Andrew Wheeler trading as PricewaterhouseCoopers v Aoyin Group Ltd

Supreme Court of NSW|2021-08-11|Before: Rees J, Gleeson JA, Beazley P, Barrett JA

Solicitors: Ashurst Australia (Plaintiffs/Cross-defendants) Mills Oakley (Defendant/Cross-claimant) File Number(s): 2017/252324

FACTS

PwC was retained on 5 February 2015 to assist Aoyin to establish a locally incorporated authorised deposit taking institution (ADI) and obtain regulatory authorisation to carry on a banking business in Australia. The law firm Baker McKenzie was also retained.
To achieve its objectives, Aoyin had to comply with the ADI Authorisation Guidelines published by the Australian Prudential Regulation Authority (APRA), including that all substantial shareholders of Aoyin were 'fit and proper' persons or entities. Aoyin's founder, Mr Chen, had no experience in conducting shareholder due diligence for the purpose of assessing compliance with the 'fit and proper' requirement and had never previously attempted to establish an ADI. Nor had Mr Ting; he understood that PwC was the expert and would know what needed to be done.
At trial, Mr Ting may be expected to give evidence that, by March 2015, he was aware of the 'fit and proper' requirement. By April 2015, Mr Ting understood that PwC had been engaged to advise Aoyin on the regulatory feasibility of establishing a bank. He assumed that PwC would, as part of that advice, assess whether Aoyin's substantial shareholders complied with the requirement. Mr Ting expected that PwC would gather whatever information it needed to make that assessment and, if PwC needed information from Aoyin, it would ask.
In June 2015, Aoyin commenced background checks on shareholders but encountered problems conducting the checks and sought PwC's assistance. In July 2015, Mr Ting asked Mr Groves of PwC to carry out criminal record checks on investors based in foreign jurisdictions.
In October 2015, Mr Ting submitted a Preliminary Consultation Paper to APRA, which stated that due diligence would be performed on each substantial shareholder to demonstrate that they were 'fit and proper'. Mr Ting understood that PwC would undertake this due diligence. On 7 October 2015, Mr Groves told Mr Ting that PwC was preparing a checklist to be used to test whether shareholders complied with the 'fit and proper' requirement.
On 29 October 2015, shares in Aoyin were allotted inter alia to a Hong Kong company, AUD Investment Ltd. Mr Chan and Ms Fong were directors of AUD Investment and had been convicted of fraud in Hong Kong and sentenced to four years imprisonment. As such, AUD Investment either did not comply with the 'fit and proper' requirement or, at least, there was a substantial risk that AUD Investment did not comply.
Whilst it is not suggested that PwC then knew that the directors of AUD Investments Ltd had criminal convictions for fraud, Aoyin sues PwC in tort and contract on the basis that PwC failed to execute its duties such that shares were allotted to AUD Investments. This prevented Aoyin achieving its goals. Aoyin sues PwC for damages, being expenditure incurred after the allotment date, but wasted, in the course of its efforts to establish a banking business in Australia.

