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LM Investment Management Limited (in liq) v EY (No 5)[2020] QSC 264

LM Investment Management Limited (in liq) v EY (No 5)[2020] QSC 264

SUPREME COURT OF QUEENSLAND

 

 

CITATION:

LM Investment Management Limited (in liq) v EY & Ors (No 5) [2020] QSC 264

PARTIES:

LM INVESTMENT MANAGEMENT LIMITED (IN LIQUIDATION) IN ITS CAPACITY AS RESPONSIBLE ENTITY FOR THE LM FIRST MORTGAGE INCOME FUND (RECEIVERS AND MANAGERS APPOINTED) (RECEIVER APPOINTED) ARSN 089 343 288

(plaintiff)

v

EY (ALSO KNOWN AS ERNST & YOUNG) (A FIRM)

(first defendant)
PAULA MCLUSKIE
(second defendant)
MICHAEL JAMES REID
(third defendant)

FILE NO/S:

2166 of 2015

DIVISION:

Trial

PROCEEDING:

Application

ORIGINATING COURT:

Supreme Court at Brisbane

 

DELIVERED ON:

20 October 2020

DELIVERED AT:

Brisbane

HEARING DATE:

14 February 2020; 14 September 2020; 15 October 2020.

JUDGE:

Dalton J

ORDERS:

1.  Strike out paragraphs 7, 55, 123.5(b), 123.5(c), 124.2, 124.3, 125.2, 125.3, 126.2(c), 126.2(d), 128.2, 128.3 so far as it refers to paragraph 7, 129.2, 129.3 so far as it refers to paragraph 7, 130.2, 130.3 so far as it refers to paragraph 7, 131.2, 131.3 so far as it refers to paragraph 7, 132.2, 132.3 so far as it refers to paragraph 7, 166.1, 167.2, 167.3 and 167.4 of the defence which is Court Document 54.

2.  Strike out paragraphs 64, 65, 67, 70, 71, 73, 74, 90, 119, 120, 121, 123.5, 124, 125, 126, 127, 128.1, 129.1, 130.1, 131.1, 132.1, 133.3, 134.3, 135.2(b), 136.3, 137.4, 138, 139, 143, 144, 145, 147, 151, 152, 153, 154, 156, 159, 160, 161, 162, 166.2, 168, 169, 170, 171, 172, 173, 174, 175 of the defence which is Court Document 54 so far as they plead on behalf of the first defendant.

3.  The defendants have leave to make an application (supported by an affidavit exhibiting their proposed pleading) to replead in respect of the paragraphs which are the subject of paragraphs 1 and 2 by a date to be fixed at a further review of this proceeding.

Directions

4.  Each of the second and third defendants may elect, on one occasion only, to waive the privilege against selfincrimination claimed to excuse them from pleading and disclosing documents in this proceeding.

5.  The last point in time at which the second and third defendants may make the elections at paragraph 4 is after the close of the plaintiff’s case at trial, and before the case for any of the defendants is opened at trial.

6. Whether or not either or both of the second and third defendants have made the election at paragraph 4 by the time the trial begins, none of the defendants is excused from compliance with the rule in Browne v Dunn in cross-examining the plaintiff’s witnesses at trial.

7. If the second or third defendants do make the election at paragraph 4, they must file and serve all relevant pleadings and disclose all documents, including expert opinions, at the time of the election, or within such further time as the Court may allow.

8. If the second or third defendants do make the election at paragraph 4 they are to plead and give disclosure as to any case they make based on ss 1317S and 1318 of the Corporations Act at the time of making the election.

9.  If the defendants wish to rely upon ss 1317S and 1318 of the Corporations Act, they must do so at trial, at the same time, and in the same way, as the rest of their case.

10.  The first defendant is to plead all the facts, matters and circumstances it relies upon to support its case based on ss 1317S or 1318 of the Corporations Act by a date to be fixed at a further review of this proceeding.

11.  If the defendants wish to rely upon s 22 of the Civil Liability Act, they must do so at trial at the same time and in the same way as the rest of their case.

12.  The first defendant is to plead all the facts, matters and circumstances it relies upon to support its case based on s 22 of the Civil Liability Act by a date to be fixed at a further review of this matter.

13.  The application which is made by Court Document 62 is dismissed.

CATCHWORDS:

PROCEDURE – CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS – PLEADINGS – STRIKING OUT – PROCEDURAL MATTERS – where the plaintiff sues its former auditors for breach of contract, breach of tortious duty, misleading and deceptive conduct and contravention of the Corporations Act and the ASIC Act – where in paragraphs of the defence the defendants claim privilege against selfincrimination or exposure to a civil penalty – where the plaintiff seeks to strike out these paragraphs – whether the defendants are likely ever to be prosecuted for an offence or civil penalty – whether the claims of privilege are justifiable – whether the defendants may delay their election to waive privilege – whether the defendants may make blanket claims of privilege

COUNSEL:

J McKenna QC, with D Ananian-Cooper, for the plaintiff

A Leopold SC, with A Shearer, for the defendants

SOLICITORS:

Gadens for the plaintiff

Clifford Chance for the defendants

  1. [1]
    The plaintiff sues its former auditors claiming damages for breach of contract; breach of tortious duty; misleading and deceptive conduct said to be in breach of various statutes, and contravention of various sections of the Corporations Act and the ASIC Act.  The statement of claim includes allegations that the defendants fraudulently concealed the plaintiff’s rights of action.  As well, some of the claims pleaded are of knowing misconduct. 
  2. [2]
    At various paragraphs the defence claims privilege against selfincrimination or exposure to a civil penalty.  It also gives notice that the defendants claim a right to waive reliance on this privilege at some future time, and plead more fully to the allegations made against them.  The plaintiff seeks to strike out these paragraphs of the defence.  There are three points:
  • The plaintiff opposes the defendants delaying their election to waive privilege.  For the purposes of this first point, the plaintiff assumes that the defendants have a right to claim privilege, as they have done.  The plaintiff acknowledges that in proceedings brought by ASIC in relation to conduct said to constitute offences or civil penalties under the Corporations Act, a defendant would have the right to first claim privilege and then to elect to amend its defence and run a positive case at any time up to and including the end of the prosecution case.[1]  However, the plaintiff objects to the defendants delaying their election to waive privilege in this case. 
  • The plaintiff’s second point is that some of the claims of privilege made by the defendants are not justifiable because the defendants are unlikely ever to be prosecuted for an offence or civil penalty.  Independently, it argues that the first defendant is not at risk of prosecution or civil penalty because no wrongdoing is alleged against it separately from that alleged against the second and third defendants.
  • Lastly, the plaintiff objects to what it calls two blanket claims of privilege made at the beginning of the defence.
  1. [3]
    I will deal with each of these points in turn.  In this judgment all statutory references are to the Corporations Act unless stated otherwise.

1. DELAYING ELECTION TO WAIVE PRIVILEGE IN CIVIL LITIGATION

  1. [4]
    As the plaintiff acknowledges, the privilege against self-incrimination is a substantive common law right.[2]  It is well established that persons in the position of the defendants cannot be compelled in a civil case, such as this, to incriminate themselves in pleading or in making disclosure of documents.[3] 
  2. [5]
    The plaintiff argued that there was no warrant for adopting the practice in civil penalty cases such as Anderson (above) in ordinary civil litigation between citizens.  I accept that in an action brought by a regulator such as ASIC, “the whole and avowed object of the proceeding is the infliction of the penalty”;[4] whereas in ordinary civil litigation, pleading to a matter which might tend to incriminate a defendant might be expected to have a “less direct” effect.[5]  However, it must be recognised that the evidence in, or judgment in, a civil proceeding such as this might be used to establish a party’s liability to a penalty in other proceedings.[6] 
  3. [6]
    The plaintiff’s submissions rest on the assertion of inconvenience, delay and expense if the procedure usually adopted in a civil penalty case were to be adopted in this case.  That is, the basis for its argument is case management principles.  It is said that the defendants should be made to elect now whether or not they wish to run a positive case at trial; if they do, they should plead now and make disclosure now on that basis.  It is said that if running a positive case risks ASIC or the Commonwealth Department of Prosecutions prosecuting the defendants, that risk will not change depending upon whether the defendants disclose incriminating material now, or during the course of a trial.
  4. [7]
    I am against the plaintiff on this point.  The plaintiff currently pleads a complex causation and damages case.  The proceeding is over five years old.  The plaintiff has had nine attempts at articulating a case.  On the hearing of this application the plaintiff’s counsel foreshadowed articulation of a tenth case, significantly re-pleading issues of causation and loss.  On the currently pleaded case, issues of causation and damage will not be straightforward.  In short, the plaintiff has struggled to articulate a case. 
  5. [8]
    If this litigation is managed so that the well-known practice in civil penalty cases applies, it may be that the defendants never elect to plead a positive case.  Given the difficulties the plaintiff has had to date, I think it must be recognised that there is a possibility that this proceeding will end without a trial.  If there is a trial, it may be that the defendants are content to call the limited evidence which would be available to them on their current defences.  Alternatively, they may seek leave to run only very limited positive cases in defence.  The cases made against the second and third defendants differ in substance, and they may each make a different election when the time comes.  In my view it would be unjust to the defendants to compel them to elect now whether or not to plead a positive case by way of defence.  It would erode the substance of the important common law privileges they rely upon.  To allow the defendants to wait until the close of the plaintiff’s case before making an election gives full latitude to their privileges.  Certainly in this proceeding, this outweighs considerations of efficiency which might be promoted by compelling the defendants to elect now.  The comments of Finkelstein J in ASIC v Mining Projects Group Ltd,[7] albeit a civil penalty case, are relevant here:

“… if a defendant who wishes to run a positive case is required to plead his [or her] case that can be accommodated while maintaining the privilege.  What should occur is that the defendant should be entitled to rely on the privilege until the plaintiff’s case is concluded.  If at that point the defendant decides to run a positive case he [or she] can deliver an amended defence that will outline his [or her] case.  In an exceptional case the judge may grant a short adjournment to allow the plaintiff time to prepare, if he [or she] is otherwise taken by surprise.  In most cases that will not be necessary.  By the time the plaintiff has closed his [or her] case the nature of the defence will usually be apparent.  That is the experience of those who prosecute criminal cases.  The advocate who runs a civil penalty proceeding should be equally adept at dealing with the defendant and his witnesses without knowing in advance every word they are about to say.” (my underlining)

