It was not in dispute that Windsor was authorised to act for Ample in the SECCU transaction.
Cahill gave evidence suggesting the Board did not see the Deed of Assignment before it was executed. He claimed he did not become aware of clause 7 until late 1994 or early 1995. He could offer no explanation why he would not have seen the letter from Cornwall Stodart. He admitted that concealment of the clause from the Board would mean he could no longer have confidence in Windsor.
Sutherland claimed to have been unaware of clause 7 and the Cornwall Stodart letter until some time in 1994. He said he did not participate in any board meeting which authorised the inclusion of the clause in the Deed. He was not informed of the meetings with the ASC or of the proposed investigation into the mortgages by MAM's receiver. He agreed in light of the clause and the letter that the investment was not prudent.
I note in passing that Napper chaired the board meeting of 23 March 1993. I note again he has not given evidence in this matter. I further note the following which is not the subject of agreement between the parties. Napper was a director of a company related to MAM when the investment was made. According to Mr Fletcher - the then employed accountant of Ample and ASN whose evidence is in no way impugned - Napper was in Melbourne for significant periods at the time of the SECCU investment. It was Fletcher's understanding that his involvement in the investment was quite substantial. Fletcher communicated with him in Melbourne on one occasion on this basis. I should add that counsel for the respondents in his oral submissions accepted that Napper was at least privy to the SECCU negotiations if he was not more fully involved in them. I am prepared to find the former to have been the case.
MAM went into liquidation. Though this is not agreed, the evidence before me suggests that the shortfall on the mortgages is in the order of 40 per cent. A loss of something of this magnitude is probable.
There is now litigation between Ample and SECCU. The proceedings were initiated by SECCU for reasons I will note below. Ample has counter claimed in these for rescission of the Deed of Assignment. It is not in dispute that if Ample is unsuccessful in these proceedings it will be insolvent.
The liquidator of MAM declared one dividend which reduced Ample's then capital liability to SECCU by about $500,000. Ample has received no moneys from the mortgages themselves. Interest payments due by Ample during the 1993-1994 financial year were paid by Securities and Fiduciary, both AS Group companies. Roughly $70,000 of the money paid by Securities came from a loan made to it by SIP1. This loan is an aspect of the next transaction to be analysed.
In January 1994 Ample ceased to make interest payments. Shortly thereafter SECCU commenced the litigation I have noted.
(b) Issues
My initial comment on this transaction was that it was perplexing. The respondents have submitted that what it displays are matters of business judgment. It is difficult enough, in my view, to understand why a company would, as a matter of judgment, make such a risk-fraught investment when its board knew that (a) a receiver had been appointed and that there was the prospect of liquidation of MAM; (b) some mortgages in the portfolio were non-performing; (c) it could not finance it from its own income if there was significant non-performance; and (d) the only apparent advantages were future goodwill with SECCU and the fact of the $10 million deposit. When one adds to this the haste with which it was effected - seemingly for no better reason than to help SECCU avoid embarrassment - the difficulty I have noted is exaggerated. But to be added to all of this is the conduct of Windsor.
For the purpose of these proceedings there are only a few issues that need address. The first relates to such due diligence as was undertaken on behalf of Ample before entering into the transaction, bearing in mind the knowledge had from both SECCU and MAM that there were irregularities with some mortgages. Windsor claimed in his ASC examination that he was unaware of the other directors performing any due diligence in the transaction. There is no evidence to suggest that they did.
Then there is the Cornwall Stodart letter of 29 March (to which I have referred) indicating it had been instructed by Windsor not to undertake any due diligence. Windsor, at his examination, denied the solicitors were "specifically instructed" not to do this. While that letter can obviously be said to have been written for reasons of self-protection, it is consistent with clause 7 of the Deed of Assignment. It equally is a letter that could reasonably be expected of solicitors who have acted on behalf of Ample in negotiations with the ASC in relation to the possible liquidation of MAM and who were aware of the need for such investigation of the mortgages as the receiver was to undertake and in which Ample's help was offered by them.
In these circumstances I am prepared to find that Cornwall Stodart was instructed by Windsor in the terms indicated in the letter and that Windsor was advised before the Deed was executed that SECCU's title to the mortgages may be suspect. Windsor, having given a not unambiguous denial that the firm received this instruction, has not been prepared to have his ASC examination response tested in these proceedings by submitting himself to cross-examination. In these circumstances and despite the submission made to the contrary, I feel fortified in the inference I am prepared to draw. It is fairly open on the evidence.