Misleading and deceptive conduct claim

Following the allotment of shares, Mr Ting continued to understand that PwC was responsible for undertaking shareholder due diligence sufficient to assess compliance with APRA's 'fit and proper' requirement. In November 2015, a briefing note was being prepared by PwC and submitted to APRA. On 21 December 2015 and 15 January 2016, Mr Ting attended further meetings, attended by PwC, to develop the proposal to establish a bank. From about February 2016, Mr Ting's involvement in the proposal diminished; Angus McBean took over primary responsibility for the project. Mr Ting, however, continued to attend meetings with PwC and to engage with APRA.
On 20 January 2016, Mr Groves of PwC sent an email to Mr Ting, advising that PwC was currently drafting the application under the Financial Sector (Shareholdings) Act 1998 (Cth) (FSSA). PwC sought confirmation of the following details: (emphasis added) 1) Is the shareholder schedule in the Preliminary Consultation up to date? If not, could you please provide the latest holdings for all shareholders. I have attached below the excel sheet you provided back in September 2015. 2) Either (a) confirm that none of the FPA shareholders are foreign government, foreign government agency or foreign government enterprise; or (b) identify those shareholders who are. 3) Confirm that none of the shareholders are "associates" of each other, with regard to the FSSA definitions (see below), other than Karen Kuang, who has interests in several of the minor holdings (as we noted in the spreadsheet). 4) A brief summary for each substantial shareholder (over 5%) of the due diligence completed so far (i.e. background checks etc.) 5) Is the corporate structure attached the latest? (has the name change been made to AoYin Holdings yet or still FPA?)
It is apparent that PwC did not then have a list of shareholders following the allotment of shares in October 2015, and was seeking to obtain the results of Aoyin's shareholder due diligence conducted thus far. On 25 February 2016, Mr Ting replied. As to PwC's request for a summary of the due diligence already completed, Mr Ting advised: (emphasis added) Please find attached a spreadsheet summarizing the status of checks performed so far. I have also attached a PDF scan of the "Client Information Checklist" referred to within the spreadsheet for each substantial shareholder. As discussed previously, we will need PwC's assistance to deal with overseas check of some of the non-Australian shareholders. Please also advise as soon as possible if you think there are any further checks which may need to be done so that we can ask the substantial shareholders to be ready.
Attached to Mr Ting's email was a spreadsheet with the file name "AOYIN Substantial Shareholders DD Summary". The spreadsheet contained the following introductory information: older Due Diligence Status Summary ● For all founding shareholders, due diligence is performed according to the "Client Document Checklist" developed with assistance from Baker & McKenzie … … ● Summary of substantial shareholder (over 5%) DD completion status is attached. ● Copy of the Client Document Checklist for each substantial shareholder is also attached.
Also attached was a Client Document Checklist for each substantial shareholder. The checklist contained 11 items including, for natural persons: 9 Criminal history background checks 10 Bankruptcy checks
The Client Document Checklist for AUD Investment recorded that the directors of the company were Mr Chan and Ms Fong. Further, for Ms Fong, "need HK criminal check … need HK bankruptcy check". The supporting Client Document Checklists for other substantial shareholders contained similar details.
Returning to the spreadsheet described at [15], there was a row for each substantial shareholder, including AUD Investment. There was a column for each of the items in the "Client Document List". Either "Y" or "N" was recorded in the substantial shareholder's row in respect of each of these items. The spreadsheet recorded that items 9 and 10 in the checklist had not been completed in respect of Ms Fong. In addition, there was a column entitled "Other Comments". For AUD Investments, the "Other Comments" column added: "Criminal check and bankruptcy check not done for Ms FONG in Hong Kong." Similar comments were made in the "Other Comments" column in respect of other criminal checks and bankruptcy checks yet to be obtained for other substantial shareholders in the Peoples' Republic of China or the Hong Kong Special Administrative Region of the Peoples' Republic of China.
On 7 March 2016, Mr Ting attended a meeting with Mr Groves and Mr Rockman of PwC. Mr Ting asked what other shareholder due diligence was required, in particular, for offshore investors. Mr Groves advised that PwC's forensics team would give Mr Ting more information on that aspect.
On 21 March 2016, Mr McBean sent an email to Mr Forwood and Mr Groves of PwC, copied to Mr Ting, entitled "Fit & Proper" as follows: I just wanted to touch base following our meeting a couple of weeks ago and see if you had given any thought to providing assistance with a process for determining fitness and proprietary of our founding shareholders. … I think there is a broader piece of work on Security and Financial Claim but the immediate need is a focus on shareholders.
