UTSG Pty Ltd v Sydney Metro

Judgment (5 paragraphs)

[1]

Sydney Metro Objects to Mr Gambhir Watts's OAM CPA Expert Accounting Report

The background to this voir dire is found in UTSG Pty Ltd v Sydney Metro [2018] NSWLEC 128 (at [6]-[15]) and UTSG Pty Ltd v Sydney Metro (No 3) [2019] NSWLEC 49 (at [1]-[5]). It is relied upon but not repeated here.
Sydney Metro, the respondent in Class 3 compulsory acquisition proceedings, objects to the tender of an expert accounting report by Mr Gambhir Watts OAM CPA dated 28 November 2018 ("the Watts report"). The Watts report is relied upon by the applicant, UTSG Pty Ltd ("UTSG").
The Watts report was prepared in response to an expert report of Mr Luke Howman-Giles of KPMG dated 16 August 2018 ("the KPMG report").
The scope of work was set out in a letter of engagement dated 26 October 2018 from Ms Simran Singh, the sole director of UTSG, to Mr Watts: Dear Mr Watts, As discussed, UTSG (Applicant) seeks and Independent Accounting Expert Report as response to submission made by Sydney Metro (Respondent) in the LEC proceeding. The report must be prepared in accordance with independent expert witness code of conduct for UTSG to be able to submit it as the 'accounting expert report' in the LEC proceeding. Scope of Work 1. Review and prepare independent 'Accounting Expert Report' as response to observations and opinions contained in the KPMG Report (enclosed), prepared by Mr Luke Howman-Giles. 2. Perform audits and cross-checks of the UTSG financials and Income Tax returns for 2016 and 2017. Provided opinion as to the accounting standards, methods, tools and processes adopted by MS Tax and Mr Fahad are appropriate and consistent with industry practices relevant to 'scale' of UTSG operations and, it to the extent validate that the UTSG Financials reported to ATO for the periods 2016 and 2017 are verifiable and reliable. 3. Clarify the UTSG corporate structure, operating models and V Health Plus business, in context to your historical knowledge; business advisory and accounting services provided to UTSG. 4. Review the KPMG Report and provide explanations to 'related entity' and funds transfer between these entities including response to observations made by KPMG relating to financial year end payables and revenue transactions. Time frame. Our need is of urgent nature to be able to meet the deadlines of court orders. Appreciate if you may be able to provide: • Report by 26 November 2018 Sincerely, Ms S R Singh, Director UTSG V Health Plus

Applicable Legal Principles for the Exclusion of Expert Reports in Class 3 Compulsory Acquisition Proceedings