I am in consequence prepared to find that: (i) Windsor did not disclose this instruction, or the advice, to the board; (ii) he was aware that a clause in a form such as 7 was to be in the Deed but did not forewarn board members of this; and (iii) when regard also is had to the evidence of Cahill and Sutherland, he concealed from the board that the receiver was investigating the MAM mortgages. While it is likely that Napper was aware of some deal of this, I am not in a position on the evidence to make a positive finding as to what precisely was Napper's knowledge. Even though he did not give evidence, I cannot for this reason engage in speculation on this matter.
Windsor's conduct was reprehensible. It has, potentially, brought Ample to ruin. I refrain from comment upon the litigation with SECCU in which Ample is now embroiled. Why Windsor should have acted in this fashion, what final advantage he anticipated would flow from the investment - these are not matters on which I can or should speculate.
What needs to be said, though, is that there is a variety of bases upon which action could be brought against Windsor (and I would add most probably Securities as manager) for such loss as Ample may suffer in consequence of his actions. The ASC in its submission, while referring to duties owed by Windsor in equity and under the Corporations Law (by which I presume is meant owed as a s60 director) did not seek to particularise possible causes of action. In these circumstances I do not feel it necessary or appropriate to catalogue the possibilities although I would add that the common law as well as equity can provide remedies for nondisclosure: see Brownlie v Campbell (1880) 5 App Cas 925 at 950; Hawkins v Clayton (1988) 164 CLR 539. I will later return to the question of liability as a s60 director.
Finally, it is not necessary for the purpose of these proceedings that I express a view on whether Cahill and Sutherland breached their common law and statutory duties of care in their participation in this board decision. I would note that it has been submitted that their reliance on Windsor and Napper was appropriate in the circumstances.
8. The Securities Loan. The Securities Loan
This is another example of self-dealing within the AS Group.
(a) Facts
The transaction was initiated by Windsor in a phone call to Cahill. He sought a loan for Securities from ASN of $300,000 to allow Securities to develop business. Cahill then communicated with the other directors.
On 1 July 1992 ASN as trustee for SIP1 entered into a loan agreement with Securities. This was not proceeded with. A subsequent agreement was signed on 17 April 1993. This apparently governed the loan actually made. It did not provide for a definite term and the loan was repayable on demand. No demand has ever been made.
On 27 April 1993 the ASN Board resolved to make "an unsecured loan" to Securities of an amount not exceeding $300,000 at 15 per cent interest. I would note that the preceding item in those minutes was a loan from Woden to ASN of $800,000 at the same rate of interest ("the First Woden Loan"). It is clear that part of the Woden loan monies went straight to Securities. The loan was fully drawn down, a repayment of $100,000 was made, then there was further drawing down.
The purpose of the loan according to Cahill was to allow Windsor to pursue the general development of his business and to obtain more clients. The uncontradicted evidence before me is that the loan funds were used (i) to pay various operating expenses of Securities; (ii) to make payments to Administration (an AS Group company) and ASN - these payments were described as "loans" or "fees"; and (iii) two payments totalling almost $70,000 to SECCU on account of Ample's interest liability: see the SECCU Transaction.
The only "security" for the loan was said to be ASN's right to set off management fees due to Securities. While the agreement of July 1992 contained a set-off provision, that of
April 1993 did not. In any event no right of set-off has been exercised. Equally no guarantee was obtained from Windsor.
On 5 July 1994 the ASN board decided to write to Securities requesting payment of the balance owing. No formal demand was in fact made. On 30 August the board decided to request information from Windsor as to Securities' ability to support the loan. Windsor apparently said in informal discussions that business he was working on at the time was expected to come to fruition. According to Cahill, Windsor was given a deadline of 30 June 1995.
On 28 November 1994, the board noted that documentation had been prepared to register a charge over Securities for the loan. No such security has been taken.
(b) Issues
In their submissions the respondents conceded that the loan was not at arms length but, nonetheless, sought to defend it. In oral submission that defence became all but formal.
While it is unnecessary for me to determine in what circumstances it would be acceptable for a trustee to lend without security, the loan here was a prima facie breach of trust. Such is the applicant's submission. It was unsecured; no inquiry was made as to how it could be supported; and it required a parallel borrowing from Woden (which resulted in no overall advantage to ASN) for it to be able to be made: on lending without security see Scott on Trusts para 227.8 (4th Ed); Jacobs on Trusts, para 1805 (5th Ed); on lending for the purpose of accommodating the borrower, see Langston v Ollivant (1807) Coop G 33.
