FEDERAL COURT OF AUSTRALIA INSURANCE - misrepresentation - non-disclosure - meaning of expression Ňcircumstances which may give rise to a claimÓ in claims made and notified policy - whether facts which later give rise to a claim constitute Ňcircumstances which may give rise to a claimÓ at time of completion of proposal form - whether statements made in documents attached to earlier proposal form constituted misrepresentations - whether representations in fact made - whether contract of insurance may be avoided by reason of misrepresentations made temporally before but not in connection with the proposal for insurance contract sought to be avoided. WORDS AND PHRASES - ŇbeforeÓ Insurance Contracts Act 1984 (Cth), ss 21, 26, 28 Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606, applied Bayer Leverkusen Ltd v Phoenix Assurance Company (unreported, NSWCA, Moffitt, Hardie and Hope JJA, 19 March 1973), referred to Bowling v Weinert [1978] 2 NSWLR 282, applied EST Limited v HIH Casualty and General Insurance Ltd (unreported, SCVic, No 6938 of 1994, Mandie J, 27 October 1997), referred to FAI General Insurance Co Ltd v Hendry Rae & Court (1993) 10 WAR 322, considered GamerŐs Motor Centre (Newcastle) Pty Ltd v Natwest Wholesale Australia Pty Ltd (1987) 163 CLR 236, applied Holts Corrosion Control Pty Ltd v CML Fire & General Insurance Co Ltd (1984) 3 ANZ Cas 60-559, considered Pengelly v British Empire Assurance Co (1974) 38 DLR (3d) 624, considered Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834 at 840, applied 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 IV) LINDGREN J SYDNEY 24 APRIL 1998 TABLE OF CONTENTS REASONS FOR JUDGMENT (PART IV) INTRODUCTION ............................................................................................... 2 ISSUES ............................................................................................................... 3 General issues relating to misrepresentation .................................................... 3 General issues relating to non-disclosure........................................................... 6 The alleged 7 May 1990 representations ........................................................... 7 Effect under section 28 of the IC Act on misrepresentation and failure to comply with duty of disclosure .......................................................................... 8 MISREPRESENTATION GENERALLY ........................................................... 10 RENEWAL OF THE PMS POLICY FOR 1989-1990 - ALLEGED MISREPRESENTATION - THE TAG FACTS .................................................. 16 Issue (1) Was any partner of PMS, after enquiry, aware, on 22 May 1989, of the circumstances referred to in pars 1-26 of Part A of the Schedule (to FAIŐs third further amended statement of claim)? .......................................... 16 Issue (2) Did those circumstances described in Part A of the Schedule (to FAIŐs third further amended statement of claim) of which any partner of PMS was aware on 22 May 1989, satisfy the description of Ňcircumstance[s] which may give rise to a claimÓ in question 13 (b) (ii)? ................................... 20 Issue (3) If the answer ŇnoÓ to question 13 (b) (ii) was untrue, have PMS nonetheless established that McS, as the person signing the proposal form, gave that answer on the basis of a belief in fact held by him, being a belief that a reasonable person in the circumstances would have held? .................... 27 Issue (4) If the answer ŇnoÓ to question 13 (b) (ii) was untrue, has FAI established that McS, as the person who gave that answer, knew, or that a reasonable person in the circumstances could be expected to have known, that the answering of the question in that way would have been relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms? ............. 27 RENEWAL OF THE PMS POLICY FOR 1989-1990 - ALLEGED NON-COMPLIANCE WITH STATUTORY DUTY OF DISCLOSURE - THE TAG FACTS ................................................................................................................ 28 Issue (5) Were the matters described in pars 1-26 of Part A of the Schedule (to FAIŐs third further amended statement of claim) known to PMS as at 22 May 1989? .......................................................................................................... 28 Issue (6) As to all or any of those matters in Part A of the Schedule which PMS knew, were they 28 (i) matters which PMS knew to be relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms; or (ii) matters which a reasonable person in the circumstances, could be expected to have known to be matters so relevant? .............................. RENEWAL OF THE PMS POLICY FOR 1989-1990 - ALLEGED MISREPRESENTATION - THE TCF FACTS .................................................. 29 Issue (1) Was any partner of PMS, after enquiry, aware, on 22 May 1989, of the circumstances referred to in pars 1-22 of Part B of the Schedule (to FAIŐs third further amended statement of claim)? .......................................... 29 The 1987 audit (Part B (pars 1-7) of the Schedule) .............................. 29 The 1988 applications for extension of time (Part B, pars 8-21) and par 22 of Part B ............................................................................ 38 Issue (2) Did those circumstances described in Part B of the Schedule (to FAIŐs third further amended statement of claim) of which any partner of PMS was aware on 22 May 1989, satisfy the description of Ňcircumstance[s] which may give rise to a claimÓ in question 13 (b) (ii)? ................................... 41 Events subsequent to the underlying facts alleged to be suggestive of the making of a claim ............................................................................. 42 The inherent nature of the underlying facts as an indication of the likelihood of a claim: the 1987 audit ...................................................... 45 The inherent nature of the underlying facts as an indication of the likelihood of a claim: the 1988 applications for extension of time ....... 47 Paragraph 22 of Part B of the Schedule (to FAIŐs third further amended statement of claim) ................................................................. 47 Issue (3) If the answer ŇnoÓ to question 13 (b) (ii) was untrue, have PMS nonetheless established that McS, as the person signing the proposal form, gave that answer on the basis of a belief in fact held by him, being a belief that a reasonable person in the circumstances would have held? .................... 48 Issue (4) If the answer ŇnoÓ to question 13 (b) (ii) was untrue, has FAI established that McS, as the person who gave that answer, knew, or that a reasonable person in the circumstances could be expected to have known, that the answering of the question in that way would have been relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms? ............. 48 RENEWAL OF THE PMS POLICY FOR 1989-1990 - ALLEGED NON-COMPLIANCE WITH THE DUTY OF DISCLOSURE - THE TCF FACTS ... 48 Issue (5) Were the matters described in pars 1-22 of Part B of the Schedule (to FAIŐs third further amended statement of claim) known to PMS as at 22 May 1989? .......................................................................................................... 48 Issue (6) As to all or any of those matters in Part B of the Schedule which PMS knew, were they 49 (i) matters which PMS knew to be relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms; or (ii) matters which a reasonable person in the circumstances, could be expected to have known to be matters so relevant? .............................. Conclusion on 1989 proposal ............................................................................. 50 ALLEGED MISREPRESENTATION AND NON-COMPLIANCE WITH THE DUTY OF DISCLOSURE, AND RENEWAL OF THE CHATSWOOD AND GOSFORD POLICIES FOR 1991-1992 GENERALLY .................................... 50 THE ALLEGED 7 MAY 1990 REPRESENTATIONS AND RENEWAL OF THE PMS POLICY FOR 1990-1991 ................................................................. 52 General ............................................................................................................... 52 Issue (7) Did McS make the 7 May 1990 representations as pleaded? ......... 59 Issue (8) If ŇyesÓ to Issue (7) were the 7 May 1990 representations untrue? 64 RENEWAL OF THE PMS CHATSWOOD POLICY FOR 1991-1992 - ALLEGED MISREPRESENTATION - THE TCF FACTS ............................... 66 Issue (1) Was any partner of PMS Chatswood, after enquiry, aware, on 28 April 1991, of the circumstances set out in pars 1-22 of Part B of the Schedule to FAIŐs further amended defence in the TCF insurance proceeding? ........................................................................................................ 66 Events subsequent to the underlying TCF facts which are alleged to be suggestive of the making of a claim .................................................. 66 Awareness of McS and of Cullen that TCF was represented at the section 541 examinations ........................................................................ 67 Awareness of TCFŐs entitlement to sue ................................................. 70 FAIŐs allegation that legal representation reflected a consciousness of possible liability ...................................................................................... 71 Conclusion .......................................................................................................... 72 Issue (2) Did those circumstances described in Part B of the Schedule (to FAIŐs further amended defence) of which any partner of PMS Chatswood (effectively McS) was aware, on 28 April 1991, satisfy the description of Ňcircumstance[s] which may give rise to a claimÓ in question 13 (b) (ii)? ....... 72 The section 541 examinations, more generally ...................................... 73 CAC interviews ...................................................................................... 75 The fact of the public examinations, at which statutory bodies were represented ............................................................................................. 75 Line of questioning of McS and Cullen in the examinations ................ 76 The 1987 audit ................................................................................. 76 The 1988 conduct ............................................................................ 77 Breadth of, and possible inferences from, the questioning ................ 78 Assurances from Mr Ross ...................................................................... 81 Absence of practice of TCF suing accountants ..................................... 83 Events subsequent to the section 541 examinations .............................. 84 Issue (3) If the answer ŇnoÓ to question 13 (b) (ii) was untrue, have TCF and PMS Chatswood nonetheless established that McS, as the person signing the proposal form, gave that answer on the basis of a belief in fact held by him, being a belief that a reasonable person in the circumstances would have held? ............................................................................................... 84 Issue (4) If the answer ŇnoÓ to question 13 (b) (ii) was untrue, has FAI established that McS, as the person who gave that answer, knew, or that a reasonable person in the circumstances could be expected to have known, that the answering of the question in that way would have been relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms? ............. 85 RENEWAL OF THE CHATSWOOD POLICY FOR 1991-1992 - ALLEGED NON-COMPLIANCE WITH THE DUTY OF DISCLOSURE - THE TCF FACTS ................................................................................................................ 86 Issue (5) Were the matters described in pars 1-22 of Part B of the Schedule to FAIŐs further amended defence in the TCF insurance proceeding known to PMS Chatswood as at 28 April 1991? ........................................................... 86 Issue (6) As to all or any of those matters in Part B of the Schedule to FAIŐs further amended defence in the TCF insurance proceeding which PMS Chatswood knew, were they 86 (i) matters which PMS Chatswood knew to be matters relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms; or (ii) matters which a reasonable person in the circumstances, could be expected to have known to be matters so relevant? .............................. Conclusion on 1991 Chatswood proposal ......................................................... 87 RENEWAL OF THE GOSFORD POLICY FOR 1991-1992 - ALLEGED MISREPRESENTATION - THE TCF FACTS .................................................. 87 Issue (1) Was any of the partners of PMS Gosford, after enquiry, aware, on 22 April 1991, of the circumstances set out in pars 1-22 of Part B of the Schedule to FAIŐs further amended defence in the TCF insurance proceeding, or of the fact that there might be a claim against Phillips by reason of PMSŐs conduct in 1987 and 1988 in relation to Travel and TCF? ... 88 Issue (2) Did those circumstances described in Part B of the Schedule to FAIŐs further amended defence in the TCF insurance proceeding of which any partner of PMS Gosford (effectively Cullen) was aware, on 22 April 1991, satisfy the description of Ňcircumstance[s] which may give rise to a claimÓ in question 13 (b) (ii)? ............................................................................ 89 Issue (3) If the answer ŇnoÓ to question 13 (b) (ii) was untrue, have TCF and PMS Gosford nonetheless established that Cullen, as the person signing the proposal form, gave that answer on the basis of a belief in fact held by him, being a belief that a reasonable person in the circumstances would have held? ................................................................................................................... 90 Issue (4) If the answer ŇnoÓ to question 13 (b) (ii) was untrue, has FAI established that Cullen, as the person who gave that answer, knew, or that a reasonable person in the circumstances could be expected to have known, that the answering of the question in that way would have been relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms? ............. 91 RENEWAL OF THE GOSFORD POLICY FOR 1991-1992 - ALLEGED NON-COMPLIANCE WITH THE DUTY OF DISCLOSURE - THE TCF FACTS ................................................................................................................ 91 Issue (5) Were the matters described in pars 1-22 of Part B of the Schedule to FAIŐs further amended defence in the TCF insurance proceeding known to PMS Gosford as at 22 April 1991? ................................................................ 91 Issue (6) As to all or any of those matters in Part B of the Schedule to FAIŐs further amended defence in the TCF insurance proceeding which PMS Gosford knew, were they 92 (i) matters which PMS Gosford knew to be matters relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms; or (ii) matters which a reasonable person in the circumstances, could be expected to have known to be matters so relevant? .............................. Conclusion on 1991 Gosford proposal .............................................................. 93 ALLEGED BREACH OF IMPLIED PROVISION REQUIRING INSURED TO ACT TOWARDS FAI WITH UTMOST GOOD FAITH .............................. 93 ATTACK ON McSŐS CREDIT ............................................................................ 93 SUMMARY OF CONCLUSIONS ...................................................................... 94 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: 24 APRIL 1998 PLACE: SYDNEY THE COURT ORDERS THAT: 1. Both proceedings (NG 312 of 1992 and NG 948 of 1992) be stood over to 8 May 1998 at 9.30 am for the making of orders. 2. The parties supply to the Associate to Lindgren J by 6 May 1998 agreed short minutes of the orders (including orders as to costs) to be made, and if agreement has not been reached by then, short minutes of the orders (including orders as to costs) for which they will respectively contend, and written submissions in support. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. 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: 24 APRIL 1998 PLACE: SYDNEY REASONS FOR JUDGMENT - PART IV ALLEGED MISREPRESENTATION AND FAILURE TO COMPLY WITH DUTY OF DISCLOSURE, RELATING TO RENEWAL OF POLICIES INTRODUCTION Parts I, II and III of my Reasons for Judgment in these two proceedings have been delivered. I take them as read. In particular, I take as read Part IŐs account of the pleadings and outline of the facts relating to insurance, including events between the TAG judgment and the TCF judgment on the one hand, and the commencement of the present hearing on the other. I continue to use the abbreviations previously identified. Annexed to the present Part is a chronology of insurance events. This forms part of my Reasons. (In Part III of these Reasons, I explained that I would use the expression ŇTCF and PMS submit.Ó Although TCF has no direct interest in the issue of avoidance of the PMS insurance contract, it has an interest in the issue of McSŐs awareness of the matters described in the twenty-two paragraphs of Part B of the Schedule (to FAIŐs third further amended statement of claim in the TAG insurance proceeding), because, apart from certain differences in par 22 noted later, they are identical in all relevant respects to those described in the twenty-two paragraphs of Part B of the Schedule to FAIŐs further amended defence in the TCF insurance proceeding. In relation to the Chatswood policy and the Gosford policy, it is strictly not correct even to say ŇPMS submitÓ as distinct from ŇPMS Chatswood submitÓ and ŇPMS Gosford submitÓ. I propose to use the expression ŇPMS submitÓ in relation to the PMS policy and the expression ŇTCF and PMS submitÓ in relation to the Chatswood policy and the Gosford policy.) ISSUES FAI alleges misrepresentation and failure to comply with the duty of disclosure imposed by s 21 of the IC Act, relating to the renewals of the PMS policy for 1989-1990 and the Chatswood and Gosford policies for 1991-1992. Certain issues are common to all three renewals. Some are also relevant to certain alleged misrepresentations which FAI says McS made in PMSŐs proposal dated 7 May 1990 for renewal of the PMS policy for 1990-1991. FAI submits that these are relevant to the renewal of the Chatswood policy for 1991-1992. General issues relating to misrepresentation Except for the 7 May 1990 representations referred to above and below, in each case the alleged misrepresentations arise from the negative answer given to question 13 (b) (ii) in, and the declaration of truth at the end of, a proposal form submitted to FAI (both set out in Part I). The proposal form dated 22 May 1989 signed by McS and submitted for renewal of the PMS policy disclosed, in answer to question 13 (a) a threatened claim by C E McDonald (Aust) Pty Ltd (ŇMcDonaldÓ), and disclosed nothing further in the answers to question 13 (a) or 13 (b). The question and the pleadings in relation to the renewal of the PMS policy for 1989-1990 raise the following two issues as to the truthfulness of the answer to question 13 (b) (ii): Issue (1) Whether any of the partners, after enquiry, was aware of any of the circumstances set out in the twenty-six paragraphs in Part A (relating to the TAG facts) and the twenty-two paragraphs set out in Part B (relating to the TCF facts) of the Schedule (to FAIŐs third further amended statement of claim in the TAG insurance proceeding) (a copy of the Schedule was annexure A to Part I of these Reasons); and Issue (2) If so, whether those circumstances of which any partner was aware satisfied the description Ňcircumstance[s] which may give rise to a claimÓ in question 13 (b) (ii)? The proposals of late April 1991 for renewal of the Chatswood and Gosford policies for 1991-1992 disclosed, relevantly, the McDonald, TAG and IPG claims, all of which had, by then, been made, but none of the TCF facts. The alleged misrepresentations arising from those two proposal forms relate to the TCF facts alone. In one respect, the twenty-two paragraphs in Part B of the Schedule to FAIŐs further amended defence to TCFŐs amended points of claim in the TCF insurance proceeding, describing TCF facts which FAI contends McS and Cullen knew to a substantial extent in April 1991 but failed to disclose in the two proposals then made for renewal of the Chatswood and Gosford policies, go beyond pars 1-22 in Part B of the Schedule to FAIŐs third further amended statement of claim in the TAG insurance proceeding, that is to say, the twenty-two paragraphs describing TCF facts which FAI contends McS knew but failed to disclose in the earlier proposal dated 22 May 1989 for renewal of the 1989-1990 PMS policy. The difference relates primarily to the examination of McS, Beale and Cullen under s 541 of the Companies Code relating to the affairs of Travel and Wheels, which had taken place between the times of the proposal in 1989 and those in 1991. Paragraph 22 of Part B of the Schedule (in the TAG insurance proceeding) reads simply: Ň22. Mr McSweeney, Mr Beale and Mr Cullen had been notified that they were to be examined pursuant to s. 541 of the Companies Code in relation to the affairs of (inter alia) Travel.Ó This paragraph is merely to the effect that as at the date of the original proposal, 22 May 1989 (I will, for convenience, refer throughout to the dates of the three proposals for renewal - the policies were renewed shortly afterwards and without any relevant change of circumstances), all three accountants had been notified that they were to be examined. As will appear later, I am not satisfied that they had been notified by that date (or by the renewal of the PMS policy on 20 June 1989). But all that need be noted for present purposes is that by late April 1991, the s 541 examinations having been completed some months earlier, the counterpart par 22 in Part B of the Schedule to FAIŐs further amended defence in the TCF insurance proceeding, is extended as indicated in bold below: Ň22. Mr McSweeney, Mr Beale and Mr Cullen had, in about mid 1989, been summonsed for examination pursuant to s.541 of the Companies Code in relation to the affairs of (inter alia) Travel; had retained solicitor and Counsel who had appeared for them at the examination; and had been examined, including by Counsel for TCF, over a number of days in November 1989 and July 1990 concerning, inter alia, PMSŐs activities in relation to TravelŐs 1987 accounts (including the management fees) and TravelŐs July-December 1988 financial position and the extensions of time.Ó (emphasis supplied) If I should conclude that any of the negative answers to question 13(b) (ii) was untrue, as FAI submits, it may not follow that the resulting untrue statement was a ŇmisrepresentationÓ for present purposes. This is because subss 26 (1) and (2) of the IC Act provide: Ň26. (1) Where a statement that was made by a person in connection with a proposed contract of insurance was in fact untrue but was made on the basis of a belief that he held, being a belief that a reasonable person in the circumstances would have held, the statement shall not be taken to be a misrepresentation. (2) A statement that was made by a person in connection with a proposed contract of insurance shall not be taken to be a misrepresentation unless the person who made the statement knew, or a reasonable person in the circumstances could be expected to have known, that the statement would have been relevant to the decision of the insurer whether to accept the risk and, if so, on what terms.Ó The further issues arising from s 26 and the pleadings in relation to the alleged misrepresentations in the three proposals are: Issue (3) If the answer ŇnoÓ to question 13 (b) (ii) was untrue, have PMS nonetheless established that McS (or Cullen, in the context of the 1991 Gosford proposal), as the person signing the proposal form, gave that answer on the basis of a belief in fact held by him, being a belief that a reasonable person in the circumstances would have held? Issue (4) If the answer ŇnoÓ to question 13 (b) (ii) was untrue, has FAI established that McS (or Cullen, in the context of the 1991 Gosford proposal), as the person who gave that answer, knew, or that a reasonable person in the circumstances could be expected to have known, that the answering of the question in that way would be relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms? General issues relating to non-disclosure Subsection 21 (1) of the IC Act is as follows: Ň21. (1) Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that: (a) the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or (b) a reasonable person in the circumstances could be expected to know to be a matter so relevant.Ó In relation to the alleged non-compliance with the statutory duty of disclosure, the issues posed by subs 21 (1) of the IC Act and the pleadings are: Issue (5) Were the relevant matters known to the insured? Issue (6) If so, as to all or any of them, were they (i) matters which the insured knew to be matters relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms; or (ii) matters which a reasonable person in the circumstances could be expected to have known to be matters so relevant? The alleged 7 May 1990 representations In relation to renewal of the Chatswood policy for the year 1991-1992, there is a complication. In relation to that renewal, FAI relies, not only on the proposal dated 28 April 1991 signed by McS, but also on alleged misrepresentations made by McS a year earlier when he submitted to FAI the proposal dated 7 May 1990 and its attachments, in connection with the renewal of the PMS policy for the year 1990-1991. Those alleged misrepresentations relate to the TAG facts. FAIŐs complaint in this respect is not that McS did not disclose the TAG claim: the TAG claim was disclosed by McS in answer to question 13 (a) of the proposal of 7 May 1990 just as it was a year later in answer to the same question both by Cullen in the proposal dated 22 April 1991 for renewal of the Gosford policy, and by McS in the proposal dated 28 April 1991 for renewal of the Chatswood policy. In fact, the TAG proceeding had been launched in January 1990; FAI had granted indemnity in respect of it; and TCM, instructed by FAI, were representing McS and Phillips, by 7 May 1990. In substance, FAIŐs complaint is that in the proposal dated 7 May 1990, and, in particular, in documents attached to it, McS made five representations touching certain aspects of the TAG facts (Ňthe 7 May 1990 representationsÓ) which were untrue. The 7 May 1990 representations as pleaded were set out in Part I of these Reasons and each is repeated later in this Part (IV). The following issues arise on the pleadings in relation to the 7 May 1990 representations: Issue (7) Did McS make the 7 May 1990 representations as pleaded? Issue (8) If ŇyesÓ to Issue (7), were the 7 May 1990 representations untrue? Issue (9) If ŇyesÓ to Issue (8), have TCF and PMS Chatswood nonetheless established that the 7 May 1990 representations were made on the basis of a belief in fact held by McS, as the person signing the proposal form, being a belief that a reasonable person in the circumstances would have held? Issue (10) If ŇyesÓ to Issue (8), has FAI established that McS, as the person who gave that answer, knew, or that a reasonable person in the circumstances could be expected to have known, that the making of the 7 May 1990 representations would be relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms? Effect under section 28 of the IC Act on misrepresentation and failure to comply with duty of disclosure Section 28 of the IC Act deals with the effect of a misrepresentation or a failure to comply with the statutory duty of disclosure. The section is as follows: Ň28. (1) This section applies where the person who became the insured under a contract of general insurance upon the contract being entered into: (a) failed to comply with the duty of disclosure; or (b) made a misrepresentation to the insurer before the contract was entered into; but does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into. (2) If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract. (3) If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place him in a position in which he would have been if the failure had not occurred or the misrepresentation had not been made.Ó Section 28 proceeds on the assumption that a misrepresentation or failure has been established. The section and the pleadings raise the following issues: Issue (11) Would FAI have entered into the contract of insurance for the same premium and on the same terms and conditions, even if the insured had not made the misrepresentation or failed to comply in the relevant respect with the duty of disclosure? (Section 28 (1) has the effect that if the answer is ŇyesÓ, the remedies provided by subss 28 (2) and (3) are not available.) Issue (12) If ŇnoÓ to Issue (11), was the misrepresentation made fraudulently or was the failure to comply with the duty of disclosure fraudulent? (Section 28 (2) has the effect that if the answer is ŇyesÓ, FAI acquired a right to avoid the contract.) Issue (13) If FAI was not entitled to avoid the contract, or, being entitled to avoid it, did not do so, to what amount, if any, is FAIŐs liability in respect of the claim to be reduced pursuant to s 28 (3) of the IC Act, as the amount that would place it in the position in which it would have been if the misrepresentation had not been made or the failure to comply with the duty of disclosure had not occurred? FAIŐs primary position in relation to all three policies is that if the alleged misrepresentations had not been made and the alleged failure to comply with the duty of disclosure had not occurred, it would not have entered into the relevant contract of insurance, and that the amount referred to in Issue (13) is therefore ŇNilÓ. But FAI also submits, in the alternative, that under any contract of insurance into which it would have entered, it would not have been liable to indemnify in any event, because of Exclusion (g) in its form of professional indemnity policy. This submission calls for some elaboration. Standard printed Exclusion (g) which formed part of the PMS policy, the Chatswood policy and the Gosford policy, is, relevantly, as follows: ŇExcept as provided for in those extensions for which limits are stated in the Schedule this Policy shall not indemnify the Insured in respect of any claim against the Insured: ... (g) arising out of claims and circumstances noted on the proposal form for the current period of cover or on any previous proposal form; ...