  1. [9]
    Furthermore, I cannot see that the plaintiffs will be particularly prejudiced by the course I propose.  This is an unusual proceeding in the sense that the audit files were produced to the administrator at public examinations which took place before this proceeding was commenced.  The plaintiff has them.  The plaintiff is not dependent upon the defendants to disclose the core documents going to its case.  The plaintiff is in a position to reconstruct from the documents what was done in the audits, and investigate for itself what it wishes to say the real position was.  To a large extent the allegations of breach in the statement of claim appear to be based on this sort of exercise.  So far as its allegations of causation and loss are concerned, the plaintiff could never have expected the defendants to assist it much with that part of its case, whether they claimed privilege or not.  It will be a matter for the plaintiff to prove this aspect of is case.
  2. [10]
    As foreshadowed during the hearing of this application, I think some limits ought to be put on the defendants’ election so that preparation towards a trial can proceed as efficiently as possible.  I will make directions to ensure that:
    1. (a)
      There is only one point in time at which each defendant may elect to withdraw its claims of privilege and run a positive case.  No defendant will be allowed to proceed piecemeal in this regard.  It may be that each defendant chooses a different time to make their election.  This may cause some inconvenience and delay, but each defendant must be allowed to run their case independently.
    2. (b)
      The outer time by which each defendant must make its election is the close of the plaintiff’s case at trial.   
    3. (c)
      If the plaintiff runs its case before the defendants make their elections, the defendants ought not be relieved from their duty to put their case in accordance with the rule in Browne v Dunn.  This is consistent with the practice in civil prosecutions in this area of the law.  It is implied in the underlined passage from Finkelstein J’s judgment in Mining Projects, above at [8]. It seems to me it ought to be perfectly possible for the defendants to comply with a direction in these terms without waiving any privilege.  It would be highly inconvenient if the trial were to run on any other basis.  Making a direction about this now means that the plaintiff has the security of knowing that the Court will refuse to compel it to recall any of the witnesses it calls in its case for reasons connected with the defendants’ election to run a positive case. 
    4. (d)
      If the defendants do elect to waive privilege and run a positive case, they must be ready to proceed immediately with that positive case.  That is, service of their pleadings and disclosure ought to happen at the time of their election.
  3. [11]
    The defendants need to take responsibility for not causing the plaintiff delay if they do make an election.  I think fairly focussed directions will need to be made to ensure that the plaintiff is aware of the substance of any professional opinion which the defendants will seek to lead in evidence.  As a matter of principle it seems to me there ought to be ways to communicate that to the plaintiff without waiving privilege, just as there ought to be ways of complying with the rule in Browne v Dunn without waiving privilege. 
  4. [12]
    Further as to matters which ought not delay a trial of this matter, I note that at present the same solicitors and barristers act for all three defendants and, I assume, for their insurer.  Having regard to the nature of the allegations made against the second and third defendants, there is obviously a potential for the insurer to decline indemnity at some point as the proceeding progresses.  The defendants should understand that in that event, the proceeding will continue without delay and they ought to be prepared for that contingency. 
  5. [13]
    Lastly, irrespective of the position of any insurer, it is not unforeseeable that the defendants’ barristers and solicitors might find themselves in a position where they cannot act for all three defendants.  Once again, all three defendants need to understand clearly that the proceeding, including any trial which might be underway, will continue should that contingency eventuate.  It is for them to manage that potential event.

2A. INDIVIDUAL DEFENDANT’S CLAIMS FOR PRIVILEGE

  1. [14]
    It is well settled that a party cannot be compelled to provide information which would tend to subject him or her to any punishment, penalty or forfeiture.[8]  Cross on Evidence puts it thus, “The gist of the privilege is that the giving of answers or the production of documents would tend to expose the claimant to the apprehended consequence”.[9]  Further drawing on Cross on Evidence, “It is for the person claiming privilege to assert it and to identify its precise basis.  …  Conventional statements require that the claimant establish a bona fide apprehension of the consequence on reasonable grounds.” 
  2. [15]
    The High Court in Reid v Howard (above) made it clear that:

“The protection which the privilege against self-incrimination confers extends not only to the risk of incrimination by direct evidence (ie evidence of the fact of disclosure and of the material disclosed) but also to incrimination by indirect or ‘derivative’ evidence (ie ‘evidence obtained by using’ the disclosed material ‘as a basis of investigation’).”[10]

  1. [16]
    A person claiming a privilege must show a real and appreciable[11] risk of selfincrimination or exposure to a penalty, as opposed to a risk which is so remote that it could be described as fanciful.[12]

Structure of the Statement of Claim

  1. [17]
    This proceeding is brought against the first defendant pursuant to r 83(2) of the UCPR.  That rule allows the firm name to be used as a convenient way to name all the partners in the firm at the time of the cause of action alleged.  At the time I heard this application it was not entirely clear from the statement of claim that it was only the second or third defendants, and no other members of the first defendant, who were alleged to have acted, or omitted to act, in a way which gives the plaintiff a cause of action.  After discussions of that issue on 14 September and 15 October 2020, that issue has been clarified.  Contemporaneously with delivery of this judgment, I will make orders giving leave for the plaintiff to file a seventh further amended statement of claim.  That document makes it clear that it is only alleged that the second and third defendants have acted or omitted to act in such a way; it is not contended that any other member of the first defendant did so.
  2. [18]
    The allegations are that the second and third defendants had different roles in relation to the plaintiff: the second defendant was the lead auditor for the LM First Mortgage Income Fund (the fund) of which the plaintiff was the responsible entity.  She is alleged to have performed financial audits each year between 30 June 2008 and 30 June 2012.  She is alleged to have conducted financial reviews each year between 31 December 2008 and 31 December 2011.  The third defendant audited the compliance plans for the fund every year between 30 June 2008 and 30 June 2012.  The third defendant was appointed under s 601HG(1) of the Corporations Act as an individual auditor.

 

Risk of Prosecution or Exposure to a Penalty

  1. [19]
    It is seven years since the plaintiff was placed into administration.  It ran a significant investment fund and there was considerable media attention to its demise.  Public examinations were conducted over four weeks in June and October 2015 and the first defendant produced its audit files during that public examination.  ASIC commenced civil penalty proceedings in the Federal Court against five directors of the plaintiff.  It discontinued proceedings against two of those directors, and was unsuccessful against the remaining three directors.[13]  ASIC cancelled the registration of a Mr Reginald Williams of Williams Partner Independent Audit Specialists who had performed an audit of the 2012 financial statements of a related fund (the LM Managed Performance Fund). 
  2. [20]
    On behalf of the defendants it is argued that should adverse findings of serious wrongdoing be made after a trial in this proceeding it might prompt further investigation by relevant authorities and action by ASIC.  It is submitted that were there to be such an outcome in this case, there might be public pressure for such a prosecution by ASIC. 
  3. [21]
    Reliance is placed on public statements by ASIC that it is adopting a new tougher approach in its pursuit of auditors, including taking Court action where appropriate as a public deterrent.
  4. [22]
    The plaintiff says that given ASIC has investigated and taken some action in the past, it is unlikely to take further action, whatever the outcome of this proceeding.  There has never been any suggestion that ASIC or the Commonwealth Department of Prosecutions has contemplated, or is contemplating, any such proceedings against the defendants.  While ASIC has reserved its rights, it has said in writing that its investigations into the affairs of LM ended on the commencement of the Federal Court proceedings.[14]

Criminal Offence Provisions

  1. [23]
    The plaintiff says any further action against the defendants is made more unlikely because most of the offences, and all the civil penalties, relied upon by the defendants are now out of time.
  2. [24]
    In terms of the potential for self-incrimination, most of the offences the defendants rely upon are out of time: sections 307A, 307C, 308, 309, 324CA(1) and (2), 324CB(1) and (2), 601HG(3) and 1308(4).  All these offences have a maximum penalty of less than six months imprisonment – s 1311 and Schedule 3.  Accordingly s 1316 applies, “[d]espite anything in any other law, proceedings for an offence against this Act may be instituted within the period of 5 years after the act or omission alleged to constitute the offence or, with the Minister’s consent, at any later time”.
  3. [25]
    Were it not for the provision in s 1316, s 15B of the Crimes Act 1914 (Cth) would require that offences punishable by imprisonment for six months or less be commenced within 12 months of the offence.  The effect of s 1316 is to extend that limitation to five years, or later with the Minister’s consent: Attorney-General (Cth) v Oates.[15]  Five years have run in this case, so none of these offences could be prosecuted unless the Minister gives consent.  The Minister’s power to grant consent must be exercised rationally and fairly and is subject to judicial review.[16]  I accept the plaintiff’s submission that difficulties would arise in the Minister now consenting to proceedings when ASIC has been aware of the allegations and the material facts; has conducted an investigation, and has not prosecuted within the five year period.  In discussing the Minister’s decision as to whether or not to consent to such a prosecution, the Full Federal Court in Oates v Williams said:

“What the Minister must decide is whether it is reasonable to allow the prosecution to proceed out of time.  This will involve a consideration of two principal issues.  The first is the reason the prosecution was not commenced within the five year period.  Here it will be necessary for the Minister to consider the conduct of those investigating the alleged offence and whether that investigation was conducted with due diligence.  If no sufficient reason for delay is shown then it would not be expected that a consent to prosecute will be given.  The second issue is whether the grant of consent will unfairly prejudice the accused.  …

There are other issues that should also be taken into account.  The Minister must consider the seriousness of the offence with which the accused is to be charged and whether the public interest would be served by its prosecution. …” – p 355.

  1. [26]
    There remain three offence provisions relied upon by the defendants punishable by more than six months imprisonment: s 311, s 601HG(4B) and s 1308(2).  There is no time limit in relation to a prosecution for these offences: Attorney-General v Oates, above.  I accept that these offences are relevant to consider having regard to the factual allegations made in this proceeding.
  2. [27]
    Section 311(1) provides that an individual auditor contravenes the section if he or she is aware of circumstances so that he or she has reasonable grounds to suspect a contravention of the Act, and does not report that matter to ASIC.  Section 311(3) provides for the same liability if a person is the lead auditor of an audit.  Section 324AF provides that if an audit firm conducts an audit, the lead auditor is the registered company auditor who is primarily responsible to the audit firm for the conduct of the audit.  Here, the second defendant is alleged to be a lead auditor. 
  3. [28]
    Sections 601HG(4) (individual auditor) and (4B) (lead auditor) is the equivalent provision in relation to compliance plan auditing.  These sections potentially apply to the third defendant.
  4. [29]
    Because of the wide way in which these obligations are cast, they would have potential application to many of the allegations made in the statement of claim.  For instance, s 295 provides that Annual Financial Reports must contain a director’s declaration that the financial statements are in accordance with accounting standards; give a true and fair view of the financial position of a company, and give a director’s opinion whether there are reasonable grounds to believe that the company or disclosing entity will be able to pay its debts as and when they fall due.  Matching this, s 296 provides that financial reports must comply with accounting standards, and s 297 provides that financial statements must give a true and fair view of the financial position and performance of the company, registered scheme or disclosing entity.  The same applies for half-yearly reports – see ss 302, 304 and 305.  Section 601HA provides that a compliance plan must set out adequate measures to ensure that the responsible entity complies with the Act and the scheme’s Constitution.
  5. [30]
    Section 1308(2) also creates a wide-ranging offence.  It provides that, “A person who, in a document required by or for the purpose of this Act or lodged with or submitted to ASIC, makes or authorises the making of a statement that to the person’s knowledge is false or misleading in a material particular, or omits or authorises the omission of any matter or thing without which the document is to the person’s knowledge misleading in a material respect, is guilty of an offence.”  The maximum penalty for contravention is five years imprisonment. 

Civil Penalty Provisions

  1. [31]
    The defendants did not assert reliance on any particular civil penalty provisions in relation to their privilege claim, although their written submissions do rely generally on their being exposed to civil penalty provisions, as does their pleading.  Section 1317K sets a six year time period in relation to the institution of proceedings for civil penalties.  Six years has run.  Any civil penalty proceedings are out of time.  In relation to the construction of s 1317K, I agree with, and follow, the Full Court of the Federal Court in Sadie Ville as to the interpretation of s 12GBC(2) of the ASIC Act.[17]

Registration as Auditors

  1. [32]
    The defendants argue that findings in this matter might also result in ASIC taking action to cancel or suspend the second or third defendant’s registrations as auditors pursuant to Part 9.2 Division 3 of the Corporations Act.  I would accept that such cancellation or suspension is in the nature of a penalty.
  2. [33]
    However, s 1349(1) provides that a person is not entitled to refuse or fail to comply with a requirement in any civil or criminal proceeding “under, or arising out of” the Corporations Act or the ASIC Act because it might tend to make the person liable to have their licence suspended or cancelled.  When the individual claims to privilege are analysed (see below), I cannot see that any of them relates to an allegation which cannot be said to arise out of or under the Corporations Act.  It seems to me, therefore, that the defendants have no point in relation to cancellation or suspension of their registration as auditors.

