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[1998] SASC 6529
Supreme Court of SA
1998-01-30
Mullighan J
Original judgment source is linked above.
The application for leave to withdraw the admission was opposed. It could not fairly be resolved upon evidence given by affidavit. Consequently I referred the application to be heard during the case of the first defendants so as to avoid duplication of evidence on the basis that if leave was given the plaintiff could re-open its case limited to that matter if necessary. Justice demanded that the issue be determined. If Stokes and Munachen were not partners at relevant times, they should not be held liable to the plaintiff in damages if the plaintiff is successful in the action. If they were partners, they should pay, along with the other partners, the damages due to the plaintiff. Each of the first defendants presented his case on this issue and gave evidence, except Pilmer and Munachen. As has been seen, Stokes did not complete his evidence. All filed affidavits in support of the application. Only when a first defendant gave evidence was his affidavit admitted into evidence. All of them were obliged to make full discovery. Having considered all of the evidence and the submissions, I have concluded that Stokes and Munachen were members of the partnership at relevant times. As there is no merit in the application, it must be refused. There is no need to consider the important issues which arise on procedural applications of this nature such as prejudice to the plaintiff, explanation for delay in making the application and other questions of procedural fairness. In my view, the first defendants were correct in their admission in the pleadings and there is no reason to give leave to withdraw those admissions. Consequently, the question of leave to the plaintiff to re-open its case on this issue does not arise.
It is the plaintiff's case that members of Nelson Wheeler Perth were so closely associated with Kia Ora and Western United that the firm lacked the necessary independence to be able to accept and undertake the contract of retainer. It will be remembered that Listing Rule 3J(3) requires both independence and expertise. The plaintiff alleges that it was principally Stokes and Munachen who lacked independence in the relevant sense, but also Pilmer and Martino and others to a lesser extent. Later in these reasons the alleged associations and lack of independence are discussed. They are not only of significance in resolving the issue of whether Nelson Wheeler Perth lacked independence, but also, on Kia Ora's case, as to their knowledge of the manner in which Western United conducted aspects of its business and of its financial circumstances which are relevant to the valuation of Western United.
There has been a vast amount of oral and documentary evidence as to the composition of Nelson Wheeler Perth at relevant times and it is impracticable to discuss all of that evidence in these reasons. It occupied a substantial part of the trial. I have reached conclusions with conviction based upon this evidence. I have rejected the evidence of the first defendants who gave evidence to the effect that Stokes and Munachen ceased to be partners as alleged by them. In my view, the story told by the documents is clear and is established time and time again by the manner in which the partners conducted their affairs. I hesitated before rejecting the evidence of the first defendants who gave evidence as to this matter because on most other matters I found most of them to be acceptable witnesses. However, on this issue their evidence is not acceptable. Also, I reached the conclusion that those defendants have tried to interpret certain unusual events in a particular way suitable to their case but the totality of the evidence really only admits of the conclusion which I have reached.
The issue of the composition of Nelson Wheeler Perth must be resolved by consideration of all of the relevant facts and circumstances and not merely by reference to purported understandings of the partners.
Nelson Wheeler Perth as it was constituted in 1987 was the result of the merger of various firms of chartered accountants during the 1980's.
Pilmer and Crawford had carried on practice as chartered accountants in Perth since June 1974 under the name of A.C. Pilmer & Co. Martino became a partner of that firm in October 1981 having joined the firm as an employee in April 1980. They also carried on practice under the name of Nelson Wheeler. In July 1972 an association between firms of practising accountants in Melbourne, Sydney, Brisbane and Adelaide came into existence. Pursuant to the arrangement between them, they were each permitted to use the name Nelson Wheeler. Subsequently, A.C. Pilmer & Co joined this association in May 1977. It seems that some of the firms practised exclusively under the name Nelson Wheeler but others did not. Pilmer & Crawford, and later Martino practiced principally under the name of A.C. Pilmer & Co but upon undertaking work on instructions from any of the other participating firms in the national association, performed the work in the name of Nelson Wheeler. It is a matter of contention whether this association between the firms in Sydney, Melbourne, Adelaide, Brisbane and the members of Nelson Wheeler Perth, at relevant times, constituted a partnership and that issue is addressed later in these reasons.
Stokes and Munachen carried on practice in partnership as accountants in Kalgoorlie with a Mr Robinson since the latter part of 1975, and without him since 30th June 1982, from which time the firm was known as Stokes, Munachen & Co. Stokes practiced mainly in Kalgoorlie and Munachen in Perth. They employed Langford who worked in the Kalgoorlie office. In December 1982 Stokes began to live in Perth. He had developed a substantial practice in the mining field and had also developed considerable personal interests in mining and had other extensive interests outside the practice. Munachen also lived in Perth. From that time they carried on practice in Perth and Kalgoorlie.
Pilmer also had clients in Kalgoorlie and he visited that city regularly. He and Stokes were acquainted and discussed merging the two practices which occurred on 1st January 1984, the partners being Pilmer, Crawford, Martino, Stokes and Munachen. They all contributed equally to the capital of the new firm but each firm retained its own creditors and debtors. Stokes and Munachen used the trust account of their former firm, known as Stokes, Munachen & Co Trust Account for this purpose. It was agreed that the new firm would carry on practice under the name of Nelson Wheeler. The names of A.C. Pilmer & Co and Stokes Munachen & Co were no longer used. Bank accounts, including a trust account, were opened in the name of Nelson Wheeler. There was no written partnership agreement. All of the partners became registered as the proprietors of the business name Nelson Wheeler along with Simmons of Nelson Wheeler in Melbourne and Wenham and Mr RWE Arnold of Nelson Wheeler Sydney. Arnold is also one of the fifth defendants. The significance of their involvement in this way is addressed later. Within about one month the firm commenced to practice at the Griffin Centre at 28 The Esplanade, Perth. Pilmer assumed the role of practice manager.
The partners established the Nelson Wheeler Unit Trust in early December 1980. The trustee was Startup Securities Pty Ltd. This trust was a service trust for the partnership and each of the partners was a director of the trustee and had an equal interest in the trustee and the unit trust, either personally or through their respective family trusts. The Nelson Wheeler Unit Trust owned all of the plant and equipment of the practice and employed the non-professional staff. Service fees were paid by Nelson Wheeler Perth to this Trust and profits were distributed each year to the owners of the units.
On 1st July 1985 Mr RJ Lewis joined the practice. He was introduced to the partnership by Stokes. Lewis and Stokes had practiced together as accountants in the early 1970s at Kalgoorlie before Stokes established his own practice. Langford also became a partner at this time. He was not a member of the Institute of Chartered Accountants. At that time Rules of the Institute prevented members from entering into partnership with non-members, so although Langford was a partner of the firm, that fact was not widely published.
On 1st July 1986 Nelson Wheeler Perth merged with a relatively small firm of practising accountants known as Cawley, Troy & Gray. At that time the partners of that firm were Mr ML Troy, the defendant Gray, the defendant Messer and Mr AR Connolly. They had carried on practice at West Perth. In consequence of the merger, there were eleven partners and seventy staff, including professional staff.
As will be seen, there were subsequent changes to the firm in 1987, 1988 and 1989. Lewis, Connolly and Troy left the partnership in 1987 and 1988, and Pilmer in 1989. Mr M Sudbury, Mr P Graus and Mr A Bonavita joined the firm in 1987. Sudbury and Graus joined the firm as salaried partners on 1st March 1987 and Bonavita on 1st July 1987. On 1st July 1988 Nelson Wheeler Perth merged with the firm Robinson Dawes of Kalgoorlie and Mr W Robinson became an equity partner.
The partners continued to carry on practice under the name of Nelson Wheeler until the remaining partners merged with Parkhill BDO on 1st March 1989. Thereafter the name of the firm was Nelson Parkhill BDO. However, it is convenient to refer to the firm as Nelson Wheeler Perth.
The new firm undertook a variety of types of work including general accountancy, taxation, corporate advisory work, corporate administration, audit work and the provisions of services to businesses. The professional work was undertaken in divisions supervised and controlled by a partner or partners. The practice of the new firm was carried on in three locations; at the Griffin Centre in Perth, at the former offices of Cawley, Troy and Gray at 45 Ventnor Avenue, West Perth and at Kalgoorlie. The new partners, with the exception of Langford, and the salaried partners, also became proprietors of the business name Nelson Wheeler.
Prior to the last mentioned merger, the partners of Cawley, Troy and Gray were considering the acquisition of the office premises at Ventnor Avenue and that matter was discussed with all of the partners of the new firm. They decided to purchase the property and did so shortly before the merger. The Platina Unit Trust was formed for that purpose. Platina Pty Ltd was the trustee. Each of the partners, or their respective family trusts, owned a unit in the Platina Unit Trust and all of the partners were directors of Platina Pty Ltd. The cost of the acquisition of the Ventnor Avenue property and fixtures, fittings, plant and equipment was a little in excess of $1.28m. Platina borrowed $1m for this purpose from First National Ltd. The balance was contributed by the partners or their respective family trusts. Nelson Wheeler Perth paid rent for the premises to Platina. The unit holders were to, and did, share equally in any profits or losses.
Upon this last merger the new firm had substantial debts. It is unnecessary to set out these debts in detail but the firm sought a loan facility from Westpac Bank in the sum of $1,600,000 to pay the debts of the two firms, refurbish the Ventnor Avenue property and to provide working capital. Westpac had been the banker of Cawley, Troy and Gray. That facility was granted and serviced by a second mortgage over the Ventnor Avenue property. Each of the partners provided a personal guarantee for that part of the loan granted to the new firm. The details of the financial position of each partner provided to the Bank reveal that Stokes appeared to have considerable wealth through a diversity of financial interests. In the main, the other partners, although not as wealthy, were each in a reasonably sound financial position with some outstanding loans and debts. Throughout the life of the new firm there was constant pressure from Westpac to comply with the terms of the loan arrangements. The requirements of Westpac were of constant concern to the partners and were never met by them.
Generally speaking the partners, except the salaried partners, shared equally in the capital and profits of the partnership. They have been referred to as "equity partners" and I shall adopt that expression. There were no salaried partners at relevant times other than Sudbury, Graus and Bonavita. The equity partners received monthly drawings, which they referred to as salaries, from the profits of the practice. They were also paid benefits in the nature of motor vehicle and telephone expenses and interest on the amounts standing to their credit in their respective capital accounts in the firm. There were periodic meetings of the partners, including the salaried partners, usually at least once a month. Pilmer, when present, was the chairman of such meetings. He was regarded as the managing partner. Minutes of each meeting were prepared and kept. An agenda was prepared prior to the meeting and circulated with a copy of the minutes of the previous meeting and other papers and documents. The practice kept detailed internal financial records including capital and current accounts of the equity partners, and the work in progress and creditors and debtors on a monthly basis.
After each merger the new partners acquired a share in, and became directors of, Startup Securities and a unit in the Nelson Wheeler Unit Trust so that each partner held personally, or through a family trust, an equal number of units in each entity.
Over the years as the activities of the practice expanded various investments were acquired and developed by the Nelson Wheeler Unit Trust, including businesses which became an integral part of its activities, namely Trendline Securities Pty Ltd, Esplanade Computer Services Pty Ltd and Premium Personnel Pty Ltd.
Trendline was a licensed investment adviser and dealer and was, in effect, totally owned by the Nelson Wheeler Unit Trust. Pilmer and Martino, on behalf of the partners, were the directors of the company at relevant times. Its profits were modest and were part of the income of the Nelson Wheeler Unit Trust. In 1989 the company made a loss. The balance sheet as at 30th June 1987 shows the net assets of Trendline to be $25,039.
Esplanade Computer Services was acquired in July 1985. Pilmer and Lewis, and later Graus, when Lewis resigned, were the directors of that company. The shares in the company were held by Startup Securities and Pilmer on behalf of the partners. This company provided computer consultancy services and sold computer hardware equipment to Nelson Wheeler Perth and to others. It made losses in 1987 and 1988.
Premium Personnel conducted an employment agency. At relevant times Nelson Wheeler Unit Trust owned two thirds of the issued capital and the remaining third was owned by a woman who managed the business. Pilmer, Messer and the woman were the directors of the company. The first year of operation of this business was 1987. During the period from 1987 to 1989 there were modest profits before income tax.
After the merger between A.C. Pilmer & Co and Stokes, Munachen & Co, Nelson Wheeler Perth developed a company share registry service. It was under the direction and supervision of Munachen and staff controlled by him. It was known as the Nelson Wheeler Share Registry and during 1986 and 1987 the business grew considerably. Munachen was also actively involved in the provision of administrative services to companies. Stokes worked less and less as a practising accountant and more as an executive or chairman of some public companies. To some extent, Munachen did likewise. Both men had many corporate contacts and clients, particularly in the mining industry and it was largely through them that the share registry developed into a financially successful part of the practice and was a valuable service for certain clients.
did stokes and munachen leave nelson wheeler perth?
During the latter part of 1985 and in 1986, Stokes was seldom in the office of Nelson Wheeler Perth. He did very little work as a practising accountant which earned fees for the practice. However, he did earn director's fees which, in accordance with the policy of the practice, were paid into the firm. He attracted a good deal of work to the firm from the mining industry and, in particular, from the companies in which he was directly involved. In the main, this work was undertaken by other partners of Nelson Wheeler.
This had always been the case since Stokes and Munachen merged with Pilmer, Crawford and Martino. Martino said that Stokes was seldom at the office. He did not regularly attend meetings and was usually busy or away doing other things. Messer said that Stokes' work was not that of a conventional accountant. According to Crawford, Stokes had never played a traditional role in the practice in the sense of undertaking the work of a practising accountant. According to Stokes he was not doing any accounting work at all. Nevertheless he had an office at the premises of the firm and remained a partner. He shared in the profits of the firm on the same basis as the other partners and in the profits of the Nelson Wheeler Unit Trust and Platina, such as they were at the time. He received monthly drawings and other benefits such as the motor vehicle benefits and retained his interest and position in the other entities of the firm.
In about November 1986 Stokes decided to change his arrangements with Nelson Wheeler Perth. The reason for this decision is not clearly established by the evidence. According to Stokes, he decided to resign from the partnership. He gave reasons for this decision in his evidence-in-chief. In brief terms they were that he was totally engrossed in the mining industry and was developing Mawson Pacific. His family had been deprived of his presence for a long time and for family reasons he decided to "get one involvement off my back which was accounting". Even without that evidence being tested, I would not accept it, not only because I did not regard Stokes as a reliable and trustworthy witness, but because this evidence is contradicted by other evidence given by him and his partners. The other evidence is that he was not practising as an accountant. He was seldom in the office. How leaving the practice would have made any difference to his workload and commitments away from his family, is not apparent. When asked to explain, he added that he was not "all that enamoured or impressed with what he was seeing in Nelson Wheeler" and he chose not to be part of it. To the contrary, the documentary evidence suggests that Stokes wished to remain as a partner and to be seen as such.
At this time Stokes was heavily involved with Mawson Pacific, Mrsa Limited and Southern Goldfields. His income taxation return for 1987 shows that he received director's fees or salary from these companies of $20,417, $21,000 and $10,000 respectively. His monthly drawings from Nelson Wheeler, if continued for that year, would have been $48,000. His total personal income for the year was $263,062 which included $22,046 from Nelson Wheeler Perth.
According to Messer, Stokes did not produce time sheets which caused some difficulties for the practice. Troy was a traditional accountant and had difficulty with the way in which Stokes ran his office. Stokes' lack of accountability for what he was doing was raised on occasions but did not become a major issue. The partners were assured that the referral work and other work generated for the firm by Stokes was of value. Pilmer and Martino would assure the partners that Stokes was earning his keep. Gray was aware of Troy's concerns and said that they were shared by Lewis. According to Gray, one of Troy's major concerns was that Stokes was taking drawings but not generating fees. Someone spoke to Stokes and he agreed to withdraw from the practice and his drawings were stopped in late 1986. Crawford also said that Stokes was not billing clients but could not recall any criticism. According to Stokes, his drawings from Nelson Wheeler in the 1986 year exceeded the director's fees ($15,000) which he contributed to the partnership. Although he said he did not get on with Troy, he maintained that no-one ever said he was taking out of the firm more than he was putting in. The other partners regarded him as "the rainmaker". Martino was also aware of the concerns about Stokes expressed by Troy and he, on many occasions, explained to Troy the true worth of Stokes to the practice. Martino also mentioned those matters to Stokes.
It is difficult to say whether this disquiet and criticism by Troy, in particular, had any effect on Stokes. It is likely that it did. By late November 1986 Stokes director's fees exceeded his drawings. He was putting more into the firm than he was receiving although the director's fees from Southern Goldfields were about to stop as that company was taken over by interests adverse to Stokes.
At all events, he decided to alter his position in the firm. It is his case, and that of the other first defendants, that he resigned from the firm as from 30th November 1986 and that he was never again a partner and that Munachen resigned and ceased to be a member of the partnership from 1st July 1987 until 1st July 1989 when he rejoined the firm. It is the plaintiff's case that Munachen never left the firm and Stokes resigned in late 1989, it being agreed that his resignation should be effective from 1st July 1989. The documents which came into existence at relevant times and the records of the firm do not, in the main, support the first defendants' case. They are discussed subsequently and include documents used both internally and externally.
There are some facts and circumstances and documents which, standing alone, tend to suggest that Stokes and Munachen did cease to be members of the firm as they alleged but when considered with the totality of the evidence cannot prevail against the substantial evidence to the contrary.
First I consider the allegation that Stokes resigned from the partnership, although in doing so it is necessary to have regard to the evidence of the resignations of other members of the firm.
In November 1986 Stokes was the Chairman of Mawson Pacific, Ramsgate Resources Ltd, First Australian Resources, Southern Goldfields Ltd, Mrsa Limited (MRSA) and Eltin Pty Ltd. His work for those companies, particularly Mrsa and Eltin, was very extensive and was the principal reason for his absence from Nelson Wheeler Perth during most of that year. He claims that he had been extremely busy earlier in the year in the opposition to the takeover of Southern Goldfields. He was also involved in other personal business activities. In consequence he had neglected the role he should have played in Mawson Pacific and resolved to give more time to that company. He had an office in the Griffin Centre but not within that part of the premises occupied by Nelson Wheeler Perth. The firm occupied the ground floor and the mezzanine floor. Forsayth, Ramsgate and Southern Goldfields had offices on the first floor. Stokes had an office within the suite occupied by Southern Goldfields.
The minutes of the meeting of the directors of MRSA on 16th October 1986 record the following:
"Mr Stokes discussed his future role with Mrsa Limited and advised that for various reasons he was going to resign as a partner of Nelson Wheeler Chartered Accountants and concentrate more on his directorships. He advised the meeting that he would now be putting more time into the Mrsa Group and suggested that it would be appropriate that he be paid a retainer by Mrsa Limited for his services and that the Company could put a facsimile machine into his house for use by Mrsa Limited. It was agreed that the facsimile machine would be installed in Mr Stokes house and that a retainer would be set at a rate to be determined by the chief executives of the Company."
He wrote a letter of resignation to Pilmer on 3rd November 1986. In this letter he gave reasons for his decision which, in brief terms, were his involvement in the companies and which took most of his time and his wish to see more of his family. A few months earlier he had established an office at his home from where he intended to work. In the letter he went on to write:
"In the circumstances, it is neither appropriate or fair to the partners of Nelson Wheeler that I continue in the partnership. I must therefore ask you to tender my resignation from the partnership to take effect from 30th November 1986. As to the terms of the withdrawal, I shall leave it to you to determine what is fair and reasonable and as to how payment is to be made. I would ask that a ruling off of the books be done at that date."
On the same day he wrote to Munachen enclosing a copy of the letter to Pilmer and explaining the reason for his decision. He referred to the letter to Pilmer as "a letter of resignation". Part of the letter to Munachen is as follows :
"I certainly have no desire to sever our relationship/partnership and believe I can expand upon our commercial involvements far more easily by not being tied to the Nelson Wheeler partnership."
There is no reason to conclude that those letters are not genuine even though it is somewhat surprising that none of the first defendants who gave evidence saw them at the time. I think it is likely that Stokes did intend to resign from the partnership and those intentions and some of his reasons are set out in the two letters. It is possible that the trigger for his acting in that way at that time was his learning of the disquiet of some partners at his lack of direct earnings for the firm but Stokes denied that such was the case. It is possible that he had become disenchanted with the lack of progress and development of the firm since the mergers and with the direction of the firm and some of the partners but the evidence does not permit positive findings about those matters. It is possible that with an increase in director's fees during 1987, the likely retainer from Mrsa and the possibility of increased income from Mawson Pacific, Stokes was no longer content to put these earnings into the partnership and draw a lesser amount.
According to Stokes, Pilmer went to see him at his home after receiving the letter sent to him. They discussed the letter and some of the consequences of the decision to retire, including the financial consequences. According to Stokes and other witnesses, he was a wealthy man at that time. He said that he had no immediate need for payment to him of his capital in the firm and was prepared to leave his capital in the firm. According to him, Pilmer agreed to rule off the books of the firm and the Nelson Wheeler Unit Trust so far as Stokes was concerned at 30th November 1986. It was agreed that Stokes would retain his interest in Platina. However, he did say that Pilmer wanted him to reconsider his resignation. According to Stokes, Pilmer told him of Stokes' value to the firm and expressed concern over the potential publicity about the resignation which could diminish the goodwill of the firm. I am unable to make any finding about whether there was a meeting between Stokes and Pilmer at this time and, if so, what they discussed because I cannot accept the evidence of Stokes for the reasons I have mentioned and Pilmer did not give evidence.
I accept the evidence of Messer and Crawford that it was a relatively simple matter to determine the monetary value of Stokes' interest in the practice and also in the Nelson Wheeler Unit Trust and the other activities despite Martino's evidence to the contrary. As far as the practice is concerned, the only matters for consideration were the value of work in progress, and the amount of debtors and liabilities. The evidence of Stokes was to the same effect. The same may be said of the interest of his family trust in the Nelson Wheeler Unit Trust. It would be necessary to determine the value of plant and equipment and any other assets and the extent of liabilities. The value of the interest of his family trust in Platina could also be ascertained without undue difficulty once the market value of the Ventnor Avenue property was ascertained.
I accept that due to the financial position of Nelson Wheeler Perth at this time, the partners may have had difficulty in paying out Stokes' interest in the firm and the other entities but there is no reason why the value of those interests could not be determined. If Stokes was not to be paid at that time, his capital amounts in the various entities could easily be converted into loans due by those entities to him and, if thought appropriate, bear interest. However, no attempt was made to calculate the amounts due to him. The partners were under financial pressure. There was the substantial debt to Westpac and the partners did not always comply with their obligations to the bank. There had to be a cut back in the drawings of the partners at times. There was constant agitation for partners to increase their billings and to reduce the amount of the unbilled work in progress. I accept that Stokes had brought a considerable amount of work to the firm through his involvement in public companies and other interests. It was in the interests of the firm that this work remain in the practice. Lastly, it was in Stokes' interests that the firm prospered. If it failed, his prospects of recovering his capital would have been compromised.
On 1st December 1986 Stokes attended a meeting of the directors of Mawson Pacific. The minutes of the meeting record that he "advised that he had resigned as a salaried partner at Nelson Wheeler" (the underlining is mine). The directors resolved to employ him as managing director of the company as from that date at an annual salary of $36,000 and to install certain office facilities at his home. This minute is signed by Stokes as a correct record of the meeting. These minutes were not discovered by Stokes, even though he previously had possession of a copy, and other minutes of meetings of directors of Mawson Pacific during 1987 which had been discovered and were admitted into evidence. According to Stokes, he tried to get copies of these minutes prior to the trial without success due to changes in management of the company. However, he did see them in May 1996 not long before he gave evidence. It is suggested that the first defendants concealed these minutes from the plaintiff in the discovery process and only produced them at a late stage when they were regarded as favourable to their case. I am not prepared to make that finding. It is surprising that they were not produced at an earlier time but I do not regard them as favourable to the case of the first defendants. I think they are consistent with both a change in arrangements at Nelson Wheeler Perth concerning Stokes and with his remaining in the partnership.
According to Stokes, he told the meeting that he had resigned. He went on to say that some months earlier he had told these directors that he wanted to get out of Nelson Wheeler Perth and that when he ceased to get an income from the firm he would take a salary from Mawson Pacific equivalent to what Dalla-Costa received as exploration manager which was $3,000 per month. The meeting agreed to that salary. Stokes' explanation of this minute in evidence cannot be accepted for the reason previously mentioned. Also, in its entirety, it is an unlikely explanation. The minutes are prima facie evidence of what occurred at the meeting. Langford was the secretary of the Mawson Pacific and did not give evidence. Given the training and qualifications of Langford and his experience as a company secretary and practising accountant, it is likely that if Stokes had announced that he had resigned from the partnership, that is what would have been recorded.
I accept that the minutes record the substance of what Stokes said, that is that he had changed the nature of his involvement in the partnership of Nelson Wheeler Perth and that he was no longer drawing a salary or receiving a regular income from the practice. In his evidence, Stokes said that he could not recall if he had used the expression "salaried partner" but accepted that he must have done so. He went on to speculate about why he might have done so and what he was meaning to convey, namely that he had resigned from Nelson Wheeler Perth. I do not accept that evidence. I think it is likely that by this time Stokes had changed his mind about leaving Nelson Wheeler Perth but had reached an understanding with someone, possibly Pilmer, that he would remain as a partner but not draw a monthly salary. It is likely that such an arrangement was an essential pre-condition to Mawson Pacific paying him a salary. The absence of Pilmer and Langford from the witness box assists in the drawing of those inferences from the evidence.
On the same day Stokes had discussions with representatives of Mrsa. It was agreed that MRSA pay Stokes a salary of $35,000 per annum with expenses of $15,000 per annum. This salary was paid to him from that date. It may be seen that under these arrangements Stokes was much better off financially than had previously been the case when he paid his director's fees into Nelson Wheeler Perth and took monthly drawings. Whilst there is no direct evidence on the matter, it seems unlikely that the directors of the two public companies, MRSA and Mawson Pacific, would authorise relatively high salaries to be paid to Stokes if he remained an equal profit-sharing partner of Nelson Wheeler Perth.
The next meeting of the partners of Nelson Wheeler Perth after the letter of resignation was on 3rd December 1986. Messer wrote the minutes of that meeting. I accept his evidence as to his method of preparing minutes of meeting and of the agenda for each meeting. He claims to have no specific recollection of the meeting on 3rd December 1986 but his practice was to take notes at meetings of the partners and prepare the minutes of the meeting before the next meeting. He would prepare an agenda for the next meeting after consultation with the partners and circulate to them the agenda for the next meeting and the minutes of the previous meeting. I accept that he followed that procedure with the meeting on 3rd December 1986. This was the first meeting at which Messer was the minute secretary. The minutes record that all of the partners, including Stokes, attended the meeting, except Langford. They record that a variety of matters were discussed and, in a general way, which partner raised or reported upon each matter. I accept the evidence of Messer that the minutes are not a verbatim record of what was said at the meeting but that he attempted to prepare minutes which reflected accurately what occurred and was decided. Under general business, the following is recorded:
"G.J. Stokes informed the meeting that due to commitments he had made in respect to Mrsa, he would not be in a position to fully commit himself to the practice. In view of the situation, he offered to give up his salary and remain in the practice as an equity partner only. The partners expressed their gratitude to G.J. Stokes for his contribution to the firm and resolved that he remain an equity partner within the practice."
Stokes claims to have no memory of this meeting. He said that the minutes do not reflect the position as he understood it to be and that he does not believe that the minutes record what happened. He claimed that he could not recall if he even attended the meeting. There is no suggestion that he did not complete his evidence-in-chief on this topic.
The impression I gained from Stokes during his time in the witness box is that he was always eager to take credit for the success of enterprises in which he has been involved. He presented as an articulate man with a good memory and a determination to say, regardless of the question, what he thought might assist his case. He claimed to have had a very clear memory of almost every other event which occurred around this time. He described in detail his involvement in his various business activities and public companies and how the activities of those businesses and companies developed and the role which he played. He claimed to be proud of his development as a practising accountant. He said he could remember many of his clients and that he had acted for most of the prominent people and businesses in Kalgoorlie. He described in detail his involvement in Southern Goldfields and the unsuccessful resistance to the takeover in 1985 and 1986. He was able to recall the development of Mrsa and Eltin and the merger of them through a reverse takeover. The role he played in the development of Mawson Pacific to the point of being a major gold producer was explained by him in detail. He could remember his letter of resignation, the meeting with Pilmer and the meeting of directors of Mawson Pacific on 1st December 1986 and what occurred at these meetings. It is inconceivable that he could not remember whether he was even present at the partners' meeting two days later or, if he was, what occurred at the meeting. From his point of view this was an important milestone in his professional life, the meeting at which he was supposed to have resigned from the firm which he had helped to develop. I reject his evidence about this matter. I find that Stokes did attend the meeting and that the minutes accurately record what occurred. It was resolved that he remain in the partnership but that he not receive a salary in the sense that the partners used that expression, namely the taking of monthly drawings. He was to remain in the firm and continued to bring in work as he had done in the past and was to share in any profits after the other partners had taken their monthly drawings.
Clearly, Stokes had a change of mind between his writing the letter of resignation and this meeting. It is likely that Pilmer persuaded him to stay in the firm which became acceptable to him as he could work from home and because of the financial arrangements which he made with Mrsa and Mawson Pacific.
The failure of Pilmer to give evidence assists in drawing this inference from the evidence. Whilst I am unable to find that Pilmer and Stokes had the meeting about his resignation as Stokes related in his evidence for the reasons mentioned, it is likely that there was some discussion between them. Pilmer was the managing partner and Stokes was a valuable member of the firm. The difference between Stokes' letter and the minute of the partners' meeting suggests such a discussion and a change of mind and intention.
It is likely that there was more than one reason for this decision. Stokes was then a wealthy man which would have been known to the bank. Perhaps there was concern that if Stokes left the partnership, the bank would call in the loans. Perhaps Stokes wanted to be seen in the commercial world as a chartered accountant who was a member of an ostensibly successful firm. It is unnecessary to speculate about the reason in the absence of cross-examination of Stokes and of Pilmer from the witness box. It is sufficient that the decision to remain in the firm was made.
According to both Martino and Messer, Stokes resigned from the partnership as at 30th November 1986 and the minutes of the meeting of the partners on 3rd December 1986 do not accurately reflect what occurred at the meeting. Martino recalled attending the meeting and that Stokes also attended. He said that Stokes did inform the meeting of his commitment to Mrsa along the lines indicated in the minutes and that the partners expressed their gratitude to him for his work in the practice but he could not recall if they did so at the meeting or elsewhere. However, Stokes did not offer to remain in the practice and give up his salary at the meeting or on any other occasion to his knowledge but he did say that he would leave his equity in the practice.
I think Martino was, in many respects, a truthful witness and a person of considerable ability. Much of his evidence I accept without question, but I do not accept his evidence about Stokes or Munachen for that matter, resigning from the practice. He had a very close personal and professional relationship with Stokes and perhaps he has been influenced by Stokes' assertion that he did resign. His evidence about this meeting, unlike much of his other evidence, was not given in a forthright and convincing manner. I do not accept it in preference to the clear documentary evidence to the contrary. Also, he proffered a reason for Stokes appearing to remain as a partner which differs from the reasons advanced by others of the first defendants. According to him, Pilmer did not process the resignation by calculating the amount of money to be paid to Stokes as he was required to do. He never got around to finalising the matter. It was a complicated task to make the calculations. Also, the remaining partners could not afford to pay the amount due to Stokes. Consequently, Stokes appeared in relevant documents as continuing to be a partner. I reject that explanation. As has been mentioned, the calculation of Stokes' interest in the practice was a relatively simple matter. Once completed, the amount could be shown as a debt due by the partnership to Stokes.
Crawford had no recollection of the meeting and the minutes did not refresh his memory, and did not reflect his understanding which is that Stokes did retire from the partnership but left his capital in the firm. Gray's evidence is to similar effect. He said he could not recall Stokes being present at the meeting, but he did recall Pilmer mentioning the matter at a meeting. The evidence of these men does not cause me to doubt the conclusion that Stokes did not resign from the partnership at this time.
According to Messer, the minutes, although drawn by him, do not accurately record what was said and decided at the meeting.
Messer was taken through the minutes of the meeting of 3rd December 1986 and confirmed their accuracy with the exception of that part concerning Stokes' resignation. During the course of his evidence, he was asked about various entries in the minutes which had been admitted into evidence. According to him, the only minutes which did not reflect accurately what had occurred at meetings were those relating to the alleged resignation of Stokes or Munachen.
Messer claims to have a poor recollection of the meeting on 3rd December 1986. He said he could not even recall whether Stokes attended the meeting but he expects that he did attend because the minute records his presence and he would not have made such a mistake when preparing them. However, he did recall that the meeting was informed that Stokes was retiring due to pressures of other work and for family reasons. There was discussion about payment to Stokes of his interest in the firm. According to Messer, of the partners Stokes had the second largest capital account and the remaining partners were not able to pay what was due to him. The meeting was informed that Stokes was willing to wait for payment. It was left to Pilmer to work out a method of payment. Thereafter Stokes was not involved in the partnership. He did not have an office in the firm. He did not receive a salary. He did not undertake any work for the firm. He only attended the office for social purposes.
Messer and Crawford acknowledged that as far as they could recall the minutes of the various partners' meetings accurately recalled the matters discussed and the decisions reached except in relation to the "resignation" of Stokes and Munachen. According to Stokes, there were many inaccuracies in the minutes. I reject that evidence. Messer appeared to me to be a careful man who answered questions with care and precision after due reflection when appropriate. It must be acknowledged that it must be difficult, if not impossible, for any of the witnesses to remember accurately what occurred nearly ten years ago in detail and in sequence. Nevertheless, Messer, and to a lesser extent Crawford, did not dispute the accuracy of the minutes. Messer, in particular, was able to recall many matters which were accurately recorded in the minutes and none which were inaccurately recorded, except the recording of the position of Stokes and Munachen in the partnership.
The alleged resignation of Stokes, and Munachen for that matter, does not appear in any of the minutes of meetings of the partners, including the meeting of 3rd December 1987. Messer offered an explanation as to why this is so. The bank was constantly requesting reduction of the debt. All of the partners had personally guaranteed that debt. Messer said that if the bank insisted upon the debt being repaid, it was likely that the practice would have ceased to exist and that Stokes and Munachen realised that the only way they could get their money out of the practice was if it survived. Consequently, the bank could not be informed of their retirement from the practice. The bank was able to call for any records including minutes and consequently it was decided by Pilmer and Messer not to record the true position in the minutes. According to Messer, the other partners knew about this decision, at least to the extent that they knew that the resignations had not been formally recorded in the minutes. However, later in his evidence he said that he was not aware of this matter when he prepared these minutes. It was not until February 1987 that he was aware of withholding the fact of Stokes' resignation from the Bank. None of the other first defendants who gave evidence were aware of this deception of the Bank. That is a matter of considerable importance. It is unlikely that Pilmer and Messer would embark upon such a course of deceiving the Bank as to the true composition of the firm without the knowledge and consent of the other partners. As has been seen, this explanation is at odds with the evidence of Martino.
Also this explanation suffers considerably by the failure of Pilmer to give evidence. He was a crucial witness about those partnership matters and his unexplained absence may be construed on the basis that his evidence would not have assisted the case of the first defendants. The same must be said about the failure of Munachen to give evidence. He was a close friend and colleague of Stokes. As has been seen, Stokes explained to him his proposal to resign. If there had not been a change of mind, it is likely that Munachen would have known about it. If there was some reason to portray to the Bank and to the world that Stokes and Munachen were partners when they were not, Munachen would have known about it. In my view, his failure to give evidence is also a matter of considerable significance.
Stokes' evidence, untested as it is, does not accord with this explanation. He said nothing about his name remaining in the records of the firm to assuage the Bank. According to him, after a short time he did want his capital. He expected calculations to be made as from 30th November 1986. It had not happened and Pilmer was not responding to him. Stokes went on to say that he did discuss the matter with Munachen who told him that he knew Stokes had not been paid what was due to him and he, Munachen, was going to leave the partnership.
These events are said to have occurred in April or May 1987. He said it was a relief because Munachen had worked out a way of getting his equity out of Nelson Wheeler Perth. If there was any truth in this evidence, it could have been verified by Munachen at the least for the purpose of affording a reason why he left the partnership. It may be accepted that if he had given evidence, it would not have supported the evidence of Stokes, Martino or Messer.
During the first half of 1987 Pilmer remained as the senior partner of the firm but Troy and Lewis assumed most of the task of managing the practice which included supervision of financial aspects of the partnership. There were clashes between Pilmer and Troy, including at meetings of partners. The minutes of the meetings of partners are full of issues of concern about management and the financial position of the firm. Troy exerted a good deal of pressure on the partners to produce adequate billings and cash flow. The level of debt of the practice was very high and substantial earnings were required to service the debt. The substantial overdraft of the firm was usually beyond the limit and there was constant pressure from the Bank to bring the borrowings down to within the agreed limits. The Bank closely supervised the firm and monitored its financial performance. Regular reports had to be sent to the Bank.
Lewis had previously held the position of administration partner which involved responsibility for staff and other office matters. The day after the meeting of 3rd December 1986, he wrote to Pilmer tendering his resignation to be effective from 28th February 1987. The reason which he gave was that he did not want to remain in a large firm. It is unnecessary to consider other evidence as to what may have prompted Lewis to resign. He stated his proposed terms of settlement of his interest, namely that he be paid $65,000, the amount of capital introduced by him when he joined the firm and that he transfer all of his interest in the Nelson Wheeler Unit Trust and the Platina Unit Trust to the partners. The minutes of the meeting on 25th March 1987 record that Crawford was awaiting figures for debtors and work in progress to finalise the February accounts to determine the amount to be paid to Lewis. Subsequent minutes make it plain that it was agreed that Lewis had left the practice as at 28th February 1987.
On 21st April 1987 Connolly wrote a letter of resignation to take effect on 30th June 1987 Troy replied to him on 4th May 1987. It seems that he and Pilmer tried to get Connolly to change his mind but to no avail. In this letter proposals were put to Connolly regarding the calculation of the amount due to him and the terms of his leaving the practice.
No agreement was reached as to the amounts to be paid to Lewis or Connolly for a considerable period of time. However, it is clear that the resignation of each of them was accepted and effected, Connolly as from 31st May 1987. After the retirement of each of them, they were not shown to be partners of the firm in the minutes. Neither was recorded as an apology for non-attendance at meetings. An apology from Stokes was always recorded in the minutes of meetings subsequent to his "resignation". Eventually, the settlement of the amount due to each of them was effected. As has been mentioned, the "resignation" or "retirement" of Stokes was never recorded in the minutes.
Since the merger involving Cawley, Troy, Gray and Messer, the firm had continued to practice in two locations at the Griffin Centre in Perth and at the Ventnor Avenue property. There were concerns about the inefficiencies in running two separate offices. Also, there was insufficient space in the premises at the Griffin Centre. It was considered desirable for the firm to carry on practice in one location, in Perth, except to maintain the office in Kalgoorlie. Forsyth Pty Ltd had offices in the Griffin Centre and proposed to move. This company was controlled by Mr John Morris and Mr Michael Evans who were close friends and business associates of Stokes and Munachen. If the space occupied by Forsyth was taken over by Nelson Wheeler, that section of the firm at Ventnor Avenue could move into the Griffin Centre. This space was eventually taken by the firm.
I now turn to the alleged retirement of Munachen from the practice.
The partners had decided to hold a conference at Bunbury on 28th and 29th May 1987. On 27th May Munachen wrote to the partners enclosing a paper on the management structure of the partnership. This paper was not produced at the trial. According to Martino, it cannot be found. In this letter, Munachen writes:
"You will note that in my proposal, I have made provision for two Non Executive Directors. This has been done purposely to accommodate the role which Geoff Stokes fills at this stage and the direction in which I have elected to head.
It is no doubt more than apparent that my involvement in partnership affairs has virtually been nil since the merger as I have been involved in a number of large corporate plays which has resulted in my being absent from the State on many overseas and interstate trips, or just not available for meetings.
This is not going to change as I have now been appointed to the Board of Wattle Gully Gold Mines N.L. as Executive Chairman which is going to occupy a lot of my time. That Company is about to launch a $10 million cash takeover bid for another public company which if successful will result in my being involved in the management. This bid will be announced within the next 48 hours, but in the intervening period, I have to put together a credit facility of $22 million and an underwriting of $6.5 million together with setting everything in place.
In the event that this bid is successful, I will then be directly involved in a management capacity in Acorn Securities Limited, Wattle Gully Gold Mines N.L., Karonie Gold N.L. [which is probably 3 months off listing] and the above target company.
It is therefore impossible for me to continue as an Executive Partner of Nelson Wheeler and accordingly, I plan to make arrangements to take alternate office space outside the current office, probably in West Perth and set these companies up there with a compliment of staff to run them.
I would also propose that to assist in alleviating the space and location problem within Nelson Wheeler that the Share Registry be relocated to my proposed office where it may be under my supervision. That way there will be sufficient space within the Griffin Centre to house all of the practice on the various levels.
We could sell West Perth, however I would be happy to take over the ground floor and house the Share Registry and the Management Company involved with the public companies. This would give the practice the opportunity to retain the building and capitalise in the future on its potential increase in value.
With respect to the Share Registry, Geoff Stokes and I would be prepared to convert our equity in the partnership to direct equity in the registry, however, this is a matter for further discussion.
This letter may give all concerned the impression that I am unhappy at Nelson Wheeler, this is not correct. The simple fact is that I no longer wish to be a Chartered Accountant in practice and that I have elected to enter the commercial arena. I am more than happy to retain a relationship with Nelson Wheeler in the capacity of a Non executive Director under my proposal attached, but that is up to you people to decide.
As a consequence of the matters outlined above, it is not possible for me to leave Perth during the crucial period of the takeover. Furthermore, for me to be present at a planning meeting for events in which I will not be involved in the future does not make a lot of sense. I will therefore not be present at the meeting in Bunbury.
Due to the tight schedule under which I am operating at present, I cannot sit down and talk to anyone today about the contents of this letter, but will be more than happy to do so next week with everyone present." (The underlining is mine)
This letter is of importance for a number of reasons. It gives an indication of Munachen's attitudes and intentions at the time. He makes no mention of resignation or retirement. He refers to "Non Executive Director", an expression commonly used in relation to corporations. They are directors who participate in the management and affairs of a company as directors but not as executives or administrators. Given Munachen's background and experience, it may be accepted that he well understood the common usage of that expression. He proposed to the partners that there be two Non Executive Directors of the partnership; Stokes who was already fulfilling such a role and himself. There is no suggestion by him that Stokes was not a partner and that he had merely left his equity in the practice as the remaining partners could not pay him out. Quite to the contrary. According to Munachen, Stokes was fulfilling a role in the firm. Munachen refers to the conventional role of a partner who is practising in the firm as an "Executive Partner" and that is the role he proposes to relinquish. He does not propose to end his relationship with the firm but to continue as a "non executive director". Also he makes no mention of calculation of his capital interest in the firm, of payment to him or of any date of retirement. This letter is expressed in clear and unambiguous terms. It cannot be construed as a letter of resignation. It must be understood for what it is, which is plain from its terms, particularly in the absence of any evidence from Munachen.
Neither Stokes nor Munachen attended the Bunbury meeting. After the meeting, according to Messer, Munachen resigned from the practice. No letter of resignation was produced at the trial. As has been mentioned, there is no mention of resignation or retirement of Munachen in any of the minutes or records of Nelson Wheeler Perth.
Munachen wrote to the partners again on 10th June 1987. He advised that 28 Financial Services Pty Ltd had been established to manage Acorn Securities Limited, Karonie Gold NL, Wattle Gully Gold Mines NL and Mt Pleasant Gold Trust. Mention is made of these companies later in these reasons. They are all companies which had been clients of Nelson Wheeler and in respect of which Munachen was responsible and had a direct or indirect interest. 28 Financial Services had leased premises at St George's Centre in Perth and the cost of fit out and furniture was to be borne by that company and Palmvale Nominees Pty Ltd, which held various interests of Stokes and Munachen. In this letter Munachen also made proposals about the Nelson Wheeler Share Registry. In effect, a new corporate structure for the Registry was to be formed, with the partners of Nelson Wheeler Perth owning 40 percent and Stokes and Munachen the remaining 60 percent jointly. It was proposed that St George's Share Registry Services Pty Ltd be established as trustee for the St George's Share Registry Unit Trust which would take over the share registry and the staff. Nelson Wheeler Perth would transfer assets. According to the proposal:
"Munachen and Stokes will gain their equity by maintaining the major client base, arranging and facilitating the new structure and guaranteeing and financing the new Company and converting whatever equity in Nelson Wheeler is necessary to maintain proportional equality.
The major difference will be that it will be under my direct management control and that Nelson Wheeler will be an investor with Board representation. I suppose in much the same way as Premium Personnel.
I have purchased a shelf company Borman Pty Ltd to take over the business name, Nelson Wheeler Share Registry and nominated Angus and Domenic to be Directors, as well as Geoff and myself and I have (sic) am arranging a bank account with Westpac.
28 Financial Services Pty Ltd which will be my management company will sub-lease approximately 200 square metres of office space to the Share Registry. I propose that the Share Registry, except for computer equipment and some furniture, will have all new furniture suitable for an open office plan which will improve efficiency, resulting in staff levels being held and an increase in profitability despite an increase in occupancy costs.
I would hope to move premises by mid to late August which will create the desired space to relocate the West Perth personnel to the Griffin Centre."
"By now you will all be aware of my planned deceleration as an Executive Partner of Nelson Wheeler. In my planning I have had several meetings with Angus to discuss my proposal regarding Share Registry.
As you are well aware, it is part of Nelson Wheeler which has grown rapidly, in the first instance from the efforts of Geoff and myself and more recently from a general contribution from nearly all of the Partners from introductions. However, suffice to say, the major introductions have come from Geoff and myself and that will still continue due to the area in which we move.
You are also aware that I have expressed the view that the Share Registry should be located in close proximity to my intended location, a view which I still maintain.
Some of you are aware that I have thought that I was going to lease space at the St George's Centre, adjoining the Griffin Centre, however, that did not eventuate. I am now negotiating to lease space in the Forrest Centre to house my future corporate activities and to provide for the Share Registry operation.
In my discussions with Angus, I proposed that Geoff and I convert whatever equity is necessary in Nelson Wheeler to give us at least 50 percent interest in the Share Registry. It is difficult to establish what the Share Registry is worth, as it has only become profitable in the last 6 months, but we all know it has an escalating income base.
What I propose is that Geoff and I, through Palmvale Nominees, hold 50 percent and the ongoing Partners hold 50 percent.
The book keeping would record the transfer of all of Share Registry assets etc as a going concern at 30th June and the other side adjusted out through Partners' capital assets and then reflected through loan accounts. Geoff and I would end up with a credit balance, as we each would effectively have 2½ times more than everyone else.
With effect from 1st July, the Share Registry will be operated by a new company, will have its own bank account, be responsible for its own expenses and responsible for collection of its debtors. It, of course, will still be called Nelson Wheeler Share Registry.
Palmvale Nominees (GJS & PLM) will draw a fee of $50,000 per annum to manage and operate the Share Registry which will be indexed by the CPI for the next 5 years. (This will replace part of PLM's & GJS notional salary at Nelson Wheeler)." (The underlining is mine)
After mentioning various companies, interests, arrangements and staff, he went on:
"The above sets out the action that I have initiated to set in motion the smooth and gradual deceleration of my day to day involvement in Nelson Wheeler to allow me to concentrate exclusively on the management and promotion of the share registry and management and control of a group of public listed companies.
Nelson Wheeler will not be required to contribute to any of the costs in setting up the above and will benefit by being able to locate the accounting practice in one building which will have inherent savings as well as other management benefits.
I have set a timetable of two months to implement the above gaols which should result in everything being in place by mid August. This should give Nelson Wheeler sufficient time to organise its relocation into one place.
The establishment of the share registry and my operating place in the same complex as Nelson Wheeler will allow the association and interaction to continue to mutual benefit." (The underlining is mine)
Again, it may be seen that Munachen does not mention retirement or resignation from the partnership. On the contrary he writes of planned deceleration as an executive partner of Nelson Wheeler Perth which, in the absence of any credible evidence to the contrary, particularly from Munachen, discloses an intention to remain as a partner on the basis disclosed in the earlier memorandum of 27th May 1987. The proposal, which eventuated, was that there be a corporate structure for the Nelson Wheeler Share Registry with the partners owning 50 percent and an entity associated with Stokes and Munachen owning the other 50 percent. Their contribution was to come from their equity in the partnership. The reference to the management fee of $50,000 per annum replacing part of the notional salaries of Stokes and Munachen from the practice is hardly consistent with those men retiring or having retired from the partnership.
These memoranda of Munachen are to be contrasted with his letter to the then partners of the firm on 14th May 1992 when he did retire. He commenced that letter with the words "I wish to retire from the accounting partnership BDO Nelson Parkhill" which is the type of language which is to be expected in those circumstances and his letter proceeded to deal with the matters to be considered upon his retirement.
The genesis of this idea of separating the share registry from the practice is probably to be found in an earlier memorandum by Munachen to the partners on 4th May 1987. After Munachen left the partners' meeting on 22nd April 1987, someone expressed concern about members of the share registry staff being paid overtime which was not being paid to other staff. Munachen wrote somewhat tersely:
"I have said it more than once, I will say it again -
The Share Registry is to be viewed as an entirely separate entity from the professional practice and accordingly, it needs to operate under separate arrangements."
He went on to refer to the "raging" sharing boom which he said had been going on for six months and looked like going on for another six months, the pressure under which the staff worked and why payment for overtime was appropriate.
The first defendant's case is that Munachen resigned from the practice at this time and went his own way independently of Nelson Wheeler Perth, except with respect to the share registry. According to Martino, Munachen put forward various proposals as to the basis of his leaving the partnership, the last of which was the letter of 24th June 1987 and that all of the partners treated his letter of 27th May 1987 as a letter of resignation. Crawford said that he regarded this letter in the same way. It is difficult to understand why the letter would have been interpreted in that way. Resignation is not mentioned. The letter does not deal with any matter on the basis of a parting of the ways.
At the partner's meeting on 24th June 1987 it was resolved that as from 1st July 1987 the Nelson Wheeler share registry be transferred into a separate company, that Stokes and Munachen own fifty percent and the other fifty percent be owned by the partners of Nelson Wheeler Perth, that the name of Nelson Wheeler Share Registry continue to be used, that the business of the share registry be valued and that the interest taken by Stokes and Munachen be offset against their capital in the partnership and that the share registry be relocated at premises to be found by Munachen. These minutes record matters concerning the retirement of Lewis and Connolly, but there is no mention of any resignation or retirement of Munachen.
According to Messer, after the Bunbury meeting he heard that Munachen was leaving the firm. Munachen did not say anything to him and what was said to him, presumably by others, did not include formal language such as "resignation" or "retirement". He could not recall who gave him this information or the circumstances in which it was given to him. Nevertheless, Messer says that he understood that Munachen was leaving the firm in the sense of resigning from the partnership. According to Messer, Munachen, at this time, put forward a proposition to try and "corporatise" the practice in order to make it run more efficiently and effectively and was using his experience in running public companies to improve the situation in the practice. He explained that when Munachen referred to the role played by Stokes as a non-executive director, he took that to mean that Munachen intended to be removed from the practice but to leave his capital in the firm, because the partners could not afford to pay him out, and to be somewhat of a mentor available for advice and guidance and to refer clients to the firm as was the case with Stokes.
Stokes' untested evidence is that in May 1987 Munachen told him that he was going to resign from Nelson Wheeler Perth. Munachen put to him the proposal about the share registry which he thought was reasonable because the two of them were the major contributors. As has been mentioned, Stokes claimed that he was expecting to be paid for his interest in the practice but by April and May 1987 he discussed the matter with Munachen and agreed to the proposal about the share registry.
Crawford does not have a good memory of these events. However, he said it was his understanding that Munachen had decided to leave the practice to set up his own business looking after corporate clients and that he wanted to take the share registry with him on the sharing basis which has been mentioned. Gray said that he recalled Munachen saying he was leaving and that something could be done by taking the share registry. His recollection is that he was told at a partners' meeting but, as has been mentioned, there is no reference to resignation or retirement in any of the minutes. Gray did not have any discussion about the matter personally with Munachen. He never heard Munachen say that he was going to resign. He said that his recollection was that Munachen left the practice and did not generate fees for the partnership.
According to Martino, Munachen expressed dissatisfaction at being a chartered accountant. Towards the end of May 1987, just before the Bunbury meeting, he said that he wanted to leave the practice. He had discussions with Martino indicating that he was happy to play a non-executive role but Martino disagreed. He pointed out to Munachen that if he was going to take his fees away, he should not share in the practice. Martino disagreed that Stokes was a non-executive partner. Munachen said he wanted to operate in the commercial world and was dissatisfied with the constraints of an accountancy practice.
I think it is unlikely that if Martino had taken this stand with Munachen that he would have persisted in the concept of taking a "non-executive role" as appears to be the case when he wrote in his letter of 24th June 1987 and referred to his planned deceleration as an executive partner. I have carefully considered the evidence of these witnesses as to how they regarded Munachen's actions at the time and later and as to their understanding that he had retired from the partnership. Even if accepted at face value, it cannot prevail over the position which is revealed in the many documents including those which show that the partners regarded Munachen as a partner.
The matter is complicated for them by the absence of Munachen and Pilmer from the witness box. Munachen could have related first hand what happened and why. The role that Pilmer played could also have been explored. Without them the best evidence is what is to be found in the contemporaneous documents, not the evidence of other partners speaking from memory of events from years ago. I think it is likely that the fact of Munachen, like Stokes, leaving the office and the change in financial arrangements, has been rationalised by the first defendants who did give evidence as an understanding of resignation of both men.
Eventually, Munachen did move out in about early October 1987 along with some staff, including most of those who worked in the share registry. A consequence was that the problem of shortage of office space was solved and the two partners and staff remaining at the West Perth office could be relocated to the main office in the Griffin Centre.
The business of the Nelson Wheeler Share Registry was transferred to St Georges Unit Trust of which Borman Pty Ltd was trustee. The shares in Borman and the units in St Georges Unit Trust were held as to fifty per cent by Nelson Wheeler Perth through Nelac Nominees Pty Ltd as trustee for them and as to fifty percent by Stokes and Munachen through Palmvale Nominees Pty Ltd. However, the half interest of Nelson Wheeler Perth also included Stokes and Munachen. Pilmer and Martino, representing Nelson Wheeler Perth, were directors of Borman, along with Stokes and Munachen.
The name of the share registry continued to be Nelson Wheeler Share Registry. It was agreed that Palmvale be paid a fee to manage and operate the share registry but it seems that this fee was paid to 28 Financial Services. Munachen attended to his own work in the various companies in which he was involved and did not undertake traditional accountancy work within the partnership. However, that had largely been the case in the previous years. He had managed the share registry and, through his own work and staff of Nelson Wheeler, had provided administrative services to various companies in which he had an interest. Usually the fees payable for these administrative services were fixed and paid periodically, so no complicated calculations were necessary to determine the value of fees taken by him. Munachen ceased taking monthly drawings from the partnership.
the indicators of remaining in nelson wheeler perth
Mention has already been made about the reference to Stokes in the minutes of meeting of the partners on 3rd December 1986. There is no mention in the minutes of meetings of the partners of any resignation or retirement of Munachen, even though the agreement with respect to the share registry is recorded in some detail in the minutes of the meeting held on 24th June 1987. The minutes record in some detail the discussions and resolutions about the resignations of Lewis, Connolly and Troy. Indeed, when other partners joined or left the partnership, there is an appropriate record in the minutes as can be seen when Sudbury, Graus and Bonavita became partners. The minutes of 3rd December 1986 refer to discussions with Sudbury and Graus about their joining the partnership. Graus and Sudbury are recorded in minutes of 25th March 1987 and subsequently as having attended partners' meetings. Their admission into the partnership is recorded in the minutes of the meeting of 20th May 1987. Bonavita's admission into the partnership is recorded in the minutes of the meeting on 24th June 1987.
What is also of significance is that whilst there is no mention of Stokes or Munachen having left the partnership, there are many references in the minutes to Munachen and his new office location and the need to make arrangements concerning the transfer of equity in the share registry. This lastmentioned matter was discussed from time to time at and from the meeting on 26th August 1987. At times both Troy and Pilmer were requested to discuss the matter with Munachen but it does not seem to have been resolved. The minutes never refer to this matter in the context of Stokes or Munachen having left the partnership. The discussion is always recorded in the context of the transfer or acquisition of equity in the share registry.
The minutes frequently record that Stokes and Munachen were absent from meetings of partners and their apologies were accepted well after the so-called resignations.
What is perhaps of even greater significance is the minutes of the meeting on 18th December 1987, again well after the so-called resignations. Stokes and Munachen are recorded as apologies. The following appears in the minutes;
The question of the future role to be played in the practice by Mr Munachen and Mr Stokes was raised. It was agreed that as neither Mr Munachen or Mr Stokes now played an active role in the practice that they should retire as soon as possible.
Mr Langford indicated that from discussions he had had with both Mr Munachen and Mr Stokes he believed they were both ready to retire from the practice. Mr Pilmer was requested to hold discussions with Mr Munachen and Mr Stokes as soon as possible and determine a settlement for consideration by the partners.
It was agreed that goodwill should be paid on fees taken out of the practice and for the share registry." (The underlining is mine).
This minute is expressed in clear terms and shows Stokes and Munachen as partners at that time. According to Stokes, he did not have any such discussions with Langford. As neither Munachen nor Langford were called to give evidence by the Nelson Wheeler defendants what they may have said about this matter is not known. In this particular context Langford's absence is significant. It may be inferred that his evidence would not have assisted the Nelson Wheeler defendants. Martino said that this matter was not discussed at this meeting and the minutes do not accord with his recollection. According to Gray, the minutes do not accord with his understanding of the true position relating to Stokes and Munachen at the time as, he said, they had already retired. Crawford's evidence is to similar effect. He had no recollection of Langford saying that he had discussed the matter with Stokes or Munachen. Messer, like Martino, remembered the meeting because there was an incident involving Sudbury and Pilmer which need not be recounted as it reflects poorly on Sudbury. Messer prepared the agenda for the meeting, which makes no reference to Stokes and Munachen, and the minutes. His explanation as to the terms of the minutes is that the words "retire as soon as possible" and "retire" were poorly chosen by him. He could not recall Langford speaking about the matter but he may have done so without prior warning. According to Messer, the minute is not accurate and the discussion was concerned more with Stokes retaining his equity and recommencing practice with the firm. He explained that the minutes were always written to show Stokes and Munachen as partners because of the Bank. Their presence in the partnership was essential to the continuation of the loan arrangements. When asked why he would write minutes in these terms if they were not accurate and truthful, he said that he believed that he did so because Stokes and Munachen were by then wanting to "withdraw" fully from the practice and they wanted the ledgers to be closed and their interests to be settled.
I find the evidence of each of these men on this matter unconvincing and I reject it. If there was a problem with the Bank and the need to show Stokes and Munachen as partners in the minutes, why prepare a minute in these terms in late 1987 which indicates that retirement is something which might happen? Why not wait until it did happen? Indeed, why even mention the matter at all. In my view, the most likely explanation is that the minutes accurately record the true position.
The agenda for the next meeting to be held on 19th January 1988 mentioned for the first time "settlement" for Stokes and Munachen as well as Lewis and Connolly. The minutes of the next meeting of the partners held on 19th January 1988 record that "Pilmer advised that he had yet to meet with Mr Stokes and Mr Munachen to discuss their retirement from the practice". This minute is consistent with the previous minute reflecting the true position.
In the minutes of the meeting of the partners on 21st April 1988, it is recorded that Troy and Bonavita "lodged formal notice of their intention to retire from the practice at 30th June 1988". The evidence establishes that this minute is correctly expressed. These minutes also record that Pilmer had confirmed that he had gone no further with Stokes and Munachen in respect of the settlement of their respective interests in the share registry. No mention is made of their interests in the partnership.
The minutes of the meeting of partners on 19th May 1988 record:
Mr Pilmer advised that Mr Stokes had indicated to him that he wanted to remain a partner in the practice. As a result it would be necessary to look at profit sharing and his responsibilities to the practice. It was agreed that this matter should be considered at the next partners meeting.
Mr Pilmer advised that as Mr Munachen had been appointed to the board of Gemcor there was every likelihood that he would resign from the practice, as Nelson Wheeler were auditors of Gemcor".
It may be seen that these minutes make it plain that Stokes and Munachen were still partners of the firm at that time.
Messer wrote those minutes. He said he has no recollection of this meeting or what occurred at it but that the minutes are not accurate. According to him, what should have been recorded is that Stokes was considering retaining his equity in the practice and recommencing work as a practicing accountant. He explained that Stokes was re-assessing his position following the share market crash which had an adverse effect upon his financial position. According to him, the minute regarding Munachen was also inaccurate. Nelson Wheeler was the auditor of Gemcor Ltd, a company which was controlled by Morris and Evans. Munachen was never appointed to the board of Gemcor and the minute should have recorded the removal of any involvement of Munachen in the practice in any way so that the position of Nelson Wheeler as auditor of Gemcor would not be prejudiced if he was to become a director of that company.
It is difficult to accept these explanations. Messer claimed that there had been discussions between him and Stokes as he was acting secretary of Mawson Pacific. He gave no explanation as to why the minute should record the information as having come from Pilmer or as to why it recorded Stokes and Munachen as being partners. He did not say that he wrote the minutes in this way to give the impression to the Bank that they were still partners.
According to Martino, he had a good memory of that meeting and the minutes do not accurately record what happened, which was that Pilmer said he was trying to bring Stokes back into the partnership. He did not say that Stokes wanted to remain as a partner. He did not recall any discussion about Munachen becoming a director of Gemcor but he did have a recollection that at the same meeting there was mention of his being approached to become a director of Gemcor and about Munachen wanting his capital
Gray said that the minutes did not accord with his understanding of what occurred at the meeting. He said he did not recall any discussion about Stokes or Munachen. Crawford's evidence is to much the same effect.
I do not accept the evidence of Martino, Gray and Crawford about this matter. The minutes expressed in clear and unmistakable terms. They record that both Stokes and Munachen were partners at the time. The reference to Munachen contradicts the suggestion of false minutes to appease the Bank. If the minutes were written in a manner for that reason, it would have been better not to include any reference to Stokes or Munachen at all in such a context. They accord with other indicators at the time that Stokes and Munachen were partners.
It is submitted by the Nelson Wheeler Perth defendants that the minutes do not accurately record the matters discussed and resolved at meetings of the partners. They were written well after the meetings occurred and reflect merely a summary of what occurred based upon recollection. They should not be regarded in any other way.
I reject that submission. The partners who gave evidence were taken through the minutes. With the exception of some of the entries relating to Stokes and Munachen and a few other matters, they regarded the minutes as accurately reflecting the matters discussed and resolved. Martino spoke of more inaccuracies than the others but I expect most of them were not inaccurate but merely different from his memory.
Of course minutes of this nature do not reflect every detail of the business transacted at each meeting but these minutes are extensive and reasonably comprehensive and I accept them as accurately reflecting the matters discussed and resolved concerning Stokes and Munachen. I reject the oral evidence of the first defendants who gave evidence to the contrary. The minutes are important evidence that Stokes and Munachen were partners at relevant times.
Stokes and Munachen maintained their equity in the firm, at all relevant times, and in the case of Stokes until the end of the 1989 financial year, when he resigned. The amount of the equity varied from time to time. When the amount paid to Stokes was calculated, it was based upon his capital account at 30th June 1989 which was affected by the operation of the practice in that year. His capital account at the end of each of the following financial years was 1986 $59,963.00, 1987 $109,817.00, 1988 $115,914.00 and 1989 $112,664.00. In each of these years a share of the net profit or a loss was allocated to Stokes. In 1987 his drawings as salary for five months slightly exceeded his share of the profit and so a small loss was debited to his loan account. In 1988 substantial losses were allocated to Stokes in consequence of the distribution of proceeds from the sale of the Ventnor Avenue property by Platina. This matter is discussed shortly. In 1989 the partnership made a loss and a share of that loss was allocated to Stokes with a consequential reduction in his loan amount. The same happened with respect to Munachen in each of these years.
As has been mention, according to Martino, the interests of these men remained in the firm because Pilmer did not get around to resolving the matter with them and the partners did not have the funds to pay out their interests. Also he said that the practice was in a difficult financial position and the intervening retirements of the others exacerbated the position.
I do not accept this evidence as the explanation for Stokes and Munachen maintaining equity in the practice. Stokes said he was not pressing for immediate payment but that Pilmer was to rule off the books and he wanted the amount due to him calculated. He was aware of the financial position of the firm. As has been mentioned, it was a relatively simple matter to calculate the amount due to Stokes and Munachen and, if it could not be paid, to establish it as the amount due in their respective capital accounts. No-one could offer any plausible reason why that was not done. If there was such a reason Pilmer could have given evidence about it and he chose not to do so.
In my view, the evidence does not reveal any reason why both Stokes and Munachen left their capital in the firm for so long if they had retired. There is not one letter or note of complaint by either man. There is not even a small payment on account.
When considered along with all of the other evidence, the only sensible conclusion is that the equity of these men remained in the firm because they remained as partners.
On 20th March 1987 Troy wrote a memorandum to all partners stressing the need to send bills to clients in order to reduce the high level of work in progress. He set a budget for each partner including Stokes. In the memorandum against the name of each partner is the work in progress balance at 19th March 1987 and the budget billings to be achieved by 25th March 1987. Stokes is shown as a partner and against his name is work in progress of $11,827.26 and a budget of $11,000. The purpose of the memorandum was to require billing of outstanding fees due to the critical cash flow position.
Troy treated and described Stokes as a partner which is inconsistent with his having resigned at 30th November 1986. If he was merely regarding Stokes as a former partner and alerting the partners to the need to bill his outstanding work in progress, he might have said so. His absence from the witness box means that his understanding of Stokes' position must be ascertained from the memorandum and from other documents.
According to Stokes he did not receive this memorandum and knew nothing of it until he saw it when preparing to give evidence. For the reasons mentioned, that evidence may not be accepted, but even if it is true it affords no explanation as to why Troy included Stokes in the memorandum.
By early 1987 Connolly was disenchanted with aspects of Nelson Wheeler Perth and the manner in which the practice was administered and conducted. He was unhappy with the manner in which Pilmer undertook his duties as managing partner. He called a special meeting of the partners. According to Martino no minutes were made of this meeting. Connolly prepared an agenda and documents entitled "Management Problems 1.7.86 to 28.4.87", "Solutions to Fix Mis-Management", 'Timing of Solutions Implementation" and "Planning Weekend".
These documents are instructive. The third item on the agenda was "Absent Partners". It will be remembered that Munachen, as well as Stokes, was heavily involved with corporate work which was not traditional accountancy work. Martino, who attended and remembered the meeting, said he did not know to whom Connolly was referring. Connolly did not give evidence and explain his memorandum but the considerable body of evidence which reveals the workings of the firm does not suggest that any partners other than Stokes and Munachen could be described as absent partners. Clearly Connolly was referring to them as partners and as a matter of concern. According to Martino, Connolly did not raise the matter at the meeting.
Stokes said he did not see the documents at the time and did not and was not asked to attend the meeting. Messer said he had no recollection of these documents or of any meeting at which the matters referred to in them were discussed. Crawford said he could not recall seeing the documents in 1987 but he did recall tension between Pilmer and Connolly and that there was a meeting attended by partners at the Western Australian Club at which Connolly became heated, left abruptly and resigned soon after.
In the document entitled "Management Problems", mention is made of the retirement of Lewis but not of Stokes. In the document entitled "Solutions to Fix Mis-Management", Connolly proposed that Troy be appointed as administrator of the practice, that a planning and engineering committee be established and that the twelve partners determine strategic direction (the underlining is mine). The records of the partnership, minutes and financial statements, reveal that there could only be twelve partners at this time if Stokes was regarded as a partner. Lewis had retired from the partnership on 28th February 1987. Martino attempted to explain the number twelve by including Bonavita but he did not join the partnership until 1st July 1987.
It is reasonable to accept that Connolly was referring to Stokes and Munachen as the "absent partners" and as Stokes as one of the twelve partners.
Also, it is appropriate to draw the inference that the memoranda and the meeting played a part in the decision of Munachen to change his arrangements within the firm as much as Stokes had done late in the previous year. Connolly's documents are evidence of the unrest in the partnership at the time. It was soon after these documents were prepared and the meeting was held that Munachen wrote his first memorandum to the partners.
Before the meeting of partners on 19th January 1988, Pilmer sent a memorandum on 11th January 1988 to all of the partners, including Stokes and Munachen, with respect to reducing the overdraft from $300,000 to $100,000. He called upon each "equity partner" to deposit $10,000 by 18th January 1988. This call was in consequence of pressure from the Bank. According to Stokes, he did not receive this memorandum. He was overseas at the time. Pilmer's failure to give evidence has prevented his explanation for writing such a memorandum to Stokes and Munachen being placed before the Court. Why would he send a memorandum to Stokes and Munachen if he did not regard them as equity partners and why did he require them to each deposit $10,000? As the managing partner he must have regarded them as partners at the time with the same obligations as the other partners. His failure to give evidence assists in reaching this conclusion. A copy of this memorandum was sent to Walters at the Bank by Pilmer. If he included Stokes and Munachen in order to appease the Bank, he could have given evidence to that effect. At the meeting of partners on 19th January 1988, it was decided that the partners need not make that contribution at that time.
On a date subsequent to 25th July 1988, someone in Nelson Wheeler Perth prepared a paper entitled 'Partnership Structure". It is unsigned but bears Pilmer's initials. It is reasonable to conclude that he is the author.
In the paper Pilmer sets out the name of each partner with his area of responsibility and comments about his work. The information provided about Pilmer, Crawford, Martino, Messer, Gray, Langford and Robinson is correct. Stokes and Munachen are referred to as partners but as non-active and their areas of responsibility are shown: Stokes as client relationships, Mawson Pacific and Tectonic, a company to be mentioned later: Munachen as share registry, Acorn Group and Mt Pleasant Group which corporate groups are also mentioned later. A comment about Munachen is that he was "under utilized".
The author makes the observations that the practice "has an interesting, if not unique, partnership structure", that six or seven partners are responsible for earning the fees and the burden falls too heavily on too few. The suggestion is made to promote professional staff.
This paper is an important document. It confirms that Stokes and Munachen continued to be regarded as partners but, it may be inferred, in the unique situation of not being active partners in the sense of earning fees. The description of Stokes being responsible for client relationships conforms with his view that he was the "rain maker". He brought much work to the firm. Mawson Pacific is a good example. Nelson Wheeler undertook a good deal of work for that company.
On 15th June 1989 Munachen wrote a memorandum to Martino who by that time was the managing partner of Nelson Wheeler Perth on the subject of 28 Financial Services. The opening paragraph is instructive:
"As discussed in an effort to create the total team attitude amongst all of the equity partners of Nelson Parkhill BDO, I am willing to merge the consulting practice of 28 Financial Services with Nelson Parkhill BDO with effect from 1st July 1989 ..."
He then set out the basis of the proposed merger which included that 28 Financial Services would continue to:
"... operate in the same manner as it does now providing complete services to corporate mining clients and with the view to attracting more business and 'one off' consulting jobs and being available to provide specialized services to corporate clients of Nelson Parkhill."
Munachen also proposed that he would pay into 28 Financial Services all of his corporate salaries and directors fees and in return would receive a salary. He was not prepared to accept the previously irregular drawings.
It may be seen that this proposal was made in order to create something positive in the attitude of the equity partners. It suggests that Munachen regarded himself as one of those partners at that time. He was prepared to bring this corporate services business which he had developed over the previous four years into the partnership to "create the total team attitude amongst all of the equity partners". Also, it may be seen that the nature of the business of 28 Financial Services was not traditional accountancy work. It would appear from this memorandum that there was dissatisfaction among the partners of Nelson Wheeler Perth because of Munachen's activities and this was his solution to the problem. If he was not a partner, why would the proposal be made? The effect of the evidence of Martino and Gray is that the memorandum was part of the negotiations for the re-entry of Munachen into the partnership. I reject that suggestion. The memorandum deals with the merger of the business conducted by 28 Financial Services and the practice of Nelson Wheeler Perth and other matters, but it is entirely consistent with Munachen having remained a partner of the firm but once again changing the financial arrangements.
On 16th February 1989 Stokes wrote to Wenham about Nelson Wheeler becoming involved in the centenary celebrations of the City of Kalgoorlie-Boulder. This incident is equally consistent with Stokes being a partner or a former partner who still had the interests of the firm at heart. However, on the same day Stokes wrote to Martino and sent him a copy of the letter to Wenham. He asked that his letter be included in the papers for the forthcoming partners' meeting and that his apology for not being able to attend "this evening". Stokes did not give any evidence about this matter.
The partnership operated on the basis that at the end of each year calculations were made as to the profit or loss of the business of the practice, the Nelson Wheeler Unit Trust, the Platina Unit Trust and the other entities operated by Nelson Wheeler Perth.
Each partner received the appropriate share of the profit or loss as the case may be after deduction of all expenses. The calculation of the profit or loss was, generally speaking, a simple matter. Invariably there were profits in the Nelson Wheeler Unit Trust and the Platina Unit Trust. Rather than pay them direct to the unit holders as would normally be expected, there was a complicated process at the end of each year of combining the profits and losses of the practice and the two unit trusts together in order to calculate the share of each partner. These calculations were made in 1987, 1988 and 1989.
The partners were provided with copies of the financial statements for the partnership and all entities in the Nelson Wheeler Perth group for the financial years 1987, 1988 and 1989, and they were adopted. Crawford prepared the statements for the 1987 year. He made detailed calculations as to the profits to which the partners were entitled, including Lewis who had retired. His working papers were admitted into evidence and reveal complicated calculations. It is unnecessary to repeat the considerable evidence which was adduced as to these calculations. A brief summary is sufficient. Crawford set about calculating the share of income due to each partner for income taxation purposes and for the purposes of the accounts of each of them in the practice. There was a difference in the two calculations as not all payments on behalf of partners were deductible for income tax purposes. A simple and accurate method of calculating the amounts due to the partners said to have retired could have been undertaken. Stokes, Lewis and Connolly, those said to have retired during the 1987 financial year, should have been excluded from the profits and expenses of the firm as from the dates of their respective resignations and their capital accounts should have been adjusted appropriately.
