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[2025] FCA 108
Federal Court of Australia
2025-02-21
Shariff J
Original judgment source is linked above.
84 The Davis Applicants carried the onus to establish the essential elements of their pleaded case. It is trite that, in a civil proceeding such as this, that case had to be proved on the balance of probabilities: s 140(1) of the Evidence Act 1995 (Cth) (Evidence Act). As Dixon J (as his Honour then was) said in Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 at 361-2, that requires the affirmative of the relevant allegation to be "made out to the reasonable satisfaction" of the Court. Reasonable satisfaction is not reached "by inexact proofs, indefinite testimony, or indirect inferences": at 362. Actual persuasion is required and it cannot be found "as a result of a mere mechanical comparison of probabilities independently of any belief in its reality": at 361; see also, NOM v DPP [2012] VSCA 198; (2012) 38 VR 618 at [123]; Morley v Australian Securities and Investments Commission [2010] NSWCA 331; (2010) 274 ALR 205 at [749]-[751]; and Citadel Financial Corporation Pty Ltd (admin apptd) v Action Scaffolding & Rigging Pty Ltd (in liq) [2019] FCAFC 145 at [57]. In Roberts-Smith v Fairfax Media Publications Pty Ltd (No 41) [2023] FCA 555; (2023) 417 ALR 267 at [104], Besanko J recently drew attention to the less cited passages from Briginshaw of Latham CJ who said at 343: There is no mathematical scale according to which degrees of certainty of intellectual conviction can be computed or valued. But there are differences in degree of certainty, which are real, and which can be intelligibly stated, although it is impossible to draw precise lines, as upon a diagram, and to assign each case to a particular subdivision of certainty. 85 The civil standard of proof is not one of mathematical scales. The resolution of a controversy depends on reaching a state of satisfaction: see Hodgson DH, "The Scales of Justice: Probability and Proof in Legal Fact-finding" (1995) 69 ALJ 731. As Lee J put it recently in Transport Workers' Union of Australia v Qantas Airways Ltd [2021] FCA 873; (2021) 308 IR 244 at [284]-[288], when the law requires proof of any fact, the tribunal of fact must feel actual persuasion as to its occurrence or existence before it can be found. A party bearing the onus will not succeed unless the whole of the evidence establishes a reasonable satisfaction on the preponderance of probabilities such as to sustain the relevant issue: citing Axon v Axon [1937] HCA 80; (1937) 59 CLR 395 at 403 (Dixon J). His Honour drew attention to GLJ v The Trustees of the Roman Catholic Church for the Diocese of Lismore [2023] HCA 32; (2023) 97 ALJR 857, where Kiefel CJ, Gageler and Jagot JJ observed at [60] (quoting from Brown v New South Wales Trustee and Guardian (2012) 10 ASTLR 164 at [51] and Bradshaw v McEwans Pty Ltd (1951) 217 ALR 1 at 5): … "To satisfy an onus of proof on the balance of probabilities is not simply a matter of asking whether the evidence supporting that conclusion has greater weight than any opposing evidence … It is perfectly possible for there to be a scrap of evidence that favours one contention, and no countervailing evidence, but for the judge to not regard the scrap of evidence as enough to persuade him or her that the contention is correct." The evidence must "give rise to a reasonable and definite inference" to enable a factual finding to be made; mere conjecture based on "conflicting inferences of equal degrees of probability" is insufficient… (Citations omitted). 86 It goes without saying that rejection of one side's case or arguments does not involve acceptance of the other side's case or arguments. Nor is the Court bound to make findings one way or the other. As Besanko J observed in Roberts-Smith at [117]: There is no doubt that a court is not bound to accept the case of one or other of the parties. It may reject the case of both parties. In Kuligowski v Metrobus [2004] HCA 34; (2004) 220 CLR 363, the High Court said (at [60]): In general, disbelief in a witness's evidence does not establish the contrary. Similarly, disbelief in the case presented by the moving party does not necessarily permit the court to conclude that the positive case of the opposing party is correct. In particular cases it may not be possible to reach a conclusion either way: [T]he judge is not bound always to make a finding one way or the other with regard to the facts averred by the parties. He has open to him the third alternative of saying that the party on whom the burden of proof lies in relation to any averment made by him has failed to discharge that burden. [Rhesa Shipping Co SA v Edmunds (The Popi M) [1985] 1 WLR 948 at 955; [1985] 2 All ER 712 (Rhesa Shipping v Edmunds) at 718.] A failure to find a matter alleged does not establish the truth of the contrary of that which is alleged… (Emphasis added). 87 Although these matters are well settled to the point of being trite, it is necessary to steadily bear them in mind in the context of essential aspects of the Davis Applicants' case. That is especially so in respect of the Davis Applicants' contentions as to whether the heartwood yield assumptions used by Quintis were materially higher than those a market participant would have assumed, and that the fair value of Quintis' biological assets was overstated. It also applies to the Davis Applicants' counterfactual case that the heartwood yield assumption that should have been applied was approximately 6 to 8 kg. There are a range of possible outcomes as to what Quintis or a market participant may or should or would have done. Accepting that Quintis' approach to the valuation of its biological assets was ambitious does not equate with a state of satisfaction that the heartwood yield assumption was materially higher than that which a market participant would have assumed. Likewise, accepting that the heartwood yield assumption was materially higher than that which would have been assumed by a market participant does not lead to the conclusion that the heartwood yield assumption that should have been applied was 6 to 8 kg. And, neither of those propositions, if accepted, necessarily leads to a conclusion that the Davis Applicants have satisfied me that the fair value of Quintis' biological assets was overstated. 88 The common law test of balance of probabilities "is not satisfied by evidence which fails to do more than establish a possibility" (emphasis added): Seltsam Pty Ltd v McGuiness [2000] NSWCA 29; (2000) 49 NSWLR 262 at [80] citing St George Club Ltd v Hines [1962] ALR 39; (1961) 35 ALJR 106 at 107 at 41. Here, on their counterfactual case it was not sufficient that the Davis Applicants persuaded me that the heartwood yield assumption used by Quintis was materially higher than that which a market participant would have used. Nor is it sufficient that the Davis Applicants persuade me that Quintis should have used a different, and more conservative, heartwood yield assumption. To succeed in their counterfactual case, the Davis Applicants had to establish that a heartwood yield of approximately 6 to 8 kg would or should have been used. They have not succeeded in establishing this part of their case. That being the case, the remainder of the myriad possibilities are not a matter to be entertained in a Court of record where the parties are bound by their pleadings. 89 As will become apparent throughout these reasons, the Davis Applicants focussed all of their attention on seeking to falsify two of the DCF Model assumptions, to in essence contend that, ipso facto, there was an overstatement of the fair value of the biological assets. There was no challenge to any other integer of the DCF Model. Whilst there was evidence adduced about what would have been an appropriate heartwood yield assumption and processing costs assumption, there was no pleaded case about what other assumptions a reasonable market participant would have made, including as to matters such as oil price, exchange rate, discount rates and mortality. These were each matters which the Davis Applicants did originally challenge, but none of which were ultimately pressed. 90 In respect of these matters, it was not for the Respondents to establish what those assumptions would have been. Notwithstanding that the Respondents contended that Quintis' approach to the valuation of its biological assets was sound and without error, as Besanko J pointed out in Roberts-Smith, the Court is not bound to accept the case of one or other of the parties and may reject the case of all parties. As it happens, whilst I am satisfied that the assumption used by Quintis as to heartwood yield was materially overstated, I am not satisfied that the Davis Applicants have established what the other inputs should have been used had the correct heartwood yield assumption been applied, such that I am unable to positively conclude that the accounts in each of FY15 and FY16 did not represent fair value. Whilst the fair value of the biological assets may well have been overstated, by not contesting the validity of the other DCF Model assumptions, and not leading any evidence as to why those assumptions would remain the same if a different heartwood yield assumption was used, the Davis Applicants failed to discharge their onus to persuade me to a state of positive satisfaction that Quintis' accounts were, in fact, overstated. These are matters developed through the body of these reasons.
91 As I will explain below, Mr Wilson did not give evidence in the proceedings and EY did not call any evidence from the personnel that were involved in auditing Quintis' accounts in FY15 and FY16. Unsurprisingly, the Davis Applicants invited me to draw adverse inferences in accordance with the principle in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298. The Davis Applicants also invited me to draw the same inference against EY. 92 The rule in Jones v Dunkel is that "the unexplained failure by a party to call a witness may, in appropriate circumstances, support an inference that the uncalled evidence would not have assisted the party's case": Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11; (2011) 243 CLR 361 (Heydon, Crennan and Bell JJ) at [63]. That is particularly so where it is "the party which is the uncalled witness": Kuhl at [63]. The failure to call such a witness may also "permit the court to draw, with greater confidence, any inference unfavourable to the party that failed to call the witness if that uncalled witness appears to be in a position to cast light on whether the inference should be drawn": Kuhl at [63]. However, the rule in Jones v Dunkel permits an inference not that evidence not called by a party, would have been adverse to the party "but that it would not have assisted the case": Kuhl at [64]. In this regard, as Heydon J explained in Australian Securities and Investments Commission v Hellicar [2012] HCA 17; (2012) 247 CLR 345 at [232]: … two consequences can flow from the unexplained failure of a party to call a witness whom that party would be expected to call. One is that the trier of fact may infer that the evidence of the absent witness would not assist the case of that party. The other is that the trier of fact may draw an inference unfavourable to that party with greater confidence. But Jones does not enable the trier of fact to infer that the evidence of the absent witness would have been positively adverse to that party. 93 The last sentence draws attention to the obvious outer limit of the Jones v Dunkel inference - it does not fill gaps in the evidence. As Besanko, Perram and Katzmann JJ said in Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd [2011] FCAFC 53 at [79]: But the fact that one can infer that a party was afraid to call some particular witness or tender some particular document can take a trier of fact only so far. It is accepted that where a party fails, without explanation, to call a witness who that party might have been expected to call and whose evidence might have elucidated the matter in dispute, then the inference may be drawn that the evidence of the absent witness would not have assisted the party that failed to call that witness. By itself that inference is frequently somewhat barren, for knowing that the evidence of a witness would not have assisted tells one nothing about what the witness's evidence affirmatively would have been. Often more directly useful is the allied principle that in such a case the trier of fact may more confidently draw any inference unfavourable to the party that failed to call that witness if that witness appears to be in a position to cast light on whether the inference should be drawn. Neither inference is mandatory and, generally speaking, these inferences only become material where the balance of the evidentiary record is equivocal. 94 It is not possible in a case such as this to make any generalised findings as to the inferences to be drawn from the failure to call witnesses. 95 Reliance upon Jones v Dunkel in a case such as this sometimes detracts attention from the ordinary process of fact finding including the orthodox approach to the drawing of inferences from other facts. Sir Frederick Jordan's classic statement in Carr v Baker (1936) 36 SR (NSW) 301 at 306 remains apposite to a case such as this: The existence of a fact may be inferred from other facts when those facts make it reasonably probable that it exists; if they go no further than to show that it is possible that it may exist, then its existence does not go beyond mere conjecture. Conjecture may range from the barely possible to the quite possible. 96 The evidence from all parties included a large documentary tender. I was invited by all parties to draw inferences from the documents and most of these were unaided by oral testimony from the authors of those documents. Each party had its own views about what was said in those documents and the limits of what the Court could draw from them. Resolving these matters has involved assessing the documents and determining whether it is reasonable to draw the inference pressed by one or other party: see, e.g., Luxton v Vines (1952) 85 CLR 352 at 358 (Dixon, Fullagar and Kitto JJ). 97 Moreover, as principal parts of the Davis Applicants case against Mr Wilson and EY sought to invite findings as to state of mind, either as to matters they knew or ought reasonably to have known, it is well to remember that the resolution of such controversies also involves an orthodox process of fact finding. As Spigelman CJ stated in Seltsam at [91] (albeit in the context of factual causation), facts "can be established by a process of inference which combines primary facts like "strands in a cable" rather than "links in a chain", to use Wigmore's simile: Wigmore on Evidence, (3rd ed, vol 9, 1981) at 412-444 [2497] referred to in Shepherd v The Queen (1990) 170 CLR 573 at 579". This is the process I have undertaken in making findings as to what was known or ought reasonably to have been known to Mr Wilson and EY, though I have not (in the interests of time) spelled this out on every occasion.
98 The Davis Applicants read and relied upon the following affidavits: (a) an affidavit of Geoffrey Peter Davis dated 23 December 2019: CB Tab 20 (Davis Snr Affidavit); and (b) an affidavit of Geoffery William Davis dated 23 December 2019: CB Tab 21 (Davis Jnr Affidavit). 99 Mr Davis Snr and Mr Davis Jnr are, respectively, father and son. They are the trustees of the Davis Fund, Mr Davis Snr's self-managed super fund. 100 Mr Davis Snr was a bus operator for about 30 years for the Brisbane City Council, and is now retired. He also worked in and ran small businesses, during which time he developed a working knowledge of basic accounting processes such as preparing and recording financial information. Mr Davis Snr set up the Davis Fund with his then-partner, Ms Jing An Yan, in late 2012. Both of them were the original trustees of the Davis Fund. Their partnership ended shortly thereafter, leading to Ms Yan ceasing to be a member and trustee of the Davis Fund. 101 Mr Davis Jnr became the second trustee of the Davis Fund on 21 January 2013 and remains in that role. He has, for most of his adult life, been self-employed and run his own businesses, both as a sole trader and with a business partner, primarily in the glass splash back industry. 102 It was common ground that the relevant transactions by which the Davis Applicants purchased and sold shares in Quintis during the relevant period were as follows: (a) purchased 50,000 shares on 2 November 2015 for $88,020.94, being $88,126.56 including brokerage and GST; (b) purchased 50,000 shares on 5 May 2016 for $75,188.00, being $75,278.22 including brokerage and GST; (c) purchased 5,618 shares off market on 5 May 2016 pursuant to a share purchase plan for $8,707.90; (d) purchased 40,000 shares on 14 September 2016 for $57,525.64, being $57,594.67 including brokerage and GST; (e) sold 145,618 shares on 22 December 2016 for $239,238.14, being $238,951.06 including brokerage and GST; (f) purchased 100,000 shares on 21 February 2017 for $150,534.75, being $150,715.39 including brokerage and GST; (g) purchased 100,000 shares on 6 March 2017 for $143,921.32, being $144,094.02 including brokerage and GST; and (h) purchased 100,000 shares on 23 March 2017 for $114,883.90, being $115,021.76 including brokerage and GST. 103 Mr Davis Jnr's evidence was largely undisputed, but was of little assistance to the central issues in the proceedings. 104 In relation to Mr Davis Snr's evidence, to the extent I have accepted or rejected various aspects of it, I deal with this below. 105 As mentioned above, Mr Wilson did not give evidence. He was due to give evidence in his own case, but when scheduled to do so his Senior Counsel sought a temporary adjournment. At the conclusion of that adjournment, I was informed that Mr Wilson would not be giving evidence in his case without any explanation. 106 Prior to the commencement of the hearing before me, EY had filed affidavits from a number of its personnel who were involved in the audit of the FY15 and/or FY16 Financial Reports. However, following the close of the Davis Applicants' case, I was informed that EY would not be calling any of those witnesses. 107 However, EY did call evidence from Mr Brown and read an affidavit of Andrew Brown dated 4 May 2023: CB Tab 27 (Brown Affidavit). At the commencement of his evidence, I was informed that Mr Brown suffered from Parkinson's disease. Whilst this did not affect the content of the evidence that Mr Brown gave, I did observe Mr Brown become progressively tired and weary as his cross-examination progressed. 108 The Davis Applicants invited me to reject Mr Brown's evidence in various respects, and took issue with his credit. In my view, Mr Brown was an honest witness, who was considered and made every effort to answer questions to the best of his recall and ability, bearing in mind that at various times he was being asked questions about matters and events that had occurred over a decade beforehand (such as in relation to what I later refer to as the "Enigma Presentation" and the matters that preceded it). I reject the Davis Applicants' contention that Mr Brown was not a witness of credit. However, it does not follow that I accept Mr Brown's evidence in every respect. In some respects, I found the contents of certain documents, such as the "Inventory Reports", to be the surest and best guide as to the evidence upon which to base my findings.
109 The Davis Applicants called expert sandalwood evidence from Dr Barbour. Dr Barbour is a sandalwood expert. She has a PhD in plant physiology and has been engaged in forestry research since the completion of her postgraduate research in 1987. Her experience with sandalwood commenced in 1993, during her period with the Western Australian Department of Conservation and Land Management (CALM), and continued with the growing of seedlings and establishing a sandalwood trial in Kununurra in 2002-2003 which she worked on until 2009. The aim of the trial was to provide quality seeds from species established over the years at a research facility named the Frank Wise Institute (FWI) in the ORIA. Subsequently, Dr Barbour worked at the Forest Products Commission of Western Australia (FPC) to assess the majority of the sandalwood trials established at the FWI since the late 1980s, resulting in a report which I later refer to as Barbour et al. (2012). Dr Barbour has also conducted research at the University of Western Australia focusing on sandalwood heartwood oil and genetics. 110 The Davis Applicants relied upon the following reports of Dr Barbour: (a) an expert report dated 25 February 2020: CB Tab 31 (Barbour Report); (b) a reply report dated 15 March 2024: CB Tab 66.01 (Barbour Reply Report); and (c) a supplementary report dated 7 April 2024: CB Tab 62.01 (Supplementary Barbour Report). 111 EY called expert sandalwood evidence from Dr Geoff Woodall by way of an expert report dated 8 August 2022: CB Tab 62 (Woodall Report). Dr Woodall has a BSc (Hons) in horticultural science and a PhD in plant physiology. He started working on hemi-parasitic plants in 1992 and has been a researcher, developer of sandalwood establishment systems and grower of sandalwood species for 30 years. As an agronomist and industry expert, Dr Woodall has established over 2000 ha of Santalum spicatum plantations, over 100 ha of developmental Santalum album plantations and small plantings of other hemi-parasitic trees and shrubs. He has also harvested and sold sandalwood, owned and run his own 200 ha sandalwood plantation and provides technical sandalwood assistance to individuals and organisations. He instigated and has been heavily involved in the Australian sandalwood growers' group, the Australian Sandalwood Network. 112 Mr Wilson called expert evidence from Mr Andrew Morton by way of an expert report dated 8 August 2022: CB Tab 51 (Morton Report). Mr Morton is not a sandalwood expert, but is a professional forester and forestry consultant. He holds a BSc (Forestry) (Hons 1) and an MBA and is a full member of Forestry Australia. He is Director of Indufor Asia Pacific (Australia) Pty Ltd (Indufor) and former Vice-President of URS Forestry and has over 30 years' experience in advising the forest and wood products sector. Indufor began operations in 2014 and is part of a global forestry consulting group which has consulted to the forestry sector for over four decades. Its work includes detailed assessment of timber product markets and industry surveys, plantation due diligence and technical analysis of plantation growth, and plantation and forest valuations. 113 Prior to the commencement of the hearing, I heard the parties' respective objections to the reports of each of Dr Barbour, Dr Woodall and Mr Morton. No party requested reasons for the rulings that I made. It is not necessary for me to set them out here. 114 Each of Dr Barbour, Dr Woodall and Mr Morton gave evidence concurrently. I regarded each of them to be honest witnesses. In some respects, I have accepted the opinions they expressed, and in others I have not. It is not necessary for me to set these matters out in a general way. I have made it clear in these reasons the opinions that I have accepted, those which I have rejected and those which I regarded as having no or little weight.
115 The Davis Applicants relied upon the expert opinions of Mr Wayne Basford relating to accounting and auditing issues. Mr Basford is a Chartered Accountant and registered company auditor. He holds a BSc (Applied Chemistry) (Hons 1) and is a member and Fellow of Chartered Accountants Australia and New Zealand (CA ANZ). He has over 30 years' experience in providing audit and advisory services. He has worked for international accounting firms in Australia, Singapore and the United Kingdom and is a currently a Partner at BDO in Perth. The Davis Applicants tendered an expert report prepared by Mr Basford in two volumes: (a) "Volume 1 - Biological Assets Report" dated 4 March 2020: CB Tab 33 (Basford Report); and (b) "Volume 2 - Issues in Accounting for Investment Products and Revenues from those Products" dated 17 March 2020: CB Tab 41. 116 By reason of the matters that it no longer pressed, the Davis Applicants did not ultimately rely upon Volume 2 of Mr Basford's report. 117 EY called expert evidence from: (a) Mr Warren McGregor by way of a two-volume report dated 8 July 2022: CB Tabs 54 and 55 (McGregor Report); (b) Professor Graham Partington by way of a report dated 8 July 2022: CB Tab 53 (Partington Report); and (c) Mr Chris Westworth by way of a two-volume report dated 8 July 2022: CB Tabs 56- 61 (Westworth Report). 118 Mr McGregor is a director of Stevenson McGregor, a firm specialising in financial reporting advice and related litigation. He was an inaugural member of the International Accounting Standards Board from 2001 to 2011, in which capacity he was intimately involved in the development of International Financial Reporting Standards which have been adopted as the Australian Accounting Standards. From 1980 to 1999, Mr McGregor worked with the Australian Accounting Standards Board in establishing the Standards, including as Executive Director from 1989. He has also been a senior consultant to PwC, during which time he provided advice on the application of the Standards, and an Enterprise Fellow in the Department of Accounting, Faculty of Business and Economics at the University of Melbourne. He holds a BEc (Hons), DipEd and MEc and is a Fellow of CA ANZ, CPA Australia and the Institute of Public Accountants. 119 Professor Partington is an Associate Professor of Finance at the University of Sydney. He holds a BSc (Hons) (Economics and Forestry) and a MEc (Hons). He has co-authored two textbooks on accounting and corporate finance respectively, and his research includes over 40 refereed journal articles and many conference papers, mostly relating to finance but also some in relation to accounting. Professor Partington also acts as a consultant in relation to the cost of capital and valuation and has experience valuing forest plantations in New South Wales and South Australia. 120 Mr Westworth is a consultant providing accounting and auditing advice and expert witness advice through Westworth Kemp PL and a non-executive director on various boards. He holds an LLB and a Diploma in International Commercial Arbitration and is a Fellow of CA ANZ. From 1988 to 2010, he was an audit partner with EY involved in audit engagements for complex listed entities and multinational groups; and from 2006 to 2010, the Professional Practice Director of EY responsible in Australia for auditing methodology and policy, accounting interpretations of complex transactions, including for construction companies and quality control. In those roles, Mr Westworth advised audit clients and clients of other partners of EY on the application of accounting and audit and assurance standards. 121 The auditing and accounting experts also prepared a joint report dated 30 September 2022: CB Tab 67 (Joint Report). Mr Morton prepared an addendum to the Joint Report dated 22 February 2024: CB Tab 68. 122 As with the other expert evidence, prior to the commencement of the hearing, I heard the parties' respective objections to the accounting and auditing expert reports. Again, no party requested reasons for the rulings that I made and I do not set them out here. 123 Each of Mr Basford, Mr McGregor, Professor Partington, Mr Westworth and, in part, Mr Morton, gave evidence concurrently. As with the other witnesses, I regarded each of them to be honest and, in some respects, I have accepted the opinions they expressed, whilst in others I have not or have concluded that they are of little weight. 124 The Respondents submitted that I should reject Mr Basford's evidence and find that he lacked credit for a number of reasons, primarily on the basis that he was not a truly independent expert. By way of summary, the Respondents contended that: (a) to a very significant degree, the case advanced by the Davis Applicants was based upon the opinions of Mr Basford about alleged errors in Quintis' accounts and alleged errors made by EY in auditing those accounts; (b) Mr Basford's connection with this litigation commenced well before these proceedings were filed, in that: (i) in August 2017, he was engaged by Piper Alderman (who, apparently, were acting for the Davis Applicants' litigation funder at that stage) to assist in the investigation and articulation of the accounting and auditing allegations made in the proceedings; and (ii) that engagement involved providing a written opinion on the merits of a proposed claim against Quintis and EY based on alleged errors in the company's accounts; meeting with Piper Alderman, counsel and representatives of the litigation funder on multiple occasions to discuss the potential claims; and providing input into the drafting of the allegations in the pleadings; (c) Mr Basford was willing to express opinions about accounting and auditing matters the subject of the proceedings without any proper basis for doing so; (d) Mr Basford was aware that his opinion was being relied upon by the litigation funder to make a decision as to whether it would fund the proceedings; (e) Mr Basford chose not to disclose his prior engagement by Piper Alderman to the Court; and (f) many of the contentions which Mr Basford saw fit to advance in his written reports were subsequently abandoned by the Davis Applicants, or by Mr Basford himself. 125 I was not persuaded to reject Mr Basford's evidence in its entirety on the grounds asserted by the Respondents. However, it is necessary for me to observe that Mr Basford's evidence (including in his very lengthy Report and in the Joint Report) addressed a number of matters that were relevant to a pleaded case that was no longer advanced. I have only had regard to those opinions that were in fact relied upon in support of the pleaded case as advanced. Mr Basford's opinions as to the recalculated accounts were entirely dependent on acceptance of the assumption that he was given by Dr Barbour as to the correct heartwood yield, and his assumption as to what should have been the correct processing costs. It follows that his opinion as to the restated accounts could only have been accepted if these assumptions were accepted. 126 The Davis Applicants contended that I should reject Mr Westworth's evidence on the basis that he was, at times, unresponsive in his answers and otherwise intemperate. I have addressed these matters in the particular respects in which they were raised later in my reasons.
127 The Davis Applicants relied upon expert evidence from Mr Andrea De Cian in relation to issues of indirect causation, quantification and loss. In this regard, they relied upon the following reports of Mr De Cian: (a) an expert report dated 29 May 2020: CB Tab 48 (De Cian Report); and (b) a reply report dated 2 November 2022: CB Tab 49 (De Cian Reply Report). 128 Mr De Cian is an associate Chartered Accountant, Director of Grant Thornton Corporate Finance Pty Ltd and a Partner of Grant Thornton Australia Ltd. He holds qualifications in Economics and Accounting. He has been providing valuation services for over 22 years and has been a Partner of the valuation team of Grant Thornton since 2008. In this role, he provides independent expert reports and valuations for financial reporting, tax and other purposes. This involves giving impartial advice to investors on the merits of a proposed transaction, and an opinion as to whether the transaction is fair and reasonable to shareholders or is in their best interests. 129 Mr Wilson called evidence in response from Mr John Holzwarth by way of a report dated 25 July 2022: CB Tab 50 (Holzwarth Report). Aspects of Mr Holzwarth's evidence addressed issues arising in the separate Excel Texel Proceedings, but other parts remained relevant to the present proceedings. Mr Holzwarth is a Partner in OSKR LLC, a consulting firm specialising in economic and financial analysis in legal proceedings. He holds a BA (Economics) and an MBA and is a CFA charter holder. He has expertise in financial and damages analysis, has published on issues relating to financial valuation and has been retained as a testifying and consulting expert in matters regarding financial analysis and damages analysis using traditional financial analysis techniques and event studies. He has acted as an expert in a number of shareholder class actions in Australia, providing opinions regarding market efficiency, the appropriate methodologies for analysing materiality and inflation, and fundamental value analysis and assessing the actions of credit rating agencies. 130 EY called evidence in response from Professor Alex Frino by way of a report dated 8 July 2022: CB Tab 52 (Frino Report). Professor Frino is a Professor of Economics and Senior Deputy Vice-Chancellor at Wollongong University and a Director of Financial Markets Consulting Pty Ltd. He holds a PhD and an MPhil in Finance, and was previously Chair of Finance at the University of Sydney, where he held a position in the finance discipline for over 20 years. His speciality is pricing and valuation of assets, and he has written numerous research papers and a book on these topics. He previously worked as an industrial analyst in the stockbroking division of Credit Suisse and has served on the Disciplinary Tribunal of the ASX. 131 In addition, Excel Texel had called evidence from Mr Frank Torchio, which he gave in the form of: (a) an expert report dated 12 June 2020: CB Tab 63 (Torchio Report); and (b) a supplementary report dated 16 February 2024: CB Tab 63.01 (Supplementary Torchio Report). 132 Although Mr Torchio's evidence did not directly bear upon the Davis Applicants' case, it did form part of the concurrent evidence that was given before me and part of it remained relevant to the present proceedings. Mr Torchio is the President of Forensic Economics, Inc., a New York firm he founded in 1989. He holds an MBA in Finance and Economics and is a member of the CFA Institute. Mr Torchio has consulted on issues pertaining to financial valuations, regulatory economics, transfer pricing, financial-economic analysis, and analysis of the response of share prices to public information in securities fraud lawsuits for over 30 years. He is also an Adjunct Professor and former Executive Professor of Finance at the Simon School of Business at the University of Rochester, and has published articles concerning trading models used for calculating damages in securities lawsuits, the proper use of event study analysis and the effect of size premiums from lack of trading liquidity. 133 As noted, each of Mr De Cian, Mr Holzwarth, Professor Frino and Mr Torchio gave their evidence concurrently. I regarded each witness as being honest. However, as I set out in the final parts of these reasons, I was not persuaded by critical parts of Mr De Cian's evidence. Ultimately, I was not satisfied that I should accept various opinions that he expressed.
136 As noted in the Introduction, Sandalwood is a hemi-parasitic tree belonging to the botanical family Santaceae. It produces fragrant oil that is valued in the manufacture of perfumes, soaps, cosmetics and medicines. Sandalwood oil is the most commercially valuable product of a sandalwood tree. The fragrant timber, from which the sandalwood oil is extracted, is also commercially valuable. 137 The part of a sandalwood tree that contains the valuable oil and fragrant timber is the heartwood, which is the central core of the wood. The heartwood is depicted in the following pictorial representation and photograph: 138 Heartwood formation occurs by the death of living tissue within the core of the tree and the infusion of that tissue with sandalwood oil, which preserves the dead heartwood. However, not every sandalwood tree will produce heartwood. 139 If a sandalwood tree produces heartwood, the heartwood proportion of the wood only develops once the tree achieves a certain age. Once it starts producing heartwood, the heartwood proportion of the tree increases over time, as does the oil yield from the heartwood. 140 It follows that heartwood and the oil contained in it, if any, accumulates over time, meaning that, on average, a 16 year old tree will yield more heartwood than a 15 year old tree, and a 15 year old tree will, on average, yield more heartwood than a 14 year old tree, and so on. On average, larger trees will contain more heartwood than smaller ones. 141 The "total merchantable mass" (TMM) of a tree refers to the total mass of wood including both heartwood and sapwood, both in the trunk or "bole" of the tree and in branches of greater than 50 mm. 142 As noted earlier, sandalwood trees are hemi-parasitic. This means that they connect to other plants to draw substances needed for survival. The other plant is generally referred to as the "host". The sandalwood tree roots seek and connect to the host plant roots, from which the sandalwood tree draws additional water and mineral nutrients. As well as providing water and nutrients, host plants can provide physical protection for sandalwood, such as from the sun and wind. The following figure demonstrates the connection between a sandalwood tree and its host: 143 The growth of sandalwood trees and, as a result, the likelihood of the development of heartwood in them to a particular level (if at all), depends on a number of variable factors including the genetic quality of the sandalwood seeds, selection of the host, "competition" as between the host and the sandalwood tree, the configuration and design of the plantations (including spacing as between the host and the sandalwood tree and as between sandalwood trees in the one compartment or plot), the stocking density in each plot, the soil in which the plantations are established, the level of irrigation (or its absence), the effect of other plantation practices (such as the use of fungicides and pruning) and climactic conditions.
5.2 The cultivation of sandalwood in Australia - the FPC and FWI trials in the ORIA
144 Indian sandalwood is native to India and Indonesia, although there are a handful of wild sandalwood trees growing in Australia, at various locations in the Northern Territory. Outside of the Australian plantations established since the 1980s (discussed below), there has been little cultivation of sandalwood elsewhere in the world. Most heartwood harvested outside Australia therefore comes from wild stocks in forests. Until the establishment of the sandalwood research program in Kununurra, Western Australia (which I refer to below), commercial sandalwood plantations on such a large scale did not exist anywhere in the world. 145 The cultivation of sandalwood in Australia began in the 1980s with the establishment of 30 trees grown from seed imported from India by Mr Chris Done (Mr Done) (who later worked for Quintis) and others, on a Western Australian Forestry Department (WAFD) site in Kununurra. 146 In 1986, Mr Done and Mr Peter Kimber (Mr Kimber) (who was also engaged by Quintis at a later time) established 140 more sandalwood trees in the WAFD's Kununurra arboretum. 147 In 1988, an agreement was reached between CALM and another government department. This led to a series of plantings looking at different sandalwood host combinations that were established at the FWI. Mr Kimber, who by then was the Principal Operations Officer of CALM (a role he held from 1985 to 1994), designed and planted these trials with Mr Done (who also worked at CALM from 1985). 148 In 2000, the commercial activities of CALM were transferred to the FPC. At or about this time Dr Barbour joined the FPC as Manager of Seed Technologies. 149 The sandalwood plantings at the FWI were used to test different silviculture regimes to assess which worked and which did not, and to capture genetic variations. In total, there were nine silviculture trials and about three genetic trials, as well as some trials related to other high-value timbers. 150 At its peak, the FWI had about 10 ha of sandalwood under cultivation. 151 In essence, the FWI trials were part of the Western Australian and Commonwealth Governments' industrial policy with respect to tropical forestry in northern Australia. The primary objective and purpose of the trials was to arm industry participants with information so that they could determine whether to establish commercial sandalwood plantations, and develop and optimise silvicultural practices in relation to those plantations. 152 The earliest of the FWI's trials related to sandalwood trees that were planted in 1987, while the last were planted in 2000. The trials tested different short and long-term hosts, different planting configurations and spacing between sandalwood trees and hosts, different stocking densities of sandalwood trees and hosts, and different ratios of sandalwood trees and hosts, with the aim of testing how different silviculture regimes would result in different growth and yield results. 153 The trials produced varying results as to the size of the sandalwood trees, their mortality rates, and their heartwood and oil yields. Some of the trials gave a very clear indication of what industry should not do. By way of example, one finding of the FWI trials was that African Mahogany (Khaya senegalensis) was a "disastrous" choice of long-term host. This dampened early hopes that a commercially valuable timber species could be used effectively as hosts for sandalwood to produce a dual crop. Other species emerged as more effective hosts, such as Cathormion umbellatum, which Quintis later used. 154 The final sandalwood silviculture trial was planted at the FWI in 2000. While Dr Barbour led the Tropical Forestry Project at FPC from 2005 to 2009, she said that she came in "right at the end of the age of the trials". By the time Dr Barbour arrived at the FPC, the original design of several trials had been altered by the removal of trees, and many of the records relating to the trials had been misplaced or removed, as the management of the FWI had been transferred between three different organisations and locations over the past two decades. 155 In about 2012, the FPC closed its tropical forestry research in Kununurra. Currently there is no further research being funded by the Western Australian Government in relation to sandalwood trees and plantations.
156 Following the trials by the FPC, large-scale commercial sandalwood plantations were established from 1999 or thereabouts. 157 Quintis was one of the first entities to engage in the commercial plantation of sandalwood trees. It planted its first commercial scale sandalwood plantation in 1999 in Western Australia and, in the following years, expanded its operations to the Northern Territory and northern Queensland. Quintis quickly emerged as the largest commercial sandalwood operator in the industry. 158 By August 2006, Quintis had 840 ha of sandalwood under cultivation, making it not only the ORIA's but the world's largest grower. 159 As noted in the Introduction, as at 30 June 2015, Quintis had 10,583 ha of sandalwood plantations under management, of which it directly owned 2,353 ha. The locations, hectares in each location, tree age and ownership details of Quintis' plantations as at 30 June 2015 are summarised in the following diagram: 160 As also noted in the Introduction, as at 30 June 2016, Quintis had 12,182 ha of sandalwood plantations under management, of which it directly owned 2,638 ha. The locations, hectares in each location, tree age and ownership details of Quintis' plantations as at 30 June 2016 are summarised in the following diagram: 161 Quintis owned part of the sandalwood estate it managed. Other parts of the sandalwood plantations were owned by investors through managed investment schemes and other investment products. Quintis owned units in some of those schemes. 162 Quintis operated a vertically integrated business model which it called "soil to oil to shelf". This business model involved: (a) establishing and managing plantations; (b) harvesting and processing the plantations, to produce sandalwood oil; and (c) developing, marketing and distributing end products. 163 Quintis planted seedlings of sandalwood every year. In Quintis' vernacular, each year's plantings were regarded as a distinct "plantation". Each year's plantation was established at various locations. These various sites came to have different names, such as Kingston Rest, Packsaddle and Eagle Park. Each such location had particular compartments or plots or lots from different years' plantations. However, as time evolved, the techniques and methods used in respect of each year's plantations evolved, such that there would have been plots, lots and compartments with different hosts, spacings, stocking densities, and so on, both within and between different sites. 164 Quintis' harvesting and processing operations took place at two facilities. In 2013, Quintis established its primary processing centre in Kununurra, where sandalwood logs were graded, sorted and prepared, and chipped if they were to be sent for distillation into sandalwood oil. Distillation then occurred at Quintis' Mount Romance facility, which Quintis had acquired in 2008 when the company took over Mt Romance Pty Ltd (Mt Romance), a commercial sandalwood distiller. Mount Romance was a specialised sandalwood distilling facility, with an existing business distilling oil from Australian sandalwood (Santalum spicatum). By 2015, the Mount Romance facility had capacity to distil 2,000 t of sandalwood heartwood per year.
165 As referred to above, the last of the FPC's sandalwood trials were established by the mid-2000s, by which time the private sector had commenced operations. 166 It is unsurprising that the private sector had greater resources than those which were available to the researchers who had conducted earlier trials. As noted, the various trials involved plantations established in an area of approximately 10 ha. By 2005, the private sector had 1,198 ha of sandalwood plantations under cultivation. Private industry sandalwood plantations were "high cost operations, being intensively managed and irrigated". 167 In addition to the sheer scale of the areas under its management, Quintis had: (a) a team of foresters, agronomists, research officers and agricultural scientists to manage the plantations, including, by at least 2006, a full-time research and development department; (b) by at least March 2009, a seed orchard, in which superior trees were selected based on growth characteristics and oil content and then control-pollinated to produce seed for use in Quintis' projects; and (c) by at least March 2009, the world's largest sandalwood nursery, where sandalwood seedlings were grown in the nursery with the host species. 168 From in or about 2000, Quintis was assisted by Mr Kimber, who Quintis engaged as a Forestry Consultant. Mr Done was engaged as a Senior Forester at Quintis from October 2005. As referred to above, both Mr Kimber and Mr Done had been centrally involved in the establishment of sandalwood plantations in Australia and had considerable experience in the trials that had been conducted by and for and on behalf of the FPC and the FWI. 169 At all material times from in or about 2008, Quintis' Head of Research was Mr Brown. His formal title was Head of Product Research, Development and Regulatory and Estate Inventory. Mr Brown had a BSc (Organic Chemistry and Pharmacology) and an MBA. He had worked for Quintis since 2008, when the company took over Mt Romance, where he had been employed since 2006. As will be evident from extracts which appear later in these reasons, Mr Brown was often referred to in internal correspondence at Quintis as "AB". 170 Mr Wilson was a director of Quintis from 12 June 2012 to 27 March 2017. He was the CEO of Quintis during FY15 and the Managing Director of Quintis during FY16. 171 Other significant Quintis personnel for present purposes included: (a) Mr Alistair Stevens (Mr Stevens), who was Quintis' Chief Financial Officer (CFO) at all material times; (b) Mr Ben Wilson, who was Mr Wilson's son and was employed as an advisor at Quintis at all material times. (Meaning no disrespect, I will refer to Frank Wilson as Mr Wilson and Ben Wilson as Mr Ben Wilson to avoid any confusion); (c) Mr Morne Wagener (Mr Wagener), who was a Financial Controller in Mr Stevens' team at all material times; (d) Mr Brett Blunden (Mr Blunden), who was Quintis' General Manager of Forestry/Operations at all material times. Mr Blunden was often referred to in internal correspondence at Quintis as "Oakey"; and (e) Mr Matt Barnes (Mr Barnes), who was Quintis' Deputy Operations General Manager at all material times. 172 Quintis' accounts were audited each year by Bentleys up until FY15 when it switched to EY. The process by which those accounts came to be audited involved the following steps: a review of the previous audit file; the development of an audit plan for the relevant year; the carrying out of audit procedures; the production of a Closing Report for each year; obtaining a management representation letter; and the issuing of an independent auditor's report and audit opinion to be included in the Financial Report for the relevant year. I make findings as to the facts that are specifically relevant to the audit case below.
173 It is next convenient to summarise the scientific studies that were conducted into the growth of sandalwood trees and related issues during these early years. In doing so, I have focussed upon the primary studies to which I was taken during the course of the hearing. Although in some cases academic articles and studies are met with objections that they are unfair or prejudicial (see, e.g., McNickle v Huntsman Chemical Company Australia Pty Ltd [2024] FCA 807 at [63] (Lee J)), no such point was taken by any of the parties here. 5.5.1 Brand et al. (2006) 174 The first paper that had some significance in the hearing was one authored by Mr John Brand, Mr Kimber and Mr John Streatfield entitled "Preliminary analysis of Indian sandalwood (Santalum album L.) oil from a 14 year old plantation at Kununurra, Western Australia", published in the March 2006 edition of the Sandalwood Research Newsletter (Brand et al. (2006)). 175 The purpose of the paper and its high-level conclusions can be gleaned from the abstract, which states: Twenty Indian sandalwood (Santalum album L.) trees planted at Kununurra, Western Australia, were sampled for total oil yield and santalol content, at age 14 years. "Chips" (heartwood only) and "cores" (heartwood plus sapwood) were taken from each sandalwood stem at 30 cm and 100 cm from the base, and were processed using solvent extraction. The mean total extractable oil yields were 2.9-3.4% from chips, and 1.8-2.0% from cores. The oil extracted from the chips contained 44.7-46.7 % α‑santalol and 20.8-22.2 % β‑santalol. The mean percentage of heartwood was 28.9 - 33.8 %. 176 The study methodology was as follows. In 1990, sandalwood seedlings were planted together with a variety of intermediate host plants in rows. Cathormion umbellatum was planted separately as a long-term host, on alternate rows. At age 14 (in December 2004), 20 of the sandalwood trees were selected for oil sampling. Stem diameter over bark (DOB) was measured from each tree at 30 cm and 100 cm above the ground. At the same heights, chip and core samples were taken, processed and analysed. 177 The results of the study were as follows: (a) regarding tree dimensions and heartwood contents, the mean stem diameters under the bark were 19.3 cm (at 30 cm) and 16.6 cm (at 100 cm), and the mean stem diameters over the bark were 20.3 cm (at 30 cm) and 17.6 cm (at 100 cm). Heartwood was not visible in four of the trees at 30 cm and five of the trees at 100 cm. The mean percentage of the wood that was clearly heartwood was 33.8% at 30 cm, and 28.9% at 100 cm. These results were set out in the following table: (b) regarding total extractable oil yields, the mean oil yields from heartwood chips was 2.9 ± 0.4% at 30 cm, and 3.4 ± 0.5% at 100 cm. Heartwood chip yields were highly variable between trees ranging from 0.1 to 5.6% at 30 cm, and 0.2 to 7.1% at 100 cm. Oil production was very poor in three of the trees, which had heartwood chip yields of only 0.2-0.3%, at both 30 cm and 100 cm. These three trees also had no visible heartwood. The mean oil yields from cores were 1.8 ± 0.3% at 30 cm, and 2.0 ± 0.3% at 100 cm. Core sample yields ranged from 0.01 to 3.8% at both 30 cm and 100 cm. Again, the same three trees with no visible heartwood had less than 0.03% oil within core samples at both 30 cm and 100 cm; and (c) regarding santalol content (santalols being the main compounds that give sandalwood oil its distinctive and commercially valuable fragrance), total santalol content was 65.5-68.9% in the heartwood chips and 60.0-62.5% in the cores. Between trees, the total santalol content varied from 47.8-80.2% within the heartwood chips and 16.9-75.7% within the cores. Three of the sandalwood trees had total santalol content of over 75% within the heartwood chips. 178 The study made the following relevant observations: Although the heartwood oil yields were reasonable and the oil quality was high, the mean heartwood percentage was only 29-34%. This indicates that at age 14 years, the mean volume of heartwood per tree is low. However, it would be expected that both heartwood percentage and oil yields will increase with age. … The observed variability in heartwood percentage, oil yield and santalol content between similar aged trees growing under the same conditions indicates that heartwood initiation and oil production may be influenced by tree genotype. However, until this is better understood, future planting of sandalwood at Kununurra should aim to use seeds from superior oil producing parent trees. These results were encouraging, providing evidence that young Indian sandalwood plantations at Kununurra are producing heartwood and good quality oil. However, the heartwood volumes appear to be low at age 14 years. To more accurately predict sandalwood yields, whole trees need to be harvested and heartwood weights and volumes measured. (Emphasis added). 179 Following the publication of Brand et al. (2006), FPC issued a media release publicising the findings of the study. It said nothing about the rate of growth of trees from year to year. 5.5.2 Brown et al. (2011) 180 The second paper which the parties placed reliance on was one authored by Mr Brown and Mr Jonathon Eatt (then of Mt Romance) and Mr Done, Mr Daniel Raymond and Mr Michael Pattinson (then of Quintis) entitled "Harvest of Indian sandalwood (Santalum album L.) and determination of heartwood yield, sandalwood oil yield and sandalwood oil quality from plantations at Kununurra, Western Australia", published in the December 2011 edition of Perfumer & Flavorist (Brown et al. (2011)). 181 The abstract to this article states: The harvest of 90 Indian sandalwood trees represents the first commercial-size harvest of mature sandalwood from the Ord River Irrigation Area (ORIA). The investigation found that Indian sandalwood grown under plantation conditions in the ORIA produced commercial yields of heartwood and sandalwood oil that is of a quality suitable for commerce. A strong correlation was observed between diameter over bark at 20 cm, merchantable mass, heartwood and sandalwood oil yield. This is contributing to the development of a predictive model for these characteristics in standing trees, which is the subject of ongoing research. (Emphasis added). 182 The study proceeded as follows. 90 trees were selected for harvest from four trial plots managed by the FPC. The selection of trees was made from those available to provide a representative cross-section of trees in each compartment. The source of the trees is shown in the following figure, which indicates that the trees ranged in age from 19 to 23 years at harvest: 183 The trees were harvested, sorted and debarked. The amount of heartwood per tree was then determined using a variety of methods (depending on the part of the tree being measured). A number of laboratory processes were then applied to calculate the oil yield per tree. 184 The results of the study were as follows: (a) total merchantable wood was calculated on a per-tree basis, as shown in the following table: (b) heartwood was identified and its weight determined on a per-tree basis, as shown in the following table: (c) sandalwood oil yield from heartwood was determined on a per-tree basis, as shown in the following table: (d) the quality of the sandalwood oil was assessed by α‑santalol and β‑santalol concentration in the oil, as shown in the following table: 185 As the table marked "T-3" shows, the mean heartwood yield for all of the trees in the study (ranging in age from 19 to 23 years) was 25.6 kg. 186 The study made the following relevant observations. 187 First, in relation to stocking rates, the paper noted that: Limited information on stocking rates was available… The reasons for attrition are unclear due to a lack of records, but could be a combination of deaths and prior selective harvests. 188 Second, in relation to heartwood yield: All of the heartwood recovered was suitable for oil extraction and all but four trees were subject to distillation through MBAs plant. Four trees were retained as samples, three of which had solid pieces of heartwood; their acceptance as carving logs has been assessed as suitable. Commercial quantities of heartwood were obtained from all harvest blocks and all the heartwood was suitable for sandalwood oil extraction, whilst some heartwood was deemed suitable for carving and other traditional heartwood uses. 189 Third, in relation to sandalwood oil yield from heartwood: The investigation indicated that commercial yields of sandalwood oil are available from heartwood. Laboratory estimates of mean sandalwood oil yield from heartwood were 4.9% w/w whilst in production yields of 4.6% w/w from heartwood were achieved. 190 Fourth, the study stated that: A number of significant relationships were observed between measured parameters in the trial harvest. These are highly relevant as they indicate that models can be developed to measure merchantable mass and heartwood yield in standing trees. It was also very apparent that there is a strong relationship between the size of a tree and its yield of heartwood and sandalwood oil… (Emphasis added). 191 In relation to the final sentence above, the study cited the following figures: 192 The study concluded as follows: This investigation found that sandalwood grown under plantation conditions in the ORIA produced commercial yields of heartwood and sandalwood oil that are of a quality suitable for commerce. Thus the findings of this report support the establishment and continued development of a plantation-grown Indian sandalwood industry in the ORIA. The commercial yields observed were from some of the first plantings of sandalwood in the ORIA. The industry's understanding of silvicultural practices required to successfully grow Indian sandalwood has developed significantly since these trees were established. This further supports the view of this report that plantation grown Indian sandalwood has a bright future in the ORIA. The investigation found a number of good correlations between diameter over bark at 20 cm, merchantable mass yield and heartwood yield. These relationships along with the observed oil yield from heartwood are important in the development of a predictive model. This model is the subject of current research at TFS. (Emphasis added). 5.5.3 Brand et al. (2012) 193 The third important study is a paper by Mr Brand, Mr Len Norris and Mr Ian Dumbrell entitled "Estimated heartwood weights and oil concentrations within 16-year-old Indian sandalwood (Santalum album) trees planted near Kununurra, Western Australia", published in vol 75(4) of Australian Forestry in 2012 (Brand et al. (2012)). 194 The abstract to this paper states as follows: Thirty-two Indian sandalwood (Santalum album) trees aged 16 y, growing near Kununurra (Western Australia), were harvested, de-barked and weighed to determine their commercial wood (heartwood and sapwood) weights. Within each tree, heartwood area, percentage and weight were measured in stem cross-sections at five different heights (0, 0.50, 1.00, 2.00 and 3.00 m above the ground) in the main stem, and used to estimate total heartwood volume and weight. Heartwood oil concentration and α‑ and β‑santalol concentrations were also measured at the same heights in each tree. At age 16 y, the 32 S. album trees had mean estimated air-dry weights (at -12% moisture content) of 5.8 kg heartwood tree-1 and 43.7 kg sapwood tree-1. The mean air-dry wood densities were 940 kg m-3 for the heartwood and 840 kg in-3 for the sapwood. Estimated heartwood weight was variable between trees, with the three largest trees each containing 24-30 kg heartwood, while nine other trees each had 0-1 kg heartwood. The S. album plantation in this study contained about 260 trees ha-1, and its predicted yields (air-dry weight) at age 16 y were 1.5 t heartwood ha-1 and 11.4 t sapwood ha-1. Within each tree, the mean oil concentration (w/w air dry) ranged from 6.2% (at 0 m) to 2.9% (at 300 m). Overall, the mean oil concentration within the heartwood was 5.0%, giving estimated yields of 0.28 kg oil tree-1 and 73 kg oil ha-1 (based on 260 trees ha-1). The mean α‑santalol concentration (44-50%) and β‑santalol concentration (18-20%) at the five different tree heights met the current ISO standard for S. album oil. In the 16-y-old S. album trees, over-bark stem diameter at 300 mm above the ground correlated well to both total air-dry weight of wood (heartwood and sapwood) per tree (r2 = 0.88) and heartwood air-dry weight per tree (r2 = 0.87). This indicated that large-diameter trees had markedly higher heartwood weights. (Emphasis added). 195 The study reported the following in relation to the trial site: The trial site was about 0.17 ha in area (120 m x 14 m) and was located at the FWI, near Kununurra, WA. The soil at the trial site was a hard-setting grey clay, classified as 'cununurra clay' (Aldrick et al. 1990). In 1994, four mounded lines about 0.3 m high, 0.5 m wide and 3.6 m apart were established over the 120 m length of the trial site. During May-August 1994, about 20 S. album seedlings were planted on each line at 6-m intervals, giving an initial stocking of 460 trees ha-1. The origin of the S. album seed used in this study is not known. At the same time, seedlings from a range of host species (Millettia pinnata, Dalbergia latifolia, Dalbergia sissoo, Cassia fistula, Azadirachta indica, Pterocarpus dalbergioides, Khaya senegalensis and Albizia lebbeck) were also planted near the S. album seedlings. The initial stocking of hosts is not known, but was most likely 920 trees ha-1, giving a sandalwood-to-host ratio of 1:2. In June 2009, the 0.17 ha trial site contained 44 surviving S. album trees, giving an approximate stocking of 260 trees ha-1; 12 of the trees were harvested during June-July 2009. The remaining 32 trees, aged 16 y, were harvested during 9-18 August 2010 as part of this study to assess heartwood and oil yields. Although measurements from the other 12 trees were not included in the current study, the trees were included in the stem count to estimate S. album yields based on 260 trees ha-1. This procedure assigned the average yield of trees harvested in 2010 to the trees harvested in 2009, although the latter were found to be 20 mm larger in diameter at 300 mm, and a year younger, than the former. In August 2010, the site also contained 35 live host plants (200 trees ha-1), giving an approximate sandalwood-to-host ratio of 1:1. The land surrounding the trial site was used for different purposes: the north side had a gap of about 15 m followed by a plantation of Eucalyptus camaldulensis, the south side was bare ground, the east side was bare ground but annually cropped, and the west side contained a plantation of a Peltophorum species. Between 1994 and 2002, the site was flood-irrigated with water from the Ord River Irrigation Scheme during each dry season (May-October). Flood irrigation was required during dry seasons because the ORIA receives over 90% of its mean annual rainfall (835 mm; data supplied from the Kimberley Research Station 1944-20W) during the wet season (November-April). Although the site was not irrigated during 2002-2010, major drainage lines were located within 5 m of the plot along the eastern and northern boundaries. Since the plot was only 14 m wide, water in the drainage line along the eastern boundary of the plot (120 m long) presumably would have intermittently provided water to a large proportion of the trees. (Emphasis added). 196 Significant results of the study were as follows: (a) the 16 year old sandalwood trees had mean air-dry wood densities (12% moisture content) of 940 ± 10 kg m-3 for the heartwood and 840 ± 10 kg m-3 for the sapwood. Mean heartwood volume per tree was multiplied by mean heartwood air-dry density (940 kg m-3) to give an estimated heartwood air-dry yield of 5.8 ± 1.4 kg tree. This yield represented only 12% of the total air-dry commercial wood weight (49.5 kg) per tree. When the air-dried yields from this stand were scaled up to a per-hectare basis, the estimated mean yields were 1.5 t heartwood ha-1 and 11.4 t sapwood ha-1 (based on 260 trees ha-1), at age 16 years; (b) estimated heartwood yields per tree were variable within the plantation, with three trees containing 24.3-30.2 kg heartwood, while six trees had only 0.3-1.0 kg heartwood, and another three trees had no heartwood (as seen in the following table): (c) there was a general trend for the larger trees within the plot also to have more heartwood. The three largest trees, with stem diameters of 274-331 mm at 300 mm, had the greatest estimated heartwood air-dry weights of 24.3-30.2 kg (as seen in the following figure): 197 The study made the following observations: Based on the mean air-dry weights from the S. album trees harvested in this study, the estimated yields from a 16-y-old plantation containing 260 trees ha-1 would be about 1.5 t heartwood ha-1 and 11.4 t sapwood ha-1. In this study, the estimated S. album heartwood yield was much lower than the 8 t heartwood ha-1 previously predicted for 15-y-old trees planted in the ORIA (Clarke 2006). The lower-than-predicted S. album yields in this study may have been due partly to the choice of host species, watering regime and tree density. Some of the host species may not have been suitable, including K. senegalensis, which typically over-tops S. album in plantations established in the ORIA. Current S. album plantations established by private industries in the ORIA use different long-term host species including Cathermion umbellatum, which may result in faster growth of S. album. The watering of the S. album plantation in this study was intermittent, and it would be expected that private industry plantings would receive more reliable watering. Private investment companies also plant S. album at a higher density of about 400-450 trees ha-1. However, even allowing for these differences the yields recorded in this study were considerably less than those forecast by Clarke (2006) and indicate that rotation lengths may need to be extended beyond 15 y to perhaps 20-25 y. Radomiljac et al (1998) suggested a suitable rotation length in the ORIA may be 20-30 y, and future monitoring of research plots owned by the state government could help determine suitable rotation lengths. (Emphasis added). 198 The study also observed that: Heartwood production within the 16-y-old S. album trees was variable within the plantation, with three trees containing an estimated 24-30 kg of heartwood, while nine other trees contained 0-1 kg of heartwood. Similarly, Doran et al. (2005) recorded that seven out of 10 S. album trees aged 10-16 y growing in Fiji had no detectable heartwood at 0.1 m from the ground. Although heartwood yields were variable in this current study, this was partly due to tree size, with the larger trees generally having more heartwood. At age 16 y, S. album over-bark stem diameter at 300 mm above the ground was closely correlated with estimated air-dry weight of heartwood per tree (r2 = 0.87). In this study, a 16-y-old S. album tree would need to have an over-bark stem diameter of about 295 mm (at 300 mm) to produce an estimated air-dry heartwood weight of 25 kg. Previous studies have also found moderate correlations between heartwood dimensions (area and diameter) and stem diameter in natural populations of S. album growing in West Timor, Indonesia (Fox et al. 1995) and in S. austrocaledonicum growing in Vanuatu (Page et al. 2010). However, genetics and environment would also presumably play a part in heartwood formation, and the relationship developed in this current study should be used only as a guide. The stem diameter-heartwood relationship developed in this study should also be used only for S. album trees within a narrow age range, perhaps 15-17 y, due to heartwood formation being a function of age (Sen-Sarma 1977; Rai 1990). It would be expected that trees older than those sampled in this study would generally have a greater proportional weight of heartwood in their stems. Separate stem diameter and heartwood equations will be needed for older trees. This study also developed an equation to predict the total air-dry weight of commercial wood (heartwood and sapwood) within a 16-y-old S. album tree, based on its over-bark stem diameter at 300 mm above the ground (r2 = 0.88). This relationship should aid the sandalwood industry in the ORIA to predict the total commercial wood weights from young plantations aged 15-17 y with stem diameters in the range of 100-350 m at 300 mm above the ground. 5.5.4 Barbour et al. (2012) 199 The final study to which attention was drawn by the parties was a paper by Dr Barbour, Professor Julie Plummer and Mr Norris entitled "Flood-irrigated Tropical Timber Trials in the North of Western Australia", published by the Rural Industries Research and Development Corporation (RIRDC), a statutory corporation, in November 2012 (Barbour et al. (2012)). 200 The paper compiled and reported on the results of 16 FWI trial plots. Its purpose was to provide scientific information on, amongst other things, sandalwood growth rates, heartwood and oil production, African mahogany growth rates, seed production and seed oil quality, and the identification of other tropical species that could be used as a long-term host for sandalwood. As the foreword to the report states, "[t]he sandalwood trials selected demonstrate a variety of silviculture systems" and "[t]he analysis of each of these trials explores the average expected performance with different silviculture management systems". 201 In terms of methodology, the report stated as follows: There were two main groups of trials, those concerned with sandalwood and its hosts, and those related to high-value timber species. Where possible, statistical analyses were completed using the original design elements of the trials; however, where trials were of a demonstrational nature or no longer conformed to the original design due to high mortality, only comparisons of descriptive results have been made. In addition to trial measurements, destructive harvesting of sandalwood was undertaken… 202 For present purposes, the key overall findings of the paper were stated as follows: Barbour (2008) indicated that the best hosts for tropical sandalwood were Cathormion umbellatum, Dalbertgia latifolia and Millettia pinnata and this was further supported by the analyses of these additional trials. Hosts producing lower sandalwood growth rates were Cassia siamea, Khaya senegalensis, Peltophorum pterocarpum and Swietenia mahogani. Poor host performance was related to a fast-growing nature and spreading canopy that enabled dominant host occupation of the site and spatial competition with the sandalwood. An unexpected finding was that even when tropical sandalwood was growing with favourable hosts, spatial competition could negatively influence sandalwood growth. A specific trial designed to explore this aspect showed that 9-year-old sandalwood growing with Cathormion displayed a growth decline when sandalwood stocking rates were increased and when planted in different host-to-sandalwood ratios. Trial analysis using spatial competition indices indicated that increasing host and sandalwood stocking could produce a situation of negative competition effects on sandalwood growth rate. What was of importance was how the nature of these competition interactions varied between hosts. Heartwood formation was found within 8-year-old sandalwood; however, the amount and development along the stem was generally low and highly variable between trees. In 15-year-old trees, heartwood development was more reliable, and in some cases extended as far as 3.5 m up the tree compared to a maximum of up to 1.8 m in 8-year-old trees. The calculated heartwood volume for 15-year-old trees was approximately 6.3 kg, with the majority (4.4 kg) occurring in the bole. (Emphasis added). 203 The study made the following observations regarding the differences between the FWI trials and contemporary commercial projects: Most of the trials assessed were planted prior to the commercialisation of tropical sandalwood in the ORIS and used silviculture systems and hosts that are different from what is seen in company plantations today. The two biggest differences are: the past use of the primary host Acacia trachycarpa which has been superceded by the dominant species Sesbania formosa; and the separation of sandalwood and primary host in one row from the secondary host in a separate row. The change in primary host had far greater implications on the choice and performance of the secondary host (long-term host) than was originally appreciated. The shading effect of Sesbania and the different management methods used to reduce the shading brought disease into the plantation as well as suppressing secondary-host growth of some species. Whereas Cathormium was an exemplary host with Acacia trachycarpa (producing the biggest trees on the Frank Wise Institute site), when the primary host was changed to Sesbania, all benefits of Cathormium as the secondary host were lost. This indicates that spatial host relationships need to be revisited and data from these trials infers that the density of secondary hosts is too high. … The most pertinent question for the developing tropical forestry industry in the ORIS is the quantity and quality of trees in sandalwood plantations when they are 15 years old. There are not many examples of trees this old in the ORIS, and those plantings that are this age were undertaken with quite different silviculture systems than what the valley is presently experimenting with. Nevertheless, knowing how much sandalwood and other biomass produced from each hectare in the ORIS will help with planning. (Emphasis added). 204 Discussing the implications of the sandalwood trials, the authors reported as follows: Sandalwood host selection demonstration plots
5.19.1 The FY16 half-year accounts and review 577 On 19 February 2016, the papers for the Audit Committee meeting to be held on 25 February 2016 were emailed to the attendees, including to Mr Wilson. The agenda noted that Mr Wilson was to attend the meeting by invitation. 578 The Audit Committee papers included a memorandum from Mr Paul Spiccia in Mr Stevens' finance team at Quintis titled "Biological Asset Valuation as at 31 December 2015". The Memorandum indicated that the valuation methodology remained unchanged from 30 June 2015 and did not recommend any material changes to the assumptions included in the valuation model. In respect of the heartwood yield assumption, the memorandum noted that management had been in dialogue with the Forestry and Research departments and there were no indicators of any significant or unusual changes to tree health since the last inventory count. 579 On 24 February 2016, Mr Wilson received EY's "Closing report for the Audit Committee for the half-year ended 31 December 2015". 580 On 25 February 2016, there was a meeting of the Audit Committee. The minutes record that Mr Wilson attended by invitation, as did Mr Michael Kay and Ms Gillian Franklin, Quintis non-executive directors, Mr Stevens, Mr Wagener and Mr Spicca, and Mr Darren Lewsen (Mr Lewsen) and Ms Chirathamjaree from EY. Mr Lewsen referred to EY's "Closing Report to the Audit Committee for the Half-Year Ended 31 December 2015" which had been emailed to the Committee on 24 February 2016. The Audit Committee resolved to recommend to the Board that, subject to final marked up amendments being processed in consultation with the auditors, the half year financial statements to 31 December 2015 be released to the ASX. 581 On 25 February 2016, Mr Wilson received a report from EY advising that, based on its review, it had not become aware of any matter that would have otherwise made it believe that the half-year financial report of Quintis, which included a statement of the value of its biological assets, did not give a true and fair view of the company's financial position as at 31 December 2015 or did not comply with AASB 134 Interim Financial Reporting and the Corporations Regulations. 5.19.2 Lead up to the 2016 Inventory Report 582 The Davis Applicants submitted that in the lead up to the 2016 Inventory Report, Mr Brown was concerned that the Tree Model was not being achieved, and he communicated this to Mr Wilson: T599.29-600.18. 583 On 21 July 2016, Mr Brown sent Mr Ben Wilson an email concerning Quintis' forecasted yields in the context of the inventory count results for 2016. Mr Brown stated in that email: During our meeting on Monday I would like to spend some time discussing the TFS tree model and forecasting. At the moment the TFS tree model indicates that we expect to have 420 stems per ha with a tree diameter over bark of 24.5cm application of the heartwood model gives us 20kg of heartwood at 15 years, 8.4 t/ha. Looking at the inventory results this year and the past 3 years I am starting to form the opinion that under our current silvicultural practices achieving these yields may not be possible. Reasons being:
(Emphasis and additional emphasis added). 645 In relation to processing costs, the table recorded as follows: Management's Approach EY Work Performed We agreed the processing cost assumption to the model audited by Bentleys at 30 June 2014 and noted no differences. We also compared the price to the actual cost incurred on the EKS harvest and noted the actual cost of processing TFS owned EKS trees in June 2014 was $229.72/kg of oil (labour $112.99/kg and overheads $116.73/kg) which exceeds the assumption applied by management. However we understand this has not been adjusted on the basis that the EKS harvest was very small compared to future plantation volumes where better economies of scale are expected to be achieved. A$207 per litre. We noted that management had not applied inflation to the processing cost but this does not appear unreasonable given: The value is derived from internal costing at the Mt Romance Processing centre based on the year's actual result The processing cost has been deducted from the oil price, to derive a heartwood price at harvest The oil price has not been adjusted for inflation Management is using a real discount rate Therefore no issues noted.
