Admissibility and the Loss of Expert Witness Independence

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Parties should aim to provide expert evidence from independent witnesses. However, the loss of independence does not in and of itself lead to a finding of inadmissibility.

Background

In Hussain v CSR Building Products Limited, in the matter of FPJ Group Pty Ltd (In Liq) [2016] FCA 392, liquidators of FPJ Group Pty Ltd (FPJ Group) sought payments from CSR Building Products Pty Ltd (CSR), which it claimed had become insolvent on 21 November 2013 with a debt of $46,000.

The Expert Evidence:

Both parties to the litigation engaged an expert witness to provide evidence on the matter. CSR’s expert, Mr Box (a partner of the Forensic Consulting Division of Grant Thornton), submitted that it was not possible to determine whether FPJ Group was insolvent in November 2013 based merely on the evidence available to the Court. [109]

In contrast, the liquidators called Mr Ross, an accounting professional with almost 20 years of experience in financial reconstruction, recovery, and management of distressed companies. [110] Mr Ross gave evidence to the effect that FPJ Group were indeed insolvent in November 2013. His report adduced figures of the financial state of CSR at different times, as well as evidence of the company’s payment plan obligations and other transactions, such as payment of building contractors.

Criticism and Rejection of Expert Evidence

1. Independence and Impartiality of the Expert

The Court highlighted Mr Ross’s lack of independence and impartiality in the proceedings.

Mr Ross had disclosed that, as well as acting as an expert witness in the proceedings, he was also a plaintiff in the proceedings: Mr Ross was liquidator in the matter and, in addition, was reliant upon the success of the proceedings for remuneration for his work on the matter.

Justice Edelman acknowledged that the fact of Mr Ross’s contingency-basis work precluded him from acting as an independent or impartial witness. [111] In addition, it noted that Mr Ross had exhibited elements of his partiality through his reluctance during cross-examination to provide straightforward or consistent answers. [112]-[113]

Despite the potential prejudice in Mr Ross’s opinions, the Court’s analysis of the evidence did not automatically lead to exclusion of the evidence. Although Mr Ross had shown obvious partiality during cross-examination, the Court nevertheless went on to consider the substance of the arguments the witness had put forward in their report.

2. Incorrect Insolvency Test

Mr Ross’s report was ultimately rejected on the basis that Mr Ross had applied an incorrect version of the insolvency test.[114] He had applied “a cash flow test… whether there was ready cash available to cover the company’s commitments as they fell due for payment”, instead of the insolvency test used by courts, which considers whether an entity is able to pay its debts as and when they become payable.

3. Application of correct insolvency test

Whilst noting that the “fundamental” reason why the Court could not accept Mr Ross’s conclusions in his report, Justice Edelman nonetheless went on to consider whether FPJ Group were insolvent in the framework of the correct test. The Court addressed seriously the Plaintiff’s claim that it could in any case prove that FPJ Group was insolvent through examination of each of the late payment of FPJ’s debts. [116] In combing through the evidence of late payments presented by the Plaintiff, Justice Edelman made the following criticisms:

  • There was no direct evidence of the bank account details of FPJ Group during the relevant time of the alleged insolvency, nor any detailed evidence about the account directly before and after 21 November 2013 [122]-[124];
  • There was no specific evidence of the kinds of entities of the debtors around that date, nor specific details about debts and company inventory [125]-[127];
  • No evidence of the stock and inventory that FPJ Group held at the time, and which it could have sold to pay debts; [128]
  • Evidence about FPJ’s other assets and liabilities (other than inventory and debtors), was not supported in the form of paperwork and was not recorded by the creditor; [130]
  • Evidence of payment plan obligations negotiated with the ATO actually indicated that, contrary to the claims of Mr Ross, FPJ Group submitted its returns on time and met all conditions of its payment plans;[131]-[134] and
  • Evidence that FPJ Group often paid CSR outside 45-day terms does not sufficiently prove their insolvency – the Court noted that such delays are common practice in the building industry and “is not a strong indicator of insolvency in that industry”. [135]

Overall, the Court held in favour of CSR. Regarding Mr Ross’s evidence, it held that the Liquidator Plaintiff presented “insufficient evidence” to demonstrate that CSR were insolvent before May 2014. [138]

Takeaways:

The order of the Court’s reasoning in this matter with regard to Mr Ross’s report demonstrates some key points regarding which elements of expert reporting will lead to admissibility issues, and which shortcomings in expert reporting the Court will sanction through cross-examination:

  • Experts whose independence or impartiality are compromised should disclose this information to the Court. For example, liquidators providing expert evidence, whose pay is reliant on the outcome of the matter, should declare this when they are offering their evidence in this context; and
  • The loss of independence does not automatically lead to the exclusion of evidence because of inadmissibility. The Court is likely to look to the weight of the expert evidence, in the form of the strength of arguments and material evidence, particularly where the expert report applies simple logical or legal tests.

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