AFG Insurances Ltd v Andjelkovic

AFG Insurances Ltd v Andjelkovic (1980) 47 FLR 348 (ACT/Blackburn J); (1981) 54 FLR 398 (FCA/FC) Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399 Cambridge Credit Corporation Ltd (Receivers Appointed) v Lissenden (1987) 8 NSWLR 411 (Clarke J) Capita Financial Group Ltd v Triden Properties Ltd, unreported, 6 September 1993 (NSW/Cole J) FAI (NZ) General Insurance Co Ltd v Blundell & Brown Ltd [1994] 1 NZLR 11 Grimson v Aviation & General (Underwriting) Agents Pty Ltd (1995) 25 NSWLR 422 (CA) Manettas v Underwriters at Lloyds (1993) 7 ANZ Insurance Cases 61-180 (NSW/Cole J) National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (1996) 138 ALR 409 (FCA/Lindgren J) New South Wales Medical Defence Union Ltd v Crawford (1993) 31 NSWLR 469 (CA) Oswald v Bailey (1987) 11 NSWLR 715 (CA) Ratcliffe v Border Homes Ltd (1987) 9 NSWLR 390 (Hunt J) Schipp v Cameron (1995) 8 ANZ Insurance Cases 61-256 (NSW/Young J) FAI GENERAL INSURANCE CO LIMITED v BRIAN ALBERT McSWEENEY & ORS No NG 312 of 1992 TRAVEL COMPENSATION FUND v FAI GENERAL INSURANCE CO LIMITED No NG 948 of 1992 REASONS FOR JUDGMENT (PART I) Lindgren J Sydney 12 March 1997

TABLE OF CONTENTS REASONS FOR JUDGMENT (PART I) INTRODUCTION........................................1 Parties.............................................1 The TAG proceeding..................................2 The TCF proceeding..................................4 Appearances on the hearing of the two insurance proceedings.............................. 5 Development of a connection between the TAG facts and the TCF facts........................ 5

OUTLINE OF THE PRESENT TWO INSURANCE PROCEEDINGS........................................ 8 Outline of the TAG insurance proceeding............ 8 Outline of the TCF insurance proceeding............ 17 OUTLINE OF THE TAG FACTS AND THE TCF FACTS......... 30 The TAG facts and proceeding - Reasons for Judgment of Olney J delivered on 28 February 1992 based on the hearing on 22-25, 29-31 July 1991, 1-2, 5-6 August 1991, 21-22 October 1991....................................... 31 The TCF facts and proceeding - Reasons for Judgment of Wilcox J delivered on 2 December 1992 based on hearing on 10, 11, 15 September 1992............................................... 53 Some general observations on the TAG facts, proceeding and judgment and the TCF facts, proceeding and judgment............................ 72 OUTLINE OF THE FACTS RELATING TO INSURANCE, INCLUDING EVENTS BETWEEN THE DELIVERY OF REASONS FOR JUDGMENT OF OLNEY J IN THE TAG PROCEEDING ON 28 FEBRUARY 1992 AND THE COMMENCEMENT OF THE PRESENT HEARING ON 5 JUNE 1995..................... 74 SHOULF TCF BE GRANTED LEAVE UNDER SUB-S 6 (4) OF THE LRMP ACT?................................... 95 The Manettas issue - jurisdiction to grant leave... 95

• 2 - First construction................................. 116 Second construction................................ 117 Should leave be refused on discretionary grounds?.. 123

IN THE FEDERAL COURT OF AUSTRALIA) NEW SOUTH WALES DISTRICT REGISTRY) No NG 312 of 1992 GENERAL DIVISION ) BETWEEN: FAI GENERAL INSURANCE CO LIMITED Applicant AND: BRIAN ALBERT McSWEENEY First Respondent BRUCE WILLIAM PHILLIPS Second Respondent JOHN WILLIAM BEALE Third Respondent PAUL FREDERICK TURNER Fourth Respondent TIMOTHY PATRICK CULLEN Fifth Respondent MICHAEL JOHN GAERTNER Sixth Respondent TAG PACIFIC LIMITED Seventh Respondent TOIKAN HOLDINGS PTY LIMITED Eighth Respondent BETWEEN: TAG PACIFIC LIMITED AND TOIKAN HOLDINGS PTY LIMITED First Cross Claimants AND: FAI GENERAL INSURANCE CO LIMITED First Cross Respondent BETWEEN: BRIAN ALBERT McSWEENEY and BRUCE WILLIAM PHILLIPS Second Cross Claimants AND: FAI GENERAL INSURANCE CO LIMITED Second Cross Respondent

IN THE FEDERAL COURT OF AUSTRALIA) NEW SOUTH WALES DISTRICT REGISTRY) No NG 948 of 1992 GENERAL DIVISION ) BETWEEN: TRAVEL COMPENSATION FUND Applicant AND: FAI GENERAL INSURANCE CO LIMITED Respondent BETWEEN: FAI GENERAL INSURANCE CO LIMITED First Cross Claimant AND: BRIAN ALBERT McSWEENEY, PAUL FREDERICK TURNER, BRUCE WILLIAM PHILLIPS and TIMOTHY PATRICK CULLEN First Cross Respondents BETWEEN: BRIAN ALBERT McSWEENEY, PAUL FREDERICK TURNER, BRUCE WILLIAM PHILLIPS and TIMOTHY PATRICK CULLEN Second Cross Claimants AND: FAI GENERAL INSURANCE CO LIMITED Second Cross Respondent CORAM: Lindgren J PLACE: Sydney DATE: 12 March 1997 REASONS FOR JUDGMENT - PART I INTRODUCTION Parties The individuals referred to in the titles to these two proceedings at relevant times practised as accountants in various partnerships. During the period when the events occurred which gave rise to claims against them, namely 1987, 1988 and the first half of 1989, the only business in question was that carried on under the name "Phillips McSweeney" ("PMS" - an abbreviation which I will use to refer to the partners of the firm at any time and from time to time), and it may be that Brian Albert McSweeney ("McS") and Bruce William Phillips ("Phillips") were the only general partners in that firm. Apparently, John William Beale ("Beale") and Michael John Gaertner ("Gaertner") left the firm as from 30 June 1990 to become partners in the firm "Beale Gaertner Young". Apparently, all six individuals were partners with each other in PMS only for the short period of some 14 months from 5 May 1989 when Timothy Patrick Cullen ("Cullen") and Gaertner were admitted as partners, down to the departure of Beale and Gaertner in July 1990. As from 1 September 1990, the original firm of PMS "split" into "Phillips McSweeney, Chatswood" ("PMS Chatswood") and "Phillips McSweeney, Gosford" ("PMS Gosford"). At least, PMS was dissolved, and McS and Paul Frederick Turner ("Turner") commenced to practise in partnership as PMS Chatswood, while Phillips and Cullen commenced to practise in partnership as PMS Gosford. FAI General Insurance Co Limited ("FAI") was, at relevant times, the professional indemnity insurer of PMS, PMS Chatswood and PMS Gosford. Importantly, the policies are "claims made and notified" policies. The TAG proceeding On 28 February 1992 in proceeding NG 38 of 1990 in this Court ("the TAG proceeding"), Olney J found that TAG Pacific Limited ("TAG") and Toikan Holdings Pty Limited (for reasons which will appear later, "TAGNT") were entitled to recover damages from McS and Phillips. On 20 August 1992, his Honour quantified damages at $4,026,915.80 and ordered that McS and Phillips pay costs ("the TAG judgment"). The Reasons for Judgment of Olney J dated 28 February 1992 had included the following: " ... 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." (Reasons for Judgment, p 46)

"[T]he transaction" referred to in this passage was a transaction which centred on a deed dated 1 October 1987. I will refer to it and the antecedent negotiations and subsequent events, all of which may, for the present, be conveniently conceived of as extending from early 1987, throughout 1988 and into the early part of 1989, as "the TAG facts". On 11 June 1992, that is to say some 3˝ months after the delivery of the Reasons for Judgment and some 2˝ months before the quantification of the damages, FAI purported to avoid the relevant contract of insurance. The ultimate question for resolution in the present proceeding NG 312 of 1992 ("the TAG insurance proceeding") is whether FAI is liable to indemnify McS and Phillips in respect of the TAG judgment. By a cross-claim, McS and Phillips seek to establish that it is. The TCF proceeding On 2 December 1992, in proceeding NG 777 of 1991 in this Court ("the TCF proceeding"), Wilcox J gave judgment in favour of Travel Compensation Fund ("TCF") against, inter alia, McS and Phillips, for $626,586 plus costs ("the TCF judgment"). In the present proceeding NG 948 of 1992 ("the TCF insurance proceeding"), TCF seeks, in substance, to recover the amount to which it is entitled under that judgment against FAI in reliance on s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) ("the LRMP Act"). In that proceeding, cross claims by FAI against McS, Turner, Phillips and Cullen and by them against FAI raise, as between the parties to the relevant contracts of insurance, the issue of FAI's liability to indemnify McS and Phillips in respect of the TCF judgment. Although the facts with which the TCF proceeding was concerned, like those with which the TAG proceeding was concerned, included a "transaction", the transaction was not essential to the liability of PMS to TCF recognised in the TCF judgment. While the successful applicants in the TAG proceeding may be loosely conceived of as "purchasers", TCF, the successful applicant in the TCF proceeding, was not a purchaser at all. I will use the expression "the TCF facts" to refer to the facts, which occurred in 1987, 1988 and early 1989, which gave rise to the liability of McS and Phillips to TCF recognised in the TCF judgment.

Appearances on the hearing of the two insurance proceedings On 8 February 1993, Wilcox J ordered that the two insurance proceedings be heard together. On the first day of the hearing, 5 June 1995, I ordered that the evidence in the one be evidence in the other, subject to all just exceptions. At the beginning of the hearing, Mr Vaughan, solicitor, announced his appearance for Beale in the TAG insurance proceeding, and Mr Manion of counsel announced his appearance for Mr Gaertner in that proceeding, in each case to submit to such order as the Court might make, save as to costs. Beale and Gaertner played no further part in the hearing. Mr P M Biscoe QC with Mr S Climpson of counsel appeared for the remaining party-partners of PMS, PMS Chatswood and PMS Gosford, that is to say, McS, Phillips, Turner and Cullen; Mr P Roberts with Mr M K Minehan of counsel appeared for TCF; and Mr J C Campbell QC with Mr P Liney of counsel appeared for FAI. By the time of the hearing an accommodation had been reached as between FAI and TAG and TAGNT. Accordingly, FAI had discontinued as against TAG and TAGNT, which had discontinued a cross claim which they had brought against FAI. Accordingly, TAG and TAGNT played no part on the hearing and their cross claim need not be considered further. Development of a connection between the TAG facts and the TCF facts The TAG facts and the TCF facts were unrelated. Accordingly, the Reasons for Judgment of Olney J in the TAG proceeding do not refer to the TCF facts, and the Reasons for Judgment of Wilcox J in the TCF proceeding do not refer to the TAG facts. But a connection has developed through the grounds relied on by FAI to support its refusal to indemnify. In order to understand how this comes about, it is necessary to appreciate that, as mentioned earlier, the policies in question are "claims made and notified" policies: they provide for indemnity against liability in respect of a claim made against an insured and notified by the insured to the insurer during a particular policy year. The claim by TAG and TAGNT against McS and Phillips was made on 29 January 1990 when they instituted the TAG proceeding. That was prior to the "split-up" of the original partnership. The claim was promptly notified to FAI. As will be seen, FAI undertook the defence of the TAG proceeding. The particular policy issued by FAI to PMS was numbered 2005185140 ("the PMS policy" and "the PMS insurance contract"). It used to be renewed each year with effect from 23 May. Accordingly, the insurance year in which the claim by TAG and TAGNT was made and notified was the year 23 May 1989 to 23 May 1990. The PMS policy for that year was issued on 20 June 1989 on the basis of a proposal form dated 22 May 1989 signed by McS. According to the proposal form, as at that time McS and Phillips had been partners for 13 years, Beale for four, Turner for two and Cullen and Gaertner only since 5 May 1989. Both the TAG facts and the TCF facts had occurred much earlier. FAI contends, inter alia, that when PMS applied in May 1989 for the renewal of the PMS policy for the 1989-1990 year, PMS fraudulently failed to comply with the duty of disclosure imposed on it by s 21 of the Insurance Contracts Act 1974 ("the IC Act") and fraudulently made misrepresentations, in each case in relation to aspects of both the TAG facts and the TCF facts. In this respect, matters touching the TCF facts as well as the TAG facts themselves, are relevant to the TAG insurance proceeding. In association with the "splitting" of the firm as from 1 September 1990, FAI cancelled the PMS policy as at 24 October 1990 and issued two new policies for the period 24 October 1990 to 23 May 1991: policy No 2030243080 in respect of PMS Chatswood ("the Chatswood policy and "the Chatswood insurance contract") and policy No 2030243160 in respect of PMS Gosford ("the Gosford policy" and "the Gosford insurance contract"). The Chatswood policy and the Gosford policy were renewed for the period 23 May 1991 to 23 May 1992. It was during that policy year that the claim the subject of the TCF proceeding was first made by TCF (on or about 11 December 1991) and was reported to FAI. Accordingly, in respect of the TCF judgment, McS's claim for indemnity arises under the 1991-1992 Chatswood policy and Phillips' claim for indemnity arises under the 1991-1992 Gosford policy. I turn now to the proposals pursuant to which the Chatswood policy and the Gosford policy were issued and renewed. On 28 September 1990, McS completed the proposal pursuant to which FAI issued the original Chatswood policy to Turner and himself. On 28 April 1991 McS completed the proposal for the renewal of the Chatswood policy for the year 23 May 1991 to 23 May 1992. Pursuant to that proposal, on 5 June 1991 FAI renewed the Chatswood policy for that year. On 1 September 1990, Cullen completed the proposal pursuant to which FAI issued the original Gosford policy to Phillips and himself. On 22 April 1991 Cullen completed the proposal for the renewal of the Gosford policy for the year 23 May 1991 to 23 May 1992. "Endorsements" were issued by FAI extending the term of the Gosford policy initially until 1 August 1991 and then until 23 May 1992. As from 1 August 1991, the extent of cover was limited to $100,000. As will be noted in more detail later, in the TCF insurance proceeding FAI complains of, inter alia, fraudulent non-disclosure and fraudulent misrepresentations in connection with the renewals of the Chatswood policy and the Gosford policy for the critical year 1991-1992, in respect of matters touching the TAG facts as well as matters touching the TCF facts. OUTLINE OF THE PRESENT TWO INSURANCE PROCEEDINGS Outline of the TAG insurance proceeding FAI's pleading in the TAG insurance proceeding is found in its third further amended statement of claim filed in Court on 14 June 1995. The first "cause of action" pleaded is that PMS failed to comply with the duty of disclosure imposed by sub-s 21 (1) of the IC Act. The matters not disclosed are said to be all those referred to in the schedule to the document ("the Schedule"). The Schedule is divided into Parts A and B. Part A comprises 26 paragraphs relating to the TAG facts and Part B comprises 22 paragraphs relating to the TCF facts. Because of the Schedule's importance and to save repetition, a copy of it is annexed to these Reasons for Judgment (annexure "A"). FAI's second complaint is pleaded as follows:

"12.On 22 May 1989 PMS completed a Proposal Form for submission to FAI, in which the following question: 'Are any of the Partners, AFTER ENQUIRY, aware of: (ii)Any claim or circumstance which may give rise to a claim against the Firm(s) or any prior Firm(s) or any of their present or former Partners/Directors/Consultants which matter is not referred to in question 13 (a) above?' was answered 'No'. 13. At the end of the Proposal Form, PMS stated that 'I/we hereby declare that the above statements are true, that I/we have not suppressed or mis-stated any facts, ...'"

FAI pleads that the answer and declaration set out above constituted a misrepresentation because PMS were aware, as at 22 May 1989, of circumstances which might give rise to a claim. The matters of which PMS are alleged to have been aware are, again, the matters referred to in the Schedule, being circumstances relating to both the TAG facts and the TCF facts. FAI pleads that it would not have entered into the PMS policy for the same premium and on the same terms and conditions if PMS had not failed to comply with their duty of disclosure or had not made the misrepresentations. Thirdly, FAI pleads that PMS's failure to comply with its duty of disclosure and its misrepresentations were: "fraudulent, in that: (a) they were deliberate, with the intention of concealing the truth from FAI, against FAI's interests; or (b) they were reckless, with indifference to whether the truth was concealed from FAI against its interests, or not."

FAI then pleads that it was entitled to avoid the PMS policy pursuant to sub-s 28 (2) of the IC Act, and did so on 11 June 1992. Sub-section 28 (2) provides that if a failure to comply with the statutory duty of disclosure or a relevant misrepresentation is fraudulent, the insurer may avoid the contract. FAI's fourth "cause of action" is that PMS breached the requirement that it act towards FAI, in respect of any matter arising under or in relation to the contract for the PMS policy, with the utmost good faith, implied by s 13 of the IC Act. Section 13 implies in a contract of insurance a provision requiring each party to it to act towards the other, in respect of any matter arising under or in relation to it, with the utmost good faith. Again, FAI relies on PMS's failure to disclose the matters in the Schedule. According to the pleading, by reason of the failure, McS and Phillips are liable to FAI in damages tantamount to full indemnity against the costs incurred by FAI in defending, in their names, the TAG proceeding. The next two grounds on which FAI relies require attention to be directed to the later time, in January 1990, when FAI undertook the defence of the TAG proceeding on behalf of McS and Phillips. At that time an agreement was entered into between PMS and FAI relating to the terms on which FAI granted them indemnity ("the Indemnity Agreement"). FAI pleads that it was a term of the Indemnity Agreement, and that PMS warranted, that there had been no dishonest, fraudulent, criminal or malicious act or omission on the part of the partners or employees of PMS ("the Warranty"), and that the Warranty had been breached by reason of the matters referred to in Part A (not Part B) of the Schedule. (It will be recalled that Part A relates to the TAG facts.) FAI pleads that in consequence of the breach, it suffered loss and damage in that it incurred the cost of the defence of the TAG proceeding. FAI next pleads that in order to induce it to undertake at its cost the defence of the TAG proceeding, PMS represented to FAI that there had been no dishonest, fraudulent, criminal or malicious act or omission on the part of their partners or employees. The representation is said to have been made orally on or about 22 January 1990 by McS to FAI through FAI's agent, John Rainbow of Tress Cocks and Maddox ("TCM"), the solicitors retained by FAI in connection with the TAG proceeding. The representation is said further to have arisen expressly or by implication, as a result of the making of the Indemnity Agreement upon its proper construction, without disclosure of the dishonesty or fraud said to be evidenced by the matters in Part A of the Schedule. (I will refer to the representation as "the TCM representation".) FAI pleads that it undertook the defence of the TAG proceeding and incurred the cost of doing so in reliance on the TCM representation, that the TCM representation was false to the knowledge of McS by reason of the matters in Part A of the Schedule, and that as a result of the TCM representation FAI suffered loss and damage, namely the cost of the defence of the TAG proceeding. Finally, FAI claims that it paid the cost of defending the TAG proceeding on the mistaken assumption that there had been no fraudulent non-disclosure or misrepresentation. Particulars of the moneys paid are given as follows: "(a)TAG and Toikan defence costs - $439,145.67; (b)Settlement of claim made by Industrial Performance Group Ltd (proceedings No. G 546 of 1989) - $245,000 (after payment of excess) and defence costs of $55,538.68."

