Liability of Mr Roseby
65 Austin J was of the opinion that the ingredients of TCF's claim against Mr Roseby for negligent mis-statement and misleading conduct contrary to s42 of the Fair Trading Act, on the ground that he was knowingly concerned in Ms Fry's contravention of s42, had been made out. His Honour said:
"186 When he provided his audit reports for the 1997 and 1998 financial statements and applications, Mr Roseby knew that the TCF would rely on those reports. That is evident from the text of the reports themselves. He was under a duty of care to the TCF. By providing his reports he represented that the accounts presented a true and fair view of the matters required to be dealt with in financial statements and that they complied with applicable accounting standards. He also represented that his audit had been conducted in accordance with Australian Auditing Standards and with due care and skill. The TCF relied on Mr Roseby's report, because the application of the TCF's financial criteria to produce a point score depended upon financial information which it required to be audited. Mr Roseby's conduct of the audit failed to comply with the standard of care to which he was subject, and the representations that he made in his report included inaccurate and misleading representations. This is so, notwithstanding that he was deceived by Mr Fry, who concealed from him information about liabilities, because Mr Roseby's duty, which he did not adequately discharge, was to conduct a proper audit regardless of what he was told by Mr Fry. He was therefore liable to the TCF for the loss caused by his negligent conduct.
187 Mr Roseby's conduct of the audits for the 1997 and 1998 financial statements and applications, and his inaccurate and misleading representations in his reports, constituted misleading conduct for the purposes of s42 of the Fair Trading Act. He was therefore liable under s68 to compensate the TCF for the loss or damage that it suffered by his contravention."
66 Austin J was not persuaded that Mr Roseby was liable to compensate the TCF under s68 as a person involved in Ms Fry's contravention of s42. It had not been established that Mr Roseby actually knew the facts material to Ms Fry's contravention, although he negligently failed to conduct a proper audit which should have uncovered the true facts with respect to liabilities.
67 Austin J's conclusions were again based on his full acceptance of the evidence of Mr Humphreys and Professor Walker about the deficiencies of the 1997 and 1998 audits. According to his Honour, those reports showed that Mr Roseby's work was seriously inadequate and none of their reasoning and conclusions had been undermined. His Honour said:
"188 … Indeed, in final submissions counsel for Mr Roseby did not directly contest the proposition that Mr Roseby was liable to compensate the TCF for losses caused by his client's audits. Rather, counsel submitted that Mr Roseby's audits did not cause the losses which the TCF seeks to recover."
68 TCF's causation case was that by reason of Mr Roseby's conduct in auditing Ms Fry's business in 1997 and 1998, the TCF renewed her participation in the fund and thereby permitted her to continue to trade as a licensed travel agent until February 1999. The TCF alleged that as a consequence it suffered the loss constituted by meeting the claimants' claims.
69 Austin J outlined Mr Roseby's answers to the TCF's case as follows:
"190 First, Mr Roseby points out that Ms Fry's participation in the Fund was terminated on 23 February 1999, and yet after that time either Ms Fry or Mr Fry or their related entities continued to trade as a travel agent. Indeed, since I have found that from November 1998, TSIPL had taken over Ms Fry's travel agency business, the logic of Mr Roseby's position is that the unlawful activity began in November 1998 rather than in February 1999. According to Mr Roseby, the resulting claims arose either entirely or substantially from this unlawful activity. Mr Roseby contends that the audits of Ms Fry's business in 1997 and 1998 cannot be causally related to the TCF losses. The losses were caused by unlawful trading without a licence or participation in the Fund. By their conduct in continuing to trade unlawfully notwithstanding the actions of the Department of Fair Trading, Mr Fry and Ms Fry have broken the chain of causation back to Mr Roseby's audits, according to his contention.
191 I disagree with this submission. If one takes the evidence of Mr Whitaker, Mr Pitts and Mr Given, which I accept, it can be seen that remedial steps would, in all probability, have been taken by the TCF and the Department of Fair Trading substantially earlier than they were in fact taken. A proper audit would have put the TCF in a position to deal with the misleading financial disclosure late in 1997 or early in 1998. In terms of the common sense meaning of causation, Mr Roseby's conduct of the 1997 audit was a cause of the losses, because it allowed a state of affairs to develop in which Ms Fry and Mr Fry were able to continue to trade and expose the clients of the business to losses."
