Ingot Capital Investments Pty Limited & Ors v PricewaterhouseCoopers & Ors

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

50169/01 INGOT CAPITAL INVESTMENTS PTY LIMITED v PRICEWATERHOUSECOOPERS & ORS JUDGMENT 1 HIS HONOUR: Before the court is an application by the plaintiffs to amend the summons as against the thirteenth defendant. The thirteenth defendant has also moved to strike out the plaintiffs' summons. The issues become the same, as the plaintiffs concede, that if they do not succeed in their motion they cannot resist the motion of the thirteenth defendant. Although the plaintiffs seek to file an amended summons, I shall refer to it as the summons. 2 There are six plaintiffs. The sixth plaintiff, Ingot Capital Management Pty Limited (Ingot) was the Funds Manager and investment advisor of the other plaintiffs and had the authority to make and implement relevant decisions on their behalf. 3 New Cap Re Insurance Corporations Holding Limited (NCRH) was a company incorporated in Bermuda and registered on the Australian Stock Exchange (ASX). It was part of a group known as the New Cap Group, which carried on business as an international reinsurance underwriter. NCRH failed in 1999, a provisional liquidator being appointed by this Court in May 1999. It is alleged in the summons that it is unlikely that there will be any return to creditors or shareholders from the liquidation. 4 The thirteenth defendant is comprised of the persons carrying on business as accountants and auditors under the name PricewaterhouseCoopers (PWC). It was the auditor of NCRH. The other defendants are variously a securities broker, corporate advisors, an investment bank, the directors of NCRH and legal advisors to NCRH. 5 In 1998, NCRH decided to raise capital by offering convertible notes to shareholders. Persons holdings ordinary shares in NCRH at 5.00 pm on 1 December 1998 were offered seven converting notes for every ten ordinary shares then held, at an issue price of $1.30 per note. The right to subscribe for converting notes ("Rights") was renounceable. The Prospectus issued to prospective investors indicated that a trading period on the ASX in relation to the Rights was expected to commence on 23 November 1998 and was to cease on 18 December the same year. 6 The Prospectus was dated 18 November 1998. Before it was issued, Ingot entered into an agreement to sub-underwrite the issue of the convertible notes. The fourth plaintiff also agreed to sub-underwrite the issue. Otherwise, the plaintiffs participated in various transactions with respect to the securities, a summary being as follows: "a. The first plaintiff Ingot Capital Investments Pty Ltd (ICC) was issued with 1,323,656 convertible notes at a cost of $1,720,752.39 pursuant to the terms of the Ingot sub-underwriting agreement; b. The second plaintiff AOIT Limited (AOIT) was issued with 2,261,899 convertible notes at a cost of $2,940,469.21 pursuant to the terms of the relevant sub-underwriting and placement agreement. c. The plaintiffs, between themselves purchased 25,600,106 rights on the market in the period from 30 November 1998 to 21 December 1998 at a total cost of $335,542. d. There was some trading of Rights amongst the plaintiffs but, between themselves, they applied on 31 December 1998 for the allotment of 25,600,106 convertible notes at total cost of $32,507,938. e. From the period 8 December 1998 to 15 March 1999, various of the plaintiffs bought 1,720,188 convertible notes on the market and on 2 February 1999 100,000 convertible notes were sold; f. In the period from 30 November 1998 to 11 March 1999 various of the plaintiffs traded in New Cap shares on the market - in total 2,863,785 shares were required and 653,815 shares were sold." 7 It appears that none of the plaintiffs was a shareholder of NCRH on 18 November 1998. It is also apparent that a number of the investments, the subject of these proceedings, were made after an inspector was appointed to NCRH by the Bermudian regulatory authorities, which occurred on or about 26 February 1999. The allegations in the pleadings 8 PWC is sued with respect to advice it gave in relation to two discrete although related matters. The first matter relates to advice it gave as the auditor of NCRH in respect of which it is alleged that PWC was retained to audit the financial statements of NCRH for the period 31 December 1997. The audit report was provided on 11 March 1998. In June 1998, PWC was also retained to conduct a review of the half-year financial statements of NCRH for the period ending 30 June 1998 and provide a report in respect of that review. That report was delivered in September 1998. In it PWC certified that: "Nothing had come to their attention that caused them to believe that the said financial statements were not properly drawn up to present fairly, in accordance with Australian Accounting Standard AASB 1029 and other professional reporting requirements, the financial position of NCRH and the New Cap Group as at 30 June 1998 and the results of their operations and cash flow for the financial period from 1 January 1998 to 30 June 1998." 9 The second matter arises from PWC's part in the preparation of the Prospectus for the Rights issue. Apparently, in October 1998, PWC was retained by NCRH for the purpose of the issue and undertook various tasks, which included participation in a due diligence committee formed for the purpose of the Prospectus. It is alleged in paragraph 214 of the summons that the retainer required PWC to undertake the following tasks: "(a) to review the financial information contained in Section 6 of the Prospectus including the actual and pro forma consolidated balance sheet of NCRH to be included in the Prospectus:

(b) to form and provide an opinion as to whether the actual and pro forma consolidated balance sheet had been prepared in accordance with Australian Accounting Standards and in accordance with NCRH's existing accounting policies;

(c) to determine whether the actual and pro forma consolidated balance sheet properly incorporated the terms and effect of the proposed issue of converting notes and the assumptions stated in the Prospectus;

(d) to form and provide an opinion as to whether, based upon the said review, anything had come to their attention which caused them to believe that the Prospectus contained a material statement about the financial information contained in Section 6 of the Prospectus which was false or misleading, in the form and context in which it appeared;

(e) to undertake due diligence procedures in relation to the Prospectus to be issued;

(f) to participate in the due diligence committee and undertake all tasks assigned to them by that committee;

(g) to provide advice on the matters reviewed by them within the scope of their due diligence and draw to the attention of the due diligence committee any matter arising out of their review within the scope of their expertise. 10 Section 6 of the Prospectus provided an analysis of the effect of the Rights issue and placement on the capital structure and balance sheet of NCRH. It included a pro forma balance sheet which was described in the following terms: "6.2 Pro-forma Balance Sheet The Pro-Forma Consolidated Balance Sheet of New Cap Re at the end of this Section 6 shows the effect of the Issue and Placement and the subsequent repayment of existing borrowings as if the transactions had occurred on 30 June 1998. The adjustments are based on available information and certain assumptions the Company believes are reasonable. A key assumption used in preparing the Pro-Forma Balance Sheet is that the amount of the raising is the equivalent of US$50 million. The Pro-forma Balance Sheet is for informational purposes only and should not be construed to be indicative of the Company's consolidated financial position or results of operations had the transactions been consummated on the date assumed and does not project the Company's consolidated financial position or results of operations for any future date or period. The 'actual' balance sheet amounts have been drawn from the consolidated balance sheet of the Company at 30 June 1998. Accordingly, for a complete understanding of the Pro-forma Balance Sheet, it should be read in conjunction with the Half Yearly Report for the six months ended 30 June 1998 and the Consolidated Financial Statements for the period ended 31 December 1997 that are available from the Company as described in Section 11.6 The effects of post 30 June 1998 events on the Company's net tangible assets as described in section 4.3 are not included in the Pro-Forma Balance Sheet." 11 A copy of the Pro-Forma Balance Sheet published in the Prospectus is annexed to these reasons. 12 Paragraph 218 of the summons pleads that: "On 5 November 1998, PWC confirmed that they were of the opinion that there was no material statement in the then latest draft of the Prospectus (the "First Draft") that was false or misleading, that there was no material omission from the First Draft of the Prospectus and that neither the issue of the First Draft of the Prospectus nor the offer of the placement of converting notes would involve conduct that was misleading or deceptive." 13 Particulars of that allegation are pleaded but it is agreed between the parties that those particulars are not accurate. The correct position appears to be that a meeting of the due diligence committee was held on 5 November 1998 for which the minutes state that "each member of the Committee confirmed that he/she is of the opinion: (a) there is no material statement in the draft prospectus that is false or misleading, there is no material omission from the prospectus and neither the issue of the prospectus nor the offer of the placement converting notes involve conduct that is misleading or deceptive;

