The acquisition of the Rothwells shares
12 The CU Trust was established by a Deed of Trust made on 2 July 1984 between Mr James Kirby as founder and Carringbush as trustee. The settlement sum was $10.00 to be held upon the trusts and subject to the terms contained in the Deed. The trust comprises a fund made up of, among other things, the settlement sum and all further sums paid to the trustee for the creation and issue of units; all assets, investments and property paid or transferred to the trustee as additions to the fund; and the proceeds of sale of assets, investments and property. A "unit" is defined to mean an undivided part or share in the fund and the initial fund of $10.00 was divided into 10 $1.00 units issued on 2 July 1984. Three units were issued to Mr John Michael Denoon. Three units were issued to his wife, Helen Margaret Denoon, and four units were issued to Mr William Ross Scott as trustee for Ilegry Pty Ltd. Those units were redeemed on 18 March 1987. Gemridge Pty Ltd ("Gemridge") as trustee for the Carringbush Group Discretionary Trust (the "CGD Trust") applied for and was issued with nine units in the CU Trust on 18 March 1987 and Mr Denoon applied for and was issued with one unit in the trust as nominee for Gemridge as trustee of the Carringbush Discretionary Trust, on 18 March 1987. Gemridge is a company controlled by Mr Denoon. Mr Denoon has been a director of Carringbush continuously since 6 February 1984. He says that he controls Carringbush and Carringbush Corporation. He has been a director of Carringbush Corporation continuously since 1 May 1987.
13 The financial statements for the CU Trust prepared by BDO Nelson Parkhill show that the trust generated a net profit at 30 June 1987 of $2,921,804.00. Note 5 to the financial statements for the 1988 financial year demonstrates that the CU Trust was involved in extensive land development activities. The non‑current assets of the CU Trust at 30 June 1988 included debts owed to the trust of $59,931,121.00 and non‑current liabilities of $56,469,575.00. The detailed profit and loss statement for the year ending 30 June 1988 demonstrates a trading profit of $3,954,719.00.
14 Plainly, Carringbush as trustee of the CU Trust was engaged in a wide range of commercial development activities. Mr John Denoon in his affidavit sworn 21 August 2008 gave the following evidence.
15 He says that in or about 1987/1988 he was contacted by friends associated with a merchant bank called Wardleys Australia Limited ("Wardleys"). He was told that Wardleys was seeking investments in Rothwells which was part of a rescue package to save what was described as the "banking system in Western Australia". He says he was asked to invest $5,000,000.00 in Rothwells shares consisting of the issue of one ordinary share and two cumulative redeemable convertible preference shares for every new issued ordinary share. He says that he was given some assurances about the security of the investment. He says he was initially contacted by Mr James Yonge although most of the detail of the package was negotiated by Mr Denoon with Mr Kerry Roxburgh who Mr Denoon understood was the managing director of Wardleys. The shares were to be a new allotment issued to the incoming investors supporting the rescue package. Mr Denoon says that he agreed to invest $2.5m in the rescue package. He says that in 1987/1988 he caused Carringbush to pay $2.5m to acquire the Rothwells shares although the ultimate amount paid by Carringbush was $2,492,655.00. He annexes to his affidavit pages from the share register of Rothwells. The annexure contains a page from the register printed on 29 September 1988 which contains a reference to "CRCP shares" and records Carringbush Pty Ltd of Level 22, 56 Pitt Street, Sydney NSW 2000 as the owner of 949,583 CRCP shares. The register also shows as printed on 1 November 1988 Carringbush recorded as the owner of 474,791 ordinary shares. The financial statements for the CU Trust for the year ending 30 June 1988 prepared by BDO Nelson Parkhill record balance sheet non‑current assets described as "investments - at cost - $1,322,830". That item is explained by Note 4 to the accounts which is in these terms:
NOTE 4: INVESTMENTS
Shares in Quoted Companies
Carringbush Kumagai Ltd
Market Value (30/6/87: $144,000) $ 72,000
Rothwells $2,492,655
Less: Provision for dimini[u]tion ($1,242,655)
…
16 Mr Denoon says that he instructs his accountants to keep primary records for the relevant period required by law. He says that it has been over 20 years since the transaction occurred and he has no records of any of his companies for such a period. He says that at the time of the acquisition, Carringbush was acting in its capacity as trustee of the CU Trust. He says that the funds were provided by way of a loan from Carringbush Corporation. He says that the true financial position of Rothwells was not clear to him. He says that he does not recall the write‑down in the value of the investment in the Rothwells shares reflected in the financial statements for the CU Trust of 30 June 1988. However, the financial statements prepared by Carringbush's accountants were tabled and approved at the Annual General Meeting on 31 December 1988. Mr Denoon says that he relied upon the advice of the accountants in preparing the accounts and the accounts are based upon material provided to the accountants at the time. He says that his practice has been to review the accounts and then, once assurances have been received from the accountants as to relevant matters, to adopt the accounts as a "true and correct set of accounts". He says in his affidavit that he believes the accounts recording the purchase of the Rothwells shares were reviewed by him shortly after their preparation and he believes now, consistent with his usual practice, that the accounts prepared at the time reflect a true and fair view of the transaction and the matters the accounts address.
17 In cross‑examination, Mr Denoon explained the contextual background to the acquisition of the Rothwells shares. He said that in May or June of 1987, he had concluded a joint venture project with a large Japanese company called Kumagai Gumi. Upon the completion of the joint venture, an amount of approximately $11,000,000 became payable to Mr Denoon's joint venture entity. Mr Denoon caused $10,000,000 to be placed on deposit with the Hong Kong Bank. Wardleys was the merchant banking arm of the Hong Kong Bank. Although the deposit with the Hong Kong Bank was supposed to be a confidential matter between the bank and its customer, Mr Yonge from Wardleys approached Mr Denoon and told him that he knew that an amount of $10,000,000 was on deposit with the bank. Mr Denoon was annoyed that Wardleys knew that information. Mr Yonge asked Mr Denoon to invest $5,000,000 in the Rothwells rescue. Mr Denoon had reservations because of the low opinion he held of Mr Connell, who was the primary guiding mind of Rothwells. Mr Denoon says that he was "badgered" to provide the funds. He thought he had conversations with Kerry Roxburgh about it. Mr Denoon agreed to invest $2.5m in the rescue and subscribe for the shares. The attempt to assemble a rescue package occurred consequent upon the stock market crash in October 1987.
18 Mr Denoon said that he was not sure how the purchase of the shares was financed. He thinks that Carringbush Corporation provided loan monies to Carringbush as trustee of the CU Trust to enable it to purchase the shares. There may have been a direct transfer of money from the monies held by the Hong Kong Bank. Alternatively, Mr Denoon may have signed a cheque drawn on an account of one of the companies in the Carringbush group of companies. He can not recall whether the money on deposit with the Hong Kong Bank was held in the name of Carringbush Corporation or a special purpose vehicle established for the joint venture. Mr Denoon is clear that the deposit at the Hong Kong Bank was not in the name of the CU Trust. Mr Denoon accepts that he has no loan documentation in relation to the transaction nor any minutes of a meeting recording a loan from Carringbush Corporation or any other company to Carringbush as trustee of the CU Trust to finance the acquisition of the Rothwells shares. Mr Denoon accepts that he is not able to produce a copy of the application form for the shares which was completed and lodged with Wardleys. He also accepts that he is not able to now recall the precise number of ordinary shares or cumulative redeemable convertible preference shares taken up. He relies on the accounts and the Rothwells share register. He accepts that he has no present knowledge of the entity specified in the application form submitted to Wardleys. Mr Denoon however recalls the discussions with James Yonge and believes he discussed the transaction with Mr Roxburgh.
