Beech & Ors v Advanced Management Consultancy Pty Ltd [2002] NSWCA 311 | Case summary

Wednesday 18 September 2002 BEECH & ORS v ADVANCED MANAGEMENT CONSULTANCY PTY LTD Judgment 1 HANDLEY JA: I agree with Giles JA. 2 GILES JA: The appellants each held a parcel of 10,000 shares in Australian Authorised Investments Ltd ("AAV"), a listed company. The respondent claimed that they held the shares on trust for it. Balla DCJ so found, and ordered that the appellants pay the respondent the proceeds of their sale of the shares. 3 The grounds of appeal challenged her Honour's finding of a trust and her rejection of a defence of illegality. Having heard the parties on the finding of a trust, we reserved our decision without proceeding to the defence of illegality. For the reasons which follow, I do not think that her Honour's finding of a trust can stand, and a new trial is necessary. 4 AAV issued a prospectus for the issue of 10,000,000 ordinary shares at 20 cents per share, and proposed also to issue 9,000,000 ordinary shares at 20 cents per share in connection with the acquisition of another company. It wished to have the shares quoted on the Australian Stock Exchange. Under Listing Rule 1.1 - "There must be at least 500 holders each having a parcel of the main class of securities with the value of at least $2,000 … . This requirement is not met if the spread is obtained by artificial means." 5 AAV had obtained 470 of the required 500 shareholders. On 22 July 1997 Mr Danny Wirken of AAV approached Mr Bryan Cook of the respondent for assistance in obtaining the remaining 30 shareholders. 6 According to Mr Cook, he agreed with Mr Wirken that the respondent would "act as agent for a number of shareholders and purchase a parcel of shares in AAV", with the shares "held by 30 different trustees each of them holding 10,000 shares". A letter was prepared recording the arrangement. Mr Cook's evidence and the letter left obscure what was intended as between the respondent and Mr Wirken, and were confusing as to agency and trust. 7 Mr Cook instructed Mr Scott Feneck, the respondent's operations manager, to see if any "staff members" were interested in holding shares in AAV. According to Mr Cook and Mr Feneck, the arrangement with Mr Wirken was explained to Mr Feneck and he was told that the respondent would offer staff members 10 per cent of any profits. 8 The staff members included the first appellant, Mr Martin Beech, then working at the respondent's premises as consultant to an associated company. Other staff members at the premises were Mr Stephen Phipps, Ms Kay Baker, Dr Augustus Hooke, Ms Marcia Bettini and Mr Keith Platt. 9 According to Mr Feneck, immediately after being instructed by Mr Cook he went into the open plan office and, addressing Mr Beech and the other staff members, told them that the respondent wanted persons to hold parcels of 10,000 shares on trust for it, which it would pay for; that there would be "a bonus of 10 per cent of any profits gained"; and that the shares would have to be returned to the respondent upon request. Mr Beech said that he would be interested in holding a parcel of the shares, that he could get five members of his family to hold parcels as well, and that he agreed to hold the shares on trust for the respondent and to make sure that the family members were aware of the trusts on which they held their parcels. 10 Still according to Mr Feneck, either at the time or overnight application forms were completed by the persons he addressed and by members of their families, including by Mr Beech and the other five appellants. The completed application forms were given to Mr Feneck and were sent to AAV. Mr Wirken paid the subscription money direct to AAV. 11 Application forms were indeed completed by Mr Beech and the other five appellants and given by Mr Beech to Mr Feneck. But Mr Beech denied both the occasion and the content of the conversation occasioning the completion of the application forms. 12 According to Mr Beech, Mr Feneck spoke to him in his (Mr Beech's) office, no other persons being present. Mr Feneck asked for help with some names for a spread of shareholders for Mr Wirken's listing of AAV. Mr Beech asked whether it was "a warehousing deal", and when Mr Feneck asked what he meant explained to Mr Feneck that shares could not be held on behalf of others just to get numbers for a float and that the spread of shareholders had to be genuine. Mr Beech said in effect that he would not be involved in warehousing, and asked where the money was coming from. Mr Feneck said that Mr Wirken was putting it up, and Mr Beech said that if Mr Wirken wanted to lend money to him and other people he nominated "on a non-recourse basis" they would take up the shares. 13 Still according to Mr Beech, he subsequently spoke to the other five appellants, asked if they wanted to take up shares and said that the finance was "all provided", and they agreed. He said that there was never any reference to a trust. 14 Mr Cook had no direct conversation with Mr Beech. Mr Feneck had no contact with the other five appellants. I have summarised the competing versions of the conversation including Mr Feneck and Mr Beech. If Mr Feneck's evidence was preferred, the finding of a trust would follow. If Mr Beech's evidence was preferred, there was no trust. The respondent's claim depended on which version of the conversation was accepted. 