Dick Smith shareholders take on company auditor Deloitte

Class action on behalf of Dick Smith shareholders against auditor (Deloitte) – Application by Deloitte to strike out plaintiffs' pleading – Whether pleading defective – Although not perfect, pleading held to be sufficient – Application dismissed

These are two class actions brought on behalf of shareholders in DSHE Holdings Ltd (in liq) (which formerly traded as Dick Smith) against Dick Smith, its former CEO and CFO, and its auditor, Deloitte Touche Tohmatsu (Deloitte).

In this judgment, Ball J dismissed notices of motion filed by Deloitte to strike out those parts of the plaintiffs' Amended Joint Statement of Claim (AJSC) that plead a claim against it.

Deloitte was retained to audit the financial statements of Dick Smith for FY14 and FY15 and Dick Smith Sub-Holdings Pty Ltd (DSSH) (an intermediate holding company in the Dick Smith group) for FY13. In the AJSC, the plaintiffs allege that the decisions made by Dick Smith and DSSH with respect to rebates and the provisioning of inventory meant that the financial statements for the relevant years did not give a true and fair view of the companies' financial position and performance. The plaintiffs further allege that Deloitte's failure to identify these matters, and certain representations made by Deloitte in its audit reports and the companies' financial statements, meant that Deloitte:

  • failed to conduct the audits in accordance with applicable auditing standards
  • failed to exercise reasonable care and skill
  • engaged in misleading or deceptive conduct.

Deloitte submitted that the relevant section of the AJSC was deficient and ought to be struck out because it did not identify what it is alleged that Deloitte ought to have done. For example, Deloitte complained that the AJSC did not identify:

  • the type of testing Deloitte should have undertaken to ascertain the inventory practices adopted by Dick Smith and DSSH management
  • the extent of the misstatement in the companies' accounts that Deloitte ought to have identified.

His Honour observed that the 'critical issue' in strike out applications 'is whether the pleading gives fair notice of the case to be made against the other party at trial so as to minimise the risk of injustice resulting from surprise' (at [6]). His Honour held that, while the pleading was not 'entirely satisfactory' (at [16]) or 'as clear as it might be' (at [25]), the pleading sufficiently articulated the case that Deloitte must meet such that it would not be caught by surprise. Therefore, the pleading was not liable to be struck out. More specifically, his Honour rejected Deloitte's contention that the plaintiffs ought to have specified the precise enquiries and testing Deloitte should have undertaken in respect of the companies' inventory practices, or what provision the plaintiffs say ought to have been made.

His Honour also noted that the class actions were being case managed with related proceedings in the Commercial List, and that 'other techniques are available and used by the Court to ensure that no party is caught by surprise', including 'orders for the provision of particulars, orders for the service of evidence in chief, including expert evidence well in advance of a hearing and orders for the exchange of lists of issues' (at [6]). His Honour noted that the process for the filing of expert evidence, in particular, would likely narrow the issues in dispute, and observed that while '[t]hat is not to suggest that that process is a substitute for adequate pleadings… it needs to be borne in mind in determining what is required of the pleading' (at [23]).

Case details

Findlay v DSHE Holdings Ltd (recs and mgrs apptd) (in liq); Mastoris v DSHE Holdings Ltd (recs and mgrs apptd) (in liq) [2019] NSWSC 394

Supreme Court of New South Wales, Ball J, 11 April 2019

  • Plaintiffs; Solicitors (Findlay Proceeding): Corrs Chambers Westgarth
  • Plaintiffs; Solicitors (Mastoris Proceeding): Johnson Winter & Slattery
  • Fourth to Four Hundred & Fifty Seventh Defendants' (Deloitte) Solicitors: Clifford Chance
  • Plaintiffs; Funder (Findlay Proceeding): Vannin
  • Plaintiffs; Funder (Mastoris Proceeding): ICP

Read more on Austlii: Findlay v DSHE Holdings Ltd (recs and mgrs apptd) (in liq), Mastoris v DSHE Holdings Ltd (recs and mgrs apptd) (in liq) [2019] NSWSC 394

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