King v Yurisich

ISSUES RAISED IN THE APPLICANTS' STATEMENT OF CLAIM 12 Licensed travel agents, of which Jaja was one during the relevant period, are entitled to become participants in the Fund. 13 A participant in the Fund is obliged to provide to the trustees of the Fund, on an annual basis, information concerning its financial resources in the form of audited financial statements for the preceding year and an Annual Financial Review form (AFR form). The information provided is sometimes call 'renewal material'. 14 A participant has to provide financial information derived from its audited financial statements and, in the AFR form, provide a calculation in accordance with that form's requirements. 15 Jaja submitted its financial statements for the financial years ended 30 June 1998 and 30 June 1999 to the Fund. It is not disputed that LMP compiled those financial statements and that Mr Young audited those financial statements. 16 Pursuant to the provisions of the Deed, the trustees are entitled to call upon a participant to supply such financial information as the trustees reasonably consider necessary to enable the trustees to determine whether the participant has sufficient resources to carry on business as a travel agent and/or remain eligible to be a participant in the Fund. The trustees are entitled, again pursuant to the provisions of the Deed, to impose conditions upon a participant's continued participation in the Fund and, in particular, a condition that the participant maintain a trust account or client account in respect of monies received from clients; increase the capital of its business; reduce the debt of its business; procure a guarantee of its business by a person or class of persons specified by the trustees; maintain and operate books of account and other accounting records of its business in a manner specified by the trustees; and provide specific financial information to the trustees so the trustees may evaluate the participant's financial viability and assess its eligibility to remain a participant in the Fund. 17 On 26 November 1998 Jaja submitted its renewal application and AFR form and its audited financial statements to the Fund for the year ended 30 June 1998. Those documents were submitted for the purpose of Jaja continuing to be a participant in the Fund in 1999. 18 On 17 February 1999 the Fund resolved to allow Jaja to continue to be a participant in the Fund but on conditions. The conditions were: '(a) provision to the Fund of monthly management accounts and client account reconciliations by the 21st day of each month following 28 February 1999; and (b) lodgement of the Renewal Application and Annual Financial Review for the year ended 30 June 1999 by 31 August 1999.' 19 Jaja complied with the conditions except that it did not provide management accounts for the month of June 1999 but the obligation to comply with that condition was waived by the trustees of the Fund. 20 On 27 August 1999 Jaja submitted its renewal application, an AFR form and accounts for the year ended 30 June 1999 prepared by LMP and audited by Mr Young to the Fund. The whole of that information is sometimes called the '2000 renewal material'. The purpose of the submission of that material was in order that Jaja might continue to be a participant in the Fund in the year 2000. 21 Jaja also submitted a guarantee provided by QBE Insurance Limited (QBE) by which QBE guaranteed to pay to the Fund the sum of $60,000 in the event of default by Jaja. 22 On 16 September 1999 the trustees of the Fund resolved: '(a) to approve the continued participation by Jaja in the Fund; (b) to rescind the condition on participation that Jaja submit monthly management accounts to the Fund; (c) to require Jaja to submit to the Fund on or before 20 January 2000 detailed management accounts for the period ended 31 December 1999, not audited but signed by the directors as being correct.' 23 On 17 September 1999 the Fund wrote to Jaja advising Jaja's directors of the resolution of the trustees. 24 In compliance with that resolution, on 20 January 2000 Jaja submitted management accounts for the period ended 31 December 1999 to the Fund. Those management accounts were not compiled by LMP. They were not audited. That material was assessed and the trustees resolved to permit Jaja to remain a participant in the Fund without any further conditions. On 23 February 2000 Jaja ceased trading as a travel agent because its directors by then recognised that Jaja was insolvent. On 29 February 2000 the trustees resolved to terminate the participation of Jaja in the Fund effective immediately. 25 Between 1 January 1999 and 23 February 2000 various clients and customers of Jaja (Jaja's clients) paid money to Jaja in respect of future provision of travel related services which, by reason of Jaja's insolvency, were never provided. Each of Jaja's clients became creditors of Jaja and Jaja was obliged to repay to each of them the amount paid by that client or, alternatively, to account to each of Jaja's clients for the amount received by Jaja. Of course, by reason of its insolvency, Jaja could neither repay nor account for the amounts. 26 Therefore Jaja's clients, pursuant to the provisions of the Deed, sought compensation from the Fund in respect of the amount or amounts each of Jaja's clients had paid to Jaja. In total, the trustees of the Fund paid the sum of $266,135 to Jaja's clients or to third parties for and on behalf of those clients. It recovered $66,000 from QBE pursuant to the guarantee provided by that company. The original guarantee had been increased by $6,000 before Jaja went into liquidation. 27 Section 37(3) of the Act provides: '(3) If a payment is made to a claimant under the compensation scheme by reason of an act or omission by a person carrying on business as a travel agent, the compensation scheme trustees are subrogated to the rights of the claimant in relation to the act or omission.' 28 The Fund claim to be entitled to be subrogated to Jaja's clients in relation to Jaja's acts or omissions in failing to provide the relevant travel services; in failing to repay each of Jaja's clients the amount or amounts respectively paid by that client; or alternatively, failing to account to each client for the monies it received. The trustees also claim to be entitled to be subrogated to Jaja's clients in respect to their claims against each of the first, second and third respondents who were directors at the relevant time. 29 However, the Fund did not proceed against the first and second respondents. In fact, the first respondent is a bankrupt and the trustees did not obtain leave to proceed against him. The second respondent is his wife and impecunious and the trustees did not proceed against her. The Fund did proceed against the third respondent claiming a right of subrogation under s 37(4) of the Act which provides: '(4) If the rights conferred by sub-section (3) on the compensation scheme trustees are exercisable against a body corporate, those rights are enforceable jointly against the body corporate and the persons who were its directors at the time of the act or omission and severally against the body corporate and each of those directors.' 30 The claim against the fourth respondent was in respect of the amount paid by the trustees to Jaja's clients. A defence is given to a director under s 37(5) of the Act but it is not necessary to address that in detail because during the hearing, the Fund and the third respondent settled the Fund's claim. 31 A deed of settlement was produced to the Court, whereby the third respondent agreed to pay the Fund with a denial of liability the sum of $10,000 'being a compromise of costs or a proportion of them of pursuing Gottschalk (including irrecoverable legal fees and disbursements) claimed by the (Fund) in the Proceedings against Gottschalk'. 32 The deed provided for mutual releases. That sum was paid on 13 April 2005. The third respondent abandoned her cross-claims against the fourth and fifth respondents. The fourth respondent also settled its cross-claim with the third respondent. No money changed hands in relation to that settlement. 33 On 20 April 2005 I made the following orders: '1. The Applicant's claims as against the Third Respondent only be dismissed with no order as to costs. 2. The Third Respondent's Cross-Claim against the Fourth and Fifth Respondents be dismissed with no order as to costs. 3. The Cross-Claims of the Fourth Respondent as against the Third Respondent only be dismissed with no order as to costs.' 34 It follows that I am only concerned with the trustees' claim against LMP and Mr Young. 35 In their statement of claim the trustees pleaded that, in submitting the 2000 renewal material to the trustees, Jaja made a number of representations to the trustees which were false. It particularises those representations made by Jaja and how it is said the representations to be false. The trustees further claim that, in the provision of the 2000 management accounts on 20 January 2000, Jaja made further representations which were also false. It particularises those representations and the falsity of them. Those pleas are no longer relevant. They were only advanced to put the proposition that the first three respondents had aided and abetted Jaja in making those representations. 36 The trustees plead that LMP made representations to the trustees of the Fund at the time of the submission of the 2000 renewal material. They also pleaded that Mr Young made representations when the 2000 renewal material was presented to the trustees. In respect of both LMP and Mr Young, it is pleaded that those representations were false. I will refer to the representations in more detail. The trustees pleaded that, by LMP making those false representations, it contravened the Trade Practices Act 1974 (Cth) and Mr Young contravened the Fair Trading Act 1985 (Vic) and/or the Fair Trading Act 1999 (Vic). 37 In the alternative, it is pleaded that both LMP and Mr Young owed the trustees, and thereby the Fund, a duty of care which they separately breached. In both cases, the duty of care was said to be 'to take reasonable care in making any representation to (the trustees) in relation to the 2000 Renewal Material to avoid loss and damage to the Fund'. 38 It is claimed that, either by reason of the contravention of the respective Acts, or the negligence of LMP and Mr Young, the Fund suffered the loss which it was called upon to pay to the claimants as a result of the failure of Jaja. 39 The statement of claim raises the following issues:

1. Whether the financial statements for each of the financial years ended on 30 June 1998 and 30 June 1999 represented a true and fair view of Jaja's financial position at that time.
2. Whether the provision by Jaja of the 2000 renewal material constituted representations by either or both of LMP and Mr Young to the trustees and thereby the Fund.
3. What those representations were.
4. Whether those representations were false.
5. Whether that leads to a finding that LMP breached the Trade Practices Act 1974 (Cth) or Mr Young breached the Fair Trading Act 1985 (Vic) and/or the Fair Trading Act 1999 (Vic).
6. Whether in the event either or both of LMP and Mr Young were guilty of negligence or a contravention of the respective Acts, the Fund has suffered loss or damage.
7. Whether LMP and Mr Young owed the trustees, and thereby the Fund, a duty of care of the kind pleaded.
8. Whether LMP or Mr Young or both breached that duty of care.
9. The quantification of that loss or damage. 40 The questions raise for consideration and examination Jaja's 1998 and 1999 financial statements.

ISSUES RAISED IN THE DEFENCES 41 Both the fourth and the fifth respondents denied that in presenting the financial statements for the years ended 30 June 1998 and 30 June 1999 they thereby made any representations. They denied that the representations were false. 42 They both denied that the trustees relied upon the financial statements submitted to the Fund or on the information contained in the AFR form. 43 The fifth respondent argued that, in any event, his conduct was not in trade or commerce and therefore did not contravene either of the Fair Trading Acts which were in force in 1999. The Fair Trading Act 1999 (Vic) (the 1999 Act) repealed the Fair Trading Act 1985 (Vic) (the 1985 Act) and was assented to on 18 May 1999. The applicant has relied on s 11 of the 1985 Act and s 9 of the 1999 Act which are in any event in the same terms. That part of the 1999 Act which contains s 11 came into operation on 1 September 1999. That section seems to me to be relevant to a consideration of the fifth respondent's liability. The fourth respondent did not argue that its conduct was not in trade or commerce. 44 The fourth respondent argued that the Fund had no obligations to Jaja's clients and in those circumstances was not entitled to seek to recover any monies paid by the trustees to Jaja's clients from the fourth respondent. The fifth respondent did not argue that the Fund did not have an obligation to Jaja's clients. 45 Both the fourth and fifth respondents argued that the Fund's claim for damages did not have regard to the Fund's liabilities to Jaja's clients which would have had to have been met if the Fund had refused to allow Jaja to continue to be a participant in the Fund after 27 August 1999. They both argued that the Fund's claim did not recognise that, on its own case, Jaja was insolvent as at 27 August 1999. Therefore, the Fund would have been liable to meet the claims of any existing clients of Jaja who had paid for travel which had not been provided. 46 The fourth respondent has also brought a cross-claim against the fifth respondent seeking contribution in respect of any liability it might have to the applicants. The fifth respondent has not sought contribution from the fourth respondent. 47 The fifth respondent claims that the Fund has been guilty of contributory negligence and that any award ought to be reduced by reason of that negligence. 48 It was agreed by all parties that if the Fund was entitled to a verdict either against the fourth or fifth respondents for a contravention of either the Trade Practices Act or the Fair Trading Acts, the verdict could not be reduced by reason of any conduct on the part of the applicants because of the decision of the High Court in I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 ('I & L Securities Pty Ltd'). 49 Of course, if the Fund were only entitled to a verdict for the cause of action in negligence then the verdict could be reduced on account of the applicants' contributory negligence. No doubt it was for that reason that the fifth respondent argued that its conduct was not in trade or commerce.

THE DEED 50 There is no dispute between the parties about the trustees' entitlement to require a participant to provide financial information; about the trustees' entitlement to refuse to allow a travel agent to be a participant in the Fund; about the trustees' entitlement to require financial information to be provided to the trustees; and about the trustees' entitlement to impose conditions upon continuing participation in the Fund. However, it is necessary to examine the Deed which provides for the Fund to understand the facts and circumstances which are relied on by the respondents. 51 The Fund is operated by a Board of trustees which consists of 11 trustees appointed by a Ministerial Council. 52 The Board of the Fund has, amongst other duties, the duty to pay out of the Fund any claim admitted under cl 16.7: cl 4A.1(a). I will return to that. 53 The Board is entitled to delegate its powers and duties relating to the administration of the Fund to a Management Committee which is constituted under cl 20 of the Deed. 54 The Management Committee consists of a Chairperson of the Board who is also Chairperson of the Management Committee, the Chief Executive Officer of the Fund and at least two trustees. The Board is entitled to determine the amount, method of calculation and manner of collection of all contributions, fees, levies and penalties payable to the Fund by participants, and any other persons applying to be participants of the Fund. 55 A 'participant' is defined in the Deed: ' "participant" means a person who is - (a) accepted as a participant of the fund under clause 10; or (b) declared to be a participant of the Fund under clause 11.' 56 The Fund is established by cl 5. It consists, inter alia, of any contributions, fees, levies and penalties paid into the Fund. The Board is empowered to determine the amount, method of calculation and manner of collection of all contributions, fees, levies and penalties payable to the Fund by participants or persons applying to become participants: cl 6.1. 57 A person who intends to operate as a travel agent may apply in writing to the Board for a determination that the person is eligible to be a participant of the Fund: cl 8.1. 58 The eligibility of a person to be a participant is provided for in cl 9.1. It provides: '9.1 A person is eligible to be a participant if the Board considers that the person has, and is likely to continue to have, sufficient financial resources to enable the person to carry on business as a travel agent and enter into travel arrangements and travel-related arrangements.' 59 The Board is required to publish guidelines as to the criteria it may use to determine whether a person is eligible to be a participant: cl 9.4. The Board has published financial criteria. 60 Clause 9.6 allows the Board, if not satisfied that a person is eligible to be a participant, to require the person to comply with conditions in order for the Board to be satisfied that the person is eligible as a participant. 61 Clause 9.6 provides: '9.6 If the Board is not satisfied that a person is eligible to be a participant, it may require the person to comply with any one or more of the following conditions in order to be satisfied that the person is eligible as a participant: (a) that the person maintain and operate the business as a travel agent in a manner specified by the Board; (b) that the person - (i) maintain a trust account or client account in respect of any money received in the course of that business; or (ii) increase the capital of that business; or (iii) reduce the debt of that business; or (iv) provide in favour of the Board any security it requires in any form it determines; or (v) pay any costs incurred in connection with providing or releasing that security; (c) that the business be guaranteed or insured in a manner, or by a person or class of person, specified by the Board; (d) that the person maintain and operate books of account and other accounting records of the business in a manner specified by the Board; (e) that a report be obtained at the expense of the person from a duly qualified auditor or accountant nominated by the Board - (i) stating that the accounting records of the business give a true and fair view of the financial position of the business; or (ii) providing any other information the Board requires to determine whether the person has sufficient financial resources to carry on the business; (f) that the person provide full disclosure of the identity of any other person involved in the business.' 62 If the Board determines that an applicant is eligible to be a participant on payment of the contribution and relevant fees, the Board must accept that applicant as a participant: cl 10.1(a). 63 Clause 12 of the Deed allows the Board to require a participant to provide the Board with any information the Board reasonably requires about the participant's financial resources. Clause 12.5 obliges a participant to notify the Board if the participant becomes bankrupt or the participant's business is wound up or placed in receivership or administration. 64 Clause 12A of the Deed empowers the Board to determine at any time whether a person is entitled to remain eligible as a participant. 65 Clause 15 of the Deed requires the Board to pay compensation out of the Fund to the persons identified in the clause. Clause 15 provides: '15 PAYMENT OF COMPENSATION 15.1 The Board must pay compensation out of the Fund to a person who - (a) enters into travel arrangements or travel-related arrangements directly or indirectly with a participant; and (b) has suffered or may suffer pecuniary loss arising directly from a failure to account by the participant for money or other valuable consideration paid by the person; and (c) is not protected against the loss by a policy of insurance. 15.2 The Board may pay compensation to - (a) a person referred to in clause 15.1 in relation to any consequential pecuniary loss suffered from a failure to account as referred to in that clause; or (b) a person who has suffered pecuniary loss and consequential pecuniary loss arising directly from a failure to account for money or valuable consideration in relation to any travel arrangement or travel-related arrangement by a person who is not a participant. 15.3 The Board may develop and publish guidelines that apply to the payment of compensation arising under clause 15.2. 15.4 The Board must not pay compensation to a person in respect of loss referred to in this clause that arises before the commencement of the Act in the appropriate State. 15.5 Compensation payable under this clause is payable - (a) to a person who is a resident of Australia in respect of any travel arrangements or travel-related arrangements; or (b) to a person who is not a resident of Australia in respect of travel arrangements or travel-related arrangements within Australia. 15.6 A travel agent or an operator who carries on or carried on a business comprising or including the provision of travel arrangements or travel-related arrangements may be paid compensation under this clause only if the travel agent or operator is exercising the right of a person to claim or receive compensation out of the Fund that has been assigned to the travel agent or operator. 15.7 The Board may pay compensation under this clause to a person in consideration of, or subject to, the assignment to the Board of the person's right and entitlement against another person. 15.8 The Board may pay compensation in instalments in any manner it determines.' 66 Clause 15 is consistent with cl 3 of the Deed which identified the Fund's purposes which, in particular, is to provide compensation for certain people who deal with travel agents. 67 The Fund is constituted for the purpose of providing monies to make the payments referred to in cl 15.1. Clause 15.1 is mandatory. The Board must pay compensation to the persons identified in paragraphs (a) and (b) of cl 15.1. If a person enters into travel arrangements or travel-related arrangements (which are defined in the Deed) with a participant of the Fund and has suffered, or may suffer, pecuniary loss arising directly from a failure to account by that participant for money or other valuable consideration paid by the person and is not protected against the loss by a policy of insurance, then the Board must pay compensation for those persons. 68 On the other hand, cl 15.2 gives a Board a discretion as to whether it should pay compensation to the persons identified in paragraphs (a) and (b) of cl 15.2. 69 Clause 15.1, as I have already noticed, only applies to persons who have dealt with a participant of the Fund. Those persons are entitled to compensation as of right. On the other hand, persons who have dealt with travel agents who are not participants are not entitled as of right to compensation but may receive compensation in the discretion of the Board. The other persons who also may receive compensation in the discretion of the Board are those who have suffered consequential loss. 70 Clause 15.6 limits the circumstances in which a travel agent, or an operator who is defined in the Deed, may receive compensation under cl 15. 71 The effect of cl 15.6 is, relevantly, for the purpose of these proceedings, that a travel agent may be paid compensation under cl 15 only if the travel agent is exercising the right of a person to claim or receive compensation out of the Fund that has been assigned to the travel agent or operator. 72 In this case, as the facts will later show, the Fund paid compensation to Harvey World Travel Pty Ltd which provided the travel arrangements or travel-related arrangements not provided by Jaja. However, as I have already indicated, the fourth respondent has argued that the trustees and the Fund had no liability to Jaja's clients. The fourth respondent argued that there had been no assignment to Harvey World Travel Pty Ltd of Jaja's clients' rights to claim or receive compensation out of the Fund. In those circumstances, it was argued, the Fund had no obligation to pay and, because it had no obligation to pay, it was not entitled to claim compensation from the fourth respondent for the payments it had made. I will address that argument later. 73 Clause 16 of the Deed requires a person to make a claim within 12 months after the failure to account for money or other valuable consideration to which the claim relates. Clause 16.4 empowers the Board to require the person to provide additional information relating to the claim and copies of any documents in the possession or under the control of the person making the claim. The Board can also require information to be provided by the maker of the claim and a statutory declaration or copies of documents to be verified in a particular manner: cl 16.5. 74 Clause 16.7 provides: '16.7 The Board may decide - (a) to admit a claim in whole or in part; or (b) to reject a claim.' 75 Clause 17 obliges the Board to determine the amount of compensation payable to a person under either cl 15.1 or cl 15.2, which sum is not to exceed the actual pecuniary or consequential pecuniary loss suffered. 76 The Board can pay emergency compensation out of the Fund where the Board is satisfied that a past participant has failed to meet, or is unlikely to meet, an obligation to a person and it 'is necessary to meet in whole or in part the emergency requirements of the person arising from the failure': cl 18.1. 77 However, in doing so, the Board must attempt to ensure that it does not make a payment prohibited by cl 15: cl 18.2. 78 The purpose of the Fund is to encourage travel agents to become participants in the Fund in order to protect travellers from a travel agent's failure to provide services that have been paid for.

