Court clarifies when professional advisors face accessorial liability due to misleading financial information

The dispute arose following Transonic Trave’s (a Helloword subsidiary) purchase of a majority 60% interest in Keygate Holdings Pty Ltd. 

Before completion, the vendors, Tilakee, warranted that Keygate’s financial statements accurately disclosed its financial position, in particular that client funds were well maintained. Keygate’s long-standing accountants, Shakespeare Partners, prepared the majority of the financial information provided during the due diligence process. 

Following the collapse of international travel and widespread cancellations during the COVID-19 pandemic, Transonic discovered a substantial shortfall in the clients’ accounts, requiring millions of dollars to rectify. 

It emerged that client funds had for years been used for other business expenses and personal purposes, leading to overdrawn trust accounts and large 'director’s loans'. Shakespeare Partners repeatedly raised these issues with Keygate and the relevant individuals, describing the trust account as 'sick'. 

Proceedings were commenced against the vendor, its director and Shakespeare. 

At trial, Tilakee and its director were found to have made four misleading 'Tilakee representations' in breach of ACL section 18:

• Client accounts representation: in the vendor confirmation letter, that client accounts were 'fully funded' in accordance with clause 4.6 as at completion on 31 May 2018. 
• Company accounts representation: through warranties in the share sale agreement (SSA), that the 2017 audited company accounts gave a 'true and fair view', with proper provision for all liabilities including client funds.
• Management accounts representation: through warranties in the SSA, that the 31 January 2018 management accounts were materially accurate and not distorted by abnormal items. 
• Client funds representation: through the SSA definition of 'Client Accounts' and related due diligence responses, that client monies were held in dedicated trust accounts solely for client travel purposes. 

Shakespeare Partners were found liable as an accessory to each of the Tilakee representations and engaged in misleading and deceptive conduct in contravention of section 18 of the ACL. The court also held that Shakespeare Partners had directly engaged in misleading and deceptive conduct by making its own false representation in contravention of section 18 of the ACL. 

At first instance, no apportionment was allowed with respect to the claim against Shakespeare Partners. 

A central issue on appeal was whether Shakespeare Partners had sufficient knowledge of the ‘essential facts’to be accessorily liable for the Tilakee representations. 

Shakespeare Partners argued that it could not be liable for the misleading conduct as it did not know the precise amount of the client account deficiency. 

The court rejected that argument, consistent with established authority that knowledge of every factual detail was not required. It did not matter that Shakespeare Partners did not know the precise shortfall. Instead, the court held that it was sufficient that Shakespeare Partners knew (or at least was wilfully blind to the fact) that the client account deficiency could not be properly determined on the system available and the figures that were issued for 2017 and 2018 materially understated that liability. 

This was sufficient to satisfy the ‘essential facts’ element for accessorial liability as:

• the court was satisfied that Shakespeare Partners had long appreciated the serious deficiencies in Keygate’s accounting systems; and
• the evidence established that Shakespeare Partners’ principal understood the limits of the internal systems used, knew there was no reliable client funds ledger, identified that reconciliation between accounting records was problematic and was aware of inappropriate use of client funds and overdrawn commission. 

Despite these concerns, Shakespeare Partners prepared financial statements and participated extensively in the due diligence process, forming the basis of the representations made to the purchaser during the acquisition process. 

This active participation, together with Shakespeare Partners knowledge of the systemic deficiencies, established liability as ‘involved in’ the relevant contraventions. 

Importantly, the liability arose from Shakespeare Partners’ continued facilitation of the representations despite its knowledge that the underlying internal systems were incapable of supporting those representations, shifting the focus from the figures to the reliability of the systems that generate them. 

Professional advisors who know the systems to be fundamentally deficient, cannot avoid responsibility by asserting ignorance to the precise financial consequences. 

The court gave no weight to the ‘no assurance’ wording and disclaimers that Shakespeare included in the relevant documentation. 

The court on appeal, also refined the assessment of damages under section 236 of the ACL, reaffirming that established position on damages being restorative. 

However, it held that operating expenses incurred as a result of the COVID-19 pandemic were not recoverable as they were caused by an extraordinary external event rather than the misleading conduct itself. 

Although Shakespeare Partners’ involvement justified liability under ACL, the Court of Appeal found that the trial judge had erred in refusing to apportion the claim pursuant to Part VIA of the Competition and Consumer Act 2010 (Cth). 

The Court of Appeal confirmed that an accessory can be a concurrent wrongdoer, where its acts or omissions contributed to the same loss.

The trial judge had refused to apportion, notwithstanding that it was not in dispute that the ACL claims were apportionable and that there were other concurrent wrongdoers. This was based on Shakespeare Partners’ central role and specified expertise, such that all of the Tilakee representations were treated as representations of Shakespeare Partners. 

The Court of Appeal found that this approach was incorrect. Once an apportionable claim and concurrent wrongdoers are identified, the court must undertake the section 87CD(1) apportionment process, irrespective of the seriousness of the conduct or one party’s central involvement. 

The Court of Appeal also rejected the argument by Transonic that Shakespeare Partners should be treated as an excluded concurrent wrongdoer on the basis that it ‘intended to cause’ the economic loss. That was too high a threshold which would have required proof of actual and deliberate intention, not just recklessness. 

The Court of Appeal ultimately found that Shakespeare Partners was 40 per cent responsible and Tilakee and a director were 60 per cent responsible. 

Professional advisors should understand the scope of liabilities they may be exposed to and how their professional indemnity insurance policies may respond to claims involving misleading and accessorial liability.

This decision may also be relevant to insurers assessing professional indemnity exposures involving accountants and other advisors who prepare or endorse financial information relied on in commercial transactions.