19 Mr Denoon was cross‑examined about three matters which are relied upon as calling into question the accuracy or reliability of the financial statements. The first of those matters concerned the share price. Mr Denoon caused an application to be made to take up the shares at a price of $1.75. However, the relevant market price of the shares in the period in question fluctuated between approximately $0.65 and $0.80 and it was put to Mr Denoon that it thus seemed improbable that he would cause an entity under his control to subscribe for Rothwells shares at such a premium. Mr Denoon accepted that the difference between the market price and the subscription price seemed anomalous and he could only speculate that the people from Wardleys must have encouraged him to believe that they could turn the company around in some fashion. It was put to Mr Denoon that if he had thought about such an investment for a moment, he would not have made the investment. Mr Denoon said that he did think about it and, in fact, he did make the investment. He says he well remembers the discussions with Wardleys. He regarded an investment of $2.5m as a significant amount and he well remembers losing the entirety of the investment.
20 The second matter put to Mr Denoon was that there were no minutes or records of a loan transaction between any Carringbush entity and Carringbush as trustee of the unit trust and moreover the financial statements for the year ending 30 June 1988 did not reflect a loan from Carringbush Corporation or any other Carringbush entity in an amount of $2.5 million. In the course of Mr Denoon's oral evidence he thought that the joint venture entity may have been a Victorian Carringbush company. The balance sheet for the CU Trust at 30 June 1988 shows non‑current liabilities in the form of unsecured loans as $56,469,575.00 and Note 6 to the accounts identifies those loans. A substantial amount is a loan from Carringbush Kumagai Limited ($50,313,868.00). Mr Denoon accepts that no part of that loan is a loan for the acquisition of the Rothwells shares. There is also a loan from Carringbush (Vic) Pty Ltd of $5,645,717.00. Mr Denoon, when asked about that loan, paused for some time but ultimately thought that the loan for the acquisition of the Rothwells shares was not reflected in the loan from Carringbush (Vic) Pty Ltd. Mr Denoon accepts that the financial accounts for the year ending 30 June 1988 do not reflect a loan for the acquisition of the Rothwells shares.
21 The third matter put extensively to Mr Denoon was that the records relating to Carringbush maintained by the Australian Securities and Investments Commission suggest a sequence in the evolution of Carringbush Corporation which shows that Carringbush Corporation was not operating by that name until 1 July 1989. Carringbush Corporation was a corporation that changed its name a number of times in quick succession. Mr Denoon accepted that there was no other corporation called Carringbush Corporation other than the entity which ultimately came to be called Carringbush Corporation, apparently on 1 July 1989.
22 Ultimately, the Commissioner contends that since there seems to be an anomaly in the references to Carringbush Corporation; an anomaly in the subscription price and the prevailing market price; a failure to record in the financial statements of the CU Trust any reference to a loan transaction between a lender and the CU Trust in respect of the funds used to acquire the Rothwells shares; and no primary documents, the financial accounts ought not to be treated as a true and fair reflection of the transactions and the matters they purport to address.
23 However, there are a number of things that seem to me to be persuasive.
24 Mr Denoon has a clear recollection of the transaction in the sense that he recalls the approach from Wardleys based on what he regarded as a quite unprincipled access to information about a deposit with the Hong Kong Bank. He recalls the request for the subscription for shares reflecting an investment of $5m as part of a rescue package for Rothwells and he recalls being pressed or badgered about the matter. He recalls committing $2,500,000.00 to the transaction and he well recalls losing all the money which must have been an experience imprinted upon Mr Denoon's mind. I have no doubt that Mr Denoon, who I regard as a witness who was telling the truth and honestly trying to recall the elements of the transaction and answer questions about it, responded to the Wardleys' request and elected to apply for the Rothwells shares and cause $2,500,000.00 to be paid for them. The transaction occurred 21 years ago. The financial accounts for the CU Trust for the year ending 30 June 1988 were prepared by BDO Nelson Parkhill on 5 December 1988. The evidence is that the external accountants were provided with all of the primary documents relating to the financial affairs for the CU Trust including expenditure vouchers, cheque requisitions, bank statements, cheque books and other primary documents. The accountants prepared the financial statements of the trust in such a way as to reflect the acquisition of the Rothwells shares by Carringbush as trustee of the CU Trust because, I infer, the primary documents caused the accountants to believe that the trustee of the CU Trust had made an investment in the Rothwells shares in the amount reflected in the accounts. By the time the accounts were prepared on 5 December 1988, the true and fair view at 30 June 1988 of the value of the investment in the Rothwells shares was diminished by $1,242,655.00. The accounts reflect an investment in the Rothwells shares in the full amount of the acquisition price subject to diminution in value. Similarly, the financial accounts for the year ending 30 June 1989 reflect a provision for diminution in the value of the Rothwells shares by a further $1,250,000.00 reducing the value of the investment to nil at 30 June 1989.
25 The financial accounts for the year ending 30 June 1988 also show non‑current assets in the form of debts owed to the CU Trust of $59,931,251.00 including an amount of $1,000.00 as a non‑current debt owed by Carringbush Corporation Limited. The accounts also show, by comparison with the position at 30 June 1987, current debts due to the CU Trust from Carringbush Corporation of $1,000.00. Although there may be some unexplained confusion in the evolution of the use of the name Carringbush Corporation, the plain inference is that the accountants took the view that Carringbush as trustee of the CU Trust had engaged in relevant commercial transactions with Carringbush Corporation in the 1987 and 1988 financial years.
26 It is clear that Mr Denoon can not recall with precision which entity was a lender of funds to the CU Trust to enable the acquisition of the Rothwells shares to occur. He accepts that the acquisition was not funded out of the cash flows available to Carringbush as trustee of the CU Trust. Nevertheless, the financial accounts for the 1988 and 1989 financial years have been prepared by the accountants with access to the primary documents. Those accounts have been prepared on the footing that the Rothwells shares were acquired by the CU Trust. The annexures to Mr Denoon's affidavit of the pages from the Rothwells share register as printed on 29 September 1988 and 1 November 1988 record the ownership of those shares in the name of Carringbush.
27 Mr Kerry Roxburgh, the former deputy managing director of Wardleys, also gave evidence about the rescue package. Mr Roxburgh knew Mr Denoon from previous commercial transactions. Mr Roxburgh however thought that he had no discussions with Mr Denoon about the transaction to subscribe for Rothwells shares. Rather, Mr Roxburgh thought that Mr Yonge conducted the relevant discussions with Mr Denoon. In his affidavit evidence, Mr Roxburgh described the applicants for shares as sub‑underwriters of the proposed Rothwells issue. In cross‑examination, Mr Roxburgh explained that Wardleys had underwritten the issue and that a project team had been established to secure applications for shares so as to, in effect, lay off the risk of the underwriting. A list of targets was prepared and each person on the list was systematically approached including Mr Denoon. Once Wardleys had secured a commitment from a particular person, the project team pursued the completion of the subscription process which involved an applicant for shares filling out and lodging an application form and making arrangement for payment of the subscription price. These steps took place in January 1988. The completed applications had to be returned to the project team in January 1988 and those applications were passed on to Rothwells for the issue of the shares. The shares were not issued by Wardleys. The original application document was held in the records of Rothwells. Mr Roxburgh was asked about the anomaly concerning the fluctuations in the share price between $0.65 and $0.80 at the relevant time and the subscription price of $1.75 for shares. Mr Roxburgh seemed to acknowledge that such a differential existed and this simply meant that "the follow up was a very difficult process, but I also recall that we were extremely pleased with the response and that we did not have a shortfall. But I do recall it was a very difficult process".
28 Evidence was also given by Mr William Ross Scott. Mr Scott has been associated with Mr Denoon since 1962. He was at the relevant time a full‑time director of all of the companies in the Carringbush group of companies including Carringbush as trustee of the CU Trust. Mr Scott was responsible for the "financial side of the businesses". He says that he was involved in the affairs of each of the companies and was aware of their activities. His association with Mr Denoon ended in March 1992 when Mr Scott pursued an independent business opportunity. He says that he can not now recall the acquisition of the Rothwells shares, specifically. He recalls that Wardleys approached Mr Denoon and pressed him to take up an investment in shares to be issued by Rothwells. Mr Scott says that he was concerned about it at the time because he thought it was taking investment away from the core activities of the Carringbush group of companies. He says that although he can not recall the payment for the shares he would have been instrumental in arranging for and processing the payment. He says that if the payment was made by cheque, he would have signed it. If the payment was made by other means, he would have made the arrangements. Mr Scott says that the companies in the group maintained a general ledger on computer and there was a general ledger for the CU Trust. He says the general ledger would have reflected the transactions of the trust and there would have been journal entries made, "from time to time".
