Sadie Ville Pty Ltd v Deloitte Touche Tohmatsu

Introduction 1 On 9 October 2017, I gave judgment on an interlocutory application filed by the respondents (the Deloitte parties) on 8 September 2017 seeking an order that the applicant's amended statement of claim be struck out in whole or in part: Sadie Ville Pty Ltd v Deloitte Touche Tohmatsu (A Firm) [2017] FCA 1202 (the Reasons). Also dealt with in the Reasons was an oral application by the applicant (Sadie Ville) for leave to amend its amended statement of claim. These reasons should be read together with the Reasons. I adopt the abbreviations used in the Reasons. 2 In the Reasons, I concluded, in summary, that the causation pleadings (contained in [94]-[97] and [114] of the pleading) were deficient. I also considered that further and better particulars were required of [27.2] and [34] and comparable paragraphs of the pleading. Otherwise, I rejected the Deloitte parties' arguments that the pleading should be struck out. 3 The orders made on 9 October 2017 were relevantly to the following effect: (a) Sadie Ville's oral application for leave to amend its amended statement of claim be dismissed; (b) paragraphs [94]-[97] and [114] of the amended statement of claim be struck out; (c) the Deloitte parties' interlocutory application dated 8 September 2017 otherwise be dismissed; (d) within 28 days, Sadie Ville file and serve a proposed second amended statement of claim; and (e) the costs of the Deloitte parties' interlocutory application be reserved. 4 Subsequently, Sadie Ville prepared a proposed second amended statement of claim, with revised causation pleadings and incorporating further particulars in relation to [27.2] and [34] of the pleading. The Deloitte parties did not accept that the proposed pleading met the deficiencies that I had identified in the Reasons. On 1 December 2017, Sadie Ville filed an interlocutory application seeking leave to amend its originating application to the form of Schedule A to that application and leave to amend its amended statement of claim to the form of Schedule B to that application. The matter came before me for a case management hearing on 5 December 2017 during which the parties indicated their positions. The Deloitte parties indicated that they opposed leave to amend being granted. The interlocutory application was then set down for hearing on 18 December 2017, being yesterday. 5 Subsequently, Sadie Ville provided a proposed amended interlocutory application together with a revised form of the proposed pleading, by way of a new Schedule B. This document, headed "Proposed Second Amended Statement of Claim", incorporated certain amendments resulting from the discussion at the case management hearing on 5 December 2017. It is this version of the proposed pleading that was the subject of submissions at the hearing yesterday. I will refer to this document as the "proposed pleading" in these reasons. 6 At the hearing yesterday, the Deloitte parties contended, in summary, that: (a) the further particulars in relation to [27.2] of the proposed pleading were inadequate; (b) the further particulars in relation to [34] of the proposed pleading were inadequate; and (c) the proposed new causation pleadings were deficient. It was accordingly submitted on behalf of the Deloitte parties that leave to amend should be refused. 7 In the course of submissions, Sadie Ville conceded that certain references or words used in the proposed pleading were inapposite and indicated that it was content to adjust the wording of the proposed pleading in several respects to address criticisms made by the Deloitte parties. 8 For the reasons that follow, I consider that, subject to making the changes discussed in the course of submissions, leave should be granted to Sadie Ville to amend its amended statement of claim to the form of the proposed pleading. 9 In relation to the applicable principles, I refer to the discussion at [15]-[21] of the Reasons. 10 The overall structure of the proposed pleading is the same as that found in the proposed second amended statement of claim (PSASOC) as considered in the Reasons. I refer to the overview of the PSASOC at [22]-[52] of the Reasons. 11 I will now address the three issues raised by the Deloitte parties.