The next day, 22 March 2016, Mr Groves replied to Mr McBean and Mr Ting: Please see below a proposed scope covering the potential checking activities we could do on shareholders. Happy to discuss or refine as needed.
Mr Grove set out details of the scope of works, being "Phase 1" and "Phase 2 (if required)". Phase 1 included: … ● Conduct a suite of checks with subscription databases in Australia, HK and China to identify any adverse information, such as past litigation, credit defaults (only for instances where the individuals have applied for credit through a company), bankruptcy, regulatory offences or entries on global Politically Exposed Persons (PEPs) and sanctions lists. ● Conduct an online media review to gauge reputation and standing within the industry as reported in media such as industry specific publications; online journals, blogs and other social network forums, focussing on: ● Potential government connections and political exposure ● Financial performance indicators and status as reported in the public domain ● Indications of unethical conduct or breaches of corporate social responsibility In order to conduct the checking we will require dates of birth from passports/identity documents provided and names in Chinese characters. A fee estimate was provided.
Mr Ting described this email as an initial proposed scope of work for shareholder due diligence. Mr Ting deposed that it was unusual for PwC to propose, in writing, a scope of work and seek Aoyin's instructions before commencing the work. As far as Mr Ting was aware, PwC took that course on only one other occasion in relation to work described as "Managed Information Technology Request for Proposal Support" in January 2016. Otherwise, all other work performed under PwC's retainer was undertaken without a written scope of work first being provided to Aoyin.
On 31 March 2016, Mr Chen, Mr Ting and Mr McBean attended a meeting with Mr Rockman of PwC and Mr Fuggle of Baker McKenzie, at which the misleading and deceptive conduct is said to have occurred. The minutes of the meeting record: ● Does PwC and Baker & McKenzie think it is necessary to change our shareholders? No, because: - APRA has not signalled for changes in our shareholders - We should keep the story the same - Part of the delay in response is because of APRA resourcing and bureaucracy
According to the pleading, Mr Fuggle represented to Aoyin that it was not necessary for Aoyin to change the composition of its substantial shareholders. However, in fact, it was necessary to change the composition of Aoyin's substantial shareholders as AUD Investment did not comply with the 'fit and proper' requirement, or there was a substantial risk that it did not comply. Mr Ting says that, had Mr Fuggle said that there was a need to change the shareholders of Aoyin, or that he was unable to say whether such a change was needed as sufficient due diligence had not yet been undertaken, Mr Tink would have immediately recommended to Mr Chen that due diligence be completed and that Aoyin avoid incurring any further unnecessary expense in relation to the ADI application until due diligence was completed.
As against PwC, Aoyin pleads that Mr Rockman remained silent in the face of Mr Fuggle's representation, by reason of which PwC is also said to have made the same representation. In fact, Mr Rockman knew that due diligence sufficient to determine whether there was a substantial risk that any substantial shareholder of Aoyin did not comply with the 'fit and proper' requirement had not been conducted. Alternatively, Mr Rockman did not know whether due diligence had been conducted sufficient to determine whether there was such a risk.
Aoyin contends that a person in its position had a reasonable expectation that, at the time when Mr Fuggle made his representation, Mr Rockman would have: 1. disclosed that due diligence sufficient to determine whether there was a substantial risk that any substantial shareholder of Aoyin did not comply with the 'fit and proper' requirement had not been conducted; or 2. disclosed that he did not know whether due diligence had been conducted sufficient to determine whether there was such a risk; and 3. qualified Mr Fuggle's representation by reference to these matters.
In failing to do so, it is said that Mr Rockman's conduct was misleading or deceptive, by reason of which Aoyin is said to have suffered loss, compensable under the Australian Consumer Law. (Although it appears from the pleading that PwC's representation by silence is said to be continuing, subsequent correspondence between the parties has clarified that the allegation of misleading and deceptive conduct is confined to the non-disclosure of matters at the 31 March 2016 meeting.)
For completeness, PwC also relies on two emails exchanged in July 2016. On 13 July 2016, Mr Rigby of PwC sent an email to Mr McBean, following a meeting that day: "As discussed, please see below the due diligence we propose to conduct on the shareholders". Phase 1, Phase 2 and Phase 3 were described. On 19 July 2016, Mr McBean replied, "We are happy for you to proceed with Phase 1 only at this stage."

