(e) the accounting policy adopted by NCRH in respect of its financial statements, including its balance sheet, was consistent with the policy adopted by NCRH in respect of the fifteenth month period ended 31 December 1997.
254. The PWC Representations were false or misleading or likely to mislead or deceive in that:
(a) The amounts set forth under the heading "Actual Balance Sheet 30 June 1998" in the actual and pro forma consolidated balance sheet which was included in the Prospectus and the First and Second Drafts of the Prospectus did not fairly and accurately disclose the financial position of NCRH as at 30 June 1998, in that the balance sheet:
(i) included only the profit arising from the whole account aggregate of loss reinsurance policy issued by General & Cologne Reinsurance Australasia Limited in favour of NCRH, but failed to disclose the right of recovery of General & Cologne Reinsurance Australasia Limited under the casualty excess of loss reinsurance policy issued by NCRH, in contravention of accounting standard AASB 1001;
(ii) included in the net assets of NCRH as at 30 June 1998 deferred acquisition costs in an amount of US$13.4 million, in contravention of accounting standard AASB 1023;
(iii) disclosed that the net assets of NCRH, as at 30 June 1998, were US$127,479,000 when they were, at least, US$19.1 million less than that amount;
(iv) included in the net assets of NCRH as at 30 June 1998 retrocession recoveries in an amount of US$13.839 million of which at least US$5.7 million was not recoverable.
(v) failed to include any substantial prudential margin in respect of outstanding claims, contrary to the previous accounting policy of NCRH.
(b) as at 30 June 1998, NCRH did not have net assets of US$127,479,000, in that the net assets of NCRH, as disclosed in the actual and pro forma consolidated balance sheet which was included in the Prospectus and the First and Second Drafts of the Prospectus:
(i) included retrocession recoveries in an amount of US$13.839 million of which at least US$5.7 million was not recoverable;
(ii) included deferred acquisition costs in an amount of US$13.4 million which did not satisfy the tests prescribed by accounting standard AASB 1023;
(iii) included a provision for outstanding claims, which failed to include any substantial prudential margin;
(c) the net assets of NCRH at 30 June 1998 were no greater than US$99,379 million;
(d) as at 30 June 1998, NCRH did not have retrocession coverage in an amount of US$13.839 million which was valid and collectable in that US$5.7 million of the retrocession recoveries was not recoverable;
(e) as at 30 June 1998, deferred acquisition costs in an amount of US$13.4 million were not fully recoverable;
(f) the accounting policy adopted by NCRH in respect of its financial statements, including its actual and pro forma consolidated balance sheet, was not consistent with the policy adopted by NCRH in respect of the fifteen month period ending 31 December 1997, in that there had been a change in the treatment of outstanding claims in the actual and pro forma consolidated balance sheet by the reduction of the prudential margin applied to those claims.
255. Each of the PWC Representations was a material representation.
256. By reason of the matters pleaded in paragraphs 209 to 255 PWC, in trade or commerce, engaged in conduct that is misleading or deceptive or is likely to mislead or deceive, in contravention of section 42 of the Fair Trading Act 1987.
257. Further, or alternatively, by reason of the matters pleaded in paragraphs 209 to 255, PWC in connection with:
(a) the issue of securities;
(b) the issue of a prospectus in relation to securities,
engaged in conduct that was misleading or deceptive or likely to mislead or deceive, in contravention of s 995(2) of the Corporations Law."
General matters
32 The parties are agreed that I should approach the application for leave to amend by applying the same principles as would be appropriate to apply to the defendant's motion to strike out the summons. The principles are well known.
33 The court will only exercise its power to grant summary dismissal of proceedings in a clear case. In General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125, Barwick CJ said at p 128:
"The plaintiff rightly points out that the jurisdiction summarily to terminate an action is to be sparingly employed and is not to be used except in a clear case where the Court is satisfied that it has the requisite material and the necessary assistance from the parties to reach a definite and certain conclusion.
…
The test to be applied has been variously expressed; 'so obviously untenable that it cannot possibly succeed'; 'manifestly groundless'; 'so manifestly faulty that it does not admit of argument'; 'discloses a case which the Court is satisfied cannot succeed'; 'under no possibility can there be a good cause of action'; 'be manifest that to allow them' (the pleadings) 'to stand would involve useless expenses'."
34 In Dey v Victorian Railways Commissioners (1949) 78 CLR 62 Dixon J (as he then was) said:
"A case must be very clear indeed to justify the summary intervention of the court to prevent a plaintiff submitting his case for determination in the appointed manner by the court with or without a jury … once there appears that there is a real question to be determined whether of fact or law and that the rights of the parties depend upon it, then it is not competent for the court to dismiss the action as frivolous and vexatious and an abuse of process." At 91.
35 I am also conscious of the fate of the decision of the majority of the Court of Appeal in Wickstead v Browne (1992) 30 NSWLR 1, when that matter was reviewed by the High Court (1993) 10 Leg Rep SL2. Also of significance are the remarks by Kirby P, as he then was, with respect to the caution with which it is necessary to approach any issue in relation to an alleged breach of duty to prevent economic loss.