Crawford made various adjustments on the following basis. He treated the monthly drawings of the partners described as salaries as deductions. He brought to account the difference between work in progress at the beginning of the financial year and at the end. He also brought to account those expenses which were not tax deductible but which, so far as the partners were concerned, should be regarded as expenses. In the end result he calculated a loss on this adjusted basis.
In the final result it was calculated that there was a taxable income of $163,045 which was distributed to the partners in varying amounts. Stokes received $22,046 and Munachen received $23,480 which they each disclosed in their respective taxation returns. However, Crawford's adjustments for the purposes of the accounts of the partnership resulted in a profit of $31,900 which was allocated to the partners. Stokes received five-twelfths and Lewis eight-twelfths to reflect the dates Stokes ceased drawing profits from the firm on a monthly basis and the date Lewis retired from the partnership even though the calculation was made over the period of the total financial year.
During the 1987 financial year, there were profits in the Nelson Wheeler Unit Trust which were allocated to the unit holders on an equal basis except that the interest of Lewis received eight-twelfths of the shares taken by the others to reflect his retirement from the practice at the end of February 1987. No such reduction was made with respect to Stokes' interest. The shares of profit as allocated were prepared precisely. Lewis received $9,035 and the others received $13,552. If amounts due to the Lewis' interest could be calculated, so could that of Stokes. However, the profit for partnership purposes was less because non-tax deductable items were brought to account. Stokes was given the same share as all of the other partners and his capital account in the Nelson Wheeler Unit Trust increased accordingly.
Esplanade Computer Services made a small loss, Trendline Securities made a small profit and the Platina Unit Trust also made a small profit.
Crawford then proceeded to calculate the capital accounts of the partners of Nelson Wheeler Perth. There was a reduction on account of work in progress written off and a tax adjustment. Those amounts written off were applied equally to all partners, including Stokes and Lewis. Stokes' share of the profits, after the adjustments earlier mentioned were credited to his capital account and they exceeded his drawings for the five months substantially. His drawings were $20,306, and the share of the profit allocated to him was $30,695.
It is suggested that this treatment of Stokes indicates that he had ceased to be a partner of the firm. I do not think that is so. Indeed it indicates the contrary.
Stokes was shown and treated as a partner of Nelson Wheeler Perth for the purpose of those calculations. He was treated differently from Lewis as has been shown even though it is said he retired much later than Stokes. Stokes could only be treated as he was in these accounts and calculations if he was regarded as a partner. There had to be adjustments because of the change in the financial arrangements regarding Stokes in that he ceased to take monthly drawings. The manner in which the calculations were made reveal that he continued as a partner during that year.
In the 1988 year much the same process was undertaken, although it was undertaken by Messer. The extent of the losses of the partnership after the same type of adjustments was $30,176 but substantial losses were allocated to both Stokes and Munachen for the reasons discussed shortly in the context of the Ventnor Avenue property
Mention has been made of the acquisition of the Ventnor Avenue premises at West Perth shortly after the merger with Cawley, Troy and Gray in 1986 and the establishment of the Platina Unit Trust as the owner of the premises with each of the partners of Nelson Wheeler Perth taking units in the Trust on an equal basis either personally or through their family trusts. At that time there were eleven partners.
By August 1987 Munachen was in the process of moving out of the premises of Nelson Wheeler Perth at the Griffin Centre at 28 The Esplanade Perth and the partners and staff at the West Perth office at Ventnor Avenue were soon to move to the Griffin Centre on 30th September 1987. Lewis and Connolly had left the partnership and had taken some staff with them. The Ventnor Avenue offices were no longer required.
At the meeting of the partners on 5th August 1987, the minutes record that the sale of the Ventnor Avenue property was discussed and Troy informed the meeting that he had instructed an agent to sell the property for $2.2m. In fact it was Gray who instructed Raine and Horne, the selling agents on 12th August 1987. By this time Troy had negotiated a lease of the property by a client Ledge Group Limited to commence on 30th September 1987. According to Gray, the value of the Ventnor Avenue premises had increased substantially and there were financial advantages to the partners in selling them.
Raine and Horne offered the property for sale but without publicity at the request of Nelson Wheeler Perth as some of the partners, Pilmer in particular, did not want publicity of a sale to reflect adversely on the practice. An offer was obtained but below the asking price of $2.2m. Gray told Mr P Botsis, the managing director of Ledge Group, that Nelson Wheeler Perth was going to sell the property and that company decided to purchase it at $2.16m. That offer was accepted in October 1987. After discharge of the first mortgage to First National and the payment of some expenses, there was a surplus of $1.1m. At the meeting of partners on 21st October 1987, it was resolved that $300,000 should be paid to the Bank in discharge of the loan obtained when the property was acquired, a further $200,000 be paid to the Bank to reduce the overdraft of the firm and $50,000 be set aside to clear the amounts due to Lewis and Connolly.
At this meeting, Troy reported that he was having some difficulty in negotiating with Connolly on the value of the Ventnor Avenue property. Given the sale of the property, there should not have been any such difficulty as the value was known.
Lewis and Connolly were not given the benefit of the increase in value of the Ventnor Avenue property. It is unnecessary for present purposes to discuss the considerable body of evidence about this matter. It is sufficient to say that calculations of the amounts due to them did not proceed on the basis of the value reflected by the sale price. No criticism is made of anyone. The significance of this matter is that because they did not share in the full extent of the increase in value, there was a greater amount for distribution to the others which included Stokes, despite the present claim that he had retired from the practice before Lewis or Connolly, and Munachen who, it is claimed, retired soon after them and before the sale.
The amount due to the remaining unit holders in the Platina Unit Trust after payments to the Bank was about $65,000 each. Whatever the amount, the usual and appropriate course would be to pay the amount due to the unit holders. There was a potential liability for capital gains tax but that had to be paid by those receiving the capital gain.
What occurred was that Stokes and Munachen, or their family trusts, received the amounts due to them upon the sale of the Ventnor Avenue property but almost corresponding losses were created for them personally in the partnership. The exact basis of these losses is not entirely clear. It may be that they were to represent the amounts which these men did not receive because of the payments to the Bank or it may be that it is their respective shares of the balance due after payment to the Bank. Having considered the evidence, it is likely to be the latter.
The respective family trusts, upon receiving the shares of the proceeds, would have been obliged to allocate the proceeds to beneficiaries and any tax liabilities including capital gains tax would have to be paid by the person or persons attracting the liability. If the share of the proceeds was allocated to Stokes, then he would have been responsible for the tax. The same is to be said of Munachen. It is likely that the amount of tax would have been substantial.
Nelson Wheeler Perth made an operating loss of $30,176 during that year. The partners decided to allocate profits to some of the partners and losses to others, the end result of which was a total negative figure of $30,176. The losses distributed to Stokes and Munachen were $61,396 each which is a little less than the profits allocated to their family trusts through the Platina Unit Trust from the sale of the Ventnor Avenue property.
The 1988 taxation return of the Stokes Family Trust reveals that during that year $77,409 was received from the Platina Unit Trust. There is no breakdown of that figure but it probably includes the share of the proceeds of the sale of the Ventnor Avenue property. No income was allocated to Stokes. In his personal taxation return, he showed a loss from Nelson Wheeler Perth of $27,600 which is the taxable loss distributed to him after adding back non tax deductible expenses of the partnership. He had substantial income from other sources during that financial year.
The taxation returns of Munachen and his family trust tell much the same story. The 1988 return for the family trust shows that a capital gain of $76,880 was received from the Platina Unit Trust, which no doubt included the share of the proceeds of the sale of the Ventnor Avenue property. It does not seem that any income or profit was distributed to him by the family trust. The loss distributed to Munachen by the partners of Nelson Wheeler Perth was $61,396, as with Stokes, and after bringing to account the non-tax deductible expenses of the partnership, the loss distributed to him was $26,301. In his personal taxation return, he claimed that loss.
On any view of the matter, these losses distributed to Stokes and Munachen were artificial and contrived to give them a taxation benefit. Whatever was the true purpose of this activity, it could not have been undertaken unless Stokes and Munachen were regarded as partners.
There is another matter of significance about the distribution of the proceeds of the sale of the Ventnor Avenue property. Each of the other partners or their family trusts received much the same distribution. If Stokes had retired, as is claimed, there were ample funds available to pay out his interest in the firm. It was claimed that the remaining partners could not afford to do that because of capital gains tax obligations and other personal financial needs. Even allowing for capital gains tax, there was more than sufficient to pay out Stokes. The fact that he was not paid out suggests that he remained as a partner.
There is another matter in respect of which Stokes and Munachen were treated as partners. Income was allocated to their family trusts from the Nelson Wheeler Unit Trust in each of the financial years 1987, 1988 and 1989. Mention has already been made of Stokes being treated in the same way as the other partners in the 1987 year although Lewis, who retired much later, was treated differently. In the 1988 and 1989 years the family trusts of Stokes and Munachen were treated in the same way as those of the other partners. There did not appear to have been any difficulty in excluding Lewis, Connolly and Troy from the Nelson Wheeler Unit Trust as and when they retired from the partnership but Stokes and Munachen continued to be included.
Mention has been made of the losses in the partnership created in the 1988 financial year for Stokes and Munachen so as to mitigate the impact of tax. In the 1989 year the share of income of the unit holders in the Nelson Wheeler Unit Trust was $6,952 which included the family trusts of Stokes and Munachen. In that year Nelson Wheeler Perth made a profit over and above the monthly drawings taken by partners which was allocated to the partners in varying amounts. The profit allocated to Munachen was $3,400 even though it is said he was not a partner. A loss of $6,865 was allocated to Stokes which he claimed in his personal income tax return. This loss was designed to nearly offset the income received by his family trust from the Nelson Wheeler Unit Trust. Once again this loss was contrived to assist Stokes. Attempts were made to justify it on the basis that as Stokes had not been paid out following his alleged retirement, it was desirable to offset his profits, through his family trust, from the Nelson Wheeler Unit Trust in this way as he was not a profit sharing partner. However, that was not the approach taken with regard to Munachen.
According to Messer, the purpose of these allocations was to ensure that Stokes and Munachen did not build up capital by the allocation of income in the Trusts which was not drawn and could not be paid out. Messer said he did discuss those matters with Stokes and Munachen. There is no evidence to establish that the relatively modest profits in the two Trusts could not have been paid to the holders of the units, including the family trusts of Stokes and Munachen.
However, as has been mentioned, it was a relatively simple matter to calculate the amounts due to Stokes and Munachen from the partnership, including the practice, the Nelson Wheeler Unit Trust and the Platina Unit Trust. If that had been done, it would be the end of the matter and no further income to them would be allocated or distributed with the consequence that no tax would be incurred.
The arrangements are inconsistent with retirement and consistent with both men remaining partners.
What does emerge from the considerable body of evidence about this matter, some of which is confusing, is that Nelson Wheeler Perth represented to the Commissioner of Taxation that Stokes and Munachen were partners, they regarded them as partners and they received financial benefit to an extent that was possible only if they were regarded as partners.
In my view these matters are compelling evidence that throughout this period neither Stokes or Munachen retired from the firm and both of them remained as partners.
There is another matter of importance. On 28th October 1988 Messer wrote to Pilmer, Martino, Crawford and Gray with regard to the financial results of Nelson Wheeler Perth for the 1988 financial year and matters which required resolution. Attached were schedules setting out the profit for the year before bringing to account the goodwill taken by Munachen with respect to the arrangements about the Nelson Wheeler Share Registry, the sale of the half interest in the share registry to Stokes and Munachen and the profit and interest expense of the interest in the Hong Kong practice which is mentioned shortly. The memorandum proceeded:
(1) There is not sufficient profit to meet partners full salaries therefore:
(a) should full salaries be charged thereby creating a loss; part of which would be borne by PLM (Munachen) and GJS (Stokes)
(b) should partners salaries be pro-rated back to create a nil profit position so that PLM and GJS do not share any loss?, if yes should PLM and GJS bear any portion of adjustment for tax purposes?
Note: There has been an increase in goodwill of $70,000 of which PLM and GJS receive 1/9 each."
The memorandum then sets out matters requiring resolution concerning the value of equipment taken by Munachen, the value of goodwill in the share registry and the calculation of fees taken by Munachen. Messer wrote that he wanted to call a meeting on the following Monday to discuss "our approach to those matters".
It is contended that this memorandum is indicative of Stokes and Munachen not being partners of Nelson Wheeler at the time because they were not to be included in the meeting and the discussions about these matters. In view of the issues, it is not surprising that they would not be included. Obviously it was appropriate for the persons who received the memorandum to discuss these matters among themselves.
On the contrary the memorandum reveals that these men regarded Stokes and Munachen as partners. They were to share in losses unless some special treatment was offered to them. They shared in the increase in goodwill during the 1988 financial year on an equal basis with the other partners.
According to Martino, he discussed this matter with Messer. Martino acknowledged that the problem had arisen because Stokes and Munachen were still being treated as partners. According to Messer, the problem arose because after deducting the monthly drawings, the partnership made a loss and Stokes and Munachen should be given the opportunity to share in that loss to compensate them for not sharing in the money paid to the Bank upon the sale of the Ventnor Avenue property. I have already made observations about that matter. It is sufficient to say that these calculations could not have been implemented unless Stokes and Munachen were regarded as partners during the 1988 financial year. According to Gray, all of the partners, except Stokes and Munachen, discussed the matter at a special meeting and agreed with the approach which was adopted. He also acknowledged that Stokes and Munachen were treated as partners.
Later in these reasons the involvement of Nelson Wheeler firms in Sydney, Melbourne and Perth in the accountancy practice in Hong Kong is discussed. For present purposes, it is necessary to mention a few matters.
In early 1985 the interest of these Nelson Wheeler firms in the Hong Kong firm was increased by 25 percent. Of this portion, Nelson Wheeler Perth acquired 10 percent and the other 15 percent was acquired by others. Nelson Wheeler Perth financed this acquisition by borrowings from the Royal Bank of Canada in Hong Kong.
Thereafter Nelson Wheeler Perth maintained this interest. The borrowings were serviced by the share of profits from the Hong Kong practice. Of course at the time the interests in the Hong Kong practice were acquired, Stokes and Munachen were partners of Nelson Wheeler Perth.
On 20th December 1989 Messer sent a memorandum to the equity partners of Nelson Wheeler Perth and attached calculations of Gray as to the income taxation implications of the share of the firm in the profits of the Hong Kong firm. Gray concluded that the possible taxable income which was $1,830 which, when shared nine ways, was not material. I accept that it is likely that his calculations, if completed, would probably have shown that there was no income.
The significance of this matter is the acceptance that there were nine partners. At 30th June 1989, there could only be nine equity partners if Stokes and Munachen were included. Martino accepted that proposition.
Both Stokes and Munachen declared income of $3,667 from the Hong Kong practice in their taxation returns for the 1988 financial year, after it is alleged they ceased to be partners of Nelson Wheeler Perth as did Messer, Crawford and Gray.
When each of Lewis, Connolly and Troy retired, the amount paid to each of them with respect to their capital in the firm was fixed after negotiation. The combined total paid to them was acknowledged by Messer and Crawford to be less than their entitlement. It is unnecessary for present purposes to trace through the various calculations to establish the amounts to which they were entitled and the amounts paid. It is sufficient to say that the difference was shared by the remaining partners including Stokes and Munachen, even though the benefits fell to them after the dates when they are said to have left the partnership.
Stokes and Munachen attended at the office premises of Nelson Wheeler Perth for social purposes after the respective times when it is said they resigned. It was customary for the partners and others to have a drink on a Friday evening after work and both men attended on occasions. Martino said that he invited Stokes on occasions. Messer said that he saw Stokes at these occasions quite regularly. Crawford said that Munachen would perhaps have attended because he was invited.
On occasions Stokes used the Nelson Wheeler facsimile facilities after he had allegedly retired from the firm. However, the evidence discloses that he only did so on a few occasions.
Munachen remained in the office premises of Nelson Wheeler Perth after his alleged resignation until the end of September 1987.
I do not regard any of these matters as assisting in the resolution of the issue of whether either or both of these men remained in the partnership. It is natural for past members of a firm to maintain social contacts with former partners. Friday night drinks would be a suitable occasion. The use of the facsimile is a matter of no significance. A former firm may well extend that facility even on a constant basis. The period Munachen remained at the office was determined to some extent by the movements of others, including the occupation of the Ventnor Avenue premises by Ledge Group.
Of course each of those matters is also consistent with Stokes and Munachen remaining as partners of Nelson Wheeler Perth.
As has been seen, there was a long-standing professional relationship between Stokes and Langford commencing when they began to practice accountancy together in the early 1980's in Kalgoorlie. After Stokes and Munachen moved to Perth, Langford remained as the resident partner in Kalgoorlie, a position he still held in the early 1990's well after the events relevant to these proceedings had passed.
Nelson Wheeler Perth, through Langford in Kalgoorlie, attended to some of the affairs of a family known as the Duncan family. In about early 1988 it seems that Langford overlooked some task and, in consequence, a fine of some sort was imposed upon a member or members of the Tonkin family which was part of the Duncan family or vice versa. Stokes was annoyed and wrote to Langford on 3rd March 1988 as follows:
It appears you have accepted the second and forgotten the first. If not for my sake, then for Christ's sake
Duncan family are part of the Tonkin family. Tonkin family are part of the Stokes' family like 60 years (John's dad and my dad). They deserve better professional care.
I copped the first fine and attendant notoriety - please don't let it happen again.
Langford appears to have taken the rebuke to heart and he wrote a long personal letter to Stokes on 6th March 1988. He assured Stokes that the work had been done and apologised to him "for being such a professional disappointment". He went on to mention matters relating to "personal gain", some of which are to the contrary to the view apparently held by Stokes and then wrote:
"Unfortunately I have failed to meet the criteria to be your partner and as such I have written to Angus Pilmer advising him of my resignation from the practice of Nelson Wheeler effective from 30th April 1988 or some other date which may be convenient to the firm. As I said earlier, I have always been judged by my peers and should I fail to live up to that judgment, I should not continue to provide embarrassment." (the underlining is mine)
Langford wrote to Pilmer on the same day and sent copies of this correspondence to him. In his letter to Pilmer, Langford wrote:
"I enclose copies of various correspondence between Geoff Stokes and myself. In view of the fact that my personal performance is obviously far below expectations I hereby tender my reignation (sic) as a partner of Nelson Wheeler effective from 30 April or such other date convenient to you. I have always insisted on performance by others and as such must be accountable for my own performance. When a person fails to live up to his partners expectations he should not continue to embarrass by hanging around.
I will not be setting up in opposition to Nelson Wheeler or working for another accounting firm as quite frankly I have lost confidence in my ability. I have also had enough of the behind the back criticisms which have been accumulating over the past year, particularly from Geoff. My friendship with Geoff has obviously terminated and as such it is inappropriate for me to have any business involvement with him.
I will use my best endeavours to promote Nelson Wheeler and offer any assistance you may wish in allowing a successor to take over from me. Angus, I have given this a considerable amount of thought and my decision is final.
I thank you and my other partners for all your assistance in the past. It will be inappropriate for me to attend the Busselton conference or future partners meetings unless it is specifically requested. I do suggest an early announcement of this to stop any stupid rumours which may arise. I am particularly concerned that my own staff are informed at an early date."
Langford did not retire from the firm and continued as a partner.
It may be seen from this correspondence that Langford regarded Stokes as his partner and both of them as partners of Nelson Wheeler Perth. If Stokes had retired from the firm as at 30th November 1986, Langford would have known. The two men were close associates and had many dealings over the years. Langford did not attend the meeting of partners on 3rd December 1986 at which Stokes' position was discussed but he did attend the meeting on 18th December 1987 at which it was reported, according to the minutes, that Stokes and Munachen should retire and that he had had discussions with both of them and believed they were ready to retire from the practice. He was also at the meeting of partners on 19th January 1988 when, according to the minutes, Pilmer reported that he had yet to meet Stokes and Munachen to discuss their retirement from the practice. He was present at the meeting on 19th May 1988 when, according to the minutes, Pilmer advised that Stokes had told him he wanted to remain a partner and there was every likelihood that Munachen would resign.
There is no explanation for the absence of Langford from the witness box. It may be accepted that had he given evidence it would not have been favourable to the case of the first defendants. This correspondence is compelling evidence that Stokes remained as a partner. If Stokes was no longer a member of the firm, why would Langford feel obliged to resign?
After Troy and Bonavita left the firm, solicitors acting for Troy wrote to the partners of Nelson Wheeler Perth on 14th July 1988 enclosing a Deed of Partition of partnership to be executed by them. The minutes of the partners' meeting on 26th June 1988 record that this Deed had been tabled at the meeting. The document first admitted into evidence was treated as a draft and contained handwritten alterations which became part of the final document. The Deed sent by Troy's solicitors must have been the Deed in its final form. It was executed by Pilmer, Crawford, Gray, Stokes, Martino, Messer, Munachen and Langford, Troy and Bonavita. This Deed shows Stokes and Munachen to be partners of Nelson Wheeler Perth at the time and recites that up until 30th June 1988 they and Troy, along with the others, carried on the business of accountants in partnership under the name Nelson Wheeler. The provisions of the Deed are proceeded on that basis.
According to Martino, this Deed was discussed at a meeting of partners which was attended by Troy. He said that at the meeting it was decided to include Stokes and Munachen in the Deed because financial matters concerning them had not been resolved. It was Troy's idea to include them. Crawford said he could not remember anything about the Deed or of the circumstances in which Stokes and Munachen came to sign it. He played no role in giving any instructions. He could not offer any explanation as to why Stokes and Munachen were described as partners. Gray acknowledged that his handwriting appears on one of the drafts of the deed and that he dealt with Troy's solicitors regarding the matter. However, he said he did not turn his mind to why Stokes and Munachen were described in the Deed as partners.
Messer said that he discussed the Deed with Pilmer and Gray and they decided to include Stokes and Munachen because it was acknowledged that Troy was being removed as a guarantor and consequently the Deed would be seen by the Bank.
It is significant that in the Deed Stokes and Munachen, along with the other persons described as partners of Nelson Wheeler Perth, agreed to indemnify and keep indemnified Troy and Bonavita against (inter alia) all claims relating to liabilities under leases and with respect to professional negligence "on any of the files relating to the [Troy] clients arising prior to the Partition Date", which was 30th June 1988. Why Stokes and Munachen, if they were not partners, would give such an indemnity concerning the period after their respective resignations and why they would execute a Deed describing themselves as partners when they were not partners, is not adequately explained. It would be surprising if Stokes and Munachen were prepared to take on such obligations merely to appease the Bank. The likely true explanation is that they were partners at the time and had no choice but to give the indemnity.
As the Deed was prepared on instructions given by Troy and in the absence of any evidence to the contrary from him, it shows that he regarded Stokes and Munachen as not having left the firm by that time. As the other members of Nelson Wheeler executed the Deed in those terms, it is evident that they regarded Stokes and Munachen in the same way.
On 4th October 1989 Stokes wrote to Martino as follows:
This letter serves to confirm my resignation from the partnership of Nelson Parkhill BDO as advised to the equity partners meeting which was held last week.
I accept your advice that it is necessary to incorporate the cash flow and operating expenditure of the Share Registry on a one hundred percent basis with the accounting practice. In the circumstances Kate and myself agree to transfer our twenty five percent shareholding in Borman Pty Ltd over to the partnership.
It is my understanding that you will put a proposal as to terms of settlement to me this Friday. As I shall be in Kalgoorlie on that day would you kindly fax through the details to John Langford and he will pass on same to me.
I shall be back in Perth on Monday and shall contact you on that date.
It may be seen that this letter is in clear and unmistakable terms. It confirms Stokes' resignation from the firm "as advised to the equity partners meeting which was held last week". This letter tends to confirm that Stokes remained a partner of Nelson Wheeler Perth through the years 1986 to 1989 as is indicated by other evidence. No minutes of a meeting of partners in late September or early October 1989 were available at the trial so there is no documentary record of what Stokes said at the meeting. However, this letter was kept in a file kept by Martino entitled "Partnership Retirements - Personal Information" It also contains the letter of Stokes of 3rd November 1986 which has earlier been mentioned and the letters of resignation of Connolly, Lewis and Sudbury. Clearly this letter of 4th October 1989 was regarded as what it is, a letter of resignation.
Stokes wrote to Martino again on 15th November 1989 providing him with information necessary to calculate the amount of his interest in Nelson Wheeler Perth. He concluded the letter as follows:
"It is some time now since our verbal agreement on the terms of settlement following my resignation. I would appreciate the written acceptance of Nelson Parkhill BDO as to those discussions so the matters can be formalised by way of a deed of termination."
Martino responded quickly by writing to Stokes on 20th November 1989 setting out the agreement reached. The letter began:
"I can only reiterate what myself, the other partners and all the team members feel about your contribution to the inevitable success of Nelson Parkhill BDO. Your energy and enthusiasm whilst you were with the firm, and your loyalty and backing for over the past year have been an inspiration to us all."
It mentioned that Stokes was to be paid $150,000 in instalments. His capital and current accounts had been calculated as:
This figure was rounded up to $150,000. These calculations proceeded on 1989, not 1986, figures. They included an adjustment on account of work in progress, the amount of which is different from the end of year figures of 1987, 1988 and less than the 1989 work in progress figure. The accounts standing to his credit in the capital account of the partnership in 1987, 1988 and 1989 are different than the $125,398 shown in the final calculations. The capital amount of the Stokes' family trust in the Nelson Wheeler Unit Trust at 30th June 1989 was $46,393, almost precisely the figure used in the calculations. At 30th June 1987 it was $23,336 and at 30th June 1988 it was $29,772. These matters suggest that the calculations were made having regard to financial performance of the partnership and its entities well after the 30th November 1986.
There was some adjustment to the proposed terms in relation to the time for payment and on 21st December 1989, Martino again wrote to Stokes setting out the terms of settlement as finalised and confirming the verbal agreement that the retirement was to be effective as from 1st July 1989. On the same day Martino wrote a personal letter to Stokes as follows:
"Just a short personal note from myself. I could not let your formal resignation from the partnership go by without putting on record our thanks for your contribution over the years.
Personally you have been instrumental in assisting my career over the years. You have been very generous in freely availing your hard won contacts to myself amongst many other things. This sort of assistance has played a large part in my achievements.
Evidence of your advice and support was obvious at the December 1988 partners meeting when you alone moved for my appointment as Managing Partner. There is no doubt that your support moved the vote to a unanimous one.
Geoff, for this support and friendship I would like to place on record my thanks to you. I know we will continue to have a close relationship in the future and I would still hope that I can continue to use you as a 'mentor' as I have in the past.
Please continue to treat Nelson Parkhill BDO as your firm and feel free to use the firms facilities. For our part we still see you as 'one of the family' and our resources are available to you accordingly."
This correspondence speaks for itself and confirms that Stokes was regarded as a partner until at least 30th June 1989. The precision in the calculations suggests the same.
It may be seen that this correspondence proceeded on the basis that Stokes had remained a partner. This was correspondence between friends and colleagues and is likely to reflect the true position, namely that Stokes did remain a partner until 1989. There is not a word about his waiting for a long overdue settlement which might have been expected if Stokes had in fact retired three years earlier.
The minutes of meetings of partners of Nelson Wheeler Perth available at the trial do not extend beyond the meeting of 20th October 1988 except for one meeting on 25th May 1989. However, there was a meeting in December 1988 at which Martino succeeded Pilmer as the managing partner of the firm. The letter written by Martino to Stokes on 21st December 1989 fixes the date of the meeting at this time and I reject the evidence of recollection of some of the partners that it occurred later. I accept that the partners at the time were dissatisfied with Pilmer's performance as managing partner.
Stokes attended this meeting and advocated that Martino should be the managing partner. The other candidate was Crawford who was proposed by Messer. According to Gray, Munachen may also have attended the meeting. Martino said that Stokes attended this meeting because he had provided security for the firm. I find that explanation to be unlikely. The management of the firm was unsatisfactory and Stokes took a hand in resolving the problem in this way.
The presence of Stokes at this meeting and his active participation in the resolution of who should succeed Pilmer as managing partner is not only consistent with his being a partner at the time and being recognised by the others as such, but suggests that such was the case.
On 10th April 1989 Nelson Wheeler Perth held a "Partners Strategy Meeting" at the Cottesloe Beach Resort which lasted all day. On 5th April 1989 Martino sent a memorandum to Messer, Gray, Crawford, Stokes, Munachen, Langford and Robinson about the meeting and stressed attendance for the full day was necessary. The memorandum concluded:
η to give all the partners the opportunity to communicate their individual goals and objectives
η to create a clear statement of achievable goals and objectives for the firm
η to ascertain how we could achieve these objectives
A Mr J Batty of Windrush & Associates, who claimed to be "executive skill builders", was engaged as the facilitator for the meeting.
At the meeting each partner was obliged to write down his personal objectives. Also each person present, other than Barry, had to contribute to discussions about various matters so that after the meeting a report could be prepared setting out what had been decided. These matters included how to increase team focus, a statement of objectives for the firm and an action plan. It may be seen from these topics that the focus of the meeting was on the future. Both Stokes and Munachen attended and participated in the meeting.
Among the personal objectives listed by Stokes were the formation of an Equity Bank which would result in increased prestige rubbing off on to Nelson Wheeler Perth and clients, the provision of assistance to Martino to really put the firm on the map, the development and promotion of partner relationships, overseeing the development of the financial services division of the firm, addressing the debt of the firm and developing the firm to be number one in Western Australia. Munachen set down objectives which were personal to himself.
The Action Plan which the partners adopted provided for the role to be played by each partner with respect to the objections which had been agreed. Stokes was to develop a draft position paper with respect to the areas of clients, marketing, services and the community by 5.00 pm on 15th May 1989. Also he was to attend to the "culling" of inappropriate personnel by 14th April 1989 and to assist Martino and others in establishing a policy direction for Trendline Securities and for communication with staff by 15th May 1989. Munachen was to assist Gray and others in the preparation of a draft position paper on the areas of management structure, administration and financial matters by 15th May 1989, and the preparation of monthly share registry accounts for the Nelson Wheeler Share Registry.
After the meeting, Batty prepared a report which set out the personal objectives and the action plan as well as other matters and sent it to Martino who, in turn, sent it to those who attended the meeting, including Stokes and Munachen on 17th April 1989. At the same time Martino also sent a memorandum setting out the required standard reporting structures for the action plan.
It is difficult to understand why Stokes and Munachen would participate in this full day meeting and undertake such tasks unless they were partners.
According to Messer, it was logical that Stokes and Munachen would attend this meeting. Munachen had been considering rejoining the partnership and at the meeting when Martino was elected as managing partner, both Munachen and Stokes spoke about what needed to be done to move the firm along and keep it on an even keel. He said that Stokes had indicated that he would like to contribute. Messer said he regarded Stokes as a close ally of the firm who was a strategic thinker.
Stokes said he recalled attending and participating in the meeting. He claimed to have a good recollection of what he did. He denied that he was a partner at the time and said he was giving his ideas of what he would want to do if he came back into the firm. He acknowledged that he agreed to undertake the matters referred to in the action plan but said that a few days after the meeting he decided not to rejoin the partnership and consequently did nothing about it. He said he told Martino he would not rejoin. According to Martino, he was still discussing Stokes' return to the practice with him well into June 1989. It was still not resolved by the end of that month. I do not accept Stokes' explanation. There is no evidence to support Stokes' assertion that he changed his mind in this way. To the contrary, he did not respond to Martino's memorandum of 17th April and say that he was no longer interested. His participation in the meeting and acceptance of the roles assigned to him demonstrates that he was involved in the practice in a manner inconsistent with having retired from the partnership. Stokes was an intelligent man and his explanation of thinking about rejoining the partnership and then changing his mind so quickly was devised to try and explain away this important evidence.
According to Martino, he asked Stokes and Munachen to attend the meeting because he was trying to entice them back into the partnership. He had been discussing that prospect with Stokes over the previous few weeks and he was very interested in rejoining the practice. Martino said that Munachen had decided to rejoin the practice by this time but not to take effect until 1st July 1989.
It is possible that Martino and Stokes were discussing prospects of Stokes returning to active work in the practice at around this time. Stokes' success in the commercial world had suffered in consequence of the share market crash and he may have considered working again as an accountant. However, there is a difference between returning to the practice in that sense and rejoining the partnership. In my view, this evidence of Martino does not establish that Stokes was not a partner.
Crawford remembered that there was a meeting to consider administration and the running of the practice at Cottesloe. He recalled that Batty, Munachen, Martino and Gray were present but he said he could not remember much else. He said he could not remember Stokes being present. He explained that Munachen was asked to attend because he was good at administration and the partners sought his assistance.
Gray said he had no recollection of the meeting, of Stokes or Munachen attending such a meeting and of any action plan or any statement of personal objectives by him or any one else.
Before parting with this meeting and the documents, mention must be made of the collection of draft position papers with appendices which were prepared following the meeting and distributed to, at least, some members of the firm. According to Martino, it was prepared by various people and put together by him following the meeting at Cottesloe. He said the information contained in it relating to the partnership was accurate at the time. Crawford also said that the document was accurate in what it contained regarding the partners. Gray said he had no recollection of seeing the paper entitled "management structure paper" which was attributed to him.
The first draft position paper is entitled "Client, Marketing, Services, Community" and purports to have been prepared by Stokes and Crawford. It is descriptive of the then current position of the firm in terms of general matters and contains a plan of action. It is the type of paper which Stokes agreed to prepare at the meeting at Cottesloe.
It is likely that he prepared it or assisted in its preparation. He was not asked about it during the evidence which he gave. His participation in the preparation of the paper is a reason to doubt his evidence about the Cottesloe meeting and his deciding not to rejoin the practice within a few days. Another draft paper in this bundle is entitled "Team Members, Professional/Technical remuneration" and purports to have been prepared by Langford and Gray. Gray has no memory of it at all and Langford was not called to give evidence. In this draft paper it is recorded that the firm had eight partners, six in Perth and two in Kalgoorlie. An appendix to the paper shows the six partners in Perth as Martino, Pilmer, Gray, Messer, Crawford and Mr R Galton. Another appendix shows the two partners in Kalgoorlie to be Langford and Robinson. Nowhere in any of the papers or appendices is there any reference to Stokes or Munachen.
However, I do not think these documents should be regarded as evidence that Stokes and Munachen were not partners at the time, and that the authors of them did not regard them as partners. The documents were, in effect, an action plan for the future, mainly in terms of strategy, administration and organisation. Neither Stokes nor Munachen were working within the practice at the time. The documents relate to those who were working in the practice. If they were to be regarded otherwise, reference would have been made to at least Munachen because on the evidence it was known he was to rejoin the practice as from 1st July 1989.
Such was the extent of the borrowings at relevant times that Nelson Wheeler Perth was required to furnish to the Bank detailed information on a regular basis about such matters as debtors, work in progress and budgets. In this way the Bank closely monitored the performance of the practice. From time to time the partners were not able to meet deadlines set by the Bank for reduction of indebtedness and experienced financial pressure. By late 1987 the total indebtedness was $1.8m which was secured by personal guarantees of the partners and a bill of sale over the assets of the partnership. Clearly this indebtedness was a burden to the partnership.
On 12th October 1987 a bill of sale in the form of a Deed was executed by the partners in favour of the Bank over the plant and equipment of the practice. Stokes and Munachen were parties to this Deed and are shown as debtors along with the others. At the same time Stokes and Munachen, along with the other partners, executed a guarantee of the debt due to the Bank.
The partners were obliged to repay $250,000 of the debt to the Bank on 30th June 1987 and had insufficient funds for that purpose. At the meeting of the partners on 24th June 1987 each of them, including Munachen, was requested to collect fees from clients amounting to $200,000. According to Messer, the position with the Bank was serious and it was appropriate to protect the position of Lewis and Connolly, both of whom had retired from this debt.
On 1st July 1987, the day after the alleged resignation of Munachen, partners of Nelson Wheeler Perth wrote to Mr Walters of the Bank on the topic of the constitution of the partnership in the following terms:
"We, the partners of Nelson Wheeler, advise and confirm that Messrs R.J. Lewis and A.R. Connolly are no longer responsible for any partnership liabilities to the bank."
No mention was made of Stokes or Munachen having resigned. The copy of the letter admitted into evidence is signed by Pilmer, Crawford, Stokes, Martino, Messer, Sudbury, Langford and Bonavita. There were places on the letter for the signatures of Troy, Munachen, Gray and Graus but none of them signed the copy which is the exhibit. The evidence does not reveal if the original letter sent to the bank was signed by them. The letterhead upon which the letter is typed shows the names of the partners, including Stokes and Munachen, but not Lewis. Connolly's name was still on the letterhead but his resignation had only just became effective. It may be seen that each of them represented to the bank that both Stokes and Munachen were still partners of the firm.
According to Messer the remaining partners had reached an agreement with Lewis and Connolly and they were pressing to be released from the obligation to the Bank. Messer had no personal involvement in this matter. It was resolved by Troy or Pilmer, neither of whom gave evidence. As the Bank was informed of Lewis and Connolly leaving the practice, the question arises as to why the Bank was not informed of the resignation of Stokes and Munachen, if that is what had occurred and also, as to why partners, including Stokes, signed the letter, which indicated that Stokes and Munachen were partners, if that was not the case. Messer's explanation is much the same as in relation to the minutes. Stokes and Munachen had much more personal wealth than any of the others and the reason why the Bank had been accommodating the practice as it had was because of the support of Stokes and Munachen. According to him, the Bank would have regarded it as a matter of importance that Stokes was a partner of the firm.
Documents admitted into evidence reveal the assets and liabilities of Martino, Lewis, Langford, Messer, Troy, Stokes, Munachen, Pilmer and Crawford in mid 1986. These documents are in the form of statements provided to the Bank and included assets held jointly with spouses. Clearly, Stokes had substantially more wealth than any of the others. Nevertheless the combined wealth of the others was considerable.
Walters, Troy and Pilmer did not give evidence. There was no explanation for the absence of any of these men from the witness box. Walters, in particular, could have spoken first hand about the attitude of the Bank to these matters. In the circumstances it may be expected that had he been called, his evidence would not have supported the case of the first defendants.
Stokes said he signed the letter but he did not consider himself to be a partner at the time. When asked if he wanted the Bank to think he was a partner, he said that until the matter of the share registry had been fixed, he was "still in the pot so to speak". He said he had not given it due thought. When the general thrust of Messer's explanation was put to him, he said that some twelve to eighteen months later he became aware that the Bank relied upon his assets and that the Bank saw him as a valued client. Also, he said that it was possible that without him, the Bank may have withdrawn the facility.
This evidence is not only unconvincing but it is at odds with the evidence of Messer. If the partners falsely represented to the Bank the position about Stokes, he would have had to know about it or any contrary indication from him could have brought it undone. If he knew about it, he would surely say so rather than give this explanation. If the position is as Messer said, Stokes would have said so. He must have known that his guarantee had to continue. He signed the Bill of Sale and guarantee of this enormous indebtedness again on 12th October 1987. To say he was not aware of the interest of the Bank in him until twelve to eighteen months later could not be correct.
Also, Messer said that Stokes and Munachen realised that the only way they could get their money out of the practice was for it to survive and they agreed to retain their personal guarantees with the Bank. If that is true, why would not Stokes say so.
Once again, I find this evidence unconvincing. The letter is in clear and unmistakable terms and is a piece of evidence which, along with the other evidence, reflects the true position at the time. Stokes and Munachen remained as partners.
On 17th July 1987 Troy wrote to the Bank and advised of changes in the partnership being the admission of Sudbury, Graus and Bonavita as salaried partners from 1st July 1987 and the retirement of Lewis and Connolly from 30th June 1987, although that date is not strictly correct. Again no mention was made of Stokes or Munachen having retired. On 29th December 1988 Troy informed the Bank of the retirement of Sudbury. He was a salaried partner. The Bank was informed even though Sudbury was not entitled to any payout. Troy informed the Bank that the remaining partners accepted full responsibility for the guarantees and other securities held in support of advances to the partnership. This letter was written on letterhead showing Stokes and Munachen as partners. No mention was made of Stokes or Munachen having retired.
On 20th June 1988 Messer wrote to Walters at the Bank and informed him about various matters concerning the retirement of Troy, the merger with Robinson Dawes and the acquisition of the practice of Peat Marwick Mitchell at Kalgoorlie. He requested that Troy be permitted to withdraw his guarantees. Also he mentioned an earlier meeting between Pilmer, Messer and Walters at which Pilmer and Messer had indicated that Stokes and Munachen "would be retiring from the partnership at 30th June 1988". He then wrote, "At subsequent discussions with Geoff and Peter, both have indicated a desire to remain partners".
According to Messer, he and Pilmer had earlier met with Walters to try and establish what would be the attitude of the Bank if Stokes and Munachen were paid out at the same time as Troy. He explained that Troy was prepared to freeze the accounts if he was not released from his guarantee and paid out promptly. They took this opportunity of gauging the reaction of the Bank to Stokes and Munachen leaving the firm. Walters told them that the Bank would not consider releasing Stokes and Munachen from their guarantees unless suitable substitutes could be found.
This is an important matter. The significance of evidence of Walters cannot be underestimated. Again it may be assumed that his evidence would not have supported the first defendants about such an important matter, had he been called to give evidence. Also it is a matter about which Pilmer could have given direct evidence. His failure to give evidence suggests that any evidence which he gave would not have supported Messer's evidence.
Messer's explanation is at odds with other evidence. If a reason for holding out Stokes and Munachen as partners was to placate the Bank and it was thought that the Bank would obtain copies of the minutes, it is difficult to understand why it would be recorded in the minutes of the meeting on 18th December 1987 that Stokes and Munachen should retire as soon as possible as they did not play an active role in the practice or that it was believed that they were both ready to retire. Furthermore, it is at odds with the minutes of the meeting of the partners on 19th May 1988, shortly before the meeting between Pilmer, Messer and Walters, recording that Munachen would resign. If Messer was genuinely concerned about the attitude of the Bank and wanted to protect the loan facility, it is unlikely that he would have permitted such an error to creep into the minutes.
I do not accept his explanation. The letter to the Bank was written in accurate terms, at least to the extent that Stokes and Munachen were to remain in the partnership. Also, it is not without significance that when Stokes did retire from the partnership in 1989, there was no difficulty in arranging for his guarantees to be withdrawn and the substantial indebtedness of Nelson Wheeler Perth to the Bank to continue. Despite the sale of the Ventnor Avenue property and payment of part of the proceeds of the sale to the Bank in late 1987, the total debt of the partnership in 1989 was $1.75m with similar security.
The evidence of Martino and Crawford is that they understood that the partnership needed the support of Stokes and Munachen in this way. According to Martino he did not give the matter much thought at the time. Crawford said that the Bank was unwilling to let them out of the guarantees. However, as Crawford acknowledged there was no occasion when a retiring partner was not released by the Bank. There is simply no document or other evidence from the Bank which suggests that Stokes or Munachen would not be released.
In my view, the most likely reason why Stokes and Munachen remained responsible for the debt to the Bank is because they continued to be partners of Nelson Wheeler Perth.
On 28th June 1988 Messer wrote to the Bank and enclosed various documents including a summary of movements in the capital accounts of the partnership between 1st July 1987 and 30th April 1988 and an updated schedule of public company directorships "held by the partners of Nelson Wheeler". The only person shown to have withdrawn capital was Connolly. Stokes and Munachen were shown as partners in the schedule of directorships
Some internal records of the Bank show that Stokes and Munachen were partners in November 1987, April 1988 and July 1988.
Throughout the years 1987, 1988 and 1989, Stokes and Munachen were treated as partners of Nelson Wheeler Perth in the taxation returns of the firm even though in the 1987 return it is shown that Lewis and Connolly had retired during that year. The 1988 return shows Sudbury, Graus and Bonavita as partners for the first time and that Lewis and Connolly were not partners. The 1989 returns shows that Troy was no longer a partner and that there were three new partners, although one of them was not an equity partner. In none of the returns for the 1987, 1988 or 1989 years is there any reference to either Stokes or Munachen having retired from the partnership. The partnership made a loss in 1989 and it was shared by all of the equity partners, including Stokes and Munachen. In the 1990 year Stokes did not receive a share of the profit or loss as he was no longer a partner but Munachen, as an equity partner, received a share of the loss.
It is a matter of considerable importance that all of the first defendants represented to the Commissioner of Taxation that Stokes and Munachen were partners.
The letterhead of Nelson Wheeler Perth was printed. At the top appeared, inter alia, the name "Nelson Wheeler" and the description "Chartered Accountants" and at the bottom appeared the name of the partners of the firm and the locations where they practiced, namely Perth, West Perth and Kalgoorlie as and when there were offices in all of these locations.
Stokes and Munachen are shown on the letterhead throughout the relevant period until it was decided to remove the names of partners from the letterhead which was after December 1987. It was the policy of Nelson Wheeler Perth that all letters were signed by a partner. Ethical Rulings AER 4, paragraph 8a(iii), of the Institute of Chartered Accountants in Australia provides that the letterhead of a member describing himself as a Chartered Accountant or an Accountant must not contain the name of any person who is not a member of the Institute. The Rulings provide that they are mandatory and must be followed by members. Each of the partners of Nelson Wheeler Perth, except Langford, were members of the Institute at all relevant times and therefore bound by the Rulings. As has been mentioned, Langford was a partner but could not be described as such because he was not a member of the Institute. Consequently he was described on the letterhead as the Manager at Kalgoorlie which indicates that the other partners regarded their membership of the Institute and the Rulings seriously.
Documents admitted into evidence show that Stokes signed letters on letterheads representing himself as a partner after his alleged retirement from the practice. An example of many such letters is the letter which he and others signed and sent to the Bank dated 1st July 1987.
Likewise Munachen was shown on the letterhead of the firm subsequent to his alleged retirement. Many documents admitted into evidence establish that fact during the second half of 1987 up to and including December.
In contrast, when Lewis retired in February 1987 and Connolly at about the end of June 1987, their names were excluded from the letterhead promptly. This contrast is particularly stark in relation to Connolly and Munachen. It is alleged that Munachen resigned at much the same time as Connolly, but Munachen's name remained on the letterhead. Also, when Sudbury, Graus and Bonavita joined the firm, their names were added to the letterhead, which is also in stark contrast to what occurred with respect to Munachen who is said to have retired from the same date.
In his first affidavit in support of his application to withdraw the admission, Stokes deposed to the following :
"29. At some time after my resignation from Nelson Wheeler, I saw a Nelson Wheeler document which displayed my name as a partner. I raised this with Angus Pilmer and was told that the firm was organizing new letterhead and whilst that was being done, the firm was using up old stock."
Pilmer did not give evidence and Stokes could not be cross-examined. The many documents admitted into evidence in the form of letterhead showing the constant naming of Stokes as a partner, and the deletion and addition of others as they left or joined the firm, demonstrates this explanation by Stokes to be probably untrue. The changes in letterhead from time to time, but the retention of the names of Stokes and Munachen, establishes that it was a deliberate decision to show that they were partners which supports the contention that they remained in the firm. In my view, this matter is a significant indicator that Stokes and Munachen remained in the firm.
It was submitted that there is no evidence that Stokes was consulted about the use of his name or the letterhead or that he condoned or consented to it. The fact of Stokes signing letters or letterhead bearing his name suggests that he was aware of the practice as does the assertion in his affidavit. At all events, the managing partner at the time, Pilmer, could be expected to have relevant evidence to give about the matter. This submission does not detract from the conclusion I have reached.
Palmvale Nominees Pty Ltd was the trustee of the Essemco Unit Trust which was a vehicle through which Stokes and Munachen pursued various interests. These entities are considered later. On 16th January 1987 Palmvale made an application to Western United for a loan of $300,000 which was granted. Stokes and Munachen are shown on the application form as partners of Nelson Wheeler Perth.
This application was prepared internally at Western United but presumably on the basis of information supplied by Stokes, Munachen or someone on their behalf.
After the loan was granted, Stokes wrote to Western United on 21st January 1987 on Nelson Wheeler letterhead which showed him as a partner.
Stokes did not give evidence about this application although he did give evidence about the letter. He said that as he and Munachen were often away, they granted a power of attorney to each other and as Munachen usually looked after Palmvale business, he expected that the letter was brought to him to sign as Munachen was away. However, on the previous day, both Stokes and Munachen signed a letter to T.C. Coombs & Co in Melbourne which was also written on Nelson Wheeler letterhead. Martino gave much the same explanation as Stokes but he was merely speculating. As I have said in relation to other matters, I place no reliance upon Stokes' evidence about any matter in contention. However, Munachen could have explained the circumstances in which the application was made and if he knew why it contained the reference to Stokes and Munachen as partners of Nelson Wheeler Perth. It is reasonable to conclude that Stokes regarded himself as a partner of Nelson Wheeler Perth at the time the application was made.
When the association of the firms of accountants came into existence in July 1972, they caused the registration of the name Nelson Wheeler in each of the mainland states of Australia. The name was registered in Western Australia pursuant to the Business Names Act 1962 (WA) on 27th July 1972 by representatives of those firms. As the firm Nelson Wheeler Perth developed, the partners became registered as the persons carrying on business under that name. Pilmer and Crawford became so registered on 26th September 1977, Martino, Munachen and Stokes as from 1st January 1984, Lewis as from 1st July 1985 and Troy, Gray, Messer and Connolly as from 1st July 1986.
The Business Names Act at the relevant times prevented a person or persons from carrying on business under a business name unless the name was registered under the Act in relation to each person carrying on the business. No doubt it was in obedience to this provision that the name Nelson Wheeler was registered and the new partners from time to time were also registered. Section 12 of that Act provided that in the event of any change in the persons carrying on the business, a statement notifying the Registrar of Companies of such change had to be lodged within 14 days. That section also provided that a person shall not sign or lodge with the Registrar a statement that to his knowledge is false in any material particular.
The registration of the business name had to be renewed each year. On 10th August 1987 Messer, on behalf of Nelson Wheeler Perth signed the appropriate form for that purpose and it was lodged with the Registrar. It purports to represent the position as at 25th June 1987. That statement shows Stokes and Munachen as among those carrying on the business. However, it also showed Lewis and Connolly as such persons even though they had clearly retired from the partnership by that time.
In 1990 Messer signed a statement of change of business name for lodgment with the Registrar which showed that Stokes had ceased to be a member of Nelson Wheeler Perth on 1st July 1989. In 1992 Messer signed a statement of change of particulars which was also lodged with the Registrar. It reveals that the following partners ceased to carry on the business on the following dates. Connolly on 31st May 1987, Troy on 30th June 1988, Lewis on 28th February 1987, Stokes on 1st July 1989, Pilmer on 1st July 1989 and Crawford and Gray on 1st June 1990. This statement was signed by each of these men and also by Martino and Munachen. It will be seen that there is no mention of Munachen having ceased to carry on the business and that the retirement date of Stokes is disclosed as 1st July 1989.
After the name of Nelson Wheeler Perth changed to Nelson Parkhill BDO on 1st March 1989, an application was made to register that name. It was lodged with the Registrar on 7th March 1988 and records that those nominated in an attached schedule commenced to carry on business under that name on 1st March 1989. The persons set out in the schedule were Gray, Messer, Munachen, Martino, Crawford, Stokes, Robinson and Galton. There is an issue raised at the trial as to whether this schedule relates to the application because it contains the heading Nelson Parkhill BDO Associates Schedule of Commencing Proprietors whereas the application is with respect to Nelson Parkhill BDO. When the documents were obtained from the Corporate Affairs Department in Perth, none of the pages were joined together. However, it is reasonable to conclude that the schedule probably does not relate to the application because the item number 5 in the schedule does not appropriately relate to item 5 in the application. Nevertheless the schedule is a formal document for the purposes of registration of a business name, probably Nelson Parkhill BDO Associates and sets out the "commencing proprietors". These men were the members of the firm when the change of name occurred. Probably the business name for associates was registered at the same time, and the partners were the same in both applications. It is of particular significance that each of these men signed the appropriate schedule of the application comprising those matters.
A statement of change in the persons carrying on the business under that name was lodged with the Registrar on a date not revealed by the evidence which shows that Pilmer and Stokes ceased to carry on the business on 1st July 1989. This statement is signed by both of them.
Martino understood that if there was a change in the members of the firm, the Registrar had to be notified. His explanation for Stokes remaining registered to carry on the business of Nelson Wheeler throughout this period is that he was negotiating with him to come back into the practice and he was maintaining the status quo with the registration. He said he could have removed his name but he wanted Stokes and Munachen to remain on the registration. He discussed the matter with them and he made a conscious decision to that effect. However, he said that he did not consider that Stokes, and I assume Munachen, carried on business under the name Nelson Wheeler.
Stokes said that he was aware that he continued to be registered as a proprietor of the business name but he did not discuss the matter with Pilmer. He said he did not consider the matter. He said nothing about having discussed the matter with Martino. There was no other evidence by way of explanation for the continuation of Stokes and Munachen as persons carrying on the business of Nelson Wheeler Perth in the registration of the business name. The continuation of the registration of their names is entirely consistent with their remaining as partners throughout the period until Stokes left as from 1st July 1989 and if that is the case there would be no need to alter the particulars of the registration. This continuation cannot be explained by oversight because both Lewis and Connolly were removed.
Martino offers an explanation with respect to Stokes which I do not accept. If true, it could only relate to that period in around the time of the Cottesloe meeting in early 1989 when Stokes says he was considering returning to the practice and Martino says he was trying to persuade him to do so. It could not explain the continued registration through 1987 and 1988.
The continued registration is evidence that the two men remained partners.
After Mawson Pacific acquired the first half of the Marvel Loch mine from Kia Ora, Stokes wrote to Wenham, the Chairman of the national body of Nelson Wheeler, on 15th February 1987 enclosing a copy of press publicity about the acquisition. In his letter he wrote :
Thought you might find the following pages of interest.
Mawson is a company controlled by myself and friends.
Needless to say, Nelson Wheeler will be picking up all of the mine accounting work - approx 200 people are employed on-site.
Brief mention has already been made of this letter.
If Stokes had retired from the partnership, the question arises as to why he would write to Wenham in these terms and why the company which he, with others, controlled would send all of the mine accounting work to Nelson Wheeler Perth. Stokes' explanation is that he used to see Wenham at the races in Sydney because he was in horse breeding syndicates. It is appropriate to set out in his words what he then went on to say:
"... and whenever I'd go to a social function like that I'd be inundated with people wanting to share tips on what's happening, and I was keeping Paul (Wenham) posted and he knew what I was doing, and at the same time I've referred to Nelson Wheeler picking up the mine accounting work. Well in fact it didn't happen - we employed somebody ourselves, and the only work Nelson Wheeler got, I think, in Mawson was share registry work ..."
When asked why he thought Wenham might be interested in Nelson Wheeler picking up all the mine accounting work, he said:
"... its me probably just letting him know that I haven't forgotten the old firm and I'm still referring work to them - I still do, actually, today, where I can."
When asked again, he said that he thought Wenham would be pleased to hear it because he was the spokes-person for Nelson Wheeler Sydney and he had a genuine interest in what he was doing. When it was pointed out that the mine work would not be done in Sydney, he said he did not know why Wenham would have been interested. However, he went on to say that they, presumably Nelson Wheeler Sydney, were fascinated by the old firm of Stokes, Munachen and Co because they did not have resource clients.
As I have said, reliance cannot be placed upon Stokes' evidence because he was not cross-examined but I would not place any reliance on this evidence in any event because it is unlikely to be true. The more likely explanation for this memorandum is that Stokes was still a member of Nelson Wheeler Perth and wanted to show Wenham that he was proposing to give the work to the firm knowing that Wenham was interested because of the national arrangements and the promotion of Nelson Wheeler as a national firm.
The professional indemnity insurance cover for the various Nelson Wheeler offices around the country was, at relevant times, arranged through the secretariat of the national body of Nelson Wheeler. Mr AF Grellman, one of the fifth defendants, a member of Nelson Wheeler Sydney, was responsible for making the necessary arrangements which involved negotiation with the insurance broker Marsh & McLennan Pty Ltd, forwarding proposal forms, and eventually policy documents, to each Nelson Wheeler office and collecting completed proposal forms and other matters incidental to the insurance arrangements. Nelson Wheeler Perth was included in these arrangements which were usually undertaken towards the end of each year.
On 15th December 1987 Crawford, on behalf of Nelson Wheeler Perth, signed a proposal for professional indemnity insurance for the ensuing year. In the proposal the partners are shown as Crawford, Munachen, Martino, Pilmer, Stokes, Langford, Troy, Gray, Messer, Sudbury and others set out in an attachment which is not in evidence. Presumably they were Graus and Bonavita. It will be noticed that Lewis and Connolly who had left the partnership during the year are not included. The proposal contained familiar provisions about the need for full disclosure and accuracy of factual information.
Crawford said he could not offer any reason why Stokes and Munachen were included in this proposal. He accepted that Lewis and Connolly were not included because they had left the practice. As to Stokes and Munachen, he could not say whether their inclusion was an oversight or an error. He had no recollection of someone having made a decision to exclude Lewis and Connolly but not Stokes and Munachen. When cross-examined, he said that he did not remember signing the proposal but he accepted that he did sign it and that he would have believed the matters set out in the proposal to be correct.
This document is significant. Nelson Wheeler Perth arranged insurance cover for Stokes and Munachen during 1988 even though they now alleged that they were not members of the partnership. This matter is further evidence that Stokes and Munachen remained as partners. Whilst there is no evidence on the matter, it may be expected that the more persons covered by the policy the greater the premium.
On 11th January 1988 Pilmer sent a memorandum to all of the partners, including Stokes and Munachen, on the subject of professional indemnity insurance. He referred to a recent visit to the firm by a representative of Marsh & McLennan and set out many matters concerning practices and procedures of the firm in the context of risk management. Stokes said he did not receive this memorandum but I am unable to accept that evidence for the reasons given.
What is significant is that it was sent to both Stokes and Munachen well after it is said they ceased to be partners and soon after the new professional indemnity insurance cover had been arranged.
The Institute of Chartered Accountants kept a register of its members. The annual lists of members kept by the Institute reveal that in the 1985/1986, 1986/1987 and 1987/1988 years both Stokes and Munachen are listed as members of the Institute and of Nelson Wheeler Perth with the address of the Griffin Centre, 28 The Esplanade, Perth. In the 1988/1989 and 1989/1990 years Stokes is also listed in the same way, except that the name has been changed to Nelson Parkhill BDO. In those years Munachen is listed as of Nelson Wheeler Share Registry Service at 221 St Georges Terrace, Perth.
It may be seen that Stokes maintained to this professional body that he had remained with Nelson Wheeler Perth during the years 1987, 1988 and 1989 which is consistent with other evidence to the same effect. The records show that maintaining this connection was no mere oversight because the name of the firm was changed and someone must have reviewed the entry. These records are inconsistent with Stokes having resigned from Nelson Wheeler Perth in November 1986.
These records do not establish that Munachen had left the partnership, but they do show that someone had caused the entry for him to be changed to show his new address which was not a known address of the accountancy practice of Nelson Wheeler Perth. Why the entry in that particular form was chosen is not known and Munachen has chosen not to give evidence and provide an explanation. In those circumstances it is not appropriate to draw an inference that the change in the entry reflects his leaving the partnership as opposed to leaving the office premises. It may be that purpose of the change in the entry was to show his change of address.
The entries for Stokes and Munachen in the 1989/1990 year cannot be regarded as significant in that Stokes is not shown to have left Nelson Wheeler Perth from 1st July 1989 and Munachen is not shown to have the same address of the firm, because it is not known when such changes had to be notified to the Institute.
Stokes appears to have sought to explain those entries relating to him by saying that up until the 1987 year Nelson Wheeler Perth paid for them but in 1988 the subscription to the Institute was paid by him. He seems to have based that assertion on the fact that he claimed the subscription as a deduction in that year in his personal income taxation return. It appears that the same deduction is claimed in the 1989 year. These matters do no more than reflect an aspect of the financial relationship between Nelson Wheeler Perth and Stokes in those years. He could not be cross-examined about the matter and so the extent of this relationship could not be explored. It may be that once it was agreed that Stokes would retain his earnings from directorship and salaries, he should pay expenses of this nature.
In May 1987 Nelson Wheeler Perth prepared a directory for distribution to clients and the public giving information about the practice, the partners, the offices in Perth, West Perth and Kalgoorlie, the fields of practice of the partners and the names and directory information about the Nelson Wheeler Associates in Western Australia. Stokes is included and described as a partner at the Perth office. His fields of practice are shown as acquisition, mergers and takeovers and the mining industry. The Associates were not members of the partnership but had links with the firm for mutual professional advantage. According to Stokes, he did not see the document before preparing to give evidence. He said he did not work in the fields of practice ascribed to him at Nelson Wheeler Perth after his alleged resignation. However, it seems that the author of this directory regarded Stokes as a partner of Nelson Wheeler Perth at the time.
When the name of Nelson Wheeler Perth was changed to Nelson Parkhill BDO, the firm produced publicity in the form of an announcement in writing and a glossy brochure. In the announcement it was stated that there would be no change to the ownership or address of the Perth and Kalgoorlie practices and that they would remain totally controlled by Western Australian partners. In the brochure the information as to the services offered by the firm and the various offices around Australia and Hong Kong is provided. With respect to the Western Australian firm, there is a page devoted to the structure of the firm and the areas of responsibility of each of the partners. The area of professional management, company directorships and commercial projects is stated to be the responsibility of the partners Munachen and Stokes.
This brochure is evidence that Stokes and Munachen were still partners of Nelson Wheeler Perth at the time.
Both Stokes and Munachen were shown by various public companies to have been partners of Nelson Wheeler Perth at various times subsequent to their alleged retirements from the partnership.
In the annual directors' report of Eltin Pty Ltd for the 1988 year, Stokes is described as a partner in an accounting firm which provided share registry services to Eltin, which is clearly a reference to Nelson Wheeler Perth, although the name of the firm is not used. Stokes signed this report on 11th November 1988. The same reference is made in the directors' report for the year ending 30th June 1989 of Eltin Underground Operations Pty Ltd which was signed by Stokes on 27th September 1989.
Stokes was one of two directors of Hazra Pty Ltd during the financial years 1987, 1988 and 1989. In the directors' report for the 1987 year which was signed by Stokes on 30th September 1987, he is shown as a partner of Nelson Wheeler Perth. The same statement is contained in the directors' report for the 1988 year which was signed by Stokes on 16th November 1988 and again in the directors' report for the 1989 year but the copy of that report admitted into evidence is not signed.
In the annual report of Mawson Pacific for the 1988 financial year, Stokes is shown as Chairman and Managing Director and, inter alia, as an Associate of the Institute of Chartered Accountants. In the section of the directors' report relating to directors' interests and benefits, it is reported that fees were paid to Nelson Wheeler Perth and that Stokes was a partner of that firm. Stokes signed this report on 16th November 1988. In the 1989 annual report of Mawson Pacific, the same statements appear. Stokes signed that report on 10th November 1989.
In the 1987 report of MRSA, he is described as a former partner in the accounting firm which provided accounting and share registry services to the group. According to Stokes, he did not approve the 1987 annual report before it was sent out. It was prepared by the auditors and reviewed by the chief financial officer of the company. He did not prepare that part of the report which described him as a former partner of an accounting firm. However, a possible explanation is to be found in the minutes of the meeting of directors of MRSA on 16th October 1986. As has been seen, it is there recorded that Stokes' future role with the company was discussed and that he advised the meeting he was going to resign as a partner of Nelson Wheeler Perth and concentrate more on his directorships.
It is possible that those responsible for writing the 1987 annual report had regard to this intimation from Stokes. In the 1988 directors' report of Eltin Pty Ltd, which was signed by Stokes on 11th November 1988, he is described as a partner in an accounting firm which provided share registry services to the Eltin Group in the ordinary course of business which is obviously a reference to Nelson Wheeler Perth. The same reference is repeated in the directors' report of Eltin Underground Operations Pty Ltd for the 1989 year.
On 14th September 1987 a facsimile transmission was sent to Mr Paul Fuller enclosing a statement about Munachen to be included in some corporate publication, the purpose of which is not disclosed in the evidence. The document was sent by 28 Financial Services. In that statement Munachen is described as a partner in the "national accounting" firm of Nelson Wheeler. Attached to this document is a document entitled "Directors Profiles" which contains similar information about Munachen but as to the true nature of the document, who prepared it and in what manner it was ever used is not established. I have not used it in an evidential sense.
In the annual directors' report of Acorn Securities for the 1988 year which was signed by Munachen on 4th November 1988, he is described as a Fellow of the Institute of Chartered Accountants in Australia and a partner in the "National Accounting Firm of Nelson Wheeler". In the section relating to directors' benefits, it is reported that professional fees were paid to Nelson Wheeler "of which Mr P Munachen is a partner and 28 Financial Services Pty Ltd of which Mr P Munachen is a director". Much the same statements are made in the annual directors' report of Mount Pleasant Management Limited for the year 1988 which was signed by Munachen on 14th October 1988 and in the annual directors' report for the same year of Wattle Gully Gold Mines NL which was signed by Munachen on 18th November 1988. In the report to unit holders of Mount Pleasant Management for the six months ended 31st December 1987 which was signed by Munachen on 19th April 1988, he is described as a Fellow of the Institute of Chartered Accountants in Australia and a partner in the national accounting firm of Nelson Wheeler. He was also so described in the 1987 directors' report for that company which he signed on 19th November 1987. In that report Stokes is mentioned as a director but there is no reference to his being an accountant or a partner in Nelson Wheeler Perth. Only his position as director in various companies is mentioned.
In my view, these statements are significant. In them Munachen distinguishes between Nelson Wheeler Perth and the national body and says he is a partner of both of them which, in my view, is established by the evidence and, of course, is not contradicted by Munachen.
Three former clients of Nelson Wheeler Perth sued the firm for damages in separate actions in 1991 and 1992. Stokes and Munachen were named as defendants in each action.
Automotive Industrial and Mining Supplies Limited ("AIMS") became a client of Nelson Wheeler Perth in 1987 having been incorporated early in that year. It acquired an electrical, mining equipment, supply and salvage businesses from clients of Nelson Wheeler and by mid 1987 had commenced business in these areas. The circumstances surrounding the establishment of AIMS and the business, is discussed later in another section of these reasons. Nelson Wheeler Perth were involved in various ways.
On 17th September 1991 AIMS commenced an action against Nelson Wheeler Perth for damages for representations alleged to have been made by Nelson Wheeler Perth to it in or about September 1988 and October 1988 alleged to constitute misleading or deceptive conduct contrary to s10 of the Fair Trading Act (WA) in connection with the purchase of shares in another company and for negligence in the advice given by Nelson Wheeler Perth and in the preparation of a feasibility report dated 21st September 1988 and an independent expert's report dated 12th October 1988. This lastmentioned report was prepared by Pilmer. There were further claims alleging breach of contract and breaches of s229 of the Companies Code and breach of fiduciary duty.
Langford was sued individually and there were other defendants. The solicitors for Nelson Wheeler Perth, in the present proceedings, also acted for them and Langford in the action brought by AIMS. An amended statement of claim was filed on 29th June 1994 which was more extensive than the initial pleading. For present purposes, it is unnecessary to mention in any detail the basis of the claim against Nelson Wheeler Perth. It is sufficient to observe that action was brought against both Stokes and Munachen, the subject matter of the action was alleged to have occurred in September and October 1988 well after it is said in the present proceedings that both Stokes and Munachen had retired from the partnership and the damages claimed turned out to be substantial. It was not alleged that either Stokes or Munachen played any part personally in the matters which were the subject of the action. Liability on their part would only arise by reason of the law of partnership.
AIMS informed the Stock Exchange in Perth of these proceedings on 23rd September 1992 and the proceedings received prominent publicity in the local Kalgoorlie newspaper at this time and Martino was aware of those matters.
On 25th September 1992 an appearance was entered on behalf of Pilmer, Crawford, Gray, Messer, Munachen, Stokes and Martino as the first defendants. On 14th July 1995 the Defence of Nelson Wheeler Perth and Langford was filed. In the Defence Nelson Wheeler Perth, ie those for whom the appearance was entered, admitted that they were, at material times, a firm of auditors and chartered accountants engaged in the provision of accounting services and advice. Nowhere in their pleading is it alleged that Stokes and Munachen were not partners of Nelson Wheeler Perth at any time, including at times material to the claim by AIMS, namely in September and October 1988.
All of the first defendants were aware of the proceedings. Martino sent a memorandum to each of them, including Stokes and Munachen, on 3rd July 1995 enclosing a letter from their solicitor Mr Mills, who acts for them in the present proceedings, and advising that Langford had been asked to review the Defence. Mills' letter was not produced at the trial as it was the subject of a claim of legal professional privilege. On 16th October 1995 Martino sent to each of them a copy of the fee account of other solicitors also acting for them in the AIMS proceedings. This account was not produced at the trial and the amount of the fees is not known. Also accompanying this memorandum was a copy of a letter from the solicitors giving some details of the nature of the work undertaken by them which reveals that both Martino and Pilmer were involved with the solicitors presumably in giving instructions and to a lesser extent Gray, but none of the other members of the firm. On 1st November 1995 Martino sent a memorandum to all of the former partners of Nelson Wheeler Perth involved in the AIMS proceedings and in other proceedings, to be discussed shortly, brought by Debono Enterprises Pty Ltd. The memorandum informed them of a meeting on 7th November 1995 to finalise the Debono - Challenge Engineering litigation and the AIMS litigation.
On 10th November 1995 the solicitor acting for AIMS forwarded to the solicitors acting for Nelson Wheeler Perth a copy of a deed of settlement and release with respect to the AIMS litigation and on the same day sent the same documents to Martino. The deed provided, inter alia, that Crawford, Gray, Martino, Messer and Pilmer would pay $150,000 in settlement of the claim and that AIMS would discontinue the action. Stokes and Munachen are not included in the draft deed. The evidence does not disclose if this claim was settled on those terms. The first defendants refused to waive legal professional privilege and disclose what instructions they gave to their solicitors which may have led to the exclusion of the names of Stokes and Munachen from the Deed. There is simply no evidence about that matter. Consequently, I am unable to regard the exclusion of their names as evidence that they were not partners of Nelson Wheeler Perth at relevant times.
The next claim against Nelson Wheeler Perth is referred to as the Craig litigation. Four persons by the name of Craig and a company with which they were associated, Diamond Co Pty Ltd, brought an action for damages against Nelson Wheeler Perth claiming that Troy, when he was a partner of the firm, negligently prepared a feasibility study in January 1988 for the redevelopment of an hotel. Notice of the claim was given on 7th September 1990 by their solicitors to Nelson Wheeler Perth and a copy was sent to both Gray and Stokes. On the same day Martino advised Marsh and McLennan of the claim pursuant to the professional indemnity insurance arrangements and in doing so advised that Troy resigned as a partner on 30th June 1988.
Proceedings were instituted by the plaintiffs in the Craig litigation in the Supreme Court of Western Australia. Troy was the first defendant and the second defendants were Connolly, Messer, Gray, Lewis, Stokes, Munachen, Martino, Pilmer and Crawford. On 24th March 1995 the plaintiffs filed an amended statement of claim. For present purposes a brief description of the basis of the claim will suffice. It was alleged that Troy agreed to undertake the feasibility statement on 29th August 1985 which was before he and Gray joined Nelson Wheeler Perth. It was further alleged that Troy undertook the work both before and after joining Nelson Wheeler Perth, that a further contract of retainer was entered into between the plaintiffs and Nelson Wheeler Perth after about September 1987 and that Troy gave negligent advice on 19th January 1988 in consequence of which Troy and Nelson Wheeler Perth acted in breach of contract and duty owed to the plaintiffs in the AIMS action. There was another claim against Troy and his partner Bonavita with respect to work undertaken by Troy after he left Nelson Wheeler Perth. It may be seen that the claim against Nelson Wheeler Perth was for work undertaken from 19th January 1988, again well after it is claimed in the present proceedings that Stokes and Munachen left the partnership.
On 29th March 1994 Nelson Wheeler Perth issued an amended contribution notice against Troy and Bonavita. It was issued on behalf of Stokes and Munachen as well as the others. A statement of claim in those third party proceedings was filed on 28th April 1994. In that statement of claim it is alleged that during the period from 1st July 1986 to 17th June 1988 Troy was, at all material times, a partner of all of Connolly, Messer, Gray, Lewis, Stokes, Munachen, Martino, Pilmer and Crawford and a member of the firm Nelson Wheeler. These allegations were admitted by Troy and Bonavita in their defence.
The action proceeded to trial and judgment was entered against Troy, Nelson Wheeler Perth and Bonavita in varying amounts. The major proportion of the judgment for a very large amount was against Troy and Bonavita. The plaintiff in the Craig litigation appealed. The major thrust of the appeal was to have the Nelson Wheeler Perth defendants included in liability for the total judgment sum which exceeded $6m. Nelson Wheeler Perth lodged a cross-appeal on 12th April 1996. At no stage of the Craig litigation did Stokes and Munachen allege that they were not partners of Nelson Wheedler Perth at relevant times even though the extent of the claim and indeed the judgment sum was considerable.
The Full Court of Western Australia gave judgment in the appeal on 22nd January 1997. It is unnecessary to set out the reasons given for disposing of the appeal. It is sufficient to say that a substantial award of damages was maintained and that the members of the Court accepted that at relevant times Stokes and Munachen were partners of Nelson Wheeler Perth, well after the dates when, in these proceedings, they alleged they retired from the firm. Of course it cannot be suggested that the reasons of judgment of the Full Court of Western Australia have any status in relation to this issue in the present proceedings, but they are relevant to show that it was not contended in the Craig litigation that Stokes and Munachen had left the partnership before the middle of 1988.
It seems that the proceedings were resolved so far as Nelson Wheeler Perth is concerned on the basis that they were obliged to contribute to the damages awarded in favour of the Craig plaintiffs to the extent of $199,993. They were insured against that liability but there was an excess under the policy of $50,000. Troy claimed that he was obliged to contribute one-tenth of that excess, namely $5,000 which was disputed by Nelson Wheeler Perth on the basis that Troy was not covered by the policy. They claimed that he had to pay one tenth of the judgment sum, ie one tenth of $199,993. There was correspondence between the solicitors about the matter and the solicitors for Nelson Wheeler Perth wrote to Troy's solicitors on 20th October 1995. In this letter the following appears:
"Your client, as you will be aware, retired from our client in June 1988. Your client is liable to contribute to the judgment entered against him and our clients on the basis of his partnership agreement with our clients. There were ten relevant partners at the time the cause of action arose and therefore your client is obliged to contribute 10 percent of the judgment sum.