29 Mr Scott can not now recall the loan transaction by which the acquisition of the shares by the CU Trust was funded. He thinks that the funds would have been provided by one of the entities in the Carringbush group of companies. He thinks that the companies' documents would have reflected a record of the payment, either in bank statements or as a journal entry in a ledger. Mr Scott says that he remembers the transaction because of his discussions about it with Mr Denoon. He says that he relies upon the accounts of the CU Trust as evidencing the ownership of the Rothwells shares although he has no independent recollection of Carringbush as trustee of the CU Trust becoming the owner of the shares. Mr Scott says that he was responsible for arranging the mechanics of the transfer of funds as and when required for the many developments which the Carringbush group of companies were then undertaking. As to the preparation of the accounts, Mr Scott confirmed that the accounts were prepared by external accountants and that those accountants had access to all of the books and records of the Carringbush group of companies. He explained that the accountants would attend the premises for the group of companies and prepare the accounts from "chequebooks, bank reconciliations, whatever was - whatever information was available, they had access to it". As to the accuracy of the accounts, Mr Scott said, "Well, I was involved from a director's point of view in going through the draft accounts with the accountants and auditors, and I would have been satisfied that they represented a true picture".
30 Mr Scott was asked in cross‑examination about the business method of recording a loan transaction in the order of $2.5 million. Mr Scott accepted that an inter‑company loan transaction would, in the ordinary course, have been the subject of a minute at least, "on a fairly regular basis". Making a minute of such a loan transaction or a significant variation to such a loan would depend upon whether the transaction was truly a loan transaction or simply a current account transaction which would not necessarily have been minuted. Mr Scott said that an amount of $2.5m was not a major amount in the context of the development activities of the Carringbush group of companies at the time and would not necessarily have been minuted. Loan transactions with external lenders were in a different category and would have been minuted.
31 I accept the evidence of Mr Denoon, Mr Roxburgh and Mr Scott. I am satisfied that the financial statements for the year ending 30 June 1988 and 1989 prepared by BDO Nelson Parkhill based upon access to all of the primary documents relating to the activities of the Carringbush group of companies and more particularly Carringbush and the CU Trust, evidence a transaction by which Carringbush as trustee of the CU Trust acquired the Rothwells shares. I am satisfied that the acquisition is consistent with the entries recorded in the Rothwells share register. I am satisfied that Carringbush as trustee of the CU Trust paid for those shares in an amount of $2,492,655.00 and that those funds were available to Carringbush as trustee of the CU Trust, on the balance of probabilities, by means of an inter‑company loan. I accept that the financial statements for the 1988 and 1989 financial years do not expressly reflect such a loan. However, I do not regard that matter as a proper basis upon which the financial statements for those years ought to be called in question and displaced as evidence of the acquisition. The funds may have been available to Carringbush from companies within the group of companies on the basis, as Mr Scott thought possible, that loan funds were provided or drawn down from a company within the group and repaid within the financial year in which event the transaction would not be recorded as a loan transaction in the financial statements at 30 June 1988.
32 In any event, the oral evidence of best recollection of a transaction that occurred 21 years ago, taken in conjunction with the entries in the financial statements and the entries in the share register, establish, on the balance of probabilities, that the Rothwells shares were acquired by Carringbush as trustee of the CU Trust in or about January or February 1988 or at least at a date within the second six months of the financial year ending 30 June 1988. The shares were sold in the 1993 income year giving rise to a net capital loss of $2,492,653.50.