Equititrust Limited (In Liq) (Receiver Appointed) (Receivers and Managers Appointed) (Responsible Entity) v Equititrust Limited

Date of hearing: 2 and 3 May 2016

Registry: New South Wales

Division: General Division

National Practice Area: Commercial and Corporations

Sub-area: Corporations and Corporate Insolvency

Category: Catchwords

Number of paragraphs: 157

Counsel for the Plaintiff: Mr CH Withers, Mr PA Meagher and Mr PR Gaffney

Solicitor for the Plaintiff: Squire Patton Boggs

Counsel for the First, Second, Third and Fourth Defendants: The First, Second, Third and Fourth Defendants did not appear

Counsel for the Fifth and Sixth Defendants: Mr R McHugh SC and Mr JA Arnott

Solicitor for the Fifth and Sixth Defendants: Allens

ORDERS NSD 2028 of 2013 IN THE MATTER OF EQUITITRUST LIMITED (ACN 061 383 944) (IN LIQUIDATION) (RECEIVER APPOINTED) (RECEIVERS AND MANAGERS APPOINTED) BETWEEN: EQUITITRUST LIMITED (ACN 061 383 944) (IN LIQUIDATION) (RECEIVER APPOINTED) (RECEIVERS AND MANAGERS APPOINTED) IN ITS CAPACITY AS RESPONSIBLE ENTITY OF THE EQUITITRUST INCOME FUND Plaintiff

AND: EQUITITRUST LIMITED (ACN 061 383 944) (IN LIQUIDATION) (RECEIVER APPOINTED) (RECEIVERS AND MANAGERS APPOINTED) IN ITS OWN CAPACITY First Defendant

MARK MCIVOR Second Defendant

WAYNE MCIVOR (and others named in the Schedule) Third Defendant

JUDGE: FOSTER J DATE OF ORDER: 17 January 2018

1. By 19 February 2018, the plaintiff serve and lodge with the Associate to Foster J a further iteration of its proposed Further Amended Statement of Claim in which it incorporates all amendments sought by it by means of its Amended Interlocutory Application filed on 16 December 2015 which are agreed by the defendant parties and in which it incorporates the final text of the amendments which it seeks to make to the Amended Statement of Claim filed on 31 October 2014 in order to introduce into its pleaded claims a cause of action against the fifth and sixth defendants pursuant to s 1041E of the Corporations Act 2001 (Cth).
2. Further consideration of the orders to be made by way of final disposition of the plaintiff's Amended Interlocutory Application filed on 16 December 2015 be reserved.
3. The costs to date of the said Interlocutory Application be reserved.
4. To the extent that it may be necessary to do so, the Amended Interlocutory Application lodged with the Court by the second defendant (Mark McIvor) on 9 June 2016 be dismissed.
5. There be no orders as to the costs of the draft Amended Interlocutory Application referred to in Order 4 above.
6. The proceeding be listed for further case management at 9.30 am on 21 February 2018 before Foster J. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

FOSTER J: 1 The plaintiff, Equititrust Limited (In Liquidation) (Receiver Appointed) (Receivers and Managers Appointed) (Equititrust) was the responsible entity (RE) of the Equititrust Income Fund (EIF) which was a managed investment scheme registered under the Corporations Act 2001 (Cth) (the Act). 2 On 20 April 2012, Equititrust was wound up by order of the Supreme Court of Queensland. On the same day, Richard Albarran, Glen Oldham and Blair Pleash of Hall Chadwick were appointed official liquidators of Equititrust. Glen Oldham ceased being a liquidator of Equititrust on 17 July 2013. 3 Earlier, on 23 November 2011, the Supreme Court of Queensland appointed David Whyte of BDO as the receiver of the EIF and ordered that the EIF be wound up in accordance with its Constitution. In April 2011, Equititrust had frozen redemptions of units in the EIF and had ceased making payments to unit holders in the EIF. 4 This proceeding was commenced by Equititrust on 27 September 2013 at the instigation of its liquidators. 5 Equititrust, in its own capacity, is the first defendant. Recently, on 21 September 2017, Jagot J ordered that the interests of Equititrust, in its capacity as a defendant in this proceeding, be represented by Liberty Mutual Insurance Company. Her Honour confirmed that the interests of Equititrust, as plaintiff in this proceeding, should be represented by its liquidators. At the same time, her Honour made appropriate consequential orders. 6 The second defendant is Mark McIvor. Mr McIvor was a director of Equititrust at all relevant times. He is said to have been the controlling mind of Equititrust. I understand that Mark McIvor is bankrupt. Mark McIvor and his family owned or controlled all of the issued capital of Equititrust. 7 The third defendant is Wayne McIvor, the brother of Mark McIvor. Wayne McIvor was also a director of Equititrust at all relevant times. The plaintiff alleges that Wayne McIvor habitually acted in accordance with the wishes of Mark McIvor and at his direction. 8 Until late 2016, the fourth defendant was Thomas Haney. Mr Haney was a director of Equititrust throughout the period from 3 July 2000 to 3 September 2010. He also is said to have acted in accordance with the wishes and directions of Mark McIvor. The claims made by the plaintiff against Mr Haney were settled in principle in about May 2016. This proceeding was discontinued as against him on 20 October 2016 and consequential orders giving effect to other terms of settlement were made by me on 27 October 2016. 9 The fifth defendant is KPMG. The sixth defendant is Paul Steer, a former member of the KPMG partnership. I shall refer to KPMG and Mr Steer together as "the auditors". 10 In 2001, KPMG was retained to audit and review the EIF's half-yearly and annual reports for each of the years 2002 to 2010. It was also retained to audit the EIF's compliance plan for each of those years. 11 Mr Steer was the KPMG partner in charge of the above audits throughout the relevant period. 12 In very brief terms, the case against the auditors is as follows: In the period between late 1999 and late 2011, Equititrust was the RE of the EIF. The business of the EIF was lending money to property developers, predominantly on the Gold Coast (Qld). The RE used the interest payments received on the loans which it made to developers to pay interest to unit holders in the scheme. As already mentioned, the controlling mind of Equititrust was Mark McIvor. As the scheme matured, Equititrust increased the external borrowings made by it as the RE of the EIF in order to obtain funds which were then used to loan more money to its property developer clientele which, in turn, increased the quantum of management fees paid to Equititrust, all for the benefit of Mark McIvor and his family. The members of the EIF did not receive any benefit from the increased external borrowings because there was no corresponding change in the interest payable to them. This practice had the effect of depriving the EIF of liquidity and further leveraging the assets of the scheme (with no prospect of a corresponding benefit to unit holders). This state of affairs meant that the EIF was unable to survive a liquidity crisis that it ultimately experienced when the Global Financial Crisis hit the world economy. 13 Equititrust alleges in this proceeding that the auditors, as the compliance plan auditors for the EIF, should have detected and put an end to the above conduct carried on by Equititrust and its directors in contravention of the Act. Equititrust alleges that the auditors were aware of the nature of the scheme and its investments and of the way in which Equititrust conducted the business of the EIF. They were also aware of the rules governing the EIF and the way in which it was required to conduct its business so that they must have been aware that the conduct undertaken by Equititrust and its directors was in breach of the Act. It is also alleged by Equititrust that, if the auditors were not actually aware of the matters to which I have referred, the reason for this was that they had failed properly to discharge their statutory, contractual and common law duties as the compliance plan auditors for the EIF. 14 Equititrust also alleges that the auditors failed to carry out the audits of the EIF's financial statements in accordance with their statutory, equitable and common law duties. As a consequence, it is alleged that the auditors failed to identify that the financial position of the EIF was materially overstated in the scheme's financial reports. In particular, it is said that the auditors failed to realise that certain of the scheme's largest mortgage investments were impaired. Equititrust alleges that the auditors' financial and review reports constituted the making of false or misleading representations in respect of the financial position of the EIF. 15 The current iteration of Equititrust's Statement of Claim (the Amended Statement of Claim filed on 31 October 2014) (ASC) is lengthy and complex. 16 In late 2015, Equititrust notified the defendants that it proposed to seek the leave of the Court to amend the ASC and its Originating Application filed on 27 September 2013. There were many amendments notified at this time. When the defendants declined to consent to all of the amendments so notified, Equititrust filed an Interlocutory Application on 24 September 2015 by which it sought the requisite leave to amend. That Interlocutory Application was itself amended on 16 December 2015. By that Amended Interlocutory Application (Amended IA), Equititrust propounded revisions to the proposed amended pleadings which it had initially brought forward in September 2015. 17 Equititrust and the director defendants reached an accommodation in respect of the proposed amendments before the hearing before me of Equititrust's Amended IA. For this reason, the director defendants did not appear at that hearing. It will be necessary in due course for the amendments agreed between Equititrust and the director defendants to be taken into account when orders are made finally disposing of Equititrust's Amended IA. 18 Many of the amendments in respect of which leave is sought were also agreed as between Equititrust and the auditors. However, certain amendments were opposed by the auditors. In broad terms, the amendments which were opposed by the auditors concern Equititrust's application for leave to plead an entirely new cause of action against the auditors based upon s 1041E of the Act. Equititrust argues that this new cause of action is founded upon the same or substantially the same facts as constitute the basis for causes of action pursuant to s 1041H and s 1041I of the Act already included in the ASC and in its Originating Application. The auditors contend that the s 1041E amendments should be refused for a number of reasons. 19 By these Reasons for Judgment, I determine Equititrust's application for leave to amend the ASC. Equititrust did not press its application for leave to amend its Originating Application. It took the view that it did not need to amend that process. 20 In light of Written Submissions exchanged between Equititrust and the auditors and in light of the auditors' oral submissions made at the amendment hearing before me, Equititrust refined its proposed Further Amended Statement of Claim yet again. The final iteration of that document is found at Tab 1 of the folder of documents handed up in Court by Counsel for Equititrust on 3 May 2016. That folder was marked on that occasion as MFI-2. For the purposes of this judgment, I will treat that iteration of the proposed Further Amended Statement of Claim as the document which contains the amendments upon which I must now rule. I shall refer to that version of the proposed Further Amended Statement of Claim as the FASOC.