(b) the draft prospectus contains all such information as investors and their professional advisors would reasonably require, and reasonably expect to find in a prospectus, for the purpose of making an informed assessment of; (i) the effect of the offer or invitation on the Company; and

(ii) the rights attaching to the securities. 14 The Committee also agreed that the report should be signed: "On the basis that: · A signed report be held in escrow pending the receipt of all reports referred to in paragraph 5.2 (a reference to senior executives sign off certificates) above required to be in final form by the time the Committee gives its report; · it be released to the Board of Directors before their meeting to approve their prospectus in order to enable them to do so; · each member is to confirm verbally or in writing to AM that there are no changes in the report required by them before its release. · it was noted that it was anticipated that the Committee's report could be released by early November 1998." 15 It is alleged that on or about 12 November 1998, one of the first, second or third defendants provided to Ingot a copy of the draft Prospectus together with a draft letter offering Ingot the opportunity of sub-underwriting the issue of convertible notes. An offer was also made to Ingot to acquire convertible notes. 16 It is then pleaded in paragraph 220 that: "220 The Investment Material was provided by MECM (Macquarie Equity Capital Markets Limited) and/or MEL (Macquarie Equities Limited) and/or Macbank (Macquarie Bank Limited) to the plaintiffs in order to seek to obtain pre-commitments by the plaintiffs to sub-underwrite the issue of converting notes in NCRH, or to participate in the accompanying placement to institutions prior to the issuance of the Prospectus on 18 November 1998." 17 It is alleged that there was a conventional practice in the underwriting and sub-underwriting of Rights issues. The following is pleaded: "222. In 1998, the usual practice for a firm underwriting a rights issue was to seek to secure sub-underwriting pre-commitments and pre-commitments to any institutional placement prior to the issuance of the Prospectus with credit worthy counter parties prior to executing the underwriting agreement, those counter-parties being typically, institutional investors, and to a lesser extent, other stockbroking firms. 223. The practice referred to in paragraph 222 involved a marketing period to sub-underwriters and institutions prior to the execution of the underwriting agreement, and as part of that marketing process, underwriters would supply a near final draft of the Prospectus to proposed sub-underwriters and institutions, subject to confidentiality undertakings, for them to consider their response to an offer of sub-underwriting, and any offer of participation in an institutional placement. 224. The Investment Materials were provided by MECM (Macquarie Equity Capital Markets Limited) and/or MEL (Macquarie Equities Limited) and/or Macbank (Macquarie Bank Limited) to the plaintiffs pursuant to that practice. 225. PWC knew, or ought reasonably to have been aware that MECM and/or MEL and/or Macbank intended to market sub-underwriting rights and the placement of converting notes to institutions by way of the Investment Material, including the First Draft of the Prospectus. 226. On 18 November 1998, PWC reported to the Due Diligence Committee that it had verified the accuracy of the actual and pro forma consolidated balance sheet which was included in the Prospectus.

227. Further, on or about 18 November 1998, PWC: (a) confirmed that they were of the opinion that there was no material statement in the then latest draft of the Prospectus (the "Second Draft") that was false or misleading, that there was no material omission from the Second Draft of the Prospectus and that neither the issue of the Prospectus nor the offer of the placement of converting notes would involve conduct that was misleading or deceptive; (b) was a party to the resolution that the report of the due diligence committee in respect of the Prospectus be released to the board of NCRH.

228. At some time between 14 October 1998 and 18 November 1998, PWC conducted a review of the financial information ultimately contained in Section 6 of the Prospectus pursuant to the contract of retainer set forth in paragraph 214.

