FEDERAL COURT OF AUSTRALIA

 

INSURANCE - claims made and notified policy - insured, a firm of accountants - “dishonesty extension” covering dishonest or fraudulent conduct, but not that of any person committing or condoning fraudulent act - client of the firm, a travel agent and member of the Travel Compensation Fund (“TCF”) - audited accounts required to be lodged annually with TCF as a condition of membership - accounts not prepared and audited in time - insured firm applied for extensions of time within which travel agent was to file audited accounts citing, as reasons, “computer failure” and “change of ownership” - whether applications for extension were fraudulent due to deliberate suppression of travel agent’s insolvency and the intermingling of its accounts with those of a related entity - no independent duty of disclosure pleaded, statutory or otherwise - whether applications fraudulently gave rise to an implied representation that the extensions of time were required only because of “unremarkable practical difficulties” or “ordinary and unalarming reasons” unconnected with travel agent’s financial condition or its relation with another entity for which accounts had to be produced so that travel agent’s own accounts could be produced - whether insolvency and intermingling of accounts were reasons why audited accounts were not able to be lodged by date due - identification of what representations of fact were made - whether implied representation was made - whether all elements of fraud made out - identification of what representations of fact were intended to be made by the insured - whether TCF acted in reliance on the representations - relevance of fact that no evidence led directed to the issue of inducement - relevance of other fraudulent conduct as similar fact evidence - whether evidence of “significant probative value”, “striking similarity” or “underlying unity” - whether disclosure by insured firm of financial condition of client would have breached insured’s professional obligation.

 

Travel Agents Act 1986 (NSW)

Evidence Act 1995 (Cth), s 97 (1)

 

Gould v Vaggelas (1985) 157 CLR 215 - appl.

San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340 - appl.

Derry v Peek (1889) 14 App Cas 337 - appl.

Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 - appl.

D F Lyons Pty Ltd v Commonwealth Bank of Australia (1991) 28 FCR 597 - appl.

Zaknic Pty Ltd v Svelte Corporation Pty Ltd (1995) 61 FCR 171 - appl.

 

 

FAI GENERAL INSURANCE CO LIMITED v BRIAN ALBERT McSWEENEY & ORS

 

NG 312 of 1992

 

TRAVEL COMPENSATION FUND v FAI GENERAL INSURANCE CO LIMITED

 

NG 948 of 1992

 

 

REASONS FOR JUDGMENT (PART III)

 

LINDGREN J

SYDNEY

9 APRIL 1998

TABLE OF CONTENTS

REASONS FOR JUDGMENT (PART III)

INTRODUCTION ...............................................................................................	2
General ...............................................................................................................	2
Application of the terms of the Chatswood and Gosford policies to those TCF facts which occurred in 1988.....................................................................	4
Matters in Part B of the Schedule to FAI’s Further Amended Defence .........	9
Findings of fact of Wilcox J ...............................................................................	10
Proof by FAI of dishonesty and fraud ...............................................................	11
FRAUD AND THE TCF FACTS .......................................................................	11
Elaboration of TCF facts in 1988 ......................................................................	11
Monthly cash statements showing need to reduce expenses .............................	11
Engagement of PMS to carry out the 1988 audit of Travel ..............................	12
The role of IBA ..................................................................................................	12
Business expansion .............................................................................................	13
The computer system .........................................................................................	13
PMS’s Preliminary Amalgamated Statement of Assets and Liabilities of Wednesday 24 August .......................................................................................	17
Gilbert’s letter of Friday 26 August to the directors of Travel and Wheels and their response on Monday 29 August ........................................................	18
PMS’s draft letter to the Corporate Affairs Commission ................................	20
Draft Amalgamated Statement of Assets and Liabilities dated Wednesday 31 August ................................................................................................................	21
Beale’s letters of Wednesday 31 August, entitled “FINANCIAL POSITION”	23
Meeting of McS, Cullen and Williams with solicitors on Thursday 15 September ..........................................................................................................	27
PMS’s understanding in September of the state of the accounting records of Travel .................................................................................................................	29
Meeting on Friday 16 September of McS, Cullen and Dunn ...........................	29
Making of agreement for sale on Sunday 18 September ..................................	31
Assumption of control by IPG on Monday 19 September ...............................	32
McS’s letter to the directors of Travel of Tuesday 20 September ....................	33
The September audit plan .................................................................................	37
Meeting of Dunn, Cullen and Beale on Friday 23 September ..........................	39
Beale’s letter to Travel’s directors of Tuesday 27 September ..........................	40
The first application (by Beale by telephone on 28 September) for an extension of time for the filing of audited accounts ..........................................	41
Three letters of Thursday 29 September ...........................................................	42
PMS’s memo of fees rendered to Travel on Friday 30 September ...................	44
Meeting of IPG directors on Friday 7 October .................................................	44
Two letters from IPG to PMS of Monday 10 October .....................................	45
Travel’s post-10 October client account ...........................................................	45
TCF’s letter to Travel of Thursday 13 October ................................................	46
McS’s letter to Travel’s directors of Friday 14 October and first Audit Review Committee Meeting on that date ..........................................................	46
Dunn’s two letters to PMS of Tuesday 18 October ..........................................	50
Second Audit Review Committee Meeting on Friday 21 October ...................	53
Beale’s letter to Krumbeck, received Tuesday 25 October ..............................	55
The second application (by Beale by telephone on 25 October and letter of 26 October) for an extension of time within which to file Travel’s audited accounts .............................................................................................................	55
Third Audit Review Committee Meeting on Thursday 27 October ................	59
Krumbeck’s letter to Beale of 28 October ........................................................	61
McDougall’s facsimile to Beale of Monday 31 October ....................................	61
Production of first draft of financial statements for Travel on Tuesday 1 November ...........................................................................................................	62
PMS’s letter of Thursday 3 November to Travel relating to fees .....................	62
Work during November .....................................................................................	62
Fourth Audit Review Committee Meeting on Wednesday 16 November ........	63
Fifth Audit Review Committee Meeting on Friday 25 November ...................	64
Involvement of Short .........................................................................................	68
McS’s letter of Wednesday 30 November to Dunn ...........................................	68
Contact between Beale and Short on Wednesday 30 November .....................	69
Application to TCF ............................................................................................	70
Early December .................................................................................................	70
The final collapse of Travel ...............................................................................	71
Fees owed to PMS by Travel .............................................................................	72
Making and notification of claims by IPG and TCF and purported avoidance ...........................................................................................................	74
REASONING IN RELATION TO FRAUD AND THE TCF FACTS ................	76
An overview of the reasons why audited financial statements could not be lodged with TCF by 30 September 1988 ..........................................................	77
The first application (by Beale by telephone on 28 September) for an extension of time for the filing of audited accounts .........................................	81
1.         A representation of fact, however made .....................................	81
2.         Falsity of the representation .......................................................	84
3.         That the maker of the representation does not                         believe that it is true in the sense in which the                         maker intends it to be understood ...............................................	85
4.         That the maker of the representation intends a                         person or class of persons to act in reliance on it .......................	86
5.         That the person or a person belonging to the class                         of persons, acts in reliance on the representation .......................	87
6.         That loss or damage is suffered as a result of the                         reliance on the representation ....................................................	88
The second application (by Beale by telephone on 25 October and letter of 26 October) for an extension of time to file Travel’s audited accounts, and the grant of it (by letter of 31 October) ......................	89
1.         A representation of fact, however made ....................................	89
2.         Falsity of the representation .......................................................	93
3.         That the maker of the representation does not                         believe that it is true in the sense in which the                         maker intends it to be understood ...............................................	94
4.         That the maker of the representation intends a                         person or class of persons to act in reliance on it ........................	95
5.         That the person, or a person belonging to the class                         of persons, acts in reliance on the representation .......................	97
6.         That loss or damage is suffered as a result of the                         reliance on the representation ....................................................	99
Two specific submissions               (i)        Relevance of McS’s conduct as part of the TAG facts                         to the TCF facts .........................................................................	99
(ii)       Breach of professional obligations ..............................................	100
CONCLUSION IN RELATION TO FRAUD AND THE TCF FACTS .............	102

 

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 312 of 1992

 

BETWEEN:	FAI GENERAL INSURANCE CO LIMITED Applicant
AND:	BRIAN ALBERT McSWEENEY First Respondent   BRUCE WILLIAM PHILLIPS Second Respondent   JOHN WILLIAM BEALE Third Respondent   PAUL FREDERICK TURNER Fourth Respondent   TIMOTHY PATRICK CULLEN Fifth Respondent   MICHAEL JOHN GAERTNER Sixth Respondent   TAG PACIFIC LIMITED Seventh Respondent   TOIKAN HOLDINGS PTY LIMITED Eighth Respondent

 

BETWEEN:	TAG PACIFIC LIMITED AND TOIKAN HOLDINGS PTY LIMITED FIRST CROSS-CLAIMANTS
AND:	FAI GENERAL INSURANCE CO LIMITED FIRST CROSS-RESPONDENT
BETWEEN:	BRIAN ALBERT McSWEENEY AND BRUCE WILLIAM PHILLIPS SECOND CROSS-CLAIMANTS
AND:	FAI GENERAL INSURANCE CO LIMITED SECOND CROSS-RESPONDENT

 

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 948 of 1992

 

BETWEEN:	TRAVEL COMPENSATION FUND Applicant
AND:	FAI GENERAL INSURANCE CO LIMITED RESPONDENT
BETWEEN:	FAI GENERAL INSURANCE CO LIMITED FIRST CROSS-CLAIMaNT
AND:	BRIAN ALBERT McSWEENEY, PAUL FREDERICK TURNER, BRUCE WILLIAM PHILLIPS AND TIMOTHY PATRICK CULLEN FIRST CROSS-RESPONDENTS

BETWEEN:	BRIAN ALBERT McSWEENEY, PAUL FREDERICK TURNER, BRUCE WILLIAM PHILLIPS AND TIMOTHY PATRICK CULLEN SECOND CROSS-CLAIMANTS
AND:	FAI GENERAL INSURANCE CO LIMITED SECOND CROSS-RESPONDENT

JUDGE:	LINDGREN J
DATE:	9 april 1998
PLACE:	SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 312 of 1992

 

BETWEEN:	FAI GENERAL INSURANCE CO LIMITED Applicant
AND:	BRIAN ALBERT McSWEENEY First Respondent   BRUCE WILLIAM PHILLIPS Second Respondent   JOHN WILLIAM BEALE Third Respondent   PAUL FREDERICK TURNER Fourth Respondent   TIMOTHY PATRICK CULLEN Fifth Respondent   MICHAEL JOHN GAERTNER Sixth Respondent   TAG PACIFIC LIMITED Seventh Respondent   TOIKAN HOLDINGS PTY LIMITED Eighth Respondent

 

BETWEEN:	TAG PACIFIC LIMITED AND TOIKAN HOLDINGS PTY  LIMITED FIRST CROSS-CLAIMANTS
AND:	FAI GENERAL INSURANCE CO LIMITED FIRST CROSS-RESPONDENT
BETWEEN:	BRIAN ALBERT McSWEENEY AND BRUCE WILLIAM PHILLIPS SECOND CROSS-CLAIMANTS
AND:	FAI GENERAL INSURANCE CO LIMITED SECOND CROSS-RESPONDENT

 

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 948 of 1992

 

BETWEEN:	TRAVEL COMPENSATION FUND Applicant
AND:	FAI GENERAL INSURANCE CO LIMITED RESPONDENT
BETWEEN:	FAI GENERAL INSURANCE CO LIMITED FIRST CROSS-CLAIMANT
AND:	BRIAN ALBERT McSWEENEY, PAUL FREDERICK TURNER, BRUCE WILLIAM PHILLIPS AND TIMOTHY PATRICK CULLEN FIRST CROSS-RESPONDENTS

BETWEEN:	BRIAN ALBERT McSWEENEY, PAUL FREDERICK TURNER, BRUCE WILLIAM PHILLIPS AND TIMOTHY PATRICK CULLEN SECOND CROSS-CLAIMANTS
AND:	FAI GENERAL INSURANCE CO LIMITED SECOND CROSS-RESPONDENT

JUDGE:	LINDGREN J
DATE:	9 april 1998
PLACE:	SYDNEY

REASONS FOR JUDGMENT - PART III

FRAUD AND THE TCF FACTS

 

INTRODUCTION

General

FAI alleges that PMS’s conduct in obtaining from TCF, in the second half of 1988, extensions of time for the lodgment of audited accounts for Travel (in Part I, I adopted Wilcox J’s abbreviations “Travel Abroad” and “Wheels Abroad”, but henceforth, in view of the frequency of references to the companies, I shall use the abbreviations “Travel” and “Wheels”) for the year ended 30 June 1988, was fraudulent. It alleges that:

“[n]either when requesting the extensions of time nor at any other time did PMS disclose to TCF that Travel was operating with a significant deficiency or that it was trading while insolvent or that the financial records of Travel and Wheels were intermingled, although it knew those matters were relevant to TCF’s decision whether to extend time for filing accounts and whether or on what terms to permit Travel’s continued participation in the travel compensation scheme.” (par 17, Part B, Schedule to Further Amended Defence).

The submission is that as a result of PMS’s fraudulent non-disclosure, Travel was allowed to continue to trade for a time, with a consequential increase in the amount of the final deficiency and of the loss borne by TCF.

But par 17 of Part B of the Schedule to FAI’s Further Amended Defence (“Part B”), set out above, and a reference to “fraudulent non-disclosure” do not adequately reflect the way in which FAI put its case. Rather, its case was that the non-disclosure caused Beale’s words by which he applied for each of the two extensions, to convey a representation that the extension was required only because of “unremarkable practical difficulties” or “ordinary and unalarming reasons”, unassociated with Travel’s financial condition or its relation with another entity for which accounts had to be produced in order that Travel’s own accounts might be produced (“the Implied Representation”), and that the Implied Representation was made fraudulently.

Annexed is a “Dramatis Personae - Part II” which lists the individuals and companies involved in the TCF facts, the subject of the present Part (III) of these Reasons for Judgment. The content of the Dramatis Personae - Part II forms part of these Reasons.

I do not propose, at least generally, to distinguish between TCF’s and PMS’s submissions, and will, for convenience, generally use the form of words, “TCF and PMS submit”. TCF’s and PMS’s submissions are in the same interest, although, in the case of TCF they are to be seen as having been made in support of its application for leave (see Part I). The cases for and against FAI’s liability to indemnify are, respectively, also cases for and against the granting of leave to TCF. My treatment of the parties’ cases and submissions on liability to indemnify, constitute further reasons relevant to TCF’s application for leave, as well as reasons on the substantive issue as between FAI and PMS.

Application of the terms of the Chatswood and Gosford policies to those TCF facts which occurred in 1988

In the TCF proceeding, Wilcox J decided that TCF’s loss resulted from PMS’s negligence in connection with the audit of Travel’s 1987 accounts, and, accordingly, that it was unnecessary for him to deal with the causes of action based on PMS’s conduct in 1988.

In the present proceeding, the TCF insurance proceeding, FAI pleaded that PMS’s conduct in both 1987 and 1988 was fraudulent. However, in the course of the hearing, it abandoned the allegation of fraud in relation to 1987. The amendment came about as follows. FAI originally pleaded that due to (all of) the matters referred to in Part B, TCF’s claim against McS and Phillips was one for damages arising out of, or contributed to by, dishonest or fraudulent conduct of PMS; that McS committed dishonest or fraudulent acts himself or condoned such acts by Beale; and that, as a result, the Chatswood policy did not indemnify McS. Part B described conduct in both 1987 and 1988. Following the filing of FAI’s Further Amended Defence on 23 June 1995, however, the alleged fraudulent conduct of McS and Beale became that described only in par 17 of Part B, set out above, “viewed in the light of the matters in paragraphs 8-16”. Paragraphs 8-16 relate to conduct in 1988 alone. (Paragraphs 1-7 relate to the 1987 audit.)

TCF and PMS submit that FAI’s obligation to indemnify arises from the TCF judgment; that that judgment was not based on conduct of McS or Beale in 1988; and that it follows that the allegedly fraudulent conduct in 1988 is irrelevant to the question of FAI’s liability.

More elaborately, they submit that there was no finding by Wilcox J, and no evidence before me, that PMS's conduct in the second half of 1988 caused TCF to suffer loss; that FAI has not contested Wilcox J's finding of a causal link between PMS's performance of the 1987 audit and the whole of the loss suffered by TCF; that FAI has not led evidence on the present hearing directed to establishing a causal link between the events of 1988 and TCF’s loss; and that, as a result, PMS's conduct in 1988 is irrelevant to the question of FAI’s liability to indemnify, which is adequately supported by Wilcox J's findings in relation to the 1987 audit alone.

 

In response, FAI submits that while it has not contested Wilcox J's findings in relation to the 1987 audit, PMS's conduct in 1988 was an additional cause of TCF's loss.  In this respect, it refers to the possibility of multiple causes of loss, as acknowledged in such cases as March v E & M H Stramare Pty Ltd (1991) 171 CLR 506.  Indeed, FAI relies on certain findings of fact made by Wilcox J as themselves already establishing a causal link between PMS’s conduct in 1988 and TCF’s loss.

Dealing with these competing submissions requires reference to be made again to the standard terms of the FAI professional indemnity policy. The relevant insuring clause is in the form of a promise by FAI:

“[t]o indemnify the Insured against any claim or claims for compensation first made against the Insured during the period of cover specified in the Schedule and reported to the Company during the period of cover specified in the Schedule.

a)         for breach of professional duty in the conduct of the practice, ...” (emphasis supplied)

The dishonesty exclusion (Exclusion (b)) is in respect of any such claim “for alleged or actual dishonest, [or] fraudulent ... acts or omissions ...”. The dishonesty extension (Extension 4), however, is as follows:

“Extension 4: Dishonesty

If a limit for this extension is specified in the Schedule Exclusion (b) is deleted and subject to the limitations, terms and conditions this Policy is extended to indemnify the Insured in respect of claims for damages for breach of professional duty arising out of or contributed by the dishonest, fraudulent, criminal or malicious conduct of employees, fellow partners or co-directors. Provided that this Policy shall not provide indemnity to any person committing or condoning such dishonest, fraudulent, criminal or malicious act.” (emphasis supplied)

Clearly, the notion of a “claim” is central to all three of the insuring clause, the dishonesty exclusion and the dishonesty extension. Definitions (2) and (4) are therefore relevant:

“2.       The expression ‘claim’ shall mean the demand for compensation made by a third party against the Insured but shall not include the Insured’s costs and expenses. Where an act, error or omission results in more than one claim against the Insured which may be the subject of indemnity hereunder, all such claims shall jointly constitute one claim under this policy (but subject always to Insuring Clause 3 hereof).” (emphasis supplied)

(Insuring Clause 3 provides for limits on the liability to indemnify.)

“4.       A claim shall be deemed to be first made against the Insured when the Insured first receives an intimation from the third party that the Insured is being held responsible in part or in whole for a loss.” (emphasis supplied)

I have reached the conclusion that the relevant question in the present case is whether the claim by TCF against McS or Phillips, against which FAI is said to be liable to indemnify, is a claim for damages or compensation in respect of loss which arises out of, or was contributed to by, the supposedly fraudulent conduct in 1988.

Before I seek to explain how, in my view, that question arises, certain preliminary observations may be made. It is not to be expected that a dishonesty exclusion will be able to be displaced for no reason other than that a claimant against the insured chooses not to allege fraud or dishonesty (cf Walton v National Employers’ Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 at 78-9 per Kerr CJ and 83-4 per Bowen JA (Hardie JA not deciding, at 82)). To hold otherwise would be to allow a claimant, knowing of or suspecting dishonesty, at least in some situations to avoid attracting the exclusion, by, for example, confining its pleading to a legal cause of action not involving fraud, such as negligence. It is perhaps for this reason that PMS did not make a submission similar to the present one, in relation to their claim that FAI is liable to indemnify McS and Phillips in respect of the TAG judgment (TAG had not pleaded fraud against them in the TAG proceeding, but the fraud found by Olney J, and now alleged by FAI in the TAG insurance proceeding, was contemporaneous with, and part of, the TAG facts which gave rise to the TAG judgment). I suggest that it is similarly not to be expected, if there are two independent causes of the same loss, one fraudulent and the other not, that a dishonesty exclusion will be able to be displaced for no reason other than that the claimant chooses to rely only on the non-fraudulent one.

In my opinion, the present submission by TCF and PMS should not be accepted. Definitions (2) and (4) make it clear that for present purposes a “claim” is a demand for compensation for a loss, which expressly or impliedly asserts the Insured’s responsibility at law to compensate for that loss. In the present case, TCF suffered loss following the collapse of Travel in December 1988. It made but one claim on PMS in respect of that loss: the demand for compensation made in December 1991. The single “claim” then made was distinct from the “causes of action” or “legal bases of liability” then said to establish liability.

As noted above, Insuring Clause 1 refers to a “claim or claims for compensation first made against the Insured during the period of cover specified in the Schedule and reported to [FAI] during the period of cover specified in the Schedule”. TCF’s claim in December 1991 was made within the period of cover from 23 May 1991 to 23 May 1992. By its application filed on 4 December 1991, TCF claimed against Phillips and McS damages for negligence, fraud, and pursuant to s 82 of the Trade Practices Act 1974 (Cth) (“the TP Act”). The accompanying statement of claim was not a model of clarity. It alleged the making of numerous misrepresentations in both 1987 and 1988. It pleaded causes of action in fraud, negligence, and misleading and deceptive conduct, arising in each year. However, counsel for TCF made it clear to Wilcox J that in relation to the 1987 audit, TCF would be content with a finding of negligence, and, as noted earlier, his Honour made only such a finding. But TCF had alleged that the whole of the loss for which it was demanding compensation, in fact flowed from the facts constituting each pleaded cause of action without distinction. There was but one “claim” for the purposes of the policy.

McS and Phillips reported TCF’s demand for compensation to FAI and sought indemnity in respect of it. The facts that ultimately TCF did not press for a finding of fraud and that Wilcox J did not find it necessary, when delivering judgment, to deal with the events of 1988 as constituting independent causes of action, are, alike, irrelevant to the identification of the demand for compensation in respect of which McS and Phillips sought indemnity. The relevant demand for compensation was not one made by TCF against PMS following delivery of the TCF judgment; at a time, it may be noted, when the Chatswood and Gosford policies were no longer on foot.

I turn now to the non-definitional provisions of the then standard form of FAI’s professional indemnity policy. The dishonesty exclusion subtracts from the claims referred to in Insuring Clause 1, claims “for alleged or actual dishonest, [or] fraudulent ... acts or omissions ...”. In my opinion, and subject to the dishonesty extension next to be discussed, this provision excludes from cover a demand for compensation for loss which is alleged to have been caused by fraudulent acts or omissions. But, as well, and even in the absence of an allegation of fraud, the exclusion operates if the loss was actually caused by fraudulent acts or omissions.

The dishonesty extension operates if a limit for that extension is specified in the Schedule. Such a limit was specified here in both the Chatswood and Gosford policies. The first effect of the dishonesty extension is that the dishonesty exclusion (Exclusion (b)) is deleted. One is left with, relevantly, the Insuring Clause and the dishonesty extension. I need not discuss the latter’s words of “extension”. What is immediately important is that the relevant exclusion in relation to dishonesty is now to be found only in the proviso to the dishonesty extension set out earlier: for example, the Chatswood policy would not provide indemnity to McS if TCF’s loss arose out of, or was contributed to by, McS’s own dishonest or fraudulent conduct, or conduct by Beale of that kind, condoned by McS.

Wilcox J found a causal nexus between the conduct of the 1987 audit by PMS and the loss suffered by TCF following the collapse of Travel. His Honour concluded that if TCF had been provided with an accurate statement of the financial situation of Travel in 1987, it would have refused Travel continued participation in the Fund (necessary for Travel to continue to hold a licence), or granted it only if further security were furnished. No such statement was provided. Travel applied for the 1988 extensions of time in circumstances in which it had not been refused continued participation in the Fund, nor been required to provide further security. The alleged representations by Beale on the basis of which TCF granted the extensions in 1988 therefore had the capacity to be causes: of delay in Travel’s being disqualified or in the suspension or cancellation of its licence; of concomitant prolongation of the period of TCF’s exposure; and of the suffering of loss by TCF. In the result, they activate the proviso to the dishonesty extension.

Moreover, although Wilcox J made no positive finding of fraud, negligence or misleading or deceptive conduct in relation to PMS’s conduct in 1988, his Honour found that that conduct formed part of a chain of causation between the 1987 negligence and the losses incurred by TCF in late 1988. I discuss his Honour’s findings in relation to 1988 later.

Matters in Part B of the Schedule to FAI’s Further Amended Defence

As noted earlier, pars 8-16 of Part B relate to the 1988 audit. They set out numerous factual matters, which are summarised below (all dates in this Part (III) of the Reasons are dates in 1988, unless otherwise stated):

PMS was retained to audit Travel’s accounts for the year ending 30 June, in the knowledge that the accounts were to be submitted to TCF by 30 September. McS, Beale and Cullen were involved in the task (par 8). From at least 1 July, Wheels and Travel engaged in insolvent trading, having a significant cash deficiency of around $2 million or more (par 9). By 24 August, PMS had prepared a “Preliminary Amalgamated Statement of Assets and Liabilities” of Travel and Wheels [as at 30 June], which demonstrated that they were operating with a significant deficiency [a net deficiency of $1,153,433], and while insolvent (par 10).