The Causes of Action Already Pleaded 21 The EIF was registered with ASIC as a managed investment scheme under Pt 5C of the Act on or about 7 September 1999. Thereafter, Equititrust raised money from the public and invested those funds in mortgage related investments. 22 In pars 1 to 201 of the ASC, Equititrust sets out a number of background and contextual facts and matters and pleads its case against the director defendants. 23 At pars 23 to 30 of the ASC, Equititrust pleads a number of relevant matters concerning the Constitution of the EIF. The scheme's original Constitution was created pursuant to a Deed Poll dated 9 August 1999 and amended by Deed Poll dated 6 September 1999. The entire Constitution was replaced by a replacement Constitution brought into effect on 22 November 1999. That Constitution was further modified or consolidated by Equititrust on ten occasions between 4 December 2000 and 3 March 2011. 24 At all relevant times, Equititrust could cause the Constitution of the EIF to be modified, repealed or replaced with a new Constitution by a special resolution of the members of the EIF or by itself, without reference to the members of the EIF, if it reasonably considered that the proposed change would not adversely affect the members' rights. 25 At par 29 of the ASC, Equititrust pleads the following: 29. At all material times the Constitution provided that:- 29.1 Equititrust held and would at all times hold the assets of the Scheme on trust for Members of the Scheme, subject to the provisions of the Constitution and the Act (clause 2.2 of the Constitution); 29.2 Equititrust would manage the Scheme in accordance with the terms and conditions contained in the Constitution (clause 2.3 of the Constitution); 29.3 The Constitution was binding on Equititrust and Members of the Scheme (clause 2.10 of the Constitution); 29.4 Each Member of the Scheme was entitled to a beneficial interest in the Scheme as provided for in the Constitution and by the Act (clause 2.9 of the Constitution); and 29.5 Equititrust was responsible for seeking and investing the monies held by the Scheme in Mortgage Investments, as defined in clause 1.1 of the Constitution (clauses 1.1 and 7.1 of the Constitution). 26 The EIF was required to have a compliance plan in place at all times in accordance with s 601HA of the Act. Between late 1999 and 8 March 2011, Equititrust put in place a number of compliance plans. 27 In its capacity as RE of the EIF, Equititrust was permitted to be paid fees out of the EIF's assets provided that the payment of such fees was authorised by the Constitution of the EIF and provided further that those fees were paid only in respect of the proper performance by Equititrust of its duties as the RE of the EIF (ASC par 36). 28 Equititrust was permitted to borrow funds to enable the payment of redemptions but such borrowings were to be short term only. It was not permitted to borrow funds in order to pay itself fees or to fund increments in the quantum of fees payable to it (ASC par 38.1, par 38.2 and pars 39 to 42). 29 As RE of the EIF, Equititrust was obliged to invest scheme funds only in authorised investments (ASC par 38.7). 30 Equititrust was obliged to ensure that its compliance plans and financial statements were reviewed and audited as required by the Act (ASC pars 47 to 52). 31 Prior to 30 June 2002, the members of the EIF had rights to share in the profits of the EIF and other rights in relation to the assets of the EIF (ASC pars 58 to 69). 32 In its capacity as RE of the EIF, Equititrust owed statutory, equitable and common law duties to the members of the scheme (ASC pars 74 to 81). 33 The directors of Equititrust owed similar duties (ASC pars 83 to 91). 34 At pars 96 to 186 of the ASC, Equititrust sets out the conduct on the part of the corporation itself and on the part of its directors which it contends constitutes breaches of the duties pleaded earlier in the ASC. In very broad terms, Equititrust complains about the following matters: (a) The conduct of the Equititrust directors in 2002 in causing unauthorised amendments to the Constitution of the EIF which had the effect of substantially increasing Equititrust's entitlements to be paid management fees as the RE of the EIF; (b) The conduct of the Equititrust directors in the period from 24 January 2002 to 30 June 2002 in causing or permitting Equititrust to pay to itself substantial sums of money by way of Interest Warranty fees; (c) Equititrust's mismanagement of the mortgage investments undertaken by it with funds of the EIF (both members' funds and borrowed funds); (d) Equititrust's lending practices which involved the making of loans to persons and entities in breach of its own mortgage lending guidelines; (e) Equititrust's failure to recognise promptly or at all the impairment of several of its mortgage investments; (f) The making of further advances by Equititrust to persons and entities to whom such advances should never have been made in the circumstances prevailing when such advances were made; (g) The granting of indulgences (such as the capitalisation of interest) by Equititrust to certain borrowers which should never have been granted in all the circumstances; (h) The raising of substantial funds by Equititrust in the form of borrowings from external lenders in breach of the Constitution of the EIF and in breach of the EIF's borrowing guidelines; (i) The making of unauthorised loans by Equititrust in its capacity as RE of the EIF to interests associated with Mark McIvor; (j) Equititrust's failure to maintain adequate liquidity; (k) The conduct of the directors of Equititrust in 2009 in causing unauthorised amendments to the Constitution of the EIF to be made which amendments had the effect of adversely altering the rights of the members of the scheme in relation to the redemption of units in that they created a new class of subordinated units all of which were held by Equititrust itself and which allowed Equititrust to divert to itself all surplus profits of the EIF; and (l) The conduct of the directors of Equititrust in causing or allowing Equititrust to pay to itself substantial, inflated and unauthorised fees particularly in 2009 and 2010. 35 At pars 187 to 201 of the ASC, Equititrust sets out the basis of its claims for pecuniary relief against itself and against its directors. 36 The case pleaded against the auditors commences at par 202 of the ASC. 37 At pars 202 to 228 of the ASC, Equititrust pleads the duties which the auditors owed as auditors of the EIF's compliance plan from time to time and as auditors of the EIF's half-yearly and annual financial statements. 38 As to the EIF's compliance plan, the auditors were obliged to examine that plan, to carry out an audit of Equititrust's compliance with that plan during each relevant financial year and to provide Equititrust with a report stating whether, in the opinion of the auditors: (a) Equititrust had complied with the EIF's compliance plan during the relevant financial year; and (b) The compliance plan continued to meet the requirements of Pt 5C.4 of the Act. 39 In addition, pursuant to s 601HG(4) of the Act, the auditors were required to notify ASIC in writing if they became aware of circumstances that they had reasonable grounds to suspect amounted to a contravention of the Act provided that the contravention was a significant one or, if the contravention was not a significant one, provided that the auditors believed that the contravention had not been or would not be adequately dealt with by commenting on it in the auditors' report or bringing it to the attention of the directors of Equititrust. 40 At pars 213 to 227 of the ASC, Equititrust pleads that the auditors owed to Equititrust a duty to exercise reasonable care, skill and diligence in carrying out their obligations in respect of their audits of the EIF's compliance plan, in performing their audits of the EIF's financial statements and in identifying circumstances that ought to be reported to ASIC. At par 228, Equititrust pleads contractual duties in more or less the same terms as the common law duties pleaded at pars 213 to 227 of the ASC. 41 At pars 229 to 231 of the ASC, Equititrust pleads that, subject to certain specific exceptions, the auditors gave opinions in respect of each of the years ending June 2004 to June 2008 that Equititrust had complied with the relevant compliance plan of the EIF and that, in respect of each of those years, the compliance plan continued to meet the requirements of the Act. 42 At par 232 of the ASC, Equititrust pleads that the auditors were aware of the following facts, matters and circumstances: (a) The matters pleaded in a number of specifically identified earlier paragraphs in the ASC, being those paragraphs where contraventions of the pleaded duties were alleged against the directors of Equititrust. The subject matter of the actual knowledge on the part of the auditors picked up by the references in par 232.1 is comprehensively summarised in a document which is Tab 5 in MFI-2. It is not necessary to traverse that material in detail for present purposes; (b) The circumstance that members of the EIF were not entitled to receive any surplus profits generated by the investment activities of the EIF over and above their entitlement to the fixed Interest Warranty (whether as income or as return of capital) because all surplus profits were paid to Equititrust as the Interest Warranty fee; (c) The fact that the payment of the Interest Warranty to the members was personally warranted by Equititrust in its own right; (d) The fact that Equititrust had, in each of 2002, 2003, 2004, 2005, 2006, 2007 and 2008, substantially increased the level of borrowings made by the EIF and its interest bearing liability; (e) The fact that Equititrust had used the EIF's assets as security for such borrowings; (f) The fact that the external borrowings made by Equititrust in the period referred to at subpar (d) above were intended by Equititrust to increase the profits of the EIF and thereby to supplement the inadequate cash flow of the EIF as a result of the composition of its mortgage investments; (g) The circumstance that the Constitution of the EIF in force at the time of each of the audits of the compliance plan conducted by the auditors provided that any surplus profits of the EIF, over and above the amount required to be paid to members pursuant to the Interest Warranty, would be paid to Equititrust by way of the Interest Warranty fee; (h) The circumstance that, as a result of the above matters, members of the EIF bore the risk of all of the EIF's external borrowings without sharing in any increased profits obtained as a result of such borrowings having been made, with such increased profits being paid to Equititrust as fees; (i) The circumstance that borrowing from external lenders was likely to substantially increase the risk to the EIF and to its members and was likely to diminish or be capable of diminishing the value of the EIF's assets where members would not share in any increased profits of the EIF arising out of external borrowings; (j) The circumstance that the EIF had become a debt-geared investment in breach of its approved compliance plans; (k) The fact that Equititrust and the McIvor interests and not the members of the EIF had benefitted financially from the scheme becoming debt-geared, through increased Interest Warranty fees paid to Equititrust for the benefit of the McIvor interests; (l) The circumstance that Mark McIvor was in a position of conflict of interest because he exercised a substantial degree of control over Equititrust as RE of the EIF, including by exercising authority over all lending to third parties and over the making of all external borrowings. Mark McIvor stood to benefit, insofar as borrowing from banks and lending to third parties increased profits that were then paid to Equititrust; (m) The fact that Mark McIvor acted while in a position of conflict of interest because he exercised authority over Equititrust's entry into and use of external borrowings; and (n) The fact that external borrowings were used to increase the management fees payable to Equititrust by which means it was intended to confer a financial benefit on Equititrust and on the McIvor interests. 43 Particulars are furnished in the ASC of each of the allegations which I have summarised at [42] above. All of the matters alleged at par 232 of the ASC were matters which were said to be actually known by the auditors when they conducted their audits. 44 At par 233 of the ASC, Equititrust pleads that, in respect of the relevant years between 2004 and 2008, the auditors had reasonable grounds to suspect that the matters of which they were aware as pleaded in par 232 of the ASC amounted to contraventions of the Act. 45 At par 234 of the ASC, Equititrust sets out a number of matters of which it alleges the auditors were aware at the time of the 2007 compliance audit. These matters are: (a) Equititrust had engaged in substantial external borrowings in order to fund further investments; (b) Equititrust was dependent upon the ongoing availability of external loans to meet its liquidity requirements in contrast to the way in which the EIF was run before 2004; (c) The EIF had become a debt-geared investment contrary to the rules of the EIF and contrary to the basis upon which it had been established; (d) The EIF was highly leveraged (to a level of 27%); and (e) Equititrust did not have in place adequate policies, procedures or contingency plans as to how to preserve the assets of the EIF in the event that external borrowings ceased to be available or negative events in the property markets affected the value of the security held by it for its mortgage investments. 46 At par 235 of the ASC, Equititrust alleges that the auditors had reasonable grounds to suspect that the matters adumbrated at [45] above amounted to contraventions of the Act. 47 At par 237 of the ASC, Equititrust pleads that, as at 12 March 2008, the auditors were aware of the following matters: (a) The amount of investor funds held by the EIF was $268,188,272 as at 31 December 2007, which was a decrease from the amount of $273,306,404 held as at 30 June 2007; (b) Equititrust had advanced $203,162,799 in mortgage investments during the six months from 30 June 2007 to 31 December 2007, which was an increase of $20,752,489 over the amount of $182,410,310 advanced in the half year from 1 January 2007 to 30 June 2007; (c) The total amount invested in mortgage investments as at 31 December 2007 was $385,394,217 which was an increase of $19,184,264 over the total amount of $366,209,953 which had been invested as at 30 June 2007; (d) Equititrust had drawn down an additional $13,500,000 from its external financiers as at 31 December 2007, increasing its total indebtedness to its external financiers to $118,500,000; (e) Equititrust held $4,942,012 in cash and cash equivalents and $3,500,000 of undrawn credit, totalling $8,442,012 or 2.1% of the total value of the assets of the EIF of $394,705,047; (f) Equititrust had disclosed in the Half Yearly Report for the EIF that since 31 December 2007, as a direct impact of the financial market volatility and sentiment of investors in the financial market segment in which it was operating, the EIF's lending activities were being reviewed; (g) As at 30 June 2007, Equititrust held no units in the EIF; and (h) As at 31 December 2007, Equititrust had invested $71,210,000 in ordinary units in the EIF and had redeemed $56,120,000 despite the redemption date under the Constitution being the annual anniversary of the date the application was accepted by Equititrust. 48 At par 238 of the ASC, Equititrust alleges that, at the time the auditors signed the Lead Auditor's Independence Declaration for the EIF's Half Yearly Report for 31 December 2007, they had reasonable grounds to suspect that the matters summarised at [47] above amounted to contraventions of the Act. 49 Similar allegations are made in respect of the knowledge of the auditors as at the time the 2008, 2009 and 2010 compliance audits were conducted (see ASC pars 239 to 241). 50 At par 243 of the ASC and in the succeeding paragraphs, Equititrust pleads that the auditors breached the various duties owed by them to Equititrust in failing to notify ASIC of various of the matters of which it was aware and failing to report those matters as required to the directors of Equititrust. 51 At pars 251 and par 252 of the ASC, Equititrust alleges that, in failing to meet the appropriate standards of behaviour required by the law, the auditors breached their contractual duties of care. At pars 252A to 252D, Equititrust alleges that the auditors knowingly participated in the breaches of the statutory and equitable duties owed to Equititrust by its directors. At par 253 ff of the ASC, Equititrust pleads a case based upon misleading and deceptive conduct said to be constituted by the auditors' making representations in connection with the compliance audits and the financial statements audits to the effect that there were no significant problems with any of the relevant audits notwithstanding the fact that they were aware of all of the matters to which I have referred at [42], [43], [45], [47] and [49] above. 52 At par 316 ff of the ASC, Equititrust pleads a case based upon alleged non-compliance by the auditors with appropriate accounting standards in relation to the EIF's financial reports for the years 2007-2010. These breaches are said to be breaches of s 1041H and s 1041I of the Act, s 12D of the Australian Securities and Investments Commission Act 2001 (Cth), s 52 of the Trade Practices Act 1974 (Cth) and cognate sections of the Queensland and New South Wales Fair Trading Acts. 53 At par 353 of the ASC, Equititrust pleads the following: 353. If KPMG had not committed the breaches referred to in paragraph 348 and the contraventions referred to in paragraph 350 and had instead exercised reasonable care, skill and diligence in carrying out the Audits and preparing and completing the Audit Reports: 353.1 KPMG would have detected some or all of the deficiencies in the Annual Financial Reports and would not have formed or held the opinions that they expressed in the Audited Annual Reports that the Annual Financial Reports: (a) presented fairly, in all material respects the financial position of the Scheme as of 30 June of each year and of its financial performance and its cash flows for the year ended; (b) complied with the Australian Accounting Standards (including the Australian Accounting Interpretations); (c) complied with other mandatory professional reporting requirements in Australia; and (d) complied with other legislative requirements. 353.2 KPMG would have provided Audit Reports which accurately identified and reported the deficiencies in the Annual Financial Reports; 353.3 Equititrust and the Equititrust Directors would have prepared reports which accurately reflected the state of the Fund in each financial year; 353.4 those reports would have included significant impairments; 353.5 Equititrust would have ceased accruing interest income in relation to the impaired loans which would have: (a) reduced the profit reported for the Fund; and (b) reduced the Interest Warranty Fee and return on the Subordinated Units payable to Equititrust under the terms of the Replacement Constitution: 353.6 Equititrust would have been required to perform its obligations pursuant to the Capital Warranty and pay the Scheme up to $10,000,000 to absorb those impairments; 353.7 to the extent that the impairments exceeded $10,000,000 Equititrust would not have paid itself Interest Warranty Fees, management fees and distributions on the subordinated interests for these periods; 353.8 to the extent that the impairments exceeded the amounts paid to Equititrust in each year, Equititrust would have been required to perform its obligations pursuant to the Interest Warranty and contribute the amount required to pay the amount of the Interest Warranty to the Members; 353.9 Equititrust would have commenced immediate recovery action in relation to the security it held in respect of the impaired loans; and 353.10 the Fund would have been made illiquid earlier than it in fact was and would have been wound up, which would have prevented Members redeeming their interests in the Scheme, reduced the ongoing costs and increased the realisable value of the Scheme's assets. Particulars Further particulars will be provided following evidence.