229. On or about 18 November 1998, PWC produced and delivered to the directors of NCRH and to the members of the due diligence committee a report (the " Prospectus Report " ) in respect of the review undertaken by PWC pursuant to the contract of retainer set forth in paragraph 214. 18 The Prospectus was tendered on the application. In the letter, which accompanied the Prospectus, the Chairman of NCRH confirmed that the Rights issue, with a placement to institutions of converting notes, was intended to raise approximately $80 million. The raising was said to be fully underwritten by Macquarie Equity Capital Markets Limited. 19 Clause 11.7 of the Prospectus provides a statement of the involvement of professional advisors in its preparation. It was headed "Consents and Responsibility Statements" and in respect of PWC the following is said: "Notwithstanding that they may be referred to elsewhere in this Prospectus, PricewaterhouseCoopers were only involved in the preparation of the following parts of this Prospectus: Section 9 (Section 9 is the section dealing with taxation matters) PricewaterhouseCoopers have given, and at the time of lodgement of this Prospectus have not withdrawn, their consent to the issue of this Prospectus with those parts included in the form and context in which they are included. PricewaterhouseCoopers did not authorise or cause the issue of any other part of this Prospectus." 20 Any role of PWC in the preparation of the pro-forma accounts and involvement in the due diligence committee does not appear to be referred to in the Prospectus. However, PWC are named as the auditors in the summary of corporate information. 21 It is further pleaded against PWC that: "231 At all material times, PWC knew or ought reasonably to have known that: (a) contemporaneously with the issue of the Prospectus converting notes were to be issued to investors by way of an institutional placement ("the Institutional Placement"), and that the issue to shareholders and the Institutional Placement was to be fully underwritten by MECM. (b) the issue and the Institutional Placement were to be sub-underwritten; (c) persons holding ordinary shares in NCRH who were registered as shareholders at 5:00pm on 1 December 1998 were to be offered seven converting notes for every ten ordinary shares then held, and that the right to apply for those converting notes was capable of assignment up until and including 18 December 1998; (d) up to and including 1 December 1998 there would be trading on the ASX by persons seeking to acquire shares in NCRH so as to participate in the issue of converting notes to shareholders; (e) up to and including 18 December 1998 there would be trading on the ASX of rights to apply for converting notes in NCRH; (f) the publication of the Prospectus for the issue of converting notes in NCRH was very likely to lead persons who were directly or indirectly provided with a copy of the Prospectus, or who obtained a copy of the Prospectus or the Investment Material for a purpose outlined in paragraphs (a) to (e) above, to acquire converting notes, rights or shares in NCRH in reliance upon the information contained in the Prospectus and in particular Section 6 thereof until at least the end of March 1999. Particulars The plaintiffs refer to the Prospectus, and in particular, Section 1 providing details of the offer, and Section 6. Insofar as reference is made to the sub-underwriting of the issue, the placement of converting notes with investors, and trading in shares or rights to acquire converting notes in NCRH, reliance is placed on the practice pleaded and particularised in paragraphs 219 TO 225. It is also alleged that these are matters that a major firm of accountants such as PWC with expertise in public company financing ought reasonably to have known. Further particulars will be provided after discovery and further interlocutory proceedings." 22 It is then pleaded that PWC knew or should have known that the Prospectus and the information which accompanied it, referred to as the Investment Material, would be communicated not only to shareholders but also to investors in identified classes. The classes are described in paragraph 232 as follows:

"(a) investors participating in the Institutional Placement;

(b) the underwriter of the issue and Institutional Placement, MECM, and/or MEL and/or Macbank;

(c) sub-underwriters or proposed sub-underwriters of the issue;

(d) persons contemplating the purchase of ordinary shares in NCRH on or prior to 1 December 1998 so as to participate in the placement of converting notes;

(e) persons who on or prior to 18 December 1998 would seek to acquire rights to apply for converting notes in NCRH and thereafter apply for converting notes in NCRH;