The applicable legal principles to be applied to the admission of expert evidence in a jurisdiction where the rules of evidence do not apply (such as compulsory acquisition proceedings in Class 3 of the Court's jurisdiction) were set out and discussed in UTSG (No 3) (at [10]-[11] and [28]-[38]). They are adopted and applied in this decision.
Rules 31.23, 31.27 and Sch 7 of the UCPR were set out in UTSG (No 3) (at [12]-[14]). They are not repeated here for the sake of brevity. Mr Watts was obliged to comply with the relevant provisions of the UCPR and the Expert Code (see the provisions referred to above of the UCPR and the Practice Note Class 3 Compensation Claims at paragraph 13).
Mr Watts stated at the start of his report that: 1.11 The content of this report is provided in an independent professional capacity as engaged by UTSG to provide an Accounting Expert Report. 1.12 I understand the protocols of expert witness code of ethics
Although Sydney Metro submitted that his statement at paragraph 1.12 was not a proper acknowledgment of the Expert Code, in my view, albeit on balance and when read together with the second paragraph of the engagement letter quoted above, it was.
However, for the reasons explained below in this judgment, these statements are not, of themselves, sufficient to save the Watts report.
Mr Watts listed, as he was obliged to do in his capacity as an expert, what material he had relied upon in forming his conclusions and expressing his opinions: 1.7 I have a portfolio of clients across the medical and health industry whom I provide business advisory, accounting and taxation specialist services. The medical and health accounting is complex by nature and evolving. Over the years [sic] remained abreast of changes in the industry. 1.8 I have developed an in-depth knowledge of the industry practices, technologies used as well as their accounting methods, regulatory body protocols, statutory compliance and reporting requirements. 1.9 I have the 'know-how' and I am well informed of how the industry operates including the various software systems used by the health business operators. 1.10 I believe I have a thorough knowledge of UTSG business which best equips me to provide an objective perspective thereby prepare the Response to the KPMG Report. … 1.14 In preparing this report, I have performed independent and all necessary cross-checks of the UTSG historical financials; 2016 and 2017 tax returns, bank accounts and reports from practice management and accounting software. I have performed reconciliations of accounts, invoices and receipts and reviewed the compilation of financials by MS Tax and Mr Fahad including the referenced reports that were provided by UTSG (Ms Singh), that were the financials relied by David Mullins in the Mullins Report of 29 March 2018. 1.15 I believe I have engaged the proper due diligence to conduct a detailed and exhaustive investigation supporting my findings and observations. 1.16 The KPMG Report provides opinion on whether the underlying financial information relied on in the Mullins Report is verifiable and reliable or otherwise appropriate for representing or ascertaining the historic financial performance of UTSG. 1.7 The KPMG Report further provides revised or adjusted cash flow analysis for UTSG for the Reference period based on information in the Briefed Materials considered reliable, verifiable or otherwise appropriate for representing or ascertaining the historic financial performance of UTSG. 1.8 I have reviewed the KPMG Report and the documents listed in its Appendix 5. - Briefed Material; Appendix 7. Information relied upon (of KPMG Report); Appendix 8. Bank accounts identified and source bank statements; Appendix 9. and Excel workbooks (MS Tax) and the Bank statements of UTSG and affiliated entities used for the banking needs of UTSG. 1.9 I have reviewed the documents and work sheets contained in Appendix 6, and all other Appendices to the KPMG Report. 1.20 I have reviewed the Mullins report and the information contained in the Appendices to the Report. 1.21 I have reviewed the financials prepared by Mr Fahad of M S Tax and information, bank statements and software generated reports that was provided by UTSG (Ms. Singh) on behalf of UTSG. … 3.61 In my analysis of KPMG Report I have reviewed the documents listed by KPMG in Appendix 5 (Briefed Materials), Appendix 6 (Calculations and comparative analysis tables 6.1 to 6.7) and Appendix 7 Information relied upon (7.1 to 7.68); Appendix 8 (Bank accounts identified and source bank statements (8.1 to 8.3) and Appendix 9 Excel workbooks (MS Tax) to his report.
The material contained in a table of appendices to his report was provided.
In addition to the appended material (especially that at Appendix 19 and 20), as Ms Singh correctly submitted, in compiling his report Mr Watts relied principally on the KPMG report and its appendices.