Further particulars to [27.2] and comparable paragraphs 12 At [59] of the Reasons, I noted that [27.2] of the PSASOC alleged that the August 2010 Information was "information that ought reasonably to have been detected and reported by a professional company auditor exercising due skill and care to conduct the audit of Hastie's FY2010 Financial Statements in accordance with DTT's Statutory Audit Obligations" and said that there was some force in the criticism of this paragraph made by the Deloitte parties to the effect that the basis upon which it was said that the August 2010 Information "ought reasonably to have been detected and reported" was not disclosed. I said that I considered it appropriate that Sadie Ville provide, at least by way of particulars, an explanation of the basis for this allegation. The same applied to the comparable paragraphs elsewhere in the PSASOC. 13 In the proposed pleading, Sadie Ville has addressed this matter by inserting new paragraphs [27.1A] and [27.1B] before [27.2] and adjusting [27.2] to refer to these paragraphs. Paragraph [27.1A] is to the effect that the August 2010 Information (ie, the alleged deficiencies in the FY2010 financial statements: see the Reasons at [23]) "concerned matters that the Auditing Standards and/or section 307 of the Corporations Act required an auditor to consider, and verify by sufficient appropriate audit evidence, being …" the matters set out in sub-paragraphs (a) to (l). These sub-paragraphs relate to each of the sub-paragraphs of [26], which collectively set out the August 2010 Information. Generally speaking, sub-paragraphs (a) to (l) of [27.1A] rely on aspects of the auditing standards rather than specific factual matters. Paragraph [27.1B] states that, in the premises of [27.1] and [27.1A], the August 2010 Information "concerned matters in respect of which DTT was empowered to require Hastie and/or its officers to provide further information sufficient to constitute sufficient appropriate audit evidence". Following these paragraphs, [27.2] alleges that, in the premises of [27.1] to [27.1B], the August 2010 Information "was information that ought reasonably to have been detected and reported by a professional company auditor exercising due skill and care to conduct the audit of Hastie's FY2010 Financial Statements in accordance with DTT's Statutory Audit Obligations". 14 One of the criticisms of [27.1A] made by the Deloitte parties was that, in the opening lines, the word "verify" is used. This was said to be inapposite in the context of audit obligations. Sadie Ville accepted this criticism in its submissions and indicated its preparedness to adjust the language to use the words "obtain … about" instead, such that the phrase would read "obtain sufficient appropriate audit evidence about". 15 More substantively, the Deloitte parties submit that the proposed new paragraphs do not identify the procedures that would have been adopted by a reasonably competent auditor and that would have inevitably led to the discovery of the August 2010 Information, relying on Smith v Australian Executor Trustees Limited [2017] NSWSC 1406 at [139]. However, this submission does not reflect the role that these paragraphs play in the proposed pleading as a whole and in effect seeks to revisit matters covered in the Reasons. The apparent purpose of proposed new paragraphs [27.1A] and [27.1B] is to provide a basis for the allegation in [27.2] that the August 2010 Information was information that "ought reasonably to have been detected and reported" by a professional company auditor. Other paragraphs of the pleading, in particular [31], address the alleged deficiencies in the conduct of the audit. 16 In my view, the proposed new paragraphs provide, at least for present purposes, a sufficient foundation for the allegation in [27.2] that the August 2010 Information was information that "ought reasonably to have been detected and reported" by a professional company auditor. If, following discovery and the filing of expert evidence, there is considered to be any lack of clarity as to how Sadie Ville puts its case in this regard, the matter can be revisited. 17 In the course of submissions, counsel for the Deloitte parties noted that the particulars under 26.5 of the proposed pleading refer to paragraph 139 of accounting standard AASB139, when in fact there is no such paragraph. Senior counsel for Sadie Ville, in response, accepted that this was an error and indicated that Sadie Ville would correct this. 18 The comparable paragraphs of the proposed pleading in relation to the 1H2011 financial statements are [43.1A], [43.1B] and [43.2]. In addition to the submissions referred to above, the Deloitte parties submitted that these paragraphs did not reflect the fundamental difference between an audit engagement and a review engagement. For example, in the opening lines of [43.1A], the words "audit evidence" are used. Senior counsel for Sadie Ville accepted that these words were inapposite and offered to change the word "audit" to "review". However, he submitted that the paragraphs do otherwise reflect an understanding that they are concerned with a review engagement, noting that the words "review engagement" are used in the opening lines of [43.1A]. Given the presence of these words, and the fact that this section of the pleading is concerned with a review engagement, I would read the proposed new paragraphs as intended to refer to a review engagement. 19 Accordingly, subject to making the changes referred to above, I would reject the Deloitte parties' submissions in relation to [27.1A], [27.1B] and [27.2] and comparable paragraphs of the proposed pleading.