Conclusions as to Risk of Prosecution and Exposure to Penalty

The Second and Third Defendants

  1. [34]
    The second and third defendants are not at risk of being exposed to civil penalties nor to having their registration as auditors cancelled or suspended. 
  2. [35]
    There is some slight risk of prosecution for offences to which the s 1316 time limit applies.  That is, the second and third defendants could be prosecuted with the consent of the Minister.  However, they face a more real risk in relation to s 1308(2); in the second defendant’s case s 311, and in the third defendant’s case s 601HG(4).  I cannot conclude that the risk of prosecution in relation to these offences is fanciful.  Despite the passage of time, and the apparent lack of interest from ASIC in prosecuting the second and third defendants to date, it may be that admissions made during the course of this proceeding, or findings made in the judgment, reignite ASIC’s interest in the matter.

The First Defendant

  1. [36]
    There does not seem to me to be any real, appreciable (in the sense of not fanciful) prospect that the partners of the first defendant, other than the second and third defendants, will be prosecuted for any offence, whatever the outcome of this proceeding.
  2. [37]
    Most of the penalty provisions which the defendants identify are out of time.  I think that the prospect of the Minister consenting to a prosecution, against an uninvolved partner, outside the five year limitation period, is too remote to ground a claim for privilege.
  3. [38]
    Further, offences created by ss 307A, 307C, 311, 324CA, 324CB, 601HG(3), 601HG(4) and (4B) all identify the person who is taken to have contravened, and who is liable to prosecution, as either the lead auditor or an individual auditor.  That is, the terms of these sections make it clear that uninvolved partners who are not alleged to have performed any act or omission could not be prosecuted.[18]  That leaves ss 308, 309, 324CB and 1308(2).
  4. [39]
    While ss 307A and 307C observe distinctions between individual auditors, audit firms and audit companies, ss 308 and 309 create obligations which can be the basis of offences without making those distinctions.  Section 324AB(1) provides that the appointment of a firm as auditor is taken to be an appointment of all the persons who are members of that firm and registered company auditors.  Sections 308(5) and 309(7) are strict liability offences. 
  5. [40]
    Even so, it seems to me that it is unlikely that an uninvolved auditor partner could be prosecuted under s 308 or s 309.  The obligations created by these sections are to state the auditor’s opinion or belief, and to include statements or disclosures required by the auditing standards.  It seems likely that only auditors who in fact conduct an audit will be in a position to form an opinion or belief as required by the sections.  Uninvolved auditor partners could not do so.  Further, the requirement to include statements or disclosures required by the auditing standards is an obligation cast on the lead auditor – see s 307A(2). 
  6. [41]
    I conclude that, while the language of ss 308 and 309 is not so clear as that in the group of provisions I mention at [38], uninvolved audit partners could not be prosecuted for contraventions of ss 308 and 309. 
  7. [42]
    In this context I note, and agree with, the way s 324AB(5) was dealt with by the Full Court of the Federal Court in Sadie Ville.  Section 324AB(5) assumes that there is a prosecution against a member of an audit firm, not the firm itself, and facilitates proof in such a proceeding.  It does not operate to make any other member of the firm liable to criminal sanction.[19]
  8. [43]
    Section 1308(2) provides that a person who makes a statement which “to that person’s knowledge is false or misleading” in a document to be lodged with, or submitted to, ASIC commits an offence.  Section 761F provides that a partnership is to be treated as a person for some purposes.  However, for the purposes of determining civil or criminal liability, there can only be a contravention by such of the partners who aided, abetted or were knowingly concerned in the relevant act or omission.[20]  I cannot see that uninvolved partners could be prosecuted for a breach of s 1308(2).
  9. [44]
    Lastly, I deal with s 324CB.  Section 324CD defines a conflict of interest situation as circumstances in which an auditor is not capable of exercising objective and impartial judgment in relation to the conduct of an audit, or circumstances in which a reasonable person, with full knowledge of all relevant facts and circumstances, would think that the auditor was not capable of exercising objective and impartial judgment in relation to the audit.  Here the plaintiff pleads that there was a conflict of interest situation because, at some point in dealing with the affairs of the plaintiff, both the second and third defendants became incapable of exercising objective and impartial judgment due to the need to acknowledge their own prior errors (prior period errors within the meaning of AASB108).  That is, the conflict alleged is between the plaintiff’s interests and the second and third defendants’ own interests. 
  10. [45]
    Section 324CB(1) provides that a member of an audit firm, who is aware of a conflict of interest as defined, and who does not take reasonable steps to ensure the conflict of interest ceases, contravenes the section.  As a matter of construction of s 324CB(1), if there was a conflict of interest as alleged by the plaintiff, any contravention of s 324CB(1) would be by the second defendant and the third defendant, not the uninvolved partners. 
  11. [46]
    Section 324CB continues:

“…

  1. (3)
     A person contravenes this subsection if:
  1. (a)
     an audit firm engages in audit activity in relation to an audited body at a particular time; and
  1. (b)
     a conflict of interest situation exists in relation to the audited body at the time; and
  1. (c)
     the person is a member of the audit firm at that time; and
  1. (d)
     at that time, another member of the audit firm is aware that the conflict of interest situation exists; and
  1. (e)
     the audit firm does not, as soon as possible after the member referred to in paragraph (d) becomes aware that the conflict of interest situation exists, take all reasonable steps to ensure that the conflict of interest situation ceases to exist.
  1. (3)
     For the purposes of an offence based on subsection (2), strict liability applies to the physical elements of the offence specified at paragraphs (2)(a), (b), (c), (d) and (e).
  1. (3)
     A person contravenes this subsection if:
  1. (a)
     an audit firm engages in audit activity in relation to an audited body at a particular time; and
  1. (b)
     a conflict of interest situation exists in relation to the audited body at the time; and
  1. (c)
     the person is a member of the audit firm at that time; and
  1. (d)
     at that time none of the members of the audit firm is aware that the conflict of interest situation exists; and
  1. (e)
     a member of the audit firm would have been aware of the existence of the conflict of interest situation if the audit firm had in place a quality control system reasonably capable of making the audit firm aware of the existence of such a conflict of interest situation.
  1. (3)
     For the purposes of an offence based on subsection (4), strict liability applies to the physical elements of the offence specified in paragraphs (4)(a), (b), (d) and (e).
  1. (3)
     A person does not commit an offence because of a contravention of subsection (2) or (4) in relation to audit activity engaged in by an audit firm at a particular time if the person has reasonable grounds to believe that the audit firm had in place at that time a quality control system that provided reasonable assurance (taking into account the size and nature of the audit practice of the audit firm) that the audit firm and its employees complied with the requirements of this subdivision.

…”

  1. [47]
    The defendants contended that because of the wording of subsection (2) above, every member of the firm which is the first defendant is able to be prosecuted for a contravention of s 324CB(4).  This was said to be because of the extended definitions of audit firm and person in s 9.
  2. [48]
    The drafting of subsection (2) is difficult.  I think that the construction contended by the defendants is arguable; that is, any member of an audit firm contravenes the section if one member of the firm knows of a conflict of interest situation and the firm does not act.  In some ways it is easier to understand subsection (2) in contrast to subsection (4).  That creates an offence for a person who is a member of the audit firm when no member of the firm is aware of the conflict of interest situation, but the firm does not have a proper system to identify conflicts of interest.  The offences at subsections (2) and (4) are offences of strict liability, but subsection (6) gives a defence to any member of a firm which had in place a proper quality control system to identify and remove conflicts of interest.
  3. [49]
    Contravention of s 324CB(2) is made an offence by s 1311 and Schedule 3 shows that the penalty for contravention is 10 penalty units, under the six month limit referred to in s 1316.  It follows that, at best for the defendants’ argument on this application, s 324CB(2) is wide enough to create an offence which is capable of commission by all the members of the first defendant, but that offence is out of time unless the Minister consents to a prosecution.
  4. [50]
    In my view, a decision to prosecute an uninvolved partner would be most unlikely.  First, there could be little public interest in such a course.[21]  Secondly, all the offences, except for that created by s 324CB, make it plain, in terms, or in substance, that only an individual auditor or lead auditor can be liable to prosecution.  Lastly, all but three offence provisions identified by the defendants would require Ministerial consent to prosecute.  My conclusion is that there is no real appreciable risk that any of the uninvolved partners will be prosecuted whatever the evidence in, and result of, this proceeding. 
  5. [51]
    Sections 4(1), 13(1) and 15 of the Partnership Act 1891 (Qld) do not change this position.  Section 13(1) provides:

“Subject to subsection (2), if, by any wrongful act or omission of a partner in a firm, other than an incorporated limited partnership, acting in the ordinary course of the business of the firm, or with the authority or his or her copartners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable for the loss, injury or penalty to the same extent as the partner so acting or omitting to act.”

  1. [52]
    The privilege against self-incrimination or exposure to a penalty may be claimed by someone who could be exposed to the jeopardy of a penalty proceeding or a criminal prosecution.  A penalty proceeding or a criminal prosecution may result in a fine, that is, a payment imposed as punishment after a finding of criminal or quasicriminal liability.  The Partnership Act provisions do not render the uninvolved partners exposed to penalty proceedings, criminal prosecution or criminal liability.  As a matter of civil liability, a firm is liable to pay a penalty incurred by one partner, even if it is imposed in quasicriminal or criminal proceedings.[22] 
  2. [53]
    Further, as explained by Wigney J in Sadie Ville in the Full Court, there is no general rule that one partner is liable for the criminal act of another partner.[23]

No Other Reason to Excuse Pleading

  1. [54]
    The defendants argue that even if the first defendant is not entitled to claim privilege, it is entitled to be excused from procedural requirements, such as pleading, for compliance with those requirements by it is dependent on information from someone who can claim privilege. 
  2. [55]
    It is fundamental to the claims of privilege against self-incrimination and exposure to a penalty that the privilege can only be claimed by the person who is called upon to produce documents or information compulsorily – Rockfort v Trade Practices Commission.[24]
  3. [56]
    In the case of Meneses v Directed Electronics OE Pty Ltd[25] the Full Court of the Federal Court cited Lindgren J in Microsoft Corporation v CX Computer Pty Ltd[26] for the following series of propositions:

“(1) a corporate defendant … may be required to provide documents and information which may tend to incriminate its officers …

  1. (3)
     a corporate defendant cannot invoke privilege on the grounds that an order or requirement to produce documents or information might tend to incriminate a natural person, such as a director …
  1. (3)
     a natural person cannot complain that a corporate defendant’s compliance with an order or requirement to produce documents or information might tend to incriminate him or her …
  1. (3)
     the relevant inquiry is whether an order directed to the corporate defendant will require that a natural person tend to incriminate himself or herself …
  1. (3)
     a corporate defendant cannot refuse to comply with a direction for the filing of evidence on the basis that its evidence may incriminate other natural person defendants or expose them to a penalty …  However a corporate defendant will not breach such direction if it fails to file a statement or affidavit from a witness where that witness claims privilege …  That is to say, compliance is not required if the only source of the information is the director defendants and they are entitled to remain silent … If the corporate defendant has other sources of information available from which it can comply with the direction, then it must do so.” (emphasis in the original)
  1. [57]
    In my view these principles apply here to the first defendant partnership, and its partners, the second and third defendants.  Despite the submissions of the defendants, there is nothing in the cases of ACCC v Eurong Beach Resort Ltd[27] or ACCC v J McPhee & Son (Aust) Pty Ltd (No 2)[28] to the contrary. 
  2. [58]
    No order I make will compel the second or third defendants to assist the first defendant.  While the second and third defendants are not obliged to provide the first defendant with information about what is pleaded, the first defendant will need to ascertain what it can from all other sources, eg, the documents available to it, and employees who worked with the second and third defendants.  It will need to obtain expert opinion on the audit files.  The second and third defendants are not the only sources of information available to the first defendant.