On 31 August, Beale informed the directors of Travel that, in the opinion of PMS, Travel was insolvent (par 11).

On 18 September, IPG agreed to acquire all shares in Travel and Wheels for $200,000, with settlement to take place in 90 days. A net deficiency of approximately $1.1 million [in fact, $1,153,433] and a net cash deficiency (which took into account major creditors) of between $2.6 million and $3.3 million were disclosed to IPG (par 12).

On 20 September, McS wrote to Travel’s new directors, and informed them that there had been a large number of transactions between Travel and Wheels, noted that the directors were presently unable to furnish him with full and complete details of those transactions, and recorded that he was concerned that the directors should establish to his satisfaction that Travel was not insolvent. He also noted that Travel was not able to pay professional fees to enable the preparation of accounts for audit, that he required particulars of any firm arrangements for refinancing of indebtedness or increase in issued capital, and that the directors should take legal advice with respect to the company’s solvency (par 13).

On 27 September, Beale wrote to Travel’s new directors informing them that PMS required confirmation and supporting evidence that the company could continue to trade and pay its debts as and when they fell due (par 14).

At the request of the new directors of Travel, at the end of September and twice in late October (in total, twice orally and once in writing), Beale sought and obtained from TCF extensions of time for filing the audited accounts, initially to the end of October, then to 14 November, and finally to 30 November. The only reasons given for the extensions sought were delays caused by computer problems, the change of ownership, and increased turnover (par 15).

McS, Beale and Cullen were in fact aware that the audit was delayed, or also delayed, by (a) Travel’s insolvency, in that it had been unable to pay for its accounts to be prepared for auditing, and (b) the intermingling of Travel’s and Wheels’ accounts, which had proved difficult to sort out; both of which matters would have been of concern to TCF (par 16).

Paragraph 17 was set out at the beginning of this Part (III) of these Reasons.

TCF and PMS submit that there are matters alleged in Part B which have not been established or are contrary to the evidence, such as, that from at least 1 July, Travel and Wheels traded while insolvent with a significant cash deficiency in the vicinity of $2,000,000. They submit that the evidence indicates, on the basis of a Draft Amalgamated Statement of Assets and Liabilities referred to later, that only one or other or both of the two companies may have been engaging in insolvent trading up until the injection of funds by IPG. They maintain, however, that there is no evidence from which an inference can be drawn that both companies traded while insolvent during the whole period from 1 July, until, apparently, December.

Findings of fact of Wilcox J

FAI has contested none of Wilcox J’s findings of fact in the TCF proceeding (substantial extracts from the TCF judgment were set out in Part I). It has, however, in its document filed pursuant to his Honour’s orders, urged the Court to make additional findings of fact which are referred to in Part B and in FAI’s cross-claim in the TCF insurance proceeding. Some of Wilcox J’s findings and the additional findings of fact sought by FAI have been contested by TCF and PMS.

As I noted in Part II, the parties have sought to address in detail every conceivable aspect of the evidence for the purpose of supporting or negating an inference that McS or Beale or both were fraudulent in relation to the TCF facts in 1988. The evidence spans numerous volumes of transcript and affidavits in this present proceeding (the TCF insurance proceeding), the TCF proceeding, the IPG proceeding and the examinations of McS, Beale and Cullen under s 541 of the Companies Code. As well there are volumes of written submissions and other exhibited material. It is impracticable and unnecessary for me to address every submission, counter-submission, and piece of evidence to which reference has been made.

Proof by FAI of dishonesty and fraud

As noted earlier, in the TCF proceeding TCF pleaded fraud in relation to PMS’s conduct in both 1987 and 1988, but did not press for a finding of fraud. FAI submits that TCF bears an onus in the present proceeding of explaining away its earlier pleading of fraud, in relation to, relevantly, PMS’s conduct in 1988. I do not accept the submission. Assertions made in pleadings are not admissions of the truth of facts pleaded (cf Laws v Australian Broadcasting Tribunal (1990) 170 CLR 70 at 85-6 per Mason CJ and Brennan J; Jamieson v The Queen (1992-3) 177 CLR 574 at 579 per Deane and Dawson JJ), even if there could ever be an “admission” by A that B’s conduct was fraudulent.

What I said in Part II about the standard of proof of dishonesty and fraud also applies in relation to the TCF facts.

FRAUD AND THE TCF FACTS

Elaboration of TCF facts in 1988

I adopt Wilcox J’s account, in the extract from the TCF judgment set out in Part I, of the provisions of the Travel Agents Act 1986 (NSW) and regulations, and of his Honour’s findings of fact, to the extent to which his Honour made them, in relation to the 1988 conduct, to the extent to which those findings have not been the subject of a notice of intention to contest. The TCF facts require further consideration, however, in view of the differences between the issues involved in the TCF proceeding and those in the present TCF insurance proceeding, and in the light of the additional findings of fact sought by FAI and contested by TCF and PMS.

Monthly cash statements showing need to reduce expenses

For a time in 1988, and certainly by March, PMS were producing monthly cash statements for the Lemon brothers, from the computer system of Travel and Wheels. McS saw those statements. They included cash flow figures. Around March the cash flow was negative. McS raised this with the Lemon brothers and recommended that they reduce expenses. Even at that early stage, McS thought that they were spending extraordinary amounts of money and that unless something drastic was done to reduce costs, the companies were headed for liquidation. The figures for monthly cash receipts and payments of Travel and Wheels continued to be provided to PMS up to 30 June, and apparently they continued to be supplied subsequently.

Engagement of PMS to carry out the 1988 audit of Travel

In July 1988, Travel engaged PMS to audit its financial statements for 1987-1988 (there is in evidence a letter of PMS “reconfirming” their engagement as auditor for Travel, dated 18 July). PMS knew that the audited statements had to be lodged with TCF by 30 September. But the audit was nowhere near ready to begin and was not to be so until mid to late October. Before the audit proper could begin in the usual way, the financial statements themselves had to be produced. PMS were also heavily involved in preparation of the financial statements for 1987-1988 for both companies, and were apparently engaged for that purpose by letters from the companies dated 25 July. Those letters are not in evidence.

PMS had in fact commenced work in the companies’ offices on preparation of financial statements in June, and had access to all their records, including computer records. McS understood that he was ultimately responsible for the audit. He supervised Beale, who was a salaried partner in PMS from about July 1988 (having been a salaried partner of “PMS Lismore” from 1985), and who was not a registered company auditor. Beale, in turn, supervised Cullen, an employee of PMS. Cullen had the day-to-day involvement in the financial affairs of the companies but there was close contact and collaboration between the three men.

Later, from about August, PMS were to involve another firm, Bird Cameron, to assist them in the audit. McS said that PMS did this because of the growth in Travel’s business, the limited resources of PMS, and McS’s desire to maintain his independence in the sense of a distancing of himself from the issues. This last reason was challenged during his cross-examination.

The role of IBA

Westpac Banking Corporation (“Westpac”) was the companies’ banker. It suggested that IBA, a subsidiary of Westpac, review the financial affairs of Travel and Wheels. According to a letter dated 10 June from the IXT Leisure Group (which included Travel and Wheels) to the manager of the Mona Vale branch of Westpac, IBA was engaged to act as financial adviser to the IXT Leisure Group, of which the Lemon brothers were directors. IBA’s role was to provide some accounting assistance, and included preparation of financial accounts for Travel and Wheels; review of their “management information systems”, including the making of recommendations for improvement of their current systems; preparation of a business plan for the Group; review of the business structure of the companies within the Group; provision of financial advice on an ongoing basis for a period of 12 months; and “provision of advice on the implementation of new accounting software packages”. The IBA officers involved were Pamela Gilbert (senior business consultant) and, to a lesser extent, Chris Hadley (“director and general manager”). By July, PMS were aware of IBA’s involvement.

Business expansion

Gregory Lemon effectively managed the businesses of Travel and Wheels. In the 1987-88 financial year, Travel’s business expanded greatly. Wilcox J gave an account of this by reference to the evidence of Juliana Rose, a travel consultant, who worked for Travel from November 1987 until its closure in December 1988. When she commenced employment, Travel and Wheels had a total staff of 20-22 people. During 1988, that number doubled to approximately 45. Rose stated that, during her employment, the volume of Travel’s business increased dramatically. The rapid expansion in business began in about November 1987.

The computer system

Although FAI did not seek to establish that there had been no computer problem whatever, it is important to understand the general effect of the evidence touching Travel’s and Wheels’ computer system.

In November 1987, the Lemon brothers retained a computer consultant, Greg Corrigan, to commence the installation of a new computer system. In or about the same month, the existing Kalamazoo trust account system ceased to be used properly by the staff of Travel and Wheels. Apparently because of a substantial increase in the volume of sales beginning in about November 1987, the staff did not have time for proper receipting, let alone the entering up of client ledgers and making of reconciliations.

The Lemon brothers, either initially or only later, entertained the hope that the new computer system installed by Corrigan would do more than it proved to be capable of doing. In January or early February 1988, Nigel Lemon told Cullen that he wanted PMS “to provide back up support so that the computer can be made operative” and asked him to speak to Corrigan and Travel’s manager, Mark Anderson. Following discussions with them, Cullen supervised substantial inputting of client data during February and March. The work had to be done manually. Nine of PMS’s own staff assisted during February. According to Cullen’s statement, because of the slackness and omissions in the offices of Travel and Wheels since November:

“it was necessary to manually go through the payment sheets, review booking information and on the basis of those bookings, allocate payments to individual clients and input that information into the computer.”

Again, according to Cullen,

“[a] group of employees of Travel and [PMS] were organised as a ‘costing team’ to identify the costings by reference to each client. The costings were written up and were then inputted into the computer system.”

Cullen gave evidence that in February 1988, Nigel Lemon complained to him that the costing of each transaction required considerable staff resources, and raised the possibility of programming the computer system so that it would “automatically cost” expenses at the time of the taking of bookings. Cullen discussed Nigel Lemon’s suggestion with Corrigan, and, according to his evidence, “a considerable amount of time was spent in trying to develop this system”, but implementation was found to be impossible. Accordingly, the concept of “automatic costing” was abandoned.

Of the computer system, Cullen said this:

 

“The new computer system could be used from about February 1988 for the purpose of taking bookings, identifying who was flying, and when and how much it was going to cost. It was useful as a management tool. However, from an accountant’s perspective, the system had fundamental shortcomings because it was not possible to determine the details of the costs (airfare, accommodation and car hire) by reference to individual clients. The reason for this was because costings of such expenses had not been inputted into the system. The client ledgers were not complete and client balances could not therefore be ascertained. Without client balances, it was not possible to determine commissions. Commissions represented the income of the business and accordingly, without client ledgers in place, it was not possible to determine whether the company was operating at a loss or a profit. Whilst there was a system which identified cash receipts and cash expenses, this was not sufficient to determine profitability, particularly having regard to the nature of the business and the small profit margin that often applied to many sales. The client ledger was an integral part of determining Travel’s debtors and creditors which I believed was essential to determine Travel’s profitability.” (emphasis supplied)

Although Cullen said that “from an accountant’s perspective, the system had fundamental shortcomings,” according to the evidence, the substantial problem was not the “computer system” itself, that is to say, the hardware or software, but Travel’s more general method of business operation. In that regard, the problem was a failure by those responsible to expend the time and labour (and to bear the associated cost) required for the proper and prompt creation and entering up of data, and to train staff adequately in the use of the computer system.

In April 1988, Cullen was involved over several sessions, in training Travel’s staff in the use of the computer system, and, in particular, in inputting data. Substantial difficulties were being experienced in relation to bank reconciliations and the obtaining of correct reports, because a large amount of data had not been correctly inputted originally. A substantial amount of time was spent in April and subsequently in correcting the erroneous inputting of the past and in training staff to ensure that it was not repeated.

It was not possible from the financial records that existed, to divide up bulk payments that had been made, into expenses paid on account of particular travellers. Therefore, it was not possible to tell what profit or loss had been made in respect of each traveller. McS’s evidence was to the effect that the bulk payments problem was merely one of keeping up-to-date with the computer processing. But this understates the problem. From as early as November 1987, staff had not been completing receipts, ledgers and reconciliations at, or shortly after, the taking of bookings, from which costing information could be ascertained in relation to bulk payments and then fed into the computer.

The evidence of Cullen, who had close knowledge of Travel’s business and of its accounts, does not accord with McS’s as to the inadequacy of the computer system. The following passage appears in Cullen’s cross-examination before me:

 

“Now, in paragraph 12 of your statement you talk about the new computer system and is it correct to say that the upshot of the difficulties with the computer was that you could not identify the commission earned in relation to each individual traveller?---At the end of the day that was the final conclusion but, I mean, that wasn’t the problem. The problem was that there was no costings going on to the system so we didn’t know the profit or loss on each transaction.

So you could not work out the expenditure that related to each traveller, is that right?---That’s correct.

 

And, of course, being able to match expenditure to income is one of the most basic requirements for producing a set of accounts is it not?---The air fares were not income to - the [T]ravel [A]broad made commissions basically and that was their income. This was virtually money held in trust so the air fares were paid in - not just the air fares, the full booking money was paid in and then from that expenses were paid out. Travel [A]broad made its income from the commissions on that. Now, we couldn’t determine the commission element of that so, therefore, the records would not - we were not in a sufficient state to be able to do an audit or to do any checking.

But it was possible, notwithstanding that, to tell what the total cash inflow into the travel company was and what the total cash outflow was?---Yes, that’s a very simplistic view point. There’s not debtors or creditors. It’s not just cash in or cash out that matter, it’s just whether there was money still owed by travellers. Quite often they paid deposits. It’s whether the airlines had been paid. So, the cash in doesn’t represent and cash out doesn’t tell you anything.” (T 1901-2 - emphasis supplied)

When commenting on the computer system in his evidence-in-chief, Cullen said:

“Clients with similar names had their transactions mixed up and incorrectly recorded on the system.

The payment of “bulk cheques” was causing major problems in relation to obtaining any meaningful accounting reports from the system. “Bulk cheques” refers to payments made for the booking of airfares. The problem was that payment would be made by Travel Abroad without “costing” the payment to particular clients. This meant that subsequently, an enormous amount of work was required to “allocate” the bulk cheque payment to various clients some of whom may not have paid for their airfares or indeed may have cancelled. Until an allocation or “costing” had been completed, it was not possible to obtain meaningful reports from the system.” (emphasis supplied)

Beale was to inform TCF at the end of September and again at the end of October, that it had not been possible for audited financial statements for Travel to be lodged with TCF because of computer problems. In fact, attempts to make the recently installed computer system do certain things occupied considerable attention, including the attention of Cullen, in the first six months of 1988 and perhaps beyond. For example, Cullen says when referring to a report dated 29 June which referred to computer-related problems that were being experienced at that time, that “[t]he absence of information on the computer system for the period up to 1 July 1987 was causing difficulties with obtaining balances for particular clients”. I accept this evidence.  But so far as the evidence reveals, the existing hardware and software in fact functioned satisfactorily. TCF and PMS suggest that it was a “computer problem” that the computer system installed had proved incapable of being developed to record costings automatically. But if staff, of a sufficient number, had been properly trained and had collected and inputted data properly and promptly, it is difficult to accept that the notion that there were “computer problems” could have fairly occurred to anyone. It seems that the Lemon brothers were not prepared to devote the resources required to make this kind of efficiency possible.

The lack of reliable financial and accounting information relating to the businesses of Travel and Wheels did not come to an end in March. The problem continued much longer and its effect was felt throughout the year.

PMS’s Preliminary Amalgamated Statement of Assets and Liabilities of Wednesday 24 August

In July/August, PMS realised that Travel was in serious financial difficulty.  They understood that the Lemon brothers were interested in selling; that Richard Tenser, in association with a John Carr and a Brian Smillie, was trying to find a purchaser; and that he and his associates had been offered a small shareholding in the companies.

As at 4 July, Cullen was negotiating with the Australian Taxation Office for a deferral of Travel’s obligation to pay $30,000 in tax owed “from 1987”. Cullen said that he presumed that Travel was having difficulty raising the money.

Around 24 August, IBA and Cullen prepared a “Preliminary Amalgamated Statement of Assets and Liabilities” of Travel and Wheels as at 30 June. The document was soon, in fact only seven days later on 31 August, to be superseded by a Draft Amalgamated Statement of Assets and Liabilities. This document is discussed below. Cullen was involved in preparing both documents from information supplied by IBA. He prepared them in connection with Tenser’s quest for a purchaser.

Gilbert’s letter of Friday 26 August to the directors of Travel and Wheels and their response on Monday 29 August

On Friday 26 August, Gilbert wrote a most serious letter on behalf of IBA to the directors of both companies, in which she commented on the Preliminary Amalgamated Statement of Assets and Liabilities produced two days previously. McS, Beale and Cullen all saw the letter on, or within a few days after, its date. Gilbert advised the directors that the Preliminary Amalgamated Statement:

“... clearly shows that the ‘group’ is operating with a significant deficiency. At this stage, this deficiency cannot be accurately quantified. However, it is believed to be in excess of $2 million.

 

Given the deficiency, along with continued delays in paying creditors, it is our opinion that the company is insolvent.” (emphasis supplied)

 

After drawing attention to the effect of s 556 of the Companies Code (directors’ liability for debts incurred during insolvent trading), Gilbert continued:

“As a consequence, we would strongly recommend that the following action be taken:-

            1.         If the company is to trade on, goods and/or services supplied to the company should be paid for on a “cash on delivery” basis. No further debts should be incurred by the company.

            2.         All deposits taken from customers be placed in a Solicitor’s Trust Account identifying the payments as customer deposits.

            3.         Application be made for the appointment of a Provisional Liquidator.

            4.         The current negotiations with potential purchasers of the business be concluded as quickly as possible.

            5.         A copy of this letter be sent to your Solicitors and that you seek their advice also;

            6.         A copy of this letter and the Statement of Assets and Liabilities as prepared by your accountants be sent to Westpac immediately in order that they are fully informed of the Group’s position.

            7.         An audited set of accounts for the year ended 30 June, 1988 be finalised as quickly as possible.”

 

In an affidavit in the IPG proceeding, McS said that he had concurred in IBA’s suggestion as to the steps to be taken immediately. According to a later Bird Cameron audit plan in September, IBA had, on the same day, 26 August, “pulled out” Gilbert. FAI submits that I should accept that this in fact happened and should infer that IBA stopped work immediately it saw that Travel was insolvent. TCF and PMS submit that there is no evidence to support this inference.

According to Beale, on the following Monday, 29 August, he and McS met with the Lemon brothers who protested that Travel and Wheels were not insolvent. But Beale was persuaded by the Preliminary Amalgamated Statement of Assets and Liabilities that they were. His evidence is that he told them that the companies appeared to be in a “serious financial situation”; that they should seek legal advice because they would be personally exposed if the companies continued to trade while insolvent; that they should consider trading on a “cash on delivery” basis so that no further debts were incurred; and that a trust account should be created into which deposits received from clients should be paid.

By a letter of the same date, 29 August, on the letterhead of the IXT Leisure Group faxed to Gilbert on 1 September, the Lemon brothers and Michael Hay responded to Gilbert’s letter of 26 August. The letter included the following:

“We were obviously very disappointed that you decided to take the route of withdrawing your services in light of the commercial effect that this action may have with our Bank. We would therefore request that you do not remove your services and ask that you continue to provide these services on a cash basis.

...

Should a definite acquirer not be identified by the 14th September, then the Directors would seek advice from their solicitors on the appointment of a provisional liquidator.

The Directors I am sure need not remind you that you have been retained by the Wheels/Travel Abroad companies and although your absence will no doubt highlight a problem to the bank, we do not wish the bank being approached.

As we have said earlier, we would like an IBA representative to return to these offices, being paid on a ‘cash’ basis, however if you still feel after what we have said in this letter that you cannot return on a full time basis, certainly Phillips McSweeney have said that they will require assistance from IBA on [sic - in] the short term to assist in preparing the accounts.” (emphasis added)

McS saw this letter soon after its date. The letter shows that its authors understood that there was a threatened withdrawal arising from the insolvency and its implications for payment of IBA’s fees. The evidence does not, however, establish that IBA in fact ceased work on 26 August or at all. The evidence on this matter is less than clear. Gilbert was certainly active in connection with the audit upon and following the establishment on 14 October of an “Audit Review Committee”, comprising representatives of PMS, IPG, Bird Cameron and IBA. Gilbert apparently chaired five meetings of that committee held on and between 14 October and 25 November.  Whether or not IBA actually ceased work, the views expressed by Gilbert in her letter of 26 August and by the authors of the reply dated 29 August, can only have endorsed the seriousness of the situation in the minds of McS, Beale and Cullen.

 

PMS’s draft letter to the Corporate Affairs Commission

Just before the end of August, McS sought legal advice from Chris Brown of Gillis Delaney Brown (PMS’s solicitors) about the affairs of Travel and Wheels. Brown prepared a draft letter for PMS to write to the Corporate Affairs Commission (“CAC”). It was as follows:

“CAC             

                        re: Travel Abroad P/L

We are the auditors of the abovementioned company.

In the course of the performance of our duties as auditor of the company, we have become satisfied that:

            (a)        there has been a contravention of, or failure to comply with the provisions of the Companies (NSW) Code, insofar as:

                        (i)         we believe that the company is unable to pay its debts as and when they fall due

                        (ii)        the company has not kept since our last audit report in 1987, such accounting records as correctly record and explain the transactions and financial position of the company

            (b)        the circumstances are such that in our opinion the above matters will not be adequately dealt with by bringing the matters to the notice of the directors of the company.

We have advised the directors that [the] company should not incur any further indebtedness, and that an immediate application should be made for the appointment of a provisional liquidator of the company.”

In fact the letter was never sent. FAI submits that the draft ought, nevertheless, be taken to reflect McS’s state of mind at the time. McS said that “this draft was simply taking an extract from the Act for us to consider, should we move to this situation”. In my opinion, for several reasons, but subject to one matter, the letter should be accepted as containing statements of fact, belief and opinion which reflected McS’s state of mind at the time. The letter accorded with McS’s understanding as revealed by other evidence. If Brown’s purpose had been only to give PMS “an extract from the Act” as McS suggests, a more straightforward way of doing so would have been to supply a photocopy of the relevant provisions. Finally, the letter is in terms very similar to a letter dated 31 August which Beale wrote to the directors, soon to be discussed. The one qualification to which I referred is that obviously McS was reserving the possibility that the directors themselves would urgently take the necessary steps in response to advice which PMS were to give them, in which event it would become unnecessary for McS to send the letter in the form of the draft, which would, to that extent, have been falsified by that supervening event.

Draft Amalgamated Statement of Assets and Liabilities dated Wednesday 31 August

On 31 August, PMS produced a “Draft Amalgamated Statement of Assets and Liabilities as at 30th June 1988” in respect of Travel and Wheels. It was largely prepared by Cullen, although McS signed the accompanying Accountant’s Report. It showed a net deficiency of $1,153,433 which Cullen drew to the attention of McS and Beale.

It was obvious on the face of the document that the true amount of the deficiency might well be greater than $1,153,433. Some of the assets shown were suspect. For example, the Draft included as current assets, “Research & Development” in a sum of $653,044. Note 3 to the Draft explained that this entry referred to expenditure on the computer system; that the amount was a cost figure supplied by the directors; and that the cost had not been amortised. The amount was of uncertain recoverability. Wilcox J described the research and development as “hardly a realisable asset”, a description with which I respectfully concur.

Other assets included “Office Equipment, Furniture & Fittings (WDV)” ($160,856), “Leasehold Improvements (WDV)” ($43,076), and “Net Capitalised value of leases” ($502,243). In his Honour’s view, as in mine, none of these assets were realisable, at least in the short term.

The full value of unsecured loans to the directors and companies associated with them ($742,011) was included as an asset, although these were also of uncertain recoverability. Note 6 to the Draft gave particulars of the amounts and debtors, adding, “[t]he directors have advised that their net equity in residential and investment property exceeds $900,000.” There was no firm arrangement for repayment by the directors. His Honour noted:

“Apart from their own assertion, there was nothing to indicate that the directors held property capable of realising $742,011. Even if they did, there would inevitably be delay; the directors’ property was substantially real estate. There was no reason to believe that the loan repayments would be available in time to pay the companies’ debts as and when they fell due.” (TCF judgment at 42)

Another asset was “Trade Debtors” of $2,564,220, but Note 5 to the Draft explained that this figure was, as to $1,428,890, an estimate.

On the Liabilities side, the figure for the companies’ liability to “Trade Creditors” of $4,481,549 was also explained in a note to be an estimate, and part of the process of estimation  involved deducting payments due to Wheels.

Wilcox J noted, as an important feature, that the Draft Amalgamated Statement of Assets and Liabilities was based on figures provided by the vendors, the Lemon brothers. In his view “[t]here was no reason to accept their estimates” and “it immediately became apparent to Ms Boyd that not even the vendors knew the true position” (TCF judgment at 38). Obviously, the vendors had an interest in understating the extent of any problem. Risk in this respect was later to be identified in an “audit plan” prepared in September by Bird Cameron and circulated to PMS.

Beale and Cullen accepted that one reason why an amalgamated statement for the two companies was appropriate was that it was difficult, without more work, to attribute certain expense items to one company rather than the other. Some of those items were expenditures for travel, air tickets and car hire, as well as  joint overheads, such as payments for rent and staff.