There was no stay of proceedings and amounts due under the judgment had to be paid. On 27th October 1995 with the insurer paying all but the $50,000 excess which was paid as to $5,000 by Troy, $15,000 by Startup Securities and $30,000 from Nelson Wheeler Perth Trust Account. The contribution of Troy represented 10 percent of the excess which means that Troy and Nelson Wheeler Perth proceeded on the basis that there were ten partners including Stokes and Munachen.
There was correspondence between Munachen and the solicitors for Nelson Wheeler Perth in January 1996 about the Craig litigation but the letter written by Munachen on 23rd January 1996 was not available at the trial and consequently the nature of the direct involvement of Munachen is not known and could not be ascertained as he did not give evidence. In the absence of any contrary evidence from Munachen, it is reasonable to infer that he contributed his share of the excess.
I return to the Debono litigation. Debono was formerly known as Challenge Engineering Pty Ltd. On about 5th June 1987 Debono retained Nelson Wheeler Perth as accountants and financial advisers and Messer and Gray were the partners who handled its affairs. Again it is unnecessary to go into detail but, in brief terms, Debono alleged that it entered into certain transactions and suffered substantial losses by reason of negligent acts and omissions of Nelson Wheeler Perth in June 1987 and incompetent conduct in October and November 1987 and February 1988. It may be seen that the causes of action were alleged to have arisen well after it is said Stokes left Nelson Wheeler Perth.
Debono made a claim for damages against Nelson Wheeler Perth and commenced legal proceedings in the Supreme Court of Western Australia on 21st January 1991. Eventually those proceedings were settled by the insurer of Nelson Wheeler Perth and orders were made by that Court on 23rd October 1995. Nelson Wheeler Perth had to pay to Debono $100,000 plus interest from that date. In these proceedings Stokes and Munachen were regarded as members of Nelson Wheeler Perth at relevant times.
There was some delay in making payment as Nelson Wheeler Perth attempted to negotiate with their insurer different arrangements with respect to the excess under the policy. Proceedings to enforce the judgment were taken in early January 1996 against Martino, Munachen, Messer, Crawford, Gray, Pilmer and Stokes personally. It was stated in an affidavit in support of the enforcement proceedings that the judgment was against a partnership and that by that time $70,000 had been paid. It appears that those acting for Debono had proceeded on the basis that the partners of Nelson Wheeler Perth were as stated in the registration of the business name. By 18th January 1996 the balance due by Nelson Wheeler Perth had been paid and all that remained was to resolve the legal costs due by them. Both Stokes and Munachen contributed $10,000 each to the amount due to discharge the judgment.
By late in the 1996 financial year, Connolly had not paid his share of the money due on the settlement of this litigation and the other contributors retained their solicitors to commence legal proceedings against Connolly to obtain the amount due by him. A litigation retainer agreement was prepared showing each of the clients, including Stokes and Munachen, as parties but the copy admitted into evidence was not signed by any of the parties. According to Gray, advice was sought from the solicitors and in consequence the document was prepared. If Stokes was not a partner at times relevant to the Debono litigation, there would not be any reason for him to become involved in litigation against Connolly.
At no stage in the Debono litigation did either Stokes or Munachen assert that they were not partners of Nelson Wheeler at relevant times and therefore were not liable. Whilst it could be argued that part of the claim arose in June 1987 when Munachen was a partner on his own case, the same could not be said of Stokes. On the case presented in these proceedings by Nelson Wheeler Perth, Stokes was never a partner at times material in the Debono litigation and it was never suggested that he played any part in the acts or omissions which were the subject of the litigation. If he was not a partner, he could not possibly be liable and it is difficult to understand why he did not defend the action by asserting that he was not a partner and why he would personally contribute to the payment of the judgment sum. The most likely explanation is that he was a partner at the relevant times and was well aware of that position. Much the same must be said of Munachen even though he could have been responsible for part of the claim.
Another matter of importance is that all of the other partners appear to have regarded Stokes and Munachen as partners.
I now turn to what has been described at the trial as the Excel litigation. On 16th August 1988 Excel Finance Corporation Limited brought an action in this Court against the persons alleged by them to be the partners of Nelson Wheeler Adelaide, alleging that it entered into a particular transaction in reliance upon advice and conduct of a member of Nelson Wheeler Adelaide in June 1987 and in consequence suffered considerable loss. Excel claimed damages against Nelson Wheeler Adelaide alleging negligence and misrepresentation including fraudulent misrepresentation. The Excel litigation is considered later in the context of the national partnership allegation.
Eventually the action was settled and Nelson Wheeler Adelaide had to pay $175,000 inclusive of costs and interest. The various Nelson Wheeler firms around Australia had agreed the proportions each of them would contribute to the excess under the professional indemnity insurance arrangement under the policy which covered them all. By the time the subject matter of the Excel litigation occurred, it was thought by these various firms that Nelson Wheeler Brisbane was no longer involved.
Martino, acting on behalf of Nelson Wheeler Perth, disputed the assertion by Nelson Wheeler Adelaide that they were obliged to contribute. Nelson Wheeler Sydney did contribute but not Nelson Wheeler Perth or Nelson Wheeler Melbourne. Nelson Wheeler Adelaide insisted and on 6th May 1991 Mr GR Ashby, a partner of Nelson Wheeler Adelaide and one of the fifth defendants, wrote to Martino informing him that Nelson Wheeler Adelaide had decided to send a letter of demand to each individual partner of Nelson Wheeler Perth and Nelson Wheeler Melbourne at the time the subject matter of the Excel litigation occurred, stated in this letter to be 6th June1987, and to institute legal proceedings against each such partner unless payment was made.
On 9th May 1991 solicitors acting for Nelson Wheeler Adelaide wrote to the ten persons whom Ashby believed were the partners of Nelson Wheeler Perth at 16th June 1987 which included Stokes. The letter to Stokes informed him of the claim being made by Nelson Wheeler Adelaide and the basis of it and that they were seeking $21,175 from the partners of Nelson Wheeler. It was stated that they understood that there were ten partners of Nelson Wheeler Perth at the time and each of them had to contribute $2,117.50. The names of the ten partners were set out in an attached schedule which was not available at the trial. Obviously Ashby regarded Stokes and Munachen as partners at the relevant times, including at that time.
Nelson Wheeler Perth did not pay the amount claimed and on 29th October 1991 Nelson Wheeler Adelaide instituted legal proceedings against them in the District Court of Adelaide. Stokes was named as a defendant and in the particulars of claim it was alleged that he and Crawford, Lewis, Munachen, Martino, Pilmer Troy, Connolly, and Langford carried on business in partnership at material times in 1987. According to Ashby he consulted the list of partners of Nelson Wheeler Australia in 1987 in a professional indemnity file which included Stokes' name.
As has been seen, Connolly left Nelson Wheeler Perth at the end of May 1987 and Lewis left at the end of February 1987. On 6th November 1991 Connolly wrote to the solicitors for Nelson Wheeler Adelaide and informed them that he was not a partner of Nelson Wheeler Perth at the relevant time. There is no evidence that Stokes did likewise.
There was correspondence and discussion between Ashby and Martino but the matter was not resolved. Martino informed Ashby that there were three claims against Nelson Wheeler Perth including the Debono litigation which would more than offset the claim in South Australia. In October 1992 Ashby swore an affidavit in the action in the District Court in which he asserted that the Nelson Wheeler Perth defendants, except Lewis, carried on in partnership. It was at this time that the claim against Nelson Wheeler Perth was eventually abandoned.
It may be seen that on no occasion did Stokes defend the claim by Nelson Wheeler Adelaide on the ground of his not being a partner of Nelson Wheeler Perth at the relevant time. At no time did Martino or any of the other partners make that assertion even though it was made by Connolly with the result that he was excluded from the proceedings. It would have been a simple matter to assert that Stokes had left the firm as from 30th November 1986 if that was in fact the case. The apparent acceptance by Stokes in the Excel litigation that he was then a partner at the relevant time is important evidence of that fact.
Stokes and Munachen did not contend that they were not partners of Nelson Wheeler Perth at relevant times in any of those four actions and none of the other members of the firm made any such assertion. These were all cases where there was actual, or at least potential, liability to contribute to the claims personally as in fact did occur with respect to the Debono litigation.
These respective legal actions continued during the course of these proceedings and at times after membership of the Nelson Wheeler Perth partnership by Stokes and Munachen became an issue. All of the first defendants must have been aware of the conflicting positions taken by Stokes and Munachen in those actions and by them in the present proceedings. Initially in the present proceedings they did not disclose those matters, it being said they were not relevant even though they are plainly relevant and significant.
The failure to disclose the four proceedings at least in the discovery process at an early stage is not satisfactorily explained. However, I do not draw any adverse inference from that matter. The facts speak for themselves and it is plain that at no time in any of those cases did the first defendants allege that Stokes and Munachen were not partners as is alleged in the present proceedings even though the two men were at risk personally. In my view, that is a matter of considerable importance.
As has been seen, this action commenced on 19th August 1992. On 23rd November 1992, the Nelson Wheeler Perth defendants made an application to this Court that the action be transferred to the Supreme Court of Western Australia pursuant to the cross-vesting legislation. The application was adjourned to 2nd February 1993 to be heard at the conclusion of the hearing of the application by the plaintiff for summary judgment. Each of the Nelson Wheeler Perth defendants swore and filed an affidavit in support of the cross-vesting application. All of them deposed that at all material times they were partners of Nelson Wheeler Perth, including Stokes and Munachen. Stokes swore his affidavit on 8th January 1993 and Munachen swore his affidavit on 7th December 1993. Munachen specifically turned his mind to when he retired from the firm because in his affidavit he also deposed that he was "no longer a partner with Nelson Wheeler having resigned from its successor Nelson Parkhill BDO as at 30th June 1992".
The evidence discloses that the solicitors for the first defendants sent a draft of the affidavits to Crawford and Gray and asked them to consider the draft and advise of any amendments and additional points thought to be desirable. The solicitors informed each of these men:
"We emphasis (sic) that the affidavit is essentially a first draft, and you should feel free to discuss any aspect of it with us."
As has been mentioned, Stokes could not be cross-examined and Munachen chose not to give evidence. It is reasonable to infer that drafts of their respective affidavits were sent to them for the same purpose and with the same information.
Both of them had been served with the statement of claim of the plaintiff well before their respective affidavits were sworn. In the statement of claim the plaintiff alleged that, at all material times, which included August, September and October 1987, Stokes and Munachen were members of Nelson Wheeler Perth. They were also aware of the nature of the claim and that it was alleged that they were liable to the plaintiff in damages merely because they were members of the partnership.
These men were qualified accountants with considerable experience. Obviously they would have been aware of the significance of liability by reason of a partnership relationship. This is a very large claim. They must have known of the considerable risk facing them, perhaps even of losing all the assets they had developed over the years. If they had left the partnership as is now asserted and, from Stokes' point of view, for the reasons he has given, it is inconceivable that they would not have checked records if they were uncertain and have correctly instructed their solicitors. Furthermore, the proceedings against them involved matters of which they had some knowledge. Stokes had a close relationship with Harold Abbott and Kia Ora and had dealings with Western United. As will be seen, the same may be said about Munachen. They were undoubtedly aware of the takeover of Western United by Kia Ora at the time and of the share market crash. These matters were sign posts in time as to important events which involved them and Nelson Wheeler Perth. If they had left the firm, these events would have called to mind that they had done so before the events occurred. After all, in the case of Stokes, the acquisition of a gold mine for $66m is not an everyday event.
In my view, these affidavits are compelling evidence that both Stokes and Munachen were partners at the times material to these proceedings and that both of them believed that to be the case.
The first defendants filed their defence on 11th March 1993 and they all admitted that they carried on business in partnership as previously mentioned. On 4th February 1994 they filed a further amended defence (document 148) and made the same admission. By that time, at the very latest, they must have known of the risk to them personally in the proceedings. The same observation about the events of 1987 and their relationship with Nelson Wheeler, Kia Ora and Western United and the stock market crash apply equally to the admissions in the Defences. It may be accepted that each of them may not have remembered without assistance the exact date upon which his retirement occurred, but it is unlikely that they would not have understood the importance of the matter and if uncertain made appropriate enquiries.
There was no satisfactory explanation of why the admission was made in these affidavits and in the Defence, the amended Defence and the further Amended Defence. Indeed there was no explanation by Munachen at all. Usually, when an admission is incorrectly made, the circumstances of how and why it was made are revealed voluntarily. Pleas of mea culpa are not uncommon, including by legal advisers. However, no such disclosure occurred in the present proceedings. Not only did Pilmer and Munachen not give any evidence at all but any attempt to explore why the legal representatives prepared the Defence and the affidavits in those terms was met with the claim of legal professional privilege. The claim was justified and those of the first defendants who gave evidence were entitled to make it. However, a consequence is that there is no evidence of the instructions given by these defendants and whether the legal representatives correctly understood them. In the end, this is not a matter which is decisive. Indeed, I have not found it necessary to bring it to account against the first defendants or in any way as the evidence has clearly established the substantive matter to my satisfaction. However, it is fair to say that the withholding of this information from the Court, although justified by legal professional privilege, hardly engenders confidence in the probity of the assertion that these men were not partners and it does raise the suspicion that the disclosure of the instructions would not have assisted them. After all, competent legal practitioners had drafted the affidavits, the Defences and the amended Defence presumably on instructions.
As has been seen, mention is made from time to time about the failure of Pilmer to give evidence. That matter is of considerable importance in this context. However, Pilmer did give some brief evidence about this matter at an examination pursuant to s541 of the Companies Code in June 1992. The following occurred:
"Q Yes, sitting here today, can you think of any other relationships between Nelson Wheeler and the partners of Nelson Wheeler, and either the offerer or the target company, and any of their affiliates, that should have been disclosed.
A Well, in using the aspect of hindsight, there could have been, yes.
A That one of our partners was involved with the acquisition of the gold mining, with the company that was negotiating to buy the gold mining interests from Kia Ora Gold.
Q And a particular director. Was he the managing director.
Q I think another partner of Nelson Wheeler was the company secretary.
Q And he was the company secretary of Mawson Pacific.
Pilmer, of course, was the partner with whom Stokes said he had discussions about his retirement from the partnership and to whom he gave the letter of 3rd November 1986. Pilmer was the managing partner at the time. He was aware of Stokes' position in relation to the firm.
This evidence was volunteered by him. There does not appear to be any uncertainty or confusion. If there was, Pilmer has chosen not to give any explanation in the evidence. Once again on a formal occasion Pilmer acknowledged that Stokes was a partner at the relevant times in 1987 and did not suggest that Munachen had ceased to be a partner.
I now mention those matters not already discussed which are said to be indicators that Stokes and Munachen had retired from the partnership.
It is the case of the first defendants that there was no intention that Stokes should be a partner after 30th November 1986 nor was he recognised as such. The wording of the minute of the meeting of the partners on 3rd December 1986 is simply wrong.
Each of the first defendants who gave evidence all said that Stokes and Munachen had left the partnership. I reject this evidence. The facts must speak for themselves. Without question there were changes in some of the arrangements so far as they affected Stokes and Munachen, but that is very different from leaving the partnership. None of the partners could have regarded Stokes or Munachen as having retired given the matters previously mentioned which strongly indicate the contrary and of which they were aware. I was asked to consider that each of the first defendants who gave evidence was a professional man of some standing who had given evidence on oath. That oath should not be readily cast aside and the fact of their giving evidence is a matter of considerable importance. No court would easily cast the oath of any witness aside and I have not done so. I have given earnest consideration to the evidence of each of them but it is unconvincing. In my view, the most favourable view which may be taken of each of these witnesses is that he has rationalised the effect of certain matters, such as setting up office elsewhere, not drawing a salary and only rarely attending partnership meetings, so as to conclude that Stokes and Munachen had left the partnership and having committed themselves to that position they were not prepared to face up to the force of the documentary evidence. I do not regard their evidence on this matter as of much assistance.
Stokes moved out of the Griffin Centre and established an office at his home. He said that he made the decision to do so in September or October 1987. MRSA Eltin installed a facsimile machine and Stokes acquired and installed necessary furniture and fittings. According to him, Nelson Wheeler Perth did not contribute to the costs and expenses of establishing the home office. This evidence is supported by documentary evidence.
I do not think this event assists in determining whether Stokes resigned from the partnership. The evidence discloses that he spent little of his time at the Nelson Wheeler Perth office in 1985 and 1986. According to him, no less than sixty per cent of his time during 1986 was occupied with the business of MRSA. In addition, he was spending more and more time on the affairs of Mawson Pacific and his other interests. The impression to be gained from his evidence is that during those years prior to his letter of resignation, he was doing very little work at Nelson Wheeler Perth and certainly little traditional accountancy work within the practice. He had set up the office at home which he used before writing the letter. His subsequent use of the office at home was, in a sense, nothing new and is consistent with his remaining in the firm and working away from the offices of Nelson Wheeler Perth which he had been doing for some time.
According to Martino, during 1987 an office in the Griffin Centre was not allocated to Stokes, he did not use one, he did not do any work at the Griffin Centre and staff were not allocated to him. This evidence standing alone is consistent with his having left the firm but also with a mere change of working arrangements.
Ceasing to Take Salary and Contribute Director's Fees
Most of the Nelson Wheeler Perth defendants who gave evidence said that a salary was not fixed for Stokes because he withdrew from the practice. That is true in a limited sense. Stokes withheld his director's fees from the partnership and agreed not to take fixed monthly drawings which have been described as salary like the other capital partners. It is unnecessary to repeat the conclusions which I have reached about this matter. It suited Stokes to alter the financial arrangements in this way and yet remain a member of the firm.
Paying Motor Vehicle Expenses and Membership Subscriptions
Mention has been made of Stokes paying his own membership fees to the Institute of Chartered Accountants in the 1988 financial year.
According to Stokes, during 1986 he had the use of a motor vehicle. Nelson Wheeler Perth paid the lease commitments but some other expenses were paid by Southern Goldfields. He said that when he had discussions with Pilmer about his retirement in November 1986, it was agreed that he would retain the vehicle and Nelson Wheeler Perth would continue to make the lease payments but would debit his capital account. He said that they were debited to his capital account and were not claimed by Nelson Wheeler as a business expense following 1st December 1986. He sold the vehicle in about October 1987 and had to pay a shortfall of $7,000.
Of course Stokes' evidence about these matters could not be tested and Pilmer chose not to give evidence. For these reasons Stokes' evidence cannot be accepted unless supported by other evidence. There is other evidence but it does not support the impression Stokes was trying to convey. During 1987 the capital accounts of all partners were adjusted to reflect the private proportion of motor vehicle expenses for each partner. However, it occurred by adjusting the share of profits of each partner for that reason. The end result, excess or deficit after drawings, was credited or debited to the loan account as the case may be. Although the amounts vary from partner to partner, probably because of the different expenses involved, all partners were treated the same. This evidence again shows that Stokes had motor vehicle expenses paid by the partnership which could only be justified if he was a partner. It was not until the 1988 financial year that these expenses were not paid by Nelson Wheeler Perth and no adjustment had to be made. It is not accurate to say that the lease payments were merely debited to his capital account.
If Stokes' assertion about the membership fees and his income taxation return accurately reflect the true position, this matter indicates no more than an aspect of the change in financial arrangements. Perhaps it is not surprising that there should be such a change in the 1988 year if Stokes was not undertaking accountancy work, or other personal work, within the practice and was retaining his directors' fees.
It is contended that Stokes did not attend meetings of partners and was not invited to attend which is indicative of his having left the partnership. The minutes record Stokes as an apology.
I accept that Stokes did not attend meetings after 3rd December 1986 until late in 1988 when he attended a meeting and supported the appointment of Martino as the managing partner. As has been mentioned, if he, and Munachen for that matter, had retired, it may be expected to find some mention of those matters in the minutes. The failure to attend meetings must be considered in context. Crawford said that after the alleged resignation of Stokes, nothing much changed as far as Stokes was concerned. He had not been around the practice very much in the physical sense. Crawford went on to say:
"He didn't attend a lot of meetings, he didn't - in the sense of what we, as partners, would have expected, the change is that he wouldn't have been expected, or wouldn't have been invited to come to meetings, to participate in the goings on in the practice, and in any decision - making process of the practice, but its not a particular change as such."
Later on in his evidence he was asked to respond to this matter. Crawford had been in partnership with Pilmer since the 1970's. The others had joined at various times. Stokes was regarded as important to the partnership. There had never been a retirement until, it is alleged, Stokes retired and yet it did not seem to be regarded as a significant event. Crawford said:
"A. But, relative to Geoff, I was, he was - it's an unusual situation, because he was there, but not there. He didn't play - from my position, didn't play a major role in any day-to-day activity of the practice, or get involved, or I didn't get involved with him in any shape or form, other than we crossed paths at meetings and occasional drinks and other practice social activities. To me, Geoff was off doing his own thing. We had accepted, when we originally joined Stokes Munachen, that Geoff was in a different capacity and not, in the traditional sense, operating as a chartered accountant. That being the case, he didn't form an integral part of the day to day activity and, in that sense, I think, you know, him going was - well, him saying he was leaving really didn't have an impact.
Q. I think you've told me, haven't you, that from the physical point of view it wasn't any different.
This is important evidence which I accept. This description by Crawford expresses in an accurate way the almost non-existent role played by Stokes in the operation of the partnership before his alleged resignation and that nothing changed, in that sense, thereafter. For this reason, Stokes' lack of involvement in the affairs of the partnership and his non-attendance at partners' meetings after the so-called resignation are not indicators that he was no longer a partner.
Stokes said that from 1984 to 1986 he did not attend meetings of partners often. After the merger of Stokes, Munachen & Co and AC Pilmer & Co, Stokes said that he attended some meetings but he did not remember any and that during those years he attended "very few" meetings. According to Messer, he did not recall consulting with Stokes to see if he was available for meetings and did not send agendas for meetings to him and Stokes did not contact him to make his apology but there was no formal process in that regard.
The failure to attend meetings of partners may suggest that a partner has left a partnership depending upon the circumstances. Here, it seems that Stokes was not accustomed to attending meetings even before his alleged retirement. He was frequently away pursuing his directorships and other interests. In these circumstances his absence from meetings is not of such significance. According to him, he was very busy with those interests after the so-called retirement.
Messer's evidence that he could not recall consulting with Stokes to see if he was available for meetings is curious. If Stokes had retired, there would be no reason to do so. If he had not retired and was absent due to increasing business commitments, there would be no reason to consult with him if it was known that he did not propose to attend. The failure to send agendas to Stokes, if that is what occurred, is probably not surprising if he had little interest in such meetings and was frequently away.
Not Being Consulted on Important Partnership Decisions
It is submitted that there were a number of important matters about which Stokes and Munachen were not consulted and that lack of consultation can only be explained by their not being partners at the time.
The first is the matters raised in the memorandum of Messer to Pilmer, Martino, Crawford and Gray of 28th October 1988 which has already been mentioned. As I have said, I regard that matter as evidence to the contrary.
Then there is the exhortation by Messer to those working within Nelson Wheeler Perth by memorandum of 8th December 1988 about billing work in progress. Stokes and Munachen did not receive this memorandum. There is no reason why it should have been sent to them. They were not undertaking accountancy work within the practice and the billing of work in progress was not a matter for either of them.
On 29th June 1988 partners of Nelson Wheeler Perth executed a memorandum of agreement for the purchase of the accountancy practice of Peat Marwick Hungerfords at Kalgoorlie for the sum of $11,940 for plant and equipment and a sum to be calculated in accordance with the agreement for goodwill payable over three years.
The partners of Nelson Wheeler Perth were shown to be Pilmer, Martino, Messer, Crawford and Gray. Stokes and Munachen were not included. According to Messer, there was no discussion with Stokes and Munachen about this acquisition and no-one suggested that they should be parties to the memorandum of agreement. This matter is, prima facie, an indicator that Stokes and Munachen were no longer partners at the end of the financial year 1988. However, there are two possible explanations to the contrary. Clearly there was some uncertainty in the first half of 1988 about the roles to be played by Stokes and Munachen in the firm in the future. It will be remembered that at the meeting of the partners on 18th December 1987, it was reported that both Stokes and Munachen should retire as soon as possible and that Langford reported that they were both ready to retire. At the meeting on 19th January 1988, Pilmer said that he had yet to meet with Stokes and Munachen to discuss their retirement. There is a further reference to the matter in the minutes of the meeting on 21st April 1988. At the meeting on 19th May Pilmer said that Stokes wanted to remain as a partner and that their was every likelihood that Munachen would resign. Also, it will be remembered that Messer wrote to Walters at the Bank on 20th June 1988 and referred to an earlier conversation when he and Pilmer had indicated that Stokes and Munachen would be retiring from the partnership as at 30th June 1988. This evidence suggests that there was an expectation that Stokes and Munachen were about to retire when the instructions for the memorandum of agreement were given and matters proceeded on that basis. At some stage it was decided that they would not retire but the transaction went ahead regardless.
The other possible explanation is that it was not thought necessary to include Stokes and Munachen in the memorandum of agreement. They were not playing a role in the day to day affairs of the practice and their equity position was unlikely to be affected because, as Messer wrote in his letter to Walters on 20th June 1988, no new partners were to be admitted as a result of the acquisition of this practice. I do not regard the absence of Stokes and Munachen from the memorandum of agreement as a strong indicator that they had left the practice.
According to Stokes, he was not consulted about the arrangements for the sale of the Ventnor Avenue property, including the price although he did know a few months earlier that it was going to be sold. This evidence could not be tested and consequently cannot be accepted. It would be surprising if it is correct or reveals the full story. The Ventnor Avenue property was sold at an enormous profit. Stokes' family trust had an equal interest. Along with the others, he was committed to the Bank. This sale was a matter of great importance to all of those involved. It is incomprehensible that Stokes would have known little about it until, as he says, he heard about it through his secretary after a cheque had been sent to him and she had banked it.
The evidence of all of the members of Nelson Wheeler Perth who gave evidence was that Stokes and Munachen played no part in the operation of the partnership after their respective dates of retirement. According to Crawford, Stokes was not consulted about any of the activities of the practice. According to Messer, he was not consulted about any negotiations with the Bank.
Once again these matters have to be put into perspective. Stokes had never been involved in the day to day operation of the practice which had been left to others. In this regard, there does not seem to be any difference between the period before the alleged resignation and the period after. There is no evidence that Munachen was ever involved in those types of partnership activities.
According to Stokes, he was about when Lewis proposed to resign because Lewis discussed the matter with him but he had nothing to do with any discussion or decision about his retirement or any payment to him. Also he said that he was not involved in any manner with the resignations of Connolly and it seems not with Troy.
Given the lack of involvement of Stokes and Munachen in the day to day affairs of the practice, I do not regard their lack of involvement in the determination of the amounts to be paid to Lewis, Connolly or Troy as of any significance.
As has been seen, Stokes and Munachen, through Palmvale, took a 50 percent interest in the ownership of the share registry after the change in arrangements in 1987. It is said that in doing so, they took the interest in part satisfaction of their equity in the partnership and that there was a clear removal from the partnership of an income producing asset. It is submitted by the first defendants that these matters are consistent with Stokes and Munachen having left the partnership.
As has been mentioned before on occasions, Pilmer, the managing partner at the time, and Munachen, did not give evidence. Stokes could not be cross-examined. It is by no means certain that the full story about the share registry has emerged.
The arrangements relating to the share registry and the establishment of a corporate and trust structure for the ownership of the share registry have been mentioned. If these arrangements are considered in the context of other corporate and trust structures established by Nelson Wheeler for the service trust and the Ventnor Avenue premises, it may be seen that the share registry arrangements, although different in terms of share of ownership, was much along the same lines.
Clearly Munachen was unwilling to continue to conduct the share registry for the benefit of all of the partners in equal shares. He and Stokes had established and developed it. They wanted a greater share of the profits but Nelson Wheeler Perth retained a 50 percent interest. Stokes and Munachen retained their shares in that half interest by reason of being part of Nelson Wheeler Perth.
There were discussions about the value of the 50 percent interest taken by Stokes and Munachen but it is not clear if that matter was ever resolved. Rather than pay cash for that interest, the proposal was that once the amount was calculated, the capital accounts of Stokes and Munachen would be reduced accordingly.
As has been seen, Stokes' capital account was never reduced for this reason and his interest in the share registry, along with that of Munachen, in effect, reverted to the partnership in 1989 when Stokes resigned and Munachen resumed his previous working arrangements with the partnership.
I do not regard the changes in arrangements about the share registry in 1987 as indicating anything about whether Stokes and Munachen remained members of the firm. However, as has been seen, they were equal participants along with the other partners in the 50 percent share held by Nelson Wheeler Perth which is consistent with their remaining as partners.
According to Messer and Crawford, Stokes and Munachen were not consulted about the acquisition of the practice of Robinson Dawes of Kalgoorlie on 1st July 1988. Stokes said he became aware of it after it had occurred and then spoke negatively about it to Nelson Wheeler Perth. However, according to Stokes, Martino told him that he also did not know of the acquisition until after it had taken place and he did not know of the acquisition of the Kalgoorlie practice of Peat Marwick Mitchell until it had been agreed. The acquisition had been undertaken by Pilmer on behalf of Nelson Wheeler Perth.
It is likely that these matters reflect more about Pilmer and his style of running the practice than they do about whether Stokes or Munachen were partners at the time.
It may be accepted that Stokes and Munachen did not undertake accountancy work to earn fees for Nelson Wheeler Perth after the times when it is said they left the partnership. The paper prepared by Pilmer in the latter half of 1988 already mentioned and a memorandum from Messer to Pilmer, Martino, Crawford, Gray, Langford and Robinson on 8th December 1988 confirm this conclusion. In that memorandum Messer referred to the budget for billing of each partner and the memorandum is addressed to "All Partners". In the absence of Munachen from the witness box, it is not known if he received a copy.
For the reasons earlier expressed, the lack of involvement of Stokes, and Munachen for that matter, in the day to day work of the practice is not an indicator of their having retired from the partnership given that the position was much the same before they allegedly retired. As Pilmer wrote in this paper, this partnership was unique, and that uniqueness was the role played by Stokes and Munachen.
Taking Clients Away from Nelson Wheeler Perth and Retaining Fees
It has been established that when Munachen left the Griffin Centre, he took the work undertaken for Acorn Securities, Mount Pleasant Management, Karonie Gold and Wattle Gully Gold mines. In the main, this work was corporate administration services and it had been predominantly undertaken by Munachen or under his direction before he moved. It was not traditional accountancy work and, along with the share registry, it amounted to a considerable portion of Munachen's work.
Munachen had considerable involvement in each of these companies outside the role of a traditional accountant. He was a director and, in effect the manager, of each company and was heavily involved in the activities and development of each of them. According to Martino, it was almost a full-time involvement. In taking these companies with him, he was merely taking most of his work. The fees charged for the administration work were paid to Nelson Wheeler Perth and Munachen received drawings by way of salary prior to the change of arrangements. The work of other companies previously undertaken by Munachen remained with Nelson Wheeler.
After Munachen left the Griffin Centre, he managed the companies through the medium of his company 28 Financial Services which retained the fees paid by them. The fees earned from the companies taken over by Nelson Wheeler Perth were retained by the partnership. Prior to his leaving, all of those fees were received by the partnership.
Stokes, it seems, took no such work with him when he left the Griffin Centre and had not contributed to the fee income of the practice for some time before that time.
Standing alone, the absence of fee sharing may be an indicator of there being no partnership arrangement. However, I do not think the fact that the fees from these sources were not shared is capable of establishing that neither Stokes nor Munachen had retired from the partnership. These were not the fees or profits of the partnership but of a separate entity owned and controlled by Munachen. The situation was unusual but was part of the arrangements made by the partners because of the non-traditional role played by Stokes and Munachen which had existed for some years. Of course, this fact does not stand alone and like some other matters it cannot prevail over the total effect of all of the acceptable evidence. What is of greater significance is that both men shared in profits or losses of Nelson Wheeler after they allegedly retired as has been seen.
It is submitted by the first defendants that an effect of the change in the arrangements with regard to the share registry was to deprive the partnership of income and the benefit of the share registry becoming more profitable. No consideration was paid to the partners by Stokes and Munachen and the share registry was the type of asset the partners would be likely to want to keep for the benefit of all of them. These matters, it is said, necessarily lead to the conclusions that Stokes and Munachen had left the partnership.
As has already been mentioned, this change of arrangement must be considered in context. The share registry had developed mainly through Stokes and Munachen. The other partners benefited even though they contributed little. The change in arrangements was to accommodate mainly what Munachen thought was fair. There had been tensions about overtime for share registry staff. It was not the traditional work of accountants. The change in arrangements did not take income from the partners, it merely altered the manner in which that income was shared. It was proposed that consideration be paid by Stokes and Munachen by adjustment to their capital accounts which was never undertaken over the two years following 1st July 1987. The other partners could not run the share registry without Munachen and his staff and the future profitability depended in large measure upon the referral of companies by Stokes and Munachen.
As late as 10th October 1988, Messer made some calculations as to the book value of assets, including goodwill of the share registry which he discussed with Crawford but the matter was not resolved. I do not regard this matter as an indicator that Munachen, or Stokes for that matter, had left the partnership. Partners may share income and create structures between themselves as they agree and the arrangements about the share registry are no exception.
After Munachen left the Griffin Centre with the share registry and it operated under the new corporate and trust arrangements, it made little by way of net profit.
It is not clear what happened after the change of arrangements as far as profit from the share registry is concerned. The 1988 and 1989 financial statements of the St George's Unit Trust which owned the share registry show that losses were made but those statements do not reveal the items of expenditure. The share registry was still in a developing stage in 1987. The extent of its development thereafter is not revealed by the documents admitted into evidence.
I am unable to say, on the evidence, what, if any, profits were earned by the share registry and paid to whom in the 1988 and 1989 financial years or if there were losses or a diminution of profits associated by any fee or benefit taken by Munachen or Stokes directly or indirectly.
Consequently the question of the profitability of the share registry under the new arrangements does not assist in determining the issue of whether Stokes and Munachen had left the partnership.
It is submitted by the first defendants that the move by Munachen from the Griffin Centre with the share registry at his own expense, his physical disassociation from the offices of Nelson Wheeler Perth is indicative of his having retired from the partnership. I accept that without more this matter could be indicative of cessation of the partnership arrangements. However, once again matters must be put into perspective.
Before the move, Munachen operated as a partner within the Griffin Centre in almost a self contained unit. He looked after the companies which have been mentioned and the share registry with staff utilised for these purposes. When he left that unit moved with him except for one or two members of staff.
Also, it must not be overlooked that this move occurred at about the time of the sale of the Ventnor Avenue property and when the Perth and West Perth offices were merged. There was a shortage of space at the Griffin Centre and if it was necessary for any section to move to make way for the West Perth partners and staff, the unit operated by Munachen would be the most suitable.
However, the fact that Munachen met the costs himself, if he did, and if they were not recouped in any way, is a matter which tends to establish that this venture by him was not part of the partnership business.
After the new corporate and trust structure was established, the share registry staff were employed by Borman and no longer by the Nelson Wheeler Unit Trust. Other staff who went with Munachen and did not work in the share registry were employed by 28 Financial Services and not the Nelson Wheeler Unit Trust. Also, Borman and 28 Financial Services assumed the existing liabilities of these staff.
The employment of staff by these companies was no different in principle than the previous arrangements when they were employed by the Nelson Wheeler Unit Trust except that the partners of Nelson Wheeler Perth, through their family trusts, had less of an interest in Borman than they had in the Nelson Wheeler Unit Trust and none in 28 Financial Services. These arrangements are not inconsistent with Munachen remaining a partner. He had established his own corporate administration business through 28 Financial Services which was separate and distinct from Nelson Wheeler Perth. The operation of a separate business by a partner is not usually inconsistent with that partner being a member of a firm.
In the circumstances I do not think that those matters do establish that Munachen had left Nelson Wheeler Perth and they are consistent with the unique situation within the partnership after the change in arrangements at the initiative of Stokes and Munachen.
After Munachen left the Griffin Centre, he paid, or caused to be paid, his motor vehicle expenses and his subscription to the Institute of Chartered Accountants. These expenses were not paid by Nelson Wheeler Perth.
This matter reflects no more than a feature of the change in the financial arrangements upon his leaving. It is consistent with his having retired from the partnership but is also consistent with his remaining within the partnership under the changed arrangements. If he was not producing direct fee income for the partnership, it may be expected that he would meet expenses of this nature.
Mr John Morris was a close friend and business associate of Stokes over many years. Material aspects of that relationship are discussed later. He gave evidence of a conversation which he said he had with Stokes in late 1986 at the boardroom of the Forsayth Group of companies of which Morris was a director and principal executive. According to him, Stokes came to see him with a bottle of champagne and said that he was free and was happy to be in a position to pursue his interests. Clearly Morris claims to have interpreted this statement by Stokes as an indication that he had resigned from Nelson Wheeler Perth.
As will be seen, I have reservations about the credibility and reliability of Morris and his evidence but for present purposes I am willing to assume that this incident occurred as related by Morris.
Of course even if taken at face value, it says very little about Stokes' relationship with Nelson Wheeler Perth. It is consistent with his having retired from the partnership. It is equally consistent with his remaining in the partnership under altered arrangements which, in turn, is consistent with the many documents previously mentioned. It could have occurred after Stokes wrote his letter of 3rd November 1986 and before a change of mind by him which is reflected in the minutes of the meeting of partners on 3rd December 1986. This evidence is of no assistance in resolving the issue of whether Stokes retired from the partnership.
Morris also gave evidence in support of the case that Munachen had left the partnership. He had also known Munachen for some years. According to Morris, Munachen told him on occasions that he was planning to leave the practice and retain an interest in the share registry. He noticed that Munachen moved from the Griffin Centre to the Forrest Centre where Morris also had an office. He saw Munachen's premises. There was no sign indicating that it was part of Nelson Wheeler, but he said he had not seen any such sign at the Griffin Centre. Munachen told him he was out of the partnership but the partners of Nelson Wheeler Perth retained a percentage interest in the share registry.
This evidence is of limited value. It is also inconsistent with the documents already mentioned. If it is true, there is no way of testing what Munachen meant when he said he was "out of the partnership" due to his failure to give evidence. It could mean no more than the physical moving of offices and the change of financial circumstances. At all events, this statement by Munachen, if made, is of little probative value in the absence of Munachen. It is unnecessary to decide if there is any basis for admissibility of this evidence.
As will be seen, Stokes and Morris were directors of Ramsgate Resources Limited. Stokes was chairman at relevant times. In the 1985 annual report, he is described as a chartered accountant and a partner in Nelson Wheeler Perth. In the 1986 report he is described as a chartered accountant and no reference is made to Nelson Wheeler Perth. Stokes signed that report on 3rd February 1987. According to Stokes, he did not play any role in that change. In the 1987 report, he is again described as a chartered accountant and no reference is made to Nelson Wheeler Perth. The same entry appears in the 1988 annual report.
Mrs JP Smith was the secretary of Ramsgate Resources at the time and of other companies with which Morris was associated, including the Forsayth Group. She was on friendly terms with Munachen who acted as the accountant for Smith and her husband. She also knew Stokes.
Smith prepared the annual reports of Ramsgate and said that she took steps to ensure the accuracy of them. In so far as the description of directors is concerned, it was customary for her to send the proposed description to the particular director for checking. She said she followed that procedure with respect to Stokes. However, she could not say whether the change in the description of Stokes between the 1985 and 1986 reports was made by her or by Stokes. She described an occasion when Stokes told her that he was no longer with Nelson Wheeler Perth. It occurred between February 1986 and February 1987 but she could not be more specific. She had known Stokes for about 12 years. According to her, the conversation was as follows:
"Smith Hello Geoff. How are you? Are you still with Nelson Wheeler?
She said she was surprised and there was no other conversation that she could recall. Smith later explained that nothing prompted her question of Stokes as she usually spoke to people she had not seen for a time in that way.
It is a curious piece of evidence and without her explanation for asking the question would have been difficult to accept. Nonetheless, given the importance of the topic, it remains curious that Smith would address Stokes in this way. It gives the appearance of evidence designed to assist Stokes. I have doubts about it but it may be correct and may afford an explanation for the differences in the descriptions of Stokes in the annual reports. It will be noticed that Stokes is not referred to as a former partner of Nelson Wheeler Perth as is the case in the 1987 annual report of the MRSA Ltd previously mentioned.
However, even if the evidence is true, it is entirely consistent with Stokes having moved offices from Nelson Wheeler to his home and with the change in arrangements as mentioned. It is also consistent with his having retired from the partnership and it must be assessed along with all of the other evidence.
The partners of Nelson Wheeler Perth had a planning meeting in late March 1988. In a memorandum written by Pilmer on 19th April 1988, he mentions one of the matters raised at the meeting, namely that staff of the firm were not aware of "the total composition of the firm and its services, or the responsibilities of various managers and partners". He enclosed a brochure and schedules which he had prepared setting out relevant information to help the staff to explain more fully the ideals of the firm and the extent of the involvement of managers and partners.
The memorandum sets out the objectives and short term goals of the firm and the structure of the practice. This structure showed an executive committee comprised of Pilmer, Troy and Martino and four sections of the practice embracing areas of responsibility entitled "profit", "productivity", "promotion" and "people". A schedule showed the various components of each section and the partners and staff who were responsible for them. Stokes and Munachen, along with Pilmer and Martino, are shown as having responsibility for the share registry which is part of the profit. They were the directors of Borman. Neither Stokes nor Munachen are mentioned in any other section.
Given the arrangements within Nelson Wheeler as have been discussed, I do not think these documents establish that either Stokes or Munachen were not partners of Nelson Wheeler Perth at the time. This was information being supplied to the staff. Stokes and Munachen did not work in the offices of the firm and did not undertake traditional accountancy work. It is to be expected that they would not be shown to be involved in other areas of responsibility.
However, it is significant that they were mentioned in the documents at all. The documents do list the partners by name but not by that description and Stokes and Munachen are mentioned as part of the structure of the firm and in the same way as the others.
It is not a matter of great significance but these documents do suggest that the partners regarded Stokes and Munachen as part of the firm.
On 15th May 1990, Crawford and Gray wrote to Martino regarding the settlement of their interest in Nelson Wheeler Perth and its entities. By this time they had left the firm. In this letter, they refer to Munachen having re-joined the practice and that before he had done so there were seven partners. It is not clear from this letter to whom Crawford and Gray were referring as the seven partners. It is suggested that they were excluding Munachen. Obviously among the seven were Pilmer, Crawford, Gray, Martino and Messer, but they are not mentioned by name. Crawford said that Stokes was not included among the seven partners. Gray said he drafted the letter. In using the expression "rejoining the practice", he was referring to Munachen again sharing in profits. The seven partners were Pilmer, Martino, Langford, Gray, Crawford, Messer and Robinson. Stokes and Munachen were not included.
This letter contains detailed calculations to determine the amount due to Crawford and Gray. The letter reflects the state of mind of those men at the time it was written. Their explanation of that state of mind is given now. I do not think the letter is inconsistent with the change of financial arrangements which occurred when Munachen rejoined the practice in the working sense. The reference to the seven partners suggests that when the letter was written, they did not include Stokes and Munachen as partners as at 30th June 1989. Of course, it was known by then that Stokes had left as from that date. The financial matters in the letter were fees, debtors, work in progress and the like. It may be that when they wrote the letter they had some reason to exclude Munachen from those types of calculations because he had not been contributing fees. The letter is important evidence and I mention these matters to put it in context. Despite its importance and the explanations of Crawford and Gray, I do not think it can prevail against the compelling evidence that Stokes and Munachen were partners until 30th June 1989.
It is the case of the first defendants that despite the many indicators which point to Stokes and Munachen having remained as partners, the fundamental elements of partnership were not present in respect of Stokes after 30th November 1986 and Munachen after 30th June 1987. There was no agreement that they were partners after those times. The remaining partners had no authority to act as agents on behalf of either of them or to bind them in the conduct by the partners of the Nelson Wheeler business and there was no expectation that either of them would be entitled to a share of the profits of the business of the partnership. Even if the members of Nelson Wheeler Perth did describe Stokes and Munachen as partners or perhaps even regard them as partners, it is the true nature of the arrangement which must be assessed to determine whether it has the essential components of a partnership. If upon such an assessment those components are not present, it was not a partnership regardless of how those within the firm regarded their relationship.
For present purposes, it is necessary to only consider well established basic principles which are uncontentious. These principles must be examined a little more closely when considering the issue of whether there was a national partnership involving the first defendants and the fifth defendants.
The starting point for this submission is to be found in the Partnership Act (WA). Section 7 provides:
"(1) Partnership is the relation which subsists between persons carrying on business in common with a view to profit.
(2) In deciding whether a partnership does or does not exist in a particular case, the court shall have regard to the true contract and intention of the partners as appearing from the whole facts of the case."
Section 7(2) effectively adopts the dictum of Sir Montague Smith in Mollwo, March & Co v The Court of Wards [1872] EngR 30; (1872) LR 4 PC 419 at p435:
"It appears to be now established that although a right to participate in the profits of trade is a strong test of partnership, and that there may be cases where, from such perception alone, it may, as a presumption, not of law but of fact, be inferred; yet whether that relation does or does not exist must depend on the real intention and contract of the parties."
In Pooley v Driver [1876] 5 ChD 458, Jessell MR had to consider whether particular circumstances contributed to a partnership. He stated the principles of partnership as, at p472:
"But it is a contract of some kind undoubtedly - a contract, like all contracts, involving the mutual consent of the parties: and it is undoubtedly a contract for the purpose of carrying on a commercial business - that is, a business bringing profit, and dividing the profit in some shape or other between the partners. That certainly partnership is. Whether it is anything more or not has been a question between various authorities, but it is that certainly."
A principle of partnership liability is the relationship of agency. In his judgment in Cox & Anor v Hickman [1860] EngR 1068; (1860) 8 HLC 268 Lord Wensleydale stated the principle to be, at p312:
"So if two or more agree that they should carry on a trade, and share the profits of it, each is a principal, and each is an agent for the other, and each is bound by the other's contract in carrying on the trade, as much as a single principal would be by the act of an agent, who was to give the whole of the profits to his employer. Hence it becomes a test of the liability of one for the contract of another, that he is to receive the whole or a part of the profits arising from that contract by virtue of the agreement made at the time of the employment. I believe this is the true principle of partnership liability."
See also Re English & Irish Church and University Assurance Society (No 2) [1863] EngR 561; [1876] 1 H&M 85 per Wood VC at p106 and Pooley v Driver per Jessell MR at p481.
A partnership has three elements with certain consequences:
The elements must exist by reason of an agreement between the parties and their true intention. A consequence of a partnership relationship is an agency relationship in the conduct of the business of the partnership.
It is the case of the first defendants that the plaintiff must establish that at relevant times, principally in August and September 1987, there was an agreement in place between each of Stokes, Munachen and all of the members of Nelson Wheeler Perth that they act as agents for one another to conduct the business of Nelson Wheeler Perth with the intention of sharing in the profits. It is argued that the evidence falls far short of establishing these matters.
The question of burden of proof may be put aside for the moment. It is in issue because this is an application to withdraw an admission.
This is not a case of merely deciding whether a commercial relationship constitutes a partnership. Clearly, the business of Nelson Wheeler Perth was carried on at relevant times in a partnership arrangement. All of the essential components were present. There was an agreement between the proprietors of the firm, albeit not in writing, but an agreement none the less to carry on the business of practising chartered accountants and to participate in the profits of the business and in circumstances of an agency relationship. Stokes and Munachen were both clearly partners. The issue is whether they left the partnership.
As I have said the evidence establishes that they remained in the partnership and in so far as intention of the partners is critical, they did so with the full knowledge and intention of all concerned. As has been seen, they shared in the profits of the partnership business in a limited but significant way and the evidence does not disclose any intention that they would not do so. Clearly all of the members of Nelson Wheeler Perth regarded Stokes and Munachen as being responsible for the debts and obligations of the partnership and in fact they contributed to those liabilities. There is no evidence to suggest otherwise. On a day to day basis Stokes and Munachen contributed to these debts and obligations because the expenses of the firm were met from the income of the practice and attributed to them when profit or loss was determined after taking into account those expenses. Stokes and Munachen contributed to certain major obligations in a direct manner. Contributing to the debt due to the Bank when the Ventnor Avenue property was sold and contributing to the amount due on settlement of litigation against the firm are examples.
It is submitted by the Nelson Wheeler Perth defendants that there was no intention that Stokes or Munachen should participate in actual profits following their departure from the practice but I think the evidence establishes the contrary for the reasons given. All of the evidence leads to the conclusion that if there had been a surplus of profit after the monthly drawings, Stokes and Munachen would have shared in that profit as occurred on occasions.
It is also submitted that far from acting as an agent of the partners, Munachen effectively became a competitor of the partners by personally undertaking work which was previously that of the partnership. This submission fails to acknowledge the unusual circumstances of Munachen. As has been mentioned in various contexts, his major work was servicing the four companies which he took with him when he left. He was not a competitor. He merely continued to do what he had done before. If he had not done that work, there is no reason to suggest that it would have been undertaken by Nelson Wheeler. If he had not been involved with the companies after he left, the work would have been undertaken by, or at the direction of, whoever controlled them. It is incorrect to say Munachen competed with Nelson Wheeler with respect to that or any other work.
Next it is contended by the Nelson Wheeler defendants that the plaintiff's case is largely advanced on the basis that Stokes and Munachen were sleeping partners in that they were content to leave their equity in the partnership whilst not participating in the profits or management. It is submitted that no such category of partnership exists in law. Reliance is placed upon the observation of Lord Cranworth in Cox v Hickman at p309. He said:
"I can find no case in which a person has been made liable as a dormant or sleeping partner where the trade might not fairly be said to have been carried on for him, together with those ostensibly conducting it, and when, therefore, he would stand in a position of principal towards the ostensible members of the firm as his agents."
In my view, that is not the case of the plaintiffs. It is not suggested that Stokes and Munachen were sleeping or dormant partners. As has been discussed, the position was unique but they supported the partnership. They took an active part in its affairs albeit occasionally. They were providers of work. They wanted to be partners and remained as such with the change in circumstances that they did not draw profits monthly.
However, the principle for which the first defendants contend is too narrowly stated. Depending upon the circumstances, the law does recognise sleeping or dormant partners as is acknowledged by Jessell MR in Pooley v Driver at p473:
"You can have, undoubtedly, according to English law, a dormant partner who puts nothing in - neither capital, nor skill, nor anything else. In fact those who are familiar with partnerships know it is by no means uncommon to give a share to the widow or relative of some former partner who contributes nothing at all, neither name, nor skill, nor anything else. Therefore it is not quite accurate, as Chancellor Kent puts it, that they must contribute labour, skill or money, or some or all of them."
There is nothing in the evidence to suggest that the component of agency did not exist. To the contrary, those undertaking the administration of Nelson Wheeler Perth incurred expense and liabilities and made commitments on a daily basis as did all of the partners which bound them all.
I have mentioned most pieces of evidence which indicate one way or the other as to whether Stokes and Munachen were partners of Nelson Wheeler Perth at relevant times. There are some which I have not mentioned but they add nothing of consequence. In mentioning the evidence, I have made some observations. Of course, each item of evidence is not to be considered in isolation. It is the combined force of all of the facts and circumstances which must be considered. Upon doing so, only one conclusion is open and that is that Stokes and Munachen remained within the partnership.
In my view, the essential elements of a partnership existed at all times, including after Stokes and Munachen changed their arrangements. As has been seen, there are some facts and circumstances which, standing alone, indicate that Stokes and Munachen had left the firm but when put in context and combined with all of the other indications to the contrary, the evidence clearly establishes that neither Stokes nor Munachen resigned or retired from the partnership before the middle of 1989.
I find that Stokes and Munachen were partners of Nelson Wheeler Perth during 1986 and 1987.
Having permitted the first defendants to raise the issue despite their admission of that fact and having decided the matter on the merits, it follows that their initial admission was correctly made. There is no occasion to grant leave to withdraw the admission and I dismiss the application.
I have not found it necessary to embark upon the matters to be considered in the exercise of the discretion to grant leave, such as prejudice to the plaintiff and the consequence of Pilmer and Munachen electing not to give evidence even though they were personally seeking the indulgence of the Court.
Before parting with this part of the case, I mention the substantial argument mounted by the plaintiff with respect to the lack of discovery or late discovery by the first defendants and their lack of disclosure of many documents and facts in the affidavits filed by them in support of the application. Due allowance must be made for difficulties caused by the passage of time and the change of firms and offices by the various defendants. However, there was insufficient discovery and some documents only came to light through the subpoena process and the technique of calling for production of documents. Some of these documents contained information adverse to the case of first defendants. I am satisfied that there can be no valid ground for criticism of the counsel and solicitors acting for the first defendants, and indeed no criticism was made, but it seems to me that those defendants who gave evidence did not fully discharge their obligation of discovery, including their continuing obligation. The evidence does not establish why that is so.
I have not found it necessary to reach conclusions about the reasons for the lack of discovery and as to whether it reflects upon the credit of all or any of these defendants as I have been able to comfortably reach conclusions on the evidence, including the documents, which was available.
It is the plaintiff's case that Nelson Wheeler Perth were not independent persons within the meaning of Listing Rule 3J(3) by reason of associations between partners of the firm Kia Ora, Western United and Harold Abbott, both directly and through the medium of various persons and companies (Para 64A.1 of S of C).
As has been seen, the plaintiff alleges that Nelson Wheeler Perth owed to Kia Ora a duty to be independent and this duty was a term of the contract of retainer, and also was part of the duty of care to Kia Ora in tort. Also, the plaintiff alleges that it was a fiduciary duty arising by reason of the relationship existing between Nelson Wheeler Perth and Kia Ora that Nelson Wheeler be independent and act independently (Paras 18 and 19 of the S of C). It is because of these associations and other matters that it is alleged that Nelson Wheeler Perth acted in conflict of interest in preparation of the Nelson Wheeler report and in breach of their co-existing obligation under the contract of retainer to Kia Ora to be and to be seen to be independent and to act independently in the preparation of the Nelson Wheeler report. The plaintiff claims that Nelson Wheeler Perth are in breach of these duties to be independent and consequently were in breach of the contract of retainer and their duty of care to Kia Ora and in breach of fiduciary duty. These allegations are raised on the pleadings.
In their Defence the first defendants admit that Nelson Wheeler Perth owed Kia Ora a duty to act independently which was an implied term of the contract of retainer and part of the duty of care which Nelson Wheeler then owed to Kia Ora. As will be seen, the first defendants now assert that in tort they did not owe a duty of care to Kia Ora but to the unassociated shareholders of Kia Ora and have sought leave to amend their Defence accordingly. That matter is considered later but for present purposes, it is not necessary to go beyond the pleading as it stands. The first defendants deny that they breached their duty to act independently and allege that if they were in breach of duty in that respect by reason of the alleged association, the plaintiff participated in, or condoned, or permitted such lack of independence and is not entitled in that respect to maintain its actions or to recover damages in respect of such breaches of duty.
The allegations have an additional significance. Some of the allegations, if true, reveal that Nelson Wheeler Perth was aware of the manner in which Western United carried on aspects of its business. Consequently Nelson Wheeler Perth could not competently have ascribed the value to Western United as revealed in the Nelson Wheeler report.
Like the issue of whether Stokes and Munachen were partners of Nelson Wheeler Perth at relevant times, the evidence about these associations and the issues raised by them occupied a considerable amount of time. I have chosen to set down my conclusions about these matters without mentioning all of the evidence and the issues, although all of them and the submissions about them have been considered.
The basis of the part of the plaintiff's case may be seen from the preamble to relevant parts of the Statement of Claim:
"64A.3.1AA In the following paragraphs there is alleged a series or web of events, transactions and circumstances which of their nature are inter-connected either by the effect of one or more of those transactions, events or circumstances on another or others of them, or by virtue of the common participation of certain of the individuals identified in respect of a particular event, transaction or circumstance. The effect of those events, transactions and circumstances, taken severally and/or cumulatively (in one or more combination of them) was that the respective participants in them came to be associated, directly or indirectly, on a business or commercial basis. When reference is made to Nelson Wheeler partners undertaking activities or providing services that reference is intended to embrace both the relevant Nelson Wheeler partner and staff acting at his direction or under his control, particulars of which are not known by Kia Ora in the absence of proper discovery."
It is claimed that each of the first defendants had actual or constructive knowledge of the various associations which are alleged by reason of direct involvement, discussion among the partners of Nelson Wheeler Perth or because they had constructive knowledge of them by operation of partnership law.
This web is alleged to have involved most of the partners of Nelson Wheeler Perth but particularly Stokes, Munachen, Pilmer and, to a lesser extent, Crawford and Martino and also Newton, Morris and his partner Mr Michael Evans and Kia Ora, Western United, Harold Abbott and some other executives of those companies.
The picture painted by the plaintiff is very complex and has been presented largely through documentary evidence. Due to the absence of Pilmer, Munachen and Harold Abbott from the witness box and the inability of Stokes to complete his evidence, this picture is far from complete which is acknowledged by the plaintiff. Also the plaintiff contends that inadequate discovery by the first defendants and others has prevented disclosure of the true picture.
Like many other allegations and claims, this aspect of the case is much in contention. The first defendants not only deny any relevant associations but they contend that the whole issue is of no significance. They say that it cannot add anything to the plaintiff's case. If the Nelson Wheeler report was prepared competently, a failure to act independently can be of no consequence as the report would not be causative of any loss. If the report was prepared incompetently, the failure to act independently does not add to their actual or potential liability. The first defendants contend that there was no fiduciary relationship between Nelson Wheeler Perth and Kia Ora.
Before examining these matters, I mention the applications of the plaintiff to amend the Statement of Claim to raise these matters.
This pleading was introduced during the course of the trial by leave over opposition by the Nelson Wheeler defendants. The director defendants, Harold Abbott, Lee-Steere, Somes, Quilty and Singleton, took no position with regard to the application of the plaintiff for leave to amend the Statement of Claim to raise this matter. After hearing argument, I granted leave to the plaintiff to make the appropriate amendments to the Statement of Claim and indicated that I would give my reasons when giving judgment and I now do so.
It is admitted by the first defendants that Nelson Wheeler Perth held itself out as an "independent qualified person" within the meaning of that expression in the Listing Rule, that the report was to accompany the notice to shareholders of a general meeting of shareholders of Kia Ora to approve the acquisition of the issued capital of Western United, that Nelson Wheeler Perth owed a duty of care to Kia Ora to act independently to carry out their instructions with all reasonable and proper care, skill and diligence and to provide Kia Ora with a report which complied with the requirements of Listing Rule 3J(3). The plaintiff also alleges that Nelson Wheeler Perth knew that unless and until a report from an independent qualified person sufficient to establish that the purchase price offered by Kia Ora for the takeover of Western United was a fair price was provided, no notice of the general meeting could be sent and the meeting could not be held which is part and parcel of its case on causation. In the initial Statement of Claim the plaintiff alleges that Nelson Wheeler Perth were in breach of this duty in various respects in work undertaken for the preparation of the report, in the conclusions reached and in the provision of the report. This alleged breach of duty is the basis of the claim of breach of contract and of negligence. It is unnecessary for present purposes to set out the particulars of the alleged breach of duty. It is denied by the first defendants. It was not alleged in the initial pleading that Nelson Wheeler Perth were not independent or acted in conflict of interest in the preparation and provision of the report and consequently for those reasons were in breach of the contract of retainer or in breach of duty in tort.
The Statement of Claim in its original form comprises 87 pages. Since it was filed, further particulars were provided thereby adding considerably to the plaintiff's allegations and a lengthy Defence and amended Defences and a Reply were filed. All of the material allegations which found the action in contract and in negligence have been denied and put in issue.
As has been mentioned, the trial commenced on 15th June 1994. On 10th October 1994 the plaintiff gave notice of its wish to amend the Statement of Claim. The first defendants did not oppose those proposed amendments. Leave was granted and the amendments were made on 11th October 1994. During the trial counsel for the plaintiff from time to time called for production of documents. This procedure was akin to a request for further and better discovery. The first defendants produced many documents in answer to these calls. By the amendments which were made on 11th October 1994 the plaintiff alleged that Nelson Wheeler Perth were not independent persons within the meaning of Listing Rule 3J(3) and had acted "in conflict" by reason of the associations which have been mentioned. 112 particulars of such associations were given and it was alleged that by reason of the claimed lack of independence Nelson Wheeler Perth was in breach of the contract of retainer. It was further alleged that the holding out of independence was false, Nelson Wheeler Perth failed to comply with a Release 102 of the National Companies and Securities Commission, that they should not have accepted the retainer with the consequence that the takeover of Western United by Kia Ora could not have proceeded and the report was not appropriate to be relied upon by Kia Ora and its shareholders when voting at the extra-ordinary general meeting on 26th October 1987.
When this amendment was made, counsel for the plaintiff made it clear that if documents to be produced by Nelson Wheeler Perth revealed further particulars of lack of independence, an application for leave to make further amendments would be made. The trial proceeded on that basis and indeed documents were admitted into evidence which are said to be capable of proving a lack of independence of Nelson Wheeler Perth in the relevant sense even though the particulars said to be established by those documents had not been pleaded. It was accepted that if further amendments were to be made, they should all be made at the one time, thereby avoiding an application for leave to amend each time a further document relevant to this issue was produced and tendered. The first defendants prepared proposed amendments to their Defence in order to plead to the amendments made on 11th October 1994.
On 31st January 1995 the plaintiff applied to further amend the Statement of Claim in order to incorporate all of its proposed amendments relating to the alleged lack of independence following the discovery and production of additional documents. The amendments were much more extensive than those previously allowed. They allege:
"64A.1 Nelson Wheeler were not independent persons within the meaning of Listing Rule 3J(3)(b) and NCSC Release 102 by reason of the associations between members of the firm of Nelson Wheeler on the one hand and companies in the Kia Ora and/or Western United group of companies and/or the directors of those companies on the other.
64A.2 Further, Nelson Wheeler acted in conflict of interest in and about the preparation of the 3J(3) report by reason of the associations and their coexisting obligation under the retainer to Kia Ora, through its unassociated shareholders, to be and to be seen to be independent in the preparation of the 3J(3) report."
What followed was 379 particulars of these allegations which included the 112 particulars in the previous amendment. It was alleged that each of the members of Nelson Wheeler Perth had knowledge of these associations and that by reason of them, Nelson Wheeler Perth were in breach of the term of the retainer to be independent, the tortious duty to be independent, and the fiduciary duty which they owed to Kia Ora and its shareholders. It was further alleged that the holding out by them as independent qualified persons within the meaning of Listing Rule 3J(3) was false. It is also alleged that Nelson Wheeler Perth should not have accepted the retainer or undertaken the preparation of the report and, had it not done so, the takeover of Western United would not have proceeded and that each of these matters is causative of the loss allegedly suffered by Kia Ora as initially pleaded.
The first defendants opposed the application to further amend and applied to revoke the order made on 11th October 1994 granting leave to amend. In November 1994 they had intimated that they proposed to apply to strike out parts of the earlier amendments but the application to revoke was based upon the ground that the first defendants should have opposed the application for leave to amend for the same reasons they opposed the second application.
In brief terms the reasons advanced by the first defendants are first, that the amendments are not in accordance with R46 of the Supreme Court Rules 1987 in both form and substance in that they are incapable of sustaining the cause of action sought to be made out or are unnecessary, irrelevant or embarrassing; secondly, such extensive amendments are unfair to the first defendants at the stage of the trial when the applications were made and in view of the trial taking place in Adelaide, and thirdly, because the proposed amendments raised new causes of action which were sought to be made out of time without any basis in law or fact for the extension of time pursuant to s48 of the Limitation of Actions Act.
I was greatly assisted by the many days of detailed argument for and against the two applications. I considered all of the arguments, including those in support of striking out parts of the earlier amendments, even though I do not mention all of them in these reasons.
The issues which had to be resolved were as follows:
1. Did the amendments made on 11th October 1994 and the proposed amendments allege new causes of action?
2. Were they incapable of sustaining the new cause or causes of action?
3. Were they statute-barred or otherwise to be made out of time and, if so, may they nevertheless be allowed?
4. Did the amendments conform with the Rules of Court?
5. Should the earlier and proposed amendments be refused in the exercise of discretion?
A party may amend a pleading at any time, including during the trial of an action, by leave: R53.01(c) of the Supreme Court Rules 1987. If the proposed amendment alleges a new cause of action and is to be made after any relevant period of limitation has expired, leave to amend may be granted pursuant to R53.03(c) if the new cause of action arises out of substantially the same facts as the original cause of action. Otherwise, if the proposed amendment does allege a new cause of action out of time, as it has been modified, the rule of practice in Weldon v Neal (1887) 19 QBD 394 applies. This rule is that an amendment should not be allowed which would introduce a cause of action which would be statute barred if a fresh action was taken for it. An amendment pleading a new cause of action out of time is not allowed: see Crafter v Webster (1979) 23 SASR 61, Karasaridis v Kastoria (1984) 37 SASR 345 per King CJ at p352, Brook v Flinders University of South Australia (1988) 47 SASR 119 and Cliff v Quin (1988) 54 SASR 151. Subject to whether the proposed amendment complies with the rules in form and substance and is not statute barred, leave is granted or refused in the exercise of discretion. The Court must also consider R2.05. That rule requires parties "positively to review" the pleadings prior to the pre-trial conference "so as to ensure their adequacy in the light of the issues known to be in contention at the time", that amendments required at that time must be made or leave sought before the pre-trial conference and goes on to provide:
"In the event that any application is made at trial for leave to amend the pleadings the Court may, if the amendment would cause the postponement or adjournment of the trial, refuse such application, if it sees fit, in order to protect the integrity of the Caseflow Management System and to implement the Court's requirement that trials proceed at the time appointed for the trial, notwithstanding that any injustice to the offering party might have been avoided by an order for costs or some other order."
This rule does not deprive the Court of the discretion to allow amendments at trial and should be applied in conformity with the purpose of the Rules of Court as expressed in R2.01 which provides that the Rules are not intended "to defeat a proper claim or defence of a litigant who is genuinely endeavouring to comply with the procedures of the Court ...". If leave is granted the amendment relates back to the time of the initial pleading: Brook v The Flinders University of South Australia (supra) per von Doussa J at p122 and Mullett v Gabriel [1989] SASC 1647; (1989) 52 SASR 330 per O'Loughlin J at pp334-335, although in both cases it was acknowledged that in granting leave there is a discretion to fix a time from which the amendment is to run subsequent to the date of commencement of the action.
I refer to the amendments made in October 1994 and to those made subsequently, together as the "amendments". Do the amendments allege a new cause, or causes, of action? Clearly, the amendments alleging breach of fiduciary duty do allege a new cause of action and I consider that proposed amendment separately.
If the alleged failure to act independently was in breach of contract or in breach of duty in tort that breach occurred in September 1987 and, depending upon whether Nelson Wheeler Perth had any ongoing duty after delivery of the report, in late October 1987 at the latest. In contract, the cause of action accrues at the time of breach. In tort it accrues when damage is suffered which, for present purposes, may be taken to be at the end of 1987. Under relevant limitation law an action in contract or in tort must be commenced within six years of the cause of action having accrued and not after. So, it may be seen that whether or not the proposed amendments raise a new cause or causes of action is of importance.
Often it is no easy task to determine if a proposed amendment raises a new cause of action. As Jacobs J observed in Karasaridis, at p361, the cases which examine this question are legion as may be seen in the article in the Australian Law Journal Vol 54, p643 "Amendments and Limitations: The Rule in Weldon v Neal" and it is difficult to reconcile many of the decisions or "spell out a consistent or coherent test".
In Karasaridis it was necessary to consider whether a proposed amendment offended the rule in Weldon v Neal. King CJ, in considering the threshold question whether the proposed amendment pleaded a new cause of action said, at p349:
"To answer that question it is necessary to compare the proposed amendment with the statement of claim in order to determine whether the amendment goes further than pleading new particulars of the essential facts constituting the cause of action or a new interpretation of those facts, and rather sets up a new claim on a different basis."
In that case an employee, seeking damages in tort from her employer, sought to plead an injury different from that alleged in the statement of claim. King CJ held that it was a different and new cause of action in that it added "a claim in respect of a different injury alleged to have been caused by different facts": p351. Jacobs J applied the same tests but took a different view, concluding that the amendment did no more "than spell out, in medical terms, how the alleged failure of the defendant to install a safe system of work, or comply with its statutory duty, led to the plaintiff's sustaining the injury of which she now complains": p362. In his view that the amendment made a more explicit statement of the injurious consequences of the negligence or breach of statutory duty.
In Brook v The Flinders University of South Australia (supra) von Doussa J also had to consider whether the plaintiff, by proposed amendments, would completely change the cause of action on the writ. He said, at p130:
"There will be a complete change in the cause of action if the statement of claim seeks to 'embark on any quite different set of ideas or on quite a different allegation of fact': Graff Brothers Estates Ltd v Rimrose Brooke Joint Sewerage Board [1953] 2 QB 318 at 328. Do the several claims of the plaintiff pleaded in the statement of claim meet this test?"
I thought it was appropriate to apply these observations as suitable tests. It was necessary to compare the original statement of claim with what is raised by the amendments and I did so as did counsel during the lengthy argument. I do not propose to set out in these reasons the detail of that comparison.
I accepted the argument of Mr Mansfield that it is not enough to say that merely because the amendments come within the same "tag" as alleged in the initial pleading, such as "breach of contract" or "negligence" that there is no new cause of action. It is necessary to look at the substance of the proposed amendments including the legal category alleged and the material facts in order to determine if, in reality, what is proposed is a new cause of action.
Clearly, the question of independence was raised in the initial Statement of Claim. It is fundamental to the task to be undertaken by the qualified person pursuant to the Listing Rule that he or she be independent of any interests of the proponent or object of the takeover in every relevant sense which includes true independence of any persons associated with the proposed takeover. As has been seen, the obligation on the part of Nelson Wheeler Perth to be independent was alleged in appropriate ways in the initial Statement of Claim. Also, it was pleaded that the requirement of independence was fundamental to the relevant takeover procedure. All of those assertions in the Statement of Claim were admitted and there was no issue of the requirement of true independence or the lack of independence raised on the pleadings.
By the time of the applications to make the proposed amendments, the plaintiff wanted to allege that when Nelson Wheeler Perth accepted the retainer and purported to discharge its obligations and in the provision of the Report, they were not independent of Kia Ora and Western United in the relevant sense and that acting without such independence constituted breach of duty to Kia Ora arising in contract and tort. Comparison of the initial Statement of Claim and the proposed amendments revealed that the parties, the contract, the duty and the alleged loss are the same. In the initial Statement of Claim, it was alleged that Nelson Wheeler was in breach of the duty in various respects in the preparation and provision of the report. A shorthand way of categorising the particulars of that breach of duty is lack of competence. It was proposed to allege that they were in breach of the same duty in another respect, namely by not being independent. In my view it is an accurate summary of the initial pleading to say that the plaintiff alleged that Nelson Wheeler Perth had an obligation to prepare and provide a report which complied with the Listing Rule and that they did not do so. The new pleading of alleged lack of independence is another respect in which Nelson Wheeler Perth was allegedly in breach of the obligation to provide a report in accordance with the Listing Rule.
True it is that the particulars contained in the proposed amendments are not directed at the allegation of breach of duty by incompetence as pleaded in the initial Statement of Claim but they do not "set up a new claim on a different basis" or "embark on any quite different set of ideas or on a quite different allegation of fact". The essential features of the claim or set of ideas is that Nelson Wheeler was in breach of its duty to provide a report in accordance with the Listing Rules.
The amendments did pass the tests which I have mentioned and did not constitute a new cause of action and thereby offend the rule in Weldon v Neal. Consequently it was within power to grant leave to make the amendments in the exercise of discretion.
If I was wrong in this conclusion and they do constitute a new cause of action, the amendments could be allowed pursuant to R53.03(c) as they arise "out of the same or substantially the same facts" as the initial pleading of breach of duty. The tests to be applied in the application of that Rule have been discussed in many cases. In Karasaridis King CJ, when discussing the previous Rule to the same effect said, at p351:
"That subrule appears to be designed to permit an amendment raising a new cause of action in the sense of a new legal categorisation of the facts in respect of which relief has already been claimed."
In Preston v Dowell (1987) 45 SASR 111, at p113, von Doussa J repeated the view which he had earlier expressed in Vaccarella v McNichol (1986) 131 LSJS 128 that there is a distinction between a cause of action and the facts which give rise to it.
It is well settled that the test to be applied as to whether the new cause of action arises out of substantially the same facts is as expressed by Cross LJ in Brickfield Properties Limited v Newton [1971] 1 WLR 862 at p880:
"It is no objection to amendment under Ord. 20, e.5(5), that some of the facts out of which the new cause of action arises are peculiar to it and that some of the facts out of which the old cause of action arises are peculiar to it. It is enough if the overlap is so great that the new cause of action can fairly be said to arise out of substantially the same facts as the old cause of action."
See Brook v Flinders University of South Australia at p131 and Swietlik v Central Linen Service (1991) 161 LSJS 191. However, as Cox J observed in Swietlik v Central Linen Service at p193:
"Of course, it is one thing to state the test, it is another thing to apply it correctly in any given instance. To start with, one must identify the respective sets of 'facts' which are to be compared, and this necessarily involves a selection. Obviously there will be borderline cases under par. (c) and room for disagreement."
In consideration of these tests in the instant case, it must be remembered that this is very complex litigation involving a vast amount of evidence concerning many issues raised on the pleadings. The extent of the proposed amendments had to be seen in that light. Also the extent of the proposed particularity was designed to show the true colour of the relevant associations which are said to have resulted in lack of independence. The plaintiff proposed to make out its case by means of documentary evidence and the large volume of allegedly relevant documents necessarily means that particularity must be extensive.
I turn to the comparison which I have considered in detail. As has been seen, two of the first defendants, Stokes and Munachen, had substantial interests in the mining industry at relevant times. On the plaintiff's case they had close associations with some of the directors of Kia Ora and Western United. They were directors of some companies which were associated with Kia Ora or Western United. They had close associations with various persons involved in the mining industry, including directors of companies associated with Kia Ora and Western United. It is alleged that Nelson Wheeler Perth undertook professional work for those persons and companies.
