Tort - Negligence - Duty of care owed by accountant to client - Whether duty breached - Whether breaches of duty caused or contributed to plaintiffs' losses - Turns on own facts

Corporations Act 2001 (Cth), s 439A(4)(b)

Midland Bank Trust Co Ltd v Hett Stubbs & Kemp (a firm) [1979] Ch 384

Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642

1 LE MIERE J: In 1988 the plaintiffs commenced a building business in partnership under the name Black Swan Builders. In 1988 or 1989 the plaintiffs retained the defendant as their accountant and tax agent. On or about 1 November 1993 Mr Leahy, a director of the defendant, advised the plaintiffs to operate the business using a company. The plaintiffs accepted that advice. The business was acquired and operated by the company, Black Swan Builders Pty Ltd ("the Company") from on or about 1 March 1994. At the time the Company acquired the business, the liabilities of the company exceeded its assets, excluding goodwill. By October 1996 the Company was in financial difficulty. In January 1997 the Company was placed into voluntary administration and was placed in liquidation on 12 February 1997.

2 The plaintiffs claim that the defendant owed to them a duty of care to ensure that the accounts of the Company properly reflected the capitalisation of the business as at the date the Company acquired the business from the partnership. The plaintiffs claim that the defendant breached that duty of care by erroneously treating the deficiency of capital, that is the excess of liabilities over assets, as an intangible asset of goodwill in the accounts of the Company. The plaintiffs further claim that between June 1993 and November 1996 the defendant breached the duty of care it owed to the plaintiffs to warn the plaintiffs of the risks inherent in operating the business without an adequate capital base. The plaintiffs further claim that the defendant breached the duty of care it owed to the plaintiffs by failing to advise them against incurring borrowings to acquire investment properties, set up their own superannuation fund and increasing the Company's bank overdraft.

3 When the Company went into liquidation the Company's overdraft with the National Australia Bank ("NAB") was approximately $480,000. The plaintiffs were liable to the NAB, as guarantors, for the overdraft liability. The NAB sold the plaintiffs' family home by mortgagee sale in March 1999. The plaintiffs now sue the defendant to recover what they have lost.

4 The plaintiffs are husband and wife, now aged 70 years and 59 years respectively. They came to Australia in 1987 from England. In England the male plaintiff (Mr Jones) was employed as a builder for 15 years and was a self-employed builder for 20 years. When he came to Australia in 1987 he obtained a job as a supervisor with a building company.

5 On 1 October 1988 Mr Jones commenced building on his own account in a partnership with his wife under the name of Black Swan Builders. Mr Jones managed the business and supervised the construction jobs. He operated the business through the use of subcontractors. Mrs Jones assisted in the business on a part-time basis in a minor way but was not involved in the making of day-to-day decisions in the course of the operation of the business or in the making of any managerial decisions in relation to the conduct of the business.

6 The defendant is an incorporated accounting practice. In 1988 Mr Leahy was a certified practising accountant and a director of the defendant. Mr Macri commenced employment with the defendant in October 1989. In 1998 Mr Leahy joined the Institute of Chartered Accountants and the defendant obtained a practising certificate from the Institute. In 2001 Mr Macri became a director of the defendant.

7 Mr Jones first met Mr Leahy when he was supervising the construction of Mr Leahy's home in 1988. Mr Jones told Mr Leahy that he had 30 years' experience as a builder in the United Kingdom operating his own business and that after an initial period of familiarisation working as a supervisor for the building company constructing Mr Leahy's home he planned to go into the building business on his own account.

8 Mr Jones called on Mr Leahy and retained the defendant Company as accountant and tax agent to the partnership in 1988 or 1989. What occurred at that initial meeting, and subsequent meetings is the subject of conflicting evidence. In the years after 1988 the defendant prepared financial statements and tax returns for the partnership, the Company and the plaintiffs. The Company also gave advice and undertook other work for the plaintiffs. However, the scope of that work and advice is the subject of conflicting evidence.

9 The duty of care owed by an accountant to a client includes the ordinary duty of care arising under the common law of negligence. An accountant generally owes a tortious duty of care to their client as well as a contractual duty. It was not submitted by either party that there is any relevant difference between the contractual duty of care and the tortious duty of care owed by the defendant to the plaintiffs. To the contrary, the parties conducted the case on the basis that the tortious duty of care is co-extensive with the contractual duty.

10 The duties of an accountant primarily depend upon the contract between them and their client. However, although the contract of retainer will be important in determining the relationship which gives rise to the common law duty of care it will not chart exclusively the perimeters of that duty. In Hawkins v Clayton (1988) 164 CLR 539 (at 579) Deane J pointed out that, depending on the circumstances of the particular case, the duty may require the taking of positive steps beyond the specifically agreed professional task or function, where these are necessary to avoid a real and foreseeable risk of economic loss being sustained by the client: see Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 at 652.

11 Although the contractual retainer does not determine exclusively the limits of the accountant's duty to their client, the extent of the accountant's professional duties depends on the terms of their retainer and it is therefore necessary to determine the terms of the retainer or retainers between the plaintiffs and the defendant. However, before considering the terms of the retainer or retainers between the plaintiffs and the defendant it is convenient to make some observations and findings concerning the credibility and reliability of the principal witnesses.

12 Mr Jones was not a credible or reliable witness in relation to some important aspects of his evidence.

13 The matters about which Mr Jones gave evidence were matters that occurred between 10 and 18 years ago. Mr Jones had no notes, diary or other means for refreshing his memory of meetings and discussions during that period long ago. I formed the impression that Mr Jones did not have a good recollection of the details of meetings, discussions and the sequence of events during that time. Some of Mr Jones' evidence was reconstructed rather than recollected.

14 At times Mr Jones reconstructed what happened so as to advance his case. For example, it is part of the plaintiffs' case that they purchased investment properties in Clarkson on the advice of Mr Leahy. In his witness statement Mr Jones said that he saw Mr Leahy at his office and told Mr Leahy that he, Mr Jones, had put in two offers which were subject to finance on two Clarkson properties. In cross-examination, counsel for the defendant, Mr Power, asked Mr Jones what he would have done if Mr Leahy had said not to buy the properties. Mr Jones first responded by saying that the contracts were subject to finance. The following cross-examination then took place:

"And if finance had been approved, what then?---Well, it was open - we spoke to Leahy prior to - I said to him that we were going to put an offer in for

No, no, Mr Jones, what you said in your evidence to me was that you put in the conditional offers and then you spoke to Mr Leahy. Are you now changing that? --- I would say so, yes.

All right. Do you want to change your evidence on that?---Not really. I just want to state the fact that we looked at the Clarkson properties. I went to Leahy and discussed the purchase of them, and then we put an offer in.

At paragraph 136 of your statement - you don't need to go to it. I will read it to you to save time?---Yes.

You say this - ... I rang up spoke to Mr Leahy and said I would come into his office to discuss some matters with him. I made an appointment and I went to the office a day or so later and met with Mr Leahy. I told him I had put in two offers which were subject to finance on two Clarkson properties.

Okay?---Yes.

I want to know which of these two versions you have put is the truth?---The truth is.

Just wait, please?---Yes.

Wait. Are you telling the truth when you say you went and saw him after you put in the two conditional offers, or are you telling the truth when you say you went and saw him before you put in the offers?---We - no, we haven't got it quite - my statement is correct.

So you are going back to this version?---I don't think it's going back to it. This is the statement I made at the time."

15 Another example is that Mr Jones said in his evidence that when he first retained the services of the defendant the firm described itself as chartered accountants and business advisers. The firm did not at that time describe itself as chartered accountants. I discuss that matter below. Another example is that Mr Jones says that in his initial meeting with Mr Leahy at Mr Leahy's office Mr Leahy described the services he had to offer by reference to a display board on the wall advertising the range of services his firm offered. In cross-examination Mr Jones then said that he recalled a display board or brown plaque in the reception area. I accept Mr Leahy's evidence that there was no display board in his office. I discuss that matter below.

16 Mr Macri is a chartered accountant. He was employed by the defendant from October 1989 before becoming a director of the defendant in 2001. Mr Leahy delegated to Mr Macri the responsibility for preparing the financial statements and tax returns for the partnership and subsequently the Company commencing in 1990. In many instances, Mr Macri's recollection of events was based upon, or confirmed by, contemporaneous notes or other documents. He made concessions where they were called for and generally was a credible and reliable witness. In general, I prefer the evidence of Mr Macri to that of Mr Jones where they conflict.

17 Mr Leahy was generally a credible and reliable witness. However, there were some aspects of Mr Leahy's evidence which appeared to be matters of reconstruction rather than recollection and where the reconstruction was undertaken with a view to advancing the defendant's case.

18 In general, I prefer the evidence of Mr Leahy to that of Mr Jones, particularly where Mr Leahy's evidence is corroborated by that of Mr Macri.

19 Mrs Jones played a minor part in the business of the partnership and the Company. Her evidence is principally relevant to a telephone conversation and a meeting. Those events took place long ago. Mrs Jones does not have any contemporaneous note or other means for refreshing her memory of the matters of which she gave evidence. In general, I prefer the evidence of Mr Macri and Mr Leahy to that of Mrs Jones where they conflict.

20 Mr Leahy said that Mr Jones contacted him in 1989 and advised him that Mr Jones and his wife had set up a partnership carrying on business as builders and renovators of residential homes under the name of Black Swan Builders. Mr Jones came to see him in his office and said words to the effect that he wanted Mr Leahy to become his accountant. Mr Leahy said that he agreed to do so and asked Mr Jones to provide him with the financial information he needed to prepare the income tax returns for Mr and Mrs Jones and the income tax returns and financial statements for the partnership for the financial year ended 30 June 1989.

21 Mr Leahy recalled a further meeting with Mr Jones at Mr Leahy's office in 1989 at about the time Mr Jones instructed Mr Leahy to prepare the income tax returns and financial statements. Mr Leahy says that in the course of that meeting he said to Mr Jones words to the effect that he performed accounting work for a number of builders and that the successful ones always carefully monitored the costs of the jobs they were undertaking and maintained a good profit margin on all the work they performed. Mr Leahy said that he said that those builders, for whom he had worked, who had got themselves into financial difficulties were those who failed to keep job costs under control and to maintain good profit margins. Finally Mr Leahy said to Mr Jones that Mr Jones should ensure, in the conduct of his business, that he monitored and put in place a system for adequately monitoring the costs of each job, that he maintained a good profit margin of at least 15 per cent on all the jobs he undertook, and that he should not simply chase work for the sake of increasing his turnover and that he had to make sure he made a good profit on every job.

22 Mr Jones' evidence is different. In his evidence-in-chief Mr Jones says that whilst he was supervising the construction of Mr Leahy's home in Carine in 1988, he told Mr Leahy that he would go into the building business on his own account and would require the services of an accountant to advise on the business and related matters and that Mr Leahy said he offered those services.

23 Mr Jones said that in September 1988 after that discussion with Mr Leahy, Mr Leahy asked Mr Jones to meet Mr Leahy in his office at Subiaco. Mr Jones says that at the meeting they discussed the range of services that Mr Leahy had to offer. Mr Jones says that Mr Leahy made reference to a display board on the wall advertising the range of services his firm offered. He recalled the services described as including taxation, financial reporting services and general investment advice. The firm itself was described as chartered accountants and business advisers. Mr Jones says that he said to Mr Leahy that he and his wife would be needing Mr Leahy's advice and assistance in relation to all taxation matters for himself and his wife and for the partnership, the establishment of a bookkeeping system for the business, the preparation of financial statements and general advice for himself and his wife and for the business.

24 I do not accept the evidence of Mr Jones. Mr Jones is wrong when he says that the firm then described itself as chartered accountants and business advisers. Mr Leahy gave evidence that in 1988 the defendant was a firm of certified practising accountants not chartered accountants. Mr Leahy joined the Institute of Chartered Accountants and the defendant obtained a practising certificate from the Institute of Chartered Accountants in 1998. Prior to 1998 the defendant had a practising certificate from the Society of Certified Practising Accountants and described itself as a firm of certified practising accountants. The documentary evidence, in the form of invoices, letterheads and a change of name, all support that evidence.

25 In his evidence-in-chief Mr Jones said that Mr Leahy made reference to a display board on the wall advertising the range of services his firm offered. Mr Jones says he recalled the services described as including "tax agents, financial reporting services and general investment advice". In cross-examination Mr Jones said he recalled a display board or brown plaque in the reception. He said that it had on it a list of things Mr Leahy had to offer but he could not remember them.