(f) persons who directly or indirectly obtained a copy of the Prospectus and the Investment Material prior to or contemporaneously with the issue and the Institutional Placement, for a purpose or purposes that included the purposes set out in (a) to (e) above. Particulars The plaintiffs rely on the terms of the Prospectus and the distribution of the Investment Material pursuant to the practice referred to in paragraphs 219 to 225. It is alleged that these are matters that a major firm of accountants such as PWC with expertise and public company financing ought reasonably to have known. Further particulars will be provided after discovery and other interlocutory proceedings. 23 It must be remembered that in paragraph 222, it is pleaded that the sub-underwriting parties were typically "institutional investors, and to a lesser extent, other stockbroking firms". 24 It is then pleaded that PWC knew or ought to have known the Prospectus and Investment Material would be likely to lead persons within the defined classes to enter into the relevant transactions. 25 Reliance on the information in the Prospectus and Investment Material is pleaded with the risk of economic loss if the statements were untrue or the advice unsound. 26 It is further pleaded that PWC: "assumed a responsibility to shareholders in NCRH and also to persons within the classes of persons set out in paragraph 232 above." 27 It is alleged that PWC owed to each of the plaintiffs as members of the class or classes a duty defined in the following manner: "246. In the premises, PWC owed to each of the plaintiffs, as members of a class or classes or persons who might reasonably and relevantly rely upon the actual and proforma consolidated balance sheet and the other financial information contained in the Prospectus and the First and Second Drafts of the Prospectus, and in particular Section 6 thereof, and the Investment Material, a duty: (a) to exercise reasonable care and skill in their review of the financial information contained in Section 6 of the Prospectus and the First and Second Drafts of the Prospectus including, without limitation, the actual and pro forma consolidated balance sheet of NCRH which was to be included in the Prospectus and the First and Second Drafts of the Prospectus; (b) to exercise reasonable care and skill in the performance of their obligations as members of the due diligence committee and in the undertaking of tasks assigned to them by that committee; (c) to exercise reasonable care and skill in ascertaining whether the financial information contained in Section 6 of the Prospectus and the First and Second Drafts of the Prospectus including, without limitation, the actual and pro forma balance sheet of NCRH which was to be included in the Prospectus and the First and Second Drafts of the Prospectus truly and fairly disclosed the financial position of NCRH;

(d) to exercise reasonable care and skill in forming and expressing any opinion to NCRH or to the due diligence committee to the effect that there was no material statement in the Prospectus or the First and Second Drafts of the Prospectus that was false or misleading, that there was no material omission from the Prospectus or the First and Second Drafts of the Prospectus and that neither the issue of the Prospectus or the First and Second Drafts of the Prospectus nor the offer of the placement of converting notes would involve conduct that was misleading or deceptive;

(e) to exercise reasonable care and skill so as to ensure that the financial information contained in Section 6 of the Prospectus or the First and Second Drafts of the Prospectus, including, without limitation, the actual and proforma consolidated balance sheet of NCRH and any commentary thereon was in accordance with the applicable Australian Accounting Standards; and

(f) to exercise reasonable care and skill so as to ensure that the opinions expressed in Section 6 of the Prospectus or the First and Second Drafts of the Prospectus, including, without limitation, the actual and proforma consolidated balance sheet of NCRH and any commentary thereon was based on reasonable grounds. 28 The duty was allegedly breached. The breaches are pleaded in para 247 which states as follows: "247. In breach of the aforesaid duties, PWC: (a) failed to consider, in their review of the half-year financial statements of NCRH for the period ending 30 June 1998, the likelihood of recovery of the deferred acquisition costs of US$13.4 million; (b) certified the balance sheet for NCRH as at 30 June 1998 which included deferred acquisition costs of US$13.4 million as a current asset;

(c) failed to consider subsequently the likelihood of recovery of those deferred acquisition costs;

(d) failed to ascertain, in their review of the half-year financial statements of NCRH for the period ending 30 June 1998 or at any time subsequently, that deferred acquisition costs in an amount of US$13.4 million were not fully recoverable;

(e) failed to ascertain that the profit arising from the whole account aggregate of loss reinsurance policy entered into by NCRH in September 1998 with General & Cologne Reinsurance Australasia Limited had been included in the balance sheet but that the liability arising from the casualty excess of loss reinsurance policy issued by NCRH in favour of General & Cologne Reinsurance Australasia Limited had not;

(f) failed to ascertain, in their review of the half-year financial statements of NCRH for the period ending 30 June 1998, that retrocession recoveries in an amount of at least US$5.7 million were not recoverable;