Cullen saw that the Draft revealed that the companies had a “substantial deficiency”, that “something would have to be done” and that “the group had financial problems”. McS and Beale saw the document soon after it was produced and reached generally similar conclusions. They all knew that the Lemon brothers were anxious to sell. So far as they knew, the Draft continued to reflect the approximate amalgamated position of the two companies down to the sale by the Lemon brothers to IPG eighteen days later, on 18 September.

When the Draft was prepared, there had been no audit. According to Cullen, many of the figures had been provided, ultimately, by the Lemon brothers, although some, which did not accord with what he had learned, had been the subject of amendment by him. Of course, no-one claimed or understood that the figures had been audited and found correct. Cullen’s position is that they were only his best guess at the time. It transpired that many were wrong and that the true amalgamated financial position of the companies was worse than that shown.

Beale’s letters of Wednesday 31 August, entitled “FINANCIAL POSITION”

On 31 August, Beale wrote separate letters to the directors of Travel and of Wheels. McS had directed him to write them because he (Beale) was more familiar with the clients. The letters were similar, and in parts identical. Each expressed the opinion that the company in question was insolvent. They were not entirely in conformity with Gilbert’s letter of 24 August or the draft letter to the CAC prepared by Brown. In particular, Beale’s letter refrained from recommending that the directors immediately apply for the appointment of a provisional liquidator.

The terms of the letter to Travel were as follows:

“Following our review on the 30th August, 1988, of the Draft Amalgamated Statement of Assets and Liabilities for Travel Abroad Pty Limited and Wheels Abroad Pty Ltd as at 30th June, 1988,it is our opinion that the company is insolvent due to the company’s exposure to Wheels Abroad Pty Limited.

We are endeavouring to finalise the financial statements for Travel Abroad Pty Ltd for the year ended 30th June, 1988 so that we can ascertain the true position of the company.

As Auditors of Travel Abroad Pty Ltd we wish to point out that pursuant to section 556(1) of the Companies (NSW) Code it is an offence to incur a debt with the knowledge that the company is insolvent. The directors should be aware of their responsibilities under the code as outlined in a letter from International Business Analysis Pty Ltd dated 26th August, 1988.

We suggest the following steps should be taken immediately :-

1.         If the company is to trade on, goods and/or services supplied to the company should be paid for a ‘cash on delivery’ basis. No further debts should be incurred by the company.

2.         All deposits taken from customers be placed in a seperate [sic] Trust Account identifying the payments as customer deposits.

3.         Arrangements should be made to discuss the position of the company regarding possible liquidation or alternatives as a matter of urgency.

4.         The current negotiations with potential purchasers of the business be concluded as quickly as possible.

5.         A copy of this letter be sent to your Solicitors and that you seek their advice.

6.         An audited set of accounts for the year ended 30th June, 1988 be finalised as quickly as possible.

We further point out that section 285(10) of the Companies (NSW) Code requires that in the course of the performance of our duties as auditor of the company, if we are satisfied that -

(a)       there has been a contravention of, or failure to comply with, any of the provisions of this code, and

(b)       the circumstances are such that in our opinion the matter has not been or will not be adequately dealt with in our report on the accounts or by bringing the matter to the notice of the directors of the company;

We are required to report the matter to the National Companies Commission by notice in writing.

In order that we can see that the matter has been adequately dealt with by the directors we request that you contract our Chatswood office to arrange a meeting.”

It will be noted that the letter unequivocally expressed the opinion that Travel was insolvent, while reserving the position that the final financial statements would show “the true position”. In  my opinion, by the expression “the true position”, Beale intended to refer, relevantly, to the true extent of the insolvency, and it was not in his contemplation that the true position might be that Travel was not insolvent after all.

 

The six steps which the letter advised should be taken were identical to the seven steps outlined in Gilbert’s letter of 26 August set out earlier, except in two respects. Instead of her third recommendation, that an application definitely be made for the appointment of a provisional liquidator, the third step was less definite, and the previous sixth recommendation (that a copy of Gilbert’s letter and the Preliminary Amalgamated Statement of Assets and Liabilities be sent to Westpac) was omitted.

McS knew and approved of the letters. He and Beale appreciated the seriousness of sending them. They also knew that members of the public were continuing to purchase travel packages from Travel. McS said in the course of his examination under s 541 of the Companies Code, that his intention was that if nothing changed between 31 August and 30 September, he would advise Travel to inform TCF of its position.

Notwithstanding the clear terms of Beale’s letter of 31 August, McS said in cross-examination before me that he had not satisfied himself that Travel was insolvent and that the letter was a knee jerk reaction to IBA’s letter to the directors of 26 August. I do not accept this evidence. It is true that Beale’s letters of 31 August substantially copied Gilbert’s letter of five days earlier. It is also true, as McS sought to emphasise, that the Draft Amalgamated Statement of Assets and Liabilities had not been the result of an audit. Finally, it is true also that in the absence of final figures, PMS ought not to represent that the detail of the Draft was, in all respects, to be relied upon . This point is made in the following passage from McS’s cross-examination:

“But you were aware that writing a letter like this letter of 31 August was the sort of thing that could bring a company to its knees were you not?---Very much so. I was very aware of the fact that we were facing a major dilemma in that if in fact we - on the one hand we had to do sufficient to ensure that the matter was progressing to a resolution; on the other hand we had to make sure that we allowed the directors time to inform us properly so that we wouldn’t be sued for deformation [sic - defamation] or for having closed the company down. I think that was on my mind as well. So what we were trying to do - and sought legal advice on this - was to give the appropriate notice under the Act to allow them to take appropriate action and come back to us. And then we would act in accordance with the law. This was a letter which was the initiation of that.” (T 1556)

But whatever else may be said of this passage, it and the other considerations mentioned above do not, in my opinion, militate against a finding that McS and Beale were confident that Travel was insolvent. The insolvency revealed by the Draft was so clear that McS’s refuge in its unaudited nature is not convincing. The Draft showed a deficiency of no less than $1,153,433, and it was so “small” only by reason of the inclusion of amounts on the assets side which were suspect and which were unlikely to be recoverable, as McS and Beale knew. I find that McS’s and Beale’s opinion as at 31 August was that Travel was insolvent and that Beale’s letter of that date to the directors accurately reflected their opinion. I also find that they were confident that the deficiency of assets was likely to be greater than the figure of $1,153,433 shown in the Draft.

Beale recognised that it was a very serious thing, calling for careful consideration, for Travel’s auditor to write this sort of letter to its directors. Like McS, however, he says that it was written as a reaction to IBA’s letter of 26 August, and that the statement “it is our opinion that the company is insolvent” was “meant as something to give them a blast to satisfy us that they weren’t [insolvent]”, and to draw the directors’ attention to the seriousness of trading while insolvent. Beale conceded that “...it [the view that Travel was insolvent] could easily be an opinion that I held but ... it was not necessarily the only opinion that could be held at that time”.

The letter was written after, and in the light of, legal advice sought and obtained from Gillis Delaney Brown. The fact that legal advice was sought indicates the serious view that PMS were taking of the situation, and is further reason to think, as I find, that the letter did in fact reflect an assessment about which McS and Beale were fairly confident at the time.

I accept that there is a difference between the level of confidence that an auditor would wish to have in his or her assessment of a company as insolvent for the purpose of reporting to the company’s directors, on the one hand, and that for the purpose of reporting to regulatory bodies on the other. Beale’s letter implemented the sensible course of inviting the directors to discuss with PMS “the position of the company regarding possible liquidation or alternatives as a matter of urgency.” There is evidence that they did so, at the same time effectively receiving further legal advice. Cullen’s account of that meeting supports my finding as to PMS’s view, seriously held, of Travel’s insolvency as at 31 August and prior to the sale to IPG. Cullen gave evidence that “within a few days” of PMS’s letter to Travel of 31 August, Gregory Lemon requested that he (Cullen) attend a meeting. Those present were Tenser, Tony Anisimoff (solicitor, of Davenport and Partners), and the Lemon brothers. Cullen thought, although he was uncertain, that Gilbert was also present. Cullen’s belief was that the purpose of the meeting was to have a “general discussion” about the Draft Amalgamated Statement of Assets and Liabilities. He did not not understand that legal advisers would be present. His account of the meeting is as follows:

“After there had been general discussion concerning the financial difficulties that Travel Abroad and Wheels Abroad were in, there was then a discussion concerning the legal obligations that applied to the directors of those companies. I recall that Mr Anisimoff, solicitor, said words to the following effect:

 

            ‘The directors really have three broad alternatives in relation to this situation. Firstly, they can liquidate the companies. Alternatively, the companies could proceed for a short time on the basis that it [sic] incurs no further debts and deals with all transactions on a cash basis. This would involve the creation of a trust account for your customers. The third alternative is to find a buyer who would be prepared to inject capital into the company.’

 

I recall that Greg Lemon said words to the following effect:

 

            ‘We are in active negotiation for a buyer. There are very positive indications from a buyer who has indicated they are prepared to inject substantial capital. I expect that we will reach agreement in principle within a matter of days.’”

Meeting of McS, Cullen and Williams with solicitors on Thursday 15 September

On 15 September, McS, Cullen and Williams consulted Brown, of Gillis Delaney Brown, because of their concern over the question of PMS’s obligations as auditors of Travel in the light of its financial condition. McS made the following notes of the discussion:

“Travel Abroad P/L                                                                           15/9/88

                                                                                                            [Illegible]

Meeting R. Williams, C. Brown, T. Cullen

            Audit engagement letter     18/7/88

            Accounting engagement letter      25/7/88

            Letter withdrawing services on accounting engagement.

 

            Meeting Westpac for details of position and evidence

                        of inability to continue to meet debts / in writing

            Meeting directors and legal advisers to confirm

            that action taken by directors to adequately deal.

            Is receipt of moneys on “Trust”

            Report by Auditor to CAC privileged not defamatory.

            Draft letter with ref to S285(9), S285(10) - matter

            of opinion.

                        Satisfied breach

                        not adequately dealt with by/comment in report

                                                                    / notice to notice [sic] directors

            Obligation to prepare accounts S. 267

            Directors unable to take steps to enable payment

                        of debts.

            [Illegible] QC

            Materiality - has loss been suffered

                Creditor action - remote

                    sec 285(10) - not yet satisfied”

The evidence of McS, Cullen and Williams is that Brown advised them that it was the Companies Code that defined PMS’s obligations as auditors; that PMS’s primary obligation was to Travel’s shareholders and directors; that the obligation of the latter was to prepare accounts and PMS’s obligation was to audit them; that it was not PMS’s obligation to determine whether Travel was insolvent; and that PMS should write a letter to Travel’s directors putting them on notice as to their obligations to PMS, as the auditors, to satisfy PMS as to Travel’s financial position.

Brown drafted some words to be incorporated in a letter to be written by PMS to the directors of Travel. In fact, the result was a letter written by McS to them on the following Tuesday 20 September, dealt with below.

PMS’s understanding in September of the state of the accounting records of Travel

Beale conceded that he could have understood in September that Travel had not kept such accounting records as correctly recorded and explained its financial position. Evidence of McS in the IPG proceeding, tendered in this proceeding, indicates that he knew this at least as at 16 September:

“I also recall that Mr Dunn [of IPG - see below] was told ‘there are problems in the incompleteness of records, in being able to accurately establish debtors and creditors.’ ... (I do not recall whether words to that effect were said exclusively by me or by Timothy Cullen, although I do recall words to that effet [sic] being said to Mr Dunn.)

...

... we had substantial concerns as to the accuracy of the information contained in the Draft Amalgamated Statement due to the incompleteness of the Companies’ records.”

I find that in fact McS and Beale knew that the accounting records were deficient earlier than September. McS had informed PMS’s solicitors, Gillis Delaney Brown, of the problem at the end of August. I infer that Cullen had informed both McS and Beale of it much earlier.

Meeting on Friday 16 September of McS, Cullen and Dunn

Since July/August, McS, Beale and Cullen had known that the Lemon brothers were anxious to sell. It was to that end that Cullen had prepared the Preliminary Amalgamated Statement of Assets and Liabilities on or about 24 August and the Draft Amalgamated Statement of Assets and Liabilities on or about 31 August. During September, notwithstanding the terms of Beale’s letters of 31 August to the directors of Travel and Wheels, and the subsequent meeting requested by Gregory Lemon and attended by the Lemon brothers, Tenser, Anisimoff and Cullen, PMS continued to provide services to Travel and Wheels. McS said that those services consisted, predominantly, of getting the in-house accounting systems set up properly, and of efforts to try and “rationalise what the companies were doing” in this regard. Cullen was of the view in mid-September, that the companies were trading unprofitably, and had probably been doing so since at least the beginning of July. McS and Cullen agreed that they did not receive specific information after that time that Travel had changed its costings, although both made the point that from 18 September the businesses were being conducted by IPG, and, in particular, by Dunn. McS said that later, during the course of the audit, from 14 October onwards, Dunn gave him:

“assurances that they were keeping independent trust accounts and that the company was operating on a profitable basis, that he had cut back expenses fairly severely.” (T 1547)

On 16 September, McS and Cullen met with Dunn at the request of Gregory Lemon and in the knowledge that IPG was interested in purchasing. They discussed the Draft Amalgamated Statement of Assets and Liabilities. According to McS and Cullen, one of them told Dunn that Travel or Wheels or both were insolvent and would require a substantial capital injection by any purchaser. McS also said that he or Cullen told Dunn that:

“... there are problems in the incompleteness of records, in being able to accurately establish debtors and creditors. Also, the way the loan account should be treated and the capitalization of research and development expenditures create problem areas ...” (emphasis supplied).

Before me, McS said at first that he did not believe that Dunn was told of the insolvency and of the need for a substantial capital injection, but when shown his affidavit of 5 October 1990 in the IPG proceeding, conceded that he must have believed it to be correct at the time when he had sworn that affidavit. FAI submits that this reflects poorly on McS’s credit. I agree that it reflects on the reliability of his evidence, notwithstanding the terms of “belief” in which McS’s evidence before me was couched. As I observed in Part II of these Reasons, however, it must be remembered that all witnesses were being asked to recall events, conversations and states of mind years previously.

McS’s account of the meeting also includes the following passage:

“... I did not make any representation as to the accuracy of the information contained in the Draft Amalgamated Statement nor did Timothy Cullen while I was present. I recall the cautions being provided and was at all times of the view that we did not have enough information to be able to make any such representations even had we been minded to, and that we had substantial concerns as to the accuracy of the information contained in the Draft Amalgamated Statement due to the incompleteness of the Companies’ records.” (emphasis added)

I accept that such a conversation may have occurred, but McS, nonetheless, in my opinion had no substantial doubt that Travel was insolvent under the Lemon brothers’ management.

According to McS’s affidavit account, Dunn told McS and Cullen that “[i]f the purchase proceeds, IPG will inject $1.5 million into those companies [Travel and Wheels]”. According to Cullen’s affidavit in the IPG proceeding (and McS’s cross-examination before me was to a generally similar effect), McS or Cullen said words to the effect:

“The companies are market leaders but cannot survive without an injection of funds. The draft figures show a need for $1.5 million to be injected plus an amount to cover the directors’ loans of $700,000.00 odd.

If the companies look at their costings and marketing strategies, their position may well improve and the companies should trade profitably. We feel that the companies’ costings and packages were undervalued. Without such changes and other major changes, the companies would continue to trade unprofitably.

The records of the companies are incomplete and the incompleteness of those records shows up in the deficiencies of being able to properly prepare even these draft accounts. That is why there are so many notes to the draft accounts.” (emphasis supplied)

Acknowledging that the audit was incomplete, Wilcox J nonetheless concluded that it had not been demonstrated before him that PMS were aware, prior to IPG’s purchase on 18 September, that the Draft Amalgamated Statement of Assets and Liabilities was in fact incorrect. According to their evidence, neither Cullen nor McS told Dunn that the Draft was correct. I find that as at the time of their meeting with Dunn on Friday 16 September, PMS understood that both companies regarded together were, and Travel in particular was, insolvent.

Making of agreement for sale on Sunday 18 September

Following the meeting between McS, Cullen and Dunn on Friday 16 September, negotiations took place over the weekend of 17 and 18 September, culminating in the making of an agreement for sale of shares on Sunday 18 September between the Lemon brothers, as vendors and IPG as purchaser. Travel and Wheels were parties too. The agreement was for settlement ninety days after its date, that is to say, by 18 December. The Draft Amalgamated Statement of Assets and Liabilities was annexed to the agreement, showing, it will be recalled, a net deficiency of $1,153,433. Also annexed  to the agreement was a document referring to the two companies’ major creditors, which revealed what was called a “nett ‘cash’ deficiency” of “$2.9 - 3,000,000 +/- $2 - 300,000 maximum”, that is, a net cash deficiency within the range $2,600,000 to $3,300,000.

Wilcox J considered that “[t]he whole point of the urgent negotiations and agreement for purchase of the company and the decision to inject IPG funds was to enable Travel to continue to trade” (TCF Judgment at 33). This accords with my view of the evidence. Reference may be made, in particular, to Bird Cameron’s September “audit plan”, discussed later, in which it was stated that “[t]he two entities are believed to be insolvent and may cease trading unless an injection of funds occurs”, and to the letter from the IXT Leisure Group to Gilbert dated 29 August and faxed on 1 September, in which, it will be recalled, after setting out a plan of action in response to that outlined by Gilbert in her letter of 26 August, the signatories advised that “[s]hould a definite acquirer not be identified by the 14th September, then the Directors would seek advice from their solicitors on the appointment of a provisional liquidator”. The Lemon brothers may have had other motives for selling not revealed by the evidence but the need to overcome Travel’s insolvency was certainly one.

Assumption of control by IPG on Monday 19 September

Upon execution of the agreement, Travel’s existing directors resigned, and the three directors of IPG (Dunn, Sharp-Paul and Smith), were appointed in their place. Dunn immediately moved to control both companies. In fact, the very next day, Monday 19 September, he went to the companies’ offices at Mona Vale with Julie Boyd, the administration manager of IPG. Dunn asked Boyd to familiarise herself with the companies’ computer system and accounting procedures, and to ascertain the amount owed to creditors.

On the same day, IPG sent a standard form of letter to creditors of the two companies, advising them that IPG, “a publicly listed company involved in the leisure industry”, had, on 18 September, purchased all the issued capital of the companies, and would present to the recipients “a satisfactory resolution of outstanding accounts.”

According to Wilcox J’s TCF judgment, Boyd experienced difficulties in obtaining accurate financial information early in her placement at Mona Vale. Nigel Lemon gave her a list of overseas car rental companies who were creditors of Wheels. Some of the figures were uncertain, but the list suggested to her at that time that the debts in this category came to between $1,400,000 and $1,500,000. It ultimately transpired that the true amount of the indebtedness as at 18 September was much greater.

McS’s letter to the directors of Travel of Tuesday 20 September

On 20 September, McS wrote to the new directors of Travel a very serious letter, in a similar vein to Beale’s letter to the former directors of 31 August. It was headed “RE : AUDIT”. Omitting formal parts, it was as follows:

“I refer to the letter from this firm to the company dated 31st August, 1988 and to the letter dated 26th August, 1988 from IBA Business Consulting Services to the directors, Wheels Abroad Pty Limited and Travel Abroad Pty Limited.

 

Please advise by return mail if the recommendations of Phillips McSweeney and/or IBA Business Consulting Services as set out in the abovementioned items of correspondence have been effected.

You have been advised that the company is obliged to :

(a)       Keep such accounting records and correctly record and explain the transactions of the company (including any transactions as trustee) and the financial position of the company; and

(b)       Keep its accounting records in such a manner as will enable:

            (i)         the preparation from time to time of true and fair accounts of the company; and

            (ii)        the accounts of the company to be conveniently and properly audited in accordance with the Companies (New South Wales) Code (the ‘Code’).

In the course of the performance of my duties as auditor of the company, it has become clear to me that:

(i)        There have been a large number of transactions between the company and Wheels Abroad Pty Limited,

 

(ii)       The directors of the company are presently unable to provide full and complete details of the respective transactions between Wheels Abroad Pty Limited and the company, and

(iii)      It is the opinion of IBA Business Consulting services that an amalgamated statement of assets and liabilities of Wheels Abroad Pty Limited and the company indicates that the amalgamated liabilities of Wheels Abroad Pty Limited and the company exceed the amalgamated assets of Wheels Abroad Pty Limited and the company. I am concerned that you should establish to my satisfaction that the company is not insolvent and able to pay its debts as they fall due.

(iv)      Mr Greg Lemon, managing director of the company, has confirmed that the company is not able to pay professional fees to Phillips McSweeney (nor any other firm) to enable accounts of the company to be prepared for subsequent audit by myself.

I require you, within 21 days of the date of this letter to provide me with:

(i)        evidence that the company is keeping its accounting records in such a manner as will enable -

 

            (a)        the preparation of true and fair accounts of the company,

            (b)        the accounts of the company to be conveniently and properly audited in accordance with the Companies (New South Wales) Code,

(ii)       evidence that the company is able to pay its debts as they fall due. In particular, please provide details of the bankers of the company, the accommodation available to the company from such bankers, and the security (and value thereof) held by the bankers for such accommodation,

(iii)      a detailed list of creditors of the company, and particulars of the arrangements made by the company to satisfy those respective creditors,

(iv)      particulars of any firm arrangements for the refinance of the indebtedness of the company, and

(v)       particulars of any firm arrangements for any increase in the issued capital of the company,

(vi)      details of the amount (if any) now due by Wheels Abroad Pty Limited to the company and evidence of the ability of Wheels Abroad Pty Limited to repay such amount.

Please give the abovementioned matters your immediate attention.

 

            I recommend that you take immediate legal advice in relation to the position of the company and its directors pursuant to Section 556 of the Code. If that legal advice is to the effect that the company is insolvent, then you should make immediate arrangements for the appointment of a provisional liquidator to the company.

            Finally I again confirm my advice to you that the Company is obliged to file audited accounts for year ended 30th June, 1988 not later than 30th September, 1988 with the Travel Agent Compensation Fund. Failure to file such accounts will jeopardise the status of your Travel Agents licence.

            You have not submitted accounts to me for audit, and based upon the present position, you will not be able to submit accounts to me so that I may audit the same to enable you to meet your licence requirements.

You should make an immediate application to the Travel Agents Compensation Fund for an extension of time to file accounts.” (emphasis supplied)

The period of twenty-one days would expire on 11 October. McS was not to receive the information sought by that date. In his cross-examination, there was the following exchange:

“The extent of the behindness was such that the accounts were not being kept in such a manner as would enable preparation of true and fair accounts, was it not? --- Not without a lot of effort to get those records up to date.” (T 1549)

On 20 September, McS also sent a copy of the letter to Williams. His covering memo said:

“Enclosed is a copy of my letter to the directors of Travel Abroad Pty Ltd of 20th September, 1988 regarding matters to be dealt with to enable me to satisfy myself as to the position of the company pursuant to section 285 of the code and matters to be dealt with pertaining to the audit of 30th June, 1988 accounts.”

(Section 285 of the Companies Code dealt with the duties of auditors in reporting with respect to a company’s accounts.)

Beale at first said that he became aware of both McS’s letter and his memo to Williams around 20 September and that he did not understand, from the memo, that McS was not already satisfied as to the matters referred to in s 285 of the Companies Code. FAI submits that this evidence is incredible. I agree. When pressed, Beale retracted his statement that he had seen the memo, saying that he was not sure whether he had seen the memo itself or only the letter. FAI submits that this change of stance detracts from his credit. Again, I agree.

Beale was clear that he saw the letter itself. He understood from it that McS was not satisfied that the company was solvent and able to pay its debts as they fell due, and that he was not satisfied about the other issues raised in the letter. For himself, on the question of Travel’s solvency, he said that as at the date of McS’s letter of 20 September, he was not satisfied that Travel was able to pay its debts, but assumed, following IPG’s purchase, that Travel had “a substantial backer”. FAI submits that this evidence ought not be accepted and that nothing had happened to change Beale’s views, which he had expressed in his letters of 31 August to the directors of both companies following the taking of legal advice. FAI also submits that nothing happened after 20 September which supported a departure from the attitude expressed by McS in his letter of that date which Beale had seen and understood. FAI submits that the proper conclusion is that McS’s and Beale’s assessment of Travel’s financial position did not change following the takeover, and that they knew that Travel remained insolvent and that the intermingled accounts remained to be “unscrambled”. FAI submits that each of the matters which McS required in his letter to be addressed, had to be addressed in order to enable the accounts of Travel and Wheels to be sorted out and a final opinion reached about Travel’s solvency.

 

There was to be no response to McS’s letter of 20 September until a letter from IPG of 18 October, referred to below, which gave certain assurances but fell far short of supplying all the information which McS’s letter had indicated was essential.

It is clear that the accounting problems, including those arising from the intermingling of accounts, had not yet been resolved. In fact the first draft to the accounts was not able to be produced until 1 November. A more difficult question is what effect the IPG takeover had upon the minds of McS and Beale in relation to Travel’s solvency. McS’s letter of Tuesday 20 September was written only two days after the agreement had been made and was apt to bring to the minds of Travel’s new directors, notably Dunn, the seriousness of Travel’s financial condition as McS and Beale saw it. But it still remained a question what effect, if any, subsequent intervention by IPG and its management would have, not as a matter of objective fact, but upon the states of mind of McS and Beale.