WITNESSES 79 All of the witnesses who were called by the various parties gave their evidence-in-chief in affidavits. 80 The witnesses were then cross-examined by counsel with opposing interests. I did not allow any duplication of the cross-examination of the applicants' witnesses by the fourth and fifth respondents or any cross-examination where there were no live issues between the parties. 81 The applicants called a number of witnesses in support of their case, including: ● Mr Brattoni, the Chief Executive Officer of the Fund from 31 May 1990 to 18 January 2002; ● Mr King, the Chairman of the Fund; ● Mr Given, a trustee of the Fund; ● Mr Whittaker, the Fund's Manager of Special Investigations; ● Mr Hammond, the Manager, Operations of the Fund; ● Mr Dellar, the Legal and Policy Adviser of the Fund; ● Mr Newman, a financial assessor employed by the Fund who had responsibility for assessing Jaja's application; and ● Ms McAlpine, assistant to the financial director at Harvey World Travel. 82 The applicants also called four of Jaja's clients. An affidavit of Mr Glen Wells, the present Chief Executive Officer, was read but he was not required for cross-examination. 83 I accept some points of Mr Brattoni's evidence. I do not accept his evidence on the hypothetical scenario that was put to him. I accept the evidence of Mr Whittaker and Mr Hammond. I accept Ms McAlpine's evidence. 84 I do not accept the evidence of Mr King or Mr Given. I was not impressed by Mr King, who clearly had not read his own affidavit before he gave his evidence and had no idea why it was that he was giving evidence. I do not accept their evidence on the same hypothetical scenario that was put to them. 85 I was not impressed by Mr Newman who, in many respects, was clearly defensive. In some respects he could not explain what he had done or why he had done it. I think he was unable to explain his position because he now recognises that what he did was wrong. 86 I have no doubt that the four Jaja client witnesses did their very best to help me in relation to their evidence and I accept their evidence. 87 The applicants also called Mr Humphreys who is a chartered accountant and registered auditor who provided expert reports in relation to both the 1998 and 1999 financial statements. He also provided commentary on other reports and evidence. He swore three affidavits. Mr Humphreys was a good witness and I accept his evidence. 88 Ms Gottschalk, who was unrepresented, read her affidavit and was cross-examined on it. She was an honest witness and I accept her evidence, although a good part of it became irrelevant after she settled with the other parties. 89 A partner of the fourth respondent, Mr Lane, who had responsibility for the compilation of the financial statements gave evidence. LMP also called Ms Kirby who was a bookkeeper employed by the fourth respondent and who had the direct involvement with Jaja and its directors for the purpose of compiling those financial statements. 90 Neither Mr Lane nor Ms Kirby were satisfactory witnesses. They were both defensive. They both attempted to distance the fourth respondent from its responsibilities in relation to the compilation of the financial statements. In a number of respects I do not accept their evidence. 91 The fifth respondent gave evidence. He was a completely frank and candid witness and I accept his evidence in all respects. Unfortunately, from his point of view, his own evidence makes a finding of negligence against him inevitable. 92 Mr Geoffrey Knott, a chartered accountant and a partner in the firm of BDO Chartered Accountants, was retained by the fifth respondent to offer an opinion: 'Our report is to provide an assessment in relation to the conduct of Mr Young in light of the allegations made against him.' 93 He was then asked to offer opinions on a number of specific matters relating to the conduct of Mr Young. One of the matters upon which he was asked to offer an opinion was whether Mr Young engaged in misleading and deceptive conduct. That is not the province of an expert. It is unfair to experts to engage them to offer opinions on matters upon which they are not entitled to give. Legal practitioners who have the responsibility of engaging practitioners should be careful to ensure that the opinions which they seek are those which are appropriate and can be given by way of admissible evidence in a Court. 94 Seeking opinions from chartered accountants about legal questions which are solely for the Court only goes to devalue the expert's opinions and evidence. This is no criticism of Mr Knott who did what he was asked. Unfortunately, Mr Knott was put in a position whereby he was asked as an expert to argue the case on behalf of the auditor. 95 Mr Knott gave three opinions; two were dated March 2004 and one was dated March 2005. In that first opinion, he argued a case for the auditor. Insofar as he gave evidence about the practice of a reasonably competent auditor, the evidence was admissible. Insofar as he purported to give evidence which amounted to findings of fact or inferences on facts, the evidence is inadmissible and I have rejected it. I have also rejected his evidence whereby he purported to give evidence on the ultimate questions in the trial. 96 Mr Knott, like Mr Young, gave his oral evidence in a forthright manner. His oral evidence did not contradict Mr Humphreys' expert evidence and, indeed, in a number of respects, supported it. His evidence again, unfortunately, confirms that Mr Young's audit work was not to the appropriate standard for an auditor. 97 Where there is difference between the evidence of Mr Humphreys and Mr Knott, I prefer Mr Humphreys' evidence. He carried out a number of exercises which were not addressed by Mr Knott which, in the end result, were helpful in determining the issues between the parties. He also addressed the correct questions. He examined the financial statements and underlying financial records in some detail which enabled me to have confidence in the opinions he expressed. 98 The respondents have raised in their defence the question of reliance. That raises for consideration the manner in which the Fund considered applications by travel agents to continue to be participants in the Fund. 99 To that end, it is necessary to consider the way in which the Fund dealt with renewal material.

THE PROCEDURE FOR REVIEWING A PARTICIPANT'S ELIGIBILITY 100 Mr Philip Hammond is the Manager, Operations of the Fund. All assessing staff report to him and he is responsible for the supervision of the assessment process. He said that between 1996 and 2002 the Fund had a standard procedure for reviewing a participant's eligibility for continuing participation in the Fund. 101 Early in 1987 the trustees of the Fund established financial criteria for continued participation in the Fund. At the same time, it was resolved that specific financial information which must be audited needed to be provided to the Fund. 102 The Fund assesses each participant's financial criteria on a points basis. The Fund will generally allow a participant to continue in the Fund without the need to provide security or additional financial information if a review of the financial material which has been provided meets the minimum financial criteria measured by a score of at least 10 out of 20 points and, at the same time, meets the necessary level of minimum capital and reserves as defined in the financial criteria. 103 At least one month before the end of each participant's financial year, the Fund would send a renewal application and in July or August of each year, the Fund would send out a blank AFR form and a copy of the Fund's financial criteria. If the participant was an International Air Transport Association (IATA) accredited agent, the Fund would require that the form be completed both for IATA and Fund assessment. 104 Within three months after the end of a participant's financial year, that participant was obliged to provide to the Fund the AFR form together with a set of audited financial statements. 105 If the participant met the Fund's financial criteria, its renewal application was approved by Mr Hammond, an assessor, or the Chief Executive Officer. 106 If the participant failed to meet the Fund's financial criteria, the Fund might require the participant to issue shares, provide a bank guarantee or, after 1 January 1999, provide an insurance bond from QBE. The participant may be also required to provide further financial information. 107 Mr Hammond said that the financial criteria addressed three issues: profitability, liquidity and solvency. 108 He said that it was important from the Fund's point of view that the participant had sufficient current assets to pay its current liabilities and thereby have sufficient working capital to meet at least one month's overhead expenses of the participant. Moreover, it was a requirement that there would be a sufficient surplus of tangible assets over liabilities (i.e., the company needed to be balance sheet solvent). 109 If a participant had incurred a loss for any particular year in assessing that participant's continuing viability, the Fund's financial criteria required that a provision for a loss of the same magnitude be made when assessing the participant's continuing participation. 110 It was Mr Hammond's evidence that the participant needed to be profitable; have sufficient working capital to meet one month's expenses; and be solvent. 111 At all relevant times the Fund had a system of colour coding which applied to all renewal applications. First, the applications were divided between those participants who returned a turnover of less than $3m which were coded 'green' and those that had a turnover of more than $3m which were coded 'yellow'. 112 It was Mr Hammond's responsibility to ensure that the travel agent had provided all of the information which was required: '(a) Annual Financial Review (AFR); (b) Audited financial statements for the required year end or period end; (c) Signatures where required on the AFR Materials, for example:- (i) from the participant on the cover of the AFR; (ii) from the auditor on personal statement of assets less liabilities; (iii) from the participant on the company director's declaration; (iv) from the auditor on the Audit Report; (v) from the company directors on the Directors' Report; (d) Notes to the accounts within the financial statements; and (e) Directors Report.' 113 I set out the colour coding procedure: 'COLOUR TURNOVER Green Less than $3M and meets the minimum financial criteria Yellow Greater than $3M and meets the minimum financial criteria Blue Less than $3M trading loss reported for the year and meets the minimum financial criteria Red Less than $3M, does not meet the minimum financial criteria Blue/Yellow Greater than $3M, loss reported, meets financial criteria Red/Blue Less than $3M, loss reported, does not meet the minimum financial criteria Red/Yellow More than $3M, does not meet the minimum financial criteria Red/Yellow/Blue More than $3M, loss reported, does not meet the minimum financial criteria'

114 Those applicants that were coded yellow and green were, on a cursory review, deemed to satisfy the minimum financial criteria as profitable. Those that were coded red or blue were deemed to have failed the minimum financial criteria. 115 If a participant failed to meet the minimum financial criteria the following procedure was adopted: '15. If the assessment reflects a financial deficiency (less than 10/20 points score), the Assessor will despatch "Assessment - Deficiency Notice : Non Compliance Penalty Fee" (ADN) letter. Refer Appendix Letter of same title. 16. This allows a period of 21 days to rectify the financial deficiency. A failure to comply, the letter advises the participant that a representative of the entity is provided with an opportunity to attend the next Management Committee Meeting of Trustees (MCM). 17. Where participant is required to lodge renewal documentation within 2 months of the year-end AND is assessed as being financially deficient with no indication of remedial action in process - Eg. Letter from bank approving guarantee, which has not yet been received by the TCF, or application to QBE for guarantee the Participant is required to attend the nextMCM - the 21-day period is not required. Such Participants would have been advised when the condition of reporting within 2 months was applied; no financial deficiency was to be evident at time of reporting. 18. If Participant is an IATA/DAPA member who does not meet the IATA/DAPA minimum financial criteria, the Assessor ● includes "the IATA Deficiency" paragraphs in the TCF ADN. Refer Appendix Notice of Deficiency Letter. ● Forwards by facsimile to IATA/DAPA 1.a copy of the ADN, 2.IATA Deficiency Worksheet 3.copy of summary balance sheet and 4.IATA calculation worksheet from Annual Financial Review Fax. Refer Appendix Assessment Calculation Form Note that this procedure is to be followed also when a Participant meets TCF criteria but not IATA/DAPA's. 19. If remedial action has not been taken within 21 days a "first call" Agenda 7.4 MCM Briefing Paper (BP) is prepared. Refer Appendix Briefing Paper 7.4. A BP includes a Participant's relevant information :- ● Legal entity ● Trading name ● Number of additional locations ● Guarantees held by TCF ● Recommendation to the Trustees ● Financial assessment ● Current deficiency ● What action, if any, is being taken or has been taken ● Two month reporter ● Reason why a 2 month reporter ● Attended prior Management Committee Meetings or on MCM agenda ● Previous determinations by Trustees ● Date AFR lodged - late, extension of time to report requested? ● Date approved prior year ● Correspondence and/or telephone contact between assessor, auditor/principal ● Mitigating circumstances ● Background/Overview ● Position for CEO to comment ● Position for Trustees' determination 20. Following Trustees' determination, despatch "Notice of Determination" (NOD) letter. Refer Appendix Notice of Determination letter. 21. If Participant fails to comply within the time permitted, a "second call" Agenda 7.5 BP is prepared. This BP is an abridged version of a "first call" BP. Refer Appendix Briefing Paper 7.5 22. Following MCM, Assessor despatches 7.5 "Notice of Determination" letter. This process is repeated until there is compliance with the conditions imposed for continuing participation or the financial deficiency is rectified. If not, then a further 7.5 BP is prepared with the recommendation for the Trustees to terminate participation in the TCF. The determination of Trustees may be immediate or to be automatically enacted at some future date. If the latter a further NOD is despatched. A participant's failure to comply by the appointed time requires a "Notice of Termination" to be despatched (NOT). Refer Appendix Letter of same title. 23. If termination of participation in the TCF is to be immediate, following the MCM the Notice of Termination letter is despatched. 24. The terminated participant has a facility to Appeal the termination of participation in the TCF and the means is conveyed in the NOT. If an Appeal is lodged with the respective State Appeals Tribunal and is usually successful, the Order of Termination of the TCF is "Stayed" which allows the Participant to trade until the next hearing. Full participation will be restored, usually after remedial action to correct any financial deficiencies is achieved and the Participant will be reinstated - with or without additional penalty fees, depending upon the circumstances. 25. "Special Case Renewals" with a small "s" "c" "r" - ie. Renewals for Routine ECM approval. As seen from the Financial Criteria the TCF has tailored the renewal criteria for certain categories of agencies - viz. Inbound, Coach, Airlines, Consolidators and Corporates. Where these hold minimal clients' funds, they have the option of providing a bank or insurance guarantee for 150% of the maximum client funds held at any time throughout the previous year as certified by their auditor. Such certification is found within the AFT (Year 2000, page 5). Such renewals are referred to as the "Exposure to Risk" or "$150% Rule." Alternatively for Airlines with NTA > A$100M another renewal option is as espoused, without audit qualification, nor subject to insolvency proceedings. Yet another renewal criteria alternative is available for Airlines and Coach operators and that is where their equity is at least 20% of total tangible assets. In each of these three cases, the Renewal Front Sheet for ECM approval is prepared with the suitable wording and passed through to the MAS for approval and ECM approval.' 116 If a participant did not meet the minimum requirements, the Fund might require the participant to take remedial action which might include obtaining a bank guarantee, establishing a trust account, or engaging external auditors to monitor the accounts. 117 Where a participant has not met the minimum financial criteria, briefing papers were prepared either by Mr Hammond, his assessors, or Mr Whittaker, who was Manager Special Investigations. They would be forwarded to the CEO who, if he agreed with the recommendation contained in the briefing papers, would sign the papers for tender to the Management Committee of trustees for formal resolution. 118 On the other hand, if the participant is coded 'green' or 'yellow' then unless the AFR materials, including the financial statements, upon close scrutiny by an assessor and a comparison with the audited financial statements reveal some manifest error, the participant's full assessment is processed as a desk audit. 119 Mr Hammond said that for Jaja to have obtained a colour coding of 'green' (which it did), the renewal material would have had to have shown that Jaja's turnover was not greater than $3 million; that Jaja was trading at a profit; that Jaja met the minimum equity gateway test; and that Jaja could obtain 10 out of 20 points in respect of the two tests, net tangible assets to turnover and working capital to overheads.

QBE INTERNATIONAL INSURANCE LTD 120 It became evident in 1996 that some participants who had been assessed as deficient often found it onerous and expensive to obtain bank guarantees to make up any deficiency in their capital. In 1997 and 1998 the Fund sought alternative forms of security to bank guarantees that would be acceptable to the Fund. In September 1998 the Fund concluded negotiations with representatives of QBE International Insurance Ltd (QBE) and a scheme was offered by QBE to Fund participants. QBE offered an 'on demand guarantee' to the Fund to pay on demand any sum which may be demanded by the Fund up to the amount of the guarantee. In return, the participant would pay QBE 2.2 per cent of the amount guaranteed. 121 Soon after the scheme commenced, QBE agreed with the Fund that it would be obliged to give a guarantee for any sum less than $900,000 if requested by a participant and if the participant paid the fee of 2.2 per cent. In other words, QBE was prepared to give an on demand guarantee without any knowledge of the participant's financial position. The participants were not required to submit any financial information or accounting in support of a QBE guarantee where the guarantee sought was less than $900,000. The guarantee was for one year and could be renewed from year to year by payment of the premium of 2.2 per cent. 122 The QBE guarantee scheme took effect on 1 January 1999 and was in operation at the relevant time. 123 It was Mr Hammond's evidence that he was not aware of any case during 1999 or 2000 where a Fund participant was required to provide any financial information to QBE or its agents to secure a guarantee of less than $900,000. In 1999 the Fund received 14 QBE guarantees for amounts between $200,000 and $2 million. Thirteen of those guarantees were given in accordance with QBE's obligation to automatically give any guarantee under the sum of $900,000. The only guarantee where a participant had to provide information was one where the participants sought a guarantee of $2 million. In 2000 the Fund received 15 guarantees. 124 As will be explained in due course, Jaja obtained a guarantee of $60,000 which was later increased to $66,000. That guarantee was, in due course, met by QBE. 125 The purpose of this evidence was to establish that if the Fund had required Jaja to take a greater guarantee than $60,000 or $66,000 from QBE, it would have been available to Jaja simply on payment of the 2.2 per cent premium.