Ó It is convenient also to note here standard condition 2: Ň2. The Insured shall as a condition precedent to his or their right to be indemnified under this Policy to give [sic] to the Company immediate notice in writing: (a) of any claim made against him or them; or (b) of the discovery of reasonable cause for suspicion of fraud or dishonesty on the part of any of his or their employees partners or co-directors whether giving rise to a claim or not, and shall in any case, upon request, give to the Company such information as the Company may reasonably require.Ó The scheme of FAIŐs standard form of policy in relevant respects was considered by the Full Court of the Supreme Court of Western Australia in FAI General Insurance Co Ltd v Hendry Rae & Court (1993) 10 WAR 322 (ŇHendry RaeÓ). In that case, a claim against an insured firm of accountants had been threatened, notified to FAI, FAI had closed its file and, apparently, the matter had Ňpassed into historyÓ. In a proposal for renewal of the insurance some years later, the former possible claim was not disclosed in answer to question 13 (a), and question 13 (b) (ii) was answered ŇNoÓ. During the year, a claim was made arising out of the same circumstances. The trial Judge (Anderson J), and on appeal all members of the Full Court (Malcolm CJ, Pidgeon, Franklyn JJ), thought that the answer to question 13 (a) had constituted a misrepresentation. There was no question of fraud. The trial Judge, and on appeal Pidgeon J, dissenting, thought that s 28 did not apply, while the majority in the Full Court (Malcolm CJ and Franklyn J) thought that it did. The majority held that if the details called for by question 13 (a) had been provided, because of the exclusion to which I have referred, FAI would not have been entering into the contract for the same premium and on the same terms and conditions, with the result that s 28 applied. The trial Judge and Pidgeon J, on the other hand, thought that the contract of insurance itself would have been no different; that the difference would have been only in its effect or operation; and that, in consequence, s 28 did not apply. The majority in the Full Court held that FAIŐs liability was reduced to nil by reason of the operation of s 28 (3) and the supposed exclusion upon the hypothesised correct answer to question 13 (a). FAIŐs alternative submission to its submission that s 28 (3) operates to reduce its liability to nil, is that I should resolve Issue (13) by holding that FAIŐs liability would have been reduced to nil in accordance with the approach taken by the majority in Hendry Rae. MISREPRESENTATION GENERALLY In my view, the expression Ňcircumstance which may give rise to a claimÓ conveys an objective notion, that is, the notion of a circumstance which, as a matter of objective fact, possesses the quality that it Ňmay give rise to a claimÓ. Question 13 (b) (ii) does not require that the proponent for insurance be aware of both the circumstance and of the fact that it possesses that quality. This approach is well supported (see, for example, Bowling v Weinert [1978] 2 NSWLR 282 (Lee J) and the cases there referred to, especially Bayer Leverkusen Ltd v Phoenix Assurance Company (unreported, NSWCA, Moffitt, Hardie and Hope JJA, 19 March 1973); EST Limited v HIH Casualty and General Insurance Ltd (unreported, SCVic, No 6938 of 1994, Mandie J, 27 October 1997); Sutton, Insurance Law in Australia (2nd edn, 1991) at 796). Accordingly, the question is whether, as at the date (22 May 1989) of the proposal for renewal of the PMS policy for 1989-1990, those of the TAG or TCF matters described in the Schedule of which a partner of PMS was aware, were circumstances which, considered objectively, satisfied the description of Ňcircumstance[s] which may give rise to a claimÓ. A similar question, with necessary modifications, is to be asked in relation to the proposal dated 22 April 1991 signed by Cullen for renewal of the Gosford policy and the proposal dated 28 April 1991 signed by McS for renewal of the Chatswood policy. The character to be possessed is described by reference to a ŇclaimÓ. What is the relationship between the known circumstance and the hypothesised ŇclaimÓ that is signified by the phrase, Ňmay give rise toÓ? TCF and PMS submit that there must be some form of direct demand or complaint. In support, Holts Corrosion Control Pty Ltd v CML Fire & General Insurance Co Ltd (1984) 3 ANZ Cas 60-559 (SCQld, Macrossan J) (ŇHolts CorrosionÓ) is relied upon. In Holts Corrosion, Macrossan J had to construe condition 1 of a policy which provided: ŇÔNotice in writing shall be given as soon as possible to the Company of (a) Every occurrence, claim, writ, summons, proceeding, impending prosecution, inquest and all information in relation thereto in respect of which there may arise liability under the Policy ... that shall come to the knowledge of the insured. Such notice shall be given by the insured ...Ó In addition to the differences between the terms of this condition and those of question 13 (b) (ii) of FAIŐs proposal form, the factual context of the case was different from that of the present one. Holts Corrosion did not concern a proposal for a claims made and notified policy but a term of a policy already on foot which required prompt notification to the insurer of occurrences of the kind described, during the currency of the policy. The insured had been spray painting in the course of its business. There had been complaints, which had been forwarded on to the insured by the company that had engaged it, by vehicle owners of damage to their vehicles from ŇoversprayÓ. No demands for compensation had been made. Macrossan J held that the insured had not failed to satisfy condition 1. His Honour noted that no-one had come to the insured directly and complained, let alone demanded, that the insured pay compensation. He further referred to the Ňflavour of legal formalityÓ suggested by the collocation of words Ňclaim, writ, summons, proceeding, impending prosecution, inquestÓ. His Honour finally said that the expression Ňin respect of which there may arise liability under the ÔPolicyŐÓ made it clear that what had to be considered under condition 1 was: Ňnot the mere possibility of a claim against the insured, but the possibility of an established liability on the part of the insurer.Ó (at 78, 372) Macrossan J concluded that, in context, it was necessary that the occurrence involve at least Ňthe assertion of a claim against the assuredÓ, and that it involve something more than Ňmere activity about to be undertaken by the insured which might thereafter result in some demand being made upon him in connection with damage which may be causedÓ and Ňeven more than the occurrence of damage to property which might thereafter result in a demand being made upon the insuredÓ (emphasis in Judgment). Question 13 (a) in the FAI proposal form refers to events during the preceding ten years. These are the making of a claim, the alleging of negligence, and the notification to insurers of circumstances that might give rise to a claim. Question 13 (b) is concerned with less definite concepts. The question begins, Ň(b) Are any of the Partners, AFTER ENQUIRY, aware of:Ó and the first matter described is Ň(i) Any accounts overdue for payment where there is reason to believe the Client is dissatisfied with the professional services rendered?Ó (emphasis supplied) followed by the critical par (ii): Ň(ii) Any claim or circumstance which may give rise to a claim against the Firm(s) or any prior Firm(s) or any of the present or former Partners/Directors/ Consultants which matter is not referred to in Question 13 (a) above?Ó (emphasis supplied) It is not obvious, in view of question 13 (a), why this paragraph begins Ň[a]ny claimÓ. It could hardly have been intended to catch claims made more than ten years earlier. Perhaps it was sought to emphasise, as question 13 (a) does not, the necessity for enquiry of all partners in respect of claims already made. It assists, perhaps, to state the obvious: if it could be known that a circumstance definitely would or would not give rise to a claim, question 13 (b) (ii) would or would not, respectively, catch it. But neither possibility, lying in the future, can be known as a certainty. The question is: What degree of likelihood that a known circumstance will give rise to a claim, is signified by the expression Ňcircumstance which may give rise to a claimÓ in question 13 (b) (ii)? The commercial context and object of the proposal must be borne in mind (see Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834 at 840 (McGarvie JA, with whom Kaye and Ormiston JJA agreed) and cases there cited, and Sutton, Insurance Law in Australia (2nd edn, 1991) at 792). Every time an accountant prepares accounts or an auditor performs an audit, there is the possibility of a claim. Moreover, where loss is suffered as a result of a business failure, it is not uncommon for a loss sufferer to search for and target persons having some connection with the business who are insured. But question 13 (b) (ii) does not, in my opinion, require a proponent to engage in surmise and speculation or to disclose every mere possibility of the making of a claim. In Hendry Rae, Pidgeon J discussed the meaning of the expression Ňcircumstance which may possibly give rise to a claimÓ in the exclusion clause to which I referred earlier in my discussion of that case. His Honour saw that expression as referring to Ňa known deficiency likely to result in a casualtyÓ (at 347). His Honour continued: ŇThe policy covered claims made during its currency. The insurer would wish to exclude claims that are likely when the proposal is completed. To go to extremes, if a ship had foundered with potential claims when the survivors reached shore, but if such claims had not been made when the proposal was filled out, then the foundering of the ship would be a circumstance which may result in a claim. Clearly an insurer would not accept the risk of indemnifying the insured when the claim was later, in fact, made. That fact must be disclosed as a circumstance. I would see the phrase intending to cover a similar area to the phrase Ôany occurrence which might give rise to a claim,Ő when a policy requires such matter to be reported during the currency of the policy. ... there must be an occurrence looked at objectively which may give rise to a claim. Applying this to a professional indemnity insurance, if it had become known to a partner that he had made a serious mistake in writing a report such as using a wrong valuation, this would be a circumstance necessary to disclose.Ó (emphasis supplied) It will be recalled that in Hendry Rae, a claim threatened years earlier appeared to have been abandoned. In relation to the significance in this context of question 13 (b) (ii), Pidgeon J agreed with the trial JudgeŐs conclusion that the negative answer given to the question was not a misrepresentation, because, at the time of completion of the proposal, the insured accountants were not Ňstill aware of any claim or circumstance which may give rise to a claim against them by [their former client]Ó (quoted by Pidgeon J at 347). His Honour referred to the standard form of exclusion, to which I also referred earlier, and said: ŇThe policy does cover an event that occurred prior to the commencement of the policy if the claim is made during the currency of the policy provided that the claim in respect of that event was not already under way at the time the proposal is being completed and provided that ÔcircumstancesŐ giving rise to a likely claim are not known to the proposed insured.Ó (at 348 - emphasis supplied) Question 13 (b) (ii) in the proposal form, and standard Exclusion (g), are clearly directed to the making of claims against the insured with which FAI will have to deal, not merely such claims as may have prospects of success. It must be remembered, however, that the parties must be taken to have intended that the insurance cover be effective. It might be suggested in respect of claims made and notified policies that: (a) the proponent insured will always be aware of those circumstances which, it transpires, have given rise to the making of a claim during the period of the policy; (b) ex hypothesi, that claim has given rise to a legal liability on the part of the insured to pay compensation for a form of legal wrongdoing falling within the terms of the insuring clause of the policy; (c) ex hypothesi, a reasonable person would have understood that those circumstances might give rise to a claim; (d) it follows that the insurer under such a policy will never be liable unless the circumstances occurred during the period of the insurance. A submission along these lines would be rejected because it would accord to the expression Ňmay give rise to a claimÓ the meaning Ňwould be recognised by a reasonable person who thought about it as possessing the capacity to give rise to a claimÓ - a meaning so favourable to the insurer as to deprive the policy of commercial effectiveness. PMS submit that it is only facts down to the time of the accrual of the relevant cause of action against the insured that are to be regarded. I reject the submission. Facts down to the date of the proposal are relevant to the question whether the earlier circumstances known to the proponent Ňmay give rise to a claimÓ. If PMSŐs submission were to be accepted, facts occurring even shortly prior to the proposal, such as a formal release of a claim on the one hand or the making of threats of a claim on the other, would, alike, have to be ignored. This result is clearly not intended. In my opinion, it is not desirable to attempt to define precisely the shade of meaning signified by the expression Ňmay give rise to a claimÓ. The appropriate connection between the known circumstances and the claim referred to in question 13 (b) (ii) is, perhaps, best described by saying that circumstances Ňmay give rise to a claimÓ if they would, as at the time of the proposing of the insurance, immediately suggest to a reasonable person in the proponent insuredŐs position who reflected upon those known circumstances, that the bringing of a claim against the insured in respect of them was a Ňdefinite riskÓ or a Ňreal possibilityÓ or Ňon the cardsÓ. Perhaps the notion of the Ňspringing to mindÓ of the making of a claim also appropriately expresses the shade of meaning intended. The expression is concerned with the making of a claim as distinct from the mere existence of legal liability. Ordinarily it can be expected that what will be known will include the fact that the circumstances have actually led a person at least to contemplate the making of a claim. However, I do not exclude the case where the underlying circumstances establishing liability themselves, of their nature, would prompt a reasonable person immediately to foresee the making of a claim as a real possibility. In such a case, the length of time that has passed without any suggestion of a claim and the degree of obviousness of liability may assume importance (cf the hypothetical case described by Pidgeon J in Hendry Rae at 347). RENEWAL OF THE PMS POLICY FOR 1989-1990 - ALLEGED MISREPRESENTATION - THE TAG FACTS Issue (1) Was any partner of PMS, after enquiry, aware, on 22 May 1989, of the circumstances referred to in pars 1-26 of Part A of the Schedule (to FAIŐs third further amended statement of claim)? FAIŐs submissions relate only to an awareness on the part of McS. The word ŇawareÓ can mislead. A fact may be within a personŐs general knowledge but the person may not have had it Ňin mindÓ at a particular time or on a particular occasion. It is particularly important to bear this distinction in mind in a case where fraud is alleged. Fraud is concerned with subjective states of mind, not with facts known but forgotten, or known but overlooked. It is important also to recall the nature of the fraud which I have found in respect of the TAG facts. While its seriousness must not be understated, McS had never intended to ŇdefraudÓ or ŇcheatÓ or Ňcause loss toÓ TAG. But these distinctions are irrelevant to question 13 (b) (ii). Its terms are apt to catch circumstances forming part of a partnerŐs general knowledge, albeit forgotten or overlooked. Those paragraphs of Part A of the Schedule which call for comment are pars 16, 17, 20 and 26. Paragraph 16 is: Ň16. PMS did not take adequate steps to verify that the cheques had been, or were about to be, presented and paid.Ó The concept of awareness of the inadequacy of the steps taken is problematical. While the statement is true as one of objective fact, and while McS was aware of what PMS had done and not done, in my view neither in 1987 nor when completing the proposal form on 22 May 1989, did McS hold the opinion that PMS had failed to take adequate steps to verify that the cheques had been, or were about to be, presented and paid. While I accept that it is not necessary in order for the notion of a Ňcircumstance which may give rise to a claimÓ to apply, that McS should have had a circumstance present to his mind as at 22 May 1989, it is not met, in my opinion, by a situation such as the present one, in which, in my view, McS is not shown ever to have held the opinion down to 22 May 1989, that PMS had not taken adequate steps to verify that the cheques had been, or had been about to be, presented and paid. But even if I had thought otherwise, for reasons appearing later, I would not have concluded that the failure to take adequate steps satisfied the description of a Ňcircumstance which may give rise to a claimÓ as at 22 May 1989. Paragraph 17 of Part A is: Ň17. On 29 July 1987, McSweeney did not know or believe that the cheques had then been presented or paid.Ó At the time of delivery of the preliminary accounts to Wu at RosenblumsŐ office on Wednesday 29 July 1987, McS did not know that the cheques had been presented or paid. He could not have known that they had been, because they had not been. However, it will be recalled that earlier on the same day, PMS, through Yip, received Ňthe informationÓ from Beazley and it was entered into TIIBŐs journal. McS believed that before telephoning the information through to Yip, Beazley would have made corresponding entries in the relevant records at the Toikan office. It will be recalled that McSŐs evidence was: ŇI also believed that at the time he made ToikanŐs entries, he had drawn cheques to effect the transactions, and that he would cause such cheques to be presented and paid shortly thereafter.Ó I find that at the time of the meeting at RosenblumsŐ office late on Wednesday 29 July, McS ŇbelievedÓ that Beazley had drawn the cheques and either had already caused them, or was about to cause them, to be presented and paid. That is to say, I find that his state of mind at the time of the meeting and handing over of the preliminary accounts to Wu, was that the misrepresentation contained in the preliminary accounts as to the position of the broking accounts as at the preceding 30 June had just been ŇremediedÓ or was about to be ŇremediedÓ. A belief that the cheques had in fact already been presented and paid earlier in the day is inconsistent with the matter described in par 17 of Part A. I am not persuaded that McS did not have that belief by the time of the meeting. I am therefore not satisfied that as at 28 May 1989, McS was aware that he had not, on 29 July 1987, believed that the cheques had by then been presented or paid. Paragraph 20 of Part A is: Ň20. At all material times, there was no reasonable basis for Mr McSweeney believing that the cheques would be met otherwise than out of the proceeds of the acquisition.Ó It will be recalled that on the basis of the money in the accounts of TIBG, Penklis ultimately conceded that there was a shortfall of only $80,271 and McS ultimately conceded that there was a shortfall of only $77,791. I say ŇonlyÓ to emphasise the vast difference between these figures on the one hand and those which FAI, at the beginning of the hearing, supported as representing the amount of the shortfall. Would it have been reasonable for McS to believe that Webber would provide an amount of the order of $80,000 from sources other than the proceeds of the acquisition? I accept that McS believed that WebberŐs wife and her family were wealthy. He gave evidence of what his belief was as to the assets of Webber and his wife and their value. The total, not supported by evidence, was $7,150,000. Mrs Webber owned the family home at 2 Bangalla Road, Rose Bay, over which we know she was prepared on 3 September 1988 to agree to give a second mortgage as security for payment of the amount of $2,232,145.54 which Webber then undertook to pay to TKN as representing the amount of the deficiencies. While the evidence does not positively establish that a sum of the order of $80,000 would have been forthcoming, I am not satisfied that there was no reasonable basis for McS to believe that an amount of that order would be provided otherwise than out of the proceeds of the acquisition. In any event, neither in 1987 nor as at 22 May 1989, was McS aware that there was no reasonable basis on which he could believe that the cheques would be met otherwise than out of the proceeds of the acquisition. Paragraph 26 of Part A is: Ň26. In respect of the period in which the transaction with Tag took place, PMS submitted on behalf of TIIB, CJ & H and C & G, applications to the Insurance Commissioner pursuant to the Insurance (Agents and Brokers) Act for registration as insurance brokers, stating in answer to a question in the application form, that the auditor was not a partner of an officer of the Applicant whereas in each case Mr Phillips was the auditor and his partner, Mr McSweeney, was a director.Ó The matters referred to in this paragraph did not form any part of the facts on the basis of which TAG made its claim against PMS. The Ňperiod in which the transaction with Tag took placeÓ might be seen to extend from April 1987 to 2 November 1987. The paragraph appears to refer to the applications that were made in December 1987 - after the acquisition was settled on 2 November. The applications stated that the auditor was not a partner of any officer of the company in question. In fact, during the period mentioned, McS was a director of TIIB, CJ & H and C & G, while his partner, Phillips, was their auditor. However, the accounts submitted in December 1987 were signed by McS himself as auditor. He claimed that this was an Ňadministrative errorÓ. The application which had been submitted to the Insurance Commissioner in June 1986, on the other hand, had been supported by accounts signed by Phillips as auditor. McS gave evidence in this respect that Wallis had contacted the Insurance CommissionŐs office and had been told that it was ŇappropriateÓ for the applications to be submitted, notwithstanding the misrepresentation that they would contain. In his statement of 23 June 1995, Wallis said that he had spoken to an officer of the Commission and informed him that Phillips, who was in Gosford, would be conducting the audit and that McSŐs Sydney practice was quite separate from that of Phillips, despite the fact that the two men were partners. But in cross-examination, Wallis conceded that the work on the audit was in fact to be performed by himself and Yip, that they were in the Sydney office and that they normally reported to McS. He claimed that he also informed the officer of the Commission of these matters, and explained the absence of any reference to them in his written statement by saying that they Ňnever occurred to me in making the statementÓ, and that he ŇdidnŐt see [them] as relevantÓ. Whatever the misrepresentations made to the Insurance Commission in June 1986 and December 1987, and whatever they may indicate as to the manner in which PMS carried on their practice, they are not relevant to any substantive issue in the case. (They are potentially relevant to credit, particularly that of Wallis, but that is another matter.) TAG did not rely on the statements; nor is any reliance on them by the Insurance Commission shown to have had any connection with the loss suffered by TAG. They form no part of Ňcircumstance[s] which may give rise to a claim.Ó They therefore need not be considered further. In the result, subject to what I have said above, the circumstances set out in Part A of the Schedule of which McS was ŇawareÓ in the (relevant) sense that they formed part of his general knowledge, as at 22 May 1989 were those described in pars 1-15, 18, 19 and 21-25. It is necessary to say Ňsubject to what I have said aboveÓ since, on 22 May 1989, McS believed that the cheques had been drawn on 29 July 1988 (cf pars 11 and 12 of Part A of the Schedule). Issue (2) Did those circumstances described in Part A of the Schedule (to FAIŐs third further amended statement of claim) of which any partner of PMS was aware on 22 May 1989, satisfy the description of Ňcircumstance[s] which may give rise to a claimÓ in question 13 (b) (ii)? It is not amiss to repeat that it is important to guard against the wisdom of hindsight: we now know that PMSŐs conduct as part of the TAG facts had the capacity to give rise to a successful claim against the firm. But it is necessary to confine attention to the position as at 22 May 1989. FAI submits that the question posed should be answered ŇyesÓ for the following reasons: Ň(1) the very nature of PMSŐs Tag conduct was pregnant with the possibility of serious consequences, and recriminations; (2) Tag regarded its losses on the purchase of the Toikan companies as matters in respect of which it was entitled to compensation from someone, and in the first place the Webber interests; (3) the Webber interests at least might not be able to satisfy all of TAGŐs claim; (4) TagŐs refusal to pay substantial fees to PMS, the letter of 2 June and meeting of 16 June 1988, and the meeting of 7 April 1989, suggested that Tag was most dissatisfied with PMSŐs role in the Toikan debacle, and in a way that sounded in money; (5) Tag had given no assurance or even indication that PMS would not be sued; (6) because of PMSŐs involvement in the purchase and in particular in the treatment of the outstanding cheques as cash at bank which was non-existent, they might as a real possibility, be seen by Tag as a claim target, whether or not PMS thought they would have good defences to such a claim.