ASIC v Adler & 4 Ors

INTRODUCTION AND OVERVIEW 1 ASIC seeks declarations that various alleged contraventions of the Corporations Act have been committed by three of the directors of a collapsed insurance company HIH Insurance Limited ("HIH"). These are alleged breaches of their directorial duties, or duties as an officer, owed to it and its subsidiary. The three directors are Mr Adler a non-executive director of HIH and also Mr Raymond Williams and Mr Dominic Fodera, both executive directors. Also joined as a Defendant is Adler Corporation Pty Limited ("Adler Corporation") a company associated with the First Defendant Mr Rodney Adler, against which company accessory liability is claimed. Accessory liability is also claimed against the three directors by reason of their alleged involvement in contraventions of the Corporations Act said to have been committed by HIH and its subsidiary. ASIC seeks against each individual director compensatory relief, civil penalties and banning orders from acting as a director. Though not therefore criminal proceedings it has been common ground that proceedings of this character invoke requirements for prosecutorial fairness and a standard of proof commensurate with the gravity of the allegations. These proceedings are vigorously defended.

These reasons which follow continue this overview. It is followed by an elaboration of the facts, identifying issues, legal and factual, as they arise. Competing arguments are explained and why they are resolved in a particular way. Finally, there is a recapitulation of the conclusions, with an overall summation at the end. The Table of Contents, headings and cross-references are intended to enable readers to readily find their way through the judgment, despite its length, and to encourage a reading of its conclusions with the reasons which support them. 2 The alleged contraventions are first that each director breached statutory duties under the Corporations Act owed to HIH and its wholly owned subsidiary HIH Casualty & General Insurance Company Limited ("HIHC"), as director or officer. Each director is also said to be liable as an accessory, being knowingly "involved" in contraventions by HIH and HIHC of two sets of provisions of the Corporations Act. The first prohibits "related party benefits" on a non-arm's length basis without shareholder approval (ss208-9). The second prohibits the giving by a company of financial assistance for the purchase of its shares, or its parent's, where materially prejudicial to the company, its shareholders or its creditors (ss260A and 260D). The Defendants deny any such contraventions. If successful, ASIC seeks relief (which I have ordered be dealt with separately with any supplementary character evidence) by way of civil penalties, compensation orders and orders for disqualification from acting as a director. ASIC so proceeds against the First, Second and Third Defendants, being Mr Adler, Mr Williams and Mr Fodera respectively, and against Adler Corporation as Fourth Defendant. 3 The relevant proceedings in relation to the alleged breaches of the Corporations Law are deemed by s1383 of the Corporations Act 2001 (Cth) to have been brought under those sections of the Act which correspond to the provisions of the Corporations Law referred to in the Statement of Claim filed in the relevant proceedings. This follows from s1400(2) of the Corporations Act which creates "substituted liabilities" and its definition of "carried over provisions" in s1371(1). I shall therefore refer to these alleged contraventions by reference to the Corporations Act rather than the Corporations Law, unless quoting from the pleadings. 4 The First Defendant Mr Adler, is sued as a non-executive director of HIH, the parent company. He is also sued as an alleged officer (non-executive) of its wholly owned subsidiary HIHC. Mr Adler denies he is a director or officer of HIHC. Mr Adler is being sued for alleged breaches of his statutory duties owed to HIH and HIHC and also, in his case only, as a director of the trustee company of a unit trust, the Australian Equities Unit Trust ("AEUT"), in which HIHC invested, namely Pacific Eagle Equity Pty Limited ("PEE"). Adler Corporation, also joined as a Defendant for accessory liability, at all material times controlled PEE and (with two others) acquired the majority of the units in AEUT. Those alleged contraventions relate to the first transaction constituted by HIHC's investment of $10 million in the trust ("the trust transaction"). Then they relate to two further sets of transactions by the trust. Thus the second set of transactions involves a substantial purchase of HIH shares by AEUT contemporaneously with and made from the $10 million investment ("the HIH share transaction"). Later there is the third set of transactions relating to the sale by Adler Corporation to AEUT of certain unlisted share investments bought by AEUT from Adler Corporation at the latter's cost ("the unlisted investment transaction"). Finally there is the fourth set of transactions comprising AEUT's loans (unsecured save in two cases by unsecured guarantees) to entities associated with Mr Adler and Adler Corporation ("the unsecured loan transactions"). Proceedings against Mr Adler and Adler Corporation are in respect of all four sets of transactions.

Proceedings against the other two directors, Messrs Williams and Fodera, are in respect of the first two sets of transactions only. This is clear from the declarations sought and the material facts pleaded, though the pleaded Particulars are similar. 5 The directors against whom action is brought include two of the executive directors of HIH, Mr Williams, Chief Executive Officer of HIH and Mr Fodera, HIH's Finance Director. They are the Second and Third Defendants respectively. There is no dispute that both are directors of HIHC as well as HIH. Accessory liability is also claimed against them, as elaborated below. 6 Accessory liability under the Corporations Act requires knowing "involvement" in the elements of the relevant contravention. Thus s79 of the Corporations Act provides: "79 Involvement in contraventions A person is involved in a contravention if, and only if, the person: (a) has aided, abetted, counselled or procured the contravention; or (b) has induced, whether by threats or promises or otherwise, the contravention; or (c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) has conspired with others to effect the contravention." 7 Speaking generally, the provisions of the Corporations Act of which contravention as an officer or director of HIH and HIHC is alleged are as follows. Section 180 (lack of care and diligence), s181 (lack of good faith or proper purpose), s182 (improper use of position) and s183 (improper use of information). These contraventions are alleged against all three Defendants, save in relation to s183 where the allegation is only against Mr Adler and Adler Corporation. Mr Adler is sued in relation to PEE as well, for contravention of ss180, 181 and 182 (but not s183); only he of the Defendants was a director of PEE. In addition accessory liability is alleged, based on knowing involvement.

(a) against Mr Adler for involvement in contraventions by Mr Williams of ss181 and 182 of the Corporations Law in relation to HIH and HIHC; (b) against Adler Corporation for involvement in contraventions of ss181, 182 and 183 in relation to HIH and HIHC and for involvement in contraventions of ss181 and 182 in relation to PEE; (c) against Messrs Adler, Williams and Fodera, and against Adler Corporation, for involvement in contraventions by HIH and HIHC of s208 with s209(2) (prohibiting related party benefits without a shareholders' resolution) and s260A (prohibiting financial assistance by a company in the acquisition of its shares unless no material prejudice). 8 The director/officer liability provisions of the Corporations Act said to have been breached can be broadly summarised as follows. Section 180 requires the director or officer to exercise the degree of care and diligence that a reasonable person would exercise in the corporation's circumstances, with a "safe harbour" for those who satisfy the "business judgment" rule. Section 181 requires the director or officer to act in good faith in the best interests of the corporation and for a proper purpose. Section 182 prohibits a director or officer from acting improperly so as to use his position to gain an advantage for themselves or for someone else, or to cause detriment to the corporation. Section 183 precludes a person who obtains information because he is a director, from improperly using that information to gain an advantage for himself or for someone else, or to cause detriment to the corporation. 9 Though the actions are primarily brought against the three directors earlier mentioned, Adler Corporation, shown in its last annual return to be fifty percent owned by Mr Rodney Adler and fifty percent owned by his wife, is also subject to these proceedings in the way I have earlier outlined. 10 None of the Defendants elected to give evidence. Such significance as that may have falls to be considered when considering what inferences, if any, may be drawn in relation to particular matters. Contrary to ASIC's position, the Defendants contend that no adverse inferences should be drawn in the circumstances.

Overview of relevant transactions and of the principal allegations and defences. 11 I will now describe in summary form as neutrally as possible the transactions said to give rise to the alleged contraventions, briefly mentioning the centrally relevant pleadings. The necessary elaboration of what occurred is dealt with later in this judgment. 12 The first transaction (the trust transaction) relied upon by ASIC as giving rise to the relevant contraventions proceeded by a payment by cheque of $10 million on 15 June 2000 by HIHC to PEE, controlled by Mr Adler. This payment followed earlier correspondence commencing 9 June 2000 between Mr Adler and Mr Williams and later steps involving various officers of HIH and HIHC. PEE either contemporaneously or shortly thereafter became the trustee of AEUT. Control of AEUT was vested in Adler Corporation with two others. Adler Corporation enjoyed an entitlement to ten percent of all distributable income via A class units issued at an issue price of $25,000. The remaining units being B class units, were issued to HIHC at a price of $10 million, thus appropriating the $10 million earlier paid over. Those B class units conferred an entitlement on HIHC to receive ninety percent of AEUT'S "distributable income". 13 The characterisation of that payment of $10 million initially as an unsecured loan (as the Plaintiff prefers) or as throughout impressed with a trust (as alleged by the Defendants) and, if so, its precise legal character, is a matter of dispute. It is the Plaintiff's view (disputed by the Defendants) that there would be no difference in result, under either characterisation; that is to say, the same contraventions would occur. 14 That payment of $10 million by HIHC to PEE, was, according to ASIC (but disputed by the Defendants):

(a) made at the instigation of Mr Adler, with Adler Corporation "involved" so liable as an accessory ; (b) with the agreement of and under the direction of Mr Williams; (c) with the assistance of Mr Fodera in implementing the payment and who (it is alleged) failed, with Messrs Adler and Williams to bring that transaction and the HIH share purchases to the attention of other directors of HIH or to its investment committee so that neither were approved or authorised as required by applicable investment guidelines by HIH's Investment Committee, or by the Board; (d) employed under a deed for AEUT that unduly favoured Mr Adler and Adler Corporation and lacked basic safeguards, permitting as it did self-dealing with no requirement for independent appraisal; (e) was made and invested by AEUT without the necessary Board or Investment Committee approval. 15 Such payment was first utilised to the extent of $3,991,856.21 in paying for the purchase on the stock market of shares in HIH instigated by Mr Adler over an approximate two week period starting 15 June 2000. This was in circumstances where, according to ASIC, but disputed, the stock market was led to believe by Mr Adler that the purchases were made by Mr Adler or family interests associated with Mr Adler (as distinct from AEUT or HIH), in order to shore up the HIH share price. Adler Corporation was already a substantial shareholder in HIH. Such HIH shares were subsequently sold by AEUT at a loss of $2,121,261.11 on 26 September 2000. just over three months later. 16 The $10 million payment was later (commencing 25 August 2000) utilised in part in the purchase at cost from Adler Corporation of various venture capital unlisted investments made by it in technology or communications stocks. Thus AEUT bought dstore Limited on 25 August 2000 for $500,002, Planet Soccer International Limited on 25 August 2000 for $820,748 and Nomad Telecommunications Limited on 26 September 2000 for $2,539,000. I shall refer to them as, respectively "dstore", "Planet Soccer" and "Nomad" and collectively as "the unlisted investments". The AEUT purchases were made at the original cost to Adler Corporation in each case. Adler Corporation had earlier acquired dstore in February 2000, Planet Soccer in March 2000 and Nomad in August 1999. ASIC contend that this was in circumstances where their subsequent resale to AEUT was to the advantage of Adler Corporation because of their known financial and capital raising difficulties which potentially, if not actually, threatened their viability. While contending that it is not necessary to establish this, ASIC also contends that the acquisitions were in each case to the disadvantage of PEE and AEUT. The purchases were made without there having been any independent analysis of the worth of the relevant investments in circumstances where the purchases had occurred after the collapse in mid-April 2001 of the stock market for technology and communications stocks. The purchases were (according to ASIC) made following unsuccessful attempts to find other investors, as was, or should have been exercising reasonable diligence, known to Mr Adler and Adler Corporation. AEUT suffered a loss on all three investments totalling $3,859,750 (ignoring interest). That loss was realised in the case of Nomad and dstore in less than four months after PEE's acquisition of them from Adler Corporation. 17 In addition, ASIC alleges that Mr Adler, between 26 July 2000 and 30 November 2000, caused three unsecured loans totalling $2,084,345 to be made by AEUT without adequate documentation to companies or funds associated with Mr Adler and/or Adler Corporation to the latter's advantage. It is also alleged by ASIC that, though not necessary to establish this, the unsecured loans were to AEUT's disadvantage. 18 I have described these transactions in broad terms only. It is important to emphasize that proof of the relevant contraventions depends upon ASIC making out its pleaded case. Much of each Defendant's case is that ASIC has fallen well short of doing so. The Defendants have pleaded to ASIC's Statement of Claim, though on the basis that they are not obliged to do so in the case of proceedings such as this, prosecuted for civil penalty. 19 Without attempting to be exhaustive, I shall attempt to summarise the contraventions relied upon by reference to the pleaded Particulars centrally relevant. I do so without reproducing the earlier paras 15 to 60 of ASIC's Statement of Claim. These set out in greater detail material facts relied upon by ASIC in relation to the four sets of transactions insofar as Mr Adler and Adler Corporation are concerned. Only paras 15 to 46 apply to Messrs Williams and Fodera (being in respect of the first two transactions). That detail where relevant is to be found subsequently in this judgment, where I deal with the specific transactions. 20 For overview purposes, I now set out a summation of the alleged contraventions against each of the Defendants with the centrally relevant associated pleaded Particulars.

Mr Rodney Adler 21 It is alleged by ASIC that Mr Adler by reason of his pleaded conduct breached ss180(1), 180(1), 182(1) and 183(1) of the Corporations Act in relation to HIH, HIHC and (save as to s183) PEE. 22 Paragraphs 15 to 60 of the Statement of Claim set out the material facts relied on in relation to Mr Adler (and Adler Corporation). They contain a description of the relevant transactions being all four sets as comprise the transactions (see para 4 above). The further pleaded Particulars principally relied upon are to be found in para 74, though in the case of s183, additional Particulars are to be found as well (at para 95 of the Statement of Claim). Because of its importance to both ASIC's case and the Defendants' defences, I set out para 74 in full, as applicable to ss180 to 183 inclusive. "74. By reason of the matters pleaded in paragraphs 15 to 60 (inclusive) above, Adler, being a director of HIH, failed to exercise his powers and discharge his duties with the degree of care and diligence that a reasonable person would exercise if they: 74.1 were a director or officer of a corporation in HIH's circumstances; and 74.2 occupied the office held by, and had the same responsibilities with the corporation, as Adler; and thereby contravened section 180 of the Corporations Law. Particulars (1) By his conduct as pleaded, Adler caused or procured HIHC, a subsidiary of HIH, to make a payment which: (a) was a substantial sum of money; (b) was on terms which were not finalised and which were not documented at the time the payment was made; (c) was made to a company which Adler controlled; (d) directly or indirectly advantaged Adler, Adler Corporation and PEE; (e) was made on terms which, to the extent that they were known, were not reasonable in the circumstances if HIHC and PEE had been dealing at arm's length; (f) was made with the contemplated object of enabling PEE to acquire from Adler Corporation unlisted investments which were not the subject of independent analysis; (g) further, or in the alternative to (f), was made with the object of: (i) enabling PEE to purchase shares in HIH; (ii) enabling Adler to state publicly that he was purchasing HIH shares; and thereby maintain or stabilise the HIH share price; (h) was ultimately accounted for as a subscription for a unit in a trust the terms of which were not reasonable as far as HIH was concerned and over which HIH had no control; (i) resulted in HIH and HIHC contravening section 208 of the Corporations Law by reason of the fact that no steps were taken to obtain the approval of the members of HIH; (j) resulted in HIHC, a subsidiary of HIH, contravening section 260A of the Corporations Law; (k) was not disclosed to the directors of HIH other than Adler, Williams and Fodera or to the Investment Committee of HIH; (l) was made in such a way that it would not come to the attention of the directors of HIH other than Adler, Williams and Fodera or to the attention of the Investment Committee of HIH; (m) was not approved or ratified by the Investment Committee of HIH; (n) if, contrary to the Plaintiff's primary allegation at paragraph 20.6 above, Williams and Fodera (or either of them) were not aware that the $10 million payment was to be used in whole or in part by PEE to pay for the purchase of shares in HIH, was made in circumstances where this purpose was not, but should have been, disclosed by Adler to them. (2) By conduct as pleaded, Adler caused or procured PEE, as trustee of the AEUT, to purchase shares in HIH and purchase unlisted securities from Adler Corporation and to make loans to entities related to or associated with Adler in circumstances where those purchases and loans: (a) were not advantageous to the AEUT, the unitholders of the AEUT, including HIHC, or to HIHC's holding company, HIH; and (b) were not disclosed to other directors of HIH or brought to the attention of the Investment Committee of HIH." 23 At para 95 the additional Particulars are pleaded as follows: "Particulars (a) The information obtained by Adler was information concerning the Investment Committee procedures and the Investment Guidelines, the HIH investment portfolio and the susceptibility of Williams to a proposal whereby HIH invest money in less conservative ways, such as in unlisted equities and venture capital. (b ) The Plaintiff otherwise repeats the particulars to paragraph 74." 24 The Statement of Claim (para 97) then pleads accessory liability on the part of Mr Adler. This is by reason of his alleged involvement in the earlier pleaded alleged contraventions by Mr Williams of s181 and s182. These are said to be in relation to the trust transactions and the HIH share transaction. 25 Then it is pleaded that Mr Adler has breached s209(2) (in failing to get member approval to a "related party" transaction), in relation to both HIH and HIHC. This is by reason of Mr Adler's alleged "involvement" in a breach of s208 by HIH and HIHC respectively in consequence of HIHC's earlier described payment of $10 million. It is alleged that HIH, as a public company and HIHC as an entity that the public company controls, has, contrary to the statutory prohibition in that behalf, given a "financial benefit" (as defined in ss9 and 229) without members' approval, in circumstances where the "arm's length" defence under s210 is not applicable. The latter defence, speaking generally, applies where the financial benefit is on terms that: "(a) would be reasonable in the circumstances if the public company or entity and the related party were dealing at arm's length; or (b) are less favourable to the related party than the terms referred to in paragraph (a)." 26 Reliance is placed upon paras 3.5, 61, 62 and 63 of the Statement of claim in so far as any such contravention by HIH and HIHC is concerned and on paras 15, 17 and 20 in so far as any "involvement" by Mr Adler is concerned. The Defendants dispute whether the payment of $10 million by HIHC to PEE on 15 June 2000 amounted to the giving of a "financial benefit" to each of PEE, Adler Corporation and Mr Adler (para 62 of the Statement of Claim) and contend that the arm's length defence in s210 is made out. 27 Finally, breach of the financial assistance provisions of s260A is pleaded in relation to HIHC. Section 260A prohibits a company giving financial assistance to a person to acquire its or its holding company's shares (here HIH's). This is save where it does not materially prejudice:

(i) the interests of a company or its shareholders; or (ii) the company's ability to pay its creditors. That indeed is what the Defendants contend, by way of defence. They rely on the payment as impressed from the outset with a trust of one or other kind. But it was a trust whereby the shares when acquired were held absolutely on trust for HIHC, until AEUT was constituted. Since the shares were on the day of purchase worth what they were purchased for, the Defendants say there could be no material prejudice, this being so even if the shares are to be treated as held on the terms of the AEUT trust. (The same argument is put to obviate any "financial benefit" for s208 purposes.) The Defendants deny the characterisation of the $10 million as an unsecured borrowing. They accept it was made available, with documentation following only later. 28 Again, Mr Adler is alleged to have been "involved" in that alleged contravention by HIHC under s260D(2), so as thereby to contravene s260A. The particular financial assistance said to have occurred is the provision of $10 million by HIHC to PEE in the circumstances referred to in paras 20 to 23 (inclusive) of the Statement of Claim. This is said to amount to the provision of financial assistance by HIHC to enable PEE to acquire shares in its holding company, HIH. Paragraphs 20 to 23 essentially set out the events of 15 June 2000 (see later) when $10 million was handed over and shares were subsequently purchased for PEE by the monies so funded in HIH, being events not themselves in dispute as to their occurrence. 29 Paragraph 69 of the Statement of Claim then pleads the material prejudice and the Particulars relied upon to establish it: "69. The giving of the financial assistance materially prejudiced the interests of HIHC and its shareholder, HIH. Particulars (a) a diminution in the value of HIHC's stake in PEE reflected by actual loss on the HIH share purchases of $2,102,802.74; (b) exposure to diminution in the value of HIHC's stake in PEE should the price of HIH shares fall and therefore cause PEE to suffer a loss; (c) loss of use of $3,973,397.84 which could have been used for other investments or other business purposes; (d) the creation of the false impression that a high profile director of HIH such as Adler was funding the purchase of HIH shares rather than HIHC; (e) the exposure to the risk of publication of the fact that HIHC was funding the acquisition of HIH shares and the consequent negative impact on HIH, HIHC and the HIHC stake in PEE of publication of that information in the circumstances of the declining HIH share price; (f) neither HIH nor HIHC acquired any, or any satisfactory, means of ensuring that HIHC could recover the amount provided together with interest thereon, or profit in respect of its use." 30 It is then said in para 71 of the Statement of Claim that by reason of his earlier conduct (as pleaded in paras 15, 17, 19, 20 and 22 of the Statement of Claim) Mr Adler was involved in the contravention. 31 That completes the description of the contraventions alleged in relation to Mr Adler. I now turn to Mr Williams and Mr Fodera.

Mr Raymond Williams 32 It is alleged by ASIC that Mr Williams, by reason of his pleaded conduct in relation to the trust transaction and the HIH share transaction, breached ss180(1), 181(1) and 182(1) of the Corporations Act in relation to HIH and HIHC. No contravention is alleged in relation to s183. 33 The Particulars relied upon are to be found in paragraph 77 and are essentially the same as those earlier quoted in relation to Mr Adler in paragraph 74 (with the omission of sub-paragraph (n). It will be noted that subparagraphs (f) and (g) of para 74 of the pleadings (quoted in para 22 above) are expressed either as cumulative or alternative. Thus Mr Williams' involvement in the contemplated object of the $10 million investment could be limited to the HIH share investment, if only subparagraph (g) were applied to him. There is also paragraph 92 which pleads the basis for the contravention of s182 alleged, as follows: "92. By reason of his conduct pleaded in paragraphs 15 to 46 (inclusive) above, Williams, as a director of HIHC, improperly used his position to: 92.1 gain an advantage for Adler; 92.2 in the alternative, gain an advantage for PEE; 92.3 in the alternative, gain an advantage for Adler Corporation; and thereby contravened section 182 of the Corporations Law. Particulars The Plaintiff repeats the particulars to paragraph 77." 34 In addition, ASIC plead that Mr Williams is in breach of s209(2) in relation to HIH and HIHC by reason of his "involvement" in the earlier pleaded breach by HIH and HIHC of s208; see Statement of Claim, para 66. 35 Finally, it is pleaded that Mr Williams has breached s260D(2) in relation to HIHC giving financial assistance for purchase of HIH's shares, on a similar basis to Mr Adler; see Statement of Claim, para 72.

Mr Dominic Fodera 36 ASIC's pleaded case for Mr Fodera is essentially the same as it is for Mr Williams (alleging breach of ss180, 181 and 182 of the Corporations Act but not s183). The relevant Particulars are found in para 79 of the Statement of Claim, which is essentially similar to para 74 again. Accessory liability under s209(2) and s260D(2) is also alleged in relation respectively to the alleged breach by HIH/HIHC of s208 and by HIHC of s260A.

Adler Corporation Pty Limited 37 The Statement of Claim essentially pleads accessory liability on the part of Adler Corporation in relation to the earlier pleaded contraventions by HIH and HIHC in paras 64 and 70 of the Statement of Claim, the earlier pleaded contraventions by Mr Adler, as earlier described, and the earlier pleaded contraventions by Mr Williams, as earlier described. This is with the consequence that Adler Corporation is said to have "thereby contravened sub-sections 181(2), 182(2), 183(2), 209(2) and 260D(2)". The following additional Particulars are pleaded: "(a) Adler Corporation acquired the majority of units in the AEUT; (b) Adler Corporation at all material times controlled PEE; (c) The acquisition by PEE of Adler Corporation's interests in dstore, Planet Soccer and Nomad Telecommunications Limited." 38 These pleadings are to be found in relation to Adler Corporation at para 98 of the Statement of Claim.

Mrs Lynda Adler 39 I simply note that no contraventions are alleged against Mrs Adler, wife of Mr Adler, nor orders sought against her. She remains a Fifth Defendant and is shown in the public record as a 50% shareholder in Adler Corporation.

Defence Overview 40 In an overview such as this, it is not possible to summarise in any fully comprehensive fashion the detailed contentions of the various defences. There was, generally speaking, broad adoption by the other Defendants of the First and Fourth Defendants' contentions. What follows is therefore by way of broad summation, drawn primarily from submissions, and is subject to the elaboration later in this judgment. 41 The Defendants severally or as indicated:

(a) dispute a substantial number of the factual matters relied upon by ASIC; (b) contend that the pleaded Particulars relied upon by ASIC are not made out, so as to establish any of the alleged contraventions, (c) contend these are proceedings for civil penalty where the Plaintiff must be strictly held to its pleaded case and has failed to establish it; (d) contend that the relevant payment of $10 million to AEUT was not even in the first instance a loan, but was from the outset impressed with a trust in favour of HIHC absolutely, as were the shares in HIH bought therewith with the detailed terms of such trust later becoming those of AEUT when it was subsequently constituted, with the consequence that, taking into account the other relevant circumstances, this (i) obviated any "financial benefit" as defined in s229 for s208 purposes, and any "financial assistance" by HIHC or HIH of the kind dealt with by s260A of the Corporations Act ; (ii) satisfied the arm's length exception in s208 in relation to any related party financial benefits, if (contrary to their denial) such there were; (iii) ensured that any such financial assistance (if contrary to their denial such there were) did not "materially prejudice" the "interests of the company and its shareholders" or "the company's ability to pay its debts", and so (iv) precluded any breach by either HIHC or HIH of s260A of the Corporations Act in respect of which any of the Defendants could be "involved" so as to render them liable; (e) contend (in the case of the First, Second and Fourth Defendants) that the evidence, expert and otherwise, does not support the pleaded Particulars relied upon by ASIC to establish a breach of either s260A of the Corporations Act or of the related party benefit provisions (ss208 and 209(2)) in relation to Mr Adler, Adler Corporation and Mr Williams; (f) in relation to knowing "involvement" in any relevant contravention (if contrary to the Defendants' primary argument there were), contend that the relevant Defendants lacked the necessary actual knowledge of all material ingredients of such contravention so as to give rise to accessory liability and in the case of Mr Fodera, lacked the degree of active participation required for such liability; (g) In relation to the alleged contravention of ss180, 181, 182 and 183 arising from Mr Adler's alleged involvement in the particularised transactions (in first causing or procuring HIHC to make a payment of $10 million and second, causing or procuring PEE as trustee of the AEUT to purchase shares in HIH and thereafter unlisted securities from Adler Corporation and to make loans to entities related to or associated with Adler Corporation) the First and Fourth Defendants contend: (i) there is no evidence that Mr Adler was, or was acting as, an officer of HIHC (as is necessary to ground liability in relation to HIHC) though concededly he was acting as an officer of PEE and was a director of HIH; (ii) the remaining Particulars are not made out, in particular the alleged lack of board authority or lack of necessary approval by the Investment Committee for the payment and subsequent individual investment in HIH, the Defendants contending that a protocol applied whereby Mr Williams' authority, here given, sufficed so that any further approval was unnecessary; (iii) such Particulars do not suffice for the relevant elements of s180 being made out, or are unsupported by the evidence; (iv) as to the investments in unlisted securities acquired from Adler Corporation at its cost, contrary to the pleaded Particulars or the assumptions underlying them, these (aa) were acquired in accordance with HIH's desire to accept greater speculative risk in return for the prospect of higher reward, (bb) there had been sufficient disclosure, (cc) the alleged lack of "due diligence" enquiry in relation to those investments was not pleaded and had in any event a "highly variable" meaning, and (dd) the evidence as to the value and prospects of the three investments at the time acquired justified the cost price paid by AEUT, having regard to HIH's desire for higher risk/reward through investing in speculative stocks, (v) as to the unsecured loans, contrary to the pleaded Particulars, (aa) these were documented; (bb) they were at interest, (cc) sufficiently disclosed, (dd) in two cases where said to be unsecured, they were in fact secured by personal guarantee, and (ee) were all on reasonable terms (in answer to ASIC's contention that the loans were not "advantageous" to AEUT), (vi) as to s183 in relation to Mr Adler, and the allegation of his improper use of information, being information concerning the Investment Committee procedures and the Investment Guidelines, the HIH investment portfolio and the susceptibility of Mr Williams to a proposal whereby HIH invest money in less conservative ways, such as unlisted equities and venture capital, (aa) there was the "protocol" referred to in (g)(ii) above, enabling Mr Williams to authorise these investments without need for reference to the Investment Committee or the Board, and (bb) such investment in fact fulfilled HIH's bias towards speculative and technology stocks in order to continue HIH's earlier out-performance of its benchmarks for investment performance through such high risk/reward investment. See for elaboration of this and other defence grounds, principally the First and Fourth Defendants' written submissions of 19 December 2001. (h) contend that no loss has been proved by ASIC on the part of PEE at the standard of proof required but that even if it had, it has not been shown that any such loss "resulted from" the alleged conduct of the Defendants or any of them, as required by s1317H(1)(b) of the Corporations Act dealing with compensation orders, more especially in view of the evidence by at least one of the directors that he would have voted to ratify; in any event the methodology for calculating interest by reference to 30 day bank bills is disputed; (i) Mr Fedora, Third Defendant and the Finance Controller of HIH/HIHC contends that: (i) ASIC has not proved its case as pleaded against Mr Fodera (see paras 1 to 99 of Third Defendant's written submissions of 20 December 2001) and the drawing of adverse inferences against Mr Fodera by reason of his silence cannot be justified in the circumstances (paras 100 to 121 of submissions); (ii) in any event, ASIC has not proved any contravention by Mr Fodera of ss180(1), 181(1), 182(1), or accessory liability under ss209(2) or 260D(2) (paras 122 to 171 of submissions), but (iii) if a contravention has been proven, then Mr Fodera ought be relieved wholly from liability pursuant to s1317S and/or s1318 and no order for disqualification or for a pecuniary penalty should be made pursuant to ss206C or 1317G (paras 179 to 190 of submissions), and (iv) in respect to the order for compensation sought pursuant to s1317H, subsection 1317H(1)(b) has not been satisfied in that any loss or damage suffered by HIH or HIHC has not "resulted from" any contravention by Mr Fodera (paras 191-196 of submissions); (j) in answer to the allegation that Mr Adler and Adler Corporation were liable as accessories as being "involved" (within s79) in the alleged contraventions by Mr Williams of ss181 and 182 of the Corporations Law . Mr Adler contends (and Adler Corporation mutatis mutandis) that (i) there was no actual knowledge of all the material ingredients of the alleged contraventions of Mr Williams (if indeed there were such), and (ii) there was no such contravention for the reasons earlier set out (see, inter alia, paras 28 - 54 and 135 - 137 of the First Defendant's submissions of 19 December 2001) (k) Mr Williams disputes that he contravened any of s180 to s182 of the Corporations Act or was involved for accessory liability purposes in any contravention of s208 or s260A and in particular he contends, inter alia, that (i) the HIH share purchase, viewed at the time, was in the interests of HIH; (ii) Mr Williams had no interest other than the interests of HIH it not "having been seriously suggested otherwise"; (iii) Mr Williams was entitled to assume Mr Adler would use the payment in a lawful manner; (iv) there is no evidence Mr Williams knew of any of the purposes or motivations of Mr Adler alleged by the Plaintiff, the evidence said to support the position that Mr Williams knew of the purchase by PEE of Adler company investments being too indirect to be relied upon for such a serious finding, is inconsistent with the schedule to the ASIC letter of 22 December 2000 (PX1/268) and even if accepted does not mean that Mr Williams knew or should have known that the transaction would be to the detriment of HIH; (v) the decision to advance $10 million for investment by PEE was within Mr William's authority as Chief Executive Officer, to whom the Board had delegated the day to day management of the HIH Group and to suggest that every transaction needed Investment Committee approval in advance is to misunderstand the workings of large public companies where the Board delegates to the chief Executive Officer its powers of management of the company; AWA v Daniels (1992) 7 ACSR 759 at 867; (vi) the evidence is clear that, contrary to the Plaintiff's allegations, Mr Williams did not attempt to conceal the transaction since all members of the Investment Committee knew about it, as did the Chairman soon after the transaction occurred; (vii) Mr Williams relied on Mr Adler and the advice provided by Minter Ellison that the transaction was lawful; Mr Williams asked Mr Howard (HIH General Manager, Finance) to obtain that advice and ensure the commercial agreement was properly documented the legal advice that the transaction was lawful was provided by Mr Adler to Mr Williams on 21 July 2000 (PX1/215); it related to an investment of a relatively minor magnitude (0.36% of HIH's funds under management); that advice was subsequently confirmed by a different partner of Minter Ellison in advice provided to HIH on 29 November 2000. (viii) the transaction was on arm's length terms and there is therefore no breach of s209(2) (adopting First Defendant's argument); and (ix) there is no breach by Mr Williams of s260D(2) as there is no evidence Mr Williams agreed to lend Mr Adler money to acquire shares in HIH; the money was lent to PEE for investment under the direction of Mr Adler; the internal investigations of the transactions concluded that Mr Williams had no such prior knowledge. See for elaboration of this and other defence grounds written submissions on behalf of Mr Williams of 20 December 2001. (l) All Defendants again dispute the admissibility of the evidence of ASIC's expert, Mr Cameron, contending that he failed to demonstrate for purposes of s79 of the Evidence Act that it was given by him as an expert with specialised knowledge in the relevant field (see my judgment of 29 November 2001 admitting that evidence as expert evidence) contending also (in the case of Mr Fodera) that it was admitted provisionally based on assumptions subsequently shown to be in disconformity with the evidence; they also attack the approach and methodology of ASIC's valuation expert Mr Carter. (m) Each Defendant (aa) invokes the business judgment rule both as a statutory element or alternatively as a statutory defence (together with its general law equivalent), in relation to allegations of breach of s180 of the Corporations Act (care and diligence) (bb) contends that the Court should decline to draw adverse inferences of the kind the Plaintiff invites the Court to draw from the fact that such Defendant did not give evidence in these proceedings; see written submissions in relation to Mr Williams paras 6 - 9, Mr Fodera paras 100 to 121 and Mr Adler para 152.

DRAMATIS PERSONAE 42 I now turn to the persons and entities principally involved, identifying them briefly in uncontroversial fashion, for ease of later reference.

HIH and HIHC Directors Geoffrey Arthur Cohen Director HIH and Chairman of this Board Justin Herbert Gardener Director HIH Hermann Franz Randolph Wein Executive Director HIH and HIHC Charles Percy Abbott Director HIH Robert Reginald Stitt, QC Director HIH Rodney Stephen Adler Director HIH Raymond Reginald Williams Director HIH and HIHC and Chief Executive Officer of HIH Terence Kevin Cassidy Director of HIH and HIHC holding the executive position described as "Managing Director, Australia" Dominic Fodera Executive Director and Finance Controller HIH and HIHC George Osvald Sturesteps Executive Director HIH and HIHC Of the above directors, Messrs Cohen, Adler, Fodera and Cassidy (but not Mr Williams) were members of an investment committee of HIH of which Mr Cohen was its chair, and on which committee was also Mr John Ballhausen (described as attending by invitation) (see "officers" below) and also it included external consultants who attended by invitation (see "other" below); TB, 2214, 2364, 2439. (Note references to "TB" are to the agreed Tender bundle exhibit PX1. The prefix "1" etc denotes the volume of the Tender Bundle.)

Officers Frederick Lo HIH and HIHC Company Secretary William Herbert Howard HIH General Manager Finance Doug Cubbin Head of Accounts Payable and Management Accounting John Ballhausen General Manager Investments Michael Rook (not member of investment committee but attended by invitation) Martin Braden (not member of investment committee but attended by invitation)

Other Dr Steven Vaughan (not member of investment committee but attended by invitation). Dr Vaughan was not a HIH employee Peter Thompson (no evidence of position)

Planet Soccer International Limited ("Planet Soccer") Aldo Santo Marcolin Director Paul Woods Director and CFO David Laundauer Burdett Buckerage Young Anthony Laurence Davis Burdett Buckerage Young

dstore Limited ("dstore") David Gold Chief Executive Officer Nicholas Frank Greiner Director and Chairman Ari Stavropoulos Executive - Hindal Corporation Simon Cant Employee of "Tinshed" an investment consortium. Leslie Janusz Hooker Director Tinshed

Nomad Communications Limited ("Nomad") Carlton James Taya CEO and Group MD Stephen Patterson Warrener Company Secretary and CEO David Samuel Greatorex Chairman Maxim James Carling Investment Banker - Cygnet Securities Bradley Lawrence Prout Senior Vice President of Finance - BT Adrian Blake Leighton Holdings

Pacific Capital Partners Pty Ltd and PCP Ensor No 2 Pty Ltd Frank Wolfe Director Suzanne Cameron Director PCP Ensor No 2 Pty Ltd John L'Estrange No evidence of position

Morehuman Pty Ltd Salman Ghassan Bayni Director

Intagro Projects Pty Ltd Andrew George Robinson Director

Minter Ellison Leigh Brown Solicitor Margaret Taylor Solicitor

Adler Corporation Pty Ltd ("Adler Corporation") Rob Baulderstone Secretary Lynda Sharon Adler Director

Journalists Mark Francis Westfield Reporter - The Australian Morgan Mellish Reporter - Australian Financial Review

Broker Brent Roderick Potts Chairman - Southern Cross Equities Ltd Stuart Foster Foster Stockbroking

FACTUAL CIRCUMSTANCES - DISPUTED FACTS AND ASSOCIATED LEGAL ISSUES 43 The Plaintiff was directed to prepare a "narrative of facts" to which the Defendants indicated agreement or non-agreement. For the earlier background (to 18 April 2000) I have reproduced much of that narrative amplifying it when necessary. Thereafter, given the importance of the more contemporary events, where much less agreement could be anticipated from the parties as to inference and (often) underlying fact, I have set out the evidence in more detail. Where matters of fact or inference require resolution, I have made findings stating the basis for them. I have also dealt with preliminary and other issues of law. Thus I have dealt with whether Mr Adler was acting as an "officer" of HIHC, within the meaning of s9 of the Corporations Act so as to have the statutory duties that attend that position. I have also had to determine whether HIH or HIHC contravened s208 or s260A of the Corporations Act, so as to give rise to the possibility of accessory liability on the part of the relevant Defendants. Then, I have had to determine whether each were (knowingly) involved, within s79 of the Corporations Act, in relation to such contraventions as were made out, where accessory liability is alleged. Finally, I have had to determine whether any contraventions of ss180 - 183 have occurred. Because there is some overlap between these questions in relation to each of the directors (and also Adler Corporation) there is some repetition of the evidence in the answers to those questions.

Early Background to 18 April 2000 44 HIH previously known as CE Heath International Holdings, was incorporated in 1988 (TB, 1949) and listed on the Australian Stock Exchange in 1992. Provisional liquidators were appointed to HIH on 15 March 2001 (TB, 1956). Liquidators were appointed to HIH on 27 August 2001 (TB, 1956). 45 Mr Williams was a director of HIH from 2 December 1988 to 15 December 2000 and Chief Executive Officer at all relevant times until his resignation as Chief Executive Officer on or about 12 October 2000 (TB, 1952). Mr Williams had been one of the founders of the insurance business that was acquired by HIH. 46 In January 1999 HIH completed a takeover of FAI Insurances Limited ("FAI"). 47 Following HIH's takeover of FAI, Adler Corporation Pty Ltd is shown on its security register as at 31 March 1999 as holding 6,922,831 shares in HIH at a cost of $2.17 per share (TB, 216B). 48 On 14 June 2000 Adler Corporation sold 5,500,000 shares in HIH to Mr Adler at a cost of $0.95 per share (TB, 216B and TB, 218A). 49 Mr Adler was a director of HIH from 16 April 1999 to 26 February 2001 (TB, 1952). 50 Mr Fodera was a director of HIH from 9 May 1997 to 12 October 2000 and its chief financial officer from 1 September 1995 (TB, 953). He was a director of HIHC at all material times from 31 January 1996 (TB, 2012). 51 HIHC is a public company incorporated on 28 July 1970. At all material times it was a wholly owned subsidiary of HIH and controlled by HIH (as admitted by the defence) (TB, 2014). 52 Mr Williams was a director of HIHC from 21 October 1977 to 15 March 2001 (TB, 2012). 53 ASIC contends Mr Adler was an officer of HIHC within the meaning of s9 of the Corporations Law during the period from 16 April 1999 to 26 February 2001 acting in that capacity in relation to the relevant transactions with AEUT and by AEUT. That is disputed. I deal with this question as the first of the preliminary issues of law. 54 Mr Adler joined the Investment Committee of HIH on 2 June 1999. (TB 2214) He was a member of that Committee throughout 2000. (Mr Williams was not a member of the Investment Committee).

Mr Adler an "officer" of HIHC FIRST LEGAL ISSUE 55 ASIC (in para 6 of its Amended Statement of Claim) pleads the basis for that contention. It is that during the relevant period, Mr Adler was an officer of HIHC within the meaning of para (b) of the definition of "officer" in s9 of the Corporations Law by reason of the fact that, as a director of HIH, the parent company of HIHC, he was a person: "(a) Who made, or participated in making, decisions that affected the whole, or a substantial part, of the business of HIHC; or (b) Alternatively, who had the capacity to affect significantly HIHC's financial standing; or (c) Alternatively, in accordance with whose instructions or wishes the directors of HIHC were accustomed to act." 56 These subparagraphs (a) to (c) correspond to the three opening subparagraphs of para (b) of the statutory definition of "officer". At para 283 to 285 (bis) of the Plaintiff's written submissions, reliance is placed primarily upon the first of these subparagraphs. However, the second subparagraph is not abandoned. 57 At para 12 of ASIC's pleading the following is asserted: "12. At all material times during 2000: 12.1 the HIH group of companies had an investment portfolio comprising, inter alia, both internally and externally managed equities ("the HIH investment portfolio"); 12.2 the HIH investment portfolio was overseen by an Investment Committee, the members of which were Cohen, who was the Chairman of the Committee, Adler, Fodera, Cassidy and two external consultants; 12.3 subject to the direction and control of the Board of Directors of HIH, the Investment Committee had responsibility for the making, management and control of investments made or to be made by the HIH group of companies; 12.4 the terms of reference of the Investment Committee included considering and approving investment guidelines, approving investment authorities and performance benchmarks for internally managed investments, approving appointments, mandates and performance benchmarks for all external investment managers, reviewing the performance of all external managers and internally managed funds and reporting all decisions and recommendations to the Board of Directors. 13. During 1999, the Investment Committee published Investment Guidelines which remained operative at all material times during 2000 ("the Investment Guidelines"). 14. The Investment Guidelines contained the following provision (paragraph 1 viii): 'Unlisted Investments Investment in new unlisted equities and venture capital may not be undertaken without prior approval of the Managing Director, Australia or Finance Director. All such transactions are to be then ratified by the Investment Committee.' " 58 The specific evidence relied upon by ASIC to render Mr Adler an officer of HIHC is that, as a director of HIH its holding company, Mr Adler was a person who "participated in the making of decisions that affected the whole or a substantial part of the business" of HIHC. 59 Investment decisions are then said to be decisions of that character. Mr Adler, as is undisputed, was a member both of the board of HIH and of the Investment Committee. Indeed as a director of HIH, Mr Adler clearly took a particular interest in the investment performance of HIH and the group. Shortly after joining the Board, he became a member of the investment committee. He expressed views that HIH should adopt a less conservative investment approach (see, for example, Gardener T, 380.20). Moreover Mr Adler initiated the very first investment transaction in question, namely the $10 million investment. Thus there is a letter Mr Adler wrote to Mr Fodera dated 17 November 1999 (PX17, p4) bringing up his concerns about the composition and strategy of the investment portfolio. Then there is a fax to Mr Williams in similar vein of 25 January 2000. 60 Finally, there is Mr Adler's letter of 30 November 2000 (TB, 1/253) where he says he "approached Mr Williams with an idea that I felt would be beneficial for myself (obviously) and to HIH". [emphasis added] This points to Mr Adler acting in relation to the particularised transaction ($10 million investment) both for himself and HIH. 61 According to ASIC's pleaded case, "subject to the direction and control of the Board of Directors of HIH" "the Investment Committee had responsibility for the making, management and control of investments made or to be made by the HIH group of companies". 62 In relation to HIH's overall role in relation to HIHC, Mr Gardener, in para 4 of his affidavit of 3 October 2001, was not contradicted in stating that: "HIH's board made many policy and strategy decisions for the group as a whole."

I would in that context adopt the description of a holding company vis a vis its subsidiary, made by Barrett J in the circumstances of LMI v Baulderstone [2001] NSWSC 866 especially in paras 89, 91 and 98 where he says of it that the holding company was "acting not as a negotiating or persuading outsider but as a participant in the subsidiary's own internal decision making". 63 However, the First Defendant responds that such a statement falls short of demonstrating how Mr Adler must have participated in such of the many policy and strategy decisions as were made for the group as a whole, no example having been given. 64 In response, ASIC take up investment decisions, and Mr Adler's participation therein, as falling within the category of decisions which "affected the whole or a substantial part of the business" of HIHC. Reliance is in that context placed by the Plaintiff on the evidence of HIH's chairman Mr Cohen. He said that the board of HIH monitored the group's investment portfolio, which was reported to it on a group basis, not a company by company basis; para 20 of his affidavit, 2 October 2001; T, 126.32 - 127.1. Investment decisions were self-evidently decisions "that affected the whole, or a substantial part of the business" of HIHC, given that performance of its investment portfolio underpinned, or at the very least supported, its capacity to meet insurance claims, being the principal business of the HIH group. 65 These matters are disputed as follows. Mr Adler in his amended defence: "(c) Denies each allegation in paragraph 12.2 and says that the functions of the Investment Committee were set out in a document entitled 'HIH Insurance Limited Investment Committee Terms of Reference'."

And then in paragraph (d): "(d) Admits that the terms of reference included the provisions referred to in para 12.4 [of ASIC's Statement of Claim] and will rely at the hearing upon the whole of the Terms of Reference for their true meaning and effect."

The relevant Terms of Reference are to be found as Appendix 1 to a set of Investment Guidelines dated March, 1999 and described as "issued; August 1999" at the foot thereof. To "consider and approve the Group's Investment Guidelines" (note reference to "Group") is specifically part of its remit under the "Terms of Reference" of the Investment Committee; see third dot point of quoted "Terms of Reference" below (TB, 24). "Investment Guidelines Appendix 1 HIH Insurance Limited Investment Committee Terms of Reference Consider and approve Policy Asset Allocation (PAA) and Asset Allocation Ranges (AAR). PAA is the neutral asset allocation benchmark, the characteristics of which are designed to meet the Group's investment objectives. These objectives include solvency and capitalisation issues, liability profiles and return on equity requirements. AAR defines the degree to which weightings may vary from PAA. This creates a framework enabling asset allocation decisions to be made within acceptable risk boundaries. Consider and approve Strategic Asset Allocation (SAA). SAA is an alternative set of benchmarks to reflect shorter term conditions (unlike PAA). SAA is generally not changed more than once or twice a year. Consider and approve the Group's Investment Guidelines including, credit and counterparty policy, derivative usage and exposure controls and foreign exchange policy. Consider and approve valuation methods for all investments. Review and approve foreign currency exposure and hedging policy. Approval of all acquisitions, disposals, capital expenditures and major decisions relating to property investments. Review and approve investment income budgets (and assumptions) and monitor and evaluate actual investment income results. Approve appointments, mandates and performance benchmarks for all external investment managers. Approve investment authorities and performance benchmarks for all internally managed investments. Review the performance of all external managers against approved benchmarks. Review the performance of all internally managed funds against approved benchmarks. Review the investment performance of the internally managed NSW WorkCover Authority investment portfolio. Report all decisions and recommendations made to the Board." [TB, 24] . 66 From this quotation, it will be apparent from the third and last dot point, read with the Investment Guidelines themselves, that the Terms of Reference of the Investment committee

(i) relate to the Group as a whole and thus include HIHC, (ii) include considering and approving "the Group's Investment Guidelines", (iii) requires reporting of all decisions and recommendations to the Board, and (iv) requires Investment Committee to "approve appointments, mandates and performance benchmarks for all external investment managers" (8th dot point above). 67 The Investment Guidelines, to which the Terms of Reference are an appendix, include under (viii), headed "Unlisted Investments" the following: "Unlisted equities and venture capital, (originating principally from FAI). Investment in new unlisted equities and venture capital may not be undertaken without the prior approval of the Managing Director, Australia, or Finance Director . All such transactions are to be then ratified by the Investment Committee." 68 The "Managing Director, Australia" at the relevant time was Mr Cassidy while Mr Fodera was the Finance Director. 69 Relevantly, the last dot point, in requiring that the Investment Committee "report all decisions and recommendations made to the Board", is wholly consistent with the continuing ultimate "direction and control" of the board of directors of HIH of Group investment (see opening of para 12.2 of ASIC's pleading). It is also, with the third and eighth dot points (approval of external investment mandates) wholly consistent with direct oversight by the Investment Committee of the HIH Investment Portfolio, as thereafter pleaded in para 12.2. Finally, page 2 of the Investment Guidelines makes clear that in calling for the Board to ratify asset allocation policy and range, it had not abdicated its overall responsibility for investment particularly as regards the critical area of asset allocation nor had the Investment Committee abdicated its immediate responsibility to recommend such allocation: "The Policy Asset Allocation ("PAA") and Asset Allocation Ranges ("AAR") have been ratified by the Board on the recommendation of the Investment Committee."

I elaborate on this at para 76 and following. 70 Finally, when regard is had to the whole of the Terms of Reference for their true meaning and effect (upon which the First Defendant in its pleading expressly relies), I observe that there is nothing in them which is other than consistent with the proposition pleaded in para 12.2; namely that the HIH Investment Portfolio "was overseen by an Investment Committee". That oversight is confirmed by the Terms of Reference of the Investment Committee laid down by the HIH Board in requiring investment mandates for all external investment managers to be approved by the Investment Committee. 71 There is no evidence from the First Defendant to refute that Mr Adler was other than an active member of the HIH Board, with its group responsibilities, particularly for investment, and was an active member of the Investment Committee, with its investment oversight responsibility. The evidence is clearly to the effect that Mr Adler took a close interest in investment matters participating fully in that category of decision affecting the business of HIHC. 72 The Defendant's argument to the contrary (that nothing has been proven concerning Mr Adler's participation) fails to grapple with it being an agreed fact that the HIH group of companies had as a whole an investment portfolio comprising, inter alia, both internally and externally managed equities ("the HIH Investment Portfolio"). Nor does it grapple with the agreed fact that Mr Adler was a member of the HIH Investment Committee as well as the HIH Board. Though it be the case that the First Defendant disputes that the HIH Investment Portfolio was overseen by that investment committee (though the evidence as I have shown is to that effect) Mr Adler in his defence nonetheless admits the following critical paragraph 12.3 of ASIC's Statement of Claim, namely: "12.3 Subject to the direction and control of the Board of Directors of HIH, the Investment Committee had responsibility for the making, management and control of investments made or to be made by the HIH Group of companies;" 73 Even if it be contended that the Investment Committee did not oversee the HIH Investment Portfolio because, for example, it was subject to the direction and control of the Board of Directors of HIH (and no other basis for disputing that oversight credibly emerges) nonetheless Mr Adler cannot escape the conclusion that he participated in the making of that category of investment decisions in one or other capacity; that is either as board member or committee member, or more likely both. Moreover, that category of decisions, in particular the crucial matter of how funds of the Group were to be invested, clearly affects the whole or a substantial part of the business of HIHC as a member of HIH group. It would be unreal in the extreme to assume that Mr Adler did not participate in making the varied decisions about the Group's investments, which were so obviously a matter of vital interest to him, whether as a member of the Investment Committee or the Board. 74 Mr Adler, in relation to HIHC, was at the relevant times a person who (within the meaning of para (b)(ii) of that definition) "has the capacity to affect significantly the corporation's financial standing". This is for the reason that his involvement in matters pertaining to investment earlier described gave him that capacity. It is also, more broadly because of his participation in the control and direction of the affairs of the Group, including HIHC, as a director of its parent HIH.

CONCLUSION 75 Mr Adler was at the relevant times of the pleaded transactions an officer of HIHC and acting as such (see para 737) within the meaning of the definition of "officer" in s9 of the Corporations Act, and in particular para (b)(i) thereof as being at the relevant times, one "who makes or participates in making, decisions that affect the whole, or a substantial part, of the business of HIHC" namely investment decisions. The same result also follows from para (b)(ii) of s9, on the basis that Mr Adler, as a director of the parent HIH, had at the relevant times "the capacity to affect significantly the corporation's [HIHC's] financial standing".

HIH Investments, Authorities and Management - Background to events of June 2000 76 I now elaborate on the foregoing investment procedures, as they operated in practice at the relevant times. At all material times during 1999 and 2000:

(a) The HIH group of companies had an investment portfolio comprising, inter alia, both internally and externally managed equities ("the HIH investment portfolio"); (b) ASIC contends, and the Defendants dispute, that the HIH investment portfolio was overseen by an Investment Committee though para 12.3 of ASIC's pleading is not denied (see para 72 above). I have earlier found that ASIC's contention is correct. It is not disputed that its members were Mr Cohen, who was the Chairman of the Committee, Mr Adler, Mr Fodera and Mr Cassidy; Mr Ballhausen attended in his capacity as General Manager, Investments. Two external consultants also regularly attended meetings (Mr Braden and Dr Vaughan). (c) ASIC contends, and the Defendants dispute, that subject to the direction and control of the Board of Directors of HIH, the Investment Committee had responsibility for the making, management and control of investments made or to be made by the HIH group of companies. (d) It is clear that the terms of reference of the Investment Committee are contained in a document entitled "HIH Insurance Limited Investment Committee, Terms of Reference, which is set out under para 65 above and which is described as "Issued August 1999". Those terms include to "consider and approve Policy Asset Allocation ("PAA") and Asset Allocation Ranges ("AAR")", and also to "consider and approve Strategic Asset Allocation ("SAA")" (each as there described), to "Consider and approve the Group's Investment Guidelines", to "Approve appointments, mandates and performance benchmarks for all external investment managers" and "Review the performance of all external managers against approved benchmarks". The terms of reference conclude with to "Report all decisions made to the Board". (e) the Investment Guidelines, which operated pursuant to those "Terms of Reference", start with a "Management Overview". The opening paragraphs of that Management Overview are as follows: " Management Overview i) Objective To maximise the return on assets within prudent risk parameters. These parameters reflect the risk averse approach the Group adopts with investment management. The level of acceptable risk is defined through the Group's asset allocation and long term benchmarks. ii) Investment Committee The Policy Asset Allocation (PAA) and Asset Allocation Ranges (AAR) have been ratified by the Board on the recommendation of the Investment Committee. In addition to making such recommendations the Investment Committee is responsible for formulating strategic asset allocation recommendations within the AAR. This Committee is chaired by the Group's Chairman Mr Geoffrey Cohen, and comprises the Group's Australian Managing Director, Mr Terry Cassidy; Finance Director, Mr Dominic Fodera; and non-executive Director, Mr Rodney Adler. The General Manager, Investments Portfolio Manager and two external consultants also attend by invitation. The latter members are Mr Braden, a long term corporate adviser to the Group with a background in banking and economics, and Dr Vaughan, an economist with extensive corporate advisory experience. The Committee meets formally each quarter to review current asset allocation. This ensures the Group's risk tolerance is properly reflected in the investment portfolio. At these meetings the Committee reviews the Group's effective exposure to all asset classes. Comparisons of investment results are made to budget forecasts and against performance benchmarks where appropriate. An economic presentation by Dr Vaughan is followed by debate on the appropriateness of current asset weightings. Subsequent approved recommendations of the Committee are delegated to the General Manager, Investments for implementation. The Investment Committee's Terms of Reference are affixed to the guidelines. (Appendix I)." (f) Between the formal quarterly meetings of the Investment Committee, asset allocation and investment performance were according to the Investment Guidelines (TB, 2), monitored by the Investment Management Group ("the IMG") and so that the IMG was to meet on a monthly basis (except months in which the Committee's meetings fell) and consisted of its executive members and other members of the Investment Committee, namely Mr Cassidy, Mr Fodera, Mr Ballhausen and two external consultants (TB, 2). (g) Mr Ballhausen was the executive of HIH responsible for the day to day business of the IMG. 77 In August 1999 (as is admitted by the Defendants) the Investment Committee of HIH published a document entitled "Investment Guidelines for the HIH Investment Portfolio" (TB, 2253). Those investment guidelines included paragraph 1(viii) dealing with "Unlisted Investments" as follows: "Unlisted equities and venture capital, (originating principally from FAI). Investment in new unlisted equities and venture capital may not be undertaken without prior approval of the Managing Director, Australia, or Finance Director. All such transactions are to be then ratified by the Investment Committee." 78 The new investment guidelines also included the following provisions with respect to property loans: "Loans secured by mortgage on real property. The property loan portfolio (originating principally from FAI) is to be run-off. Property loans may not be written or renegotiated without prior approval of the Managing Director, Australia or Finance Director. All such transactions are to be then ratified by the Investment Committee". (Paragraph 1(vii)). (TB, 5). 79 At the meeting of the Board of Directors of HIH on 22 February 2000, Mr Cassidy, HIH's Managing Director, tabled the Investment Report for the half year ended 31 December 1999 and advised, inter alia, that: "(d) It would be desirable to seek out higher return investments (with associated higher risks) in the asset allocation process. However not much could be done presently due to: Standard & Poors ratings consideration US regulatory requirements Capitalisation obligations of Cotesworth and the UK Branch". [T, 1443 and TB, 1722-1731) 80 The performance of the HIH investment portfolio for the nine months to 31 March 2000 substantially exceeded the Investment Committee's benchmark according to the executive summary in the Investment Report of 31 March 2000. "The result is 29% above the budget forecast and 41% higher than the corresponding period in 1998/99". The Report goes on, "The attribution analysis below shows that the equity portfolio (comprising approximately 22% of total costs) contributed 84% of total return, led by the strong performance from the internally managed portfolio". [emphasis added] see TB, 1746 being "Investment Report - 31 March 2000"). Though not agreed by the Defendants, they advance no basis for disputing the above outcomes as stated in the investment report of 31 March, 2000. I would accept them. Indeed Mr Adler relies on that "out-performance" as justification for the investments he or Adler Corporation caused AEUT to make, bought from Adler Corporation five months later. 81 But meantime, significantly, over the period from 14 to 18 April 2000 there was a very substantial (if not dramatic) fall in the value of technology, internet and media stocks in the share markets around the world. These included the Australian (and US) share markets and became known as the "tech-wreck"; affidavit of Mr Jason Feldmayer, 30 November 2001, Director, Index Services, Standard & Poors and contemporary newspaper articles in TB, 24A-24W. While this statement about such fall is "not agreed" by the Defendants, no evidence was adduced to the contrary. While the newspaper articles are not evidence of the fact, they are evidence of what was conveyed, inter alia, to the investment market. Moreover that conclusion is borne out by other evidence below. 82 That market fall is referred to also in the Investment Committee Minutes of 31 May 2000 (TB6/2364 para 4) and in the Committee papers for that meeting in the report of Dr Vaughan (6/2368 at 6/2401 and 6/2404). Dr Vaughan speaks of an undermining of confidence. Dr Vaughan was one of the consultants to whom the Investment Committee looked to for expert advice. Dr Vaughan also referred to this in the Investment Report (TB, 5/1757 for nine months ending 31 March 2000) submitted to the board meeting of 1 June, 2000 (TB, 4/1450). 83 That Investment Report also records the decision made in March, just before the crash in April 2000, actually to reduce the Group's exposure to technology stocks (TB, 5/1748). Subsequently, it says "The HIH internally managed portfolio continued to perform strongly against its benchmark, principally because of the current bias towards technology stocks. Late in the March quarter a decision was made to reduce the fund's exposure to this sector by A$20 m." Likewise the Minutes of the Investment Management Group (TB, 6/2452) submitted to the 8 August 2000 Investment Committee Meeting (TB, 6/2439) refers to the "bounce in Nasdaq in June again being used as an opportunity for further reduction in internally managed portfolios in high tech exposures". That again preceded the AEUT unlisted technology investments. The Investments Report to 30 June 2000 (TB, 5/1828 was in fact tabled by Mr Adler at the 8 September 2000 Board meeting. So it is fair to infer that he was well familiar with it given his interest in the subject and in the absence of evidence to the contrary (TB, 4/1459). That Report also refers to exposure to technology stocks being continuously lowered into 30 June 2000. There is no suggestion in that Report or the subsequent Investment Report of 30 September 2000 (TB, 5/1901) that this policy should alter, more especially as equities had a negative 2.76% return (as against a benchmark of negative 1.71% (TB, 5/1903) and "Australian share markets drifted sideways in the December quarter". 84 Moreover, in the period to 30 June 2000, the Board and Investment Committee had received positive reports of the Group's investment performance in its own internally managed portfolios. Thus, it was said investment performance substantially exceeded benchmark (Investment Committee Minutes TB, 6/2368), strong performance of the internally managed portfolio (Investment Report in the 1 June 2000 Board papers TB, 5/1746-7), internal fund performance much better than benchmark (Investment Committee papers TB, 6/2459-60 reporting as to the financial year ending 30 June 2000 in the Investment Committee report of 8 September 2000). Only by 30 September 2000, the internally managed fund had slipped to a negative fund return of 8.99% as against a benchmark return of 0.38%. As to One.Tel, see para 411 of this judgment. 85 In light of the performance results of the internally managed portfolio, criticism of the Group's own internally managed investment performance was not fairly open in mid 2000 when AEUT was set up.