Mr Watts concluded that: Summary Conclusion: My analysis of the UTSG financials, as an independent accounting expert and taxation specialist, is that UTSG financials of 2016 and 2017 are verifiable, reliable and appropriate. The underlying financial information relied upon by Mr Mullins in the Mullins is verifiable, reliable or otherwise appropriate for representing or ascertaining the historic financial performance of UTSG. KPMG report has highly distorted review and presentation of UTSG financials for financial years 2016 and 2017. KPMG report is bias and tainted; it does not depict a true and accurate performance of UTSG business. By the writer's own admission neither KPMG nor the writer have performed any audits, verification or validation of information that was provided to them in the 'Brief Material' as such I consider the KPMG report unreliable and incorrect. UTSG was in the final stages of business sale to 5 G Trading LLC of U.A.E. The sale/purchase agreement has been completely ignored by Sydney Metro which caused the actual disturbance of settlement. At minimum, UTSG is entitled to the actual loss caused by the Sydney Metro for the sale/purchase value of US$14.57m plus ongoing service agreement of US1.5m annually since 30 April 2016. The KPMG report is erroneous, inconsistent and manipulated by the author and: as such I consider the KPMG report highly biased and crafted to mislead the audience of the report by depicting a wrongful picture of UTSG business, UTSG personnel (Ms Singh) and financials.
Sydney Metro took the Court in detail through Mr Watts's report. In doing so, the vices complained about by Sydney Metro became immediately apparent. Several of the more egregious examples will suffice to illustrate the problematic nature of his report: 1. paragraph 2.16 - Mr Watts does not elaborate on what constitutes the "'know-how' of the health industry" he relies upon; 2. paragraphs 2.21, 2.22 and 2.23 refer to software that does not appear to have been provided to Sydney Metro; 3. paragraph 2.36 is stated as a fact but if so, the foundational basis for arriving at this conclusion is not set out; 4. paragraphs 2.40-2.44 and 2.50 do not disclose where Mr Watts obtained the information relied upon; and 5. paragraph 3.14 does not explain how the reports referred to therein "indicate results which are not materially different fro [sic] those in the Mullins report".
Paragraph 2.48 states as follows: 2.48 To the best of my investigations and sources of information provided to me by UTSG, I am of firm believe that UTSG did not have any past relationship or interest in LPAA nor did UTSG allot any shares or interested in UTSG to LPAA. I observed the writer has repeated the emphasis in the KPMG Report in relation to LPAA purporting it is somehow connected with UTSG or a UTSG company. I am not able to establish any connection through my investigations.
Critically, however, "the investigations and sources of information" referred to are not disclosed nor are they provided.
Paragraph 3.7 relevantly says: 3.7 The basis of KPMG decision of "Verifiable" is indicated in paragraphs 3.3.3 to 3.3.16. In arriving at his conclusion KPMG writer has made the following fallacious assumptions and presumptions that the accounts maintained on systems other than the accounting software are not properly maintained. (3.3.3). I have reviewed the financials provided by a suitably qualified Accounting professional Mr Fahad of MS Tax prepared and find the various financial statements are prepared from an elaborate Excel spreadsheet based on bank statements, invoices and practice management report provided to him by UTSG (Ms Singh).
But none of the documentary material referred to in the paragraph is identified by Mr Watts in a manner that allows Sydney Metro to challenge the conclusion that KPMG has made "fallacious assumptions and presumptions" about the maintenance of the accounts referred to therein.
Paragraphs 3.9 and 3.10 opine that: 3.9 At Appendix 8.3 of The KPMG Report, the writer has listed detailed transactions for every account used by UTSG for its business. Yet he considered the deposits and payments in only two accounts (3.8) in the name of UTSG and V Health Foundation. The writer is aware that all these accounts are used for the deposits of and disbursements for the business of UTSG and therefore transactions of all these accounts need to be considered as transactions of UTSG business. The KPMG Report and the writer has attempted to present a distorted set of the UTSG financials. 3.10 At Appendix 6.5 of the KPMG Report, the writer lists transactions between "related parties" worth $2,65 million approx. At Appendix 6.7 in analysing the total deposits and expenditure he eliminates the so-called related party transaction from the total revenue of UTSG. This is NOT correct: All these wrongly eliminated transactions are genuine business transactions. All these transfers between the related entities represent genuine trade transactions for the services provided through the respective entities and such transactions are NOT duplicated.
The basis of Mr Watts's 'awareness' is not stated in paragraph 3.9 and no reasoning is provided as to why the "wrongly" eliminated transactions were "genuine business transactions" in paragraph 3.10.