The relevant principles
36 The law in relation to the liability of professional advisors for unsound advice which causes economic loss has been described in England as being "in a state of transition" Electra Private Equity Partners & Ors v KPMG Peat Marwick & Ors [1999] EWCA Civ 1247. It has also been described as an area where "the law is developing pragmatically and incrementally." David John de Marle Coulthard & Ors v Neville Russell (1997) EWCA Civ 2837.
37 For this reason, it has been suggested that only rarely "will a court be in a position to determine the question of the existence or otherwise of a duty of care owed by professional advisors on a strike out application" Andrew & Ors v Kounnis Freeman [1999] EWCA Civ 1499.
38 However, in Australia, the High Court considered the issue of the liability of auditors on a strike out application, which was upheld in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241. PWC rely upon this decision to submit that notwithstanding any cautionary view expressed in England, the court should strike out the present summons. It is useful to examine the critical elements of the reasoning of the members of the High Court in Esanda.
39 Brennan CJ considered the following elements were necessary before a plaintiff could succeed:
· That the defendant knew or ought reasonably to have known that the information provided by the auditor would be communicated to the plaintiff individually or as a member of an identified class.
· That the information would be communicated for a purpose that would be very likely to lead the plaintiff to enter into the transaction from which the loss occurred.
· That it would be very likely that in entering the transaction the plaintiff would rely on the information.
40 Brennan CJ emphasised that mere foreseeability of the possibility that a plaintiff may, as a member of a class, receive and act upon the information, is not enough.
41 Dawson J also emphasised that the foreseeability of harm, "where the only harm is pure economic loss" does not give rise to a duty of care. Adopting the conventional formulation of the relationship of proximity, Dawson J identified some circumstances where it may be established:
· Advice given by one person directly to another in the circumstances identified by Barwick CJ in Mutual Life & Citizens' Assurance Co Ltd v Evatt (1968) 122 CLR 556. Liability is not confined to circumstances where advice has been requested, although that fact may assist in demonstrating reasonable reliance, which is an essential element in proving causation.
· Reliance may also be demonstrated where there has been an inducement by the giver of the advice for the recipient to act upon the advice - see R Lowe Lippmann Figdor & Franck (a firm) v AGC Advances Ltd [1992] 2 VR 671.
· The purpose for which the advice was given is relevant to the question of inducement and accordingly whether the plaintiff's reliance was reasonable: see Caparo Industries Plc v Dickman [1990] 2 AC 605. An audit report intended to provide advice to the company and its shareholders could not give rise to a liability to potential investors.
42 Toohey and Gaudron JJ joined in emphasising "the law's insistence that a plaintiff who sues in negligence to recover pure economic loss must establish more than foreseeability of loss." P 260
43 The following principles emerge from the joint judgment of their Honours:
· Whether there is a duty of care depends upon whether there is the requisite relationship of proximity.
· Liability is frequently seen to depend on the plaintiff's reliance on the defendant or on the defendant's assumption of responsibility or both.
· Liability for negligent misstatement is not confined to cases involving a request for advice if the giver of the advice intended to induce the plaintiff to act upon it
· Although the decided cases do not identify precisely the elements giving rise to liability, when advice is voluntarily provided, the necessary special relationship of proximity will be marked either by reliance (which must be reasonable) or by the assumption of responsibility.
· Advice which relates to information otherwise available to a plaintiff will not give rise to liability.
44 McHugh J reviewed the principles expressed in San Sebastian Pty Ltd v The Minister Administering Environmental Planning Act 1979 (1986) 162 CLR 340 and concluded that the position in Australia, in the absence of a statement to a particular person or an assumption of responsibility to the plaintiff for that statement, is that:
"… it will be difficult to establish the requisite duty of care unless there is an intention to induce the recipient of the information or advice, or a class to which the recipient belongs, to act or refrain from acting on it. Mere knowledge by a defendant that the information or advice will be communicated to the plaintiff is not enough. With the exception of Columbia Coffee & Tea (1992) 29 NSWLR 141 no Australian decision supports Esanda's claim, and R Lowe Lippmann [1992] 2 VR 671 is squarely against it. Nevertheless, the decisions have all emphasised that a lack of an intention to induce the plaintiff to act or refrain from acting is not necessarily fatal to a plaintiff's claim because other factors may be present that obviate the need for such an intention.
45 After reviewing the law in other common law countries, McHugh J stated that the law in Australia was correctly stated in R Lowe Lippmann. His Honour held that no facts were pleaded from which the inference could be drawn that the accountants owed Esanda a duty of care. Although it had been pleaded that Esanda was a member of a class of persons whom the accountants foresaw or ought reasonably to have foreseen might rely on the accounts, more was required. "It was critical for Esanda to plead facts indicating that Peat Marwick intended to induce Esanda to rely on the audit accounts." At 291
46 McHugh J also exposed significant policy reasons why persons, who it may be assumed have relevant expertise, should be denied a capacity to sue in relation to the allegedly negligent advice of auditors. It could be expected that his Honour and, perhaps, other members of the High Court, may return to those issues when, and I consider it inevitable, those matters are again considered by that court.