FAI claims that in consequence of its having avoided the PMS policy for fraudulent non-disclosure or misrepresentation, it is entitled to recover those moneys. In the TAG insurance proceeding, FAI claims a declaration that it validly avoided the PMS policy and that that policy is void ab initio; and an order that McS and Phillips repay moneys paid out under that policy by way of restitution, alternatively as damages, and interest on the moneys ordered to be paid by way of restitution or on the damages, as the case may be. The defence to the third further amended statement of claim was filed in Court on 22 June 1995. In their defence to the allegation of breach by PMS of their duty of utmost good faith and the claims based on the circumstances surrounding FAI's undertaking of the defence of the TAG proceeding, PMS plead that s 33 of the IC Act makes the remedies for non-disclosure and misrepresentation provided by Division 3 of Part IV of that Act exclusive of any right that FAI might have otherwise under the general law in respect of a non-disclosure or misrepresentation. Section 33 provides that the provisions of Division 3 (ss 28-33) of Part IV (ss 21-33) of the Act are exclusive of any right that an insurer has, otherwise than under the IC Act, in respect of a failure by an insured to disclose a matter to the insurer before the contract of insurance was entered into and in respect of any misrepresentation or incorrect statement. Next, PMS plead the Indemnity Agreement and that contrary to FAI's allegations, neither the partners nor employees of PMS were guilty of any disqualifying acts or omissions within the meaning of the Warranty, so that FAI is bound to indemnify PMS against their liability arising out of the TAG proceeding up to the full limit of $6,000,000 specified in the PMS policy. If, contrary to PMS's denial, PMS did, by their partners or employees, commit any dishonest, fraudulent, criminal or malicious act or omission within the meaning of the Warranty, PMS say that FAI waived its entitlement to rely on the fact that they did so, and became irrevocably bound by the Indemnity Agreement. The waiver is said to arise from FAI's having engaged in the conduct set out in Schedule 1 (respectively "the Waiver Conduct" and "the Waiver Conduct Schedule") to the defence, with knowledge of the matters referred to in the documents set out in Schedule 2 (respectively "the Waiver Knowledge" and "the Waiver Knowledge Schedule") to the defence. The Waiver Conduct extends from a letter from TCM to PMS dated 24 January 1990 confirming that FAI would indemnify PMS subject to certain conditions, down to a deed of settlement dated 15 July 1994 between FAI and TAG and TAGNT, settling the claim by TAG and TAGNT against PMS. The Waiver Knowledge comprises events and documents extending from 22 January 1990 to October 1990. It will be necessary to discuss the import of the "waiver" issue in more detail later. For convenience, copies of the two Schedules are annexed to these Reasons for Judgment (annexure "B"). The next special defence raised by PMS is that if FAI did not affirm the PMS policy or waive its right to avoid it or to reduce its liability under it, FAI has nonetheless breached its obligation of the utmost good faith implied in the PMS policy by s 13 of the IC Act. PMS give the following particulars of the breach: "(a)FAI, exercising its entitlement under condition 1 of the policy, took over and conducted in the name of the first and second respondents, the defence of the Tag claim and instructed TCM in the conduct of the defence and settlement negotiations with Tag during the period from about January 1990 to about 12 June 1992. (b)FAI failed to warn PMS or the first and second respondents that if the trial judge made any statement in his reasons for judgment to the effect that any of PMS had acted fraudulently or dishonestly FAI would or might avoid its policies with PMS or reduce its liability under same, even though fraud and dishonesty were not issues in the proceedings and even through, [sic - though] absent such statements, TCM and FAI did not consider that there had been any such fraud or dishonesty. (c)FAI failed to warn PMS or the first and second respondents that, by reason of the matters referred to in (b) above, they should be separately represented during the Tag proceedings and should obtain independent legal advice in relation to those proceedings and independent advice as to whether PMS should obtain insurance with another insurer. (d)FAI has purported to avoid such policies or alternatively reduce its liability to nil on the basis of statements made by the trial judge of the kind referred to in (b) above."

PMS say that by reason of FAI's breach of its duty of utmost good faith, it is taking advantage of its own wrong in seeking to avoid the PMS policy or to reduce its liability under it, and that it is not entitled to do so. In the alternative, PMS plead that FAI continually represented to PMS that FAI would indemnify them, and that there was nothing in the material relating to the TAG facts known to TCM or FAI on which FAI relied or would rely to avoid or reduce its liability under the PMS policy. PMS plead that in reliance on those representations, they acted to their detriment by not obtaining separate legal representation for McS and Phillips in the TAG proceeding, or obtaining independent legal advice or insurance with another insurer or independent advice as to whether they should do so, and, indeed, that PMS entered into or renewed professional indemnity insurance policies with FAI on or about 28 May 1990, 24 October 1990 and 23 May 1991. As a result, so the defence goes, it would be unconscionable for FAI to refuse to indemnify PMS against liability arising out of the TAG proceeding and it is estopped from doing so. There were once two cross claims in the TAG insurance proceeding. The first, brought by TAG and TAGNT against FAI, was discontinued, as noted earlier. The second is a cross claim by McS and Phillips (who are referred to in it as "PMS") against FAI. The further amended cross claim of PMS, filed on 8 November 1993, seeks to establish that FAI is liable under the PMS policy to indemnify PMS against the TAG judgment. It also seeks to establish that PMS are entitled to be indemnified by FAI under the Chatswood Policy and the Gosford Policy in respect of the TCF judgment (see below). The further amended cross claim seeks a declaration that FAI has not validly avoided the PMS policy; a declaration that FAI is liable to indemnify PMS under that policy in respect of the TAG judgment; and a declaration that FAI is liable to indemnify PMS under the PMS policy in respect of all costs, on a solicitor/client basis, incurred by PMS as a result of FAI's denial of indemnity to them. In the alternative, PMS seek a declaration that FAI is liable to indemnify Phillips in respect of the TAG judgment and costs, up to a limit of $500,000 and to pay interest. As well, PMS seek declaratory relief in respect of the TCF judgment and the alleged liability of FAI to compensate PMS for FAI's repudiation of the PMS policy. Outline of the TCF insurance proceeding TCF seeks leave pursuant to sub-s 6 (4) of the LRMP Act to commence the proceeding against FAI, and, subject to the granting of that leave, an order pursuant to s 6 of the LRMP Act that FAI pay it the amount of the TCF judgment plus interest and costs. In its amended points of claim filed 9 June 1993, TCF pleads that its claim, the subject of the TCF proceeding was first made by TCF against McS and Phillips on or about 11 December 1991 when the application and statement of claim in that proceeding were served on them. TCF pleads that on or about 18 December 1991, McS and Phillips, through an agent, reported the claim to FAI. FAI admits that on or about that date the claim was reported to it under the Chatswood policy by an agent of McS. TCF pleads that on or about 18 May 1992, a further report of the claim was given to FAI. FAI admits that on or about 18 May 1992 the claim was first reported to it under the Gosford policy by an agent of Phillips. Nothing seems to turn on the times of the reportings, both having occurred within the 1991-1992 insurance year. FAI raises a special defence in para 7 of its further amended defence filed 23 June 1995 to TCF's amended points of claim. This is that s 6 of the LRMP Act does not give rise to a charge because, at the time of the happening of the events giving rise to TCF's claim for damages against McS and Phillips, they had not yet entered into the Chatswood policy or the Gosford policy; that at that time neither policy indemnified them against the liability to pay damages to TCF; and that there were then no insurance moneys that were or might become payable under the Chatswood policy or the Gosford policy in respect of the liability of McS and Phillips. It is convenient to refer to this defence as "the Manettas defence" or "the Manettas point" and to the issue whether s 6 operates where the relevant claims made and notified insurance contract did not come into existence until after the event giving rise to the claim against the insured occurred, as "the Manettas issue" (see Manettas v Underwriters at Lloyds (1993) 7 ANZ Insurance Cases 61-180). FAI pleads that TCF commenced the TCF insurance proceeding without the leave of the Court and that by reason of sub-s 6 (4) of the LRMP Act, any charge which may otherwise have arisen under sub-s 6 (1) of that Act, is not enforceable in that proceeding. TCF asked that I determine at the beginning of the hearing and in advance of the determination of any other issue, its application for leave. Wilcox J had rejected an application that the application for leave be determined in advance of the trial. FAI asked that I revoke his Honour's order that the two proceedings be heard together, and that I defer the hearing of the TCF insurance proceeding until after the result of the issues as between insurer and insureds was known. It submitted that if the result were that McS and Phillips were held not entitled to indemnity, TCF could not succeed, and that if they were held entitled to indemnity, whether leave should be granted to TCF would be appropriately decided in the light of that result. FAI pointed out that if the Manettas point was good, TCF could not succeed. FAI submitted that in substance the present issue was whether McS and Phillips were entitled to indemnity under the Chatswood and Gosford policies, that this issue should be litigated as between insurer and insureds, and that McS and Phillips had demonstrated that they were ready, willing and able to litigate that issue. Further, FAI submitted that it should not, in any event, have to bear the cost of the participation of TCF in the hearing in view of the fact that TCF's rights were totally parasitic in relation to the rights of McS and Phillips. I decided not to accede to the application of TCF or of FAI, and to adhere to the direction of Wilcox J. It was, as a matter of case management, in the context of the period assigned for the hearing, impracticable to hear and decide the application for leave first. Moreover, evidence to be given on the substantive hearing on the issue of FAI's liability to indemnify would be potentially relevant to the application for leave, and so it might transpire that TCF would have an interest in participating in the hearing and determination of that issue. The hearing of the TCF insurance proceeding has therefore been a hearing of TCF's application for leave in the first instance. I noted that my refusal to accede to FAI's request was without prejudice to its position and submissions as to costs. TCF was on notice of FAI's position but elected to continue to participate in the hearing and made submissions. I return to consider the remaining paragraphs of FAI's further amended defence. FAI pleads, in the alternative, that the Chatswood policy provided for an indemnity limit of $5,000,000 and an excess of $5,000, and that the Gosford policy provided for an indemnity limit of $100,000 and an excess of $5,000. The first special defence relating to the Chatswood policy arises out of a "dishonesty" extension. FAI pleads that the Chatswood policy provided that it was extended to indemnify in respect of claims for damages for breach of professional duty arising out of, or contributed to by, the dishonest or fraudulent, criminal or malicious conduct of employees, fellow partners or co-directors of the Insured, but not to any person committing or condoning such conduct, and that in any event the extension was subject to a limit of $500,000. FAI pleads that by reason of the matters referred to in Part B of the Schedule to the defence, TCF's claim against McS was a claim for damages arising out of or contributed to by the dishonest or fraudulent conduct of McS himself, or of his partner at the time, Beale (or of both), and that McS committed or condoned such dishonest or fraudulent acts of Beale, and that accordingly the Chatswood policy does not indemnify McS. The Schedule referred to is almost identical to that referred to earlier as having been annexed to FAI's third further amended statement of claim in the TAG insurance proceeding, a copy of which is, as noted earlier, annexed to these Reasons for Judgment. I will therefore, by the use of the expression "the Schedule", refer to both the schedule to FAI's further amended defence in the TCF insurance proceeding and the schedule to FAI's third further amended statement of claim in the TAG insurance proceeding. The conduct of McS or Beale (or both) is particularised as the conduct referred to in para 17 of Part B of the Schedule viewed in the light of the matters in paras 8-16 of the Schedule. The next special defence is that McS had, pursuant to sub-s 21 (1) of the IC Act, a duty to disclose to FAI before the Chatswood policy was entered into, every matter which he knew to be relevant to FAI's decision whether to accept the risk and if so on what terms, and every matter which a reasonable person in the circumstances could be expected to know to be a matter so relevant. FAI pleads that as at 23 May 1991 (the date of commencement of the relevant year of the Chatswood policy) the matters referred to in the Schedule satisfied that description and were known to McS, yet McS failed to disclose them to FAI. FAI also pleads that McS made misrepresentations in the proposal form dated 28 April 1991 for the Chatswood policy. The form of question 13 (b) (ii), the negative answer to it and the declaration, all in the proposal form and all referred to earlier in relation to the PMS policy, are again pleaded in relation to the proposal for the Chatswood policy. It is pleaded that in answering question 13 (b) (ii) "No", McS made misrepresentations to FAI, in that contrary to his answer he was aware of all the matters in Part B of the Schedule (relating to the TCF facts), being circumstances which might give rise to claims against him. Further misrepresentations by McS to FAI are pleaded. These are that on or about 7 May 1990, McS had completed a proposal form which was subsequently submitted to FAI attaching documents containing disclosures or purported disclosures relating to the TAG claim. The representations as pleaded are that: "(1)Mr. McSweeney did not believe, and had no reasonable ground to believe, that Tag was relying on the financial statements in question. (2)Funds were available to clear the unpresented cheques in question and this was supported by evidence of bank deposits sufficient for that purpose. (3)Mr. McSweeney was unaware of anything which made it unreasonable to accept the accuracy of the financial statements in question, from 28 July to 29 September 1987. (4)The cheques in question had been drawn in June 1987 in relation to June 1987 transactions, pursuant to arrangements made before 30 June 1987, and were effective on or about 30 June 1987. (5)Tag representatives had been informed of the loan accounts and the outstanding cheques in question."

FAI says that it would not have entered into the Chatswood policy for the same premium or on the same terms and conditions if McS had not failed to comply with his statutory duty of disclosure and had not made the misrepresentations pleaded. It says, further, that the non-disclosure and misrepresentations were fraudulent in the respects mentioned earlier in the context of FAI's pleading in the TAG insurance proceeding in relation to the PMS policy. FAI pleads that as a result, it was entitled to avoid the Chatswood policy under sub-s 28 (2) of the IC Act, and did so on 11 June 1992. In the alternative, FAI pleads that its liability to McS is, pursuant to sub-s 28 (3) of the IC Act, reduced to nil, in that if the failure to comply with the statutory duty of disclosure had not occurred and if the misrepresentations had not been made, FAI would not have issued the Chatswood policy. Sub-section 28 (3) of the IC Act provides that where an insurer is not entitled to avoid the contract of insurance, or being entitled to avoid it has not done so, the insurer's liability, in cases of operative non-compliance with the statutory duty of disclosure or misrepresentation, is "reduced to the amount that would place him in a position in which he would have been if the failure had not occurred or the misrepresentation had not been made." The next special defence is an alleged breach by McS of the obligation of utmost good faith implied by s 13 of the IC Act. The matters to which I have already referred are pleaded as constituting the breach of the obligation. The pleaded consequence is that McS is not entitled to be indemnified by FAI. The remaining paragraphs of the defence refer to the Gosford policy which, it will be recalled, related, relevantly, to Phillips, not McS. The first special defence relates to failure to comply with the statutory duty of disclosure implied by sub-s 21 (1) of the IC Act. It is pleaded that Cullen, Phillips' partner as at 23 May 1991, was under such a duty, and that as at that date certain matters were known to him which satisfied the statutory description of matters which had to be disclosed and that they were not disclosed. The matters are particularised as follows: "(a)There might be a claim against Phillips by reason of the conduct of Phillips McSweeney in 1987 and 1988 in relation to Travel Abroad and the Travel Compensation Fund. (b)The matters in part B of the Schedule hereto."

Next, question 13 (b) (ii) and its negative answer and the declaration in the proposal form, all in the form referred to earlier in other contexts, are again pleaded, this time in the context of the proposal form for the issue of the Gosford Policy. It is pleaded that in answering question 13 (b) (ii) "No", Cullen made misrepresentations to FAI, in that he was aware of the matters referred to in paras (a) and (b) quoted above. FAI pleads that it would not have entered into the Gosford policy at the same premium and on the same terms and conditions if Cullen had not failed to comply with his duty of disclosure and had not made the misrepresentations. The failure to comply and the misrepresentations are pleaded to be fraudulent in the respects previously mentioned and it is pleaded that FAI was thereby entitled to avoid the Gosford policy under sub-s 28 (2) of the IC Act and did so by a letter dated 24 August 1993. In the alternative, it is pleaded that FAI's liability to Phillips is, pursuant to sub-s 28 (2) of the IC Act, reduced to nil, in that if Cullen's failure to comply with the duty of disclosure had not occurred, and the misrepresentations had not been made by him, FAI would not have issued the Gosford policy. Next, the duty of utmost good faith implied by s 13 of the IC Act as a contractual term of the Gosford policy is pleaded. It is alleged that by reason of the matters mentioned above, Cullen breached that term, and that in consequence, his partner and co-insured Phillips is not entitled to indemnity. TCF filed an amended reply to FAI's further amended points of defence. TCF pleads that if any of the alleged non-disclosures or misrepresentations occurred, FAI affirmed the Chatswood and Gosford policies and waived its right to avoid them or to reduce its liability under them to nil. The reply gives particulars of FAI's knowledge and acts which, together, are said to constitute the affirmation and waiver. The particulars do not distinguish between knowledge and acts. The particulars are of a mélange of acts and documents extending over the period 21 August 1989 to 15 July 1994. Although they overlap to a considerable extent with the particulars contained in the Waiver Conduct Schedule and the Waiver Knowledge Schedule, it does not simply repeat them. A copy of TCF's, "Waiver Schedule" is annexed to these Reasons for Judgment (annexure "C"). There are two cross claims in the TCF insurance proceeding. The first cross claim was filed by FAI on 6 September 1993 against McS, Turner, Phillips and Cullen. It pleads that from 23 May 1991 to 23 May 1992, FAI insured McS and Turner trading as PMS Chatswood pursuant to the Chatswood policy and that during the same period it also insured Phillips and Cullen trading as "Bird Cameron (incorporating Phillips McSweeney Gosford)" pursuant to the Gosford policy. It pleads that TCF, having on 2 December 1992 obtained the TCF judgment against McS and Phillips, commenced the present proceeding against FAI claiming relief under s 6 of the LRMP Act. FAI repeats against McS and Turner, McS, Phillips and Cullen, and Phillips, respectively, relevant paragraphs of its amended defence. FAI claims the following substantive relief: "A. Against McSweeney and Turner, a declaration that it has validly avoided the Chatswood Policy. B. Alternatively, against McSweeney: (1) A declaration that its liability to him in respect of the Applicant's judgment against him should be reduced to nil. (2) A declaration that he is not entitled to indemnity in respect of the Applicant's judgment against him. (3) Alternatively, a declaration that the Cross-Claimant's liability to indemnify him in respect of his liability to the Applicant is limited to $500,000 by reason of the dishonesty extensions. C. Against Phillips and Cullen, a declaration that it has validly avoided the Gosford Policy. D. Alternatively, against Phillips: (1) A declaration that its liability to him in respect of the Applicant's judgment against him should be reduced to nil. (2) A declaration that he is not entitled to indemnity in respect of the Applicant's judgment against him."