2B. INDIVIDUAL CLAIMS OF PRIVILEGE IN THE DEFENCE

  1. [59]
    I will now deal with the individual paragraphs which the plaintiff applies to strike out.
  2. [60]
    The statement of claim pleads that the plaintiff (in liquidation since 2013) was the responsible entity of the fund (now in receivership).  The first defendant was the audit firm retained on behalf of the plaintiff.  The second defendant audited the plaintiff’s financial reports every financial year from 30 June 2008 to 30 June 2012.  She reviewed the half yearly statements every year from 31 December 2008.  The third defendant audited the fund’s compliance with its plan every year from 30 June 2008 to 30 June 2012. 
  3. [61]
    It is pleaded that the defendants had responsibilities at common law, under contract, and pursuant to various statutesIt is pleaded that the second defendant was aware that the plaintiff relied upon the performance of the audits and reviews.  In reliance the plaintiff signed a director’s declaration each half year, saying that in its opinion the financial statements gave a true and fair view of the fund’s financial position and complied with accounting standards.  Further, the plaintiff lodged the financial statements and director’s declaration with ASIC.  There is then a heading in the statement of claim, “The deficiencies in the Financial Statements”.

Paragraphs 64 and 65 of the Statement of Claim

  1. [62]
    The first paragraph after this heading is paragraph 64 which pleads that none of the plaintiff’s financial statements and half yearly review statements identified fund investments as impaired nor (for various reasons) dealt properly with such impairment as was recognised.  Paragraph 65 of the statement of claim pleads that therefore the financial statements did not give a true and fair view of the financial position of the fund at any time after 30 June 2008, and did not comply with accounting standards. 
  2. [63]
    The defendants deny these paragraphs without giving an explanation for the denial.  They claim privilege against self-incrimination and privilege against exposure to penalty as a reason for not pleading further.
  3. [64]
    For reasons discussed at above, I cannot see that the first defendant has any valid claim for privilege in relation to these allegations.  As a consequence I will strike out paragraphs 64 and 65 of the defence so far as they are pleaded on behalf of the first defendant.  I will give leave to the first defendant to re-plead.  The first defendant should plead fully to paragraphs 64 and 65 of the statement of claim.  A proper explanation should be given for any denial or non-admission.  Any positive case, including any positive case based on expert accounting evidence, ought to be fully pleaded.  (In subsequent parts of any judgment I shall use the term ‘plead fully’ to mean these things.) 
  4. [65]
    For reasons discussed above, I think the second defendant does have a valid claim to privilege in relation to these paragraphs.  It was the second defendant’s task to audit the financial statements and review statements which are the subject of paragraphs 64 and 65 of the statement of claim.  To plead to the criticisms made of those documents would involve the second defendant making statements which might tend to incriminate her.  So far as the second defendant is concerned, I think that the pleaded defence is adequate. 
  5. [66]
    While the second defendant had responsibility for preparation of the financial statements and review statements identified in paragraphs 64 and 65 of the statement of claim, I think the third defendant also has a valid privilege against selfincrimination excusing his pleading to these paragraphs.  As can be seen at [126] below, the basis for his liability is, in part, that he had available to him the financial statements audited and reviewed by the second defendant, and the second defendant’s working papers.  It is pleaded against the third defendant that, having regard to these documents, inter alia, he ought to have reported that the plaintiff did not comply with its compliance plans, and that the plans were inadequate.  In this way there is an overlap between the facts of the cases against the second and third defendants.  For the third defendant to plead to the facts alleged here would involve him pleading to parts of the case made against him later in the pleading and that might tend to incriminate him.

Paragraph 67 of the Statement of Claim

  1. [67]
    Paragraph 66 of the statement of claim pleads various auditing standards.  Then paragraph 67 of the statement of claim pleads that the second defendant: (a) failed to use reasonable care in auditing the financial statements because she failed to deal properly or carefully with impairment issues; (b) failed to report significant matters to those charged with governance of the plaintiff; (c) failed to report to the plaintiff that changes or additions were needed to the financial statements in order that they give a true and fair view of the fund’s financial position; (d) failed to report to members by qualifying her audit opinion, and (e) failed to report to ASIC that she had reason to suspect a significant contravention of the Corporations Act.
  2. [68]
    All the defendants deny this paragraph without giving an explanation for the denial.  They claim privilege against self-incrimination and privilege against self-exposure to a penalty.
  3. [69]
    My decision in relation to all the defendants is identical with that given in relation to paragraphs 64 and 65 of the statement of claim, for the same reasons. 

Paragraphs 70 and 71 of the Statement of Claim

  1. [70]
    Paragraphs 68 and 69 of the statement of claim plead the facts and circumstances relied upon to attract the operation of the Corporations Act, ASIC Act, Trade Practices Act, and the Australian Consumer Law in relation to the conduct of the second defendant. 
  2. [71]
    Paragraphs 70 and 71 plead that the Audit Representations and Further Audit Representations were false.  These defined terms have their origin earlier in the pleading.  At paragraph 59 it is pleaded that, by signed statements accompanying each of her audits and review statements, the second defendant represented to the plaintiff that the financial statements and review statements gave a true and fair view of the financial position of the fund and complied with the Australian Accounting Standards and Australian Auditing Standards.  Further, that the second defendant had sufficient audit evidence to perform the audits and reviews.  These are the Audit Representations.  At paragraph 60 it is pleaded that Further Audit Representations occurred because, by performing the audits, the second defendant represented that she had exercised reasonable care in so doing, and in making the Audit Representations. 
  3. [72]
    Paragraph 70 pleads that the Audit Representations and the Further Audit Representations were false because these things were not true.
  4. [73]
    At paragraph 71 it is pleaded that in making the Audit Representations and Further Audit Representations, the second defendant engaged in misleading and deceptive conduct within the meaning of the Corporations Act, ASIC Act, Trade Practices Act and the Australian Consumer Law. 
  5. [74]
    At paragraph 72 it is pleaded that the plaintiff relied upon the Audit Representations and Further Audit Representations in continuing to operate; not winding up the fund, and not making significant changes to its management of the fund. 
  6. [75]
    At paragraphs 59 and 60 of the defence the defendants admit that certain statements were made in the audit reports which tend to support the existence of the representations alleged.  They go on to point out various qualifications in the audit reports, such as that the directors of the plaintiff were responsible for the preparation and fair presentation of the financial reports, and for establishing internal controls to ensure that the financial reports were free from material mis-statement.  The half yearly review reports contained similar statements, and also contained the statement that these review reports were not audits.  These paragraphs also draw attention to notes to the 2008 and 2012 audit reports, and to the 2009 financial review report.  These notes point out such things as the plaintiff being in breach of its financing agreement and raise “a significant uncertainty as to whether or not the Fund would continue as a going concern”. 
  7. [76]
    Then in answer to paragraphs 70 and 71 of the statement of claim, the defendants repeat and rely on these matters raised in paragraphs 59 and 60 of the defence and claim privilege against self-incrimination and privilege against self-exposure to a penalty as a reason for not further pleading. 
  8. [77]
    I accept that the second defendant is able to claim privilege in relation to these paragraphs.  The allegations made are critical of her work and to plead to them might tend to incriminate her.
  9. [78]
    For the same reasons as are given at [66] above, I accept that while the allegations concern work of the second defendant, the case pleaded against the third defendant is partly dependent on the matters alleged and for him to plead to these matters would involve him pleading things which might tend to incriminate him.
  10. [79]
    I do not accept that the first defendant has a valid claim for privilege.  For reasons given above, I cannot see that there is any real or appreciable risk of the first defendant being subject to prosecution.
  11. [80]
    While the existing defence is good so far as the second and third defendants are concerned, I will strike it out so far as the first defendant is concerned.  I grant leave to re-plead.  The first defendant must plead fully to the allegations made. 

 

Paragraphs 73 and 74 of the Statement of Claim

  1. [81]
    Paragraphs 73 and 74 of the statement of claim plead what the plaintiff says would have happened had the second defendant not breached her tortious and contractual duties, and not made misleading statements pursuant to the Corporations Act, ASIC Act, Trade Practices Act and the Australian Consumer Law.  The second defendant would have become aware of: impairment of the plaintiff’s loans and receivables; prior period errors in relation to impairment; the plaintiff prepaying management fees to itself and to a service company in breach of the Corporations Act and the Constitution, and distributions and redemption payments to a certain class of unitholders otherwise than in accordance with the Act and the Constitution.
  2. [82]
    It is then said that the second defendant would have reported these matters to those in charge of the plaintiff; provided qualified audit reports, and if necessary notified ASIC.  Further, it is pleaded that the plaintiff would have properly calculated impairment of its mortgage investments; realised its investments in a way similar to a winding up; stopped payment of fees, distributions and redemptions contrary to the Act, and commenced proceedings against the first and second defendant based on the second defendant’s prior period errors and recovered damages caused by those breaches. 
  3. [83]
    At paragraphs 73 and 74 of the defence, the defendants repeat and rely upon legal points they take as to the allegation of tortious duty of care and the scope of the second defendant’s contractual duties.  It is pleaded that the plaintiff and its directors were required to be, and at all material times were, aware of the financial position and financial performance of the fund; value of the property portfolio of the fund; their obligations, and the availability of some of the causes of action pleaded in the counterfactual scenario in the statement of claim.  Otherwise all defendants claim privilege against self-incrimination and privilege against self-exposure to a penalty.
  4. [84]
    Paragraphs 73 and 74 of the statement of claim are predicated on the second defendant breaching her duty of care to the plaintiff.  Therefore, I think the claim of privilege is properly taken and that the pleading of paragraphs 73 and 74 on her behalf is good.  For the same reasons as are given at paragraph [66] above, I consider that the third defendant also has a valid claim to privilege.
  5. [85]
    For the reasons I have expressed above, I cannot see that the first defendant has a real or appreciable risk of prosecution or exposure to a penalty.  I will strike out these paragraphs of the defence so far as they relate to the first defendant, and give leave to re-plead.  It ought to plead fully to paragraphs 73 and 74 of the statement of claim. 

Paragraph 90 of the Statement of Claim

  1. [86]
    Between paragraphs 84 and 97 of the statement of claim the plaintiff alleges that the fund’s Constitution provided for the responsible entity to receive a management fee for, inter alia, loan management.  The plaintiff as the responsible entity caused the custodian of the fund to enter into a series of management services agreements pursuant to which the service company LM Administration was engaged to perform the loan management services which the responsible entity was obliged to perform pursuant to the Constitution.  Under the management services agreements LM Administration was paid fees, separate and additional to the responsible entity’s management fee, from the assets of the fund.  It is pleaded that these payments were not authorised by the Constitution or the Corporations Act; involved LM Administration performing no service additional to those services it was already obliged to perform under contract to the plaintiff; were not calculated by reference to the cost of the services provided, and were charged when the plaintiff either was aware, or ought reasonably to have been aware, that there was a real risk that there would be a shortfall in fund assets.  In these circumstances it is pleaded that the plaintiff preferred its own interests, or the interests of LM Administration (a related entity), to the interests of the members of the fund; failed to act in the best interests of the members of the fund, and did not exercise reasonable care and diligence. 
  2. [87]
    Paragraph 90 of the statement of claim is the paragraph which alleges that the loan management fees paid pursuant to the management services agreements with the custodian were payments made to LM Administration for the performance by LM Administration of the duties for which the responsible entity management fee was paid.
  3. [88]
    The defendants deny paragraph 90 and otherwise claim privilege against selfincrimination and exposure to a penalty.
  4. [89]
    So as far as the second defendant is concerned, one of the matters pleaded at paragraph 67(a)(xiii)(A) of the statement of claim is that, in breach of her tortious and contractual duties, she failed to adequately consider (as required by Australian Auditing Standard ASA 250) whether or not the payments made by the fund to the plaintiff as fees and expenses were correctly payable and in accordance with the Corporations Act and the Constitution.  It seems to me that the second defendant can validly claim privilege excluding her from pleading to this paragraph.  Pleading to it might tend to incriminate her. 
  5. [90]
    Likewise, the allegations at paragraph 90 form a foundation for allegations of contravention by the third defendant – see paragraph 133(a)(vii) and 136 of the statement of claim, discussed at [133] ff below.  For the same reasons as are given at [66] above, I think that the pleading is sufficient on behalf of the third defendant.
  6. [91]
    In accordance with the reasons I have given above, I cannot see that the first defendant has any valid claim to privilege.  I will strike out paragraph 90 of the defence so far as it is pleaded on behalf of the first defendant and give leave to re-plead.  The first defendant ought to plead fully to this allegation.