The present case
47 In the present case, as I have already identified, the pleading alleges that PWC gave advice in two separate categories. Firstly, it audited the accounts of NCRH and provided an audit report for the period ending 31 December 1997, followed by a further audit review and report for the period ending 30 June 1998. For the purpose of these activities, which were conventional audit matters, PWC was retained by NCRH to whom it provided the advice.
48 If the allegations made against PWC were confined to this category of advice, the claim would be likely to fail, for the same reasons that the plaintiff failed in Esanda. The giving of audit advice to NCRH did not give rise to any relevant relationship with persons who were merely prospective investors.
49 The second category of advice raises different considerations. This advice was allegedly given as a result of the retainer by NCRH of PWC for the purpose of the due diligence process and the preparation of the Prospectus, for the Rights issue. Although the advice was given to NCRH, it was published in the Prospectus. It is alleged that the Prospectus was issued for the express purpose of inviting sub-underwriters to participate in the fund raising and investors to take up the offer, either directly, or, by acquiring shares. PWC both knew, and ought to have known, that its advice would be published in this manner and also knew the part, which the draft Prospectus, and the final documents, were intended to play in encouraging investors to participate in the fundraising.
50 In Caparo Industries Plc, the House of Lords recognised that liability could arise in circumstances where, as stated by Lord Bridge of Harwich:
"the defendant knew that his statement would be communicated to the plaintiff, either as an individual or as a member of an identifiable class, specifically in connection with a particular transaction or transactions of a particular kind (eg in a prospectus inviting investment) and that the plaintiff would be very likely to rely on it for the purpose of deciding whether or not to enter upon that transaction or upon a transaction of that kind." P 621. See also Candler v Crane Christmas Co (1951) 2 KB 164.
51 Accepting that this statement may reflect the law in Australia, it is nevertheless submitted by PWC that this aspect of the plaintiffs' claim must fail, for the reason that no relevant class of persons to whom the advice was communicated can be identified. The plaintiffs respond by defining the class as either, or both, prospective sub-underwriters and prospective investors in the converting notes. Although a claim framed in this manner may not be without its difficulties, I do not believe it could be said to be bound to fail in the relevant sense. Furthermore, the evidence at the trial may refine an understanding of the alleged class of persons and reveal circumstances in which a duty of care should be imposed. As Kirby P said in Wickstead:
"Common experience teaches that it is usually more efficient and just to consider the viability of a cause of action when the facts said to support it are adduced and the suggested action can be judged with a full understanding of all relevant evidence. Testimony gives colour and content to the application and development of legal principle. That is why leave is usually required for an appeal from interlocutory orders. Appellate courts, including this Court, will usually require evidence to be adduced and a trial concluded before considering the application of the law to that evidence. Out of the detail of the evidence ultimately proved, affecting the relationship of the respondent and the appellant, may arise a finding of a duty of care which the common law of negligence would uphold."
52 The question which arises in this case is whether the entities described as "prospective sub-underwriters" and said to include "institutional investors and to a lesser extent other stockbroking firms", are relevantly a "class" or "a limited class". Plainly, there will be a limited number of entities with the necessary financial resources and with the necessary expertise to accept sub-underwriting obligations. Presumably, evidence could be given of the nature and likely number of such entities and, by that evidence, the plaintiffs may endeavour to persuade the court that the necessary class of person existed.
53 In San Sebastian, the plaintiff defined the relevant class as "developers". Whether this was a class of persons to whom a duty was owed did not have to be decided; the court found that the alleged representation was not made. However, there was no indication from the court that developers could not be a relevant class. Anyone is able to be a developer, but only a limited number of entities would, by reason of resources or expertise, be able to respond to an invitation of the type allegedly made by the defendant in San Sebastian.
54 PWC submits that because the case is pleaded as a representational case, and PWC made no representation to anyone, other than perhaps NCRH, it is bound to fail. The relevant paragraph of the pleading is paragraph 249. However, the ultimate question may be whether PWC's participation in the preparation of the relevant sections of the Prospectus, knowing that it was to be issued for the purpose of attracting investors, provides the necessary relationship between PWC and potential investors so that a duty of care is created. For my part, I see no reason why it could not be argued, if it be correct, that by giving advice to another, the content of which you know will be published for the purpose of attracting investment, you have made a relevant representation.
55 It is further submitted by PWC that, because the plaintiffs' case relies upon the action taken by the due diligence committee at its meeting of 5 November 1998, after which only a draft of the Prospectus was published to a limited number of persons and because that meeting left open the possibility of further amendments of the Prospectus, liability could never arise.
56 However, I see no reason why it could not be argued that a draft Prospectus could give rise to liability. It may be a difficult argument, and, much would depend upon the nature of the draft and the context in which it was disseminated, but, in my opinion, these are matters which should be determined having regard to the evidence tendered at a trial.
The statutory claims
57 Section 42 of the Fair Trading Act 1987 provides as follows: