Briginshaw v Briginshaw

Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170 - appl.

Polhill v Walter (1832) 3 B & Ad 114 (110 ER 43) - appl.

Brown Jenkinson & Co Ltd v Percy Dalton (London) Ltd [1957] 2 QB 621 - appl.

FAI GENERAL INSURANCE CO LIMITED v BRIAN ALBERT McSWEENEY & ORS

TRAVEL COMPENSATION FUND v FAI GENERAL INSURANCE CO LIMITED

TABLE OF CONTENTS REASONS FOR JUDGMENT (PART III) INTRODUCTION .......................................................................................................... 2

General .......................................................................................................................... 2

FAI's claims against PMS ............................................................................................. 4

Proof by FAI of dishonesty and fraud .......................................................................... 6

DRAMATIS PERSONAE .............................................................................................. 8

FRAUD AND THE TAG FACTS .................................................................................. 9

Webber .......................................................................................................................... 9

Elaboration of underlying facts of the TAG transaction ............................................. 14

"Pooling" ....................................................................................................................... 14

Structure of the TAG transaction ..................................................................................... 14

Supply of financial statements by PMS to TAG ................................................................ 16

The inter-company debts and cheques ............................................................................. 16

Pro forma balance sheets ................................................................................................ 20

Awareness of McS subsequent to 29 July 1987, that cheques not presented ................... 21

Issue of audited accounts on 30 November 1987 ............................................................. 22

McS's own account of the TAG facts ........................................................................... 25

Background matters ........................................................................................................ 25

Background ..................................................................................................................... 25

Early negotiation of the TAG transaction: Wu's fax of 24 April and Wise's letter of 12 May ................................................................................................................................. 28

Further negotiations including requests for PMS to provide sets of accounts .................. 31

Monday 22 July ............................................................................................................... 35

Work on the preliminary accounts ................................................................................... 36

Monday 27 July ............................................................................................................... 36

Tuesday 28 July .............................................................................................................. 41

Delivery to TAG of the first batch of preliminary accounts on Wednesday 29 July .......... 44

Events between Wednesday 29 July and execution of Acquisition Deed on Monday 1 October ........................................................................................................................... 45

1 October 1987 - execution of Acquisition Deed .............................................................. 48

19 October 1987 - discovery that the cheques had not been presented ............................. 49

Events between 19 October and 2 November ................................................................... 51

2 November 1987 - settlement of TAG transaction .......................................................... 52

Audit ............................................................................................................................... 53

Events of December 1987 ................................................................................................ 55

1988 ................................................................................................................................ 56

FINDINGS OF FACT OF OLNEY J IN THE TAG JUDGMENT ............................. 59

REASONING IN RELATION TO FRAUD AND THE TAG FACTS ........................... 66

A representation of fact, however made ..................................................................... 66

Falsity of the representation ...................................................................................... 69

That the maker of the representation does not believe that it is true in the sense in which the maker intends it to be understood .................................................................... 69

That the maker of the representation intends a person or class of persons to act in reliance on it ................................................................................................................... 70

That the person, or a person belonging to the class of persons, acts in reliance on the representation ........................................................................................................... 76

That loss or damage is suffered as a result of the reliance ......................................... 76

RESULT IN RELATION TO FRAUD AND THE TAG FACTS ................................... 77

BETWEEN: TAG PACIFIC LIMITED AND TOIKAN HOLDINGS PTY LIMITED

BETWEEN: BRIAN ALBERT McSWEENEY AND BRUCE WILLIAM PHILLIPS

AND: BRIAN ALBERT McSWEENEY, PAUL FREDERICK TURNER, BRUCE WILLIAM PHILLIPS AND TIMOTHY PATRICK CULLEN

BETWEEN: BRIAN ALBERT McSWEENEY, PAUL FREDERICK TURNER, BRUCE WILLIAM PHILLIPS AND TIMOTHY PATRICK CULLEN

REASONS FOR JUDGMENT - PART II FRAUD AND THE TAG FACTS INTRODUCTION General Part I of my Reasons for Judgment, comprising 127 pages and annexures A, B and C, was delivered on 12 March 1997 (Part I is now reported at (1997) 73 FCR 379). No orders were made at that time. The issues debated on the hearing were numerous and complex. The thirty-two days and 2,079 pages of transcript of the hearing before me are an inadequate measure of the dimension of the proceeding, because substantial parts of the transcript of, and evidence in, the TAG proceeding and the TCF proceeding were also in evidence before me. So were substantial extracts from the transcripts of the examinations under s 541 of the Companies Code of McS, Cullen and Beale, in connection with the liquidations of Travel Abroad and Wheels Abroad. The affidavit evidence and exhibits before me were voluminous, occupying some forty lever arch binders. The thirty-two days of hearing were not continuous. Apparently due to an unrealistic original estimate by someone of the time required, the hearing occurred intermittently over a period of some nine months. With only one day of further hearing time in the foreseeable future available after the end of the evidence, I directed that submissions be put fully in writing, with the one day available fixed for oral elaboration. In consequence, submissions have been voluminous and detailed, and, I should add, helpful. The submissions for all three parties (FAI, PMS and TCF) occupy 1,246 pages. They are, throughout, cross-referenced to the evidence. A question arises, with the benefit of hindsight, whether the course taken was the preferable one for the expeditious finalisation of the matter. One lesson learned is that, at least in a complex case like the present one, there must be, notwithstanding the difficulties of the task, a realistic estimate by the parties of the time which will be required for the various elements of the hearing to which the parties will be, with some flexibility, held. Time is allocated for the performance of the Court's work on the basis of such assessments by parties. FAI alleges fraudulent behaviour by McS. The parties have sought to address in detail every conceivable aspect of the evidence for the purpose of supporting, or negating, an inference that McS was fraudulent. It is impracticable, and not my duty, to address every submission and counter-submission made.

FAI's claims against PMS FAI has three claims against PMS: (a) a claim that it is entitled to recover its costs of $439,145.67 of defending the TAG proceeding (FAI does not, however, seek to recover the amount of $2,900,000 which it paid to TAG by way of settlement of the TAG proceeding); (b) a claim that it is entitled to recover its settlement payment to IPG of $245,000 ($250,000 less excess of $5,000 payable by insured) plus its costs of $55,538.68 in defending the IPG claim; (c) a claim that it is not liable to indemnify PMS against the TCF judgment against McS and Phillips for $626,586 nor their costs, if any, of defending the TCF proceeding (McS and Phillips represented themselves on the hearing of the TCF proceeding before Wilcox J). It is common ground that the PMS policy for 1989-1990 applied to the TAG and IPG claims and the Chatswood and Gosford policies for 1991-1992 to the TCF claim. Issues of fraud arise in two contexts: first, that of underlying facts, that is, the facts underlying each of the TAG claim and the TCF claim; and, second, that of the issue of the relevant policies, that is, the PMS policy for 1989-1990 and the Chatswood and Gosford policies for 1991-1992. Fraud in the context of the underlying facts arises because standard exclusion (b) of all policies excluded claims against the insured: "(b) For alleged or actual dishonest, fraudulent (both legal and equitable), criminal or malicious acts or omissions of the Insured or any of the Insured's partners, co-directors or employees (including directors in the case of companies) or predecessors in business; ..." However, in the case of all policies, this standard exclusion was subject to "Extension 4: Dishonesty" which was as follows: "If a limit for this extension is specified in the Schedule Exclusion (b) is deleted and subject to the limitations, terms and conditions this Policy is extended to indemnify the Insured in respect of claims for damages for breach of professional duty arising out of or contributed by the dishonest, fraudulent, criminal or malicious conduct of employees, fellow partners or co-directors. Provided that this Policy shall not provide indemnity to any person committing or condoning such dishonest, fraudulent, criminal or malicious act. ..." By the schedule to the PMS policy it was declared and agreed that the policy was extended to include the dishonesty extension subject to a "dishonesty limit" of $500,000. In the result, if the claim by McS and Phillips to be indemnified by FAI in respect of their liability to TAG established by the TAG judgment arose out of, or was contributed to, by, relevantly, the dishonest or fraudulent conduct of McS, FAI was not liable to indemnify McS at all, and was liable to indemnify Phillips up to an amount of only $500,000. Dishonest or fraudulent conduct by McS as part of the TAG facts may also conceivably be relevant to the question whether he was fraudulent later in connection with the issue of the PMS policy for 1989-1990 and the Chatswood policy for 1991-1992. The schedule to the Chatswood policy for 1991-1992 also stated a limit in respect of the dishonesty extension of $500,000. However, TCF has no judgment against Turner. If McS's conduct as part of the TCF facts was dishonest or fraudulent, he is not entitled to indemnity under the Chatswood policy for 1991-1992. In the case of the Gosford policy for 1991-1992, the dishonesty extension was subject to a limit of $100,000. Phillips was, with Cullen, insured under that policy. The TCF judgment is against Phillips as well as against McS. Accordingly, if McS engaged in fraudulent or dishonest conduct as part of the TCF facts, Phillips is entitled to be indemnified in respect of his resultant liability to TCF up to a limit of $100,000. Dishonesty or fraudulent conduct by McS as part of the TCF facts may also conceivably be relevant to the question whether he was fraudulent later in connection with the issue of the PMS policy for 1989-1990 and the Chatswood policy for 1991-1992. I turn next to the issue of the various policies. Fraud by McS arises as an issue under s 28 (2) of the Insurance Contracts Act 1984 (Cth) ("the IC Act"). If the alleged failure to comply with the duty of disclosure imposed by s 21 of the IC Act when the PMS insurance contract was entered into in June 1989 was fraudulent, or the misrepresentations allegedly made in the proposal at that time were made fraudulently, FAI is entitled to avoid that contract under s 28 (2) of the IC Act. Similar observations apply in relation to the Chatswood and Gosford insurance contracts for 1991-1992. FAI claims that by its letter dated 11 June 1992 to M & M, it avoided for fraudulent non-disclosure and misrepresentation the PMS policy for the three insurance periods within the period 23 May 1988 to 24 October 1990, and the Chatswood policy for the two insurance periods within the period 24 October 1990 to 23 May 1992, that is, all policies in which McS was an insured. By two letters dated 24 August 1993 to Phillips and Cullen respectively, FAI purported to avoid the Gosford policy for the period 23 May 1991 to 23 May 1992 pursuant to s 28 (2) of the IC Act for fraudulent non-disclosure and misrepresentation by Cullen. However, FAI has not purported to avoid the Gosford policy for its initial period, 24 October 1990 to 23 May 1991. As noted in Part I of these Reasons for Judgment, the pleadings also raise issues not involving fraud. Proof by FAI of dishonesty and fraud While the standard of proof by FAI of dishonesty or fraud is the civil standard, commonly referred to as "the balance of probabilities", I must bear in mind the seriousness of the allegation made, and should not find dishonesty or fraud proved "by inexact proofs, indefinite testimony, or indirect inferences": Briginshaw v Briginshaw (1938) 60 CLR 336 at 362 (Dixon J); and see Helton v Allen (1940) 63 CLR 691 at 701; Rejfek v McElroy (1965) 112 CLR 517 at 519-521. The most recent High Court pronouncement relating to the issue in the context of a case of fraud is to be found in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170. In their joint judgment, Mason CJ, Brennan, Deane and Gaudron JJ said (omitting references to authorities): " ... authoritative statements have often been made to the effect that clear or cogent or strict proof is necessary 'where so serious a matter as fraud is to be found'. Statements to that effect should not, however, be understood as directed to the standard of proof. Rather, they should be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct." (at 171) Their Honours went on (at 171) to refer with approval to the following passage from the judgment of Dixon J in Briginshaw v Briginshaw (at 362): "The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved ..." The expression "the gravity of the consequences" should not be misunderstood. In the context of a case such as the present, the reference is not to ultimate consequences, that is, the unavailability of indemnity insurance, but to more immediate consequences of the allegedly fraudulent conduct. I should not lightly find that McS engaged in dishonest or fraudulent conduct as part of the TAG facts or that he or Beale did so as part of the TCF facts, and I should not lightly find fraudulent non-disclosure or misrepresentation in connection with the obtaining of the various policies, because it is not ordinarily to be expected that the individuals concerned would fraudulently deceive TAG, TCF or FAI, respectively The fraud sought to be established in the present case is alleged to have occurred some years ago: in the case of the TAG facts, in 1987; in the case of the TCF facts, in 1988; in respect of the renewal of the PMS policy for 1989-1990, in 1989; and in respect of the renewals of the Chatswood and Gosford policies for 1991-1992, in a period down to May/June 1991. By the time the witnesses gave evidence before me, their recollection of events must have been affected by the passing of the years. I bear this in mind when I consider, in particular, the inability of a witness to recall or explain conversations, thoughts, understandings and courses of conduct. While this consideration must have affected every witness, it is particularly relevant to McS who was the target of FAI's accusations.

DRAMATIS PERSONAE Annexed and marked "A" is a "Dramatis Personae - Part I" which lists the individuals and companies involved in the TAG facts, the subject of the present Part II of these Reasons for Judgment. The content of that Dramatis Personae - Part I forms part of these Reasons. Some explanation is appropriate in relation to the expressions "Webber companies", "Webber family companies" and "Toikan Group" which are used in the evidence. Prior to the TAG transaction, Webber controlled or had an interest in sixteen relevant companies. All sixteen were "Webber companies", but it is convenient to think of them as divided into two broad groups. The expression "Toikan Group" seems to have been used to refer to those Webber companies that operated as insurance or finance brokers, from premises at 30-38 Victoria Street, Paddington. The expression "Webber family companies" seems to have been used to refer to the other Webber companies. But the distinction is not clear, and the categorisation of some companies changed with events. Nonetheless, by reference to these two expressions, the positions of the more significant Webber companies can be identified. Sabada, Dawlarnu, Ligon 125, Shamm Pagny, Salamander Leasing Corporation Pty Ltd and Salamander Finance Corporation Ltd, were Webber family companies before and after the TAG transaction. TIBG was originally part of the Toikan Group but sold its insurance broking portfolio to TIIB with effect from 1 July 1986, although it continued to manage the portfolio for TIIB for some time afterwards. Accordingly, in substance it had become an ordinary Webber family company well prior to the TAG transaction, was not subject to the TAG/Webber joint venture, and later ceased to have the word "Toikan" as part of its name. With effect from 1 July 1986, TIIB owned and operated the major insurance broking business within the Toikan Group. Although that business was sold as part of the TAG transaction to the joint venture vehicle, TKN, the shares in TIIB were not. Accordingly, upon settlement of the TAG transaction on 2 November 1987, TIIB ceased to be part of the Toikan Group and became an ordinary Webber family company. Later, it too ceased to have the word "Toikan" as part of its name. TFS was sui generis. Before and after the TAG transaction, sixty per cent of its issued shares were owned by TKN. To this extent it was a part of the Toikan Group and became part of the joint venture, but it had never functioned as an insurance broker and therefore did not operate a broking account. Although it had owned the issued share capital of Salamander Leasing Corporation Pty Ltd and Salamander Finance Corporation Ltd prior to the TAG transaction, TKN had not traded prior to its being called into service as the vehicle to implement the TAG/Webber joint venture. Locna, Vana, CJ & H and C & G operated as insurance brokers and the Webber interests' shares in them were sold to TKN as part of the TAG transaction (prior to the transaction, C & G was wholly owned, and CJ & H, Locna and Vana were partly owned, by the Webber interests). FRAUD AND THE TAG FACTS Webber Webber was not called as a witness. This is understandable: no one had a good word to say about him. He was the primary cause of the unfortunate sequences of events with which the case is concerned. Notwithstanding his absence from the witness box, I have been able on two bases, to form an impression of the kind of person that Webber was. First, there is evidence given in response to specific questions on the matter. Secondly, there is evidence of Webber's conduct. The evidence shows that Webber was a plausible person who created a favourable impression but who deceived, perhaps himself, and certainly others. He seems to have been primarily interested in "doing deals"; to have made unrealistic demands on those about him on whose professional skills he depended; to have been unable to accept constraints on his conduct; and to have left it to others to overcome the chaos which his contempt for detail created. He was dangerous, the more so for his charm and charisma. Any professional person such as an accountant must take care to resist the demands of such a person against the danger of being compromised. Part of McS's case is that he was taken in by Webber and his assurances. McS said that he met Webber in about 1974 and that Webber became a client of PMS when the firm was established in 1976. Down to the time of the TAG transaction in the second half of 1987, the story of the Toikan Group had been one of rapid expansion as a result of the purchase of existing businesses, although it is noteworthy that the purchase prices were payable by instalments spread over some years. McS said: "5 At all times until about the beginning of 1989, when Mr Webber failed to honour agreements he and some of his companies had made with Tag in about September 1988, I believed that Mr Webber was a man of substantial financial means. I had by mid-1987, a general awareness of what I understood to be Mr Webber's financial position from Phillips McSweeney's preparation of the accounts of Mr Webber and his companies, and comments made by Mr Webber to me from time to time. In 1987 to the best of my recollection, I understood that Mr Webber and his wife had gross assets of around $7,150,000 though I do not recall that I had a precise knowledge of all of Mr Webber's financial position ... On a number of occasions Mr Webber had made comments to me, which caused me to believe Mr Webber's wife's family was very wealthy. Mr Webber had on a number of occasions said words to the effect: 'Roslyn's (Mr Webber's wife) family owns one of the largest car clutch and brake businesses in Australia.' Mr Webber also said to me on one occasion words to the effect: 'My wife's family banks at the same branch at the National Australia Bank [NAB] at Maroubra at which Toikan has its accounts. Roslyn's family has one of the largest accounts with that branch, and I have the family's backing and influence at the bank.' I believed throughout my dealings with Mr Webber that he was a man of his word, and a responsible business man of considerable financial means. I trusted Mr Webber in his dealings with me." Beazley, who was, in effect, employed by Webber, described him as "a very smart man" who "could manipulate people", and added: ' ... he was certainly a smart man and certainly you could, I have used the word before, confidence man. I think he would certainly take you into his confidence and because of his astuteness he could often say lead you down the garden path." (T 518) Wu negotiated the TAG transaction with Webber. After settlement on 2 November 1987, Webber continued to be the managing director of the Toikan Group (now TKN and its subsidiaries) under a contract of employment, while Wu was the chairman of directors of TAG and its subsidiary TAGNT, the latter being the holder of 60 per cent of the shares in TKN. Wu was based in New Zealand but had frequent contact with Webber who was based in Sydney. Wu gave this evidence: "I would like you to assist the court in an understanding of the sort of man that Mr Webber was based upon your experience of him. Please tell the court? - I think he initially was very charming, smooth, fairly persuasive. Obviously my impression changed as events took effect. How did they change? - I think to use the word colloquially he is a bit of a conman. I think he manipulates people to his own ends I suspect." (T 724) It is remarkable how long the relationship between TAG and Webber continued. The fact of the unpresented cheques became known to TAG in the first half of 1988. On 3 September 1988 a deed was entered into between TKN (by then called "Toikan International Insurance Broking Pty Ltd") and Webber, Mrs Webber and the Webber family companies, Sabada, Shamm Pagny, Ligon, TIBG, Salamander Leasing Corporation Pty Ltd and Salamander Finance Corporation Ltd. By the deed, Webber assumed responsibility for, and agreed to pay, the amount of the deficiencies which had existed in the broking and general accounts of the members of the Toikan Group as at 1 July 1987, which the parties agreed had amounted to $2,232,145.54. The Webber family companies guaranteed, and agreed to provide security for, payment of this sum. Of course, payment was not made. Webber's services were not terminated until 1992. Phillips, McS's partner who signed the audit certificates dated 30 November 1987 for TIIB, C & G and CJ & H, said that Webber had "turned out to be a charleton [sic - charlatan]". Webber disregarded McS's advice in mid-1986 that the Act required that separate broking accounts be maintained for the receipt and disbursement of underwriting moneys. Webber seems to have used any money in any account of any company for any purpose that suited him, leaving it to others to find a way to record his misappropriations. When his past misdeeds stood in his way in connection with the TAG transaction, he brushed aside the difficulty. A particular instance is to be found in his meeting held with McS and Beazley on the night of Tuesday 28 July 1987, extending into the early hours of Wednesday 29 July (I will henceforth refer to this lengthy meeting as having occurred on 28 July to distinguish it from the meeting with the representatives of TAG at Rosenblums' office on the afternoon of Wednesday 29 July). McS gives the following account of part of the conversation at the meeting in his affidavit sworn 7 September 1993: "I said to Mr Webber and Mr Beazley words to the effect: 'The draft financials for the group which Eric and I have prepared show that there are intercompany loans between the companies. We have discussed this previously and you are aware that this is contrary to the provisions of the Insurance Brokers Act. I spoke with you both about this matter last year, and the need to use the broking accounts for a limited number of purposes. This appears to have been ignored. You are simply going to have to stop the pooling of the broking funds and correct the inter-company loan balances.' Mr Webber said words to the effect: 'How are we going to fix it up?' I said words to the effect: 'Funds will have to be moved back into the correctcompanies [sic] bank accounts.' Mr Webber said words to the effect: 'We will do whatever is needed to fix it up. What do we have to do?' Mr Beazley said: 'We will have to draw cheques at 30 June.' A discussion took place concerning the work paper of intercompany loan balances that had been prepared by Robert Yip .... I cannot recall in detail what was discussed. However, I do recall that during the discussion, Mr Beazley said: 'I think you will find that we will be about $800,000 short.' I cannot recall what my response was to Mr Beazley's comment. However, I recall that I was surprised by the comment. The comment did not make any sense to me based on what I understood to be the financial position of the group at the time. To the best of my recollection, I said: 'I don't believe there should be a problem because the loan accounts are within the group and should have no effect on the nett [sic - net] cash position of the group as a whole. I think you should check your figures in the morning.' Mr Beazley said: 'What will I do if there is a problem?' Mr Webber said: 'Speak to the Bank if you need to and get it completed in the morning.' I said: 'So you don't hold everything up, you could consider drawing two cheques, one for $800,000 and one for the balance. But we are going to need confirmation of what you have done in the morning.' I recall Mr Wallis then said to Mr Beazley words to the effect: 'If you are going to get the loan accounts correct you will have to do a lot of work. You will have to go through the records from 1 July 1986 to make sure you identify what transactions need to be reversed.' Mr Webber said to Mr Beazley words to the effect: 'You will need to do this first thing in the morning. Please send all of the information necessary to finalise the accounts to Phillips McSweeney.' Mr Webber said to me: 'We will make sure that is done. I want the preliminary accounts prepared on that basis and ready for the morning.' Mr Beazley said: 'I will phone through details of the adjustments in the morning.' The above conversation about the possibility of $800,000 shortfall in funds was raised by Mr Beazley towards the end of the meeting. The meeting finished at about 2.00 a.m." (emphasis supplied) "The morning" had already begun. In effect, Webber was instructing Beazley to "fix up", within a few hours, the results of his own misappropriations, knowingly committed in contravention of the Act over the preceding twelve months. He expected similar service from McS. McS, who was impressed by Webber's talk of his and his wife's family's wealth and connections, and, no doubt, by his apparent success in business, appears to have been disposed to succumb rather than to take the independent stand for which the circumstances called. It is difficult to resist the impression that McS was, in terms of personality and the coincidence of his own financial interest with that of Webber, no match for Webber's determination to see the joint venture with TAG consummated. Webber was one to brush aside obstacles, and it would have taken a stronger person than McS to withstand him.

Elaboration of underlying facts of the TAG transaction I adopt Olney J's account in the extract from the TAG judgment set out in Part I of these Reasons, of the Act's provisions, the chronology of key events, and "THE FACTS", to the extent to which his findings of fact have not been the subject of a notice of intention to contest. However the facts merit elaboration in view of the differences between the issues involved in the TAG proceeding and those involved in the TAG insurance proceeding. "Pooling" The insurance broking companies in the Toikan Group did not observe the requirement of s 26(3) of the Act. It has been said that broking moneys were "pooled". But this does not mean that there was one "composite" or "group" broking account into which they were paid, or even that they were paid into the wrong broking accounts. Rather, they had their own broking accounts, but moneys which should have been paid into and retained in those accounts and applied exclusively to the broking account purposes specified in s 26(3), were applied to other impermissible purposes. Structure of the TAG transaction It is useful at this early stage to note the main features of the TAG transaction as it was ultimately to proceed pursuant to the Acquisition Deed dated 1 October 1987. But the "shape" of the transaction evolved over some months before its ultimate structure was attained. The acquisition by TAG involved a subscription for shares in TKN in which the Webber interests already held shares. Prior to the transaction, all 100 $1.00 issued shares in the capital of TKN were held by a Webber family company, Ligon 125, which was itself a wholly owned subsidiary of another Webber family company, Sabada. On the TAG side, the acquisition was to be effected by Kelso Pty Ltd ("TAGNT"), a wholly owned subsidiary of TAG, which was itself a wholly owned subsidiary of The Anthony Group Limited ("GROUP"). TAGNT was incorporated in the Northern Territory, TAG in Tasmania, and GROUP in New Zealand. As part of the transaction, Ligon was to subscribe for an additional two shares in TKN at a premium of $399,999 per share. This would result in Ligon's owning 102 shares and having injected $800,000 into TKN as share capital and premium. TAGNT was to subscribe for 153 shares in TKN at an aggregate premium of $1,199,847, making a total payable by TAGNT of $1,200,000 as share capital and premium. In the result, TKN would have received share capital and premium aggregating $2,000,000 and would have an issued share capital of 255 shares, held as to 153 (60 per cent) by TAGNT and as to 102 (40 per cent) by Ligon. But TKN was to need more than $2,000,000. Accordingly, it was also part of the transaction, as ultimately expressed in the Acquisition Deed, that TAG and TAGNT would procure a bank to lend $900,000 to TKN, and that Ligon would lend or procure the Webber interests to lend $600,000 to TKN. It will be noted that the total of this loan capital of $1,500,000 was to be procured as to 60 per cent by TAG and as to 40 per cent by the Webber interests. TKN was to have the benefit of ownership of the broking portfolios, or of the Webber owned proportions of the broking portfolios, of TIIB, Vana, Locna, CJ & H and C & G. The most substantial broking portfolio was that of TIIB. Although TKN was to acquire TIIB's portfolio, it was not to acquire shares in TIIB, which was therefore to become an ordinary Webber family company (in fact it was to be wound up and its net funds distributed to Ligon); TKN was to change its name to "Toikan International Insurance Broking Pty Ltd" in order to enjoy the goodwill of TIIB's broking business; and TIIB was to change its name to a name not including the word "Toikan" or any similar word (the name changes did not take place until mid-1988, long after the TAG transaction was settled on 2 November 1987). In the case of the other four insurance broking companies mentioned, Locna, Vana, CJ & H and C & G, TKN was to acquire the Webber interests' shareholdings in those companies. Supply of financial statements by PMS to TAG PMS prepared the financial statements of TIIB, TIBG, TKN, TFS, Locna, Vana, CJ & H and C & G for the year ended 30 June 1987. As well, PMS were the auditors of the accounts of the insurance broking companies, TIIB, Vana, Locna, CJ & H and C & G, for that year. PMS provided "preliminary accounts" and "audited accounts" to TAG. On Wednesday evening, 29 July 1987, under cover of a PMS letter of that date signed by Wallis and addressed to TAG care of TAG's solicitors, Rosenblums, PMS forwarded "preliminary Financial Statements" (including preliminary balance sheet and preliminary profit and loss accounts) which they had prepared for the year ended 30 June 1987 for TIIB, TFS, Locna, Vana, and the proposed joint venture vehicle, TKN, which had not yet traded, those for each company being accompanied by an "Accountant's Report" signed by McS, the terms of which were set out by Olney J in the TAG judgment quoted earlier. On 28 August and 9 September 1987, McS forwarded to Wu "preliminary Financial Statements"(and accompanying Accountant's Report) for the same year for CJ & H and C & G, on both occasions under a covering faxed memo from McS to Wu. A close consideration of the facsimile cover sheets might suggest that the preliminary accounts were not enclosed with the memo of 28 August, but the parties have treated them as having been, and I will proceed on the same basis - nothing appears to turn on the question whether they were sent twice or on 9 September alone. The inter-company debts and cheques As at Tuesday night 28 July 1987, McS knew that the "inter-company debts" had existed on 30 June as a result of the "pooling" of moneys which should have been maintained in the insurance broking companies' separate broking accounts. McS says that it was in reliance on the assurance given by Webber at the meeting that night and a communication on the following morning 29 July from Beazley to PMS (Yip), that he caused the preliminary accounts as at 30 June to be drawn up as if the inter-company debts had in fact been paid by that date, although he knew that they had not been. Properly understood, his evidence is that because he believed Beazley had caused the inter-company debts to be paid following and in accordance with the discussion on the night of Tuesday 28 July, he (McS) treated the inter-company debts in the preliminary accounts as not having existed at all as at the preceding 30 June. Either on the morning of Wednesday 29 July or over a period from then to 19 August 1987, Beazley prepared requisitions for thirty-one cheques and the cheques themselves, necessary to put the accounts in order. According to an uncontested finding by Olney J, the cheques were drawn over the period from 29 July until about 19 August. In cross-examination before me, Beazley agreed that he drew them (and the associated requisition forms) on the morning of Wednesday 29 July. The difference is inconsequential for present purposes. Some of the cheques were expressed to be drawn on a company's broking account and others on a company's general account. In some instances they were drawn in favour of a company's broking account and in others in favour of a company's general account. Two signatures were required but in the case of each cheque only one appeared, in most cases that of Beazley, but in a few cases that of Webber. It follows that although it is convenient to refer to these pieces of paper as "cheques", they were not signed by the customer or by signatories authorised by the customer. The cheques were not presented for payment. If they had been completed by the addition of the second signature and presented, they would not have been met without a special arrangement having been put in place by Webber with the manager of the Maroubra branch of the National Australia Bank ("NAB") where the accounts were kept. The reason is that there were inadequate funds actually in the accounts on which the cheques were drawn. Most of the funding of the cheques was to come ultimately from the Webber company, TIBG, and it had insufficient money available for the purpose. Before me there was much evidence as to the extent of the shortfall. If one resorts only to the money actually standing in the various bank accounts, the shortfall was $2,232,146. If one takes into account other matters it is much less. (see later) The cheques were placed by Beazley in a drawer in his desk. The cheques give a picture of what moneys had to be paid and deposited if the various accounts were to be put in order. Penklis analysed the cheques and the various preliminary balance sheets which were provided to TAG. He demonstrated the position in a table in his affidavit as follows:

"Company Deposits Cheques Result [of cheques into both broking and general accounts] [to be paid out of both broking and general accounts] $ $ $ (In) (Out) TIIB [not involved in the takeover] 2,088,524 728,359 1,360,165 + Vana 116,000 3,444 112,556 + TFS 3,444 31,578 28,133 - Charlton James 337,761 187,000 150,761 + Carroll 110,491 491 110,000 + Locna 893,516 366,719 526,797 + ________ ________ ________ Total of all 3,549,736 1,317,592 2,232,146 " deposits and cheques ======= ======= =======

Excluding TIIB, the share capital of which was not to be acquired, the table shows that the net result for Locna, Vana, CJ & H, and C & G was that they needed to have deposited into their broking and general accounts an aggregate net amount of $900,114, while TFS, which did not have a broking account, was liable to disgorge a net amount of $28,133 from its general account, with the result that the companies involved in the acquisition needed a net injection overall into their broking and general accounts, of $871,981. When TIIB is brought into the picture, however, its need of a net injection of $1,360,165 brings the total required up to $2,232,146. As noted above, this amount was to come from TIBG, a company which was not involved in the acquisition, and which, since selling its broking portfolio in 1986 to TIIB, had been a Webber family company. Penklis also set out the effect on the broking accounts alone of the deposits and withdrawals referred to above. The actual but undisclosed overdrafts $29,700 (TIIB), $5,175 (C & G) and $13,759 (CJ & H), would have been converted into credit balances of $1,057,812 (TIIB), $105,316 (C & G) and $191,852 (CJ & H) respectively. Similarly, Locna's credit balance of $17,944 would have been increased to a credit balance of $506,734, and Vana's credit balance of $163,957 would have been increased to a credit balance of $279,957. After making allowance for an error in the figure shown in a note to the preliminary accounts for TIIB, these were the figures that appeared in the preliminary balance sheets for those companies as at 30 June 1987 supplied by PMS to TAG. In his affidavit, Penklis also set out in a table as follows, the amounts shown in the preliminary accounts which were provided to TAG (column B below), and beside those balances, the net differences resulting from the inter-company transactions (column A below) and the correct balances (column C below): "Company A B C Net In Balance Sheet (A - B) Difference As an Asset Correct Balance (Overstated) $ $ (c) $ TIIB 1,087,513 + *1,057,812 29,700 O/D Locna 488,790 + 506,734 17,944 Vana 116,000 + 279,957 163,957 Carroll 110,491 + 105,316 5,175 O/D Charlton James 205,611 + 191,852 13,759 O/D TFS (a) TKN (b) Total ________ ________ ________ 2,008,405 2,141,671 133,266 ======= ======= =======

(a) Did not have a Broking Account (b) Broking Account not shown in preliminary accounts as at 30 June 1987 (c) Calculated as per Schedule 3A attached [Schedule 3A gave particulars for each of TIIB, Vana, Locna, C J & S, and C & G of the cheques to come into and go out of the company's broking and general accounts.] * Notes to the Balance Sheet are incorrect, I have used the figures in the Balance Sheet as supported by the figures in Exhibit A49, attached to this report as Schedule 3B. [I need not discuss Schedule 3B, and mention elsewhere the need to correct the erroneous figure of $1,199,200 shown as the credit balance in TIIB's broking account]" Penklis observed that of the total deposits of $3,549,736 required to be made into both broking and general accounts referred to in the table set out earlier, $3,051,920 was required to be credited to the broking accounts and $497,816 was required to be credited to the general accounts. I turn now to TIBG. It had sold the insurance portfolio to TIIB with effect as from 1 July 1986, that is to say, from the time when Part III of the Act commenced to operate. The sale price was to be calculated as a multiple of the earnings of the portfolio for the year ended 30 June 1987. The price was owed by TIIB to TIBG. TIBG was to be the source of cheques totalling $2,307,230.49. It had ceased trading as an insurance broker and was not to be a party to the agreement. It was therefore not necessary for its accounts to be provided to TAG and they were not provided. The total of the required net injection by TIBG of $2,232,146 was to come as to $99,894 from its general account and as to $2,132,252 from its "broking account" (although it is convenient to use this expression, it must be remembered that TIBG had ceased to trade as an insurance broker as from 1 July 1986). But as at 30 June 1987, TIBG's broking account was overdrawn to the extent of $405,194.63. If $2,132,252 had been paid out of that account, the overdraft would have risen to more than $2,500,000. In fact, according to Penklis, after allowing for a small amount of certain unrelated outstanding cheques totalling $617.39, TIBG's broking account would have been overdrawn to the extent of $2,538,063.78. McS was aware that TIBG's broking account was already overdrawn. Moreover, McS had signed the accountant's report attached to the financial statements of TIBG for the year ended 30 June 1986 which showed that it had had net assets of only $7,267 as at that date. He was appointed as a director of TIBG on 17 June 1987. Pro forma balance sheets A distinction must be made between the "preliminary balance sheets" which formed part of the "preliminary accounts" to which I have referred, and the "pro forma balance sheets" which were to be, and were, schedules to the Acquisition Deed. The preliminary balance sheets were historical in the sense that they purported to give an account of historical actuality on 30 June 1987. The pro forma balance sheets with which the case was also much concerned stated financial states of affairs which Webber was to undertake in the Acquisition Deed, and did so undertake, would exist immediately following settlement of the TAG transaction. The form of the pro forma balance sheets developed over time. Under cover of a letter dated Monday 28 September 1987, PMS, (Wallis) forwarded to Wu, the final form of the pro forma balance sheets for TKN, CJ & H, C & G, TFS, Locna and Vana, showing how the balance sheets were to appear "as at the close of the effective date", that is, immediately following settlement. There is no suggestion in these figures that inter-company debts were to be paid. So far as TAG understood, underwriting debtors plus cash at bank equalled or exceeded underwriting creditors. McS knew that the pro forma balance sheets were to be "warranted" in the Acquisition Deed. His case is that he understood that in deciding to contract, TAG was relying on that warranty by Webber and associated companies and a warranty by them as to future performance of the business, and not on the preliminary accounts at all. The Acquisition Deed was entered into on 1 October 1987. By clauses 2.5, 4.1(b), 4.2(b), 4.3, 4.4 and 4.5, the Webber interests warranted to TAG and TAGNT that as at the "Effective Date", and upon completion of the transactions contemplated by the deed, the balance sheets of TKN, C & G, CJ & H, Locna, Vana and TFS would be "no less favourable" than the pro forma balance sheets contained in Schedules 2, 7, 8, 9, 10 and 11 respectively to the Deed. The expression "Effective Date" was defined to mean the fifth business day after satisfaction of the last of certain conditions relating to the Foreign Takeovers Act 1975 (Cth) and registration of TKN as an insurance broker. Settlement occurred on 2 November 1987. Awareness of McS subsequent to 29 July 1987, that cheques not presented On or about Monday 19 October 1987 McS became aware that the cheques drawn as at 30 June 1987 had still not been banked. On that date, Wallis wrote a memo to "Audit File" in relation to each of TIIB, CJ & H, C & G, Locna and Vana. In each case, the memo was headed "outstanding cheques and deposits as at 30th June 1987". Each memo commenced: "In the course of our audit for the year ended 30th June, 1987, we have reviewed aspects of the books and records of the above company. There are a number of outstanding cheques and deposits which related to June, 1987 transactions which have not been presented at the National Australia Bank Marouba [sic] Junction. This matter has been raised with Ray Webber and Brian Beazley today and action required to clear these cheques. We also advised that inter Company cheques should in future be cleared as soon as possible. Set out below are the outstanding cheques and deposits referred to above." There followed particulars of "outstanding cheques" and "outstanding deposits" with cheque number, payee or payer as the case may be, whether payment was made to or from (as the case may be) the broking or the general account, and the amount in question. (Wallis's reference to "June, 1987 transactions" was misleading: the transactions had not occurred in or by the end of June and the cheques represented an attempt to "create" transactions retrospectively as at the end of June.) On settlement of the TAG transaction on Monday 2 November 1987, knowing that the cheques had still not been banked, McS took the precaution of writing to Webber: "Further to our meeting on 19 October, 1987 we confirm that, during the course of our audit, it has come to our notice that a number of cheques and deposits which related to June, 1987 transactions have not been presented and on enquiry these cheques were found to be held by Brian Beazley and had not been banked. These cheques are listed below for your attention. This holding over by Brian Beazley is contrary to discussions on 28 July, 1987 at which time assurances were given that arrangements would be made to clear those cheques. Please make suitable arrangements to clear these cheques forthwith and confirm those arrangements by reply to enable us to complete our audit. We further advise that inter Company cheques should in future be cleared as soon as possible." As at settlement on 2 November, McS knew that Webber had dishonoured undertakings given on 29 July and 19 October that the cheques drawn on, or on and after, 29 July, and backdated to 30 June, would be promptly presented and cleared. Issue of audited accounts on 30 November 1987 Four weeks later, on Monday 30 November, McS, knowing that the cheques were even still outstanding, approved of a form of five "representation letters" to be written by Webber to PMS, one in respect of each of C & G, CJ & H, TIIB, Locna and Vana. They commenced: "After our discussions held early today, I now confirm in writing the following details which to the best of my knowledge and belief are correctly and accurately recorded as at 30th June, 1987:-" Each letter went on to state that the "total of unpaid Underwriters as at 30 June, 1987" was a specified amount, that the "total of Debtors owing monies as at 30 June, 1987" was a specified amount, and that "related company cheques totalling [a specified amount] were held at the 30th June, 1987 by [the company in question] are [and were] still unbanked." No letter was written in relation to TFS, no doubt because it did not have a broking account. The letters advised that the cheques would be banked "within the next week" and stated that Webber had had Beazley make arrangements with the bank to ensure that they would be "immediately cleared". In relation to the failure to bank the cheques, the letter said: "At the 30th June, 1987 these were to have been banked, however, with the sale of the insurance portfolio to Tag Pacific, this special banking was not completed by the Accounts Department." In fact, the cheques were not banked "within the next week" or at all. On the same day (30 November), PMS issued audited accounts for the year ended 30 June 1987 for TIIB, Vana, Locna, CJ & H and C & G. In each case, the "auditor's report" was addressed to the members of the company. Those for Locna and Vana were signed by McS as a partner of PMS, and those for TIIB, C & G and CJ & H were signed by Phillips as a partner of PMS. The report read as follows: "We have audited the accompanying accounts being the profit and loss statements for the year ended 30th June, 1987, balance sheet at that date, notes, statement of sources and applications of funds and statement by directors. Our audit was conducted in accordance with Australian auditing standards. In our opinion, the accounts of [TIIB, C & G or CJ & H, as the case might be] are properly drawn up: (i) so as to give a true and fair view of the state of affairs of the company as at 30th June, 1987 and of the Profit of the company for the year ended on that date, and the other matters required by Section 269 of the Companies [name of State] Code to be dealt with in the accounts; (ii) in accordance with the provisions of that Code; and (iii) in accordance with applicable approved accounting standards." On the same day (30 November) PMS furnished financial statements to the Insurance and Superannuation Commission in respect of the same year for TIIB, Locna, Vana, C & G and CJ & H. In all five cases the auditor's certificate dated 30 November was signed by McS, notwithstanding the fact that he was a director of TIIB, C & G and CJ & H. The form of auditor's certificate supplied to the Commission was not expressed to be addressed to anyone and was as follows: "In our opinion, 1. The accompanying financial statements, being the Balance Sheet and Profit and Loss Statement of [name of company] appear to be properly drawn up in accordance with the Insurance (Agents and Brokers) Act 1984. 2. The accounts of [name of company] have been properly kept and record and explain correctly the transactions and financial position of the Company. 3. In relation to the accompanying accounts all information and explanations requested from [name of company] have been supplied. 4. The accompanying financial statements agree with the accounts of [name of company] and appear to truly represent the transactions and financial position of the Company." The financial statements to which the certificates were attached were in a special form required under the Act. They perpetuated the erroneous statements of positive balances in the broking accounts. The documents represented to the Commissioner that as at 30 June 1987, "in bank account or prescribed investments", TIIB had $966,806, C & G had $105,255, CJ & H had $191,852, Vana had $117,236 and Locna had $472,681. (These representations were false to McS's knowledge.) On 21 December 1987 Wu instructed PMS to complete the accounts of all companies in the Toikan Group to 31 December 1987. In mid-January 1988, McS saw from bank reconciliations that the cheques had still not been banked. On Friday 22 January 1988, McS wrote to Wu enclosing what he described as "Composite Balance Sheets" of TKN, TFS, C & G, CJ & H, Locna and Vana as at 1 July 1987. The purpose was stated in the covering letter to be "to establish an opening position as at 1st July, 1987". The letter said that the "balance sheets [were] a representative statement of position of the Companies and [did] not purport to reflect the financial position of the Companies as at the balance date stated thereon". The covering letter also said that the balance sheets had been "constructed for comparative purposes" and represented "the position of the Company as at the start of business on the 1st July, 1987 adjusted fo [sic] transactions which [had] occurred subsequent to the balance date and up to the effective date" as defined in the Acquisition Deed. The "Composite Balance Sheets" continued to treat the cheques as if they had been presented and paid by 1 July, although McS knew that they had not been. These were, so far as the evidence reveals, the last financial statements provided by McS to TAG which misstated the position. McS's own account of the TAG facts Background matters In the face of the serious allegations made against him, I am called upon to make findings as to whether McS was fraudulent (including "recklessly indifferent" as to whether a position being put forward was true or false). McS swore a lengthy affidavit (108 pages comprising 123 paragraphs) which referred to documents contained in three lever arch binders. He did so with a view to explaining his conduct and state of mind from time to time during the course of the TAG facts. It is important to consider closely what he says. I will therefore address the TAG facts and McS's contemporaneous state of mind, in the first instance, by reference to McS's account as given in that affidavit. Except where otherwise indicated, the following is McS's own account as found in that affidavit, and I will not further say so. Background McS first met Webber in about 1974. Webber asked him to do accounting work for him and his business. The work included the preparation of accounts and tax returns. At that time, Webber conducted an insurance broking business through a corporate structure. When PMS was established in 1976, Webber and his companies became clients of the firm. In the second half of the 1970s, Webber expanded his insurance broking business by acquiring other such businesses. In the early 1980s, he caused the broking businesses to be transferred to R J Webber Insurance Management Services Pty Ltd, which later changed its name to TIBG. PMS did not participate in negotiations for the acquisition of the new businesses: the firm's work was limited to "compliance work" after acquisitions had been made. In about the second half of 1986, Webber made further acquisitions through Dawlarnu. Dawlarnu entered into "joint venture arrangements" with Associated Newsagent Cooperative Limited through Locna and with Victorian Authorised Newsagents Association Limited through Vana. Dawlarnu held a 40 per cent interest in each of Locna and Vana. It also acquired a 51 per cent interest in the Victorian broker, CJ & H. In the first half of 1987, TKN acquired all the capital of the Queensland broker, C & G. (I note that it was a feature of the acquisitions or of some of them that the price was payable by instalments payable over some years and that Webber borrowed to fund the first instalment, using as security any property of any company in his empire available to him.) Initially, PMS had a role in the preparation of the annual accounts, particularly for the purpose of preparation of the statutory account. This role continued when Webber appointed Beazley as "financial controller" in October 1985. Beazley was responsible for banking, for the maintenance of financial records including cash books, general ledgers and broking accounts, and for day-to-day financial management advice. Beazley remained employed with the Toikan Group until "at least December 1987". PMS at no time had any involvement in day-to-day financial management and did not prepare regular management accounts. However, from time to time, upon request, PMS made available employees to assist Beazley to carry out such matters as bank reconciliations, where difficulties arose or where the Toikan Group did not have sufficient staff to complete work within applicable time constraints. As at about June 1987, McS held shares in eleven of the sixteen Webber companies, was a director of thirteen of them and secretary of fourteen of them. Some of his directorships began in June 1987 when a previous director resigned. Any share held by him was held on trust for Webber interests; his directorships were non-executive; he did not receive director's fees; he did not attend directors' meetings, except for the purpose of formalising and recording decisions of Webber and of complying with statutory obligations of the companies; he was not involved in day-to-day management; and he became aware of a company's affairs only in so far as they were disclosed in its annual accounts or were discussed in casual conversations with Webber. As at mid-1987, the day-to-day affairs of the companies were managed by Webber, Panozzo, who was the general manager of the Toikan Group, and Beazley, who was its financial controller. McS was secretary of some of the Toikan companies but his role as secretary was "essentially for the purpose of assisting with compliance work". That role involved the preparation of minutes and the preparation and filing of documents with the Corporate Affairs Commission and other authorities. McS did not receive fees as secretary, although PMS charged and was paid fees for work carried out by McS and employees of the firm of a "company secretarial" kind. McS at no time had a beneficial interest in any of the companies and the only income which he received as a result of the association was as a partner of PMS in relation to services performed by the firm. PMS charged on a time basis and rendered fees in relation to the TAG transaction on that basis. As at June 1986, a major portion of the Toikan Group's insurance broking activity was conducted through TIBG. Webber told McS that he had been seeking an investor to enter into a joint venture arrangement in relation to TIBG's broking business, in order to provide capital to fund further expansion. McS told Webber that an investor would find a joint venture more attractive if the business was held by a new company that did not have potential liabilities. McS was aware that the Act required that companies carrying on insurance broking business in the year beginning 1 July 1986 apply for registration, and, in support, submit accounts. He thought that it would be difficult to prepare the necessary accounts of TIBG within the time available because of Beazley's problems of the kind referred to earlier. (McS rejected the proposition that he made the suggestion because he believed that TIBG would be refused registration.) In about June 1986, Webber and McS agreed that TIBG's insurance broking portfolio should be sold to TIIB. They agreed that the price would be a multiple of whatever the broking commissions and other earnings of TIIB proved to be for the 1986-1987 financial year. Accordingly, the price could not be known until after 30 June 1987. Webber said that for a time, TIBG would continue to employ the staff necessary to run the business and own property associated with it; that it would take time for subsisting agreements between TIBG and insurers to be "transferred" to TIIB; and that, in the meanwhile, for six months or so, TIBG would act as manager of the portfolio, for which work TIIB would have to pay a "management fee in due course" to TIBG. McS told Webber and Beazley: "The Act requires that all premiums must be paid into a separate broking account and you can only use monies in that account to pay underwriting creditors of that particular company, or commission where the company is entitled to it, or other limited investments as specified in the Act. Each of the companies must operate discrete broking accounts. From 1 July 1986 there will be a new company which will run the broking business. As there will be a period of transition to allow company staff to be put into a new employer, and for arrangements to be made with the underwriters, TIBG will act as an agent for TIIB until that is put into effect. However, you will need to open up a fresh bank account and operate the broking account from this." Minutes of meeting of directors of TIBG and TIIB bearing date 26 June 1986 purport to record resolutions for the sale and purchase of the insurance portfolio for a price of 1.7 times broking commissions (including management fees) based on the 1986/87 broking earnings as determined from the audited financial statements for the year ended 30 June 1987. The minutes also purport to record an agreement by TIBG to provide management services to TIIB in relation to the portfolio for six months from 1 July 1986. McS states: "The Minutes are dated 26 June 1986, I believe, to reflect the date [1 July 1986] when the agreement to effect the transfer was made." (In cross-examination, McS conceded that the minutes were in fact prepared later and back-dated, but did not agree that they were prepared as late as July 1987. ) Early negotiation of the TAG transaction: Wu's fax of 24 April and Wise's letter of 12 May PMS received a letter dated 26 February 1987 from Edward Hogg Group Pty Limited valuing the insurance broking business at between $3,300,000 and $3,600,000. On 30 April 1987, Webber told McS of a proposed joint venture with TAG. McS noted that: Webber and TAG hoped to settle by 1 June; he (McS) was to receive a heads of agreement document from TAG; Dawlarnu was to acquire a further 24 per cent of the shares in CJ & H, increasing its holding from 51 per cent to 75 per cent (other records show 75.5 per cent which is correct); the total insurance broking business was to be brought into the joint venture at $3,500,000; TAG was to acquire a 60 per cent interest so that it would, in substance, be paying $2,100,000 to Webber; and this amount of $2,100,000 was to be paid as to $1,200,000 on settlement and as to the balance of $900,000 by three equal instalments of $300,000 each. The provision that Webber was to receive $2,100,000 for the 60 per cent interest sold to TAG did not subsequently change, although the proposal as to payment by instalments did. Webber told McS that certain amounts of external debt totalling $863,000 would have to be paid out on settlement. On 11 May, Webber forwarded to McS a copy of an important fax dated 24 April 1987 which he had received from Wu. The fax identified the business to be taken into the joint venture as all the insurance and finance broking business operated by the Toikan Group and Webber in Australia and New Zealand, and, more specifically, the insurance broking business carried on in Sydney by the Toikan Group; that carried on in Queensland owned by C & G; 75 per cent (see the qualification above) of that carried on in Victoria owned by CJ & H; 60 per cent of the business of TFS; and the Toikan Group's joint venture interests in various other enterprises, including Locna and Vana. According to the fax, a new company ("Newco") was to be formed, owned as to 60 per cent by TAG and 40 per cent by the Webber interests; its paid up capital was to be $2,000,000; and it was to acquire the business for $3,500,000, payable as to $2,000,000 on settlement and the balance by three instalments of $ 500,000 each over the next three years. TAG was to ensure that Newco had sufficient funds, whether by lending them to it or providing a guarantee to support a borrowing by it, to operate and develop the business; and Webber was to guarantee up to 40 per cent of borrowings by Newco. According to the fax, settlement was to be effected on 1 June (the target date later became 1 July) on which date all profits actually earned and secured were to be the property of "the vendor", but funds held in trust (apparently a reference to broking accounts) were to be transferred to Newco and all interest earned on them were to become the property of Newco. It is convenient here to recall Olney J's explanation set out earlier that although moneys held in an insurance broking account were held in trust to be paid to insurer