KPMG has today started a High Court constitutional challenge against the corporate watchdog over the latter's $200 million compensation claim for investors in the failed Westpoint Group.
KPMG has today started a High Court constitutional challenge against the corporate watchdog over the latter's $200 million compensation claim for investors in the failed Westpoint Group.
The accounting firm is seeking a declaration that section 50 of the Australian Securities and Investments Commission Act is unconstitutional, and therefore the watchdog has no powers to continue its legal action.
KPMG is claiming that section 50, which empowers ASIC to start and carry on a proceeding in the name of a company, is invalid.
ASIC today said in a statement that it will vigorously defend the challenge.
The watchdog started action in the Supreme Court of Victoria in 2008 before it was transferred to the Federal Court in 2010.
ASIC is claiming negligent conduct by KPMG for its audits of Westpoint's accounts from 2002 to 2004.
In 2009, ASIC accepted enforceable undertakings from three partners of KPMG's Perth office, Brett Fullarton, Robert Kelly and Jonathan Robinson, who were all involved in Westpoint auditing activities.
The undertakings require the partners not to practice as auditors for between nine months and two years.
If ASIC is successful in its compensation claim, the action could potentially benefit up to 80 per cent of the Westpoint investors.
ASIC's announcement is below:
ASIC today said it will vigorously defend the constitutional challenge 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 $200 million. 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 program to obtain compensation for Westpoint investors who have suffered loss.
Background
In August 2009 ASIC accepted enforceable undertakings (EUs) from three partners of KPMG's Perth office, Messrs 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 9 months and 2 years. The EUs 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 Corporation Pty Ltd and its insurer QBE Australia for $2.5 million. This settlement is subject to the approval of the Court.
The Glenhurst settlement results from the Global Mediation initiated by ASIC to resolve the litigation commenced by it seeking compensation on behalf of Westpoint investors.
It follows settlements with State Trustees Ltd for $13.5 million (refer AD 09-256), Professional Investment Services Pty Ltd for $5.9 million (refer AD 09-256), and Bongiorno Financial Advisers Pty Ltd and Bongiorno Financial Advisers (Aust) Ltd for $2.6 million (refer AD 09-255). If the Court approves the Glenhurst settlement, ASIC will have recovered approximately $24.5 million for eligible investors from these four settlements. This is in addition to approximately $49.2 million which liquidators have recovered for investors and an estimated $6.9 million yet to be returned to investors by liquidators. The estimated return of capital from Westpoint companies not in liquidation or administration is $22.5 million. In overall terms, investors will see a potential return to date of around $100 million of the $388 million (approx) invested.