Ó FAIŐs reason (5) above can be disposed of shortly. A mere failure to give an assurance or indication that a claim will not be made does not suggest the making of one. Moreover, as PMS submit, the Ňdominant supervening circumstance, ... is that ... prior to January 1990 TAG gave no hint to [McS] that it thought the accountants might be liable, and the relationship between TAG and the accountants was co-operative and harmoniousÓ. I turn to FAIŐs reasons (1) and (6). Both refer to PMSŐs conduct as part of the TAG facts as, of its nature, raising the spectre of a claim against PMS. But I think that this view is a product of hindsight, and also fails to give due weight to the fact that it is the making of a claim, not the existence of liability, which is the concern of question 13 (b) (ii). It is true that PMS had issued preliminary accounts which contained a statement that they knew to be false and in reliance on which they intended TAG to act. But what were the indications as at 22 May 1989 that TAG might make a claim against PMS? It might be pointed out that by mid-1988, TAG had ceased to retain PMS. But no adverse inference should be drawn from this fact, as it had apparently been agreed as early as late 1987 that MoffittŐs firm, Thompson Douglass Buttrell, who were WuŐs accountants, would take over from PMS. WuŐs evidence in cross-examination before me was that McS was Ňco-operative with [him] in [his] investigationsÓ and Ňappeared to be as helpful as [Wu] would have wished in trying to assist [Wu] in relation toÓ the question of the unpresented cheques. Evidence was also given by Chalker and Moffitt, who were also involved in the questioning of McS, to the effect that he was helpful, forthcoming, co-operative, open, frank and honest. Such a stance is difficult to reconcile with an awareness on McSŐs part that TAG was contemplating making a claim against PMS or was viewing PMS as responsible for its loss. Indeed, Wu agreed that, prior to January 1990, McS was given no indication that PMS might be sued. While McSŐs apparent state of mind at the time does not directly bear on the issue whether the circumstances bore the character of which question 13 (b) (ii) speaks, it does so indirectly by providing some evidence that a reasonable person in McSŐs situation at the time would also not have understood that TAG was contemplating making a claim against PMS or was viewing PMS as responsible for its loss. FAI submits that disharmony is revealed by what happened at two meetings. The first was a meeting on 16 June 1988. Wu gave affidavit evidence of what occurred. Those present were McS, Webber, Moffitt, Wallis and Yip. Wu explained the conclusions which TAG had reached as to the extent and origin of Ňthe cash deficiencies in the accountsÓ. He invited a response from Webber and McS. McS agreed with a statement by Wu that the cheques had not been deposited, but added, Ňwe do not agree with your final sumÓ. According to Wu, McS contended that Webber owed much less than the amount claimed by Wu. This stance was consistent with the view which McS had always held, and continued to hold, that after all available moneys were brought to account, there was either no shortfall or only a small one, which Webber, his wife or her family would have no difficulty in making up. According to Wu, he (Wu) became Ňannoyed with the unsatisfactory answers [he] was being given and felt unable to continue with the discussion [and] left the roomÓ. He returned later. It seems clear that WuŐs feeling of annoyance was related to McSŐs insistence that his (WuŐs) figures were incorrect, while he (McS) was unable to substantiate his contention that the amount of any shortfall must be much less than WuŐs figure. In my opinion, there was no reason to think that WuŐs annoyance in this respect was suggestive of the making of a claim by TAG against PMS. The second meeting to which FAI refers occurred on 7 April 1989. On that day, McS met with Wise, Wu, Buttrell, Webber and Turner. According to McSŐs contemporaneous note, Wise appeared to be concerned that TAG was in a serious financial plight and was possibly insolvent. According to McS, Wise considered that there were two possible reasons: first, that the accounting methods used by the company were misleading; and second, the ŇWebber loansÓ. In cross-examination, it was put to McS that Wise Ňwas complaining about the accounting systems that had been in the company all alongÓ. McS denied this, saying in response to a similar question, that he understood WiseŐs complaint to be that the accounting systems TAG was using did not give him (Wise) a true picture of the cash position. McSŐs evidence was consistent with his contemporaneous note, that Ňthe rapid deterioration of business must reflect on the state of financial management of the Company over the last eighteen monthsÓ (that is, since completion of the TAG acquisition). As for the ŇWebber loansÓ, McS testified that this was a reference to amounts totalling $975,000 drawn out of the companies by Webber after 30 June 1987, and that it was not a reference to the inter-company debts already existing at that date. This is a plausible explanation and there does not appear to be any evidence contradicting it. Therefore, there appears to be nothing in the 7 April 1989 meeting that should have suggested to McS that TAG was dissatisfied with anyone or anything other than its own accounting practices and Webber. In particular, there was nothing in the meeting to indicate that TAG would or might demand compensation for its losses from PMS. FAIŐs reason (2) PMS knew that TAG was looking for compensation. However, as noted in Part II, TAG was looking to Webber. By the deed dated 3 September 1988, Webber assumed responsibility for, and agreed to pay, the amount of the deficiencies which had existed in the broking and general accounts of the members of the Toikan Group as at 1 July 1987, agreed in the deed to be $2,232,145.54. Payment by Webber of this amount was guaranteed and secured by WebberŐs wife and Webber family companies. PMS were not parties to the deed and no-one had ever suggested they should be. Subsequently, such as at the meeting on 7 April 1989, only some six weeks before McS signed the proposal form on 22 May 1989 for renewal of the PMS policy, reference was made to the making of demand on Webber, but there was still no suggestion of a liability in PMS. So far as the evidence reveals, TAG was taking the view that the amount of its losses was recoverable from Webber alone. FAIŐs reason (3) As previously noted, McS believed Webber to be a man of considerable means (a belief shared by Wu). McSŐs understanding was that Webber and his wife had gross assets of around $7,150,000. It is not shown that McS had no reason to believe that Webber would not be able to satisfy all of TAGŐs claim. But even if this had been shown, it would not have led to the result contended for by FAI. To reach that result, the proponent-insured would have had to engage in a process of surmise and speculation which is foreign to question 13 (b) (ii). TAG had been content on 3 September 1988 to accept WebberŐs covenant to pay $2,232,145.54 supported by his wifeŐs and family companiesŐ guarantees and securities. Let it be assumed that if McS had investigated the position, he would have found that the securities were inadequate. It would not follow that the circumstances known to McS were such as to attract the description Ňwhich may give rise to a claimÓ against PMS. Much more would be required before that conclusion could be reached. The execution of the deed on 3 September 1988 by Webber, his wife and family companies, followed by the absence of any claim by TAG against PMS down to McSŐs signature of the proposal form on 22 May 1989, is itself, incidentally, itself strong evidence that as at the latter date, a reasonable person in McSŐs circumstances would not have regarded a claim by TAG against PMS as being a Ňreal possibilityÓ. FAIŐs reason (4) I have dealt above with the meetings on 16 June 1988 and 7 April 1989. In its reason (4) FAI also refers to TAGŐs refusal to pay substantial fees to PMS and Ňthe letter of 2 JuneÓ. The reference is to a letter in WebberŐs name (although in fact signed by someone else) for and on behalf of TIIB to PMS dated 2 June 1988. In substance, the letter was as follows: ŇFurther to our telephone conversations over the past weeks, and various visits I now enclose a cheque for $44,462.51 in settlement of all accounts between your firm and the Toikan Group. This amount is made up as follows:- Total Outstanding as advised by you $102,962.51 Less Amount in Dispute $ 58,500.00 Balance Herewith $ 44,462.51 I have already advised you that the fees charged are well in excess of what we consider to be reasonable fees for the services performed and in your various meetings with Harvey Wu the reasons for our opinion have been conveyed to you. The Board of Toikan are firm in their view that the fees should be reduced and this settlement offer is made without prejudice to our rights, if the offer is rejected, to take the approach that you should in fact be entitled to an even smaller remuneration without waiver of any other rights which we might have. I trust that you will see reason and accept this cheque in full and final settlement of all outstanding accounts between your firm and the Toikan/Tag Group. If you do not agree to accept this cheque we will be forced to take such action as our legal advisors consider appropriate.Ó (emphasis supplied) FAI submits that the letter conveyed a threat by TAG of a claim against PMS. There was no evidence before me that any one on behalf of TIIB or TAG had identified any particular reason why the amount of fees charged by PMS was said to be excessive. FAI relies on the letterŐs reference to TAGŐs being Ňforced to take ... actionÓ and to TAGŐs Ňother rightsÓ, and submits that Ň[TAG] was most dissatisfied with PMSŐs role in the Toikan debacle, and in a way that sounded in moneyÓ. However, the letter is ambiguous. Its terms relate only to a dispute about fees, and give as the reason for the dispute, not impropriety or negligence on the part of PMS, but that Ňthe fees charged [were] well in excess of what [TAG] consider[ed] to be reasonable fees for the services performedÓ. I do not conclude from the letter that TAG was disputing PMSŐs entitlement to fees on the basis of negligence or other conduct of the firm giving rise to a liability on its part, as distinct from the more innocuous basis that the fees were exorbitant in amount, or had been charged in respect of work not done. Indeed, given that the letter was in WebberŐs name, although not signed by him, it is not to be expected that it was intended to refer to accusations against PMS, at the heart of which was WebberŐs own misconduct. Moreover, even if TAG was making accusations of negligence or other wrongful conduct against PMS, those allegations were made only in relation to PMSŐs claim for fees, yet PMS accepted the cheque enclosed in satisfaction of their claim and wrote off the remainder. Whether or not the writing off shows a Ňguilty mindÓ, as submitted by FAI, the fact is that there is nothing in the letter which would suggest to McS or to a reasonable person in his position, that TAG was seeking to recover from PMS the amount of any losses resulting from the deficiencies in the broking accounts. The letter referred to reducing the fees even further, but did not suggest that TAG did not owe PMS anything or that PMS was liable in damages in an amount exceeding the amount of the fees claimed. Rather, so far as the letter suggested, PMSŐs acceptance of the amount paid put an end to the dispute between TAG and PMS referred to in it. This view is strengthened by the fact that the matter was not raised again when Webber, by the deed dated 3 September 1988, undertook to make good TAGŐs loss. In these circumstances, even if McS had once known, or a reasonable person in his position ought to have once known, that PMSŐs conduct had been such that there was a real possibility that TAG would make a claim against PMS, it should be accepted that by 22 May 1989 McS did not still believe, and a reasonable person in his position would not have still believed, that TAG would or might, as a real possibility, yet make such a claim. Mention should be made of one further submission made on behalf of PMS, relating to condition 3 of the PMS policy. Condition 3 provided that if, during the subsistence of the policy, PMS should become aware of Ňany occurrence which may subsequently give rise to a claim against [PMS] for breach of professional duty by reason of any negligence, ..., and [should] ... give written notice to [FAI] of such occurrenceÓ, then any claim which might subsequently be made against PMS arising out of such negligence should be deemed to have been made during the subsistence of the policy. According to PMSŐs submission, if McS had thought in 1988 that TAG was likely to make a claim against PMS, it is Ňintrinsically probableÓ that he would have notified FAI of the fact in order to take advantage of Condition 3 under the then subsisting policy. In response, FAI submits that it should be inferred that McS failed to notify FAI of the matter because it involved dishonesty on his part. In the end, I do not need to deal with PMSŐs submission, which would or might require consideration of McSŐs awareness of Condition 3, his practice in relation to other occurrences satisfying the description in that condition, or both. I make it clear, however, that I do not accept FAIŐs submission in reply. I conclude that as at 22 May 1989, those circumstances referred to in Part A of the Schedule (to FAIŐs third further amended statement of claim) of which McS was aware did not satisfy the description in question 13 (b) (ii) in the proposal form, of Ňcircumstance[s] which may give rise to a claim [against PMS]Ó. In reaching this conclusion I have taken into account the possibility that the matters relied on by FAI taken individually might not, while taken together might, satisfy that description. Issue (3) If the answer ŇnoÓ to question 13 (b) (ii) was untrue, have PMS nonetheless established that McS, as the person signing the proposal form, gave that answer on the basis of a belief in fact held by him, being a belief that a reasonable person in the circumstances would have held? If I should be wrong in my conclusion on Issue (2), I am satisfied that McS answered ŇnoÓ to question 13 (b) (ii) on the basis of his belief that the circumstances known to PMS were not such as satisfied the description Ňcircumstance[s] which may give rise to a claimÓ. However, the supposed untruth of the answer ŇnoÓ dictates a conclusion that that is not a belief that a reasonable person in the circumstances would also have held. Accordingly, s 26 (1) of the IC Act does not operate to require that the supposed untrue answer Ňnot be taken to be a misrepresentationÓ. Issue (4) If the answer ŇnoÓ to question 13 (b) (ii) was untrue, has FAI established that McS, as the person who gave that answer, knew, or that a reasonable person in the circumstances could be expected to have known, that the answering of the question in that way would have been relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms? If I should be wrong in my conclusion on Issue (2), it is clear in my view that McS knew, and also that a reasonable person in the circumstances could be expected to have known, that the answering of question 13 (b) (ii) ŇnoÓ would be relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms. It is sufficient to say that the question was asked and required to be answered in FAIŐs standard proposal form, being a proposal form for a claims made and notified policy. Accordingly, s 26 (2) of the IC Act does not require that the answering of question 13 (b) (ii) in the negative be not taken to be a misrepresentation. RENEWAL OF THE PMS POLICY FOR 1989-1990 - ALLEGED NON-COMPLIANCE WITH STATUTORY DUTY OF DISCLOSURE - THE TAG FACTS FAI submits that the statutory duty of disclosure required disclosure of the same matters described in Part A of the Schedule. Issue (5) Were the matters described in pars 1-26 of Part A of the Schedule (to FAIŐs third further amended statement of claim) known to PMS as at 22 May 1989? I answered this question when dealing with PMSŐs awareness of the matters referred to in the same twenty-six paragraphs for the purpose of resolving Issue (1). Issue (6) As to all or any of those matters in Part A of the Schedule which PMS knew, were they (i) matters which PMS knew to be matters relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms; or (ii) matters which a reasonable person in the circumstances, could be expected to have known to be matters so relevant? FAIŐs submissions on this issue relate only to McS. FAI submits that those matters in Part A of which McS was aware were matters that satisfied both pars (i) and (ii) of Issue (6). In support, FAI relies on its reasons (1)-(6) noted earlier in the context of my discussion of FAIŐs case of misrepresentation arising from the answering of question 13 (b) (ii) and the declaration of truth in the proposal form, together with its submissions relating to Issue (4) which I have dealt with above. I then gave reasons why I do not accept that those six reasons show that the Part A matters known to PMS did not engage the description Ňcircumstance[s] which may give rise to a claimÓ in question 13 (b) (ii). FAI has not submitted that the duty of disclosure was enlivened otherwise than because the known Part A matters satisfied that description. Accordingly, I need not consider whether PMS was under a duty to disclose those matters on any other basis. It is appropriate to note, however, that those of the Part A matters of which I have found McS was aware, excluding as they do the matters referred to in pars 16, 17 and 20, are, perhaps, fairly innocuous. FAI submits that it is a corollary to its submissions that the misrepresentation and non-disclosure were fraudulent, that McS knew the Part A matters (or some of them) to be relevant to FAIŐs decision whether or on what terms to renew. The submission has no factual basis, and therefore no work to do, as I find no misrepresentation or failure to comply with the duty of disclosure, in any event. In the result, for the reasons which I gave in relation to Issue (2), in my opinion PMS did not fail to comply with their statutory duty of disclosure, when they applied on 22 May 1989 for renewal of the PMS policy. RENEWAL OF THE PMS POLICY FOR 1989-1990 - ALLEGED MISREPRESENTATION - THE TCF FACTS Issue (1) Was any partner of PMS, after enquiry, aware on 22 May 1989, of the circumstances referred to in pars 1-22 of Part B of the Schedule (to FAIŐs third further amended statement of claim)? Once again, FAIŐs submissions relate only to an awareness on the part of McS. FAI submits that McS was aware of all of the matters in Part B of the Schedule as at 22 May 1989. However, FAI concedes that there is doubt in relation to par 22, that is, as to whether the s 541 summonses had been served by that date. The only evidence is McSŐs affidavit evidence that they were served Ňin May or JuneÓ 1989. PMS submit that I should find that it is not proved that PMS knew of service as at 22 May 1989. I accept the submission but I will return to it later, turning first, to pars 1-7 of Part B which concern the 1987 audit. The 1987 audit (Part B (pars 1-7) of the Schedule) FAI submits that McS was aware of all of the matters in pars 1-7 as at 22 May 1989. PMS submits to the contrary, and, in particular, they submit that the matters described in pars 5 and 7 are not established, and, further, that PMS were unaware, as at 22 May 1989, of any circumstances relating to the management fee which might give rise to a claim. It is clear, in my view, that McS was aware of the circumstances referred to in pars 1 (with the qualification that Beale was not involved in the audit of TravelŐs accounts for the year ended 30 June 1987), 2, 3, 4 and 6. It is pars 5 and 7 which are really in issue. They are: Ň5. PMS had no information as to how the amount of the management fee was determined and no documents showing how it was made up or supporting its correctness, did not verify its reasonableness and had no reasonable grounds to believe that the management fee of $180,000 shown in the 1987 accounts constituted or reflected a proper adjustment of shared expenses or a proper attribution of expenses as between Travel and Wheels.Ó Ň7. A proper attribution of operating expenses as between Travel and Wheels in the year ending 30 June 1987 would have shown a substantial subsidy of TravelŐs operations by Wheels, resulting in accounts showing a loss to Travel, threatening its continued participation in the travel compensation scheme.Ó Were PMS aware of these matters on 22 May 1989? The findings of Wilcox J described below, appearing at pp 54-5 of his HonourŐs Reasons for Judgment, are the subject of a Ňnotice of intention to contestÓ given by PMS. His Honour did not accept McSŐs claim that the reasonableness of the 1987 management fee was checked, a proposition which he found to be contradicted by evidence of Cullen, the accountant in charge of the actual audit work. Cullen said that neither he nor his assistant had verified the reasonableness of the amount of the fee, and that they had merely checked that it had been paid. When asked about the making of an independent assessment of the reasonableness of the amount, Cullen said ŇWell, we believed the directors were closely associated and they would have knownÓ. He also said that he had discussed the fee with the Lemon brothers, but did not claim that they had enlightened him as to its computation. His Honour concluded that the reasonableness of the amount had not been verified, and that the auditors had simply accepted the figure selected by the Lemon brothers, who, he noted, had an interest in ensuring that Travel remained a participant in the TCF and retained its licence to operate as a travel agent. He concluded that in simply accepting the Lemon brothersŐ word, PMS had acted negligently and had not properly audited the 1987 accounts. Further, his Honour thought that in the light of the 1988 figures, any proper attribution of costs in 1987 would have resulted in accounts showing a loss by Travel, and in TravelŐs being unable to continue in the Fund after 30 September 1987, at least without adequate provision of security against claims. However, PMS submit that, in relation to the 1987 audit, and, in particular, in relation to the management fee, I should find in accordance with pars 16-35 of a statement dated 13 August 1993 made by Cullen for the purpose of the present insurance proceedings. I will not give an account here of the effect of those paragraphs or of the documents to which they refer, but will proceed immediately to express my findings, including, where appropriate, references to CullenŐs evidence. At the time of the 1987 audit, PMS were not given any information about how the figure for the management fee had been derived. At its highest, on the basis of a conversation between Cullen and Hay in about July 1987, Cullen, and therefore PMS, believed that the fee related to Ňtelephone, rent and wagesÓ, and that there was in place a system for reimbursement by Travel to Wheels for joint expenses paid by the latter. Cullen checked only that the amount had actually been paid by Travel to Wheels. He says that he did so by reference to cheque requisitions and bank statements. There was no documentary evidence that Cullen discussed the reasonableness of the amount with Hay, McS, or anyone else. In the ordinary course of an audit, I would expect there to be some note of a matter of such importance. In these insurance proceedings, however, both Cullen and McS have given accounts of a discussion between them in mid-September 1987. They say that they discussed and calculated the management fee based on a fair apportionment of figures in relation to telephone, rent and wages. Each says that one or other of them wrote down their calculations as they discussed the matter. They say that they have searched for the piece of paper but without success. McS says that he cannot recall the figures discussed, other than an aggregate, which was in the order of $180,000 (the amount shown in the audited accounts). Cullen says that he cannot recall the precise figures either, but gives detailed calculations extending over four paragraphs of his statement dated 13 August 1993, which he says represent his best recollection of the calculations which he and McS performed. His figures total $181,154. Cullen adds that he does not suggest that this figure or those that go to make it up were definitely those that he or McS wrote down at the time, but he does say that the two sets of calculations were approximately the same. With reference to his evidence in his s 541 examination to the effect that PMS checked the payment but not the reasonableness of the amount of the management fee, Cullen now says: ŇI had not given any consideration to the management fees of Travel prior to being asked the abovementioned questions [in the course of his s 541 examination]. It had been over two years since the audit had been completed. I had not looked at the Exhibits which are B11, B12, B13, B14-16 [exhibits to his statement dated 13 August 1993 filed in the TAG insurance proceeding] since the audit. At the time of the examination, I understood that I was being asked whether I had verified and checked the management fee itself or its components by reference to invoices and cheque requisitions and the like in the same manner as other expense items had been verified in the audit. While the management fee was not verified in this way, I recall being satisfied at the time of the audit that the management fee consisted of joint expense items for rent, telephone and wages and that there was a reasonable basis on which Travel paid Wheels a total sum of $180,000 by reference to those items.Ó (par 34, emphasis supplied) But in the course of his s 541 examination, Cullen had been shown the audit work papers and questioned extensively about the fee of $180,000 and its basis. His evidence was that although he had ŇtracedÓ where the payment of the fee went, neither he nor anyone under his direction did any work to assess whether the amount itself was reasonable. Cullen now says that with the benefit of hindsight, he can see that he and examining counsel were at cross purposes. He says that he had understood the questioning to be referable to Ňphysical papers and physical checks ... doneÓ. FAI submits that I should reject this evidence. Cullen also gave evidence on the present issue in the TCF proceeding. He did so in the knowledge that the allegations made against PMS in that proceeding were of negligence in relation to the management fee. The relevant part of the transcript of the questions and answers in his s 541 examination was read over to him on that occasion. He told his Honour that the evidence he had given in his s 541 examination was Ňtrue and correctÓ. In his cross-examination before me, upon being shown the relevant part of the transcript of his s 541 examination and being referred to the fact that before Wilcox J he had acknowledged his earlier answers to be Ňtrue and correctÓ, Cullen said: ŇI believed them to be true and correct. I still do.Ó (T 1898 - emphasis supplied) He subsequently again said that he had understood the questions in his s 541 examination to have been directed to the issue whether PMS had Ňverified the physical work paper of the management feeÓ. In re-examination before me, Cullen was able to refer to a reference which he had made in his oral evidence before Wilcox J to a discussion which he had had with McS as to the adequacy of the amount of the fee. It will be recalled that on the hearing of the TCF proceeding, McS and Phillips were not professionally represented. McS, ŇrepresentingÓ himself and Phillips, asked Cullen whether he had given Ňany consideration to the basis on which a management fee may have been allocatedÓ when preparing the work papers. Cullen replied that Ňwith the telephone and rental being so low consideration was given to the adequacy of the management feeÓ. In further cross-examination he added that in relation to the question of the adequacy of the management fee he had relied on two things: a minute of the directors and Ňa discussionÓ which he had with McS when Ňreviewing the accountsÓ. This passage follows: ŇYou spoke about it? --- ThatŐs right. And that is what the consideration was, was it, speaking to Mr McSweeney about it? --- And IŐd discussed with the directors the adequacy. And you relied on a minute did not you? --- Well a minute was part of the work papers at the time. Who did you discuss it with? --- With Greg Lemon and Nigel Lemon.Ó (T 269-70, TCF proceeding) Before me, Cullen appeared to understand the questions put to him and he agreed that he had had no difficulty of comprehension in the course of his s 541 examination. The questions put to Cullen in his s 541 examination were not obscure. Cullen and examining counsel appear to have understood each other. The particular questions were simple. The answers given were simple and direct. Cullen has confirmed on oath on two occasions that the answers he gave were true and correct. I do not accept CullenŐs present evidence to the effect that he had understood the questions to be limited in their scope. FAI points out, further, that even in his re-examination in the TCF proceeding, when he was asked whether he had given Ňany consideration as to the basis on which a management fee may have been allocated in relation to the 1987 financial accounts at the time [he was] preparing the work papers?Ó, he replied in terms nowhere near as detailed as the account now given in his statement in the present insurance proceedings. In effect, all that he said was that due to the low figures in relation to telephone and rent expenses, he and McS discussed the adequacy of the management fee. As noted earlier, McS also gave evidence in the present insurance proceedings of a discussion with Cullen of the reasonableness of the amount of the management fee and of the carrying out by them of written calculations, although he does not set out even approximate calculations. He says that he has Ňno specific recollection of the figures that were discussed and calculatedÓ. He does, however, give evidence of the effect of their discussion concerning the respective items of telephone, rent and wages, and, in particular, of the calculated total as being approximately $180,000. This evidence was not given by McS at his s 541 examination or in the TCF proceeding. In cross-examination before me, McS said that he had had only a couple of days to prepare for the hearing of the TCF proceeding before Wilcox J (following FAIŐs withdrawal of indemnity), that he had understood that the question of the management fee was of central importance in the TCF proceeding, and that he definitely did converse with Cullen to the effect appearing in his present statement and could Ňspecifically recall itÓ. FAI submits that I should reject McSŐs evidence in this respect. When McS was questioned in the s 541 examination about the management fee, he had had the audit papers to study overnight and had been told the areas which the examiner wished to cover with him the next day. When McS appeared in the TCF proceeding (assisted by Cullen throughout), he understood that the issues relating to the 1987 audit involved an allegation of negligence which related to the reasonableness of the amount of the $180,000 management fee charged by Wheels to Travel, and the question whether that amount was adequate to cover the relevant costs of carrying on TravelŐs business which had been borne by Wheels. Yet, like Cullen, on neither occasion did he give the evidence which he now gives before me. In my view, the proper finding is that while there may have been some passing discussion between Cullen and McS about the adequacy of the management fee, a detailed conversation of the kind which Cullen now sets out in pars 28-32 of his statement dated 13 August 1993, did not occur. If it had occurred, it would have featured on one or both of the earlier occasions (the s 541 examinations and the hearing before Wilcox J). Even if I were to accept McSŐs and CullenŐs current versions of their evidence, I would not make a finding different from that of Wilcox J, that is, that PMS had failed to verify the reasonableness, and, in particular, the adequacy, of the amount of the management fee, for the following reasons. First, the basis for PMSŐs satisfaction that the management fee was to account only for joint expense items of telephone, rent and wages, was only the word of Hay. This difficulty is not eliminated by CullenŐs evidence that he saw that, at times in December 1986 and June 1987, Travel reimbursed Wheels in relation to identified advertising and printing and stationery expenses. The fact that those reimbursements were made does not establish that other expenditure by Wheels on advertising, printing and stationery could not have been truly a cost of the carrying on of TravelŐs business. Nor does it provide a basis for understanding how the separate payments by Travel to Wheels totalling $180,000 were supported. Evidence by Cullen that he Ňdid an internal control reviewÓ which Ňmentioned the shared expensesÓ is not borne out by the terms of the internal control review document on which he relied. In an affidavit in the TCF proceeding, McS said that the management fee included expenditure on advertising, although his statement in the present insurance proceeding says that this was an error. Second, any calculations that Cullen and McS did were based on their own unsupported estimates of the proportions of draft figures for telephone, rent and wages expenditure for the year which constituted a fair allocation as between Travel and Wheels. Cullen says that he and McS had in their possession at the time of their discussion, draft audited financial statements for the year ending 30 June 1987, from which the final profit and loss statement was not materially different (McS does not mention this in his account). According to both men, telephone expenses were apportioned by reference to the gross sales of the respective companies at 50/50 because their respective sales were approximately equal. CullenŐs and McSŐs accounts as to the way in which the 50/50 apportionment of rent was arrived at differ. According to Cullen, the apportionment was calculated by reference to his understanding of the approximate floor space occupied by the respective companies (he said that he was at the premises regularly and knew exactly what the situation was). However, McS says that rent, like telephone, was apportioned by reference to gross sales. According to both men, wages were allocated on the basis of CullenŐs estimate, in respect of those employees who worked in part for Travel, namely, Jan Hogan (accountant), Cathy Shannon (accountant), Hay and Nigel Lemon, of the amount of time spent by them on the respective companiesŐ affairs (CullenŐs estimate was again 50/50) and of what their wages were at the time (Cullen estimated HoganŐs and ShannonŐs wages at $60,000, HayŐs salary at $40,000 and Nigel LemonŐs salary at $40,000). McS and Cullen do not claim to have referred to any documentation (such as time sheets or pay slips) in arriving at the figures for wages or time spent as between Travel and Wheels. McS does not remember what the proportions or overall figures discussed were at all. In cross-examination in the present insurance proceedings, CullenŐs evidence was to the effect that he was not sure what calculations he did, and that he had no recollection of the method used, but that it was ŇsimilarÓ to that set out in his statement). It is perhaps remarkable that the ŇrememberedÓ apportionment in respect of each of the three classes of expenditure is 50/50. It seems reasonable to expect that if there had been a serious and soundly based attempt at apportionment, an apportionment other than 50/50 would have been arrived at in respect of at least one of the items. Third, at the time of the 1987 audit PMS knew certain matters apt to raise questions as to whether there was a sound basis for the amount of $180,000. Wheels had not charged Travel any management fee in the preceding year (1985-1986). The fee of $180,000 which Travel paid to wheels in the year in question, 1986-1987, was paid in the form of four round sums: $20,000 in September 1986, $65,000 in October 1986, $30,000 in January 1987 and $65,000 in April 1987. These amounts were paid in irregular amounts at irregular intervals, despite being allegedly related to what would be expected to be regular expenses (rent, wages and telephone). Cullen had asked to see invoices and understood from Hay that none existed. He asked for the break-up of the four amounts as between telephone, rent and wages or any other expenditure, but again Hay was not able to assist him. These various considerations suggested that the four figures and thus the total of $180,000, may have had no relationship with the true amount of TravelŐs telephone, rent and wages costs paid by Wheels, and may in fact, have been plucked by the directors out of the air. Fourth, additional cause for concern lay in PMSŐs knowledge that: Travel and Wheels were related and the only information PMS had as to the basis of the fee was a statement of a director of both companies; Travel (unlike Wheels) needed to provide audited accounts to TCF; and TravelŐs (unlike WheelsŐ) continuation in business depended on its financial position as displayed in audited accounts. In the result, even if I were to accept the evidence now given by McS and Cullen of their discussion and calculations, in my view it remains the position that they totally failed to verify the reasonableness of the amount of the management fee charged. In my opinion, the matters in par 5 of Part B of the Schedule (to FAIŐs third further amended statement of claim) are made out, and were part of McSŐs general knowledge as at 22 May 1989 when he completed the proposal form for renewal of the PMS policy for 1989-1990. In relation to Wilcox JŐs finding (at 55) that, Ň[i]n the light of the 1988 figures, it is obvious that any proper attribution of costs in 1987 would have resulted in accounts which reflected a loss by Travel Abroad.