Kirby v Centro Properties Limited

THE LAW 7 The principles to be applied are well settled. 8 The principles respecting disqualification for apprehended bias represent a balance between two competing policy considerations, namely the maintenance of public confidence in the judicial system, by ensuring that the public perceive that cases are decided only by reference to the evidence before the court, and the need for judges to discharge their duties unless good reason is shown. 9 The apprehension of bias principle is stated in Ebner v The Official Trustee in Bankruptcy (2000) 205 CLR 337 at [6] where Gleeson CJ, McHugh, Gummow and Hayne JJ said (subject to qualifications relating to waiver and necessity): … a judge is disqualified if a fair-minded lay observer might reasonably apprehend that the judge might not bring an impartial mind to the resolution of the question the judge is required to decide. 10 The question is one of possibility (real and not remote), not probability. If there is an appropriate apprehension of bias, then the judge must disqualify himself or herself, no matter what case management considerations arise in the efficient and effective determination of a proceeding. 11 In Ebner, the majority in the High Court affirmed that the application of this test involves two steps. First, there must be identification of what it is that might lead a judge to decide the particular questions before him or her other than on the merits. Second, having identified the factors or circumstances that might influence a departure from meritorious decision-making, it is "no less important" to articulate the "logical connection" between those factors and the fear that the judge might not apply proper judicial method (that is, merits based decision-making) in resolving the controversy on the facts and the law (at [8]). 12 The mere fact that a judge has made a particular finding on a previous occasion does not necessarily give rise to an apprehension of bias. Nevertheless, in some situations previous findings may lead to disqualification and "what kind of findings will lead to relevant apprehension of bias must depend upon their significance and nature": Gascor v Ellicott [1997] 1 VR 332 at 348 (Ormiston JA); see also at 342 (Tadgell JA with whom Brooking JA agreed); and see Cabcharge at [34]. 13 However, as the majority observed in British American Tobacco Australia Services Ltd v Laurie (2011) 242 CLR 283, the lay observer is the "yardstick", and in this regard: … the lay observer might reasonably apprehend that a judge who has found a state of affairs to exist, or who has come to a clear view about the credit of a witness, may not be inclined to depart from that view in a subsequent case. It is a recognition of human nature (at [139]). (Original emphasis.) 14 The application of these principles does not change merely because a judge expressly acknowledges at the hearing of the first proceeding that different evidence may be led in the later proceeding, casting new light on the facts he or her had found in the previous proceeding. This is assumed to occur in any event. Such an acknowledgment does not necessarily remove the impression created by reading the earlier judgment that the views there stated might influence the determination of the same issue in a later judgment: see Laurie at [145] per Heydon, Kiefel and Bell JJ. 15 These principles must be carefully applied. It has been said that: "… disqualification flows from a reasonable apprehension that the judge might not decide the case impartially, rather than that he will decide the case adversely to a party": Cabcharge at [32]; Re JRL; Ex parte CJL (1986) 161 CLR 342 at 352 (Mason J). 16 Needless to say, disqualification of a judge by reason of prejudgment must be "firmly established": Cabcharge at [25]; Re JRL at 352. Judges should not accede too readily to recusal by reason of apprehended bias. 17 To apply these principles in any given case is a matter of judgment and evaluation depending on the exact circumstances. Undoubtedly, the question of an apprehension of bias requires one to focus on the issues that the judge is called upon to decide - see eg British American Tobacco Australia Ltd v Gordon (2007) NSWSC 109 at [97] per Brereton J. No strict approach should be taken in identifying the legal and factual issues. The issues before a judge sought to be disqualified may well be different in some respects to those issues determined in the earlier proceeding. At the core of the inquiry is an examination of the legal and factual issues on foot and the extent to which previous findings may, in the eyes of the fair-minded lay observer, impact on the judge's ability to decide the matter other than on its merits. 18 Because the test of apprehended bias involves "a fair-minded lay observer" who is observing a judge, the assumed characteristics of each need to be considered. 19 A judge is trained and is required "to discard the irrelevant, the immaterial and the prejudicial": see Vakauta v Kelly (1988) 13 NSWLR 502 at 527 (McHugh JA), adopted in Vakauta v Kelly (1989) 167 CLR 568 at 584-585 (Toohey J); Johnson v Johnson (2000) 201 CLR 488 at [12] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ); and Laurie at [80] (Gummow J); and at [140] (Heydon, Kiefel and Bell JJ). 20 As to the "reasonable observer", in Laurie at [145], Heydon, Kiefel and Bell JJ affirmed that a reasonable observer would note the possibility of the evidentiary position changing between the previous proceeding and the subsequent proceeding. 21 In R v Burrell (2007) 175 A Crim R 21; [2007] NSWCCA 79 at [11], McClellan CJ at CL (with whom the other members of the New South Wales Court of Criminal Appeal agreed) stated that: The ordinary fair minded person understands that in the exercise of the judicial function it will be necessary, from time to time, for a judge to reconsider matters which have previously been considered or which may have been pronounced upon by that particular judge. 22 In Sengupta v Holmes [2002] EWCA Civ 1104, at [35]-[37], Laws LJ (Jonathan Parker LJ agreeing) stated that the fair-minded observer would recognise that a professional judge would be capable of departing from an earlier expressed opinion. 23 However, as I have indicated, applying these principles will be a matter of judgment and evaluation in the circumstances. The application of these principles to particular facts in earlier authorities, concerning as they do, the particular circumstances that may or may not have lead a judge to be disqualified, are not to be elevated to the "principles" to be applied. Nor is the application of the principles in any given case to be used as a gloss upon those principles. As the authorities demonstrate, including Laurie, the principles are relatively well established, but in the application of these principles reasonable minds may differ as to the result. 24 It remains to consider the ASIC proceeding, and my findings in that proceeding which are relevant and contested in these proceedings.