The Contentious Amendments 54 The first contentious amendment to which objection is taken is a proposed amendment to the particulars provided in par 233 of the ASC. The substantive allegation as pleaded is not the subject of any application to amend. 55 Similar minor amendments are also sought to be made to the particulars provided in par 242 of the ASC. Objection is also taken to these proposed amendments. 56 The auditors' objection to each of the proposed amendments to the particulars contained in par 233 and par 242 of the ASC is that the allegations made in those paragraphs are rolled up allegations without adequate particulars of the facts and circumstances from which it is alleged that the auditors ought to have acquired the alleged knowledge. 57 I do not agree that the minor amendments sought to the particulars provided in par 233 and par 242 are objectionable on that ground. The proposed amendments merely supplement the existing particulars. No change is sought to be made to the pleaded allegations. Those allegations have been on foot in their present form since late October 2014. The auditors have never taken any steps to strike out those paragraphs. They filed a Defence to the ASC which included pars 233 and 242 in the form in which they now appear. I propose to allow the amendments to pars 233 and 242. 58 Equititrust seeks to introduce an entirely new paragraph between existing par 256 and par 257 of the ASC. This is proposed new para 256A which is in the following terms: 256A The KPMG Compliance Representations pleaded in paragraph 256 constituted the making of statements or dissemination of information which were likely: 256A.1 to induce persons to apply for financial products (being units in the Scheme); and 256A.2 to induce persons in this jurisdiction to dispose of or acquire financial products (being units in the Scheme). Particulars (i) Each Compliance Audit Report was provided to ASIC shortly after it was issued. (ii) ASIC made each Compliance Audit Report available on its website for a small fee shortly after being provided with it. (iii) Equititrust would have provided the Compliance Audit Reports upon request. (iv) The following persons were likely to, and did, access and review the copies of the Compliance Audit Reports available on the website of ASIC, or were provided copies of the Compliance Audit Reports upon request to Equititrust: (a) persons interested in applying for, disposing of or acquiring units in the Scheme, including institutional investors; (b) financial advisors providing advice to persons who may be interested in applying for, disposing of or acquiring units in the Scheme; and (c) stockbrokers, (together, Interested Persons) (v) Equititrust published its annual reports, half-yearly reports and product disclosure statements on its website. (vi) Interested Persons were also likely to, and did, access and review copies of Equititrust's annual reports, half-yearly reports and product disclosure statements. (vii) If any Compliance Audit Report stated that KPMG or Steer had reasonable grounds to suspect that there had been contraventions of the Act or the Compliance Plan, Equititrust would been required to disclose that fact in its annual reports, half-yearly reports or product disclosure statements. (viii) Each Compliance Audit Report failed to record that KPMG or Steer had reasonable grounds to suspect that there had been contraventions of the Act or the Compliance Plan. (ix) Whether there had been contraventions of the Act or the Compliance Plan of the Scheme of the kind pleaded above was a matter which was likely to be, and was, material to the decisions of Interested Persons as to whether they would apply for, dispose of, or acquire units in the Scheme. (x) In this way, the KPMG Compliance Representations constituted the making of statements or dissemination of information which was likely to induce Interested Persons who became aware of the KPMG Compliance Representations by: (a) accessing the annual reports, half-yearly reports or product disclosure statements on the Equititrust website; and/or (b) accessing the Compliance Audit Reports available on the ASIC website; and/or (c) being provided copies of the Compliance Audit Reports by Equititrust on request; and/or (d) being told of their contents, to apply for or acquire units in the Scheme. (xi) Further particulars will be provided with expert evidence. 59 Minor amendments are sought to be made to par 257 of the ASC to which objection is taken upon the basis, once again, that the amendments are not sufficiently particularised. I intend to allow the proposed amendments to par 257. 60 Equititrust seeks to insert additional new paragraphs between existing par 257 of the ASC and par 258 of the ASC. These paragraphs are pars 257A, 257B and 257C which are in the following terms: 257A By reason of the matters pleaded in paragraph 257, the KPMG Compliance Representations were false or misleading. 257B The KPMG Compliance Representations were false in a material particular or alternatively materially misleading. Particulars (i) By reason of the matters pleaded in paragraph 257, the representations pleaded in paragraph 256.1 and 256.2(b) respectively were false in a material particular or alternatively materially misleading (ii) By reason of the matters pleaded in paragraphs 232 to 242, the representation pleaded in paragraph 256.2(a) was false in a material particular or alternatively materially misleading (iii) By reason of the matters pleaded in paragraph 257.4, the representations pleaded in paragraphs 256.1(d) and 256.2(b) was false in a material particular or alternatively materially misleading 257C When KPMG and Steer made each of the KPMG Compliance Representations, they ought reasonably to have known that they were false in a material particular or materially misleading as pleaded in paragraph 257B. Particulars (i) Constructive Knowledge: KPMG and Steer ought reasonably to have known that the KPMG Compliance Representations were false in a material particular or materially misleading because: (a) Paragraph 246 is repeated. (b) KPMG and Steer ought reasonably to have carried out the Compliance Audits with reasonable care, skill and diligence and in accordance with all applicable Auditing Standards, including by adequately testing and reviewing their own audit processes. Had they done so, they would have: (1) identified the matters pleaded in paragraph 257; and/or. (2) become aware of the matters pleaded in paragraphs 232, 234, 237, 239 and 241. (c) Had they identified and/or become aware of those matters, they would have known that: (1) KPMG and Steer had not done sufficient audit work to form conclusions as to issues arising from the Compliance Audits, exercised reasonable care, skill and diligence in carrying out those Compliance Audits, or carried out the Compliance Audits in accordance with all applicable Auditing Standards; (2) there did not exist a reasonable basis for an auditor exercising reasonable care, skill and diligence and carrying out the engagement in accordance with all applicable auditing standards to form the compliance opinion contained in the Compliance Audit Reports; (3) there were circumstances that would give an auditor reasonable grounds to suspect a significant contravention of the Act; and (4) there was no reasonable basis for an auditor exercising reasonable care, skill and diligence and carrying out the engagements in accordance with all applicable auditing standards to not suspect that circumstances of which KPMG or Steer were aware amounted to a significant contravention of the Act. (d) Accordingly, KPMG and Steer ought reasonably to have known that the representations pleaded in paragraphs 256.1, 256.2 and 256.3 were false in a material particular or materially misleading. (ii) Actual Knowledge: In the alternative to (i), KPMG and Steer ought reasonably to have known that the KPMG Compliance Representations were false in a material particular or materially misleading because: (a) The Applicant repeats paragraphs 232 to 242, and 252A, which plead that KPMG and Steer had actual knowledge of various matters. (b) As a result of KPMG's and Steer's knowledge of those matters, KPMG and Steer ought reasonably to have known that: (1) the circumstances pleaded in paragraphs 232, 234, 237, 239, 241 and 252A amounted to contraventions of the Act; (2) the Compliance Audit Reports for 2004-2010 were therefore deficient and inaccurate in that they did not record those contraventions; (3) KPMG and Steer had not done sufficient audit work to form conclusions as to issues arising from the Compliance Audits, exercised reasonable care, skill and diligence in carrying out those Compliance Audits, or carried out the Compliance Audits in accordance with all applicable Auditing Standards; (4) there did not exist a reasonable basis for an auditor exercising reasonable care, skill and diligence and carrying out the engagement in accordance with all applicable auditing standards to form the compliance opinions contained in the Compliance Audit Reports; (5) there were circumstances that would give an auditor reasonable grounds to suspect a significant contravention of the Act; and (6) there was no reasonable basis for an auditor exercising reasonable care, skill and diligence and carrying out the engagements in accordance with all applicable auditing standards to not suspect that circumstances of which KPMG or Steer were aware amounted to a significant contravention of the Act. (c) Accordingly, KPMG and Steer ought reasonably to have known that the representations pleaded in paragraphs 256.1, 256.2 and 256.3 were false in a material particular or materially misleading. (iii) Combination of actual and constructive knowledge: In the further alternative to (i) and (ii): (a) As a result of a combination of: (1) the knowledge that KPMG and Steer would have had had they carried out the Compliance Audits with reasonable care, skill and diligence and in accordance with all applicable Auditing Standards, including by adequately testing and reviewing their own audit processes (as described in paragraph (i)(b) above); and (2) the knowledge that KPMG and Steer actually had (as described in paragraph (ii)(a) above), KPMG and Steer ought reasonably to have known that: (3) the circumstances pleaded in paragraphs 232, 234, 237, 239, 241 and 252A amounted to contraventions of the Act; (4) the Compliance Audit Reports for 2004-2010 were therefore deficient and inaccurate in that they did not record those contraventions; (5) KPMG and Steer had not done sufficient audit work to form conclusions as to issues arising from the Compliance Audits, exercised reasonable care, skill and diligence in carrying out those Compliance Audits, or carried out the Compliance Audits in accordance with all applicable Auditing Standards; (6) there did not exist a reasonable basis for an auditor exercising reasonable care, skill and diligence and carrying out the engagement in accordance with all applicable auditing standards to form the compliance opinions contained in the Compliance Audit Reports; (7) there were circumstances that would give an auditor reasonable grounds to suspect a significant contravention of the Act; and (8) there was no reasonable basis for an auditor exercising reasonable care, skill and diligence and carrying out the engagements in accordance with all applicable auditing standards to not suspect that circumstances of which KPMG or Steer were aware amounted to a significant contravention of the Act. (b) Accordingly, KPMG and Steer ought reasonably to have known that the representations pleaded in paragraphs 256.1, 256.2 and 256.3 were false in a material particular or materially misleading. 61 A minor amendment is then sought to be made to par 258 by inserting therein reference to par 256 and par 257A. 62 Equititrust then seeks to insert new par 258A which is in the following terms: 258A By reason of the matters pleaded in paragraphs 253 to 257B above, in making each of the KPMG Compliance Representations, KPMG and Steer contravened s 1041E of the Act (1041E Compliance Conduct). 63 The auditors oppose the inclusion of all of these new paragraphs in the pleading. 64 Consequential amendments are then sought to pars 259, 260, 262, 263, 265 and 267. The amendments sought to be made to par 259 and to par 260 are objected to on discretionary grounds and upon the basis that they too are not sufficiently particularised. The essence of the amendments to par 259 and par 260 is an allegation that, had the auditors not contravened s 1041E of the Act in respect of their audit of the EIF's compliance plans from time to time, the auditors would have provided a non-compliance report to Equititrust and its directors and would have given notice to ASIC of their awareness of the various contraventions alleged against Equititrust and against the directors of Equititrust in respect of the EIF's compliance plans in place from time to time and in respect of Equititrust's failure to comply with those plans. 65 Equititrust proposes to insert a new par 267A immediately after existing par 267. That proposed paragraph is in the following terms: 267A. In the premises of paragraphs 260 to 267, the Applicant suffered loss and damage by reason of KPMG and Steer's breaches of the Auditor's Statutory Duties and the Auditor's Duty of Care as pleaded in paragraphs 243, 244, 248 and 249, the breaches of the Auditor's Contractual Duty pleaded in paragraph 251, and the KPMG Misleading Conduct as pleaded in paragraph 258 and the 1041E Compliance Conduct as pleaded in paragraph 258A. Particulars The Applicant repeats paragraphs (i), (ii) and (iii) of the particulars to paragraph 201H. 66 The inclusion of par 267A is also opposed by the auditors. 67 Similar allegations are sought to be made in respect of the auditors' audits of the financial statements and reports of the EIF by means of the amendments proposed at par 337A ff. For the purposes of the case sought to be made pursuant to s 1041E of the Act in respect of those statements and reports, Equititrust relies upon a combination of actual and constructive knowledge in respect of the imprudent and unauthorised mortgage investments (as to which see par 347A of the FASOC) and constructive knowledge in respect of that part of the case which relies upon representations made by the auditors in the audit reports provided in respect of the EIF's financial statements (as to which see par 349B of the FASOC). 68 I note that the allegations of knowledge made by Equititrust in pars 232, 234, 237, 239 and 241 are all allegations of actual knowledge on the part of the auditors. With the exception of some aspects of the allegations made in par 241, all of these allegations of actual knowledge are made in the ASC. That is, they are existing allegations already made in the proceeding. 69 The auditors' opposition to the inclusion in Equititrust's Statement of Claim of a cause of action based upon s 1041E of the Act is founded upon three broad strands. They are: (a) The cause of action sought to be prosecuted by Equititrust based upon s 1041E is fatally flawed. To a significant extent, Equititrust relies upon allegations of constructive knowledge on the part of the auditors. Section 1041E requires that there be actual knowledge of the relevant matters. Therefore, to the extent that constructive knowledge is relied upon, the plea is bad in law and should not be allowed to be advanced because it would be futile to permit the cause of action, as proposed, to be litigated; (b) In the alternative to (a), the s 1041E cause of action is not pleaded properly; and (c) Leave to make the proposed amendments should be refused on discretionary grounds.