15 Acceptance of Mr Feneck's evidence had initial difficulties. First, Mr Beech's denial of the occasion of the conversation was supported by his diary, which showed that he could not have been in the respondent's office when, according to Mr Feneck, the conversation took place. Secondly, according to Mr Phipps he was invited to participate in a small meeting, and he was not sure that Mr Beech was present, and according to each of Dr Hooke and Mr Platt he was invited to participate in a one on one conversation with Mr Feneck and not by the general announcement in the respondent's office. Noting these matters, Balla DCJ found "that the relevant conversation took place between Scott Feneck and the first defendant only". That Mr Feneck's evidence of the conversation was unreliable as to the occasion and persons present cast doubt on its reliability as to what was said. 16 Balla DCJ nonetheless preferred the evidence of Mr Feneck. Her Honour said - "In relation to the conversation between Scott Feneck and the first defendant, I prefer the evidence of Scott Feneck to the first defendant and in particular find that the first defendant was told that the plaintiff would buy the shares which would be held in the names of the first defendant and his family, that they would receive a bonus of 10% of any profits gained and that the defendants were required to return the shares to the plaintiff on request. I make this finding based on the following: · The inherent improbability of the first defendant believing that he was being offered without any explanation a gift of $64,640.30. · The first defendant's concession that he immediately suspected that the offer could have been an attempt at warehousing and the inherent unlikelihood that he would have accepted an assurance that it was not warehousing from Scott Feneck who was unlikely to have a proper understanding of the legal consequences of the transaction. · The first defendant's failure to disclose that he had sold some of the shares at the meeting with Scott Feneck which I find took place on 22 December 1997. In relation to the date of the meeting I accept the evidence of Scott Feneck together with the evidence in chief of the first defendant. I accordingly find that the first defendant was aware that the offer was made to him on the basis that he hold the shares on behalf of the plaintiff until the plaintiff called for their return at which time he would be paid a fee. The other defendants did not give evidence. It was the evidence of the first defendant that they were all aware of these proceedings but that they did not want to give evidence. The only explanation given for their failure to attend is that the third defendant is the first defendant's wife and that they are not on harmonious terms and the evidence of the first defendant that he has given the other defendants indemnities. I do not consider that there is a satisfactory explanation for their failure to give evidence and I infer that their evidence would not have assisted the defendant's case. Based on my findings as to the offer made and accepted by the first defendant and the inference drawn from the failure of the defendants other than the first defendant to give evidence, I do not accept the evidence of the first defendant that he told the other members that they were being given the shares as a gift." 17 Each of the three bases given by Balla DCJ for her finding is unsound. 18 The basis concerning a gift came in part from evidence in which Mr Beech was asked whether he ascertained at the time the terms of the non-recourse loans, and said that he did not; the evidence continued - "Q. Why didn't you sir, a man of commerce and experience such as yourself, was it something that didn't occur to you? A. I think the terms non-recourse loan are pretty self evident. Q. What do they mean then sir? A. There's no recourse for the loan against the loan or the security. Q. So you thought this was a gift? A. Indeed." 19 Mr Beech may have had an unusual understanding of a non-recourse loan. Even if he thought there was a gift in that he and his family members did not have to repay the so-called loans, however, the gift was not of $64,640.30. The paid-up value of the six parcels of shares was $12,000. Months later they had risen in value, and they came to be worth $64,640.30 more than six months later. Mr Beech thought that the shares would be listed at a premium, but it was not suggested that he anticipated the considerable increase in value which occurred and there was no evidence of an immediate rise in value. Mr Beech could not know what the value of the shares would be in six months time. Any improbability fell to be assessed by regard to a much smaller figure than the $64,640.30. 20 Further, in assessing any improbability regard was also to be had to Mr Beech's evidence of considerable experience in the stock market, earlier participation in floats in the same manner, and understanding that there was a pressing need for AAV to obtain the requisite shareholders in order that a multi-million dollar listing could go ahead. In effect, Mr Beech said that it was not unusual that AAV would "give" the subscription money in order to achieve its listing. 21 In the circumstances, the view of inherent improbability taken by Balla DCJ was not well founded. 22 The basis concerning a concession came from Mr Beech's evidence of the conversation with Mr Feneck. It misapprehended the conversation. Mr Beech did not concede anything. He asked whether it was "a warehousing deal", and made plain that if it were he would not be involved. He did not receive an assurance from Mr Feneck that it was not warehousing - Mr Feneck did not know what warehousing was. Mr Beech said that he and others he nominated would take up shares if Mr Wirken lent money on a non-recourse basis. On Mr Beech's evidence that, not any assurance, moved Mr Beech to participate. The inherent unlikelihood was not present. 