THE FACTS 126 On 26 November 1998 LMP wrote to the Fund enclosing Jaja's audited financial statements together with the AFR form. The profit and loss statement showed a loss for the year ended 30 June 1998 of $23,040. The company's current liabilities were $67,978 and exceeded the current assets of $46,916. The balance sheet showed total shareholders' equity of only $2,742. 127 The audit report which was addressed to 'The Members of Jaja Pty Ltd, The Trustees of the Travel Compensation Fund and the International Air Traffic Association' was qualified: 'Qualification During the financial year the company changed from a manual accounting system to a computerised general ledger and client accounting system. We are unable to satisfy ourselves as to the accuracy of certain computer generated records and in particular commission received which has decreased some $42,518 (or 31%) compared to the previous years, despite a 30% increase in turnover. We are also unable to express an opinion on the accuracy of the Client Bank Account and Client Creditors as shown in the attached Balance Sheet. We are unable to quantify the extent of the above uncertainties. Qualified Audit Opinion In our opinion, except for the effects on the financial statements of the matters referred to in the qualification paragraph, the financial statements of Jaja Pty Ltd for the year ended 30th June 1998 are properly drawn up: a) to give a true and fair view of: (I) the company's state of affairs as at 30th June 1998 and its profit (or loss) for the financial year ended on that date; and (II) the other matters required by Divisions 4, 4A and 4B of Part 3.6 of the Corporations law as they apply to large corporations to be dealt with in the financial statements; and b) in accordance with the provisions of the Corporations law; and c) in accordance with applicable Accounting Standards and mandatory professional reporting requirements.' 128 The audit opinion therefore contained an 'except for' qualification. 129 In the letter accompanying the provision of those documents, LMP wrote: 'Our client, the Directors of the above, wish to advise that the attached audit report has confirmed their grave concerns regarding the financial ratio position of the company's accounts as at 30 June, 1998. On presenting our firm with the company's computer generated general ledger and trial balance for the year ended 30 June, 1998 the Directors of the company advised us that they were very concerned as to the position of the client account and the amount of available commission income to be transferred to the general operating account. Furthermore, due to their lack of knowledge and understanding of the software, they felt very insecure regarding the accuracy of the reports generated by their inhouse computer system. As of 1 November, 1998 the company commenced using an integrated computer travel software package recommended for use by their franchisor, Harvey World Travel. All records were then "backloaded" to 1 July, 1997 onto the new software. A dual manual/computer system has not been in place for the year ended 30 June, 1998. On investigation by ourselves and the auditor, Mr Robert Young of Rankin & Young we found that the Directors' fears were well founded, as the accounts reflected inadequate working capital and other requirements to satisfy the minimum financial ratios required by TCF/IATA and Harvey World Travel. This firm has prepared the attached financial statements based on source documents as provided. After our review of these financial statements, we believe that the commission income is inaccurate, and therefore produces inaccurate profit, working capital and equity results for the year ended 30 June, 1998. As a result of lengthy discussions with the Directors, it was decided that due to the prohibitive cost, time and resources available, it is not possible, at this time, to further investigate and determine, the exact cause of the problem, but rather, the Directors have immediately taken steps, based on our advice, to rectify the company's financial and client account position as measured by TCF/IATA. The following measure have been implemented; ● A $10,000-00 capital injection from shareholders private funds was made into the company, October, 1998. Note this capital injection does not encumber the company's assets. ● The Directors have taken steps to strengthen internal control by making all cash monies paid by travel clients secure until they are actually deposited at the bank by utilising a wall safe and allowing only one staff person access to the safe. ● To enable the Directors to have confidence in the amount available for transfer of commission income from the client account to the general operating account, and to provide working capital, a manual accounting system for the client account has been implemented, effective October, 1998 (operated in conjunction with the integrated computer software). As a result working capital has been generated and funds are being transferred, with greater accuracy into the general operating account. Furthermore, the accuracy of both the client account and the general operating account are now able to be determined and reconciled. ● The shareholders are in the process of selecting a real estate agent for the purpose of listing their home for sale, with the intent of using funds from the sale to contribute working capital into the company. ● To monitor the performance of the company's position and the effect of the above strategies the Directors have decided that interim financial statements will be prepared for the six months to 31 December, 1998 by this firm. ● As soon as surplus working capital becomes available the Directors will invest in comprehensive staff training of the existing integrated travel software package to avoid future problems. It is our belief that given the resolve of the Directors, combined with the positive effect of the above strategies that the TCF/IATA financial measures of, percentage working capital ratios, ratio of net tangible assets to turnover, and minimum equity requirement, and rectification of accurate client account recording will be restored over the current financial year ending 30 June, 1999. The company has positive current bookings and trading outlook, with significant positive inroads already being made into the 1999/2000 year by confirmed large party bookings being recorded. We, together with the Directors of the company fully realise that the attached TCF/IATA financial analysis does not meet the requirements as laid down. However, we trust that you will give fair and due consideration to both the Directors' determination to ensure that the ratios are rectified in order to satisfy the TCF/IATA testing criteria, and to the extenuating circumstances that have arisen resulting in the ratios as per the attached analysis. Should you have any queries please contact us immediately. On behalf of the Directors of the company, we thank you in anticipation of your support in this matter.' 130 The letter was signed by Mr Lane. In that letter Mr Lane said that the shareholders, who were then the first and second respondents, had injected $10,000 into the company in October 1998. If that had occurred then, of course, that injection would not have been reflected in the balance sheet as at 30 June 1998. If it happened it should have appeared in any balance sheet which was compiled after October 1998. 131 In the penultimate paragraph of that letter Mr Lane referred to Jaja not meeting the requirements as laid down by the Fund. 132 In that regard, he was referring to a calculation termed a 'financial analysis ratio' used by the Fund to determine whether a travel agent met the financial criteria necessary to remain a participant in the Fund. 133 As I have said, the financial criteria requires a travel agent to maintain a minimum level of capital and reserves dependant upon the scale of operations measured by the annual turnover (both travel and non-travel). In addition to the minimum capital and reserve criteria, the review of an agent's financial statements involves the allocation of points for working capital and net tangible asset ratios. Additional points are allocated where a travel agent maintains a client account. The maximum points available are 20 and at least 10 points are required for renewal of membership. 134 In the calculation Jaja presented on 26 November 1998, the total points were minus one (-1). 135 Jaja was colour coded 'red/blue'. It did not meet the financial criteria. It had operated at a loss. It did not meet the minimum capital and reserves requirements or the minimum equity gateway. It attained -3 points for each of the working capital available to the overhead test and the net tangible assets to turnover ratio test. 136 The audited financial statements and the AFR form were considered by Mr Newman, a financial assessor employed by the Fund. Mr Norman had the responsibility of assessing Jaja's application for renewal against the criteria imposed by the Fund. That required a consideration of the financial analysis ratio. The Fund also had the separate responsibility, which in this case was also imposed upon Mr Newman, of determining whether the travel agent, in this case Jaja, met the financial criteria for continued membership of IATA. 137 On 1 December 1998 he wrote to the directors of Jaja advising them that the Fund's assessment of Jaja's financial statements and AFR form reflected a deficiency in capital of $55,000 and that Jaja had not met the minimum financial criteria determined by the trustees 'in that it has insufficient Net Capital & Reserves and Working Capital'. He wrote that the equity in the company would need to be increased by the amount of $55,000 either by providing the Fund with a bank guarantee, which was not secured over agency assets, or issuing shares fully paid for cash and retaining the proceeds of the issue. 138 Jaja was further advised that should the appropriate action not be taken by 8 January 1999 the matter would be referred to the trustees' meeting on 14 January 1999 for determination. 139 On the same day, Mr Newman wrote to IATA and advised that Jaja failed the IATA financial criteria for membership of that organisation. 140 Mr Newman sought an undertaking from Jaja that the proceeds of the $10,000 capital injection which was referred to in LMP's letter would be retained within the company to strengthen its working capital/equity position. 141 On 3 December 1998 LMP replied to Mr Newman's letter and enclosed a copy of a letter addressed to the Fund signed by the first and second respondents 'undertaking that the sum of $10,000 that has been injected into the agency, since the balance date of 30 June, 1998 will remain within the agency to strengthen its working capital/equity position'. 142 LMP also advised that it had a lengthy meeting with the directors and that the directors were confident that the deficiency reflected in the AFR form for the year ended 30 June 1998 was a 'one off occurrence'. 143 LMP reported that the directors also undertook to provide a further $30,000 capital from the unencumbered proceeds of the sale of their home. Moreover, the directors also undertook to provide the Fund with financial statements for the six months ending 31 December 1998 to be tabled for the February 1999 meeting of the trustees. 144 On 19 January 1999 Ms Kirby telephoned the Fund and advised that the financial statements to 31 December 1998 would be available in mid February. She also advised that she and a director of Jaja wished to attend the February Management Committee meeting of trustees. She further confirmed that the directors were selling their house for the purpose of injecting $30,000 of capital. 145 Mr Newman prepared an Assessing Services Report for submission to the Management Committee meeting on 28 January 1999. In due course, that was signed by both Mr Hammond and Mr Brattoni. 146 In that report it was recommended: '2. RECOMMENDATION: The Trustees resolve as a condition precedent of ongoing participation the participant is allowed 21 days to provide: ● Monthly management accounts commencing with accounts to 31/12/98. Review MCM February 1999, and ● Is allowed until 8 March 1999 to provide Audit and Directors' confirmation of cash capital injection of $30,000. Review MCM March 1999. The participant wishes the attached letter dated 3/12/98 to be tabled at this MCM, in which they state their intention to attend the February 1999 MCM. The Shareholder's house is being auctioned on 20/2/99 to provide the cash capital injection.' 147 On 29 January 1999 Mr Newman wrote to the directors of Jaja stating, inter alia: 'Dear Participant, Fund File No: 3 / 4925 NOTICE OF TRUSTEES' DETERMINATION This letter is to confirm that, at the Fund's Management Committee Meeting held on 28 January 1999 at which you were offered the opportunity to attend, but declined to do so, the Management Committee resolved that: As a condition precedent of ongoing membership, you must provide the Fund, with all the following documents and information by the stated date. A. By 17 February 1999: ● A set of monthly management accounts for the period ended 31 December 1998 The Management Committee will review your compliance or otherwise with the above at their next Management Committee Meeting to be held on 17 February 1999, and make the appropriate further determination. B. The participant be requested to attend the next meeting of the Fund's Management Committee to be held on 17 February 1999, if there is perceived to be a problem with the cash capital injection requirement of $30,000 by 8 March 1999.' 148 On 9 February 1999 LMP provided Jaja's financial statements for the period ended 31 December 1998 to the trustees. It also provided an AFR form which indicated a financial ratio analysis of seven points. The profit and loss account showed an operating profit for the six months of $3,430. The balance sheet showed an excess of assets over liabilities of $6,482. Current assets were shown as $56,495. They exceeded Jaja's current liabilities of $48,626. 149 The issued capital as at 31 December 1998 was the same as it had been at 30 June 1998. Thus, the balance sheet did not reflect an injection of $10,000 by way of capital between 30 June 1998 and 31 December 1998. 150 The documents were accompanied by a document headed 'Compilation Report to Jaja Pty Ltd' which said: 'On the basis of information provided by the client, we have compiled in accordance with APS9 "Statement of Compilation of Financial Reports" the special purpose financial report of the Client for the period ended 31 December, 1998 as set out in the accompanying Profit and Loss Statement, Balance Sheet and other attachments (as applicable).' 151 The reference to 'APS9' is a reference to an accounting standard. Professional Statement APS9 'Statement of Compilation of Financial Reports' was issued by the National Councils of the Institute of Chartered Accountants in Australia (ICAA) and the Australian Society of Certified Practising Accountants (CPA). The members of both the ICAA and the CPA are obliged by the Code of Professional Conduct to conform with that accounting standard. That Code relevantly provides: 'A.2 Compliance "Compliance with the Code is mandatory for all members…" B.6 Technical & Professional Standards "Members must carry out their professional work in accordance with the technical and professional standards relevant to that work." B.7 Competence and Due Care "Members must perform professional services with due care, competence and diligence. A member has a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent professional service based on up-to-date developments in practice, legislation and techniques."' 152 I find that LMP was obliged to comply with APS9 as it represented it had. 153 The relevant clauses of APS9 provide: '11 In undertaking a compilation engagement, a member must comply with the requirements of Miscellaneous Professional Statement APS 1 "Conformity with Accounting Standards and UIG Consensus Views" ("APS 1"). 12 When performing any professional service a member must comply with the Code of Professional Conduct. The basic principles governing an engagement by a member to compile a financial report are as follows: (a) integrity; (b) objectivity; (c) confidentiality; and (d) professional competence and due care. … 20 A member must obtain a general knowledge of the business and operations of the client in relation to which the compilation is being prepared and must be familiar with the accounting principles and practices of the industry in which the client operates and with the form and content of the financial report that is appropriate in the circumstances. … 24 A member must consider whether the compiled financial report appears to be appropriate in form and free from material misstatements. … 26 If a member becomes aware that information supplied by the client contains any material misstatement or is otherwise unsatisfactory, the member must request the client to provide such additional information as may be required. If the client refuses to provide such additional information as is necessary, the member must consider the effect that this may have on the financial report. The outcome of such consideration must be reflected by comment in the report prepared by the member, or in the member withdrawing from the engagement.' 154 Clause 11 refers to Miscellaneous Statement APS1 'Conformity with Accounting Standards and UIG Consensus Views'. 155 Paragraph 20 of APS1 provides: 'Members who are involved in, or are responsible for, the preparation, presentation or audit of a special purpose financial report of an entity are required, except where it is reasonable to expect that the special purpose financial report will be used solely for internal purposes, to take all reasonable steps within their power to ensure that the special purpose financial report, and any audit report or accountant's statement clearly states: (a) that it is a special purpose financial report; (b) the specific purpose for which the special purpose financial report has been prepared; and (c) the extent to which Accounting Standards and UIG Consensus Views have, or have not, been adopted in its preparation and presentation.' 156 I find that LMP was obliged in compiling Jaja's financial statements to comply with each of the provisions to which I have referred. 157 LMP also said: 'Under the terms of our engagement we have not audited the accounting records of the Client or the Accounts. Accordingly, we express no opinion on whether they present a true and fair view of the years trading and no warranty of accuracy or reliability is given. To the extent permitted by law, we do not accept liability for any loss or damage which any person (or entity), other than the Client, may suffer arising from any errors or omissions therein however caused. No person should rely on the special purpose financial report without having an audit or review conducted. The special purpose financial report was prepared solely for the benefit of the Client. We do not accept responsibility to any other person (or entity) for the contents of the special purpose financial report.' 158 On the same day, LMP also provided financial statements for the period ended 31 January 1999. That showed an operating profit to that point of time of $4,323. The shareholders' equity had risen to $7,430. Current assets of $78,411 exceeded current liabilities of $66,743. An AFR form showed a point score of 10. 159 Those documents were enclosed in a letter from LMP dated 9 February 1999. That letter was prepared by Ms Kirby but signed by Mr Lane. 160 In that letter, LMP wrote: 'On behalf of our client we are pleased to report that the positive action of the Directors for the above combined with the effect of strategies implemented (please refer to our correspondence dated 25 November, 1998) has resulted in a positive change of direction of the company with a turnaround in net profit for the seven month period until 31 January, 1999 of $27,728.' 161 LMP further wrote: 'The directors of the above are committed to doing all they possibly can to gradually rectify the deficiency as reflected in the 30 June, 1998 financial ratio analysis. It is a belief of our firm that, our clients, the directors of the above, are genuine people and given support and the opportunity to continue to trade they believe the company should be able to gradually meet all the financial ratio analysis criteria of both TCF and IATA.' 162 An Assessing Services Report was prepared for the meeting of 17 February 1999 by Mr Newman which was again signed by Mr Hammond and Mr Brattoni. 163 In the Assessing Services Report, the following recommendation was made: '2. RECOMMENDATION: The Trustees resolve as a condition precedent of ongoing participation the participant is to provide: A. On or before 10 March 1999: ● Audit verification and directors' written undertaking, of additional cash capital injection of $30,000, or ● QBE On Demand Guarantee for $30,000. B. Or, monthly management accounts commencing with accounts to 28 February 1999, due on 15 March 1999. Review MCM 11 March 1999.' 164 However, following upon a meeting with the first respondent and Ms Kirby the trustees resolved otherwise. The trustees reported and resolved that: 'Mr Yurisich, director and the accountant Ms J. Kirby attended the meeting with the Trustees. Following discussion of all matters, IT WAS RESOLVED that as a condition precedent of ongoing membership, the company must provide the Fund, with all the following documents by the stated dates: A. By 21st of the month following: ● Monthly management accounts and client account reconciliations commencing with the accounts to 28 February 1999, due on 21 March 1999. B. By 31 August 1999: ● Lodgement of the 1998/1999 Annual Financial Review and accompanying financial statements. The Management Committee will review compliance or otherwise with "A" above at their Management Committee Meeting to be held in April 1999, and make the appropriate further determination. The matters in "B" above to be reviewed on 9 September 1999.' 165 Mr Newman wrote to the first respondent on 18 February 1999 advising of the resolution of the Management Committee. In that letter he advised that the Management Committee would review Jaja's compliance or otherwise on 8 April 1999. He suggested that the net capital and reserves position would be improved by capitalising the shareholders' loans of $11,121. 166 Sometime in early 1999 Ms Gottschalk paid the first respondent $40,000 'with the intention that I obtain a half share in the business'. She said in her affidavit: '9. Sometime in early 1998 I paid $40,000 by personal cheque to Yurisich with the intention that I obtain a half share in the business. This was to entail a transfer of half the shareholding and eventually my appointment as a director. It was agreed with Yurisich that my appointment as a director would be postponed at his discretion. My concern was primarily to obtain some employment security over the long term. It is very difficult to obtain part time employment close to my residence which I required in order to attend to parental duties. I was not instructed such that I was able to develop my role in the business beyond sales matters. I had no reason to doubt Yurisich's management of the business which he had been operating since about 1980 to my knowledge.' 167 She did not receive a transfer of the shares nor was she appointed a director at that time. 168 She paid $40,000 because she was told by the first respondent that there was an existing bad debt. She said in her evidence: 'Did you have any concerns when Mr Yurisich told you about the bad debt?---We did. We knew there was an existing bad debt, namely being Aussie Golf, and we knew that it was approximately $47,000-odd and by injecting that $40,000 we believed that that debt would be, if not - yes, mostly cleared off and we could move ahead from that. That's the only bad debt that we were informed of. You now know there were a large number of bad debts in excess of that, don't you?---We now know, at that stage we did not. But you never had any detailed discussion with Mr Yurisich about the debit balances in the client ledger trial balance?---No, we were led to believe all the way along that the company was not making a great profit but it was holding its own and by me working there - have another travel agent working in the business so we could grow the business. Never at any stage did we get notification from either Mr Yurisich or Mr Martin Lane that - anything to the contrary.' 169 The applicants did not proceed against the first and second respondents and, as a result of course, neither of them gave evidence. As I have already noticed, the first respondent is a bankrupt and the second respondent is a apparently impecunious. 170 It is necessary to make a finding about their financial position in 1999 because they were then the directors and only shareholders of Jaja. 171 On 26 November 1998 LMP had represented that the shareholders had injected $10,000 into the company. On 3 December 1998 LMP wrote to Mr Newman enclosing a letter in which the first and second respondents undertook that the sum of $10,000, which had been injected into the agency, would remain within the agency to strengthen its working capital/equity position. No balance sheet prepared subsequent to either of those dates showed an injection of $10,000 by way of capital. 172 On 3 December 1998 LMP said that the directors would be providing a further $30,000 by way of capital after the sale of the proceeds of their house. Apparently, at the Management Committee meeting on 28 January 1999, Mr Newman was told that the first and second respondents' house was to be auctioned on 20 February 1999 to provide the cash capital injection of $30,000. No such injection ever took place. 173 Some time in early 1999 the fourth respondent, Ms Gottschalk paid the sum of $40,000 for 50 per cent of the shareholding of Jaja. That sum was used to be offset a bad debt. 174 I find that by early 1999 the shareholders had not injected $10,000 by way of capital into Jaja. I find that they had not used any monies (if any monies were received) from the proceeds of the sale of their house to inject any further capital into Jaja. I find that, by early 1999, neither the first nor the second respondent had the capacity to support Jaja. I find that the half interest was sold by Ms Gottschalk to meet the loss occasioned by a bad debt. 175 In March 1999, LMP submitted management accounts for the period 1 July 1998 to 28 February 1999. By letter dated 15 April 1999 LMP wrote to Mr Newman enclosing management accounts for the period 1 July 1998 to 31 March 1999, although in that letter they described the accounts for the period 1 July 1998 to 28 February 1999. 176 On 19 April 1999 Mr Newman wrote to Mr Lane reminding him that Jaja was also required to lodge a monthly statement showing the client trust account reconciliation between the cash at bank and the client ledger position certified by the directors as true and correct. 177 On 14 May 1999 Mr Lane wrote apologising for not having responded to that letter earlier, explaining that Ms Kirby had been off from work for nearly two months and that they were attempting to work towards the rebuild of the computerised client account. He wrote: 'Further to our telephone conversation May 11, 1999, we thankyou for your letter of 19 April, 1999 and apologise for the delay of this written response regarding the above. There are several reasons why this information hasn't been supplied to date. They are: 1] At the Management Committee meeting held 17 February 1999 which Mrs Jenny Kirby of our office and Mr Wayne Yurisich attended, Jenny raised and discussed the issues relating to the disparity between a manual client account reconciliation and the inhouse computerised client account reconciliation, and outlined the problems regarding the quality of information generated from the computerised client account reconciliation. At that time we had taken steps to ignore the information as produced from the inhouse accounting package, preferring instead to manually reconcile the client account cash at bank to the client ledger. This has been done on a monthly basis. 2] Jenny Kirby has been off work for nearly two months due to her hospitalisation and two operations. The operation and a spell from the office was unexpected. Her anticipated recovery period has been extended due to the need for the second operation. Nevertheless Jenny is making good progress and we anticipate her return to the office by the end of this May. Jenny as you would appreciate has been instrumental in the rebuilding of Jaja's computerised accounting records. Therefore she has been sorely missed and our timetable in relation to the rebuild of the inhouse computerised client account system has been set back by at least two months. We advise that without Jenny, we are attempting to work towards the rebuild of the computerised client account and to bring it into line with the manual client account reconciliation. It is our expectation that the review and rebuild Wayne's computerised client account reconciliation will be finalised in time for the production of the monthly draft June 1999 financial statements.' 178 On 19 May 1999 the first respondent, and on 20 May 1999 the second respondent, signed an Agreement setting out the terms and conditions of LMP's appointment to act as accountants (the Engagement Agreement). The Engagement Agreement announced that it was to apply to all future assignments in which LMP acted as accountants. 179 The purpose and scope of the engagement was stated to be: 'The purpose and scope of the engagement would be for the preparation and lodgement of annual income tax returns, and the preparation of any annual and/or interim financial statements relevant to your business structure as of this date, including preparation of statutory minutes and Australian Securities and Investments Commission annual return of the company. On the basis of the information you provide, we will compile, financial reports (where applicable), in accordance with APS 9 "Statement on Compilation of Financial Reports". Our procedures use accounting expertise to collect, classify and summarise the financial information, which you provide, into a financial report.' 180 The document continued: 'It is our understanding that no audit or review will be performed regarding your financial statements and accordingly no assurance will be expressed. We will process the financial information as presented to us without any review of your primary source documents being undertaken on the specific understanding that you have the necessary supporting documentation to satisfy the Australian Taxation Office, or other relevant authority, as required. The procedure undertaken by our firm will not include verification or validation procedures. Accordingly, we will not express an opinion as to the truth and fairness of any financial statements and our usual form of compilation report will accompany them. The special purpose financial report will be prepared (exclusively for your benefit and for the purpose specified to us by you). We will not accept responsibility to any other person for the contents of the financial report. No person should rely on the financial report without having an audit or review conducted.' 181 Having regard to the terms of the Engagement Agreement, there cannot be any doubt, as I have already found, that LMP was obliged to comply with APS9. 182 On 21 May 1999 LMP submitted management accounts to the Fund for the period 1 July 1998 to 30 April 1999. On 21 June 1999 LMP wrote to Mr Newman enclosing management accounts for the period 1 July 1998 to 31 May 1999. 183 LMP wrote: 'On behalf of our client we report that the positive action of the directors for the above combined with the effect of strategies implemented (please refer to our correspondence dated 25 November 1998) has resulted in a positive change of direction of the company with a turnaround in net profit for the 11 month period ended 31 May 1999 of $30,631.' 184 On 29 July 1999 Mr Lane wrote to Mr Newman asking that Jaja be excused from providing management accounts for the period to 30 June 1999. Instead, it offered to lodge the 1998/1999 AFR form together with the audited financial accounts for the year ended 30 June 1999 by 31 August 1999. 185 Ms Kirby compiled Jaja's financial statements for the period to 30 June 1999. She provided those financial statements to Mr Young, together with a number of source documents to enable Mr Young to carry out his audit. 186 Among the documents provided was the client account debtors ledger for corporate clients for June 1999 which showed a total of $57,746.29 owing. 187 Mr Young conducted the audit in accordance with an audit checklist which included as part of the audit plan: 'The main purpose of the audit is to express an opinion on the financial statements and to certify TCF/IATA Annual Review Form. This form must be in accordance with information extracted from the financial statements and its purpose is to determine whether the travel agent obtained sufficient points based on various financial ratios. The main ingredients of the ratios are turnover, net tangible assets, working capital and operation of a client account (trust monies).' 188 He prepared a draft audit opinion which he provided to LMP. 189 The draft audit opinion was in the same form as the final audit opinion. It contained a qualification. Therefore his audit opinion was qualified in the following terms: 'Qualification a) Current liabilities in the attached balance sheet comprise Trade Creditors $16,090 and Trust Creditors $14,098. The Trust Creditors amount of $14,098 is a net amount after offsetting client debtors of $57,746. As a result current assets and current liabilities are both understated by $57,746. The client debtors total of $57,746 includes $47,217 owing by one debtor. At the date of this report the ageing of that debt is as follows: over 2 months $12,988 over 6 months 7,318 over 12 months 26,911 _______ $47,217 ===== We are unable to be satisfied that this material debt is collectable. No provision for doubtful debts has been made. b) To the extent that last year's financial report was subject to an audit qualification on specified balance sheet items, we have had to accept that closing balance sheet amounts at 30th June 1998 have been used as opening balance sheet amounts at 1st July 1998 for those items. Qualified Audit Opinion In our opinion, except for the matters referred to in the qualification paragraph, the financial report of Jaja Pty Ltd for the year ended 30th June 1999 is in accordance with: a) The Corporation Law, including: (i) giving a true and fair view of the company's financial position as at 30th June 1999 and of its performance for the year ended on that date, and (ii) complying with Accounting Standards and Corporations Regulations; and b) other mandatory professional reporting requirements.' 190 The audit opinion did not address the effect upon Jaja's financial statements of the understatement of the current assets and current liabilities of $57,746. The audit opinion drew attention to the debt of $47,217. It referred to the age of the debts. The opinion did not address whether, in the auditor's opinion, any provision should have been made for bad or doubtful debts. Nor, of course, in view of that answer did the opinion address the effect upon Jaja's financial statements if any provision of that kind were made. The audit opinion was, like the audit opinion for the previous financial year, an 'except for' opinion. 191 At the same time as that draft audit opinion was provided to LMP, LMP was also advised that the financial statements should be adjusted as indicated in a handwritten document. I think it might be inferred that if the adjustments had been made the audit opinion would not have been qualified, although if that were the case, in my opinion, the audit opinion would not still have been in accordance with audit standards. The handwritten document was in the following terms: 'JAJA Y/E 30/6/99 ADJUST FINANCIALS AS FOLLOWS (1) ↑ TRUST CREDITORS 57 746 (2) ↑ TRADE DEBTORS 57 746 ↓ TRADE DEBTORS (47 217) VERY DOUBTFUL DEBTS (assumes remaining $10 529 was collectable) (3) ↓ PROFIT 47 217 RE ABOVE ABOVE ADJUSTMENTS AS INDICATED PER QUALIFIED AUDIT OPINION.' 192 Of course, the financial statements are not those of the auditor but are the directors. The auditor cannot insist upon the directors drawing their financial statements in accordance with his/her opinion. All an auditor can do is suggest that the financial statements needs to be redrawn in a particular way to conform with the opinion which he has formed. 193 In this case, on 25 August 1999, Ms Kirby received the copy of the draft qualified audit report enclosed with a facsimile written by Mr Young to Ms Kirby. In that facsimile he wrote: '(1) Draft audit report for consideration. I feel I need to spell out all that detail on the basis that TCF & IATA place heavy reliance on audit reports. (2) Could you please fax me a copy of 30/6/99 bank rec and final bank statement for General A/C. Could Wayne contact NAB and ask them to promptly respond to our audit letter which is in tonights [sic] mail.' 194 It is plain that Mr Young was well aware that the Fund and IATA would rely upon Jaja's financial statements and his audit opinion in determining Jaja's eligibility for participation in the Fund and as a member of IATA. 195 I find that Mr Young knew that the Fund and IATA would rely upon his audit opinion for that purpose. 196 His facsimile to Ms Lane brought to LMP's attention the fact that the Fund and IATA would rely upon the audited financial statements and the other financial material forwarded to the Fund in support of Jaja's continuing eligibility as a participant in the Fund. 197 In my opinion, LMP did not need to be advised of that fact. LMP was always aware that the Fund relied upon representations made by Jaja and by LMP in determining whether Jaja remained eligible to participate in the Fund. I find that LMP knew that the Fund would rely upon Jaja's financial statements in considering whether Jaja was eligible to remain a participant in the Fund. 198 Ms Kirby brought Mr Young's draft audit report to the attention of Mr Lane. Subsequently, she received a second document from Mr Young in which he stated that additional notes needed to be made to the accounts. Ms Kirby said that she also brought that to the attention of Mr Lane. 199 Mr Lane said that he had a telephone conversation with Mr Young who told him that the Fund relied heavily on audit reports. 200 It was Mr Lane's evidence that he spoke to the first respondent who told him that the debts, which Mr Young had formed the opinion were uncollectible, were in his opinion collectible. In those circumstances, the directors were not prepared to modify the accounts to provide for any amount for bad and doubtful debts. 201 I think little or no effort was made by the fourth respondent to convince the directors that they ought to make a provision of the kind referred to in the draft audit report. 202 Indeed, if such a provision had been made then the company would have had to report a loss in the order of $40,000. 203 Although Mr Yurisich did not give evidence, I think it may be inferred that he must have thought that if the company reported a loss of that magnitude it would be unlikely that the trustees would continue to allow Jaja to be a participant in the Fund. If that were to occur, then almost certainly Jaja would have to cease carrying on the business as a travel agent. 204 No effort was made by Mr Lane or Ms Kirby to separately assess the collectability of the debts referred to in the draft audit opinion. 205 On 27 August 1999 LMP submitted the company's audited financial statements and AFR form to the Fund. 206 LMP provided a covering letter which included the following: 'We are pleased to report that the commitment of the company's Directors to rectify the problems of the past is beginning to effect a positive result as reflected in the companies [sic] financial statements with a significant turnaround of $28,405 from the loss of 1998 to the profit of 1999. In addition, please note that the majority of the problems relating to the company's "in house" computer system have been addressed. Consequently, the Directors are now in a position to more accurately produce reports than they were in the past. In particular please note, that the in house computer system now produces accurate bank reconciliations for both the general and client accounts. Given the above improvements combined with the directors having complied with all requirements as imposed by yourselves on 17 February, 1999; they respectfully request that as of this current financial year, you allow them to submit to you six monthly unaudited management accounts together with client travel account bank reconciliations. The directors acknowledge that there is a lot more that can be done to improve the financial ratio analysis of TCF, and given the continued support of yourselves they believe the company should be able to gradually meet all the financial ratio analysis criteria of both yourselves and IATA without the long term use of QBE's Trade Indemnity guarantee program. It is the belief of our firm that our clients have made significant changes to their work practices and are determined to succeed in complying with all requirements of a licensed travel agent. We also suggest that they be given the opportunity to do so without the added cost impost of submitting monthly management accounts.' 207 LMP made no reference to the qualified audit opinion attached to Jaja's financial statements. 208 The documents submitted by LMP also included a 'Statement of Auditor' signed by Mr Young and dated 27 August 1999 in the following terms: 'Jaja Pty Ltd I report and acknowledge that the information in this Annual Financial Review: -

