Tag Pacific Ltd v McSweeney, B.A

Re: TAG PACIFIC LIMITED and TOIKAN HOLDINGS PTY. LIMITED (formerly KELSO PTY.
LIMITED)
And: BRIAN ALBERT McSWEENEY and BRUCE WILLIAM PHILLIPS
No. N G38 of 1990
FED No 81
Trade Practices

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Olney J.(1)

CATCHWORDS

Trade Practices - misleading and deceptive conduct - acquisition of interest in insurance broking business - preliminary balance sheets of broking companies supplied to purchaser of interest by vendor's accountants - balance sheets prepared on the basis that unpresented cheques had been duly presented and paid - knowledge of purpose for which balance sheets were required by purchaser - failure to disclose substantial non-compliance with regulatory legislation - effect of accountants' disclaimer

Trade Practices Act 1974 (Cth) ss. 6(3), 52, 82

Fair Trading Act 1987 (NSW) ss. 42, 68

Insurance (Agents and Brokers) Act 1984 (Cth) ss. 26, 27

Smolonogov v O'Brien 67 FLR 311

Yorke v Lucas 158 CLR 661

Gardam v George Wills and Co. Ltd. (1988) ATPR 40-884

M.K. Hutchence and Others v South Sea Bubble Co. Pty. Ltd. (1986) ATPR 40-667

Abundant Earth Pty. Ltd. v R.C. Products Pty. Ltd. 59 ALR 211

Collins Marrackville Pty. Ltd. v Henjo Investments Pty. Ltd. 72 ALR 601

HEARING

MELBOURNE (heard in Sydney)

#DATE 28:2:1992

Counsel for the applicants: Mr S.D. Robb with Mr J. Bartos

Solicitors for the applicants: Rosenblum and Associates

Counsel for the respondents: Mr T. Simos QC with Mr P. Blackburn-Hart

Solicitors for the respondents: Tress Cocks and Maddox

ORDER

That judgment be entered for the applicants against the respondents for damages to be assessed;

That the settlement of the Court's order, including any order in relation to costs and to the further conduct of the proceedings be referred to a directions hearing at Sydney on Friday, 27 March 1992 at 2.15 p.m.

JUDGE1

The first applicant is a company duly incorporated in the State of Tasmania.

The second applicant is a company duly incorporated in the Northern Territory of Australia and is a wholly-owned subsidiary of the first applicant.
For the purpose of these proceedings there is no need to distinguish between the two applicants.
At all relevant times the respondents carried on in partnership the business of certified practising accountants under the name and style Phillips McSweeney (PMS).
2. THE CAUSES OF ACTION
The applicants claim that the respondents engaged in misleading and deceptive conduct or conduct likely to mislead or deceive them in contravention of section 52 of the Trade Practices Act 1974 (Commonwealth) or section 42 of the Fair Trading Act 1987 (NSW) and that as result they suffered loss or damage which they seek to recover in these proceedings.
As the respondents are individuals, the applicants rely primarily on section 42 of the Fair Trading Act (NSW). Certain of the representations said to constitute the conduct complained of were made in Sydney and in respect of those representations the applicants rely only on the NSW Act. Other of the representations said to constitute the impugned conduct were made in documents forwarded by facsimile transmission from Sydney to New Zealand. Section 52(1) of the Trade Practices Act 1974 (Cth.) which is within Division 1 of Part V of the Act provides:

A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

By section 6(3) of the Act it is provided that:

In addition to the effect that this Act, other than Part X, has as provided by sub-section (2), Divisions 1 and 1A of Part V have, by force of this sub-section, the effect it would have if-

(a) those Divisions (other than section 55) were, by express provision, confined in their operation to engaging in conduct to the extent to which the conduct involves the use of postal, telegraphic or telephonic services or takes place in a radio or television broadcast; and

(b) a reference in those Divisions to a corporation included a reference to a person not being a corporation.

And by virtue of section 82(1):

A person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV or V may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.

In Smolonogov v O'Brien 67 FLR 311, section 53A (which is contained within Division 1 of Part V) was held to apply to an individual who made representations in the course of the sale of land because the representations were made in a telephone conversation. No evidence has been led as to the exact nature of facsimile transmissions but they are so commonplace these days that I am able to take judicial knowledge of the fact that they involve the use of a telephone line and can properly be categorised as involving the use of "telephonic services". It would follow that section 52 of the Act is capable of application to the respondents in respect of the alleged transmissions notwithstanding that the respondents are not corporations.

Section 42(1) of the Fair Trading Act 1987 (NSW) provides:

A person shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

And section 68(1) is in terms relevantly identical to those of section 82(1) of the Trade Practices Act. The alleged conduct of the respondents in supplying certain documents to the first applicant occurred in Sydney and thus the provisions of the Fair Trading Act are applicable to that conduct.

In so far as the applicants' case relies upon the provisions of the Fair Trading Act (NSW) it is a "State matter" within the meaning of section 3(1) of the Jurisdiction of Courts (Cross-vesting) Act 1987 (NSW) and by section 4(1) of that Act, this Court may exercise jurisdiction with respect to it.
The applicants have specifically pleaded that each of the alleged facsimile transmissions was made by the respondents in trade or commerce. Although the respondents did not admit this assertion, no specific evidence or argument was addressed to the point and it is abundantly clear that the assertion is supported by the evidence. No similar assertion was specifically pleaded in respect of the documents supplied in Sydney although the issue is sufficiently raised by the plea that the conduct complained of was misleading and deceptive in contravention of section 42 of the Fair Trading Act. Although the question of whether the respondents' conduct in supplying those documents was in trade or commerce was not raised, the evidence supports an affirmative finding.
In the alternative, the applicants claim that the respondents owed them a duty of care, which they breached, thereby causing the applicants to suffer loss and damage, for which the applicants claim damages.
No issue has been raised as to the competence of this Court to try all of the issues raised in the pleadings. However, at this stage only the question of the respondents' liability is before the Court. The question of damages will be dealt with separately on a later occasion if the need arises.
3. DRAMATIS PERSONAE
The factual context in which the proceedings have arisen is one of some complexity and involves numerous companies and individuals. In order to assist in understanding the narrative which follows it is convenient to first identify those to whom reference is made and to indicate their respective relationships to each other.
The first applicant (TAG) is a company listed on the main board of the Australian Stock Exchange and the second applicant (TAGNT) is a wholly-owned subsidiary. Peter Harry Wise (Wise) is chairman of both companies, which are part of a group of companies, the ultimate parent of which is The Anthony Group Limited, a New Zealand company controlled by Wise's family interests.
Harvey Wu (Wu) is a resident of New Zealand and is a director of both applicants. He is by profession a chartered accountant. He was engaged in private practice for some years but retired in 1987 to devote his attention full time to company directorships and consulting services.
Robert Terrence Constable (Constable) resides in NSW and is a non-executive director of the first applicant. With effect from 2 November 1987 he became chairman of the company hereafter described as TKN.
Brian Michael Beazley (Beazley) is presently a life insurance agent, but he is by training a chartered accountant and from about 1 october 1985 to 30 June 1986 was employed as an accountant by the company hereafter described as TIBG, and from 1 July 1986 to about February 1987 he worked in a similar capacity for the company hereafter described as TIIB. Subsequent to February 1987 and through to about February 1988 he worked on a casual basis for TIIB.
Warren Anthony Chalker (Chalker) is also a chartered accountant. He was employed by TKN as its financial controller from February 1988 to 20 April 1989.
Richard Niven Moffitt (Moffitt) is a chartered accountant being a partner in the firm of Thompson Douglass Butterell. From February 1987 to October 1989 he was the secretary of the first applicant.
Richard Noel Rees (Rees) is a chartered accountant being a partner in the Corporate Advisory Services section of the firm of Ernst and Young. His qualifications are such that he can properly be regarded as an expert in the field of public and commercial accounting, and his involvement in these proceedings is only in that capacity.
Each of Wise, Wu, Constable, Beazley, Chalker, Moffitt and Rees made written statements which were tendered in evidence on behalf of the applicants. Each was cross-examined by counsel for the respondents.
Other names which have been mentioned in the proceedings as associated with the applicants' interests are their solicitors Messrs. Rosenblum and Partners (Rosenblums) and Messrs. Paul Larbalestier and Ellis Varejes, partners in that firm.
Bruce William Phillips (Phillips), the second respondent, is a certified practising accountant who at the relevant time practiced in partnership with the first respondent. He was not personally involved in any of the events giving rise to the proceedings.
Brian Albert McSweeney (McSweeney), the first respondent, with his partner Phillips, were first engaged as accountants by TIBG and other associated companies in about 1976. At various times between 1986 and 1987 the firm was retained to prepare audited financial statements for some of the companies within the group, and in the period with which these proceedings are mostly concerned McSweeney was a non-executive director of TKN, TIIB and several other companies within the group.
Raymond Webber (Webber) was at the material time the principal of the group of companies known conveniently as the Toikan group. Companies within the group controlled by Webber (and which were referred to in the proceedings) included the following:

(i) Toikan International Broking Group Pty. Ltd. (TIBG);

(ii) Toikan International Insurance Group Pty. Ltd. (TIIB) (on 22 July 1988 TIIB changed its name to Salamander Investment Corporation Pty. Ltd.);

(iii) Charlton James and Hedley (Vic.) Pty. Ltd. (C.J. and H);

(iv) Carroll and Georgeson (Qld) Pty. Ltd. (C and G);

(v) Locna Insurance Brokers Pty. Ltd. (Locna);

(vi) Vana Financial Services Pty. Ltd. (Vana);

(vii) Toikan Financial Services Pty. Ltd. (TFS);

(viii) TKN Holdings Pty. Ltd. (TKN) (on 22 July 1988 TKN changed its name to Toikan International Insurance Broking Pty. Ltd.)

Eric Charles Wallis (Wallis) is a certified practising accountant who at the date of trial had been employed as such by PMS for 10 years.

Robert Yip (Yip) is an accountant now practising in Hong Kong who between May 1987 and March 1990 had been employed by PMS as a senior accountant.
Goodwin Bultimore Allen Gower (Gower) is a chartered accountant being a partner in the firm of Duesburys having primary responsibility for the Corporate and Litigation Services Division of that firm in Sydney. His qualifications and experience entitle him to be regarded as an expert in public and commercial accounting and his involvement in these proceedings is only in that capacity.
Each of McSweeney, Webber, Wallis, Yip and Gower made written statements which were tendered in evidence on behalf of the respondents. Each was cross-examined by counsel for the applicants.
Other names which have been mentioned in the proceedings but not specifically associated with the interests of either the applicants or the respondents are the firm of Dunhill Butler, solicitors acting for the Webber and Toikan interests and Mr Michael Binetter, a partner in that firm.
4. INSURANCE (AGENTS AND BROKERS) ACT 1984
Central to these proceedings is the fact that on 1 October 1987 the applicants executed a deed (the acquisition deed), inter alia, whereby the second applicant was to acquire a 60% interest in the insurance broking portfolio of TIIB. Much of what follows has to do with the legal requirements associated with the conduct of the business of insurance brokerage and it is appropriate at this stage to make reference to the provisions of the Insurance (Agents and Brokers) Act 1984 (the Brokers Act).
Part III of the Brokers Act (comprising sections 18 to 31), provides for the registration of insurance brokers and came into operation on 1 January 1986.
Section 19 prohibits a person or corporation, after the expiration of 6 months from the commencement of Part III, from carrying on business as an insurance broker unless registered. Sections 20 to 25 inclusive deal with the formalities associated with registration, the keeping and inspection of registers and the suspension or cancellation of registration. Section 26 and parts of section 27 have particular relevance in these proceedings and are set out in part below:

26. (1) A registered insurance broker shall pay into an account maintained by him with a bank solely for the purposes of this section all moneys received by him -

(a) from or on behalf of an insured or intending insured for or on account of an insurer in connection with a contract of insurance arranged or effected or to be arranged or effected by the broker; or

(b) from or on behalf of an insurer for or on account of an insured or intending insured.

(1A) In sub-section (1), 'bank' includes a building society with which trust funds may be invested under a law of the Commonwealth or of a State or Territory.

(2) An account maintained under sub-section (1) shall be called an "Insurance Broking Account", with or without other words of description.

(3) A registered insurance broker shall not, except with the consent in writing of the Commissioner, withdraw moneys from an account maintained by him under sub-section

(1) except -

(a) for payment to or for a person entitled to receive payment of the moneys, including himself in so far as he is entitled to receive payment for himself;

(b) for payment to or for an insurer in respect of amounts due to the insurer under or in relation to a contract of insurance arranged or effected by the broker (including a contract of insurance that has been cancelled);

(c) for investment as provided by sub-section (4); or

(d) for repayment of moneys that were paid into the account in error.

(4) A registered insurance broker may invest in such manner as is prescribed moneys included in an account maintained by him under sub-section (1) that were received by him from an insured or intending insured in connection with a contract of insurance (not being a contract of life insurance) arranged or effected or to be arranged or effected by the broker.

(5) A registered insurance broker shall pay moneys received from the realization of an investment made under sub-section (4) into an account maintained by him under sub-section (1).

(6) If, upon the realization of an investment made under sub-section (4), an amount is received in respect of the realization that is less than the amount invested, the registered insurance broker shall pay into the account from which the moneys were withdrawn for investment an amount equal to the difference between the amount invested and the amount received.

(7) If, upon the realization of an investment under sub-section (4), an amount is received in respect of the realization that is greater than the amount invested, the registered insurance broker may retain for his own benefit the amount by which the amount received exceeds the amount invested and need not pay it into, or retain it in, an account maintained under sub-section (1).

(8) Interest, dividends or other income received by a registered insurance broker from an account maintained under sub-section (1) or from an investment made under sub-section (4) may be retained by the broker for his own benefit and need not be paid into, or retained in, an account maintained under sub-section (1).

(9) Moneys received by a registered insurance broker as mentioned in sub-section (1) or (5), both before and after those moneys are paid into an account maintained under sub-section (1), moneys paid into such an account under sub-section (6) and securities in which moneys are invested under sub-section (4) are not capable of being attached or otherwise taken in execution or of being made subject to a set-off, charge or charging order or to any process of a like nature.