or insured as the case might be, a registered insurance broker was entitled to retain for its own benefit interest earned on those moneys, and that this was a considerable advantage because the broker was not obliged to pay premiums to an insurer until ninety days after it had accepted the risk. Importantly, the fax said that Webber was to provide a "performance guarantee" to the effect that Newco would earn a profit before taxation for the years ended 30 June 1988 and 30 June 1989 of not less than certain amounts yet to be agreed upon, and that if it should not perform to those levels, the purchase price was to be reduced proportionately according to a formula. (This provision assumes importance because McS says that on the basis of it, and a repetition of it in a later letter dated 12 May from Wise to Webber, he understood that TAG was relying, not on past performance or historical accounts, but on Webber's warranty of future performance.) Webber was to agree to execute an employment contract with Newco for at least ten years and was to accept a "restraint of trade" during the period of that contract and for five years after termination of it. Webber was to arrange for Newco to take a lease of the premises at 30-38 Victoria Street, Paddington (owned by Sabada) at which the business was carried on. The "Toikan" name was to be transferred to Newco, and any Webber family companies having "Toikan" in their names were to change their names at settlement. Paragraph 11(a) [there was no 11(b)] of Wu's fax of 24 April has assumed importance: "11 Warranties and Representations (a) Webber agrees to give warranties to Newco on the representations he has made about the business that Newco is to acquire.It is acknowledge [sic] that Tag Pacific has relied entirely on the financial information supplied by Webber and the disclosure that the formal annual accounts do not represent the true nature of the business being acquired." McS noticed this term but did not know then or ever find out what "financial information" Webber had given to TAG. He did not know what Webber had told TAG as to why the "formal annual accounts" did not "represent the true nature of the business being acquired". In par 12 of his affidavit, he states: "To the best of my recollection I concluded from this paragraph that Tag had been told that the annual accounts of the Toikan businesses prior to that date did not truly reflect the nature of the businesses that would be transferred to Newco. I believe that I also thought that Tag had agreed in principle to enter into the joint venture upon the basis of its belief as to the future profitability of the business, and the protection as to reduction of the purchase price, and the withholding of part of the purchase price referred to above." In May 1987, McS received a copy of a letter dated 12 May from Wise to Webber. It outlined the basis on which TAG saw the venture proceeding. The letter stated that Wise understood that Webber had agreed with Wu on the points listed in it. The letter departed from that of 24 April in certain respects. For example, it suggested that as an alternative to Newco, TIIB might be used as the joint venture vehicle; that $2,100,000 (rather than $2,000,000) be paid on settlement and a further sum of up to $900,000 be paid on or as soon as possible after settlement, leaving $500,000 to be paid by equal instalments on 1 July 1988, 1989 and 1990; that settlement take place on 30 June; and that so long as there should still be a liability by Webber under the profit performance guarantee, he should also leave as a shareholder's loan an amount to cover "his exposure under the guarantee". Paragraph 10(a) [there was no 10(b)] was substantially the same as par 11(a) in Wu's fax of 24 April, but with an additional final sentence: "10 Warranties and Representations (a) Webber shall agree to give warranties to Newco on the representations he has made about the business that Newco is to acquire. It is acknowledged that Tagpac has relied entirely on the financial information supplied by Webber and the disclosure that the formal annual accounts do not represent the true nature of the business being acquired. Webber shall also provide the normal vendor warranties usual in transactions of this nature." Paragraph 11(b) of Wise's letter was as follows: "The contents of this letter sets out [sic] the intention of the parties to enter into an association with each other, however this letter shall not bind Tag to proceed with implementation of the proposals contained herein." FAI emphasised the latter part of this paragraph. When Webber handed McS a copy of the letter, Webber told him that the deal with TAG was "done", that it remained "for the formalities to be settled", and that to this end he had retained Binetter to act. Webber requested McS to give Binetter whatever accounting information he required so that he could draw up the agreement. Further negotiations including requests for PMS to provide sets of accounts In June, Webber said to McS: "Tag is buying the business on the basis of its performance. No accounts are to be provided to Tag, as the performance terms agreed relate to future profit premiums and commissions earned on the insurance portfolio, and not historical accounts." As will be seen, the instruction not to supply accounts was to change. McS had discussions with Binetter about the structure of the transaction, and, in particular, the capital gains tax consequences for Webber if his interest in the joint venture should not be regarded as a pre-capital gains tax asset. McS was largely guided by Binetter in relation to capital gains tax issues, although he emphasised their importance to Webber. It was capital gains tax considerations that led to the use of TKN as the joint venture company: it had become part of the Toikan Group a few days prior to the introduction of capital gains tax. On 22 June, Webber told McS: "As part of the deal with Tag, I have agreed to give warranties that the companies will be in a certain financial position as at the date of completion. Larbalestier requires accounts for the purpose of the warranties in the agreement. Wu describes them as 'pro forma balance sheets'. Please discuss this with Michael Binnetter [sic]. We are going to have to move quickly in relation to the accounts, particularly so that it doesn't hold up the preparation of the agreement." McS replied: "To allow us to start working on the accounts, get Brian[Beazley] to send the trial balances to the end of May. We can start work on them so we are ready to move quickly when the trial balances for June become available in July." McS understood that the "pro forma balance sheets" were intended to set out what the balance sheet positions of the companies involved in the joint venture were to be immediately following settlement; that they would be exhibited to the agreement; and that it would be Webber's obligation to ensure that the companies' actual balance sheet positions immediately after settlement conformed to them. Binetter told McS that Larbelestier had asked for the profit and loss statements and balance sheets for TIIB and TFS as at 31 May and that the balance sheets were required in order to facilitate preparation of a "heads of agreement" document. McS queried Webber as to whether the agreement was to be referable to the position of the companies as at the end of May, and Webber told him that he thought that TAG would wish to "do this deal as at 30 June" and that McS should proceed on that basis. Webber told McS to check, however, whether the supply of the balance sheets would hold up preparation of the draft heads of agreement. McS made a note, "Check if holding up Agreement", and was concerned that it would be some time before balance sheets and profit and loss statements referable to 30 June could be prepared. McS had a conversation with Wu during July to the following effect: WU: "I require pro forma balance sheets as at completion for each of the companies which will show the position of the underlying assets of the companies for inclusion in the sale agreement for warranty by Webber. These should exclude the assets and liabilities which are changing relating to trading." McS: "I won't be able to do anything until the accounts for 30 June 1987 are completed. They should form the basis for the pro formas. I will need to clarify with you further on the presentation of information you need in the pro formas after I have completed the preliminary accounts." (emphasis supplied) Wu agrees that he probably said the words attributed with the exception of the words emphasised, which he denies saying. Wu says that he also asked Webber and McS several times in July for "financial accounts as at 30 June 1987", without qualifying the request by reference to his purpose. McS understood that Wu was not concerned to have information about such matters as creditors, debtors and cash, because those elements were the subject of change on account of ongoing trading, and he (McS): "understood that Mr Wu wished to know the basic capital structure of the companies, so that he could work out how the companies which were to become part of the joint venture structure could have their financial position arranged so that they fitted the overall concept that the joint venture structure would have a capitalisation of $3,500,000.00." McS's affidavit continued: "To the best of my recollection I understood that the pro forma balance sheets would be in a form appropriate to constitute the basis of warranties by Mr Webber to be made in the proposed agreement that the financial structure of the companies would conform at the time of completion at the agreement to the structure set out in the Exhibits." I interrupt my account of McS's affidavit to note the significance of McS's reference to "creditors, debtors and cash". That significance derives from the nature of insurance broking and, in particular, of a broking account. "Creditors" are "trading" or "underwriting" creditors, that is to say, insurers or insureds to whom money is payable out of the broking account. "Debtors" are "trading" or "underwriting" debtors, that is to say, insurers or insureds whose money, when paid to the broker, will be properly deposited in the broking account. "Cash" is a reference to the cash balance in the broking account. Putting to one side extraordinary circumstances not presently relevant, if an insurance broking business is carried on as required by the Act, debtors plus cash must always equal or exceed creditors, or, to express the point differently, "cash" must always equal or exceed any amount by which "creditors" exceeds "debtors". McS knew this. McS received a copy of a letter dated 15 July 1987 from Dunhills (Binetter) to Rosenblums (Varejes). The letter advised that TKN was to be the joint venture holding company; that it would acquire TIIB's business; and that it would hold various stated percentages of the other specified companies. McS understood that it was necessary to ensure that all relevant external debt would be paid at or before settlement, in order to ensure that the financial positions of the companies to be "sold into the joint venture" would conform to the pro forma balance sheets. He also knew that it was important to ensure that third party securities given by such companies in respect of borrowings by other companies did not exist following completion. On 20 July, McS had a lengthy meeting with Binetter. He made notes of matters which TAG required to be attended to. The notes record a request from TAG for information as to the actual present structure of the Toikan Group. He and Binetter discussed this request as he was aware that Webber's instructions were that such information should not be given to TAG. To the best of his recollection, Binetter and he (McS) agreed that the information should not be supplied; he told Binetter that he would discuss the matter with Webber; and the following day he did so and Webber agreed that the information should not be supplied. Monday 22 July On Monday 22 July, McS wrote to Binetter enclosing a "shareholding schematic including details of cash flow and proposed shareholdings". Also enclosed was a valuation (by Edward Hogg Group Pty Ltd) of the portfolio as at 30 June 1986 of "in the region of between $2,700,000 and $2,800,000". The letter stated McS's understanding that a paid-up capital of $2,000,000 would be insufficient to satisfy the guidelines issued by the Insurance Commissioner under the Act and that a paid-up capital of $2,800,000 would be necessary . The letter suggested that the obvious solution would be to convert proposed loans of $320,000 by the Webber interests and $480,000 by the TAG interests, into share capital. In the event, this proposal was not acceptable to TAG and led to a restructuring. The restructuring involved TIIB's "valuing" its insurance broking portfolio down to $2,000,000 and selling it to TKN for that sum. The remaining $800,000 purchase money to be paid by TKN to TIIB was to be accounted for by a sale by TIIB of "computer software". Also on 22 July, Webber advised McS that Wu would be in Sydney at the end of July and that his (Wu's) solicitors, Rosenblums, needed accounts for contract purposes. He said: "The preparation of the accounts is taking too long. We must have the accounts done as soon as possible. We must have the accounts done by the end of the month before my meeting with Harvey Wu." McS replied: "There is little chance of us having the financials completed by then. We will do our best to prepare some drafts so that you will have some idea of what the general position is before your meeting. Make sure Brian Beazley sends in the trial balances for June. I will ask Eric Wallis to start preparing the drafts as soon as those documents are received. We can meet to discuss the draft before the end of the month if you like." Webber agreed. Work on the preliminary accounts Work by PMS on the draft preliminary accounts for the year ended 30 June 1987 for TIIB, TKN, Locna and Vana commenced shortly after that conversation on Monday 22 July. Work could not commence on the accounts of C & G or CJ & H because, according to information received by PMS, the Toikan Group was experiencing difficulty in completing the records of those companies. PMS was not asked to prepare preliminary accounts for TIBG, because TIBG was not involved in the proposed joint venture. Of course, TIIB's portfolio was involved in it, even though TIIB itself was not. Within PMS, Yip performed the basic work on preparing the preliminary accounts, and Wallis oversaw his work. Beazley provided PMS with "general ledgers" and "trial balances" for the companies, other than C & G and CJ & H, for the period to 31 May 1987. McS annexes to his affidavit copies of trial balances prepared at the time by PMS from Beazley's own trial balances in respect of TIIB and Locna. PMS no longer has copies of those for the other companies, that is, TKN, TFS and Vana. McS described in detail, however, the practice that would have been followed in PMS's office in order to arrive at the figures as at 30 June. To the best of his recollection, preliminary balance sheets and profit and loss accounts were prepared as at 30 June 1987 in this way and the initial drafts were not available until about Monday 27 July 1987. Annexed to McS's affidavit are copies of the original diary notes for the work done by him and PMS employees. On Friday 24 July, Wu faxed Webber advising that he had arranged to meet Varejes of Rosenblums at 3.00 pm the following Wednesday 29 July. He asked Webber to check whether Webber's "people" could attend the meeting. Monday 27 July On Monday 27 July, McS spent about three and a half hours reviewing draft financial documents prepared by Wallis and Yip. He has searched for but cannot find them. The forms of the trial balances produced by PMS at that time cannot be found and the information is not stored in PMS's computer. However, by using the TIIB journal, McS has reconstructed the relevant information which would have been disclosed by PMS's trial balances for TIIB available to him on Monday 27 and Tuesday 28 July. McS would have understood, for example, that as at 30 June, TIIB's general account at NAB was overdrawn by $4,152.10 and its broking account by $141,387.96. (He knew that a broking account could not be overdrawn if the Act was being complied with.) He would have understood that TIIB owed $258,611.16 to CJ & H, $8,000 to Vana, $50,000 to Sabada, $322,000 to Locna and $3,386,788.06 to "trade creditors". He would also have understood that there were moneys owing to TIIB: $1,788,319.94 by TIBG, $24,400 by TFS, $29,000 by Dawlarnu, $212,950 by C & G and $2,884,339.38 by trade debtors. Therefore the amounts owed to TIIB would have appeared to total $4,939,009.32 and the amounts owed by it would have appeared to be $4,170,939.30 - a difference in favour of TIIB of $768,070.02. Yip prepared a working sheet as at 30 June entitled "Toikan Group of Companies Inter-Company Loan Analysis". At the latest, McS saw it at the meeting on Tuesday night 28 July. The working sheet showed substantial inter-company debts, the nature and extent of which were referred to earlier. McS states: "I believe that Mr Yip's worksheet set out the inter-company debts as they were known to Phillips McSweeney and disclosed in TIIB's trial balance as known at 28 July 1987. " McS's affidavit explains: "I recall that when I was shown the trial balances and preliminary balance sheets for the Toikan companies, I formed the belief that they showed that Mr Beazley had been somewhat haphazard in the way he had treated receipts and payments of money by the Toikan companies. I did not believe that any of those companies' moneys had been taken or paid for purposes other than paying the companies' creditors. I formed the belief that Mr Beazley had appeared to use the companies' bank accounts as a pool for the payment of all the companies' creditors and appeared to have used moneys in one company's bank account to pay another company's creditors. To the best of my recollection, I believed that this was either done for convenience, or because of pressure of work caused by the fact that to my understanding, Mr Beazley did not have an adequate accounting staff to help him. At that time, I understood that TIBG had ceased to carry on an insurance broking business as at 1 July 1986, except for paying TIBG's residual creditors as at 30 June 1986 and to act as agent for TIIB in carrying on the business after 30 June 1986. I believed that Mr Beazley must have continued to use TIBG's bank accounts for convenience, perhaps as a continuation of the agency arrangement. Although from my experience of dealing with the Toikan companies' accounts I knew that errors were often made in the posting of entries relating to the companies' transactions in the companies' books of account, it was my belief that the Toikan companies did keep records of all financial transactions, so that it was possible by proper auditing of the companies' accounts to ensure that all transactions were ultimately accounted for properly. I believed that the reason the intercompany debts were shown in the companies' trial balances was that, even though Mr Beazley may have used the companies' bank accounts as a pool, when any such payment was made, it was recorded in the companies' general ledgers so that the accumulation of such payments reflected in the companies' trial balances as intercompany loans. The existence in the companies' trial balances of the intercompany loans was not the only factor which then caused me to believe that the companies' bank accounts had been dealt with by Mr Beazley in a haphazard way. At that time, I understood that an efficiently run insurance broking business would pay all receipts of premiums from customers into its broking account. The broking account should then contain sufficient credit moneys to cover the difference between the company's underwriting creditors and its debtors. It was, as I understood it, the practice in the insurance industry that if any customer who owed a debt to the insurance broker for an unpaid premium did not in fact pay that debt, then the insurance provided by the insurer would be cancelled. Accordingly, if any debtor included in the amount of the company's debtors did not pay its premium by the due date, then the policy would be cancelled and the amount of the premium would cease to be included in the company's debtors, and an identical amount less any amount of commission deductable from the premium would cease to be included in the company's creditors. It was for this reason that in the proper running of its business an insurance broking company only had to have credit in its broking account sufficient to make up the difference between the company's underwriting creditors and debtors. Additionally, as I understood the industry practice was for the insurer to allow the insurance broker a commission out of the amount of the relevant premium received from the customer, I believed that an efficiently run insurance broking business would regularly remove from its broking account the amounts of commission to which the business was entitled and pay those amounts into its general account for use in operating the business. When I perused the trial balances and preliminary balance sheets for the Toikan companies, I noticed that if the intercompany debts were repaid, there would then be substantial amounts in the Toikan companies' broking accounts in excess of the moneys required to be in those accounts for the purpose of ensuring that there were sufficient funds to pay underwriting creditors. These excesses were moneys available to the Toikan companies, which could be applied for those companies' purposes including the repayment of the companies' intercompany debts to other companies in the group." McS continues by referring to the preliminary accounts for the three broking companies, TIIB, Locna and Vana. Using their preliminary balance sheets (referred to later) he has now calculated the difference between each company's underwriting creditors and debtors and deducted the amount of that difference from the amount shown in the notes to the preliminary accounts as being credited to that company's broking account. This suggests to McS that TIIB, Locna and Vana would have had an excess of moneys in their broking accounts above the amounts necessary to cover the difference between the companies' underwriting creditors and debtors: an excess of $696,751 in the case of TIIB, an excess of $137,678 in the case of Locna, and an excess of $141,694 in the case of Vana. However, the preliminary balance sheet of Vana shows an overdraft in the general account of $103,935, so that if the excess in Vana's broking account were first used to pay out that overdraft, the excess would have been reduced to $37,759. Although he cannot recall whether, in July 1987, he calculated the excesses precisely, he was aware of their general magnitude. When he considered the companies' trial balances and draft preliminary balance sheets, he understood that substantial sums had been paid out of the various broking accounts, to or for the benefit of other companies in the Toikan Group, and that the payments were recorded as giving rise to debts owed by one company to another. However, a substantial part of the debts owed on broking accounts did not relate to moneys which the creditor company required in order to be able to pay its underwriting creditors. This substantial part had been in fact available for the creditor company's "private" purposes. The explanation was that Beazley had not taken care to pay, where appropriate, moneys from the companies' broking accounts in excess of the sums required to be kept in those accounts, into the companies' general accounts, before making the loans to other companies in the Toikan Group. On Monday 27 July, McS prepared a "rough work paper" in the course of trying to work out the likelihood that the companies retained by Webber would be able, following settlement, to discharge their debts. At that time he expected the TAG transaction to be entered into and completed soon. It does not seem necessary to set out McS's calculations. He calculated that there would be a "surplus" of $626,882.

