Prior to its collapse in September 2012, the Gunns group of companies carried on Australia's largest integrated hardwood and softwood forest products business and, as part of that business, operated a number of managed investment schemes known as "Woodlot Projects". Under the terms of the schemes, investors became growers of eucalyptus wood on "Woodlots" located in Tasmania which were to be managed and harvested by Gunns Plantations Ltd (in liquidation) ("GPL") for fees payable by investors. As part of the scheme Gunns Limited (in liquidation) (receivers and managers appointed) ("Gunns"), the listed parent company of GPL, agreed to purchase the timber produced by each grower.
Like so many other similar schemes, the schemes were not successful and growers lost substantial sums of money.
In these proceedings, the plaintiffs, Giabal Pty Ltd and Mr Geoffry Underwood, as the representatives of growers who acquired an interest in one or more of six of the schemes, who have suffered loss and damage and who have entered into a litigation funding agreement with LCM Operations Pty Ltd, sue to recover that loss from GPL (the first defendant), Gunns (the second defendant), the directors of GPL and KPMG, the auditors of compliance plans prepared in connection with the schemes. On 13 April 2018, the Court granted leave to continue the proceedings against GPL and Gunns. That leave was revoked on 4 December 2019, with the result that GPL and Gunns are no longer involved in the proceedings. [1]
The matter is now listed for hearing for 20 days commencing on 14 February 2023.
By Notice of Motion filed on 25 October 2022 the plaintiffs seek leave to amend their Commercial List Statement as against KPMG and to seek further discovery from KPMG.
[3]
The proposed amendment
At the conclusion of argument on 11 November 2022 I informed the parties that I would not allow the proposed amendment. These are my reasons for reaching that conclusion.
The existing claim made by the plaintiffs against KPMG is, to oversimplify matters somewhat, that KPMG owed the plaintiffs a common law duty to exercise reasonable care, skill and diligence in auditing GPL's compliance with certain "Compliance Plans" of the Gunns Woodlot Scheme to avoid reasonably foreseeable damage to the plaintiffs' interests.
KPMG denies owing any such duty to the plaintiffs.
Mr Arnott SC, who appeared with Ms Hammond for KPMG, informed me that there was no case yet decided establishing the existence of a duty by an auditor of the kind for which the plaintiffs contend.
The amendments proposed an alternative cause of action, said to arise from the same facts as give rise to the alleged duty of care, to the effect that KPMG represented (evidently to GPL, although that was not stated in terms) that the relevant Compliance Plans had been complied with, that it was not aware of any circumstances that provided reasonable grounds to suspect there had been a significant contravention of the Corporations Act 2001 (Cth) and that opinions thereby expressed by KPMG were based on reasonable grounds and the appropriate exercise of reasonable care, skill and diligence.
The proposed allegations were that those representations were not based on reasonable grounds and were misleading or deceptive and, for the purposes of s 1041E of the Corporations Act, were likely to have the effect of inducing "persons" (presumably including the plaintiffs) to "dispose of or acquire financial products".
The proposed pleadings allege that, absent the making of the proposed representations, the same consequences would have flowed as would have flowed absent a breach of the alleged common law duty; in effect that the transaction causing loss would not have occurred.
Mr Arnott pointed to what he contended to be various infelicities in the manner in which the proposed amendments were formulated and difficulties evidently encountered by the pleader endeavouring to accommodate the proposed new claim within the structure of the old.
For example, the proposed pleading did not assert that GPL, to whom the representations were allegedly made, was misled by them, nor explain how the same consequences would flow, so far as concerns the plaintiffs, from the representations not being made to GPL on the one hand, and KPMG not being in breach of its alleged duty to the plaintiffs, on the other.
Mr Arnott also pointed out, and Mr Lloyd in effect accepted, that there was no satisfactory explanation as to why the application was only made now when junior counsel had evidently advised that it be made as long ago as May this year.
However that may be, the wider, and I thought dispositive point, was that notwithstanding the fact that the amendments were expressed to arise out of allegations already made in the Commercial List Statement, they raised new factual issues that it would be necessary for KPMG, at this very late stage, to investigate.