The September audit plan

In September, Nicholaeff and Williams (of Bird Cameron) drafted and reviewed, respectively, a lengthy “audit plan”, apparently based on information provided by staff of Travel. A copy was given to McS soon after it was prepared.  It included the following passages:

“The turnover of the business has grown dramatically in the last twelve months as a result of extensive and expensive marketing and advertising - of competitive fly-drive packages. The marketing and advertising strategy changes rapidly in the competitive travel agent environment.

The business - both Travel and Wheels - is effectively managed by Greg Lemon.

The business has suffered severe liquidity problems due to rapid expansion, accompanied by -

a)         apparent lack ot [sic] sound financial management;

b)         inadequately trained staff to cope with the computerised accounting system/volume of transactions.

...

Based on the draft amalgamated balance sheet as at 30.6.88, the group is insolvent and Travel Abroad Pty Limited is insolvent due to its exposure to the amount owing by Wheels Abroad Pty Ltd.

...

The two entities are believed to be insolvent and may cease trading unless an injection of funds occurs. This situation may result in psychological pressure on the owners/managers who have borrowed substantial amounts to purchase expensive houses/cars.

...

... our understanding is:

    -      the large increase in turnover has resulted in a breakdown in internal controls during the year. ‘Bulk’ cheques have been drawn in favour of both Cathay & Air New Zealand.

    -      the turnover increase resulted in individual bookings not being costed. This, in conjunction with bulk cheques, could have resulted in incorrect accounting for individual transactions.

    -      a review of the clients ledger has revealed numerous errors including refunds from suppliers being treated as receipts. This could result in timing errors in the recognition of income... Phillips McSweeney and client personnel are presently correcting these errors.

    -      the directors have had a marketing emphasis with potentially inadequate emphasis on financial management and necessary supervisory controls.

...

AUDIT APPROACH

Audit Approach to Risk Areas

1.         Review criteria for annual financial statements and determine compliance.

2.         Review requirements of Travel Agents Act for compliance/non-compliance/ Discuss with Tim Cullen apparent departures.

...

8.         Arrange a meeting with Pamela Gilbert of IBA to obtain any information she has of relevance to the audit, eg, evidence of information/liabilities not disclosed.

...

11.       RELATED PARTIES

            A. We understand that Wheels Abroad owe[s] significant sums for car rentals including that car rental companies have allowed ‘credit’ to clients who have ‘travelled’.

            Discuss this with Greg Lemon and Richard Tenser to determine if monies are owed to major car rental companies for people who departed before 30 June 1988.

           

            If so confirm these creditors of Wheels, ensure accounted for by Wheels and determine whether Travel Abroad has paid Wheels Abroad by tracing to ‘client ledger’ and cash disbursments [sic].

            Correlate this with audit of client ledger be [sic - by] whether it appears that Travel has paid Wheels for all persons departed before 30 June 1988.

            B. The possibility exists that expenses of Travel Abroad may have been recorded in Wheels Abroad deliberately or by accident.

            ...

            C. The possibility exists that assets of Travel Abroad have been used as security to obtain loans to Wheels Abroador the directors.

            ...

            D. Review the propriety of inter-company management charges between the two entities.” (emphasis supplied)

It will be noted that the Bird Cameron audit plan refers to the “computerised accounting system”, not as having been deficient, but only in the context of a statement that the staff were “inadequately trained ... to cope” with it.

Meeting of Dunn, Cullen and Beale on Friday 23 September

Dunn, Cullen and Beale met on Friday 23 September. Dunn had, by then, been managing the business for four days. Cullen made notes of the discussion at the meeting, and he, McS and Beale gave evidence of the discussion.

Dunn said that IPG would inject $500,000 in the following week and a further $1,000,000 within the “next 10 days”, that it would meet all the debts of Travel and Wheels incurred from “this date” (Friday 23 September), and that arrangements would be made to pay off “old debts”. These descriptions would encompass the companies’ existing and future indebtedness to PMS. Dunn did not say whether the cash injection would be in the nature of equity or loan funding. Beale’s evidence was that he did not know whether trading had been profitable or not, and that it was impossible for him to form a view as to whether the proposed injection of $1,500,000 would be adequate to get Travel out of trouble. Clearly, Dunn believed at the time that the companies could be made solvent and profitable. His statement of intention was a new factor to be taken into account in McS’s and Beale’s assessment of Travel’s position.

Dunn, Cullen and Beale discussed the relationship between Travel and TCF and the travel agents legislation. In particular, they discussed the issue, which had been raised in McS’s letter to Travel’s directors dated 20 September, of Travel’s responsibility to file audited accounts with TCF by 30 September and of the consequences of non-compliance. Beale told Dunn that if the audited accounts were not lodged by 30 September, Travel’s licence would not be renewed. Cullen undertook to supply Dunn with a copy of the Travel Agents Act 1986 (NSW). Dunn told Cullen and Beale that there were secret provisions in the contract for sale, and that, accordingly, he would not make it available to them.

Dunn told Cullen and Beale that IPG would handle all cash in and out. This course would henceforth deprive PMS of the first-hand access to information about Travel’s trading which they had previously had. Beale said that after IPG took over, he was not privy to the working accounts of Travel or Wheels.

 

Beale’s letter to Travel’s directors of Tuesday 27 September

The following Tuesday 27 September, only seven days after McS’s own letter to the directors of Travel, Beale, at McS’s request, also wrote to them. The letter referred to the discussion between Beale, Cullen and Dunn on the preceding Friday 23 September, and continued:

“1.       We are awaiting confirmation in respect of changes in shareholding and directors of Travel Abroad Pty Limited. Being Auditors and holding the share register we require clarification and documentation relating to any changes immediately.

2.         We have been unable to commence the audit for the year ended 30th June, 1988 because we have not received completed financial accounts for the company.

3.         We request immediate confirmation that the following requirements (as advised in our previous correspondence) have been put into place:

            a)         A trust account has been set up and all client deposits are placed in this and that the account be only used to meet payments on behalf of those clients.

            b)         We require confirmation that IPG will guarantee payment of all debt incurred from the 20th September, 1988.

            c)         In addition we require confirmation and supporting evidence that the company can continue to trade on and pay its debts as they fall due.

5.[sic]  Lastly we wish to remind you once again that the Travel Agents Compensation Fund requires audited accounts and financial ratios to be lodged by the 30th September, 1988. We do not consider this is possible and an immediate extension must be applied for.” (emphasis supplied)

Clearly, McS and Beale were not content to let matters rest with what Dunn had told Beale and Cullen the preceding Friday. The key word in pars 1 and 3 is “confirmation”. All may or may not have been well, but as auditors they were looking for something more reliable than Dunn’s oral statement of what IPG intended to do.

The first application (by Beale by telephone on 28 September) for an extension of time for the filing of audited accounts

According to Beale, on 28 September he received a message from Cullen that Dunn wanted an extension of time in which to lodge audited financial statements with TCF. Beale knew that it was impossible for the audited accounts to be filed by 30 September. He telephoned Dunn, who confirmed his request that the application be made. Beale then telephoned James McDougall, the claims manager of TCF, and obtained an extension until 31 October.

McDougall did not remember the telephone conversation with Beale but did not dispute that it took place. As noted below, in a letter of 29 September to McDougall, Beale confirmed his understanding that McDougall had granted an extension until 31 October during the telephone conversation. The letter does not refer to any ground for the request for, or grant of, the extension. McDougall did not respond to Beale’s letter, apparently accepting it as accurate.

It follows that we are dependent on Beale for the terms of the telephone conversation of 28 September. His written evidence of the conversation was as follows:

“BEALE:        Jim, we act for Travel Abroad Pty Limited and we have been requested by the directors of that company to apply for an extension of time in which to lodge Travel Abroad’s audited accounts with you. We have had problems with getting the financials from Travel for the purposes of the audit because of difficulties with their new computer system. In addition, the company has just been purchased by a group called IPG. We will need more time to prepare the audited accounts. Can you give Travel an extension?

 

McDOUGALL: Yes, we will give you an extension to the 31 October 1988.” (emphasis supplied)

In cross-examination, Beale said that he told McDougall that Travel had had some difficulty providing PMS with the information because of “computer problems”. He said that at the time he had had no idea whether Travel was trading profitably or not. He also said that he had understood at the time that it was TCF’s practice to grant extensions “as a matter of course”. The following exchange took place in Beale’s cross-examination:

“Now, you were aware at this time that if you did not get the extension then the Travel Compensation Fund might either withdraw the licence or require some conditions to be imposed on it?---At that point in time I was aware that the Travel Compensation Fund was giving extensions to companies as a matter of course.

...

I assume that you thought that it would not be terribly difficult or that they would not be terribly difficult about giving you an extension but you did understand you had to ask?---Yes.” (T 1787-8)

The grounds of Beale’s telephone request are consistent with those which he was to state in more elaborate form later in his letter of 26 October (see below): difficulties associated with a new computer system and a change of ownership. There is no evidence that McS was aware of the grounds that Beale was going to mention, or had mentioned, when applying for the extension on 28 September.

Three letters of Thursday 29 September

The following day, Thursday 29 September, Beale wrote to McDougall. After referring to their telephone conversation of the preceding day, he continued:

“We confirm our understanding  that an extension of time until the 31st October, 1988 for the lodgment of the Audited financial statements for the year ended 30th June, 1988 was granted by yourself during that telephone conversation.”

The letter concluded by inviting McDougall to contact PMS’s Chatswood office if he required further information.

Also on 29 September, Krumbeck of TCF wrote to Travel a standard form of letter stating that TCF had been advised that there had been “a change of ownership of Fund membership of” Travel. It seems reasonable to assume that the letter was prompted by Beale’s telephone conversation with McDougall on the preceding day. The letter advised that if there had been “a change of legal entity”, a fresh application was required, forms for which were enclosed, and for which a fee, the amount of which depended upon the nature of the change, was payable. Two amounts of fees were stated: for a change “to a corporate entity” and an “alteration to existing partnership”. It is not clear what operation Krumbeck intended the letter to have in relation to Travel’s position, but no doubt the generalised nature of its terms are explained by the generalised nature of the information which Beale had given to McDougall. The letter stipulated that advice was required regarding any change within five days (by 4 October) and that any application was to be lodged within fourteen days (by 13 October).

Finally, again on Thursday 29 September, PMS sent a total of three engagement letters to “the Directors” of Travel and Wheels c/- IPG’s office at Pymble. Each letter was signed by Turner. One letter to the directors of each company was in respect of the provision of “accounting and other services”, while the third letter, to the directors of Travel alone, was in respect of the auditing of Travel’s accounts. The letter to the directors of Wheels recorded that the engagement of PMS was not for an audit.  McS and Beale gave evidence that all three letters of engagement were sent in order to put beyond doubt that PMS were engaged by the authority of the new directors of the companies, that is, the directors of IPG.

All three letters began by referring to “confirmation of [PMS’s] recent discussions with Craig Dunn.” Apparently this was a reference to the discussion on the preceding Friday 23 September, discussed above. The letters to the directors of Travel and Wheels relating to accounting services, advised, under the heading “OTHER SERVICES”, that PMS would be pleased to provide, if requested, among other services, “[c]omputer advice including implementation of new systems.” Under the heading “FEES”, those two letters advised that PMS’s practice was to render progress fees during the period of performing work; that their normal terms were that payment was to be made in full on receipt of invoice and that reminder statements were not issued but they reserved the right to charge an account fee of 1.85 per cent per month on an amount overdue; and they noted that overdue fees of $29,868.32 and $9,835.21, for Travel and Wheels, respectively, were outstanding as at 29 September but that PMS were “prepared to defer payment of this amount” provided payment of one quarter of it ($7,467.08 and $2,458.80, respectively) was made on each Friday of October (7, 14, 21, and 28 October).

The letter to the directors of Travel about auditing advised in conformity with the legal advice given by Brown, that it was the directors’ responsibility under the Companies Code to prepare and submit accounts for auditing. This advice was to provoke a response (on 10 October) drawing attention to the fact that PMS were also engaged to provide accounting services.

McS appreciated that PMS would do no work for Travel or Wheels until confirmation of their engagement was received. Confirmation was not received until 10 October.  In fact from 29 September to 10 October, a period of eight week days including Thursday 29 September and Monday 10 October, PMS “downed tools”.

PMS’s memo of fees rendered to Travel on Friday 30 September

The next day, Friday 30 September, PMS rendered a memo of fees to Travel. The amount totalled $26,916.10 but after giving credit for two payments on 31 August totalling $30,600, the memo showed a credit balance in favour of Travel of $3,683.90. However, it is not the amounts but the textual content of the memo that is of more significance for present purposes:

“Finalisation of Fringe Benefits Tax Annual Return and presentation to Directors for signing.

Continuation of client account reconciliation and bank reconciliation (attendance at client of 3 staff members for 8 days).

Preparation of Detailed Audit Plan and procedures.   Attendance for legal advice on going concern problems.  Testing of General Ledger and preparation of preliminary work papers.   Preparation of engagement letters and letter to Consumer Affairs confirming extension for licencing.

Meetings with Craig Dunn regarding change of ownership.

Preparation of audit confirmation letters.” (emphasis supplied)

The reference to “[a]ttendance for legal advice on going concern problems” was apparently a reference to the conference with Brown of Gillis Delaney Brown on 15 September and is further evidence, if more were needed, of PMS’s view as at 15 September of the nature of Travel’s “problem” as it had existed as at 15 September, immediately before the purchase by IPG.

Meeting of IPG directors on Friday 7 October

On 7 October, Dunn reported to IPG’s directors the acquisition of Wheels and Travel for $200,000, and the things done since then to trim their operating costs. The board noted “that the companies had debts of approximately $3.1 million and that IPG must commit approximately $2.0 million to keep the companies operating” (TCF judgment at 28). The directors resolved to commit the necessary funds and to meet ongoing liabilities from that time. They were thus aware that the two companies may have had debts exceeding the amount which they had apparently previously decided to commit. Wilcox J described the purchase by IPG as “a transaction fraught with danger; not only to that company but, because it involved continued trading, to the creditors and clients of Travel Abroad” (TCF judgment at 44-5).

Two letters from IPG to PMS of Monday 10 October

On 10 October, Dunn, on IPG letterhead, faxed PMS in regard to their letter of 29 September in respect of the provision of accounting and other services to Travel. He asked for clarification of two matters: a timetable as to completion of Travel’s accounts, taxation return and secretarial services, and details of outstanding fees. As McS was aware, PMS had done no work on the accounts during the eight working days between, and including, 29 September and 10 October.

On the same date, Dunn also wrote to PMS in response to their letter of 29 September concerning the appointment of the firm as auditors of Travel. The letter included an acknowledgment that “the directors accept responsibility for the accounts of the company.”

PMS appear to have accepted these two letters as satisfactory acceptances of the terms of engagement advanced in PMS’s two letters to Travel’s directors of 29 September.

Travel’s post-10 October client account

IPG opened some new bank accounts, one of which was a Travel “client account” opened on 10 October. It was intended that moneys received by Travel in respect of “new” bookings would be deposited into this account. Some payments received were so deposited and were used to pay for airline tickets and other expenses incurred on behalf of clients (eg, accommodation and car hire). According to Wilcox J, it was not clear whether or not all moneys received in respect of “new” bookings went into this account, but, importantly, even if they did, the protection offered was qualified by the fact that the account was only for “new” bookings. Following Dunn’s directions, Boyd used the account only for bookings initially made after 10 October. As Wilcox J explained, this would have the effect that a client who had made a booking in June and paid a deposit, would be considered to have made an “old” booking, with the result that if the balance were paid after 10 October, it would not go into the new account. His Honour said that in the light of the volume of business being engaged in by Travel, there must have been hundreds of cases of this type, with the result that substantial amounts paid by clients even after 10 October continued to become part of Travel’s own funds. There was no evidence as to the proportion of the final deficiency that could be attributed to the failure to deposit post-10 October payments in respect of “old” bookings into the new account.

TCF’s letter to Travel of Thursday 13 October

Krumbeck wrote to Travel, on 13 October. The letter was received on Monday 17 October, and Dunn faxed a copy to Beale on 19 October. The letter advised that Travel’s failure to respond to Krumbeck’s letter of 29 September (about change of ownership) left Krumbeck no alternative but to “refer to the Trustees the question of continued membership of the Travel Compensation Fund of: Travel Abroad Pty Ltd”. The letter noted that under cl 13 of the trust deed, before the Trustees determined that a participant was no longer eligible to be a contributor to the Fund, the participant was to be given a reasonable opportunity to be heard. The letter informed Travel that the next meeting of the Trustees was to be held on 28 October, and that if Travel wished to meet with the Trustees, an appointment could be made, but that if Travel provided the requested information, attendance would not be required.

McS’s letter to Travel’s directors of Friday 14 October and first  Audit Review Committee Meeting on that date

Having received what they accepted as satisfactory letters of confirmation of engagement from the new owners on Monday 10 October, PMS apparently immediately became active again. On Friday 14 October, McS wrote to Travel’s directors enclosing a document headed “meeting points for 14/10/88” and an “audit timetable”, “summary audit program” and “check list of information and confirmations required for audit and tax purposes”. The covering letter drew the directors’ attention to “the need for complete cooperation of directors and staff in order to complete the audit as quickly and cost efficiently as possible”, and concluded by emphasising that their “full assistance in this regard [was] appreciated and critical to [PMS’s] completion of audit matters.”

The “meeting points” numbered fourteen, and included:

“11.     Reply to Audit Request re Solvency.”

This was a reference to McS’s requirement, which McS had stipulated in his letter of 20 September to the new directors of Travel, that they must, by 11 October, furnish him with evidence that the company was able to pay its debts as they fell due.

The “audit timetable” was a list of items with columns for planned and actual dates. It was recorded that the “[e]ngagement acceptance” had been received from Travel on 10 October. It was planned that on 26 October, an application would be made to TCF for an extension of the lodgment period to 30 November, and that on 23 November there would be lodged “[c]omplete application T/A licence renewal.”

At the first Audit Review Committee meeting of Dunn (IPG), Hadley, Gilbert (IBA), Williams (Bird Cameron), McS, Beale and Cullen (PMS) held at PMS’s office at Chatswood on 14 October, McS’s letter to the directors of the same date and its enclosures were tabled and discussed. Although Williams had been “on the scene” for some time (since about August) apparently it was only at around this time that PMS formally retained his firm, to supervise the audit.

There was discussion at the meeting of the necessity for urgent completion of the audit and lodgment of documents with TCF, and of the fact that the audit was to be under the direction of McS rather than Beale.

Wilcox J noted (TCF Judgment at 21-2) Beale’s evidence that it was at this meeting that he became aware that Travel was finding it difficult to reconcile its computer records, and that incorrect data had been entered, many bookings being missing or only partly entered. The evidence before me indicates that Beale was in fact aware of these matters some months earlier, certainly by 12 July.

The typed minutes of the meeting, after noting the tabling of the documents from PMS, proceeded in the following terms:

“Various matters were discussed in respect of the points raised by the letter.

1.         Required staff will be made available in particular Pam Gilbert and Greg Corrigan.

2.         All contracts to be made available excluding the contract for the purchase by IPG from Lemons. This contract is subject to secrecy agreement between Lemons and IPG however some specific clauses will be made available (note: as auditors we should have access to full contract if considered necessary).

            The Directors to provide copies of all statutory forms in respect of change of Shareholdings, Directors, Secretaries etc. by 17/10/88.

3.         Directors Loans: Lemon[s] to repay their loans within 90 days from 18/9/88.  M. Hay to repay his within 12 months from 18/9/88.

4.         Directors to revalue computer and program development and provide full working papers to auditors.

5.         C. Dunn stated that the company will be operated on a trust basis however deposits will be recognised as income, 6 weeks before due travel date when deposit becomes non refundable.

            -           Legal opinion to be obtained;

            -           Organise computer to provide necessary reports;

            -           Change in accounting policy to be disclosed in notes.

6.         Sundry creditors - to be advised.

7.         Essential Travel Abroad staff to be made available for audit.

8.         As for (2) above.

...

11.       Directors will reply to audit request, re: solvency, by the 17/10/88.

12.       IPG will provide details of guarantees.

13.       Audit program agreed to.

14.       Present operation structure to be defined by IPG. General Manager to be appointed shortly, Julianna Rose to be appointed manager Travel Abroad Pty Limited.

*Other points raised include:-

            -           Pam Gilbert to act as company liason [sic - liaison] with auditors;

            -           IPG operating a bank account in their own name and disbursing payments on behalf of Travel Abroad Pty Limited and Wheels Abroad Pty Limited from it.” (emphasis supplied)

The reference to Greg Corrigan in par 1 makes it clear that a problem calling for his computer expertise was involved. But again, the problem was in the nature of correction and entering up of data required to remedy the omissions of the past.

In relation to par 5, the operation of Travel “on a trust basis”, FAI submits that PMS never saw that this was implemented. FAI also submits that it was not for PMS to decide that a trust arrangement was sufficient to protect the public from an insolvent travel agent. It submits that what Dunn said at the meeting was insufficient to excuse PMS from their obligation not to mislead TCF by remaining silent when, according to the submission, they realised that Travel was insolvent and had obtained the benefit of an extension on a false basis.

Paragraph 11 clearly refers to PMS’s outstanding request, made three and a half weeks earlier on 20 September, in McS’s letter to the directors of Travel, that Travel’s directors furnish to McS evidence of Travel’s solvency by 11 October. In fact, as will be noted below, Dunn was to write a letter to McS the following Tuesday, 18 October, in reply to McS’s letter.

McS gave evidence that during the course of the Audit Review Committee meetings, of which the present one held on 14 October was the first, he inquired of Dunn as to how Travel was going, to which Dunn replied that an “independent trust account” was being kept, that the company was “operating on a profitable basis” and that he had “cut back expenses fairly severely”. McS said that Dunn did not “table figures” in support, but that he (McS) took Dunn’s assurances as going to the “going concern” question.

I see no reason not to accept this evidence. It is only reasonable to expect that the “going concern” question would be discussed between them at the Audit Review Committee meetings which they both attended, in the light of McS’s concern which he, as auditor, had previously communicated to Dunn. In addition to the first of such meetings held on 14 October, further ones were held on 21 October, 27 October, 16 November and 25 November.  When dealing with those meetings below, I will not give an account each time of the evidence just mentioned, but I accept that similar exchanges between McS and Dunn occurred at those meetings. The result was that, putting to one side the pre-existing debts of Travel, according to McS’s understanding ongoing trading was exposing no-one to risk.

But there is one qualification to what I have said above. Before the last meeting held on 25 November, Cullen told McS, who believed him, that Travel was then not trading profitably.

Dunn’s two letters to PMS of Tuesday 18 October

On 18 October, Dunn wrote to Beale enclosing copies of the letters of 29 September and 13 October from TCF to Travel, and requesting Beale to “arrange for the appropriate notification to be given and preparation of application completed for exercution [sic].” Beale received the letter and its enclosures on 19 October. He was troubled, in particular, by TCF’s letter to Travel of 13 October threatening to refer to the Trustees the question of Travel’s continued membership of the Fund and by the apparent continuing insolvency of Travel.

Also on Tuesday 18 October, Dunn wrote an important letter to McS, in reply to his letter of 20 September. McS received the letter on Thursday 20 October and Beale saw it at about that time. The best figures either of them then had showing the financial position of the companies was still the Draft Amalgamated Statement of Assets and Liabilities produced on 31 August. They were no longer privy to the companies’ working accounts.

Dunn’s letter to McS of 18 October was, omitting formal parts, in the following terms:

“1.       Represenativies [sic] of the parent company Industrial Performance Group Limited (“IPG”) are at present revising the accounting procedures employed by Travel and modifing [sic] them to enable Travel to prepare true and fair accounts capable of audit in accordance with the Companies (New South Wales) Code: (‘the code’).

2.         The board of IPG has resolved to meeting [sic] any liabilities incurred by Travel from the date of acquistion [sic] 18 September, 1998.    IPG has already injected approximately $2 million into Travel and Wheels Abroad Pty. Limited (“Wheels”) as working capital: Bankers for Travel are Westpac Banking Corporation Ltd. Gordon Branch.

3.         My administration Manager Julie Boyd will provide a list of creditors to your staff. Our satff [sic] are presently reconciling creditors:

The injection of working capital has gone to discharge trade creditors, airlines, refunds etc.

4.         The indebtedness of Travel has been refinanced by IPG as parent company.

5.         Travel does not have any firm arrangment [sic] as to issued capital rearrangement at this point in time.

6.         Staff from your office are presently ascertaining the amount owing by Wheels to Travel.  Any amount owing to Wheels or Travel will be met by arrangements structured by the parent company IPG.

In response to the other matters raised in your letter we respond as follows:-

A.  We believe the relevance of S.556 of the code is no longer relevant based on the amalgamated balance sheet of Wheels & Travel prepared by your firm as of 30 June, 1988 showing a deficiency of $1,153,433 and the fact that IPG has injected approximately $2 million and has undertaken to meet liabilities incurred by Travel from 18 September, 1988:

B.  We have been advised by your firm that an extension of time to file audited accounts with the Travel Agents Compensation Fund has been obtained until 31 October, 1988 and that a further extension will be applied for.