Paragraph 3.15 simply states as fact, without disclosing the basis for the assertion, that: 3.15 KPMG at paragraphs 3.3.14 to 3.3.16 of his report refers to audited reports prepared by Law Partners Accountants and Attorneys Pty Ltd (LPAA) and TaxSavvy Solutions. These are an external accounting and auditing firm which was appointed by a prospective investor from UAE named 5G General Trading LLC to undertake due diligence. LPAA used their affiliated Tax Savvy to carry professional audit and evaluation of the UTSG business. The writer has not verified the accuracy of information and is making fundamental misleading statements in his report. At no point of time the LPAA or any of their associated entities operated from the same premises as UTSG and at no point of time UTSG allocated any ownership rights to LPAA. KPMG at paragraph 3.3.16 concludes that financial statements by TaxSavvy should not be relied on for the purposes of verifying the underlying financial information. The writer then selectively used the report to compare the UTSG financials.
As these examples demonstrate, much of Mr Watts's report is unsupported assertion presented as fact without any reasoning or rational foundation, that cannot be tested by Sydney Metro. To permit this material into evidence would be unfair to Sydney Metro. This conclusion is reinforced when regard is had to paragraphs 2 and 3 of the letter of engagement and the conclusions reached by Mr Watts.
The problem cannot be cured, as Ms Singh suggested, by cross-examining Mr Watts.
In this form, the Watts report cannot, moreover, assist the Court because its probative value is so low that no weight can be placed on it.
As to the scandalous and unsupported allegations levelled against KPMG, again several examples from the Watts report demonstrate the difficulties with the report. For example, paragraph 3.1 states (emphasis added): 3.1. The writer of the KPMG Report (hereinafter referred to as "KPMG") has by his own admission not verified, validated or audited to cross-check and confirm the accuracy of information provided to him which, he based his finding in the KPMG report. The writer has ignored or has not fully understood the nature of UTSG business or its operating model, structure and its multifaceted service lines supporting an integrated Healthcare business. The writer has provided a biased report containing inconsistent and inaccurate comparison of financials. The underlying assumptions that is relied by the writer throughout the KPMG Report is inaccurate and lacks the reliability tests. The KPMG report has been manipulated to suit their client's outcome. The KPMG report lacks common basic understanding of the industry practices and way the Health Care industry especially in the small business sector functions. The KPMG report demonstrate a lack of appreciation of accounting methods and financial year end practices of business in Australia.
Paragraphs 3.6, 3.23, 3.24, 3.27 to 3.29, 3.30 and 3.31 all contain similarly inflammatory and unprofessional language.
In addition, almost none of these statements can be properly challenged by Sydney Metro because the underlying documentation upon which they are based is not available - all of it is not, contrary to Ms Singh's submission, appended to the KPMG report - and the reasoning underlying the conclusions and opinions expressed by Mr Watts has not been adequately (or in many cases, at all) elucidated.
Moreover, the scandalous material, which comprises much of "Section 3. Response to KPMG Report", cannot be excised as Ms Singh suggested. If it were, little would remain of that section.
And to reiterate, even if the Watts report was admitted into evidence, the weight the Court would accord to the report because of its manifest deficiencies would be so low that its receipt would be rendered nugatory.
Having regard to the legal principles referred to above, unlike the Mullins report in UTSG (No 3), the Watts report does not reach the minimum standard for admission as an expert report when measured against "the Makita principles", as those principles are applied in Class 3 proceedings in this Court.
I note that unlike the Mullins report in UTSG (No 3), rejection of the Watts report, while certainly prejudicial to UTSG, will not be fatal to its claim having regard to what Mr Watts was engaged to do. Ms Singh will, if the KPMG report is successfully tendered by Sydney Metro, be able to cross-examine Mr Howman-Giles as to its contents. Having said this, I am cognisant of the fact that Ms Singh is neither an accountant nor a lawyer.
In rejecting the Watts report, I have given heavy consideration to the fact that Ms Singh is not legally qualified and UTSG is not legally represented. But fairness is a two way street and to admit the report into evidence would result, for the reasons given above, in very real prejudice to Sydney Metro.
The objections made to the Watts report, and the breaches of the provisions of the UCPR referred to above, including Sch 7 of the Expert Code, are sufficiently serious that the report provides no material assistance to the Court. No weight can be placed on it. Again, in this regard the Watts report may be contrasted with the Mullins report that was admitted into evidence over the objection of Sydney Metro (UTSG (No 3)).