PRINCIPLES

There is no dispute as to the principles. The Court will not allow an amendment "if it is so obviously futile that it would be liable to be struck out if it had appeared in the original pleading" McGuirk v University of New South Wales [2009] NSWSC 1424 at [18] (Johnson J). As to when a pleading can be struck out, the Court may order that the whole or any part of a pleading be struck out if the pleading discloses no reasonable cause of action: rule 14.28(1)(a), Uniform Civil Procedure Rules 2005 (NSW).
The principles to be applied when considering an application to summarily dismiss claims on the basis that no reasonable cause of action is disclosed - or to strike out a pleading on the same basis - were summarised by Gleeson JA (Beazley P and Barrett JA agreeing) in Simmons v NSW Trustee and Guardian at [196]-[199]: [196] It is not in dispute that "great care must be exercised to ensure that under the guise of achieving expeditious finality a plaintiff is not improperly deprived of [their] opportunity for the trial of [their] cause by the appointed tribunal": General Steel Industries Inc v Commissioner for Railways (NSW) (General Steel) [1964] HCA 69; 112 CLR 125 at 130 (Barwick CJ). [197] More recently in Agar v Hyde [2000] HCA 41; 201 CLR 552, Gaudron, McHugh, Gummow and Hayne JJ said at [57]: "Ordinarily, a party is not to be denied the opportunity to place [their] case before the court in the ordinary way, and after taking advantage of the usual interlocutory processes. The test to be applied has been expressed in various ways, but all of the verbal formulae which have been used are intended to describe a high degree of certainty about the ultimate outcome of the proceeding if it were allowed to go to trial in the ordinary way." [198] Subsequent authorities have reaffirmed that formulation: see Batistatos v Roads and Traffic Authority (NSW) [2006] HCA 27; 226 CLR 256 at [46]; Spencer v Commonwealth at [24]. [199] In Shaw v New South Wales [2012] NSWCA 102, Barrett JA (with whom Beazley, McColl, Macfarlan JJA, and McClellan CJ at CL agreed) expressed the test for summary dismissal as follows at [32]: "The question is ... whether the claims in question are so obviously untenable or groundless that there is 'a high degree of certainty' that they will fail if allowed to go to trial; and whether this is one of the 'clearest of cases' in which the court may accordingly intervene to prevent the claims being litigated."
Courts are especially reluctant to strike out part of a pleading on an issue of fact as opposed to an issue of law. In Webster v Lampard (1993) 177 CLR 598; [1993] HCA 57, Mason CJ, Deane and Dawson JJ observed at 602-603: The power to order summary judgment must be exercised with "exceptional caution" [General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129] and "should never be exercised unless it is clear that there is no real question to be tried" [Fancoun v Mercantile Credits Ltd (1983) 154 CLR 87 at 99] … Nowhere is that need for exceptional caution more important than in a case where the ultimate outcome turns upon the resolution of some disputed issue or issues of fact. …
That is so even where the Court may take the view that one party is unlikely to succeed at trial on the issue of fact. In Spencer v The Commonwealth (2010) 241 CLR 118; [2010] HCA 28, French CJ and Gummow J said, at [25]: Where there are factual issues capable of being disputed and in dispute, summary dismissal should not be awarded to the respondent simply because the court has formed the view that the applicant is unlikely to succeed on the factual issue.
Similarly, in Wickstead v Browne (1992) 30 NSWLR 1; [1992] NSWCA 272, as endorsed on appeal by Deane, Toohey and Gaudron JJ in Wickstead v Browne (1993) 10 Leg Rep SL2, Kirby P observed, at 5: Common experience teaches that it is usually more efficient and just to consider the viability of a cause of action when the facts said to support it are adduced and the suggested action can be judged with a full understanding of all relevant evidence. Testimony gives colour and content to the application and development of legal principle.
That is, the plaintiff's case may not simply be the sum of its pleading, affidavits and documentary exhibits. At trial, the plaintiff's witnesses may be expected to bring their affidavits 'to life' - in a way which may enhance or detract from its claim - which evidence may be considered together with evidence adduced from those witnesses, and the defendant's witnesses, during cross-examination. However, if the plaintiff's case is, on any view of it, destined for failure, the plaintiff should not be permitted to take the evidence to trial.