Ó PMS have again urged me to find Ňin accordance with paras 16-35 of Statement of Timothy Cullen dated 13 August 1993Ó. Those paragraphs set out CullenŐs account of the steps taken by him as part of the 1987 audit, including his supposed Ňreconstructed calculationsÓ to which I have referred above. What they fail to do is to establish underlying facts to support the amount of $180,000, as representing anything like the full extent of the subsidy of Travel by Wheels. In the light of my findings above in relation to PMSŐs failure to verify the reasonableness of the management fees, and my discussion of the 1988 TCF facts in Part III of my Reasons, I find nothing in those paragraphs of CullenŐs statement or in the submissions of PMS regarding the facts of the 1987 audit, which would support a finding different from that made by Wilcox J, who had the benefit of evidence on the present issue from three expert witnesses. It must have been obvious to PMS, by 22 May 1989, in the light of all that had happened in 1988, including PMSŐs production of the Draft Amalgamated Statement of Assets and Liabilities on 31 August 1988 and PMSŐs acute concern down to the time of the IPG takeover on 18 September, that Travel had been trading while insolvent, and that any proper attribution of costs in the preceding year, 1987, would have resulted in accounts reflecting a loss by Travel for that year. Paragraph 7 of Part B of the Schedule perhaps urges an additional finding, that Ň[a] proper attribution of operating expenses between Travel and Wheels in the year ending 30 June 1987 would have shown a substantial subsidy of TravelŐs operations by WheelsÓ. The expert evidence before Wilcox J in this regard (which he accepted without reservation (at 48)) remains uncontradicted by the account of Cullen on the basis of which PMS seek a different finding. However, one qualification may be that, in his HonourŐs words, it was Ňdifficult to determine with precision the level of any subsidy in the 1987 financial yearÓ (at 50, describing evidence of Mr Kropp). In my view, if they had reflected upon it, PMS must have immediately appreciated as at 22 May 1989, that in the light of the intervening TCF facts of 1988, any proper attribution of costs in 1987 would have resulted in accounts which reflected a loss by Travel and outstanding amounts owed by Travel to Wheels, that is to say, a substantial subsidy of Travel by Wheels. In the result, in my opinion, McS was aware on 22 May 1989, of the circumstances referred to in pars 1-7 of Part B of the Schedule (subject to the minor qualification in relation to par 1 noted at the outset). The 1988 applications for extension of time (Part B, pars 8-21) and par 22 of Part B FAI submits that McS was aware, as at 22 May 1989, of all of the matters in pars 8-21 (and par 22) of Part B of the Schedule. PMS submit that those matters are not established on the evidence, and, of course, that when PMS renewed the policy in May 1989, they were unaware of them. I have made extensive and detailed findings in relation to the TCF facts in Part III of these Reasons. Only pars 9, 16, 17, 20 and 22 call for special discussion. Paragraph 9 of Part B is as follows: Ň9. From at least 01 July 1988, Wheels and Travel traded while insolvent with a significant cash deficiency in the order of $2m or more.Ó It seems to me that the important point to make is that from the time of the IPG takeover on 18 September, PMS did not ŇknowÓ that Wheels and Travel were Ňtrad[ing] while insolvent with a significant cash deficiency in the order of $2m or moreÓ. From the time of the takeover, the companiesŐ financial position was not clear to PMS, if it was to anyone. Accordingly, I am not persuaded to find that on 22 May 1989, McS was aware of the circumstances described in the terms of par 9. Paragraph 16 of Part B reads: Ň16. In fact, as Messrs McSweeney, Beale and Cullen were aware, the audit was delayed, or also delayed, by (a) TravelŐs insolvency, in that it had been unable to pay for accounts to be prepared for auditing, and (b) the intermingling of TravelŐs and WheelsŐ accounts, which had proved difficult to sort out; both of which matters would have been of concern to TCF.Ó I have made detailed findings as to whether the audit was Ňdelayed by TravelŐs insolvency, in that it had been unable to pay for accounts to be prepared for auditingÓ. It was not. It was, however, Ňdelayed ... by the intermingling of TravelŐs and WheelsŐ accounts, which had proved difficult to Ôsort outŐÓ and McS knew this. I accept that as a matter of fact, TravelŐs insolvency, if known to TCF, would have been of concern to it. In relation to an Ňintermingling of TravelŐs and WheelsŐ accounts, which had proved difficult to sort outÓ, the position is less clear. No-one from TCF was called to give evidence as to how it would have reacted to disclosure of an intermingling of accounts as a cause of delay. It seems reasonable to think that TCF might have distinguished between, for example, an intermingling which, while it had, in the past, been difficult to sort out and was a cause of the current delay, had in fact been sorted out and was therefore not a continuing cause of further delay, and an intermingling which had not yet been sorted out and for which, perhaps, no end was yet in sight. A third and ŇworstÓ category would have been intermingling which was still taking place. On the evidence, or lack of it, I am not persuaded that TCF would have been concerned to learn that the audit had been delayed by the intermingling of the accounts of the two companies in the present case which had proved difficult to sort out. Paragraph 17 of Part B is as follows: Ň17. Neither 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 TCFŐs decision whether to extend time for filing accounts and whether or on what terms to permit TravelŐs continued participation in the travel compensation scheme.Ó PMS did not disclose to TCF that Travel was operating with a significant deficiency or that it was trading while insolvent, neither of which matters was, at the relevant times (28 September 1988 and 26 October 1988), known to PMS for certain to be the fact. Intermingling was not expressly disclosed but was capable of being understood to be encompassed within the disclosure that was made in BealeŐs letter dated 26 October 1988 to the Fund Administrator, as explained in Part III of these Reasons. PMS knew that insolvency, but not intermingling, was relevant to TCFŐs decision-making. Paragraph 20 of Part B is as follows: Ň20. Had the insolvency and intermingling of accounts been disclosed to TCF, it would probably not have permitted Travel to trade for as long as it did.Ó I have addressed the questions of inducement and causation of loss in detail in Part III. If PMS had simply disclosed to TCF that Travel was currently trading while insolvent with a significant cash deficiency of $2m or more and if this had been the fact at the time of the disclosure, TCF would probably not have permitted Travel to trade for as long as it did. But how much trading would have been ŇavoidedÓ is not a straightforward matter and would have depended on when the disclosure was made, 28 September or 26 October, and what IPGŐs response would have been to TCFŐs inevitable enquiry. In the absence of evidence on the issue, in Part III I was not prepared to conclude that Travel would have ceased to trade prior to 18 December 1988. If PMS had disclosed the intermingling of accounts to TCF, it is not at all clear that TCF would not have permitted Travel to trade for as long as it did. Again, inter alia, whether the intermingling was a continuing ongoing practice, a past practice, some of the results of which were yet to be overcome, or a problem entirely of the past, albeit one, the effects of which were still being felt, would apparently have been relevant matters for TCF to consider but there was no evidence as to what TCFŐs consideration of them would have been. Paragraph 22 of Part B of the Schedule to FAIŐs third further amended statement of claim was set out earlier. FAI concedes that there is doubt whether the s 541 summonses were served prior to the completion of the proposal form by McS on 22 May 1989 and, indeed, the renewal of PMS the policy on 20 June 1989. The only evidence on the matter is that of McS, Cullen and Beale that the s 541 summonses were served in ŇMay or June 1989Ó. I make no finding that any partner of PMS was aware, as at 22 May 1989, or as at 20 June 1989, that McS, Cullen and Beale, or any of them, had been notified of the requirement of examination pursuant to s 541. In the result, I find that, as at 22 May 1989, McS was aware of the circumstances in Part B of the Schedule to FAIŐs third further amended statement of claim, subject to the exceptions and qualifications discussed above relating to pars 1, 7, 9, 16, 17, 20 and 22. Issue (2) Did those circumstances described in Part B of the Schedule (to FAIŐs third further amended statement of claim) of which any partner of PMS was aware on 22 May 1989, satisfy the description of Ňcircumstance[s] which may give rise to a claimÓ in question 13 (b) (ii)? I have discussed the meaning of the expression Ňcircumstance[s] which may give rise to a claimÓ earlier. It is convenient to consider separately the circumstances subsequent to the collapse of Travel first, followed by the underlying TCF facts of 1987 and 1988, or, more accurately, those of them which are identified in Part B of the Schedule and which, I have found, were known to McS. Events subsequent to the underlying facts alleged to be suggestive of the making of a claim McS became aware of the collapse of Travel and Wheels by the end of January 1989. By May 1989, PMS had not been served with any originating process in relation to the TCF facts: the IPG and TCF proceedings lay in the future. Nor had PMS received correspondence threatening or foreshadowing legal action. There is, in fact, no evidence that by 22 May 1989 PMS had been the subject of any criticism whatever in relation to their role in the TCF facts. FAI relies on a newspaper article about the collapse of Travel and Wheels published on 24 December 1988 and submits that I should infer that McS was aware of its contents. McS was overseas at that time and did not return to the office until the end of January 1989. He was not directly asked whether he had ever read the article or had otherwise become aware of its contents. Cullen was asked whether he had told McS about it and ŇansweredÓ merely that he supposed it was Ňcommon knowledgeÓ by the time he (Cullen) was given a copy to read upon his return to the office after the Christmas holiday. The article mentioned that: i) the Minister for Business and Consumer Affairs had ordered an immediate investigation by the CAC into the affairs of Travel and Wheels; ii) the failure of the companies followed Ňbitter dealings between Mr Greg and Mr Nigel Lemon, the former owners of Travel Abroad and Wheels Abroad, and the Industrial Performance Group (IPG), which agreed to buy them in SeptemberÓ; iii) in the week preceding the date (Saturday 24 December 1988) of the newspaper, IPG terminated the 90 day contract of sale, accusing the Lemon brothers of Ňfundamental breaches of the memorandum of agreement - including failing to reveal the true financial position of the companiesÓ; iv) an IPG spokesperson had stated that IPG had legal action pending against the Lemon brothers, for Ňmisrepresentation of the contractÓ and also that he understood that some government agencies were conducting their own investigations; and v) TravelŐs customers were covered by the Fund, and all legitimate claims were expected to be paid in full. The article did not mention PMS; the audit of 1987 or 1988; the applications for, and granting of, extensions of time; or any intention on the part of TCF or anyone else to seek to recover compensation from PMS. The Lemon brothers were the only targets of the criticism, investigation and legal action mentioned. For anyone, such as PMS, knowing that the Lemon brothers were not the directors of Travel and Wheels, the article might be understood to indicate that the directors also might also be targets. While it is possible that McS saw the article or became aware of the general nature of its contents prior to May 1989, it was not apt to suggest to him or anyone else at PMS that a claim by TCF against PMS was on the cards. This view gains some little support from the fact that TCF had never taken, and was therefore not known to have taken, any such action against any firm of accountants or auditors responsible for the preparation of or auditing of financial statements, until it sued PMS more than two years later, in December 1991. The fact that the collapse of Travel and Wheels was being investigated by ŇauthoritiesÓ such as the CAC or a liquidator or TCF, was not itself a circumstance suggestive of a claim against PMS. FAI next refers to certain communications between PMS and the CAC in the early months of 1989. Beale and Cullen had discussions with officers of the CAC and PMS handed over to the CAC the firmŐs papers concerning the Travel audit. However, the evidence of Beale, Cullen and McS is that they believed that the CAC was concerned with the activities of the companiesŐ directors, and that, on the basis of conversations which they had all had with a Mr Ross of the CAC, they were not themselves at risk of a claim. To the extent to which this submission relies on conversations with Mr Ross after 22 May 1989, it is irrelevant to completion of the 1989 proposal. McSŐs conversation with Mr Ross took place after that date. Beale, however, gave evidence that he had conversations with people from CAC early in 1989, the first conversation having taken place in January. He could not, however, recall precise dates. He also said that he had interviews with the CAC prior to the s 541 examination (his examination commenced on 13 October 1989). He said that at Ňa meeting with a representative of the CAC in about 1989Ó, the representative said to him: ŇWe are targeting the directors of Travel Abroad and Wheels Abroad. Are you prepared to give some assistance?Ó The evidence does not specify whether this conversation, or that which he had with Mr Ross, took place prior to 22 May 1989. Cullen was not a partner of PMS as at 22 May 1989. He became a salaried partner on 23 May 1989. Although, as noted above, McSŐs conversation with Mr Ross did not occur prior to his completion of the insurance proposal on 22 May 1989, it is convenient to note here his evidence on the matter, which is relevant to the submissions by TCF and PMS touching the later Chatswood policy. He said that during the second half of 1989, he attended a meeting with Mr Ross in relation to the events concerning the liquidation of Travel; that he could not remember whether the meeting was before or after his s 541 examinations in November 1989; that on the advice of his solicitor, Chris Brown of GDB, counsel and a solicitor from GDB attended the interview in his interest; that Mr Ross asked him if he was prepared to be a witness in a prosecution against Dunn; and that Mr Ross questioned him about his dealings with Dunn. McS says that during the course of the meeting, the following exchange occurred: ŇMR ROSS: Would you be prepared to be a witness in a prosecution against Mr Dunn? McS: I am prepared to make myself available if I can be of any assistance.Ó Mr Ross did not give evidence before me. I do not infer from PMSŐs handing over of their audit papers to the CAC, that there was cause to think that a claim by TCF or anyone else against PMS was a real possibility. The inherent nature of the underlying facts as an indication of the likelihood of a claim: the 1987 audit It is now necessary to consider FAIŐs submission that those matters referred to in Part B of the Schedule of which McS was aware themselves immediately and obviously suggested that a claim by TCF against PMS was a real possibility. I found earlier that McS was not aware of all the circumstances identified in Part B. This conclusion was virtually exclusively of relevance to the TCF facts of 1988, that is, the applications for extensions of time. In dealing with FAIŐs submissions, I will not refer further to this fact. I turn first to the 1987 audit. FAI submits that the matters in Part B relating to the 1987 audit (pars 1-7) satisfied the description, as at 22 May 1989, of Ňcircumstance[s] which may give rise to a claimÓ against PMS, for the following reasons. First, McS was aware in general terms that if he supplied a negligently prepared audit report to anyone, and that person suffered a loss, that person might sue him. In his evidence, McS also said that he had never Ňput his mindÓ to TCFŐs suing him and that he could not recall when he had first learned that TCF had paid money to travellers who had lost money as a result of TravelŐs collapse, but thought that it was after the commencement of the TCF proceeding. Second, McS was aware of how TCF operated and of the important part that the audits played in those operations, in terms of TCFŐs dependence upon them. Third, he found out upon his return to Australia at the end of January 1989 that Travel had in fact collapsed. In my opinion, however, these facts do not establish that the circumstances known to McS satisfied the terms of question 13 (b) (ii). The fact that his client company had collapsed, together with the first and second very general pieces of knowledge mentioned, does not lead to the conclusion that PMS should reasonably have understood that a claim against them by TCF was a real risk. Fourth, FAI points out that there was the potential for the question to be asked by those affected by, or investigating, the collapse of Travel, why the company had been permitted to trade on for as long as it did without giving security, and that in this context there was a potential for the audit to be examined, and for a query to be raised about the management fee. We now know that this course of events was one which, as at 22 May 1989, lay in store for PMS. It would be easy, but in my opinion erroneous, to jump to the conclusion that the known circumstances satisfied the description of Ňcircumstance[s] which may give rise to a claimÓ as at 22 May 1989. I accept PMSŐs submission, however, that without the benefit of hindsight, whether they did or not was a matter of mere speculation and was not the kind of Ňreal possibilityÓ which would spring to the mind of a reasonable person, with which question 13 (b) (ii) is concerned. Fifth, and similarly, FAI suggests that it suffices that there was, as in fact there clearly was, a possibility that TCF (or any other person caused loss by the collapse) might claim that the management fee had been negligently audited, even if PMS doubted that such a claim would succeed. But for reasons given earlier, I do not accept that a Ňmere possibilityÓ meets the terms of question 13 (b) (ii). If it did, the policy would be denied commercial effectiveness, as I have attempted to explain. In my view, the TCF facts relating to the management fee were not of such a kind, in and of themselves, as to provide an obvious and immediate indication that a claim by TCF or anyone else against PMS was a definite risk. Sixth, FAI submits that in view of the publicity attendant upon the collapse, the involvement of the Minister for Business and Consumer Affairs, the size of the collapse, the number of people involved, and the fact that Travel was one of the countryŐs largest travel wholesalers, it was at the very least a real possibility that whatever action could be taken to recover losses would be taken. This submission is also infected by the benefit of hindsight, and ignores the insistence, which I find in question 13 (b) (ii), that the circumstances known must be such as would immediately cause the thought of the making of a claim against the insured to spring to the mind of a reasonable person in the proponentŐs circumstances. Seventh, FAI submits that there was a real possibility that the liquidator of Travel or members of the public might make claims against PMS. However, once again, in my view, this was a mere possibility which would not have suggested itself immediately and obviously to a reasonable person. The inherent nature of the underlying facts as an indication of the likelihood of a claim: the 1988 applications for extension of time FAI submits that those matters in Part B of the Schedule relating to PMSŐs conduct in 1988 (pars 8-21) of which McS was aware, might, as at 22 May 1989, as a possibility, have given rise to a claim against PMS, whatever its prospects of success. They refer to several considerations in support. The first three are identical to the first three relating to the 1987 audit noted above, and are subject to the same objections. Fourth, FAI says that there was a real possibility that questions would be asked as to what TravelŐs financial condition had been in the second half of 1988, why it had continued to trade without conditions, and why it had been given extensions of time without discovery of its financial condition. In that context, FAI submits it was possible that TCF (or any one else who had been caused loss by TravelŐs collapse) might claim that PMS, as auditors dealing with TCF, should not have obtained extensions of time without making known to TCF what they knew about TravelŐs parlous financial condition. Fifth, FAI says, as in relation to the 1987 audit, that in view of the publicity, the involvement of the Minister for Business and Consumer Affairs, the size of the collapse, the number of people involved, and the fact that Travel was one of the countryŐs largest travel wholesalers, it was at the very least a real possibility that whatever action could be taken, whether by TCF or by members of the public, to recover compensation for losses, would be taken. PMS replies that these two submissions depend on speculation as to possibilities and that this process is not within question 13 (b) (ii). I agree, and incorporate my observations above in the context of generally similar submissions relating to the 1987 audit. Paragraph 22 of Part B of the Schedule (to FAIŐs third further amended statement of claim) The evidence does not establish that any of McS, Beale and Cullen had received his summons under s 541 of the Companies Code by 22 May 1989 or by the renewal of the PMS policy on 20 June 1989. If one, two, or all three of them had been served the fact of service would not have suggested the making of a claim against the person served or against PMS. I conclude that McSŐs answer to question 13 (b) (ii) was not untrue. Issue (3) If the answer ŇnoÓ to question 13 (b) (ii) was untrue, have PMS nonetheless established that McS, as the person signing the proposal form, gave that answer on the basis of a belief in fact held by him, being a belief that a reasonable person in the circumstances would have held? If I should be wrong in my conclusion on Issue (2), I am satisfied, for the reasons given in relation to Issue (2), that McS answered ŇnoÓ to question 13 (b) (ii) on the basis of his belief that the circumstances known to PMS were not such as were likely to give rise to a claim. However, the hypothesised untruth of the answer ŇnoÓ dictates a conclusion that that is not a belief that a reasonable person in the circumstances would also have held. Issue (4) If the answer ŇnoÓ to question 13 (b) (ii) was untrue, has FAI established that McS, as the person who gave that answer, knew, or that a reasonable person in the circumstances could be expected to have known, that the answering of the question in that way would have been relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms? If I should be wrong in my conclusion on Issue (2), FAI has established from the presence of question 13 (b) (ii) and the answer in the proposal form, together with the nature of a claims made and notified policy, both that McS knew and that a reasonable person in the circumstances could be expected to have known, that the answering of question 13 (b) (ii) ŇnoÓ would have been relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms. RENEWAL OF THE PMS POLICY FOR 1989-1990 - ALLEGED NON-COMPLIANCE WITH THE DUTY OF DISCLOSURE - THE TCF FACTS Issue (5) Were the matters described in pars 1-22 of Part B of the Schedule (to FAIŐs third further amended statement of claim) known to PMS as at 22 May 1989? I answered this question in the context of FAIŐs case of misrepresentation and incorporate here the answer which I then gave. Issue (6) As to all or any of those matters in Part B of the Schedule which PMS knew, were they (i) matters which PMS knew to be relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms; or (ii) matters which a reasonable person in the circumstances, could be expected to have known to be matters so relevant? FAI submits that those of the matters in Part B which McS knew satisfied both pars (i) and (ii). FAIŐs submission in this respect is that they do so because they were circumstances that might give rise to a claim against PMS for the purpose of question 13 (b) (ii). For the reasons which I gave earlier in relation to FAIŐs case of misrepresentation based on the answer given to that question in the proposal form dated 22 May 1989, I reject the submission. I need not consider whether PMS was under an obligation on any other basis to disclose the matters referred to in Part B of the Schedule known to PMS. FAIŐs submission that McS knew the matters in the Schedule (or some of them) to be relevant to FAIŐs decision whether or on what terms to renew, as a corollary to its submissions that the misrepresentation and non-disclosure were fraudulent, is made redundant by my finding that there was no misrepresentation or breach of the duty of disclosure. However, I will consider the following matter raised in those submissions. In support of a conclusion, contended for by FAI, that McS knowingly concealed from FAI circumstances likely to give rise to a claim, FAI refers to McSŐs treatment of the McDonald claim at about the time of the 1989 renewal, and submits that McSŐs conduct in respect of that