FEDERAL COURT OF AUSTRALIA

Quatre-Bornes Pty Ltd v John H Walker & Associates [2010] FCA 492

THE COURT ORDERS THAT:

1.         There be judgment for the Applicant against the First Respondent in the sum of $84,498.80.

2.         There be judgment for the Applicant against the Second Respondent in the sum of $97,294.70.

3.         There be judgment for the Applicant against the Third Respondent in the sum of $293,086.20, which includes interest up to 14 May 2010 of $7,967.70.

4.         The Respondents pay the Applicant’s costs of this proceeding save for the appearances on 12 April 2010 and 3 May 2010 and the costs incurred by the Applicant in complying with the Orders made on 12 April 2010 and 3 May 2010.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

INTRODUCTION

1                          This is an application for default judgment under O 35A r 3(2) of the Federal Court Rules for loss and damage suffered by the Applicant as a result of allegedly negligent accounting advice it received.  It is common ground that under O 35A r 3(2)(c), it is only necessary to establish that on the face of the Statement of Claim there is a claim for the relief sought and that the Court has jurisdiction to grant that relief:  Burke v Residential Investments Australia Pty Ltd [2009] FCA 885 at [12]; Universal City Studios LLLP v Hoey t/as DVD Kingdom (2006) 232 ALR 525 at [8]; Arthur v Vaupotic Investments Pty Ltd [2005] FCA 433 at [3].  Each of the Respondents was served with these proceedings, with this application for default judgment and with the further amended Statement of Claim filed on 7 May 2010 (the FASC).  No Respondent has taken any step in the proceedings. 

FACTS AND PROCEDURAL HISTORY

Amended Application and Statement of Claim

2                          By an amended application (the amended application), the Applicant claimed damages of $285,118.50, interest and costs from each of the Respondents. 

3                          The First and Second Respondents, John H Walker & Associates Pty Ltd (ACN 006 272 804) and Elmawalks Pty Ltd (ACN 107 090 504), at different times carried on business as practising accountants under the name “John Walker and Associates” (the Practice).  The First Respondent carried on the Practice from 25 May 1993 until about 1 February 2004.  The Second Respondent carried on the Practice from about 1 February 2004 until 30 June 2007.  The principal of the Practice was the Third Respondent, Mr Walker.  Mr Walker was also a shareholder and sole director of the First and Second Respondents.  For the entire period, the Applicant alleged each Respondent operated as a registered tax agent in the name of “Walker and Company”.  It will be necessary to return to address the respective liabilities of each Respondent in further detail below.

4                          The Applicant alleged that in about 1993, Dr Devanand Gya and Loretta Gya gave instructions to Mr Walker to act as the accountant for themselves and the entities they controlled.  One of those entities was the Applicant.  The Applicant alleged that it was an implied term of the retainer that the First and Second Respondents would exercise all reasonable care, skill and diligence as accountants while advising and acting for the Applicant and that each of the Respondents was under a duty to take reasonable care as accountants in providing services to the Applicant.  The Applicant alleged that the Third Respondent was liable in negligence because, as an employee of the First and Second Respondents, the Third Respondent assumed personal responsibility for providing services to the Applicant and, in fact, personally provided those services.

5                          Then, the Applicant alleged that in breach of the retainer, the First and Second Respondents failed to perform the services with due skill, care, diligence and responsibility as accountants and that in breach of their duty of care to the Applicant, each of the Respondents failed to perform the duties required of them.  The particulars of loss and damage were instructive and included:

1.         allegations that the breaches concerned the income tax years ended 30 June 2000 to 2005;

2.         in relation to each of the 2000 to 2003 income tax years, there was an overstatement of deductions;

3.         in relation to each of the 2001 to 2005 income tax years, the income tax returns and business activity statements (BAS) were lodged after the due dates for lodgement;

4.         in a year not specified, there was a failure to advise the Applicant to elect to form a GST Group under Div 48 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth); and

5.         in a year not specified, the Applicant’s BAS was incorrectly prepared by failing to show the GST payable in rent paid to a related entity, Kyatin Pty Ltd.

6                          As a consequence of those breaches, the Applicant alleged that it suffered loss and damage of $285,118.50, comprised of $181,793.50 in GST, penalties and interest (collectively, the Penalties) imposed by the Australian Taxation Office for which it would not otherwise have been liable and accounting fees of $103,325.00 to rectify the work performed by the Respondents. 

7                          That brings me to the final claim – the allegation was that the First and Second Respondents were registered tax agents and that because the Applicant was liable to pay the Penalties, the taxpayer (here the Applicant) may sue the registered tax agent and sue for and recover that amount:  s 251M of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act).  At the hearing on 3 May 2010, the Applicant provided the Court with a proposed amended application to extend the s 251M claim to the Third Respondent. 

Further Amended Statement of Claim

8                          On 3 May 2010, the application for default judgment came on for hearing.  A number of issues with the Applicant’s amended application were identified. 

9                          First, the amended application did not identify the year in which each head of loss and damage in paragraph [6] above was incurred.  That omission was significant.  The First and Second Respondents were unlikely to be liable for the same loss and damage.  This was heightened by the fact that the Applicant itself alleged that the First and Second Respondents did not operate the Practice in the same period.  The precise identification of the period in which the loss and damage was said to have arisen was important – it directly affected or had the potential to affect the liability of the First and Second Respondents.