CONCLUSION 86 There was by end March 2000, even pre-dating the mid-April collapse in technology stocks, a considered view formed by those charged by the HIH Group structure with responsibility for investment decisions (subject to board oversight) to reduce HIH Group's exposure to technology stocks. The April 2000 fall in technology, interest and media stocks would have reinforced that view. It continued unabated thereafter during (and beyond) August and September 2000. Yet Adler Corporation sold at cost to AEUT its technology stocks in dstore, Planet Soccer and Nomad notwithstanding.

Payment of $10 million to PEE and HIH Share Purchases: April 2000 to 12 October 2000 87 What now follows are the events relating to the payment by HIHC of $10 million to PEE and the contemporaneous and subsequent HIH share purchases. I have adopted a more elaborated narrative in order properly to describe this centrally relevant issue and to ground any disputed factual findings. This is particularly important as the Plaintiff's Narrative of Facts is described by the Defendants in a number of places in their response as "incomplete" or "not agreed", so requiring findings to be made. 88 The lead up to the payment of the $10 million to PEE was the meeting of the Board of Directors of HIH on 1 June 2000. At that meeting, all directors are shown as present. Two matters of potential significance occurred at that meeting. The first is that Mr Adler disclosed a conflict in relation to a company Pacific Capital Partners Pty Limited and absented himself while a question regarding the company was being dealt with (TB, 4/1450). The significance of that, according to ASIC, is that it can be inferred that Mr Adler and other Board members were well aware, as they ought to have been, of the need to avoid making decisions where there was a conflict of interest. It is then said by ASIC that this principle was disregarded by Mr Adler and Mr Williams in relation to the $10 million payment of 15 June 2000 and thereafter by Mr Adler in relation to his subsequent investments of AEUT's funds. 89 The second matter of significance is that the minutes indicate that the meeting was informed that after tax profit would be ten percent below budget "mainly because of underwriting losses incurred in the UK and USA operations". However, the meeting decided that disclosure under ASX listing rule 3.1 was not warranted "as profit for the year ending 30 June 2000 could not be projected with a reasonable degree of accuracy" for various reasons including "continued volatility in the investment markets". The significance of this is that on 20 June 2000, according to Mr Mellish's undisputed evidence, Mr Adler told Mr Mellish that the "profit results are going to be lousy" (Mellish, para 25). Mr Mellish was a financial reporter with the Australian Financial Review. 90 The Plaintiff then contends that this information, which Mr Adler had, along with other matters, tells very strongly against the notion that Mr Adler caused PEE to buy HIH shares because he thought that there would be a profit to be made for HIH from their purchase. This is because, during the period that the shares were being purchased (15 to 30 June 2000), Mr Adler had information which the market did not, that is, that the profit result for HIH would be "lousy". The Plaintiff contends that "it would be inevitable that when this information became public the market place would be affected adversely rather than positively"; see Plaintiff's written submissions, para 20. However, that evidence is consistent with Mr Adler's motive being to maintain HIH's share price or at rate lessen the extent of any fall. 91 A further fact bearing potentially upon this and other issues is that the data for stock exchange dealings in HIH shares disclose, that over the period from 4 January 2000 to 9 June 2000, when the transactions in question commenced, the closing share price of HIH fell from $1.48 to $1.03 (TB, 104A to 104C). The Defendants comment upon that statistic that it is incomplete. But they do not state what further facts would be needed to make it complete or what they advance to refute evidence of a clear downward trend in the HIH share price prior to the HIH share purchase occurring. 92 A similar comment can be made about the fact that on 8 June 2000 the share price fell to $0.99 during trading (TB, 104C). I should note that the volume traded was not insignificant being, according to TB, 104C, 1,406,481 shares. Moreover, the fall was from $1.04 to $0.99, a significant fall. 93 A further relevant matter is the article which appeared in The Australian on 9 June 2000 by Mr Mark Westfield another financial journalist. That article is relied on, not for the truth of what is said, but for the fact that it was conveyed to the market. The article was said to concern "A capital problem" for the "troubled insurer HIH". The article specifically referred to HIH's ability to raise equity capital "being crimped almost daily as the share price slides, but it also has two large off-shore shareholders, accounting for 15% of the capital and looking to quit their holdings." 94 Clearly enough the article, correct or not, feeds into negative market sentiment even if it does not manifest it. A critical point in the article is that: "the regulator appears to require a very substantial injection of fresh capital to meet the APRA standard", being in the form of tougher capital adequacy requirements soon to be imposed. It goes on to say that, if these APRA proposals are enshrined in law "it is understood HIH will need to raise about $250 million in fresh capital". There is also reference to "APRA's desire to toughen the liability valuation standard by requiring a so-called prudential margin of 25%" (TB, 26/27). None of this would have encouraged the notion that buying HIH shares was likely to yield a quick profit. 95 The next event is on 9 June 2000. Mr Adler faxes Mr Williams. Because of the importance of that communication, I set it out in full: "Dear Ray Drenmex (or one of its wholly owned subsidiaries) is an investment company with a history of share trading and would like to borrow unsecured, $10m for the purpose of venture capital and share trading. Drenmex would like absolute discretion to invest the funds as it sees fit but would report profits and/or losses on a quarterly basis. The management of Drenmex suggests it would like to take 10% of profits to initially prove itself to HIH Management with no management fee and only after HIH receives interest on its money at 10% per annum and these profits will be calculated on a yearly basis and cumulative. I would appreciate your timely response to this matter as it follows up on our previous discussions. Yours sincerely, Rodney S Adler AM" [TB, 1/28] . 96 There are several points to note. First, what is proposed is a borrowing but involving a profit share of 10% in return for Drenmex or one of its wholly owned subsidiaries providing investment management but with no (additional) management fee, in order to initially prove itself to HIH management. Second, Drenmex was a company associated in various ways with Mr Adler as the search in TB, 31 - 42 reveals. Thus there is Drenmex' registered office at Australia Square common to Adler Corporation. Then Mr Baulderstone is its sole director having been at 18 April 2000 company secretary of Adler Corporation (TB, 42). Third, the proposed borrowing would have been unsecured and was to be used "for the purpose of venture capital and share trading". The borrowing actually made by PEE was likewise unsecured, and its return was to be 10%. Fourth, Drenmex per se was not of cardinal importance, as evinced by the reference to "or one of its wholly owned subsidiaries". 97 Finally, it should be noted that there is no evidence, in particular from either Mr Adler or Mr Williams, of "our previous discussions" referred to in the last quoted paragraph. 98 On the same day of 9 June 2000, Mr Williams responds to Mr Adler and I quote his letter in reply in full. "Many thanks for your fax of today. This is an issue that you and I have been discussing for some months now. As you know one of my concerns has been the approporiate(sic) level of interest and fees to be earned and incurred on such a transaction. What you propose appears to me to be fair and reasonable since no management fees will be charged to HIH. I will therefore arrange for these funds to be transmitted to you early next week. There is one aspect which should be clarified and that is the limit on any one particular venture or share trade. Regards Ray" [TB, 1/29]. [emphasis added] 99 It should be noted that on the letter just quoted, there is a handwritten note from Mr Williams to Mr Fodera in these terms: "Dominic, please arrange for the funds to be forwarded to Drenmex Pty Limited",

with Mr William's initials followed by the date "14/6", ie 14 June 2000. There is agreement by the Defendants that thereby Mr Williams instructed Mr Fodera to arrange for the $10 million to be forwarded to Drenmex. Note however that the emphasised reference the funds being transmitted "to you" and the two letters read together show that the clear understanding conveyed was that the corporate vehicle was of secondary importance. What was important was that the money was to go "to you" i.e. Mr Adler to be employed for "venture capital and share trading under Mr Adler's care. 100 On 14 June 2000, Mr Adler writes to Mr Williams as follows: "Dear Ray I look forward to seeing you tomorrow at 7:30 am. For various tax, disclosure and accounting reasons, it is not appropriate to use Drenmex. The name of the company that has been incorporated is Pacific Eagle Equity Pty Limited. Yours sincerely Rodney S Adler AM " [TB, 1/30) . 101 PEE was incorporated on 15 June 2000. Mr Adler was its only director and its only issued share was owned by Adler Corporation (TB, 1/35). According to the company search as at 11 October 2001 Mr Adler and his wife were the only directors and shareholders of Adler Corporation; (see TB, 1/40). No submission was made by the Defendants to the contrary of that revealed position, nor casting any doubt on Mr Adler's identity of interest with Adler Corporation, nor on his control of it in at least a practical sense. It defies credulity to suggest that for Mr Fodera it would have made any difference that PEE was being substituted for Drenmex, had he known of that. 102 The facsimile refers to a meeting between Mr Adler and Mr Williams at 7.30 am the next morning 15 June 2000 which meeting is admitted in the Defendants' response to the Narrative of Facts. There is no evidence as to what was discussed at that meeting but I would infer they must have spoken about what was to be done that day, namely purchasing shares in HIH. It was at about 9.18 am on 15 June 2000 that HIH released a statement to the Australian Stock Exchange which reported to be an "HIH Update". 103 The media release contains comments under headings as follows: "on capital adequacy", "on investment" "on result drivers and business strategy". 104 These comments are introduced by a prefatory introduction. "There appears to be what amounts to a significant level of misinformation prevalent in relation to the company and its operations."

Whilst then disclaiming commentary on reporting results (with the financial year still having some weeks to run), it states: "However, a number of comments can be made now on issues of key relevance to the market."

The release included the statement that no capital raising by HIH was required, imminent or planned (TB, 102B). On investment, it was stated that: "The HIH investment portfolio performance will generally be consistent with market performance".

There was then presented a generally positive outlook for the financial performance of HIH. No reference was made to any impending "lousy" profit. That announcement was released to the market place by the Australian Stock Exchange at 9.18 am on 15 June 2000 (TB, 1/102D). 105 Apart from faxing the media release to the ASX for release at 9.18 am (TB, 1/102D) it was faxed to Mr Adler at 9.31 am (TB, 1/102E). Mr Mark Westfield, the financial journalist with The Australian, gives evidence as to his phone call after the media release. I agree with the Plaintiff's submission that the media release in its terms, attempted to put a positive complexion on HIH's position. But in reality, as Mr Westfield said to Mr Adler, it said "nothing" or as Mr Adler said to Mr Westfield, it said "very little" (T, 628.10 - .15). I shall refer shortly to other aspects of the telephone conversation between Mr Adler and Mr Westfield that day regarding the purchasing of HIH shares that followed. 106 At 10.00 am on 15 June 2000 Mr Adler instructed a stockbroker at Foster Stockbroking to purchase 2,000,000 HIH shares at market in the name of PEE (TB, 1/105). 107 The evidence of what thereafter occurred that day was predominantly from the affidavit of Mr William Howard and is relied upon by ASIC. Mr Howard, in about April 1999, had become General Manager, Finance of HIH. He continued in that role for approximately 18 months and thus occupied that role on 15 June 2000. (For a period of about 3 months from November 2000 to March 2001 he was Chief Investment Officer, taking over from Mr Ballhausen.) As General Manager, Finance his role was to oversee the accounting operations for the HIH Group and prepare management accounts and financial reports for the group. He reported to Mr Fodera, the Finance Director of HIH; (see evidence of Mr Howard paras 5 and 6). I should record my impression of him as an honest witness, stolid rather than particularly quick or acute, careful in his answers and essentially unshaken in his evidence and which evidence I would accept. 108 Mr Howard gives evidence that on 15 June 2000 Mr Fodera: "Called me to his office and gave me two documents and said words to the following effect: 'Bill, here is a piece of paper. I would like you to talk to Rodney to draw a cheque for $10 million. I don't want to give this to John (Ballhausen) because it will be too hard''."

The documents handed to Mr Howard included Mr William's handwritten note to Mr Fodera which I have earlier quoted, namely: "Dominic, please arrange for the funds to be forwarded to Drenmex Pty Limited." 109 On the same annexure B (the facsimile of 9 June 2000 from Mr Adler to Mr Williams) there is a handwritten note identified as Mr Doug Cubbin's handwriting, who was head of Accounts Payable and Management Accounting. Mr Cubbin instructs someone called "Catherine" to: "Prepare a manual cheque for $10M to these people. Pacific Eagle Equities Pty Ltd …" 110 Following Mr Howard's conversation with Mr Fodera, Mr Howard had a conversation with Mr Adler which at para 8 of his affidavit he quotes as follows: "8. On the same day, I spoke to Mr Adler over the phone with words to the following effect being spoken:

I said: 'Rodney, I've been asked to talk to you about the drawing of this cheque.' He replied 'Thanks Bill. I'd like you to make it payable to Pacific Eagle Equities Pty Limited and could you have that done today. The $10 million is for venture capital and short-term trading opportunities. We've started to purchase some shares to take advantage of the oversold situation in HIH. I need the money today for settlement.' I said: 'I thought, you know, that we were doing the paperwork as well.' He said: 'We're doing that in parallel at the same time. Minter Ellison is dealing with that issue. I have also had conversations with Ray that the trust may or may not purchase other venture capital investments that I was associated with such as dstore at cost to give them a chance to make money. The discussions with Ray have been ongoing for a period of time and Ray will look after the necessary internal procedures.' I said: 'I will check back with Dominic in regards to drawing the cheque today.' He replied 'Do that, but I need the money today'." 111 It is to be noted that Mr Adler acknowledges that there were "internal procedures" which "Ray will look after". That rather suggests that approval from Mr Williams, per se, would not be enough to satisfy those internal procedures, to the knowledge of Mr Adler. It should also be noted that Mr Ballhausen was the Chief Investment Officer for HIH. The $10 million cheque was an unusual cheque to be drawn by Mr Cubbin, who was the head of what was called "Accounts Payable Direct". This was a different stream to the "Investment Settlement Area" (Howard para 17, T, 163.35 - .45). As a consequence, it did not appear as an investment in "unlisted equities" in the HIH portfolio of Investments, until December 2000 (PX17). 112 Mr Howard thought that the payment had been allocated to "Loans Unsecured" and in particular "Property Loans" when it should have been regarded as an "Unlisted Investment" (T, 172.40 - .55). 113 Following his conversation with Mr Adler, Mr Howard had a conversation again with Mr Fodera. That conversation has some significance insofar as it bears on Mr Fodera's position. This is contained in para 9 of Mr Howard's affidavit, quoted below. "9. Following that conversation I spoke to Mr Fodera and words to the following effect were said: I said: 'Rodney wants the cheque drawn today. Did you know we had purchased some shares in HIH today and that the funds are required to settle those trades?' He said: 'Talk to Mr Williams about it - I don't want to know about it'."

If, as I do, one accepts that evidence, then Mr Fodera was aware on 15 June 2000 that "we", meaning HIH through Mr Adler, had purchased shares in HIH, to which some at least of HIHC's cheque for $10 million was to be applied. It is also to be inferred that Mr Fodera was seeking to distance himself from the HIH share purchase transaction, leaving matters to Mr Williams. 114 Following Mr Howard's conversation with Mr Fodera, Mr Howard describes the conversation he then had with Mr Williams in para 10 of his affidavit. "10. I then spoke to Ray Williams with words to the following effect being said: I said: 'I've spoken to Rodney and we've bought some HIH shares. And he wants the $10 million to settle the trades.' He said: 'Go ahead, draw the cheque but make sure Rodney follows through with the documentation'." 115 After Mr Howard's conversation with Mr Williams, he states that he gave the original of Annexure B (the facsimile of 9 June 2000) to Doug Cubbin, as earlier described, and who reported to Mr Howard and Mr Howard then said words to the following effect: "Please organise for this cheque to be drawn".

See affidavit of Howard para 11. 116 Following Mr Howard's conversation with Mr Cubbin the manual cheque for $10 million was drawn dated 15 June 2000 on an account with the National Australia Bank in the name of HIHC payable to PEE. It was signed by two employees of HIH and was delivered to Mr Adler; (TB, 1/96). 117 Mr Adler then sent a facsimile (TB, 1/101) to Mr Howard at HIH acknowledging receipt that day of the cheque for $10 million and stating that it would be duly banked and that "documentation is being prepared by Minter Ellison and a draft will be forwarded to you next week". That firm, I note, were to act for both parties, namely Mr Adler and PEE on the one hand and HIH on the other, although subsequently using different partners. Mr Adler states in his facsimile to Mr Howard: "The reason that we are seeking Minter Ellison to draw-up the legal documentation is that there are aspects like investor adviser's licence, related party transactions, etc, etc, that we are making sure are being properly provided for."

This shows Mr Adler was clearly aware of the related party provisions, viz s208 and following of the Corporations Act . 118 At para 17 of Mr Howard's affidavit, he states: "I am not aware of any other transactions similar in nature to this $10 million payment. It was an unusual cheque to have been drawn out of my department. In my experience it was unusual for any one-off investment like this not to go to the Investment Committee for approval." 119 He also quotes, in para 18 of Mr Howard's affidavit, Mr Adler saying words to the following effect: "Investment in fixed interest and cash and the like is an utter waste of time. We need to get into things that can make money because insurance is not good. What Ballhausen is doing is too conservative." 120 Mr Adler then said, according to Mr Howard, on another occasion words to the following effect: "I can't believe Ballhausen is investing in fixed interest at this time - a monkey could do that - it takes smart people to create something like One.Tel." 121 I now return to the evidence of Mr Westfield at para 7 of his affidavit of 22 October 2001. It relates to a telephone conversation with Mr Adler on 15 June 2000. It was prompted, I infer, by the earlier quoted announcement to the market by HIH that day about HIH's financial condition. After the point in the conversation where Mr Westfield had said words to the effect that "This announcement tells us nothing", he quotes Mr Adler as saying words to the following effect: "It doesn't say all that much, but now that the company has made this disclosure, which it says fully states its position, I feel that there is no restriction on me buying shares." 122 Mr Westfield then said that he said words to the effect: "Why would anyone want to buy shares in HIH? They will probably only go lower." 123 Mr Westfield quotes Mr Adler's reply was words to the effect: "I think they are undervalued. I think it is a good time to buy HIH. I have been buying shares through a trust associated with me." 124 Mr Westfield adds: "He may have said 'intend to buy' rather than 'have been buying'." 125 Mr Westfield then says: "I did not question Mr Adler about the nature of the trust which he referred to in his conversation, or its structure. I assumed it was a family trust as I understand it to be fairly common practice for investors to hold shares in trusts for tax reasons." 126 At para 9 he says: "About 2 days later Mr Adler called me back and said he had issued a substantial shareholder notice and, for the record, would fax it to me." 127 Mr Westfield then states that at no time did Mr Adler use words to the effect of: "I am buying these shares with my own money"

His evidence was that Mr Adler had said nothing to him about which entity associated with him was purchasing HIH shares, how that purchase was structured, or who was paying for or financing the acquisition of those shares (see para 10 of Mr Westfield's affidavit). 128 At the time of the conversations between Mr Howard and Mr Fodera, it appears Mr Fodera was, as usual, very busy (Howard T, 164.55) particularly because he was about to go overseas for a month on business. 129 There are other matters which are relevant to Mr Fodera's position. Thus, at the time of his conversations with Mr Fodera and Mr Williams, according to his evidence (in cross-examination) Mr Howard "understood" that the proposed payment of $10 million "was Mr William's deal" (T, 169.27). He had no recollection of that being said to Mr Fodera. He also understood that Mr Williams had been speaking to Mr Adler about it for some time (T, 169.32), that Mr Williams had made a decision about the transaction (T169.40), that Mr Williams had authorised the payment (T, 164.5; T, 169.43), that Mr Adler had told him that Mr Williams would look after the necessary internal procedures (Howard para 8; T, 166-167.32); Mr Howard acknowledged that if Mr Williams had spoken to him directly, he would have implemented the transaction (T, 164.10) and that he did not consider Mr Fodera's approval, either separately or in addition to Mr William's approval, was required in order for Mr Howard to "implement" the transaction (T, 164.15). However, the Plaintiff here seeks to draw a distinction between the approval necessary to implement such a proposal and the authority or at least subsequent ratification needed for it to take place at all, where (says the Plaintiff), Mr Williams had no authority to bypass the Investment Committee. I return to that later (see paras 461-2). 130 In addition, Mr Howard, without any express direction or reminder from Mr Fodera (Howard para 7) assumed that implementation of the transaction would include the preparation of "paper work" by HIH, (Howard para 8). Also, by the time that Mr Howard spoke to Mr Fodera the second time, Mr Howard expected that further documentation would be forthcoming from some source as part of the implementation of the transaction (T, 170.1) but that Mr Fodera was not responsible for the type of documentation (T, 170.10) which was to emanate from Minter Ellison. 131 Mr Williams, having been told by Mr Howard about the purchase of shares in HIH then, without further reference to Mr Fodera, directed Mr Howard to go ahead and draw the cheque (Howard para 10) and Mr Howard, also without any further reference to Mr Fodera, directed Mr Cubbin to do so (Howard para 11). 132 Mr Fodera was neither told that the payment was still going to be made nor was he provided with any further information concerning the transaction before he went overseas on Monday 19 June 2000 (D3X24) which was the next working day but one after Thursday 15 June 2000. In particular, Mr Fodera was not told, notwithstanding the additional information provided to Mr Howard by Mr Adler and notwithstanding the absence of the documentation contemplated by Mr Howard, that is documentation prepared for HIH, that the payment was going to proceed or had proceeded. The Plaintiff would say in response that Mr Fodera had no basis for assuming the transaction would not go ahead and needed no further confirmation of that. I would accept that inference. Mr Fodera did not do anything further after his second conversation with Mr Howard in relation to the proposed payment. 133 I have set this evidence out because it is relied upon by Mr Fodera as justifying the course he took or at least excusing it when it comes to any breach of the statutory duty under s180 (care and diligence). I will deal later with the pleaded breaches alleged to have been committed by Mr Fodera. The gravamen of the Plaintiff's case against him is that it is: "Not open to Fodera to say that it was 'impossible' to bring the proposed transaction to the attention of the Board or the Investment Committee when the evidence does not reveal any reason for thinking that the members of the Board and Investment Committee could not have been contacted and does not in any event reveal that Fodera made any attempt to delay the transaction until appropriate steps were taken. Indeed … his actions facilitated and progressed the making of the payment";

See Plaintiff's written submissions and reply dated 24 December 2001, para 40. 134 The thrust of the Plaintiff's case otherwise is that: "The evidence does not support the proposition that Williams had authority to make investment decisions as distinct from approving cheques to implement investment or other decisions. In any event, that Williams might have had authority is insufficient because, for the reasons given … Fodera was on notice of a proposed transaction which was improper and constituted an abuse of any authority that Williams might have had."

See para 16 of Plaintiff's written submissions in reply dated 24 December 2001. 135 Finally, the Plaintiff's basic proposition is that: "A payment, apparently by way of unsecured loan to or at the direction of a director, involving a share of profits agreed to be given to a company associated with the director, where the payment is apparently made for investment purposes but the Investment Department of HIH has been side-stepped and no Investment Committee or Board approval has been obtained, is improper unless adequate explanation of it is given. None of the directors involved - Adler, Williams and Fodera - gave evidence to seek to justify what was on its face an 'improper payment'."

See para 12 of Plaintiff's reply and the evidence of Mr Cameron, the Plaintiff's expert who described it, with some emphasis, as an "extraordinary transaction" explaining why he considered it to be so (T, 336.25): "On the basis of my experience the making available to one single non-executive director in an amount of $10 million without any guidelines and without reference to the Board, without the Board being made aware of it, that is an extraordinary payment, in my belief. If it had been $1,000,000 it would have been extraordinary." [at T, 336.35 - .40] 136 Mr Fodera takes issue with that assessment; see Third Defendant's written submissions dated 20 December 2001, at para 142 and following. 137 When Mr Cameron asked what was the "cut off" (in terms of the size of the payment) he said: "I don't know. I think in good practice there isn't a question of materiality in a payment of this nature". [T, 336.45] 138 The Plaintiff relies upon Mr Howard's unchallenged evidence that Mr Fodera knew that the payment was required to enable the purchase of HIH shares to be paid for, (Plaintiff's reply para 14). 139 Finally, the Plaintiff contends that Mr Fodera was: "Involved because he instructed Mr Howard to effect the payment and although he tried to wash his hands of it later, it was in breach of his duty to do so because he was on notice that an improper transaction was proceeding and doing so on his instructions."

(Para 15 of Plaintiff's reply). 140 Mr Fodera emphatically denies any wrong-doing, for reasons developed in the written submissions to which I will return. He gives no evidence as to his account of what happened. I have referred in outline only to his and ASIC's competing contentions as they pertain to the assessment of that evidence and I will deal with their resolution later (paras 462 and following). However, I am in a position now to make a finding as to the events of 15 June 2000 as recounted by Mr Howard.

CONCLUSION 141 I accept the evidence of Mr Howard (General Manager Finance of HIH) as to the conversations he recounts and the order of events of 15 June 2000. Those events concern the way in which the payment of $10 million was effected, including the two conversations that occurred with Mr Fodera, the conversation with Mr Adler, and subsequently with Mr Williams and then Mr Cubbin. I am satisfied on the evidence that:

(a) as of 15 June 2000, Mr Adler was fully aware of the $10 million investment, having instigated it, and of the proposed investment in HIH shares as well as its later application in the kind of unlisted technology investments he later caused to be made; (b) it was a matter of indifference to Mr Fodera which Adler associated company was to be used for the $10 million investment, whether Drenmex or another, such being (as would be apparent from the letter of 9 June 2000 upon which Mr Williams appended his instructions to Mr Fodera) for an investment management proposal involving Mr Adler. Accordingly Mr Fodera on 15 June 2000 instructed Mr Howard to talk to Mr Adler to draw a cheque for $10 million instructing that Mr Ballhausen be bypassed "because it will be too hard" so as thereby to facilitate the payment and avoid a potential impediment in Mr Ballhausen; (c) Mr Williams was aware during that day, as was Mr Fodera, that some HIH shares had earlier been bought that day (15 June 2000) via Mr Adler which were to be paid for out of the $10 million, though Mr Williams' awareness of that as a matter of future intention is likely to have preceded 15 June 2000 (see (f) below); (d) Mr Fodera sought to distance himself from that transaction treating it as Mr Williams' deal; (e) none of Messrs Adler, Williams or Fodera made any steps towards getting Investment Committee or Board approval (with Mr Adler acknowledging the existence of "internal procedures" which he said he left to Mr Williams "to look after") and each were content to proceed, with documents to follow after; (f) it may be inferred that Mr Adler had had prior discussions with Mr Williams about the trust, including in particular the intended purchase of shares in HIH.

Completing the HIH share purchases 142 Returning to the purchases effected that day of shares in HIH, as a result of the instructions from Mr Adler to Foster Stockbroking on the morning of 15 June 2000, 1,873,661 shares in HIH were purchased at a price of $1.0062. These shares were purchased on behalf of PEE on 15 June 2000 (TB, 1/106). Further purchases were made over the fifteen days following 15 June 2000. They too were acquired for and on behalf of PEE and as a result of orders placed by Mr Adler with the stockbrokers, as follows at prices with the trust purchased ranging from $1.00 to $1.03 per share (TB, 252):

On 16 June 2000, 951,339 shares; (TB, 108) On 19 June 2000, 425,000 shares; (TB, 109) On 20 June 2000, 425,000 shares; (TB, 126) On 21 June 2000, 75,000 shares; (TB, 142) On 22 June 2000, 79,545 shares; (TB, 150) On 23 June 2000, 50,000 shares; (TB, 155) On 30 June 2000, 45,000 shares; (TB, 179) 143 There is some dispute as to whether the last purchase occurred later on 5 July 2000 (TB, 179) which is a contract note dated 30 June 2000 for settlement 5 July 2000). But in my judgment nothing turns on that. In any event, all purchases were made with no proper documentation as between HIH/HIHC on the one hand and the Adler interests or PEE on the other, with the AEUT trust deed not completed until 7 July 2000 (TB, 205) nor subscribed for by HIHC until 12 July 2000 (TB, 208). 144 I note that it appears "not agreed" by the Defendants that the foregoing purchases were made for or on behalf of PEE as a result of orders placed by Mr Adler with stockbrokers, though it may be the extent of the disagreement is only as to the last purchase date. However, the evidence including contract notes (see for example TB, 108), correspondence (see for example TB, 156) and s205 notices (see for example TB, 157) is clear enough that such shares were so purchased.

CONCLUSION 145 Shares in HIH totalling 3,924,545 and costing an aggregate (including stamp duty and brokerage) of $3,991,856.21 were purchased out of the $10 million from 15 June 2000 to 30 June 2000 (the last completed by 5 July 2000 at the latest). They were purchased for and on behalf of PEE as a result of orders placed by Mr Adler with stockbrokers. They were purchased at prices ranging from $1.00 to $1.03 per share. They were purchased before any trust deed was executed or constituted by the subsequent subscription for units; both only took place later on 12 July 2000 after all share purchases were completed.

Notification by Mr Adler to ASX of HIH share purchases 146 As a result of the acquisition of HIH shares by PEE, Mr Adler notified the Australian Stock Exchange by s205G notifications under the Corporations Law between 19 June 2000 and 6 July 2000 and well before the last date for doing so, of a change in his relevant interests in HIH (TB, 114/115, 134-132, 145-146, 153-154, 158-159, 162-163, 168-169). He had up to 14 days to do so. 147 It will be noted that s205G of the Corporations Law, pursuant to which the relevant notifications were made, require of a director not only notification of the change in relevant interests in securities in the company of the director concerned, but also "the circumstances giving rise to the relevant interest" (see s205G(2)). Under that heading, each of the relevant notifications was in the form "purchase of [number] shares at [$] per share on [date] in an on-market transaction". 148 In that brief description, there is no further explanation of how Mr Adler has a "relevant interest" in the shares PEE has acquired, no mention in particular of PEE being the acquirer as trustee and then how Mr Adler, by reason of his interest in PEE and the trust thereby has his relevant interest. That PEE has been financially assisted by HIH or HIHC is not disclosed either, but that may fairly be said to fall outside the circumstances giving rise to the relevant interest. However, the nature of Mr Adler's relationship to PEE and his interest under the trust are clearly central to the circumstances giving rise to the relevant interest. Indeed if prior to the formation of AEUT, the shares (as the First Defendant suggests) are held on bare trust for HIHC, then it may be argued that Mr Adler had no relevant interest at all, though his interest in PEE probably still suffices for such interest. In saying that I do not of course concern myself with the question whether s205G was complied with, save insofar as it bears on whether Mr Adler set about conveying a false impression. As to that, I would infer that Mr Adler wished to convey to the Market, as he did to Mr Westfield, the false impression that he was purchasing the shares on his own behalf or on behalf of family interests through some related trust, but certainly not that he was acting on behalf of HIH as a beneficiary of and real funder of such trust. That is evidence going to his real purpose. 149 In relation to the s205G notices, in each case it is to be observed that the notice was given well before expiry of the fourteen days required by the legislation. The Plaintiff relies on this fact for it to be inferred, coupled with other evidence to that effect, that Mr Adler was anxious for the market to know of the purchases as being his or his family's purchases, and wanting to do so contemporaneously with them being made, in so far as he was giving notice of his purchases early. That action was calculated to drive the HIH price up, or at least inhibit any downward slide, thus making his cost of purchase higher than it might otherwise have been. That suggests price stabilisation rather than profit was Mr Adler's real purpose. His real aim, according to the Plaintiff, was to ensure that the price of HIH shares would not fall or at any rate, would fall to a lesser degree than it would otherwise have done. That purpose would be served by the "vote of confidence" of a director buying up HIH shares, so augmenting his personal holding. While it might be argued that price stability was also in the interest of HIH, that could not be reconciled if it be, as it was, at the cost of the "quick profit" that was Mr Adler's avowed purpose. See paras 313 to 320 of this judgment and the Schedule of Events (prepared "having made appropriate enquiries", inferentially including of Mr Adler) attached to Mr Cohen's letter of 22 December 2000 para 11 (TB, 267) which here operates by way of admission. 150 I turn in that context also to Mr Adler's exchanges with another journalist, Mr Mellish, who was at the time deputy editor of the Financial Services Section of the Australian Financial Review. In that role he was responsible for writing stories about the financial sector. Prompted by Mr Mellish reading Mr Adler's s205G notice, he telephoned Mr Adler's secretary and eventually spoke to him. Mr Adler in answer to the question why did he buy the shares said: "The shares were undervalued in the long term. HIH have fallen an awful lot because of tax loss selling because it has been a hideous under performer. I think there will be a weakness for another week or two and that will give me a chance to get some volume. And I am fairly confident about the medium term outlook of the company. I think it's a solid medium term acquisition." 151 He then confirms that he has bought more shares since that statement. The conversation is elaborated in para 18 of Mr Mellish's statement of evidence. 152 The Plaintiff submits that Mr Adler must have known that this would be likely to be reported in the press, as it in fact was (TB, 121). Subsequent to this conversation on 19 June 2000, there were further conversations by Mr Mellish with Mr Adler on 20 June 2000, to which paras 23 and 25 of Mr Mellish's statement of evidence attest. Thus, at para 25 Mr Adler is stated as concluding: "I think there is value in medium to long term in HIH. I think the company is cheap. This is off the record. I don't want to be quoted." 153 Later, on 20 June 2000, there was a further telephone conversation with Mr Adler and Mr Mellish. In the course of that statement he acknowledged that the results "are going to be lousy" but his principal message was: "HIH has been oversold. … It has great potential but there are significant management issues that could be addressed…"

He was then asked: "How committed to HIH are you?"

To which he is said to have replied: "I want people to know I am a committed insurance person. People think I have sold out and I've got my money and gone. That's not true. I am making a number of statements about buying these shares. I believe in the company. I'm putting my money up which shows I believe in the industry. I think the company can be a billion dollar company again."

Mr Adler, of course, had put none of his money up, or that of his family's. 154 Then follows clarification about what Mr Adler is willing to be quoted about in which he makes it clear, according to Mr Mellish, that he is happy to be quoted about: "Just buying shares and your commitment to the industry".

But: "The stuff about Ray Williams is completely off the record." 155 Again, it can be seen that there is no mention, at all, that Mr Adler is not using his own money to buy the HIH shares but using HIH's money. In fact to the contrary, he says, "I'm putting my money up …". 156 These statements were published the next day in an article by Mr Mellish (TB, 147). He confirms (para 31) that at no occasion in the course of his several conversations with Mr Adler on 19 and 20 June 2000 "was there any mention of an entity called Pacific Eagle Equities Pty Limited ("PEE"), the Australian Equity Unit Trust ("AEUT") or any other trust". 157 It is the Plaintiff's case that Mr Adler, in making it publicly known that he was buying HIH shares while he was doing so and by his conversations with Mr Westfield and Mr Mellish as financial journalists, intended to have a beneficial or supportive effect on the HIH share price. That intention was served by Mr Adler communicating the misleading impression that it was his money that was being used, with no mention of HIH's funding, save later to Mr Brent Potts. My conclusion is not altered by the evidence given by Mr Potts, a stockbroker acting for Mr Adler, that: "The market would take the same impression if the company was buying shares in itself as if Mr Adler, or one of the other directors was buying shares in it; it would gain the confidence from either." [T, 650.15]

[Note that the transcript refers not to " confidence" but to " confers " but clearly the former was what was said at T, 650.15.] 158 Mr Potts subsequently acknowledged in re-examination that HIH purchasing might also be "seen as an act of desperation" (T, 651.2). Moreover, were the market to have learnt that it had been misled into thinking that it was Mr Adler purchasing when in fact he was using HIH's money all along, a reasonable inference I would draw, as a matter of common sense, is that the market would rightly question why Mr Adler was not risking his own money. It would the more likely conclude, as Mr Potts acknowledged as a possibility in terms of perception, that the buying was an act of desperation rather than of confidence. 159 Mr Pott's evidence, given by affidavit for the First Defendant on 23 November 2001, is also relevant as regards whether Mr Adler's purpose in causing PEE to purchase and in causing the market to be given the impression that it was his money that was being used, was to shore up the HIH share price for the benefit of Mr Adler's own company's very substantial shareholding in HIH as the Plaintiff alleges; see TB, 5/2034, 2031 and Statement of Claim para 4). 160 Mr Potts attests to a telephone call he received on 20 June 2000 from Mr Adler, which I quote below: "Mr Rodney Adler and Adler Corporation Pty Limited are clients of Southern Cross Equities. On 20 June 2000 I received a telephone call from Mr Adler and we had a conversation during the course of which words to the following effect were spoken: Adler: 'Brent, I think HIH is underpriced and I am looking to do a short term trade in them. I want to buy 250,000 shares in HIH at $1.02. It's for a new account. I'll fax the details to you.' Potts: 'OK, Rodney but I'll need an account name now and details as soon as possible. Can you give the name to me now?' Adler: 'Sure, it's for a new company named Pacific Eagle Equities. It's a venture capital vehicle which has been set up principally with HIH.' Potts: 'If HIH is an investor, can it buy HIH shares?' Adler: 'Yes, it's a trust arrangement and we've had legal advice that we can buy HIH shares'." 161 Here it is apparent that Mr Adler is more frank with Mr Potts, who is his stockbroker, than he was with Mr Mellish and Mr Westfield, in that he did state that HIH was involved in the new company PEE, indeed was principally so involved. But he fails to tell Mr Potts that the market will not be told HIH is to be the investor, albeit indirectly through the trust. 162 Mr Pott's evidence is also significant for another reason. His evidence was that Mr Adler's orders were unable to be completed because there were insufficient sellers at the relevant price, that is to say more buyers than sellers (T, 636.10; T, 636.8). Mr Pott's evidence was that the market price would not fall if there were no unsatisfied sellers (T, 636.20). The downward trend of the share price since the beginning of the year was in fact altered and reversed on 15 June 2000 (TB, 104A-E). Mr Pott's acknowledged in cross-examination that Mr Adler's purchasing in the period from 15 June through to 30 June was likely to have had an influence on the level of the market price in terms of either preventing it falling or increasing it, though he said it was also possible that the market may have remained constant at $1.02; (see T, 639.6 - .18). Mr Pott's acknowledges that the: "Other possibility is a real one, namely that the purchasing of PEE on the instructions of Mr Adler had a positive effect on the share price." [T, 639.18-.22] 163 The Plaintiff's contention is that Mr Adler's purpose in causing PEE to purchase and then causing the market to be given the impression that it was his money that was being used, was to shore up the HIH share price for the benefit of his own company's very substantial shareholding in HIH of some 5,500,000 shares; (see TB, 5/2034, 2031). 164 In support of that contention, the Plaintiff relies not only on the earlier conversations with Mr Mellish and Mr Westfield, but on the following further facts and matters:

(i) Mr Adler was an active share trader and undoubtedly had the means to purchase HIH shares for himself (PX14 and 15). Yet neither he nor Adler Corporation purchased any HIH shares at all after July 1999 (TB, 5/2034, 2031). (ii) No contrary explanation, subject to testing, was given in the witness box by Mr Adler that he caused PEE to buy the HIH shares because he believed a short term profit could be made, such being in support of an inference otherwise available to be drawn as to Mr Adler's real purpose. (iii) Also suggesting that resale at a profit to AEUT was not the purpose of PEE purchases is Mr Pott's evidence that the market price of HIH was falling progressively prior to 15 June 2000 indicating a distinct lack of market confidence in the stock (T, 650.50). (iv) Moreover, PEE shares were not sold by Mr Adler when the price rose to $1.21 on 11 July 2000 and a profit of twenty percent could thus have been realised (TB, 1/104A-E). Why did not Mr Adler take the "quick profit" it is asserted he was seeking? It is said in Annexure E ("Schedule of Facts") to Minter Ellison's advice to the Board of HIH of 29 November 2000 (TB, 248-252F): "Mr Adler made the decision to invest in HIH shares as he considered them to be undervalued. In his view, there was no real reason for the recent fall in the share price and he considered that it was likely that the share price would bounce back. He saw the fall in the share price as a good trading opportunity and expected to make a quick profit and boost the funds of the trust." I should point out that Minter Ellison preface their advice to the HIH Board by the words "Having made appropriate enquiries" and they refer at para 2.2 to having interviewed both Mr Williams (21 November 2000) and Mr Adler (24 November 2000). (v) Objectively speaking, Mr Westfield was right when he told Mr Adler that he was "mad" to be buying HIH shares at that time (T628.10-629.5) and when Mr Westfield said in evidence that: "The overwhelming mood in the market seems to be negative" [T, 628.30].

(vi) Moreover, Mr Adler's friend, Mr Le Souef, had a similar reaction (affidavit para 4) but was told, or at least given a hint, as was Mr Adler's broker, Mr Potts, that Mr Adler was not really buying them for himself; (see T, 649.1). It is a plausible explanation that Mr Adler was doing this to avoid embarrassment for himself and his credibility in pursuing what would otherwise be seen as a disadvantageous course. In the case of Mr Le Souef it may also have been so that Mr Adler's purchases should not be seen as an encouragement to him to buy. (vii) Mr Mesley gave evidence for the Plaintiff in his affidavit of 27 September 2001 as a stockbroker, (paras 7) that: "In my experience there is no better indication as to the probable success of a stock than the people who are insiders in the company, such as directors and executives, putting their own money into it".

Adding (para 8) that: "Normally, public knowledge that an "insider" has recently bought shares will increase demand for the shares with a consequent increase in the share price, even more so where the size of the investment by the "insider" is substantial." While Mr Mesley's views were attacked, I agree with the Plaintiff that the attack was essentially confined to para 10 of his affidavit. That related to the question whether he was in a position to draw any conclusions as to what impact had in fact occurred on the share price from Mr Adler's buying where Mr Mesley acknowledged that he had made no detailed analysis of the share price. (viii) The evidence of Mr Potts is consistent with the views of Mr Mesley in recognising the importance to the market of knowledge that an insider was buying (see para 16 of his affidavit and the earlier mentioned evidence he gave at T, 650.7 - .17). (ix) The contrast is marked between what Mr Adler told Mr Mellish and Mr Westfield where each were left with the clear understanding that it was Mr Adler's own money that was being used; compare his reference in his letter to Mr Wolfe of 28 June 2000 to: "The fund that I manage for HIH" This was in relation to the PEE/ Ensor loan discussed later (para 707 and following; see TB, 4/1223. (x) On 28 June 2000 an article by Mr Westfield appeared in The Australian (TB, 164) in which it was said that the share price was only being kept above $1.00 by the support of Mr Adler and that HIH was dependent upon Mr Adler to stave off a slide in the stock and in confidence in HIH. It can be accepted that these were fair and accurate inferences from what was now known publicly and from what Mr Adler had told Mr Westfield on 15 June 2000. However, unbeknown to Mr Westfield, the truth was, however, that the support for the share price was coming from HIH itself and not Mr Adler. I agree the article illustrates how detrimental to HIH it would have been if it had become known in the marketplace that Mr Adler was not in fact prepared to spend his own money to purchase HIH shares but HIH was having to prop up its own share price with its own funds and doing so on a covert basis. (xi) As the later events of September 2000 showed, when finally Mr Adler caused AEUT to exit its unsuccessful investment in HIH, he made sure he sold his own (Adler Corporation) holding first, thus in a blatant preferment of his own interest over AEUT's reducing the loss for his own holding and increasing the loss for AEUT's (see para 277 and following); I note that his own sale of HIH shares is not one of the material facts or Particulars relied upon. The date of sale of HIH shares is pleaded at para 41). I would incline to the view that this order of sale is merely evidence supportive of Mr Adler's real purpose, which was as pleaded. But even without that fact of the order of sale, if it be excluded as an unpleaded material fact, that purpose can be readily made out from the material facts and Particulars pleaded and the evidence supporting them, as earlier identified. (xii) Also relevant is the expert evidence of Mr Cameron for the Plaintiff who in his affidavit of 26 September 2001 (at para 11 and 17(a)) concludes that if the proposal for the payment had been put to the Board and had included an indication that some of the funds were to be used to buy shares in HIH, then: "A reasonably careful and diligent director of HIH or HIHC would not have voted to approve the payment for the reasons set out in paragraph 17(a) and (c) below." Paragraph 17(a) states: "The giving of that assistance was materially prejudicial to the interests of HIH and HIHC because: (a) If the payment and its purpose had become known to the public, then it would have been likely to undermine public confidence in the companies. Public knowledge of the transaction would have been likely to give rise to the perception that the company was engaging in illegal or improper activity in order to support its share price." While Mr Cameron's evidence was challenged at T, 301.50 to 302.30) on the basis that his proposition was " guesswork " , I consider that Mr Cameron, as an experienced company director and auditor, was well able to express an opinion on the likely affect on public confidence in a company buying its own shares in a covert way. I would accept Mr Cameron's evidence on this matter as consistent with (a) the strictures against companies giving such financial assistance, (b) the related doctrine of maintenance of capital, one aspect of which precludes a company owing its own shares, though here the first was carefully framed to circumvent that, (c) the lack of public disclosure of HIH's role, and (d) the fact that a director, Mr Adler, also stood to benefit.

CONCLUSION 165 Mr Adler's purpose in causing PEE to purchase shares in HIH, giving the market the impression that it was his money that was being used, and passing up the opportunity to sell at a profit on 11 July 2000, was to maintain or stabilize the HIH share price, or prevent it falling by an even greater amount, doing so for the benefit of his own company's very substantial shareholding in HIH and not because in reality he sought a "quick profit" for AEUT and indirectly HIH by so doing, which was the purpose attributed to him (see TB, 268 containing "schedule of events", para 11 accompanying letter from Mr Cohen to ASIC dated 22 December 2000 and said by Mr Cohen to have been prepared "having made appropriate enquiries"). Indeed Mr Adler's actions showed that he forewent the opportunity to make such "quick profit", deliberately passing by the opportunity to sell at a profit around 11 July 2000 and maximising the ultimate loss for AEUT (and therefore HIH) by selling his own interest's shares in HIH first, in a falling market.

Minter Ellison letters of advice to Mr Adler of 28 June 2000 and 5 July 2000 166 The foregoing analysis is not affected by the Minter Ellison letters of advice to Mr Adler (TB, 170 and 176) above referred to. I should add that it is notable that HIH did not get any independent advice until at the earliest November 2000, and then the advice obtained was from another partner of Minter Ellison. In saying that, I am not to be taken as suggesting that that partner did not genuinely turn his mind to an independent consideration of HIH's interests. Nonetheless, in the nature of things, that represents a lesser gradation, in terms of independence. This is when one partner is in effect reviewing the advice of another, albeit from a different standpoint and with more facts, though as it turned out, the facts obtained or proffered were less than adequate. See later in this judgment at paras 286 and following, concerning Minter Ellison's later advice through another partner, given by letter dated 29 November 2000. 167 It is clear from reading each letter that it does not give an unqualified imprimatur to the transaction. Nor does it expressly refer to any actual transaction or even to a generic purchase by the trust, of shares in HIH. It points to various issues that would arise about which Mr Adler would have to satisfy himself - for example, in relation to the related party issue that the terms were such as would be reasonable if the parties were dealing at arm's length. Also in relation to financial assistance for the purchase of a company's own shares, that there be no material prejudice to the company; (see paras 4.2 and 4.3 of the letter at TB, 174). 168 This letter also makes it clear that at 28 June 2000 (which was when most of the HIH shares had already been purchased) no final choice of structure had yet been made, much less had a trust been set up. The letter canvasses a number of possibilities, including but not limited to a trust. 169 The terms in which the letter is written suggest that Mr Adler had been less than frank with the solicitors in not informing them that large parcels of HIH shares had already been purchased before any structure existed; (see in particular TB, 170 para 1.1). It is a fair inference that Mr Adler did not tell them this, refraining from doing so out of an appreciation that the purchase of HIH shares by use of HIH funds prior to the establishment of the protective trust structure within which the shares were to be held, would have been likely to cause legal difficulties, for example, in relation to the prohibition in a company dealing in its own shares. Indeed, if the First Defendant's submission were correct, that the monies were made available not by way of an unsecured borrowing prior to the trust being set up, but on a resulting trust with the HIH shares thus held absolutely for HIHC, that it must equally follow that the shares so purchased were acquired in breach of both s259A and s259C of the Corporations Law. While no doubt the Defendants would refer to s259F(1) in so far as it confirms that while a contravention occurs, the contravention does not affect the validity of the acquisition, nonetheless it is much less likely that Minter Ellison would have given a favourable opinion on legality if these matters had been put before it, and in particular the fact that the share purchases had already started to occur. 170 The further letter that Minter Ellison wrote on 5 July 2000 (TB, 176) is subject to similar comment to the earlier letter, namely that the letter does not in reality sanction the transaction but points to issues about which Mr Adler would need to be satisfied including, importantly, as to conflicts of interest. Clearly, Mr Adler's purpose involved him in a conflict of interest, or more accurately a conflict between his self interest and his duty to HIH, HIHC and PEE. Thus Mr Adler was pursuing his own self-interest in supporting the share price of his own 5,500,000 shares in HIH even at the cost of any profit to HIH from the AEUT purchase, whereas HIH's interest (according to its report to ASIC on 22 December 2000) lay in making a quick profit out of such a transaction. So it follows that supporting the HIH share price was not to be at the price of losing such a profit. As we know, Mr Adler preferred his own interest by not taking that profit on 11 July 2000. The likelihood of any durable profit opportunity thereafter was belied by the facts of HIH's known "lousy" results and its potential need for more capital to satisfy future APRA requirements as well as the falling trend in share price. Also as it emerges (see paras 277 and following) when finally Mr Adler did cause AEUT to sell the HIH shares on 26 September 2000, doing so at a substantial loss, at 48 cents per share, he made sure he had first sold the bulk of his own shares. He did so at a much higher price (85 cents going down to 49 cents per share), doing so between 13th to 25 September 2000 and in a rapidly falling market. All of this goes to Mr Adler's true purpose. If his purpose were a quick profit, as Minter Ellison earlier described it, one would expect that if such profit were unavailable after 11 July 2000, he would at least have sought to minimise AEUT's loss. On the other hand what he did do in selling his own shares first, bears out that his real purpose was to maximise the value of his own HIH holding even at the cost of AEUT and HIH.

Related Party Benefits without shareholder approval SECOND LEGAL ISSUE 171 The other significance of the characterisation of the payment concerns the second legal issue. It is whether that payment of $10 million amounted to the giving of a "financial benefit" to each or any of PEE, Adler Corporation and Mr Adler, in breach of s208 of the Corporations Act or whether liability thereunder is avoided, because the transaction was on "arm's length terms". Thus elaborating, the first question is whether "a financial benefit is given" within the meaning of s229 of the Corporations Act (in relation to the prohibition on related party benefits without member approval). The second question is whether the exception for arm's length terms in s210 of the Corporations Act is made out which provides that: "Member approval is not needed to give a financial benefit on terms that: (a) would be reasonable in the circumstances if the public company or entity and the related party were dealing with at arm's length; or (b) are less favourable to the related party than the terms referred to in paragraph (a)." 172 Leaving aside to begin with the terms of the AEUT Trust Deed entered into on 7 July 2000, and concentrating on, to use the words of para 62 of the Statement of Claim "The payment of $10 million by HIHC to PEE on 15 June 2000", the starting point is the characterisation of that payment. The First and Fourth Defendants submit that the only available finding is that the payment of $10 million on 15 June 2000, with which the shares in HIH were purchased in the period 15 June 2000 to 5 July 2000, was, with the shares purchased, held on trust by PEE for HIHC absolutely as the sole beneficiary; (see paras 5 to 11 of the First Defendant's written submissions of 19 December 2001). The Plaintiff's preferred characterisation is that the payment was made by way of an interest free unsecured loan though submitting that the same result would follow with the alternative characterisation. The Plaintiff thus puts the two characterisations in the alternative. It contends that in either case

(a) a "financial benefit" was given within the very wide terms of s229 (see below) and (b) that the exception for a financial benefit on arm's length terms (within s210) is not made out. 173 The Defendants' characterisation of the payment is based on this reasoning. The initial correspondence on 9 June 2000 from Mr Adler to Mr Williams, in referring to a loan from HIH to Drenmex, was overtaken by the circumstances which prevailed by 15 June 2000 whereby (it is said) any idea of a loan was replaced by an intention to create a trust, or otherwise the circumstances gave rise to a resulting trust such that the $10 million and any HIH shares acquired were held absolutely for HIHC. On 15 June 2000 Mr Howard's evidence, which I have accepted, is that Mr Adler said to him in connection with the payment of the $10 million: "I have also had conversations with Ray that the trust [emphasis added] may or may not purchase other venture capital investments that I was associated with such as dstore at cost to give them a chance to make money." 174 There was here no reference to any relationship of lender and borrower in that, or any other, conversation referred to in Mr Howard's affidavit. Moreover, the receipt voucher for the $10 million payment dated 15 June 2000 refers to the amount being banked in the account of "Pacific Eagle Equities P/L" in respect of "units"; see First and Fourth Defendants' tender bundle D1X23, vol 2, guide card "HIH Investments/AEUT", p188. Similarly, Adler Corporation's facsimile to Minter Ellison on 19 June 2000 makes a request for Minter Ellison to: "Prepare a Unit Trust Deed for the Austral Equities Unit Trust. The trustee will be Pacific Eagle Equities Pty Limited";

(D1X23, vol 2, guide card "HIH Investments/AEUT" or at p190). 175 Then there were the conversations between Mr Adler with Mr Westfield, and Mr Adler with Mr Le Souef, to which I have earlier made reference, during June 2000. In those conversations Mr Adler expressly referred to the investment vehicle as a trust. Similarly in his conversation with Mr Potts on 20 June 2000, Mr Adler referred expressly to the venture capital vehicle as a trust; (see Mr Pott's affidavit para 5, T, 639.45 - .49). Minter Ellison's memorandum of fees indicates that they began fee earning work in relation to the AEUT on 13 June 2000; (D1X23, vol 2, guide card "HIH Investments/AEUT" p199). 176 If one then accepts that trust characterisation and the consequences that the Defendants say follow, such that the shares in HIH purchased with that money were held on trust by PEE for HIHC as the sole beneficiary until AEUT was properly constituted by the issue of units, it must follow that HIH would for that time be (indirectly) holding shares in itself through HIHC, an interposed wholly owned subsidiary. This in turn would have the consequence that any transfer of share to HIHC would be void pursuant to s259C, were it to occur. Moreover s259B would preclude either HIH taking any security over "shares … in itself" or HIHC taking any security over the shares in HIH being "the company that controls it". Until that occurs, there would be no contravention of s259A and following, which preclude self-acquisition and control of shares. There is the further unusual feature that HIHC is financing the acquisition of its parent's shares. Leaving aside whether the prohibition on the giving of financial assistance in s260A is thereby applicable, such a transaction hardly meets the description in s210 of "arms length terms". That is to say it is hardly on terms that "would be reasonable in the circumstances if the public company or entity and the related party were dealing at arm's length". Even assuming the propriety of the overall transaction and accepting that a financial benefit is given, one would not consider it "reasonable" (within s210) for the transaction to involve a purchase of shares in the parent HIH, to be paid for by its wholly owned subsidiary HIHC, without any legal documentation whatsoever nor any prospect of security. If (as the Defendants say) the general law of trusts may be invoked to confer remedial protection in this unsatisfactory state of affairs, from HIH/HIHC's viewpoint, that is hardly to render the terms of any financial benefit "reasonable" in any arm's length sense. In particular, HIHC could never have obtained a valid transfer of the shares, (see s259C). Moreover s259B would preclude taking security over the relevant shares further to protect its interest. 177 None of this analysis depends upon a contravention of s260A of the Corporations Act where the issue is whether "giving the assistance does not materially prejudice" the interests of the company or its shareholders, or the company's ability to pay its creditors. But even if there were no contravention, the fact that financial assistance was thereby provided goes to the reasonableness of the terms and thus whether arm's length within s210(a). 178 Finally, I should add that s 210(b) could hardly apply, since the actual terms here are self-evidently not "less favourable" to the related party (PEE) than the arm's length terms of s210(a). 179 That still leaves further argument that the First and Fourth Defendants mount, namely that no "financial benefit" was in fact provided, having regard to the definition in s229 of the Corporations Act and the characterisation of the relevant payment. In short, the argument put by the Defendants is that as the HIH shares purchased by PEE were at the time of each purchase held absolutely on trust for HIHC, then HIHC ex hypothesi gets an asset worth no less than was paid for it, judged as at the date of each purchase. 180 Section 229 provides as follows: " 229 Giving a financial benefit (1) In determining whether a financial benefit is given for the purposes of this Chapter: (a) give a broad interpretation to financial benefits being given, even if criminal or civil penalties may be involved; and (b) the economic and commercial substance of conduct is to prevail over its legal form; and (c) disregard any consideration that is or may be given for the benefit, even if the consideration is adequate. (2) Giving a financial benefit includes the following: (a) giving a financial benefit indirectly, for example, through 1 or more interposed entities; (b) giving a financial benefit by making an informal agreement, oral agreement or an agreement that has no binding force; (c) giving a financial benefit that does not involve paying money (for example by conferring a financial advantage). (3) The following are examples of giving a financial benefit to a related party: (a) giving or providing the related party finance or property; (b) buying an asset from or selling an asset to the related party; (c) leasing an asset from or to the related party; (d) supplying services to or receiving services from the related party; (e) issuing securities or granting an option to the related party; (f) taking up or releasing an obligation of the related party." 181 Clearly enough, "financial benefit" is to be given the broadest of interpretation. Importantly, "economic and commercial substance of conduct is to prevail over its legal form". Any consideration for the financial benefit must be disregarded, even if adequate. The strictures of Pt 2E.1, in requiring member approval for related party benefits, requires therefore a wide meaning to "financial benefit", with s210 providing the gateway out. 182 The Defendants argue that from 15 June 2000 it was only the bare legal title to the sum of $10 million and the shares bought with part of that sum, which were held by PEE. The entire beneficial interest was held by HIHC. They say there cannot therefore be any financial benefit conferred on PEE, Adler Corporation or Mr Adler on 15 June 2000 by reason of the $10 million payment made that day. But that cannot be right. First, it was intended from the outset, before any purchases took place, that Mr Adler or interests associated with him, would have a 10% interest. That this started with Drenmex, subsequently replaced by PEE, is nothing to the point. Clearly Mr Adler never forewent that 10% interest. Second, there is the financial benefit in a practical sense of PEE having control over the sum of $10 million and legal title, even if bare, to the shares. That must be a real benefit looking, as s229 directs, to economic and commercial substance, even if as the Defendants' contend the beneficial interest resides with HIHC. Remember even on that hypothesis, this is in circumstances where a transfer to HIHC of the HIH shares would have been precluded, as would any protective charge. Clearly the terms of s229 are wide enough to embrace these kind of benefits as "financial benefits".