claim suggests an attitude toward FAI of Ňwithholding knowledge of a potential claim until it became essential to speak, and then presenting a favourably coloured version of the factsÓ. On 22 May 1989, McS wrote a letter to FAI which became attachment ŇCÓ to the renewal proposal of the same date. In the body of the proposal form, McS answered questions 13 (a) and 13 (b) (i) ŇyesÓ and question 13 (b) (ii) ŇnoÓ, and gave as particulars that McDonald had Ňnot yet notifiedÓ a claim but had alleged negligence in PMSŐs own action against McDonald to recover outstanding fees. The form continued by referring to ŇAttachment CÓ which was McSŐs letter of the same date to FAI. In that letter, McS said that he was writing to FAI Ňfor the sake of good orderÓ; that McDonald Ňhas not notified any claimÓ; that Ňneither we or our legal advisors believe there is any substance to the matters raised by C E McDonald and in any event no loss has or will accrue as a result of the matters raisedÓ; and Ňwe simply advise you for the sake of good orderÓ. FAI submits that McS had been aware of the McDonald matter complained of, or the circumstances out of which a claim by McDonald might arise, from at least 15 March 1989, but had failed to disclose what it had then learned or any of the subsequent threats of a claim, until the renewal proposal of 22 May, by which time, FAI says, the McDonald claim was made inevitable and imminent by reason of PMSŐs having commenced their own proceeding (on 24 May 1989) to recover fees. I do not think that McSŐs conduct in relation to the McDonald claim is relevant to the issues I have to decide in relation to the different claims by TAG and TCF. Even if McS could or should have notified FAI on 15 March 1989 or between that date and 22 May 1989, this would not be probative in relation to any issue which I have to decide. Conclusion on 1989 proposal PMS did not fail to comply with the duty of disclosure, or make a misrepresentation in McSŐs answer to question 13 (b) (ii) and declaration of truth in the proposal completed by him on 22 May 1989. It follows that s 28 of the IC Act does not apply and FAI did not become entitled to avoid the PMS contract of insurance; nor was the liability of FAI reduced as provided for in s 28 (3). FAIŐs purported avoidance of the PMS insurance contract, by its letter to M & M of 11 June 1992, was therefore nugatory. Exclusion (g) of the PMS policy was not activated either. ALLEGED MISREPRESENTATION AND NON-COMPLIANCE WITH THE DUTY OF DISCLOSURE, AND RENEWAL OF THE CHATSWOOD AND GOSFORD POLICIES FOR 1991-1992 GENERALLY The proposal for the renewal of the Gosford policy for the year 23 May 1991 - 23 May 1992 was dated 22 April 1991 and was signed by Cullen. The proposal for renewal of the Chatswood policy for the same year was dated 28 April 1991 and was signed by McS. Those proposals disclosed the TAG claim as an outstanding claim, but disclosed nothing in relation to the TCF facts. Nearly two years had intervened between McSŐs completion on 22 May 1989 of the proposal for renewal of the PMS policy for 1989-1990, and those dates in late April 1991. There had been developments during that period. In August 1989 the IPG proceeding had been launched against, inter alia, Phillips and McS trading as PMS, arising out of the facts which I have been calling the TCF facts. In that proceeding, FAI had indemnified Phillips and McS. PMS had also launched a proceeding against, inter alia, IPG for recovery of professional fees. Both proceedings were settled on 16 October 1990 or shortly thereafter by a payment of $250,000, including costs, to IPG ($245,000 payable by FAI, $5,000 by PMS). Accordingly, the claim by IPG had come and gone during the period mentioned. PMS had notified FAI of the IPG claim by letter dated 21 August 1989, which had enclosed details of their denial of the allegations made against them, together with IPGŐs application and statement of claim and a detailed response by PMS to it, which annexed eight pertinent items of correspondence and PMSŐs Draft Amalgamated Statement of Assets and Liabilities of Travel and Wheels as at 30 June 1988. During the period mentioned, McS, Cullen and Beale had been examined under s 541 of the Companies Code in connection with the affairs of Travel and Wheels in the course of which they had been questioned by counsel representing TCF. In January 1990, the TAG proceeding had been threatened, then commenced. Again, FAI was indemnifying Phillips and McS. Unlike the IPG proceeding, the TAG proceeding was still pending when McS and Cullen completed the proposal forms in late April 1991. On 7 May 1990, PMS had applied for renewal of the PMS policy for the year 23 May 1990 - 23 May 1991. The proposal form, signed by McS, disclosed, in answer to question 13 (a), inter alia, the IPG and TAG claims, and gave FAIŐs file reference numbers for them. It will be necessary to consider this proposal in some detail below. With effect from 1 September 1990 PMS had ŇsplitÓ into PMS Gosford and PMS Chatswood. FAI issued the Chatswood and Gosford policies for the period 24 October 1990 to 23 May 1991. Since the claim by TCF was made and notified during the insurance year 23 May 1991 - 23 May 1992 of those policies, it is primarily with the renewals for that year that FAIŐs submissions on avoidance are concerned. But first, it is necessary to consider FAIŐs case that avoidance of the contract for the 1991-1992 Chatswood policy (not the 1991-1992 Gosford policy) is supported by misrepresentations made by McS a year earlier, in the proposal dated 7 May 1990 for renewal of the original PMS policy itself for the year 1990-1991. THE ALLEGED 7 MAY 1990 REPRESENTATIONS AND RENEWAL OF THE PMS POLICY FOR 1990-1991 General Section 28 of the IC Act provides for the consequences for contracts of general insurance of a failure to comply with the statutory duty of disclosure and the making of Ňa misrepresentation to the insurer before the contract was entered intoÓ. The word ŇbeforeÓ raises an important question for FAIŐs submission that in relation to the renewal of the 1991-1992 Chatswood policy in May 1991, the section is enlivened by misrepresentations allegedly made by McS some twelve months earlier in the proposal dated 7 May 1990 for renewal of the former PMS policy for 1990-1991. Subsection 28 (1) was set out in full earlier in this Part. Does s 28 (1) (b) have the effect that s 28 has scope for operation in all cases where a misrepresentation is made ŇbeforeÓ, no matter how long before, the contract of insurance is entered into? While it is true that s 28 applies only to, relevantly, misrepresentations which have in fact made a difference to the insurerŐs decision-making, it is conceivable that such an Ňinfluential misrepresentationÓ may have been made temporally ŇbeforeÓ the making of the contract of insurance, but not Ňin connection withÓ it. Little light is thrown on the present issue by the juxtaposition within s 28 (1) of the references to a failure to comply with the duty of disclosure and the making of a misrepresentation. The duty of disclosure is imposed by s 21. That section, like s 28 (1) (b), uses the expression Ňbefore the relevant contract of insurance is entered intoÓ. But since it requires a positive act of disclosure by the insured, in effect Ňat any time byÓ the time when the relevant contract of insurance is entered into, s 21 does not illuminate the meaning of the word ŇbeforeÓ in its reference to misrepresentations in s 28 (1). If the word ŇbeforeÓ in s 28 (1) (b) is understood in a purely temporal sense and without any connotation of ŇrelationshipÓ or ŇconnectionÓ between the making of the misrepresentation and the making of the contract of insurance, a particular difficulty arises in relation to s 26. That section provides that a statement made Ňin connection with a proposed contract of insuranceÓ is not to be taken to be a misrepresentation in the circumstances set out in the section. The words ŇproposedÓ and Ňin connection withÓ make it clear that s 26 is concerned with statements made, not only ŇbeforeÓ, but also Ňfor the purpose ofÓ or Ňdirected toÓ, the making of the particular contract of insurance in question. Although the supposed 7 May 1990 representations were made temporally ŇbeforeÓ the contract for the Chatswood policy was entered into, they were not made Ňin connection withÓ that contract. Indeed, they were made long before PMS ŇsplitÓ into PMS Chatswood and PMS Gosford. A purely temporal construction of the word ŇbeforeÓ in s 28 (1) (b) would have the effect that misrepresentations, albeit ones which made a difference to the insurerŐs decision-making, made at any time before a contract of general insurance is entered into, would attract s 28 to the advantage of the insurer, but the insured would not have the protection of s 26 where the ŇconnectionÓ spoken of in that section did not exist. Other provisions in Division 2 (ss 23-27) of Part IV of the IC Act also require of the misrepresentations to which they are directed, something more than mere temporal precedence. For example, s 23 refers to statements made in answer to questions asked Ňin relation to a proposed contract of insuranceÓ; s 24 addresses statements made Ňin or in connection with a contract of insuranceÓ; s 25 refers to misrepresentations made to an insurer Ňduring the negotiations for a contract of life insuranceÓ; and s 27 addresses questions in proposal forms. Under the general law, a misrepresentation made in relation to the making of an earlier contract of insurance may vitiate a later one by way of renewal if the misrepresentation is of a ŇcontinuingÓ nature. Professor Sutton expresses the general law position as follows (Insurance Law in Australia (2nd edn, 1991) at par 3.164): Ň ... it would appear that misstatements or concealment of facts which would have vitiated the original contract of insurance but which are no longer applicable when the contract is sought to be renewed, will not operate to vitiate the new transaction. Any vitiating factor must be one which exists at the time of the application for renewal and anything occurring at the time when the original contract of insurance was made is irrelevant. ... It is otherwise of course if the misstatement or concealment is a continuing one and is therefore still operative.Ó (emphasis supplied) This passage distinguishes between earlier misrepresentations which are still ŇapplicableÓ, ŇcontinuingÓ or ŇoperativeÓ and those that are not. Kelly and Ball, in Principles of Insurance Law in Australia and New Zealand (1991), seem to assume that there is a duty to correct a misrepresentation in an original proposal for insurance, unless the circumstances have so changed that the representation is true at the time of the later renewal (par 3.184). The Canadian case, Pengelly v British Empire Assurance Co (1974) 38 DLR (3d) 624 is instructive. A proposal form asked whether the insured had been involved in an accident in the previous three years, to which he falsely answered ŇnoÓ. He renewed the policy three years later and again answered the same question ŇnoÓ. By the time of the renewal, he had not been involved in an accident in the then preceding three years. The Court saw the concern of the insurer as being to know whether or not the proponent had been involved in an accident recently as at the time of the proposal. Accordingly, the earlier misrepresentation was viewed as a spent force (not ŇapplicableÓ, ŇcontinuingÓ or ŇoperativeÓ in Professor SuttonŐs terms) and therefore irrelevant to the making of the later contract of insurance. Is the position under the general law relevant to the construction of the word ŇbeforeÓ in s 28 (1) (b)? In Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606, Mason CJ, Dawson, Toohey and Gaudron JJ said in the context of a discussion of s 33 of the IC Act (at 615): ŇThe evident intention of the legislature is to replace the antecedent common law regulating non-disclosure, misrepresentations and incorrect statements by insured persons before entry into a contract with the provisions of Pt IV. To that extent Pt IV is a statutory code which replaces the common law. Accordingly, the circumstances in which it is legitimate to resort to the antecedent common law for the purpose of interpreting the statute are extremely limited: see GamerŐs Motor Centre (Newcastle) Pty Ltd v Natwest Wholesale Australia Pty Ltd [(1987) 163 CLR 236 , at pp 243-244].Ó In the GamerŐs Motor Centre case, referred to in the above passage, Mason CJ said: ŇIt is a well-settled rule of construction that in the case of a statute being a code intended to replace the common law, its meaning is to be ascertained in the first instance from its language and the natural meaning of that language is not to be qualified by considerations derived from the antecedent law: Brennan v The King [(1936) 55 CLR 253, at p 263]; Bank of England v Vagliano Brothers [[1891] AC 107, at pp 144-145]. But an appeal to earlier decisions can be justified if the language of the statute is itself doubtful or if some other special ground is made out, e.g., if words used have previously acquired a special meaning which differs from their ordinary meaning: Sungravure Pty Ltd v Middle East Airlines Airliban SAL [(1975) 134 CLR 1 , at p 22].Ó The Ňnatural meaningÓ of the word ŇbeforeÓ in s 28 (1) (b) is Ňtemporally beforeÓ, no matter by how long or short a period. It is difficult to read into the word some limiting notion, such as one of reasonableness. Similarly, it is difficult to read into the word some limiting notion of a non-temporal kind, such as one of purpose. These considerations suggest that I should proceed on the basis that the supposed 7 May 1990 representations are potentially within s 28 of the IC Act if they were still ŇapplicableÓ, ŇcontinuingÓ or ŇoperativeÓ as at 28 April 1991. In order to understand whether they were of that kind, it is necessary to consider both what McS said in the 7 May 1990 proposal, and the place of what he then said in the context of the overall communications between him and FAI in relation to the claim by TAG. On 12 January 1990 PMS forwarded to M & M copies of two letters dated 11 January 1990 from Rosenblums to McS and Phillips respectively, and a copy of each of the then proposed application and statement of claim to initiate the TAG proceeding. On 17 January, M & M forwarded those documents to FAI. At that time, PMS made no representations to FAI touching the subject matter of the TAG claim. On 22 January, McS met with Rainbow of TCM and gave him an account of the TAG facts. On 20 March 1990, McS wrote to TCM a lengthy letter supplying information and PMS files touching the TAG claim. McS was later to attach a copy of this letter to the proposal form dated 7 May 1990 referred to below. The letter of 20 March commenced: ŇFurther to your letter of 10 February, 1990 and our subsequent phone conversations on 12 March, 1990, enclosed is our reply to the statement of claim and relevant records and files held by our office as listed in the attached schedule of records. These [sic] are several aspects of our engagement and subsequent events relative to the actions of Tag Pacific Limited, Tag Holdings Pty Ltd (formerly Kelso Pty Ltd) and the officers of those Companies who took office within the Toikan Group of Companies subsequent to 2 November, 1987, which may be considered, namely; ... Ó (emphasis supplied) There follow twenty-two numbered paragraphs followed by a ŇsummaryÓ comprising six numbered paragraphs and the following concluding sentence: ŇWe trust that this may assist in understanding in brief some of the underlying facts of our engagement and subsequent events.Ó (emphasis supplied) Clearly, the letter did not purport to give an exhaustive account to the solicitors who were, by then, representing McS and Phillips in the TAG proceeding. Implicit in the passages set out above is a recognition of the fact that it was for the solicitors to form their own expert opinion, in the light of a comprehensive analysis of all the facts, as to whether McS and Phillips were liable to TAG. On 7 May, McS completed the proposal form for renewal of the PMS policy for 1990-1991, and on 10 May M & M forwarded it to FAI. Question 13 (a) in the form asked: ŇDuring the past ten years has any claim been made, or has any negligence been alleged against the Firm(s) or any of their predecessors in business or any prior Firm(s) or any of their present or former Partners/Directors/Consultants; or have any circumstances been notified to Insurers which may result in a claim?Ó McS answered ŇYesÓ. The question then asked for the following details in respect of each matter: year of notification; name of insurer (if any); name of claimant; nature of problem; amount paid or estimate of potential liability; and whether the matter had been finalised or was outstanding. A small space was provided for a statement of these details. They were given by McS within that space. At the foot of the space, he referred to ŇAttachment CÓ. Attachment C bore the heading ŇClaims Notified Status ReportÓ. In columns under the headings ŇDate NotifiedÓ, ŇReferenceÓ and ŇClaim or Claim CircumstancesÓ, McS gave dates, FAI file references, and the identity of claimants in respect of the McDonald, IPG and TAG claims. Under a fourth column heading, ŇCurrent StatusÓ, he referred to numbered annotations below, one annotation in respect of each of those three claims. The third annotation was headed ŇTAG PACIFIC LIMITED (TAG) PIC 116/89Ó. Under that heading appeared this: ŇDocuments have been made available to FAI Solicitor, Tress Cocks and Maddox for discovery. TAG allege that Phillips McSweeney provided financial statements on which TAG relied in making an investment in Toikan International Insurance Broking Pty Ltd (formerly TKN Holdings Pty Ltd) which statements did not properly reflect the net asset position of Toikan. We rely on the facts that; 1. the statements were not provided under engagement by TAG but were provided on instruction from the Vendor for the sole use of the Vendor. 2. the statements were clearly identified as Preliminary and/or Proforma Statements and had full disclosures and disclaimers attaching thereto. 3. the allegations that funds represented by unpresented cheques were not available is denied and supported by evidence of bank deposits sufficient to clear those cheques. 4. TAG provided a letter to the vendor wherein the chairman of TAG states that TAG rely wholly on the representations of the Vendor. On the evidence we do not believe that the claim will proceed and/or succeed. The case is waiting listing in the courts.Ó (emphasis supplied) Clearly, McS was advocating PMSŐs case for non-liability. Annexed to the Claims Notified Status Report was a copy of McSŐs letter dated 20 March 1990 to TCM. It will be clear from what I have already said that this letter was not actually referred to in the proposal form or in Attachment C, that is, the Claims Notified Status Report: apparently, the copy letter was provided, simply as a convenient way of informing FAI of what McS had already told TCM. On 26 September, TCM wrote to FAI reporting on progress of the TAG proceeding. The letter advised FAI that TCM were concerned because PMS had been Ňactually aware of the fact of the unpresented chequesÓ; that they had interviewed McS, Phillips and Wallis; and that although they believed that PMSŐs defences were ŇsustainableÓ, the possibility of settlement should be addressed once their expertsŐ views were known. This made it clear to FAI that the account of the TAG facts which McS had given to FAI should not lead it to jump to the conclusion that PMS were not liable. On 27 March 1991, only a month before McS signed the critical proposal for renewal of the Chatswood policy, TCM again reported to FAI. They advised that they had now received expert opinions which led them to consider that it was likely that the Court would find that the financial statements prepared by PMS were misleading and deceptive as alleged by TAG, and that damages would Ňflow as a resultÓ. The letter sought FAIŐs instructions for TCM to retain Arthur Andersen & Co to assist in relation to the quantification of damages. Accordingly, the letter clearly warned FAI not to place much store by information previously supplied to it by McS, at least in so far as that information might suggest non-liability to TAG. On 28 April 1991, McS completed the proposal in question for renewal of the Chatswood policy. Again, McS answered question 13 (a) ŇyesÓ. On this occasion, in the space provided on the proposal form, McS gave details of the McDonald, IPG and TAG claims, and of two further claims which I need not identify. Immediately below the space provided, he again referred to ŇAttachment CÓ as giving Ňclaims status informationÓ. There are three important differences between this proposal and the earlier one of 7 May 1990. The first is that no copy of PMSŐs letter dated 20 March 1990 was attached. The second and third differences are between the relevant part of ŇAttachment CÓ as annexed to this proposal and the relevant part of ŇAttachment CÓ as annexed to the 7 May 1990 proposal. The second difference is that the final two sentences which had appeared in the relevant part of Attachment C to the 7 May 1990 proposal, ŇOn the evidence we do not believe that the claim will proceed and/or succeed. The case is waiting listing in the courtsÓ were now omitted. The third difference is that there was an additional sentence added to paragraph number 4 in Attachment C reading as follows: ŇRefer to J. Rainbow, Tress Cocks & Maddox for comment on present status.Ó The three differences are important. TCM had by now been representing McS and Phillips in the TAG proceeding for some fifteen months. TCM had formed a pessimistic view of their chances of successfully defending the TAG proceeding and had advised FAI, and, no doubt, McS and Phillips, of this view. While McS was again prepared to put to FAI the enumerated four ŇfactsÓ on which PMS ŇreliedÓ, he did not again say Ň[o]n the evidence we do not believe that the claim will proceed and/or succeedÓ and he expressly referred FAI to TCM for further ŇcommentÓ. This was a clear notification to FAI that McS wished to disclose as material to be taken into account by FAI, RainbowŐs current appreciation of TAGŐs claim. In my opinion, the three differences to which I have referred signify that McS was making it clear to FAI: (a) that he was not intending to make, as continuing representations to be relied upon by FAI, any representations to be found in his letter dated 20 March 1990 (written thirteen months earlier); and (b) that he was not intending to make representations within the Current Status Report attached to either the 7 May 1990 or 28 April 1991 proposal, as representations to be relied upon by FAI, to the extent to which they might be inconsistent with any opinion of RainbowŐs. While these conclusions alone suffice to dispose of the 7 May 1990 representations, I will proceed to address the three issues relating to them (Issues (7), (8) and (9)) Issue (7) Did McS make the 7 May 1990 representations as pleaded? Before considering the five particular representations pleaded by FAI in par 18A of its further amended defence to TCFŐs amended points of claim in the TCF insurance proceeding, I should note certain general features of the ŇClaims Notified Status ReportÓ and the letter dated 20 March 1990 from PMS to TCM, both annexed to the proposal of 7 May 1990. The two documents did not purport to give a comprehensive account of the TAG facts. The ŇClaims Notified Status ReportÓ was of only one page and referred to three claims. In respect of each, McS said that PMS did not consider that the claim would succeed. In relation to the TAG claim, the document set forth briefly some of the arguments on which PMS would (and did) rely in their defence. The letter of 20 March 1990 was more extensive, but was again in the nature of an attempt by McS to put forward the material on which PMS thought reliance might be placed in their defence. So much is apparent from the introduction to the letter, which spoke of its being PMSŐs Ňreply to the statement of claimÓ, and as setting forth Ňseveral aspects of [PMSŐs] engagement and subsequent events relative to the actions of Tag ... which may be consideredÓ. The documents were patently an attempt by PMS to put a favourable light on their position for the consideration of FAI. This view of Attachment C and the copy letter was accepted by Hunter. He conceded in cross-examination that Ňthere was nothing in attachment C which caused [him] or did not cause [him] to renew the Chatswood policy in relation to TagÓ. FAI submits that this was saying no more than that nothing remarkable was disclosed, as there should have been, and that Ň[t]he whole point of the misrepresentation was that FAI remained unaware of TAGŐs known reliance on McSŐs accountsÓ. I do not accept the submission: Hunter understood the question and intended to agree with what was put to him in the terms in which it was put. Hunter had said in his affidavit that he gave Ňconsiderable credenceÓ to McSŐs letter of 20 March to TCM. However, in cross-examination he qualified this evidence by ultimately agreeing that he had been referring to the May 1990 renewal of the PMS policy, not the May 1991 renewal of the Chatswood policy. Further he agreed that FAI would make Ňits own inquiries as to the merits of claims regardless of favourable lights put on answers by the insured in the proposal formÓ. It is against this background that the 7 May 1990 misrepresentations pleaded by FAI must be considered. I set out earlier the five representations pleaded by FAI. The first two allegedly arose from the ŇClaims Notified Status ReportÓ, the four numbered paragraphs of which were set out earlier. The first pleaded representation is that: Ň(1) Mr. McSweeney did not believe, and had no reasonable ground to believe, that Tag was relying on the financial statements in question.Ó In my opinion, the pleaded representation is not conveyed by the material in the ŇClaims Notified Status ReportÓ. In that document McS was putting forward to FAI and for its consideration a Ňcase in replyÓ to TAGŐs case. That case in reply was, relevantly, that the financial statements had not been provided by PMS under an engagement by TAG, but under an instruction from the Webber interests and for their sole use; that the statements were identified as ŇpreliminaryÓ and/or Ňpro formaÓ and had Ňfull disclosures and disclaimersÓ attached; and, finally, that TAG had provided a letter acknowledging that it relied on the representations of the vendor. These facts, and McSŐs highlighting of them, were consistent with a belief by McS that TAG had in fact relied on the financial statements, but that this should not entitle TAG to succeed at law on the basis that it had plainly done so at its peril. The second pleaded misrepresentation is that the ŇClaims Notified Status ReportÓ misrepresented that: Ň(2) Funds were available to clear the unpresented cheques in question and this was supported by evidence of bank deposits sufficient for that purpose.Ó Clearly, this pleaded representation is said to be founded on par (3) in the ŇClaims Notified Status ReportÓ set out above. Literally, par (3), like the other three paragraphs, purports to describe a consideration on which PMS were saying they relied in denying TAGŐs claim. The proper construction of par (3) is that McS was stating, argumentatively, the view of the facts which he contended and believed should be taken. I accept that he did believe, wrongly as it turned out, that Ňevidence of bank depositsÓ supported fully his claim that the unpresented cheques were able to be met. Ultimately, as observed in Part II of these Reasons, there was a shortfall of between $77,791-$80,271. In the context of all the circumstances, including the size of the amounts of money in question, this was not a large amount. I think that par (3) in the Claims Notified Status Report is to be properly construed as the putting forward of a ŇcaseÓ or Ňview of the factsÓ for consideration by FAI and its solicitors. McS believed that it was a valid and meritorious one. Therefore, the second representation pleaded, formulated as it is as an unqualified statement of objective fact, is, in the context of all the background circumstances to which I have referred, not conveyed by par (3) in the Claims Notified Status Report. The remaining three 7 May 1990 representations pleaded are said to have been made in the letter from PMS to FAI dated 20 March 1990. As noted earlier, a copy of the letter was not again forwarded to FAI with the critical proposal form dated 28 April 1991, and for this reason alone I would hold that the third, fourth and fifth representations, even if made on 7 May 1990, were not Ňcontinuing onesÓ as at 28 April 1991. Moreover, I have set out earlier the opening two paragraphs and the concluding paragraph of the letter and described their effect. The third pleaded representation (the first said to arise from the letter) is Ň(3) Mr. McSweeney was unaware of anything which made it unreasonable to accept the accuracy of the financial statements in question from 28 July to 29 September 1987.Ó The relevant passage in PMSŐs letter to FAI dated 20 March 1990 was par (11) which was as follows: ŇAt the time of preparation of the Preliminary Financial Statements at 30 June, 1987, and Pro-Forma Balance sheets at the effective date we [PMS] were not aware of any facts, matters or circumstances which made it unreasonable for us to accept the accuracy of those statements as a proper representation of the information extracted from the records of the Companies at the date of preparation between 28 July, 1987 and 29 September, 1987.