Thank you for your assistance in this matter.” (emphasis supplied)

FAI submits, and I accept, that the letter was in fact a partial and inadequate answer to McS’s letter of 20 September. Moreover, when Beale read it at the time, he appreciated that it did not answer conclusively the specific matters which McS had raised. In relation to the requirements in the six numbered paragraphs of McS’s letter, Beale’s evidence was that according to his understanding:

(i)         there was still no evidence that Travel’s accounting records were being kept in a manner appropriate to enable preparation of true and fair accounts and the auditing of such accounts;

(ii)        although IPG had apparently resolved to meet the liabilities of Travel from 18 September, he (Beale) was aware that the resolution could be rescinded; PMS had no basis for believing that IPG had the financial backing necessary to make its resolution good; the basis on which the sum of approximately $2,000,000 had been supposedly injected (loan or equity capital) had not been made clear, although Beale felt confident that it was a loan; and although the letter had identified Travel’s bank, it gave no details of financial accommodation available from that bank or of security held by it;

(iii)       Travel had not provided, and was not able to provide, a list of its creditors;

(iv)       there were no details of any firm arrangement for the refinancing of Travel’s indebtedness, other than by IPG itself;

(v)        there were no details of any firm arrangement for an increase of issued capital; and

(vi)       the amount of the indebtedness of Wheels to Travel was not stated and the ability of Wheels to pay Travel depended on arrangements which IPG said it would make but which it had not yet made.

Beale gave evidence in his s 541 examination that as at around 19 October (the time of his receiving Dunn’s letter) he was concerned as to the potential continuing insolvency of Travel.

For his part, McS generalises in respect of Dunn’s letter as follows:

“In that letter, IPG confirmed that it had resolved to meet any liabilities incurred by Travel from the date of acquisition (18 September 1988). The letter advised me that IPG had injected approximately $2 million into Travel and Wheels Abroad as working capital. ... Dunn expressed his belief that s. 556 of the Companies Code was no longer relevant based on the fact that the amalgamated balance sheets of Wheels and Travel prepared as at 30 June 1988 showing a deficiency of $1,153,433 when in fact IPG had injected approximately $2 million and had undertaken to meet liabilities incurred by Travel from 18 September 1988. ... I believed the various matters stated in the letter from IPG to be true.” (emphasis supplied)

He conceded that the Draft Amalgamated Statement of Assets and Liabilities, although “rubbery”, was the best information to hand on Travel’s financial position, as at 18 October.

In cross-examination on Dunn’s letter of 18 October, McS would not agree that he had no basis for believing that IPG had the financial strength to meet Travel’s liabilities and said that he had seen its published accounts, although he could not recall when; he said that it did not occur to him at the time that IPG’s directors might rescind their resolution referred to in par 2 of Dunn’s letter and that they were “very positive about adopting and running this company”; and said that apart from Dunn’s assurance, he did not know one way or the other whether Travel had been trading at a profit or at a loss under the IPG management between 18 September and Dunn’s letter of 18 October. I accept this evidence of McS in relation to Dunn’s letter of 18 October.

Second Audit Review Committee Meeting on Friday 21 October

Dunn, McS, Cullen, Gilbert, Williams and Nicholaeff met for the second meeting of the Audit Review Committee on Friday 21 October at IPG’s offices at Pymble. Dunn’s letter to McS of the preceding Tuesday 18 October, and received by McS on 20 October, the day before the meeting, was noted. Item 3 of the minutes of the meeting refers to it but does not record any discussion of it. Review of the audit timetable indicated that deadlines were not being met. The minutes of the meeting include the following:

“1.       Disclosure of contracts and events occurring prior to and after the year end - listing still to be prepared by Travel Abroad.

...

3.         Reply to audit request regarding solvency - Letter received by Phillips McSweeney from Craig Dunn on 20th October 1988.

4.         Review of Audit Timetable - Tim Cullen informed the meeting that the client trust ledger would not be fully reconciled and adjusted by Friday night [21 October] as outlined in the timetable due to a combination of staff resources not being available on a full time basis and the under estimation of the amount of work involved in the reconciliation.

            ...

            A new deadline of Monday night, 24th October 1988 was set for completion of the client ledger. ...

            Sunday [sic - Sundry] creditors and supporting workpapers to be made available by Pam Gilbert on Monday morning 26th October 1988 [sic - Monday was in fact 24 October] for Auditors. Information requested on payroll also to be completed and made available to Auditors on Monday morning.

5.         Draft accounts for Travel Abroad Pty. Limited - Due to the delays outlined above, Draft Accounts would not be completed by Tuesday 25th October 1988.

            Tim Cullen to complete draft accounts once client ledger reconciled.   Tim Cullen to prepare list of points pertaining to preparation of draft accounts for follow up by Pam Gilbert.

            Brian McSweeney suggested that this list be prepared as soon as possible to give Pam Gilbert as much time as possible to complete.   Tim Cullen stated these points were relatively minor and would not have a major impact on the draft accounts.

            Draft Accounts to be completed by Thursday 27th October 1988.

6.         Extension of renewal of Travel Licence - As draft accounts would not be available for presentation to the Travel Compensation Fund, on Wednesday 26th October 1988, Brian McSweeney suggested that the Board should be approached now for a further extension rather than at the eleventh hour.

 

            This was agreed by Craig Dunn.

            John Beale to arrange a meeting with the Board early next week. Craig Dunn to attend meeting.

            Craig Dunn requested copy of correspondence with Board of previous extension - Brian McSweeney to provide.

...

9.         Statutory forms - Information as requested by Phillips McSweeney completed by Craig Dunn except for information required from Greg Lemon. Form 61 for Travel Compensation Fund to be completed by Phillips McSweeney and signed by Craig Dunn and Julie Boyd.

...

11.       Share Certificates held by minority shareholders - Point raised by Brian McSweeney. In the process of being resolved by IPG.” (emphasis in text supplied)

TCF and PMS rely on the absence from the minutes of any reference to discussion of Dunn’s letter of 18 October as giving rise to an inference that those present found it satisfactory. I infer, at least, that they were not alarmed by it. It will be recalled that Gilbert had written a “strong” letter to the directors of Travel on 26 August and that Williams had attended with McS and Cullen, the offices of Gillis Delaney Brown on 15 September. I infer that whatever the shortcomings they and the others present saw in Dunn’s letter, they would have gained some reassurance from it, and, in particular, from the advice that IPG had injected approximately $2,000,000 into Travel and Wheels.

Clearly, Beale and McS were aware that the client trust ledger would not be fully reconciled and adjusted before Monday 24 October, and, therefore, that until then, expenditures by Travel could not be linked to particular clients and the allocation of expenses as between Travel and Wheels could not be ascertained. Only after these accounting procedures were completed could a draft, followed by final accounts, be prepared and only subsequently could the audit be completed.

The meeting with TCF contemplated by par 6 of the minutes was not held.

Beale’s letter to Krumbeck, received Tuesday 25 October

By letter mistakenly dated 20 September, received by TCF on 25 October, Beale belatedly acknowledged receipt of Krumbeck’s letter of 29 September seeking information about change of ownership, and advised that there had been no change of legal entity. He also advised that Anderson had resigned, and that Rose had been appointed as manager of Travel.

The second application (by Beale by telephone on 25 October and letter of 26 October) for an extension of time within which to file Travel’s audited accounts

According to a PMS diary note on Monday 24 October, Beale spoke to Dunn on that date and was instructed to contact TCF, and, if necessary, to arrange for a meeting with TCF on “Tuesday or Wednesday”.

The next day, Tuesday 25 October, Beale rang McDougall. Beale’s written evidence is that the conversation was to the following effect:

“[BEALE]: We will not be able to complete the audit of Travel Abroad’s accounts by the end of October because financial accounts are not completed. We are still having trouble with the computer system and we therefore need a further extension from you. The audit of Travel has been delayed because of the new accounting system. We found that a lot of information and data that had been inputted into the computer for the purposes of producing sensible audit information were incorrectly inputted and we have had to reorganise the data and arrange for the entries to be properly inputted. This problem has been intensified by an increase in turnover of the company.

The change of ownership of Travel and Wheels  has also caused a delay in the audit of these companies. We were only advised of the change of ownership around mid September and could not commence the audit until October 1988.

[McDOUGALL]: I can give you a verbal extension until 14 November 1988. However, you will have to apply to the Fund in writing with your reasons. Upon receipt of the letter, we may be able to give you a further extension.” (emphasis supplied)

McDougall could not recall the conversation but did not deny that it occurred.

According to a PMS diary note written by Cullen, and his affidavit evidence, he telephoned Dunn at Beale’s request to report on Beale’s conversation with McDougall, but Dunn was in a meeting. Cullen left a message with one, Peter Vincent, that the application for the further extension would have to be made in writing and include a statement of reasons, but that the longest verbal extension available would be until 14 November.

The evidence as to what happened between then and Beale’s writing of his letter to TCF the following day is not entirely clear, but is not of major importance. Beale’s written evidence includes the following:

“I do not recall discussing the contents of the letter with anyone before it was sent out, although I did speak to Tim Cullen and asked him to inform Mr Dunn of what I had been told by Mr McDougall ... I also asked Tim Cullen to inform Mr Dunn that I would prepare a letter. I also forwarded a copy of the letter drafted by me to Craig Dunn on that same day by facsimile.”

In his s 541 examination and in the IPG proceeding, however, Beale’s evidence was that he discussed with Dunn the reasons which were to be given to TCF in the letter. In his s 541 examination, he said that he did not fax a copy of the letter to Dunn before sending it to TCF, and that, to the best of his recollection, he faxed a copy to him after he had sent the original to TCF. In his affidavit in the IPG proceeding, he said that when he told Dunn that TCF required a written application stating reasons, Dunn replied:

“Alright, write the letter please. I suppose the reason we need the extension is that we are unable to complete the audit because of the major software development problems we are having added to the extraordinary growth in turnover of the Companies. In addition as you know there has been a change of ownership which has caused problems in getting to the bottom of what the financial position of the Companies really is.”

Beale’s letter to TCF dated 26 October, written from PMS’s Lismore office where Beale was working at the time, was as follows:

“ Re:   TRAVEL ABROAD PTY. LIMITED.

We request a further extension of time for the lodgment of Audited Financial Statements for Travel Abroad Pty. Limited for the year ended 30th June, 1988.

The reasons for the request are as follows:-

1.         Computer Failure.

            A new computer was installed in November, 1987 to handle all bookings, receipts, payments etc, however major software development problems became apparent only after several months of use.

            The failures of the system have meant that the majority of transactions have had to be viewed, re inputed, amended or deleted before the accounts are in a suitable condition for Auditing.

            We initially expected this work to take four weeks however, the sheer volume and added complications have increased this to 10 weeks.

            The fact that the Company has grown from turnover of $8,000,000 in 1986/87 to in excess of $20,000,000 in 1987/88 has accentuated the problems.

            The Directors advise that the Company’s records and in particular the Computer generated records, are now being maintained in a form that will enable them to be Audited.

            During the past few weeks we have continued our Audit in areas not affected by the Computer problems and therefore, we anticipate the timely completion of the Audit once the Accounts for the year ended 30th June, 1988 have been completed.

2.         Change of Ownership

            As previously advised, the companies Travel Abroad Pty. Limited and Wheels Abroad Pty. Limited, have recently been sold to the publicly listed company Industrial Performance Group Limited.

            Several days of negotiations over the past three months have resulted in further delays to the Audit, however we believe the security and management skills of the new owners will assist our task as Auditors in the future.

Should there be any query regarding our request for a further extension, please contact our Chatswood Office.” (emphasis in text supplied)

 

There is a handwritten note, apparently of McDougall, on the letter received by TCF: “Beale obtained verbal extension to 14/11/88 on 25/10/88.”

 

Wilcox J found that there was no evidence to support the claim of “computer failure”. His Honour noted that the only evidence on the matter before him was from Fiona Hofmeyer, and that its effect was contrary to the statements in the letter. This finding of his Honour’s was contested. However, FAI has not sought to prove, and does not submit, that there were never any problems with the computer system or any delay due to the change of ownership of Travel and Wheels. Rather, FAI’s submission is that the deceptiveness of the letter lay in what was not said in it, and in the creation of the false impression that what was said was a fair description of all the real causes of the delay of interest to TCF.

As at the time, and at all times following the sale on 18 September, Beale was not privy to any of the working accounts of Travel or Wheels, into which receipts were being paid, although he knew that following the change of ownership, the companies no longer used the accounts at Westpac’s Mona Vale branch. He knew that IPG had refused a request that a copy of the agreement for sale of shares be furnished to audit staff. He was not aware of what, if any, steps had been taken by others at PMS, such as McS, to verify independently the nature and quantum of the capital injected by IPG into Travel. He gave evidence in his s 541 examination of his concern at the time as to the “potential continuing insolvency of Travel”. There was, of course, no hint of this in his letter to TCF.

 

McS saw Beale’s letter of 26 October before it was sent. He says that he believed that the statements made in it were true. The following exchange took place during McS’s cross-examination

“You understood that to be a statement of all of the reasons for the request?--

Well, I believed it was the primary reasons, and the main reason why the delay occurred.” (T 1569)

Cullen saw the letter shortly after it was sent and his evidence is that he also believed that the letter contained a true and reasonable statement of the reasons for the delay.

TCF and PMS submit that I should accept that at the time of the letter, neither Beale nor McS believed that Travel was trading while insolvent, and that in fact their belief was to the contrary. Further, they submit that this view was a reasonable one, particularly in the light of the events since IPG’s purchase on 18 September, including Dunn’s letter of 18 October noted earlier. According to the submission, the IPG takeover presented a sound financial proposition. McS and Beale knew that IPG was a publicly listed company, which had, to their knowledge, promised the trade in a circular dated 19 September, that it would present to recipients of the letter “a satisfactory resolution of outstanding accounts”. They knew that IPG had promised at the meeting of 23 September an imminent cash injection of $1,500,000, had undertaken to pay all debts incurred after 18 September, and had undertaken to ensure that arrangements were made to pay off pre-existing debts. They also knew that at the first Audit Review Committee Meeting on 14 October, Dunn had said that Travel would operate on a trust account basis.  Finally, they had both read Dunn’s letter of 18 October and McS and Cullen had attended the second meeting of the Audit Review Committee on 21 October when that letter was tabled and no-one suggested that it was unsatisfactory.

Third Audit Review Committee Meeting on Thursday 27 October

Those who had attended the second Audit Review Committee meeting on Friday 21 October, including McS and Cullen, met again the following Thursday, 27 October. They discussed issues raised by the need for Travel to lodge its accounts with TCF. Cullen said that if the accounts were not lodged, this would result in suspension in the first instance, then withdrawal, of Travel’s licence, with the result that Travel could not continue to trade. It was noted that the disclosure of contracts and events occurring prior to and after 30 June, remained to be finalised by Travel. The minutes include the following passages:

“2.       Travel Abroad NZ Ltd Audit - Tim Cullen presented the draft accounts. The audit certificate to be faxed later today. The original audit certificate to be recieved [sic] by post.

3.         Reply to audit request re solvency - This will be replied to by Phillips McSweeney in the final stages of the audit.

4.         Statutory Forms - Form 61 has been completed and signed by IPG. Craig Dunn to forward to Phillips McSweeney today.

            Share Transfers - Share transfers to be completed by IPG, signed and the originals sighted by Tim Cullen prior to despatch for stamping. Pam Gilbert to organise time for sighting by Tim Cullen.

5.         Extension of renewal of Travel Licence - Letter sent by John Beale to the Travel Compensation Fund on 26th October 1988. Pam Gilbert asked for comments. Craig Dunn noted that no date for the extension was mentioned in the letter. Tim Cullen stated that a final extension had been granted verbally to 15th November 1988. [sic - it had been granted verbally until Monday 14 November]

            Pam Gilbert asked what approach should be adopted if by 15th November 1988 audited accounts were not completed. Craig Dunn wished to know the normal procedure in such situations.

            Tim Cullen replied that in normal circumstances this would result in suspension from the Conpensation[sic] Fund and therefore withdrawal of the travel licence. He noted that from past experience this can take about two months to sort out and therefore gives time to get the accounts together within that period.

            Original letter of confirmation of first extension to be provided to Craig Dunn by John Beale.

6.         Review of Audit Timetable - Tim Cullen informed the meeting that he was now happy with the client ledgers, the client trust was adjusted and the reconciliation was currently being completed. Brian McSweeney noted that the deadline set at the previous meeting was not met as a result of delays in bringing the accounts up to date, the sheer volume of work involved and compounded problems in the accounts area. For example, the input of current live data to the 30.6.88 client ledger reports. This problem was discussed and it was decided that access to these 1987/88 ledgers should be restricted as from today. Pam Gilbert to organise with Greg Corrigan.

...

10.       Determination of Sales and Cost of Sales.

            As a result of the method adopted for the change over from the manual to computer system during the year it is not possible to obtain accurate information for Sales and Cost of Sales on a departure date basis from the computer produced print-outs. It was decided that sales and cost of sales would be determined by a cash receipts/payments approach and checked for accuarcy [sic] against the gross profit percentage earned on departures on a monthly basis.” (emphasis in text supplied)

There was no written or oral evidence elaborating on par 3. Paragraph 3 suggests that those present took the view that the appropriate time for PMS to respond to Dunn’s letter of 18 October in so far as it related to Travel’s solvency, was after the audit by PMS progressed sufficiently to expose Travel’s true financial position.

Form 61, referred to in par 4 of the minutes, was a form of notice prescribed under the Companies Code for changes of particulars in the register of directors, principal executive officers and secretaries. Beale in fact sent the signed form (or a copy) to the Department of Business and Consumer Affairs with a letter dated 3 November in which he advised of the “change of ownership” of Travel and Wheels. TCF and PMS submit that this lends support to Beale’s evidence that he understood that ownership and control had already changed and that completion was a mere formality.

As par 5 of the minutes demonstrates, Gilbert asked for comments on Beale’s letter to TCF of the preceding day, 26 October. The minutes do not record that she or anyone else thought that the letter was incorrect or misleading. TCF and PMS submit that it is to be inferred that all present accepted its accuracy.

Krumbeck’s letter to Beale of 28 October

On 28 October, Krumbeck wrote to Beale acknowledging receipt on 25 October of Beale’s letter erroneously dated 20 September, and requesting details of the new shareholdings. He added the handwritten postscript: “The question of an extension has been referred to the Trustees”.

McDougall’s facsimile to Beale of Monday 31 October

On 31 October McDougall faxed to Beale this message:

“Travel Abroad Pty Ltd

Re your letter 26 October.

The Trustees have approved your request for extension to 30 November 1988. They have declined other requests for extension beyond that date.

Regards

                                    Jim McDougall.”

It will be recalled that Beale’s letter of 26 October had not nominated a period or end date for the extension requested.

Production of first draft of financial statements for Travel on Tuesday 1 November

On 1 November, Cullen produced a first draft of financial statements for Travel. They showed that Travel had made a total operating loss of $573,707 in the year ended 30 June 1988 and had a net deficiency of assets as at that date of $436,988. McS saw these draft statements but could not recall when. He said that he believed that the draft was supplied soon afterwards to the members of the Audit Review Committee, and that his “recollection” was that it caused “obvious concern”.

PMS’s letter of Thursday 3 November to Travel relating to fees

On 3 November, Beale wrote to Travel a letter which, omitting formal parts was as follows:

“We enclose herewith our October invoice together with copy invoices for advance payments made during the month.   We also enclose copy of our statement to 30/9/88 for your records.

In respect of the outstanding amounts we refer to our previous discussions with Craig Dunn and also to our engagement letter.   Outstanding invoices were to be paid in instalments over four weeks.   We now request that this undertaking be honored and summarise below the total amount due.

Balance of Account 30/9/88                            17,813.33

Add:  October Invoice Balance                       16,035.55

                                                                        $33,848.88

Payable  7/11/88                     8,462.22

             14/11/88                     8,462.22

             21/11/88                     8,462.22

             28/11/88                     8,462.22

Should you have any query please contact our Chatswood Office.”

Work during November

During November, work continued on preparation of the companies’ accounts. Wilcox J considered that the intensity of this work was difficult to discern. The companies did not honour the arrangements for the payment of fees to PMS. Some fees were paid, but his Honour was of the view that the failure to pay PMS probably impeded progress.

Fourth Audit Review Committee Meeting on Wednesday 16 November

Dunn, Williams, Nicholaeff, McS, Cullen and Gilbert met on 16 November at IPG’s office. The minutes of the meeting include the following passage:

“1.       Allocation of Expenditure

            The meeting commenced with discussions on allocation of expenditure between Travel Abroad Pty Ltd and Wheels Abroad Pty Limited, Present: C Dunn, R Williams, M Nicholaeff and P Gilbert.

            C. Dunn outlined the company’s intended approach to the allocation of expenditure as follows:

            1.         Total Group expenditure by category would be calculated.

            2.         Direct expenses would be isolated - namely Advertising, Direct        Wages, Printing and Stationery, Courier and Telephone.

            3.         A rational method of allocation of direct expenditure would be applied based on the provision of service.

                        Pam Gilbert stated that after discussions with Craig Dunn, the company proposed to allocate and direct expenditure based on the number of self drive and flydrive packages booked in the year. This would result in the direct expenditure split of 25% to Travel Abroad, and 75% to Wheels Abroad.

                        Both R. Williams and M. Nicholaeff disagreed with the package basis. R. Williams stated that other approaches should be considered before a final decision was made.

                        It was agreed to adopt steps 1 + 2 outlined above and that Robert Williams and Pam Gilbert would together determine a rational approach to the basis of allocation which should adopt a fair matching principle.

                        ...

3.         Review of Timetable + Current Position.

            Pam Gilbert gave brief summary of the current position with the preparation of the accounts for Travel Abroad and the audit.

             A list summarising the major outstanding points for audit purposes was presented by Brian McSweeney and another list summarising accounting matters [was] presented by Tim Cullen.

            The points raised in the listings were not discussed in detail.

            Craig Dunn said that the company would consider each point in detail and would provide a written reply by the end of the day. He stressed that the company would endeavour to provide all the major items. If however these could not be complied with within the timeframe set then he asked if certain items could be suppressed and alternative approaches adopted.

            This was agreed by the auditors on the provised[sic - proviso] that the alternative approaches were acceptable.

            The timetable was reviewed and it was agreed that the audited accounts must be completed by Friday 25th November 1988.

            ...

6.         Management Accounts.

            Mark Nicholaeff requested for audit purposes details of the most recent management accounts. Craig Dunn stated that management accounts had not been prepared to date and that preparation could not be undertaken within the timeframe set. He suggested that the auditors pose specific questions relating to subsequent events and that he would reply to each in turn.

            Mark Nicholaeff outlined that information required would include details of the capital contribution made to date by IPG and an indication of the ongoing support from IPG to Travel Abroad.

            Craig Dunn said this would be provided once the accounts had been       finalised.

            ...

10.       Share Transfers

            Currently being addressed by IPG Ltd.

11.       Phillips McSweeney

            Brian McSweeney outlined th [sic - the] position with the payment of Phillips McSweeney[’s] fees. Craig Dunn to speak to Julie Boyd about the previous week’s outstanding payment and the long outstanding fees which are payable on an instalment basis.” (emphasis in text supplied)

McS said that he was uncertain what was being referred to by the reference to suppression in par 3 (it was not put to him that it was anything suspicious or sinister).

Fifth Audit Review Committee Meeting on Friday 25 November

Dunn, Williams, Nicholaeff, McS, Cullen and Gilbert met on 25 November at IPG’s office. Dunn said that so far as he was aware, IPG had not given guarantees to major suppliers concerning the liability of Wheels. However, at a later point, the minutes record an agreement that Dunn would sign a representation letter which would include “cross guarantees (re Wheels’ liabilities) to major suppliers.”

Prior to this meeting, McS did not know, on the basis of evidence seen by him, and was looking for confirmation, that IPG had in fact injected the promised funds and completed its purchase.  He doubted whether Travel would be able to maintain its licence, and had formed the view that he needed to have satisfactory evidence that IPG could support Travel.

McS understood that it was “common knowledge” that Travel would have a deficit substantially larger than the $436,988 indicated in Cullen’s first draft balance sheet of 1 November. The latest figures at the time suggested to him a deficit of the order of $1,000,000, as was, in fact, later to be shown in the final accounts. In cross-examination before me, McS agreed that his view at the time was “that in all likelihood the company was then travelling in a non-profitable manner.” McS was actively considering what he could say in the audit report in relation to whether Travel could currently be regarded as a “going concern”. He was aware that it was still carrying on business and intending to continue taking money from members of the public for future travel. He had been told earlier by Cullen, who had the day-to-day involvement in the financial matters concerning Travel, that in his (Cullen’s) view, Travel and Wheels were not trading profitably.

Cullen knew that Travel had suffered significant losses between July and November. He had previously mentioned to McS that it would be impossible for Travel to maintain its licence if TCF’s usual points system was applied to establish whether its business was able to be carried on in a solvent manner. He had understood that if a licensee failed the points system, it could retain its licence only upon provision of a bank or other guarantee acceptable to TCF. At the time of the meeting on 25 November, McS was of the view that to satisfy TCF, Travel would have to supply a guarantee by IPG in an amount sufficient to support it, and that he needed to have satisfactory evidence that IPG had the capacity to do so. A financial statement in respect of IPG which he had seen had caused him some concern; his view was that some of IPG’s assets were “not supportable in terms of cash”. A major asset of IPG’s was “its interests in overseas ventures which had not got off the ground”. McS knew that although IPG was listed, it was only on the second board, and initially in Hobart, where the capital requirements were at that time, to his understanding, the weakest of any in Australia.