26 Mr Leahy's evidence is that when Mr Jones first attended at the defendant's offices they were located at Suite 19, 100 Hay Street, Subiaco and there was no display board. It was not until the defendant moved to premises at Suites 8 and 9, 100 Hay Street, in or about April 1995 that there was a display board in reception which stated: "Accountants, Registered Tax Agents, Registered Auditors, Superannuation Funds and Estate Planning". I accept Mr Leahy's evidence on those matters. I find that Mr Jones' evidence was largely a product of reconstruction in which he telescoped later events into his recollection of his first meeting at Mr Leahy's office and did so consciously or otherwise in a way that advanced his case.

27 The defendant prepared income tax returns and financial statements for the plaintiffs and their partnership for the years ended 30 June 1989 and 1990.

28 Mr Leahy delegated to Mr Macri the task of preparing income tax returns and financial statements for Mr and Mrs Jones and various entities which they controlled in the period between 1990 and 1997. Mr Macri first started attending to the accounting and tax affairs of Mr and Mrs Jones and the partnership in 1990. Mr Macri prepared income tax returns for Mr and Mrs Jones and the partnership and financial statements for the partnership for each of the financial years ended 30 June 1990 to 30 June 1996.

29 In his evidence-in-chief Mr Jones said that in early 1990 he was in the process of selling the family home at Fawkner Gardens, Hillarys and proposed to purchase a property at 20 Clifton Gardens. He said that he met Mr Leahy and sought advice as to whether or not he could retain the Fawkner Gardens property and rent it out to tenants and live in the Clifton Gardens property. Mr Leahy did calculations as to the affordability of the proposition. It was not affordable and so Mr Jones decided not to proceed with retaining the Fawkner Gardens property. He says that Mr Leahy basically told him he could not afford the cost of two mortgages.

30 Mr Leahy said that at no time was he requested by Mr Jones to provide any advice concerning the financial viability of purchasing any real property and he did not give the plaintiffs any such advice. Mr Leahy says that on one occasion in or about 1989 when Mr Jones came into Mr Leahy's office Mr Jones said words to the effect that he was thinking of buying an investment property and he wanted to know if he was able to get a tax deduction for it. Mr Leahy said that he obtained from Mr Jones details concerning the proposed purchase price, the proposed size of any loan, an estimate of the interest rate which would be payable on the loan and an estimate of the rent Mr Jones would receive on the property. Mr Leahy recalls calculating an approximate after tax position for Mr Jones based on the information provided to him. The substance of his advice to Mr Jones was to the effect that he explained that Mr Jones was able to get a tax deduction on his personal income for any interest he paid on the loan and expenses associated with maintaining the property, less any rent he received from the property. Mr Leahy also explained that the property had to be purchased with a view to making income from it in order for him to claim the interest as a tax deduction.

31 I find that Mr Leahy did give advice to Mr Jones concerning the tax deductibility of interest paid by the plaintiffs on a loan to purchase the property and that Mr Leahy calculated an approximate after tax position for Mr Jones based on the information provided to him. It may well be that the calculations made by Mr Leahy influenced Mr Jones' decision that the plaintiffs could not afford to retain the Fawkner Gardens property but I am not satisfied that Mr Leahy said to Mr Jones words to the effect that the plaintiffs could not afford the cost of two mortgages. There is no documentary or other evidence of any sort to corroborate or support Mr Jones' recollection. Mr Jones does not purport to recall the conversation in any detail. Mr Jones recalls nothing more than his impression or appreciation of the outcome of his discussion with Mr Leahy. That is hardly surprising given that it took place 16 years ago. In all the circumstances I am not satisfied that Mr Leahy's advice to Mr Jones went beyond the tax matters and calculations of which Mr Leahy gave evidence.

The engagement of an estimator and secretarial assistance

32 Mr Jones gave evidence that in February 1990 he had discussions with Mr Leahy at Mr Leahy's office and sought Mr Leahy's advice on the merits of the partnership engaging an estimator to cost contracts. Mr Jones says that Mr Leahy also gave advice on working to budgets on contracts. Mr Jones said that in November 1990 he had a meeting with Mr Leahy at his office and sought Mr Leahy's advice on the merits of the partnership engaging a secretarial service to assist in expansion of the partnership business. He said that Mr Leahy recommended a secretarial service located next to his premises in Subiaco. Mr Jones looked into using that service but it turned out not to be satisfactory.

33 Mr Jones' evidence is all denied by Mr Leahy. Again, Mr Jones does not purport to have any detailed recollection of these matters. His evidence is nothing more than a broad brush summary of the effect of conversations. Mr Jones' summary recollection is not supported by any documentary evidence or other evidence of any sort. I find that Mr Leahy did give advice to Mr Jones about monitoring the costs of jobs and maintaining a good profit margin on all the work he performs. Mr Leahy said he gave that advice in a meeting in 1989. Apart from that I am not satisfied that Mr Leahy gave the advice which Mr Jones said he did.

34 Mr Jones says that in late 1991 he asked Mr Leahy for advice about he and his wife obtaining a bank loan to renovate their home at Clifton Gardens at an approximate cost of $10,000. Mr Jones said that Mr Leahy advised him that they would not be overextending the borrowings by obtaining the loan and that the plaintiffs proceeded to obtain the loan for $10,000 in December 1991.

35 Mr Leahy said in evidence that he did not advise Mr and Mrs Jones about obtaining a bank loan of $10,000 for the renovation of Clifton Gardens in late 1991 or at all. I accept his evidence on that point.

36 Mr Jones says that in early 1992 Mr Leahy advised him to convert the partnership business overdraft of approximately $30,000 into a business loan of $35,000. He says that the reason Mr Leahy gave for doing this was to reduce overdraft fees and interest payments by converting the overdraft into a loan.

37 Mr Leahy says that he did not advise Mr Jones to convert the partnership business overdraft into a business loan. I accept his evidence.

38 Mr Jones says that in early 1993 he sought advice from the defendant as to what type of computer accounting programme to get for the business and had discussions with Mr Macri on this issue.

39 In his evidence Mr Leahy said that the defendant operated an electronic cashbook system called Cashman and they suggested to Mr Jones that as his cashbook was getting quite voluminous it would suit the defendant if Mr Jones was to put his cashbook on the electronic cashbook. Mr Leahy accepted that the defendant had recommended the Cashman accounting system to Mr Jones. In my view that does not amount to the giving of financial advice or advice on how to run the business. It was advice that related to the partnership's business records and would facilitate the records being kept in a way that would make the preparation by the firm of the partnership's accounts and financial statements easier and hence cheaper.

40 Mr Jones said that in January 1993 he sought Mr Leahy's advice at a meeting with him at his office on the merits of the partnership employing an in house secretary/bookkeeper to cope with the expanding secretarial and bookkeeping work of the partnership. Mr Leahy denied that he did so. It is not necessary to make a finding on this issue. If Mr Leahy did give such advice then it was advice relating to the partnership's bookkeeping, and I accept that the defendant at different times gave advice to the plaintiffs about various aspects of their bookkeeping.

41 Mr Jones gave evidence that in May 1993 he came across a property for sale at 25 Seaforth Loop, Kallaroo. It was on the market for approximately $130,000 and Mr Jones knew that properties in the area in good condition could sell for $200,000. He knew he could do the work required to the property and sell it after completing the renovation. However, his evidence is that he first wanted to know whether or not he could afford the property and in May 1993 he and his wife had a meeting with Mr Leahy at his office in Subiaco.

42 Mr Jones says he required Mr Leahy's advice because of the borrowing commitment that he would be required to undertake. He did not have any deposit to put on the property and needed to borrow almost 100 per cent of the purchase price. The mortgage would therefore be about $130,000. He did not want to overcommit himself with two mortgages.

43 Mr Jones says that he told Mr Leahy that he had no deposit to put on the property and needed to borrow 100 per cent of the purchase price of $130,000. He told Mr Leahy there was plenty of work coming into the business and there was an increase on last year's turnover. Mr Leahy said to Mr Jones that he should proceed with the purchase.

44 Mr Jones testified that a day or so thereafter he applied to his bank, ANZ, for a loan. The loan application was declined. Mr Jones says he spoke to Mr Leahy and told him he was unsuccessful in raising the finance from the ANZ. He says that Mr Leahy said that he would speak to a business associate of his who was manager of the Whitfords branch of Challenge Bank. Later, Mr Leahy gave Mr Jones the name of the manager of the Challenge Bank at Whitfords. Mr Jones went and spoke to the manager and applied for a loan. The loan was subsequently approved. Settlement of the purchase of the Seaforth Loop property occurred in June 1993.

45 Mr Jones says that he relied on Mr Leahy's advice about proceeding with both the Seaforth Loop purchase and the Subaru purchase, to which I will refer shortly, and if Mr Leahy had said no to either of the transactions he would not have proceeded with either of them.

46 Mr Leahy denied that Mr Jones sought any advice from him concerning the Seaforth Loop property or that he gave any such advice to Mr Jones. Mr Leahy denied that he had offered to speak to a business associate at the Whitfords branch of the Challenge Bank to arrange for Mr Jones to apply for a mortgage loan. Mr Leahy said that he had no business associates at the Challenge Bank and had never dealt with the Challenge Bank.

47 Mr Macri said that he first became aware that the plaintiffs had purchased the property at Seaforth Loop when he prepared the income tax returns for the plaintiffs for the financial year ended 30 June 1993. He made a note in his working papers where he recorded the purchase price of the property for capital gains tax purposes and retained a copy of the offer and acceptance, the settlement statement and a letter from Challenge Bank.

48 Mr Jones' evidence is unsupported by any other witness or any document. I am not satisfied that Mr Jones sought the advice of Mr Leahy as to whether or not he could afford to purchase the property prior to making an offer to purchase the property or at all.

49 Mr Jones says that after the plaintiffs had purchased the Seaforth Loop property he carried out renovations on it. When the renovations were completed he arranged to see Mr Leahy for the purposes of discussing whether he should keep the property with the tenants or sell it. He says he met Mr Leahy at his office and Mr Leahy told him that the plaintiff should keep the property.

50 Mr Leahy denied that he advised Mr Jones to keep the property or that Mr Jones had sought his advice about the matter. The tax treatment of the property in the partnership financial statements and tax return indicates that Mr Jones did not at any relevant time intend to sell the property. Mr Leahy explained that his working papers show that at 30 June 1993 his accountant was of the view that it was a rental property and if he had known that the plaintiffs were going to renovate and sell the property then it would have been treated differently in the tax return for 30 June 1993. I do not accept the evidence of Mr Jones in relation to this matter.

51 Mr Jones said that in May 1993 he called into Mr Leahy's office and told Mr Leahy that he was thinking of entering into a lease transaction for a Subaru for the business. Mr Jones said that he told Mr Leahy that he was considering hiring the vehicle pursuant to a hire purchase agreement with Esanda, that he was in a position to pay a $10,000 deposit funded from the proceeds of the sale of their previous vehicle and the hire purchase cost was to be $500 per month. Mr Jones says that Mr Leahy said he would consider it. Mr Jones called in on another day when he was passing and questioned Mr Leahy about the vehicle. Mr Jones said that Mr Leahy said: "Go and buy your car".

52 Mr Leahy denied saying to Mr Jones: "Go and buy your car". Mr Leahy could not recall discussing the Subaru with Mr Jones but conceded it was possible that he would have given Mr Jones advice about the difference in the tax treatment between leasing and hire purchase. Mr Leahy made that concession after observing that in his evidence-in-chief Mr Jones said that he spoke to Mr Leahy about a lease transaction and also about entering into a hire purchase agreement.

53 Mr Leahy might have advised Mr Jones in relation to the tax treatment and consequences of leasing a motor vehicle or acquiring a motor vehicle by hire purchase. However, I am not satisfied that Mr Leahy told Mr Jones: "Go and buy your car" or otherwise told Mr Jones that he could afford to purchase the vehicle.

54 The turnover and profit figures for the partnership show that its financial performance for the financial years 1989 to 1994 were as follows:

55 In late 1993 the plaintiffs discussed with Mr Leahy incorporating the business being conducted by the partnership. Subsequently the Company was incorporated and took over the partnership business from on or about 1 March 1994. The partnership ceased trading on 28 February 1994. The turnover and profit for the year ended 30 June 1994 was for a period of eight months. If that figure was extrapolated for a whole year it would result in a turnover of $1,455,000 and a profit of $81,000.