The more basic objection to the loan is, of course, the multiple breaches of fiduciary duty which infect it. It not only is an infra-AS Group loan, it is a loan between trustee and manager both of which, as I have previously indicated, owe fiduciary duties to the investor-beneficiaries of SIP1 and one of whom, Securities, remunerates a director (Cahill) of the other. It was with Cahill that the loan was initiated. The loan is impeachable in all probability on the ground that it was a partial one taken in the interests of Securities and not of the SIP1 beneficiaries: see Sutherland v Sutherland [1893] 3 Ch 169; see also Walker v Wimborne (1976) 137 CLR 1; cf In Re Clifford [1948] SASR 83.
It could constitute as well a per se breach of fiduciary duty on the grounds that it violated the "no conflict" and "no profit" fiduciary rules: see the formulation of Deane J in Chan v Zacharia (1984) 154 CLR 178 at 198-199 - "no conflict", arguably, on the basis that, if it is wrong for a fiduciary to lend to itself without informed consent: cf Paul A Davies (Australia) Pty Ltd v Davies [1983] 1 NSWLR 440, it is equally wrong to lend to a manager who is a party to the trust deed and who for this purpose should be taken to be in the same position as the trustee: cf Ex p James (1803) 8 Ves 337 at 346-347; the "no profit" rule on the ground that the only benefit the manager should expect to derive from the trust funds without the beneficiaries' consent is its fees and allowances. It should be unnecessary to say that there is nothing in the character of superannuation trusts which takes their trustees and managers outside of the ordinary operation of these rules of equity: see In re Drexel Burnham Lambert, UK Pension Plan [1995] 1 WLR 32.
The question of accessorial liability of the directors of ASN and of Windsor was not raised in this matter. I refrain from comment on it.
9. The Woden Loans. The Woden Loans
Woden Constructions Pty Ltd ("Woden"), a Canberra construction company, was introduced to the AS Group by Napper. Napper's firm acted as Woden's solicitors.
(a) Facts
Between April 1993 and February 1995 Woden made four loans to ASN as trustee for SIP1. Documentation of these transactions is conspicuously sparse - so much so that despite the ASC investigation one of these loans only came to light during the hearing.
First Woden Loan
On 27 April 1993 ASN resolved to borrow $800,000 for SIP1 to cover what the minutes describe as "short term commitments" of the trust. The loan was repayable on 14 June 1993. The money was received on 29 April. Its application cannot be identified. As I noted early in these reasons, all of the SIPs and the Ample trusts share a common bank account. On 30 June 1993, $512,739 was repaid by SIP1 to Woden. The source of this payment is likewise unknown.
Second Woden Loan
On 8 November 1993 Woden made a further loan of $900,000 to SIP1. There are no minutes recording this loan or its purpose. The money was used for a number of substantial payments by the SIPs. It is impossible to tell the precise application of the funds because of the common banking arrangements. The loan was not repaid on the repayment date of 8 January 1994.
On 22 February 1994 the board of ASN resolved to grant a floating charge over the assets of SIP1 to secure the loan at an annual interest rate of 20.5 per cent. The charge was never granted. The loan was repaid on 18 April 1994 using the proceeds from the Bilambee mortgagee sale: on which see the Bilambee Loan.
Third Woden Loan
Woden made a loan of $180,000 to SIP1 on 2 June 1994. There are no board minutes approving the loan or its purpose. The application of the loan funds is unknown.
Fourth Woden Loan
On 14 February 1995 a loan of $300,000 was made to SIP1. Coupled with this loan was a charge over the assets of ASN. The charge is dated 22 February 1995. Napper on behalf of Woden lodged it with the ASC on 3 April 1995. This loan was needed, according to Cahill, because of Windsor's failure to repay the Constant loan: on which see the Constant Loan. The associated charge over all of ASN's assets to secure this loan was not considered by Cahill to be excessive.
The justification given by Cahill for using Woden as a lender (it not being a financial institution) was that it was more flexible than a bank and did not charge the usual bank fees. The latter is not surprising given the interest rates it charged.
The prevailing Reserve Bank rates at the times of these loans have been put in evidence. At the time of the first Woden loan that rate was between 9.4 and 9.5 per cent. The Woden rate was 15 per cent. As to the second Woden loan, the prevailing rate was between 8.95 and 9.5 per cent. The Woden rate was 20.5 per cent. The prevailing rate for the third Woden loan was unchanged from the time of the second. The Woden rate was 14 per cent. For the fourth loan the prevailing rate was between 10.6 and 11.5 per cent. The Woden rate was 13 per cent on compliance and 15 per cent on default.