(10) Nothing in sub-section (9) prevents moneys or securities being attached, taken in execution or made the subject of a set-off, charge, charging order or like process at the suit of a person for whom or on whose account moneys have been paid into the relevant account maintained under sub-section (1) and to whom or on whose account payment in respect of those moneys has not been made.

(11) ...

27. (1) Where -

(a) money is received by a registered insurance broker from, or on behalf of, an insured or intending insured, or from another registered insurance broker on behalf of an insured or intending insured, as a premium or an instalment of a premium in connection with a contract of insurance or a proposed contract of insurance;

(b) the risk, or a part of the risk, to which the contract or proposed contract relates is accepted by or on behalf of an insurer; and

(c) the broker who so received the money is informed of, or otherwise ascertains, the amount of the premium or instalment to be paid, the broker who so received the money shall pay, in accordance with sub-section (2), to the insurer by whom or on whose behalf the risk, or a part of the risk, to which the contract or proposed contract relates is accepted an amount equal to so much of the money as does not exceed the amount of the premium or instalment to be paid.

(2) An amount payable by a registered insurance broker to an insurer under sub-section (1) shall be paid -

(a) subject to paragraph (b), within the period (in this section referred to as the "relevant period") of 90 days after the day on which the cover provided by the insurer under the contract commences to have effect or the first day of the period to which the instalment relates, as the case may be; or

(b) if it is not practicable for him to pay the amount within the relevant period - as soon after the expiration of that period as it is reasonably practicable for him to do so.

(3) Where the amount of the premium, or of an instalment of the premium, payable in respect of a contract of insurance has not been received by a registered insurance broker at the expiration of the relevant period, the broker, unless he receives the amount before notifying the insurer in accordance with this sub-section, shall notify the insurer in writing, within 7 days after the day on which the relevant period expired, that he has not received the amount.

The aspects of the Brokers Act which are of particular importance are that the business of insurance broking may only be carried on by a registered broker and that a broker must maintain a separate insurance broking account in accordance with the provisions of sections 26 and 27. A broker enjoys the very considerable advantage of being entitled to invest premiums paid into his broking account for his own benefit and his obligation to pay premiums received from insured persons to the insurer does not arise until 90 days after the insurer accepts the risk.

A CHRONOLOGY

In the following narrative it is intended to set out in chronological order the more important events relevant to these proceedings. For the most part there is no dispute as to general facts of the case but to the extent that the parties are in dispute, nothing in this section of these reasons is intended to represent a finding of fact. Rather, the intention is to establish the context in which the contested matters can be considered.
The "Australian Financial Review" of 21 January 1987 carried an advertisement headed "Insurance Broking Business - Investment Opportunity" which indicated that a shareholding of between 40% and 60% was available in a substantial insurance broking business. The advertisement invited responses to Ted Hogg of Edward Hogg Group Pty. Ltd., in Sydney.
On 2 February 1987 Wu telephoned Hogg in connection with the advertisement, and met with him in Sydney on 9 February 1987. Later, in about mid-February 1987, Webber met with Wu in New Zealand and gave him a document entitled "Toikan International Insurance Broking Pty. Limited - Joint Venture Proposal dated 1 January 1987".
By letter dated 12 May 1987 Wise, in his capacity as Chairman of TAG, wrote to Webber setting out his (Wise's) understanding of an agreement reached between Wu (on behalf of TAG) and Webber, and inviting Webber to confirm the position by signing at the foot of the letter and faxing a copy back to Wise. Webber made some alterations to the text of Wise's letter, endorsed his confirmation and faxed a copy of the amended document to Wise on 18 May 1987. Wise does not appear to have dissented from the amendments made by Webber. The letter as amended is referred to hereafter as the letter of understanding. The general thrust of the agreement evidenced by the exchange was that a new company would be formed to acquire all the insurance and finance broking business operated by the Toikan group and Webber family interests and that the capital of the new company would be held as to 60% by TAG and as to 40% by the Webber family interests. Settlement was to be effected on "June 1 1987 or as close thereto". It is common cause that the intention was that settlement be effected on or about 1 July 1987.
On 11 June 1987 a meeting was held at the offices of Dunhill Butler in Sydney. Those in attendance were Wu and Larbalestier representing TAG and Webber, McSweeney and Binetter representing the Webber and Toikan interests. The purpose of the meeting was to refine some of the details contained in the letter of understanding and to discuss a proposal to restructure the transaction to minimise Webber's liability for capital gains tax.
Some discussions took place between Wu and McSweeney during June 1987 concerning the proposal that TIIB's insurance broking business be transferred to TKN and on 26 June 1987 McSweeney sent a memo to Larbalestier summarising the proposed joint venture proposal.
On 28 July 1987 McSweeney sent a memo to Wu confirming a meeting to be held at Rosenblums' office the next day. The memo indicated that one of the agenda items would be "discussion and resolution of capitalisation under the revised structure to meet the requirement for insurance licencing", as to which a discussion paper was forwarded in which the registration requirements of the Brokers Act were discussed.
Also on 28 July 1987, a meeting was held at Toikan's offices which was attended by Webber, Beazley, McSweeney, Wallis and Yip. Draft preliminary financial statements prepared by PMS as at 30 June 1987 for TIIB, TFS, Locna, Vana and TKN were presented to this meeting. Each of the statements showed an account item "inter-company loan". These loan accounts were the result of the use of a single broking account rather than individual broking accounts for each company. McSweeney said to those present that the pooling of broking accounts was against the law and that the funds must be repaid into the correct accounts. Calculations made at the time suggested that further funds amounting to $800,000 would be required to enable the broking accounts to be put in order. Webber instructed McSweeney to finalise the financial statements on the basis that the necessary funding had been obtained and the broking accounts put in order.
The Toikan meeting of 28 July 1987 concluded at about 2.30a.m. on 29 July. Later that day preliminary financial statements were prepared on the basis that the inter-company loan accounts had been repaid. On Webber's instructions copies of the preliminary financial statements for TIIB, TFS, Locna, Vana and TKN were sent by PMS to TAG at care of Rosenblums' office on 29 June 1987.
Still later on 29 July 1987 the meeting foreshadowed in McSweeney's memo of 28 July 1987 was held. Those in attendance included McSweeney, Webber, Wallis and Wu. The financial affairs of the Toikan group were not discussed.
Subsequent to the meeting at Toikan's office on 28-29 July 1987, Beazley, acting on instructions from Webber, prepared a number of cheques on various Toikan company accounts for the purpose of adjusting the various inter company loans. Most of these cheques (the unpresented cheques) were signed by Beazley, but some were signed by Webber. All were required to be countersigned but never were and none was ever banked or presented for payment.
Negotiations between the parties to the proposed transaction and their solicitors continued during August and September 1987. On 28 August 1987 McSweeney sent a memo to Wu enclosing a proposed timetable to be followed. This timetable included, inter alia, Webber and McSweeney meeting the Insurance Commissioner on 2 September 1987 to discuss the transfer of the insurance brokers' licence to TKN.
Preliminary balance sheets as at 30 June 1987 for C and G and C.J. and H were faxed to TAG in New Zealand by PMS on 9 September 1987.
On 15 September 1987 PMS faxed to Wu in New Zealand pro-forma balance sheets of 6 Toikan group companies for inclusion in the proposed agreement.
On 29 September 1987 PMS faxed to Wu in New Zealand final pro-forma balance sheets of the Toikan group companies for inclusion in the proposed agreement.
On 1 October 1987 the acquisition deed was executed.
On about 19 October 1987 first Yip, then Wallis and McSweeney became aware that the unpresented cheques had not been presented.
On 22 October 1987 McSweeney sent to Wu a list of cheques that would be required for the purpose of settling the transaction. A subsequent list was sent to Rosenblums by McSweeney on 2 November 1987 on which day settlement took place. As part of the settlement arrangements TAG executed an unlimited guarantee of TKN's account in favour of the State Bank of NSW (the State Bank).
On the same day, 2 November 1987 (but before settlement took place), PMS wrote to Webber pointing out that the unpresented cheques had still not been presented and requesting that arrangements be made to clear the cheques forthwith so that PMS could complete its audit.
On 30 November 1987 Webber wrote to PMS confirming, inter alia:

That related company cheques totalling $2,088,524.14 were held at the 30th June, 1987 by Toikan International Insurance Broking Pty Limited are still unbanked, however, I confirm that these will be banked within the next week and that I have had Brian Beazley make arrangements with the Bank to ensure they are immediately cleared. At the 30th June, 1987 these were to have been banked, however, with the sale of the insurance portfolio to Tag Pacific, this special banking was not completed by the Accounts Department.

On the same day PMS signed auditors' certificates for the 30 June 1987 financial statements of TIIB, C.J. and H, Locna, C and G and Vana all of which statements treated the unpresented cheques as having been presented and paid as at 30 June 1987.
PMS's retainer as accountants for the Toikan group was terminated in late February 1988. At about the same time Chalker was engaged by TKN.
On 25 March 1988 Wu instructed Chalker to assist in reconciling the cash position of the Toikan group companies.
The reconciliation of the Toikan group bank accounts was completed during May 1988 and it was then that Wu first became aware of the unpresented cheques.
On 16 June 1988 a meeting was held between McSweeney, Webber, Moffitt, Wallis, Yip and Wu at which Wu explained his conclusion that the cash position of the companies was deficient by approximately $1.2m. McSweeney disputed the amount of the deficiency, saying it was less than claimed but in a letter dated 27 June 1988 addressed to Webber he confirmed that he had been in error and that Wu's figures were correct.
On 28 June 1988 Webber signed a letter acknowledging his indebtedness to TKN of $1,465,404, and on 3 September 1988 Webber and his associated interests agreed to pay TKN $2,232,145.54.
On 20 April 1989 Sun Alliance Insurance Co. Ltd. appointed a receiver of the Toikan group of companies and on the same day the State Bank made demand on TAG, pursuant to its guarantee of 2 November 1987, for $1,347,263.67.
TKN applied to the Supreme Court of NSW on 21 April 1989 for the appointment of a provisional liquidator, and on 21 June 1989 the company was wound-up.
In September 1989 Webber became bankrupt on the petition of Sun Alliance and in October 1989 proceedings commenced by the State Bank against TAG were settled by TAG paying the bank $575,000.
6. THE CONTRACT
The acquisition deed is a complex document to which there are many parties. However, in these proceedings, only relatively few terms of the deed have any special relevance and it is appropriate that there should be only a brief overview of those provisions.
There are 3 parties to the deed representing the TAG interests namely the first and second applicants and the Anthony Group Limited.
The parties representing the Webber and Toikan interests are Ligon 125 Pty. Limited (Ligon), Salamander Finance Corporation Limited (SFC), Sabada Pty. Limited (Sabada) and Webber (in the deed, RW).
The deed recites that TKN is beneficially wholly-owned by Ligon, that the issued capital of Ligon is held by Sabada, that at the request of Webber TAG is willing through its wholly-owned subsidiary TAGNT to take a majority shareholding in TKN on the basis set out in the deed as if the same had been taken up as at 1 July 1987, and that the Anthony Group Limited is willing to grant a loan facility to SFC on the basis set out in the deed.
The major purpose of the deed was to facilitate the acquisition by TAGNT of a 60% shareholding in TKN, the other 40% remaining with Ligon. This was achieved by TAGNT, for a total outlay of $1.2m, subscribing for sufficient new shares in TKN to effect the required change in the proportion of Ligon's shareholding.
Clause 7 of the agreement deals with "Simultaneous performance and conditions precedent". Apart from provisions relating to the Foreign Takeovers Act 1975 (Cth.) (which in the events which happened presented no problems) the clause provided that the deed would not become binding on the parties unless and until Webber and Ligon had furnished to TAG and TAGNT proof, inter alia, of registration of TKN as a general insurance broker pursuant to the Brokers Act. Upon satisfaction of the conditions precedent the deed would become fully binding on the parties and settlement would occur on "the effective date", a date defined as the date on which the last of the conditions precedent contemplated by sub-clause 7.2 shall have been satisfied.
Clause 2.5 of the deed provides:

2.5 RW and LIGON covenant and agree with TAG and TAGNT that following completion of the transactions contemplated by this Deed as occurring on the Effective Date, the balance sheet of TKN will disclose a financial position which may reasonably be regarded as no less favourable in any material respect than the pro-forma balance sheet contained in Schedule 2, subject to the effect upon the financial position of TKN by reason of movements in the quantum of the items referred to in the note to such pro-forma balance sheet.

Note 2 to the pro-forma balance sheet referred to provides:

In addition to the above mentioned assets and liabilities, the balance sheet is to include the insurance broking and other operating assets and liabilities of the company. Other than the effect upon such Balance Sheet by reason of the net profit or loss from trading operations, the inclusion of such assets and liabilities will not materially effect the net asset position of the Pro-forma Balance Sheet.

Pursuant to clauses 4.1(b), 4.2(b), 4.3 and 4.4 Webber, Sabada and Ligon covenanted in similar terms to clause 2.5 with respect to pro-forma balance sheets for C and G, CJH, Locna and Vana (except in the case of C and G, the obligation arose with one month after the effective date). Each of the pro forma balance sheets contains a note in similar terms to Note 2 to the pro-forma balance sheet of TKN.

It is common cause that settlement occurred on 2 November 1987. By that date the necessary formalities associated with the Foreign Takeovers Act had been satisfactorily attended to. However, at no stage was proof ever furnished of TKN's registration as a general insurance broker, nor indeed was such registration ever effected. Presumably the TAG interests were prepared to waive compliance with this condition precedent.
7. THE PLEADINGS
The application was filed on 29 January 1990 and was accompanied by a statement of claim. The applicants' case is finally pleaded in an amended statement of claim which was filed on 28 June 1991 pursuant to an order made by Lockhart J on that day. The respondents had pleaded to the applicants' original statement of claim by a defence filed on 27 March 1990 and later filed an amended defence on 3 October 1990. The respondents do not appear to have specifically pleaded to a number of paragraphs in the amended statement of claim, and to some extent there are some minor anomalies in the pleadings in relation to paragraph numbering, but nothing turns on any of these matters. The issues at trial were quite clearly defined and are raised in the amended statement of claim. I propose therefore to provide a brief analysis of the case pleaded by the applicants, and to indicate the respondents' responses to the facts pleaded.
The due incorporation of the applicants, the fact that the respondents at all material times have carried on business in partnership as public accountants and that at all material times prior to 30 June 1987 TIIB carried on the business of insurance brokers (the Toikan business) are admitted. The respondents say that prior to 30 June 1987 the business was carried on by TIIB for its own behalf and that thereafter until about 2 November 1987 it did so as agent for TKN.
The applicants say, and the respondents admit, that prior 2 November 1987 TIIB held shares in the following companies in the stated percentages, each of which companies at all material times carried on the business of insurance and/or finance brokers, or other businesses associated with that of TIIB -

(a) CJ and H 75%

(b) C and G 100%

(c) Locna 40%

(d) Vana 40%

(e) TFS 60%

It is further admitted that at some time between 30 June 1987 and 2 November 1987 TIIB transferred with effect from 30 June 1987 all of its right, title and interest in the Toikan business to TKN. After the transfer and until such time as TKN commenced operations in its own right TIIB continued to operate the Toikan business in its own name as agent for TKN and TIIB held the assets of the Toikan business on trust for TKN.