56 Those figures show that the business turnover had grown significantly, but not at a consistent rate, since October 1988 and was profitable if no wages were paid to the partners.

57 Mr Jones says that in approximately October or November 1993 he and his wife met with Mr Leahy at Mr Leahy's office in Subiaco to discuss the business and the financial statements for the year ended 30 June 1993 which had been finalised at about that time. Mr Jones says that there was a conversation which he cannot recall in detail but the substance of it was that Mr Leahy thought that the business ought to be incorporated now that it had been established for a number of years. Mr Leahy said that the benefits of incorporation would include a lower company tax rate applicable to profits and there would be protection of the plaintiffs' assets by reason of limited liability. Mr Jones says that he acted on Mr Leahy's advice and Mr Leahy said he would attend to the necessary work to achieve incorporation.

58 Mr Jones says that in early 1994 Mr Macri telephoned him to discuss the transfer of the business from the partnership to a company. Mr Macri said that the plaintiffs owed the partnership $120,000 which included moneys then owing to creditors. Mr Jones said that Mr Macri said the way to get around this was to treat the $120,000 loan as goodwill in the partnership and then transfer it to the company. Mr Jones said that he did not follow the technicalities of this and told Mr Macri to go ahead with his recommendation. As I have said the Company was incorporated and from 1 March 1994 acquired and operated the business previously carried on by the partnership.

59 Mr Leahy said that he recalls meeting with Mr Jones at his office in or about November 1993. Mr Jones was dropping off some financial records while seeing Mr Macri in relation to his financial affairs. Mr Leahy had a conversation with Mr Jones and Mr Macri. During the conversation Mr Leahy asked Mr Jones how his business was going. Mr Jones said that he was very optimistic about the growth prospects of the business and that he was expecting the business to "boom" in the near future. Mr Jones said that he intended to expand the business and was interested in doing some work with some Singaporeans who had expressed an interest in buying into the business. Mr Jones gave some estimates of his expected increase in turnover. Mr Jones said that he had heard from others in the building industry that a company would be the best structure for the future growth of the business and asked Mr Leahy what he thought about the matter. Mr Leahy gave Mr Jones advice, the substance of which was that based on his plans for introducing additional owners to the business, for expansion of the business and his expected growth of the business, there were advantages in operating the business through a company. Mr Leahy outlined advantages of operating the business through a company and advised Mr Jones to consider transferring his business into a company. Mr Leahy told Mr Jones of the capital gains tax rollover relief provisions and the applicable taxation legislation that may enable the plaintiffs to defer any capital gains tax on moving the assets of the partnership into the company. Mr Leahy says that he advised Mr Jones that if he was planning to expand his business and take on a greater number of jobs it was important that he continue to maintain his previous profit margins and did not allow the costs of his jobs to blow out.

60 Mr Leahy says that either during that meeting or at a subsequent meeting he prepared some rough calculations for Mr Jones which demonstrated the difference in the tax payable by the partnership and a company on Mr Jones' forecast levels of turnover.

61 Mr Leahy says that either he or Mr Macri subsequently received instructions from Mr Jones to establish a company. Mr Leahy says that he does not recall any further dealing with the plaintiffs concerning the Company until about February 1995. At about that time Mr Macri told Mr Leahy that the gross profit margins based on the financial information provided by Mr and Mrs Jones, for the partnership and for the Company were inconsistent. Mr Leahy told Mr Macri to check his figures and if his figures were right then Mr Jones must have made an error in the information he had given to Mr Macri and Mr Macri should discuss the figures with Mr Jones. Later, in or about February 1995 Mr Macri showed Mr Leahy amended accounts for each of the partnership and the Company. The amended figures showed a significantly lower amount for opening work in progress than that which had been recorded in the draft account prepared in 1994. With the adjusted work in progress figures, the profit margins for each of the partnership and the Company became more or less consistent. The effect of reducing the closing work in progress figure of the partnership was to decrease the assets of the partnership at the time they were acquired by the Company. When Mr Macri prepared the accounts for the Company based on the reduced opening work in progress figure, it became apparent that at the time the business was transferred from the partnership to the Company, the Company acquired less assets from the partnership than the liabilities of the partnership which the Company had assumed as at 28 February 1994. By 30 June 1994 the deficiency in the assets over liabilities had become approximately $120,000. Mr Leahy says that he did not know what the asset and liability position of the partnership had been at the time the business was transferred to the Company, that is 1 March 1994. Mr Leahy was not aware of any deficiency in the assets of the Company at the time it commenced trading, that is 1 March 1994. Mr Leahy says he did not become aware of that deficiency until Mr Macri brought it to his attention in about February 1995.

62 Mr Leahy says that as a result of the deficiency in assets over liabilities, for the accounts of the Company to balance as at 30 June 1994, a balancing item of an asset of approximately $120,000 was required in the accounts of the Company. He discussed the matter with Mr Macri. The options they discussed were an asset being a debt owed by the plaintiffs to the Company as a directors' loan account or an asset item for the value of the goodwill of the business the Company acquired from the partnership or a combination of those two.

63 Mr Leahy says that Mr Jones attended his office and met with him and Mr Macri in about February 1995. Mr Leahy said to Mr Jones that as a result of amended closing and opening work in progress figures that Mr Jones had given to Mr Macri there was a deficit in the assets of the Company over liabilities of about $120,000. Mr Leahy said that to make the Company's balance sheet balance an item had to be included as an asset and the item could be recorded as a director's loan account, that is a debt owed to the Company by Mr and Mrs Jones. If it was recorded as a directors' loan then Mr and Mrs Jones would have to repay the loan at some stage. Mr Leahy said that in his view the Company should not have the director's loan account showing that Mr and Mrs Jones owed it money for three reasons. First, in the event of liquidation of the Company Mr and Mrs Jones would be personally liable for this debt to the Company. Secondly, fringe benefits tax may be payable on the loan and it may be considered a deemed dividend under the applicable taxation legislation and therefore income tax would be payable on it. Further, the directors should only draw income from the Company in the form of salaries and wages or dividends and not as loans from the Company. It was unlikely the Commissioner of Taxation would accept that, on the transfer of the business from the partnership to the Company, the partnership had a nil value for goodwill and, accordingly, some value must be assigned to the goodwill of the partnership at the time of the transfer of the business to the Company. Mr Leahy said to Mr Jones that with a directors' loan account the Company would be less attractive to investors unless the loan was repaid. Mr Leahy said if $120,000, as goodwill, could be reasonably justified it would eliminate the debt owed by Mr and Mrs Jones to the Company, would set up a cost base in the Company for capital gains tax purposes and would recognise Mr and Mrs Jones' work in building the business in the Black Swan name.

64 Mr Leahy says that he asked Mr Jones whether he thought $120,000 for goodwill was reasonably justified, that is the price at which he thought he could sell the business. Mr Leahy says that Mr Jones said that the business was worth at least $120,000 and that in his view it was worth $500,000, particularly based on his expectations of the growth of the business. Mr Jones said there were a number of projects in the pipeline and likely to be commenced in the near future which would be very profitable for the company. Mr Jones said he was not interested in paying back $120,000 to the Company. Mr Leahy said that he said to Mr Jones that if Mr Jones was satisfied that the value of the goodwill was at least $120,000 then the Company's accounts would be amended to reflect that as an asset acquired from the partnership. Mr Leahy did not carry out any detailed calculations based on past performance of the Company to verify Mr Jones' view of the value of the business. Mr Leahy considered, based on his experience, his knowledge of the past performance of the business, Mr Jones' predictions of growth and general optimism in relation to his business, which up to that time had been reasonably accurate, that a value of $500,000 for goodwill was not reasonable but a figure of $120,000 was probably on the higher end of reasonable.

65 Mr Leahy says that he then instructed Mr Macri to complete the accounts on the basis that the partnership had a value of $120,000 for goodwill.

66 Mr Macri's evidence is broadly consistent with that of Mr Leahy. He says that in or about January 1995 he prepared financial statements for the Company and the partnership for the financial year ended 30 June 1994. The gross profit margins were not consistent with each other as one would expect. Mr Macri says he had a discussion with Mr Jones concerning the difference in the profit margins. Subsequently Mr Jones provided Mr Macri with an amended opening work in progress figure for the Company and closing work in progress figure for the partnership as at 28 February 1994. Mr Macri amended the draft partnership and company accounts in accordance with those figures. After trading to 30 June 1994 and based on the closing work in progress figures given by Mr Jones, the liabilities of the Company exceeded its assets by $121,050. Mr Macri had not previously been aware of the deficiency in the assets of the Company.

67 Mr Macri says he spoke to Mr Leahy about the deficiency in the assets of the Company and they discussed the means by which the Company could legitimately balance its balance sheet other than by a directors' loan account. Mr Macri says that he and Mr Leahy considered it would be more advantageous to Mr and Mrs Jones to balance the Company's balance sheet by including as an asset goodwill acquired from the partnership of approximately $120,000 if that amount could be justified or a combination of goodwill and directors' loan account to reduce the amount of the directors' loan account.

68 Mr Macri says that he and Mr Leahy met with Mr Jones at their office in or about February 1995. Mr Macri's account of that meeting is broadly consistent with that of Mr Leahy.

69 Mr Macri says that he subsequently prepared rollover elections which were later signed by Mr and Mrs Jones and kept on file as required for the Australian Taxation Office. These documents reflect the sale of goodwill in the partnership to the Company at a value of $120,000. Mr Macri subsequently completed the financial statements and tax returns of the Company on or about 21 February 1995.

70 I accept the evidence of Mr Leahy and Mr Macri concerning the events leading to the partnership selling the goodwill of the business to the Company for $120,000, and the relevant entry being made in the Company's balance sheet, as broadly correct. Their evidence is consistent with each other. Furthermore, the partnership accounts were signed by Mr Jones on 14 March 1995. That is consistent with the chronology of events that were accounted by Mr Leahy and Mr Macri. To the extent that Mr Jones' evidence is different I do not accept it.

71 The financial statements for the Company show that its financial performance for the financial years 1994 to 1996 were as follows:

72 The turnover and profit of the business operated by the partnership and then the Company, as disclosed in the financial statements of the partnership and the Company, for the years ending 30 June 1992 to 30 June 1996 are as follows:

73 Those figures show that the turnover of the business increased rapidly from 1992 to 1995 before decreasing by 29 per cent in the year ended 30 June 1996. Significantly, turnover increased by 121 per cent in the Company's first full year of operation, but there was no increase in profit. Turnover declined dramatically in 1996 with a consequential drop in profit.

74 Mr Jones says that the increase in the business turnover resulted in an increase in creditors. He says he discussed this issue with Mr Leahy in about August 1994 and Mr Leahy recommended that he apply to the bank to increase the Company's overdraft from $35,000 to $100,000. Mr Jones says that between August and October 1994 there was a general rearrangement of both the plaintiff's personal financial obligations to the ANZ bank and in relation to the business overdraft and the mortgages over the Seaforth Loop and Clifton Gardens properties. The new arrangement resulted in the business overdraft with ANZ being increased from $35,000 to $100,000, the Challenge Bank third mortgage over Clifton Gardens being discharged and the plaintiffs as directors of the Company giving personal guarantees to the ANZ bank for $150,000.

75 Mr Leahy denied that he recommended to Mr Jones that he apply to increase the Company's overdraft from $35,000 to $100,000. Mr Leahy denied that he knew about the overdraft increase at the time but accepted that his firm may subsequently have received information that disclosed the increase in the overdraft and that Mr Leahy may have become aware of it. I accept Mr Leahy's evidence on this matter.

76 Mr Jones said that in about September 1994, after the financial statements for the financial year ending 30 June 1994 had been completed, he and his wife attended the usual end of financial year meeting with Mr Leahy. Mr Leahy told the plaintiffs that the Company's business was doing very well and that they would have to offset tax with an investment property. Mr Jones said that Mr Leahy said that the plaintiffs should buy property for negative gearing and recommended that they buy a residential property in Floreat or a commercial unit.

77 Mr Jones said that he investigated purchasing property. His research disclosed that he could purchase two new properties in Clarkson for the same price as one property in Floreat. In about October 1994 he saw two properties in Clarkson for sale at a price of $109,000 each. He put an offer on the two properties for $109,000 each. Both offers were made subject to finance.

