The Australian Securities and Investments Commission says it will vigorously defend the constitutional challenge that accounting firm KPMG has initiated in the High Court of Australia against the Commonwealth of Australia and ASIC.
KPMG is seeking a declaration that section 50 of the ASIC Act is unconstitutional.
It contends that, insofar as section 50 empowers ASIC to begin and carry on a proceeding in the name of a company, it affects an acquisition of property otherwise than on just terms contrary to the provisions of section 51 (xxxi) of the Constitution, and is accordingly invalid.
The effect of the declaration sought by KPMG, if successful, is that ASIC would not have powers to continue the action to obtain compensation against KPMG for the benefit of Westpoint investors. ASIC will maintain that section 50, in empowering it to bring proceedings for the benefit of investors who have suffered loss and might otherwise never be compensated, is valid.
ASIC commenced action pursuant to Section 50 of the ASIC Act against KPMG in the Supreme Court of Victoria on 13 October 2008 over its auditing of the companies in the Westpoint Group. The action claims compensation in the order of AUD200m. This action was transferred to the Federal Court in April 2010.
ASIC is claiming negligent conduct by KPMG for the audits of financial accounts of various Westpoint companies for the years ended 30 June 2002, 2003 and 2004. ASIC also alleges that KPMG should have notified ASIC that it had grounds to suspect that breaches of the Corporations Act were taking place within the Westpoint Group, including breaches of director’s duties and laws against insolvent trading.
If successful, the action could potentially benefit up to 80 per cent of investors in Westpoint. It represents a significant phase in ASIC’s programme to obtain compensation for Westpoint investors who have suffered loss.
In August 2009 ASIC accepted enforceable undertakings from three partners of KPMG’s Perth office, Brett Charles Fullarton, Robert Charles Kelly and Jonathan Grant Robinson, who were involved in auditing activities relating to Westpoint Group companies. These undertakings require the KPMG partners not to practice as registered auditors for periods ranging between nine months and two years. The enforceable undertakings arise out of audits performed by the KPMG partners of Westpoint entities before the group collapsed in 2006.
KPMG’s proceedings in the High Court of Australia follow ASIC’s announcement yesterday that it had reached its fifth Westpoint compensation settlement with Glenhurst and its insurer QBE Australia for AUD2.5m. This settlement is subject to the approval of the court.
It follows settlements with State Trustees for AUD13.5m, Professional Investment Services for AUD5.9m and Bongiorno Financial Advisers and Bongiorno Financial Advisers (Aust) for AUD2.6m.
If the court approves the Glenhurst settlement, ASIC will have recovered approximately AUD24.5m for eligible investors from these four settlements. This is in addition to approximately AUD49.2m which liquidators have recovered for investors and an estimated AUD6.9m yet to be returned to investors by liquidators. The estimated return of capital from Westpoint companies not in liquidation or administration is AUD22.5m. In overall terms, investors will see a potential return to date of around AUD100m of the AUD388m (approximately) invested.