Section 1041E of the Act 70 Section 1041E of the Act is in the following terms: 1041E False or misleading statements (1) A person must not (whether in this jurisdiction or elsewhere) make a statement, or disseminate information, if: (a) the statement or information is false in a material particular or is materially misleading; and (b) the statement or information is likely: (i) to induce persons in this jurisdiction to apply for financial products; or (ii) to induce persons in this jurisdiction to dispose of or acquire financial products; or (iii) to have the effect of increasing, reducing, maintaining or stabilising the price for trading in financial products on a financial market operated in this jurisdiction; and (c) when the person makes the statement, or disseminates the information: (i) the person does not care whether the statement or information is true or false; or (ii) the person knows, or ought reasonably to have known, that the statement or information is false in a material particular or is materially misleading. Note 1: to comply with this subsection is an offence (see subsection 1311(1)). For defences to a prosecution based on this subsection, see Division 4. Note 2: Failure to comply with this subsection may also lead to civil liability under section 1041I. For relief from liability under that section, see Division 4. (2) For the purposes of the application of the Criminal Code in relation to an offence based on subsection (1), paragraph (1)(a) is a physical element, the fault element for which is as specified in paragraph (1)(c). (3) For the purposes of an offence based on subsection (1), strict liability applies to subparagraphs (1)(b)(i), (ii) and (iii). Note: For strict liability, see section 6.1 of the Criminal Code. 71 Section 1041E is in Div 2 of Pt 7.10 of the Act ('Market misconduct and other prohibited conduct relating to financial products and financial services'). Division 2 of that Part specifies the prohibited conduct insofar as that Part is concerned other than prohibitions on insider trading. 72 Failure to comply with the requirements of s 1041E(1) is an offence. Contravening that subsection may also lead to civil liability pursuant to s 1041I. 73 Certain defences and limits on liability in respect of the civil consequences of a contravention of s 1041E(1) are provided for in Div 4 of Pt 7.10 of the Act. 74 The elements of a contravention of s 1041E(1) are: (a) A person makes a statement or disseminates information (whether in the jurisdiction or elsewhere); and (b) The statement is false in a material particular or is materially misleading; and (c) The statement is likely to induce persons in the jurisdiction to apply for financial products or, alternatively, is likely to induce persons in the jurisdiction to dispose of or acquire financial products; or, in the alternative to (c) (d) The statement is likely to have the effect of increasing, reducing, maintaining or stabilising the price for trading in financial products on a financial market operated in the jurisdiction; and (e) If, when making a statement or disseminating information, the person either does not care whether the statement or information is true or false or knows, or ought reasonably to have known, that the statement or information is false in a material particular or is materially misleading. 75 The elements of s 1041E(1) of the Act were considered by Gzell J in Australian Securities and Investments Commission v Macdonald (No 11) (2009) 230 FLR 1; (2009) 256 ALR 199. An appeal from his Honour's decision (James Hardie Industries NV v Australian Securities and Investments Commission (2010) 274 ALR 85) was dismissed. The High Court upheld an appeal by ASIC against certain findings made by the NSW Court of Appeal, none of which concerned the correct interpretation of s 1041E (see Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345). 76 In Australian Securities Commission v McLeod (2000) 22 WAR 255 (McLeod) at 265-266 [44], Owen J (with whom Ipp and Anderson JJ agreed) said, in respect of a provision in substantially the same form which appeared in an earlier Corporations Act, that the test, at least where it concerns the concept that a person "ought to have known" something, is objective. 77 The decision of the Western Australia Full Court in McLeod was reversed by the High Court on other grounds (Macleod v Australian Securities and Investments Commission (2002) 211 CLR 287) but no adverse comment was made in respect of [44] of the Full Court's judgment.