78 Mr Jones says that he then met with Mr Leahy and told him about the two offers which were subject to finance on the Clarkson properties. Mr Jones says that Mr Leahy listened to what he had to say and then said that Mr Jones should go ahead.

79 The plaintiffs applied to the ANZ bank for finance. The ANZ agreed to two loans totalling $218,000. The plaintiffs purchased the properties for $109,000 each in November 1994. The start-up costs for the properties together with settlement fees, stamp duty, bank fees, rates and taxes and other charges were in the order of $30,000 - $35,000. This was paid out of the Company's overdraft as was the deposit of $2,500 on each property.

80 Mr Jones says that he did not know what effect the purchase of the Clarkson properties would have on the business' cash flow. He was relying on Mr Leahy's advice as to whether the income from the business would be sufficient to fund these additional borrowings. Mr Leahy knew that these borrowings would be funded through the business. At that time Mr Leahy knew the full extent of all the borrowings being funded by the business, namely the plaintiffs' personal borrowings to fund the Clifton Gardens and Seaforth Loop properties as well as repayments on the Company overdraft. Mr Jones says he understood Mr Leahy's advice to make the Clarkson investments to mean that the cash flow was sufficient to fund the borrowings required to fund the purchases.

81 Mr Leahy denies that he advised the plaintiffs to reduce their personal income tax liability or to purchase an investment property or properties which could be negatively geared. Mr Leahy says that he did not discuss the Company's financial results for the year ended 30 June 1994 in September or October 1994 and that the draft accounts for that year were not prepared until February 1995. That is consistent with Mr Macri's evidence. I accept the evidence of Mr Leahy on that point.

82 Mr Leahy says that he learned of the plaintiffs offers to purchase properties in Clarkson when he was standing in the passageway at his office talking to Mr Macri and Mr Jones bustled into the office and said he had put two offers on some properties in Clarkson. Mr Leahy says that all he said to Mr Jones about the matter was: "Why the hell would you buy in Clarkson? Where is it?" And Mr Jones replied: "Look, because it's out in the northern suburbs and along the coast and that's where the property is going to go ahead and I saw it all when I was in England". Mr Leahy's evidence on that point was convincing.

83 Mr Jones gave inconsistent evidence concerning the offers to purchase the Clarkson properties. I have already referred to that evidence and I will refer to it again briefly. In his written witness statement he said that he told Mr Leahy that he had put in two offers which were subject to finance on two Clarkson properties. In cross-examination Mr Jones first said that he had said to Mr Leahy that he was going to put an offer in. Counsel for the defendant, Mr Power, then put to Mr Jones that he had said in his evidence that he had put in the conditional offers and then spoken to Mr Leahy. Mr Jones responded that he did not want to change his evidence he just wanted to state that he went to Mr Leahy and discussed the purchase of the properties and then put an offer in. Mr Power then put to Mr Jones that that was inconsistent with his witness statement. Mr Jones then said that his witness statement was correct.

84 I find that Mr Jones did not have an actual recollection of having spoken to Mr Leahy about the purchase of the Clarkson properties before he put in an offer to purchase them. Mr Jones' evidence at trial on this point was largely a matter of reconstruction and in reconstructing events Mr Jones behaved so as to advance his case.

85 I accept Mr Leahy's evidence that he did not advise the plaintiffs to purchase an investment property or properties. I accept Mr Leahy's evidence that he first learned of Mr Jones' intention to purchase properties in Clarkson when Mr Jones informed him that he had put two offers on some properties in Clarkson.

86 Mr Jones says that in about June 1995 he met with Mr Macri to discuss superannuation. Mr Jones says he wanted Mr Macri's advice on how the plaintiffs could contribute to superannuation. Mr Macri recommended that the plaintiffs set up their own self-managed fund and said he could make all the arrangements for the fund to be set up before the end of the financial year. Mr Jones told Mr Macri to go ahead. Mr Macri did not discuss any options other than a self-managed fund. The next thing that happened was that the documents for setting up the Black Swan Superannuation Fund Trust had been arranged by Mr Macri through solicitors and a bank account at the ANZ was opened for the superannuation trust. After the fund had been set up and before the end of the financial year Mr Macri rang Mr Jones and asked him if he could put $40,000 into the fund. Mr Macri explained that there was a tax benefit in doing it before the end of that financial year. Mr Jones says that he told Mr Macri that $40,000 was too much and asked if he could put $25,000 in. Mr Macri said yes. Mr Jones drew a cheque for $25,000 on the business cheque account and deposited it in the superannuation fund bank account.

87 Mr Jones says that subsequently Mr Macri introduced him to Mr Macri's brother, Dominic, who is a stockbroker. Mr Jones later gave Dominic Macri instructions to act as his sharebroker and to trade in shares with the funds invested in the superannuation fund.

88 Mr Jones says that in about February 1996 Mr Macri telephoned him and said that he should put $20,000 into superannuation for that year. Mr Jones said that he could not put that amount in but could put in half that much. Mr Jones arranged for that to be done.

89 Mr Macri's evidence is quite different. Mr Macri says that during a telephone conversation Mr Jones said words to the effect that he was annoyed that Mr Macri had not advised him to invest money in superannuation. Mr Macri says he recalls having a general discussion with Mr Jones concerning the advantages and disadvantages of self-managed superannuation funds. Mr Jones said that he intended to build the fund up to a substantial amount over the next few years and that he wanted to have control of his own funds and investment. Mr Macri denies that he gave Mr Jones any advice concerning the amount, if any, which the plaintiff should contribute to the superannuation fund over and above the 4 per cent of wages and salary paid to the plaintiffs that the Company was required to contribute. Mr Macri says that Mr Jones asked him to establish a self-managed superannuation fund and he agreed to do so.

90 Mr Macri says that he arranged for solicitors to draft the necessary documents and sent letters to the Insurance and Superannuation Commission and to the ANZ bank concerning the establishment of the superannuation fund.

91 Mr Macri says that Mr Jones asked him if he knew of any stockbrokers who could advise him concerning the shares the superannuation fund should purchase. Mr Macri said that his brother was a stockbroker and gave Mr Jones his contact details.

92 I find that Mr Jones played a more active role in establishing and running the superannuation fund than his evidence-in-chief would suggest. It was Mr Jones who initiated the discussions with Mr Macri concerning the establishment of a self-managed superannuation fund. Mr Jones sought advice from Mr Macri about a self-managed fund. I accept Mr Macri's evidence that Mr Jones said to Mr Macri that he favoured a fund that he could manage himself, where he could invest directly in shares and maintain control over the shares in which his funds were invested. Mr Macri advised Mr Jones that as he wanted to invest directly in shares and maintain control and management himself, the only manner in which he could do that was through a self-managed superannuation fund. Mr Jones decided that he wanted to establish a self-managed fund and informed Mr Macri of that. Mr Macri undertook the work, or caused others to undertake the work, to establish the fund. Mr Macri referred Mr Jones to his brother, Dominic. Subsequently Dominic Macri advised Mr Jones what shares the fund should buy. Mr Jones conceded that he "suggested" a few shares to be purchased by the fund. I am not satisfied that Mr Macri gave Mr Jones any advice concerning the amount which the plaintiffs or the Company should contribute to the plaintiffs' superannuation fund other than the amounts the Company was legally obliged to pay in respect of wages and salary paid to the plaintiffs.

93 Mr Jones says that in about October 1995 the business was experiencing some difficulties in paying its creditors on time. In July 1995 the overdraft was in excess of its limit by approximately $17,000. By October 1995 the Company had exceeded its overdraft limit by $65,000.

94 Mr Jones says that in or about October 1995 he was contacted by the ANZ bank who requested a meeting with Mr Jones and his accountant to discuss the state of the overdraft. Mr Jones says he telephoned Mr Leahy and told him of this development. Mr Leahy agreed to meet with Mr Jones and Mr Shinnick of the ANZ bank. Mr Jones says that the meeting took place and at the meeting Mr Leahy said to Mr Shinnick that in his view the Company was experiencing a short term liquidity problem which required the bank's assistance for no more than a month or two. At that meeting Mr Shinnick agreed to extend the Company's overdraft from $100,000 to $200,000 until 21 November 1995.

95 Mr Leahy denies having any discussions with Mr Jones about meeting Mr Shinnick of the ANZ Bank and denies that he attended any meeting with Mr Shinnick and Mr Jones in or about October 1995.

96 Neither Mr Shinnick nor any representative of the ANZ Bank was called to give evidence. There is no documentary or other evidence to support Mr Jones' version of what happened. I am not satisfied that Mr Leahy advised Mr Jones to seek an increase in the Company's overdraft or that Mr Leahy attended any meeting with Mr Shinnick at the ANZ Bank.

97 Mr Jones says that by January 1996 the Company overdraft was in excess of $250,000. He received a letter from the ANZ Bank requiring the plaintiffs to execute documents to increase the stamp duty on the security.

98 Mr Jones says that in March 1996 he received a telephone call from Ms Welburn of the ANZ Bank who said that he was not to issue any more cheques on the account. Mr Jones says he went to Mr Leahy's office and told him that the ANZ were closing down the account. Mr Leahy said that that was ridiculous. Mr Jones says that Mr Leahy said that the business clearly needed a higher overdraft limit and that if Mr Jones left it with him Mr Leahy would speak to his contact, Mr Nayler, at the National Australia Bank. Mr Jones says that a day or two later Mr Leahy arranged for Mr Jones, Mr Leahy and Mr Macri to meet Mr Nayler. The meeting took place a day or so later. Mr Nayler told Mr Macri and Mr Leahy to prepare a report and give him some figures so that he could consider the matter. Mr Leahy prepared a report on the current financial status of the Company for Mr Nayler.

99 Mr Jones says that subsequently there was another meeting between Mr and Mrs Jones, Mr Leahy and Mr Macri and Mr Nayler. Mr Nayler confirmed that the NAB agreed to take over the Company's banking and all other accounts and that it had been approved subject to certain conditions, including obtaining independent legal advice. Mr Jones attended to those matters and returned all the documents to Mr Nayler later that day. The NAB refinancing package included an increased overdraft from the previous $200,000 limit of the ANZ overdraft to a new overdraft facility of $300,000. All ANZ mortgages were discharged and the NAB took mortgages over the properties. The plaintiffs were required to give personal guarantees securing the full amount of the Company's indebtedness to the NAB.

100 Mr Leahy's evidence is different. Mr Leahy says that in or about January or February 1996 Mr Jones contacted him and said that he wanted to change banks. Mr Leahy told Mr Jones that he dealt with the NAB as did many of his clients. Mr Leahy arranged for Mr Jones to be introduced to the West Perth branch manager of the NAB, Mr Nayler. Mr Leahy says he instructed Mr Macri to arrange the meeting and to prepare any necessary financial information which the NAB would require. Mr Leahy denies he attended any meetings between Mr Nayler and Mr Jones.

101 Mr Macri said that he had a conversation with Mr Leahy in or about February 1996 and as a result of the conversation he arranged a meeting between Mr Nayler and Mr Jones. Mr Macri spoke to Mr Nayler by telephone and Mr Nayler requested that Mr Macri provide financial statements and other information for Mr and Mrs Jones and the Company. Mr Macri had a telephone conversation with Mr Jones and informed him of what Mr Nayler wanted. Mr Jones instructed Mr Macri to provide the information. Mr Macri required further information from Mr Jones to prepare the necessary documents and information for the NAB. Mr Jones gave Mr Macri the information. Mr Macri says he recorded this information in his working notes. Mr Macri produced the notes in evidence. Mr Macri prepared a letter and information that the NAB had requested. The letter stated amongst other things that the plaintiffs wished to transfer the banking affairs of themselves, the Company and the superannuation fund from the ANZ to the NAB and that the plaintiffs wished to extend the Company's overdraft facility from $200,000 to $300,000. Mr Macri says that he drew the letter on Mr Jones' instructions. Mr Macri says that he attended a meeting at the NAB with Mr Nayler and Mr Jones.

102 I accept the evidence of Mr Macri and Mr Leahy in preference to that of Mr Jones. I accept that Mr Macri, but not Mr Leahy attended a meeting with Mr Nayler. I accept that the letter prepared by Mr Macri, and the information and documents provided by Mr Macri to the NAB, were provided on the instructions of Mr Jones. I do not accept that Mr Leahy, or Mr Macri, advised the plaintiffs to increase the Company overdraft facility from $200,000 to $300,000.