During the meeting on 25 November, Dunn asked to speak confidentially to McS and Williams. They discussed what support IPG could give Travel. McS considered Dunn to be conversant with the financial affairs of Travel and Wheels, and therefore to be able, if anyone could, to satisfy him in relation to Travel’s financial viability. In the confidential segment of the meeting, McS attempted to ascertain from Dunn whether Travel’s income covered its overheads, and whether Travel was able to operate on a going concern basis. Dunn could not satisfy him then and there, but undertook to give him the necessary information. Dunn told McS that in his view, Travel needed an injection of a further $2,000,000.

Also during the confidential part of the meeting, Dunn produced a copy of the agreement of 18 September for the sale of shares in Travel and Wheels to IPG. McS and Williams were allowed to read it and make notes, but not to take a copy. This was the first time they had seen the agreement. It became apparent to McS at or around the time of the meeting, that IPG was not going to complete its purchase, that the contract was conditional, and that it contained provisions which entitled IPG not to proceed in certain circumstances.  The agreement contained a warranty by the vendors that Travel’s financial affairs were in accordance with the Draft Amalgamated Statement of Assets and Liabilities prepared on 31 August. There was also an undertaking by the vendors to “repudiate and rescind” an earlier agreement by which they had contracted to sell shares in Travel and Wheels to Tenser and his associates. McS specifically raised the question of completion and asked for undertakings by IPG to provide continued support and not to recall the “loan funds” it had provided to Travel, but IPG declined. It was clear to McS from reading the agreement, that IPG could “walk away” from the contract if it chose to do so. However, his evidence is that Dunn did not indicate that IPG in fact intended to do so. McS’s evidence is, further, that he thought that at the time he was still trying to confirm whether the money which Dunn said IPG had provided to Travel was by way of loan or equity capital. In my view, McS and Beale understood that it was probably by way of loan capital.

The following exchange took place in the course of McS’s s 541 examination, in relation to the meeting of 25 November:

“Well, I take it that although you noted with some care the details of the sale agreement, that was not the principal reason for this confidential inquiry that was then being conducted?---That is correct. We wanted to get supporting evidence that the company would be supported by IPG, and in fact ---

And you wanted to go behind the agreement, did you not?---Yes, we did.

And I take it you were concerned, were you not, as to whether the deposit of 1.5 million which you had been told of, or about, at the earlier meeting, was a significant deposit?---That is correct.

 

Taking into consideration your knowledge that in all likelihood the company was then travelling in a non-profitable manner?---That is correct.”

...

...I take it you and the auditor...- were concerned that you raised this issue as to whether of course IPG could support Travel and, in effect, Wheels, at that time?---That is correct.

...

It is correct, is it not, that in that conversation you tried to establish whether there was sufficient income coming in to cover the overheads which he said he had previously established?---Yes. We were concerned to clearly identify that the company was able to operate on a going-concern basis.

 

But it is correct, is it not, that he did not satisfy you with regard to that particular issue?---That is correct.

And I take it that is one of the reasons why you did not issue straight away the accounts even though they were finally printed in final form on 30 November 1988?---We wanted to get clearance on certain items from Craig Dunn at that time.

And I take it the items you needed clearance on was an acceptable assertion by him that the companies and, in particular, Travel Abroad, was then travelling as a profitable concern?---That is correct.

And it is correct, is it not, that that note that you have made - number 3[a reference to a note to a draft of Travel’s financial statements for the year ended 30 June 1988] - would indicate that he had not satisfied you there that it was then running at a profitable - in a profitable position?---That is correct.

 

And it is correct, is it not, that he only asserted to you that [at] a subsequent date - because of projections, it may run in a profitable manner?---That would be correct.” (s 541 T 633-5 - emphasis supplied)

Cullen’s view, at the date of this meeting, was that Travel had no hope of keeping its licence without the support of IPG or guarantees; that “the points system was a total loss so far as Travel Abroad was concerned”; and that at the time Travel “had incurred further significant losses”. Moreover, like McS, Cullen did not know what support IPG was in a position to give to Travel.

Involvement of Short

At around this time (late November), Lewis Short, a substantial shareholder in, and consultant to, IPG, became involved. He was at the offices at Mona Vale for a period, and at the end of November he organised a “working weekend” with several members of staff. They prepared a list of assets and liabilities as at 30 November. The document was completed in early December and showed assets of $860,000 against liabilities of $5,979,870 (of which $2,005,000 was due to IPG), and a deficiency of $5,119,870. Short gave the document to Dunn, who went to England to put to the companies’ major trade creditors a proposal to convert their debt into equity capital. The creditors did not agree to it.

McS’s letter of Wednesday 30 November to Dunn

By 30 November, the draft accounts were completed by PMS. McS signed a letter of that date to Dunn in the form of the letter under which the accounts were eventually delivered, enclosing the following documents: draft consolidated financial statements; draft auditor’s report for Travel; draft directors’ report; and draft client representation letter. The draft accounts showed that Travel had been insolvent as at 30 June. The covering letter said:

“Our audit report includes our inability to form an opinion on the going concern concept and that the statutory records have not been kept as required by the Code. Further we are unable to issue an audit report until we have received answers to the queries listed on the attached schedule.” (emphasis supplied)

There was a list of six “audit matters outstanding 30th November, 1988” attached to the letter. None of the matters listed is of special immediate relevance. The letter suggested to Dunn that in the interests of Travel, an alternative course to withholding the audit report would be to submit the draft accounts to TCF, with a letter stating that the audit report would be attached on 18 December on completion of the purchase by IPG. The letter also stated that on completion of the purchase, correction of the statutory registers, and receipt of a guarantee under seal by IPG that it would support Travel for at least twelve months and would not recall its unsecured loans, PMS would be able to issue an unqualified report on Travel “subject to qualification of computer software reduction”. McS concluded his letter:

“Alternatively, you may wish to proceed with the draft audit report accompanied by a letter by IPG to the Travel Compensation Fund including that IPG will support the companies.”

McS gave evidence in the IPG proceeding, tendered before me, that at the time of writing this letter to Dunn, he had a conversation with him to the following effect:

“We have a draft Audit Report which we are forwarding to you. As you will be aware when you receive it, it states our inability to form an opinion on the “going concern” concept. Furthermore, we cannot give a final Audit Report until the replies to the Audit Requests that we have raised with you are clarified and cleared up.”

 

McS said that he believed he also said to Dunn:

“Our Invoice for the work to 30 November is being sent and we would like to be paid the amount due. It is $81,799.00.”

Although the draft accounts and letter were signed by McS on 30 November, they were not delivered until 16 December, when Cullen and Turner, in the absence of McS overseas, delivered them to Travel. McS said that he had intended that the accounts be delivered on 30 November, but could not contact Dunn and decided not to deliver them at that stage, because he wanted them to be delivered personally in order to demonstrate to Dunn that PMS had completed its engagement; that when he went overseas, he left instructions that the accounts were to be delivered as soon as possible, and that if PMS did not receive the responses to the six audit qualifications raised, they were to be delivered in their existing form; and that he was in Sydney until the end of the working day on 7 December and was aware that the accounts had not been delivered down to that time. FAI submits that it should be inferred that the accounts were held back as a means of exerting pressure on Travel (in effect, on IPG) to pay PMS’s fees. I accept this submission.

Contact between Beale and Short on Wednesday 30 November

On 30 November, Beale tried to telephone Dunn in relation to outstanding fees and the six outstanding audit queries. He spoke to Short in Dunn’s absence. Short explained, in some detail, that he was analysing the problematic financial affairs of Travel and Wheels, and had concluded that there was a possible deficiency. Short also told Beale of the nature and purpose of Dunn’s trip to the United Kingdom. Beale subsequently received a document prepared by IPG which indicated a deficiency of about $5,000,000, in which the figures “match[ed] up pretty accurately” with those in his notes of his conversation with Short. The document was handed to Cullen and Williams, and was to be “filed” by Cullen in connection with finalisation of the audit. To Beale’s mind, it crystallised an issue yet to be resolved, namely, the form of the qualification of the audit. Beale accepted that, if correct, the figures demonstrated that Travel was hopelessly insolvent as at 30 November.

Application to TCF

In late November, Gilbert, to Cullen’s knowledge, filled out the form of “application for renewal of participation in the Fund”, in which it was obvious that Travel would score no points. Cullen told Gilbert that the deadline for submission of the application was 30 November, but he knew that she did not submit it, although, as he also knew, Travel was still advertising and selling to the public.

 

Early December

As at Thursday 1 December, PMS were still trying to obtain information from Dunn in order to enable finalisation of the form of the qualification to the audit report.

On Monday 5 December, Beale telephoned Dunn and told him that Travel’s accounts were completed and that a qualified audit report would depend on resolution of several matters. He said that he read over to Dunn a list of “audit matters outstanding 30th November, 1988”. The question of PMS’s fees was also raised. According to Beale, Dunn said that he would telephone him when he had a cheque available to pay the fees. Beale agreed that it was arranged that PMS would deliver the letter and accounts in exchange for the cheque, yet denied that PMS would not have delivered the letter and accounts until payment was made. I do not accept Beale’s denial.

On Tuesday 6 December, Krumbeck wrote to Travel, noting that the deadline of 30 November had passed, advising that he was referring the question of its continued participation in the Fund to the Trustees, and offering it an opportunity to be heard by the Trustees on 16 December.

The final collapse of Travel

On Tuesday 13 December, Beale was unable to contact Dunn who was overseas. Short informed him that IPG had not completed the purchase. The same or preceding day, Gregory Lemon had already told him “that there was some difficulty” in relation to completion.

On Thursday 15 December, Short and Travel’s manager, Sam Cannon, met with Krumbeck at TCF’s office.

The next day, Friday 16 December, the TCF Management Committee determined not to grant Travel a further extension. Wilcox J noted that Krumbeck did not recall communicating this decision to any person on behalf of Travel. On the same day, Cullen and Turner delivered to Travel draft consolidated financial statements of Travel for the year ended 30 June 1988 and other documents. They were in the same form as those prepared on 30 November.

On Sunday 18 December, IPG declined to complete the purchase.

On Wednesday 21 December, Travel and Wheels ceased to trade, and PMS were so informed on or about that date. On the same day, Dunn wrote to the Travel Agents Registration Board advising that IPG was not completing the agreement because of breaches of contractual conditions. The letter was delivered to TCF on or about Thursday 22 December, together with boxes of documents of Travel’s, including airline tickets and cheques. TCF started to deal with claims. Its total loss was $423,369. The audit was never completed and a provisional liquidator was appointed on Friday 23 December.

The detail of TCF’s loss was set out in its affidavit evidence before Wilcox J. His Honour found it sufficient to say that $423,369 was the amount of TCF’s net loss, after allowance was made for some moneys received from Travel’s liquidator, being the balance of the trust account at the bank. Wilcox J noted that there was no likelihood of any further payment by the liquidator. After payment of priority creditors and the costs of winding up, Travel had no funds.

Fees owed to PMS by Travel

As at 30 June, Travel owed PMS around $28,000, and Wheels owed $19,183, in fees. Some of PMS’s accounts had been unpaid since March. On 25 July, PMS issued an engagement letter providing for payment of outstanding invoices, including that for June, by 29 August, and of $7,000 per week in respect of the provision of two members of PMS’s staff full-time “to assist in the client account reconciliation”, supervised by Cullen. McS conceded that he had insisted upon this arrangement because the companies already owed fees to PMS. In my view, his insistence was also due to the fact that he had, earlier in the year, considered that Travel needed to reduce its costs drastically if it was to escape liquidation. FAI submits that McS’s evidence in cross-examination that he was not, as at 25 July, concerned about the credit-worthiness of the companies, ought not be accepted. In my opinion, contrary to the thrust of McS’s denial, some uncertainty about Travel’s credit-worthiness was a consideration which contributed to his insistence upon the conditions as to payment of fees.

In the light of the Draft Amalgamated Statement of Assets and Liabilities produced on 31 August, PMS was again concerned about fees, and asked Travel to pay in advance for ongoing work. On 31 August, PMS was paid $30,600 for future work. FAI submits that the request for payment in advance was to avoid problems connected with the possible insolvency of Travel, and relies on the following evidence of McS:

“You adopted the arrangement of having payment in advance for work so that there would not be a difficulty of any amount owing to you being a preference if the company were to become insolvent, is that right?---It may have been a consideration after we spoke with Gillis Delaney - I just can’t recall but it could’ve been.” (T 1543)

 

Beale denied that the arrangement made at the end of August for payment in advance was entered into so that PMS would not be an unsecured creditor in the event of a liquidation. FAI submits that that denial ought not be accepted.  Beale agreed in cross-examination that he knew at the time that a payment by a company to a creditor might be “upset if it [was] a preferential payment” and the company “becomes insolvent shortly afterwards”. He agreed that the arrangement for payment in advance was consistent with advice given to Travel that no further debts should be incurred by it. Again, in my opinion, Beale’s denial should not be accepted. I find that Travel’s financial straits were at least a factor which led  to PMS’s insistence upon payment in advance and which was in the back of McS’s and Beale’s minds.

In September PMS began to receive payments weekly in advance on account of the audit, but nothing towards existing outstanding accounts. McS’s letters of 20 September to Travel and Wheels stated that Gregory Lemon had confirmed that the companies were unable to pay audit fees to PMS or to any other firm. As at 22 September, McS was of the view that if the companies were to receive a capital injection from IPG and were to continue to trade, it was necessary that the audit be completed, “and [PMS] needed to be sure of being paid for work done and to be done.” Sums of $29,868.32 and $9,835.21, being “old debt” of Travel and Wheels, respectively, which was not reduced by the weekly payments received in September, was still outstanding as at 29 September. By the letters of engagement to provide accounting services of that date, PMS advised each of Travel and Wheels that they were prepared to accept payment of one quarter of this sum each week in October.

McS said that PMS had a practice of having their appointment as auditor or accountant (or both) of a company confirmed in writing. Between PMS’s issue on 29 September of fresh engagement letters (following the sale of the companies to IPG on 18 September), and receipt of confirmation of their engagement on 10 October, PMS ceased doing any work for Travel.

At the first Audit Review Committee meeting on 14 October, Dunn agreed to pay PMS $16,000 per week in advance, and existing outstanding accounts. By the end of October, this undertaking had not been performed. During November, McS was concerned about payment of fees owed by Travel. On 3 November, PMS wrote to Travel seeking payment of the then outstanding amount of $33,848.88 (comprising a balance of account of $17,813.33 as at 30 September and a balance of $16,035.55 of the October invoice) by four weekly instalments of $8,462.22 each in November. On 16 November, McS complained to Dunn about Travel’s failure to pay both fees on account of future work and the long outstanding fees for the period down to 30 September. During November, at least, Beale’s role was to ensure that PMS was paid (as well as to become more actively involved in the audit due to McS’s planned trip overseas). McS agreed that between 16 September and 24 November, PMS received about $84,000 in fees.

The last payment of fees on Travel’s behalf was one of $16,000 on 24 November. At the time, and again at the meeting on 25 November, McS raised with Dunn the matter of fees still outstanding. From about 30 November, Beale tried to telephone Dunn in relation to outstanding fees and to seek answers to audit queries. In December, Beale telephoned IPG virtually every day for information and to obtain payment of fees. Cullen agreed that the principal reason why the accounts were not delivered to Dunn earlier than 16 December, “could have been” that McS was attempting to recover more of their outstanding fees. At the date of cessation of trading and the appointment of the provisional liquidator, PMS were owed “over $80,000” in outstanding fees.

FAI submits that the making at the end of August of the arrangements for payment of fees in advance indicates that PMS had concerns as to the solvency of Travel. FAI also submits that PMS’s concern about the payment of their own fees explains why they did not act as openly or as promptly as they ought to have done in 1988. In my opinion, this is at least true in relation to delivery of the final form of the accounts. FAI argues that there was a concern about fees running through PMS’s activities, which assists in the conclusion that McS, Beale and Cullen appreciated the significance of what they were doing, and also in the conclusion that the failure to disclose Travel’s insolvency to TCF was deliberate.

There can be no doubt that PMS were concerned about the dilatoriness in payment of their fees. Like any professional firm, they were not excited by the prospect of expending time and incurring costs in providing services to a client which had already shown itself to be regularly in default in the matter of paying fees. PMS’s concern was increased by their concern over Travel’s insolvency, although after the takeover by IPG the position was, in their minds, less clear than it had been previously. There was the possibility that IPG might prove to be a rescuer. It would take a little time to know for sure. It seems clear that PMS were reassured upon being re-engaged by the new IPG management on 10 October: they bestirred themselves considerably in the days and weeks that followed. By late November/early December, however, they saw that the position was hopeless.

Making and notification of claims by IPG and TCF and purported avoidance

IPG’s application and accompanying statement of claim were filed in this Court on 10 August 1989. On 21 August, McS wrote to FAI notifying it of the claim.

On or about 11 December 1991, TCF’s claim was made by TCF and reported to FAI. On 23 December 1992, after obtaining the TCF judgment on 2 December 1992, TCF commenced this TCF insurance proceeding.

In the meanwhile, on 11 June 1992, FAI had purported to avoid the PMS policy for the periods 23 May 1988 to 24 October 1990 and the PMS Chatswood policy for fraudulent misrepresentation and fraudulent non-disclosure. Subsequently, on 24 August 1993, eight months after TCF commenced the TCF insurance proceeding, FAI also purported to avoid the Gosford policy, again for fraudulent misrepresentation and fraudulent non-disclosure.

REASONING  IN RELATION TO FRAUD AND THE TCF FACTS

The elements of fraud are as follows, as set out in Part II:

1.         A representation of fact, however made;

2.         Falsity of the representation;

3.         That the maker of the representation does not believe that it is true in the sense in which the maker intends it to be understood;

4.         That the maker of the representation intends a person or class of persons to act in reliance on it;

5.         That the person, or a person belonging to the class of persons, acts in reliance on the representation; and

6.         That loss or damage is suffered as a result of the reliance on the representation.

TCF and PMS submit that McS and Beale had no motive to defraud TCF, and, in particular, that they did not stand to derive personal financial advantage from doing so. But motive is not an element of deceit, although its presence or absence may be relevant to the existence of the third or fourth element or both. Nor is it necessary that PMS have been subject to a duty of disclosure. FAI relies on Beale’s silence as to certain matters, not as constituting breach of an independent duty of disclosure or as itself constituting fraud, but as rendering that which was said false, and fraudulently so.

Deliberate half-truth is a form of fraud well known to the law. In Tapp v Lee (1803) 3 Bos & Pul 367 (127 ER 200), Chambre J said:

“An action on the case for deceit is an action well known to the law, and I cannot agree in the argument which has been used for the Defendant, that such actions ought to be confined to representations which are literally false. Fraud may consist as well in the suppression of what is true, as in the representation of what is false. If a man, professing to answer a question, select those facts only which are likely to give a credit to the person of whom he speaks, and keep back the rest, he is a more artful knave than he who tells a direct falsehood.” (at 371; 127 ER 203)

Passages in the same vein can be found in nineteenth century cases dealing with prospectuses, such as Oakes v Turquand (1867) LR2 HL 325 at 342-3, 344 and Peek v Gurney (1873) LR6 HL 377 at 392, 403. In Peek v Gurney Lord Cairns said (ibid):

“Mere non-disclosure of material facts, however morally censurable, however that non-disclosure might be a ground in a proper proceeding at a proper time for setting aside an allotment or a purchase of shares, would in my opinion form no ground for an action in the nature of an action for misrepresentation. There must, in my opinion, be some active misstatement of fact, or, at all events, such a partial and fragmentary statement of fact, as that the withholding of that which is not stated makes that which is stated absolutely false.” (emphasis supplied)

The words emphasised in the passage just set out were said by Pincus J in Re Hoffman; ex parte Worrell v Schilling (1989) 85 ALR 145, to describe the circumstances of that case. His Honour there found deceit proved where a man who owned a business, apparently jointly with his wife, offered to sell a one third interest in it to an employee, telling him that he was “in financial difficulty”, but omitting to add that he had been made bankrupt the preceding month.

FAI’s pleading of fraud has been recounted previously. The particulars given were the conduct of McS or Beale, or both, described in par 17 of Part B, viewed in the light of the matters in pars 8-16 of that Part. Paragraphs 8-16 described TCF facts in 1988 down to the requesting and granting of the second extension. Paragraph 17 was set out earlier in this Part (III). But FAI did not put its case as one of mere “silence” or “non-disclosure”. Rather, it submits that Beale fraudulently suppressed Travel’s insolvency and the intermingling of accounts (including non-allocation of bulk payments), and, in doing so, fraudulently caused what he said to give rise to the Implied Representation. It is not amiss to repeat the Implied Representation:

“A representation that the extension was required only because of ‘unremarkable practical difficulties’ or ‘ordinary and unalarming reasons’, unassociated with Travel’s financial condition or its relation with another entity for which accounts had to be produced in order that Travel’s own accounts might be produced.”

An overview of the reasons why audited financial statements could not be lodged with TCF by 30 September 1988

It is possible to identify several reasons which contributed to Travel’s inability to lodge audited financial statements with TCF by the original deadline of 30 September or the extended deadline of 31 October. The reasons, or some of them, were interrelated. Some underlay others. For example, an immediate reason why the audit could not be carried out was that the financial statements had not been completed. More fundamental are the reasons why the financial statements had not been completed.

The basic accounting records necessary to enable preparation, let alone auditing, of financial statements of Travel, had not been kept. One aspect of this was that there had been intermingling of financial records as between Travel and Wheels, including a failure to allocate “bulk payments”.  The failure to maintain proper accounting records began in about November 1987. What caused it is not clear. It coincided with a sudden upsurge in business activity and the installation of a new computer system. But coincidence is not causation. Perhaps the Lemon brothers believed that the new computer system, which apparently did not become fully operative until February 1988, would enable the lack of proper record-keeping from November 1987 to be quickly overcome.

Preparation of financial statements, the first step towards an audit, could not commence until the omissions of the past were made good. They could be made good only by intensive labour. The Lemon brothers were apparently not willing or able to cause the necessary work to be done within the companies’ own resources. Understandably, PMS were not willing to undertake the work, which was a costly, time consuming and labour intensive activity, unless assured of payment. Yet Travel and Wheels were never up to date in paying fees. They were unsatisfactory clients. PMS made the best of a difficult situation by regularly chasing up and extracting payments, sometimes on account of work to be performed in the future. But the evidence does not establish that they ceased or slowed down work, either because of the companies’ dilatoriness in paying fees or because of a fear that the companies were or might be insolvent.

In my view, the Draft Amalgamated Statement of Assets and Liabilities produced by PMS on 31 August satisfied McS and Beale that Travel and Wheels were insolvent as at 30 June. It is true that the “draft” nature of the document and the state of disarray of the basic accounting records reduced their confidence in the precise figures expressed. I do not accept, however, that either of them entertained as a real possibility that the true figures might prove to be so much more favourable, that the companies would be shown to have been solvent as at 30 June after all. Rather, their view was that the correct figures would probably show the insolvency to be worse.

Without any supervening event, Travel would have ceased trading, probably following the appointment of a provisional liquidator in mid-September upon Travel’s own application, and certainly prior to the original deadline of 30 September for the lodgment of audited financial statements with TCF. But by mid-September, IPG was on the scene as a potential purchaser and saviour. What effect did this event and its sequelae have upon the opinions of McS and Beale as to the companies’ insolvency? This is a difficult question. McS’s letter of 20 September to the directors of Travel shows that the mere fact of IPG’s having contracted to purchase two days earlier did not allay his concern.  But on Friday 23 September Dunn told McS, Beale and Cullen that IPG would inject $500,000 within one week and a further $1,000,000 within ten days. It will be recalled that at that time, IPG believed that the amount of Travel’s and Wheels’ existing debts was between $1,400,000 and $1,500,000. Dunn also said that IPG would meet debts incurred by Travel as from 23 September and would make arrangements to pay off “old debts”. There was discussion on that occasion of outstanding fees due to PMS and of the question of payment for services to be rendered by the firm in the future.

There was also discussion of PMS’s desire to have fresh letters of engagement. PMS were concerned to ensure that Travel and Wheels, through their new management, came to a satisfactory arrangement with PMS for payment of fees. This desire is explicable without the necessary of inferring that McS, Beale and Cullen were moved by a definite understanding that Travel and Wheels were still unable to pay their debts as they fell due. PMS had long been experiencing difficulty in obtaining payment of fees from Travel and Wheels. Their concern at and following the meeting on 23 September seems to have been no more and no less than to ensure that Travel, under its new management, accepted responsibility for fees previously outstanding and for further fees to be charged for work yet to be done.

But this “responsibility” was not a personal one. The terms of Turner’s letters of engagement of 29 September are consistent with this view. They do not seek a personal acceptance of liability by IPG or the three directors. They seek simply an agreement of Travel and Wheels, through their new directors, to terms of engagement.  As at the end of September, an amount of $30,600, which had been paid to PMS on 31 August, had gone in payment of fees run up during September, except to the extent of $3,683.90. In addition, an “old account” amounting to around $30,000 for work done down to 31 August was still outstanding. PMS were not prepared to continue working after 29 September in these circumstances, without having clear terms agreed to by Travel’s and Wheels’ new management. PMS did not insist upon payment in advance as a condition of their resuming work. They were prepared to resume work simply upon having Travel and Wheels, through their new directors, accept the terms of engagement set out in Turner’s letters of 29 September.