Paragraphs 119-121 of the Statement of Claim

  1. [92]
    At paragraph 114 and following, the statement of claim deals with allegations against the third defendant, and his auditing of the plaintiff’s compliance plan from 30 June 2008 until 30 June 2012.  It is said that having undertaken these audits, the third defendant expressed the opinion that in all material respects the plaintiff had complied with its compliance plans in the relevant years, and that the compliance plans met the requirements of Part 5C.4 of the Corporations Act. 
  2. [93]
    At paragraphs 119 to 122 it is pleaded that the plaintiff contravened its compliance plans in various respects, which I will summarise.  It is said that the plaintiff: (a) did not apply generally accepted accounting principles in preparing its accounts because it did not have a process for properly identifying and assessing impairment of loans and receivables; (b) did not have a proper process to account for the expected rate and timing of cash to be received from the sale of real property securities; (c) did not have a proper system to assess the impact of delays and holding costs where decisions were made to delay selling real property securities, and (d) did not have a proper system in place to discount future cash flows.  Further, it is said that the plaintiff did not require current valuations when assessing the fair value of underlying real property securities.  The plaintiff did not require qualified or independent valuers to value its real property securities, but relied upon in-house estimations, and did not conduct feasibility analyses when valuing developments.  The plaintiff varied or extended loans without updated valuations.  The plaintiff did not take into account the general fall in the property market in Australia from late 2007 in making its valuations.  The plaintiff reduced its own internal audit procedures from about 2009 notwithstanding the global financial crisis and the financial difficulties which the fund was experiencing.  It paid fees to itself or LM Administration in breach of its compliance plans, and did not adequately consider the propriety of these fees.  It did not consider the propriety of paying redemptions and income distributions to certain classes of unitholders. 
  3. [94]
    At paragraph 120 of the statement of claim it is pleaded that at no material time did the plaintiff’s compliance plans satisfy the requirements of s 601HA(1).  Their provisions were insufficient in relation to obtaining updated valuations; ensuring that the plaintiff’s officers and employees were adequately qualified and experienced to properly recognise and deal with impairment issues, and were insufficient to ensure that the plaintiff complied with its duties under the Act and its Constitution. 
  4. [95]
    Paragraph 121 of the statement of claim pleads that at all material times the plaintiff’s financial statements had not been prepared in accordance with accounting standards and did not give a true and fair view of the financial position and performance of the fund.  Also, that from and including the 2009 compliance plan audit, the plaintiff paid redemptions to a certain class of unitholders contrary to the requirements of its Constitution and the Act.  Lastly, that at the time of the 2012 compliance plan audit, the plaintiff recognised income distributions to that class of unitholders contrary to the requirements of the Act and its Constitution.
  5. [96]
    At paragraphs 119, 120 and 121 of the defence the defendants deny paragraphs 119, 120 and 121  of the statement of claim; repeat and rely upon other pleadings which are not material to my purpose here, and otherwise claim privilege against selfincrimination and exposure to penalty as a reason for not pleading further.
  6. [97]
    I think the third defendant has a valid claim not to plead to these paragraphs.  It is pleaded in subsequent paragraphs of the statement of claim – 134 and 135 – that he is inferred to have become aware of the plaintiff’s breaches of its compliance plan while performing the compliance plan audits and that in those premises he has breached s 601HG(3), (4) and (4B).  Further, it is pleaded at paragraph 133(b) that the third defendant did not apply adequate professional scepticism in assessing the adequacy of the plaintiff’s compliance plans.  Further, at paragraph 136(a)(ii) of the statement of claim it is pleaded that the third defendant contravened the Act by failing to give an opinion that the compliance plans did not meet the requirements of Part 5C.4 of the Corporations Act.  To plead to paragraphs 119, 120 and 121 might tend to incriminate the third defendant.
  7. [98]
    Further, I am of the view that the second defendant can claim privilege in relation to pleading to these paragraphs.  While they are in that part of the pleading which is concerned with compliance plan auditing (the province of the third defendant) rather than general auditing (the province of the second defendant), it seems to me that to plead properly to the allegations which are made, the second defendant would have to descend to detail which might tend to incriminate her.  There is sufficient overlap with the detail of the matters pleaded to be inadequacies in the compliance plan, and the matters pleaded to have been overlooked by the second defendant in her audits, that she should not be compelled to plead to these paragraphs.
  8. [99]
    However, I cannot see that the first defendant has any basis not to plead to these paragraphs.  My reasoning is above.  I will strike out paragraphs 119, 120 and 121 of the defence so far as it is made on behalf of the first defendant.  I give leave to replead.  The first defendant should plead fully to these paragraphs.

Paragraphs 123-127 of the Statement of Claim

  1. [100]
    This section of the statement of claim deals with breaches said to have been committed by the third defendant. 
  2. [101]
    Paragraph 123 of the statement of claim pleads that it is to be inferred from the third defendant’s qualification as a registered company auditor, and his decision to take on the responsibility of auditing the compliance plans for the fund, that he was aware at all times of various matters.  The defendants admit all but two of these matters: paragraphs 123(d) and (e).  They claim privilege against self-incrimination in relation to pleading to those two matters.
  3. [102]
    The pleading is that the third defendant was taken to be aware at all material times:

“(d) that paragraph 58 of AASB139 required the plaintiff to assess at the end of each reporting period whether there was any objective evidence that any of the Fund’s loans and receivables or any group of its loans and receivables was impaired, by considering objective evidence of impairment, which would include:

  1. (i)
     the fair value of the real estate assets securing the Fund’s loans and receivables;
  1. (ii)
     levels of and trends in delinquencies for similar financial assets; and
  1. (iii)
     national and local economic trends and conditions;
  1. (e)
     that paragraphs 63 and AG84 of AASB139 required an impairment loss on a loan to be measured as the difference between the loan’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the loan’s original effective interest rate, except that the cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial.”
  1. [103]
    The defence is that the defendants:

“123.5 do not admit subparagraphs 123(d) and 123(e) and in further answer to the subparagraphs:

  1. (a)
     claim privilege against self-incrimination and privilege against self-exposure to penalty;
  1. (b)
     say that ASIC Regulatory Guides merely set out ASIC’s own interpretation of the law but, relevantly, have no legal effect and no legal significance, and do not prescribe or create legal or other requirements or establish any relevant principles or affect in any way the legal relations between persons; and
  1. (c)
     repeat and rely on paragraph 7 above.”
  1. [104]
    At paragraph 7 of the statement of claim the plaintiff defines the terms Australian Accounting Standard and Australian Auditing Standard as having the meanings given to accounting standard and auditing standard in s 9.  Section 9 in turn refers to ss 334 and 336, which provide that the Australian Accounting Standards Board and the Auditing and Assurance Standards Board, respectively, may by legislative instrument make accounting standards and auditing standards for the purpose of the Act. 
  2. [105]
    Paragraph 7 of the defence says that the defendants will rely upon these standards for their full terms, meaning and effect.  While this style of pleading occurs frequently enough, it does not comply with the Court rules, or with good pleading principles.  If there is some point to be made about the standards in general, or about any particular part of them, it should be clearly articulated.  The plaintiff did complain about paragraph 7 of the defence.  On balance I think I will strike it out as meaningless.  I will give leave to re-plead if there is any real point to be made.
  3. [106]
    I do not know what paragraph 123.5(b) of the defence means.  It seems irrelevant to any of the allegations made at paragraphs 123(d) and (e).  If the defendants say that the standards referred to at paragraphs 123(d) and (e) of the statement of claim do not mean what is pleaded, then they should say so distinctly, and say why.  Further, there is no point in repeating and relying on paragraph 7 of the defence, as paragraph 123.5(c) of the document does.  For these reasons I will strike out paragraphs 123.5(b) and (c).  I will give leave to re-plead.
  4. [107]
    I cannot see that the first defendant has any privilege to claim in relation to this paragraph.  It is not said to be involved in any of the acts or omissions which amount to breaches of the compliance plan audits.  The defence ought to be struck out so far as it concerns the first defendant.  The first defendant has leave to re-plead.  It should plead fully to the allegations.
  5. [108]
    In my view the third defendant has a valid claim of privilege.  To admit that he was unaware of relevant accounting standards may tend to incriminate him.  On the other hand, to admit that he was aware of standards may also tend to incriminate him, for it adds to the plaintiff’s case that he breached them and knowingly made false and misleading representations by publishing inadequate or false audit reports. 
  6. [109]
    The allegations are not made against the second defendant.  She need not plead to the allegations, but the pleading should be amended so that is is plain on the face of the pleading that she does not plead to these paragraphs.
  7. [110]
    Paragraph 124 of the statement of claim is similar to paragraph 123.  It is pleaded that it is to be inferred that the third defendant was aware of the ASIC Regulatory Guideline 119 issued in April 2004.  This guideline stated ASIC’s belief that poor valuation procedures; inadequate security, and poor procedures and responses to defaults on mortgage payments were areas that were systemically weak in the market.  ASIC’s guide gave examples of appropriate compliance measures, including that valuations be updated every three years, and every 12 months if the valuation was of a development.
  8. [111]
    Paragraph 124 of the defence does not admit the allegations; claims privilege against self-incrimination and privilege against exposure to a penalty; at paragraph 124.2, repeats paragraph 123.5(b), see above, and at paragraph 124.3, states that it will rely upon ASIC Regulatory Guide 119 for its full terms, meaning and effect.
  9. [112]
    Because I have struck out paragraph 123.5(b), I will strike out paragraph 124.2.  I will give leave to re-plead.  If the defendants wish to plead the equivalent of paragraph 123.5(b) of the defence in answer to this pleading, I cannot see that it would be objectionable.  Although I must say that I cannot see that it is very relevant given that it seems entirely to miss the point of the pleading. 
  10. [113]
    I will strike out paragraph 124.3.  It is meaningless.  If the defendants have something to say about the guidelines, they should say it.
  11. [114]
    Consistently with my reasoning above, I cannot see that the first defendant has any privilege which would excuse it pleading to this allegation.  I will strike out paragraph 124 of the defence so far as it is made on behalf of the first defendant.  I will give leave to re-plead.  The first defendant should plead fully to the allegations made against it.
  12. [115]
    The second defendant’s position is identical to that in relation to paragraph 123 of the statement of claim.
  13. [116]
    I think the third defendant can validly claim privilege.  My reasoning is the same as that in relation to paragraph 123.  If he pleads that he did know of the guide, it will tend to support the case that he made a knowing misrepresentation, and if he did not know of it, it tends to support the proposition that he breached his duties. 
  14. [117]
    Paragraph 125 of the statement of claim is another similar paragraph.  It pleads that it is to be inferred that the third defendant knew of ASIC Regulatory Guide 45 issued in September 2008, which emphasised the significance of independent and uptodate valuations.
  15. [118]
    The defence is identical to that pleaded to paragraph 124. 
  16. [119]
    My decisions are identical to that in relation to paragraph 124, for the same reasons.
  17. [120]
    Paragraph 126 is another paragraph in the same style.  It is pleaded that it should be inferred that the third defendant was aware of the content of AASB Guidance Statement G014 from August 2009. 
  18. [121]
    Paragraph 126 of the defence aspires to be in the same form as paragraphs 124 and 125.  Paragraph 126.2(c) is in identical terms to 123.2(b), above.  It is irrelevant for the reasons expressed in relation to paragraph 123.5(b) above.  I will strike it out.  Paragraph 126.2(d) should also be struck out.  If there is some point about the meaning of the Guidance Statement, the defendants should state what it is explicitly, and its relevance to the proceeding.
  19. [122]
    My decisions in relation to the privilege points are the same as those in relation to paragraphs 123-125 above, for the same reasons.
  20. [123]
    Paragraph 127 of the statement of claim is a shorter, but conceptually a similar, pleading that, at all times from 2008, the third defendant was aware of the pressures of the global financial crisis, including credit tightening and uncertainty in the property markets. 
  21. [124]
    The defendants do not admit this paragraph and claim privilege against selfincrimination and exposure to a penalty.
  22. [125]
    My decisions in relation to the privilege points are the same as those in relation to paragraphs 123-126 above, for the same reasons.