Ó It will be recalled that PMS prepared a first draft of the preliminary financial statements on Tuesday 28 July 1987 and finalised the preliminary financial statements and delivered them to Wu on Wednesday 29 July. McS forwarded to Wu final pro forma balance sheets on 29 September. So far as the evidence reveals, PMS did not become aware in the intervening period of the fact that the cheques had not been presented and paid on or immediately after 29 July. That discovery was not made until on or about 19 October. To express the matter differently, so far as PMS knew, Webber had performed his undertaking of the night of 28 July, by causing the cheques to be drawn on 29 July and presented and paid on that date or immediately afterwards. Accordingly, the third representation pleaded, even assuming that it arose in the unqualified terms in which it is pleaded, was true. Of course, PMS had always known that the financial statements were inaccurate in their representation of the position as at 30 June but this is not the third pleaded representation, and if it were it would not arise from par (11) of the letter. The fourth pleaded representation (the second said to arise from the letter dated 20 March 1990) is: Ň(4) The cheques in question had been drawn in June 1987 in relation to June 1987 transactions, pursuant to arrangements made before 30 June 1987, and were effective on or about 30 June 1987.Ó This pleaded representation seems to be based on par (12) in PMSŐs letter to FAI dated 20 March 1990, which was as follows: ŇPrior to 30 June, 1987, the officers of TIIB had been advised to maintain a Client Broking Account for each trading company. On or about 28 July, 1987 in reviewing the various companies ledger [sic] it become [sic] evident that Client Broking Funds had been deposited to a pooled Broking Account with the National Australia Bank Ltd. This was discussed with Webber and Brian Beazley, the Financial Controller of TIIB, prior to 30 June, 1987. Cheques had been left open to allow transfer of funds to the correct companies [sic] accounts to repay client funds represented in inter Company transfer accounts. We were given assurances by Webber that arrangements were being made with National Australia Bank to clear these cheques.Ó (emphasis supplied) The critical sentence is that which I have emphasised. It signifies that cheque forms in a series had been left uncompleted so that they could, without arousing suspicion or giving rise to anomaly or inconsistency, be completed after 30 June and backdated to that date or an earlier date, so as to give the appearance that funds had been transferred by 30 June. In my opinion, the letter does not give rise to the representation pleaded. Indeed, it is inconsistent with a representation that the outstanding ŇchequesÓ had been ŇdrawnÓ in June 1987. The fifth and final pleaded representation (the third said to arise from PMSŐs letter dated 20 March 1990) is: Ň(5) Tag representatives had been informed of the loan accounts and the outstanding cheques in question.Ó This pleaded representation is apparently based on par (22) in the letter which was: ŇThe matter of outstanding cheques was also brought to the attention of officers of TKN Holdings Limited including Brian Beazley, Ray Webber and Harvey Wu between 19 October, 1987 and 23 December, 1987 by this firm.Ó Following settlement of the TAG transaction on 2 November 1987, Webber and Beazley became, at least in a loose sense, Ňofficers of TKN Holdings LimitedÓ. It is not obvious, however, on what basis they qualify as ŇTAG representativesÓ. PMS drew the matter of the outstanding cheques to their attention between 19 October and 23 December 1987. McS discussed the matter with Wu on 25 January 1988. There is no evidence that PMS brought the matter to WuŐs attention between 19 October 1987 and 23 December 1987. But the fifth pleaded representation is simply that Ň[TAG] representatives had been informed of the loan accounts and the outstanding cheques in questionÓ. The expression Ňhad been informedÓ surely signifies, Ňhad been informed prior to execution of the Acquisition Deed on 1 October 1987 or, at least, prior to settlement of the TAG transaction on 2 November 1987Ó. Either way, the representation does not arise from par (22) of the letter. That paragraph refers to a period after execution of the Acquisition Deed and is consistent with PMSŐs not having brought the matter to the attention of any TAG representative, such as Wu, until after settlement on 2 November 1987. The result of the foregoing is that McS did not make 7 May 1990 representations (1), (2), (4) and (5) as pleaded. I need not decide whether he made 7 May 1990 representation (3) as pleaded, because if he did, it was true. Issue (8) If ŇyesÓ to Issue (7) were the 7 May 1990 representations untrue? If the 7 May 1990 representation (3) as pleaded was made (I do not decide whether it was) it was true. I need not discuss whether 7 May 1990 representations (1), (2), (4) and (5), as pleaded, were true. The foregoing conclusions made it unnecessary for me to address Issues (9), (10), (11), (12) and (13) in relation to the 7 May 1990 representations. However, it is appropriate to note that if all five representations had been made and had been untrue, I would have resolved Issues (10) and (11) against FAI. In relation to Issue (10), my view is that FAI has not established that McS knew as at 28 April 1991, or that a reasonable person in the circumstances could be expected to have known at that date, that the 7 May 1990 representations, assuming that they had all been made and had all been untrue, had any continuing relevance whatever to FAIŐs decision whether to accept the risk proposed on 28 April 1991, and, if so, on what terms. The reasons why I reach this conclusion have been set out at length earlier and may be summarily described as the total context and history of events, from the notification of the claim by TAG in January 1990 down to the submission of the proposal dated 28 April 1991 and its contents and omissions. In the present context, Issue (11) raises the question under s 28 (1) of the IC Act whether FAI would have entered into the contract for the Chatswood policy for the same premium and on the same terms and conditions, even if McS had not made the 7 May 1990 misrepresentations. I have referred earlier to the evidence of Hunter. It should be recalled that on 7 May 1990 McS volunteered the information contained in the Claims Notified Status Report and voluntarily provided the copy of PMSŐs letter to FAI dated 20 March 1990, which was attached to that Report: the information contained in the Report and in the letter was not called for by FAI in its form of proposal. Hunter appreciated that in volunteering the information in question, McS was seeking to put a favourable light on matters, and that it was necessary for FAI, if it saw fit, to conduct its own investigation. In fact, it was doing so through TCM in the period, relevantly, from 7 May 1990 down to 28 April 1991 (it was also doing so before and after that period). Finally, there are to be taken into account the three differences between what McS said to FAI when signing the critical proposal form on 28 April 1991, a little under three months prior to the commencement of the hearing of the TAG proceeding before Olney J on 22 July, and what he had said a year earlier in the proposal form dated 7 May 1990. Even if all five 7 May 1990 representations had been made and had been untrue, in my view they had no effect on FAIŐs decision, that is to say, FAI would have entered into the contract for the Chatswood policy for 1991-1992 for the same premium and on the same terms and conditions as it would have done if they had not been made. RENEWAL OF THE PMS CHATSWOOD POLICY FOR 1991-1992 - ALLEGED MISREPRESENTATION - THE TCF FACTS Issue (1) Was any partner of PMS Chatswood, after enquiry, aware, on 28 April 1991, of the circumstances set out in pars 1-22 of Part B of the Schedule to FAIŐs further amended defence in the TCF insurance proceeding? FAIŐs pleading and submissions relate only to an awareness on the part of McS: FAI did not plead or submit that McSŐs partner in PMS Chatswood, Turner, had any relevant awareness. The relevant pleading is as follows: ŇBy the matters in paragraphs 16 and 17 [the answer ŇnoÓ to question 13 (b) (ii) and the declaration of truth], McSweeney made misrepresentations to the Respondent, in that he was in fact aware of all of the matters in part B of the Schedule hereto, being circumstances which might give rise to claims against him, but did not disclose all or any of such matters to the Respondent.Ó (par 18, FAIŐs further amended defence in the TCF insurance proceeding) In my opinion, McSŐs awareness as at 28 April 1991 of the matters described in pars 1-21 of Part B was the same as his awareness of them as at 22 May 1989, discussed earlier. I incorporate that discussion here. Events subsequent to the underlying TCF facts which are alleged to be suggestive of the making of a claim The only relevant increase in McSŐs awareness by 28 April 1991 relates to par 22 and to the effect, if any, of the s 541 examinations, which had, of course, been completed by that date. It will be recalled that par 22 of Part B of the Schedule to FAIŐs further amended defence in the TCF proceeding is: Ň22. Mr McSweeney, Mr Beale and Mr Cullen had, in about mid 1989, been summonsed for examination pursuant to s.541 of the Companies Code in relation to the affairs of (inter alia) Travel; had retained solicitor and Counsel who had appeared for them at the examination; and had been examined, including by Counsel for TCF, over a number of days in November 1989 and July 1990 concerning, inter alia, PMSŐs activities in relation to TravelŐs 1987 accounts (including the management fees) and TravelŐs July-December 1988 financial position and the extensions of time.Ó It is clear that McS knew of the matters in par 22 as at 28 April 1991, with the possible exception of the fact that he, Beale and Cullen had been examined at the s 541 examinations by counsel for TCF, a matter which was the subject of evidence and competing submissions before me. In the light of my other findings made later in this Part, whether McS was aware, as at 28 April 1991, (or Cullen, as at 22 April 1991, for the purposes of the 1991-1992 Gosford policy (to be discussed later)), that one of the barristers who had questioned him in his s 541 examination had been representing TCF, is of little significance. However, I will address here the evidence and submissions relating to it, in relation to both McS and Cullen. Awareness of McS and of Cullen that TCF was represented at the section 541 examinations The facts are that at the s 541 examinations, Mr Ross, solicitor, appeared for the liquidator, at different times Ms Bergin of counsel and Mr Roberts of counsel appeared for TCF, and Mr Carnovale of counsel appeared for McS and Cullen. Cullen was examined on Friday 24 and Monday 27 November 1989, by Mr Ross and Ms Bergin. McS was examined on Monday 27, Tuesday 28 and Wednesday 29 November 1989 and Wednesday 4 and Thursday 5 July 1990, on the first three days by Mr Ross and Ms Bergin and on the last two days by Mr Ross and Mr Roberts. McSŐs evidence was that he did not realise until 1992 or 1993 that TCF had been represented at the s 541 examinations. He gave evidence that he was questioned by two lawyers, one of whom, Mr Ross, he knew represented the CAC. He said that he could not recall his own lawyer explaining who would be questioning him. He said that he knew that Ms Bergin of counsel had questioned him, but that he thought that the hearing had Ňhad to doÓ only with the directors, in particular Dunn, and had been conducted by the CAC and the liquidator. He said further that he did not understand that the adequacy of the 1987 audit had been the subject of examination, and that his understanding was that the examinations had been Ňjust a seeking of knowledgeÓ, that the CAC Ňwas interested in finding out about the circumstances of the collapse of [Travel]Ó. He conceded that he had read the transcript at some time after the examinations, but could not recall whether he had done so before or after the renewal of the Chatswood policy in May 1991. He said that when he read the transcript, he Ňwould thinkÓ he would have read that Mr Roberts had appeared for TCF. TCF and PMS submit that Ň... it was a lengthy transcript and it is apparent from McSweeneyŐs evidence that the fact that TCFŐs counsel is there referred to did not register with himÓ. They further submit that there is no evidence that McS understood at any time that Ms Bergin of counsel had appeared for TCF. TCF and PMS make a similar submission in relation to CullenŐs understanding. McS said in cross-examination: ŇI had no doubt in my mind about our proper conduct in relation to these matters, so it didnŐt appear to me to be anything beyond what IŐve mentioned to you, that it was just an action that the Corporate Affairs were looking at taking against the directors.Ó (T 1621) TCF and PMS submit that McSŐs understanding as described in this passage is consistent with the fact that in late 1989 or early 1990, McS had, at the request of the CAC, attended court at the hearing of a prosecution against Dunn (McS had not been required to give evidence on that occasion because Dunn had pleaded guilty). Cullen said that he had had Ňno ideaÓ that TCF had been represented at the s 541 examinations until very much later - after the present TCF insurance proceeding was begun, he thought. He said that he knew that Mr Ross and a Ňlady barristerÓ had questioned him, but that he had not understood that she appeared for TCF. He said that he had Ňnever been before a court in [his] lifeÓ and that although his own legal representative may have told him what to expect, he had no idea until later that TCF had been represented. He said, however, that he carefully read and signed his transcript (which acknowledged an appearance for TCF) after the s 541 examinations. CullenŐs evidence was to the effect that he was of the same belief as McS as to the nature and purpose of the examinations that is, that they represented a general inquiry by the liquidator and the CAC into the affairs of Travel and Wheels and the conduct of their directors leading up to the companiesŐ liquidation. FAI submits that Ň[t]he better view to take of CullenŐs evidence is that he found out that he was being questioned by a barrister for TCF at the time of the examination or soon afterÓ. It submits that it is difficult to believe, given that McS and Cullen were legally represented at the examinations, that they were not made aware at the time, even in passing, that they were being questioned by a lawyer representing TCF. McS was asked in cross-examination directly whether PMSŐs legal representatives had explained to him Ňthe set-up of the hearingÓ, Ňwho would be asking ... questions and what kinds of questions were permissibleÓ, and Ňthe roles that the various people involved in the hearing would be takingÓ. He did not answer in the negative, saying only that he could not recall any of these matters being explained. I accept that it would be in the ordinary course of things for McSŐs and CullenŐs legal representatives at the s 541 examinations to explain to them the identity of the legal practitioners who were questioning them, and of the parties for whom they respectively appeared. An inference that they would have done so perhaps gains support from McSŐs evidence that PMS obtained legal representation because they had not previously been involved in such a proceeding and wanted to ensure that they conducted themselves properly in relation to it. McS and Cullen gave evidence that they understood that Mr Ross, solicitor, was examining them fot the CAC (in fact, although he was ŇfromÓ the CAC, according to the transcript of the examinations he appeared ŇforÓ the liquidator); that the examinations were being conducted by or at the instigation of the CAC and the liquidator; and that they were being questioned by another lawyer in addition to Mr Ross. The true position is that there were three ŇauthoritiesÓ having an interest in the examinations: the CAC, the liquidator and TCF. On any one day, in addition to their own counsel, Mr Carnovale, there were two lawyers sitting at the Bar table. In fact neither was instructed by the CAC. The identity of the one appearing for TCF changed in the course of McSŐs examination. It is readily understandable that distinctions between the three ŇauthoritiesÓ, and, in particular, the notation of an appearance for TCF in the transcript of the examinations, may not have impressed themselves on minds unaccustomed to such matters. I accept that if their legal representatives told McS and Cullen that TCF was represented, or if they read this in the transcript, it was a matter of no particular significance to them and did not ŇregisterÓ with them. Awareness of TCFŐs entitlement to sue McS gave evidence that he was not aware, in 1991, as a general proposition, that if TCF compensated travellers who lost money, it was entitled to sue people whose conduct had caused it to make those payments. He said that he Ňnever put [his] mind to [TCF] suing [him]Ó, although he was aware in general terms that if he supplied a negligent audit report to anyone and that person suffered loss, then he or she might be able to sue him. He agreed that he was aware of an auditorŐs vulnerability to suit, but said that he had believed that the 1987 audit was correct; that the 1988 audit was not completed; and that the statements made by Beale to TCF had been true. He gave evidence that he did not know when he had become aware that TCF had paid out money to travellers who had lost money in the collapse, but thought that he Ňbecame more aware of that when the action [the TCF proceeding] was commencedÓ. He maintained that at no time prior to receipt of formal notice of the claim by TCF in December 1991, did anyone tell him that PMS might be liable to TCF in relation to PMSŐs work for Travel and Wheels, or did he believe that PMS were at risk of being sued by TCF. I accept that McS did not in fact contemplate, at the time of the s 541 examinations, that if TCF compensated travellers who lost money, it might be entitled to sue people who had caused it to make those payments, and, in particular, that he did not in fact contemplate the possibility of TCFŐs suing him. It is noteworthy that TCF had taken no such action against any firm of accountants or auditors responsible for the preparation of audited statutory financial statements, until it brought the proceedings against PMS, more than two and half years later, in December 1991. What McS might have acknowledged in relation to such matters if he had been pressed in relation to them contemporaneously with his s 541 examination is beside the point. FAIŐs allegation that legal representation reflected a consciousness of possible liability FAI appears to invite me to infer that McS and Cullen were in fact conscious of Ňclaim circumstancesÓ from the fact of their having been legally represented at the s 541 examinations. FAI submits that Ň[t]his is not suggestive of a clear conscienceÓ and that: Ň[t]he obvious reason was that he [McS] (and his partners) realised that they required legal protection, and this was obviously protection against some legal threat.Ó I disagree. I do not infer a consciousness of guilt or of liability from the fact of legal representation. Contrary to FAIŐs submission, I do not find the inference for which it contends, to be supported by the following exchange in the course of McSŐs cross-examination: ŇI suggest to you that by the time that you gave instructions for representation to take place at the 541 examinations, you were of the view that you might have some potential exposure concerning the Travel collapse? --- No, I donŐt think we had any view as to particular exposures. I think we just wanted to make sure that we did have some proper representation. What was the point of having representation if you had no exposure? --- Well, we were the auditors and I think anybody is likely to attack an auditor, are they not? And the way in which they might attack an auditor is by suing them, is it not? --- Yes, thatŐs true. And you thought that that might happen to you, did you not?--- No, we didnŐt at that time. Is that a serious answer, Mr McSweeney? --- It certainly is.Ó (T 1616) There is no evidence that prior to the s 541 examinations, PMS became aware that any criticism was to be levelled at them in the course of the examinations or that a possible claimant against them was to be represented at the examinations. I do not accept FAIŐs submission that McSŐs explanation of a desire to have Ňproper representationÓ is implausible in the absence of awareness of exposure to attack. McS and Cullen say that they were legally represented at the examinations, not because they thought they were at risk, but because it was their solicitorŐs advice that they should be, and because they were unfamiliar with the procedure to be followed at the examinations. I accept this evidence. Conclusion In the result, I find that, McS, as at 28 April 1991, and Cullen, as at 22 April 1991, were aware of the circumstances in Part B of the Schedule to FAIŐs further amended defence, subject to the qualifications and exceptions discussed, particularly relating to pars 1, 9, 16, 17, 20 and 22, and subject to my findings in Part III of these Reasons. Issue (2) Did those circumstances described in Part B of the Schedule (to FAIŐs further amended defence), of which any partner of PMS Chatswood (effectively McS) was aware, on 28 April 1991, satisfy the description of Ňcircumstance[s] which may give rise to a claimÓ in question 13 (b) (ii)? I have previously discussed the meaning of the expression Ňcircumstances which may give rise to a claimÓ. Would a reasonable person in McSŐs position as at 28 April 1991, have immediately recognised that those matters described in Part B of which McS was aware, were circumstances which might as a real possibility or risk, have given rise to a claim against PMS? FAI relies (as to pars 1-21) on the reasons it advanced in relation to the 1989 proposal, and, in addition, the considerations touching the legal representation of TCF on the one hand and McS and Cullen on the other, at the s 541 examinations, just discussed. But FAI also submits that the content of the s 541 examinations constituted an independent circumstance to be taken into account. I have previously dealt with the matters in pars 1-21 of Part B in the context of my discussion of the 1989 proposal and I have dealt under Issue (1) above with the question of legal representation at the s 541 examinations. For the reasons then given, those matters were not, as at either 28 or 22 April 1991, circumstances which satisfied the description Ňcircumstance[s] which may give rise to a claimÓ. I will now proceed to consider more fully FAIŐs submissions in relation to par 22. The section 541 examinations, more generally FAI relies on its ŇPrecis of Propositions Drawn from section 541 Examination TranscriptsÓ handed up on the hearing before me. It submits that the s 541 examinations made it clear that PMSŐs conduct in 1987 and 1988 Ňwas under attackÓ, and that it could not have escaped McS (and Cullen) that, given the losses to the public, and the role of TCF, PMS might well be sued. As to the evidence of McS and Cullen that they were unaware of TCFŐs involvement, that they believed the examination was for the purposes of the CAC and the liquidator, that they believed the examination was in respect of an action against the directors only, and that they perceived no threat to PMS, FAI submits that McS is not to be believed. It gives the following reasons: Ň(1) The examinations of PMS people extended over ten days. (Beale 17 July and 13 October, Cullen 24 and 27 July [sic - November] 1989, [McS] 24 [sic], 27, 28, 29 November 1989, 4 and 5 July 1990). (2) [McS] saw fit to be legally represented by solicitor and counsel, not only throughout the hearing but also at his conference with Mr Ross [T 1617]. This is not suggestive of a clear conscience. (3) It is also difficult to believe, given the representation, that he was not aware of what was going on, who was questioning him and the thrust of the questions. (4) The questioning was clearly critical of the 1987 audit and the 1988 extension of time, especially the questioning by Mr Roberts and Ms Bergin. There was extensive and close questioning of PMS dealings with the TCF, including (for example) in respect of the 1987 accounts, in the course of which it was put to him that it was ÔextraordinaryŐ that the management fee was not checked [s 541 T 682]; also about his knowledge, without informing TCF, of TravelŐs insolvency, it being put to him that he should have advised the companies to notify the TCF [s 541 T 688], and the provision of information by his firm in respect of the change of ownership had been ÔdilatoryŐ [s 541 T 732]. (5) The questioning concerning the 1987 audit and the 1988 extensions of time did not concern the new directors including Dunn, with whom [McS] says he believes the proceedings were concerned, or concerned them less than they concerned PMS. (6) [McSŐs] examination continued in July 1990, after Mr Dunn had pleaded guilty to charges, this being in Ôlate 1989 or 1990Ő (paragraph 7 of [McSŐs] statement of 20 June 1995). (When cross-examined on this point, [McS] said [T 1617 line 30] that he believed Mr DunnŐs plea was in fact in late 1990. He regarded this as consistent with what he had said in his statement. It is submitted that it is not consistent. Reading the statement in context, [McS] was clearly giving what purported to be a chronological narrative. When he said Ôin late 1989 or 1990Ő he apparently meant this as Ôin late 1989 or in 1990Ő not Ôin late 1989 or in late 1990Ő. A fair reading of his statement suggests that he intended to say that if the plea was not in late 1989 it was early in 1990.) (7) [McS] had a full awareness of TCF, the compensation scheme, and the relevance of the firmŐs audit work ( ... ). (8) [McS] was aware of an auditorŐs liability to anybody who relies on him [T 1646] and an auditorŐs vulnerability to suit [T 1616]. (9) When [McS] read the s 541 transcript for the purpose of signing it [T 1621], (ÔI would think soŐ), he read that Mr Roberts was appearing for the Travel Compensation Fund [s 541 T 1] (see also eg.[s 541 T 25]). (10) [McS] accepted that it would have been ÔnaiveŐ to believe that the examination was only concerned with the directors [T 1622], and it is submitted that at no time during the course of the events with which this trial is concerned has [McS] been shown to be a person who is ÔnaiveŐ. (par 51, FAIŐs submissions in chief - emphasis in original) I have previously dealt with the subject matter of pars 2, 3, 7, 8 and 9, above. I refer to that discussion, and will not repeat it here, except to say that, in my view, these matters did not constitute Ňcircumstance[s] which may give rise to a claimÓ, nor imply that McS perceived a threat of a claim. The examinations, particularly that of McS, were lengthy. But this fact itself is consistent with the examineesŐ being, or being believed to be, a rich source of information for purposes of the examiners other than the purpose of fixing the examinees with legal liability. Examples of such other purposes are the attribution of blame for the collapse of the companies to others; the prosecution of company officers for offences; and the exploration of the adequacy of existing regulation of the industry. I will deal with the remaining paragraphs of FAIŐs submission in the course of the discussion of the s 541 examinations, below. CAC interviews FAI relies on the facts that Beale and Cullen were interviewed by officers of the CAC in early 1989, and that at around that time, PMS provided the firmŐs papers concerning the Travel audit to the CAC. In doing so, PMS handed over the papers relating to a client which had collapsed and was under investigation, to the investigating body. However, a reasonable person would not have concluded from this that there was a real possibility of TCFŐs claiming against PMS. FAIŐs submission does not give due weight to discussions between PMS and the CAC (discussed below), in which the CAC informed PMS that it was concerned with the activities of the directors of Travel and Wheels and with the affairs of the companies in a general sense, and that PMS was not at risk. According to McS, Beale and Cullen, they did not think that there was any risk at all of the firm being sued, and thought that the examinations had to do with the directors, and were in the nature of a general search for knowledge about the companiesŐ affairs by the CAC and the liquidator. I find their evidence in this respect credible and I accept it. The fact of the public examinations, at which statutory bodies were represented The knowledge of McS, Cullen and Beale of the facts that Travel and Wheels, of which PMS had been accountants and auditors, had been investigated by the CAC and a liquidator, and that public examinations had been held in relation to their collapse at which the three of them had been examined at length were not circumstances which, in and of themselves, pointed to a claim against PMS. This is so even if McS, Beale and Cullen had been told that TCF was represented at the examination by counsel who had in fact questioned them in a testing manner about their role in relation to Travel in 1987 and 1988. Participation by TCF in such lengthy examinations does not necessarily bespeak a claim by it. Its participation is consistent with its role in the public interest. The overall submission by TCF and PMS, which I accept, is that it is highly unlikely that McS or Cullen or a reasonable person in their positions, would have been caused by TCFŐs representation at the s 541 examinations, and by the nature of the questions being asked on its behalf, to appreciate as at the end of April 1991 (ten months after completion of the last examination on 5 July 1990) that there was a definite or real possibility of a claim being made by TCF against PMS. Line of questioning of McS and Cullen in the examinations The questioning, especially by Mr Roberts and Ms Bergin of counsel, implied criticism of the 1987 audit, and, in particular, of the lack of any assessment of the reasonableness of the amount of the management fee, and (to a much lesser extent in my view), the obtaining of the extensions of time in 1988. There was detailed questioning of McS and Cullen on these topics. The questions concerning the 1987 audit and the 1988 extensions of time did not directly concern the new directors, including Dunn, with whom McS and Cullen say they believed the examinations were concerned, or were concerned more than they were with PMS. The 1987 audit It was put to McS that it would be an ŇextraordinaryÓ position if a management fee of the size in question was not checked and if Cullen had simply relied on the bona fides of the directors (he agreed). At one point, on 28 November 1989, Ms Bergin of counsel made clear to McS that she would examine him the next day on, inter alia, Ňthe audit opinion that [he] gave and the basis upon which that audit opinion was given in the unqualified terms in 87Ó, and she invited him to read the audit work papers overnight with that in mind. Some of that questioning concerned the lack of justification to be found in the work papers for items in the accounts. Subsequently, from 5 July 1990, Mr Roberts appeared for TCF and asked McS more questions in relation to the 1987 audit work papers. Cullen agreed, in an important series of answers in his s 541 examination (T 583, 584-5, 588-9), that he had checked only that the management fee had in fact been paid; that no work had been done to verify that the amount was reasonable; that there was no document or any evidence amongst the work papers of verification of the amount; and that he had relied on the bona fides of the directors in accepting the amount of the fee. FAI submits that the substance of this evidence was put to McS, in terms which made it clear that that was the effect of the answers which Cullen had given in the course of his own examination, and that McS gave answers which broadly accepted the correctness of what Cullen had said. Before me, Cullen accepted that at the s 541 examination he was being questioned in a critical way concerning the adequacy of the 1987 audit in respect of the management fee. He said that he had been aware at the time that he was being questioned about PMSŐs conduct of the 1987 audit in an ŇunfriendlyÓ way, which involved counsel pressing for answers to difficult questions, and that it was being suggested to him that he had not done enough work to assess whether the management fee was reasonable in amount. Cullen said that he had understood that the way things had been done by PMS in relation to the audit was being criticised. The 1988 conduct McS was questioned about his knowledge, and the non-disclosure to TCF, of TravelŐs insolvency, about whether he gave any advice to the Lemon brothers about what they should be doing in relation to TCF, and about whether he should have advised Travel to notify TCF. It was also put to him that the provision of information by his firm in respect of the change of ownership had been ŇdilatoryÓ. The following exchange occurred during CullenŐs cross-examination before me: ŇCould I suggest, Mr Cullen, that you understood that the suggestion that was being put to you was that when there was a company that was going to fail the points test, that was continuing to take money from the public and that was continuing to make losses, and you knew these three matters; you understood it was being suggested that you should have taken action yourself?