Professional Liability Guide

PROFESSIONAL LIABILITY GUIDE

These decisions are to be contrasted with that in Drayton v Martin. 369 Mr Martin conducted business as both an accountant and investment adviser and, in doing so, gave investment advice to a client. The client later made a claim against the accountant, alleging breach of duty. The accountant settled the claim, and the question arose whether it fell within the scope of the accountant’s professional indemnity policy – particularly, whether the liability incurred by the accountant was incurred ‘in connection with’ his practice as an accountant.

Justice Sackville said:

‘The simple fact of the matter is that, so far as the Draytons were concerned, Mr Martin’s advice to them to invest in the cash flow plan was, to use his words “inextricably interwoven” with his role as their accountant and his business or profession as an accountant. In practice, the stringent demarcation identified by Mr Williams was blurred, at least in Mr Martin’s dealings with the Draytons. His work as the accountant for the tractor business provided the impetus for his recommendation that the Draytons participate in the tax-driven cash flow plan. His role as an accountant was undertaken at the same time as his role as an investment adviser. His function as an adviser, however imperfectly performed, depended on information obtained as the accountant for the Draytons. In these circumstances, it seems to me inevitable that the liability Mr Martin incurred to the Draytons was incurred “in connection with” his practice as an accountant.’ 370 ‘As his Honour said, it was Mr Martin’s work as accountant for the Draytons in connection with the tractor business that provided the impetus for his recommendation that they participate in what his Honour called the “tax driven cash flow plan” … Mr Martin says he told Mr Drayton that the plan “might help to reduce your tax liability. You still have a large amount of money on deposit and you could have tax problems this year and in the future”. He then enlarged on the virtues of the plan. I think a simple way of testing whether the liability arose out of Mr Martin’s practice as an accountant would be to ask what would have been his position if, after referring the Draytons in general terms to the plan, and recommending it as something for their consideration, he had sent them off to an entirely independent investment adviser who completed the negotiations and signed them up on the plan. Would Mr Martin have been liable? In my view he undoubtedly would have been. I say this because it is quite plain that the plan was only a useful acquisition for the Draytons if the otherwise assessable income of the tractor business was sufficient to support the interest payments that would be required, and indeed to make the incurring of those payments worthwhile. It is clear it was not. At the relevant time the tractor business was operating at a loss and there was nothing to indicate that, in future, it would receive profits of the dimensions necessary to require consideration of a plan such as this. That decision was upheld on appeal ( HIH Casualty & General Insurance Ltd v FAI General Insurance Co Ltd 371 ), where Wilcox J said:

In other words, the scheme was fundamentally flawed from the outset. Mr Martin, as the Draytons’ accountant, should have known this.’ 372

369 (1996) 67 FCR 1. 370 Ibid 34. 371 [1997] FCA 272. 372 Ibid.

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