There is a further amended defence filed on 27 June 1995 of McS, Turner, Phillips and Cullen to FAI's cross claim. It pleads that any remedies available to FAI are limited to the relief specified by reason of s 33 of the IC Act and by reason of the fact that Division 3 of Part IV of that Act operates as a code of remedies available for non-compliance by an insured with his duty of disclosure or misrepresentation or for an incorrect statement. Finally, the further amended defence pleads, in answer to the whole of FAI's cross claim, that FAI, before it purported to avoid the Chatswood policy and the Gosford policy, affirmed those policies and waived its rights to avoid them or to reduce its liability under them; in the alternative that FAI acted in breach of its obligation of the utmost good faith implied by s 13 of the IC Act; in the further alternative, that FAI represented to PMS that it would indemnify them and that there was nothing in the material relating to TAG known to TCM or FAI on which FAI relied or would rely to avoid or reduce its liability under the Chatswood policy or the Gosford policy; that on those representations PMS relied in the respects previously mentioned; and that, in consequence, it would be unconscionable for FAI now not to indemnify them. The second cross claim referred to earlier is brought by McS, Turner, Phillips and Cullen against FAI. It was filed in Court on 23 June 1995. It seeks declarations that FAI is liable to indemnify McS and Phillips in respect of the TCF judgment; that FAI is liable to indemnify McS, Turner, Phillips and Cullen in respect of all costs on a solicitor/client basis incurred by them in defence of that proceeding as from 12 June 1992; and a declaration that FAI is liable to compensate the four of them for any damages arising from FAI's wrongful repudiation of the Chatswood policy or the Gosford policy for the 1991-1992 year. The second cross claim also seeks damages. FAI filed a defence to this second cross claim. It admits purporting to avoid on 11 June 1992, the 1991-92 Chatswood policy, and on or about 24 August 1993, the 1991-92 Gosford policy. FAI says that its liability (if any) in respect of the total sum of damages plus costs plus interest payable to TCF is limited to the respective policy limits and after payment of excess. Finally, it pleads that its liability (if any) in respect of the costs of defending the TCF proceedings is limited to costs incurred with the written consent of FAI; and that, if a payment in excess of the policy limit or indemnity is made to dispose of the TCF claim, FAI's liability is limited to a proportion of the defence costs. OUTLINE OF THE TAG FACTS AND THE TCF FACTS On 17 December 1993, Wilcox J directed that each party should file and serve a document identifying any "finding of fact" in the Reasons for Judgment of Olney J in the TAG proceeding or in the Reasons for Judgment of himself (Wilcox J) in the TCF proceeding, which was to be contested in the present two insurance proceedings, and stating what finding is contended for on that subject in lieu of the finding in the judgment. Importantly, his Honour directed that except to the extent that findings were challenged in this way, the findings in the two earlier judgments were to be treated as facts found for the purpose of the present proceedings. The direction added that all parties in each case were to address both earlier judgments in this way and that any additional matter, not the subject of findings, was to be identified and the contention stated in the same way. This direction makes it possible for me to give an account of the TAG facts and proceeding and the TCF facts and proceeding by quoting at length from the earlier Reasons for Judgment. I indicate below by highlighting, findings contested by PMS, and by underlining the one finding contested by TCF. No findings were contested by FAI. I will not indicate the alternative or additional findings which were notified pursuant to his Honour's direction, since I will sufficiently and more conveniently deal with such matters when I come to address the parties' submissions. There are passages in the Reasons for Judgment which are not expressed to be findings of fact. Wilcox J's direction does not apply to them. Therefore, I do not treat the parties' failure to identify such passages as being in contest, as giving rise to an admission of them for the purpose of the present proceedings, pursuant to his Honour's direction. However, this is inconsequential since the passages are uncontroversial. Except if and to the extent that my own reasons stated later may be inconsistent with them, I adopt them as my own as a convenient means of giving an account of the background to the present case. They include identification of many of the individuals and companies involved in the present two insurance proceedings. The TAG facts and proceeding - Reasons for Judgment of Olney J delivered on 28 February 1992 based on the hearing on 22-25, 29-31 July 1991, 1-2, 5-6 August 1991, 21-22 October 1991 "1. THE PARTIES The first applicant [Tag Pacific Ltd] is a company duly incorporated in the State of Tasmania. The second applicant [Toikan Holdings Pty Ltd] 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. ............................................................. 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. ............................................................. 3. DRAMATIS PERSONAE .............................................................. 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 & 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 & 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 practised 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 [sic - Broking] Pty. Ltd. (TIIB) (on 22 July 1988 TIIB changed its name to Salamander Investment Corporation Pty. Ltd.); (iii) Charlton James & Hedley [sic - Healy] (Vic.) Pty. Ltd. (CJ & H); (iv) Carroll & Georgeson (Qld) Pty. Ltd. (C & 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. 5. 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' [sic] licence to TKN. Preliminary balance sheets as at 30 June 1987 for C & G and CJ & 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, CJ & H, Locna, C & 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 Act1975 (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 & G, CJH, Locna and Vana (except in the case of C & 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 & H 75% (b) C & 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 CJ & H, C & 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 & 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 ................................. .............................................................. 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. 8. 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, CJ & H, C & 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 monies paid by TAG on settlement. PMS controlled the settlement and made no attempt to ensure that any settlement monies 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 .............................................................. (d) The disclaimers .............................................................. 9. THE FACTS .............................................................. 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 CJ & H. In relation to the year ended 30 June 1987 PMS were auditors for C & G, CJ & 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 [sic] 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 some time 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. [Olney J also held that PMS owed and breached a duty of care to TAG to exercise reasonable care in the preparation of the preliminary balance sheets and said that the principles applicable to the assessment of damages for that reach were no different from those applicable in respect of the claim of 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).'

The TCF facts and proceeding - Reasons for Judgment of Wilcox J delivered on 2 December 1992 based on hearing on 10, 11, 15 September 1992 In 1986 the New South Wales Parliament enacted legislation, the Travel Agents Act 1986, to increase the security available to travellers against the risk of default by travel agents. The New South Wales legislation apparently arose out of an agreement between Ministers in four States for the establishment of a compensation fund. .............................................................. Section 4 of the Act specifies activities which, for the purposes of the Act, constitute carrying on business as a travel agent. I need not detail those activities. They include the activities carried on at relevant times by Travel Abroad ... Section 6 of the Act makes it an offence for a person to carry on business as a travel agent otherwise than in accordance with the authority conferred on that person by a travel agent's licence. Subject to some specified exceptions, anybody may obtain a licence; but only if the Commissioner for Consumer Affairs is satisfied that the applicant is, or will be, a participant in the compensation scheme' (s.10). It is a condition of every licence that the licensee remain a participant in that scheme (s.11). The compensation scheme' referred to in s.10 is the scheme arising out of regulations prescribed under s.57. Those regulations took effect from 2 February 1987. They identify the compensation scheme referred to in s.57 of the Act as being that contained in a trust deed, dated 12 December 1986 and made between the four Ministers. The deed provides for the creation of a Trust known as the Travel Compensation Fund and for the appointment of trustees to manage that Fund. The trustees are empowered to require persons seeking admission to the Fund, and persons who are already contributors, to provide financial information. Section 40 of the Act contains provisions enabling the compensation scheme trustees to take legal action to recover moneys paid out of the Fund in satisfaction of claims. The provisions relevant to this case are subss. (3)(4) and (5) of s.40. They read: (3)Where a payment is made to a claimant under the compensation scheme by reason of an act or omission by a person carrying on business as a travel agent, the compensation scheme trustees are subrogated to the rights of the claimant in relation to the act or omission. (4) Where the rights conferred by subsection (3) on the compensation scheme trustees are exercisable against a body corporate, those rights are enforceable jointly against the body corporate and the persons who were its directors at the time of the act or omission and severally against the body corporate and each of those directors. (5) Where it is proved that an act or omission by a body corporate occurred without the knowledge or consent of a director of the body corporate, rights are not enforceable as provided by subsection (4) against the director in relation to the act or omission.'