Paragraphs 128-132 of the Statement of Claim

  1. [126]
    Each of paragraphs 128-132 of the statement of claim is in almost identical form.  The first relates to the 2008 compliance plan audit, and the last to the 2012 compliance plan audit.  Each paragraph lists various documents which it is alleged the third defendant either personally, or by those assisting him with the conduct of the audit, reviewed in the course of conducting the compliance plan audits.  The detail of these matters varies slightly from year to year.  For the purposes of this judgment, it is enough to broadly summarise them as being:
    1. (a)
      The financial statements for the relevant years, which: (i) disclosed accounting policies, judgments and assumptions not in compliance with proper standards, so far as identification and assessment of impairment was concerned; (ii) revealed improper prepayment of management fees; (iii) in later years, revealed substantial redemptions by related feeder funds, including after redemptions for other funds were suspended, and (iv) identified substantial income distributions to the feeder funds.
    2. (b)
      The second defendant’s working papers which recorded facts which the plaintiff says showed that impairment issues were not being appropriately dealt with by the second defendant.
    3. (c)
      Notice that LM Administration and the feeder funds were related parties.
    4. (d)
      The plaintiff’s credit committee minutes, which documented the plaintiff’s consideration of all requests for variations and extensions to loans. 
    5. (e)
      Work by the second defendant to determine the currency of valuations which found irregularities.
    6. (f)
      Working papers of the second defendant which showed that valuations were being carried out on incorrect bases, and in some cases not by valuers, but by the plaintiff’s in-house personnel.
    7. (g)
      Work carried out by the second defendant which showed redemptions in the feeder funds.
  2. [127]
    The defence to each of these paragraphs is identical.  I set out paragraph 128 of the defence by way of example:

“128. The defendants do not admit paragraph 128 and in further answer to the paragraph:

128.1 claim privilege against self-incrimination and privilege against self-exposure to a penalty;

128.2 will rely at trial on each of the documents referred to therein for its full terms, meaning and effect; and

128.3 repeat and rely upon paragraph 7 above and, in further answer to the references to paragraphs (ii) and (iii) of the particulars subjoined to subparagraphs 119(a), repeat and rely upon subparagraph 119.2 above.”

  1. [128]
    I cannot see that paragraphs 128.2, 129.2, 130.2, 131.2 or 132.2 add anything.  I will strike them out.  I will give leave to re-plead in case the defendants have something to say about particular provisions of the documents. 
  2. [129]
    In relation to the reference to paragraph 7, where appearing in each of paragraphs 128, 129, 130, 131 and 132, my view is the same.  That reference should be struck out.  It is meaningless.
  3. [130]
    Otherwise, I am satisfied that the pleading is good so far as the third defendant is concerned.  It seems to me that pleading to the allegations might tend to incriminate him. 
  4. [131]
    The allegations are not made against the second defendant and I do not think she is compelled to plead to these paragraphs.  The pleading should be amended to make it clear that she does not. 
  5. [132]
    I cannot see that the first defendant has any privilege excusing it from pleading to the paragraphs.  I will strike out the pleadings at 128.1, 129.1, 130.1, 131.1 and 132.1 so far as they are made by the first defendant and give leave to re-plead.  The first defendant must plead fully to these paragraphs.

Paragraphs 133-137 of the Statement of Claim

  1. [133]
    In these paragraphs it is pleaded that the third defendant breached his tortious duty, contractual duty, and statutory duties because the compliance plan audits ought to have shown that the plaintiff did not comply with its compliance plans and that the compliance plans did not meet the requirements of Part 5C.4 of the Corporations Act.
  2. [134]
    It is said that the third defendant did not undertake any or any proper consideration of whether: (a) the fund property was properly valued and at regular intervals; (b) the employees of the plaintiff were properly trained or sufficiently skilled to identify and measure impairment on loans or value real property; (c) the payment of fees in advance to the plaintiff and LM Administration was in accordance with the Corporations Act or the Constitution of the fund, and (d) redemptions to related unitholders were in accordance with the Corporations Act or the compliance plan.  Further, it is said that the third defendant did not treat the plaintiff’s valuations and assessments of impairment with appropriate professional scepticism, and did not consider whether or not the plaintiff was acting in the best interests of members, or was acting in its own interests.  It is alleged that the third defendant did not take reasonable care to determine whether or not the plaintiff’s financial statements were made and maintained in accordance with Australian Accounting Standards. 
  3. [135]
    It is pleaded that it is to be inferred that the third defendant became aware of the plaintiff’s noncompliance with its compliance plan pleaded at paragraphs 119 and 121 of the statement of claim. 
  4. [136]
    I think the third defendant has a valid claim to plead to these paragraphs on the basis of privilege against self-incrimination. 
  5. [137]
    The allegations are not made against the second defendant and she is not compelled to plead to them.  The pleading should be amended so as to show this. 
  6. [138]
    I cannot see that the first defendant has any claim to any privilege in relation to this paragraph.  I strike out paragraphs 133.3, 134.3, 135.2(b), 136.3 and 137.4 so far as they are made on behalf of the first defendant.  I give leave to re-plead.  The first defendant ought to plead fully to these paragraphs. 

Paragraphs 138 and 139 of the Statement of Claim

  1. [139]
    These paragraphs plead the plaintiff’s case as to what would have happened had the third defendant not breached the tortious, contractual and statutory duties of care already pleaded.  The factual scenarios pleaded assume a breach of these duties. 
  2. [140]
    I accept that the third defendant could not plead to these paragraphs without descending into detail which might tend to incriminate him or expose him to a penalty.  The current pleading is therefore adequate so far as he is concerned.
  3. [141]
    The paragraphs are not pleaded against the second defendant.  The defence should be amended to show that she does not plead to these paragraphs.
  4. [142]
    Once again, I cannot see that the first defendant has any valid claim of privilege which would prevent it pleading fully to these paragraphs.  I strike out paragraphs 138 and 139 of the defence so far as they are made on behalf of the first defendant.  I give leave to re-plead.  The first defendant must re-plead fully.

Paragraphs 143 and 144 of the Statement of Claim

  1. [143]
    Paragraphs 140 and following of the statement of claim make allegations that the third defendant engaged in misleading and deceptive conduct with respect to the compliance plans for the plaintiff.  It is said that the third defendant represented to the plaintiff, at the time of each of the compliance plan audits, that he had done sufficient audit work to form conclusions in relation to his auditing tasks; that he had exercised reasonable care in carrying out his auditing tasks, and that there existed a reasonable basis for him to form the opinions recorded in his audit reports.
  2. [144]
    At paragraph 143 of the statement of claim it is pleaded that these representations were false.  Reliance is placed on the faults identified with the third defendant’s work earlier in the pleading.  Paragraph 144 of the statement of claim says that in making the false misrepresentations, the third defendant engaged in misleading and deceptive conduct contrary to the Corporations Act, the ASIC Act and the Australian Consumer Law.
  3. [145]
    It seems to me that the third defendant has a valid claim of privilege in relation to these paragraphs.  The current defence is adequate for his purposes.
  4. [146]
    The pleadings are not made against the second defendant.  The current pleadings should be amended to show that she does not plead to those paragraphs.
  5. [147]
    I can see no valid claim of privilege in the first defendant.  I strike out paragraphs 143 and 144 of the defence so far as it is made on behalf of the first defendant.  The first defendant has leave to re-plead.  The first defendant should plead fully to these paragraphs.

Paragraphs 145 and 147 of the Statement of Claim

  1. [148]
    These paragraphs make allegations as to the consequences of the third defendant’s misleading and deceptive conduct.  Like paragraph 123 of the statement of claim, dealt with at [108] above, if the third defendant pled to these paragraphs he might tend to incriminate himself.  Therefore I think the current pleading is adequate on his behalf.
  2. [149]
    Once again, the second defendant need not plead to these paragraphs, but the pleading ought to be amended to show that she does not.
  3. [150]
    Lastly, I cannot see that the first defendant has any valid claim for privilege which would excuse it from pleading fully to these paragraphs.  I strike out paragraphs 145 and 147 of the defence so far as they are made on behalf of the first defendant.  I give leave to re-plead.

Paragraphs 151-154 of the Statement of Claim

  1. [151]
    Paragraphs 151 and following of the statement of claim deal with allegations that the defendants fraudulently concealed the plaintiff’s rights of actions. 
  2. [152]
    Paragraph 151 says that the second defendant was at all material times aware of accounting standards which applied to the plaintiff.  These standards dealt with impairment of loans and assets; valuation of assets; correction of prior period errors and reporting of errors; qualitative aspects of internal accounting practices, etc, and obligations to report various matters to those charged with the governance of the plaintiff.
  3. [153]
    Paragraph 152 of the statement of claim pleads that at all times from October 2008, the second defendant was aware that the fund was exposed to uncertainty because of the global financial crisis.  Further, the plaintiff had adopted a strategy of not acting on defaults until the real property market recovered its value. 
  4. [154]
    Paragraph 153 pleads that in the premises, the second defendant was aware after October 2008 of an increased risk of management bias in the plaintiff’s management’s valuation of real property assets and assessment of impairment.
  5. [155]
    Paragraph 154 of the statement of claim pleads that the plaintiff did not obtain updated external valuations of “a significant number of significant real property assets” from mid-2008 until June 2012. 
  6. [156]
    Were the second defendant to plead admitting to the knowledge alleged, she might tend to incriminate herself because such knowledge lays the foundation for part of the plaintiff’s case to the effect that she knowingly misled.  On the other hand, were she to deny knowledge of these things, she might incriminate herself because it might tend to prove that she was careless in not properly acquainting herself with accounting standards and other matters applicable to the performance of her tasks.  Accordingly, I think that the second defendant has a valid claim to privilege which would excuse her from pleading to these paragraphs. 
  7. [157]
    Paragraphs 151-153 are not pleaded against the third defendant, and I cannot see that he is obliged to plead to them.  However, the pleading should be amended to make it clear that he does not.
  8. [158]
    Paragraph 154 is not expressly pleaded against either the second or third defendant.  It is simply pleaded as a matter of fact.  In my view neither the second nor third defendant can be compelled to plead to it, for it is part of the foundation for the plaintiff’s case that the defendants ought to have acted differently in relation to the plaintiff’s assessments of value of its real property securities.  I think that both the second and third defendants have a valid claim to privilege to excuse them from pleading to paragraph 154 of the statement of claim.
  9. [159]
    I cannot see that the first defendant has any valid claim to privilege which would excuse it from pleading to these paragraphs.  There is no knowledge, conduct or omission alleged on the part of anyone but the second or third defendants.  Therefore I strike out paragraphs 151-154 of the defence so far as they concern the first defendant.  The first defendant is given leave to re-plead.  It must plead fully.