70 Austin J then summarised the second argument put and resolved it as follows:
"192 Secondly, Mr Roseby invites the Court to consider the traditional sine qua non test, namely whether "but for" the negligent audit the TCF would have avoided any claims being made upon it. Mr Roseby submits that any such conclusion cannot be drawn in relation to the 1998 audit. This is because Mr Brattoni gave evidence that it would take up to a month to review the financial information in a renewal application, and if remedial action was then required, at least 21 days would be given for the participant to comply, and in the event of non-compliance, the participant would be invited to put its case at the next meeting of the Management Committee. This evidence means, according to Mr Roseby's submission, that a termination following the renewal application made in November 1998 would be unlikely to have occurred before 18 February 1999.
193 I accept this submission, subject to a qualification. Indeed, it seems to me that the same conclusion follows whether one applies the 'but for' test or the more general common sense concept of causation. In my view, it could not be said that the deficiencies in the 1998 renewal application and financial statements, if they were considered in isolation, could be said to have been a contributing cause to the TCF losses. The qualification is that Mr Roseby's submission requires that the 1998 renewal application and financial statements be considered in isolation. If one considers the 1998 financial disclosure together with the 1997 financial disclosure, taking into account the evidence of Mr Whittaker, Mr Pitts and Mr Given, a different picture emerges. If there had been full disclosure of liabilities in 1997 either initially or in response to some investigations stimulated by the auditor, and then Ms Fry lodged an application for renewal in 1998 showing much larger turnover figures but no liabilities, it stands to reason that the TCF would have responded rather more quickly than Mr Brattoni's timetable implies.
194 Turning to the 1997 audit, Mr Roseby says that at its highest, the TCF's case is that Ms Fry's licence would have been terminated in about February or March 1998 following lodgement of the financial materials in December 1997. But Mr Brattoni gave evidence that the policing of unlicensed trading was the responsibility of the Department of Fair Trading, whose activities were outside the control of the Fund, and he agreed with the proposition that no one knew whether the Frys would have stopped unlicensed trading if Ms Fry's licence had been terminated a year earlier. Moreover, says Mr Roseby, the Fund became aware of serious grounds for concern about the business on 8 February 1999, and rather than freezing bank accounts or requiring a trust account, it merely gave Ms Fry time to resign and terminated her participation two weeks later.
195 This submission does not take into account the evidence of Mr Whittaker, Mr Pitts and Mr Given. The effect of their evidence is that if proper financial disclosure had been made in 1997, Ms Fry's point score would have been minus 6 and the TCF would have imposed a requirement for a bank guarantee or an injection of capital, leading to termination of the licence if this funding was not forthcoming. Either funding would have been provided and so a capital buffer would have been created for the protection of clients, or participation in the Fund would have been withdrawn and Ms Fry's licence cancelled. If funding had been provided for the purposes of the 1997 renewal, it would then have been increased for the 1998 renewal so that, by February 1999, there would have been a capital buffer in the vicinity of $292,000, an amount adequate to meet the claims in fact made. Mr Roseby's deficient audits in 1997 and 1998 were a cause of this capital buffer not being required and obtained.
196 If the TCF's funding requirements were not met for the 1997 renewal, and consequently Ms Fry's participation in the Fund and her travel agent's licence were withdrawn in 1998, no one can be sure that Ms Fry and her father would not then have engaged in unlawful trading causing losses. But there is no evidence that would lead me to conclude that unlawful trading and losses would be more likely than not. The issue is purely one for speculation. What is tolerably clear is that proper discharge of his auditing duties by Mr Roseby would have led to a chain of regulatory events that would have prevented the loss in fact suffered by the TCF."