FINDINGS IN THE ASIC PROCEEDING 25 The hearings in the ASIC proceeding were contested hearings both as to liability and penalty. The liability hearing lasted for a number of weeks and involved evidence from numerous witnesses. Consideration was given to a large volume of factual material, involving cross-examination (including cross-examination of an expert called by ASIC, Mr Lonergan). A number of findings and conclusions were made about a variety of legal and factual issues. In reliance upon those findings the Court made declarations of contravention against the defendants and imposed penalties. The findings were sufficiently conclusive to form a proper basis for those orders. 26 Looking at the pleadings in these proceedings (including the cross-claims), the area of overlap between the factual and legal matters canvassed in the ASIC proceeding and these proceedings is extensive. I am not concerned with a lone finding or the evidence of a single witness. 27 It is convenient to mention some of the more significant findings of fact I made in the ASIC proceeding, which to a lesser or greater extent are in contention in these proceedings. 28 PwC and PwCS identified nine broad issues upon which I made factual findings (or, at least, began to analyse the facts) and which are in contention in these proceedings. From this, they argue, a fair-minded lay observer might reasonably apprehend bias on my part. That is, there might be the perception I cannot be persuaded otherwise as to the facts I found in the ASIC proceeding. 29 I will identify these nine issues in turn, by reference to the Liability judgment, although certain matters were repeated or elaborated on in the Penalty judgment.