646 The table also recorded the assessment as to discount rates set out in greater detail in the "Discount rate review" memorandum referred to above. 647 Further in relation to the heartwood yield assumptions, Ms Tee had prepared a separate memorandum dated 20 August 2015 and entitled "Calculated Yield Curve vs Assigned Yield Curve". The memorandum set out the following "Background": Based on the annual tree count, an actual yield curve ("Calculated Yield Curve") is determined based on observations of DOB and mortality data recorded. However, management then applies judgement in consultation with the R&D and forestry experts to determine a forecast yield curve ("Assigned Yield Curve") to value the Group's biological assets. This is designed to take into consideration:
663 EY submitted that its audit in FY16 followed a similar path to the previous year's audit, and it did not seek to repeat the work that it had already done a year earlier. Having reviewed the evidence, I agree. It is not necessary for me to again set out in detail every aspect of the procedures that EY took in FY16, other than to note relevant differences. 6.5.1 Planning of the FY16 audit 664 The audit team again prepared a memorandum entitled, "Audit Strategies Memo", dated 12 July 2016. It again identified the carrying value of Quintis' biological assets as a "significant accounting and auditing issue", and also observed that the tree valuation would need to be updated based on updated biological findings from the annual tree count. 665 An Audit Plan for the year ending 30 June 2016 was also prepared. The materiality threshold for the audit was 5% of net profit before tax, equating to $8.2 million in FY16. The carrying value of Quintis' biological assets was noted as a matter of key audit focus. The commentary in the FY16 Audit Plan was expressed as follows: Our perspective Work to be performed Procedures validating existence • Perform sample tree counts on site and engage our in-house actuary to review the appropriateness of the statistical approach applied by TFS' external tree counters. • Perform controls testing of the grower register ("BIMS") to ensure reliance on output is appropriate for the biological asset valuation model. Procedures validating measurement • As TFS completes its third harvest of managed plantations and another plantation graduates from the TFS Model Yield Curve on to its own individual yield curve, ongoing consideration will be required to assess whether the TFS Model Yield Curve and other biological assumptions remain appropriate. • Review management's accounting treatment of biological assets for compliance with AASB 141. • The judgmental nature of the valuation of TFSs biological assets coupled with the sensitivity of the valuation to key assumptions triggers disclosure requirements in accordance with AASB 13 and 101. • Perform audit procedures on the tree model to ensure the methodology and assumptions used are in accordance with the requirements of AASB 13 Fair Value Measurements ("AASB 13"), • Include the EY V&BM Group on the audit team to review the key economic assumptions utilised in the biological asset valuation model, including the sandalwood oil market price, discount rate, inflation rates, foreign exchange rates, mathematical accuracy and appropriateness of the discounted cash flow method applied. • Consider the appropriateness of economic assumptions with due consideration for market transactions which may indicate a market price for the biological assets being valued. • Obtain an understanding of the biological assumptions made by TFS forestry experts and statisticians with due consideration for actual results achieved in the previous harvests completed. • Review management's sensitivity analysis on the key economic assumptions to ensure the biological asset value recognised as at balance date is within our tolerable range.
6.5.2 FY16 audit procedures 666 EY submitted that it applied the same audit procedures that it had done the year before, but adapted to account for work that had already occurred. (a) Assessment of valuation methodology 667 EY's assessment as to the appropriateness of Quintis' valuation methodology was set out in a memorandum dated 14 August 2016 and entitled "Accounting for Biological Assets", prepared by Ms Tee. After going through a similar analysis to the previous year, the FY16 memorandum concluded that management's approach to valuing the biological assets appeared consistent with AASB 141 and AASB 13. (b) Review of the DCF Model and discount rate 668 In FY16, EY TAS's review and consideration of the DCF Model, discount rates, and other inputs was contained in a memorandum dated 24 August 2016 entitled "Biological Asset Review". In FY16, EY TAS was not requested to review the mathematical accuracy and logical integrity of the DCF Model as this had occurred a year earlier. 669 In FY16, EY TAS again determined its own discount rate, based on a wide range of factors, and concluded that its preferred rate was 12.1-13.7%. In arriving at this conclusion, an asset specific risk premium of 2.0% was applied based on considerations including the following: Based on our experience in valuing forestry assets, plantations with longer times to maturity generally demand a higher rate of return (i.e. discount rate) to account for the higher risk associated with these assets with regards to the price, yield, mortality rates, etc. 670 It was again concluded that Quintis' rate of 12-14% was conservative. 671 In FY16, EY TAS also observed that the oil price input assumed by Quintis was "conservative", stating: TFS adopted a sandalwood oil price of US$2,800/kg in assessing the value of the Biological Assets. Given there is no liquid market for the buying and selling of sandalwood oil and forecast information for sandalwood is limited, we relied upon the following sources of information to assess the reasonableness of the sandalwood oil price used in the Model:
677 As in the previous year and based on the above, EY had again performed a sensitivity analysis. The sensitivity analysis for FY16 is contained in a memorandum dated 4 August 2016 and entitled "Yield Curves and Sensitivity Analysis". Relevantly, this memorandum stated: We have then performed sensitivity analysis of the tree valuation prepared by management on the following assumptions to apply professional skepticism and challenge the assumptions of management's expert. …
6.6 The Davis Applicants' contentions as to the audit facts
688 As noted above, the Davis Applicants did not dispute the audit facts, but pointed to some additional facts and otherwise contended (relying upon Mr Basford's evidence) that EY had not obtained appropriate and sufficient audit evidence in various respects. 689 In particular, a central contention made by the Davis Applicants was that EY erroneously and blindly relied upon Mr Brown without applying appropriate professional judgement and scepticism. In this regard, the Davis Applicants drew attention to an email dated 26 August 2015 from Ms Tee of EY to Mr Brown which identified that "there were a few outliers… where the assigned yield curve is quite far from the calculated yield curve". The email relevantly stated as follows: From the spreadsheet forwarded to me we noticed there were a few outliers (see below) where the assigned yield curve is quite far from the calculated yield curve. I'd like to get an understanding around these compartments particularly as I think I may be experiencing some gap in knowledge. My thoughts currently are:
708 Canaccord initiated coverage of Quintis shares on 26 November 2013 and ceased such coverage on 10 May 2017. 709 From 26 November 2013 until 1 May 2017, Canaccord maintained a "Buy" rating on Quintis' shares. On 1 May 2017, following the release of the Second Glaucus Report and the share price fall following the release of that report, Canaccord revised its rating to "Speculative Buy". 710 All of Canaccord's reports which were released in the period from 31 August 2015 to 10 May 2017 recorded a share price target of between $2.90 and $3.36. A graph of the share price target plotted against Quintis' actual share price during that period is extracted below: 711 As will be apparent, Canaccord's share price recommendations were prepared using a DCF valuation of Quintis' future cash flows. In order to arrive at its price target, Canaccord applied a 27-year discount period, a long-term survival rate of 83% in respect of Quintis' sandalwood plantations, a WACC of between 11.2% to 11.9% (without any stepped discount rate to account for mortality risk or any other variable risks), a long-term heartwood yield assumption of 17.9 kg per tree and an assumed oil sale price of between US$4,000-$5,000 per kg. 712 In relation to the heartwood yield assumption, Canaccord did not adopt or apply the estimated yields based on historical data. This is because Canaccord's expectation was that the early, historical yields were anticipated to underwhelm and did not reflect long-term yields. Instead, Canaccord utilised a long-term heartwood yield assumption of 17.9 kg per tree for the purposes of preparing its DCF valuation of Quintis in 2015, and did not adopt the heartwood yield assumption used by Quintis as disclosed in its Financial Reports.
713 UBS covered Quintis from 10 December 2014 to 13 July 2017. 714 From 10 December 2014 until at least 12 May 2017, UBS maintained a "Buy" rating over Quintis, with a price target of $2.60 to $3.25. During that same period, Quintis shares traded at between $1.10 and $1.83. 715 UBS valued Quintis using a DCF methodology. Some of the key assumptions adopted by UBS included a long-term survival rate of 83%, a long-term heartwood yield of 15.75 kg per tree and long-term oil price of US$3,000 per kg, none of which is the same as the equivalent assumption adopted by Quintis in estimating the fair value of its biological assets in FY15 and FY16. 716 In addition to the base investment, UBS's reports also referred to two additional scenarios: (a) an upside scenario in which the forecasted heartwood yield and Sandalwood oil prices significantly outperforms UBS's estimates; and (b) a downside scenario in which Quintis no longer establishes any new plantations and simply manages and harvests the existing asset base. From 10 August 2016, the downside scenario also included an assumed yield of 12.6kg per tree, which was a further 20% reduction in UBS's heartwood yield forecast. 717 Under the downside scenario, UBS valued Quintis at $1.02 to $1.32 per share, although it noted that a risk in the downside scenario was that there may be a cash shortfall before harvest volumes ramp up.
718 Moelis regularly covered Quintis stock from 2015 to 2017. 719 Moelis valued Quintis shares using a DCF valuation of Quintis' future cash flows based on Moelis' own assumptions. For example, Moelis valued Quintis using a WACC of between 12.4-12.8%, and estimated oil price of $4,500 per kg and heartwood yield of 21.4 kg per tree. 720 Moelis recognised that Quintis' biological assumptions of survival, heartwood yield and oil percentage remained uncertain. The report dated 27 February 2015 records: Second Harvest in Q4 FY15 a Critical Milestone Given the small number of samples of sustainable yields, the second harvest is a critical milestone to prove up longer term core assumptions. … 721 In the section titled "Moelis View" the report also records: [Quintis] offers significant longer term opportunity given its dominant position in a sought after industry and the signing of an exclusive distribution agreement with a leading pharmaceutical player. In the near to medium term however a number of core assumptions are still required to unlock the full potential.
722 During the relevant period, Argonaut produced at least six reports, each of which was based on a DCF valuation of Quintis' business at the time of the report using its own assumptions and inputs. In relation to the discount rate, Argonaut applied a discount rate/WACC of between 10.7-11.1% during this period. 723 In relation to the price of sandalwood oil, Argonaut assumed a price of $4,500 per kg until 2024, where it then assumed a price drop to $2,800 per kg. 724 In the first five reports issued in this period, Argonaut maintained a Buy recommendation in relation to Quintis' shares, which it valued between $2.85 to $3.30. 725 One of the longer-term assumptions in Argonaut's DCF valuation was the estimated heartwood yield of Quintis' plantations. Argonaut's valuation adopted a heartwood yield assumption of 21.5 kg per tree. 726 On 20 April 2017, Argonaut issued a further report in which it revised its recommendation from "Buy" to "Hold" on a price target of $1.50, based on 30% discount to its valuation of Quintis' business as a whole. Argonaut also reduced its valuation of Quintis shares from $3.30 to $2.09 by applying more conservatism in longer term forecasts.
727 As is evident from the analyst reports identified above, none of the analysts uncritically relied upon Quintis' published information. They each valued Quintis on the basis of their own DCF modelling. For the purpose of their respective DCF models, these analysts used assumptions which were at times the same, at times more conservative and at times more aggressive than those used by Quintis. 728 I accept that, as the Davis Applicants submitted, each of these firms were "sell-side analysts" and may have had an interest in promoting recommendations to acquire shares in Quintis. I also accept the Davis Applicants' submissions that each of these analysts, whilst using their own assumptions and valuation methodologies, nevertheless used as a starting point the information that Quintis itself had published. However, there are three aspects of their assessments which are relevant. The first is that they made their own assessments of the value proposition in Quintis beyond its net assets, which indicates that they gave consideration to the existence of a market for the sale of Quintis' products and did not blindly assume that Quintis had value merely because it had assets. Second, the analysts appear to have made critical assessments of the price at which it could be expected that Quintis would sell its products, most of which assumed a price higher than that which Quintis had itself assumed in its DCF Model. Third, each of these four analysts acknowledged the risks involved in Quintis' business and applied discount rates to account for those risks, which in most cases were not as conservative as the discount rates applied by Quintis. To the extent that these matters are of any significance, I return to them later in my reasons.
729 Before turning to address the Davis Applicants' case that Quintis' FY15 and FY16 accounts were overstated, it is necessary to consider the requirements imposed by the Accounting Standards.
8.2 The relevant parts of the pleaded case relating to the Accounting Standards
730 The Davis Applicants pleaded that Quintis was required by s 292(1)(a) of the Corporations Act to prepare financial reports for FY15 and FY16 which included financial statements for those years in accordance with s 295(1) of the Corporations Act: FFASOC [11]-[12]. It was pleaded that each of these financial reports was required by s 296 of the Corporations Act to be prepared in compliance with the Accounting Standards (as defined by ss 9 and 334 of the Corporations Act), which relevantly required Quintis to comply with, inter alia, (FFASOC [13]-[14]): (a) Australian Accounting Standards Board Standard 141 titled "Agriculture" (compilations prepared on 3 October 2013 and 13 February 2015) (together and separately, AASB 141); and (b) Australian Accounting Standards Board Standard 13 titled "Fair Value Measurement" (compilation prepared on 8 August 2014) (AASB 13). 731 Despite the reliance on all of these Accounting Standards, the central allegations pleaded by the Davis Applicants were that (FFASOC [22]-[24]): (a) AASB 141 required Quintis to measure the value of biological assets on their initial recognition, and at the end of each reporting period, at their fair value less cost to sell, unless fair value could not be measured reliably, in which case the assets were required to be recorded at cost less any accumulated depreciation and impairment losses; and (b) AASB 13 required Quintis to: (i) measure the fair value of biological assets at the price that would be received to sell the biological asset in an orderly transaction between market participants at the measurement date; and (ii) measure the fair value of biological assets in their current location and condition. 732 The Davis Applicants pleaded that s 297 of the Corporations Act required that each of the FY15 and FY16 Financial Reports was required to give a fair view of the financial position and performance of Quintis and the Quintis Group: FFASOC [17]; and that ss 295(1)(c), (4) and (5), 296 and 297 of the Corporations Act required that each of the Reports include a declaration by the Directors as to whether, in the Directors' opinion, the financial statements and notes to the financial statements complied with the Accounting Standards, and gave a true and fair view of the financial position and performance of Quintis and the Quintis Group: FFASOC [18]. 733 There was no dispute between the parties about the fact that Quintis was required to comply with these obligations. The contest between the parties related to whether the inputs adopted by Quintis in its DCF Model to value its biological assets in FY15 and FY16 complied with the Accounting Standards. It is therefore necessary to consider the content of the Accounting Standards and the requirements they imposed on Quintis.
734 The Accounting Standards are legislative instruments made by the Australian Accounting Standards Board pursuant to its statutory functions under s 334 of the Corporations Act and subs 227(1)(b) of the ASIC Act. The same is true of the Auditing Standards, which I deal with in the following section. They are made by the Auditing and Assurance Standards Board pursuant to its equivalent statutory functions under s 336 of the Corporations Act and subs 227B(1)(a) of the ASIC Act. 735 The Accounting Standards have the status of delegated legislation that must be interpreted in accordance with ordinary principles of statutory construction and the Acts Interpretation Act 1901 (Cth) (which applies by virtue of subs 13(1) of the Legislation Act 2003 (Cth)). The ASIC Act further requires that they be construed in a way that would promote the objects of Part 12 of that Act and the Standards themselves: ss 228 and 234A of the ASIC Act. 736 The objects of Part 12 of the ASIC Act are relevantly as follows: (a) to facilitate the development of accounting standards, and sustainability standards, that require the provision of financial and other related information that: (i) allows users to make and evaluate decisions about allocating scarce resources; and (ii) assists directors to discharge their obligations in relation to financial reporting; and (iii) is relevant to assessing performance, financial position, financing and investment; and (iv) is relevant and reliable; and (v) facilitates comparability; and (vi) is readily understandable; and (aa) to facilitate the development of auditing and assurance standards and related guidance materials that: (i) provide Australian auditors with relevant and comprehensive guidance in forming an opinion about, and reporting on, whether financial reports comply with the requirements of the Corporations Act; and (ii) require the preparation of auditors' reports that are reliable and readily understandable by the users of the financial reports to which they relate… 737 The correct accounting treatment in accordance with the Accounting Standards is therefore ultimately a question of law: Bill Express Ltd v Pitcher Partners (a Firm) [2014] VSC 482 at [8] and [39] (Macaulay J); Australian Cement v Adelaide Brighton [2001] NSWSC 645 at [9] (Barrett J). 738 The two Accounting Standards of central relevance to the present proceedings are AASB 141 and AASB 13. Those Standards set out the process that must be followed when estimating the carrying value of biological assets.
739 AASB 141 incorporates and adopts International Accounting Standard 41 titled "Agriculture" (IAS 41). The version of the Standard that was current at the time of the preparation of Quintis' FY15 accounts was issued on 3 October 2013. The Standard was revised on 13 February 2015 for reporting periods from 1 July 2016, but the revisions are immaterial for the purposes of this proceeding. 740 Quintis was required to apply AASB 141 to account for "biological assets" when they related to "agricultural activity": paragraph 1(a). The Standard defines "agricultural activity" to mean the "management by an entity of the biological transformation and harvest of biological assets for sale or for conversion into agricultural produce or into additional biological assets":. A "biological asset" is defined as a "living animal or plant". 741 Paragraph 12 provides that: A biological asset shall be measured on initial recognition and at the end of each reporting period at its fair value less costs to sell, except for the case described in paragraph 30 where the fair value cannot be measured reliably. 742 "Fair value" is defined to mean (paragraph 8): … the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See AASB 13 Fair Value Measurement.) 743 It follows that the central relevant obligation contained in AASB 141 is that biological assets are required to be measured at "fair value less costs to sell" unless fair value is not able to be measured reliably. In turn this requires an application of AASB 13 to assess fair value, being the "price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date".
744 AASB 13 incorporates and adopts International Framework Reporting Standards 13 titled "Fair Value Measurement". The relevant version was issued on 2 September 2011 and applied to each reporting period in issue. 745 The purpose and object of AASB 13 is to define "fair value", set out a framework for measuring fair value and require applicable entities to make disclosures about fair value measurements: paragraph 1. 746 Paragraphs 2 and 3 explain that "fair value" is: … a market-based measurement, not an entity-specific measurement. For some assets and liabilities, observable market transactions or market information might be available. For other assets and liabilities, observable market transactions and market information might not be available. However, the objective of a fair value measurement in both cases is the same - to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions (ie an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability). When a price for an identical asset or liability is not observable, an entity measures fair value using another valuation technique that maximises the use of relevant observable inputs and minimises the use of unobservable inputs. Because fair value is a market-based measurement, it is measured using the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. As a result, an entity's intention to hold an asset or to settle or otherwise fulfil a liability is not relevant when measuring fair value. (Original emphasis removed; additional emphasis added). 747 It will be immediately apparent that there are several organising concepts inherent in the determination of "fair value" for the purpose of AASB 13. The first is that fair value is an "estimate". The second is that it is an estimation of the price to sell the asset in an "orderly transaction" as between "market participants" under "current market conditions". The emphasis on estimation is more pronounced in light of the fact that valuation techniques may permissibly involve the application of both observable and unobservable inputs, though the former are to be maximised where possible. 748 AASB 13 outlines various techniques by which fair value may be measured. It does not prescribe any one method. However, where particular methods are adopted, AASB 13 provides a framework and guidance for their implementation, which operate as "guardrails" (to use the apt description raised by EY). In this regard, and as discussed further below, it is to be borne in mind that AASB 13 recognises that estimating fair value involves the application of "judgements". 749 It is necessary to set out the relevant parts of AASB 13. 750 Paragraph 9 defines "fair value" as the price that: … would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 751 The fair value measurement is of a particular asset or liability. Therefore, it must take into account "the characteristics of the asset" if "market participants would take those characteristics into account when pricing the asset", including, for example, the condition and location of the asset: paragraph 11. 752 Relevantly, and critically, Appendix A to AASB 13 defines "market participants" as being: Buyers and sellers in the principal (or most advantageous) market for the asset or liability that have all of the following characteristics: (a) They are independent of each other, ie they are not related parties as defined in AASB 124, although the price in a related party transaction may be used as an input to a fair value measurement if the entity has evidence that the transaction was entered into at market terms. (b) They are knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all available information, including information that might be obtained through due diligence efforts that are usual and customary. (c) They are able to enter into a transaction for the asset or liability. (d) They are willing to enter into a transaction for the asset or liability, ie they are motivated but not forced or otherwise compelled to do so. 753 Paragraphs 15 and 16 repeat the central organising principles of an orderly transaction and market-based measurements. They provide as follows: 15 A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date under current market conditions. 16 A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either: (a) in the principal market for the asset or liability; or (b) in the absence of a principal market, in the most advantageous market for the asset or liability. 754 Paragraphs 17 to 20 address the circumstances in which there is a market or observable market for the asset. Paragraph 21 deals with circumstances where there is no observable market. It provides as follows: Even when there is no observable market to provide pricing information about the sale of an asset or the transfer of a liability at the measurement date, a fair value measurement shall assume that a transaction takes place at that date, considered from the perspective of a market participant that holds the asset or owes the liability. That assumed transaction establishes a basis for estimating the price to sell the asset or to transfer the liability. 755 The text of this paragraph, as with others, brings focus to what the reporting entity must assume in respect of a market transaction from the perspective of a (putative) market participant. It directs the reporting entity's attention to the assumptions that a market participant would make without needing to identify a particular or actual market participant. This is reinforced by paragraphs 22 and 23, which provide as follows: 22 An entity shall measure the fair value of an asset or a liability using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. 23 In developing those assumptions, an entity need not identify specific market participants. Rather, the entity shall identify characteristics that distinguish market participants generally, considering factors specific to all the following: (a) the asset or liability; (b) the principal (or most advantageous) market for the asset or liability; and (c) market participants with whom the entity would enter into a transaction in that market. 756 AASB 13 next addresses the "price". Paragraph 24 relevantly provides as follows: 24 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (ie an exit price) regardless of whether that price is directly observable or estimated using another valuation technique. (Emphasis added). 757 In respect of non-financial assets, paragraph 27 provides that the fair value measurement is to take into account "a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use". 758 AASB 13 does not prescribe any one particular valuation technique by which fair value is to be measured. To this end, paragraphs 61 and 62 provide that: 61 An entity shall use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. 62 The objective of using a valuation technique is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. Three widely used valuation techniques are the market approach, the cost approach and the income approach. The main aspects of those approaches are summarised in paragraphs B5-B11. An entity shall use valuation techniques consistent with one or more of those approaches to measure fair value. (Emphasis added). 759 Before turning to the techniques set out in Appendix B of the Standard, it is pertinent to note that AASB 13 also sets out general principles as to the use of inputs in the different valuation techniques. Relevantly, paragraph 67 states that "[v]aluation techniques used to measure fair value shall maximise the use of relevant observable inputs and minimise the use of unobservable inputs". 760 AASB 13 identifies a "fair value hierarchy" whereby observable inputs (referred to as Level 1 inputs) are of higher priority than unobservable inputs (referred to as Level 3 inputs). Paragraph 72 provides as follows: To increase consistency and comparability in fair value measurements and related disclosures, this Standard establishes a fair value hierarchy that categorises into three levels (see paragraphs 76-90) the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). 761 It was common ground that essential integers of Quintis' DCF Model involved the use of unobservable inputs, such as the Tree Model and the Heartwood Model. As to the use of such inputs, paragraphs 86-90 of AASB 13 provide as follows: 86 Level 3 inputs are unobservable inputs for the asset or liability. 87 Unobservable inputs shall be used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, ie an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs shall reflect the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. 88 Assumptions about risk include the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and the risk inherent in the inputs to the valuation technique. A measurement that does not include an adjustment for risk would not represent a fair value measurement if market participants would include one when pricing the asset or liability. For example, it might be necessary to include a risk adjustment when there is significant measurement uncertainty (eg when there has been a significant decrease in the volume or level of activity when compared with normal market activity for the asset or liability, or similar assets or liabilities, and the entity has determined that the transaction price or quoted price does not represent fair value, as described in paragraphs B37-B47). 89 An entity shall develop unobservable inputs using the best information available in the circumstances, which might include the entity's own data. In developing unobservable inputs, an entity may begin with its own data, but it shall adjust those data if reasonably available information indicates that other market participants would use different data or there is something particular to the entity that is not available to other market participants (eg an entity-specific synergy). An entity need not undertake exhaustive efforts to obtain information about market participant assumptions. However, an entity shall take into account all information about market participant assumptions that is reasonably available. Unobservable inputs developed in the manner described above are considered market participant assumptions and meet the objective of a fair value measurement. 90 Paragraph B36 describes the use of Level 3 inputs for particular assets and liabilities. (Emphasis and additional emphasis added). 762 These paragraphs are important to the present case. 763 AASB 13 requires unobservable inputs to reflect the assumptions that market participants would use when pricing the asset. However, importantly, it makes explicit that an entity may use its own data as adjusted if reasonably available information indicates that other market participants would use different data. Equally important is the prescription that an entity need not undertake exhaustive efforts to obtain information about market participant assumptions so long as it takes into account all information about market participant assumptions that are reasonably available. It follows that unobservable inputs developed in this manner are considered market participant assumptions and meet the objective of a fair value measurement. 764 Further, these provisions make clear that the valuation must include a risk adjustment to reflect any discount to the future cash flows that a market participant would assume when pricing the asset having regard to any uncertainty in the cash flows and to address the risk inherent in the inputs themselves. 765 Appendix B sets out Application Guidance including, relevantly, as to valuation techniques. It was (eventually) common ground that Quintis adopted the "Income approach" addressed in paragraphs B10-B30 of Appendix B and, specifically, a present value technique. Paragraph B10 identifies the income approach as one that: … converts future amounts (eg cash flows or income and expenses) to a single current (ie discounted) amount. When the income approach is used, the fair value measurement reflects current market expectations about those future amounts. 766 As to present value techniques, paragraph B12 provides: Paragraphs B13-B30 describe the use of present value techniques to measure fair value. Those paragraphs focus on a discount rate adjustment technique and an expected cash flow (expected present value) technique. Those paragraphs neither prescribe the use of a single specific present value technique nor limit the use of present value techniques to measure fair value to the techniques discussed. The present value technique used to measure fair value will depend on facts and circumstances specific to the asset or liability being measured (eg whether prices for comparable assets or liabilities can be observed in the market) and the availability of sufficient data. (Emphasis added). 767 As is made plain here, AASB 13 does not prescribe the use of a single technique. 768 Appendix B next sets out the central elements of present value techniques, being the estimation of future cash flows, expectations about possible variations in the amount and timing of cash flows representing the uncertainty inherent in those cash flows, and the time value of money represented by a "risk-free interest rate", as well as an allowance for risk by way of a risk premium for bearing uncertainty: paragraph B13. Paragraph B14 recognises that present value techniques differ in how they capture these elements. However, it provides that certain general principles govern any of those techniques, including that: (a) Cash flows and discount rates should reflect assumptions that market participants would use when pricing the asset or liability. (b) Cash flows and discount rates should take into account only the factors attributable to the asset or liability being measured. (c) To avoid double-counting or omitting the effects of risk factors, discount rates should reflect assumptions that are consistent with those inherent in the cash flows. For example, a discount rate that reflects the uncertainty in expectations about future defaults is appropriate if using contractual cash flows of a loan (ie a discount rate adjustment technique). That same rate should not be used if using expected (ie probability-weighted) cash flows (ie an expected present value technique) because the expected cash flows already reflect assumptions about the uncertainty in future defaults; instead, a discount rate that is commensurate with the risk inherent in the expected cash flows should be used. (d) Assumptions about cash flows and discount rates should be internally consistent. For example, nominal cash flows, which include the effect of inflation, should be discounted at a rate that includes the effect of inflation. The nominal risk-free interest rate includes the effect of inflation. Real cash flows, which exclude the effect of inflation, should be discounted at a rate that excludes the effect of inflation. Similarly, after-tax cash flows should be discounted using an after-tax discount rate. Pre-tax cash flows should be discounted at a rate consistent with those cash flows. (e) Discount rates should be consistent with the underlying economic factors of the currency in which the cash flows are denominated. (Emphasis added). 769 It is recognised that present value techniques inherently involve estimation, uncertainty and risk. In this regard, paragraphs B15 and B16 provide that: B15 A fair value measurement using present value techniques is made under conditions of uncertainty because the cash flows used are estimates rather than known amounts. In many cases both the amount and timing of the cash flows are uncertain. Even contractually fixed amounts, such as the payments on a loan, are uncertain if there is risk of default. B16 Market participants generally seek compensation (ie a risk premium) for bearing the uncertainty inherent in the cash flows of an asset or a liability. A fair value measurement should include a risk premium reflecting the amount that market participants would demand as compensation for the uncertainty inherent in the cash flows. Otherwise, the measurement would not faithfully represent fair value. In some cases determining the appropriate risk premium might be difficult. However, the degree of difficulty alone is not a sufficient reason to exclude a risk premium. 770 Thereafter, paragraph B17 identifies two different present value techniques, being the "Discount rate adjustment technique" and the "Expected present value technique" (addressed further at paragraphs B18-B22). Paragraph B17 states that the two techniques "differ in how they adjust for risk and in the type of cash flows they use". 771 The "Discount rate adjustment technique" uses "a risk-adjusted discount rate and contractual, promised or most likely cash flows". As further explained in paragraph B18: The discount rate adjustment technique uses a single set of cash flows from the range of possible estimated amounts, whether contractual or promised (as is the case for a bond) or most likely cash flows. In all cases, those cash flows are conditional upon the occurrence of specified events (eg contractual or promised cash flows for a bond are conditional on the event of no default by the debtor). The discount rate used in the discount rate adjustment technique is derived from observed rates of return for comparable assets or liabilities that are traded in the market. Accordingly, the contractual, promised or most likely cash flows are discounted at an observed or estimated market rate for such conditional cash flows (ie a market rate of return). 772 The "Expected present value technique" uses expected cash flows that are not risk-adjusted, and a discount rate that is adjusted to include a risk premium. The discount rate in this latter approach is different to that in the former technique. 773 The important difference between the two techniques is that the first uses cash flows that are adjusted for risks conditional upon the occurrence of specified events, whereas the second does not. 774 It was ultimately common ground that Quintis had used the "Discount rate adjustment technique". However, there was a dispute between the parties as to the use that could be made of the discount rates actually applied by Quintis. I will return to the resolution of these issues later.
775 It is also necessary to make reference to AASB 108 titled "Accounting Policies, Changes in Accounting Estimates and Errors" (AASB 108) which deals with, amongst other things, changes in accounting estimates from one period to another. 776 Paragraph 32 of AASB 108 provides that "[a]s a result of the uncertainties inherent in business activities, many items in financial statements cannot be measured with precision but can only be estimated" and that "[e]stimation involves judgements based on the latest available, reliable information". 777 EY drew attention to the fact that paragraph 34 of AASB 108 distinguishes between a change in an estimate and the correction of an error. The latter requires restatement of an entity's accounts; the former does not. Paragraph 34 provides: An estimate may need revision if changes occur in the circumstances on which the estimate was based or as a result of new information or more experience. By its nature, the revision of an estimate does not relate to prior periods and is not the correction of an error. 778 EY submitted that a fair value estimate recorded in one period is not rendered "wrong" or an "error" because more or better information becomes available in a later period which suggests a change in estimate. It was submitted that, by their nature, fair value estimates can only be made on the basis of information available to the entity at the time the estimate is made. 779 It follows that a fair value estimate made in accordance with the framework in AASB 113 is not rendered non-compliant with that Standard merely because the entity would make a different estimate if it had new or better information. EY pointed out that when Quintis released its FY17 accounts with the biological asset value determined on the basis, amongst other things, of a reduced heartwood yield assumption, there was no restatement of the equivalent values in the FY15 and FY16 accounts.
8.7 Relevant conclusions to be drawn from the Accounting Standards
780 A number of conclusions may be drawn from the Accounting Standards. 781 The first is that it is important to bear in mind that it is the relevant reporting entity that is required by the Accounting Standards to make the assessment as to "fair value". The stated objective of that requirement is that it is the reporting entity that must make an "estimate" as to the price at which, in an orderly transaction, the relevant asset would be sold, and the relevant market participant would buy that asset, at the measurement date under the then-current market conditions, and using the assumptions that the market participant would use when pricing the asset: paragraph 2 of AASB 13. 782 Therefore, in a case (such as this one) involving an allegation as to the fair value that was required to be reported about the asset in circumstances where there is no market for the asset, it is not necessary to establish what a market participant would have in fact paid for the asset. Rather, the focus is upon the reporting entity's assessment of what a market participant would assume and pay. 783 The second is that the relevant parts of the Accounting Standards require the application of judgement on the part of the entity undertaking the valuation. Those judgements apply in myriad ways. That is necessarily the case given that the fair value assessment is an "estimate". It is also necessarily the case because that estimate involves the reporting entity's assessment as to the price that a market participant would have paid for the asset in an orderly transaction, especially where, as was the case here, no relevant market exists. 784 The fair value "estimate" requires judgement as to the application of valuation techniques that maximise the use of observable inputs and minimise the use of unobservable inputs, and in the determination and use of each of those inputs. In turn, they require an assessment as to the assumptions that the hypothetical market participant would make, without being exhaustive in ascertaining the actual assumptions a market participant would make. Those assumptions and inputs also bear upon estimations of cash flows, the application of discount rates and risk premiums. 785 Third, the Accounting Standards are not prescriptive as to the precise technique to be used by the reporting entity. The obligation is to use valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value: paragraph 31 of AASB 13. 786 Fourth, it is also important to bear in mind that the hypothetical orderly transaction is assumed to occur between market participants in the principal or most advantageous market, and taking into account the market participant's ability to generate economic benefits using the asset in its highest and best use: paragraph 27 of AASB 13. The principal or most advantageous market is considered from the perspective of the reporting entity. These matters were accepted by Mr Basford. Mr Basford and Mr McGregor also agreed that "the market participant is looking at that asset to presumably, all things being equal, do the same thing with the tree". 787 Fifth, in relation to unobservable inputs, as already noted above, they are to be the assumptions that the reporting entity assesses that a market participant would use. An "unobservable input" has to be developed using "the best information available about the assumptions that market participants would use when pricing the asset or liability". Such information would include all data about past performance, past and present trials and scientific studies, and information about proposed strategies. EY submitted that a backward-looking assessment is fundamentally inconsistent with the requirements of AASB 13. However, in my view, data from the past would inform the future. It may be accepted that, in its assessment as to the assumptions a market participant would make, the reporting entity would have regard to the fact that a market participant is likely to have regard to past performance, as well as reasonable management plans for future improvement including the expected results of reasonable management interventions. 788 It follows from each of the points above that a reporting entity's determination of "fair value" is necessarily the product of a series of judgements, including quintessentially evaluative judgements about known facts and, in some respects, unknown facts. Such an exercise inherently involves prediction and opinion. In this regard, in his submissions, Mr Wilson drew my attention to the decision of Ipp J (with whom Kennedy and White JJ agreed) in WMC Resources Limited v Leighton Contractors Pty Ltd [1999] WASCA 10 at [23], where his Honour stated that: Valuations may involve making decisions where no fixed or readily available standard criteria exist. There may be several possible methods of assessing value, each giving widely different results, but each being reasonable. Many subsidiary factors relevant to the valuation may be uncertain, many contingencies may have to be taken into account, wide ranges of legitimate decisions may apply, and opinions may legitimately differ as to virtually all of the relevant issues. 789 Although decided in a very different statutory context, Ipp J's general observations resonate with the considerations that arise in the determination of "fair value" of biological assets for the purpose of AASB 141 and AASB 13. 790 Whilst the essence of the determination of fair value is inherently evaluative and there is scope for opinions to legitimately differ as between reasonable persons, it is my view that the question of whether there has been compliance with the Accounting Standards is an objective one. It produces an answer as to whether there has been compliance or not, even if reasonable minds may differ as to the determination of "fair value". As I explain further below at [1085]-[1086], in my view a standard akin to the correctness standard for appellate review applies to such a conclusion: see GLJ at [16] (Keifel CJ, Gageler and Jagot JJ). 791 However, whether an error or overstatement in one or more inputs in the determination of fair value, or non-compliance with one or more aspects of the Accounting Standards, will have the effect of overstating "fair value" of the relevant asset will depend on the circumstances and the particular errors. The Davis Applicants submitted, in effect, that the estimate of fair value will be overstated if one input into the model is not "correct" in the sense that it is not the singular assumption that a hypothetical market participant would use. EY submitted that this is not how AASB 13 works and it requires the inputs in the valuation technique to reflect those that a market participant would use, including, in the present case, the discount rate. EY submitted that the Standard recognises that inputs are interdependent, in that it is the combination of those inputs that produces the final valuation, with the goal, at the end of the day, not being to discover what is in the mind of the hypothetical market participant in respect of each and every assumption. EY submitted that if one input is clearly conservative then that can be taken into account in assessing the reasonableness of another assumption that is less certain. 792 In my view, whether in any given case, an error in one or more assumptions will lead to a different valuation or not, will depend on the circumstances and the particular valuation in question. The ultimate task is whether the reporting entity has determined a fair value that reflects the price a market participant would have paid for the asset in an orderly transaction.
8.8 Disputes between the parties about the Accounting Standards
793 There was considerable common ground between the parties as to the interpretation of the Accounting Standards and their application, but disputes remained about certain issues relating to approach and methodology. 794 The first dispute between the parties related to the characteristics of the hypothetical market participant and the information to be imputed to such a person or entity. The Davis Applicants submitted that, consistent with the definition of "market participant" in AASB 13, the relevant market participant is taken to have knowledge and a reasonable understanding about the asset and the transaction using all available information, including information that might be obtained through due diligence efforts that are usual and customary. In this regard, the Davis Applicants emphasised the importance of the market participant being seized of all available information as would be obtained through due diligence efforts. They pointed to Mr Morton's acceptance in evidence that "the inquiry as to fair value has to be on the basis of the true facts". 795 It was submitted that consistently with this approach, a "market participant" would know all the relevant information and the "true facts" known to Quintis, including that the trees from years one to five, which were on the theoretical yield curve (underpinned by the Tree Model), had a substantial history of underachieving projected growth as soon as they were placed on assigned or actual yield curves. It was further submitted that a market participant would also know that the Tree Model was developed in 2004 by Mr Kimber who had no track record of correctly predicting heartwood yield (which is apparent from the consistent declines in forecasted heartwood yields compared to what was initially recorded in the PDSs for various projects based on Mr Kimber's opinion). It was submitted that the market participant would properly take into account later scientific studies, Quintis' own inventory data and the plantation management issues Quintis was facing (such as overcrowding, poor quality seeds, poor quality hosts and poor quality sandalwood). 796 EY submitted that contrary to the thrust of the Davis Applicants' submission, the definition of market participant in AASB 13 did not require an entity to "perform a mock due diligence over its own records". It was contended that it required an entity to make a pragmatic assessment of the understanding of the asset that a market participant would acquire following a customary due diligence exercise. It was said that this was apparent from the use of the words "reasonable understanding" and "information that might be obtained". It was further submitted that, on any view, "due diligence efforts that are usual and customary" would not include scouring a company's internal emails, as the Davis Applicants had done. 797 A related dispute concerned whether a market participant would be taken to have regard to reasonably available market data. EY submitted hat this included information contained in market analyst reports covering the entity, or assumptions or inputs used by competitors. 798 Where, as in the present case, no market exists for the asset, the reporting entity must have regard to the approach that the hypothetical market participant would take in pricing the asset. By reason of the definition of market participant, the characteristics of that hypothetical participant are that they are knowledgeable, have a reasonable understanding of the asset and the transaction by relying upon all available information including information that might be obtained through due diligence efforts that are usual and customary. This requires the reporting entity to account for the fact that the market participant would have information available to them that they might obtain through a usual or customary due diligence process. The extent of such information will depend on the circumstances of the case. 799 The Davis Applicants submitted that Quintis was required to assume that a market participant would have obtained all data relating to Quintis as part of a usual and customary due diligence process, including all of Quintis' relevant internal emails relating to the performance of the plantations. I do not agree. In my view, even in a usual and customary due diligence process, it would not be expected that a prospective purchaser would access all the internal emails of the subject company. In the present case, I do not consider that Quintis was required to make an assessment of fair value by assuming that a market participant would have had access to every one of its internal correspondence relating to the performance of the sandalwood plantations, including the banal and mundane everyday communications relating to that subject. Rather, in my view, as I explain further below at [1054], Quintis should have assumed that a reasonable market participant would have access to information such as Quintis' PDSs, the inventory and tree count records (such as they were available) over time, its valuation documents and its past financial accounts. This was information which a market participant would take into account in assessing and evaluating the past performance of the biological assets as a step in determining the fair value of those assets. However, I do not accept that a market participant would be taken to have obtained every single email or communication sent in relation to the asset. 800 In my view, it could also be accepted that a reporting entity in Quintis' position would assume that a hypothetical market participant would have access to market information, including that which was made available by market analysts in making their own assessments as to the value of the assets. However, it would not follow that the reporting entity would assume that a market participant would simply rely upon a market analysts' opinion, without undertaking their own assessment. 801 The second dispute between the parties related to the valuation technique used by Quintis, and whether its cash flows could be adjusted by the application of a risk adjusted discount rate. 802 Initially, relying upon the evidence of Mr Basford, the Davis Applicants submitted that Quintis had used the "expected cashflow technique" (set out in paragraph B17(c) of AASB 13), as opposed to the "discount rate adjusted technique" (set out in paragraph B17(a)). However, after reading the McGregor Report, Mr Basford agreed that Quintis had in fact used the "discount rate adjusted technique". 803 There was nevertheless a dispute between the parties as to the use that could be made of the discount rates applied by Quintis. In substance, the Davis Applicants submitted that, as Quintis used the "discount rate adjusted technique", it was required to have determined its "most likely cashflows" (paragraph B18 of AASB 13) in a way that accounted for risks arising from specified and conditional events, specifically, mortality. It was submitted that, despite this, Quintis had not adjusted its determination of its "most likely cashflows" to account for mortality. Instead, Quintis had accounted for mortality in its tiered discount rates. Relying upon these matters, the Davis Applicants contended that the "risk premium" inherent in the discount rate therefore could not be brought to account for other risks in the assumptions it had made about its most likely cash flow. 804 The Davis Applicants relied upon the following evidence given by Mr McGregor (at T978.26-36; T993.4-36): MR HUTLEY: And you have to build that into the risk premium at the end of the exercise, don't you? MR McGREGOR: Yes, that's correct. MR HUTLEY: And you can't just build in mortality into the risk exercise at the end of the process, you have to build in all the other uncertainties which your most likely cashflow confronts; correct? MR McGREGOR: Correct, yes. MR HUTLEY: And that would be particularly the case in respect of what might be called a cutting edge developing silviculture plantation process; correct? MR McGREGOR: Yes. 805 The Davis Applicants further submitted that Mr McGregor's view was consistent with Mr Basford's evidence (at T995.25-29): "… that the standard says for each one of the uncertainties within the cashflow you should build in a risk adjustment… [to] build in the risk that the most likely event will not happen." 806 Relying upon this evidence, the Davis Applicants submitted: The consequence of that evidence is that Quintis had to use inputs which reflected its most likely cashflow and then apply a discount rate which included a risk premium to account for the risk that those most likely cashflow assumptions will not be correct (being significant risks given the nature of Quintis' operations as one of the first and the largest sandalwood plantation and there being no liquid market for sandalwood oil). That is, the risk premium is not there to account for known errors in the cashflow inputs. In Quintis' case, it sought to address mortality risk wholly within the risk premium (rather than as an input into the cashflows). As such, it cannot be said that there was a component of the risk premium to address other known issues or errors with the cashflow inputs. 807 In the present case, the fact is that Quintis determined fair value of its biological assets by accounting for mortality in its discount rate as opposed to an adjustment to its expected cash flows. That is because it addressed mortality by way of its staggered discount rates. 808 The implied suggestion in the Davis Applicants' submissions appeared to be that, having determined its most likely cash flow without account for mortality, it was not open to Quintis to bring the discount rates to bear upon an adjustment to those cash flows other than in relation to mortality. That is, it was submitted that Quintis could not account for any further "issues" or "errors" in the cash flows through the application of its discount rate. 809 There was something of an arid technicality about the Davis Applicants' contentions. This is best exposed by the opinions expressed by Professor Partington. Any discounted cash flow calculation requires two main elements: "an estimate of the cash flow" and "a discount rate to apply to that cash flow". However, as AASB 13 reflects, there are a number of ways of undertaking the discounted cash flow calculation. Professor Partington explained: Variation in the method of calculation arises because there are differing ways of defining the cash flow and the discount rate. This can be a source of confusion and the key principle to apply in order to avoid such confusion is the "consistency principle". That principle is that the cash flow and the discount rate must be defined such that they are consistent with each other and with the asset being valued. Provided this principle is adhered to alternative approaches to the DCF calculation give equivalent values. As an example of the consistency principle, consider the case of the valuation of an asset where all the risk adjustments are made to the cash flows. Such cash flows are known as certainty equivalent cash flows, since after the adjustment the cash flows are equivalent to risk free cash flows. Under the consistency principle such cash flows should be discounted at the risk free rate. 810 As Professor Partington further explained, so long as there is "consistency", the result will give equivalent values. 811 In relation to Quintis' approach, Professor Partington opined as follows: In the current case there are two methods of DCF calculation to be considered. One adjusts for tree crop mortality losses via the discount rate. The other adjusts for tree crop mortality losses via the cash flow. In the first method there is no mortality adjustment to the cash flow so the cash flow is overestimated, thus the discount rate must be increased by adding a premium to compensate for the overestimate of the cash flows. In other words, overestimated cash flows require an overestimated discount rate. In the mortality adjusted cash flow method there is no overestimate of the cash flows, and no discount rate premium is required. In both methods[,] the cash flow and the discount rate are defined consistently. The asset being valued under both methods is the sandalwood plantations. The consistency principle is met, and the two methods are equivalent. 812 Professor Partington explained that the two approaches both have advantages and disadvantages: The advantage of the adjustment to the cash flow is that it makes explicit the magnitude and timing of the cash flow adjustment. The disadvantage is that it can be more complex to undertake and where the adjustments are subject to uncertainty, from sampling error in the current case, there is the potential for spurious precision. The advantage of the adjustment to the discount rate is that it is relatively simple. The disadvantage is that the adjustment may be subjective and also may not reflect time variation in the required adjustment. As the discount rate adjustments compound over time, even small adjustments can have very large effects at longer time horizons, and this may not always be recognised when setting the adjustment. 813 Professor Partington's opinions are logical and coherent. I accept them. These opinions are consistent with paragraphs B15 and B16 of AASB 13 which ultimately provide that a fair value measurement should include a risk premium that is reflective of the amount that market participants would demand as compensation for the uncertainty inherent in the cash flows. 814 EY submitted that, to the extent the Davis Applicants' contentions were intended to suggest that the discount rate applied by Quintis could not account for the inherent uncertainty in the unobservable inputs used by Quintis other than with respect to mortality, it was wrong. For the reasons set out above, I agree. 815 The third dispute between the parties related to whether the reporting entity is required to obtain the views, opinions and advice of an independent expert. The Davis Applicants submitted that in light of "its history of poor growth and uncertainties as to future yield", Quintis was required to base its growth and yield assumptions on the views of "an expert in Indian sandalwood such as Dr Barbour". EY submitted that there was no support in the Standard for these submissions. It was said that no part of the Accounting Standards supported the Davis Applicants' submissions. EY relied upon the history of IAS 41 (on which AASB 141 was based). When issuing or amending an international accounting standard, the International Accounting Standards Committee (IASC) Board publishes a "Basis for Conclusions" document that summarises the IASC Board's reasons for proposing the standard and accepting or rejecting certain alternative views. EY pointed to the fact that the Basis for Conclusions for IAS 41 records (at paragraph B33) that: A significant number of commentators on the DSOP [Draft Statement of Principles] indicated that, if present value of expected net cash flows is used to determine fair value, an external independent valuation should be required. The Board rejected this proposal since it believes that external independent valuations are not commonly used for certain agricultural activity and it would be burdensome to require an external independent valuation. The Board believes that it is for entities to decide how to determine fair value reliably, including the extent to which independent valuers need to be involved. 816 EY submitted that this passage was referring to a proposed requirement that a company engage an external independent valuer (such as Mr Morton). However, EY submitted that the IASC Board's reasoning applied equally to the Davis Applicants' "(novel) contention that Quintis was required to engage an academic to opine on the inputs in the DCF". It submitted that there is no evidence that this commonly occurred for agricultural activity and no question that it would be burdensome if companies were required to do this. 817 EY also relied upon the absence of any textual support for the submission advanced by the Davis Applicants and pointed out that Mr Basford himself accepted that "[i]f you were valuing agricultural assets it would be reasonable to have internal people doing the valuation". 818 In my view, EY's submissions should be accepted. No part of AASB 141 or AASB 13 requires the advice of an independent expert on the inputs to be used in a fair value model. Rather, as EY points out, the Accounting Standards expressly contemplate that unobservable inputs will be primarily derived from the entity's own information and any reasonably available extrinsic information as to market participants' assumptions: paragraph 89 of AASB 13. To the extent that the inputs are uncertain, the Standard further provides that this uncertainty will be addressed through the risk adjustment (discount rate) rather than adjustments to the cash flow: paragraph 88 of AASB 13. 819 There were other disputes that were raised on the evidence, but which ultimately fell away. For example, Mr Basford had given evidence relying upon paragraph 11 of AASB 13 that Quintis was required to assign a value to its trees based solely on the most recent measurements (i.e., only using the "actual" yield curve), and was precluded from assigning yield curves based on its assessment of long-term growth trends or assessments as to future growth. However, this argument was not pressed by the Davis Applicants. 820 There was also a dispute between the parties as to the discount rate and mortality rates used by Quintis. However, the Davis Applicants abandoned those claims. The only ways in which the discount rates and the issue of mortality featured was in the Davis Applicants' contentions as to the present valuation techniques addressed above and in the calculation of its counterfactual fair value estimates.
821 Next, it is convenient to the consider the requirements imposed by the Auditing Standards, which are relevant to the case against EY. 822 The Auditing Standards, like the Accounting Standards, are legislative instruments. As outlined above, the Auditing Standards have the status of delegated legislation and must be interpreted in accordance with ordinary principles of statutory construction and in a way that would promote the objects of Part 12 of the ASIC Act and of the particular standard in question. 823 The Auditing Standards provide a framework for the conduct of an audit. There are general Standards that apply to all audits, and specific Standards that apply to the audit of specific items in a company's financial statements. This includes a Standard that applies specifically to the audit of accounting estimates. 824 Unlike in respect of the Accounting Standards, there was no substantial dispute between the parties as to the interpretation and requirements of the Auditing Standards. Instead, the dispute between the parties related to the extent to which EY had complied with the Auditing Standards, which I deal with below.
9.2 The relevant parts of the pleaded case relating to the Auditing Standards
825 The following matters pleaded by the Davis Applicants were uncontroversial. 826 First, Quintis was required by s 301 of the Corporations Act to have the FY15 and FY16 Financial Reports audited and to obtain an auditor's report in respect of each financial year. EY was engaged to conduct each of these audits and did so: FFASOC [30]-[32]. 827 Second, in conducting each of the FY15 and FY16 audits, EY was required by ss 307(a) and 308(1) of the Corporations Act to form an opinion about, and report to members on, whether the relevant financial report was in accordance with the Corporations Act, including whether the report (FFASOC [33]): (a) complied with the Accounting Standards; and (b) gave a true and fair view of the financial position and performance of Quintis and the Quintis Group. 828 Third, EY was also required by s 307(b) of the Corporations Act to form an opinion about whether it had been given all information, explanation and assistance necessary for the conduct of the audit: FFASOC [34]. 829 Fourth, if EY was not of the opinion that the relevant financial report was in accordance with the Corporations Act and Accounting Standards, it was required by s 308(1) of the Corporations Act to say why it was not of that opinion, and by s 308(2) to quantify the effect of any such non-compliance to the extent it was practicable to do so: FFASOC [35]-[37]. 830 Fifth, EY was required by s 308(3) of the Corporations Act to include in its audit reports a description of any defect or irregularity in the relevant financial report: FFASOC [38]. 831 Sixth, EY was required by s 308(3A) of the Corporations Act to include in its audit reports any statement or disclosure required by an Auditing Standard, and was required by s 307A(1)(a) to conduct each audit in accordance with the Auditing Standards: FFASOC [38] and [40]. 832 The Davis Applicants pleaded reliance on a number of Auditing Standards, but the ones of particular importance to the resolution of the proceedings were: (a) Auditing and Assurance Standards Board Standard 200 titled "Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards" (compilations prepared on 11 November 2013 and 1 December 2015) (together and separately, ASA 200); (b) Auditing and Assurance Standards Board Standard titled "Audit Evidence" (compilations prepared on 11 November 2013 and 1 December 2015) (together and separately, ASA 500); and (c) Auditing and Assurance Standards Board Standard 540 titled "Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures" (compilations prepared on 27 June 2011 and 1 December 2015) (together and separately, ASA 540). 833 Also relevant is the guidance statement published by the AASB titled "Using the Work of a Management's Expert" (GS 005).
834 ASA 200 deals generally with the overall objectives and responsibilities of an auditor and the conduct of an audit. 835 The overall objectives of an audit are set out in paragraphs 11 and 12 which provide as follows: 11. In conducting an audit of a financial report, the overall objectives of the auditor are: (a) To obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial report is prepared, in all material respects, in accordance with an applicable financial reporting framework; and (b) To report on the financial report, and communicate as required by the Australian Auditing Standards, in accordance with the auditor's findings. 12. In all cases when reasonable assurance cannot be obtained and a qualified opinion in the auditor's report is insufficient in the circumstances for purposes of reporting to the intended users of the financial report, the Australian Auditing Standards require that the auditor disclaim an opinion or withdraw (or resign) from the engagement, where withdrawal is possible under applicable law or regulation. (Emphasis added). 836 As is made clear, the purpose of an audit is to obtain "reasonable assurance". Paragraph 13(m) provides that "[r]easonable assurance means, in the context of an audit of a financial report, a high, but not absolute, level of assurance", and paragraph 5 provides that: As the basis for the auditor's opinion, Australian Auditing Standards require the auditor to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error. Reasonable assurance is a high level of assurance. It is obtained when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk (that is, the risk that the auditor expresses an inappropriate opinion when the financial report is materially misstated) to an acceptably low level. However, reasonable assurance is not an absolute level of assurance, because there are inherent limitations of an audit which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor's opinion being persuasive rather than conclusive. (Ref: Para. A28-A52) (Emphasis added). 837 Paragraph 13(i) provides that: Misstatement means a difference between the amount, classification, presentation, or disclosure of a reported financial report item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud. Where the auditor expresses an opinion on whether the financial report is presented fairly, in all material respects, or gives a true and fair view, misstatements also include those adjustments of amounts, classifications, presentation, or disclosures that, in the auditor's judgement, are necessary for the financial report to be presented fairly, in all material respects, or to give a true and fair view. 838 Paragraph 17 is titled "Sufficient Appropriate Audit Evidence and Audit Risk". It provides that: To obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to base the auditor's opinion. (Emphasis added). 839 As paragraph 17 makes clear, to obtain reasonable assurance, the auditor is required to obtain "sufficient and appropriate audit evidence" to reduce audit risk to an acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to base the auditor's opinion. Paragraphs A29-A31 provide further context: A29. The sufficiency and appropriateness of audit evidence are interrelated. Sufficiency is the measure of the quantity of audit evidence. The quantity of audit evidence needed is affected by the auditor's assessment of the risks of misstatement (the higher the assessed risks, the more audit evidence is likely to be required) and also by the quality of such audit evidence (the higher the quality, the less may be required). Obtaining more audit evidence, however, may not compensate for its poor quality. A30. Appropriateness is the measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditor's opinion is based. The reliability of evidence is influenced by its source and by its nature, and is dependent on the individual circumstances under which it is obtained. A31. Whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level, and thereby enable the auditor to draw reasonable conclusions on which to base the auditor's opinion, is a matter of professional judgement. ASA 500 and other relevant Australian Auditing Standards establish additional requirements and provide further guidance applicable throughout the audit regarding the auditor's considerations in obtaining sufficient appropriate audit evidence. (Emphasis added). 840 In discharging an auditor's function, ASA 200 refers to two important concepts: professional scepticism and professional judgement. Paragraph 15, titled "Professional Scepticism", provides that "[t]he auditor shall plan and perform an audit with professional scepticism recognising that circumstances may exist that cause the financial report to be materially misstated". Professional scepticism is defined in paragraph 13(l) as "an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence". 841 Paragraph 16, entitled "Professional Judgement", provides that the auditor "must exercise professional judgement in planning and performing an audit of a financial report". Professional judgement is defined in paragraph 13(k) as "the application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement".
842 ASA 500 explains what constitutes audit evidence and addresses the auditor's responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence. The standard accordingly addresses two related topics: audit procedures and audit evidence. 843 Paragraph 4 provides that "[t]he objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion". Paragraph 6 provides that "[t]he auditor shall design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence". 844 Audit procedures are explained in paragraph A2 as follows: Most of the auditor's work in forming the auditor's opinion consists of obtaining and evaluating audit evidence. Audit procedures to obtain audit evidence can include inspection, observation, confirmation, re-calculation, re-performance and analytical procedures, often in some combination, in addition to enquiry. Although enquiry may provide important audit evidence, and may even produce evidence of a misstatement, enquiry alone ordinarily does not provide sufficient audit evidence of the absence of a material misstatement at the assertion level, nor of the operating effectiveness of controls. 845 "Audit evidence" is defined in paragraph 5(c) as "information used by the auditor in arriving at the conclusions on which the auditor's opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial report and other information". Paragraph A1 further provides that: Audit evidence is necessary to support the auditor's opinion and report. It is cumulative in nature and is primarily obtained from audit procedures performed during the course of the audit. It may, however, also include information obtained from other sources such as previous audits (provided the auditor has determined whether changes have occurred since the previous audit that may affect its relevance to the current audit) or a firm's quality control procedures for client acceptance and continuance. In addition to other sources inside and outside the entity, the entity's accounting records are an important source of audit evidence. Also, information that may be used as audit evidence may have been prepared using the work of a management's expert. Audit evidence comprises both information that supports and corroborates management's assertions, and any information that contradicts such assertions. In addition, in some cases the absence of information (for example, management's refusal to provide a requested representation) is used by the auditor, and therefore, also constitutes audit evidence. (Emphasis added). 846 As is apparent from the above, reliance may be placed on a management's expert to obtain sufficient audit evidence. However, ASA 500 does not make provision for an uncritical reliance on the assertions of a management's expert. This is critical in the case against EY. Where an auditor relies upon the work of a management's expert, it is important to have regard to paragraph 8 of ASA 500, which provides as follows: 8. If information to be used as audit evidence has been prepared using the work of a management's expert, the auditor shall, to the extent necessary, having regard to the significance of that expert's work for the auditor's purposes: (Ref: Para. A34-A36) (a) Evaluate the competence, capabilities and objectivity of that expert; (Ref: Para. A37-A43) (b) Obtain an understanding of the work of that expert; and (Ref: Para. A44-A47) (c) Evaluate the appropriateness of that expert's work as audit evidence for the relevant assertion. (Ref: Para. A48) (Emphasis and additional emphasis added). 847 Paragraph 5(d) defines a "management's expert" as "an individual or organisation possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial report". 848 Paragraphs A34-A40 and A44-A48 provide further guidance on the reliance on a management's expert. It is worth setting out some of these paragraphs in full: Reliability of Information Produced by a Management's Expert (Ref: Para. 8) … A35. When information to be used as audit evidence has been prepared using the work of a management's expert, the requirement in paragraph 8 of this Auditing Standard applies… A36. The nature, timing and extent of audit procedures in relation to the requirement in paragraph 8 of this Auditing Standard, may be affected by such matters as:
851 Further guidance on the use of a management's expert is provided in GS 005. 852 Paragraph 9 provides that "[t]he auditor has sole responsibility for the audit opinion expressed and that responsibility is not reduced by the auditor's use of the work of a management's expert". 853 Paragraph 13 reiterates the matters I have set out above as to the considerations relevant to determining the information to be used as audit evidence as required by ASA 500: ASA 500 requires that if information to be used as audit evidence has been prepared using the work of a management's expert, the auditor to the extent necessary, having regard to the significance of that expert's work for the auditor's purposes:
856 ASA 540 is the auditing standard that applies specifically to audits of accounting estimates, including fair value accounting estimates. 857 Paragraph 7(a) defines an "accounting estimate" as: … an approximation of a monetary amount in the absence of a precise means of measurement. This term is used for an amount measured at fair value where there is estimation uncertainty, as well as for other amounts that require estimation. Where this Auditing Standard addresses only accounting estimates involving measurement at fair value, the term "fair value accounting estimates" is used. (Emphasis added). 858 Paragraph 7(c) defines "estimation uncertainty" as "the susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement". 859 Paragraph 6 sets out the objective of the auditor in auditing accounting estimates: 6. The objective of the auditor is to obtain sufficient appropriate audit evidence about whether: (a) accounting estimates, including fair value accounting estimates, in the financial report, whether recognised or disclosed, are reasonable; and (b) related disclosures in the financial report are adequate, in the context of the applicable financial reporting framework. (Emphasis added). 860 ASA 540 requires the auditor to make an assessment about the risk of material misstatement, and where this involves the use of accounting estimates, it, amongst other things, provides at paragraph 13(b): 13. In responding to the assessed risks of material misstatement, as required by ASA 330, the auditor shall undertake one or more of the following, taking account of the nature of the accounting estimate: (Ref: Para. A59-A61) … (b) Test how management made the accounting estimate and the data on which it is based. In doing so, the auditor shall evaluate whether: (Ref: Para. A68-A70) (i) The method of measurement used is appropriate in the circumstances; and (Ref: Para. A71-A76) (ii) The assumptions used by management are reasonable in light of the measurement objectives of the applicable financial reporting framework. (Emphasis added). 861 ASA 540 also imposes obligations upon auditors where they identify that there is a risk of material misstatement arising because of the use of internal models used by management. This point is adverted to at paragraph A26, which provides as follows: A26. There may be greater risks of material misstatement, for example, in cases when management has internally developed a model to be used to make the accounting estimate or is departing from a method commonly used in a particular industry or environment. (Emphasis added). 862 Where assumptions are relied upon, it is also necessary to have regard to paragraphs A33, A35 and A47. They provide: A33. Management may support assumptions with different types of information drawn from internal and external sources, the relevance and reliability of which will vary. In some cases, an assumption may be reliably based on applicable information from either external sources (for example, published interest rate or other statistical data) or internal sources (for example, historical information or previous conditions experienced by the entity). In other cases, an assumption may be more subjective, for example, where the entity has no experience or external sources from which to draw. … A35. With respect to fair value accounting estimates, assumptions or inputs vary in terms of their source and bases, as follows: (a) Those that reflect what marketplace participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the reporting entity (sometimes referred to as "observable inputs" or equivalent). (b) Those that reflect the entity's own judgements about what assumptions marketplace participants would use in pricing the asset or liability developed based on the best information available in the circumstances (sometimes referred to as "unobservable inputs" or equivalent). In practice, however, the distinction between (a) and (b) is not always apparent. Further, it may be necessary for management to select from a number of different assumptions used by different marketplace participants. … A47. Examples of accounting estimates that may have high estimation uncertainty include the following: …
9.7 Relevant conclusions to be drawn from the Auditing Standards
864 A number of conclusions may be drawn from the Auditing Standards. 865 First, the overall objective of an auditor is to obtain reasonable assurance about whether the relevant financial report as a whole is free from material misstatement. This requires the auditor to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level. Reasonable assurance means a high, but not absolute, level of assurance. 866 Second, it is a matter of professional judgement for the auditor as to how they go about the task of planning and performing an audit. The Standards provide a framework, but are not prescriptive as to how an audit must or should be performed. However, an auditor is required to plan and perform the audit with professional scepticism, which includes a questioning mind, being alert to conditions that indicate possible misstatement, and a critical assessment of audit evidence. 867 Third, an auditor may rely on the work of a management's expert as audit evidence, but must, to the extent necessary: evaluate the expert's competence, capabilities and objectivity; obtain an understanding of their work; and evaluate the appropriateness of their work as audit evidence for the relevant assertion. Where the management's expert's work involves the use of significant assumptions and methods, the relevance and reasonableness of those assumptions must be considered. 868 Fourth, in the context of auditing a fair value accounting estimate, when responding to assessed risks of material misstatement, an auditor should test how management made the accounting estimate and the data on which it is based, and evaluate whether the method of measurement used is appropriate in the circumstances and whether the assumptions used by management are reasonable. 869 Fifth, there may be greater risks of material misstatement where an internally developed, highly specialised model has been used to make an accounting estimate. Various methods for testing the robustness of such a model and the assumptions underpinning it should be considered and applied where appropriate. 870 These are matters to which I will return.
