Accountants’ Duty of Loyalty; A Re-Statement of Equitable Principle

The High Court of Australia, in its recent decision in Pilmer v The Duke Group (in liq) & Ors [2001] HCA 31 re-affirmed the law’s traditional approach to the imposition of fiduciary duties between accountant and client. Whether, in the circumstances of a particular case, an accountant or financial adviser is subject to such a high duty essentially comes down to an analysis of all the circumstances of the case. To determine the duties to which an accountant, or indeed, any other consultant, financial adviser, or the like, will be held requires a careful analysis of circumstances of the relationship, the terms of the retainer, and the position of the client.

The Duke Group appeal to the High Court involved aspects of long-running litigation brought by Duke in the Supreme Court of South Australia. Relevantly, Duke (formerly known as Kia Ora Gold Corp NL") sued, amongst others, a firm of accountants, Nelson Wheeler.

A Brief Summary of the Facts

Nelson Wheeler had prepared a report that was placed before a meeting of shareholders of Kia Ora. It was alleged that the report was prepared incompetently and in breach of:

• a fiduciary duty owed by the accountants to Kia Ora
• the accountants’ retainer
• Nelson Wheeler’s common law duty of care.

The offending report considered whether a takeover bid by Kia Ora for a company, Western United Ltd, was fair and reasonable. Kia Ora had offered $1.20 for each share in Western United plus five shares in Kia Ora for each two shares in Western United or four shares in Kia Ora for each share in Western United.

As a result of the acceptance of the offers, the company paid $25.696 milliion and issued and allotted 67.9 million of its own, $1 shares.

The principal issue for resolution in the High Court turned upon the quantum of the loss suffered by Kia Ora by reason of the report, with particular reference to the loss suffered (if any) by reason of the issue of the 67.9 million shares.

The joint majority judgment (McHugh, Gummow, Hayne and Callinan JJ) and the dissenting judgment of Kirby J, deal with the question of whether or not Nelson Wheeler owed Kia Ora fiduciary duties. The majority state "The central issue in this appeal is whether Kia Ora suffered any loss by the issue and allotment of its shares…". On the other hand, Kirby J commences his judgment with the words "This appeal, in my opinion, is mainly concerned with fiduciary obligations".

By reason of various associations between the partners of Nelson Wheeler Kia Ora, Western United, and, in particular, one Harold Abbott (who, the trial judge found, "orchestrated" the takeover) it was said that Nelson Wheeler was not "independent" of Kia Ora.

The Issues

The trial judge had held that there was no fiduciary duty between Nelson Wheeler and Kia Ora. This was on the basis that fiduciary obligations arise because a person has come under an obligation to act in another’s interests. His Honour held that there was no other reason to suggest the existence of a fiduciary relationship in this case. It was to be expected that Nelson Wheeler would act competently and independently, but that firm was not "guiding" or "influencing" Kia Ora in a manner that suggested an "ascendency" over the plaintiffs.

The Full Court of the Supreme Court disagreed. Their Honours concluded that there was a fiduciary obligation between Nelson Wheeler and Kia Ora and that undivided loyalty was required. The only way that such a duty could be satisfied was by Nelson Wheeler declining to act at all.

The Full Court held that the "alignment" of Nelson Wheeler with the directors gave rise to a conflict of duty and interest in that Nelson Wheeler’s duty was to act independently whereas the directors’ "interest" was in maximising the value of Western United so that they, personally, received the maximum amount of consideration.

The Majority Decision

The High Court decided, by majority, that there was no fiduciary duty owed by Nelson Wheeler to Kia Ora. Where a relationship is demonstrated to be fiduciary in nature, prescriptive duties arise (such as duties to avoid conflicts of interests, duties of loyalty etc) which, if breached, give rise not only to a right of compensation, but also a right to have the fiduciary account for any profits improperly made.

Their Honours considered that the case for the existence of a duty was simply not proven; conflicts of interest of a fiduciary nature are not demonstrated to have existed merely because there were past dealings between the parties.

The Dissent

As Justice Kirby’s opening remarks suggest, His Honour considered the nature of the duties owed by Nelson Wheeler to Kia Ora to be the most significant issue in the case.

There are some relationships, such as the solicitor/client relationship, that are automatically fiduciary in nature. These "categories" of relationships are restricted, and can only be extended by clear analogy.

His Honour noted that, like the relationship between doctor and patient, the relationship between Chartered Accountant and client has not yet been classified as one that is automatically fiduciary in character (unlike, say, the relationship between solicitor and client).

It is not sufficient to impose fiduciary obligations on an alleged wrongdoer, simply to point to the vulnerability of the person wronged.

Various approaches have been adopted in the past, and the courts take various considerations, such as the common requirement of "loyalty" into account.

Upon consideration of the facts, His Honour concluded that the relationship between Nelson Wheeler and Kia Ora was not merely contractual in nature, but had a higher quality; it was a fiduciary relationship.

Conclusions

The High Court has affirmed that the accountant/client relationship does not, of itself impose upon accountants the sort of strict duties of loyalty that are imposed upon solicitors.