Mr Lonergan's expertise 30 An expert opinion - of a Mr Lonergan - upon which ASIC relied in the ASIC proceeding, is intended to be used in these proceedings. Mr Lonergan's main affidavit in the ASIC proceeding exhibited three reports. It appears that the third of these reports is intended to be relied upon in these proceedings. In the ASIC proceeding, I found that this third report: … addressed the "significance" of the matters which Lonergan opines should have been the subject of disclosures (the "omitted matters") for users of CNP and CER's financial statements between 18 September 2007 and 14 December 2007, the relevance of those matters to an assessment of the value of CNP and CER stapled securities in that period, and whether disclosure of the omitted matters was likely to "influence" users of the financial statements who were considering whether to buy, sell or hold (at [439]). 31 The first contention that PwC and PwCS have is that Mr Lonergan lacks the expertise to give the relevant evidence and that any report in similar terms to the third report would be otherwise inadmissible. This, they submitted, goes to the very core of the present proceedings, as Mr Lonergan's report opines that alleged errors in the financial statements of CNP and CER were material to the market price of the relevant securities or to any decision to buy, sell or hold securities. 32 In relation to Mr Lonergan's expertise and the admissibility of his evidence under s 79 of the Evidence Act 1995 (Cth), I found at [446]: Based on the evidence before me in this proceeding, I am satisfied that Mr Lonergan has the expertise to opine as he does in his reports, and has not gone beyond his field of specialisation. Without going into detail of all of his "experience", the affidavit sworn on 29 March 2011 satisfies me that Mr Lonergan is able to opine within his area of specialist knowledge on the impact of the relevant omissions in the accounts on users of the financial statements. 33 There is a discussion in the following paragraphs ([447]-[456]) as to the type of evidence that Mr Lonergan could give based on his expertise. At [455] I made the following remarks: In my view, on a fair reading Mr Lonergan's second and third reports, these reports do not contain statements which are unsupported by any articulated chain of reasoning, and are based on his specialised field of knowledge that has been applied in reaching those views… To a certain extent the opinion is "speculative", but this is because of the nature of the inquiry as to whether disclosure of the guarantees was required and the impact on the market. 34 I recognise, however, that there is a difference between having preconceived views about the credit or expertise of an expert and the credit or trustworthiness of a lay witness - see Vakauta v Kelly (1989) 167 CLR 568 at 571.

Materiality of errors in the financial statements of CNP and CER 35 The second finding with which PwC and PwCS take issue is the materiality of the alleged errors in the financial statements of CNP and CER. That is, whether the errors potentially affected the price of the relevant securities and any decision to buy, sell or hold those securities. Mr Lonergan's third report - parts of which is summarised at [473] - contains a number of points about the materiality of the errors. They are: Even if CNP could have refinanced some or all of its commitments, CNP was likely to incur significantly higher funding costs as credit spreads had increased. Furthermore, CNP's short-term commitments were so great and its liquidity position so poor that its negotiating position with lenders would have been very weak. … In the context of the deepening of the GFC in the US over the period from 18 September 2007 to 14 December 2007, it would have been apparent to the users of CNP's financial statements that CNP's refinancing risk must have become worse during this period. … If Centro had lodged with ASX on 18 September 2007 the Notional Amended CNP annual report, in Mr Lonergan's view, the CNP omitted matters would have been relevant to the assessment of the value of CNP Stapled Securities by users of the annual financial statements who were considering whether to buy, sell or hold those securities in the period from 18 September 2007 to 14 December 2007. … If Centro had lodged with ASX on 18 September 2007 the Notional Amended CNP annual report, in Mr Lonergan's view, the CNP omitted matters would have been likely to significantly influence users of the financial statements who were considering whether to buy, sell or hold CNP Stapled Securities in the period from 18 September 2007 to 14 December 2007 in deciding whether to acquire or dispose of those securities. … If Centro had lodged with ASX on 18 September 2007 the Notional Amended CER annual report, the CER omitted matters would have been relevant to an assessment of the value of CER Stapled Securities by users of the annual financial statements who were considering whether to buy, sell or hold those securities in the period from 18 September 2007 to 14 December 2007. … If Centro had lodged with ASX on 18 September 2007 the Notional Amended CER annual report, the CER omitted matters would have influenced users of the financial statements who were considering whether to buy, sell or hold CER Stapled Securities in the period from 18 September 2007 to 14 December 2007 in deciding whether to acquire or dispose of those securities. 36 In [475] I said: In my view, the opinions of Mr Lonergan, which I accept, can be supported on the basis of this material which is all admissible before the court.