871 The first step in the Davis Applicants' case in seeking to falsify Quintis' accounts was its attack on the DCF Model. Although this attack initially focussed upon a number of inputs in the DCF Model, by the close of the trial, there were only two inputs that were the subject of the Davis Applicants' case, namely the heartwood yield and processing costs assumptions. At its irreducible core, the Davis Applicants' case was that Quintis (FFASOC [169] and [169A]): (a) assumed a predicted heartwood yield per tree at harvest that was materially higher than that which a market participant would have assumed; and (b) understated the cost of processing per litre of sandalwood oil. 872 The next step in the Davis Applicants' case was that by reason of these two matters by reason of these matters: (a) the recognition of the FY15 and FY16 BA Carrying Values in the FY15 and FY16 Financial Reports (respectively) had the effect of overstating the carrying value of the most valuable asset on Quintis' balance sheet in each of the relevant financial years and therefore overstated Quintis' assets in each of the relevant financial years: FFASOC [174]; (b) the recognition of the FY15 and FY16 Revaluation Gains in the FY15 and FY16 Financial Report (respectively) had the effect of overstating the value of the gain recognised in respect of the increase in the fair value of Quintis' biological assets in the income statement in each of the relevant financial years and therefore overstated Quintis' income and profit in each of the relevant financial years: FFASOC [175]; (c) and further, by reason of these matters: (i) the Directors' assessments overstated the fair value of Quintis' biological assets in each of the FY15 and FY16 Financial Reports: FFASOC [170]; (ii) each of the FY15 and FY16 Financial Reports did not comply with the Accounting Standards because they did not yield a value of biological assets that represented fair value: FFASOC [171]-[173]; and (iii) each of the FY15 and FY16 Financial Reports did not give a true and fair view of the financial position and performance of Quintis and did not comply with the Accounting Standards: FFASOC [176]. 873 In the way in which it was pleaded, the Davis Applicants' case required them to establish: first, that the heartwood yield was materially higher than that which a market participant would have assumed and that the processing costs understated the actual costs; second, that by reason of those two flawed assumptions, Quintis overstated the value of its assets, revaluation gains, income and profits; and third, that by reason of these matters, the FY15 and FY16 Financial Reports did not comply with the Accounting Standards because they: (a) did not yield a value of biological assets that represented fair value; and (b) did not give a true and fair view of the financial position and performance of Quintis. 874 As will become evident in what follows, the Davis Applicants' case proceeded on the basis that, if they could establish that the assumptions relating to heartwood yield and processing costs were flawed (and nothing else), it would necessary follow that Quintis' assets were overstated and that the FY15 and FY16 Financial Reports did not comply with the Accounting Standards. 875 It is convenient at this juncture to provide an overview of how the Davis Applicants' case was advanced at trial. 876 By the close of the trial, the Davis Applicants' attack on the critical assumption in the DCF Model as to heartwood yield primarily focussed on the flaws in Quintis' use and reliance upon the Tree Model. The Davis Applicants' case was that, by reason of the Tree Model, the DCF Model assumed that a sandalwood tree at 15 years would grow to be 24.5 cm DOB and would produce 20 kg of heartwood. Although the Davis Applicants did not take issue with the Heartwood Model or the fact that a tree that in fact grew to be 24.5 cm DOB would produce 20 kg of heartwood, they sought to falsify the premise that a sandalwood tree would achieve a DOB of 24.5 cm by 15 years. 877 In doing so, the Davis Applicants took issue with the lack of evidentiary support for the incremental rates of growth assumed in the Tree Model. It was submitted that by the time of the preparation of the FY15 and FY16 Financial Reports, Quintis did not have an evidentiary basis upon which to rely upon the Tree Model, and, to the contrary, the evidence pointed to the fact that Quintis' sandalwood trees were not growing in accordance with the Tree Model. It was submitted that Quintis, and in particular Mr Brown, relied upon and assumed the accuracy of the Tree Model (which had been devised by Mr Kimber) without any interrogation as to its validity. 878 In respect of trees aged under five years, the Davis Applicants submitted that, as there was no evidentiary support for the Tree Model, there was no reasonable basis for Quintis to assume that trees at age 15 would grow to 24.5 cm and produce 20 kg of heartwood, or, in other words, would achieve 100% of the predicted heartwood yield. The Davis Applicants contended that a market participant would not have made such an assumption on the "true facts" that were known. 879 Further, the Davis Applicants argued that, to the extent that Quintis had relied on an assumption that trees aged under five years would achieve a 100% heartwood yield on the basis of improved silvicultural practices in the (then) more recent plantations from 2009 onwards, there was no evidentiary basis to support that assumption. It was contended that, on the facts that were then known, the actual or proposed silvicultural improvements had neither individually nor cumulatively led to an improvement in tree performance, or led to an improvement to the extent that was assumed by Quintis. 880 In respect of trees aged over five years, the Davis Applicants submitted that the assigned yield curves allocated to plantations depended on the accuracy of the Tree Model because those assigned yield curves were a function (expressed as a percentage) of the 100% yield curve drawn from the Tree Model. It was contended that the assigned yield curves depended on the accuracy of the rates of growth embedded into the 100% yield curve - that is, that trees would continue to grow at the incremental rates of growth inherent in the Tree Model such that they would after five years grow to that curve, or the shape of that curve, from the time of their assignment. It was submitted that this approach simply adopted the incremental rates of growth from the Tree Model from the time of assignment into the future (for which there was no evidentiary basis) and, therefore, had the effect of leading to a "garbage in, garbage out" result. There was a deal of contest about these contentions, including those which emerged during the course of closing oral submissions. 881 The Davis Applicants submitted that another problem with the valuation of the trees aged over five years is that they were placed on "assigned" yield curves and not "actual" yield curves. This was because Quintis did not adjust the yield curves year-on-year unless Quintis' management, including Mr Brown, exercised a discretion to do so, and this included circumstances where Mr Brown decided that the performance of the poorer performing plantations would improve by reason of certain intervention strategies proposed by management. The Davis Applicants submitted that there was no basis upon which Quintis, and, specifically, Mr Brown, and, therefore, Mr Wilson, could assume that improvements in silvicultural practices would improve heartwood yields by 25%, or at all. It was submitted that even if Mr Brown was correct in his belief that the underperforming trees identified during the annual stocktakes would recover, the value that a market participant would have paid for such trees would have been less than for trees that had performed in accordance with the expected growth rate, this being because it would take time for those trees to recover and, hence, cash flows from harvest would be delayed which would need to be further discounted. It was submitted that there would also be additional maintenance costs that had to be accounted for in the DCF Model, but which were not, and an increased risk that the trees would not recover which was a further matter that had not been addressed by Quintis. The Davis Applicants contended that the approach of relying upon "assigned" yield curves further inflated the value of the biological assets. 882 As a result of these matters, the Davis Applicants submitted that Quintis did not comply with AASB 13. It was submitted that the assumptions based on the Tree Model were not "realistic or achievable and therefore did not reflect the assumptions that a market participant would make when determining the fair value of Quintis' biological assets in their current state and condition and the potential for future biological transformation". Specifically, the Davis Applicants submitted that: … the Court should find that no market participant would have valued the biological assets based on the model adopted by Quintis. This is because, consistently with the definition provided by AASB 13, a "market participant" would know all the relevant information and the "true facts" known by the company, including that the trees from years 1 to 15, which were on the theoretical yield curve (underpinned by the tree model), had a substantial history of underachieving projected growth as soon as they were placed on assigned or actual yield curves. A market participant would also know, as Mr Brown acknowledged throughout his evidence, that the Tree Model was developed in 2004 by someone (Mr Kimber) who was not associated with the company by 2015 and who had no track of correctly predicting heartwood yield (which is apparent from the consistent declines in forecasted heartwood yields compared to what was initially recorded in the PDS for various projects based on Kimber's opinion), and did not properly take into account later scientific studies, Quintis' own inventory data or the plantation management issues Quintis was facing (such as overcrowding, poor quality seeds, poor quality hosts and poor quality sandalwood). 883 It was further submitted that: In the circumstances, a market participant would conclude that the trees under 5 years could never on average produce what the model predicted they would at 15 years. Likewise, a market participant would not accept that the trees over 5 years could achieve their forecasted yield projections as they were based on yield curves built off the flawed Tree Model. For these reasons, the valuation of the biological assets did not accord with AASB 13 and was materially overstated. Although there was confusion in the expert evidence as to the implications of adopting one or other of the valuation techniques in paragraph B17(a) or (c) of AASB 13 and its impact on the appropriate discount rate (T1025.42 to T1026.2-30), the fundamental anterior enquiry is whether the projected cash flows (whether it be "likely" or "expected") are those that a market participant would adopt based on knowledge of all relevant information and the true facts. For the reasons outlined above, on any view, the cash flows adopted by Quintis did not reflect the "most likely" or the "probability weighted average" in accordance with AASB 13. 884 The Davis Applicants relied upon Dr Barbour's and Mr Basford's expert evidence to support their submission that a "market participant" would have adopted different assumptions in determining fair value when acting in their own economic interest as required by paragraph 22 of AASB 13. It was said that a market participant would have sought to identify the "most likely cash flows" which the trees would generate based on inputs which most accurately reflected their current state and condition and the potential for future biological transformation as required by the discount rate adjustment technique set out at paragraph B17(a) of AASB 13. 885 The Davis Applicants asserted that a market participant would have assumed a heartwood yield per tree of approximately 6 to 8 kg. In support of these contentions, they relied upon the opinions expressed by Dr Barbour, which I refer to and examine in detail below when dealing with the Davis Applicants' counterfactual case. Mr Basford's opinions were tied to those expressed by Dr Barbour. The Davis Applicants submitted that Mr Basford's opinions aligned with what a "knowledgeable" market participant "using all available information" - which included the scientific information about the growth of sandalwood trees and the actual growth rates and harvest results Quintis had from past plantations - would assume in determining fair value in accordance with AASB 13. It was submitted that Mr Basford's analysis of the appropriate inputs best reflected the available information as to what would be the "most likely cash flows" for the purpose of the discount rate adjustment approach in paragraph B17(a) of AASB 13. In this regard, the Davis Applicants submitted that: In applying the definition of "market participant" in AASB 13, the Court should find that a market participant would not have blindly accepted what was in the Inventory Reports. Rather, they would have begun by analysing Quintis' inventory data and other sources of data available at the time (including the data Mr Brown had regard to when developing his Heartwood Formula and the data referred to in Dr Barbour's 2012 paper). If they had done so, they would have reached the conclusion that Quintis' own inventory data and the data from the trials and studies conducted up until 2015 and 2016 showed that a reasonable estimate of heartwood in a 15 year old sandalwood tree was between 6 and 8 kilograms rather than 20 kilograms. That conclusion would be reinforced by the fact that there was no data or evidence available to support a conclusion that the silviculture practices which Quintis put hope in would generate higher yields. They would have also identified (as Frank Wilson, Ben Wilson and Andrew Brown did in their emails at the time), that Quintis was facing mortality and stunted growth from overcrowding, it had poor seeds in recent planting years and it had not successfully grown good quality sandalwood or good quality hosts, and had not improved on that over the years. In view of the matters outlined above, a market participant would not accept Quintis' projected cash flows which it attributed to its sandalwood trees. Instead, the Court should find that a market participant, with all relevant information including what the company knew about its history of poor growth and the uncertainties as to future yield, would have been driven to rely on an expert in Indian sandalwood such as Dr Barbour as to the achievable projections for growth and yield. For the reasons set out earlier, that would have led a market participant to adopt a range of approximately 6-8 kg of heartwood per tree as an input. 886 Based on the heartwood yield assumption drawn from Dr Barbour's opinion, Mr Basford prepared a series of counterfactual calculations as to Quintis' biological assets.
10.2.1 Onus and what had to be established 887 Before turning to my specific findings, it is necessary to frame them by reference to the pleaded case advanced by the Davis Applicants. 888 As noted above, a critical element of the pleaded case advanced by the Davis Applicants was that Quintis' DCF Model assumed a predicted heartwood yield per tree at harvest that was materially higher than that which a market participant would have assumed: FFASOC [169(a2)] and [169A(b)]. Thus, the Davis Applicants had to establish that the assumed predicted heartwood yield was not only higher but materially higher than that which a market participant would have assumed. 889 The Davis Applicants had to alternatively, or additionally, establish that the DCF Model understated the processing costs that would have been assumed by a market participant. 890 Critically, the Davis Applicants had to establish that by reason of one or both of these two matters (the materially higher heartwood yield assumption and the understated processing costs assumption), the carrying value of Quintis' biological assets were overstated and thereby the FY15 and FY16 Financial Reports overstated the value of Quintis' assets, revaluation gains, income and profits. This was the basis upon which it was contended that the FY15 and FY16 Financial Reports did not comply with the Accounting Standards. Specifically, by reason of their pleaded case, the Davis Applicants had to establish that there was non-compliance with the Accounting Standards because the biological assets as reported in the Financial Reports did not represent fair value and because the Financial Reports did not give a true and fair view of the financial position and performance of Quintis. 891 The Davis Applicants bore the onus of establishing each of these matters at all times. 10.2.2 The inputs that were not disputed 892 It is also necessary to observe that the Davis Applicants did not ultimately take issue with any other aspect of the DCF Model including the Heartwood Model. 893 As to the Heartwood Model, the Davis Applicants did not put in issue the fact that a sandalwood tree that reached a DOB of 24.5 cm at 20 cm above the ground would produce 20 kg of heartwood. 894 There was also no dispute about any of the other observable and unobservable inputs which were the essential integers in Quintis' DCF Model. Although the Davis Applicants had originally pleaded that there were flaws in other integers including the discount rates, mortality rates, oil price and exchange rates, none of their pleaded allegations about these matters were pressed by the conclusion of the hearing before me. 895 It thereby followed that the only aspects of the DCF Model that were in issue were the assumed heartwood yield at 15 years and the oil processing costs. 10.2.3 The Davis Applicants' submissions about the "market participant" and the relevant question 896 It will be evident from the overview of the Davis Applicants' submissions (addressed above) that various contentions were made as to what a market participant would or would not do, and what information such a person would be seized with when making an assessment of the fair value of Quintis' biological assets. For the reasons set out at [781]-[782] above, the question before the Court is not what a market participant would have in fact done or not done. The question is what a disclosing entity in the position of Quintis would have estimated as the fair value of its biological assets by reference to what it would have assessed a market participant to have done or not done. That question is an objective one.
10.3 Was the heartwood yield assumption materially higher than that which a market participant would have assumed?
10.3.1 The Tree Model 897 The Tree Model was first developed by Mr Kimber and estimated that trees in "a good performing plantation" would grow at approximately: (a) 2.5 cm per annum for trees aged one to five years; (b) 1.6 cm per annum for trees aged five to 10 years; and (c) 0.8 cm per annum for trees aged 11 to 15 years. 898 There was no dispute between the parties that, in the ordinary course of things, sandalwood trees grow at different rates in distinct phases of their growth with that rate decreasing as trees grow older. There was also no dispute that this rate of growth reflects a shaped curve which tails off over time. The real contest between the parties was as to the rates of incremental growth over time, specifically, whether the rates assumed in the Tree Model had any basis in fact. 899 The precise basis upon which the Tree Model was developed was largely unexplained in the evidence. As Mr Kimber had passed away, there was no direct evidence from him as to how the Tree Model was devised. There was also no distinct business record, by way of a work paper or memorandum, that explained or established the basis upon which the incremental rates of growth contained in the Tree Model were determined. 900 EY contended that the Brand et al. (2006) study was used, at least in part, by Mr Kimber to derive the Tree Model. That contention appears to be corroborated by statements in Mr Kimber's expert forester's report in Quintis' PDS for 2006. In that PDS, Mr Kimber was reported as stating: A 14 year old experimental plantation belonging to the WA Forest Products Commission (FPA) was recently sampled for the presence of oil in the trees, and for the quality of the oil. The results are to be published by the FPA as a "Sandalwood Information Sheet". … The estimates of heartwood yield from the proposed plantation are based largely on data derived from the 14 year old experimental plantation. … Although individual trees and sizeable trial plots of Indian sandalwood have been grown on the ORIA since the early 1980s, it is only recently that an experimental plantation has been grown to harvesting age. Forecasts of growth and yield are based on this single plantation and on the extrapolation of growth rates and characteristics of other individual and small groups of trees growing in the area, and backed by extensive scientific literature on Indian sandalwood which is largely based on trees growing in natural forests. (Emphasis added). 901 The reference in the above extract to the "14 year old experimental plantation", and the further reference to "[f]orecasts of growth and yield" being based on "this single plantation", support an inference that Brand et al. (2006) was at least one basis upon which the rates of growth contained in the Tree Model were determined. Dr Barbour agreed that the performance recorded in Brand et al. (2006) was likely to have been the source of the Tree Model, and it was the sort of performance industry participants such as Quintis would seek to replicate across their plantations: T813.11-16. 902 The Davis Applicants contended that the Brand et al. (2006) study was based upon an analysis of sandalwood trees growing in Vanuatu and eucalyptus trees. That contention is not correct. An examination of Brand et al. (2006) reveals that it was a study directed to the examination of heartwood percentage, oil concentration and santalol content from trees within one of the first sandalwood plantations established at Kununurra. The study examined 14 trees from those early plantations. 903 However, the Davis Applicants were correct to point out that nothing within Brand et al. (2006) indicated that its purpose was to examine or chart incremental growth rates of sandalwood trees over time. Rather, as set out at Part 5.5.1 above, the study had a different purpose. The only reference to measurements of sandalwood trees in Brand et al. (2006) was Table 1 which reported that the examined trees were measured to be at 20.3 cm DOB at 30 cm with a standard deviation of 0.8 cm. The study's findings were published by the FPC in a media release. It was accepted that the media release said nothing about the incremental growth rate of sandalwood trees year-on-year, or in phases of growth. 904 Mr Brown said he understood that Mr Kimber had derived the Tree Model from "a mixture of work that he had done on the FPC plantations" and "eucalypt plantations that were actually done in the Ord River [I]rrigation [A]rea": T681.27-30. Mr Brown did not himself perform any work on the Tree Model until much later in 2016. Up until that time, Mr Brown relied upon Mr Kimber's experience and expertise to assume the correctness of the Tree Model. 905 The Davis Applicants submitted that not only was there no evidence to support the Tree Model, but that Quintis and Mr Brown had access to data that was collected for the purpose of the Enigma Presentation that could have been considered in order to test the reliability of the Tree Model. They further pointed out that Mr Brown did not turn his mind to the fact that the data in relation to DOB did not support the Tree Model when he prepared the Enigma Presentation: T597.23-47. It was submitted that Mr Brown tried to avoid conceding the DOB and age data underlying the Enigma Presentation showed that the Tree Model would not be achieved, and instead suggested in his evidence that he was not looking at the data for that purpose and that growth could only be predicted by using permanent sample plots despite having never established any himself: T598.20-599.19. 906 The Davis Applicants submitted that, although Mr Brown agreed that he used the data underlying the Enigma Presentation, including DOB and age, for the development of the Heartwood Model because it was the best available at the time (T602.42-603.32), he refused to provide any reasonable explanation why he did not use the relationship between DOB and age data underlying his Enigma Presentation to assess the reliability of the Tree Model: T603.34-604.10. It was further submitted that Mr Brown, irrationally, said he relied solely on Mr Kimber's expertise in supporting the Tree Model even though he conceded that Mr Kimber had less data than Mr Brown: T605.4-46, T606.28-607.2 and T607.4-19. 907 There is no case here against Quintis or Mr Brown that they were respectively negligent in respect of the determination of the Tree Model or in not reviewing it following the collection of data for the purpose of the Enigma Presentation. Nevertheless, it is the case, and I accept, that Quintis did not examine the data it had commenced to collect from in or about 2012 to test the reliability or veracity of the incremental rates of growth contained in the Tree Model. 908 For his part, Mr Wilson appropriately accepted in his written submissions that "the Court does not have before it clear evidence of how Mr Kimber developed the Tree Growth Model": T604.38-T605.25; T606.25-T607.25; T904.35-T906.12. 909 It follows that, as a trier of fact, I am left in a position where little to no evidence has been adduced by which I can be satisfied as to the basis upon which the Tree Model was devised. Nor am I satisfied that Quintis had such information available at the time of the preparation and finalisation of the FY15 and FY16 Financial Reports. As Mr Wilson was intimately involved in Quintis' business, his failure to give evidence leads to me infer there is nothing he could have said that would have assisted him in his case. 910 However, these conclusions alone do not inexorably lead to the further conclusion urged by the Davis Applicants that the heartwood yield assumption used by Quintis was materially higher than that which should have been assumed. That is because it is necessary to understand the way in which the Tree Model was used in the DCF Model. Both Mr Wilson and EY pointed to the fact that the Tree Model was a starting point of sorts as an input into the DCF Model in the determination of the fair value of Quintis' biological assets, but that it was not uncritically or unthinkingly adopted as such. EY and Mr Wilson contended that it was wrong to look at the Tree Model in isolation without bringing to account the manner in which it was applied in order to determine the present value of each sandalwood tree. Mr Wilson submitted that Quintis and Mr Brown did not "blindly rely on the Tree Growth Model" and had regard to data as to the growth of Quintis' plantations. The essence of the submissions advanced by Mr Wilson and EY was that the Tree Model was only one input into the DCF Model which was attenuated by the other aspects of that Model, in particular the year-on-year inventory reviews and assignments to yield curves of trees aged five years and over. 911 Therefore, it is necessary to examine the manner and extent to which the Tree Model was used as an input into the DCF Model, which necessarily requires an examination of the distinct ways in which it was used in relation to trees aged five and over and those aged under five. 10.3.2 Trees aged five and over and the "garbage in, garbage out" case (a) An overview of the process of assigning the plantations aged five and over 912 Mr Wilson and EY contended that the trees aged five and over were not valued on the basis of the Tree Model alone. Rather, it was submitted that the Tree Model was a starting point for an assessment process by which the trees in this cohort came to be valued upon "graduation" at age five and thereafter year-on-year by reference to their individualised growth patterns. 913 The process by which this occurred was as follows. 914 First, from 2012 onwards, Quintis performed annual inventory counts which involved a process by which trees in particular compartments were counted and measured as to their diameters on a quasi-randomised sampling basis, including with the assistance of an external independent contractor. These results were extrapolated and applied to the remainder of the plantations using statistical methods to a 95% confidence limit. A quality assurance program was undertaken by Quintis and the results compared to ensure accuracy of the counts and measurements. The Davis Applicants took no issue with the method by which the trees were counted or measured, or the statistical validity of the sampling process that was involved, and by which conclusions were drawn from it. 915 Second, as part of the tree counts, Quintis assigned a "health score" which was relayed back to the research and development team for tracking. 916 Third, the relevant aspects of the data were reported in the Inventory Reports. The evidence before me included the 2014, 2015 and 2016 Inventory Reports, and each of these Reports contained data as to the measurements that had been undertaken. The appendices to each of these Inventory Reports set out such data by reference to compartments and plantations. 917 Fourth, when the trees reached graduation at five years of age, Quintis management, including Mr Brown, took account of the data that had been collected as to the growth of the plantation and measured that as against the Tree Model. The plantation for that year was then assigned a yield curve. The result of this was that, for example, a plantation growing at 50% of the 100% yield curve would be placed on a 50% yield curve. I will return below to precisely what this meant. 918 Fifth, trees over the age of five were reviewed annually and their assigned yield curves were adjusted upon the exercise of judgement by Mr Brown in consultation with the forestry team and Quintis management. This did not involve an adjustment every year, but was dependent on the exercise of an evaluative judgement by Mr Brown and others as to whether any variations were significant, could be explained by seasonal or climactic conditions, or pointed in the direction of longer term trends over a three to four year period. 919 It was accepted that Mr Wilson was involved in the fourth and fifth steps. (b) The parties' contentions 920 The Davis Applicants submitted that the process by which yield curves were assigned was flawed. There were several contentions advanced by the Davis Applicants in this regard. 921 The first was that, because the assignment of yield curves was a function of the Tree Model (as the plantations were measured against the benchmark of 100% from the Tree Model), the resulting valuation was necessarily the product of an unsubstantiated model. The Davis Applicants described this as a "garbage in, garbage out" method. 922 Mr Brown was challenged on this basis during cross-examination, as follows (at T610.13-T612.11: And what I understand you did is you took Mr Kimber's tree model and then you estimated or work out the diameter over bark at 20 centimetres of trees in the plantation, in various sections of the plantations; correct?---Yes, that's right. Right. If a tree was performing, say, at about 50 per cent of the growth model of the Kimber tree model, you developed a yield curve at about 50 per cent of that growth; correct?---That's correct. And you projected forward on the basis of 50 per cent, ie, there would be performance at about 50 per cent of the Kimber tree model growth curve; correct?---Yes, that's correct. Right. Now, you are a scientist; correct?---Yes. That would only be valid methodology if Kimber's tree model was valid, wouldn't it?---That was what we had at the time. Would you agree with my question or not. That would only be valid, method of proceeding, if the Kimber tree model was a reasonable estimate of the performance of a well-managed plantation; correct?---Yes, and our thought was that that the Kimber tree model was the best model that we had at the time. Do you agree with what I'm putting to you: it would only be a scientifically defensible process if the Kimber tree model was reasonable; correct?---The thought was at the time the Kimber tree model was - - - HIS HONOUR: Mr Brown, I think you are being asked whether you agree with Mr Hutley's proposition. I understand you say that's the best you had, but perhaps, Mr Hutley, just ask it again. MR HUTLEY: You built yield curves on the basis that if identified performance was a proportion of the anticipated performance under the Kimber tree model, you would develop a yield curve which mirrored that performance as a percentage of the tree model, the Kimber tree model over the anticipated life of the tree; correct? HIS HONOUR: Mr Hutley, I have got to say I didn't understand that question. MR HUTLEY: I will do it again. Your tree model, your yield curves, were a proportion of the Kimber tree model; correct?---Yes, that's right. Right. And you related the performance of trees to the Kimber tree model and as their performance bore to the Kimber tree model you had put them on an appropriate yield curve; correct?---Yes. Right. It follows, does it not, that if the Kimber tree model was not reasonable the process you followed to develop yield curves would also not be reasonable; correct?---No. No, not at all. The intention of the yield curves was to actually - to align the plantation and actually value the plantation up appropriately to - - - But you were trying to - sorry?---So what happened was that we were - we were seeing a stand of trees and we were going - and conducting an inventory and then to predict that growth going forward rather than we would apply the - so if the - basically the proportional growth of that tree going forward. Quite?---So the whole intention of it, but was to try and accurately value the estate. But the methodology depended upon in projecting forward that the Kimber tree model was reasonable, didn't it?---That's - that's why we put the proportional amount in the curve, so that we would be - could accurately predict the likely outcome actually at harvest. And if the Kimber tree models curve was not justifiable then the proportional curve would not be justifiable; that's correct, isn't it?---No. I will give you an example. If, for example, we actually predicted the - [indistinct], what we do is that the proportional growth would actually be less so that a 50 per cent of the original value would be 25 per cent of the high value. So the Kimber tree model was a reference point and then what we would do is it would put a point on the curve that was proportionately the value of the tree model and that would then predict the yield - the likely outcome. For example, a 50 per cent yield curve would actually be about a 25 per cent - in terms of its heartwood yield. I accept that. But you were working out the projection of the growth of plantations which were not achieving the Kimber yield model by predicting growth at a proportionate rate based upon the Kimber yield model - growth model - - -?---Yes.
1066 The Davis Applicants' case concerning processing costs was described by EY as "small beer". I agree. The processing costs were a relatively minor input into the DCF Model when compared to heartwood yield and received little attention from the parties in their written and oral submissions. Accordingly, the issue can be dealt with briefly. 1067 The Davis Applicants' case was as follows. In FY15 and FY16, Quintis assumed its costs of processing heartwood to extract sandalwood oil would be $207 per litre despite its actual costs being closer to $500 per litre. Quintis made that assumption on the basis that it could achieve lower costs from economies of scale, but the Davis Applicants contended that those economies of scale would take years to achieve. The Davis Applicants submitted that Quintis should have assumed, in its model, actual costs of processing up until the time when it could achieve lower costs from economies of scale. 1068 The Davis Applicants relied on Mr Basford's opinion that "Quintis was not able to achieve a cost of $207 per litre because the processing plant was not being used at full capacity. The FY17 budget included costs of $597 per litre, reflecting this fact". Mr Basford further opined that AASB 13 required Quintis to "properly forecast the costs they would incur in processing the oil. The forecast costs up to the point that the processing plant was operating at capacity should have been greater than $207". It is on this basis that the Davis Applicants submitted that Quintis' assumed processing cost of $207 per kg failed to comply with AASB 13. The Davis Applicants further contended that in circumstances where Mr McGregor did not contradict Mr Basford on this issue, and Mr Westworth could only suggest that the "uncertainties and lack of clarities for a period can be covered by the discounting rate" (T1179.11-12), the Court should accept Mr Basford's opinion as to the correct assumptions in FY15 and FY16 in relation to processing costs. 1069 The Respondents submitted that the processing costs assumption of $207 per litre was based on internal costings and was broadly consistent with the known cost of processing Quintis' first (EKS) harvest in June 2014 of $229.72 per litre. Whilst the cost of processing the TFS2 harvest ($561.57 per litre), which was known by FY16, was materially greater, EY and Mr Wilson submitted that this was explained by the fact that the processing facility was not yet operating at scale. The TFS2 harvest (planted in 2000) yielded just 28 tonnes of heartwood from a single, poorly performing, 33.1 ha compartment. By contrast, the EKS harvest (also poorly performing) had yielded 46 tonnes for processing from 99.9 ha, whilst the following vintage, 2001, was forecast to yield closer to 326 tonnes of heartwood from 103.8 ha. Later vintages were orders of magnitude greater, both in terms of hectares under cultivation (over 1,200 ha in 2010) and expected heartwood yield. The Respondents submitted that it was rational to expect economies to be achieved as sandalwood production and processing capacity improved over time. 1070 Mr Basford's evidence was that, from his review of the DCF Model, the projected quantity of heartwood produced at harvest would not result in the processing plant being fully utilised until Quintis was harvesting 200,000 trees a year, which equated to the harvesting of "TFS 2008" in 2022. To recalculate the FY15 valuation, he assumed a processing cost of $229.72 per litre, being the actual processing cost reported in FY15, whilst in recalculating the FY16 valuation, he assumed a processing cost of $597 per litre, being the budgeted processing cost reported in FY16 for FY17. Using these adjusted processing costs in FY15 and FY16, and keeping all other inputs the same, Mr Basford's evidence was that the processing costs assumptions adopted by Quintis had the effect of overstating the accounts by $1,931,099 in FY15 and $14,160,262 in FY16. 1071 I do not accept Mr Basford's evidence. In my view, and as EY pointed out, it fails to account for the fact that the assumption of $207 per litre was an assumption as to costs that would be incurred up to 15 years into the future across all plantations. This was accepted by Mr Basford in cross-examination: T1084.6-11. In those circumstances, it is inaccurate to suggest that in order to reflect fair value, Quintis needed to utilise an assumption as to processing costs into the future based on those costs as they stood at the point in time when the prediction was being made. As I understood it, the figure of $207 per litre was a projected average cost of processing in circumstances where trees were not being harvested until around 15 years. There was an expectation that economies would be achieved in processing as plantation performance improved, and accordingly, an anticipated reduction in the per unit cost of processing. I consider that to be a rational assumption that an entity in Quintis' position would assess that a market participant would likely make, and one which Quintis was therefore justified in making in incorporating this assumption into the DCF Model. I do not think that AASB 13 required Quintis to utilise the known cost of processing its first harvest, or the budgeted cost of processing in FY17, until the point at which the processing facility reached capacity (whenever that may have been between FY15 and FY16 and 15 years into the future). 1072 In those circumstances, I consider it unnecessary to examine Mr Westworth's suggestion that any "uncertainties and lack of clarities" in terms of processing costs could be "covered by the discounting rate". Nor do I consider it necessary to consider Mr Wilson's submission that, by virtue of his reliance on an Audit Committee paper in FY15, Mr Wilson had reasonable grounds in his position as to processing costs, even if Quintis did not. 1073 In any event, even if I am wrong about whether the processing costs were understated, I would not have been satisfied that it led to the carrying value of Quintis' biological assets being overstated in a material way. As noted above, Mr Basford's recalculations indicated that the effect of the alleged understatement of processing costs was that the value of the biological assets was overstated by $1,931,099 in FY15 and $14,160,262 in FY16. Whilst in a general sense these are not insignificant sums, in the context of the value of Quintis' assets overall the quantum of the alleged overstatement said to have been caused by the understatement of the processing costs was insignificant in relative terms and was appropriately characterised by EY as "small beer".
1101 It was a necessary element of the Davis Applicants' case that they establish causally-connected loss in respect of each of the pleaded causes of action. Specifically, it was necessary to establish the counterfactual case as a basis for recovery on behalf of the Davis Applicants and Group Members under s 1041I of the Corporations Act, s 12GF of the ASIC Act, and at common law. Although it would be logical to deal with the counterfactual case after determining questions of liability, it is convenient to deal with it at this juncture as it follows from the determinations that I have made in relation to Quintis' reported accounts. 1102 The Davis Applicants' counterfactual case in respect of FY15 was particularised at FFASOC [169] as follows: The assumptions which should have been adopted are approximately: … (ii) as to subparagraphs (a2) and (a3): average yield for a tree harvested at 15 years of around 6 to 8 kg; … (iv) as to subparagraph (a5): estimated cost of harvesting and processing at $229.72 per litre of oil; … The material particulars are further identified in the Report of Wayne Basford dated 4 March 2020 at paragraphs 1.1.11, 1.1.12 at footnote 5 and 3.4.26 to 3.4.29; and the Report of Dr Elizabeth Barbour dated 25 February 2020 at paragraphs 13, 171 to 172 and 188 to 198. (Emphasis added). 1103 A similar counterfactual position was particularised in respect of FY16 at FFASOC [169A], save that the assumption which should have been adopted in respect of processing costs for FY16 was said to be $597 per litre of oil. 1104 The FY15 counterfactual was then expressly pleaded in the FFASOC at [193] as follows: Had the discounted cash flow model used to derive the FY15 BA Carrying Value and the FY15 Revaluation Gain pleaded in paragraph 99 above been developed and applied in accordance with AASB 141 and AASB 13, it would have: (a1) contained the following assumptions, or approximately the following assumptions, instead of the significant inputs referred to in paragraph 100 above: … (ii) average predicted heartwood yield per tree for a tree harvested at 15 years of around 6 to 8 kg; and/or … (viii) estimated cost of harvesting and processing at $229.72 per litre of oil. 1105 Again, a similar position was pleaded in respect of FY16 at FFASOC [193A], save that the "corrected" figure in respect of processing costs for FY16 was said to be $597 per litre of oil. 1106 The Accounting Standards required Quintis to determine the fair value of its biological assets based upon the value that would be attributed to those assets by a hypothetical market participant in an orderly market transaction. The essence of the Davis Applicants' case was that the market participant would have had regard to the "true facts" and, would have concluded that the correct average heartwood yield assumption was 6 to 8 kg per tree. In support of this case, the Davis Applicants relied upon the expert opinions of Dr Barbour. 1107 For the reasons that follow, I am not satisfied that the Davis Applicants have established their counterfactual case. That is because their case relied upon acceptance of Dr Barbour's opinions as to the correct heartwood yield estimate. As I explain below, I do not accept Dr Barbour's opinions.
12.2 A summary of Dr Barbour's opinions and their criticality to the Davis Applicants' case
1108 Consistently with the particulars at FFASOC [169], [169A], [193] and [193A], the Davis Applicants' counterfactual case as to the heartwood yield was exclusively based upon the opinions expressed by Dr Barbour and their adoption by Mr Basford. In the executive summary to her first Report, Dr Barbour opined as follows: 6. Critically, the model Quintis' used to calculate heartwood and Sandalwood oil production was based upon various assumptions about the way in which heartwood forms within a Sandalwood tree, and included specific assumptions which in my opinion were misconceived: (a) Basal Diameter at 24.5cm: The basal diameter assumed by Quintis in its modelling was approximately 24.5cm at 15 years based on the assumed incremental growth of Sandalwood during specified periods after establishment (2015 Inventory Report, QIN.001.001.0013 p14). My analysis of the results of Quintis' inventory reporting, which corresponds with the results observed in Barbour et al.(2012), indicates that the actual Basal Diameter measurements recorded by Quintis consistently reach approximately only 17.4cm at 15 years of age; and (b) Tree survival at 420 sph: Tree survival has a major impact on overall heartwood yield per hectare. Whilst Quintis were modelling for a 420 stems per hectare (SPH) survival at 15 years (2014 Inventory Count, QIN.001.001.0012 p11; 2015 Inventory Report QIN. 001.001.0013 p22; 2016 Inventory Report, QIN.001.001.0014 p25), Quintis' inventory results are trending to show that survival at 15 years was approximately 50% of initial stocking as depicted at Figure 12 (2016 Inventory Report, QIN.001.001.0014 p7). With Quintis increasing their initial stocking ranging from 463 to 562 SPH (with mean of 500 SPH) (2016 Inventory Report, QIN.001.001.0014 p7), in my opinion, it would be more reasonable to expect survival of approximately 250 SPH at 15 years of age. … 13. Ultimately in this report I demonstrate why in my opinion, Quintis ought to have used different assumptions as regards to the average heartwood yield and tree survival rates in its modelling. The model that Quintis used to predict heartwood (as set out in the equation referred to in paragraph 156) relies on three variables i.e. Basal Diameter, age and stems per hectare (an alternate measurement of survival depending on how many trees were established in the first instance). In my opinion, as noted in paragraph 6(a) and 6(b) above and as I explain in greater detail in the balance of this report, Quintis' assumptions that the average Basal Diameter of a 15 year old Sandalwood tree would be 24.5cm and that approximately 420 Sandalwood trees per hectare would survive at the end of a rotation were both misconceived. Having regard to the studies and Quintis' own harvest data which I have analysed in this report, a more accurate assumption for the Basal Diameter of a 15 year old Sandalwood tree would be 17.4cm while a more accurate assumption of surviving Sandalwood trees on a per hectare basis at the end of a rotation would be 250. When these alternative assumptions are applied to the equation set out at paragraph 156 this produces a result of 2.014 tonnes of heartwood per hectare or 8.06kg per tree at end rotation. Ultimately I conclude that a reasonable estimate of heartwood in a 16 year old Sandalwood tree would be between 4.85 -7.95kg at a moisture content of 25%, whilst the calculation using Quintis' model of 8.06kg at 15 years is above that range it is nevertheless close to the upper end. (Emphasis added). 1109 As will be apparent from the above, Dr Barbour's expressed four interrelated opinions that were relevant to heartwood yield: (a) first, that the basal diameter assumed by Quintis of 24.5 cm at 15 years based on the Tree Model was misconceived; (b) second, that Dr Barbour's analysis of the results of Quintis' inventory reporting were consistent with the results observed in Barbour et al. (2012), which indicated that the actual basal diameter consistently reached approximately only 17.4 cm at 15 years of age; (c) third, that it was more reasonable to expect survival of approximately 250 SPH at 15 years of age; and (d) fourth, taking the above matters into account, that a reasonable estimate of heartwood in a 16-year-old sandalwood tree would be between 4.85 and 7.95 kg at a moisture content of 25%, and that a yield of 8.06 kg at 15 years was above that range but nevertheless close to the upper end. 1110 The process of reasoning upon which these opinions were based was set out in the Barbour Report. It is necessary to set out (by way of summary) Dr Barbour's reasoning in support of these conclusions as to the appropriate heartwood yield estimate. 1111 First, Dr Barbour considered Quintis' actual harvest results. She identified that the first harvest produced 3.1 kg of heartwood per tree, the second harvest produced 4.9 kg of heartwood per tree, and the third harvest (which post-dated the FY16 Financial Report) produced a median heartwood of 7.15 kg per tree. Dr Barbour plotted these results in a linear regression represented in Figure 28 of the Barbour Report. Dr Barbour expressed the opinion that there was a broad range of results of heartwood yield at 15 years and this represented a "weak statistical relationship" on the basis of an r co-efficient of 0.5708. Dr Barbour considered that the weak statistical relationship was caused by one outlier result and plotted a revised linear regression which removed this outlier as represented in Figure 29 of her Report. Based on this revised linear regression (which had an r co-efficient of 0.9636), Dr Barbour opined that Quintis' harvest results supported a heartwood yield of 3.05 kg at 14 years, 5 kg at 14.5 years and 6.95 kg at 15 years (the Quintis Harvest Results Reasoning). Although Dr Barbour acknowledged that this opinion was not the product of a rigorous trial, she considered that it was broadly in line with the results reported in Brand et al. (2012) (as considered below). 1112 Second, Dr Barbour considered the incremental rates of growth contained in the Tree Model and expressed the opinion that these were inconsistent with the measurements taken and reported in the studies undertaken in Brand et al. (2012) and Barbour et al. (2012). Dr Barbour sought to plot the measurements recorded in these studies in a linear regression which she represented in Figure 21 of the Barbour Report, which she corrected and updated in the Supplementary Barbour Report (Corrected Figure 21). Dr Barbour expressed the opinion that the conclusion to be drawn from this analysis was that the basal diameter of a 15-year-old sandalwood tree would be 17.8 cm which would produce a heartwood yield of 8.55 kg (the Figure 21 Reasoning). 1113 Third, Dr Barbour said that she had considered each of the 2014, 2015 and 2016 Inventory Reports and concluded that the Tree Model assumed rates of growth in basal diameter which exceeded the actual measurements as being reported in these Inventory Reports. Dr Barbour said she compared the data obtained for basal diameter measurements from the 2015 Inventory Report, the data reported in Barbour et al. (2012) and the Tree Model. She plotted these on a linear regression represented in Figure 25 of the Barbour Report, which she corrected and updated in the Supplementary Barbour Report (Corrected Figure 25) (the Figure 25 Reasoning). 1114 Fourth, Dr Barbour expressed opinions about survival rates and SPH, and concluded that tree survival has the greatest impact on overall production on a per hectare basis. Ultimately, however, these matters were not put in issue by the Davis Applicants as they abandoned their claims relating to the mortality rates assumed by Quintis. 1115 Fifth, Dr Barbour considered the assumption that a sandalwood tree would produce 20 kg at 15 years of age, and concluded that this assumption was inconsistent with results reported in Brand et al. (2012). Dr Barbour expressed the opinion that Brand et al. (2012) was the only trial conducted with sufficient scientific rigour to give an opinion as to the reasonable heartwood yield to be expected in a tree harvested at 16 years. Relying on this study, Dr Barbour expressed the opinion that "a reasonable range for a heartwood yield estimate for a 16 year old Sandalwood tree is between 4.4kg to 7.2kg at 12% moisture content, or approximately 4.85kg to 7.95kg at a 25% moisture content" and with a mean heartwood yield of 6.4kg at 25% moisture content (the Brand Study Reasoning). 1116 Sixth, Dr Barbour considered the results of her own trial which was based upon a selective destructive harvest of 40 trees aged 15 years as reported in Barbour et al. (2012). Dr Barbour expressed the view that the results of this trial supported an average heartwood yield of 6.3 kg, which she considered was in line with the Brand Study Reasoning (the Barbour Study Reasoning). 1117 Based on all of the above strands of reasoning, Dr Barbour concluded that the leading study published in respect of 16-year-old sandalwood trees remained Brand et al. (2012) and opined as follows: 194. As there have been no other independent or unbiased studies conducted into heartwood yields for 14 and 15 year old Sandalwood trees, I have considered Quintis' own results to identify any statistically significant trends, which, as explained at paragraph 177 above, show as follows: (a) 3.05kg at 14 years; (b) 5kg at 14.5 years; and (c) 6.95kg at 15 years. 1118 In her Reply Report (which was prepared in reply to the opinions expressed by Dr Woodall and Mr Morton), Dr Barbour considered the data that Mr Brown had relied upon to develop the Heartwood Model (as considered in the Enigma Presentation), which consisted of five destructive harvests. Dr Barbour examined that data by reference to different datasets arising from these destructive harvests, including by excluding datasets she considered to be outliers. Based on this analysis, Dr Barbour expressed the opinion that the reality from this data was that a tree at age 15 would be expected to have a DOB of 15 to 16 cm (the Destructive Harvest Reasoning). 1119 In the Supplementary Barbour Report, Dr Barbour made corrections to Figure 21 and Figure 25 from her first Report (as set out above). 1120 Finally, during her cross-examination, Dr Barbour expressed the view that each of the studies she had relied upon were contributing datasets to her ultimate opinion as to the heartwood yield Quintis could expect to produce from trees at 15 years of age (the Multiple Dataset Reasoning). As explained further below, the Davis Applicants ultimately relied upon this reasoning to support their counterfactual case. 1121 For the reasons that follow, I did not find Dr Barbour's reasons and conclusions (both individually and cumulatively) as to heartwood yield to be compelling or ultimately persuasive. By this I mean that Dr Barbour's opinions did not persuade me, or incline my mind, to reach a state of reasonable satisfaction as to their correctness. As a result, I reject her opinions as to expected heartwood yield, and it follows that I reject the Davis Applicants' counterfactual case.
12.3 Assessment of Dr Barbour's opinions and reasons as to heartwood yield
12.3.1 General assessment of Dr Barbour's evidence 1122 Having read each of Dr Barbour's reports and heard her giving evidence, I formed the view that Dr Barbour had a sound understanding of the basal aspects of the science of sandalwood trees. It was also my view that she gave her evidence honestly and was a witness who was prepared to make concessions. It will also be apparent that, in other respects, I have accepted Dr Barbour's opinions, including as to her views on silvicultural practices. However, when it came to her evidence about estimated or expected heartwood yield, there were aspects of Dr Barbour's evidence where she gave discursive answers that strayed from the topic at hand, and, in some cases, where she did not attend to answering questions directly. Ultimately, after Dr Barbour's evidence was tested in cross-examination (especially her reasoning as to the opinions she expressed about expected heartwood yield), I did not find her evidence to be compelling or persuasive. In order to explain why this is so, it is necessary for me to consider her essential reasons for the opinions she expressed as to expected heartwood yield. 12.3.2 The Brand Study Reasoning 1123 As noted above, Dr Barbour relied upon Brand et al. (2012) to support her opinion that "a reasonable range for a heartwood yield estimate for a 16-year-old sandalwood tree is between 4.4 kg to 7.2 kg at 12% moisture content, or approximately 4.85 kg to 7.95 kg at a 25% moisture content". 1124 Dr Barbour expressed the opinion that Brand et al. (2012) was the leading sandalwood tree study that contained "the most complete results insofar as heartwood yield is concerned in the published literature" and "the only paper which report[ed] on a trial conducted with sufficient scientific rigour to give support" to an opinion regarding expected heartwood yield at 14 to 16 years. It is necessary to refer again to the context of the study that was the basis of Brand et al. (2012). There were 32 trees that were the subject of the Brand et al. (2012) study. The initial stocking of the hosts was not known, but was thought to be 920 SPH, or a 1:2 sandalwood to host ratio. The origin of the sandalwood seed was also unknown to the authors. By June 2009 (the year before the study), only 44 sandalwood trees that were planted as part of the trial remained. There was no evidence about the reason for this rate of mortality. 1125 Eight host species were planted, which included African mahogany. As noted above, in other FWI trials, African mahogany was reported to have dominated and overtaken whole plantations and was shown to have a profoundly negative impact on the growth of sandalwood trees. Dr Barbour agreed that the 32 trees in the Brand et al. (2012) study were adversely affected by the inclusion of African mahogany, which was "a very poor choice of host": T824.38-41. 1126 Brand et al. (2012) reported and recorded that the plantation was not irrigated between 2002 and 2010. It received intermittent watering from an adjacent drainage line, and then only to part of the plantation. In her evidence, Dr Barbour initially suggested that there had been no lack of irrigation in relation to this trial, but later conceded she did not actually know whether this was the case or not. When taken to the Brand et al. (2012) article and shown what it reported about irrigation, Dr Barbour said she could not dispute the truth of what was said and then said, "I don't know. So I can't confirm that at all": T819.45-46. Dr Barbour accepted that if the plantations were not continuously watered, then she would expect that to have an adverse impact on its performance. She accepted that sandalwood trees become stressed without water in the dry season, and that the Kununurra clays crack when they dry out, which can rip the sandalwood trees' roots and affect their connections with their hosts: T821.1-16. 1127 Further, the 32 trees studied by Brand et al. (2012) were not randomly selected. They were the only surviving sandalwood trees at the trial site. These 32 trees were biased towards smaller trees. That is because, as recorded in the article, 12 trees had been removed from the trial site one year earlier and these were on average 2 cm larger despite being a year younger than the 32 trees the subject of the study. 1128 In respect of these various matters, Dr Barbour did not gainsay the statement in Brand et al. (2012) that: The lower-than-predicted S. album yields in this study may have been due partly to the choice of host species, watering regime and tree density. Some of the host species may not have been suitable, including K. senegalensis, which typically over-tops S. album in plantations established in the ORIA. Current S. album plantations established by private industries in the ORIA use different long-term host species including Cathormion umbellatum, which may result in faster growth of S. album. The watering of the S. album plantation in this study was intermittent, and it would be expected that private industry plantings would receive more reliable watering. Private investment companies also plant S. album at a higher density of about 400-450 trees ha-1… 1129 In her evidence before me, Dr Barbour acknowledged that the average DOB of the 32 trees at 16 years as reported in Brand et al. (2012) was 14.9 cm, and that this DOB was not as developed as some trees within Quintis' plantations as reported in the Inventory Reports which showed that some trees as young as eight years old had achieved that DOB. Dr Barbour also acknowledged that eight- or nine-year-old trees in a number of other trials detailed in Barbour et al. (2012) had performed better than those reported in Brand et al. (2012): T822.12-23. 1130 Ultimately, Dr Barbour accepted that it would not be safe for the Court to take the Brand et al. (2012) data and infer by reason of that data that Quintis would have produced the same or similar results: T823.23. Having regard to this appropriate concession made by Dr Barbour, the result is that, although Brand et al. (2012) was conducted with rigour, the study had, and has, limited use in seeking to estimate the heartwood yield that Quintis, or an entity in its position, could expect from its plantations, which (as Dr Barbour ultimately accepted) were clearly being developed under different conditions. 1131 For these reasons, I do not accept Dr Barbour's opinion based on the Brand Study Reasoning that a reasonable range for a heartwood yield estimate for a 16-year-old sandalwood tree is between 4.4 kg to 7.2 kg at 12% moisture content, or approximately 4.85 kg to 7.95 kg at a 25% moisture content. 12.3.3 The Figure 21 Reasoning 1132 Dr Barbour expressed the opinion that "a more accurate assumption" for the basal diameter of a 15-year-old sandalwood tree would be 17.8 cm and when this assumption was inputted into Quintis' Heartwood Model, it led to a heartwood yield of 8.55 kg. 1133 The basis for Dr Barbour's opinion in this respect was a linear regression she prepared using DOB measurements from various FWI sandalwood trials at various ages, as reported in Barbour et al. (2012). Dr Barbour took such of the data as was available as to the DOB of sandalwood trees in the various trials that were reported on in Barbour et al. (2012), and plotted a linear regression in Figure 21 of the Barbour Report. In the Supplementary Barbour Report, Dr Barbour adjusted some errors from her earlier report. Corrected Figure 21 was presented as follows: 1134 Relying upon the outcome of this linear regression, Dr Barbour expressed the opinion that the DOB for a tree aged 15 years would be 17.8 cm and this translated into an outcome for heartwood yield of 8.5 5kg. 1135 The Davis Applicants submitted that the linear regression in Corrected Figure 21 also relied upon data from Quintis' trees. The Respondents disputed this to be the case. EY prepared a modified version of Figure 21 which sought to identify the sources for each of the plotted points on the linear regression as follows: 1136 EY submitted that despite the Davis Applicants' submissions that the 17.8 cm and 8.55 kg estimate were based on Quintis' data, the estimate was, in fact, based entirely on trials conducted at the FWI and was not based on Quintis' trees. The Davis Applicants did not dispute this to be the case in their submissions in reply. EY's submission accords with the facts apparent from the face of the Barbour Report and Supplementary Barbour Report. The Figure 21 Reasoning must be approached on the basis that it was not based on an examination of Quintis' plantations. 1137 Further, the Respondents submitted that the linear regression reflected in Corrected Figure 21 was of no or little value to an assessment of Quintis' plantations for the following reasons. 1138 First, it was submitted that the linear regression had "a very weak r2". The reference to "r2" is to a correlative co-efficient seeking to establish a relationship between two or more matters. A higher co-efficient reflects a closer relationship between the two matters, whereas a lower co-efficient reflects a weaker relationship. The r2 reported for Figure 21 was 0.3482, meaning that the trendline predicted little more than a third of the variation in DOB. It was submitted that this was to be expected because the very purpose of the FWI trials was to test different host species and silvicultural regimes, and as such the different regimes produced a variety of results. 1139 Second, relatedly to the first point, it was submitted that each of the specific trials considered in Barbour et al. (2012) had different results reflecting the different conditions under which the trials had been conducted. It was submitted that: (a) the best results were produced by Trial 1, which yielded a mean DOB at 18 years of 25.6 cm, with the largest tree in the trial measuring 58 cm. Trial 1, which was planted in 1990, involved a stocking density of 460 SPH with the long-term host Cathormion umbellatum planted at a ratio of 1:1 in alternating rows from the sandalwood, about 3 m apart. It was contended that, unsurprisingly (because the whole point of the FWI trials was to show industry what worked), this regime was similar to that adopted by Quintis. Dr Barbour had herself observed that Quintis commonly used Cathormion umbellatum as a long-term host, and typically planted at 463 SPH, with the long-term host at a 1:1 ratio in alternating rows about 3.6 m apart; (b) the worst-performing trial was Trial 5. This involved a measurement of sandalwood trees aged 11 years (with a mean DOB of 8.9 cm). The trial was established in 1997 (before Quintis' first plantation) to assess sandalwood growth with different high-value timber hosts, including African mahogany and Swietenia mahogany, both of which had been identified as very poor hosts. The trial had no short-term hosts at all - something which Quintis never did. By 11 years, the African mahogany had overrun the site, accounting for 69% of the wood volume despite accounting for only 10% of stems originally planted leading to the conclusion that the combination of host species used produced low sandalwood growth at age 11. It was noted that in relation to this Trial, Dr Barbour and her co-authors wrote: The combination of host species used here produced low sandalwood growth at age 11. Two of the host species, Khaya and Swietenia, belong to the Meliaceae family, which has been broadly indicated as providing poor longterm hosts (Barbour 2008). Leguminous species often make better hosts in the Cununurra clays (Barbour 2008; Radomiljac and McComb 1998b; Radomiljac et al. 1999a; Radomiljac et al. 1999b) probably because symbiotic relationships with rhizobia enable legumes to fix atmospheric nitrogen and nitrogen-containing compounds are transferred to sandalwood (Radomiljac et al. 1998c). The potential nutritional benefit gained from the two legume species used, Cassia and Cathormion, was insufficient to allow the slower growing sandalwood to compete for resources, particularly against Khaya which dominated the site in terms of basal area production. The tree size and the proportion of the site occupied by Cassia suggest it could also have negative competition effects on sandalwood growth. Both Cassia and Khaya were nearly or more than double the height of sandalwood and dense shading by these trees, especially Khaya, appeared to be a major factor. (c) Trial 3 was a planting established in 1993 (well before Quintis' first plantation) of separate host species blocks of 0.13 ha and 0.41 ha using Peltophorum and Cassia as hosts. The Respondents submitted that Dr Barbour's Corrected Figure 21 analysis treated the measurements of each block at 15 years as a separate data point. The mean DOB of sandalwood with Peltophorum as long-term host was 14.47 cm and with Cassia was 18.15 cm. Both trial blocks were planted with extreme stocking densities: 1235 SPH and 929 SPH of sandalwood (at 2:1 and 3:1 sandalwood-to-host ratios) for Peltophorum and Cassia blocks respectively. It was submitted that Peltophorum, which Quintis did not use, was a poor performing host. It was submitted by the Respondents that the high sandalwood-to-host stocking density likely contributed to the low growth rates; (d) Trial 2 was planted in 1991 to test three long-term hosts: Acacia aneura, Bauhinia cunninghamii and Carthormion umbellatum. It was submitted that the first two of these hosts were ones which Quintis did not use, and proved to be unsuitable long-term hosts. The mean DOB at 17 years across the trial was 17.9 cm (the data point Dr Barbour used) yet growth with the one host Quintis did use, Carthormium, was greater at a mean DOB of 20.3 cm. Barbour et al. (2012) concluded that the low sandalwood survival likely related to the "less than optimised nature of the silviculture and management practices applied across the trials" and that survival "could be greatly enhanced with silviculture improvements"; (e) Trial 7 was used for three data points, based on measurements of 11-year-old sandalwood using three different hosts: Cathormium umbellatum, Dalbergia latifolia and Millettia pinnata; and (f) Trial 8 was planted in 2000 to assess sandalwood growth response in a multi-species plantation environment. Mean DOB was measured at 8 years and was 14.7 cm. The Respondents pointed out that these sandalwood trees were the same size as those in the Brand et al. (2012) study at half the age (eight years as opposed to 16 years). The trial did not follow typical silvicultural practices for a tropical sandalwood plantation in Kununurra. In 2002, an inappropriate application of herbicide resulted in widespread sandalwood deaths and the remaining trees received little management. 1140 Third, the Respondents submitted that Dr Barbour's Figure 21 Reasoning also included the Brand et al. (2012) study results as one of its data points (DOB of 14.9 cm at 16 years), which they contended should not be given any weight for the reasons I have addressed above. They further pointed out that Dr Barbour had also relied upon Trial 4 from Barbour et al. (2012) in Corrected Figure 21, but this also formed part of her separate reasoning (which I refer to as the Barbour Study Reasoning) and is dealt with below. 1141 Fourth, the Respondents pointed out that there were two trials reported in Barbour et al. (2012) which Dr Barbour did not include in her Figure 21 Reasoning, being Trials 6 and 9. It was submitted that: (a) Trial 6 tested different spacing and hosting treatments using Cathormium as the long-term host and Sesbania and Acacia trachycarpa as short-term hosts (all of which Quintis used). At year nine, sandalwood utilising "treatment 3" (as reported in the paper) had a DOB of 16.2 cm, a fact which Dr Barbour noted by way of comparison when observing the low growth at 15 years in Trial 4: "For example, earlier in this report the (Section 4.2.2, Trial 6) sandalwood grown with long-terms host Carthormium umbellatum, at 9 years of age had a mean basal diameter of … 16.2 cm when stocked at 231 stems per hectare, compared to 15.7 cm measured for these 15-yearold trees". It was submitted that this showed that these trees were bigger than the Brand et al. (2012) trees when seven years younger; and (b) Trial 9 used Carthormium as the long-term host and Sesbania as the short-term host (which were both used extensively by Quintis as hosts) to assess the impact of different sandalwood-to-host stocking ratios. At eight years, in the plot where the hosts were not removed, mean DOB was approximately 15 cm (again, larger than the Brand et al. (2012) trees at half the age). 1142 The Respondents submitted that Dr Barbour had inexplicably excluded these two trials from her Figure 21 Reasoning. 1143 In their reply submissions, the Davis Applicants did not seek to dispute any of these criticisms made in relation to the Figure 21 Reasoning. Rather, they submitted as follows: The Applicants do not suggest that the data Quintis had available to it perfectly replicated the conditions under which Quintis trees would be grown. That does not mean it was reasonable to ignore the data. The commercial plantation of sandalwood was in its infancy, and the data from FPC trees and inventory measurements was all that was available until Quintis started harvesting its plantations (as it did from 2014). With respect to the FPC data, the Respondents go to great lengths to point to various differences between the conditions which trees in the FPC trials grew when compared to Quintis' plantations: see EYCS [277]-[320]. Dr Barbour acknowledged that the FPC data has its limitations, including because the conditions in which the trees were grown may not have been replicated by Quintis and the FPC trials did not record consecutive years of growth (which she described as continuous measurement): T845.30-846.27 and T847.18-27. Similarly, Quintis' own inventory data was limited to measurements taken from 2012 onwards and did not record consecutive years of growth of the same trees and grew its trees in different locations with a variety of different hosts (as identified by Dr Barbour by reference to the West report at T846.47ff). Despite those limitations, the body of data which Mr Brown had and which he used for his Heartwood Model was the best available. It is in that context which Dr Barbour identified it would be inappropriate to look at the data for one particular destructive harvest or one inventory report on its own to reach conclusions about potential growth. The reasonable and appropriate course was to look at the data sets together. That is what Mr Brown did when creating the Heartwood Model. The Respondents ignore this entirely, and instead fixate on seeking to distinguish the FPC trials, the Quintis trees over 5 years old and its poorly performing early harvests (see e.g. EYCS [113(b) suggesting the early harvests suffered from poor soil and fungus) - to establish that it was reasonable to entirely ignore the data for the purposes of determining growth of its trees, particularly for its under 5 year olds. The problem is that it was unreasonable to ignore the mountain of data from multiple sources which were available from 2012 onwards which showed the capacity that sandalwood trees could grow to (which is what Dr Barbour identified at T855.42 the data sets together showed), and Quintis' experience was that its plantations were suffering from their own problems which were inhibiting growth such that there was no reasonable basis to consider things would significantly improve on that (e.g. site capacity, host deaths, disease, irrigation problems, poor seedlings, poor hosts, poor sandalwood and the growth disaster unfolding at Kingston Rest with an unknown cause). 1144 As will be apparent from the above, the Davis Applicants did not seek to respond to the specific criticisms that had been made in relation to Corrected Figure 21, but submitted that the reasonable approach, given the limitations with the individual data sets available at the time, was to bring them together and to identify trends. I will return to these contentions below. 1145 In her evidence before me, Dr Barbour agreed that each trial shown in Corrected Figure 21 involved very different host regimes from those used by Quintis, very different stocking ratios, very different watering regimes, and any number of other differences in the silvicultural conditions between the trials and Quintis' plantations: T852.1-20. Dr Barbour accepted that if one was going to pick up data from studies one would have to look at the conditions within which those studies were conducted, such as stocking rates, irrigation systems, host species and the like. Dr Barbour acknowledged that the trials she had considered that were the subject of Corrected Figure 21 contained a whole host of uncontrolled variables affecting each data point: T851.22-25. 1146 Critically, Dr Barbour accepted that the analysis based on Corrected Figure 21 was unreliable to form any meaningful conclusion of the likely size of a Quintis tree planted from 2009 onwards at 15 years of age: T851.36-44. 1147 Even more critically, Dr Barbour said that it would be "absolutely terrible" to rely solely on the Figure 21 Reasoning: T851.43. She said that instead of doing this, she had relied upon it as one of several data points. One of those other data points was the Brand et al. (2012) study, which, as noted above, she also accepted in cross-examination could not be relied upon to draw inferences about Quintis' trees. The other three data sets relied upon by her are dealt with below. 1148 In addition to the concessions which Dr Barbour appropriately made about the limits of Corrected Figure 21, I am not satisfied that the linear regression presented in Corrected Figure 21 provides a basis upon which to find, on the balance of probabilities, that "a more accurate assumption" for the basal diameter of a 15-year-old sandalwood tree would be 17.8 cm and a heartwood yield of 8.55 kg. That is because, in addition to the fact that each of the Trials the subject of Corrected Figure 21 were affected by the particular conditions in which they were conducted, the linear regression constructed by Dr Barbour on which her opinion was based had a weak r co-efficient of 0.3482, meaning that there was a weak relationship represented by that trendline. In this regard, I note that in respect of other data that Dr Barbour had collected, she had expressed the opinion that there was a "weak statistical relationship" where the relevant r co-efficient in respect of that data was 0.5708. 1149 Having regard to these matters and those which Dr Barbour accepted in her cross-examination, I am not satisfied that Dr Barbour's opinions based upon Corrected Figure 21, and the Figure 21 Reasoning, should be accepted. Specifically, I am not satisfied on the basis of this reasoning that "a more accurate assumption" for the basal diameter of a 15-year-old sandalwood tree would be 17.8 cm and for heartwood yield would be 8.55 kg. 12.3.4 The Figure 25 Reasoning 1150 Dr Barbour relied upon the analysis from her Figure 25, which she corrected and updated in her Supplementary Report, to express the opinion that DOB at 15 years of age would be similar to that in Corrected Figure 21. Corrected Figure 25 consisted of a further linear regression prepared by Dr Barbour based on some of Quintis' DOB measurements. Other than stating that Corrected Figure 25 was similar to Corrected Figure 21, Dr Barbour never quantified an estimated DOB using Corrected Figure 25. 1151 Corrected Figure 25 was as follows: 1152 The Respondents submitted that Corrected Figure 25 was of no or limited value for two reasons. 1153 First, it was submitted that it was not based on the latest data available to Quintis in FY15 and FY16, as it was based on the 2014 Inventory Count. It was submitted that the subsequent Inventory Reports contained materially higher mean DOBs. For example, it was submitted that 14-year-old trees in 2014 had a mean DOB of 14.4 cm (and this is what is shown in Corrected Figure 25) but the 14-year-old trees in 2015 had a mean DOB of 17.9 cm which was a 20% difference and not shown in Corrected Figure 25. The Respondents pointed out in this respect that the 2015 Inventory Report noted, "[t]ree growth was in general much better than the 2013/14 year, this supporting our proposition last year that the big wet season contributed to poor growth." 1154 Second, the Respondents submitted that whilst Corrected Figure 25 purported to depict the growth of Quintis' trees over time, it did not do this. It was submitted that Corrected Figure 25 compared different plantations at different ages and was a snapshot at a single (inapposite) point in time (2014) of the size of trees across Quintis' estate from ages five to 15 years. It was submitted that Corrected Figure 25 was misleading in the sense that it sought to demonstrate DOB of Quintis' trees aged six to nine years by dot points, but these datapoints appeared to show that Quintis' plantations experienced little to no growth in diameter from age six to age nine, and flattened the trendline in Corrected Figure 25. It was submitted that this was "seriously misleading" because it suggested that Quintis' plantations barely grew from ages six to nine. EY submitted that the true position was as follows in that the underlying DOB at 20 cm figures for these datapoints were as follows: Age 6 7 8 9 DOB 11.4 11.9 11.9 11.9
1155 EY submitted that the actual data demonstrated that Quintis' plantations from the mid-2000s increased dramatically year-on-year. For example, whilst the 2005 plantations reached a mean DOB at 20 cm of 11.9 cm at nine years of age, the 2006 plantations reached that same mean diameter one year younger, the 2007 plantations reached the same mean diameter one year younger still, and the 2008 plantations were only 0.5 cm shy of the same diameter at just six years of age. It was submitted that instead of seeking to measure growth overtime, Dr Barbour had simply plotted the dots from one year and joined the dots to form a trendline purporting to depict growth over time, which created a highly misleading impression. 1156 Again, the Davis Applicants did not directly respond to these submissions, but again submitted that Quintis ought to have taken into account all available datasets, including that contained in Corrected Figure 25. 1157 In my view, Corrected Figure 25 presented far too simplistic an analysis. It was simply a means by which Dr Barbour sought to aggregate and plot the average DOB figures for trees at different ages from the 2014 Inventory Report, which revealed nothing about the changing dynamics of those trees. Further, contrary to what Dr Barbour stated in her reports, Corrected Figure 25 was not based on a review of all of the data in the Inventory Reports. It was only based on the 2014 Inventory Count. She said (at T878.22-23) that: I wasn't aware that 2014 was any worse than anything else, sorry. So I just took a full dataset. What I was looking for was full datasets. 1158 It followed that the analysis contained in Corrected Figure 25 was only comparing one year's results from Quintis' plantations in 2014 as against other data points being the Tree Model and the data from the FWI. As I have already noted, 2014 was a poor performing year for Quintis' plantations due to climactic conditions. The subsequent years were reported as being better years of performance for the plantations. 1159 Further, as pointed out by EY, Corrected Figure 25 tended to conceal the improvement in DOB for trees at different ages and in different plantations. It was nothing more than an analysis of one year's results, which incorporated earlier plantations which Quintis knew to be poorly performing. 1160 Moreover, the Davis Applicants did not make any submissions by which I could draw any conclusion from Corrected Figure 25 and its associated analysis as to the heartwood yield assumption that Quintis should have used. It was not made clear to me what heartwood yield assumption should be divined from Corrected Figure 25. 1161 For these reasons, I do not accept Dr Barbour's reasoning and opinion that Corrected Figure 25 established that the DOB at 15 years of age for sandalwood trees would be similar to that in Corrected Figure 21. 12.3.5 The Barbour Study Reasoning 1162 Dr Barbour considered the results of a destructive harvest of 40 trees aged 15 years from the FWI reported in Barbour et al. (2012) as Trial 4, which it was said resulted in an average heartwood yield of 6.3 kg of heartwood per tree. Dr Barbour expressed the opinion that this was consistent with the results reported in Brand et al. (2012). 1163 In her evidence before me, Dr Barbour accepted that the purpose of Trial 4 was to determine the suitability of three long-term hosts, being Cassia siamea, Acacia Mangium and Peltophorum. It was found that two of those hosts were poor hosts and, as far as Dr Barbour knew, those two hosts were never used by Quintis. The trial also used a very high stocking density of 926 SPH, which was roughly double that of commercial operators. The trial was not irrigated from 2002 onwards. 1164 Dr Barbour acknowledged, both in her first Report and in cross-examination, the harvest from Trial 4 was a biased selection and the results of the Trial did not in isolation assist in providing a reasonable estimate of anticipated heartwood from Quintis' plantations. Dr Barbour accepted that Trial 4 was itself not a proper basis to make any conclusion as to the likely growth rates of Quintis' plantations from 2009 onwards. 1165 Again, the Davis Applicants did not raise anything in their reply submissions which sought to support the Barbour Study Reasoning or the opinions which Dr Barbour expressed based upon that Reasoning. 1166 I do not accept Dr Barbour's reasoning and opinion that the Barbour Study Reasoning established that Quintis could expect an average heartwood yield of 6.3 kg of heartwood per tree. 12.3.6 The Destructive Harvest Reasoning 1167 Dr Barbour relied upon the data from the five destructive harvests used by Mr Brown to prepare the Heartwood Model, and which were the subject of the Enigma Presentation. Dr Barbour performed regression analyses on various combinations of these datasets from which she drew conclusions across those datasets as to DOB at 15 years of age ranging from 15.34 cm to 24.2 cm. Dr Barbour expressed the opinion that "the reality" from Quintis' destructive harvests was that a DOB at 15 years of 15 to 16 cm could be expected. However, in expressing this opinion, Dr Barbour did not account for one of the datasets where trees were measured to have DOB at 24.2 cm. Dr Barbour explained that she did this as the results in that dataset was based on "an anomaly at the Frank Wise Institute which could not be explained, and [whose] agronomy was not copied by Quintis". 1168 The Respondents submitted that Dr Barbour's opinions based on the Destructive Harvest Reasoning should be rejected because: (a) four of the harvests were not of Quintis' trees - these trees were taken from the FWI, a private plantation grown by Mr Done, and one from Quintis' competitor, Elders; (b) the other harvest was of trees from Quintis' oldest and worst performing plantations, EKS and TFS2, which Dr Barbour accepted had very different silvicultural conditions to Quintis' later plantations; and (c) the purpose of these destructive harvests was not to analyse the growth of Quintis' trees, but to assess the amount of heartwood in a tree of any given size, to validate the Heartwood Model. 1169 The Davis Applicants submitted that Mr Brown had relied upon the same dataset to develop the Heartwood Model, and it is the type of data that should have also been relied upon to determine DOB at different ages. 1170 In her evidence before me, Dr Barbour conceded that it would not be reliable to rely upon the size of trees observed in the destructive harvest dataset to form any meaningful view about the likely performance of Quintis plantations from 2009 onwards: T884.1-18. 1171 Given the concession that Dr Barbour made, I do not accept Dr Barbour's reasoning and opinion that the Destructive Harvest Reasoning established that Quintis could expect DOB at 15 years of 15 to 16 cm in its commercial plantations, which were being grown in different circumstances and in different conditions. 12.3.7 The Quintis Harvest Results Reasoning 1172 Dr Barbour relied upon the data from Quintis' harvests from 2014 to 2017 (including those that post-dated the FY16 Financial Report) to express the opinion that Quintis should expect a heartwood yield of 3.05 kg at 14 years, 5 kg at 14.5 years and 6.95 kg at 15 years. 1173 The data upon which Dr Barbour relied was as follows: 1174 The Respondents submitted that there were two reasons why this data should not be relied upon. The first was that the results of only two of the above harvests (EKS and TFS2) had been conducted by the time work was being performed on the FY16 Financial Report and only one had been reported by the time of work being performed on the FY15 Financial Report. The second was that the first two harvests were known poor performers and otherwise these results were from the earliest of Quintis' plantations. 1175 In her evidence before me, Dr Barbour accepted that the earlier harvests occurred in respect of plantations that had very different silvicultural conditions to Quintis' later plantations, and that it would not be reliable to rely upon the size of trees observed in the destructive harvest dataset to form any meaningful view about the likely performance of Quintis' plantations from 2009 onwards: T883.43-46. 1176 Again, given Dr Barbour's concession, I do not accept that Dr Barbour's Quintis Harvest Results Reasoning established that Quintis should expect a heartwood yield of 3.05 kg at 14 years, 5 kg at 14.5 years and 6.95 kg at 15 years. 12.3.8 The Multiple Dataset Reasoning 1177 During the course of oral closing submissions, Senior Counsel for the Davis Applicants submitted that Dr Barbour's opinion (as expressed in the executive summary of her first Report) did not rely upon any one single dataset or study, but was an opinion based on all of them. As already mentioned, the Davis Applicants submitted that they relied upon the combination of the datasets referred to by Dr Barbour to support their counterfactual case. It was submitted that this was consistent with Dr Barbour's opinion that it would be a "terrible mistake" to rely upon any one dataset. 1178 The Davis Applicants accepted that none of the external studies relied upon by Dr Barbour replicated the conditions under which Quintis trees would be grown and that Dr Barbour's opinions had limitations, but it was submitted that this did not mean that the data from those studies could be ignored. The Davis Applicants further submitted that Quintis itself had contributed to the issue with limited datasets due to the fact that it had only commenced to collect data from 2012. 1179 The Davis Applicants submitted that Quintis could not "ignore the mountain of data from multiple sources which were available from 2012 onwards" which established a multiplicity of problems in Quintis' plantations, and which made it entirely unreasonable to adopt the Tree Model as part of the DCF Model and continue to do so in the face of that data. 1180 The fundamental problem with the Davis Applicants' contentions insofar as they sought to support Dr Barbour's opinions by reference to the combination of all the studies and datasets upon which she relied is that it assumes the reliability or persuasiveness of each dataset or the combination of them. The executive summary to Dr Barbour's first Report expressed the opinion that: (a) a more accurate assumption for the basal diameter of a 15-year-old sandalwood tree would be 17.4 cm; and (b) a reasonable estimate of heartwood in a 16-year-old sandalwood tree would be between 4.85 and 7.95 kg at a moisture content of 25%, and whilst the calculation using Quintis' model of 8.06 kg at 15 years is above that range it is nevertheless close to the upper end. Dr Barbour did not identify any basis for these opinions other than the studies and reasoning process exposed in the balance of that Report, and as updated in her subsequent Reports. I have rejected each of these individual studies and datasets as giving rise to any reliable or compelling conclusion as to the heartwood yield Quintis could expect from its plantations. I do not consider that the combination of all of them supports the conclusion which each of them individually did not support. 1181 Further, even if there was some basis to the Davis Applicants' contentions as to the data that Quintis could not ignore (and I have not accepted all of their contentions in this regard), by their counterfactual case the Davis Applicants had to establish that the heartwood yield that should have been assumed was an average of around 6 to 8 kg at 15 years. I do not accept that the Davis Applicants have established this case by reliance upon the individual and cumulative opinions expressed by Dr Barbour. The Davis Applicants have not persuaded me to reach a reasonable state of satisfaction that the entirety of Quintis' plantations as at the end of FY15 and as at the end of FY16 would achieve a heartwood yield of approximately 6 to 8 kg at 15 years, such that this was the heartwood yield assumption to be used in the DCF Model. 1182 That is not to say that I need to reach a positive state of satisfaction that the actual heartwood yield assumption used by Quintis was supportable on the evidentiary materials that were adduced before me. As I have earlier mentioned, in civil litigation of this type, the Court is not bound to accept the case of one or other party and it may reject the case of both parties: see Roberts-Smith at [117]ff. Nor is it the task of the Court to reach a state of satisfaction on a mathematical scale as between competing choices presented by the parties. Instead, the task is to reach a state of satisfaction on the case as presented by the plaintiff and, if not so satisfied, to reject that case. 1183 For the above reasons, I do not accept the Davis Applicants' arguments based upon the Multiple Dataset Reasoning.