71 Thirdly, Mr Roseby drew attention to evidence indicating that Mr Fry, through one or more of the companies, Fiji Resorts, Bali Resorts and TSIPL, engaged in unlicensed trading throughout 1997 and 1998. Austin J had found that TSIPL took over the business from November 1998 onwards. TSIPL was never licensed and never audited. Austin J said:
"198 It does not seem to me that Mr Fry's activities, assuming them to have been unlawful, made it improbable that proper auditing of Ms Fry's business in 1997 and 1998 would have avoided the TCF's loss. Whether, if regulatory intervention had taken place after a proper audit, Mr Fry would nevertheless have used one or more corporate entities to conduct unlawful trading, is a matter for speculation. Whether, if he did so, he would have caused loss to anyone and whether, if so, the loss would have been borne by the TCF rather than (for example) trade creditors such as Metro, are matters for speculation upon speculation. The evidence shows that on the balance of probabilities, and applying the common sense test of causation, Mr Roseby's deficient audits were a cause of the loss in fact incurred by the TCF."
72 Mr Roseby's fourth submission was that, as from 8 February 1999, all of the alleged financial misrepresentations had been revealed to the TCF. Therefore any misrepresentation arising from the audit no longer had any operative effect on the TCF. It was submitted that from that date, TCF was entirely the author of its own losses and that it declined to conduct a field audit and permitted participation to continue until 23 February 1999. Thereafter, it left it to the Department of Fair Trading to follow up any potential unlicensed trading. Accordingly, it was submitted losses incurred after 8 February 1999 could have no causal link to any misrepresentation in the audit.
73 Austin J said:
"200 This submission misses the point of the TCF's case on causation. Assuming that the TCF had all relevant knowledge on 8 February 1999, it was then in a position to commence appropriate regulatory steps that would make it likely that losses would eventually be avoided. The losses in fact suffered by the TCF were incurred, principally, during 1999 before closure of the business. The evidence does not show that, if the TCF took its appropriate and usual regulatory measures in a period beginning on 8 February 1999, the actual losses it suffered would have been avoided. However, the evidence does show, on balance, that if Mr Roseby had conducted proper audits and thereby put the TCF in a position to commence its appropriate and usual regulatory procedures in 1998, the losses suffered by the TCF would have been avoided."
74 Fifthly, Mr Roseby drew attention to the fact that the TCF treated the claims it received as discretionary claims, under cl 15.2 of the deed, on the ground that even where payments were made before termination, the failure to account was considered to have arisen while the business was unlicensed. Generally speaking, the dates of travel by claimants, or the dates of the demands made upon the travel agent, or the dates of the claims made upon the TCF, post-dated the termination of Ms Fry's participation in the scheme. Mr Roseby invoked the general principle that "the free, deliberate and informed act or omission of a human being, intended to produce the consequence which it did in fact produce, negatives causal connection", citing HLA Hart and A Honore, Causation in the Law (1959) at 130. Putting the matter another way, the law did not recognise a voluntary payment as amounting to a person's loss or damage unless that person was under a legal obligation to meet the payment. Therefore, it was submitted, the TCF was under no such obligation to meet the claims, because claims were in respect of unlicensed trading and the trustees had a discretion with respect to them.
75 Austin J said:
"203 In my opinion it is correct, in respect of most of the claims, that they were not covered by clause 15.1 of the Deed, because the Claimants' losses did not arise from an act or omission by a participant in the Fund. By the time the losses were incurred, the business had been taken over by TSIPL, which was not a participant, and although Ms Fry remained a participant until 23 February 1999, her business conduct from November 1998 onwards was as agent for TSIPL. Consequently I proceed on the basis that most of the claims were met under clause 15.2, which gives the Trustees an absolute discretion to pay compensation in certain circumstances not governed by clause 15.1.