Those matters were summarised in an affidavit made by KPMG solicitor, Mr Ross Drinnan, as follows:
"The Plaintiffs' Proposed Pleading Amendments raise at least the following new issues which the KPMG Parties will need to consider and which have previously not arisen in this proceeding:
(a) whether Gunns Plantations Limited (In Liquidation) (GPL) was misled or deceived or was likely to have been misled or deceived by the 'KPMG Representations';
(b) what may have occurred if the 'KPMG Representations' were not made; and
(c) whether each 'KPMG Representation' was likely to have the effect of inducing persons to dispose of or acquire financial products.
If the Plaintiffs' Proposed Pleading Amendments are allowed, the KPMG Parties will need to consider whether it is necessary to serve further lay or expert evidence or seek the issue of further subpoenas in relation to the issues identified in the preceding paragraph. In the time since receiving notice of the proposed amendments, I have not formed a view on what may or should be done, but it may be necessary to:
(a) prepare further evidence from Andrew Gray or the KPMG Parties' audit expert, Denis Thorn;
(b) issue subpoenas to the liquidators of Gunns Limited (Receivers and Managers Appointed) (In Liquidation) (Gunns Limited) and GPL in order to obtain documents relevant to the question of whether GPL was misled or deceived by any of the 'KPMG Representations' in the manner alleged and what action Gunns Limited or GPL may have taken if the 'KPMG Representations' were not made; and/or
(c) obtain further evidence relevant to whether each 'KPMG Representation' was likely to induce persons in the manner alleged." (Emphasis in original.)
Those matters, alone, persuaded me that I should not allow the amendments.
Accordingly, I order that the plaintiffs' application to amend its Third Further Amended Summons and its Third Further Amended Commercial List Statement in the form annexed to its Notice of Motion of 25 October 2022 is dismissed with costs.
[4]
Discovery
The plaintiffs' application for discovery arises out of KPMG's non-admission of an allegation introduced into the plaintiffs' Third Further Amended Commercial List Statement on 23 March 2022 at par 55J1.
In that paragraph the plaintiff alleges that one of the two KPMG defendants, Mr Andrew Gray, had actual knowledge of the "Gunns Financing and Security Arrangements" as defined in the Commercial List Statement.
Mr Lloyd and Mr Bagley submitted that:
"Whether [Mr Gray] knew or ought to have known about the arrangements is a critical starting point for the allegation that [Mr Gray] failed to comply with his duties as compliance plan auditor."
Mr Arnott pointed to the circumstances that had led to KPMG agreeing to the amendment of the plaintiffs' Commercial List Statement to include par 55J1 and to a notation that I, by consent, made to orders on 23 March 2022 allowing the amendment:
"The Plaintiffs do not intend to seek any further disclosure arising from the amendments made in the Second Further Amended Commercial List Statement. This does not preclude the Plaintiffs' (sic) making an application for further disclosure if subsequent matters (such as the Defendants' list responses or evidence to be served by the Defendants) so require."
Mr Arnott submitted that nothing in KPMG's Commercial List Response or evidence since served could justify the further discovery sought.
The plaintiffs seek three categories of documents relevant to KPMG audit files, and three categories defined by reference to communications within KPMG in the period of 2007 to 2011.
In relation to the audit files, Mr Drinnan's evidence is that all but one of the audit files for the period 2007 to 2011 have been identified, that those audit files comprise some 42,100 pages and that:
"If the KPMG Parties are required to give discovery of documents responding to categories 1, 5 and 6 of the Proposed Further Discovery Categories then the first step would be to formulate and apply appropriate keyword searches to the documents comprising the audit files. Documents which were responsive to the keyword searches would need to be manually reviewed to assess whether they are responsive to the discovery categories."
As Mr Lloyd submitted, as it appears that no keyword searches have yet been formulated or applied, it is too early to reach any conclusion as to how oppressive discovery of the audit files categories would be.
Accordingly, I have adjourned the proceedings, for the moment until 18 November 2022 for directions, in order to give the KPMG legal team a chance to formulate keyword search terms.
As to the categories of discovery concerning the total KPMG communications, Mr Lloyd accepted during argument that the current formulation of the categories is overbroad and offered to formulate a more precise wording.
I will consider the question of discovery further, including Mr Arnott's submissions recorded at [24], after these matters have been attended to.
[5]
Endnote
This summary repeats the words of Ball J in Giabal Pty Ltd v Gunns Plantations Ltd (In Liquidation) [2020] NSWSC 1070 at [1]-[3].
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Decision last updated: 14 November 2022