1184 A further fundamental problem with the Davis Applicants' counterfactual case is that it proceeded on the basis that the heartwood yields assumed by Quintis in the DCF Model were materially higher than those that a market participant would have assumed, which it claimed would be an average of around 6 to 8 kg of heartwood at 15 years. It sought to support this heartwood yield assumption by reference to Dr Barbour's opinions. The effect of this was that the Davis Applicants' counterfactual case proceeded on the premise that a reporting entity in Quintis' position would have assessed the fair value of its sandalwood assets on the basis that in an orderly transaction, a relevant market participant would buy those assets at a price based upon an assumption that Quintis' sandalwood trees would produce an average of around 6 to 8 kg of heartwood at 15 years. 1185 I am satisfied that a reporting entity in Quintis' position would have assessed fair value on the basis that a market participant would have regard to the published studies and datasets available in relation to sandalwood trees, as well as those available in relation to Quintis' plantations. However, I am not satisfied that the effect of this was that fair value would be assessed on the basis that a market participant would have assumed a heartwood yield of around 6 to 8 kg at 15 years. 1186 For example, if fair value was assessed on the basis that a market participant would have had regard to the study in Brand et al. (2012), it does not follow that a market participant would be expected to rely upon that study without looking at the differences between the conditions in which that study was conducted (in the context of an early trial at the FWI) and those in which Quintis' plantations were being developed and growing - i.e., in a commercial context with access to greater resources and facilities. The same position applies in relation to the Trials that were the subject of Corrected Figure 21 and Trial 4 considered in Barbour et al. (2012). 1187 In my view, an entity in Quintis' position would assess fair value on the basis that a market participant would take into account the results of earlier studies and trials, but also consider in detail the year-on-year data kept by Quintis as to the growth and development of its plantations, its harvest results to date, the problems it was confronting in the management of its plantations and the strategies it had in place to address those problems. Although some of Dr Barbour's analysis focussed on Quintis' specific data, it was not fulsome in this respect. For example, as noted above, Dr Barbour had regard to Quintis' harvest results, but these were from the earliest of its plantations, and she only relied upon the data from the 2014 Inventory Count on the assumption that the subsequent years recorded data that was much the same. The result is that there was little expert analysis or assessment of Quintis' actual data as at the relevant dates. 1188 For these reasons, whilst I do not consider (as I have already found) that an entity in Quintis' position would have determined fair value on the basis that a market participant would have predicted cash flows that assumed all trees under five would achieve a yield of 20 kg at 15 years, I am likewise not satisfied that a heartwood yield of 6 to 8 kg would have been assumed for this purpose. The Davis Applicants' counterfactual case fails.
1189 The Davis Applicants also relied upon the West Report to establish that the heartwood yield assumption that should have been used was a yield of approximately 6 to 8 kg. As identified at [609] above, Quintis received a report in March 2017 in which Professor West proposed a new model for estimating heartwood yields and applied this model to estimate that Quintis would obtain a mean heartwood yield of between 1.3 tonnes per ha and 3 tonnes per ha for the harvests of its current plantings which were to be harvested between 2016 and 2028, being a range of 3.095 kg to 7.142 kg per tree (whereas Quintis' Heartwood Model assumed 8.4 tonnes per ha or 20 kg per tree). 1190 Mr Wilson contended that the Davis Applicants' reliance on the West Report was impermissible as it was a report based on events which occurred after the release of the FY16 Financial Report and were irrelevant to the question of whether Quintis' valuation was reasonable as at the date it was done: citing Propell National Valuers (WA) Pty Ltd v Aust Executor Trustees Ltd [2012] FCAFC 31 (2012) 202 FCR 158 at [9] (Stone J), [77]-[80] (Collier J), referring in particular to HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640 at [44]. EY further contended that it was impermissible to rely upon the West Report for this purpose as the Davis Applicants' case had been particularised by reference to the opinions expressed by Dr Barbour and Mr Basford. 1191 The contentions made by the Respondents should be accepted. The West Report relies upon data that postdated the events leading to the finalisation of the FY16 audit and Financial Report. Further, and more importantly, Professor West did not give evidence in the proceedings and I did not have the benefit of his opinions being explained or tested. Apart from a largely inconsequential line of cross-examination of Dr Barbour which touched upon the West Report, none of the experts who did give evidence before me were asked to opine on the West Report and this was not pursued in any substantive way in their oral evidence. As EY submitted, the Respondents did not have any notice prior to receipt of the Davis Applicants' closing submissions that the West Report would be relied upon to support the pleaded case. 1192 In all of these circumstances, and especially in circumstances where I did not receive any direct evidence from Professor West, I am not persuaded that any weight can or should be placed on his report.
1193 Contrary to the Davis Applicants' case, in my view, there was data available concerning the performance of Quintis' plantations from which conclusions could have been drawn as to the heartwood yield that might have been properly assumed for the purpose of a fair value exercise consistent with AASB 13 and AASB 141. 1194 In their written closing submissions, the Davis Applicants undertook an exercise by which they contended that "… adopting the Tree Model all of the trees over the age of 5 years which were on assigned yield curves were predicted to only yield 10.8 kilograms per tree". The methodology adopted by the Davis Applicants by which they arrived at the figure of 10.8 kg was to take the average heartwood yield for each year of establishment of Quintis' plantations, and then to calculate an average of those averages. In another part of the Davis Applicants' submissions, they drew attention to the fact that in an email dated 27 August 2016, Mr Brown reported on the early results for the harvest that had been conducted that year. It was there reported that "[m]ean yield per tree is up slightly on expectations 10.3kg per tree vs forecast 9.6kg per tree". The likely harvest of 10.3 kg of heartwood yield was broadly in line with the average that the Davis Applicants had calculated. 1195 The Respondents submitted that there were flaws with the averages that the Davis Applicants calculated. They contended that, even if the methodology adopted by the Davis Applicants was applied, the average heartwood yield at 15 years for trees over five years of age in FY15 was not 10 kg but 11.37 kg and 11.89 kg in FY16. The latter point was demonstrated by taking the average from each plantation year and then creating an average of that as follows: 1196 The Respondents further submitted that the Davis Applicants had adopted a flawed methodology to take the average heartwood yield for each year of establishment of Quintis' plantations, and then to calculate an average of those averages. In doing so, it was submitted that the Davis Applicants had given the same weighting to the trees in each establishment year, regardless of how much or how little of Quintis' estate those trees comprised. For example, it was pointed out that in the calculation for FY16, the average heartwood yield of 6.6 kg for the 2005 plantations was given the same weight as the average heartwood yield of 15.4 kg for the 2009 plantations, even though the former covered about one tenth of the area of the latter (84.2 ha vs 803.3 ha) and had a far lower stocking density (310 SPH vs 432 SPH). 1197 For the purpose of responding to this exercise, EY submitted that a more accurate way to calculate the projected heartwood yield per tree was to weight the average according to how many trees of a given size there were in each year. Taking this approach produced the following results on EY's calculations: (a) the weighted average heartwood per tree over five years old in FY15 was 13.62 kg: (b) the weighted average heartwood per tree over five years old in FY16 was 14.93kg: 1198 EY submitted that a range of 13.62 to 14.93 kg was nearly twice the upper bound of the Davis Applicants' pleaded case (8 kg), and it did not take into account the trees under five years of age at all. EY further submitted that if the trees under five years old were taken into account, and the assumption is made that (contrary to Quintis' expectations) their performance would be no better than the 2009 to 2011 plantations, then the average heartwood yield across Quintis' plantations would be as follows: (a) in FY15, 14.37 kg: (b) in FY16, 15.57 kg: 1199 Relying upon these datasets, EY submitted that even if the Court were to find that it was unreasonable to expect any material improvement in heartwood yield from Quintis' trees under five years of age beyond the performance of the 2009 to 2011 plantations, the resulting weighted average heartwood yield estimate per tree across Quintis' plantations would be 14.37 kg to 15.57 kg. 1200 The Davis Applicants did not respond to these contentions in their written submissions in reply and ultimately did not press their alternative calculations based on a review of Quintis' data. It was submitted that their counterfactual case remained one which sought to establish a range of 6 to 8 kg: T1805.5-7. 1201 It is therefore unnecessary for me to resolve the dispute that arose between the parties in this regard. 1202 However, the exercise that was conducted by each of the Davis Applicants and EY demonstrated to me the possibilities that the Davis Applicants did not avail themselves of and which in my view would have reflected a more realistic counterfactual exercise - that is, one which accounted for the studies and datasets considered by Dr Barbour but noting their limitations, and considered them in the context of a more rigorous review of the data that was available from each of the Inventory Reports as to the growth and performance of Quintis' plantations from which to make predictions as to future heartwood yields which did not slavishly rely upon the Tree Model, if at all. 1203 Had the Davis Applicants taken such an approach to their pleaded case, and supported it with the rigours of expert analysis, it may have demonstrated the heartwood yield assumptions that an entity in Quintis' position should have applied. This would have been an exercise that examined the data that was available in and from the 2014, 2015 and 2016 Inventory Reports. In my view, it is more likely that in the real world of commerce, it would be expected that the hypothetical market participant would have been expected to examine Quintis' actual plantations and the actual performance of those plantations over time. However, this was not at the forefront of the counterfactual case the Davis Applicants advanced, which, as I have observed, was based on an expert opinion that paid scant regard to Quintis' actual data. 1204 Having come to the conclusions I have as to the validity of the heartwood yield assumption adopted by Quintis, whether Quintis' accounts were relevantly overstated in each financial year by reason of that assumption, and the counterfactual case advanced by the Davis Applicants, I turn now to consider questions of liability in respect of the specific contraventions alleged against Mr Wilson and E in the following two sections. For reasons that will become apparent, the conclusions that I have reached above inform my conclusions as to liability, but are not themselves dispositive of the contraventions discussed in those sections.
1205 As set out earlier in these reasons, Mr Wilson is alleged to have contravened three statutory provisions: ss 1041H and 1041E of the Corporations Act, and s 12DA of the ASIC Act. 1206 The case pleaded against Mr Wilson raised several issues that were common across the three statutory causes of action, and some issues that were unique to each action. One of the common issues was whether Mr Wilson had, in fact, made any of the pleaded Representations. For convenience, I have addressed this issue as a preliminary matter before turning to consider the cases under s 1041H of the Corporations Act, s 12DA of the ASIC Act and s 1041E of the Corporations Act respectively. 1207 Before turning to address these issues, it is necessary to point out that even if the Davis Applicants establish any liability against Mr Wilson for contraventions of ss 1041H and 1041E of the Corporations Act, and s 12DA of the ASIC Act, I am not satisfied that any such contraventions lead to any causally connected loss that is recoverable as against Mr Wilson by order of the Court under s 1041I of the Corporations Act. That is because the Davis Applicants failed to establish their counterfactual case.
13.2 Did Mr Wilson make the alleged Representations?
1208 In what was advanced as a complete answer to the whole of the case against him, Mr Wilson submitted that he did not make any of the pleaded Representations. Mr Wilson submitted that the Representations pleaded against him were "directors' declarations" and, therefore, were not made by any single director but by the collective of directors. 1209 The relevant Directors' Declarations are set out above at [571] (as to the FY15 Financial Report) and at [601] (as to the FY16 Financial Report); it is unnecessary to repeat them again here. Mr Wilson drew attention to the fact that these declarations were expressed as being the opinions of "the Directors'", were expressed to be given in accordance with a resolution of the directors as required by s 295(5)(a) of the Corporations Act, and were signed by Mr Gooding on behalf of "the Directors" in FY15 and "the Board" in FY16. Mr Wilson submitted that, properly construed, the Directors' Declarations conveyed that they were the collective opinions of the Board and not the opinions of each director individually. Mr Wilson submitted that this characterisation of the declarations accorded with the text of s 295(5)(a) which obliged the body of directors to make the relevant declaration and did not cast that obligation upon each individual director. Mr Wilson contrasted s 295(5)(a) with the specific obligations imposed upon the CEO and CFO under s 295A of the Corporations Act. Mr Wilson further submitted that this characterisation of the Directors' Declarations avoided anomalies which may arise where, for example, a director is absent or does not vote in favour of the resolution approving the financial statements of a company. 1210 In response to these contentions, the Davis Applicants submitted that the Corporations Act imposes obligations upon the Board and each director in making a declaration under s 295, relying on the reasoning of Middleton J in Australian Securities and Investments Commission v Healey [2011] FCA 717; (2011) 196 FCR 291 at [17] and [175]. The Davis Applicants further submitted that Mr Wilson's contentions ignored the operation of s 295A, which relevantly provides that, where a company is listed, the directors' declaration under sub-s 295(4) must be made only after each person who performs a chief executive function has given the directors a declaration under sub-s (2) of that section. It was submitted that the ability of Quintis' directors to make the relevant declarations was therefore conditional upon Mr Wilson first giving the directors a declaration under s 295A. Finally, the Davis Applicants submitted that, in any event, Mr Wilson authorised the Directors' Declarations by voting in favour of the resolutions in each year, and that there was therefore no basis to suggest that he did not personally represent that he held the opinions expressed in the respective Directors' Declarations. 1211 I do not accept Mr Wilson's contentions. 1212 The case pleaded against Mr Wilson was that by "making" the FY15 and FY16 Directors' Declarations, Mr Wilson represented to members and potential investors in Quintis that he was of the opinion that the FY15 and FY16 Financial Reports were in accordance with the Corporations Act including that they complied with the Accounting Standards and gave a true and fair view of the financial position and performance of Quintis: FFASOC [113]-[114] and [141]-[142]. Further, it was pleaded that by "authorising the issuing" of the FY15 and FY16 Financial Reports, Mr Wilson represented to members and potential investors in Quintis that he was of the opinion that Quintis' assets and the profits were as disclosed in those respective reports: FFASOC [115]-[118] and [143]-[146]. 1213 Thus, the pleaded case raised a factual issue as to whether, in making the relevant declarations and in authorising the issue of the respective Financial Reports, Mr Wilson made the pleaded Representations. The question raised is one of fact and characterisation, as opposed to statutory construction. During the course of closing submissions, Senior Counsel for Mr Wilson accepted that the issue as to whether Mr Wilson had made the relevant Representations raised a question of fact (at T1710.14-27): HIS HONOUR: And there's no factual issue that Mr Wilson did, in fact, do so on both occasions. MR LAWRANCE: With respect, correct, but he's not identified as having done so. So the recipient doesn't know. HIS HONOUR: I understand the point. … MR LAWRANCE: There are two cases I should draw your Honour's attention. Before I do, can I say that I accept that it's a factual inquiry. (Emphasis added). 1214 My attention was then drawn to the decision of the Court of Appeal of the Queensland Supreme Court in Manicaros v Commercial Images [2024] QCA 40 (Buss AJA with whom Flanagan JA and Kelly J agreed). It was there held that, by signing a directors' declaration, the appellant director personally declared that the company's financial statements reflected its financial position and performance including her indebtedness to the company. Although Manicaros raised different legal and factual issues, Senior Counsel for Mr Wilson accepted that directors' declarations may be characterised as conveying both the opinions held by the collective of directors and by each director personally. 1215 Thus, by the close of the hearing, the question that arose was a factual one, specifically, whether the Directors' Declarations in each year conveyed that they were representations made by Mr Wilson and whether those representations were also conveyed by the fact that Mr Wilson had authorised the issuing of the respective Financial Reports which contained those declarations. The Davis Applicants embraced this position. Senior Counsel for the Davis Applicants submitted as follows (at T1827.23-30): … I now turn to Mr Wilson's representation of the board point as my learned friend's original and threshold legal argument about his alleged representation being that of the board's. He now accepts, as conceded at transcript 1710 to 11, that is just a question of fact. The cases he referred your Honour to which are against him essentially support that proposition. Mr Wilson does not have a factual answer to the arguments we have raised about how one must construe in its context the word of the director's declaration as being made on behalf of each of the directors who unanimously resolved to adopt the accounts. 1216 The question as to what is conveyed by an impugned representation is an objective one that must be answered in light of all of the surrounding facts and circumstances, and looking at the conduct as a whole and not as to isolated parts: see, e.g., Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592 at [109] (McHugh J); Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304 at [102] (Gummow, Hayne, Heydon and Kiefel JJ). 1217 There was no dispute that, as a matter of fact, Mr Wilson had voted in favour of the respective resolutions by which the Directors' Declarations came to be made. Further, in his Defence, Mr Wilson admitted that Quintis' Board at the respective times had authorised the issuing of the Financial Reports in each of FY15 and FY16: Wilson Defence at [93]. Thus, there was also no dispute that Mr Wilson was involved in authorising the publication of the Financial Reports which contained the respective Directors' Declarations. 1218 The respective Directors' Declarations contained statements that declared, without qualification, that the directors held the opinions therein stated and, also without qualification, that the respective declarations had been signed by Mr Gooding on their behalf. It may be accepted that, in literal terms, the directors' declarations were expressed as containing the opinions of "the directors". And, it may be further accepted that they did not state in express terms that each of the individual directors held those opinions. However, the declarations were not qualified in any way and did not contain any statement that one or more directors did not hold the opinions therein stated. Thus, in conveying that the opinions were held by the directors as a collective, the declarations (absent any qualification) necessarily conveyed that each director held the relevant opinions contained in the declarations. The Directors' Declarations at the very least conveyed that the opinions were held by each of the directors who had voted in favour of the resolution by which the declarations came to be made. 1219 For the foregoing reasons, I am satisfied that Mr Wilson made the Representations that he is alleged to have made. Specifically, I am satisfied that the declarations conveyed that Mr Wilson held the opinion that the respective Financial Reports were in accordance with the Corporations Act, including the Accounting Standards, and gave a true and fair view of Quintis' financial position and performance. In light of the conclusions I have reached, it is unnecessary to consider whether a representation would have been conveyed if Mr Wilson had been absent, had abstained, or had voted against the resolution. That was not the factual position in this case. It is also unnecessary for me to further consider the effect, if any, of ss 295 and 295A and the obligations they impose.
13.3 The case against Mr Wilson under s 1041H of the Corporations Act
13.3.1 Overview of the pleaded case 1220 The case against Mr Wilson was that, by making the Directors' Declarations in each year, and thereafter authorising the issuing of the respective Financial Reports, Mr Wilson represented to members and potential investors in Quintis that he held particular opinions as to the Financial Reports, Quintis' assets and Quintis' profits, and, in doing so, impliedly represented that in each respect, his opinions were held on a reasonable basis and were the product of the application of reasonable care and skill by him. 1221 It is not necessary to repeat all of the elements of the pleaded case against Mr Wilson, which I have summarised at the outset of my reasons. It is sufficient for present purposes to restate that it was essential for the Davis Applicants to establish that: (a) first, Mr Wilson knew, or ought reasonably to have known, that significant inputs into the DCF Model were unrealistic or otherwise did not comply with the Accounting Standards: FFASOC [227]; (b) second, Mr Wilson did not have reasonable grounds for being of the opinion that the FY15 and FY16 BA Carrying Values represented fair value: FFASOC [228]; (c) third, as a result, Mr Wilson did not have reasonable grounds for representing that the FY15 and FY16 Financial Reports had been prepared in accordance with the Accounting Standards or that they gave a true and fair view of the financial position and performance of Quintis: FFASOC [229]; and (d) fourth, therefore, each of the Representations were made in circumstances where Mr Wilson's opinions were not held on a reasonable basis and were not the product of the application of reasonable care and skill by him. 1222 This conduct was said to give rise to a contravention of s 1041H of the Corporations Act. 13.3.2 Applicable principles 1223 Section 1041H(1) provides as follows: Misleading or deceptive conduct (civil liability only) (1) A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive. 1224 The elements of s 1041H(1) relevantly proscribe conduct "in relation to a financial product or a financial service". Unlike EY, Mr Wilson did not dispute that his representations were made in relation to a financial product, being Quintis' shares. It is therefore unnecessary to decide this issue in the case against Mr Wilson. 1225 The principles applicable to s 1041H were not in dispute. It was accepted that conduct is "misleading or deceptive" if "the impugned conduct viewed as a whole has a tendency to lead a person into error": Campbell at [25] (French CJ); Self Care IP Holdings Pty Ltd v Allergan Australia Pty Ltd [2023] HCA 8; (2023) 277 CLR 186 at [80]-[83] (Kiefel CJ, Gageler, Gordon, Edelman and Gleeson JJ). For conduct to be "likely to mislead or deceive" there must be a real or not remote chance or possibility of it doing so: Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd [1984] FCA 180; (1984) 2 FCR 82 at 87. This is an objective question to be considered in light of all of the surrounding facts and circumstances: Butcher at [109] (McHugh J); Campbell at [102] (Gummow, Hayne, Heydon and Kiefel JJ). 1226 Where, as here, the representation is said to be an expression of opinion, the Full Court's reasons in Global Sportsman at 88 remain apposite: An expression of opinion which is identifiable as such conveys no more than that the opinion expressed is held and perhaps that there is basis for the opinion. At least if those conditions are met, an expression of opinion, however erroneous, misrepresents nothing. 1227 Depending on the context and circumstances, a statement of opinion may carry other inherent or implied representations that may be found to be misleading. As French CJ explained in Campbell at [33]: Opinions may carry with them one or more implied representations according to the circumstances of the case. There will ordinarily be an implied representation that the person offering the opinion actually holds it. Other implied representations may be that the opinion is based upon reasonable grounds, which may include the representation that it was formed on the basis of reasonable enquiries. In the case of a person professing expertise or particular skill or experience the opinion may carry the implied representation that it is based upon his or her expertise, skill or experience. 1228 In Bathurst Regional Council v Local Government Financial Services Pty Ltd [2012] FCA 1200 at [2416], Jagot J reasoned that there were two circumstances where the expression of an opinion will carry with it an implied representation as follows: … The two circumstances are (a) where the person expressing the opinion knows that another person will or may act in reliance on the opinion, and (b) where the person expressing the opinion professes to have an expertise in forming and giving opinions of the kind in question [MGICA (1992) Ltd (formerly MGICA Ltd) v Kenny & Good Pty Ltd (1996) 140 ALR 313 (MGICA (1992) Ltd) at 356 per Lindgren J; see also Campbell v Backoffice Investments at [33] per French CJ]. 1229 Jagot J's judgment in this respect was affirmed on appeal: ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65; 224 FCR 1 relevantly at [765]-[773] (Jacobson, Gilmour and Gordon JJ); see also Chowder Bay Pty Ltd v Paganin [2018] FCAFC 25 at [31] (Besanko, Markovic and Lee JJ). 1230 Although I have concluded that the Davis Applicants have not established that the FY15 and FY16 Financial Reports overstated the carrying value of Quintis' biological assets, this is not fatal to the case pleaded against Mr Wilson. That is because that case is that Mr Wilson did not have reasonable grounds for the opinions that he expressed or that they were not the product of the exercise of reasonable care and skill by him. This case is maintainable irrespective of whether the actual representations were true or not. As the Full Court stated in Australian Competition and Consumer Commission v Dateline Imports Pty Ltd [2015] FCAFC 114 at [100]-[102] (Gilmour, McKerracher and Gleeson JJ): [100] There will not be reasonable grounds for making a representation if, at the time of making, it, the representor did not have facts sufficient to induce, in the mind of a reasonable person, a basis for making the representation: Australian Competition and Consumer Commission v Jones (No 5) [2011] FCA 49 at [32]-[33]; George v Rockett (1990) 170 CLR 104 at 112. [101] It matters not that it transpires, in due course, that the fact represented is true. That may simply be serendipitous. The representation, "I have reasonable grounds" for making the representation of fact is a discrete representation, indeed one which is likely to reinforce in the representee the reliability of the representation of fact." [102] Moreover the reasonable grounds representation is also one of fact. It is not directed to grounds which may become known but are not then known. Consumers should be protected against such conduct where, in fact, objectively assessed, there were no reasonable grounds known to the representor. (Emphasis added). 1231 Although Dateline concerned s 52(1) of the Trade Practices Act 1974 (Cth) (TPA), the same principles apply here. Further, even though Dateline involved representations as to fact, and not opinion, the principles there stated "apply with equal force where the relevant enquiry arises in circumstances where it is alleged that reasonable grounds are represented, by implication or otherwise, for a representation of opinion": Australian Competition and Consumer Commission v Mazda Australia Pty Limited [2023] FCAFC 45 at [108] (Mortimer and Halley JJ; Lee J agreeing). 1232 Thus, for the purposes of Mr Wilson's liability under ss 1041H of the Corporations, it is not to the point whether the Davis Applicants have established whether Quintis' accounts were in fact prepared in accordance with the Accounting Standards and in fact gave a true and fair view of the company's financial position and performance. The question is whether, at the time Mr Wilson made the Representations which I have found he made, there were objectively reasonable grounds for the making of those Representations, given the facts and circumstances at the time. The answer to that question is unaffected by my finding, one way or the other, as to whether the accounts were in fact prepared in accordance with the Accounting Standards. 1233 Whether a representor has reasonable grounds for a representation is to be assessed objectively: Dateline at [97]; Mazda at [108]. There will be an absence of reasonable grounds for making a representation if, at the time of making, it, the representor did not have facts sufficient to induce, in the mind of a reasonable person, a basis for making the representation: Dateline at [100] citing Australian Competition and Consumer Commission v Jones (No 5) [2011] FCA 49 at [32]-[33]; George v Rockett (1990) 170 CLR 104 at 112; Mazda at [108]. There will also be an absence of reasonable grounds where the representor "ought reasonably to have known" the relevant facts or the relevant state of affairs. These questions do not turn upon the subjective belief of the representor to make good a claim. Rather, they call for an objective enquiry such that the question of the presence or absence of reasonable grounds is to be considered "in light of the grounds which [the representor] actually then knew and […] those grounds [that], objectively, were reasonable": Dateline at [99]. 1234 Because the implied representation (if established) is that Mr Wilson had reasonable grounds for his opinion, the enquiry into reasonable grounds must be approached from Mr Wilson's position: City of Botany Bay Council v Jazabas Pty Ltd [2001] NSWCA 94 at [83]-[85]. This does not mean that the frame of analysis is a subjective one, but merely that it requires an assessment of reasonable grounds from that vantage point based on the facts that were either actually known to him or ought to have been known. A director personally may have reasonable grounds for an opinion even though the company, considered as an entity, does not: RT & YE Falls Investments Pty Ltd v NSW [2001] NSWSC 1027 at [115]-[117] (reversed on other grounds: [2003] NSWCA 54); Rakic v Johns Lyng Insurance Building Solutions (Victoria) Pty Ltd [2016] FCA 430; (2016) 259 IR 47 at [80]. 1235 Direct evidence from the representor is not necessary to establish reasonable grounds, even where the applicant has the benefit of the effect of s 4 of the Australian Consumer Law (ACL) or one of its equivalents: Australian Competition and Consumer Commission v Woolworths Ltd [2019] FCA 1039 at [212] (Mortimer J); Gate Gourmet Australia Pty Ltd (in liq) v Gate Gourmet Holding AG [2004] NSWSC 149 at [280], [296] (Einstein J); Jazabas at [82] (Mason P). The overall circumstances of the case will likely provide more reliable guidance than oral evidence from interested parties: Cummings v Lewis (1993) 41 FCR 559 at 566 (Sheppard and Neaves JJ). A respondent may rely on any evidence, adduced by any party, for the purpose of establishing reasonable grounds (Australian Securities and Investments Commission v GetSwift Ltd (Liability Hearing) [2021] FCA 1384 at [2154] (Lee J)) or, as here, demonstrating that the applicant has not shown an absence of reasonable grounds. 1236 Questions of onus must also be borne in mind. The fact is that it is for the Davis Applicants to prove that Mr Wilson did not have reasonable grounds for the matters he conveyed. In some other contexts when dealing with misleading representations as to future matters, it is the respondent that bears the evidentiary onus to adduce "evidence to the contrary" in order to negate an evidential presumption that they did not have reasonable grounds for making such a representation: see, e.g., s 4(2) of the ACL and Woolworths at [90]-[91], [212] (Mortimer J). No such presumption or evidentiary onus operates in the present context. 1237 It follows that the ordinary (legal and evidentiary) onus of proof applies. Mr Wilson was not required to go into evidence to rebut a presumption that he did not have reasonable grounds for the matters he expressed. The onus to prove the absence of reasonable grounds rested squarely with the Davis Applicants. That is not to say, however, that Mr Wilson's failure to give evidence on this matter is not without consequence. The failure to call evidence from a relevant witness may justify an inference that the evidence of the witness would not have assisted the case for reasonable grounds: Crowley v Worley Ltd [2022] FCAFC 33; (2022) 293 FCR 438 at [78] (Jagot and Murphy JJ). However, it is also to be borne in mind, as I have already mentioned, that, putting adverse inferences to one side, the usual approach to fact finding applies and inferences as to the existence or absence of reasonable grounds may be drawn from the facts as established: see [95]-[97] above. 13.3.3 Consideration 1238 In essence, the case pleaded against Mr Wilson made it necessary for the Davis Applicants to establish that Mr Wilson: (a) knew, or ought reasonably to have known, that the significant inputs in the DCF Model were unrealistic or otherwise did not comply with the Accounting Standards; and (b) accordingly, did not have reasonable grounds for holding the opinions that he expressed, or that they were not the product of the exercise of reasonable care and skill by him. 1239 Additionally, in the way the Davis Applicants ran their case at trial, they invited me to find, or infer, that Mr Wilson knew, or ought reasonably to have known, the requirements of the applicable Accounting Standards; and knew, or ought reasonably to have known, about the Tree Model, the Heartwood Model and the significant inputs used in the DCF Model. 1240 I now turn to address each of these matters. (a) Knowledge of the applicable Accounting Standards 1241 The Davis Applicants submitted that I should find that, as a director of Quintis, and its CEO, since 2000 (other than during a short hiatus in 2011-2012), Mr Wilson: (a) was involved in every step in relation to the preparation of the FY15 and FY16 Financial Statements; (b) understood the relevantly applicable Accounting Standards and considered all major accounting issues, including because he was highly experienced in the plantation field; (c) appreciated the requirements of fair value under AASB 13; and (d) understood that AASB 13 required Quintis to work out what a market transaction would be based upon actual knowledge of all the circumstances. 1242 In his submissions, Mr Wilson disputed the assertion that he was involved in every step in the preparation of the FY15 and FY16 Financial Statements or that he was highly experienced in the "plantation field". However, Mr Wilson accepted that the evidence showed that he had sought and obtained advice from KPMG about the Accounting Standards, and that the relevant requirements of AASB 141 and AASB 13 were explained in Mr Stevens and Mr Wagener's biological asset valuation memoranda in each of FY15 and FY16. Mr Wilson submitted that these documents showed that Mr Wilson knew as much as was recorded in those documents, and the Court would not infer that he knew more than was recorded in the documents. 1243 Although I am not satisfied that Mr Wilson was involved in "every step" of the preparation of the FY15 and FY16 Financial Reports, I am satisfied that (as accepted by him) Mr Wilson had knowledge of the requirements of the applicable Accounting Standards and, specifically, AASB 141 and AASB 13. I am further satisfied that Mr Wilson knew that Quintis' biological assets were being measured at fair value in accordance with the requirements of AASB 13 and AASB 141. This was made plain in the biological assets memoranda sent to Mr Wilson as part of the Audit Committee papers: see [559]-[562] and [593]-[594] above. Although Mr Wilson was not a member of the Audit Committee, I have found that Mr Wilson did attend those meetings from time to time and received and read the Audit Committee papers that were sent to him: see, e.g., [431], [436], [566], [580] above. 1244 The biological assets memoranda that were prepared by Mr Stevens and/or Mr Wagener specified the relevant requirements of AASB 13 and AASB 141. In particular, the FY15 Audit Committee Memorandum set out the key provisions of these Standards including that AASB 141 defined "fair value" as the price that would be received to sell an asset between market participants at the measurement date and that AASB 13 further defined "fair value [as] the price that would be received to sell an asset in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique": see 5.18.10 above. 1245 Each of the FY14, FY15 and FY16 Audit Committee Memoranda, together with the TFS Tree Valuation Policy, disclosed to Mr Wilson that Quintis measured the fair value of its biological assets on the basis of an "income approach" which involved determining the present value of anticipated future net cash flows less costs and the application of tiered discount rates. These documents also informed Mr Wilson that the future net cash flows were determined on the basis of a number of key judgements and assumptions including as to heartwood yield and processing costs. These assumptions were set out in detail in the TFS Tree Valuation Model Policy, which was attached to the FY14 Audit Committee Memorandum: see Part 5.17.1 above. That Policy identified each assumption by reference to its "level of hierarchy" and relevantly identified the heartwood yield as a "level 3" assumption. More fundamentally, these documents clearly informed Mr Wilson that the purpose of the use of these assumptions was for Quintis to determine the fair value of the biological assets on the basis of the price at which the assets would be sold as between market participants in an orderly transaction. It followed that Mr Wilson was aware that it was fundamental to the valuation of the biological assets that they reflected Quintis' assessment as to what a market participant would assume in relation to the value of its assets and would pay for their acquisition in an orderly transaction. 1246 Mr Wilson's knowledge of the Accounting Standards can also be inferred from the declarations that he signed in his capacity as Quintis' CEO. Mr Wilson accepted that he signed declarations for the purpose of s 295A of the Corporations Act in FY15 and FY16. He also accepted that he voted in favour of the Directors' Declarations which expressed the opinions that the respective Financial Reports complied with the Accounting Standards and gave a true and fair view of the financial position and performance of Quintis. The fact that Mr Wilson made these declarations allows me to infer (as represented in those documents) that he turned his mind to whether the Financial Reports in each year, including the assumptions upon which they were based, complied with the Accounting Standards. (b) Knowledge about the Tree Model, the Heartwood Model and the DCF Model 1247 The Davis Applicants contended, and Mr Wilson accepted, that the evidence established that Mr Wilson knew the details of the Tree Model, the Heartwood Model and the DCF Model. It necessarily follows that Mr Wilson knew the details of the significant inputs used in the DCF Model including as to heartwood yield and processing costs. 1248 As to the Tree Model, I am satisfied that Mr Wilson knew that it had been developed by Mr Kimber in or about 2004. Mr Kimber's expert forestry reports were contained in the PDSs for each plantation year. It was not in dispute, and I am satisfied, that Mr Wilson read these reports. By reason of the content of these reports, I am satisfied that Mr Wilson was generally aware of Mr Kimber's expertise, and knew that there had been trials conducted by the FWI and others, and that there had been published studies arising from those trials including those authored by Mr Brand and others. Although the evidence does not permit me to make a finding as to the level of knowledge Mr Wilson acquired of the published studies and trials, I am satisfied that Mr Wilson considered Mr Kimber to have been one of the leading researchers as to the growth and development of sandalwood plantations in Australia. 1249 I am further satisfied that Mr Wilson knew the essential elements of the Tree Model, including the incremental rates of growth assumed by that Model and its predicted DOB of 24.5 cm at 15 years. These elements of the Tree Model were specified in the FY14, FY15 and FY16 Inventory Reports, the TFS Tree Valuation Model Policy and the Audit Committee Memoranda. 1250 I am also satisfied that Mr Wilson knew the details of the Heartwood Model. Mr Wilson had received and was aware of the Enigma Presentation prepared by Mr Brown and its contents. Accordingly, Mr Wilson was aware that there had been significant developments that occurred during 2012. I am satisfied that he knew that during that year, Mr Brown made his Enigma Presentation, which formed the basis of the development of the Heartwood Model. Mr Wilson also thereby knew that there was to be a change in the way that Quintis would thereafter value its biological assets. Mr Wilson knew that this would involve Quintis commencing a process of measuring its plantations as part of annual inventory counts, and knew that these would then be carried out year-on-year. None of these matters as to Mr Wilson's knowledge were disputed. 1251 The entirety of the evidence and the findings I have made also satisfy me that Mr Wilson knew from sometime in or about 2012 that Quintis' biological assets would be, and were, valued on the basis that trees aged five and over would be moved from the theoretical 100% yield curve (which assumed a yield of 20kg of heartwood at 15 years) to assigned yield curves based on the growth of plantations as reported in the yearly Inventory Reports. And, Mr Wilson further knew that trees aged under five were assigned to the theoretical 100% yield curve. Again, these facts as to Mr Wilson's knowledge were not disputed by him. 1252 From the contents of the annual Audit Committee Memoranda relating to the biological asset valuation, I am further satisfied that Mr Wilson knew that Quintis' valuation of its biological assets was based upon a DCF Model that calculated the present value of the net cashflows expected to be generated from the plantations, which involved predicting future cash flow expected at harvest which was then discounted by the application of a tiered risk-adjusted discount rate. The TFS Tree Valuation Model Policy dated 21 August 2014 stated that the biological assets were valued on a "Net Value per Tree" basis and set out the narrative and mathematical expression of the DCF Model as follows: The narrative expression of how to calculate the Present Value per Tree is as follows: Present Value Per Tree = [(Current Open Market price per kg of Sandalwood Oil - Processing Costs per kg of Sandalwood) x Expected Heartwood Yield per tree) Marketing Fees} (Discounted to Trees Present Value using TFS Discount Rate) The formula used is set out below: Present Value Per Tree = {[ - (Processing cost per litre of oil (E) / ) ] * Heartwood yield (per kg) (H) * (1 - Marketing and sales fee (%) (F) } / (1 + Discount rate (A)) A (period remaining to harvest in years (I)) Included in the calculation is a reference to the related assumption detailed below. Harvesting Costs Per Tree: (Calculation 2) Harvesting Costs per tree = Estimated Future Harvesting Cost per Ha which is then discounted to the Trees Present Value using TFS Discount Rate and Converted to Cost Per Tree = {Harvesting cost (per ha) (G) + inflation rate) A (period remaining to harvest in years (0)] / 1+ Discount rate (A)) A (period remaining to harvest in years (I)) (total Ha's (K) (Ha's of land for related project) / Number of Trees in related project (J)) Net value per tree: Net value per tree = Present value of tree (calculation 1) - Harvesting costs per tree (Calculation 2) Total Valuation of all trees is performed on a project by project basis, times by the number of trees within each project. The total value of each project is then accumulated as either a TFS owned Trees or Grower owned trees and reported accordingly. 1253 As with other documents of this type, Mr Wilson did not dispute, and I accept, that Mr Wilson read this document and I am satisfied that he knew that the heartwood yield assumption and the assumed processing costs were critical to the determination of Quintis' expected future cash flows. 1254 It follows that I am comfortably satisfied that Mr Wilson had knowledge of the significant inputs that were used in the DCF Model, including as to heartwood yield and processing costs. (c) Did Mr Wilson know, or ought he reasonably to have known, that significant assumptions were unrealistic or otherwise did not comply with the Accounting Standards? 1255 An essential element of the Davis Applicants' pleaded case required them to establish that Mr Wilson knew, or ought reasonably to have known, that, relevantly, the heartwood yield assumption and the assumed processing costs were unrealistic and that, as a result, the FY15 and FY16 Financial Reports did not comply with the Accounting Standards including because they did not record a true and fair view as to Quintis' assets or its financial position. 1256 Mr Wilson accepted that his statements of opinion in each of the FY15 and FY16 Financial Reports carried implied representations that they were based on reasonable grounds. That brought into sharp focus the issue of whether Mr Wilson had reasonable grounds for the opinions he expressed based on what he knew or ought reasonably to have known. Mr Wilson submitted that an opinion is not misleading merely because it is found to be incorrect. It was submitted that Mr Wilson may have blundered, but that this was ultimately not to the point. Mr Wilson further submitted that it was not to the point that, as the Managing Director and CEO of a publicly listed company, he on occasion questioned or challenged the valuation of the company's most significant assets. He contended that his questioning and challenging of his subordinates as to the valuation of the plantations did not mean that he did not have reasonable grounds for the opinions he expressed as to the value of the biological assets, especially when Mr Wilson knew that those valuations were arrived at through a process involving (in addition to Mr Wilson) Mr Brown and his team, Mr Stevens and his team, the Audit Committee and the board, and Quintis' auditors, Bentleys and later EY. 1257 For the reasons that follow, I do not accept Mr Wilson's submissions. I am satisfied that the Davis Applicants have established that Mr Wilson ought reasonably to have known that the heartwood yield assumption was unrealistic in respect of the trees aged under five. As this was a significant assumption (given that it related to approximately 60% of Quintis' plantations), I am also satisfied (for reasons further addressed below) that Mr Wilson ought reasonably to have known that the FY15 and FY16 Financial Reports did not comply with the Accounting Standards. 1258 The overwhelming weight of the evidence establishes that Mr Wilson was regularly sent information, which he read, that indicated that the plantations were not, as a whole (other than in a handful of compartments), growing in accordance with the Tree Model and would not be producing 20 kg of heartwood at 15 years. As a result of this information, in my view, Mr Wilson ought reasonably to have known that it was unrealistic to assume that all trees aged under five would achieve a 100% yield which assumed growth in accordance with the Tree Model. The evidence which supports my conclusion in this regard is as follows. 1259 During late 2014 and early 2015, Mr Wilson received information about the EKS Harvest. He was informed that that the heartwood yield per tree from the EKS Harvest was 3.5 kg, compared to the expected yield of 4.0 kg: see [377]-[381] above. I am comfortably satisfied that Mr Wilson was aware that Quintis' earliest plantations would not be producing 20 kg of heartwood at 15 years. I accept that Mr Wilson was aware that Mr Brown had recommended that neither the Heartwood Model nor the oil yield model required adjustment at that stage (ie, as at 30 July 2014). Nevertheless, the results of the harvest put Mr Wilson on notice that, as a matter of historical fact, Quintis' plantations had performed poorly from the very outset. 1260 In August 2014, Mr Wilson was informed by Mr Stevens that the graduating class for that year, being the 2008 plantation, was 45% off the expected 100% yield curve: see [382]ff above. He was also informed that the during that year's inventory count, it was found that "the majority of vintages grew at a rate below the applied yield curve". Mr Stevens expressed the concern that the auditors had flagged as an issue the "gap" between the theoretical yield curve and the actual performance of the plantations, and that the auditors were "worried" that the "trees on the 'theoretical model' are over-valued - ie: as soon as we use actual measurements the value drops". Despite identifying these concerns, Mr Stevens informed Mr Wilson that he would not be recommending any change to the DCF Model based on one year of poor growth and indicated that Quintis could "argue" (with the auditors) that there were improvements occurring and that the next year's graduating class would be in line with the "theoretical yield". Although Mr Wilson was being informed that Mr Stevens would not be recommending any changes to the Models based on one year's poor growth performance, this email, coming from the CFO to the CEO, in my view, put Mr Wilson on notice of the likely valuation issues that lay ahead if the performance of the plantations, especially the graduating classes, did not improve. As it turned out, the next year's graduating class also dropped off the 100% yield curve. 1261 The results reported to Mr Wilson in the 2014 Inventory Report identified that 2014 had been a poor performing year for the plantations, especially in relation to the Kingston Rest compartments, and, in particular, it had been a poor year for tree growth due to a number of factors such as a wetter than normal wet season, and site occupancy reaching close to maximum in some cases: see Part 5.16 above. The graduating class, being the 2009 plantation, was assigned to a 75% yield curve (which meant that, on average, the plantation had dropped by 25% from the benchmark 100% yield curve): see [420] above. The data included in the FY14 Inventory Report as to tree growth reported that the plantations were not growing in accordance with the incremental rates of growth assumed in the Tree Model, with some exceptions in particular compartments: see [425] above. 1262 There was some positive news reported in the 2014 Inventory Report including that mortality was within expected levels, though some specific compartments warranted further investigation, including at Packsaddle and elsewhere. It was also reported that there were improvements underway in respect of irrigation, site selection and preparation, more effective host management and use of superior seeds. And, Mr Brown expressed the view that he was not inclined to recommend that any changes be made to the Tree Model. 1263 Thus, by the commencement of FY15, it had been reported to Mr Wilson, and there was objective evidence available to him, that growth of the sandalwood trees in the plantation, as a whole and on average, was not tracking to the Tree Model. The early plantations were unlikely to yield 20 kg of heartwood at 15 years. And, whilst there were some signs of improvement in the more recent plantations relative to the early plantations, the graduating classes were still dropping (significantly) off the 100% yield curve upon graduation. 1264 By October 2014, in an email to Mr Wilson, Mr Brown expressed the view that the 2005 and 2006 plantations were a "bit of a basket case" and there was significant mortality in certain lots within the Packsaddle compartments: see [445] above. This is consistent with the fact that Mr Wilson was well aware that the older plantations and, in particular, the 2005 and 2006 plantations, had performed poorly. 1265 By June 2015, Mr Brown reported on the results of the TFS2 heartwood estimate, indicating that the trees at age 15 had grown to 15.1 cm DOB at 20 cm and the mean heartwood was 5 kg: see Part 5.18.5 above. I am satisfied that Mr Wilson was aware of this fact. It was consistent with the fact that it was being reported to Mr Wilson that the older plantations had been performing poorly. 1266 Things changed in July 2015. In that month, Mr Brown sent an email in which he expressed the view that he had "reviewed [his] position slightly on the TFS Tree Model in that it is applicable in certain instances" and that there was a "good body of data to work out where it is applicable" and "to define an alternative": see [509]-[511] above. Mr Brown indicated that he would continue to investigate the matter, and raised the prospect that a peer review should be looked at without recommending this course. Whilst it may be accepted that Mr Brown indicated that he would undertake further work and investigation, the fact is that Mr Brown, as Quintis' Head of Research, was raising issues as to the applicability of the Tree Model in all circumstances. I am satisfied that Mr Wilson was aware that Mr Brown, as Quintis' Head of Research, had expressed this view. 1267 In August 2015, Mr Wilson received the 2015 Inventory Report. That report disclosed to Mr Wilson that (see Part 5.18 above): (a) the 2015 year had been a better performing year for the plantations as a whole, as the estate had grown faster than the preceding year, supporting the theory that the performance in the previous year was affected by the heavy wet season, but there remained issues in respect of some areas where problems had been identified: see [542] above; (b) tree growth had in general been much better than the previous year, but there continued to be particular compartments that were of concern: see [542] above; (c) mortality was a concern in certain plantations, and especially within particularly problematic compartments, including Packsaddle and elsewhere: see [542] and [544] above; (d) the graduating class, being the 2010 plantations, were on average assigned to a 73% yield curve (which meant that they had dropped by 27% from the benchmark 100% yield curve), but there were particular problems within the Kingston Rest compartments: see [539] above; (e) Mr Brown's opinion was that each year was getting better including because: (i) the 2009 graduating class had two compartments that had been assigned to 105% yield curves and a further nine that had assigned to yield curves exceeding 80%; (ii) the 2010 graduating class had six compartments assigned to yield curves greater than 100%, and a further 14 in excess of 80%: see [540] above; (f) Mr Brown expressed the view that there were continued signs of improvements in the use of revised silvicultural practices in respect of irrigation, site selection and preparation, more effective host management and use of superior seeds. However, it was also noted that some of these practices had limitations and others needed more time to determine their impact: see [540] above; and (g) existing assigned yield curves had been evaluated, and some assigned yield curves had been adjusted downwards, mainly within the Packsaddle compartments. 1268 Despite the hopes of improved performance in the future, the fact is that the graduating class for that year had not, on average, grown in accordance with the Tree Model. In this regard, it is necessary to recall a number of objective data points from the 2015 Inventory Report which augment and further contextualise a number of the abovementioned points: (a) Table 3 (see [539] above) clearly identified that only six of 30 compartments within the 2010 plantations had been assigned to a yield curve of 100% or greater; (b) Table 9 (see [542] above) clearly identified that, on average, whilst tree growth (measured as changes in DOB from year to year) had improved from 2014, the majority of plantations including the more recent plantations from 2010 were not growing at the incremental rates assumed in the Tree Model; and (c) Table 10 (see [549] above) clearly identified that in respect of each of the plantations that had been assigned to individual yield curves, none of them on average from 2001 to the graduating class of 2010 were expected to achieve a heartwood yield of 20 kg at 15 years, and the highest expected heartwood yields were 15.3 kg and 14.5 kg respectively for the 2009 and 2010 plantation (which had different and larger plantation areas to each other and from the balance of the earlier plantations). 1269 In my view, it would have been obvious to a reasonable person in Mr Wilson's position, that as at the time of the 2015 Inventory Report, the plantations were not, as a whole, going to achieve 20 kg of heartwood yield at 15 years, and were not growing in accordance with Tree Model. The significance of the fact that the plantations were not, on average, growing in accordance with the Tree Model cannot be downplayed. That is because all trees aged under five were being valued on the basis that they would grow in accordance with the Tree Model and yield 20 kg of heartwood at 15 years. And, this fact was further significant in circumstances where Mr Wilson ought reasonably to have known that trees aged under five constituted the most significant portion (around 60%) of Quintis' biological assets at that time. 1270 As I will return to below, in the face of these matters, Mr Wilson submitted that there were signs of improvement in the more recent plantations and there was cause for optimism based on improved silvicultural practices. In relation to these practices, the 2015 Inventory Report relevantly stated that: (a) improved irrigation practices involving drip irrigation had shown good survival rates in Western Australia, but its full potential was yet to be achieved and was an area of active research and development for Quintis; (b) improved site selection and set-ups in soil could be seen in the effectiveness of the plantation performance since 2009; (c) there was a potential for significant future improvements arising from genetically superior seeds that had been planted from 2012 and were the subject of trials in particular compartments; and (d) it was hoped that improvements in host intervention and management may increase yields by 25%. 1271 As will be evident from each of these apparent improvements, they were expressed to be ones where some signs of improvement had been observed but others were still in progress in terms of research, trial or development, and would need to be monitored to determine their effectiveness. 1272 Things changed again during FY16. By July 2016, Mr Brown expressed the view that having looked at the inventory results from that year, and from the past three years, he was "starting to form the opinion that under [Quintis'] current silvicultural practices" it "may not be possible" to achieve the yield results predicted by the Tree Model: see [583] above. In particular, Mr Brown drew attention to the fact that growth trajectories for trees aged between five and 10 years were "behind target", which indicated that, despite improved silvicultural practices, the plantations were not growing as expected. Mr Brown also expressed the opinion that many of Quintis' sites did not have the size or capacity to carry the sandalwood trees and their hosts. Mr Brown raised for discussion a number of options including the need to adjust the Tree Model, revise the silvicultural practices and revise the Heartwood Model. 1273 The fact that these opinions were being expressed by Quintis' Head of Research made them ones which, in my view, would have put a reasonable person in Mr Wilson's position on notice that the heartwood yield assumptions were unrealistic. Further to this point, shortly after Mr Brown had sent his email, Mr Ben Wilson expressed the view to Mr Wilson that the "numbers" he had reviewed together with Mr Brown, were projecting around 80% of the model and that Quintis seemed to be "hitting the wall": see [585] above. 1274 The reality was that prior to the finalisation of the FY16 Financial Report, Mr Wilson had been informed about the significant concerns held by both Mr Brown in his position as the Head of Research and Mr Ben Wilson, his son, who appears to have been somewhat of a trusted advisor to Mr Wilson. 1275 Following these views being expressed, in August 2016 Mr Wilson was sent the FY16 Inventory Report: see [578]ff above. That document disclosed to Mr Wilson that: (a) there had been improvement in survival rates and mortality, which were closer to Quintis' targeted rate: see [579] above; (b) the graduating class, being the 2011 plantation, was assigned on average to a 74% yield curve (which meant that it had dropped by 26% from the benchmark 100% yield curve), but the reason for this was due a significant amount of the 2011 plantation being located in Kingston Rest: see [579]-[580] above; (c) a review of recent graduating classes' yield assignments indicated a trend of them starting to level out at 75%: see [579]-[580] above; (d) there had been downward adjustments to the yield forecasts from the 2006 plantations, which were located mainly in the Packsaddle compartment, and certain of the Kingston Rest plantations had been given a lower yield even though they were under five: see [579] above; (e) there were particular compartments, especially amongst three- to four-year-old trees which were achieving high standards of tree growth and in excess of the Tree Model, but the growth rates for five- to 10-year-old trees was slower than the previous year, though it was not expected to have a long term or sustained impact: see [579] above; (f) based on the growth of the younger trees, it was likely that the 2012 plantings would perform well and particular compartments would be placed on 100% yield curves, but Kingston Rest plantations would likely be assigned an 80% yield curve: see [584] above; (g) Mr Brown expressed the view that there were continued signs of improvements in silvicultural practices but: (h) irrigation practices appeared to provide a basis for a good survival rate, but not for high rates of growth; and (i) there were significant issues with site capacity, especially at particular sites; and (j) existing assigned yield curves had been evaluated, and some assigned yield curves had been adjusted downwards, one had been increased, and most of them had remained unchanged. 1276 Again, it is necessary to restate a number of objective data points from the 2016 Inventory Report which augment and further contextualise a number of the abovementioned points: (a) Table 3 (see [580] above) clearly identified that only one of seven compartments within the 2011 plantations had been assigned to a yield curve of 100% or greater; (b) Table 4 (see [580] above) clearly identified that the plantations since 2009 had been graduating to assigned yield curves of between 73-75% on average; (c) Table 9 (see [585] above) clearly identified that in respect of each of the plantations that had been assigned to individual yield curves, none of them on average from 2002 to the graduating class of 2011 were expected to achieve a heartwood yield of 20 kg at 15 years, and the highest expected heartwood yields were 15.4 kg, 16.3 kg and 16.13 kg, respectively for the 2009, 2010 and 2011 plantation (which had different and larger plantation areas to each other and from the balance of the earlier plantations). 1277 As to improvements arising from enhanced silvicultural practices, the 2016 Inventory Report stated that: (a) improved irrigation practices involving drip irrigation had provided the basis for good survival rates "but not for high rates of growth"; (b) site capacity was an issue in certain areas and there could be a benefit in thinning; (c) improved site and soil selection had been effective since 2009; and (d) there continued to be significant future potential arising from genetically superior seeds. 1278 The information recorded in relation to improved site and soil selection and superior seeds did little more than repeat the matters that had been reported on in the previous year. 1279 Thus, by the time of the 2016 Inventory Report, there had been an evident improvement in the yields to be achieved from the more recent plantations from 2009 onwards, but the fact is that every plantation since 2009 had on graduation being assigned to a yield curve that was on average below the 100% yield curve. In my view, the FY16 Inventory Report made it tolerably clear that Quintis' plantations were not, on average or as a whole, growing in accordance with the Tree Model. By that time, not a single plantation had, as a whole or an average, been assigned to a 100% yield curve upon graduation. There were some compartments within each year's plantations that had been so assigned, but this was not the case in relation to the whole of the plantation. Despite this, Mr Wilson knew, or ought reasonably to have known, that Quintis continued to assume that all trees aged under five would achieve growth rates in accordance with the Tree Model and yield 20 kg of heartwood at 15 years. In my view, a reasonable person in his position would have known that this was an unrealistic assumption. 1280 The Davis Applicants submitted that I should find from the totality of the evidence that Mr Wilson knew that Quintis' predicted yields were unrealistic and could not be achieved because: (a) many sites did not have the site capacity to carry the necessary sandalwood and host trees of sufficient size, and this had been reported to him by Mr Brown and others; (b) the stocking requirements were outside the maximum size density relationships for the species Quintis used; (c) Mr Brown and others had expressed the need to look at methods to improve site capacity or revise the Heartwood Model; (d) growth trajectories were behind target over the five- to 10-year-old age bracket; (e) notwithstanding various improvements being made, including irrigation, Quintis had sufficient data from its inventory programs to suggest that the Tree Model required adjustment because growth rates were not sufficient to achieve the tree diameters required; and (f) the potential silviculture solutions to this problem were only in the process of being investigated. 1281 The Davis Applicants further submitted that I should infer from these facts that Mr Wilson knew that the Tree Model was unsupportable and had no statistical validity, and that Quintis' sandalwood plantations were, as a whole, not growing in accordance with the Tree Model. 1282 In my view, whilst there was considerable force in some of the matters by the Davis Applicants, their submissions tended to be an oversimplification and did not account for the subtleties in the assumptions that Quintis actually used. As with other submissions that they made, the Davis Applicants did not differentiate the approach taken by Quintis in respect of the trees aged five and over, and those under five. 1283 Based on the findings I have made, I am satisfied that Mr Wilson knew that the process of assigning yield curves to plantations at age five and over had as a reference point the Tree Model, but I do not accept that he thereby knew or ought reasonably to have known that the assumptions being made in relation to those trees were unrealistic. In respect of this cohort, I am satisfied that Mr Wilson knew that at age five, each of the compartments in the graduating year's plantation would be assigned to their own yield curves using the Tree Model as a reference point. Mr Wilson knew that these compartments and plantations would then be measured again year-on-year, and the yield curves would be adjusted (up or down) or remain the same depending on their growth. These adjustments in fact occurred from year to year, and were reported to Mr Wilson in each of the 2014, 2015 and 2016 Inventory Reports. In that sense, once the plantations were assigned to a yield curve, their growth and expected yield, and therefore the value of each tree within such plantation, was determined by the performance of each such plantation. I do not regard that as being an unrealistic assumption to have made, let alone one that Mr Wilson knew, or ought reasonably to have known, was an unrealistic one. 1284 However, the position was different in relation to the valuation of trees aged under five. Mr Wilson knew that these trees were being valued by reference to the 100% yield benchmark which assumed the rates of growth from the Tree Model. By the time that the FY15 Financial Report was being finalised and published, Mr Wilson knew that the plantations, as a whole, had not performed at a rate of 100% growth, though some compartments were performing at or better than that level. That position did not change by the finalisation and publication of the FY15 and FY16 Financial Reports, though each of the 2015 and 2016 Inventory Reports disclosed improvements in performance in some compartments, including in relation to trees aged three to four. 1285 Whatever may have been the case in relation to trees performing well at ages two to four, the fact is that none of the plantations, as a whole or an average, were being assigned to a yield curve of 100% on graduation. It may be accepted that some individual compartments of these plantations had been assigned to yield curves of 100% or greater (six of 30 in FY15 and one of seven in FY16), but the majority of the compartments were being assigned to yield curves that were lower than 100%. Thus, even though each consecutive Inventory Report from 2014 to 2016 expressed optimism, including that each year's graduating class was getting better, the fact is that in each subsequent year, the graduating classes were being assigned to yield curves that were on average in the range of 73-75%. Critically, Mr Wilson knew by FY16 that Mr Brown had reported that none of the graduating classes to that point in time had been assigned to yield curves that were on average greater than 75% and growth had plateaued at that level. Mr Brown had also expressed the opinion that the expected yield would not be achieved on the basis of the then applicable silvicultural practices. 1286 Mr Wilson submitted that these facts did not establish that the heartwood yield assumption was unrealistic. It was submitted that Mr Wilson knew that: (a) the Tree Model had been prepared by Mr Kimber who was a pioneer in the establishment and development of sandalwood plantations in Australia; (b) Mr Brown, as the Head of Research, had undertaken extensive research into the development of the Heartwood Model and was continuing to investigate matters and conduct research; (c) Mr Brown was assisted by a group of experts in Quintis' forestry research team; (d) Mr Brown had repeatedly recommended that that there was no reason to change the Tree Model or the Heartwood Model, and to the extent that he had sent emails raising issues with them, these had been qualified on the basis of further work needing to be done; (e) Mr Stevens and Mr Wagener had accounting expertise and had not recommended any changes to the various models and their inputs; (f) persons external to Quintis, such as Mr Underwood, had inspected its plantations and considered that, to the extent that Quintis was experiencing difficulties in one or more compartments, these were soluble; (g) it was being reported to him that there were signs of actual improvement in the performance of the plantations, and this was consistent with the improvements in silvicultural practices taking hold and further such improvements continuing into the future; (h) there was considerable optimism as to future improvements due to improvements in silvicultural practices and these were bearing fruit in particular compartments; and (i) Bentleys and later EY had audited Quintis' Financial Reports, including the underlying models and assumptions upon which they were based, and had expressed unqualified audit opinions that the Financial Reports represented a true and fair view of Quintis' financial position, including as to the value of its biological assets. 