In the initial Statement of Claim the plaintiff not only pleaded the various matters relating to independence on the part of Nelson Wheeler Perth which I have mentioned but it alleged various associations between Nelson Wheeler Perth and Kia Ora, Western United and some of their subsidiaries not in order to establish a lack of independence but as particulars of incompetence in the preparation and provision of the report. These associations were alleged mainly to show that Nelson Wheeler Perth had special knowledge of the affairs of Kia Ora, Western United and subsidiaries and in view of that knowledge could not have reached the opinions contained in the report if they had acted with due care, diligence and skill.
I mention some of those allegations as examples. It is alleged that the valuation by Nelson Wheeler Perth of the business of Porter Western on behalf of Western United at $4,615,000 in April 1987 and, some five months later, in the report, at $41,437,500 or thereabouts constitutes a lack of independence as well as incompetence. The next matter relates to Parry Corporation. In the Statement of Claim it is alleged that Nelson Wheeler Perth was aware of the sale by Parry Corporation of its shares in Western United in August 1987 which, as has been seen, was of importance in assessing the true value of Western United shares in September 1987, an essential task in the preparation of the Nelson Wheeler report. The allegations were made in support of the alleged of breach of duty with respect to competence. In the proposed amendments in support of the allegations of lack of independence, the plaintiff alleged that at all relevant times Parry Corporation was a client of Nelson Wheeler Perth, was a customer of Western United and had representation on the Board of Western United, as well as the matters raised in the initial pleading.
During the course of valuing Western United and its subsidiaries for the purpose of determining whether the takeover price was fair, Nelson Wheeler Perth adopted the maintainable earnings after income taxation method to which it applied price earnings multiples. This process necessarily involved assessment of future maintainable earnings based upon revenue and expense projections. In the initial Statement of Claim the plaintiff alleged, inter alia, that Nelson Wheeler Perth failed to verify, substantiate or make any independent assessment of information as to these matters. Throughout the initial Statement of Claim there are various references to the obligation of Nelson Wheeler Perth to act independently in the valuation exercise. It follows, on the plaintiff's case, that Nelson Wheeler Perth, if acting independently, would have been obliged to check and assess the information provided to them by carrying out their own investigations of the financial records of Kia Ora, Western United and their subsidiaries and making enquiries of appropriate directors and staff. It is alleged that by reason of professional and other associations members of Nelson Wheeler Perth acquired a good deal of information without such investigation and enquiries and were involved directly and indirectly in transactions which could bear upon essential features of the valuation task.
Also, it was alleged in the initial Statement of Claim that the projections of the maintainable earnings of the merchant bank division of Western United were wrong which would have been revealed by competent scrutiny by a suitably qualified expert bringing an independent mind to the task, or at least that is a brief summary of various allegations. The plaintiff alleged that by reason of the associations between Nelson Wheeler Perth and Western United and between some of the subsidiaries of Kia Ora and Western United, they had knowledge which must have led them to the conclusion that fundamental bases of the valuation were unsound and, in particular, that the projections of future maintainable earnings were not sustainable. In the amendments, it was alleged that Nelson Wheeler Perth had relevant associations with 18 companies and 14 of them were depositors with Western United. The circumstances of some of those transactions are said to show that the projected earnings of the merchant banking division were probably wrong.
As has been seen, at relevant times Stokes was the managing director of Mawson Pacific and Munachen was the managing director of Wattle Gully Gold Mines. These companies were, at relevant times, the largest depositors with the merchant bank conducted by Western United. Information about these companies and the future of the deposits was relevant to the assessment of the maintainable earnings of Western United.
These and other matters are relevant to the issue of the alleged competence of Nelson Wheeler in the preparation and provision of the report. Evidence could be led to establish the associations for that purpose. By the amendments the plaintiff wanted to rely upon the same allegations and the same evidence to prove the lack of independence and conflict of interest. True it is that many more particulars of conduct were alleged by the proposed amendments and were not initially pleaded in the Statement of Claim. However, the question is whether there was sufficient overlap of facts out of which the old and new causes of action arise for it to be fairly said that they arise out of substantially the same facts: Brickfield Properties Limited v Newton. The reference to "facts" in that test is undoubtedly a reference to the "material facts" which found a cause of action and which must be pleaded pursuant to R46.04(b). It is not a reference to "particulars". Whilst the distinction between the two is not always obvious, "material facts" are those necessary for the purpose of formulating a complete cause of action. The function of "particulars" is "to fill in the picture of the plaintiff's cause of action with information sufficiently detailed to put the defendant on his guard as to the case he has to meet and to enable him to prepare for trial": Bruce v Odhams Press Ltd [1936] 1 KB 697 per Scott LJ at pp711-713. The distinction is preserved in our Rules: R46.04(b) and R46.04(f).
In my view, the allegations with respect to independence and the failure to act independently in the preparation and provision of the report as contained in the initial Statement of Claim are material facts out of which the causes of action for breach of duty in contract and tort arise. Those material facts were the basis of the proposed claim that Nelson Wheeler Perth were also in breach of duty by reason of not acting independently and in conflict of interest as alleged in the proposed amendments. Consequently, if the amendments did raise a new cause of action, it arose out of substantially the same facts. Whilst it must be acknowledged that the amendments allege a considerable number of new facts which are not alleged in the Statement of Claim, they are, in my view, additional particulars of the material facts upon which the new cause of action arises.
For these reasons the appropriate test is satisfied and leave to amend could be granted pursuant to R53.03(c) if the amendments did raise a new cause of action.
I now turn to the amendment raising the new cause of action of breach of fiduciary duty. The plaintiff alleges that by reason of the alleged lack of independence and conflict of interest of Nelson Wheeler Perth, they were in breach of a fiduciary duty which they owed to Kia Ora. Mr Mansfield contended that in the circumstances such a relationship did not exist and the amendment should be refused.
At this stage I am expressing the reasons for my decision to allow this amendment. Since then the cases of the parties have been fully developed and as will be seen there have been important decisions of the Courts on this question. However, I mention only my reasons at that time. It may be said that the circumstances of the relationship between Kia Ora and Nelson Wheeler Perth at the time of the report and the nature of the duty which Nelson Wheeler Perth owed to Kia Ora did not make it strikingly obvious to me that a relevant fiduciary relationship existed. Mr Gray referred to Hospital Products Limited v United States Surgical Corporation & Anor [1984] HCA 64; (1985) 156 CLR 41 in support of the proposition that Kia Ora has an arguable case that such a relationship existed and Nelson Wheeler was in breach of the duty to Kia Ora imposed by reason of it. It is now unnecessary to mention that case in any detail. It is sufficient to say that the members of the Court acknowledged that there was no comprehensive statement of the criteria by reference to which the existence of a fiduciary relationship may be established and that the categories are not closed: in particular see Gibbs CJ at p68. Mason J expressed similar views at p96. Dawson J, at p137, accepted that no satisfactory single test had emerged which would serve to identify a relationship which is fiduciary.
I was referred to other authority to deny the proposition that a fiduciary relationship between Kia Ora and Nelson Wheeler Perth existed and, if it did, that there was any breach or any remedy in damages, it being suggested that the only remedy was that Nelson Wheeler Perth should account for any benefits it received in consequence of that breach.
In the circumstances of this particular amendment, I did not think it was appropriate to attempt to consider the matter on the merits without all of the evidence being known. Whether a fiduciary relationship exists carrying with it particular fiduciary duties depends upon the particular factual circumstances. In this instance it was preferable to hear the argument on the merits once the evidence had been given, particularly as the evidence to support this cause of action was relevant to other issues in the case.
The cause of action of breach of fiduciary duty arises out of substantially the same facts as the pleading of breach of duty in the initial Statement of Claim in the same way as the proposed amendments alleging breach of duty in contract or tort by reason of the alleged lack of independence. It was unlikely that the trial would be prolonged by permitting the cause of action to be pleaded except in so far as further time would be required in making submissions on that topic.
Mr Mansfield contended that if leave to amend was granted, it should be on terms by fixing the date of the granting of leave or some other date as the time from which the amendments were to operate so as to avoid their being related back to the date the proceedings were commenced. In that event the first defendants could maintain an argument that any causes of action raised by the amendments were out of time. He drew attention to the approach adopted by von Doussa J in Brook v The Flinders University of South Australia. In that case that course was adopted in the unusual circumstances there present, so as to do justice to the parties by preserving to the plaintiff the right to pursue a new cause of action out of time by evoking s48 of the Limitations Act and to enable the defendant to raise the limitation period as a defence. Such an approach was thought to be appropriate by Brandon LJ in Liff v Peasley [1980] 1 WLR 781, at pp803-804, in cases where there is doubt about the date upon which a cause of action arose or uncertainty concerning the suspension of interruption of the relevant period of limitation which demands a full trial, or pleadings following discovery in order to resolve the issue. No such considerations here arose. In my view, the proposed amendments do not raise new causes of action, except in the case with respect to breach of fiduciary duty. Nothing further needs to be known to resolve any issue about limitation. There is no consideration of justice which requires the normal course of "relation back" to be altered.
As has been seen, I considered that the amendments did not raise a new cause or causes of action but if they did the new cause or causes arose out of substantially the same facts. For the purpose of the application, I was satisfied that they were capable of sustaining the cause or causes of action. The test at that stage was whether, upon accepting the factual content of the amendments, it was arguable that a cause of action was established. The plaintiff passed that test. I do not mean to suggest that I formed the view that breach of duty in contract or tort to act independently per se necessarily gives rise to damages. That was a matter to be determined if necessary after full argument on consideration of all of the evidence. As the amendments were justified for other purposes, it was convenient to leave that argument to the end of the trial.
In my view, the proposed amendments were not unnecessary, irrelevant or embarrassing and thereby contrary to the Rules of Court. They are voluminous but necessarily so in view of the subject matter raised by them which is relevant to the causes of action pleaded in the initial Statement of Claim and to the new claim of breach of fiduciary duty. There were matters of form which needed to be addressed and after hearing further argument, they were resolved by further alteration and by explanation of the plaintiff's case which I permitted Mr Gray to give so that the defendants could be certain as to what was alleged against them. Once that explanation was given and the alterations made, it was appropriate to focus upon the resumption of evidence rather than matters of form of pleading.
It remained to consider whether the discretion should be exercised so as to permit the proposed amendments. Mr Mansfield contended that if the proposed amendments were allowed all of the Nelson Wheeler defendants would be prejudiced to such an extent that no steps could be taken to prevent injustice.
As has been seen early during the pre-trial procedures, the first defendants brought an application that the action be transferred to the Supreme Court of Western Australia pursuant to the relevant cross-vesting legislation. It was alleged that the causes of action arose and the first defendants lived and then conducted their practices in that State. Many documents not in the possession of the liquidator of Kia Ora which could be tendered in evidence and many potential witnesses were to be found in Western Australia. Nelson Wheeler Perth abandoned that application well before the commencement of the trial and before it was heard. It is now asserted that if the first defendants had been aware that the issues raised by the amendments would be part of the trial, they would not have abandoned the application and that they were greatly prejudiced because the application could not be renewed.
Of course it was obvious that allowing the amendments would greatly increase the length of the trial. The distance between Perth and Adelaide increases expense and difficulty in preparation of the defence, the collection and presentation of evidence and the giving of instructions. It was said that none of these first defendants could afford to live in Adelaide for extensive periods during the trial and the capacity to protect their interests was greatly compromised by the trial of these issues in Adelaide.
The first defendants had legal representatives acting for them in this matter in Perth who acted in conjunction with their legal representatives in Adelaide. It may be accepted that from the point of view of the first defendants, it would be more convenient, and possibly less expensive, if the trial was conducted in Perth, but it does not follow that the inability to bring a cross-vesting application is prejudice in a real sense. It was always known that this litigation would be complex and take a very long time, including when the cross-vesting application was abandoned. A consequence of allowing the proposed amendments was that the litigation will be more complex and take longer. Mr Mansfield contended that if the proposed amendments had been pleaded before trial, the cross-vesting application would obviously have succeeded in view of the number of transactions raised by them which occurred in Perth and other parts of Western Australia. I was unable to say if that is the case as I did not hear the application and the contrary arguments. No information has been put before me to support that contention. The fact remains that the parties came to trial in this Court well aware that the trial would be long and expensive. In my view, the proposed amendments should not have been denied in the exercise of discretion for that reason. I did not think any other discretionary ground for refusing the amendments was established.
It was unnecessary to consider the argument of Mr Mansfield that the amendments raised new causes of action which were statute barred and as to the choice of the relevant limitation law. I left open to the Nelson Wheeler defendants the right to argue that the claim for breach of fiduciary duty should not be considered due to the considerable delay in bringing that claim but, appropriately in my view, no such submission was made.
I now turn to the case based upon the alleged associations.
The plaintiff contends that it is important in the context of these associations that the true nature of the business of Nelson Wheeler Perth be correctly understood. I mention only those matters alleged by the plaintiff which have been established by the evidence.
Mention has been made of the business activities of Stokes and Munachen, particularly in the field of mining and prospecting companies and of the executive work which both men undertook for some of those companies. As a consequence, they brought to Nelson Wheeler Perth a considerable amount of work which some accountants may not regard as traditional work of that profession.
Nelson Wheeler Perth undertook the share registry which provided an important service for companies. They undertook the administration of companies, including public companies. Partners acted as directors and secretaries of companies, including public companies. On some occasions the partners took shares in companies for their own benefit and on other occasions as trustees for clients. Nelson Wheeler Perth acted in the flotation of new public companies where additional capital was raised. On occasions they took shares in these companies. It is alleged that the firm was entrepreneurial in nature rather than a firm of traditional accountants.
Clearly, Nelson Wheeler Perth did undertake an entrepreneurial approach in some areas in common with the approach taken by Nelson Wheeler nationally, as discussed later, but this approach was adopted mainly in respect of the mining industry and by Stokes, Munachen and Pilmer and to a lesser extent, Martino.
Considerable evidence was adduced to show that the style of practice of Nelson Wheeler Perth inevitably lead to the professional relationship with many clients being compromised by reason of conflicts of interest and lack of objectivity regarding the clients' interests. The evidence discloses such matters on some occasions but it is unnecessary in order to resolve the issues in the present proceedings to pass judgment about the style of accountants taking personal financial interests in, and assuming control of, the affairs of their clients in the interests of sound management or even personal gain. The evidence as to professional standards adopted by chartered accountants establishes that the standards are appropriate but it is for practitioners to decide their style and manner of practice. There is a clear line between the businessman and the true professional. When the two are mixed, difficulties inevitably arise. However, I think it can safely be said that where accountants, and other professional persons for that matter, do take interests in the affairs and assets of their clients, the professional relationship becomes blurred, if not destroyed, and conflicts of interest are very likely to arise.
It is the plaintiff's case that by reason of the style and manner of practice of Stokes, Munachen and Pilmer, and to a lesser extent Martino, and their marketing focus and profit motive, their role as independent experts under the contract of retainer safeguarding the investing public was greatly compromised.
Nelson Wheeler Perth did make money on occasions by taking shares in client companies. They acted in floats of many companies engaged in the mining and other industries. It is submitted by the plaintiff that in doing so they acted initially as promoters and then as accountants for the company after it was floated. The evidence discloses that on occasions they charged what may be described as a success fee. If a float was successful, a substantial fee would be paid. The evidence does not disclose if this practice was rare or common but by adopting it the problems for the true professional are obvious because of conflicts of interest which may arise.
Conflicts may also arise where accountants act as nominee shareholders and directors for clients wanting anonymity because the duty to company and the duty to client may conflict. Partners of Nelson Wheeler Perth acted in these capacities reasonably extensively.
Apart from traditional work of tax, accounting and audit work, Nelson Wheeler Perth had developed and undertook corporate, administration, secretarial, share registry, computer consulting and management advisory services to a significant extent and was developing personal services for clients. All of this happened at a time when, as the evidence discloses, there was a strong competitive attitude among many firms of practising accountants with a perceived need to provide a total service to clients.
In late 1986 and early 1987 Nelson Wheeler nationally held discussions with the Elders Group of companies with a view to entering into a joint venture arrangement. Reports were prepared by Elders extolling the mutual benefits of such an arrangement which were sent to Wenham, Simmons and Pilmer. Nothing came of these discussions but it appears that some members of Nelson Wheeler national were considering further extension into non-traditional areas of work through the medium of a business arrangement with Elders.
Mention has already been made of the type of work undertaken by Stokes and Munachen. Pilmer was also involved in work for companies in the mining industry. As has been seen, it was a significant part of the work of Nelson Wheeler Perth to provide management and administration services for client companies.
According to Newman, Nelson Wheeler was seeking to provide a total business service. A profile for Nelson Wheeler Perth produced after Newman joined the firm stated that the firm "seeks to provide the integrated business solution. Under one corporate umbrella, we have the facility to service every aspect of financial, corporate or personal life".
Nelson Wheeler Perth also took benefits in lieu of fees through partners acting as directors of companies for clients. These benefits were in the form of director's fees which were paid into the practice as income and shares which were taken in companies. On occasions, options would be issued and later exercised. On some occasions, employee shares or options would be issued and allocated to partners who were directors. Shares would be issued and allocated for other reasons.
Nelson Wheeler Hong Kong provided corporate, secretarial and nominee services and established companies which acted as nominees and trustees including for blind trusts for the purpose of hiding the identity of the true beneficiary. These services were established by 1985 and were explained in memoranda sent to Wenham, Simmons and Pilmer at various times as the Australian representatives in the Nelson Wheeler Hong Kong practice management.
The foregoing is but a brief summary of the nature of the business and professional activities and style of Nelson Wheeler Perth.
Of course, the firm also undertook a substantial amount of traditional accounting work. Messer, Crawford and Gray undertook some of this non-traditional type of work, but most of their work was as traditional accountants and was the case with most of the professional staff. Martino was more extensively involved in non-traditional work. He had close ties with Stokes and, to a lesser extent, with Munachen and undertook or controlled work brought by them to the firm. He also undertook traditional work. The full extent of Pilmer's non-traditional work is not revealed by the evidence.
The plaintiff contends that once the true nature and style of the practice of Nelson Wheeler is understood, it may be seen that traditional professional boundaries were crossed which was what happened with respect to Kia Ora, with consequential lack of independence and conflict of interest. These observations about the manner and style of aspects of the practice are not really in contention but the first defendants dispute that any relevant conflicts occurred or that there was any compromise of proper professional standards. They say that none of this evidence is of assistance in resolving the matters in issue in these proceedings.
There is a danger in reasoning to a conclusion based upon propensity evidence and I have not done so. This evidence of the manner and type of practice of Nelson Wheeler Perth is relevant to show the background against which the matters in issue have to be decided, including the relationship between Nelson Wheeler Perth and Kia Ora and Western United.
Stokes and Munachen had close personal, business and professional relationships with Morris and Evans at all relevant times.
Morris and Evans effectively controlled Forsayth Oil & Gas Pty Ltd, First Australia Resources NL, Ramsgate Resources Ltd, Northern Gold NL and Gemcor Limited. Forsayth Group Management Pty Ltd managed this group of companies. Nelson Wheeler Perth were auditors of two of the companies and undertook the taxation work for all of them. As will be seen, there were associations between Nelson Wheeler Perth and other companies in which Morris and Evans held interests.
Morris had known Harold Abbott since at least 1981 when he worked with him for certain public companies. He knew that Harold Abbott and Schneider-Paas were the faces behind Kia Ora and later he was aware that Harold Abbott and Gary Abbott were the faces behind Western United. During the 1980's Morris, and companies with which he was associated, had extensive dealings with Western United involving many millions of dollars in borrowings and deposits but, according to him, he was not always personally involved in these transactions and did not always know of them as, he claimed, Evans attended to many of those types of dealings.
Morris met Stokes in 1982 and presumably Munachen at about the same time. It is to be expected that they in turn met Evans soon thereafter. The four men became close friends and formed the Brothers Four Unit Trust with Brothers Four Pty Ltd as the trustee. They were the directors of the company and owned the shares in the company. Entities controlled by each of them owned the units in the Brothers Four Unit Trust. Brothers Four was a vehicle used by them to acquire shares.
The four men also formed the Prospecting Unit Trust with Avorton Pty Ltd as the trustee. Palmvale Nominees Pty Ltd, as trustee for the Essemco Unit Trust, held the interest of Stokes and Munachen in this venture. It made significant profits.
The relationship between these men and their connection with Western United and Harold Abbott is considered further a little later, however, it is convenient to mention a little more about Palmvale Nominees and the Essemco Unit Trust. The units in the Trust were owned by Kala Nominees Pty Ltd, the trustee of the Munachen Family Trust, Brookman Securities Pty Ltd as the trustees of the Stokes Family Trust, Paa Nominees Pty Ltd as the trustee for the IR Cornelius and NJ Cornelius Family Trust and Shamra Pty Ltd as the trustee of the Shamra Trust, the beneficiaries of which were the family trusts of Munachen, Stokes, Morris and Evans and Sherwood Craft Pty Ltd, a company of Mr Silvers. Stokes, Munachen and Mrs D Munachen were directors of Palmvale at all times. Mr IR Cornelius was a long time associate of Stokes and Munachen and was the executive director of the West Coast Group of companies.
A considerable body of evidence was adduced to establish a type of lending arrangement by Western United which has been described as "back to back" loans. In essence the arrangement is that Western United lent money to a borrower on the condition that the borrower caused another, usually a company, to deposit money with Western United, usually a substantial but slightly smaller amount than the amount of the loan. This arrangement had the consequence of inflating both the asset and income position of Western United. There was a significant margin in the interest rates payable by Western United on the deposit and by the borrower on the loan and so the income position of Western United was enhanced for that reason. The loans produced establishment fees which also increased the income of Western United. Most of the money lent to the borrower was, in effect, the money which the borrower caused to be deposited with Western United. Substantial loans, which were regarded as assets of Western United, could only be made if the almost corresponding deposit was made. The asset position of Western United was also enhanced. These matters had the effect of increasing the value of the merchant bank and hence Western United. The nexus between the loan and the deposit is a matter of importance to a valuer of Western United because it would be relevant to the assessment of the asset position and future maintainable earnings.
Back to back loans which involved a public company so that a director of the company obtained the personal advantage of the loan were likely to be unlawful because the director was obtaining an advantage from the company by reason of his or her position as a director contrary to s229(4) of the Companies Code. In those circumstances the arrangement was in effect a method of obtaining the use of company funds for personal use.
This technique was known to Nelson Wheeler Perth. At a meeting of partners or principals of Nelson Wheeler Hong Kong on 4th April 1986, it was resolved that the back to back loan facilities promoted by Hill Samuel, an international group of accountants with whom Nelson Wheeler Hong Kong was affiliated, should be marketed by writing to all Australian offices of Nelson Wheeler setting out the facilities available and costs if undertaken through the Hong Kong office. That is not to say that the proposal was to deliberately market arrangements which were unlawful as the use of company funds in this way for the benefit of directors may not have been involved.
In about early June 1987 Nelson Wheeler Hong Kong forwarded to Nelson Wheeler Perth a draft of a booklet entitled "The Hong Kong - based multinational - an international tax strategy" which included the back to back arrangement. Martino and Gray were asked to read it and give comments to Pilmer.
It is alleged that Nelson Wheeler Perth also knew of those types of arrangements because some of the partners participated in them on behalf of clients. It is necessary to consider the seven alleged back to back loans disclosed in the evidence.
Chiswick Gold Ltd and Lexham Port Limited were both incorporated in Hong Kong on 4th July 1986 and on 22nd July 1986 respectively with the same corporate directors arranged by Nelson Wheeler Hong Kong and the same registered office being the office premises of Nelson Wheeler Hong Kong. Records of that firm show that those companies were "referred" by Nelson Wheeler Perth in July and August 1987 and at about that time Morris was also referred to the Hong Kong office. The principal activity of both of these companies was share dealing. Pilmer was one of the three Australian partners, the others being Wenham and Simmons, who participated in the management of Nelson Wheeler Hong Kong. According to Messer, Pilmer was a close personal adviser to Evans.
On 9th June 1987 Mr Alan Cheung of Nelson Wheeler Hong Kong spoke by telephone to Green at Western United to arrange a loan of $1.25m to enable Chiswick Gold and Lexham Port each to acquire 625,000 shares in Northern Gold NL in Australia. Someone at Western United, probably Green, made a handwritten note of that telephone conversation upon which he had written "Mates deal". Cheung wrote to Green on the same day requesting the transfer of the funds as a matter of urgency. Documents admitted into evidence reveal that these loan transactions were undertaken as a matter of urgency. The security for the loans was a pledge over 1.25m fully paid shares in Northern Gold NL. The loans were approved by Green, Gary Abbott, Somes and Harold Abbott.
Northern Gold was a gold exploration company. Morris and Evans were two of four directors and Morris was the Chairman. On 25th May 1987 Northern Gold had placed 4m ordinary shares in the company with Rivkin James Capel Limited in Sydney. Cheung had requested the funds to be transferred to Rivkin when he wrote to Green on 9th June 1987.
On the handwritten note probably made by Green, it is also recorded that "Comserv (1663) Pty Ltd - Jeff Cohen will lodge 1.3m with us. 180 days. Possible roll over". Comserv deposited $1.3m with Western United on 10th June 1987. Also on that day Wattle Gully deposited $1.25m with Western United and on 11th June 1987 Western United advanced $1.25m to Chiswick Gold and Lexham Port. On that day Morris and Evans acquired 373,000 shares in Northern Gold at a cost of $373,000. At about that time Chiswick Gold and Lexham Port each acquired 625,000 shares in that company.
Comserv was an investment company of which Mr Geoffrey Michael Cohen, a solicitor in Sydney, was a director. It was a vehicle for Morris and Evans which they used for personal investments. According to Morris, Evans ran Comserv for their joint benefit.
There is some circumstantial evidence which suggests that Western United, Morris, Evans, Cohen and Martino were aware of these transactions. Cheung sent facsimile transmissions to Evans at Nelson Wheeler Perth on 20th and 22nd May 1987. According to Morris' diary, he and Gary Abbott met at Western United on 5th June 1987. Morris said they did meet with Harold Abbott on that occasion but he could not recall if it was to raise finance. He said he had no recollection of the meeting. According to Morris' diary, he met Martino and Mr Patrick Ong, an employee of Nelson Wheeler Perth, immediately before the meeting but Morris said he had no memory of this meeting. Immediately after his meeting with Gary Abbott, Morris met with Evans and another person, the name of whom is indecipherable in his diary.
His diary also records that he, Martino, Cohen and Evans met in Perth on 9th June 1987. Morris mentioned in his evidence that he knew nothing of Chiswick Gold or of Lexham Port at that time and said that they were not companies which held investments for him and were not administered or controlled on his behalf. He knew Cheung but not of any loans to the two companies. In early July Morris was in Hong Kong but, according to him, on holiday with his family. Also, it is significant that the purpose of the loans was to enable Chiswick Gold and Lexham Port to acquire shares in Northern Gold, a company in which Morris and Evans had substantial interests.
Martino said that he knew nothing about the transactions involving Chiswick Gold or Lexham Port or the borrowings from Western United. He acted for Morris and Evans and various of their companies from time to time and, at their request, acted as director, shareholder and trustee on occasions. It follows that around the time of those transactions involving Chiswick Gold and Lexham Port, he could have seen Morris and Evans about other matters.
On 21st August 1987 Evans acquired 1.2m Northern Gold shares for $1.512m. On 8th July 1987 Mr W Hutchinson of Nelson Wheeler Hong Kong, acting on authority of Chiswick Gold, sent various documents to Mr H Christensen of West Coast Securities Limited in Perth relating to this loan transaction involving Western United and requested him to forward them to Western United and Christensen did so. Morris met Christensen for lunch on 24th August 1987. Any relationship between Christensen, Nelson Wheeler Perth and Harold Abbott is not revealed by the evidence.
On 2nd September 1987 Christensen wrote to Gary Abbott confirming that West Coast Securities required a loan of $1m, the security for which was to be shares in Ramsgate Resources and Northern Gold. The credit application contains a note to Green "Kevin contact Morris for $1million deposit".
Morris and Evans borrowed $3m from Western United on 16th October 1987 to assist in the purchase of Northern Gold NL shares and the security for the loan was 4m shares in that company, then valued at $6m.
As has been mentioned, the stock market crash occurred on 20th October 1987 and thereafter. On 26th October 1987 Evans sold 1.2m Northern Gold shares for a little less than $1m. On 6th November 1987, Chiswick Gold and Lexham Port paid a little over $1.5m to Western United and Morris paid $556,800 to Western United. On 13th November 1987 Chiswick Gold paid a little over $1.3m to Western United and a further sum of about $675,000. Lexham Port paid the same amount. These last two mentioned amounts were paid in re-payment of the original loan of $1.3m or thereabouts. On the same day the two companies paid a further sum of a little over $675,000 to Western United. Thereafter there were further deposits by other companies with Western United which it is unnecessary to specify.
The plaintiff's case about those matters is that Morris and Evans wanted to maintain control of Northern Gold and through that company of the Forsayth and Ramsgate group of companies but wanted the manner of that control disguised. They required a suitable technique which was provided by Nelson Wheeler Perth through Nelson Wheeler Hong Kong. Martino was aware of the technique and met with Cohen, Morris and Evans and discussed it with them. They approached Western United because they needed a financier who would adopt this back to back type of arrangement to permit the disguise. The appearance of the matter is that Western United is a financier but, in reality, it is merely providing funds immediately replenished by the deposit from Comserv at a fee and in circumstances which achieved the desired disguise. It is submitted by the plaintiff that this transaction could only occur in this way because of the relationship between Nelson Wheeler Perth and Western United and, in particular, Harold Abbott. The Nelson Wheeler defendants deny this is the case.
Once again it is necessary to mention that Pilmer chose not to give evidence which assists in drawing inferences which are justified by the evidence. Evans did not give evidence but he was overseas for an extended period at the time of the trial and no inferences may be drawn by reason of his absence.
Given the relationship between Morris and Evans, their involvement in Northern Gold and the circumstances of the transaction, I accept that they were the faces behind Chiswick Gold and Lexham Port. I found Morris' evidence unsatisfactory. I do not think he tried to help the Court at all. I appreciate that he was a busy businessman and it is possible that Evans attended to those sorts of investments on their joint behalf at the time. I also accept that they were used to dealing in large sums of money so for them borrowings in excess of $1m may not be unique. However, the circumstances which have been mentioned and the referral to Nelson Wheeler Hong Kong by Nelson Wheeler Perth of Morris and Chiswick Gold and Lexham Port suggest that Morris was aware of the transactions at the time. He was in Hong Kong. Pilmer was an adviser of Evans. It is likely that transactions of this magnitude involving Nelson Wheeler Hong Kong were known to Nelson Wheeler Perth and to Pilmer in particular. These transactions were the subject of an enquiry and legal proceedings by the National Companies and Securities Commission which were resolved without any findings adverse to Morris but nevertheless I do not think Morris was willing to disclose to the Court all that he knew about the matter.
Also, it is clear that Nelson Wheeler Perth played a role in the matter. They referred Morris and, I expect, Evans, to Nelson Wheeler Hong Kong. If Evans handled the matter without the knowledge of Morris, it is unlikely that the Hong Kong office would record Morris as a new client at this time and not Evans. The matter was very likely represented to Cheung as urgent and for friends hence the note on the Western United file "Mates deal" made in consequence of Cheung's telephone conversation with someone at Western United. That matter says something about the relationship between Morris and Evans and Nelson Wheeler Perth which was close because of the relationship between Morris, Evans, Stokes and Munachen.
The manner in which Western United became involved through the telephone conversation, the disclosure of the loan being a "mates deal" and the manner in which Western United was prepared to undertake it, suggests that there was familiarity and a closeness of relationship between Nelson Wheeler Perth and Western United. The evidence permits the conclusion that Pilmer referred the matter to Hong Kong but does not disclose what other role, if any, was played by him.
Lastly, it is reasonable to conclude that Nelson Wheeler Perth, and probably Pilmer and Martino, were aware of the general nature of the transactions and that they involved back to back loans. Further, it may be accepted that Pilmer was aware of this type of lending activity by Western United.
In early 1984 Munachen was secretary of Southern Goldfields. On 4th January 1984 Southern Goldfields deposited $180,000 with Western United and Munachen confirmed by letter that the money may be used to advance to third parties. Western United required amendment to that letter to include that should there be any loss arising as a result of such an advance, the repayment of the deposit could be reduced by a corresponding amount equivalent to the loss. Munachen re-drafted the letter accordingly.
This money was then advanced by Western United by way of loan to Ablyt Pty Ltd to enable that company to acquire shares and options in Forsayth which, in turn, were used as security for the loan. Ablyt was the vehicle for the purchase of those shares and options by Morris, Evans, Stokes and Munachen. Cohen was a director of Ablyt and Munachen arranged for the money to be a cheque payable to the sharebroker Eyres Reed & Co sent to Cohen.
The loan was repayable on 5th March 1984 and was re-paid on 6th March 1984 by a cheque drawn on the trust account of Stokes, Munachen & Co and forwarded by Munachen through Nelson Wheeler Perth.
Sanderson was employed by Western United at the time and handled this transaction.
This was clearly a back to back transaction to enable the four men to acquire a substantial interest in Forsayth. They used the medium of Western United for this purpose although Southern Goldfields provided the money.
This is not a transaction which involved Nelson Wheeler Perth but it is appropriate to mention it at this stage as it is another back to back transaction and it involved Somes and shows that Western United undertook this type of transaction.
Granadilla was an investment company controlled by Somes and his partner Cooke. They carried on practice as chartered accountants at West Perth and, as has been mentioned, Somes was a director of both Kia Ora and Western United. He and Cooke were directors of Granadilla.
On 26th February 1987 Granadilla applied to Western United for a loan of $120,000 to assist in the purchase of a country hotel. The loan was approved by Harold Abbott, Green and Gardiner and was to be re-paid on 1st June 1987. Cupreous Pty Ltd was the trustee for the John Cooke Family Trust No 2. Somes and Cooke were the directors of the company. It had nearly $140,000 on deposit with Western United. Western United required that deposit to be held as security for the loan to Granadilla. Cupreous undertook to maintain its deposit with Western United for the full term of the loan to Granadilla and authorised Western United to apply those monies to meet any default in the loan to Granadilla.
This transaction was, in effect, the use of money deposited by Cupreous for the loan to Granadilla which had the effect of increasing the income and the assets of Western United.
As has been seen, Medif was the trustee of the J.K. Investments Unit Trust, the unitholders of which were the J Cook Family Trust and the K.C. Somes Family Trust. Somes and Cooke undertook investments through the J.K. Investment Trust. Medif was involved in loan transactions with Western United in the nature of back to back transactions. They did not involve Nelson Wheeler Perth and are not evidence of an association between Nelson Wheeler Perth and Western United but once again it is appropriate to mention these matters at this stage as this involved Somes and revealed a feature of the business practice of Western United.
Medif borrowed $50,000 from Western United in November 1987 and that loan was again extended in May 1987. A.W.B. Nominees Pty Ltd was the trustee of the K.C. Somes Family Trust. Security for the loan included a charge over $120,000 which A.W.B. Nominees had deposited with Western United. A.W.B. executed an agreement in writing with Western United presumably at about this time whereby it agreed to lodge a deposit of $50,000 with Western United as security for the loan and that in the event of the loan facility being terminated, Western United may redeem the deposit and apply it to any shortfall in the loan repayment.
On the 25th November 1987 Medif sought another loan of $90,000 from Western United. At some stage it was written on the credit application that repayment was to be made from acceptance of Kia Ora's offer for Western United shares. Security for this loan was shares in various companies.
The first transaction involving the loan of $50,000 has the character of a back to back arrangement but not the second transaction. The second transaction seems to be no more than an arrangement for security of the advance by shares in other companies.
Domenal was the trustee for the D.V. Martino Family Trust which was, as the name suggests, Martino's family trust and he was a director of that company.
The loan transaction involving Domenal occurred in early 1988 well after the preparation of the Nelson Wheeler report. Nevertheless, it is submitted by the plaintiff that the transaction is relevant to establish features of the relationship between Nelson Wheeler Perth and Western United during the previous year and knowledge by Nelson Wheeler Perth of this type of transaction at that time. It is the contention that if those facts existed in early 1988, it is likely that they existed in 1987 at relevant times.
On 5th January 1988 Martino wrote to Mr D Martin of Western United confirming a telephone conversation that afternoon and requesting a loan of $60,000 to Domenal as trustee for his family trust. He offered as security shares in AIMS and in Tectonic Resources Limited. In this letter Martino also wrote that in addition he would arrange for an associated company to deposit $200,000 with Western United.
On the same day Martino prepared the credit application form on behalf of Domenal which included the proposed security arrangements. The loan was granted and continued for some time. It was rolled over until the end of January 1989. Mention is made later of Tectonic which was re-activated in the middle of 1987 and became a minerals prospector. Further mention of AIMS is also made later.
On 8th January 1988 Money Mining NL, of which Martino was a director deposited $200,000 with Western United and requested that the deposit be made in the name of Munda Management Pty Ltd. The letter forwarding a cheque for the money to be deposited and making this request was signed by Martino.
Money Mining was a public mining company that was established by Mr JR Money to develop a number of exploration mining areas. The company was a client of Nelson Wheeler Perth and Martino undertook much of the work for the company of which he was a director and the secretary. Pilmer and Pilfin Securities Pty Ltd, a company with which Pilmer was associated, owned shares in the company. The principal shareholders were Mr RJ Anderson and Mr G Money. Nelson Wheeler Share Registry provided the share registry service. JR Money was the managing director of the company. The registered office was that of Nelson Wheeler Perth.
During the previous year, Money Mining had substantial sums of money on deposit with various banks and institutions but none with Western United.
According to Martino, Domenal borrowed the money because of Martino's commitments to other investments. He had loans from other financial institutions and wanted a financier who would take share script as security rather than real estate. He said that Mr Daryl Robb, a director of Tectonic, suggested that he contact Western United and he did so. He said he also contacted three other financiers. He discussed the matter with Martin of Western United and then wrote the letter to Western United. His explanation for the intimation that he would arrange for an associated company to deposit $200,000 was that Martin told him that in those sorts of transactions, they wanted to get deposits and do a two-way business. Martin told him that he knew of Nelson Wheeler Perth and that they acted for mining companies and he would like to do reciprocal business. Martin mentioned Money Mining to him because the company was trying to get into production in a joint venture and he thought it would be appropriate to start a relationship with Western United. JR Money had asked him to explore finance possibilities. Martino discussed the matter with him who agreed that Money Mining should try to get Western United on board. It was JR Money who made the decision. Martino said he gave advice but that the motivation for that advice was the development of relationships with financiers, in this case Western United.
A little later in his evidence Martino was again asked to relate his conversation with Martin on this occasion and he added that he made it clear to Martin that the deposit by Money Mining was not as security for the loan to Domenal and that Martin agreed that there was no suggestion of that being the case. That evidence was given after Martino was asked if he thought he had a conflict of interest in this transaction which he had denied.
Martino's explanation about this transaction is not convincing. There is no evidence to dispute that JR Money gave his permission for the deposit of the $200,000 with Western United or to suggest that Pilmer was in any way involved, although that could be the case. The fact remains that this loan was arranged quickly with adequate security but nonetheless Martino arranged for the deposit by Money Mining which was also arranged promptly. Given the earlier experience with Questenberg Pty Ltd yet to be mentioned, Chiswick Gold and Lexham Port, it is difficult to accept that Martino had no prior knowledge of Western United doing business in this manner of back to back arrangements and that Western United was barely known to him. His explanation for the reason for Money Mining making the deposit is unlikely and is rejected. The likely explanation is that although the deposit was not to be used as security for the loan to Domenal, that loan would not have been granted unless the deposit was made.
Grumpy Investments Pty Ltd was the trustee of the Tick Tock Unit Trust which was a vehicle for investments by Mr Peter Andrews and his family. He is not the Leslie Andrews involved with Stokes in the LGM Prospecting Syndicate and Mawson Pacific. Grumpy Investments also carried on business under the name of Western Strategic. Peter Andrews and his wife were directors of the company. He was a corporate consultant, geologist and manager of mining companies and was well known to Western United.
On 26th March 1987 Grumpy Investments applied to Western United for a loan of $100,000 to assist in the purchase of shares in Cove Mining NL. Peter Andrews was managing director of Falcona Exploration and Mining NL of which mention is made later. Cove Mining owned a 32 percent interest in Falcona. The loan was granted. The security was a pledge over shares in Cove Mining and in Noble Resources NL and a personal guarantee given by Andrews.
In the application it is recorded that funds raised by a float, noted as $1.3m, were to be placed on deposit with Western United. The float is a reference to the float of Concord Mining NL, a minerals prospecting company. Gardiner and Peter Andrews were two of the three directors of that company. Nelson Wheeler Perth provided the share registry service for the company and acted as auditors. Crawford wrote the investigating accountants' report for this purpose. Ray Porter and Partners acted as underwriters. The float was successful and the company was listed on the Stock Exchange on 30th July 1987. On 30th June 1987 Concord paid various amounts due in consequence of the float by way of expenses and fees and $610,000 to Western United which was placed on deposit. It is alleged that this payment met, in part, the intimation at the time Grumpy Investments obtained the loan that $1.3m would be deposited with Western United. It is the plaintiff's case that these arrangements constituted a back to back arrangement and that Nelson Wheeler Perth must have been aware of it in view of their involvement in the float.
It is likely that this loan to Grumpy Investments was part of a back to back arrangement involving the deposit of Concord Mining but the evidence does not disclose that Nelson Wheeler Perth were aware of the nature of the transaction. Mere involvement in the float and as auditors may have caused them to know of the deposit by Concord with Western United but there is no evidence to suggest that they knew of the other side of the transaction.
There are other alleged back to back loan transactions involving Parry Corporation, Palmvale Nominees, Cullimore Investments Pty Ltd and Questenberg which are discussed shortly as they also involve other features of the alleged associations between Nelson Wheeler Perth and Kia Ora and Western United.
It is likely that this loan to Grumpy Investments was part of a back to back arrangement involving the deposit of Concord Mining.
These various transactions establish the allegations of the plaintiff about back to back loans by Western United with a consequence of inflating the income and asset base of Western United. They also establish that Pilmer, Stokes, Munachen and Martino were aware of this technique. It is also significant that Somes was also aware of these matters because as a director of Kia Ora he had to consider the valuation of Western United by Nelson Wheeler Perth and the Nelson Wheeler report.
Acorn Securities Limited was a mining company and producer of diamonds and gold in Indonesia and Western Australia. In 1986 and 1987 Munachen was a director and share registry services to the company were provided by the Nelson Wheeler Share Registry. Other directors included Mr B Wrixon and Cornelius. Wrixon was an accountant who acted for Mr D Hill and companies associated with him. Karonie Gold NL and Gowners Pty Ltd were wholly owned subsidiaries of Acorn Securities until in 1987 Karonie Gold was floated. Thereafter Acorn Securities had a forty per cent shareholding in Karonie Gold. Munachen, Wrixon and Cornelius were also directors of Gowners, the business of which was share trading.
According to Messer, Munachen and Wrixon had looked after Hill's interests for some time and the effect of his evidence is that Hill had a substantial interest in Acorn. Hill also had substantial interests in Wattle Gully Gold Mines and Mt Pleasant Gold Trust which are mentioned later.
Munachen, Cornelius and Wrixon owned shares in Acorn. By February 1987 Munachen, through a company which he controlled, owned 130,000 shares and 650,000 options in Acorn.
Nelson Wheeler Perth also undertook other work for Acorn. On instructions, they arranged funds for Acorn's share in what was known as the Karonie Gold Project. They provided taxation advice to Acorn. Pilmer, Munachen and Crawford, along with Cornelius, were signatories to a bank account in 1985. In that year, the share registry was, in effect, transferred to Nelson Wheeler Perth. Martino became a signatory in lieu of Crawford in July 1986.
Acorn and Gowners were involved in activities of other companies which feature in the plaintiff's case relating to association between Nelson Wheeler and Kia Ora and Western United.
At a meeting of directors of Acorn on 21st March 1986, a joint venture arrangement with Mawson Pacific regarding tenements in Canada was discussed. Reports about exploration at Mt Pleasant were received.
County Securities acted as broker in the sale by Acorn of shares in various companies in January 1987.
The shares owned by Gowners included substantial shareholding in various companies which are the subject of submissions by the plaintiff about associations between Nelson Wheeler and Kia Ora and Western United. They include Phoenix Oil and Gas Ltd, Geometals NL, Southern Resources, Southern Goldfields, Pact Oil & Gas Ltd, Mt Pleasant Gold Trust, West Coast Holdings, Mawson Pacific, Forsayth NL and Wattle Gully.
Palmvale borrowed $300,000 for this purpose from Western United. The application for the loan was made on 16th January 1987 and was granted on 22nd January 1987.
On 16th January 1987 Munachen, on behalf of Acorn, deposited nearly $280,000 with Western United on 24 hour call. As Harold Abbott and Munachen did not give evidence to the contrary, it is reasonable to conclude that this transaction was a back to back loan for the benefit of the beneficiaries of the Essemco Unit Trust. When Munachen made this deposit, he wrote a letter to Ms Wendy Allen of Western United and addressed her on first name terms which suggests he was known to her.
County Securities undertook share trading at the instruction of Gowners during 1987.
In February 1987 the directors of Acorn ratified the appointment of City of London Public Relations which, it will be remembered, was the firm employed by Kia Ora and Harold Abbott.
On 7th April 1987 Acorn deposited $580,356 with Western United at call to the credit of Gowners. Western United was not the only merchant bank or financial institution with which Acorn deposited substantial funds. Nevertheless, it did deposit funds with Western United at times.
The evidence establishes that Munachen and staff of Nelson Wheeler Perth administered Acorn and Gowners. Munachen was closely associated with Hill who was the promoter and controller of the Mount Pleasant Gold Trust which is discussed later. Acorn and Gowners had financial dealings with Western United as did Palmvale. Stokes and Munachen were involved in those dealings to the extent described and they had a business relationship with Western United. They were involved in the back to back arrangements involving Acorn and Palmvale.
wattle gully gold mines nl and the mount pleasant gold trust
The events concerning Wattle Gully and Mount Pleasant Gold Trust in 1987 are of considerable importance in the plaintiff's case. It is said they disclose a close involvement between Harold Abbott and Pilmer, Stokes and Munachen as well as Nelson Wheeler Perth and Kia Ora and Western United and to such an extent that Nelson Wheeler should not have been offered, and should not have accepted, the retainer to undertake the Nelson Wheeler report because they lacked the necessary independence to undertake that task. Furthermore, it is alleged that with the knowledge, gained by Nelson Wheeler Perth by reason of these events, and the circumstances surrounding them, they could not have expressed the views contained in the Nelson Wheeler report if they were acting diligently and competently. To understand the full impact of these matters, it is necessary to relate these events in some detail.
Wattle Gully was a public company incorporated in Victoria in 1933 as a mining and exploration company. It was moribund for many years. It became active for a time in the early 1980's but its history before 1986 is of little importance to matters in issue in these proceedings. Munachen had professional and business relationships with Hill who had extensive interests in the Golden Kilometre and Mount Pleasant regions in Western Australian through various companies.
Mount Pleasant Management Ltd was a public company incorporated in Western Australia on 4th December 1984. As from 21st December 1984 the registered office of Mount Pleasant Management was the office of Nelson Wheeler Perth. It was listed on the Stock Exchange. In November 1985 Mount Pleasant Management became the manager of the Mount Pleasant Gold Trust. On 13th December 1985 it caused 11m units at 50 cents each to be issued in the Mount Pleasant Gold Trust. Eyers Reed McIntosh acted as brokers for this issue and Mr T Bannerman acted as solicitor for those brokers with respect to the issue. Bannerman was a solicitor who had practiced in Kalgoorlie and was a long time friend and associate of Stokes and Munachen.
The major asset of the Mount Pleasant Gold Trust was mining tenements which were said to have a value of nearly $20m. During the six months to 31st December 1986 the Trust made a loss. Gold mining at that stage was more prospective than actual. In 1987 financial year a further small loss was made.
Munachen was appointed a director of Mount Pleasant Management on 24th June 1987. There were three other directors and Wrixon was the secretary of the company at all material times.
Some time after 25th June 1987 Morris and Chisholm were appointed directors of Mount Pleasant Management in place of two of the existing directors. The date of their appointments is not revealed by the evidence but they were probably both appointed soon after that date as Morris, along with Munachen, signed the 1987 annual directors' report of the company on 3rd November 1987.
During the 1986 financial year Wattle Gully operated modestly. The net assets for the company and subsidiaries was about $1.5m. There were a little over 14m issued shares. In early 1987, Palmvale, as trustee for the Essemco Unit Trust, acquired 2m shares at 12 cents per share and Gowners and Alkane Exploration NL each acquired another 1m shares at the same price. The evidence discloses little about Alkane, however, according to Stokes, he had some association with it. These acquisitions represented nearly fourteen per cent of the company. It will be remembered that the beneficiaries of the Essemco Unit Trust, through other trusts, were Stokes, Munachen, Cornelius, Morris, Evans and, at that time, Silver and that the purchase by Palmvale was financed by a loan of $300,000 from Western United.
By way of security for that loan, Western United took a pledge over the 2m shares in Wattle Gully and 200,000 shares in Mawson Pacific and personal guarantees of Stokes and Munachen. Stokes wrote to Green at Western United on 21st January 1987 seeking most of the loan funds urgently to pay the sharebroker who arranged the purchase. The scrip for the shares pledged as security had not then been issued. According to Stokes, he merely signed the letter in the absence of Munachen. This letter indicates that the arrangement between Stokes and Munachen and Western United permitted the urgent advance of most of the loan even though the scrip for part of the security was not available, which reveals a feature of the relationship between the two men and Western United, namely that they were well known by the company and thought to be trustworthy and reliable.
Between 5th February 1987 and 10th February 1987 Palmvale sold 885,000 shares in Wattle Gully thereby reducing its shareholding to 10.84 percent of the voting shares in the company.
By agreement in writing dated 29th April 1987 Wattle Gully agreed to acquire from Avenger Mining Pty Ltd tenements known as the Kookynie claims in consideration for the allotment of 3m shares in Wattle Gully to Avenger Mining. At that time Cornelius, his wife and another person were directors of that company.
After negotiations commencing in May 1987 Wattle Gully acquired a 47.5 percent interest in the tenements known as Badgebup from Southwest Gold Mines NL, a company controlled by Cornelius with the consequence that Wattle Gully, Glengarry Mining NL, each as to 47.5 percent and South West as to 5 percent were joint owners of the Badgebup project. The consideration paid by Wattle Gully was $2.2 comprising $1.4m in cash and 4m shares and 4m options.
In May 1987 Munachen, on behalf of Wattle Gully, applied to Western United for a secured syndicated loan facility of $22m. The terms of the application were such that the total exposure of Western United was to be $2.4m. Kia Ora was to acquire 19.9 percent of the issued capital of Wattle Gully and inject $2.4m into Wattle Gully. South West and Palmvale were to increase their shareholding in Wattle Gully to 19.9 percent each thereby injecting a further $4.6m into Wattle Gully. Kia Ora, Geometals, Oil Exploration Ltd and Forsayth NL were to provide an indemnity to Western United in the amount of $4.2m each and in case of Geometals and Forsayth each was to deposit $4.2m with Western United to support their respective indemnities. The loan facility was to be used by Wattle Gully to acquire an interest in the Mount Pleasant Gold Trust pursuant to a Part C on market cash offer and also to acquire Mount Pleasant Management. The proposal of Wattle Gully was to acquire the shares in Mount Pleasant Management for $750,000 and to acquire a minimum of 40 percent of the 44m issued units in the Mount Pleasant Gold Trust at a cost of $9m.
There were further conditions of the loan application. Kirke Securities was to underwrite and confirm to Western United a share issue by Wattle Gully to raise capital of $7m. County Securities acted as the principal sub-underwriter which, in turn, had sub-underwriting arrangements with Geometals, Palmvale, Morris and Evans and Resource and Mineral Equities Ltd. These arrangements may be seen from a facsimile transmission sent by Munachen to Newton. Finally, Wattle Gully had to provide security by way of a pledge over 18,153,000 units in the Mount Pleasant Gold Trust and a pledge over the shares in Mount Pleasant Management.
The management of the Mount Pleasant Gold Trust project in the sense of mine management was to be undertaken by Australian Mine Management Pty Ltd which was a company owned by Elders Resources Ltd and Eltin.
The loan was approved on 29th May 1987 and Harold Abbott, Lee-Steere, Somes, Gary Abbott and Green participated in that decision. In his diary for that day, Lee-Steere recorded "Afternoon at Kia Ora for big decision" which he said related to this matter. Lee-Steere acknowledged that he knew nothing about Wattle Gully or who was involved in it when he gave his approval even though it was the largest loan transaction ever undertaken by Western United and Kia Ora was to become the largest shareholder in Wattle Gully. Somes said he did not remember the transaction in detail given the lapse of time but he did recall that the purpose of the loan was to enable a takeover of the Mount Pleasant Gold Trust and that he thought Western United should be involved in such a transaction.
On 22nd June 1987 a general meeting of Southwest approved the sale of the interest in the Badgepup project to Wattle Gully and Glengarry.
At about the beginning of June 1987 the Part C offer for all of the issued units in the Mount Pleasant Gold Trust at fifty cents each was made by Wattle Gully, Kia Ora, Geometals and Forsayth on the basis that Wattle Gully would acquire the first 40 percent of the units, Kia Ora the next 11 percent with the balance being distributed equally amongst Kia Ora, Geometals and Forsayth.
Wattle Gully made a non-renounceable rights issue on 4th June 1987 on the basis of four new shares for every seven existing shares at a price of 25 cents per share. A little over 27.7m shares were issued and about $6.9m was raised. The purpose of the issue was, inter alia, to raise funds for the Part C takeover of the Mount Pleasant Gold Trust. 10m shares of fifty cents each at a price of twenty-five cents were placed with various companies and persons including Kia Ora, 5m shares, and Comserv, 1.5m shares, both of which took up those allocations. Wattle Gully instructed Kirke Securities, the principal underwriter of the rights issue, to deposit with Western United the proceeds of the issue and authorised Western United to apply those moneys against the amount owed from time to time by Wattle Gully under the loan facility.
Wattle Gully acquired all of the issued capital in Mount Pleasant Management for $750,000.
Thereafter the transactions concerning Wattle Gully, Southwest and Associated proceeded. Wattle Gully deposited $1m with Western United on or about 17th June 1987. At about that time Western United advanced that amount to Southwest to enable it to complete its transaction with Associated and eventually the acquisition of a 47.5 percent interest in the Badgebup project by Wattle Gully was completed. Wattle Gully paid $1.4m in cash and allotted 2m shares in Wattle Gully to Southwest. This deposit by Wattle Gully with Western United was another back to back loan arrangement.
Stokes and Cornelius were appointed directors of Wattle Gully effective from 30th June 1987.
The Part C takeover of Mount Pleasant Gold Trust was completed and all of the issued units were held by Wattle Gully (41.21 percent), Kia Ora (26.98 percent), Geometals (15.9 percent) and Forsayth (15.9 percent).
At about 18th August 1987 the directors of Wattle Gully were Stokes, Munachen, Cornelius and a Mr Burton. Munachen, Morris and Chisholm were the directors of Mount Pleasant Management.
It will be seen that familiar names were involved in this very large and complex transaction: Hill, Harold Abbott, Stokes, Munachen, Cornelius, Morris and Evans. This extra-ordinarily large loan of $22m by Western United was approved promptly by Harold Abbott, Lee-Steere, Somes, Gary Abbott and Green. Companies in which Stokes and Munachen had interests became closely involved with Kia Ora and Western United.
It will be remembered that on 21st August 1987 Harold Abbott and others instructed Pilmer to undertake the valuation of Western United. On this day Munachen instructed the R & I Bank of Western Australia to issue a bank cheque to Western United for $2,469,224.20. Also on that day Stokes, Munachen and Morris had lunch together. That amount was received by Western United on 24th August 1987.
A consequence of the deposit was to enhance the financial position of Western United. By making this deposit Wattle Gully became the fifth largest depositor with Western United. The first three largest depositors were Kia Ora, Kia Pacific and Mawson Pacific. Wattle Gully was, at the same time, the largest single borrower from Western United owing nearly $8.5m which represented a little over 50 percent of all borrowings from the bank. As with the deposit, the borrowings also enhanced the financial position of Western United.
Also, it is to be remembered that only a few days before on 19th August Stokes, on behalf of Mawson Pacific, wrote to Harold Abbott and offered to purchase the second half of the Marvel Loch mine for $40m.
The plaintiff contends that given the association between all of these men, they must have known of all of these matters at the time concerning Wattle Gully and Western United. Morris and Stokes could remember little of the lunch. However, these events involving Wattle Gully, Mawson Pacific, Kia Ora, Western United and Stokes, Munachen, Morris and Evans were major events by their own, or any, standards and it is safe to conclude that Harold Abbott, Stokes, Munachen and Morris were aware of them. What Pilmer knew is not certain. However, it is likely that he knew of the involvement of Stokes and Munachen in Mawson Pacific and Wattle Gully, that Nelson Wheeler Perth acted for both companies and that the two companies of Stokes and Munachen had associations with Kia Ora and Western United of the general nature which has been mentioned.
Pilmer gave some brief evidence at the s541 examination where he was asked about partners of Nelson Wheeler Perth having dealings with Western United. He said he believed that Stokes and Munachen had some form of a relationship with Western United but he could not recall when it was. According to him, they were involved with companies borrowing money from Western United in the ordinary course of business. He then mentioned Wattle Gully. He said that Nelson Wheeler Perth provided professional services to Wattle Gully and held shares in the company. He was aware that Kia Ora had shares in Wattle Gully and that Munachen and Kia Ora had an interest in the Mount Pleasant Gold Trust. Also, he said he was aware that Stokes was a director of Mawson Pacific. It is likely that Pilmer was aware of these companies and the role played by Stokes and Munachen. If he did not have any precise information, it would have been but a small step to make appropriate enquiries.
Wattle Gully continued to deposit money with Western United and was the fourth highest depositor during September and October 1987.
As at 30th October 1987 the top twenty shareholders in Wattle Gully included Kia Ora, Southwest, Avenger Mining with which Cornelius was associated, Ramsgate Resources, Palmvale, Bowyang Nominees, Gowners and seven nominee companies.
The extent of the debt owed by Wattle Gully to Western United at 12th November 1987 was $9.7m. The loan was extended for a further twelve months.
The plaintiff contends that the transactions involving Wattle Gully were major matters for Harold Abbott, Stokes, Munachen and Nelson Wheeler Perth during 1987. It is claimed that they were joint venturers. Nelson Wheeler Perth had substantial benefits because of the development of the company and the various transactions which resulted in a considerable amount of profitable work. Stokes and Munachen also benefited personally through the taking of shares. Harold Abbott, Kia Ora and Western United also benefited substantially. Each was dependant upon the others and advanced the interests of the others. Because of the involvement of Stokes, Munachen and Nelson Wheeler Perth, the firm could not have acted as an independent expert when undertaking the Nelson Wheeler report. They depended upon Harold Abbott for the financial support for Wattle Gully to develop as it did.
The first defendants dispute those contentions. They contend that although Munachen commenced to take control of Wattle Gully in January 1987 that did not eventuate until he became a director, a position realised after he resigned from Nelson Wheeler Perth. I have concluded that he did not resign but even if he did leave the firm at the end of June 1987, he had by that time developed Wattle Gully substantially
Also the first defendants contend that the Part C takeover of the Mount Pleasant Gold Trust was a business activity of Wattle Gully and not a matter of which Nelson Wheeler had constructive knowledge. Each of the associations was appropriate. Kia Ora owned half of the Marvel Loch Mine in the same general vicinity. Forsayth was a gold miner and explorer. Geometals was an active participant in the mining industry and Western United was one of four merchant banks in Western Australia. The level of funding by Western United is overrated given the obligations of Kia Ora, Geometals and Forsayth. Western United was an attractive place for Wattle Gully and other companies to deposit funds as it offered higher interest rates than the R & I Bank or the ANZ Bank according to a record of Wattle Gully. Also it is submitted that the evidence does not establish that Wattle Gully was aware of, and implicated in, back to back loans involving Southwest.
The evidence clearly establishes a close relationship between each of these men and companies and financial dependence of Wattle Gully upon Western United. Once it is acknowledged, as is the case that Stokes and Munachen were heavily involved in Wattle Gully and Harold Abbott was the driving force behind Western United, which is also the case, it may be seen that Stokes and Munachen were financially dependent upon Harold Abbott. Also it may be seen that each of the companies taking units in the Mount Pleasant Gold Trust, Wattle Gully, Kia Ora, Geometals and Forsayth were dependent upon each other for the security of their investment. Without each of them, the project would not have succeeded. Kia Ora, Geometals, Oil and Exploration Limited and Forsayth were all committed to Western United and dependent upon each other for the success of the transaction. These matters show the close business connections between Stokes, Munachen, Harold Abbott, Morris, Evans and others and mutual dependence on each other and upon Western United. Given that Stokes and Munachen were partners of Nelson Wheeler Perth at the time of these events, the firm could not possibly have been regarded as independent of Kia Ora or Western United. The extent of Pilmer's knowledge of these matters is not known. There is simply no evidence about that matter. His failure to give evidence does not permit a finding that he had actual knowledge of those matters. However, I reject the contention that he did not have constructive knowledge by reason of Stokes and Munachen being his partners. The work undertaken by Munachen on behalf of Wattle Gully was the type of work he customarily undertook within his role in the practice and the altered arrangements with Nelson Wheeler Perth after 1st July 1987 do not change that position.
The proposed transaction involving Aljalon Pty Ltd and Mount Pleasant Management was to occur in 1988 and did not proceed. Nevertheless the plaintiff contends that it reveals the closeness of the relationship between Harold Abbott and Munachen, as well as others and other matters, which very likely existed in 1987 before Nelson Wheeler Perth entered into the contract of retainer with Kia Ora to undertake the valuation of Western United and the Nelson Wheeler report was drafted. It is fair to say that the absence of Harold Abbott and Munachen from the witness box leaves a good deal of the story untold.
At relevant times the directors of Aljalon were Mr PE Kordic and Mr DJ Williams who were both partners of Talbot and Olivier solicitors in Perth, the firm at which Gardiner had earlier practised and remained as a consultant. Kordic was well known to Western United and in June 1987 had borrowed money from that company. The credit application for that loan noted a business relationship between Talbot and Olivier and Western United with the former providing legal services to the latter and the latter providing finance to the former.
On 18th March 1988 Kordic, as a director of Aljalon, wrote to Wattle Gully offering to purchase all of the issued shares in Mount Pleasant Management for $500,000 on certain conditions. He wrote to Gardiner on the same day. This letter began:
"The letter to Wattle Gully Gold Mines NL was sent today. Enclosed is a copy for your records."
It may be seen that Gardiner must have been aware of the offer prior to this time. This letter to Gardiner enclosed a Deed of Guarantee and Indemnity and sought information about the shareholders, presumably of Mount Pleasant Management and the agreements by parties to provide the funds for the offer. These matters suggest that the proposal was well advanced, and to the knowledge of Gardiner, before the offer was made and that he was giving the instructions to Kordic.
It will be remembered that Munachen was the chairman of directors and executive director of Wattle Gully. Gardiner wrote to Munachen on 6th April 1988 referring to the offer and requesting Munachen and Cornelius to sign a guarantee and indemnity which was enclosed. This guarantee and indemnity was said to be "to the nominee directors who are acting on our behalf in respect of this matter", obviously Kordic and Williams . On 6th April Gardiner wrote to Kordic in response to his letter of 18th March 1988 and informed him that he, Harold Abbott, Gary Abbott and a Mr B Fogarty had signed the guarantee and indemnity and that he was arranging for Munachen to do likewise.
This correspondence establishes that as directors of Aljalon, Kordic and Williams were being indemnified and they were acting on behalf of Harold Abbott, Gary Abbott, Gardiner, Fogarty, Munachen and Cornelius who were attempting to takeover Western United Management.
Munachen wrote on 8th April 1988 to the directors of Aljalon and rejected the offer but advised that $750,000 would be acceptable provided that the office used by him to administer Mount Pleasant Management and his position as manager were retained for a year. He required other terms including that his monthly salary continue.
A short time later on 19th April 1988, Gardiner wrote to Kordic and informed him that the proposed transaction was not proceeding.
The plaintiff makes a number of submissions about this matter to the effect that Munachen was on both sides of the transaction, which appears to be the case, that he was attempting to prefer his personal positions to those of Mount Pleasant Management, that Harold Abbott was exerting pressure on Munachen through Western United and that they were dealing with an asset of Kia Ora because Mount Pleasant Management managed Mount Pleasant Gold Trust in which Kia Ora had a substantial interest.
The first defendants contend that this transaction was apparently driven by Harold Abbott and Munachen was never truly a party to the proposal. It was put to him and rejected by him. They further contend that this transaction does not demonstrate any relevant relationship between Munachen, Kia Ora and Western United or anyone involved in these companies.
I do not agree. The evidence reveals that Munachen, Harold Abbott, Gary Abbott, Gardiner, Fogarty and Cornelius were attempting to acquire Mount Pleasant Management for their own purposes and they used Aljalon and Kordic and Williams as directors of that company to preserve their anonymity. Although the proposal did not proceed, control of Mount Pleasant Management would have enabled them to control Mount Pleasant Gold Trust in which Kia Ora had a substantial interest which Easton quantified at 14.9 percent of that Trust. Wattle Gully Gold Mines owned 41.2 percent of that Trust. By this time Wattle Gully was in financial difficulty and could not repay the balance of the loan due to Western United. Proposals for the reverse takeover were being considered.
Stokes said he knew nothing of the proposed Aljalon transaction which may be so but he could not be cross-examined. The absence of Harold Abbott and Munachen from the witness box probably prevented the full story becoming known to the Court but what is clear is that even at this stage in early 1988, a close business relationship between Harold Abbott, Gary Abbott, Gardiner and Munachen existed. A feature of that relationship was that those men were attempting to gain control of a significant asset in which companies which they in effect controlled had substantial interests. Munachen was on both sides of the transaction with a conflict of interest which was known to the others.
Although those events occurred in early 1988, it is likely that this type of close relationship, particularly between Munachen, Harold Abbott, Gary Abbott and Gardiner, existed during 1987 after Munachen assumed control of Wattle Gully.
AIMS is the result of the amalgamation of three business in Kalgoorlie. It will be remembered that mention of this company was made in the context of the composition of the partnership of Nelson Wheeler Perth because AIMS took legal proceedings against the partners. The company was incorporated on 11th March 1987 in Western Australia and acquired the businesses known as Goldfields Brake Service, Muirhead Electrical and Burketts. Each of the businesses had been conducted by separate companies. By this time Goldfields Brake Service was involved in industrial retailing and had developed a failsafe braking system suitable for use in the underground mining industry. Muirhead Electrical operated in retail and service areas in the automotive electrical industry for mining and industrial companies. It developed an engine protection system used by the mining industry in Australia designed to prevent machinery operating when overheated, deficient of oil or having malfunctioned. Burketts was an industrial retail company operating in the Eastern Goldfields. The proprietors of the three businesses were all clients of Nelson Wheeler Perth in Kalgoorlie and their accountancy work had been undertaken by Langford. They had all been clients of Stokes. Langford's sister was married to a person controlling one of the businesses.
Langford wrote to Stokes on 21st January 1987 setting out facts and figures relating to the proposed amalgamation. Nelson Wheeler Perth provided the registered office and share registry for AIMS and acted as auditors and investigating accountants. AIMS was incorporated as a public company with limited listing on the Stock Exchange. Freehills acted as the solicitors for this purpose on instructions from Langford. The initial directors were Graham Smith, Ivan MRSA, Harken, Kim Gardner and George Botica who were all acquaintances and associates of Stokes. The three businesses were acquired on 20th March 1987. On 14th May 1987 Gardiner and Harken were asked to resign as directors and did resign. On 17th June 1987 AIMS issued a prospectus for the issue of 3.5m ordinary shares of $1 each. By this time there were new directors, two of whom were the persons who had controlled Goldsfields Brake Service and the person who had controlled Muirhead Electrical. The underwriter for the issue was Jacksons Limited of Perth. On 16th June 1987 Jacksons offered to Gowners general sub-underwriting of the issue of 200,000 shares for a fee of 2.5 percent which was accepted by Munachen on behalf of Gowners. Gowners acquired shares in AIMS. Crawford undertook the investigating accountants' report for the purpose of the issue and it was included in the prospectus.
According to Stokes, he had no role in the underwriting arrangements and said that he does not believe he was aware of the role played by Gowners at the time.
The share issue was not immediately successful and Stokes became involved in the placement of shares. He was informed by a representative of Jacksons that he was having trouble placing all of the shares. Stokes spoke to Harold Abbott in consequence of which Kia Ora acquired 700,000 shares in AIMS on 3rd July 1987, which represented 13.22 percent of the issued capital. Kia Ora was the third largest shareholder. The issue was eventually successful and AIMS was able to pay the balance due on the purchase of the three businesses and to pay out various loan accounts.
Nelson Wheeler Perth was closely involved in, and continued to act for, the company. Directors' meetings were held at the Kalgoorlie offices of Nelson Wheeler Perth. Stokes was well aware of the formation and operation of AIMS and played a significant role. The proprietors of the three businesses had all been his clients. He negotiated with Jackson. He arranged for Kia Ora through Harold Abbott to take shares and also for Mawson Pacific and Eltin to take shares. He supported the concept of the merger of the businesses and he said that he thought it was a good investment for Kia Ora.
The plaintiff alleges that it was inappropriate for Crawford to undertake the investigating accountants' report for the share issue and that there are other aspects of the conduct of Nelson Wheeler Perth which are inappropriate. It is unnecessary to consider those matters or to make any findings about them.
The significance of those matters is the close involvement of Nelson Wheeler Perth in the AIMS share issue involving Stokes, Langford, Crawford and Munachen and the involvement of Kia Ora through Harold Abbott. It was obviously important to the clients and to Nelson Wheeler Perth for the share issue to be successful. It was failing and Stokes secured the assistance of Harold Abbott and Kia Ora. This matter demonstrates that the relationship between Nelson Wheeler Perth and Kia Ora and Harold Abbott was sufficiently close to achieve this important assistance. It was only a little over a month later that Kia Ora and Harold Abbott sought the assistance of Nelson Wheeler Perth for the purpose of the Nelson Wheeler report. It is to be expected that the assistance given by Harold Abbott on this occasion could, in the minds of some, create a sense of obligation.
As has been seen County Securities was the sharebroker involved in the sale of the parcel of shares owned by Parry Corporation in Western United on 14th August 1987. Newton was a principal officer of the company and a close friend and associate of Stokes.
As will be seen, County Securities was involved in many of the dealings, promotions and investments undertaken by Stokes and Munachen through various companies during 1986 and 1987 and earlier. Those companies included Mawson Pacific, Wattle Gully, MRSA and Tectonic.
It will be remembered that Muscoda Holdings, with which Newton and Stokes were associated, acquired some of the shares in Western United sold by Parry Corporation on 14th August 1987. Stokes acknowledged an aspect of his relationship with County Securities in the letter which he later wrote to Harold Abbott on 8th February 1988 and which is mentioned later in the context of Mawson Pacific. In that letter he wrote that he had taken positions as requested from time to time in companies supported by County Securities in return "for the great support they have given me in Mawson".
According to Stokes he arranged for Newton to contact Kia Ora in January 1987 to lend credibility to the proposal of Mawson Pacific to purchase the first half of the Marvel Loch mine. There was a transaction in March and June 1987 involving Palmvale and Newton. It is not clear from the records admitted into evidence what was the precise nature of the transaction but it seems that Palmvale acted as a bare trustee for Newton in relation to the purchase and sale of shares in Australian Emeralds Pty Ltd and that Newton owed a substantial sum of money to Palmvale for a time. The absence of Munachen and Newton from the witness box and the inability of the plaintiff to cross-examine Stokes has prevented the explanation of this transaction. These records were made on Nelson Wheeler stationery probably under the control of Munachen. At all events this evidence does disclose a close business relationship between Newton and Munachen and Palmvale and that Newton chose to use Palmvale rather than Bowyang or some other company controlled by him.
It will be remembered that in January 1987 Newton, for County Securities, purchased for an individual purchaser, 30m options in Kia Pacific from Kia Ora. Newton was appointed a director of Mawson Pacific on 18th February 1987. Munachen acquired shares in Acorn Securities from Bowyang Nominees using County Securities as the sharebroker. Also, it will be remembered that in March 1987 County Securities was appointed as the official broker for Kia Ora.
There were many transactions during 1987 which involved County Securities and one or more of Palmvale, Kia Ora, Western United, Parry Corporation and Wattle Gully Gold Mines. As has been seen Stokes and Newton went to London in May 1987. The documentary evidence suggests that they met with Harold Abbott and one of Newton's tasks was to promote Kia Ora. Harold Abbott sent a telex to Schneider-Paas on 23rd March 1987 which wrote that Kia Ora was "working together with Stokes in complete harmony and all looks well for the future". The telex went on:
"It looks as though I may have to be in London for a week or so commencing Monday 27th April and I will confirm these dates to you later. The point of the trip is that both Stokes and his stock broker will be in London at that time and are keen to introduce us to London Brokers and Institutions. They were up at Marvel Loch for four days last week and were very impressed with what they saw. The stock broker believes that Kia Ora should be selling at DLRS.2 per share and his firm, County Securities Limited will become our official brokers from this point onwards."
Stokes denied that Newton undertook that role but his evidence on that matter was not tested and cannot be accepted.
In late March 1987 Mr W Grigor of County Securities prepared a proposal for various companies in the Yilgarn Goldfields in Western Australia with a view to attracting into the area a major gold producer. In the course of preparing this proposal he visited the Marvel Loch mine and premises of other companies in the Southern Cross area, including Mincoa. The proposal involved a number of companies including Kia Ora and Mawson Pacific.
County Securities was involved in the underwriting of a non-renounceable rights issue by Wattle Gully in June 1987. Kirke Securities was the lead underwriter. As has been seen, the proceeds of the issue were to be used to acquire units in the Mount Pleasant Gold Trust. County Securities acted as a sub-underwriter and in turn Comserv and Palmvale, along with another company Resource and Mineral Equities Limited, underwrote part of the commitment of County Securities.
There is one further aspect of the sale of the shares held by Parry Corporation in Western United that should be mentioned. On that day Newton and Stokes attended a meeting of directors of Mawson Pacific. Given the close relationship between Newton and Stokes, it is likely that they would have discussed this transaction at least in general terms.