204 Although the Trustees had a discretion to accept or deny the claims, they were required to exercise that discretion in their capacity as fiduciaries, acting for proper purposes and upon relevant considerations. It is probable that their discretion is in the nature of a trust power ( Re Baden's Deed Trusts [1971] AC 424 at 449 per Lord Wilberforce), and consequently they have an equitable duty to exercise that discretion, when faced with a claim for compensation in proper form. The Court cannot review "on the merits" the exercise by a trustee of an absolute discretion that has been exercised in good faith and without ulterior purpose ( Gisborne v Gisborne (1877) 2 App Cas 300), but the exercise of fiduciary powers is open to review on several grounds, however broad may be the terms of the discretion ( Karger v Paul [1984] VR 161). The Court may determine whether the discretion has been exercised in bad faith or arbitrarily or capriciously or irresponsibly ( Re Pauling's Settlement Trust [1964] Ch 303, at 333; Lutheran Church of Australia v Farmers' Co-operative Executors & Trustees Ltd (1970) 121 CLR 628, at 639; Attorney-General for the Commonwealth v Breckler (1999) 197 CLR 83); whether it has been exercised upon a "real and genuine consideration" ( Dundee General Hospitals Board of Management v Walker [1952] 1 All ER 896, at 905); whether the discretion has been exercised for an ulterior purpose or not in accordance with the purposes for which it was conferred ( Cowan v Scargill [1985] 1 Ch 270; Lock v Westpac Banking Corporation (1991) 25 NSWLR 593); and in a case where the trustee has disclosed the reasons for the exercise of the discretion, whether those reasons are sound ( Re Londonderry's Settlement [1965] Ch 916; Parkes Management Ltd v Perpetual Trustee Co Ltd (1997) 10 ACLR 303)."
76 In Austin J's opinion the evidence did not provide any ground for contending that the trustees acted otherwise than properly in the discharge of their fiduciary responsibilities. Nevertheless the trustees' decisions were constrained by the equitable principles to which his Honour had referred. In particular, the equitable requirement to exercise the discretion for proper purposes, having regard to the objects for which it was conferred, was a substantial limitation. This limitation might well mean that, subject to disentitling factors, a claim in proper form should be allowed, where the loss had been caused to a customer of a travel agent who did not know, and had no reason to believe, that the agent was unlicensed.
"205 That being so, it is incorrect to classify the Trustees' decisions to allow claims as free acts of intervention, breaking the chain of causation. The misleading financial disclosure in 1997 and 1998 set in train a series of events that included the consideration of compensation claims by the Trustees in the exercise of their fiduciary responsibilities, the product of that process being acceptance of the claims and payment of the Claimants."
77 Sixthly, Mr Roseby submitted that, on the evidence, the Metro account holder until June 1997 was Fiji Resorts and thereafter the account holder was TSIPL. He contended that Ms Fry's business acquired tickets from TSIPL and was only indebted to that company for the tickets actually ordered by her for the business, all of which were paid for. Hence, it was said, Ms Fry's evidence that her business had no liabilities at the two balance dates was correct, and consequently the financial statements and renewal applications in 1997 and 1998 did not mistake the liabilities of the business.
78 In Austin J's opinion there were two answers to this submission:
"207 … First, it is contrary to the findings of fact that I have made with respect to the Metro account, on the basis of my review of the whole of the evidence. I have taken the view that from about February 1997 until November 1998, a period that includes the two balance dates, the account holder with Metro was Ms Fry trading as The Travel Shop International. Secondly, while Mr Roseby's submission, if correct, would have answered the allegation that the financial statements were misleading in their assertion that there were no liabilities, it would not have overcome other deficiencies in the financial statements and their audit, as identified by Mr Humphreys and Professor Walker. Those other deficiencies were causally related to the TCF's loss."
79 Seventhly, Mr Roseby contended that even if Ms Fry's personal business was indebted to Metro Travel at the two balance dates, it did not necessarily follow that this fact would have been revealed in an audit. The state of the records, in the possession of Ms Fry and Mr Fry at the time of the 1997 audit, was not known. Metro did not issue regular statements of accounts to the Travel Shop International and the invoices that it issued were not in evidence. While the printout that was in evidence suggested an outstanding debt of approximately $65,000 as at 30 June 1997, Mr Roseby pointed out that there was no direct evidence that the invoices, the subject of the printout, had been issued to and received by Ms Fry before 30 June 1997, or that they were due for payment at or before this date.
80 Austin J disagreed with Mr Roseby's assessment of the evidence on this point and said that the printout was to be read in conjunction with Mr Ng's second affidavit and his oral evidence. His evidence clearly was that, although the due date on the statement may not have been accurate, an amount of approximately $65,000 was owing as at 30 June 1997.