(g) certified the balance sheet for NCRH as at 30 June 1998 which included retrocession recoveries in an amount of US$13.839 million;

(h) failed to ascertain subsequently that at least US$5.7 million of the retrocession recoveries were not recoverable;

(i) certified the balance sheet for NCRH as at 30 June 1998 which did not include a prudential margin of any significance when by PWC's own assessment, the prudential margin which should have been included in the balance sheet was at least US$9 million; Particulars Letter addressed to the Board Audit Committee of New Cap Reinsurance Corporation Holdings Limited dated 27 August 1998 (j) failed to ascertain that the actual and pro forma balance sheet of NCRH which was included in the Prospectus and the First and Second Drafts of the Prospectus did not truly and fairly disclose the financial position of NCRH; (k) confirmed to NCRH and to the due diligence committee that they were of the opinion that there was no material statement in the Prospectus and the First and Second Drafts of the Prospectus that was false or misleading, that there was no material omission from the Prospectus and the First and Second Drafts of the Prospectus and that neither the issue of the Prospectus or the First and Second Drafts of the Prospectus nor the offer of the placement of converting notes would involve conduct that was misleading or deceptive; (l) permitted or consented to the inclusion in the Prospectus and the First and Second Drafts of the Prospectus of the actual and pro forma consolidated balance sheet; (m) ought to have ascertained that as at 30 June 1998, deferred acquisition costs in an amount of US$13.4 million were not fully recoverable; (n) ought to have ascertained that 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; (o) ought to have ascertained that the profit arising from the whole account aggregate of loss reinsurance policy entered into by NCRH in September 1998 with General & Cologne Reinsurance Australasia Limited had been included in the balance sheet but that the liability arising from the casualty excess of loss reinsurance policy issued by NCRH in favour of General & Cologne Reinsurance Australasia Limited had not; (p) ought to have ascertained that the actual and pro forma balance sheet of NCRH which was included in the Prospectus and the First and Second Drafts of the Prospectus did not truly and fairly disclose the financial position of NCRH; (q) ought to have ascertained that the actual and proforma consolidated balance sheet in the Prospectus and the First and Second Drafts of the Prospectus was not in accordance with applicable Australian Standards; and (r) ought to have ascertained that the opinions expressed in Section 6 of the Prospectus and the First and Second Drafts of the Prospectus were not based on reasonable grounds." 29 It is alleged that if PWC had performed its duties with reasonable care and skill, the net asset position of NCRH would have been shown as US$99.379 million instead of US$164.795 million. 30 A representation claim and reliance are pleaded:

"249 By permitting or consenting to the inclusion in the Prospectus or the First and Second Drafts of the Prospectus of the actual and proforma consolidated balance sheet, and the financial information contained in Section 6 thereof, in the Prospectus and the First and Second Drafts Prospectus, including the Investment Material, PWC represented that Section 6 and the actual and proforma consolidated balance sheet which was included in the Prospectus and the First and Second Drafts of the Prospectus truly and fairly disclosed the financial position of NCRH, which representation by reason of the breaches of duty referred to in paragraph 247 was false. 250. The plaintiffs relied upon the financial information contained in the Investment Material, and the Prospectus, including the amounts shown in the actual and pro forma consolidated balance sheet, in the material set forth in Section 6 thereof, as truly and fairly disclosing the financial position of NCRH, and were thereby induced to acquire rights, converting notes and shares as set out in paragraphs 77 to 109 and to underwrite the issue as set out in paragraph 61 and 63 above. 251. Further, or in the alternative, if the financial information contained in Section 6 of the Prospectus and the First and Second Drafts of the Prospectus and the actual and proforma consolidated balance sheet (and drafts thereof) had been adjusted in accordance with paragraph 248 the Prospectus would not have been issued, or alternatively, would not have been issued in the form in which it was issued, and the rights, converting notes and shares which were ultimately acquired by the plaintiffs (and referred to in paragraphs 77 to 109) would not have been issued or acquired, and the sub-underwriting agreements referred to in paragraphs 61 and 63 above would not have been entered into." 31 It is further pleaded that PWC engaged in misleading and deceptive conduct in breach of both s 42 of the Fair Trading Act 1987 and s 995(2) of the Corporations Law as in force at the relevant time. The following is pleaded: "253. By reason of the audit and review by PWC of the financial statements of NCRH (pleaded in paragraphs 209 to 213), the participation of PWC in the preparation of the Prospectus and the First and Second Drafts of the Prospectus, the participation of PWC in the due diligence committee, (pleaded in paragraph 214), the marketing of the Institutional Placement and sub-underwriting rights the issue as detailed in paragraphs 219 to 225 above and the provision by PWC of its permission or consent to the inclusion in the Prospectus of the actual and pro forma consolidated balance sheet which included the amounts set forth under the heading "Actual Balance Sheet 30 June 1998" (pleaded in paragraph 214), PWC represented to persons who might acquire Rights, converting notes or shares in NCRH following the issue of the Prospectus on the faith of the information contained in the Prospectus and to the persons who agreed on the basis of the information set out in the First Draft of the Prospectus included in the Investment Material to participate in the Institutional Placement or to sub-underwrite the issue ("the PWC Representations") 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 fairly and accurately disclosed the financial position of NCRH as at 30 June 1998; (b) as at 30 June 1998, NCRH had net assets of US$127.479 million;