Further particulars to [34] and comparable paragraphs 20 In [78] of the Reasons, I noted that the Deloitte parties had also criticised the PSASOC in relation to the "ought reasonably to have known" element of s 1041E(1)(c)(ii) of the Corporations Act 2001 (Cth). The pleading of this element in relation to the FY2010 audit was at [34] of the PSASOC. I expressed the view that this paragraph did not explain the basis upon which it was alleged that DTT "ought reasonably to have known" the relevant matters, and that this issue should be addressed by Sadie Ville by the provision of further and better particulars: see Tamaya Resources Ltd (in liq) v Deloitte Touche Tohmatsu (a firm) (2016) 332 ALR 199 at [195], [202]. I said that the same applied to the comparable paragraphs elsewhere in the pleading. 21 In the proposed pleading, Sadie Ville has included new or revised particulars under each of [34.1], [34.2] and [34.3]. In some respects, these involve cross-referencing to other paragraphs of the pleading. For example, it is contended that DTT ought reasonably to have known the August 2010 Information by reference to the matters alleged in [27] and [31] of the proposed pleading. In relation to the allegation that DTT ought reasonably to have known of the alleged breaches, it is contended (among other things) that the alleged breaches concerned the conduct of DTT "comprising material non-compliance with the Auditing Standards", as alleged in [31] of the proposed pleading. 22 The Deloitte parties submitted that these particulars do not provide sufficient detail, relying in particular on Whittenbury v Vocation Limited [2017] FCA 1185 at [49]-[53]. It was also submitted that the proposed pleading is elusive as to the attribution of knowledge. 23 In my view, the proposed particulars under [34.1], [34.2] and [34.3] provide sufficient detail, at least for present purposes, as to how Sadie Ville puts its case in relation to the "ought reasonably to have known" element of s 1041E(1)(c)(ii). It should be noted that [34] is not the only paragraph of the pleading that deals with the elements of s 1041E(1). The various elements are separated out in a clear manner. Thus, the proposed pleading conforms to the matters discussed in Whittenbury at [49]-[53]. In relation to the attribution of knowledge, the observations in Whittenbury at [50], upon which the Deloitte parties relied, appear to have been directed to the particular pleading in that case, which referred specifically to a particular person. In contrast, [34] of the proposed pleading is expressed in terms of DTT, that is, the firm. In any event, if following discovery and the delivery of expert evidence there is any concern as to how Sadie Ville puts its case, the matter of the particulars under [34] can be revisited. Accordingly, I would reject the Deloitte parties' submissions as to the particulars under [34] and comparable paragraphs of the proposed pleading.