Paragraphs 156 and 159 of the Statement of Claim

  1. [160]
    It is pleaded that the plaintiff’s management first identified substantial impairments in the fund’s loans and receivables in the December 2010 financial statements.  The most significant contribution to that impairment was downwards adjustment of the value of underlying real property securities.  The valuations which were revised downwards were those which had been previously estimated by the plaintiff’s management, or those which had been established by external valuations obtained before October 2008. 
  2. [161]
    Paragraph 156 of the statement of claim alleges that the second defendant was not aware of any events which had occurred since 30 June 2010, and which were sufficient to explain the plaintiff’s downward revision of its real property securities in December 2010.
  3. [162]
    I think the second defendant is entitled to refuse to plead to paragraph 156 of the statement of claim.  To do so might tend to incriminate her by showing that she knew or ought to have known the plaintiff’s valuations and estimates of value were outofdate and unreliable. 
  4. [163]
    The paragraph is not pleaded against the third defendant so he is not obliged to plead to it.  The pleading should be amended to show that he does not plead to this paragraph.
  5. [164]
    I cannot see any valid claim for privilege on behalf of the first defendant to excuse it pleading to paragraph 156 of the statement of claim.  I strike out paragraph 156 of the statement of claim so far as it is made on behalf of the first defendant.  There should be a full pleading as previously described.
  6. [165]
    At paragraph 157 of the statement of claim it is pleaded that in March 2011 the second defendant reviewed the fund’s loans and receivables for indicators of impairments, and the level of that impairment.
  7. [166]
    At paragraph 159 of the statement of claim it is pleaded that, having regard to the factual pleadings at paragraphs 151-158, the second defendant was aware that external valuations prior to mid-2008 no longer accurately identified the fair value of the fund’s real property; new valuations had become necessary, but had not been obtained and therefore, there were prior period errors.  Further, that her audit procedures had not adequately addressed these risks in previous reviews and audits, and that if proper audits and reviews had been carried out, such matters would have been discovered, corrected and disclosed. 
  8. [167]
    It seems clear to me that the second defendant has a valid claim of privilege, excusing her from pleading to paragraph 159. 
  9. [168]
    The paragraph does not contain allegations against the third defendant so he is not obliged to plead to it.  The defence should be amended to make it clear that he does not.
  10. [169]
    I cannot see any reason why the first defendant has any privilege excusing it from pleading to this paragraph.  It should do so, explaining the reasons for any non-admissions and denials and fully pleading any positive case it wishes to run, including any case based on expert opinion.

Paragraphs 160-162

  1. [170]
    At paragraph 160 of the statement of claim it is pleaded that the plaintiff had not discounted expected future cash flows for the fund from loans and receivables until June 2010; thereafter it continued not to discount expected future cash flows for some of its development loans, and for most of its other loans.  It is further alleged that those development loans which were discounted, were not properly discounted. 
  2. [171]
    At paragraph 161 it is alleged that the second defendant reviewed the projected cash flows for development projects on an “as complete” basis in 2010, 2011 and 2012.
  3. [172]
    At paragraph 162 it is pleaded that at all material times from at least 30 June 2010 the second defendant was aware of “a further increased risk, including of management bias, in management’s assessment of objective evidence of impairment, and its estimation of the level of impairment of the Fund’s loans and receivables”. 
  4. [173]
    The defendants make quite a lengthy pleading to paragraph 160, but in part claim privilege.  As to paragraphs 161 and 162, they essentially repeat and rely upon other factual pleadings and claim privilege as the reason for not pleading more fully to the allegations.
  5. [174]
    Paragraph 160 is not particularly directed at the second defendant.  It seems to me that both the second and third defendants do have a valid claim of privilege which excuses them from pleading more fully than they have to this paragraph.  To plead to the paragraph would involve them pleading to factual allegations which might tend to incriminate them.
  6. [175]
    The position of the second defendant is the same in relation to paragraphs 161 and 162.
  7. [176]
    Paragraphs 161 and 162 are not part of the case against the third defendant.  Therefore he is not obliged to plead to them.  The pleading should be amended to make that express.
  8. [177]
    I cannot see that the plaintiff has any valid claim of privilege to excuse it from pleading to paragraphs 160-162.  The current pleading should be struck out so far as it concerns the first defendant.  The first defendant has leave to re-plead.  It must plead fully.

Paragraphs 166 and 167 of the Statement of Claim

  1. [178]
    At paragraph 166 of the statement of claim it is pleaded that on 7 November 2012, as part of her 30 June 2012 audit, the second defendant sought technical advice from others within the first defendant as to the appropriate basis to measure impairment for loans and receivables, and was given some particular advice.  An internal memorandum to the second defendant is particularised. 
  2. [179]
    The defence says:

“166. The defendants deny paragraph 166 and in further answer to the paragraph:

166.1 will rely at trial on the internal memorandum referred to in the particulars subjoined to paragraph 166 for its full terms, meaning and effect; and

166.2 claim privilege against self-incrimination and privilege against self-exposure to penalty.”

  1. [180]
    I will strike out paragraph 166.1.  I will give leave to re-plead if there is anything sensible to be said about the terms of the memo or its meaning.  At the moment the pleading is meaningless.
  2. [181]
    In my view, the second defendant has a valid claim to privilege against selfincrimination which excuses her from pleading to this paragraph.  Therefore the pleading at paragraph 166.2 is good so far as she is concerned.
  3. [182]
    Paragraph 166 is not pleaded against the third defendant.  He need not plead to it.  The pleading should be amended to make it clear that he chooses not to.
  4. [183]
    I cannot see any basis for a valid claim of privilege on behalf of the first defendant.  I will strike out paragraph 166.2 so far as it concerns the first defendant.  There is leave to re-plead. 
  5. [184]
    At paragraph 167 the plaintiff pleads that its financial statements never disclosed any prior period errors as required by the Accounting Standards. 
  6. [185]
    The pleaded defence is:

“167. As to paragraph 167, the defendants:

167.1 admit that none of the Relevant Annual Financial Reports or Relevant Half-Year Financial Reports contained any statements purporting to correct or disclose any material prior period error;

167.2 repeat and rely on paragraphs 7 and 55 above;

167.3 having regard to the above, otherwise deny the paragraph; and

167.4 in further answer to the paragraph claim privilege against selfincrimination and privilege against selfexposure to penalty.”

  1. [186]
    Paragraph 55 of the defence contains the statement that the plaintiff will “rely at trial on each of the Relevant Annual Financial Reports and Relevant HalfYear Financial Reports for their full terms and effect”.  In other words, it is a paragraph similar to paragraph 7 which I have criticised above.  Paragraph 55 should be struck out.   Paragraph 167.2 should also be struck out.  They are meaningless.  If there is any point about what the accounting standards or the financial reports actually say, it should be pleaded expressly and precisely. 
  2. [187]
    It is hard to know what to make of paragraph 167.3.  Logically it could only be a denial that the accounting standards required the disclosure of prior period errors.  If that is so, it should be said clearly, and the reason should be stated.  For that reason I will also strike out paragraph 167.3. 
  3. [188]
    I cannot see any point in the claim of privilege at paragraph 167.4.  The factual substance of paragraph 167 has been admitted.  I will strike out paragraph 167.4 and give leave to re-plead in case there is some proper claim for privilege in relation to this paragraph. 

Paragraphs 168-170 of the Statement of Claim

  1. [189]
    These paragraphs make allegations critical of the second defendant in not disclosing prior period errors; not properly designing audit parameters which would address risk; not bringing matters to the attention of those governing the plaintiff, and not qualifying the financial statements of the plaintiff.  Allegations are made that the second defendant was acting wilfully or being recklessly indifferent.
  2. [190]
    The pleading goes on to say that, in the premises, the second defendant was not capable of exercising objective and impartial judgment in relation to the conduct of the audits or reviews of the financial statements so that a conflict of interest as defined by s 324CD arose.  The second defendant gave a written declaration pursuant to s 307C(1) or (3) of the Corporations Act that there had been no contraventions of the auditor independent requirements of the Act despite either knowing that to be untrue, or being recklessly indifferent to it.
  3. [191]
    The second defendant is entitled to claim privilege excusing her from pleading to these allegations.  The current pleading is good, so far as it is made on her behalf.
  4. [192]
    The allegations are not made against the third defendant.  He is therefore not obliged to plead to these paragraphs.  The pleading should be amended to show that he does not.
  5. [193]
    I cannot see that there is any valid claim for privilege on the part of the first defendant which would excuse it pleading to these matters.  Paragraphs 168, 169 and 170 should be struck out so far as it purports to be on behalf of the first defendant.  The first defendant has leave to re-plead.  It must plead fully.

Paragraphs 171 and 172 of the Statement of Claim

  1. [194]
    Paragraph 171 of the statement of claim alleges that, because of the matters pleaded at paragraphs 152-170, the plaintiff’s “rights of action set out in this statement of claim with respect to the Audits and Reviews in negligence and for breach of contract were concealed from those authorised to commence legal proceedings on behalf of the plaintiff by fraud within the meaning of s 38(1)(b) of the Limitation of Actions Act 1974 (Qld)”. 
  2. [195]
    At paragraph 172 of the statement of claim it is pleaded that those authorised to commence legal proceedings on behalf of the plaintiff did not become aware of the matters set out in paragraphs 159 and 168 until June 2015, when the second and third defendants provided files to the receiver pursuant to summons.
  3. [196]
    Despite the fact that the particulars to paragraph 172 refer to production of documents by the third defendant, it seems to me that the allegations at paragraphs 171 and 172 could only relate to the second defendant.  The internal paragraph references are to paragraphs 152-170 and to 159 and 168.  All these pleadings are in relation to the second defendant only. 
  4. [197]
    It seems to me that the second defendant is entitled to refuse to plead to paragraphs 171 and 172 of the statement of claim in reliance on a claim of privilege against selfincrimination. 
  5. [198]
    It seems to me that the third defendant is not obliged to plead to these paragraphs for, as explained, it seems to me they relate only to the second defendant.  The pleading should be amended so that it is clear that the third defendant does not plead to these paragraphs.
  6. [199]
    I cannot see that the first defendant has any valid claim to refuse to plead to these paragraphs.  The defence at paragraphs 171 and 172 should be struck out so far as the first defendant is concerned.  The first defendant has leave to re-plead.  It should do so fully.