1. Forms the basis, together with the audited financial statements, on which the participant's continued eligibility for participation in the Travel Compensation Fund is determined; on which the participants continued eligibility as an accredited IATA agent is determined; (Cross out if not reporting to IATA) 2. Has been extracted from the participant's audited financial statements and underlying accounting records on a basis consistent with that of the prior year. 3. In my opinion, discloses all material contingent liabilities of the participant; 4. In my opinion, reports all material investments at values that are not greater their realisable values; 5. That the person signing this report is a Registered Company Auditor. 6. Strike through if not correct That the participant has properly maintained a fully funded Client Travel or Trust Account in accordance with the criteria CLIENT TRAVEL OR TRUST ACCOUNT at the Client Travel Account worksheet of this computer file. 7. Strike through if not correct That any loan from related parties deducted from liabilities in calculating the agency's Net Tangible Assets on the Summary Balance Sheet (Line 107) existed for a substantially similar amount throughout the whole audit period. 8. Strike through if not required That any Capital subscription since balance date included at Line 149 and, if applicable, Line 182, has been made by capitalisation of loans OR for cash for which the related monies have been deposited to the participant's bank account and not subsequently withdrawn and loaned to a related party.' 209 Also enclosed was a Statement by Directors signed by the Directors dated 4 August 1999 and in the following terms: 'STATEMENT BY DIRECTOR(S) JAJA PTY LTD ACN 057 681 740 The directors have determined that the company is not a reporting entity. The directors have determined that this special purpose financial report should be prepared in accordance with the accounting policies outlined in Note 1 to the accounts. In the opinion of the Director(s) of the company: [a] the balance sheet gives a true and fair view of the state of affairs of the company as at 30 June 1999 and the profit and loss account gives a true and fair view of the result for the year/period ended on that date. [b] at the date of this statement there are reasonable grounds to believe that the company will be able to pay its debts as and when they fall due. The accompanying accounts have been made out in accordance with statements of Accounting Concepts and Applicable Accounting Standards. The company has, in respect of the financial year: [i] kept such accounting records as to correctly record and explain the transactions and financial position of the company; [ii] kept its accounting records in such a manner as would enable true and fair accounts of the company to be prepared; [iii] kept its accounting records in such a manner as would enable the accounts of the company to be conveniently and properly audited in accordance with the Corporations Law. The accompanying accounts have been properly prepared by a competent person.' 210 Included in the documents provided by LMP to the trustees was a compilation report in the same terms as the compilation report previously referred to. 211 As I have already indicated, the qualified audit opinion which, of course, was also enclosed, was in the same terms as the draft audit opinion which had previously been provided to Ms Kirby and to Mr Lane. 212 On the same day, Risk Financing Solutions, agents for QBE, confirmed in writing in a memorandum to Mr Newman that Jaja had obtained a $60,000 guarantee at a cost of $1,320 which would be supplied direct to the Fund as soon as possible. The Fund received the QBE guarantee on 1 September 2000. 213 The financial ratio analysis, which assumed the existence of the guarantee and the correctness of the financial statements without qualification, scored 16 out of 20. The AFR form which was submitted to the Fund did not make any provision for bad and doubtful debts. It simply ignored the qualification in the audit opinion. The AFR form also did not address the understatement of current assets and current liabilities which was also part of the audit qualification. 214 In the previous financial year Jaja had been initially coded by Mr Hammond with a red or blue marker because the 1999 AFR form indicated that Jaja had operated at a loss for the year, did not meet the minimum capital reserves requirement and had failed the minimum points score. 215 However, in view of the contents of the documents sent and received on 27 August 1999, Mr Hammond coded the renewal material green. They were then forwarded to Mr Newman for assessment. 216 Mr Newman noticed the audit qualification. In particular, he noticed the auditor's opinion that the auditor was unable to be satisfied that a material debt was collectable. Mr Newman recalculated the financial ratio analysis assuming a provision for bad and doubtful debts of $26,911, being those debts which were outstanding in excess of 12 months. 217 Upon that assumption, and upon the assumption that no allowance needed to be made for any further provision in the next year, he concluded that the points score for the financial ratio analysis of 13 was appropriate. A points score of 13 was sufficient for Jaja to remain a participant in the Fund without conditions. 218 In proceeding in that way, Mr Newman presumed that no provision needed to be made for bad and doubtful debts for the next year and that the sum of $26,911 could be treated as a 'one off'. 219 On 30 August 1999 Mr Newman wrote to the directors of Jaja advising them that the company was deficient in meeting the IATA financial criteria by $4,421 in that it had insufficient capital and reserves. On the same day he wrote to IATA advising it of Jaja's failure to meet IATA's financial criteria. He recommended, however, that IATA approve renewal because the shortfall in equity and reserves was below $5,000. 220 On 2 September 1999 Mr Newman prepared an Assessing Services Report for signature by Mr Hammond and Mr Brattoni for submission to the Management Committee meeting of 16 September 1999. He also prepared a 'Deficiency Calculation Workpaper' which showed a surplus and a points score of 16/20. In particular, in that Deficiency Calculation Workpaper, no regard was had to bad or doubtful debts. Mr Newman's evidence was that he did not bring qualified audits to the attention of Mr Hammond or any other person senior in authority to himself if he was able to work out the effect of the qualification for himself. 221 The Assessing Services Report was in the following terms: '1. AGENT DETAILS: Fund File No : 3 / 4925 Legal Entity Name : Jaja Pty Ltd Trading Name : Harvey World Travel Croydon QBE Guarantee Held : $60,000 Profit for year 30/6/99 : $5,300 2. RECOMMENDATION: The Trustees resolve to rescind the previous resolution requiring the Participant to provide monthly management accounts to the Fund, and to require lodgement of management accounts for the period ending 31 December 1999, by 20 January 2000.

GROSS TICKET SALES 1,783.3

NET TICKET COMMISSIONS 108.7 OTHER INCOME 3.8 TOTAL INCOME 112.5 OVERHEAD EXPENSE (107.2) TRADING PROFIT (LOSS) 5.3

CURRENT TANGIBLE ASSETS 32.5 INTANGIBLE ASSETS 0.0 LIABILITIES (30.2) NON CURRENT TANGIBLE ASSETS 16.2 INTANGIBLE ASSETS 4.5 LIABILITIES (14.9) EQUITY 8.1

TEST : CAP/RES WK CAP NTA % $,000 $,000 $,000

EQUITY/WK CAP/EQUITY 8.1 2.3 8.1 ADD BANK GUARANTEES 60.0 60.0 60.0 LESS INTANGIBLES (4.5) 0.0 (4.5) RELATED PARTY A/CS 0.0 0.0 0.0 ENCUMBERED ASSETS 0.0 0.0 0.0 REVAL'N RESERVES 0.0 0.0 0.0 LOSS PROVISION 0.0 0.0 0.0 OTHER ADJUSTMENT 0.0 0.0 0.0

REVISED BALANCES 63.6 62.3 63.6

FOR: 2 POINTS 0.1 0.1 5 POINTS 9.8 29.2 PASS/8 POINTS 35.0 19.7 58.4

SURPLUS (DEFICIENCY) 28.6 52.5 34.4

6.3 3.3 8 8 Complies and $29.2K - reducing 16/20

223 The Deficiency Calculation Workpaper ignores any provision at all for bad and doubtful debts. 224 The Assessing Services Report and the Deficiency Calculation Workpaper are important for what they do not contain. First, the trustees were not advised that the financial statements were subject to a qualified audit opinion. Secondly, they were not advised that the auditor was unable to be satisfied that $47,217 debts were collectible. Thirdly, the trustees were not advised that no provision had been made for doubtful debts. Fourthly, no advice was given that the trust creditors and client debtors were both understated by $57,746. Mr Newman did not advise that he had recalculated the financial analysis ratio by assuming that a provision ought to be made for bad and doubtful debts of $26,911. He did not advise the trustees that if that assumption were made that the appropriate score was 13/20. 225 Not only were the trustees not provided with adequate information, nor were the persons who signed the recommendation, Messrs Hammond and Brattoni, advised. 226 There can be no doubt that the information was relevant, both for those who were making the recommendation to the trustees and to the trustees who were considering the recommendation. 227 On 16 September 1999 the trustees resolved: '● To rescind the previous resolution requiring the company to provide monthly management accounts to the Fund, and ● To require the company to lodge with the Fund detailed management accounts for the period ending 31 December 1999, not audited but signed by the directors as being correct, on or before 20 January 2000. The Trustees will review compliance or otherwise with the above at the Management Committee Meeting to be held in February 2000, at a date to be determined, and make the appropriate further determination.' 228 On 20 January 2000 LMP provided to the Fund the company's management accounts for the period ended 31 December 1999. In those management accounts the shareholders' equity is disclosed as $9,515. The current assets exceed the current liabilities by in the order of $7,500. 229 On 23 February 2000 the first and third respondents wrote to the Chief Executive Officer of the Fund in the following terms: 'As the two owners of the above business [referring to Jaja] we advise that due to deficiencies in our accounts we have current liabilities to the client files totalling $151,387, that we are unable to meet. As such, we have ceased trading forthwith and wish to surrender our licence.' 230 On 24 February 2000 they wrote again to Mr Brattoni: 'Further to our letter of 23 February 2000 further investigation of our clients' accounts indicates that current liabilities to the client files are approximately $198,600 that we are unable to meet.' 231 In due course, as already indicated, claims totalling $266,135 were made on the Fund and paid by the Fund. Of that sum, $66,000 was recovered from QBE pursuant to its guarantee. 232 No attempt has been made by anyone and, in particular, the experts, to do any assessment of the company's financial position as at 31 August 1999. In particular, no attempt has been made to identify those of Jaja clients who had paid for travel services but who had not at that stage had travel services delivered to them as at that date. 233 Clearly, as will be disclosed later when addressing the true financial position of the company as at 30 June 1999, there must have been a considerable number of clients who as at 31 August 1999 had paid for travel services which had not been provided. 234 The reason that issue needs to be addressed is that if the trustees had been advised of the matters contained in the qualified audit opinion and had determined at that time not to allow Jaja to continue to participate in the Fund, then because its liabilities exceeded its assets by at least in the sum of $40,000, in my opinion, Jaja would have ceased to trade immediately. In those circumstances, the Fund would have been liable to those of Jaja clients who had paid for travel services prior to the date upon which it ceased to be a participant in the Fund and who had not had travel services provided to it as at that date. 235 No attempt has been made by the applicants to establish what liability they would have had in the event that they had resolved not to allow Jaja to continue to participate in the Fund at that point of time. 236 The fourth and fifth respondents asserted that the Fund's failure to address that issue is fatal to the Fund's claim because it cannot therefore establish what damages it suffered. I will return to that matter. 237 As I have already mentioned, the applicants relied upon the expert evidence of Mr Humphreys. Mr Humphreys qualified as a chartered accountant in 1968. He became an audit partner in an antecedent firm of Deloitte Touche Tohmatsu in 1976. 238 He has been responsible for the audit of major public companies and subsidiaries of multi-national corporations and for special assignments related to management consulting services, valuations, due diligence, investigations and negotiations. 239 He was admitted to the Roll of the Supreme Court of New South Wales in July 1992, having completed the Barrister's Admission Board Examinations in that year. 240 Thereafter, he concentrated on providing forensic accounting services in relation to commercial disputes, professional negligence claims, economic loss calculations, investigations and valuations. 241 He retired from Deloitte Touche Tohmatsu in June 1994 and established his own business. On 1 July 2000 he joined White Iliffe Forensic Pty Ltd as a director. That company changed its name to Moore Stephens WI Forensic Pty Ltd on 1 July 2002. 242 He was asked by the applicants to provide an opinion as to whether the financial statements for 1999 and the AFR form lodged with the Fund provide a true and fair view of the company's financial position as at 30 June 1999. 243 He was also asked to advise on the role and responsibility of Jaja's accountants, LMP and the conduct by Mr Young of the audit of Jaja's financial statements for the financial year ending 30 June 1999. He provided a report dated 31 July 2003 in response to those matters. 244 Because there is no dispute about the way in which Mr Humphreys reasoned, it is not necessary to go into his reasoning in any detail. Mr Humphreys' evidence was that Jaja's 1999 financial statements did not give a true and fair view of the financial position and performance of the company. In particular, he said debit balances were misstated and no 'provision had been made and should have been made for bad and doubtful details'. Mr Knott agreed with Mr Humphreys' opinion or at least so much of those opinions as are necessary to decide the case adversely to Mr Young. There may be a dispute between Mr Humphreys and Mr Knott about the amount of the provision necessary for bad and doubtful debts but not as to any matter of principle. 245 Jaja's financial statements have been prepared on the basis that the company is a going concern. Jaja's balance sheet as at 30 June 1999 which had been compiled by LMP and audited by Mr Young disclosed: 'JAJA PTY LTD BALANCE SHEET AS AT 30TH JUNE 1999 1998 $ NOTE $ $ CURRENT ASSETS 46180 Cash 30511 736 Inventories 5 1943

46916 TOTAL CURRENT ASSETS 32454 NON-CURRENT ASSETS 5262 Receivables 4 - 40 Investments 6 40 13973 Property, Plant and Equipment 7 16205 4528 Intangible Assets 8 4528

70719 TOTAL ASSETS 53227 CURRENT LIABILITIES 54555 Creditors & Borrowings 9 30188 NON-CURRENT LIABILITIES 13422 Creditors & Borrowings 9 14932

2742 NET ASSETS 8107 SHAREHOLDERS' EQUITY 255000 Share Capital 10 25000 22258 Accumulated Losses 16893

2742 TOTAL SHAREHOLDERS' EQUITY 8107' 246 Note 1 to the financial statements included: 'These special financial statements are a special purpose financial report prepared in order to satisfy the accounts preparation requirements of the Corporations Law. … The statements have been prepared in accordance with the requirements of the Corporations law, and …' 247 The Note then listed a number of accounting standards said to have been complied with. 248 The Corporations Law required that a corporation's financial statements give a true and fair view of the financial position and performance of the company. 249 The profit and loss statement disclosed an operating profit of $5,365: 'JAJA PTY LTD PROFIT AND LOSS STATEMENT FOR THE YEAR ENDED 30TH JUNE 1999 1998 $ NOTE $ $ Operating Profit (23040) Before Income Tax 2 5365

• Income Tax Expense - OPERATING PROFIT AND (23040) EXTRAORDINARY ITEMS 5365 (8282) Accumulated Losses at July 1 22258 7500 Dividends -

22258 ACCUMULATED LOSSES 16893 250 Note 2 to the financial statements disclose the operating profit before income tax. It disclosed: '1998 $ $ $ NOTE 2 - OPERATING PROFIT BEFORE INCOME TAX HAS BEEN DETERMINED AFTER CHARGING AS EXPENSES 1225 Auditors Remuneration - Fees 1525 4117 Depreciation Non Current Assets 1718 93 Interest Other Persons 27 NOTE 3 - OPERATING REVENUE Other Operating Revenue 73032 Commissions 59007 23146 Rebates Received 52805 48 Other Income - 1875 Interest Received 888

98101 TOTAL OPERATING REVENUE 112700' 251 Notes 4, 8, 9 and 10 of the financial statements provided: 'NOTE 4 - RECEIVABLES Non-Current Shareholders Loans 5263 W & C Yurisich (Pre 4/12/97) NOTE 8 - INTANGIBLE ASSESTS [sic] 946 Formation expenses 946 3582 Patents, trademarks & licences 3582 4528 4528 Valued at cost. The directors have decided there is No need to Reduce the carrying value of these assets. NOTE 9 - CREDITORS & BORROWINGS Current 10346 Trade Creditors 16090 44209 Trust Creditors 14098 54555 30188 Deferred