81 Mr Roseby also submitted that Mr Fry, who admitted to deceiving the auditor in 1998, could have succeeded in deceiving the most diligent auditor in 1997 by not revealing invoices or client files and the like. His Honour said:
"210 … However, Professor Walker's evidence established that a diligent auditor would have pursued the question of liabilities in the circumstances in this case, where the accounts asserted that there were no liabilities at all. I infer that, although particular invoices or client files could have been concealed from even the most diligent auditor, Mr Fry would not have been able to persuade a diligent auditor that the business had no liabilities whatever at the balance date. Further, I infer that where the business involved very frequent contact with a ticket consolidator, a diligent auditor would have been concerned to know the state of the account between the ticket consolidator and travel agent, and would not have accepted the assertion that there was no debt in the absence of verification."
82 Mr Roseby argued that the alleged debt to Metro Travel, as at 30 June 1997, could have been matched by corresponding debtors (for example, DMV Travel or TSIPL), whose debts were not accounted for as current assets. This submission, Austin J regarded as merely speculation. The only fact, established by the evidence, was that there was a debt owing to Metro Travel.
83 Mr Roseby said that a payment of $30,000 was proved to have been made to Metro on 2 July 1998, but there was no direct evidence that it was for unpaid invoices issued before 30 June 1998. Austin J was satisfied by other evidence that there was a substantial debt owing to Metro as at 30 June 1998. Moreover, on balance it would be appropriate to infer that the amount of $30,000 paid to Metro on 2 July 1998 was in respect of a debt incurred on or before 30 June 1998. Although neither Mr Humphreys nor Professor Walker was prepared to give evidence that proper audit would in fact have revealed the outstanding liabilities to Metro Travel, their evidence was to the effect that the audit should have been directed towards testing, inter alia, whether there was any indebtedness as at the balance dates by the business to the major ticket consolidator with which the business dealt.
84 Austin J said:
"214 My conclusion is that there is no substance to Mr Roseby's submissions on these matters. The TCF has made out its case against Mr Roseby for negligent misstatement and for misleading conduct in contravention of s 42, and has established the requisite causal connection between the negligent conduct and contravention and the losses incurred in meeting claims by Claimants."
85 Austin J went on to summarise his conclusions as follows:
"215 The case against Ms Fry for misleading conduct in contravention of s 42 of the Fair Trading Act has been made out. Mr Fry was involved in Ms Fry's contravention, for the purposes of ss 61 and 68 of the Fair Trading Act, and he was also involved in contraventions by Mr Tambree and Mr Roseby. Mr Tambree and Mr Roseby engaged in conduct in breach of their duties of care to the TCF, which was also misleading conduct under s 42 of the Fair Trading Act.
216 I am satisfied that the wrongful conduct of each of these four defendants caused the TCF to suffer the losses in the sum of $143,050 particularised in the schedule to the Third Amended Statement of Claim. Consequently the TCF is entitled to judgment against each of those four defendants.
217 In my opinion, the TCF has not established any entitlement to recovery under s 40 (3) of the Travel Agents Act or by virtue of assignments by the Claimants of their rights of action.
218 There is no credible evidence to support the cross-claim (the Third Cross-claim) brought by Ms Fry against the TCF, alleging breach of duty and conspiracy by officers of the TCF and defamation against the TCF. That cross-claim should be dismissed."
86 His Honour gave judgment as follows:
"1. In favour of the plaintiff against the first, second, fourth and fifth defendants in the sum of $143,050.00 together with interest on the said judgment sum in accordance with the Supreme Court Act and Rules from 20 September 1999 to 15 November 2002 in the sum of $45,280.22 [sic] being a total of $188,330.23.
2. The proceedings against the third defendant be dismissed with no order as to costs.
3. The first defendant's third cross claim against the plaintiff be dismissed with costs and order that the first defendant pay the plaintiff's costs in respect of such cross claim.
4. The first, second, fourth and fifth defendants pay the plaintiff's costs of the proceedings."