The Alleged Fatal Flaw in the Section 1041E Case and the Pleading Deficiencies in that Case 78 In par 256A of the FASOC, Equititrust wishes to contend that, when the auditors made the KPMG Compliance Representations (as defined in par 256 of the ASC) to Equititrust and to the directors of Equititrust, to ASIC and to members of the public, the making of those representations constituted the making of statements or the dissemination of information which was likely to induce persons to apply for financial products (being units in the EIF) and to induce persons in this jurisdiction to dispose of or acquire financial products (being units in the EIF). The relevant representations were those constituted by the audit reports in respect of the compliance plans given by the auditors from time to time which, subject to certain minor exceptions, stated that those compliance plans met the requirements of the Act and that Equititrust had complied with them. 79 In par 257A of the FASOC, Equititrust alleges that the KPMG Compliance Representations were false or misleading. In par 257B, Equititrust alleges that the KPMG Compliance Representations were false in a material particular or, alternatively, materially misleading. 80 In par 257C of the FASOC, Equititrust sets out its allegations against the auditors said to support a case of actual and/or constructive knowledge of the relevant matters. 81 Paragraph 257C is somewhat confusing. I shall return to the form of this paragraph later in these Reasons. For present purposes, it is sufficient to note that it is Equititrust's intention in respect of the knowledge requirements of s 1041E as applied to the KPMG Compliance Representations to allege against the auditors both actual and constructive knowledge of matters which tended to establish the falsity of those representations. 82 A similar approach is taken by Equititrust to the KPMG Financial Representations (as defined in par 337 of the ASC). The relevant paragraphs are pars 337A, 349A, 349B and 350A of the FASOC. It would appear that, insofar as the knowledge requirement in respect of these matters is concerned, Equititrust intends to rely upon constructive knowledge alone. 83 As already mentioned, the auditors submitted that the proposed pleading in respect of the cause of action relied upon pursuant to s 1041E of the Act is bad in law because it relies substantially upon allegations of constructive knowledge against the auditors when the requirements of the section are such that constructive knowledge can never be sufficient. 84 The auditors submitted that, as presently drafted, the relevant paragraphs in the proposed FASOC rely upon allegations that the auditors "ought reasonably to have known" that the audit opinions were materially false or misleading in relation to the compliance plan opinions and in relation to the financial statement opinions. This submission is correct. However, the most recent attempt on the part of Equititrust to come to grips with the requirements of s 1041E when pleading a cause of action based upon that section includes some material which is clearly appropriately characterised as actual knowledge. 85 The auditors went on to submit that the effect of the contentions in the particulars contained in par 257C and par 349B in the FASOC is that, while the auditors did not actually know that the audit opinions were materially false or misleading, they ought to have carried out the audits and reviews with reasonable care, skill and diligence and in accordance with all applicable auditing standards and that, if they had done so, then they would have known that the audit opinions were materially false or misleading. The auditors argued that these propositions lead to an absurd and alarming outcome, that is, that an auditor who negligently performs an audit will always inevitably have committed a serious criminal offence and be liable to imprisonment for ten years. 86 The auditors also submitted that the proposed s 1041E pleading is defective because, insofar as the alleged knowledge on the part of the auditors is concerned, Equititrust does not plead how the auditors acquired that knowledge. The auditors submitted that this approach fails to meet the requirements of r 16.43 of the Federal Court Rules 2011 (FCR) (esp subr (2) of that rule). 87 Rule 16.43 FCR provides as follows: 16.43 Conditions of mind (1) A party who pleads a condition of mind must state in the pleading particulars of the facts on which the party relies. (2) If a party pleads that another party ought to have known something, the party must give particulars of the facts and circumstances from which the other party ought to have acquired the knowledge. (3) In this rule: condition of mind, for a party, means: (a) knowledge; and (b) any disorder or disability of the party's mind; and (c) any fraudulent intention of the party. 88 After addressing the pleading deficiencies to which I have referred, the auditors moved on to make substantive submissions as to why constructive knowledge can never be sufficient for the purposes of s 1041E. Those submissions were founded substantially upon the decision of the High Court in Boughey v The Queen (1986) 161 CLR 10 (Boughey). 89 Boughey concerned the correct interpretation of s 157(1) of the Criminal Code Act 1924 (Tas) which relevantly provided that "culpable homicide" was murder if committed inter alia "by means of an unlawful act or omission which the offender knew, or ought to have known, to be likely to cause death in the circumstances, although he had no wish to cause death or bodily harm to any person". At 28-29, the plurality (Mason, Wilson and Deane JJ) (with whom Gibbs CJ substantially agreed) held that the words "ought to have known" in the relevant provision had been included in that provision as an alternative to "knew" in the sense of "actually knew". Their Honours went on to hold that the words when used in the relevant provision did not require an assessment by reference to the notional knowledge and capacity of some hypothetical person. The relevant test was: What would the accused have known if he or she had stopped to think to the extent that he or she ought to have? This test is to be measured against what the accused actually knew relevantly at the time and is entirely subjective. 90 A similar approach was taken in another criminal case in the High Court (Simpson v The Queen (1998) 194 CLR 228). 91 I note that the phrase under consideration in Boughey was "ought to have known", not "ought reasonably to have known". Further, the core issue in Boughey, being the correct definition of 'murder' for the purposes of the relevant Tasmanian legislative provision, is an entirely different issue from the issues raised in the present case. The context in which the critical phrase "ought to have known" which was under consideration in Boughey is very different from the context in which similar language is used in the Act. 92 The auditors also submitted that the phrase "ought reasonably to know" appears in s 1043A(1)(b) of the Act and that, in R v Rivkin (2004) 59 NSWLR 284; [2004] NSWCCA 7 (Rivkin), the NSW Court of Criminal Appeal applied the reasoning in Boughey to the insider trading provisions when used as the basis of a criminal prosecution. However, in Rivkin, the NSW Court of Criminal Appeal proceeded upon the assumption that the reasoning in Boughey was apt to be applied to a prosecution under s 1043A of the Act, the parties having agreed that this was appropriate in that case. The point concerning constructive knowledge raised in this case by Equititrust's proposed pleading was not a matter of contest in Rivkin and, therefore, was not the subject of a considered decision in that case. 93 For the above reasons, the auditors submitted that it was not open to Equititrust as a matter of law to plead contraventions of s 1041E by alleging that the knowledge element described in s 1041E(c) of the Act may be satisfied by positing a hypothetical reasonable person in the position of the auditors in the present case with notional knowledge (in this case a hypothetical auditor exercising reasonable care and skill) or by contending that the auditors would have found out certain things by reviewing other material or inquiring of others or by contending that the auditors had something less than actual knowledge. Rather, so it was submitted, Equititrust must plead and prove with precision the actual knowledge possessed by the auditors and explain why the auditors, with that actual knowledge, ought to have known that the audit opinions which they had provided were materially false or materially misleading. The auditors submitted that Equititrust had failed to meet these requirements in the FASOC. 94 The auditors made a separate submission to the effect that, for liability to be sheeted home to KPMG, the partnership, it was not sufficient merely to establish that Mr Steer contravened s 1041E. They argued that it was necessary to establish that any other partners of KPMG sought to be found liable for contravening that section also had the requisite knowledge. In the face of this submission, Equititrust abandoned its s 1041E case against KPMG. 95 The auditors also submitted that Equititrust has not come to grips in the FASOC with its obligation to identify with precision those persons who are alleged to be the object of the pleaded inducements and has not addressed its obligation to plead a logical nexus between the alleged inducements and those persons. I do not agree that the proposed pleading is defective in this respect. However, Equititrust may wish to consider improving the current iteration of the pleading in this respect in the further pleading which I propose to give it an opportunity to file. 96 Equititrust contended that the proposed FASOC raised a viable case and was adequately pleaded. It submitted that the threshold for refusing an amendment upon the basis that it does not disclose a reasonable cause of action is high. It supported that proposition by references to Commonwealth v Verwayen (1990) 170 CLR 394 at 456 per Dawson J; Caason Investments Pty Ltd v Cao (2015) 236 FCR 322 (Caason) at 332 [58] per Gilmour and Foster JJ; Oztech Pty Ltd v Public Trustee of Queensland (No 2) [2015] FCA 1485 at [54] per Yates J; Octaviar Administration Pty Ltd (In Liq) v Craig [2013] NSWSC 1116 per Adamson J; and Lock v Australian Securities and Investments Commission (2016) 248 FCR 547 at 553 [9] per Gleeson J. 97 Equititrust went on to submit that the auditors' proposition that constructive knowledge was not sufficient in order to satisfy the knowledge element required in s 1041E was not so plain as to warrant leave to amend being refused on that ground. 98 Equititrust submitted that the allegations which it makes of constructive knowledge on the part of the auditors in respect of the KPMG Compliance Representations and the KPMG Financial Representations are based, in part, on allegations of actual knowledge. It intends to allege that the auditors ought reasonably to have known the following, namely, that the KPMG Compliance Representations were false or misleading based upon: (a) Matters of which the auditors ought to have become aware as a consequence of their statutory, contractual and common law obligations, as the EIF's compliance auditor; (b) Matters of which they were actually aware in that capacity; or (c) A combination of actual knowledge and constructive knowledge. 99 Equititrust emphasised that the High Court's judgment in Boughey was given in an entirely different context and was referable to a phrase which did not include the word "reasonably". 100 Equititrust also submitted that the legislative history of the Financial Services Reform Bill 2001, which was the bill which later, when enacted, introduced s 1043A into the Act, suggested that the phrase "ought reasonably to have known" reflects an objective fault element rather than a subjective fault element. 101 Equititrust also relied upon remarks made by the Full Court in ABN AMRO Bank NV v Bathurst Regional Council (2014) 224 FCR 1 (ABN AMRO) at 271 [1367] per Jacobson, Gilmour and Gordon JJ in support of its proposition that constructive knowledge may be sufficient knowledge for the purposes of s 1041E. It also argued that Jagot J, at the trial of that matter, had expressly decided that constructive knowledge would suffice (Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200 at [2720], [2906] and [2909]). 102 Equititrust went on to submit that, provided the Court is of the opinion that it is arguable that constructive knowledge is sufficient for the purposes of s 1041E, the Court ought not refuse leave to amend upon the basis that the proposed pleading was bad in law. It submitted that this is not a case where a decision to disallow the proposed amendment will bring the case to an end. Rather, allowing the plea to go forward would add little in terms of complexity, time and cost. Equititrust went on to submit that, for these reasons, the appropriate course was to allow the cause of action based on s 1041E to go forward and to decide the question of law raised by the auditors as part of the final judgment given after a trial on the merits. 103 In the circumstances of the present case, I think that the better course is to do that which Equititrust urges upon the Court for the reasons which it has advanced. Also, it seems to me that the question of law raised by the auditors is an important one and should not be finally determined upon an application of the kind with which I am currently dealing. It should be remembered that the Full Court of the Supreme Court of Western Australia in McLeod held that the relevant test was an objective one and that Jagot J at first instance and the Full Court on appeal in ABN AMRO appear to have been of the same opinion. The point is not without difficulty and I think that the preferred course is the one advocated by Equititrust. 104 In RSD Chartered Accountants v Bolitho (2014) 102 ACSR 528 (Bolitho) at 531-532 [16]-[19], Nettle JA (as his Honour then was) held that, in the circumstances of that case, once the Court had found that the construction of s 729 of the Act for which the respondent contended was arguable, it would be wrong for the Court to determine the point of law forthwith on the respondent's application for leave to amend his Statement of Claim given that the point was debatable and contentious and given that it was not governed by any relevant authority. At 532 [18], his Honour said: … In cases where what is in issue is a seriously arguably novel point of law, and particularly where, as here, the answer may well depend upon the factual context [As was conceded in argument, and see Wickstead v Browne (1992) 30 NSWLR 1, 6 (Kirby P, in diss but upheld on appeal)], it is not the task of a judge at first instance or this court on appeal to undertake an exercise of that kind at this very early stage of the proceeding [See also Lonrho plc v Fayed [1992] 1 AC 448, 469, 470 (Lord Bridge); Thorpe v The Commonwealth (1997) 144 ALR 677, 686 (Kirby J). cf Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241, 311 (Gummow J)]. 105 The principle explained by Nettle JA in Bolitho remains a good guide to the correct approach to the problem with which I am confronted. I have endeavoured to apply that principle in the decision which I have made. Of course, here, there is not a dearth of authority. Rather, there is authority which supports Equititrust's position and possibly authority which goes the other way (Rivkin). 106 However, I also think that there are difficulties in Equititrust's current formulation of its s 1041E case. In both par 257C and par 349B, the overriding or umbrella pleaded allegation is that the auditors "ought reasonably to have known" the various matters picked up by those paragraphs. That is to say, the primary allegation is one based upon the contentious phrase "ought reasonably to have known". However, within the particulars contained in each of those paragraphs, there are suggestions that, at least in respect of some matters, actual knowledge is relied upon. This is confusing and, in the language of the rules governing pleading, "embarrassing". 107 The present iteration of the FASOC does not respect the requirements of r 16.43 FCR esp the requirements of subr (2) of that rule. What is required in the present case is a clear articulation of the knowledge which Equititrust wishes to allege the auditors actually had or ought reasonably to have had and, in respect of each matter said to have been known to the auditors, the facts, matters and circumstances upon which Equititrust proposes to rely in establishing the actual knowledge or constructive knowledge relied upon, as the case may be. For example, if it is to be alleged that the auditors actually knew that one or more of the KPMG Compliance Representations was misleading in a material particular, it is incumbent upon Equititrust to set out in the pleading the facts, matters and circumstances upon which it will rely in order to make good that allegation. Similarly, if constructive rather than actual knowledge is to be relied upon, Equititrust is obliged to set out in the pleading the facts, matters and circumstances from which it will urge upon the Court a finding that the auditors ought reasonably to have known those matters said to be subject to such constructive knowledge. 108 I think that the present pleading of knowledge in the FASOC, for the purposes of the case sought to be brought under s 1041E, is deficient, as a matter of pleading. For this reason, I propose to allow to Equititrust one last opportunity to bring forward a pleading in respect of the cause of action based upon s 1041E which meets the pleading requirements explained above. My decision to allow this one last opportunity necessarily carries with it a rejection of the argument advanced by the auditors that constructive knowledge can never satisfy the requirements of s 1041E. 109 When bringing forward its final attempt to plead a case under s 1041E, Equititrust should also make clear that it does not propose to press such a case against KPMG, the partnership, but only intends to proceed against Mr Steer alone. It should also take advantage of that opportunity, if it wishes, to improve its pleading of the alleged inducements upon which it will rely at trial.