CONCLUSION 183 The payment of $10 million by HIHC to PEE on 15 June 2000 amounted to the giving of a "financial benefit" to each of PEE, Adler Corporation and Mr Adler within the meaning of s229 of the Corporations Act. Further, the terms of that financial benefit so given were not, within the meaning of s210 of the Corporations Act, what it defines as "arm's length", so as to be saved by that exception in s210. As a result both HIH, and HIHC being an entity which it controlled, contravened s208 of the Corporations Law (with equivalent result under the Corporations Act). That result follows even on the Defendants' characterisation of the relevant payment as giving rise to a trust over the shares in HIH acquired out of the A$10 million, as well as over the balance of the A$10 million. It would clearly arise if the payment of $10 million were characterised as an (undocumented) unsecured borrowing with no provision for interest. Finally, I am satisfied that the Plaintiff's pleadings in paragraphs 61 to 64 have sufficiently identified the elements required to be established by the Plaintiff to found this conclusion, which is amply supported by the evidence. That result is not altered by the earlier pleading in relation to the formation of AEUT, to be found at paras 33 to 40 of the Plaintiff's Statement of Claim.

Constitution of AEUT 184 I need now to turn to the constitution of AEUT on 7 July 2000 and the implications of that as it bears on the foregoing matters. 185 On the Plaintiff's alternative reasoning, pleaded by the earlier mentioned paragraphs, the terms of the AEUT and HIH's subscription for one B class unit for $10 million: "40.1 Would not have been reasonable in the circumstances if HIH or HIHC and PEE were dealing at arm's length; or 40.2 Alternatively, were not less favourable to PEE than the terms referred to in (40.1)." 186 The Particulars which follow I quote below. " Particulars (a) the effect of the provisions of the deed concerning the distribution of income as between HIH, as the only B Class shareholder, and the A Class shareholders, including Adler Corporation, was that HIHC provided 98.8% of the fund but received only 90% of the income whereas the A Class unitholders provided only 1.2% of the funds and receive 10% of the income; (b) HIHC did not receive any priority on termination, notwithstanding that it provided the majority of the fund; (c) HIHC was locked into the investment in the AEUT for three years as redemption was not possible until 7 July 2003 and removal of the trustee required the direction of all unitholders; (d) HIHC has no capacity to control the conduct of the trustee in any way; (e) HIHC could not itself convene a meeting of unitholders notwithstanding that it provided 98.8% of the fund; (f) the voting power was entirely disproportionate to the level of contribution to the fund as between HIHC and the C Class shareholders; (g) there was no limit on the type of the investments which the trustee could make; (h) clause 24(c) exposed the trust fund to the risk of transactions by the trustee involving clear conflicts of interest without any protections requiring independent evaluation of the terms of the transactions; (i) the effect of the provisions concerning the issue price of new units and the redemption price of all units was that if the fund was successful, a new unit could be issued to a new unitholder with the effect that the value of HIHC's units would be immediately diminished the instant after the issue of the new unit. Conversely, if the fund was unsuccessful, the value of a new unit was immediately diminished to the benefit of HIHC the instant after it was issued. Hence, the more that the fund lost money the less likely it was to attract new unitholders and the more successful the trust, the more attractive it was to new unitholders who could achieve a windfall at the expense of HIHC." 187 The First and Fourth Defendants' contention is that the terms of the Trust Deed executed on 7 July 2000 (TB, 181-198) do not fall for consideration in that the pleading of this contravention is limited to the payment of $10 million on 15 June 2000 and predates the Trust Deed. The Trust Deed is described broadly by the effect of the Particulars pleaded above, (see paras 61 to 64 and in particular 62 of the Plaintiff's Statement of Claim.) If that be right, then my earlier finding simply stands against the Defendants, with the consequence that the application of s210 in relation to the later trust deed does not arise; (see para 11 of the First and Fourth Defendants' written submissions of 19 December, 2001). However, I shall deal now with that further argument, recognising that it was debated by the First and Fourth Defendants in any event. For convenience, I quote the relevant part of the First and Fourth Defendants' written submissions in that regard: "The terms of the trust deed executed on 7 July 2000 (PX1/181-198) do not fall for consideration, in that the pleading of this contravention is limited to the payment of $10m on 15 June 2000.] In any event, the terms of the trust are within the bounds of reasonableness if HIH/HIHC had been dealing with PEE at arm's length. The Annual Report for HIH as at 30 June 2000 expressly reached that conclusion as at balance date (Ex PX5/2204). Cohen's evidence was that there was considerable discussion at the board meeting on 12 October 2000 and with HIH's auditors concerning that note: T, 511.29-48. Cohen regarded the note as correct in every particular (T, 83.25-.32, 84.36-.43), he took seriously the reference to terms and conditions being no more favourable than those which it is reasonable to expect HIH/HIHC would have adopted if dealing with the director or the director-related entity at arm's length in similar circumstances (T, 84.16-.21, 104.10-21), and he made appropriate inquiries in that regard, including discussions with lawyers and auditors (T, 84.23-85.17). Cohen's view was that a profit share disproportionate to the equity share is a recognised way of providing incentive and reward for the active or entrepreneurial aspects of the investment (T, 120.10-35). Similarly, Gardener (a member of the Audit committee and a highly experienced chartered accountant: see Ex PX5/2148) said the note reflected his genuine view concerning the AEUT investment: T, 357.16-.41, 357.58-358.6." 188 The Plaintiff, in its written submissions relies on the terms of the Trust Deed as pleaded being "highly prejudicial to HIH's interests". It also relies on paragraph 10 of Mr Cameron's principal affidavit which summarises the effect of the trust deed. I quote paragraph 10 as follows: "10. If the terms of the proposed payment as put to the Board were that the payment was to be a subscription of one B Class unit on the terms of the trust called the Australian Equities Unit Trust (see terms set out in paragraph 34 of annexure B) then, in my view, a reasonably careful and diligent director of HIH or HIHC would not have voted to approve such an arrangement because: (a) the funds were to be left in the control of Mr Adler. Mr Adler was able to employ the funds as he wished, including use for the financial benefit of himself or his related companies; (b) HIHC could not recoup its investment for at least three years; (c) the B Class unitholder had no power to control the activities of the trustee even though it was a subscriber for 98.8 per cent of the trust fund; (d) the A Class unitholders, which included Adler Corporation, were to receive a 10 per cent share of the profits even though such unitholders provided only 1.2 per cent of the trust fund; (e) there were no investment guidelines for the use of the funds." 189 The First and Fourth Defendants complained that the statement is "oracular" meaning broad assertion, in failing to identify more specifically how these features were not such as a reasonably careful and diligent director of HIH or HIHC would have voted to approve. However, they, in my view, represent a fair summation of the combination of features which placed HIHC and through it HIH, completely dependent upon Mr Adler, with no powers of overriding direction whatsoever save by invoking equity's jurisdiction in the event of a breach of trust; (see also paras (d), (e) and (f) of the earlier quoted Particulars from para 40 of the Plaintiff's Statement of Claim.) To be told that protection lies only by recourse to equity is hardly satisfactory, more especially as such litigation would be likely to be drawn-out and expensive. 190 In those circumstances, self-evidently in the absence of investment guidelines for the use of the funds or any form of independent appraisal in the context of expressly permitted self-dealing, that absence of capacity to intervene placed HIHC and through it HIH in a situation where it was utterly dependent upon Mr Adler. 191 To this the Defendants seek to argue that the position is no different from that of an investor in a conventional externally managed fund. However, no evidence was given as to whether such a conventional managed fund would typically leave unit holders unable to remove the person charged with the management of the monies in question or of investments generally (save perhaps by recourse to the Court's intervention). Moreover a conventional, externally managed fund would not be managed by a corporate insider, here Mr Adler, with no independent appraisal of investments, facing quite evident conflicts of interest to which (as I conclude) he succumbed when he preferred his own position over that of HIH and HIHC in a number of respects. One need only cite his (via Adler Corporation) interest qua shareholder in HIH (he sold his own shares in HIH first before AEUT's), his planned intent to sell across to AEUT dstore and other unlisted investments owned by Adler Corporation and finally the opportunity he took to borrow from AEUT via interests associated with him. Finally, the mandate for such an externally managed fund required Investment Committee approval under the Terms of Reference that was never obtained here. 192 I have noted Mr Cohen's earlier quoted evidence. I have also taken into account the notes to the HIH accounts as at 30 June 2000 (TB, 5/2204) attesting to the "supplier" relationship with PEE (presumably of investment services) "being not more favourable than it is reasonable to expect if dealing with the director or director-related entity at arm's length". I consider that the note was quite wrong and thus Mr Cohen, insofar as he regarded the note as correct, was clearly in error. The terms of the Trust Deed could not be equated to those of an independent funds manager and were entirely inappropriate to regulate dealings between a director-related entity under the control of a conflicted insider Mr Adler. Indeed, the absence of proper safeguards is emphasised by the fact that in clause 24(c) of the AEUT Trust Deed, the trustee PEE was permitted to deal in any capacity with the trustee or with any related company or associate or with the trust, a permission of which Mr Adler took full advantage. Such an express provision would remove much of the protection otherwise afforded by trust law in relation to self dealing, more especially given the absence of any provisions in the trust deed enabling HIHC to control the conduct of the trustee in any way.

CONCLUSION 193 In so far as the provisions of the Trust Deed for AEUT may be taken into account in determining whether a contravention of s208 of the Corporations Act occurred, though entered into some weeks after the payment, the relevant dealing was not within the arm's length exception in s210 from the prohibition on dealings with a related party without shareholder approval. There was a "financial benefit" given, within the meaning of s229 of the Corporations Act in access to the $10 million, the more so given lack of proper safeguards. This is so whether or not the $10 million was initially impressed with a trust or was an unsecured borrowing until AEUT was formed. There were indeed lacking the safeguards that would be reasonable in the circumstances. These circumstances include that Mr Adler was himself a director of HIH and his associated interests had a significant shareholding in HIH, and thus he had a potential conflict of interest as he did with respect to Adler Corporation's unlisted investments which he planned to sell to AEUT. The Trust Deed, lacking such safeguards, was grossly inadequate, in the respects pleaded and as particularised in para 40 of the Plaintiff's pleading.

Involvement of Messrs Adler and Williams and Adler Corporation in breach of Related Party Benefit Provisions (ss208-9) THIRD LEGAL ISSUE 194 Were Mr Adler and Mr Williams "involved" in the contravention of s208 by HIH and HIHC so themselves to contravene sub-section 209(2) of the Corporations Law? Was Adler Corporation? "Involved" is defined in s79 in these terms: " 79 Involvement in contraventions A person is involved in a contravention if, and only if, the person: (a) has aided, abetted, counselled or procured the contravention; or (b) has induced, whether by threats or promises or otherwise, the contravention; or (c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) has conspired with others to effect the contravention." 195 There can be no question but that each of Messrs Adler and Williams were knowingly concerned in that contravention, when regard is had to the events summarised in paragraphs 15, 17 and 20 of the Plaintiff's Statement of Claim. In particular, there can be no doubt that both Mr Adler and Mr Williams knowingly brought about the relevant payment through PEE, which was undoubtedly a related party (see in particular s228(2) and (4) of the Corporations Act). It is conceded that "Mr Williams knew that Mr Adler controlled PEE" though it is then said that fact does not lead to a breach of duty. The transaction was carried out totally bypassing the Investment Committee and the Board, though even if that were not so, the wide "aiding and abetting" language of s79 would clearly catch both Mr Adler and Mr Williams. They were on any view "knowingly concerned in" the contravention, even if they did not appreciate it was a contravention. They could hardly deny knowledge of the factual elements making up the contravention, even if (and no evidence at all or to that effect is given by either) each mistakenly considered the transaction on arm's length terms in the sense used by s210. 196 Thus it does not avail Mr Williams that he "left it" to Mr Howard to ensure the transaction was documented and legal advice obtained; indeed he went further and urged him to "make sure Rodney follows through with the documentation" (Howard, para 10). The payment very clearly did advantage Adler and Adler Corporation, as indeed Mr Adler conceded (letter 30 November 2000, TB, 1/253.9). This is in any event obvious when regard is had to the advantage of having unrestricted access to $10 million in cash, as Mr Williams must have known, leaving HIH/HIHC merely to hope for documentation and meantime rely on trust law for protection; the latter with the disadvantage of likely extended and expensive litigation if enforcement were required. This is apart from the fact that the evidence does not support any express trust at 15 June 2000 as its terms and indeed the precise beneficiaries were not resolved. The trust was just one vehicle in contemplation at the time, probably the likeliest. 197 The Trust Deed itself was in the respects earlier identified so lopsidedly in favour of Adler Corporation as compared to HIHC that to the extent it may be taken into account, it did advantage the former at the cost of the latter. Further to establishing his knowledge, I accept and consider admissible as part of the contemporaneous steps in the transaction itself though hearsay (Cross on Evidence 6th ed para 31080-31110) what Mr Howard quotes Adler as having said to him on 15 June 2000 (para 8 of his affidavit): "The $10 million is for venture capital and short-term trading opportunities. We've started to purchase some shares to take advantage of the oversold situation in HIH. I need the money to-day for settlement."

Para 10 of Mr Howard's affidavit, unchallenged, confirms Mr Williams' knowledge at 15 June 2000 that the HIH shares had been bought and that Mr Adler was known by Mr Williams to need the $10 million "to settle the [HIH] trades". That knowledge finds further support in the obvious lack of surprise of Mr Williams on hearing of the HIH share purchases (Howard, para 10) and in the fax from Adler to Williams dated 19 June 2000 (TB, 109A) referring to Adler having purchased "more" shares. Mr Williams does not successfully negate knowledge by reference to the self-serving statements written to ASIC as regulator (PX1/268) on 22 December 2000 and the earlier Minter Ellison report of 29 November 2000 (PX1/238) and in particular its Schedule of Facts. However that Schedule does contain the admission (TB, 1/268 point 7) that the prior approval of the Investment committee was required but not obtained, making Mr Williams' decision to fund the transaction with HIHC's money very much one to which he was not merely a party, but the principal party apart from Mr Adler (see s79(e)). 198 Thus the transaction was carried out at Mr Adler's initiative and with Mr Williams' concurrence and direction. That is most clearly evidenced by the exchange of faxes on 9 June 2000 earlier quoted and Mr Williams' handwritten note to Mr Fodera, written on the bottom of Mr Williams' facsimile of 9 June 2000. It is true that the corporate entity was shortly after corrected to substitute Pacific Eagle Equities Pty Limited for Drenmex but this was of incidental importance, Mr Adler advising Mr Williams of the need for this "for various tax, disclosure and accounting reasons". It could not fairly be suggested that Mr Williams' direction to implement was in any way altered, save in so far as a different but still Adler associated entity was to be the recipient; see letter of 14 June 2000 (TB, 130). That the transaction came to involve a trust does not alter the necessary involvement, as there is no suggestion that Mr Williams would have been unaware of that. As to Adler Corporation, because it acquired the majority of the units in AEUT and at all material times controlled PEE, it too was "involved" in the relevant transactions. Its capacity to sell to PEE at cost its interests in the unlisted investments in their then known state (see paras 513 and following) illustrated the lack of safeguards in the trust documentation, and Adler Corporation's knowledge and exploitation of that; see generally, the Plaintiff's pleadings, para 98. Finally, as stated at para 6.3 of the material facts pleaded, Mr Adler was a director of Adler Corporation at all material times, such that Mr Adler's knowledge may be attributed to Adler Corporation which I infer was under his effective control. That knowledge would include the essential elements as make up the contravention of s208.

CONCLUSION 199 I am satisfied that within the meaning of s209(2) of the Corporations Act both Mr Adler and Mr Williams were "involved" in a contravention of s208 of the Corporations Act by HIH and HIHC, as was Adler Corporation.

Involvement of Mr Fodera in breach of Related Party Benefit Provisions (ss208-9) FOURTH LEGAL ISSUE 200 I have earlier sought to lay out the evidence and competing contentions in relation to the role played by Mr Fodera (para 99 and following). Again, the pleadings are based on the matters set out in paras 15, 17 and 20 of the Plaintiff's Statement of Claim. 201 The relevant matters concerning Mr Fodera are to be found in paras 20.2, 20.3, 20.6 and 20.7. Mr Fodera denies in his defence, that he was made aware of the matters referred to in paras 20.4 and 20.5 of the Statement of Claim, namely that

(i) Mr Adler had advised Mr Howard that the $10 million was to be paid to PEE, (ii) Mr Adler advised Mr Howard that Mr Adler, on behalf of PEE, had placed an order for the purchase of HIH shares on behalf of PEE, and (iii) that the $10 million was urgently needed to pay for those shares. 202 Otherwise, Mr Fodera does not admit the remainder of the paragraph beyond para 20.2. Paragraph 20.2 states: "Fodera handed the Adler facsimile with Williams' handwritten instructions to forward $10 million to Drenmex to an employee of HIH, Bill Howard ('Howard')". 203 It will be recalled that the above pleaded "Adler facsimile" was in fact the facsimile of 9 June 2000 which was in relation to an unsecured borrowing not a trust arrangement, was in relation to Drenmex not PEE and finally did not contain the handwritten instruction from Mr Williams, which rather appears on the subsequent facsimile of 9 June 2000 from Mr Williams back to Mr Adler where the handwritten note is in these terms: "Dominic, please arrange for the funds to be forwarded to Drenmex Pty Limited"

with Mr Williams' initials and the date "14/6" underneath. 204 The Third Defendant's written submissions of 20 December 2001, at para 31, states in relation to para 20.6 of the Statement of claim: "There is no evidence that Fodera was told that the $10 million was to be paid to PEE (para 20.4) or that Fodera was told that an order for the purchase of HIH shares had been placed on behalf of PEE (para 20.5)." 205 It is then said that: "This allegation, as pleaded , has not been proved." 206 Paragraph 20.7 of the Plaintiff's Statement of Claim is to the effect that: "Fodera instructed Howard that the $10 million was to be paid out of the HIHC operating account rather than being paid out through the HIH Investments Department." 207 For this Mr Fodera responds, through the Third Defendant's written submissions, para 32, that: "There is no evidence that Fodera gave any such instruction to Howard. Howard simply made that assumption, presumably because there was only one bank account. [T, 162.46 - .51]

The submission goes on to state that the allegation as pleaded is meaningless because any money paid out through the HIH Investments Department would be paid in the normal course from the HIHC Operating Account (Howard T, 162.42 - .51; T, 163.56 - 164.3). 208 The Third Defendant goes on to say: "The point now sought to be made in paragraph 39 of ASIC's submission, namely that there were two different administrative 'streams'…. is not pleaded. This allegation has not been proved." 209 Clearly for Mr Fodera to be "involved" within the meaning of s79 of the Corporations Act as applied to s209(2) in the relevant contravention, Mr Fodera must have knowledge not merely of some potential occurrence, constituting the offence, but of the actual events, though only the essential ones, which constitute that offence. That knowledge must embrace all essential material factual ingredients of a contravention by HIH or HIHC of s208; York v Lucas (1985) 158 CLR 661, esp at 668-70 in relation to the equivalent s75B of the Trade Practices Act 1974 (Cth). Knowledge may be inferred from the fact of exposure to the obvious, though that does not obviate the need for actual knowledge of the essential facts constituting the contravention; Georgianni v The Queen (1985) 156 CLR 473 at 507-8 per Wilson, Deane and Dawson JJ. That is further explained, in words which I would adopt, from Burchett J in Richardson & Wrench (Holdings) Pty Ltd and Anor v Ligon No. 174 Pty Limited (1994) 123 ALR 681 at 693-4: "the passage which was cited in Official Trustee in Bankruptcy v Mitchell (1992) 38 FCR 364 at 371; 110 ALR 484 at 492 from the advice of Lord Sumner in The Zamora No 2 [1921] AC 801 at 812-13, distinguishing between the senses in which "a man is said not to know something because he does not want to know it", is instructive. The sense which condemns, according to Lord Sumner, is that which indicates that the man really does know, but wishes to avoid: full details or precise proofs … because they may embarrass his denials or compromise his protests. In such a case he flatters himself that where ignorance is safe, 'tis folly to be wise, but there he is wrong, for he has been put upon notice and his further ignorance, even though actual and complete, is a mere affectation and disguise … Mr Banck understood it very well, so well that he knew where to draw the judicious line between scanty but sufficient information and undeniable complicity. Knowledge being proved, no opinion need be expressed as to the effect of presumptions in the present case [emphasis added]. This is not constructive, nor is it imputed, knowledge; it is actual knowledge reduced to a minimum by the defendant's wilful act, and the point of the case was that the minimum of actual knowledge was enough: see also R v Crabbe (1985) 156 CLR 464 at 470-1; 58 ALR 417." 210 The Third Defendant's submissions, in dealing with what Mr Fodera knew (from TB, 28 and subsequently TB, 29) is fairly summated in para 21(g) (fair, that is save for the references that the investment company "had a track record" PEE or Drenmex had none though Adler Corporation certainly did): "Accordingly, notwithstanding the terminology used by Adler of an 'unsecured borrowing', which does not appear apt to describe the nature of the investment as expressed in the second paragraph of PX1/28, Fodera knew that the gist of the proposal was that HIH was to invest $10 million in an investment company which had a track record and was associated with Adler on terms that the funds would be invested as that company's management saw fit and that HIH would receive, firstly, ten percent interest and, secondly, ninety percent of the profits thereafter."

They add though that: "(It is important to note that there is no suggestion from PX1/28 that HIH could not withdraw its funds at any time on demand or on normal terms for investment companies)".

They add, that: "It was also apparent that the document was a summary of previous discussions and did not purport, on its face, to be a final or detailed statement of the precise terms of the investment." 211 Thus far, while Mr Fodera would have been aware that this entailed a "financial benefit" (within the very wide definition of that expression in s229), it is said that this would not of itself have been enough for Mr Fodera to have actual knowledge that the provision of $10 million by way of financial benefit was not given on arm's length terms within the meaning of s210 of the Corporations Act. 212 It is then said by the Third Defendant that what Mr Fodera knew from the response, namely the facsimile from Mr Williams to Mr Adler of 9 June 2000 (TB, 29) was the following:

(i) Mr Williams and Mr Adler had been discussing the proposal for some months; (ii) Mr Williams considered that the proposal was fair and reasonable; (iii) Mr Williams had told Mr Adler on 9 June 2000, some five or six days before, that he would arrange for the funds to be transmitted early the next week. 213 Then, what Mr Fodera learnt from Mr Howard on 15 June 2000 was two additional pieces of information about what was still a proposed payment (Howard para 9): "(i) That Mr Adler wanted a cheque drawn that day; and (ii) That some shares in HIH had been purchased and that the funds were required to settle that purchase." 214 However, there is an additional piece of evidence in para 9 of Mr Howard's affidavit which, in the absence of any countervailing evidence from Mr Fodera, I would accept, more particularly as no successful attack was made upon that part of his affidavit, namely that Mr Fodera said: "Talk to Mr Williams about it - I don't want to know about it." 215 It might be said that that statement on its own is ambiguous. But it is hardly likely that Mr Fodera would be saying he was too busy to deal with it when using those terms. Nor that he would contemplate sending any overflow of work involved to his superior Mr Williams. In the absence of any explanation to the contrary, though not relying just on that, I would infer that he meant that he did not want any involvement in the transaction because he sensed its impropriety; he was trying to wash his hands of it. That is the more likely, when clearly enough the transaction, as Mr Fodera knew about it, was a payment, apparently commencing as an unsecured loan to, or at the direction of, a director, Mr Adler, involving a 10% share of profits agreed to be given to a company (whether Drenmex or not would not have been significant) associated with that director. He must be taken to have known that the payment has to be made for investment purposes including in particular both venture capital and to settle purchases already made of shares in HIH itself, and yet, though for investment purposes, in circumstances where, as Mr Fodera must have known (being a member of the Investment Committee) no Investment Committee approval had been obtained. Mr Fodera puts on no evidence on his behalf as to his state of knowledge or his view at the time (were it relevant) as to "what would be reasonable in the circumstances" of HIH and HIHC, in the context of a dealing at arm's length. 216 If my later conclusion is correct (see para 264 below) that Mr Williams' authority did not extend to approve an investment in those circumstances, absent Investment Committee or Board approval, but merely extended to authorising the administrative steps to implement what was so approved, then I would infer Mr Fodera had knowledge of that lack of authority. He also knew that $10 million was being handed over with no documentation submitted inferentially he would have assumed that it was to follow later given the urgency. Otherwise he knew what I set out at para 210 above (including the 10% return) and that HIH shares were purchased and the funds were to settle the purchases. The effect of that knowledge is that Mr Fodera must have known enough of the broad outline and circumstances of the transaction to know that it was not, within the meaning of s210, on arm's length terms. The clearest indication that the terms of the financial benefit were not reasonable was the complete absence of any documentation in dealing with a director who self-evidently was not at arm's length and with whom proper safeguards were thus needed. Moreover for the drawing of the cheque he caused Mr Ballhausen to be bypassed, though the responsible officer for Investments as General Manager ("because it would be too hard"). This further emphasises the sufficiency of awareness that I infer Mr Fodera had that the terms were not reasonable. To pretend to hide from that knowledge is not to avoid it; see earlier at para 209.

CONCLUSION 217 Mr Fodera was "involved" in the contravention of s208 of the Corporations Act by either HIH or HIHC. He had sufficient knowledge of the essential factual elements constituting the contravention, though clearly not every detail, much of which was still being worked out, to be thus "involved" within s79 of the Corporations Act. He knew enough to know that an undocumented loan to a fellow director giving him a 10% return with evident potential for a conflict of interest was not "reasonable", as required to satisfy the arm's length test under s210, even assuming that knowledge of that defence being unavailable is required to establish "involvement". He was sufficiently "concerned in" the related events, facilitating their occurrence and removing a potential impediment (Mr Ballhausen) though attempting to keep himself at a safe distance. He had knowledge of the use of HIH's money to fund a related party (as it happened PEE but not the earlier identified Drenmex) purchasing HIH shares. That renders him in contravention of s209, as regards the prohibition on related party benefits without member approval. That he may not have known specifically of the identity of PEE as substituted for Drenmex is not to the point, both being associated with Mr Adler, and the substitution having no effect on the substance of the transaction. It was essentially an investment via a company associated with Mr Adler that was a "related party", within the meaning of s208 utilised to purchase HIH shares and effected to his knowledge without Investment Committee approval or ratification. It is of course Mr Adler who renders that party a "related party".

Subsequent events to entry into AEUT Trust Deed on 7 July 2000 principally concerning corporate approval or ratification 218 Reverting now to the events following the entry into the AEUT Trust Deed. An article appeared in the business section of The Australian by Mr Mark Westfield on 18 July 2000 under the headline "HIH hype can't hide the grim reality". The article included a statement that: "Much of that share bounce over the last four weeks has been due to buying by director Rodney Adler who has pushed his family interests through the 5% threshold".

Earlier he refers to HIH shares as having: "staged a weak recovery since plumbed 99c in mid-June to close yesterday 1c firmer at $1.17." 219 The significance of the article is that the publicity which Mr Adler had played an important role in generating, along with the misleading description of the buying being his, was being portrayed to the market in those terms without any attempt by HIH, HIHC or Mr Adler to correct that misleading impression. 220 On or about 21 July 2000, Mr Adler sent a letter to Mr Williams enclosing copies of Minter Ellison's letters advice of 28 June 2000 and 5 July 2000. Mr Adler attempts in the last paragraph of that letter to persuade Mr Williams to rely solely on the advice already furnished by Minter Ellison for Mr Adler and his interests, without having it reviewed by another partner Mr Leigh Brown. He says: "I appreciate the desire to have a legal sign off, but professional jealousies can exist within firms and it would be a shame if the current advice is changed in any way. I would suggest that the advice we have already received from Minter Ellison covers the issues that you and I have discussed." [See TB, 215-6] . 221 The last quoted paragraph demonstrates on Mr Adler's part a desire to avoid HIH obtaining its own advice, where clearly the parties were not at arm's length. Of course for proper independent advice to be proffered, the lawyers concerned needed to be fully cognisant of the relevant facts. Since Mr Adler had, one can infer, done the initial briefing, any inadequacies in that briefing were his responsibility and to his advantage but clearly not to HIH's or HIHC's. An independent appraisal of the Trust Deed at that early stage from HIH's viewpoint might for example have led to advice that any future investments should be the subject of independent appraisal under the Trust Deed before being made, where they emanated from Mr Adler or his associates, because of the obvious conflict of interest involved. However, that would have entailed amending the Trust Deed to that effect or otherwise the Trustee PEE so undertaking. That may not have been agreed by Mr Adler, given that the Trust Deed had been drafted so as to omit any such safeguard. By the time Minter Ellison did advise HIH on 1 November 2000 the Trust Deed had already been acted upon and it was far too late. Thus the unlisted investments and loans had already occurred with Adler Corporation and other Adler associates as also the earlier investment in HIH. This advice was obtained only after the AEUT transaction involving the shares in HIH had been brought to the attention of the Board by the auditors of HIH on 12 October 2000. 222 Thus the time Mr Adler had made his first quarterly report to Mr Howard on the performance of AEUT on 18 August 2000 (TB, 217 - 8), the shares in HIH had long been bought. It stated that there was already an investment of A$500,000 in dstore and an investment of US$500,000 in Planet Soccer in fact that only took place a week later. There was also an investment in something called "Jewish Minds" of A$1,000,000 of which A$500,000 was said to have been paid. The evidence does not disclose anything further about Jewish Minds beyond that it had to do with online education. The report contains no independent appraisal whatsoever of the various investments nor does it disclose dstore and Planet Soccer were acquired from Adler Corporation. I will return to these investments later.

The payment of $10 million and its subsequent investment knowledge and approval of directors and of Investment Committee? 223 I turn now to the question of whether the payment and associated transactions were disclosed to the directors of HIH other than Mr Adler, Mr Williams and Mr Fodera, or to the Investment Committee of HIH and, if so, when. This question is relevant to the important set of Particulars contained in para 74 of the Plaintiff's Statement of Claim, principally Particular (l). 224 Particular (l) states that: "By his conduct as pleaded, Adler caused or procured HIHC, a subsidiary of HIH, to make a payment which: … (l) was made in such a way that it would not come to the attention of the directors of HIH other than Adler, Williams and Fodera or to the attention of the Investment Committee of HIH." 225 Particular (m) adds that such a payment: "was not approved or ratified by the Investment Committee of HIH". 226 Earlier in para 43 of the Plaintiff's Statement of Claim it is stated that: "Apart from Williams, Adler and Fodera, no other director of HIH or HIHC was made aware of or consulted in relation to the fact that Adler, on behalf of PEE, was purchasing shares in HIH utilising funds which had been advanced by HIHC until about September or October 2000." 227 Importantly, paras 44, 45 and 46 of the Plaintiff's Statement of Claim says respectively as to Messrs Williams, Adler and Fodera that "on no occasion prior to about September or October 2000" did any of these: "notify the Investment Committee or any of its members of the advance of $10 million to PEE, though in the circumstances pleaded in paragraphs 15, 17, 20 and 38 above. [Cassidy, Fodera and Adler] were aware of the advance", "seek to have the Investment Committee ratified of the advance of $10 million to PEE."

See respectively paras 44.1 and 44.2 (Williams) 45.1 and 45.2 (Adler) and 46.1 and 46.2 (Fodera). 228 Paragraphs 44.3, then says that on no occasion did Mr Williams "notify the Investment Committee or any of its members (other than Adler) that PEE was purchasing shares in HIH utilising the funds which had been advanced by HIH." 229 Paragraph 45.3 provides similarly for Adler and paragraph 46.3 provides similarly for Fodera. 230 Finally, paragraph 38 of the Plaintiff's Statement of Claim states: "On 12 July 2000, Cassidy, on behalf of HIHC, signed an application form for one "B" class unit in the AEUT at an issue price of $10 million and undertook to pay $10 million to PEE as trustee of the AEUT." 231 Thus, the First and Fourth Defendants are correct in stating as to the Particulars contained in paragraph 74(1)(l) that the fact of the payment must also have been disclosed to Mr Cassidy. But importantly, this was nearly a month after the time the payment was made. Mr Cassidy was a director of HIHC as well as of HIH and he made the application on behalf of HIHC for one "B" class unit in AEUT on 12 July 2000; (TB208). That the signature was that of Mr Cassidy is confirmed by reference to TB, 5/1654, 1657 and 1658. Mr Cassidy was also a member of the Investment Committee of HIH. His title in 2000 was "Managing Director Australia"; (T, 127.47 - .54). The company secretary of HIHC and HIH, Mr Lo, also executed the application form in the transaction. In any event, nothing really turns on that, as the earlier pleading of material facts (paras 44-46) make clear that Mr Cassidy, as also Mr Fodera were aware of the advance of $10 million. Clearly enough the pleadings would thus have been adequate to disclose the case in that regard to be met at trial without unfair surprise. The technique here used is a conventional combination of narrative pleading of material facts and subsequent Particulars, to which the comments of von Doussa J in Beach Petroleum NL v Johnson (1991) 105 ALR 456 are apposite: "A strict distinction between material facts and particulars has tended to become more obscured as the years have gone by. The tendency now is towards narrative pleadings as there is a growing concern that pleadings according to traditional rules do not adequately make known to the court and to the parties the nature of the opposing cases in complex matters. … Technical objections raised to pleadings on the ground of alleged want of form will be received with less enthusiasm today than in times past. Nevertheless the pleadings, including particulars stated therein, must be adequate to disclose the case which the opposing party must meet at trial, and to disclose a reasonable cause of action." 232 Returning to the sequence of events, I make no finding that Mr Cassidy was aware of the purpose of AEUT being to enable PEE to purchase shares in HIH or knew of the other purposes of AEUT. There is simply no evidence of that one way or the other. Certainly signing an application form would not of itself disclose anything other than that this was an investment of A$10 million in the AEUT Trust. Nor does the fact that Mr Cassidy knew of the payment, refute that

(a) there was no disclosure to the other directors, either collectively as a Board or individually (that is other than Mr Adler and Mr Williams); (b) there was no disclosure to the Investment Committee either collectively or in relation to its individual members (other than Mr Cassidy and Mr Adler, Mr Williams not being a member of the Investment Committee); and (c) ad hoc awareness by some individual members of the Investment Committee (or Board) is very different to proper referral seeking a collective response by way of approval or ratification, absence of concealment being no excuse for bypassing a proper approval process. 233 The first board meeting after the events of 15 June 2000 was on 5 September 2000 (TB, 4/1453). It was followed by further board meetings on 8 September 2000, (TB, 4/1457) and 12 September 2000 (TB, 4/1460). The first Investment Committee meeting after the events of 15 June 2000 was on 8 September 2000. It is here common ground that the minutes (TB, 6/2439) wrongly refer to the meeting taking place on 8 August 2000; (T, 136.57 - 137.12; 495.45 - ,55). According to Mr Howard's evidence (T, 162.20 - ,23) there was no previous occasion when the Investment Committee was convened especially to consider a particular investment, though Mr Howard did not himself manage investments and thus would not have had direct knowledge of that. 234 Mr Gardener gave evidence that he was told of HIH's investment in the AEUT by HIH's auditors a few days before 12 September 2000 (affidavit paras 18 to 19). He identified the date in cross-examination as being certainly prior to 8 September 2000 and probably on or about 5 September 2000 (T, 352.20 - .28). Mr Gardener gave evidence of a clear recollection of the AEUT transaction being explained and discussed at the Audit Committee meeting on 12 September 2000 (Gardener affidavit para 22). That Audit Committee meeting was attended by all directors of HIH (EX22 to Mr Stitt, QC's affidavit of 13 November 2001). At para 17 of that affidavit, Mr Gardener states that he first heard of the AEUT at a meeting to prepare for the meeting of the Audit Committee of 12 September 2000. Significantly, the matter was then raised by Mr Buttle a partner of the auditors Arthur Anderson & Co. At para 19 he describes Mr Buttle as using words to the following effect: "Are you aware that the company has made an investment in a trust to be managed by Rodney Adler, and that this trust has invested in HIH shares?" 235 Mr Gardener describes his reply in words to the following effect: "I'm horrified that the company has invested in HIH shares. I strongly advise that this matter be raised as a matter of urgency at the next meeting of the Audit Committee and the next meeting of the Board." 236 He says that he does not believe that Mr Buttle, at that time, told those present that the amount invested was $10 million but that: "I may have learnt this from discussion at a subsequent Board meeting." 237 He recalls that Dominic Fodera, introducing what Mr Buttle was about to tell, used words to the following effect: "John [Buttle] has something to tell you - it's just crazy." 238 It was at the Audit Committee on 12 September 2000 that Gardener describes Mr Adler and Mr Williams explaining this transaction. He says that: "Whilst I am unable to recall the precise words they used, they made statements to the following effect: "Mr Adler: 'I went to see Ray because I wanted to help improve the company's investment performance. I completely overlooked the fact that the investment in the trust needed the prior approval of the Investment Committee and the board. This was an innocent oversight on my part. There was considerable legal advice taken from the Group's lawyers establishing the trust in such a way that its dealings would be at arm's length from HIH. Therefore I do not believe that there is a legal problem in the trust buying HIH shares.' Mr Williams: 'I agree with Rodney's comments. I also had not considered that the trust and its investment would require prior approval of the Investment Committee and the board'. 239 Mr Gardener then said that he made a statement to the following effect: 'I am shocked that the investment has been made in the trust, and that the trust has bought HIH shares, both from a governance point of view and from an investment point of view.' A number of other board members used words to similar effect, but I cannot now recall who said what." 240 That evidence is consistent with Mr Cohen's letter to ASIC of 22 October 2000, para 23 (TB, 270) bringing to its attention matters raised by HIH's auditors, Arthur Andersen. Paragraph 23 is contained in the Schedule to the letter dated 22 December 2000 to ASIC in regard to the transaction. It is prefaced in the third paragraph as follows: "'Having made appropriate inquiries' on the part of the Board of HIH the Board of HIH understands that all relevant matters concerning the events that Arthur Anderson became aware of are set out in the Schedule of Events."

It adds "Upon legal advice, the Board does not believe that the matters in the Schedule involve any contravention of the Corporations Law ". The Schedule is entirely silent about the investments acquired from Adler Corporation and the loans to Adler associates. 241 Paragraph 23 reads as follows: "Other members of the HIH Board who were not directors of HIHC, first became aware of the existence and operations of the trust on 12 September 2000." 242 Reading para 23 in context of the earlier paragraphs (paras 3, 5, 14 and 15), he is thus excluding Mr Adler and Mr Williams from the class of those members of the HIH Board who were not aware until 12 September 2000 "of the existence and operations of the trust". It appears Mr Cassidy did not know of the operations of the trust. All other non-executive directors of HIH who were not also directors of HIHC, are to be taken to have been completely unaware. They comprise Messrs Cohen, Gardener, Abbott and Stitt. 243 Mr Stitt, QC gave evidence that there was only a very brief reference to "the trust" by Mr Buttle on 12 September 2000 (see his affidavit 13 November 2001 para 6-7) and that at the time he did not know what "the trust" was. On 12 October 2000 at the Audit Committee meeting he recalls Mr Buttle raising again "the trust" with the words "the trust may be a related party transaction and it needs to be recorded in the accounts" (para 9). He states that at the time of the Audit Committee meeting he (still) had no knowledge of what the purpose of "the trust" was, "who or what was involved in the trust or the amount of money involved" (para 12). But at a subsequent pre-Board meeting that day, he attests to Mr Cohen asking about the trust and then at paras 15 and 16 he says: "15. Ray Williams and Rodney Adler both responded to Cohen's question. I cannot recall the words they used or who conveyed what information however I recollect that the following was conveyed to the Board members present: 15.1 There has been an investment. 15.2 It had involved the creation of a trust. 15.3 That it had been organised by Rodney Adler. 15.4 That Ray Williams had invested some of HIH's money in the Trust. 15.5 That the transaction had concluded. 15.6 That the Trust had been brought to an end or never formed. 15.7 That Leigh Brown of Minter Ellison had provided advice that the transaction breached no provisions of the law. I recall Williams saying words to the effect: 'There is nothing in it, it all happened a long time ago, it shouldn't have happened but it is fixed now. Lets move on." 16. I was not aware at 12 October 2000 of: 16.1 the Trust's structure, terms or name. 16.2 the amount invested by HIH in the trust. 16.3 The identity of the trustee or the beneficiary. 16.4 The nature of the investments made by the trust."

See also his answers in cross-examination at T, 479.3 - .12 referred to at para 285 below. 244 Mr Stitt, QC gave evidence in cross-examination that he made what he regarded as appropriate corrections to para 23 of Mr Cohen's letter to ASIC, so as to record that the directors of HIH became aware of the existence and operations of the trust on 12 September 2000 (T, 473.36 - 474.37; 475.55 - 477.20). Mr Stitt, QC stated in evidence (and see para 31 of his affidavit) that he had been handicapped in refreshing his memory by what he described as ASIC's refusal to comply with his request for a complete set of documents (T, 461.46 - 463.38). Mr Cohen had no recollection of what was said on 12 September 2000, (T, 78.51 - 79.35). 245 I do not consider that the evidence of Mr Stitt, QC is in any substantial way inconsistent with the evidence of Mr Gardener. Given however the greater precision of Mr Gardener's recollection, I would accept his account of the essentials of what was said at the Audit Committee Meeting on 12 September 2000. 246 Finally, I should note that Mr Gardener (at para 27 of his affidavit) stated that he was not aware: "Until Dominic Fodera told me during the first week in December 2000 that some of AEUT's investments were obtained from Adler Corporation Pty Limited. The only information that I received concerning these investments was the AEUT balance sheet as at September 25, 2000 tabled at the Board meeting of 14 December 2000 and possibly the fax circulated by Mr Adler on 14 or 15 December 2000 … I did not receive any details of those investments in my capacity as a director of HIH." 247 There is a facsimile from Mr Adler to board members dated 14 December 2000 (TB, 261-2) which reports on the investments by the PEE trust in dstore, Planet Soccer and Nomad, but not that they were acquired from Adler Corporation and at its cost. I am satisfied that this was the first time that the directors as a whole were informed about the various "in-house" investments made by AEUT in particular dstore, Planet Soccer and Nomad and, as I have said, that information was incomplete. It also discloses loans, to Morehuman Pty Limited ("Morehuman") ($160,000) Intagro Projects ($250,000) and Pacific Capital Partners ($1,300,000). It does not mention that they are unsecured or anything as to their terms, and does not expressly state that the loans were to entities associated with Mr Adler.

CONCLUSION 248 Apart from the later limited awareness of Mr Cassidy (as to the existence of AEUT) and of Messrs Adler and Williams (as to the existence and operations of the Trust, though only Mr Adler would have been fully familiar with it) and of Mr Fodera (to a more limited extent as earlier described), I am satisfied that no directors were aware of the AEUT investment and its purchase of HIH shares or of its subsequent investments until the Audit Committee Meeting of 12 September 2000, save that Mr Gardener (and possibly others) would have learnt about it about a week earlier, on or about 5 September 2000. I am also satisfied that the Investment Committee as such were not informed about the AEUT investment either. Moreover it never approved any "appointment", or "mandate" for AEUT as required by the Investment Committee's "terms of reference" earlier quoted (TB, 24). Nor did it approve or "ratify" the investment in AEUT as laid down by para (viii) of the earlier quoted investment guidelines (TB, 5). Nor did Mr Adler, Mr Williams or Mr Fodera take any timely action or indeed any, to have the matter referred to the Investment Committee, though each were aware of the AEUT investment, with only Mr Adler having complete knowledge of the subsequent transactions. I note however that Mr Fodera was aware of the commencement of purchases in HIH by an entity associated with Mr Adler, as also Mr Williams. There was thus no collective disclosure to the Board or to the Investment Committee either prior to the investment in AEUT nor subsequently of the particular investments made by AEUT, including the share purchases in HIH and the purchases from Adler Corporation and the loans to Adler associates. This was until there was disclosure of AEUT and its HIH share purchases at 12 September 2000, though only, and informally, at the Audit Committee. Mr Williams subsequently gave false and misleading information on 12 October 2000 that "it had been fixed", that the trust had been brought to an end. As to the "in-house" investments from Adler Corporation and loans to Adler associates, there was for the first time information given, though incomplete, on 5 December 2000 (TB, 261). There is no specific disclosure of their "in-house" character, in particular that the investments had been acquired from Adler corporation at cost and the loans made to Adler associates, inadequately documented and with no independent appraisal as I later conclude (see para 682 and following).

Concealment of payment from Board and Investment Committee? Para 74(1(l) of Statement of Claim. 249 I need now to deal with the related Particulars, described in the First and Fourth Defendants' submissions as the 12th, 13th and 14th Particulars, being those contained in para 74 1)(l), (m) and (n). 250 That Particular contained in sub-paragraph (l) is that the payment: "Was made in such a way that it would not come to the attention of directors of HIH other than Adler, Williams and Fodera or to the attention of the Investment Committee of HIH." 251 The First and Fourth Defendants are undoubtedly correct in stating that the payment was made in a way which bought it to the attention of Mr Cassidy (Managing Director, Australia and a member of the Investment Committee) as well as senior managers of HIH in particular Mr Howard (General Manager, Finance) and Mr Lo (Company Secretary). But the circumstances in which the matter was before Mr Cassidy are simply that an application form was signed with nothing upon its face to indicate the nature of the trust beyond that it was a unit trust and that the trustee shared the same address as Adler Corporation. Neither side have called Mr Cassidy as a witness. Thus I do not draw any inference from that evidence beyond the fact that what was before Mr Cassidy was uninformative as to the nature of the transaction, beyond it involving a subscription to a unit trust. What is more significant is that in circumstances where it may reasonably be inferred that Mr Cassidy was in no way alerted to the buying intended in HIH, or to the nature of the trust as being of the kind that would require the approval of the Investment Committee, there was nonetheless an intention on the part of Mr Fodera to avoid bringing it to the attention of Mr Ballhausen: "because it will be too hard"

(Howard para 7). 252 It is nothing to the point to say that Mr Ballhausen was not a member of the Investment Committee, given that he regularly attended it. Moreover he was HIH's Chief Investment Officer (Howard para 5). He was likely, from his daily function in that capacity, to have appreciated the need for the cheque and the underlying transaction to be questioned and placed before the Investment Committee for its approval, or prompt ratification thereafter at the least. This is more especially when the mandate of AEUT had never been approved by the Investment Committee in accordance with the earlier quoted Terms of Reference for the Investment Committee. To place before a busy Managing Director (Mr Cassidy) an application form for signing, being a person whose primary responsibility was not investments per se, was hardly calculated to have the matter come to the attention formally of the Investment Committee or properly to the directors of HIH. Messrs Adler, Williams and Fodera who were already involved and committed to implementing the transaction, in Mr Adler's case instigating it with the concurrence of Mr Williams. It is a very different matter to approach an individual member of the Investment Committee to perform the ministerial act of signing an application form, or having a cheque drawn, than it would be to give the application form to the person most likely to question it as not having gone to the Investment Committee or Board, namely Mr Ballhausen. 253 Indeed, Mr Howard understood that Mr Fodera did not want Mr Ballhausen to deal with the payment because of a "personality clash" between Mr Adler and Mr Ballhausen (T164.40). The "personality clash": "was however constituted by a clash of views as to investment philosophy, with Adler wanting HIH to take a 'bigger risk profile'." [T, 174.35]. "Adler had criticised Mr Ballhausen for being too conservative in investing in fixed interest - 'a monkey could do that' (Howard para 8 )."

Mr Adler had been making criticisms to this effect for some time (see letters of 17 November 1999 and 25 January 2000) (PX17 pages 4-7). 254 In these circumstances I would draw the inference that Mr Adler and Mr Williams were actually intending that the Investment Department be sidestepped. I think it more likely than not that its chief investment officer, Mr Ballhausen, would not have approved of the payment or at least would have questioned it and would most likely have required the proper procedures to be followed, including submission to the Investment Committee for approval.

CONCLUSION 255 The pleaded Particulars relied upon by ASIC in sub-paragraph (l) of para 74 of ASIC's pleaded case are made out, in particular the payment of the $10 million to AEUT was made in such a way that it would not come to the attention of directors of HIH, other than Mr Adler, Mr Williams and to a lesser degree Mr Fodera and, though after the event and only as an incidental matter, Mr Cassidy.

If the payment was not approved or ratified by the Investment Committee did it need to be? Paragraph 74(1)(m) of Statement of Claim 256 The 13th particular, that contained in para 74(1)(m) is that the payment: "Was not approved or ratified by the Investment Committee". 257 The First and Fourth Defendants refer to there being a: "'Protocol or practice' which operated in the HIH Group during 1999 to 2000 to the effect that if Mr Williams signed a note to draw a cheque for investment purposes, then that instruction was carried out, and there was no applicable monetary limit on Mr Williams' authority to do so:" [Howard, T, 154.18 155.20] . 258 They then refer to there being such a note in respect of the $10 million payment (TB, 29). There indeed was. They also point out that Mr Howard acted on it, pursuant to Mr Williams express oral instructions to draw the cheque for $10 million (Howard affidavit paras 10-11). Mr Howard said expressly that the drawing of the $10 million cheque on 15 June 2000 was in accordance with the current protocol: "Which operated so that if you got a note from Ray Williams to draw a cheque on a piece of paper it went through; …." [T, 154.23 - .26] . 259 In cross-examination Mr Howard was pressed as to whether he had any way of knowing if this was an unusual occurrence, contrary to his assertion that it was; see para 17 of his affidavit (T, 157.49 - 158.1). However, earlier in cross-examination, while accepting that his knowledge was not derived from attendance at any meetings, and agreeing that he did not attend the Investment Committee meeting, and conceding that he had done no specific research, he made clear the basis of his answer at T, 157.10 - ,19. I quote the passage: "Q. If you have done no research, you don't know how many there were, you don't know how many had been to the committee, how can you talk about what was unusual? A. Because in my knowledge of the operations of the firm, usual investment mandates to external fund managers would go to the Investment meeting. That was my knowledge. And my knowledge of the general operations is that I was unaware in my time at HIH of anything else like this." 260 He then made clear that though he had done no specific research, in his role, he received and read Investment Committee papers. But what he said in referring to "investment mandates" going to the investment meeting clearly accords with the Terms of Reference. These expressly require Investment Committee approval of the mandate for investment managers; this was not just a guideline, but expressed as mandatory 261 I accept Mr Howard's evidence therefore that he had a proper basis for the statement that this was an unusual occurrence and that he was in a position to conclude and did conclude that it was. One important aspect of that unusualness was that this was a dealing involving a director of HIH and thus clearly not at arm's length. 262 It is true that the specific investment guideline does not require prior approval by the Investment Committee but is satisfied with either prior approval of the Managing Director Australia or of the Finance Director; nonetheless ratification is still required after the event from the Investment Committee. But did the actual investment in the unlisted units occur with Mr Cassidy's approval as Managing Director, merely because he signed the application form for the units? There is no evidence that the circumstances of the intended transaction were then (or thereafter) put before Mr Cassidy for proper informed approval including the intended application of part of the money subscribed in paying for HIH shares bought or to be bought. Moreover, the important part of the guideline is the next sentence, namely that: "All such transactions are to be then ratified by the Investment Committee" [see TB, 5 at (viii)].

That simply never took place. That such approval "is required" is admitted by the Schedule of Facts (para 7) appended to Mr Cohen's letter to ASIC of 22 December 2000 on behalf of the Board of HIH submitted "after having made appropriate enquiries"; TB, 267-8. An admission in such a document carries particular weight. 263 I consider that the furthest any "protocol" went, if indeed it rose above a mere practice, was that Mr Williams had authority to approve the administrative steps of implementation of such a payment (as indeed could the Managing Director or Finance Director though Mr Fodera was careful not to get too closely involved), but not to bypass:

(a) the requirement for any investment mandate to be approved by the Investment Committee in accordance with the Terms of Reference, (b) the guidelines that the transaction itself be ratified (after prior approval by the Managing Director Australia or the Finance Director) by the Investment Committee, who were separately required to "report all decisions and recommendations made to the Board" as per the Terms of Reference). (c) on the basis that must impliedly exist, that such ratification be sought reasonably promptly thereafter.

CONCLUSION 264 The payment of $10 million and the associated investment of it in HIH shares (or later in investments acquired from Adler Corporation and loans) "Was not approved or ratified by the Investment Committee."

as required by the Investment Guidelines, and as pleaded by ASIC. There was no protocol permitting that requirement to be bypassed just because Mr Williams approved since his authority extended no further than administrative implementation. Likewise the investment mandate of AEUT had not been approved, as required of the Investment Committee by the Terms of Reference.

Significance of omitting to obtain approval or notification 265 The First and Fourth Defendants, however, seek to diminish the significance of that omission by reference to the evidence of Mr Cohen, who it will be recalled was both the Chairman of the Investment Committee and Chairman of the Board of HIH. In cross-examination, he stated that he did not regard the investment guidelines as "significant": (T, 61.34 - .39). When asked in re-examination why he took that view, Mr Cohen explains his reasons thus: "They are only guidelines, as distinct from terms of reference, which are more prescriptive": [T, 510.57 - 511.8]. 266 That Mr Cohen did not regard the guidelines as "too significant" (to use the precise expression at T, 61.32) does not alter the fact that they must have had some significance. That is more especially here, where the dealing was not with an external fund manager at arm's length from HIH, but with a director of HIH, who is very much an insider, namely Mr Adler. Moreover his mandate had never been approved, this being a mandatory requirement, not just a guideline requirement. Moreover, Mr Cohen was not asked about the significance of the guidelines in that specific context of an "in-house" transaction with a director, but simply as a matter of generality. In a company with a substantial portfolio, one could imagine departures occurring from time to time as indeed they did. But the present departure necessarily had much greater significance notwithstanding the relatively modest amount of $10 million in the overall context of the portfolio. Dealings between a company and its directors as Mr Cameron says in his expert evidence, are especially sensitive. Finally, it is not unfair to question whether Mr Cohen's relaxed attitude, which itself should not be overstated consisting as it did of higher ranking of the more prescriptive terms of reference, was rather a reflection of retrospective minimisation of what was in truth a serious departure from HIH's own investment safeguards. It was made the worse because it benefited a director. That may well have reflected a lax attitude prevailing in HIH's affairs concerning its investment safeguards, even though it involved a benefit to a director. Other departures had apparently also occurred of the Guidelines. But the Minutes of the Investment Committee and Board of HIH showed that breaches, rather than being simply ignored or tolerated, were closely monitored and taken seriously; see for example, Mr Adler's tabling of the Investment Report at the Board meeting of 8 September 2000 reporting breaches of the guidelines (TB, 4/1459) and the earlier Investment Report to 30 June 2000 (TB, 5/1828) advising the Board of an earlier breach. 267 Finally, the First and Fourth Defendants assert that the evidence indicates that the document being the Terms of Reference and Investment Guidelines (TB1-24 "Issued August 1999") was never operative. For this, they rely upon evidence given by Mr Cohen that the Investment Committee itself did not make the investment guidelines (T, 59.3 - ,11): "The Investment Committee would make a recommendation to the Board which would make the decision to amend or revise the guidelines" [T, 69.12 to 63.7) And: "There is no evidence of this having occurred in respect of the document…." 268 What however is the evidence on this? First the passage quoted from Mr Cohen is not inconsistent with the guidelines being made initially by the Investment Committee, though their amendment or revision required Board decision. Nor does it deal with the Terms of Reference, in, relevantly, requiring investment mandates to be approved by the Investment Committee. At the Board Meeting of HIH on 25 August 1999, Mr Cassidy advised that the revised investment guidelines would be submitted to the next meeting; (TB, 4/1417). This Mr Cohen said was a reference to the next Board Meeting. (T, 131.44 - .46). Mr Cohen did not recollect any discussion at that Board Meeting about limitations and authority to invest in unlisted equities: (T, 132.9 - .13). Nor did Mr Cohen have any recollection of the Investment Guidelines being submitted to a Board Meeting (T, 132.25 - ,27) and the Minutes of subsequent Board Meetings (TB, 4/1420 and following) do not record the Guidelines being so submitted. 269 Nonetheless, Mr Cohen's clear evidence (para 19 of his affidavit), as also the unchallenged evidence of Mr Gardener (para 12 of his affidavit) was that revised Investment Guidelines marked as "Issued August 1999" (TB, 1) were current as at June 2000. This is the case, notwithstanding that there is no formal record of the Board's adoption of the Investment Committee's recommendation of them (TB, 6/2253 and 4/1417). 270 Strong contemporary evidence that the Guidelines were indeed treated as operative is to be found in the Investments Report to 30 June 2000 (TB, 5/1828) which actually advised the Board of breach of certain of the Guidelines. It was Mr Adler who tabled the report at the Board Meeting of 8 September 2000 (TB, 4/1459) acknowledging this. I accept the Plaintiff's contention that this confirms not only the currency of the Guidelines but Mr Adler's knowledge of them. It would be remarkable indeed if the proposition were correct that the solemn meetings of the Investment Committee dealing with the Investment Guidelines were a total farce, as also the board in being advised of breaches, because the Guidelines were never operative. This is so, even if it be the case that Mr Cohen did not attach too much significance to them, though he was not then pressed with the fact that they dealt with a $10 million unlisted investment for the benefit of a fellow director even if mutual benefit was contemplated. Indeed the voluminous minutes and papers of the Investment Committee (TB vol 6) and of the Investment Management Committee (PX16) as well as the Quarterly Investment Reports submitted to the Board show, contrary to the Defendants' proposition that the Guidelines were never operative, that indeed considerable time and energy was devoted by the relevant officers and committees of the HIH Group to proper performance of the investment functions in accordance with the Investment Guidelines and by the Board in receiving such reports. That reflects the reality of the requirement in the Terms of Reference to report all decisions and recommendations made to the Board (TB, 24), Mr Cohen did not express any lack of significance when it came to the Terms of Reference. Finally in the letter of 22 December 2000 (Schedule of Facts, para 4) written to ASIC by Mr Cohen on behalf of HIH, the requirement for prior approval of the Investment Committee was confirmed (see para 316 below).

CONCLUSION 271 The Terms of Reference for the Investment Committee, and its Investment Guidelines were operative at the relevant time. Failure to comply with them in the circumstances was a matter of significance. Mr Cohen's opinion, to the extent it is to the contrary, should not be accepted. This is save as it bespeaks a somewhat lax attitude prevailing in HIH's affairs concerning its investment safeguards. This was the more serious because it involved a benefit to a director not properly disclosed and authorised in accordance with laid down requirements.

Further pleading matters 272 The final particular, to which the First and Fourth Defendants take issue is that contained in para 74(1)(n) of the Plaintiff's pleadings, being the 14th particular. It is expressed in these terms: "If, contrary to the Plaintiff's primary allegation at para 20.6 above, Williams and Fodera (or either of them) were not aware that the $10 million payment was to be used in whole or part by PEE to pay for the purchase of shares in HIH [the payment] was made in circumstances where this purpose was not, but should have been disclosed by Adler to them." 273 The First and Fourth Defendants correctly state that this alternative contention, which is not the Plaintiff's primary allegation, does not arise, citing the evidence Mr Howard gave at para 9 of his affidavit which makes clear that Mr Fodera was aware of the use of the funds to settle HIH trades. 274 Mr Howard also gave evidence that he then spoke to Mr Williams on 15 June 2000 and had the following conversation: "Howard: I have spoken to Rodney and we bought some HIH shares. And he wants the $10 million to settle the trades".

Mr Williams: "Go ahead, draw the cheque but make sure Rodney follows through with the documentation." (Howard affidavit para 10).

CONCLUSION 275 As Mr Williams and Mr Fodera were, on the evidence, aware that the $10 million payment was to be used in whole or part by PEE to pay for the purchase of shares in HIH, no question arises (in terms of ASIC's pleadings) as to whether that purpose was not, but should have been, disclosed by Mr Adler to them.

