Case: State Bank of NSW v Kit Cheng Chia [2000] NSWSC 552
Outcome: cited
legal principles emerging from Dobbs [1935] HCA 49 ; (1935) 53 CLR 643 have been largely confined to circumstances where a banker's certificate has been issued as to the amount of indebtedness of a debtor to the bank (for example Dobbs [1935] HCA 49 ; (1935) 53 CLR 643 , Je Maintiendrai Pty Ltd v Australia and New Zealand Banking Group Ltd (1985) 128 SASR 70, Campbell v National Australia Bank Ltd [1994] SASC 4526 , Equus Financial Services Limited v Sabri [1994] FCA 1331 , George Biritz v National Australia Bank Limited [1995] VSC 91 , Shomat v Rubenstein (1995) 124 FLR 284 , Thurwood v First for Finance Pty Ltd [1997] FCA 559 , Australia &amp; New Zealand Banking v Pan Foods Company Importers &amp; Distributors Pty Ltd [1998] VSC 346 , Jenkins v National Australia Bank Ltd [1999] VSCA 33 , State Bank v Lo [2000] NSWSC 1191 , State Bank of NSW v Kit Cheng Chia [2000] NSWSC 552 , Australia and New Zealand Banking Group Ltd v Dzienciol [2001] WASC 305 , Julong Pty Ltd v Fenn [2002] QCA 529 , Apple Computer [2003] NSWSC 126 , Commonwealth Bank of Australia v Bouwman [2003] WASC 205 , Timms v Commonwealth Bank of Australia [2004] NSWSC 76 , Permanent Trustee Company Limited v Gulf Import and Export Company [2008] VSC 162). Since and possible because of Dobbs [1935] HCA 49 ; (1935) 53 CLR 643 , bankers' certificates have become well-known in practice. That is not to say that the principle articulated in Dobbs [1935] HCA 49 ; (1935) 53 CLR 643 has not been extended beyond the banker/customer/surety relationship, however circumstances in which the Dobbs [1935] HCA 49 ; (1935) 53 CLR 643 principle is applicable are primarily confined to those involving the issue of a certificate as to the existence of a fact pursuant to legislation, or certain types of agreement, for example: In this case cl 3.3 and Annexure 1 are not framed in such terms that an audit report is final and conclusive irrespective of any errors (whether manifest or otherwise) in calculations of the audited financial statements or failure of the audit report to comply with the prescribed formula in Annexure 1 (contrast for example State Bank of NSW v Chia [2000] NSWSC 552). Accordingly it could not be contended that the claimed profit shortfall of $1,691,284 as stated in the Deloitte Touche Tohmatsu report would be final and conclusive even if the respondents were able to demonstrate flaws in the calculations which arrived at that figure, including failure to comply with the prescribed formula in Annexure 1 or otherwise. The respondents submit that because of the absence of source financial documentation, they cannot test the accuracy of the report through cross-examination or other analysis. In light of this submission I note the following: The expert accounting evidence tendered during the proceedings suggests deficiencies attendant upon the Deloitte Touche Tohmatsu report; The expert report of Mr Angus Blackwood dated 18 September 2006 for the applicants is of minimal assistance in relation to the report because Mr Blackwood's comments in relation to the 1999 profits are based upon the audited financial statements by Deloitte Touche Tohmatsu. Mr Elia Lytras, an expert witness for the respondents, deposed that in order to determine the audit profit shortfall or excess for Forbes Australia for the year ended 31 December 1999 he required copies of all the instructions, working papers and files of Deloitte Touche Tohmatsu in relation to their audit of the Financial Reports of Forbes Australia (affidavit of Elia Lytras affirmed 18 January 2007). It is not in dispute that the documentation requested by Mr Lytras was not available. Mr Robert Edwards, a registered company auditor who gave expert evidence for the respondents, deposed that as at the date of his affidavit there was an absence of essential documentation necessary for him to prepare an audit of the accounts of Forbes Australia for 1999. More significantly, Mr Edwards deposed that the lack of essential documentation provided by Deloitte Touche Tohmatsu in response to requests for information meant that he was unable to assess the quality of the 1999 audit of Forbes Australia undertaken by Deloitte Touche Tohmatsu (affidavit of Robert Edwards affirmed 21 September 2007). Annexure 1 requires that, in calculating the audited profit before tax of Forbes Australia and its subsidiaries, the following were to be excluded: extraordinary items; abnormal items; gain or loss on disposal and/or revaluation of assets; expenses relating to research and development; provisions for long service leave; additional depreciation and amortisation resulting from the value of any item. However as the respondents submitted, these were steps which were, in accordance with the formula, to be undertaken after the delivery of the audited accounts. The significance of these items is apparent from the undisputed evidence of Mr Lytras in his affidavits affirmed 11 September 2007 and 11 February 2008. In his affidavit affirmed 11 September 2007, Mr Lytras stated that Deloitte Touche Tohmatsu was unable to provide any data which explained a $1,068,399 variance in their audited figures from the management accounts for the year ended 31 December 1999. In a briefing note exhibited to his affidavit affirmed 11 February 2008 (exhibit 6), Mr Lytras stated that he believed that the variance arose due to a substantial and material write-down of trade debtors, accompanied by raising a significant bad debt provision, as at 31 December 1999. Mr Lytras also stated, inter alia , that: The material provided by Deloitte Touche Tohmatsu contained no explanation for the reasons or basis for those write-downs or the additional bad debt provision accordingly it was not possible to form an opinion as to the reasonableness of the write-down. At least one of the debts written off was more than twelve months prior to 31 December 1999. The nature of the Favco Australia amounts written off were unclear. The write-down causing the variance accords with the definition of "abnormals", was of significant size and had a significant impact upon the entity's trading performance for the subject period. In view of the lack of source financial documentation it was unclear whether the write-down was extraordinary. In summary, Mr Lytras' evidence was that the possible treatment of extraordinary and abnormal items potentially affected the 1999 calendar year profit result, as stated in the Deloitte Touche Tohmatsu report. In the absence of the source financial documentation, it is not possible to be confident that the accounts were produced in accordance with the Australian Accounting Standards or that the formula in Annexure 1 had been followed. In my view this evidence demonstrates that there are grounds for inferring either errors in the Deloitte Touche Tohmatsu report, or that the report does not comply with Annexure 1 of the share sale agreement. On this basis I do not consider that the audit statements in the report are reliable evidence of the profit position of Forbes Australia in the year ending 31 December 1999. Should the Deloitte Touche Tohmatsu report be ruled inadmissible? Finally, the respondents submit that the Deloitte Touche Tohmatsu report should be ruled inadmissible on the basis of both s 135 and s 136 of the Evidence Act 1995 (Cth). The applicants concede that, if I were to so rule, there is a cascading effect in relation to the report prepared by Ernst &amp; Young dated 4 October 2001 (exhibited to Mr Poh's affidavit) based on the Deloitte Touche Tohmatsu Report, so that my decision in relation to the Deloitte Touche Tohmatsu report will determine the fate of the Ernst and Young document (TS p 26 ll 9-13).