Section 52 provides that the compensation fund trustees may sue, and be sued, in the name Travel Compensation Fund'. I shall refer to the fund as TCF'. The proceeding This proceeding is brought by the trustees in the name of the Travel Compensation Fund. There are two sets of respondents. The first respondents, Craig Joseph Dunn, Alistair Victor Nicholas Sharp‑Paul and Terrance James Smith, all became directors of Travel Abroad on 18 September 1988. They remained directors until 21 December 1988, when the company ceased to trade. During that period, substantial moneys were received by Travel Abroad from members of the public as pre‑payments for overseas travel. Much of that money was expended on behalf of clients; some was not. Many clients of Travel Abroad had to pay twice for their travel, or elements of it. They made reimbursement claims against TCF. After investigation, they were paid. Some of the money received by Travel Abroad from clients was held in a trust account. After the collapse of the company, the remaining moneys in this account were made available to TCF. Nonetheless, there remained a deficiency, the difference between the amount received by Travel Abroad after 18 September 1988 and the moneys properly expended or accounted for, of $404,133. In this proceeding TCF seeks to recover that sum from the first respondents, with interest. The applicant's claim against the first respondents is based upon the fact that they were directors at the time. ........................................................... The second set of respondents, Bruce Phillips and Brian Albert McSweeney, are accountants who conducted a partnership practice known as Phillips McSweeney'. The firm audited Travel Abroad's 1987 accounts. Those accounts were supplied to TCF in September 1987, in connection with Travel Abroad's application for continued participation in the compensation scheme. TCF claims that the audit was negligently performed and that a proper audit would have revealed that Travel Abroad sustained a substantial loss in the year ended 30 June 1987. TCF says that, if the true position had been disclosed, Travel Abroad would not have been allowed to participate in the scheme after 30 June 1987; so TCF would not have suffered the subject losses. The total loss sustained by TCF in relation to payments received by Travel Abroad in 1988, some before 18 September, is $423,369. TCF claims this sum, with interest, from the second respondents. TCF also complains of the conduct of Phillips McSweeney in connection with the 1988 accounts. In respect of this year there is no complaint of negligently audited accounts; the audit was not completed before Travel Abroad ceased trading. The complaint is that, knowing the company's parlous financial position, Phillips McSweeney made statements to TCF officers which caused them to believe that the delay in preparing the 1988 accounts was caused only by operational problems, especially in the company's computer system, rather than being a reflection of a condition of insolvency. TCF says that, as a result, Travel Abroad was permitted to trade after 30 September 1988, with a consequential increase in the amount of the final deficiency. Mr Phillips and Mr McSweeney appeared in person at the hearing. They each gave evidence. Mr McSweeney was apparently more intimately involved in the Travel Abroad audits than Mr Phillips. Mr McSweeney in effect conducted the case for both men. He called some witnesses. ........................................................... Background facts Before coming to the issues in the case, I should mention some background facts. It appears that Travel Abroad was one of two companies operated by two brothers, Gregory and Nigel Lemon. The other was Wheels Abroad Pty Limited. For reasons left unexplained by the evidence, others acted as directors of the companies. But it is clear that Messrs Lemon were the effective controllers of both companies until their sale, on 18 September 1988, to a company called Industrial Performance Group Limited (IPG'). Travel Abroad and Wheels Abroad occupied adjoining space in premises at Mona Vale, a suburb of Sydney. The main activity of Travel Abroad was the marketing of pre‑paid tours to Europe. The tour package included return airfares and accommodation and, sometimes, travel within Europe. Some tours were sold by Travel Abroad directly to travellers but most of them were wholesaled by Travel Abroad through other travel agents, a commission being allowed to the other agent. Wheels Aboard was engaged in the business of selling car hire in Europe. Clients paid Wheels Abroad, in Australia, for their car hire. Upon their arrival in Europe, cars were made available to the clients, without further payment, pursuant to arrangements made between Wheels Abroad and the European car hire company. It appears that Travel Abroad was incorporated in about 1983. Its operations were on a modest scale for some years. According to the financial statements prepared for the company by Phillips McSweeney, the total income of the company in the financial year ended 30 June 1986 was $143,399, all but $lll of which was earned from commissions and fees. In the 1987 financial year income increased sixfold to $857,952, of which $847,538 represented commissions and fees. According to Phillips McSweeney, total expenses for 1986 were $109,931, leaving a pre‑tax profit of $33,468. Again according to Phillips McSweeney, total expenses for 1987 were $656,764, yielding a pre‑tax profit of $201,188. By contrast, according to the accountants, the income of Wheels Abroad dropped from $1,544,574 in 1986 to $1,477,765 in 1987. Total expenses rose from $1,321,820 to $1,575,665. The 1986 profit of $222,754 became a loss of $97,900 in 1987. The predecessor of the Travel Agents Act 1986 was the Travel Agents Act 1973. Under that Act New South Wales travel agents were required to be licensed and registered with the Travel Agents Registration Board. Upon the commencement of the 1986 Act, on 2 February 1987, all registered travel agents were automatically admitted to the new Fund. Those persons included Travel Abroad. Wheels Abroad was never the holder of a travel agent's licence or a Fund participant. Early in 1987 the trustees decided to require participants in the Fund to provide specific financial information. The purpose was to evaluate the desirability of their continued participation. The relevant requirements were set out in a document entitled Review Criteria to Annual Financial Statements. The document not only specified the nature and form of the financial documents which the Fund expected to receive; it also specified criteria for evaluation of the information they contained. The document outlined a points system for determining compliance with those criteria. The criteria included minimum levels of share capital and reserves, working capital ratio (i.e. ratio of current assets to current liabilities), ratio of working capital to monthly overheads, net tangible asset to turnover ratio and equity ratio. Although loss making agencies were not to be automatically excluded from participation, the document envisaged special supervision of agencies who had incurred losses in the previous financial year which resulted in a diminution of 25% or more of the agency's net tangible assets. The trustees decided that all participants in the Fund should be required to submit audited financial statements complying with this document within three months of the end of their financial year. A financial questionnaire had to be completed and lodged at the same time. Phillips McSweeney prepared Travel Abroad's financial accounts for the year ended 30 June 1987. They gave a certificate, signed on behalf of the firm by Mr McSweeney, that they had audited the accounts, being a profit and loss statement for the year ended 30 June 1987, a balance sheet at that date and various notes and ancillary statements. The firm certified that the accounts ... are properly drawn up: (i) so as to give a true and fair view of the state of affairs of the company at 30th June, 1987 and of the profit of the company for the year ended on that date, and the other matters required by Section 269 of the Companies (NSW) Code to be dealt with in the accounts; (ii) in accordance with the provisions of that Code; and (iii) in accordance with applicable approved accounting standards.' The certificate was dated 11 September 1987. The accounts were apparently submitted to TCF before the end of September; that is, within the permitted three month period after the end of the financial year. They were examined by John Bryan Murphy, an accountant employed by the Fund on a contract basis to assist in the assessment of participants. Mr Murphy accepted the truth of the information in the financial statements. In particular, as he deposed in an affidavit filed in this proceeding, he assumed on the basis of that information: ... that all the operating expenses incurred by Travel Abroad had been fully reflected in its audited accounts and that there was no matter which had not been revealed in the accounts which may have adversely impacted on its financial position.' On the basis of that information, Mr Murphy concluded that Travel Abroad scored more than the minimum number of points required for continued participation in the Fund. Without reference to the person in charge of financial assessments, Antony Whittaker, Mr Murphy put Travel Abroad's application for continued participation before the trustees for approval. The trustees did approve, with the result that the company continued to participate in the Fund. Mr Murphy deposed that, if he had known that there was an arrangement whereby another company in effect provided a subsidy to Travel Abroad in respect of its operating expenses which enabled Travel Abroad to operate at a profit instead of at a loss', he would have referred the matter to Mr Whittaker and not put it before the trustees for approval. Mr Whittaker deposed that, at the time, he did not see Travel Abroad's financial statements. He has since done so. In his affidavit he made this comment on the 1987 financial statements: It is quite clear to me from my analysis of those documents that expenses incurred by Travel Abroad in the 1987 financial year were in fact paid by Wheels Abroad and Wheels Abroad was thus subsidising Travel Abroad. This fact is apparent from a comparison of the level of operating expenses revealed in the 1987 financial statements for both companies and the huge increase in percentage terms for the operating expenses of Travel Abroad disclosed in its unaudited 1988 financial statements. The extent of this subsidy is difficult to determine but if the percentage figures for 1988 are translated to 1987, the subsidy would be in the order of about $300,000.' Mr Whittaker said that, if Travel Abroad had not received a subsidy of this order, it would have had an excess of liabilities of assets and fallen within the category of loss making agencies'. He went on: Further, Travel Abroad would not have satisfied the minimum requirements for eligibility for participation in the Fund. Had I known or suspected this was the case I would have recommended to the Trustees that Travel Abroad be required to obtain a bank guarantee in an appropriate sum and that audited financial statements be provided to the Fund for the ensuing six months period, as a precondition for Travel Abroad being permitted to continue to participate in the Fund.' It appears that, in the 1987‑1988 financial year, Travel Abroad's business expanded even more. Evidence of this expansion was given by Juliana Rose, a travel consultant who worked for Travel Abroad from November 1987 until it closed in December 1988. When Ms Rose commenced employment, the total staff of Travel Abroad and Wheels Abroad was 20 to 22 persons. During 1988 the number of staff doubled, to about 45. Ms Rose said that, during the period of her employment, the volume of business transacted by Travel Abroad increased dramatically. She also said that, as early as 1987, she became aware that Travel Abroad was not paying for airline tickets until the last possible moment. Phillips McSweeney were retained by Travel Abroad and Wheels Abroad to prepare their 1988 financial statements. Their representatives commenced working in the companies' offices in June 1988. They had access to all the companies' records including their computer. According to Fiona Hofmeyer, who was employed by Travel Abroad as a data operator, the computer was used by that company for costing information, reservations, printing invoices and other purposes. She said in her affidavit that the same system was used by the accounts department. She assisted two Phillips McSweeney representatives, John Beale, a partner in the firm, and Tim Cullen, in accessing the computer data base. She said that, as far as she is aware, both the hardware and software functioned satisfactorily. Phillips McSweeney quickly realised that Travel Abroad was in serious financial difficulties. By 24 August 1988 the firm prepared a Preliminary Amalgamated Statement of Assets and Liabilities' covering both companies. This document purported to show the position as at 30 June 1988. A business consultant, Pamela Gilbert of International Business Analysis Pty Limited (IBA') was retained. She was shown the preliminary statement. On 26 August she wrote a letter to the directors of the two companies commenting on this document. In this letter Ms Gilbert said that the statement: ... clearly shows that the 'group' is operating with a significant deficiency. At this stage, this deficiency cannot be accurately quantified. However, it is believed to be in excess of $2 million. Given the deficiency, along with continued delays in paying creditors, it is our opinion that the company is insolvent.' Phillips McSweeney reached the same conclusion. On 31 August Mr Beale wrote to the directors of Travel Abroad. He said: Following our review on the 30th August, 1988, of the Draft Amalgamated Statement of Assets and Liabilities for Travel Abroad Pty Limited and Wheels Abroad Pty Ltd as at 30th June, 1988, it is our opinion that the company is insolvent due to the company's exposure to Wheels Abroad Pty Limited. We are endeavouring to finalise the financial statements for Travel Abroad Pty Ltd for the year ended 30th June, 1988 so that we can ascertain the true position of the company.' Mr Beale went on to advise the action which ought to be taken. The suggested steps included that (a)ll deposits taken from customers be placed in a separate Trust Account identifying the payments as customer deposits'. They also included the conclusion, as quickly as possible, of the current negotiations with potential purchasers of the business'. The evidence does not reveal much about the negotiations then on foot. There may also have been other prospective purchasers; but, at about this time, there were discussions between the Lemon brothers and Mr Dunn on behalf of IPG. Negotiations over the weekend of 17‑18 September culminated in an agreement on 18 September 1988. The parties to the agreement were the Lemon brothers, as vendors, the subject companies, Wheels Abroad and Travel Abroad, and IPG as purchaser. The agreement provided for the sale by the vendors to IPG of all the shares in both companies for $200,000. The sale was to be completed 90 days after the date of the agreement. Amongst the documents annexed to the agreement was the Preliminary Amalgamated Statement of Assets and Liabilities of the two companies, previously referred to. This document showed a net deficiency of $1,153,433. There was also a document referring to the two companies' major creditors. This revealed what was called a nett cash' deficiency' of $2.9‑3,000,000 +/‑ $2‑300,000 maximum'; in other words a cash deficiency lying within the range $2.6 million to $3.3 million. .......................................................... Immediately after the execution of the agreement, the incumbent directors of Travel Abroad resigned their offices. The three directors of IPG, Messrs Dunn, Sharp‑Paul and Smith, were appointed in their place. Mr Dunn immediately moved to control both companies. On Monday, 19 September, the day after the agreement was made, he went to Mona Vale with Julie Boyd, the Administration Manager of IPG. Mr Dunn asked Ms Boyd to familiarise herself with the companies' computer system and accounting procedures and find out the amount of money they owed their creditors. Ms Boyd remained at Mona Vale, as Administration Manager, until 21 December 1988, when the two companies ceased to trade. Early in her time at Mona Vale, Ms Boyd encountered difficulties in obtaining accurate financial information. Mr Nigel Lemon gave her a list of overseas car rental companies who were creditors of Wheels Abroad. Some figures were uncertain but the list suggested that the debts in this category amounted to $1.4 ‑ $1.5 million. It later turned out, according to Ms Boyd, that the true figure was over $2.2 million. These debts were incurred before 18 September 1988. They were for rentals of cars supplied by the creditor company to Wheels Abroad's customers, the customers having pre‑paid their car rental before travelling overseas. Ms Boyd said that IPG opened some new bank accounts. One of them was a Travel Abroad client account. It was opened on 10 October. The intention was that all moneys received in respect of new' bookings would be deposited in this account. Some moneys were deposited in this account and were used to pay for airline tickets and other expenses incurred on behalf of clients; such as accommodation, car hire etc. It is not clear whether or not all moneys received in respect of new' bookings went into this account. But, even if they did, the assurance apparently offered by the existence of this account was compromised by its restriction to new' bookings. At Mr Dunn's direction, Ms Boyd used the account only in respect of bookings initially made after 10 October. She agreed in cross‑examination that the effect of this instruction was that, if a client had made a booking in June and paid $200 deposit, that would be regarded as an old' booking. If, after 10 October, the client paid the balance of the travel cost, the payment would not go into the trust account; the booking was not new'. Given the volume of business then being transacted by Travel Abroad, there must have been hundreds of such cases. The result was that, after 10 October and notwithstanding the opening of the trust account, substantial clients' payments continued to go into the company's own funds. Ms Boyd was unable to say what proportion of the final deficiency was attributable to the failure to place payments in respect of old' bookings in the trust account. On 20 September, Mr McSweeney wrote a letter to the new directors. The letter inquired whether the advice previously tendered had been adopted. Mr McSweeney noted his observations about the company's position in this way: In the course of the performance of my duties as auditor of the company, it has become clear to me that: (i) There have been a large number of transactions between the company and Wheels Abroad Pty Limited. (ii) The directors of the company are presently unable to provide full and complete details of the respective transactions between Wheels Abroad Pty Limited and the company, and (iii) It is the opinion of IBA Business Consulting services that an amalgamated statement of assets and liabilities of Wheels Abroad Pty Limited and the company indicates that the amalgamated liabilities of Wheels Abroad Pty Limited and the company exceed the amalgamated assets of Wheels Abroad Pty Limited and the company. I am concerned that you should establish to my satisfaction that the company is not insolvent and able to pay its debts as they fall due. (iv) Mr Greg Lemon, managing director of the company, has confirmed that the company is not able to pay professional fees to Phillips McSweeney (nor any other firm) to enable accounts of the company to be prepared for subsequent audit by myself.' Mr McSweeney went on to require the directors, within 21 days, to provide him with evidence of a number of things. They included evidence that the company was keeping its accounting records in such a manner as would enable the preparation of true and fair accounts and the audit of those accounts, evidence that the company was able to pay its debts as they fell due and particulars regarding arrangements with creditors. There was no express repetition of the stipulation that moneys received by clients by way of pre‑payment of future travel expenses be kept in a separate fund. This may have been intended to be covered by Mr McSweeney's request for confirmation that the steps which had been earlier recommended had been effected. Mr McSweeney ended his letter by referring to TCF: Finally I again confirm my advice to you that the Company is obliged to file audited accounts for year ended 30th June, 1988 not later than 30th September, 1988 with the Travel Agent Compensation Fund. Failure to file such accounts will jeopardise the status of your Travel Agents licence. You have not submitted accounts to me for audit, and based upon the present position, you will not be able to submit accounts to me so that I may audit the same to enable you to meet your licence requirements. You should make an immediate application to the Travel Agents Compensation Fund for an extension of time to file accounts.' On 27 September Mr Beale wrote a further letter to the directors of Travel Abroad. He referred to a discussion with Mr Dunn on 23 September and indicated that he was waiting for confirmation of the changes of shareholdings and directorships. He then said: 2. We have been unable to commence the audit for the year ended 30th June, 1988 because we have not received completed financial accounts for the company. 3. We request immediate confirmation that the following requirements (as advised in our previous correspondence) have been put into place: a)A trust account has been set up and all client deposits are placed in this and that the account be only used to meet payments on behalf of those clients. b)we require confirmation that I.P.G. will guarantee payment of all debt incurred from the 20th September, 1988. c)In addition we require confirmation and supporting evidence that the company, can continue to trade on and pay its debts as they fall due. 5. Lastly we wish to remind you once again that the Travel Agents Compensation Fund requires audited accounts and financial ratios to be lodged by the 30th September, 1988. We do not consider this is possible and an immediate extension must be applied for.' Mr Beale's letter was addressed to the Mona Vale premises. According to evidence given by Mr Beale, on 28 September Mr Dunn telephoned him and requested that he seek an extension of time in which to lodge audited financial statements with TCF. According to Mr Beale, he telephoned James McDougall, the then Claims Manager of TCF, and obtained an extension of time. Mr McDougall said in evidence that he does not remember this conversation but does not dispute that it occurred. It was referred to in a letter of 29 September in which Mr Beale purports to confirm an understanding that an extension until 31 October 1988 had been granted. The confirmatory letter does not give any reason for the request for extension of time. In evidence, Mr Beale said that he told Mr McDougall on the telephone that the business had been sold and that the directors had not yet completed the financial statements. Mr McDougall did not respond to Mr Beale's letter. He apparently accepted it as accurately stating the terms of the telephone conversation. Mr Dunn retained IBA to assist with the preparation of the 1988 accounts. A meeting was held on 14 October to discuss the audit program. The only director of Travel Abroad in attendance was Mr Dunn. The other people present were representatives of IBA and Phillips McSweeney, including Mr Beale and Mr McSweeney. At about this time another firm of accountants, Bird Cameron, was retained by Phillips McSweeney to supervise the audit. Mr Beale gave evidence that he became aware at the meeting of 14 October that the company was having difficulty reconciling its computer records. He said that incorrect data had apparently been entered. Many bookings were missing or only partly entered. On 18 October Mr Dunn wrote on behalf of IPG to Mr McSweeney responding to his letter of 20 September. He referred to the position regarding the preparation of the accounts. In relation to liabilities, Mr Dunn stated that the board of IPG had resolved to meet any liabilities incurred by Travel Abroad from the date of acquisition, 18 September, and that IPG has already injected approximately $2 million into Travel and Wheels ... as working capital'. Reference was made to some of the other matters raised by Mr McSweeney, but nothing was said about keeping a separate account for client pre‑payments. On 20 October, at the request of Mr Dunn, Mr Beale wrote to TCF requesting a further extension of time for the lodgement of the 1988 financial statements. He gave two reasons. The first was computer failure'. In relation to that matter Mr Beale said: A new computer was installed in November, 1987 to handle all bookings, receipts payments etc, however major software development problems became apparent only after several months of use. The failures of the system have meant that the majority of transactions have had to be viewed, re imputed, amended or deleted before the accounts are in a suitable condition for Auditing. We initially expected this work to take four weeks however, the sheer volume and added complications have increased this to 10 weeks. The fact that the Company has grown from turnover of $8,000,000 in 1986/87 to in excess of $20,000,000 in 1987/1988 has accentuated the problems. The Directors advise that the Company's records and in particular the Computer generated records, are now being maintained in a form that will enable them to be Audited. During the past few weeks we have continued our Audit in areas not affected by the Computer problems and therefore, we anticipate the timely completion of the Audit once the Accounts for the year ended 30th June, 1988 have been completed.' There is no evidence to support the claim of computer failure. The only evidence on this matter, from Ms Hofmeyer, is to the contrary. The other reason given in the letter was change of ownership'. Mr Beale said: Several days of negotiations over the past three months have resulted in further delays to the Audit, however we believe the security and management skills of the new owners will assist our task as Auditors in the future.' The letter of 20 October succeeded in its purpose. On 28 October Max Krumbeck, the administrator of TCF, wrote a letter to Mr Beale concerning details of the new shareholdings. He added a handwritten postscript: The question of an extension has been referred to the Trustees'. On 26 October Mr McDougall faxed a message to Mr Beale stating that the trustees had approved an extension to 30 November 1988. He added that the trustees had declined other requests for extensions beyond that date. During the month of November, work on the preparation of the financial statements of Travel Abroad and Wheels Abroad proceeded; at what intensity it is difficult to say. The companies failed to honour arrangements for payments of fees to Phillips McSweeney. Although some payments were made, these failures probably impeded progress. In the meantime, Ms Boyd kept discovering unpaid accounts. She was constantly receiving telephone calls and facsimile messages from creditors. In evidence she estimated having received 50 to 100 telephone calls per day throughout September, October and November. By the end of November, it was clear that the moneys injected by IPG into the companies was inadequate. About this time Lewis Short, a person who was a substantial shareholder in, and a consultant to, IPG (though not a director) became involved in the problem. He spent some time at Mona Vale and told Ms Boyd that he thought the deficiency exceeded $4.2 million. He organised a working weekend with several staff members. The group prepared a list of assets and liabilities as at 30 November. This document revealed assets of $860,000, liabilities of $5,979,870 (of which $2,005,000 was due to IPG) and a deficiency of $5,119,870. Mr Short gave the document to Mr Dunn. Mr Dunn travelled to England to speak to the companies' major trade creditors about a proposal to convert their debts into equity. The mission was unsuccessful. The proposal depended upon the agreement of all creditors and this was not forthcoming. On 6 December 1988 Mr Krumbeck wrote to Travel Abroad noting that the 30 November extension date had not been complied with. He said that he was referring to the trustees the question of Travel Abroad's continued participation in the Fund and offered an opportunity for the company to be heard by the trustees on 16 December. This invitation was not taken up. But Mr Short and Sam Cannon, the manager of Travel Abroad, met Mr Krumbeck on 15 December. They apparently told him the position but added that it was not certain what course IPG would take. On the same day, Mr Cannon faxed a request for a further extension. At their meeting on the following day, the Travel Compensation Fund Management Committee decided not to approve this request. But, surprisingly, no decisive action was taken by TCF. So far as appears, the trustees did not deal with the matter, nor did Mr Krumbeck inform Travel Abroad of the management committee's decision. IPG was due to complete the purchase of the two companies on 18 December. It decided not to do so. On 21 December the two companies ceased trading. On that day Mr Dunn wrote to the Travel Agents Registration Board stating that IPG was not completing the agreement to purchase the two companies because of breaches of contractual conditions. Some boxes of documents, including some airline tickets and cheques, were delivered to TCF. TCF set about dealing with claims, at an ultimate loss to it of $423,369. The detail of that loss is set out in the applicant's affidavit evidence. As it is not disputed, I need not reproduce it. It is sufficient to say that the sum of $423,369 is a net loss, after taking account of some moneys received from the liquidator of Travel Abroad, being the balance of the bank trust account. There is no prospect of any further payment from the liquidator. After payment of priority creditors and the costs of the winding up, the company has no funds. The claim against the first respondents: some additional facts ........................................................... The claim against the second respondents I have already mentioned that TCF bases its case against the second respondents on alternative foundations: negligence in respect of the 1987 amount [sic - accounts] and failure to disclose to TCF, in the period July to September 1988, Travel Abroad's condition of insolvency. I do not find it necessary to deal with the second basis of claim. In my opinion, the complaint concerning 1987 is clearly established. Before going to the evidence concerning the 1987 accounts I should deal with a submission made by Mr McSweeney, on behalf of Mr Phillips and himself, that there could be no liability in negligence because his firm was not a client of TCF. He said that the second respondents did not owe TCF a duty of care. Mr McSweeney's submission must be evaluated in the light of the fact that he was aware that the 1987 audited accounts would be submitted to TCF. I admitted into evidence an extract from evidence given by Mr McSweeney during the course of an examination under s.541 of the Companies Code in relation to Travel Abroad. Mr McSweeney was asked: You I take it realised did you not that the purpose of the audit was to furnish information to the Travel Compensation Fund people?' The audit referred to was the 1987 audit of Travel Abroad. Mr McSweeney replied: We were aware of that'. There was also tendered in evidence an affidavit, sworn in a different proceeding in this Court, by Mr Cullen. Mr Cullen was actively engaged on the 1987 audit. In that affidavit he said: 6. The trust account of Travel has been audited for the period 31 December, 1986 and again for the period to 30 June, 1987. No interim audit was done between those accounting periods. The audited accounts were to satisfy the obligation of Travel to the Travel Agents Compensation Board. The accounts of Wheels were prepared, relying on information provided by the company, without any audit.' Leaving aside these express admissions, it is plain from the sequence of events described above that Phillips McSweeney knew that part of their 1987 task was to supply the information necessary for TCF to consider Travel Abroad's continued participation in the Fund. Having regard to these facts, the proposition that Phillips McSweeney owed no duty of care to TCF is untenable. TCF was plainly a person so closely and directly affected by the audit that the auditors ought reasonably to have had them in mind in carrying out their duties. See per Lord Atkin in Donoghue v Stevenson [1932] AC 562 at 580 and the later statements of principle in Grant v Australian Knitting Mills [1936] AC 85 at 104 and Home Office v Dorset Yacht Co [1970] AC 1004 at 1027. Evidence critical of the 1987 audit was adduced from three expert witnesses: Robert Walker, Professor of Accounting at the University of New South Wales, James Frederick Kropp, a partner in Price Waterhouse, and Albert Cachia, a partner with KPMG Peat Marwick. Professor Walker and Mr Kropp were called on behalf of the applicant, Mr Cachia on behalf of Mr Sharp‑Paul. All were impressive witnesses whom I accept without reservation. Professor Walker prepared a report dealing with both the 1987 and 1988 audit. In his report he assumed that Phillips McSweeney was aware that Mr Gregory Lemon was in a position to control both companies, an assumption undoubtedly valid until 18 September 1988. He said that the 1987 audit failed to address the question whether the Travel Abroad statements were likely to be misstated by virtue of transactions with related parties, though this possibility was recognised in 1988. He said that the audit failed to subject the financial statements to analytical review; that is, an examination of the turnover of the travel business, and the margin of gross profit derived from it, so as to assess its viability relative to its overhead expenses. He also criticised the inadequacy of the supervision supplied in 1987. Mr Kropp dealt with a number of specific items. He noted that a management fee of $180,000 was charged by Wheels Abroad to Travel Abroad on 30 June 1987. He thought this might not have fully reimbursed Wheels Abroad for the expenditure it incurred on behalf of Travel Abroad, with the result that Travel Abroad received an undisclosed subsidy from Wheels Abroad. The decision to pay $180,000 was made by a resolution of the directors. The resolution did not disclose the method of computation of this figure. Mr Kropp made the point that there was nothing before Phillips McSweeney to indicate the appropriateness of the figure. He drew attention to three matters: (i) the physical premises and the functions of the various employees of the two companies were so intermingled that it would have been difficult to separate the two entities. (ii) expenses were being incurred by one or other of the companies for the benefit of both companies (eg advertising and promotion) and it would have been difficult to ascertain precisely the proportion relating to each company; and (iii) expenses were being paid by Wheels abroad which later charged Travel Abroad a management fee. No analysis of the make up of the management fee was evident in the documentation reviewed by us.' Mr Kropp commented that these matters made it difficult to determine with precision the level of any subsidy which existed in the 1987 financial year. But he obtained some assistance from consideration of information in the 1988 audit working papers and by performing analytical review procedures on the Travel Abroad results for 1987. Comparing 1987 with 1988, Mr Kropp noted that commissions and fees increased from $848,000 to $1,307,000, a rise of just over 50%; yet salary costs rose from $144,000 to $639,000, printing and stationery from $1,000 to $181,000, auditor's expenses from $16,000 to $143,000 etc. These discrepancies were partly offset by a reduction of the management fee from a total of $204,000 in 1987 to $66,000 in 1988. Nevertheless, even after allowing for this, total expenditure quadrupled from $655,000 to $2,650,000. The declared 1987 net profit before taxation, $201,000, became a loss in 1988 of $1,258,000. Focussing on only four items, advertising and promotion, salary costs, printing and stationery and telephone, and after taking into account the management fees paid in each year, Mr Kropp concluded that actual expenditure incurred in 1987 by Travel Abroad was some $620,000 higher than noted i.e. $440,000 higher than the management charge incurred'. The effect of Travel Abroad paying the true cost of management would, of course, have been to plunge it into loss in 1987. Mr Kropp estimated this loss at $112,000. Having reviewed TCF's published requirements, Mr Kropp expressed the opinion that proper Travel Abroad accounts would not have satisfied the criteria for continuation in the Fund after 30 September 1987. In his report, Mr Kropp made criticisms of the conduct of the 1987 audit. They were similar to the comments of Professor Walker. But Mr Kropp specifically mentioned the lack of evidence that Phillips McSweeney made any inquiry as to the make up of the $180,000 management fee, discussed the fee with management, reviewed any documentation held by Wheels Abroad concerning the fee or assessed whether there was a possibility of further charges. He concluded that Phillips McSweeney did not comply with relevant auditing standards.