Events pertaining to the AEUT investment in HIH 13 September 2000 to 3 October 2000 276 It remains now to deal with the final phase of events pertaining to the AEUT investment in HIH shares. 277 On 13 September 2000, a joint venture with the company Allianz was announced. This effectively involved the sale of a significant portion of HIH's business. Preliminary final results were also announced. On that same day, that is to say the day of the HIH media release, Mr Adler commenced to cause to be disposed a large portion of his and/or Adler Corporation's shareholding in HIH (TB, 287). By 25 September, 2000 he had sold 4,000,000 shares representing in excess of seventy percent of his 5,500,000 shareholding (TB, 4/2034). This had occurred in a rapidly falling market. However, it was not until 26 September 2000, just after he had sold his own shares, that he caused the HIH shares which PEE held to be sold (TB, 222-3). These realised an average price of only $0.48 per share. The prices realised earlier in respect of Adler Corporation's shareholding were considerably higher ($0.85 to $0.49 - TB, 287). As the market price had fallen after the 13 September 2000 media release (TB, 104A-E), I would draw the inference that Mr Adler ensured that he, preferring his own position to that of HIH, sold the bulk of his own company's very substantial shareholding before selling PEE's shareholding. He thus relegated the later sale by AEUT of its holding in HIH to a much lower market than that to which Adler Corporation's own holding was sold. There is no evidence to suggest that Mr Adler was not in charge of the timing of both sets of sales, Adler Corporation's and then AEUT's. It will be recalled he had earlier passed up the opportunity to sell AEUT's holding around mid-July 2000 at a profit, notwithstanding that short term profit was his ostensible purpose. 278 The Plaintiff contends that Mr Adler's conduct as to the sale of the respective shareholdings is significant evidence by way of admission by conduct that Mr Adler's purpose in having PEE purchase HIH shares in June 2000 was not to enable PEE to make a profit on the resale of HIH shares but to advantage himself. If his purpose had been to enable PEE to make a profit on resale, the Plaintiff asks rhetorically why would he not have had PEE sell its HIH shares if not in July 2000 then at least at the same time that he had Adler Corporation sell the bulk of its shares? This is particularly so when the market was rapidly falling (TB, 104A-E) and Mr Adler thought so ill of HIH's prospects (see for example his letter of 18 October 2000 TB, 224). 279 The Plaintiff also points out that in contrast to the celerity with which Mr Adler gave his s205G notice in June 2000 (just two business days after his purchase - TB, 110) it was not until 3 October 2000, at the last possible moment, that he notified the market that he had commenced to sell HIH shares (TB, 223C).

CONCLUSION 280 Mr Adler's conduct in holding back from selling AEUT's HIH shares in mid July 2000, and then causing Adler Corporation's shares to be sold straight after the preliminary final results on 13 September 2000 for HIH were announced and doing so prior to his causing PEE to sell its shares in HIH, evidences by way of admission by conduct that Mr Adler's purpose in having PEE purchase HIH shares in June 2000 was not to enable PEE to make a quick profit (or indeed any profit at all) on the resale of HIH shares. Rather it was to advantage himself, by maintaining the HIH share price or keeping it at a higher level than it would otherwise have been. This is borne out by the fact that PEE thereby sold at a substantially lower price than Mr Adler was able to procure for Adler Corporation in selling just before. Likewise, the delay with which he gave his s205G notice in September 2000 compared to the celerity with which he gave his s205G notice in June 2000, reinforces the inference that his purpose in doing so was to support the HIH share price rather than to enable AEUT to make a quick profit.

Events pertaining to AEUT in relation to HIH shares 4 October 2000 to 13 and 14 December 2000 281 On 18 October 2000, Mr Adler wrote to Mr Williams (TB, 224) setting out with what he saw as wrong with HIH and the mistakes he thought had been made in the previous three years. He had expressed similar sentiments to Mr Williams in his letter of 6 September 1999 (PX17 1-3) and also in his letter of 12 December 2000 (TB, 258A). 282 Those pre-existing pessimistic and critical views expressed by Mr Adler in those letters are inconsistent with the proposition that he thought HIH shares were a "good buy" in June 2000. 283 Mr Buttle as auditor having previously raised the issue of the AEUT investment, wrote a formal letter to the Chairman of HIH on 15 November 2000. Mr Buttle describes in his letter that this particular matter was formally raised earlier with the Board Audit Committee at its meeting on 12 October 2000. Mr Buttle describes the investment made of $10 million on 15 June 2000 and the purchase by PEE of 3,924,545 shares in HIH as being acquisitions made by PEE "on behalf of a trust, yet to be constituted", the trust being established on 7 July 2000. He describes the trust structure in broad outline and describes the class A and class B units and finally that the shares were sold on 26 September 2000 at a price of $0.48. He makes no mention of the other investments of the trust. 284 He concludes by stating that: "We respectfully request that it be given the urgent attention we believe it deserves."

He asks for a written response no later than 13 November 2000. In so doing, he has set out earlier in the letter his concerns in relation to AEUT under both Corporations Law and Stock Exchange Listing requirements. 285 In that context, the evidence to which I have earlier made reference, given by Mr Stitt, QC is relevant. I have no reason to doubt its correctness. Mr Stitt, QC refers to a discussion which took place shortly after the Audit Committee Meeting on 12 October 2000 after Mr Buttle had raised the matter and before the Board Meeting started. Present, according to Mr Stitt, was: "Ray Williams, Rodney Adler, Geoff Cohen, myself, Dominic Fodera".

He stated in cross-examination that he couldn't remember whether Terry Cassidy was there but thought Charles Abbott was there (T, 479.3 - ,12). He quotes Mr Williams as saying: "'Look, there has been an investment; Rod organised it. There was some money of HIH that was put into this investment. There was a trust.' And he said either the trust was never actually formed, or it had now been terminated - I can't remember that - he said, 'we have advice from Leigh Brown of Minters that there was no breach of any Corporations Law'. He [Mr Williams] said, 'It shouldn't have happened. There is nothing in it. It was all a long time ago. It has been fixed and we should move on. Let's move on.' … But the effect of it was that it had happened, it was past, it was fixed, there wasn't any breach of the law involved because Minters had advised to that effect and that we should now move on." [T, 479.18 - .34 and see also .35 - 39] . 286 In the event, Minter Ellison did provide a formal advice through Mr Leigh Brown dated 29 November 2000 to the Board of Directors of HIH; TB, 248 to 252F to which I have earlier made brief reference. 287 The letter commences: "Having made appropriate inquiries, we are not aware of any matter which would indicate that the investment by Pacific Eagle Equities Pty Limited (PEE) in HIH Shares and the subsequent disposal of that investment involves any breach of"

and follows reference to the relevant parts or chapters of the Corporations Law covering share buy backs, self-acquisition of shares, financial assistance, related party transactions, conduct in relation to securities, or notifying interests by directors (noting in the latter case that the notice in respect of the sale of HIH shares was lodged by Mr Adler six days late). 288 Specifically, the letter refers to having interviewed Mr Williams and Mr Rodney Adler (para 2.2). The understanding of Minter Ellison of the relevant factual background is then set out in a schedule of facts being Annexure E to their report. Notably, the letter does not deal with any other investments of AEUT than in the HIH shares, as indeed the auditor's earlier letter likewise. 289 At 5.2 of their letter, Minter Ellison state: "We understand from our discussions with Mr Williams and Mr Adler that HIH was not aware that PEE would acquire shares in HIH when the $10 million was provided to PEE by HIH"

There is then a cross-reference to paragraphs 6-15 of Annexure E setting out a "Schedule of Facts". That information, if given, would have been false based upon Mr Howard's evidence, which I accept, to which I have earlier made reference. Mr Howard referred in his conversation with Mr Williams during the day of 15 June 2000 to Mr Adler having bought HIH shares and needing the $10 million: "to settle the trades"

Mr Williams is quoted in response: "Go ahead, draw the cheque but make sure Rodney follows through with the documentation." 290 He portrays no evidence of surprise in his response (Howard affidavit para 10). But even if Mr Williams were surprised, he was clearly aware, accepting Mr Howard's evidence, of the proposed use of the $10 million for the purchase of HIH shares. Mr Howard's evidence earlier in his affidavit (paras 8 and 9) shows that HIH's $10 million, used in part for the purpose of paying for the share trading in HIH shares, was known to have been so used by Mr Williams, Mr Adler, Mr Howard and Mr Fodera. If the Chief Executive Officer of HIH, Mr Williams, was so aware - and his lack of surprise supports the inference I draw that Mr Williams and Mr Adler had discussed the purchase of HIH shares at least on the morning of 15 June, but probably earlier, then Minter Ellison may well have concluded that that knowledge must be attributed to HIH, though its Board were unaware of the transaction. It follows that Minter Ellison's conclusion in para 5.3, that the financial assistance provisions of the Corporations Law (s260A) were not breached, was based on inadequate information furnished to it. 291 Other "facts" relied upon by Minter Ellison were clearly wrong, namely (at 4.2): "…. At the time of HIHC's investment in the trust, the trustee had not yet acquired any HIH shares". 292 Then, in 6.3, dealing with chapter 2E "Financial Benefit to a Related Party" provisions of the Corporations Law, Minter Ellison conclude that: "The use by the trustee of HIH funds to acquire the Shares should not, in our view, constitute providing a financial benefit to a related party, …"

That conclusion appears to be based on the terms being arm's length. Mr Brown appears to base this, at least in part, on what Mr Williams told him, giving as the cited reason: "(a) Mr Williams has informed us that the funds were provided as subscription for the participation by HIH or HIHC in the trust and were proved on arm's length terms … ." 293 I have earlier concluded that the monies were not in reality provided on arm's length terms. They were provided when no documentation existed, the terms remained to be defined in appropriate detail and when so defined were not such as constituted arm's length terms having regard to the one-sided nature of the trust and the lack of safeguards to deal with Mr Adler's obvious potential conflict of interest. Those matters are no part of the Schedule of Facts upon which Minter Ellison based their advice. 294 There are similar incomplete factual statements in Schedule E; see in particular paras 5 and 6. There is also para 11 to the effect that Mr Adler thought that HIH shares were undervalued and expected to make a "quick profit", a purpose that I earlier conclude Mr Adler never had. Rather his expectation was that by purchasing the HIH shares this would maintain the HIH price or else leave it higher than it would otherwise have been. 295 Importantly, there was no reference anywhere in the letter of advice to the unlisted investments acquired by PEE from Adler Corporation or to the loans made by PEE to entities associated with Mr Adler. Clearly enough, neither Mr Adler nor Mr Williams disclosed to Minter Ellison that important fact. It may not have been known to the auditor either. This is so, though a quarterly report had been provided by Mr Adler on 18 August 2000 to, amongst others, Mr Howard (TB, 217-8) which refers to, amongst other investments, dstore and Planet Soccer. There was however no reference to either having been acquired from Adler Corporation. 296 The Plaintiff contends, and I accept, that the failure of Mr Williams and Mr Adler at the end of the year 2000 to fully and frankly describe what had occurred in relation to the $10 million payment and AEUT (particularly the "in-house" investments and loans involving Adler Corporation and Adler associates) when the circumstances clearly called for such a description, is an admission of their consciousness of impropriety in what occurred in relation to those matters and therefore of that impropriety itself. I would agree that that evidence bears upon the improper purpose of Mr Williams and Mr Adler first in relation to the purchase of the HIH shares and then in relation to the other investments. 297 The Minutes of the Board Meeting at which a draft of this report from Minter Ellison was tabled, is to be found in TB4/1478. At the Board Meeting so minuted of 29 November 2000, neither Mr Adler nor Mr Williams dissented from any of the factual matters stated in the Minter Ellison letter as can be seen from the terms of the Minutes and the fact that the letter was not altered. This, as the Plaintiff says, must be taken as an implicit assertion in confirmation of those facts, yet a number of these were false. 298 The Minutes record that Mr Adler said that: "'The trust' had no intention specifically to invest in HIH shares." 299 If this were intended to indicate that the decision to invest in HIH shares was made after the trust was set up, it was clearly incorrect. This is because Mr Adler had ordered the first purchase of HIH shares before he obtained the $10 million payment but in anticipation of the formation of AEUT and with the express purpose of using monies paid to PEE to pay for the shares purchased. 300 In a letter from Mr Adler to Mr Cohen, as Chairman of HIH, on 30 November 2000 (TB, 253) Mr Adler said, "I am concerned that the Board was unaware of the creation of the trust. He added "I accept that other than Ray Williams and myself, the knowledge was to imparted to the Board but how was I to know that fact?" He later says "however I am not to know whether Mr Williams spoke to members of the Board or the Investment Committee believing that Mr Williams either has a certain amount of discretion or went through the normal procedures". However this was quite misleading. As the Plaintiff says, Mr Adler was a member of both the Board and the Investment Committee and well knew what had or had not been submitted to those bodies. He also must be taken to have known that even if Mr Williams had the authority initially to approve the investment, the Investment Guidelines required that such investment be ratified by it. This, with the requirement for the investment mandate to be also approved, is of a special importance where the dealings were between a director and HIH, where the director had a clear conflict of interest, potential if not actual. 301 Thus when Mr Adler says that he presumed Mr Williams had dealt with it: "In my absence or directly with the Board and Investment Committee".

Mr Adler must have known that this had not occurred. That indeed was what Mr Cohen correctly said in his reply to Mr Adler of 8 December 2000 in relation to the Investment committee; TB, 256. 302 When Mr Adler in his letter refers to the original idea as one that he felt: "Would be beneficial for myself (obviously) and to HIH"

he was clearly acknowledging or admitting the conflict of interest and his appreciation of it. 303 That paragraph of the letter also makes clear that he had approached Mr Williams on the idea, and that they had discussion "over an extensive period of time" before "Mr Williams agreed on behalf of HIH, to make a $10 million investment". It seems intrinsically unlikely that Mr Adler did not also tell him of the intended purchase of HIH shares. Mr Adler suggests Mr Howard was chosen as a "point man" to update on a regular basis and to have any future discussions, with provision for a quarterly report. But not even Mr Adler suggests there was to be any implied primary responsibility on Mr Howard's part to inform the Board of the investment or to so inform the Investment Committee, so absolving either Mr Adler or Mr Williams from primary responsibility to do so. I conclude that responsibility then fell on Mr Fodera, especially given his title as finance director, should those with primary responsibility fail in that obligation. Indeed the context rather suggests Mr Howard was merely to keep Mr Williams informed and be a go-between for Mr Adler and Mr Williams, as "point man". 304 The final correspondence in the sequence, which warrants reference, is a letter from Mr Adler to Mr Cohen dated 8 December 2000. Mr Adler asserts that he did not know that the transaction was not approved by the Investment Committee: "Even though I am a member".

He adds: "As we both know, I'm frequently asked to leave meetings due to conflicts or meetings are held in my absence due to conflicts." 305 However, Mr Adler well knew what happened when a matter involving a conflict of interest on his part was being dealt with, with his leaving the room or otherwise not participating knowing of the subject matter to be discussed. For example, he left the room during the meeting of 1 June 2000 when an issue concerning an entity Pacific Capital Partners was being discussed; TB, 4/1450 and see Mr Adler's letter of 11 December at TB, 1/257B, where he objects to private meetings of board members in his absence in regard to FAI. In that further correspondence, Mr Adler affirms his entitlement to be present at every meeting and then decide if there is a conflict. Moreover, clearly enough if such a private meeting of directors did occur, he had been told about it by Mr Cohen afterwards. There is no suggestion that in any event the Investment Committee Meetings proceeded without first informing Mr Adler of their subject matter, because of some anticipated conflict. The letter of 8 December 2000 appears therefore to be wholly self-serving. Certainly Mr Adler has not taken advantage of the opportunity to provide any evidence that would support his contention that he had any expectation in reality that meetings of the Investment Committee might be held in his absence, without his even knowing of the matters to be discussed. That this should be so is so intrinsically unlikely that I would reject any such suggestion. 306 At the Board Meeting on 14 December 2000 (TB, 1485) the Minutes record Mr Adler as saying that company management should have complied with the requisite internal procedures. This, as the Plaintiff says, is an admission that there were internal procedures to be complied with, being here approval by the Investment Committee and the Board, in circumstances where Mr Adler must have known that such approval had not been given.

CONCLUSION 307 In so far as Minter Ellison, in advising the Board in its letter of 26 November 2000 as to the legality of these transactions, relied upon information provided from interviewing Mr Williams and Mr Adler, they were given materially false information. This included that PEE had not acquired any HIH shares when HIH invested and that HIH was not aware at the time of the use of the funds when, as is clear from the evidence, both Mr Williams and Messrs Adler, Howard and Fodera were all aware of the use of those monies to acquire HIH shares. Furthermore, failure of Mr Williams and Mr Adler fully and frankly to describe what had occurred in relation to the $10 million payment and AEUT's investments in companies previously owned by Adler Corporation and loans to associates of Mr Adler amounts to an admission of their consciousness of impropriety in what occurred in relation to those matters and therefore points to that impropriety itself. Even if Mr Williams was not fully aware of the latter, he knew enough that he should have made it his business to find out the full details. Instead he simply assured Board members prior to the Board meeting on 12 October 2000 that "it has been fixed and we should move on". Minter Ellison's opinion of 29 November 2000 afforded no protection to Messrs Adler and Williams from any impropriety or breach, as Mr Williams and Mr Adler must have known it rested on incomplete and inaccurate information. They should also have been alerted by the auditor's continued concerns. Nor is Mr Adler to be believed when he stated that he was unaware that neither the Board nor the Investment Committee knew of the creation of the trust. He was a member of both Board and Investment Committee and knew what was disclosed to each. There was no practice of bypassing a member of the Investment Committee on the subject matter of disclosure, because of any perceived conflict on that member's part. There is absolutely no evidence that board members met privately on AEUT without Mr Adler, or that he had any anticipation at the time that this would occur.

Events pertaining to AEUT in relation to HIH shares 13 and 14 December 2000 to 22 December 2000 308 On 13 December 2000, the auditors, Arthur Anderson, wrote a letter to Mr Cohen as Chairman of HIH expressing continued concerns as to whether contravention of the Corporations Law had occurred. They stated that having given the circumstances careful consideration and referring to the letter of Minter Ellison dated 29 November 2000 and having taken advice from senior counsel: "We continue to have concerns that a contravention of the Corporations Law may have occurred given the circumstances taken as a whole."

The letter states that: "However, if there is further material that might remove our concerns, please provide it to us immediately." 309 The letter then states that otherwise the only options now open to Arthur Andersen and/or HIH appear to be for HIH to refer the circumstances of the involvement of HIH and the trust to ASIC or for Arthur Anderson, as auditors, to do so. 310 On 15 December 2000, Mr Adler wrote to all of the Directors of HIH in anticipation of the Board Meeting that day purporting to summarise the asset position of the Pacific Eagle Equities Trust in the context of: "The likelihood of early realisation and the value thereof". 311 He refers specifically to a loan of $1,300,000 to Pacific Capital Partners and to the various loans as well as to investments dstore, Planet Soccer and Nomad. Nowhere is there any disclosure that in the case of the loans these were to companies associated with Adler Corporation or Mr Adler and in the case of the investments these were purchased from Adler Corporation, at Adler Corporation's original cost. (See TB, 261) 312 Subsequently, in a memorandum to Mr Cassidy from Mr Ballhausen dated 19 December 2000 (TB, 264) this is rectified by a great deal more information being given about the various investments and loans including the origins of the investments in dstore, Planet Soccer and Nomad Telecommunications in purchases from Adler Corporation. At the conclusion he says unlike Mr Adler: "In summary, I believe PEE will suffer a significant diminution in the value of its investments. The vast majority of this loss is attributable directly to investments originally held by Adler Corporation that were transferred to PEE in August/September this year."

He notes that Mr Adler had resigned from PEE on 4 October that year leaving PEE with no directors or a secretary. 313 Following Arthur Anderson's earlier requirement that the matter be referred to ASIC on 22 December 2000 as I have earlier mentioned, Mr Cohen as Chairman of HIH, wrote to ASIC: "To inform you of the events which are set out in the attached schedule." [TB 267] .

The letter goes on to say: "HIH's auditors are Arthur Anderson, Chartered Accountants. In conducting the audit of HIH's finance reports, Arthur Anderson became aware of certain events which are included in the Schedule of Events and which are marked with an asterisk. Arthur Anderson requested that the Board conduct inquiries to ascertain the circumstances which surrounded those events. Having made appropriate inquiries, the Board of HIH understands that all relevant matters concerning the events that Arthur Anderson became aware of are set out in the Schedule of Events. Upon legal advice, the Board does not believe that the matters in the Schedule involve any contravention of the Corporations Law. Nevertheless the Board of HIH has decided to bring to the attention of the Commission the matters in the Schedule of Events." 314 No mention is made in the letter that the auditors do not agree with that view of there being no breach of the Corporations Law. 315 The Schedule of Events contains para 4. It is false in suggesting that it was not envisaged that the trust would trade in HIH shares, though I do not thereby suggest that Mr Cohen was aware of its falsity. 316 Significantly, para 7 states: "Prior approval of the Investment Committee, a committee of the HIH Board, is required for such an investment to be made. As the proposal to make this investment was not presented to the Investment Committee, the investment as a consequence was not authorised." 317 That statement is telling evidence for the Investment Guidelines to have been actually in force, and breached, contrary to the submission of the First and Fourth Defendants dealt with earlier. 318 Paragraph 9 states: "The decision to purchase the Shares [the HIH shares] was made solely by Mr Adler." 319 That statement is incomplete, failing to mention Mr Williams' involvement, though again I do not suggest that Mr Cohen necessarily was aware of it. 320 Paragraph 11 states: "Mr Adler made the decision to invest in HIH Shares as he saw the recent fall in the share price as a good trading opportunity and expected to make a quick profit and boost the funds of the trust." 321 I have already stated my conclusion that that was not Mr Adler's real purpose. Rather his real purpose was to support the share price for the benefit of his own substantial shareholding in HIH. 322 Paragraph 14 states: "On 16 June 2000 Mr Adler informed Mr Williams that he had decided to take advantage of the low HIH share price and decided to invest some of the trust funds in HIH shares." 323 Paragraph 15 states: "Mr Williams had no prior knowledge of Mr Adler's decision to purchase the HIH shares". 324 As the evidence earlier stated makes clear, Mr Williams was well aware of the decision to purchase the HIH shares at the latest contemporaneously with that purchase commencing, though I would infer, probably before. Thus, the statements are misleading and incorrect although again I do not suggest that Mr Cohen knew this. 325 Paragraph 23, the Schedule states: "Other members of the HIH Board, who were not directors of HIHC, first became aware of the existence and operations of the trust on 12 September 2000." 326 I have dealt earlier with the evidence relating to that matter. 327 Paragraph 25 states: "HIHC's investment in the trust was disclosed in a related party transactions section of HIH's Annual Report dated 16 October 2000." 328 That disclosure, (which is to be found in TB, 2204) states: "Directors of the consolidated entity and directors of its related parties, or the director related entities, conduct transactions with entities within the consolidated entity that occur within a normal employee, customer or supplier relationship on terms and conditions no more favourable than those which it is reasonable to expect the entity would have adopted if dealing with a director or director related entity at arm's length in similar circumstances." 329 It is then said that these transactions include the following with the fourth of these transactions being described in these terms: "At balance date, the consolidated entity had invested $10 million in the Australian Equities Unit Trust. The manager and trustee of this fund is Pacific Eagle Equities Pty Limited, an entity controlled by a director, R S Adler AM. Mr Adler also had a five percent beneficial interest in the fund at balance date." 330 Given the varying suggestions as to whether Mr Adler in fact owned beneficially any shares in Adler Corporation, in circumstances where the Annual Report showed him owning all of them, Mr Adler's five percent beneficial interest remains unexplained, save on the supposition that Mr Adler owned beneficially half of the shares in Adler Corporation. Be that as it may, the stated conclusion quoted above was that the related party transaction was: "… on terms and conditions no more favourable than those with which it is reasonable to expect the entity would have adopted if dealing with the director or director related entity at arm's length in similar circumstances"

There is, incidentally, no suggestion of a lack of any "financial benefit" in this disclosure, but rather the admission that there was, albeit (it is said) on arm's length terms. 331 That statement of arm's length terms, as I have earlier concluded, is not correct in relation to the original $10 million before the trust was constituted, which was made available without any formal documentation or reasonable safeguards. Nor is the statement congruent with the many features of the arrangement which are conveniently set out at para 34 of the Plaintiff's Statement of Claim and having consequences set out in the pleaded Particulars to para 40 of that Statement of Claim. One need only refer to clause 24(c) of the Trust Deed permitting self-dealing which exposed the trust fund to the risk of transactions by the Trustee involving clear conflicts of interest, such as the very transactions that occurred in relation to Nomad, dstore and Planet Soccer. This was moreover, without any of the conventional protections requiring independent evaluation of the terms of the transaction, where the terms of the trust expressly permitted self dealing. Such terms could not, on any view, be reasonable on an arm's length dealing basis, so that the statement in the accounts was simply false. Moreover, the transaction, insofar as it involved the use of the funds to purchase shares in HIH, revealed fairly and squarely the conflict of interest that Mr Adler faced. Thus nothing in the Trust Deed precluded him from selling his own shares in HIH in advance of his causing PEE to sell the HIH shares held in the trust, as in fact happened to the substantial disadvantage of the trust. One could not think of anything more fundamental than that the terms of such a trust should have had proper safeguards in place which would have removed Mr Adler's freedom to advantage himself at the cost of the trust. That could have been achieved simply by appointing an independent third party with no such conflict, without HIH itself controlling the disposal of its shares with the legal complications that might ensue. To say that this protection is sufficiently provided at general law under the law of trusts is to reduce HIH's safeguards to enforcement in the courts under likely expensive and drawn out litigation. 332 Paragraph 18 of the Schedule of Facts given to ASIC states the provisions included in the Trust Deed, But it makes no mention of the omission of any safeguard to deal with the obvious conflicts of interest that Mr Adler would have in managing that trust. 333 Finally, the Schedule of Events makes no mention of the assets by way of the "in-house" investments and loans that had been acquired or made. I refer here to the investments from Alder Corporation and the loans made to entities associated with Mr Adler or Adler Corporation. Again, I do not suggest that Mr Cohen had direct knowledge of these matters since the communication to the Board from Mr Adler, to which I have earlier made reference, dated 15 December 2000 (TB, 261) does not mention that the relevant investments or loans were so associated with Adler Corporation or Mr Adler. Mr Ballhausen's subsequent note of 19 December 2000 is not directed to Mr Cohen but rather to Mr Cassidy, with circulation to Mr Wein and Mr Fodera.

CONCLUSION 334 The disclosure by the Chairman of HIH Mr Cohen, in his letter of 22 December 2000 to ASIC at the urging of Arthur Andersen of the situation concerning the AEUT Trust and the investment in shares in HIH contained a number of misstatements and omissions, though this is not to suggest that Mr Cohen was aware that there were such misstatements or omissions. Minter Ellison's earlier letter of advice to the Board of HIH of 29 November 2000 was similarly based on incomplete or inaccurate statements, again with no suggestion that Minter Ellison were aware of this. The directors who were aware were Mr Williams to a degree and Mr Adler in toto, neither of whom on the evidence, made any attempt to correct these. The disclosure of HIHC's investment in the Trust in the related party transactions section of HIH's Annual Report dated 16 October 2000 was false, in stating that these transactions were "on terms and conditions no more favourable than those with which it is reasonable to expect the entity would have adopted if dealing with the director or director related entity at arm's length in similar circumstances". That falsity stems from the absence of proper safeguards to deal with Mr Adler's obvious actual or potential conflicts of interest in managing the trust as well as its imbalance in terms of favouring Mr Adler over HIH's interests. To say that trust law itself provides sufficient safeguards is no answer at all, as it simply left HIHC as a unitholder with the prospect of expensive and drawn out litigation.

Financial assistance by HIHC in the purchase of its parent's shares which was materially prejudicial FIFTH LEGAL ISSUE 335 Because this aspect of the transaction is not dependent on the later investments by the AEUT Trust, it is therefore convenient to deal with this legal issue now. 336 Section 260A(1) is in the following terms: "A company may financially assist a person to acquire shares (or units of shares) in a company or a holding company of the company only if: (a) Giving the assistance does not materially prejudice: (i) The interests of the company or its shareholders; or (ii) The company's ability to pay its creditors…." 337 Paragraphs 68 and 69 of the Plaintiff's Statement of Claim provides the basis and Particulars for the Plaintiff's contention that HIHC contravened s260A of the Corporations Law. I quote these paragraphs below: "68. The provision of $10 million by HIHC to PEE in the circumstances referred to in paragraphs 20 to 23 (inclusive) above amounted to the provision of financial assistance by HIHC to enable PEE to acquire shares in its holding company, HIH. 69. The giving of the financial assistance materially prejudiced the interests of HIHC and its shareholder, HIH. Particulars (a) a diminution in the value of HIHC's stake in PEE reflected by actual loss on the HIH share purchases of $2,102,802.74; (b) exposure to diminution in the value of HIHC's stake in PEE should the price of HIH shares fall and therefore cause PEE to suffer a loss; (c) loss of use of $3,973,397.84 which could have been used for other investments or other business purposes; (d) the creation of the false impression that a high profile director of HIH such as Adler was funding the purchase of the HIH shares rather than HIHC; (e) the exposure to the risk of publication of the fact that HIHC was funding the acquisition of HIH shares and the consequent negative impact on HIH, HIHC and the HIHC stake in PEE of publication of that information in the circumstances of the declining HIH share price. (f) neither HIH nor HIHC acquired any, or any satisfactory, means of ensuring that HIHC could recover the amount provided together with interest thereon, or profit in respect of its use." 338 The principally relevant issue is whether the giving of the financial assistance did in the present circumstances materially prejudice: "(i) The interest of the company or its shareholders". 339 When regard is had to the substance of the transaction, it amounts to this. HIHC handed over $10 million to PEE, without in the first instance any documentation, of which $3,991,856.21 (inclusive of stamp duty and brokerage) was used to pay for the HIH share purchases, such intended use being known to Mr Williams, the Chief Executive Officer of the HIH Group. Thus, the interest of HIHC and through it HIH in the cash amount so applied, was converted into the interest, but only by 7 July 2000, of a unit holder in a unit trust in which HIH had no direct interest in the assets. It is said in paragraph (b) of the pleaded Particulars that this materially prejudiced the interests of HIHC and through it HIH by bringing about:: "exposure to diminution in the value of HIHC's stake in PEE should the price of HIH shares fall and therefore cause PEE to suffer a loss"

And see also the other Particulars. 340 Against the background of the Plaintiff's pleaded case and before dealing with the evidence relied upon in support of the Particulars, I should start with s260A itself. The origin of s260A, though not of course its numerous predecessors in their variant forms, is to be found the reforms achieved by the Company Law Review Act 1998 (Cth). Importantly, it was part of a project of simplification of the Corporations Law. 341 The explanatory memorandum for the Company Law Review Bill 1997 (Cth) contains the following provision: "Paragraph 12.76. The Bill will therefore prevents a company giving financial assistance to a person to acquire shares, or units of shares, in the company or holding company if the transaction would materially prejudice the interests of the company or its shareholders or materially prejudice the company's ability to pay its creditors (Bill, s260A(i)(a)). This is subject to the exception that a company will be able to give financial assistance if the transaction has been approved by the company's shareholders in the manner set out in s260B(Bill, s260B (Bill, s260A(i)(b)). This approach is intended to minimise the difficulties currently experienced for ordinary commercial transactions. In particular, for transactions which do not involve material prejudice, the new rules will make it unnecessary to decide whether the transaction involves the giving of financial assistance. The new rules will bring the requirements for financial assistance more closely into line with those proposed for capital reductions." [emphasis added] 342 I have emphasised the word "transaction" because it supports an interpretation of the expression "the assistance does not materially prejudice" which embraces the whole transaction constituted by the assistance to acquire the shares and so brings into account its immediate consequences in terms of "material prejudice". That invites the Court to take the kind of commercial approach advocated by Hofmann J (as he then was) in Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] PCLC 1. Hofmann J said (at 10-11) that: "It was necessary to look at all interlocking elements in a commercial transaction as a whole , and to determine where the net balance of financial advantage lay." [emphasis added]

343 As is said in Ford's Principles of Corporations Law ("Ford") at 24,710: "Under s260A the question is whether the net transfer value so assessed is materially prejudicial to the interests which the section protects."

See also Sheller JA in Wambo Mining Corporation Pty Ltd v Wall Street (Holdings) Pty Ltd (1998) 16 ACLR 1601 at 1607 who applied the net transfer of value test on the predecessor provision. 344 Thus, it can be seen that the new s260A opted for what might be called the "impoverishment" doctrine as against a more wide ranging prophylactic approach (which asks whether the dominant intention of the company was to facilitate an acquisition of shares, whether or not the company's assets were reduced). Thus as is pointed out in Ford: "The law will … apply to a transaction which involves conversion of a company asset into one of lesser quality (for example where cash is converted into an unsecured loan without interest to the purchaser of shares).

Prior to the present statutory regime, there were competing lines of authority as to whether impoverishment was necessary (see Ford 24.711). 345 Finally, I would adopt what Ford says as to onus being on the party seeking to demonstrate lack of material prejudice (at 24.710): "The notion that the onus is on those seeking to defend the transactions to show that there is no material prejudice is reinforced by s1324(1B) which says that in proceedings for relief under that section based on the alleged contravention of s 260A(1)(a), the Court must assume that the transaction constitutes a contravention unless the Defendant proves otherwise." 346 That contention is reinforced by the presence of the "material prejudice" provisions (s260A(1)(a)) immediately alongside what in earlier versions of the prohibition on financial assistance was the other gateway out of that prohibition, namely shareholder approval (see s260A(1)(b)) and note the final gateway added in the contiguous s260A(1)(c). 347 I turn now to the potential application of s260A in the present circumstances. 348 The First and Fourth Defendants contend that the time for determining whether the giving of financial assistance materially prejudiced the interests of HIHC and its shareholder HIH, is at the time the financial assistance is given. It thus could not comprehend events giving rise to material prejudice at a later point of time, in particular events three and a half months later when the shares were sold at a loss, actually realised, of $2,102,802.74. The First and Fourth Defendants contend that as no actual loss had occurred at 15 June 2000, that is all that is relevant, so disposing of Particular (a) quoted above. The other Defendants adopt that argument. 349 That, however, is an over-simplification. As I earlier conclude, one assesses material prejudice by reference to the transaction with its interlocking elements giving rise to the financial assistance, taking into account its financial consequences for the interests of the company or its shareholders. This is in order to determine where the net balance of financial advantage lies from the giving of the financial assistance. Those elements of the transaction start with the receipt of cash by PEE by way of unsecured loan or so as to give rise to an interest as beneficiary under an express or resulting or Quistclose purpose trust pending documentation. Subsequently, within three weeks, the next element of the transaction sees the interest of HIHC become that of a holder of B class units, all this with the intention on HIHC's part to purchase and subsequently make profit on future re-sale of, the HIH shares. Meantime such profit would be locked into the trust for three years along with any other profits or losses. I say this, though Mr Adler's true intention, and thus PEE's, as distinct from that of HIH and HIHC, was as I have earlier determined, to use his totally unsupervised control of PEE and the absence of express safeguards in the AEUT documentation, to shore up the HIH share price for the benefit of his own company's very substantial shareholding in HIH. That Mr Adler's intention was not to make a "quick profit" is borne out by the fact that when the price rose to $1.21 on 11 July 2000 and a profit of up to twenty percent could thus have been realised, Mr Adler passed up the opportunity to cause PEE to sell. Moreover, when PEE did sell later, it was only after Mr Adler had caused Adler Corporation first to sell his own shareholding in HIH down, thus accentuating the loss for PEE. 350 There was therefore a fundamental mismatch between HIHC's intention of making a quick profit and the reality that

(a) it had surrendered its cash to a Trust; (b) which it did not control; (c) to a person with an inherent conflict of interest; (d) subject to no proper safeguards beyond the general law to ensure that that conflict was resolved in favour of HIHC; (e) where Mr Adler intended (i) rather to support the HIH share price even at the cost of a quick profit, which would in any event be locked in for three years if made; and, (ii) to conceal from the public the fact that it was HIHC's money that was being used, by pretending it was for Adler or his family interests. Material prejudice thus resulted from giving the financial assistance. In the words of paragraph (f) of the Particular even at the outset: "Neither HIH nor HIHC acquired any, or any satisfactory, means of ensuring that HIHC could recover the amount provided together with interest thereon or profit in respect of its use."

And note also Particulars (b), (c), (d) and (e) in relation to the eventual loss realised referred to in Particular (a). 351 That the loss of $2,102,802.74 was ultimately realised, simply reflected the working out of the consequences which were inherent in the financial assistance given, culminating in the subscription by HIHC of B class units in the trust on 7 July 2000 and attended by the disadvantageous consequences from HIHC's point of view as are set out that at paragraph 40 of the Plaintiff's Statement of Claim (and see also paragraph 34). 352 That the essential elements were in place from the outset for the later loss and consequent material prejudice which did occur, is borne out both by the circumstances set out above and by the following additional circumstances which surrounded the financial assistance:

(i) HIHC paid out $10 million to an entity incorporated upon the very day of payment, without any security for its return and without any control over its disposition, and without any documentation whatsoever, in circumstances where the law (s259C) would have precluded effectuation of any such resulting trust by a transfer of the relevant shares back to HIHC, it being no answer that such resulting trust still gave a beneficial interest to HIHC. Clearly it suffered material prejudice when that result is compared to the position HIH and HIHC would have had if HIHC had retained the $10 million in its hands free of risk or invested it otherwise (see Particular (c) in para 69 which essentially reflects this); (ii) There was material prejudice in the prospect of the covert financing by HIHC of the share purchases becoming known to the public and being seen by the public as an act of desperation by HIH to shore up its share price, exacerbated by the fact that Mr Adler deliberately conveyed the impression that it was his own interests that were buying the shares yet he put HIHC at risk that if the true facts were known, the public would see that Mr Adler had no wish to put at risk his own family interests' money. (iii) Mr Cameron, (at paras 11 and 17(a) of his affidavit) said that it would have been likely to be so seen and Mr Potts (T, 651.1) conceded that it would be possible that it would be seen in this way. He also stated that it would be seen as an act of confidence on the company's part in buying its own shares, though he did not deal with how it would be so seen if the public were to learn that Mr Adler had first allowed, even encouraged, a misleading impression to be conveyed, that it was his own money or that of his family's which was being so used. The fact that some, even though not all, people might be likely to have seen the transaction in that way, would be enough to raise the prospect of real prejudice to HIH's reputation and indeed to its share price, thus putting at risk the short term profit which lay behind the company's motivation in entering into the transaction in the first place though not, as I have said, the true motivation of Mr Adler. (iv) From an investment point of view, there were a number of indications against the appropriateness of the financing, including that the share price had been continuously falling since the beginning of the year (TB, 104A - E), there was publicity in the market place indicating in strong terms that HIH was in need of capital and would have difficulty raising it bearing in mind the state of its share price (Westfield article at TB, 26), Mr Adler's view that HIH would in fact need to raise $250,000,000 more capital (Mellish para 25; Westfield at T, 626.5); indeed, contrary to what the Media Release of 15 June 2000 asserted, Mr Adler had, and had expressed to Mr Williams, extremely gloomy views about the company (letter of 6 September 1999 at PX17 T1 and the later letter of 12 December 2000 at TB, 258A) and finally HIH, but not the market, knew of HIH's "lousy" profit performance for the year ended 30th June 2000 (submissions paras 19, 20 and 34). 353 Mr Cameron expressed the view in his second affidavit (13 November 2001) that an investment in HIH shares at this time was "speculative" (para 2 and see para 11 of his first affidavit). I agree with the Plaintiff's submissions that Mr Cameron was well justified in his evidence having regard to the matters noted above. Moreover he did not think that the UBS Warburg publication, which was more favourable, would necessarily have any effect because it was only one analyst's view (T, 312.55 referred to in the First and Fourth Defendants' written submissions at para 15(b)). Mr Potts, in cross-examination, gave evidence that there were ten or twelve very large broking firms that published a great deal of research material and had only referred to reports from two of them (T, 643.45 - 643.50). 354 Moreover, neither the Salomon Smith Barney nor the UBS Warburg Report constituted a recommendation to buy HIH shares, being favourable reports upon which the First and Fourth Defendants rely. Mr Potts' interpretation of the Salomon Report was that it was saying that for those prepared to take a higher risk profile, HIH was a "speculative buy" (T, 645.35 - .40) thus reinforcing that it was a speculative stock.

CONCLUSION 355 HIHC suffered material prejudice as a result of its financial assistance, so contravening s260A of the Corporations Act. It did so by exchanging cash for either unsecured indebtedness owed to it, or alternatively in the first instance equitable rights by way of resulting or other trust in respect of the HIH shares being contemporaneously bought. Such rights against PEE were from the start of materially lesser value than the cash handed over. This is because such equitable rights would be likely to be contentious and to require expensive litigation to enforce in Court. Thereafter material prejudice also resulted from the other elements of the transaction, that is, the lack of safeguards in, and disadvantageous terms of, the AEUT Trust documentation and the circumstances which, from its inception, rendered the investment in HIH shares inherently likely to give rise to the loss that in fact occurred. These included Mr Adler's intention, not to make a quick profit, but to support the HIH share price. A loss was inherently likely from the inception, and did in fact eventuate, both in HIH's carrying value as an investment and when the shares were realised at a loss. Either would constitute "material prejudice" both to HIHC and HIH within the meaning of s260A(1)(a) and in terms of the pleaded Particulars. That completes the elements for such contravention by HIH and HIHC to have occurred. It leads to the conclusion that both HIH and HIHC contravened s260A of the Corporations Act.

"Involvement" by Messrs Adler, Williams and Fodera, and of Adler Corporation in breach of s260A SIXTH LEGAL ISSUE 356 I turn now to consider whether Mr Adler, Mr Williams or Mr Fodera were involved in HIHC's contravention of s260A so as to be liable under s260D(2) of the Corporations Act. Similarly as to Adler Corporation. I shall deal with each of them in turn. But before doing so I need to deal with a preliminary question, namely, whether "involved" as defined by s79 requires that there be actual knowledge on the part of the person concerned, not only of financial assistance to acquire shares, but also that the assistance did materially prejudice, in this case, "the interests of the company or its shareholder", as the First and Fourth Defendants contend. 357 In York v Lucas (supra), in construing the equivalent provision in the Trade Practices Act to s79, the High Court held that where it is thought to make a person liable as an accessory to a contravention it is necessary to establish that the person had intentionally participated in the contravention. To establish intentional participation, the Court held that it must be proven that the person has knowledge of the essential matters that make up the offence or breach (in that case of s52(1) of the Trade Practices Act). At 670, the majority comprising Mason ACJ, Wilson, Deane and Dawson JJ, observed that the words require: "a party to a contravention to be an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention."

The majority went on to say: "There can be no question that a person cannot be knowingly concerned in a contravention unless he has knowledge of the essential facts constituting the contravention." 358 That knowledge is actual and not constructive. But a combination of suspicious circumstances and the failure to make appropriate inquiry when confronted with the obvious, makes it possible to infer knowledge of the relevant essential matters: Pereira v Director of Public Prosecutions (1988) 63 ALJR 1 at 3. 359 Turning to s260A, if it be the case that the onus lies upon the company to demonstrate, relevantly, that giving the assistance does not materially prejudice the interests of the company or its shareholders, this being in effect by way of defence rather than an element of the contravention, it would follow that each of Mr Adler and Mr Williams (I leave aside Mr Fodera) had the necessary knowledge of the essential facts. This is because, first, each were aware that HIHC was financially assisting AEUT when formed with an intent for it to buy HIH shares. Before that, each were aware that the assistance was to an entity, initially Drenmex then PEE, to acquire shares in HIHC's holding company HIH. Even if, contrary to the inference I would draw, Mr Williams only knew of the HIH share transaction on 16 June 2000, that is still sufficiently contemporaneous with the funding and ongoing share purchases. These did not end on 15 June 2000 with the hand over of the cheque but continued throughout June 2000. Thus the later HIH share purchases were interlocking elements of the same transaction. Clearly, the evidence on this makes the position beyond dispute. However, if actual knowledge had to extend to whether the assistance did in fact materially prejudice the interests of the company, while I would conclude that Mr Adler had knowledge of that too, I will need to deal in more detail with the extent and relevance of the knowledge of Mr Williams and later Mr Fodera. 360 A powerful argument in favour of a more limited requirement for actual knowledge is that the contravention is made out unless the company satisfies the onus upon it to show that one or other of the potential defences or gateways apply. That gateway relevantly here is that the assistance does not materially prejudice the interests of the company or its shareholders. To convert what is thereby expressed in the negative to an affirmative element of the contravention when it comes to the aiding and abetting provisions of s260D(2) would be incongruous in terms of the primary position of the company as principal offender. It proceeds by denying that the contravention is made out by the proof of each of the elements which precede the words "only if", with thereafter the onus passing to the company concerned. Clearly the company knows best the consequences in terms of material prejudice to it, and in consequence its shareholders and its creditors. 361 Moreover, under s1324, the availability of an injunction extends to someone under sub-paragraph (c) whose conduct would constitute "aiding, abetting, counselling or procuring a person to contravene this act" whilst sub-section (1)(b) makes clear that: "The court must assume that the conduct constitutes, or would constitute, a contravention of that paragraph, section or provision unless the company or person proves otherwise."

This clearly reverses the onus when it comes to an injunction. That supports on grounds of consistency the preferred interpretation of the more limited scope required for actual knowledge under the operative s260A(1). 362 Moreover, s1318 of the Corporations Act and the earlier s1317S allow the court latitude where there are degrees to culpability in terms of lack of knowledge of matters pertaining to potential defences, so enabling the court to excuse the contravention in appropriate circumstances. 363 Finally, such an interpretation accords with the legislative history of s260A as earlier briefly recounted. The better view, though there is also strong authority to the contrary, is that the predecessors to s260A were prophylactic in intent giving the prohibition a wide interpretation so as to prevent such financial assistance at the outset and buttress the doctrine of maintenance of capital. The impoverishment notion on this view, is not a necessary element of the contravention in Australia though cases like Burton v Palmer (1980) 2 NSWLR 878 are to the contrary. For a fuller discussion of the competing lines of cases see Ford at [24.711]. If the wider prophylactic view were right, it would be a radical change to the old law were impoverishment, which had not been an element of the offence under the old law, to become under the current legislation, not merely a defence but an actual element of the contravention. That would in any event be the more unexpected in simplification legislation whichever view were earlier to have prevailed. Moreover that supposed element is grouped with what are clearly defences suggesting rather it is a defence also; see s260A(1)(b) and (c). 364 As I have said, whether actual knowledge is required of the matters of material prejudice or not, Mr Adler was fully aware of all of the matters earlier recounted which demonstrate the presence of material prejudice. 365 Mr Williams, who gave no evidence as to his knowledge, may nonetheless have been unaware of Mr Adler's true purpose in having PEE, through AEUT, purchase shares in HIH in order to support the HIH share price. If so, he would most likely have had the purpose which Mr Adler (falsely) professed. That purpose was to make a short term profit from the dealing in HIH shares. But even absent that knowledge of Mr Adler's real purpose (supporting HIH's share price), Mr Williams was aware of all of the other features of the transaction which rendered the assistance materially prejudicial to the interests of the company, even if, as might be assumed in his favour, he gambled on ultimate benefits outweighing any material prejudice. But if that were so, what he was gambling on was that later events would produce a profit for the company notwithstanding that at the time of the financial assistance he was aware of all of the factors pointing to material prejudice, save (it may be) Mr Adler's true motive. 366 Moreover, Mr Williams and Mr Adler had co-operated to ensure that the in-house HIH expertise was not brought to bear in assessing the wisdom of purchasing shares in HIH itself, through the fact that the transaction was entered into with no input from the Investment Committee or the Board or indeed from those involved with investment management. Mr Howard's role was purely to implement the transaction, not to advise on its wisdom. In circumstances where Mr Williams has chosen not to give evidence of matters which would be peculiarly within his knowledge and where otherwise an inference is amply available that he had actual knowledge of all the elements of the contravention, both in the wider and narrower sense, Mr Williams must be taken to have been "involved" in HIHC's contravention of s260A, for the purposes of s260D of the Corporations Act. 367 Finally I turn to Mr Fodera. On the narrower view of the scope of knowledge (excluding material prejudice), he knew two essential facts. First he knew of the financial assistance (if not its precise mode) and second its application (by an Adler associate) to the purchase of HIH shares (though he may well have thought it was being done by Drenmex). He did not know that PEE had been substituted for Drenmex (though he knew Drenmex was an Adler associate, as indeed was PEE). He did know the purchasing was being done by an Adler associate. He may be taken not to have known at least at the outset that the money was supposed to come, not by way of the initially intended unsecured borrowing, but via a trust. Nonetheless financial assistance would be afforded by either an unsecured loan (which such it probably was at the outset) or by way of a trust subscription. So he knew the essential fact that money was going to an Adler associate but not that it was PEE) and that such money would afford financial assistance in providing funds required to settle the purchase of HIH shares made that day (15 June 2000). As Mr Fodera occupied the position of the Financial Officer, he was aware of the company's "lousy results" and must be taken to have been aware of the declining share price throughout the year. He would not have been aware of Mr Adler's true motive. Most certainly, he procured implementation of the transaction in arranging for Mr Howard to carry it out, bypassing Mr Ballhausen. There was no question that Mr Fodera knew that the $10 million was urgently needed to pay for the purchase of HIH shares. 368 One does not here need to reach a conclusion as to whether Mr Fodera actively set about bypassing the Investment Committee and Board or simply assumed Mr Williams would deal with those matters, though as I conclude later, he at least took no steps later to ensure that the matter did go to the Investment Committee for ratification. Thus, on the narrow knowledge test, and taking into account the role he played, he too would be a person who "is involved in a company's contravention of s 260A". If the wider knowledge test were applied (contrary to the view I consider correct) that is, knowledge of the essential facts going to material prejudice, though it be a defence, I would give Mr Fodera the benefit of the doubt, though the case is close to the line. As to Adler Corporation, for the same reasons as stated at para 198 in relation to s209(2) of the Corporations Act, it too was involved in the contravention of s260A.

CONCLUSION 369 Each of Mr Adler and Mr Williams were "involved" in the contravention by HIHC of s260A of the Corporations Act, in giving financial assistance to HIHC to acquire shares in its holding company HIH, being assistance which did materially prejudice the interests of the company or its shareholders. However, if it be the case that for Mr Fodera to be so involved, he had to have knowledge not only of the financial assistance but also of the essential facts pertaining to material prejudice (though it be a defence rather than an element of the contravention) then I could not be positively satisfied that at the time Mr Fodera had that knowledge of material prejudice. As I do not consider that there need be knowledge of what is essentially a defence rather than an ingredient of the contravention, I conclude that he too was sufficiently involved, though to a lesser degree than Messrs Williams and Adler. The result is that each contravened s260D(2) of the Corporations Act as did Adler Corporation, with the above qualification concerning Mr Fodera.

Application of s180 to s182 of the Corporations Act to the investment in AEUT and by AEUT in HIH in relation to Mr Adler SEVENTH LEGAL ISSUE 370 Thus far, I have dealt only with the initial payment of $10 million and its application in paying for shares in HIH. I have not dealt with the other investments in dstore, Planet Soccer (each as at 25 August 2000) and each acquired from Adler Corporation at its original cost to Adler Corporation. Nor have I dealt with the acquisition of Nomad, acquired 26 September 2000, also from Adler Corporation and also at its cost. Nor finally have I dealt with four unsecured loans which Mr Adler caused PEE to make as trustee of AEUT, being $160,000 to Morehuman Pty Limited, about 26 July 2000, $200,000 to Pacific Capital Partners on or about 3 October 2000, $500,000 to Intagrowth Fund No. 1 on or about 20 September 2000 and $1,275,475 to PCB Ensor No. 2 Pty Limited, such latter sum being advanced by a number of payments made over the period from 28 June 2000 to 30 November 2000. 371 These later investments also fall to be considered in relation to Mr Adler (but not Mr Williams or Mr Fodera) as contraventions of s180 to s183 of the Corporations Act. However all of Messrs Adler, Williams and Fodera are said to have contravened ss180-182 (and in the case of Mr Adler s183) in relation to the original $10 million investment and its application in buying shares in HIH. The pleaded Particulars are primarily to be found in para 74 of the Plaintiff's Statement of Claim, the breaches alleged being in relation both to HIH and HIHC and, so far as Mr Adler alone is concerned, PEE. I have commented earlier on the minor differences between the Particulars in para 74 concerning Mr Adler and the particulars concerning Mr Williams and Mr Fodera. 372 I commence by setting out as a series of summary propositions, the principles applicable to the duty of care and diligence, now as enacted in s180 of the Corporations Act and as they relate to delegation. The principles applicable to the duty to act in good faith and for proper purpose (s181) and to avoid making improper use of position or information (ss182-3) are to be found later in this judgment at paras 458, 735 and 738-740. The principles applicable to s180 now follow:

(1) Directors owe a duty of care and skill at common law and in equity: Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109; Daniels t/as Deloitte Haskins & Sells v AWA Ltd (1995) 37 NSWLR 438.

(2) However, the equitable duty to exercise reasonable care and skill is not properly classified as a fiduciary duty: Permanent Building Society (in liq) (supra) per Ipp J (at 158).

(3) The statutory duty of care and diligence, s180, is framed in similar terms to its predecessor s232(4). It has been said of the latter that the duties imposed upon directors by it are essentially the same as the duties of directors under the common law: Sheahan (as liquidator of South Australian Service Stations) (In liq) v Verco (2001) 37 ACSR 117 per Mullighan J (at 134) ; Daniels v Anderson (1995) 37 NSWLR 438 per Powell JA at 603; see also Lockhart J in Australian Innovation Ltd v Petrovsky (1996) 21 ACSR 218 at 222.

(4) In determining whether a director has exercised reasonable care and diligence one must ask what an ordinary person, with the knowledge and experience of the Defendant might be expected to have done in the circumstances if he or she was acting on their own behalf: Permanent Building Society v Wheeler (supra) per Ipp J (at 159); ASC v Gallagher (1993) 10 ACSR 43.

(5) However, under the implied term in a contract of employment of an executive director, the director (such as here Mr Williams and Mr Fodera) will be taken to have promised the company that he or she has the skills of a reasonably competent person in his or her category of appointment and that he or she will act with reasonable care, diligence and skill: Permanent Building Society v Wheeler at 287-8.

(6) Although the standard of reasonable care is generally said to be that of an ordinary prudent person ( Re City Equitable Fire Insurance Co. Ltd [1925] Ch 407 per Romer J) there is some suggestion that directors of a professional trustee company owe a higher duty of care: Wilkinson v Feldworth Financial Services Pty Ltd (1998) 29 ACSR 642 at 693.

(7) In determining whether a director has breached the statutory standard of care and diligence (s180(1)), the court will have regard to the company's circumstances and the director's position and responsibilities within the company: see also Explanatory Memorandum to the CLERP Bill 1999 (para 6.75).

(8) In accordance with these responsibilities directors are required to take reasonable steps to place themselves in a position to guide and monitor the management of the company: Daniels t/as Deloitte (supra) at 664. That is to say, (supra) at 666-67: (a) a director should become familiar with the fundamentals of the business in which the corporation is engaged; (b) a director is under a continuing obligation to keep informed about the activities of the corporation; (c) directorial management requires a general monitoring of corporate affairs and policies, by way of regular attendance at board meetings; and (d) a director should maintain familiarity with the financial status of the corporation by a regular review of financial statements. Indeed, he or she will be unable to avoid liability for insolvent trading by claiming that they had never learned to read financial statements: Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 125.

(9) A director appointed to a company because of special expertise in an area of the company's business is not relieved of the duty to pay attention to the company's affairs which might reasonably be expected to attract inquiry, even outside that area of expertise: Re Property Force Consultants Pty Ltd (1995) 13 ACLC 1051 at 1061.

(10) At general law, a director is entitled to rely without verification on the judgment, information and advice of management and other officers appropriately so entrusted. However, reliance would be unreasonable where directors know, or by the exercise of ordinary care should have known, any facts that would deny reliance on others: Daniels t/as Deloitte at 665-6.

(11) Although reasonableness of the reliance or delegation must be determined in each case, the following may be important in determining reasonableness: (a) the function that has been delegated is such that "it may properly be left to such officers": Re City Equitable Fire Insurance Co Ltd (supra) per Romer J . (b) the extent to which the director is put on inquiry, or given the facts of a case, should have been put on inquiry: Re Property Force Consultants Pty Ltd (supra) per Derrington J at 1,060. (c) the relationship between the director and delegate, must be such that the director honestly holds the belief that the delegate is trustworthy, competent and someone on who reliance can be placed. Knowledge that the delegate is dishonest or incompetent will make reliance unreasonable: Biala Pty Ltd v Mallina Holdings Ltd (1994) 15 ACSR 1 at 62. (d) the risk involved in the transaction and the nature of the transaction: Permanent Building Society v Wheeler (1994) 14 ACSR 109 (although in this case the Chief Executive Officer in question also had a conflict of interest). (e) the extent of steps taken by the director, for example, inquiries made or other circumstances engendering "trust"; (f) whether the position of the director is executive or non-executive: Permanent Building Society v Wheeler per Ipp J, though, in Daniels v Anderson (supra), the majority have moved away from this distinction.

(12) That general law explains what the Corporations Act now requires when referring (s190(2)) to "reasonable grounds" in codifying the directors' responsibilities for the actions of the delegate. Thus under s198D of the Corporations Act directors may delegate any of their powers to a committee of directors, a single director, an employee of the company or any other person (This delegation must be recorded in the company's minute book: see s251A). Moreover, the director will be responsible for the delegate's exercise of power if he or she did not believe on reasonable grounds and in good faith, after making proper inquiries if the circumstances indicate the need for it, that the delegate was reliable and competent in relation to the power delegated and would exercise the power in conformity with the duties imposed on the directors of the company by the Corporations Act : s190(2).

(13) For the purposes of s180(1) and relevantly in the present case, failing to ensure that a company makes loans only in accordance with its authorised practices and failing to ensure that the company has a proper system of controls and audit in its business to avoid any defalcation by officers and employees may amount to breaches of the statutory duty of care and diligence: Cashflow Finance Pty Ltd v Westpac Banking Corp [1999] NSWSC 671 per Einstein J.

(14) Where there is a transaction involving the potential for conflict between interest and duty, as here arose, the duty of care and diligence falls to be exercised in a context requiring special vigilance, calling for scrupulous concern on the part of those officers who become aware of that transaction to ensure that any necessary corporate approvals are obtained and safeguards put in place. While the primary responsibility will fall on the director or officer proposing to enter into the transaction, this does not excuse other directors or officers who become aware of the transaction.