(c) as at 30 June 1998, NCRH had retrocession coverage in an amount of US$13.839 million, all of which was valid and collectable;

(d) as at 30 June 1998, NCRH had deferred acquisition costs in an amount of US$30.650 million, all of which was fully recoverable.

(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:

(1) A person shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. (2) Nothing in this Part shall be taken as limiting by implication the generality of subsection (1)." 58 The case pleaded against PWC in relation to s 42 depends upon the allegation, pleaded in para 253 of the summons, of a representation by PWC, by reason of its involvement in the preparation of material published in the Prospectus, as to the financial position of NCRH. 59 For the reasons I have already discussed in relation to paragraph 249 of the summons, although the argument is not without difficulties, I am of the opinion that the plaintiffs are entitled to have it determined after the available evidence has been tendered and can be considered. 60 Accordingly, although the plaintiffs' case in relation to s 42 may face some problems, it should not be dismissed at this stage (see Wickstead). 61 Section 995 (2) of the Corporations Law as in force at the relevant time, provided, as follows: "995 Misleading or deceptive conduct (2) A person shall not, in or in connection with: (a) any dealing in securities; or (b) without limiting the generality of paragraph (a): (i) the allotment or issue of securities; (ii) any prospectus issued, or notice published, in relation to securities; (iii) the making of takeover offers or a takeover announcement, or the making of an evaluation of, or of a recommendation in relation to, takeover offers or offers constituted by a takeover announcement; or (iv) the carrying on of any negotiations, the making of any arrangements or the doing of any other act preparatory to or in any other way related to any matter referred to in subparagraph (i), (ii) or (iii); engage in conduct that is misleading or deceptive or is likely to mislead or deceive." 62 Section 995(4) maintains the general application of s 995(2) irrespective of the impact of other provisions of the legislation. 63 Section 995 does not itself provide a remedy. For that reason the present pleading is deficient, although PWC accept this is a technicality which is capable of remedy. 64 Section 1005(1) provides the right of action for damages. Recovery is available both against a person "engaged" in a relevant contravention or against a person "involved" in it. Section 1006(2)(g) expressly provides that a person involved in a contravention includes: "(g) a person named, with the consent of the person, in the prospectus as an auditor, banker or solicitor of the corporation or for or in relation to the issue or proposed issue of securities." 65 Section 1006(2)(g) is qualified by s 1009(2) which is in the following terms: "(2) A person referred to in paragraph 1006(2)(e), (g) or (h) is liable in an action under section 1005 only in respect of: (a) a false or misleading statement in the prospectus purporting to be made by the person as a person referred to in that paragraph, or to be based on a statement made by the person as a person referred to in that paragraph; or (ba) in the case of a person referred to in paragraph 1006(2)(e) - an omission of any material matter from a statement in the prospectus purporting to be made by the person as a person referred to in paragraph 1006(2)(e), or to be based on a statement made by the person as such a person; or (b) in the case of a person referred to in paragraph 1006(2)(g) or (h) - an omission from the prospectus of any material matter for which the person is responsible in the person's capacity or purported capacity as a person referred to in paragraph 1006(2)(g) or (h)." 66 It is submitted by PWC that "s 1009 makes it clear that in relation to the prospectus, persons named in those subsections can only be liable for acts or omissions for which they were in fact responsible. In other words, acts or omissions which were engaged in by them as distinct from the acts or omissions in which they were involved." 