103 Mr Leahy testified that in or about November 1995 Mr Macri prepared financial returns for the Company for the financial year ended 30 June 1995. Mr Macri informed Mr Leahy that the gross profit margin for 1995 was 6.9 per cent compared with 14.5 per cent for the financial year ended 30 June 1994. Mr Macri also informed Mr Leahy that the plaintiffs, in addition to wages, salary and superannuation drawn by them out of the Company's funds had drawn an additional amount of $116,915. Mr Leahy was concerned by the change in the financial position of the Company and telephoned Mr Jones.

104 Mr Leahy says that he could not reach Mr Jones and spoke with Mrs Jones. During the course of the telephone conversation Mr Leahy said to Mrs Jones that he was concerned by the fall in the Company's gross profit margin and that the plaintiffs had drawn more funds from the Company than the Company had earned in profits and more funds than had been paid to the plaintiffs as wages, salary or superannuation. Mr Leahy said that if the Company continued to be managed in that manner then ultimately it would become insolvent. Mr Leahy said that drawing funds from the Company as a loan and not as income or dividends could have serious tax consequences as it may be considered a deemed dividend with the result that income tax would be payable on the amount drawn from the Company. Mr Leahy arranged for Mr and Mrs Jones to come and see him.

105 Mr Leahy says he recalls a subsequent meeting with the plaintiffs during which he repeated the matters he had discussed with Mrs Jones on the telephone. Mr Leahy said that during the meeting he said there was a difference between profit and turnover and that it was folly to chase turnover at the expense of profit margins. Mr Leahy said that he could prepare a statement that would demonstrate what he was talking about concerning turnover.

106 Mr Leahy says that shortly after that meeting Mr Jones asked him to prepare the statement Mr Leahy had spoken about for them to consider. Mr Leahy instructed Mr Macri to prepare a break even analysis for Mr and Mrs Jones, illustrating the effect of various gross profit margins and various levels of sales on profitability and the corresponding break even points necessary for Mr and Mrs Jones to cover their living expenses, the costs of the business, loan repayments, other drawings and tax.

107 Mr Macri testified that he prepared tax returns and financial statements for the Company for the year ended 30 June 1995 in about October or November 1995. The profit margin of the Company had fallen from 14.5 per cent for the year ended 30 June 1994 to 6.9 per cent for the year ended 30 June 1995 and the directors had withdrawn funds from the Company in excess of wages and salary in the sum of $116,915. After preparing the accounts Mr Macri says he spoke to Mr Jones by telephone and told him that the Company's profit margin had fallen, that Mr and Mrs Jones had drawn substantially more from the Company than it had paid to each of them in salary and wages and any drawings made by Mr and Mrs Jones from the Company must only be as wages and salary or dividends and appropriate group tax or company tax paid on it. Mr Macri also said to Mr Jones that the overdrawings would have to be repaid to the Company by Mr and Mrs Jones, and to avoid the possibility of fringe benefits tax applying, or the overdrawing being considered a deemed dividend and therefore income of Mr and Mrs Jones, it was necessary that they pay interest on loans from the Company and that the interest would be treated as income of the Company and increase the taxable income of the Company.

108 Mr Macri says that after he prepared financial statements for the Company he showed them to Mr Leahy and advised Mr Leahy of the fall in the gross profit margin and the existence of the director's loan account. Sometime later, in or about November 1995, Mr Macri had a further discussion with Mr Leahy and Mr Leahy informed Mr Macri that he had spoken to Mrs Jones and discussed the matter with her. Mr Leahy instructed Mr Macri to prepare a statement for Mr and Mrs Jones that indicated the amount of profit the Company would need to generate at various levels of turnover to cover the costs of the Company, the wages and salary of Mr and Mrs Jones and their various personal expenses.

109 Mr Macri says that he telephoned Mr Jones to obtain information he needed to prepare the document. Mr Jones said that he and Mrs Jones needed to draw $65,000 after tax from the Company for their personal living expenses. Mr Macri then prepared a break even analysis showing the gross revenue the Company needed to generate at different levels of gross profit margin to cover the operating costs of the Company, the plaintiffs' personal expenses and wages and salaries. Mr Macri produced the document in evidence. Mr Macri said he provided the break even analysis to Mr Jones at some time in or about late November 1995. Mr Macri also had a discussion with Mr Jones about the break even analysis.

110 Mrs Jones denied that the telephone conversation Mr Leahy referred to ever took place. She denies that the meeting Mr Leahy refers to ever took place. Mr Jones denies that the meeting referred to by Mr Leahy took place.

111 I find that Mr Leahy did have a telephone conversation with Mrs Jones in which he told Mrs Jones that the Company's financial position needed to be addressed and arranged a meeting to discuss it. I am not satisfied Mr Leahy discussed the matter with Mr Jones in the detail Mr Leahy testified. I find that Mr Leahy did have a meeting at least with Mr Jones in which Mr Leahy outlined broadly the matters to which he later testified. I am satisfied that Mr Macri prepared the break even analysis document and that it was given to Mr Jones. I find that Mr Leahy and Mr Macri did explain the information in the document and told Mr Jones in effect that the same profit could be generated from a smaller turnover by maintaining a higher gross profit rate. I find that Mr Leahy and Mr Macri informed Mr Jones that the plaintiffs were drawing more out of the Company in addition to wages, salary and superannuation than the profit the Company was making and that the Company would eventually become insolvent if that continued.

112 Mr Jones says that by October 1996 the Company position had not improved and he went to Mr Leahy for advice. Mr Jones says that Mr Leahy advised him to apply to the NAB to further increase the overdraft to a limit of $360,000 on a temporary basis. Mr Jones telephoned Mr Nayler and requested an increase in the facility from $300,000 to $360,000. Mr Nayler agreed to the increase.

113 There is no documentary or other evidence to support Mr Jones' claim. It is denied by Mr Leahy. Mr Jones was not a convincing witness for the reasons I have set out earlier. I am not satisfied that Mr Leahy advised Mr Jones to apply for the Company overdraft to be increased from $300,000 to $360,000.

114 Mr Jones says that shortly before Christmas 1996 he formed the view that the business' cash flow situation was very serious. He called Mr Leahy and told Mr Leahy that he needed to meet with Mr Leahy urgently. They met shortly after Christmas on a Sunday morning. Mr Leahy told Mr Jones that an administrator would have to be appointed to the Company and he recommended Norgard Clohessy. The Company stopped trading on 7 January 1997 and Ross Norgard was appointed administrator on 16 January 1997. On 12 February 1997 Mr Norgard was appointed liquidator.

115 Mr Leahy's recollection is that he had a telephone conversation with Mr Jones in about October or November 1996. Mr Jones said that his debtors were not paying their debts and he had some architects who were withholding payments. Mr Jones said that things were getting tight. Mr Jones said that there had been a serious decline in his business. Mr Leahy said to Mr Jones that Mr Jones should speak to his bank, explain his situation and attempt to get the bank's agreement to allow his cheques to be honoured so that he could pay his creditors. Mr Leahy said to Mr Jones that it was a serious offence to trade whilst insolvent and that if things were as tight as he was saying then Mr Jones should appoint an administrator. Mr Jones said that he did not want to appoint an administrator because he had seen what they do to companies. However, Mr Jones said he would get in touch with his bank.

116 Mr Leahy said he had another discussion with Mr Jones in about November 1996 during which Mr Jones said that he had spoken with his bank and they had referred him to the accounting firm Bourne Griffiths to assess the Company's financial position and Bourne Griffiths was of the view that the Company could trade out of its difficulties. Mr Jones asked Mr Leahy if he thought the Company could trade out of its difficulties. Mr Leahy asked Mr Jones to forward him some further information which he did by letter dated 18 November 1996. After receiving that letter Mr Leahy had a further conversation with Mr Jones. Mr Leahy said to Mr Jones that he did not think that there was any alternative to appointing an administrator.

117 Mr Leahy says that in early December 1996 he was aware that Mr Jones met with Mr Macri but he did not participate in the meeting. After the meeting Mr Macri informed Mr Leahy of the substance of the discussion and Mr Leahy advised Mr Macri to put any advice which he had given to Mr Jones during their meeting in writing.

118 Mr Macri said that towards the end of November 1996 he completed the income tax returns and financial statements for the Company for the year ended 30 June 1996. He had a telephone conversation with Mr Jones during which Mr Jones said that there had been some retraction in the business of the Company. Mr Jones requested that Mr Macri prepare an interim set of accounts for the period 1 July to 30 September 1996. Mr Macri requested Mr Jones provide him with information to enable that to be done. Mr Macri prepared an interim set of accounts for the period 1 July to 30 September 1996.

119 Mr Macri testified that at about the time he was preparing the Company accounts for the financial year ended 30 June 1996 Mr Macri had a discussion with Mr Leahy concerning the financial position of the Company. Mr Macri said he was concerned the Company may be in financial difficulty. After he showed the figures to Mr Leahy, Mr Leahy said he shared Mr Macri's concern and said that he would speak to Mr Jones. Mr Macri was present when Mr Leahy made a telephone call. Mr Macri recalled Mr Leahy saying that given the current financial position of the Company Mr Jones should advise the NAB that the Company had insufficient funds to meet its present creditors and Mr Jones should seriously consider putting the Company into voluntary administration. Mr Macri says that after the telephone call sometime in or about November 1996 Mr Jones telephoned him and asked him to accompany Mr Jones to the NAB so that Mr Macri could assist Mr Jones explain the financial position of the Company to Mr Nayler. Mr Macri agreed to do so. Mr Macri says that when he arrived at the NAB there was a representative of the accounting firm Bourne Griffiths present. It appeared to Mr Macri that Bourne Griffiths had been retained by the NAB to advise them and Mr and Mrs Jones concerning the prospects of the Company trading out of its financial difficulties.

120 Mr Macri says that towards the end of November or early December 1996 Mr Jones telephoned him to arrange a meeting. The meeting took place on or about 2 December 1996 between Mr Macri and Mr Jones. Mr Jones spoke to Mr Macri about the appointment of an administrator. Mr Jones said he was reluctant to place the Company into voluntary liquidation because he believed the Company could trade on and that he had received advice from Bourne Griffiths that the Company was still viable. Mr Jones said that he had the Clarkson properties on the market but had been unable to sell them and he intended selling the Seaforth Loop property. Mr Macri said, amongst other things, that the Company had no tangible assets and it was technically insolvent. Mr Macri said that the only way in which Mr Jones could continue to trade was if he sold the Seaforth Loop property and the Clarkson properties on an urgent basis to reduce the debt to the NAB and to obtain working capital for the Company.

121 Mr Macri says that after the meeting he had a discussion with Mr Leahy. Mr Leahy instructed Mr Macri to confirm the substance of the advice he had given to Mr Jones in writing. Mr Macri prepared a letter dated 5 December 1996 and sent it to Mr and Mrs Jones as directors of the Company.

122 Mr Macri says that in or about January 1997 Mr Jones came into the firm's office and had a discussion with himself and Mr Leahy. During the discussion Mr Jones said that the Company could no longer continue to trade. Mr Leahy asked Mr Macri to contact Brian Hughes of Norgard Clohessy for the purpose of placing the Company into administration. Mr Macri did that.

123 I find that in the second half of 1996 the Company's cash flow situation deteriorated. The amount drawn by the Company under the overdraft increased. Mr Jones was aware that the Company's business had retracted. There were discussions between Mr Jones and Mr Macri and between Mr Jones and Mr Leahy concerning the Company's deteriorating financial situation. I accept Mr Macri's evidence concerning his dealings and communications with Mr Jones and Mr Nayler in November and December 1996 and January 1997. I find that Mr Macri's letter of 5 December 1996 to Mr and Mrs Jones sets out the substance of the advice he had given to Mr Jones.

124 The administrator, Ross Norgard, prepared a report to the creditors of the Company dated 4 February 1997. The report included a summary of the assets and liabilities of the Company including the director's valuation of the assets and Mr Norgard's expectation of their estimated realisable value. The summary is as follows:

125 The report said that the directors and their accountant had advised Mr Norgard that the majority of the directors' loans represented the directors' personal use of the Company's bank overdraft facility and that a significant proportion of this loan went towards meeting mortgage payments on four residential properties owned in the directors' personal names, together with paying the general day-to-day living expenses of the directors.

126 Mr Jones testified that the Seaforth Loop and Clarkson properties were sold in November 1997 and the Clifton Gardens property was sold in March 1998 by NAB as mortgagee in possession.