The importance that PMS placed on having proper letters of engagement is shown, not only by testimonial evidence given in the case, but also by a letter of Friday 5 August from Cullen to the directors of Travel, reporting on PMS’s work during the week then expired. The letter included the sentence:

“Phillips McSweeney did not have any staff at Travel Abroad this week other than myself as we were unable to have our engagement letter signed.”

(Perhaps the reference was to signature of PMS’s “accounting engagement letter” dated 25 July.)

On 10 October, PMS received letters of engagement that satisfied them. They immediately recommenced work. The “down-tools” period from 29 September to 10 October should be seen as attributable to PMS’s desire to have the two companies, through their new management, re-engage them.

By his letter of 18 October, Dunn advised that IPG had in fact by then invested some $2,000,000. This was only eight days before Beale’s letter to TCF of 26 October. The letter of 18 October also advised of the resolution of IPG’s directors to meet Travel’s liabilities incurred after 18 September. This gave PMS, and apparently others who attended the second meeting of the Audit Review Committee on 21 October, some comfort. On the other hand, the letter was clearly an inadequate response to McS’s letter of 20 September in the respects noted earlier. Moreover, McS and Beale did not actually see the purchase agreement until McS was allowed to read it in the confidential part of the meeting on 25 November; they did not verify the reported injection of funds; and if the funding was by way of loan capital, as they understood it probably was, the deficiency of assets problem would not have been overcome in any event. Dunn told McS from time to time in Audit Review Committee meetings that Travel was trading profitably. I accept that McS believed him until prior to the last meeting on 25 November, Cullen told McS that the truth was otherwise.

In my view, from the time of the purchase by IPG on 18 September, the understanding of McS and Beale was that there was still a “cloud” over the solvency of Travel, but they could not be sure, and certainly the position had, according to their understanding, improved or potentially improved since the takeover. Their view was that Travel might well survive, that while a little time would be necessary before the true position would be known, and that they would have to monitor events and IPG’s performance in the meanwhile.

Although McS and Beale were, following the takeover by IPG, uncertain as to the state of solvency of Travel and Wheels, I do not infer that they were confident that the companies were in fact still insolvent, that is, unable to pay their debts out of their own money, as they fell due. In their minds, this was a view that could no longer be safely taken.

In any event, Travel’s financial condition was not a significant cause of the delay in preparation, auditing and lodgment of the financial statements.

The first application (by Beale by telephone on 28 September) for an extension of time for the filing of audited accounts

The terms of Beale’s telephone request on 28 September were set out earlier and are repeated below.

1.         A representation of fact, however made

It will be recalled that Beale deposed to the terms of his telephone conversation with McDougall as follows:

“Jim, we act for Travel Abroad Pty Limited and we have been requested by the directors of that company to apply for an extension of time in which to lodge Travel Abroad’s audited accounts with you. We have had problems with getting the financials from Travel for the purposes of the audit because of difficulties with their new computer system. In addition, the company has just been purchased by a group called IPG. We will need more time to prepare the audited accounts. Can you give Travel an extension?”

It is necessary to construe carefully what was said for the purpose of identifying what representations of fact were made (Issue 1 earlier). The construction of what was said is also relevant to the question of the sense in which the speaker intended the representations made to be understood (Issue 3 earlier) although it is not conclusive in this respect.

In Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563, a case with some similarities to the present one, Brennan, Deane, Gaudron and McHugh JJ said in their joint judgment (at 576-7, authorities cited omitted):

“When fraud is alleged against a defendant, it is not enough to prove that the representation as pleaded was false. The words or conduct by which a representation is made may be understood in different senses. The words or conduct may be understood by a reasonable person in the position of the representee in one sense, by the representee in a second sense and by the representor in a third sense. Or the representee may understand the words or conduct in a sense which the representor knew the representee might understand them, albeit not in the sense in which a reasonable bystander would understand them. The differing senses in which words or conduct are understood must be borne in mind in determining whether the several elements of deceit are proved.

The sense in which a representation would be understood by a reasonable person in the position of the representee is prima facie the sense relevant to the question whether the representation is false. The sense in which a representation is understood by the representee is relevant to the question whether the representation induced the representee to act upon it. And the sense in which the representor intended the representation to be understood is relevant to the question whether the representation was made fraudulently.”

In Krakowski, the appellants contracted to purchase a shop for $1,560,000, having earlier made clear that they were looking for a leased property as an investment from which the rent would return a reliable 10 per cent per annum. The vendor’s agent told the appellants’ agent that a tenant had been found paying a commencing rent of $156,000 per annum. The instrument of lease conformed to these terms, but there was an undisclosed separate written agreement between the vendor and the tenant by which the vendor had agreed to grant the tenant an initial rent-free period of three months, and to pay the tenant a sum equivalent to one year’s rent for fitting out and stocking up the shop. Without these benefits, the tenant would not have taken the tenancy, since $156,000 per annum was significantly above market rent. It was a term of the lease that it comprised the entire understanding and the whole agreement between the parties.

The sale to the appellants was completed with adjustments made as if the tenant was paying rent throughout the rent-free period. Almost immediately after completion, the tenant failed to pay rent to the appellants. Much later, they purported to rescind the agreement for sale on the ground of the vendor’s misrepresentation with respect to the terms of the lease. The High Court held by a four-to-one majority that the appellants had been induced to purchase by the vendor’s fraudulent conduct.

The facts of Krakowski are distinguishable in certain respects from those of the present case. First, unlike TCF, the appellants in that case made known a particular concern (to have a 10 per cent return on their investment). Second, the express “entire contract” provision in the instrument of lease gave rise to the positive representation that no collateral agreement had been made between the vendor and the tenant. Third, in Krakowski the issue was not whether the vendor’s selling agent was guilty of fraud but whether the vendor was.

What representations of fact would a reasonable person in McDougall’s position understand Beale to have made?

Such a reasonable person would have noted, first, that the terms of the conversation made it clear that PMS were Travel’s auditors, although, in making the application, Beale was not performing the function of an auditor. The request was made, in the first instance, from an auditor’s viewpoint: Beale correctly stated that the reason why audited accounts could not be lodged by 30 September was that PMS had had problems getting “the financials” from their client, Travel. Beale then purported to state why “the financials” had not been supplied by Travel. A reasonable person in McDougall’s position would have understood that Beale was giving, at least in part, a hearsay account, and that it would be the directors and staff of Travel, rather than its auditors, who would have direct knowledge of the circumstances touching the underlying causes of the delay.

Second, the request for an extension was a first request for one, it was made over the telephone, and the reasons were volunteered by Beale and not being sought by McDougall.

Third, a reasonable person in McDougall’s position would have understood Beale’s reference to the “difficulties with [the] new computer system” and the purchase by IPG as a summary statement of reasons, not intended to be exhaustive, formulated by Beale spontaneously at the time and on the basis of information supplied to him by the directors of Travel. He or she would know that more might be said as to both reasons. He or she would understand, for example, that difficulties with a new computer system might be a loose shorthand way of referring to an inability of staff, whether through lack of training or otherwise, to utilise the system properly, and to the incapacity of the system to do, or to be developed to do, that which the client had expected or hoped for. Similarly, a reasonable person in McDougall’s position would understand that all the circumstances of the purchase by IPG, known to the directors of Travel, might well reveal more than the mere fact of a change of management and possibly staff, with, perhaps, associated difficulty in accessing and communicating to the auditors, accounting information which they needed. Such a reasonable person would understand that the vendors might have sold because they were not able to operate the business profitably, for example. Such a person would understand that the new owners might have delayed in deciding whether to retain PMS as auditors.

In sum, a reasonable person in McDougall’s position would understand the “labels” of difficulties with a new computer system and a change in ownership of the company, to be consistent with the existence of other underlying or associated causes of delay. But in addition, in my opinion, such a person would understand Beale not to be excluding the possible existence of other unrelated significant causes of delay of interest to TCF.

For the reasons mentioned, I also do not think that a reasonable person in McDougall’s position would have understood Beale to be making the Implied Representation. Notwithstanding this view, I will proceed on the alternative basis that Beale’s words did convey the Implied Representation.

2.         Falsity of the representation

Contrary to the supposed Implied Representation, a significant cause of delay was the intermingling of Travel’s and Wheels’ accounts, and, therefore, a reason associated “with Travel’s ... relation with another entity for which accounts had to be produced in order that Travel’s own accounts might be produced”.

The failure to lodge audited financial statements by 30 September is not, however, shown to have been caused by Travel’s financial condition. PMS had not “downed tools” or “gone slow” at all, for this reason alone, down to 29 September. It is true that Travel’s insolvency was a cause of the sale by the Lemon brothers to IPG on 18 September, that McS had written his “strong” letter to Travel’s directors on 20 September, and that on 23 September, Beale and Cullen expressed their concerns to Dunn. But at the same meeting, Dunn had told Beale that IPG would inject $1,500,000 within ten days, would meet all debts as from 23 September, and would make arrangements to pay “old debts”.  There is no evidence that PMS’s concern caused PMS to cease or slacken off work during the eight working days from Monday 19 September down to Beale’s telephone conversation with McDougall on Wednesday 28 September.

There is no evidence either that Travel’s financial condition had caused delay in the preparation of the accounts prior to that period. On the other hand, there is evidence that during one week in late July/early August, PMS had only Cullen working on the accounts, at least in part, for the reason that Travel had not returned a signed copy of the engagement letter.

3.         That the maker of the representation does not believe that it is true in the sense in which the maker intends it to be understood

Did Beale intend McDougall to understand his words as conveying the Implied Representation? I am not persuaded that he did. He intended McDougall to understand that PMS were having a problem getting financial information from Travel for auditing. He believed that this was true and it was. He intended McDougall to understand that a cause of the non-supply of the financial information by Travel was difficulty experienced with a new computer system of Travel’s. FAI has not sought to prove that this was not true, or that Beale did not believe that it was true. Beale intended McDougall to understand that an additional cause of the delay was the purchase by IPG. FAI has not sought to prove that this was not an additional cause of delay or that Beale did not believe that it was.

I am not persuaded that Beale adverted to the intermingling of accounts or Travel’s financial condition, and chose to suppress it in order to convey the Implied Representation. If, contrary to my view expressed earlier, the Implied Representation was conveyed, it was conveyed by accident, not by design, in my opinion.

Beale made numerous concessions as to what he had understood at the time as to the “cloud” over Travel’s solvency and TCF’s interest in such matters. I address those concessions later, when dealing with the second application for an extension of time. For reasons generally similar to those given there, I do not infer from Beale’s concessions, that on 28 September Beale intended to make the Implied Representation.

Moreover, if Beale had thought about the question whether he should mention the cloud over the solvency of Travel to McDougall, and I do not accept that he thought about it at all, he would have appreciated that it was not a significant cause of any delay and was therefore irrelevant to his request, and, further, that at least it would have been imprudent for him, without more, to inform McDougall of it, in view of the changed, or potentially changed position, arising from the recent takeover by IPG.

4.         That the maker of the representation intends a person or class of persons to act in reliance on it

Contrary to submissions by TCF and PMS, Beale intended TCF to act in reliance on those reasons for the delay that he mentioned. In the same breath, he applied for the extension and stated reasons why TCF should grant it, thereby showing that he understood that there was a connection between the two, and that it was at least necessary or desirable for him to offer some explanation for Travel’s inability to meet the 30 September deadline.

I do not accept, however, that Beale intended to make the Implied Representation. It follows that in my opinion he did not intend TCF to act in reliance on it.

I should add that in my opinion the present element of fraud is not established by findings that Beale intended TCF to act in reliance on the representations that he intended to make in his letter and a later conclusion by a court that the letter also conveyed the Implied Representation.

5.         That the person or a person belonging to the class of persons, acts in reliance on the representation

Contrary to a submission by TCF and PMS, Beale’s belief that TCF was granting extensions as a matter of course is irrelevant to the issue whether McDougall in fact relied on the Implied Representation in granting the extension on 28 September.

Although an initial extension for one month may have been easily obtainable, I do not accept the submission that Beale’s statement of reasons was without influence on McDougall. It is difficult to accept that if Beale had stated no reasons whatever, McDougall would not have asked why the extension was sought.

FAI did not lead evidence directed to the issue of inducement, but, at least to some extent, this was explained by McDougall’s evidence that he could not recall the conversation deposed to by Beale, while not denying that it took place.

What Beale said to McDougall was, regarded objectively, calculated to influence his decision whether to grant the extension and he granted it immediately. Therefore a fair inference of fact arises that he was induced to do so by what Beale said. It is not fatal to a claim of reliance, that a witness does not give express and direct evidence of the reliance: Gould v Vaggelas (1985) 157 CLR 215 at 236 (per Wilson J); Elders Trustee & Executor Co Ltd v EG Reeves Pty Ltd (1987) 78 ALR 193 (FCA/Gummow J) at 242; San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340 at 366 (per Brennan J); Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 38 FCR 471 (FC) at 483; Huntsman Chemical Co Australia Ltd v International Pools Australia Pty Ltd (1995) 36 NSWLR 242 (CA).

To assume that the Implied Representation was made requires me to assume, contrary to my view, that a reasonable person in McDougall’s position would have understood it to be made. Therefore, assuming, again contrary to my view, that Beale made the Implied Representation, it should be accepted that McDougall was induced by it to grant the first extension.

6.         That loss or damage is suffered as a result of the reliance on the representation

TCF and PMS submit that there was no finding by Wilcox J, and no evidence before me, that PMS's conduct in the second half of 1988 caused TCF to suffer loss.

 

In my opinion, the findings of Wilcox J do not answer the question, what would have happened if Beale had not made the Implied Representation, either by not applying for the first extension of time at all, or by applying for it, but disclosing Travel’s financial condition and the intermingling of accounts?

 

What would have happened if Beale had not applied for the extension at all? After Travel’s failure to comply with the 30 November deadline, TCF took no action and Travel continued to trade until it closed its doors on 21 December. Even after Short and Cannon took the initiative of contacting TCF and calling upon Krumbeck on 15 December, all that TCF did was to resolve on 16 December not to grant Travel a further extension. It was IPG’s decision on 18 December not to complete the purchase that precipitated Travel’s ceasing to trade three days later. It seems reasonable to infer, however, that as a result of the visit by Short and Cannon on 15 December, TCF would have then learned that matters were to come to a head one way or another three days later.

It may seem unlikely that in the absence of any application for an extension of time, TCF would have done nothing, but in the absence of evidence on the issue, I am not prepared to conclude that Travel would have ceased to trade earlier than 18 December.

What would have happened if Beale had, on 28 September, disclosed to TCF the two matters mentioned? In my opinion, TCF would not have automatically granted the extension. We know that following the disclosure by Short and Cannon to Krumbeck on 15 December, it took only twenty-four hours for the TCF Management Committee to resolve not to grant any further extension. But it must be remembered that the position which they disclosed then included a deficiency in excess of $5,000,000, and they told Krumbeck that IPG was not certain what course it would take. TCF did not immediately take steps to prevent Travel from trading. Travel continued in business until “it closed itself down”. In fact, no-one from TCF even informed anyone on behalf of Travel of the TCF Management Committee’s resolution of 16 December not to grant a further extension. On the other hand, as noted above, I infer that TCF learned from Short and Cannon on 15 December that by 18 December it would be known whether Travel would or would not continue to have IPG as a “backer”. Travel may not have continued in business beyond say 28-30 September if Beale had made disclosure. But the more likely course of events is that the disclosure would have prompted discussions between TCF and Travel’s directors in the course of which TCF would have insisted upon an appropriate form of security as a condition of Travel’s being allowed to continue to trade. Of course, from a time when such security was provided or Travel ceased to trade, TCF would have ceased to be exposed to risk of loss.

But in the absence of evidence, I cannot say what would have happened or when it would have happened. What occurred after Short and Cannon made their disclosure to Krumbeck on 15 December provides no illumination because IPG repudiated its contract on 18 December and Travel closed down on 21 December. As at 28 September the occasion for completion of IPG’s purchase was some eleven weeks away. In the absence of evidence from TCF, I am not willing to infer that if Beale had disclosed the two matters in question to McDougall on 28 September, TCF would have ceased to be exposed to risk at or about any particular time, and therefore I am not willing to infer that TCF would have ceased to be exposed to risk prior to 21 December.

As I noted earlier, there is no evidence that McS knew of the reasons given by Beale to McDougall on 28 September. If I had found that Beale had made fraudulent misrepresentations to McDougall on that occasion, I would not have found that McS condoned that conduct.

The second application (by Beale by telephone on 25 October and letter of 26 October) for an extension of time to file Travel’s audited accounts, and the grant of it (by letter of 31 October)

Beale’s letter of 26 October was set out earlier in this Part (III) as was TCF’s short and favourable reply of 31 October.

 

1.         A representation of fact, however made

Again, FAI has not undertaken the task of proving that the literal terms of Beale’s letter of 26 October were false. Again, it relies on the Implied Representation and a representation that the letter gives “a full statement of the reasons for the delay”, while omitting to mention delay caused by insolvency and intermingling of accounts. Did either of these representations arise from the letter?

The letter states, “The reasons for the request are as follows: ... ” What do the opening words “[t]he reasons for the request” mean? There are several possibilities: (1) “all of the significant causes as a matter of objective fact of the non-lodgment of Travel’s audited accounts by 31 October”; (2) “those of the causes described in (1) of which Travel is aware and selects to put forward and rely upon”; and (3) “those of the causes described in (1) which move Beale at the time of writing.” It will be noted that construction (1) is substantially identical with the representation contended for by FAI that the letter gives “a full statement of the reasons for the delay”.

The second meaning is a strained and artificial one. Clearer language than that used here would be required, in my view, to convey a meaning so unexpected.

As between the first and third meanings, the position is less clear. The language of the letter is “the reasons for the request”, not “the reasons for the delay”. The former can be understood to mean “[t]he reasons why I am making this request.” This tends to suggest, albeit far from conclusively, a subjective element, indicated, again, by the form “the causes of delay that have moved me to make this request.” According to this view, Beale is identifying the reasons which he has in fact for requesting the extension, and is not purporting to give an exhaustive account of what are, objectively speaking, all the significant causes of the delay, whether known to him or not. In my view, the expression is capable of bearing both constructions (1) and (3). As a person charged with fraudulent misrepresentation, in such a case of ambiguity, Beale is entitled to have his words construed according to the meaning he intended (cf Derry v Peek (1889) 14 App Cas 337; Angus v Clifford [1891] 2 Ch 449; Akerhielm v De Mare [1959] AC 789 (PC); John McGrath Motors (Canberra) Pty Ltd v Applebee (1964) 110 CLR 656; Sargent v Campbell [1972-73] Argus LR 708; Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 578-579 (per Brennan, Deane, Gaudron and McHugh JJ).Later, I hold that he intended construction (3). Accordingly, the expression bears that construction. Notwithstanding this, as will be seen, there is no difference in the result in the case, even if construction (1) applies.

I will now consider the letter’s account of the reasons. The reference to the “major software development problems” which “became apparent only after several months of use” is, apparently, a reference to the discovery in February that the system installed in the previous November could not effect “automatic costing”, and that such work would still have to be done manually after all. To refer to this as “failures of the system” was incorrect, although “inadequacy of the system chosen and installed” may have been correct. What necessitated the “viewing”, “re-inputting”, “amendment” and “deletion” to which the letter referred was largely the combined effect of a lack of staff training in the use of the computer system and an overwhelming increase in sales without adequate internal managerial control or staffing.

The reference to “several days of negotiations over the past three months” seems to be a reference to the period from 15 to 18 September during which the sale to IPG was negotiated, and, perhaps, the “down tools” period from 29 September to 10 October. It will be recalled that I reached the conclusion earlier that PMS ceased work during this last period because they wanted to have fresh letters of engagement from the new directors of Travel.

What would a reasonable person in the position of the TCF administrator have understood the following sentence to mean:

“We initially expected this work to take four weeks however the sheer volume and added complications have increased this to 10 weeks.”

Exactly four weeks had passed since Beale’s first request on 28 September. Perhaps Beale was hoping for an extension of a further six weeks. Perhaps both periods of four and ten weeks referred to are periods of those durations which occurred early in 1988. A reasonable person in the position of the TCF administrator would be uncertain, as I am. The statement,

“During the past few weeks we have continued our Audit in areas not affected by the Computer problems ...”

is clearly directed to the position since 28 September.

A reasonable person in the position of the TCF administrator would understand Beale’s letter in the light of the first and third considerations which I described when dealing with the first application for an extension. However, the second consideration is only partly applicable to the letter of 26 October: this was not the first application for an extension, it was not made over the telephone, and, although the reasons given were again volunteered rather than advanced in response to specific inquiries by TCF, they were put in writing at TCF’s insistence.

While the terms of Beale’s letter were not of a kind which would alarm TCF, I do not think that they carried the Implied Representation. Under the heading “Computer Failure”, Beale informed TCF expressly or by implication:

1.         that much work had had to be done by way of viewing, inputting, amendment or deletion inorder that accounts in a suitable condition for auditing might be prepared;

2.         that accounts in that condition had still not been prepared;

3.         that Travel’s records, and in particular the computer generated records, were previously not maintained in a form that enabled them to be audited; and

4.         that Travel’s directors had advised that such records were “now” being maintained in a form that enabled them to be audited;

A reasonable person in the position of the TCF administrator would understand pars (3) and (4) to be an attribution of blame by the new owners to the previous management, not to the computer hardware or software. I do not see why the previous failure to maintain records in an auditable form referred to in the letter, does not reasonably extend to encompass the intermingling of accounts (including non-allocation of bulk payments). In this respect, the letter is inconsistent with part of the terms of the Implied Representation. In the same respects, the letter did give “a full statement of the reasons for the delay” and satisfied even construction (1) set out earlier.

Again, while there is no hint of insolvency or financial difficulty in the letter, its terms are not inconsistent with them or with the existence of a “cloud” over Travel’s solvency, provided this was not a significant cause of the failure to lodge the audited financial statements by 31 October, which moved Beale to write the letter (construction (3) earlier). In my opinion, it was not, and, further, it was not in fact a significant cause of that non-lodgment (cf construction (1) earlier).

In the result, in my opinion the letter of 26 October does not make the Implied Representation.

Notwithstanding this conclusion, I shall proceed on the footing that it does.

2.         Falsity of the representation

The intermingling of accounts (including the non-allocation of bulk expenses), was a significant cause of the delay and was also a “reason” which in fact moved Beale to make his request. It therefore satisfied both the first and third constructions of the expression, “[t]he reasons for the request” mentioned in the context of issue (1) above. If, contrary to my view, the Implied Representation in its terms was made, it was false because the intermingling of accounts signified a “relation with another entity for which accounts had to be produced before Travel’s own accounts might be produced.” As I tried to make plain earlier, however, a particular reason why this part of the Implied Representation does not arise, is that the letter expressly referred to the failure to maintain Travel’s accounting records in auditable condition.

The Implied Representation was not falsified by Travel’s financial condition, for the reasons which I gave when dealing with the first application for an extension: in short, it was not a significant cause of the delay in lodging audited accounts.

While PMS had been troubled by the issue of outstanding fees throughout 1988, there is no evidence that this delayed preparation of the accounts and, therefore, commencement of the audit. Similarly, while insolvency had been a cause of the sale to IPG, IPG’s arrival did not delay work. In fact, it probably accelerated it. Viewing matters overall, I am not satisfied that the “down tools” period from 29 September to 10 October pending receipt of letters of engagement from the new directors can fairly be regarded as an equivalent period (eight week days) of delay attributable to the insolvency of Travel, even though the need to have unequivocal authorities from the new directors arose from the fact of sale, which in turn arose, at least in part, from the fact of insolvency. The fact is that following the takeover by IPG on 18 September, it ceased to be clear that Travel would fail. PMS’s wish to have written confirmation of their engagement from the new owners was too remotely connected with Travel’s earlier insolvency to support a conclusion that PMS’s “downing tools” for eight week days from 29 September to 10 October was caused by that earlier insolvency. It must always be remembered that FAI’s case is not that Beale was under a duty to TCF to disclose the present or past financial condition of TCF or the existence of a “cloud” over its present or past solvency. Rather, Beale’s letter is concerned with reasons why the extension was being requested. Insolvency not causing delay is not within the scope of the letter.

3.         That the maker of the representation does not believe that it is true in the sense in which the maker intends it to be understood

If, contrary to my view, Beale’s letter of 26 October carried the Implied Representation, it is irrelevant for the purposes of fraud that he and McS knew it to be false because they knew that the intermingling of accounts (including non-allocation of bulk payments) had in fact been a significant cause of the delay. The reason why it is irrelevant is that what matters, for the purpose of the present element of fraud, is how they intended what Beale wrote to be understood by the TCF administrator. In my opinion, they did not intend the letter to convey the Implied Representation. In my view, they intended the letter to be understood by the TCF administrator as identifying all the significant causes for the non-lodgment of the audited financial statements by 31 October that actually moved them to request the extension. In Beale’s cross-examination, the following passage occurs:

“I suggest that when you wrote this letter it was a letter that was designed to hide from the Travel Compensation Fund some matters? - That’s incorrect.” (T 1826)

This is the most direct confrontation of Beale with the Implied Representation. I accept Beale’s denial. I am not persuaded that Beale thought about the causes of delay beyond what he wrote. Of course, he might have written more - much more. Let it be accepted too, that even as a short summary, his words were carelessly chosen and gave a wrong impression. Nonetheless, I am not persuaded that he deliberately suppressed some matters so that his letter would convey a false impression, such as that inherent in the supposed Implied Representation.