10                        Further, the description of the s 251M claim raised a number of issues:

1.         the Third Respondent was not a registered tax agent, and therefore could not be subject to a s 251M claim; and

2.         the years in which the loss and damage arose were not identified.

11                        In the circumstances, I adjourned the further hearing of the application for default judgment until today, 17 May 2010 and directed the Applicant to file and serve any further amended Statement of Claim by 7 May 2010.

12                        On 7 May 2010, the Applicant filed the FASC.  To the extent that the FASC addressed the issues in paragraphs [9] and [10] above:

1.         the claim against the Third Respondent under s 251M was abandoned; and

2.         the Penalties attributable to the conduct of the First Respondent and the Penalties attributable to the conduct of the Second Respondent were separately pleaded.  Of the $181,793.50 in Penalties incurred (see [6] above), the Applicant attributed $84,498.80 to the conduct of the First Respondent and $97,294.70 to the conduct of the Second Respondent.

13                        However, the Applicant failed to identify the accounting fees attributable to the First Respondent’s conduct and the accounting fees attributable to the Second Respondent’s conduct.  As noted earlier (see [9] above), the First and Second Respondents are not liable for the same loss and damage.  It would be inconsistent, on the one hand, to separate the Penalties incurred as a result of separate conduct of the First and Second Respondents, but not the accounting fees incurred as a result of their respective conduct. 

ANALYSIS

1.         Breach of Retainer by the First and Second Respondents

14                        As noted earlier, the Applicant alleges that, in breach of the retainer identified in paragraph [4] above, in different periods the First and Second Respondents failed to perform their services with due skill, care, diligence and responsibility as accountants.  The particulars of the loss and damage suffered by the Applicant are outlined at paragraph [5], [6] and [12] above.

15                        I am satisfied that, on the face of the FASC, there is a claim against the First and Second Respondents for breach of retainer, with the First Respondent being liable for $84,498.80  and the Second Respondent being liable for $97,294.70.  For the reasons outlined at paragraph [13] above, I refuse to award damages for the accounting fees totalling $103,325.00 because the Applicant failed to properly identify the amount attributable to each of the First and Second Respondents.

2.         Negligence of the Respondents

16                        Further, the Applicant alleges that the First and Second Respondents were under a duty to take reasonable care as accountants in providing the services to the Applicant: see [4] above.  The Applicant alleges that the First and Second Respondents breached their duty (see [5] above), thereby causing the loss and damage outlined at paragraphs [6] and [12] above.

17                        The Applicant alleges that the Third Respondent owes a duty of care to it because, as an employee of the First and Second Respondents, the Third Respondent assumed personal responsibility for providing the First and Second Respondents’ services to the Applicant and, in fact, personally provided those services: see Sweeney v Boylan Nominees Pty Ltd (2006) 226 CLR 161 at [18] and [23] and Johnson Matthey (Aust) Ltd v Dascorp Pty Ltd (2003) 9 VR 171 at [153]-[159].  The First and Second Respondents’ liability is a “necessary element” of the liability of the Third Respondent to the Applicant: see Sweeney (2006) 226 CLR 161 at [23].

18                        I am satisfied that, on the face of the FASC, there is a claim against each of the Respondents in negligence and that the Court has jurisdiction to grant that relief.  The First Respondent is liable for $84,498.80 and the Second Respondent is liable for $97,294.70.  The Third Respondent is liable for $285,118.50 comprising penalties of $181,793.50, as well as the accounting fees of $103,325.00.

3.         Section 251M of the 1936 Act Claim against the First and Second Respondents

19                        Finally, the Applicant alleges that it became liable to pay the Penalties as a result of the First and Second Respondents’ negligence as registered tax agents, and that it can now sue the First and Second Respondents to recover the Penalties under s 251M of the 1936 Act: see [12] above.

20                        Section 251M of the 1936 Act was repealed with effect from 1 March 2010: Tax Agent Services Act 2009 (Cth) (the Tax Agent Services Act).  However, the Applicant remains entitled to bring these proceedings to recover the Penalties because, at the date of the imposition of the Penalties, either of the First or the Second Respondents would have been liable to the Applicant under s 251M of the 1936 Act:  see Sch 2, subitem 20(1) of the Tax Agent Services (Transitional Provisions and Consequential Amendments) Act 2009 (Cth).

21                        On the face of the FASC, there is a claim against the First and Second Respondents under s 251M of the 1936 Act entitling the Applicant to recover the Penalties, being an amount of $84,498.80 attributable to the First Respondent’s conduct and an amount of $97,294.70 attributable to the Second Respondent’s conduct.

CONCLUSION

22                        The Respondents are in default for the purposes of O 35A r 3(2).  The Respondents have not participated in any stage of the proceedings.  On the face of the Applicant’s FASC, the Applicant is entitled to have judgment in default for the matters identified above.  The Orders of the Court will be:

1.         There be judgment for the Applicant against the First Respondent in the sum of $84,498.80.

2.         There be judgment for the Applicant against the Second Respondent in the sum of $97,294.70.

3.         There be judgment for the Applicant against the Third Respondent in the sum of $293,086.20, which includes interest up to 14 May 2010 of $7,967.70.

4.         The Respondents pay the Applicant’s costs of this proceeding save for the appearances on 12 April 2010 and 3 May 2010 and the costs incurred by the Applicant in complying with the Orders made on 12 April 2010 and 3 May 2010. 

Associate:

Dated:         17 May 2010