Obviousness of errors in the financial statements 37 Another issue in these proceedings is the extent to which PwC and the directors of CNP and CER ought to have realised the alleged errors in the financial statements of CNP and CER. PwC and PwCS submitted that "a consistent theme may be discerned from the judgment in [the ASIC proceeding] that the alleged errors in the financial statements were obvious and apparent on their face". PwC and PwCS point to paragraphs [391]-[392] in support of this: Third, I accept that to form a final and proper view of the correct classification may involve an investigation of the facilities themselves, and whether agreement had been reached regarding any extension, roll over or refinancing. However, this is not what is being asked of the directors in this proceeding. They must have known or at least thought simply because negotiations were taking place to refinance or extend, that the expiry or maturity date of the facilities was short-term. This is all that they needed to know, along with a general or basic understanding of the classification requirement, to raise the question as to the appropriateness of the classification. The complexity of the documentation is neither here nor there on this issue - the maturity date would be apparent, and unless it had been extended, negotiations taking place were immaterial, no matter how optimistic Centro was about the future. 38 Other paragraphs could be referred to, including [566] and [569]. In the latter paragraph I made reference to "obvious errors" being missed. This is a matter in contention in these proceedings.

PwC's access to information 39 PwC and PwCS' fourth contention is that PwC did not have sufficient and appropriate access to relevant information to conduct its audit. At [237] I listed a number of submissions made by the directors in the ASIC proceeding in relation to PwC, including their submission that: (c) … (ii) PwC had complete access to staff and information to conduct its audit; … 40 Then, at [238] I said that "for the purposes of this proceeding, I accept these submissions, and proceed on the assumptions contained within them…".

The market, economy and Centro Group 41 The fifth set of findings with which PwC and PwCS take issue are findings I made about the state of the market, the economy and Centro Group at the relevant time, around September 2007. PwC and PwCS submitted that I made relevant findings in a number of paragraphs. 42 At [312], I held that the non-executive directors knew a number of facts in relation to financial risk management, including that: (e) around August to September 2007, refinancing of facilities could occur, although with the market difficulties there might be some impact on price. 43 At [413]-[414], I found: I accept the position of the non-executive directors, that in the period leading up to 6 September 2007, the information regarding the state of the economy and fundraising was fundamentally positive. The advice given to the non-executive directors by Centro's CEO and CFO would not have led the non-executive directors to hold any concerns about the group's ability to raise debt or equity or the realisable value of its assets... 44 And, after discussing what the non-executive directors were told at board meetings in August and September 2007, I concluded at [418]-[419]: As was the case with the August 2007 board meeting, there was nothing said in the September 2007 board meeting which ought to have raised concerns any further on the part of the directors regarding the management of maturing facilities and management's program to roll over, extend or refinance maturing facilities. Each of the non-executive directors has given evidence that he did understand that CNP had substantial short-term liabilities due to mature before 30 June 2008 and that CER had some debt facilities due to mature in 2008. However, I accept this understanding in the context of: (a) Centro's long and consistent history of rolling over or extending its finance facilities; (b) the positive information the non-executive directors were given at the August and September 2007 board meetings by the CFO and CEO as to Centro's ability to re-finance those short-term or maturing liabilities.

Scope of PwC's retainer with Centro and work done 45 PwC and PwCS' sixth contention is that the scope of PwC's retainer with Centro was more limited than found in the ASIC proceeding. In particular, the non-executive directors were not entitled to place reliance on PwC to ensure that the management representation letter complied with s 295A of the Corporations Act 2001 (Cth). In this regard, PwC and PwCS rely on paragraph [519] to show that I have already made factual findings on this issue: I accept that the non-executive directors were entitled to place trust in PwC, Moore Stephens, the CFO, Mr Hutchinson, Mr Belcher and Ms Hourigan to ensure that the management representation letter provided to them complied with s 295A of the Act. Each of those people had expertise in the field and by their receipt of draft letters and attendance at BARMC meetings had ample opportunity to detect and inform the directors that the letters did not expressly provide for the opinion required by the section…