• Shareholders loan account 14932

NOTE 10 - SHARE CAPITAL Authorised Capital Authorised Capital 1000000 1,000,000 Ord Shares of $1 ea 1000000 Issued Capital 25000 Issued Capital 25000' 252 Before addressing Mr Humphreys' opinion, the following matters can be noted from Jaja's financial statements, if they did in fact reflect a true and fair view of Jaja's financial position and performance. 253 From Note 10 and the balance sheet it can be seen that there was no injection of capital after 30 June 1998. This contradicts LMP's letter of 26 November 1998 and the first and second respondents' letter of 3 December 1998 which LMP sent to the Fund on that day. Note 9 is inconsistent with the balance sheet. Note 9 would suggest shareholders lent Jaja $14,932 in the financial year ended 30 June 1999. But I think that note is wrong. I think the balance sheet is correct when it shows an existing debt of $13,422 as at 30 June 1998. Whichever is correct does not matter. The shareholders' loan account is not capital even if called 'deferred'. Jaja made a net operating profit of $5,365 compared with an operating loss of $23,040 in the previous financial year. In other words, its operating position had improved by $28,405. Jaja was balance sheet solvent. Its assets exceeded its liabilities by $8,107. 254 Its assets exceeded its liabilities even if its intangible assets were ignored. Its current assets exceeded its current liabilities. Therefore, it might be thought that it could pay its debts as and when they fell due. The balance sheet discloses no receivables. In the previous year the shareholders were indebted to Jaja in the sum of $5,262 (or $5,263 if Note 4 is correct) but the balance sheet represents that had been repaid. The absence of any debts might be thought to be surprising. 255 Note 9 shows that the current liabilities were made up of two creditors, trade creditors ($16,090) and trust creditors ($14,098). The trust creditors had apparently been significantly reduced in the year. Trust creditors were those persons who had paid for travel but not yet been provided for the travel service. No provision was made for bad and doubtful debts in the financial yar ended 30 June 1999 or indeed in the previous year. 256 Mr Humphreys was of the opinion that the trust creditors were substantially understated. He said the actual client ledger credit balances showed trust creditors as: 'Debit balances identified as debtors control account $57,746 Other debit balances included in account 6300 $110,235 Balance sheet figure $14,098 Credit balances outstanding at 30 June 1999 $182,079 ' 257 By the same token, the balance sheet understated trade creditors which should have included: 'Debtors control account $57,746 Other debit balances included in account 6300 $110,235 Debt balances outstanding at 30 June 1999 $167,981 ' 258 Mr Humphreys therefore concluded that Jaja's liabilities to trust creditors totalled $182,079, not $14,098 as disclosed in the balance sheet. The trust bank account was only in credit to the extent of $18,397. The deficiency meant that clients' funds, which had been paid for travel services to be provided, had been used for other purposes to the extent of more than $163,000. What in fact the author of the financial statements had done was to net the trade creditors off against the trust creditors which gave rise to the liability of $14,098 disclosed in Note 9. This, both Mr Humphreys and Mr Knott said, was quite inappropriate. Mr Knott said it was only appropriate to net off where the creditors and the debtors are the same. 259 The likelihood that outstanding debts will be paid by clients diminishes over time. An assessment has to be made of aged debts. In a travel agent's business, when a debit balance remains after the date on which the client has been provided the travel services, an assessment must be made as to whether the debt is collectable. 260 Prudent accounting requires an assessment of all aged debts in order to determine whether or not a provision ought to be made for bad and doubtful debts. 261 In Mr Humphreys' opinion a provision should have been made in the financial statements for bad and doubtful debts as follows: 'Debit balances outstanding from prior to January 1999 (see paragraph 13 above) $ 56,542 Debit balances representing reversal of prior receipts after January 1999 (see paragraph 14 above) $ 9,629 Debtors balances representing reversal of prior receipts (see paragraph 15 above) $ 24,229 Amounts apparently overspent after January 1999 (see paragraph 14 above) $8,263 Less apparently unrecorded commissions (see paragraph 15 above) $1,662 $ 6,601 Amounts prior to January 1999 for which no client receipts are recorded (see paragraph 17 above) $ 30,568 Total provision for bad and doubtful debts $127,569 ' 262 Moreover, the majority of the debit balances in the client ledger account, disclosed as trade debtors, were of such long-standing that collection was extremely doubtful. A provision for bad and doubtful debts of $127,569 needed to be made. 263 Jaja was insolvent on the basis that it had a deficiency of shareholders' equity of $118,387. It was not in a position to pay its debts as and when they fell due. It had a liability of $182,079 to pay for travel services for which clients had already paid which it could not fulfil from the funds available to it. 264 If proper disclosure had been made in the financial statement it would have been necessary to increase Jaja's share capital or to cease trading by reason of the company's insolvency. 265 I have already dealt with Mr Knott's first report. Mr Knott's third report was given in March 2005. Mr Knott was provided with a copy of Mr Humphreys' report of 31 July 2003. That report more precisely identified the issues in the trial. 266 In his second report he said that providing that the records of the company were reliable it was arguable that a provision for doubtful debts of $84,299 should have been made. 267 He addressed the question of the audit qualification and addressed the question of whether or not it should have been an 'except for' or 'adverse' opinion. He did not answer the question but said that the qualification should have included more detail concerning the result that the debts were not collectable. 268 He said, in his oral evidence, that the audit qualification expressed by Mr Young was ambiguous and should not have been expressed in the terms it was. He said that he agreed that if the auditor had formed the opinion that there ought to be a provision for bad and doubtful debts of $47,000, and as a result there would have been a deficiency of assets over liabilities in the order of $39,000, the auditor ought to have applied his mind to whether or not the company should have been assessed as a going concern. 269 He was directed to the provision which he said in his second report should have been made of in the order of $84,299. He said that the auditor should have included in the audit qualification that management would not agree that it was necessary to make a provision for bad and doubtful debts of that amount. The auditor should also have indicated the consequences of a provision of $84,299 which would have been that shareholders' equity would have been negative to the extent of $76,000. The auditor then should have included in his audit opinion that the company was not a going concern. Finally, the auditor then should have assessed the assets and liabilities of the company on the basis that the company should be wound up. 270 Mr Humphreys prepared a revised balance sheet which was 'Attachment 4' to his first affidavit. He later made some minor changes to reflect arithmetic error. That balance sheet reflects in accounting terms his evidence. 271 I set out that balance sheet. It was referred to by other witnesses: 'Amended Balance Sheet 20 June 1999 As Audited at Debit Adjustments Amended 30-Jun-99 Credit Balance Sheet Current Assets Cash at Bank and in Hand 30,511 30,511 Inventories 1,943 1,943 Trade Debtors - 167,981 167,981 Provision for doubtful debts - 127,569 (127,569) 32,454 72,866

Non-Current Assets Investments 40 40 Property Plant and Equipment 16,205 16,205 Intangible Assets 4,528 4,528 20,773 20,773

Total Assets 53,227 93,639

Current Liabilities Trade Creditors 16,090 16,090 Trust Creditors 14,098 167,981 182,079 30,188 198,169

Non-Current Liabilities Shareholders Loan Account 14,932 14,932

Total Liabilities 45,120 213,101

NET ASSETS 8,107 (119,462)

Shareholders' Equity Share Capital 25,000 25,000 Accumulated Losses (16,893) 127,569 (144,462) NET EQUITY 8,107 (119,462)'

272 I accept Mr Humphreys' opinions which are largely supported by Mr Knott. In accepting Mr Humphreys' evidence, it followed that as at 30 June 1999 Jaja had a liability to its clients of in the order of $163,000 for travel services not rendered. It followed that if Jaja had been wound up, as it should have been as at 30 June 1999, the Fund would have been liable to pay at least the sum of $163,000 in claims by the then clients of Jaja who had paid for travel services not rendered. Those clients, like the clients who in due course actually claimed, were entitled to be reimbursed by the Fund according to the Deed. 273 That is a most significant matter because, on the applicants' own case, their damages are nothing like they claim them to be. I will return to this later but the applicants' case is simply that they paid out the sum to Jaja's existing clients as at the time that Jaja went into liquidation. The applicants' case does not recognise that if the fourth and fifth respondents had done what the applicants say they ought to have done, the applicants would have paid at least $163,000 to the existing Jaja clients. In any event, I shall address that matter in detail later. 274 I have already found that, by early 1999, neither the first respondent nor the second respondent had the financial capacity to support Jaja either by way of capital injection or in any other way. 275 I find that their financial position did not improve at any time between early 1999 and 27 August 1999. At that date, they were not in a position to support Jaja so as to allow Jaja to continue to trade. 276 I make the following findings: (1) Jaja's trust creditors were understated by $182,079 in Jaja's 1999 financial statement. (2) Trade debtors should have been disclosed at $167,981 in Jaja's 1999 financial statement. (3) A provision of $127,569 should have been made for bad and doubtful debts as at 30 June 1999. (4) As at 30 June 1999 the company's liabilities exceeded its assets by $118,387. (5) The balance sheet should have been drawn in accordance with those findings so as to show in the current assets trade debtors of $167,981 and a provision for doubtful debts of $127,579; and in the current liabilities trust creditors of $182,079. (6) As at 30 June 1999 the company's current liabilities exceeded the company's current assets by $125,313. (7) As at 30 June 1999 Jaja had used $163,000 of clients' funds for purposes other than travel services. (8) Jaja was insolvent as at 30 June 1999. It could not meet its debts as and when they fell due. (9) Jaja could not have continued to trade unless it increased its share capital. (10) Jaja's shareholders were not in a position to contribute further funds. 277 Mr Humphreys offered opinions on the directors' duties in circumstances such as those which he said existed as at 30 June 1999. 278 He referred to the directors' statement which accompanied the 2000 renewal material to the Fund and, in particular, the statement by directors attached to the financial statements for the year ended 30 June 1999 to which I have referred at [209]. 279 He said that it was his opinion that the balance sheet did not give a true and fair view of the state of affairs of the company as at 30 June 1999, nor did the profit and loss account give a true and fair view of the result of the year/period on that date. It was his opinion that there were not reasonable grounds to believe that the company would be able to pay its debts as and when they fell due. Further, he said that the accounts had not been made out in accordance with the statements of accounting concepts and applicable accounting standards. 280 There can be no doubt that Mr Humphreys is correct to say that the financial statements do not give a true and fair view of the statement of affairs of the company as at 30 June 1999. There can also be no doubt that as at 30 June 1999, or the date of the directors' statement, there were not reasonable grounds to believe that the company would be able to pay its debts as and when they fell due. I have reached those conclusions independent of Mr Humphreys' opinions, although I accept his opinions. 281 For the reasons which follow, I also accept his opinion that the accounts had not been made out in accordance with the statements of accounting concepts and applicable accounting standards as represented by the directors in the directors' statement. 282 Mr Humphreys next turned his attention to the role of the fourth respondent. 283 In doing so, he assumed the facts, which I have found earlier in these reasons, including the historical facts in 1998 and 1999, and further including the correspondence emanating from LMP to the Fund prior to 27 August 1999. 284 He referred to the representations made by LMP in their compilation report signed by LMP that the financial statements were compiled in accordance with APS9. 285 I have already found that LMP was obliged to comply with APS9 and I have already indicated the particular clauses of APS9 which are relevant in this matter and which needed to be complied with by LMP. 286 Mr Humphreys then rather stepped outside of his role as an expert and drew conclusions from LMP's conduct. Those are matters for the Court to decide, not an expert. I have already referred to Mr Knott's first report. It is worth reminding experts that their participation in legal proceedings is not for the purpose of making findings, but for the purpose of offering opinions. It is for the Court to decide whether these factual assumptions have been made out: Ramsay v Watson (1961) 108 CLR 642, 648-649; Paric v John Holland (Constructions) Pty Ltd (1985) 59 ALJR 844 at 846. If the factual assumptions are not made out, the opinion cannot be received into evidence: Bugg v Day (1949) 79 CLR 442 per Dixon J at 462. 287 On 26 November 1998 LMP forwarded the renewal material for the 1999 year to the Fund. That renewal material included Jaja's audited financial statements which were subject to a qualified audit opinion. 288 On that day, LMP informed the Fund of various improvements which Jaja had put in place in their accounting practices and the capital contribution said to have been made by the directors. 289 As I have already noticed in that letter, LMP wrote that it was their belief that 'the positive effect of the above strategies that the TCF/IATA financial measures of, percentage, working capital ratios, ratio of net tangible assets to turnover, and minimum equity requirement, and rectification of accurate client account recording will be restored over the current financial year ending 30 June 1999'. LMP was not there representing the directors' opinion but offering their own. 290 On 3 December 1998 LMP wrote to Mr Newman enclosing a copy of the letter signed by the first and second respondents undertaking that the capital injection of $10,000 would remain within the agency. 291 In that same letter, LMP advised that the directors would be providing a further $30,000 capital from the unencumbered proceeds of the sale of their home. Ms Kirby attended with the first respondent at the February Management Committee meeting where she again confirmed that the directors were selling their home for the purpose of injecting $30,000 of capital. 292 LMP provided a number of compilation reports to the Fund, all of which represented that the financial statement had been compiled in accordance with APS9. A compilation report was also included with the documents on 27 August 1999. 293 On 9 February 1999 LMP reported positive action on the part of the directors who, it was said, were doing all that possibly could be done to rectify the deficiency as reflected in the 30 June 1998 financial ration analysis. 294 More importantly, LMP wrote that it was their belief that the directors 'are genuine people and given support and the opportunity to continue to trade they believe the company should be able to gradually meet all the financial ratio analysis criteria for both TCF and IATA'. 295 On 14 May 1999 Mr Lane wrote to the Fund advising that Ms Kirby had been instrumental in the rebuilding of Jaja's computerised accounting records. 296 On 19/20 May 1999 LMP entered into an agreement with the first and second respondents which obliged LMP to compile financial reports in accordance with APS9. I have already found that LMP was thereby obliged to comply with APS9 to comply with its contractual obligations to the first and second respondents. 297 LMP prepared Jaja's financial statements in circumstances where it was obliged to comply with APS9. It knew that the financial statements would be audited. It also knew that the financial statements, when audited, would be submitted to the Fund for the purpose of the Fund determining whether Jaja was entitled to continue to participate in the Fund and to remain a member of IATA. 298 It well knew that the financial statements would be relied upon. LMP was made aware by Mr Young that the Fund and IATA placed heavy reliance upon audit reports. LMP was made aware of Mr Young's audit opinion and the qualification contained in it. 299 Ms Kirby played a substantial role in the affairs of Jaja. As I already indicated, she attended meetings of the Fund with the first respondent. She rebuilt the computerised system. She compiled the AFR form and prepared the documents which accompanied the AFR form. 300 LMP wrote the covering letter enclosing the renewal material to the Fund in which it made a number of representations in relation to actions taken by the director. They did not merely repeat representations made by the directors but made representations for themselves intending, in my opinion, for the Fund to rely upon them in coming to a favourable conclusion from Jaja's point of view. 301 In particular, LMP brought to the attention of the Fund, in its letter of 27 August 1999, that 'the inhouse computer system now produces accurate bank reconciliations for both the general and client account'. 302 At trial, LMP tried to distance itself from what, in my opinion, were clearly its responsibilities. Mr Thompson, the fourth respondent's counsel, in opening his case contended that LMP was merely a conduit for the passing of information from Jaja to the Fund. This was not a plea raised on the defence but, in any event, it is clearly inconsistent with the facts. 303 In the case of the fourth respondent, it not only passed on representations made by the directors but made representations for itself in support of Jaja. 304 For the reasons already given, Ms Kirby and Mr Lane were both unsatisfactory witnesses. 305 They claimed that it was no part of the LMP engagement to become involved in the client trust account or to have anything to do with the client position. Indeed, Mr Lane went as far as to say that this was a result of a direct instruction from the first respondent to have nothing to do with the client accounts. 306 Again, this limitation in the retainer, which is inconsistent with the retainer document, was not pleaded. Nor did the witnesses refer to it in their affidavit evidence. 307 Moreover, it is simply inconceivable that they would have accepted a retainer which isolated out the clients' trust account from their obligations. 308 As can be seen from Mr Humphreys' opinion, to which I have already referred, the clients' trust account was a significant part of the liabilities of Jaja. 309 LMP could not know whether they complied with any part of APS9 without knowing whether the clients' trust account had been kept in accordance with appropriate accounting and internal control systems. 310 The applicants asked me to infer that because the fourth respondent did not call the first respondent his evidence would not have assisted LMP: Jones v Dunkel (1959) 101 CLR 298. The applicants argued that it was no answer by LMP to say that the first respondent was a party to the proceedings because it was indicated early in the proceedings that the Fund would not be proceeding against him. I reject that contention. In Jones v Dunkel, Dunkel was the employer of Mr Hegedus who was the driver of a diesel truck which collided with the plaintiff's husband's motor vehicle. The plaintiff's husband was killed in the accident. Mr Hegedus was injured, but not seriously. Mr Hegedus was not called in the trial. The appeal concerned the adequacy of a direction given to the jury. Kitto J said that the direction was inadequate because the trial judge omitted to say (at 308): '… that any inference favourable to the plaintiff for which there was ground in the evidence might be more confidently drawn when a person presumably able to put the true complexion on the facts relied on as the ground for the inference has not been called as a witness by the defendant and the evidence provides no sufficient explanation of his absence. The jury should at least have been told that it would be proper for them to conclude that if Hegedus had gone into the witness-box his evidence would not have assisted the defendants by throwing doubt on the correctness of the inference which, as I have explained, I considered was open on the plaintiff's evidence.' 311 What was important for the decision in Jones v Dunkel was that Mr Hegedus was a defendant with the same interests as his employer. He was available to the employer to give evidence in support of both the employer's case and his own case. He was represented by the same counsel and solicitors as his employer. 312 It is a necessary precondition for raising an inference of the kind mentioned in Jones v Dunkel that the witness who was not called is available to the party against whom the inference is sought to be drawn. The witness must not only be available to the party but able to be called. The evidence that the witness might give must not only be relevant, the party who might have called the witness must expect that the witness will give honest and truthful evidence. 313 In this case, I cannot be satisfied that the first respondent would have been a willing witness. Nor can I be satisfied, having regard to the facts of this case, that his evidence would have been reliable. In those circumstances, I think it would be quite inappropriate and unfair to the fourth respondent to infer anything against the fourth respondent for the failure to call the first respondent. 314 In any event, it does not matter. For the reasons I have already given, the objective evidence contradicts Mr Lane and Ms Kirby's evidence that they had a limited retainer. 315 I reject Ms Kirby and Mr Lane's evidence that they had no obligation to consider the clients' trust account. I find that there was no limitation on the terms of their engagement, except those limitations contained in the Engagement Agreement to which I have already referred. In those circumstances, they were obliged to compile financial reports in accordance with APS9 and use their accounting expertise to collect, classify and summarise the financial information provided by Jaja. 316 They were not, of course, under an obligation to audit those financial statements. Nor were they under an obligation to pass an opinion as to the truth and fairness of any financial statements. 317 In my opinion, however, LMP did not comply with its obligations in relation to APS9. LMP was under an obligation to be familiar with the accounting principles and practices of the travel industry. It had to consider whether the financial statements which it compiled appeared to be appropriate in form and free from material misstatement. 318 It could never have been satisfied that the financial statements were free from material misstatement if it had no obligation to consider the contents of the clients' trust account. 319 LMP did make itself familiar with the travel agent industry and I find, in particular, that Ms Kirby and Mr Lane were familiar with the industry. Because that was so, Ms Kirby and Mr Lane should have known that there should not have been a large number of debit balances in the client trust account. Those balances ought to have been reviewed and reconciled to determine the cause for the debit balances to arise and continue unchanged over many months. 320 I am satisfied that neither Ms Kirby nor Mr Lane properly applied their minds to the individual client balances and how it was that debit balances arose. 321 If they had, they would have recognised the inappropriateness of the debit balances and the need to make a provision for bad and doubtful debts. They would then have recognised that Jaja was insolvent. 322 I find that LMP failed to comply with APS9.