---Well, I never at any stage believed that it was our responsibility or my responsibility. What I am suggesting to you is that whether rightly or wrongly, you understood that Ms Bergin was suggesting to you that you should have taken action?---ItŐs very hard to remember what was in your mind back at - at that time. But just looking at these lines of questioning, all relating to the directors and stuff, I didnŐt infer that. ... Mr Cullen, you well understood that in the course of the 541 examination, you were being asked questions which suggested that your conduct concerning the obtaining of the extensions in 1988 was being challenged did not you?---No, at no time was I aware of that.Ó (T 1973-4 - emphasis supplied) McS conceded before me that it may have been ŇnaiveÓ not to believe that the adequacy of PMSŐs conduct in not notifying TCF of information as the [1988] audit progressed, was being questioned by TCF during the examinations. However, in my view, this falls short of an intimation of a claim, or an allegation of fraud or misrepresentation in relation to the actual applications for extension of time. FAI submits also that the questioning about the 1988 events must have drawn the attention of McS and Cullen to the role of PMS in obtaining the extensions of time from TCF. FAI points out that Cullen was specifically asked if his view of the company as at 25 November 1988 had not led him to advise Travel that it ought to contact TCF ŇurgentlyÓ. To this he had replied that PMS Ňhad already advised the directors at an earlier stage about their requirements under the Companies Act with regard to their liabilities of continued tradingÓ. In my opinion, the questioning on the 1988 events does not, contrary to FAIŐs submission, actually attack PMSŐs part in the making of the applications on 28 September and 26 October, for the extensions of time. It is not, for example, put to McS or Cullen that the applications for extension conveyed misrepresentations in the way in which FAIŐs case has been put in these present insurance proceedings. While the lengthy questioning of McS and Cullen on behalf of TCF in the s 541 examinations was clearly critical of PMS, more so in respect of the management fee item in the 1987 audited accounts than in respect of the applications for the extensions of time in 1988, it is important to avoid the Ňdetriment of hindsightÓ in assessing how McS or Cullen, or a reasonable person in their positions, would have viewed the lines of questioning, when completing the proposal forms in late April 1991. At that time, CullenŐs examination had been completed twenty-one months earlier. There had been no suggestion of a claim by TCF in the meanwhile. This passing of time might have to be weighed against a line of questioning which made it clear that TCF was contemplating making a claim, but that is not this case. In my view, the questioning in the s 541 examination did not constitute, either of itself or in conjunction with the other matters described in Part B and known to McS and Cullen, a circumstance suggestive of the making of a claim by TCF against PMS. Breadth of, and possible inferences from, the questioning It must also be borne in mind that the questioning of McS and Cullen about the 1987 audit and the 1988 applications for extension of time, took place as one part of a questioning about numerous issues, such as the true shareholdings in Travel, the arrangements made for payment of PMSŐs fees, and advice given to Travel. Interestingly, McS gave evidence that he was Ňconcerned about the possibility of a claim by the liquidator that the payment of [PMSŐs] accounts may have been preferencesÓ. He said: ŇWhilst I was concerned about the possibility of a claim by the liquidator that the payment of [PMSŐs] accounts may have been preferences, and whilst I was aware that IPG had brought proceedings against [PMS] in relation to the 1987 audit and the events surrounding the acquisition of Wheels Abroad and Travel Abroad in 1988, I was not aware that the Travel Compensation Fund or the liquidator might commence proceedings against [PMS] in relation to Travel Abroad or Wheels Abroad.Ó FAIŐs selection of evidence does not expose the true breadth of the subject matter of the questioning of McS, Beale and Cullen. It is important to remember that it was not put directly to McS or Cullen that they had been careless or dishonest or that they were in any sense responsible for TCFŐs losses. It was not put to them that they had committed specific breaches of duty, under the general law or legislation. They were asked about a broad range of matters in a probing critical fashion, in the context of an examination which they understood was concerned to investigate and ascertain the cause of the collapse of Travel and Wheels, on behalf of the CAC and the liquidator, against a background of assurances from the CAC that they were not the targets of the investigation. Their conduct was clearly no part of the cause of that collapse. Indeed, FAIŐs case is (and TCFŐs case was) that their conduct artificially delayed the collapse at TCFŐs cost. TCF and PMS submit, and I agree, that the s 541 examinations cannot be viewed as a direct demand or complaint by TCF, or otherwise to constitute a Ňcircumstance which may give rise to a claimÓ. The position is no different even if McS and Cullen were aware that TCF was represented at the examinations by a lawyer who questioned them antagonistically. McS and Cullen knew the nature and function of TCF as a public body with responsibilities in the public interest set up under the Travel Agents Act 1986 (NSW) with which they were familiar. They knew that that Act required the provision to TCF of annual audited financial information to enable it to assess whether travel agents were able to carry on business in a solvent fashion. The presence and representation of TCF at an investigation into such a notorious collapse of a substantial travel agent, which had been a member of the Compensation Scheme administered by TCF, and in relation to which TCF had had to compensate travellers, could be explained by reference to more than one reason. It could be simply interested in ascertaining the reasons for the collapse of one of its members. It could be interested in the conduct of the companiesŐ directors, and whether they bore responsibility for the loss. It could be interested in what the collapse might have to teach as to the adequacy of the statutory regime, its administration, or both, and in whether legislative or administrative changes needed to be made with a view to preventing a recurrence. McS gave evidence, when questioned about whether he understood that Ms Bergin of counsel was concerned to probe why he had given an unqualified audit report in 1987, that he thought that she was Ňtrying to establish the events of what the directors had doneÓ. In my view, it was not the only or most obvious inference arising from TCFŐs presence and the testing questioning of McS, Beale and Cullen by its counsel, that a claim by TCF against PMS was in the offing. The passages of questioning pointed to by FAI can equally be seen to be relevant to an inquiry into the directorsŐ conduct (for instance, by providing the background of advice against which the directors acted), as was McSŐs and CullenŐs understanding. Cullen gave evidence that this was the way in which he had understood such questioning, for example, during the following exchange in his cross-examination before me: ŇWhen you were asked that question [in the s 541 examination] you understood that you were being criticised for not having given advice that the Travel Compensation Fund should be contacted urgently, did not you?---No, I donŐt - I donŐt think I did. At the time when she asked that question I think she - well, I believed she was still under a 541 talking about the directors and the directorsŐ responsibilities and she was just asking whether we advised the company that they should contact Travel Abroad [sic-TCF], just as a question. And I answered, I said weŐd already advised them of their requirements.Ó (T 1973 - emphasis supplied) It is important again to recognise the effect of hindsight. We now know that TCF did sue McS and Phillips and that in the TCF proceeding it used the transcript of the s 541 examinations in aid of its case. But at the time of the examinations a line of questioning may have had other explanations as to its purpose. I accept that the belief of McS and Cullen that the examinations were for the purpose of an inquiry by the liquidator and the CAC into the affairs of Travel and Wheels and their directors, would have informed their understanding of the significance and relevance of any perceived criticism of PMSŐs own conduct. Finally, a question asked in a s 541 examination does not necessarily imply a belief on the part of the examining party as to the true facts: the examiner is investigating, and casting around for, possible causes of a corporationŐs failure. Although the s 541 examinations should have made it clear that PMSŐs conduct of the 1987 audit and some aspects of their involvement with Travel and Wheels in 1988, were, or could be, the subject of criticism, this was insufficient to put McS and Cullen on notice that a claim for compensation was a real possibility. Assurances from Mr Ross McS and Cullen gave evidence, in support of their evidence that they did not understand that there was a risk of the firmŐs being sued and that they understood the examinations to be concerned only with the directors, of conversations with Mr Ross of the CAC in 1989 or 1990, or both, in which they say that he assured them that the CAC was interested only in pursuing the directors. Cullen gave evidence that Mr Ross told him at a conference prior to the s 541 examination: ŇYou have nothing to be concerned about. We are interested in the directorsŐ involvement in Travel Abroad and Wheels Abroad.Ó Before me, Cullen said that Mr Ross Ňtold us specifically that they were not worried about us whatsoever; there was no allegations [sic] whatsoever against usÓ. He said that he could not remember the questions he was asked at the conference with Mr Ross, but said that he thought that they related to the Lemon brothers. He does not place a date on the conversation, except to say that it took place after he received his summons to appear at the s 541 examination and prior to the actual examination. Thus it is relevant to his awareness both during the examination and when he completed the form of proposal for renewal of the Gosford policy on 22 April 1991. FAI submits that CullenŐs statement that he was not aware that there might be a claim, on the basis of his discussions with Mr Ross, is implausible. It says that it would be most surprising if the CAC were to give an assurance that a party to be called at a s 541 examination was immune from action, even before the CAC knew what the person had to say or what his or her involvement was. In my view, it is not clear that the CAC did not know what Cullen was going to say, particularly as it is CullenŐs evidence that he was asked questions about the Lemon brothers at his meeting with Mr Ross. Neither party called Mr Ross, there was no evidence that he was available or even alive. However, I do not accept FAIŐs submission that evidence of the conversation between Cullen and Mr Ross should not be accepted without corroboration, of which there is none. FAI says also that whatever comfort Cullen may have derived from the conversation with Mr Ross must have been displaced by the unfriendly examination that followed. But this is not necessarily so, and it was not CullenŐs evidence. TCF and PMS also submit, and I agree, that this submission of FAIŐs ignores CullenŐs understanding of the purpose of the examination, his belief that the accountants had done nothing wrong, and his belief that the answers he gave were satisfactory. In my view, Cullen believed Mr RossŐs assurances that the s 541 examination was concerned with the directors and that no allegations were being made against the accountants. I do not think that the effect of the assurances was nullified by the actual course taken by the s 541 examinations. McS gave evidence that, from his discussions with Mr Ross, he understood that the CAC was ŇprimarilyÓ interested in prosecuting Dunn. According to McS, during the second half of 1989, he attended a meeting with Mr Ross in relation to the liquidation of Travel (discussed above in relation to the 1989 proposal). On BrownŐs advice, Mr Carnovale of counsel and a solicitor from GDB also attended the interview. McS does not recall whether the meeting took place before or after his examination under s 541. McS said that he recalled that in the course of the meeting, Mr Ross asked questions relating to the circumstances surrounding McSŐs dealings with Dunn, and asked him whether he would be a prosecution witness against Dunn, to which McS replied that he was prepared to make himself available if he could be of any assistance. According to the submission of TCF and PMS, this is substantiated by the fact that in late 1989 or early 1990, McS attended court at the request of the CAC for the purpose of a hearing of a prosecution against Dunn (McS was not required to give evidence because Dunn pleaded guilty). McS said that he did not recall being told what the charges were. During cross-examination, McS said that he believed that DunnŐs plea was actually in Ňlate 1990Ó and that this was consistent with his (McSŐs) account in chief, in which he had used the words Ňlate 1989 or 1990Ó. I accept FAIŐs submission that McS was giving a chronological narrative, and that by that expression (in his statement in chief) he had meant Ňin late 1989 or in 1990Ó not Ňin late 1989 or in late 1990Ó. But in my opinion, the fact that McSŐs s 541 examination may have resumed after Dunn had pleaded guilty does not change the effect of what Mr Ross had said to him, or signify that McSŐs understanding of the nature and purpose of the s 541 examinations, and of the effect of the questions which he was asked, should be taken to have altered. In my view, it did not do so. Beale also gave evidence (discussed above in relation to the 1989 proposal) in his written statement that at a meeting with a representative of the CAC in about 1989, the representative said to him: ŇWe are targeting the directors of Travel Abroad and Wheels Abroad. Are you prepared to give some assistance?Ó It is true that the affidavit evidence of Cullen and Beale does not say that they were told that the CAC was only targeting the companiesŐ directors, and that nothing was said to exclude the possibility of claims by the liquidator, or by others. In my view, however, it was a reasonable view to form from the terms used, and one which in fact was formed, that the examinations would not be a cause of concern for the examinees. TCF and PMS submit, rhetorically, that surely Beale, Cullen and McS were entitled to accept at face value Mr RossŐs assurance that the s 541 examinations were concerned with the directors, and that no allegations were being made against the accountants. Mr RossŐs assurance naturally would have put McS and Cullen in a state of mind, which nothing happened to change prior to April 1991, in which they would have thought that they were not personally under any threat of a claim. Absence of practice of TCF suing accountants There was also evidence before me from Carlo Brattoni (Chartered Accountant and Chief Executive of TCF since June 1990), upon which TCF and PMS rely, the effect of which I have already briefly mentioned. He said that the TCF claim against PMS was the first occasion on which TCF had claimed against accountants or auditors arising out of an alleged duty of care owed to TCF, in respect of preparation of audited accounts of a travel agent for submission to TCF. FAI says that BrattoniŐs evidence is irrelevant, in that it is not shown that McS or anyone else in PMS knew that TCF had never sued an accountant or auditor before, and that, even if they had known it, it does not prove that there was any reason to believe that TCF would not sue. I agree. The evidence serves only the very limited purpose of making it clear that PMS could not have been aware of a practice of TCFŐs suing accountants or auditors of licensed travel agents following a collapse. Events subsequent to the section 541 examinations TCF and PMS also submit that, in any event, the examinations were long past by the time the proposals in question were completed in late April 1991, and that the only claim which had been made by that time was IPGŐs claim (and DunnŐs prosecution). The last of the examinations, that of McS, concluded on 5 July 1990, ten months earlier. TCF had made the last payment of compensation to a traveller on 25 May 1990 (TCF judgment at 45). There had been no correspondence or other communication which even remotely foreshadowed to PMS the making of any claim by TCF as a possibility or indicated any perception by TCF that PMS bore some responsibility for TCFŐs losses. If a reasonable person in the circumstances of McS and Cullen at the end of April 1991 had thought about the matter, he or she would have thought that if TCF was to claim against PMS, the claim would have surfaced during the preceding ten months. TCF and PMS submit that even if McS and Cullen had been conscious of the fact that TCF had been Ňhaving a go at themÓ at the s 541 examinations, and even if they had not thought that it was the directors alone who had been targeted at those examinations, the matter had Ňpassed into historyÓ by the end of April 1991. I agree. Issue (3) If the answer ŇnoÓ to question 13 (b) (ii) was untrue, have TCF and PMS Chatswood nonetheless established that McS, as the person signing the proposal form, gave that answer on the basis of a belief in fact held by him, being a belief that a reasonable person in the circumstances would have held? The relevant pleading is par 4(d) of the further amended defence of McS, Turner, Phillips and Cullen to FAIŐs cross-claim in the TCF insurance proceeding: Ň4. In response to paragraph 4 of the cross claim:- ... (d) In further answer to paragraphs 16 to 18B of the Further Amended Defence to the Amended Points of Claim [pleading the misrepresentations allegedly made by McS when he completed the proposal form on 28 April 1991], the cross respondents say that if, which is not admitted, the statements made by Mr McSweeney as alleged were untrue, those statements were made by Mr McSweeney upon the belief that they were true, which is a belief which a responsible [sic - reasonable] person in the circumstances would have held.Ó FAI submits that this defence fails because: McS gave no evidence that the misstatements were made on the basis of a belief that he held; an inference to that effect could not be drawn in the circumstances; and the Court should not be satisfied that a reasonable person in McSŐs circumstances would have held the belief that McSŐs negative answer to question 13 (b) (ii) was true. I reject the first two submissions. McS gave evidence directed towards establishing his state of belief in April 1991 as to the TCF facts and subsequent events. On the basis of his state of belief, there were not circumstances which might give rise to a claim. McSŐs evidence as to the TCF facts and subsequent events is itself evidence from which an inference can and should be drawn as to what his state of belief was in relation to those facts as at 28 April 1991. Would a reasonable person in the circumstances have believed that the matters referred to in Part B of the Schedule to FAIŐs further amended defence to TCFŐs amended points of claim in the TCF insurance proceeding, in the light of subsequent events, satisfied the description Ňcircumstance[s] which may give rise to a claimÓ in question 13 (b) (ii)? In answering this question, I am required to assume, contrary to my view, that McSŐs negative answer to question 13 (b) (ii) was untrue, that is to say, that, contrary to my view, on the basis of the Part B matters known to McS, a reasonable person thinking about the matter on 28 April 1991, would have immediately recognised that the making of a claim against PMS was a real possibility. Given that assumption, Issue (3) must be answered ŇnoÓ. Issue (4) If the answer ŇnoÓ to question 13 (b) (ii) was untrue, has FAI established that McS, as the person who gave that answer, knew, or that a reasonable person in the circumstances could be expected to have known, that the answering of the question in that way would have been relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms? FAI has clearly established both limbs. The question was asked in the proposal form and its relevance in the context of a claims made and notified policy is obvious. RENEWAL OF THE CHATSWOOD POLICY FOR 1991-1992 - ALLEGED NON-COMPLIANCE WITH THE DUTY OF DISCLOSURE - THE TCF FACTS Subsections 21 (1) and (2) of the IC Act have been set out earlier. The relevant part of the pleading is as follows: Ň14. McSweeney failed to disclose to the Respondent, before the Chatswood policy was entered into, all of the matters in the Schedule.Ó Ň15. McSweeney thereby failed to comply with his duty of disclosure.Ó (pars 14-15, FAIŐs further amended defence in the TCF insurance proceeding - emphasis supplied) There was no disclosure of any of the matters in Part B in the proposal form dated 28 April 1991. Issue (5) Were the matters described in pars 1-22 of Part B of the Schedule to FAIŐs further amended defence in the TCF insurance proceeding known to PMS Chatswood as at 28 April 1991? I answered this question when dealing with Issue (1) earlier. Issue (6) As to all or any of those matters in Part B of the Schedule to FAIŐs further amended defence in the TCF insurance proceeding which PMS Chatswood knew, were they (i) matters which PMS Chatswood knew to be matters relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms; or (ii) matters which a reasonable person in the circumstances, could be expected to have known to be matters so relevant? FAI submits that both limbs of this Issue should be resolved in its favour for the reason that as to the Part B matters known to PMS Chatswood as at 28 April 1991, PMS Chatswood (through McS) knew, and a reasonable person in the circumstances could be expected to have known, that those matters constituted circumstances that might give rise to a claim against a partner of PMS Chatswood, namely, McS. FAIŐs submission therefore makes the same case for a positive answer, as its case in support of a finding of a misrepresentation in the proposal form dated 28 April 1991. For the reasons which I gave earlier in that context, I would resolve both limbs in the negative. Conclusion on 1991 Chatswood proposal McS did not make a misrepresentation in his negative answer to question 13 (b) (ii) and the declaration of truth, in the proposal form dated 28 April 1991, or fail to comply with the duty of disclosure. Section 28 of the IC Act does not apply and so FAI is not entitled to avoid the Chatswood insurance contract, and FAIŐs liability is not reduced as provided for in s 28 (3). FAI was not entitled to avoid the Chatswood policy, its purported avoidance of it was ineffective, and the Chatswood policy is enforceable in accordance with its terms. Exclusion (g) of the Chatswood policy has no scope for operation. RENEWAL OF THE GOSFORD POLICY FOR 1991-1992 - ALLEGED MISREPRESENTATION - THE TCF FACTS On 22 April 1991, Cullen completed the form of proposal for renewal of the Gosford policy for 1991-1992 in which he answered question 13 (b) (ii) ŇNoÓ and signed the declaration of truth. Paragraph 27 of FAIŐs further amended defence in the TCF insurance proceeding is, relevantly, as follows: ŇAs at 23 May 1991, certain matters were known to Mr Cullen, and were matters that he knew to be relevant to the RespondentŐs decision whether to accept the risk and if so on what terms, or matters that a reasonable person in the circumstances could be expected to know to be a matter so relevant. Particulars (a) There might be a claim against Phillips by reason of the conduct of [PMS] in 1987 and 1988 in relation to Travel Abroad and the Travel Compensation Fund. (b) The matters in part B of the Schedule hereto. (c) [Deleted]Ó FAI submits that its case is made out if Cullen misrepresented his knowledge of either the fact that there might be a claim against Phillips by reason of the conduct of PMS in 1987 and 1988 in relation to Travel and TCF, or by reason of his knowledge of the matters in Part B. Issue (1) Was any of the partners of PMS Gosford, after enquiry, aware, on 22 April 1991, of the circumstances set out in pars 1-22 of Part B of the Schedule to FAIŐs further amended defence in the TCF insurance proceeding, or of the fact that there might be a claim against Phillips by reason of PMSŐs conduct in 1987 and 1988 in relation to Travel and TCF? FAIŐs pleading and submissions relate only to the awareness of Cullen: it did not suggest that his partner in PMS Gosford had any relevant awareness. Of the matters in Part B, FAI submits that Cullen was aware of all of the matters concerning the 1987 audit, some of the matters concerning the 1988 audit, and of the s 541 examinations. In support, it refers back to its entire submissions on the 1987 and 1988 TCF facts. I find that, as at 22 April 1991, Cullen was aware of the matters in Part B, subject to the qualifications and exceptions previously discussed, particularly relating to pars 1, 9, 16, 17, 20 and 22, and subject to my findings in Part III of these Reasons. Was Cullen aware, on 22 April 1991, of the fact that there might be a claim against Phillips by reason of PMSŐs conduct in 1987 and 1988 in relation to Travel and TCF? FAI submits that Cullen was aware that there might be such a claim by reason of (in particular, so far as Cullen was concerned) the 1987 audit. (Phillips was not involved in the 1988 conduct.) FAI says, in support of this submission, that Cullen was aware: Ň(1) Of the purpose of the audit, the operation of TCF and the compensation and licensing scheme [T 1865-6], also TCFŐs interest in the true state of TravelŐs accounts and the materiality thereof to its continued participation in the scheme, and that it was necessary for TCF to be satisfied in respect of its financial adequacy [T 1867]; (2) At least from the Sydney Morning Herald article of 24 December 1988 (exhibit FAI28), which he read and accepted [T 1943] and also probably because it was Ôcommon knowledgeŐ [T 1943], he was aware of TravelŐs collapse, and that TCF was called on to meet customersŐ claims, and he was also aware of publicity and ministerial and government agency involvement; (3) The 1987 audit including the management fee had been critically examined by interested investigating parties by the time of the 541 examinations; and (4) At the examinations, he was being questioned in a critical way concerning the adequacy of the 1987 audit including the management fee [T 1962 and following]. He was aware that he was questioned about PMSŐs conduct of the 1987 audit in an unfriendly way, which involved pressing for answers to difficult questions [T 1964-5]; he understood that it was suggested to him that he had not done enough work to assess whether the management fees were in fact reasonable [T 1967]; he understood that the way things had been done was being criticised [T 1969].