67 Although it may be accepted that there are sound policy reasons for this approach to the construction of the legislation, the plaintiffs submit that PWC's argument is flawed. They argue as follows: "There are a number of propositions which can be made concerning the arguments of construction which have been addressed in relation to these provisions which will suffice for present purposes:- (a) Firstly, Section 995(4) makes it clear that nothing in the following provisions of the Law should be taken as limiting by implication the generality of subsection (2). (b) Section 1005 makes it clear that it operates in favour of 'a person who suffers loss or damage by conduct of another person that was engaged in a contravention of a provision of this part' (Part 7.11) … 'or against any person involved in the contravention.' (c) Section 1006(2) only applies to proceedings under Section 996 of the Law (note Section 996(1)(b)(i) and (ii) cf: Section 1006(1)(a) and (b)). Moreover, it only applies 'to any person involved in the contravention'. It is not applicable to conduct 'that was engaged in in contravention of a provision of (Part 7.11)'. It is not alleged that PWC was 'involved in a contravention' only that it was 'engaged in a contravention' (see paragraph 257). The categories of persons referred to in subsection (2) are 'inclusive', and not 'exclusive'. The fact that PWC relevantly answers the descriptions in sub-paragraphs (g) and (h) does not mean if relevant that they could not otherwise be involved. (d) The arguments based on the provisions of the succeeding sections depend upon the construction placed upon Section 1006. (e) Even if relevant on the issue of the proposed amendments PWC was relevantly 'involved' not only in the respects set out in Section 1006(2)(g) and (h), but also in the other relevant respects pleaded in paragraphs 214 of the proposed amendments." 68 Finally it is submitted that: "In any event, the applicability of the provisions of the Law could depend on evidentiary questions which have not yet finally been determined relating to PWC's involvement in any relevant contravention, and it is therefore not a suitable matter to be determined at this stage." 69 To my mind, the argument of PWC has considerable force. Although s 995(4) ensures the primacy of s 995(2), it is s 1005 which provides a remedy. Accordingly, as PWC argues, because s 1006 confines the conduct which may give rise to liability, it is not affected by s 995 (4). The sections are dealing with different matters. However, whether s 1009(2)(a) or (b) is relevant or operates to limit the potential liability of PWC may depend on the precise circumstances in which the relevant accounting material was provided and the nature of PWC's participation in the due diligence process. In my opinion, it would not be appropriate, at this stage, to conclude that the plaintiffs should be denied the opportunity to prosecute a case which seeks to establish that PWC was "engaged in a contravention." 70 Finally, PWC argues that because the statute provides a remedy in damages in relation to a prospectus of the type issued in this case, it should be concluded that the common law has no role to play. No doubt, some will find this to be an attractive argument. (See the discussion in Esanda esp McHugh J). However, in my opinion, any decision to deny a remedy beyond the statute should only be made when the relevant facts are available so that appropriate principles are founded in a practical factual matrix. Conclusion 71 For these reasons, I have concluded that the plaintiffs' summons should not be struck out and amendment should be allowed. However, as I have identified in these reasons the current draft summons requires further amendment. The plaintiffs should have leave to file an amended summons incorporating the further matters which have been identified in these reasons. 72 The thirteenth defendant should pay the plaintiffs' costs of both the plaintiffs' and thirteenth defendant's motions. **********

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