Cahill in cross examination did not accept that the higher rates made the loans unsound or that (taking into account bank charges) they would still have been substantially higher than borrowing from a bank. He denied that the pattern of higher interest rates and lack of security (save for the last loan) indicated that Woden was a lender of last resort.
(b) Issues
By the time of the fourth Woden loan, the Superannuation Industry (Supervision) Act 1993, s97 governed ASN's borrowings. The section prohibits borrowing save in two narrowly confined situations. Despite the valiant attempt of ASN's counsel to argue to the contrary, the exceptions are at such distance from this loan as to make it unnecessary to burden these reasons with an exposition of them. The loan breached the section.
That ASN so needed to avail of Woden as a lender is of itself a matter for comment. The ASC has submitted that there are four available inferences:
(i) ASN had so poorly managed its affairs that it was unable to meet ordinary calls, whether for day-to-day expenses or from beneficiaries;
(ii) Windsor's activities had caused a drain on available funds - both the first and fourth loans were related directly (the loan to Securities) or indirectly (the Constant loan) to transactions involving him;
(iii) Napper, while Chairman of ASN's board, was seeking to confer benefits on his client; and
(iv) ASN was not able to borrow from any orthodox financial institution because it could not demonstrate a capacity to repay.
Counsel for the respondents in oral submission conceded that the first three inferences were possibilities on the facts. He rejected the fourth essentially on the ground that Woden was a handy, available, friendly lender. That submission may have had some attraction were it not for the interest rates to which ASN subjected the SIPs.
As previously noted, the interest rates charged were significantly in excess of bank rates - and grossly so in the case of the second loan. It is unlikely that any of the first three loans could be said to be prudent transactions for this reason alone. The fourth, when considered in the light of the security taken, has the hallmarks of a company in some difficulty - and very real difficulty at that as will be seen when the Ample Mortgage transaction is considered.
I am prepared to draw the first two of the inferences noted above. These relate to how ASN has managed its affairs and to the effect of Windsor's activities on ASN's available funds. I do not draw the third inference suggested i.e. as to Napper conferring a benefit on Woden. This is not because I do not think there are serious fiduciary issues raised by his conduct. Rather it is because the conclusion of favouritism (or partiality) is on the facts before me more in the nature of speculation than an inference.
Having said this, Napper has, in my view, quite improperly placed himself in a position where he owes fiduciary duties to two separate and adverse interests. The objections to this practice are well known: see Moody v Cox & Hatt [1917] 2 Ch 71; particularly where legal advisers are concerned. It may well be that on examination an actual conflict of duties will be found (I would point in this to ASN agreeing to a charge over all of its assets) with consequential potential exposure to liability: see Wan v McDonald (1992) 33 FCR 491; Moody v Cox & Hatt, above at 81 and 91. Again it may well be found on examination that, in committing ASN to a transaction in which his firm apparently had an indirect pecuniary interest, he failed properly to consider whether the terms of the loan were in ASN's best interests: cf Richard Brady Franks Ltd v Price (1937) 58 CLR 112. For present purposes all I need do is to note Napper's actions in this matter.
The fourth inference advanced by the ASC relating to ASN's alleged inability to borrow from orthodox lending institutions is not one I am able to make. It embodies too great a generalisation.
There are two final comments that should be made. First, there have been breaches of the Corporations Law, s258 in relation to three of the four loan transactions. Secondly, I merely wish to emphasise how, through its borrowings, ASN has been used to support (the Securities loan) and to protect (the Constant loan) the Windsor interests.
10. The Second and Third Fawkner Centre Transactions. The Second and Third Fawkner Centre Transactions
Because of their length and detail, only an abbreviated version of the agreed facts will be provided here.
(a) Facts
The second Fawkner Centre transaction appears to have originated in discussions between Windsor, a Cornwall Stodart Financial Services associate (Mr Sinn) and the managing director of Hudson Company (Mr Hamilton).
Having acquired its 7 million units in the Fawkner Centre unit trust, Ample was unable to reduce its indebtedness to Vania. Its own financial position was unsatisfactory. In 1993 the Ample board began to consider the disposal of its units. There is, for example, a resolution of the boards of Ample and ASN of 18 January 1993 which suggests that another AS Group company - "Properties" - was to acquire all of the units in the Fawkner Centre. The Windsors are the directors of Properties. Mr Windsor is its principal shareholder.