The comments made by Mr Cachia covered much the same ground. But he added some additional points. He criticised the inclusion of research and development costs' as an asset in the 1987 balance sheet without amortisation. Turning to the profit and loss statement, he noted that advertising and promotion in 1987 amounted to only 20% of commissions whereas in 1988 they accounted for 65%. Amongst other substantial increases were rent, $5,147 in 1987 and $43,175 in 1988; overseas travelling expenses, $13,890 in 1987 and $53,125 in 1988; and wages, $134,988 in 1987 against $521,280 in 1988. He concluded that there appeared to be a number of items: which require further investigation so as to ascertain the correct expense allocation between companies. Given the number and amount of possible anomalies, it would appear that if expenses were correctly allocated as required by the time honoured Accounting Principle of Matching Costs against Income, in particular the 1987 year, it may have resulted in Travel Abroad Pty. Limited not being able to meet the required level of financial viability as required by the Travel Compensation Fund and if sufficient bank guarantees were not available, it would not have had its licence renewed.' The response made to these criticisms on behalf of Messrs Phillips and McSweeney is fourfold: first, that they owed no duty of care to TCF; second, that the 1987 audit was carried out in accordance with standard accounting and audit practices except for the recording of tests in the working papers; third, that the nature of Travel Abroad's business changed substantially during the 1987‑1988 financial year so that comparisons between the accounts for 1987 and 1988 are misleading; and, finally, that the loss sustained by TCF was the result of the trading activities of the company, there being no causal relationship between any act or omission of the auditors and that loss. I have already dealt with the first point. There is no evidence to support the third proposition. The business increased dramatically in turnover over the 1987‑1988 financial year. But there is no evidence that its nature changed. All through this period it was substantially a travel wholesaler. The fourth point is clearly untenable. It is plain, on the evidence, that 1987 accounts which showed a loss of $112,000 would have led TCF to make Travel Abroad's continuation in the scheme conditional upon the supply of security against possible claims. If appropriate security had been obtained, TCF would not have suffered the losses it did in fact sustain. The only evidence tendered by the second respondents in relation to the second point ‑ that is, to demonstrate that the 1987 statements were correct and the audit properly conducted ‑ was evidence of a conversation between Mr McSweeney and Mr Cullen concerning the appropriateness of the $180,000 management fee payment. This evidence did not extend to inquiries of management regarding the sum or any independent analysis of it. The matter was taken further in cross‑examination. Mr McSweeney conceded that his firm was at all times aware that Travel Abroad and Wheels Abroad were related entities. Asked about the $180,000 management fee, he said that those involved in the audit checked that it had actually been paid. But he conceded that they had no information as to how the figure was determined. The figure was determined by the client, not his firm. Mr McSweeney agreed that there was not a single document showing how the $180,000 was made up or supporting its correctness. He said that the auditors believed the fee included components of rent, wages and telephone. Mr McSweeney said we allocated the management fee in accordance with those expenses we believed were deficient in quantum' and then compared the items with the previous year and with reasonable industry figures for those expenditures' and we just assessed it on our knowledge of the way the company was being run at the time'. Mr McSweeney said that, at the time, Mr Cullen looked at vouchers. But he agreed that there was no reference to vouchers in the audit working papers. I do not accept Mr McSweeney's claim that the reasonableness of the 1987 management fee was checked. It is contradicted by evidence given by Mr Cullen, the accountant in charge of the actual audit work. He said that neither he nor his assistant, Robert Cereato, verified the reasonableness of the fee. He said that they checked that the fee was paid. But, asked about assessing reasonableness, he said: Well, we believed the directors were closely associated and they would have known'. He said he discussed the figure with the Lemon brothers. But he did not claim that they enlightened him as to its computation. It hardly requires expert evidence to make the point that, where two companies are closely associated, a management fee paid by one to the other by way of adjustment of shared expenses needs careful scrutiny before the profit and loss statement of either company may properly be said to reflect its true trading result. The need for scrutiny is even greater where there is a commercial need for one company to report a profit; but no similar need for the other, which is in fact reporting a loss. There is an obvious temptation for those in control of the two companies to select a management fee which will ensure the desired profit. If the management fee fails to match the actual costs incurred by one company on behalf of the other, both profit and loss statements are wrong. Until the auditors verify the reasonableness of the management fee, they cannot say that the accounts are correct. The reasonableness of the 1987 fee was not verified. The auditors simply accepted the figure selected by the Lemon brothers, people with a vested interest in ensuring that Travel Abroad remained a participant in the Fund and thereby retained its registration as a travel agent. In taking that course, they acted negligently. The 1987 accounts were not properly audited. In the light of the 1988 figures, it is obvious that any proper attribution of costs in 1987 would have resulted in accounts which reflected a loss by Travel Abroad. Alternatively, if the directors had declined to amend the accounts, they would have gone unaudited. In either case, Travel Abroad would not have been allowed to continue in the fund after 30 September without adequate security against claims. TCF would not have incurred the losses it did, and in respect of which it makes this claim. The claim against the second respondents is made out, for the full 1988 losses of $423,369. TCF should have judgment against the second respondents for this sum, once again with interest for the period since it made its disbursements totalling 48%. The amount to be allowed for interest will be $203,217, taking the judgment sum to $626,586."

Some general observations on the TAG facts, proceeding and judgment and the TCF facts, proceeding and judgment

(In these Reasons, I will use the abbreviated forms of reference which their Honours, Olney J and Wilcox J, used in their respective Reasons for Judgment quoted above, and others, to be noted later, in respect of persons, companies and matters yet to be discussed. In effect, this means, in the case of individuals, that I will refer to those whose names occur more than once by their family name only. There are two exceptions: because of the central position which he occupies, I refer to Mr McSweeney as "McS" and, for obvious reasons, I will refer to Gregory Lemon and Nigel Lemon by their full names.) It is useful to note at the outset certain points of comparison and contrast, as between the TAG facts and the TCF facts as recorded in their Honours' Reasons. In both cases, an outsider (TAG in one case, IPG in the other) acquired an interest in what might be described loosely as a "business" of a client of PMS which was insolvent. In both cases, PMS prepared and provided financial statements in respect of the business. The clients and the outside purchasers involved in the respective cases were unrelated. Each transaction embraces events of 1987 and 1988. The pre-contract negotiations in the TAG facts began with the advertisement in "The Australian Financial Review" on 21 January 1987. The Acquisition Deed was dated 1 October 1987. The transaction was settled on 2 November 1987, after which the "purchaser", TAG, was in control. For a time following settlement, TAG, being unaware of the problem of the unpresented cheques, supported the business. TAG became aware of the problem of the unpresented cheques in May/June 1988. TKN finally collapsed in the first half of 1989. McS was heavily involved in the TAG facts. His partner, Phillips, was not involved, but employees of PMS, namely Wallis and Yip, were. PMS prepared and certified Travel Abroad's accounts for the year ended 30 June 1987 during the period of three months following that date and they were submitted to TCF prior to 30 September 1987. Beginning in June 1988, PMS worked on preparing Travel Abroad's 1988 accounts. Again, Phillips was not involved. McS "supervised" the work. Beale, who was described by Wilcox J as a partner in the firm and may have been a "salaried partner" in it, and Cullen, who was at the time an employee of the firm, were involved. The Lemon brothers contracted to sell to IPG by a contract dated 18 September 1988 and IPG immediately assumed control of the business. McS, as well as Beale, was involved in the applications to TCF for extensions of time for the furnishing of audited accounts of Travel Abroad. Both were aware of Travel Abroad's insolvency. But IPG, was unaware of it and initially supported the business. By the end of November or early December 1988, IPG became aware of the true extent of Travel Abroad's problem and decided not to complete the purchase on 18 December 1988. Following this, on 21 December 1988, both Travel Abroad and Wheels Abroad ceased trading. McS was a "key player" in both the TAG facts and the TCF facts. Accordingly, his evidence, and in particular, his cross examination, was extensive and important, occupying some 10 days of the hearing before me which extended over 32 days in all. OUTLINE OF THE FACTS RELATING TO INSURANCE, INCLUDING EVENTS BETWEEN THE DELIVERY OF REASONS FOR JUDGMENT OF OLNEY J IN THE TAG PROCEEDING ON 28 FEBRUARY 1992 AND THE COMMENCEMENT OR THE PRESENT HEARING ON 5 JUNE 1995 The TAG judgment and the TCF judgment did not, of course, touch upon the insurance issues which are at the heart of the present two proceedings. The following is a broad chronological outline of insurance-related events which will serve to "fill in the gaps" between the matters canvassed in the two earlier judgments and the commencement of the hearing before me. On 22 May 1989, McS completed the proposal for renewal of the PMS policy for the year 23 May 1989 to 23 May 1990, the insurance year during which the claim which gave rise to the TAG proceeding was made on PMS and notified to FAI. It will be recalled that FAI relies on what was said and what was not said in the proposal to support its avoidance of the PMS policy. FAI's form of proposal which was completed in connection with renewal of the PMS policy for 1989-1990 contained question 13 which was in the following form: "13.(a) During the past ten years has any claim been made, or has negligence been alleged against the Firm(s) or any of their predecessors in business or any prior Firm(s) or any of their present or former Partners/Directors/Consultants; or have any circumstances been notified to Insurers which may result in a claim? Yes ¨No ¨ If 'Yes" please provide the following details in respect of each matter. Year of Name of Name of Nature of Amount paid Is matter Notific- Insurer Claimant Problem or Estimate Finalised ation (if any) of Potential or Liability Outstanding

(b) Are any of the Partners, AFTER ENQUIRY, aware of: (i) Any accounts overdue for payment where there is reason to believe the Client is dissatisfied with the professional services rendered? Yes ¨ No ¨ If 'Yes' please supply full details: (ii)Any claim or circumstance which may give rise to a claim against the Firm(s) or any prior Firm(s) or any of their present or former Partners/ Directors/Consultants which matter is not referred to in question 13(a) above? Yes ¨ No ¨ If 'Yes' please provide the following details in respect of each matter: Name of Claimant Nature of Problem Estimate of Potential Liability" The form concluded with the following declaration: "I/we hereby declare that the above statements are true, that I/we have not suppressed or mis-stated any facts ... . I/we agree that this proposal is for insurance in the normal terms and conditions of the Professional Indemnity Policy and shall be incorporated into and form the basis of the insurance contract."

(Identical forms of question 13 and declaration appeared in the proposal forms for renewal of the Chatswood policy and the Gosford policy for 1991-1992.) In the proposal form, McS disclosed, in answer to question 13(a), only one claim made or allegation of negligence, during the preceding ten years, namely a claim by C E McDonald (Aust) Pty Ltd ("McDonald"). This matter had been notified to FAI by letter dated 22 May 1989 from PMS, a copy of which was annexed to the proposal form. The letter gave an account of a dispute by a client, McDonald, over the amount of PMS's fees, and an allegation, according to the letter subsequently withdrawn, that there were errors in PMS's audit of a profit and loss statement. According to the letter, PMS were advising FAI of the matter simply "for the sake of good order", neither PMS nor their legal advisers believed that there was any substance in the matters raised, and no loss had or would accrue as a result of the matters raised. Question 13 (b) (ii) in the proposed form was answered "No". Accordingly, nothing relevant to the TAG facts or the TCF facts was disclosed. The declaration at the end of the form was signed on behalf of PMS by McS. As noted earlier, FAI relies upon the matters referred to in the Schedule relating to both the TAG facts (Part A of the Schedule) and the TCF facts (Part B of the Schedule), as circumstances which might give rise to a claim against PMS of which McS was aware as at 22 May 1989. The PMS insurance contract for the year 23 May 1989 to 23 May 1990 was concluded on 20 June 1989. The preamble to the policy recorded that "the Insured" (defined as "Phillips McSweeney" of 1st Floor, 56 Neridah Street, Chatswood) had made to FAI a written proposal containing particulars and statements which it was agreed were the basis of the contract and were to be considered as incorporated in it. By the insuring clause, FAI agreed to indemnify PMS against any claim or claims for compensation first made against PMS and reported to FAI during the period 23 May 1989 to 23 May 1990 for breach of professional duty in the conduct of the practice of accountants at first floor, 56 Neridah Street, Chatswood. EXCLUSION (b) was a "dishonesty exclusion" to the effect that the policy did not indemnify the Insured in respect of any claim against them: "for alleged or actual dishonest, fraudulent (both legal and equitable) ... acts or omissions of the Insured or any of the Insured's partners ... or employees ..."

However, the dishonesty exclusion was expressed to be subject to the following "dishonesty extension": "Extension 4; Dishonesty If a limit for this extension is specified in the Schedule Exclusion (b) is deleted and subject to the limitations, terms and conditions this Policy is extended to indemnify [PMS] in respect of claims for damages for breach of professional duty arising out of or contributed [sic - to] by the ........... fraudulent ... conduct of the employees, ............ partners or co-directors. Provided that this Policy shall not provide indemnity to any person committing or condoning such dishonest [or] fraudulent, ... act. This extension excludes claims for loss of money, negotiable instruments, bearer bonds or coupons, stamps, bank or currency notes."

In fact, the policy Schedule included the following:

"INDEMNITY LIMIT OF INDEMNITY ANY ONE CLAIM 6000000 .................................................... DISHONESTY LIMIT 500000 .................................................... POLICY EXCESS EACH CLAIM 5000 IT IS HEREBY DECLARED AND AGREED THAT THE POLICY IS EXTENDED TO INCLUDE THE FOLLOWING EXTENSIONS. .................................................... DISHONESTY ...................................................."

Accordingly, the dishonesty extension applied subject to a limit of $500,000. Chronologically, the next event to note is that on 10 August 1989, IPG commenced proceeding NG 546 of 1989 ("the IPG proceeding") in this Court against Gregory Lemon as first respondent, Nigel Lemon as second respondent, and Phillips and McS trading as PMS as third respondents, claiming, as against Phillips and McS, damages for breach of contract, damages for fraud, damages pursuant to s 68 of the Fair Trading Act 1987 (NSW), interest and costs. The application was accompanied by a statement of claim. PMS wrote to FAI on 21 August 1989 enclosing copies of the application and statement of claim. In PMS's letter, signed by McS, the firm denied liability. There was enclosed a document prepared by Gillis Delaney, solicitors, who had apparently been retained by PMS, setting out responses to many of the paragraphs in the statement of claim. On 7 September 1989, in a memo to McS, FAI advised that it would indemnify the partners subject to the terms of the policy. Copies of affidavits filed in the IPG proceeding were in evidence in the present proceedings. These included affidavits by McS, Beale and Cullen of PMS. Apparently, not long before the commencement of the IPG proceeding, PMS had commenced proceeding NG 520 of 1989 against, inter alia, IPG for recovery of fees. The IPG proceeding was settled on terms that PMS agreed to pay, and IPG agreed to accept, $250,000 inclusive of costs in settlement, but that of this amount, $75,000 was to be paid to PMS's own solicitors, Gillis Delaney Brown, in satisfaction of the amount payable by IPG as a respondent in that other proceeding. Chronologically, the next event to be noted is the examination of McS, Cullen and Beale under s 541 of the Companies (New South Wales) Code in connection with the liquidations of Travel Abroad and Wheels Abroad. They were examined on the following dates: Beale 13 October 1989 Cullen 24, 27 November 1989 McS 27, 28, 29 November 1989, 5 July 1990 McS and Cullen, at least, had been served with their summonses in May or June 1989. On the examinations, TCF was represented by counsel, as were McS, Cullen and Beale. FAI submits that I should infer from the fact that these three partners knew that TCF was represented by counsel and that she questioned them antagonistically on behalf of TCF, that they were aware, at least from that time, that TCF might bring a claim against PMS.

On 11 January 1990, Rosenblums wrote on behalf of their client, TAG, to each of McS and Phillips alleging liability and enclosing a draft application and statement of claims. On 12 January 1990, PMS wrote to their broker, Marsh & McLennan Pty Ltd, ("M & M") enclosing copies of those documents and on 17 January 1990 M & M wrote to FAI enclosing copies of them. On 19 January 1990, FAI wrote to TCM requesting them to investigate the claim and to advise FAI as to indemnity. The TAG proceeding was commenced in this Court on 29 January 1990. TCM appeared on the Court record as solicitors for the respondents, McS and Phillips. They reported from time to time, both orally and in writing, to FAI on progress of the TAG proceeding down to the hearing before Olney J which, it may be recalled, extended over a period from 22 July 1991 to 22 October 1991. It will be necessary, in due course, to consider in some detail the conduct of both FAI and PMS in relation to the TAG proceeding. This necessity arises out of PMS's case against FAI of waiver, election or estoppel, and out of FAI's allegation that it was led to grant and maintain the ground of indemnity by misleading conduct of PMS. On 7 May 1990, PMS applied for renewal of the PMS policy. The application form was signed by McS on behalf of the firm. Again, all six accountants were shown as partners. The application sought cover of $6,000,000 for any one claim with no limit on the aggregate of claims made in the period of insurance, and an excess of $5,000. It disclosed in answer to question 13 (a), as "claims made or ... negligence alleged against the Firm", the McDonald, IPG and TAG claims. It referred to the McDonald and IPG claims as "cross claim on debt recovery action". It referred to the TAG claim as "alleged misrepresentation in accounts." Attachment "C" contained the following further particulars of the claims: "(1) C E McDONALD NPIC 179/88 The defendant CE McDonald (Australia) Pty Ltd has indicated a cross claim but has failed to lodge a sufficient defence. The claim by Phillips McSweeney for recovery of fees is listed for hearing 17 July, 1990. We do not believe there are grounds for a cross claim in that we believe that no loss has or will accrue as a result of the alleged negligence action inferred. All costs to date have been met by Phillips McSweeney. (2) INDUSTRIAL PERFORMANCE GROUP LTD (IPG) NPIC 041/89 The defendant IPG has lodged a cross claim following a Phillips McSweeney claim on IPG for recovery of fees. The matters referred to in the IPG cross claim are a fabrication and we believe a strong defence is available based on the facts. The case is waiting listing in the courts. We do not believe the claim will succeed. All costs to date have been met by Phillips McSweeney. (3) TAG PACIFIC LIMITED (TAG) NPIC 116/89 Documents have been made available to FAI solicitor, Tress Cocks and Maddox for discovery. TAG allege that Phillips McSweeney provided financial statements on which TAG relied in making an investment in Toikan International Insurance Broking Pty Ltd (formerly TKN Holdings Pty Ltd) which statements did not properly reflect the net asset position of Toikan. We rely on the facts that: 1. the statements were not provided under engagement by TAG but were provided on instruction from the Vendor for the sole use of the Vendor. 2. the statements were clearly identified as Preliminary and/or Proforma Statements and had full disclosures and disclaimers attaching thereto. 3. the allegations that funds represented by unpresented cheques were not available is denied and supported by evidence of bank deposits sufficient to clear those cheques. 4. TAG provided a letter to the vendor wherein the chairman of TAG states that TAG rely wholly on the representations of the Vendor. On the evidence we do not believe that the claim will proceed and/or succeed. The case is waiting listing in the courts."