On 26th October 1987, the day of the extra-ordinary general meeting of Kia Ora to consider the takeover of Western United, Morris, Newton and Stokes had lunch and the annual general meeting of Mawson Pacific was held which was attended by Stokes and Newton. Morris said he could not remember what was discussed at the lunch but it was a lively and talkative lunch. It is likely that the takeover of Western United by Kia Ora and the Marvel Loch mine were discussed.
By 30th October 1987 Bowyang Nominees held over 1m shares in Wattle Gully and was in the top ten shareholders along with Palmvale, Ramsgate Resources, Gowners and Kia Ora. Beechgrove also held 1m shares at that time. It will be remembered that Beechgrove took 200,000 of the shares in Western United sold by Parry Corporation but the evidence does not disclose the directors or shareholders of that company.
After the takeover of Western United by Kia Ora, Hartigan revealed in his report to Reid on 18th February 1988 that Newton was one of the major shareholders in Kia Ora, holding 5m shares. It seems that this shareholding arose through the acceptance of the shares and cash offer by Bowyang Nominees. When the plaintiff went into liquidation in 1989 Bowyang Nominees held only 30,750 shares in the company. The evidence does not disclose when the other shares were sold or the reasons for, or the circumstances of, the sale.
It may be seen from this brief summary of some of the evidence that Newton and County Securities through Palmvale, Mawson Pacific and Muscoda, had close associations with Stokes and Munachen through Acorn and Wattle Gully, and with Harold Abbott and Kia Ora. Newton and County Securities were also linked with Nelson Wheeler Perth through that firm's involvement in various companies including Palmvale, Mawson Pacific, Wattle Gully and, as will be seen, Tectonic and MRSA.
The nature of the relationship between Newton and Stokes may be seen from Newton financially supporting Stokes after the share market crash and his financial losses in a venture in Canada. Newton assisted Stokes to undertake prospecting and acquire tenements which were sold to a public company of which Stokes became managing director.
Cullimore Investments Pty Ltd was the trustee of the Cullimore Family Trust which was a trust for the Stokes family and, according to Stokes, was set up in 1985 or 1986 as the ultimate holding trust for his family. However, it is likely that the Trust was established in March 1987. Stokes and his wife were directors of the company and Christine Wirth was appointed secretary on 6th July 1987 and Martino on about 15th September 1987. There is no evidence to suggest that Cullimore Investments was an entity of Nelson Wheeler Perth.
On 10th September 1987 Stokes applied to Western United for a loan of $1m. The purpose of the loan is described in the credit application as an "Accommodation Facility". The security for the loan was 3m ordinary shares in Mawson Pacific and a commercial bill of exchange. In the application the following remarks appear:
"Geoff Stokes is a partner at the chartered accounting firm of Nelson Wheeler, holds directorships of several public companies and is well known to Western United Limited."
The application was granted to the extent of $950,000 for 30 days in favour of Cullimore on about 15th September 1987 and was approved by Green and others including Harold Abbott. The loan was outstanding until at least May 1988.
It will be remembered that when the application was made and granted, Nelson Wheeler Perth were undertaking the Nelson Wheeler report and Mawson Pacific, in which Stokes had a substantial shareholding and was chairman of directors, was in the process of acquiring the second half of the Marvel Loch mine from Kia Ora for $40m. It was only a little over a month later that Stokes accepted the position of chairman of directors of Kia Pacific upon Harold Abbott's request, which facilitated the Autocure transaction.
This loan, and when it occurred, are matters of significance. The relationship between Stokes and Western United was such that he was able to obtain a loan of nearly $1m on short notice. At this time, as I have found, Stokes was a partner of Nelson Wheeler Perth. Even if that conclusion is wrong, Stokes was held out as a partner and had close links with the firm.
According to Messer, if he had written the Nelson Wheeler report and had known of this loan, he would at least have disclosed it in the report. He would have hesitated about proceeding with the report. He went on to say that because of the magnitude of the loan, he would have been obliged to disqualify himself. Undoubtedly Messer was correct in his assessment of the situation and all the more so as Stokes, on my finding, was a partner.
Also this loan transaction demonstrates the closeness of the relationship between Stokes and Harold Abbott. It is the plaintiff's case that this loan was a pay off by Harold Abbott to Stokes for the latter's assistance to him in the takeover of Western United, but the evidence does not permit such a finding.
Decade Mining Resources NL was a mineral exploration company and a client of Nelson Wheeler Perth. The partner responsible for Decade was Crawford.
In April 1987 Decade issued a prospectus for an issue of shares. Nelson Wheeler Perth undertook the role as investigating accountant and also was the auditor of the company. Porter Western, then known as Ray Porter and Partners, acted as the sponsoring broker to this public issue. West Coast Share Registries Pty Ltd acted as the share registry for the company, not Nelson Wheeler Share Registry. Nelson Wheeler Perth conducted an audit of the cash received by this issue and continued to undertake routine audit work for the company for the 1987 financial year.
On the plaintiff's case, the professional work for this share issue was undertaken by Nelson Wheeler Perth and the use of Porter Western as the broker provides the connection between Nelson Wheeler Perth and Western United.
According to Crawford, Decade was introduced to him by Peter Andrews who shared an office with Mr M Farrell, a director of the company. It will be remembered that Peter Andrews was involved with Grumpy Investments, Cove Mining and Concord Mining. Crawford accepted instructions as investigating accountant and auditor. He said he did not have any dealings with anyone other than Andrews and he did not select Porter Western to act as the sharebroker. He had no role in who took shares on issue and he denied the suggestion that he or Nelson Wheeler Perth were involved in a joint venture with Kia Ora or Western United or anyone else in floating Decade. He said he had no meetings with anyone from Porter Western.
I do not think this public float of Decade establishes any relevant association between Nelson Wheeler Perth and Kia Ora or Western United and there is no reason to reject Crawford's evidence about this matter. Even if there was, there is no evidence to establish anything more than that Nelson Wheeler Perth and Crawford, in particular, undertook professional services of the nature mentioned and Porter Western was the sharebroker. There is no evidence that Nelson Wheeler referred the matter to, or engaged, Porter Western.
Drosma Nominees Pty Ltd was incorporated in Western Australia. On 10th August 1987 Stokes and Chisholm were appointed directors of the company and both resigned on 4th November 1987 when Gary Abbott and Bryan Gardiner were appointed. Cullimore Investments, for Stokes, and Mandu Pty Ltd, for Chisholm, became, in effect, the equal shareholders of Drosma when they became directors.
It will be remembered that Chisholm was a senior executive within the Western United Group. In August 1987 he was the manager of Western United Mining Services. He had been involved with Harold Abbott, Gary Abbott, Gardiner and Thomas in the mining tenements transactions in early 1987. He was an adviser to Kia Ora about mining and exploration matters. He was in London and attended a luncheon hosted by Mawson Pacific on 6th May 1987 and a press luncheon on the following day both of which were also attended by Newton and Stokes. Documents admitted into evidence do not reveal that Harold Abbott attended either of these luncheons although Stokes had informed the directors of Mawson Pacific on 18th January 1987 that he had planned a trip to London with Harold Abbott in May 1987. According to Stokes, he went to London with Newton and did not travel with Harold Abbott as Newton had objections to him. Along with Milligan, Gardiner and Harold Abbott, Chisholm was a director of Mineral Estates NL of which Kia Pacific was a major shareholder. Along with Munachen and Morris, he was a director of the Mount Pleasant Gold Trust. Also during 1987 Chisholm was an adviser to Mawson Pacific and attended a meeting of directors of that company on 26th June 1987.
On 16th September 1987 Western United Mining Services and Chisholm entered into an agreement with respect to his employment. According to Stokes, he had regular contact with Chisholm during 1987.
These matters establish the relationship between Chisholm and Western United and Kia Ora which had existed for some years and the relationship between Stokes and Chisholm.
The story of the Drosma transaction is told only by Stokes. According to him, Chisholm had identified a mining prospect in the south-west of Western Australia and was looking for a financier and Stokes agreed to fulfil that role. The details are immaterial. Stokes and Chisholm used Drosma for this purpose. It was arranged by Chisholm. Stokes undertook the arrangement personally through Cullimore as he did not consider it to be a suitable prospect for Mawson Pacific. Stokes said he thought that Chisholm informed him that he obtained Drosma from Western United or Gardiner. The prospect fizzled out and nothing came of it.
The Drosma matter, standing alone, is of minor significance. It establishes that Stokes was prepared to be financially and commercially involved with a senior officer of the Western United Group and that the relationship between the two men was of such a nature that they were willing to be so involved. All of the evidence shows that the relationship between Stokes and Chisholm was close and they met regularly. It shows the nature of Stokes' relationship with yet another senior officer of the Western United Group of a personal nature not merely because of the relationship between Mawson Pacific and Kia Ora and Western United.
The plaintiff asserts that this is the start of yet another tenement transaction, this time to include Stokes, but the evidence does not permit such a finding. Western United Mining Services, Chisholm and Thomas did sell mining tenements to Kia Pacific on 3rd December 1987 for $451,000 to be paid by $1,000 in cash and 4.5m shares in Kia Pacific. Stokes said he knew nothing of this transaction even though he was a director of Kia Pacific at the time.
This subsequent transaction does assist in resolving any issue as to the nature of the relationship between Stokes and Chisholm.
Falcona Exploration and Mining NL was a client of Nelson Wheeler Perth. It was incorporated on 16th April 1984 to acquire and evaluate exploration and mining opportunities.
At relevant times in 1986 and thereafter the directors of the company were Gardiner, Peter Andrews and three other men. Nelson Wheeler Perth provided the share registry services and was the auditor. Gardiner was the solicitor and Western United Finance was the financial adviser.
In April 1986 Falcona issued a prospectus for subscription for 8m new shares of 20 cents each to raise $1.6m. Crawford undertook the investigating accountant's report. All material contracts referred to in the prospectus were available for inspection at offices of Nelson Wheeler in Perth, Sydney, Adelaide and Brisbane. On 11th August 1987 Falcona had $141,000 on deposit with Western United. Nelson Wheeler Perth continued to act as auditors during the 1987 financial year.
According to Crawford, he was instructed to act as auditor and investigating accountant by Peter Andrews and in doing so he dealt with him. He played no part in the selection of others who played a role in the company, including Gardiner and Western United Finance. He said he played no role in preparing the prospectus, in the appointment of any of the directors or the preparing or lodging of returns of the company. He did not have any dealings with Gardiner or Western United Finance in relation to Falcona.
It is the plaintiff's case that Gardiner and Peter Andrews were involved together in Falcona and in this float and Nelson Wheeler Perth also became involved and associated in this way with Gardiner and Western United.
There is no reason to reject Crawford's evidence about this matter. There was no direct association established on the evidence between Nelson Wheeler Perth and Gardiner or Western United in the context of Falcona. All that is established is that Nelson Wheeler Perth acted in this way in 1986 and 1987 for Falcona on the instructions of Peter Andrews. However, it must be remembered that Crawford was also involved with Gardiner and Peter Andrews in a similar manner in the float of Concord Mining.
As has been mentioned, Ledge Group Limited was a client of Nelson Wheeler Perth and purchased from Platina the Ventnor Avenue property.
The plaintiff's case in relation to Ledge Group is not that there was, through that transaction, an association between Nelson Wheeler Perth and Kia Ora or Western United but that the manner in which Nelson Wheeler Perth discharged its professional responsibilities to Ledge Group reveals that it lacked independence and was prepared to act when there was a conflict of interest and that when valuing Western United it had a closed mind in using Ledge Group as a comparable company for the purpose of selecting an appropriate price earnings multiple. This second matter is discussed later in the context of whether Nelson Wheeler Perth were incompetent in the preparation of the Nelson Wheeler report. The first matter is of no assistance in resolving the issues in these proceedings. It is in the nature of evidence of propensity and whilst in some circumstances propensity evidence may assist in the resolution of facts in issue, such is not the case here. How other members and employees of Nelson Wheeler Perth may have conducted themselves in the discharge of their duties to other clients at different times in different circumstances does not assist in correctly categorising the conduct of Nelson Wheeler Perth in relation to Kia Ora.
None of the evidence about Ledge Group and Nelson Wheeler Perth is capable of establishing any relationship between Nelson Wheeler Perth and Kia Ora or Western United or the character or any feature of the relationship as it existed.
Mention has been made of the close association between Kia Ora and Mawson Pacific during 1987 and between Harold Abbott and Stokes in the context of the Marvel Loch mine and the relationship between Stokes and Newton and County Securities and Kia Ora.
Also, Stokes borrowed substantial sums of money from Western United. Nelson Wheeler Perth undertook administrative and accountancy work and provided share registry services for Mawson Pacific. Accounts admitted into evidence reveal that the fees charged were not insubstantial and that Nelson Wheeler Perth had not undertaken any such work for Mawson Pacific prior to the purchase of the first half of the mine. This work was of considerable importance to Nelson Wheeler Perth. The acquisition of the second half of the mine was important to Stokes. It was also important to Nelson Wheeler Perth for that reason.
It is necessary to say a little more about the history of Mawson Pacific. Stokes, Dalla Costa and Leslie Andrews became substantial shareholders in Mawson Pacific in July 1983 through the sale of their interests in mining tenements to Mawson Pacific in consideration for shares in the company. Langford became a secretary of Mawson Pacific on 27th November 1985 and played an active role in the administration of the company thereafter including throughout the whole of 1987, including in his capacity as a partner of Nelson Wheeler Perth. He and Stokes attended meetings of directors. Nelson Wheeler Perth also provided share registry services for Mawson Pacific at all relevant times. Bowyang Nominees was also a substantial shareholder in Mawson Pacific by July 1986. Munachen attended general meetings of Mawson Pacific and was appointed a secretary of the company on 5th January 1987 and held that position until 18th February 1987. Martino was appointed a secretary on 31st August 1987. Also it will be remembered that County Securities placed the new issue of shares with its clients to raise most of the purchase price for the first half of the Marvel Loch mine. Newton was appointed as a director of Mawson Pacific at that time in February 1987.
Elders Resources Ltd acquired 3.7m shares in Mawson Pacific at the time of the purchase of the first half of the Marvel Loch mine. Also, in consequence of the loan to complete the acquisition of the first half of the Marvel Loch mine and a previous loan to acquire what was called the Randalls Gold Project, Mawson Pacific issued to Elders Resources 2.2m options on 8th April 1987.
In April 1987 Mawson Pacific acquired 5000 shares in Kia Ora through County Securities.
Against this background it is convenient to now mention LUL Corporate Financial Services which was a division of Lease Underwriting Limited. According to Stokes, he first became aware of LUL in 1985 at the time of the acquisition of Mawson Pacific. Mr M Stevens was an adviser to Wallamine and he was an officer of LUL which was a finance company and merchant banker. Stevens advised Morris regarding an attempted takeover of Forsayth by a company called Giant Resources during 1986 or 1987. At least that is how I interpret Stokes' evidence. In the minutes of the meeting of directors of Mawson Pacific on 26th June 1987, it is recorded that Stokes advised that he was currently having discussions with Lease Underwriters regarding the forward sales of gold and that he would keep the directors informed as to the progress of the discussions. At this time Anthony resigned as a director of Mawson Pacific. It will be remembered that he was the only director who was not a member of the LGM Prospecting Syndicate. Stokes said he met Mr W Jurd, of LUL, in 1987.
However, on 4th March 1987 Gardiner, on behalf of Kia Ora, sent a facsimile transmission to Mr A Cook of LUL setting out production figures for the Marvel Loch mine projected to 1992 and Mawson Pacific's figures which formed part of their offer to purchase the first half of the mine. He wrote that he would send reserve figures later in the day. It may be seen from these documents that LUL had information about production at the mine. Stokes said that he knew of Cook and someone from LUL had approached him about a forward sales programme and they had dealt with Gardiner about it but they did not succeed in getting that work.
Thus far it may be seen that LUL had contact with both Kia Ora and Mawson Pacific about gold production figures and had been involved with Forsayth and Morris.
On 23rd July 1987 Jurd sent a letter and a draft paper to Stokes. The letter begins:
This letter is to update you on our thinking regarding the strategy for securing ownership of Marvel Loch gold production and strengthening links between Mawson and Forsayth.
I promised to give you a draft paper summarising the discussion we had in your office with John Morris. Attached is that paper which has now benefitted from being discussed with Warwick Grigor, as you instructed."
It may be seen from these opening paragraphs that Jurd had been discussing the matter with Stokes and Morris and County Securities through Grigor who had also contributed. The letter continues:
"The attached analysis is a 'movable feast' owing to the variations in share prices. Nevertheless, there are some clear messages which will probably pertain within the range of foreseeable price movements, and these are summarised below.
1. A process of acquisition on-market by Mawson is not economic at current relative share prices. Mawson's share price needs to increase relative to Kia Ora, Mincoa, G V Gold and Forsayth. An initial target would be for Mawson's share price to independently move to $4.40.
2. The overall strategy comprises a number of discrete transactions which can be separated, although there is a logical sequence. Consolidation of the Marvel Loch mine ownership is a logical first step and attention is appropriately focussed on achieving this step as effectively as possible. Other transactions are probably best deferred and reviewed once the first step is completed.
3. As a general observation, the holdings of outside or unaligned shareholders remain a large proportion (44 percent) of the combined Mawson, Kia Ora and Mincoa. The implication for framing strategy is that outside shareholdings need to be analysed and absorbed as far as possible in advance of any market moves. A related issue is the determination of attitude and strategy toward large shareholdings of Elders Resources and Giant Resources.
4. Substantial cash costs are likely to be incurred and this reinforces the need to establish a sound base for funding. Mawson's share price and further equity (an issue of options was suggested by Wascovich) are paramount considerations.
The conclusion which we have reached, Geoff, is that we should devote our attention to the first step - ie acquisition of 100 percent of the Marvel Loch mine - and leave the other transactions to a later date. In the process we need to increase Mawson's share price and establish a good base for further funding. It is on this basis that our discussions with Peter Newton and Warwick Grigor are continuing.
On another matter, the floor price plan was established with Macquarie Bank on terms which we believe will be effective. If the need arises, we also believe a gold loan could be quickly implemented once the ore reserves are confirmed.
In the meantime we will work with Peter and Warwick to progress 'Step 1' of the broad strategy."
Jurd sent a copy of the letter to Newton. The enclosed draft paper is lengthy. The detail is unnecessary for present purposes. A brief summary will suffice.
The objectives were stated to be to consolidate gold production at Marvel Loch, to secure control over Marvel Loch producers and to secure control of Forsayth and Mawson Pacific. The first of two stages involved the following tactics which were stated to be:
The relevant shareholders of Mawson Pacific were stated to be Stokes, Elders Resources, County Securities and others. The major shareholder of Kia Ora was stated to be Schneider-Paas. Various considerations were discussed. A negotiated merger and a reverse takeover were considered.
It was stated that in cash, Kia Pacific and Mineral Estates were expected to generate $26m.
It was stated that the cost would be $179m and the owners of the merged companies capital would include Stokes, Elders Resources, County Securities, other Mawson Pacific shareholders, Schneider-Pass, other Kia Ora shareholders, clients of Stokes and a few others.
4 A further tactic was mentioned which involved not acquiring another company.
Mincoa NL was a mining company that had a mine adjacent to the Marvel Loch mine. According to Stokes, the persons behind Mincoa were Mr B Patterson, Graham Smith, Harken and Botica who were the founders of Eltin and associates of Stokes.
The second stage was the consolidation of the merged companies with Forsayth. The name "Giant" is referred to in this stage of the paper and may be a reference to Giant Resources. The main reference to Giant is "Giant remains dominant in Forsayth".
This letter and draft paper contained detailed and carefully reasoned proposals and strategies.
Stokes was dismissive of this letter and the draft paper. He attempted to explain them away by saying that in those days many brokers went to people like him offering deals. He said it would be nothing to see five or six brokers in a week going to Perth from the eastern States wanting to be involved. He could remember Stevens but not Jurd and he could not remember receiving the letter or the paper at the time. LUL were not engaged and nothing came of the matter. He said he did not discuss those matters with Morris or Munachen. He gave no information to Jurd whatever. Eventually he said he did not remember Jurd or even meeting him but then said he might have given him annual reports and some background on Mawson Pacific but he could not remember.
I do not accept this evidence of Stokes, not simply because he was not cross-examined but because I do not think he was being truthful. The letter speaks for itself as does the draft paper. They contain well considered proposals. They are not merely some notion being floated to obtain business. Furthermore, as has been mentioned, Stokes told the directors of Mawson Pacific on 26th June 1987 that he was having discussions with Lease Underwriters although he said on a limited topic. It is inconceivable that Jurd would go to such lengths without Stokes' knowledge and cooperation. The letter refers to a discussion with Stokes and Morris. I reject Stokes' evidence that he did not discuss the matter with Morris in 1987.
Stokes was asked about his strategy in early 1987 for Mawson Pacific in relation to gold production. He said his aim was to take Mawson to 100,000 ounces a year. He explained that the first step was to purchase the first half of the Marvel Loch mine. The second step was to purchase the second half of the mine. The third step was to take control of Mincoa's mining assets.
Stokes denied that he had any ambitions which involved Harold Abbott or that he discussed any of those matters with him. It may be seen that there is some similarity between the proposals in the draft paper sent by Jurd and in Stokes' stated ambitions.
Against the background which has been mentioned, this letter and paper from LUL is important. These documents were admitted for the purpose of establishing that they were written in those terms and sent to Stokes and Newton. They reveal a plan for the development of a substantial mining operation and the acquisition of companies which involved Stokes and his close associates Newton and Morris. The plan also involved Kia Ora. The documents reveal something of Stokes plans and ambitions at the time and it seems that Kia Ora was aware of LUL's involvement because Gardiner provided information. It is impossible to say if Harold Abbott was involved in those plans as he did not give evidence and Stokes could not be cross-examined, but it is likely that he knew something of what LUL was doing. Of course, the documents were sent to Stokes less than a month before Mawson Pacific acquired the remaining half share of Kia Ora's main asset, and shortly before Kia Ora embarked upon the process of the takeover of Western United.
Mawson Pacific used Western United as a banker and Stokes arranged with Western United from time to time during 1987 for funds to be withdrawn from its account with Western United and placed in the joint venture account. Nelson Wheeler Perth continued to provide accounting and administrative services to Mawson Pacific which included financial advice on one occasion by Pilmer. In August 1987 Chisholm, for Western United Mining Services, prepared a proposal for large scale regional mining operations in the Southern Cross and Marvel Loch area which was provided to Mawson Pacific.
It will be remembered that on 19th August 1987 Hayward recorded in his file the suggestion that Stokes be an independent director of Kia Ora for the purpose of the takeover which did not occur and further that Stokes became a director of Kia Pacific at the time of the Autocure transactions.
It is submitted by the plaintiff that, given the Marvel Loch mine transactions and the takeover of Western United, the timing of the general meetings of Kia Ora and Mawson Pacific regarding the sale of the second half is significant. It will be remembered that an offer was made by Mawson Pacific to Kia Ora on 19th August 1987.
Mention has been made earlier of the extra-ordinary general meeting of Kia Ora on 21st September 1987 at which the shareholders approved the sale to Mawson Pacific of the second half of the Marvel Loch mine for $40m. This meeting occurred well after Kia Ora had put in train the process of the takeover of Western United. The extra-ordinary general meeting of shareholders of Kia Ora approved the takeover of Western United on 26th October 1987. As has been mentioned, it is not clear when the shareholders of Mawson Pacific approved the purchase of the second half of the mine but it was on or after 30th October 1987, however, on the 30th October 1987 the directors of Mawson Pacific resolved to execute documentation to enable the company to draw on $32m of a loan from Elders Resources for the purchase of the mine. The minutes of the adjourned meeting on 2nd November 1987 do not contain any mention of the matter. However, settlement was effected on 3rd November 1987. It may be accepted for present purposes that the approval was given by the shareholders at around this time.
The significance of those dates is readily apparent. The takeover of Western United by Kia Ora could only occur with the proceeds of the sale of the second half of the mine. Harold Abbott arranged the extra-ordinary general meeting of Kia Ora to approve the sale of the second half of the Marvel Loch mine before the shareholders of Mawson Pacific had even considered the matter in general meeting. Furthermore, Kia Ora embarked upon the takeover process including the calling and holding of the general meeting on 26th October 1987 again before the shareholders of Mawson Pacific had considered the matter in the general meeting. Those controlling Kia Ora would not have embarked upon those processes unless they were certain, or at least very confident, that the shareholders of Mawson Pacific would approve. Mawson Pacific would not have to go to the trouble of raising substantial finance and committing itself to the proposal unless it was certain that Kia Ora would sell.
It is submitted by the plaintiff that these matters indicate that there was cooperation between those controlling Kia Ora, including Harold Abbott, and those controlling Mawson Pacific, including Stokes and it was likely that they agreed to arrange the meetings in that order to suit themselves. In my view there is some merit in that submission. The only possible uncertainty was whether the shareholders of Kia Ora would agree to the sale and the takeover. The shareholding of Kia Ora was diverse which was not the case with Mawson Pacific. It is likely that Stokes could deliver the necessary resolution of shareholders of Mawson Pacific but Harold Abbott could not be so sure. The Autocure transaction supports this view. In the absence of evidence from Harold Abbott and others involved at the time, there is no reason not to accept this submission and I do so. This matter illustrates a feature of the association between Stokes and Kia Ora and Harold Abbott.
Mawson Pacific did, subsequently in November 1987, take steps to acquire Mincoa and another company which had an interest in Mincoa which accords with both the LUL letter and draft paper and the ambitions of Stokes as mentioned in his evidence.
In early 1988, after the share market crash, Stokes experienced some financial difficulties. On 8th February 1988 he wrote to Harold Abbott in the following terms:
You will be aware of the material benefits I have been instrumental in having endowed upon some of my business partners/associates these past twelve months. Being a 'key player' in the Mawson growth I have been prevented from selling any of my holding and hence missed the opportunity to 'cash in' at the higher levels.
Coupled with this I have taken positions (as requested from time to time) in companies supported by Country Securities in return for the great support they have given me in Mawson. The net effect is that my mates are rich and I am not.
By the time my tax assessments are paid I shall have personal borrowings of $2m million. Needless to say I can sell my Mawson shareholding and square off the debt. To do this I would miss out on future upside plus lose the benefits of future capital gains as the shares are all pre-September 1985.
I hold a portfolio of shares (760,000) in Southern Sea Farms Limited and seek to sell this parcel at cost ($1.25 per share excluding interest on borrowings) to a third party on the basis of a guaranteed buy back at the end of 12 months. Considerable overseas interest is being shown in this company so it is possible the buy back could be satisfied at an earlier date. Its fish farm is well advanced by world standards.
If possible would you please consider Kia Ora/Western United taking up a buy back contract with me on this stock at terms commercial to your group.
P.S. My rich mates don't call me these days so I am loathe to go 'cap in hand' to them."
According to Stokes, the reference to "rich mates" did not include Harold Abbott but was a reference to his longstanding colleagues in Mawson Pacific and the LGM Prospecting Syndicate. That explanation cannot be accepted because it could not be tested and is not supported by other evidence. Nevertheless, the letter is instructive as to the fact and nature of the relationship between Stokes and Harold Abbott which was such that Stokes felt able to seek such an important favour.
All of this evidence establishes that there was a close relationship between Stokes and Harold Abbott and between Mawson Pacific and Kia Ora and Western United and in the context of commercial affairs which were mutually advantageous to all of them. Nelson Wheeler Perth, apart from Stokes, were closely associated with Mawson Pacific through the provisions of services mainly through Langford, Martino and staff.
In my view, because of those matters it was inappropriate for Nelson Wheeler to undertake the Nelson Wheeler report because of this association alone and the view expressed by Pilmer at the s541 examination, earlier referred to, was correct.
The plaintiff contends for more sinister findings. It is submitted that Nelson Wheeler Perth was dependent upon Stokes for work which he provided through Mawson Pacific. He was among the Nelson Wheeler Perth partners. He was in the strongest position financially and was of importance to them in the financial arrangements with their bankers. Stokes and Mawson Pacific deposited substantial sums of money with Western United.
Those matters may be accepted. It is the next submission which causes difficulty.
The plaintiff contends that Harold Abbott played a central, critical and substantial role in the progress of Stokes and Mawson Pacific during 1987. Prior to the acquisition of the first half of the Marvel Loch mine, Mawson Pacific was a very small gold explorer and was not a producer. It had no operating revenue or profits to fund further exploration. There is no evidence that Mawson Pacific was successful in exploration. The acquisition of the first half of the Marvel Loch mine permitted Mawson Pacific to obtain the appearance of both growth and success. It was now a producer and could be seen as a company of substance rather than a merely speculative explorer. The acquisition of all of the Marvel Loch mine was an essential part of Stokes' strategy to become a major gold producer and was achieved with the co-operation of Harold Abbott and the Elders Group. Newton was also an essential contributor to this success. His acquisition of a substantial share of the Western United shares owned by Parry Corporation demonstrates his close involvement in the activities of Harold Abbott and those controlling Kia Ora and Western United at the time. It is submitted that his close friendship and association with Stokes suggests that Stokes was likely to have been involved in that transaction.
If Nelson Wheeler had not provided a favourable Nelson Wheeler report, then the acquisition of the second half of the Marvel Loch mine and the takeover of Western United would not have proceeded. Consequently, both those controlling Kia Ora, principally Harold Abbott, and those controlling Mawson Pacific, particularly Stokes, were dependent upon Pilmer providing the correct type of report.
The price of Mawson Pacific shares had moved from about 30 cents in August 1986 to $5.70 in August 1987. Much of that increase had occurred after the purchase of the first half of the Marvel Loch mine. Most of Stokes' personal fortune occurred for this reason. The sale of the Marvel Loch mine was critical to Harold Abbott's plans. Without the first payment of $26m, the apparent value of Western United could not have been inflated as it was. Without the second payment of $40m, the takeover of Western United and the conversion of substantial shareholding in Western United into cash for the benefit of those controlling Kia Ora and Western United and their associates could not have occurred.
Newton played a significant role in the important transactions. He participated in raising the funds for the payment of the first half of the Marvel Loch mine. He promoted Mawson Pacific to London stockbrokers and probably Kia Ora. He negotiated the purchase of Kia Pacific options by Kia Ora. He played a major role through County Securities in the sale of the Western United shares owned by Parry. He played an active role in the affairs of Mawson Pacific in his capacity as director of that company, including in the acquisition of the second half of the Marvel Loch mine.
The evidence does justify conclusions as to the facts upon which these submissions are based but it is inappropriate to draw adverse conclusions about Newton in the absence of clear and unequivocal evidence. He is not a party to these proceedings and was not called to give evidence. Also, the evidence does not justify the conclusion that Harold Abbott supported Stokes personally and contributed to his wealth in the way that the plaintiff submits. Stokes' development in 1987 may well have been independent of direct assistance from Abbott. The evidence does not justify the conclusion that in giving the Nelson Wheeler report, Pilmer acted dishonestly to advance the interests of Harold Abbott, Stokes and Newton.
However, these relationships explain why Kia Ora could rely upon Mawson Pacific to complete the purchase of the mine and they are very likely the reason for Kia Ora selecting Nelson Wheeler Perth to undertake the work with respect to the takeover. It is appropriate in the absence of Harold Abbott and Pilmer from the witness box to infer from this evidence that those controlling Kia Ora, particularly Harold Abbott, selected Nelson Wheeler Perth because of their connection with Stokes and Munachen. However, this evidence does not justify a finding that they did so because they knew Pilmer would be compliant to their wishes, although it seems that he was.
Mr Zabon Mrsa became a client of Stokes in Kalgoorlie in 1971 when MRSA Limited purchased earthmoving equipment. He continued to act for him until 1974 and commenced to act for him again in about 1980. MRSA carried on business in earthmoving in the mining industry.
Eltin Pty Ltd was formed in about early 1980. It was the trustee for the Eltin Unit Trust. The four founding members of Eltin were former managers of a prominent public mining company, Mr B Patterson, Mr G Botica, Harken and Mr G Smith. They were all well known to Stokes. Each of these men, except Stokes, took units in the Eltin Unit Trust. They and Stokes were all shareholders and directors of Eltin, the trustee company.
Eltin undertook work in mine management. Stokes acted for the company in a professional capacity. Eltin initially traded under the name of Gold Mining Consultants and Contractors and in 1980 entered into an agreement with Kia Ora and Western United, then Uranium and Nickel, to act as consultants to Kia Ora at Marvel Loch mine in consideration, inter alia, of 1m shares in Kia Ora. According to Stokes, he played no part in any discussions or negotiations with Kia Ora. Harken was the mine manager of Kia Ora at the Marvel Loch mine in the 1980 and 1981 financial years. Eltin remained a consultant to Kia Ora and acted in that capacity for other smaller companies.
Stokes claimed that he played no role in the day to day operation of Eltin.
When Mrsa returned to Stokes as a client, his son, Ivan Mrsa, had left school and was becoming involved in the family business. According to Stokes, he undertook the accountancy work for the family. A number of companies and trusts were formed to operate the interests of the Mrsa family and Stokes or Langford were one of two directors of each company and a shareholder in most of them. Langford was the secretary of each of them and Munachen was a secretary of Ivan Mrsa Pty Ltd.
The operations of the Mrsa family became very extensive involving a turnover of millions of dollars each year. In 1985 consideration was given to incorporating the businesses into a public company with a listing on the second board of the Stock Exchange. Stokes discussed the matter with Newton who introduced him to the manager of a public company Proline Holdings Pty Ltd. A receiver had been appointed to this company which was incorporated in South Australia. Under an arrangement involving the Mrsa family and auditors of Proline, businesses of the Mrsa companies were sold to Proline and the name of the company was changed to MRSA. MRSA went on to the main board of the Stock Exchange soon after in 1985.
During this process, there was a public float of MRSA shares which was undertaken by Nelson Wheeler Perth through Stokes and Langford. The fee charged by Nelson Wheeler Perth included a success fee. The basic fee was $100,000 upon the listing of the company and at that time the company had to grant 500,000 options to Nelson Wheeler Perth exercisable upon payment of 20 cents per share. The options could be converted at the rate of 150,000 in each of the first two years after allocation and 200,000 in the third year. It was a further part of the arrangement that should Nelson Wheeler succeed in having the sale of assets to the new company approved on the basis of consideration of 4m shares, 4m options and $4m cash to Mrsa then he would pay to have the options allocated to Nelson Wheeler Perth converted to shares as soon as practical and they would be entitled to dispose of them in accordance with an arrangement which had been reached. Effectively, the fee was $200,000 with further benefits if the options were exercised and the shares had a value greater than 20 cents. Stokes, Ivan Mrsa and Mr R Hardy were appointed directors of the company and Stokes as chairman. Langford was appointed secretary. The share registry of the company was moved to Nelson Wheeler Perth. Stokes, Langford and Martino were involved in the work necessary for the float.
Meetings of shareholders of Proline which approved the acquisition of the businesses of the Mrsa family and the issue of shares to Ivan Mrsa were held on 28th June 1985 and 10th July 1985.
On 1st July 1985 the Secret Seven Unit Trust was formed with Brackendale Securities Pty Ltd as trustee. Each of the then partners of Nelson Wheeler Perth, through their family trusts, held units in equal shares and contributed equally to the capital of the Trust through fees earned for work in the MRSA transaction. At that time the partners were Pilmer, Crawford, Martino, Langford, Munachen, Lewis and Stokes. They were, of course, the brothers seven. The 500,000 options in MRSA were issued to Brackendale.
The memorandum prepared for the listing of MRSA on the main board of the Stock Exchange was signed by Ivan Mrsa and Stokes on 16th July 1985. It advised that no director or expert and no firm in which the director or expert was a partner had any interest in the promotion of the company or had been handed any sum as an inducement to become a director or otherwise for services rendered by him or the firm other than, inter alia, Nelson Wheeler Perth, of which Stokes was a partner being paid professional fees for their services and interests associated with the directors being allotted shares and options as disclosed. The disclosure in the memorandum did not mention the interests taken by Brackendale for the partners of Nelson Wheeler Perth.
Documentary evidence, in the form of file notes of Langford, suggests that from monies paid by Ivan Mrsa, $100,000 was paid into the Nelson Wheeler Trust Account, which was then paid to MRSA for conversion of the 500,000 options, however, the position is not clear from this evidence.
The fee of $100,000 was the subject of an account sent by Nelson Wheeler Perth to Ivan Mrsa on 8th August 1985. Nelac Nominees, the nominee company of Nelson Wheeler Perth, held shares in MRSA for various persons who received shares from Ivan Mrsa.
The shares in MRSA held by Brackendale were sold through County Securities in October 1986 at 85 cents per share for a net return of about $420,000 which was divided between the family trusts of the seven partners which have been mentioned which represented a cash payment to each of them of about $60,000. Also Brackendale had acquired rights which were sold at this time with the consequence that each of those partners through their family trusts received about another $3,500.
It may be seen that Nelson Wheeler Perth were closely involved in MRSA through Stokes as a director and accountant, through Langford and Martino as accountants, and as investors.
MRSA continued to operate a substantial earthmoving business mainly in the mining industry. On 1st May 1986 Kia Ora and MRSA entered into a contract for services to be provided by MRSA at the Marvel Loch mine for a period of two years. Later in that month Gardiner, on behalf of Kia Ora, informed Ivan Mrsa, through Langford, that MRSA had been successful in its tender for further major works at the mine.
In September 1986 MRSA and Eltin effectively merged. MRSA acquired all of the issued capital of Eltin. This transaction was initiated by Stokes. According to him, it was in the interests of MRSA to replace Ivan Mrsa and Hardy as directors. Eltin had parted company with Kia Ora by this time but was active in mining consultancy work. Stokes said he took the view that the expertise of Eltin would assist MRSA. He made the necessary arrangements with Ivan Mrsa. Graham Smith became managing director. Ivan Mrsa remained a director. Stokes remained as chairman and Hardy was dismissed.
Eltin was by this time operating as a private company and not as a trustee for a unit trust. On 2nd September 1986 the shareholders of MRSA in general meeting, in effect, approved the acquisition of Eltin. Shares and options were issued to the shareholders of Eltin at the purchase price.
The price paid for the issued capital of Eltin was $5.5m payable as to $4m in cash to the Eltin shareholders and 3m shares and 3.5m options to shares in MRSA allocated to them. A consequence of this transaction is that the shareholding of Ivan Mrsa was substantially diluted and he no longer had control of MRSA. Nevertheless, according to Stokes, the transaction was in the best interests of MRSA. The financier of the transaction was a member of the Elders Group of companies. Clearly this transaction benefited the four founders of Eltin. Harken and Botica, as well as Smith, were appointed directors and Stokes continued as chairman.
MRSA continued as a contractor for Kia Ora including during 1987. Its debtors as at 16th October 1986 included Kia Ora to an amount of $1,257,204 which was in excess of 25 percent of the total amount owed to the company. This association between MRSA and Kia Ora was obviously regarded as important to Stokes. During the course of negotiations to purchase the first half of the Marvel Loch mine when Stokes wrote to Harold Abbott on 10th February 1987 his letter included the following:
"As you are aware, the writer is Chairman of MRSA Limited which company is currently contracting to Kia Ora Gold Corporation NL and also owns the underground mining contracting specialist Eltin Pty Ltd. This group are operating at approximately 20 mining operations throughout Australia and it gives Mawson access to a great depth of technical and practical expertise.
The original founders of the Eltin Group are represented on the board of MRSA by Mr. Graeme Smith (Managing Director), a highly experienced mining engineer who had total responsibility for the establishment of the $26. million Paringa Project for C.S.R. Ltd. The other Eltin representative is Mr. George Botica (previously Manager of Kalgoorlie Nickel Smelter) who undertakes consultant metallurgical services to approximately 20 gold projects throughout Australia.
Besides their shareholding in MRSA Limited, the Eltin Group have a controlling interest in Mincoa N.L. and this connection in turn would assist with any negotiations we may decide to have with that company in respect to the Jupiter leases.
We believe this relationship of companies and personnel is a decided advantage to Mawson Pacific Limited and such benefits would flow to the Kia Ora/Mawson Joint Venture."
It is unnecessary for present purposes to explore all of the evidence about the matters involving MRSA, Eltin and Brackendale. It is sufficient that they established an intimate involvement of Nelson Wheeler Perth in the affairs of MRSA and Eltin including in the management of MRSA. Both of these companies had a close association with Kia Ora and, as has been seen, this association was an aspect of the relationship between Stokes and Harold Abbott and the companies which he and others controlled.
I have recited the effect of the evidence relating to Nelson Wheeler Perth taking an interest in MRSA through Brackendale in order to draw an aspect of the relationship between Nelson Wheeler Perth and Kia Ora through MRSA. Nelson Wheeler Perth were not merely professional advisers to MRSA but had a direct financial interest in the company until October 1986. These matters reveal an aspect of the method of practice by the firm in that sense. Their involvement is not mentioned in order to make any judgment about the propriety of such an involvement and that is a matter of no relevance to the relationship between Nelson Wheeler Perth and Kia Ora and Western United.
Oil Venturers Pty Ltd was an oil prospector of little moment. From November 1985 and, at all relevant times, the directors of the company were Bannerman, Mr R Raynaud and Munachen. The secretaries of the company were Pilmer and Messer and Bannerman and Munachen. Nelson Wheeler Perth provided the administration for the company as well as accountancy services and some directors and secretaries.
In 1986 and 1987 the principal activity of Oil Venturers was resource exploration within certain exploration permit areas in Western Australia, South Australia, Queensland and the Northern Territory. Mention has been made of Marvel Petroleum and Antarctic Petroleum which were wholly owned subsidiaries of Kia Ora, the directors of which in 1986 were Thomas, Harold Abbott and Somes. It will be remembered that in 1987 Gardiner was also a director. In those years those subsidiaries of Kia Ora also held interests in the same exploration permit areas in Western Australia and the Northern Territory. Oil Venturers and Marvel Petroleum and Antarctic Petroleum were joint ventures with respect to these areas and they met through their officers from time to time at the offices of Nelson Wheeler Perth.
According to Messer, Oil Venturers was not a very active company. It participated in a number of joint ventures but not as the lead operator. Nonetheless it was involved in a joint venture with the two subsidiaries of Kia Ora.
In February 1985 a participation agreement was entered into between a number of exploration companies including Antarctic Petroleum, Forsayth & Oil & Gas NL, in which Morris and Evans had an interest. In about late June 1985 the South Australian Government granted to the parties to that agreement the exploration permit for the area in South Australia. The partners at that time included Antarctic Petroleum, Marvel Petroleum and Forsayth Oil & Gas. The parties to the agreement transferred their interests to some of themselves and others including Oil Ventures in April 1986. This new arrangement continued throughout 1986 and 1987.
I accept the submission of the plaintiff that the failure of Pilmer and Munachen to give evidence means that there has not been any oral evidence from persons who will have been aware of the extent of the association between Oil Ventures and the two subsidiaries of Kia Ora and the personnel from each company who conducted the joint venture. However, this matter cannot permit inferences adverse to the first defendants to be drawn in the absence of a factual basis.
The plaintiff complains of inadequate discovery by Nelson Wheeler Perth about Oil Venturers but again that matter, if true, cannot be a make weight for evidence.
The evidence does disclose the joint venture and some association between those controlling the companies which included partners of Nelson Wheeler who administered Oil Ventures and acted as office bearers. The lack of means of those companies and the detail of the accounts for services rendered by Nelson Wheeler Perth to Oil Venturers, suggest that although the association existed, it did not, in itself, involve frequent and close contact between Nelson Wheeler Perth and Kia Ora. Nevertheless an association as mentioned has been established.
Brief mention has been made of United Nickel. In the 1985 financial year United Nickel became a wholly owned subsidiary of Pact Mining NL which eventually changed its name to Pact Resources NL on 19th June 1986. United Nickel was previously a minerals explorer with limited means. The principal shareholder up until the end of the 1983 financial year was Schneider-Paas. Harold Abbott and Mr J C Martin each had a small shareholding and they were the directors of the company with Somes as an alternate director for Schneider-Paas.
Mention has also been made of the LGM Prospecting Syndicate, the members of which were Andrews, Stokes and Dalla Costa and their involvement in the development of Mawson Pacific. Burhan Pty Ltd was the corporate trustee of that syndicate and was one of a number of companies which the members of the syndicate used as trustee to hold mining tenements for them. In 1983 it was the registered holder of certain mining tenements at Jubilee and Wyawells in the East Coolgardie Goldfield in Western Australia on behalf of Andrews, Stokes and Dalla Costa. During that year it entered into a joint venture arrangement with Stockdale Prospecting Limited with respect to those tenements because there were prospects of finding diamonds. Those tenements were referred to as the Jubilee tenements. In 1983 Stokes played an central role in this joint venture arrangement. In about September 1983 Burhan sold to United Nickel a sixty per cent interest in these tenements for $1.45m. Part of that price was paid by the issue and allocation of 1m shares of 25 cents each in United Nickel to Burhan. The balance was paid in cash. Andrews, a member of the LGM Prospecting Syndicate became a director of United Nickel. Burhan became the principal shareholder of United Nickel. At about this time there was activity in United Nickel. Another 7m shares were issued to provide working capital and to acquire another mining tenement. On 6th December 1983 a further 2m shares were allotted to Burhan in the acquisition of mining tenements. Schneider-Paas and Burhan were the principal shareholders with approximately an equal number of shares.
According to Stokes, United Nickel purchased the interest in these tenements through an agent appointed by Burhan. He said he played no part in the appointment of that agent or in dealing with United Nickel as a purchaser. It may be seen that the members of the LGM Prospecting syndicate profited handsomely by this transaction.
Exploration of the tenements continued. According to Stokes, he played no role in that activity. United Nickel made these arrangements. However, documents submitted into evidence suggest that he played some role.
Both he and Harold Abbott received a report on the Jubilee prospects dated 12th October 1983. On 24th November 1983 Stokes, for Burhan, and United Nickel received a report from Seltrust Mining Corporation Pty Ltd about those prospects with a proposal to enter into an arrangement with Burhan and United Nickel. In reality, the prospects were not successful and Stockdale wrote to both Stokes and Abbott informing them of their withdrawal from the venture.
Stokes appears to have been the contact point for Burhan. However, he said that he could not recall having any dealings with Harold Abbott as to the manner or development of the exploration.
Mention has been made of Bannerman and his longstanding personal and professional relationship with Stokes. In 1985 Bannerman approached Stokes about Pact and United Nickel. According to Stokes, he had shares in United Nickel through one of his companies or trusts. Bannerman said he wanted to control United Nickel and turn it into an industrial processing company but with some exploration interests. Stokes was asked if he would accept an offer for his shares by taking shares in Pact. It seems that he did so. He admitted in the Defence that from about 1983 to 1984 he owned 1.5m shares in Pact until he sold them in 1986. It is not known if there are shares in addition to those acquired upon the transaction when United Nickel became a subsidiary of Pact.
Pact was incorporated on 14th August 1984. It was a public company. Initially the directors were Gary Abbott, Gardiner and Somes. By early May 1985 Harold Abbott, Andrews, Bannerman and Schneider-Pass were also directors. At all material times Pact was a client of Nelson Wheeler Perth.
During the 1985 financial year Pact Resources entered into a scheme of arrangement whereby all the issued capital and options of United Nickel were acquired in consideration of the allocation of shares in Pact and it was then that United Nickel became a wholly owned subsidiary of Pact.
Kia Ora became a substantial shareholder in Pact on 7th November 1984 when that company issued 6.25m shares to Kia Ora.
Pact made a share issue of 16m shares in the first half of the 1986 financial year. Eyres Reed McIntosh acted as sharebroker and possibly as the lead underwriter. Western United acted as a sub-underwriter to the extent of 1.875m shares. The share issue was not entirely successfully and there was a shortfall of 26 percent. Western United had to contribute $39,000.
Kia Ora had supported Pact by contributing $70,000. In discharge of this obligation, Pact, in December 1985, transferred to Kia Ora its interests in various mining tenements. Chisholm was involved in this transaction, probably as an adviser to Kia Ora and he processed the agreement. In correspondence about this transaction, Chisholm described himself as the Manager of Geological Services of Kia Ora.
In January 1987 Bannerman was in Hong Kong. He met Mr Wang Poh Weng and Hutchinson of Nelson Wheeler Hong Kong with Pilmer and had lunch and attended sporting entertainment with Poh Weng and Pilmer. It is the plaintiff's case that this meeting was in the context of Nelson Wheeler Perth, through Pilmer and Nelson Wheeler Hong Kong, acting for Bannerman or Pact or both.
Fleubaix Pty Ltd was the trustee for the Minlex No 2 Trust in which Bannerman had an interest, the nature and extent of which is not disclosed by the evidence. It will be remembered that Nelac Nominees was a nominee company of Nelson Wheeler Perth which provided nominee and trustee services. Nelac Nominees acted in that capacity for Fleubaix but the nature and extent of the arrangement are not disclosed by the evidence.
On about 7th April 1987 Fleubaix obtained a loan of $330,000 from Western United. On 5th June 1987 Fleubaix obtained a further loan of $250,000 from Western United to facilitate the exercise of an option to purchase the 6.25m shares which Kia Ora held in Pact at a cost of 4 cents per share. Bannerman and others guaranteed these loans. These loans, less $80,000, were repaid. The balance remained outstanding in late 1988.
Pact deposited substantial monies with Western United. The first deposit of $400,000 was made during November 1986. On 30th April 1987 the total deposits were $806,000 and remained at about that level until after 31st August 1987 when the total fell to about $705,000. In October and November 1987 the total of the deposits was about $1.2m.
It is the plaintiff's case that Bannerman, through Fleubaix, obtains these loans because of the deposits made by Pact with Western United and whilst not strictly speaking typical back to back loans, the effect of them is the same. The value of Western United was enhanced by these arrangements in the same way. Without evidence from those involved, it is not possible to reach any conclusions about such matters. It may well be the case that Western United advanced the second loan of $250,000 to assist Kia Ora which may have wanted to sell its shares in Pact. However, the evidence does not permit that conclusion.
However, the evidence about LGM Prospecting syndicate, United Nickel and Pact does establish an association between the persons involved in each of those entities: Stokes, Bannerman and Harold Abbott. It reveals other associates: Gary Abbott, Chisholm, Gardiner and Pilmer. It is not possible to be precise about the full extent and nature of those relationships but what is known shows that Nelson Wheeler Perth was also involved in these associations at least to the extent mentioned. The evidence does not disclose if in 1987 Burhan retained any of the shares in United Nickel (Pact) acquired in September 1983.
Paralet was a company of which Stokes and Munachen were two of the four directors and was used by them to acquire a unit at Thredbo Village in the snowfields of Victoria in about April 1987. The families of Stokes, Munachen and a friend and his son each acquired a quarter interest in the unit.
The method of acquisition was an assignment of the interest of the owner in the unit to Paralet. The owner of the complex required, inter alia, character, business and bank references for the assignee. Solicitors acting for the assignor wrote to Nelson Wheeler Perth on 14th April 1987 requiring those references.
On 21st May 1987 Gardiner, as an executive of Western United, gave a written reference for both Munachen and Stokes. He wrote that he had known them for a period of five years and went on:
"I am aware of their personal and other company assets and consider them to be extremely sound financially. I recommend both as persons of good character.
On the basis that they are directors of Paralet Pty Ltd, I hereby recommend Paralet Pty Ltd as a suitable assignee."
According to Stokes, he had nothing to do with the procedures in acquiring the unit or this reference. His part of the transaction was arranged by Munachen. He said he had not known Gardiner for five years at that time, he had never disclosed to him information about his personal or company assets and he did not ask Gardiner for the reference. Stokes said he barely knew Gardiner at this time. He had seen him from time to time socially but usually from a distance. He had not had anything to do with him in business terms. According to Stokes, Gardiner would not have known anything about his financial position or business activities. He went on to add that Gardiner may have been acting for Kia Ora or United Nickel when the LGM Prospecting Syndicate did business with those companies in 1982, but he was not involved and did not believe that he had contact with him until the acquisition of the first half of the Marvel Loch mine.
I do not accept this evidence. It does not accord with what Harold Abbott wrote about Stokes at the time when the first half of the Marvel Loch mine was purchased by Mawson Pacific. It is likely that Stokes had known Gardiner and other senior personnel at Kia Ora and Western United for some years.
The circumstances in which Gardiner came to give the reference in those terms are also significant. On 21st May 1987 Nelson Wheeler Perth sent to Martin of Western United by facsimile transmission a handwritten draft of the reference to be given by Gardiner in substantially the same terms as the final document. After some minor alterations, it was typed and signed by Gardiner.
There is no evidence as to the role played by Munachen, if any, in the selection of Gardiner as the referee and in the preparation of the draft due to Munachen's failure to give evidence.
If Stokes' evidence about his limited association with Gardiner is correct, it is difficult to understand why Gardiner would be willing to sign a reference in those terms. It is significant that of all the social and business acquaintances of Stokes and Munachen at this time, Gardiner should be selected to give the reference.
No evidence other than that of Stokes was led to show the true nature of the association between Stokes and Munachen and Gardiner and Western United at this time and for the previous five years. In my view, the reference is an indicator of the nature of the associations between these men at this time and between Stokes and Munachen and Western United.
Parry Corporation was a long standing client of Nelson Wheeler Perth and Parry was known to Pilmer. It is appropriate to mention the evidence of the nature and extent of the association between Nelson Wheeler national, including Nelson Wheeler Perth, and Parry Corporation. Mention has already been made of the involvement of Parry Corporation and Parry in Western United.
In late 1983 Wenham forwarded a telex to Pilmer and mentioned that he had not seen Parry in Sydney for a long time. He suggested that Pilmer should contact him and tell him that Wenham would be delighted to see him when he was next in Sydney. On 27th January 1986 Wenham, Simmons and Pilmer wrote to Parry Corporation and on behalf of Nelson Wheeler national congratulating the company upon winning the right to defend the America's Cup and forwarded a contribution of $10,000 for that purpose. These matters alone tend to suggest a significant relationship between Nelson Wheeler Perth and nationally with Parry and Parry Corporation.
The minutes of the meeting of the management committee of Nelson Wheeler Hong Kong on 19th December 1986 record that two directors of Parry Corporation attended at Nelson Wheeler Hong Kong having been referred by Pilmer. They were interested in setting up a property trust in Australia for particular purposes. It was expected that Nelson Wheeler in Australia and Hong Kong would be used by Parry Corporation. The minute also records that these directors spoke highly of Pilmer. A copy of these minutes were sent to Wenham, Simmons and Pilmer.
On 30th January 1987 Nelson Wheeler nationally published a full page advertisement in the Financial Review congratulating the Task Force for the defence of the America's Cup and the crew of the defending yacht on their selection as the defenders. The advertisement included that Nelson Wheeler was proud to be in association with Parry Corporation "in pursuit of their sporting and commercial objectives". Every office in Australia and Hong Kong was mentioned with its telephone number.
On 11th March 1987 Newman forwarded a memorandum to Parry Corporation enclosing financial statements and cash flow projections for subsidiaries. The task of Nelson Wheeler Perth was to prepare a financial plan for the Parry Group of companies. On 16th March 1987 Nelson Wheeler Perth prepared a report on the restructuring of Parry Boat Builders Pty Ltd, a member of the Parry Group. In this report Nelson Wheeler Perth noted that their role as a firm of chartered accountants and the company's auditors had not yet been defined, but their work would be useful because of their involvement in the local boat building industry. Also it was mentioned that Newman's experience in his former employment with the Western Australian Railways could be an advantage to Parry Corporation and that Sudbury would be responsible for the assignment. Pilmer was the partner in charge of this work which was envisaged to be substantial as the estimated fee was $100,000.
According to Newman, Parry Corporation had by this time become diverse in its business activities. Each business required funds and Nelson Wheeler Perth was required to provide forecasts for the business and to develop an integrated package. His work for Parry Corporation occupied only about two or three weeks in about March 1987.
The account rendered by Nelson Wheeler Perth on 9th April 1987 to Parry Corporation indicates that a considerable amount of work had been undertaken by the firm during the period from 1st October 1986 to 31st March 1987.
Nelson Wheeler Perth continued to act for Parry and for companies with which he was associated. The evidence does not disclose when all of this work was undertaken, but some work was done in October 1987 and in 1988 and involved Pilmer. One document, a handwritten note, suggests that Nelac Nominees may have been used to hold shares in a holding company in the Parry Group. Another document which is incomplete suggests Pilmer was, or was to be chairman of directors of that company.
Plainly Nelson Wheeler Perth undertook work for Parry Corporation over a considerable period of time. Pilmer was the partner in charge of this work which occurred before Parry Corporation acquired the interest in Western United and after the Nelson Wheeler report was completed. It is to be expected that Pilmer had knowledge of aspects of the structure and financial viability of the Parry Group and Parry Corporation in particular. It is also to be expected that Pilmer would have known of the relationship between Western United and Parry Corporation and of its shareholding in Western United both as to the acquisition of the shares and the sale of them. These are reasonable inferences which may be drawn from the evidence and the absence of Pilmer from the witness box assists in the drawing of them. Newman said he did not learn anything about the relationship between Parry Corporation and Kia Ora or Western United but his work had a particular focus and his lack of knowledge does not assist in deciding the extent of knowledge of Pilmer.
This evidence does not, to my mind, establish a direct association between Nelson Wheeler Perth and Western United through Parry Corporation. However, it does establish two matters of importance. First, that Nelson Wheeler Perth, principally through Pilmer, was aware of the relationship between Parry Corporation and Western United, including the shareholding, the borrowings and the sale of the shares when he signed the Nelson Wheeler report, and secondly that Western United financed Parry Corporation in the purchase of its own shares. The most significant aspect of those matters is the involvement of Parry Corporation in Western United as both an "investor" and a borrower inflated the value of Western United. These matters were important in valuing Western United and Pilmer was, or should have been, aware of them.
In itself, it is not of particular significance that Nelson Wheeler Perth was acting for Parry Corporation at the time they undertook the Nelson Wheeler report provided any confidences of one did not have to be disclosed to the other. The significant matters concerning Parry Corporation which could bear upon the valuation of Western United were known to Western United. The plaintiff sought to make something of the point that Parry Corporation did not put any of its own money into Western United but walked away with a very substantial profit, something like about $5.8m less purchase and sale expenses.
The evidence does not disclose why those controlling Western United enabled this to happen, but it has not been established that this profit is relevant to matters in issue in these proceedings. The plaintiff contends that this profit and the circumstances of it establish that Parry was a collaborator with Harold Abbott in the plan to inflate the value of Western United to increase the benefits to the shareholders of Western United upon the takeover including Harold Abbott and that Pilmer was aware of that matter. In support of this contention, the plaintiff submits that Parry did not complain when the takeover announcement was made to the effect that Kia Ora was to pay $3.90 or $4.40 for shares which a short time earlier Parry Corporation had sold for $1.30 and further that Viner remained a director of Western United. They are intriguing matters but, in my view, the evidence does not go far enough for such a finding about such a serious matter.
The next matter is the information contained in the Nelson Wheeler report as to the sale of the shares owned by Parry Corporation in Western United on 14th August 1987. It will be remember that on that day the shares (6,238,726) were sold through County Securities at $1.30 each. Nelson Wheeler Perth were aware of the correct position at the time of preparing the report as that information is contained in their file. In the Nelson Wheeler report it was reported that this sale occurred in July 1987 and the number of shares was 3,829,045 which is the number initially allocated to Parry Corporation. No price was mentioned. This incorrect information also appeared in second and third drafts of the Nelson Wheeler report. On each occasion Parry Corporation was mentioned by name.
The plaintiff contends that this incorrect information was provided by Pilmer deliberately. If the correct information had been provided as to the date and the number of shares being about 25 percent of the issued capital, and the price of $1.30, a reader of the Nelson Wheeler report would have had a basis to question the accuracy of the valuation and the opinions expressed in it. By moving the date of the transaction another month away from the date of the valuation, by understating the number of the shares and by not mentioning the price, the reader would not understand the true significance of the transaction.
These inaccuracies were significant but do not establish that Pilmer included them deliberately in collaboration with Harold Abbott or otherwise. They do not therefore establish some relevant feature of the association between Pilmer and Harold Abbott or Nelson Wheeler Perth and Western United.
In evidence at the s541 examination, Pilmer acknowledged that correct information about the sale of these shares could be important to readers of the Nelson Wheeler report. According to Newman, the error about the number of shares occurred because he used information which he obtained from the Nelson Wheeler share registry because he believed that information to be correct. He said it was his mistake. He regarded the sale of the shares held by Parry Corporation as significant in determining the market price of Western United shares because he took the view the market had been opened up by that sale. However, this evidence is unconvincing. Newman's subsequent explanations indicate that at the time he gave little thought to the significance of the sale of those shares. He claimed that he regarded the sale as a "stress" sale because of his knowledge of the financial position of the Parry Group but he acknowledged that he did not make any enquiry about it.
It is not established to my satisfaction that there are any similar implications about these errors.
Mention has been made of the employment agency business conducted by Premium Personnel, the majority interest in which was owned by Nelson Wheeler Perth, through Startup Securities. The plaintiff contends that through Premium Personnel, Nelson Wheeler Perth provided personnel and employment services for clients throughout the period from February 1987 to May 1989. Having become directors and secretaries of companies of clients, Nelson Wheeler Perth would use this service to recruit staff for those clients and indeed did so for the MRSA Eltin Group in September and October 1987.
The plaintiff's case, as pleaded, is that through Premium Personnel there was a link between Nelson Wheeler Perth and Kia Ora through the Marvel Loch mine and MRSA and Western United through Gardiner.
Premium Personnel engaged an accountant for the Marvel Loch joint venture. On another occasion in October 1986 Premium Personnel sought an accountant for MRSA.
These matters do no more than establish one of the services provided by Nelson Wheeler Perth. They do not establish the link as pleaded.
It will be remembered that Shamra was the trustee for the Shamra Trust which owned units in the Essemco Unit Trust.
Shamra was incorporated in Western Australia on 24th March 1986 and had its registered office at the offices of Nelson Wheeler Perth. It was administered by the firm under the control of Munachen who was the public officer of the company. It was a unit trust and it will be remembered that the units were owned by the family trusts of Stokes, Munachen, Morris, Evans and Silver. These units were issued on 1st July 1986. Munachen was the chairman. He and Silver ceased to be involved in June 1987 and the unit which was held by the family trust of Silver was transferred to Brothers Four.
Shamra was a vehicle through which Stokes, Munachen, Morris and Evans held shares. It had a substantial shareholding in Southern Goldfields in 1986 and early 1987, the rights and entitlements of which were allocated to the individual unit holders on 1st July 1986. Shamra held 3.3m shares and about 1.9m options in Southern Goldfields. It also held shares from other companies including Acorn and Australian Emerald. Those shares were acquired as part of the strategy to resist the eventually successful takeover of Southern Goldfields. According to Stokes, money was borrowed for that purpose from either Western United or Rothwells, a merchant bank in Perth and he said he did not know which bank. Morris claimed to have known little about that transaction. However, the records of Western United do not disclose either Palmvale or Shamra as a borrower from Western United at times relevant to this transaction.
The evidence does not reveal that Shamra had any dealings with Kia Ora or Western United or any of those persons controlling those companies.
The evidence about Shamra merely establishes an aspect of the relationship between Stokes, Munachen, Morris and Evans and that Nelson Wheeler Perth were closely involved with Shamra through Stokes and Munachen and also by reason of providing secretarial, administrative and accountancy services.
It is the plaintiff's case that through Tectonic Resources there was an association between Nelson Wheeler Perth, through Stokes, Martino and staff and Western United, through Green, the merchant bank, Alecdor Nominees and Western United Insurance Brokers. Although a considerable body of evidence was adduced on this matter, the factual position is clear and may be stated relatively briefly.
Tectonic Systems Pty Ltd was incorporated in Western Australia in October 1985. The directors were Robb and Mr MG Blakiston and they each held one subscribing share. The company was a client of Nelson Wheeler Perth through its Kalgoorlie office. In June 1986 additional shares were issued to Robb. He was introduced to Martino by Stokes. Tectonic Systems entered into the field of mineral exploration. Robb was acquainted with Mr P Wilson, a senior geologist with the CSIRO. He was developing remote sensing techniques from satellites, the details of which are irrelevant for present purposes. Robb introduced Wilson to Stokes who took an interest in this technology for the exploration of tenements owned by Mawson Pacific. Mawson Pacific committed funds to the development of the techniques and Stokes also introduced Robb to Ramsgate Resources Limited which was a company of which Stokes, Morris, Evans and Eddy were directors and substantial shareholders. It also was a client of Nelson Wheeler Perth. Mention is made of this company shortly. Ramsgate also contributed to the project, with the consequence that Tectonic Systems, Mawson Pacific and Ramsgate became joint venturers.
According to Stokes, Robb, representing Tectonic Systems, required financial backing and Stokes introduced him to Newton. Newton acquired shares in Tectonic Systems through Muscoda. As has been seen, Stokes also had shares in Muscoda. Tectonic Systems acquired various mining tenements in Western Australia, South Australia and the Northern Territory.
A procedure was adopted in 1987 which resulted in the establishment of Tectonic Resources and a public float to raise capital. The issued capital in Tectonic Systems was sold to a delisted company Kornblums Furnishings Limited which was then re-listed on the Stock Exchange. Tectonic Systems had its assets revalued at a substantial increase in value and then made a bonus share issue to its shareholders out of the resultant revaluation reserve. Martino became a director of Tectonic Systems and Nelson Wheeler Perth acted for the company in these matters. After the transaction with Kornblums, that company changed its name to Tectonic Resources on 8th July 1987. Its directors resigned and were replaced by Robb, Blackiston and Martino.
On 10th July 1987 Tectonic Resources made a placement of 5m fully paid ordinary shares of 25 cents each to raise capital and did so through County Securities. On 13th July 1987 Tectonic Resources was re-listed on the Stock Exchange. In consequence of the placement, 540,000 shares were allocated to Alecdor Nominees which, it will be remembered, was a nominee company of Western United, 5,000 shares to Somes and his partner Cooke, 1,060,000 shares to Bowyang Nominees, a nominee company of County Securities, 180,000, shares to Domenal Enterprises, the trustee of Martino's family trust, 7,000 shares to Granadilla, a company associated with Somes and Cooke, 5,000 shares to Langford, 5,000 shares to a client of Nelson Wheeler, 5,000 shares to Milligan and 5,000 shares to an associate of Milligan. Alecdor Nominees held the shares as to 296,000 for Robb and 240,000 for Ms G Wilson.
Wilson financed the acquisition of the shares held by Ms Wilson by a loan to him of $60,000 from Western United. Martino and employees of Nelson Wheeler Perth assisted him in arranging that loan. Robb also obtained a loan from Western United to acquire the shares held for him in the sum of $70,000. These loans were obtained on about 30th June 1987. Tectonic Resources arranged its general and worker's compensation insurance cover with Western United Insurance Brokers.
Tectonic Resources continued with the joint venture arrangements and also in a joint venture with Mawson Pacific and Ramsgate. On 8th September 1987 Martino and Blackiston instructed the Rural and Industries Bank at West Perth to transfer $500,000 of the funds held by the Bank for Tectonic Resources by bank cheque to Western United. On that day Martino forwarded the cheque to Ms Wendy Allen, the manager of the Money Market Division of Western United, and he addressed her in first name terms. According to Martino, this deposit was arranged by Robb through a member of staff of Nelson Wheeler Perth, Mr Guille. Martino merely signed the letters which had been prepared by Guille. He did not know Allen. The decision to place the money with Western United was made by Robb in his capacity as managing director of Tectonic Resources and Martino signed the letters because Robb was not available at the time. On 11th September 1987 the Development Manager of Western United Insurance Brokers wrote to Martino for Tectonic Resources as to certain agreements and addressed him by his first name.
Accounts for professional fees rendered by Nelson Wheeler Perth to Tectonic Resources indicate that the firm undertook many tasks for the company, including secretarial and administrative work. Martino was the partner in charge of this client and played an active part in the work. The principal office of the company became that of Nelson Wheeler Perth in September 1986.
The top twenty shareholders of Tectonic Resources as at 14th October 1987 included: Robb about 2.8m, Muscoda about 2.5m, Wilson about 3m, Bowyang Nominees about 1.2m, Alecdor Nominees about 536,000, presumably for Robb and Ms Wilson, Domenal 180,000 and Ivan Mrsa Pty Ltd 76,000. In the 1988 taxation return of Cullimore Family Trust, a trust of the Stokes family, it is shown that the Trust held a substantial fund of shares in Tectonic Resources at a cost of in excess of $250,000 and also that income was received for Tectonic in excess of $106,000.
On 16th October 1987 County Securities agreed to place with clients of the company 1.4m shares in Tectonic Resources at $1.35 per share. After the share market crash, Martino informed the Stock Exchange that the directors had reconsidered the placement and decided it was not in the best interests of the company to proceed with it at that price but at the price of 80 cents per share.
The effect of Martino's evidence is that he acted for Tectonic Systems and then Tectonic Resources in a professional capacity and also was a director at the request of Robb. Nelson Wheeler provided the administrative and secretarial services also at the request of Robb. He was not associated with Kia Ora or Western United when undertaking that work. The executive decisions of the company were made by Robb. There is no evidence to the contrary and no reason not accept Martino's evidence as to the role played by him and Nelson Wheeler Perth excluding Stokes.
The evidence does establish that Mawson Pacific, Ramsgate Resources and Muscoda were heavily involved with Robb and Wilson in the development of the project. That arrangement brought together those two men and Newton, Morris and Evans, Stokes and the other members of the LGM Prospecting Syndicate. When Robb and Wilson required money, Western United provided a loan. When Tectonic Resources required capital Stokes, Morris, Evans and Newton caused companies they controlled to take substantial shareholdings and in the case of Newton to place shares with clients. It is likely that Stokes also took shares personally with Newton through Muscoda. Nelson Wheeler Perth provided the professional assistance and services which have been mentioned and Martino was personally involved as a director and shareholder through Domenal.
I do not think that any relevant association between Nelson Wheeler Perth and Kia Ora or Western United is established through Tectonic Resources. Nelson Wheeler Perth was closely involved with the company. Morris, Evans, Newton and Mawson Pacific were also involved. However, the link with Western United was by way of loans and there is no reason to suggest that any relationship between Nelson Wheeler and Western United played any part in the obtaining of those loans.
The Western United Property Trust did not eventuate but the attempts to establish it reveal an association between Western United and Nelson Wheeler Perth and something about the nature of that association.
Gelorup Nominees Pty Ltd was the trustee of the old Westralian Asset Trust. In October 1986 Mr HR Haselhunt and Munachen were managers of the Trust. At the meeting of directors of the Trust on that day, it was noted that when Haselhunt had prepared a report about a management fee structure for an activity, he, another person and Munachen, would review the matter and report to the directors. Stokes joined the meeting and advised of an enquiry by Western United which was keen to establish a public property trust. It was resolved that Stokes and Munachen would meet with the principal of Western United. According to Stokes, he had met Green in 1986 who at some time had told him that Western United was interested in setting up a property trust which they wanted to list publicly. Stokes told him about the Westralian Asset Trust and said that he told Haselhunt of that conversation.
Cableform Technologies Limited was a subsidiary of Western United and changed its name in November 1986 to Western United Properties Limited. It was proposed that the company be the manager of the Western United Property Trust.
On 4th February 1987 Milligan sent a facsimile transmission to Gary Abbott concerning the Western United Property Trust. He had discussed the matter with County Securities and forwarded five pages of comments to someone at County Securities. These comments are in detail and illustrate matters to be considered by those setting up such a trust. Green replied to Milligan on 6th February 1987 and the detail of this reply indicates that Western United were considering the matter seriously.
Minutes of the meeting of directors of Gelorup on 6th February 1987 record that Haselhunt informed the meeting that he and Munachen had had three meetings with Western United Properties and that Western United, "a public company 25 percent of which is owned by Parry Corporation", had offered to merge with Westralian Asset Trust to establish a public trust. He also reported that upon the listing of the public trust, the managers would no longer be involved in the day to day running of the Trust and that the managers would change from Haselhunt, Stokes and Associates to Western United Properties Ltd, the Trust from Westralian Asset Trust to Western United Property Trust and the Trustee Company from Gelorup to WA Trustees Limited. The then 45 unit holders would receive a bonus issue and with a new issue there would be 23m units of $1. Haselhunt, Munachen and Mr Hunter were empowered to continue negotiations with Western United Properties.
According to Stokes, Nelson Wheeler Perth undertook the administration of the Westralian Asset Trust and the name Haselhunt Stokes and Associates was the business name registered for that purpose. Stokes claimed to have nothing to do with the consideration of the proposed Trust.
By 18th February 1987 Western United had proceeded further with the proposed trust. A draft prospectus was prepared and sent to County Securities and another stockbroker in Sydney to see if either would underwrite the float of the new trust.
This matter reveals that Stokes and Munachen were involved with Western United in 1986 and early 1987 in this way. It shows that County Securities was also involved. Green mentioned Western United's interest to Stokes who took the matter up with Gelorup. Stokes and Munachen were willing to work with Western United in this way.
Mention has been made of the Nelson Wheeler Share Registry which was established and operated by Nelson Wheeler Perth and later by Borman. There was a relationship between Nelson Wheeler Perth and Western United in this context which the plaintiff alleges is significant. It is necessary to examine each aspect of this alleged relationship in order to determine whether it is of significance.
In June 1985 Pilmer met with Harold Abbott and Gary Abbott at the offices of Western United and negotiated the purchase from Western United of used computer equipment for the share registry at a cost of about $73,000.
As from 15th August 1986 Western United transferred its share registry to Nelson Wheeler Perth. At the time Nelson Wheeler Perth estimated the annual fees from Western United at $7,334. They also expected that Kia Ora would transfer its share registry to them as from 1st September 1986 with estimated annual fees of $53,620 but that transfer did not eventuate. On 1st September 1986 the secretary of Kia Ora wrote to Munachen, addressing him on first name terms, informing him that Kia Ora had decided to accept his proposal to provide share registry services for Kia Ora and asking him to make the necessary arrangements to effect the transfer. Ms M Di Lucia was the manager of the Nelson Wheeler Share Registry at relevant times. She had been informed, probably by Munachen, that the share registry of Kia Ora was to be transferred to Nelson Wheeler Perth at about this time and he wrote to the firm that had the registry to effect the transfer but it did not eventuate. She said that Nelson Wheeler Perth did not refuse to accept the share registry of Kia Ora.