127 The plaintiffs claim damages from the defendant for negligence. The plaintiffs allege that the defendant breached the duty of care it owed to the plaintiffs at all relevant times.

128 The plaintiffs submit that the defendant breached the duty of care it owed to the plaintiffs in three ways. First, the defendant treated a funding deficiency of $120,000 in the business on the incorporation of the Company as an intangible asset, namely goodwill, in the Company accounts. Secondly, the defendant failed to advise the plaintiffs, throughout the period that the defendant advised the plaintiffs, to implement appropriate strategies to overcome the deficiency of working capital in the business in circumstances where, unless the problem was resolved, there was a real risk that the Company would go into liquidation and they would lose their family home and Mr Jones would lose his builder's licence. Thirdly, the defendant failed to advise the plaintiffs, in circumstances where the Company's liquidity crisis was progressively worsening and the prospects of it going into liquidation were progressively increasing, against:

(1) incurring further borrowings to acquire the Seaforth Loop and Clarkson investment properties;

(2) incurring further borrowings to set up their own superannuation fund and to contribute excessive amounts to that fund;

(3) increasing the Company's bank overdraft from $35,000 in 1994 to $360,000 in 1996.

129 The plaintiffs say that as a result of the defendant's negligence, the Company went into liquidation, the plaintiffs lost their family home and Mr Jones lost his builder's licence. The amount of damages claimed by the plaintiffs was amended on the last day of the trial to claim the following losses:

(a) loss as guarantors of the debt the Company owed to the NAB on the winding up of the Company which debt consisted of the balance of the Company's overdraft facility at that time plus interest thereon from 31 July 1997 to the date of judgment;

(b) costs and expenses incurred as a result of the plaintiffs losing their home and business, being the cost of home rental for the period of December 2000 to December 2001;

(c) past and future loss of income of the plaintiffs taking into account the loss of Mr Jones' building licence following the Company being placed in liquidation being an after tax loss of $15,000 per year for eight years compared to what the plaintiffs' combined earnings would, but for the defendant's negligence, have been.

130 I will discuss the plaintiffs' retainer of the defendant before considering each of the alleged breaches of duty as formulated by the plaintiffs' counsel in his written submissions.

131 In Midland Bank Trust Co Ltd v Hett Stubbs & Kemp (a firm) [1979] Ch 384, Oliver J said at 402 that there is no such thing as a general retainer and the expression "my solicitor" is as meaningless as the expression "my tailor" or "my bookmaker" as establishing any general duty apart from that arising out of the particular matter in which his services are retained. The extent of his duty depends upon the terms and limits of that retainer and any duty of care to be implied must be related to what he is instructed to do. The same observations apply to the duty of an accountant. Deane J in Hawkins stated (at 579) that the relationship of the solicitor and client may well give rise to a duty of care on the part of the solicitor which requires the taking of positive steps, beyond the specifically agreed professional task or function, to avoid a real and foreseeable risk of economic loss being sustained by the client. Whether the solicitor-client relationship does give rise to a duty of care requiring the taking of such positive steps will depend upon the nature of the particular professional task or function which is involved in the circumstances of the case. Those observations apply to the duty of care owed by the defendant to the plaintiffs.

132 There was, or were, a contract, or contracts, between the plaintiffs and the Company on the one hand and the defendant on the other hand whereby the defendant agreed to render certain services. There was no written contract specifying the scope of work that was to be carried out by the defendant under that contract or contracts. There were a series of retainers arising from those requests.

133 The scope of work to be undertaken by the defendant under each contract depends on the work the plaintiffs requested the defendant to carry out. Where there was no express request then the scope of work depends on the work carried out by the defendant.

134 There was a contract whereby the defendant agreed to prepare annual financial statements and income tax returns for the plaintiffs and the Company. In addition, the plaintiffs or the Company from time to time requested the defendant to carry out other tasks or the defendant carried out specific tasks, including giving advice on specific matters. The scope of work undertaken in each case depends on the terms of the request, the work carried out and the circumstances in which the request was made and the work carried out.

135 There are other terms of the contract or contracts. There is a term to the effect that the plaintiffs and the Company would pay the defendant for the services it rendered at its usual professional rates or a reasonable fee. There is an implied term that the defendant would exercise reasonable skill and care in carrying out the work it undertook.

136 The plaintiffs say that the defendant's duty or duties of care arose from the specific services that the defendant undertook for the plaintiffs over a number of years as well as the reliance that the plaintiffs placed on the defendant to provide them with the required advice pleaded in the statement of claim and the obligation the law imposes on a professional to take positive steps beyond the specifically agreed professional task or function where the steps in question are necessary to avoid real and foreseeable risk of economic loss being sustained by the plaintiffs. Before considering the breaches of duty alleged by the plaintiffs it is convenient to summarise the tasks that the Company or the plaintiffs requested the defendant to undertake and the work that was carried out by the defendant.

137 The defendant prepared the income tax returns and financial statements for Mr and Mrs Jones, the partnership and the Company from 1989 until the Company went into liquidation. The defendant undertook other specific tasks for the plaintiffs or the Company from time to time. The plaintiffs instructed the defendant to establish a company that would take over the business from the partnership. The defendant accepted those instructions. The limits of the work undertaken by the defendant to effect those instructions are not clear. However, the work included drawing financial statements, including balance sheets, for the partnership and the Company for the financial year ended 30 June 1994.

138 The defendant, principally through Mr Leahy, gave advice to the plaintiffs and the Company from time to time. For example, in 1989 when the defendant first started to act as accountant for the plaintiffs Mr Leahy advised Mr Jones that he should ensure, in the conduct of his business, that he monitored and put in place a system for adequately monitoring the costs of each job, that he maintained a good profit margin of at least 15 per cent of all the jobs he undertook and that he should not simply chase work for the sake of increasing his turnover and that he had to make sure he made a good profit on every job.

139 I am not satisfied that the defendant, through Mr Leahy, advised the plaintiffs that they would not be overextending their borrowings by obtaining a loan of $10,000 to renovate their home at Clifton Gardens in 1991. I am not satisfied that the defendant, through Mr Leahy, advised Mr Jones to convert the partnership business overdraft of approximately $30,000 into a business loan of $35,000. I am not satisfied that Mr Jones sought any advice from Mr Leahy concerning the Seaforth Loop investment property or that Mr Leahy gave any such advice to Mr Jones.

140 I am not satisfied that Mr Leahy advised Mr Jones that he could afford to purchase the Subaru although Mr Leahy might have advised Mr Jones in relation to the tax treatment and consequences of leasing a motor vehicle or acquiring a motor vehicle by hire purchase.

141 Mr Leahy advised the plaintiffs in relation to the incorporation of the partnership business. Mr Leahy outlined advantages of operating the business through a company and advised Mr Jones to consider transferring his business to a company. Mr Leahy told Mr Jones of the rollover relief provisions and the applicable taxation legislation that may enable the plaintiffs to defer any capital gains tax on moving the assets of the partnership into the company. In about February 1995 Mr Leahy and Mr Macri advised the plaintiffs in relation to a deficit in the assets of the Company over liabilities of about $120,000. Mr Leahy advised Mr Jones that if Mr Jones was satisfied that the value of the goodwill of the business was at least $120,000 then the Company's accounts would be amended to reflect that as an asset acquired from the partnership.

142 I am not satisfied that Mr Leahy recommended to Mr Jones that he apply to increase the Company's overdraft from $35,000 to $100,000 in 1994.

143 I am not satisfied that the defendant, through Mr Leahy, gave advice to the plaintiffs about the financial wisdom of buying the Clarkson investment properties or to purchase any negatively geared investment property.

144 I find that the defendant advised Mr Jones of the Company's obligation to pay statutory required superannuation to its employees but the defendant did not otherwise advise the plaintiffs that they should put money into superannuation. I find that Mr Macri advised Mr Jones about the advantages and disadvantages of self-managed superannuation funds in response to a request for such advice from Mr Jones but neither Mr Macri nor Mr Leahy advised the plaintiffs that they should establish a self-managed superannuation fund. I am not satisfied that the defendant advised the plaintiffs to contribute any particular amount to their self-managed superannuation fund.

145 I find that the defendant assisted the plaintiffs to obtain a new overdraft facility of $300,000 from the NAB. However, I am not satisfied that the defendant advised the plaintiffs to increase the company overdraft facility from $200,000 to $300,000. I am not satisfied that the defendant advised Mr Jones to apply to the NAB to further increase the overdraft to a limit of $360,000.

146 I will now consider the breaches of duty alleged by the plaintiffs in the light of the work that the defendant was asked to undertake or carried out for the Company and the plaintiffs.

147 The first breach of duty of care alleged by the plaintiffs is that the defendant negligently treated a funding deficiency of $120,000 in the business on the incorporation of the Company as goodwill.

148 The plaintiffs led expert evidence from Mr Gilmour, a chartered accountant with RSM Bird Cameron. The defendant also called expert evidence from a chartered accountant, Mr Ron Fabbro of Fabbro Consulting. Mr Gilmour and Mr Fabbro broadly agreed how goodwill had been treated in the Company's financial statements. Mr Gilmour stated that on the incorporation of the Company, the business was transferred at a profit on sale to the partnership of $120,000 and gave rise to an intangible asset in the books of the Company of goodwill on acquisition of $120,000. Mr Gilmour said that the creation of this book profit in the partnership allowed the majority of the debit balance of the partners' current accounts to be cleared. At 30 June 1993 the partners, that is the plaintiffs, had drawn out of the business $122,985 more than the business had generated in profits since it had commenced operations. These excess drawings had been funded by bank borrowings and creditors. Mr Gilmour opined that the $120,000 goodwill accounting entry overstated the value of the assets of the Company and did not disclose the real undercapitalisation of the business.

149 Mr Gilmour and Mr Fabbro both gave evidence concerning the value of the goodwill of the business when it was transferred from the partnership to the Company.

150 In the accounting expert's referral report Mr Gilmour and Mr Fabbro agreed that the capitalisation of future maintainable earnings method was the appropriate methodology for valuing the goodwill of the business.

151 In his report of 22 May 2002 Mr Gilmour said that from the commencement of the partnership on 1 October 1998 to the transfer of the business to the Company in 1994 the business failed to provide a return over and above an amount equal to reasonable wages payable to the proprietors. Accordingly, Mr Gilmour believes a prudent investor would not have paid for any goodwill in the partnership. Mr Gilmour said that the historical financial statements show that there was no certainty or regularity of the business producing any returns over and above normal proprietors' wages. Mr Gilmour's opinion is that the $120,000 goodwill in the books of the Company at transfer was not representative of the true goodwill figure.

152 In his report of 16 March 2005 Mr Gilmour reviews the valuation of the business. He considers that on the basis of historical trading figures, the business does not have any future maintainable earnings after adding back proprietors' wages and notional finances costs. Mr Gilmour again concludes that the value of goodwill was nil.

153 Mr Fabbro said that he does not agree with the accounting treatment of goodwill in the financial statements of the Company upon transfer of the business from the partnership to the Company.

154 I have set out earlier in these reasons for decision how a goodwill value of $120,000 came to be entered into the Company's financial statements. In cross-examination it was put to Mr Leahy that he made no attempt to ascertain what the true value of the goodwill was. He denied that. Mr Leahy said that he asked Mr Jones what Mr Jones thought the business was worth. Mr Leahy conceded that he had not investigated the matter. Mr Leahy said that his knowledge of what Mr Jones had told him about the business' prospects gave him some feeling as to what a reasonable value for goodwill would be. Mr Leahy was referred to the information in the partnership's accounts. In response Mr Leahy said that goodwill is all about maintainable profits and in effect he took into account what Mr Jones was telling him about the business' prospects and that investors from Singapore were going to buy into the Company. Mr Leahy referred to the profit of the business in previous years but it is apparent that he did not take into account any notional proprietors' wages or that part of the partners' drawings that represented a reasonable wage. That would have to be taken into account in properly assessing the business' maintainable profits.

155 Mr Leahy did not attempt to calculate the value of the goodwill of the business. He undertook no investigation or enquiry into the matter other than a superficial enquiry of Mr Jones. In doing so, Mr Leahy failed to exercise proper care in assessing the value of the goodwill of the business. Had he undertaken a proper consideration of the value of the goodwill of the business he would have concluded that the goodwill value was nil or nominal. That is because, as Mr Gilmour demonstrated, the historical trading figures of the business after adding back reasonable proprietors' wages, did not disclose any regular and hence maintainable profits.

