Fiduciary obligations of professionals Law Reporter

The Kia-ora litigation comes to a merciful end as the High Court has its say on a number of interesting issues

Over the years we have commented on the litigation arising out of the collapse of The Duke Group Ltd and the potential liabilities of directors and others in relation to that collapse (Duke Group Ltd v Pilmer (1998) (Law Reporter, October 1999) and Fitzsimmons v R (1997)).

Now, the High Court of Australia, in Pilmer and Ors v The Duke Group Ltd (in liquidation) and Ors ((2001) 38 ACSR 122) has brought to an end much of the litigation in this area and made some interesting comments about the fiduciary obligations of professionals who issue reports on behalf of the company in relation to the company's assets. Briefly the facts (as taken from the Butterworths Report) are as follows. The Duke Group Ltd (formerly Kia-Ora Gold) sought to take over a company called Western United Ltd (WU). A rule of the Australian Stock Exchange Listing Rules provided that in certain circumstances an acquisition of securities could not take place unless the acquirer obtained the prior approval of its shareholders at a general meeting. At that meeting the shareholders had to be provided with a report from "independent qualified persons" which would establish that the sale price of the assets being acquired were fair". In order to comply with this listing rule Kia-Ora retained the appellants (or some of them) to prepare a report. The appellants' report expressed an opinion that the price proposed to be offered was fair and reasonable. The takeover was approved, a price of $25.896 million was paid, and shares in WU were issued in return. Not too long afterwards Kia-Ora became insolvent and was wound up. The liquidator of Kia-Ora commenced proceedings against the appellants alleging that their report was prepared incompetently and in breach of their common law duty of care as well as in breach of their contract. Importantly, the liquidator added a further claim that they had breached their fiduciary duties owed to Kia-Ora. At first instance the trial judge held that the accountants did owe a common law duty of care, but they did not owe a fiduciary duty. The trial judge found that the accountants were in breach in preparing a report which concerned what he described as an inferred over-valuation. He also held that the Kia-Ora directors were in breach of various other duties. On appeal the Full Court of the Supreme Court of South Australia held that the trial judge had erred in calculating the value of the shares and that the amount that should be awarded in the form of damages should be reduced. The Full Court, however, reversed the trial judge and held that the appellants by providing a report to Kia-Ora, at a time when they had a relationship with WU, owed fiduciary obligations to it which had been breached. The appellants were granted special leave to appeal to the High Court. The High Court upheld the appeal on a number of grounds including an important technical issue as to the valuation of the shares being offered in return for the cash paid.

The most important part of the decision for our purposes is that the High Court, with Justice Kirby dissenting, held that there was no fiduciary duty owed by the appellants (the accountants) to Kia-Ora. The court examined much of the older authority on this question of fiduciary duty (a very important question because the courts had been tending to widen the notion of fiduciary duties and the range of fiduciary obligations owed). In the Full Court, because of the existence of relationships between the appellants and WU, and because of certain potentially conflicting interests that consequently arose in the context of preparing the report, that there was a breach of fiduciary duty. It was suggested that the appellants had had a past and continuing "alignment" with the directors of Kia-Ora. The directors were said to have had an interest in maximising the value of the shares in WU so that they would receive a maximum amount by way of consideration. It was alleged that the appellants had been engaged to prepare an independent report knowing that this was in fact the case.

The High Court rejected the Full Court's conclusion that a fiduciary obligation existed on the part of the appellants. The majority of the court made these comments (at paragraphs 82 – 83): "Whatever may be meant by the term 'alignment' ... it could not ... be used to suggest knowing assistance by the appellants in any dishonest or fraudulent conduct of the Kia-Ora directors. Moreover [the company] did not indicate with any specificity the existence of any prior or concurrent engagement or undertakings by the appellants or any one or more of them which, within the meaning of the [legal authorities] presented an actual conflict or a real or substantial possibility of conflict in the acceptance or performance of the retainer for the provision of the report. ... "The conflicting duty or interests must be identified [in the pleadings]. Conflict is not shown by simply pointing to the fact that there have been past dealings between the appellants and interests associated with the Kia-Ora directors. The fact that dealings are completed will ordinarily demonstrate that any interest or duty associated with those dealings is at an end and no continuing or interest was identified here. Nor is it sufficient to say generally that there was a hope or expectation of future dealings. That will often be so. Most professional advisers would hope that the proper performance of the task at hand will lead the client to retain them again. No real or substantial possibility of conflict was demonstrated."

In those circumstances the finding of a fiduciary duty was rejected. It should be noted by way of completeness that Kirby J in a strong dissenting judgment reached a different conclusion. In his view, the appellant had failed to provide proper disclosure of their past relationship in the preparation of the relevant report and this was in breach of their fiduciary obligations. Although the decision is an important one it can be restricted to its facts. The question of whether persons who are advisers to a company, where they have previously given advice to the directors in other scenarios, owe a fiduciary duty may well raise interesting issues in other circumstances. We will await with interest the potential of such cases being considered by the courts in due course.

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