A substantial body of evidence was led to establish the function of a share registry of a company, the method of operation of the Nelson Wheeler Share Registry and the type of information which was readily available to Nelson Wheeler Perth, the client companies, shareholders and the public. Munachen supervised the Registry. Di Lucia was a capable and efficient manager. For present purposes it is necessary only to give a brief description of these matters. All share transactions were notified to the Registry and recorded. The transfer documentation was retained. Share scrip was cancelled and issued. All significant information was entered into computer systems and could be retrieved promptly and in a manner suitable for the particular purpose, eg the number of existing shareholders, the top twenty shareholders, the number of shares traded and the like. Of course, in busy times, as in 1987, there were delays in sharebrokers providing information to the Registry and in entering it into the computer. Nevertheless, the Nelson Wheeler Share Registry was run efficiently and effectively. It is appropriate to mention a few transactions as examples of work undertaken by the Registry.
It will be remembered that on 20th October 1986 the shareholders of Western United in general meeting authorised the directors to allot to Parry Corporation the initial parcel of shares and options taken by it. On 5th November 1986 the Registry was requested by Western United to prepare the share certificate. The Registry attended to that task promptly and sent the certificate to Western United on 6th November 1986. On 9th October 1986 Western United requested the Registry to effect a transfer of 740,000 shares in Western United owned by members of the Kordic family to Voteride Limited and then to National Nominees Pty Ltd. It appears that there was some delay due to the need for a particular person, Milligan, to provide authority to sign documents which were provided to the Registry on 28th March 1987. A new certificate was sent by the Registry to National Nominees on that day.
On 5th November 1986 Di Lucia wrote to Western United enclosing Transfer Journals and Issued Capital Control Reports relating to Western United shares. The summary provided in the letter showed the number of transactions, the transfer numbers, the certificate numbers, the quantity of shares and the class of shares. It appears that this information was provided at least twice a month. Each month the Registry provided to the company a Top Spread Report which showed the number of shareholders in categories 1-1000, 1001-5000 and so on, with the number of shares held by the shareholder in each category and the percentage of the total. This document also included the name of the shareholding of each of the top twenty shareholders. These documents were also sent to the Stock Exchange.
New obligations with respect to share certificates were imposed upon listed companies by the Australian Stock Exchange pursuant to Listing Rules to effect speedy transfers of shares. The Adelaide Stock Exchange wrote to Western United advising of these obligations on 30th January 1987. In effect a company had to provide to the transferee the share certificate within ten business days after the transfer was lodged. Western United informed the Nelson Wheeler Share Registry of these obligations on 9th February 1987 and asked that they be discharged.
It follows that the Nelson Wheeler Share Registry had information of the share dealings of the directors of Western United and senior employees in shares and options in the company. Information as to the rise in price of Western United shares in 1987 was also recorded and was available to Pilmer and Newman when the Nelson Wheeler report was undertaken.
It is appropriate to mention another transaction by way of example. Mention has been made of Katinka, a company which held Western United shares for Harold Abbott and Gary Abbott. On 11th March 1987 the Nelson Wheeler Share Registry was informed by Katinka of its intention to exercise 2m options for fully paid ordinary shares of 25 cents each in Western United. That information was provided by a letter under seal affixed in the presence of Harold Abbott and Gary Abbott. The letter also instructed the Registry to deliver the scrip, upon the option being exercised, to Standard Chartered Bank and to send a letter to that Bank in terms of the draft attached. Katinka paid the price on exercising the options, $500,000, to Western United on 12th May 1987 and had borrowed money from the Standard Chartered Bank for that purpose. The share certificate was issued for 2m shares by the Registry on 19th May 1987.
When Nelson Wheeler Perth came to undertake the Nelson Wheeler report, mere enquiry from the Registry would have revealed that Harold Abbott and Gary Abbott, through Katinka, paid $500,000 for shares in which a little over four months later Nelson Wheeler Perth had valued at $6.44m on the basis of $3.22 per share and in respect of which had expressed the opinion that it was fair and reasonable for Kia Ora to pay $7.8m or $8.8m depending upon which offer was accepted. This holding of 2m shares was but part of the holding of Harold Abbott and Gary Abbott. Of course the price for the exercise of the option did not represent the value of the shares at the time, but these matters would have indicated to Nelson Wheeler Perth that Harold Abbott and Gary Abbott stood to gain handsomely from the takeover and consequently there was the need to exercise great care in discharging the responsibilities under the retainer. Similarly a simple enquiry of their own share registry would have indicated to Pilmer and Newman the substantial benefits to be received by the other directors and senior management, including Green, should the takeover succeed, which was yet another reason to use caution in the use to be made of information provided to them. Documents admitted into evidence reveal that the Registry was aware of the shareholding of, and the exercise of options by, each of these men. Also, the Nelson Wheeler Share Registry was informed by Western United on 3rd June 1987 of the bonus issue of the one share for three shares held at 11th June 1987 which increased the shareholding of the directors and others controlling Western United.
The Nelson Wheeler Share Registry was also informed of various other transactions affecting directors and senior management of Western United.
Also, the arrangement between Nelson Wheeler Perth and Western United for the provision of the share registry services necessarily means that Nelson Wheeler Perth were not truly independent of Western United. This arrangement was beneficial to Nelson Wheeler Perth and personally to each of the partners including Pilmer. The continuation of the arrangement necessarily depended upon the goodwill of management of Nelson Wheeler Perth towards Nelson Wheeler Perth and Munachen in particular.
I now turn to another matter. On 15th October 1987 Munachen wrote a memorandum to Di Lucia as follows:
"Re: Kia Ora Gold Corporation N.L. Western United Holdings Ltd
Kia Ora Gold has announced a takeover bid for Western United, which if successful will result in Kia Ora controlling Western United, at which stage, Kia Ora will change its name to Western United. Harold Abbott is adamant that we take over the register when this is effected, which in effect will be the old Kia Ora register, but with a new name and having some 20,000 shareholders. This time we won't refuse. It should be ready early 1988, so I suggest we plan for a January, 1988 takeover. With all of the other changes and new floats, we should plan to recruit sufficient new staff to handle this extra work. We should also plan for additional computer facilities etc. These matters should be given priority when our newest staff member joins."
It will be remembered that the extra-ordinary general meeting of Kia Ora at which the takeover of Western United was authorised did not occur until 26th October 1987 well after this memorandum was written. In the monthly report for the Nelson Wheeler Share Registry for October 1987, the following was reported:
Stokes said he did not have any discussion about this matter with Harold Abbott at about this time which could have precipitated Kia Ora offering to Nelson Wheeler Perth its share registry. However, he said that after he acquired his interest in the Registry in 1987, he would have urged Harold Abbott to give the work to the Registry. He said he could not recall any discussion with Munachen about the matter. He could not explain the statement in the memorandum "This time we won't refuse".
Of course if Munachen had given evidence he could have related what happened and when. His failure to give evidence means that the memorandum is to be understood from its terms. It shows a feature of the relationship between Harold Abbott and Munachen which involved Nelson Wheeler Perth directly and not merely through associated companies. It shows that Harold Abbott's proposal was to be implemented and that Kia Ora was to be a substantial client. It is not known when Harold Abbott mentioned these matters to Munachen. It may have been whilst the Nelson Wheeler report was being undertaken, but there is no evidence as to that matter. It shows that Kia Ora and Nelson Wheeler Perth at this time had a close business relationship, a consequence of which was the share registry work of Kia Ora being given to the Nelson Wheeler Share Registry.
The question may be asked, "Why would Harold Abbott make that proposal at that time?" The evidence does not permit the finding that he was grateful to Nelson Wheeler Perth for a favourable Nelson Wheeler report or that the offer of the work had been made to Pilmer before, or at the time of the contract of retainer, but it does establish that a close association existed which very likely existed before the contract of retainer.
The importance of the share registry of Kia Ora to Nelson Wheeler cannot be underestimated. The Nelson Wheeler Share Registry had grown steadily since 1985 when, according to Di Lucia there were only two registries of two companies. Many of the names of the companies for which Nelson Wheeler Share Registry provided this service in 1987 were introduced by Stokes or Munachen and are companies mentioned in this part of these reasons for judgment.
According to Di Lucia if Kia Ora had been given the work to Nelson Wheeler Perth, it would have almost doubled the size of the Nelson Wheeler Share Registry based upon the number of shareholders in Kia Ora and the number of shareholders of all of the other companies. As has been seen, the calculation in 1986 was that estimate fees from Kia Ora would have been in excess of $53,000 and it is likely that the fees would have been similar in 1987.
The last matter is the request by Western United to the Nelson Wheeler Share Registry on 19th November 1987 to send to Western United the offer documents of Kia Ora for the takeover of Western United which were to be sent to various shareholders so that Western United could deliver them by courier. These shareholders were the companies of the directors, Milligan and Gardiner and National Nominees, ANZ Nominees and Bowyang Nominees. Mention of these nominee companies in this context suggests that they held shares for the directors, senior management or persons associated with them or some of them. This request concluded:
"Also please arrange to send documents to overseas shareholders by express (or priority) mail."
According to Di Lucia, because the Nelson Wheeler Share Registry held the register of Western United shareholders, it prepared the acceptance forms with precise information about shareholding which had to be sent to Kia Ora to be included with the offer document. She was speaking from her recollection of usual practice but the reference to overseas shareholders seems to suggest that her evidence may not be correct. It is a matter of no significance. What is relevant is that this matter is an aspect of the work undertaken by the Nelson Wheeler Share Registry and of the relationship between Nelson Wheeler Perth and Western United.
Questenberg Pty Ltd was the trustee of the Questenberg Unit Trust. Stokes, Munachen and Martino were the directors of Questenberg and the legal owners of the issued shares. It was incorporated on 13th May 1986 as a shelf company and acquired by Nelson Wheeler Perth on 23rd June 1986 at which time Stokes and Martino were appointed directors, the shares were transferred to them and the office of Nelson Wheeler Perth became the registered office of the company. Munachen was appointed a director on 8th July 1986. Martino was also appointed the secretary of the company. There were ten units in the Questenberg Unit Trust, all of which were held by Martino upon trust as to five of the units for Morris and Evans and as to the other five units for Forsayth. At this time, in July 1986, Morris and Evans were directors of Forsayth and controlled 16 percent of the issued capital of that company.
There was a vast amount of evidence adduced at the trial about Questenberg and various transactions in which it was involved. The evidence of Morris was, in the main, unhelpful and, I find, deliberately incomplete. According to him, Questenberg was established to purchase a motor cruiser vessel called "the Angelina" from Singapore at a cost of $150,000. Munachen signed the letter containing the offer and the agreement for sale and purchase. According to Morris, it was a pleasure craft used for the benefit of the mine workers of Forsayth and was purchased on 27th May 1986. Evans undertook the negotiations and as far as he was aware Questenberg was not involved in any activity other than with respect to the Angelina. As will be seen, Questenberg was involved in other financial activities and I do not accept that Morris was unaware of them.
On 25th August 1986 Questenberg applied to Western United for a loan of $1.5m. Three forms with respect to that application were admitted into evidence. One showing Morris and Evans as the applicants, another showing the same information but with their names crossed out and Questenberg Pty Ltd written on the form and the third in the name of Questenberg. It is the third application form which was processed by Western United. Morris and Evans are shown as guarantors of the proposed loan. The security includes a first mortgage over 2.45m shares in Forsayth but this amount is altered to 1m shares. The application also records that it was a condition precedent of the loan that Forsayth would deposit $500,000 with Western United for the duration of the loan and further that Questenberg was a "shell" company being used by Morris and Evans as a vehicle for the transaction of an investment programme.
The loan was approved on 17th October 1987. It was a "drawing and discount" facility for 30 days which enabled all or part of the $1.5m to be drawn down as required. The security was a pledge over 1.45m shares in Forsayth not 2.45m or 1m. No mention is made in the letter of offer setting out the terms of the loan for the deposit by Forsayth. This letter was sent to Questenberg at the office of Nelson Wheeler Perth.
The $1.5m was paid to Questenberg on 17th October 1987. Martino, Morris and Evans each signed three bills of exchange for $500,000 each but not until 17th November 1987. The funds were disbursed as follows: $210,000 to Fosayth Group Management Pty Ltd, $450,000 to First Australian Resources, $500,000 to Eyres Reed McIntosh, $300,000 to Western United and a further $10,000 to Western United. The small surplus was retained by Questenberg. Martino wrote cheques for Questenberg in payment of those amounts. He said he made out the cheques and signed them and did so on the instructions of Evans. He said he could not recall why the payments were made except that he did recall that Evans told him that the payment of $500,000 to Eyres Reed McIntosh was for an investment of Questenberg.
However, the Nelson Wheeler Perth file which was admitted into evidence contains records which assist in explaining the reason for these payments.
The payment of $10,000 to Western United was in payment of the loan fee. The payment of $300,000 was a deposit with Western United by Questenberg which was in the nature of a back to back arrangement. Martino forwarded the $500,000 to Eyres Reed McIntosh on 17th October 1987 with the instruction to hold that amount pending further instructions. That amount was deposited with Western United on 12th November 1986 in the name of Questenberg. The payment to First Australian Resources was in re-payment of a loan and the payment to Forsayth was repayment of loan with respect to the Angelina.
It is necessary to go back in time to understand the reason for payments to First Australian Resources and to see the involvement of Western United. Although a considerable body of oral and documentary evidence was given about these matters and Morris claimed to have little knowledge about them, a reasonably clear picture has emerged.
In 1984 Morris and Evans, as directors of Forsayth and shareholders, were fighting off a takeover of the company by Briggs and interests associated with him. Jarrahmond Holdings Pty Ltd was a company associated with a geologist Dr Longman. It owned 2.5m shares and 2.5m options in Forsayth. At the time of the threatened takeover, those options were exercised so that the shares acquired could carry votes against the takeover. $500,000 was required for that purpose which was advanced to Jarrahmond as a loan by Western United on 23rd March 1984. According to Morris, he, Evans and Longman went to see Harold Abbott who was against Briggs and wanted to see the takeover attempt defeated. He was willing to help but wanted any involvement on his part and that of Western United hidden. The 2.5m shares in Forsayth to be acquired by Jarrahmond exercising the options was a critical number of shares in the takeover battle.
Western United advanced the loan for one day secured by 5m shares in Forsayth. The takeover bid was defeated and Morris and Evans remained in control of Forsayth.
In early 1986 the debt had to be repaid. First Australian Resources was a company with which Morris and Evans were associated. That company advanced $450,000 to Palmvale on 30th May 1986. Of this amount Palmvale deposited $410,871.24 with the merchant banker Kimberley NZI. In the records of Palmvale, there is the note that Evans had given instructions that these monies were on deposit against funds advanced to Longman of $450,000. Records of Palmvale identify the deposit with Kimberley NZI as "Loan No 2 Morris/Evans (NZI)".
First Australian Resources had to be repaid and if that happened during the financial year, the issue of whether the loan was recoverable did not have to be addressed by the auditor which was Nelson Wheeler Perth. Crawford handled that matter.
On the plaintiff's case the need to repay First Australian Resources was the primary reason for the establishment of Questenberg and the loan from Western United of $1.5m. The problem is noted in the file relating to Questenberg. The following note was made much later:
"Really - Mike (Evans) and John (Morris) should put in the money to clear this then Questenberg would have cash at Bank. The point is they used Forsayth money and subsequently Questenberg money and it has never been repaid.
Can't see repayment via journals else P/V in Questenberg books will become M & E which is not acceptable. Should be by cash then and client don't come into it."
I am satisfied that the full story about Questenberg has not been told. Munachen, Evans and Harold Abbott did not give evidence. Stokes could not be cross-examined and Morris was not forthcoming about matters of which, I am satisfied, he was aware.
Nevertheless, the following matters are established. Morris and Evans were assisted by Harold Abbott in 1984 and again in 1986. The Questenberg loan involved a back to back arrangement. Martino claimed to know nothing about this matter but he did write out and sign the cheques and bills of exchange and give some instructions to Eyres, Reed and McIntosh. Of course, no-one could be expected to remember many matters about client affairs ten years later, but I expect he could have remembered more if he had better prepared himself to give evidence. I accept that it is likely that Evans, with the knowledge of Morris, arranged the Questenberg loan and that both men arranged the Jarrahmond loan. They were sufficiently well regarded by Harold Abbott for such large loans to be made. The Questenberg loan included back to back arrangements through the deposits totalling $800,000 which were repaid by Western United in December 1986. Given the close and longstanding relationship between Stokes, Munachen, Morris and Evans and the involvement of Palmvale and the positions of Stokes, Munachen and Martino in Questenberg, Stokes and Munachen would have been aware of these various transactions and I accept that Martino was aware of, at least, in a general way of the loan by Questenberg and its purpose. In the Nelson Wheeler Perth file created for the Nelson Wheeler report, there is written on the liquidity report for Western United as at 17th October 1986 "Forsayth NL 1,500,000" which is in Green's handwriting. At that time, excluding that loan, the total assets of Western United were stated to be $9,894,855. It may be seen that Green regarded the Questenberg loan as a loan to Forsayth. Nelson Wheeler Perth was informed of the loan. It was the largest loan made by Western United until that time. Investigation would have revealed the back to back arrangement.
The plaintiff contends that these transactions were contrary to law to the knowledge of both Nelson Wheeler Perth and Western United. Nelson Wheeler Perth was aware that Western United was willing to be involved in that type of arrangement and to collaborate with Morris and Evans in their corporate conduct. It is unnecessary for present purposes to make any comment about the propriety of the transactions. It is sufficient to have regard to the transactions and the associations which are implicit in them.
As has been seen, some of these associations do not assist in the resolution of issues in these proceedings. I have disregarded them. However, other associations are of importance for various reasons.
Some of them show the manner in which Western United and Harold Abbott undertook business through the back to back arrangements and that Nelson Wheeler Perth, including Pilmer, were aware of these types of arrangements. So too was Somes who participated in some of them. The value of Western United was artificially inflated by those types of loans.
The evidence discloses close relationships between Morris, Evans, Stokes and Munachen and many business dealings. Each of these men had a close relationship with Harold Abbott and with Western United which involved substantial loans which were usually granted urgently. The relationship between Nelson Wheeler Perth, mainly Stokes and Munachen, and Harold Abbott and Kia Ora and Western United enabled substantial assistance and borrowings through Harold Abbott as may be seen from the AIMS, Wattle Gully and Questenberg transactions. Over the years Stokes and Munachen came to know Gardiner.
Newton was also closely involved with all of these men and Kia Ora, Western United and Mawson Pacific which assists in understanding why County Securities became involved in the sale of the shares owned by Parry Corporation in Western United.
Nelson Wheeler Perth benefited significantly from many of these associations through the professional work given to them, the share registry services provided to some of the companies and, on occasions, the interests which the firm took in some of the companies.
At the very time the valuation of Western United and the Nelson Wheeler report was being undertaken by Nelson Wheeler Perth, one of the partners, Stokes, received a loan of nearly $1m from Western United through Harold Abbott. Stokes had a business relationship with Chisholm, a senior executive of Western United.
Stokes benefited substantially from his association with United Nickel, later Pact, through the LGM Prospecting Syndicate and at that time, in 1983, was involved with Harold Abbott in the transactions involving tenements.
Nelson Wheeler Perth, and in particular Pilmer, through the association with Parry Corporation knew, or was in the position to know, relevant information about the relationship between Parry Corporation and Western United which was relevant to the valuation and the Nelson Wheeler report. A question arises whether a duty of confidence to Parry Corporation had existed which would have prevented Nelson Wheeler Perth from disclosing information about Parry Corporation to Kia Ora but that question need not be decided. Much of the significant information would have been known to Western United and could have been sought from that company by Nelson Wheeler Perth or from other sources. Parry Corporation could have consented to the disclosure to Kia Ora of confidential information. However, if there was a duty of confidence which posed an obstacle to the proper performance of the task under the contract of retainer, Nelson Wheeler should have refused the retainer.
Also through the associations between Nelson Wheeler Perth and Western United through the medium of the Nelson Wheeler Share Registry, relevant information was available to Nelson Wheeler for the purpose of the valuation and the report. This does not, in itself, indicate a lack of independence but an opportunity to readily obtain the information.
Also the proposal that Kia Ora would place its share registry with the Nelson Wheeler Share Registry after the takeover of Western United indicates that Nelson Wheeler Perth had an interest in the success of the takeover and consequently could not be regarded as independent of Kia Ora. The fact that this proposal did not eventuate is not to the point.
In my view, all of these matters speak for themselves and establish that Nelson Wheeler Perth were not independent of Kia Ora or Western United and should not have accepted the retainer.
Before parting with these associations, I mention evidence given by Messer. He knew nothing about most of these matters at the time Nelson Wheeler Perth undertook the valuation and the Nelson Wheeler report. However, he was asked what he would have done had he known about them at the time if he had been undertaking the retainer.
He said that he would have regarded the Questenberg transaction as material to the valuation of Western United in September 1987 in the context of whether fees received by Western United were abnormal which could impact upon future maintainable earnings. If he was aware that Nelson Wheeler Perth had been involved in this transaction, he would not have been able to accept the retainer upon his application of the appropriate professional standards.
Messer also said that if he had been aware of the borrowings of Stokes and Munachen and others through Palmvale to acquire shares in Wattle Gully in January 1987, he would not have accepted the retainer because in September 1987 Nelson Wheeler Perth were holding Stokes and Munachen out as partners. If he had been aware that Wattle Gully had obtained the loan of $22m from Western United in May of 1987 and that Kia Ora was, in effect, in a joint venture arrangement with Wattle Gully with respect to the Mount Pleasant Gold Trust, he would not have accepted the retainer.
Also Messer said that if he had known of the loan from Western United to Stokes through Cullimore in September 1987, he would have not have accepted the retainer because he would have been obliged to disqualify himself.
He went on to say that the combined effect of each of those matters indicated to him that Nelson Wheeler should not have accepted the retainer.
In my view, Messer was correct in expressing those opinions. He expressed them on the basis that Stokes and Munachen were not in fact partners of Nelson Wheeler Perth at the time but were held out as such. I have found that they were partners.
The existence of the contract of retainer between Kia Ora and Nelson Wheeler Perth is not in issue. The date of the retainer is not important. It may have been finalised when Harold Abbott spoke to Pilmer prior to the first meeting on 21st August 1987 which has been discussed or subsequently. What is in issue is the scope of the retainer.
It is the plaintiff's case that Kia Ora retained Nelson Wheeler Perth to undertake a valuation of Western United to assist in the formulation of the precise terms of Kia Ora's offer for the takeover of Western United and also a report pursuant to the Listing Rule 3J(3) (para 16 of the Statement of Claim). In their Defence the first defendants admit that at this meeting Harold Abbott requested that Nelson Wheeler Perth provide the directors of Kia Ora with an independent valuation report of Western United (para 16 of the Defence). They also admit that between 7th September and 22nd September 1987 the Nelson Wheeler report was requested by Kia Ora for the purposes of Kia Ora complying with Listing Rule 3J(3) but they deny that the Nelson Wheeler report, or any drafts, were requested to assist in the formulation of the precise terms of the offer.
Without the letter of engagement, the only written record of the retainer is to be found in the Nelson Wheeler report which is addressed to the Directors of Kia Ora and contains the following:
"We report at your request on the value of the company Western United Limited. The valuation has been prepared for the Directors of Kia Ora Gold Corporation N.L. for use in connection with a Stock Exchange Section [sic] 3J(3) notice to shareholders for approval to acquire all of the issued capital of Western United Limited"
"This report has been prepared at the request of the Directors of Kia Ora Gold Corporation N.L. and in accordance with the Stock Exchange Listing Requirement 3J(3) to accompany a notice to shareholders of a meeting to approve the acquisition of the issued capital of Western United Limited.
The report has been prepared solely for the benefit of the Directors and those persons who are entitled to receive notice of the meeting to approve the proposed acquisition and represents Nelson Wheeler's opinion on the value of the issued capital of Western United Limited.
Nelson Wheeler hereby consents to the inclusion of this report with the notice of meeting to shareholders to approve the acquisition."
However, that record must be seen in the context that it is part of the Nelson Wheeler report. It does not deny that Nelson Wheeler Perth had also been instructed to value Western United for the purpose of formulating the price. It will be remembered that Newman was the only person present at the meeting on 21st August 1987, to give evidence. He said that Nelson Wheeler Perth were retained to value Western United for the purpose of the takeover and the terms of the offer were not discussed at that meeting.
Newman's evidence is not precise. It seems that there was no specific instruction at that time as to the purpose of the valuation, namely so that the offer may be formulated.
As has been seen, those controlling Kia Ora had fixed upon the general level of the takeover price by the time of their first meeting with Hayward and before the meeting with Pilmer and Newman. That level was nearly $4.20 and did not alter.
Having considered the pleadings and the evidence about the various drafts of the Nelson Wheeler report, having reached the conclusion that the directors of Kia Ora considered the third draft and that Pilmer and Newman were subsequently informed of the terms of the offer, I am satisfied that the scope of the retainer was that Nelson Wheeler Perth was to undertake a valuation of Western United for Kia Ora in the context of a proposed takeover and then, if required, to prepare a report pursuant to Listing Rule 3J(3), which is what in fact occurred.
The valuation was required to see if the general level of the takeover price already determined was feasible. This is a reasonable inference from the evidence, particularly in the absence from the witness box of Harold Abbott and Pilmer. If it was, then the precise takeover price could be fixed. It is not known what those controlling Kia Ora would have done if the valuation had indicated to the contrary.
Nelson Wheeler undertook both of those tasks and reported to the Directors of Nelson Wheeler on the clear understanding that the final report would be sent to shareholders of Kia Ora.
Pursuant to the terms of the retainer, the first defendants owed a duty of care to Kia Ora to act independently, carry out their instructions with all reasonable and proper care, skill and diligence and to provide Kia Ora with a valuation of Western United and a report which complied with the requirements of Listing Rule 3J(3). As will be seen, although the first defendants admitted in their Defence that they owed such a duty of care to Kia Ora in tort, at the end of the evidence, with the exception of the evidence of Quilty and Singleton, they applied to withdraw that admission and to amend their Defence so as to deny that they owed a duty of care to Kia Ora at all in tort but only to the unassociated shareholders of Kia Ora. The plaintiff opposed the application. This matter is considered later. At all events the first defendants do not deny that such a duty on their part was an implied term of the contract of retainer.
It is unnecessary to consider issues raised on the pleadings as to whether the duty which Nelson Wheeler Perth owed to Kia Ora in contract existed by reason of express or implied terms of the contract of retainer. Leaving aside for the moment to whom Nelson Wheeler Perth owed the duty of care in tort, the scope of the duty in contract and tort was the same and was to be independent and undertake the valuation and the Nelson Wheeler report competently. Given the course which was taken by the Nelson Wheeler defendants at the end of their final address before Quilty and Singleton gave evidence when they conceded that lack of competence in preparing the valuation and the Nelson Wheeler report was no longer in issue and the fact that none of the director defendants contend to the contrary, it is unnecessary to particularise the scope of the duty any further although that is done in the pleadings.
Nelson Wheeler owed a duty of care to Kia Ora to act independently, to perform the retainer competently and to provide a report which complied with requirements of Listing Rule 3J(3). Furthermore, Nelson Wheeler, in discharge of that duty was obliged to make all reasonable and proper enquiries to establish that the purchase price to be offered by Kia Ora for the Western United shares was a fair price. Obviously, they were obliged to exercise all reasonable care, skill and diligence which a reasonably competent qualified person would possess in carrying out the task, given the importance and purpose of that task.
What then of the obligation of independence. There are obvious matters. Clearly the expert could not hold shares in either the vendor or the purchaser or hold office in either. He or she could not be associated with anyone who had such an interest or held office. The expert could not be one of the usual professionals engaged by the company, such as the auditor, or accountant or financial adviser. The expert would not be independent if he or she or an associate stood to gain in some material way from the success of the takeover. It is impossible to list all circumstances which would negate independence. It is a state of fact determined from all of the circumstances and it is to be assessed objectively. The matter was considered in ANZ Nominees Pty Ltd v Wormald International Ltd. Bryson J said at pp706-707:
"In appraising whether they would treat an expert's report as an independent report, and in considering the weight that they would be prepared to give to it, it would, in my view, be quite necessary that shareholders should have the opportunity to see that there had been such revision and that information material to the report had been withheld from them; that is to say, they should be told so by the expert or by the directors. Consideration whether an expert is independent is not always susceptible of an answer in absolute and unqualified terms. A person in a position to give such a report through expertise, for example a merchant banker, is quite likely to have associations with many persons in commerce; an entirely pure absence of earlier association with parties to the transactions of a large public company is probably too much to hope for or insist on. Rather I would think that in appraising a quality which it is only a shorthand expression to refer to as independence and in deciding the weight which they are to give to a report, shareholders ought to have disclosed to them any facts of association between the expert and the parties which could reasonably be regarded as relevant to his independence. The application of such a requirement even in the most undemanding way would, it seems to me, make it imperative that shareholders should be told that they were receiving less than the report as available on 20 January 1988, and that they should be told the nature of the omissions, at least in general terms. They would then be in a position to decide for themselves whether they wanted to insist on there being no omissions if they were to act on the report, or whether they were prepared to act on the report notwithstanding that the material omitted was not made available to them."
It is appropriate to mention Policy Release 102 of the National Companies and Securities Commission which speaks to independence. It was issued to reveal what it took into account in discharging its functions and exercising its powers in relation to s23 and s43(5) of the Acquisition of Shares Code. Section 23 provides for a report of an expert, not being a person associated with the offeror or target company, that the takeover offer is "fair and reasonable" in the circumstances of acquisition embraced by the section. Section 43(5) provides that such a report is to accompany the notice to those shareholders who have not accepted a takeover offer in the compulsory acquisition process where acceptances of not less than 90 percent of the shares have been received. Whilst there is an issue as to whether this Release was binding upon the first defendants at the time, it is beyond dispute that it was widely accepted as an appropriate standard to be adopted by experts when making reports pursuant to Listing Rule 3J(3). Relevant paragraphs of the release are:
"5. Sections 23 and 43(5) of the legislation are predicated on the basis that an expert, seen to be independent, will bring an uncommitted viewpoint to a proposal having potential for conflict of interest, and supply the detachment characteristically missing from such a proposal.
The value of the expert's report will depend substantially on both the motivation of those who engage him and the professionalism and the objectivity which he displays: the expert's performance can be influenced by who engages him and instructs him, at what stage he is engaged, to whom he reports, who pays him and on what basis.
The Commission expects market participants and company managements to encourage the recognition of maximum rather than minimal standards of disclosure and probity in takeovers. The Commission would be concerned if mere technical compliance with the legislation, whether concerning expert's reports or any other matter, were to impair the market system or result in diminishing public expectations of corporate accountability. Either occurrence might prompt recommendations for further legislation or regulation and less flexibility.
6. Whether a person is 'associated with the offeror or the target company' is a question of fact, to be determined by reference to sub-sections 7(5) and (6) of the legislation.
9 The expert should recognise that in discharging his special duty to offerees he is entrusted with public confidence which may be damaged by failure to disclose the existence of any other relationship with the offeror or the target company or any of their affiliates (eg through auditing, superannuation fund management, taxation advisory services or management consultancy services).
The expert should disclose, in his report, details of any relationship between the expert and the offeror or the target company during at least the preceding two years, even though this relationship might not in the view of any of the parties amount to an 'association'. The period of two years is arbitrary: earlier association might be sufficiently significant to warrant disclosure.
In all such cases where professional and other services are or have been rendered by the expert to the offeror or the target company or any of their affiliates an expert will be required to exercise special care to ensure that he furnishes the unbiased report which is the purpose of the provisions: the closer the relationship with the offeror or target company, the heavier becomes the onus which the expert must discharge to establish the absence of relevant association within the intent of the proscription in the legislation."
The first defendants were aware of this Release as a copy of relevant parts of it were contained in their file relating to the Nelson Wheeler report.
These standards should be adopted when considering the meaning and purpose of independence of the expert under the Listing Rule. It may be seen that a true state of independence on the part of the expert is crucial to the efficacy of the process and for the protection of the public generally and the company and its members in particular.
Was Nelson Wheeler Perth in breach of the duty to act independently? They were not associated in the sense that they held shares in Kia Ora or Western United although Stokes had an indirect shareholding of an unspecific nature in Western United through Muscoda. However, I think they were in breach of this duty in three respects; first, by reason of many of the associations which have been discussed; secondly, by reason of the knowledge which members of Nelson Wheeler Perth had as to the method of operation of Western United which was not brought to account when undertaking the valuation and the Nelson Wheeler report or disclosed to Kia Ora and the shareholders, and thirdly by reason of the influence which Green had upon Pilmer and Newman as to the contents of the Nelson Wheeler report which has also been mentioned. There were close relationships between partners of Nelson Wheeler Perth with Harold Abbott, Kia Ora and Western United, directly and through Mawson Pacific, Kia Pacific, Wattle Gully and other companies which have been mentioned.
The friendly relations between Stokes, Munachen, Pilmer and, to a lesser extent, Martino, and Harold Abbott and Kia Ora and Western United, have the consequence that Nelson Wheeler Perth were not independent in fact. Loans had been made and, I think it is fair to say, favours had been granted by Harold Abbott in the granting of loans personally and to companies with which these men were involved and to friends which destroyed any notion of independence. The assistance given in the AIMS matter is an example of another type of benefit. These matters are capable of creating a sense of obligation on the part of those who benefited.
The knowledge of the back to back loans was also sufficient to destroy independence unless brought to account in the valuation process and disclosed. It is enough that Pilmer knew of some of these loans which he disregarded in the valuation process.
The retainer should not have been accepted as was correctly acknowledged by Messer.
The manner in which Pilmer conducted himself with Harold Abbott and Green suggests subservience and lack of objectivity and impartiality. He did not reject improper suggestion and influence. It is possible that because of matters previously discussed, he and others at Nelson Wheeler Perth had a sense of obligation to Harold Abbott, Kia Ora and Western United. That is a serious suggestion but Harold Abbott, Pilmer and Munachen have chosen not to give evidence and explain the true nature of the relationship and Stokes did not complete his evidence. At times Pilmer did as he was told rather than exercise a truly independent professional judgment.
In my view, Nelson Wheeler Perth was in breach of their duty to be independent and to act independently when undertaking the valuation and the Nelson Wheeler report.
A very long time was occupied at the trial on the issue of whether Nelson Wheeler Perth prepared the Nelson Wheeler Report competently. During final addresses Nelson Wheeler defendants conceded that Nelson Wheeler Perth undertook the valuation of Western United and the Nelson Wheeler report incompetently and in breach of the duty of care they owed to Kia Ora pursuant to the contract of retainer and the duty of care owed in tort, leaving aside for the moment to whom that duty was owed.
In my view, the evidence is clear and overwhelming. The concession is properly made albeit at a very late stage of the trial.
Nonetheless the plaintiff contends that in order to fully understand its case of breach of fiduciary duty by Nelson Wheeler Perth, it is necessary to consider the particulars of incompetence in detail despite the concession. Also, the nature of the incompetence is relevant upon consideration of any apportionment of responsibility among the parties. I accept that submission in a general sense but I do not think it is now necessary to make findings about every allegation made by the plaintiff. I have considered all of the allegations and it is sufficient to mention the more substantial aspects of the incompetence of Nelson Wheeler Perth.
Before doing so I make some preliminary observations.
It is nothing to the point that Kia Ora, through Green, put pressure on Nelson Wheeler Perth to have the task completed quickly. There was no sound basis for urgency about the matter. The takeover could occur at any time. It has been suggested that because Kia Ora was in effect a "cash box" after the sale of the second half of the Marvel Loch mine, it was susceptible to takeover and therefore it was necessary to complete the proposed takeover promptly. There is no evidence to support that suggestion. There was no activity on the market which suggested any such interest in Kia Ora. In any event even if it was true, it would be for the shareholders to decide if they wanted to accept or resist a takeover offer. If the stated reason for the takeover as disclosed in the letter of Quilty to the shareholders was reasonable, which I reject, there was no pressing urgency. Even if there was, a competent independent expert undertaking this role under the Listing Rule, he or she could not be deflected from his or her task merely because of perceived urgency. All necessary enquiries and other work had to be undertaken even if the matter was urgent so that the purpose of the report was fulfilled. Urgency may affect the pace at which the tasks were undertaken but not the extent or quality of the work. If undue pressure is applied by the client, the expert may decline to act or to act further.
The second matter is the economy. Observations have already been made about the state of the economy in August and September 1987.
What then was the state of knowledge and belief of Nelson Wheeler Perth about the economy and the share market prior to the crash.
Munachen attended a meeting of directors of Acorn Securities on 19th February 1987 when the "bull" state of the share market was discussed. Newman said that the market was buoyant. He said there were as many commentators saying that there would be a new "bull" run as there were saying that there would be a crash. He accepted that the share market is cyclical and may move up or down with or without warning. In a publication entitled "Management on the Move" in November 1987, Newman wrote, after the share market crash, that prior to the crash "there was a general consensus on the likelihood of a downward correction occurring". He accepted that the article expressed his view at the time.
Pilmer, at his s541 examination, said that the buoyancy of the share market in September 1987 was a matter to be addressed in the valuation process. He said that at that time the share market had reached unprecedented heights. It is plain from his evidence at that examination that he did not have regard to the possibility of a correction to the share market.
Crawford acknowledged the buoyancy of the share market when he prepared the report regarding Ray Porter and Partners in April 1987. In August 1988 Gray wrote to the solicitors acting for Nelson Wheeler Perth in the Debono litigation. In that letter he wrote:
"6. Advice was tendered to our client that the rising market trends prevalent at that time could not be sustained and that stabilisation and some correction, particularly in the speculative stock could be expected.
7. In our opinion correction was likely to occur at the end of 1987 or very early in 1988 based upon various publications and views expressed within the industry."
In a witness statement which Gray prepared in September 1995 for that litigation, he said that a graph which Nelson Wheeler Perth had obtained from the Australian Stock Exchange was shown to Paul Debono which demonstrated the cyclical nature of the market and that he and Messer discussed with him the possibility of a correction taking place in the stock market.
Messer provided a witness statement in the same proceedings. He said that he told Debono that there was a general feeling in the business community that there was going to be a correction in the market which was anticipated in late 1987 or early 1988. In his evidence he said that he was giving that advice to clients. There was a bull market and he confirmed the view that the correction was anticipated in late 1987 or early 1988. He agreed that the economy was overheated.
The third matter is the manner in which Nelson Wheeler approached this task and the justifying of the report at this trial. Pilmer gave Newman the task of undertaking the necessary work and preparing the report in draft. Newman had never undertaken such a task before. He had never prepared a report pursuant to the Listing Rules. He had limited experience or expertise for this type of task. It is unnecessary in view of the concession to recite his qualifications and experience in any detail. At the time he was an Honours graduate in Economics at the University of Western Australia and a qualified accountant with membership of the Australian Society of Certified Practising Accountants. However, before he joined Nelson Wheeler Perth in January 1987 he had very little experience as a practising accountant or as a valuer. Some of his work at times had involved the use of the discounted cash flow method of assessment and valuation with respect to major capital investment but not in the valuation of companies such as Western United.
He joined Nelson Wheeler Perth in January 1987 as manager of the management consultancy division. He was accountable to Pilmer and worked at the Griffin Centre. During most of that year, prior to his undertaking the work for the report, he was involved with a client of the firm which had a transport business related to Westrail. Other duties required him to assist various organisations involved in aquaculture. Also as has been seen he undertook separate planning work for Parry Corporation.
Newman expressed, in his evidence, confidence in his ability to undertake the work. However, his previous experience was of a limited nature. He had never been called upon to value businesses such as merchant banking, stockbroking, insurance broking or mining services. He had never practised as an accountant involved in such businesses. To some extent his expertise may be assessed by the manner in which he undertook the work and the conclusions which he reached.
Having considered all of the evidence, I do not think Newman had sufficient expertise for the task at hand. His background was relatively limited and the conclusions which he reached were so far wide of the mark that they indicate inexperience and lack of expertise.
Nevertheless, he was responsible to Pilmer who undertook the retainer on behalf of the firm and delegated the work, or much of it, to Newman. Pilmer signed the report and adopted it as his own. The judgments made, and the conclusions reached, became those of Pilmer. His experience and expertise are in question. He declined to give evidence. The extent to which he applied his mind to the matters in question is not known. Did he merely adopt the work of Newman or did he exercise his own judgment? Was he influenced by Green, Harold Abbott or anyone else at Kia Ora or Western United and, if so, to what extent? What instructions were given to him? Why did he delegate the task to Newman, a relative newcomer and not to Crawford, an experienced partner who earlier that year, in April 1987, had given the report concerning the acquisition of the remaining half interest in Porter Western and therefore had knowledge of the sharebroking business of Western United? The absence of Pilmer from the witness box prevents an answer to these important questions.
What then is the evidence as to the qualification, training and experience of Pilmer. At the s541 examination he gave some evidence about this matter.
He was a qualified chartered accountant and a Fellow of the Institute of Chartered Accountants. He obtained his professional qualifications in 1971 or 1972. He was in constant practice as an accountant since that time. As has been seen, he was the managing partner of Nelson Wheeler Perth at relevant times.
Pilmer was an experienced director of public companies in the resources industry. He wrote an article on duties of directors for publication by the national body of Nelson Wheeler in 1985. It is unnecessary to set out what he wrote in this paper. It is sufficient to mention that he drew attention to the obligations of directors to avoid conflicts of interest, to act for the benefit of the company and to act in good faith. As to this last matter he wrote that directors have rights and powers which must be exercised on behalf of the company. They are not empowered to act as they please. He discussed duties of directors in the context of takeovers, conflicts of interest, directors contracting with the company, loans by directors, profiting as a director and duties of care, diligence and skill.
He undertook Listing Rule 3J(3) reports for Minskips Limited regarding the business of management consultants conducted by Richmond & Carr Pty Ltd. His report is undated but appears to have been written in the first half of 1985. In reaching his conclusions he had regard to the significance of the directors, Richmond & Carr, remaining with the company. In mid 1985 Nelson Wheeler Perth undertook a valuation of Rotair Technologies. None of the first defendants who gave evidence acknowledged an involvement in this matter. Despite a call for the report at the trial, it was not produced. A letter for Western United Finance to Jacksons Limited enclosed a copy of "the Accounting valuation by Nelson Wheeler, Chartered Accountants". There is no evidence that Munachen undertook that type of work but Pilmer did. It is reasonable to infer that Pilmer prepared the report.
Given the time frame in which the Nelson Wheeler report was undertaken and the work undertaken by Newman which he described in his evidence, it is likely, and I find, that Pilmer did very little in the discharge of the work and was content to discuss matters from time to time with Newman. In most respects he merely adopted the work which Newman had done. He did make some crucial decisions which greatly affected the valuation, namely the selection of the price earnings multiples and the premium for control. He gave directions as to the contents of the report, namely that the information about the five major successful depositors be omitted. However, in the main, the report was the work of Newman and was merely adopted by Pilmer. In that regard, as the supervising partner responsible for this very important task, Pilmer failed to exercise reasonable and proper skill and diligence such as would have been used by a reasonable competent accountant undertaking the task.
The professional standard to be applied to Nelson Wheeler Perth in performing the retainer was that of a reasonable expert valuer preparing a report under the Listing Rule, not that of a relatively inexperienced but well motivated and well intentioned accountant, recently qualified and acting largely without supervision which accurately describes Newman. Nelson Wheeler Perth must be judged against the proper standard not of the capacity of the person chosen by them to undertake the task.
The last preliminary matter to be mentioned is the extent of the work undertaken by Easton. He is a highly qualified expert of vast experience who was engaged in the critique and assessment of the work of Nelson Wheeler Perth in the preparation of the report. This work extended over a long period of time and involved employment by him of considerable staff. No-one would rightly expect an expert engaged for the purpose of a valuation of a company such as Western United and a report under the Listing Rule to undertake work to that extent and I have not done so. Easton was instructed to undertake various tasks and he did so with extensive thoroughness. Newman's work is not to be judged by the extent of that of Easton's. Nevertheless in undertaking his work, Easton employed professional standards of the highest order and in his reports and evidence spoke of the standards to be applied by experts undertaking this task.
Generally speaking, the approach of Nelson Wheeler Perth to the task was appropriate and in accordance with accepted practice. It would not have been acceptable to merely use the share market price of shares as a basis for valuing a publicly listed company as that price at any given time usually does not accurately reflect the true value of the issued capital of the company. It is usually the case, even in normal times, that the share market price of shares may not reflect the true value of a company. The value may be greater than is indicated by the share market price because that price is usually for minority parcels of shares or for some other reason. The value may in fact be lower because the share market is reflecting some phenomenon which is irrelevant to value, eg a false rumour about the future of the company or, indeed, speculation about takeover. Hence it was necessary to value all of the assets of the company in order to determine if the price for the issued capital was fair. Although Nelson Wheeler Perth took that view about Western United, the same view was not taken about Kia Ora. As part of the purchase price was Kia Ora shares, a true assessment of the fairness of the purchase price could not be made without valuing the assets of Kia Ora in order to ascertain if the true value of the purchase price being paid by Kia Ora. Nelson Wheeler Perth assessed the value of the purchase price upon the share market price of Kia Ora shares. As it turns out this is not a matter of great moment as accepting Easton's valuation of Kia Ora, as I do, the share market price did in fact reflect something like the true value of the company and so this omission of Nelson Wheeler Perth has no causative effect of any loss sustained by Kia Ora by reason of the takeover. However, it does reflect upon competence of Nelson Wheeler in discharging the obligation under the retainer.
Nelson Wheeler Perth adopted a correct method of valuation of Western United in the general sense. They identified the various business activities of Western United and selected the method of applying a price earnings multiple to future maintainable earnings which is a means of capitalisation of the future maintainable earnings and was a common valuation method. They accepted the division of the businesses of Western United and its subsidiaries into the financial services division and the mining services division and applied separate price earnings multiples to the future maintainable earnings of each of them. Generally speaking, neither Easton nor Hall regarded that method as inappropriate. However, it was in the application of this method that Nelson Wheeler Perth fell into error in a serious way.
It was essential that Nelson Wheeler have due regard to the history of Western United.
Mention has already been made of the various operating divisions of Western United at relevant times. As has been seen Western United had a limited history of profitable operation to 31st March 1987. The merchant banking business and other divisions were heavily dependent upon Kia Ora. This was a matter of considerable importance in the valuation of Western United and seems to have been entirely overlooked by Nelson Wheeler Perth. If Kia Ora withdrew its support of Western United merely by investing its money elsewhere, the value of the merchant banking business would have decreased substantially. The same may be said of Western United Management and the mining services division if Kia Ora withdrew its business.
As has been seen, the financial position of Western United had been inflated by the deposit by Mawson Pacific of the consideration for the purchase of the first half of the Marvel Loch mine on the eve of the end of the 1987 financial year and by the inclusion of capital profits on unique share trading as part of the income of revenue profit of Western United during the same year. These matters are mentioned merely to illustrate the need to have regard to the history of Western United. Other important matters would also have been discovered such as the support given to Western United by other associates of Kia Ora, such as Kia Pacific, the Marvel Loch mine and Mawson Pacific. These matters would have established that the financial position of Western United presented by Green, the annual accounts and the projections could not possibly be justified as the basis for a calculation of future maintainable earnings.
The first defendants made a submission that an expert acting pursuant to the Listing Rule was not obliged to go behind the financial accounts of the target company when determining the basis of a valuation. The expert is not an auditor and is entitled to act upon audited accounts and the information supplied by the target company. In my view this proposition is too broadly stated. The extent of the obligation of enquiry depends upon the particular circumstances. In many cases the expert will not be obliged to go behind audited accounts and other ostensibly reliable information supplied by the target company if there is no reason to doubt or question those accounts or information, particularly where the auditor's report is unqualified. However, it is to be expected that a reasonably competent expert in those circumstances would need to make some enquiry of management in order to reach the state of mind that there is no reason to doubt or question the accounts or information.
However, in other cases, it is likely that some enquiry and investigation would be required and obviously so. The present case is a good example. This was a friendly takeover. Most of the shares in Western United were tightly held by the common directors and their associates. Enquiry at a basic level would have revealed as much although not the full extent of that shareholding. The takeover price was greatly in excess of the share market price which suggests a strong profit motive for the takeover. As will be seen, the projections for future profits supplied by Western United were inappropriately made and obviously unrealistic which suggests that they were artificial and designed for favourable consideration of the takeover. The behaviour of Green and those directing him as to what went into the report and what was excluded from it was a strong indicator for enquiry as to the accuracy of information supplied. Given the responsibilities of the expert under the Listing Rule, this was a case when enquiries to test the reliability of information were necessary.
There was a good deal of relevant information available to Pilmer and Newman. Western United kept precise and detailed records of all financial transactions. Monthly financial reports were provided to management. These records were admitted into evidence and there is no reason to doubt their accuracy. Consideration of the management accounts would have revealed that the projections of income and expenditure provided were unrealistic and seriously overstated the likely future maintainable earnings. Failure to question and alter these projections to give a realistic basis for valuation was a serious omission.
Newman opted to only use the projections for one year, the first year which was for the year ending 30th June 1988. Easton and Hall agreed with that approach. As has been seen, the projections for that year were for net profits after income tax of $2,984,010 for the financial services, being merchant banking, stock broking and insurance broking and $637,000 for mining services. Even a cursory view of these projections in the context of actual performance demonstrates that they were grossly inflated.
Western United and Nelson Wheeler Perth divided the operations of Western United into two divisions, financial services, comprised of merchant banking, stockbroking and insurance broking, and mining services. As has been seen, Nelson Wheeler Perth aggregated the various sections of each divisions for the purpose of determining future maintainable earnings and then selected a price earnings multiple for each division. Easton was critical of this approach in a limited but important respect. He identified the businesses making up the financial services division as being separate and distinct. I accept Easton's evidence that they shared some common risk factors, eg economic risk and management risk, but they were also exposed to different risks. Stockbroking is dependant upon stock market activity which is historically cyclical. Merchant banking may be affected by market activity but is not exposed to the same extent or in the same direction. I expect that there may be different considerations again in the insurance broking industry which may be less affected by the changes in the economy or the stock market depending upon the type of insurance business which is written. The appropriate price earnings multiple for each of those types of businesses may vary. I accept Easton's evidence that there were no other companies at the relevant time which had the same mix of business activity and therefore the selection of one price earnings multiple for the financial services division was not appropriate.
It is convenient to first consider the Nelson Wheeler valuation at a basic level.
The principal business of the merchant bank was the lending of funds of depositors. The profits were made from the interest margins and loan establishment fees. The revenue for this division depended upon the amount of deposits and the loans made. The projection used by Nelson Wheeler Perth was based upon an average of deposits over the whole year of $96m which is mentioned in the Nelson Wheeler report. What is also mentioned in the report is that the funds held on deposit as at 3rd September 1987, a little over five months into the financial year, amounted to only $58.8m. The prospect of such a substantial increase in funds during the remainder of the year so as to produce such an average was so unlikely as to be regarded as virtually impossible.
The calculation made by Easton which, I accept, is that in order to achieve the average of $96m, deposits would have to be increased steeply from that level of $58.8m to a little under $175m by the end of March 1988. Given the history of Western United, including its dependence upon Kia Ora and associated companies, no competent valuer could have concluded that such a projection was possible, let alone likely. As has been seen, the total of secured and unsecured deposits was always comparatively small until the sale of the first half of the Marvel Loch mine by Kia Ora in March 1987. Kia Ora and other associates were substantial depositors. Thereafter, the level of deposits increased but again Kia Ora and associates were the major depositors.
The significance of this matter is, in a sense, acknowledged by Nelson Wheeler Perth in the report:
"Any change in the beneficial ownership of the Company which had the effect of reducing funds on deposit would lower the base upon which growth is projected and accordingly reduce the valuation of the Company."
As has been seen, a significant proportion of the funds actually on deposit were those of Kia Ora and associates of Western United, but the point now to be made is that Nelson Wheeler Perth clearly understood the significance of the projected deposit base but accepted it even though it could hardly be achieved. The significance of this matter is illustrated by the interest actually earned from deposits during the six months to 30th September 1987 and the projected interest of revenue for the whole year accepted by Nelson Wheeler Perth. The projection for interest income was $1,680,000 on the basis of equal investment by way of advances in the money market and the corporate sector. In the period to 30th September 1987 the net interest income received was only $454,000 which was only 27 percent of the projection. For these reasons alone, the maintainable earnings could not be justified and obviously so.
There is one further but obvious matter. Kia Ora's deposits with the merchant bank decreased after April 1987 when the proceeds of the sale of the first half of Marvel Loch mine were deposited. At that time the total deposit was $20.9m which was 44.5 percent of the total deposits at the merchant bank. Thereafter the position was as follows: May $19.6m (48.4 percent), June $15.8m (33.5 percent), July $10.8m (21.5 percent), August $10.4m (19.2 percent) and September $8.5m (12.7 percent). The evidence does not disclose the reason for the decline in these deposits but it is to be expected that a substantial amount was expended at the Marvel Loch mine.
Upon the takeover of Western United, Kia Ora was likely to be committed to the expenditure of the substantial portion of the $40m to be received upon the sale of the second half of the mine. As it happened, nearly $26m was expended in that way but if all shareholders of Western United had accepted the cash and shares offer, a sum of $31.2m would have been committed to the takeover. A valuer upon considering that matter would necessarily have come to the conclusion that Western United could not expect in the future to receive substantial additional deposits from Kia Ora at least in the next few years. Given the history of dependence upon Kia Ora by Western United and the absence of any other substantial depositor, apart from associates, it was virtually certain that the deposits of nearly $175m could not be achieved and by March 1988.
There are other reasons why the maintainable earnings could not be justified.
As has been seen, the future maintainable earnings adopted by Nelson Wheeler Perth for the purpose of he valuation was $2,985,000 for financial services and $637,000 for mining services. The projections for the 1988 year supplied to Nelson Wheeler were virtually the same for each division.
A comparison with the actual results to August 1987, or even July 1987, would have caused a competent valuer to reject the projections.
Newman did consider the actual trading results to 31st July 1987 based upon the management accounts given to him by Western United. These accounts revealed that for the four months ending 31st July 1987, Western United and its subsidiaries had made a net profit before tax of $1,410,635 excluding Porter Western. Newman was not given, and did not seek, the accounts for August 1987. Unlike Western United and its other subsidiaries, the financial year of Porter Western ended on 30th June 1987 not 31st March 1987. The accounts given to Newman showed a net profit for July and August 1987 of $473,939.
Newman annualised those actual results which resulted in total pre-tax earnings of $6,158,140. The combined net profit before tax in the projection for that year was $7,101,000. Pausing there, a competent valuer would have seen sufficient reason to query the projection.
However, there are three matters of importance. During the four month period, Western United and subsidiary sold particular shares for $208,476. This was a unique transaction which would not be repeated again and in particular during that year. This amount had been treated as income in the management accounts. By adopting the technique of annualising the pre-tax profit for those four months, Newman included $625,428 ($208,476 x 3) as income for the year. The share profit should not have been included at all in the calculation of future maintainable earnings and so $624,428 had to be deducted.
The second matter is the loss which Western United Insurance Brokers made during those four months, namely $75,027. Newman had regard to that loss and did not annualise it on any basis. Had he done so, on the same basis as profits, the loss would have been $225,081. However, in the projection the loss had been shown as $426,000. Using a consistent annualised approach, the loss should have been shown at $225,081 and not $426,000 which would have increased the pre-tax profit of the financial services division by $200,919 in the projection and created an even greater disparity between the annualisation of actual income and the projections.
The third matter is the deduction which should have been made from the projection on account of bonuses due to senior employees of Porter Western. It will be remembered that when Western United acquired the shares in Ray Porter and Partners owned by these employees, the incentives which they had enjoyed by owning shares were replaced by bonus arrangements. These bonuses were to be calculated as percentages of gross income of Porter Western. Newman acknowledged the need to deduct the bonuses from the actual income and he calculated the bonus at $180,809 for the two months July and August 1987 and deducted that amount from the actual income for those months before annualising the pre-tax income. However, in doing so, not all gross income had been included, only that from brokerage. It is not clear if Newman actually made those calculations. They could have been made by Green but he adopted them and applied them in his annualising exercise. If he had used the correct figures which were available to him, the bonuses should have been $259,916 which would have reduced the operating profit before tax of Porter Western to $214,223. When annualised, this represents an overstatement of $473,442.
These three errors resulted in the annualised earnings of Western United being overstated by $624,428 with respect to the profit from shares, $200,919 with respect to Western United Insurance brokers and $473,442 with respect to Porter Western, making a total of $1,298,789. Adjustment for these errors would have resulted in a reduction of a net profit after income tax of about $1,313,000 for financial services and an increase in such profit for mining services of $54,000 or thereabouts, which is a net amount of $1,274,000 and after income tax at 49 percent is $812,000 or 22.4 percent below the forecast earnings used by Nelson Wheeler as being maintainable. In consequence, if the future maintainable earnings reduced by this amount and an average of the price earnings multiples used by Nelson Wheeler, which Easton calculated to be 22.8, was used, the valuation of Nelson Wheeler would be reduced by $18,513,600. It may be seen that these were simple but serious errors.
It was therefore incumbent upon Nelson Wheeler Perth to have scrutinised the projections with ever greater care and to have sought explanations from management. In the absence of satisfactory explanations, I accept that no expert valuer would have adopted the forecast earnings as being the future maintainable earnings for the purpose of the valuation, and would have used historic earnings for that purpose.
Further scrutiny of the historical earnings would have revealed that the forecast earnings could not possibly be used to estimate future maintainable earnings.
Mention has already been made of the dependence of the merchant bank upon deposits from associated companies, including Kia Ora. Without these funds, the profit of the merchant bank would have been dramatically reduced. Easton made calculations as at 30th September 1987 which is a little over a week after the date of the Nelson Wheeler report. Nevertheless they are sufficiently proximate to the date of the report for present purposes and are at a time before the report was in its final form as at 9th October 1987. During the period from the end of March 1987 to the end of September 1987, the average percentage of deposits by associated companies of the total was 45 percent. As at 30th September 1987 that average was 34 percent. Even though there had been a significant increase in the deposit base over this period, the substantial dependence upon associated depositors remained.
In the valuation exercise the market value of the merchant banking business had to be determined in accordance with well accepted principles. Easton was content to accept the following proposition from Lonergan: The Valuation of Business, Shares and Other Equity at p6:
"... most independent valuations of shares and businesses tend to use the term (value) as meaning:
'the price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller, acting at arm's length'.
This definition considers the price both parties would have negotiated given an open and unrestricted market. It is implicit in this definition that the circumstances of the valuation are hypothetical. Therefore the valuation is prepared without particular regard to the identity of either buyer or seller."
I accept that this work is regarded as an authoritative text by expert valuers in this field of expertise. It may be seen that these principles are, to a large extent, taken from the well known observations of Griffiths CJ in Spencer v Commonwealth of Australia [1907] HCA 82; (1907) 5 CLR 418 where he said at p432:
"In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, ie, whether there was in fact on that day a willing buyer, but by inquiring: 'What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?'
The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together."
They are apposite to the task undertaken by Nelson Wheeler Perth and are of considerable importance because of the dependency of Western United upon Kia Ora and associates with respect to both deposits and advances which an unrelated buyer in the hypothetical context could not expect to continue. Kia Ora and the associates were free to withdraw their deposits at any time, subject to the terms of the individual deposits, and upon doing so, the funds available for lending, and therefore the profits, would have been substantially reduced. This is a matter of considerable importance to a prospective purchaser and consequently to a valuer. No consideration was given by Nelson Wheeler Perth to the fact that the hypothetic purchaser would necessarily have discounted the value by reason of the large amount of deposits by Kia Ora and associates which could be withdrawn at any time and were unlikely to be replaced. The qualification in the Nelson Wheeler report that any change in beneficial ownership of Western United which had the effect of reducing funds on deposit would lower the base on which growth was projected and accordingly could reduce the valuation of Western United does not address this point. The value should have been discounted for those reasons and Nelson Wheeler Perth were significantly in error in failing to do so.
Interest received from lending of funds on deposit in the financial year to 31st March 1987 was $345,000 and in the six months to 30th September 1987 was $454,000. Given the average percentage of deposits from Kia Ora associated companies over that period the impact on the income of the merchant of the withdrawal of those funds by these depositors would be substantial.
Also the source of income of fees is relevant in this context. These fees consisted of loan establishment fees, advisory fees and management fees. For the year ending 31st March 1987, these fees were $239,000, $110,000 and $70,000 respectively, making a total of $419,000. For the six months ending 30th September 1987, loan establishment fees were $736,000 and advisory fees were $258,000. Management fees to 31st July 1987 were $54,274 and upon adjustment were about $82,000. The total is $1,066,000.
The loan establishment fees were substantially inflated during the six months period by two transactions involving associates. In May 1987 Western United again advanced $4m to Parry Corporation which, as has been seen, earlier borrowed that amount to acquire the shares in Western United. It was, in effect, a continuation of the loan. The merchant bank charged a loan establishment fee of $130,000. With respect to the loan by Western United of $22m to Wattle Gully, a loan establishment fee of $250,000 was paid by Wattle Gully. These two fees, which amounted to $380,000 and 52 percent of the total of loan establishment fees for this period. Both of these fees were unique and it was highly unlikely that fees of this nature or of this magnitude would be charged again. It was not appropriate to regard them as part of the future maintainable earnings of the merchant bank.
During the period for the six months ending 30th September 1987, Western United received an advisory fee from Kia Ora of $130,000 upon the sale of 50 percent interest in Marvel Loch. It is difficult to see how this fee could possibly be justified as Western United was not involved in the transaction. It could certainly not be regarded as part of the future maintainable earnings of Western United.
Also Western United charged advisory fees of $28,025 upon the sale of options in Kia Pacific Gold and $80,000 for the preparation of a prospectus, and for advice given to, Mineral Estates, both of whom were associates of Kia Ora. It is difficult to imagine how an advisory fee of $130,000, or any amount for that matter, could have justifiably been charged by Western United to Kia Ora. The Marvel Loch transaction was between Kia Ora and Mawson Pacific and it appears that Harold Abbott, the senior executive of Kia Ora, was responsible for the negotiations. None of senior management of Kia Ora gave evidence and Stokes, who was involved in the negotiations on behalf of Mawson Pacific, could not be cross-examined and did not give any evidence which could explain this fee. Presumably it was charged and paid to improve the financial position of Western United Management. Even if there was some justification for it, the fee could not be included in the future maintainable earnings of Western United.
These fees were also unlikely to recur. They should have been isolated from future maintainable earnings for the purpose of the valuation. Once the amounts are deducted from the annualised income, it may be seen that there could be no basis for accepting the projections.
In the projection of future maintainable earnings, Western United not only forecast average deposits of $96m but also net interest margins of 2.00 percent for corporate lending and 1.50 percent for funds invested on the money market. All of these projections had to be accurate to achieve gross revenue in merchant banking of $3,560,000 as forecast. Records of Western United, liquidity and yield reports, reveal that the average of the margins during the period from August 1986 to September 1987 was 1.47 percent, the average from March 1987 to September 1987 was 1.55 percent and the average from May 1987 to September 1987 was 1.72 percent. It may readily be seen that the margins essential to produce the projected income were highly unlikely to be achieved. Even a difference of .25 percent of $96m would result in a reduction of $240,000. Once again this was a simple matter to investigate.
In order to assess the future maintainable earnings of the merchant bank, likely operating expenses had to be considered. In the projections they were stated to be $775,000. The monthly management accounts reveal that these expenses amounted to $579,000 which on an annualised basis was over 50 percent greater than the total expenses forecast.
I now turn to the stockbroking business. The projection was a gross revenue of $7,800,000 and expenses of $4,550,000 for the year. The revenue derived in the six months to 30th September 1987 was generally consistent with the forecast. It was $3,815,000 which is 49 percent of the forecast sum. However, expenses were substantially higher than as forecast. They were $3,162,000 which is 69 percent of the forecast. These results indicated that the net profit after tax would fall well short of the projection.
Consequently, a competent valuer should have carefully analysed the expenses of the stockbroking business in order to evaluate whether the projections were sound. Had Nelson Wheeler done so adequately, it would have been established that the forecast was inadequate.
Other headings in the projection of expenses for the stockbroking business were systems, office rental and sundries. The actual expenses for systems and office rental to September 1987 when annualised, approximate the forecast of these expenses for the year ending 30th March 1988. However, not so sundry expenses. The actual expenses to 30th September 1987 when annualised amount to $3,138,320 as against the forecast of $1,900,000. Hence the future maintainable earnings had to be reduced accordingly.
It may be seen that Nelson Wheeler Perth fell into serious error in their approach to future maintainable earnings and the assessment of the projections. These errors were really rather obvious upon even a basic level of scrutiny by a competent valuer. Their consequence is substantial. If detected and the appropriate adjustments were made, the valuation of Western United would have been a small proportion of that fixed by Nelson Wheeler Perth even applying the price earnings multiples used by them.
As has been seen, Nelson Wheeler Perth ultimately selected a price earnings multiple of 25 for the financial services division of Western United. Newman had selected a range of 20 to 25 in the second draft, his first draft, of the Nelson Wheeler report but Pilmer instructed him to use the highest end of the range which appeared in the third draft. In the Nelson Wheeler report, Nelson Wheeler Perth set out in Table 1 five major financial institutions in Australia, four banks and one finance company, and their respective price earnings multiples which varied with between 6.7 and 11.5. They also set out five smaller companies with price earnings multiples as follows: Forbes Securities Ltd 21.6, Garrets Ltd 21.7, Helm Corporation Ltd 550, Milton Corporation Ltd 21.7 and Selected Securities Ltd. The report went on to say:
"Of the smaller organisations listed above, Helm Corporation Limited is closest in character to Western United. In addition to investment and mining activities, it has a substantial financial services arm comprised of; Equity Life Ltd, marketing a range of investment linked products; Inscorp, an investment advisory adjunct to Equity Life; and a 50 percent share of the stockbroking firm Eric J Morgan & Co Ltd. In addition to stockbroking, Eric J Morgan offers a broader range of financial services including arranging finance and fund management.
It is not intended to suggest that the price earnings multiple for Helm Corporation is representative of all similar financial services houses but there is clear evidence of a market expectation of substantial earnings growth for firms operating in these areas.
There is also an indication from Table 1 of a market willingness to pay a premium for financial services houses with smaller capital bases than the large retail banks.
On the evidence available, P/E ratios in the range of 22.5 - 25 appear sustainable for financial services companies under present market conditions.
For Western United Limited, the following situational factors tend to justify the use of a P/E multiple towards the top end of this range.
i) The Company's record of improving profitability over the past three years.
ii) Trading results achieved in the first quarter of the Company's 1987/88 financial year.
iii) The likely impact on future trading results of the acquisition in April 1987 of the outstanding 50 percent of Ray Porter and Partners Pty. Ltd.
iv) The Company's shares are currently trading on a P/E multiple on historic earnings of 48 indicating an expectation of earnings growth.
v) There are strong prospects for improved contributions from insurance broking services which are at an early stage of growth and development.
On the basis of the above factors a P/E multiple of 25 has been used to value maintainable earnings for the financial services arm of the Company's operation."
Nelson Wheeler Perth selected a price earnings multiple of 12.5 for the mining services division "using an industrial sector average P/E on productive earnings".
It is necessary to consider whether the price earnings multiples of the selected companies are of the same nature as that selected for Western United and also of the companies selected by Nelson Wheeler Perth were truly comparable.
The price earnings multiples selected by Newman were published in early September 1987 and were based upon 1986 and 1987 historical earnings. I accept the evidence of Easton and Hall that in times of increasing earnings the consequence is unrealistically high price earnings multiples. If price earnings multiples of comparable companies based upon historical earnings are used, then the selected price earnings multiple should have been applied to historical earnings not future maintained earnings. It is a fundamental error to use such a multiple with respect to future earnings. According to Easton those price earnings multiples would be substantially reduced if it is assumed that the increased earnings of the companies had been factored in by the market in the trading of shares. The two highest price earning multiples would be reduced from 550 and 66.7 to 144.7 and 37 respectively. The price earnings multiples should be further adjusted if they are to be applied to future earnings as opposed to historical earnings. These tasks were not undertaken by Nelson Wheeler Perth. Assuming that the companies selected were comparable to the financial services division of Western United, it was nevertheless wrong to use their price earnings multiples without the appropriate adjustments.
The second basis is to consider whether the selected companies were comparable for this purpose. Both Easton and Hall rejected all of the selected companies as being comparable to Western United. According to Easton the selected companies were essentially asset based and, or alternatively, had a major asset which was not producing commensurate earnings but had a significant separate potential value. Also, in respect of some of them, the share price would have been influenced by large extra-ordinary profits excluded from the price earnings multiple calculation.
I accept the evidence of Easton and Hall that the companies selected by Newman and adopted by Pilmer were inappropriate as comparators and I reject Newman's evidence by way of justification. In view of the concession of incompetence, it is unnecessary to review this evidence in detail. It is sufficient to mention what Easton and Hall had to say in their written reports.
Forbes Securities was a relatively small company, the main activities of which were investment finance and property activities. According to Easton, this company as at 30th June 1987 was essentially a cash box with net tangible assets of 88 cents per share and the market price was 98 cents per share. The share price at 7th and 22nd September was $1.55 which represented a premium over asset valuation of 58 percent. Easton did not know why the shares traded at such a premium over net tangible assets. The price earnings multiple should have been 18.9 based upon earnings per share of 8.2 cents and a share price of $1.55. Easton could not determine why the share price in September was so high. In his opinion the company was not comparable to Western United because it was a cash box and its activities were dissimilar. Furthermore it was not appropriate to use the price earnings multiple as comparable because the trading of shares in Forbes Securities had been extremely thin. Hall said that the company was primarily an investment company and most of its revenue was from interest income and share trading activity. He did not think a meaningful price earnings multiple could be calculated.
According to Easton, Garratts Limited was essentially an investment company with little similarity to Western United. Its assets consisted mainly of shares, bank bills and cash. As at 31st January 1987 it had net assets of $6,987,000 and a net operating profit of $1,024,000, part of which was an extraordinary item of $545,000 being a surplus on the sale of investments and which should be excluded from the determination of earnings per share for the purpose of calculating the price earnings multiple. It was not possible to consider actual earnings of the company for a six months ending close to the time of Nelson Wheeler's deliberations because this information for the period ending 31st July 1987 was not released until the end of October 1987, but when released it did show that profits had remained steady. The net tangible assets per share at market value of investments was $13.95 per share. Effectively the share price used by Nelson Wheeler Perth, having regard to the price earnings multiple which they selected, was $13.00. Easton said that Garratts Limited was not comparable to Western United because its activities were dissimilar and its share trading volumes were thin. Given the nature of the company, the current method of valuation was the orderly realisation of the net assets valuation method. Consequently, it is wrong to use an implied price earnings multiple derived from Garratts Limited.
Hall also thought that this company was not similar to Western United. Over 90 percent of its funds were employed in investments which were primarily shareholdings in listed securities and investments in bank bills.
Easton and Hall did not qualify in any way the description of the activities of Helm Corporation in the Nelson Wheeler report but both expressed the opinion that it was not comparable to Western United.
The accounts for Helm Corporation for the year ending 30th June 1987 were released on 18th September 1987, some days after the date used by Nelson Wheeler Perth for the selection of price earnings multiples for selected companies but before the date of the Nelson Wheeler report. According to the Australian Financial Review, the price earnings multiple reduced from 550 to 145 after those results were released to reflect the significant increase in profits in the twelve month period. During 1987 Helm Corporation was in the course of recognising and establishing new lines of business. According to Easton, the price of shares on the market would have been more in consequence of looking forward than usual as the historical results in these circumstances would have provided little indication of the future earnings and the cashflow of the group. The 1987 results also included a major extra-ordinary item of $4.373m which, although excluded from earnings per share by Nelson Wheeler Perth and consequently from the price earnings multiple, would have been reflected to a large extent in the share price as it increased net tangible assets by 14 percent.
Also unrealised profits or investments in listed companies of $31.651m would have increased net tangible assets by 159 percent and would have had a significant impact on share price. The unrecorded value of Equity Life Limited would have also had an impact upon the share price. It had only recently commenced operations and would not have been able to report profits for its holding company in the early years.
I accept Easton's opinion that Helm Corporation was not comparable to Western United and the use of a price earnings multiple derived from its earnings and share price for the purpose of valuing Western United was not appropriate.
Hall was also of the opinion that Helm Corporation was not an appropriate comparator. According to him, it was not involved in a range of investment and financial services related activities including investments in property, mining companies, listed and non-listed securities, life assurance, stockbroking and also financial services related activities. A substantial proportion of its funds were employed in its investment activities which produced little or no return in the 1987 financial year. In consequence, no meaningful price earnings data could be produced.
The principal activities of this company were stated in the 1987 annual financial statements to have been investment in a range of securities. It had net assets of $43.519m, including deposits at call of $29.107m and investments at cost of $31.726m. Investments in quoted securities had a book value of $23.623m and at 30th June 1987 had a market value of $49.231. The price earnings multiple for this company adopted by Nelson Wheeler, 21.7, was derived from a market price of $5.30 per share and earnings per share of 24.4 cents. The net tangible assets based upon the market value of investments was $5.67 per share. The shares were selling at a discount to their underlying asset value recognising that the price was for a minority parcel derived from thin trading.
According to Easton, Milton Corporation was not comparable to Western United. Its activities were largely dissimilar to those of Western United. It was an investment company and should be valued on the orderly realisation of net assets basis not by an earnings and price earnings multiple basis. Its share price would have been influenced by the extraordinary and unrealised profit on the quoted investments which did not relate to the normal operating profit used for calculating the price earnings multiple. Lastly, the share trading volumes of this company were also very thin.
Hall did not discuss this company in his report but clearly did not regard it as comparable to Western United.
According to Easton, Selected Securities Limited was the investment arm of McDonnell and East Ltd. In December 1986 it acquired a 45 percent interest in a land development and house building company which was a minor part of its assets. At 30th June 1987 the net tangible assets at book value was $1.10 per share and at market value $1.31 per share. At 22nd September 1987 the share price was $1.20 per share which reflected a discount of underlying asset values and recognised trades of minority parcels of shares. This company was not comparable with Western United. It was an investment company and the appropriate method of valuation was the orderly realisation of net assets and not by an earnings and price earnings basis. Its activities were dissimilar to those of Western United and the volume of share trading was thin. Consideration of a price earnings multiple of 66.7 was not appropriate.