156 I am satisfied, having regard to the evidence of Mr Gilmour and Mr Fabbro, that Mr Leahy should have dealt with the apparent deficiency of assets in the balance sheet of the Company on transfer of the business to the Company by recording directors' loans of $120,000.

157 The defendant, through Mr Leahy, breached its duty of care to the plaintiffs in causing the plaintiffs to transfer the business at a profit on sale to the partnership of $120,000 and giving rise to an intangible asset in the books of the Company of goodwill on acquisition of $120,000. The information in the Company's balance sheet was not reliable. The value of goodwill was wrong and had no proper foundation. The Company balance sheet did not show a true and fair view of the financial position of the Company. Mr Leahy formed the opinion that a goodwill value of $120,000 was reasonable. But in forming that opinion he failed to exercise the degree of skill and care which is ordinarily exercised by reasonably competent accountants. It is not, of course, negligent merely to be wrong. However, Mr Leahy made no proper investigation or assessment of the true value of the goodwill of the business. He did not address his mind to whether the capitalisation of future maintainable earnings or some other method was the appropriate methodology for valuing the goodwill of the business. He failed to properly analyse the profit generated by the business before it was transferred to the Company or whether or not the profit exceeded normal proprietor's wages.

158 The second breach of duty of care alleged by the plaintiffs is that the defendant negligently failed to advise the plaintiffs, throughout the period that the defendant advised the plaintiffs, to implement appropriate strategies to overcome the deficiency of working capital in the business in circumstances where, unless the problem was resolved, there was a real risk that the company would go into liquidation and they would lose their family home and Mr Jones would lose his builders' licence.

159 In 1989 the defendant, through Mr Leahy, agreed to become the plaintiffs' accountant. The expression "my accountant" is as meaningless as the expression "my tailor" in establishing any general duty apart from that arising out of the particular matter in which his services are retained: see Midland Bank Trust Co Ltd v Hett Stubbs & Kemp referred to above. The extent of the defendant's duty to the plaintiff depends upon the terms and limits of that retainer and any duty of care to be implied must be related to what he is instructed to do although the relationship of accountant and client may give rise to a duty of care which requires the taking of positive steps beyond the specifically agreed professional task or function: see Hawkins referred to above.

160 I do not accept the evidence of Mr Jones that when Mr Leahy agreed to become the plaintiffs' accountant he agreed to provide general advice for the plaintiffs and for the business they operated. Mr Leahy took it upon himself to offer some advice to Mr Jones. That included the advice that successful builders carefully monitored the costs of the jobs they were undertaking and maintained a good profit margin on all the work they performed and those builders who got themselves into financial difficulties were those who failed to keep job costs under control and to maintain good profit margins. Mr Leahy also advised Mr Jones that he should monitor and put in place a system for adequately monitoring the costs of each job and should maintain a good profit margin of at least 15 per cent on the jobs he undertook and not chase work for the sake of increasing his turnover. At that time the plaintiffs had recently commenced their building business in partnership. The plaintiffs did not seek advice from Mr Leahy beyond advice and assistance in relation to taxation matters, the preparation of financial statements and the maintenance of bookkeeping to enable that to be done. Notwithstanding Mr Leahy's advice concerning maintaining profit margins on work and monitoring the costs of each job, Mr Leahy did not assume responsibility to the plaintiffs and the plaintiffs did not rely upon Mr Leahy to advise them how to operate their business, or whether to commence the business at all. Mr Jones did not seek advice from Mr Leahy concerning the requirement of working capital for the business. Mr Leahy did not assume responsibility to advise the plaintiffs in relation to the need for working capital for the business and the plaintiffs did not rely upon Mr Leahy to provide such advice.

161 The defendant continued to provide services to the plaintiffs and the Company until the Company went into liquidation. Those services included preparing income tax returns and financial statements for the plaintiffs, the partnership and the Company. From time to time the defendant undertook other specific tasks for the plaintiffs or the Company and provided advice to the plaintiffs and the Company. The defendant, through Mr Leahy, advised the plaintiffs to incorporate the business. The defendant undertook work for the plaintiffs and the Company to establish or acquire the Company and transfer the business from the partnership to the Company. The defendant provided taxation advice to the plaintiffs. That included advice concerning the tax treatment and consequences of leasing a motor vehicle or acquiring a motor vehicle by hire purchase, the taxation advantages of transferring the business to a company and the tax deductibility of interest paid by the plaintiffs on a loan to purchase real property. The defendant, through Mr Macri, advised Mr Jones of the advantages and disadvantages of self-managed superannuation funds but did not advise the plaintiffs that they should establish a self-managed fund. The defendant, through Mr Leahy and Mr Macri, assisted the plaintiffs to establish banking facilities with the NAB in early 1996. That assistance included introducing Mr Jones to the West Perth branch manager of the NAB, Mr Nayler, and preparing financial statements and other information for the plaintiffs and the Company to provide to Mr Nayler. Mr Macri also attended a meeting at the NAB with Mr Nayler and Mr Jones. However, I find that neither Mr Leahy nor Mr Macri advised the plaintiffs or the Company to increase the Company overdraft from the NAB. I find that the defendant did not previously, or at any time, advise the plaintiffs or the Company to increase the overdraft facility with the ANZ Bank. Neither the plaintiffs nor the Company requested advice from the defendant whether they should increase their loan or loans from or overdraft facility with the ANZ Bank or subsequently the NAB. The defendant did not assume responsibility to advise the plaintiffs or the Company about the size of the loans or overdraft facilities and the plaintiffs did not rely upon the defendant for such advice.

162 In or about November 1995 at a meeting with Mr and Mrs Jones, Mr Leahy informed them that he was concerned by the fall in the Company's gross profit margins and that the plaintiffs had drawn more funds from the Company than the Company had earned in profits and more funds than had been paid to the plaintiffs as wages, salary or superannuation. Mr Leahy warned the plaintiffs that if the Company continued to be managed in that manner then ultimately it would become insolvent. I also find that Mr Macri had told Mr Jones in a telephone conversation in October or November 1995 that the profit margin of the Company had fallen and that the directors had withdrawn funds from the Company in excess of wages and salary in the sum of $116,915. Mr Macri prepared and subsequently provided to Mr Jones a break even analysis showing the gross revenue the Company needed to generate a different level of gross profit margin to cover the operating costs of the Company, the plaintiffs' personal expenses and wages and salaries. I also find that Mr Leahy and Mr Macri informed Mr Jones that the plaintiffs were drawing more out of the Company in addition to wages, salary and superannuation than the profit the Company was making and that the Company would eventually become insolvent if that continued.

163 Before the defendant, through Mr Leahy and Mr Macri, gave to the plaintiffs the advice and warnings to which I have referred in or about November 1995, the defendant did not owe to the plaintiffs a duty of care to advise the plaintiffs to implement appropriate strategies to overcome the deficiency of working capital in the business. The plaintiffs had not sought such advice. The defendant did not assume the responsibility to give such advice and the plaintiffs did not rely upon the defendant for such advice. The relationship of the plaintiffs and the defendant prior to November 1995 did not give rise to a duty of care on the part of the defendant to advise the plaintiffs to implement appropriate strategies to overcome the deficiency of working capital in the business.

164 In and subsequently to November 1995 the defendant assumed responsibility to advise the plaintiffs that the plaintiffs had drawn more funds from the Company than the Company had earned in profits and that if the Company continued to be managed in that manner then it would become insolvent. In giving that advice the defendant assumed a responsibility to advise the plaintiffs in relation to the Company's then financial situation. The plaintiffs have not established that the advice that the defendant gave was negligent. The plaintiffs have not established that in November 1995 and subsequently the defendant should have given advice to the plaintiffs which it negligently failed to give. In particular, the defendant did not breach its duty of care to the plaintiffs by failing to advise them to implement appropriate strategies to overcome the deficiency of working capital in the business.

165 The third breach of duty of care alleged by the plaintiffs is that the defendant failed to advise the plaintiffs, in circumstances where the Company's liquidity crisis was progressively worsening and the prospects of it going into liquidation were progressively increasing, against incurring further borrowings. The further borrowings are alleged to be borrowings to acquire the Seaforth Loop and Clarkson investment properties, borrowings to set up their own superannuation fund and to contribute excessive amounts to that fund and increasing the Company's bank overdraft from $35,000 in 1994 to $360,000 in 1996. I will consider each in turn.

166 I accept the evidence of Mr Leahy that he gave no advice to the plaintiffs concerning the purchase of the Seaforth Loop property. Indeed, I accept the evidence of Mr Leahy that he did not know of the purchase of the property until after the plaintiffs had purchased it. Mr Macri did not learn of the purchase of the Seaforth Loop property until after it had been completed. I accept the evidence of Mr Leahy that he learned of the plaintiffs offers to purchase properties in Clarkson after the plaintiffs had made the offers to purchase the properties. I reject the evidence of Mr Jones that Mr Leahy advised the plaintiffs to reduce their personal income tax liability or to purchase an investment property or properties which could be negatively geared. In those circumstances and having regard to the relationship between the plaintiffs and the defendant that I have discussed earlier, there was no duty on the defendant to advise the plaintiffs against incurring further borrowings to acquire the Seaforth Loop and Clarkson investment properties.

167 I have discussed the evidence concerning the establishment of the Black Swan Superannuation Fund Trust and the plaintiffs depositing money into that Fund. In essence, Mr Jones said that Mr Macri recommended that the plaintiffs set up their own self-managed fund, arranged for it to be established and advised Mr Jones to put $40,000 into the fund and when Mr Jones said that was too much agreed that the plaintiffs should put $25,000 into the fund. Mr Macri says that he had a discussion with Mr Jones concerning the advantages and disadvantages of self-managed superannuation funds and that he did not give Mr Jones any advice concerning the amount, if any, which the plaintiff should contribute to the superannuation fund over and above the 4 per cent of wages and salary paid to the plaintiffs that the Company was required to contribute. I accept the evidence of Mr Macri.

168 The plaintiffs have not established that the defendant breached its duty of care to them by failing to advise them not to incur further borrowing to set up their own superannuation fund and to contribute excessive amounts to that fund. The Company was required by statute to pay to or on behalf of the plaintiffs, superannuation in the amount of 4 per cent of wages and salary paid to the plaintiffs. It may be inferred that some costs were involved in establishing the self-managed superannuation fund. However, there is no evidence that the costs of establishing the superannuation fund significantly contributed to the borrowings of the Company. In the course of the trial the plaintiffs complained that the benefits of establishing a self-managed superannuation fund did not justify the costs of operating a fund with the comparatively small amount contributed to the Black Swan Superannuation Fund. However, those costs were costs incurred by the superannuation fund and reduced the amount of that fund, they were not costs incurred by the Company and did not increase the borrowings of the Company. The real issue concerns the funds contributed by or on behalf of the plaintiffs to the superannuation fund. The plaintiffs' case is that directly or indirectly those contributions added to the Company's borrowings. I accept Mr Macri's evidence that he did not give Mr Jones any advice concerning the amount, if any, which the plaintiff should contribute to the superannuation fund over and above the 4 per cent of wages and salary paid to the plaintiffs that the Company was required to contribute by statute. At the time the superannuation fund was established and Mr Jones drew a cheque for $25,000 on the business account and deposited it in the superannuation fund bank account, the defendant was under no duty to advise the plaintiffs in relation to the amount which should be deposited in the account or the amount which should be drawn on the business bank account for that purpose. The plaintiffs had not sought advice from the defendant in relation to that matter, the defendant had not assumed responsibility to give advice in relation to that matter and the plaintiffs did not rely upon the defendant for such advice. The relationship between the parties at that time did not give rise to such a duty of care.

169 Mr Jones says that in about February 1996 Mr Macri telephoned him and said that he should put $20,000 into superannuation for that year. Mr Jones said that he could not put that amount in but could put in half that much and arranged for that to be done. Mr Macri denies that happened. By that time Mr Leahy and Mr Macri had given advice to the plaintiffs that the plaintiffs had drawn more funds from the Company than the Company had earned in profits and that if the Company continued to be managed in that manner then ultimately it would become insolvent. There was no duty on the defendant to give additional advice to the plaintiffs about the amount that they should draw from the Company's bank account to pay into their superannuation account.