It is common cause that at all material times the respondents were the auditors of C.J. and H, C and G, Locna, Vana and TIIB.
The applicants say that between about 27 January 1987 and 1 October 1987 they engaged in numerous discussions with TIIB and/or TKN with a view to the acquisition by them or one of them of an interest in the business of TIIB and (after the applicants had been informed of the sale of the Toikan business by TIIB to TKN) of TKN.
The various allegations of misleading and deceptive conduct made against the respondents have a common basis namely that it is said that the various preliminary balance sheets and pro-forma balance sheets supplied by the respondents to the applicants disguised the fact that the broking accounts of the Toikan companies in which the applicants were proposing to acquire an interest were seriously overdrawn and that there were insufficient funds within the Toikan group to meet the shortfall, being a sum of the order of $2,000,000.
The applicants say that relying upon the representations contained in the preliminary balance sheets and pro-forma balance sheets, and induced thereby, the applicants' first entered into the acquisition deed and later completed their obligations under the deed, whereas, had they known the truth concerning the unpresented cheques they would not have done so. As a consequence of entering into the acquisition deed the first applicant agreed to procure the second applicant to subscribe for 153 fully paid ordinary shares in the capital of TKN at a total cost of $1,200,000 and to pay $90,622.10 for its own legal costs together with an agreed portion of the vendors' legal costs, and the second applicant agreed to subscribe for and pay for those shares. Furthermore, following settlement of the transaction, the first applicant:

(a) On or about 2 November 1987 gave a written guarantee to the State Bank of all moneys then or thereafter owing by TKN to the bank.

(b) In or about February 1988 made loans to TKN of which $176,618.00 remains outstanding.

(c) In or about February 1988 and from that date until the date of appointment of a receiver to TKN, paid on behalf of TKN to third parties sums amounting to $382,155.42.

(d) On or about 2 February 1988 gave a written guarantee to the State Bank with a limit of $200,000 plus interest, to secure the obligations of TKN to the bank under an indemnity given by TKN to the bank in respect of a bank guarantee granted by the bank to the Insurance Commissioner at the request of TKN to secure the obligations of TKN and its subsidiaries to the Insurance Commissioner.

The respondents rely upon a disclaimer which accompanied the preliminary balance sheets to the following effect:

We have prepared the accompanying preliminary accounts, being the preliminary balance sheet as at 30 June 1987, preliminary profit and loss statement for the year then ended, notes and additional financial data from the books and records of (the company concerned) and other information provided by the officers of that company and at the request of and exclusively for the use and benefit of (the company concerned) and its directors.

Under the terms of our engagement we have not audited the accounting records of (the company concerned), the accounts or the additional financial data. Accordingly, we express no opinion on whether they present a true and fair view of the state of affairs or of the year's results and no warranty of accuracy or reliability is given. Neither the firm nor any member or any employee of the firm shall be liable or responsible in any way whatsoever to any person (other than (the company concerned)) in respect of the accounts or the additional financial data, including any errors or omissions therein however caused.

and further they say, inter alia, that the preliminary accounts were qualified by the disclaimer, on their face were described as being "preliminary", and bore on each page a statement to the effect:

These accounts are unaudited. Refer accountants' report. The accompanying notes form part of the company's accounts.

The respondents deny that the pro-forma balance sheets amounted to a representation by the respondents as to the respective financial positions of those companies at the date of completion of the sale and say that the pro-forma balance sheets were prepared for the purposes of the warranties given by Webber, Sabada and Ligon in the acquisition deed.

The applicants say by way of further or alternative plea that the respondents owed to the applicants a duty to exercise reasonable care in and about the provision of financial information to the applicants concerning TKN and its subsidiaries or companies in which TKN owned shares and that in forwarding to the applicants the preliminary balance sheets and the pro-forma balance sheets the respondents breached that duty whereby the applicants suffered substantial loss and damage.
The respondents deny that in consequence of the alleged contraventions of the Trade Practices Act and the Fair Trading Act the applicants suffered loss and damage and they further deny that they were under the duty of care pleaded by the applicants. Further, in answer to the whole of the statement of claim the respondents say that any loss or damage suffered by the applicants was contributed to or caused by the negligence of the applicants. In support of this plea the respondents say by way of particulars that the applicants:

(i) Entered into and concluded the transaction relying entirely upon financial information supplied by, and warranties and representations made, by Webber, Sabada and Ligon in the knowledge that the pro-forma annual accounts of the companies did not represent the true nature of the business being acquired.

(ii) Elected to rely on the warranties contained in the acquisition deed as their only opportunity of contractual resort.

(iii) Failed to make any or any proper enquiries of the true financial state of affairs of each of the companies.

(iv) Ignored the warnings and disclaimers and notes appended to the preliminary balance sheets and other financial information which emanated from the respondents.

(v) Failed to call for or to inspect the cash books and/or bank reconciliations of all or any of the companies concerned as at 30 June 1987 prior to settlement.

(vi) Failed to acknowledge that the figures for "Cash at Bank and On Hand" shown in each of the preliminary balance sheets showed the cash book balance and not the bank account balance.

(vii) Did not require the accounts of the companies concerned to be audited and found to be satisfactory prior to completion.

(viii) Generally failed to make such enquiries and investigations as a prudent and careful purchaser in the circumstances ought to have made.

(ix) Having found after completion that the unpresented cheques had not been presented failed to present them and if necessary, to enforce the contractual warranties available under the acquisition deed.

Further, the respondents say that if (which is denied) the applicants have suffered loss and damage as alleged they have failed to take any or any adequate steps to mitigate such loss.