In his affidavit, McS explains that (and how) he held the view as at 27 July that on completion the retained Webber family companies would have a cash surplus after the inter-company loans had been repaid. He explains also that (and how) he held the view that the Webber family companies would continue to carry debts of $1,190,000 ( $440,000 owed to "Equity Mortgage" and $750,000 owed to "National Westminister") secured on properties unrelated to the TAG joint venture, and that (and how) Webber and his companies would service that indebtedness. On Monday 27 July, there was a discussion between Webber, McS and Wallis of the matters to be dealt with at the meeting with the TAG representatives two days later on Wednesday 29 July. Webber did not indicate that the preliminary financial documents which PMS were preparing would be discussed at the meeting, and he (McS) did not believe that they would be (McS's evidence to this effect was attacked by FAI). McS understood, however, that the availability of the preliminary accounts was a matter of urgency because preparation of the agreement depended upon them. McS's conversation with Webber included the following: WEBBER: "I must have accounts ready for tomorrow afternoon." [McS says he understood Webber to be referring to the ordinary end of year accounts and to a proposed meeting between McS and Webber on 28 July] McS "That is impossible. The accounts need a lot of work done on them. Beazley seems to have ignored my advice in relation to the broking accounts." WEBBER: "Well, we'll have to fix that up. It has been taking far too long to get the accounts ready, and I cannot allow any further delay in the preparation of the contracts." McS: "Well, we will do our best to get the job done and we will meet with you tomorrow as soon as we can get draft preliminaries together. The figures will only be preliminary and extracted from your records. We cannot give you any assurances that the figures are correct. I will arrange to be available for a meeting tomorrow to review the draft preliminaries. I will arrange for Eric(Wallis) and Robert(Yip) to be available for the meeting. Make sure that Brian Beazley is there so that any matters that arise can be dealt with immediately." Tuesday 28 July On Tuesday 28 July, McS faxed Wu confirming his understanding of the points that were to be discussed on Wednesday 29 July at 3.00 pm at Rosenblums' office. The points were: "1. Review of the organisational structure proposed and resolution of adoption. 2. Discussion and resolution of capitalisation under the revised structure to meet the requirements for Insurance licensing - see note. [McS provided an attached memo addressing the supposed need for the capital of TKN to be some $2.6 million] 3. Overview implementation procedures and timing. 4. Review of documentation from Rosenblum to initialise [sic] acquisition by TAG." McS's fax did not refer to the preliminary accounts because he did not believe they would be discussed and because he understood Webber would be obliged to ensure that the companies' positions immediately following settlement accorded with the pro forma accounts to be identified in the agreement. By reference to a PMS time sheet for Tuesday 28 July, McS says he spent from 4.00 to 6.00 pm with Wallis reviewing draft financial information relating to the Toikan Group. A reference in the note to "complete drafts" suggests to him that Wallis and he were completing the preliminary balance sheet and preliminary profit and loss accounts as at 30 June for the purpose of a review of those documents at a proposed meeting with Webber that evening. To the best of his recollection, it was shortly before Tuesday 28 July that McS first became aware that companies in the Toikan Group had, since 30 June 1986, been using money in their broking accounts for the purposes of other companies in the Group. He believed that Beazley had been pooling the broking accounts for administrative convenience. Beazley told him: "I have continued to use old Toikan's (meaning TIBG's) accounts, as that has been convenient. I have used those accounts from time to time to pay underwriters on behalf of the individual companies because of the underwriting contracts we have with them in TIBG's name." He did not believe that the broking funds had been used for purposes other than payment of underwriters or commissions. He "believed that Mr Beazley had simply not been careful enough to comply with the strict requirements imposed by the Insurance (Brokers and Agents) Act to keep broking account moneys separate." Paragraph 51 of McS's affidavit commences: "51 At that time I was also aware that from 1 July 1986 TIBG had managed TIIB's insurance broking business. In or about June 1986 I advised Mr Webber and Mr Beazley that a new and separate bank account should be opened for TIIB. In July 1987 I did not know the extent to which this had been done, and I was not sure the extent to which the debt which was apparently owed by TIBG to TIIB related to TIBG's underwriters being paid using TIIB's broking account funds or to what extent, if any, it related to TIIB's underwriters being paid with TIIB's funds through TIBG's accounts." PMS were still receiving information relevant to preparation of the preliminary balance sheets from Beazley until late in the morning on Tuesday 28 July. Work was being done on the figures until McS and Wallis left the office that evening for the first of two important meetings: one that night, Tuesday 28 July, at the Toikan offices at Paddington with Webber and Beazley, and the other, the following afternoon, Wednesday 29 July, at Rosenblums' office, with representatives of TAG and the solicitors for both parties. McS questioned whether it was necessary that the meeting with Webber take place on 28 July, but Webber insisted it be held. Accordingly, on the evening of Tuesday 28 July McS and Wallis travelled from PMS's offices at Chatswood to the Toikan office at Paddington where they met with Webber, Panozzo and Beazley for what was to be a lengthy meeting. They had dinner for about an hour and then the meeting proper commenced. It finished at about 2.00 am. McS tabled the preliminary accounts for TIIB, Locna, Vana, TFS and TKN. At that time, Panozzo left the meeting. For about an hour, McS explained the items in the accounts, but in the case of TKN, which had not traded, virtually nothing was said. At about 1.00 am (on Wednesday 29 July) there was discussion of the pooling of broking account funds. I have set out earlier McS's account of the relevant part of the conversation. It will be recalled that McS had calculated that if all the company loans of which he was aware were repaid, the Webber interests would be left carrying a debt of $1,190,000 and there would be a cash surplus of $626,882. McS's understanding following the meeting was that if it proved to be necessary to approach the bank, the purpose and effect of doing so would be merely to arrange bridging finance, in order that the intercompany debts could be repaid immediately rather than following settlement. McS believed Beazley would carry out Webber's instructions, and that if, for any reason, they could not be paid out, Webber or Beazley would inform PMS. McS did not know how accurate Beazley's estimate of a shortfall of $800,000 was, and states: "53 During the course of the meeting on 28 July 1987, I recall that I was quite satisfied from my general understanding of the financial position of Mr Webber and his companies that there would be no difficulty in funding the repayment of the intercompany debts and, if necessary, borrowing the shortfall of the order estimated by Mr Beazley. To the best of my recollection, my belief that there would be no difficulty in funding the repayment was reinforced by my understanding that Tag had in principle committed itself to completion of the proposed joint venture, and this would yield to Mr Webber funds which were more than sufficient to repay not only the shortfall, but the whole of the net amount due by the various companies in relation to the intercompany debts. I therefore believed that, if there was a need to make arrangements with the bank, Mr Beazley would only need to make short term arrangements and that he would have no difficulty in putting the transactions into effect. I did not in late July 1987 make any calculation myself of how I would have gone about funding the repayment of the intercompany loans, and I had not been instructed by Mr Webber to advise Mr Beazley as to how that task should be carried out." McS did not calculate whether it was possible for the intercompany loans to be repaid. Nor did he "carry out any calculations to determine whether Mr Webber and his companies had sufficient equity in their assets to secure a borrowing sufficient to fund the repayment of the intercompany debts." However, for the purpose of the present proceeding, he carried out such exercises. Before me much detailed evidence was led on both sides (FAI and PMS) and McS was cross-examined upon on this subject and detailed submissions were made relating to it. Delivery to TAG of the first batch of preliminary accounts on Wednesday 29 July On Wednesday 29 July, PMS, through Yip, received "the information" (McS's expression) from Beazley. On the same day, the information was entered into TIIB's journal. McS reviewed the final form of the preliminary balance sheets and profit and loss accounts which now reflected those entries. The information to which McS refers was the making of the inter-account transfers represented by the cheques. Although he did not do so at the time, in preparation for the present hearing McS carried out an exercise reconciling from the preliminary figures on Tuesday 28 July 1987 to the preliminary figures on Wednesday 29 July 1987, on the basis of the information supplied by Beazley. On the latter date, McS reviewed the final form of the preliminary balance sheets and profit and loss accounts. He believed that before Beazley telephoned through to PMS's staff the new journal entries on 29 July, he (Beazley) would have made corresponding entries in the relevant records at the Toikan office. McS adds: "I also believed that at the time he made Toikan's entries, he had drawn cheques to effect the transactions, and that he would cause such cheques to be presented and paid shortly thereafter." At the meeting on Tuesday 28 July, it had been arranged that Webber would collect the preliminary accounts from PMS on Wednesday 29 July. McS did not know what Webber was proposing to do with them, although he knew that Rosenblums were requesting information for inclusion in the agreement. Apparently, Webber could not call to collect the documents so he requested PMS to deliver them to Rosenblums. The second meeting to which I referred earlier took place at Rosenblums' office at about 3.30 pm on Wednesday 29 July. Present were Wise, Henderson and Wu of TAG, Varejes of Rosenblums, Binetter of Dunhills, and McS. There was discussion of the items of business mentioned in McS's memo dated 28 July to Wu. During the meeting Wallis arrived with the preliminary accounts for TIIB, TFS, Locna, Vana and TKN. Copies were given to Wu. There was no discussion about them. McS understood that the preliminary accounts contained information concerning the cash position of the various companies as at 30 June as now reflected in company records, and that they would be used to enable preparation of the "pro forma accounts" to be exhibited to the agreement. McS states: "Because of the belief that I recall having as to the purpose for which the preliminary accounts were to be used, I do not recall thinking at all about what Tag's response to Phillips McSweeney's qualification and disclaimer might be. I recall, however, knowing at the time Mr Wu was a chartered accountant, and to the best of my recollection I took it that Mr Wu would not regard accounts described as preliminary containing the qualification and disclaimer appended to the accounts as being reliable in any way. So far as I now recall, I was then aware that Mr Webber would retain ownership of TIBG and TIIB, and only TIIB's subsidiaries would be transferred to TKN to become part of the joint venture structure. That meant that any cash owed by TIBG or TIIB to the subsidiaries would have to be repaid, but to the best of my recollection I believed that the net position as between TIBG and TIIB could be adjusted by making appropriate arrangements with Toikan's bank in relation to the drawing of cheques by TIIB to pay TIBG for the portfolio, and TIBG to pay TIIB the debt it owed. To the best of my recollection I believed that there was at least $800,000 cash available, and that in view of Mr Webber's substantial financial substance, arrangements could be made if necessary to borrow from the bank against the value of the insurance broking portfolio, or the expectation of completion of the Tag joint venture." (par 59) I will return later to the content of the preliminary accounts, and, in particular, the content of the preliminary balance sheets. Events between Wednesday 29 July and execution of Acquisition Deed on Monday 1 October On 12 August, Rosenblums sent to McS, at Binetter's request, a draft deed together with some of the schedules referred to in it. McS has been unable to locate the documents. However, he has located a fax of the same date from Rosenblums to Wu enclosing pro forma balance sheets which McS believes were forwarded to him also on 12 August. The pro forma balance sheets were in respect of TKN, C & G, CJ & H, TFS, Vana and Locna. Those for TFS, Locna and Vana included items for trade debtors, trade creditors and cash at bank. Those of TKN, C & G and CJ & H did not, but they bore a note. Those of C & G and CJ & H bore the note: "In addition the balance sheet is to include the insurance broking assets and liabilities which will offset each other." The note on the pro forma balance sheet of TKN was: "The balance sheet is to include in addition to the above the insurance broking assets calculation of the Toikan Portfolio". Of these various pro formas, McS states: "62 I understood that these documents were drafts of pro forma balance sheets to be exhibited to the proposed agreement. I believed that a number of the pro formas had been drafted from the preliminary accounts which had been delivered on 29 July 1987. I note that the pro-formas for TFS, Vana and Locna have used the heading 'Preliminary Balance Sheet as at the Effective Date' rather than 'Pro-forma Balance Sheet'. They set out the balance sheet of the companies as they were to appear at the effective date, which I understood to be the date of completion. Some of the draft pro formas contain the note 'in addition the balance sheet is to include the insurance broking assets and liabilities which will off-set each other'. I believe that I understood that all of the pro formas which would be Exhibited to the proposed agreement were intended to contain such a note. The pro forma balance sheets did not contain any reference in specific terms to the insurance broking assets and liabilities of the companies. I understood that the reason for this was that those assets and liabilities were changing on a day-to-day basis with the continued trading of the companies. I understood that the effect of the agreement was that at the effective date such insurance broking assets and liabilities as then existed would be brought into the balance sheet on the basis that assets equalled liabilities. For that reason the insurance broking assets and liabilities would not effect [sic] the net position of the balance sheets." (emphasis supplied) On 25 August, C & G and CJ & H, by letters signed by Webber, requested PMS to deliver copies of their preliminary accounts for the year ended 30 June 1987 to Wu or to TAG's solicitors, as Wu might request. As noted earlier, on 28 August, McS faxed Wu enclosing those preliminary accounts. On 9 September, McS wrote to Wu enclosing "settlement details and schedules to support calculations" and, again, copies of the preliminary balance sheets and profit and loss accounts for C & G and CJ & H. McS sent to Wu settlement details relating to the purchase by Dawlarnu of the further 24.5 per cent interest in CJ & H. On 15 September, McS sent to Wu preliminary balance sheets as at 30 June for TKN, Locna, Vana, CJ & H, C & G and TFS, and amended drafts of the pro forma balance sheets for all of these companies except TFS. He asked Wu whether he was "in agreement" with the documents enclosed. The pro forma balance sheets contained this note: "In addition to the abovementioned assets and liabilities, the balance sheet is to include the insurance broking and other operating assets and liabilities of the company, the total of which will offset each other, and have no monetary effect on the assets represented in the Pro-forma Balance Sheet." McS understood also that there would be an agency agreement between TKN and TIIB so that the income and expenses received or incurred by TIIB in relation to the insurance broking business from 1 July 1987 would be "transferred" to TKN. During late August and September, McS had further discussions and meetings with Webber and Binetter in relation to the transaction. In a file note, he recorded: "Management agreement between TKN Holdings Pty Limited and TIIB Pty Limited to transfer income and expenses 1/7/87 to 30/9/87 to TKN." The reference to "30/9/87" is explained by McS's understanding at the time that the parties hoped to settle by 30 September, and that in the meanwhile, TIIB, as registered insurance broker, would, in effect, manage TKN's business for it until 30 September, and that there would need to be an agreement for a transfer to TKN by book entry of the income and expenses during that period. On 18 September, McS spoke to Binetter and observed that note 1 to the pro forma balance sheets did not take into account the net result of trading from 1 July 1987, and that the words: "with the exception of the net profit or net loss from normal trading operations" should be added. On 28 September, PMS (Wallis) forwarded to Wu pro forma balance sheets for TKN, CJ & H, C & G, TFS, Locna and Vana, together with a statement of proposed movements of funds on the "effective date". The note to the pro forma balance sheets was now in this form: "In addition to the abovementioned assets and liabilities, the balance sheet is to include the insurance broking and other operating assets and liabilities of the company. Other than the effect upon such balance sheet by reason of the net profit or loss from trading operations, the inclusion of such assets and liabilities will not materially effect [sic] the net asset position of the Pro-Forma Balance Sheet." On 29 September, McS forwarded to Wu final pro forma balance sheets and a schedule of proposed fund movements on the Effective Date. 1 October 1987 - execution of Acquisition Deed On 1 October, the Acquisition Deed was entered into. It can best be viewed as a contract between TAG interests and Webber interests. Accordingly, on the one side the document was executed by TAG, TAGNT and GROUP, while on the other side it was executed by Ligon, Salamander Finance Corporation Limited, Sabada and Webber. McS read a copy prior to execution. Its principal terms were outlined by Olney J in the TAG judgment. Clause 2.5 was a covenant by Webber and Ligon: " ... that following completion of the transactions contemplated by this Deed as occurring on the Effective Date, the balance sheet of TKN will disclose a financial position which may reasonably be regarded as no less favourable in any material respect than the pro-forma balance sheet contained in Schedule 2, subject to the effect upon the financial position of TKN by reason of movements in the quantum of the items referred to in the note to such pro-forma balance sheet." Schedule 2 contained a "pro forma balance sheet as at the close of the effective date" of TKN. As observed earlier, cll 4.1 (b), 4.2 (b), 4.3, 4.4 and 4.5 contained, respectively, similar provisions relating to C & G, CJ & H, Locna, Vana and TFS, and the relevant pro forma balance sheets for those companies were found in Schedules 7, 8, 9, 10 and 11 respectively. According to cl 6, Webber, Sabada and Ligon acknowledged that TAG and TAGNT were relying on warranties and representations made and given by Webber, Sabada and Ligon in order to satisfy themselves that TAGNT would receive or be entitled to receive a minimum return on its investment in TKN, and that TKN's net profit before tax would be not less than certain amounts stated for the years ended 30 June 1988, 1989 and 1990. Clauses 6.2 to 6.6 contained provisions for determining amounts that Webber and his companies would have to pay if the stipulated amounts of net profit before tax were not attained. McS states: "From these provisions I understood that Tag had decided to enter into the agreement with Mr Webber and his companies on the basis of Tag's being satisfied that Mr Webber would ensure that the companies would have the financial position described in the respective pro-forma balance sheets at or shortly after the effective date, and that Mr Webber could make good his promise to ensure a minimum return on Tag's investment. I did not understand that Tag had decided to enter into the acquisition Deed upon the basis of any belief as to the particular financial circumstances of any of the Toikan companies at 30 June 1987. At the time the acquisition Deed was executed I believed that Mr Webber was in a position to satisfy the requirements of the Deed which obliged Mr Webber to ensure that the companies had a particular financial position on the effective date. I believed that the proceeds which Mr Webber and his companies would receive from Tag on completion of the acquisition Deed were much more than was necessary to finance any transaction necessary to enable Mr Webber to comply with his obligations to ensure that the company's financial positions were not materially different than as was set out in the pro-forma balance sheets." (emphasis supplied) On 16 October, the Insurance Commissioner certified that TKN was registered to carry on business as an insurance broker in respect of general insurance business for one year from that date. Accordingly, it was no longer necessary for TIIB to carry on business as agent for TKN. 19 October 1987 - discovery that the cheques had not been presented On or about 19 October, Wallis said to McS: "Robert Yip has just told me he has found a number of cheques in Brian Beazley's desk which were drawn to pay inter-company loans." McS immediately telephoned Beazley and this exchange took place: McS: "Robert (Yip) during the course of the audit has come across cheques which were drawn to repay the inter-company loans as at 30 June. Is there any reason why they have not been banked?" BEAZLEY: "No, we just haven't got around to making the arrangements to bank them. I'll get on to it." Shortly afterwards, McS had this conversation with Webber at the Toikan office: McS: "You must make arrangements to clear those cheques which were drawn for the repayment of the inter-company loans. Brian (Beazley) has been sitting on them and Robert (Yip) has found them in his (Beazley's) desk drawer." WEBBER: "I'll take it up with Brian (Beazley). I told him previously to make arrangements with the bank. I thought it was done. If the banking of them needs special arrangements to be made, as we are about to settle with Tag, I'll cover them out of the proceeds of the Tag settlement." Later the same day McS had this conversation with Beazley: McS: "Why haven't you banked the inter-company loan cheques?" BEAZLEY: "It was just too hard for me to work out the effect on the cash flow." McS: "Well, it has to be done, you should have attended to this before. You had best get on with it. If you have a problem, let us know and we will work it through with you." BEAZLEY: "I will work it out and arrange for them to be banked. I will speak to Ray (Webber)." In cross-examination, McS agreed that he would not have said the words which he secondly attributes to himself in the above passage, and may have remained silent. On the same day, 19 October, Wallis prepared his memoranda to audit file described earlier. Among the "review notes" prepared by Yip in connection with the audit of TIIB, there is one dated 1 October 1987 reading: "Outstanding cheques and deposits as at 30.6.87 When checking bank reconciliations as at 30.6.87, cheques for inter-company transfers and corrections of broking & general accounts errors still not presented." but McS was not informed by Yip or anyone else about the outstanding cheques until about 19 October. The note dated 1 October is also annotated: "Shareholders notified of position in Oct '87." McS states that this writing appears to be that of Phillips and that the reference is to the conversation which he (McS) had with Webber. There are similar "review notes" by Yip in relation to the audits of CJ & H, C & G, Vana and Locna. The diary notes relating to CJ & H, C & G, Vana and Locna bear handwriting which reads: "Should we consider showing these outstanding cheques for inter-company transactions on loan account balances." In cross-examination, Wallis said that the notes to this effect appear to be in his handwriting and that he thought he discussed the matter with McS who said he was content to rely on Webber's undertaking and that the cheques should be shown as if the amounts were "cash at bank". Wallis also said in cross-examination that he also believed that Webber's undertaking was reliable and that he did not question McS's judgment as to how the amounts of the outstanding cheques should be treated. Events between 19 October and 2 November On 20 October McS asked Wallis to prepare "updated figures in relation to the external loans and the estimated cash inflow and outflow position so far as the Webber group were [sic] concerned that would result from the settlement". In late October, McS was involved in the checking and preparation of various documents directed to settlement. For example, on 26 October he prepared a list of twenty-six money movements which were to take place. On 30 October he prepared a work paper reconciling the payments which would have to be made and received by the various companies involved.