Ó In my view, Cullen was clearly aware of the matters in pars (1), (2) and (4) above. TCF and PMS submit that Cullen did not know the matters in par (3), except in so far as he may have gleaned it from the questioning at the s 541 examinations. FAI refers to no evidence to support the matters in par (3). I am not persuaded on the evidence that Cullen was aware of the matters referred to in par (3). The most that can be said is that Cullen was aware that the financial collapse of Travel and Wheels was being investigated by the CAC or their liquidator or both. The matters above of which Cullen was aware, did not make him aware that there might well be a claim against Phillips Ňby reason of the conduct of [PMS] in 1987 and 1988 in relation to [Travel] and [TCF]Ó; see my discussion below of Issue (2) in relation to whether these matters satisfied the description in question 13 (b) (ii), Ňcircumstance[s] which may give rise to a claimÓ. Issue (2) Did those circumstances described in Part B of the Schedule to FAIŐs further amended defence in the TCF insurance proceeding of which any partner of PMS Gosford (effectively Cullen) was aware, on 22 April 1991, satisfy the description of Ňcircumstance[s] which may give rise to a claimÓ in question 13 (b) (ii)? FAI submits that the matters quoted above from its submissions were ones which made Cullen aware that there might be a claim against Phillips, and that the Part B matters of which he was aware were also circumstances which might give rise to a claim. I have dealt with the matters referred to in pars 1-21 of Part B in the context of the 1989 proposal and the 1991 Chatswood proposal. I have dealt with the matter described in par 22 of Part B of the Schedule to FAIŐs further amended defence in the TCF insurance proceeding, when dealing with the 1991 Chatswood proposal. For the reasons then given, which I will not repeat, in my view, those matters (they include the s 541 examinations) of which Cullen was aware on 22 April 1991 did not then satisfy the description Ňcircumstance[s] which may give rise to a claimÓ in question 13 (b) (ii). Whether there might be a claim against Phillips by reason of PMSŐs conduct in 1987 and 1988 in relation to Travel and TCF, now must be considered. In relation to the matters in FAIŐs submissions, quoted above, TCF and PMS submit, and I agree, that none of the matters in par (1) advances FAIŐs submission. It is entirely consistent with proper conduct in relation to the 1987 audit. Paragraph (2) deals with the newspaper article of 24 December 1988. For the reasons discussed in relation to the 1989 proposal, this article did not suggest that there might be a claim against Phillips, by reason of PMSŐs 1987 audit, either alone or in conjunction with the matters referred to in pars (1), (3) or (4). In relation to the matters in par (3) (which I qualified in my discussion of Issue (1)), in my view, the fact that the financial collapse of Travel and Wheels was being investigated by the CAC or their liquidator, or both, or that it was the subject of publicity and Ministerial concern, did not signify that there might be a claim by TCF against Phillips for compensation in respect of TCFŐs losses by reason of the 1987 audit. This is so, regardless of whether par (3) is considered on its own, or in conjunction with the matters in pars (1), (2) and (4). The questions asked of Cullen during the s 541 examinations, referred to in par (4), did not amount to circumstances which might give rise to a claim against Phillips by reason of the 1987 audit. Paragraph (4) takes the questioning out of the overall context, which consisted of more than the bare facts of the questions asked. I refer to my discussion of the s 541 examinations in relation to Issue (2) in the context of the 1991 Chatswood proposal. Issue (3) If the answer ŇnoÓ to question 13 (b) (ii) was untrue, have TCF and PMS Gosford nonetheless established that Cullen, as the person signing the proposal form, gave that answer on the basis of a belief in fact held by him, being a belief that a reasonable person in the circumstances would have held? There were no written submissions dealing with this issue, however, it was pleaded in par 6 of the further amended defence of the first, second, third and fourth cross respondents to the cross claim in NG 948 of 1992. If CullenŐs answer ŇnoÓ to question 13 (b) (ii) was untrue, in my opinion TCF and PMS have established that he gave that answer on the basis of his belief that the circumstances in question did not satisfy the description Ňcircumstance[s] which may give rise to a claimÓ. But was that belief of CullenŐs Ňa belief that a reasonable person in the circumstances would have heldÓ? The answer must be ŇnoÓ, because of the assumption that must be made, contrary to my conclusion expressed above in relation to Issue (2). Inherent in the assumption that the answer to question 13 (b) (ii) was untrue, is the conclusion that a reasonable person in CullenŐs circumstances as at 22 April 1991 would have immediately recognised that those Part B matters of which Cullen was aware satisfied the description of Ňcircumstance[s] which may give rise to a claimÓ. Once it is appreciated that this is inherent in the making of the assumption, it follows that Issue (3) must be answered favourably to FAI. Issue (4) If the answer ŇnoÓ to question 13 (b) (ii) was untrue, has FAI established that Cullen, as the person who gave that answer, knew, or that a reasonable person in the circumstances could be expected to have known, that the answering of the question in that way would have been relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms? If, contrary to my conclusion, CullenŐs answer to question 13 (b) (ii) was untrue, Cullen knew and a reasonable person in the circumstances could be expected to have known, that a statement that there were no circumstances known which might give rise to a claim under the policy would be relevant to FAIŐs decision whether to accept the risk and, if so, on what terms. Again, one need refer only to the fact that the question was asked in the proposal form and to the nature of the insurance sought, that is, a Ňclaims made and notifiedÓ policy. RENEWAL OF THE GOSFORD POLICY FOR 1991-1992 - ALLEGED NON-COMPLIANCE WITH THE DUTY OF DISCLOSURE - THE TCF FACTS Issue (5) Were the matters described in pars 1-22 of Part B of the Schedule to FAIŐs further amended defence in the TCF insurance proceeding known to PMS Gosford as at 22 April 1991? My discussion above under Issue (1) answers this question. Issue (6) As to all or any of those matters in Part B of the Schedule to FAIŐs further amended defence in the TCF insurance proceeding which PMS Gosford knew, were they (i) matters which PMS Gosford knew to be matters relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms; or (ii) matters which a reasonable person in the circumstances, could be expected to have known to be matters so relevant? FAI pleads that Cullen failed to disclose to it, prior to entry into the Gosford policy, certain matters which were known to him, and which were matters that he knew to be relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms, or matters that a reasonable person in the circumstances could be expected to know to be so relevant. The matters were those involved in FAIŐs case of misrepresentation (by Cullen, that is, that there might be a claim against Phillips by reason of the conduct of PMS in 1987 and 1988 in relation to Travel and TCF, and the matters in Part B of the Schedule). FAI submits that Cullen breached the duty of disclosure, apparently relying on the submissions which it advanced in relation to the issue of misrepresentation. FAI submitted that: Ň... At the least, a reasonable person in the circumstances could be expected to know that circumstances making a claim possible, such as the matters in Part B of the Schedule, were relevant to FAIŐs renewal terms. This is obvious, and in any event question 13 made it clear.Ó (par 88, FAIŐs submissions in chief - emphasis supplied) In my view, Cullen did not fail to comply with the duty of disclosure. The duty did not require disclosure of a mere possibility of the making of a claim. The circumstances known to Cullen, and which FAI says Cullen should have disclosed, did not immediately suggest that a claim might as a real possibility be made against Phillips. Therefore, Cullen did not know that they were relevant to FAIŐs decision whether to accept the risk, and, if so, on what terms. Nor could a reasonable person in the circumstances be expected to have known the Part B matters and conduct of PMS in 1987 and 1988, known to Cullen, to be so relevant. Conclusion on 1991 Gosford proposal Cullen did not make a misrepresentation in his negative answer to question 13 (b) (ii) and the declaration of truth, in the proposal form dated 22 April 1991, or fail to comply with the duty of disclosure. Section 28 of the IC Act does not apply and so FAI is not entitled to avoid the Gosford insurance contract, and FAIŐs liability is not reduced as provided for in s 28 (3). FAI was not entitled to avoid the Gosford policy, its purported avoidance of it was ineffective; and the Gosford policy is enforceable in accordance with its terms. Exclusion (g) of the Gosford policy has no scope for operation. ALLEGED BREACH OF IMPLIED PROVISION REQUIRING INSURED TO ACT TOWARDS FAI WITH UTMOST GOOD FAITH FAIŐs case of failure to comply with the provision implied in all three contracts of insurance by s 13 of the IC Act, in so far as it required the insured to act towards FAI in respect of any matter arising under, or in relation to the contract, with the utmost good faith, must fail. The reason is that the case was founded upon FAIŐs case of misrepresentation and non-disclosure with respect to the matters known to the relevant insured and described in the relevant Schedule (to FAIŐs third further amended statement of claim or to FAIŐs further amended defence to TCFŐs amended points of claim, as the case may be). It suffices to say that I reject this part of FAIŐs case for the reasons that I gave earlier for rejecting its case of misrepresentation and breach of the duty of disclosure. ATTACK ON McSŐs CREDIT FAI made substantial submissions attacking McSŐs credit. In the course of these Reasons for Judgment I have rejected his evidence on some matters and accepted it on others. Notwithstanding a careful reading of FAIŐs submissions on the issue, I do not accept that McS is not a witness of truth, that he is disposed to tell the truth only when it coincides with his interests, or that his evidence is not to be accepted unless corroborated. This is not to say that on particular matters his evidence was not affected by wishful thinking, rationalisation, reconstruction or the benefit of hindsight. But having considered his written evidence as well as his oral evidence over a lengthy cross-examination, I do not accept FAIŐs general submission that his credit is destroyed. SUMMARY OF CONCLUSIONS TCF should be refused leave under s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) and ordered to pay FAIŐs costs of the application for leave, that is to say, FAIŐs costs of the TCF insurance proceeding to the extent that they would not have been incurred but for TCFŐs participation. The claim by McS and Phillips for indemnity by FAI in respect of the TAG judgment is a claim for indemnity in respect of a claim made against them for actual fraudulent acts and omissions of McS within Exclusion (b) of the PMS policy, but FAI does not seek a finding that Phillips condoned that fraudulent conduct of McS. The claim by McS and Phillips for indemnity by FAI in respect of the TCF judgment is not a claim for indemnity of the kind just described. FAI was not entitled to avoid any of the 1989-1990 PMS policy, the 1991-1992 Chatswood policy or the 1991-1992 Gosford policy under s 28 of the IC Act, and its liability in respect of the claims made against it for indemnity in respect of the TAG judgment and the TCF judgment is not reduced by the operation of that section on account of misrepresentation or failure to comply with the duty of disclosure. Accordingly, the three policies were and are enforceable in accordance with their terms. Exclusion (g) of the policies has no scope for operation. FAIŐs claim for damages for breach of the implied provision requiring the insured to act towards FAI with the utmost good faith fails. These conclusions render it unnecessary for me to address the further issues mentioned below. (a) PMS advanced a case based upon a suggested Ňletter agreement of 24 January 1990Ó and FAI advanced a case in reply based on that agreement. By a letter of that date, TCM advised PMS that TCM acted for FAI and had been instructed by FAI to confirm indemnity and undertake the defence of the claim made against McS and Phillips in the TAG proceeding on certain conditions, including the following: Ň2. That there has been no dishonest, fraudulent, criminal or malicious act or omission on the part of the partners or employees of your firm (see exclusion (b) of the Professional Indemnity Policy); ...Ó There were other conditions stipulated in TCMŐs letter, including a condition that PMS Ňwaive any Legal Professional privilege concerning any evidence of dishonest, fraudulent, criminal or malicious acts or omissions which may become known to [TCM] when acting as [PMSŐs] solicitors in connection with the subject matter of [the] claimÓ. Another condition was that the partners of PMS execute and deliver to TCM a form of deed of waiver which was enclosed with TCMŐs letter. The letter also included this paragraph: ŇProvided you agree to the above conditions FAI will indemnify your firm in connection with this claim under the policy on the understanding that such indemnity may be retrospectively withdrawn in the event that dishonest, fraudulent, criminal or malicious acts or omissions as referred to in Exclusion (b) of the Professional Indemnity Policy are found to exist.Ó On 16 February 1990, PMS returned the completed deed of waiver. By the deed, the partners executing it irrevocably authorised such solicitors as might be appointed by FAI to act in the defence or settlement of the TAG proceeding to provide full details to FAI of any alleged or actual dishonest, fraudulent, criminal or malicious acts or omissions of PMS or of any of PMSŐs partners or employees, of which such solicitors might, during their conduct of the defence or settlement, become aware. The deed also included this provision: Ň2. The Insured acknowledges that such acts or omissions of the kind referred to in the last paragraph may entitle the Company to cancel the Policy.Ó (emphasis supplied) PMS submit that there was an agreement constituted by TCMŐs letter to PMS dated 24 January 1990 and PMSŐs letter in reply dated 16 February 1990 enclosing the executed deed. They submit that by the agreement so formed, FAI gave up any right which it might have to avoid the PMS policy for fraudulent misrepresentation or fraudulent non-disclosure. In response, FAI submits that no such contract came into being and that the correspondence constituted a mechanism for confirming and implementing the PMS policy (a submission which, I think, has much force). Since I have concluded that there was no misrepresentation or non-disclosure, it is strictly unnecessary for me to deal with PMSŐs submission. However, it seems appropriate to record my opinions: (a) that any agreement that may be found in TCMŐs letter of 24 January 1990 and PMSŐs reply of 16 February 1990 enclosing the executed deed of waiver of legal professional privilege, clearly did not have the effect of varying the dishonesty extension in the PMS policy; and (b) FAI did not give up the right to avoid for misrepresentation or non-disclosure. (b) A further aspect of FAIŐs case with which I need not deal comprehensively is the TCM representation. It will be recalled that FAI submits that on or about 22 January 1990, McS represented orally to FAI through FAIŐs agent, Rainbow of TCM, that there had been no dishonest or fraudulent act or omission on the part of PMS, their partners or employees. The submission is that the TCM representation was false to the knowledge of McS by reason of the matters in Part A of the Schedule. Finally, this part of FAIŐs case includes the allegation that FAI undertook the defence of the TAG proceeding and incurred the cost of doing so in reliance on the TCM representation and suffered loss and damage equal to the cost of undertaking that defence. Again, however, FAI does not, and in my view could not successfully, contend for the result that it is entitled to be relieved of its liability under the terms of the PMS policy, and, in particular, its liability under the dishonesty extension. If the supposed TCM representation had not been made, or if McS had disclosed his fraud which I have found established in Part II of these Reasons, FAI would have remained liable to indemnify Phillips as a non-condoning partner, subject to the terms of the PMS policy. (c) I need not deal with FAIŐs claim to a restitutionary remedy in respect of the moneys which it outlaid in the defence of the TAG proceeding and settlement of the IPG claim, based on its supposed right to avoid the PMS policy for fraudulent non-disclosure and fraudulent misrepresentation, since I have concluded in this present Part (IV) of these Reasons, that FAI was not entitled to avoid the PMS policy. (d) I need not deal with the issue raised by PMS as to the effect of s 33 of the IC Act. (e) I need not deal with the issue whether, by waiver or affirmation, FAI lost any right of avoidance it had, because I have concluded that it never did become entitled to avoid any of the three contracts of insurance. (f) I need not deal with the issue whether FAI breached the provision implied by s 13 of the IC Act, requiring FAI to act towards its insured with the utmost good faith, since I have concluded that in any event FAI is liable to indemnify in accordance with the terms of the respective policies. (g) I need not deal with a submission that FAI is estopped from refusing to indemnify as a result of its having made certain representations, since I have concluded that FAI is liable to indemnify in accordance with the terms of the three policies in any event. I propose not to make orders at this stage but to stand over the proceeding to a date convenient to the parties for that purpose, and to direct the parties to supply to my Associate, by a stipulated date, agreed short minutes of orders, including orders as to costs, and if agreement is not reached, the short minutes of the orders for which they will respectively contend and written outlines of their submissions in support. I certify that this and the preceding ninety-six (96) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren Associate: Dated: 24 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: Dates of delivery of Parts II and III: 12 March 1997 9 April 1998 Date of Judgment: 24 April 1998 CHRONOLOGY OF INSURANCE FACTS 22.05.89 McS signs proposal to renew PMS policy (2005185140) currently to expire on 23 May 1989, for the year 23 May 1989 - 23 May 1990. Attachment ŇCÓ to the proposal is a letter from PMS (McS) to FAI expressed to be written Ňfor the sake of good order pursuant to condition 2 of the policyÓ notifying allegations by C E McDonald (Aust) Pty Ltd. (FAIŐs file on the McDonald claim is FAI NP/C 179/88) 23.05.89 M & M forward proposal to FAI. 20.06.89 FAI renews PMS policy (2005185140) FAI for the year 23 May 1989 - 23 May 1990 ($6,000,000 limit of indemnity any one claim, $5,000 excess per claim Ňdishonesty limit $500,000). 21.08.89 PMS notify FAI by letter of IPG claim against the Lemon brothers and PMS, annexing application and statement of claim NG 546/1989 (FAIŐs file on the IPG claim is FAI NP/0041/89). 17.01.90 PMS (through broker M & M) notify FAI of TAG claim made by letters dated 11 January from its solicitors, Rosenblums (FAIŐs file on the TAG claim is FAI NP/C116/89). 19.01.90 FAI (Kendrick) instructs TCM to investigate TAG claim and advise FAI as to indemnity. 22.01.90 Meeting between McS and Rainbow of TCM at which McS gives Rainbow an account of the facts relating to the TAG transaction; McS makes lengthy notes of the conference. 24.01.90 TCM (Rainbow) write to PMS enclosing ŇDeed of Waiver of Legal Professional PrivilegeÓ for execution. 29.01.90 TAG and TAGNT commence proceeding launched against McS and Phillips (NG 38/1990) (Ňthe TAG proceedingÓ) and TCM is instructed to conduct defence for them. 16.02.90 PMS return to TCM (Rainbow) executed ŇDeed of Waiver of Legal Professional PrivilegeÓ. 20.03.90 McS writes to TCM lengthy letter supplying facts and files re TAG claim. 07.05.90 McS completes proposal form for renewal of the PMS policy for 1990-1991. 10.05.90 M & M write to FAI enclosing proposal of PMS and seeking quotation. 23.05.90 Renewal of PMS policy (2005185140). 23.07.90 PMSŐs Lismore practice is sold to Beale, Gaertner and Young. 27.07.90 PMS write to M & M advising Beale and Gaertner retired as partners of PMS on 30 June 1990 and that PMS sold Lismore practice to them and another from 23 July 1990; and that from 1 September 1990, PMS would be licensed to operate in association with Bird Cameron, would be covered by Bird CameronŐs policy, and would require cover from FAI only to the extent of the Bird Cameron ŇexcessÓ of $100,000. 31.07.90 M & M write to FAI enclosing copy of PMSŐs letter dated 27 July and Ňrevised proposal formÓ dated 30 July 1990 signed by McS, and requesting quotation. 01.09.90 Cullen completes proposal for PMS Gosford practice of Phillips and Cullen (ŇBird Cameron incorporating Phillips McSweeney - GosfordÓ). 26.09.90 Letter from TCM to FAI reporting on progress of TAG proceeding. 28.09.90 McS completes proposal in respect of PMS Chatswood practice of McS and Turner (ŇPhillips McSweeney PartnersÓ). 15.10.90 Hinton of FAI instructs GDB who had been representing PMS on the claim for fees against, and the counter-claim for damages by, IPG, henceforth to represent FAIŐs interests also in the defence of IPGŐs claim against PMS for damages. 06.10.90 McS forwards that proposal form (dated 28 September 1990, for PMS Chatswood) to FAI. 16.10.90 IPG proceedings (NG 546/1989) settled by payment of $250,000 including costs by PMS to IPG (FAI paid $245,000 and PMS paid excess of $5,000). 24.10.90 M & M write to FAI noting that FAI agreeable to cancelling PMS policy and issuing two policies in its place. 29.10.90 M & M forward to FAI proposal for PMS Gosford dated 1 September 1990 and advising that Ňclaims historyÓ is the same as for ŇPhillips McSweeneyÓ. 08.11.90 FAI write to M & M confirming PMS policy cancelled with effect from 24 October 1990 and new policies to be issued for PMS Chatswood and PMS Gosford with effect from 24 October 1990 to 23 May 1991. 15.11.90 M & M write to PMSconfirming this. Jan 91 FAI issues policy no 2030243080 for PMS Chatswood (for period 24.10.90-23.5.91). FAI issues policy No 2030243160 for PMS Gosford (for period 24.10.90-23.5.91). Each policy has a limit of $6,000,000 and an excess of $5,000 for each claim. The two policies are non-cumulative for claims arising out of work done before 24 October 1990. They replace the PMS policy which was cancelled with effect from 24 October 1990. 27.03.91 Letter from TCM to FAI advising that expert opinion obtained by TCM suggests PMS will be found liable, and seeking instructions to retain Arthur Anderson & Co as to damages. 22.04.91 Cullen completes proposal for renewal of PMS Gosford policy, currently due to expire on 23 May 1991. In answer to question 13 (a), Cullen states ŇYesÓ and says ŇSEE ATTACHED LIST.Ó He answers question 13 (b) ŇNoÓ. The attached list referred to inter alia, the McDonald, IPG and TAG claims. 28.04.91 McS completes proposal for renewal of PMS Chatswood policy, currently due to expire on 23 May 1991. In answer to question 13 (a), McS refers to the McDonald, IPG and TAG claims previously notified to FAI and two further claims not presently relevant. Attachment ŇCÓ was a Ňclaims status informationÓ. 20.05.91 M & M forward to FAI the proposals for renewal of PMS Chatswood and PMS Gosford policies, and request quotations. Each memo referred to an enclosed sheet of claims which was that attached to the proposal. 26.05.91 FAI provides quotation to M & M. 05.06.91 M & M accept relevant quotation, and FAI renews Chatswood policy ($5,000,000 limit, $5,000 excess per claim Ňdishonesty limitÓ $500,000) for twelve months (23 May 1991 to 23 May 1992). M & M accepts relevant quotation, and FAI renews Gosford policy ($6,000,000 limit for period 23 May 1991 to 1 July 1991, $100,000 limit for period 2 July 1991 to 23 May 1992, $5,000 excess per claim, Ňdishonesty limitÓ $500,000). 26.06.91 FAI (Kendrick) instructs TCM (Rainbow) to offer $150,000 to settle TAG litigation against PMS. 27.06.91 Letter from TCM to FAI advising TAGŐs claim is for $2,405,923.40 plus costs of $197,000 and that they are awaiting further expert advice on damages. 22.07.91- 22.10.91 Intermittent hearing of TAG proceeding before Olney J. Sept 91 In answer to an inquiry by Kendrick, Rainbow tells him that he does not think McS had been dishonest. 09.10.91 FAI confirms renewal of the Gosford policy on the following terms (varied from those confirmed in June as a result of subsequent endorsement): $6,000,000 limit of indemnity any one claim for period 23 May 1991 to 1 August 1991, $100,000 limit from 1 August 1991 to 23 May 1992. The excess was to remain at $5,000, and the dishonesty limit was to remain $500,000. 04.12.91 TCF commences proceeding (NG 777/1991) against Dunn and others and McS and Phillips (Ňthe TCF proceedingÓ). 11.12.91 Application and statement of claim in the TCF proceeding are served on McS and Phillips. Claim for compensation, the subject of the TCF proceeding, was first made by TCF against McS and Phillips on or about this date. 13.12.91 McS notifies M & M by letter (enclosing letter for him addressed to FAI) of TCF proceeding, enclosing a copy of application NG 777/91 returnable on 19 December and accompanying statement of claim. McSŐs letter refers to PMS policy and PMS Chatswood policy but not to Gosford policy. 18.12.91 M & M notify FAI of TCFŐs claim made in the TCF proceeding under the Chatswood policy and refer FAI to the previous notification of the claim by IPG. M & MŐs memo to FAI enclosed copy of the letter dated 13 December from PMS to M & M. 19.12.91 FAI instruct TCM to offer $1,200,000 plus costs to settle TAG litigation against PMS. 28.01.92 GDM file notice of appearance on behalf of McS and Phillips in the TCF proceeding. 28.02.92 Olney J gives judgment on liability in the TAG proceeding. 06.03.92 By now, Kendrick has read Olney JŐs judgment and taken advice from TCM; FAI fax TCM (Rainbow) stating that FAI will not indemnify McS as Olney JŐs judgment has revealed that his conduct was dishonest and therefore is not covered under terms of the PMS policy, and that Phillips is to be indemnified to the extent of $500,000 only pursuant to Ňthe dishonesty extensionÓ, and that FAI will not bear any further legal costs for McS. 06.03.92 FAI forwards to M & M proposal form for renewal of PMS Gosford Policy. 09.03.92 TCM write to PMS seeking to clarify TCMŐs position in relation to further representation of PMS. 14.04.92 TCM, on instructions from FAI, write to Rosenblums offering $157,000 in settlement of TAGŐs litigation against PMS. 24.04.92 Letter from TCM to McS and Phillips advising they will cease representing McS and Phillips by reason of conflict. 05.05.92 FAI writes to M & M reminding it that FAI is awaiting completed proposal for renewal of Gosford policy. Cullen completes proposal for renewal of Gosford policy for 1992-1993. TCM advise FAI, and FAI instructs TCM, that TCM should go off the record in the TAG proceeding. 12.05.92 McS completes proposal for renewal of Chatswood policy for 1992-1993. 12.05.92 FAI files summons S 50189/1992 in the Commercial Division of the Supreme Court of New South Wales against McS, Phillips, TAG and TAGNT seeking declarations that FAI not liable to indemnify McS and Phillips in respect of judgment in the TAG proceeding (NG 38/1990) and an injunction restraining TAG and TAGNT seeking leave to join or sue FAI under s 6 (4) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (Ňthe TAG insurance proceedingÓ). 14.05.92 FAI write to M & M confirming that it will indemnify Phillips re TAG proceedings up to $500,000. 15.05.92 M & M forward to FAI completed proposal for renewal of Gosford policy and completed proposal for renewal of Chatswood policy. 18.05.92 M & M notify FAI under the Gosford Policy of the claim made by TCF in the TCF proceeding, against possibility that such a notification should be required as distinct from that given by M & M on 18 December 1991. 19.05.92 FAI write to M & M offering renewal of Gosford policy (limit of $100,000, excess of $5,000 per claim) but declining renewal of Chatswood policy. 21.05.92 After complaint by TAG and TAGNT, TCM cease representing FAI in the TAG insurance proceeding and CBP commence to represent FAI in their place. 22.05.92 The TAG insurance proceeding is transferred to the Federal Court of Australia, becoming NG 312/1992. 23.05.92 Effective date of renewal of Gosford policy. Chatswood policy lapsed, no renewal offered. 26.05.92 FAI writes to M & M seeking instructions regarding renewal terms offered by FAI for Gosford policy. 11.06.92 FAI write to M & M purporting to avoid PMS policy (2005185140) for periods 23 May 1988 to 24 October 1990 and Chatswood policy (2030243080) for periods 24 October 1990 to 23 May 1992. 20.08.92 In TAG proceeding Olney J quantifies damages against McS and Phillips at $4,026,915.80 and orders that they pay costs. 10.09.92 Hearing of TCF proceeding commences before Wilcox J. 02.12.90 Wilcox gives judgment for TCF against, relevantly, McS and Phillips, in the TCF proceeding for $626,586 plus costs. 23.12.92 TCF commences proceeding NG 948/1992 against FAI under s 6 Law Reform (Miscellaneous Provisions) Act 1946 (Ňthe TCF insurance proceedingÓ). 08.02.93 Wilcox J orders that the TAG insurance proceeding and the TCF insurance proceeding be heard together. 24.08.93 FAI purports to avoid Gosford policy (2030243160) for period 23 May 1991 to 23 May 1992. 17.12.93 Wilcox J directs parties to TAG insurance proceeding and to TCF insurance proceeding to identify those findings of fact of Olney J in TAG judgment and of Wilcox J in TCF judgment which they contest and the findings which they contend should be made instead. 15.07.94 Deed between TAG and TAGNT and FAI settling the TAG proceeding by FAIŐs paying the sum of $2,900,000.