that, for example, the left road was known to be dangerous in that respect I may, of course, be liable. But, in relation to losses of that kind, the fact that the breach has initiated one train of events rather than another is not, or at least may not, be sufficient in itself. It is necessary, to determine whether there is a causal relationship, to look more closely at the breach and what (to use a neutral term) flowed from it.
In the present case, the company’s loss resulted from the defendant’s breach in the sense that the course of events vis-à-vis the company would have gone in a different direction had it not been for that breach. But that, I think, is not, or is not necessarily, sufficient. Thus, the breach allowed the company to continue in business. If its net worth had fallen because, for example, the main buildings it owned had been destroyed by an earthquake, I do not think that that loss would have been causally related to the breach which let the company continue in business.”
His Honour continued (at 334 - 335) :-
“It may sometimes be argued that a breach exposes the plaintiff to particular dangers and that if what happens subsequent to the breach is loss from a danger of that kind, the loss may be seen as a result of the breach: see, for example, the reference to arguments of this kind in the preface to the second edition of Hart & Honore (at lviii). But, again, I do not think that this argument is open to the company. To allow the company to continue in existence is, in a sense, to expose it to all of the dangers of being in existence. But allowing the company to remain in existence does not, without more, cause losses from anything which is, in that sense, a danger incident to existing. There are some dangers loss from which will raise causal considerations and some will not. But the company’s case has been conducted on the basis that there is not to be - and there has in fact not been - a detailed examination of what particular things caused the fall in net value of the company between 1971 and 1974 and the nature for this purpose of them.
In the end, the company’s case has been that the loss it claims was caused by the breach because, and because alone, the breach allowed the company to continue in existence. Some of the incidents flowing from its existence during 1971 - 1974 may be the results of the breach; some, for example, those flowing from earthquakes or the like, will not be. But the basis of the plaintiffs’ claim has been such that no inquiry is to be or has been pursued, for this purpose, into what in fact happened, why and the relationship of what happened to the breach. I do not think that this is enough to establish a causal relationship.”
To similar effect, McHugh JA said (at 358) :-
“Moreover, Cambridge did not seek to prove that particular losses in respect of particular transactions were caused by the auditors’ certificates. It asserted that from the moment that the trustee acted on the auditors’ certificate and, as a consequence, did not put Cambridge into receivership, the auditors became the insurers of Cambridge’s trading fortunes. The argument went so far as to maintain that even though Cambridge may have prospered for years the auditors, subject to the Limitation Act 1969, were liable for any ultimate loss made by the company.
In the proved circumstances of this case, I do not think that the issue of the certificates by the auditors constituted a cause of Cambridge’s loss of $145,000,000. The existence of a company, as counsel for Cambridge conceded, cannot be a cause of its trading losses or profits. Yet that is what the case for Cambridge comes to. Except in the sense that the issue of the certificates induced the trustee not to take action against Cambridge and thereby permitted Cambridge to exist as a trader, the issuing of the certificates was not one of the conditions which were jointly necessary to produce the loss of $145,000,000. To assert in these circumstances that the issue of the certificates was a cause of the loss in my opinion is to depart from the commonsense notion of causation which the common law champions.”
In Galoo Ltd (in liquidation) v Bright Grahame Murray (a firm) [1994] 1 WLR 1360 the Court of Appeal dismissed an appeal from a deputy judge of the Queen’s Bench Division striking out claims against the auditors of the company for breach of contract and in negligence. One of the heads of damage claimed against the auditors was that the company incurred trading losses as a result of the negligence of the auditors because it continued to trade when it otherwise would not have done. The deputy judge, in striking out this element of the company’s claim said (in a passage recorded in the judgment of Glidewell LJ in the Court of Appeal at [1994] 1 WLR 1374) :-
“‘Trading losses ... are losses which by their nature do not flow from whatever statement appears in the accounts as to the state of the company’s assets or profits; they flow from trading. If a company trades, it may suffer losses or it may enjoy profits, and those losses or gains depend upon as number of factors such as the prudence of the trading, market conditions, and so on. It does not seem to me that trading losses as such can possibly be attributed to statements as to the status of the company before that trading ever takes place ... it seems to me that, for the reasons I have given ... trading losses as such cannot arguably be said to be damages which flow from the auditors’ negligence.’”
Glidewell LJ, with whom Evans and Waite LJJ agreed, considered that Alexander v Cambridge Credit and March v Stramare, to which his Lordship had been referred, required the court to apply its common sense to deciding whether a breach of duty was the cause or merely the occasion for the loss. His Lordship concluded (at 1375) :-
“Doing my best to apply this test, I have no doubt that the deputy judge arrived at a correct conclusion on this issue. The breach of duty by the defendants gave the opportunity to Galoo and Gamine to incur and to continue to incur trading losses; it did not cause those trading losses, in the sense in which the word ‘cause’ is used in law.”
The case which Arthur Andersen seeks to advance does not rely upon an investigation of the various “causes” of the trading losses incurred by Southern Cross and thereby seek to link one or more of those causes to the wrongful conduct of the cross-respondents to establish the wrongful conduct as a, or the, legal cause of the loss. Even the primary case as pleaded in paragraph 33 of the statement of claim would treat the fact that Southern Cross commenced trading without sufficient cash resources as merely a circumstance which followed upon the share allotment and commencement of trading. It was not sought to establish, on the evidence, that any cash resources deficiency was created as a consequence of any conduct of the cross-respondent. The attempt to do so in the alternative case pleaded in paragraph 34 was not persisted in. There is, in any event, no evidence before me from which it would be possible to conclude that a prima facie case of conduct on the part of the cross-respondents causative of the losses pleaded in paragraph 35 of the statement of claim is made out.
It is said that the wrongful conduct of the cross-respondents allowed Southern Cross to trade when it otherwise would not have done so and thereby caused the relevant loss. That is, it is sought to say that the fact that Southern Cross traded was causative of the loss. A case sought to be made out on that basis and without more, cannot succeed as a matter of principle, for the reasons expressed in the authorities referred to above. The wrongful conduct of the cross-respondents, if made out, is properly characterised as the occasion for the loss suffered by Southern Cross and not the, or a, legal cause of it. To hold otherwise would be to apply the “but for” test without regard to logic or common sense.
I am not satisfied that a prima facie case for the relief sought has been made out.
Conclusion
The orders made by Drummond J on 6 June 1997 will be discharged insofar as they relate to these cross-respondents. Service of the cross-claim on each the eleventh, twelfth and thirteenth cross-respondents will be set aside.
Arthur Andersen, having failed on the issue of joinder, should pay the eleventh, twelfth and thirteenth cross-respondents’ costs of and incidental to the notice of motion, including reserved costs, if any, and of the joinder, to be taxed if not agreed.
I certify that this and the preceding twenty-four (24) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Cooper
Associate:
Dated: 27 March 1998
Counsel for the eleventh, twelfth and thirteenth cross-respondents:: S Doyle SC and R Lilley
Solicitors for the eleventh, twelfth and thirteenth cross-respondents: Deacons Graham & James
Counsel for Arthur Andersen, the first respondent/ cross-claimant: P McMurdo QC and
P O’SheaSolicitors for Arthur Andersen, the first respondent/ cross-claimant: Minter Ellison
Date of Hearing: 5 September 1997 Date of Judgment: 27 March 1998