(15) In order for the safe-harbour "statutory business judgment rule" to be relied upon, the director must first have made a business judgment. Then that business judgment must satisfy the following requirements, namely made in good faith for a proper purpose; after the director has informed himself as to the subject matter of the judgment to the extent he reasonably believes to be appropriate; in circumstances where the director does not have a material personal interest in the subject matter of the judgment and rationally believes that the judgment is in the best interests of the corporation: s180(2). The director's belief that his or her judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in that position would hold: s180(2). 373 Finally, but in relation only to the investment in HIH, each of Mr Adler and Adler Corporation are alleged to have been involved in the contravention of s208, that is prohibited related party benefits, by HIH and HIHC. I have dealt earlier with that allegation and do not need therefore to deal with it again in the present context, where the focus is rather upon directorial duties under s180 to s183. Similarly, I do not need to deal with any alleged breach by Mr Adler or Adler Corporation in relation to financial assistance arising from the acquisition of shares in HIH under s260A. 374 So far generally as the purchase of shares in HIH is concerned and its funding via monies made available by HIHC to AEUT, I conclude for essentially the reasons earlier set out, that the Particulars in para 74 were made out. It might be said that this should be with the minor qualifications that:

(a) it might be argued that sub-paragraph (k) should have added Mr Cassidy to the directors to whom disclosure was made (see earlier paras 44 to 46 of the Statement of Claim where Mr Cassidy is mentioned as aware of the advance) but as this disclosure was both late and limited, being only of the subscription to the Trust, when he made the application for B class units (TB, 208) and is included in the earlier pleaded material facts, I do not consider this material, and subparagraph (k) is not thereby negated. (b) Subparagraph (n) was not applicable in the circumstances, because Mr Williams and Mr Fodera were aware that the $10 million payment was to be used in whole or in part by PEE to pay for the purchase of shares in HIH. 375 I would likewise conclude that the Particulars in paragraph 76.2 are made out in relation to PEE in so far as the purchase of shares in HIH is concerned. 376 Mr Cameron, a highly experienced company director and former senior partner of a leading accounting firm with extensive audit experience, gave evidence in relation to the question which I accept: "Would a reasonably careful and diligent director or officer of HIH or HIHC in the position of Mr Adler have caused or procured the payment on 15 June 2000 of $10 million by HIHC to PEE? 4. My answer is no. 5. Mr Adler had a conflict of interest because he was to benefit from the transaction, at least by obtaining control of $10 million which he could use in any way he wanted. Also, there was a potential benefit from a 10 per cent share of profits. 6. In my view, a reasonably careful and diligent director or officer of HIH or HIHC in Mr Adler's position would have taken the view that the proposed transaction was quite contrary to HIH and HIHC's interests as it was to involve the payment of a large sum of money to a company controlled by a director, for investment completely at the discretion of the director, without security and without adequate documentation of appropriate arrangements including arrangements as to interest and/or profit share. 7. At the very least, a reasonably careful and diligent director or officer of HIH or HIHC in the position of Mr Adler would in my view at least have sought approval of the proposed transaction from the Board of HIH and from its Investment Committee and would have made full disclosure of all of the proposed terms and the use to which the funds were to be put." 377 Much of the cross-examination that followed on behalf of Mr Adler was whether that investment in HIH was a "speculative" one. However, this part of his evidence was not directed to that question. Nonetheless, to the extent it was called in aid as an additional reason for Mr Cameron's conclusion concerning Mr Adler, quoted above, I consider that the evidence earlier reviewed amply justifies that description (see para 17(c) of Mr Cameron's affidavit). His answer is rather directed at Mr Adler's fundamental conflict of interest and the lack of safeguards to deal with that conflict, when Mr Adler was given complete discretion to invest. This was moreover in circumstances where he first was handed over the money totally without security (save as the law might afford in equity) and at first without any documentation at all and then without any adequate documentation properly dealing with Mr Adler's conflict of interest. Moreover, para 7 of Mr Cameron's evidence states that the position of Mr Adler required him at least to have sought approval of the proposed transaction from the Board of HIH and from its Investment Committee and would have required him to make full disclosure of all of the proposed terms and the use to which the funds were to be put. I would agree with that. 378 Indeed, Mr Cameron, in cross-examination by counsel on behalf of Mr Fodera, elaborated on his reasons at T, 335.45 - T, 336.47. 379 Thus, Mr Cameron, when pressed with the size of the sum of $10 million as being but a third of one percent of the total HIH assets of three billion dollars, states that while in that context it is not material, in other contexts it is very material, in view of the nature of the transaction (T, 335.50 - .55). Then at T, 336 he states that he considers that $10 million was, given the nature of this transaction, a significant amount, on the basis of his experience, because it was an extraordinary transaction (T, 336.15 - .29). He then explains why he considers it extraordinary at T, 336.37 - .43 in these words: "A. On the basis of my experience the making available to one single non-executive director in an amount of $10 million without any guidelines, and without reference to the Board, without the Board being made aware of it, that is an extraordinary payment in my belief. If it had been $1,000,000 it would have been extraordinary." 380 When asked: "What is the cut off?"

He replies (T336.45 - ,46) again in my opinion correctly: "A. I don't know. I think in good practice there isn't a question of materiality in a payment of this nature." 381 As to Investment Committee notification, at T, 340.11 - .27, he makes clear that it should have been: "made perfectly clear to the Investment Committee for a start that one of the directors himself was involved and was going to have full control of those funds." 382 He is then asked: "Q. Would you expect that type of matter to be reported at the next scheduled meeting of the Investment Committee? A. I think prior to it being made. Prior to the payment being made." 383 Mr Cameron gives this evidence in the context of questions directed particularly at Mr Fodera's position when Mr Williams, on 15 June 2000, directed Mr Fodera to implement his decision. At T340.42 - 341.40, he deals specifically with Mr Fodera's position in these terms: "Q. And if Mr Williams on 15 June 2000 directed Mr Fodera to implement his decision, are you saying that Mr Fodera should have notified the members of the investment committee before he gave instructions to the officers he had reporting to him? A. As I said before, I understand his difficulty but I believe he should have, and may have done, I don't know, but should have said to Mr Williams that this is a matter in his view that should be brought to the full board before implementation. Now if he did that, and Mr Williams refused to do it, then I still think he had an ongoing responsibility. Q. And would that ongoing responsibility be to bring the matter to the attention of the investment committee at its next regular meeting? A. If the next regular meeting was before the implementation of this proposal. Q. No Mr Cameron, the assumptions that I am asking you to make are that a direction was made by Mr Williams for a payment to be made on 15 June 2000 to Mr Adler, or to entities associated with Mr Adler, not that it be made sometime in the future; do you understand? A. Right. Q. And I would ask you to also assume that if Mr Fodera had declined to comply with Mr Williams' direction, that Mr Williams would have directed Mr Howard to do it himself. By 'himself' I mean Mr Williams would have given that direction directly to Mr Howard. Do you understand? A. Yes. Q. In those circumstances, would you consider it appropriate for Mr Fodera to raise the matter with the next regularly scheduled investment committee meeting? A. Well I believe he should request that the cheque not be drawn, that the matter not be implemented until it had been referred to the board. And if then Mr Williams instructs him to go ahead, then I think in his position as a director I think he should have asked for a record to be made of his objection to it being dealt with that way. ….. SEXTON: Q. I suggest to you that is very much a counsel of perfection, do you agree? A. Yes but I have known people in time to be faced with similar difficulties." 384 In the passage just quoted, I should note that Mr Walker, SC, on behalf of the First and Fourth Defendants, objected to the evidence on the basis that: "There is no link whatever with any of [Mr Cameron's] experience so as to make that an expert opinion." 385 However, that objection could not be sustained. It is self-evident that a director like Mr Cameron, of substantial experience (and earlier as a senior partner of a leading accounting firm and as an experienced auditor) would have the capacity from that experience to provide an expert opinion within s79 of the Evidence Act on these issues. This is precisely because directors, executive and non-executive, customarily are faced with issues of authority in their reporting obligations; see the elaboration of my reasons for accepting the admissibility of Mr Cameron's evidence as an expert, in relation to the objections earlier made by Mr Walker, SC on behalf of the First and Fourth Defendants in my judgment dated 29 November 2001. Moreover, I am satisfied that the findings on fact which I have reached and the evidence generally, justify the assumptions upon which Mr Cameron gave his expert opinion. 386 In summary then, Mr Cameron's evidence to the effect that a careful and diligent director in Mr Adler's position had a conflict of interest and would have taken the view that the proposed transaction was quite contrary to HIH and HIHC's interest and at the very least would have sought approval of the transaction from the Board and the Investment Committee was essentially unchallenged in cross-examination. Nor was it effectively refuted during cross-examination on behalf of Mr Fodera.

CONCLUSION 387 (a) A reasonably careful and diligent director or officer of HIH or HIHC in the position of Mr Adler, would not have caused or procured the payment on 15 June 2000 of $10 million by HIHC to PEE to be applied as it was (in part) in purchasing HIH shares. To the extent that $3,973,397.84 was so used for the purpose of assisting PEE to acquire shares in HIH, not only did that assistance materially prejudice the interests of HIH and HIHC and in that sense was not advantageous to AEUT, the unit holders of AEUT, including HIHC or to HIHC's holding company HIH, but also it was not disclosed as it should have been to other directors of HIH (save Mr Adler, Mr Williams, Mr Fodera and to a limited extent only, as regards the subscription to AEUT, Mr Cassidy). Nor was it brought by Mr Adler to the attention of the Investment Committee of HIH for approval or ratification, as it should, nor was the mandate for AEUT's investments ever brought to the Investment Committee for approval by Mr Adler, as mandatorily required by the Investment Committee's Terms of Reference. The semi-covert bypassing of proper corporate safeguards for these arrangements (only executive directors apart from Mr Adler were aware), reflects consciousness of impropriety on Mr Adler's part. Furthermore, the purchase was made with Mr Adler stating publicly that he was purchasing HIH shares and with the object to maintain or support the HIH share price rather than for HIH's purpose, of enabling HIHC to obtain, through its interests in AEUT, the benefit of a quick profit on the resale of HIH shares so acquired. Mr Adler thereby breached s180 of the Corporations Act. This was in failing to follow authorised practices (see para 372(13) above) and in properly safeguarding the interests of HIH and HIHC (in the latter case as an officer), falling well short of the standard of a reasonably competent person in his category of appointment, well familiar as he was with investment practices; see para 375 above.

(b) The foregoing circumstances also give rise to breach of s181, applying the principles set out at para 735 particularly (1), (2), (4) (5) and (6), with (3) not applying in the circumstances. Mr Adler as a director was required to act in good faith, and for a proper purpose, neither of which he did. This was in promoting his personal interest by making or pursuing a gain (of maintaining or supporting the HIH share price for his own benefit as a substantial shareholder) where looked at from the viewpoint of a person familiar with the circumstances, there was a real or substantial possibility of a conflict between his personal interests and those of the company in pursuing a profit, and in failing to make proper disclosure. Moreover the interests of HIH and HIHC were put at risk by the illegality under s208 and s260A as well as by concealment from the market that HIHC was funding these purchases of HIH shares, not Mr Adler or his interests.

(c) Moreover, he improperly used his position as a director (thereby in breach of s182) to gain the foregoing advantages to himself, as a substantial shareholder, via Adler Corporation, in HIH; the principles set out at para 458 below are directly applicable. This was for the improper purpose earlier described, namely maintaining or supporting the price of shares in HIH, so as to benefit his own HIH holding rather than HIH, as evinced by his conduct earlier described including foregoing a quick trading profit and selling his shares first rather than after, or at least at the same time. Moreover, it was concealed from the Investment Committee collectively, though known to Messrs Fodera, Williams and to a much more limited extent Mr Cassidy, as well as Mr Howard. As a consequence, Mr Adler, as a director of HIH and an officer of HIHC, and as a director of PEE, contravened s182.

(d) Insofar as the "business judgment" provisions of s180(2) are concerned, these could not apply to exonerate Mr Adler. This was because there was no "business judgment" (as either a defence or as an element in the contravention) shown by Mr Adler to have been made "in good faith for a proper purpose" (s180(2)(b)). Clearly Mr Adler did have "a material personal interest in the subject matter of the judgment" so also precluding application of that rule. No equivalent defence at general law is made out either.

Application of s183 of the Corporations Act to the investment in AEUT and AEUT in HIH in relation to Mr Adler EIGHTH LEGAL ISSUE 388 I turn now to s183 of the Corporations Act where the contravention alleged is in relation to Mr Adler only and in relation to his position as a director of HIH. 389 Paragraph 95 of the Plaintiff's Statement of Claim alleged that he improperly used information he obtained because he was a director to either gain an advantage for himself or alternatively PEE, or alternatively Adler Corporation, so as to contravene s183. 390 The Particulars identify the information in these terms: "The information obtained by Mr Adler was information concerning the Investment Committee procedures and the Investment Guidelines, the HIH Investment Portfolio and the susceptibility of Williams to a proposal whereby HIH invest money in less conservative ways, such as in unlisted equities and venture capital." 391 The Particulars otherwise are repeated from paragraph 74. 392 A similar allegation is made in relation to HIHC but not in relation to PEE. It is not made in relation to either Mr Williams or Mr Fodera. 393 The Particulars relate principally to unlisted equities and venture capital in so far as the information is concerned, which is said to have been improperly used. Therefore that allegation relates not specifically just to the HIH share purchasing but the HIH share investment is rather an instance of investing "in less conservative ways" as the first of a series of investments of that character, following the formation of AEUT with that purpose.

CONCLUSION 394 It is premature to consider whether Mr Adler contravened s183 of the Corporations Act in so far as the investment in shares in HIH was concerned, without considering that in the overall context of all of the transactions, being all investments "of a less conservative character". The factual position and findings with regard to the investment in unlisted equities and the loans are dealt with later (between paras 513 to 730). It is there concluded (see principally para 577(d) that Mr Adler contravened s183 taking into account each of the unlisted investments acquired from Adler Corporation and each of the loans to Adler associated entities.

Application of ss180 - 182 of the Corporations Act to the investment in AEUT and by AEUT in HIH in relation to Mr Williams 395 Next I need to deal with the position of Mr Williams in relation to ss180 - 182 of the Corporations Act as applicable to the payment of $10 million by HIHC to PEE on 15 June 2000 and the use of part thereof in purchasing the HIH shares. I start with s180.

Section 180 and Mr Williams: investment in AEUT and HIH 396 Here the Particulars in relation to Mr Williams and Mr Fodera are essentially the same as for Mr Adler, save that Particular (n) in para 74 in relation to Mr Adler, is omitted. The latter is of no consequence since both Mr Williams and Mr Fodera were aware that the $10 million was to be used in whole or in part by PEE to pay for the purchase of shares in HIH. Also, the material facts pleaded in relation to Mr Williams are from paras 15 to 46. They thus do not (unlike for Mr Adler) encompass "other AEUT investments", that is, the unlisted investments and loans, but are limited to the $10 million payment to AEUT and the HIH share investment. 397 The other difference is that so far as Mr Williams is concerned, the pleaded Particulars commence with the words "by his conduct as pleaded" followed by the reference to Mr Williams "causing or procuring" HIHC to make the relevant payment. In contrast, in relation to Mr Fodera, Particulars commence: "By his conduct and knowledge as pleaded, Fodera was involved in the payment by HIHC, a subsidiary of HIH …" 398 The distinction here drawn between Mr Williams and Mr Fodera, thus reflect a gradation in their respective conduct, namely that Mr Williams actually caused or procured HIHC to make the relevant payment, whereas Mr Fodera was less actively involved, though he clearly facilitated the $10 million payment for an investment vehicle associated with Mr Adler and also facilitated its intended use in buying (as he knew) HIH shares. 399 Taking Mr Williams' position first, I do not accept that because the sum was not a substantial one viewed as a percentage of 0.36 percent of HIH's funds under investment at the relevant time, (TB, 6/2440, TB, 5/1826) that it therefore ceases to be capable of giving rise to the relevant contravention. That was a point equally applicable to Mr Fodera, and which was brought out in the earlier quoted cross-examination by Mr Fodera's counsel of Mr Cameron, whose answer on that point I would accept. That answer was that in the circumstances where a non-executive director had a clear conflict of interest, to fail first to obtain Investment Committee approval at least, if not Board approval, while failing to ensure adequately documented safeguards, rendered the conduct of bypassing the Investment Committee a breach of the obligation to exercise care and diligence. Nor would I accept what is put by counsel for Mr Williams in his written submissions of 20 December 2001 at para 4(a) as some kind of exculpatory circumstance. Here again the 0.36 per cent statistic is quoted. It is self-evident that the larger the sum as a percentage of the total funds invested, the greater may be the detriment to the company from the breach. But that is not a consideration going to exculpation. It certainly does not refute Particular (a) in para 77 of the Plaintiff's Statement of Claim, namely that the payment: "Was a substantial sum of money". 400 The second Particular sought to be refuted, or at least minimised, as a ground of lack of care and diligence on the part of Mr Williams, is para (b). This alleges that the payment: "Was on terms which were not finalised and which were not documented at the time the payment was made." 401 Here, in the Second Defendant's written submissions, it is said that the commercial agreement was worked out between Mr Adler and Mr Williams so that Mr Williams left it to Mr Howard: "To ensure it was documented and legal advice obtained in relation to it" (Howard affidavit para 10, T, 170, 175-6) . 402 Then it is said that, for the reasons shown and the submissions filed on behalf of Mr Adler, trust law protected the position of HIHC, a proposition I have earlier rejected. 403 However, the first contention is not correct so far the available evidence is concerned. Mr Williams did not leave it to Mr Howard to ensure legal advice was obtained at all. There is simply no mention of legal advice but rather documentation in what he said to Mr Howard, namely: "Go ahead, draw the cheque but make sure Rodney follows through with the documentation." (Howard, para 10) . 404 On the face of the statement, Mr Williams not only makes no mention of legal advice but makes no mention of it being independent, and no mention that the documentation should be drawn up by someone who is not already advising Mr Adler. Finally Mr Williams permits the $10 million to be paid over in advance of documentation with no stipulation of any necessary safeguards to deal with Mr Adler's actual or potential conflicts of interests. It is clear from the evidence that the investment was made on terms which were not then finalised, save in the very broadest sense that there was to be a ten percent return to Mr Adler. Indeed the very structure of borrowing versus a trust was at the very time the subject of advice from the partner advising Mr Adler - not HIH or HIHC - and had still to be resolved by that partner at Minter Ellison. Thus, very clearly the evidence bears out the pleaded Particular, namely, that the money was handed over on terms which were not then finalised and which were not documented at the time the payment was made. One could hardly treat so loose and irresponsible a commercial arrangement as "worked out". 405 Finally, and of special significance, is that Mr Williams did not leave it to Mr Howard even to obtain the documentation. Rather he was to make sure that Mr Adler follows through with the documentation, meaning that irresponsibly he left it to the non-executive director with a conflict of interest to ensure that there was documentation in the first place promptly obtained, and second that the documentation properly safeguarded HIH and HIHC's interests. That was highly irresponsible, and certainly not reasonable delegation. That alone was a failure to exercise the degree of care and diligence that a reasonable person would exercise in Mr Williams' circumstances. 406 Moreover, the business judgment rule set out in s180(2) could not apply, even if, contrary to what I would conclude, one were to treat there having been a business judgment made in circumstances where Mr Williams simply neglected to deal with proper safeguards, with no evidence that he even turned his mind to a judgment of what safeguards there should be. Given that the purpose of Mr Adler was to maintain or stabilise the HIH share price and of HIH to make a quick profit, Mr Williams, as a major shareholder in HIH, had "a material personal interest" as would preclude reliance on the rule under s180(2)(b) (see his s205G notice at PX22 disclosing that he had an approximate $10 million shareholding). The market price had fallen from a $1.55 opening price on 4 January 2000 to $0.95 on 14 June 2000. At the 4 January price, his shareholdings were worth $16,302,458. At the 14 June price they were worth $9,991,829 - a loss of $6,302,629. Mr Williams was therefore faced with the prospect of further HIH share price falls adversely affecting a substantial part of his personal wealth. So he very clearly had a material personal interest in encouraging share purchasing in HIH shares by PEE via Mr Adler (as indeed did Mr Adler). 407 Next, to rely on the business judgment rule, any judgment must have been made "in good faith for a proper purpose" as required by s180(2)(a). I am not able to be positively satisfied, in the absence of any evidence on his part, that he acted for a proper purpose, as distinct from sharing Mr Adler's improper purpose. That, I should emphasise is not a finding that he did not act "in good faith for a proper purpose" as that negative finding is not one I am able to make with sufficient confidence either; see para 454 and following. 408 Next, there is no basis for an inference that Mr Williams properly informed himself about the subject matter of any judgment he made, as for example by having proper independent advice obtained on behalf of HIH as to the safeguards that should be applicable (s180(2)(c)). 409 Finally, there is the issue that if the onus of satisfying the business judgment rule falls upon the party invoking it, then clearly Mr Williams has not chosen to give evidence beyond reliance upon the factual circumstances, and that could not satisfy such onus. But even if the onus were not so placed at the outset, there comes a point where any evidentiary onus has been satisfied by the Plaintiff by reference to the matters to which I have earlier set out such that, in the absence of any countervailing evidence from the director concerned, the Plaintiff must succeed. That is how I view the present position. 410 On onus more generally, it would be as the Plaintiff points out, an odd position if, as part of establishing a contravention of s180, the Plaintiff bore a burden of establishing another and more serious contravention, namely of s181, when it comes to whether the judgment was made "in good faith for a proper purpose" (see s180(2)(a)). 411 Finally, in the context of rational belief (s180(2)(d), it was suggested on behalf of Mr Williams that HIH's experience with One.Tel provided Mr Williams with a basis for confidence in Mr Adler's ability. However, by 15 June 2000, it was clear that virtually all the initial gains made in relation to One.Tel had been wiped out (TB, 103). In any event, even if Mr Williams had reason to be confident in Mr Adler's investment ability, it did not excuse Mr Williams from taking the elementary precaution of ensuring that the documentation was in place before the money was made available. But in any event, even if a brief delay could be excused, it could not excuse the failure to have adequate documentation thereafter in place with the benefit of independent legal advice properly safeguarding HIH's position in relation to a director (Mr Adler) with an obvious conflict of interest. 412 I would reach the same conclusion whichever way the onus was placed, namely that the business judgment rule does not apply to protect Mr Williams in the present circumstances. 413 In relation to Particular (d), the Second Defendant's argument, like that of the other Defendants, is that the payment was held on trust by PEE as at 15 June 2000 for the benefit of HIHC so that, contrary to the pleaded Particular, the payment did not advantage Adler, Adler Corporation or PEE. 414 I have earlier dealt with this contention. One short answer is that Mr Adler himself admitted that he was advantaged, when he described how he had approached Mr Williams: "With an idea that I felt would be beneficial for myself (obviously) and to HIH".

See letter 13 November 2000, (TB, 253). 415 If one takes into account the arrangement simply as it stood at 15 June 2000 (described in the letters of 9 and 14 June 2000 (TB, 28, 29, 30), Mr Adler was to get the benefit of a $10 million unsecured loan for the purpose of "venture capital and share trading" with his interests to keep ten percent of the profits. If, as the Defendants assert, there was no loan but a trust, it can only have been an express, resulting, constructive or Quistclose purpose trust, which in each case would require an enforcement action for effect to be given to it at the suit of HIH and/or HIHC. That is hardly a situation that avoided disadvantage as against actually having the money still safely retained in HIHC. 416 An express trust, as at 15 June 2000, would be difficult to justify as the terms of the trust were entirely unresolved. Such a trust was in reality at best one possible, or perhaps probable, type of vehicle in contemplation at the time. 417 A resulting trust might have arisen had the arrangements failed, but with the necessity then to seek enforcement in legal proceedings. 418 A Quistclose purpose trust would suffer from the difficulty applicable to an express trust referred to above, namely that the terms of the trust were not resolved. 419 Finally, self-evidently, there was an advantage to Mr Adler, Adler Corporation, and PEE when the one-sidedness of the trust documentation, no doubt the product of lack of independent legal advice, is taken into account including most especially the lack of proper safeguards to deal with the conflict of interest of Mr Adler; see the Plaintiff's Statement of Claim, paras 34 and 40. 420 To return to the Second Defendant's submissions, it is true that there may have been mutual benefits for PEE and HIH. But the benefits were so one-sidedly in favour of PEE and the Adler interests, with no proper safeguards, that for Mr Williams to have so neglected his responsibilities as to allow them to come about or continue in the case of a fellow director was a clear contravention of his obligation of care and diligence. Accordingly, Particular (d) of para 77 is made out. 421 As to Particular (e) of the para 77 of the pleading, the foregoing analysis establishes that payment was made on terms which, to the extent that they were known, were not reasonable in the circumstances if HIHC and PEE had been dealing at arm's length. 422 Particular (f) is that the payment was made: "With the contemplated object of enabling PEE to acquire from Adler Corporation unlisted investments which were not the subject of independent analysis." 423 It is true that the only evidence that Mr Williams had the "contemplated object" is the evidence of Mr Howard (para 8). That evidence is admissible as original evidence dealing with the steps in the very transaction itself (Cross on Evidence, 6th Australian Edition, para 31080), so that the hearsay rule is not applicable to it (s60 of the Evidence Act). 424 The question is, therefore what weight should be placed upon that evidence. The conversation itself is second-hand hearsay, namely that on 15 June 2000, Mr Howard was told by Mr Adler that he (Mr Adler) and Mr Williams, had had conversations: "That the trust may or may not purchase other venture capital investments that I was associated with, such as dstore at cost, to give them a chance to make money."

See para 8 of Mr Howard's affidavit. 425 Recognising that this is second-hand hearsay does not mean that it should lack weight when the conversation occurred contemporaneously with the very transaction itself in conjunction with the carrying out of its steps, namely payment over of the money. 426 The Second Defendant then relies upon TB, 212A, a memorandum of 10 July 2000, to Mr Williams and Mr Howard from Mr Adler which actually informs them that: "I will place two of my own investments, being dstore and Planet Soccer into the fund at my original cost". 427 It is said that if Mr Williams had such prior knowledge, why did Mr Adler not refer to or allude to this in his memorandum? The short answer is that the memorandum was clearly enough directed at dealing with two investments which he would necessarily need to inform HIH about. There was no need in that process to refer to any previous conversation foreshadowing such investments in the broader way that Mr Howard's affidavit describes (para 8). It would be otherwise if the quoted conversation in para 8 had then specifically referred to dstore and Planet Soccer. 428 Moreover, the communication on 10 July 2000, does not assist Mr Williams in so far as he was then on notice that investments had been made in the trust in circumstances where, by ready enquiry, he would have ascertained that there was no independent appraisal mechanism for determining whether the investments were being properly placed in the AEUT at Mr Adler's original cost, and where independent due diligence was not required. Yet it would have been an elementary safeguard Mr Williams should have informed himself was lacking, and have insisted upon it. Absence of any enquiry in that regard could not excuse Mr Williams, who thereby failed to exercise the care and diligence called for by s180 in relation to his fellow directors' arrangements with HIHC. Particular (f) specifically refers to the lack of independent analysis. Instead, Mr Williams simply relied upon Mr Adler's statement: "Both would be valued higher than that level [my original cost] I am reliably informed". (TB, 212A)

There is simply no basis given than Mr Adler's obviously self-interested assertion. 429 Turning to Mr Cohen's evidence, it is difficult to see what comfort could be gained from the Schedule to the letter written by Mr Cohen of 22 December 2000 to ASIC (TB, 267-270). That Mr Cohen said he believed that the Schedule of Facts was accurate (T, 91-2, 503, 509) does not, of itself, make the statements in the Schedule any less affected by the context in which they were made. Mr Cohen and the Board were under threat from the auditors to report direct to ASIC. The Board would be concerned that ASIC should not take action against the company or its directors. Moreover, the statement in para 15 of the Schedule that: "Mr Williams had no prior knowledge of Mr Adler's decision to purchase HIH shares"

simply does not accord with the evidence. Finally, there is nothing in the Schedule which expressly denies Mr Williams was unaware before it occurred of the intention to purchase dstore and Planet Soccer shares, save such indication as might derive from para 3. Indeed, the whole Schedule is totally silent about the fact that investments were purchased from Adler Corporation and loans were made to interests associated with Mr Adler. It is true that the auditors did not raise that matter but by then Mr Williams, at least was aware of these "in-house" purchases. 430 In relation to Particular (g), relating to the object of enabling PEE to purchase shares in HIH and enabling Mr Adler to state publicly that he was purchasing HIH shares, so as thereby to maintain or stabilise the HIH share price, the unchallenged evidence of Mr Howard, in para 10 of his affidavit, is clear evidence of knowledge on the part of Mr Williams of Mr Adler's intention to use the $10 million to pay for HIH shares. Bearing in mind the lack of surprise in Mr Williams' response, (para 10) and the fact that Mr Williams and Mr Adler had a meeting scheduled at 7.30 am on that day (TB, 30) it is highly probable that the purchase of HIH shares had been discussed between Mr Williams and Mr Adler. This is also supported by the letter of 19 June 2000 (TB, 109A) referring to the purchase of "more" shares in HIH. 431 Moreover, Mr Williams admits that from 16 June 2000 he did know of the purchase of HIH shares (see Schedule of Facts above, TB, 252E para 14). 432 It is contended by the Second Defendant the Mr Williams was entitled to rely upon Mr Adler to "do the right thing". I agree with the Plaintiff that the duty of Mr Williams, as the Chief Executive Officer and most senior executive in the company, was to take proper steps to protect HIH's interests and those of HIHC. That was not done by concurring in $10 million being handed over to Mr Adler without proper safeguards, when Mr Adler had so obvious a conflict of interest, certainly so in relation to the purchase of HIH shares. 433 While I could not conclude, one way or the other, as to whether Mr Williams foresaw that Mr Adler would use the opportunity to state publicly that he was purchasing HIH shares, or interests associated with him, Mr Williams would most likely have been aware contemporaneously with the statements made that this was the impression that Mr Adler was conveying and he made no attempt to correct it. That points, if anything, to Mr Williams having no particular concern about that, though the market was being misled. 434 The subsequent "legal advice" obtained from Minter Ellison was in fact obtained from the partner advising Mr Adler, Ms Margaret Taylor. It was sent on 21 July 2000 by Mr Adler to Mr Williams (TB, 215) in which he urges Mr Williams not to get the independent advice from another partner, Mr Leigh Brown. Moreover, a reading of that legal advice shows that Minter Ellison were not told that the shares in HIH had already been purchased using the funds, a fact which would have had the clear potential to alter the effect of their advice. The evidence suggests that this advice only came to be sent to Mr Williams as a result of Mr Howard's conversation with Mr Leigh Brown, at Minter Ellison, which was evidently directed to Mr Howard's personal position (TB, 216). 435 Minter Ellison indeed pointed to many issues that needed to be addressed. It was certainly not the kind of advice that would have allowed a director acting with the degree of care and diligence called for by s180(1), to simply rely upon without more. 436 Finally, the most telling point is that the advice was given to Adler Corporation well after the 15 June 2000 payment was made and given to Mr Williams well after that (21 July 2000, TB, 215). Thus, it in no way negates Particular (g). 437 Applying the stricter Briginshaw standard (Briginshaw v Briginshaw (1938) 60 CLR 336 at 362 - 3), urged by the Second Defendant, the evidence relied upon by the Plaintiff comfortably meets it as regards each of the Particulars referred to above, including Particular (g). I should add that the Second Defendant refers, in its written submissions, (page 10) to: "The Minter Ellison investigation which concluded that Mr Williams had no prior knowledge (PX1/238)". 438 Reading the advice of 1 November 2000 for such a statement, the nearest is para 2.2 where it is stated: "It is worth noting that at the time of HIHC's investment in the trust, the trustee had not yet acquired any HIH shares. Therefore, HIHC did not invest in a vehicle that already had an interest in HIH shares." 439 Two points should be made. First, that statement does not confirm that Mr Williams had no prior knowledge. Second, it is clear that the share purchases had already started when the $10 million was handed over so the statement is simply wrong, probably the result of misinformation given to Minter Ellison. 440 Turning now to Particular (h) (that the payment was "ultimately accounted for as a subscription for a unit in a trust, the terms of which were not reasonable so far as HIH was concerned and over which HIH had no control"), the Second Defendant states that the fact that HIH had no control over the investment does not amount to breach of duty by the director concerned. There are many investments made by a company in which the investor company has no control. However, here the investments were being carried out with a director who was not an arm's length investment manager but someone with a clear conflict of interest, namely Mr Adler, in circumstances where the documentation made no provision for safeguards to deal with this. In that sense, the situation is very different from one with an arm's length manager. Moreover, there was a flagrant breach of the Terms of Reference here, because the mandate had never been approved by the Investment Committee. 441 As to Particular (j) (the payment resulted in a contravention of s260A), Mr Williams supposed lack of knowledge of any material prejudice, based upon the proposition that Mr Williams, when he agreed to make the advance to Mr Adler, did not know that the monies would be used for the purpose of acquiring HIH shares, is simply in contradiction with the evidence, to which I have earlier referred. I have dealt earlier with Mr Williams' position in relation to s260A of the Corporations Law. 442 As to Particular (k) (non-disclosure of the payment to Board and Investment Committee) that payment should have been and was not disclosed to the directors of HIH or the Investment Committee for the reasons earlier stated. 443 Particular (l) is to the effect that the payment: "Was made in such a way that it would not come to the attention of the directors of HIH other than Adler, Williams and Fodera or to the attention of the Investment Committee of HIH". 444 Most certainly, that statement is correct in so far as it relates to it coming to the attention of directors of HIH, other than Mr Adler, Mr Williams and Mr Fodera at the time the payment was made. Mr Cassidy only learnt of the payment being made after the event on 6 July 2000, when he signed the application form for the relevant units. The important point of this Particular is that when the transaction did come to the attention of the Board and Investment Committee, it was already a fait accompli being too late then to reverse. 445 Finally, there is Particular (m), namely that the payment: "Was not approved or ratified by the Investment Committee of HIH"

This was admitted in the Schedule of Facts (TB, 268, para 7) which the directors approved. It was a proper admission to make for the reasons earlier explained. Apart from the requirement to approve Investment Guidelines, as I have said the Investment Committee's Terms of Reference included to: "Approve appointments, mandates , and performance benchmarks for all external investment managers." [emphasis added] 446 Clearly enough, Mr Adler and PEE were acting as external investment managers, though Mr Adler had the conflict of interest earlier mentioned. Most especially is this so where the external investment manager is a non-executive director of the company concerned. That there may have been some protocol or practice whereby Mr Williams' authority sufficed for permitting by way of administrative step the payment of monies, does not in any way detract from the proposition that the Investment Guidelines and Terms of Reference were both breached. The evidence as to the supposed protocol, as earlier explained could not override a mandatory requirement of that sort. In any event I have earlier concluded there was not such a protocol, or at any rate one extending beyond administrative steps of implementation.

Jones v Dunkel - adverse inference from not giving evidence 447 It will be apparent that the inference that I would draw as to the failure to exercise reasonable care and diligence, does not depend upon the absence of Mr Williams in the witness box. That inference is well capable of being drawn without that fact, and is simply strengthened by his absence. 448 On this issue more generally, and in relation both to Mr Adler and Mr Fodera, as well as Mr Williams, I agree with the Plaintiff that a Jones v Dunkel inference against each of these persons has some significance in this case. It is not only because they are parties who are clearly available and not called, but also because of their personal involvement in the transactions in question. In Dilose v Latec Finance Pty Ltd (1966) 84 WN (Pt 1)(NSW) 557, Street J said (at 582): "The inference which a Court can properly draw in the absence of a witness, where such absence is not satisfactorily accounted for, is that nothing which this witness could say would assist the case of the party who would normally have been expected to have called that witness. The significance of this inference differs according to the closeness of the relationship of the absent witness with the party against whom the inference is sought to be propounded. Where the absent witness is a party himself then considerable importance may well attach to the inference. Similarly, the inference is significant if the absent witness is, as in the present case, a person who is a senior executive of a corporate party who was personally engaged in the transactions in question and who was in fact present at Court during part of the hearing…"

(See also Cross 6th Australian Edition at para 1215). Where the Defendant elects not to give evidence "the court is entitled to be bold" (per Gleeson CJ and Handley JA, SS Pharmaceutical Co Ltd v Qantas Airways Ltd [1991] 1 L1 Rep 288 at 293 citing Insurance Commissioner v Joyce (1948) 77 CLR 39 at 49; 55 ALR 356 per Rich J). 449 So far as Mr Williams is concerned, at the heart of the case against him is the question of the reasons for which, and purposes for which, he acted. He is the only one who could give direct evidence as to that. As he has declined the opportunity to do so, the adverse inferences which arise from his words and conduct may be more confidently drawn. This would be so even if this were a criminal trial stricto sensu RPS v The Queen (2000) 199 CLR 620 at para 27). 450 The supposed explanations proffered in the Second Defendant's written submissions (para 9) are unconvincing. The facts, which are said to provide an explanation for why the witness was not called, (Fabre v Arenales (1992) 27 NSWLR 437) are the nature of these proceedings and the fact of an extant Royal Commission (which is empowered to recommend charges). There is however nothing about the nature of these proceedings or the existence of the Royal Commission which explains Mr Williams absence from the witness box. As to supposed inconsistencies which ASIC as prosecutor could have cleared up, between on the one hand, the letter to ASIC (TB, 268) together with Mr Cohen's evidence that he believed the schedule to it was accurate (T, 91 - 2, 503, 509) and Mr Howard's evidence on the other, Mr Howard's evidence rather casts doubt on the accuracy of the letter to ASIC than the other way round. There is no substance in that reason either. In those circumstances, the Court is entitled to conclude that nothing Mr Williams could have said would have assisted his case.

Error of judgment or permissible delegation? 451 Then it is said, by the Second Defendant, that Mr Williams was merely guilty of an error of judgment; (see para 15 and following) or can shelter behind the failure of a delegate, Mr Adler, or upon Mr Howard to confirm the legalities of the transaction (paras 19 and following). However, in my judgment, Mr Williams' conduct went well beyond a mere error of judgment and amounted to a gross disregard of HIH's interests and of the need to protect those interests by proper safeguards in the circumstances that obtained. Mr Williams was not entitled to rely upon delegation to Mr Adler in circumstances where Mr Adler self-evidently had a conflict of interest; see s190(2)(a) of the Corporations Act requiring the director, if he is to be absolved of responsibility for the failure of a delegate, to have "believed on reasonable grounds … that the delegate would exercise the power in conformity with the duties imposed on directors … ". The complaint is not that ultimately HIH lost money, but that the safeguards were never put in place which Mr Williams should have insisted upon, exercising the degree of care and diligence that a reasonable person would exercise in Mr Williams position. Nor can delegation to Mr Howard assist, when Mr Williams allowed the transaction to proceed contrary to the approval process required. Consistent with the more stringent holding of the Court of Appeal in AWA Limited v Daniels (1995) 37 NSWLR 438, and in any event as now stated in s190 of the Corporations Law it is no longer possible to state in so broad a fashion what was said by the trial judge in that case ((1992) 7 ACSR 759): "A director being entitled to rely, without verification, on the judgment, information and advice of the officers so entrusted."

Mr Williams could not simply leave it to others to ensure the approval process was carried out. Indeed he acted as if there was no such approval process beyond his approval. 452 The Plaintiff makes the telling point that underlying the mandatory approvals required, it is only common sense that a transaction such as this involving the payment of many millions of dollars to a director to be used at his discretion, should be brought before the Board, or at least the Board's Investment Committee. I agree with the proposition that it is a common sense question of what any reasonably careful and diligent director would have done, not a question as to whether Mr Williams had the authority, if such he had, to authorise a ten million dollar payment. For even if he had that authority, it was irresponsible for him to exercise it in the way he did. No expert was called by the Second Defendant, nor indeed did any of the Defendants assert that this was the type of action which might be taken by a reasonably careful and diligent director. Mr Cameron's evidence on that matter was not effectively assailed.

CONCLUSION 453 As to s180 and the duty of care and diligence, Mr Williams was not entitled to rely on Mr Adler to make investments, which conformed with the law and were not detrimental to the interests of HIH, without at the least making sure there were put in place proper safeguards including independent appraisal of the investments made by way of proper due diligence and by ensuring that before the arrangements were put in place, the terms of the mandate were approved by the Investment Committee, if not the Board. Mr Williams simply did not do this either when making the original commercial deal or by instructing Mr Howard. It is nothing to the point to say that he hoped that the investment would turn out profitably or he would not have made it. The fact of the matter was that Mr Williams did not ensure that the company complied with its own safeguards laid down for approval of such a mandate by its Investment Committee, nor did he put in place safeguards to avoid investments being made which were in breach of the law and which, directly or indirectly, advantaged Mr Adler, Adler Corporation and PEE and were not reasonable in the circumstances even if HIHC and PEE had been dealing at arm's length. Mr Williams' concern should have been heightened by the fact that he was dealing with a fellow director. That is enough, though one can add that Mr Adler, as should have been apparent, had an obvious inherent conflict of interest as a significant shareholder in HIH. That is quite apart from his early intention to on-sell investments to AEUT like dstore; the evidence of the extent of Mr Williams' knowledge about such investment is set out at para 515 below. Accordingly, I conclude that Mr Williams was in breach of s180 of the Corporations Act in failing to exercise the degree of care and diligence that a reasonable person would have exercised as a director in the circumstances and occupying the office held by Mr Williams. Mr Williams is not able to invoke the business judgment rule in the circumstances where he either failed to make a business judgment at all or to the extent that he did, failed to establish that he made it in good faith for a proper purpose, and in any event, where he had a material personal interest in the subject matter of the judgment and had failed to inform himself to the extent he could reasonably believe to be appropriate.

Section 181 and Mr Williams 454 As to s181 of the Corporations Act (the duty to act in good faith in the best interests of the corporation and for a proper purpose), I am not satisfied to the higher Briginshaw standard, that Mr Williams contravened that obligation so far as the investment in AEUT and by it in HIH (leaving till later the later "in-house" investments). I have earlier concluded that I could not be positively satisfied that he had so acted in relation to the business judgment rule, presupposing that the onus is upon Mr Williams to satisfy that element of the business judgment rule. Here however the onus is on the Plaintiff. Pressed by the Plaintiff is that Mr Williams, having failed to give any explanation in the witness box of his true purpose, should be taken to have shared the improper purpose of Mr Adler, namely to maintain or stabilise the HIH share price rather than the ostensible purpose of making a short term profit on the HIH shares. In support is that there is no suggestion of remonstration on Mr Williams' part as to the failure to take advantage of the opportunity in mid July 2000 to make such a short term profit. There is the fact that Mr Williams had himself an even larger holding in HIH than Mr Adler (some 10 million shares). So he had the motivation to try to maintain or stabilise the HIH share price in a falling market. However, he never did sell his shares unlike Adler Corporation. I do not consider it would be right to attribute lack of good faith or improper purpose in relation to what appears a less than adequate supervisory role of the kind rather invoking, justifiably, a conclusion of lack of due diligence. Mr Williams played an excessively passive, inadequate role in regard to the HIH share trading, leaving it to Mr Adler. 455 It could not be argued that a purpose of maintaining or stabilising the HIH share price even at the cost of deriving any profit should opportunity arise was itself a proper purpose. Still less so, if it was to advantage himself or Mr Adler rather than the company. That purpose could in any event only be proper if the means chosen to do so were legitimate and lawful. Whereas here, as I have determined, there was contravention both of the related party benefit provisions of the Corporations Law, and the financial assistance provisions of the Corporations Law. 456 The Second Defendant however points out in defence that there is no suggestion that Mr Williams disposed of any of his personal shareholdings in HIH during the relevant period (unlike Mr Adler who sold, and sold first to the disadvantage of HIH and HIHC). Nor is there any suggestion that Mr Williams obtained any other collateral benefits as a result of the transaction. His sins were those of failing to exercise reasonable care and diligence and in particular allowing a mandate to Mr Adler and Adler Corporation's subsidiary, PEE without seeking the necessary approval required from the Investment Committee (or the Board) and to likewise stand by to permit the transaction to go ahead, contrary to the Investment Guidelines without ratification from the Investment Committee.

CONCLUSION 457 On balance and though close to the line, I am not able to be satisfied, at the stringent standard of proof required, that Mr Williams was in breach of his statutory obligation as a director to exercise his powers and discharge his duties in good faith in the best interests of the corporation and for a proper purpose, as required by s181 of the Corporations Act. This is in relation to the initial transaction in making available the $10 million and in the application of part thereof in purchasing HIH shares.

Section 182 and Mr Williams: investment in AEUT and by AEUT in HIH 458 Turning finally to s182 of the Corporations Act, the question is whether Mr Williams improperly used his position as a director to gain an advantage either for himself or for someone else (Mr Adler) or to cause detriment to the corporation, here HIH and HIHC. I should commence by a brief statement of the effect of the case law on the application of s182 in the present context. (1) causing a company to enter into an agreement which confers unreasonable personal benefits on a director is a breach of ss180, 181 and 182. (2) failing to end an agreement that pays reasonable benefits to a related consultant after the director should realise that the company is insolvent breaches s182: Simar Transit Mixers Pty Ltd v Baryczka (1998) 28 ACSR 238 [CL s232 1992]. (3) obtaining the agreement in a manner which keeps any independent director "in the dark" is strong evidence that the benefits are unreasonable, as is the lack of any evidence as to what the director did for the company in return: Claremont Petroleum NL v Cummings (1992) 10 ACLC 1685, 9 ACSR 1; on appeal (1993) 11 ACLC 125, 9 ACSR 583 [CC s229 1989]. (4) Moreover it is sufficient to establish that the conduct of a company was carried out in order to gain an advantage for that director or someone else without also having to establish that an advantage was actually achieved: Chew v R (1992) 173 CLR 626 per Mason CJ, Brennan, Gaudron and McHugh JJ at 633. (5) Where a director acts in relation to a transaction in which he or a party to whom the director owes a fiduciary duty stands to gain a benefit without making adequate disclosure of his interest, that director acts "improperly" within the meaning of s182(1): R v Byrnes (1995) 183 CLR 501 at 516-17. That is likely to lead also to a conclusion of lack of good faith for s181 purposes. There could be no adequate disclosure here, or the essential fully informed consent, where there was neither disclosure to HIH's or HIHC's board or even to the Investment Committee. It does not suffice that Mr Williams or Mr Fodera knew (or Mr Howard as a non-director knew) of the transactions, or for that matter Mr Cassidy, his knowledge being in any event limited. (6) Finally, impropriety for the purposes of s182(1) is to be determined objectively and does not depend upon the director's consciousness of impropriety. It consists in a breach of the standards of conduct that would be expected of a person in the position of the alleged offender by reasonable persons with knowledge of the duties, powers and authority of the position and the circumstances of the case: R v Byrnes (supra) at 514-15 per Brennan, Deane, Toohey and Gaudron JJ. 459 I have concluded that Mr Williams did on that basis improperly use his position to gain an advantage for Mr Adler, namely in using such authority as he had or purported to have, to authorise the payment of $10 million without proper safeguards and without the relevant mandate being submitted for approval to the Investment Committee and without obtaining subsequent ratification from the Investment Committee in accordance with the Investment Guidelines. The advantage to Mr Adler is as I have earlier described. 460 The advantage that he secured for Mr Adler did indeed cause detriment to the corporation HIH and HIHC, as well as PEE. The causal link between the improper use of his position to cause that detriment is made out by the matters I have just recited. But for Mr Williams occupying the position of the most senior executive in the company, he could not have authorised the payment of $10 million and had that course of action carried out without question. The end result is indubitably to have caused detriment to both HIH and HIHC.

CONCLUSION 461 Mr Williams breached his statutory obligation under s182 not to improperly use his position as a director of HIH and HIHC to gain an advantage for Mr Adler. He likewise improperly used his position to cause detriment to HIH and HIHC, in authorising the relevant payment without proper safeguards and without having the relevant mandate to Mr Adler and PEE submitted for approval to the Investment Committee and for the relevant investment to be ratified by the Investment Committee, in accordance with the Investment Guidelines.

Application of ss180 - 182 of the Corporations Act to the investment in AEUT and by AEUT in HIH in relation to Mr Fodera NINTH LEGAL ISSUE 462 I turn now to consider the position of Mr Fodera, the Third Defendant, in relation to each of s180, s181 and s182. 463 The question in each case is whether: "By his conduct and knowledge as pleaded, Fodera was involved in the payment"

such that he acted in contravention of those provisions. 464 I accept that the "conduct and knowledge as pleaded" is a reference back to paras 17.1, 20 and 46 of the Plaintiff's Statement of Claim where there appears the essence of the case against Mr Fodera, so far as his conduct and knowledge is concerned. I have earlier dealt with the relevant evidence concerning Mr Fodera's facilitating role (para 99 and following) and the state of his knowledge (para 200 and following). That factual position can be summarised as follows:

(a) Mr Fodera received instructions from Mr Williams to effect the $10 million payment and in turn instructed Mr Howard to progress it (paras 17.1, 20.2 and 20.3), and did not, at any time, withdraw those instructions. (b) Mr Fodera was aware (paras 20.2 and 20.3) that the $10 million was to be made available to Mr Adler, and that a company associated with Mr Adler was to receive ten percent of the profits (the change from Drenmex to PEE being simply for accounting and other reasons and having no particular significance here in terms of the quality of that conduct or the effect of his lack of knowledge of that substitution). (c) The effect of Mr Fodera's instructions to Mr Howard was that the payment not be made through the HIH Investments Department, (para 20.7); this was the result of Mr Fodera's comment that he did not want to "give this" to Mr Ballhausen "because it will be too hard" (see Mr Howard, para 17). (d) Mr Fodera knew that $10 million was urgently needed to pay for the purchase of HIH shares (para 20.5 and 20.6 of the Plaintiff's Statement of Claim). 465 Mr Fodera was a member of the Investment Committee of HIH and thus must be taken to have known that the express requirements of the Terms of Reference had not been complied with, namely, to have the mandate to Mr Adler or his associated entity submitted for approval to the Investment Committee and the investment also ratified in accordance with the guidelines. Even if, as Mr Cohen's evidence indicates, the guidelines were not significant, a contention that I do not accept, the Terms of Reference which Mr Cohen stated were binding, and were clearly not complied with to Mr Fodera's knowledge at the time, nor subsequently when he returned from overseas. 466 Nothing the Third Defendant says in his submissions refutes this point though the pleading issue does, at least impliedly, raise it. The pleading issue is whether, para (m) of the Particulars (see para 79) sufficiently encompassed the requirement for the mandate to be so approved as distinct from the actual payment. In my view, the Particulars should not be read so pedantically as to be limited to the Investment Guidelines, though even so limited they were not complied with and were, as I have said, prescriptive. Rather, than non-approval or non-ratification necessarily embraces any mandate as would encompass such payment being permissible for the purposes it was made. 467 The Third Defendant contends that because there was (as he asserts) a protocol or practice that permitted Mr Williams to authorise such a payment, Mr Fodera, as chief financial officer, was entitled to rely upon that authorisation and take no further step to have the matter referred to the Investment Committee. To this, the Plaintiff responds, correctly in my view, that the evidence does not support that assertion. Mr Howard's evidence (at T, 154.18) was concerned with the administrative step of drawing of cheques for investment purposes and not the making of decisions about investments. In other words, it was concerned with the administrative steps in implementing decisions themselves properly approved. That is borne out by the fact that there is nothing in the Investment Guidelines or the Terms of Reference that gives the Chief Executive Officer the power to bypass the Investment Committee in the way that occurred here. Indeed, the relevant provision of the Investment Guidelines, while contemplating that investment "in new unlisted equities and venture capital" may be undertaken with the prior approval "of the managing director, Australia, or finance director" (that is Mr Cassidy or Mr Fodera and by implication perhaps the only officer senior to them, Mr Williams) the Guidelines go on to say: "All such transactions are to be then ratified by the Investment Committee" (emphasis added)

Mr Fodera, in any event, must be taken to have been aware of the Terms of Reference which required prior approval of the relevant mandate. He should have been especially conscious of the need for that where the mandate was being given to someone who was not at arm's length from the company, even if Mr Fodera was not conscious of any immediate conflict of interest on Mr Adler's part. 468 Nor does the evidence of Mr Cohen (at T, 124.10 - .30) support the proposition put by the Third Defendant. Mr Cohen was asked about the investment in Business Thinking Systems, which was not an investment made until October 2000 (TB, 4/1480). His evidence went no further than saying: "There may have been quite a few. There is one particular one, the trust about which this case is centred in particular." 469 It was suggested to him that it was not Robinson Crusoe, and he agreed, but no others were identified. The thrust of Mr Cohen's evidence was his rejection of the proposition that: "Investments were made because Mr Williams said so".

Mr Cohen said: "No, I don't know that investments were made because Mr Williams necessarily said so, so far as I am aware, investments should have come through the Investment Committee and, where necessary, the Board." (T, 124.20) 470 Mr Cohen's evidence was supported by the Board minutes dealing with Business Thinking Systems. At the Board Meeting of 29 November, 2000, Business Thinking Systems was referred to in the context of a breach of Investment Guidelines (TB, 4/1480 to 1481). At the Board Meeting of 14 December 2000, it was recorded that the investments in Business Thinking Systems and PEE were not authorised by the Investment Committee and that Mr Adler responded that it was company management that should have complied with the requisite internal procedures (TB, 4/1486). This was an acknowledgement by Mr Adler that the investment should have been approved by the Investment Committee and amounts to an admission to that effect. However, it is quite spurious to suggest that Mr Adler, as a member of the Investment Committee, could shed his responsibility to have the matter approved by the Committee and blame company management for that failure. 471 In para 22 of the Third Defendant's submissions of 20 December 2001, reliance is also placed on an additional fact, which should be found, namely: "That Howard told Fodera that Minter Ellison were looking at the transaction and would draw up legal documentation for the transaction" (T, 166-7.36 - .47, T, 168.25 - .30; T, 168.44 - .58 ) 472 That evidence was, however, qualified by Mr Howard conceding that he could not remember whether or not he actually did tell Mr Fodera that: "Minter Ellison were looking at the transaction and would draw up legal documentation" (T, 168.55) "I can't say whether it was likely or not likely". 473 But even if Mr Fodera did have that assurance about Minter Ellison looking at the transaction and drawing up legal documentation, that fact does not, in any way, diminish the ultimate responsibility of Mr Fodera as a member of the Investment Committee and as Chief Financial Officer to see to it that the matter did go to the Investment Committee for approval or ratification. No advice from Minter Ellison was going to alter that requirement. He did nothing about it at the time of the transaction, leaving matters to Mr Williams, or Messrs Adler and Howard, as may have been reasonable at first, given his own impending departure overseas. But then he did nothing about it subsequently when he got back from overseas. He was overseas from 19 June 2000 to 17 July 2000. Thus, there is no evidence that he did anything on his return to follow matters up, when as a member of the committee and Board he must have known that no referral had taken place to the Committee or Board. While Mr Fodera might properly assume that a chief executive (or the other two, Messrs Adler or Howard) would respond appropriately in so referring, he could not shelter behind that assumption when on notice

(a) that no referral in fact took place, and (b) when he should have known that Mr Williams' authority did not suffice for other than the administrative steps of implementation. 474 There was evidence that special meetings of the Investment Committee were not convened (Howard T, 162.20; Cohen T, 135.30), and that the next regular meeting of the Investment Committee was on 8 September 2000 (T, 135.25), a meeting which Mr Fodera did not attend (we do not know why). However, though this further fact could not exculpate Mr Fodera or indeed Messrs Adler and Williams, the transaction was finally raised on 8 September 2000 not by a director, but by the external auditors (Gardener para 17 and T, 351.55, 352.20 - .28). Then the matter was raised at the Audit Committee meeting on 12 September 2000 which took place during the adjournment of the Board meeting which had commenced on 8 September 2000. The Third Defendant attacks Mr Cameron's evidence for not addressing these matters. But the short answer is the inescapable fact that Mr Fodera chose to do nothing from 17 July 2000 relying presumably either on others to report or on a mistaken view of Mr Williams' authority (but giving no evidence himself as to this) and importantly chose not to attend the Investment Committee meeting on 8 September 2000 when, as a responsible member, he could have seen to the referral. But for the auditors, it is likely that it still would not have been raised, and Mr Fodera had no reason to count on the auditors doing what they did. 475 The Plaintiff also contends that for Mr Fodera to avoid liability in the present case, it would have been at least necessary for him to give evidence to explain why he thought payment of the $10 million made available to Mr Adler or his associated entity, on an unsecured basis, avoiding the normal Investment Department procedures and being for the purpose of purchase of HIH shares, was considered by him to be in the best interests of the company and not requiring Investment Committee and/or Board approval. As the evidence stands, the Plaintiff contends that it points strongly towards impropriety and inappropriateness of the payment whilst the evidence of Mr Fodera's statement, made at the time, strongly suggests an appreciation by him of this. Those inferences are put against him. The Plaintiff concludes that as he has chosen not to give evidence, it must be inferred that nothing he could have said would have assisted him. 476 The question to be answered is whether, on the material before me and leaving aside Mr Fodera's failure to give evidence, there is sufficient for such an inference to be drawn against him, and so that the failure to give evidence merely strengthens that inference rather than impermissibly provides the essential basis for it. For reasons elaborated below, the former is the conclusion I have reached, so far as s180 is concerned, but not ss181 - 2. 477 In that context, the Third Defendant takes issue with the application of a number of the Particulars pleaded in para 79. Most of these matters have already been dealt with in relation to Mr Williams so I shall deal with them concisely here, and as they relate to Mr Fodera's circumstances. 478 As to para (a), undoubtedly $10 million was a substantial sum of money, whatever its proportion of what assets under investment; certainly so in the particular context in which consideration of it arises, namely the making available of the sum of money to a company associated with a director, where the payment is apparently made for investment purposes. 479 As to Particular (b), I will accept in Mr Fodera's favour, that Mr Fodera assumed that the transaction would be documented, or at any rate that it has not been established otherwise. 480 As to Particular (c), the fact was that the payment was made to a company which Mr Adler controlled, clearly a matter of significance in the context of a transaction where, to the knowledge of Mr Fodera as must have been soon apparent, the transaction involved avoiding any Investment Committee or Board approval. (I say soon apparent, because even if Mr Fodera did not know in mid-June 2000 that these approvals were not about to be sought, he would have known thereafter, simply because he was a member of both the Investment Committee and Board and would know nothing had been submitted for approval.) I do not consider that the fact that Mr Fodera was aware of Drenmex but not PEE, avails Mr Fodera since both were simply vehicles associated with Mr Adler, there to perform the same function. Nor does the fact that he may have assumed that the money was to be lent rather than invested by way of subscription for units. He was aware, clearly enough, that the money was to be handed over for the purpose of effectuating payment in relation to the share purchases of HIH shares whether Drenmex was the vehicle used or some other entity associated with Mr Adler. That was neither here nor there in terms of Mr Fodera's responsibility for proper approvals or ratification. 481 I would also assume in Mr Fodera's favour that it has not been established that, as Particular (f) suggests, that he would be aware of any contemplated object of enabling PEE to acquire from Adler Corporation unlisted investments, which were not the subject of independent analysis. However, as to Particular (g), the fact that Mr Fodera did not know of PEE, does not avail, and Mr Howard's unchallenged evidence clearly established that Mr Fodera knew that the payment was required to enable the purchase of HIH shares to be paid for. Having instructed Mr Howard to effectuate the payment, it is hardly credible to suggest that he did not know that the payment of $10 million had been paid (see para 43 of the third Defendant's written submissions). 482 So far as Particulars (h), (i) and (j) are concerned, these are in themselves established, but the Third Defendant contends that unless there is a connection, both pleaded and proven, between those Particulars and Mr Fodera's alleged failure to exercise his powers and discharge his duties with the requisite degree of care and diligence, then those Particulars, as pleaded, are not material. 483 I agree with that submission of the Third Defendant. In particular, there is no basis for attributing knowledge to Mr Fodera of the improper purpose of Mr Adler in maintaining or stabilising the HIH share price for his own advantage. But absent that knowledge and the application of those Particulars to him, it does not follow that Mr Fodera is exculpated if (as I conclude) the other Particulars suffice to render him liable and are made out. 484 So far as Particular (k) is concerned, that is the non-disclosure to the directors of HIH other than Mr Adler, Mr Williams and Mr Fodera, or to the Investment Committee of HIH, I consider that that is sufficiently made out that disclosure, but of a very limited kind, was made to Mr Cassidy about the payment by 12 July 2000; that is from the fact of being given the application form for the B units to sign. 485 I turn now to Particular (m), that the payment: "Was not approved or ratified by the Investment Committee of HIH" 486 This is the gravamen of the case against Mr Fodera under s180.