 

There is another sequence of passages from Beale’s cross-examination to which I should refer. It does not, however, address FAI’s case of fraudulent misrepresentation by deliberate concealment. There was the following exchange:

“ ... you understood after that conversation with Mr McDougal [sic] that you had to state the reasons for the extension in writing, did you not? --- Yes.

And you understood that what was required to be stated was all of the reasons why an extension was necessary, is that right? --- Well, the reasons being all the reasons, yes.” (T 1815 - emphasis supplied)

Senior counsel for PMS objected that the letter referred to “the reasons for the request” whereas the question referred to the “reasons why an extension of time [was] needed” saying “[t]here may be a distinction”. This exchange then followed:

“MR CAMPBELL:      You understood that what you were doing was explaining the reasons why an extension of time was needed, did you not?---I was substantiating the fact that we had not been provided with the financial statements at that time to audit and the reasons why we had not been provided were twofold: one, because there was a failure of the system to enable those figures to be collated and, secondly, there was a change of ownership which had substantially held up the process.” (T 1816)

In the result, the evidence is not entirely clear whether Beale intended his letter to convey meaning (1) or (3). In context, his failure to answer the last question simply “yes”, and the answer he in fact gave, can be seen to favour construction (3). Beale’s intention is, of course, irrelevant to the issue of construction itself (Issue 1). Having particular regard to PMS’s position as auditors, and the perspective referred to by Beale in the passage just set out, I think that he intended to convey meaning (3), not (1). Indirectly, the same evidence can also be seen, to the same extent, to lend support to the view that Beale did not intend to make the Implied Representation.

4.         That the maker of the representation intends a person or class of persons to act in reliance on it

Beale intended TCF to act in reliance on those representations that he intended to make in the letter. But I have already concluded that he did not intend to make the Implied Representation. It follows that he did not intend TCF to rely upon it. As I noted when dealing with this element in connection with the first application for an extension, the present element of fraud is not established by a finding that Beale intended TCF to act in reliance on the representations that he intended to make in his letter, and a later conclusion by a court that the letter also conveyed a representation that he did not intend to make.

In cross-examination, Beale and McS made numerous concessions which FAI seeks to make relevant to the present issue. Beale conceded that he understood that if TCF was not told of any “cloud hanging over the solvency” of a travel agent, it would assume that there was no problem; that he was aware that there was in fact “probably a cloud” over Travel’s solvency by the end of September; that he knew at the time that members of the public were paying money to Travel every day on a basis which made them unsecured creditors of Travel; that TCF was “an organisation that was designed to protect travellers against the risk of a travel agent becoming insolvent”; that travel agents were required to lodge audited accounts with TCF in a particular form; that TCF relied upon the accuracy of audited accounts to be able to regulate the industry; that he understood that a failure to file audited accounts within the time limit, absent an extension, would lead to cancellation of Travel’s licence; that TCF reviewed the solvency and viability of travel agencies, and that if it was not satisfied on these matters, it could take steps to withdraw the agency’s licence or grant a licence upon conditions, such as provision of extra capitalisation or security; that if it was brought to TCF’s attention that there was a cloud over Travel’s solvency, TCF may not have granted the extension; and that disclosure of insolvency and the interrelationship of Travel and Wheels would concern TCF, cause the extension to be refused, jeopardise Travel’s participation in the Fund, and hence it’s licence and ability to continue in business.

McS saw the letter of 26 October prior to Beale’s submitting it to TCF. It was he who had, on 21 October, suggested that the application for a further extension be made. He raised no objection to its terms at the meeting on 27 October, when Gilbert asked for comments on it. In my view, he approved of the reasons in it. He had a similar state of knowledge and intention to that of Beale. As well he made concessions generally similar to those made by Beale. In particular, he conceded that he knew that if an extension were not granted, and audited accounts not submitted by the current deadline of 31 October, Travel’s licence would be jeopardised; that a licence was necessary to carry on business as a travel agent; that participation in the Fund was required to qualify for a licence; that TCF had published review criteria for accounts which were to be submitted to it (in particular the “points check list”) which he had read; that accounts were to be submitted to TCF in a particular form; that it was PMS’s responsibility to give a true and fair picture of the running of the company; and that TCF relied on audited financial information for approval of continuation of membership in TCF.

But the various concessions of Beale and McS to which I have referred do not go to the question what actually passed through their minds at the time. It is one thing to concede that at a particular time in the past, one “knew” or “understood” or “was aware of” something; it is a different thing to concede that at that time that particular matter was present to one’s mind. The evidence does not establish that McS or Beale in fact adverted to the cloud over Travel’s solvency when requesting the second extension and I do not infer that they did.

I do not accept that Beale or McS intended TCF to act in reliance on the Implied Representation (or on the letter as bearing construction (1)).

5.         That the person, or a person belonging to the class of persons, acts in reliance on the representation

FAI submits that it should be inferred that if the cloud over Travel’s solvency and the intermingling of accounts had been disclosed to TCF, TCF would not have permitted Travel to trade for as long as it did. TCF and PMS rely on the fact that FAI called no witness from TCF to give evidence to this effect. They draw attention to what they call “uncontradicted evidence that TCF would have been ‘ecstatic’ or ‘very comfortable’ if it had been apprised of the circumstances known to the accountants including the presence of IPG on the scene”. This “evidence” is, however, that of Beale. Beale’s speculations about how TCF would have acted are of no probative weight.

TCF and PMS refer to TCF’s failure to close down Travel even when TCF was told on 15 December that Travel and Wheels had a deficiency of over $5,000,000 and that IPG was not certain what course it would take (TCF judgment at 24-5). They point to the fact that TCF did not inform Travel on 16 December of the decision of the TCF Management Committee on that day not to approve a request for a further extension (made on 15 December), and say that this indicates that TCF was inclined to do nothing when faced with an admission of insolvency vastly in excess of that shown in the Draft Amalgamated Statement of Assets and Liabilities.  They submit that if TCF was not prepared to act in that situation, it probably would have done nothing when faced with a much less serious picture of a “cloud” over Travel’s solvency, particularly as long as there was then a chance that IPG would complete the purchase.

FAI submits, in reply, that the decision not to approve the extension shows that the TCF Management Committee was not prepared to await IPG’s decision about what course it would take. FAI further submits, in reply, that the effect of the running out of the second extension on 30 November and the non-granting of the further extension requested, was that Travel was in breach of the conditions of its licence, and that TCF was entitled to believe that of its own volition it would not continue to trade. FAI submits that Wilcox J expressed himself in terms which indicated some doubt about whether the evidence before him was complete as to whether Travel was told of the decision which the Management Committee made on 16 December:

“... the Travel Compensation Fund Management Committee decided not to approve this request. But, surprisingly, no decisive action was taken by TCF. So far as appears, the trustees did not deal with the matter, nor did Mr Krumbeck inform Travel Abroad of the management committee’s decision.” (TCF judgment at 25)

In any event, FAI submits that there were only three working days between 15 and 21 December in 1988 (in fact, there were five if one includes 15 and 21 December), and that, although it may not have acted as fast as could be wished, it could not be said that the closure of Travel was slow after TCF was informed on 15 December. FAI submits, further, that the proper inference as to what TCF would have done if told the truth regarding Travel’s situation earlier than 15 December, is that by no more than three working days after TCF was informed, Travel would have been closed.

Subject to two qualifications, I incorporate here the reasons which I gave in relation to the present issue (5) in the context of the first application for an extension. The first qualification is that the absence of any person from TCF to give evidence of reliance is not explained by the fact that the only TCF officer who could give the evidence cannot remember the incident. On this occasion the application was in writing and was considered and approved by the Trustees of the Fund. I do not know why one of the Trustees was not called by FAI to give evidence. The second qualification is that in the context of the second application (and not the first), written reasons were required at the insistence of TCF, a factor which, despite the lack of any evidence from FAI as to inducement, strengthens the view that it is a fair inference of fact that the Trustees were induced to grant the extension, by what Beale wrote.

6.         That loss or damage is suffered as a result of the reliance on the representation

I repeat what I said under this heading (6) in the context of the first application for an extension.

 

Two specific submissions

(i)        Relevance of McS’s conduct as part of the TAG facts to the TCF facts

FAI submits that evidence of fraud by McS in the TAG facts, which I found in Part II, is probative of fraud in the context of the TCF facts. The submission is that such evidence of fraud by McS in the second half of 1987 in connection with the TAG acquisition, constitutes “similar fact evidence” and supports its allegations of fraud in relation to the applications to TCF in the second half of 1988 for extensions of time. FAI also submits that McS’s earlier conduct is relevant to his credit in connection with his evidence relating to the TCF facts.

I accept that a finding that McS acted fraudulently on an earlier occasion is potentially relevant to his credit in respect of his evidence touching the TCF facts. But the nature of the earlier fraud in the present case must be understood. It is inherent in my finding in Part II that McS was prepared to issue accounts which spoke falsely, knowing that they did so and intending them to be relied upon, while believing that no harm would befall the relier (TAG) because of what he believed his client (Webber) would do to “make the representation good”. I have not derived assistance from my finding of fraud of that kind in connection with the TAG facts, in assessing McS’s evidence in relation to the different TCF facts.

Whether the evidence of McS’s conduct as part of the TAG facts can be used as “similar fact evidence” depends on whether there is any striking similarity or underlying unity between the two sets of “facts”, and even if there is, the similar fact evidence should be considered with caution and discretion (D F Lyons Pty Ltd v Commonwealth Bank of Australia (1991) 28 FCR 597  at 606-7 per Gummow J).  In my opinion, the evidence of McS’s conduct as part of the TAG facts does not satisfy the criteria of similar fact evidence, because there is no striking similarity or underlying unity between that conduct and McS’s conduct in connection with the applications to TCF for an extension of time. The person who made both requests for an extension was not McS, but Beale. McS did not participate in the formulation of the terms in which either application was made, although he approved of the terms of the second application. Any similarity is simply at too general and abstract a level to merit the epithet, “striking”. The evidence of McS’s conduct in relation to the preliminary accounts and the audited accounts as part of the TAG facts does not have “significant probative value”, either by itself or in conjunction with other evidence adduced, in relation to McS’s “tendency” to act as he did in relation to the second application to TCF for an extension of time: cf s 97 (1) of the Evidence Act 1995 (Cth) discussed in Zaknic Pty Ltd v Svelte Corporation Pty Ltd (1995) 61 FCR 171 at 175-6 (Lehane J).

(ii)       Breach of professional obligations

TCF and PMS submit that, absent a statutory duty of disclosure, PMS would have been in breach of a duty owed to their client if they had told TCF what they knew about Travel’s financial condition without Travel’s consent.

FAI replies that PMS’s duty to their client, Travel, is no answer to FAI’s case, for reasons along the following lines. The obligation of confidence on the part of an accountant is not an absolute one. The disclosure in issue is to TCF, a body established by statute for a public purpose to which information of the kind in question is of central concern, and to which PMS understood they were instructed by Travel to submit audited accounts revealing its true financial position. PMS knew that Travel was continuing to take payments from members of the public, and that to do this lawfully, it was required to hold a licence, for which participation in the compensation scheme was necessary. PMS’s understood that failure to submit audited accounts by the deadline would result in cancellation of Travel’s licence. They were also aware of the provisions of the Travel Agents Act 1986 (NSW), which provided (ss 20 and 21) that a licence could be cancelled or other disciplinary action taken where there were reasonable grounds to believe that a licensee did not have, or was not likely to continue to have, sufficient financial resources to enable the licensee to carry on business as a travel agent.

I do not find it necessary to deal with all aspects of these competing submissions. It is pertinent to observe that while the Travel Agents Act 1986 (NSW) obliged a person who carried on business as a travel agent, to keep financial records of a certain kind and to a certain standard, including records which would “enable profit and loss accounts and balance sheets for the business, to be conveniently and properly audited” (s 41 (c)), the Act did not oblige auditors to act as informant to TCF (cf the obligation to inform which was imposed on auditors in favour of the CAC by subss 285 (9), (10) of the Companies Code). PMS could, however, have indicated to TCF that there were further reasons for the delay which PMS were of the opinion they could not disclose without breaching any professional obligations to their client. By this means PMS would have honoured any obligation of confidence owed to their client, not misrepresented the causes of delay, and left TCF to take its own course. Again, PMS might have declined to have anything to do with Travel’s application for an extension of time, leaving the matter in Travel’s own hands. Further, they could have sought Travel’s  consent to disclosure. What PMS could not do, was, having taken upon themselves the task of applying for the extension and making out Travel’s case for it, to make the supposed Implied Representation. For these reasons I do not accept the submission of TCF and PMS that PMS’s obligation of confidence would somehow negate liability for the supposed Implied Representation.

CONCLUSION IN RELATION TO FRAUD AND THE TCF FACTS

FAI has not established that the claim for indemnity in respect of the TCF judgment is one in respect of a claim which arises out of, or is contributed to by, dishonest and fraudulent conduct committed by Beale and McS, or by Beale condoned by McS, in respect of either of the two applications for an extension. I will have occasion to consider the TCF facts further in relation to issues yet to be addressed, such as those of misrepresentation and non-disclosure to FAI.

I certify that this and the preceding one hundred and one (101) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren

Associate:

Dated:              9 April 1998

Proceeding No NG 312 of 1992

Counsel for the Applicant:	Mr J C Campbell QC with Mr P Liney (FAI)
Solicitors for the Applicant:	Colin Biggers and Paisley (FAI)
Counsel for the Respondents:	Mr P M Biscoe QC with Mr S Climpson appeared for the first, second, fourth and fifth respondents (McSweeney, Phillips, Turner and Cullen) Mr K Manion appeared (submitting) for the sixth respondent (Gaertner)
Solicitors for the Respondents:	Gillis Delaney appeared for the first, second, fourth and fifth respondents (McSweeney, Phillips, Turner and Cullen) Mr D M Vaughan, solicitor, of Heaney, Richardson & Nemes appeared (submitting) for the third respondent (Beale) Walters Solicitors, appeared (submitting) for the sixth respondent (Gaertner)
Proceeding No NG 948 of 1992
Counsel for the Applicant:	Mr P Roberts with Mr M K Minehan (TCF)
Solicitor for the Applicant:	T G Hartmann & Associates (TCF)
Counsel for the Respondent:	Mr J C Campbell QC with Mr P Liney (FAI)
Solicitors for the Respondents:	Colin Biggers & Paisley (FAI).
Date of Hearing:	5, 6, 7, 8, 9, 13, 14, 15, 16, 19, 20, 21, 22, 23, 26, 27, 28, 29, 30 June; 3, 4, 5, 6, 7, 10, 11, 12, 13, 14 July; 23, 25 August 1995; 11 March 1996.
Date of delivery of Part I: Date of delivery of Part II:	12 March 1997 9 April 1998
Date of Judgment:	9 April 1998

DRAMATIS PERSONAE - PART II

ANNEXURE TO PART III OF REASONS FOR JUDGMENT

TCF FACTS

 

PARTNERS OF PMS

BEALE, John William (“Beale”): chartered accountant; employed by PMS in its Sydney office from 1982; became a salaried partner in June 1985 of an “associated firm”, PMS Lismore; returned to the Sydney Office in about mid-1988 and became a salaried partner in PMS proper at that time; in mid-1990 ceased to be a partner of PMS to become a foundation partner in the firm Beale Gaertner Young; was actively involved in the 1988 TCF facts; was examined under s 541 in relation to the affairs of Travel and Wheels.

 

CULLEN, Timothy Patrick (“Cullen”): qualified as an accountant in New Zealand in 1980; moved to Australia in August 1980; became employed by PMS from 6 April 1985 and became a salaried partner on 23 May 1989; following the “split” with retrospective effect from 1 September 1990 (but for insurance purposes from 24 October 1990) became, with Phillips, a partner in PMS Gosford; as an employee, was actively involved in doing work for Travel and Wheels but played no part in the TAG facts; completed the proposal form dated 22 April 1991 for the renewal of the Gosford policy for 1991-1992 under which Phillips claims to be entitled to indemnity in respect of the TCF judgment; was examined under s 541 in relation to the affairs of Travel and Wheels.

 

GAERTNER, Michael John (“Gaertner”): became a salaried partner in PMS in May 1989; on 1 July 1990 ceased to be a partner in PMS to become a foundation partner in Beale Gaertner Young as from 23 July 1990; had no active role in either the TAG facts or the TCF facts.

 

McSWEENEY, Brian Albert (“McS”): chartered accountant; obtained first accountancy qualification in 1967; became a member of Australian Society of Accountants in 1969; with Phillips, “equity partner” in PMS from its establishment in August 1976 down to the “split” with retrospective effect from 1 September 1990 (but for insurance purposes as from 24 October 1990); from about 1976 was engaged as accountant by Webber and the Webber companies; was actively involved in the TAG facts and the TCF facts; of the sixteen Webber companies, held shares in eleven (in each case as trustee for a Webber interest) was a director of thirteen and secretary of fourteen; in particular, was a director and secretary of TIBG, TIIB, C & G, CJ & H, TKN and TFS, and although not a director or secretary of the joint venture companies Locna and Vana, held a 40 per cent interest in each of them; was a director and the secretary of the Webber family company, Dawlarnu and a director of other Webber family companies; was examined under s 541 in relation to the affairs of Travel and Wheels; following the “split” became, with Turner, a partner in PMS Chatswood; completed the proposal form dated 22 May 1989 for renewal of the PMS policy for 1989-1990 under which he and Phillips seek indemnity in respect of the TAG judgment; completed the proposal form dated 28 April 1991 for renewal of the Chatswood policy for 1991-1992 under which he seeks indemnity in respect of the TCF judgment; with Phillips, a respondent in TAG proceeding and TCF proceeding; PMS undertook the work associated with the annual accounts, tax returns and statutory returns for all sixteen Webber companies and the audit of the accounts of some of them; PMS prepared the annual financial statements of Travel and Wheels and undertook the audit of those of Travel.

 

 

PHILLIPS, Bruce William (“Phillips”):chartered accountant; “equity” partner with McS in PMS from its establishment in August 1976 down to the “split” with retrospective effect from 1 September  1990 (but for insurance purposes from 24 October 1990); following the “split”, became, with Cullen, a partner in PMS Gosford; not involved in the TCF facts; at McS’s request, auditor of TIIB, CJ & H and C & G of which McS was a director, and, as auditor, had some role in the TAG facts.

 

 

TURNER, Paul Frederick (“Turner”): accountant; apparently became a salaried partner of PMS in 1987; following the “split” with retrospective effect from 1 September 1990 (but for insurance purposes as from 24 October 1990), became, with McS, a partner in PMS Chatswood; not actively involved in the TAG facts or, except in a minor respect, the TCF facts.

 

 

OTHER THAN PARTNERS OF PMS

Individuals

ANDERSON, Mark (“Anderson”): office manager of Travel, succeeding Karen Marvell when she resigned; resigned during 1988 after IPG purchased Travel and Wheels.

 

BOYD, Julie (“Boyd”): administration manager of IPG during 1988; went to the Mona Vale premises of Travel and Wheels on 19 September 1988 with Dunn and remained there as administration manager until 21 December 1988 when Travel and Wheels ceased to trade.

 

BROWN, Chris (“Brown”): partner of Gillis Delaney Brown, solicitors to PMS; advised PMS in relation to their obligations as auditors in view of the apparent insolvency of Travel and Wheels.

 

CANNON, Sam (“Cannon”): manager of Travel in December 1988.

 

CORRIGAN, Greg (“Corrigan”): computer consultant retained by Travel and Wheels to commence installation of a new computer system in November 1987; regularly at the offices of Travel and Wheels until the system commenced operating in early February 1988.

 

DUNN, Craig Joseph (“Dunn”): director of IPG; became a director of Travel and Wheels immediately following IPG’s purchase on 18 September 1988; was the director who, on and after the takeover, chiefly represented IPG, Travel and Wheels in dealings concerning the TCF.

 

GILBERT, Pamela (“Gilbert”): business consultant employed by IBA; chaired the Audit Review Committee meetings for Travel (and Wheels) in October and November 1988.

 

HADLEY, Chris (“Hadley”): managing director of IBA.

 

HAY, Michael Freeman (“Hay”): sales and marketing manager and director of Travel and Wheels; director of Travel and Wheels since January 1983.

 

HOFMEYER, Fiona (“Hofmeyer”): data operator employed in the businesses of Travel and Wheels.

 

KRUMBECK, Max William Paul (“Krumbeck”): administrator of TCF.

 

LEMON, Gregory: holder of 65 per cent of the shares in each of Travel and Wheels; with his brother, Nigel Lemon, effectively controlled both companies until their sale on 18 September to IPG.

 

LEMON, Nigel: holder of 25 per cent of the shares, in each of Travel and Wheels; with his brother, Gregory Lemon, effectively controlled both companies until their sale on 18 September to IPG.

 

McDOUGALL, James Kirk (“McDougall”): claims manager of TCF in 1988; from time to time assisted in dealing with requests for extensions of time for lodgment of financial statements in relation to renewal of participation in TCF; acceded to Beale’s first application (by telephone on 28 September) for filing of audited accounts by granting an extension from 30 September to 31 October.

 

MARVELL, Karen (“Marvell”): manager anddirector of Travel from March 1985; resigned as director on 30 June 1988.

 

NICHOLAEFF, Mark (“Nicholaeff”): employee of Bird Cameron; involved in the audit of Travel from about August 1988.

 

ROSE, Juliana Mary (“Rose”): travel consultant; employed by Travel from November 1987 until 21 December 1988; office manager of Travel from May 1988.

 

SHARP-PAUL, Alistair Victor Nicholas (“Sharp-Paul”): non-executive director of IPG; became a director of Travel and Wheels immediately following the agreement between the sale by the Lemon brothers to IPG, on 18 September; remained director until 21 December 1988 when Travel and Wheels ceased to trade.

 

SHORT, Lewis (“Short”): substantial shareholder in, and consultant to (but not a director of) IPG; in late 1988 decided independently to prepare a statement of assets and liabilities of Travel and Wheels, and found that there were not books of account or records that could be used for this purpose so organised for several members of Travel and Wheels to work over a weekend at the end of November 1988 to compile information necessary to prepare a statement of assets and liabilities, which he completed in early December 1988, and which showed a net liability of $5,119,870.

 

TENSER, Richard (“Tenser”): management consultant; in conjunction with some associates, sought a buyer of Travel and Wheels in 1988.

 

WILLIAMS, Robert George (“Williams”): a partner of Bird Cameron; assisted PMS in the audit of Travel in 1988.

 

Companies and Firms

BIRD CAMERON: firm of accountants apparently formally retained by PMS on or around 14 October 1988 to supervise the audit of Travel.

 

GILLIS DELANEY BROWN: solicitors for PMS; advised them as to their obligations as auditors in view of the apparent insolvency of Travel.

 

INTERNATIONAL BUSINESS ANALYSIS PTY LIMITED (“IBA”): a subsidiary of Westpac which provided business consultancy services and was retained to provide advice and other services, to Travel and Wheels, and which was represented for that purpose mainly by Gilbert.

 

INTERNATIONAL PERFORMANCE GROUP LIMITED (“IPG”): contracted on 18 September 1988 to purchase from the Lemon brothers all the issued shares in Travel and Wheels for $200,000; due to complete the purchase on 18 December, but did not do so; its directors were Dunn, Sharp-Paul and Smith; applicant in NG 546 of 1989 against the Lemon brothers and PMS, which was settled.

 

IXT LEISURE GROUP PTY LTD (“IXT”): group of companies which included Travel and Wheels; IXT’s directors were Nigel and Gregory Lemon.

 

 

TRAVEL ABROAD PTY LIMITED (“Travel Abroad” and “Travel”): incorporated in about 1983; travel agent licensed under the Travel Agents Act 1986 (NSW), its members and controllers were the brothers Gregory Lemon and Nigel Lemon; the company occupied adjoining space in premises at Mona Vale, Sydney, with Wheels, which was similarly owned and controlled; the main activity of Travel was the marketing of pre-paid tours to Europe; agreement for sale to IPG of Travel, together with Wheels, executed on 18 September 1988; following IPG’s refusal to complete its purchase on 18 December, ceased trading on 21 December (see “Wheels Abroad Pty Limited”).

 

VEREKERS & PARTNERS (“Verekers”): solicitors for IPG on its purchase from the Lemon brothers of all the shares in Travel and Wheels.

 

WHEELS ABROAD PTY LIMITED (“Wheels Abroad” and “Wheels”): a company engaged in the business of selling, in Australia, car hire in Europe; clients paid Wheels, in Australia, for their car hire, and Wheels made arrangements with European car hire companies so that upon the arrival of travellers in Europe, cars were made available to them without further payment; its members and controllers were the brothers Gregory Lemon and Nigel Lemon; the company occupied adjoining space in premises at Mona Vale, Sydney with Travel, which was similarly owned and controlled; Wheels never held a travel agent’s licence nor participated in the TCF and, accordingly, its accounts did not have to be audited; agreement for sale to IPG of Travel, together with Wheels, executed on 18 September 1988; following IPG’s refusal to complete its purchase on 18 December, ceased trading on 21 December (see “Travel Abroad Pty Limited”).