23 The basis concerning failure to disclose came from other evidence. Mr Beech gave instructions for the sale of some of the shares on 16 December 1997. At a meeting at about that time (see later as to when the meeting occurred) Mr Feneck conveyed to Mr Beech a request from Mr Cook that the shares be transferred to the respondent. Mr Beech refused, saying the shares were his and his family's. 24 On the assumption that the shares had been sold prior to the meeting, to say that Mr Beech failed to disclose that fact begs the question. Whether or not he could be expected to have disclosed the sale if he believed the shares were held on trust for the respondent may be doubted: why would he have confessed to wrongdoing? If he did not believe that the shares were held on trust for the respondent, there was no reason for him to disclose their sale - he and the members of his family could deal with them as they wished. In either alternative, even on the assumption stated the failure to disclose the sale of the shares provides no reason to prefer the evidence of Mr Feneck; more particularly, unless the question be begged by regarding the shares as held on trust, Mr Beech's conduct ws consistent with his evidence. 25 But the assumption is false. There were insufficient grounds for the finding that the meeting took place on 22 December 1997. Mr Feneck's first affidavit placed it at a time in January 1998. Mr Beech's affidavit then said it was "on or about" 22 December 1997 but was before the shares were sold. In the face of this Mr Feneck said that it could have been in December, he still inclined to January, but he was not sure. In cross-examination Mr Beech said that "on or about" 22 December 1997 encompassed a date before 16 December 1997, and was firm that the shares had not been sold at the time of the meeting. I do not think it could properly have been found that the meeting took place on 22 December 1997, or that the shares had been sold prior to the meeting. 26 The three bases given for the finding being unsound, the preference for the evidence of Mr Feneck lacks support. The doubt cast by the initial difficulties to which I have referred tells against acceptance otherwise of his version of the conversation. 27 In Rosenberg v Percival (2001) 205 CLR 434 at 447 McHugh J emphasised the trial judge's advantage of seeing and hearing the witnesses, and repeated from Devries v Australian National Railways Commission (1993) 177 CLR 472 at 477 - " … that a finding of fact by a trial judge, based on the credibility of a witness, is not to be set aside because an appellate court thinks that the probabilities of the case are against - even strongly against - that finding of fact. If the trial judge's finding depends to any substantial degree on the credibility of the witness, the finding must stand unless it can be shown that the trial judge has failed to use or has palpably misused his advantage or has acted on evidence which was inconsistent with facts incontrovertibly established by the evidence or which was glaringly improbable." (citations omitted) 28 The finding of Balla DCJ was credibility based in that she concluded that the evidence of Mr Feneck was more credible than the evidence of Mr Beech, but not in that she found Mr Feneck more credible than Mr Beech. Her finding was based on the three matters she set out. In Abalos v Australian Postal Commission (1990) 171 CLR 167 it was said (at 179) that when a trial judge resolves a conflict of evidence between witnesses the "subtle influence of demeanour" can not be overlooked. It is a material consideration even if the trial judge does not mention demeanour as playing a part in the resolution of the conflict of evidence, and Balla DCJ's basis for her finding should not be taken to exclude the impressions which Mr Feneck and Mr Beech made upon her. But even then a trial judge's advantage by reason of having seen and heard the witnesses may not be sufficient to explain or justify the finding if the judge has misapprehended the evidence, or if errors in reasoning mean failure to use or palpable misuse of the trial judge's advantage. 29 The matters set out by Balla DCJ as the basis for her preference of the evidence of Mr Feneck do not provide a proper basis. Her Honour misapprehended the evidence and fell into error in her reasoning, and even accepting that there may have been some influence of demeanour, although unstated, the deficiencies in the path her Honour took to her finding mean that this is one of the relatively rare occasions on which the trial judge's preference for the evidence of one witness over the evidence of another has been shown to be unjustified. 30 Balla DCJ's inference that the evidence of the appellants other than Mr Beech would not have assisted the defence case was, and was accepted in the appeal to have been, only supplementary. I doubt that the inference was available, since those appellants could have spoken only of what Mr Beech told them of the conversation with Mr Feneck and Mr Beech's evidence of what he told them was not challenged. It does not matter, since the inference would not save her Honour's finding. 31 I do not think that this Court can substitute its own finding to resolve the conflict between Mr Feneck and Mr Beech. The reasons why Balla DCJ's finding can not stand do not lead inevitably to preference for the evidence of Mr Beech. Regrettably, a new trial is necessary. 32 The defence of illegality may or may not be considered in the new trial. It can not be anticipated in this appeal, however, since it requires findings of fact which are thrown open by the now unresolved conflict between Mr Feneck and Mr Beech and the need to determine their reliability and credibility. 33 I propose the orders -

Beech & Ors v Advanced Management Consultancy Pty Ltd

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