Mr Cameron's views were thus expressed in cross-examination: "Well I think Mr Fodera had an obligation as a director himself to make sure that the payment was in order within the company's investment guidelines. But also in view of the particular circumstances in this case I think he had an obligation to ensure that the Board were aware - were fully aware of the transaction." (T, 338.35) "Yes, I believe the nature of the transaction that occurred at that time was such that any reasonable and diligent director if (he) became aware of it would want to be assured that all directors were aware of the nature of it." (T, 338.50) 487 When Mr Cameron was pressed about what Mr Fodera should have done, he first dispelled any suggestion that Mr Fodera should have suspected Mr Williams of some wrong doing (T, 338.53 - .55). 488 At T, 338.57 - 339.10, the following question and answer appears in Mr Cameron's cross-examination: "Q. Let me suggest to you that if an employee is made aware of information in relation to a transaction, that it is appropriate for the employee to report it to the Chief Executive Officer unless he suspects the Chief Executive Officer of some wrong doing? A. But we're talking here about that person who is not only an Executive Officer, he is also a member of the Board of the Company, and I think that carries with it additional obligations. I'm not suggesting that he should go beyond advising Mr Williams of the matter, provided he follows it through and ensures that Mr Williams advises the Board." 489 That Mr Fodera was overseas from 19 June 2000 to 17 July 2000, was drawn to Mr Cameron's attention as a matter he was not aware of but, according to Mr Cameron the only difference that fact made was as to timing; (T, 339.45 - .48). I agree. 490 It is then said by the Third Defendant in submissions that mere knowledge and inaction is not enough to satisfy what "involved" connotes, namely

(a) aiding, abetting, counselling or procuring, (b) inducing, (c) being knowingly concerned in or being a party to, and (d) conspiracy: Yorke v Ross Lucas Pty Limited (supra) at 667, 668 and 673. This counselling and procuring requires that the accused "urged" or "advised" or "persuaded": see for example Stuart v The Queen (1976) 134 CLR 426 at 445). It is then said that this element is absent here. That is to say, there is lacking what must be something in the nature of active participation, usually by affirmative words, of encouragement or persuasion and not mere passive presence: (R v Russell (1933) VLR 59 at 71 and 77). "Inducement" is likewise lacking, there being no form of threat, coercion or promises; nor is there any conspiracy. 491 However, I would conclude that in causing Mr Howard to make the payment as he did and in the facilitating role he played (avoiding Mr Ballhausen because "it will be too hard"), quite clearly Mr Fodera's role involved sufficient active participation. That it was a proposed transaction makes no difference; Mr Fodera had no reason to suppose that the transaction was not going ahead. 492 I do not accept that Mr Fodera was entitled to escape responsibility by relying upon Mr Howard to implement the transaction appropriately, not only in terms of form and documentation, but also in terms of notification to the Investment Committee. Mr Fodera was clearly on notice that "prior" approval was not being sought from the Investment Committee as he himself was a member of it and would know that no such approval was being sought, and that it had not been later sought after the event. In those circumstances, it is nothing to the point to suggest, as does the Third Defendant in the written submissions, that Mr Fodera: "Could reasonably have expected that Williams, Adler or Howard would notify the Board"

or, for that matter, the Investment Committee. Mr Fodera was a member of both and though he went overseas, he would have returned on 17 July 2000 to find no such notification; see generally paras 71 and 72 of the Third Defendant's written submissions. While Mr Fodera was entitled to rely upon Mr Howard to implement the transaction appropriately in terms of form and documentation, and even accepting that Mr Fodera knew that Mr Williams had considered the transaction and, in terms merely of administrative implementation, had made a decision within his monetary authority, a fundamental shortcoming remains, namely that Mr Fodera must have known that the transaction did not go either to the Investment Committee or Board being, as I have said, a member of both and he must have known that it had to go to one or other for such approval. Even if it be a counsel of perfection that it should have gone for approval in advance, it certainly had to go afterwards for ratification. This is more especially as Mr Williams was neither "the Managing Director, Australia or Finance Director" (who under the guidelines could give "prior approval" but still, requiring ratification after by the Investment Committee). Mr Fodera as Finance Director had in the end tried to wash his hands of the matter (see para 9 of Howard's affidavit "Talk to Mr Williams about it - I don't want to know about it"), though he had still set about getting the cheque organised. 493 Finally, paras 68 and following start with the proposition in the Third Defendant's submissions that pleadings of the Plaintiff are deficient in that para 79 expressly pleads "involvement" whereas ASIC sought to adduce evidence, through Mr Cameron, only on the assumption that Mr Fodera "caused or procured the payment" (see Mr Cameron question 3 put to him). However, that is a distinction without a difference, because the term "involvement" as defined is perfectly capable of including "causing or procuring", as the definition in s79 of the Corporations Act makes clear. Quite clearly, Mr Fodera was more than a mere "passive presence" (R v Russell (supra) having participated sufficiently actively, with broad knowledge of the essential facts (of Drenmex not PEE but nothing really hangs on that). His first conversation with Mr Howard asking him to arrange the cheque, bypassing Mr Ballhausen suffices for "causing or procuring" the payment. 494 Particulars (k) and (l) to para 79 of the Plaintiff's Statement of Claim are quite wide enough to accommodate the failure on Mr Fodera's part to do that which would have resulted in disclosure, namely either objecting to the request that the monies be paid, or requesting that the cheque not be drawn until the matter had been referred to the Board and, secondly, after the transaction did proceed, following up on Mr Williams to ensure that the matter was reported immediately to the Board. Clearly enough, his conduct contributed to the non-disclosures referred to in paras (k) and (l) and clearly enough also he was prepared to involve himself in the transaction by the instructions he gave, and by that conduct, facilitated its progress, with knowledge of the outcome being unavoidable as far as Mr Fodera was concerned, simply by reason of his position as a member of the Board and the Investment Committee, who had been bypassed. 495 Nor is it any answer for Mr Fodera to say that the transaction might have gone ahead anyway, even if he had not been involved. I agree with the Plaintiff's submissions that Mr Fodera might conceivably have made out a case for relief from liability under s1317S if he had given evidence that he did not attempt to dissuade Mr Williams from making the payment say because he thought on good grounds that that would be pointless, that he did not seek to dissuade Mr Howard for the same reason, and that he did not seek to contact other directors or officers of the Investment Department, including Mr Ballhausen, for the same reason. However, he chose not to put on any evidence and that remains an issue when I consider relief on a subsequent occasion. The evidence that is before the Court indicates that he was thus prepared to involve himself in the transaction and, by that conduct, facilitate its progress putting no matters himself in evidence by way of extenuation; see the Plaintiff's reply, para 19. 496 Turning again to Mr Cameron's evidence, I should make it clear that I would not accept that Mr Cameron's view, applicable to Mr Adler, was equally applicable to Mr Fodera, as he expressed it in para 6 (and see paras 9 and 15) since that presupposed that he knew at the time (15 June 2000) not only about the 10% profit share for the manager rather than a fee (that he did know) but that the money would remain available "without security and without adequate documentation of appropriate arrangements", given Mr Howard was charged with getting advice and documentation through Minter Ellison. Mr Cameron says: "In my view, a reasonably careful and diligent director or officer of HIH or HIHC and Mr Adler's [Mr Fodera's] position would have taken the view that the proposed transaction was quite contrary to HIH and HIHC's interests as it was to involve the payment of a large sum of money to a company controlled by a director, for investment completely at the discretion of the director, without security and without adequate documentation of appropriate arrangements, including arrangements as to interest and/or profit share." 497 As regards what is put by the Third Defendant at paras 73 to 99, I do not accept that: "Mr Cameron's evidence, taken as a whole, is so unsatisfactory that it should simply be disregarded" because: "Cameron …. did not know the precise details of the facts in this case and the precise assumptions on which his opinion is based have not been identified;" [para 99]. 498 Although I do not accept that position with regard to Mr Adler referred to in para 6 of Mr Cameron's affidavit is equally applicable to Mr Fodera, I do accept his evidence concerning Mr Fodera having to follow through to ensure Board approval or at least Investment Committee satisfaction (which would include approving the AEUT investment mandate). Mr Fodera had a responsibility to ensure that the matter was brought to the attention of the Investment Committee of which he was a member for approval or at least ratification. It is thus no answer for the Third Defendant to point out that the next Investment Committee meeting of HIH was not till 8 September 2000, by which time the transaction had been raised by the external auditors and the matter was then raised at the Audit Committee Meeting on 12 September 2000, which took place during an adjournment of the Board Meeting which commenced on 8 September 2000 (see para 86 of the third Defendant's written submissions). Nor is it to the point that Mr Fodera did not attend the next Investment Committee meeting after 15 June 2000, on 8 September 2000. It was simply not good enough for him to:

"Have expected that all or any of the other three members, who knew of the transaction, would raise it at that meeting."

The time to raise the investment with the Investment Committee was well before, when something could still be done about it and certainly promptly after his return from overseas. He could have raised it instead with Mr Williams for him to put it before the Investment Committee but there is no evidence he even did that. By September 2000 the only course open was ratification or unwinding, with the latter involving substantial losses. If he had moved in early August 2000 he might have forestalled the unlisted investments and later loans. This is if the Investment Committee had met earlier than scheduled, and so determined, as well it might when dealing with such an arrangement with a fellow director. 499 As I have said earlier, I would not attribute knowledge to Mr Fodera beyond the fact of the payment of a large sum of money to a company controlled by a director (Mr Adler) for investment, with the investments including shares in HIH. In particular, I would not attribute knowledge to Mr Fodera that the intention was that such investment be "completely at the discretion of the director" (Mr Adler) nor that there would not be ultimately adequate documentation of appropriate arrangements, including arrangements as to interest and/or profit share.

Jones v Dunkel Inferences 500 I do not accept, as the Third Defendant contends, (paras 100 to 121 of the Third Defendant's written submissions) that this is a case of two equally competing inferences, or a case where the inference adverse to the Third Defendant, depends upon failure by that party to give evidence. I am satisfied on the evidence that it points sufficiently clearly against Mr Fodera in the respects that I have identified. I do so without need for recourse to any inferences merely from his not giving evidence though that circumstance strengthens the adverse inferences well capable of being drawn against him. Moreover, I do not accept the innocent explanation, put by the Third Defendant, for his saying: "I don't want to give this to John [Ballhausen] because it will be too hard"

or Mr Howard's evidence at para 9: "Talk to Mr Williams about it - I don't want to know about it"

In response to Mr Howard's statement: "Rodney wants the cheque drawn today. Did you know we had purchased some shares in HIH today and that the funds are required to settle those trades?" 501 Mr Howard's acceptance of the proposition that he did not regard there as being anything "sinister" in Mr Fodera saying that he did not want to give "this" to Mr Ballhausen because "it will be too hard" is not of countervailing significance. First, as the Plaintiff says, the precise connotation of "sinister" in this context is not clearly put by the cross-examiner and so accepted by Mr Howard. Certainly, Mr Howard thought that the cheque was an unusual one to be drawn out of his department (Howard para 17) and he was sufficiently concerned to seek a meeting with a solicitor to discuss the transaction and Mr Howard's personal position in relation to it (T, 149.35). 502 As to the words "I don't want to know about it", again I accept the Plaintiff's submission that if Mr Fodera had been intending to say that he was too busy to deal with it, he would have used words to that effect. Moreover, as the Plaintiff says, it was hardly likely that he would contemplate sending any overflow of his own work up the corporate ladder to Mr Williams especially if it was sent from Mr Williams to him in the first place. The earlier comment by Mr Fodera that he did not want to give this to Mr Ballhausen "because it will be too hard", reinforces the inference that he was not simply talking about being too busy on 15 June 2000 to concern himself with the HIH share purchase and Mr Adler's role therein. Moreover, Mr Fodera's concern, as I would infer, held on 15 June 2000 concerning the transaction is reinforced by Mr Fodera's comment in September 2000 that "it's just crazy" when introducing Mr Buttle from the auditors, who stated to the other directors: "Are you aware that the company has made an investment in a trust to be managed by Rodney Adler, and that this trust has invested in HIH shares?"

(Gardener paras 19 and 20). 503 At para 119 of the Third Defendant's written submissions, an explanation of the failure to give evidence is said to be that because s 1317L of the Corporations Act applies both civil procedures and civil rules of evidence, therefore the protection given to the accused in criminal proceedings as to the limit of cross-examination would not be available to Mr Fodera in such case. Thus, if he gave evidence, it is said that Mr Fodera could be exposed to cross-examination about matters which may become the subject of further proceedings for a penalty. It is said then that that risk was recognised by the High Court in RPS v The Queen (supra), as an appropriate reason for an accused not to give evidence. That reason is said to be equally applicable in the case of a Defendant in proceedings for a civil penalty. However, the short answer to all that is that if Mr Fodera had given evidence, cross-examination would have been confined to matters relevant to these present proceedings. There is no basis for any suggestion that cross-examination of him could or would have been allowed to be used as the occasion for a "fishing expedition" as to matters that might constitute quite different contraventions. The Court would, in any event, be in a position to disallow any such questions, using its broad powers under s41 of the Evidence Act. 504 Nor is it to the point that, if Mr Fodera were asked any question which might tend to prove that he was liable to a civil penalty, he could have refused to answer that question on that basis and, even if he were compelled to give the evidence, it could not be used against him; see s128(1)(b) and s128(7) of the Evidence Act 1995. Here, the issue is simply whether any adverse inference should be drawn from Mr Fodera's failure voluntarily to give evidence, which might have provided an innocent explanation, not whether he could be compelled to answer questions which might tend to prove that he was liable to a civil penalty. 505 Finally, I do not consider that evidence, yet to be tested, of Mr Fodera's good character are of such weight as to alter the inference that would otherwise be drawn, based on the evidence to which earlier reference has been made. 506 I should refer, at this point, to paras 128 and 129 of the Third Defendant's written submissions. Para 128 contends that: " If Fodera's knowledge of the proposal to purchase shares in HIH is put to one side , there is no basis for finding a contravention of s180 in respect of the other matters which Fodera knew about the transaction." [Emphasis added] 507 Then para 129 sets out the features of the transaction, excluding the proposal to purchase shares in HIH. 508 But even if one were to accept that those features were not in themselves "extraordinary", when one adds the proposal to purchase shares in HIH, the transaction clearly was extraordinary, as Mr Cameron's evidence affirms. It is quite unreal to consider the proposal without taking into account the vital element that shares in HIH were to be purchased, when considering Mr Fodera's position. It is the combination of all these elements, including the HIH share purchases, that made the transaction extraordinary. I certainly include in that context, the making available of $10 million in advance of any documentation to a non-executive director, not at arm's length from the company and with potential conflicts. 509 Given the extraordinary nature of the transaction, whether or not it should also have been referred to the Board, it should most certainly have been referred to the Investment Committee in advance or contemporaneously at the very least, for approval, such approval necessarily encompassing the relevant mandate. Here in contemplation as part of that mandate was not just ordinary share trading but share trading in HIH's own shares, a matter quite clearly unusual. Mr Fodera was clearly aware that some of the money was to be used to pay for HIH share purchases, as should have immediately conveyed the extraordinary nature of the investment and its need for application of the proper approval processes. Not only did Mr Fodera not seek to procure that approval, but he failed to take any steps in the two days before he left for overseas, which may have been difficult, because he was very busy, or after he returned from overseas on 16 July 2000, to have the matter at least referred to the Investment Committee for ratification pursuant to the Investment Guidelines. The likely reaction of the remaining directors when they found out about the transaction in September/October indeed supports Mr Cameron's evidence. For example, Mr Cohen at T, 79.25: "When they became aware of the trust, a number of directors expressed 'surprise' perhaps 'horror might be a better word to use' at what had taken place." 510 Hence given that evidence of the obviously extraordinary features of the transaction, it certainly could not be assumed that a reasonable Board would have approved, even if it is conceivable that it might. Its position when forced to ratify after the event is no reliable guide to what it would have done if asked to approve in advance. 511 I turn finally to the business judgment rule, either as a defence or as an element to be rebutted by the prosecutor. The fundamental problem is that Mr Fodera gives no evidence as to any business judgment he made, nor is it otherwise able to be established whether he made any business judgment at all, though he played an important facilitating role. Mr Fodera's sins were otherwise sins of omission, in failing to bring the proposed transaction to the attention of the other directors of HIH or to the Investment Committee, before it was implemented or afterwards for ratification or otherwise, relying (if such he did) on others to do so. While the late Sir William McMahon famously said that "a decision not to make a decision is still a decision", I would still doubt that Mr Fodera made any business judgment at all, as for example, not to refer the transaction to the Investment Committee or the Board for approval or ratification. It is far more likely that he simply overlooked the matter. What I have said earlier about delegation applies mutatis mutandis here. He could not rely on a belief on reasonable grounds that Mr Williams would do the necessary referral, when he was on notice that no referral had taken place, he being both a board member and member of the Investment Committee.

CONCLUSION 512 (a) Mr Fodera failed to exercise the degree of care and diligence required by s180 of the Corporations Act by reason of the failure of Mr Fodera to take such steps as were open to him to have the proposal either submitted for approval in advance to the Investment Committee, if not the Board, or thereafter submitted for ratification by the Investment Committee if not the Board. This was especially in circumstances where extraordinary features of the transaction should have been apparent to him, including in particular involvement of a fellow director Mr Adler and the purchase of shares in HIH by an entity associated with Mr Adler with part of the $10 million. He was not entitled to rely on others to do this, though primary responsibility to do so lay with Mr Williams and Mr Adler. He must be taken to have known that there had been no submission to the Board or Investment Committee, as he was a member of both. Yet he took no steps from July 2000 to 8 or 12 September 2000 when the auditors first drew attention to the transaction. The business judgment rule does not avail Mr Fodera, though no finding of lack of good faith or improper purpose or dishonesty is made in the case of Mr Fodera. It would be premature to consider the application of s1317S or s1318, in terms of any relief in relation to the contravention in question. That needs to be considered as a matter of discretion in light of the evidence then before the Court.

(b) Though Mr Fodera failed to bring the AEUT investment (including the associated purchase of shares in HIH) to the attention of the other directors of HIH or to the Investment Committee, it has not been established to the stringent standard required for a civil penalty that any contravention occurred of s181 (lack of good faith or proper purpose) or s182 (improper use of position) of the Corporations Act .

Investments in dstore, Planet Soccer and Nomad 513 The foregoing consideration of the factual events and of the Corporations Act has not taken into account the subsequent unlisted investments and loans by PEE being respectively bought from, or lent to, Adler associates. This is in any event not relevant to Mr Fodera of whom there is no evidence of his being aware at the relevant time of the prospect or actuality of these unlisted investments and loans (as distinct from the earlier HIH purchases). They are, however, relevant in relation to Mr Adler. 514 The gravamen of the Plaintiff's case is that Mr Adler caused PEE to enter into these "in-house" transactions with Adler Corporation, which were to the advantage of Mr Adler because they enabled Adler Corporation to dispose of investments with which Mr Adler was dissatisfied, in circumstances where a breach of his duty is said to follow sufficiently from the following:

(a) Mr Adler chose to advantage himself and Adler Corporation by these AEUT purchases by having Adler Corporation sell them at its cost to AEUT in circumstances where it was dissatisfied with them ((c) below) and where there had been earlier, by mid April 2000, radical downward change in market conditions for technology stocks; (b) The arrangements were made with the contemplated object of enabling PEE to acquire from Adler Corporation unlisted investments which were not the subject of independent analysis and Mr Adler did not have any due diligence or other similar inquiry or investigation undertaken on behalf of PEE prior to the purchases being made, where the evidence indicated that such was a necessary safeguard in the circumstances. (c) Mr Adler knew, or should have known, of the financial and capital raising difficulties of dstore, Planet Soccer and Nomad and the effect of these on their financial viability, being difficulties which had arisen since Adler Corporation made those investments and before they were transferred to PEE, yet he had Adler Corporation transfer them and PEE acquire them at the same price as Adler Corporation had paid to Adler Corporation's advantage and Mr Adler's; (d) though the above matters are sufficient in themselves to establish breaches of duty, that conclusion is supported by evidence to the effect that the three investments were not advantageous to AEUT (see para 74 of the pleadings) being of less value at the time of acquisition of PEE than when acquired originally by Adler Corporation; (e) accordingly, no reasonable director in Mr Adler's position and possessing his knowledge would have permitted PEE to acquire Adler Corporation's investments in dstore, Planet Soccer and Nomad at Adler Corporation's original cost; (f) these transactions were not brought to the Investment Committee (or Board) for approval and in circumstances where the mandate to AEUT had never been approved by the Investment Committee (or the Board), as Mr Adler must have known, being a member of both; (g) the later loans, made also without such approval, by AEUT to interests associated with Mr Adler were likewise to the advantage of Mr Adler and his associated interests and (though it is contended that this is not necessary to establish) to the disadvantage of AEUT. 515 So far as Mr Williams' role concerning these "in-house" investments (as well as the earlier HIH investment) as bears particularly on Particular (f) of para 77 of the Statement of Claim, the Plaintiff put the position thus:

(a) evidence from Mr Howard (para 8) that Mr Adler told Mr Howard that he (Mr Adler) and Mr Williams had had conversations "that the trust may or may not purchase other venture capital investments that I was associated with such as dstore at cost to give them a chance to make money"; this is evidence which I have admitted pursuant to s60 of the Evidence Act and which, in the absence of any countervailing evidence I accept;

(b) evidence which is undisputed that Mr Williams had prior knowledge that PEE would be investing in "venture capital and share trading" (TB, 28, 29 and 268);

(c) Mr Adler's memorandum of 10 July 2000 (TB, 212A) to Mr Williams (and Mr Howard) notifying them of the [still to be made] purchase of dstore and Plant Soccer at "my original cost" and described as "two of my own investments", such that Mr Williams then clearly knew of them coming from Mr Adler on those terms, as well as having Mr Adler's assurance that "both would be valued at higher than that level, I am reliably informed";

(d) Mr Williams did nothing about seeking the necessary approvals from the Investment Committee (or Board) and must have known they had never been obtained; see earlier and note here the admission in the letter of 22 December 2000 to ASIC para 7 from Mr Cohen on behalf of the Board in para 7 of the Schedule that "Prior approval of the Investment Committee … is required for such an investment [the $10 million to AEUT] to be made" and "the proposal to make this investment was not presented to the Investment Committee, the investment as a consequence was not authorised", negating any suggestion that Mr Williams' own approval was enough;

(e) Mr Williams left to Mr Adler, as is admitted (First and Fourth Defendants' written submissions para 4(f)) "total discretion as to the investment of the $10 million" (see also TB, 252D, letter to the Board of HIH by Minter Ellison 29 November 2000, para 6 of Schedule: "… managed by Mr Adler or a related person or entity who would have complete discretion as to the type of investments to be made" and I note also paras 3 and 4 as to taking advantage of investment opportunities offered to Mr Adler or related entities as distinct from those already taken up.

To resolve these issues, it is necessary to consider in more detail the circumstances surrounding each unlisted investment.

dstore 516 I shall commence with the history of dstore. 517 dstore commenced business in November 1999. Its business was to engage in e-commerce through its internet website. It initially specialised in sporting goods and toys but later broadened its product range (Gold, the Chief Executive Officer, para 3). This occurred in an environment of rapidly increasing use of the internet for shopping and in the absence of a major online retailer in Australia (Gold, paras 4 to 14; Greiner paras 6-7). 518 In December 1999, dstore raised $4,500,000 from private placement of equity to investors at $1.60 per share, being the amount sought to be raised pursuant to the November 1999 information memorandum (Gold, paras 15-17). These investments valued dstore at $16.5 M post investment: (Gold, para 17). In its first full month of trading in December 1999, dstore's revenue was over five times its budgeted forecast: (Gold, paras 18-19). A joint venture between PBL Holdings Limited and Microsoft, known as ninemsn, subscribed $5.23 million at a price of $3.38 per share in December 1999, which valued dstore at $40.2 million post investment: (Gold, para 20). 519 In January 2000, dstore issued a further information memorandum seeking to raise an additional $10 million of equity funds at $5.03 per share: (Gold, paras 21-31). This second round of capital raising in fact raised $16.5 million which, (at $5.03 per share) valued dstore at $76.9 million, post investment: (Gold, paras 32-33). As part of this capital raising, Adler Corporation purchased 99,404 shares at $5.03 per share, that is for a total of $500,000. 520 The subscription agreement (TB, 2/291) incorporated an agreement to be bound by the shareholders agreement and was signed by Mr Adler, for Adler Corporation, on behalf of Two Gables Super Fund. Mr Adler was the sole unit holder of that fund (PX21). 521 Mr Greiner, its Chairman of Directors, described dstore's strategy as based around very aggressive growth to reach significant scale and profitability in several years time (T, 519.50). He agreed that the achievement of such a strategy required substantial funding during the initial years (T, 519.55). The raising of capital was a sine qua non of the achievement of dstore's plans (T, 520.5). That necessarily meant losses in earlier years and the achievement of the strategy required substantial capital. Indeed, as at February 2000, as indicated above, dstore's record was one of successful capital raising (T, 518.30) and the investment market was then undoubtedly strong (T, 518.40). Mr Greiner had become a Director and Chairman of dstore on 15 February 2000. One of the reasons he was invited to join the company was his high profile in the community, which was a positive feature likely to assist the company in its capital raising activities as Mr Greiner said in cross-examination: (T, 520.15 - .25). He explained that one of his roles for the company was in effect to market the company to the investment community (T, 520.25). To that end, he made comments to the press and to existing investors (T, 520.20). 522 Mr Greiner acknowledged that it was critical to a company's survival that it raise capital (T, 520.1) and it was its inability after February 2000, as events emerged, to raise further capital (despite strenuous efforts to which Mr Greiner attests, T, 520.5) which eventually led to its collapse at the end of the year (T, 520.15; 521.15). Mr Greiner's evidence was that the circumstances showed that there was indeed a significant lack of investor confidence, manifested as the year went on (T, 523.10). However, dstore's operations continued to expand throughout early 2000, launching new product lines and establishing strategic alliances, including to facilitate expansion into the Asian market (Gold, paras 39-46). 523 There was a large downward stock market correction in April 2000 which most seriously affected internet and technology stocks, such as e-commerce retailers (Greiner T, 527.35; Greiner para 10). There was thus a dramatic change after April 2000 in the stock market community as Mr Greiner acknowledged (T, 527.40). Mr Greiner's evidence was that over the six months prior to October 2000, circumstances in the investment community changed dramatically (T, 527.50) and that after April 2000, the global investment market for e-commerce retailers changed dramatically (T, 528.25 - .55). 524 Nonetheless, in April 2000, dstore pursued plans for its proposed IPO with a view to raising $100 million in order to fund further expansion of the business: (Gold paras 47-52). Macquarie Equity advised that dstore may be expected to receive a pre-crash IPO valuation based on a revenue multiples approach of $133 million to $199 million, equating to $8.71 to $13.03 per share, and provided a valuation based on discounted EBIT of $416 million as the base case: (Gold para 50). Salomon Smith Barney advised dstore that they believed an IPO valuation could be achieved in the range $90 M to $150 M, excluding capital committed to date, equating to a value per share of $5.89 to $9.81: (Gold, para 51). That assessment proved unduly optimistic post the mid-April 2000 stock market correction. 525 In Mr Gold's and Mr Greiner's affidavit evidence, each stated that they regarded dstore as being well placed to ride out the volatilities in the capital markets following the April 2000 stock market correction, (Gold paras 53-57, 63-66; Greiner paras 10-14). Mr Greiner said in his affidavit evidence that it was only with the benefit of hindsight that he now perceives that the April 2000 correction for technology stocks had a more profound effect in terms of investor confidence than he appreciated at the time: (Greiner para 34). In cross-examination, Mr Greiner gave as his view at the time that many businesses in the internet and technology field would go out of business (T, 529.5). It was however dstore's hope and expectation that dstore would be "the last man standing" (Greiner T, 529.15). Mr Greiner also saw the opportunity for acquisitions as the changed market had substantially lower valuations (T, 529.30). 526 In March and April 2000, a IPO briefing was given to a number of investment brokers, who were asked to prepare proposals (Gold para 48; TB, 2/354J). When these written proposals were submitted, these were in effect bids for the job by brokers who were not to be remunerated unless they were successful in winning the job, (Gold at T, 701.58 - 702.10). 527 The brokers' presentations occurred on or about 14 April 2000 (the date the stock market collapse commenced in IT stocks) but a decision was made in June 2000 to postpone the IPO as a result of changed market conditions (TB, 2/438A). 528 In response to an update letter from Mr Greiner to the shareholders (TB, 2/355) Mr Adler asked searching questions as to what cash was on hand, the "cash burn rate" and as to when cash flow would be positive. 529 Mr Greiner saw this letter from Mr Adler as indicating that the question of dstore's cash position was a matter of concern to Mr Adler (T, 531.50) and I would also draw that inference. 530 Mr Greiner's response of 8 May 2000 (TB, 2/361) indicated that dstore had cash reserves of $18.1 million and that its burn rate was $1.3 million per month and falling. On this basis, dstore should have had more than $15.5 million at 30 June 2000. 531 Mr Greiner, in cross-examination, however acknowledged that in retrospect, this turned out not to be the position. In fact because the cash reserves held at 30 June 2000 were $11.8 million, that indicated a burn rate for May and June 2000 of something like $3.1 million per month, nearly three times the amount estimated (T, 533.25). Mr Greiner agreed that the burn rate was thus far in excess of what he thought it was in May 2000 (T, 534.1). 532 The letter setting out Mr Greiner's estimate of the burn rate, at $1.3 million per month, was sent to all investors: (Gold, para 59). 533 On 9 May 2000, Mr Adler thanked Mr Greiner for his answers and requested further information as to his budgeted cost of purchase per customer (in light of a statement that the costs per customer was $1,200) and requested more details on the warehousing/fulfilment facility (TB, 2/362). Mr Greiner responded on 12 May 2000 saying that the correct figure for the cost per customer was $100, which Mr Greiner said was "still way high" but "significantly scale related" (TB, 2/363). 534 Passing over events in May and June, including the decision at the end of June 2000, to defer its IPO, (Gold, para 67, TB, 2/438A), in July 2000 dstore issued a further information memorandum seeking to raise $10 million in new funds for the issue of ordinary shares at the price of $7.25 per share, in order to fund its further expansion: (Gold, paras 79-81; Greiner paras 15-16). Importantly, the higher burn out rate experienced of $3.1 million per month and the associated cash reserves as at 30 June of $11.8 million, were apparent from that July information memorandum (Greiner Exhibit 1, 213). Bearing in mind the concern Mr Adler showed in respect of the cash position of the company (4 May 2000 letter referred to above) and the steps taken by Tinshed, which was the investment group with which he was associated (Gold at T, 703.45 - 704.5; PX18 last page; TB, 3/439-441) to obtain all the available information in relation to dstore's financial position, the Plaintiff contends, and that it should be concluded. that Mr Adler became apprised of its contents, notwithstanding that Mr Gold asserted that the information memorandum offer was not made to Adler Corporation (Gold para 87). 535 I would accept that that inference may fairly be drawn. Thus, that information would have shown Mr Adler that dstore had sufficient cash reserves at this time to meet its requirements only through to November 2000. However, the $10 million sought to be raised pursuant to the July 2000 information memorandum, was expected to be sufficient to meet dstore's requirements through to mid 2001, with the IPO expected to take place early in 2001, (Gold, para 82; Greiner para 23-24). 536 In the events that happened, that IPO with the vitally needed $10 million, turned out unsuccessful. This was despite the efforts of Mr Gold between July to September 2000, in numerous meetings and presentations to potential investors who had received the July 2000 information memorandum and what appeared to be a high level of interest in the investment opportunity being expressed by many potential investors, including Qantas and the ANZ Bank, and discussions with Westfield: (Gold, para 84; T, 706.43 - .50). But by September 2000, it had become evident to dstore that it would not be possible to raise the equity sought in the July 2000 information memorandum: (Greiner para 28; Gold para 85; T, 706.23 - .28, 706.55 - 707.3). Mr Greiner said in cross-examination that the decision by potential investors to invest usually comes at the end of the process rather than people signing up along the way, and a lot of interest was being expressed despite some resistance to the price: (T, 540.1 - .21). But the reality was that this capital raising failed and the difficulty was not communicated to shareholders until the October 2000 information memorandum for a convertible note issue published under cover of Mr Greiner's letter of 26 October 2000: (Greiner paras 30, 32; Gold paras 88-92). The September 2000 information memorandum was not sent to Adler Corporation: (Gold, para 87, T, 707.23 to 708.12). Mr Greiner was still speaking positively about dstore in October 2000; (T, 527.13 - .16). Mr Gold's confidence in dstore did not wain until November 2000: (T, 708.13 - .20, 708.57 - 709.6). 537 The Plaintiff's submission is that either it can be inferred that Mr Adler had seen the July information memorandum offer, with its disclosure of the higher burn rate at $3.1 million per month, or though not so aware, it was nevertheless information that should and would have been acquired by a person undertaking the due diligence that should have been performed on behalf of PEE before the shares in dstore were acquired, as they were, on 25 August 2000 at cost. However, as against that, there was still the prospect of further funding with the indications earlier mentioned, which had still to fail and only did so in September, 2000, after the shares had been acquired by PEE on 25 August 2000. 538 The Defendants point out that as at July 2000, Mr Gold and Mr Greiner believed that dstore was Australia's leading internet retailer, with strong sales volumes well in excess of budget and with further plans to expand its marketing channels: (Gold, paras 73-78; Greiner paras 19-22). It had an established brand name and a number of strategic affiliations: (Greiner paras 25-26). The evidence indicates that Mr Adler had some concerns as to the flow of information to shareholders, while contending that there is no evidence as to any specific concerns or of the contents of any requests for such information, (see last page of Exhibit PX18). Mr Gold was not aware of any threat to call an AGM if information was not provided, (T, 705.34 - .38). 539 As against that, there were concerns expressed at the 19 June 2000 shareholders' meeting, the notice of meeting having been addressed, inter alia, to Adler Corporation, describing the principal purpose of the meeting as being one to provide information to shareholders (TB, 2/363A). 540 Mr Cant was present on behalf of Tinshed (T, 534.40; T, 703.33). Significantly, questions were asked about dstore's cash position and its burn rate (Gold T, 704.5 - .15). Mr Greiner's evidence was that he did not recall if questions were asked about dstore's cash position, but he would be "amazed" if there were not (T, 534.50). This reflects an appreciation of the shareholders' real concern as to the company's cash position. 541 The shareholders were told at the meeting that it had been decided not to pursue the proposed IPO at that stage, because of the then current market conditions (Gold at T, 705.20 - .25). 542 The Tinshed Investment Group, which held a meeting of members, including Adler Corporation, on 23 June 2000, refers in relation to dstore to the need to "monitor strategy in light of cash reserves and burn rate" and to "conserve cash" (PX18, 5th page of exhibit). 543 Mr Adler wrote to Mr Hooker of Tinshed on Thursday 6 July 2000 (PX18, last page) referring to a conversation of Mr Hooker on that day and to the insufficiency of information received from dstore. He said that he thought that the letter should be written to Mr Greiner, advising him that: "unless we have answers to our questions that we intend to call an extraordinary general meeting". 544 Mr Greiner gave evidence that he recalled complaints around this time about insufficiency of information and that Mr Hooker raised the question (T, 535.1 - .10). 545 On Tuesday, 18 July, Mr Cant of Tinshed wrote to Mr Adler enclosing a draft letter to dstore requesting monthly reporting. Mr Gold recalled such a letter being subsequently received by dstore (T, 705.40 - .55). 546 Mr Cant referred to the entitlement of shareholders to inspect records of the company. That was the right conferred by the company's constitution (TB, /430, clause 39.1 and see TB, 2/365). The existence of this right is relevant to the extent of material that would have been available to PEE if it had conducted a due diligence with the co-operation of Adler Corporation. 547 Importantly, Mr Cant's letter refers to a discussion between himself and Mr Adler "the week before last" that is the week ending Friday, 7 July. This may have prompted Mr Adler to write the next described letter on the following Monday, 10 July, 2000 to Mr Williams. 548 Mr Adler said in this letter: "I will place two of my own investments, being dstore and Planet Soccer, into the fund at my original cost. Both would be valued at higher than that level I am reliably informed." 549 No mention is made in the letter of any concerns about lack of information. The evidence discloses that Mr Adler was aware of Mr Cant's request for monthly reporting, giving some basis for an inference that there was concern as to the cash position and perhaps performance generally. Nor is any basis given by Mr Adler for why he considers that his investment in dstore would be valued at higher than the amount he paid for it. The absence of disclosure of concerns about lack of information is, according to the Plaintiff, misleading in relation to dstore. The Plaintiff contends that it should be concluded that the decision to transfer dstore was made for the purpose of relieving Mr Adler of the burden of a troublesome investment and that he failed to have any regard to PEE's interests. The Plaintiff adds that his failure to give evidence to explain his conduct enables these inferences to be drawn with greater confidence. 550 There are other indications of problems with dstore, in particular the criticality of raising capital. The July information memorandum showed a loss for the year ended 30th June 2000 before interest and tax (EBIT) of about $10.9 million with a forecast on the same basis for the following year of a loss of $12.5 million (Greiner Exhibit P207). The existence and expectation of losses made raising of capital critical, as Greiner conceded in his evidence (T, 519.50; T, 520.1). 551 It is instructive to look more closely at what happened with the failed capital raising. Had independent analysis been applied to the known or ascertainable facts, on Mr Greiner's evidence nothing could be more critical than ascertaining the likely capacity to find additional capital when the burn rate (absent more capital) would have left the company bereft of capital by November 2000. It will be recalled that Particular (f) of para 74(1) is that: "By his conduct as pleaded, Adler caused or procured HIHC, … to make a payment which: (f) Was made with the contemplated object of enabling PEE to acquire from Adler Corporation unlisted investments which were not the subject of independent analysis;" 552 Moreover, para 49 states that: "At the time of acquisition by PEE of the shares in dstore, Adler was aware that: 49.1 dstore was in need of significant capital in order to continue doing business; 49.2 dstore was encountering difficulties in raising new capital; 49.3 dstore was having cash flow difficulties; 49.4 There was a significant risk that dstore would fail; 49.5 In transferring the dstore shares to PEE, Adler Corporation was in breach of pre-emptive rights clauses in the shareholders' agreement, to which it was a party." 553 Finally, I should refer in the pleadings to para 74(2) which states: "By his conduct as pleaded, Adler caused or procured PEE, as trustee of the AEUT, to purchase shares in HIH and purchase unlisted securities from Adler Corporation and to make loans to entities related to or associated with Adler in circumstances where those purchases and loans: (a) Were not advantageous to the AEUT, the unit holders of the AEUT, including HIHC, or to HIHC's holding company, HIH; and (b) Were not disclosed to other directors of HIH or brought to the attention of the Investment Committee of HIH." 554 Thus, the offer price in the July 2000 information memorandum was $7.25 (compared to $5.03 per share paid by Adler Corporation) but the attempt at capital raising failed (Greiner, paras 28 and 32) and the price at which capital was sought to be raised had to be reduced to $4 in the September 2000 information memorandum (Gold, para 86). (The earlier sale to AEUT had been at $5.03 per share as at 25 August 2000.) Yet even this raising failed, as did the subsequent attempts at capital raising in October and November (Gold at T, 708.40 - .55). 555 The First and Fourth Defendants contend that because the failure only occurred in September 2000, and the final failure only in October and November, then testing the matter as at 25 August 2000, when Mr Adler caused PEE, as trustee for the AEUT to acquire the shares in dstore from Adler Corporation, at Adler Corporation's original cost, there was no cause for any alteration to the optimism exhibited in July 2000. Thus, in the written submissions of the First and Fourth Defendants, para 78, it is said: "At that time, there was nothing to indicate to Adler that this was not an 'advantageous' investment for PEE to make at the price of $5.03 per share which Adler Corporation had paid six months earlier. As submitted in para 60 above, of the standard ways of valuing venture capital investments" (see the AVCAL Guidelines referred to by Buckeridge, para 29(a)) . 556 At para 60, the First Defendant relies on two of its experts on venture capital (Mr Parker affidavit para 34 US President and CEO of a US company providing advisory services to businesses seeking to raise capital from venture capital interests and Mr Buckeridge's affidavit (para 29(a)) executive director of a leading venture capital funds manager who cites "Guidelines For the Valuation and Disclosure of Venture Capital Portfolios" published by the Australian Venture Capital Association "AVCAL"). It does so to support the contention that "it is typical practice in the venture capital industry to value venture capital investments by reference to the amount paid for equity in the company by the next outside investor or to value the investment at cost". 557 The AVCAL Guidelines are stated to be (Buckeridge affidavit p20): "Guidelines for the valuation and disclosure of venture capital portfolios." 558 Mr Buckeridge (para 29 of his affidavit) cites these Guidelines as if they stated a general requirement to value at cost (at para 29): " cost basis : All early stage investments should be valued at cost - that is the investor should treat the investment as being valued at the amount paid for investment." [emphasis added]

Various exceptions are thereafter stated including where there has been significant third party investments (where the reference is to the price at which further capital is raised) but also "if the performance of the investment has been significantly below the expectations on which it is based". The alternative bases are then price/earnings multiple applied to earnings, and a net assets basis. The AVCAL Guidelines (at para 2.4.1) actually state the position rather less universally: "Venture stage investments should generally be valued at cost for at least one year unless this basis of valuation is unsustainable." [Emphasis added] 559 The Defendants rely on evidence from Mr Greiner and from these two experts in the venture capital business, Messrs Buckeridge and Parker. Thus, it is earlier said at para 60 of the First and Fourth Defendants' written submissions, which I should now quote substantially in full: "It is inherent to the nature of venture capital stocks that the business has no record of profitability or positive cash flow, and that it needs capital, and has to confront the difficult task of obtaining capital in order to continue in business, and also that there is a significant risk that the business will fail: Greiner, affidavit paras 37-43; Buckeridge, affidavit paras 9-12, 25-29; Parker affidavit paras 6-17, 24-32. … Further, the valuation of venture capital stocks is highly subjective given their inherent nature, and is conducted very differently from traditional methods of valuation: Greiner, para 42; Buckeridge paras 27-29; Parker paras 33-36. It is the typical practice of the venture capital industry to value venture capital investments by reference to the amount paid for equity in the company by the next outside investor or to value the investment at cost: Parker, para 34; Buckeridge, para 29A." 560 This approach was also said to be in accordance with Mr Adler's consistently expressed view that HIH's investment policy should be more heavily weighted towards investments which offer higher rewards with concomitant levels of risk; see correspondence by Mr Adler in PX17, dated 17 November 1999 and 25 January 2000, and the evidence given by Mr Cohen (at T, 74.32 - 76.35), Howard (at T, 174.29 - .43) and Gardener (in re-examination at T,380.17 - .46). 561 It is also said by the First and Fourth Defendants that: "In the year to 30th June 2000, HIH did have a bias towards speculative stocks and technology stocks and HIH's out-performance of its benchmarks for investment performance was said in the Investment Reports and Board Minutes to be due to that weighting: see Investment Report for the quarter ending 30.9.99 (Ex PX5/1703 at 1706.6), adopted and commented on at the board meeting on 19.11.99 (Ex PX4/1420 at 1421.8); Investment Report for the half-year ended 31.12.99 (Ex PX5/1722 at 1725.6), adopted at the board meeting on 22.2.00 (Ex PX4/1443-4); Investment Report for the nine months ending 31.3.00 (Ex PX5/1745 at 1748.6), adopted at the board meeting on 1.6.00 (Ex PX4/1450); Investment Report for the year ending 30.6.00 (Ex PX5/1825 at 1828.5), adopted at the board meeting on 8.9.00 (Ex PX4/1459). Cohen and Gardener gave evidence that the favourable investment outcome due to large investments in technology and speculative stocks was regarded as a source of satisfaction and business success: T, 68.11 - .49, 73.10 - .29, 115.21 - .54 (Cohen); T, 362.1 - .18 (Gardener). Gardener himself agreed with Adler's criticisms of the conservative nature of HIH's original investment portfolio: T,380.39 - .46." 562 To all of this, the Plaintiff's response is that: "The lack of investor confidence evident from these failed capital raisings was consistent with Greiner's evidence that as a generalisation he agreed with the proposition that: 'anyone with half a brain' would have known that there were problems with technology stocks in August 2000 (T, 540.25).

That answer is important. 563 Furthermore, Mr Greiner indicated that he agreed that the matters referred to by Mr Cameron (Cameron paras 21 and 22) were legitimate area for concern (T, 547.35) 564 Mr Cameron said the following, at paras 20 and 22 of his affidavit: "20. In addition, a reasonably careful and diligent director or officer of HIH, HIHC and PEE would not have procured the investments in Planet Soccer, Nomad and dstore in the absence of a due diligence exercise being undertaken by an appropriate expert. This is particularly so in view of the matters referred to below concerning Planet Soccer, Nomad and dstore, which should have caused concern for a potential purchaser of these shareholdings."

That evidence is supported by Mr Greiner's statement (see para 567 below) that "absolutely" he would expect any prudent investors making an investment of half a million dollars or more in a company of this type to undertake the due diligence contemplated. 565 At para 21 he refers to the substantial deterioration in share market conditions dating back to 17 April 2000, particularly for technology and dotcom stocks. And then at para 22, relevantly to dstore, he says: "…. The documents relating to dstore [he refers here to the correspondence between Mr Greiner and Mr Adler referred to earlier dated 3 May 2000, 4 May 2000 and 8 May 2000 dealing simply with cash burn rate] reveal that at the time of PEE's investment, dstore is a company which had no record of profitability or positive cash flows and was likely to be dependent upon the investment community for future funding support, which in the investment climate in August 2000 may not have been achievable." 566 Mr Greiner's evidence as to the offer price in the July 2000 information memorandum based on dstore's forecast financial information, was to discount the earnings projections as a "high risk hockey stick sort of projection". He said that as an investor himself, he would pay less attention to the DCF project revenue to 2004 than his own assessment of the market and his willingness to punt on the people concerned (T, 538.35). 567 While one could not predict with certainty whether or not an independent due diligence conducted around mid August 2000 (before the purchase occurred) would have punctured the optimism exhibited in July 2000 and thereby conclude that investors were unlikely to invest there was certainly some prospect of that and the fact remains that none took place. Importantly, and fatal to any suggestion of adequate diligence on the part of Mr Adler, as Mr Greiner said: "Absolutely" (T, 539.10) he would expect any prudent investors making an investment of half a million dollars or more in a company of this type to undertake the due diligence contemplated by the timetable in the information memorandum. This provided for a due diligence period between 31 July and 1 September (T, 539.10, 548.25). This wholly accords with Mr Cameron's unchallenged views that the Planet Soccer, Nomad and dstore investments should not have been acquired in the absence of a due diligence exercise being undertaken by an appropriate expert. The undeniable fact is that no independent expert appraisal took place and the transfer to PEE was effected before the due diligence had been completed under the July 2000 information memorandum and before the outcome of the attempt to raise crucially needed capital was known. It would have been clearly prudent for the investment by PEE to have been deferred until that outcome was known and at the least a due diligence undertaken by an independent expert. 568 Also relevant is the fact that Mr Adler had a fundamental conflict of interest as being both seller (through Adler Corporation) and acting on behalf of the buyer (through PEE). I agree with Mr Cameron when he says at para 19 of his affidavit: "With respect to the acquisition of shares in each of Planet Soccer, Nomad and dstore, a reasonably careful and diligent director of HIH, HIHC and PEE would, in my view, have recognised the conflict of interest that Mr Adler had by reason of the proposed purchase of shares from Adler Corporation. In my view, such a director would either have decided not to proceed with the share purchases for that reason alone or, at the very least, before proceeding made full disclosure to the Board of HIH, accompanied by a valuation for each shareholding from a truly independent expert." 569 Evidently, having bypassed the Investment Committee and the Board with the original $10 million investment, Mr Adler saw no need to advise the Board or the Investment Committee of investments made within AEUT, even where he had the most fundamental of conflicts. 570 It is no answer to that fundamental omission of an independent appraisal to say that the valuation at cost was a conventional way of valuing venture capital investments, at least absent good reason for departure from that. The whole point of an independent appraisal is to see whether there was good reason to depart from that. That the market in technology stocks by mid-April 2000 had collapsed, should at the least, have induced caution, even if, as Mr Parker's evidence indicates, there were investors who would still have invested in appropriate venture capital investments. As to HIH/HIHC's willingness to undertake greater risks in investments for commensurate reward, that presupposes that there is an independent appraisal of the risks before they are taken, more especially in the case of dstore, where the danger signs were already apparent and known to Mr Adler, from his own inquiries about cash burn rate, and from the information in the July 2000 memorandum. In reality he was not giving AEUT the opportunity to make a profit, but knowing what he knew, or should have known, he was giving AEUT a likely loss. 571 There is further ground for justified criticism. Mr Adler made a quarterly report to Mr Howard of HIH (as well as to others outside of HIH) dated 18 August 2000 (TB, 217). It said: "dstore: This is an online department store that intends to be listed next year. Has very good backing from Looksmart and various other known venture capitalists." 572 This was misleading, by reason of its optimistic portrayal, coupled with lack of disclosure of Mr Adler's knowledge and concerns regarding dstore earlier mentioned. 573 The statement was simply false in saying that the investment in dstore had already been purchased from Adler Corporation - this did not occur until 25 August 2000. The same comment applies to Planet Soccer. 574 In no more than four months, by 15 December 2000, Mr Adler in a memo to the Directors (TB, 261) records the fact that dstore has been: "Just taken out at a point that would value our holding at $50,000." 575 This was a reference to an offer from Harris Scarfe (TB, 2/505A, 507). PEE in the four months lost ninety percent of the value of its investment whereas Mr Adler had made sure Adler Corporation fully recouped its investment in dstore.

CONCLUSION 576 At the time of the acquisition by PEE of the shares in dstore, it is a fair inference, on the evidence, and strengthened by Mr Adler's failure to give any other explanation, of a matter which was peculiarly within his knowledge, that he was aware that:

(a) dstore was in need of significant capital in order to continue doing business given the "burn rate" it was known to Mr Adler to have been experiencing; (b) dstore was encountering difficulties in raising new capital; (c) dstore was having cash flow difficulties; (d) there was a significant risk that dstore would fail (para 49 of ASIC's Statement of Claim). (e) PEE had thereby acquired from Adler Corporation an unlisted investment (dstore) which was not the subject of independent analysis, was purchased from interests associated with a director (Adler), who had not disclosed this to the directors of HIH other than Mr Williams and Mr Fodera (and subsequently Mr Cassidy) nor sought approval from the Investment Committee or Board either for the investment of $10 million in AEUT or its application in part to acquire assets such as dstore from Adler Corporation, in circumstances where this entailed a clear conflict of interest for Mr Adler; (f) that purchase was not advantageous to AEUT or to the unit holders of the AEUT, including HIHC, or to HIH but was to the advantage of Adler Corporation and Mr Adler; (g) no disclosure was made by Mr Adler to HIH or HIHC before dstore was acquired of the matters in (a) through (d) above and the first HIH and HIHC knew of the failure of this investment was on 15 December 2000; 577 In so doing, Mr Adler breached his obligation

(a) to exercise the degree of care and diligence required from a director by s180 of the Corporations Act breaching his obligations as a director or officer to HIH, HIHC and PEE, and having a material personal interest in the subject matter of any business judgment could not rely on any defence under the business judgment rule ; (b) to act in good faith for a proper purpose as required by s181 of the Corporations Act; (c) not to improperly use his position to gain an advantage for himself or to cause detriment to each of HIH, HIHC and PEE, so breaching s182 of the Corporations Act, and (d) not to improperly use information obtained by him to gain an advantage for himself or to gain an advantage for Adler Corporation, so contravening s183 of the Corporations Law, being information concerning the Investment Committee procedures and Investment Guidelines, the HIH Investment Portfolio and the susceptibility of Mr Williams to a proposal whereby HIH invest money in less conservative ways, such as in unlisted equities and venture capital; see para 95 of the Plaintiff's Statement of Claim (no s183 claim is made in relation to PEE). 578 Adler Corporation, by reason of its "involvement" as vendor to PEE of the unlisted investments, and being in (shared) control of PEE as majority unit holder, must be taken to have contravened each of the provisions of the Corporations Act that Mr Adler has contravened (save s180 which is not pleaded against Adler Corporation).

Mr Williams 579 I have already dealt with Mr Williams' position with regard to the making available of the $10 million and its use in purchasing HIH shares. It suffices that I note that Particular (f) of para 77(1) of the Plaintiff's Statement of Claim is relevant, namely that the relevant payment: "Was made with the contemplated object of enabling PEE to acquire from Adler Corporation unlisted investments, which were not the subject of independent analysis." 580 However, the significance of this turns on whether Mr Williams knew that the investments, which would be made by PEE, involved acquiring assets owned by Adler entities or would be on a basis not advantageous to HIH or HIHC's interests, having regard to the pleading in para 74(2) in relation to the transactions being not advantageous to HIHC or to HIH as well as not being disclosed to other directors of HIH or brought to the attention of the Investment Committee of HIH. 581 The written submissions for the Second Defendant (para 4(d)) take issue with there being any motive on the part of Mr Williams or any basis for inferring anything other than that Mr Williams was motivated solely by what he considered to be in the best interests of HIH and HIHC. It is said that Mr Williams and HIH's interests "were completely aligned". 582 It is true that the only evidence that Mr Williams had the "contemplated object" of enabling PEE to acquire from Adler Corporation unlisted investments is that on 15 June 2000, according to the evidence of Mr Howard (affidavit para 8), Mr Adler told Mr Howard that he (Mr Adler) and Mr Williams had had conversations: "That the trust may or may not purchase other venture capital investments that I was associated with such as dstore at cost to give them a chance to make money." 583 That evidence was admitted as original evidence dealing with the steps in the very transaction itself, such that the hearsay rule was not applicable to it (Evidence Act s60; Cross on Evidence, 6th Aust Ed, para 31080-31110). I have earlier concluded that evidence is admissible. It is entitled to considerable weight because it is of statements made in the course of the very transaction in question so as to be more likely to be inherently reliable. This is in contrast to statements that may be made after the event, by which stage different interests and motivations may have intruded. I agree with the Plaintiff's submission that the memorandum of 10 July 2000 (TB, 212A) is not inconsistent with that evidence, being addressed to Mr Howard and Mr Adler. It did not need to allude to Mr Howard's prior knowledge (though Mr Howard clearly had such knowledge), when referring to the dstore and Planet Soccer investments. 584 Thus, for these reasons and particularly given Mr Williams' bypassing of the approval process with Mr Adler and his knowledge that dstore and Planet Soccer were being purchased from Adler Corporation yet did not ensure that there would be an independent due diligence, I am satisfied that Mr Williams shared Mr Adler's: "contemplated object of enabling PEE to acquire from Adler Corporation unlisted investments which were not the subject of independent analysis".

That inference is strengthened by the fact that Mr Williams chose not to give any evidence. 585 When added to the bypassing of the Investment Committee and the Board, it is clear in relation to Mr Williams that Particular (f) of para 77 of the Plaintiff's pleading is made out.

CONCLUSION 586 Subsequent events concerning the investment in dstore, insofar as they bear on the relevant Particulars in para 77 of the Plaintiff's pleading (see in particular, Particulars (f), (k) and (l)) but only on the material facts pleaded at paras 15 to 46; support the earlier conclusions reached concerning Mr Williams' contravention of s180 (see para 453) and s182 (see para 461).

Planet Soccer 587 The starting point is again the pleadings. At para 52 of the Plaintiff's Statement of Claim, after referring to the agreed fact that the shares in Planet Soccer were acquired by PEE from Adler Corporation on 25 August 2000 for essentially the same amount as they had been acquired originally by Adler Corporation in March 2000, ($820,000) it is stated that: "At the time of the acquisition by PEE of the shares in Planet Soccer, Adler was aware that: 52.1 Planet Soccer was in need of significant capital in order to continue in business; 52.2 Planet Soccer was encountering difficulties in raising new capital; 52.3 There was a significant risk that Planet Soccer would fail." 588 The pleadings otherwise are again as set out in para 74 of the Plaintiff's Statement of claim. 589 Planet Soccer's plan was to develop a business focused on an internet website concerned with the sport of soccer. The business concept is described by Mr Marcolin, (its director) in his affidavit paras 3-10. Planet Soccer International Limited ("Planet Soccer") was incorporated in September 1990 for the purposes of developing and exploiting this business concept: (Marcolin para 14). The management team at Planet Soccer includes a number of people with what is said to be very considerable experience in the management of sports and e-commerce businesses: (Marcolin paras 15-17; Mr Woods, Director and CFO of Planet Soccer, paras 14-15). 590 On 17 February 2000, Adler Corporation said it would invest $US1 million in Planet Soccer (TB, 2/589). On 30 March 2000 this was reduced to the investment actually made of $US500,000 (equivalent to $A820,000). For that $US500,000, Mr Adler received a two percent equity based on the valuation of Planet Soccer of $US25,000,000. It was said that this amount would enable the company to: "Sign the deals in Tokyo and bring the key personnel to the project." [TB, 2/590] 591 Apart from the $US100,000, which had already been put in by Mr David Pethard, the Adler Corporation investment was the only funding that was, or has been ever, obtained by Planet Soccer, despite the fact that since at least the end of 1999 it has been looking for funding (T, 555.25, 556.1020, cross-examination of Mr Marcolin). 592 Planet Soccer had entered into a contract with Universal Management Consultancy Pty Limited, (of which Mr Paul Marcolin is a director) to acquire all the trade marks and intellectual property relating to the name "Planet Soccer" for $US350,000, subject to Planet Soccer receiving sufficient funding to commence initial operations, estimated at $US1 million: (Marcolin para 21-23 and T, 463-4). Given that no more than $US600,000 has been invested, it would appear that that contract could not be fulfilled. Planet Soccer, or its ninety percent subsidiary, is also the registered licensee of certain domain names such "planetsoccer.net"; (Marcolin para 24). 593 Moreover, one of the main purposes of seeking initial funding was to construct and develop a website but this website has never been established (Marcolin T, 559.40 - .50). Planet Soccer has not been able to "commence initial operations" as envisaged in the above mentioned trade marks letter (T, 559.20) and at no stage has it earned any revenue or signed a contract for access to high profile soccer players, which had been envisaged in December 1999 (T, 561.55, 565.55). 594 The First and Fourth Defendants, in para 83 of their written submissions, refer to the forecast revenue streams as being based on a number of projected sources of income set out by Mr Marcolin, (para 25). The projected revenues are set out in "Planet Soccer Deal Financial Analysis" as at May 2000: (Marcolin, para 26-27, T, 468 to 91). These projections were prepared by Mr Woods, who gives a detailed explanation of the bases upon which he prepared the forecast in his affidavit, (paras 22-50). Mr Woods was pressed in cross-examination as to whether the figures he used, particularly in total operating costs, were "very speculative" and he conceded "there were some elements of speculation on the line items"; (T, 595.35-.52). He was also pressed as to whether the forecasts were very subjective, to which his response was that they were researched and checked with a number of sources so the subjectivity would depend upon those sources; (T, 59.51-.59). 595 Mr Carter, an expert called by the Plaintiff from PriceWaterhouseCoopers ("PWC") gave evidence in reply in an affidavit of 11 December 2001 which did dispute Mr Woods' DCF analysis. The forecasts were in fact the basis of Mr Woods' valuation of an investment in forty percent of the issued capital of Planet Soccer as at May 2000. Mr Woods estimated that as amounting to a value of $US15.6 million using a DCF analysis: (Woods' first affidavit, paras 51-56, as corrected by his subsequent affidavit of 7 December 2001 in relation to the description of the calculation performed). A higher prospective valuation was also reached by Mr Woods using a price earnings multiple approach, (Woods' first affidavit paras 57-59). 596 Mr Carter's evidence in reply questioned the valuation based on a DCF analysis but not a price earnings multiple approach (there being however no positive earnings to multiply). The fundamental difference between Mr Carter and Mr Woods related to the discount rate usually required by investors in venture projects. It is not possible for me to reach a reliable conclusion as to who was right. It suffices for me to conclude that an analysis of Planet Soccer, by an external investor, based on price earnings ratios or DCF to arrive at a valuation would encounter the same scope for difference of opinion as is reflected in the competing assessments of Mr Woods and Mr Carter. What is significant though is whether Planet Soccer was in a position to raise new capital and its likely failure if it did not. 597 I should also note that as to Mr Woods' price earnings analysis, Mr Woods gave the following evidence: "Q. Do you agree that it is not appropriate to value a company on the price earnings multiple method that you refer to there unless there is an operating business with an actual earnings history? A. It was an indication as to where we would be once the company was up and running. It was more sort of analogous to what value would be attributed to Planet Soccer once it was up and running.