THE ISSUES

(a) The applicants' case of misleading and deceptive conduct

The following is the substance of the case presented on behalf of the applicants on the issue of misleading and deceptive conduct and for the most part has been extracted from the final written submissions of counsel for the applicants.
TAG contends that it entered into the acquisition deed to acquire a 60% shareholding interest in TKN, and undertook other obligations, on the faith of representations made by PMS in documents described as "preliminary balance sheets" for TIIB, C.J. and H, C and G, Locna and Vana. The preliminary balance sheets were prepared by PMS knowing that they were required by TAG to consider whether it should enter into the deed, and were directly forwarded by PMS to TAG.
PMS knew that, as TKN was to engage in business as an insurance broker, it was essential that the broking accounts operated by TKN and its subsidiaries complied with s.26 of the Brokers Act. In particular insurance premiums received were required to be paid into a broking account, and be dealt with only in accordance with the Act. Premiums in the broking accounts plus trade debtors must equal underwriting creditors plus commission entitlement.
At the time each of the preliminary balance sheets was prepared by PMS, PMS knew that the Toikan companies had engaged in systematic conduct in contravention of the Brokers Act with consequences of crucial significance to the conduct of their insurance broking businesses. First, on balance of account a sum of over $2 million was owed by TIBG to TIIB and its subsidiaries. That debt was unsecured, and PMS knew that TIBG did not have the financial capacity to repay the debt. Second, PMS were aware that the Toikan companies had a practice of not complying with the Act.
PMS, through McSweeney, at a meeting with Webber and other Toikan officers held on 28 July 1987 were party to a proposal whereby cheques would be drawn by the several Toikan companies in favour of others in the group in the sums of the various inter-corporate debts that the Toikan companies owed. The cheques were such that, if presented and paid, the inter-corporate debts would be extinguished.
PMS proceeded to prepare the preliminary balance sheets for the relevant companies on the basis not only that the cheques had been drawn, presented and paid, but had been paid at 30 June 1987. PMS did nothing to ensure that the cheques were paid, and had reason to know that they could not be paid because of insufficient funds in the account of TIBG.
The effect of the preliminary balance sheets was, generally speaking, that each of the Toikan companies was represented to have cash at bank in either or both of its broking and general accounts, when the money to the knowledge of PMS was not there. The deficiencies were very substantial. In a direct and unambiguous way the preliminary balance sheets represented both that the necessary cash was present, and inferentially that the requirements of the Brokers Act had been complied with, when in truth the relevant assets of the companies were not cash, but were unsecured debts owed by other Toikan companies, which ultimately depended for payment on payment by TIBG, which at all material times was relevantly insolvent.
PMS never told TAG the truth, though it had ample opportunity so to do. PMS became aware between the date of the acquisition deed and completion that the cheques had not been paid, and still omitted to inform TAG of the truth. Either from the outset, or from shortly before settlement, PMS were aware that the only way the cheques could be paid was for money to be made available out of the moneys paid by TAG on settlement. PMS controlled the settlement and made no attempt to ensure that any settlement moneys were used to remedy the deficiencies.
PMS allowed TAG to pay the price for the shares, to enter into a guarantee of TKN's indebtedness, and to make substantial further payments and incur substantial liabilities, while continuing to keep secret the true financial position of the Toikan companies.
(b) Misleading and deceptive conduct - the respondents' answer
PMS deny that the preliminary balance sheets were prepared by them knowing that they were required by TAG to consider whether TAG should enter into the acquisition deed. The purpose to which the accounts were to be put was not known to PMS. It is unreasonable to attribute to McSweeney the knowledge that TAG would rely upon the preliminary balance sheets without any further enquiry at all.
PMS deny that TAG relied upon any representations made in the preliminary balance sheets, and they deny that they engaged in any misleading conduct.
Calculations relied upon by PMS indicated that the net deficiency was approximately $871,000, (not $2,000,000 as asserted by TAG). It is not correct to claim that the source of the funds was to be TIBG and then say that TIBG was insolvent. PMS accepted the assurances of Webber to the effect that all inter-company balances would be repaid. In any event PMS did not know what the financial position of TIBG was and did not commence to work on the 1987 accounts for TIBG until sometime in 1988. Webber instructed that "his" share of the proceeds would be used to remedy the deficiency and PMS were entitled to assume this would be done. It was no part of the duties of PMS to draw cheques on the part of any company for any purpose. If Webber failed to draw cheques after settlement to discharge the deficiencies it was his responsibility and no part of the duties of PMS. It was Webber's failure in this respect that was the real cause of TAG's loss, since, if he had done what he said he would do, all cheques would have been presented and paid and there would have been no relevant deficiency.
There was no duty to disclose, nor was there misleading conduct, in circumstances where PMS were entitled to assume either that Webber would comply with his assurances or alternatively, would inform TAG that he had not presented and paid the cheques.
There was no obligation on PMS to inform TAG as to the non-presentation of the cheques. There was no contractual or fiduciary relationship between the parties or any relationship of proximity that might give rise to a duty of care to inform TAG. Since PMS could not be aware of the purposes to which the preliminary balance sheets would be put or that there would be any relevant reliance on them by TAG and that it was a reasonable assumption on the part of PMS that the applicants would make their own enquiries and investigations as any prudent purchaser would do in a transaction of this magnitude and complexity, there could be no reasonable expectation on the part of TAG that PMS would disclose the non-presentation of the cheques nor can it be asserted that PMS were under any obligation to ensure that the settlement moneys were used to remedy the deficiencies.
(c) The duty of care
TAG's submission is that in the circumstances of the case, PMS was under a common law duty to exercise reasonable care in providing financial information to TAG concerning the affairs of the Toikan companies. It is said that the Court should find that the financial information supplied by PMS to TAG was supplied in circumstances where, (a) at the time the information was prepared, it was prepared for the particular purpose of assisting in TAG's consideration of whether it would enter into the acquisition deed, (b) PMS knew that the information was required by TAG for that purpose, (c) PMS knew that in the circumstances TAG would rely upon PMS's expertise, as TAG was not given direct access to other relevant information concerning the financial circumstances of the Toikan companies, and (d) PMS supplied the information directly to TAG.