170 The defendant did not breach its duty of care to the plaintiffs by failing to advise them against incurring further borrowings to set up their own superannuation fund and to contribute excessive amounts to that fund.

171 The Company's bank overdraft increased steadily from 1994 to 1996. Prior to November 1995 the defendant had not been asked to advise the plaintiffs or the Company in relation to its financial position generally or in relation to the amount of its bank overdraft. The defendant had not assumed responsibility to give such advice and the plaintiffs did not rely upon such advice. The relationship between the defendant and the plaintiffs and the Company did not give rise to such a duty. In November 1995 the plaintiffs assumed responsibility to advise the plaintiffs in relation to the financial position of the Company by giving the advice and warnings to which I have referred. I am not satisfied that the defendant's duty of care required it to advise the plaintiffs not to increase the Company's bank overdraft in addition to giving the advice which Mr Leahy and Mr Macri gave in late 1995. The plaintiffs have not established that the defendant breached its duty of care by failing to advise the plaintiffs against increasing the Company's bank overdraft from $35,000 in 1994 to $360,000 in 1996.

Did the defendant's breach of duty cause the plaintiffs' loss?

172 On the final day of the trial the plaintiffs amended their statement of claim to plead that as a result of one or more or all of the breaches of duty pleaded by the plaintiffs they have suffered loss and damage particularised as follows:

(a) Loss as guarantors of the debt the Company owed to the National Australia Bank on the winding up of the Company, which debt consisted of the balance of the Company's overdraft facility at that time

Plus interest from 31 July 1997 to date of judgment

(b) Costs and expenses incurred as a result of the plaintiffs losing their home and business, being the cost of home rental for the period December 2000 to December 2001

(c) Past and future loss of income of the plaintiffs taking into account the loss of the first named plaintiff's building licence following the company being placed in liquidation, being an after tax loss of $15,000 per year for eight years compared to what the plaintiffs' combined earnings would, but for the defendant's negligence, have been

173 The defendant submitted that the evidence did not establish that the Company's debt as at the date of the winding up was $231,380. However, I draw the inference from the affidavit of Maxine Wallis filed by the NAB in support of its application for summary judgment against the plaintiffs dated 1 May 2000 and the annexures thereto that the Company debt as at the date of the winding up was $231,380.

174 The plaintiffs' case is that their losses resulted from the Company becoming insolvent and being liquidated.

175 The basis of the plaintiffs' claim is that the defendant knew from the time that the Company commenced operating the business that the plaintiffs were personally liable for the amounts outstanding under the Company overdraft from time to time and in these circumstances it was foreseeable that if the Company was wound up, the plaintiffs would be personally liable for any overdraft balance then outstanding. At the time the Company was wound up, the plaintiffs' personal liability was a liability under the NAB guarantee. That aspect of the plaintiffs' claim is founded on their loss as guarantors of the Company's debt to the NAB, that debt being the balance of the Company's overdraft on the winding up of the Company, plus interest. The plaintiffs submit that their damages are to be measured by what the Company, the principal debtor to the NAB, has failed to pay them, the guarantors of that debt. I will first consider the plaintiffs' case that the defendant's breach of duty caused or contributed to the Company becoming insolvent or being wound up.

176 Mr Jones gave evidence that in about January 1997 he had meetings with the administrator, Mr Norgard, and those assisting him. On 4 February 1997 the administrator provided a report to creditors pursuant to Corporations Law, s 439A(4)(b).

177 In his report of 4 February 1997 Mr Norgard referred to the Company's trading history. That showed that sales declined from $3,654,133 in the year ended 30 June 1995 to $2,603,808 in the year ended 30 June 1996 and that net profit declined from $32,871 in the year ended 30 June 1995 to a loss of $61,816 in the year ended 30 June 1996. Mr Norgard stated:

"The directors have advised me that although business was declining during 1996, they were not concerned due to the overdraft facility that they had in place, and an expectation that things would improve. In September 1996, when work virtually ceased to become available, the directors became seriously concerned about the financial position of the Company. After discussions with their secured creditor in November 1996 and with their accountants in early January 1997, they decided to appoint Ross Norgard as Voluntary Administrator."

178 Mr Jones was cross-examined about that paragraph. He accepted the correctness of the paragraph and accepted that the first sentence correctly recorded what he had said to Mr Norgard. He was more equivocal about the second sentence. However, I find that Mr Jones did say to Mr Norgard words to the effect that in September 1996 work had virtually ceased to become available and he was seriously concerned about the financial position of the Company.

179 In his report Mr Norgard stated that one of the assets of the Company was directors' loans of $230,000. Mr Norgard commented:

"The directors and their accountant have advised me that the majority of this loan represents the directors' personal use of the Company's Bank Overdraft Facility. A significant proportion of this loan went towards meeting mortgage payments on four residential properties owned in the directors' personal names, together with paying the general day to day living expenses of the directors."

Mr Jones accepted that those statements were true in substance.

180 In December 1997 Mr Jones tried to have his builders' licence reinstated. On 2 December 1997 he wrote to Mr Cooper of the Builders' Registration Board. In his letter Mr Jones said:

"The major reason for my voluntarily liquidating Black Swan Builders Pty Ltd in [sic] due to reduced cash flow caused by the decrease in contracts obtained as a result of competition and hard economic times and several clients and architects refusing to release instalment payments."

181 In cross-examination Mr Jones accepted that the two reasons he had stated in his letter for voluntarily liquidating the Company were firstly, reduced cash flow caused by the decrease in contracts obtained as a result of competition and hard economic times and secondly, several clients and architects refusing to release instalment payments. Mr Jones said that that was his view at the time he wrote the letter but at the time he "did not have the true reason" as to why the company went into liquidation. Mr Jones added that the paragraph in the letter where he described the major reasons for the voluntary liquidation of the company was not a totally correct account of the reasons why the business failed but he accepted the statement in cross-examination.

182 Mr Jones produced some handwritten notes entitled "Reason Trevor Jones required builders' licence". In his notes Mr Jones recorded:

"In September of 1996 new work ceased to come in.

We had meeting with bank and independent accountant Bourne Griffiths in [sic] 11 November 1996 and agreed the company was still viable with list of work in hand (note enclosed information).

His comment were providing the money does not dry up you will be okay and proceeded trading on this basis.

The situation deteriorated owing to clients refusing to release money and slow down of work.

Then had meeting with accountant and on this basis decided to cease trading."

183 Mr Jones accepted that he had written the notes in about November 1997. Mr Jones said that after the meeting in November 1996 instead of cash flow continuing at a reasonable level what happened was that clients refused to pay money which was owing to the business. The slow down of work referred to new work not coming into the business.

184 The financial statements of the partnership and the Company show that the business expanded rapidly between 1993 and 1995. The turnover in the 1993 financial year was $836,000, in the 1994 financial year $1,620,000 and in the 1995 financial year $3,654,000. Profit (before wages to partners or directors) increased from $41,000 in 1993 to $111,000 in 1994. Profit in 1995 was $110,000 which is virtually the same as in 1994. In the 1996 financial year turnover declined to $2,604,000 and profit (before wages to directors) declined to $31,000. Throughout that period the funds being drawn from the Company by the plaintiffs were substantially more than the profit. The difference was financed by an ever increasing overdraft. By September 1996 new work had substantially declined if not entirely ceased, creditors had to be paid and cash flow had substantially declined if not entirely dried up. The decline in cash flow was caused in part by a decline in work and in part by existing clients not releasing money.

185 In about November 1995 the defendant advised the plaintiffs that the plaintiffs had drawn more funds from the Company than the Company had earned in profits and that if the Company continued to be managed in that manner then it would become insolvent. That is what happened. The position was exacerbated by the decline in work in 1996 and the withholding of money by existing customers of the business.

186 The question is not what caused the business to become insolvent but rather whether the defendant's breach of duty caused or contributed to it becoming insolvent. I have found that the defendant breached its duty of care to the plaintiffs in causing the plaintiffs to transfer the business at a profit on sale to the partnership of $120,000 and giving rise to an intangible asset in the books of the Company of goodwill on acquisition of $120,000. The defendant should have dealt with the apparent deficiency of assets in the balance sheet of the Company on incorporation by recording director's loans of $120,000. If that had been done then the balance sheet of the Company would have shown a true and fair view of the financial position of the Company.

187 I am not satisfied that that breach of duty by the defendant caused or contributed to the Company becoming insolvent and going into liquidation. I am not satisfied that the defendant's breach of duty caused or contributed to the loss and damage of which the plaintiffs complain. From virtually the time the Company took over the business, the plaintiffs drew more out of the Company than the Company earned in profits. They did not do so in reliance upon any belief that the intangible asset of goodwill would or could provide the Company with funds to operate the business. Manifestly, the intangible asset of goodwill could only be realised, if at all, on a sale of the business.

188 There is a further and independent reason why I am not satisfied that the breach of duty by the defendant caused or contributed to the loss alleged to have been suffered by the plaintiffs as guarantors of the debt the Company owed to the NAB on the winding up of the Company. That reason arises from the balance of the Company's overdraft facility at the time. The amount of the directors' loans was $230,000. In his report Mr Norgard commented that a significant proportion of that loan went towards meeting mortgage payments on four residential properties owned in the directors' personal names, together with paying the general day-to-day living expenses of the directors. Mr Jones accepted that statement to be true in substance. It was the decision, or decisions, of the plaintiffs to enter into the mortgages which gave rise to the obligation to make the mortgage payments and it was the decisions of the directors that gave rise to the directors' living expenses. Some of the plaintiffs' expenditures, which were funded by drawings from the Company, included expenditure on a swimming pool and a holiday. It is not alleged by the plaintiffs that the defendant was in any way responsible for the plaintiffs withdrawing funds from the Company for those purposes.

189 Causation is essentially a question of fact to be answered by reference to commonsense and experience. Applying commonsense and experience to the facts as I have found them, I find that the plaintiffs have not established that if the defendant had not caused the plaintiffs to transfer the business at a profit on sale to the partnership of $120,000 and to include an intangible asset in the books of the Company of goodwill on acquisition of $120,000, the plaintiffs would not have suffered a loss as guarantors of the debt the Company owed to the NAB on the winding up of the Company.

190 I find that the plaintiffs' breach of duty did not cause or contribute to the costs and expenses incurred by the plaintiffs as a result of losing their home, that is the cost of home rental for the period December 2000 to December 2001.

191 The defendant's breach of duty did not cause or contribute to the past and future loss of income of the plaintiffs based on the loss of Mr Jones' building licence following the Company being placed in liquidation. The defendant's breach of duty did not cause or contribute to the Company becoming insolvent and subsequently being wound up. Furthermore, there is no evidence from which it can be found or inferred that the business would have made a profit if it had not been for the defendant's breach of duty of care.

192 If, contrary to my findings, the defendant did breach its duty of care to the plaintiffs by failing to advise the plaintiffs to implement appropriate strategies to overcome the deficiency of working capital in the business or failing to advise the plaintiffs against incurring further borrowings to acquire the Seaforth Loop and Clarkson investment properties and to contribute amounts to their own superannuation fund and increasing the Company's bank overdraft, then those breaches of duty did not cause, or materially contribute, to the Company becoming insolvent and the plaintiffs suffering the loss and damage of which they complained.

193 The plaintiffs did not have any money which they could provide to the Company, whether by way of investment or loan, to provide working capital. In 1994 the only asset which the plaintiffs had available to them which they might have realised and used the proceeds to providing working capital for the Company was the family home at Clifton Gardens. That was used by the plaintiffs and the Company as security for the loans and bank facilities obtained.

194 Incurring further borrowings to acquire the Seaforth Loop and Clarkson investment properties did exacerbate the Company's deteriorating financial position. That is because the loan repayments were sourced from the Company and exacerbated the situation whereby the funds being drawn out from the Company exceeded the profits it was making.

195 The funds drawn by the plaintiffs to contribute to the Black Swan Superannuation Trust Fund also exacerbated the situation whereby the funds drawn from the Company exceeded its profit.

196 Increasing the Company's overdraft facility did not cause the Company to become insolvent. The need to increase the overdraft facility arose from the Company's outgoings, including the funds drawn out by the plaintiffs, exceeding its revenue. Without the increasing overdraft facility the Company would have had to cease trading at an earlier time.

197 In conclusion, none of the breaches of duty alleged by the plaintiffs, if established, caused or contributed to the loss or damage claimed by the plaintiffs.

198 For the reasons I have given the plaintiffs' action fails and will be dismissed.