2 November 1987 - settlement of TAG transaction On 2 November, McS wrote to Webber the letter set out earlier relating to the outstanding cheques. He attended on settlement. A list of cheques which McS had prepared as a possible way of settlement came to be used. He states: "I believed at the time that the net effect so far as the Webber group was concerned was approximately $780,000.00 after paying out the loan to Equitcorp Finance Limited of $404,672." On 11 November, McS faxed Webber, requesting him to ensure that funds were not transferred between companies for investment purposes because to do so might have adverse effects from the viewpoint of licensing. McS states: "I believed at the time of sending this memorandum that the cheques which represented repayment of the inter-company loans had been presented and paid." (This signifies a belief that the inter-company debts had been paid following settlement on 2 November.) A statement of account of NAB in relation to the TIIB general account at Maroubra Junction shows that on 3 November, $2,158,638.92 was credited to that account and various payments were made out of it. McS says that he was aware of all but two of these payments. Those two were payments of $250,000 to CJ & H and $480,000 to the broking account of TIIB. He states that those two payments were not contemplated in the "settlement check list" which he had prepared, and were apparently made by Webber without reference to anyone. McS understood at the time of settlement that nothing of substance had changed between 27 July when he had, as noted earlier, conducted an exercise to ensure that there would be sufficient moneys available. He states: "While the amounts of some of the payments which had been made had changed to a degree, I did not understand those changes to have any substantial effect on the proposal that I understood on 27 July 1987 Mr Webber intended to put into effect. I believed that all of the loans which Mr Webber then intended to repay had been repaid at or before settlement, except for the partial repayment of $320,000.00 to Equity Mortgage Fund. As to that, I believed that Mr Webber held the $300,000.00 deposit to which I have referred. I was not aware of any of the Toikan companies suffering trading losses, nor was I aware that any payments had been made by any of the companies other than in the ordinary course of the operation of the businesses. I thought that the considerations reflected in my workpaper of 27 July 1987, and the associated workpaper which I have now lost, which caused me to believe that the Toikan companies would have funds to repay all of the inter-company debts, were still valid. To my mind it did not matter that the inter-company debts had not actually been repaid at settlement, because so far as I understood, nothing had changed which would prevent those debts being repaid from available funds." (emphasis supplied) Audit The audits of TIIB, TKN, Locna, Vana, C & G and CJ & H were completed about 30 November. In late November, Yip informed McS that during the audit, he had discovered that the cheques had still not been presented. McS telephoned Webber and they spoke as follows: McS: "Robert (Yip) has informed me that the cheques have still not been presented. What is going on?" WEBBER: "There is no problem. We have been absolutely flat out with organising ourselves with Tag I will speak to Brian and ask him to arrange for the cheques to be cleared immediately." McS: "Well, we have to sign off on the audit by 30 November 1987. I need an undertaking in writing from you. Unless we have a representation letter from you that the cheques will be cleared, we will have to reflect the cheques as loans." WEBBER: "I am sorry about this Brian. I will give you a written undertaking that the cheques will be presented." The form of representation letter, to which I referred earlier, prepared in PMS's office for Webber to write to PMS and approved of by McS was in full form as follows: "After our discussions held earlier today, I now confirm in writing the following details which to the best of my knowledge and belief are correctly and accurately recorded as at 30th June, 1987:- (a) The total of unpaid Underwriters as at 30th June, 1987 is $3,407,469. (b) The total of Debtors owing monies as at 30th June, 1987 is $2,911,274. (c) That related company cheques totalling $2,088,524.14 were held at the 30th June, 1987 by Toikan International Insurance Broking Pty Limited are still unbanked, however, I confirm that these will be banked within the next week and that I have had Brian Beazley make arrangements with the Bank to ensure they are immediately cleared. At the 30th June, 1987 these were to have been banked, however, with the sale of the insurance portfolio to Tag Pacific, this special banking was not completed by the Accounts Department. (d) ... " McS, who, it will be recalled, was the auditor of Locna and Vana, discussed with Phillips, who, it will be recalled, was the auditor of TIIB, C & G, CJ & H, TFS and TKN, the question whether the unpresented cheques should be treated as "loan account balances", since they would not have been cleared, even by 30 November. Phillips said that there was an argument that they should be classified as "debtors" and "accruals" rather than as "cash at bank", to which McS responded: "There should be no problem in arranging for the cheques to be presented. There was a considerable amount of net cash which came into TIIB at the time of settlement. In these circumstances, I believe we can accept a representation letter [a reference to Webber's letter dated 30 November set out above] that the cheques will be presented." McS showed Phillips Webber's "representation letter" and they agreed that they would "accept" it and the existing balance sheet treatment of the inter-company transactions, rather than make a change. On or shortly after 30 November, McS wrote in the audit work papers relating to Vana: "Referred matter to client by letter 2/11/87 [a reference to McS's letter to Webber written on the day of settlement]. Consideration was given to classification of these items in respect of outstanding cheques and deposits. An argument could exist to classify these amounts as other debtors and accruals. R Webber has advised that the company has made arrangements to complete the transactions. Refer letter of 30/11/87 confirming. I have relied on these undertakings as a basis for accepting the balance sheet classification of these transactions and confirmed by deposit of funds on 2/11/87." There appears in, according to McS, Phillips' handwriting, the following note endorsed on Webber's audit file note of 19 October relating to TIIB: "On review of the information supplied I believe an argument could exist as to classification of these accounts in question in respect to Outstanding Deposits & Deposited Cheques. We could argue that these accounts could be classified as other Debtors & accruals however we have in writing that Mr Webber would honour his obligations in completing these transactions & I have relied on his undertaking as a basis for accepting the Balance Sheet classifications BP 30/11/87." Wallis's notes to the audit files bore handwritten notes in substance the same as that of Phillips in relation to TIIB set out above. That relating to Locna is in the handwriting of McS but those relating to the CJ & H, C & G and Vana are again in the handwriting of Phillips. The final accounts of the various companies for the year ended 30 June 1987 bear directors' and auditors' reports all dated 30 November. In relation to TIIB, McS signed as a director and Phillips signed as auditor. Phillips also signed as auditor of CJ & H and C & G, while McS signed as auditor of Locna and Vana. Events of December 1987 On 1 December 1987 Yip prepared a document setting out the positions as at 30 June on the basis of all outstanding cheques being presented and met. McS reviewed this document with Yip in mid-December, and, to the best of his (McS's) recollection, Yip gave a copy to Beazley on 18 December at the Toikan office. Of course, the document showed all broking accounts as being in credit. TIBG's "broking account" was shown as being overdrawn to the extent of $2,132,251.76. McS's affidavit states: "To the best of my recollection this document was produced by Mr Yip on 1 December 1987 to assist Mr Beazley in relation to the presentation of the outstanding cheques." (Yip produced a further work paper relating to the outstanding cheques on 15 December: McS knew in December that the cheques were still outstanding.) On 21 December, Wu engaged PMS to complete the accounts of all Toikan Group companies to 31 December. Wu's letter said that the accounts were to comprise full profit and loss statements and balance sheets and incorporate all adjustments arising from the TAG acquisition, and that the accounts were to be completed urgently and were to be ready by 14 January. On 23 December, McS replied, accepting the retainer but stating that it was unrealistic to "fully complete the accounts of all Group Companies by 14th January". 1988 McS gave Wu a progress report on 18 January. In about mid January, during preparation of the accounts and when he was provided with the bank reconciliations to 31 December 1987 for all companies, McS saw that the cheques had still not been banked. He had a conversation with Webber as follows: McS: "Ray, fresh bank reconciliations show that those cheques have still not been presented." WEBBER: "I have been meaning to discuss the matter with Harvey Wu. They now have the control of the bank accounts including the TIIB account and I therefore need to speak to him about the matter." McS did not inform Wu. On 22 January, McS wrote to Wu enclosing what he described as "Composite Balance Sheets for Group Companies [TKN, TFS, C & G, CJ & H, Locna and Vana] to establish an opening position as at 1st July, 1987". The letter stated: "The balance sheets are a representative statement of position of the Companies and do not purport to reflect the financial position of the Companies as at the balance date stated thereon. The Balance sheets have been constructed for comparative purposes and represent the position of the Company as at the start of business on the 1st July, 1987 adjusted fo [sic] transactions which have occurred subsequent to the balance date and up to the effective date, which relate to the Deed between Tag Corporation and others and Raymond Webber dated 1st October, 1987. The comparative 1987 column is the audited 30th June, 1987 position. The Balance Sheet stated will enable comparison to:- (1) finalised accounts to 31st December, 1987, to establish funds movement from the period commencing 1st July, 1987 to that date in respect of normal trading operations. (2) Pro-forma Balance Sheets represented in the abovementioned Deed. Please confirm your requirement for balance date to be used for acknowledging compliance with warranties in respect of Pro-forma balance sheets. If possible it would be preferable to use the attached composite or 31st December, 1987 final Balance Sheets to avoid undue costs." In his affidavit, McS states: "The composite balance sheets were essentially used to determine the respective positions of Webber and Tag so far as the warranties were concerned in relation to the pro formas. What the composite balance sheets were was the actual balance sheet position of the companies as at 1 July 1987 adjusted as if the transactions that occurred at or before settlement had occurred on 1 July. The purpose of the composite balance sheets was to compare them to the pro formas and then to make adjustments based on the warranties." The composite balance sheets did not reveal the existence of the overdrawn broking accounts. On 25 January, McS had a conversation with Wu, which included the following: WU: "I am concerned that the cash position of the companies appears to be extremely low. The bank reconciliations show that there are a large number of unpresented cheques. I believe that these cheques may be the cause of the shortfall in cash. What do these cheques represent? McS: "These are cheques between the companies that Webber told me he would arrange to have banked and cleared. My understanding is that the cheques effected a transfer of funds between group companies and should have no overall impact on the cash position. Ray should have arranged to have this done some time ago. He told me that he would speak to you about presenting the cheques. If you want, I will speak to him and get him to contact you." ... WU: "Tell Ray not to bank the chques [sic - cheques] yet. We may wish to write them back to the loan accounts." McS subsequently told Webber of this conversation and Webber handed him the unpresented cheques, saying: "I will have to sort out the cheques with Harvey. You should keep the cheques until I have cleared the matter up." Yip prepared a work paper dated 8 February. It records that $929,600 cash had been transferred from TIIB to TIBG in the period from 1 July to 31 December. McS did not become aware of this until PMS had completed the preparation of TKN's balance sheet as at 31 December 1987. Yip's work paper also records receipt by TIIB from TIBG of the amount of a term deposit of $700,000 and other transactions in TIIB's bank records relevant to "the balance of account between TIIB (operating TKN's business) and TIBG". McS states: "I believe that the document shows that TKN, having taken over TIIB bank accounts, suffered a cash outflow of $324,188.50 on the account of TIBG. In addition, subsequent to Mr Yip's work paper, it was discovered that the $700,000 was on account of premiums received before 30 June 1987 and therefore should not have been credited to TIBG's account. Therefore, the true cash outflow was $1,024,188 which I believe was caused by TKN taking over TIIB's bank account." On 11 February, McS wrote to Wu enclosing "details of extraordinary charges to the [Toikan] Groups [sic] Preliminary Financial Accounts together with an overall summary of group results". The documents showed that for the period to 31 December 1987, TKN had made a loss of $377,750 and that the Toikan Group as a whole had made a loss of $183,857. McS did not become aware of these losses until about late January. On 16 March, Yip sent to Chalker, by then financial controller of TKN, statements showing the positions on the broking and general accounts of TIIB, Locna, Vana, C & G, CJ & H and TFS. The documents showed particulars of the outstanding cheques and outstanding deposits. On 24 June, McS wrote to Moffitt of Thomson Douglas & Co, who had replaced PMS as accountants to the Toikan Group. In the letter and its enclosures, McS reviewed matters which had been raised at a meeting with the TKN directors on 16 June and attempted to correct what McS perceived to be the directors' erroneous understanding. On 3 September Webber executed a deed, undertaking to pay $2,232,145.54 to TKN for itself, its four broking company subsidiaries (Locna, Vana, CJ & H and C & G) and TFS, to eliminate the deficiencies in their broking accounts and general accounts as at 1 July 1987. Of course, he did not pay. This concludes the summary of McS's account of the TAG facts. FINDINGS OF FACT OF OLNEY J IN THE TAG JUDGMENT FAI relies on all findings of Olney J in the TAG judgment not contested, including the following: "Webber gave PMS instructions that financial information was not to be given to TAG, but later, some weeks before 29 July 1987 instructed PMS that provisional balance sheets should be made available to TAG" (judgment of Olney J at 42) "On 28 July 1987 McSweeney became aware that the broking accounts of the Toikan companies were in very substantial disarray. He then gave instructions to Webber to rectify the position [not the other way around], and was aware that Beazley was instructed to draw the necessary cheques" (judgment of Olney J at 42) "The unpresented cheques were drawn at some time on or after 29 July .... over the period from 29 July until about 19 August .... The preliminary balance sheets were drawn on the basis that the unpresented cheques had been presented and paid as at 30 June 1997." (judgment of Olney J at 42 and 43) FAI makes this submission: "From these findings it follows that as at 29 July 1987, when the balance sheets were handed over, [McS] did not know that the cheques had been drawn, not all the cheques had in fact been drawn, yet [McS] treated them, in a series of documents which took the form of proper professionally prepared accounts (albeit preliminary), as being in existence, presented and paid more than 4 weeks earlier. Thus he knew that the preliminary accounts were inaccurate in so far as they purported to say what the position was as at 30 June, and had no reason to believe that even as at 29 July the cheques had been drawn, presented and paid. This in itself is fraud. ... " McS's evidence is that he believed on the evening of Wednesday 29 July, that the cheques had been drawn, presented and cleared that morning, although he had not taken independent steps to ensure that they had been, and simply accepted the word of Yip or Wallis, that Beazley had, in effect, informed PMS, that they had been. The cross-examination of McS on the matter included the following: "Can I suggest that on the 29th you were prepared to put into the accounts whatever figures Mr Beazley phoned through to you, whether they were correct or not; do you agree with that? - That's what happened, my employee accepted what Mr Beazley had phone through to him and put it through the accounts as being what they had recorded. I suggest that you had no basis for believing at the time that figures were given to you that Mr Beazley had already drawn cheques to effect the transactions? - I wasn't involved in what happened then. He used to just ring through and advise my firm just to what they should transact into the accounts. ... You had no basis on the 29th for believing that Mr Beazley would cause the cheques to be presented and paid soon afterwards, did you? - I did have an honest belief that they were going to do what they said they were going to do, that is, correct the loan accounts. Mr Beazley certainly did not tell you on the 29th that he was going to cause the cheques to be presented and paid, did he? - I don't recall speaking to Mr Beazley on the 29th. You never checked whether Beazley had made any entries in the books of Toikan to reflect the repayment of the inter-company loans or not, did you? - I accepted what my people had done from his call to them. No, I didn't ring him back and check the ... But on the 29th the books of Toikan were over in Paddington with Mr Beazley and you were in your office over in Chatswood, were you not? - That's correct." (T 1263) Beazley's evidence on the matter is unclear. In a statement dated 19 October 1990 filed in the TAG proceeding, he said that he could recall "an occasion" when McS had instructed him to draw up [internal] balance sheets as at 30 June "as if" the money had already been received. Before me, Beazley said that he could not recall McS saying this to him, but that he understood the instructions given to him on the night of Tuesday 28 July to be that he was to treat the inter-company debts as having been discharged by 30 June. He said that details of the cheques to be drawn were faxed to him on the morning of Wednesday 29 July by Wallis. Wallis's evidence as to what happened at the meeting on Tuesday night 28 July is, in the relevant respect, generally consistent with that of McS. However, whereas he had said in a statement in the TAG proceeding that McS, Yip and he (Wallis), calculated the amounts of the cheques required, in his statement in the present proceeding he says that Beazley provided details of them to Yip on the morning of 29 July and that the payments were then recorded in PMS's records as having been made, that is to say, as having been made on 30 June. FAI also relies on these findings: "The preliminary balance sheets were prepared by PMS at Webber's request ... because Wu ... had requested they be provided [and] [t]hey were sent by PMS directly to TAG at Webber's request and with his written authority." (judgment of Olney J at 42) "Beazley knew that there were insufficient funds within the various companies' accounts for all cheques to be paid if presented" (judgment of Olney J at 43) McS knew that TAG required the preliminary accounts. Let it be assumed that McS understood that TAG was moved by the desire to have a historical basis for the pro formas. Even so, I do not accept that McS's state of mind was that TAG would not act in reliance on the preliminary balance sheets. As I will explain more fully later, in my opinion he understood that TAG would do so, but believed that no harm would come of its doing so. FAI refers to seven findings of misleading or deceptive conduct by Olney J. In its submissions, it expresses these as follows: The balance sheets (1) "misrepresented the amount of money available in the various broking accounts of the Toikan companies" (2) "misrepresented the fact that there was not sufficient money within the group as a whole to support the cash balances shown in the balance sheets" (3) "misrepresented the true position with respect to the failure of the companies to comply with s 26 of the Brokers Act" (referring to judgment of Olney J at 44) (4) "the pro forma balance sheets faxed on 15 and 29 September were consistent with the preliminary balance sheets, and misleading and deceptive, in the absence of a warning that the bank broking accounts at 30 June 1987 were substantially overdrawn and remained so" (referring to judgment of Olney J at 44-45) (5) "on 2 Nov [McS] knew that the unpresented cheques had not been presented, and that they could not be met except out of the proceeds of settlement. His failure to alert TAG to this situation was misleading and deceptive conduct" (referring to judgment of Olney J at 45) (6) "that the preliminary balance sheets were prepared from the books and records of the company and other information provided by the officers of the company at the request and exclusively for the use and benefit of the company and its directors. It was untrue that the accounts were prepared from the books and records of the company 'and other information provided by the officers of the company', because they omitted a vital piece of information which had been provided, namely that the unpresented cheques had not been paid" (7) "the assertion that 'we express no opinion on whether the accounts represent a true and fair view of the state of affairs' is in the context of the case untrue, and thus misleading and deceptive" (referring to judgment of Olney J at 46-47) FAI makes submissions in respect of these findings in groups. As to findings (1), (2) and (3), it submits that: "In each of these respects, it is only a very short step from the other undisputed findings of fact that the statement was one which was made knowing that it was false, or not caring whether it was true or false." McS clearly knew that the relevant parts of the preliminary balance sheets were untrue in so far as they purported to state the position on 30 June 1987. In relation to the fourth and fifth findings, FAI submits that each is: "a finding which supports a conclusion that there was a deliberate course of conduct after the sending of the preliminary balance sheets to ensure that TAG was not informed about the situation, to ensure that the transaction did not founder." McS's state of knowledge as at 2 November referred to in the fifth finding presents a problem for PMS. The notice of findings in dispute filed by PMS did not state that the finding was contested. However, PMS's notice asked for a finding in terms of pars 53 and 100 of McS's affidavit sworn 7 September 1993. Paragraph 53 was to the effect that during the course of the meeting on Tuesday night 28 July, McS was satisfied that there would be no difficulty in funding payment of the inter-company debts and, if necessary, in Webber's organising a borrowing for the purpose. According to par 53, McS's belief was reinforced by his understanding that on settlement Webber would receive funds more than sufficient to pay, not only the shortfall estimated by Beazley, but the whole of the net amount payable by the various companies for inter-company debts. Paragraph 100 of the affidavit is to the effect that at settlement on 2 November, McS believed that the Toikan companies would have funds to repay all inter-company debts and that according to his understanding it did not matter that they had not been actually repaid at settlement because he understood that nothing had changed which would prevent them from being repaid. FAI understood that the proposition that the unpresented cheques "could not be met except out of the proceeds of settlement" was in fact disputed. McS was cross-examined on the subject as follows: "By the end of November you were well aware that the cheques had still not been presented at the time that the accounts of the company needed to be finalised, were you not? - Yes, that's right. Could I suggest that it was quite impossible by the end of November to regard cheques that had not even been written at 30 June to be treated as having been written, presented, cleared and turned into cash on the bank on 30 June? - Well, I still had a belief he was going to present the cheques and that the cash was there. Yes, but just as a matter of accounting I suggest that it was quite impossible when by the end of November to regard cheques which had still not been presented as somehow having been presented, cleared and turned into cash at the bank on the previous 30 June? - At the time I didn't think it was a problem. But looking back now to today I can see that it may have been better for me to take a different course. Could I suggest to you that it is just wrong accounting to treat cheques as cash in the bank when they have not even been presented five months after balance date? - Well, I didn't believe there was any cash missing, I thought it was probably just - Could you answer my question, please? - When I look at it today I think that I should have written them back to the loans. Is the answer to my question yes? - I believe looking back now that I made an error in my decision making then and should have written them back to the loans." (T 1334) Whatever his state of mind may have been on the evening of 29 July, it is clear that on 19 October, 2 November, 30 November and in December, McS knew that the cheques had not been presented. There was much evidence, principally from Penklis and McS, directed to the question whether there were sufficient funds available to enable the cheques to be met. It becomes important, however, to distinguish in the first place between the position that existed on 30 June and that which might be caused to exist later; and to distinguish between the knowing making of a false representation and its causing loss. I discuss these matters under "Conclusions" below. It is beside the point that McS may have believed that the resources available to Webber would enable him to ensure that the cheques would be met. The question raised by the present submission is whether he believed that they would be met immediately upon presentation. Penklis ultimately concluded that on the basis of the money in the accounts of TIBG, there was a shortfall of $80,271 and McS ultimately concluded that the amount was $77,791. The NAB manager did not give evidence. But taking into account the relatively small amount of the shortfall, I am not persuaded to reject McS's evidence that he believed that the cheques would be met upon presentation, although in fact they would not have been in the absence of the making of a special arrangement with NAB. In relation to the last three findings of misleading or deceptive conduct, FAI submits that: "The various respects in which it is uncontested that the accounts are misleading and deceptive are ones which of their very nature, and in the light of the other uncontested findings of fact, are not inadvertent or the product of mistake or oversight." I accept this submission. The preliminary accounts purported to state the position on 30 June 1987 and McS went to some trouble to ensure that they did so incorrectly. FAI submits that Olney J's findings of "deception" should be construed as findings of dishonesty. FAI refers to his Honour's finding that the disclaimers: "tend to compound the deception by adding further misleading statements" and to his Honour's reference to: " ... the magnitude of the deception ..." (judgment of Olney J at 47 - emphasis in original of FAI's submissions) The sentence which immediately precedes the two sentences in which the passages set out above occur, is as follows: "Second, the disclaimers do not neutralise the misleading and deceptive statements contained in the accounts." To my mind, this sentence does not suggest dishonesty but uses the neutral language of s 52 of the Trade Practices Act 1974 (Cth). It is true that earlier on the page on which the sentence and the passages quoted occur, his Honour spoke of the "deliberate step taken to mislead and deceive the persons for whose benefit and use the accounts were prepared", but I do not think that the dishonest suppression of which his Honour there speaks signifies that the "deception" referred to in the passages quoted is also necessarily "dishonest deception". In any event, it is abundantly clear that PMS have always contested his Honour's characterisation of McS's conduct as dishonest. It would be unjust to hold that PMS's omission to identify expressly the two references to deception in the passages quoted has the severe significance contended for by FAI. I reject FAI's present submission. In pars 5-20 of its submissions in chief, FAI identifies sixteen findings of Olney J which are contested by PMS and which FAI submits I should, in substance, make again. However, in the remainder of its submissions in chief (pp 11-113) it refers to the evidence in detail and it seems unnecessary that I address the particular findings made by his Honour, provided I indicate my findings on the important factual issues thrown up by the evidence, which I will now seek to do. REASONING IN RELATION TO FRAUD AND THE TAG FACTS The elements (in some instances overlapping) of fraud are:

1. A representation of fact, however made;
2. Falsity of the representation; 3. That the maker of the representation does not believe that it is true in the sense in which the maker intends it to be understood; 4. That the maker of the representation intends a person or class of persons to act in reliance on it; 5. That the person, or a person belonging to the class of persons, acts in reliance on the representation; and
3. That loss or damage is suffered as a result of the reliance.
4. A representation of fact, however made No doubt various representations can be found in the preliminary balance sheets and they can be expressed in various ways. The following findings of Olney J in the TAG judgment are not contested: (i) that the words "cash at bank" in the preliminary balance sheets meant that the sums indicated stood to the credit of the respective companies' bank accounts at 30 June; (ii) that the words "National Australia Bank Broking Account" in the notes to the preliminary balance sheets meant that at 30 June the respective companies maintained separate broking accounts as required by s 26 of the Act and that the sums indicated stood to the credit of those accounts at that date; (iii) that the preliminary accounts had been prepared from the books and records of the respective companies and other information supplied by their officers. In my opinion, giving particular weight to the use of the word "preliminary" and the wording of the Accountant's Report, the preliminary accounts conveyed at least the following "further" representations: (iv) that on the basis of the financial data available to PMS from the company's books and records and other information provided to PMS by company officers, it appeared to PMS, and PMS believed, that the amounts stated in the preliminary balance sheets and in the notes to them as "cash at bank" and as the credit balances of the companies' broking accounts at the NAB and as the credit or debit balance of their general accounts at the NAB, on 30 June 1987 were correct; (v) that on the same basis, it appeared to PMS, and PMS believed, that the broking accounts had not been overdrawn as at 30 June 1987; (vi) that on the same basis, it appeared to PMS, and PMS believed, that trade debtors plus cash at bank and on hand had equalled or exceeded underwriting creditors as at 30 June 1987; (vii) that PMS did not yet have any information which falsified any of representations (i) to (vi). I will refer to all seven representations as "the Representations". What were the relevant figures in the preliminary accounts for the respective companies? First, there were the preliminary accounts of TIIB, Locna, Vana, TFS and TKN delivered on 29 July. In the case of TIIB, and treating the figure of $1,199,200 in note 3 as corrected, as McS would have it, to $1,053,660, the representation was that there had been on 30 June cash at the NAB in accounts of TIIB totalling $1,211,093, comprising $1,053,660 in its broking account and $157,433 in its general account. In the case of Locna, the representation was that there had been on 30 June cash at the NAB in accounts of Locna totalling $510,234, comprising $506,734 in its broking account and $3,500 in its general account. In the case of Vana, the representation was that there had been on 30 June "Cash at Bank and on Hand" of $176,122, made up of a credit balance in its NAB broking account of $279,957, a debit balance in its NAB general account of $103,935, and cash on hand of $100. TFS did not operate a broking account and was represented to have had on 30 June a secured bank overdraft of $26,071 and cash on hand of $10. TKN had not traded, and was represented to have had on 30 June a secured bank overdraft of $4,640 and cash on hand of $336. Next, there were the preliminary accounts of C & G and CJ & H, which McS faxed to Wu on 28 August and 9 September. Those for C & G represented that on 30 June C & G had had "Cash at Bank and on Hand" of $102,916, made up of a credit balance in the company's NAB broking account of $105,316, a debit in its NAB general account of $2,402, and cash on hand of $2.00. The preliminary accounts for CJ & H represented that on 30 June CJ & H had had "Cash at Bank and on Hand" of $145,723, comprising a credit balance of $191,852 in the company's NAB broking account, a debit balance of $47,381 in its NAB general account, a credit of $1,250 at the ANZ Bank, South Melbourne, and cash on hand of $2.00. It was not submitted, and could not have been successfully submitted, that the preliminary accounts were relevantly ambiguous. The preliminary balance sheet purported to represent the actual position of each company on 30 June. It was not submitted, and could not have been successfully submitted, that the representation was, for example, that the particular balances shown in the preliminary balance sheets would result if there were a notional combining of unidentified actual credit and debit balances as at 30 June 1987 in certain unidentified accounts of unidentified companies and a redistribution made. The case is therefore not one of assuming in favour of the person charged with fraud, the one of two meanings which he or she in fact understood and intended others to understand (cf Akerhielm v De Mare [1959] AC 789; John McGrath Motors (Canberra) Pty Ltd v Applebee (1964) 110 CLR 656; Sargent v Campbell [1972-73] Argus LR 708; Krakowski v Eurolynx Properties Ltd (1995)183 CLR 563 at 578-579). In my opinion, McS understood that the preliminary accounts made, and would be understood by readers of them to make, the Representations.