PMS deny each of the propositions relied upon by TAG. In particular they deny that they were under a duty to exercise reasonable care in providing financial information to TAG. The circumstances in which the information was provided, including the disclaimers, and the failure of TAG to act as a reasonable and prudent purchaser in all the circumstances, prevented any such duty from arising.
Specifically PMS deny that the financial information was provided to TAG for a particular purpose, namely to assist in TAG's consideration of whether it would enter into the acquisition deed.
(d) The disclaimers
For TAG it is submitted that the authorities establish that disclaimers and exclusion clauses may only protect a respondent sued for engaging in misleading and deceptive conduct in three broad situations. First is the case where the respondent is a mere intermediary. (Yorke v Lucas 158 CLR 661; Gardam v George Wills and Co. Limited (1988) ATPR 40-884.) The disclaimer may be effective if the circumstances are such as to make it apparent that the respondent was not the source of the information, that it disclaims any belief in its truth or falsity, and is merely passing it on for what it is worth. In this circumstance the existence of the disclaimer would in part support the conclusion that the respondent had not engaged in misleading or deceptive conduct. Second, a disclaimer may in some circumstances neutralise what would otherwise be misleading and deceptive conduct. (M.K. Hutchence t/as "INXS" v Southsea Bubble Co. Pty. Limited (1986) ATPR 40-667; Abundant Earth Pty. Limited v R.C. Products Pty. Limited 59 ALR 211.) Finally, the existence of a disclaimer when considered in relation to all of the other evidence might demonstrate that in fact the applicant did not rely upon the information provided by the respondent. (Collins Marrickville Pty. Limited v Henjo Investments Pty. Limited 72 ALR 601.) TAG submits that in the present case the disclaimers do not protect PMS from the consequences of their misleading and deceptive conduct.
TAG also submits that the disclaimers do not have the effect in the present case of preventing a duty of care arising. This is so notwithstanding that the public policy reasons for holding that a disclaimer will not generally protect a respondent guilty of misleading and deceptive conduct may not be available.
PMS submit that the disclaimers are effective both in their terms and in establishing that any reliance on the preliminary balance sheets by TAG was unreasonable. The argument advanced on behalf of PMS is put thus:
The disclaimer is equivalent to a statement to the reader that the accounts cannot be relied upon. This makes it unreasonable to rely on the accounts, but also operates to produce the result that it cannot be said that the accounts are misleading. What is involved is a construction of the disclaimer in the relevant circumstances. In these circumstances, it should be construed as saying to the reader: You should not rely upon these accounts. The accounts together with the disclaimer as so construed do not give rise to any misleading conduct. The features of the accounts were that they were both qualified, being described as "preliminary" i.e. draft, not final, and unaudited, a fact which was reinforced on each page, and there were notes forming part of the accounts warning any reader to that effect.
9. THE FACTS
Any meaningful survey of the evidence requires some assessment to be made of the various witnesses whose testimony is relied upon to establish the relevant facts of the case. For the most part assertions of fact which remain undisputed can be relied upon as probative except where there is other objective evidence to contradict it. Where there is no objective evidence against which to test conflicts of testimony it is necessary to assess the credibility of the witnesses both in general terms and in relation to the specific issue in dispute.
In the present case I have had the opportunity to see and hear all of the witnesses and each has been cross-examined by competent counsel. In my opinion the witnesses for the applicant were credible and convincing. On the issues of fact central to the proceedings I accept the evidence of the applicants' witnesses, particularly that of Wu, in preference to that of Webber and McSweeney to the extent that the testimony of the latter is contrary to the former. On the important issue of whether PMS knew that TAG required the preliminary balance sheets for the purpose of deciding whether to enter into the argument and would rely upon the information supplied, the evidence of McSweeney in particular lacked any credibility.
I find the facts to be as follows:
In early 1987 TAG wished to acquire an interest in an appropriate business in Australia with a reasonable, stable cash flow, which could be used to assist in developing other investments in Australia. Directors of TAG were of the view that an insurance broking business might be a suitable investment.
Webber controlled the Toikan group of companies. Until 30 June 1986 the principal Toikan company was TIBG. In June 1986 the business of TIBG was sold to TIIB. The price was left outstanding as a debt due by TIIB to TIBG, and could only be calculated after the completion of TIIB's accounts for the year ended 30 June 1987.
At relevant times McSweeney was a non-executive director of TKN, TIIB, TFS and C.J. and H. In relation to the year ended 30 June 1987 PMS were auditors for C and G, CJ and H, Locna, Vana and TIIB. In or about December 1986 McSweeney became aware that TIBG's financial position as at 30 June 1986 was such that it did not have an asset position which would have allowed it to engage in substantial borrowing on its own account, unless it was guaranteed by some third party.
The initial negotiations between representatives of TAG and Webber led TAG to write to Webber the letter dated 12 May 1987 which was signed by Webber after he made certain amendments on 18 May 1987. The letter described the asset to be purchased by reference to certain insurance broking businesses and contemplated as the structure of the transaction the formation of a new company in which TAG was to take 60% of the shares and Webber family interests the balance.
Originally it was contemplated that settlement would take place on 30 June 1987, but this was changed to 1 July 1987. At all times the parties contemplated that the business would be taken over with effect from 1 July 1987.
The provisions of paragraph 5(c) of the letter of intent which provided that the new company would have the benefit of all interest earned on premiums held at the date of acquisition was a matter of considerable importance to TAG. It was contemplated that there would be substantial cash credits in the various broking accounts, thus affording the new company an immediate right to a significant income from interest derived from those balances.