THE CASE AGAINST LMP 323 The applicants put their case against LMP in two ways. First, it said that LMP made a number of representations which are contained in paragraph 39 of the amended statement of claim: '39. At the time of submission of the 2000 Renewal Material to the trustees of the Fund, LMP represented ("the LMP Representations") to the trustees of the Fund that: (a) the financial information provided in the 2000 Renewal Material was true and fair; (b) the 2000 Renewal Material accurately reflected the liability of Jaja, as at 30 June 1999, for monies of clients deposited with it; (c) the extent of Jaja's liability, as at 30 June 1999, for monies of clients deposited with it was $14,098, alternatively $71,844. (d) the previous inability of Jaja to generate from its computerised accounting system financial information which accurately reflected the financial position of the company had been overcome; (e) the financial information provided in the 2000 Renewal Material accurately reflected the financial position of Jaja; (f) on the Fund's formula for the assessment of the ratio of working capital to average monthly overheads and the ratio of net tangible assets to turnover Jaja scored 16 points; (g) no provision for doubtful debts of Jaja was required to be made; (h) Jaja had shareholders equity as at 30 June 1999 of $69,579; (i) the client travel account balance at bank and the related liability for client deposits were shown the balance sheet; (j) LMP had complied with miscellaneous accounting professional statement 9 "Statement on Compliance with Financial Reports" (APS 9) issued by the National Council of the Institute of Charged Accountants in Australian [sic] and the Australian Society of Certified Practising Accountants; (k) in the alternative to sub-paragraphs (a)-(i), it had reasonable grounds for holding an opinion to the effect of each of sub-paragraphs (a)-(i).' 324 It says those representations were false. The applicants claim that those representations were made by LMP in trade or commerce and they were misleading or deceptive or likely to mislead or deceive and therefore in contravention of s 52 of the Trade Practices Act. 325 Alternatively, the applicants say that LMP owed the trustees of the Fund a duty to take reasonable care in making any representation to them in relation to the 2000 renewal material to avoid loss and damage to the Fund. It says that LMP breached that duty as a result of which the Fund has suffered loss and damage. 326 The duty is said to arise because LMP intended and knew that the trustees would rely on the 2000 renewal material and any representations made by LMP in relation to that material in assessing whether Jaja could continue to be a participant in the Fund with or without conditions. 327 It is therefore necessary to determine whether any representations were made; whether they were false; whether they were made in trade or commerce; whether they were relied upon; whether a duty of care existed; the terms of the duty of care; and whether there was a breach of that duty of care. If the cause of action under the Trade Practices Act is made out or the breach of duty established, then damages must be considered. 328 I do not accept that LMP represented to the Fund that the financial information provided in the 2000 renewal material was true and fair. Such a representation would put LMP in the position of an auditor whose responsibility was to express an opinion on the financial statements. That was not LMP's responsibility. To find such a representation would elevate LMP to the position of auditor. I reject the applicants' claim that LMP made the representation in paragraph 39(a). I find that the representation in paragraph 39(b) is contained in the 2000 renewal material. That representation arises on a reading of the balance sheet and Note 9. In Note 9 it is represented that Jaja's liabilities to its trust creditors was $14,098. The financial statements were represented to have been compiled in accordance with APS9. APS9 requires the accountants to comply with the Code of Professional Conduct which means that the financial report must have been compiled with professional competence and due care. The financial report must be appropriate in form and free from material misstatements: Clause 24. If accounting standards have not been adopted that must be disclosed: APS1 and APS9 clause 1. Therefore, it follows that LMP represented that the financial statements had been prepared competently and with due care; in accordance with accounting standards; appropriate in form and free from material misstatements. It follows that I also consider the representation pleaded in paragraph 39(c) has been proved but only, in my opinion, as to the sum of $14,098. The representation in paragraph 39(d) is made out. It is contained in LMP's letters of 27 August 1999 and 14 May 1999. 329 I am not prepared to find the representation pleaded in paragraph 39(e) has been established. What has been established is that LMP represented that the financial statements appear to be appropriate in form and free from material misstatements. 330 Because LMP assisted to compile the AFR form, the representation in paragraph 39(f) has been established. The representation pleaded in paragraph 39(g) has not been made out in its terms. What has been made out is that LMP represented that no provision for doubtful debts of Jaja had been made and that the financial statements were appropriate in form and free from material misstatements. I do not think that LMP represented that no provision for doubtful debts needed to be made. That was not LMP's task or responsibility. It was for the directors to decide whether a provision for bad and doubtful debts needed to be made. It was for the auditor to determine whether the failure to make such provision meant that the financial statements did not reflect the true and fair view of the company's position and performance. LMP's obligation was to ensure that in compiling the financial statements they were appropriate in form and free from material misstatement. I do not think that representation pleaded in paragraph 39(h) has been made out. There is no suggestion by anyone that Jaja had shareholders' equity of that amount at that time. 331 I think that the representation in paragraph 39(i) has been made out. LMP's obligation was to ensure that the financial report was appropriate in form. It would not be appropriate in form if the creditors and debtors were incorrectly netted off. In compiling the financial statements LMP represented that it had complied with APS9 and it follows, therefore, that the representation in paragraph 39(j) has been made out. 332 The representations which have been established are, in my opinion, false. They are false for the reasons which I have already given. LMP did not comply with APS9 (paragraph 39(j)). Because LMP did not comply with APS9, the financial statements were not appropriate in form nor were they free from material misstatement (paragraphs 39(b), 39(c) and 39(g)). The financial statements incorrectly netted off creditors and debtors (paragraphs 39(c) and 39(i)). The financial statements were therefore not appropriate in form. The financial statements did not provide for bad and doubtful debts (paragraph 39(g)). There should have been a provision of $127,569 for bad and doubtful debts. Unless a provision of that kind was contained in the financial statements, the financial statements were not free from material misstatement. 333 Jaja had not overcome its computerised accounting system problems and its computerised accounting system could not accurately reflect the financial position of the company (paragraph 39(d)). The assessment of the ratio of working capital to average monthly overheads and the ratio of net tangible assets to turnover was, on the true financial position of Jaja, significantly less than 16 and negative (paragraph 39(f)). 334 The fourth respondent does not dispute that if the representations were made and if they were false they were made in trade and commerce. It follows, therefore, that there must be a finding that the fourth respondent has contravened s 52 of the Trade Practices Act in that the representations are misleading and deceptive. 335 I will address the question of reliance separately. 336 LMP was retained by Jaja to compile its financial statement to provide a special purpose report for the use by the Fund in its continuing assessment of Jaja's participation in the Fund and membership of IATA. LMP was well aware that the Fund would rely upon the financial statements which were submitted for the purpose of its assessment of that matter. Letters were written encouraging the Fund to continue Jaja's participation. Ms Kirby attended meetings for the purpose of encouraging the Fund to continue Jaja's participation. 337 Jaja was under an obligation to comply with APS9. It had to compile financial reports and financial statements which were in an appropriate form and free from material misstatements: APS9 Clause 24. In accordance with the Code of Professional Conduct, it had to carry out its work with professional competence and due care, and in accordance with technical and professional standards relevant to that work. 338 In my opinion, LMP not only owed Jaja a duty of care but it also owed the Fund a duty of care of the kind pleaded. 339 For the reasons already given, in my opinion, it breached that duty of care by failing to perform its work competently and to the standard required of an ordinarily competent accountant as a result of which it made representations to the Fund of the kind to which I have referred and which were false. LMP is also liable to the Fund in negligence.

THE CASE AGAINST MR YOUNG 340 I turn to the case against Mr Young. 341 The applicants' case against the fifth respondent, Mr Young, was framed in the same way as the case against the fourth respondent. First, it was alleged, that by publishing the 2000 renewal material Mr Young made a number of representations. Those representations are pleaded in paragraph 42: '42. As part of the 2000 Renewal Material, Young represented ("the Young Representations") to the trustees of the Fund that: (a) the financial information provided in the 2000 Renewal Material was true and fair; (b) the information contained in the "Annual Financial Review" form disclosed all material liabilities of Jaja as at 30 June 1999; (c) the 2000 Renewal Material accurately reflected the liability of Jaja, as at 30 June 1999, for monies of clients deposited with it; (d) the financial statements (comprising the profit and loss account, balance sheet, directors report and notes to and forming part of the financial statements) of Jaja for the year ended 30 June 1999 gave a true and fair view of the financial position of Jaja as at 30 June 1999. (e) the extent of Jaja's liability as at 30 June 1999 for monies of clients deposited with it was $14,098, alternatively $71,844; (f) on the Fund's formula for the assessment of the ratio of working capital to average monthly overheads and the ratio of net tangible assets to turnover Jaja scored 16 points; (g) no provision for doubtful debts of Jaja was required to be made; (h) Jaja had shareholders equity as at 30 June 1999 of $69,579; (i) the client travel account balance at bank and the related liability for client deposits were shown the balance sheet; (j) the aging of the debt of $47,217.00 was: ● over 2 months $12,988.00 ● over 6 months $7,318.00 ● over 12 months $26,911.00 $47,217.00 (k) there was no need to adjust the point score or the financial statements to have regard to that doubtful debt and/or that Jaja attained the score of 16 points on the TCF point score as set out in the AFR; (l) there was no need to make an adjustment to the annual financial review and accounts even given the qualification expressed by Young regarding doubtful debts; (m) the 2000 Renewal Material was audited in the manner and to the standard identified in the Independent Audit Report and the Auditor's Statement contained in the 2000 Renewal Material (n) the 2000 material was audited in accordance with the Australian Auditing Standards; (o) Jaja was not insolvent and it was appropriate to adopt a going concern basis in the financial statements; (p) the client travel account balance at bank and the related liability for client deposits were shown in the balance sheet; (q) in the alternative to sub-paragraphs (a)-(o), it had reasonable grounds for holding an opinion to the effect of each of sub-paragraphs (a)-(o).' 342 It is pleaded that each of those representations were false. Next, it is pleaded that the representations were made in trade or commerce and, because they were false, they were misleading or deceptive or likely to mislead or deceive. 343 In those circumstances, it is pleaded that he has contravened s 11 of the Fair Trading Act 1985 (Vic) or, alternatively, s 9 of the Fair Trading Act 1999 (Vic). 344 It is also pleaded that Mr Young owed the Fund a duty of care 'to take reasonable care in making any representation to them in relation to the 2000 Renewal Material to avoid loss and damage to the Fund'. It is pleaded in paragraph 55 that he breached that duty of care because he failed to take any reasonable care in making the representations referred to in paragraph 42 or failed to exercise any or any reasonable care before expressing the opinions referred to in paragraph 42(p). The reference to paragraph 42(p) is a typographical error in the Statement of Claim. It should read paragraph 42(q). 345 It is therefore necessary to determine what representations were conveyed to the Fund, if any, by Mr Young' in offering his audit opinion. 346 There can be no doubt, in my opinion, that the audit opinion carried with it the representation that, in the auditor's opinion, the financial statements and notes for the 1999 financial year gave a true and fair view of the financial position and performance of the company. That was the purpose of the audit opinion. There can be no doubt that the representation in paragraph 42(a) was made. 347 The representation asserted in paragraph 42(b) has also been made out. The AFR form was also audited by Mr Young. The purpose of the AFR form was to enable the Fund to calculate the ratios previously referred to. The form which was provided to the trust did not include any provision for bad and doubtful debts. In my opinion, in the absence of any provision for bad and doubtful debts the audited AFR form represented that all material liabilities had been disclosed. 348 The financial statements did not separately address the clients' trust account and identify precisely the monies which had been paid to Jaja in contemplation of further travel services. The balance sheet purported to disclose the monies owing to clients. The representation implicit in that disclosure is that all monies owing had been disclosed. 349 I think the representation in paragraph 42(d) is no more than the representation made in paragraph 42(a). 350 In my opinion, the financial statements represented that the extent of Jaja's liability to clients for monies deposited with it was in the sum of $14,098. That clearly emerges from the balance sheet and, in particular, Note 9. In those circumstances, the representation in paragraph 42(d) has been made out. 351 The AFR form discloses the representation pleaded in paragraph 42(f). That representation has been established. Because the AFR form was audited by Mr Young, it follows that he has made that representation for himself. 352 Because there is no provision for bad and doubtful debts in Jaja's financial statements and because the auditor's opinion is not qualified for that reason, the auditor has thereby represented that in his opinion no provision needed to be made. The representation in paragraph 42(g) has been established. 353 I do not think that the representation in paragraph 42(h) has been made out. The audited financial statements did not disclose shareholders' equity of $69,579. 354 Financial statements should be prepared on the basis that only corresponding creditors and debtors should be netted off. It follows, in the absence of any note in the statements, the financial statements assert that the client travel account balance and the related liability for client deposits were included in the balance sheet. Because there is no qualification in the audit opinion in that regard, it follows that Mr Young represented that the financial statements were, in that respect, true and fair. In those circumstances, the representation in paragraph 42(i) has been made out. 355 The representation pleaded in paragraph 42(j) was included in the audit opinion. In those circumstances, the representation has been made out. 356 The absence of any adjustment to the point score of the financial statements to have regard to bad and doubtful debts carries with it the representation that there was no necessity to adjust the point score for that reason. The representation in paragraph 42(k) has been made out. The representation pleaded in paragraph 42(l) may be implied from the absence of any provision for bad and doubtful debts in the financial statements themselves. If there had been a need in the auditor's opinion to make any adjustment, then that would have to be included in the auditor's opinion. That representation has been made out. 357 The representation in paragraph 42(n) has been made out. That representation was included in the audit opinion itself. The auditor wrote: 'An audit has been conducted in accordance with Australian Auditing Standards to provide reasonable assurance as to whether the financial statements are free of material misstatement.' 358 The audit opinion carried with it the representation that Jaja was not insolvent and it was appropriate to draw the accounts on a going concern basis. The representation in paragraph 42(c) has been proved. 359 I think the representation pleaded in paragraph 42(p) is the same as that pleaded in paragraph 42(i). 360 I think by offering his audit opinion on Jaja's financial statements the auditor therefore published an opinion that the financial statements had been prepared in accordance with the Corporations Law, the appropriate standards and give a true and fair view of the financial position and performance of the company subject to the qualification contained in the audit opinion. 361 I am satisfied that each of the representations, which I found were made, was false. 362 On the financial statements as they were, the audit opinion was both ambiguous and deficient. There are two ambiguities in the auditor's opinion. First, the opinion that the auditor is unable to be satisfied that this material debt is collectable is ambiguous. The auditor should have expressed an opinion as to whether, in his opinion, the debts were bad or doubtful. Secondly, as the auditor's expert said, the qualification in paragraph (b) is ambiguous. The qualification should have referred to the closing balances. 363 The financial statements were not drawn in accordance with accounting practices. Creditors and debtors were inappropriately netted off. That served to disguise the amount owing by Jaja to its clients for travel services not provided. A provision should have been made for bad and doubtful debts in the sum of $127,569. 364 Of course, if a provision had been made for bad and doubtful debts of the kind to which I have referred, the company could not have been assessed as a 'going concern'. Jaja was not a going concern as at 30 June 1999. It was insolvent and hopelessly so. The auditor ought to have concluded so on his examination of the financial records. 365 In the end result, there was really no dispute about the falsity of the representations which had been pleaded and which, in my opinion, have been established. The auditor's own expert was of the opinion that the audit work was deficient. Mr Young, himself, recognised the deficiencies in his evidence. 366 Mr Young admitted in his evidence that he had reached the conclusion that the debts of $47,217 referred to in his audit opinion were not collectable. He agreed that he should have given an opinion to that effect, notwithstanding that the first respondent claimed that the debts were collectable. 367 He agreed that if he had offered an opinion that provision should have been made for the sum of $47,217, he would have had to conclude that Jaja was not a going concern. Therefore, it would need to have been valued on a liquidation basis. 368 Mr Young has frankly admitted that his audit opinion was wrong. It should have been an adverse opinion. He should have concluded that Jaja was insolvent. 369 He did not seek to quarrel with Mr Humphreys' opinion that in fact the actual provision which should have been made was $127,569. He has not done the exercise. He agreed that if that was the amount that should have been provided for then the same consequences would flow, i.e. Jaja was not a going concern and should have been valued on a liquidation basis. 370 The AFR form should have provided, at least on Mr Young's own opinion, for bad and doubtful debts of $47,217. It followed that the points score which was provided for in the AFR form was wrong. 371 I am satisfied that each of the representations to which reference has been made was false. 372 As I have already indicated, the applicants put an alterantive case against Mr Young in negligence. 373 If it had not been for the Fund's trust's requirements, Jaja would not have been under an obligation to have its financial statements audited. It was a small proprietary company: s 45A(2). A small proprietary company has to prepare financial reports only if directed to do so under s 293 or s 294, neither of which pertain. 374 The sole purpose of the audit was to provide audited financial statements and an audited AFR form to the Fund for its assessment of Jaja's continuing participation in the Fund and as a member of IATA. That is made clear in Mr Young's own documents. 375 As previously mentioned, Mr Young had an audit checklist for the purpose of considering Jaja's financial records and statements. The terms of the audit plan are set out above at [187]. 376 Mr Young provided two documents in support of the 2000 renewal material. The first was his independent audit report. In his audit report, he said: 'To: The Members of Jaja Pty Ltd, the Trustees of the Travel Compensation Fund and The International Air Traffic Association. Scope We have audited the financial statements, being a special purpose financial report comprising the profit and loss account, balance sheet, directors' report and notes to and forming part of the financial statements of Jaja Pty Ltd for the year ended 30th June 1999. The company's directors are responsible for the financial statements and they have determined that the accounting policies used and described in Note 1 to the financial statements and the accounting disclosures contained therein are appropriate to the requirements of the Corporations Law as it applies to large corporations and the needs of the members, and the Trustees of the Travel Compensation Fund and, if applicable, of the members, and the Trustees of the Travel Compensation Fund and, if applicable, the International Air Traffic Association. We have conducted an independent audit of the financial statements in order to express an opinion on them to the members, the Trustees of the Travel Compensation Fund, the International Air Transport Association. The financial statements have been prepared for distribution to members, the Trustees of the Travel Compensation Fund and, if applicable, the International Air Transport Association for the purpose of fulfilling the requirements of the Corporations Law as it applies to large corporations, the Trustees of the Travel Compensation Fund, and if applicable, the International Air Transport Association. We disclaim any assumption of responsibility for any reliance on this report to which it relates, to any person other than the members, the Trustees of the Travel Compensation Fund and, the International Air Transport Association, or for any purpose other than that for which it was prepared. Our audit has been conducted in accordance with Australian Auditing Standards to provide reasonable assurance as to whether the financial statements are free of material misstatement. Our procedures included examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial statements and the evaluation of accounting policies and significant accounting estimates. These procedures have been undertaken to form an opinion as to whether, in all material respects, the financial statements are presented fairly in accordance with the Accounting Standards and other mandatory professional reporting requirements and statutory requirements so as to present a view which is consistent with our understanding of the company's financial position and the results of its operations. The audit opinion expressed in this report has been formed on the above basis.' 377 There cannot be two clearer expressions of Mr Young's knowledge that the Fund would rely upon the audited financial reports for the purpose of its assessment. 378 In the independent audit report, which also accompanied the 2000 renewal material and, in particular, the AFR form, he repeated the matters to which I have referred in the audit report. 379 In his note of 25 August 1999 to Ms Kirby he said that he felt a need 'to spell out all that detail on the basis that TCF and IATA place heavy reliance on audit reports'. 380 I find, therefore, that the sole purpose for the audit of Jaja's financial statements was for submission by Jaja of those financial statements, together with the other 2000 renewal material to the Fund, for the purpose of the Fund determining whether Jaja should continue to participate as a member of the Fund. I find that Mr Young was always aware of that fact. He knew that the audited financial statements would be relied upon by the Fund for the purpose of its exercise. He knew that the representations contained in the audit opinion or in the audited financial statements would be relied upon for the purpose of that assessment. 381 He therefore owed a duty of care to take reasonable care in making any representation to the Fund in relation to the 2000 renewal material to avoid loss and damage to the Fund. For the reasons already given, he was in breach of that duty of care. Subject to proof of damages, he is liable to the applicants in negligence.