1287 I do not accept that any of these matters gainsays the conclusion that Mr Wilson ought reasonably to have known that the heartwood yield assumption being used for trees aged under five was unrealistic. 1288 First, I do not accept that by 2014 to 2016, Mr Wilson, or a reasonable person in his position with knowledge of all of the matters I have set out above, could reasonably rely upon the fact that Mr Kimber had devised the Tree Model. The fact is that the Tree Model had been devised sometime in 2004. It was known that Quintis' plantations were not growing in accordance with the Tree Model. That this was the case was known from the process by which trees aged five and over were assigned to individual yield curves as a proportion of the Tree Model. That process of assignment necessarily proceeded on the premise that the trees aged over five would not be growing at the rates that were the same as the incremental rates of growth assumed in the Tree Model. Further, as at the conclusion of FY15, and as at the conclusion of FY16, it was known that none of the plantations, on average, had graduated to a 100% yield curve up to those respective points in time (even though some individual compartments had been so assigned). In the face of this evidence as to the actual performance of the plantations, I do not consider that a reasonable person in Mr Wilson's position, with knowledge of these facts, could reasonably rely on Mr Kimber's theoretical Tree Model. 1289 Second, it follows from the first point that, by 2014 to 2016, Quintis and Mr Wilson knew that all plantations that had graduated and were graduating in each of those years, would not be producing (on average) 20 kg of heartwood at 15 years. 1290 Third, although Mr Brown had made earlier recommendations that neither the Tree Model nor the Heartwood Model should be changed, by July 2015 he had started to express doubts about the applicability of the Tree Model in all circumstances, and expressed stronger opinions in this regard by July 2016. 1291 Fourth, I am satisfied that Mr Wilson was aware of both specific and general problems affecting the plantations. The specific concerns applied to particularly problematic parts of the estate, such as Kingston Rest. The general concerns included site selection, overcrowding, self-thinning and mortality. These problems had been raised with Mr Wilson in email exchanges with Mr Brown and with members of the forestry team. I am satisfied that Mr Wilson was aware that these issues would need to be addressed. The extent of his knowledge about these matters are set out in my detailed assessment and findings of the Chronological Facts above. 1292 Fifth, from the totality of the Inventory Reports and the other findings I have set out above, I am satisfied that whilst Mr Wilson was optimistic as to future improvements in tree growth, he nevertheless knew, or a reasonable person in his position ought to have known, that Quintis' silvicultural practices needed more time to develop and some were not bearing fruit. I am satisfied that although Quintis had experienced improved performance in its plantations from 2009 onwards, it was nevertheless being reported to Mr Wilson that not all of the improvements in silvicultural practices were being effective or had been proven to have an impact on performance. I am satisfied that Mr Wilson knew, or a reasonable person in his position ought reasonably to have known, that: (a) host management strategies would require testing to see if they would work; (b) there were instances where site capacity was constraining growth and survival, and potential solutions would take a great deal of time to test and there was no evidence they would be successful; (c) drip irrigation appeared to have a positive influence on survival rates, but not on tree growth; (d) there had been signs of significant improvements from the use of superior seeds, but these had been observed in particular trial compartments; and (e) although better site and soil selection was leading to improvements, there were other issues emerging as to site capacity and overcrowding. 1293 Sixth, it may be accepted that Mr Wilson was made aware, and thereby knew, that certain compartments within Quintis' yearly plantations were performing better than others (including being assigned to yield curves at greater than 100%), but the fact is that, both as a whole or on average, the graduating classes were not being assigned to 100% yield curves. Although the (then) recent trend was an improvement from the earlier graduating classes, especially from 2009 onwards, I am satisfied that Mr Wilson knew that Mr Brown had by 2016 expressed the opinion that there was serious doubt as to whether the plantations would grow in accordance with the Tree Model and whether the (then) current silvicultural practices would be effective in achieving the theoretical yield. This did not of itself invalidate the Tree Model, but it established that Quintis' plantations were not growing to the Tree Model. It cast serious doubt on the ongoing assumption that trees would grow to the Tree Model when nothing in the past performance had indicated that this would be the case in respect of the plantations as a whole (leaving to one side particular exceptions amongst specific compartments). 1294 Based on all of these matters, I am satisfied that Mr Wilson ought reasonably to have known that the assumption being used to value the trees aged under five was unrealistic. The trees aged under five constituted a large proportion of the overall plantations, being approximately 60% in FY15 and FY16. As this was an unrealistic assumption, I am further satisfied that Mr Wilson ought reasonably to have known that in the determination of fair value for the purposes of the Accounting Standards, there were not reasonable grounds for Quintis to assume that a market participant would have assumed that all trees aged under five would achieve 100% yield. 1295 Thus far, these reasons have dealt with whether Mr Wilson knew, or ought reasonably to have known, that the heartwood yield assumption was unrealistic. I have not addressed whether Mr Wilson knew, or ought reasonably to have known, that the processing costs assumption was unrealistic. The Davis Applicants did not address this matter in any substance and there was nothing said about this topic during the course of the Davis Applicants' detailed oral closing submissions. In circumstances where I do not consider I have been given adequate assistance on the matter, I am not satisfied that the Davis Applicants have established that Mr Wilson knew, or ought reasonably to have known, that the processing costs assumption was unrealistic. In any event, I have concluded that this assumption was not unrealistic. Whilst that is not the test for whether Mr Wilson had reasonable grounds for representing that the Financial Reports gave a true and fair view, including on the basis of the processing costs assumption, my conclusion that that assumption was appropriate allows me to more confidently conclude that I am not satisfied that Mr Wilson knew, or ought to have known, that that assumption was unrealistic. (d) Mr Wilson's opinions were not based on reasonable grounds or the product of reasonable care and skill 1296 Although I have concluded that Mr Wilson ought reasonably to have known, that the heartwood yield assumption was unrealistic and did not reflect an assumption that Quintis should have assumed that a market participant would have adopted in the determination of the fair value of the biological assets, it does not necessarily follow that Mr Wilson did not have reasonable grounds or did not exercise reasonable care and skill in expressing the opinions that he did about the value of the biological assets in each of FY15 and FY16, or to make the FY15 and FY16 Financial Report, Assets and Profit Representations (as pleaded against him). 1297 As was the case in relation to the question as to whether Quintis had overstated the value of its biological assets, it is again necessary to observe that the fact that one assumption was unrealistic does not lead inexorably to the conclusion that the end-product of the valuation process did not reflect the fair value of the assets in question. That is because there were other inputs contained in the DCF Model that have not been challenged. And, for the reasons I have already addressed, I am unable to be satisfied whether those inputs would or would not have offset the unrealistic heartwood yield assumption applied in respect of trees aged under five. 1298 There is, however, an important point to be made in the case against Mr Wilson (and, for that matter, in the case against EY). Whereas the pleaded allegations seeking to establish that Quintis had overstated the value of its biological assets required the Davis Applicants to establish that proposition as a matter of fact, the case against Mr Wilson required the Davis Applicants to establish that Mr Wilson did not have reasonable grounds for the opinions that he expressed or that they were not the product of the exercise of reasonable care and skill by him. 1299 As earlier mentioned, there will be an absence of reasonable grounds for making a representation if, at the time of making it, the representor did not have facts sufficient to induce, in the mind of a reasonable person, a basis for making the representation: Dateline at [100]. Putting this into context, the relevant enquiry here is whether, at the time of making the Wilson Representations, Mr Wilson had reasonable grounds for expressing the relevant opinions in the sense that the facts that were known and available to him were sufficient to induce in the mind of a reasonable person (in his position) a basis for making the representation. Relevantly put another way, the question is whether, on all the facts known to Mr Wilson, or those which he ought reasonably to have known, a reasonable person in Mr Wilson's position had a basis for expressing the opinions that: (a) the FY15 and FY16 Financial Reports complied with the Accounting Standards; (b) Quintis had the total and net assets as disclosed in each of the FY15 and FY16 Financial Reports; and (c) Quintis had generated the post-tax profits as disclosed in each of the FY15 and FY16 Financial Reports. 1300 Dealing with these matters squarely, Mr Wilson made a number of submissions. First, it was submitted that the Court would need to consider the "swings and roundabouts effect" as to whether any adjustment to the heartwood yield assumption would affect other assumptions made by Quintis in its DCF Model. Second, it was submitted that Mr Wilson had reasonable grounds on the basis of his reliance upon a number of experts including Mr Kimber, Mr Brown, Mr Underwood, Mr Fremlin (who had taken over from Mr Kimber as the expert forester), Mr Stevens and Mr Wagener, and the audits conducted by Bentleys and later EY who had expressed unqualified audit opinions. Mr Wilson emphasised the fact that none of these internal or external experts had advised him that the valuation of the biological assets did not have a reasonable foundation, despite the fact that they were each skilled and experienced in their respective fields of expertise. Relatedly, Mr Wilson submitted that he was also entitled to rely upon the report that he had evidence available to him that a competitor, Santanol, used a more aggressive model. Third, it was submitted that the Court had before it evidence from Mr Morton who is a professional forestry valuer. It was submitted that Mr Morton had reviewed all of the material that was available to Mr Wilson relating to the biological asset valuation and that the Court should accept Mr Morton's opinion that the valuation model and its inputs were reasonable and, therefore, that Mr Wilson had reasonable grounds for expressing the opinions that he did. 1301 I do not accept these arguments. The fact is that I am satisfied that Mr Wilson ought reasonably to have known, based on all of the materials that were provided to him, that the heartwood yield assumption was unrealistic. This input into the DCF Model assumed that every sandalwood tree aged under five in each of FY15 and FY16 would achieve a 100% yield of 20 kg at harvest. The trees aged under five in each of FY15 and FY16 comprised approximately 60% of the whole of the biological assets. It was a significant assumption to make, which in my view lacked a factual foundation on the materials that were provided to Mr Wilson and which he ought reasonably to have known about. 1302 In this context, the difficulty with Mr Wilson's "swings and roundabouts" contention is that, insofar as he knew it, or a reasonable person in his position would have known it, the other inputs (such as the oil price and discount rates) may or may not have been sufficient to offset the overstatement arising from the use of the unrealistic heartwood yield assumption. There was material contained in the EY Closing Report which indicated that an increase in the assumed oil price by approximately $300 could offset approximately $60 million in the biological valuation, but nothing in that report or any other document revealed the extent of the impact of the use of an unrealistic heartwood yield assumption for all trees aged under five. I am satisfied that Mr Wilson, or a reasonable person in his position, could not have known, on the materials that were then available, whether the inaccuracies brought about by the use of an unrealistic heartwood assumption (whatever they might have been in numerical terms) would be offset by other, more conservative assumptions. I am not satisfied that Mr Wilson, or a reasonable person in his position, had facts available that were sufficient to induce in the mind a basis for the view that the other so-called conservative integers would offset the ambitious heartwood yield assumption. 1303 As to reliance upon the internal and external experts, whilst I accept that the opinions they expressed, or did not express, were part of the information that was available to Mr Wilson, they had to weighed in the mix of the totality of the information that was available to him. Thus, the fact that Bentleys and later EY had issued unqualified audit opinions in FY14, FY15 and FY16 has to be weighed together with other information that was available to Mr Wilson. That other information was, in my view, sufficient to incline Mr Wilson's mind, or the mind of a reasonable person in his position, to the conclusion that the heartwood yield estimate used in respect of trees aged under five was unrealistic and did not have a factual foundation. 1304 Nor do I consider that Mr Morton's opinions assist Mr Wilson. Mr Morton's opinions were being expressed post-fact, and, in any event, without the detailed knowledge of all of the facts that were available to Mr Wilson. As I have already indicated, I regarded Mr Morton as having providing helpful evidence in some respects, but ultimately his opinions were of limited weight because his working knowledge of Quintis' operations were confined to his review of the documents he had considered and his application of expertise drawing upon his experience as a valuer in respect of matters such as discount rates and methodological approach to the valuation of forestry assets. On the other hand, Mr Wilson had available to him a greater wealth of information as to the actual performance of the plantations. 1305 In reaching my conclusions, I have borne in mind that the onus did not fall upon Mr Wilson to establish reasonable grounds for the opinions that he expressed, but that the Davis Applicants carried the onus of establishing the absence of reasonable grounds for those opinions. I am satisfied that the Davis Applicants have established this to be the case. As I have set out, Mr Wilson knew that his opinions involved a consideration as to whether the accounts represented the fair value of the biological assets, which in turn required him to consider whether they were the value that would have been paid for the assets in an orderly market transaction, as valued by a market participant, knowledgeable in the market and the asset. Relevantly, Mr Wilson also knew that the biological assets were being valued on the basis of an income-based technique involving an estimation of future cash flows and adjusted by the application of risk adjusted discount rates. In expressing the opinions that he did, I am satisfied that Mr Wilson ought reasonably to have known that a material assumption adopted in this model was unrealistic. I am further satisfied that Mr Wilson ought reasonably to have known that this was not an assumption that Quintis should have assumed that a market participant would have adopted in the determination of the price at which to purchase the assets in an orderly transaction. I am satisfied that as a result of these matters, and notwithstanding the fact that Bentleys and EY had expressed unqualified audit opinions in relation to the FY15 and FY16 accounts, Mr Wilson did not have reasonable grounds for the opinions that he expressed. And because he did not have reasonable grounds for the expression of those opinions, the implied representations in each financial year that he did have such grounds were relevantly misleading. 1306 Given the conclusion that I have reached, it is unnecessary for me to determine whether the opinions that Mr Wilson expressed were the product of a lack of reasonable care or skill by him. 13.3.4 Conclusion: did Mr Wilson contravene s 1041H? 1307 As a result of the above findings, I am satisfied that, in making each of the Wilson Representations in each of FY15 and FY16, Mr Wilson engaged in conduct that was misleading and deceptive in contravention of s 1041H of the Corporations Act. 1308 However, as the Davis Applicants have failed to establish their counterfactual case, I am not satisfied that Mr Wilson's contravention led to any causally connected loss that is recoverable by order of the Court under s 1041I of the Corporations Act as claimed against him. I return to this in detail below.
13.4 The case against Mr Wilson under s 12DA of the ASIC Act
1309 Section 12DA(1) of the ASIC Act provides: Misleading or deceptive conduct (1) A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive. 1310 The Davis Applicants pleaded this case. It was denied. They said nothing of any substance about it in their written submissions, other than to assert conclusions. In their written opening submissions, the Davis Applicants asserted that by making the alleged misleading statement, "Mr Wilson … contravened s 1041H of the Corporations Act or s 12DA of the Australian Securities and Investments Commissions Act 2001 (Cth) (ASIC Act) or s 1041E of the Corporations Act" (emphasis added). In their written closing submissions, the Davis Applicants addressed "the allegations of contravention of s 1041E and s 1041H of the Corporations Act and s 12DA of the ASIC Act by Mr Wilson" collectively and fleetingly before ultimately asserting that "Mr Wilson contravened s 1041H of the Corporations Act or s 12DA of the ASIC Act or s 1041E of the Corporations Act" (emphasis added). 1311 The Davis Applicants made these submissions without addressing whether, as a matter of principle, a director's conduct could take place in trade and commerce for the purposes of s 12DA and whether, in the circumstances of this case, Mr Wilson's impugned conduct was in trade and commerce. 1312 In light of the Davis Applicants' failure to address these matters, and after I had reserved and was well advanced in the preparation of my reasons, on 29 November 2024 I directed the parties to provide supplementary submissions on the topic. I specifically asked the Davis Applicants to confirm whether they continued to press their s 12DA case against Mr Wilson. The parties accepted my invitation and on 20 December 2024 the Davis Applicants filed supplementary submissions, wherein they did not indicate that they abandoned the case against Mr Wilson under s 12DA. And, despite my direct request that the Davis Applicants address "whether the conduct of EY and Mr Wilson was 'in trade or commerce' for the purposes of s 12DA", the Davis Applicants' supplementary submissions, like their earlier submissions did not address the case against Mr Wilson under s 12DA. 1313 The position is unsatisfactory. In Wyzenbeek v Australiasian Marine Imports Pty Ltd [2017] FCA 1460, Derrington J embraced and expanded upon the observations made by Allsop J (as his Honour then was) in White v Overland [2001] FCA 1333 at [4] as to the leaving of "footprints" in correspondence without squarely raising matters to the attention of an opponent. Derrington J stated at [61]-[62]: These comments have been cited with approval and approbation on numerous occasions, see for instance Nowlan v Marson Transport Pty Ltd (2001) 53 NSWLR 116 at [28]; Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243 at [160]. They were referenced by Johnson J in McGuirk v The University of New South Wales [2009] NSWSC 1424 at [26] where his Honour emphasised that the duty of the parties to assist the Court in the overriding objective to facilitate the just, quick and cheap resolution of the real issues in dispute, gives rise to need for "clarity, precision and openness in the conduct of litigation"… More recently, in the New South Wales Court of Appeal in Benn v State of New South Wales [2016] NSWCA 314 at [62] Gleeson JA (with whom Meagher JA and Johnson J agreed) identified that it was part of the duty of all parties to litigation to ensure that other parties are cognisant of the issues which are sought to be raised in the litigation. His Honour noted that this was not a "new phenomenon" but reflected what has been referred to for some years as the "cards on the table" approach to litigation (see Boyes v Collins (2000) 23 WAR 123; White v Overland [2001] FCA 1333 at [4] and Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243 at [160]-[162]). 1314 Whilst these observations were made in an inter partes context, they apply presumptively in relation to the articulation and exposition of a pleaded case for the benefit of the Court. The Court should not be left in a position where it has to wade through complex pleadings and detailed written submissions to work out the case that has been advanced by piecing together footprints in the sand to locate the trail of a party's case. And, it most certainly should not be left to do so after the close of the respective parties' cases and in circumstances where further assistance has been called for. This is a matter of obligation and not option. 1315 In the present matter, I have been left in the position where I cannot identify the precise manner in which the Davis Applicants advanced their case against Mr Wilson under s 12DA. Mr Wilson filed his supplementary submissions in reply on 31 January 2025, denying the Davis Applicants' s 12DA allegations on the grounds that his conduct was not in "trade or commerce". Mr Wilson submitted as follows: Not every act or omission in which a person might engage in the course of, or for the purpose of, an overall trading or commercial business is conduct in trade or commerce: Williams v Pisano (2015) 90 NSWLR 342 at [36]-[37]. There is a difference between conduct "in trade or commerce" and conduct "in relation to trade or commerce": Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594 at 614. As Dowsett J put it in Hearn v O'Rourke (2003) 129 FCR 64 at [29]: … the focus must be upon the conduct in question and not upon the range of activities in which a relevant corporation may be engaged. In other words, one does not simply identify the conduct in question, note that the relevant corporation is engaged in commercial activity of some kind, then look for a connection between the two. Because corporations are usually formed to engage in commercial activities, it will rarely be difficult to find such a connection. The correct approach is to determine whether or not the relevant conduct can, according to ordinary usage, be described as having occurred in the course of dealings "…which, of their nature, bear a trading or commercial character". The applicants' supplementary submissions filed 20 December 2024 explain at [14]-[17] why EY's conduct was in trade or commerce, but they advance no submission as to why Mr Wilson's conduct was in trade or commerce. Mr Wilson was not a professional advisor (cf. [15], [17]) nor was he engaging in an activity that had, in substance, a trading or commercial character (cf. [16]). He was performing a role required of him as a member of an organ of the corporation, in connection with the statutory function of reporting to shareholders on the financial position of the corporation. The Board was not engaged in trade or commerce with the shareholders. Nor was the Board engaged in Quintis' trade or commerce, which was the business of growing and harvesting sandalwood and selling sandalwood products. At most, the expression of the Board's opinion related to, or was incidental to, Quintis' business: it was part of a report on the financial position of the corporation, which position resulted from the corporation's conduct of its business. That the Board's opinion related to, or was incidental to, the trading of the corporation is insufficient. The expression of the opinion was not conduct which, of its nature, bore a trading or commercial character. (Emphasis added). 1316 In my view, nothing the Davis Applicants have put before me provides any answer to the compelling submissions advanced by Mr Wilson. Perhaps they could have done. But it is not the role of the Court to make a party's case for it. 1317 It is the Davis Applicants who pleaded a case under s 12DA and who bore the onus of establishing their case. Given the circumstances that I have detailed above, the Davis Applicants have failed to establish their case under s 12DA to my satisfaction. Accordingly, it fails.
13.5 The case against Mr Wilson under s 1041E of the Corporations Act
1318 Having pleaded a case under s 1041H of the Corporations Act, and also under s 12DA of the ASIC Act, it is not clear to me what was sought to be achieved by an additional claim under s 1041E of the Corporations Act. If the Davis Applicants' claim did not succeed under s 1041H of the Corporations Act, it would also fail under s 1041E. If the Davis Applicants' claim succeeded under s 1041H, the claim under s 1041E would give no greater remedy to the Davis Applicants or the Davis Group Members in the way these proceedings were cast. Nevertheless, a claim under s 1041E was pleaded. A little more was said about it than the claim under s 12DA of the ASIC Act, but not a great deal more. 1319 Section 1041E provides: False or misleading statements (1) A person must not (whether in this jurisdiction or elsewhere) make a statement, or disseminate information, if: (a) the statement or information is false in a material particular or is materially misleading; and (b) the statement or information is likely: (i) to induce persons in this jurisdiction to apply for financial products; or (ii) to induce persons in this jurisdiction to dispose of or acquire financial products; or (iii) to have the effect of increasing, reducing, maintaining or stabilising the price for trading in financial products on a financial market operated in this jurisdiction; and (c) when the person makes the statement, or disseminates the information: (i) the person does not care whether the statement or information is true or false; or (ii) the person knows, or ought reasonably to have known, that the statement or information is false in a material particular or is materially misleading. Note 1: Failure to comply with this subsection is an offence (see subsection 1311(1)). For defences to a prosecution based on this subsection, see Division 4. Note 2: Failure to comply with this subsection may also lead to civil liability under section 1041I. For relief from liability under that section, see Division 4. (2) For the purposes of the application of the Criminal Code in relation to an offence based on subsection (1), paragraph (1)(a) is a physical element, the fault element for which is as specified in paragraph (1)(c). (3) For the purposes of an offence based on subsection (1), strict liability applies to subparagraphs (1)(b)(i), (ii) and (iii). Note: For strict liability, see section 6.1 of the Criminal Code. 1320 The most important (but not the only) distinction between ss 1041H and 1041E is the fault element in s 1041E(1)(c): Kumova at [121] (Lee J). In this regard, it has been observed that s 1041E involves "a higher level of moral culpability than the conduct referred to in s 1041H" and unlike s 1041H, "contravention of any of ss 1041E-1041G constitut[e] an offence, an element of which is knowledge or recklessness": Selig v Wealthsure Pty Ltd [2015] HCA 18; (2015) 255 CLR 661 at [36]. 1321 There are other distinctions between ss 1041H and 1041E. Whereas s 1041H proscribes conduct that is misleading or deceptive or is likely to mislead or deceive, s 1041E(1) prohibits conduct that is "false in a material particular" or "is materially misleading". Further, unlike s 1041H, s 1041E(1) prohibits such a false or materially misleading statement that is likely to induce persons to do things specified in s 1041E(1)(b)(i) and (ii) or that have the effect specified in s 1041E(1)(b)(iii). These are significant additional elements. They are important elements in a provision of the Corporations Act that creates an offence. 1322 Despite this, the pleaded case in relation to Mr Wilson's liability under s 1041E did little more than merely assert conclusions that, in substance, repeated the statutory text. There was no helpful elucidation as to the essential material facts upon which such serious liability was to be sheeted home to Mr Wilson. To illustrate this point, the pleading against Mr Wilson asserted the following (at FFASOC [246]): 246. Each of: (a) Mr Wilson's FY15 Financial Report Representation pleaded in paragraph 114 above; (b) Mr Wilson's FY15 Assets Representation pleaded in paragraph 116 above; and (c) Mr Wilson's FY15 Profit Representation pleaded in paragraph 118 above, was likely to either: (i) induce persons in this jurisdiction to acquire financial products, being shares in Quintis; or (ii) have the effect of increasing, reducing, maintaining or stabilising the price for trading in Quintis' shares on the ASX. 1323 As will be apparent from the text of the FFASOC at [246], these were no more than bare assertions that each of the Wilson Representations was likely to have the effects pleaded in [246(c)]. These assertions merely replicated, with some adaptation, the statutory text contained in s 1041E(1)(b)(ii) and (iii). These pleadings were conclusory. 1324 Turning to the specific Representations, and using the FY15 Asset Representation as an example, the Davis Applicants pleaded their case as follows at FFASOC [250]-[252]: 250. Mr Wilson's FY15 Assets Representation was false in a material particular or materially misleading for the reasons pleaded in paragraph 241 above. 251. Mr Wilson either: (a) knew; or (b) ought reasonably to have known, that Mr Wilson's FY15 Assets Representation was materially misleading for each the reasons pleaded above in paragraphs: (i) 225 to 227 (concerning the FY15 BA Carrying Value). (ii) [Not used] Particulars The particulars to paragraphs 226 and 234 to 235 are repeated. 252. In the premises of paragraphs 246, 250 and 251 above, by making Mr Wilson's FY15 Assets Representation, Mr Wilson contravened s 1041E of the Corporations Act. 1325 In essence, a similar formulation was adopted in sequence in relation to the other Wilson Representations, which it is unnecessary to repeat. 1326 The obvious point to draw from an examination of these pleadings is that they merely cross-referenced by way of particulars the material facts pleaded in support of the case against Mr Wilson under s 1041H. There was no attention given in the pleadings to whether or how those material facts supported the conclusion that the Mr Wilson had made a statement that was "false in a material particular" or was "materially misleading", or that such a statement was likely to have one or more of the effects specified in s 1041E(1)(b). 1327 The Davis Applicants' submissions did little to augment these conclusory assertions. 1328 The first element of s 1041E(1) required it to be established that Mr Wilson's Representations were "false in a material particular" or "materially misleading". The Davis Applicants' submissions assumed that proof that Mr Wilson had engaged in misleading and deceptive conduct under s 1041H(1) would equate to a finding that the relevant statements made by him were therefore "false in a material particular" or "materially misleading". The Davis Applicants' submissions in this regard did little to differentiate between their arguments in support of ss 1041H and s 1041E: Davis Applicants' Closing Submissions dated 16 May 2024 at [476]-[482]. Both as a matter of principle and logic, this invites an unsound approach which must be rejected. As the Full Court observed in ABN AMRO at [1594]: The facts required to be established to make out a breach of s 1041H may form part of those necessary to prove a claim under s 1041E. However, to make good a claim in respect of conduct done in contravention of s 1041H it would not be necessary to plead or to prove that the statement or information was "false in a material particular" or "materially misleading" or that when that person made the statement or disseminated the information they did not care whether the statement or information was true or false or that they knew or ought reasonably to have known that the statement or information was false in a material particular or is materially misleading: s 1041E. In other words, to make out a contravention of s 1041H will ordinarily require fewer facts to be established than in a case founded on contravention of s 1041E and such was the case here. 1329 It may be that in some cases, establishing that conduct is misleading or deceptive under s 1041H(1) will, in substance, establish that the conduct also involved the "mak[ing of] a statement" or the "dissemination [of] information" that is "false in a material particular" or "materially misleading", but equally, the latter may not always follow from the former. No attempt was made here to address why the Wilson Representations were "false in a material particular" or were "materially misleading" for the purpose of s 1041E(1). As best as I can discern, the Davis Applicants assumed that the Representations were false or materially misleading merely because Mr Wilson did not have reasonable grounds for expressing the opinions that he did. That would certainly make the statements misleading and deceptive, but why were they "false" in a material particular or "materially" misleading? Lee J reasoned in Kumova at [124] that: …a statement is "materially misleading" if its likely effect is to induce investors to purchase a company's securities: Australian Securities Commission v McLeod [2000] WASCA 101; (2000) 22 WAR 255 (at 265 [42] per Owen J). The Court is to ask whether inducement of the reader to act in an erroneous belief is a natural and probable result of a statement: McLeod (at 265 [42] per Owen J). This question is to be determined objectively. 1330 His Honour there was drawing the contextual connection as between the materially misleading statement (referred to in s 1041E(1)(a)) and its effect as specified in s 1041E(1)(b). In Australian Investments and Securities Commission v McLeod [2000] WASCA 101; (2000) 22 WAR 255, Owen J (with whom Ipp and Anderson JJ agreed) reasoned at [42] that the impugned statement at issue in that case: … was material because its natural and probable result would be to induce the reader to act in the belief that the Company had a basis for making a prediction of the profitability of the venture and that profits would arise from the mining venture. It seems to me, therefore, that the impugned statement was "materially misleading". 1331 Thus, Owen J's reasoning (which disconnected s 1041E(1)(a) from s 1041E(1)(b)) was that a statement would be "materially misleading" if its natural and probable result was to induce the reader to act in the belief of that which was being conveyed. 1332 Mr Wilson did not address these matters in any substance his written or oral submissions. Had this been the only mater of sparse assistance that was provided as to the operation of s 1041E, I would have sought to resolve whether Mr Wilson's representations were "false in a material particular" or "materially misleading", but in light of what I say below the case under s 1041E should be dismissed for other reasons and it is not necessary for me to say anything further about s 1041E(1)(a). 1333 The second element of s 1041E requires the Applicants to prove that the relevant statement was likely to induce persons to apply for financial products, induce a person to dispose of or acquire financial products, or otherwise affect the price for trading in a financial product within the meaning of s 1041E(1)(b). It has been held that the words "likely to induce" mean a "real and not remote chance": ASIC v Cassimatis (No 8) (2016) 336 ALR 209; [2016] FCA 1023 at [633]-[635] (Edelman J); Kumova at [126] (Lee J). This can include consideration as to whether the person making the statement intended the statement to induce investors in this way: Cassimatis at [635] (Edelman J). 1334 The Davis Applicants paid little attention to whether Mr Wilson's representations were likely to induce persons to acquire shares in Quintis or to have the effect of "increasing, reducing, maintaining or stabilising the price for trading" in Quintis' shares. As I have earlier noted, the Davis Applicants' pleading at FFASOC [246] simply recited the statutory text. 1335 In their closing submissions, the Davis Applicants submitted: As explained below in the section dealing with causation and loss, Mr Wilson's misrepresentations had the effect of significantly inflating its net assets and profit, and the Court should find that this likely induced people to acquire shares in Quintis (as it did the Applicants) and also significantly inflated the share price and value. If the true position was revealed, that the financial statements did not comply with the Australian Accounting Standards and did not give a true and fair view of Quintis' financial position, that would have had a significant negative effect on Quintis' share price. (Emphasis added). 1336 In the hundreds and hundreds of pages committed to these proceedings by way of pleadings, written opening and written closing submissions, this was the entirety of the space and time that was occupied by the Davis Applicants on an essential element of an offence-creating provision of the Corporations Act. The matter was not addressed in oral closing submissions. I repeat the lament which I expressed at the commencement of these reasons. 1337 It is not entirely clear to me that the word likely in s 1041E(1)(b) requires proof of a causal relationship, as opposed to something less than such a relationship: e.g. see the discussion in Kumova at [126]; Cassimatis at [633]-[635]. Despite this, as noted above, the Davis Applicants submissions tied their case under s 1041E(1)(b) to their indirect market-based causation case. As those submissions made clear, the Davis Applicants contended that Mr Wilson's representations had the effect of "significantly inflating" Quintis' net assets and this induced people to acquire its shares and thereby "inflated the share price", and disclosure of the true position would have had a significant negative effect on Quintis' share price. 1338 The matter was not addressed in oral submissions. There was no submission made as to whether the case under s 1041E could succeed for other reasons even if the Court rejected the indirect market-based causation case. As nothing else was put in this regard, I have proceeded on the basis that the substance of the Davis Applicants' case under s 1041E would stand or fall based on the Court's acceptance of their indirect market-based causation case. For the reasons set out below when dealing with the Davis Applicants' "indirect market-based causation" case, I am not satisfied that this case has been established. Further, I am also not certain that it is correct to say that Mr Wilson's opinions "had the effect of significantly inflating [Quintis'] net assets and profit". There are a number of suppressed premises in that assertion. But it is not necessary for me to consider them in light of the conclusion I have reached. 1339 It follows that the Davis Applicants' case under s 1041E as against Mr Wilson fails for this reason. 1340 Therefore, it also follows that it is strictly unnecessary for me to decide whether the Davis Applicants established the third element specified s 1041E(1)(c), which establishes the required fault element. The Davis Applicants addressed this limb in much greater detail, as did Mr Wilson and EY. There was a deal of contest between the parties as to the appropriate approach to s 1041E(1)(c)(ii). It is not necessary for me to resolve that contest in the present case. 1341 For the above reasons, I am not satisfied that the Davis Applicants established their case under s 1041E on the basis that they failed to satisfy me of the element under s 1041E(1)(b). Further, even if I was satisfied that Mr Wilson had contravened s 1041E, I would not have been satisfied that Mr Wilson's contravention led to any causally-connected loss that was recoverable against him by order of the Court under s 1041I of the Corporations Act. Again, that is because the Davis Applicants failed to establish their counterfactual case.
1342 EY is alleged to have contravened the same three statutory provisions as Mr Wilson (ss 1041H and 1041E of the Corporations Act, and s 12DA of the ASIC Act), and also to have breached a common law duty of care owed to existing and potential shareholders in Quintis. 1343 I will address each cause of action in turn.
14.2 The case against EY under s 1041H of the Corporations Act
14.2.1 Overview of the pleaded case 1344 The case against EY under s 1041H of the Corporations Act engaged largely the same principles as the case against Mr Wilson, which it is unnecessary to repeat. However, other distinct issues of law and fact were raised, which it is necessary to decide. 1345 The case against EY focussed upon the FY15 and FY16 Audit Opinions (as contained in the FY15 and FY16 Financial Reports). As in the case against Mr Wilson, the Davis Applicants case was that by expressing these opinions, EY impliedly made the EY FY15 and FY16 Financial Report Representations, being that: (a) it was of the opinion that the FY15 and FY16 Financial Reports were in accordance with the Corporations Act, including that they complied with the Accounting Standards and gave a true and fair view of the financial position and performance of Quintis: FFASOC [119] and [147]; and (b) these opinions were held on a reasonable basis and the product of the application of reasonable care and skill by EY and formed after EY had conducted an audit in accordance with the Auditing Standards: FFASOC [120] and [148]. 1346 The conduct relied upon by the Davis Applicants was not limited to the expression of the FY15 and FY16 Audit Opinions simpliciter. Rather, the conduct was pleaded to encompass the expression of those Opinions in circumstances where EY knew that they would be contained in the FY15 and FY16 Financial Reports which would be lodged with the ASX and published more broadly: (as set out at FFASOC [94]-[95] and [123]-[124]). It is this conduct in its totality that was pleaded at FFASOC [291]-[292] as being misleading and deceptive in relation to a financial product within the meaning of s 1041H of the Corporations Act. 1347 It was pleaded that EY's conduct was misleading and deceptive because it did not have a reasonable basis for making the relevant representations and because EY did not exercise reasonable care and skill in doing so. In seeking to establish this case, the Davis Applicants first sought to establish what a reasonable auditor in EY's position would have done when auditing the FY15 and FY16 Financial Reports, and second, sought to establish what EY actually did which it claimed fell short of what a reasonable auditor would have done. In this regard, it was pleaded that a reasonable auditor would have, amongst other things: (a) complied with the Auditing Standards: FFASOC [293] and [332]; (b) recognised that the DCF Model was sensitive to the significant inputs pleaded at FFASOC [100] and [128]: FFASOC [296B] and [335B]; (c) identified a risk that Quintis materially overstated the value of its biological assets by reason of the assumptions adopted in the DCF Model not being in accordance with the requirements of AASB 141 and AASB 13, and would have assessed that risk as being significant: FFASOC [297]-[298] and [336]-[337]; and (d) given that risk was significant, required sufficient appropriate audit evidence that the value of the biological assets had not been misstated, before concluding that there had been no misstatement: FFASOC [299] and [338]. 1348 For the purpose of the last contention, it was pleaded that sufficient appropriate audit evidence would have included (FFASOC [300] and [339]): (a) evidence that the assumptions pleaded at FFASOC [100] and [128] underlying the value of the biological assets were appropriate; (b) evidence concerning the competence and integrity of Mr Brown, given that Mr Brown's judgements impacted significant inputs in the valuation model; and (c) (if a reasonable auditor could not be satisfied about the competence and integrity of Mr Brown) requesting Quintis to obtain an independent expert as to the valuation of its sandalwood assets. 1349 It was further pleaded that, in order to obtain and understand such appropriate audit evidence, a reasonable auditor auditing the FY15 and FY16 Financial Reports would have (FFASOC [301] and [340]): (a) ensured its staff had the relevant expertise in auditing the fair value of sandalwood plantations; (b) ensured its staff included technical accounting experts with experience in the application of AASB 141 and AASB 13 to biological assets such as those controlled by Quintis; (c) obtained appropriate technical expertise from a third party; (d) analysed Quintis' predicted heartwood yields for each of its sandalwood plantations and determined whether the predicted heartwood yields for newer plantations were significantly better than for older plantations; (e) analysed Mr Brown's competence and integrity as a management's expert to determine whether his assumptions represented sufficient appropriate audit evidence concerning the predictions of heartwood yield and the valuation of the biological assets; (f) ascertained the basis upon which the estimated theoretical heartwood yield had been determined and whether it was realistic or achievable; (g) considered the forecasted heartwood yield against appropriate supporting evidence corroborating Quintis' management assertions; (h) compared forecasted theoretical heartwood yield at harvest to Quintis' actual harvest results to determine whether the forecasted heartwood yield was realistic and achievable; (i) compared forecasted heartwood yield at harvest to scientific or academic studies in relation to heartwood yield of sandalwood trees; and (j) considered the controls Quintis had in place in respect of validating its assumptions as to forecasted heartwood yield. 1350 In those premises, it was pleaded that a reasonable auditor auditing the FY15 and FY16 Financial Reports would have (FFASOC [301A] and [340A]): (a) concluded that representations by Mr Brown concerning the basis for the predicted heartwood yield were not sufficient appropriate audit evidence; (b) recognised that Quintis' predicted heartwood yield for its newer sandalwood plantations' predicted yields were significantly better than in older vintages and that the plantations utilising these predicted heartwood yields were material to the FY15 and FY16 BA Carrying Values; (c) concluded that it was unable to obtain sufficient appropriate audit evidence that the assumptions pleaded at FFASOC [100] and [128] underlying the value of biological assets were appropriate; and (d) concluded that the only way to obtain sufficient appropriate audit evidence concerning the reasonableness of Quintis' predicted heartwood yield would be to request Quintis to engage a suitably qualified independent expert in sandalwood to report on the validity of the heartwood yield predictions. 1351 EY submitted that the Davis Applicants' case was that a reasonable auditor would have come to all of these conclusions including, critically, that it would have requested that Quintis engage a suitably qualified independent expert to report on the validity of the heartwood yield predictions. I do not agree that all of these matters needed to be established in order for the Davis Applicants to prove the essential allegation that the EY FY15 and FY16 Financial Report Representations were not held on a reasonable basis and the product of the application of reasonable care and skill by EY. In saying this, I accept that the pleadings were not a model of clarity and were convoluted. However, in my view, any one or more of the matters specified in (a) to (d) could establish that the relevant Representations were misleading in that there was no reasonable basis for them and that they were not the product of the exercise of care and skill. For example, if I were to be satisfied that a reasonable auditor in EY's position would have concluded that the representations made by Mr Brown concerning the basis for the predicted heartwood yield were not sufficient, it would lead to the conclusion that EY did not have a reasonable basis for the representations that it did make. I do, however, accept that a critical element of the Davis Applicants case was that a reasonable auditor in EY's position would have requested Quintis to engage a suitably qualified independent expert. This aspect of the pleaded case was an essential platform from which the Davis Applicants pleaded a specific counterfactual as against EY. This counterfactual case was further convoluted. It was contended that, if a reasonable auditor had requested Quintis to engage a suitably qualified independent expert, and Quintis did so, a reasonable auditor would have concluded, based on the advice from that independent expert, that (FFASOC [302] and [341]): (a) the assumptions underlying the FY15 and FY16 BA Carrying Values were not reasonable given that, amongst other things, the heartwood yield assumption was materially higher than that which a market participant would have assumed and the processing costs were understated; and (b) the FY15 and FY16 BA Carrying Values did not give a fair value of Quintis' biological assets when compared to an independent valuation of those assets. 1352 Alternatively, it was pleaded that a reasonable auditor auditing the FY15 and FY16 Financial Reports would have concluded that there was insufficient audit evidence to support an unqualified audit opinion: FFASOC [304] and [343]. It was unclear to me whether this alternative case was an alternative to: (a) a reasonable auditor requesting Quintis to obtain the opinion of an independent expert; or (b) the circumstance where, having requested Quintis to obtain the opinion of an independent expert, Quintis was unwilling or unable to do so. In light of this uncertainty, I directed the Davis Applicants and EY to provide supplementary submissions. 1353 In their supplementary submissions, the Davis Applicants accepted that the alternative case pleaded at FFASOC [304] and [343] was an alternative intended to address what would have occurred if an independent expert was not engaged despite EY having requested Quintis to do so. The Davis Applicants submitted that it had two alternative pathways which arrived at the same destination. 1354 The Davis Applicants submitted that, on the first pathway, if EY had requested Quintis to obtain an independent expert, and Quintis complied with that request, then the independent expert would have expressed an opinion that the correct heartwood yield assumption was approximately 6 to 8 kg and this would have led a reasonable auditor to conclude that the heartwood yield assumption used by Quintis in the DCF Model was not reasonable and this would have led to the conclusion that the FY15 and FY16 Financial Reports did not give a true and fair view of Quintis' biological assets. It was submitted that in this context Quintis would have revised the FY15 and FY16 Financial Reports such that they expressed a value of biological assets, net assets, revaluation gains and pre-tax profit based on the corrected heartwood yield assumption. The "alternative pathway" would have led to the same result but by an even more convoluted means whereby, if Quintis refused or was unable to engage an independent expert, the reasonable auditor would have indicated that it would need to express a qualified audit opinion (because it would not have received sufficient appropriate audit evidence as to the heartwood yield assumption used in the DCF Model) and Quintis would have then revised its accounts to reflect a heartwood yield of 6 to 8 kg as it would not have countenanced a qualified audit opinion being published to the market. 1355 Having reviewed the parties' supplementary submissions, it does appear to me that the Davis Applicants and EY both approached the pleaded case on the basis that it was an essential element of that pleaded case that a reasonable auditor in EY's position would have requested Quintis to engage an expert in sandalwood. And, further, the parties approached the case on the basis that the alternative case pleaded at FFASOC [304] and [342] would arise (in the counterfactual universe) where, having requested Quintis to seek the opinions of an independent expert, Quintis was unwilling or unable to do so. I have approached the case pleaded against EY on this basis. In doing so, I will return later in these reasons to whether the Davis Applicants have established these counterfactual "pathways". 14.2.2 Preliminary issues 1356 The pleaded case against EY raised a number of preliminary matters about which the parties were in dispute. First, EY disputed that it engaged in any conduct in relation to a financial product. Second, EY submitted that it did not make any representations that were directed to prospective shareholders. It submitted that its opinions were, as a matter of fact and law, only issued to Quintis and existing shareholders. Third, EY disputed that the opinions it expressed carried the implied representations alleged against it. (a) Was the pleaded conduct in relation to a financial product? 1357 The Davis Applicants initially pleaded that EY had engaged in conduct that was in relation to a financial product or a financial service for the purpose of s 1041H of the Corporations Act. However, it ultimately pressed its case only on the basis that EY's conduct was in relation to a financial product for the purpose of s 1041H (but advanced a different position for the purpose of s 12DA of the ASIC Act). 1358 EY submitted that the conduct pleaded against it did not relate to a financial product. In support of this contention, it submitted that: (a) EY prepared and issued its audit report on Quintis' statutory accounts in furtherance of its statutory function as an auditor; (b) the reports did not make any reference to Quintis' shares and were not being published to increase Quintis' share price or encourage persons to invest in Quintis; (c) the statutory obligation in s 308 of the Corporations Act pursuant to which the audit reports were prepared does not depend on the company having shares tradeable in an open market, or even having shares at all; and (d) the representations made in the audit report were akin to communications between the company and its shareholders as to the compliance or non-compliance of the company's accounts with accounting principles, a matter that relates to the internal management of the company: Vanguard Financial Planners Pty Ltd v Ale (2018) 354 ALR 711 at [208]-[209] (dealing with the related question of whether such representations are in "trade or commerce"). 1359 I do not accept EY's submissions. 1360 As explained in Australian Securities and Investments Commission v Narain [2008] FCAFC 120; 169 FCR 211, the words "in relation to" a financial product are ones of wide import. The facts in Narain concerned an ASX announcement that disclosed and made assertions about "landmark" results of scientific tests relating to a company's product. The issue raised was whether the company's conduct in issuing the ASX Announcement was conduct "in relation to" a financial product, being the company's shares. Jacobson and Gordon JJ reasoned at [68]-[71] that: [68] There is a wealth of authority for the proposition that the expression "in relation to" is extremely wide and that its meaning will be determined by the context. The leading authorities were collected and stated by Beaumont and Lehane JJ in Joye v Beach Petroleum NL (1996) 67 FCR 275 at 285; see also Australian Competition and Consumer Commission v Maritime Union of Australia (2001) 114 FCR 472 at [68] per Hill J. [69] As those cases point out, the words "in relation to" signify the need for there to be some relationship or correlation between the two subject matters that are specified. [70] But as Hill J observed in ACCC v Maritime Union of Australia at [68] there will always be a question of degree involved where the issue is the relationship between those matters. [71] What must be borne in mind is that, as Beaumont and Lehane JJ said in Joye, the context will determine whether the relationship must be direct or substantial or whether an indirect or less than substantial connection will be sufficient: Joye at 285 (citing a number of decisions of the High Court). 1361 Their Honours then had regard to the legislative history to the introduction of s 1041H and further reasoned at [75]-[76] that: [75] Misleading and deceptive conduct takes many forms. The degree of the relationship between the financial product and the proscribed conduct is informed by the examples set out in s 1041H(2). They range from issuing a financial product (s 1041(2)(b)(i)) to carrying on negotiations or making arrangements or doing any other act preparatory to "or in any way related to" an activity referred to in the nine earlier examples listed in that subsection: see s 1041H(2)(b)(x). [76] In our view this indicates that the relationship which is contemplated by s 1041H(1) is at the lower end of the spectrum so that an indirect or less than substantial connection is sufficient. (Emphasis added). 1362 It was held that the ASX announcement in that case did relate to a financial product even though it did not, on its face, or expressly, refer to the company's shares or its value. In this regard, Jacobson and Gordon JJ reasoned at [80]-[84] that: [80] The breadth of the relationship between the conduct proscribed by s 1041H(1) and the financial product is not confined in this way because the concept of misleading and deceptive conduct is one which embraces all of the circumstances in which the conduct takes place. This is illustrated not only by the terms of s 1041H(2) but by what the High Court has said about the amplitude of the "conduct" which must be considered in analysing the question of whether it is misleading: Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 at 605. [81] Here, the relevant conduct was not merely the text of the announcement, as was urged upon us by Mr Myers. The conduct consisted of an announcement made to the ASX about a "landmark" test result for the Company's products. It was an announcement that consisted of disclosure to the market that the test results indicated that the Company believed it could offer a global solution to a disease which affects 40 million people. [82] To say that one must parse and analyse the announcement to determine whether it expressly refers to the company's shares or the value of them, is, with respect to the primary judge, contrary to the meaning of the section and to commercial reality. [83] As Senior Counsel for ASIC, Mr Bathurst QC, pointed out, upon the construction adopted by the primary judge, a company could announce to the ASX with impunity that it had struck gold but it could not say, "Buy our shares because we have struck gold." [84] This is not to apply an ex post facto rationalisation by looking at what actually occurs in the marketplace. It is simply to reject, as a matter of statutory construction and commercial common sense, the narrow view of s 1041H(1) for which Mr Myers contended. 1363 Finkelstein J arrived at the same conclusion but for different reasons. 1364 The reasoning in Narain was applied by Jagot J in Bathurst Regional Council at [2904] and by the Full Court in ABN AMRO at [759]. 1365 EY accepted that the expression "in relation to" is "wide" but submitted that it is "not limitless". EY further submitted as follows: Narain provides no support for the proposition that any representation contained in an announcement published on the ASX is "in relation to a financial product". Nor is it support for the proposition that it is enough that the representation is likely to impact the company's share price, regardless of its author or content: cf ACWS [470]. The true ratio of Narain is that conduct by a company that [involves] making statements to the ASX calculated to increase the value of the company's shares or encourage investment in those shares may be "in relation to a financial product", even if there is no express statement to this effect on its face. This is how the decision has been applied in subsequent cases: Australian Securities and Investments Commission v Macdonald (No 11) (2009) 256 ALR 199; [2009] NSWSC 287 at [626]-[627] (Gzell J)… 1366 I reject the submission that the true ratio of Narain is that the statement made to the ASX was in relation to a financial product because it was "calculated to increase the value of the company's shares or encourage investment in those shares". In arriving at their conclusions, Jacobson and Gordon JJ did not make any dispositive finding to this effect. Nor do I accept that this is the way that Narain has been applied in subsequent cases. Gzell J did not say so in Australian Securities and Investments Commission v Macdonald (No 11) (2009) 256 ALR 199; [2009] NSWSC 287 at [626]-[627]. And, in ABN AMRO, the Full Court (which included Jacobson and Gordon JJ who had given the joint judgment in Narain) said as follows at [759]: The conclusion that in expressing an opinion as to the creditworthiness of the Rembrandt notes by communicating the rating, S&P "provide[d] a service … that [was] otherwise supplied in relation to a financial product" is consistent with authority: Australian Securities and Investments Commission v Narain (2008) 169 FCR 211; 247 ALR 659; [2008] FCAFC 120 (Narain) where an ASX release by a company about its products was "in relation to a financial product", namely shares in the company (particularly at [19]-[22] per Finkelstein J and at [66]-[87] Jacobson and Gordon JJ) and Australian Securities and Investments Commission v Australian Lending Centre Pty Ltd (No 3) (2012) 213 FCR 380; 287 ALR 693; 87 ACSR 529; [2012] FCA 43 at [176]. As the primary judge said at J[2904] , the words "in relation to" are of wide import (Narain at [68]) and, "[i]n the context of misleading and deceptive conduct claims, the relationship that is required to be established between the product and the service 'is at the lower end of the spectrum' and an 'indirect or less than substantial connection is sufficient' (Narain at [76])." The rating was not "anterior to and separate from the provision of financial product advice" (Avoca Consultants Pty Ltd v Millenium 3 Financial Services Pty Ltd (2009) 179 FCR 46 ; [2009] FCA 883 [232] ); it was in relation to the Rembrandt notes. 1367 As is apparent from this passage, the Full Court again emphasised that "the relationship which is contemplated by s 1041H(1) is at the lower end of the spectrum so that an indirect or less than substantial connection is sufficient". 1368 The statutory norm in s 1041H is not the same as the norm underlying an action for negligent misrepresentation. The statutory norm seeks to proscribe conduct of a particular type (i.e., conduct that is misleading or deceptive) in relation to a particular subject matter (i.e., a financial product). The delimiting conditions are that the conduct must be conduct in the jurisdiction and must be in relation to a financial product or service. There is no requirement that the relationship between the conduct and the financial product be direct or substantial, or causal. As Beach J more recently explained in Australian Securities and Investments Commission v Westpac Banking Corporation (No 2) (2018) 266 FCR 147; 127 ACSR 110 at [2261]: … the expression "in relation to" is of wide ambit. Now it is trite to observe that its meaning will be determined by the context. The phrase signifies the need for there to be a relationship or correlation between the two subjects formally referenced. Moreover, an indirect or less than substantial connection may be sufficient. 1369 True it is that, as EY submitted, in Narain the relevant conduct involved an ASX announcement by the company about a "landmark" test result, which is of a different nature to the conduct pleaded against EY in this case. It is also true that ABN AMRO and Bathurst Regional Council related to the conduct of a ratings agency in rating a relevant financial product. But these are factual points of distinction. 1370 It may be accepted that an auditor is not required to express an opinion to anyone but the company and members: s 308 of the Corporations Act. However, it is a statutory requirement that a listed company must publish a report which must contain its auditor's report to its members and the company must also publish it to ASIC: ss 314 and 319 of the Corporations Act. In addition, Quintis was a disclosing and listed entity that was required to publish its report to the ASX. This was an objectively known fact. The objective circumstances were that EY was providing its audit services in relation to this entity, including by expressing opinions that would thereby be published as part of that listed company's financial reports published to the market. In those circumstances, I do not agree that the opinions expressed were akin to communications as to the internal management of the company; cf, Vanguard Financial Planners Pty Ltd v Ale (2018) 354 ALR 711 at [208]-[209]. 1371 The pleaded case here against EY was not confined to the mere expression of its Audit Opinions. Rather, as set out above, the pleaded case focussed upon the expression of the FY15 and FY16 Audit Opinions in the context of them being included in the FY15 and FY16 Financial Reports, which were to be published to the ASX and more broadly. It was the totality of these matters that were said to be the conduct that was "in relation to a financial product". The contents of the Financial Reports in respect of which the Audit Opinions were being expressed included reports as to Quintis' key accounting estimates and financial results (including as to assets, earnings and profits), and included notes which set out major assumptions and limitations in the determination of those estimates and results. Though not the exclusive means, the reporting of such information via annual financial reports is one means by which a listed entities (such as Quintis at the time) communicate important financial information to existing shareholders and the market at large. In my view, such information has a connection with the shares of a company, even if that relationship is not direct or substantial, or, relevantly, is not causative of any impact upon share price. In Narain a report as to the landmark results in relation to a company's product was found to have a connection with the shares of that company. If that be so, it would seem to me that the expression of an opinion that a company's financial reports reflect a true and fair view of its assets and financial position also has a connection with the shares of that company. 1372 It may be accepted that, at common law, it has been held that auditors do not owe a duty of care to non-members and potential investors: see, generally, Caparo Industries Plc v Dickman [1990] 2 AC 605 and Esanda Finance Corporation Ltd v Peat Marwick Hungerfords [1997] HCA 8; (1997) 188 CLR 241. However, as I have noted above, s 1041H deals with a different norm which is not concerned with whether an auditor owes a duty of care at law to an indeterminate class of persons. Accordingly, in my view, it is no answer to the case against EY that the Audit Opinions were confined to an expression of the opinions required by s 308 of the Corporations Act which were directed to Quintis and its members. Nor is it an answer to the case that the Audit Opinions did not express any opinions about or refer to Quintis' shares, and were not published with the express purpose of affecting Quintis' share price. These arguments fail to grapple with the statutory and commercial context in which the relevant Financial Reports that contained the Audit Opinions came to be published. 1373 Nor in my view is it to the point that the Audit Opinions did not make any reference to Quintis' shares and were not being published to increase Quintis' share price or encourage persons to invest in Quintis. The opinions were ones which informed the market that EY considered the financial statements to comply with the Accounting Standards and represented a true and fair view of the company's assets and financial position. These opinions were to be published to the market. Irrespective of whether the conduct had any causal relationship with the price of Quintis' shares, it nevertheless had a relationship to Quintis' shares. In my view, this was sufficient for the pleaded conduct against EY to fall within the scope of s 1041H. (b) Were the representations made only to members or also to non-members? 1374 The next preliminary issue in dispute was whether EY's representations were made to both current and prospective members in Quintis, or, as EY submitted, only the former. EY submitted that the Court could only consider and determine whether its conduct was misleading or deceptive in respect of those persons who were members of Quintis at the times that each of its Audit Opinions were issued. EY submitted that this result reflected the legal position that its opinions were only required to be issued to the company and its members. And, it was submitted that this also reflected the factual position in that the opinions were, as a matter of fact, only issued to the company and its members. 1375 EY pointed out that the audit reports themselves were entitled "Independent auditor's report to the members of TFS Corporation Ltd" (emphasis added). This reflects the statutory obligation on auditors under ss 308(1) of the Corporations Act, which is to "report to members on whether the auditor is of the opinion that the financial report is in accordance with this Act" (emphasis added), and paragraphs 22 and A16 of ASA 700 which provide that: Addressee [22] The auditor's report shall be addressed as required by the circumstances of the engagement. (Ref: Para. A16) … Addressee (Ref: Para 22) [A16] Law or regulation often specifies to whom the auditor's report is to be addressed in that particular jurisdiction. The auditor's report is normally addressed to those for whom the report is prepared, often either to the shareholders or to those charged with governance of the entity whose financial report is being audited. 1376 EY submitted that the auditor's obligation is directed only to existing members and that this reflects the underlying purpose of an audit, which is not to assist investors to make investment decisions, but to assist the company's shareholders to monitor the performance of the company and its directors: see, e.g., Caparo at 630 (Lord Oliver, Lords Roskill and Ackner agreeing). It was further submitted that the answer to the question to whom the representations in the audit reports were made is to be found in the purpose of an auditor's report understood in its statutory context, relying on the observation of Dawson J in Esanda Finance at 258 (a case involving allegations of common law negligence against an auditor) that: … Informing potential investors in the company lay outside the purpose of the [auditor's] report… There was the possibility that they might rely upon the report for the purpose of investing in the company but that was not the purpose for which the report was given and the possibility was insufficient to establish their reasonable reliance upon it. 1377 EY submitted that the fact that the audit reports were attached to, or included in, the FY15 and FY16 Financial Reports and thereby disclosed to the ASX did not change their character. It was submitted that the representations were still directed to the company's existing shareholders, and were not "transformed" by the mere act of publication into investment guidance. It was submitted that: … EY, in accordance with its statutory obligation, provided a report to Quintis that was addressed to its current members. The fact that this report was then incorporated into Quintis' financial report and published to the world does not mean that EY's representations suddenly became representations to every reader of that report anywhere in the world with access to the internet. A written representation from A to B does not become a representation from A to C simply because B provides the document recording the representation to C. For example, a lawyer who provides an opinion to his or her client does not make a representation to every person to whom the client sees fit to provide the advice (as is its right). 