Accounting firm Hayes Knight has lost a bid to throw out accusations it breached its duty of care in signing off on Belgrave Finance accounts, and is one of several parties being sued by the receivers of the failed lender.
Associate Judge John Matthews dismissed an application to strike out Belgrave's case against Hayes Knight, provided the claim was amended to more clearly demonstrate the auditor's alleged culpability, he said in a November 7 judgment.
Belgrave has filed six causes of action against former directors Shane Buckley and Steven Smith, their associate Raymond Schofield, solicitors Davidson, Armstrong & Campbell and Hayes Knight.
The judge agreed with Belgrave's lawyer, Bruce Stewart QC, who argued the losses were caused "by the very fact of continued trading" and that it was an issue for a trial to determine, rather than a strike out application.
Belgrave claims that had Hayes Knight done a "careful, diligent and professionally appropriate" audit, the lender wouldn't have issued the 2007 prospectus and would probably have been placed into receivership earlier than it ultimately was in 2008.
From the time of the offer document, the lender advanced some $3.8 million, including to Schofield and related entities, and received $4.9 million from debenture stockholders which it was unable to repay.
Stewart "acknowledges that the plaintiff will have to prove these contentions at trial, but says that if proved the losses claimed are the recoverable consequence of Hayes Knight's negligence," the judgment said.
Judge Matthews ordered Belgrave to "clearly plead relevant facts to show that the losses claimed were the result of the decision to continue to trade."
Costs were reserved, though the judge said his immediate view was to let them lie where they fell.
In August, former Belgrave director Buckley was sentenced to three years in jail after pleading guilty to 19 charges of theft by a person in a special relationship, and four charges of false statement by promoter under the Crimes Act. He also pleaded guilty to one Securities Act charge of making an untrue statement and one Companies Act charge of making a false statement to a trustee.
The Serious Fraud Office has levelled similar charges against Smith and Schofield, who are due to stand trial in April next year.