Causation pleadings 24 At [80]-[81] of the Reasons, I expressed the view that the causation pleadings in the PSASOC (and the amended statement of claim, being the then current pleading) were deficient. Accordingly, I struck out [94]-[97] and [114] of the amended statement of claim. 25 In the proposed pleading, Sadie Ville has put forward new causation pleadings at [97A]-[97K] and [114A]-[114E]. These paragraphs separate out the various alleged representations and contraventions and set out, in each case, the alleged consequences. In my view, these new pleadings address the deficiencies that I identified in the Reasons. 26 The Deloitte parties made submissions in respect of a number of particular aspects of the proposed new paragraphs. In my view, the points made go to the merit or otherwise of the proposed new paragraphs, rather than the adequacy of the relevant paragraphs as a matter of pleading. Further, the points made by the Deloitte parties relate to only a small number of the paragraphs or sub-paragraphs of the proposed new causation pleadings. It was not suggested that the other paragraphs of the proposed causation pleadings were untenable. In these circumstances, it is not productive to engage in a detailed examination of a small number of allegations within the causation pleadings. In any event, as indicated above, I consider that the points made by the Deloitte parties, in respect of the paragraphs that were the subject of submissions, go to the merits of the allegations, rather than the adequacy of these paragraphs as a matter of pleading. 27 The Deloitte parties also submitted that the paragraphs in the proposed pleading regarding what the audit opinion or review opinion should have said were inadequate. Reference was made, by way of example, to [47.9] of the proposed pleading. It was submitted that this paragraph in effect covers every conceivable possibility. While it may be accepted that a pleading in this form does not narrow the case, and that such a pleading does not assist the efficient conduct and disposition of the proceeding, it needs to be recognised that discovery has not yet taken place and there is, therefore, a prospect of the case being narrowed following discovery and the filing of expert evidence. This is a matter that can be revisited at that stage. 28 For these reasons, I consider the proposed causation pleadings to be adequate. 29 It follows from the above that, subject to Sadie Ville making the changes discussed in the course of submissions, I would grant leave to Sadie Ville to amend its amended statement of claim to the form of the proposed pleading. No separate points were raised in relation to Sadie Ville's application for leave to amend its originating application. I would therefore also give leave to Sadie Ville to amend that document to the form of Schedule A to the amended interlocutory application.

Discovery 30 Sadie Ville's amended interlocutory application also seeks orders for discovery of an initial tranche of documents comprising, among other things, the audit files for the relevant engagements. I consider it preferable, in terms of the orderly conduct of this proceeding, to address this matter once a defence has been filed. I will therefore adjourn this aspect of the amended interlocutory application to a date shortly after the date for the Deloitte parties to file a defence. 31 I note for completeness that the Deloitte parties submitted that I should make an order for Sadie Ville to file its expert evidence before the Deloitte parties are required to file their defence. However, I do not consider this to be a practical course in circumstances where discovery has not taken place and Sadie Ville has had access to only a limited number of documents.

Costs 32 In the Reasons at [85], I said that if either party wished to agitate the question of costs of the matters dealt with in the Reasons, that party could do so at the next case management hearing. The Deloitte parties submit that the costs of their interlocutory application dated 8 September 2017 should be costs in the cause, on the basis that each party had mixed success. The Deloitte parties seek a costs order in their favour in respect of Sadie Ville's oral application for leave to amend (dealt with in the Reasons) on the basis that costs should follow the event. Sadie Ville submits that there should be no order as to costs as regards the matters dealt with in the Reasons. In my view, it is appropriate that costs be reserved with respect to all the matters dealt with in the Reasons on the basis that each party had a substantial measure of success. I do not consider it practical to separate out the costs of Sadie Ville's oral application to amend, as this was part and parcel of the matters dealt with on the relevant occasions. Accordingly, I will leave intact the previous order that the costs of the Deloitte parties' interlocutory application be reserved and, as the matter has not been specifically dealt with, I will reserve the costs of Sadie Ville's oral application for leave to amend. 33 As regards the costs of Sadie Ville's interlocutory application dated 1 December 2017 and its amended interlocutory application, I consider it appropriate that costs be reserved. Although the Deloitte parties sought an order for costs in their favour, on the basis that the costs were occasioned by Sadie Ville seeking leave to amend, the Deloitte parties have been unsuccessful in their opposition to the application for leave to amend. On the other hand, it would not be appropriate to make an order in favour of Sadie Ville in respect of the hearing yesterday (and I note that no such order was sought) in circumstances where some adjustments to the pleading arose as a result of the submissions made by the Deloitte parties at the hearing. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moshinsky.