1378 The Davis Applicants submitted that EY's characterisation of its conduct focussed too narrowly on the intended audience for the representations and ignored the wider context in which they were made. The Davis Applicants pointed to the fact that the Financial Reports, which included the FY15 and FY16 Audit Opinions, were published on the ASX and on its website and, consequently, to all participants in the market for Quintis' shares, and, more significantly, pointed to EY's knowledge that this would be the case. 1379 The Davis Applicants also pointed to EY's involvement in Quintis' press release on 31 August 2015, its understanding about the significance of Quintis going into a trading halt, and its participation in the company's AGM. They contended that EY knew that the publication of the audited accounts (by a "big four auditor") would inform market and investor perception of Quintis. This is said to be clear from a number of emails to which I was taken, namely: (a) an email sent by Mr Dachs on 4 November 2015 to another member of the audit team saying that "management are overly sensitive to any negativity with investors because their business model is overly reliant on access to capital markets"; (b) an email sent by Mr Dachs on 13 November 2015 to Mr Darren Lewsen (who took over the Quintis audit in FY16) in which he observed that "the company is over-sensitive to press coverage because they have a business model that is overly dependent on capital raisings"; and (c) another email, dated 13 November 2015, from Mr Dachs to Mr Lewsen in which he expressed his concern that Quintis had tried "to pressure us in to being lenient on biological asset valuation assumptions". 1380 I do not accept EY's arguments. 1381 It is trite to state that what must be answered is the pleaded case. The pleaded case was not limited to the expression of the FY15 and FY16 Audit Opinions, but to the totality of EY's conduct. The relevant conduct was pleaded to include the issuing of the Audit Opinions in the following circumstances, being: 94. The issuing of the FY15 Financial Report included: (a) lodging it with the ASX; (b) publishing it on the ASX Market Announcements Platform; (c) publishing it on Quintis' website; and (d) distributing it to Quintis' shareholders. 95. EY knew at the time the Board of Directors authorised the issuing of the FY15 Financial Report referred to in paragraph 93 above and at the time it issued the FY15 Audit Opinion referred to in paragraphs 108 and 109 below that: (a) the FY15 Audit Opinion referred to in paragraphs 108 and 109 below would be included in the FY15 Financial Report; and (b) Quintis would lodge with the ASX and cause to be published on the ASX Market Announcements Platform the FY15 Financial Report. (Emphasis added). 1382 Although EY admitted some of these circumstances and denied others, I am satisfied that, as a matter of fact, each of these things occurred and the relevant circumstances existed. 1383 EY's submission that an opinion expressed to members is not "transformed" by the fact of its wider distribution into one directed to non-members proceeds on a narrow characterisation of the pleaded conduct and the statutory norm. Section 1041H is not concerned with the question as to whom the relevant representation is directed, or indeed, to whom it is ultimately conveyed. Rather, as I have already mentioned, the statutory norm in s 1041H is a proscription on a person engaging in conduct of a particular type. The words "engage in conduct" is defined in s 9 to mean to "do an act" or "omit to perform an act". In a case, such as this, the question that arises is whether the "act" or "acts" constituting the "conduct" were misleading or deceptive. That question does not of itself require determination of whether the conduct was conveyed to one class of person or another. The question as to whether the representation was conveyed to one class or another may be relevant in assessing whether the relevant conduct was misleading or deceptive, and also to causation (or, in some cases, what is sometimes described as "reliance"): e.g., see Self Care at [80]-[83]. 1384 This is consistent with the analysis of Leeming JA (with whom Bell CJ and Brereton JA agreed) in CBRE (V) Pty Ltd v City Pacific Ltd (in liq) [2022] NSWCA 54 at [63]-[65]. The facts there were that a company (CBRE) had provided a valuation to its client (ILO), but the valuation was not provided to the plaintiff (City Pacific) who claimed that the valuation was misleading and deceptive. CBRE also relied upon disclaimers contained in the valuation which stated, amongst other things that (at [63]): This valuation is for the use only of the party to whom it is addressed and for no other purpose. No responsibility is accepted to any third party who may use or rely on the whole or any part of the content of this valuation. The valuer has no pecuniary interest that would conflict with the proper valuation of the property. The assessment of the individual values assumes the development is completed to a satisfactory standard as at the date of valuation having regard to market evidence existing at the time, and does not purport to represent values at any future point in time. … This report may only be relied upon by [ILO] for first mortgage security purposes. This confidential document is for the sole use of persons directly provided with it by [CBRE]. Use by, or reliance upon this document by anyone other than [ILO] is not authorised by [CBRE] and [CBRE] is not liable for any loss arising from such unauthorised use or reliance. This document should not be reproduced without our prior written authority. 1385 In rejecting an appeal from the trial judge's finding that CBRE had engaged in misleading and deceptive conduct that could relied upon by City Pacific, Leeming JA reasoned as follows: [64] … As the respondents observed, it is not to the point to characterise the valuations as a series of representations made to the client. The question posed by statute is whether there was conduct in trade or commerce that contravened the statutory norm, and it involves error to approach its operation by reference to causes of action such as negligent misrepresentation at law or innocent misrepresentation in equity. As Lockhart and Gummow JJ said in Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470 at 504 and as McHugh J said in Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; [2004] HCA 60 at [103] , "it is necessary to keep steadily in mind when dealing with [the Act and, in particular, s 52] that 'representation' is not co-extensive with 'conduct'". The joint judgment in Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25 at [102] confirmed that s 52 was not confined to 'representations', whether they be representations as to matters of present or future fact or law. [65] In short, I am unpersuaded that the fact that the named recipient of the Amended Indigo Valuation was ILO could immunise the conduct in supplying the document from being characterised as misleading or deceptive. The submission distracts from the question presented by statute. If that were not so, it would be very easy for the provisions of the Trade Practices Act and now the Australian Consumer Law to be evaded, and not lightly would the legislation be construed to produce that result. … [67] …Whether conduct is misleading or deceptive is to be determined having regard to all the circumstances. The impugned conduct must be viewed as a whole: Campbell v Backoffice Investments Pty Ltd at [25]. In the present case, the conduct is the delivery of a document containing the various expressions of opinion, the implied representation that due care and skill had been applied, and the disclaimers. Notwithstanding the presence of the disclaimers, the Amended Indigo Valuation amounted to conduct conveying an opinion of value and that the opinion had been obtained by the exercise of due care and skill. That is to say, whether or not the document contained clauses purporting to restrict its use, that does not alter whether it contravened the statutory norm proscribing misleading or deceptive conduct. [68] This accords with what was said in comparable circumstances by a Full Court of the Federal Court in ABN Amro Bank NV v Bathurst Regional Council (2014) 224 FCR 1; [2014] FCAFC 65 at [771], reproduced by the primary judge at [334]… (Emphasis added). 1386 In my view, the same logic and reasoning applies in respect of s 1041H of the Corporations Act. 1387 Often, it is instructive to consider the "class" to whom the relevant representation has been directed as an analytical technique which assists in determining whether the conduct is, or is likely to be, misleading or deceptive and contravenes the provision. As Wheelahan J stated in Australian Competition and Consumer Commission v Jayco Corp Pty Ltd [2020] FCA 1672 at [597], the relevant circumstances by reference to which the inquiry must be undertaken include consideration of the person or persons to whom the conduct was directed. But that is but one surrounding fact or circumstance to be taken into account, in circumstances where the conduct must be viewed as a whole in its context: Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592 at [109] (McHugh J); Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304 at [102] (Gummow, Hayne, Heydon and Kiefel JJ). 1388 Irrespective of whether the conduct was directed toward members or non-members, the relevant question is whether there has been a contravention of the statutory proscription. Thus, the question which the pleaded case raises for determination is whether EY's conduct in issuing the FY15 and FY16 Audit Opinions (by including those Opinions in the FY15 and FY16 Financial Reports in the circumstances pleaded) was misleading or deceptive or likely to mislead or deceive. I do not accept EY's submission that I am limited to considering whether the conduct was misleading or deceptive, or likely to mislead or deceive, in respect of only those persons who were members of Quintis at the time the opinions were expressed. (c) Did EY make the implied representations that are alleged? 1389 EY raised a further preliminary issue as to whether the FY15 and FY16 Audit Opinions carried the implied representation that these opinions were (a) held on a reasonable basis, and (b) the product of the application of reasonable care and skill by EY. 1390 EY accepted that by issuing an unqualified audit opinion in each of FY15 and FY16, it represented that it was of the opinion that: (1) the relevant Financial Report was prepared in accordance with the Corporations Act, including: (a) that it gave a true and fair view of Quintis' financial position and performance as at the relevant date; and (b) that it complied with the Accounting Standards; and (2) the opinion in (a) was based on its audit, which was conducted in accordance with the Auditing Standards. 1391 However, EY denied that by expressing these opinions it made any implied representation that they were "held on a reasonable basis and the product of the application of reasonable care and skill". 1392 EY's submission must be rejected. There may be room for debate as to whether the expression of an opinion always carries with it an implied representation that the opinion is held on a reasonable basis: see Forrest v Australian Securities and Investments Commission [2012] HCA 39; (2012) 247 CLR 486 at [102] (Heydon J). But, as French CJ pointed out in Campbell at [33], in the case of a person professing expertise or particular skill or experience, the expression of an opinion by that person may carry the implied representation that it is based upon his or her expertise, skill or experience. That reasoning accords with earlier and subsequent decisions: see MGICA (1992) Ltd (formerly MGICA Ltd) v Kenny & Good Pty Ltd (1996) 140 ALR 313 at 356 (Lindgren J); Bathurst Regional Council at [2416]; ABN AMRO at [765]-[773]; see also Chowder Bay at [31] (Besanko, Markovic and Lee JJ). 1393 The text of the Financial Reports included statements by EY that "we have audited the accompanying financial report", that "[w]e have conducted our audit in accordance with Australian Accounting Standards" and (at least for FY15) that "[a]n audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report… We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion". 1394 It is clear that EY was representing that it had conducted an audit in accordance with the Accounting Standards and that it had obtained audit evidence that it considered to be sufficient and appropriate. It was representing that it had done that which it had been retained to do and in a manner required by the Corporations Act by exercising its professional skill and judgment. In these circumstances, I am satisfied that, in giving an unqualified audit opinion in each of FY15 and FY16, EY also impliedly represented that those opinions were opinions held on a reasonable basis and were the product of the application of reasonable care and skill, and were formed after EY had conducted an audit in accordance with the Auditing Standards. 14.2.3 Did EY contravene s 1041H? 1395 The issues that require determination are whether in engaging in the conduct pleaded against it, EY engaged in misleading and deceptive conduct because (a) it did not have a reasonable basis for the representations that it made, and (b) those representations were not the product of the exercise of reasonable care and skill by EY. 1396 The case as to EY's failures was confined to matters bearing upon the audit as to Quintis' estimation of heartwood yield and costs of processing as integers in its DCF Model as its basis for the determination of the fair value of its biological assets. The Davis Applicants abandoned the other contentions that were initially advanced as being "auditing failures", which were addressed at length in Mr Basford's Report, and later in the Joint Report. The Davis Applicants also abandoned other alleged failures including as to the audit of tree counts and mortality rates, estimation of oil content, estimation of oil price, estimation of foreign exchange rate, estimation of the costs of maintenance, and the determination and application of discount rates. 1397 Given the way the Davis Applicants' case was pleaded, it is convenient to address each of the pleaded contentions as to what a reasonable auditor would have done together with what EY actually did. (a) Recognising that the DCF Model was sensitive to significant inputs and identifying the risk of material overstatement 1398 The Davis Applicants pleaded that a reasonable auditor would have recognised that the DCF Model was sensitive to significant inputs. It was relatedly asserted that a reasonable auditor would have identified a risk that Quintis materially overstated the value of its biological assets by reason of the assumptions adopted in the DCF Model and would have assessed that risk as significant. 1399 I am satisfied that the Auditing Standards required EY to identify the use by management of a model in its determination of key accounting estimates, and, in doing so, to identify the risks arising from the use of significant inputs in such models, including the risk of material overstatement: see [860]-[863] above. I am satisfied that a reasonable auditor in EY's position would have recognised the DCF Model was sensitive to significant inputs and further identified the risk of material overstatement. However, I reject the contention that EY did not do so for the following reasons. 1400 First, prior to it being engaged to perform audit services, EY's proposal to Quintis identified that it recognised a key risk in Quintis' business was the carrying value of its biological assets: see [613] above. It was identified that "[u]ncertainty is inherent in the valuation and cannot be avoided, only mitigated with high quality research of fundamentals underlying assumptions": see [613] above. 1401 Second, in planning the audit for FY 2015, EY reviewed the FY14 audit file of Quintis' previous auditor, Bentleys. EY identified that Bentleys had noted that the valuation of biological assets was a key area of risk of material misstatement: see [617] above. 1402 Third, as part of its planning of the FY15 audit, the internal memorandum dated 30 April 2015 entitled, "TFS - Audit Strategies Memo", recorded that the carrying value of Quintis' biological assets was a "significant accounting and auditing issue": see [620] above. It was recognised that the DCF Model was "…dependent on key inputs including rate of growth, weight of heartwood, oil content and costs of maintenance and harvesting" and that EY "[would] also review the tree model assumptions used in the valuation and cash flow inclusion/exclusion for compliance with the requirements of AASB 13 Fair value measurements ("AASB 13")": see [620] above. It was proposed that the EY's Internal Actuary and EY TAS would be engaged to assist, with the latter looking into key economic assumptions utilised in the biological asset valuation model: see [620] above. 1403 Fourth, EY's FY15 Audit Plan outlined the work that was to be performed in reviewing the assumptions contained in the DCF Model, including as to heartwood yield and the Tree Model: see [622] above. 1404 Fifth, EY's audit planning for FY16 identified and recognised the same risks, and again charted a similar course of action: see [664]-[665] above. 1405 Based on these facts, I am comfortably satisfied that EY recognised that the DCF Model was sensitive to significant inputs and assumptions, relevantly, those relating to heartwood yield, tree growth, and processing costs. Further, I am also comfortably satisfied that EY recognised and was aware that there was material risk that the biological assets might be overstated and assessed that risk as significant. It is for that very reason that the assumptions in the DCF Model were to be a focus of the audit, and the assistance of other parts of EY would be called upon. (b) Ensuring that staff had the relevant expertise in auditing the fair value of sandalwood plantations and included technical accounting experts with experience in the application of AASB 141 and AASB 13 to biological assets 1406 It was next pleaded that a reasonable auditor would have ensured that its staff had relevant expertise in auditing the fair value of sandalwood plantations and included technical accounting experts with experience in the application of AASB 141 and AASB 13 to biological assets. It was pleaded that EY did not take these steps. 1407 I am satisfied that a reasonable auditor would have ensured that its staff had relevant expertise in the valuation of biological assets. However, I reject the contention that a reasonable auditor was required to have amongst its staff a person with expertise in auditing the fair value of sandalwood plantations. There is no express requirement in the Auditing Standards that required EY to have such expertise amongst its staff. Further, the Davis Applicants' expert, Mr Basford, did not suggest in his evidence, and the opinions that he expressed, that a reasonable auditor was required to have amongst its staff a person with such specific expertise. Rather, his evidence was that, in all of the circumstances, a reasonable auditor would have required Quintis to engage an independent expert to opine in relation to the assumptions as to tree growth and predicted heartwood yield. 1408 Mr Westworth expressed the opinion that, in line with his experience as an auditor, EY used audit staff with the appropriate skills for the following reasons: (a) the audit workpapers relating to key audit risks such as the valuation of biological assets were prepared and/or reviewed by a combination of a Manager (Ms Tse), an Executive Director (Ms Chirathamjaree), and, where appropriate, one or more partners (Mr Dachs and Mr Kirkby in FY15, and Mr Lewsen and Mr Meyerowitz in FY16); (b) the counting and measurement of trees which was based on statistical analysis was assessed by an audit Executive Director with statistical knowledge; and (c) EY sought the advice of the EY TAS to provide specialist input into areas that were not in the day to day experience of the audit team. In both FY15 and FY16, EY engaged this specialist team to determine the appropriateness of the forecast price of sandalwood oil, the discount rates, and the exchange rates applied by Quintis in its valuation of sandalwood plantations. 1409 Importantly, Mr Westworth also expressed the opinion that, although the members of EY TAS used on the engagement did not have experience of sandalwood trees, "it is not a requirement that any expert (regardless of whether it is an internal or external expert) must have experience in valuing the particular asset owned or held by the entity being audited". 1410 Insofar as Mr Westworth's opinions related to the expertise of internal staff members, it was not the subject of challenge or any contrary opinion expressed by Mr Basford in the Joint Report. 1411 Based on the opinions expressed by Mr Westworth, which I accept, I am not satisfied that EY failed to take the steps that a reasonable auditor would have taken in relation to the composition of its audit team, including as to their expertise. (c) Obtaining evidence concerning the competence and integrity of Mr Brown given that his judgements impacted significant inputs in the valuation model 1412 The Davis Applicants next pleaded that a reasonable auditor would have required sufficient appropriate audit evidence that the value of the biological assets had not been misstated by obtaining evidence concerning the competence and integrity of Mr Brown given that his judgements impacted significant inputs in the valuation model. This pleading was one basis upon which the Davis Applicants submitted that EY ought to have requested Quintis to obtain an independent expert to opine as to the important biological inputs in the DCF Model. 1413 In resolving this aspect of the Davis Applicants' pleaded case, it is necessary to identify the subtle but important distinctions in the pleaded case which at times were rolled-up into a singular allegation. There were two related allegations made by the Davis Applicants relating to Mr Brown. The first was that EY had not taken the steps that a reasonable auditor would have taken to obtain evidence concerning the competence and integrity of Mr Brown given that his judgements impacted significant inputs in the valuation model. The second was that EY did not take the steps that a reasonable auditor would have taken in relying upon Mr Brown to provide sufficient appropriate evidence in relation to significant assumptions used in the DCF Model. It is the first allegation that I address in this part of my reasons. I will return later to the Davis Applicants' other contentions relating to EY's reliance upon Mr Brown. 1414 The Davis Applicants submitted that EY had conceded that Mr Brown was not a management expert. In support of this position, EY relied upon the Joint Report where Mr Westworth agreed with Mr Basford that "Mr Brown was not a management expert in respect of valuing Quintis' biological assets". EY submitted that the Davis Applicants had misread the Joint Report and pointed out that Mr Westworth clarified during his examination that his agreement with Mr Basford that "Mr Brown was not a management expert in respect of valuing Quintis' biological assets" was not to be read as suggesting that Mr Brown was not a management expert. Rather, it was Mr Westworth's view that Mr Brown was not an expert valuer and could not be relied on to value the assets. 1415 I accept EY's and Mr Westworth's explanations. In my view, the statement in the Joint Report of Accounting Experts that "Mr Brown was not a management expert in respect of valuing Quintis' biological assets" conveys that it was agreed that Mr Brown was not an expert in the valuation of the biological assets. This agreement did not mean that Mr Westworth and EY were agreeing that Mr Brown was not a management expert for all purposes. I accept Mr Westworth's evidence that he intended to convey that Mr Brown was not an expert in valuation. His evidence accords with my reading of that document. 1416 I also reject the Davis Applicants contention that EY failed to properly assess Mr Brown's qualifications, skills or experience. It was submitted that EY had failed to properly assess these matters because Mr Brown had qualifications in chemistry and had not worked with biological assets, and had no experience with sandalwood plantations. The Davis Applicants submitted that Mr Brown was not a person upon whom reliance could be placed (including "blind" reliance) as to the validity of the assumptions contained in the Tree Model and the predictions as to heartwood yield that were based on the Tree Model. 1417 As set out above at [847], a management expert for the purposes of the Auditing Standards is "an individual or organisation possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial report". Where an auditor such as EY is aware that reliance has been placed on such an expert, it is required to "evaluate the competence, capabilities and objectivity of that expert. 1418 I am satisfied that EY did assess the competence, capabilities and objectivity of Mr Brown in a way that a reasonable auditor would have done. As part of the audit in FY15, EY's consideration of its reliance upon Mr Brown as a management expert was outlined in a workpaper entitled "Using the work of a management's expert": see [651] above. The workpaper recorded that Mr Brown's qualifications and professional history, including his BSc (Organic Chemistry and Pharmacology) from the University of Western Australia, his MBA from the same institution, and his employment by Quintis as R&D Manager. The workpaper also recorded that Mr Brown was not responsible for preparing the financial statements. It was noted that Mr Brown's role related to collecting, analysing and conveying data (such as yield curves and heartwood yields per tree). Finally, it was found that his direct responsibility was to ensure that the valuation of the trees was done appropriately (from a scientific perspective). EY undertook a similar analysis in FY16. By taking these steps, I am satisfied that EY properly assessed Mr Brown to be a management expert. 1419 The steps that EY took accorded with the objective facts. 1420 First, although Mr Brown's qualifications were in organic chemistry and pharmacology, he had been employed by Quintis for many years and been involved in significant aspects of its work relating to sandalwood. Mr Brown had been employed with Quintis from 2007. He had been the primary person responsible for Quintis' research team and inventory program from 2012. He therefore had years of experience with the growth of sandalwood trees that gave him expertise in a field other than accounting or auditing. 1421 Second, Mr Brown was a published author on the topic of sandalwood. A copy of his article was annexed to the report of Dr Barbour. I reject Mr Basford's assertion in his evidence that Mr Brown was not a published author on the topic of sandalwood. Mr Brown had clearly been involved in conducting an analytical framework for research and reporting on its results. He had been involved in the destructive harvests which led to the analysis of that data in 2012, which led to that data being relied upon for the Enigma Presentation and the development of the Heartwood Model. This work not only involved applied field work (in the sense of the destructive harvests) but also the observation of the data collected from that field work and its mathematical analysis. This research resulted in Mr Brown developing the Heartwood Model, which was not put in dispute by the Davis Applicants and with which ultimately no issue was taken by Dr Barbour. 1422 Third, Mr Brown worked with a team of researchers and foresters employed by Quintis, whose expertise and experience he could and did call upon in preparing his Inventory Reports. This included a forestry team including: Mr Ken Robson (Head of Forestry Research) who had a Bachelor of Science (Biology), an Associate Diploma in Applied Science (Forestry) and approximately 20 years of experience working in the forestry industry; and Dr Daniel Manson (Research Forester) who had a PhD in Botany/Ecology and a Bachelor of Engineering. EY submitted, and I accept, that the Auditing Standards expressly allow the auditor to rely on the collective knowledge and expertise of management. Mr Basford also accepted this to be the case. 1423 Finally, there was nothing to suggest that Mr Brown was not objective. EY assessed Mr Brown's objectivity and concluded that the fact he was an employee of the company did not undermine the reliability of information provided by him. 1424 I am satisfied that EY undertook the steps that a reasonable auditor would have taken in assessing the competence, skill and objectivity of Mr Brown as a management expert. (d) Requiring and obtaining sufficient appropriate audit evidence that the value of the biological assets had not been misstated and compliance with the Auditing Standards 1425 The real substance of the Davis Applicants' case was that a reasonable auditor would have required and obtained sufficient appropriate audit evidence that the value of the biological assets had not been misstated and would not have been satisfied of this on the materials that EY obtained. The argument was pleaded in various different ways but included the contentions that a reasonable auditor would have: (a) analysed Quintis' predicted heartwood yields for each of its sandalwood plantations and determined whether the predicted heartwood yields for newer plantations were significantly better than for older plantations; (b) ascertained the basis upon which the estimated theoretical heartwood yield had been determined and whether it was realistic or achievable; (c) considered the forecasted heartwood yield against appropriate supporting evidence corroborating Quintis' management assertion; (d) compared the forecasted theoretical heartwood yield at harvest to Quintis' actual harvest results to determine whether the forecasted heartwood yield was realistic and achievable; (e) compared the forecasted heartwood yield at harvest to scientific or academic studies in relation to heartwood yield of sandalwood trees; (f) considered the controls Quintis had in place in respect of validating its assumptions as to forecasted heartwood yield; and (g) analysed whether Mr Brown's competence provided sufficient appropriate audit evidence concerning the predictions of heartwood yield and the valuation of the biological assets. 1426 These contentions were expanded upon in the Davis Applicants' submissions, which were opposed by EY. (i) What did the Auditing Standards require? 1427 The central obligation under the Auditing Standard required EY to obtain "reasonable assurance about whether the financial report as a whole is free from material misstatement" and, in turn, to do this by obtaining "sufficient appropriate audit evidence to reduce audit risk to an acceptably low level": see [836] above. The purpose of this was to obtain a high but not absolute level of assurance as to audit risk: see [836] above. 1428 In attending to its obligations under the Auditing Standards, EY recognised that the DCF Model used by Quintis to estimate the fair value of its biological assets contained a number of assumptions about unobservable inputs that created a risk of misstatement: see [620] above. Specifically, as set out above, for the purpose of the FY15 audit, EY identified and recognised that the carrying value of biological assets was a "significant accounting and auditing issue" that was "…dependent on key inputs including rate of growth, weight of heartwood, oil content and costs of maintenance and harvesting": see [620] above. 1429 ASA540 required that where there are "assessed risks of material misstatement" the auditor was required to, amongst other things, "[t]est how management made the accounting estimate and the data on which it is based" and "[i]n doing so, the auditor shall evaluate whether… [t]he assumptions used by management are reasonable in light of the measurement objectives of the applicable financial reporting framework": see [860] above. Further, as noted above, ASA 540 further required that where management has used a model for the purpose of making fair value assessments, an auditor may consider testing the model to determine whether it is valid including as to theoretical soundness and mathematical integrity. In this regard, the auditor's evaluation of the assumptions used by management and audit procedures dealing with management assumptions are required to be performed in the context of the audit of the entity's financial report, and "not for the purpose of providing an opinion on assumptions themselves": see [863] above. And the matters the auditor may consider when evaluating the reasonableness of the assumptions include "[w]hether individual assumptions appear reasonable", "[w]hether the assumptions are interdependent and internally consistent" and "[w]hether the assumptions appear reasonable when considered collectively or in conjunction with other assumptions, either for that accounting estimate or for other accounting estimates": see [863] above. 1430 Also of relevance is that, as noted above, where the assumptions on which accounting estimates are based reflect what management expects will be the outcome of specific objectives and strategies, the auditor "may perform audit procedures to evaluate the reasonableness of such assumptions": see [863] above. 1431 As explained at [846]ff above, the Auditing Standards make provision for reliance to be placed on a management expert, not only to obtain sufficient audit evidence, but as the source of that sufficient audit evidence. However, as I have already noted, the Auditing Standards do not make provision for an uncritical reliance on a management expert's assertions. Critically, this involves evaluating "the appropriateness of that expert's work as audit evidence for the relevant assertion": see [846] above. (ii) Steps taken to comply with the Auditing Standards 1432 EY identified the risks arising from the "key inputs" in the DCF Model. Having done so, EY proposed to "review the tree model assumptions used in the valuation and cash flow inclusion/exclusion for compliance with the requirements of AASB 13 Fair value measurements ("AASB 13")": see [620] above. The procedures that EY adopted sought to test the various assumptions. This is demonstrated by the fact that it relied upon the EY Internal Actuary for the purpose of testing the statistical validity of the tree count process and methodology, and for mathematical soundness. It also involved reliance upon EY TAS for the purpose of testing the economic assumptions and the appropriateness of important integers in the DCF Model including discount rates, oil price, oil content, exchange rate, processing costs and so on. 1433 In relation to the biological assumptions involved in the model, EY's audit work performed in reviewing the assumptions used in the Tree Valuation Model was documented in the memorandum dated 22 July 2015 entitled "Biological Asset Assessment" (FY15 EY Biological Asset Assessment Memorandum) and the memorandum dated 30 July 2016 entitled "Biological Asset Assessment" (FY16 EY Biological Asset Assessment Memorandum). In both of these documents, EY recognised that the DCF Model was dependent on the Tree Model. Specifically, the FY15 EY Biological Asset Assessment Memorandum identified that management's approach to the valuation of the biological assets was as follows: Trees less than 5 years old Expected heartwood production is based on an internally developed yield curve model prepared by Foresty experts. For trees 5 years of age, an updated yield curve model will be applied. This would apply to plantations established from year 2009 onwards. At FY14, the weighted average of heartwood was at 21.3kg vs 21.9kg at FY13. 1434 The FY16 EY Biological Asset Assessment Memorandum also similarly identified these matters as central to management's approach: [675]ff above. 1435 Having identified these significant assumptions, it fell to EY to assess and evaluate whether the assumptions in the DCF Model were reasonable and to obtain reasonable assurance by way of "sufficient appropriate audit evidence to reduce audit risk to an acceptably low level" in relation to them. (iii) Reasonableness of the Heartwood Model Assumption? 1436 I am satisfied that EY considered the research and data upon which the Heartwood Model was based. 1437 The FY15 EY Biological Asset Assessment Memorandum set out that EY had considered the "TFS Destructive Harvest & Research Considerations" which was based on research conducted by Mr Brown and his research team: see [644] above. In assessing these materials, EY recognised that the oil content was a function of heartwood yield and that the research conducted by Quintis had established "a strong correlation (r2=95) between the diameter over bark at 20cm off the ground (DOB@20cm) and heartwood yield". The FY16 EY Biological Asset Assessment Memorandum also set out the same content. 1438 The Davis Applicants did not contend that this aspect of Quintis' DCF Model, being the Heartwood Model, was flawed, and did not contend that EY had engaged in any failures in respect of its audit of this assumption. (iv) Reasonableness of the Tree Model Assumption? 1439 There was a deal of contest as to whether EY complied with the Auditing Standards by identifying that the Tree Model was a significant assumption that was used in the valuation of Quintis' biological assets and, if so, whether it obtained "reasonable assurance about whether the financial report as a whole is free from material misstatement" by obtaining "sufficient appropriate audit evidence" to reduce that audit risk to an acceptably low level. 1440 EY did not dispute that the Tree Model was an element of the DCF Model and, therefore, was an input by which Quintis determined the fair value of its biological assets. To this end, Mr Westworth agreed that the Tree Model "was a vital assumption in the accounting estimate prepared by Quintis for both the 2015 and 2016 years": T1161.3-6. Mr Westworth also agreed that "reasonably competent auditors were required under ASA540 paragraph 15(b) to evaluate whether that assumption used by management was reasonable": T1161.8-12. 1441 The real dispute between the Davis Applicants and EY was not so much about whether the Tree Model was a "vital assumption", but about the use that was made of the Tree Model and whether the EY evaluated whether the assumptions drawn from that Model were "reasonable" and, if not, whether EY had obtained sufficient appropriate audit evidence overall that reduced the audit risk of material misstatement to an acceptably low level. 1442 The Davis Applicants submitted that the Tree Model assumptions were not reasonable and that EY ought reasonably to have known that there was no reasonable basis for accepting the reasonableness of those assumptions. As a result, it was contended that EY had not attended to the ultimate task of the audit which was to obtain sufficient appropriate evidence so as to obtain the requisite level of assurance to address the audit risk that the Financial Reports were free from material misstatement. It was submitted that Mr Westworth's opinion to the effect that EY had obtained sufficient appropriate audit evidence to support the valuation of Quintis biological assets should be rejected, and that his evidence was lacking in credit. In particular, it was pointed out that when asked "can you direct me to the audit paper which sets out" EY's evaluation of the Tree Model assumptions, Mr Westworth answered (unresponsively) "I think this is pedantry gone mad, quite frankly": T1163.22. The Davis Applicants submitted that Mr Westworth's unresponsive answer only reinforced that there was no evidence that established that EY had evaluated the Tree Model. The Davis Applicants claimed that the high point of Mr Westworth's opinion as to the extent of the evidence that EY had obtained to support the assumptions in and arising from the Tree Model were the following matters set out in the Joint Report: 2.2.10. In Mr Westworth's view there was audit evidence to support: (a) The number of trees forecast to survive to harvest (Westworth 5.7 and 5.12); (b) The anticipated heartwood yield from the trees upon harvest (Westworth 5.8-5.13, 5.74 -5.82); (c) The anticipated price that could be obtained for the oil extracted at harvest and foreign exchange rates anticipated at harvest transactions (Westworth 5.127- 5.133 and 5.157- 5.161); (d) The costs of maintaining and harvesting the trees; (e) The discount rates used in the valuation to take account of uncertainties and to calculate the number of trees surviving to harvest (Westworth 5.136 - 5.138 and 5.146). 1443 The Davis Applicants drew attention to the fact that the only assurance that EY obtained as to the Tree Model was by checking survival rates through the process of "counting of trees", and relied upon the following exchange during cross-examination: MR HUTLEY: I see. So the only matter that you rely upon as evidencing audit materials to justify an assessment of the reasonableness of the tree growth model is the material under A [being a reference to the Joint Report of Accounting Experts]; is that right? MR WESTWORTH: It's the counting of the trees likely to - it's the counting of the trees, yes. MR HUTLEY: Thank you. And that's all. MR WESTWORTH: That's all that an auditor would have as concrete evidence in those circumstances. MR HUTLEY: I see. So, in effect, working out how many are alive? MR WESTWORTH: Working out how many are alive and their growth at that point of measurement. 1444 The Davis Applicants submitted that Mr Westworth had given a range of unresponsive and intemperate answers, which ultimately led to me getting him to focus on answering the questions he was being asked by Senior Counsel for the Davis Applicants, leading to the following exchange (T1169.27-1170.20): HIS HONOUR: Well, I think what Mr Hutley is asking you to focus on is the tree growth model. Just pause. … The tree growth model had a hypothesis that at 15 years the trees would be at 24.5 centimetres. MR WESTWORTH: Yes. HIS HONOUR: Is that right? MR WESTWORTH: Yes. HIS HONOUR: The assignment of yield curve is occurring as against that hypothesis. MR WESTWORTH: Yes. HIS HONOUR: I think what Mr Hutley is asking you is, is there any evidence that discloses that the auditors tested the hypothesis that a tree at 15 years would in fact achieve 24.5 centimetres. MR WESTWORTH: I have no understanding of the method that you could test that hypothesis. HIS HONOUR: Well, would one step be to examine and identify from where the hypothesis came? MR WESTWORTH: It could have done, but HIS HONOUR: And then to examine whether that had a valid scientific foundation or other foundation that could justify the continuation of the hypothesis? MR WESTWORTH: Yes. I'm just postulating as the alternative to actually observe the physical growth that was occurring and bearing in mind that that model, because it - that model that's the predicate there was not the final valuation model. HIS HONOUR: But then what you're doing is plotting against a chart. You're saying it's 50 per cent of what's going to be 24.5. But if your starting point is something different, it will be 50 per cent of something different. MR WESTWORTH: Yes. 1445 The Davis Applicants relied upon these passages as amounting to an acknowledgement by Mr Westworth that EY had not obtained any sufficient evidence as to the Tree Model. It was further submitted that, despite identifying "DOB assumptions" as the key predictive metric, EY did not test or reconcile the "DOB assumptions", which were central to the Tree Model, with available studies and data. It was said that Mr Westworth could not identify any audit evidence obtained by EY to support the "vital assumption" of the Tree Model of DOB of 24.5 cm for a 15-year-old tree. The Davis Applicants submitted that instead of conceding that fact, however, he gave the following "circular" answers: MR WESTWORTH: But what would you do with it to evaluate it? By testing it against the tree growth as it was actually occurring. That's what they did. … MR WESTWORTH: I've told you that in my opinion the auditors had evaluated it. Maybe they didn't articulate their evaluation, but by concluding that there was sufficient appropriate audit evidence based on the work that they did, they had effectively evaluated it. 1446 It was submitted that Mr Westworth's answers and his intemperate responses to being challenged about his opinions regarding evidence obtained by EY to support the yield assumptions stood against his credit and should not be accepted. 1447 The Davis Applicants' contentions as to the steps that EY took to assess the reasonableness of the assumptions drawn from the Tree Model and to obtain sufficient appropriate audit evidence, as with other aspects of their case, were an oversimplification of the essential integers of the DCF Model and EY's audit of them. Both the Tree Model and the DCF Model need to be unpacked to explain why this is so. 1448 As I have already mentioned, the Tree Model assumed: (a) incremental rates of growth of trees over three distinct phases of their life; and (b) that a tree at age 15 years would grow to be 24.5 cm DOB and would produce 20 kg of heartwood. The way in which the Tree Model was used in the DCF Model delineated between those trees aged under five and those aged five and over. This is the way that Quintis predicted its expected cash flows. It drew upon the Tree Model to assume that all trees under five would achieve 20 kg of heartwood at 15 years, and it used the Tree Model as a reference point for the trees aged five and over in the ways that I have set out at length above. 1449 Viewed this way, an essential task for EY was to evaluate the reasonableness of the assumptions drawn from the Tree Model and, next, to obtain reasonable assurance by way of sufficient appropriate evidence as to the key estimates in the DCF Model and ultimately to assure itself that the Financial Reports as a whole were free from material misstatement. 1450 The Davis Applicants were correct - up to a point - to draw attention to the fact that EY did not obtain any evidence as to the assumptions that were embedded within the Tree Model. I say they were correct up to a point because, as I have already pointed out, there was no dispute that, if a sandalwood tree did in fact grow to be 24.5 cm DOB, it would produce 20 kg of heartwood. Thus, this aspect of the Tree Model was not in dispute. 1451 However, to the extent that the Tree Model assumed incremental rates of growth of sandalwood trees, the Davis Applicants were correct to point out, and I accept, that EY did not obtain any evidence as to the basis for those assumptions, scientific or otherwise. To be clear about this, I was taken to no evidence that established that EY obtained any evidence to verify or validate the assumption that was inherent in the Tree Model as to the specific rates of incremental growth that were embedded in the Tree Model. 1452 Mr Westworth was asked on a number of occasions to point out the evidence that supported that fact, but he was unable to point to any specific evidence in this regard. In deciding whether to accept or reject Mr Westworth's opinions, it is unnecessary for me to make adverse findings as to this credit. There were occasions on which Mr Westworth did not directly respond to questions that were put to him. There were also occasions where I regarded his responses, not as being intemperate, but as expressions of palpable frustration by being met with repeated questions in respect of which he considered the answers were tolerably clear. Whilst I did not regard Mr Westworth's manner in this respect to be particularly helpful, I did not regard this as being adverse to his credit or a basis upon which to reject his evidence. Rather, in determining whether to accept or reject Mr Westworth's opinions, it is ultimately necessary to focus on the content of Mr Westworth's evidence, together with the other evidence that was before me. 1453 In his expert Report, Mr Westworth opined as follows: The validity of the model was tested annually by statistically based counts of the numbers of trees and measurement of their diameters. It was also reassessed in the light of periodic harvests of trees from which heartwood was taken and oil extracted. … The purpose of the count described by Mr Brown in his inventory report is to: "1) Count and measure the portion of the estate greater than 5 years old for growth over the last 12 months and reassess their future yield. 2) Count and measure the portion of the estate that becomes 5 years old in that year (2010 plantings) and project its future yields. (The graduating class). 3) Count and estimate the number of sandalwood 1 to 4 years of age plus measure and monitor growth on 3 and 4 year old plantings." The DOB of trees in the years 1- 4 is typically not measured. The basis of valuing early-stage trees is the yield curve model, although one of the tasks of the tree count process in 2015 was "measure and monitor growth on 3 and 4 year old plantings".52 In 2015, Quintis measured the DOB of trees planted in 2011 and 2012 (3 to 4 year old trees) to satisfy itself that those plantings were on target to achieve the yield based on a 100% yield curve. From the fifth year, when trees "graduate", the DOB measurement of the trees in each year is compared to the DOB in the model for that stage of growth. This may indicate that the projected DOB at harvest that is used for valuation purposes needs to be revised. … Mr Brown describes the validation process in his inventory reports. In these reports he considers inter alia: 5.21.1 Survival rates for recent plantings; 5.21.2 The performance of graduating plantations (that is plantings in the years 2010 and 2011) against the yield curve expectations; 5.21.3 The evaluation of existing yield curves; and 5.21.4 The assignment of new yield estimates. 1454 Properly understood, Mr Westworth's opinion as expressed here was that Quintis had tested the reasonableness of the Tree Model in the ways that he described, and that EY examined this material to obtain sufficient appropriate audit evidence as to the key accounting estimates and reasonable assurance overall. 1455 The steps which Mr Westworth identified as involving tree counts did not directly address whether the trees were growing in accordance with the incremental rates assumed in the Tree Model. The measurements of the trees that he said that EY had considered would have shown, and did show, that other than some minor exceptions, the trees were not in fact growing at the incremental rates that were assumed. And, the steps which Mr Westworth said involved Mr Brown's validation of the process as including assessing the performance of the graduating plantations, assigning yield curves and evaluating the performance of existing assigned yield curves were all steps that would have shown, and did show, that, other than some minor exceptions, the trees were not growing at the incremental rates assumed in the Tree Model. 1456 It follows that none of the steps identified by Mr Westworth were ones which specifically assessed or evaluated the assumption that sandalwood trees, in fact, grew at the incremental rates embedded in the Tree Model. Rather, to the extent that they contained data as to measurements of Quintis' plantations, they demonstrated that, on the whole, with some exceptions, the trees were not growing in accordance with those incremental rates. In other words, subject to the exceptions to which I will return to below, the steps identified by Mr Westworth were, in fact, ones which indicated that the incremental rates of growth assumed in the Tree Model were not being observed in practice. That was evidence which, contrary to Mr Westworth's opinions, established that EY had obtained evidence that assumptions inherent in and drawn from the Tree Model were in fact not reasonable. In my view, based on this evidence which was available, a reasonable auditor would have concluded that the Tree Model assumption was not reasonable as applied to trees aged under five. 1457 The conclusion that EY did not adequately assess the reasonableness of the Tree Model assumption (including because the evidence showed that this assumption was unreasonable) says nothing in and of itself. That is because, as I have already mentioned, it was necessary to understand how, and the extent to which, the Tree Model was in fact used as an integer in the DCF Model. This requires an assessment as to the way in which the Tree Model was relied upon for trees aged over five, and those aged under five. That is, it required an assessment as to how the Tree Model was relied upon to determine the heartwood yield assumption in respect of these two cohorts of trees. 1458 In both the FY15 and FY16 Biological Asset Assessment Memoranda, EY recognised that the yield curves for the older plantations were "considerably lower than that the theoretical yield curve": see [644] and [676] above. It is significant that in doing so, EY recognised three matters. The first was that the assigned yield curves were lower than the theoretical yield curve, i.e., the Tree Model curve. The second was that EY recognised that the assigned yield curves were not just lower, but they were "considerably" lower than the theoretical yield curve: see [644] and [676] above. The third was that EY also recognised (as addressed further below) that there was a difference between the assigned yield curves and the actual yield curves, which reflected the exercise of management's judgement not to alter the assigned yield curves year on year unless the circumstances justified that course. 1459 Each of these matters is important. They demonstrate that EY was aware that the older plantations were not growing to the theoretical yield curve, which was the Tree Model curve, and upon which the valuation of the trees aged under five was entirely dependent. 1460 Having identified the issue that the assigned yield curves for trees aged over five were "considerably lower" than the theoretical yield curve, the step that EY took was recorded in the FY15 EY Biological Asset Assessment Memorandum as follows: … [we] inquired of management as to the reasonableness of the theoretical yield curve. PDW [per discussion with] Andrew Bro[w]n, it is management's view that the theoretical yield curve remains appropriate as the older plantations were planted at a time when TFS had considerably less experience and research behind them. With the strength of their knowledge around host tree selection, production of progeny seeds and maintenance program, the heartwood yield is expected to be met. This is partly confirmed by our observation that the individual yield curves of 5+ year plantations, which takes into consideration annual measurements, have continued to trend upwards towards the theoretical yield curve. (Emphasis added). 1461 The FY16 EY Biological Asset Assessment Memorandum was in almost identical terms as follows: … [we] inquired of management as to the reasonableness of the theoretical yield curve. PDW [per discussions with] Andrew Brown, it is management's view that the theoretical yield curve remains appropriate as the older plantations were planted at a time when TFS had considerably less experience and research behind them. With the strength of their knowledge around host tree selection, production of progeny seeds and maintenance programs, the heartwood yield is expected to be met. This is partly confirmed by our observation that the individual yield curves of 5+ year plantations, which take into consideration annual measurements, have continued to trend upwards towards the theoretical yield curve. (Emphasis added). 1462 The fact that the assessment made in each year was near identical suggests that EY did little further work in FY16 relative to do what it had done in FY15 to assess and evaluate the reasonableness of the "theoretical yield curve". Putting this to one side, it will also be immediately evident from these extracts that EY's evaluation of the reasonableness of the Tree Model was based on discussions with Mr Brown, though not exclusively so. In particular, reliance was placed on his view that that the "theoretical yield curve" (i.e., the Tree Model) remained appropriate and the poor performance of older plantations was explained by Quintis having had less experience and research in the early years' plantations. EY also relied upon its analysis of the individual yield curves of trees aged over five which, in its observation, "continued to trend upwards". Further, reliance was also placed on management's knowledge about improvements in silvicultural practices. For the reasons that I return to below, none of these matters supported the reasonableness of the "theoretical yield curve". 1463 EY also considered the issue of growth rates more generally by looking at whether there had been any movements in the assigned yield curves. The FY15 EY Biological Asset Assessment Memorandum recorded as follows: Specific compartments have been identified as growing more slowly than expected and certain operational measures have also been identified that are expected to remedy part of this in future years, most particularly relating to host tree management and irrigation techniques. Overall, 9 compartments were moved to lower yield curves as a result of the tree count/growth measurement conducted in FY15 on account of concern over growth rates and mortality. 1464 The FY16 EY Biological Asset Assessment Memorandum recorded as follows: 2016 Annual Tree Count Results We have considered the documented results from management's annual tree count performed in the period. Refer to FY16 TFS - Biological Assets Tree Count (PBC).docx for further details. Overall, we noted the following:
14.3 The case against EY under s 12DA of the Corporations Act
1549 The Davis Applicants alleged that in making the representations in the EY FY15 and FY16 Financial Report Representations, EY contravened s 12DA of the ASIC Act. 1550 Section 12DA provides as follows: 12DA Misleading or deceptive conduct (1) A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive. 1551 To succeed on this claim, the Davis Applicants had to establish that: (a) EY's representations were made in relation to financial services; (b) EY's representations were made in trade or commerce; and (c) EY's representations were misleading or deceptive, or likely to mislead or deceive. 14.3.1 Were EY's representations made in relation to financial services? 1552 The parties were in dispute as to whether EY's conduct was in relation to "financial services". 1553 Section 12BAB of the ASIC contains a definition of "financial service" as follows: 12BAB Meaning of financial service When does a person provide a financial service? (1) For the purposes of this Division, subject to paragraph (2)(b), a person provides a financial service if they: (a) provide financial product advice (see subsection (5)); or … (g) provide a service (not being the operation of a derivative trade repository) that is otherwise supplied in relation to a financial product (other than an Australian carbon credit unit or an eligible international emissions unit); … (Emphasis added). 1554 EY initially submitted that it had a complete answer to the case under s 12DA of the ASIC Act because "audit services" were excluded by reason of the combined effect of s 766A(2) of the Corporations Act and reg 7.1.29(3)(a) of the Corporations Regulations, as picked up by s 5(2) of the ASIC Act. However, EY accepted that the Corporations Regulations do not apply to the ASIC Act and, in the absence of regulations made for the purpose of s 12DA under the ASIC Act, the definition in s 12BAB is not expressly qualified by any carve out for audit services. 1555 It is not clear why there are differing definitions that apply as between the Corporations Act and ASIC Act as to the meaning of "financial services" and the exclusion of audit services from them. It is unsurprising that following the completion of its Review of the Legislative Framework for Corporations and Financial Services Regulation, the Australian Law Reform Commission published Final Report entitled 'Confronting Complexity: Reforming Corporations and Financial Services Legislation' which was tabled in Parliament on 18 January 2024 and recommended that the definitions should be amended to enact a single, simplified and uniform definition: see Recommendations 31, 32 and 35. 1556 The application of the definitions is not straightforward. Nor is it clear to me why the Davis Applicants persisted with a claim against EY under s 12DA of the ASIC Act. As I have earlier noted in respect of the case against Mr Wilson, I see no additional forensic utility to the Davis Applicants in maintaining cases under both s 1041H of the Corporations Act and s 12DA of the ASIC Act. I would echo what Rares J said in Wingecarribee Shire Council v Lehman Brothers Australia Ltd (ACN 066 797 760) (in liq) [2012] FCA 1028; (2012) 301 ALR 1 at [948]: Of course, each Act has a myriad of complex definitions of what is a financial product or a financial service or are financial services. Each Act gives a person, who suffers loss or damage by conduct of another in contravention of the prohibition, the right to compensation (e.g. s 1041I(1), s 12GF) coupled with substantively identical related exceptions and qualifications concerning proportionate liability. Since the end result of this legislative morass seems to be the same, it is difficult to discern why the public, their lawyers (if they can afford them) and the Courts must waste their time turning up and construing which of these statutes applies to the particular circumstance. Here, should it make any difference whether Grange was alleged to have engaged in conduct in relation to "financial services" (s 12DA(1)) or "a financial product or a financial service" (s 1041H(1))? Why is there a difference? Why does a court have to waste its time wading through this legislative porridge to work out which one or ones of these provisions apply even though it is likely that the end result will be the same? As Edmund Davies LJ lamented in The Putbus [1969] P 136 at 152: "Were bewilderment the legitimate aim of statutes, the Merchant Shipping (Liability of Shipowners and Others) Act, 1958, would clearly be entitled to a high award. Indeed, the deep gloom which its tortuousities induced in me has been lifted only by the happy discovery that my attempt to construe them has led me to the same conclusion as my brethren." 1557 Returning to the definition, it will be apparent from s 12BAB(1)(g) of the ASIC Act that it is a "catch all" definitional provision that stretches the meaning of financial services to include the provision of "a service" that is "otherwise supplied in relation to a financial product". EY accepted that in conducting its audit it provided a "service" to Quintis. However, it denied that this service was supplied in relation to Quintis shares (as the relevant financial product). For the reasons that I have set out above, I do not accept EY's contentions. As I have there reasoned, the words "in relation to" are "of wide import" and, in the context of misleading and deceptive conduct claims, "the relationship that is required to be established between the product and the service 'is at the lower end of the spectrum' and an 'indirect or less than substantial connection is sufficient'": see Narain at [76]. Those statements apply equally to s 12BAB(1)(g). 1558 Having reached this conclusion, it is unnecessary to consider the operation of s12BAB(1)(a) as to whether EY provided "financial product advice". The resolution of that question raises complex issues to which insufficient attention was given. 14.3.2 Were the representations in trade or commerce? 1559 The next issue that arises is whether EY's conduct was "in trade or commerce". 1560 EY disputed that its conduct was "in trade or commerce". It submitted that its conduct did not bear a trading or commercial nature because it was acting in furtherance of its statutory function under the Corporations Act. EY submitted that the conduct pleaded against it was not the mere provision of professional services under a retainer, but the expression of audit opinions in the discharge of statutory functions. EY submitted that it was appointed by Quintis under s 327B of the Corporations Act to perform the statutory "office" of auditor. This was a role that was required to be independent of the company: see, e.g., s 307C of the Corporations Act. And the obligation to prepare the report to members (being the conduct that is alleged to give rise to liability) was mandated by statute (s 308(1)) and was required to be in a form prescribed by the Auditing Standards: s 308(3A); ASA 700. It was submitted that EY's conduct in carrying out the audit and reporting to members therefore did not bear a commercial or trading character in the sense described in the authorities and placed auditors in a different category to other professional service providers. EY contended that its role was analogous to a liquidator or other type of officer discharging a statutory office, and submitted as follows: The position of the auditor is far more analogous to that of liquidators or other external administrators. Like auditors, liquidators and administrators perform a statutory function under the Corporations Act and are vested with powers to perform that function. In exercising those statutory functions, powers and duties, it is accepted that liquidators and administrators are generally not engaging in conduct "in trade or commerce": Macks v Viscariello [2017] SASCFC 172; (2017) 130 SASR 1 at [234]; Baxter v Hamilton [2005] TASSC 64; (2005) 15 Tas R 59 at [41]-[46]; du Boulay v Worrell [2009] QCA 63 at [47]. This includes when making representations in reports required by the Corporations Act: Seaman v Silvia [2018] FCA 97 an administrator made misleading statements in a s 439A report, on the basis that the statements were not "in trade or commerce" and "could not succeed"). The same applies equally to auditors providing an audit report in accordance with s 308 of the Corporations Act. The conduct of EY is also analogous to preparation of the report considered in Chapman v Luminis Pty Ltd (No 4) [2001] FCA 1106; 123 FCR 62. In that case, it was alleged that preparation of a report by an academic for the Aboriginal and Torres Strait Islander Commission (ATSIC) was conduct "in trade or commerce" because the academic agreed to provide consultancy services and was paid a fee for her report. Van Doussa J rejected that submission. His Honour explained (at [178]) that the academic "was carrying out the statutory function of reporter" and that "that is not a function which is itself an aspect or element of activities or transactions which bear a trading or commercial character". The fact that her work was of a professional nature and that she was remunerated for doing so did not transform the function into an activity bearing a trading or commercial character. The same is true of EY's services as auditor. 1561 I do not accept EY's contentions. EY was a professional services firm that was providing its audit services for reward. As French J (as his Honour then was) stated in Bond Corporation Pty Ltd v Thiess Contractors Pty Ltd (1987) 14 FCR 215; 71 ALR 615 at 620 (for the purposes of s 52 of the TPA): … where the conduct of a profession involves the provision of services for reward, then in my opinion, even allowing for widely differing approaches to definition, there is no conceivable attribute of that aspect of professional activity which will take it outside the class of conduct falling within the description 'trade or commerce'. 1562 This passage was subsequently cited with approval by Bell J in Goddard Elliott (A Firm) v Fritsch [2012] VSC 87 in concluding that services provided a lawyer to a client were "in trade or commerce" for the purposes of s 9(1) of the Fair Trading Act 1985 (Vic): see at [504], [514]-[517]. 1563 In my view, the commercial and trading quality of EY's services did not alter because it was retained to provide a service that was required and governed by the Corporations Act, and in respect of which its appointment served a statutory office. It is true that the Corporations Act required a company in Quintis' position to have its accounts audited. It is also true that in auditing Quintis' accounts, EY was appointed under the Corporations Act to the office of Quintis' auditor to independently audit Quintis' accounts and, in doing so, was required to express an opinion that was required by s 308 of the Corporations Act. It is further true that EY's conduct as an auditor was in other respects regulated by the Corporations Act. 1564 However, none of these contentions advanced by EY (like others that were advanced) attended to the case that was pleaded. As I have elsewhere noted, the conduct pleaded against EY was not limited to its expression of the Audit Opinions as contained in the FY15 and FY16 Financial Reports. The conduct that was pleaded encompassed the totality of the acts by which the Audit Opinions came to be published to the ASX and more broadly in circumstances that were known to EY. It was conduct by which the Davis Applicant sought to imply from all of those circumstances that EY had made the implied representations that were pleaded not just to Quintis and its members, but more broadly in that it was to be included in the Financial Reports of a publicly listed company. As I have also noted, those Financial Reports were one means, but not the exclusive means, by which important financial information was to be conveyed to the market including with the benefit of the inclusion EY's Audit Opinions (though this was required to be done). 1565 I do not consider that the decision of the Court of Appeal the Supreme Court of South Australia in Macks v Viscariello [2017] SASCFC 172 to be apposite or analogous. There, it was alleged that an administrator (Mr Macks) had misled creditors when discharging his duties as an administrator of two companies (Bernsteen and Newmore). The suit was brought by the director of Bernsteen and Newmore, Mr Viscariello. The Court of Appeal (Lovell J, Corboy and Slattery AJJ) held that the administrator's conduct was not in trade or commerce. It reasoned as follows at [233]: We agree with the Primary Judge that there was no commercial exchange or trade between Mr Macks and Bernsteen and Newmore, their shareholders or creditors when all the relevant circumstances are considered. As the Primary Judge observed, the relationship between a voluntary administrator, the company, the contributors and the creditors is a statutory construct. Mr Macks was performing his statutory role as administrator in providing the s 439A report and in informing the creditors of the position of the Companies at the second creditors meeting. His conduct could be reviewed by a court pursuant to Pt 5.3A and s 1321 of the CA. The s 439A report and the statements made by him at the meetings of creditors were merely part of a process by which a decision was made to terminate the administrations and place the Companies in liquidation. (Emphasis added). 1566 As will be apparent from the above, the Court of Appeal reasoned to its conclusion on the basis that there was no commercial exchange that lay at the heart of the appointment of Mr Macks as the administrator. The administrator would undoubtedly earn fees from the administration but not by function of any commercial relationship or exchange with any other person. That is because of the operation of a statutory construct. However, the essence of the relationship between an auditor and the company is not based on a statutory construct but has its source a commercial retainer by which a company requests and the auditor accepts an appointment as an auditor. 1567 The decision in Chapman v Luminis Pty Ltd (No 4) [2001] FCA 1106; 123 FCR 62 was peculiar to the particular statutory context by which Professor Saunders came to be appointed to carry out an exclusively statutory function as a "reporter" to gather information in the nature of evidentiary materials and representations. It does not assist EY's argument. 1568 There is no general rule of law that a person or entity that is engaged in discharging a statutory duty or function is thereby not engaging in trade or commerce: e.g. see generally, NT Power Generation Pty Ltd v Power and Water Authority [2004] HCA 48; (2004) 219 CLR 90. The conduct of the entity must be viewed in context including by situating that conduct as part of the overall commercial character (or not) and other objectives of the person or organisation that is discharging that statutory function. In Braverus Maritime Inc v Port Kembla Coal Terminal Ltd [2005] FCAFC 256; (2005) 148 FCR 68, the Full Court (Tamberlin, Mansfield and Allsop JJ) considered whether the Port Kembla Port Corporation was liable for any loss or damage caused by reason of its supply of a unlicensed "pilot" to operate the pilotage and navigation of a ship in discharge of that Corporation's obligations under the Ports Corporatisation and Waterways Management Act 1995 (NSW). After relying upon NT Power and examining the operations and functions of the Corporation, the Full Court stated at [146]-[147] that: In light of these features, we are persuaded that the Corporation, on its own admissions and records and having regard to the legislation and manner of providing pilotage services in this case, was engaged in trade or commerce. It is evident that the pilotage was carried out in the broader context of providing services for a ship that was engaged in trade or commerce and where the Port Kembla Coal Terminal was also engaged in trade or commerce. For these reasons, we conclude that, having regard to the principles recently expressed in NT Power, the pilotage was carried out in trade or commerce. The objectives of the Corporation and the performance of its statutory functions in this case are permeated with indicators of commercial objectives, strategies and profit-making methodologies such that the conduct can properly be characterised as being in trade or commerce. (Emphasis added). 1569 The Full Court's reasoning is apposite here. EY may well have been expressing opinions in the discharge of its function as the entity appointed to office as Quintis' auditor. However, it was discharging those services in pursuit of its commercial business and in respect of subject matter that expressed opinions as to the financial reports of a publicly listed company that it was known would be published to the market. I am satisfied that its conduct was in trade or commerce. 14.3.3 Was EY's conduct misleading or deceptive? 1570 Neither the Davis Applicants nor EY contended that the question as to whether EY engaged in misleading or deceptive conduct was any different under s 12DA of the ASIC Act to that which arises under s 1041H of the Corporations Act. For the same reasons set out above in the case against Mr Wilson, I am satisfied that EY engaged in conduct that was misleading and deceptive in contravention of s 12DA of the ASIC Act. 1571 However, as the Davis Applicants failed to establish their counterfactual case, I am not satisfied that EY's contravention of s 12DA of the ASIC Act led to any causally-connected loss that is recoverable by order of the Court under s 12G of the ASIC Act.