WAS MR YOUNG'S CONDUCT IN TRADE OR COMMERCE? 382 Mr Young argued that he was not liable to the applicants for a contravention of the Fair Trading Acts because his conduct was not in trade or commerce. 383 It was argued by the fifth respondent that Mr Young's conduct did not amount to a contravention of the Fair Trading Acts because it was not conduct in trade or commerce. The relevant sections of the two Fair Trading Acts are relied upon by the applicants. 384 Section 11 of the 1985 Act provides: ' (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 the succeeding provisions of this Part shall be taken as limiting by implication the generality of sub-section (1).' 385 As I have previously mentioned, s 9 of the 1999 Act is in substantially identical terms to s 11 of the 1985 Act. Section 9 provides: '(1) A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. (2) Nothing in the succeeding provisions of this Part is to be taken as limiting by implication the generality of sub-section (1).' 386 There is a difference between conduct in trade or commerce and conduct in respect of trade or commerce. In Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594, the respondent was a construction worker who was employed by a construction company and who was instructed by his foreman to remove some grates from airconditioning shafts. He was told that certain bolts secured each grate. The respondent pleaded that the statement relating to the security of the grates was untrue. Whilst removing one of the grates, it gave way and the respondent fell and suffered serious personal injuries. He brought proceedings against his employer on the basis that the foreman's statement was conduct which was misleading or deceptive, or likely to mislead or deceive and a contravention of s 52 of the Trade Practices Act. 387 Mason CJ, Deane, Dawson and Gaudron JJ said at 602-603: ' The phrase "in trade or commerce" in s. 52 has a restrictive operation. It qualifies the prohibition against engaging in conduct of the specified kind. As a matter of language, a prohibition against engaging in conduct "in trade or commerce" can be construed as encompassing conduct in the course of the myriad of activities which are not, of their nature, of a trading or commercial character but which are undertaken in the course of, or as incidental to, the carrying on of an overall trading or commercial business. If the words "in trade or commerce" in s. 52 are construed in that sense, the provisions of the section would extend, for example, to a case where the misleading or deceptive conduct was a failure by a driver to give the correct handsignal when driving a truck in the course of a corporation's haulage business. It would also extend to a case, such as the present, where the alleged misleading or deceptive conduct consisted of the giving of inaccurate information by one employee to another in the course of carrying on the building activities of a commercial builder. Alternatively, the reference to conduct "in trade or commerce" in s. 52 can be construed as referring only to conduct which is itself an aspect or element of activities or transactions which, of their nature, bear a trading or commercial character. So construed, to borrow and adapt words used by Dixon J. in a different context in Bank of N.S.W. v. The Commonwealth, the words "in trade or commerce" refer to "the central conception" of trade or commerce and not to the "immense field of activities" in which corporations may engage in the course of, or for the purposes of, carrying on some overall trading or commercial business.' (Footnotes omitted.) 388 The majority preferred the narrower, that is the second, of the alternatives presented in the passage quoted above. In doing so, they said at 603: 'Indeed, in the context of Pt V of the Act with its heading "Consumer Protection", it is plain that s. 52 was not intended to extend to all conduct, regardless of its nature, in which a corporation might engage in the course of, or for the purposes of, its overall trading or commercial business. Put differently, the section was not intended to impose, by a side-wind, an overlay of Commonwealth law upon every field of legislative control into which a corporation might stray for the purposes of, or in connection with, carrying on its trading or commercial activities. What the section is concerned with is the conduct of a corporation towards persons, be they consumers or not, with whom it (or those whose interests it represents or is seeking to promote) has or may have dealings in the course of those activities or transactions which, of their nature, bear a trading or commercial character. Such conduct includes, of course, promotional activities in relation to, or for the purposes of, the supply of goods or services to actual or potential consumers, be they identified persons or merely an unidentifiable section of the public. In some areas, the dividing line between what is and what is not conduct "in trade or commerce" may be less clear and may require the identification of what imports a trading or commercial character to an activity which is not without more, of that character.' 389 The fifth respondent argued that whilst the relationship between Jaja and the fifth respondent was in part trading or commercial, not every aspect of the relationship would necessarily involve conduct 'in' trade or commerce. That cannot be denied. However, more importantly in this case is whether or not the relationship between Mr Young and the Fund involved conduct which was 'in' trade or commerce. 390 A person or a corporation engages in trade or commerce where that person or corporation engages in some sort of commercial activity. Usually that commercial activity would involve the supply of goods or services. 391 In this case, the financial statements were audited by Mr Young for presentation to the Fund so that Jaja could continue to be a participant in the Fund. Presentation by Jaja of the 2000 renewal material was, itself, conduct in trade or commerce. Mr Young's conduct in offering an audit opinion was also in trade or commerce, because the opinion was formed for the purpose of a commercial transaction. 392 In that sense, the conduct was different from that considered by von Doussa J in Chapman v Luminis Pty Ltd (2001) 123 FCR 62 ('Chapman'). In that case, Professor Saunders was retained to give a report to ATSIC under s 10(4) of the Aboriginal and Torres Strait Islander Heritage Protection Act 1984 (Cth) (the HPA). Under the HPA, a report had to be obtained to deal with matters relating to the particular significance of areas of land for Aboriginals. The applicants claimed that statements contained in the report amounted to a contravention of s 52 of the Trade Practices Act. 393 Von Doussa J found that, in making her report, Professor Saunders was carrying out a statutory function under s 10(4) of the HPA and that function did not have a trading or commercial character. 394 In that case, the report was a statutory one which was the commission for the purpose of providing the report to the Minister. He said that because it was a paid report that does not mean that it was a report which was prepared in trade or commerce. More was needed to give it a commercial flavour. 395 In this case, I am not concerned with the claim by Jaja against its auditor. I am concerned with the claim by a Fund which has been provided with the participants' auditor's opinion for the purpose of considering whether that participant may continue to participate in the Fund. The provision of the audit opinion, which clearly was assented to by Mr Young, was in my opinion in trade or commerce. It had the commercial flavour which was lacking in Chapman. In my opinion, Mr Young's conduct was in trade or commerce. 396 The Trade Practices Act contemplates that conduct by professional people within the scope of their profession may contravene s 52, or in this case, the relevant sections of the Fair Trading Acts. However, the conduct, like any other conduct which is sought to be impugned under these provisions must be in trade and commerce. Where a professional person is retained to give a person (the client) professional advice, the conduct of the professional person leading up to the engagement will ordinarily be in trade or commerce. The conduct will have the necessary commercial flavour. If, after the retainer has been agreed, the professional person gives professional advice to the client pursuant to the terms of the retainer, the conduct, including the advice, may lack the commerciality necessary to characterise the conduct as 'in' trade or commerce. It might be advice 'in respect to' or 'in relation to' trade or commerce but it will not be 'in' trade or commerce: Prestia v Aknar (1996) 40 NSWLR 165. 397 However, if that advice is then proffered by the professional to a third party for the purpose of inducing that third person to enter into a contractual relationship with the client then that conduct will be 'in' trade or commerce. It has the necessary commerciality about it. The professional has engaged in conduct for the purpose of assisting others to enter into a commercial relationship. The fact that the professional was paid, as Mr Young was for the opinion and for the use of that opinion, will lend support to the commercial nature of Mr Young's conduct insofar as it related to the trust. 398 I do not think that because the professional was paid that necessarily means that the advice or opinion was given 'in' trade or commerce: c.f. Bond Corporation Pty Ltd v Thiess Contractors Pty Ltd (1987) 14 FCR 215. The fact of payment is relevant in showing the commerciality of the arrangement entered into between the professional and the client and will therefore be relevant in a consideration of the professional's conduct leading up to the engagement or the retainer. It may also be relevant in considering whether the advice or opinion was given in trade or commerce but it is not, in my opinion, determinative. In the end, it is a question of fact and all of the surrounding circumstances will be relevant in determining whether the conduct was in trade or commerce. 399 I reject the fifth respondent's contention that Mr Young's conduct insofar as it impacted on the Fund was not in trade or commerce. The representations were made in order to induce a third party, the trust, to enter into a commercial relationship or at least to continue such a relationship with Jaja. The representations were made in trade or commerce.

RELIANCE 400 Both the fourth and fifth respondents argued that the Fund had not relied upon any of the representations made by their respective client or clients. 401 The fourth respondent argued that the Fund's culture was to support ongoing participation of any agency if at all feasible. That, indeed, was the evidence of Mr Whittaker but it does not rise above that. I cannot accept the submission that Mr Whittaker was thereby suggesting that the Fund would support an insolvent agency as a participant in the Fund. 402 It was also put by the fourth respondent that Harvey World Travel was a major contributor to the Fund. That is so but, in my opinion, does not give rise to any inference that the Fund would have supported one of the franchisees of Harvey World Travel. I do not accept the respondents' contentions, in particular the fourth respondent's contention, that the Fund would have supported a company which was as impecunious as Mr Humphreys' evidence discloses Jaja to be. For reasons which I will come to, if the Fund had been aware of Jaja's parlous financial state, it would not have allowed Jaja to continue to participate in the Fund. 403 The respondents otherwise argued that the Fund had not relied upon the financial information which was provided to it because Mr Newman ignored the auditor's qualification and carried out his own calculation. It is necessary to have regard to Mr Newman's evidence to address the respondents' argument. The Fund read two affidavits of Mr Newman. Mr Newman is well qualified. He graduated with a Bachelor of Commerce from Victoria University in Wellington, New Zealand. He worked for an audit company in Wellington, London and, later, in Hamilton in New Zealand. He came to Australia in December 1996 and he commenced working with the Fund. He said that since 1996 he has carried out about 700 assessments a year. In Mr Newman's first affidavit he deposed briefly to the procedure which he would have adopted on receipt of a participant's renewal material which had been classified as 'green' or 'yellow' only. He then directed his attention to the financial information and AFR materials which were received on about 30 August 1999. He said: '12. In accordance with the Practice, when I received the 1999 AFR Material I would have noted that Mr Hammond had initially classified it as green only. 13. I would then have reviewed the 1999 AFR Materials and confirmed all the relevant signatures and documents were contained therein. 14. After that check had been completed I would have reviewed the material contained within the AFR to ensure that information was correct and that the figures had been correctly brought forward to the AFR page entitled "Financial Ratio Analysis". Whilst conducting that review I would have noted that the figures at Line 117 was incorrect as the TCF only held a $60,000.00 guarantee. As a result of that finding, I amended the page entitled "Financial Ratio Analysis" to reflect the above. 15. I would then have reviewed the accounts provided by the accountants with the AFR and noted that everything within those accounts was consistent with the AFR. 16. Finally, I would have checked the general nature of the business and noted that 90% of tickets sold were for leisure travel which was consistent with Line 75 of the AFR showing no trade debtors. 17. After my review, I would have then confirmed the initial assessment of Jaja completed by Mr Hammond of the AFR Materials as green only and Jaja's participation was renewed for the ensuing year without the need for remedial action.' 404 A reading of that evidence would suggest that Mr Newman did nothing but accept the 2000 renewal material on its face value. However, the Fund read a further affidavit, sworn by Mr Newman on 11 February 2005, where he deposed to markings which he had made on the AFR material. It is clear from that affidavit that Mr Newman did more than accept the AFR material on its face value. He amended the material to reflect a $60,000 guarantee rather than $66,000 which was represented in the material. More importantly, however, he carried out his own assessment of the financial analysis upon the assumption that $26,911 of the $47,217, which Mr Young had said in his audit opinion he was not satisfied was collectable, was not collectable. After making that adjustment, Mr Newman said in his affidavit that he achieved a point score of 13. 405 Mr Newman was cross-examined on his affidavit. He was, as I have already said, an unsatisfactory witness. 406 In his cross-examination, he explained that his first affidavit had been sworn in circumstances where he had not given the matter much thought. It was not until he was given the files that he was able to recollect the detail which he was able to give in the second affidavit and in his evidence. I think his memory was prompted by his own notes on some of the documents. I do not think that he has an independent recall of what it was that he did in considering the financial statements and the AFR form. 407 He was directed to the exercise which he carried out in which he assumed that $26,911 was provided. He said, for the purpose of his exercise, he simply assumed that $26,911 needed to be provided as a bad debt for the year ended 30 June 1999. He did not assume that there would be any ongoing losses in future years. 408 It is important, for the purpose of the financial analysis of the AFR form, to have regard not only to the provision for bad and doubtful debts in the year under review but also as to whether any provision needs to be made in the future years. 409 It is to be remembered that Mr Young's audit opinion was that he was unable to be satisfied that the sum of $47,217 was collectable. $26,911 of that had been outstanding for more than 12 months; $7,318 had been outstanding for more than six months; and $12,988 had been outstanding for more than two months. 410 When Mr Newman was asked why it was that he assumed that none of the other debts apart from the $26,911 needed to be provided for in the next financial year, he was unable to explain. I asked him how it was that he formed a judgment on that matter. He said that he did not take it into account. When asked why, he said, 'because I just didn't'. He was also asked about the effect of the accounts being netted off. In respect of that, he answered, 'Whoever prepared the accounts has netted them off and if you gross them up you end up with the same effect on the working capital'. He was asked why it was that he did not approach the auditor. Again, his answer was unsatisfactory. He said, 'I think it was fairly clear what he was saying'. 411 The following exchange took place: 'HIS HONOUR: Well, in this case at 433 has the auditor spelled out the effect on the accounts?---Well, he has said there's a possible problem with the collectability of 47,000. That's the - - - But has he spelled out the effect on the accounts?---No, he hasn't, which is - - - So this is one of the ones that you would ordinarily make inquiries of?---No, because I can work out the effect. He has given enough information that I can work out the effect. Ordinarily you would expect an auditor who was qualifying a company's accounts in relation to the company's failure, the management failure to make provision for doubtful debts, to state what provision ought to be made and the effect that would have, to put it crudely, on the bottom line of the company?---But he didn't so - - - I know he didn't?---No. That's ordinarily what you would expect?---Well, usually they do. That is what an auditor, as you understand it, is obliged to do?---Yes. So this auditor didn't do that?---No. So you didn't know what the auditor's opinion was to the effect on the bottom line of the accounts?---Well, yes, because he said that he has got a problem with 47,000, which is the only problem he had. No - well, perhaps?---Yes, so I could quantify what the effect of that qualification is. But this auditor knew what those debts were. He might have been of the opinion that a provision ought to have been made in relation to all of the amount?---But he doesn't say that. He doesn't say that?---No. He doesn't say what provision should be made?---Yes. And isn't that a reason why you should have contacted him?---Well, I made my decision. I know you did. Isn't that a ---?---Yes. But no, I don't think - well, maybe but I didn't.' 412 That is an example of the quality of Mr Newman's evidence. 413 He was later pressed as to whether he took any steps to satisfy himself as to the accuracy of the accounts and the information provided. He said in answer to that, 'We rely on the auditors'. If the auditors qualify the whole of the account he would talk to the auditor. A simple qualification of this kind does not give rise to the need to talk to the auditor. 414 He said that when he considered the 30 June 1999 accounts he did not have regard to the previous accounts because he was looking at the situation as at 30 June 1999. He did not notice that there had not been a capital injection of the kind promised. 415 He said, in making his assessment, he had regard to the QBE guarantee which increased, he said, the working capital. He accepted, I think, in cross-examination, that in fact the QBE guarantee had no effect on working capital. It was available to the Fund but to no other creditor in the event that the Fund called upon the sum. He said that the Fund was there to protect the consumer and itself, not the creditors. 416 He agreed in cross-examination that if provision had been made for the whole of the sum of $47,217 that would have given rise to a loss of about $41,000. There would have been a deficiency in working capital. There would have been a deficiency of assets over liabilities and Jaja would have failed the financial analysis. 417 Moreover, he agreed that if a provision were made in the financial year for the debts over 12 months, namely, $26,911 and it was further assumed that the balance of the sum of $47,217 would be written off in the next year, Jaja would have again failed the financial analysis. 418 As has already been demonstrated, the matter proceeded to the Management Committee on 16 September 1999 with the Committee being unaware of the exercise which Mr Newman had carried out and without the benefit of seeing the independent audit report and therefore the qualified audit opinion or statement of auditor. The only matter that was put before the Management Committee on 16 September 1999 was the assessing services report, the deficiency calculation workpaper and the letter from LMP dated 27 August 1999. 419 It was argued that the decision-makers therefore did not rely on the audited financial statements. The only one who had regard to the audited statements was Mr Newman. Therefore, it was argued, there was no reliance upon those statements. 420 As I have already indicated, the minutes of meeting of the Management Committee suggest the Management Committee accepted Mr Newman's recommendation. The two trustees who gave evidence agreed that it would be have been preferable for them to have further information. They agreed that it would have been relevant for them to know if there was a qualified audit report and the effect of that report. It would be relevant to know whether a provision of $47,217 in respect of bad and doubtful debts would have had an effect upon the financial position and performance of Jaja. The CEO, Mr Brattoni, agreed that the qualified audit report should have been brought to the attention of the trustees. 421 It is said by both the fourth and fifth respondents that, in the circumstances to which I have referred, the Fund did not rely upon, in the case of the fourth respondent, the compiled financial statements or the letter of 27 August 1999 and, in the case of the fifth respondent, the auditor's opinion. 422 It was submitted that if the Fund suffered any loss or damage that arose from the conduct of its assessor, Mr Newman. It was put that Mr Newman did read the audited financial statements and the documents accompanying those financial statements. He decided that there should not be a full provision for the bad/doubtful debt of $47,217 referred to in the audit opinion. He also decided that there should not be a provision for bad and doubtful debts into the future. He did not contact Mr Young. He failed to provide relevant material to the Management Committee to allow that Committee to make an informed decision. 423 In my opinion, those contentions should be rejected. The evidence shows that the Fund, in the system which prevailed within the Fund, did rely upon the audited financial statements. That appears from the colour coding of the application and Mr Newman's consideration of the documents. 424 The financial statements and the AFR form represented that Jaja was solvent. The financial statements further represented that, with the QBE guarantee, it had sufficient capital. It was represented that it had sufficient working capital insofar as the financial analysis was concerned. It was represented that Jaja had made a profit. 425 Mr Newman's evidence, in my opinion, shows that he did rely upon the financial statements for the purpose of considering whether Jaja should continue to participate in the Fund. The fact that he did not give the raw information to the trustees, in my opinion in the end result, does not mean that the Fund did not rely upon the information contained in the financial statements. It is not to the point, in my opinion, that the trustees and the CEO did not see the audit opinion. The person who was charged with the responsibility of determining whether or not a recommendation should go to the trustees or, more particularly, to the Management Committee, clearly relied upon the audited financial statements and the audited AFR form for the purpose of making that recommendation. 426 It was argued by the fifth respondent that Mr Newman failed to comply with the Fund's own procedures. In particular, it was said that Mr Newman failed to have regard to the loss of $23,040 suffered by Jaja in the previous financial year to 30 June 1998 and the qualified audit report to the financial statements for that financial year. He also failed to have regard to the special conditions which had been opposed by the Fund in connection with the documents submitted for the 1999 year. It was also argued that Jaja had not complied with some of those conditions and that had not been taken into account. 427 In my opinion, that information was not so clearly relevant as to affect a decision made in relation to the 2000 renewal material. Indeed, if Jaja's fortunes are traced after the submission of the 1999 renewal material to the 2000 renewal material, Jaja's position gradually improved to the point where its profitability increased by some $28,000. 428 In my opinion, the previous material that is historically relevant was not so relevant as to enable it to be said that Mr Newman was wrong not to take account of it. 429 It was also argued that Mr Newman should have made an assessment of Jaja's financial position by assuming a full provision of $47,217. 430 There is certainly evidence from Mr Hammond and Mr Brattoni that they would have assessed Jaja's continuing participation against a full provision of $47,217. I am not satisfied, however, that Mr Newman was necessarily wrong not to make such an assessment. It certainly does not lie in the mouth of the auditor to complain about Mr Newman's failure to assess Jaja's financial position against a full provision of $47,217 when he himself failed to do the same. 431 The audit opinion was so ambiguous in the respects to which I have already referred that it is hard to criticise someone who received the audit report and for the manner in which they dealt with it. 432 There is no doubt, in my opinion, that the applicant relied upon the 2000 renewal material for the purpose of assessing the continuing eligibility of Jaja as a participant in the Fund. 433 I reject the respondents' contention that the Fund did not rely upon the audited financial statements. 434 I also reject the separate argument of each of the fourth and fifth respondent that if the Fund did rely upon the financial statements the Fund did not rely upon the representations made by their individual clients. 435 It was argued by the fifth respondent that even if the fifth respondent had been negligent in the conduct of the audit, that that negligence and the representations which were negligently made merely provided the occasion or opportunity for Jaja to submit the AFR form containing the misrepresentation and the conduct was not a cause of the loss. 436 In my opinion, the submission that the conduct merely provided the occasion or opportunity for the loss to occur flies in the face of the facts in the case. As I have already indicated, the purpose of Mr Young carrying out his work was to provide an audit opinion so that the Fund could assess Jaja's continuing participation in the Fund. He provided the audit opinion which was negligent. It was a direct cause of any loss or damage suffered by the Fund. For reasons which I will come to, in my opinion, the Fund has not established any loss or damage. If, however, it could have established loss or damage, in my opinion, there is no doubt on the facts that Mr Young's conduct was a direct cause of that loss. 437 For the reasons already given, in my opinion also, there can be no doubt that the Fund relied upon the expression of Mr Young's opinion, as it did on the LMP financial statements in allowing Jaja to continue to participate in the Fund after 27 August 1999.

CONTRIBUTORY NEGLIGENCE 438 It was argued by the fifth respondent that I should reduce the damages otherwise payable by reason of the Fund's contributory negligence. 439 For the reasons already mentioned, if the Fund is entitled to damages for contravention of the Trade Practices Act by the fourth respondent or contraventions of the Fair Trading Acts by the fifth respondent, there should be no reduction in the damages to be awarded to the Fund on account of any conduct on the part of the Fund: I & L Securities Pty Ltd. 440 However, the fifth respondent, but not the fourth respondent, has argued that insofar as the fifth respondent is liable in negligence there should be a reduction in the damages payable in respect of the tort on account of the Fund's contributory negligence. 441 The fifth respondent pleaded: '66. He denies each and every allegation contained in paragraph 56 thereof. Further, if the Applicants suffered any loss and damage which is denied, Young says that:- … (c) any such loss or damage was caused wholly or partly by the acts, omissions and/or contributory negligence of the Applicants. PARTICULARS (i) failing to pay any or any proper attention to Young's audit report in respect of the 1998 accounts; (ii) failing to pay any or any proper attention to Young's audit report in respect of the 1999 accounts; (iii) failing to pay any or any proper attention to the letter from LMP dated 26 November 1998; (iv) failing to pay any or any proper attention to the auditor's statement in the 1999 renewal application; (v) failing to pay any or any proper attention to the auditor's statement in the 2000 renewal application; (vi) failing to analyse and assess properly or at all the financial information sent to them by LMP and Young; (vii) failing to act sooner to terminate Jaja's participation in the Fund; (viii) failing to monitor properly or at all Jaja's financial performance; (ix) failing to monitor or assess properly or at all the risk posed by Jaja to the Fund; (x) failing to monitor or assess properly or at all the trust account for client funds operated by Jaja; (xi) failing to monitor or assess properly or at all the solvency of Jaja; (xii) failing to examine properly or at all the information and/or assertions given by the directors of Jaja about the company's operations.' 442 In his written submissions at the conclusion of the trial, the fifth respondent's counsel did not address the question of contributory negligence. Nor did he address that matter in his oral submissions. 443 The applicant addressed the question of contributory negligence in a sentence by noting that the fifth respondent relied upon the purported qualification regarding doubtful debts as putting the Fund on notice such that it was guilty of contributory negligence. 444 I therefore have not been assisted by either counsel in relation to this issue. I suppose, in a way, this issue is closely related to the question of reliance. However, counsel has advised since I reserved my decision, that reliance is still placed upon this defence. Therefore, I must address the matter. 445 The onus is upon the fifth respondent to establish that the applicant failed to take proper care to avoid suffering loss or damage. 446 It is said that the applicant failed to pay any or any proper attention to Mr Young's audit report in respect of the 1998 accounts. I am not sure what it meant by that. I am not sure what attention should have been paid and how, in paying that attention to those 1998 accounts, the applicant would have avoided suffering loss or damage. 447 In placita (ii) to placita (vi), the fifth respondent asserts that the Fund failed to pay proper attention to the material contained in the 2000 renewal material and, in addition, the letter of LMP dated 26 November 1998 and all the financial information sent by LMP and Mr Young. 448 I will deal with those in reverse order. The fifth respondent has not identified the financial material which was sent by LMP and Mr Young to the applicant, or how the applicant failed to analyse and properly assess that material. I am not prepared to make a finding of the kind sought in paragraph 66(c)(vi). It has not been established how the Fund could have paid better attention to the letter from LMP dated 26 November 1998 and, if so, how that would have avoided the Fund suffering loss or damage. That particular fails. 449 As to the other matters in placita (ii) to placita (vi), there is no evidence that the Fund failed to pay any or any proper attention to the audit report or the other matters contained in the renewal material. The fact is that the financial statements unknown to the Fund did not reflect a true and fair view of the company's position or its performance. On the other hand, that was known to Mr Young. Mr Young knew, as his evidence discloses, that a provision should have been made in respect of the bad and doubtful debts identified in the audit opinion. If he had disclosed that information to the Fund, then the Fund might have been guilty of contributory negligence in failing to pay proper attention to that matter. However, he did not disclose that matter in his audit opinion. None of those placita are made out. 450 The other matters are, with respect, too vague to be of any assistance in the fifth respondent's case on contributory negligence. 451 It has not said how the applicant should have acted to terminate Jaja's participation in the Fund sooner or why. It has not said how the Fund should have been aware of the risk posed by Jaja to the Fund because of Jaja's financial position or performance. I reject the contention implicit in paragraph 66(c)(xi) that the Fund failed to monitor or properly assess the insolvency of Jaja. That was the very reason why Mr Young was employed to audit the financial statements. It was for him to assess the solvency of Jaja and it was for him to advise the Fund of Jaja's financial position. In my opinion, it does not lie in the mouth of the fifth respondent to complain of the conduct of the Fund where the Fund was entitled to rely upon the conduct of Mr Young in its assessment of Jaja's financial position and performance. 452 In those circumstances, it seems to me, that the issue of contributory negligence does not arise.