PMS became aware that an agreement in principle had been entered into on 2 June 1987.
At some time in the period 12 May 1987 to 11 June 1987 the structure of the proposal was changed at the request of Webber to improve the capital gains tax position of the Webber interests. The essence of the change was that TKN, a company whose shares had been owned by Webber interests since before the introduction of capital gains tax, was substituted for the proposed new company.
McSweeney understood that at settlement premiums held in the broking accounts of the businesses were to be transferred to the joint venture company where they would earn income for that company even though it would ultimately have to pay the premiums to the underwriters.
Compliance by the Toikan companies with the requirements of s.26 of the Brokers Act it was of fundamental importance to TAG as a prospective purchaser of an interest in those businesses. McSweeney became aware of the introduction of the Act in about January 1986 and understood that, subject to a minor, immaterial exception, a broking account should never go into overdraft.
PMS became aware of TAG's concern about the operation of the Brokers Act and on 28 July 1987 McSweeney sent to Wu the memorandum setting out certain criteria which must "be met to ensure that a broker maintains liquidity to safeguard the insurance underwriter and client position in respect of premiums paid and held by the broker".
In the course of the negotiations between TAG and Webber, TAG requested access to the books of the Toikan companies but this was denied to it on the ground, as asserted by Webber, that only the broking businesses were being acquired. Webber gave PMS instructions that financial information was not to be given to TAG, but later, some weeks before 29 July 1987 instructed PMS that provisional balance sheets should be made available to TAG.
On 28 July 1987 McSweeney became aware that the broking accounts of the Toikan companies were in very substantial disarray. He then gave instructions to Webber to rectify the position and was aware that Beazley was instructed to draw the necessary cheques. The preliminary balance sheets were drawn on the basis that the unpresented cheques had been presented and paid as at 30 June 1987. The unpresented cheques were drawn at sometime on or after 29 July 1987. The preliminary balance sheets were prepared by PMS at Webber's request. They were prepared because Wu on behalf of TAG had requested that they be provided. They were sent by PMS directly to TAG at Webber's request and with his written authority. McSweeney was aware that TAG required the preliminary balance sheets. He had been asked for them by Wu on a number of occasions and his reply was that PMS were working on them and would make them available to TAG subject to Webber's agreement. The preliminary balance sheets that PMS delivered to TAG's solicitors on 29 July 1987 were prepared on an urgent basis for the purpose of enabling TAG to consider the proposed acquisition. The preliminary balance sheets faxed to TAG on 9 September 1987 were prepared for the same purpose. PMS knew that the information contained in the preliminary balance sheets was the only financial information concerning the Toikan companies which Webber was prepared to make available to TAG.
The unpresented cheques were drawn by Beazley on instructions from Webber or possibly from McSweeney, given in Webber's presence. The cheques were drawn over the period from 29 July 1987 until about 19 August 1987. During this time Beazley worked in liaison with PMS's employee Yip who was well aware that the cheques, when drawn were not presented for payment. Having drawn the cheques, which were required to be countersigned by a second signatory, Beazley made no attempt to have them countersigned nor to pay them into the relevant bank accounts. He put them away in a safe or a drawer. At the time, Beazley knew that there were insufficient funds within the various companies' accounts for all cheques to be paid if presented.
McSweeney was aware that approximately $2m had to be found by the Toikan group to enable all the cheques to be met and I reject the suggestion made by Webber that it was within Beazley's authority to raise such an amount from the bank on behalf of Webber or his companies. McSweeney was aware that the unpresented cheques could not be met unless and until suitable credit arrangements were made and that PMS had no basis upon which it could be reasonably thought that the cheques could be met otherwise than out of the proceeds of the settlement of the TAG transaction.
Ignoring for the present the disclaimers, the preliminary balance sheets were literally misleading and deceptive. By treating the unpresented cheques as having been presented and paid as at 30 June 1987 the individual balance sheets misrepresented the amount of the cash funds available in the various broking accounts of the Toikan companies, and taken collectively misrepresented the fact that there was not sufficient money within the group as a whole to support the cash balances shown in the balance sheets. Further, in the context of the dealings between the parties, the preliminary balance sheets misrepresented the true position with respect to the failure of the various companies to comply with s.26 of the Brokers Act.
The pro-forma balance sheets faxed by PMS to TAG on 15 and 29 September 1987 were consistent with the preliminary balance sheets and the notes thereto suggested that "the broking ...assets and liabilities" of the respective companies would cancel each other out.
TAG and PMS understood broking assets to refer to the credit balances in the broking accounts of the respective companies plus trade debtors as at 1 July 1987 and broking liabilities to refer to the companies' liabilities to underwriters as at the same date.
In the absence of a warning that the broking bank accounts at 30 June 1987 were substantially overdrawn and remained so, the pro-forma balance sheets were misleading and deceptive.
On 2 November 1987, the day on which settlement occurred, McSweeney was aware that the unpresented cheques had not been presented and from his knowledge of the affairs of the Toikan group he knew that they could not be met except out of the proceeds of the settlement. His failure to alert TAG to this situation was misleading and deceptive conduct. McSweeney had no reasonable basis upon which he could accept Webber's assurances that the cheques would be paid.
McSweeney knew that TAG would not have entered into the contract and later would not have settled if it had known that the funds represented as being in the broking accounts were not available to derive income for the joint company nor if it had known that there was any doubt as to the ability of TKN and the other broking subsidiaries to obtain a brokers' licence.
PMS continued the deception when they signed auditors' certificates on 30 November 1987 while knowing that the balance sheets were misleading and deceptive. Although this latter conduct was not known to or relied upon by TAG, it is evidence from which an inference can be drawn that throughout the whole transaction, at least since 28 July 1987 PMS were engaged in a concerted course of conduct to disguise the truth to ensure that the transaction did not founder.
Each disclaimer contains false statements which are misleading and deceptive. It is untrue that the preliminary balance sheets in each case were prepared "from the books and records of (the company) and other information provided by the officers of the company and at the request of and exclusively for the use and benefit of (the company) and its directors". First, (as I have found) the accounts were prepared for the use of TAG in connection with the proposed acquisition. It may well be that this was not the exclusive purpose but nevertheless it was the purpose for which the accounts were given to TAG. Second, by failing to note that the unpresented cheques had not been paid, it was untrue to say that the accounts had been prepared from the books and records of the company "and other information provided by the officers of the company". By omitting to disclose such a vital piece of information which had been so provided, the statement was itself clearly misleading and deceptive.
The assertion in the second paragraph of the disclaimers that "we express no opinion on whether (the accounts) represent a true and fair view of the state of affairs" is in the context of the case untrue, and thus misleading and deceptive. The purpose for which TAG required the preliminary balance sheets (as was known to PMS) was to obtain an idea of the state of the companies' affairs. The accounts were prepared for the purpose of disclosing, and were put forward as an expression of PMS's view of, the general state of the respective companies' affairs. The omission to disclose the truth concerning the state of the companies' broking accounts was not a mere omission, nor was it a mistake, but rather on any view of the facts, it was a deliberate step taken to mislead and deceive the persons for whose benefit and use the accounts were prepared.
Is not the case that PMS acted as a mere intermediary to pass on to TAG information emanating from Webber. The accounts were the work of PMS and presented as such. Indeed, the opening words of the disclaimer "We have prepared the accompanying accounts ..." indicate that they are the result of the application of PMS's professional skill to a set of books and other information. The fact that they were prepared by professional accountants gave them the appearance of authenticity. Second, the disclaimers do not neutralise the misleading and deceptive statements contained in the accounts. Instead, they tend to compound the deception by adding further misleading statements. Third, the existence of the disclaimers when considered in relation to all of the other evidence, in particular the magnitude of the deception and the fact that TAG required financial information concerning the companies but was denied access to the companies' records other than the information supplied in the preliminary balance sheets demonstrates that they were prepared with the intention that they be relied upon notwithstanding the disclaimers.
In the context of the transaction between TAG and Webber, the only meaning that can be attached to the words "cash at bank" used in the preliminary balance sheets is that the sums indicated stood to the credit of the respective companies' bank accounts at the balance date, and further that the words "National Australia Bank - Broking Account" in the notes to the preliminary balance sheets meant that at the balance date the respective companies maintained a separate broking account as required by s.26 of the Brokers Act and that the sums indicated stood to the credit of those accounts at that date.
TAG relied upon the preliminary balance sheets as a general indication of the extent of the cash balances held in the broking accounts upon which interest could be earned pending payment of premiums to the underwriters. TAG also relied upon the preliminary balance sheets as an indication that the various companies maintained broking accounts as required by the Brokers Act and that the insurance broking business of the companies had been conducted in accordance with the requirements of the Act.
If TAG had known the truth it would not have entered into the acquisition deed, nor would it have proceeded to settlement after having entered into the deed. It follows that it would not have paid the money paid out at settlement nor entered into the other obligations associated with the settlement.
The ultimate failure of the Toikan group was at least contributed to by the reduced amount of income received from interest on the broking accounts. TAG continued to provide financial support to the group after settlement, beyond the extent of its contractual obligations for the purpose of trying to maintain the value of the group's broking portfolio.
TAG suffered loss and damage by reason of the misleading and deceptive conduct of PMS. That loss and damage arose directly from it having been misled and deceived by PMS's conduct and it did not contribute to the amount of its loss and damage by any failure on its part to act prudently in the transaction. Nor did TAG fail to take any step reasonably open to it to mitigate its loss or damage.
10. CONCLUSIONS
Upon the facts as found, the applicants are entitled to recover from the respondents the full amount of the loss sustained by the applicants by reason of their reliance upon the misleading and deceptive conduct of the respondents. The assessment of damages has not been embarked upon in the proceedings so far.
It is unnecessary to deal at length with the applicants' claim for damages for breach of duty. Whether or not in the facts of the case the respondents owed the applicants a duty of care is a question of law. The issues are not necessarily identical to those which arise in the context of a claim for damages for having engaged in misleading and deceptive conduct, but in the present context I am of the view that the facts as found do establish the existence of a duty to the applicants on the part of the respondents to have exercised reasonable care in the preparation of the preliminary balance sheets, and further that they failed to exercise the required degree of care. The principles applicable to the assessment of damages for breach of duty cannot, in the facts of this case, be distinguished from those applicable in respect of the claim arising from the respondents' misleading and deceptive conduct.
On the question of liability I find that the applicants are entitled to recover damages against the respondents pursuant to s.82(1) of the Trade Practices Act 1974 (Cth) and/or s.68(1) of the Fair Trading Act 1987 (NSW).

[1992] FCA 81

28 FEBRUARY 1992