According to Hall, Selected Securities was primarily an investment company with an excess of 80 percent of its assets employed in investments, most of which were in listed companies. Only a small proportion of its activities were involved in the provision of finance and financial services related activities. He also rejected Selected Securities as an appropriate comparator.
Easton regarded the appropriate price earnings multiples for the merchant bank at 7.2 to 7.6 for a minority interest and at 9.0 to 9.5 upon applying a premium for control. He regarded Rothwells Limited, HDF1 Limited and Standard Chartered Bank Australia Limited as being suitable comparators to the merchant bank. Their price earnings multiples were 10.7, 8.9 and 11.4 respectively. With respect to the stockbroking business, he regarded an appropriate price earnings multiple of 6.5 to 7.0 for a minority interest and 8.1 to 8.7 upon applying a premium for control. In doing so he had regard to the price earnings multiples of two sharebrokers Jacksons Limited and McIntosh Securities Limited. These price earnings multiples were applied to historical earnings analysed to 31st March 1988. On the same basis Hall applied a price earnings multiple of 10 to 11 for the merchant banking business and 9 to 10 for stockbroking. Hall also regarded the same three companies selected by Easton as suitable for comparison as well as Australian Guarantee Corporation, Brunckhurst Investments Limited and Finance and Development Limited for the purpose of valuing the merchant bank. He also selected the same companies as Easton for the purpose of valuing the stockbroking business as well as Deak Morgan Limited. Both he and Easton valued the insurance broking business on a different basis, namely the orderly realisation of net assets.
In my view, there could be no justification for the selection of the price earnings multiple attributed by Nelson Wheeler Perth to the allegedly comparable companies or to the selection of the companies themselves which were clearly not comparable, in the relevant sense, to Western United. Such selections were so unreasonable that they cannot be regarded as a mere error of judgment or valid difference of opinion.
With respect to the mining services division of Western United, Nelson Wheeler Perth selected a price earnings multiple of 12.5 based upon an industrial sector average price earnings multiple on prospective earnings. Easton disagreed with this approach. He carefully analysed the companies in this division of Western United and selected ARM Unit Trust and Scientific Services as comparators. Their price earnings multiples were 8.4 and 9 respectively. After analysis, Easton selected a price earning multiple of 7 to 7.5 for the mining services division.
Hall analysed sales of four other mining services businesses as well as other publicly listed companies which he regarded as suitable for comparison. He concluded that a price earnings multiple of 7.8 to 9.8 was appropriate.
It may be seen that both Easton and Hall carefully analysed each company for the purpose of comparison, not simply to ascertain if the range and type of businesses were comparable, but also to understand the likely reason for the price earnings multiples applied to them. The approach of Nelson Wheeler Perth was unduly superficial and resulted in serious error.
The acceptance of the plainly unjustified and insupportable forecast earnings as maintainable future earnings and the selection of the price earnings multiples constituted such a lack of skill as to amount to incompetence and breach of the duty of care required by the retainer.
This observation may be tested against certain obvious checks which were readily available to Nelson Wheeler Perth. Consideration of the relevant history of Western United and its subsidiaries would have revealed what must be regarded as the absurd over valuation of Western United.
It is unnecessary to again mention the modest operation and profit of the merchant bank and its dependence upon associates, including Kia Ora. Having seen the result of their valuation, Nelson Wheeler Perth should have totally reconsidered their approach and their acceptance of the projections of future maintainable earnings and the price earnings multiple in view of this history.
The next matter is the earlier valuation of Ray Porter & Partners in April 1987 by Nelson Wheeler Perth. It will be remembered that at that time Crawford estimated the future maintainable earnings of $750,000 which was based upon annualisation of the actual earnings over the previous eight months with adjustments and deductions. He concluded that the price earnings multiple should be between 6 and 10 which accords with the opinions of Easton and Hall. Crawford did not select any of the companies later alleged by Newman to be comparable to Porter Western. He selected other companies, including two of those selected by Easton and three of those selected by Hall. Crawford noted in this report that the proposed price of $3m for 65 percent of the company valued the business at $4,615,000 and that the price earnings multiple to support that value on future maintainable earnings of $750,000 was 6.2. In fact it was $4.65m which is a difference of no consequence.
Nelson Wheeler Perth in September 1987, a little over five months later, accepted an increase in future maintainable earnings from $750,000 to nearly $1.7m and a substantial increase in the price earnings multiple. If what Nelson Wheeler Perth regarded as a premium for control in the Nelson Wheeler report is included, the increase in the price earnings multiple was from, in effect, 6.2 in April 1987 to 33 in September 1987.
Newman was not aware of the April valuation of Crawford when he undertook the work in August and September 1987 but he was aware that in April 1987 Western United acquired the remaining half interest of Ray Porter and Partners for $3m. He was not aware that Nelson Wheeler Perth had played a part in the transaction. Newman disputed that this valuation of Crawford was relevant and attempted to discount its significance on the ground that upon the acquisition of the remaining interest in Ray Porter and Partners by Western United, the whole of the stockbroking business would be within Western United which he said was a composite financial house and so it would be likely to grow in that environment. Before the acquisition of the remaining interest, it functioned only as a stockbroker. This view is entirely without foundation. Ray Porter and Partners had been operating as a partly owned subsidiary of Western United since it was established on 8th August 1984.
There is no basis to conclude that the acquisition of the remaining interest would have affected value in any significant manner. As has been seen, Crawford estimated annual maintainable earnings at $750,000. He did so having regard to what he described as the recent surge in trading activity. Had Newman been aware of this report and had he considered the trading results of the sharebroking business for the financial year ending 30th June 1987, he would have noticed an operating profit before tax of $1,515,611 which is only a little in excess of Crawford's estimated earnings. If he had considered the results for the months of July and August 1987, he would have seen a total operating profit before tax of only $164,380 which, if annualised, after tax would indicate future earnings of $483,277.
In my view, the April 1987 valuation was of critical importance. If Pilmer and Newman had been aware of it, they would have been obliged to consider its implications with respect to the September 1987 valuation. It would have offered a check for their valuation. At the very least, it would have provided another reason to question the projections of future maintainable earnings and to their selection of comparable companies in order to select the price earnings multiples. Furthermore, it is the sort of important information which should have been included in their report for the benefit of the unassociated shareholders. Easton expressed the opinion, which I accept, that the April valuation was competently undertaken and was correct.
It is not to the point that Newman (and Pilmer if that is the case) were not actually aware of Crawford's valuation. It was undertaken by Nelson Wheeler Perth. Western United was the client. The system within the practice should have enabled matters of this nature to be discovered by persons in the position of Newman in much the same way as partners in any firm must be able to ensure that they do not act in conflict of the interests of clients of other partners.
I now turn to the share market history of Western United shares. The first matter is the significance of the sale on market of the parcel of shares owned by Parry Corporation at $1.30 each on 14th August 1987 which amounted to just under 25 percent of the issued capital of Western United.
Newman agrees that he did not have regard to the sale of these shares as evidence of value of Western United because he regarded it as a stress sale. Earlier in the year he had undertaken some corporate planning work for Parry Corporation and understood that as discretionary expenditure was stopped, the company was under financial stress. He said he thought the sale of the Western United shares was not anything but quick liquidation. Later in his evidence he said that at the time there were rumours in the market that Parry Corporation was not trading well. However, he made no enquiry. He did not seek any information from Parry Corporation or from Western United. He made no enquiry as to who had purchased the shares. His explanation is that he did not see the need to make any enquiries because of the view which he had taken as to the purpose of the sale.
In my view this approach of Newman fell far short of the standard of work to be expected from a competent valuer. Impressions and rumour are no substitute for the sort of enquiries that a competent valuer should make. The sale of those shares could not be dismissed in this way. Parry and Viner were directors of Western United and presumably had knowledge of the affairs of both Parry Corporation and Western United. Management of Western United would very likely have knowledge of the reason for the sale.
Although it could not be suggested that the price paid for these shares should be regarded as the true value of Western United shares, it was incumbent upon a valuer to analyse the sale and the price in order to establish if it was relevant to a valuation in September 1987. At the least it was a yardstick against which the valuation could be measured as a check.
Merely a brief reflection by Newman would have alerted him to matters of considerable importance. As Parry and Viner were directors of Western United which was known to Newman at the time, Newman could assume that they were aware of the "directors projections of future earnings" which are referred to in the Nelson Wheeler report and are the foundation of the Nelson Wheeler valuation. If that is so, and these projections did justify a valuation of $3.90 to $4.40 per share, why would Parry Corporation sell its shares at such a comparatively low figure? Were Parry and Viner aware of the proposed takeover? These are matters which Newman should have investigated.
However, to my mind, there is a matter of even greater significance to a valuer. It has been seen that, at least, management of Kia Ora moved very quickly to develop and implement the takeover proposal. If the purpose of the takeover was genuine and thought to be in the interests of the Kia Ora shareholders and as management of Kia Ora and Western United was in virtually the same hands, why did not Kia Ora purchase, or attempt to purchase the Western United shares owned by Parry Corporation Ltd at a price of only one-third, or less than one-third depending upon which offer was accepted, of the price which a short time later it had to pay. I have mentioned this matter earlier in the context of Harold Abbott. This issue should have been investigated by a competent valuer, at the latest, as soon as the takeover price was known. Such an investigation may have established that motives of management for the takeover were entirely in conflict with the interests of Kia Ora shareholders and resulted in an adverse report.
The price paid for these shares, in the absence of any evidence to the contrary, represented the market value of Western United shares from the point of view of minority shareholders and consequently required an expert valuer to justify his valuation which departed from the share price to any significant extent. Nelson Wheeler were remiss in failing to consider this matter.
Lastly on this topic, there are the matters disclosed in the Nelson Wheeler report which went to the shareholders about the sale of the shares owned by Parry Corporation. The reader was misinformed as to the date of the transaction and the number of the shares and the price was not revealed. Clearly, the true facts, including the price of $1.30 paid in mid August 1987 would be relevant information to be given to the shareholders and, indeed, the directors. The giving of incorrect and incomplete information, particularly when they had the correct information, demonstrates a lack of competence on the part of Nelson Wheeler Perth.
The share market history of trading in Western United shares was also a matter of importance. There may be a number of reasons for the increase in the market price of Western United shares in 1987. However, the price of the shares in 1986 reflects that Western United was, in essence, a small operator. The substantial increase in price of shares in April 1987 may reflect one or both of two matters, the sale of the first half of the Marvel Loch mine by Kia Ora and the deposit of substantial funds with Western United and also the acquisition of the remaining interest in the sharebroking business of Ray Porter and Partners. Both of these events were made public. Furthermore, the share market was heated which likely caused an increase in share price. These matters, or any one of them, could explain the steady increase between April 1987 and 13th August 1987. Thereafter, there is the possibility of takeover speculation in the market which could inflate the price of Western United shares. Lastly, there is the consideration of ramping. Whatever is the reason, Nelson Wheeler Perth did not pay due regard to this history of increase in the share market price.
Newman was well aware of the movements in the price of Western United shares. Indeed, as has been seen, he prepared a graph which showed these movements and against calculations of share prices deflated by the banking group index, the all ordinaries index and the insurance group index over the period from July 1986 to August 1987, which he attached to his first draft of the report. These calculations, although not accurate, revealed that there had been a substantial rise in the market price of Western United shares over and above the banking and insurance groups and the all ordinaries indices. According to Newman, he considered this rise as a true reflection of the attitude of the market to the stock. He said that he thought that the sale of the large parcel of shares owned by the Parry Corporation had freed up the market in that more shares were available for trading. Of course that view could only be speculation as he was not aware who had purchased these shares and he made no enquiries. He also said that he attributed the increase in share market price to what he described as the improving performance of Western United which he ascertained from annual and management accounts. Whilst the 1987 annual report shows an increase in net profit after tax of about $400,000 for the group, ignoring the extraordinary items, this profit was relatively modest. However, Newman did not seek any information from management or the directors of Western United about these matters. The profit and loss statements in the management accounts for the months of July and August 1987 show modest profits for the year to date at the end of these months.
In my view, there is no sound basis for the evidence of Newman that the dramatic increase in share price was due to the sale of the shares owned by Parry and the improving results of Western United. Newman acknowledged that although he was aware at that time of the phenomenon of ramping, he did not consider it.
There are other matters of significance about this share market price history. Nelson Wheeler Perth valued Western United shares at $3.22 and then added a very substantial premium for control. Whatever might have been the reason for the dramatic increase in the market price of the shares in August and September 1987, be it ramping, takeover speculation, or either of the reasons advanced by Newman or all of those matters or a combination of some of them, the fact is that the share market price fell far short of the valuation of Nelson Wheeler. That, in itself, should have caused Nelson Wheeler Perth to pause and reflect upon the increase and make enquiries as to the likely cause. The difference between the market price of $1.30 at the time of the sale of the parcel of shares owned by Parry Corporation and the value fixed by Nelson Wheeler Perth a little over a month later, was so great as to cause any competent valuer to question the value which he had reached. The second matter of significance is that the dramatic increase in the market price given that most of the issued capital was in the hands of associates should have caused any competent valuer to question the genuineness of the proposed takeover and whether it could possibly be in the interests of the Kia Ora shareholders. All Nelson Wheeler Perth did was to make assumptions. The failure to investigate relevant matters and seek explanation and information from management and directors fell short of the level of competence expected from an expert valuer undertaking the task.
According to Hall, there were further simple benchmarks which were available and against which Nelson Wheeler Perth could have judged the accuracy of their valuation. I accept his evidence that this approach is widely accepted as the correct approach among competent valuers and, of course, it accords with common sense.
The first is the ratio of price to net tangible assets. The value implicit in the proposed offer was between $3.95 and $4.40 per share which represents multiples of 15.2 to 16.9 times net tangible assets per share using the balance sheet figure for net tangible assets. I accept Hall's evidence that this ratio is a common benchmark for valuation of financial institutions and in transactions involving the purchase of banks and finance companies and it can be a primary valuation criterion. According to him, the average ratio of price to net tangible assets for companies in the banking and finance sector as reported in the Australian Stock Exchange Analysis at September 1987 was 1.3 times. The ratio for one of Australia's leading finance companies was 1.7 times. The ratio for most listed trading banks was 1.2 to 1.4 times. He went on to say that a ratio in excess of 15 times is unheard of in a valuation of financial institutions and it would be an alarm bell which would cause a valuer to have a very close look to reconsider the valuation very carefully and to question the method used.
The second benchmark is the level of goodwill which has already been discussed. I accept that this matter would suggest to a competent valuer that the price to be paid by Kia Ora was unlikely to be fair and would have caused such a valuer to question the valuation and approach.
The third benchmark is the price earnings multiple implicit in the valuation of $3.95 to $4.40 per share. This valuation corresponds to historical multiples of earnings of Western United in 1986/1987 of a range from 120 to 134 times. In the year ending 31st March 1987, the audited accounts showed a net profit after income tax, including extra-ordinary items of $840,000 which, according to Hall, is the figure used by the Stock Exchange to calculate price earnings multiples which is 3.3 cents per share. Dividing Nelson Wheeler's valuation of $3.95 per share by 3.3 cents earnings per share gives an historical price earnings multiple of about 120. Using a valuation of $4.40, such a multiple is about 133. According to Hall, a multiple based upon historical earnings of around 25 would be very unusual but multiples of 120 to 133 could not be accepted. Later mention is made of Hall's own valuation of the issued capital of Western United which is 81 cents to 93 cents per share. This valuation represents a price earnings multiple of 24.9 to 28.5 based on historical earnings to 31st March 1987. According to Hall, they would not have been justified in the market conditions of about the time of the Nelson Wheeler valuation. I accept that the multiples used by Nelson Wheeler are extraordinary and would cause a competent valuer to question the valuation.
The multiples of 120 to 133 implied by the valuation of Nelson Wheeler should be compared to the average historical multiples for the Banking and Finance Industry as reported by the Australian Stock Exchange which is 10.3 times. Clearly, this benchmark, if employed, would alert a valuer to error in the valuation.
I accept the evidence of Hall that any one of the benchmarks considered alone would have caused a competent valuer to doubt a valuation at the level reached by Nelson Wheeler. Newman acknowledged that he did not undertake any of these checks. According to him, the business of Western United were cash flow businesses and consideration of net tangible assets was inappropriate.
The fourth and last matter is not so much a benchmark but a matter to be considered. It is the discounted cash flow method of valuation. None of the experts suggested that this method was appropriate to the task at hand but Hall considered it to be a check worth undertaking. If there were reliable and supportable long term cash flow projections, a useful result could be obtained. As has been seen, this task was not undertaken by Nelson Wheeler Perth. Pilmer doubted the ten year projections which had been supplied by Green and for good cause but Newman rejected this method of valuation because he did not find a suitable comparison. Hall is of the opinion that if a valuation using the discounted cash flow method was rejected because the underlying assumptions were not accepted, this rejection would cause the valuer to doubt the high valuation reached by Nelson Wheeler Perth. No doubt that view is correct if the discounted cash flow valuation was in fact made by Nelson Wheeler Perth but I am satisfied that it was not. It is not suggested that a valuation using this methodology should have been used by Nelson Wheeler Perth as a check.
There is one further additional matter which suggests that Nelson Wheeler prepared the valuation incompetently and that is the valuations of Hall and Easton. Of course, expert valuers working competently may reach different conclusions. However, where valuations are at enormously different levels, it is appropriate to say that gross disparity is indicative of incompetence.
Using information most of which was available to Nelson Wheeler, but was questioned and evaluated, Easton valued the issued capital of Western United at 9th October 1987 at between $18,906,000 and $20,966,000 or 74 cents to 82 cents per share. At the same date Hall's valuation is $21m to $24m or 81 cents to 93 cents per share. Both Easton and Hall had information up to 30th September 1987 which was not available to Nelson Wheeler but that is a matter of little significance. If information to 31st August 1987 is used, there is little difference. If these valuations are accepted as competently undertaken and are reliable and accurate, within tolerable limits for acceptable differences of opinion, and I do accept them as such, it may be seen that a valuation of Nelson Wheeler Perth of between $100,729,175 ($3.95 x 25,501,057) and $1,122,046,508 ($4.40 x 25,501,057) is so far removed from an acceptable range that it must have been prepared incompetently.
I mention briefly the issue about the premium for control implied by the takeover offer and the opinion expressed by Nelson Wheeler Perth with regard to it. As has been seen, in the Nelson Wheeler report they state that the value of the issued capital was $82.6m which equated to $3.22 per share, that the proposed offer valued the shares at between $3.95 and $4.40 per share and the current market price was $2.45 per share. All that was said about a premium was:
"In our opinion it is reasonable for Kia Ora to pay a premium to acquire all of the shares in Western United. Further, we are of the opinion that, from the point of view of Kia Ora, the price proposed to be offered is fair and reasonable in all of the circumstances."
Nelson Wheeler Perth do not reveal any methodology in expressing the view that it was reasonable for Kia Ora to pay such a premium on the basis upon which the amount of the premium was determined. All that can be ascertained from the Nelson Wheeler report is that they must have accepted that the price earnings multiples selected by them did not include a premium for control and that the amount of the premium thought to be reasonable was the difference between $3.22 per share and the amounts of the proposed offer which is 23 percent to 37 percent.
Hall expressed the view that in adopting the price earnings multiples which they did, Nelson Wheeler Perth had included a premium for control and that it could not be counted twice. My understanding of the evidence is that there may be some issue between Easton and Hall about whether a premium for control is included in the price earnings multiples used by Nelson Wheeler Perth. He does not dispute what Hall says, he is uncertain.
For present purposes, it is unnecessary to explore this matter. In practical terms such a large premium for control was inappropriate as Kia Ora, in practical terms, controlled Western United through the associated shareholders and directors but, in terms of principle, the issue may still arise.
However, in view of all of the matters which demonstrate the incompetence of Nelson Wheeler Perth, it is unnecessary to dwell on this matter.
Mention has been made of the goodwill implicit in the takeover price. It will be remembered that it is the difference between the price paid for the issued capital of Western United and the value of the net tangible assets of the company. I accept the observations of Easton about goodwill. The investor accepts that the value placed on a business may be greater than its net tangible assets and it is understood that the existence of goodwill is attributable to intangibles, such as management, strengths, distribution networks, location on market shares. It is his view that the market would generally expect finance related companies to trade at or about net tangible assets with, possibly, a small amount of intangibles. As goodwill is tied almost entirely to profits, its entire value may be lost in the event of a decline in profit.
As has been seen, the goodwill implicit in the takeover price of $4.40 per share is $103.5m.
In my view, it is unnecessary to recite the considerable body of evidence about the matter of goodwill. It is likely that this matter was not considered by Nelson Wheeler Perth at all.
There is no mention of goodwill in the Nelson Wheeler report. They did not address the level of net tangible assets or the goodwill implicit in their valuation. They identified only two intangible assets which could contribute to future cash flows, management and the connections and influence of controlling shareholders. As to the former, they said:
"The skills and experience of existing management are considered critical in operating performance and this valuation is contingent upon their retention."
Senior management of Western United appears to have been in the hands of Harold Abbott and to a lesser extent Gary Abbot and Gardiner. Lee-Steere regarded Harold Abbott as having exceptional ability but did not have the same opinion of the others. Below them, the senior managers were Green, Chisholm, Woolhouse, White and Porter, Walsey, Carter and Lyons. In most cases this management was not secured in favour of Western United, and most of these managers could leave at any time taking with them any goodwill attaching to them personally. Furthermore, it is questionable whether any of these managers, with the possible exception of Harold Abbott had any skills or capacities which attracted significant goodwill.
It is plain that any significant goodwill was attributable to the connections and influence of the controlling shareholders, Harold Abbott and Schneider-Paas who, in effect, controlled Kia Ora and who were able to influence associates. Consequently, these companies deposited funds with the merchant bank and directed transactions and business to sections of Western United. I do not think there can be any doubt that Easton is correct when he said that a hypothetical willing buyer would be prepared to pay little for goodwill given the high degree of probability that upon a change of shareholding the connections and influence which had given rise to this aspect of goodwill would be lost.
In the Nelson Wheeler file relating to the report is a document entitled "Analysis of Major Takeovers in 1980" which identifies the date of each takeover, the parties, the price, earnings per share, the net tangible assets and other information concerning the target companies. Easton analysed this information and concluded that the average of the takeovers was in fact at a discount to net tangible assets of 40 percent and 29 percent of the major takeovers had offers at a discount to net tangible assets. The highest price to the net tangible assets ratio was 212 percent which involved the takeover of a television company. Easton concluded that there was probably a large payment for the intangible of the television business. In Easton's opinion the implied goodwill in the Nelson Wheeler Perth valuation could not be justified on any ground and was plainly erroneous. According to him, no competent valuer would have valued the issued capital of Western United at the figures fixed by Nelson Wheeler Perth for this reason alone, apart from the other reasons already discussed.
Hall is of the same opinion. His valuation of the net tangible assets is about $6.7m, a little lower than the figure reached by Easton. It seems that Hall adjusted the figures in the balance sheet as did Easton. The difference is of no significance. The difference between the valuation and the net tangible assets is so enormous that the difference in the figures used by Easton and Hall is relatively minuscule. Newman, during the course of his evidence, adopted a figure of $6m from the balance sheet. According to Hall, the implicit range of goodwill, which he considered to be $95m to $107m is excessive and "wildly" overstated. There was simply no justification for those levels of goodwill. He could see no sound reason why a purchaser would pay goodwill at anything like this level.
Consideration of this matter should have demonstrated to Nelson Wheeler that their valuation was obviously wrong and grossly excessive.
Newman acknowledged that the goodwill implied in the takeover offer was within the range of about $86m to $100m. He attempted to justify the figure of $100m by saying that Western United had pre-tax earnings of $7m and that a return to a buyer of 7 percent or $100m for goodwill was acceptable. I reject this evidence. It does not accord with the principles to be applied in the assessment of goodwill and is plainly erroneous.
The other reason why goodwill impacts adversely on the valuation of Nelson Wheeler is because of the requirement that it be amortised over a period of not more than 20 years.
As has been seen upon the takeover being completed, Kia Ora would have required goodwill of about $103.5m which had to be amortised by charges against the profits of Kia Ora over a period not exceeding twenty years with the likely consequence that dividends to shareholders could not be paid during that period.
Newman acknowledged that he was aware of that obligation but that he did not consider goodwill apart from noting the figure of nearly $2m in the 1987 balance sheet of Western United, most of which he thought was for goodwill.
However, that is not a matter which Newman considered in reaching his conclusion that the proposed takeover proposal was fair. Obviously the shareholders of Kia Ora would want to know whether the takeover of Western United would mean that there would be no dividends, or reduced dividends, for many years. Newman gave no consideration to that matter at all.
Newman said he approached the matter in a different way. He said that although the amortisation of goodwill may prevent payment of dividends, the cash earnings would continue and accumulate which would strengthen the company and be reflected in the share market price. I think this evidence is an after-thought to try and justify this very serious omission by Nelson Wheeler Perth.
Both Pilmer and Newman deposed in affidavits sworn by them in 1992 and 1993 respectively that in valuing Western United, Nelson Wheeler Perth assessed the goodwill of Western United and considered that the goodwill was reasonable. Newman acknowledged that he did not assess the goodwill of Western United. He went on to say that he was not sure that Nelson Wheeler Perth assessed the goodwill of Western United and considered that it was reasonable. It was not done by him. Newman acknowledged that although he recognised that there would be goodwill upon the takeover, he did not assess it or determine if it was reasonable. I am not prepared to find that Pilmer gave any consideration to these matters. He chose not to give evidence and there is no evidence that he considered goodwill or its implications apart from what is stated in his affidavit. If he had considered goodwill with even a modicum of competence, he could not have expressed the opinions set out in the Nelson Wheeler report.
In my view, this is a matter of fundamental importance, consideration of which would have shown the valuation to have been obviously wrong.
It will be remembered that Nelson Wheeler Perth had knowledge of business practices of Western United which impacted upon the valuation of the company and which have been discussed in the context of associations between Nelson Wheeler Perth, Harold Abbott, Kia Ora and Western United.
The earlier valuation of the sharebroking business was a matter of considerable importance. Pilmer, Stokes and Munachen had personal knowledge of back to back loan arrangements which inflated the asset position and earnings of the merchant bank. It is likely that Martino had knowledge of that type of arrangement through acting for Questenberg and because of the transactions involving Domenal and Money Mining.
It is to be expected that Stokes and Munachen, through their connections with Harold Abbott, would have been aware, at least in a general way, of the dependence of Western United and its subsidiaries on Kia Ora. Pilmer should have been aware of the involvement of Parry Corporation in Kia Ora, the Lexham Port and Chiswick Gold transactions and the loans involving Morris and Evans through companies which they controlled to avert the takeover of Forsayth were known to Pilmer and Stokes.
None of this knowledge was brought to account in the valuation process. There was no review of the projected earnings of Western United even though Nelson Wheeler Perth had this information. There was no information about any of these matters given to Newman by Pilmer who apparently kept what he knew to himself.
These matters, standing alone, indicate a substantial departure from the standard of care and skill to be expected from Nelson Wheeler Perth, and Pilmer in particular, when undertaking the valuation of Western United and the Nelson Wheeler report.
For these reasons it has been established that Nelson Wheeler Perth was in breach of the duty of care in that they did not discharge their obligations with reasonable and proper care, skill and diligence. It is fair to say that the extent of the incompetence is a very substantial departure from the standards which they were required to observe.
It is in the context of this background and the findings thus far that the role of each of the defendants must be considered. It is necessary to examine the case of the plaintiff against each of them to see if liability against any of them is established. First, consideration is given to the case against the directors, Harold Abbott, Quilty and Singleton, Lee-Steere and Somes ("the director defendants").
As put in final submissions, the plaintiff seeks to make out a case of fraud against each of these defendants. It is alleged that the fraud was the dishonest removal from Kia Ora of most of the cash it received from the sale of its principal asset, the Marvel Loch Gold mine, concurrently with the issue of shares in Kia Ora to the shareholders of Western United who were mainly the directors or their associates. As has been seen, approximately 86 percent of nearly $26m paid by Kia Ora to Western United shareholders was paid to the directors and employees of Western United, and their associates. Harold Abbott, Lee-Steere, Somes and Schneider-pass benefited substantially.
The allegation of fraud must be considered against the claims as pleaded against the director defendants. In essence these claims are that each of them was in breach of fiduciary duties to act in good faith, exercise their powers for proper purposes, avoid conflicts of interest or potential conflict of interest situations with Kia Ora, to exercise care, skill and diligence towards Kia Ora and to act in the best interests of Kia Ora as a whole (S of C, para 102). Also, each of the director defendants are alleged to have breached duties under ss229(1) and (2) of the Companies Code, ie to act honestly in the exercise of his powers and the discharge of the duties of his office (s229(1)) and to exercise a reasonable degree of care and diligence in the exercise of his powers and discharge of his duties (s229(2)). It is further alleged against Harold Abbott, Lee-Steere and Somes that contrary to s229(4), that they made improper use of their position as directors to gain directly or indirectly an advantage for themselves or others or to cause detriment to Kia Ora (S of C, para 102).
It is alleged that each of those duties was breached prior to the preparation of the Nelson Wheeler report in resolving to proceed with the takeover, in the forwarding of the Nelson Wheeler report and the letter signed by Quilty to the shareholders of Kia Ora, in proceeding with the takeover following the share market crash, at the extraordinary general meeting of Kia Ora on 26th October 1987 in failing to avoid the takeover or adjourn the meeting, in proceeding with the takeover after that meeting, in waiving the conditions of the offer and extending the offer to ensure its success at a time when it clearly would have been in the best interests of Kia Ora to use the failure to meet the conditions within the takeover period to avoid the need to proceed with the takeover and in failing to comply with the Articles of Association of Kia Ora and the Listing Rules.
In addition to these claims by the plaintiff, the first defendants make third party claims against the director defendants claiming indemnity or contribution should the plaintiff obtain an award of damages against them. Their case against Quilty and Singleton is on the same basis as that made by the plaintiff. Their claims against Harold Abbott, Lee-Steere and Somes is again on the same basis but also on the additional basis of breach of duty in tort. The plaintiff pleads no such claim.
The pleader did not employ the word "fraud" at any stage of the allegations against the director defendants. The significance of the allegation of fraud and the state of the pleadings is discussed later when considering the case against the Nelson Wheeler defendants. In order to resolve the case against the director defendants, it is unnecessary to decide whether the appellation of "fraud" should be applied to any of them.
Before considering the case against each of the directors, it is appropriate to say something about the duties and obligations imposed upon the directors of a public company such as Kia Ora. In terms of day to day activities, Kia Ora was not a large company. It had relatively few assets. After the sale of the second half of the Marvel Loch mine, those assets were mainly cash and investments in other companies. There was daily trading of Kia Ora shares on the share market and generally speaking governance of the company was not complicated. There were regular meetings of directors and reports with appropriate financial and other information placed before the directors. Much the same may be said about Western United except that its assets were mainly the merchant bank and the businesses conducted by its subsidiaries. Harold Abbott, Lee-Steere and Somes had been directors of both companies for many years since they were re-activated and had presided over their development and prosperity, such as it was. They were familiar with the financial position, strategies and policies of both companies. Quilty and Singleton were newcomers who had been appointed, at least in the short term, for the particular purpose of the takeover. Harold Abbott was the only executive director, and he was the managing director, of Kia Ora and the driving force behind Western United.
For present purposes it is hardly necessary to go far into the authorities and well known texts to ascertain in clear terms the duties and obligations of directors to a public company such as Kia Ora. The power to control the management of a company, its property and affairs is usually vested by the articles of the company in the board of directors. As is observed by the authors of Ford's Principles of Corporation Law at para 8.010:
"With this power comes the opportunity for fraud and mismanagement. Anyone who entrusts their property or affairs to another person is at risk of suffering loss by the other person's wrongdoing. The shareholders of companies are often especially vulnerable, because they are frequently passive investors who do not follow the company's progress on a day-to-day basis. Their vulnerability is all the more acute if they are numerous and not organised.
The law responds to the directors' position of temptation and the vulnerability of shareholders by subjecting the directors to strict fiduciary and statutory duties."
These observations provide a useful back drop when considering the duties and obligations of the director defendants of Kia Ora.
Each of the director defendants was a fiduciary. It is said that, by reason of the fiduciary relationship, a high standard of loyalty is set for the directors by principles of equity. As the authors of Ford observe the standard of loyalty is reflected in a number of positive obligations as well as some negative obligations. These duties of loyalty are sometimes expressed in different ways but they include all of those fiduciary duties alleged by the plaintiff.
The negative aspects of the duty of loyalty are those which require directors to avoid conflicts of interest of various kinds. The directors must exercise their powers "bona fide for the benefit of the company as a whole": Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 at p671. They must not act sectionally or partially: Howard Smith Ltd v Ampol Petroleum Ltd [1974] UKPC 3; [1974] AC 821 per Lord Wilberforce at p833.
Additionally, it is now recognised that directors owe a duty of care to the company at common law: Daniels v AWA Ltd (1995) 37 NSWLR 438 at pp488ff: see also Rogers J at first instance (1992) 10 ACLC 993 at pp1012ff.
Lastly there are the statutory duties which, at times relevant to issues in these proceedings, were contained in s229 of the Companies Code and are as alleged by the plaintiff. That section provided, inter alia:
"229(1) An officer of a corporation shall at all times act honestly in the exercise of his powers and the discharge of the duties of his office.
(a) in a case to which paragraph (b) does not apply - $5,000; or
(b) where the offence was committed with intent to deceive or defraud the company, members or creditors of the company or creditors of any person or for any other fraudulent purpose - $20,000 or imprisonment for 5 years, or both.
229(2) An officer of a corporation shall at all times exercise a reasonable degree of care and diligence in the exercise of his powers and the discharge of his duties.
229(4) An officer or employee of a corporation shall not make improper use of his position as such as officer or employee, to gain, directly or indirectly, an advantage for himself or for any other person or to cause detriment to the corporation.
Penalty: $20,000 or imprisonment for 5 years, or both."
Each of the director defendants were officers of Kia Ora for the purposes of these provisions by reason of being directors: 229(5).
In Daniels v AWA Ltd (supra) the Court of Appeal and Rogers CJ in Comm D, at first instance, had occasion to review the law relating to the duties and obligations of directors. Their observations provide a useful summary of the principles to be applied when assessing the conduct of directors of a public company such as Kia Ora. I mention the following. Directors are fiduciary agents: Mills v Mills (1938) 69 CLR 150 per Dixon J at p185. A power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power: at p494. In Re City Equitable Fire Insurance Co [1925] Ch 407 Rowe J at pp428-429 said that the obligation is to exercise reasonable care which does not mean all possible care. The performance of the duties does not require a greater degree of skill than might reasonably be expected from a person of the directors' knowledge and experience. A director is not bound to give continuous attention to the affairs of the company. In respect of duties that, having regard to the contingencies of business and the articles of association, might properly be left to some other official, a director was, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly. A director is entitled to rely upon the judgment, information and advice, of the chairman and general manager, as to whose integrity, skill and competence he had no reason for suspicion.
However, in Daniels v AWA Ltd, Clarke JA and Sheller JA observed that neither the law about the duty of directors nor law of negligence, has stood still since Re City Equitable Fire Insurance Co. They referred to insolvency trading cases in which there was discussion about the duties of directors. I mention but a few of those cases. In Metal Manufacturers Pty Ltd v Lewis (1988) 13 NSWLR 315, Kirby P, in dissent, said at pp318-319:
"The time has passed when directors and other officers can simply surrender their duties to the public and those with whom the corporation deals by washing their hands, with impunity, leaving it to one director or a cadre of directors or to a general manager to discharge their responsibilities for them. Section 219 of the Code requires that a company have at least two natural persons as directors. By s 229, the directors are obliged to exercise reasonable care and diligence. Other provisions of the Code (eg, s 269 and s270) require the directors to address their minds to the affairs of the company. In these circumstances, the terms of s 556 must be understood to be part of an integrated legislative scheme. That scheme requires of (relevantly) directors (of whom there must be at least two) higher levels of attention to the affairs of the corporation and its dealings with the outside world than was the case in the past."
In Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 Tadgell J made the following observations at p126:
"Sir Douglas Menzies, in a paper entitled 'Company Directors' delivered over 30 years ago ((1959) 33 ALJ 156), suggested that what would in general be expected of directors would tend to become the measure of what the law required of them by way of diligence and capability. That has surely been borne out over the succeeding years. As the complexity of commerce has gradually intensified (for better or for worse) the community has of necessity come to expect more than formerly from directors whose task it is to govern the affairs of companies to which large sums of money are committed by way of equity capital or loan. In response, the parliaments and the courts have found it necessary in legislation and litigation to refer to the demands made on directors in more exacting terms than formerly; and the standard of capability required of them has correspondingly increased. In particular, the stage has been reached when a director is expected to be capable of understanding his company's affairs to the extent of actually reaching a reasonably informed opinion of its financial capacity. Moreover, he is under a statutory obligation to express such an opinion annually. I think it follows that he is required by law to be capable of keeping abreast of the company's affairs, and sufficiently abreast of them to act appropriately if there are reasonable grounds to expect that the company will not be able to pay all its debts in due course and he has reasonable cause to expect it."
Clarke JA and Sheller JA in Daniels v AWA Ltd expressed the following conclusions: at pp500-501:
"There is no doubt reason for establishing a board which enjoys the varied wisdom of persons drawn from different commercial backgrounds. Even so a director, whatever his or her background, has a duty greater than that of simply representing a particular field of experience. That duty involves becoming familiar with the business of the company and how it is run and ensuring that the board has available means to audit the management of the company so that it can satisfy itself that the company is being properly run."
and went on to say that the directors must take reasonable steps to place themselves in a position to guide and monitor management of the company. Where the company's business and activities are large and complex, it would be unreasonable to expect every director to have equal knowledge and experience of every aspect of the company's activities but there is not a lower standard of care for a non-executive director than for an executive director: see also Deloitte Haskins & Sells v National Mutual Life Nominees (1991) 5 NZCLC 67,418 at 67442-3. They acknowledged that the law recognised that directors must be allowed to make business judgments and decisions in the spirit of enterprise untrammelled by the concerns of a conservative investment trustee but went on to say at p501:
"Any entrepreneur will rely upon a variety of talents in deciding whether to invest in a business venture. These may include legitimate, but ephemeral, political insights, a feel for future economic trends, trust in the capacity of other human beings. Great risks may be taken in the hope of commensurate rewards. If such ventures fail how is the undertaking of it to be judged against an allegation of negligence by the entrepreneur? In our opinion the concept of negligence which depends ultimately 'upon a general public sentiment of moral wrongdoing for which the offender must pay' (Donoghue v Stevenson [1932] AC 562 at 580) can adapt to measure appropriately in the given case whether the acts or omissions of an entrepreneur are negligent."
As to non-executive directors relying on management, their Honours said at p502:
"A matter of particular significance in these appeals is the extent to which directors are justified in trusting and relying upon officers of the company. Rogers J said that a director is justified in trusting such officers to perform all duties that, having regard to the exigencies of business, the intelligent devolution of labour and the articles of association, may properly be left to them. He said that a director is entitled to rely without verification on the judgment, information and advice of the officers so entrusted and on management to go through relevant financial and other information of the corporation and draw to the board's attention any matter requiring their consideration. The business of a corporation could not go on if directors could not trust those who are put into a position of trust for the express purpose of attending to details of management. Reliance would only be unreasonable where the director was aware of circumstances of such a character, so plain, so manifest and so simple of appreciation that no person, with any degree of prudence, acting on his behalf, would have relied on the particular judgment, information and advice of the officers. A non-executive director does not have to turn him or herself into an auditor, managing director, chairman or other officer to find out whether management is deciding him or her. These are the words uttered in 1872 by Lord Hatherley LC in Overend & Gurney Co v Gibb (at 487) in describing crassa negligentia. In our respectful opinion it does not accurately state the extent of the duty of directors whether non-executive or not in modern company law."
Lastly, I mention their reference with approval to the observations of Pollock J in giving the opinion of the Supreme Court of New Jersey in Francis v United Jersey Bank 432 A 2d 814 (NJ 1981) at pp821-823:
"As a general rule, a director should acquire at least a rudimentary understanding of the business of the corporation. Accordingly, a director should become familiar with the fundamentals of the business in which the corporation is engaged: Campbell v Watson 62 NJ Eq at 416, 50 A 120. Because directors are bound to exercise ordinary care, they cannot set up as a defence lack of the knowledge needed to exercise the requisite degree of care. If one 'feels that he has not had sufficient business experience to qualify him to perform the duties of a director, he should either acquire the knowledge by inquiry, or refuse to act'. Campbell v Watson (at 416, 50 A 120)
Directors are under a continuing obligation to keep informed about the activities of the corporation. Otherwise, they may not be able to participate in the overall management of corporate affairs: Barnes v Andrews 298 F 614 (SDNY 1924) (director guilty of misprision of office for not keeping himself informed about the details of corporate business); Atherton v Anderson 99 F 2d 883, 889-890 (6 Cir 1938) (ignorance no defence to director liability because of director's 'duty to know the facts'); Campbell at 409, 50 A 120 (directors 'bound to acquaint themselves with ... extent ... of supervision exercised by officers'); Williams v McKay 46 NJ Eq 25, 36, 18 A 824 (Ch 1889) (director under duty to supervise managers and practices to determine whether business methods were safe and proper). Directors may not shut their eyes to corporate misconduct and then claim that because they did not see the misconduct, they did not have a duty to look. The sentinel asleep at his post contributes nothing to the enterprise he is charged to protect: Wilkinson v Dodd 42 NJ Eq 234, 245, 7 A 327 (Ch 1886), affirmed 42 NJ Eq 647, 9 A 685 (E & A 1887).
Directorial management does not require a detailed inspection of day-to-day activities, but rather a general monitoring of corporate affairs and policies: Williams v McKay at 37, 18 A 824. Accordingly, a director is well advised to attend board meetings regularly ...
While directors are not required to audit corporate books, they should maintain familiarity with the financial status of the corporation by a regular review of financial statements ...
The review of financial statements, however, may give rise to a duty to inquire further into matters revealed by those statements: Corsicana Nat'l Bank v Johnson [1919] USSC 223; 251 US 68, 71[1919] USSC 223; , 40 SCt 82, 84[1919] USSC 223; , 64 L Ed 141 (1919); Atherton 99 F 2d at 890; LaMonte v Mott 93 NJ Eq 229, 239, 107, A 462 (E & A 1921); see Lippitt v Ashley 89 Conn at 457, 94 A at 998. Upon discovery of an illegal course of action, a director has a duty to object and, if the corporation does not correct the conduct, to resign. See Dodd v Wilkinson 42 NJ Eq 647, 651, 9 A 685 (E & A 1887); Williams v Riley 34 NJ Eq 398, 401 (Ch 1881) ...
A director is not an ornament, but an essential component of corporate governance. Consequently, a director cannot protect himself behind a paper shield bearing the motto 'dummy director': Campbell at 443, 50 A 120 ('The directors were not intended to be mere figure-heads without duty or responsibility'); Williams v McKay at 57-58, 18 A 824 (director voluntarily assuming position also assumes duties of ordinary care, skill and judgment). The New Jersey Business Corporation Act, in imposing a standard of ordinary care on all directors, confirms that dummy, figurehead and accommodation directors are anachronisms with no place in New Jersey law. See NJSA 14A: 6-14. Similarly, in interpreting section 717, the New York courts have not exonerated a director who acts as an 'accommodation'".
The words "for the benefit of the company as a whole" do not mean the company as a commercial entity but the corporators as a general body: Ngurli v McCann [1953] HCA 39; (1953) 90 CLR 425 at pp438-439, Australian Growth Resources Corporation Pty Ltd v Van Reesema (1988) 13 ACLR 261 at p268 and Southern Resources Ltd & Ors v Residues Treatment & Trading Co Ltd & Ors (1990) 56 SASR 455.
With these principles and observations in mind, consideration is given to the case against each of the director defendants.
A director must act honestly in the exercise of his powers and the discharge of his duties as a director which, of course, means in the interests of the company. Whilst in many cases conduct which constitutes breach of fiduciary duty will also amount to a breach of s229(1) of the Companies Code, it will not always be so. The question for present purposes is what is meant by the expression to act honestly.
The matter was considered by Gowans J in Marchesi v Barnes & Anor [1970] VicRp 56; [1970] VR 434. He said at pp437-438:
"This is the language it has become customary to use in respect of a director's duty in the exercise of his powers or position. 'They must exercise their discretion bona fide in what they consider - not what a Court may consider - is in the interests of the company, and not for any collateral purpose' (per Lord Greene, M.R., in Smith v Fawcett [1942] 1 Ch 304, at p 306). The company in this passage means the company as a whole. This background to the language of the section appears to justify the conclusions, first, that the section is not concerned with the conduct of a director in relation to creditors or other persons dealing with or concerned with the company or anybody else but the company itself; secondly, that it is concerned with the performance of his fiduciary duty to the company; and, thirdly, that to 'act honestly' refers to acting bona fide in the interests of the company in the performance of the functions attaching to the office of director. A breach of the obligation to act bona fide in the interests of the company involves a consciousness that what is being done is not in the interests of the company, and deliberate conduct in disregard of that knowledge. This constitutes the element of mens rea in the criminal offence created by the statute. If the term 'fraud' is applicable in this situation, it is only so in the sense of a 'fraud on the power'. In effect, the common law obligation in respect of acting honestly, as with the common law obligation to act with due diligence has been made a statutory duty, and failure to perform it, provided there is the proper mental element, has been made a criminal offence."
I do not think the observations of Lord Greene MR in Smith v Fawcett Ltd [1942] 1 Ch 304 cited by Gowans J should be regarded as authority for the proposition that the Courts will never question whether the act of a director claimed to be in the best interests of the company was in fact so. If the decision of the directors was made in good faith without self interest and was consistent with the interests of the company but turned out to be a bad or wrong decision, a judgment to that effect will not necessarily impugn the validity of the decision itself. The observations of Gowans J in Marchesi v Barnes & Anor & Anor have been acknowledged as correct in a number of cases upon consideration of s229(1): see Feil v Corporate Affairs Commission (1991) 9 ACLC 811 at p817 and the cases referred to therein. In one of those cases, Corporate Affairs Commission v Papoulias (1990) 8 ACLC 849 Allen J said:
"The criminal offence (s. 229(1)) requires consciousness that what is being done is directed not to furthering any interest of the company but to achieving some collateral purpose such as the conferring of benefit on someone else ... No offence is committed if the purpose of the director is, in whole or in part, that the overall effect of what he is doing will benefit the company. What the section is directed to is the honesty of the director in what he does. It is not directed to his wisdom or clarity of thought. Nevertheless it is manifest that a director can be guilty of dishonesty in the relevant sense without that dishonest conduct involving deception or defrauding."
The Full Court of this Court in Australian Growth Resources Corp v Van Reesema accepted that the Court could review whether that conduct of the directors was in fact in the interests of the company: see King CJ, with whom Cox J agreed, at p269. I do not expect that this view is really contrary to what was said by Lord Greene in In re Smith v Fawcett Ltd. The mere assertion by a director that he acted in the interests of the company must be assessed in all of the circumstances. This proposition is also made clear by the Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd (supra). Lord Wilberforce, in giving the judgment of the Privy Council, said at pp834-5:
"But it does not follow from this, as the appellants assert, that the absence of any element of self-interest is enough to make an issue valid. Self-interest is only one, though no doubt the commonest, instance of improper motive: and, before one can say that a fiduciary power has been exercised for the purpose for which it was conferred, a wider investigation may have to be made. This is recognised in several well-known statements of the law. Their Lordships quote the clearest which has so often been cited:
'Where the question is one of abuse of powers, the state of mind of those who acted, and the motive on which they acted, are all important, and you may go into the question of what their intention was, collecting from the surrounding circumstances all the materials which genuinely throw light upon that question of the state of mind of the directors so as to show whether they were honestly acting in discharge of their powers in the interests of the company or were acting from some bye-motive, possibly of personal advantage, or for any other reason.' (Hindle v John Cotton Ltd (1919) 56 Sc.L.R. 625, 630-631, per Viscount Finlay.)"
"To define in advance exact limits beyond which directors must not pass is, in their Lordships' view, impossible. This clearly cannot be done by enumeration, since the variety of situations facing directors of different types of company in different situations cannot be anticipated. No more, in their Lordships' view, can this be done by the use of a phrase - such as 'bona fide in the interest of the company as a whole', or 'for some corporate purpose'. Such phrases, if they do anything more than restate the general principle applicable to fiduciary powers, at best serve, negatively, to exclude from the area of validity cases where the directors are acting sectionally, or partially."
On the question of self interest, Lord Wilberforce had this to say a little earlier, at p834:
"Further it is correct to say that where the self interest of the directors is involved, they will not be permitted to assert their action was bona fide thought to be, or was, in the interest of the company; pleas to this effect have invariably been rejected (e.g. Fraser v Whalley [1864] EngR 278; 2 Hem & M 10 and Hogg v Cramphorn Ltd [1967] Ch 254) just as trustees who buy trust property are not permitted to assert that they paid a good price."
In Australian Growth Resources Corp v Van Reesema the Court also considered the meaning of honesty in the context of fiduciary duty which proceeded on the acceptance of the finding of the learned Trial Judge that the director in question did not have any fraudulent intent. King CJ, with whom Cox J agreed, said, at pp270-271:
"But a fiduciary may be in breach of his fiduciary duties notwithstanding the subjective honesty of his motives. This is made clear by the following passage from the judgment of Viscount Haldane LC in Nocton v Lord Ashburton [1914] AC 932 at 954:
'But when fraud is referred to in the wider sense in which the books are full of the expression, used in Chancery in describing cases which were within its exclusive jurisdiction, it is a mistake to suppose that an actual intention to cheat must always be proved. A man may misconceive the extent of the obligation which a court of equity imposes on him. His fault is that he has violated, however innocently because of his ignorance, an obligation which he must be taken by the court to have known, and his conduct has in that sense always been called fraudulent, even in such a case, as a technical fraud on a power. It was thus that the expression 'constructive fraud' came into existence. The trustee who purchases the trust estate, the solicitor who makes a bargain with his client that cannot stand, have all for several centuries run the risk of the word fraudulent being applied to them. What it really means in this connection is, not moral fraud in the ordinary sense, but breach of the sort of obligation which is enforced by a court that from the beginning regarded itself as a court of conscience.'
It is not to the point that a director genuinely considers his purposes to be honest if those purposes are not in the interests of the company. The director must act in a way which he conceives to be for the benefit of the company as a whole, as that concept is understood by the law. It may be accepted, on the learned judge's assessment of the first respondent as a witness, that the first respondent was genuine in his account of his purposes in entering into the transaction and that those purposes were shared by his co-offenders. He may have genuinely believed those purposes to be proper. In essence, however, those purposes are reducible to the single purpose of divesting the company of its business and assets without corresponding benefit to it, in order to enable the first respondent to take over and conduct the business. Such a purpose is not within the scope of what the law regards as the interests of a company as a whole."
King CJ then considered s229(1). He acknowledged that the section provided that a person may fail to "act honestly" within the meaning of the section without fraud and went on to say, at p272:
"The section therefore embodies a concept analogous to constructive fraud, a species of dishonesty which does not involve moral turpitude. I have no doubt that a director who exercises his powers for a purpose which the law deems to be improper, infringes this provision notwithstanding that according to his own lights he may be acting honestly."
Johnston J took the view that whether a director is in breach of s229(1) is a different question than whether there is a breach of fiduciary duty: p275.
In Southern Resources Ltd & Ors v Residues Treatment & Trading Co Ltd, the Full Court was inclined to take a different view from that of King CJ and Cox J in Australian Growth Resources Corp v Van Reesema as to the mental element of an offence against s229(1) of the Companies Code which was said to be too widely stated. However, the Court said that having regard to the change in the structure of s229(1) from that considered by Gowans J in Marchesi v Barnes & Anor & Anor (supra), his observations may now be too narrow. I was a member of that court and shared these views and I am bound by the decisions in those cases, but upon reflection, I prefer to leave to another day and in a relevant context whether the questioning of the observations of King CJ is justified. I do not think he was necessarily equating fiduciary duty with the obligation under s229(1) although the same conduct may constitute a breach of both. However, in my view, it is not a matter of significance in the present case.
In Chew v The Queen [1992] HCA 18; (1992) 173 CLR 626 Dawson J had occasion to comment on the mental element required for an offence under s229(1). He rejected the view expressed by King CJ in Australian Growth Resources Group Pty Ltd v Van Reesema. He said, at p642:
"For my own part I cannot, with respect, equate dishonesty in the context of s229(1) with mere impropriety. As I have said, the use of a power for an impermissible purpose, viewed objectively as it should be, may be improper, but is not necessarily dishonest. Whether the element of dishonesty is adequately encompassed by the remarks of Gowans J in Marchesi v Barnes is something which does not fall for decision in this case, but it is, I think, necessary to give the word 'honesty' in a provision creating a criminal offence a somewhat wider scope than King CJ was prepared to give it in Australian Growth Resources Corporation Pty Ltd v Van Reesema."
Acting in conflict of interest is usually not acting honestly. In Southern Resources v Residues Treatment, the Full Court said at p455:
".... had a conflict of interest which they have been found not to have properly disclosed, and that is in breach of the fundamental principle expanded in Keech v Sandford [1726] EngR 954; [1726] Sel Cas Ch 61; 25 ER 223 which underlies the fiduciary duty of directors, not to put themselves in a position in which their private interests are likely to be in conflict with, and are preferred to, their duty to the company. Equity cannot regard that as acting honestly."
The obligation to exercise a reasonable degree of care and diligence pursuant to s229(2) does not involve a mental element. The test is limited to what may reasonably be expected of a director in the circumstances: Byrne v Baker [1964] VicRp 57; [1964] VR 443 at p450 and Chew v The Queen (supra) per Dawson J at p642.
I turn now to s229(4). The true meaning of this provision was considered in Chew v The Queen. The majority of the Court concluded that the correct interpretation is that an officer or employee of a corporation shall not make improper use of his or her position as such in order to gain, directly or indirectly, an advantage for himself or any other person or to cause detriment to the corporation. The actual accrual of an advantage or the suffering of a detriment is not an element of the offence. It is necessary to establish that the director intended that such a result should ensue and also that he or she believed that the intended result would be an advantage to himself or herself or for some other person or a detriment to the corporation: per Mason CJ, Brennan, Gaudron and McHugh JJ at pp633-634. Their Honours went on to say at p634:
"The accused's state of mind is relevant not only to the requirement of purpose but also to the element of improper use of his or her position. If, for example, an accused person reasonably but mistakenly believed that a particular transaction which he or she authorised was genuinely for the benefit of the corporation, that belief may, in an appropriate case, be material in determining whether the accused person can be held criminally responsible for using his or her position in a manner which would objectively be seen to be improper."
In the The Queen v Byrnes [1995] HCA 1; (1995) 183 CLR 501 it was held that the test of impropriety under s229(4) was objective. It did not depend upon the director's consciousness of impropriety but consisted in a breach of standards of conduct expected of a person in the position of the director by reasonable persons with knowledge of the duties, powers and authority of the position of director and the circumstances of the case: per Brennan, Deane, Toohey and Gaudron JJ at pp514-515. McHugh J made the following observation at p522:
"It will often be difficult to determine whether or not a particular use of a position is improper. But, in my opinion, officers or employees who act in breach of their fiduciary duties to secure a gain for themselves or others or to cause detriment to the corporation always make improper use of their position unless they are honestly and reasonably mistaken as to the facts which give rise to the duties or their breach. In the absence of a mistake of that kind, it is difficult to see how officers or employees who use their positions in breach of fiduciary duty to secure such a gain or cause such a detriment can escape a finding of improper use of their position. Certainly, they cannot escape a finding of improper use of position merely because they believed that what they were doing was in the interests of the corporation. Nor can they escape that finding by claiming that they believed that the breach of fiduciary duty would be ratified any more than a clerk can escape a finding of embezzlement by claiming that he or she thought the employer would ratify the unlawful takings."
It is appropriate to first consider the case against Harold Abbott.
As has been seen, I have found that Harold Abbott was the architect of the takeover which was undertaken primarily for his personal benefit and for the benefit of the other shareholders in Western United.
Harold Abbott knew that he would benefit directly or indirectly from the takeover of Western United by Kia Ora and in a substantial way. He was aware that he had a fundamental conflict of interest but nevertheless played an active and crucial role in the takeover process at every stage from beginning to end. He made all of the crucial decisions. He engaged Hayward and Nelson Wheeler Perth. He appointed Quilty and Singleton. He did not consult the other directors unless it was necessary to do so and often ex post facto. He obtained a benefit through the indirect acquisition of a large parcel of the shares in Western United owned by Parry Corporation covertly and at a price substantially lower than the takeover price. He withheld the extent of the shareholding which he controlled from Hayward and the other directors. He arranged the removal of the opposition to the takeover by Autocure by use of public company funds. He promoted the takeover overseas. He eschewed every opportunity for Kia Ora to escape from the takeover after the share market crash.
Harold Abbott was an astute and competent businessman with a detailed knowledge of the workings of Kia Ora and Western United and their subsidiaries. As has been seen, over the years he manipulated the assets and affairs of the companies for personal gain and to acquire and greatly increase the shareholding which he controlled in Western United.
He had an intimate knowledge of the financial position of Kia Ora and Western United. He was well aware of all of the matters which would bear upon the true value of Western United and its subsidiaries. He knew that the merchant bank and the subsidiaries of Western United depended heavily upon Kia Ora. As an astute businessman, he was well aware of what was in the best interests of Kia Ora, which had found itself with a very large sum of cash. He knew that this money had to be invested wisely in the best interests of the company. This was a unique position for Kia Ora. No longer was it involved in the operation of a gold mine. It had cash and the freedom to make wise investments based upon sound judgment. What happened was entirely to the contrary. Decisions were made urgently, initially without involvement of the other directors, with the consequence that Kia Ora was divested of most of its money and the decisions were executed in great haste.
The evidence does not reveal one plausible legitimate reason for the takeover of Western United by Kia Ora at the prices offered. Whatever others might have thought of the Nelson Wheeler report, Harold Abbott must have known that the valuation implicit in the takeover price was grossly inflated. He knew that it was not in the interest of Kia Ora to pay such a price. If commercial honesty prevailed, Kia Ora could have acquired the issued capital of Western United at a much lower price. I would not suggest that directors should sacrifice their own legitimate interests to advance those of the company, but if Harold Abbott had only the interests of Kia Ora at heart, he could have sold to the company the substantial shareholding which he controlled in Western United at market price which would have been fair and resulted in substantial savings to Kia Ora. If the other common directors and their associates had behaved altruistically and solely in the interests of Kia Ora, they could have done likewise. However, at all events Harold Abbott could have ensured that the shares sold by Parry Corporation were acquired by Kia Ora and not on his behalf.
Furthermore, the evidence does not reveal any sound reason in Kia Ora's interest for the takeover at all. The history of the two companies shows the separation of their interests prior to 1986 for no apparent reason and then the merging of them by the takeover procedure again for no apparent reason except to benefit the shareholders of Western United.
The notion that a single mining finance house in the West was an altruistic and honest reason for the takeover must be rejected. In the absence of any evidence or defence from Harold Abbott, the obvious inferences from the proven facts must be drawn. The purpose of the takeover was to direct the proceeds of the sale of the second half of the Marvel Loch mine into the pockets of Harold Abbott, Gary Abbott and Schneider-Paas and their associates and, as an additional purpose, to financially benefit other directors and senior staff of the two companies and associates and I reject the suggestion to the contrary.
Harold Abbott was in breach of all of his fiduciary and statutory duties as alleged. He acted dishonestly, contrary to the interests of Kia Ora and in preferment of his own interests. He made improper use of his position as a director to gain an advantage for himself and for others. This dishonesty was not of the nature discussed by King CJ in Australian Growth Resources Corp v Van Reesema but was dishonest conduct to his own knowledge. Not only was he aware of the significance of his conduct but it was undertaken with the intent to defraud Kia Ora for his own personal benefit. His conduct clearly came within s229(1)(b) and s229(4). It is unnecessary to set out all of the particulars of these breaches of duty which are clearly established by the evidence. A brief summary will suffice.
Nelson Wheeler Perth was not provided with accurate information relevant to their task and relevant information was not given to them. Harold Abbott set up the system whereby the necessary information would be given to Nelson Wheeler Perth. In his absence and that of Green and Pilmer from the witness box, what role he played in providing this information is not known. As has been seen, some information was inadequate, some was false, some was misleading. He was aware of the true financial position of Western United and its subsidiaries. When Harold Abbott came to read the Nelson Wheeler report and the earlier drafts, he must have known that incorrect information had been supplied and acted upon and the Nelson Wheeler report gave a fundamentally misleading picture of Western United and its subsidiaries. Harold Abbott knew the merchant bank depended upon associates, including Kia Ora, for its viability. He knew that the extra-ordinary income from share trading, inappropriate consulting fees and establishment fees gave a false impression of the maintainable earnings of Western United. He knew that the projections of income and expenditure for the 1988 financial year were not reliable. The income projections were inflated and unachievable and their bases were unsound. He knew that the merchant bank could not possibly hope to achieve an average deposit base of $96m in the 1988 financial year which was fundamental to the projections of maintainable earnings. He knew that by merely withdrawing the deposits with the merchant bank, Kia Ora and Kia Pacific, could drastically reduce the value of Western United.
Knowing as he did that the Nelson Wheeler report was flawed and not appropriate to be relied upon, he was in breach of his fiduciary and statutory duties in causing the report, or in participating in the decision to send the report, to the shareholders. Later, the case against Quilty and Singleton is discussed. They were not truly independent of Harold Abbott and he did not stand back from the decision-making process after they commenced to act as directors. He attended all relevant meetings of directors. He worked otherwise extensively in the takeover process and never allowed his conflict of interest to stand in the way of that process or in any way to deflect him from his resolve to implement the takeover.
Also he was in breach of these duties in participating in the sending of the letter signed by Quilty to the shareholders. My conclusions about that letter in the context of Quilty and Singleton, which are mentioned shortly, apply also to Harold Abbott. He well knew that the letter was inappropriate for the shareholders and was calculated to mislead them to a view supporting the takeover.
There was not even a pause by those controlling Kia Ora, including Harold Abbott, in the process to achieve the success of the takeover following the share market crash. There is no evidence to suggest that Harold Abbott gave any consideration to the implications of the share market crash upon Western United and its subsidiaries or the takeover proposal. The Autocure transaction speaks loudly about his attitude. He intended to proceed regardless of opposition, the share market crash or anything else. There is no evidence that he took any advice but it appears that he gave instructions to proceed because of the information which was given to Jarosik. He did not seek to adjourn the extra ordinary general meeting or to provide any information to the shareholders.
Because of his knowledge of the true purpose of the takeover and the financial position of Western United, Harold Abbott continued to be well aware that it was not in the best interests of Kia Ora to proceed with the takeover after the extra ordinary general meeting. He participated in the decisions of the directors immediately following that meeting to proceed with the takeover and in the subsequent decisions to waive the conditions of the offer and to extend the period in which it could be accepted. He knew that Kia Ora could abort the takeover but he chose to proceed motivated by self interest.
In my view, clearly the alleged breaches of fiduciary and statutory duty have been established and he is liable to the plaintiff in damages for the loss suffered in consequence of the takeover.
As has been seen in the letter of 20th August 1987 to Kia Ora, Hayward advised as to the legal requirements for the takeover and recommended that at least two additional directors be appointed who would satisfy the requirement of independence. The reason for this recommendation was explained. It will be remembered that Hayward also advised that it was most important that the new directors be seen as truly independent and that they could not be regarded as associates of the shareholders of Western United. Further, he advised, they would carry a "very heavy fiduciary responsibility to ensure that the offer is fair to Kia Ora and its shareholders". The accuracy of this advice could not be doubted.
There is no requirement of independence in relevant legislation or in the Listing Rules so far as directors are concerned. What then is meant by independence? To a limited extent it was considered in Southern Resources v Residues Treatment & Trading. The court said at p474:
"It is a common place of commercial experience that directors contribute different skills, especially in large and complex corporations; issues will often arise for decision in which a director will necessarily have to rely to a large extent on the knowledge and experience of others; and when it is said that directors must exercise an independent judgment, that means no more than that they, having listened to and assessed what their colleagues have to say, must bring their own mind to bear on the issue using such skill and judgment as they may possess."
Obviously, independence means that the person under consideration has no direct or indirect interest in the bidding of a target company. He or she could not be a shareholder or a debtor or a creditor or an associate of any person or company who was a shareholder, debtor or creditor. He or she could not be beholden to anyone who had an interest in either company.
Independence is a matter of fact which must be determined from all of the circumstances. In a context such as the present, independence also means that the person must in fact be independent and also must act independently.
Were Quilty & Singleton independent in the relevant sense?
Neither of them owned shares in Kia Ora or Western United or held any office or position in either company except that of director of Kia Ora. In that sense they were independent but it is necessary to assess the evidence to see whether each of them was truly independent.
The position of Quilty is considered first. The evidence discloses many facts and circumstances which bring into question his independence from Kia Ora and Western United.
He was well known to both. He was the managing director of George Moss and a substantial shareholder in that company. He met Harold Abbott in mid 1983. Quilty consulted Harold Abbott from time to time and came to know him well. According to Quilty, they had mutual respect for one another and they also met socially on many occasions. Quilty said he had continuing commercial involvement with Harold Abbott, Kia Ora and Western United over the years. There was a continuing banking arrangement between Quilty and Harold Abbott during the years 1984 through to 1988. Whenever Quilty obtained finance from Harold Abbott, he received it promptly. As has been seen, when Western United acquired the shares in Carama Pty Ltd, Quilty gave a valuation of the air motor concept said to have been established by Rotair.
George Moss borrowed money from Western United in April 1984 to acquire shares and Quilty guaranteed the loan and gave a mortgage of his house as security. On 12th June 1984 George Moss borrowed $150,000 from Western United to provide short term working capital. The term of the loan was 60 days. The application contains the recommendation of management of Western United in these terms:
"As we have a close association with this company as well as good real estate security and previous satisfactory dealings - recommend to fund the deal."
At this time it was proposed that Western United Finance would undertake the listing of George Moss as a publicly listed company. On 18th July 1984 George Moss borrowed $250,000 from Western United for sixty days which was extended by rollover to 14th December 1984. This loan included the earlier loan of $150,000.
In early 1985 Western United agreed to underwrite a share issue by George Moss of 5m shares of 25 cents with a premium of 45 cents making a total potential commitment of $2m. The background to this float is significant. George Moss was a company which had been established many years ago by members of the Moss family. Quilty and his father were substantial shareholders. Members of the Moss family wanted to sell the company as a means of selling their shares. Quilty sought the advice of Harold Abbott who lent money to Quilty to buy the shares of the Moss family over a period of time. The float was a way of extinguishing the loans. Quilty's father sold shares to Kia Ora. Quilty acquired the shares from the Moss family at a low price and as the company was re-structured and floated the shares acquired by him increased in value. The process occupied a long time but eventually it was completed. The end result was favourable to Quilty and he was grateful to Harold Abbott even though Harold Abbott charged substantial fees. Quilty accepted that he acquired the shares from the Moss family at an average of about $1.60 per share and Kia Ora acquired his father's shares for about $8.90 per share. In these transactions Quilty also had dealings with Gary Abbott.
Quilty worked closely with Harold Abbott in connection with this float. He also spent a considerable amount of time with Milligan in Sydney promoting the float. Harold Abbott promoted this share issue to Schneider-Paas and informed him by letter dated 18th December 1985 that Western United Finance had underwritten the float to 49 percent of the issued capital and that this underwriting represented an "excellent opportunity to invest in a company that has been in existence for fifty years and is now in young but very capable, experienced and aggressive hands". The letter went on to remark that Harold Abbott gathered that during his last visit, Schneider-Paas was "quite impressed" with Quilty and his knowledge of the mining services industry. Mention was made of the possibility of some joint manufacturing and market arrangements with one of Schneider-Paas's companies about which Quilty was keen to pursue. Gardiner acted as the solicitor for George Moss on the float. Western United acted as financial adviser on the float. This letter concluded with the following:
"My suggestion is that you may consider subscribing for 10 percent of the capital (in George Moss) i.e. $500,000 and Quilty has agreed that he would welcome your representative on the Board. We are of course quite close to the company and an even closer association via yourself would seem to have greater benefits."
Schneider-Paas accepted his suggestion and on 10th January 1986 Harold Abbott informed Milligan accordingly and also that Schneider-Paas would be entering into marketing and manufacturing arrangements between his Westrail group and George Moss.
Nelson Wheeler Perth operated the share registry of George Moss which, according to Quilty, was arranged by Western United Finance at the time of the float without any involvement on his part.
Kia Ora acquired 1,248,008 shares in George Moss in its own name and through Alecdor. During 1986 Western United also acquired shares in George Moss. As at 1st October 1987 Kia Ora and Alecdor were two of the top twenty shareholders in George Moss. Kia Ora held 356,000 shares and Alecdor held 919,000 shares.
Western United sold its shares in Carama in June 1985 and required the approval of the shareholders in general meeting. Quilty's earlier valuation was updated to $600,000 - $700,000 and was used for that purpose. The sale was approved on 28th June 1985.
On 1st July 1985 Quilty owed Western United $309,680. This amount was repaid in about late October 1985 from the proceeds of the sale by Quilty and by his father to Kia Ora of shares in George Moss. As at 16th December 1985 George Moss had insurance cover arranged through Western United Insurance Brokers. On 17th December 1985 and thereafter until December 1986 Western United guaranteed a business obligation of George Moss in the form of a bankers' undertaking. Kia Ora took leased premises in Sydney in February 1986 and George Moss acted as a referee. In the course of the promotion by Western United of the float, Harold Abbott wrote to a shareholder in Adelaide and his letter included the following:
"We have been close to the firm for some years and we are very confident of their future performance".
On 3rd April 1986 George Moss borrowed $300,000 from Western United and Quilty authorised repayment of the share issue amount upon the formal resolution of directors of the allotment of shares on 9th April 1986. It appears that George Moss required that financial facility for a brief period. George Moss placed funds on deposit from time to time with Western United. In April 1986 the amount on deposit was $393,120 and had reduced to $28,787 by 31st August 1986. In June 1987 Western United purchased 50,000 shares in George Moss.
In February 1987 George Moss again borrowed $300,000 from Western United. This loan appears to have been arranged in an unusual way. The credit facility of $300,000 was made available to Kia Ora for the period from 10th February 1987 to 11th May 1987. Kia Ora advanced those monies to George Moss and that loan was secured by a change over shares held by Quilty in George Moss. The loan was extended for one month.
As at 30th June 1987 $200,000 of the loan was outstanding. On 1st September 1987 it appears that the loan was reduced to $100,000 and continued to the end of the year. It was during this period in August 1987 that Quilty signed the consent to act as a director of Kia Ora. On 12th October 1987 Kia Ora forwarded to Quilty a loan facility offer for George Moss in the sum of $100,000 which was but a few days after Quilty signed the letter to the shareholders of Kia Ora. This loan was extended until 31st December 1987 and was further extended periodically until 30th September 1988.
During 1987 George Moss undertook work for Kia Ora and Mawson Pacific at the Marvel Loch mine.
In November 1987 Quilty had discussions with Harold Abbott and Green about the acquisition by George Moss of Domino Mining Equipment Pty Ltd. He made a detailed proposal in writing to Western United and Harold Abbott on 23rd November 1987. The proposal included a purchase price of $5m and $1m for working capital. It is unnecessary to mention the details of this proposal as its significance for present purposes is that it reveals that Quilty and Abbott and Western United were involved in this type of discussion at the time Quilty was supposed to be an independent director of Kia Ora and to be making decisions about the fate of the takeover of Western United after the offer was made.
After Quilty retired as a director of Kia Ora on 16th June 1988, he continued an association with Harold Abbott, Somes and Singleton. They were all appointed as directors of George Moss, Harold Abbott and Singleton on 12th May 1988 and Somes on 15th July 1988 and they continued to serve in that capacity. Quilty said the Kia Ora Board was breaking up and he wanted to keep access to their advice for a relatively low price. After selling their shares in Kia Ora, Harold Abbott and Gary Abbott formed a business under the name Abbott Brothers and George Moss borrowed money from them. Whilst these last mentioned associations occurred after the takeover of Western United by Kia Ora, they are not irrelevant because they tend to confirm the closeness and nature of the relationship of Quilty, and Singleton, with Harold Abbott at an earlier time.
It may be seen, from this evidence, that Quilty had a long standing relationship with Kia Ora and Western United.
Also, Quilty's own view at the time is significant. He thought that because Kia Ora owned shares in George Moss, he was not independent. He said the other financial connections did not cause him any concern because they were arm's length transactions. He was sufficiently concerned to speak to Gardiner about the matter who told him that it was not a problem. What is also significant is that Quilty took advice from someone who had a conflict of interest. It is likely that Gardiner would have been aware of Hayward's advice but because of his absence from the trial, no findings should be made against him. However, I accept Quilty's evidence that he was concerned about the matter.
What then of Singleton? In the absence of Harold Abbott from the witness box, there is no direct evidence as to why he selected Singleton as one of the new directors. Unlike Quilty he was not experienced as a public company director. He said he was not sure if he had been a director of a public company before becoming a director of Kia Ora and he had no experience of a takeover of a public company. If he had been a director of a public company, he said it would have been in the early 1970's. Although Somes and Lee-Steere approved of his appointment, neither understood him to have any such experience. Lee-Steere knew nothing of his experience and qualifications to be a director of a public company, although Lee-Steere said Singleton was a well qualified accountant and was highly regarded. Lee-Steere said there were many talented people in Perth with appropriate experience to undertake the role of independent directors.
Singleton qualified as a practising accountant in June 1970. He was described by Somes as a suburban public accountant in practice on his own account but in a substantial way. He had many business interests and acted for various companies and businesses over many years. He was a close friend and associate of Gardiner. He met Gardiner in July 1970 in a professional context when Gardiner was working at Talbot and Oliver. Gardiner introduced him to Harold Abbott in March 1973. He was then employed as a part-time accountant by Harold Abbott for a few years. Singleton was asked by Harold Abbott to assist him regarding the acquisition of a company which managed a group of public companies known as the Comstock Group in which Murray was involved. It will be remembered that Murray was a director of International and Irish and had an association with Harold Abbott, Milligan, Kia Ora and Kia Pacific at relevant times. According to Singleton, there was some impropriety regarding the withdrawal of money from the Comstock Group and the matter was referred to the police by Harold Abbott or both of them. Singleton was closely involved with Harold Abbott at this time and his work in that task occupied a few years. Harold Abbott lost money and, according to Singleton, eventually went to work for Briggs. Thereafter he did not work for Harold Abbott and had no professional relationship with him but he did see him socially on occasions. It was not unusual for Harold Abbott, Singleton and Gardiner to have a drink together occasionally.
