Supreme Court New South Wales Medium Neutral Citation: Findlay v DSHE Holdings Limited (Receivers and Managers Appointed) (In Liquidation) (No 2); Mastoris v DSHE Holdings Limited (Receivers and Managers Appointed) (In Liquidation) (No 3) [2019] NSWSC 1827 Hearing dates: 12 December 2019 Decision date: 18 December 2019 Jurisdiction: Equity Before: Ball J Decision: The plaintiffs should be permitted to amend para 504(a) of the existing statement of claim to raise a case that if the actual gross margins that were achieved in FY13 and 1Q14 required adjustment because of errors in provisioning and the writing back of the warranty sign on liability, then a similar adjustment would have been made to the gross margin assumed for the purposes of the FY14 forecast included in the Prospectus Catchwords: CIVIL PROCEDURE – Pleadings – Amendment – whether to grant leave to amend – whether proposed amendment is logical extension of case already pleaded - late amendments – whether proposed amendments open new questions for factual enquiry – no new evidence served in respect of new questions for factual enquiry – prejudice Cases Cited: Findlay v DSHE Holdings Limited (Receivers and Managers Appointed) (In Liquidation) (No 2); Mastoris v DSHE Holdings Limited (Receivers and Managers Appointed) (In Liquidation)(No 2) [2019] NSWSC 1816 Category: Procedural and other rulings Parties: Haliburton Charles David Findlay (First Plaintiff | 2017/294069) Marian Jennifer Denny Findlay (Second Plaintiff | 2017/294069) Epaminodas Mastoris (First Plaintiff | 2018/52431) Lena Mastoris (Second Plaintiff | 2018/52431) DSHE Holdings Limited (Receivers & Managers Appointed)(In Liquidation) (First Defendant) Nicholas Abboud (Second Defendant) Michael Thomas Potts (Third Defendant) David White and others listed in Annexure A t/as Deloitte Touche Tohmatsu (Fourth to Four Hundred & Fifty Seventh Defendants) Representation: Counsel: C Withers with K Lindeman (Plaintiffs) P Braham SC with A Shearer and R Mansted (Fourth to Four Hundred & Fifty Seventh Defendants) Solicitors: Corrs Chambers Westgarth (Plaintiffs 2017/294069) Johnson Winter & Slattery (Plaintiffs 2018/52431) Clifford Chance (Fourth to Four Hundred & Fifty Seventh Defendants) File Number(s): 2017/294069 & 2018/52431 Judgment Introduction 1. On 12 December 2019, I heard an application by the plaintiffs in proceedings 2017/294069 and 2018/52431 (the Representative Proceedings) to file a further amended joint statement of claim (FAJSC) and to file a supplementary expert report of Mr Andrew Archer dated 25 October 2019. The FAJSC sought to amend the plaintiffs' claims against the fourth to four hundred and fifty seventh defendants (Deloitte) in three respects. Mr Archer's supplementary report is relevant to one of those amendments. 2. At the time of hearing the application, I indicated my attitude to one of the proposed amendments and said that I would reserve my judgment in relation to the other two. Subsequently, the plaintiffs notified my Associate that they no longer pressed a second amendment, at least in the form sought at the time of the hearing, leaving only one amendment or group of amendments to be dealt with. I handed down judgment in relation to those amendments on 18 December 2019 (Findlay v DSHE Holdings Limited (Receivers and Managers Appointed) (In Liquidation) (No 2); Mastoris v DSHE Holdings Limited (Receivers and Managers Appointed) (In Liquidation) (No 2) [2019] NSWSC 1816). At the time I did so, it became apparent that the parties might be assisted if I indicated my views and provided my reasons in relation to the amendment that was no longer pressed (at least in the form set out in the FAJSC). This judgment deals with that issue. The amendment concerning the forecast in the prospectus 1. The amendment sought to be made by the plaintiffs was to para 504 of the existing pleading. 2. In para 503 of the existing pleading, the plaintiffs plead that if Deloitte had not breached its duties, it would have communicated to DSH's management the true position in relation to inventory provisioning and the writing back of a warranty sign on liability in respect of FY13. 3. In para 504, it is pleaded that had that happened one of two consequences would have followed. The first (pleaded in para 504(a)) is that the FY13 Financial Statements and the financial results for the first quarter of 2014 (1Q14) would have been corrected in which case the Prospectus would not have been issued and the plaintiffs and Group Members would not have acquired shares in DSH. The second (pleaded in para 504(b)) is that the FY13 Financial Statements would not have been amended. In that case, it is alleged that Deloitte would have issued a qualified audit opinion with the same consequences (that is, no Prospectus and no acquisition of shares by the plaintiffs and Group Members). 4. An alternative case is pleaded in para 505 to the effect that if the shares had been listed, they would have been listed at their true value, which was substantially less than the amount for which they were listed. 5. The amendment sought to be made to para 504 is to include in para 504(a) the following additional consequence that is said to follow from the correction of the FY13 Financial Statements and 1Q14 financial results: (iia) any forecasts prepared in respect of FY14 would have been set by reference to the Corrected FY13 Pro Forma and Statutory Financials and the Corrected 1Q14 Pro Forma Financials and would have been set at a lower value than were in fact provided in the Prospectus; The reference to forecasts prepared in respect of FY14 is presumably a reference to the forecasts that would have been included in the Prospectus. 1. Deloitte submit that the amendment should not be permitted because it opens up a new factual enquiry concerning how the forecasts in respect of FY14 were made and because there is insufficient time to permit them to undertake that enquiry before the hearing, which is set down to commence on 9 March 2020. That is said particularly to be so having regard to the extensive work Deloitte are obliged to undertake to prepare their evidence in accordance with the current timetable, which requires Deloitte to file their lay evidence by 20 December 2019 and their expert evidence by 20 February 2020. 2. In making that submission, Deloitte point to the fact that in his Report on Accounting Issues dated 24 September 2018, Mr Michael Potter, an expert engaged by the plaintiffs, states: 10.25 ... I am unable to say whether the persons preparing and approving the Prospectus would have amended or adjusted their assessment of the FY14 forecast rate of gross profit margin below the rate of 25.1% had they been aware of the lower achieved rate in 1Q14 of 23.0%. However, that [sic] in order to achieve an annual gross margin of 25.1% after achieving a gross margin of 23.0% in 1Q14, DSHE would have had to achieve a gross margin for the remainder of FY14 of 25.7%. [Footnote omitted] 1. However, the position is complicated by the fact that in his Deloitte Accounting Report dated 20 June 2019, Mr Potter sets out a table taken from the Prospectus and makes adjustments to that table to take into account the adjustments he says ought to have been made to inventory provisioning and the writing back of the warranty sign on liability, which includes adjustments to the FY14 forecast. In that table, Mr Potter states the 1Q14 gross margin (after adjustments for impairment) was 22.7%. He uses the same figure for the FY14 forecast. That adjustment is consistent with what the Prospectus says on the issue. It states that the forecast gross margin for 1Q14 was 25.0% and that the forecast for FY2014 was 25.1%. A note to those figures states: Forecast gross profit margin FY2014 expected to be consistent with 1Q2014 margins. 1. In my opinion, the plaintiffs should be permitted to run a case that if the actual gross margins that were achieved in FY13 and 1Q14 required adjustment because of errors in provisioning and the writing back of the warranty sign on liability, then a similar adjustment would have been made to the gross margin assumed for the purposes of the FY14 forecast. That case is consistent with the position taken by Mr Potter in his June 2019 report and with what the Prospectus says. 2. In an affidavit sworn 10 December 2019 in support of Deloitte's opposition to the amendments, Ms Angela Pearsall, the solicitor for Deloitte, says that the amendment "would necessitate factual inquiries as to the assumptions underlying and basis for the forecasts" which "may involve documentary, lay witness and expert witness dimensions". Ms Pearsall does not, however, state what further investigations Deloitte would want to undertake. Nor does she give an estimate of how long she expects the investigations to take. 3. I am not satisfied that Deloitte would be unable to deal with the amendment if it were allowed. There is no reason why Deloitte should not be granted an extension of time in which to address the issue - to the hearing or sometime after the hearing commences, if necessary. The plaintiffs have indicated that they do not propose to file any further evidence in relation to the amendment. As things stand, it appears that Mr Potter has made an assumption based on a note in the Prospectus. The question for Deloitte, therefore, is a narrow one. They are not required to address any evidence filed by the plaintiffs. They are only required to address the question whether, if the gross margins ought to have been adjusted for FY13 and 1Q14, a similar adjustment would have been made for the FY14 forecast. It is not clear why that requires any investigation of the assumptions underlying the forecast, except that assumption. And it is not clear why that is a large exercise. 4. I appreciate that the plaintiffs have had substantial time to formulate their case and that this amendment has been raised late. The amendment, however, appears to be no more than a logical extension of the pleaded case. If it is not allowed, the Court may be placed in a difficult position. If it accepts that the FY13 Financial Statements and 1Q14 results required amendment and it is faced with the question whether the Prospectus would have been issued, it may be necessary to decide in what form it would have been issued. As the case stands, it will be Deloitte's submission that it is no part of the plaintiffs' case that the forecast would have been amended. However, the forecast itself assumed that the gross margins in FY14 would be similar to the gross margins in 1Q14. Consequently, there will be a tension between the pleaded case and what the Prospectus appears to say on its face. In my opinion, the most satisfactory way of resolving that tension is to permit the amendment and to give Deloitte an opportunity to address the point if they can. Conclusion 1. It follows that the plaintiffs should be permitted to amend para 504(a) of the existing statement of claim to raise a case that if the actual gross margins that were achieved in FY13 and 1Q14 required adjustment because of errors in provisioning and the writing back of the warranty sign on liability, then a similar adjustment would have been made to the gross margin assumed for the purposes of the FY14 forecast included in the Prospectus. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 18 December 2019