14.4 The case against EY under s 1041E of the Corporations Act
1572 It is not necessary for me to be exhaustive in addressing the Davis Applicants' case under s 1041E of the Corporations Act. The principles applicable to s 1041E have been set out above, and I do not repeat them. 1573 It is not necessary for me to deal with this case in any detail. That is because, as in the case against Mr Wilson, I am not satisfied that the case under s 1041E has been established because I am not satisfied that the Davis Applicants have established the specific case that they advanced that the Representations were likely to induce persons to acquire Quintis' shares or had the effect of increasing Quintis' share price. It follows that this case against EY fails.
1574 The case against EY in negligence may also be addressed in brief terms. 1575 The Davis Applicants submitted that EY owed a duty of care to the Davis Applicants and to Davis Group Members (including group members who had not already bought shares in Quintis). It was submitted that this proposition was supported by authority in Esanda Finance and ABN AMRO at [573]ff. 14.5.1 EY did not owe any duty to non-members 1576 EY denied that it owed a duty of care to the Davis Applicants and Davis Group Members and submitted that the case against it in this regard was contrary to authority. EY submitted that I was bound to follow Esanda Finance. In Esanda Finance, significant reliance was placed on the decision of the House of Lords in Caparo. In addition to Dawson J's reasons already set out above, it bears noting that McHugh J observed at 281 that there was no basis to extend the liability of auditors to those members of a class whom the auditor knows, or ought to know, will rely on the audit where the auditor has not assumed responsibility to those members or intended to induce them to rely on the audit. Brennan CJ, and separately, Toohey and Gaudron JJ, came to similar conclusions for slightly different reasons. See also D'Orta-Ekenaike v Victoria Legal Aid (2005) 223 CLR 1; [2005] HCA 12 at [98] (McHugh J); London City Equities Ltd v Ernst & Young [2019] NSWSC 963 at [31]-[39] (Fullerton J); Ingot Capital Investments Pty Limited v PricewaterhouseCoopers [2002] NSWSC 1129 at [47] (McClellan J). 1577 During oral submissions, Senior Counsel for the Davis Applicants accepted that I was bound by Esanda Finance. Therefore, contrary to the Davis Applicants' submissions, and having regard to the authorities, the facts pleaded at FFASOC [377]-[378] cannot establish that EY owed a duty of care to non-members of Quintis. 1578 It follows that the Davis Applicants' case against EY in relation to non-members must fail. 14.5.2 Duty to members 1579 There was no dispute that EY owed a duty of care to those persons who were shareholders of Quintis at the time of that its Audit Opinions were expressed. The Davis Group Members included such shareholders. 1580 Whilst such a duty was owed, I am not satisfied that the Davis Applicants have established their case in negligence by reason of their failure to establish the counterfactual case pleaded against EY for the reasons I have set out above. In those circumstances, it is unnecessary to say any more about this case as little attention was given to it in written and oral submissions by the parties.
15.1 The case fails as the counterfactual case is not established
1581 The Davis Applicants accepted that their case as to causation and, therefore, loss depended upon the counterfactual case being established: see Berry at [72]-[73]; T1805.4-6. 1582 For the reasons set out above, I am not satisfied that the Davis Applicants have established their counterfactual case. The result is that I do not accept that the Davis Applicants have established the true or correct value of the accounts upon which both the direct and indirect market-based causation cases were based. 1583 Nevertheless, for completeness, I have addressed matters of causation and loss.
1584 The Davis Applicants pleaded both a direct and an indirect "market-based" causation case. 1585 The direct causation case was essentially a "no transaction" case. It was pleaded in the FFASOC at [401]-[407] that: (a) the Davis Applicants and Group Members would not have acquired an interest in Quintis shares at the time they did for the price they did, or at all, if the contraventions had not occurred; and (b) the Davis Applicants and Group Members still hold Quintis shares that are now worthless, or Group Members sold their shares at a loss. 1586 It was submitted that, at this stage, the "direct reliance" case should only be determined in respect of the Davis Applicants' claim. 1587 As to the indirect or marked-based causation case, the Davis Applicants pleaded in the FFASOC at [395]-[400] that the misleading representations made by Mr Wilson and EY in the FY15 and FY16 Financial Reports published to the market, and/or EY's negligence in auditing those Reports, caused the market price of Quintis shares traded on the ASX to be substantially greater than: (a) their true value; or (b) the market price that would have prevailed but for the contravention or contraventions. 1588 It was submitted that this indirect causation case can and should be determined in respect of all Group Members.
1589 Section 1041I of the Corporations Act provides that a person who suffers "loss or damage by conduct of another person" that was engaged in in contravention of, relevantly, ss 1041E and 1041H, may recover the amount of the loss or damage (emphasis added). Section 12GF of the ASIC Act is similarly expressed in respect of the recovery of loss or damage suffered by the conduct of another person in contravention of, relevantly, s 12DA. These provisions have a similar focus to s 82 of the Competition and Consumer Act 2010 (Cth) and may "embrace practical or common sense" concepts of causation of the type discussed in March v E & MH Stramare Pty Ltd (1991) 171 CLR 506, but "must yield to the primacy of the ordinary meaning of the statute": TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Ltd [2019] FCA 1747; (2019) 293 FCR 29 at [1516], citing Wardley Australia Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514 at 525. 1590 A causal connection must be established between the alleged representations and the loss in respect of which compensation is sought: Wardley at 525-526; Henville v Walker [2001] HCA 52; (2001) 206 CLR 459 at [17] (Gleeson CJ), [61] (Gaudron J), [94] (McHugh J with whom Gummow J agreed) and [159]-[160] (Hayne J with whom Gummow J agreed). This requires that the contravention be a cause of the loss, in the sense of the contravention materially contributing to the loss, rather than the cause or the predominant cause: TPT Patrol at [1516], citing Henville at [14], [61], [69], [70], [106], [109], [163]; I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2002] HCA 41; (2002) 210 CLR 109 at [62]. 1591 In Gould v Vaggelas [1985] HCA 75; (1985) 157 CLR 215 Wilson J at 236 referred to the applicable principles and restated them as follows:
1597 The central contentions in support of the direct reliance case were as follows: (a) Mr Davis Snr identified and relied on the fact that the FY15 and FY16 Financial Reports showed that Quintis had significant net assets; (b) Mr Davis Snr relied on the fact that the net assets had grown year-on-year; (c) Mr Davis Snr also focussed on the forward projections and relied on the fact that Quintis was projecting significant returns in the future from its plantations; (d) Mr Davis Snr took comfort from the fact that EY had audited the FY15 and FY16 Financial Reports; (e) Mr Davis Jnr relied upon his father's assessments; and (f) based on the above matters, Mr Davis Snr caused the Davis Fund to acquire shares in Quintis. 1598 The Davis Applicants submitted that if Mr Davis Snr had known the true position as to Quintis' net assets, he would not have acquired Quintis shares at all. It was submitted that it was wrong to look at the counterfactual on the basis of whether Mr Davis Snr would have acquired the shares if the net assets were something less than what was reported in the Financial Reports. It was submitted that the relevant counterfactual was whether Mr Davis Snr would have caused the Davis Fund to acquire shares if Quintis had disclosed to the market in its FY15 or FY16 Financial Reports that it had materially devalued its biological assets which were its principal cash generating asset, compared to what it had previously told the market about their value. It was submitted that Mr Davis Snr would not have done so given that there would have been a material write down of the biological assets in FY15 relative to the value of those assets reported in FY14. 1599 The Respondents disputed each of these contentions. 15.4.1 Mr Davis Snr's approach to investments 1600 Mr Davis Snr began investing on the ASX in about 2004. Mr Davis Snr was, and is, a keen follower of the stock market and devoted significant time and energy into researching the companies he chose to invest in through the Davis Fund. He read extensively about the stocks he invested in, including most ASX announcements they had made and their financial statements: e.g., T437.1-27. This reflected his general interest in the stock market, and the fact that he was investing his own superannuation funds. 1601 The Davis Fund was created in late 2012. At that time, Mr Davis Snr arranged for the balance of his Local Government Super Fund (which he and his employer, Brisbane City Council, had been making made contributions to) to be deposited into the Davis Fund. Mr Davis Snr would decide which shares to buy and sell on the ASX for and on behalf of the Davis Fund. He would usually discuss those decisions with Mr Davis Jnr, but the latter ultimately deferred to Mr Davis Snr's decision. 1602 Mr Davis Snr engaged in share transactions for the benefit of the Davis Fund using the online "CommSec" trading platform. He generally invested large sums of money (between $50,000 and $100,000 in a few companies). Generally speaking, Mr Davis Snr would cause the Davis Fund to hold shares for the medium to long term so he could grow his superannuation. However, in doing so, Mr Davis Snr would often, but not always, put an automatic "stop loss" on the investments in the Davis Fund. He was able to do this by using a function contained in CommSec's trading platform which enabled a user to implement an automated decision to sell shares if particular conditions were met. Mr Davis Snr's usual practice was to wait until an investment had increased in value to around 115% of the original sum invested and then he would set a "stop loss" such that his CommSec account would automatically sell the shares if they thereafter dropped below 110% of the original sum invested. 1603 Mr Davis Snr researched potential investments by reading publications such as the Australian Financial Review (AFR) and Money Magazine, and through research on his CommSec portal (which gave access to articles, market data and information). He would also monitor the companies he was researching and had invested in, particularly through an application on his phone which provided him share price and related information that he checked daily. 1604 There was a dispute about whether Mr Davis Snr's approach to investing had been to maintain a diverse portfolio of primarily "blue chip" stocks or whether he also invested in growth stocks or other, riskier investments. Mr Davis Snr said that he generally tried to invest in established companies that were part of industries he understood such as BHP, Northern Star Resources Ltd (Northern Star), Wesfarmers and Retail Food Group. 1605 However, Mr Davis Snr eventually accepted that he also caused the Davis Fund to invest in shares of companies that were not "blue chip", including in companies that were higher risk and, in my view, likely to be speculative investments where he considered there to be likely future growth or in respect of which Mr Davis Snr was seeking short term profits. These companies included Alchemia Ltd (Alchemia), Northern Star and Silver Lake. In the period from 1 July 2013 to 30 June 2014, Mr Davis Snr had caused the Davis Fund to purchase 50,000 shares in Alchemia, which were sold approximately two months later. Mr Davis Snr explained that the sale came about due to his use of the "stop loss" mechanism which meant that the shares were sold when the profit on them had dropped to 10%. In the same financial year, Mr Davis Snr caused the Davis Fund to buy 130,000 shares in Northern Star and shares in Silver Lake, which were both gold mining and exploration companies. He said that he considered that there would be an increase in the price of gold and he was expecting these companies to generate significant profits in the future. By 30 June 2015, the entire portfolio of the Davis Fund was invested in Northern Star and Silver Lake, but Mr Davis Snr explained that this might have been brought about because other shares may have been sold due to the operation of the "stop loss" mechanism. 1606 Although Mr Davis Snr did not initially agree with the proposition that Northern Star and Silver Lake were not "blue chip" companies, he did accept that these two companies were either mid-level or "junior" stock: T433.34-434.26. And, he eventually accepted that neither company was "blue chip". Putting to one side whether these companies were "blue chip", Mr Davis Snr accepted that his investment in Silver Lake was a speculative one which he made based on the research he had done on the stock and the gold market, including his assessment that the gold price was predicted to go up because of the war in the Middle East at the time, and he thought the company had good prospects of finding gold: T438-440 and T442.25-28. Similarly, with respect to Northern Star, Mr Davis Snr had confidence in the gold reserves that the company reported in its financial reports: T441.40-41. As he clarified in answers to questions on this topic, he sought to invest in shares which he thought had value in them, particularly their growth prospects, which he came to have an understanding about after researching them and reading their financial statements: T435.29-34. 1607 Whilst Mr Davis Snr relied upon the reports that he read, he also made his own assessments. For example, in making his assessment as to the risk and reward involved in the investment in Silver Lake, Mr Davis Snr did not solely rely upon the information that was published by that company. Mr Davis Snr caused the Davis Fund to purchase 130,000 shares in April 2014. He had done so after Silver Lake had published a report that recorded an impairment of $43 million on its inventories. The share price had dropped and the net tangible assets per share had decreased by 13%. Despite this, Mr Davis Snr doubled the Davis Fund's investment in Silver Lake. He also made this decision despite Silver Lake's auditors having stated in their audit report that there was "material uncertainty" as to whether Silver Lake could continue as a going concern: T439.15-34. Mr Davis Snr accepted that the auditor's report was negative, but said that he had already made the decision to invest in the company and so did not want to "walk away" and lose money when he considered the company still had potential: T440.10-15. Despite his evidence, it is clear that Mr Davis Snr was prepared to take the risk despite the information published by the company and its auditor. 1608 I am satisfied that, whilst Mr Davis Snr caused the Davis Fund to invest in established "blue chip" companies such as BHP, Wesfarmers and Retail Food Group, he also from time to time invested in less established companies where he considered that there was scope for growth and profit. Some of his investments, such as those in Northern Star and Silver Lake, were more speculative than others. And, each of these investments were ones where Mr Davis Snr made his own assessment of the risk having regard to the research he had conducted. 15.4.2 Mr Davis Snr's investments in Quintis 1609 Mr Davis Snr first became aware of Quintis (then TFS) and sandalwood through articles he read in Money Magazine, The Australian, the AFR, the Courier Mail and an interview with Mr Wilson on the ABC television program Landline. These reports prompted him to do further research. He explained that, as this was the first time he had invested in a horticultural company, he tried to do as much research as he could: T443.18-22. 1610 Mr Davis Snr said he read the FY15 Financial Report for Quintis from which he formed the view that Quintis was "a financially sound, solvent company with good potential for continuing growth" and "took comfort from the fact that EY audited Quintis' financial reports". He said that he thought this meant that "the financial reports must have been accurate and prepared properly given EY was such a large respected accounting firm". 1611 Mr Davis Snr said that he also recalled reading the FY16 Financial Report in detail and, after doing so, maintained the view that he had formed after reading the previous year's report that Quintis was a "financially sound, solvent company with good continued growth prospects". Mr Davis Snr said that, having regard to these matters, he caused the Davis Fund to purchase shares in Quintis. 1612 The Davis Fund's trading history in Quintis shares was set out in the Agreed Facts, as follows: 1613 Mr Davis Snr did not give specific evidence as to why he caused the Davis Fund to purchase or sell shares at these particular times. Mr Davis Snr did identify that the sale on 22 December 2016 occurred automatically as a result of the "stop loss" he had set. 1614 Other than in relation to his general view that he considered Quintis to be "a financially sound, solvent company with good potential for continuing growth", there was no more specific evidence as to the information that Mr Davis Snr had relied upon to cause the Davis Fund to acquire the parcels of Quintis' shares at each of the times that they were acquired, including as to why in particular he caused the Davis Fund to acquire more shares in Quintis in February 2017. All that was said about this topic in his Affidavit was that he caused the Davis Fund to buy a further three tranches of 100,000 shares each in February and March 2017 because he still believed, from the material he had read including in the FY15 and FY16 Financial Reports, that Quintis remained a good investment with good growth potential, and he did not set a "stop loss" on those investments as they did not sufficiently increase in value: at [49] CB p. 798. But this evidence did little to explain precisely why those shares were bought at that time, and I will address this further below. 1615 It was an agreed fact that, on 27 February 2017, Quintis released an announcement to the ASX titled, "Exponential growth in Indian sandalwood sales driving transformational year", stating, amongst other things, "[Quintis] has also reaffirmed its guidance for FY17 Cash EBITDA to increase by at least 25% on FY16, as plantation and product (wood and oil) sales continue to gather pace in the second half of the year." However, Mr Davis Snr did not say that the bought further shares in Quintis in anticipation of this announcement or because of it. 1616 It was also an agreed fact that on 22 March 2017, the First Glaucus Report was published which valued Quintis's shares at $0 and made various allegations including that Quintis was something akin to a "Ponzi" scheme. Quintis' share price started to fall. On the same day, the ASX made a price query of Quintis concerning the decline in the price of Quintis' shares and asked whether Quints was aware of any information concerning it that has not been announced to the market which, if known by some in the market, could explain the recent trading in its securities. 1617 Quintis responded to the ASX price query on 22 March 2017 in a document released to the ASX, stating, among other things, that: Yes, the Company is aware of a note by Glaucus Research Group and provides the following comments:- (i) The note is a self-serving and biased note by a shorter of the stock in an attempt to drive [Quintis'] share price down for their own financial gain; (ii) There are substantial and egregious inaccuracies littered throughout the note which could have been avoided had the note's author contacted the Company; (iii) [Quintis'] plantations and shares are owned by some of the largest and most respected institutional investors in the world, investments they made after undertaking considerable due diligence; (iv) [Quintis] also has a strong track record of meeting its financial guidance; and (v) The Company reaffirms its guidance that FY17 Cash EBITDA will increase by at least 25% on FY16. 1618 As noted above, the trading history indicates that the 100,000 shares bought by the Davis Fund on 23 March 2017 was after the First Glaucus Report was released on 22 March 2017. By this time, the share price had already started to drop. Mr Davis Snr said that he did not sell Quintis shares when he became aware of the First Glaucus Report. Mr Davis Snr recalled that Quintis' share price fell shortly after the First Glaucus Report was issued, however, he chose to hold on to the Davis Fund's shares in Quintis in the hope that the share price would increase again. He said that he understood that Glaucus believed Quintis was a "pyramid scheme" but he believed that Glaucus was a hedge fund that was seeking to take advantage of the market by shorting the share price and further believed that if there was any truth to what Glaucus was saying that Quintis would have told the market that: T453.2-13. Quintis made statements that accorded with Mr Davis Snr's views. The Davis Applicants submitted that Mr Davis Snr had faith in Quintis and proceeded on the reasonable assumption or belief at that time that Quintis had been truthful about what it had informed the market. He said in cross-examination (T452.24-453.13): … I was looking for value in the company and when they dropped down at that point - and I still thought the company was a very good solid company. It had a good balance sheet. So I had no concerns about the company. I was confident in the company and the statements they had put out… I bought shares in again, because - yeah, I bought in because I thought the company was still good. I still had confidence in the company … I believed the Glaucus report was a - it was a sell-down company trying to sell the company down which they had done to another company about four months before and - and that company director came out and stated the company had - had cash reserves and the share price went up and they lost money. … So I presumed - I still went on their financial position, Quintis' financial, with the cash reserves and that, they - I still felt the company was being sold, tried to be sold down by American sell-down company and I made a bad judgment and that, but - and that's why I bought more shares in it because I - as you stated, the price has gone down and I thought the company was still good and I thought the share price would eventually come back in long-term. 1619 Mr Davis Snr started to have doubts about Quintis' true financial position when he read via the CommSec Portal that Quintis' contract with Galderma had been terminated some months prior to an announcement being made about it on 10 May 2017. On reviewing this announcement, Mr Davis Snr decided to sell the Davis Fund's existing Quintis shares, but Quintis was placed into a trading halt before he was able to do so. In his oral evidence, it was suggested to Mr Davis Snr that the only reason he tried to sell his shares was because of the loss of the Galderma contract. Mr Davis Snr's response was that he tried to sell because Quintis had announced that it had lied to the market: T455.5-17. 1620 The Respondents submitted that the Court could not be satisfied that Mr Davis Snr had relied upon the impugned Representations contained in the FY15 and FY16 Financial Reports. To be more precise about this, the Respondents submitted that there was no specific evidence contained in Mr Davis Snr's Affidavit that he had read the Directors' Declarations or the Audit Opinions that were contained in the FY15 and FY16 Financial Reports, or understood them to mean that Mr Wilson and EY respectively had reasonable grounds for making their respective Representations or that they were the product of reasonable care. The Respondents invited me to find that Mr Davis Snr did not rely upon these specific Representations (as pleaded) and instead he made an investment which he knew to be speculative. Further, the Respondents submitted that Mr Davis Snr did not identify in his Affidavit the basis upon which he formed the view that Quintis was "a financially sound, solvent company with good potential for continuing growth". 1621 The Davis Applicants submitted that the Respondents' submissions invited the type of self-serving reliance evidence that is regularly deprecated by courts. They submitted that the totality of Mr Davis Snr's evidence (including that which was given orally) was that he relied upon both the value or the quantum of the net assets as specified in the FY15 and FY16 Financial Reports for the purpose of his assessment as to the future growth of the company, as well as its year-on-year growth. It was submitted that his evidence to the effect that Quintis was "a financially sound, solvent company with good potential for continuing growth" was based on Quintis' reported net assets which in turn could not be separated from the Directors' Declarations and Audit Opinions that they reflected a true and fair view of Quintis' financial position in accordance with the Corporations Act, the Accounting Standards and the Auditing Standards. 1622 The Respondents disputed that this was the effect of Mr Davis Snr's evidence. They submitted that the effect of Mr Davis Snr's evidence was that he did not place any particular reliance upon the reported value or quantum of the net assets reported, as opposed to the fact that Quintis had substantial assets. The Respondents further submitted that the Court should not accept that Mr Davis Snr had read the pleaded Representations at all or understood their nature, let alone relied upon them. The Respondents submitted that these matters were relevant because, for the purposes of the direct reliance case, it had to be established that Mr Davis Snr in fact relied upon the Representations and that they had some substantial rather than negligible effect on his decision to buy the relevant Quintis shares and that they were a real inducement or one of the real inducements to engage in the conduct which occasioned loss. 1623 It followed that there was a contest as to whether Mr Davis Snr relied upon Quintis' reported net assets and, specifically, whether he relied at all upon the Representations that were pleaded against the Respondents. 1624 The Respondents' cross-examination of Mr Davis Snr focussed upon whether the value or quantum of the net assets as reported, and the opinions expressed about them, mattered at all in his decision to acquire the shares. Mr Davis Snr explained what was important to him as follows (T460.31-35 and T460.47): I ran through all these numbers [in the financial reports] here but the main thing I concentrate - I looked at different - what they itemise, but the main thing was the total, it would be down the bottom where it was 574 million against 466 from year '14. So that to me showed me that the company was in a good financial position. … And that's why I - I invested in the company of[f] their financial position. … I invested in the company of[f] their financial position. 1625 As will be evident from this evidence, Mr Davis Snr focussed upon the figure reported as net assets in FY15, and that it was $574 million as against the figure of $466 million from the previous year. His evidence was that this demonstrated to him that Quintis was in a good financial position, and he invested on that basis. It was suggested that all Mr Davis Snr was concerned about was the existence of an asset base, as opposed to its extent. The following exchange occurred (T464.16-32): Yes. Your purpose in looking at the annual report was to check that the company had a healthy balance sheet? Yes. If the net assets had been above $100 million and you thought the company had good prospects for growth you would still have proceeded. Do you agree with me? I probably would have - I would have wanted more - more assets than 100 - what did you say? 100,000, did you? No, I wanted a larger - I would have wanted a lot more assets than that. What about 100 million? I was - I was happy with the 500 million. But the 500 million wasn't a figure that you had regard to in working out what you thought the shares were worth, was it? The 500 million there was the say - to say to me that the company - the company was viable, it was financially viable and the share - they were - and they were delivering a three cents fully franked share and the market value. The market value valued the company. I relied on the market value. The people there knew more about market val[u]e than what I did. 1626 Pausing there, Mr Davis Snr was here saying that he relied upon the net asset figure of approximately $500 million as it conveyed to him that the company was viable and had value. There was further cross-examination on this topic as to whether it mattered whether the figure was $500 million or something less (T465.1-9): What I'm suggesting to you is that if the net asset figure in the balance sheet hadn't been $500 million but had been, say, $300 million you would still have made the same decision because you would have been comfortable about the asset position of the company?‑‑‑Well, I can't say whether I would or not. I would have looked at, and I might have said the assets may be a bit low. But that's a decision I would have made then. But I didn't - I wasn't - I didn't have to make that decision because the - the net assets were 500 and something, so I was making my assessment on that - that net asset. So I'm not going to imagine what I would have done if there was 300 million there, because I wasn't looking at that scenario. 1627 In my view, Mr Davis Snr was being candid. He was not certain what he would have done if the reported net assets were lower, say, $300 million. The purpose of the cross-examination here had a dual purpose: first, to test whether in fact Mr Davis Snr relied upon the value or quantum of the net assets as reported in the respective Financial Reports; and second, to test the counterfactual proposition as to whether, as a result, it would have made any difference to him if the assets were reported at a lower value. The Davis Applicants submitted that this cross-examination missed the point because it did not then engage with whether, if the reported figure for net assets for FY15 was $300 million, Mr Davis Snr would have still invested in Quintis shares given that this would have been a material reduction in net assets relative to the figure of $466 million that had been reported for FY14. The Davis Applicants placed significance on the absence of such cross-examination. 1628 Mr Davis Snr was taken to the balance sheet of Northern Star which had reported net assets of $110 million. Mr Davis accepted that, having regard to those net assets, he had caused the Davis Fund to invest in a company that had lower net assets than those reported by Quintis. However, it was not made clear what flowed from this fact. It may be accepted that Mr Davis Snr made different decisions in relation to different companies. However, it did not mean that Mr Davis Snr was making relative assessments as between those companies or, more specifically, their reported net assets. All that this evidence established was that in respect of one company, Northern Star, Mr Davis Snr formed the opinion that $110 million was a healthy balance sheet, and he formed a different opinion in respect of Quintis. 1629 As earlier noted, the Davis Applicants submitted that the Respondents' focus on whether Mr Davis Snr would have made a decision to invest if the assets were lower missed the point that Mr Davis Snr relied upon the increase year-on-year of the net assets as this showed that Quintis had growth prospects and was in a good financial position (which he had demonstrated was important to him when investing in shares) (at T468.31-T469.2): But you weren't having a look at its balance sheet for the purpose of informing yourself about its prospects for growth, were you? No, I had already read those statements about growth and - and the sandalwood trees were going to mature and have a - 50 per cent more sandalwood. So the company put those statements out. I may - I then went in and looked at the financial report and the auditor's report to see if the company was sound. And you're doing that to check the company is sound, right? Yes. You want to see a healthy balance sheet and a sign-off from some competent auditors? Yes. The $500 million figure didn't play any particular role in your decision making process, did it? Yes, it did. It was a - it was a major issue because they had 500 and something million in assets there and that was a pretty - I thought that made it a pretty sound company. But you would also have regarded it as a pretty sound company if it had had, say, $300 million of assets? Only about half a sound company as 500 million. 1630 As will be seen from this exchange, it was of significance to Mr Davis Snr that the net assets that were reported were in the order of $500 million, but also that the assets were growing (both in physical terms and in financial value). I accept his evidence in this regard. 15.4.3 The factual (and counterfactual) causation questions 1631 The Respondents disputed that the Davis Applicants had established factual causation. They disputed that Mr Davis Snr had relied upon the specific opinions that were pleaded against them or that it had been established that he would have acted any differently had the true position been conveyed. 1632 As mentioned above, the Respondents submitted that it was not sufficient for Mr Davis Snr to have read the Financial Reports, and that it was necessary for the Davis Applicants to prove, on the balance of probabilities, that Mr Davis Snr specifically read the Directors' Declarations and the audit report contained in each of the FY15 and FY16 Financial Reports, and that these representations and the opinions they conveyed had some substantial rather than negligible effect on his decision to cause the Davis Fund to buy the relevant Quintis shares. In this respect, EY submitted that Mr Davis Snr's Affidavit did not refer to EY's audit report at all. It was submitted that Mr Davis Snr did not give evidence that he read and understood the audit report and that it was a substantial or real factor in his decision to purchase shares in Quintis. It was pointed out that he did not say that he would not have purchased those shares had EY not made the Representations that it did, for example, if it had issued a qualified audit opinion. EY argued that, at its highest, Mr Davis Snr's evidence was that there was a collection of factors including the identity of the auditor that caused Mr Davis Snr to believe that "Quintis remained a good investment with good growth potential". It was submitted that this was not sufficient to establish direct reliance on the impugned Representations. 1633 I do not accept the Respondents' submissions. EY submitted, and I accept, that whether an alleged wrongful act can be said to have caused the loss claimed in a legal proceeding is not a matter of physics; it is a normative decision that must have regard to the legal framework in which the question is being asked: Henville at [98]-[100] (McHugh J), citing Barnes v Hay (1988) 12 NSWLR 337 at 353 (Mahoney JA); see also Comcare v Martin [2016] HCA 43; (2016) 258 CLR 467 at [42]; Fisher v Nonconformist Pty Ltd [2024] NSWCA 32 at [111] (Kirk JA). EY pointed in this regard to the illustration of the principle given by McHugh J at [101]-[103] of Henville that the mere fact that a defendant's conduct provides the reason why the plaintiff acted will not be sufficient to establish a causal connection unless the purpose of the legal norm that the defendant breached was to prevent persons suffering detriment of the kind concerned. McHugh J gave the following example (at [103]): If a broker negligently advises a client to retain shares because they are a good investment, the broker will be liable for the loss sustained in retaining those shares. But if, having received that advice, the client decides to buy more shares, the broker will not be liable for the further losses unless the terms of the original retainer imposed a duty on the broker to advise in respect of further purchases. 1634 EY submitted that even if Mr Davis Snr had relied upon its opinions, EY had not expressed any opinions in respect of which it was purporting to advise Mr Davis Snr to invest or not invest in Quintis' shares. It contended that the legal norm requiring it to express an opinion as to Quintis' accounts was not intended to protect investors from losses they suffered when investing other than on the defendant's advice. Whilst EY's contentions may have some force in respect of its common law duty of care, as I have already addressed the statutory misleading and deceptive causes of action relate to a different legal norm. 1635 It is true that Mr Davis Snr did not in his Affidavit say in terms that he had read the specific opinions expressed by the directors in their declarations or the opinions expressed by EY, or that he had relied upon them. However, he did say in his Affidavit that he had read both Financial Reports, and further that he took comfort from EY's audit of Quintis' accounts. I do not consider that any great weight can be placed on the fact that Mr Davis Snr did not specifically refer to Mr Wilson's or EY's opinions in his Affidavit or say that he specifically relied upon those opinions. This would have been self-serving evidence of little probative value to me. Further, Mr Davis Snr gave evidence in cross-examination that shed light on the matters that were important to his decision to cause the Davis Fund to invest in Quintis' shares. In relation to EY, Mr Davis Snr said that he read EY's declaration and understood that it "was true" and that EY had "signed off on it" (meaning the accounts): T449.21-29. There followed an exchange as to what in particular Mr Davis Snr relied upon (T450-451): Okay. And what the auditors said there wasn't relevant to your decision to purchase into Quintis, was it? Yes, it was important to me because they had signed off and said it was a true and fair view of the company's financial position and they had complied with the Australian standards and, yes. Yes, "so in our opinion remuneration report" so they had signed off on the company and said all the financial - the financial statement, the yearly statement they made was true and so I - I was happy with that. Okay? That signing off with that. If they had given a negative opinion you still would have bought shares in Quintis, wouldn't you? If it was what, sorry? If they had given a negative opinion you still would have purchased shares in Quintis? No, I wouldn't have, because this is my first time into growing trees and I had known about other companies, Timbercorp and all them going broke. So I was pretty - very cautious with this company to see if it's long-term growth. So I figured I would be - if I didn't - if my profit - loss profit hadn't been activated I would have stayed in the company because I was looking at, say, a two year - I was looking at growth of trees for two years to give me a share portfolio - the share valuation would go up from three cents a share. So it was a - I was hoping for long-term, but if my - if it had gone up and it would activate my profit margin, I - I would have had to get out of the company then, maybe rebought back into the company again. You understood that Ernst & Young were not auditing Quintis's contracts? No, I didn't realise that. I thought they would have taken that into consideration with the - with the Quintis statements that they put out. You understood that Ernst & Young - I withdraw that. So you purchased shares in Quintis on the understanding that the auditors were not only signing off on the historical results of the company, but on its future contracts and profitability; is that correct? I - I - I would have presumed they would have read those statements that Quintis put out about the long-term contracts in - in the contracts for two years selling that sandalwood, so I thought they - they would have been aware of that Okay? when they did their audit. So when you say that Ernst & Young's opinion was relevant to your investment decision, it was based on that understanding, was it? Yes. It - yes. (Emphasis added). 1636 The Respondents submitted that no weight should be given to Mr Davis Snr's assertions in cross-examination. EY submitted that Mr Davis was giving evidence of his thought process at the time he bought Quintis shares over eight years after the event. It was submitted that he had no more than a general recollection of reading about Quintis in the press and reviewing its ASX announcements and that, whilst Mr Davis Snr said he read the relevant Financial Reports, it was apparent that he did not have a clear recollection of reading or understanding them, let alone relying on the representations made in them. 1637 Whilst it is true that Mr Davis Snr was giving evidence a substantial period of time after he caused the Davis Fund to invest in Quintis' shares, I considered that Mr Davis Snr was giving his evidence honestly and accurately to the best of his recollection. Having observed him give evidence, I am satisfied that he was giving evidence in a way that is consistent with ordinary human experience in seeking to recall events from some time ago. Mr Davis Snr did his best to honestly recall why he made the decisions he did without confecting them to his advantage. I am satisfied that Mr Davis Snr conducted research on Quintis. I am satisfied that he did in fact read the FY15 and FY16 Financial Reports and took confidence from them as to the reported net assets. I accept his specific evidence that he read the FY15 and FY16 Financial Reports to form the view that Quintis was "a financially sound, solvent company with good growth prospects". I also accept Mr Davis Snr's evidence that he "was aware that EY had audited Quintis' accounts in each of those years [and] took significant comfort from the fact that EY audited Quintis". 1638 I accept that Mr Davis Snr looked at and read the totality of the Financial Reports, which necessarily included the Directors' Declarations and Audit Opinions, to form his view that they accurately conveyed that Quintis was financially sound and, in doing so, satisfied himself, based on the quantum of net assets reported in each year, that Quintis had an asset base of sandalwood trees that was growing year-on-year. I am satisfied that Mr Davis Snr relied upon the reported quantum of the net assets for two purposes, the first being to determine whether the company was one that was financially sound and of substance, and the second being to ascertain its growth prospects by reference to its asset base of sandalwood trees which he had compared to the previous year's reported assets to identify growth. In so relying upon the reported quantum of assets, I am satisfied that Mr Davis Snr relied upon them as reflecting a true and fair view of Quintis' financial position as asserted in the opinions of the directors and EY. 1639 In my view, the distinction that was sought to be drawn by the Respondents was artificial. Mr Davis Snr had read the totality of the FY15 and FY16 Financial Reports. Those Reports included the Directors' Declarations and the Audit Opinions, without which the Financial Reports would have not been issued or would have been issued subject to adverse or qualifying opinions. Those Declarations and Opinions could not be disassociated or delineated from the document read as a whole, which is consistent with the substance and effect of the evidence that Mr Davis Snr gave. 1640 I accept that in some respects Mr Davis Snr did not entirely understand what an audit involved. For example, his evidence indicated that he thought EY would audit Quintis' contracts, and he also appears to have relied upon the identity of the auditor to obtain comfort. However, he also gave clear evidence that he relied upon the fact that EY had "signed off" on the accounts. In my view, that evidence was to be understood as meaning that he relied upon the fact that EY had audited and was satisfied with the accounts as reported. I am satisfied that this was a relevant factor that weighed in his decision-making that Quintis was financially sound. 1641 Whilst I accept all of the above as being matters that Mr Davis Snr relied upon, the fact is that they were expressed at a high level of generality. There was a lack of specificity as to why Mr Davis Snr caused the Davis Fund to acquire the shares in Quintis at each of the specific times set out above at [1612]. I understood the Davis Applicants to submit that on each occasion that the Davis Fund acquired shares in Quintis, it did so because on each such occasion Mr Davis Snr continued to rely upon the reported net assets being accurate as disclosed in each of the FY15 and FY16 Financial Reports, which necessarily encompassed his reliance upon the Directors' Declarations and the Audit Opinions that this reflected a true and fair view of Quintis' financial position. I will return to the significance of precisely what Mr Davis Snr relied upon and its relevance to the Davis Applicants' counterfactual case. 1642 It was accepted that it is not enough that Mr Davis Snr relied upon the reported net assets and the opinions expressed by the Respondents in relation to them. It was accepted that it must be shown that this reliance was causative of loss in the way that it was pleaded here, namely, that Mr Davis Snr would not have caused the Davis Fund to make any investments in Quintis had he known the true position - reflecting a no transaction case. In advancing this no transaction case, the Davis Applicants submitted that the relevant counterfactual was not whether Mr Davis Snr would have caused the Davis Fund to invest in Quintis' shares if the quantum of net assets happened to be less than what was reported. It was submitted that the relevant counterfactual was whether Mr Davis Snr would have caused the Davis Fund to invest if Quintis had disclosed to the market in its FY15 or FY16 Financial Reports that it had materially devalued its biological assets (being the sandalwood trees) which were its principal cash generating asset compared to what it had previously told the market about their value. It was submitted that the increase year-on-year of the net assets was fundamentally important to Mr Davis Snr's investment decision as it showed the company had growth prospects and was in a good financial position, and that the relevant counterfactual was what would have occurred had Mr Davis known the true position that, in fact, those assets had been substantially overvalued and were being materially written down. 1643 In my view, it is not possible to resolve the factual causation question without examining the effect of and accepting the precise counterfactual that was advanced. Nor is it possible to do so given the imprecise way in which the case was advanced. 1644 In order to illustrate these points, it is necessary to start by examining the biological and net assets as they were reported from year to year in the Financial Reports that were tendered in evidence before me: 2011 2012 2013 2014 2015 2016 Biological Assets $48 million $85.6 million $191.4 million $348.1 million $607,010 million $742,961 million Net Assets $242 million $268.8 million $324.6 million $466.3 million $574,523 million $747,222 million
1645 Consistently with Mr Davis Snr's evidence, the Financial Reports over the years demonstrated growth in both the biological and net assets from year to year. 1646 If the FY15 and FY16 accounts were restated on the basis of the counterfactual calculations as ultimately advanced by the Davis Applicants by the close of trial, the net assets that would have been reported would have been as follows (depending on the specific heartwood yield assumption adopted): 2011 2012 2013 2014 2015 2016 6 kg: 6 kg: $284 million $404.3 million Net Assets $242 million $268.8 million $324.6 million $466.3 million 8 kg: 8 kg: $340.7 million $476.8 million 10 kg: 10 kg: $394 million $543 million
1647 As will be apparent from the above, the quantum or value of the net assets that would have been reported depend on the assumed heartwood yield. I should note that the Davis Applicants did not plead that the counterfactual heartwood yield assumption should be 10 kgs plead or particularise, but at stages suggested that such a heartwood yield fell within their case to the extent that it was pleaded or particularised that the range would be "approximately" 6 - 8 kgs. When pressed about the figure of 10 kgs during oral closing submissions, it was not, in my view, advanced in earnest, and I have included it here for illustrative purposes in respect of the analysis that follows. 1648 The above table demonstrates that in FY15, there would have been a reduction in net assets relative to those reported in FY14 regardless of which heartwood yield assumption was adopted. At worst, the net assets would have dropped from approximately $466 million to $284 million, and, at best, they would have dropped from $466 million to $394 million. 1649 The above tables also demonstrate that there would have then been a reduction in the net assets that would have been reported in FY16 relative to those that were actually reported in the FY15 Financial Report. However, in FY16, if the Davis Applicants' counterfactual case was accepted, there would have been growth in net assets from those that would have been reported in FY15. And, on at least two of the potential rival counterfactuals (adopting an average heartwood assumption of 8 kg or 10 kg), there would have been an increase in net assets in FY16 relative to the net assets reported in the FY14 Financial Report. In the later scenarios, the net assets reported in FY14 of $466 million would have dropped in FY15 to either $340 million (at an 8 kg yield) or $394 million (at a 10 kg yield) and then would have increased in FY16 to $476 million (at an 8 kg yield) or $543 million (at a 10 kg yield). 1650 In part, the explanation for the increases over time was that Quintis was planting more sandalwood trees and the size of its plantations were growing. Thus, even if the heartwood yield assumption was revised downwards, at least a portion of the value of that decrease would have been offset by the fact that more trees had been planted. The number of trees in Quintis' sandalwood plantations were disclosed in the year-on-year Financial Reports and were as follows: Year Number of trees 2010 89,825 2011 98,459 2012 215,334 2013 601,129 2014 1,015,485 2015 1,022,892 2016 1,146,656
1651 Further, over the period of time from when Quintis commenced to publish information as to its expected heartwood yield to investors, there had been a steady reduction in its expected heartwood yield. This is apparent from the following table: Year Expected heartwood yield per tree as disclosed to investors 2002 30 kg 2003 30 kg 2004 30 kg 2005 30 kg 2006 27.5 kg 2007 28 kg 2008 27.5 kg 2009 27 kg 2010 27 kg 2011 25 to 30 kg 2012 25 to 30 kg 2013 21.9 kg 2014 21.3 kg 2015 20.8kg 2016 19.6kg
1652 In the way the Davis Applicants put their case, and on the basis of Mr Davis Snr's evidence, the question then was whether on any of the counterfactual scenarios Mr Davis Snr would not have caused the Davis Fund to invest in Quintis shares at all. 1653 The Davis Applicants' case was that if its counterfactual accounts in FY15 were accepted, then, based on the evidence given by Mr Davis Snr, he would not have caused the Davis Fund to acquire any Quintis shares at all as he would have assessed that Quintis was not growing and was not in a sound financial position. The Davis Applicants claimed that this would have been the case because there would have been a substantial and material devaluation relative to what had been reported in FY14. However, as with other aspects of the Davis Applicants' case, there was an imprecision about what this meant. For example, what level of "write-down" in the assets would have been substantial or material? This was not addressed, but would have been highly relevant in assessing the factual causation question by reference to the various counterfactual scenarios I have addressed above. 1654 As indicated above, depending on the precise heartwood yield assumption that would have been adopted, the reported net assets in FY15 would have dropped from approximately $466 million reported in FY14 to $284 million on a 6 kg assumption, to $340 million on an 8 kg assumption and to $394 million on a 10 kg assumption. Whilst a drop from $466 million to $284 million might readily be accepted to have been a material devaluation, it was not clear to me whether the Davis Applicants' position was that a drop from $466 million to either $340 million or $394 million would also have been a material devaluation especially given that over the same time Quintis had grown the size of its sandalwood plantations. In the latter respect, the corrected Financial Report containing the counterfactual calculations would have shown that Quintis remained solvent and continued to have substantial assets, which were continuing to grow. None of these matters were squarely addressed; rather, it was simply assumed that Mr Davis Snr would not have caused the Davis Fund to invest in Quintis shares at all. 1655 A further matter that was assumed was that on the force of what would have been disclosed in the counterfactual accounts for FY15 (relative to what was reported in FY14 and irrespective of which heartwood yield assumption was to be used), Mr Davis Snr would not have invested in Quintis shares at all and therefore would not have caused the Davis Fund to make investments in 2016 or 2017. Again, the essence of this submission proceeded on the premise that there would have been a material write down in the FY15 Financial Report. However, this submission did not engage with the actual investment decisions made by the Davis Fund. In this regard, it is notable that there was no singular transaction by which Mr Davis Snr caused the Davis Fund to invest in Quintis shares. The FY15 Financial Report was published in August 2015 and revised in October 2015, and the FY16 Financial Report was published in August 2016. The transactions that Mr Davis Snr caused the Davis Fund to enter following those publications were as follows: (a) transactions after the FY15 Financial Report was published: (i) 2 November 2015: 50,000 shares bought at $1.7604; (ii) 5 May 2016: 50,000 shares bought at $1.5038; (iii) 5 May 2016: 5,618 shares bought at $1.55; (b) transactions after the FY16 Financial Report was published: (i) 14 September 2016: 40,000 shares bought at $1.4381; (ii) 22 December 2016: 145,618 shares sold at $1.6429; (iii) 21 February 2017: 100,000 shares bought at $1.5053; (iv) 6 March 2017: 100,000 shares bought at $1.4392; (v) 23 March 2017: 100,000 shares bought at $1.1488. 1656 It is relevant that by 22 December 2016, the Davis Fund held 145,618 shares in Quintis. However, on that day, Mr Davis Snr caused the Davis Fund to sell all of those shares by reason of the automated "stop loss" mechanism. Apart from the first allotment of 50,000 shares, this resulted in the Davis Fund obtaining a profit on its transactions. Thereafter, on 21 February, 6 March and 23 March 2017, Mr Davis Snr caused the Davis Fund to purchase 300,000 shares in total. On the Davis Applicants' counterfactual case, each of these transactions would have occurred after the FY16 Financial Report was published. 1657 The Davis Applicants' case assumed that if the true accounts were published on the basis of their counterfactual case in August or October 2015 (when they were revised), Mr Davis Snr would not have engaged in any of the abovementioned transactions including the profitable ones and those that occurred in early 2017. It is not lost on me that, as a pragmatic man, Mr Davis Snr may well have decided (in the counterfactual universe) after the drop in the reported net assets in FY15 that he was no longer interested in investing in Quintis. However, the point of making these observations is to identify the matters that were not addressed. 1658 It is necessary to return to what Mr Davis Snr actually said in his evidence. I have accepted his evidence that he caused the Davis Fund to invest in Quintis shares because he considered Quintis to be "a financially sound, solvent company with good growth prospects" and, in doing so, he relied in part on the reported net assets. However, as I have endeavoured to point out, on any one of the counterfactual scenarios advanced by the Davis Applicants, the revised net assets that would have been reported would have shown that Quintis continued to be solvent. The counterfactual reports would have disclosed that Quintis was financially sound, but that the value of its net assets was lower even though it continued to have substantial assets that were growing in number year-on-year. Thus, the question that needed to be resolved, had I accepted the counterfactual case, was whether, despite these matters, Mr Davis Snr would have not caused the Davis Fund to buy Quintis shares at all after the counterfactual FY15 Financial Report was published because it would have disclosed a material write down in assets. 1659 In my view, this question, and the others that I have identified, cannot be answered in the abstract in circumstances where I have not accepted the Davis Applicants' counterfactual case. And, even if I had accepted the counterfactual case, the matters I have identified are ones in respect of which there was a high degree of imprecision.