Whether audit clearance was given 46 The seventh contention of PwC and PwCS is that I found in the ASIC proceeding that PwC gave audit clearance to the Appendix 4E ('App 4E') accounts. In these proceedings, PwC and PwCS will submit that such clearance was not given by PwC; specifically, the App 4E accounts are not audited accounts. 47 At [214] of the decision, I found: … PwC attended numerous meetings of the BARMC and, whatever form of words may have been used by the relevant advisors at PwC, Mr Cougle and Mr Fekete, there seems no doubt that (in accordance with PwC's audit plans) they gave the App 4E accounts and the full financial statements audit clearance… 48 At [237] I referred to the submissions of the directors, including that: (c) … (iv) PwC gave audit clearance of the App 4E financial statements at the August 2007 BARMC and the final accounts at the September BARMC meeting; … 49 I accepted this submission at [238], although I noted that ASIC did not contend to the contrary.

Whether the directors were notified of changes to the accounts 50 PwC and PwCS' eighth contention is that PwC did notify the directors of CNP of the change between the App 4E accounts and the final accounts, in particular at the 5 September 2007 BARMC meeting. In the ASIC proceeding, I found to the contrary, at [215]: I also accept for the purposes of this proceeding that neither management nor PwC brought to the directors' attention the change between the App 4E and the final accounts. If the audit committee and the board had been advised that a material error had been detected, this should have prompted them to inquire into the nature and reason for the error. 51 At [274]-[278] there is some discussion about whether the directors had knowledge of the reclassification of the interest bearing current liabilities after the App 4E accounts were released. ASIC's amended statement of claim did not plead that the non-executive directors were informed that an error had been found in the App 4E accounts. I proceeded in the ASIC proceeding on the basis that the matter was not raised. 52 Although I made no findings of fact per se on this issue, Counsel for PwC and PwCS submitted that it indicates that I have already begun to analyse facts which will need further analysis in this case. 53 PwC and PwCS also point to a number of paragraphs in which I made observations about the recording of events at the 2 August 2007 BARMC meeting, including at [327]: The company secretary, Elizabeth Hourigan, took handwritten notes during the meeting. She was a very diligent note taker, and her notes are comprehensive and detailed. It is apparent from her notes that the following relevant events occurred at this meeting… 54 In [333] I accepted that Ms Hourigan's notes gave a "sound basis for determining what occurred" at the September 2007 BARMC meeting. PwC and PwCS will contest whether Ms Hourigan's notes do give an accurate account as to what occurred at that meeting. 55 At [355] I made further findings about the directors' knowledge: It seems to me that on this evidence it can be concluded, at least, that the information in version draft #4 of the accounts, emailed on 5 September 2007, which was before the directors on 6 September 2007, included the current interest bearing liabilities in the balance sheet and note 18 (but without the reference to the App 4E)…

Whether PwC was working under an old accounting standard 56 PwC and PwCS' ninth - and final - contention is about an observation I made about some email correspondence between a PwC employee, Angela Evans, and an employee of Centro's finance department, Mr Gore. I found that the evidence indicated that they were using an old Australian Accounting Standards Board standard in relation to the classification of current and non-current liabilities. This is disputed in these proceedings by PwC and PwCS. At [370], I said: Angela Evans, an employee of PwC, was working on the audit of Centro. Ms Evans corresponded by email with Richard Gore of Centro. In the process of finalising the full financial statements of CNP, Mr Gore sent an email to Ms Evans on 18 August 2007. Mr Gore provided responses to an "open items list", prepared by PwC, which considered whether material could be produced to show that the JP Morgan facilities could be extended beyond 6 September 2007. The question of whether a facility can be extended after the balance date, but before the reporting date, is a highly relevant inquiry under the old standard, but is quite irrelevant under the new standard. The evidence seems to indicate that both Mr Gore and Ms Evans were operating under the old standard.