On 20 April Sinn wrote to Windsor and Hamilton setting out details of a proposal to which agreement had by then been reached. It involved a (a) $7 million deposit by Hudson Conway with a SIP2 related trust; (b) the purchase by an AS Group company from Hudson Conway or other nominated party of 7.734 million units in the Fawkner Centre; and (c) the sale of the Ample units. The sales by Hudson Conway and Ample were to be back-to-back with both transactions being completed by 31 December 1994. Both sales were for $1 per unit. Though subject to some changes this proposal provided the essence of the agreement finally executed.
On 23 April, Fletcher, Ample's accountant, wrote to Sinn confirming that Ample would commit itself to this agreement. There is no Ample board minute approving this commitment prior to the letter. There is no suggestion, though, of Fletcher acting unilaterally. The only person he could remember discussing the letter with was Windsor.
Properties agreed to buy both Ample's 7 million units and 7.734 million units belonging to Consolidated Press Holdings Ltd (CPH).
On 11 June 1993 the board of Ample met on two occasions to approve the agreements which were to give effect to the overall proposal. The documents included the Ample Unit Sale Agreement, the Properties/CPH Unit Sale Agreement, and an Investment Agreement under which Banvid Pty Ltd (a Hudson Conway company) was to deposit $7 million in a SIP2 related trust. For reasons of no present significance the documents were not finally executed until 18 June by Napper under a power of attorney. All of the documents which were to carry the various transactions into effect (including the three noted above) were placed in escrow on 1 July 1993.
The agreement for the sale of Ample's units produced to the ASC in these proceedings by the respondents gave the sale price of the 7 million units as $9 million. During the cross examination of Cahill the actual documents put into escrow were produced. The sale agreement in these revealed a sale price of $7 million which was consistent with the $1 per unit sale price in the CPH agreement. For ease in reference I will differentiate the two by referring to the $9 million agreement as the "Ample Agreement" and the $7 million agreement as the "Escrow Agreement". The Ample Agreement was in fact prepared by Cahill and Sutherland using a photocopy of an earlier version of the Escrow Agreement.
Cahill was cross examined extensively upon the Ample Agreement before he was presented with the Escrow Agreement. At no time until it was so produced did he indicate that there was this second document. It was likewise with Sutherland.
The two agreements are relatively similar in their terms. They differ on price of the units, the completion period, the localising of the Ample Agreement to the ACT, and the removal from it of an attorney clause which in the Escrow Agreement gave control of the operation of the agreement to representatives of Hudson Conway. Perhaps the most startling similarity was that the payment provisions of each had the effect that the purchase price in its entirety in each case was to be paid, not to Ample, but to Hudson Conway and to Vania. I would interpolate that, given the Vania loan, there is a plausible explanation for this in relation to the Escrow Agreement. There is none in relation to the Ample agreement. It is clear that it was Windsor who proposed the $9 million purchase price for the Ample Agreement.
It was the Ample Agreement that Ample represented as being the operative one between it and Properties. Cahill's explanation of the fact of the two agreements was that the Escrow Agreement was deliberately created at a lower price to conceal from CPH the true price being paid for the Ample units. This explanation I would add was only advanced the morning after he was confronted with the Escrow Agreement.
All of the agreements put into escrow, as also the Ample Agreement, contained a common "conditions precedent" clause. One of the two conditions precedent was that Banvid subscribe for 7 million units in a SIP2 trust. This never happened. The terms of the escrow were (inter alia) that if the Escrow Holder did not receive notice that the condition precedents had been complied with (this is a paraphrase) by 14 July, all transactions contemplated in the escrow documents were to be at an end.
I might interpolate that that, one would have thought, was the end of the matter. Neither Hudson Conway nor CPH ever questioned the fact that the transaction had not proceeded. Ample acted quite differently.
Ample treated the $9 million transaction with Properties as remaining enforceable. It booked a $2 million profit in its 30 June 1993 accounts. In turn, the transaction was treated as effective for the purposes of distribution to SIP3 and, in turn, SIP1. $1,901,265 was so distributed.
An effect of treating the transaction as operative (with its profit and its subsequent distributions) was that both Ample 1 and SIP1 assessed trustee's and manager's fees on the basis of the increased value of the trusts. These fees flowed to Securities.