Discretion 110 The auditors also submitted that the Court should refuse leave to amend to Equititrust on discretionary grounds. 111 As submitted by Equititrust, the Court's discretionary power to grant leave to amend is broad. The discretion is to be exercised in a manner that is consistent with the overarching purpose set out in s 37M of the Federal Court of Australia Act 1976 (Cth). 112 The following matters are generally relevant to the exercise of the Court's discretion in relation to applications for leave to amend, namely: (a) The nature and importance of the amendment to the party applying for it; (b) The extent of the delay and the cost associated with the amendment; (c) The prejudice that might be assumed to follow from the amendment and that which is shown to follow from the amendment; (d) The explanation for any delay in applying for leave to amend proffered by the party seeking leave to amend and the potential loss of public confidence in the legal system which can sometimes arise when a court is seen to accede to applications made without an adequate explanation or justification; and (e) The party's choices to date in the litigation and the consequences of those choices. These principles are extracted from Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175 (Aon) at 214-215 per Gummow, Hayne, Crennan, Kiefel and Bell JJ; Cement Australia Pty Ltd v Australian Competition and Consumer Commission (2010) 187 FCR 261 (Cement) at 275-276 [51] per Keane CJ, Gilmour and Logan JJ; Tamaya Resources Limited (In Liq) v Deloitte Touche Tohmatsu (2016) 332 ALR 199; [2016] FCAFC 2 (Tamaya) at [125] per Gilmour, Perram and Beach JJ; and Tamaya Resources Limited (In Liq) v Deloitte Touche Tohmatsu [2015] FCA 1098 at [127] per Gleeson J. 113 As submitted (correctly) by Equititrust, the weight to be given to the considerations identified in Aon, individually and in combination, and the outcome of the balancing process is a matter for the trial judge in every case and may vary depending upon the facts of each case (Cement at 275-276 [51]). 114 The power to grant leave to amend has a remedial objective (Caason at 327 [20]). The object of the Court is not to punish parties for mistakes made in the conduct of their case but rather to allow such mistakes to be corrected so that a decision can be made in respect of the real matters in controversy. With these propositions in mind, generally, leave to amend should be granted unless the proposed amendment is futile, such that the issue sought to be added is unlikely to succeed, the amendment is likely to be struck out or the amendment would cause substantial prejudice or injustice to the opposing party in a way that cannot be compensated by costs (Caason at 327 [21]). 115 Evidence of expense and hardship arising from the amendment is, alone, an insufficient basis for refusing leave to amend (Dye v Commonwealth Securities Limited (No 2) (2010) 63 AILR 101-302; [2010] FCAFC 118 at [81] per Marshall, Rares and Flick JJ) 116 The auditors submitted that, if the amendment is allowed, there will be significant delay in the future progress of the proceeding. 117 Delay is a relative concept. There have been significant delays in the proceeding so far. There have been various reasons for such delays, not all of which have been justified and not all of which can fairly be laid at the door of Equititrust. In reality, although the proceedings have been on foot for some years, they are still at a very early stage. Further, I do not think that the inclusion of a case based upon s 1041E will add much to the trial of the proceeding in terms of time, effort and cost. As submitted on behalf of Equititrust, the new case based upon s 1041E is very substantially based upon the same facts as form the foundation of the case presently pleaded in the ASC. I do not think that further delay in fixing the matter for trial is a sufficiently weighty consideration to justify the refusal of leave to amend. 118 Next, the auditors submitted that they will suffer significant prejudice if the amendments are allowed. The auditors submitted that they will be obliged to consider whether to bring cross-claims and that some of the cross-claims which they have in mind may already be statute-barred. They also submitted that the delay in bringing forward the s 1041E claim is likely to make it much more difficult for the auditors to access the necessary documents and witnesses in order to successfully prosecute potential cross-claims. 119 Equititrust countered these submissions concerning potential cross-claims by emphasising that the evidence of Mr Harris, the solicitor for the auditors, did not go so far as to prove that the auditors definitely would bring any particular cross-claim. Mr Harris simply said that the auditors would have little choice but to consider bringing cross-claims to ventilate any issues of wrongdoing by other parties because the s 1041E cause of action now sought to be raised by Equititrust was not apportionable (as to which, see Selig v Wealthsure Pty Ltd (2015) 255 CLR 661) (Selig). During the hearing, Senior Counsel for the auditors handed up to me a list of persons against whom cross-claims might potentially be brought by the auditors. Potential cross-defendants were Equititrust, in its own capacity, and as RE of the EIF and as RE of the Equititrust Premium Fund, Mark McIvor, Wayne McIvor and Mr Haney. Other persons were also listed in that list. 120 The document which listed the potential cross-defendants also contained a detailed Written Submission in relation to the relevant limitation periods. 121 When confronted with the equivocal nature of the evidence given by Mr Harris in relation to potential cross-claims and with the fact that there was no evidence that the auditors were actually of a mind to bring any particular cross-claim in the event that the proposed amendments are allowed, Senior Counsel for the auditors was instructed to proffer an undertaking to the Court to bring a cross-claim against McCullough Robertson, the former solicitors for Equititrust, in the event that the cause of action based upon s 1041E is permitted to go forward. McCullough Robertson was the only party in respect of whom such an undertaking was proffered. Insofar as the other potential cross-defendants are concerned, I am not persuaded that there is any real prospect that the auditors would wish to cross-claim against such persons. For this reason, it is not necessary to enter into a detailed discussion of whether or not such cross-claims are statute-barred. 122 As far as any cross-claim against McCullough Robertson is concerned, it is noteworthy that, notwithstanding that one or more of the causes of action brought against the auditors in the ASC are also not apportionable, no cross-claim has yet been filed against McCullough Robertson in respect of those claims. In the absence of a more concrete delineation of the basis of such a cross-claim, I do not think that I should refuse leave to amend because such a cross-claim might have been time-barred from the commencement of the proceeding or as a result of the passage of time after the date the proceeding was commenced. As submitted by Equititrust, for the loss of a potential cross-claim to amount to prejudice, the party asserting prejudice must establish that the potential cross-claim is both "viable and realistic, rather than fanciful or theoretical" (Creevey v Barrois [2005] NSWCA 264 at [56] per Basten JA, Handley JA and McColl JA agreeing; Weston v Publishing and Broadcasting Ltd (2011) 83 ACSR 206 at 265 [241] per Ward J (as her Honour then was); and GIO General Limited v Love [2009] NSWCA 269 at [40] per Handley AJA, Basten JA and Young JA agreeing). 123 In June 2015, Equititrust decided that amendments should be made to the ASC, after it served its Replies to the Defences of the auditors. At that time, Equititrust did not intend to introduce any new causes of action. 124 Equititrust did not provide to the auditors a version of its proposed amendments until 20 August 2015. This was one month after it had indicated it would provide those amendments. 125 The auditors did not object to the proposed amended pleading which had been served on 20 August 2015. 126 After the auditors had indicated that they would not oppose leave to amend, Equititrust put forward a second version of its proposed Further Amended Statement of Claim. This was done on 16 September 2015. This was the version of its pleading which was annexed to its Interlocutory Application filed on 24 September 2015. 127 The auditors reviewed the second version. Again, this version did not contain any new causes of action against the auditors. On 15 October 2015, the auditors informed Equititrust that they did not object to the version made available to them on 16 September 2015. 128 On 16 October 2015, because the director defendants objected to the second version of the proposed amended pleading, the Court listed Equititrust's Interlocutory Application filed on 24 September 2015 for hearing on 2 December 2015. That hearing was subsequently vacated. 129 However, rather than proceeding with the second version, Equititrust put forward additional versions of its proposed pleading after its application was set down for hearing. Equititrust served a third version on 11 November 2015, a fourth version on 30 November 2015 and a fifth version on 15 December 2015. 130 The third to fifth versions included for the first time proposed new causes of action against the auditors alleging that they had contravened s 1041E of the Act by giving certain audit opinions between 2004 and 2010. 131 The auditors submitted that: (a) They would suffer significant prejudice if the amendments are allowed because: (i) Additional stress will be imposed upon Mr Steer and other KPMG operatives because the allegations sought to be introduced are allegations of criminal conduct; (ii) Some of the allegations made in the FASOC go back as far as January 2002. To allow such allegations to be introduced at this late stage would impose an unreasonable burden in terms of preparation for trial because Mr Steer and the other witnesses will be required to go back further in time than they would have otherwise been required to go in order to remember what occurred; (b) No acceptable reasons, sufficient to counter-balance the above prejudice and the additional prejudice of the trial being delayed, have been proffered by Equititrust; (c) Equititrust has had an ample opportunity in the course of the proceedings to plead its case. When it decided in late 2014 not to proceed with a s 1041E claim, it had the benefit of extensive documentary material produced by the auditors pursuant to an order for production in the winding up and had examined Mr Steer and two other KPMG auditors. Further, it did not reveal its intention to raise a claim pursuant to s 1041E until very late in 2015, after previously announcing to the Court and to the defendant parties that it proposed to seek leave to amend the ASC in respects which did not include the introduction of a claim under s 1041E; and (d) Equititrust has failed to offer additional security for costs to cover the expanded case that it now wishes to bring. 132 During the hearing, Equititrust indicated that it would increase the amount of security for the auditors' costs of the proceeding. The terms upon which it would do so were left to be agreed or ultimately ruled upon by the Court if not agreed. 133 I have already addressed the alleged prejudice caused by any delay in fixing the matter for hearing. Further, I do not propose to give any weight to the contention noted at [131(a)(ii)] above. Allegations relating to 2002 are already made in the ASC and it is apparent that Mr Steer and the other KPMG personnel who might be witnesses at the trial have already devoted extensive time to preparing their evidence in relation to most, if not all, the issues raised in the case. The factual matrix of the existing case and the proposed s 1041E case is broadly the same. 134 There is no doubt that this proceeding has caused and will continue to cause considerable stress to Mr Steer and the other KPMG operatives who are the subject of serious criticism in respect of their performance of the professional duties owed by them to Equititrust and the members of the EIF as compliance plan auditors and as auditors of the EIF's financial statements. Mr Harris gave evidence of a conversation which he had with Mr Steer shortly before the hearing before me in which this was made perfectly clear. In addition, Mr Harris agreed in cross-examination that he had advised Mr Steer that it was very unlikely that any criminal proceeding would be brought against him. The evidence of Mr Harris did not go so far as to suggest that Mr Steer had told him that the introduction of a claim under s 1041E of the Act into this proceeding would cause additional stress to him. Equititrust also made the point that the evidence given on behalf of the auditors in relation to this topic generally was given by Mr Harris, as the auditors' solicitor, and not directly by Mr Steer. I do not consider that this latter point matters much. 135 Given that the existence of this proceeding has no doubt already caused considerable stress to Mr Steer and to the other KPMG auditors involved in the relevant audits and given that there is no evidence of any weight as to whether or not Mr Steer and the other auditors are experiencing additional stress at the prospect of a claim pursuant to s 1041E being introduced into the case, I do not think that I should uphold the auditors' submissions to the effect that stress is a matter of prejudice which should be taken into account in determining the present application. 136 The auditors' criticism of Equititrust's explanation for the delay in bringing forward the case which it now seeks to maintain pursuant to s 1041E of the Act focussed particularly on the period from late 2014 until late 2015. It will be remembered that this proceeding was commenced on 27 September 2013 and that the ASC was filed on 31 October 2014. 137 The evidence of Ms Banton, the solicitor for Equititrust, was that, in late 2014, she had turned her mind to the question of whether or not Equititrust should seek to amend its Statement of Claim in order to include within that pleading a case based upon s 1041E of the Act. She said that she decided not to bring forward such a claim because she did not think she could support it with a credible causation theory in terms of the compensation that would be sought for breach of the section. 138 She also said that, in late 2015, one of the lawyers with whom she was working on the case convinced her that an appropriate causation theory could be advanced in support of a s 1041E claim. It was in light of that change of position that she consulted with Counsel in the matter and a decision was made to bring forward an application for leave to amend to include such a claim. 139 Ms Banton placed little emphasis upon the fact that the decision of the High Court in Selig had been handed down on 13 May 2015. It will be remembered that, in that case, the High Court found that a claim under s 1041E was not apportionable thereby overruling a decision to the opposite effect given by the Full Court of this Court. 140 The fact that such a claim is not apportionable is, of course, of considerable significance to the present application. Equititrust submitted that the non-apportionable nature of such a claim provides a significant benefit to it in the present case and that this was a factor which the Court should take into account in determining the present application. I think that this submission is correct and I accept it. 141 Senior Counsel for the auditors cross-examined Ms Banton at some length concerning the evidence which she gave by way of explanation for Equititrust's delay in bringing forward the s 1041E claim which it now seeks to bring. Senior Counsel submitted that Ms Banton's explanation did not make any sense. He submitted that she had had no difficulty in other cases (Tamaya and Trilogy Funds Management Limited v KPMG, NSD 973 of 2014) in bringing a s 1041E claim with a causation theory which she considered was both appropriate and viable. Senior Counsel went on to submit that it was reasonably clear that Ms Banton was the person making the relevant decisions as to what would or would not pleaded and that she was unable to advance a coherent reason as to why the s 1041E case had not been pleaded earlier. 142 The auditors went on to submit that the explanation offered should not be accepted by the Court and that the Court should proceed upon the basis that no satisfactory explanation for the delay in raising the s 1041E case has been provided. It was then submitted that the only available inference is that such a case was not pleaded as a result of a conscious forensic decision made by Ms Banton not to plead such a case even though she had had ample time to consider whether she should advise Equititrust to plead such a case and, by late 2014, had significant information as to the conduct of the auditors in performing the audits in question. 143 I accept that the explanation which Ms Banton offered for not pleading the s 1041E case earlier was, to some extent, incoherent, especially in light of the fact that s 1041E pleadings had been propounded in both the Tamaya and Trilogy cases. I also formed the impression that, when Ms Banton was answering questions in cross-examination, she became confused and at times was at cross purposes with the cross-examiner. I did not form the impression that Ms Banton was being deliberately evasive or that the explanation which she had proffered in her evidence in chief was a knowingly false one. It seemed to me that she had difficulty reconstructing the reasoning process which she had undertaken in late 2014 which led to her decision not to plead such a case at that time. 144 While it may be fair to interpret the evidence given by Ms Banton as demonstrating that Equititrust took a deliberate forensic decision not to plead a case based upon s 1041E of the Act, it was not a forensic decision which caused irreparable prejudice to the auditors. In my judgment, Equititrust has given an explanation for what occurred albeit one which, with the benefit of hindsight, may not have been the best decision that it could have made. 145 The auditors also submitted that the Court ought not to permit the amendments which are now sought to take effect from the commencement of the proceeding but rather should make an order making clear that the amendments will only take effect from some later date. 146 In my view, in a case such as this, the question of when particular amendments should take effect should be left to the trial judge. This was the approach recently taken by the Full Court in McGraw-Hill Financial, Inc v Clurname Pty Ltd [2017] FCAFC 211. 147 When I make orders finally disposing of Equititrust's Amended IA, I will make an order reserving to the trial judge the date from which the amendments, if made, should take effect.