CONSIDERATION 57 The first point to make is that, as a matter of principle and in the circumstances of these proceedings, the fact that I had expressly stated in the ASIC proceeding that the findings were made only for the purposes of the ASIC proceeding (or like expressions), is of no real significance. The findings of fact were made in the exercise of judicial power and only made for the purpose of the ASIC proceeding. Whether such expressions are used or not by the judge in an earlier proceeding, the lay observer will appreciate that a judge is capable of putting out of his mind those earlier views expressed for the purpose of fulfilling his or her judicial function in a particular proceeding, as is the responsibility of the judge. 58 The second matter to observe is that the lay observer will take into account that in the ASIC proceeding I had reached a degree of satisfaction or "actual persuasion" of the correctness of my conclusions. I do not consider that it matters whether the findings were made to any particular standard of proof; although the lay observer will take into consideration that, based upon the primary facts, I felt justified in making declarations of contravention of civil penalty provisions, which involved serious misconduct. 59 The third matter to mention again is that every application for a judge to disqualify himself or herself must be considered in the circumstances, particularly taking into account the lay observer's point of view as to "human nature". 60 I consider the circumstances before me are unusual. I appreciate that PwC and PwCS were not parties to the ASIC proceeding, and no issue of credit of any witness arose in that proceeding. I accept that just because findings are made on the same issue that is subsequently to be considered does not necessarily lead to the conclusion that there is a case of apprehended bias. 61 The important consideration in my mind which makes this situation 'unusual' is that I made numerous factual findings in the ASIC proceeding, adverse to the interests of PwC and PwCS in these proceedings. Each of those factual findings are to be contested by PwC and PwCS, and are of individual and cumulative importance and relevance in these proceedings. Even though in some respects the legal issues may differ, the factual findings in dispute are of critical significance in these proceedings. I do not detail the pleadings in these proceedings, but by reference to the pleadings (including the cross-claims) this conclusion is apparent. The context and setting for the consideration of the factual issues to be put into contention by PwC and PwCS in these proceedings are similar to that in the ASIC proceeding. The materiality of the facts and evidence the subject of the ASIC proceeding are live and relevant to the determination of these proceedings. Hence, prejudgment of these facts and evidence, as a matter of logic, could affect the outcome of these proceedings. 62 If there were one or two findings of fact that PwC and PwCS wished to dispute contrary to my earlier findings, the position may well have been otherwise - the lay observer may well have understood that the judge in a subsequent proceeding would look at the matter afresh. After all, this is not a situation where fraud has been found (or suggested) to have been committed by PwC or PwCS, or their credit has been in issue. However, the reasonable observer will display some common sense, which will involve him or her standing back and observing the extent of the findings made in the earlier proceeding which are now sought to be agitated. The reasonable lay observer, even if mindful of earlier qualifications made to findings that were made "for the purposes of [that] proceeding" or based on "the evidence … in [the earlier] proceeding", will nevertheless feel that the extent and number of the findings made (now in contention) might influence my decision. 63 This is particularly so where a theme extends throughout the judgment of the earlier proceeding, such as "the obviousness of the errors" made by the directors. Whilst I did not attribute a reason for other persons (including PwC or PwCS) falling into error, I did conclude that the errors were obvious. This was an important part of ASIC's case (see eg [566]), which I accepted. It has an important impact upon these proceedings, and how the position of PwC or PwCS is perceived. 64 It is the number of factual findings now in contention, upon which I reached judgment in the ASIC proceeding, which makes the apprehension in the eyes of the reasonable lay observer more apparent and potentially real. It may be assumed I would be able to make different findings of fact in this proceeding based upon the evidence in this proceeding. However, where there are so many factual findings which are now in contention, the reasonable lay observer might have an apprehension the judge would find it difficult to 'start afresh'. Other cases, like Cabcharge and A1 v King QC (unreported, Merkel J, 31 May 1996), can be distinguished readily, because of the range of contentious legal and factual issues that overlapped between the relevant proceedings were not as significant or extensive as the overlap between the ASIC proceeding and these proceedings. 65 For the above reasons, I disqualified myself from hearing the trial of these proceedings. I certify that the preceding sixty-five (65) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Middleton.