ARGUMENTS

PwC submitted that the evidence - in particular, the emails of 21 and 22 March 2016 - led to the inevitable conclusion that the misleading or deceptive conduct case has no reasonable prospects of success, even when taken at its highest. Complex, disputed factual questions were not involved. Whether conduct is misleading or deceptive is a question of fact which must be determined in light of the surrounding circumstances: Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; [2004] HCA 60 at [109] (McHugh J). Conduct is misleading or deceptive if it leads into error: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 198; [1982] HCA 44 (Gibbs CJ). If the person to whom the conduct is directed does not labour under some error, then the conduct is not misleading or deceptive: Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136; (1982) 42 ALR 177 at 200 (Deane and Fitzgerald JJ). Whether conduct leads into error is not determined "at large" or in a vacuum. The conduct is assessed according to the person at whom it was directed, as well as all the surrounding circumstances. This includes the state of knowledge to whom the alleged misrepresentation is directed: Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25 at [26] (French CJ). As such, any misleading quality of PwC's alleged misrepresentations must be assessed having regard to what Aoyin knew about the state of due diligence that had been conducted on Aoyin's substantial shareholders.
PwC says it is perfectly apparent from Mr Ting's affidavits and the contemporaneous documents what due diligence work had been done by Aoyin and what still needed to be done by PwC. Gaps in information had been identified, which PwC was to fill on receipt of instructions to proceed with Phase 1. Further, there was no doubt in Mr Ting's mind that this was a separate body of work for which a scope of work was specifically provided and Aoyin's instructions sought before commencing such work. In the absence of such instructions, there was no reason think - and no suggestion that Mr Ting did think - that PwC had commenced or completed the work. To suggest that PwC nonetheless had an obligation to speak and say that, because the checks had not been done and needed to be done there was a substantial risk, would be an obligation to tell Aoyin what it already knew.
Fatal to the misleading and deceptive conduct case was said to be that Aoyin knew, at the time of the meeting on 31 March 2016, that shareholder due diligence had not yet been conducted, nor commenced, nor even approved to be commenced by Aoyin. PwC emphasised the description of the different phases in PwC's email of 22 March 2016. Phase 2 was "if required". Phase 1 was not. Self-evidently, Phase 1 was required. The first bullet point of Phase 1 described checks that Aoyin already knew it had to conduct and had not yet conducted. It was also said to be clear from the final paragraph of the email that the work had not been done and could not yet have be done because PwC did not have the material necessary to do it.
In these circumstances, the contention that Aoyin was misled by Mr Rockman's alleged failure to disclose that due diligence had not yet been completed was said to be patently hopeless. It was said to be plain, beyond any scope for genuine argument, that Aoyin laboured under no error in this regard. The only matter which was said to have had any causative effect was the failure to conduct overseas criminal checks in relation to Ms Fong and Mr Chan. It was said to be absolutely clear that Aoyin knew the position, knew that the necessary criminal checks on overseas shareholders were required to be conducted and had not been conducted, and was aware that any representation from Mr Fuggle was made in that context.
The July 2016 emails were said to be confirm that, months later, Aoyin was still liaising with PwC about the scope of any due diligence. These emails were said to sweep away the last vestiges of Aoyin's case that, as at 31 March 2016, Aoyin was misled by Mr Rockman's silence, causing Aoyin to proceed to expend (ultimately wasted) money in seeking to establish a locally incorporated ADI. Finally, if the pleading were to survive, then PwC submitted that causation was not pleaded. If it was said that Aoyin would have taken certain steps had Mr Rockman not remained silent, it was necessary to identify what those steps were and what consequences would follow from those steps: Anchorage Capital Master Offshore Pty Ltd v Sparkes [2019] NSWSC 384 at [41]-[43].
Aoyin submitted that the determination of whether Aoyin knew that sufficient due diligence had not yet been carried out required investigation into, at least: 1. the extent of Aoyin's knowledge and understanding about what shareholder due diligence had in fact been performed, as at 31 March 2016; and 2. the extent of Aoyin's knowledge about what level of due diligence would be "sufficient" to reach a conclusion as to whether there was a substantial risk that any substantial shareholder of Aoyin did not meet the 'fit and proper' requirement, and thus whether it was necessary to change the composition of Aoyin's substantial shareholders.
This was said to turn on complex, disputed factual questions going beyond a handful of emails. These nuanced and disputed factual issues were best resolved at trial, with a full understanding of all relevant evidence, including oral evidence. It could not be said that there was no triable issue. It was at least reasonably arguable that, as at 31 March 2016, Aoyin: 1. reasonably believed that PwC was (and had, since its engagement, been) responsible for assessing whether there was "a substantial risk that any Substantial Shareholder of Aoyin did not comply with the Fit and Proper Requirement"; 2. reasonably believed that PwC would have conducted "due diligence sufficient to determine" whether there was such a risk before allowing Aoyin to incur substantial expenses in relation to the project; and 3. reasonably believed that if PwC had not undertaken sufficient diligence to assess that risk, it would have said so at the 31 March 2016 meeting, in light of the comment by Mr Fuggle that it was unnecessary to change the composition of Aoyin's shareholders.
Aoyin submitted that PwC's email of 22 March 2016 described optional further checks which it was up to Aoyon to decide whether to undertake. PwC did not tell Aoyin that the checks were essential. The emails did not prove that Aoyin knew the matter that Mr Rockman allegedly failed to disclose at the 31 March 2016 meeting. Nor do the emails establish that it was "not reasonably arguable" that a person in Aoyin's position would have expected Mr Rockman to disclose that matter at the 31 March 2016 meeting. The emails did not establish that Aoyin knew (or ought to have known) that the representation made by Mr Fuggle (and Mr Rockman) was false. The emails did not establish that Aoyin knew that it was necessary to change the composition of its substantial shareholders.