An Additional Matter 148 Mark McIvor has applied to the Court for leave to issue a subpoena for production to McCullough Robertson. The documents which Mr McIvor seeks to have produced to the Court are: (a) Copy of Equititrust Ltd's client file bearing number 12495; (b) Copy of Equititrust Ltd's client file bearing number EQU685/27; and (c) Copy of Equititrust Ltd's client file bearing number 138442. 149 Mr McIvor submitted that McCullough Robertson, as the solicitors for Equititrust at all relevant times, provided a number of advices to it and to him throughout the period 1998 to 2011. He claims that those advices are directly relevant to the issues raised already on the pleadings on the case. 150 Mr McIvor submitted that it was not premature to require McCullough Robertson to produce these documents since they would be of assistance to him in properly pleading his defence. He also submitted that it was apparent to him that, having inspected certain files in relation to the issues raised in the present proceeding, those files did not contain all of the advices provided in the relevant period by McCullough Robertson. 151 I am not persuaded that I should grant leave to Mr McIvor to issue the subpoena the subject of his application at this point in time. At the present time, there is no legitimate forensic purpose to which requiring McCullough Robertson to produce the files referred to in Mr McIvor's draft subpoena could be relevant. Mark McIvor has already filed a Defence to the ASC and has agreed to the amendments in the FASOC which affect him. 152 Accordingly, I refuse leave to Mark McIvor to issue the subpoena the subject of his application. I will dismiss that application in the orders which I propose to make today. I will make no order as to costs in relation to that application.