CONTRIBUTION 453 The fourth respondent has argued that there ought to be an order that the fifth respondent contribute to whatever damages are payable by the fourth respondent. 454 Section 23B of the Wrongs Act 1958 (Vic) provides: '(1) Subject to the following provisions of this section, a person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with the first-mentioned person or otherwise).' 455 That section allows a party to recover contribution from another party liable, whether jointly or otherwise, in respect of the same damage to a third party. Contribution is available whether the two parties who are liable are liable in tort or have a statutory liability. The section operates where there is a joint liability for the same damage. 456 Section 24(2) provides: '(2) Subject to sub-sections (2A) and (2B), in any proceedings for contribution under section 23B the amount of the contribution recoverable from any person shall be such as may be found by the jury or by the court if the trial is without a jury to be just and equitable having regard to the extent of that person's responsibility for the damage; and the jury or the court if the trial is without a jury shall have power to exempt any person from liability to make contribution, or to direct that the contribution to be recovered from any person shall amount to a complete indemnity.' 457 Thus it is that liability for that same damage is apportioned having regard to the extent of the responsibility for the damage. 458 The fourth respondent filed a cross-claim seeking indemnity or contribution under the Wrongs Act 'or at law'. It does not appear that the fifth respondent has addressed that plea. 459 The fourth respondent said that its claim was non-controversial. It was not addressed by the fifth respondent's counsel in his written or oral submissions. 460 I am not so sure that the claim is non-controversial. I think if on giving this judgment it still remains a live issue in the proceedings, I should hear the fourth and fifth respondents on that limited issue. 461 If the applicants are not entitled to damages then the cause of action in negligence has not been made out. The Fund claims that it is entitled to compensation for the payments which it had to make to travellers when Jaja ceased trading on 23 February 2000. The Fund claims $206,135, being the net sum after payment of $66,000 by QBE to the Fund pursuant to the guarantee given by QBE in August 1999.

TRUST UNDER NO LIABILITY 462 The fourth respondent argued that the trust was not under any liability to Jaja's clients to reimburse them for services not provided. 463 Jaja was a franchisee in the Harvey World Travel organisation. Ms McAlpine is the assistant to the financial director of the head office of Harvey World Travel. During her six years with the company, some six franchisees have failed out of a network of about 450. When a franchisee fails, her duties are to coordinate the claims made by clients of the failed franchisee and to pass travel arrangements for those clients to other Harvey World Travel offices. Her primary role is to ensure that the clients or customers of the failed franchisee still receive their travel arrangements. She facilitates another franchisee taking over the files of the failed franchisee who then has the responsibility of determining what has been paid for and what has been supplied in travel services. The payment for the replacement booking is provided by the franchisor. The franchisor contacts the Fund to advise the Fund that the franchisor will be funding the travel arrangements and will be making claims. The franchisor's purpose is to protect the clients. 464 The franchisee, who is then providing the substitute services, helps the clients to complete the claim forms to the Fund. The client would be told that the Fund would pay the franchise company the amount of the claim. 465 She said that if the Fund refused to pay the franchisor for any substituted services the franchisor had supplied to the client of the failed franchisee, then the franchisor 'wore the loss'. 466 I accept her evidence in its entirety. She was cross-examined about one aspect of her affidavit. In her affidavit she said: 'Whilst our aim is to ensure that the claimant does not suffer any loss due to the collapse of the HWT franchise and is able to go on the same or similar trip to that which was originally planned, HWT only arranges such travel because it can be paid for from the TCF. If the TCF was to decline a claim I would have to have the matter of the new travel dealt with by the Board who may then charge the claimant for the new arrangements.' 467 It was put to her in cross-examination that that was inconsistent with her oral evidence. I am not satisfied there is any inconsistency at all. The evidence in the affidavit is addressing a different time point to the oral evidence. Her oral evidence was discussing claims made on provision of substitute travel services. Her affidavit evidence was addressing a point of time before any substituted service was offered by the franchisor. 468 Ms McAlpine was directed to the documentation which was tendered in the trial, I think for the purpose of establishing that the documentation did not reflect the actuality of the arrangements between the franchisor and the client, and the client and the Fund. 469 Each of the clients signed a document entitled 'Claim for Compensation'. A typical claim form indicated that 'Harvey World Travel Franchises Pty Ltd has paid again for travel arrangements'. The clients also, in due course, signed a Deed of Release, usually before any payment was made in which the client agreed to accept payment by the Fund of a sum of money and discharge the Fund from any further or other claim against the Fund and at the same time authorise the Fund to pay the compensation to the franchisor. 470 The fourth respondent argued that the arrangements between the franchisor and the Fund were such that no assignment was ever made which allowed the Fund to pay Harvey World Travel Franchises Pty Ltd pursuant to clause 15.6 of the Deed. 471 Clause 15.6 prevents the Fund paying money to any travel agent unless the travel agent is exercising the right of a client to receive compensation out of the Fund that has been assigned to the travel agent. The clause does not contemplate any formal assignment. The purpose of the clause is to prevent travel agents profiting by reason of the default of other travel agents. 472 In my opinion, the arrangements which were in place between Harvey World Travel Franchises Pty Ltd and its clients, and the claims which were made in these cases, were such that the Fund became obliged to pay Harvey World Travel Franchises Pty Ltd the sum which it paid. In my opinion, the fourth respondent's contentions must be rejected.

DAMAGES 473 I turn to the question of damages. 474 The Fund's case was that if it had been aware of the true financial position of Jaja it would not have continued Jaja's participation in the Fund, except upon conditions. 475 The Fund called Mr Whittaker, the manager of special investigations. He gave evidence upon the assumption that Jaja submitted financial statements which incorporated Mr Humphreys' amended balance sheet (Attachment 4), to which I have already referred and which I have set out above: [271]. 476 He performed the financial analysis upon the assumptions contained in Mr Humphreys' amended balance sheet and concluded that Jaja would have scored -6 points instead of 16 points which were attributed to it. 477 He said, based upon those calculations, the Fund's assessing section would have required either a bank guarantee in the sum of $222,000 or an injection of capital in the amount of $222,000 and a report from a duly qualified auditor at the expense of Jaja to investigate the reasons for the deficiency in the client trust bank account; to determine whether Jaja is likely to continue to have sufficient financial resources to carry on business as a travel agent; for Jaja to meet the TCF's financial criteria for participation in the Fund. The Fund would have sought a bank guarantee or a capital injection in the sum of $220,000 because in the terms of its financial analysis or its financial criteria there would have been a shortfall of capital in the order of $220,000. 478 Mr Whittaker prepared a special investigations report with recommendations which he deposed to in his affidavit. The special investigations report is a nonsense. It assumes Mr Humphreys' opinions expressed in Attachment 4, but Mr Young's audit opinion. Of course, if one assumes the facts contained in Mr Humphreys' amended balance sheet and that the financial statements were audited, the audit opinion could never have been in the terms that Mr Young expressed. The audit opinion would have had to refer to a provision for bad and doubtful debts of $127,000 rather than $47,217. As I say, his proposed special investigations report is a nonsense. 479 He said, based upon the assumptions made in Attachment 4 (Mr Humphreys' amended balance sheet), that the assessor would have written to Jaja imposing those conditions as a condition of Jaja's eligibility for continued participation in the Fund. Mr Whittaker prepared an amended AFR form to reflect Mr Humphreys' assumptions. 480 However, in his evidence, he said that if he thought Jaja was hopelessly insolvent he would not have put forward the recommendation to which I have referred but instead would have recommended to the trustees that they terminate its participation in the Fund. That was also the evidence of Mr Hammond. 481 In my opinion, there can be no doubt that that is correct. I set out Mr Whittaker's evidence: 'HIS HONOUR: Mr Whittaker, if an accountant was called upon to investigate the reasons for the deficiency, which was, as you show in your workings upon the assumptions made, in the order of $163,000 for services paid for but not delivered, having regard to the assumptions contained in the balance sheet, what explanation could there ever be that would ever satisfy you?---There are a number of reasons, your Honour. People, participants, have a tendency to take money out of their client account and use it for other purposes - very dangerous from the point of view of keeping your business financially healthy, but it does happen. The stock market goes up, the money is in a bank account. Participants think that if they invest it in the stock market they can make money out of it, they can buy a building?---This has happened in a number of instances. Well, maybe, but that doesn't seem to me to be a very satisfactory explanation, that they've put the money into the stock market to make a profit for themselves. Just assuming that the balance sheet was, as Mr Humphreys has said at page 749, that you've got negative shareholders' funds of $120,000. You've got to make a provision for doubtful debts of $127,000. You've got accumulated losses of $144,000 and there would appear to be of in the order of $163,000 worth of services paid for but not delivered and insufficient money to deliver them. What explanation could be given in those circumstances that would have satisfied you that the company could have remained a member?---Well, the only way that they could have satisfied me was (a) the business will be conducted in a manner which wouldn't further undermine the business and that they were in a position to recapitalise the business and give it sufficient financial resources. Even if one has a bank guarantee, if there are $163,000 worth of clients out there who want their tickets the airlines and other principals who provided those tickets have got to be paid in cash and therefore one would need, at the very minimum a corresponding amount of money to that liability and probably for the trade creditors as well, in order to carry on trading. So the only explanation that would have satisfied you at the time, if such a report had been requested and obtained, was not only the provision of the guarantee but also the recapitalisation of the business to ensure that the clients' funds were covered?---Yes. You will note that within my briefing paper I said "a bank guarantee of 222,000 as an interim measure." That was protecting the interests of the fund while we really found out what was going on. So if you had commissioned the report in paragraph 19(c) which you speak of, you would have, in addition to the guarantee, more than likely - assuming all the assumptions of Mr Humphreys' balance sheet, more than likely required a recapitalisation in the order of 167,000?---Probably more. Yes, probably more. Yes, I understand. Yes.' 482 Mr Brattoni was the CEO of the Fund at the relevant time. He was a member of the Management Committee. He said that he would have accepted the recommendations in Mr Whittaker's briefing paper and imposed the conditions suggested in that paper. Mr Given is a trustee of the Fund. He swore an affidavit in which he referred to Mr Whittaker's affidavit and the briefing paper exhibited to Mr Whittaker's affidavit. He said that if he had been provided with that information he would have imposed the conditions suggested by Mr Whittaker. Mr King, who was the chairman of trustees of the Fund, gave evidence to the same effect. 483 I reject the evidence of Messrs King, Given and Brattoni that if they had been provided with the special investigations report, which Mr Whittaker said he would have created if he had assumed the facts contained in Mr Humphreys' amended balance sheet, they would have imposed the conditions suggested by Mr Whittaker. 484 Mr Humphreys' amended balance sheet shows Jaja to be hopelessly insolvent. The directors and shareholders could not have injected capital of the kind mentioned to recapitalise Jaja. Jaja could not have continued to trade. Its directors would have committed a number of contraventions of the Corporations Law if they had been aware of the financial position of the company as disclosed in the amended balance sheet and continued to allow Jaja to trade whilst insolvent. 485 The financial statements would have had to be audited. The audit opinion would not have been as that disclosed in Mr Whittaker's special investigations report. The audit opinion would have had to be adverse. It would have had to refer to the extent of the trust creditors ($182,079) and that their monies had been used for other undisclosed reasons. It would have had to mention the extent of the provision for bad and doubtful debts ($127,569). It would have had to refer to the loss for the year ($116,720). It would have had to note that Jaja's current liabilities exceeded its current assets by $125,303. Its shareholders' funds were negative to the extent of $119,462. It would have had to record that Jaja did not have the necessary support to continue trading and that it could not pay its debts as and when they fell due. The audit opinion would have had to conclude that Jaja was insolvent and not a going concern. It would have had to further conclude that Jaja had to be valued on a liquidation basis. 486 If Jaja's true financial position as disclosed in Mr Humphreys' amended balance sheet had been known as at August 1999, the company had to have stopped trading immediately. Jaja could not have applied to continue to participate in the Fund. It had to cease trading immediately. Even if it did not, the Fund could not have supported a company which was hopelessly insolvent by imposing a condition that the company obtain a QBE guarantee in the sum of $220,000. That guarantee may have been some protection to the Fund but it would have been no protection to the general body of creditors. 487 I find that if the Fund had become aware on either 27or 30 August 1999 of Jaja's true financial position it would have immediately ceased Jaja's participation in the Fund. 488 I reject the Fund's case to the contrary. 489 If Jaja had ceased to be a participant in the Fund, the Fund would have been liable for any claims of any of the then clients of Jaja who had paid money for travel services not provided. The Fund would have been liable under the Deed for the reasons which I have already explained. 490 No attempt has been made by the Fund or its witnesses to identify Jaja's client to which and the amounts for which the Fund would have been liable as at, say, 30 August 1999. 491 The clients who had paid for travel services which had not been provided as at, say, 30 August 1999 could easily have been ascertained from the clients' trust account ledger. That was a task that Mr Humphreys had undertaken as at 30 June 1999. He had ascertained in his inquiry that as at that date the total amount paid for services not provided was $182,079. He could have been asked to undertake the same task as at 30 August 1999. One further matter would need to have been ascertained so as to determine the Fund's liability to the then clients of Jaja. Each of the clients would need to have been approached to ascertain whether they were protected against a loss caused by Jaja's inability to repay the amount paid or provide the traveller's services by a policy of insurance: see clause 15.1(c) of the Deed. 492 It seems to me that the Fund needed to establish those facts so that it could establish its damages. Its damages must be the additional sum which it was called upon to pay by reason of its allowing Jaja to continue to participate in the Fund after 30 August 1999 and up to and including either 23 February 2000 or 29 February 2000. 493 The Fund had an existing liability to Jaja's clients as at 27 or 30 August 1999. It had to discharge that liability. By relying on the audited financial statements, it allowed Jaja to continue to participate in the Fund up until the time that Jaja advised that it was insolvent in February 2000. The true measure of the Fund's loss is the amount by which its liability increased to Jaja's clients between August 1999 and 23 or 29 February 2000. 494 The measure of damages must be the difference between the Fund's liability as at 27 or 30 August 1999 and its liability as at February 2000. 495 Sometimes a court is called upon to assess damages on incomplete information, when a plaintiff or an applicant cannot establish, with any real certainty, all of the facts which could give rise to a precise assessment of the plaintiff/applicant's loss. In those circumstances, a court must do the best it can. 496 Where there are difficulties in establishing loss, the law does not permit those difficulties to defeat an appropriate claim for damages. Where those difficulties exist, the court must do the best it can to assess damages: Fink v Fink (1946) 74 CLR 127. In the Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 83, Mason CJ and Dawson J said: 'The settled rule, both here and in England, is that mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can. Indeed, in Jones v Schiffmann (1971) 124 CLR 303 at 308 Menzies J went so far as to say that that "assessment of damages … does sometimes, of necessity involve what is guesswork rather than estimation". Where precise evidence is not available the Court must do the best it can. And uncertainty as to the profits to be derived from a business by reason of contingencies is not a reason for a court refusing to assess damages.' See also Gaudron J at 153. 497 But there is a difference between an applicant who cannot establish the facts and circumstances upon which the assessment must proceed and an applicant who elects not to do so. As I say in the former case, a court will do the best it can. In the latter case, the applicant must fail for want of proof of damages. 498 In Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 196 ALR 257, Hayne J said at [37]-[38]: '[37] Placer undoubtedly bore the burden of proving not only that it had suffered damage as a result of Thiess Contractors' breach of contract, but also the amount of the loss it had sustained. It goes without saying that it had to prove these matters on the balance of probabilities and with as much precision as the subject matter reasonably permitted. [38] It may be that, in at least some cases, it is necessary or desirable to distinguish between a case where a plaintiff cannot adduce precise evidence of what has been lost and a case where, although apparently able to do so, the plaintiff has not adduced such evidence. In the former kind of case it may be that estimation, if not guesswork, may be necessary in assessing the damages to be allowed. References to mere difficulty in estimating damages not relieving a court from the responsibility of estimating them as best it can may find their most apt application in cases of the former rather than the latter kind. This case did not invite attention to such questions. Placer sought to calculate its damages precisely.' 499 This is a case where the Fund could have proved its starting point for the assessment of the applicants' loss. It chose not to. In those circumstances, it could not prove its damages. No satisfactory explanation has been advanced by the Fund as to why it chose not to establish the starting point for the assessment of its damages. 500 The only information before the Court relating to the Fund's potential liability as at 30 August 1999 is contained in the financial statements of 30 June 1999. For reasons already expressed, those financial statements are not accurate. There is Mr Humphreys' evidence which shows that the amount paid by trust creditors at that time for which services had not been provided was in the order of $182,079. 501 Let it be assumed, wrongly in my opinion, that was the Fund's liability as at 30 August 1999. It may or it may not have been. I cannot know that but, for the purpose of the exercise, I shall assume it to be. 502 On my findings, Jaja would have ceased to trade some time in August 1999 and immediately upon the auditor giving the auditor's opinion. It would not have obtained the QBE guarantee. The Fund then would have been liable to Jaja's clients in the order of $182,000. 503 In due course, the Fund became liable to Jaja's clients (who were probably different clients at that time but, nevertheless, claimants under the Fund) in the sum of $266,135. The Fund received $66,000 from QBE pursuant to the guarantee which was provided because the Fund allowed Jaja to continue to participate in the Fund. Credit must be given for that amount. The Fund's loss is therefore in the order of $200,000. 504 The difference between the amount which the Fund would have had to have paid assuming that it had a liability to Jaja's clients as at August 1999 of $182,000 and the amount it paid, was in the order of $18,000. 505 However, there are two further pieces of evidence which are relevant to a consideration of the loss suffered by the Fund. Mr Humphreys acknowledged that the sum of $182,079 might be understated to the extent of $6,000, being a further payment made by Mount Lilydale College. The trial balance does not disclose the receipt of a cheque for $6,000 which that client undoubtedly paid on or about 25 June 1999. Mr Humphreys agreed that that would increase the trust creditors to $188,000. I find that the trust creditors as at 30 June 1999 were $188,000. 506 Because the Fund's loss then is the difference between the amount that it paid after recouping the sum of $66,000 from QBE and the amount for which it would have been liable if it had been presented with accurate financial statements for Jaja as at 30 June 1999, the increase in the trust creditors reduces the Fund's loss by $6,000. 507 However, there is one further sum to which regard might have to be taken. As mentioned earlier, Ms Gottschalk, the fourth respondent, has paid the Fund the sum of $10,000 in satisfaction of the proceedings against her. Whether that sum has been paid in satisfaction of the Fund's loss or in satisfaction of the Fund's costs is not clear. If it has been paid in satisfaction of the Fund's loss then credit might need to be given for it. 508 Therefore, if I am wrong, and there is sufficient evidence upon which the Fund's damages could be assessed, they would assess in the order of $2,000. 509 However, for the reasons which I have given, in my opinion, the proceeding should be dismissed for the Fund's failure to prove its damages.

I certify that the preceding five hundred and nine (509) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lander.

Counsel for the Applicants: Mr P G Cawthorn

Solicitor for the Applicants: McCabe Terrill

Counsel for the First and Second Respondents: The First and Second Respondents did not appear

Counsel for the Third Respondent: Ms Y Gottschalk appeared in person

Counsel for the Fourth Respondent: Mr M W Thompson

Solicitor for the Fourth Respondent: Herbert Geer & Rundle

Counsel for the Fifth Respondent: Mr P J Cosgrave

Solicitor for the Fifth Respondent: Moray and Agnew

Date of Hearing: 4, 5, 6, 7, 8, 11, 12, 13, 20, 21 April 2005

Date of Judgment: 13 September 2005