CONCLUSION

Having read, and re-read, the plaintiff's pleading and evidence in support several times, I consider that Aoyin should be permitted to advance its claim for misleading and deceptive conduct at trial. There are sufficient gaps between PwC's email of 20 January 2016 and Mr Ting's reply of 25 February 2016, and between the email exchange on 21 and 22 March 2016 and the meeting itself on 31 March 2016 that it is possible to contend that, in the absence of a remark by Mr Rockman at the meeting, Aoyin may have been misled as to the state of shareholder due diligence or the risks posed by its incomplete state. Whilst the email exchange of 21 and 22 March 2016 refers to Ms Fong, no mention was made of Mr Chan. The content of the emails may be open to varying interpretations. This is not to make any comment on the merits or otherwise of Aoyin's claim for misleading and deceptive conduct, but simply to say that I am not satisfied that the claim should be struck out having regard to the principles summarised at [30]-[34].
The proposed amended pleading, however, should be revised to make plain that the suggested conduct is confined to the meeting of 31 March 2016 and not continuing. In addition, PwC's complaint about the pleading as to causation is well-made. Aoyin needs to amend its pleading to make plain what it is said would have occurred if PwC had said something at the meeting, as it is suggested it should.

ORDERS

For these reasons, I make the following orders: 1. Direct the cross-claimant to provide a proposed Amended Statement of Cross-Claim, addressing the matters described in [45] of the judgment of Rees J on 17 August 2021 by 4.00 pm on 24 August 2021. 2. Direct the cross-defendant to advised by 4.00 pm on 31 August 2021 whether it consents to the filing of the Amended Statement of Cross-Claim in the form proposed in accordance with Order 1. 3. Invite the parties to provide Short Minutes of Order to the Associate to Rees J by 4pm on 2 September 2021 for leave to file the Amended Statement of Cross-Claim, the costs of the application and listing the matter for further directions. 4. Liberty to apply on two days' notice.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 17 August 2021

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