Mr Watts is Neither Independent Nor Impartial

With respect to the asserted lack of independence of Mr Watts, Sydney Metro relied on the following disclosure by Mr Watts in his report in section 1 under "Professional Background": 1.5 I have previously provided business advisory, accounting and taxation services for the financial years to 2015 to UTSG and to some of the doctors engaged by the UTSG owned V Health Plus business which operated from 40 Park Street Sydney NSW 2000. 1.6 I am well informed and aware of the UTSG business proposals, business structures and V Health Plus operating models. Information on the UTSG / V Health Plus corporate structure is annexed marked Appendix 4.
As the authorities canvassed in Lake Macquarie City Council v Australian Native Landscapes Pty Ltd [2015] NSWLEC 92 indicate, impartiality only goes to the weight to be accorded to an expert's evidence.
In that case Biscoe J usefully reviewed the relevant authorities and concluded as follows (at [9]-[15]): 9. In Pittwater Council v A1 Professional Recycling Pty Ltd [2008] NSWLEC 325, 165 LGERA 1, the expert was an investigator employed by the prosecutor council who had carried out the investigation and recommended prosecution. I admitted his evidence over objection on the ground of partiality and held at [11]: The authorities support the following propositions, in my view. First, a mere family, personal or business relationship (including that of a retainer as an investigator), even of a kind that might reasonably cause an expectation of lack of impartiality, is insufficient of itself to lead to rejection of expert evidence. Secondly, and exceptionally, there may be additional factors which justify rejection on the ground of clear lack of capacity to bring the requisite degree of impartiality to the expert's reasons, either because the evidence is then inadmissible or in the exercise of the court's discretion. In my opinion, that an expert witness is or was an employee of the party retaining the expert, has investigated the matter prior to commencement of proceedings, and has recommended that proceedings be taken, are insufficient factors, of themselves, to lead to rejection of the expert's evidence. That is the present case. 10. The position is made even clearer by the more recent decision of the Court of Appeal in Sydney South West Area Health Service v Stamoulis [2009] NSWCA 153. There the experts in question were two radiologists (for whose conduct the appellant was vicariously liable). It was alleged that they had been negligent in their diagnosis. The Court of Appeal, overruling the trial judge, held that their evidence was admissible. Ipp JA (Beazley and Giles JJA agreeing) held that evidence of an expert is not inadmissible merely because he or she is materially interested in the litigation or is a party to the litigation or an employee of a party to the litigation, and that whether he or she would tend to give exculpatory and therefore unreliable evidence went to weight and could be tested in cross-examination: at [211]-[219]. His Honour held that the evidence was relevant and therefore admissible under s 56 of the Evidence Act. Whether or not the trial judge intended to reject it under s 135 (which the trial judge did not mention), to do so on the ground of unreliability was a material error of legal principle. To the extent that the trial judge's decision amounted to a finding that the evidence would be unfairly prejudicial to the respondent under s 135, he erred in failing to take into account the unfairness to the appellant in preventing the experts (for whose conduct the appellant was vicariously liable) from explaining and defending their conduct: at [225]. 11. In MM Constructions (Aust) Pty Ltd v Port Stephens Council (No 3) [2010] NSWSC 243 the defendant objected to the admissibility of evidence of a town planner on the ground that he was not an objective and independent witness. Johnson J considered that my decision in A1 accorded with the law as it stood before Stamoulis, and that the position is made even clearer by the principles laid down by Stamoulis: at [45]. In admitting the expert evidence, his Honour said that the issues raised by the defendant concerning the expert went to weight and not admissibility, and that s 135(a) of the Evidence Act did not apply. In his Honour's subsequent decision in Commonwealth v Milne (No 1) [2010] NSWSC 932, 260 FLR 166 at [247], he observed that objections to expert evidence upon the ground of bias have led to the judicial response that issues of that type bear upon weight and not admissibility, citing Stamoulis. 12. In Kulikovsky v Police [2010] SASC 58 the defendant contested a charge of speeding. He was a Defence scientist and a magistrate permitted him over objection to give expert evidence as to the accuracy of the police laser equipment. Gray J dismissed an appeal and held that the authorities made plain that lack of independence in an expert witness does not go to admissibility but is relevant to the weight to be attached to the expert's evidence: at [36]. 13. In Ananda Marga Pracaraka Samgha Ltd v Tomar (No 4) [2012] FCA 385, 202 FCR 564 there was an objection that the expert witnesses in question were not impartial. Dodds-Streeton J held at [35]: In my opinion, relevant authority establishes that while (as reflected by the Federal Court Practice Note and like curial protocols) objectivity and independence are sought of expert witnesses, such qualities are not preconditions of competence, even in the case of expert witnesses. The sanction for failure to fulfil the obligations imposed by relevant authority and curial protocols is not the exclusion of the expert's evidence, but rather, the significant risk that it will fail to persuade. 14. Her Honour went on to add that a "lack of objectivity combined with other circumstances" may in some cases justify exclusion of the expert's evidence under s 135 of the Evidence Act: at [47]. No s 135 application had been made. Accordingly, her Honour found that the experts were qualified to give opinion evidence and that "a lack of independence, partiality or an interest in the outcome, if established, [would not] preclude them from doing so": at [55]. 15. In my view, Stamoulis and the subsequent authorities to which I have referred support these propositions: 1. evidence of a partial expert is relevant and therefore admissible under s 56 of the Evidence Act; 2. partiality of an expert goes only to the weight of the expert's evidence; 3. exceptionally, evidence of a partial expert combined with other circumstances may in some cases justify exclusion of the expert's evidence in the court's discretion under s 135 of the Evidence Act if its probative value is substantially outweighed by the danger that the evidence might be unfairly prejudicial to a party
The provocative language contained throughout the Watts report, especially in Section 3, together with the unsupported and unprofessional allegations made against KPMG and the KPMG report, strongly suggest, however, that Mr Watts has crossed over the rubicon from objective and impartial expert witness to partisan advocate for UTSG. In my view, his previous dealings with UTSG, while normally of themselves not otherwise precluding tender of his report, have rendered him incapable of providing an impartial expert opinion in this matter.

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