As from 30 June 1990, Beale and Gaertner ceased to be partners of PMS. PMS "split into PMS Chatswood and PMS Gosford" as from 1 September 1990, that is to say, after completion of the s 541 examinations, while the TAG proceeding was in progress but before it had reached a hearing, and before the making of the claim by TCF which led to the TCF proceeding. It will be recalled that the partners of PMS Chatswood were McS and Turner and the partners of PMS Gosford were Phillips and Cullen. The initial proposal for what was to be the Gosford policy was dated 1 September 1990 and was signed by Cullen. The partners were identified as Phillips and Cullen. In answer to the question in the proposal form about prior claims or allegations of negligence, the following appeared: "FAI - PLEASE REFER YOUR RECORDS" The proposal form nominated the "sum insured" as "$100,000 AS FROM 1/11/90". A covering memo dated 29 October 1990 from M & M to FAI advised that "the claims history of this firm is obviously the same as that for Phillips McSweeney". Notwithstanding what was stated in the proposal form, M & M's memo asked that the limit and excess be the same as for the old PMS policy. Apparently the reason why $100,000 had been mentioned in the proposal was that it was thought that Phillips and Cullen would be indemnified against similar liability under a policy issued to "Bird Cameron" which carried an excess of $100,000. The initial proposal for what was to be the Chatswood policy was dated 28 September 1990 and was signed by McS. It applied for the same cover as that provided by the predecessor PMS policy, and gave, in attachment "C", the same details of the IPG and TAG claims, except for the omission from the particulars of the TAG claim of the sentence, "On the evidence we do not believe that the claim will proceed and/or succeed", and the substitution for it of the sentence "Refer to J Rainbow, Tress Cocks and Maddox for comment." The PMS policy was cancelled with effect from 24 October 1990 from which date to 23 May 1991 the Chatswood policy and the Gosford policy were first issued. The proposal for the renewal of the Gosford policy for the critical year 23 May 1991 to 23 May 1992 was dated 22 April 1991 and was signed by Cullen. It sought cover up to $6,000,000 with an excess of $5,000 for each claim. It gave the following particulars of the IPG and TAG claims: "IPG Ltd purchased two businesses which it alleged had greater liabilities than disclosed prior to the purchase. The vendors were sued for damages and Phillips McSweeney were joined due to their involvement in the preparation of draft accounts. The matter was settled just prior to hearing. TAG invested money in an insurance broking company. When investing TAG alleged it relied on financial statements provided by Phillips McSweeney which it said did not properly reflect the net asset position of the insurance broking company." The proposal for renewal of the Chatswood policy in respect of the critical year, 23 May 1991 to 23 May 1992, was dated 28 April 1991 and it was signed by McS. It sought the same limits of cover. It gave the same particulars of the TAG claim as had been given in the proposal dated 28 September 1990, but noted that the McDonald and IPG claims had been settled in the meanwhile. The claim by TCF against McS and Phillips was made by the filing on 4 December 1991 and service on 11 December 1991 of the application and statement of claim in the TCF proceeding. A few days after service, notice of the making of the claim was given to FAI under the Chatswood policy. Perhaps for more abundant precaution, much later, on 18 May 1992, notice of the claim was given to FAI under the Gosford policy as well. The terms of the Chatswood policy and the Gosford policy were similar to those of the PMS policy noted earlier. By the insuring clause of the Chatswood policy, FAI agreed to indemnify "the Insured" against any claim or claims for compensation first made against the Insured during the period of cover and reported to FAI during that period: "(a) For breach of professional duty in the conduct of the practice (as defined herein and referred to in the Schedule) by reason of any negligence, whether by way of act, error or omission whenever or wherever the same was or may have been committed or alleged to have been committed on the part of the Insured or his or their predecessors in business or any person now or heretofore employed by the Insured or his or their predecessors in business or hereafter to be employed by the Insured during the subsistence of this Policy, in the conduct of the practice conducted by or on behalf of the Insured or his or their predecessors in business in their professional capacity as specified in the Schedule; ..."

The Chatswood policy defined the expression "the Insured" to mean "Phillips McSweeney Partners" of Level 2, 56 Neridah Street, Chatswood, and it has not been in dispute that this expression encompassed McS and Turner. There was a "Dishonesty Exclusion", EXCLUSION (b), in the same terms as EXCLUSION (b) of the PMS policy noted earlier, and there was a "Dishonesty Extension", Extension 4, which was in the same terms as Extension 4 of the PMS policy noted earlier. In the case of the Chatswood policy, the Schedule included the following: "INDEMNITY LIMIT OF INDEMNITY ANY ONE CLAIM $5,000,000 ......................................................... DISHONESTY LIMIT $ 500,000 ......................................................... POLICY EXCESS EACH CLAIM $ 5,000 THE INDEMNITY PROVIDED UNDER THIS POLICY IS NON-CUMULATIVE WITH THAT OFFERED UNDER POLICY NO; 2030243160 EXPIRY ON 23.05.1992 ARISING OUT OF WORK DONE PRIOR TO 23.10.1990."

Accordingly, the dishonesty extension applied subject to a limit of $500,000. It may be recalled that the reference above to Policy No 2030243160 is a reference to the Gosford policy. The Gosford policy identified "the Insured" as "Bird Cameron incorporating Phillips McSweeney Gosford" of 54 William Street, Gosford. It was common ground that Phillips and Cullen fell within this expression. The terms of the Gosford policy were identical to those of the Chatswood policy and the endorsement covering the period 1 August 1991 to 23 May 1992 included the following: "LIMIT OF INDEMNITY ANY ONE CLAIM/AGGREGATE IS REDUCED TO: $100,000 .................................................. DISHONESTY $500,000" Accordingly, again the dishonesty extension applied subject to a limit of $500,000. The Gosford policy included the following note: "THE INDEMNITY PROVIDED UNDER THIS POLICY IS NON-CUMULATIVE WITH THAT OFFERED UNDER POLICY NO. 2030243080. EXPIRING ON THE 23.5.91 FOR CLAIMS ARISING OUT OF WORK DONE PRIOR TO 24.10.90" It may be recalled that the reference above to Policy No 2030243080 is a reference to the Chatswood policy. The TAG proceeding was heard by Olney J over 13 days extending from 22 July 1991 to 22 October 1991. TCM represented McS and Phillips as respondents. His Honour delivered judgment on liability on 28 February 1992 in which, it will be recalled, there appeared the following passage: "... at least since 28 July 1997 PMS were engaged in a concerted course of conduct to disguise the truth to ensure that the transaction did not founder." (p 46)

This prompted FAI to take a different stance towards indemnifying PMS. On 8 May 1992, FAI commenced the TAG insurance proceeding by filing a summons in the Commercial Division of the Supreme Court of New South Wales (No 50189 of 1992) against McS and Phillips as first and second defendants, TAG as third defendant and TAGNT as fourth defendant ("the Supreme Court summons"). The Supreme Court summons sought declarations that FAI was not liable to indemnify McS under the PMS policy in respect of any damages which might be awarded to the third and fourth defendants in the TAG proceeding, and that its liability to indemnify Phillips under that policy in respect of such damages was limited to $500,000. As well, the summons sought an injunction against TAG and TAGNT from seeking leave under sub-s 6 (4) of the LRMP Act to join FAI as a respondent in the TAG proceeding or to commence separate proceedings against FAI in respect of the subject matter of that proceeding. The "Summary of Plaintiff's Contentions" attached to the Supreme Court summons referred to the terms of the PMS policy, to the TAG proceeding and to Olney J's finding referred to above. Paragraph 8 of the Summary stated that Olney J had found that McS had taken a deliberate, as opposed to a mistaken, step to mislead and deceive the persons for whose benefit the accounts had been prepared by PMS, and para 9 of the Summary stated that such conduct of McS constituted dishonest or fraudulent conduct within the meaning of Extension Clause 4 of the PMS policy. The Supreme Court summons reflects a view of FAI that Extension Clause 4 of the PMS policy was enlivened by the specification of the limit of $500,000 in the Schedule; that McS, as the person actually guilty of the dishonest or fraudulent act, was not entitled to indemnity at all; and that Phillips was entitled to indemnity up to the limit of $500,000. The summons reflects a reliance by FAI on the terms of the PMS policy rather than an intention to avoid the policy. The return date in the summons was 15 May 1992. On 14 May 1992, FAI (David Kendrick, solicitor) wrote to M & M, forwarding a copy of Olney J's Reasons for Judgment dated 28 February 1992, advising that FAI had denied indemnity to McS but would indemnify Phillips up to a maximum amount of $500,000, and noting that FAI's right to take this position had been disputed, in consequence of which FAI had issued the Supreme Court summons. On 22 May 1992, the Supreme Court proceeding was transferred to this Court, becoming proceeding NG 312 of 1992 in this Court, that is to say, the TAG insurance proceeding. The Supreme Court summons had been issued by TCM as solicitors for FAI, but they ceased to act because of a perceived conflict of interest, and Colin Biggers and Paisley ("CBP") commenced to act for FAI. On 27 May 1992, CBP (Mr G A Skehan) wrote to Mr Kendrick of FAI referring to a telephone conversation between Mr Skehan and Mr Kendrick on 21 May and Mr Skehan's attendance at a conference with counsel on 22 May, and expressing concern as to the proper construction of the PMS policy. It referred to Dishonesty Exclusion (b), and, for reasons which I need not discuss, expressed the view that there might still be a liability on the part of FAI to indemnify Phillips to the extent of the policy's general limit of $6,000,000 for negligence and $500,000 in respect of the dishonesty of McS. The letter included the following: "To strengthen your position it seems to us that we ought consider raising fraudulent non-disclosure. This is an area that will require some thought and we would like to discuss this with your Mr Kendrick. As you will no doubt appreciate the consequences of fraudulent non-disclosure include, inter alia, avoidance of the policy."

On 5 June 1992, in a letter addressed to FAI (Hinton), CBP (Skehan) confirmed FAI's instructions that FAI wished to avoid the PMS policy for the years beginning 23 May 1989, 23 May 1990 and 23 May 1991. CBP enclosed a settled form of letter to be sent by FAI to the brokers. On 11 June 1992, FAI (Hinton) sent a memo to M & M. The memo enclosed a copy of the relevant page from Olney J's Reasons for Judgment in the TAG proceeding and referred to his Honour's finding that at least since 28 July 1987, PMS had been engaged in a concerted course of conduct to disguise the truth to ensure that the transaction with TAG did not founder. FAI's memo continued as follows:

"Subsequent to July 1987 Mr. McSweeney as managing partner completed and signed on behalf of the practice proposal forms which asked the question (or similarly worded questions) Are any of the partners aware of circumstances which may give rise to claims against the firm ...?' The proposal forms related to policy number 2005185140 in the name of Phillips McSweeney' for the periods 23rd May 1988 to 23rd May 1989, 23rd May 1989 to 23rd May 1990, and 23rd May 1990 to 24th October 1990 and policy number 2030243080 in the name of `Phillips McSweeney Partners' (i.e. Chatswood office) for the periods 24th october 1990 to 23rd May 1991 and 23rd May 1991 to 23rd May 1992."

The memo asserted that the failure to disclose to FAI the conduct to which Olney J had referred was a "fraudulent non-disclosure" entitling FAI, pursuant to sub-s 28 (2) of the IC Act, to avoid the contracts of insurance specified. The letter then advised that such contracts were avoided accordingly. The last two paragraphs of the memo were as follows: "Without in any way detracting from the decision made by us to avoid the contracts if we had elected not to avoid the contracts this Company's liability for claims would have been reduced to nil because this Company would never have agreed to renew the policy after 1987 if we had been advised of the fraudulent conduct of Mr. McSweeney as it occurred. In cases where contracts of insurance are avoided for fraudulent non-disclosure no premiums are refundable (per Maye v C.M.L. (1924) 35 CLR)." By the time of that purported avoidance (11 June 1992), the TCF proceeding was well under way. In fact, on 31 July 1992 it was fixed for hearing before Wilcox J on 10, 11 and 15 September 1992. FAI had instructed solicitors to represent McS and Phillips as respondents in that proceeding, but, having purportedly avoided on 11 June 1992 the PMS policy and the PMS Chatswood policy for relevant periods, FAI notified McS and Phillips that it would not indemnify them in respect of the TCF proceeding. McS and Phillips were in fact unrepresented on the hearing before Wilcox J on 10, 11 and 15 September 1992. His Honour noted that McS and Phillips appeared in person at the hearing; that each gave evidence; that McS had been more intimately involved in the audits of Travel Abroad than Phillips; and that McS had, in effect, conducted the case for both men and called some witnesses. The application by TCF against FAI in the present TCF insurance proceeding was filed on 23 December 1992. It will be recalled that FAI's purported avoidance on 11 June 1992 related only to relevant years of the PMS policy and the PMS Chatswood policy, and not at all to the PMS Gosford policy. On 1 July 1993, FAI wrote to Mr Cullen "c/- Bird Cameron incorporating Phillips McSweeney Gosford" a letter reading as follows: "1. We enclose a copy of Amended Points of Claim served upon us by the Travel Compensation Fund to which we are obliged to file a Defence. 2. You and Mr. Phillips were both insured under the policy referred to in particular (b) of paragraph 2 of the Amended Points of Claim. 3. We have very recently obtained copies of transcripts of examinations of you, Mr. McSweeney, and Mr. Beale under s.541 of the Companies Code (NSW) relating to your involvement in the affairs of Travel Abroad in 1987 and 1988. The contents thereof and further investigations arising therefrom have raised matters of considerable concern to us. 4. We must inform you that, as presently advised, we are mindful to avoid the abovementioned policy relating to the period 23 May 1991-92 pursuant to s.28(2) of the Insurance Contracts Act 1984 (Cth), for the following reasons. 5. It appears that you have failed to comply with your duty of disclosure, by failing to disclose the following matters: (a) Circumstances which were known to you as at 23 May 1991 which might have given rise to a claim against your partner and co-insured Mr. Phillips by reason of the conduct of Phillips McSweeney in 1987 and 1988 in relation to Travel Abroad and the Travel Compensation Fund. (b) The fact, content and circumstances of the s.541 examinations referred to above, which had taken place in 1989 and 1990. (c) The fact that you, Mr. McSweeney and Mr. Beale, particularly when obtaining extensions of time for lodging audited financial statements of Travel Abroad with the Travel Compensation Fund, had dishonestly concealed from the Fund the true financial position of Travel Abroad, so that the fund would not take action against Travel Abroad. 6. It appears that you made a misrepresentation to FAI before the said contract of insurance was entered into, by answering question 13(b)(ii) of the Proposal `no' (copy attached), and making the declaration contained in the Proposal (copy attached), when in fact you were aware of the matters referred to in paragraph 5(a)-(c) above. 7. It appears that your non-disclosure and misrepresentation were fraudulent, in that you deliberately failed to disclose the said matters, and deliberately made the misrepresentation referred to, intending to conceal from FAI the matters referred to in paragraph 5(a)-(c) and thereby induce FAI to renew your insurance on standard terms. 8. We invite you to give such information or explanation as you may see fit in respect of the above matters, but must ask that you do so within seven days, as we are being pressed to file our Defence, in which we are to state whether we admit the continuing existence of the policy in question, or assert that it has been validly avoided." On the same date, 1 July 1993, FAI wrote to Mr Phillips enclosing a copy of the contemporaneous letter to Mr Cullen. On 24 August 1993, FAI wrote letters to Mr Cullen and Mr Phillips, in each case referring to its letter of 1 July and purporting to avoid policy number 2030243160 (the Gosford policy) for the period 23 May 1991 to 23 May 1992 pursuant to sub-s 28 (2) of the IC Act, for the reasons set out in paras 5-7 of FAI's letter to Mr Cullen dated 1 July quoted above. SHOULD TCF BE GRANTED LEAVE UNDER SUB-S 6 (4) OF THE LRMP ACT? The answer to this question involves considerations arising specifically from s 6 of the LRMP Act and considerations arising as between FAI and PMS. Logically, the first question calling for consideration is that of jurisdiction which I have called "the Manettas issue". The Manettas issue - jurisdiction to grant leave As noted earlier, TCF applies for leave pursuant to sub-s 6 (4) of the LRMP Act to commence in this Court a proceeding against FAI to enforce a charge which, TCF says, arises under sub-s 6 (1) of that Act. Section 6 is as follows: "6. (1)If any person (hereinafter in this Part referred to as the insured) has, whether before or after the commencement of this Act, entered into a contract of insurance by which he is indemnified against liability to pay any damages or compensation, the amount of his liability shall on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance moneys that are or may become payable in respect of that liability. (2) If, on the happening of the event giving rise to any claim for damages or compensation as aforesaid, the insured (being a corporation) is being wound up, or if any subsequent winding-up of the insured (being a corporation) is deemed to have commenced not later than the happening of that event, the provisions of subsection (1) shall apply notwithstanding the winding-up. (3) Every charge created by this section shall have priority over all other charges affecting the said insurance moneys, and where the same insurance moneys are subject to two or more charges by virtue of this Part those charges shall have priority between themselves in the order of the dates of the events out of which the liability arose, or, if such charges arise out of events happening on the same date, they shall rank equally between themselves. (4) Every such charge as aforesaid shall be enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured; and in respect of any such action and of the judgment given therein the parties shall, to the extent of the charge, have the same rights and liabilities, and the court shall have the same powers, as if the action were against the insured: Provided that, except where the provisions of subsection (2) apply, no such action shall be commenced in any court except with the leave of that court. Leave shall not be granted in any case where the court is satisfied that the insurer is entitled under the terms of the contract of insurance to disclaim liability, and that any proceedings, including arbitration proceedings, necessary to establish that the insurer is so entitled to disclaim, have been taken. (5) Such an action may be brought although judgment has been already recovered against the insured for damages or compensation in respect of the same matter. (6) Any payment made by the insurer under the contract of insurance without actual notice of the existence of any such charge shall to the extent of that payment be a valid discharge to the insurer, notwithstanding anything in this part contained. (7) No insurer shall be liable under this Part for any greater sum than that fixed by the contract of insurance between the insurer and the insured. (8) Nothing in this section shall affect the operation of any of the provisions of the Workers Compensation Act 1987 or the Motor Vehicles (third Party Insurance) Act 1942." (In sub-s 6 (7)) the words "the insurer" were substituted for the word "himself" by the Statute Law (Miscellaneous Provisions) Act 1996 (Act No 30 of 1996).) I will refer to "the event giving rise to the liability to pay damages or compensation" as "the Event". In the present case, "the insured" is, relevantly, McS and Phillips; the insurer is FAI; the relevant "contract of insurance" is, in relation to McS, the Chatswood policy for 1991-1992, and in relation to Phillips, the Gosford policy for 1991-1992, since the contracts of insurance expressed in those policies were the ones on foot when TCF's claim was made on McS and Phillips and notified by them to FAI; and the "liability to pay any damages or compensation" is owed by McS and Phillips to TCF. The Event was perfected when TCF paid compensation to the clients of Travel Abroad. According to the Reasons for Judgment of Wilcox J in the TCF proceeding, those payments were made on various dates between 3 March 1989 and 25 May 1990, and the bulk of them were made in about May 1989. Therefore, the Event preceded the existence of the Chatswood policy and the Gosford policy for the 1991-1992 year. In Manettas, Cole J held that s 6 had no application to a "claims made and notified" policy where, as in the present case, the Event occurred prior to the existence of the policy. His Honour noted that sub-s 6 (1) provides that the charge arises "on the happening of [the Event]". He reasoned that there cannot be a charge on the happening of the Event unless it can be said that at that time there are "insurance moneys that are or may become payable" in respect of the liability, and that this cannot be said unless there already exists a contract of insurance under which it can be said that insurance moneys are payable or may become payable. Cole J drew support from Oswald v Bailey (1987) 11 NSWLR 715 (CA). In Oswald v Bailey, Dr Bailey, a medical practitioner, had a contract of indemnity insurance with an incorporated body, the Medical Defence Union ("MDU"), at a time when, in 1973 or 1974, he incurred liabilities in damages for negligence to Mrs Oswald and Mr Crawford. The contract of insurance was contained in MDU's articles of association. The insurance was in favour of MDU's current financial members from time to time. Membership was limited to medical practitioners in New South Wales. Dr Bailey was at all relevant times a current financial member. At first, MDU granted Dr Bailey indemnity. However, on 4 November 1982, MDU's articles of association were amended to provide that the granting or maintaining of indemnity was at the discretion of MDU. Dr Bailey died on 8 September 1985. In and from October 1985, MDU refused indemnity to his estate. Mrs Oswald and Mr Crawford applied for leave to bring actions directly against MDU under s 6 of the LRMP Act. Clearly, the case was not one of a claims made and notified policy which came into existence after the Event. Rather, there was a contract of indemnity insurance on foot at the time of the Event, but as a result of the amendment to the articles, there was a difference between the terms of that contract and the terms of the contract as at the time of the application for leave. Passages in the judgments which refer to or assume the existence of a contract of insurance at the time of the Event must be understood against the background of the facts of the case and the issue to which they gave rise. The choice in that case was between the contract which existed at the time of the Event and that which existed later, after the articles of association had been altered, in effect, unilaterally by the insurer so as to produce the effect that no moneys were payable in respect of the liability to the late Dr Bailey's patients. FAI relies on the following passages in the judgments of the members of the New South Wales Court of Appeal: Kirby P: "Section 6(1) speaks of a 'charge' at a specified time, namely 'the happening of the event giving rise to the claim for damages or compensation'. It is at that time, and none other, that the charge attaches. The subject matter of the charge must then be determined, again at that time. Otherwise there would be no point in providing in terms of a 'charge'. In some cases the precise amount of the insurance moneys will be clearly established by the terms of the contract of insurance. In others, such as the present, they will need to be established, by litigation. They are thus, for the purposes of the charge, moneys payable which 'may become payable in respect of that liability'. But the important point to note is that by the force of s 6(1), the statutory charge has already been created 'on the happening of the event'. Events, however valid and enforceable as between the insurer and the insured which take place after the moment at which the statutory charge has attached for the protection of the claimant for damages or compensation, can have no effect to deprive that claimant of the benefit of the statutory charge. Apart from the language of the section, in which Parliament has taken pains to identify a moment at which the charge will attach, I have referred to the policy which it is clearly designed to achieve. The section is, as I have already mentioned, a novel reforming provision. As such, it should be construed beneficially to protect claimants such as the appellants. It gives a direct statutory right of action against an insurer which normally the law would not allow. Once the premises are established the appellants' rights no longer depend upon the contract of insurance. They are derived from the Act itself. The scheme of the Act is plainly not designed for the purpose of benefiting insurers (such as MDU) or the insured (such as Dr Bailey or, upon his death, his estate). It is for the protection of persons claiming damages or compensation." (at 723E-724B)