15.5 The indirect market-based causation case (the Davis Applicants and Davis Group Members)
1660 The Davis Applicants' case as to indirect market-based causation was pleaded as follows: N.1 MARKET-BASED CAUSATION 395. The Applicants and the 2015 New Shareholder Group Members acquired their interests in Quintis shares in a market where the matters pleaded and particularised in paragraphs 166 to 192 above had not been disclosed and had they been disclosed, would have had a material negative effect on the price of Quintis shares. 396. From 31 August 2015, the contraventions of the Corporations Act and the ASIC Act (or any one or a combination of them) pleaded above caused the market price of the Quintis shares traded on the ASX to be substantially greater than: (a) their true value; or (b) the market price that would have prevailed but for the contravention or contraventions. 397. Further or alternatively, from 31 August 2015, EY's breaches of duty pleaded above at paragraphs 389 to 390 (or any of the breaches or combination of them) caused the market price of the Quintis shares to be substantially greater than: (a) their true value; or (b) the market price that would have prevailed but for the contravention or contraventions. 398. The Applicants and the 2016 New Shareholder Group Members acquired their interests in Quintis shares in a market where the matters pleaded and particularised in paragraphs 166 to 192 above had not been disclosed and had they been disclosed, would have had a material negative effect on the price of Quintis shares. 399. From 26 August 2016, the contraventions of the Corporations Act and the ASIC Act (or any one or a combination of them) pleaded above caused the market price of the Quintis shares traded on the ASX to be substantially greater than: (a) their true value; or (b) the market price that would have prevailed but for the contravention or contraventions. 400. Further or alternatively, from 26 August 2016, EY's breaches of duty pleaded above at paragraphs 391 to 392 (or any of the breaches or combination of them) caused the market price of the Quintis shares to be substantially greater than: (a) their true value; or (b) the market price that would have prevailed but for the contravention or contraventions. (Emphasis added). 1661 As will be evident from the above, the pleaded case was that the Respondents' contraventions caused the market price of Quintis shares to be substantially greater than their true value or the market price that would have prevailed but for the contraventions. The corollary pleaded was that had the true position been disclosed, it would have had a material negative effect on the price of Quintis shares. In each respect, the focal point of the case was the price of Quintis shares and whether it was substantially greater than the true value of those shares or the market price that would have prevailed. 1662 In support of the pleaded case, reliance was placed on the opinions expressed by Mr De Cian in his reports in chief and reply. 15.5.1 The principles and theory underlying indirect market-based causation 1663 The theory of market-based causation and its logic was considered in depth by Beach J in TPT Patrol at [1656]-[1672]. In Crowley, Jackman J succinctly summarised Beach J's analysis as follows at [171]: The concept of market-based causation… was the subject of thorough analysis by Beach J in Myer, in which it was accepted that market-based causation is a valid means under Australian law of establishing causally-connected loss where misconduct has caused the price of securities in an efficient, publicly-traded market to be inflated. Beach J held that there were three well-established mechanisms for causation in misleading or deceptive conduct cases: [1656]. The first category is direct causation, which requires proof that the applicant relied upon some impression created by the respondent's misleading act or omission: [1657]. Second, there is "active indirect causation", being the scenario where a respondent's misleading conduct induces some reaction in a particular person, and the applicant would have acted differently but for that reaction by the particular person, but there is no additional requirement that the applicant was aware of or relied on the respondent's conduct: [1659]. Third, there is "passive indirect causation", being the scenario where the respondent's misleading conduct induces some reaction in a person or persons, and that reaction itself causes loss to the applicant without any requirement for a reaction by the applicant: [1660]. Pausing there, that reasoning, and in particular the existence of the category of "passive indirect causation", was expressly approved in Braham v ACN 101 482 580 Pty Ltd [2020] VSCA 108 at [155]-[156] (Tate, McLeish and Niall JJA); Re DCA Enterprises Pty Ltd [2023] NSWSC 11; (2023) 166 ACSR 156 at [164]-[165] (Black J); and Re Mediation & Online Dispute Resolution Operating Network Pty Ltd [2022] NSWSC 5 at [103]-[105] (Rees J). 1664 The logic of the theory applies where it is proved that a wrongdoer's misleading conduct contravention has caused inflation in the price of a security. In such a case, the theory proceeds on the basis that the market has been deceived even if it did not directly mislead specific applicants or group members: In the matter of HIH Insurance Limited (In Liquidation) (ACN 008 636 575) [2016] NSWSC 482; (2016) 335 ALR 320 at [72]-[73] (Brereton J); TPT Patrol at [1656]-[1672]; Crowley at [171]-[173]. 1665 The decision in TPT Patrol involved "active indirect participation". That is because the logic of the case there, as set out by Beach J at [1662] was as follows: (a) Myer's disclosure failures caused the actions of intermediaries, namely the buyers and sellers in the market, to inflate the trading price of the relevant securities above the price which a properly-informed market would have set; (b) the applicant acquired its securities, that is, it was active not passive in that inflated market; and (c) the applicant would not have acquired those securities, at that price, but for the market's reaction to Myer's misleading or deceptive conduct and disclosure failures. 1666 This gave rise to "active indirect causation" because the applicant had acquired the relevant securities in Myer at the inflated price without directly relying upon the disclosures. Importantly, central to this argument was proof that Myer's failures had caused inflation in the trading price. 1667 This scenario was similar to that considered by Brereton J in HIH Insurance at [74]-[77]: … Upon the assumption that the effect of the misleading conduct was, as the plaintiffs allege, that HIH shares traded on the market at a higher price than would otherwise have been the case, it was inevitable that any purchaser of HIH shares would, upon acquiring such shares, incur loss. The case is analogous to the first class described by McHugh J in Henville v Walker, though it is the laws of the market rather than those of nature which dictated that the inevitable consequence of the contravening conduct would be that share purchasers would pay an inflated price - although an investor who was shown to have acquired shares knowing that the results were overstated, or indifferent to it, could not be said to have incurred the loss "by" the contravening conduct - a decision to do so with such knowledge or indifference would break the causal chain. Alternatively put, the plaintiffs would have acted differently if the contravening conduct had not occurred, in that they would have paid a lesser price for their shares than they did. The chain of causation was (1) HIH released overstated financial results to the market, (2) the market was deceived into a misapprehension that HIH was trading more profitably than it really was and had greater net assets than it really had, (3) HIH shares traded on the market at an inflated price, and (4) investors paid that inflated price to acquire their shares, and thereby suffered loss. Thus, the contravening conduct materially contributed to that outcome. This can be tested by a counterfactual inquiry: what would have happened if each contravention had not occurred? On relevant assumptions, the answer is that the market price of the HIH shares would have been lower, and the plaintiffs would have paid less for the shares they acquired. In those circumstances, I do not see how the absence of direct reliance by the plaintiffs on the overstated accounts denies that the publication of those accounts caused them loss, if they purchased shares at a price set by a market which was inflated by the contravening conduct: the contravening conduct caused the market on which the shares traded to be distorted, which in turn caused loss to investors who acquired the shares in that market at the distorted price. In the absence of any suggestion that any of the plaintiffs knew the truth about, or were indifferent to, the contravening conduct, but proceeded to buy the shares nevertheless, I conclude that "indirect causation" is available and direct reliance need not be established. 1668 Again, central to Brereton J's reasons was the assumption, which would need to be proved, that the misleading conduct had caused the shares traded on the market to be a higher price than otherwise would have been the case. 1669 Although Beach J's reasons in TPT Patrol in relation to indirect market-based causation were strictly by way of obiter, those reasons are compelling as to the availability of this method under Australian law to establish causally-connected loss, and are broadly in line with Brereton J's reasoning in HIH: see Zonia Holdings Pty Ltd v Commonwealth Bank of Australia Limited (No 5) [2024] FCA 477 at [1149] (Yates J). Both the reasons of Brereton J and Beach J demonstrate that indirect market-based causation involves an application of orthodox principles. 1670 However, accepting market-based causation as an available method of establishing causally-connected loss says nothing about the conditions that are necessary to prove such causally-connected loss. Nor does it say anything about the exceptions to it or the matters that may be raised to rebut its operation. The cases decided to date indicate that the following matters need to be borne in mind: (a) first, it is necessary to establish that the relevant shares or securities trade in an efficient market (referred to as the "efficient market hypothesis"): TPT Patrol at [1629]; Crowley at [173]; (b) second, and fundamentally, it is necessary to establish that the contravening conduct caused the market (buyers and sellers) to inflate the trading price of the relevant securities "above the price which a properly-informed market would have set" - this fact cannot be assumed: Crowley at [175]; Zonia Holdings at [1164]; HIH Insurance at [78]; (c) third, and equally fundamentally, it is necessary to establish that a claimant for damages would not have purchased the shares at all, or would not have purchased the shares at the price they paid: Zonia Holdings at [1160]; and (d) fourth, related to the third point, causation will not be established if it is shown that the claimant for damages purchased the relevant securities with actual knowledge of the non-disclosed information, or would still have purchased the securities even if they had known the non-disclosed information: Zonia Holdings at [1161], relying upon Masters v Lombe (Liquidator); In the Matter of Babcock & Brown Ltd (in liq) [2019] FCA 1720 at [392] (Foster J), HIH Insurance at [74] and [77] and TPT Patrol. 1671 It is next necessary to consider the way in which the Davis Applicants sought to establish their indirect causation case, and whether they did so. 15.5.2 The Davis Applicants' case 1672 The necessary steps in the Davis Applicants' market-based causation case were as follows: (a) the Representations made by the Respondent amounted to failures to disclose the true or correct net assets to the market; (b) those Representations caused the market price of Quintis shares to be substantially greater than their true value or the market price that would have prevailed but for those Representations; (c) the Davis Applicants and Group Members acquired securities in this inflated market; (d) had the true position been disclosed, it would have had a material negative effect on the price of Quintis shares; and (e) the Davis Applicants and Group Members would not have acquired Quintis shares at the price at which they did but for the market's response to the Respondents' misleading or deceptive conduct. 1673 The irreducible minimum of this argument was that the misleading Representations contained in the FY15 and FY16 Financial Reports caused buyers and sellers in the market to inflate the trading price of shares in Quintis above their "true value" or the "market price" which a properly-informed market would have set had the true position been disclosed. 1674 The Davis Applicants sought to establish these matters by relying upon Mr De Cian's determination of the value of Quintis' shares by applying the "price to net assets" method (P/NA Method). The Davis Applicants had also relied upon a DCF model developed by Mr De Cian, but abandoned reliance upon it by closing submissions. 1675 The P/NA Method applied by Mr De Cian purported to establish a quantitative or mathematical relationship between the closing price of Quintis' shares and its reported net assets in order to derive a "price/net assets ratio" (P/NA Ratio) on particular days. The particular days selected by Mr De Cian were those on which the Davis Fund had acquired Quintis shares. Mr De Cian then applied the P/NA Ratio to the "Restated Accounts" determined by Mr Basford on each of those days. This analysis was presented by Mr De Cian as follows: 1676 Mr De Cian then charted the restated prices during the relevant period from 31 August 2015 to 30 April 2017 as follows: 1677 The difference between these charted lines was said to highlight the price inflation in Quintis' shares that was caused by the misrepresentations. 1678 In the course of undertaking these calculations, Mr De Cian also charted the Quintis share price relative to "Net Assets per share". In order to do this, Mr De Cian determined "net assets per share" by dividing the amount of "Net Assets" on each of the relevant days by the total number of shares on issue on that day. Mr De Cian charted this analysis as follows: 1679 Mr De Cian then determined whether Quintis' share price was trading at a discount or premium to "net assets per share" as represented in the following chart: 1680 The above analysis showed windows of time during which the share price was trading at a premium or discount to the net assets per share. 1681 The Davis Applicants stepped out Mr De Cian's calculation of restated prices by applying the daily premium/discount between the closing prices for Quintis' shares on the ASX and the underlying net assets at relevant dates to the net assets in the restated accounts prepared by Mr Basford. By reference to the dates on which the Davis Fund was caused to purchase shares in Quintis, it was said that the ratio could easily be applied to the restated net assets calculated for FY15 and FY16 in relation to the 6 kg, 8 kg and 10 kg yield scenarios as follows: (a) at 6 kg yield: (b) at 8 kg yield: (c) at 10 kg yield: 1682 In preferring the P/NA Method, Mr De Cian stated that he had considered the following alternative "key valuation" methodologies: (a) the quoted price for listed securities; (b) the discounted cash flow methodology based on the net present value of future cash flows that the company is able to generate; (c) the application of earnings, net assets or cash flows multiples derived from the observation of the multiple at which listed comparable companies are trading or having regard to earnings, net assets or cash flows multiples paid for comparable transactions; (d) the amount available for distribution to security holders under an orderly realisation of assets; (e) any genuine offers received by the target for any business units or assets as a basis for valuation of those business units or assets. 1683 Mr De Cian expressed the opinion that other than the P/NA Method and the DCF approach, none of the other methodologies were appropriate. He explained his reasons for this as follows: 4.6 In my assessment of Restated Prices based on Quintis' Share trading prices, instead of calculating the P/NA ratio, I could have used a ratio based on earnings (EBITDA, EBIT, NPAT). However I did not consider this appropriate due to the following: a. Earnings based multiples are usually adopted for businesses with stable earnings. Quintis' earnings were highly volatile and depended largely on the harvest profile of the Sandalwood plantations which varied considerably year-to-year. b. None of the investment analysts covering Quintis adopted earnings based multiples as their primary methodology to assess the market value of the Company. c. In the Restated Accounts, Quintis presented negative EBITDA, EBIT and NPAT and so these metrics were not appropriate to assess the Restated Prices. 4.7 I have not considered the orderly realisation of the assets method as this is usually adopted for companies which mainly own highly liquid assets such as listed shares. 4.8 I am unaware of any genuine offers received by Quintis during the Relevant Period. 1684 In relation to the methodologies that had been adopted by investment analysts that had covered Quintis, Mr De Cian summarised these in a table as follows: 1685 Mr De Cian considered the P/NA Method to be appropriate for the following reasons: (a) the majority of Quintis' assets, including the Biological Assets, were purportedly recorded at fair value and this provided market observers and investors key data points for their valuation of the prices of the company; (b) the changes in the "Restated Accounts" (as determined by Mr Basford) compared with the reported statutory accounts were mainly in relation to assets and liabilities of the company; (c) Quintis' shares were frequently traded and they were sufficiently liquid, and hence, the share price responded to market announcements, and would have done so in relation to the release of the Restated Accounts, in a timely manner; (d) the assessment of the restated prices under this approach was based on quantitative and objective observations; (e) in the Restated Accounts, Quintis presented negative EBITDA, EBIT and NPAT and so these metrics were not appropriate to assess the Restated Prices. 1686 Based on Mr De Cian's opinions, the Davis Applicants submitted that the P/NA Method accorded with conventional propositions (said to have been recognised in Re HIH, Myer and Grant-Taylor v Babcock and Brown Ltd (in liq) [2015] FCA 149; (2015) 322 ALR 723) particularly when considering the position of Quintis, being that: (a) its biological assets were its main cash generating assets, making up 89% of its net assets, with any movement in their value having a corresponding effect on its profit and loss statement; (b) the value of the biological assets was calculated by reference to the future cash flows to be generated from those assets, with the consequence that there was a likely close correspondence between the net present value of future net cash flows, net assets and share price; (c) individual accounting failures such as the kilograms of heartwood per tree assumption and mortality rate assumption on their own resulted in Quintis' net assets being overstated by more than 50%. 1687 The Davis Applicants accepted that Mr De Cian's opinions as to the appropriateness of the P/NA Method were based upon his view that the market for Quintis' shares was liquid and operated in an efficient market. Mr De Cian expressed the opinion that shares "that are liquid are assumed to properly respond to changes in information such as the issuance of the Restated Accounts". The Davis Applicants contended that Mr De Cian's opinions in this respect were consistent with the opinions expressed by other experts as to the operation of the efficient market hypothesis. It was submitted that Mr De Cian's opinions had established that Quintis' shares operated in both a liquid and efficient market. 1688 It was submitted that the collective effect of the expert evidence, the Davis Applicants submitted that, in an efficient market, share prices are affected by information "if and only if the information is: (a) new; (b) of a type that relates to expected future cash flows of the stock, the riskiness of those flows, or both; and (c) of a magnitude that would materially change the market's expected future cash flows or risks for the stock". In relation to "new information", it was submitted that, relying upon the efficient market hypothesis, the market will react to new information by adjusting the price of a share once, and the price of the share will fully reflect that new information quickly. 1689 In relation to the materiality of the information, the Davis Applicants submitted that this criterion was dependent upon the type of information and must relate to the expected future cash flows of the share, the riskiness of the cash flows, or both. In relation to magnitude, the Davis Applicants submitted that the impact of the information must be sufficiently large to cause investors to change their forecasts of expected future cash flows or riskiness and therefore the price of the share. It was submitted, by reference to Mr Holzwarth's evidence that, [f]or instance, if a company indicated its expected earnings would increase from previous guidance of $1.0 billion to $1.0001 billion (a $100,000, or 0.01%, increase), then the magnitude of the change is unlikely to change how the market views the future of the stock". 1690 The Davis Applicants submitted that the information as to Quintis' net assets met each of the criteria identified above, such that, in an efficient market, Quintis' shares can be taken to have responded to disclosure of its reported net assets in FY15 and FY16 and would therefore also have responded to the disclosure of the "Restated Accounts" (based on its counterfactual case). It was submitted that to the extent that Professor Frino had expressed the opinion that the market for Quintis' shares was not efficient and not liquid, this evidence was at odds with the other experts. 1691 It was argued that the P/NA Method was also consistent with the evidence given by the other experts (Mr Holzwarth, Professor Frino and Mr Torchio) that market participants used "fundamental valuation methodologies" to predict a company's future cash flows such as a P/NA method or a DCF method and that the market price reflected an equilibrium of the market's expectation of the company's future cash flow. And, it was contended that the P/NA Method produced "conservative" outcomes as to the impact on share price of the "Restated Accounts" because, as Mr De Cian had opined, it was likely that the disclosure of the Restated Accounts would have caused a more than proportional share price decrease due to the fact that investors and potential investors would also have taken into account a number of qualitative factors including: (a) the uncertainty in relation to the viability of the business; (b) the ability of the Quintis to sell new plantations; and (c) the loss of trust in Quintis' management team and the lack of robust corporate governance. 1692 Mr De Cian pointed to examples of announcements made by other companies that had been subject to class actions where there was evidence that the disclosure of negative news that was material in nature had an adverse impact on its share price. These examples included QBE, Blue Sky, Lendlease and Newcrest. 1693 The Davis Applicants accepted that Mr Holzwarth had expressed the opinion that the P/NA Method was not "an accepted approach for estimating counterfactual prices for a publicly traded security" and that the "accepted methodology to measure price changes associated with information in financial economics is an event study". However, it was submitted that Mr Holzwarth also conceded that an event study could not be performed in the present case. It was further submitted that an event study was not available to be conducted in the present case as there was no corrective disclosure. To this end, the Davis Applicants relied upon Jackman J's observation in Crowley at [260] that "an event study analysis is not the only available approach to the issue of finding the true value of shares", with other available approaches being "a fundamental analysis or valuation of shares… which would have required consideration and analysis of the future cashflows of the business and the risks associated in achieving those cashflows". Reliance was also placed on Earglow Pty Ltd v Newcrest Mining Ltd [2015] FCA 328; (2015) 230 FCR 469 at [495] (Beach J). 1694 Based on these matters, the Davis Applicants submitted that the P/NA Method was a widely accepted technique for valuing shares. The Davis Applicants contended that the Respondents' arguments defied logic and principle. It was submitted that accepting the Respondents' arguments would involve the Court accepting that if Quintis had announced to the market that it had revalued its principal income generating assets by somewhere between 30% and 50%, the price of Quintis shares would not have dropped at all. The Davis Applicants drew attention to the fact the price-to-net-assets methodology was applied by Brereton J in HIH Insurance at [79], [99]-[101], [105], [112] and [114]. In particular, attention was drawn to the following propositions drawn from Brereton J's judgment: (a) precisely how the market would have responded to information affecting net assets or the future income of a company cannot realistically be the subject of precise proof, and necessarily involves hypothesis and a degree of speculation: [99]; (b) generally speaking, the net assets of a company set the floor of its value, and a share is worth its relative proportion to those net assets: [100]; (c) however, shares rarely trade on the market precisely at their book value. This is because the market attributes a premium or discount to book value, based on its assessment of the likely future economic benefits of holding the share. If shares are trading above book value, that indicates that there is a profitable business that promises an ultimate return in excess of current book value. If shares are trading at a discount to book value, that means the market has perceived that the stated book value is not going to be realised (or that supply exceeds demand): [101]; (d) it is a reasonable and logical hypothesis that the ordinary and natural consequence of an overstatement to the market of a listed company's financial performance would be to inflate its share price: [105]. 1695 It was said that after taking into account these and other facts, Brereton J stated at [112] that: … Although the defendants submitted that the proposition that the obvious effects of particular types of misrepresentations could readily be inferred should be confined to the obvious, and that this was not an obvious case, it seems to the obvious and calculated effect of a representation that an insurance company was operating more profitably than in truth it was, and had materially greater net assets than in fact it had, would be that the market would overprice its shares. A general provision for risk and doubt, such as the price to book ratio reflected, would not evaporate upon materialisation of this specific matter… 1696 In reaching that conclusion, Brereton J identified at [116] that: This approach has the additional attraction of excluding the effect of any matter other than the contravening conduct, because all other influences on price are reflected in the actual price movements on the ASX, and seeking to identify only the impact of the contravening conduct. It also means that the hypothetical price will fluctuate proportionately to fluctuations in the actual price, rather than being a fixed "straight line" for each six-month period. 1697 The Davis Applicants contended that Brereton J's reasoning applied here. 15.5.3 Consideration 1698 The Davis Applicants' pleaded case was that the Respondents' misrepresentations had caused the market price of Quintis shares traded on the ASX to be substantially greater than their true value or the market price that would have prevailed but for the contravention or contraventions. 1699 At the outset of this section, it is necessary to observe that the Davis Applicants variously used the concepts of "value", "true value", "market price" and "share price" without precision and, in my view, conflated related but distinct concepts. The Davis Applicants did not address what was meant by the true value of Quintis' shares. 1700 It necessitates identifying that there were quite distinct concepts that were raised in the evidence. These concepts may or may not overlap depending on the context. For example: (a) one can speak of and refer to the valuation of a single asset or asset class. That was the case here in relation to the valuation of the biological assets; (b) one can also speak of and refer to the valuation of the net assets of a company and, in other circumstances, the value of the net assets of that company. That was the case here in relation to the value of the net assets as reported in the FY15 and FY16 Financial Reports; (c) one can speak of and refer to the valuation of the whole of a company or a part of it; (d) one can also speak of and refer to the valuation of the shares in a company. 1701 In relation to the first two categories, the valuation of a particular asset or the valuation of the net assets of a company may be informed by the application of the Accounting Standards as was the case here in relation to Quintis' biological assets and its net assets. The value of those assets may bear upon the valuation of the whole of a company or its shares, but that is not a universal rule of valuation and requires an examination that is not straightforward. Companies with significant assets may have little value on a share market because those assets generate little revenue, and those with few assets may have greater value in a share market because the assets are not necessary for the generation of the revenue of the company. 1702 The last two ways in which the concept of value is sometimes used as specified above (i.e., the value of the whole of a company and the value of its shares) may be related but may also be distinct depending on the context including the statutory context. For example, s 667C of the Corporations Act (dealing with takeovers) deals with the method of determining what is "fair value for securities" which specifically requires (by s 667C(1)(a)) that the first step involves assessing the "fair value of the company as a whole". The valuation of the whole of a company may be greater or lesser than the sum of its net assets. The valuation of the whole of a company may also depend on various factors including whether it is privately held or publicly traded, its different classes of shareholding, the circumstances of its control and any premium attributed to its control, its business and its industry: see, generally, Teh v Ramsay Centauri Pty Ltd [2002] NSWSC 456; (2002) 42 ACSR 354 (Barrett J). 1703 Where the shares in a company are traded on a public market, the price at which its shares are traded may or may not bear any relationship to the value of its net assets or the value of the company as a whole. Undoubtedly, each investor or potential investor may make their own assessment of the value of a company that trades on a public market, but the value of the shares in a listed company at any given point in time are the price at which they trade. The share price at a given point in time reflects the coalescence of the expectations of all the market participants wishing to trade at that time. As explained by Mr Torchio, the market price is the equilibrium at a point in time between each investor's valuation of the company's shares. Mr Holzwarth similarly opined that "[p]ublic markets create a mechanism for price discovery where prices reflect an equilibrium of the expectations of all market participants" (emphasis added). 1704 Viewed this way and in the context of the expert evidence before me, it is meaningless and devoid of content to speak of the true value of a company such as Quintis whose shares traded on a public market. Putting to one side the question of "true value" (whatever that means), the Davis Applicants' case as to causation and loss was framed by reference to the market price of Quintis shares. 1705 Returning to the pleaded case, as noted above the Davis Applicants had to establish that the alleged misrepresentations caused the market price of Quintis shares to be substantially higher than the price at which the shares would have traded had the true position been disclosed. 1706 I am not satisfied that the Davis Applicants established that the reported value of the net assets as contained in the FY15 and FY16 Financial Reports caused Quintis' share price to trade at an inflated price being a price that was (as pleaded) substantially greater than the market price that would have prevailed but for the contravention or contraventions. 1707 The only basis upon which the Davis Applicants attempted to establish share price inflation was the P/NA Method. I do not accept Mr De Cian's opinions, upon which the Davis Applicants' case was based, that there was a relevant causal relationship between Quintis' net assets and its share price. Nor do I accept that Mr De Cian had "established a quantitative relationship between the movements in the Quintis [s]hares trading prices and the net assets of Quintis during the [r]elevant [p]eriod and at the [r]elevant [d]ates". 1708 Mr De Cian's methodology did no more than establish that one could create a relationship between two variables by identifying each of them and creating a ratio between them. The first variable was Quintis' reported net assets, which were relevantly reported on an annual basis in an audited form, and updated quarterly or half-yearly. The second variable was Quintis' share price. At any given point in time, one could calculate a ratio between these two variables. The calculation of such a ratio did not establish any causal relationship between them or any interconnectedness. One could also calculate a ratio between share price and the total of shares on issue to determine a net asset per share, as Mr De Cian had done. The determination of these ratios involved nothing more than a rudimentary mathematical calculation. They did not establish a relevant correlative or, more relevantly, a causal relationship between the two variables. As Mr Wilson submitted: This was as silly as saying that a person who divides 10 by 2 to get 5 has established a mathematical relationship between the numbers 10 and 2. In truth, all that Mr De Cian did was assume that share price was proportional to net assets, and then reduce the historical share price proportionately with Mr Basford's restated net assets to arrive at a supposed counterfactual share price: T1234.26-29. 1709 The logic advanced by the Davis Applicants was a form of non causa pro causa. It advanced a logical fallacy seeking to establish a cause between share price and assets merely because of the existence of two variables without establishing the essential predicates for the causal connection between those two variables. The effect of the P/NA Method was that, if Quintis' net assets fell by 30%, there would be a proportionate decrease in Quintis' share price and, thereby, a 30% overstatement of net assets meant that the share price was necessarily inflated by reference to the P/NA ratio. This merely assumed the effect because of the supposed cause. 1710 Nor do I accept that Mr De Cian's opinions demonstrated a relationship between movements in Quintis' published net assets per share and movements in its share price over time. The graph reproduced at [1678] above did little more than chart the two variables over time, and did not of itself explain a causal or other relevant relationship. There was no co-variance analysis to establish some form of relationship, let alone one that was at a level of confidence that would be regarded as causal. When pressed about these matters, Mr De Cian gave the following evidence (T1234.41-T1235.2): MR LAWRANCE: Isn't the correct position that you can't identify any mathematical relationship between the yellow line and the purple line [in the chart on CB-2149]? MR DE CIAN: I don't need to because the market has done it. I mean, that's - that's - that's - that's what I believe is the merits of this method. I mean, it's not me or in any of my other colleague establishing that relationship based on speculative or subject assumption. The market has done that. Just - that takes completely away the subjectivity and the speculation. 1711 I do not accept Mr De Cian's evidence that the market had established a relationship between the two things. There was no cogent (or any) reasoning to support the assertion that the market had established that relationship. 1712 Mr De Cian sought to explain that the benefit of the P/NA Method was that it excluded all the other factors and focussed singularly on the ratio between net assets and share price. He gave the following evidence (T1233.9-11): MR DE CIAN: … this approach, it takes away all the noise, all the subjectivity and all the speculations, because it is just based on how the market was valuing Quintis based on those net assets. 1713 However, Mr De Cian did not explain "how the market was valuing Quintis based on" its net assets. This statement exposed that he assumed the market's valuation was based on the existence of the two variables and an assumed relationship between them. The basis for that assumed relationship was because Quintis' biological assets were its main cash generating asset. At its core, the logic of Mr De Cian's opinion was that because Quintis' biological assets were its primary cash generating asset, in a liquid and informationally efficient market (assuming the efficient market hypothesis), a change in reported net assets would have a proportionate change in share price relative to the shares on issue with all other things being equal. 1714 It may be accepted that, as a matter of theory, in a liquid market, the efficient market hypothesis holds that share prices adjust quickly in response to new information, and to changes in future cash flows after discounting, irrespective of when they are expected to occur: TPT Patrol at [1095]. There was a dispute between the parties as to whether the market for Quintis' shares was liquid and, as between the Davis Applicants and Mr Wilson, a further dispute about whether the market was efficient at all times. It is unnecessary for present purposes to resolve these disputes and my analysis here proceeds on the basis that it may be accepted (without deciding) that the market for Quintis' shares was both liquid and efficient. 1715 However, application of the efficient market hypothesis in the abstract does not answer the question as to whether there is a causal relationship between reported net assets and share price of trading entity or the extent of any such relationship. It is meaningless to talk about the response of the share price to the adoption of new information without examining the nature of that information and its relationship to share price in a traded market for that security, or having any means by which to measure the price impact of that information. Amongst other things, as a matter of economic or market theory, the price for the security may have already absorbed the alleged new information because it is not strictly new or it may have been irrelevant. For example, it may have been entirely irrelevant whether the net assets moved by $50 million or $100 million; it may have mattered more if the assets moved by $300 million. One does not know. These matters have to be proved. They cannot be proved by merely asserting a relevant relationship between variables and then assuming the result by reason of the assertion. 1716 Based on the evidence adduced before me, I accept that the net assets of a company may be relevant to an assessment of the value of a company. As the Davis Applicants pointed out, Mr Holzwarth expressed the opinion that a "key tenet of modern finance theory is that the value of an asset is the net present value of its expected future cash flows" and "this underlying principle is the basis for all other valuation techniques" (emphasis added). Mr Torchio, who was called to give evidence in the Excel Texel Proceedings, largely agreed. And, Professor Frino similarly identified that "it is the value of [the] free cashflows that makes a company valuable". Professor Frino further opined that, as companies use their assets to produce a good or a service to generate future free cash flows, it is the value of those free cashflows that makes the assets of a company, and the company itself, valuable. For example, as has been set out above in the parts of these reasons dealing with the Accounting Standards, this logic is fundamental to the determination of the fair value of the assets of a company. 1717 However, it was not established on the basis of probative evidence that investors or the market had valued or priced Quintis' shares on the basis that all of Quintis' reported quantum of net assets would be converted into cash flows. The Davis Applicants' reliance upon the expert evidence was misplaced. Mr Holzwarth's evidence that a key tenet of modern finance theory is that the value of an asset is the net present value of its expected future cash flows. This was the expression of an opinion as to the value of an asset, not the price of shares. Similarly, the opinions expressed by Mr Torchio and Professor Frino as to the value of the free cash flows that make a company valuable were opinions as to the factors that make a company valuable and, again, not necessarily the factors that established the share price. 1718 The fact that a company has value because it reportedly has substantial assets says nothing about the relationship between, on the one hand, those assets and their contribution to the value of a company and, on the other, the company's share price. As Professor Frino explained: The value created by a company based on its free cashflows need not have any relationship to the value of its net assets. For example, it is possible for a company to take a given set of net assets and generate cashflows with a value of X, and for another company to take the same set of net assets and generate cashflows with a value of Y. This can also be applied to a company through time, and therefore the value of a company need not change in line with the fair value of its assets. To illustrate, consider land used by a company whose fair value may increase or decrease because of fluctuations in the rental market. However if the company uses the land in the same way through time and the cashflows of the company are unrelated to rental returns then the value of the company will not change in line with changes in the value of land of the company. Therefore, in my opinion, a change in the value of the net assets of a company will not have a "mathematical" relationship, as stated by Mr De Cian, between the value of the company and the value of its net assets. Net assets of a company measure one thing while the price of a company measures another. Mr De Cian also identifies this point when he states: "the share price trades on future growth and profit expectations whereas the net assets provide a snapshot at a specific point in time" (paragraph 5.32(b) of the De Cian Report). In my opinion, investors value a company's shares based on forecasts of its future net cashflows, and that published historical net assets are largely irrelevant to forecasting future net cashflows. The published historical accounts of a company only influence the price of a stock to the extent that they are likely to influence forecasts of the future net cashflows. In my opinion, for these reasons, it is not valid to use a P/NA approach to value a company such as Quintis. 1719 Further, Mr Holzwarth explained that: One cannot directly observe why the actual market price is different from a valuation opinion's estimate of value in litigation. It may reflect differences related to specific instructed assumptions or it may reflect differences in expectations between the analyst and the market's equilibrium. Valuation opinions based on a DCF or ratio analysis are different from market prices that reflect an equilibrium, where some market participants think shares are overvalued while others think it is undervalued at the market price. This equilibrium will therefore reflect these heterogeneous expectations of market participants and the information that is the underlying basis for these heterogeneous expectations. While we can observe the expectations of one market participant, such as an investment analyst's expectations summarised in a report, we are not able to directly observe the expectations of all market participants. While one market participant may value a company with certain expectations or using a certain methodology, one cannot reliably assume that these expectations reflect the views of all market participants without further analysis. 1720 In a similar vein, Professor Frino said: In my opinion, the main reason why the P/NA approach is inappropriate is because there is no theoretical basis for expecting a relationship between the net assets of a company (even if they are based on the fair value of assets and liabilities) and the value of shares in a company which is involved in the production of a good or service. 1721 The proposition may be tested as a matter of logic. Quintis may have had in excess of $500 million worth of biological assets, but different investors may have forecasted their expected future cash flows on the basis that not all of those assets would generate cash flow and that only some portion of them would. Investors may have done so by analysing information as to the market for sandalwood products, the ability of management to market the products, the entry into by Quintis of actual contracts with real world customers, the nature of those contracts, and so on. These investors may have done so on the basis of informed expectations of realistic cash flows, not an assumed basis that the full quantum of reported assets would generate cash flows. Other investors may have taken a different view that was even more pessimistic, or more optimistic. A reduction in the reported biological assets or the net assets may have had little effect on the forecasted cash flows that were expected depending upon the approach taken by each investor. As Mr Wilson submitted: … it is virtually inconceivable that each investor's valuation exactly equals the equilibrium market price. Put in terms of the P/NA methodology, it is virtually inconceivable that every investor was valuing Quintis based on its reported net assets or that they would have the same reaction to a change in reported net assets. 1722 Despite the force of this logic, Mr De Cian's opinions and the Davis Applicant's contentions assumed a one-for-one relationship as between the reported net assets and share price. That is, Mr De Cian's opinion assumed that merely because of the existence of a P/NA Ratio that could be generated as between share price and net assets, a reduction in the latter would lead to a proportionate reduction in the former. The practical consequences of this may also be tested. As noted above, the FY14 Annual Report had recorded net assets at $466.3 million. On one of the Davis Applicants' counterfactual calculations (if it was accepted), using a heartwood yield assumption of 8 kg, the reported net assets would have been $340.7 million in FY15 and $476.8 million in FY 16. Mr De Cian's opinions and the Davis Applicants' contentions assumed that these asserted reductions, if disclosed, would have necessarily reduced the share price in proportion to the reductions in net assets, because they would have lowered every investors' expectations. I am not satisfied that this assumption was established. 1723 As I have explained, it is tolerably clear that there is a conceptual difference between the value of a company (including its assets) and its share price. It is far too simplistic to accept, as urged by the Davis Applicants, that because Quintis' biological assets were central to its generation of cash flow, it followed that a reduction in those assets would lead to a proportional reduction in its share price. Whether there would be a reduction in share price and, if so, whether that reduction would be proportional, would depend on a number of matters peculiar to the market for that traded security. It was for these reasons that Mr Holzwarth expressed the opinion that an event study was the best means by which to determine share price inflation. 1724 The difficulties in establishing share price inflation and proving causation and loss in respect of market-based securities was identified in Professor Fischel's seminal article (Fischel D, "Use of Modern Finance Theory in Securities Fraud Cases Involving Actively Traded Securities" (1982-1983) 38 Bus Law 1) at 17: Determining whether an alleged misrepresentation or omission caused a firm's stock to trade at an artificially high or low price presents problems, one of which is calculating what the price of the security would have been had the alleged wrongful conduct never occurred. The market price of the security on the date of purchase or sale is unreliable for this purpose because of the possibility that it has been affected as a result of the alleged fraudulent conduct. Attempting to appraise the value of the security by analyzing asset value, earnings data, and other information is inherently speculative. Measuring the difference in the market value of the security between the date of purchase and the date of sale (or any other post[-]transaction date) also is flawed because of the possibility that the decline was caused by factors other than the alleged wrongdoing by the defendant. Because any decline in value might be attributable to factors that affect the entire market, the relevant industry, or the firm itself, but have nothing to do with the alleged fraud, measuring damages by the difference between the purchase and sale prices may significantly inflate the plaintiffs' losses attributable to conduct of the defendant. 1725 As Mr Holzwarth opined, the P/NA method is "inherently speculative" for the reasons identified by Professor Fischel. This is not to suggest an event study is a panacea (and is itself only valid if certain conditions are met) but indicates that it is a less subjective means by which to measure share price inflation. 1726 The biases that may come to bear in seeking to establish share price inflation are further demonstrated by the parties' reliance upon reports that were prepared by market analysts that undertook research on Quintis and made recommendations including about its "target" share price. The Respondents contended that these market analysts did not place much, if any, weight on Quintis' reported net assets. The Respondents submitted that these market analysts instead focussed upon future cash flows to be generated from the sale of sandalwood oil to customers such as Galderma, and the analysts formed their own views about likely heartwood yield, oil price and discount rates. Mr Wilson drew attention to the following two examples: (a) a Canaccord report dated 19 January 2015 gave a target price of $2.84 against a Quintis share price of $1.58. Cannaccord had reduced its heartwood yield assumptions to be 15% below Quintis' audited retail grower accounts at a 15-year rotation. It made a maximum heartwood yield assumption of 17.9 kg per tree. At the time, Quintis' weighted average assumption was 21.3 kg. Canaccord also assumed an oil price starting at US$4,500 and increasing over time. At the time, Quintis' oil price assumption was US$2,500/kg; (b) a UBS report dated 31 August 2016 gave a target price of $3.20 against a Quintis share price of $1.66. It assumed a heartwood yield of 15.75 kg a tree, which it described as being 30% lower than Quintis' internal targets. At the time, Quintis' weighted average assumption was 19.6 kg. UBS also assumed the oil price would rise from around US$4,590 per kg in FY16 to around US$5,169 per kg in FY22, and then drop to US$2,800 per kg on the expectation that Quintis' production would increase from that time. In its downside scenario, UBS valued Quintis at $1.02 per share. It assumed heartwood yields that were a further 20% lower than Quintis' target, at 12.6 kg per tree. 1727 Mr De Cian accepted that market analysts were calculating value or target prices using assumptions that were inconsistent with the assumptions used by Quintis to value its biological assets and calculate its net assets: T1230.19-27. This evidence also identified that market analysts were relying upon a wide range of considerations, other than the company's published net assets, in coming to their view as to the value of Quintis' shares. 1728 The Davis Applicants submitted that the analyst reports in fact established that reliance was being placed on Quintis' published financial information. Specifically, it was submitted that the analysts considered the financial information provided to them by Quintis and formed their own views by comparison to Quintis' valuation. Whilst the Davis Applicants accepted that the analysts formed their own views regarding predicted yield, it was submitted that they were close to the predictions being made by Quintis and not the yield predictions asserted by the Davis Applicants in their counterfactuals. For example, the analysts predicted between 15.75 kg and 19.6 kg per tree as a heartwood yield, and not approximately 6 to 8 kg per tree. The Davis Applicants further contended that, as Mr Holzwarth acknowledged, the views of sell-side analysts was not a good proxy for what the market would take into account, including because sophisticated investors would treat such analyst information with scepticism given the relationship between Quintis and sell-side analysts: T1270.17-28. The Davis Applicants submitted that, more fundamentally, what was not seen in any analyst report, at least until the First Glaucus Report in March 2017, was any identification that Quintis had adopted yield assumptions that were not supportable including because of the data from the FPC trials. In support of these contentions, the Davis Applicants pointed out that, when asked whether the market prior to the First Glaucus Report had taken the view that Quintis' biological asset valuations were supported by dubious yield assumptions, Mr Torchio said he would expect that to have been prominent in the analyst reports (T1356.3-11) and that the yield assumptions were called into question in the First Glaucus Report and that was part of what caused the share price to plummet after the release of that Report. 1729 It is true that the market analysts, as with other investors, were relying upon the information published by Quintis. However, it is not clear that the market analysts were using the information in the same way. The market analysts each had different opinions and recommendations about Quintis' share price. They made their own determinations of value of the business, and then, based on these determinations, made recommendations as to appropriate prices at which to buy, hold or sell shares in Quintis. This is entirely unsurprising and demonstrates the subjective biases that arise when one seeks to establish share price inflation (let alone causation and loss) by reference to assessments made by particular participants in the market. One or more participant's analysis does not attend to examining the inflation of, or impairment to, the share price in the market as a whole. It is a further reason why an event study is considered to be a more appropriate (though not exclusive or flawless) means by which to determine share price inflation or impairment. 1730 This brings me to the Davis Applicants' contentions relying upon Brereton J's reasoning in HIH Insurance. I do not regard Brereton J's reasoning as establishing any a priori principle as to the application of a P/NA approach to the determination of an indirect market-based causation case. In that case, Brereton J, assisted by expert evidence, found that there was a relationship between the share price of an insurance company such as HIH and its book value: at [101]-[102]. At [100], Brereton J stated: Generally speaking, the net assets of a company set the floor of its value, and a share is worth its relative proportion of those net assets. Some write-downs and allowances for costs may be necessary in a liquidation scenario, whereas the value may exceed net assets if earnings indicate that the present value of the economic benefits of holding a share exceed its net asset backing. But in the context of an insurance company, book value is the single most important indicator of value. 1731 The first sentence in the above extract says no more than in general terms the assets of a company set the floor of its value. However, whether the proportion of the value of those assets to its shares is a meaningful indicator of the price of the company's shares will depend on the context for all of the reasons stated above. In an insurance company, it is understandable that, with the assistance of expert evidence, Brereton J concluded that the book value was the single most important indicator of that company's value. At [86], Brereton J referred to the nature of the evidence before his Honour, as follows: Dr Coulton's valuation approach involved a conditional relative valuation model, adapted from authoritative work on the valuation of insurance companies in the United States by Professor Nissim. Essentially, Professor Nissim's thesis, adopted with some modifications by Dr Coulton, commences from the position that whereas for the valuation of businesses generally, earnings multiples are usually preferred to book value (net asset backing) multiples, for the valuation of insurance companies, book value multiples (specifically, the price to book ratio) provide a significantly more reliable basis than earnings multiples. A valuation involves, broadly, ascertaining the ratio that the share market price of shares in comparable insurance companies bears to their net asset backing, and applying that ratio to the net asset backing of the subject company to derive a value for its shares. One important reason why book value is a more reliable basis than earnings is the nature of the insurance business, and the way in which they are accounted for - in particular, that insurance assets must be reported in the "book" at net market value. 1732 As will be evident, the nature of the expert evidence before his Honour was that, although an orthodox approach to valuation is by reference to earnings multiples, there is a difference when it comes to an established industry such as insurance. There was no probative evidence of this type before me. 1733 To the contrary, there was evidence before me that there was not a causal relationship between movements in Quintis' reported net assets and its share price. The Respondents relied upon other evidence that pointed in the direction that Quintis' share price did not move in accordance with movements in its reported net assets. In his report, Mr Holzwarth gave two examples of disclosures by Quintis where there were changes in its net assets. The first example was that on 30 November 2015, Quintis disclosed an 11% increase in net assets. Quintis' share price increased by only 1.2% on that day and by 0.58% the day after. Mr De Cian in his evidence in reply said that the true increase in net assets was not 11% but was only 6.9% when allowance was made for the fact that the acquisition of two companies, Santalis and Viroxis, was announced by Quintis in August 2015. Mr De Cian also said that shortly before the disclosure of the increase in net assets, Quintis had updated the market on an anticipated increase in its FY16 cash EBITDA which he said would "likely have caused the market to price in positive results before the time of the disclosure on 30 November 2015". In his evidence before me, Mr Holzwarth explained that, if one adopted a test of materiality given by other experts in the case, the 6.9% increase in Quintis' assets as postulated by Mr De Cian would have been material at that time but there was not a corresponding increase in share price. Mr Holzwarth also explained that there was no share price movement attributable to the earlier announcements in relation to Quintis' EBITDA. Mr Holzwarth's evidence, which I accept, was that the fact remained that the market simply did not react to the increase in net assets in the way Mr De Cian assumed. 1734 The second example given by Mr Holzwarth was that on 26 August 2016 Quintis announced a 14% increase in net assets. Quintis' share price declined by 0.87% on that day and by 6.18% on the following trading day. Mr De Cian said in response to this that the net assets only increased by 3% when allowance was made for a capital raising in April 2016. However, this did not explain why the share price fell significantly following the announcement of an increase in net assets. 1735 Professor Frino also gave evidence that contradicted Mr De Cian's analysis. Professor Frino in fact performed an event study by reference to 12 relevant announcements considered by Mr De Cian that had been made by Quintis or about Quintis during the relevant period. These announcements were as follows: 1736 Professor Frino excluded from the event study two credit rating changes announced by Moodys and S&P as they were materials published by a third party and not information published by Quintis. 1737 Professor Frino concluded from his event study that there was no evidence of any significant relationship between the 10 announcements and Quintis' share price. As will be apparent from the above, Professor Frino's event study examined the impact on share price following the publication of the FY15 Financial Report on 31 August 2015 and the FY16 Financial Report on 26 August 2016. Both those Reports had recorded an increase in the reported net assets relative to the previous year. The event study also considered announcements made as to unaudited quarterly results on 26 February 2015, 31 May 2015, 30 November 2016 and 27 February 2017. Professor Frino set out the changes in share price following these announcements as follows: 1738 Professor Frino considered that only two announcements had a statistically significant impact on the share price. The first was the 26 February 2016 announcement which included additional significant information concerning Quintis signing multi-year agreements with Chinese and Indian buyers forward-selling 100% of the 2016 and 2017 harvests at prices of US$4,500/kg. The second was the 10 May 2017 announcement which reported on the termination of the Galderma contract and other matters. 1739 Professor Frino also sought to point out that Mr De Cian's opinions about the share price impact of the release of the FY15 Financial Report were not soundly based. Mr De Cian had opined that, "[i]n conjunction with the release of the FY15 Financial Statements on 31 August 2015, the share price increased from A$1.54 to A$1.84 on 23 October 2015". Professor Frino responded to this evidence as follows: Mr De Cian is therefore suggesting that the price response to the information released on 31 August 2015 takes approximately 53 days to be impounded in the price of Quintis. In my opinion, this is clearly anomalous, as it appears to take an extraordinarily long period of time for information released by Quintis to be reflected in its price. 1740 The opinions expressed by Professor Frino are logical. The fact that the share price increased over 53 days says nothing, either as a matter of economic theory or fact, as to whether that share price increase was caused by the release of the FY15 Financial Report. 1741 Professor Frino further opined that: Mr De Cian carries out an analysis of the price movements of Quintis from 31 August 2015 to 12 May 2017. He purports to identify the information releases that, in his opinion, were associated with significant price movements in Quintis. Based on this analysis, he concludes at paragraph 5.30(a) "The share price of Quintis during the Relevant Period changed with new information released to the market in relation to the Financial Statements, the performance of the business and other price catalyst announcements". He also concludes at paragraph 5.30(b) that "I have not observed any anomalies in my analysis which would lead me to believe that I should not rely on the price of Quintis shares". In my opinion, and for the reasons given in the following paragraphs, (1) in contrast to Mr De Cian's analysis, almost none of the pieces of information released by the company that he identifies in paragraphs 5.8 to 5.30 of his report result in a price movement at the time that they are released or up to one week after they are released when a proper event study analysis is carried out, suggesting that information released by the company often has very little immediate impact on the price of Quintis, (2) that in the analysis he reports, he documents what I regard as numerous anomalies suggesting that the price of Quintis does not properly reflect information as and when its released. 1742 The Davis Applicants submitted that neither Mr Holzwarth's nor Professor Frino's analysis involved consideration of material changes in the net assets of a magnitude that would be expected to change the share price. To a like effect, as noted above, the Davis Applicants submitted that it was unrealistic and contrary to principle to accept that a reduction in assets of up to 30 to 50% would not have an impact on Quintis' share price. It may be accepted that publication of information that disclosed that Quintis' net assets were continuing to grow may have been merely confirmatory of the market's expectations and not to be likened to publication of information disclosing a material write down in net assets. However, the difficulty is that even with the latter, questions may arise as to whether the write down was merely confirmatory of the market's expectations or irrelevant because the market was making different assumptions. These rival points only serve to highlight that seeking to interpolate the market's reactions to a set of positive or negative news is fraught with difficulty and susceptible to subjective and speculative biases. It is another reason why generally an event study is considered a more reliable method to ascertain market responses. 1743 I entirely accept the Davis Applicants' submissions that an event study is not an exclusive means by which to prove causation or causally-connected loss and it may not have been available in the present case, but it has advantages when seeking to measure share price inflation or impairment. None of this is to the point here. The onus fell on the Davis Applicants to establish, in the first instance, the relationship between net assets and share price, and then, that by reason of that relationship, the Davis Applicants and Group Members bought shares in an inflated market in that the market price of the shares was substantially higher than what it would have been had the "true position" been disclosed. The Davis Applicants were required to establish that, by reason of that asserted relationship, the share price would have been lower if the restated assets had been published. For all of the reasons I have outlined above, I am not satisfied that the Davis Applicants established their case. 1744 For completeness, it is necessary to refer to some other matters. 1745 To the extent that Mr De Cian relied upon an analysis of companies other than Quintis, it was of limited probative value. First, Mr De Cian plotted the P/NA ratios for other "MIS" companies, being Great Southern Limited, Timbercorp, Wilmott Forest Limited and Forest Enterprises Australia Limited. The chart that Mr De Cian produced was as follows: 1746 Mr De Cian expressed the view that the relationship between share price and the net assets of these "other managed investment schemes operating in the agricultural and forestry sectors prior to their failure" showed that the share prices of these entities traded below their net assets for most of the time. It is unclear what the Davis Applicants urged me to find by reference to this analysis. 1747 Mr De Cian also relied upon four "case studies" relating to QBE, Blue Sky, Lendlease and Newcrest in support of a conclusion that, if the "corrected accounts" had been disclosed, this would have resulted in "a reduction of the Restated Prices more proportional [sic] than the reduction in the net assets" due to, amongst other things, negative news having a "shock" impact on the market. Each of the companies the subject of the case studies were ones in respect of which there had been class actions commenced. 1748 Professor Frino considered each of these examples and pointed out that: (a) in relation to QBE, Mr De Cian had observed that there was a fall of "circa 8.3% of the net assets as 30 June 2013 and the share price reduction was over 30%". However, the information released to the market also included a revision of QBE's earnings guidance such that the group was expecting a net loss after tax of around $250 million compared with a NPAT [net profit after tax] of US$761 million in 2012" being a 32.8% decline in forecast earnings. Professor Frino expressed the opinion that the majority of the price movement in QBE could be accounted for by the revision in forecast NPAT, and not the adjustment to historical net assets. He expressed the view that this was consistent with basic finance theory which holds that investors value shares based on expected future cash flows; (b) in relation to Blue Sky, Mr De Cian had reviewed a set of announcements which resulted in a decline of "circa 32% of the latest statutory available net assets prior to the announcement… [and] … the Blue Sky share price declined by 85%". However, the set of information released also included "changes to the Board and Management", "revised fee earning AUM [assets under management] guidance for FY18 from $4.25-4.75 billion to $4.0-4.25 billion" and "underlying NPAT guidance for FY18 from $34-$36 million to $20-$25 million" which represented a 36% decrease in forecast earnings alone. Professor Frino expressed the opinion that the majority of the price movement in Blue Sky was likely to be accounted for by the revision in forecast NPAT and reduction in AUM, and not any adjustment to its historical net assets; (c) in relation to Lendlease, Mr De Cian reviewed a set of announcements where the "price fell by more than 25% over the period between 9 November 2018 and 26 February 2019" which he suggested resulted from the reduction in net assets "[r]elative to the group's reported net assets as at 30 June 2018" where the impairment charge arising from its Engineering and Service Business of Lendlease represented "a circa 5% reduction". Professor Frino pointed out that Mr De Cian failed to identify that over that four month period, the ASX website revealed that there were over 30 announcements made by Lendlease and many of them could have contributed to the price decline including the large volume of information released with its half-yearly report on 25 February 2019 which was unrelated to the Engineering and Service Business of Lendlease. Professor Frino expressed the opinion that it was impossible to disentangle the effects of the other information released in the four month period ending 26 February 2019 from the information relating to the impairment of assets of Lendlease; (d) finally, in relation to Newcrest, Mr De Cian had reviewed a set of announcements released on 7 June 2013 including impairment charges of "39% of the last reported net assets" which Mr De Cian suggested caused the "share price decline during the period from and including 28 March 2013 to 7 June 2013 [which] was 44%". However, Professor Frino pointed out that Mr De Cian identified that the announcements on 7 June 2013 included a downgrade of forecast FY14 gold production and that the company would be paying no final dividend for FY13. Professor Frino expressed the opinion that these two pieces of information were material and are likely to explain a significant proportion of the price decline around the time that the information was announced. 1749 I am unable to draw any relevant conclusion from Mr De Cian's reliance upon these selected examples that would lead to the acceptance of the Davis Applicants' indirect market-based causation case. 1750 In the final analysis, I am not satisfied that the Davis Applicants have established their indirect market-based causation case.
1751 It follows in all the circumstances that I am not satisfied that the Davis Applicants have established their case as to causation, such that they have not established their case as to recovery of causally-connected loss.
1752 In light of the above, it is not necessary for me to determine what loss, if any, was suffered by reason of the various causes of action that were pleaded. Making an assessment of these matters would involve mere speculation in circumstances where I have not accepted the essential predicates for the Davis Applicants' case as to causation. 1753 Further, given these conclusions, it is unnecessary for me to consider or determine any of the proportionate liability claims (such as they continued to be maintained) as between Mr Wilson and EY.
SCHEDULE: GLOSSARY OF DEFINED AND COMMON TERMS AND KEY PERSONS Term or person Meaning AASB 108 AASB 108 titled "Accounting Policies, Changes in Accounting Estimates and Errors" AASB 13 Australian Accounting Standards Board Standard 13 titled "Fair Value Measurement" (compilation prepared on 8 August 2014) AASB 141 Australian Accounting Standards Board Standard 141 titled "Agriculture" (compilations prepared on 3 October 2013 and 13 February 2015) Accounting Standards or AASBs The Australian Accounting Standards published by the Australian Accounting Standards Board ACL Australian Consumer Law ADIC Abu Dhabi Investment Council Agreed Facts Statement of Agreed Background Facts filed on 5 March 2024 Alchemia Alchemia Ltd Argonaut Argonaut Securities Pty Ltd ASA 200 Auditing and Assurance Standards Board Standard 200 titled "Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards" (compilations prepared on 11 November 2013 and 1 December 2015) ASA 500 Auditing and Assurance Standards Board Standard titled "Audit Evidence" (compilations prepared on 11 November 2013 and 1 December 2015) ASA 540 Auditing and Assurance Standards Board Standard 540 titled "Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures" (compilations prepared on 27 June 2011 and 1 December 2015) ASIC Act Australian Securities and Investments Commission Act 2001 (Cth) ASX Australian Stock Exchange Auditing Standards or ASAs The Australian Auditing Standards published by the Auditing and Assurance Standards Board Barbour et al. (2012) An article authored by Dr Barbour, Professor Julie Plummer and Mr Norris entitled "Flood-irrigated Tropical Timber Trials in the North of Western Australia", published by the RIRDC, a statutory corporation, in November 2012 Barbour Reply Report Reply expert report of Dr Barbour dated 15 March 2024: CB Tab 66.01 Barbour Report Expert report of Dr Barbour dated 25 February 2020: CB Tab 31 Basford Report Expert report of Mr Basford, "Volume 1 - Biological Assets Report" dated 4 March 2020: CB Tab 33 Brand et al. (2006) An article authored by Mr John Brand, Mr Kimber and Mr John Streatfield entitled "Preliminary analysis of Indian sandalwood (Santalum album L.) oil from a 14 year old plantation at Kununurra, Western Australia", published in the March 2006 edition of the Sandalwood Research Newsletter Brand et al. (2012) An article authored by Mr Brand, Mr Len Norris and Mr Ian Dumbrell entitled "Estimated heartwood weights and oil concentrations within 16-year-old Indian sandalwood (Santalum album) trees planted near Kununurra, Western Australia", published in vol 75(4) of Australian Forestry in 2012 Brown Affidavit Affidavit of Andrew Brown dated 4 May 2023: CB Tab 27 Brown et al. (2011) An article authored by Mr Brown, Mr Jonathon Eatt, Mr Done, Mr Daniel Raymond and Mr Michael Pattinson entitled "Harvest of Indian sandalwood (Santalum album L.) and determination of heartwood yield, sandalwood oil yield and sandalwood oil quality from plantations at Kununurra, Western Australia", published in the December 2011 edition of Perfumer & Flavorist CA ANZ Chartered Accountants Australia and New Zealand CALM Western Australian Department of Conservation and Land Management Canaccord Canaccord Genuity (Australia) Ltd CEO Chief Executive Officer CFO Chief Financial Officer Common Questions The common questions for determination that had been agreed by the parties prior to trial Corporations Act Corporations Act 2001 (Cth) Corporations Regulations Corporations Regulations 2001 (Cth) Corrected Figure 21 Figure 21 of the Barbour Report, which Dr Barbour corrected and updated in the Supplementary Barbour Report Corrected Figure 25 Figure 25 of the Barbour Report, which she corrected and updated in the Supplementary Barbour Report Davis Applicants Mr Davis Snr and Mr Davis Jnr, collectively Davis Applicants' Ready Reckoner Davis Applicants' Quintis Growth Model Ready Reckoner for the 2014 and 2015 Inventory Reports Davis Fund Davis Superannuation Fund Davis Group Members Members of open class who brought representative proceedings, each of whom acquired an interest in ordinary shares of Quintis between 31 August 2015 and 15 May 2017 (including those who already had an interest in ordinary shares of Quintis before 31 August 2015) Davis Jnr Affidavit Affidavit of Geoffery William Davis dated 23 December 2019: CB Tab 21 Davis Snr Affidavit Affidavit of Mr Davis Snr dated 23 December 2019: CB Tab 20 DCF Model Quintis' discounted cash flow model which it used to value its biological assets: De Cian Reply Report Reply expert report of Mr De Cian dated 2 November 2022: CB Tab 49 De Cian Report Expert report of Mr De Cian dated 29 May 2020: CB Tab 48 DOB Stem diameter over bark DOCA Deed of Company Arrangement Dr Barbour Dr Elizabeth Barbour Dr Woodall Dr Geoff Woodall EKS2 The East Kimberley Sandalwood project, Quintis' first commercial plantation established in 1999 Enigma Presentation A presentation which Mr Brown made to Quintis staff and external parties explaining how the Heartwood Model operated, which referred to data collected from five destructive harvests conducted between 2010 and 2012 Evidence Act Evidence Act 1995 (Cth) Excel Texel Excel Texel Pty Ltd (as trustee for the Mandex Family Trust) Excel Texel Proceedings NSD1983/2017 EY Ernst & Young EY FY15 Financial Report Representation The alleged representation by EY that the FY15 Audit Opinion was an opinion held on a reasonable basis and the product of the application of reasonable care and skill by EY and formed after EY had conducted an audit in accordance with the Auditing Standards EY FY16 Financial Report Representation The alleged representation by EY that the FY16 Audit Opinion was an opinion held on a reasonable basis and the product of the application of reasonable care and skill by EY and formed after EY had conducted an audit in accordance with the Auditing Standards EY TAS EY Transaction Advisory Services (also known as EY V&BM) FCA Act Federal Court of Australia Act 1976 (Cth) FFASOC The Davis Applicants' Fifth Further Amended Statement of Claim First Glaucus Report Report released by Glaucus on 22 March 2017 valuing Quintis shares at $0 FPC Forest Products Commission of Western Australia Frino Report Expert report of Professor Frino dated 8 July 2022: CB Tab 52 FVLCS Fair value less costs to sell FWI Frank Wise Institute FY11 Annual Report Quintis' annual report for the financial year ending 30 June 2011 FY12 Annual Report Quintis' annual report for the financial year ending 30 June 2012 FY13 Annual Report Quintis' annual report for the financial year ending 30 June 2013 FY15 Financial year ending 30 June 2015 FY15 Audit Opinion The representation by EY that the FY15 Financial Report was in accordance with the Corporations Act, including by giving a true and fair view of Quintis' financial position and performance and complying with the Accounting Standards FY15 Audit Plan EY Audit Plan for the year ending 30 June 2015 FY15 BA Carrying Value The carrying value reported for Quintis' total biological assets for FY15, being $624,574,000 FY15 Closing Report Closing Report to the Audit Committee for the year ended 30 June 2015 FY15 Directors' Declaration The declaration contained in the FY15 Financial Report that, in the Directors' opinion, the FY15 Financial Report had been prepared in accordance with the requirements of the Corporations Act and the Accounting Standards FY15 EY Biological Asset Assessment Memorandum EY memorandum dated 22 July 2015 entitled "Biological Asset Assessment" FY15 Financial Report Quintis' financial report for FY15 FY15 Revaluation Gains The revaluation gains on Quintis' biological assets for the financial year ended 30 June 2015 as reported by Quintis in the FY15 Financial Report FY16 Financial year ending 30 June 2016 FY16 Audit Opinion The representation by EY that the FY16 Financial Report was in accordance with the Corporations Act, including by giving a true and fair view of Quintis' financial position and performance and complying with the Accounting Standards FY16 BA Carrying Value The carrying value reported for Quintis' total biological assets for FY16, being $771,208,000 FY16 Directors' Declaration The declaration contained in the FY16 Financial Report that, in the Directors' opinion, the FY16 Financial Report had been prepared in accordance with the requirements of the Corporations Act and the Accounting Standards FY16 EY Biological Asset Assessment Memorandum EY memorandum dated 30 July 2016 entitled "Biological Asset Assessment" FY16 EY Closing Report Closing Report to the Audit Committee for the year ended 30 June 2016 prepared by EY FY16 Financial Report Quintis' financial report for FY16 FY16 Revaluation Gains The revaluation gains on Quintis' biological assets for the financial year ended 30 June 2016 as reported by Quintis in the FY16 Financial Report FY17 Financial Report Quintis' financial report for the financial year ending 30 June 2017 Galderma Galderma SA Galderma Contract Contract signed by Quintis (through its subsidiary Santalis) and Galderma in 2014 providing for the supply of sandalwood oil to Galderma for a period of 20 years at US$4,500 per kg plus annual CPI (capped at 3%) Glaucus Glaucus Research Group California, LLC GS 005 Guidance Statement published by the AASB titled "Using the Work of a Management's Expert" Heartwood The central core of the sandalwood tree Heartwood Model The model adopted by Quintis to estimate the average heartwood in a tree of a certain size (by reference to DOB at 20cm) and age: Holzwarth Report Expert report of Mr Holzwarth dated 25 July 2022: CB Tab 50 IAS41 International Accounting Standard 41 titled "Agriculture" IASC International Accounting Standards Committee Indufor Indufor Asia Pacific (Australia) Pty Ltd IPO Prospectus The prospectus issued to potential investors in Quintis shares on 3 November 2004 for its listing on the ASX Joint Report Joint expert report prepared by the auditing and accounting experts dated 30 September 2022: CB Tab 67 McGregor Report Expert report of Mr McGregor dated 8 July 2022: CB Tabs 54 and 55 MISs Management Investment Schemes Moelis Moelis Australia Securities Pty Ltd Mortality The reduction in the number of trees in a plantation over time Morton Report Expert report of Mr Morton dated 8 August 2022: CB Tab 51 Mr Barnes Mr Matt Barners, Quintis' Deputy General Manager at all material times Mr Basford Mr Wayne Basford Mr Ben Wilson Mr Ben Wilson, Mr Wilson's son and advisor at Quintis at all material times Mr Blunden Mr Brett Blunden, Quintis' General Manager of Forestry/Operations at all material times; often referred to in internal correspondence as "Oakey" Mr Brown Mr Andrew Brown, Quintis' Head of Research at all material times Mr Davis Jnr Mr Geoffrey William Davis Mr Davis Snr Mr Geoffrey Peter Davis Mr De Cian Mr Andrea De Cian Mr Done Mr Chris Done Mr Holzwarth Mr John Holzwarth Mr Kimber Mr Peter Kimber Mr McGregor Mr Warren McGregor Mr Morton Mr Andrew Morton Mr Stevens Mr Alistair Stevens, Quintis' Chief Financial Officer at all material times Mr Torchio Mr Frank Torchio Mr Wagener Mr Morne Wagener, Financial Controller at Quintis at all material times Mr Westworth Mr Chris Westworth Mr Wilson Mr Frank Wilson, Quintis' CEO, Managing Director and director at all material times Mt Romance Mt Romance Pty Ltd, a commercial sandalwood distiller acquired by Quintis in 2008 ORIA Ord River Irrigation Area P/NA Method The price to net assets methodology used by Mr De Cian to determine the purported value of Quintis' shares on the Davis Applicants' counterfactual case P/NA Ratio The quantitative or mathematical relationship between the closing price of Quintis' shares and its reported net assets on particular days as derived by Mr De Cian as part of the Davis Applicants' counterfactual case Partington Report Expert report of Professor Partington dated 8 July 2022: CB Tab 53 PDS Product disclosure statement Professor Frino Professor Alex Frino Professor Partington Professor Graham Partington Quintis Quintis Ltd (formerly TSF) Respondents Mr Wilson and EY, collectively RIRDC Rural Industries Research and Development Corporation Sandalwood Indian Sandalwood (Santalum album) Santalis Santalis Pharmaceuticals Inc, a subsidiary of Quintis Second Glaucus Report Report released by Glaucus on 29 March 2017 valuing Quintis shares at $0 Settlement Decision Davis v Quintis Ltd (Subject to a Deed of Company Arrangement) [2022] FCA 806 SPH Stems per hectare Supplementary Barbour Report Supplementary expert report of Dr Barbour dated 7 April 2024: CB Tab 62:01 Supplementary Torchio Report Supplementary expert report of Mr Torchio dated 16 February 2024: CB Tab 63.01 TFS TFS Corporation Ltd TFS2 Quintis' second commercial plantation established in 2000 TMM Total merchantable mass, the total mass of wood in a sandalwood tree including both heartwood and sapwood in the trunk or bole of the tree and in branches of greater than 50 mm Torchio Report Expert report of Mr Torchio dated 12 June 2020: CB Tab 63 TPA Trade Practices Act 1974 (Cth) Tree Model The model adopted by Quintis to predict the average annual growth rates of a sandalwood tree over time in a "good performing plantation" (2.5 cm per annum for trees aged 1-5; 1.6 cm per annum for trees aged 5-10; and 0.8 cm per annum for trees aged 11 to 15 years) and the likely size of a sandalwood tree at harvest by assessing its size by reference to the tree's DOB at 20 cm above the ground (24.5 cm) UBS UBS Securities Australia Ltd WACC Weighted average cost of capital WAFD Western Australian Forestry Department West Report Report dated 31 March 2017 prepared by Professor Phil West on Quintis' growth models and yield measurement practices in which he proposed a new model for estimating heartwood yield: CB Tab 1606 Westworth Report Expert report of Mr Westworth dated 8 July 2022: CB Tabs 56-61 Wilson FY15 Assets Representation The alleged representation that Mr Wilson was of the opinion that Quintis had total assets of $1,173,335,000 and net assets of $574,523,000 in FY15, and that those opinions resulted from the application of the Accounting Standards and were held on a reasonable basis and were the product of the application of reasonable care and skill by each director of Quintis, including Mr Wilson Wilson FY15 Financial Report Representation The alleged representation by Mr Wilson that he was of the opinion that the FY15 Financial Report had been prepared in accordance with the requirements of the Corporations Act, including that it complied with the Accounting Standards, and gave a true and fair view of the financial position and performance of Quintis, and that those opinions were held on a reasonable basis and were the product of the application of reasonable care and skill by Mr Wilson Wilson FY15 Profit Representation The alleged representation that Mr Wilson was of the opinion that Quintis had post-tax profit of $113,021,000 for FY15 and that that opinion resulted from the application of the Accounting Standards and was held on a reasonable basis and was the product of the application of reasonable care and skill by Mr Wilson Wilson FY16 Assets Representation The alleged representation that Mr Wilson was of the opinion that Quintis had total assets of $1,491,958,000 and net assets of $747,222,000 in FY16, and that those opinions resulted from the application of the Accounting Standards and were held on a reasonable basis and were the product of the application of reasonable care and skill by each director of Quintis, including Mr Wilson Wilson FY16 Financial Report Representation The alleged representation by Mr Wilson that he was of the opinion that the FY16 Financial Report had been prepared in accordance with the requirements of the Corporations Act, including that it complied with the Accounting Standards, and gave a true and fair view of the financial position and performance of Quintis, and that those opinions were held on a reasonable basis and were the product of the application of reasonable care and skill by Mr Wilson Wilson FY16 Profit Representation The alleged representation that Mr Wilson was of the opinion that Quintis had post-tax profit of $90,143,000 for FY16 and that that opinion resulted from the application of the Accounting Standards and was held on a reasonable basis and was the product of the application of reasonable care and skill by Mr Wilson Wilson Representations The Wilson FY15 and FY16 Financial Report Representations, Wilson FY15 and FY16 Assets Representations and Wilson FY15 and FY16 Profit Representations, collectively Woodall Report Expert report of Dr Woodall dated 8 August 2022: CB Tab 62
Davis
Wilson
FEDERAL COURT OF AUSTRALIA Davis v Wilson [2025] FCA 108 File number(s):
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(2012) 247 CLR 345 Australian Securities and Investments Commission v Macdonald (No 11) (2009) 256 ALR 199; [2009] NSWSC 287 Australian Securities and Investments Commission v Narain [2008] FCAFC 120; 169 FCR 211 Australian Securities and Investments Commission v Westpac Banking Corporation (No 2) (2018) 266 FCR 147; 127 ACSR 110 Australian Securities and Investments Commission v McLeod [2000] WASCA 101; (2000) 22 WAR 255 Axon v Axon [1937] HCA 80; (1937) 59 CLR 395 Barnes v Hay (1988) 12 NSWLR 337 Bathurst Regional Council v Local Government Financial Services Pty Ltd [2012] FCA 1200 Berry v CCL Secure Pty Ltd [2020] HCA 27; (2020) 271 CLR 151 Bill Express Ltd v Pitcher Partners (a Firm) [2014] VSC 482 Bond Corporation Pty Ltd v Thiess Contractors Pty Ltd (1987) 14 FCR 215; 71 ALR 615 Bradshaw v McEwans Pty Ltd (1951) 217 ALR 1 Braverus Maritime Inc v Port Kembla Coal Terminal Ltd [2005] FCAFC 256; (2005) 148 FCR 68 Brown v New South Wales Trustee and Guardian (2012) 10 ASTLR 164 Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592 Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304 Caparo Industries Plc v Dickman [1990] 2 AC 605 Carr v Baker (1936) 36 SR (NSW) 301 CBRE (V) Pty Ltd v City Pacific Ltd (in liq) [2022] NSWCA 54 Chapman v Luminis Pty Ltd (No 4) [2001] FCA 1106; 123 FCR 62 Chowder Bay Pty Ltd v Paganin [2018] FCAFC 25 Citadel Financial Corporation Pty Ltd (admin apptd) v Action Scaffolding & Rigging Pty Ltd (in liq) [2019] FCAFC 145 City of Botany Bay Council v Jazabas Pty Ltd [2001] NSWCA 94 Comcare v Martin [2016] HCA 43; (2016) 258 CLR 467 Como Investments Pty Ltd (in liquidation) v Yenald Nominees Pty Ltd [1997] ATPR 41-550 Crowley v Worley Ltd [2022] FCAFC 33; (2022) 293 FCR 438 Cummings v Lewis (1993) 41 FCR 559 D'Orta-Ekenaike v Victoria Legal Aid (2005) 223 CLR 1; [2005] HCA 12 Dare v Pulham [1982] HCA 70; (1982) 148 CLR 658 Davis v Quintis Ltd (Subject to a Deed of Company Arrangement) [2022] FCA 806 Earglow Pty Ltd v Newcrest Mining Ltd [2015] FCA 328; (2015) 230 FCR 469 Esanda Finance Corporation Ltd v Peat Marwick Hungerfords [1997] HCA 8; (1997) 188 CLR 241 Fisher v Nonconformist Pty Ltd [2024] NSWCA 32 Forrest v Australian Securities and Investments Commission [2012] HCA 39; (2012) 247 CLR 486 Gate Gourmet Australia Pty Ltd (in liq) v Gate Gourmet Holding AG [2004] NSWSC 149 George v Rockett (1990) 170 CLR 104 GLJ v The Trustees of the Roman Catholic Church for the Diocese of Lismore [2023] HCA 32; (2023) 97 ALJR 857 Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd [1984] FCA 180; (1984) 2 FCR 82 Cases cited: Goddard Elliott (A Firm) v Fritsch [2012] VSC 87 Gould v Vaggelas [1985] HCA 75; (1985) 157 CLR 215 Henville v Walker [2001] HCA 52; (2001) 206 CLR 459 HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640 I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2002] HCA 41; (2002) 210 CLR 109 Ingot Capital Investments Pty Limited v PricewaterhouseCoopers [2002] NSWSC 1129 Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11; (2011) 243 CLR 361 Lin v Zheng [2023] NSWCA 174 London City Equities Ltd v Ernst & Young [2019] NSWSC 963 Luxton v Vines (1952) 85 CLR 352 Macks v Viscariello [2017] SASCFC 172 Manicaros v Commercial Images [2024] QCA 40 March v E & MH Stramare Pty Ltd (1991) 171 CLR 506 Masters v Lombe (Liquidator); In the Matter of Babcock & Brown Ltd (in liq) [2019] FCA 1720 McNickle v Huntsman Chemical Company Australia Pty Ltd [2024] FCA 807 MGICA (1992) Ltd (formerly MGICA Ltd) v Kenny & Good Pty Ltd (1996) 140 ALR 313 Microsoft Corporation v CPL Notting Hill Pty Ltd [2024] FCAFC 20 Morley v Australian Securities and Investments Commission [2010] NSWCA 331; (2010) 274 ALR 205 Mummery v Irvings Pty Ltd [1956] HCA 45; (1956) 96 CLR 99 NOM v DPP [2012] VSCA 198; (2012) 38 VR 618 NT Power Generation Pty Ltd v Power and Water Authority [2004] HCA 48; (2004) 219 CLR 90 Pinson v Lloyds and National Provincial Foreign Bank Ltd (1941) 2 KB 72 Propell National Valuers (WA) Pty Ltd v Aust Executor Trustees Ltd [2012] FCAFC 31 (2012) 202 FCR 158 Rakic v Johns Lyng Insurance Building Solutions (Victoria) Pty Ltd [2016] FCA 430; (2016) 259 IR 47 Re HIH, Myer and Grant-Taylor v Babcock and Brown Ltd (in liq) [2015] FCA 149; (2015) 322 ALR 723 Roberts-Smith v Fairfax Media Publications Pty Ltd (No 41) [2023] FCA 555; (2023) 417 ALR 267 RT & YE Falls Investments Pty Ltd v NSW [2001] NSWSC 1027 Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd [2011] FCAFC 53 San Sebastian Pty Ltd v Minister Administering Environmental Planning and Assessment Act 1979 (NSW) [1986] HCA 68; (1986) 162 CLR 340 Self Care IP Holdings Pty Ltd v Allergan Australia Pty Ltd [2023] HCA 8; (2023) 277 CLR 186 Selig v Wealthsure Pty Ltd [2015] HCA 18; (2015) 255 CLR 661 Seltsam Pty Ltd v McGuiness [2000] NSWCA 29; (2000) 49 NSWLR 262 Shop Distributive and Allied Employees' Association v Karellas Investments Pty Ltd [2008] FCAFC 42; (2008) 166 FCR 562 St George Club Ltd v Hines [1962] ALR 39; (1961) 35 ALJR 106 at 107 Teh v Ramsay Centauri Pty Ltd [2002] NSWSC 456; (2002) 42 ACSR 354 Thomson v STX Pan Ocean Co Ltd [2012] FCAFC 15 TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Ltd [2019] FCA 1747; (2019) 293 FCR 29 Trade Practices Commission v David Jones (Australia) Pty Ltd (1985) 7 FCR 109 Transport Workers' Union of Australia v Qantas Airways Ltd [2021] FCA 873; (2021) 308 IR 244 Vanguard Financial Planners Pty Ltd v Ale (2018) 354 ALR 711 Wardley Australia Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514 White v Overland [2001] FCA 1333 Wingecarribee Shire Council v Lehman Brothers Australia Ltd (ACN 066 797 760) (in liq) [2012] FCA 1028; (2012) 301 ALR 1 WMC Resources Limited v Leighton Contractors Pty Ltd [1999] WASCA 10 Wyzenbeek v Australiasian Marine Imports Pty Ltd [2017] FCA 1460 Zonia Holdings Pty Ltd v Commonwealth Bank of Australia Limited (No 5) [2024] FCA 477 Australian Law Reform Commission, "Confronting Complexity: Reforming Corporations and Financial Services Legislation" (Report No 141, November 2023) Fischel D, "Use of Modern Finance Theory in Securities Fraud Cases Involving Actively Traded Securities" (1982-1983) 38 Bus Law 1 Hodgson DH, "The Scales of Justice: Probability and Proof in Legal Fact-finding" (1995) 69 ALJ 731 Krogerus M and Tschappeler R, The Decision Book (Profile Books, 2013)
[2000] WASCA 101
[2014] VSC 482
[2012] VSC 87
[2017] SASCFC 172
[2024] QCA 40
[2012] VSCA 198
[1986] HCA 68
[1999] WASCA 10
[2004] HCA 34
[2005] TASSC 64
[2009] QCA 63
[2020] VSCA 108
(2016) 336 ALR 209
(2011) 190 FCR 364
(2011) 196 FCR 291
(2012) 247 CLR 345
(2009) 256 ALR 199
(2018) 266 FCR 147
(2000) 22 WAR 255
(1937) 59 CLR 395
(1988) 12 NSWLR 337
(2020) 271 CLR 151
(1987) 14 FCR 215
(1951) 217 ALR 1
(2005) 148 FCR 68
(2004) 218 CLR 592
(2009) 238 CLR 304
(2016) 258 CLR 467
(2022) 293 FCR 438
(1993) 41 FCR 559
(2005) 223 CLR 1
(1982) 148 CLR 658
(2015) 230 FCR 469
(1997) 188 CLR 241
(2012) 247 CLR 486
(1990) 170 CLR 104
(2023) 97 ALJR 857
(1984) 2 FCR 82
(1985) 157 CLR 215
(2001) 206 CLR 459
(2004) 217 CLR 640
(2002) 210 CLR 109
(1959) 101 CLR 298
(2011) 243 CLR 361
(1952) 85 CLR 352
(1991) 171 CLR 506
(1996) 140 ALR 313
(2010) 274 ALR 205
(1956) 96 CLR 99
(2012) 38 VR 618
(2004) 219 CLR 90
(2012) 202 FCR 158
(2016) 259 IR 47
(2015) 322 ALR 723
(2023) 417 ALR 267
(1986) 162 CLR 340
(2023) 277 CLR 186
(2015) 255 CLR 661
(2000) 49 NSWLR 262
(2008) 166 FCR 562
(1961) 35 ALJR 106
(2019) 293 FCR 29
(1985) 7 FCR 109
(2021) 308 IR 244
(2018) 354 ALR 711
(1992) 175 CLR 514
(2012) 301 ALR 1
(1990) 169 CLR 279
(1916) 22 CLR 490
(2006) 33 WAR 82
(1976) 50 ALJR 666
(1988) 180 CLR 491
(1938) 60 CLR 336
(2004) 220 CLR 363
(1990) 170 CLR 573
(2001) 53 NSWLR 116
(2000) 23 WAR 123
(2015) 90 NSWLR 342
(1990) 169 CLR 594
(2003) 129 FCR 64
(1996) 67 FCR 275
(2001) 114 FCR 472
(2008) 169 FCR 211
(2012) 213 FCR 380
(2009) 179 FCR 46
(1993) 42 FCR 470
(2014) 224 FCR 1
(2017) 130 SASR 1
(2005) 15 Tas R 59
(2016) 335 ALR 320
[2011] HCA 11
[1938] HCA 34