Proceeding No NG 312 of 1992 Counsel for the Applicant: Mr J C Campbell QC with Mr P Liney (FAI)

Solicitors for the Applicant: Colin Biggers and Paisley (FAI)

Counsel for the Respondents: Mr P M Biscoe QC with Mr S Climpson appeared for the first, second, fourth and fifth respondents (McSweeney, Phillips, Turner and Cullen) Mr K Manion appeared (submitting) for the sixth respondent (Gaertner)

Solicitors for the Respondents: Gillis Delaney appeared for the first, second, fourth and fifth respondents (McSweeney, Phillips, Turner and Cullen) Mr D M Vaughan, solicitor, of Heaney, Richardson & Nemes appeared (submitting) for the third respondent (Beale) Walters Solicitors, appeared (submitting) for the sixth respondent (Gaertner) Proceeding No NG 948 of 1992 Counsel for the Applicant: Mr P Roberts with Mr M K Minehan (TCF)

Solicitor for the Applicant: T G Hartmann & Associates (TCF)

Counsel for the Respondent: Mr J C Campbell QC with Mr P Liney (FAI)

Solicitors for the Respondents: Colin Biggers & Paisley (FAI).

Date of Hearing: 5, 6, 7, 8, 9, 13, 14, 15, 16, 19, 20, 21, 22, 23, 26, 27, 28, 29, 30 June; 3, 4, 5, 6, 7, 10, 11, 12, 13, 14 July; 23, 25 August 1995; 11 March 1996. Date of delivery of Part I: 12 March 1997 Date of Judgment: 9 April 1998

DRAMATIS PERSONAE - PART I ANNEXURE TO PART II OF REASONS FOR JUDGMENT TAG FACTS PARTNERS OF PMS BEALE, John William ("Beale"): chartered accountant; employed by PMS in its Sydney office from 1982; became a salaried partner in June 1985, of an "associated firm", PMS Lismore; returned to the Sydney Office in about mid-1988 and became a salaried partner in PMS proper at that time; in mid-1990 ceased to be a partner of PMS to become a foundation partner in the firm Beale Gaertner Young; was actively involved in the 1988 TCF facts; was examined under s 541 in relation to the affairs of Travel and Wheels. CULLEN, Timothy Patrick ("Cullen"): qualified as an accountant in New Zealand in 1980; moved to Australia in August 1980; became employed by PMS from 6 April 1985 and became a salaried partner on 23 May 1989; following the "split" with retrospective effect from 1 September 1990 (but for insurance purposes from 24 October 1990) became, with Phillips, a partner in PMS Gosford; as an employee, was actively involved in doing work for Travel and Wheels but played no part in the TAG facts; completed the proposal form dated 22 April 1991 for the renewal of the Gosford policy for 1991-1992 under which Phillips claims to be entitled to indemnity in respect of the TCF judgment; was examined under s 541 in relation to the affairs of Travel and Wheels. GAERTNER, Michael John ("Gaertner"): became a salaried partner in PMS in May 1989; on 1 July 1990 ceased to be a partner in PMS to become a foundation partner in Beale Gaertner Young as from 23 July 1990; had no active role in either the TAG facts or the TCF facts. McSWEENEY, Brian Albert ("McS"): chartered accountant; obtained first accountancy qualification in 1967; became a member of Australian Society of Accountants in 1969; with Phillips, "equity partner" in PMS from its establishment in August 1976 down to the "split" with retrospective effect from 1 September 1990 (but for insurance purposes as from 24 October 1990); from about 1976 was engaged as accountant by Webber and the Webber companies; was actively involved in the TAG facts and the TCF facts; of the sixteen Webber companies, held shares in eleven (in each case as trustee for a Webber interest) was a director of thirteen and secretary of fourteen; in particular, was a director and secretary of TIBG, TIIB, C & G, CJ & H, TKN and TFS, and although not a director or secretary of the joint venture companies Locna and Vana, held a 40 per cent interest in each of them; was a director and the secretary of the Webber family company, Dawlarnu and a director of other Webber family companies; was examined under s 541 in relation to the affairs of Travel and Wheels following the "split" became, with Turner, a partner in PMS Chatswood; completed the proposal form dated 22 May 1989 for renewal of the PMS policy for 1989-1990 under which he and Phillips seek indemnity in respect of the TAG judgment; completed the proposal form dated 28 April 1991 for renewal of the Chatswood policy for 1991-1992 under which he seeks indemnity in respect of the TCF judgment; with Phillips, a respondent in TAG proceeding and TCF proceeding; PMS undertook the work associated with the annual accounts, tax returns and statutory returns for all sixteen Webber companies and the audit of the accounts of some of them; PMS prepared the annual financial statements of Travel and Wheels and undertook the audit of those of Travel. PHILLIPS, Bruce William ("Phillips"):chartered accountant; "equity" partner with McS in PMS from its establishment in August 1976 down to the "split" with retrospective effect from 1 September 1990 (but for insurance purposes from 24 October 1990); following the "split", became, with Cullen, a partner in PMS Gosford; not involved in the TCF facts; at McS's request, auditor of TIIB, CJ & H and C & G of which McS was a director, and, as auditor, had some role in the TAG facts. TURNER, Paul Frederick ("Turner"): accountant; apparently became a salaried partner of PMS in 1987; following the "split" with retrospective effect from 1 September 1990 (but for insurance purposes as from 24 October 1990), became, with McS, a partner in PMS Chatswood; not actively involved in the TAG facts or, except in a minor respect, the TCF facts. OTHER THAN PARTNERS OF PMS Individuals BEAZLEY, Brian Michael ("Beazley"): chartered accountant; employed as "financial controller" of the Toikan Group by TIBG full-time from about 1 October 1985 to 30 June 1986, and by TIIB full-time from 1 July 1986 to about February 1987 and on a casual basis from February 1987 to settlement of the TAG transaction on 2 November 1987; following the TAG transaction, employed by (ultimately) TKN until February 1988; his immediate supervisor on day to day matters was Stephen Panozzo, the general manager of the Toikan Group, and his ultimate controller was Webber, the Group's managing director; on (or on and after) 29 July 1987, wrote out and signed cheques back-dated to 30 June 1987 to put broking companies' bank accounts "in order", but placed the cheques in a safe or drawer rather than bank them, because of his knowledge that there were insufficient funds in the bank accounts to enable them to be met. BINETTER, Michael: solicitor; partner of Dunhills, solicitors for the Webber interests and the Toikan Group on the TAG transaction. CHALKER, Warren Anthony ("Chalker"): chartered accountant; following termination of PMS's retainer, employed by TKN as its financial controller from February 1988 to 20 April 1989; as a witness called by FAI, gave evidence of dealings with McS, Webber and Wu, and the eventual discovery of the problem of the unpresented cheques. CONSTABLE, Robert Terrence ("Constable"): non-executive New South Wales director of TAG since before the beginning of 1987; with effect from settlement of the TAG transaction on 2 November 1987, chairman of directors of the TAG/Webber joint venture vehicle, TKN. DUNHILL BUTLER ("Dunhills"):solicitors for the Webber interests on the TAG acquisition. FINNEY, Warwick:chartered accountant; partner of Deloitte Touche Tomahtsu; expert witness called by FAI. GOWER, Goodwin Bultimore Allen ("Gower"): chartered accountant; partner in Duesburys; expert witness called by PMS. LARBALESTIER, Paul: solicitor; partner in Rosenblums, solicitors for TAG and TAGNT on the TAG transaction. MOFFITT, Richard Niven ("Moffitt"): chartered accountant; partner in Thompson Douglass Butterell (formerly "Thompson Douglass"); secretary of TAG from February 1987 to October 1989; not active in the negotiation of the TAG transaction, but attended on settlement on 2 November 1987 at Dunhills' offices with Constable for the TAG interests, and had involvement after that date; conducted an investigation at Wu's request; discovered problem of the outstanding cheques in the first half of 1988. PANOZZO, Stephen Aldo ("Panozzo"): both prior to and after the TAG transaction, general manager of the Toikan Group. PENKLIS, Alexander ("Penklis"): chartered accountant; partner of Green Penklis Lawson; expert witness called by FAI. RAINBOW, John ("Rainbow"): solicitor; partner of TCM; retained by FAI to represent McS and Phillips in the TAG proceeding. REES, Richard Noel ("Rees"): chartered accountant; partner of Ernst & Young; expert witness called by TAG in the TAG proceeding. ROSENBLUM R I & PARTNERS ("Rosenblums"):solicitors for TAG and TAGNT on the TAG transaction. VAREJES, Ellis (Varejes"): solicitor; partner of Rosenblums, solicitors for TAG and TAGNT on the TAG transaction. WALLIS, Eric Charles ("Wallis"): certified practising accountant; long time employee of PMS; undertook work in the Webber interests on the TAG transaction. WEBBER, Raymond James ("Webber"): managing director of the sixteen Webber companies, including the Toikan Group of companies; after the TAG transaction, continued as managing director of the TAG/Webber joint venture company, TKN, and its subsidiaries, under an employment contract. WISE, Peter Harry ("Wise"): chairman of directors of The Anthony Group Limited ("Group"), a New Zealand company controlled by Wise's family interests, of its subsidiary TAG, and of TAG's subsidiary TAGNT. WU, Harvey ("Wu"): resident of New Zealand; director of TAG and TAGNT; chartered accountant; retired from practice in 1987 to devote time to company directorships and consulting services; negotiated the TAG transaction for TAG interests. YIP, Robert ("Yip"): accountant; between May 1987 and March 1990, employed by PMS as a "senior accountant"; did work in the Webber interests on the TAG transaction. Companies THE ANTHONY GROUP LTD ("GROUP"):New Zealand company which was the parent of TAG, and, through it, of TAGNT. CARROLL & GEORGESON (QLD) PTY LTD ("C & G"): incorporated in Queensland on 12 August 1986 as "Orbec Pty Ltd"; carried on business as insurance broker, chiefly in Queensland; was purchased by TKN in the first half of 1987 (the price being payable by instalments) when it became a wholly owned subsidiary of TKN and, as such, part of the Toikan Group; at material times its directors were Webber and McS, and Phillips was its auditor; McS was appointed as a director on 23 April 1987 and resigned on 16 March 1988; successfully applied for registration as an insurance broker in May 1987; was "sold into the TAG/Webber joint venture". CHARLTON JAMES & HEALY (VIC) PTY LTD ("CJ & H"): incorporated in Victoria where it carried on business as an insurance broker; in the latter half of 1986, the Webber family company Dawlarnu purchased a 51 per cent interest in it and an option to acquire remaining shares (the price being payable by instalments), whereupon it became part of the Toikan Group of broking companies; at material times, its directors were Webber and McS, and Phillips was its auditor; McS was appointed as a director on 19 September 1986 and resigned on 8 December 1987; successfully applied for registration as an insurance broker in 1986-1987 year; as part of the TAG transaction Dawlarnu increased its shareholding to 75.5 per cent and sold that shareholding to the TAG/Webber joint venture company, TKN. CLASSIC CAR INSURANCE BROKERS PTY LTD: a Webber family company which sold its insurance broking portfolio to TIBG in 1986. DAWLARNU PTY LTD as trustee of a Webber family discretionary trust ("Dawlarnu"): a Webber family company; held 40 per cent of the issued shares in each of Vana and Locna and 51 per cent (later 75.5 per cent) of those in CJ & H; sold them all to the TAG/Webber joint venture company, TKN, as part of the TAG transaction; McS was a director of Dawlarnu as from 4 March 1985. DUFF HALLAM PROSURE PTY LTD ("Duff Hallam"): a Webber family company;sold its insurance brokingportfolio to TIBG in 1985. KELSO PTY LTD ("TAGNT"): incorporated in the Northern Territory (hence the abbreviation); changed its name to Tag Holdings Pty Ltd; wholly owned subsidiary of TAG; was the vehicle through which TAG acquired 60 per cent interest in the joint venture company, TKN, as part of the TAG transaction. LIGON 125 PTY LTD ("Ligon"): a Webber family company; prior to the TAG transaction, immediate parent of TKN and subsidiary of Sabada; as a result of the TAG transaction, its shareholding in TKN became only a 40 per cent shareholding in that company. LOCNA INSURANCE BROKERS PTY LTD ("Locna"): one of the Toikan Group of companies; Dawlarnu acquired a 40 per cent shareholding in Locna in April 1985, the holder of the remaining 60 per cent being Associated Newsagents Corporation Ltd; as part of the TAG transaction, Dawlarnu sold its 40 per cent interest to the TAG/Webber joint venture company, TKN; McS was not a member, director or secretary of Locna but was its auditor. MARSH & McLELLAN PTY LTD ("M & M"): insurance brokers for PMS, PMS Chatswood and PMS Gosford; on their behalf, dealt with FAI in relation to renewals of the respective policies. SABADA PTY LTD as trustee of the "Sabada Number 1 Trust" ("Sabada"): A Webber family company; owned the office building at 30-38 Victoria Street Paddington at and from which the Toikan Group carried on business; parent company of Ligon and, through it, of TIIB; prior to the TAG acquisition, had owned (through Webber and McS) all the shares in TKN since 16 September 1985, that is, since prior to the introduction of capital gains tax. SALAMANDER LEASING CORPORATION PTY LTD: a Webber family company; a 100 per cent subsidiary of TKN; changed its name from "Toikan Insurances Pty Ltd"; at material times, its directors were Webber and McS and its auditor was Phillips. SALAMANDER FINANCE CORPORATION LTD: a Webber family company; a 100 per cent subsidiary of TKN; McS became a shareholder (in trust for TKN) and a director on 27 June 1985. SHAMM PAGNY CORPORATION PTY LTD as trustee of the "Shamm Pagny No 1 Trust" ("Shamm Pagny"): a Webber family company which owned and operated a horse stud at Mudgee; McS was a shareholder, director and the secretary. TAG PACIFIC LTD ("TAG"): incorporated in Tasmania and listed on the Australian Stock Exchange; first applicant in the TAG proceeding and parent of the second applicant, TAGNT; a subsidiary of Group. TAG HOLDINGS PTY LTD ("TAGNT"): incorporated in the Northern Territory (hence the abbreviation); at the time of the TAG transaction, called "Kelso Pty Ltd"; wholly owned subsidiary of TAG; the vehicle through which the 60 per cent interest in the TAG/Webber joint venture company, TKN, was acquired by the TAG interests. TKN HOLDINGS PTY LTD ("TKN"): prior to the TAG transaction, all its issued shares were owned by Sabada (through Webber and McS as trustees); owned all the issued shares in TIBG and TIIB, Salamander Leasing Corporation Pty Ltd, Salamander Finance Corporation Pty Ltd and C & G; as well, owned a 60 per cent shareholding in TFS; was called into service as the TAG/Webber joint venture company used in the TAG transaction to purchase the TIIB insurance broking portfolio, Dawlarnu's 75.5 per cent shareholding in CJ & H and 40 per cent shareholdings in Vana and Locna; following the transaction, was 60 per cent owned by TAG interests and 40 per cent by Webber interests; some time after the transaction, changed its name to "Toikan International Insurance Broking Pty Ltd". TOIKAN FINANCIAL SERVICES PTY LTD ("TFS"): one of the Toikan Group of companies; in 1984 when it was called "S R Hillston (Insurances) Pty Ltd", 60 per cent of its shares were acquired by TKN and the remaining 40 per cent were held by Ligon 92 Pty Ltd, the ownership and control of which are not revealed by the evidence; McS was secretary from 12 October 1984 and became a director at some time prior to 9 February 1987 (the other director was Webber) and resigned on 31 March 1988; did not carry on business as an insurance broker and therefore did not maintain a broking account. TOIKAN INSURANCE BROKING GROUP PTY LIMITED ("TIBG"): the major company in the Toikan Group; from 16 September 1985 to 30 June 1986, carried on insurance broking business in New South Wales; sold its business as at that date to TIIB; McS was a majority shareholder (holding in trust for TKN), the secretary, and, as from 17 June 1987, a director (with Webber); a 100 per cent subsidiary of TKN; was not a party to the TAG transaction and stood outside it; was the entity which was the ultimate debtor in respect of the money needed to fund the outstanding cheques which were directed to "curing" the earlier misappropriation of money from the broking accounts. TOIKAN INTERNATIONAL INSURANCE BROKING PTY LTD ("TIIB"): incorporated in New South Wales on 23 April 1986 as "Geldome Pty Ltd"; as from that date its directors and shareholders were Webber and McS, and McS was its secretary; its auditor was Phillips; successfully applied in June 1986 for registration as an insurance broker; as from 1 July 1986, purchased the insurance portfolio of TIBG, but for some time afterwards it operated through the vendor, TIBG, as its agent; was a 100 per cent subsidiary of Ligon which, in turn, was a 100 per cent subsidiary of Sabada; some time after the TAG transaction, changed its name from TIIB to "Salamander Investment Corporation Pty Ltd". VANA FINANCIAL SERVICES PTY LTD ("Vana"):one of the Toikan group of companies by reason of Dawlarnu's having acquired a 40 per cent shareholding in Vana in August 1986, the holder of the remaining 60 per cent being Victorian Authorised Newsagents Association Ltd; as part of the TAG transaction, Dawlarnu sold its 40 per cent interest in Vana to the TAG/Webber joint venture company, TKN; McS was not a member, director or secretary of Vana, but was its auditor.