" ... the subsection [sub-s 6 (7)] would appear to imply an adjectival phrase qualifying the 'contract of insurance' namely the contract 'which was in force at the time that the charge provided under s 6(1) attached'." (at 727G)

"It appears from Yeldham J's first judgment that counsel for the New South Wales Medical Defence Union Ltd (the MDU) had conceded that prior to their amendment in 1982 the articles contained a contract of insurance between the late Dr Bailey and the MDU. Having regard to the ultimate view I take of the matter, I think that I can approach it by accepting the conclusion expressed both by Yeldham J and the President that at the relevant dates, that is, when Dr Bailey's liability to his patients (if any) arose, there was a contract of insurance in existence between Dr Bailey and the MDU by which he was indemnified against liability to pay damages. Consequently, the preconditions for the attachment of the charge which s 6(1) contemplates were established." (at 730G)

"In my view the first problem is whether the amendments to the articles were effective to divest the charge which had previously crystallised upon the happening of the events said to give rise to a liability to pay damages at a time when there existed a contract of insurance by which the late Dr Bailey was indemnified. I am inclined to think, as the President is, and as Yeldham J was, that the amendments cannot affect that entitlement." (at 731D)

"Furthermore, it cannot be doubted, in my opinion, that since s 6 establishes a charge upon 'insurance moneys', the effectiveness, indeed, the reality of the charge, must depend upon whether that subject matter exists." (at 732B)

"Before Yeldham J and also before this Court counsel for the MDU conceded, in my opinion soundly, that until the amendment by MDU of its articles on 4 November 1982 contracts of indemnity were on foot between Dr Bailey and MDU. On this basis Yeldham J was of the opinion that the amount of Dr Bailey's liability to the applicants became a charge on the insurance moneys. In this Court Kirby P is of like opinion. I agree, generally for the reasons given by their Honours." (at 734E) The High Court refused special leave to appeal from the Court of Appeal. It will be necessary, in due course, to consider further, judgments of members of the Court of Appeal and of the High Court relating to claims made by the late Dr Bailey's patients against MDU under s 6 of the LRMP Act. But it will again be necessary to do so with the facts of the case and the nature of the issue which they presented for decision steadily in mind. In Capita Financial Group Ltd v Triden Properties Ltd, unreported, 6 September 1993, Cole J had occasion to consider s 6 again. In that case, the insured was Timalco Glass Structures Pty Ltd ("Timalco") which had, as subcontractor with Triden Contractors Pty Ltd ("Contractors") as builder, designed a curtain wall in a building. Timalco's insurer was C E Heath Casualty & General Insurance Ltd ("Heath"). His Honour held that Contractors was entitled to succeed on its claim against Timalco for indemnity pursuant to a term of the subcontract, in respect of moneys which Contractors had incurred liability to pay to a third party. Timalco had designed the curtain wall negligently some time in 1987. However, the design defects remained latent until they were discovered in October 1990. Contractors alleged that it had asserted its claim against Timalco by a letter dated 27 November 1990 or a letter dated 17 January 1991. It asserted entitlement to the benefit of the statutory charge in respect of moneys payable under a claims made and notified policy by which Heath had insured Timalco for the year 30 April 1990 - 29 April 1991. Heath's first submission was that sub-s 6 (1) does not apply at all to claims made and notified policies. It submitted that the words "is indemnified" in sub-s 6 (1) have the effect that the insurer's liability to indemnify must be complete at the time of the Event, and that in the case of a claims made and notified policy, the insured is indemnified only from the later time when the claim is made and notified. Cole J rejected this submission. His Honour considered that the words "is indemnified" describe a policy which exists at the time of the Event, but do not require that all those conditions which must be fulfilled before the insured can successfully claim against the insurer, have been fulfilled by that time. His Honour thought that this construction was made clear by the use of the words "that are or may become payable in respect of that liability". For his Honour, the alternatives inherent in that expression refer respectively to "an existing liability under the insurance policy upon the insurer to give indemnity in respect of the event which occurred creating a liability to a third party" and "a liability which would arise in the future upon the insurer to pay moneys upon the happening of the subsequent event such as, for example, the making of a claim under a claims made policy" (Reasons for Judgment, p 81). After holding, contrary to a submission of Heath, that Contractors' letter dated 17 January 1991 amounted to the making of a claim within the meaning of the insuring clause of the policy, his Honour considered Heath's submission that the expression "the event giving rise to the claim for damages" referred to the defective design of the curtain wall, which had occurred in 1987, rather than the accrual of the cause of action to Contractors to recover damages, which had occurred only when the defective design became known in October 1990. If Heath's submission were accepted, the Event preceded the existence of the policy for 1990-1991 under which Contractors claimed to be indemnified. On that basis, Heath submitted that Cole J should follow his decision in Manettas, with the result that sub-s 6 (1) did not apply. For its part, and on the same hypothesis, Contractors submitted that Manettas was wrongly decided and should not be followed. In the event, his Honour held that the Event was the accrual or perfection of the third party's cause of action. Since this had occurred in October 1990 while the contract of insurance for 1990-1991 was on foot, s 6 was activated. In several cases, leave has been granted where the Event preceded the existence of a claims made and notified contract of insurance to which the third party's claim of a charge refers. Examples are FAI (NZ) General Insurance Co Ltd v Blundell & Brown Ltd [1994] 1 NZLR 11 (NZ/CA) ("FAI(NZ)"), Schipp v Cameron (1995) 8 ANZ Ins Cas 61-256 (NSW/Young J) and National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (1996) 138 ALR 409 (FCA/Lindgren J) ("National Mutual"). In these cases, the present issue did not arise for final decision as it had before Cole J in Manettas. In FAI (NZ), leave was granted to enforce the charge created by the New Zealand equivalent and progenitor of sub-s 6 (1) of the LRMP Act (sub-s 9 (1) of the Law Reform Act 1936 (NZ)), against a solicitor's insurer. The claim was notified to the insurer on 15 July 1991, the period of the relevant policy was 1 October 1990 to 30 September 1991, and the Event had occurred in 1984 and 1985. The insurer appealed against the granting of leave. The New Zealand Court of Appeal dismissed the appeal. The Manettas point was not raised, but two of the three members of the Court referred to the applicability of the terms of the statutory provision to a claims made and notified policy where the Event preceded the existence of the policy. Richardson J said: "Two elements must be present before a charge arises: the first is a contract of insurance by which the insured is indemnified against liability to pay any damages or compensation; the second is an event giving rise to a claim for such damages or compensation. In providing that the charge arises 'on the happening of the event giving rise to the claim for damages or compensation' the subsection does not advert to those situations where the contract to indemnify was entered into subsequent to the event giving rise to the plaintiff's claim. No doubt that was because claims notified were not a common form of insurance practice in the contemplation of the legislators of 1936. But the subsection itself also provides that the charge is on 'all insurance money that is or may become payable in respect of the liability'. It is implicit in the subsection and in accord with reality that the charge cannot arise unless and until there is insurance money available out of which it can be met. In short the charge arises only when there is in existence both a relevant contract of insurance indemnifying the insured and an event giving rise to the claim. Insurance cover was provided for Mr Leishman [the insured solicitor] by FAI from 1 October 1990. The claim was notified on 15 July 1991 but the event giving rise to the claim occurred at the latest on 1 April 1985 when the purchase from Blundell and Brown and the sale of the property to the third party were completed. The charge against FAI insurance money under s 9 (1) did not arise before 1 October when the insurance cover began." (at 16.43-17.08, underlining supplied)

Similarly, Robertson J said: "I am conscious that the Law Reform Act 1936 was passed in a very different social and commercial environment than that which now exists. I rather suspect that the legislators did not contemplate the effect of a 'claims notified' policy. I am satisfied however that the Court should interpret the words of the statute to reflect the apparent policy and intention. Three separate relationships require to be assessed and their collective effect analysed. The respondent's claim against Mr Leishman is in equity and no limitation period applies. The relationship between Mr Leishman and his insurers is in contract. The trigger point in respect of a potential liability for the appellant is the emergence of a claim against Mr Leishman during the period of insurance. It would make the insurance cover of no utility if one were to interpret the provisions so that a claim notified in respect of an incident more than six years earlier (but itself not statute-barred) could not create a liability. The notification of the claim was made in this case more than six years after the event giving rise to liability. I am not attracted by an interpretation which indicates that the remedial benefit contained in s 9 of the law Reform Act is to have no potential for application." (at 25.03-25.20) It can be seen that their Honours did not treat the words "... shall on the happening of the event giving rise to the claim for damages or compensation, ... be a charge ... " as precluding the application of the provision to a claims made and notified policy which comes into existence after the Event. Rather, Richardson J expressly, (at 16.54-.55), and Robertson J implicitly, emphasised that the charge was one over "insurance money available out of which [the charge] can be met". The third member of the Court, Hardie Boys J, did not address the present issue. In Schipp v Cameron, Young J expressed the view that Cole J had emphasised the words "on the happening of the event ... be a charge on all insurance moneys", while the New Zealand Court of Appeal in FAI (NZ) had given more emphasis to the words "all insurance money that is or may become payable in respect of a liability". His Honour granted leave. With respect to Manettas, he said that it seemed to him that the views there expressed were "out of kilter with the general approach to s 6" (at 75,871, right column). He also referred to other factors which, he thought, told "against the view espoused by Cole J being correct" (at 75,872 right column). Between Young J's decision granting leave in Schipp v Cameron on 4 May 1995, and mine granting leave in National Mutual on 9 July 1996, the High Court gave judgment on 3 November 1995 in Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399 ("Bailey"). I will return to that case. Taking into account what was said in Bailey, I expressed the view in National Mutual that it was arguable that the statutory charge applied to a claims made and notified policy which came into existence after the Event. I suggested a construction according to which effect could be given to the different parts of sub-s 6 (1) which had been emphasised by Cole J in Manettas on the one hand, and by the New Zealand Court of Appeal in FAI (NZ) on the other hand. It seemed to me that arguably this could be achieved, if the charge were conceived of as partaking of the nature of a floating charge which becomes fixed once there are moneys payable in respect of the liability in question. (Since delivering judgment in National Mutual, I have become aware that a suggestion to a similar effect had been made by Mr A J Meagher SC in "Recent Decisions on Section 6 of the Law Reform (Miscellaneous Provisions) Act 1946" (1993) 6 (1) Ins LJ 68 at 77.) I expressed the view in National Mutual that nothing said by members of the High Court in Bailey rendered this construction unarguable for the purpose of the granting of leave under sub-s 6 (4). Bailey was an appeal from the decision of the New South Wales Court of Appeal in New South Wales Medical Defence Union Ltd v Crawford (1993) 31 NSWLR 469 ("MDU v Crawford"). Some of the background facts were recorded in my discussion of Oswald v Bailey earlier. Relevantly, Mrs Oswald and Mr Crawford had sought leave to enforce a supposed charge against MDU under s 6, and MDU had sought a declaration that it was no longer an "insurer" within the meaning of the section. Yeldham J refused the declaration and also refused leave. On 18 September 1987, the Court of Appeal reversed the latter decision and granted leave to Mrs Oswald and Mr Crawford to join MDU as a co-defendant in their respective actions and "to commence actions against it": (1987) 11 NSWLR 715 at 728E. As noted earlier, an application for special leave to appeal to the High Court was refused. Mr Crawford's proceeding against the estate of the late Dr Bailey and MDU went to trial before Enderby J. Mr Crawford succeeded. The defendants appealed, and again Mr Crawford generally succeeded: (1993) 31 NSWLR 469 (CA). I need not, at present, discuss the issues. The Court of Appeal agreed with Enderby J that MDU was liable to indemnify Dr Bailey's estate. On further appeal, the High Court, in Bailey, agreed. That result provided an answer to the question arising under s 6, since it had not been argued that sub-s 6 (1) did not impose a charge on all insurance moneys that were or might have become payable by MDU in respect of the liability of Dr Bailey or his estate to Mr Crawford. However, in their joint judgment, with which Brennan CJ, Deane and Dawson JJ expressed agreement, McHugh and Gummow JJ discussed the genesis and antecedents of s 6. I will not give an account of that discussion, and will refer only to passages which may be considered relevant to the Manettas point. Obviously, it is necessary to assess the significance of those passages for the present case, having regard to the nature of the issue which was before the Court. Their Honours considered that the charge for which sub-s 6 (1) provides clearly arises upon the happening of the Event, and that this is made clear, not only by the terms of sub-s 6 (1), but also by those of sub-ss 6 (2) and (3). At pp 447-448 of their Honours' judgment, there occurs the following passage: "The reference in s 6 (7) to the contract of insurance is, in our view, that contract referred to in s 6 (1) by which the insured is indemnified on the happening of the event giving rise to the claim for damages or compensation. It is not that contract identified in s 6 (1) as varied or replaced by unilateral or mutual action of the insurer and insured in the interval between the happening of the event giving rise to the claim for damages or compensation (and thus to the charge) and some later date, such as the recovery of judgment in the action by the claimant to enforce the charge against the insurer. That is not to say that the contract may not, at the time the charge arises, contain provisions conferring rights which, in the events which have already happened or which later happen, are exercisable by the insurer against the insured. But those rights, whenever exercised, draw their life from the contract at the time when the charge descended, not from any subsequent variation or replacement of that contract." (underlining supplied)

In Bailey, there was a contract by which the insured, Dr Bailey, was indemnified on the happening of the event. Their Honours referred to McMillan v Mannix (1993) 31 NSWLR 538 (CA), a case in which a provision of the policy made cooperation of the insured in the event of a claim, a condition precedent to the insurer's liability, and breach of the obligation to cooperate, a ground for disclaiming liability. Their Honours described the right to disclaim as an entitlement "conferred by the contract as it stood at the earlier date [the date of the happening of the Event], albeit the entitlement became exercisable only after the happening of a later event" (at 449). Their Honours said that in that case, the New South Wales Court of Appeal, by majority, had held, correctly in their Honours' view, that there were no insurance moneys which were or might become payable within sub-s 6 (1). Their Honours conceived of the expression in sub-s 6 (1) "all insurance moneys that are ... payable" as covering the case where the terms of the policy and the events that had happened were such that it could be said that a "particular sum" was payable by the insurer to the insured on the happening of the Event. They said: "In that state of affairs, the charge has an immediate operation upon an existing and quantified obligation of the insurer to make payment to the insured." (at 449)

In relation to the alternative, "the insurance moneys that ... may become payable", their Honours said: "The phrase in s 6 (1), 'insurance moneys that ... may become payable', is apt to deal with the situation where, whilst the charge has descended, there is as yet no sum which could be identified as presently payable by the insurer to the insured. In such a case, the statutory charge operates, by loose analogy to an agreement for a charge on after-acquired property, upon such moneys as and when they do become payable. However, there will be nothing in respect of which the charge may be enforced if the moneys never become payable by reason of the exercise by the insurer of rights to avoid the contract or of a vitiating factor in its formation. So also in the case of a breach which, pursuant to the terms of the contract or the general law, entitles the insurer to disclaim liability and this state of affairs exists when action is brought by the claimant under s 6 (4) or, as necessary, leave is sought to commence that action. In all these cases, there were no insurance moneys which were payable when the charge arose and none have become payable. However, once the charge has descended on the happening of the event giving rise to the claim for damages or compensation, no mutual or unilateral action of insurer or insured which is taken otherwise than under or pursuant to the contract of insurance or the general law as it operates upon the contract may vary, discharge or otherwise qualify or abrogate the contract of insurance so as to deny to the claimant what otherwise would be the fruits of enforcement of the charge by action taken under s 6 (4) against the insurer. The contract of insurance is that as it stood when the charge descended. Nor, after the charge has descended, is it open to the insurer to rely upon a payment made under the contract to the insured, unless the payment was made without actual notice of the existence of the claimant's charge (s 6 (6)). In these ways the position of the claimant is protected." (at 449-450, underlining supplied)