Q. Do you agree that if one was valuing Planet Soccer as at May 2000, it would not be appropriate to use the price earnings multiple method that you refer to there? A. Not in isolation." [T, 594.15-.30] . 598 That simply underlines the scope for difference of opinion and the fact that it could not be taken, as established by the Defendants, that the valuation which Mr Woods arrived at could not be seriously questioned by prospective investors or an independent analyst, if one had been employed before AEUT purchased. 599 The First and Fourth Defendants referred to Planet Soccer as having: "Developed strategic alliances with Sony Communication Network Corporation and Tokyo Dome." And as: "Conducting ongoing discussions with SFX Entertainment, Nike Inc and Adidas:" [Marcolin paras 29-43] . 600 Mr Marcolin had informed Mr Adler by facsimile on 29 June 2000 of Sony's confirmation that Planet Soccer Japan's shareholding in So-Net.Sports.Com Corporation was approved by the management committee of Sony Communication Network Corporation, with total investment of sixteen million yen, together with that company's outline of the procedure for the approval of Planet Soccer content on the So.Net home page and So-Net Sports Channel (TB, 2/595-597). 601 However, Mr Marcolin conceded in cross-examination that the sixteen million yen was not in fact to be paid in "hard cash" (T, 576.18 - .31). 602 However, the uncontested fact remains that no website has been established and no concluded arrangements reached with Sony or other high profile soccer players. 603 Thus, whilst Mr Marcolin had communicated to Mr Adler at the time he made his investment in Planet Soccer in March 2000 of the company's plans to make an IPO in the months leading up to the World Cup finals in 2002 (Marcolin paras 53 and 57), by 29 June 2000 only four months later, Mr Marcolin wrote to Mr Adler in a letter of that date (TB, 2/595). He described attempts to progress matters on behalf of Planet Soccer. He said: "It has been extremely difficult because of the market volatility… I look forward to advising you comprehensively next week." 604 The "extremely difficult" reference in the letter was to negotiations with an Australian publicly listed company ("Asset Back") which Planet Soccer had been talking to for three or four months about an investment in Planet Soccer - which never occurred. The major stumbling block was: "… where is the market going, for them, not for us. Like their question was always how do we value our investment - where is it going to be in the next twelve months, all subjective questions that no matter how hard we tried we couldn't answer." [T, 577.25 cross-examination of Mr Marcolin) . 605 Between 3 and 7 July, a meeting earlier foreshadowed and convened on 29 June 2000 took place. At that meeting Mr Marcolin told Mr Adler of the problems that were being expressed to him by Asset Back about the value of the investment under consideration and that the concerns were related to market volatility (T, 578.5, .20, .40). 606 Shortly after, on Monday 10 July 2000, Mr Adler wrote to Mr Williams that he would transfer Planet Soccer (and dstore) to PEE at cost (ie for what Adler Corporation had paid in March 2000). I would accept the Plaintiff's submission that this was done with the knowledge of, and it should be inferred in response to, what Mr Marcolin had communicated to Mr Adler in his letter of 29 June 2000 and at the subsequent meeting in the week immediately preceding 10 July 2000. It should be concluded that what Mr Adler learnt led him to want to divest himself of the investment in Planet Soccer or at the least confirmed him in a view already formed about that. Though the divestment itself only occurred on 25 August, 2000 the intention to make it had crystallised; see the letter to Mr Williams of 10 July 2000 (TB, 212A). 607 On 17 August 2000, Mr Marcolin met with Mr Adler to update Mr Adler on Planet Soccer (Marcolin paras 60-62). Mr Adler had ask Mr Marcolin to come to Sydney to give him a full appraisal in relation to Planet Soccer (T, 579.15). Mr Adler was unhappy with the fact that Planet Soccer had not obtained funding despite interest being expressed by three or four entities (T, 579.30 - .50). 608 Following that meeting Mr Adler wrote a letter to Burdett Buckeridge Young ("BBY") who were experienced venture capitalists and arrangers of venture capital finance. Mr Adler, in his letter, refers to his "very interesting" discussion with Mr Marcolin that afternoon. 609 He then said that: "Results would be achieved if a broker or BBY were to get behind [Marcolin] to put a prospectus together … When you and Tony approached me, I was prepared to back Aldo because you said you were behind it. To date, the only money raised has come from me. That really is unacceptable. The market is strong, let us do it - I'm prepared to work with you to achieve results." 610 David Landauer and Terry Davis of BBY were investment brokers (Marcolin para 44). The letter (TB, 2/617) shows that Mr Adler relied upon their support for the concept in early 2000 in making his own investment decision. Their subsequent apparent lack of support for it in the period leading up to August 2000 must therefore have been disturbing to Mr Adler. It is a reasonable inference to draw that this contributed to Mr Adler's desire to divest himself, he being conscious of the difficulties in raising new capital for Planet Soccer, even if it be the case that Mr Adler had not entirely given up hope. 611 Then on 18 August 2000 Mr Adler made what he called a quarterly report to Mr Howard of HIH/HIHC and other investors (TB, 217). He describes Planet Soccer in these glowing terms: "An e-commerce site that provides soccer content to the sports one billion + international fans. The site is positioned to capitalise on the resulting e-commerce and other revenue opportunities that arise out of this sport. Hope to list this year." He adds: "Please note that these two interests [referring to dstore and Planet Soccer] were purchased from Adler Corporation as per my original letter at the inception of the fund." 612 I agree with the Plaintiff that there were a number of obvious false statements in this "report".

(a) It was not true that Planet Soccer "is an e-commerce site ". The site had not been established and it certainly was not a site that: "Provides soccer content to the sports one billion + international fans". (b) The site was not " positioned to capitalise " on the matters mentioned, as there was no such site. (c) The prospect of listing that year should have been considered remote, if looked at realistically in light of the lack of interest and support evidenced between February and August 2000. (d) PEE had not purchased the interest as of 18 August 2000 at all - this occurred later on 25 August 2000, though the report made it appear a fait accompli. (e) Nor did the report disclose the problems Planet Soccer had and was having in raising funds. 613 So far from there being any independent investigation, this communication amounted to a grossly misleading picture from Mr Adler. 614 It is true, as the First Defendant points out, that Mr Davis of BBY gave evidence in his affidavit that he never had any reason to believe that Planet Soccer was not likely to list at a premium to the price at which Mr Adler invested in March 2000, and that he has never said anything to Mr Adler, which is inconsistent with the view he expressed to Mr Adler in February 2000, that Planet Soccer was likely to float at a premium to Mr Adler's investment; (Davis, affidavit para 12). However, the facts belie Mr Davis's optimism. 615 As to the Sony position, as it was then perceived, there is a conversation referred to in Mr Adler's letter of 4 September 2000 (TB, 2/628) referred to below. That conversation is confirmed in Mr Marcolin's cross-examination: T, 580.30 where he refers to a conversation with Mr Adler a few days after 18 August 2000. Turning to that letter of 4 September 2000 (TB, 2/628). Mr Adler, in his letter to Mr Marcolin, said: "It has been a solid week since we last spoke."

That was a reference to the conversation a few days after the meeting of 17 August 2000 (T, 580.30 - see above). He then says in the letter: "I will be very interested to know how things are going. If you believe we are going to lose the Sony opportunity, then I believe that the best course for you and all shareholders would be to return capital, shrink the company and pursue the other non-Sony opportunities that you and I discussed, thereby being in a position to build something more substantial." 616 The concern as to the loss of the Sony opportunity, evidenced in this letter, must be inferred to have been already held as a result of Mr Adler's communications with Mr Marcolin, the last of which occurred a few days after Thursday 17 August 2000, and importantly, just prior to Mr Adler having Adler Corporation sell its interest to PEE on Friday 25 August, 2000. 617 I would draw the inference for which the Plaintiff contends. It is that in the absence of any other explanation being given by Mr Adler in the witness box that there is sufficient from the evidence (without relying on his failure to give evidence) to infer that Mr Adler was prompted to effect this transfer (which he had previously foreshadowed to Mr Williams) as a result of his dealings with Mr Marcolin in the preceding eight days and the reason for dissatisfaction with the Planet Soccer investment which they evinced. 618 On 15 December 2000, Mr Adler, by memo to the HIH Directors (TB, 261) said the following: "Planet Soccer ($800,000) - proceeding with next round of capital. Tough market." 619 This, as the Plaintiff says, gave a misleading impression bearing in mind that the only capital which had been raised by Planet Soccer since its inception was $US100,000 from Mr Pethard, and then $US500,000 from Mr Adler, representing only two percent of the theoretical capital. 620 Mr Marcolin's own assessment is rather more optimistic as is set out at paras 82 and 83 of his affidavit. This includes a reference to a prospective $5 million from a Mr Keith Sinclair, of which there is no evidence that it eventuated. He concludes (para 83) "that Planet Soccer is a viable concept and am still working on proceeding to an IPO with the Planet Soccer concept". However he refers to past endeavours to seek investment funds from overseas, but does not disclose any success in that regard.

CONCLUSION 621 At the time of acquisition by PEE of the shares in Planet Soccer, Mr Adler was aware that:

(a) Planet Soccer was in need of significant capital in order to continue in business; (b) Planet Soccer was encountering difficulties in raising new capital; and (c) There was a significant risk that Planet Soccer would fail, in the absence of such new capital.

In all other respects, the position with regard to the investment in Planet Soccer is substantially the same as for dstore. Mr Adler is in contravention of s180 to s183 in relation also to the purchase of Planet Soccer, as also is Adler Corporation (save for s180) by reason of its involvement in the relevant breaches.

Nomad Telecommunications Limited ("Nomad") 622 The relevant pleading in the Plaintiff's Statement of Claim is that at the time of the acquisition by PEE of the shares in Nomad, Mr Adler was aware that (at 54.1): "Nomad Telecommunications Limited was in need of significant capital in order to continue in business." 54.2: "Nomad Telecommunications Limited was encountering difficulties in raising new capital." 54.3: "There was a significant risk that Nomad Telecommunications Limited would fail." [See para 54]. 623 The pleadings are otherwise as set out in para 74 of the Plaintiff's Statement of Claim. 624 Nomad was established in 1990 to trade in mobile radio, cellular and paging business (see affidavit of Mr Taya, the CEO and Group Managing Director, para 2). It undertook a number of capital raising initiatives in 1999; (Mr Taya's affidavit, paras 2-3). Nomad's facilities management business line was in the start up phase in 2000, its mobile business was said to be in a dynamic period in 2000 and the enterprise business was in the start up phase in 2000; see affidavit of Mr Prout, who was involved in its fundraising as an executive at BT, in re-examination at T, 232.41 to 233.5. 625 On 20 August 1999, Adler Corporation acquired 3,627,143 shares in Nomad at $0.70 per share, and following the two for one consolidation on 21 December 1999, Adler Corporation held 1,813,571 shares in Nomad at $1.40 per share: (Mr Taya, para 5.6; TB, 3/755-756). 626 The shareholders' agreement executed by Adler Corporation (TB, 3/734) required reasonable endeavours to be exercised to have an IPO at no less than $0.70 per share undertaken by 31 December 1999 (TB, 3/719.9). 627 In October 1999, Nomad decided to defer its proposed IPO in conjunction with the Deutsche Bank to early next year, as a result of a strong negative view in relation to the current state of the market as well as "our timing to float" (TB, 3/754). 628 Unchallenged evidence was given by Mr Prout that from this time, Mr Adler told Mr Prout that Mr Adler wanted to sell his shares in Nomad "immediately" Mr Prout, para 23). There were a number of telephone conversations to that effect in the following seven or eight months (Mr Prout, para 23). 629 Mr Prout advised Mr Adler on 12 November 1999 of negative adjustments that had been made to revenue projections (TB, 3/781.5) and of a shortfall in cash against the budgeted position with a cash flow "crunch" to arise in January 2000 (TB, 3/783.8). Mr Adler responded by saying that he found "the whole Nomad situation quite upsetting" (TB, 3/793). I would accept the Plaintiff's inference that Mr Adler was dissatisfied with the investment, at least from the end of 1999. 630 On 1 February 2000, Nomad advised its shareholders (TB, 3/795) that Deutsche Bank was not now prepared to proceed with involvement in the proposed IPO. Ord Minnett was appointed as sole lead manager for the IPO in its place. It was said that the Board and Management was committed to "fast tracking the ASX" listing of Nomad. 631 It was claimed that the IPO would close on 19 May 2000 (affidavit of Mr Carling, investment banker from Cygnet Securities, para 28) but due to the "turbulent market conditions" subsequent to February 2000, the IPO did not proceed (letter of 15 June 2000 at TB, 3/817). 632 Messrs Prout and Carling wrote to shareholders on 11 April, 2000 advising that Ord Minnett had agreed to a $2.30 per share "underwritten" IPO price, but that the offer was not yet underwritten (TB, 3/812). They said that the price was lower than expected because it reflected: "A change in sentiment towards technology-related stocks." 633 This occurred even before the substantial market falls commencing on or about 14 April 2000. 634 Mr Adler replied to their letter by saying it was "not good news" (TB, 3/814). 635 Nonetheless, the fund raising did proceed and on 21 February 2000, Mr Warrener (Company Secretary) wrote to Nomad shareholders on Mr Taya's instructions, saying that Nomad had received oral and written commitments which were just over the target $12 million to be raised by the issue of convertible notes: (TB3/802; Mr Taya para 10.) The issue raised $12.45 million: (Mr Carling, para 27). 636 Having raised the $12.45 million, nonetheless the proposed IPO with Ord Minnett did not proceed and Mr Taya wrote to shareholders on 15 June 2000 indicating that Fosters Stockbroking were keen to manage an IPO non-underwritten for $10 million (TB, 3/817-818; Mr Taya para 11, pages 43-60; Mr Carling para 29, pages 313-4). In that letter, Nomad referred to "turbulent market conditions" since the stock market fall on 17 April, and said that: "A small number of key institutions were expected to support our offering, but given the market uncertainty, they have not been prepared to commit to this or any other IPO." (TB, 3/817) . 637 It was then said that as Nomad's business strategy was dependent on a listing in May 2000 (and that having not occurred) interim funding of a minimum $3 million and up to $5 million was required to be raised prior to lodgement of the prospectus, which was planned for late in the following week. 638 On 21 June 2000, Mr Taya wrote again to all shareholders as to Nomad's use of proceeds of the $12.45 million Convertible Note Issue, the forecast cash position at 30 June 2000, which was negative $8,667,000 in light of the delay in the IPO, and the decision to restrict the capital raising to $7.5 million, which Fosters Stockbroking advised would be successful at that size and price: TB, 3/835-8. On 26 June 2000, Mr Taya informed shareholders of the forecast revenues and EBITDA for the year ended 30 June 2001, which had been signed off by Ernst & Young, showing total revenue of $191.8 million and EBITDA of $12.3 million: TB, 3/839-846, esp at 841 (item 1.5). Similarly, Mr Taya's letter of 21 June 2000 had referred to the auditor's endorsement of the forecasts for the financial year 2001: TB, 3/837. 639 Following the substantial fall in the investment market in mid-April 2000 for technology stocks, on 1 June 2000 Mr Prout, reported to Nomad (TB, 3/815), with copies to Mr Adler and others. 640 It referred to a Nomad Board Meeting the next day at which he understood a decision on whether or not to proceed with an IPO was contemplated to be made. Mr Prout said that very detailed and accurate answers to various questions, including as to the cash position, were needed and that: "The bulk of shareholders I liaise with believe that"

if an IPO did not proceed, Nomad would have no choice but to immediately carry out a trade sale. "This is based on the view that the private equity market would not be accessible on terms acceptable to existing shareholders in the time frame required by Nomad." 641 By then the planned IPO was through Fosters Stockbroking of $10 million, priced at only $1.50 per share "to ensure that the IPO was fully subscribed"; Mr Carling, para 29. Even that could not and did not proceed, (see letter of 30 June 2000 TB, 3/865). 642 In fact, as the end of June 2000 approached, Nomad was in a desperate financial position cash-wise. Summarising the evidence that demonstrates this, although with some repetition:

(a) The letter of 21 June 2000 (TB, 3/835) saw Nomad advising its shareholders that the forecast cash balance at 31 May 2000 had been $12.4 million but the actual balance was a negative $6 million, at $18 million adverse turnaround in cash as against budget forecast; (b) The same letter said that until Nomad lodged its prospectus, the ANZ Bank would not consider any temporary increase to the existing facility requiring $3 million to $5 million in additional debt/equity for Nomad to meet its working capital requirements; (c) The same letter showed that the original forecast for the year to June 2000 was for an EBITDA of $6.1 million, whereas the final forecast results to 30 June 2000 were $0.9 million. (d) The letter of 26 June 2000 from Nomad to shareholders under the headings "cash balance" (para 1.1), "debt funding" (para 1.2) "revenue" (para 1.4) and "Capital Requirements" (para 2.0) showed that Nomad was in a serious, if not desperate, financial position. (e) The letter of 26 June 2000 (at TB, 3/842) demonstrates this as does the statement in that letter that: "The company is facing pressure from auditors and has commitments which require a minimum $3 M to be raised immediately." 643 Against this background, Mr Adler on 22 June 2000 wrote to Mr Prout saying that he had given Mr Prout a mandate to sell his Nomad shares and he would like Mr Prout to take this mandate on "with gusto" (TB, 3/864). 644 This was reiterated by Mr Adler on the telephone shortly after 22 June 2000 when he said: "As previously discussed with you, I want you to sell my entire shareholding in Nomad and you should regard this as a matter of urgency". [Unchallenged evidence of Mr Prout, para 25]. 645 It is true that Mr Prout indicated in his affidavit that he had had similar conversations with Mr Adler since 25 October 1999 (Mr Prout, paras 23-35) so that in that context the facsimile of 22 June was not an unusual communication. That does not, however, detract from the clear statement that Mr Adler wanted to sell. Mr Prout did not give any evidence to the contrary and referred mainly to attempts to comply with Mr Adler's mandate. I do not agree with the First and Fourth Defendants in their written submissions (para 95) that in the absence of evidence of those matters, no inference can be drawn from TB, 3/864, referred to above, as to any lack of investor demand for Nomad shares or as to whether Mr Adler's desire to sell was based on any adverse view he held of the merits of the investment. To the contrary, such an inference is well open and could only be assisted by the failure of Mr Adler to provide any explanation in the witness box as to his actual intentions. 646 In a letter of 30 June 2000 to Nomad, Mr Carling referred to the "general malaise in the stock market" persisting and that the "IPO market has dried up" (TB, 3/865). 647 By letter of 20 July 2000 Nomad advised shareholders that it had decided not to proceed with an IPO "at this stage" (TB, 3/871). It referred to the "continuing negativity of the stockbroking and investment community" and to "constructive dialogue with a major group" in connection with a strategic investment (this was Leighton Holdings as referred to below). 648 In a letter of 20 July 2000 from Mr Prout to Mr Adler (TB, 3/874) he said: "…. In terms of a capital raising update, Nomad is working with two parties - one of which is a large and extremely successful company in the same industry …." , referring to Leighton. 649 He goes on to say: "Knowing your desire to sell, I appreciate the frustration this continuous capital raising delay/process causes you - I respect your position and if you want me to start work now on selling down your position now - rather than wait for the outcome of Nomad's capital raising negotiations, I will. I am told this current process will culminate in an offer for about $15 M new capital and possibly a take out of part of our existing capital, or die, over the next two weeks." 650 The Plaintiff infers that this was a suggestion by Mr Prout that Mr Adler postpone attempts to sell his investment until the outcome of the negotiations with Leighton was known. As I make clear below, when it did become known that it was unsuccessful because the offer was withdrawn on 21 September 2000 from Leighton, following due diligence, Mr Adler immediately transferred the investment in Nomad to PEE. 651 Macquarie Bank Limited was engaged on 11 July 2000 to assist Nomad to "achieve maximum value" in relation to the offers sought to be listed from Leighton (Macquarie Bank Limited, terms of engagement at Mr Carling's exhibits, p336). 652 Macquarie Bank's suggestion on 4 August 2000 of pricing parameters of $1.73 to $2.29 (Mr Carling, exhibits, p343) should therefore be seen in this context. It should also be noted that these parameters included a premium for control, which can be inferred to have been twenty to thirty percent (Mr Carling, exhibits, pp343, 345 and 346) and that Macquarie Bank had simply applied a multiple to the company's earnings forecast, which it had not "reviewed in detail, nor independently verified" (Mr Carling, exhibits, p343). 653 Leighton did make an offer by letter of 28 August 2000 (TB, 3/881). It was stated to be a non-binding indicative offer and, importantly, subject to due diligence being done. It was for an average price of $1.03 per share (Mr Carling, para 45(a)) and was for a controlling interest in Nomad (Mr Carling, para 39(b), T, 612.50). (It did not include any right to a proportionate share of proceeds of sale of the mobiles business, if that business were to be sold for in excess of $9.8 million). As subsequent events showed, the latter was hardly a prospect. 654 Just prior to a meeting which occurred on 13 September 2000, Mr Adler told Mr Taya on the telephone that he was: "Not happy with the situation regarding Nomad. The company needs capital. You should think about selling the company". [Mr Taya, para 18]. 655 I agree with the Plaintiff that this statement should be seen in the context of Mr Adler having wanted to sell his non-controlling interest in Nomad for close to a year but having been unable to do so. In these circumstances, the only alternative to enable Mr Adler to effectively realise his investment was for Nomad to sell its business as a whole. As Mr Taya said, this was not something that Nomad had been contemplating and in particular was not what Nomad had been negotiating with Leighton about, as those negotiations related to a fifty percent interest (Tm 188.25, .50, 189.15, .50, 191.15). The conversation was challenged in cross-examination (for example T, 191.20). Mr Adler has not been called to contradict Mr Taya's evidence. 656 On 18 September 2000, Mr Taya wrote to Mr Adler (TB, 3/886) saying: "I understand your frustration in relation to the capital raising but can I please assure you that I am not acting on my own in terms of the IPO process or alternative equity options … I am in the process of circulating a detailed letter to shareholders." 657 Then on 21 September 2000, Leighton advised Nomad by letter that: "Based on its due diligence investigations to date, Leighton does not wish to proceed with an investment in NTL." [TB, 3/918] 658 The reason given was important, because it showed that no significance can be attached to the amount offered by Leighton in its letter of 28 August 2000. One must infer that what Leighton ascertained on the investigation of Nomad's financial position did not support the assumptions upon which the offer had been made. 659 By email of 25 September 2000, Mr Prout advised Mr Adler and others that Leighton: "have now pulled out with little chance of any resumption of negotiations" (TB, 3/924).

He advised that Nomad "is now revisiting discussions with " three named parties. He said that Nomad had three problems " in order of time pressure " - a need for the bank debt to be reduced from $9 million to $5 million, a need for $6 million working capital and a requirement of potential equity investors that he mobile phones business be disposed of. On the same day, and I would infer not coincidentally, Mr Adler advised Mr Williams that: "The trust will purchase from Adler Corporation its interest in Nomad Technologies" [TB, 3/922.4] 660 This facsimile was sent at 10.46 am on 26 September 2000, and therefore after receipt by Mr Adler at 4.47 pm on the previous day of the e-mail from Mr Prout advising him of the withdrawal of the written Leighton offer. This is clear from the facsimile header. Importantly, Mr Adler makes no disclosure whatsoever of the problems that Nomad was having raising capital or its critical cash position and the likely serious consequences of the failure to find funding. 661 Mr Adler implemented the sale of the Nomad shares to PEE on that same day, that is 26 September 2000 (TB, 3/948G, with supporting documents at TB, 3/949.955). Consideration was the same as that which Adler Corporation had paid to acquire the shares just on a year earlier. However, it is nothing to the point to say that the investment was a more mature one with a year's work to it when the value of the investment with its desperate cost position was totally dependent upon finding an investor willing to put more money in, as the subsequent collapse of Nomad bears out. One does not need the vision of hindsight to reach that conclusion, all the signs were already there and readily apparent to Mr Adler. Mr Adler's decision to effect this transfer must be seen to have been a response to his own dissatisfaction with the Nomad investment for some considerable time, exacerbated by the knowledge he had recently acquired of its financial difficulties and by the news he had just received of the withdrawal of the Leighton offer. 662 Clearly enough Mr Adler did not suggest that an independent appraisal be made of the value of Nomad, since it might be expected that a thorough due diligence would produce the same results which led to Leighton withdrawing. 663 By letter dated the same day, 26 September 2000, (TB, 3/928) Nomad advised shareholders of its funding requirements (TB, 3/929) and that Leighton had withdrawn (TB, 3/931). 664 The letter said that: "In the unlikely event that the private equity transaction(s) and the sale of mobiles do not proceed, and the rights issue is unsuccessful, the Nomad Board will be faced with a situation where it will be difficult to continue trading given that the bank and short term funding will be overdue for repayment and the company will have no working capital." [TB, 3/933] And that: "Given the extraordinary delays in raising capital, time is against us and the company's options are limited." 665 I agree with the Plaintiff which says in its written submissions (para 148): The measure of the financial difficulties of Nomad, of which the shareholders were appraised by this letter, as indicated by the reference to "only two shareholders …" having "reluctantly agreed to provide essential funding" [TB, 3/930] and the fact that to obtain funding, the company had had to agree to terms as set out in schedule 1 [TB, 3/930-935] . Indeed those terms were extraordinary: for a loan amount of up to $5 M, an establishment fee of 25% of the loan amount had to be paid together with a 20% interest rate [TB, 3/935] . As the loan was only for three months, Nomad had to pay $1.5 M in establishment fee and interest, equivalent to 120% on an annualised basis. 666 The inevitable then happened and Nomad went into receivership on 18 January 2001 and liquidation on 22 January 2001 (TB, 3/989B). 667 The First and Fourth Defendants submit (para 62) that: "Whether the particular investments made by PEE were 'advantageous' must be ascertained by reference to the circumstances of each particular investment, not by reference to general market trends for technology stocks." 668 Taking the Nomad investment in its particular circumstances, nothing could be more clear than that it was sold by Mr Adler to the substantial advantage of Mr Adler and Adler Corporation and the substantial disadvantage of AEUT and its unit holders, in circumstances where Mr Adler must be taken to have been aware of Nomad's imminent likely demise or at least the high risk of it. While it may have been HIH's wish to invest in venture capital with concomitant risk, for greater reward, here the risk had, to the knowledge of Mr Adler, but kept from HIH and HIHC, well and truly come home before Mr Adler chose to sell. He then sold at his original cost and thus at no loss to Adler Corporation. That investment in Nomad exploited the lack of any independent appraisal. It featured gross non-disclosure by Mr Adler of those matters which would lead any rational investor to refuse the investment. But instead Adler Corporation and Mr Adler made sure that PEE relieved them of their likely impending loss from Nomad, hardly with the prospect of commensurate high reward. 669 There is one matter which needs to be dealt with. On 1 February 2001, Mr Prout wrote to Mr Adler stating that in his opinion an equity value in the order of $1.40 per share as at September 2000 was reasonable, and within the range which he would consider broadly consistent with a capital structure of Nomad at that time. He based this on:

(a) earnings multiples for comparable telecommunications companies and the then forecast; (b) valuations contemplated by two large investments, and (c) Nomad continuing to win new and profitable facilities, management contracts in the fourth quarter of 2000, including those with BHP and opportunities with Hewlett Packard: (see Mr Prout's exhibits, p197). 670 Mr Prout gave evidence that as at 1 February 2001, it was his honest and skilled opinion that an equity value in the order of $1.40 per share as at September 2000 was reasonable, and broadly consistent with the matters referred to in the letter (T, 224.27 to 225.23). 671 However, in para 41 of his affidavit, Mr Prout makes clear that he felt under an obligation to write the letter and somewhat pressured to do so and that his references to a value of $1.40 per share: "Were not based on the detailed assessment of value that I would normally undertake if I was to do a valuation of such a shareholding." And: "I had not undertaken any investigations or due diligence on Nomad as at September 2000." And adds that: "By the time I wrote my letter of 1 February 2001, I believed that the June 2001 earnings forecast referred to had not been a reliable forecast." 672 In cross-examination Mr Prout explained that he had not undertaken any investigations or due diligence of Nomad in September 2000 and was really only talking about a due diligence exercise and did not intend the reference to "investigations" to be wider than that. I do not consider that Mr Prout's letter which, in any event, makes no reference to the critical effect of the inability to find investors, in any way detracts from the earlier conclusions that I have reached. 673 Nor can reliance be placed on the Carling "calculation" on 13 August 2000 that the implied value for the then Leighton offer was $1.52 to $1.73 per share. The fact was that the Leighton offer did not proceed after due diligence and all Mr Carling was doing was indicating what the value of the shares would have been had the offer proceeded, not give valuation evidence (T, 619.25, 621.30). 674 Reference was also made by the First and Fourth Defendants to an offer made by a Mr Brait, which is referred to in Mr Carling's affidavit (paras 44, 45(a) and 48). It too is of no significance since that offer did not proceed and was not on foot at the time of the purchase by PEE. The Brait offer was not made until 17 October 2000 and was in any event dependent upon another co-investor being located (Mr Carling, exhibit p378.9). But this never occurred (T, 614.35 - .40) and was, in any event, reliant upon the projections supplied by Nomad (Mr Carling exhibit p379.1). It was also subject to due diligence being undertaken (p379.9) and was subject to a recalculation of the offer in the event that the earnings were not substantiated (exhibit p379.7, T, 615.20). We know moreover that when Leighton did a due diligence it did not proceed. 675 Finally, the First and Fourth Defendants rely on the view expressed by a major shareholder, Oceania & Eastern Group, on 26 October 2000, that the value of Nomad shares was in the range of $1.00 to $1.52 (Exhibit D1X11). This Mr Prout said in cross-examination he regarded as a serious exercise which, without any injection of hindsight, according to the Defendants, enabled one to see what serious people were thinking within Nomad as at 26 October 2000: (T, 216.10 - .35). 676 However, it should be remembered that the Oceania & Eastern Group view was expressed by a shareholder who had already invested, who was interested in finding other investors, for the purpose of inclusion in the letter to shareholders (D1X11). It was in fact included in the letter to shareholders of 27 October 2000 (TB, 3/968) in which Nomad described its substantial need for capital and its need to raise capital from shareholders and others (TB, 3/969 and 972). 677 I agree with the Plaintiff that the clearest demonstration of value, or more accurately lack of value in the shares in Nomad, were the difficulties it faced in raising capital and the critical adverse consequences that flowed from its failure to do so. Put simply, the market did not attribute the value that Mr Adler, dissatisfied for good reason with his investment, was able to extract for Adler Corporation by selling, without independent appraisal, to AEUT.

CONCLUSION 678 At the time of the acquisition by PEE of the shares in Nomad, Mr Adler was clearly aware that:

(a) Nomad was in need of significant capital in order to continue in business; (b) Nomad was encountering difficulties in raising new capital and failed to do so when needed by the time of the sale to AEUT, nor subsequently; (c) there was a very significant risk, which Mr Adler must have appreciated, that Nomad would fail, which risk eventuated in less than four months; and (d) again the Investment Committee and its approval process were bypassed by Mr Adler, and also Mr Williams. Despite this, Mr Adler and Adler Corporation caused the sale to occur to extricate Adler Corporation from an investment with which he had long been dissatisfied to advantage himself and disadvantage PEE, HIH and HIHC. In the circumstances, this produces the same finding as in relation to dstore and Planet Soccer. Mr Adler contravened ss180 - 183 of the Corporations Law, as also Adler Corporation (save for s180) by reason of its involvement in the relevant breaches.

Overall Assessment of the three unlisted investments 679 It remains to consider the collective effect of these three investments. 680 No reasonable director in Mr Adler's position and possessing his knowledge and acting bona fide for a proper purpose would have committed PEE to acquire Adler Corporation's investments in Nomad, dstore and Planet Soccer, at the prices Adler Corporation paid for these investments in the circumstances. 681 The risk of total loss on these investments had heightened considerably after Adler Corporation's purchases, as was borne out by subsequent events, most markedly in Australia by the financial collapse of Nomad and dstore within a matter of months after PEE's acquisitions. Such a conclusion is supported by the known radical change in market conditions in mid-April 2000 after Adler Corporation's purchases of these technology stocks and before they were on-sold at cost to AEUT, the lack of any due diligence, and the misleading statements and omissions made by Mr Adler in relation to on-sale of these investments. This was all in circumstances where it may properly be inferred that Mr Adler had lost confidence in these investments, having been an early round investor where it was obvious that the critical capital needs of those companies was not forthcoming. So it is quite fallacious to suggest that AEUT was getting the benefit of a high risk/ high prospective gain opportunity. What it got was the known prospect, that is, known to Mr Adler, of a likely loss, when these three investments were to varying degrees at real risk.

The Unsecured Loans 682 Paragraph 55 of the Plaintiff's Statement of Claim states that: "Adler caused PEE, as trustee of the AEUT, to make the following unsecured loans and without any or any adequate documentation: 55.1 $160,000 to Morehuman Pty Limited in or about late July 2000 without interest; 55.2 $200,000 to Pacific Capital Partners Pty Limited; 55.3 $500,000 to Intagrowth Fund No 1; 55.4 $1,120,000 to PCP Ensor No 2 Pty Limited." 683 Each of the borrowers were connected with Mr Adler, or Adler Corporation, or other associated companies of Mr Adler, as more particularly set out at paras 56 to 59 of the Plaintiff's Statement of Claim. 684 Paragraph 74 is said to apply equally to these loans, including in particular that they were not advantageous to the AEUT, or its unit holders HIHC or HIH, and were not disclosed to other directors of HIH or brought to the attention of the Investment Committee of HIH. 685 The first point to be made about these loans is that they were not even within the scope of the mandate, even as vaguely sketched in the correspondence between Mr Adler and Mr Williams of 9 June, 2000, being neither "venture capital" nor "share trading". 686 The Plaintiff's basic proposition is that the various loans which Mr Adler had PEE make were disadvantageous to PEE and HIH and HIHC because they were made on an unsecured basis to companies with which Mr Adler was associated. The fact that they were made through PEE meant that the scrutiny of the HIH investment structure involved was avoided. It is said to follow also that the loans were advantageous to Mr Adler. It is necessary to look at each loan individually, because the fact that the loan is unsecured and with a company with which Mr Adler was associated, does not of itself make the loan disadvantageous to PEE and HIH/HIHC.

The Loan of $160,000 to Morehuman Pty Ltd 687 By letter of 25 July 2000 from Mr Adler on behalf of PEE to Mr Bayni (TB, 3/1014) PEE agreed to lend Morehuman $160,000 to enable it to meet three weeks of short term working capital commitments, and to be repaid when any new capital or other loan funds came into Morehuman. The letter was signed by Mr Bayni to acknowledge that he guaranteed the loan. The actual payment was made on 26 July 2000 of the loan money (TB, 3/1015-1019B). Prima facie, it is difficult to see how a loan outside any mandate and without any provision for the payment of interest could possibly be other than not for the advantage of AEUT.. 688 The loan was not to be paid within the three weeks of 25 July 2000 and was indeed still outstanding at 1 February 2001, when Mr Ballhausen asked Mr Adler what steps had been undertaken to recover the debt (TB, 3/1021). Mr Adler replied that the letter had been sent and Mr Bayni was in financial difficulty but: "Nevertheless, my own recommendation would be to ring Mr Bayni and place additional financial pressure upon him." [TB, 3/1022] . 689 One might pause to observe that Mr Adler seems thereby to be shedding any responsibility for obtaining refund of the now doubtful loan though fully involved in bringing it about in the first place. 690 The loan was eventually repaid by cheque enclosed with a letter of 14 September 2001 from Adler Corporation to the HIH liquidator, well over a year from the time it was first made available. It is not clear whether the funds came from Morehuman. Mr Adler had written to Morehuman on 7 September asserting an obligation to pay interest (Exhibit D1X23, vol 1, guide card "Morehuman", p85), which was not the subject of any protest. Interest of $21,610.96 was in fact paid by Morehuman together with the principle amount of $160,000 (see Exhibit D1X23, vol 1, guide card "Morehuman", p87A). The First and Fourth Defendants contend that the loan was documented and interest was payable. They rely on the original letter exchange referred to above (paras 109 and 110 of the First and Fourth Defendants' written submissions). 691 But that cannot be reconciled first with the fact that the supposed documentation was as informal as an exchange of letters, with no written guarantee beyond the statement that a guarantee was to be given. Second, the documentation did not even provide all the basics of a loan, and in particular for the payment of interest. That the loan was belatedly repaid with interest suggests rather that it was only upon the urging of Mr Ballhausen and subsequently the appointment of a liquidator that Mr Adler got round to procuring the repayment at interest. I should note that the cheque for repayment was drawn on the account of Trafalgar Properties Limited (Ex D1X23, vol 1, guide card "Morehuman", p87A). That suggests that Morehuman did not have the resources on its own account, underlying the imprudence therefore of the loan being so informally transacted without security beyond a personal guarantee inadequately documented. 692 The Adler and Adler Corporation Defence (para 48(b)) admits that Adler Corporation owned 19.6% of the shares in Morehuman. Mr Adler was also a director of the company (search at TB, 3/1006-9). 693 Thus, we have a loan made to a company of which Mr Adler was a director and in which he had a substantial equity interest at a time when the company was clearly short of funds. It was lent on an unsecured basis, apart from the inadequately documented guarantee, and without any apparent written documentation for the payment of interest and was outside any mandate. It is no answer to these contentions to state, as the First and Fourth Defendants do, (para 111 of their written submissions) that the loan was shown on the AEUT balance sheet at 25 September 2000, sent by Mr Adler to Mr Williams and Mr Howard (TB, 219 to 221). That was not a disclosure in any formal sense to either the Investment Committee or the Board nor a disclosure to the other Directors of HIH, including Mr Fodera, nor did it seek approval.

CONCLUSION 694 Mr Adler caused PEE, as trustee of the AEUT, to make an unsecured loan without any adequate documentation of $160,000 to Morehuman Pty Limited, without any documented obligation to pay interest and with no security other than an inadequately documented guarantee. That loan was not advantageous to AEUT, nor disclosed to other Directors of HIH, or brought to the attention of the Investment Committee of HIH, save that it came to the attention of Mr Adler and Mr Williams. In those circumstances, Mr Adler was in contravention of s180 to s183 of the Corporations Act for similar reasons as are set out in relation to the earlier findings, as is Adler Corporation (save for s180).

Intagrowth Fund No 1 loan of $500,000 695 The pleadings are essentially the same in relation to this loan of $500,000 made on or about 20 September 2000. 696 The circumstances of this loan are set out in Mr Robinson's affidavit of 24 October 2001. Intagrowth Fund No 1 is a unit trust formed in June 1998, when Pacific Mentor Pty Limited and Mr Robinson's family trust each subscribed $500,000 in units: (Mr Robinson, para 1; TB, 4/111A). Mr Adler's interest in the fund was held through Pacific Mentor Pty Limited, which held fifty percent of the units in the fund (see Defence of Adler and Adler Corporation, para 51(b), Robinson para 1). Pacific Mentor was a company in which Mr Adler owned seventy percent of the shares and FAI Insurances (and hence, by 2000, effectively HIH) the thirty percent balance (company search at TB, 4/1112 and defence, para 51(a)). Mr Adler was also a director of Pacific Mentor (TB, 4/1112). 697 Between June 1998 and September 2000, Mr Adler, through Pacific Mentor, then made various loans to Intagrowth Funds No 1, at an interest rate of ten percent payable monthly: (Mr Robinson, para 2). On 9 February, 1999 each of Pacific Mentor, and Robinson's family trust, increased its unit holding to $1 million (Mr Robinson para 2). Intagrowth Fund No 1 regularly paid all interest due to Pacific Mentor and the trust performed to expectations: (Mr Robinson, para 3). 698 The occasion for the loan was a letter of 19 September 2000 to Mr Adler from Intagro Projects Pty Limited (which was the trustee of the fund). On behalf of the fund, the letter requested a: "Further draw down of $500,000 for working capital specifically to meet the next instalment payment of the recent scaffolding purchase." 699 The letter confirmed that: "This amount will be added to the 'existing loan' and will be covered by the floating charge and will bear interest at 10% compounded monthly." 700 The reference to the "floating charge" was however to a charge in favour of Pacific Mentor, not AEUT, dated 28 October 1998 (TB, 4/1114) pursuant to which Mr Adler's funding of Intagrowth Fund No 1 had presumably been occurring. 701 The loan by PEE was made on 20 September 2000 (TB, 4/1143-5). An epitome of loan of that date describes it as being for two months at ten percent per annum with security being a charge over the assets and liabilities of the trustee (TB, 4/1146, Mr Robinson, para 2). In reality, there was no such charge in favour of PEE. Rather, the existing charge was in favour of Pacific Mentor and did not secure the advance by PEE. 702 Intagrowth Fund No 1 did pay interest for the months of October, November and December and repaid the balance of $250,000 principal on 13 December 2000: (Mr Robinson, paras 8-14). 703 The First and Fourth Defendants in their written submissions (para 116) point to the fact that by 13 December 2000 the loan was repaid in full and interest was paid at a rate of ten percent (with an overpayment of $1,506), then contending: "There is no evidence to suggest that this loan was not 'advantageous' to AEUT at the time it was made"

(para 117 of the First and Fourth Defendants' written submissions). "It was adequately documented, and the fact that it was unsecured appears to have been unintended"

(referring to the charge over Intagro Projects Pty limited to Pacific Mentor (TB, 4/1142). The contention is then that: "Even if the loan had been intended to be unsecured, there is no evidence which would indicate that this rendered the loan other than 'advantageous', particularly given the history of borrowing by Intagrowth Fund No 1."

(Para 117 of the First and Fourth Defendants' written submissions). 704 Finally it is said that the alleged lack of disclosure to HIH was cured by the fact that the loan to Intagrowth Fund No 1 was disclosed in the AEUT Balance Sheet at 25 September 2000, which Mr Adler sent to Mr Williams and Mr Howard (TB219-221). As to that, the same comment applies mutatis mutandis as applies to the failure to disclose information concerning the $160,000 loan to Morehuman Pty Limited. 705 The loan was however, not properly documented, did not properly provide for security and in fact was unsecured, was to a trust in which Mr Adler had a substantial interest and was neither "venture capital" nor "share trading" within the description of those terms in the 9 June 2000 correspondence between Mr Adler and Mr Williams.

CONCLUSION 706 The conclusion as to the loan to Intagrowth Fund No 1 by AEUT, is the same as the finding in relation to the Morehuman loan in para 694, above.

Loan of $200,000 to Pacific Capital Partners and loan of $1,275,475 to PCP Ensor No 2 Pty Limited 707 It is convenient to deal with these two loans together because of the relationship between the two, as well as the relationship between Pacific Capital Partners Pty Limited ("PCP") and the Manly Development Project involving PCP Ensor No 2 Pty Limited ("PCP Ensor"). 708 The pleadings are the same as for the earlier loans and apply to the loan to PCP and the aggregate loan to PCP Ensor, each of which I shall describe in turn. Mr Adler was connected with both PCP and PCP Ensor in the manner I will also describe below. Taking first the PCP loan, Mr Adler was a director of PCP and Adler Corporation owned fifty percent of the shares (search at TB, 4/1062-4). 709 By a letter of 29 September 2000, Mr Adler on behalf of PEE, offered a loan to PCP of $200,000 at twenty percent per annum for two years with interest to be compounded monthly (TB, 4/1071). The letter was counter-signed by Dr Wolfe for PCP, by way of acknowledgment (TB, 4/1074). That was the only documentation and was clearly informal and I would conclude inadequate. No security was given. The loan was actually made on 3 October 2000 (TB, 4/1075, 1079-84), Mr Adler being also one of the two directors of PCP. The other director was Dr Frank Wolfe (TB, 4/1062) who had been referred to favourably in HIH Board Minutes of 1 June 2000. This was as being "well-known to the company as a successful developer of projects" of the kind then in contemplation at Mascot, which HIH decided to undertake jointly with PCP, thereby rendering an independent valuation of the Mascot project unnecessary (TB, 4/1450). 710 By letter of 5 March 2001, PCP sent to PEE a cheque for $1.3 million: "In full and final settlement of your interest in PCP Ensor No 2 and the amount owing by PCP" [TB, 4/1106]. 711 The circumstances relating to this payment are referred to below in relation to the PCP Ensor loan. 712 The documentation in relation to the PEE loan of $200,000, though by letter, is somewhat more comprehensive. It is signed by two directors in the case of PEE and accepted by one director for PCP. Neither execution is under common seal. In the case of PCP, there is a signature with the expression "for Pacific Capital Partners Pty Limited" immediately underneath but no designation of the signatory. That degree of informality does amount to inadequate documentation, more especially where the loan is not at arm's length in terms of lender and borrower. It raises questions as to the authority of the signatory. 713 Turning now to the PCP Ensor loan, it is first necessary to give some background to that company. It was incorporated on 26 June 2000 with the directors being Messrs Adler, Wolfe and a Ms Cameron (TB, 4/1164-1177). The company search records the ten issued shares as being held as to four by Ms Cameron and six by PEE. The holding by PEE came about as a result of the arrangements referred to below. 714 The company appears to have been incorporated as a result of a "Relationship Deed" between Mr Adler and Dr Wolfe dated 20 August 1999 (TB, 4/117A) designed to regulate their relationship in relation to PCP and two other companies. Their equity interests were to be 50/50 with Mr Adler to fund PCP's working capital requirements. 715 There is also an undated but executed Shareholders' Agreement (TB, 4/1185) in which PEE's name has been substituted for PCP merely in handwriting. It provides for a joint venture between Ms Cameron and PCP (hence presumably, PEE) to develop certain land at Manly, with PCP (presumably referring to PEE), to provide such loans as were required to enable PCP Ensor to comply with its payment obligations (clause 5.2). There is no pleaded allegation concerning this agreement or PEE's acquisition of six shares in PCP Ensor. The Plaintiff's case was opened on the basis that: "It was really a standard property development project." [T142.54 - .55]. 716 I should add that the earlier mentioned amounts which PCP or PEE agreed to lend PCP Ensor were to be at an interest rate of thirty percent. Any additional funding by way of shareholders' loan was also to be at thirty percent interest: (clause 5.4 at TB, 4/1194). All debts owed by PCP Ensor were secured by a guarantee given in writing signed by Dr Wolfe: (TB, 4/1210-1219). Dr Wolfe was a director of PCP Ensor: (TB, 4/1164). The First and Fourth Defendants contend that the terms of the loan were thus properly documented as to the security by way of (unsecured) guarantee (First and Fourth Defendants' written submissions, para 123). I would agree with that, so far as the documentation goes, though I would not agree that the loan to PCP was properly documented for the reasons earlier stated. 717 The next event was that by letter of 28 June 2000 from Mr Adler to Dr Wolfe (TB, 4/1223) Mr Adler referred to PEE as "The fund that I manage for HIH", that it was investing in the Manly property and that: "It is important that we determine upfront how PCP can and should be involved."

In other words, Mr Adler wanted to ensure that his own interests (through PCP) did not miss out on profits or remuneration in relation to the project. 718 The response from Dr Wolfe of 7 July 2000 (TB, 4/1261) was that PCP would manage the project on behalf of PEE for a monthly fee of $7,500. PEE was to receive a twenty five percent per annum return on all funds employed and: "A ten percent profit share after all fees and interest payments have been made."

That is to say, that the balance of the profit would be divided between Messrs Adler, Wolfe and Ms Cameron. 719 It is not clear how this arrangement was intended to relate to the acquisition by PEE of sixty percent of the share capital of PCP Ensor (see the resolution of Messrs Adler, Wolfe and Ms Cameron at TB, 4/1220). Notwithstanding that acquisition, it would appear from Dr Wolfe's letter of 7 July 2000 and the letter from Mr L'Estrange of PCP (TB, 4/1381) that PEE was to receive only ten percent of the profits, with the balance, by inference, being split between Messrs Adler, Wolfe and Ms Cameron. 720 Between 28 June 2000 and 30 November 2000, loans were made by PEE to PCP Ensor by the making of payments to or for the benefit of PCP Ensor. These are listed at TB, 4/1223A. The largest payment was $600,000 to Vital Finance Corporation on 29 June 2000. The total of payments is $1,224,845 (after leaving aside the $200,000 loan to PCP referred to earlier) plus payments of $50,631 primarily representing monthly management fee payments to Mr Adler via PCP. The total is thus $1,274,345. 721 By a letter of 5 March 2001, Dr Wolfe sent to Mr Howard at HIH a cheque for $1.3 million: "In full and final settlement" of your interests in PCP Ensor No 2 in the amount owing by PCP." [TB, 4/1384]. 722 Receipt is acknowledged by Mr Howard. It should be remembered that according to the earlier arrangements, $1.3 million was being paid in lieu of any right to receive the ten percent profit share or the right to twenty five percent per annum return on the money provided for any rights in respect to its sixty percent shareholding and finally in respect of the repayment of $1,274,345 plus interest. 723 Clearly, this did not fully repay to PEE the amounts owing to it, nor interest in respect of the loans to PCP and PCP Ensor. The principal amount of the PCP loan was $200,000, to which one adds the principal amount of the PCP Ensor loan namely $1,274,345. That totals $1,474,345 without even allowing for any interest. The amount received was only $1,300,000, a shortfall in respect of both principal and interest. 724 The reasons for this "settlement" are described by Mr Adler in a file note of 7 March 2000 (TB, 4/1384A) as follows: 1. "Documentation between PEE and PCP was not as precise as originally thought." 2. "HIH/PEE is in desperate need of cash". 3. "We were the logical buyer." 725 I agree with the Plaintiff's submission that Mr Adler was taking full advantage of PEE and AEUT and in a way that was wholly unjustified. That the documentation was not as precise as originally thought was a shortcoming to be laid at Mr Adler's own door, yet he was blatantly exploiting it for his own advantage. He was clearly advancing his own, not PEE/HIH's, interests, taking advantage of HIH/PEE's desperate need of cash to procure a payment that fell well short of the obligation to pay principal and interest on the PCP/PCP Ensor loans. 726 The First and Fourth Defendants, at para 125 of their submissions, state as follows: "The case was opened on the basis that 'Mr Howard, who is an HIH man, was trying to recover what could be recovered and it led to this payment being made'. (T, 141.20 - .25). But there was no evidence by Mr Howard as to any attempts by him to recover more than that amount. This gives rise to a Jones v Dunkel inferences of the kind considered by Handley JA in Union Commercial v Ferrcom (supra)." 727 I do not consider that there is anything in the First and Fourth Defendants' submissions on this point. First, the evidence is clear that Mr Adler (who chose to give no explanation in the witness box) took advantage of a situation that he himself brought about by his own conduct. Second, the principle is invoked that the failure to adduce evidence on a particular topic from a witness called on other topics indicates "as the most natural inference the party fears to do so" and that fear is then "some evidence" that such examination in chief "would have exposed facts unfavourable to the party": Commercial Assurance Co of Aust Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418-419, per Handley JA quoting from Jones v Dunkel (1959) 101 CLR 298 at 320-321, per Windeyer J. 728 Whatever that "some evidence" might represent, the Plaintiff's case on this matter is so clear that it is hardly to be supposed that Mr Howard would have advanced some explanation favourable to the First and Fourth Defendants. This is moreover in circumstances where they themselves have chosen to refrain from providing that information, when it was clearly well within their capacity to do so if such information there were. This submission is simply untenable. 729 Summing up, the loan to PCP was certainly not for "venture capital" or "share trading" in accordance with the 9 June 2000 communications between Mr Adler and Mr Williams. The loan in respect of the Manly project was a standard property development and hardly could be described as "venture capital" or "share trading" either. Moreover, it was a development in which Mr Adler had a substantial interest and one for which PEE was procured to make unsecured loans with no security other than Dr Wolfe's guarantee, itself unsecured. The documentation in relation to PCP was not fully adequate in the manner I have described and indeed as was admitted by Mr Adler, in his own diary note (see TB, 4/1384A). Finally, the manner in which the transaction proceeded, avoided the investment decision-making processes of HIH and the continuing scrutiny and monitoring that the Investment Department, Investment Management Committee and Investment Committee processes would have provided, had the Investment Committee and the Board not been bypassed.

CONCLUSION 730 The finding in relation to the two loans to PCP and PCP Ensor respectively, is the same as for the loan to Intagrowth (para 706) and earlier to Morehuman (para 694). The PCP Ensor loans were favourable to Mr Adler because of his apparent entitlement to a very substantial share of the profits in respect of the development and via PCP's role as project manager. The loans were disadvantageous to HIH/PEE because they were made without security other than the Wolfe guarantee (itself unsecured) in respect of the PCP Ensor loan, for a very limited (ten percent) share of profits which was never paid and in circumstances where the careful scrutiny and monitoring would ordinarily have attended an HIH property development investment, through the Investment Management Group and Investment Committee, was entirely bypassed.

Accessory liability of Mr Adler in any contraventions by Mr Williams of s181 and s182 731 This pleading is to be found in para 97 of the Plaintiff's Statement of Claim. It seeks to impose accessory liability under s181(2) on Mr Adler in relation to alleged contraventions by Mr Williams of those sections 181 and 182, if such there were. There is no basis to consider this separate basis for Mr Adler having contravened s181 as I have earlier concluded that Mr Williams did not contravene those provisions himself. However, there is a basis to consider Mr Adler's accessory liability in Mr William's contravention of s182. Quite clearly Mr Adler had the necessary knowing involvement in that contravention.

CONCLUSION 732 There is no basis for Mr Adler to be "involved" in any contravention by Mr Williams of s181 of the Corporations Act as I have earlier concluded Mr Williams did not himself contravene that provision. However, Mr Adler was knowingly involved in Mr Williams' contravention of s182 so as to be in breach of s182(2).

Some Further Issues Pleading 733 It is contended by the Defendants, and in particular the First and Fourth Defendants, that the Plaintiff's pleading fails to accommodate allegations of breaches of a duty to avoid conflicts and are accordingly irrelevant. This is said in relation to the Plaintiff's submissions in paras 274 to 277 (bis) under the heading "Self Dealing by Directors - Sections 181(1) and 182(1)". It is further said that these submissions are contradicted by the submissions at paras 296-8 (bis) of the Plaintiff's written submissions under the heading "Mr Adler's Continuing Duty to HIH and HIHC Whilst Acting in Relation to PEE". 734 The short answer to this contention of "unpleaded suggestions of breaches of duty to avoid conflicts" is that these were not as the Plaintiff puts its case. The Plaintiff's case, as is said in the Plaintiff's reply (para 72) is not that the mere existence of a conflict led to a breach or contravention. What the Plaintiff says is that Mr Adler in acting to advantage his own interests (para 74(1)(d) and (e) of the pleadings) and (as the evidence shows) he disadvantaged those of HIH/PEE. This was first in obtaining and then applying the $10 million from HIHC. He did so in breach of his duties both to PEE and to HIH (as well as HIHC) in instigating the central transaction and then the later transactions involving the unlisted investments and essentially unsecured loans. There is no conflict of duties as between HIH and PEE, as paras 296 to 298 (bis) makes clear in the Plaintiff's principal written submissions. This then is precisely what the Plaintiff pleads; see Statement of Claim, para 74(2) and para 76 in relation to s180 and correspondingly in relation to s181, s182 and s183. There was undoubtedly a conflict between the interests of HIH and Mr Adler. But it is the preferring of Mr Adler's own interests over HIH's and PEE's that is the subject of complaint, so succumbing to that conflict by advantaging himself and disadvantaging them; it is not the mere existence of the conflict.

Principles applicable to self-dealing - advantage by Mr Adler as a director 735 It is useful if I now set out in summary form the principles applicable to s181 of the Corporations Act as applicable to the relevant transactions, in ascribing the statutory duty to act in good faith and for a proper purpose (as to the latter see also para 458 above). Some of these, insofar as dealing with impropriety, or lack of good faith, are common to both s181 and s182. I have set out those principles below (and see also paras 738-40) with reference where noted to the present circumstances:

(1) A director (as a fiduciary) is under an obligation not to promote his personal interest by making or pursuing a gain in circumstances where there is a conflict or a real or substantial possibility of a conflict between his personal interests and those of the company: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 per Mason J at 103. This is both at general law and by statute (s181 and as applicable ss182 and 183). Such promotion would not be to act in good faith in the best interests of the corporation, or for proper purposes (s181). If the director has improperly used his position or information to gain such advantage ss182 and 183 respectively are breached. (2) In order to assess whether or not there is a real sensible possibility of conflict one must adopt the position of the reasonable person looking at the relevant facts and circumstances of the particular case: Phipps v Boardman [1967] 2 AC 46 per Lord Upjohn (at 124); Queensland Mines Ltd v Hudson (1978) 18 ALR 1. (3) Nonetheless, a director may act with a personal interest even though the director has not freed his or her mind of that personal interest when acting provided that this personal interest was not the actuating motive rather than some bona fide concern for the benefit of the company as a whole or for fairness as between members: Mills v Mills (1938) 60 CLR 150 per Latham CJ (at 164-65). (4) In certain circumstances, such as a director in "a position of power and influence" over the board, mere disclosure of a conflict between interest and duty and abstaining from voting is insufficient to satisfy a director's fiduciary duty. The director may also be under a positive duty to take steps to protect the company's interest such as by using such power and influence as he had to prevent the transaction going ahead: Permanent Building Society (In Liq) v McGee (1993) 11 ACSR 260 per Anderson J (at 289). Here neither Mr Adler nor Mr Williams, and failing them Mr Fodera did anything to have the following reach the Investment Committee or the Board; that is, payment of the $10 million, the formation of AEUT and its investment in HIH. This allowed the subsequent unlisted investments and loans to be made with no properly approved mandate permitting this and no specific approval or ratification within a reasonable time thereafter. (5) What action, beyond disclosure, the director must take will depend on matters such as the degree to which the director has been involved in the transaction, and the gravity of possible outcomes for the company: Fitzsimmons v R (1997) 23 ACSR 355 per Owen J (at 358). Here Mr Adler was intimately involved in all aspects of the transactions, while Messrs Williams and Fodera were involved to the lesser degrees earlier identified, with Mr Fodera least involved and the outcomes for HIH and HIHC were clearly adverse, in terms of ultimate loss. (6) A director of a company (here Mr Adler) who is also a director of another company (here Adler Corporation) must not exercise his or her powers for the benefit or the gain of the second company without clearly disclosing the second company's interests to the first company and obtaining the first company's consent: R v Byrnes (1995) 183 CLR 501 per Brennan, Deane, Toohey and Gaudron JJ at 517 (which here was never effectively given by HIH or HIHC). 736 The manifest failure of AEUT and the fact that the HIH share price did fall despite AEUT's buying, in no way obviates the intended advantage to Mr Adler and Adler Corporation. Thus to establish liability under s182(1) it is sufficient to establish that the conduct of the director was carried out in order to gain an advantage. It is not necessary to establish that advantage was actually achieved; Chew v R (1992) 173 CLR 626 per Mason CJ, Brennan, Gaudron and McHugh JJ at 633. Nor does that failure obviate the actual advantages earlier identified, as were in fact achieved by Mr Adler and Adler Corporation from the transactions. These include selling off at original cost Adler corporation's three unlisted investments, with their (by then) manifest difficulties raising the capital that they needed. They also included the advantages associated entities of Mr Adler achieved from the loans to them by AEUT. That failure thus affords no defence to each of the allegations of impropriety under ss181-3.

No conflict of Mr Adler's duty vis a vis PEE, and HIH/HIHC 737 I also agree with the Plaintiff's written submissions at paras 296 to 298, (bis) as to Mr Adler having a continuing duty to HIH and HIHC whilst acting as a director in relation to PEE. Because PEE's sole business was to manage the funds of the AEUT in the interests of HIHC and the other unit holders, there was no occasion for conflict between the two sets of duties. That is, the duties that Mr Adler owed as a director of PEE and the duties he owed as a director of HIH and as an officer of HIHC. I should add that not only was Mr Adler an officer of HIHC (see earlier conclusion at para 75) but his actions as such officer did not cease to be in that capacity because he also acted as a director of HIH and PEE. Mr Adler remained bound to act in the best interests of both HIH and HIHC as well as in the best interests of PEE. As my earlier findings indicate, his actions in relation to the making of investments in dstore, Planet Soccer and Nomad and the making of loans to PCP Ensor, PCP, Morehuman and Intagrowth involved breaches of duty to each of PEE, HIH and HIHC.

Objective standard for duty to act in good faith and proper purpose under s181 738 I also agree broadly with the submissions of the Plaintiff regarding the proper principles to apply in relation to the requirement of s181(1) to act in good faith for a proper purpose. I have earlier (paras 458 and 735 and see also 736) delineated these principles and explained how they apply in relation to Mr Adler (and Adler Corporation). In particular, I consider that the standard of behaviour required by s181(1) is not complied with by subjective good faith or by a mere subjective belief by a director that his purpose was proper, certainly if no reasonable director could have reached that conclusion. This is made clear by the new provisions in s184(1) which by contrast imposes the additional elements of being "intentionally dishonest" or "reckless" for the purpose of criminal sanctions. Thus, as was said by Bowen LJ in Hutton v West Cork Railway Co (1883) 23 ChD 654 at 671: "Bona fides cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company, and paying its money with both hands in a manner perfectly bona fide yet perfectly irrational." 739 Where, as my findings indicate apply here, no reasonable board could consider a decision to be within the interests of the company, the making of the decision will be a breach of duty (Ford 6th Ed, para 8.060 at p313). 740 Thus, whether a director has acted for a proper purpose, namely for the benefit of the company, is to be objectively determined (Permanent Building Society (In Liq) v Wheeler per Ipp J at 137; see also Ford, 6th Ed at para 8.200). The application of those principles in the circumstances that I have found lead to the conclusion that Mr Adler failed to act in good faith.