Conclusions 153 By way of summary, my conclusions in relation to Equititrust's Amended IA are as follows: (a) The auditors' argument that the proposed s 1041E case is bad in law because, to some extent, Equititrust proposes to rely upon constructive knowledge is rejected; (b) The auditors' criticisms of the way in which Equititrust presently intends to plead the requisite element of knowledge for the purposes of the s 1041E case are accepted; (c) The auditors' argument that the current iteration of the FASOC does not adequately address, from a pleading point of view, the question of inducement is rejected; and (d) All discretionary arguments advanced by the auditors for refusal of leave to amend are rejected. 154 It follows from the above that, as indicated earlier in these Reasons, if leave to amend is ultimately to be granted to Equititrust, it will need to improve its proposed pleading in respect of the knowledge on the part of the auditors which it wishes to allege for the purposes of s 1041E of the Act. As earlier indicated, I propose to allow Equititrust a relatively short time in which to formulate its final attempt to plead that knowledge in a way which conforms to the pleading requirements of r 16.43 FCR and the law generally. 155 Accordingly, the orders which I propose to make today will afford such time to Equititrust. Those orders will also make clear that, when Equititrust brings forward its next iteration of its proposed pleading, it should incorporate in that iteration all amendments presently under consideration which have already been agreed as between it and the director defendants and as between it and the auditors. I will relist the proceeding for further case management soon after the next iteration of Equititrust's FASOC is available. 156 As to costs, I am inclined to think that the costs of Equititrust's Amended IA should be costs in the proceeding. While it is true that Equititrust has had substantial success in rebuffing most of the auditors' arguments, the auditors have nonetheless succeeded for the time being in their criticisms of the pleading of knowledge. Pleading knowledge correctly and in conformity with that which is required by the rules of Court and the law generally is, and always has been, an important part of the amendments which Equititrust seeks to make. In addition, I do not think that the stance adopted by the auditors was unreasonable when due regard is paid to the fact that Equititrust is seeking a considerable indulgence by its current application and the fact that many of the arguments advanced by the auditors were not without merit. Notwithstanding these preliminary views, I propose to reserve the question of costs to be determined in light of the final disposition of Equititrust's Amended IA. 157 There will be orders accordingly. I certify that the preceding one hundred and fifty-seven (157) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster.

SCHEDULE OF PARTIES NSD 2028 of 2013 Defendants Fifth Defendant: KPMG (A FIRM) Sixth Defendant: PAUL STEER