 

Paragraphs 173-175 of the Statement of Claim

  1. [200]
    At these paragraphs the pleading returns again to the third defendant.  Allegations are made that, despite being aware of faults in relation to the compliance plans and the plaintiff’s compliance with its compliance plans, the third defendant did not communicate those concerns to the plaintiff, and did not provide a qualified opinion in its compliance plans audit.  It is pleaded that the third defendant also was, or became, incapable of exercising objective and impartial judgment, so that a conflict of interest arose within the meaning of s 324CD.  The third defendant also gave declarations that he was independent and must, therefore, have either been wilfully false in doing so, or recklessly indifferent.  It is pleaded that in the premises, the third defendant concealed the plaintiff’s rights of action in relation to the compliance plan audits, and that the plaintiff did not become aware of them until June 2015.
  2. [201]
    It seems to me that the third defendant has a valid excuse for not pleading to these paragraphs because to do so would tend to incriminate him.
  3. [202]
    It seems to me that the allegations are only made in relation to the third defendant, not the second defendant.  The pleading should be amended to show that the second defendant does not plead to these paragraphs.
  4. [203]
    I cannot see that the first defendant has any valid claim of privilege which would excuse it from pleading to these paragraphs.  The pleading so far as it concerns the first defendant should be struck out.  The first defendant has leave to re-plead and should do so fully.

3.  BLANKET CLAIMS OF PRIVILEGE

  1. [204]
    The defence begins with the following paragraphs:

INTRODUCTION

1A. Nothing in this defence should be taken to amount to an express or implied waiver of any privilege against self-incrimination or privilege against self-exposure to penalty belonging to the first defendant, or any of its partners or employees, or to the second or third defendants.

RELIEF FROM LIABILITY

1B. In answer to the claims against it, the defendants rely on sections 1317S and 1318 of the Corps [sic] Act, but in reliance on privilege against self-incrimination or privilege against exposure to penalty, the defendants do not presently assert a positive defence but reserve their right to do so at an appropriate time.”

  1. [205]
    Associated with this is paragraph 188 of the defence:

Relief from Liability – Corporations Act

  1.  Further or in the alternative, in reliance on privilege against self-incrimination or privilege against exposure to penalty, the defendants do not at this time assert a positive defence based on s 1317S (by reason of s 1041I(4)) or s 1318 of the Corps [sic] Act but reserve their right to do so at an appropriate time.”
  1. [206]
    A similar paragraph to paragraph 1A was considered by Finkelstein in ASIC v Mining Projects Group Ltd & Ors (above).  That case was a civil penalty proceedings.  The defendant pleaded quite some detail of a positive case, but in other respects did not plead fully and included a paragraph in its defence similar to that at 1A of the defence in this case.  Finkelstein J held:

“On the question of waiver, ASIC contends that the directors have waived each privilege by providing information in their respective defences which they were not obliged to provide.  It may be accepted, indeed it was not disputed, that the directors have waived each privilege as regards the admitted and asserted facts.  But, in my opinion, the waiver is confined to what appears in the defences.  First of all, what is conceded in each defence is not that the facts asserted or admitted are true facts.  The defences do no more than relieve ASIC of the need to prove those facts.  Second, there was no intention to waive privilege beyond what appears in each defence.  The prefatory qualification makes each director’s intention clear.  Third, at least as regard self-incrimination privilege, I do not accept that can be waived by mere admission of some facts (other than, of course, the admitted facts).  …  in my opinion the defendant who admits a particular fact in his defence does not thereby waive his right to claim the privilege for all other facts.  That is to say, the waiver goes no further than what has been admitted or asserted … There is nothing unfair in this result.  By way of contrast, it has been said in relation to legal professional privilege that partial disclosure in court of privileged material might result in unfairness and the interests of justice rightly demand that there should be full disclosure.  However, this rule cannot be carried over into pleadings, the purpose of which is merely to put the parties on notice about the scope of the trial.” – [24].

  1. [207]
    I cannot see any objection to the plea at paragraph 1A of the defence.  With respect to the views of Finkelstein J just quoted, I do not know whether or not the plea would be effective if, in substance, the defendants have otherwise waived privilege somewhere in the defence, but I do not need to decide that issue now.
  2. [208]
    As to paragraph 1B, s 1041I(4) of the Corporations Act provides that in circumstances where a person suffers damage because of conduct which is in contravention of ss 1041E, 1041G or 1041H, as the plaintiff here alleges it has, a defendant is entitled to the benefit of s 1317S.  That section provides for relief from liability in certain circumstances at the discretion of the Court.  Preconditions to the Court exercising this discretion are its making a finding that the defendant concerned has acted honestly, and its having regard to all the circumstances of the case – s 1317S(2).
  3. [209]
    Section 1318 of the Corporations Act gives the Court, if anything, a wider discretion to excuse an auditor for negligence and other types of default.  It provides that if in any civil proceeding for negligence it appears to the Court that a person may be liable in respect of that negligence, but “that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with a person’s appointment, the person ought fairly be excused for the negligence … the court may relieve the person either wholly or partly from liability, on such terms as the court thinks fit”.  Again, it is a precondition to the Court’s relieving the person from liability that the person acted honestly. 
  4. [210]
    The defendants say that there should be a short, separate hearing after findings in the main proceeding as to whether or not the Court should relieve them of liability pursuant to ss 1317S and 1318.  On the other hand, the plaintiff says that all matters should be dealt with together and the defendants should be compelled to plead the matters they rely upon in relation to these sections now.
  5. [211]
    In my view, there should not be a separate hearing in relation to these sections.  Matters which can be raised by way of exculpation pursuant to ss 1317S and 1318 are likely to be the same as, or have substantial overlap with, matters which are raised by way of defence.  There should only be one hearing, and witnesses should only give evidence once.  Otherwise, there is the real potential for findings, including credit findings, to be made in the main proceedings and then for further evidence, contrary to those findings, to be led in the subsequent hearings as to ss 1317S and 1318.  This would be most undesirable. 
  6. [212]
    I do recognise that this direction will potentially mean that the second and third defendants must give evidence in the trial before me in order to satisfy me of matters going to ss 1317S and 1318, where they might otherwise choose not to give evidence at trial.  Cross-examination will be at large.  However, the second and third defendants can claim privilege in relation to any questions where it is proper for them to do so and are therefore protected from incriminating themselves to any greater extent than they otherwise choose during the hearing.
  7. [213]
    It is the defendants who raise ss 1317S and 138.  They are giving notice that they will rely on those sections but refusing to say what facts and circumstances they will rely upon.  The second and third defendants do have a claim for privilege which excuses them from fully pleading the matters relied upon to support their ss 1317S and 1318 cases.  To plead matters in relation to these sections the second and third defendants would have to traverse, or assume against their interests, factual matters which would tend to incriminate them.  They would have to plead as to their states of mind.
  8. [214]
    The second and third defendants will have to elect whether or not to waive privilege in relation to these matters at the same time they elect whether or not to waive privilege in relation to all other matters in the proceeding.  I think the s 1317S and 1318 points should be treated in the same way as the other privilege claims raised by the defendants: if the defendants do elect at some point to plead a positive case, everything which is to be relied upon in relation to the ss 1317S and 1318 points must be raised at the same time, and all evidence concerning it must be adduced along with all the other evidence in the trial. 
  9. [215]
    I cannot see that the first defendant has any valid claim for privilege in relation to these sections.  No partners of it, other than the second and third defendants, are alleged to have acted or omitted to act in a way which amounts to a contravention of any contractual, tortious or statutory duty.  If the first defendant wishes to rely upon ss 1317S or 1318, it should plead fully all the facts which it says entitles it to be granted relief pursuant to those sections now.

 

Section 22 Civil Liability Act 2003 (Qld)

  1. [216]
    Section 22(1) of the Civil Liability Act provides:

“22(1) A professional does not breach a duty arising from the provision of a professional service if it is established that the professional acted in a way that (at the time the service was provided) was widely accepted by peer professional opinion by a significant number of respected practitioners in the field as competent professional practice.”

  1. [217]
    Sections 22(2)-(5) go on to qualify the wide words of that exculpatory provision, but it is not necessary to canvas them in detail here.
  2. [218]
    Paragraph 191 of the defence makes a claim, “… in respect of all claims to which the Civil Liability Act applies, … the defendants acted in a manner that (at the time the services were provided) was widely accepted by peer professional opinion as competent professional practice within the meaning of s 22 of the Civil Liability Act and accordingly [they] are not liable for any loss or damage alleged in the [statement of claim]”. 
  3. [219]
    In their pleading the defendants give notice that they will rely upon s 22 of the Civil Liability Act, but refuse to state the basis upon which they will make their case.
  4. [220]
    In my view, the same considerations apply here as apply to ss 1317S and 1318.  There should not be a separate hearing in relation to these issues. 
  5. [221]
    While the second and third defendants can claim privilege against pleading the facts upon which they base this part of their pleading, they will have to elect at some stage whether or not to waive that privilege. 
  6. [222]
    I cannot see any basis for the first defendant claiming privilege against pleading the facts upon which this part of its pleading is based.  It should do so fully, including pleading proper particulars of what it says were the widely accepted peer professional opinions and who it says are the respected practitioners who held them.
  7. [223]
    I will hear the parties further as to costs.

Footnotes

[1]  See for example Anderson v ASIC [2013] 2 Qd R 401, [36].

[2]  Reid v Howard (1995) 184 CLR 1, 11.

[3]  Pyneboard Pty Ltd v Trade Practices Commission (1983) 152 CLR 328, pp 335-6.

[4]  R v Associated Northern Collieries (1910) 11 CLR 738, 742.

[5]  QC Resource Investments Pty Ltd (in liq) v Mulligan [2016] FCA 813, [23].  See also Refrigerated Express Lines (Australasia) Pty Ltd v Australian Meat & Livestock Corp. (1979) 42 FLR 204, 207‑208 per Deane J.

[6]  Refrigerated Express, above.

[7]  (2007) 164 FCR 32, [13].

[8]  Pyneboard, above.

[9]  J D Heydon, LexisNexis [25100] citing Evans v Staunton [1958] Qd R 96, 110 and Rio Tinto Zinc Corp v Westinghouse Electric Corp [1978] AC 547, 647. 

[10]  Reid v Howard (above) – p 6.

[11]  This language has been used in many of the cases; see for example Gibbs CJ in Sorby v The Commonwealth (1983) 152 CLR 281, 294-5, cited in Reid v Howard (above) at p 6.

[12]  Cross on Evidence, above, [25100], and the cases cited there.

[13]  ASIC v Drake (No 2) (2016) 118 ACSR 189; [2016] FCA 1552.

[14]  Affidavit of David Whyte, Court Document 73, ex 24.

[15]  (1999) 198 CLR 162.

[16]  Oates v Williams (1998) 84 FCR 348; the High Court did not express an opinion on this point, and see Gelzinis v T & R (Murray Bridge) Pty Ltd (2009) 103 SASR 194.

[17]  Deloitte Touche Tohmatsu (a firm) v Sadie Ville Pty Ltd [2020] FCAFC 23, [71] and [245]-[249].

[18]  Sadie Ville, above, [18].

[19]  Sadie Ville, above, at [22] and [229].

[20]  See the discussion of s 1041E at [231] ff of Sadie Ville in the Full Court by way of analogy.

[21]  In that respect I note that the Commonwealth Director of Prosecutions guidelines include “the passage of time since the alleged offence when taken into account with the circumstances of the alleged offence and when it was discovered” and “the degree of culpability” as relevant considerations in the decision to prosecute.

[22]  Sadie Ville, above, [48]-[52].

[23]  Sadie Ville, above, [54] ff.

[24]  (1982) 153 CLR 134, 145.

[25]  (2019) 373 ALR 624, 649.

[26]  (2002) 116 FCR 372, [7].

[27]  [2005] FCA 1134.

[28]  (1997) 77 FCR 217.

Close

Editorial Notes

  • Published Case Name:

    LM Investment Management Limited (in liq) v EY & Ors (No 5)

  • Shortened Case Name:

    LM Investment Management Limited (in liq) v EY (No 5)

  • MNC:

    [2020] QSC 264

  • Court:

    QSC

  • Judge(s):

    Dalton J

  • Date:

    20 Oct 2020

  • White Star Case:

    Yes

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