I have indicated, by underlining, passages which may be thought particularly relevant to the Manettas issue, including passages which assume the existence of a contract of insurance at the time of the Event. But I remain of the view, which I expressed in National Mutual, that Bailey leaves it arguable that sub-s 6 (1) applies to a claims made and notified policy which comes into existence after the Event. It can scarcely be overemphasised that in Bailey the issue was whether the charge which arose upon the happening of the Event fixed upon moneys which would, in the ordinary case, have become payable under the contract of insurance which did in fact exist at the time of the Event. In this connection, it is perhaps noteworthy that the passages from the joint judgment of McHugh and Gummow JJ which I have quoted are preceded by the following: " ... the focus of submissions was on the proposition, advanced by the Union [MDU], that, on the proper construction of s 6 and in light of the 1982 amendments to the articles, in 1985 the council [of MDU] had been entitled to withdraw assistance from the Estate [of the late Dr Bailey]. The result was said to be that no insurance moneys are payable by the Union in respect of Dr Bailey's liability and no subject matter exists upon which a charge could fix under s 6 in favour of Mr Crawford. We turn then to consider the basic questions of construction of s 6 which are raised by the case put by the Union." (at 445, underlining supplied)

FAI relies on AFG Insurances Ltd v Andjelkovic (1981) 54 FLR 398. In that case, a Full Court of this Court considered sub-s 25 (1) and s 26 of the Law Reform (Miscellaneous Provisions) Ordinance 1955 (ACT). Sub-s 25 (1) was in terms relevantly identical to sub-s 6 (1), with one notable exception: instead of "shall ... be", the verb "is" was used. Sub-sections 26 (1), (2) and (3) were similar to sub-s 6 (4) of the LRMP Act. In a joint judgment, the Full Court referred to the proviso requiring the granting of leave, and said: "Section 26 (3) commands the court not to grant leave in certain circumstances. It is not easy to decide precisely what is embraced in the words which describe the circumstances where the court is not to grant leave. In our opinion the court has a general power to grant leave in all cases which do not fall within the provision that it shall not grant leave and in which it is made to appear by evidence available in the application that there is an arguable case of liability against the insured, being a liability against which the insured is indemnified by a contract of insurance in force at the time of the happening of the event said to give rise to the claim." (at 400, underlining supplied)

The case concerned a building company's public liability insurance policy, issued by the appellant insurer, which existed at the time of the Event. The Event was the suffering of personal injury by the respondent when she was inspecting an exhibition home of the building company. While the passage quoted is expressed in general terms, the Full Court cannot be taken to have had in mind a claims made and notified policy which post-dates the Event. FAI also relies on several cases in the Supreme Court of New South Wales in which it was held that the limitation period in respect of enforcement of the charge by the claimant against the insurer begins to run on the happening of the Event, like that in respect of the claimant's cause of action against the insured. The cases are Cambridge Credit Corporation Ltd (Receivers Appointed) v Lissenden (1987) 8 NSWLR 411 (Clarke J) ("Cambridge Credit"), esp at 421; Ratcliffe v Border Homes Ltd (1987) 9 NSWLR 390 (Hunt J), esp at 396-397; and Grimson v Aviation & General (Underwriting) Agents Pty Ltd (1995) 25 NSWLR 422 (CA), esp at 428-429 per Meagher JA with whom Hope AJA agreed, Kirby P dissenting. It seems to me that there is more than one answer to the submission. Firstly, in MDU v Crawford, this line of authority was not followed by any member of the Court (Kirby P, Mahoney and Sheller JJA). The majority (Kirby P, Sheller JA) held that although the charge is created upon the happening of the Event, the right of action to enforce it does not accrue until leave is given. FAI submits, however, that what is significant for present purposes, is an underlying assumption in all three cases, that the contract of insurance existed when the Event occurred. A second answer is that none of the three cases appears to have concerned a claims made and notified policy which post-dated the Event, a situation which may be taken not to have been in their Honours' contemplation. I do not find the submission persuasive, based, as it is, on a line of thinking which has subsequently not been followed by the same court, and which did not address the situation before me. I accept as background to the resolution of the question of construction posed: 1. that the charge for which sub-s 6 (1) provides arises on the happening of the Event, in the present case, prior to the period of the contracts of insurance for the Chatswood and Gosford policies for 1991-1992 (Bailey at 446, 449); 2. that the charge is on insurance moneys that are or may become payable in respect of the liability of McS and Phillips to TCF (Bailey at 447); 3. that if there are no insurance moneys which are or in fact become payable in respect of the liability of McS and Phillips to TCF, there is no property on which the charge can operate (Bailey at 448). It is convenient now to describe what I conceive to be the two competing constructions between which a choice must be made. First construction Sub-section 6 (1) speaks as at the moment after the contract of insurance is entered into, and, for that matter, at subsequent moments throughout the period of the contract of insurance down to the time of the happening of the Event. At that moment, and at those moments, the insured "is indemnified" against liability to pay any damages or compensation. The happening of the Event, is, at that moment, and at those moments, a future event, as is indicated by the words "shall on the happening of the [Event] ... be a charge". The alternatives posed by the expression "all insurance moneys that are or may become payable in respect of that liability" encompass the possibility that the insurance moneys will be payable upon the happening of the Event and the possibility that they will become payable subsequently, in either case, pursuant to the contract of insurance by which the insured is already indemnified. In the latter case, the charge may be conveniently described as a "floating" charge. Second construction Sub-section 6 (1) speaks as at the time of adjudication. As at that time, the insured has entered into a contract of insurance by which the insured "is indemnified [at the time of the adjudication] against any liability to pay damages or compensation". The expression, "shall be a charge" does not convey a future tense but is prescriptive of a legal result to which courts must give effect. The charge which the section creates exists on and from the Event. The charge is a fixed charge in the case where insurance moneys are payable at the time of the Event and a floating charge in respect of insurance moneys that may become payable, and do in fact become payable, at a later date. In relation to the latter, it is immaterial that the insurance moneys become payable pursuant to an insurance contract entered into after the Event: once insurance moneys have in fact become payable in respect of the liability, the charge fixes upon them. I have, with respect, reached the opposite conclusion to that reached by Cole J in Manettas. I favour the second construction referred to above. It seems to me that the following considerations lend support to the second construction: 1. Unlike Cole J in Capita, I do not think that the expression "is indemnified" speaks as at the time of the Event, and therefore requires that a contract of insurance be in existence at that time. The construction that that expression speaks as at the time of adjudication by the Court is at least equally open, and, in my view, it is the construction that is suggested by a natural and unforced reading of sub-s 6 (1). 2. The charge is expressed to be on, relevantly, "insurance moneys that may become payable" in respect of the insured's liability to pay damages or compensation. In Oswald v Bailey, Kirby P considered (at 723F) that the expression "moneys that may become payable" embraced a situation in which the precise amount of insurance moneys payable was not clear at the time of the Event. In Bailey, McHugh and Gummow JJ referred (at 449-450) to further "contingencies" which might be contemplated by that expression, such as an insurer's right to avoid the contract because of a vitiating factor in its formation, or its right to disclaim liability for breach. While their Honours' observations assumed, consistently with the facts of the case before them, the existence of a contract of insurance at the time of the Event, in my opinion, the expression "moneys that may become payable" is apt also to accommodate moneys that may become payable after the subsequent entry by the wrongdoer into a claims made and notified contract of insurance. 3. The terms of sub-s 6 (1) do not expressly restrict the charge to, relevantly, moneys that may become payable under a contract of insurance in existence at the time of the Event. Nor should such a limitation be held to be implied unless this is plainly required. It should not be readily implied because it is inconsistent with the policy objective which underlies the provision, namely, that of achieving the result that moneys which in fact become payable under a liability indemnity policy are made available to a claimant. It would have been a simple matter for Parliament to add such words as "under the contract of insurance in existence at the time of the event giving rise to the insured's liability" at the end of sub-s 6 (1) if the provision had been intended to have the restricted operation suggested. 4. No reason of policy has been suggested, and I can think of none, why the provision should not apply to a claims made and notified policy which comes into existence after the Event. According to either of the two constructions described earlier, the charge is a "windfall" for the claimant. It is no part of the policy which underlies the provision, that the claimant should have been aware of the existence of the contract of insurance, bargained for its existence, or dealt with the insured in reliance on its existence. The legislative policy of ensuring that the claimant will have the benefit of the moneys payable under a contract of liability indemnity insurance is better served by the second construction than by the first. The two constructions referred to earlier are both arguable, and the second should be preferred as better conforming to the purpose of the provision. 5. Sub-section 6 (7) presents no difficulty for either construction: according to the first, "the contract of insurance" to which that sub-section refers is that which was in existence at the time of the Event; according to the second, it is that which existed during the period in which the relevant claim was made and notified. 6. Once it is accepted that the expression "moneys that may become payable" encompasses the situation where moneys become payable pursuant to a claims made and notified policy entered into after the Event, it is clear that the language of sub-s 6 (1) is always satisfied as at the time of the Event, since it is always the case that the wrongdoer may, after the Event, enter into a claims made and notified policy under which relevant moneys will become payable. 7. It seems to me, with respect, that the reasoning in Manettas gives an undue significance to the expression "on the happening of the [Event]". On any reckoning sub-s 6 (1) provides for a charge which comes into being on the happening of the Event and continues in existence afterwards. Indeed, it is reasonable to think that in most cases, including most non-"claims made and notified" cases, it is insurance moneys that "may become payable" after the Event rather than those that "are payable" at the time of the Event, on which the statutory charge can be expected to operate. This is because in most cases (as sub-ss 6 (2) and (3) contemplate) the amount of the insured's and the insurer's liability will not be known on the happening of the Event, and because the making of a claim by the insured upon the insurer for indemnity will be a condition precedent to the arising of the insurer's liability to indemnify. If sub-s 6 (1) had made explicit that which is implicit, by saying "... on and from the happening of the Event ...", rather than simply "... on the happening of the event ...", the capacity of the provision to encompass claims made and notified policies subsequently entered into would, perhaps, have been clear. I am not bound by Cole J's construction of sub-s 6 (1) in Manettas but ordinarily I should follow a decision of a Judge of a Supreme Court of a State, a fortiori, on a question of construction of a statute of the State, unless convinced that it is plainly wrong: cf Bradley v Armstrong (1981) 39 ALR 118; 55 FLR 355 (FCA/FC) at 356 (Fox J), 361 (Connor J); Hamilton Island Enterprises Pty Ltd v FCT [1982] 1 NSWLR 113 (Rogers J) at 119F; Re Rothercroft Pty Ltd and Companies (NSW) Code 1981 (1986) 4 NSWLR 673 (Kearney J) at 679E; DCT v Access Finance Corp Pty Ltd (1987) 8 NSWLR 557 (CA) at 558C-D; Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492; Upperedge v Bailey (1994) 13 ACSR 541 (FCA/Jenkinson J) at 543; Fernando v Commissioner for Police (1995) 36 NSWLR 567 (CA) at 593 (Powell JA); Thompson v Hill (1995) 38 NSWLR 714 (CA) at 730-731 (Kirby P). I say "ordinarily" because there are exceptions to the general principle, of which inconsistency between Supreme Court decisions provides an obvious example. While Manettas is the only Supreme Court decision of a final nature on the present issue to which I was referred and of which I am aware, the application to it of the rule of practice to which I have referred must, in my view, take into account the support for the opposite construction expressed by Young J in Schipp v Cameron, albeit on an application for leave, and by the New Zealand Court of Appeal in FAI (NZ), albeit on an appeal against a grant of leave. With respect, I think that the construction of sub-s 6 (1) in Manettas is wrong and I decide that the provision is available in the case of moneys which become payable under a claims made and notified policy entered into after the Event. This conclusion makes it necessary to consider, for the purpose of deciding the question of leave, the following further submissions which were made by FAI directed against the granting of leave: (a) As a matter of discretion, leave should not be granted; there are "good common law defendants" available who are vigorously, and through competent legal representatives, asserting the alleged obligation of FAI to indemnify; it is undesirable that a third party such as TCF should be allowed to intervene in litigation between the insurer and insured; no reasons are shown by TCF to the contrary; and support for the present submission is found in the very limited role that TCF has played in the hearing which can be adequately described as that of supporting McS's and Phillips' case. (b) The Court should be satisfied that FAI is entitled to disclaim liability under the Chatswood and Gosford policies for the 1991-1992 year and that sub-s 6 (4) therefore has the effect that the Court must not grant the leave sought by TCF. (c) The dishonesty exclusion of the Chatswood policy is activated, and therefore it would be futile to grant leave under the Chatswood policy. It is premature to consider (b) and (c) until the factual issues as between PMS and FAI have been addressed (see later). Should leave be refused on discretionary grounds? The purpose of the requirement of leave and, concomitantly, factors which might be expected to be relevant to the exercise of the discretion to grant leave, have been considered in several cases: Campbell v Mutual Life and Citizens Fire and General Insurance Co (NZ) Ltd [1971] NZLR 240 (HC/Roper J) at 243; Andjelkovic v AFG Insurance Ltd (1980) 47 FLR 348 (ACT/Blackburn CJ) at 355-356 (on appeal at (1981) 54 FLR 398); National Mutual Fire Insurance Co Ltd v Commonwealth of Australia [1981] 1 NSWLR 400 (CA) at 402C-403B (Moffitt P, with whom Glass and Samuels JJA agreed); Cambridge Credit Corporation Ltd v Lissenden (1987) 8 NSWLA 411 (Clarke J) at 422; Oswald v Bailey (1987) 11 NSWLR 715 (CA) at 725B-E (Kirby P), at 742D,E (Priestley JA); Dixon v Royal Insurance Australia Ltd (1991) 105 FLR 129 (ACT/Higgins J) at 135-136; Grimson v Aviation and General (Underwriting) Agents Pty Ltd (1991) 25 NSWLR 422 (CA) at 424A-425E (Kirby P). In Andjelkovic v AFG Insurance Ltd, Blackburn CJ said: "I may sum up my decision as follows. The main purpose of the provision requiring leave to commence the statutory action is to prevent the substitution of a statutory claim for a claim against the insured where the latter is available and will apparently be effective. Leave may also be refused where the applicant's claim is unarguable, that is, where the applicant's contention that the statutory conditions for the vesting in him of a right of action have been fulfilled could not possibly succeed. But if on such an issue there is an argument in the applicant's favour which could be seriously put, then in my opinion, on the proper construction of the Ordinance, leave should be granted and the issue should be determined in the action in any available way." (at 355-356, underlining supplied)

An appeal was allowed on the basis that the evidence did not establish an arguable case, but the passage quoted appears to have been approved ((1981) 54 FLR 398 (FCA/FC) at 399-400). Later cases have not diminished the authority of this passage. It seems to me that in the perhaps unusual circumstances of the present case, TCF must show that it is less likely to recover the amount of its judgment against PMS if leave is refused than if it is granted. TCF cannot be charged with having ignored the letter of the judicial warnings in some of the passages cited above against treating enforcement of the charge, rather than the ordinary action against the insured wrongdoers, as its primary remedy to be pursued. As noted earlier, it obtained judgment against McS and Phillips on 2 December 1992 for $626,586 plus costs. But as early as 22 December 1992, 20 days after obtaining judgment, it commenced the TCF insurance proceeding. It did so solely on the basis that FAI had refused to indemnify McS and Phillips. Apart from that fact, there is a lack of evidence as to why TCF resorted to s 6 of the LRMP Act. There is no evidence, for example, that it first unsuccessfully sought to enforce its judgment or that there was reason to think that an attempt to do so would be unsuccessful. There is no evidence that McS and Phillips had refused to seek relief against FAI or had shown no interest in doing so. There is no evidence that TCF was in a position to lead evidence against FAI which McS and Phillips were unable to lead. Clearly, if TCF had threatened enforcement action against McS and Phillips they would have asked TCF to stay its hand pending resolution of their own attempt to extract indemnity from FAI. TCF might have agreed to that request, on condition, for example, that McS and Phillips diligently prosecuted their claim for indemnity and kept TCF informed of progress. Alternatively, they might have refused the request. Either way, it is difficult, on the existing evidence, to perceive as reasonable the launching of the TCF insurance proceeding virtually immediately after the TCF judgment was obtained, for no reason other than that FAI was denying indemnity. It has long since been clear to TCF that McS and Phillips were, through solicitors and senior and junior counsel, engaged in litigating to finality with FAI, the issues touching its liability to indemnify them. TCF's rights are, and always have been, entirely parasitic on those of McS and Phillips. TCF's evidence in chief was formal documentary evidence. In substance, it did not cross examine in relation to the insurance issues. Leading counsel for TCF was absent for a substantial part of the hearing. I hasten to say that these observations, far from being a criticism, are intended to emphasise that TCF's legal representatives took sensible practical measures to minimise their clients' costs, in view of its nominal involvement. The same measures have, fortunately, produced the result that TCF's participation has increased the cost of the proceeding to FAI, only to a commensurately small extent. In its submissions dated 4 September 1995, TCF has acknowledged that in the light of PMS's cross claim, "the application of s 6 is largely academic" (para 9). It submits, however, that an order should be made for payment direct to it. But, having actual notice of a charge in favour of TCF, FAI would be liable to TCF if it were not to pay it and it were to remain unpaid: cf sub-s 6 (6) of the LRMP Act. It has not been in dispute that, subject to FAI's defences, the liability of McS and Phillips to TCF under the TCF judgment is within the insuring clauses of the Chatswood and Gosford policies. I have contemplated two results on TCF's application for leave. It would be possible to grant leave on the basis that, in any event, it should not have its costs from FAI. Alternatively, it would be possible to refuse leave and to order that TCF pay FAI's costs of the application for leave, that is to say, FAI's costs of the TCF insurance proceeding to the extent that they would not have been incurred but for TCF's participation. In my view, the latter course is, in principle, the appropriate one to take since, in my view, TCF has not made out a case for the granting of leave.

I certify that this and the preceding 126 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren. Associate: Dated: 12 March 1997 Heard: 5, 6, 7, 8, 9, 13, 14, 15, 16, 19, 20, 21, 22, 23, 26, 27, 28, 29, 30 June; 3, 4, 5, 6, 7, 10, 11, 12, 13, 14 July; 23, 25 August 1995; 11 March 1996. Place: Sydney Last written submission received: 13 March 1996 Decision: 12 March 1997 (Reasons for Judgment Part I) Appearances: In proceeding No NG 312 of 1992 Mr J C Campbell QC with Mr P Liney of counsel instructed by Colin Biggers and Paisley appeared for the applicant (FAI). Mr P M Biscoe QC with Mr S Climpson of counsel instructed by Gillis Delaney appeared for the first, second, fourth and fifth respondents (McSweeney, Phillips, Turner and Cullen). Mr D M Vaughan, solicitor, of Heaney, Richardson & Nemes appeared (submitting) for the third respondent (Beale). Mr K Manion of counsel, instructed by Walters Solicitors, appeared (submitting) for the sixth respondent (Gaertner). Proceeding No NG 948 of 1992 Mr P Roberts with Mr M K Minehan of counsel instructed by T G Hartmann & Associates appeared for the applicant (TCF). Mr J C Campbell QC with Mr P Liney of counsel instructed by Colin Biggers & Paisley appeared for the respondent (FAI).