Calculation of loss 741 On the question of calculation of loss and its causation, Mr Carter's affidavit of 27 September 2001 establishes the loss suffered by HIH, HIHC and PEE in respect of the $10 million payment. Thus, at para 85 of Mr Carter's Report and Annexure "A", the loss suffered in respect of the $10 million is the sum of $7,768,000 plus interest from 31 August 2001. That figure represents the loss on the investments made by the AEUT, including a total loss on the amounts invested in Nomad, Planet Soccer and dstore (see para 37 of Mr Carter's affidavit of 27 September 2001). 742 Mr Carter's calculation of the loss represents the difference between the current realisable value of the assets of the AEUT and the $10 million payment. To this has been added an opportunity cost based on an investment of $10 million in thirty day bank bills, compounding monthly, for the period from 15 June 2000 to 31 August 2001. This results in an interest component of the loss in the amount of $718,403 (see paras 82-84 of Mr Carter's Report of 27 September 2001).

Causation and loss TENTH LEGAL ISSUE 743 The Plaintiff relies upon what it describes as the wider and thus more stringent test of causation for breach of these statutory provisions, by analogy to that applicable in equity to breaches of fiduciary duty. This is as opposed to the less stringent narrower common law test of causation, expressed most recently to the High Court in these terms: "An act is legally causative if it materially contributes to the result"

Henville v Walker (2001) 182 ALR 37 at para 60 per McHugh J (citing March v E & MH Stramare Pty Limited (1991) 171 CLR 506 at 512-14 per Mason CJ in its appeal to common sense as the basis for its application) and see paras 14, 61, 78, 106-108 and 163; see also GPG (Australia Trading) Pty Limited v GIO Australia Holdings Limited (2001) 40 ACSR 252 per Gyles J at para 104. 744 This question arises in the context of a statutory provision for the payment of compensation orders as claimed here. Section 1317H(1) provides that: "A court may order a person to compensate a corporation … for damage suffered by the corporation … if: (a) The person has contravened the civil penalty provision in relation to the corporation or scheme; and (b) The damage resulted from the contravention." [Emphasis added] 745 Ford para 3.400 (p90) argues that the common law, rather than the equitable causation test should be applied. To this the Plaintiff contends that the statutory references to loss which "resulted from" the contravention does not direct one away from the equitable test, as damage "resulting from" breach is a notion as much part of the equitable test as the common law test. 746 The Plaintiff further correctly presses the analogy to equitable claims against fiduciaries by pointing out that if the same test of causation were not adopted, it would raise the spectre of duplication of litigation. This is because, if ASIC failed to recover compensation under the common law test said to be applicable under s1317H, the company could then sue for breach of fiduciary duty and have the more stringent equitable test applied. 747 The equitable test is conveniently delineated by the Plaintiff's written submissions at para 264 (bis), by reference to a number of the authorities, namely Brickenden v London Loan & Savings (1934) 3 DLR 465 at 469; Re Dawson [Deceased] (1966) 2 NSWLR 211; Canson Enterprises Limited v Boughton & Co (1991) 85 PLR(4th) 139; Target Holdings Ltd v Redferns (1996) 1 AC 421; Maguire v Makaronis (1997) 188 CLR 449 at 467 to 474; O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 272 to 279; Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 at 69, para 423 - 94, para 452; Pilmer v Duke Group Limited (In Liq) (2001) ALJR 1067, per Kirby J at 1098 to 1100. 748 It is convenient that I briefly set out my own summation of the applicable principles in relation to causation in equity compared to common law, before dealing with their present application.

(1) In equity, as in common law, liability is fault-based: the defendant is only liable for the consequences of the legal wrong he has done to the plaintiff and to make good the damage caused by such wrong. He is not responsible for damage not caused by his wrong or to pay by way of compensation more than the loss suffered from such wrong: Target Holdings Ltd v Redferns (supra) per Lord Browne-Wilkinson at 432. Nonetheless, the detailed rules of equity as to causation differ, at least ostensibly, from those applicable at common law. (2) When a fiduciary fails to disclose material facts, speculation as to what course the constituent, on disclosure, would have taken is not relevant: Brickenden v London Loan & Savings (supra) at 469. That case was concerned with a solicitor acting for both the mortgagor and mortgagee in a land transaction in circumstances in which he had a personal interest in the discharge of existing mortgages, under which the borrower owed him moneys. The existence of these mortgages was not disclosed to the new lender and the trial judge found that the other mortgages in favour of the solicitor, which were not disclosed and which were paid out from the new loans, would not otherwise have been met from the sale of the properties; (3) Before applying the Brickenden principle, it is necessary to identify the fact which is "material" in the requisite sense. For once it is so identified, the defaulting fiduciary will not succeed in a argument that, even with disclosure of this material fact, the transaction would still have gone ahead: Beach Petroleum NL v Kennedy (supra) at 89 para 423-94. (4) However, the Brickenden principle is not authority for the general proposition that, in no case involving breach of fiduciary duty, may the Court consider what would have happened if the duty had been performed: Beach Petroleum NL v Kennedy at 89 para 444. (5) Nonetheless, Brickenden's disclosure principle may also apply to delinquent non-trustee fiduciaries: Maguire v Makaronis (1997) 188 CLR 449 at 467-474, including directors. (6) Even if the immediate cause of loss to the trust estate is the result of the dishonesty or failure of a third party, if specific restitution of the trust property is impossible, then the trustee is liable to make good that loss to the trust estate if, but for the breach, such loss would not have occurred: Target Holdings Ltd v Redferns per Lord Browne-Wilkinson (at 434). (7) Just like the trustee of a traditional trust, the director of a company who has the power to dispose of company property and does so for an improper purpose is liable to make "restitution" to the company: O'Halloran v RT Thomas & Family Pty Ltd (supra) at 272E-279G. That principle is reflected in the statutory civil compensation provisions of s1317H. (8) It is the vulnerability of a company which places its property in the power of directors, that makes it appropriate to adopt the approach to causation applicable to the trustee of a traditional trust in deciding issues of causation for the improper disposal of property: O'Halloran v RT Thomas & Family Pty Ltd at 272E-279G. (9) Under the common law approach to causation, (a) where two or more hypotheses exist for the cause of an injury the evidence adduced by the Plaintiff must do more than give rise to conflicting inferences of equal degrees: Luxton v Vines (1952) 85 CLR 352 at 358; (b) indeed, whether or not a causal connection exists is a question of fact to be decided on the balance of probabilities: Bonnington Castings Ltd v Wardlaw [1956] AC 613 at 620. (c) the "but for" test, applied as a negative criterion of causation has an important role to play, but it is not a comprehensive and exclusive test; value judgments and policy considerations necessarily intrude: Bennett v Minister of Community Welfare [1992] 176 CLR 408 per Mason CJ, Deane and Toohey JJ at 413 (d) The mere fact that something constitutes an essential condition (in the "but for" sense) of an occurrence does not mean that, for the purposes of ascribing responsibility or fault, it is properly to be seen as a "cause" of that occurrence as a matter of either ordinary language or common sense: March v Stramare (E & MH) Pty Ltd (supra) per Deane J at 523 (e) rather, questions of causation are to be answered as a matter of commonsense and experience: March v Stramare per Mason CJ at 515; Deane J at 572 and Toohey J at 524. (f) as long as the breach materially contributed to the damage, a causal connection will ordinarily exist even though the breach without more would not have brought about the damage: Henville v Walker (supra) per Gaudron J para [60] and McHugh J para [106]; March v Stramare per Mason CJ at 512-14; it is not necessary that the event in question be "the" cause: Fitzgerald v Penn (1954) 91 CLR 268 at 273. (g) the term "reasonably foreseeable" is not, in itself, a test of "causation", however, it marks the limits beyond which a wrongdoer will not be held responsible for damage resulting from his wrongful act: Chapman v Hearse (1961) 106 CLR 112 at 122 749 The principal effect of applying the stringent test adopted in equity is that once the Court has determined that a breach has occurred, then the liability of the fiduciary is to pay sufficient compensation to put it back to the situation it would have been had the breach not been committed. Once the court has determined that the breach was a cause of the loss, though there be other immediate causes operative as well, there is no room for speculation as to whether the loss might have occurred even without the wrongdoing, or whether it might have been avoided under certain contingencies. 750 Applying that to the present circumstances, this would obviate any consideration of what the Board or Investment Committee might have done by way of authorisation or ex post ratification in the present case, had disclosure occurred. 751 The Plaintiff argues its case on the alternative that the common law test would be applied and contends that the same result would follow under that less stringent test of causation. 752 I would accept the Plaintiff's submission that, by analogy from equitable claims against fiduciaries, the words "resulted from" should accommodate the more stringent equitable test so that the loss which follows is thereby treated as the causal consequence for which compensation is payable. That therefore means that the loss, as calculated by Mr Carter, is to be taken to have "resulted from" the relevant contraventions by Mr Adler and Mr Williams, and, to the extent identified, Mr Fodera. 753 However, turning to the question of whether the common law test would produce the same result, one needs to consider the evidence of directors, which was led in relation to that alternative submission put by the Plaintiff if its primary submission were rejected, namely that the common law test produces the same result. 754 The First and Fourth Defendants rely on the evidence given by Mr Gardener that he would have voted to ratify the transaction (T, 379.49) and in his evidence in re-examination he said that: "Probably in the end, it probably would have been approved" [T, 379.57 to 380.3]. 755 It was then said by the First and Fourth Defendants that Mr Cohen had contradicted each of the reasons in paras 28 to 30 of his affidavit for saying that he would not have approved the transaction if it had come before the Board of HIH: (T, 373.36 - .43), (no need to raise it at a Board meeting, contra para 28); (T, 377.38 - .58) (the few reasons in para 29 for saying that the investments were inappropriate were rejected); (T, 378.10 - 379.2) (Mr Gardener voted to ratify the investment by HIH in Business Thinking Systems on 29 November 2000 despite Mr Adler's association with that business, contra para 30); see para 140 of the First and Fourth Defendants' written submissions. 756 However, the Plaintiff rightly points out that his evidence at T370 to 80 did not relate to prior approval of the transaction. It related to the complications that would have arisen if it had not been ratified after the event (T, 379.45). One can well imagine that a Board might take a different view in regard to ratification when presented with a fait accompli. But in any event it does not follow that Mr Gardener could properly anticipate what he would do even in that contingency, for much would depend upon the circumstances at the time, including perhaps a desire to avert public concern about the viability of HIH when its financial circumstances were shaky if not parlous as against a concern about propriety. 757 Thus, Mr Gardener's affidavit evidence, (paras 28 to 30) stands unaffected by the cross-examination in so far as it was based upon subsequent ratification rather than the prior approval of the transaction to which his affidavit is directed. Mr Gardener rejected the proposition put to him in cross-examination that the three reasons he gave "as to this being an inappropriate investment, were simply wrong" (T, 378.5). The unchallenged statement he made upon finding out about the transaction after the event is as the Plaintiff says a clear indication as to what his attitude would have been if prior approval had been sought. He said: "I'm shocked that the investments have been made in the trust, and that the trust has bought HIH shares, both from the governance point of view and from an investment point of view." [Para 23]. 758 He added that a number of other Board members used words to similar effect (para 23). 759 The First and Fourth Defendants then turned to the evidence given by Mr Cohen first in his affidavit wherein he said that he would not have approved the transaction (affidavit, paras 39-41) and then to his answers in cross-examination in which the First and Fourth Defendants contend that Mr Cohen gave contradictory evidence. The First and Fourth Defendants then contend that it should be found that Mr Cohen would also have voted in favour of the transaction (see para 141 of the First and Fourth Defendants' written submissions). 760 At para 148 of the First and Fourth Defendants' written submissions, the following is said: "148 Cohen made appropriate inquiries concerning HIH's investment in AEUT before signing the company's financial report on 16 October 2000, and he was satisfied that the transaction was legal and proper: T, 85.4-30; 87.20-30; 105.33-35. As at 22 December 2000 when Cohen wrote to ASIC concerning the transaction, in his view there was no call to question the legality and propriety of the transaction: T, 87.37-45. Cohen conceded that as to legality and propriety, he would not have questioned the transaction in the middle of June 2000 any more than he would have at the end of December 2000: T, 93.37-49; 106.16-20. Both on 16 October 2000 and 22 December 2000, there was no aspect of the lack of prior approval of the transaction which led Cohen to regard it as contrary to good corporate governance: T, 96.10-14. Cohen was perfectly content as at 16 October 2000 and 22 December 2000 with the commercial terms of the transaction: T, 110.3-6." 761 To this the Plaintiff responded that Mr Cohen's evidence that he would not have given prior approval to the transaction in his affidavit was very clear (affidavit paras 39-41). Then the Plaintiff says, correctly, that it is of no avail to the Defendants to point out to what occurred at the end of the year (in terms of the company's financial accounts and the reference to the related party transaction). This was because Mr Cohen made it clear that there was a "big distinction" between what would have happened if prior approval had been sought and what happened after the transaction (T, 94.55, 104.35). In relation to the end of the year, he said that: "From a commercial point of view, I would have been taking other actions if this had been an ongoing situation" [T, 93.35] 762 At the time he wrote the letter of 22 December 2000 to ASIC: "The whole thing had been collapsed at that stage, so it was history." [T, 93.5] 763 He then gave evidence that to satisfy himself about the note in the accounts, he made such inquiries as seemed appropriate and adequate and placed reliance on others that he had talked to (T, 84.25). The persons he placed reliance upon were: "fellow Board members and executive staff" (T, 511.45). His view in December 2000 on the question of legality and impropriety was expressly based on legal advice which had been received (T, 87.45). However, that legal advice was based upon materially inaccurate and deficient instructions as to the facts supplied inter alia through interviews with Mr Adler and Mr Williams, as I have earlier pointed out. 764 Thus, it could not be predicated with any certainty that Mr Cohen would have approved the transaction if it had been put to him properly before it had been effected, had disclosed the intention to acquire assets from Adler Corporation, and where the legal opinion may well have been different if there had been a proper briefing of the relevant facts. That would include the fact, not disclosed to the legal advisers, that the purchasing of HIH had already commenced at the time the loan monies were made available and before any documentation. On the advice of the lawyers and its reasoning, it would appear more likely than not that the lawyers would have concluded that the legal outcome of that was that a breach may well have occurred. That in turn would make it less likely there would have been approval or ratification. Concededly, with hindsight, it is still difficult to predict with any certainty whether Mr Cohen would, (or would not), in those circumstances, have altered his position as he describes in his affidavit based upon the events that did occur. This is when one is hypothesising a very different set of circumstances to those to which his affidavit was directed, namely approval with proper disclosure of all relevant circumstances at the outset, before none of the steps had taken place. 765 The First and Fourth Defendants then place reliance on the evidence of Mr Stitt, QC (para 150 of the First and Fourth Defendants' written submissions). At para 150, the First and Fourth Defendants say this: "150 Stitt, QC is not only an experienced company director but also a highly experienced barrister, whose expertise includes commercial law generally, and who is familiar with the law concerning the duties of company directors: T, 461.19-32. Stitt, QC was absent from the board meeting on 29.11.00 and the only questions he raised at the board meeting on 14.12.00 concerning the AEUT were as to who was the Senior counsel advising Arthur Anderson and what was the advice: T, 470.8-12. When Stitt, QC read the draft of the 22.12.00 letter to ASIC with its attached schedule, it did not occur to him that the factual ingredients of any contravention of the Corporations Law had been established by the facts set out in the schedule: T, 474.38-46. The fact that Stitt, QC was considering the letter in his capacity as a director focussing on the facts rather than as a legal adviser (T, 474.11-31) renders his evidence all the more pertinent to a consideration of the position of the non-lawyer directors who are presently being sued." 766 To this, the Plaintiff responds in its reply of 24 December 2001, in terms with which I would concur: "106 (Re 1DS142) Mr Stitt's evidence was understandably cautious when dealing with a hypothetical situation but nevertheless indicated that, without further information, he would probably not have been in favour of the transaction (T, 460.15-461.5). Mr Stitt was concerned that 'as far as the governance questions were concerned', 'I was concerned that this had been done in the way in which it had been done, which was, I believe, not in accordance with the appropriate governance procedures that we had in place' (T, 467.55). (The abbreviation for 'not' in the next sentence at T, 468.1 appears to be a transcript error in light of the rest of the answer which makes it clear that he did think the transaction was detrimental from a governance point of view). As he said: 'There was a structure in place that there was an Investment Committee, that the Investment Committee was the appropriate committee to deal with this, that matters would only be brought to the Board if the Board was - if it was considered the Board was necessary to deal with it. None of that had happened and investment guidelines were laid down by the Board, so that I was concerned about all of those matters.' (T, 468.5). Q. You have been specific and precise in your reference to investment guidelines and the appropriateness of deliberation by the Investment Committee as the matters of concern to you from a corporate governance point of view in this transaction; is that right? A. Well, there is more than that; there was the role of Rodney Adler. Why were these moneys unsecured? I mean, there were a lot of questions, as I have said, that I, had I known of it, I would have wanted answers to." [T, 468.30]. 767 That reply, properly cautious as it was, gives no reason to assume that Mr Stitt, QC would have approved the transaction at the outset had it been put to him for approval as a Board member before any of the steps had been taken and with legal advice which reflected the true situation. In those circumstances, as with Mr Cohen, I consider it more likely than not, on the evidence, that Mr Stitt, QC would have declined to approve the transaction, or especially given his view that the transaction was detrimental from a governance point of view.

CONCLUSION 768 Whether the more stringent equitable test applicable to fiduciaries is applied or the common law test, on either basis, the loss identified has "resulted from" the identified contraventions, so as to satisfy the requirements of s 1317H of the Corporations Act for the making of compensation orders.

Mode of calculation of loss ELEVENTH LEGAL ISSUE 769 I should refer finally to the attack made by the First and Fourth Defendants (paras 143-4) to the calculation of the loss suffered by HIH and HIHC by reference to how HIH would have invested the $10 million if it had not paid it to PEE. They point out that the evidence of loss suffered by HIH and HIHC is contained in Mr Carter's affidavit and report of 27 September 2001. Loss is said to be comprised in the value of AEUT being less now by reason of the various investments made by PEE as trustee than it would have been if the $10 million had been invested in thirty day bank bills. 770 Mr Carter assumed that if the $10 million had not been paid to PEE on 15 June 2000, it would have been invested in thirty day bank bills (para 82 of his report). Mr Carter confirmed that he was not giving an opinion that that was a reasonable assumption (T, 416.55 - 417.18). It is then said that, by reference to the evidence considered in para 61 of the First and Fourth Defendants' written submissions, namely that HIH's investment policy was to be more heavily weighted towards investments which offered higher rewards with concomitant higher levels of risk, thus suggesting investments in technology and speculative stocks, rather than bills, this was a most unrealistic assumption. It is then said, by the First and Fourth Defendants: "There is a range of possibilities as to how HIH would have invested the $10 M, if it had not paid it to PEE. The Plaintiff has not called any evidence on this topic from the former directors and officers of HIH whom it has called, and a Jones v Dunkel inference of the kind considered by Handley JA in Commercial Union v Ferrcom (supra), arises on this issue. The inference which the First and Fourth Defendants say should be drawn is that the $10 million would have been invested in the same or similar underlying assets by HIH directly, if it had not been so invested via the AEUT, with the same financial outcome." Finally, the First and Fourth Defendants submit (para 146) that if the court were to find (even in the absence of evidence), that the $10 million would have been invested consistently with the entire mix of assets in HIH's Internally Managed Fund, that Fund suffered a negative return of 8.99 % in the quarter ended 30 September 2000 (TB, 5/1904). There is no evidence as to its performance after 30 September 2000." 771 The contention then is that on that basis: "The quantification of loss would require that $899,000 be subtracted from $10 million, and that credit be given for Carter's assessment of the current value of AEUT of $2,950,000 producing a figure of $6,151,000." 772 To this the Plaintiff responds that the bank bills referred to in Mr Carter's affidavit are a guide to the rate of interest which, the Plaintiff submits, should be awarded upon loss found. Thus, in the exercise of the court's discretion to award compensation, the Plaintiff contends that both the principal and interest elements should be so included. The Plaintiff presses the analogy as that applicable where the court is exercising its discretion in dealing with the award of interest against a defaulting trustee or other fiduciary. 773 Thus, a defaulting trustee or fiduciary who misapplies funds for his own use is obliged to pay compound interest on those funds on the basis that he is not allowed to make a profit out of the trust and is presumed to have made the most beneficial use of it (Wallersteiner v Moir (1975) 1 QB 373 at 388). The Plaintiff then contends that the First and Fourth Defendants' reference to the HIH Internal Fund return for the limited period to 30 September 2000 is not to the point and should not be adopted.

CONCLUSION 774 The proper analogy upon which the court should act in exercising its discretion in making a compensation order for damage suffered is that applicable to a defaulting trustee or other fiduciary, on the basis that Mr Adler, Mr Williams and, to the extent applicable, Mr Fodera, were each fiduciaries. Thus, it is in accordance with principle and a proper estimation of loss, to assume that the $10 million had been invested safely in thirty day bank bills and the loss calculated accordingly as Mr Carter, the Plaintiff's expert, has done.

RECAPITULATION OF CONCLUSIONS (1) Mr Adler an "officer" of HIHC First Legal Issue [see earlier paras 55 - 74] Conclusion : Mr Adler was at the relevant times of the pleaded transactions an officer of HIHC and acting as such (see para 737) within the meaning of the definition of "officer" in s9 of the Corporations Act , and in particular para (b)(i) thereof as being at the relevant times, one "who makes or participates in making, decisions that affect the whole, or a substantial part, of the business of HIHC" namely investment decisions. The same result also follows from para (b)(ii) of s9, on the basis that Mr Adler, as a director of the parent HIH, had at the relevant times "the capacity to affect significantly the corporation's [HIHC's] financial standing". (2) HIH Investments, Authorities and Management - Background to events of June 2000 [see earlier paras 76 - 85] Conclusion : There was by end March 2000, even pre-dating the mid-April collapse in technology stocks, a considered view formed by those charged by the HIH Group structure with responsibility for investment decisions (subject to board oversight) to reduce HIH Group's exposure to technology stocks. The April 2000 fall in technology, interest and media stocks would have reinforced that view. It continued unabated thereafter during (and beyond) August and September 2000. Yet Adler Corporation sold at cost to AEUT its technology stocks in dstore, Planet Soccer and Nomad notwithstanding.

(3) Payment of $10 million to PEE and HIH Share Purchases: April 2000 to 12 October 2000 [see earlier paras 87 - 140] Conclusion : I accept the evidence of Mr Howard (General Manager Finance of HIH) as to the conversations he recounts and the order of events of 15 June 2000. Those events concern the way in which the payment of $10 million was effected, including the two conversations that occurred with Mr Fodera, the conversation with Mr Adler, and subsequently with Mr Williams and then Mr Cubbin. I am satisfied on the evidence that: (a) as of 15 June 2000, Mr Adler was fully aware of the $10 million investment, having instigated it, and of the proposed investment in HIH shares as well as its later application in the kind of unlisted technology investments he later caused to be made; (b) it was a matter of indifference to Mr Fodera which Adler associated company was to be used for the $10 million investment, whether Drenmex or another, such being (as would be apparent from the letter of 9 June 2000 upon which Mr Williams appended his instructions to Mr Fodera) for an investment management proposal involving Mr Adler. Accordingly Mr Fodera on 15 June 2000 instructed Mr Howard to talk to Mr Adler to draw a cheque for $10 million instructing that Mr Ballhausen be bypassed "because it will be too hard" so as thereby to facilitate the payment and avoid a potential impediment in Mr Ballhausen; (c) Mr Williams was aware during that day, as was Mr Fodera, that some HIH shares had earlier been bought that day (15 June 2000) via Mr Adler which were to be paid for out of the $10 million, though Mr Williams' awareness of that as a matter of future intention is likely to have preceded 15 June 2000 (see (f) below); (d) Mr Fodera sought to distance himself from that transaction treating it as Mr Williams' deal; (e) none of Messrs Adler, Williams or Fodera made any steps towards getting Investment Committee or Board approval (with Mr Adler acknowledging the existence of "internal procedures" which he said he left to Mr Williams "to look after") and each were content to proceed, with documents to follow after; (f) it may be inferred that Mr Adler had had prior discussions with Mr Williams about the trust, including in particular the intended purchase of shares in HIH.

(4) Completing the HIH share purchases [see earlier paras 142 - 144] Conclusion : Shares in HIH totalling 3,924,545 and costing an aggregate (including stamp duty and brokerage) of $3,991,856.21 were purchased out of the $10 million from 15 June 2000 to 30 June 2000 (the last completed by 5 July 2000 at the latest). They were purchased for and on behalf of PEE as a result of orders placed by Mr Adler with stockbrokers. They were purchased at prices ranging from $1.00 to $1.03 per share. They were purchased before any trust deed was executed or constituted by the subsequent subscription for units; both only took place later on 12 July 2000 after all share purchases were completed.

(5) Notification by Mr Adler to ASX of HIH share purchases [see earlier paras 146 - 164] Conclusion : Mr Adler's purpose in causing PEE to purchase shares in HIH, giving the market the impression that it was his money that was being used, and passing up the opportunity to sell at a profit on 11 July 2000, was to maintain or stabilize the HIH share price, or prevent it falling by an even greater amount, doing so for the benefit of his own company's very substantial shareholding in HIH and not because in reality he sought a "quick profit" for AEUT and indirectly HIH by so doing, which was the purpose attributed to him (see TB, 268 containing "schedule of events", para 11 accompanying letter from Mr Cohen to ASIC dated 22 December 2000 and said by Mr Cohen to have been prepared "having made appropriate enquiries"). Indeed Mr Adler's actions showed that he forewent the opportunity to make such "quick profit", deliberately passing by the opportunity to sell at a profit around 11 July 2000 and maximising the ultimate loss for AEUT (and therefore HIH) by selling his own interest's shares in HIH first, in a falling market.

(6) Related Party Benefits without shareholder approval Second Legal Issue [see earlier paras 171 - 182] Conclusion : The payment of $10 million by HIHC to PEE on 15 June 2000 amounted to the giving of a "financial benefit" to each of PEE, Adler Corporation and Mr Adler within the meaning of s229 of the Corporations Act. Further, the terms of that financial benefit so given were not, within the meaning of s210 of the Corporations Act , what it defines as "arm's length", so as to be saved by that exception in s210. As a result both HIH, and HIHC being an entity which it controlled, contravened s208 of the Corporations Law (with equivalent result under the Corporations Act ). That result follows even on the Defendants' characterisation of the relevant payment as giving rise to a trust over the shares in HIH acquired out of the A$10 million, as well as over the balance of the A$10 million. It would clearly arise if the payment of $10 million were characterised as an (undocumented) unsecured borrowing with no provision for interest. Finally, I am satisfied that the Plaintiff's pleadings in paragraphs 61 to 64 have sufficiently identified the elements required to be established by the Plaintiff to found this conclusion, which is amply supported by the evidence. That result is not altered by the earlier pleading in relation to the formation of AEUT, to be found at paras 33 to 40 of the Plaintiff's Statement of Claim. (7) Constitution of AEUT [see earlier paras 184 - 192] Conclusion: In so far as the provisions of the Trust Deed for AEUT may be taken into account in determining whether a contravention of s208 of the Corporations Act occurred, though entered into some weeks after the payment, the relevant dealing was not within the arm's length exception in s210 from the prohibition on dealings with a related party without shareholder approval. There was a "financial benefit" given, within the meaning of s229 of the Corporations Act in access to the $10 million, the more so given lack of proper safeguards. This is so whether or not the $10 million was initially impressed with a trust or was an unsecured borrowing until AEUT was formed. There were indeed lacking the safeguards that would be reasonable in the circumstances. These circumstances include that Mr Adler was himself a director of HIH and his associated interests had a significant shareholding in HIH, and thus he had a potential conflict of interest as he did with respect to Adler Corporation's unlisted investments which he planned to sell to AEUT. The Trust Deed, lacking such safeguards, was grossly inadequate, in the respects pleaded and as particularised in para 40 of the Plaintiff's pleading.

(8) Involvement of Messrs Adler and Williams in breach of Related Party Benefit Provisions (ss208-9) Third Legal Issue [see earlier paras 194 - 199] Conclusion: I am satisfied that within the meaning of s209(2) of the Corporations Act both Mr Adler and Mr Williams were "involved" in a contravention of s208 of the Corporations Act by HIH and HIHC, as was Adler Corporation.

(9) Involvement of Mr Fodera in breach of Related Party Benefit Provisions (ss208-9) Fourth Legal Issue [see earlier paras 200 - 216] Conclusion: Mr Fodera was " involved " in the contravention of s208 of the Corporations Act by either HIH or HIHC. He had sufficient knowledge of the essential factual elements constituting the contravention, though clearly not every detail, much of which was still being worked out, to be thus "involved" within s79 of the Corporations Act . He knew enough to know that an undocumented loan to a fellow director giving him a 10% return with evident potential for a conflict of interest was not "reasonable", as required to satisfy the arm's length test under s210, even assuming that knowledge of that defence being unavailable is required to establish "involvement". He was sufficiently "concerned in" the related events, facilitating their occurrence and removing a potential impediment (Mr Ballhausen) though attempting to keep himself at a safe distance. He had knowledge of the use of HIH's money to fund a related party (as it happened PEE but not the earlier identified Drenmex) purchasing HIH shares. That renders him in contravention of s209, as regards the prohibition on related party benefits without member approval. That he may not have known specifically of the identity of PEE as substituted for Drenmex is not to the point, both being associated with Mr Adler, and the substitution having no effect on the substance of the transaction. It was essentially an investment via a company associated with Mr Adler that was a "related party", within the meaning of s208 utilised to purchase HIH shares and effected to his knowledge without Investment Committee approval or ratification. It is of course Mr Adler who renders that party a "related party".

(10) The payment of $10 million and its subsequent investment knowledge and approval of directors and of Investment Committee? [See earlier paras 223 - 247] Conclusion: Apart from the later limited awareness of Mr Cassidy (as to the existence of AEUT) and of Messrs Adler and Williams (as to the existence and operations of the Trust, though only Mr Adler would have been fully familiar with it) and of Mr Fodera (to a more limited extent as earlier described), I am satisfied that no directors were aware of the AEUT investment and its purchase of HIH shares or of its subsequent investments until the Audit Committee Meeting of 12 September 2000, save that Mr Gardener (and possibly others) would have learnt about it about a week earlier, on or about 5 September 2000. I am also satisfied that the Investment Committee as such were not informed about the AEUT investment either. Moreover it never approved any "appointment", or "mandate" for AEUT as required by the Investment Committee's "terms of reference" earlier quoted (TB, 24). Nor did it approve or "ratify" the investment in AEUT as laid down by para (viii) of the earlier quoted investment guidelines (TB, 5). Nor did Mr Adler, Mr Williams or Mr Fodera take any timely action or indeed any, to have the matter referred to the Investment Committee, though each were aware of the AEUT investment, with only Mr Adler having complete knowledge of the subsequent transactions. I note however that Mr Fodera was aware of the commencement of purchases in HIH by an entity associated with Mr Adler, as also Mr Williams. There was thus no collective disclosure to the Board or to the Investment Committee either prior to the investment in AEUT nor subsequently of the particular investments made by AEUT, including the share purchases in HIH and the purchases from Adler Corporation and the loans to Adler associates. This was until there was disclosure of AEUT and its HIH share purchases at 12 September 2000, though only, and informally, at the Audit Committee. Mr Williams subsequently gave false and misleading information on 12 October 2000 that "it had been fixed", that the trust had been brought to an end. As to the "in-house" investments from Adler Corporation and loans to Adler associates, there was for the first time information given, though incomplete, on 5 December 2000 (TB, 261). There is no specific disclosure of their "in-house" character, in particular that the investments had been acquired from Adler corporation at cost and the loans made to Adler associates, inadequately documented and with no independent appraisal as I later conclude (see para 682 and following).

(11) Concealment of payment from Board and Investment Committee? Para 74(1(l) of Statement of Claim [see earlier paras 249 - 254]. Conclusion: The pleaded Particulars relied upon by ASIC in sub-paragraph (l) of para 74 of ASIC's pleaded case are made out, in particular the payment of the $10 million to AEUT was made in such a way that it would not come to the attention of directors of HIH, other than Mr Adler, Mr Williams and to a lesser degree Mr Fodera and, though after the event and only as an incidental matter, Mr Cassidy.

(12) If the payment was not approved or ratified by the Investment Committee did it need to be? Paragraph 74(1)(m) of Statement of Claim [see earlier paras 256 - 263] Conclusion: The payment of $10 million and the associated investment of it in HIH shares (or later in investments acquired from Adler Corporation and loans) "Was not approved or ratified by the Investment Committee."

as required by the Investment Guidelines, and as pleaded by ASIC. There was no protocol permitting that requirement to be bypassed just because Mr Williams approved since his authority extended no further than administrative implementation. Likewise the investment mandate of AEUT had not been approved, as required of the Investment Committee by the Terms of Reference.

(13) Significance of omitting to obtain approval or notification [see earlier paras 265 - 270] Conclusion: The Terms of Reference for the Investment Committee, and its Investment Guidelines were operative at the relevant time. Failure to comply with them in the circumstances was a matter of significance. Mr Cohen's opinion, to the extent it is to the contrary, should not be accepted. This is save as it bespeaks a somewhat lax attitude prevailing in HIH's affairs concerning its investment safeguards. This was the more serious because it involved a benefit to a director not properly disclosed and authorised in accordance with laid down requirements.

(14) Further pleading matters [see earlier paras 272 - 274] Conclusion: As Mr Williams and Mr Fodera were, on the evidence, aware that the $10 million payment was to be used in whole or part by PEE to pay for the purchase of shares in HIH, no question arises (in terms of ASIC's pleadings) as to whether that purpose was not, but should have been, disclosed by Mr Adler to them.

(15) Events pertaining to the AEUT investment in HIH 13 September 2000 to 3 October 2000 [see earlier paras 276 - 279] Conclusion: Mr Adler's conduct in holding back from selling AEUT's HIH shares in mid July 2000, and then causing Adler Corporation's shares to be sold straight after the preliminary final results on 13 September 2000 for HIH were announced and doing so prior to his causing PEE to sell its shares in HIH, evidences by way of admission by conduct that Mr Adler's purpose in having PEE purchase HIH shares in June 2000 was not to enable PEE to make a quick profit (or indeed any profit at all) on the resale of HIH shares. Rather it was to advantage himself, by maintaining the HIH share price or keeping it at a higher level than it would otherwise have been. This is borne out by the fact that PEE thereby sold at a substantially lower price than Mr Adler was able to procure for Adler Corporation in selling just before. Likewise, the delay with which he gave his s205G notice in September 2000 compared to the celerity with which he gave his s205G notice in June 2000, reinforces the inference that his purpose in doing so was to support the HIH share price rather than to enable AEUT to make a quick profit.

(16) Events pertaining to AEUT in relation to HIH shares 4 October 2000 to 13 and 14 December 2000 [see earlier paras 281 - 306] Conclusion: In so far as Minter Ellison, in advising the Board in its letter of 26 November 2000 as to the legality of these transactions, relied upon information provided from interviewing Mr Williams and Mr Adler, they were given materially false information. This included that PEE had not acquired any HIH shares when HIH invested and that HIH was not aware at the time of the use of the funds when, as is clear from the evidence, both Mr Williams and Messrs Adler, Howard and Fodera were all aware of the use of those monies to acquire HIH shares. Furthermore, failure of Mr Williams and Mr Adler fully and frankly to describe what had occurred in relation to the $10 million payment and AEUT's investments in companies previously owned by Adler Corporation and loans to associates of Mr Adler amounts to an admission of their consciousness of impropriety in what occurred in relation to those matters and therefore points to that impropriety itself. Even if Mr Williams was not fully aware of the latter, he knew enough that he should have made it his business to find out the full details. Instead he simply assured Board members prior to the Board meeting on 12 October 2000 that "it has been fixed and we should move on". Minter Ellison's opinion of 29 November 2000 afforded no protection to Messrs Adler and Williams from any impropriety or breach, as Mr Williams and Mr Adler must have known it rested on incomplete and inaccurate information. They should also have been alerted by the auditor's continued concerns. Nor is Mr Adler to be believed when he stated that he was unaware that neither the Board nor the Investment Committee knew of the creation of the trust. He was a member of both Board and Investment Committee and knew what was disclosed to each. There was no practice of bypassing a member of the Investment Committee on the subject matter of disclosure, because of any perceived conflict on that member's part. There is absolutely no evidence that board members met privately on AEUT without Mr Adler, or that he had any anticipation at the time that this would occur.

(17) Events pertaining to AEUT in relation to HIH shares 13 and 14 December 2000 to 22 December 2000 [see earlier paras 308 - 333] Conclusion: The disclosure by the Chairman of HIH Mr Cohen, in his letter of 22 December 2000 to ASIC at the urging of Arthur Andersen of the situation concerning the AEUT Trust and the investment in shares in HIH contained a number of misstatements and omissions, though this is not to suggest that Mr Cohen was aware that there were such misstatements or omissions. Minter Ellison's earlier letter of advice to the Board of HIH of 29 November 2000 was similarly based on incomplete or inaccurate statements, again with no suggestion that Minter Ellison were aware of this. The directors who were aware were Mr Williams to a degree and Mr Adler in toto, neither of whom on the evidence, made any attempt to correct these. The disclosure of HIHC's investment in the Trust in the related party transactions section of HIH's Annual Report dated 16 October 2000 was false, in stating that these transactions were "on terms and conditions no more favourable than those with which it is reasonable to expect the entity would have adopted if dealing with the director or director related entity at arm's length in similar circumstances". That falsity stems from the absence of proper safeguards to deal with Mr Adler's obvious actual or potential conflicts of interest in managing the trust as well as its imbalance in terms of favouring Mr Adler over HIH's interests. To say that trust law itself provides sufficient safeguards is no answer at all, as it simply left HIHC as a unitholder with the prospect of expensive and drawn out litigation.

(18) Financial assistance by HIHC in the purchase of its parent's shares which was materially prejudicial Fifth Legal Issue [see earlier paras 335 - 354] Conclusion: HIHC suffered material prejudice as a result of its financial assistance, so contravening s260A of the Corporations Act . It did so by exchanging cash for either unsecured indebtedness owed to it, or alternatively in the first instance equitable rights by way of resulting or other trust in respect of the HIH shares being contemporaneously bought. Such rights against PEE were from the start of materially lesser value than the cash handed over. This is because such equitable rights would be likely to be contentious and to require expensive litigation to enforce in Court. Thereafter material prejudice also resulted from the other elements of the transaction, that is, the lack of safeguards in, and disadvantageous terms of, the AEUT Trust documentation and the circumstances which, from its inception, rendered the investment in HIH shares inherently likely to give rise to the loss that in fact occurred. These included Mr Adler's intention, not to make a quick profit, but to support the HIH share price. A loss was inherently likely from the inception, and did in fact eventuate, both in HIH's carrying value as an investment and when the shares were realised at a loss. Either would constitute "material prejudice" both to HIHC and HIH within the meaning of s260A(1)(a) and in terms of the pleaded Particulars. That completes the elements for such contravention by HIH and HIHC to have occurred. It leads to the conclusion that both HIH and HIHC contravened s260A of the Corporations Act .

(19) "Involvement" by Messrs Adler, Williams and Fodera, and of Adler Corporation in breach of s260A Sixth Legal Issue [see earlier paras 356 - 368] Conclusion: Each of Mr Adler and Mr Williams were "involved" in the contravention by HIHC of s260A of the Corporations Act , in giving financial assistance to HIHC to acquire shares in its holding company HIH, being assistance which did materially prejudice the interests of the company or its shareholders. However, if it be the case that for Mr Fodera to be so involved, he had to have knowledge not only of the financial assistance but also of the essential facts pertaining to material prejudice (though it be a defence rather than an element of the contravention) then I could not be positively satisfied that at the time Mr Fodera had that knowledge of material prejudice. As I do not consider that there need be knowledge of what is essentially a defence rather than an ingredient of the contravention, I conclude that he too was sufficiently involved, though to a lesser degree than Messrs Williams and Adler. The result is that each contravened s260D(2) of the Corporations Act as did Adler Corporation, with the above qualification concerning Mr Fodera.

(20) Application of s180 to s182 of the Corporations Act to the investment in AEUT and by AEUT in HIH in relation to Mr Adler Seventh Legal Issue [see earlier paras 370 - 386] Conclusion: (a) A reasonably careful and diligent director or officer of HIH or HIHC in the position of Mr Adler, would not have caused or procured the payment on 15 June 2000 of $10 million by HIHC to PEE to be applied as it was (in part) in purchasing HIH shares. To the extent that $3,973,397.84 was so used for the purpose of assisting PEE to acquire shares in HIH, not only did that assistance materially prejudice the interests of HIH and HIHC and in that sense was not advantageous to AEUT, the unit holders of AEUT, including HIHC or to HIHC's holding company HIH, but also it was not disclosed as it should have been to other directors of HIH (save Mr Adler, Mr Williams, Mr Fodera and to a limited extent only, as regards the subscription to AEUT, Mr Cassidy). Nor was it brought by Mr Adler to the attention of the Investment Committee of HIH for approval or ratification, as it should, nor was the mandate for AEUT's investments ever brought to the Investment Committee for approval by Mr Adler, as mandatorily required by the Investment Committee's Terms of Reference. The semi-covert bypassing of proper corporate safeguards for these arrangements (only executive directors apart from Mr Adler were aware), reflects consciousness of impropriety on Mr Adler's part. Furthermore, the purchase was made with Mr Adler stating publicly that he was purchasing HIH shares and with the object to maintain or support the HIH share price rather than for HIH's purpose, of enabling HIHC to obtain, through its interests in AEUT, the benefit of a quick profit on the resale of HIH shares so acquired. Mr Adler thereby breached s180 of the Corporations Act. This was in failing to follow authorised practices (see para 372(13) above) and in properly safeguarding the interests of HIH and HIHC (in the latter case as an officer), falling well short of the standard of a reasonably competent person in his category of appointment, well familiar as he was with investment practices; see para 375 above. (b) The foregoing circumstances also give rise to breach of s181, applying the principles set out at para 735 particularly (1), (2), (4) (5) and (6), with (3) not applying in the circumstances. Mr Adler as a director was required to act in good faith, and for a proper purpose, neither of which he did. This was in promoting his personal interest by making or pursuing a gain (of maintaining or supporting the HIH share price for his own benefit as a substantial shareholder) where looked at from the viewpoint of a person familiar with the circumstances, there was a real or substantial possibility of a conflict between his personal interests and those of the company in pursuing a profit, and in failing to make proper disclosure. Moreover the interests of HIH and HIHC were put at risk by the illegality under s208 and s260A as well as by concealment from the market that HIHC was funding these purchases of HIH shares, not Mr Adler or his interests. (c) Moreover, he improperly used his position as a director (thereby in breach of s182) to gain the foregoing advantages to himself, as a substantial shareholder, via Adler Corporation, in HIH; the principles set out at para 458 below are directly applicable. This was for the improper purpose earlier described, namely maintaining or supporting the price of shares in HIH, so as to benefit his own HIH holding rather than HIH, as evinced by his conduct earlier described including foregoing a quick trading profit and selling his shares first rather than after, or at least at the same time. Moreover, it was concealed from the Investment Committee collectively, though known to Messrs Fodera, Williams and to a much more limited extent Mr Cassidy, as well as Mr Howard. As a consequence, Mr Adler, as a director of HIH and an officer of HIHC, and as a director of PEE, contravened s182. (d) Insofar as the "business judgment" provisions of s180(2) are concerned, these could not apply to exonerate Mr Adler. This was because there was no "business judgment" (as either a defence or as an element in the contravention) shown by Mr Adler to have been made "in good faith for a proper purpose" (s180(2)(b)). Clearly Mr Adler did have "a material personal interest in the subject matter of the judgment" so also precluding application of that rule. No equivalent defence at general law is made out either.

(21) Application of s183 of the Corporations Act to the investment in AEUT and by AEUT in HIH in relation to Mr Adler Eighth Legal Issue [see earlier paras 388 - 393] Conclusion: It is premature to consider whether Mr Adler contravened s183 of the Corporations Act in so far as the investment in shares in HIH was concerned, without considering that in the overall context of all of the transactions, being all investments "of a less conservative character". The factual position and findings with regard to the investment in unlisted equities and the loans are dealt with later (between paras 513 to 730). It is there concluded (see principally para 577(d) that Mr Adler contravened s183 taking into account each of the unlisted investments acquired from Adler Corporation and each of the loans to Adler associated entities.

(22) Application of ss180 - 182 of the Corporations Act to the investment in AEUT and by AEUT in HIH in relation to Mr Williams [see earlier paras 395 - 452] Conclusion: As to s180 and the duty of care and diligence, Mr Williams was not entitled to rely on Mr Adler to make investments, which conformed with the law and were not detrimental to the interests of HIH, without at the least making sure there were put in place proper safeguards including independent appraisal of the investments made by way of proper due diligence and by ensuring that before the arrangements were put in place, the terms of the mandate were approved by the Investment Committee, if not the Board. Mr Williams simply did not do this either when making the original commercial deal or by instructing Mr Howard. It is nothing to the point to say that he hoped that the investment would turn out profitably or he would not have made it. The fact of the matter was that Mr Williams did not ensure that the company complied with its own safeguards laid down for approval of such a mandate by its Investment Committee, nor did he put in place safeguards to avoid investments being made which were in breach of the law and which, directly or indirectly, advantaged Mr Adler, Adler Corporation and PEE and were not reasonable in the circumstances even if HIHC and PEE had been dealing at arm's length. Mr Williams' concern should have been heightened by the fact that he was dealing with a fellow director. That is enough, though one can add that Mr Adler, as should have been apparent, had an obvious inherent conflict of interest as a significant shareholder in HIH. That is quite apart from his early intention to on-sell investments to AEUT like dstore; the evidence of the extent of Mr Williams' knowledge about such investment is set out at para 515 below. Accordingly, I conclude that Mr Williams was in breach of s180 of the Corporations Act in failing to exercise the degree of care and diligence that a reasonable person would have exercised as a director in the circumstances and occupying the office held by Mr Williams. Mr Williams is not able to invoke the business judgment rule in the circumstances where he either failed to make a business judgment at all or to the extent that he did, failed to establish that he made it in good faith for a proper purpose, and in any event, where he had a material personal interest in the subject matter of the judgment and had failed to inform himself to the extent he could reasonably believe to be appropriate.

(23) Section 181 and Mr Williams [see earlier paras 454 - 456] Conclusion: On balance and though close to the line, I am not able to be satisfied, at the stringent standard of proof required, that Mr Williams was in breach of his statutory obligation as a director to exercise his powers and discharge his duties in good faith in the best interests of the corporation and for a proper purpose, as required by s181 of the Corporations Act . This is in relation to the initial transaction in making available the $10 million and in the application of part thereof in purchasing HIH shares.

(24) Section 182 and Mr Williams: investment in AEUT and HIH [see earlier paras 458 - 460] Conclusion: Mr Williams breached his statutory obligation under s182 not to improperly use his position as a director of HIH and HIHC to gain an advantage for Mr Adler. He likewise improperly used his position to cause detriment to HIH and HIHC, in authorising the relevant payment without proper safeguards and without having the relevant mandate to Mr Adler and PEE submitted for approval to the Investment Committee and for the relevant investment to be ratified by the Investment Committee, in accordance with the Investment Guidelines.

(25) Application of ss180 - 182 of the Corporations Act to the investment in AEUT and by AEUT in HIH in relation to Mr Fodera Ninth Legal Issue [see earlier paras 462 - 511] Conclusion: (a) Mr Fodera failed to exercise the degree of care and diligence required by s180 of the Corporations Act by reason of the failure of Mr Fodera to take such steps as were open to him to have the proposal either submitted for approval in advance to the Investment Committee, if not the Board, or thereafter submitted for ratification by the Investment Committee if not the Board. This was especially in circumstances where extraordinary features of the transaction should have been apparent to him, including in particular involvement of a fellow director Mr Adler and the purchase of shares in HIH by an entity associated with Mr Adler with part of the $10 million. He was not entitled to rely on others to do this, though primary responsibility to do so lay with Mr Williams and Mr Adler. He must be taken to have known that there had been no submission to the Board or Investment Committee, as he was a member of both. Yet he took no steps from July 2000 to 8 or 12 September 2000 when the auditors first drew attention to the transaction. The business judgment rule does not avail Mr Fodera, though no finding of lack of good faith or improper purpose or dishonesty is made in the case of Mr Fodera. It would be premature to consider the application of s1317S or s1318, in terms of any relief in relation to the contravention in question. That needs to be considered as a matter of discretion in light of the evidence then before the Court.

(b) Though Mr Fodera failed to bring the AEUT investment (including the associated purchase of shares in HIH) to the attention of the other directors of HIH or to the Investment Committee, it has not been established to the stringent standard required for a civil penalty that any contravention occurred of s181 (lack of good faith or proper purpose) or s182 (improper use of position) of the Corporations Act .

(26) Investments in dstore, Planet Soccer and Nomad [see earlier paras 513 - 575] Conclusion: At the time of the acquisition by PEE of the shares in dstore, it is a fair inference, on the evidence, and strengthened by Mr Adler's failure to give any other explanation, of a matter which was peculiarly within his knowledge, that he was aware that: (a) dstore was in need of significant capital in order to continue doing business given the "burn rate" it was known to Mr Adler to have been experiencing; (b) dstore was encountering difficulties in raising new capital; (c) dstore was having cash flow difficulties; (d) there was a significant risk that dstore would fail (para 49 of ASIC's Statement of Claim). (e) PEE had thereby acquired from Adler Corporation an unlisted investment (dstore) which was not the subject of independent analysis, was purchased from interests associated with a director (Adler), who had not disclosed this to the directors of HIH other than Mr Williams and Mr Fodera (and subsequently Mr Cassidy) nor sought approval from the Investment Committee or Board either for the investment of $10 million in AEUT or its application in part to acquire assets such as dstore from Adler Corporation, in circumstances where this entailed a clear conflict of interest for Mr Adler; (f) that purchase was not advantageous to AEUT or to the unit holders of the AEUT, including HIHC, or to HIH but was to the advantage of Adler Corporation and Mr Adler; (g) no disclosure was made by Mr Adler to HIH or HIHC before dstore was acquired of the matters in (a) through (d) above and the first HIH and HIHC knew of the failure of this investment was on 15 December 2000; In so doing, Mr Adler breached his obligation (a) to exercise the degree of care and diligence required from a director by s180 of the Corporations Act breaching his obligations as a director or officer to HIH, HIHC and PEE, and having a material personal interest in the subject matter of any business judgment could not rely on any defence under the business judgment rule; (b) to act in good faith for a proper purpose as required by s181 of the Corporations Act; (c) not to improperly use his position to gain an advantage for himself or to cause detriment to each of HIH, HIHC and PEE, so breaching s182 of the Corporations Act, and (d) not to improperly use information obtained by him to gain an advantage for himself or to gain an advantage for Adler Corporation, so contravening s183 of the Corporations Law, being information concerning the Investment Committee procedures and Investment Guidelines, the HIH Investment Portfolio and the susceptibility of Mr Williams to a proposal whereby HIH invest money in less conservative ways, such as in unlisted equities and venture capital; see para 95 of the Plaintiff's Statement of Claim (no s183 claim is made in relation to PEE). Adler Corporation, by reason of its "involvement " as vendor to PEE of the unlisted investments, and being in (shared) control of PEE as majority unit holder, must be taken to have contravened each of the provisions of the Corporations Act that Mr Adler has contravened (save s180 which is not pleaded against Adler Corporation).

(27) Mr Williams [see earlier paras 579 - 585] Conclusion: Subsequent events concerning the investment in dstore, insofar as they bear on the relevant Particulars in para 77 of the Plaintiff's pleading (see in particular, Particulars (f), (k) and (l)) but only on the material facts pleaded at paras 15 to 46; support the earlier conclusions reached concerning Mr Williams' contravention of s180 (see para 453) and s182 (see para 461).

(28) Planet Soccer [see earlier paras 587 - 620] Conclusion: At the time of acquisition by PEE of the shares in Planet Soccer, Mr Adler was aware that: (a) Planet Soccer was in need of significant capital in order to continue in business; (b) Planet Soccer was encountering difficulties in raising new capital; and (c) There was a significant risk that Planet Soccer would fail, in the absence of such new capital. In all other respects, the position with regard to the investment in Planet Soccer is substantially the same as for dstore. Mr Adler is in contravention of s180 to s183 in relation also to the purchase of Planet Soccer, as also is Adler Corporation (save for s180) by reason of its involvement in the relevant breaches.

(29) Nomad Telecommunications Limited ("Nomad") [see earlier paras 622 - 677] Conclusion: At the time of the acquisition by PEE of the shares in Nomad, Mr Adler was clearly aware that: (a) Nomad was in need of significant capital in order to continue in business; (b) Nomad was encountering difficulties in raising new capital and failed to do so when needed by the time of the sale to AEUT, nor subsequently; (c) there was a very significant risk, which Mr Adler must have appreciated, that Nomad would fail, which risk eventuated in less than four months; and (d) again the Investment Committee and its approval process were bypassed by Mr Adler, and also Mr Williams. Despite this, Mr Adler and Adler Corporation caused the sale to occur to extricate Adler Corporation from an investment with which he had long been dissatisfied to advantage himself and disadvantage PEE, HIH and HIHC. In the circumstances, this produces the same finding as in relation to dstore and Planet Soccer. Mr Adler contravened ss180 - 183 of the Corporations Law, as also Adler Corporation (save for s180) by reason of its involvement in the relevant breaches.

(30) The Loan of $160,000 to Morehuman Pty Ltd [see earlier paras 687 - 693] Conclusion: Mr Adler caused PEE, as trustee of the AEUT, to make an unsecured loan without any adequate documentation of $160,000 to Morehuman Pty Limited, without any documented obligation to pay interest and with no security other than an inadequately documented guarantee. That loan was not advantageous to AEUT, nor disclosed to other Directors of HIH, or brought to the attention of the Investment Committee of HIH, save that it came to the attention of Mr Adler and Mr Williams. In those circumstances, Mr Adler was in contravention of s180 to s183 of the Corporations Act for similar reasons as are set out in relation to the earlier findings, as is Adler Corporation (save for s180).

(31) Intagrowth Fund No 1 loan of $500,000 [see earlier paras 695 - 705] Conclusion: The conclusion as to the loan to Intagrowth Fund No 1 by AEUT, is the same as the finding in relation to the Morehuman loan in para 694, above.

(32) Loan of $200,000 to Pacific Capital Partners and loan of $1,275,475 to PCP Ensor No 2 Pty Limited [see earlier paras 707 - 729] Conclusion: The finding in relation to the two loans to PCP and PCP Ensor respectively, is the same as for the loan to Intagrowth (para 706) and earlier to Morehuman (para 694). The PCP Ensor loans were favourable to Mr Adler because of his apparent entitlement to a very substantial share of the profits in respect of the development and via PCP's role as project manager. The loans were disadvantageous to HIH/PEE because they were made without security other than the Wolfe guarantee (itself unsecured) in respect of the PCP Ensor loan, for a very limited (ten percent) share of profits which was never paid and in circumstances where the careful scrutiny and monitoring would ordinarily have attended an HIH property development investment, through the Investment Management Group and Investment Committee, was entirely bypassed.

(33) Accessory liability of Mr Adler in any contraventions by Mr Williams of s181 and s182 [see earlier para 731] Conclusion: There is no basis for Mr Adler to be "involved" in any contravention by Mr Williams of s181 of the Corporations Act as I have earlier concluded Mr Williams did not himself contravene that provision. However, Mr Adler was knowingly involved in Mr Williams' contravention of s182 so as to be in breach of s182(2).

(34) Causation and loss Tenth Legal Issue [see earlier paras 743 - 767] Conclusion: Whether the more stringent equitable test applicable to fiduciaries is applied or the common law test, on either basis, the loss identified has "resulted from" the identified contraventions, so as to satisfy the requirements of s 1317H of the Corporations Act for the making of compensation orders.

(35) Mode of calculation of loss Eleventh Legal Issue [see earlier paras 769 - 773] Conclusion: The proper analogy upon which the court should act in exercising its discretion in making a compensation order for damage suffered is that applicable to a defaulting trustee or other fiduciary, on the basis that Mr Adler, Mr Williams and, to the extent applicable, Mr Fodera, were each fiduciaries. Thus, it is in accordance with principle and a proper estimation of loss, to assume that the $10 million had been invested safely in thirty day bank bills and the loss calculated accordingly as Mr Carter, the Plaintiff's expert, has done.

OVERALL SUMMATION 775 The effect of the foregoing can be summarised briefly as follows, though such summary needs to be read with the earlier reasons and conclusions:

(1) HIH and HIHC contravened s208 (related party financial benefits without shareholder approval) and HIHC contravened s260A (financial assistance for the purchase of shares) of the Corporations Act by the payment of the $10 million used (in part) for the purchase of shares in HIH, this being a determination I make for the purpose of determining (2) below (there being no proceedings brought against HIH or HIHC as such). (2) Each of Mr Adler, Mr Williams and Mr Fodera, and Adler Corporation were "involved" in those contraventions so as themselves to be in breach of s209(2) and s260D(2) respectively. Declarations should be made accordingly in terms reflecting this judgment. (3) Mr Adler contravened his directorial duties or duties as an officer under ss180, 181, 182 and 183 of the Corporations Act owed to HIH and HIHC and (save in relation to s183) PEE, by reason of the transactions pleaded concerning payment of $10 million to the AEUT and its subsequent investment (a) in HIH shares; (b) in unlisted investments acquired from Adler corporation; and (c) in loans to entities associated with Mr Adler. Thus the declarations as broadly sought against Mr Adler in paras 1, 2 and 3 of the Plaintiff's pleading should be made accordingly, in terms reflecting this judgment. (4) Adler Corporation was involved in the foregoing contraventions, so as itself to be liable under ss181(2), 182(2) and 183(2) of the Corporations Act . See more precisely the declarations sought against Adler Corporation in paras 10, 10A, 11 and 12 of the Plaintiff's pleading, which should be made broadly as sought, in terms reflecting this judgment. (5) Mr Williams contravened his directorial duties or duties as an officer , owed to HIH and HIHC, under s180 of the Corporations Act and s182 (but not s181) through his involvement with the payment of $10 million by HIHC to PEE on or about 15 June 2000 in the circumstances pleaded. Mr Adler was involved in Mr Williams' contravention of s182. Declarations in terms of this judgment should be made accordingly. See paras 4 (omitting s181(2)), 6 and 7 of the Plaintiff's pleading for the effect of the declarations sought. (6) Mr Fodera contravened his directorial obligations, or obligations as an officer owed to HIH and HIHC under s180 of the Corporations Act (but not ss181 and 182) through his involvement with the payment of $10 million by HIHC to PEE on or about 15 June 2000 in the circumstances pleaded. However, declarations in relation to Messrs Williams and Fodera should be made accordingly in terms reflecting this judgment (a) broadly as in paras 6 and 7 of the Plaintiff's pleading, (omitting s181) for Mr Williams; and (b) broadly as in paras 8 and 9 of the Plaintiff's pleading for Mr Fodera, omitting ss181-182. (7) Relief will need to be separately considered.

CIVIL PENALTY ORDERS AND DISQUALIFICATION AND RELIEF GENERALLY 776 It is appropriate, and in accordance with the orders that I made at the outset that I consider relief (apart from the declarations) only after further submissions have been made. These must be directed to relief only and will be made with an opportunity to consider the reasons in this judgment and to advance any further character evidence that may be thought appropriate. It suffices if I say that on the evidence presently before me I consider that the contraventions by Mr Adler (and Adler Corporation) the most serious of all. But I view with considerable seriousness the contraventions by Mr Williams of his obligations. It may be anticipated from submissions so far that a case may be put in his favour that his motivation was directed, though misguidedly, to the best interests of HIH and HIHC. Certainly he did not profit in the way Mr Adler and Adler Corporation profited by the investments derived from Adler Corporation or the loans made to Adler Corporation or Adler related entities. As to Mr Fodera, I consider that his failings were of a significantly lesser order, though still amounting to contraventions in the respects earlier identified. Basically, his failure was as a responsible director in facilitating the original $10 million payment knowing it was to be used (in part) to buy HIH shares and in neglecting to ensure that the proper processes were followed for approval of the relevant transactions after Messrs Adler and Williams had failed to bring that about. However, the proper perspective in which to view Mr Fodera's contraventions in the context of relief will need to be the subject of further consideration, as also will the position of Mr Adler and Mr Williams. 777 I direct the parties to return within five days with declarations as earlier foreshadowed which reflect the terms of this judgment.

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