Auditors in the gun again, as Pitcher Partners faces music over SGH downfall

Class action against Pitcher Partners (as auditor of Slater & Gordon Ltd) – Pleading of 'apportionable' claims only – Cross-claims by Pitcher Partners against directors of Slater & Gordon – Whether cross-claims futile – Whether cross-claims should be dismissed or struck-out

These are two class actions brought by shareholders in Slater & Gordon Ltd (S&G) against S&G’s auditors, Pitcher Partners (PP).

The allegations made against PP in the two class actions are not identical. However, essentially, the applicants in both proceedings allege that PP made misleading or deceptive representations in the course of auditing S&G's financial reports, including that the relevant reports gave a true and fair view of S&G’s financial position and performance and complied with accounting and/or auditing standards. The applicants allege that these representations (in one way or another) caused the market price of the S&G shares acquired by the applicants and class members to be inflated, thus causing loss.

The applicants in each proceeding previously brought class actions against S&G. Those proceedings were settled pursuant to a deed of settlement executed by the parties to the Hall Proceeding (the Deed), and a separate scheme of arrangement under the Corporations Act 2001 (Cth) between S&G and all shareholder claimants (including the applicant and class members in the Babscay Proceeding) (the Scheme). The Deed and the Scheme extinguished S&G and S&G’s directors’ (the Directors) liability to shareholders, but provided that shareholders could bring apportionable claims (but not non-apportionable claims) against third parties (including PP), subject to the shareholder claimant indemnifying S&G and the Directors from any liability arising from such a claim.

In the proceedings against PP, PP has filed cross-claims against the Directors. In this judgment, Middleton J dismissed applications brought by the Directors to summarily dismiss or permanently stay those cross-claims.

The central tenor of the Directors' applications was the argument that PP's cross-claims would inevitably fail and were futile, on the basis that the available relief would be of no (or at best nominal) monetary value. This argument was based on the application of apportionment defences pleaded by PP in its defences to each proceeding. In short, in its defences, PP denies that it is liable to the applicants but says that, if it is liable, then the applicants' claims are apportionable, the Directors are concurrent wrongdoers, and any liability of PP should therefore be limited to its share of responsibility for the applicants' loss.

The Directors submitted, in effect, that the apportionment regime will ensure that any damages awarded against PP in the primary proceedings will represent only its proportion of responsibility for the applicants' loss. Accordingly, the Directors contended, the claims made by PP in its cross-claims would be of no (or only nominal) monetary value, because PP’s liability to the applicants will be exclusively referrable to its own wrongful conduct.

His Honour dismissed the Directors' applications because he considered PP's cross-claims could raise issues distinct to those considered by the Court during its determination of PP's apportionment defences. His Honour rejected the Directors' contention that the sole cause of PP’s claimed losses under the cross-claims would inevitably be PP’s own wrongful conduct. For example, his Honour observed that:

  • PP has pleaded causes of action in the cross-claims against the Directors that are not available to (and not pleaded by) the applicants in the primary proceedings, which may enable PP to establish that the Directors are liable for any damages awarded against PP in favour of the applicants.
  • In its cross-claims, PP alleges that it has been exposed to the cost of defending the applicants' claims by the conduct of the Directors. In the event that PP successfully defends the proceedings brought by the applicants, PP will be entitled to an award of costs against the applicants. In these circumstances, PP could seek from the Directors the difference in the costs incurred by PP and the costs recovered from the applicants. This claim was described by his Honour as 'a separate head of loss … arising from a legal liability owed by the Directors to [PP], not to the Applicants' (at [79]).

Finally, his Honour refused to dismiss or stay the cross-claims on discretionary, case management grounds. The Directors argued that allowing the cross-claims to proceed would add significant complexity, time and cost to the proceedings. The Directors pointed out that, pursuant to the operation of the Deed and the Scheme, the applicants would potentially be required to indemnify the cross-respondents (including the Directors), which, in the event of a successful outcome against PP, may result in a greatly reduced judgment or settlement sum payable to class members (net of costs).

The Directors also put on evidence that, should the cross-claims continue, they would potentially choose not to actively defend the cross-claims and adopt a largely passive role in the proceedings, including by not pleading all defences and cross-claims available to them, or obtaining expert evidence. His Honour stated that he was 'not convinced of the dire consequences that will result if the Directors are left to defend the whole of the amended cross-claims at trial' (at [89]), and observed that the decision as to whether or not to actively participate in the proceedings is (as is the case in all legal proceedings) a matter for the Directors and their legal representatives. In any event, his Honour concluded that, '[t]he Court has a wide range of powers available to it to accommodate the interests of all parties and the efficient progression to trial of litigation and the efficient conduct of a trial itself' (also at [89].

Case studies

Babscay Pty Ltd v Pitcher Partners (a firm) [2019] FCA 480

  • Federal Court of Australia, Middleton J, 15 March & 8 April 2019
  • Applicant's Solicitors (Babscay Proceeding): Johnson Winter & Slattery 
  • Applicant's Solicitors (Hall Proceeding): Maurice Blackburn
  • Respondent's Solicitors: SBA Law
  • First and Third Cross-Respondents' Solicitors: Minter Ellison
  • Second, Fourth, Fifth, Sixth, Seventh and Eighth Cross-Respondents' Solicitors: Arnold Bloch Leibler
  • Applicant's Funder (Babscay Proceeding): Vannin
  • Applicant's Funder (Hall Proceeding): ILP

Read more on Austlii: Babscay Pty Ltd v Pitcher Partners (a firm) [2019] FCA 480

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