Singleton became, and remained, Gardiner's accountant and he retained Gardiner as a solicitor to act for mutual clients. From the 1975 financial year, Singleton was a director and shareholder of Maclare Pty Ltd which, as has been mentioned, was the trustee of Gardiner's Family Trust and owned a substantial parcel of shares in Western United at relevant times. Maclare was also the trustee of the Gardiner Family Trust No 2.
Meacham Nominees Pty Ltd was incorporated on 23rd July 1976. Singleton and Gardiner were the subscribing shareholders and the directors and remained the only shareholders and directors until well after the takeover of Western United by Kia Ora. Meacham was a trustee company but the evidence does not disclose what it did.
Singleton administered both Maclare and Meacham in the sense of lodging company returns with the Commission throughout the years until 1988 and beyond. On 9th June 1989 he advanced $227,000 to Maclare pursuant to a loan agreement of that date which advance was secured by a charge on property of Maclare, namely a deposit with Western United. Whilst this advance occurred well after the takeover of Kia Ora by Western United, it is evidence that tends to establish the closeness and nature of the relationship between Singleton and Gardiner at relevant times.
When Singleton was approached by Harold Abbott to become a director of Kia Ora, he was told that he was to be one of two independent directors regarding the takeover of Western United and he knew that Gardiner was employed by Kia Ora as the inhouse company solicitor. He was aware that Gardiner had a substantial shareholding in Western United through Maclare and that Gardiner had a conflict of interest in the takeover.
Another piece of relevant evidence is the involvement of Singleton in the Autocure transaction. It will be remembered that he was with Harold Abbott, Gary Abbott and Gardiner when Ewart-James spoke to Harold Abbott on the telephone on 19th October 1987 and advised of Autocure's opposition to the takeover and that he was prepared to support on oath Harold Abbott's recollection of the conversation. Singleton was aware of Autocure's opposition and that Autocure was prepared to take legal proceedings to prevent the takeover. He knew that Hambros was a merchant bank and that it was strongly expressing the view that the takeover price being proposed by Kia Ora and the valuation of Western United were excessive. He was asked by Gardiner to sign a statutory declaration supporting Harold Abbott's version of the telephone conversation with Ewart-James so that Hayward could give an opinion. This document was prepared and Singleton signed it on about 20th October 1987. According to Singleton, he thought Hambros was trying to sell the shares above market value. He heard no more about the matter and did nothing about it. It will be remembered that when he was walking with Harold Abbott to the extra-ordinary general meeting of Kia Ora on 26th October 1987, Harold Abbott told him that the Autocure problem had been fixed and that Singleton accepted that position without any enquiry.
Singleton's approach to the Autocure matter is significant in two respects. His acceptance of what Harold Abbott did about it without even knowing, or even asking, suggests a lack of true independence from Harold Abbott and the others controlling Kia Ora at that time. Also, it is an important matter in considering whether Singleton discharged his duties as a director of Kia Ora properly, which is considered shortly.
These matters demonstrate that neither Quilty nor Singleton was independent of Kia Ora or Western United and all of the common directors and could not be seen as such. Quilty had a long history of involvement with Kia Ora, Western United and Harold Abbott and was a borrower who, in no small measure, depended upon the goodwill towards him of Harold Abbott. Singleton was a longstanding acquaintance of Harold Abbott and a close associate of Gardiner who had a vested interested in the success of the takeover. Indeed, as a director of Maclare, Singleton was in the position of a trustee and also, in that capacity, had a vested interest, although not a personal one, in the success of the takeover. Without question, they were susceptible to influence by Harold Abbott.
Whether they acted independently is another question and is to be judged by all of the circumstances and their actions. Having considered these matters, I have concluded that they did not. Their lack of enquiry and minor participation in the affairs of Kia Ora at crucial times leads to that conclusion. In my view they were prepared to go along with the takeover process giving the appearance of independence but in reality because they were simply prepared to accede to the wishes of the common directors and, in particular, Harold Abbott.
Whilst Quilty and Singleton were non-executive directors who had only recently been appointed or assumed that role before the takeover, they assumed all of the duties of directors. As may be seen from the cases, they were obliged to familiarise themselves with the business and operation of Kia Ora and its officers. They could not simply rely upon the administration and particularly because its senior members had a conflict of interest. They had to put themselves in the position to be able to guide and monitor management of the company. They had to bring their judgment to bear upon the matters calling for decision and do so in an informed and independent manner. If they were lacking sufficient information or knowledge to discharge their duties, they were obliged to make appropriate enquiries. Whilst having the same duties as the other non-executive directors, the proper discharge of those duties by them was crucial as they had accepted the position of directors for a specific purpose and for a particular reason. They had been appointed as independent directors for the purpose of the takeover and because all of the existing directors had a conflict of interest. They were aware of the nature of that conflict.
It will be remembered that at the outset Hayward advised that the independent directors would carry a very heavy fiduciary duty, which was undoubtedly true. They did not know of that advice but their position as independent directors for the known purpose was sufficient to make clear to them the nature and seriousness of their responsibilities. Quilty said that he understood that, as an independent director, he had a special role which included protecting the shareholders by vetting the documents that were going out and being satisfied on their behalf that they were appropriate. He understood that he had an obligation to make a recommendation to shareholders whether or not to approve the takeover. He saw it as his role to see that the Nelson Wheeler report was reasonable for the shareholders' purposes.
What then did Quilty and Singleton do in the discharge of their very onerous duties and responsibilities? The answer is very little. In my view, it is established that they did not become familiar with the business of Kia Ora in a way relevant to the takeover process. They did not obtain a basic level of knowledge of Western United and its subsidiaries so that they could discharge their duties in the context of the takeover. Consequently, they could not make any informal decisions about whether the takeover was in the best interests of Kia Ora and its shareholders and what would be the likely consequence to them if the takeover succeeded. Given their knowledge of the conflicts of interest of the common directors and senior management, they could not rely upon them and Harold Abbott in particular. The tasks for which they had been appointed required independence, firmness, objectivity, skill and knowledge. In my view, they had none of these characteristics, except perhaps skill.
It is alleged that Quilty and Singleton were in breach of their duties to Kia Ora prior to the preparation of the Nelson Wheeler report. It is alleged that they were under a duty to ensure that the common directors were not involved in, and did not participate in, the decision of Kia Ora to proceed with the takeover or in the formulation of the terms of the takeover.
In my view, these allegations may be dealt with briefly. By the time Quilty and Singleton commenced to act as directors of Kia Ora, the takeover process was well advanced in that both Nelson Wheeler Perth and Hayward were progressing matters with expedition. Neither Quilty nor Singleton played any part in those matters. It seems likely that they each received information from time to time from Harold Abbott and probably management. They did nothing until they considered the draft of the Nelson Wheeler report along with the other directors.
At no time did either of them have any contact with Nelson Wheeler Perth. They did not make any enquiries of management or of Nelson Wheeler Perth to ensure that appropriate instructions and information were being given. In the circumstances, that is not a matter of great moment but it is an indication of their inactivity. Once the Nelson Wheeler report was received, both as a draft and as a final report, and their valuation of Western United was known, which was far in excess of share market value, neither made any enquiry of Nelson Wheeler Perth or anyone else to satisfy themselves about the opinions expressed in the report. Given their positions as independent directors in the setting of the conflict of interest of the common directors and senior management, I think the failure to make appropriate enquiries indicates a lack of due diligence on their part.
As has been seen, it is not clear from the evidence precisely when the directors of Kia Ora decided to make the takeover bid in the terms in which it was made. Possibly that occurred at the meeting of directors on 2nd October 1987 but it is by no means clear that Quilty and Singleton attended that meeting. However, it may readily be accepted that as independent directors they joined in the decision to make the takeover offer and for Kia Ora to undertake the necessary procedures, including holding the extra-ordinary general meeting of shareholders. It is claimed that they were in breach of duty to Kia Ora in that they caused, consented or allowed Kia Ora to proceed with the takeover.
In my view, that claim is established. Quilty and Singleton say that in doing so they relied upon the Nelson Wheeler report. As far as they were concerned, Nelson Wheeler Perth was a suitably qualified and reputable firm. They had undertaken the work and there was no reason why they should not rely upon the report and the views expressed in it.
If the Nelson Wheeler report gave the appearance of reliability, I think Quilty and Singleton would have been entitled to rely upon it for the purpose of discharging one of their tasks, ie considering what price Kia Ora should offer for shares in Western United. But that was only one matter for them to consider. They had to consider whether Kia Ora should embark upon a takeover of Western United and if so whether the Part A procedure should be adopted. As the independent directors, Quilty and Singleton were obviously not only concerned with price. At no stage did they consider whether it was in the interests of Kia Ora to acquire Western United. Had they done so, it is likely that they would have had serious misgivings. If they had even decided to consider the matter, they would have needed information and advice from appropriate people. They sought no advice at all.
It is clear that they did no more than participate in the takeover process which included consideration of the Nelson Wheeler report. Upon assuming the position of directors, they made no evaluation of the proposed takeover and whether it was in the interests of Kia Ora to acquire the issued capital of Western United. Had they done so, and had they discharged their duties properly, they would have rejected the takeover and the price. It is established that they simply acquiesced in what those controlling Kia Ora wanted and were in breach of duty in doing so.
They both attended the meeting at the office of Kia Ora at which the draft of the Nelson Wheeler report was read and considered. Quilty signed the letter to the shareholders dated 9th October 1987. Neither of them played any role in writing the letter. As has been mentioned, that task was undertaken by Rush International, Harold Abbott, Green and Hayward. Whilst there is no evidence to indicate that Harold Abbott played a part in drafting the letter, it would be surprising if he did not.
It will be remembered that Quilty acknowledged in his evidence the nature and purpose of the letter and that he thought it was fair and reasonable. Also, as has been mentioned, Singleton read the letter before it had been sent and approved of it. He saw no reason to doubt anything in the letter.
I have already made some observations about the contents of the letter which need not be repeated. However, I now mention some matters which reinforce those observations. Mere perusal of the letter reveals that most extravagant claims were being made. Examples are "the resulting company would be poised to be one of the largest publicly listed merchant bank/mining finance houses in Australia", and "it will have the capacity to grow on a global scale in key markets, including London, Sydney, Melbourne and the Pacific Rim". Western United was described as "a company with an exceptional growth pattern". The rationale of the takeover was to "provide substantial returns for shareholders, including attractive dividends on a consistent basis". As has been seen, the goodwill component in the price effectively foreclosed dividends indefinitely. Singleton said he was aware of that problem and agreed that there would not be "a sniff of dividends for a long time". The letter also contained "Kia Ora can look forward to a new era of growth, profitability and a new deal for its shareholders", after the takeover Western United "will have a long term and highly profitable future both in Australia and in the world's key capital markets" and there would be "a solid return for shareholders". As has been seen, the letter ended with a recommendation to vote in favour of the takeover.
Neither Quilty nor Singleton made any enquiries or sought any information to verify any of the statements in the letter. According to Quilty, he agreed with the subjective contents of the letter but accepted that parts of it were "rather flowery" and that the letter was a sales document. He maintained during his evidence that he considered the letter to be reasonable. However, he had insufficient knowledge or information to reach any sound judgment about these matters. Singleton's attempts to justify the letter were specious. His evidence establishes at best that the statements in the letter reflect the hope rather than the fact. He accepted that parts of the letter were difficult to justify.
In my view, neither Quilty nor Singleton could have held the extravagant views expressed in the letter genuinely. It is likely that they gave little consideration to it. It was simply a sales pitch and, in my view, contained fundamental inaccuracies about Western United. Even a basic level of inquiry and consideration would have led Quilty and Singleton to the view that the letter was totally inappropriate to be sent to shareholders about such an important matter.
By assuming the mantle of independent directors, Quilty and Singleton assumed a position of great importance in the eyes of the shareholders and for Kia Ora. The shareholders were entitled to accurate information and balanced and genuinely held opinions if any were to be expressed. In Advance Bank Australia Ltd & Ors v FAI Insurances Ltd & Anor (1987) 9 NSWLR 464, the Court of Appeal had occasion to consider extravagant and misleading statements to shareholders by the chairman on behalf of directors. The observations of Kirby P, at p487, are appropriate in all circumstances where information and views are provided by directors to shareholders:
"But to the extent that directors, in a situation of potential conflict of personal interest and corporate duty, stray into exaggeration, half truth, emotional language and misleading statements, the risk they run is that their activity will later be characterised by a court as not bona fide for the purpose of the company but rather for the primary purpose of their own re-election. To the extent that their actions are nevertheless classified as being for the purpose of the company, such conduct may still convince a court, when it is challenged, that the directors have exceeded their authority and abused their powers."
However, the obligations should not be confined to circumstances of conflict of interest. In Claremont Petroleum NL & Ors (1986) 11 ACLR 94, McLelland J expressed the fiduciary obligation of directors as follows at p96:
"Where directors take it upon themselves to urge or recommend or advise members to exercise their powers in general meeting in a particular way, they are in general required to make a full and fair disclosure of all matters within their knowledge which would enable the members to make a properly informed judgment on the matters in question (see generally Bulfin v Bebarfold's Limited & Ors [1938] NSWStRp 28; (1983) 38 S.R.(N.S.W.) 423, the cases therein cited, and the other cases cited by Young J. in Devereaux Holdings Pty. Ltd. v Pelsart Resources N.L. & Anor (1985) 9 ACLR 956, 4 ACLC 12)."
The observations of Young J in Devereaux Holdings are instructive. At p958 (9 ACLR) he said that it is the fiduciary duty of directors not to mislead the shareholders with material that is other than "substantially full and true" and that this is especially so where the directors themselves may benefit from the passing of a resolution. He went on to say that the test is what effect will the information provided have on "the ordinary shareholder who scans or reads the document quickly, not as a lawyer, but as an ordinary man or woman in commerce or as an ordinary investor". He went on to say that the question is "will the information fairly inform and instruct the shareholder about the matter upon which he or she will have to vote?"
Of course, this letter to the shareholders signed by Quilty and approved by Singleton failed those tests dismally. The importance of letters of this nature was further illustrated by Young J in Devereaux Holdings when he went on to say at p958:
"As was pointed out ... in ... Tiessen v Henderson [1899] 1 Ch 861 at 870 the person to be protected by the rules is 'not the dissentient, but the absent shareholder - the man who is absent because, having received and with more or less care looked at the circular' consider that he can leave the matter to the majority."
These observations were expressly followed by the Full Court of this Court in Residues Treatment and Trading v Southern Resources.
Quilty and Singleton could not discharge these obligations merely by blindly accepting that what was written in the letter might be true. As directors they were obliged to satisfy themselves that the letter was accurate and not misleading. As independent directors appointed especially for the purpose of the takeover in the knowledge that the other directors had a conflict of interest, this obligation could not be discharged by mere enquiry of them or some of them.
In my view, Quilty and Singleton were in breach of their duties to Kia Ora in the sending of this letter. Accepting as I do that it is likely that Harold Abbott played a significant part in the writing of the letter and because he asked Quilty to sign it in the knowledge that it was being sent to the shareholders, he too was in breach of his duties to Kia Ora by reason of this involvement.
Later in these reasons for judgment the issue of whether it was appropriate to rely upon the Nelson Wheeler report after the share market crash is considered. However, that issue is raised in the allegations of breach of duty against Quilty and Singleton. It is alleged that following the share market crash they knew, or ought to have known, that as the Nelson Wheeler report was dated 22nd September 1987 and pre-dated the crash, that event rendered it no longer appropriate to be relied upon. I do not think that Quilty and Singleton were in breach of duty in continuing to rely upon the Nelson Wheeler report after the share market crash if that is what they did. By the time of the meeting on 26th October 1987, which was five days or so after the share market crash, the state of the market, on the evidence, was uncertain. There had been a brief rally of share prices and subsequent falls. Advice at the time was for caution. Quilty also relied upon the fact that Nelson Wheeler Perth did not withdraw its report after the crash. In my view, that is a matter of limited significance so far as Quilty and Singleton are concerned, because they did not seek advice and as independent directors discharging such important responsibilities, they should have done so.
It is also alleged that they were in breach of duty in not adjourning the extra-ordinary general meeting and in not obtaining further independent advice as to whether the takeover of Western United was in the best interests of Kia Ora in view of the share market crash. Whilst I think there is some force in the view expressed by Quilty in his evidence that the share market crash must not be considered in hindsight and that at the time it was not known if it was merely a temporary, albeit severe, correction, nevertheless it was an event which should have been considered and suitable advice should have been obtained.
Further, it is alleged that they were in breach of duty in making the offer after the extra ordinary general meeting and in subsequently extending the offer and waiving the conditions. It will be remembered that while the shareholders resolved to authorise and empower Kia Ora to make the offer, it remained for the directors to do so. I have concluded that it was not in the interests of Kia Ora to acquire the issued capital of Western United and that Quilty and Singleton were in breach of their duty to Kia Ora in proceeding with the takeover. If Quilty and Singleton had discharged their obligations, they would have reached the same conclusion. As time went by after the share market crash, it would have become increasingly obvious that it was not in Kia Ora's interest to proceed with the takeover even without such enquiry. It follows that they were also in breach of duty at those stages when the takeover process could have been aborted. In my view, they were obliged to consider the best interests of Kia Ora at all stages of the process and they failed to do so.
In defence of those allegations, Quilty and Singleton say that the shareholders of Kia Ora would have known as much about the significance of the share market crash as they did and their decision was informed by their knowledge of the crash. This submission is not supported by the evidence. As has been seen, many shareholders voted by proxy. It is likely that many such votes were cast before the share market crash first became apparent. Perhaps these proxy votes could have been withdrawn before the meeting if the shareholders were minded to do so and if time permitted. Nevertheless I do not think Quilty and Singleton were adequately discharging their duty to Kia Ora by taking no action. They could not assume that the shareholders were indifferent to the share market crash but even if they were entitled to assume that some shareholders took that view, their duty to act in the best interests of Kia Ora remained. They were obliged to consider the matter themselves and they did not do so. They also say that no dissent was voiced at the extra ordinary general meeting but that is a matter of little significance. The duty of the directors remained.
I think it was incumbent upon Quilty and Singleton to inform the shareholders at that meeting that they were the independent directors appointed for the purpose of the takeover in view of the conflict of interest of the other directors and move that the meeting be adjourned in view of the share market crash pending independent advice and appraisal.
The position taken by Quilty and Singleton at the trial is that once the shareholders had passed the resolution, their role was merely to facilitate that resolution which they regarded as an instruction. Quilty said that at no time did he think Kia Ora should not go ahead with the takeover. It is appropriate to set out what he said:
"Q Did you at any time after 26th October think yourself that Kia Ora should not go on with the offer.
Q You didn't really address your mind to the question whether Kia Ora should pull out. You regarded the position after 26 October, did you not, as simply effectuating the process that had been commenced.
A I say to you and to his Honour, a group of legal people will look at a thing and dissect it in this way. I'm sure it is very difficult for all of you to imagine how the business was proceeding, how people thought at the time. When a business event commences, when the shareholders give you approval to proceed, when your fellow directors have put this proposal before you and have thought it was worthwhile, and with the background of your beliefs about the future, your general thrust is to proceed to the positive, not to the negative, so there wasn't discussions of how we could stop, because in business you have discussions on how you can proceed, not how you can stop, so I can understand your thinking in those terms and expecting that you would have thought in those terms, but generally the thought was of the positive. I have made my comments on the acceptability or otherwise of statements made in the memorandum of information. I still believe those, so my general view was it was positive to proceed.
Q You didn't give thought to not proceeding, you were going ahead with what had been put in motion.
A If I did, it certainly wasn't on the terms of seeing an opportunity to stop, given by an extension or that sort of legalistic point. It just was not thought about in those terms."
Singleton said that his view was that it was his role to implement the decision of the shareholders.
These views are misguided. As has been said, Quilty and Singleton had a duty to act in the best interests of Kia Ora as long as they were directors and the breach of that duty in failing to appraise the changed circumstances in light of the share market crash continued. Clearly, they had the opportunity to bring the takeover to an end at each of these stages and they did not ever consider the matter. As to the decision of the shareholders, they were obliged to do no more than pay due regard to it. It was simply a condition precedent to any decision by the directors to proceed.
Both Quilty and Singleton maintained that they had acted honestly. They said that Harold Abbott had spoken of what was called "the Collins House" concept. It was named after an enterprise in Collins Street Melbourne which brought together mining and finance interests. It was said to be his dream to do likewise in Perth, or at least that is a very brief description of what was said to be in his mind. Quilty and Singleton said they shared in the view that such a concept was worthwhile and that this takeover of Western United was the beginning of the process. As has been mentioned, it is difficult to see how anyone could have held that view genuinely given the nature of the takeover which would almost certainly, and did in fact, cause Kia Ora to pay away most of its cash to the shareholders of Western United with the consequence that those funds would not be available for the merchant banking business. In my view, upon a moment of reflection by Quilty and Singleton, they would have realised that disposing of much of the cash in this way was contrary to the viability of such a concept. It is likely that the concept was mentioned by Harold Abbott as a selling device for the shareholders.
However, even if that evidence was to be accepted, it could not justify such a lack of action by Quilty and Singleton in the discharge of their responsibilities. In reality they did nothing to adequately inform themselves so that they could discharge their duties. There is no evidence of their having made any decision which was contrary to the wishes of Harold Abbott and those controlling Kia Ora. They, and Somes and Lee-Steere, gave evidence of certain businesses of Western United continuing and now being successful and extremely valuable. Apart from the sharebroking business, it was not made entirely clear which businesses they were. No evidence, apart from those assertions, was called to establish the truth of what was said. Even if it is the truth, the reasons for the success are not known and do not reflect the value of these businesses in September and October 1987. I reject that evidence as any basis for justifying the takeover. These directors had to consider the matter as it was at the relevant times in late 1987 and, in my view, they failed to do so at least adequately, if at all.
Quilty and Singleton maintain that they were bona fide and honest in their belief that the takeover continued to be in the best interests of Kia Ora after the extra ordinary general meeting. They say that they were justified in this belief for the following reasons. They had no reason to suspect the motives of Harold Abbott or any of his associates. I find that submission to be unacceptable. They knew he had a conflict of interest and that he stood to gain financially in a very substantial way. Singleton's awareness of what he saw of the Autocure transaction must have caused him to suspect the good faith and honesty of Harold Abbott and Gardiner. Furthermore, the extravagant price offered in the takeover and the undue haste in the process must have caused both men to question the bona fides of Harold Abbott and the other directors.
It is said that Quilty was a strong man and if he had experienced any doubts he would have said his piece. In my view, that is a two-edged submission. Quilty did appear to be of strong mind and he did not voice any objection or opposition. I accept that he did not even consider if the takeover was in the best interests of Kia Ora. These matters are consistent with his acquiescing in the wishes of Harold Abbott and those controlling Kia Ora. Despite their evidence to the contrary, which I reject, I think both of them merely did what was expected of them by those controlling Kia Ora.
Both Quilty and Singleton said that after the share market crash, and prior to the extra ordinary general meeting, they received advice from management, including Gardiner, said to be the company solicitor, that the advice of the Stock Exchange in Adelaide and the National Companies and Securities Commission was that Kia Ora was obliged to proceed with the offer as the takeover proposal had been announced publicly before the share market crash. Somes and Lee-Steere gave evidence to similar effect. They said they had been so informed by Gardiner and Harold Abbott. Some support of this view is said to be found in articles in the Financial Review on 29th October 1987 and 9th November 1987. Those articles contained reports that the Commission would not allow any reduction in the cash component of takeover offers in consequence of the share market crash because to do so would disadvantage shareholders in target companies. These articles were published after the extra-ordinary general meeting of Kia Ora and they refer to the situation where the offer had already been made. In the case of Kia Ora, the offer had not been made. As has been seen, it was not made until 23rd November 1987. The proposed takeover was announced on 9th October 1987 when the letter to shareholders, the notice of the extra ordinary general meeting and the Nelson Wheeler report were sent to shareholders. Kia Ora was not only not obliged to go on with the takeover but could not do so before the approval of the shareholders. If Harold Abbott or Gardiner did say that the takeover had to proceed, that statement was not true. As has been seen, Jarosik contacted Hayward on 22nd October 1987 and asked if Kia Ora had had a change of heart. Nothing was said about Kia Ora being obliged to proceed.
Mr Evans and Mr Heywood-Smith also sought to draw some support from the provisions of s21 and s52 of the Acquisition of Shares Code. Section 21 provided that a takeover offer is not capable of being withdrawn without the consent in writing of the Commission which may be given subject to conditions. Section 52 dealt with announcements of proposed takeover bids and provided, inter alia, that where such an announcement had been made publicly, the person making the announcement had to proceed to make the bid within two months or such further period as the Commission permitted. Failure to do so constituted an offence but s52(8) provided that such a person had not committed an offence if by virtue of a change in circumstances after the making of the announcement not caused directly or indirectly by the person, he or she could not reasonably have been expected to make the takeover bid.
The Commission issued policy releases relating to the discretions which it may have to exercise in this context. Policy release 133 was operative at the time. Paragraph 5.2 provided that the Commission considered that the withdrawal of a takeover offer would only be justified in exceptional circumstances. However, as the section has no relevance to any matter in issue in these proceedings because no offer had been made prior to the extra ordinary general meeting, it is unnecessary to consider the Policy Release further. In so far as s52 is concerned, the only discretions of the Commission are to extend time to make the offer and to institute a prosecution. In my view, neither of these sections had any bearing upon the position of Kia Ora in October and November 1987 before the takeover offer was made as clearly Kia Ora would have come within s52(8).
I do not think that Quilty or Singleton believed they were obliged to proceed with the takeover before the extra ordinary general meeting. However, if they did they took that advice from persons who stood to gain substantial fortunes if it did proceed. They did not seek any independent advice.
Mention has been made of the Horwath and Horwath report. It will be remembered that they valued Western United at nearly $45m and the shares at $1.74 each and expressed the opinion that should the takeover succeed, there would be a negative impact on the value of Kia Ora shares which value would be 59.9 cents.
According to Quilty, he has no specific memory of reading the report but he does remember discussing it with the other directors. They decided to proceed with the takeover. He did not ask Nelson Wheeler Perth to reconsider their report. The evidence does not disclose when Quilty saw the Horwath and Horwath report or when this discussion among the directors occurred. As has been seen, a draft of the report was in the hands of the common directors on 5th November 1987 or a little later and the final report is dated 16th November 1987 before the takeover offer was made. Given the role played by Quilty and his relationship with Harold Abbott and the other directors, it is likely that he was aware of the Horwath and Horwath report and had the discussions with the other directors shortly after the draft was received. Being aware of their opinion and valuation after the share market crash, he did nothing to re-assess what was in Kia Ora's best interests. Singleton said he had no recollection of considering the Horwath and Horwath report but I find that he would have done so at least in the same way as Quilty and for the same reasons. Their failure to act on the report in any way at all constitutes a breach of their duty to Kia Ora. At the very least they should have sought advice from appropriate sources which includes Hayward. The explanation that they believed that they were committed to the takeover because of information from Harold Abbott and Gardiner is unconvincing. They were men of experience. They were supposed to be independent. They knew that they had access to advice and they sought none.
As to the decisions to extend the offer and to remove the conditions, both Quilty and Singleton say that they regarded these matters as purely administrative. It is submitted on their behalf that in most takeovers, conditions are waived and the time for acceptance of the offer is extended. I do not know if that is so but even if it is and was at that time, it does not afford any valid reason for the failure by Quilty and Singleton to consider what was in the interests of Kia Ora and to take such advice as was necessary.
Neither Quilty nor Singleton read the articles of association of Kia Ora or the Listing Rules in their entirety. Quilty claimed to have some knowledge of the Listing Rules. It is submitted that this omission does not constitute a breach of duty on their part as Kia Ora had an in-house solicitor in Gardiner and it was part of his responsibilities to advise them on formalities pertaining to documents. Singleton expressed his view in this way, "He's a solicitor of the Supreme Court. I have known him for a long while. Why wouldn't I believe him?". In my view, that evidence is revealing. To Singleton's knowledge, Gardiner had a substantial conflict of interest. He must have known that if he was to discharge his duties as an independent director properly, he could not blindly take advice and accept information from a person such as Gardiner. However, I do not think that the failure to read the Articles of Association or the Listing Rules is of much moment, but it does reveal something about the manner in which Quilty and Singleton approached their task. It appears from their evidence that they read and did very little. They made no independent enquiries and despite their knowledge of the conflicts of interest of the common directors and senior management, they merely accepted the takeover process which they joined part way through its course.
For all of these reasons it has been clearly established that both Quilty and Singleton were in breach of their fiduciary and statutory duties to Kia Ora.
Did they act honestly? They assert that they did so. Having concluded that they did not act in the best interests of Kia Ora, it is necessary to make specific findings about the state of mind of each of them. I do not think either of them acted bona fide in the interests of the company. They were aware of their special position and of the seriousness of the task in hand. In my view, each of them was aware that the takeover was not in the interests of the company. Certainly they had no positive state of mind to that effect.
In my view, their lack of independence played an active part. It affords an explanation for the lack of activity on their part and their apparent acquiescence in the wishes of the common directors and those controlling Kia Ora. Their actions were not calculated to be for the benefit of Kia Ora as a whole which includes all of the corporators but only for relatively few of them, the associated shareholders. Consequently, their motives were improper because the interests of Kia Ora were subjugated to those of Harold Abbott, Schneider-Paas, the other common directors, senior management and their associates. At the very least their conduct may justly be categorised as constructive fraud in the sense described by Viscount Haldone LC in Nocton v Lord Ashburton. They acted dishonestly in that their motives were not bona fide in the interests of Kia Ora: Howard Smith Ltd v Ampol Petroleum Ltd. Upon the authority of Australian Growth Resources Corp v Van Reesema, they acted dishonestly.
Furthermore, they failed to exercise a reasonable degree of care and diligence.
Both Quilty and Singleton were in breach of their fiduciary and statutory duties to Kia Ora and are liable in damages for the loss sustained by Kia Ora in discharge of their duties.
The role of Lee-Steere and Somes in Kia Ora and Western United over the years and the development of their shareholding in the two companies has been mentioned. Also it has been seen that both of them played an active role in the takeover of Western United by Kia Ora.
In my view, both Lee-Steere and Somes were in breach of all of the fiduciary and statutory duties as alleged at almost every stage of the takeover process. I say almost every stage because I accept that it has not been established that Lee-Steere and Somes were ever aware of the proposed takeover when Hayward and Nelson Wheeler Perth were instructed. It has not been established that they were involved in the earlier events of ramping of Western United shares or that they were aware of the sale of the shares owned by Parry Corporation at the time. They were not involved in the provision of any information to Nelson Wheeler Perth in their capacities as directors of Kia Ora or at all. There is no evidence to establish that Lee-Steere or Somes was in breach of duty in the provision of information to Nelson Wheeler Perth or that they played any role in the manner in which Nelson Wheeler Perth discharged their responsibilities.
However, thereafter they were in breach of their duties and in a serious way. Both Lee-Steere and Somes read the Nelson Wheeler report. Like Harold Abbott, they were familiar with both Kia Ora and Western United. They were experienced in business and corporate affairs. They understood the various businesses of Western United and its dependency in large measure upon Kia Ora and its associates. They were not directors who were appointed to bring some limited, but important, expertise to the Board. They had both been around for a long time. They were on the finance committee. They considered and approved loans granted by Western United. They were aware of problems experienced by Porter Western and some of the other subsidiaries. They were aware of the price paid by Western United for the remaining half interest in Porter Western in April the same year. They were aware of the artificiality of assertions of growth of Western United in the 1987 annual report which could only be made by reason of the deposit of $26m by Mawson Pacific on the eve of the end of the financial year. They must have been aware of the various fees, commission and sales of shares which gave a false impression of the profits of Western United. As has been seen, Somes knew of some back to back loans. Given their intimate knowledge of the monthly accounts of Western United and its subsidiaries, they must have known that the revenue projections adopted by Nelson Wheeler could not be achieved. They must have known that the income projection for the merchant bank based in part on average deposits of $96m for the 1988 financial year could not possibly have been achieved.
Somes said he knew that Parry Corporation had owned 25 percent of the issued capital of Western United and that he was aware of the sale in August or September at $1.30 per share. Both Lee-Steere and Somes owned or controlled substantial shareholdings in Western United and were astute businessmen. They would have been aware of the share market price of those shares, at least in a general way, at any time. They must have known that the Nelson Wheeler Perth valuation at $3.22 per share was grossly inflated and unjustified. Somes' evidence that the sale by Parry Corporation in August 1987 at $1.30 and the valuation at $3.22 about five weeks later was consistent with current substantial fluctuations in share prices brought about by persons trying to buy into companies that were seen to be on the takeover trail is not only unsupported by the evidence but is plainly a nonsense. Western United shares did not reach a price of $3.22 on the share market.
I am satisfied that Lee-Steere and Somes, given their knowledge of Western United over the years, could not possibly have thought that the valuation and opinions of Nelson Wheeler Perth in the Nelson Wheeler report were justified. They well knew that this report was not fit to be relied upon by the shareholders. They knew that it could not possibly be in the best interests of Kia Ora to proceed with the takeover on that basis. The prices referred to in the report could only have been in the interests of Western United shareholders to their knowledge. In accordance with their duty to Kia Ora, having seen the report, even at the draft stage, they should have rejected the takeover on that general basis and opposed it. They should have opposed Harold Abbott and the others controlling Kia Ora and counselled the independent directors Quilty and Singleton to the same view.
Their failure to do so was motivated by self interest and support of Harold Abbott and Schneider-Paas. It was contrary to the interests of Kia Ora and plainly so. They could not for one moment have thought otherwise and I reject their evidence to the contrary.
Even though they had a conflict between their own interests and those of Kia Ora, they could not stand aside and do nothing to prevent such a disastrous course by Kia Ora. Of course they could not prefer their own interests but they could not ignore their duties as directors.
The other matter of prime importance at this stage was to consider not simply the Nelson Wheeler report and the opinions expressed by Pilmer but also to consider the whole undertaking. Even if the price was right, the question remained whether the takeover was in the best interests of Kia Ora. Given the control of Western United by these common directors and the actual control which was in the hands of Harold Abbott, Gary Abbott, Schneider-Paas and friendly associates, the obvious question was how it could possibly be in the best interests of Kia Ora and its shareholders to dispose of all of this money, the principal asset of Kia Ora, by paying it to shareholders of Western United. As with Harold Abbott, Quilty and Singleton, these two men gave no consideration as to whether the takeover was in the best interests of Kia Ora. Having heard their evidence and considered all of the other evidence, I am satisfied that they preferred their own interests in their decision to go along with Harold Abbott. They must have known that the Nelson Wheeler report would mislead the shareholders and was not suitable to be relied upon. They admit that they intended and believed that the shareholders, in considering the takeover resolution, would rely upon the report.
I reject the evidence of both Lee-Steere and Somes that they believed that the takeover of Western United was in the best interests of Kia Ora or that the Nelson Wheeler report was appropriate to be relied upon by the shareholders.
The next allegation of substance is that Lee-Steere and Somes were in breach of their duty to Kia Ora in that they caused, consented to or allowed Kia Ora to send the letter signed by Quilty to the shareholders. They admit that they believed that the shareholders would rely upon it, in considering the takeover resolution. As has been observed, the letter was an entirely inappropriate document and contained inaccurate and misleading information. Those directors responsible for sending it were in breach of their duty to Kia Ora. Lee-Steere and Somes say that they had nothing to do with the preparation or sending of the letter. They both say that they first saw it when they received it as shareholders along with the notice of meeting. There is no evidence to the contrary. Although it is not a particular of breach of duty alleged against them, it should be observed that having seen it they did nothing about it. They must have known that the letter contained inaccuracies and was misleading. If they genuinely had the interest of Kia Ora and the shareholders at heart, it might have been expected that they would have done something to correct it. Somes said that he read it when receiving it and there was nothing he disagreed with or considered to be inaccurate or over optimistic. I do not accept that evidence. Somes is not a stupid man despite some of his evidence and demeanour. He must have assessed the letter for what it was and his evidence is simply untruthful.
The allegations made against Lee-Steere and Somes of breach of duty after the stock market crash, are the same allegations made against Harold Abbott, Quilty and Singleton.
Lee-Steere and Somes contend that it was inappropriate for them to take any action because of the conflicting duty they owed to the Western United shareholders. Lee-Steere maintained that he and Somes stood aside. The interests of these shareholders coincided with their own personal interests. If there was any merit in this contention, it would apply equally to the decisions made earlier in the takeover process in which Lee-Steere and Somes admittedly participated. However, in my view, the contention is without substance both in fact and in principle. The evidence clearly establishes that both Lee-Steere and Somes attended the meeting of the directors of Kia Ora held immediately after the extra ordinary general meeting and participated in the decision to proceed with the takeover. Somes participated in the decisions of the directors on 10th December 1987 and 16th December 1987 to make the offer unconditional or to extend the period for acceptance of the offer. The contention also offends principle. A director having a conflict between the interests of two companies does not entitle him or her to act in favour of one and contrary to the interests of the other. The fiduciary, statutory and common law duties remain. What is required is that one interest is not to be preferred to the other, not that one is to be abrogated.
As with Harold Abbott, Quilty and Singleton, Lee-Steere and Somes did nothing after the share market crash. They sought no advice. They did not approach Nelson Wheeler Perth. They did not even require the matter to be discussed with the directors. They maintain that it was for Nelson Wheeler Perth to say if the share market crash affected the position. They say they believed that if Nelson Wheeler Perth was concerned about the share market crash, they would have approached the independent directors and withdrawn their report or asked the directors to review it. The Nelson Wheeler report was a public document. It had been lodged with the Stock Exchange in Adelaide and was in the hands of the shareholders and the media. According to Lee-Steere and Somes, no-one had suggested it was no longer appropriate. There had never been any adverse comment except by Hambros which they submit was because of Autocure's own interests.
In my view, these submissions overlook that it was the fundamental obligation of the directors of Kia Ora to act in the best interests of the company and to make decisions accordingly. They could not discharge their responsibilities by leaving decisions to others. They had to consider whether, following the share market crash, it was in Kia Ora's interests to proceed and they did not do so. They say that they did consider the effects of the share market crash but I do not accept that they did so in the context of what was in the interests of Kia Ora. Had they done so, they would have decided not to proceed. Somes said that he thought the correction in the market might be of some benefit to Western United but I reject that evidence.
As with Harold Abbott, Quilty and Singleton, Lee-Steere and Somes should have concluded that it was not in the best interests of Kia Ora to proceed with the takeover and should have informed the shareholders at the extra ordinary general meeting accordingly and called for the meeting to be adjourned so that the absent shareholders could also be informed.
It was submitted that as the full impact of the share market crash could not have been known by the time of the extra ordinary general meeting, Lee-Steere and Somes were not in breach of their duties to act against the takeover in consequence of it. I accept that the full implications of the share market crash were not known by the time of the meeting. Nonetheless, by that time the extent of the correction was considerable. Given the nature of most of the businesses undertaken by Western United and its subsidiaries, a substantial adverse impact in the market would inevitably have affected the viability and value of those businesses which must have been known to all of the directors, including Lee-Steere and Somes. At the very least a wait and see approach was appropriate. After all, as has been said, Kia Ora was substantially a cash box unlikely to be greatly affected by the down-turn in the stock market. Any competent person considering the matter at that stage would have seen that the value of Western United shares would diminish to the advantage of Kia Ora but not, of course, to the shareholders of Western United.
Lee-Steere and Somes take a similar approach to the significance of the Horwath and Horwath report. Somes sought to explain it away by saying that it was a little on the conservative side but the substantial difference in the valuation from that of Nelson Wheeler Perth could be explained by the reduction in maintainable earnings which was likely to be temporary and therefore of no concern. The difference in the price earnings multiple which could be explained by a different appreciation of what the future held for the businesses of Western United and its subsidiaries. I regard this evidence as somewhat astonishing and I reject it. As Somes well knew, Horwath and Horwath valued Western United at a time which was not even two months further into the 1988 financial year than when Nelson Wheeler Perth undertook their valuation. Somes well knew that projections of profit used by Nelson Wheeler Perth were totally unrealistic. He must have known that price earnings multiples used by Nelson Wheeler for financial services was totally unrealistic. However, above all, he knew that the valuation of $82.6m by Nelson Wheeler Perth was totally unrealistic. He could not have genuinely believed that the two valuations were not inconsistent. After all, the difference was nearly $38m. Furthermore, as has been seen, Horwath and Horwath, unlike Nelson Wheeler Perth, considered the effect of the takeover upon Kia Ora shares and concluded that there would be a negative impact.
In my view, any competent director of Kia Ora acting in the best interests of the company would have reconsidered the takeover proposal upon receiving the Horwath and Horwath report and Lee-Steere and Somes were in breach of their duties in failing to do so.
There is no evidence that Lee-Steere was in any way involved in the decisions to waive the condition and extend the offer or that he was aware at the time that those decisions had been made. As has been seen, Somes participated in them and was in breach of his duties to Kia Ora in doing so. He explained his reasons. He said it was proper and common practice to declare offers of this nature unconditional once the level of acceptances passed 50 percent. He said he voted in favour of the extension of time for acceptance of the offer because the offer expired on 24th December 1987 which was a difficult time for the receiving of mail, particularly with many shareholders living overseas. By 15th December 1987, acceptances had been received by shareholders owning about 70 percent of the issued capital. It is asserted by the first defendants and admitted by the plaintiff on the pleadings that on 16th December 1987 acceptances for at least 85 percent of the shares in Western United had been received by Kia Ora. He said that he was convinced that acceptances would reach 90 percent by 24th December 1987.
Of course, these reasons given by Somes, even if true, miss the point. If the offer was not made unconditional and the time not extended, it would have lapsed and Kia Ora would not have had to proceed with the takeover. In my view, Somes was in breach of his duties to Kia Ora by reason of participating in these decisions.
Both Lee-Steere and Somes were in breach of their fiduciary and statutory duties to Kia Ora. I do not think either of them acted honestly. Their self interest and the circumstances in which they participated in the takeover process prevents any finding that they acted bona fide in the interests of Kia Ora or that they believed they so acted.
Furthermore, they did not act honestly in accordance with s229(1). In my view, their conduct was driven by the motive of self interest which was preferred to the interests of Kia Ora. I would categorise their conduct as falling within s229(1)(b). Also they acquiesced in the conduct of Harold Abbott, Gary Abbott and Gardiner in the takeover process without query, let alone objection. Vital steps were taken by Harold Abbott in the takeover process including, as has been mentioned, the instructions to Hayward and Nelson Wheeler Perth and the purported appointment of Quilty and Singleton were undertaken without any reference to them. That Harold Abbott, Gary Abbott and Gardiner would embark upon the takeover process without any mention of it at Board level, must have caused Lee-Steere and Somes grave concern if they were genuine. Careful analysis of the actions of Lee-Steere and Somes demonstrates that the preferment of self interest and this acquiescence amounts to fraud on Kia Ora.
Also, they were clearly in breach of their obligations under s229(4) in that they made improper use of their positions as directors to gain an advantage for themselves. Obviously they were also in breach of their duties to exercise reasonable care and diligence in the exercise of their powers in the takeover process.
Lee-Steere and Somes contend that the plaintiff has not established a causal link between their breach of fiduciary and statutory duty and the loss sustained by Kia Ora in consequence of the takeover of Western United.
Before examining this contention and the authorities upon which it is said to be based, it is appropriate to consider its alleged factual basis.
If the "hell bent" theory is fact, it is said that Harold Abbott, Gary Abbott and Schneider-Paas would never have countenanced two dissident directors upsetting their plans. If Lee-Steere and Somes had opposed the takeover, Harold Abbott and Schneider-Paas, with the support of Quilty and Singleton, would have got their way. If Lee-Steere and Somes had voted against the takeover at the extra-ordinary general meeting, the result would have been the same. It is contended that there is no evidence from any shareholders that they would have altered their vote if they had been informed that there was a minority directorial opposition to the merger and it is not a natural inference. If Somes had not supported making the offer unconditional, Harold Abbott, Quilty and Singleton would have secured the passage of the appropriate resolution. If Lee-Steere and Somes had opposed the motion being put at a general meeting, Harold Abbott could still have done so because a single director could call a general meeting. As the motion was put to the extra-ordinary general meeting, Lee-Steere and Somes could have done nothing but vote against it and would have been obliged to accept the decision of the majority. Clearly, the majority vote would have been in favour of the motion, given the voting on the parcel of shares owed by Autocure.
I hope the description of these contentions in this way does justice to Mr Evans' argument. He drew the distinction between breach of fiduciary duty, breach of an equitable duty to take care and breach of the common law duty to take care. As I understand his argument, he quite properly acknowledged that these contentions do not apply to loss suffered by Kia Ora in consequence of breach of fiduciary duty but on the basis that any liability of Lee-Steere and Somes should not be on that basis but only for breach of equitable duty of care and breach of the common law duty of care which is alleged against them by the Nelson Wheeler defendants in the third party proceedings. It is unnecessary to consider this argument in view of my conclusion that both Lee-Steere and Somes were in breach of their fiduciary duties to Kia Ora as well as their statutory duties. There could be no question that the breach of these duties by all of the director defendants were causative of Kia Ora's loss.
However, even if the liability of the directors was limited to breach of the equitable duty of care or common law negligence, the causative link between such breach of duty and the loss sustained by Kia Ora is established as a matter of fact. It is inappropriate to isolate one or more culpable directors and say that because they could or would have been outvoted if they had taken a different course, their conduct cannot be causative of the loss. If that were the case, all the directors would have to be excluded. The correct approach is to identify the culpable conduct and then determine whether the factual reality is that it caused, or was a cause of, the loss. That is certainly the case with respect to common law negligence: March v E & MH Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506 and Medlin v State Government Insurance Commission [1995] HCA 5; (1995) 182 CLR 1. For present purposes, it is unnecessary to decide but I expect that the same common sense practical approach should be taken where the conduct is in breach of equitable duty of care: see the observations of Ipp J in Permanent Building Society (In Liquidation) v Wheeler & Ors (1994) 14 ACSR 109 109 at 161ff.
Both Lee-Steere and Somes are liable to Kia Ora in damages for the loss sustained in the takeover process by reason of the breach of fiduciary and statutory duties.
All of Quilty, Singleton, Lee-Steere and Somes seek relief under s535 of the Companies Code. This section provides that in civil proceedings against a director or other specified persons for negligence, default, breach of trust or breach of duty in his capacity as a director of a company, if it appears to the court that he is, or may be, liable in respect of negligence, default or breach, but that he acted honestly and that, having regard to all of the circumstances of the case, he ought fairly to be excused for the negligence, default or breach, the court may relieve him wholly or partly from his liability on such terms as the court thinks fit.
In Daniels v Anderson the court referred to the similar provision in s1318 of the Corporations Law in the context of negligence of directors. Clarke JA and Sheller JA said at p525:
"The purpose of the section is to excuse company officers from liability in situations where it would be unjust and oppressive not to do so, recognizing that such officers are businessmen and women who act in an environment involving risk in commercial decision making: see the Company Law Amendment Committee (Reid Committee Report) 1906 (UK) par 24 and the Companies and Securities Law Review committee, Company Directors and Officers, Indemnification Relief and Insurance, Discussion Paper No 9, 1989 at 42 and following. The courts have a wide discretion to relieve in whole or in part."
In Advance Bank Australia v FAI Insurances, the Court of Appeal had to consider whether this type of relief should be granted to directors of a public company who, it had been found, had acted honestly and bona fide and substantially upon legal advice. For these reasons it was submitted that the trial Judge was in error in not relieving them from liability even though they were in breach of their duties to the company in various ways. Kirby P said at pp490-491:
"The difficulty of this argument is that it overlooks the fact that, for the relief provided under s 535, honesty is a requirement but it is not alone sufficient. The section also calls the attention of the Court to 'all the circumstances of the case'. The 'case' referred to directs attention to the way in which the default or breach has occurred. Waddell CJ in Equity, in his judgment on this question, pointed to the inadequacies and unsatisfactory terms of the chairman's letter and to the material used in the telephone soliciting. His Honour concluded, as I have, that the material could not be regarded as the sort of information to which the shareholders were entitled, having regard to the concerns of the directors. Making every due allowance for the need for brevity and simplicity and for the fact that the directors were acting on legal advice, the position remains as Waddell CJ in Equity described it. The letter and the soliciting script contained at once too much irrelevant, prejudicial and inaccurate information which was misleading and did not contain some of the countervailing information which directors, properly discharging their duties in these circumstances, would place before the shareholders."
Tadgell J in Commonwealth Bank of Australia v Friedrich & Ors (1991) 5 ACSR 115 noted that the section did not require that the director had also acted reasonably as had been the case in earlier legislation but expressed the view that, at pp196-197:
"... in having regard to all the circumstances of the case it will be permissible and appropriate, and usually necessary, to consider whether the defendant had acted reasonably in those circumstances: ..."
In my view, none of the directors should be relieved from liability wholly or in part by reason of s535. I have found that all of them acted dishonestly. Accepting the observations of Tadgell J in Commonwealth Bank of Australia v Friedrich as I do, it is significant that none of them acted reasonably. This is not a case of mere inadvertence on the part of a director who was acting honestly by any standards. Here, these directors were in breach of their onerous duties in a very serious manner. Lee-Steere and Somes benefited personally in a substantial way and preferred their own interests to those of Kia Ora. Quilty and Singleton accepted their positions as directors for a specific purpose which was of great importance to Kia Ora. They were charged with very heavy responsibilities which they failed to discharge. They did not even undertake basic enquiries and were influenced by a lack of independence.
In my view, each of the director defendants were in breach of fiduciary and statutory duties and are liable to the plaintiff in damages for the loss sustained by reason of the takeover.
I now turn to the case against the first defendants. As has been the seen the plaintiff claims damages for breach of the contract of retainer, negligence and breach of fiduciary duty. It is appropriate to consider each of those heads of claim separately. However, before doing so, it is necessary to consider certain matters of importance.
It is the plaintiff's case that Kia Ora was obliged in practical terms and as a matter of law to comply with the Listing Rules, a proposition which is contested by the first defendants. It is necessary to consider the true effect and significance of the Listing Rules.
The Australian Stock Exchange Limited was incorporated by the Australian Stock Exchange and National Guarantee Fund Act 1987 and commenced on 1st April 1987. The Stock Exchanges in the various States of Australia became subsidiaries of the Australian Stock Exchange under that Act and their names were changed to Australian Stock Exchange [Name of City, eg Adelaide] Limited as the case may be. So, from 1st April 1987 there was one nationally operating Stock Exchange in Australia. The companies already listed on the various Exchanges became automatically listed on the Australian Stock Exchange without any action being required. The Australian Stock Exchange Listing Rules were adopted from the Listing Rules of the various Stock Exchanges and with some alterations. They are the Listing Rules earlier mentioned.
The Foreword to the Listing Rules includes the following:
"The ... Listing Rules that follow are additional and complementary to companies' common law and statutory obligations. The Rules impose strict requirements on companies which, if not complied with, render them liable to removal from the Official List and the securities lose Official Quotation.
As such the Listing Rules are the strongest elements in the regulation of listed companies in Australia and have received judicial and legislative recognition (See Securities Industry Act and Codes)."
Listing Rule 1(1) provides that a company shall not be admitted to the Official List unless, inter alia, its Memorandum and Articles of Association do not contain provisions inconsistent with these Listing Rules. As the law stood in 1987, the constitution of a company as comprised in the memorandum and articles of the company was a contract between the corporators which bound them and the company: see Ford's Principles of Corporations Law 8th Ed paras 6.030 and 6.050.
"While a company remains on the Official List, it is required to comply with the following Listing Rules and to provide forthwith any explanations requested by the Home Exchange."
The "following Listing Rules" include Listing Rule 3J(3) and the Home Exchange was the Adelaide Stock Exchange.
The Listing Rules are also part of the contract between the Australian Stock Exchange and the listed company: Kwikasair Ltd v Sydney Stock Exchange Ltd [1968] ACSLR 30,701; Ampol Petroleum v RW Miller (Holdings) Ltd [1972] NSWLR 850 per Street CJ in Eq at p881. On appeal the Privy Council adopted the same view: Howard Smith Ltd v Ampol Petroleum Ltd [1974] UKPC 3; [1974] AC 821 at p838. This view was accepted in Repco Ltd v Bartdon Pty Ltd [1981] VicRp 1; [1981] VR 1 and Designbuild Australia Pty Ltd v Endeavour Resources Ltd [1980] ASLC 86,120. In Ampol Petroleum v RW Miller (Holdings) Ltd Street CJ in Eq said that a listed company was obliged to observe the Listing Rules when issuing new shares. He made the following observations at pp881-2:
"The Stock Exchange makes its rules in protection of the public interest and in promotion of due and orderly dealings in shares. Persons buying shares in listed companies are entitled to expect directors faithfully to abide by Stock Exchange rules."
In Repco Ltd v Bartdon Pty Ltd [1981] VicRp 1; [1981] 4 ACLR 787 the Full Court of the Supreme Court of Victoria expressed the same view about listed companies (pp795-797) although the Court was concerned with the position of unlisted companies. Whilst Powell J in Designbuild Australia v Endeavour Resources accepted the existence of such a contract, he said that unless the contract arising from the acceptance by the Stock Exchange of an application for listing, either expressly or by necessary implication, imposed an obligation to observe the Listing Rules, the mere fact that the company was listed did not mean that it was the subject of a relevant obligation under s31 of the Securities Industry Act 1976 (NSW). That section provided for enforcement of obligations under the Listing Rules by the Court upon the application of the Commission or a person aggrieved. Powell J said that he expressed this view despite the decision in Repco Ltd v Bartdon Pty Ltd. It seems his attention was not drawn to Ampol Petroleum v RW Miller (Holdings) Ltd. Also it seems that Powell J did not regard Listing Rule 3 as continuing that obligation so far as a listed company is concerned. In my opinion the views expressed in Ampol Petroleum v RW Miller (Holdings) Ltd and Repco Ltd v Bartdon Pty Ltd should be preferred and I do so.
Section 31 of the Securities Industries Act (NSW) was a precursor of s42 of the Securities Industries Code which was in operation at the time of the events concerning these proceedings. It was as follows:
"42(1) Where any person who is under an obligation to comply with, observe, enforce or give effect to the business rules or listing rules of a securities exchange fails to comply with, observe, enforce or give effect to any of those business rules or listing rules, as the case may be, the Court may, on the application of the Commission, the securities exchange or a person aggrieved by the failure and after giving to the person against whom the order is sought an opportunity of being heard, make an order giving directions to the last-mentioned person concerning the compliance with, observance or enforcement of, or the giving effect to, those business rules or listing rules.
(2) For the purposes of sub-section (1), a person (in this sub-section referred to as the 'relevant person'), being -
(a) a body corporate that has, with its agreement, consent or acquiescence, been admitted to the official list of a securities exchange and has not been removed from that official list; or
(b) a person associated with a body corporate that has, with its agreement, consent or acquiescence, been admitted to the official list of a securities exchange and has not been removed from that official list,
shall be deemed to be under an obligation to comply with, observe and give effect to the listing rules of that securities exchange to the extent to which those rules purport to apply in relation to the relevant person."
This provision makes it clear that a company such as Kia Ora was obliged to comply with, observe and give effect to the Listing Rules and in particular to the Listing Rule 3J(3). This section is wider than the earlier s31 in that it added the obligation to comply with the Listing Rules and to observe and give effect to them and it gave standing to the Australian Stock Exchange to apply to the court for an appropriate order.
Thus it may be seen that at material times Kia Ora had an obligation in law, pursuant to the contract with the Australian Stock Exchange and s42 of the Securities Industries Code to comply with the Listing Rules. This obligation is admitted by the first defendants on the pleadings. It could be enforced by the Court pursuant to s42. Also Kia Ora had an obligation in practical terms. If it did not comply with the Listing Rules in the context of the takeover of Western United, it is very likely that the takeover could not have proceeded. The involvement of the Corporate Affairs Commission and the Australian Stock Exchange and their requirements have been mentioned. It was suggested at times that the takeover could have proceeded without compliance with the Listing Rules and the only consequence would have been that Kia Ora would have been de-listed. I do not accept that submission. Listing on the Official List was important to both Kia Ora and its shareholders. As has been seen, the issue of marketable parcels of shares allotted for the purchase of assets was a feature of trading by Kia Ora. The consequence to Kia Ora shareholders of de-listing would have been considerable and confidence in the company would have diminished. It is likely that the Australian Stock Exchange would have intervened to prevent the takeover if there had not been compliance with Listing Rule 3J(3) as occurred in FAI Traders Insurance company Ltd v ANZ McCaughan Securities Ltd (1990) 3 ACSR 279. In that case the report of the expert stated that the transaction was not fair: see p290. In the present case action under s42 of the Securities Industries Code would have been almost certain and court intervention most likely. It is unnecessary to consider if Kia Ora could have issued the new shares and "traded" them with Western United shareholders if it had been de-listed: see Listing Rule 3E. For all practical purposes, compliance with the Listing Rules was essential for the purposes of the takeover.
It is necessary to consider Listing Rule 3J(3) in a little more detail. Pursuant to the Rule, Kia Ora was prevented from acquiring the issued capital of Western United "without the prior approval of its shareholders in general meeting" and notice of such meeting had to be accompanied by "copies of reports, valuation and other materials from independent qualified persons sufficient to establish that the purchase ... price ... is a fair price" (The underlining is mine). In view of the arguments soon to be addressed, it is important to consider those matters carefully. Only unassociated shareholders could vote at the meeting, ie shareholders who would not be regarded as associated with the vendor or the purchaser by reason of s9 of the Companies Code. It is the company which is prevented from proceeding unless the pre-conditions are met, not some of the members, namely the unassociated shareholders. Those pre-conditions are that a meeting of shareholders must be called. It is not a meeting of unassociated shareholders, but a meeting of shareholders. The shareholders are given notice of the meeting, not merely the unassociated shareholders. With that notice, the shareholders must receive the reports, valuations or other material. The observation of Young J in Deveraux Holdings, already cited in the context of a letter from directors to shareholders, is also pertinent in this context. All shareholders must receive these reports, valuations or materials. Upon reading them some, or many, may be content to leave the matter to others and not attend the meeting in the knowledge that all is well. This applies to both associated and unassociated shareholders.
The reports, valuation or other material, must have two essential characteristics. The author must be independent and expert. The report must be of a particular type; it must be sufficient to establish that the purchase price is a fair price. A report would not meet that criterion if it said something different, such as "it is a matter for the shareholders whether the proposed price should be paid given the lower valuation". Unless the report, valuation or other material has those characteristics, there can be no meeting, no vote and no approval. It may readily be seen that the expert plays a crucial role in the process. Without the expert possessing the required characteristics of being expert and independent, and having expressed the required opinion, the takeover process could not, in my view, proceed to completion. That was the practical effect in FAI Traders Insurance Company Ltd v ANZ McCaughan Securities Ltd (supra).
What then is the purpose of the Listing Rule 3J(3). It is the case of the first defendants that it is to protect the unassociated shareholders. I do not think that is its primary purpose, although it usually will have that consequence if it is duly observed and the expert plays his or her part properly. However, its primary purpose is to protect the company as a whole. Because of conflicts of interest in the circumstances mentioned in the Rule and the potential damage to the company from the actions of directors and associates whose personal interests are in conflict with those of the company, shareholder approval is required. Consideration of the Rule indicates that it is "the approval of (the) shareholders in general meeting" which is required before the directors may proceed. One organ of the company must give approval to the other. For obvious reasons there is a qualification as to who may vote at the meeting, but nevertheless it is a meeting of the shareholders, not merely the unassociated shareholders. There is no restriction as to who may attend the meeting or speak at it. An associated shareholder who opposed the proposal is not prevented from attending the meeting and speaking against it. But, in the end, it is only those who do not have a conflict of interest who can vote. The restriction upon voting is for this limited purpose.
The first defendants contend that because of this restriction, it is not a meeting of Kia Ora. Unless all shareholders can vote, the meeting is not of an organ of the company. Article 58 of the Articles of Association of Kia Ora provides that every member shall be entitled to be present at every general meeting and entitled to vote on any question put before the meeting. It is argued that restrictions on voting necessarily mean that the meeting is not of the shareholders who must be free to vote even in their own interests and that in that respect, and others, they are in a different position than the directors who may only vote in the interests of the company. The first defendants contend that the Listing Rules cannot change the Articles of Association or company law.
I reject that argument. Whilst it is obvious that the Listing Rules do not change the Articles of Association, in circumstances where they apply, the Articles of Association must be considered in conjunction with them. The Listing Rules are part of the legal obligations of Kia Ora and are accepted by it by reason of the listing and for the reasons mentioned. The restriction of entitlement to vote in these limited circumstances is accepted by the company and its members. The wording of the Listing Rule is clear and unambiguous. The extra-ordinary general meeting on 26th October 1987 was a meeting of Kia Ora and the resolution was a resolution of the meeting of shareholders which was a decision of Kia Ora. This seems to be the approach adopted by the learned authors of Ford and Austin's Principles of Corporations Law 7th at p202, p238, pp354-5 and p426. It also seems to be the view taken by Bryson J in ANZ Nominees v Wormald International Ltd (1988) 13 ACLR 698. He referred to Listing Rules and acknowledged that they were significant in establishing the standard to which disclosures by the directors and the expert's report should conform. He said at pp703-704:
"For the purpose of transactions in which assets of a company are sold to directors, directors because of their fiduciary duties toward companies are in a position very much the same as trustees who purchase the assets of a trust; such a transaction is void unless carried out with the assent of the company, and in obtaining its assent directors' fiduciary duties to the company require them to make available to the company all information material to the decision to assent which is available to them. Participation of some or all directors in a proposed transaction would appear to disqualify the directors from assenting on behalf of the company in pursuance of powers conferred on them by articles of association. The principles on which directors are so precluded and on which shareholders may give an effective assent are somewhat shadowy and their application may vary with variations in the facts and the terms of powers of management, but the usual and cautious view is that directors should approach the shareholders for any such assent. It does not seem to make any difference that only one or a minority of the directors are the proposed purchasers, or that the proposed purchaser leaves the board after the inception of the transaction. In any event, in this case the directors have made no attempt to bind the company by a decision of the directors themselves; they have approached the members for a decision, and their approaching the members would be sufficiently explained by Listing Rule 3J(3), and the relevant principles apply when the members are approached for a decision irrespective of the reasons for approaching them."
It may be seen that Bryson J regarded a general meeting under the Listing Rule as the company. It is possible that the issues raised in the present case were not agitated before him, but he does not appear to have doubted that directors obtain the assent of the company through the procedure under the Listing Rule at a meeting of the shareholders.
It is the case of the first defendants that the relevant organ of Kia Ora for the purposes of making decisions and carrying out the takeover of Western United was the directors of Kia Ora not the unassociated shareholders. To some extent the issue raised by this contention has been addressed in that I have concluded that the extra-ordinary general meeting on 26th October 1987 was a meeting of the shareholders. However, it is necessary to say a little more.
There are two organs of a company such as Kia Ora, the shareholders in general meeting and the directors. The role and function of these two organs is determined by company law and the Articles of Association. Matters falling within the province of the shareholders in general meeting do not usually involve management of the company and are concerned with matters such as amending the Memorandum and Articles of Association, altering the share capital, altering the status of the company, altering the purpose and objects of the company, and altering rights attached to shares. Of course, the directors and some other officers of the company are appointed by the shareholders in general meeting as is the auditor.
Usually the Articles of Association of a company specify that the management of the company is committed to the directors and the shareholders cannot instruct the directors how to exercise their powers of management. Kia Ora was no exception. Article 98 provided that the management of the business and affairs of the company was vested in the directors.
There is a clear division of powers between the general meeting of shareholders and the board of directors. In John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113, Green LJ expressed the position as follows at p134:
"A company is an entity distinct alike from its shareholders and its directors. Some of its powers may, according to its articles, be exercised by directors, certain other powers may be reserved for the shareholders in general meeting. If powers of management are vested in the directors, they and they alone can exercise those powers. The only way in which the general body of the shareholders can control the exercise of the powers vested by the articles in the directors is by altering their articles, or, if opportunity arises under the articles, by refusing to re-elect the directors of whose actions they disapprove. They cannot themselves usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers vested by the articles in the general body of shareholders."
These views remain an appropriate description in a general way of the role and function of the two organs of a company although subsequent legislation has provided some modification which is irrelevant for present purposes. There is abundant authority to the effect that given an Article such as Article 98, the directors are free from the control of the shareholders in general meeting regarding management matters: see Ford's Principles of Corporations Law (8th Ed) 7,090-7,123; Gower's Principles of Modern Company Law pp145-147, Howard Smith Ltd v Ampol Petroleum at p837.
In Gower's Principles of Modern Company Law 4th Ed, the position is expressed in this way at p146:
"All this means is that the old idea that the general meeting is the company whereas the board of directors are merely agents requires modification. It seems that both the general meeting and the board may be called the company; the former when acting under the reserved powers, the latter when acting under an express or general delegation. Or, to put it another way, both the general meeting and the board are organs, rather than agents, of the company ..... But here we may note a further distinction between the two organs. As Walton J has pointed out:
'a director is an agent, who casts his vote to decide in what manner his principal shall act through the collective agency of the board of directors; a shareholder who casts his vote in general meeting is not casting it as an agent of the company in any shape or form. His act, therefore, in voting as he pleases, cannot in any way be regarded as an act of the company." (Northern Counties Securities v Jackson & Steeple Ltd [1974] 1 WLR 1113 at p1114.'"
Of course, in the passage cited, Walton J was saying that the act of the individual shareholder is not the act of the company. However, clearly the resolution of the shareholders in general meeting about a matter not delegated to the directors is a decision and an act of the company.
The contention of the first defendants is too narrowly stated in the present context. There is perhaps a real question as to whether, under the general law, the directors of Kia Ora could change the business of the company and embark upon a course which was not embraced by its objects without shareholder approval, but that is not a matter which need be considered in view of what did happen. There was shareholder approval.
The directors could not embark upon the actual takeover, as opposed to preliminary matters, without the approval of the shareholders in general meeting, by reason of the Listing Rule for the reasons mentioned. As has been said, one organ of the company, the shareholders in general meeting, had to give approval to the other organ, the directors. Unless that approval was given, there could be no takeover. Once it was given, it was for the directors to proceed or not proceed as they saw fit in the interests of Kia Ora.
Upon considering liability of the first defendants to Kia Ora for damages for breach of contract and in tort, it is necessary to determine the state of knowledge of Kia Ora of various matters at different times and to decide whether the acts of the directors, or some of them, and of senior management, were the acts of the company.
It is useful to mention some particular findings before considering the contentions of the parties. As has been seen, I have found that the common directors, Harold Abbott, Lee-Steere and Somes, acted dishonestly, and in breach of fiduciary and statutory duties. The evidence does not disclose that Schneider-Paas participated in the various decisions regarding the takeover as a director, except in the decision to make the offer, but it is likely that everything that occurred was done with his knowledge, consent and approval.
Those controlling Kia Ora on a day to day basis at a practical level were Harold Abbott, Gary Abbott and Gardiner. As has been seen, they were heavily involved in the takeover process from beginning to end. None of them gave evidence. It is difficult to criticise the conduct of Gary Abbott and Gardiner as they are not parties to the action and no party called them to give evidence with the consequence that neither has had the opportunity of relating his version of events. Nonetheless the evidence does disclose not only what they did but the probable reason why. They both benefited substantially from the takeover and were close associates of Harold Abbott. Their actions in the takeover process were contrary to the interests of Kia Ora. It is possible that Gardiner acted under the direction of Harold Abbott who was the general manager of Kia Ora. Given their levels of experience and expertise and their depth of knowledge of the officers of Western United and its subsidiaries, it is difficult to see how either could have genuinely thought the takeover was in the interests of Kia Ora or that the purchase price was other than grossly inflated.
Kia Ora was clearly the victim of the takeover process. It suffered substantially and that it would do so must have been obvious to those three men as well as Lee-Steere, Somes, Quilty and Singleton. The plan was to divest Kia Ora of most of its cash, nearly $26m and to ensure that this money was paid to the shareholders of Western United who, as has been seen, were the common directors, senior management, staff and persons and corporations associated with them. Kia Ora did not benefit in any way from the takeover of Western United.
Green was instructed by Harold Abbott to provide information to the first defendants. It will be remembered that he was the general manager of the merchant bank division of Western United. Roberts also provided information, no doubt having been instructed to do so, by Harold Abbott. He was one of the joint secretaries of Western United. The first defendants seek the finding that they were appointed by Kia Ora for those purposes. The evidence does not justify such a finding. It is to be expected that an expert providing a report under Listing Rule 3J(3) would seek information from all appropriate sources including the target company, particularly if it was to be a friendly takeover. There is no reason to suppose that when Green and Roberts provided information to Nelson Wheeler Perth, they did so as agents for Kia Ora or that they were acting as Kia Ora in some other way. The evidence discloses that they provided information about Western United and its subsidiaries. The only finding justified by the evidence is that they acted as, or on behalf of, Western United. I reject the submission of the first defendants that in providing information to Nelson Wheeler Perth, they were acting within the scope of the authority given to them by Kia Ora.
As has been mentioned, at various times during the trial, the first defendants contended that Kia Ora and Western United were, in reality, a merged entity at all material times. I have rejected that contention. As has been mentioned, they had a common office and other facilities and Western United Management Services provided services of that nature to both. They had, in the main, common directors and it is to be expected that staff of one would, at times, have undertaken duties for the other. As has been seen, Gardiner did so on occasions. However, it will be remembered that over the few years prior to mid-1987, interests and activities of the two companies had been separated and their paths further divided. Despite features of common management and facilities, the two companies were not a merged entity before the takeover.
The first defendants also contend that the knowledge and conduct of one or more of the directors of Kia Ora at relevant times is to be imputed to Kia Ora. I have found that the evidence establishes that Harold Abbott, Lee-Steere and Somes had considerable knowledge about Western United, certainly sufficient for each of them to have known that the takeover of Western United at the offer prices could not possibly have been in the interests of Kia Ora. Much the same could be said of Schneider-Paas. It was not possible at the trial to explore the depth of knowledge of Harold Abbott about Western United but there is abundant evidence that he had most detailed information about probably every facet of the operations of Western United and its subsidiaries. No doubt each of the common directors had different levels of such knowledge. Harold Abbott knew most and Somes knew more than Lee-Steere. I expect that Lee-Steere and Somes knew less than Gary Abbott and Gardiner but nonetheless were well aware that the takeover of Western United was not in the interests of Kia Ora and the purchase price was grossly inflated.
Quilty and Singleton had less knowledge about the true position of Western United but, as has been seen, they did have some knowledge and sufficient for them to know that the takeover was contrary to the interests of Kia Ora.
Is this knowledge and information to be attributed to Kia Ora?
Also, it has been seen that the directors and senior management undertook various acts in pursuit of the takeover. It is unnecessary to repeat all of those matters but it will be remembered that Harold Abbott, Gary Abbott and Gardiner acted extensively as Kia Ora and the directors made decisions at various times both before and after the extra-ordinary general meeting which advanced the takeover. They included retaining Nelson Wheeler Perth, using the Nelson Wheeler report, calling the extra-ordinary general meeting, sending the letter signed by Quilty, making and extending the offer, and removing the conditions of the offer. Are these acts, or any of them, to be attributed to Kia Ora?
I have had the benefit of extensive legal argument on these questions and to opposite effect. I intend no discourtesy in not repeating these arguments in detail or the extensive reference to authority. I have considered them carefully and reached my conclusions having given due regard to them.
In brief terms the plaintiff's case is that knowledge and certain actions of the directors and senior management should not be attributed to Kia Ora where the essence of the arrangement involving such knowledge or acts is to deprive Kia Ora of its assets. The knowledge and conduct of these persons who were deceiving it are not to be attributed to Kia Ora. This improper conduct includes dishonest conduct, recklessly indifferent conduct, conduct amounting to equitable fraud, illegal conduct, deceptive conduct and conduct amounting to breach of duty. The knowledge of directors who act irregularly cannot be imputed to the company. Consequently, the knowledge of the directors and senior management of the true financial state and value of Western United, the purpose of the takeover, that incorrect information had been given to Nelson Wheeler Perth and that the takeover was not in the interests of Kia Ora, cannot be attributed to Kia Ora.
The first defendant's case is that the knowledge and acts of the directors at relevant times must be attributed to Kia Ora. They were acting in the scope of their duty and they did so without fraud. At all events fraud on their part was not pleaded and could not be relied upon for any purpose: Banque Commerciale SA, En Liquidation v Akhil Holdings Limited (1990) 169 CLR 279.
It is appropriate to begin with some obvious propositions. A company is a legal entity separate from its corporators: Salomon v A Salomon & Co Ltd [1896] UKHL 1; [1897] AC 22; Viscount Holden in Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 made the following well known observation at p713:
"My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. That person may be under the direction of the shareholders in general meeting; that person may be the board of directors itself, or it may be, and in some companies it is so, that that person has an authority co-ordinate with the board of directors given to him under the articles of association, and is appointed by the general meeting of the company, and can only be removed by the general meeting of the company."
This statement is sometimes referred to as the organic theory under which the acts and omissions of senior people in the management and direction of the company are imputed or attributed to the company: Ford's Principles of Corporation Law (8th Ed) para 16.060.
Usually the knowledge and acts of directors and senior management acting within the scope of their authority are the knowledge and acts of the company.
Lord Hoffman, in speaking for the Privy Council in Meridian Global Funds Management Asia Limited v Securities Commission (1995) 13 ACLC 3245 approached the matter from the point of view of attributing the knowledge and acts of various persons to the company. He said at p3248:
"Any proposition about a company necessarily involves a reference to a set of rules. A company exists because there is a rule (usually in a statute) which says that a persona ficta shall be deemed to exist and to have certain of the powers, rights and duties of a natural person. But there would be little sense in deeming such a persona ficta to exist unless there were also rules to tell one what acts were to count as acts of the company. It is therefore a necessary part of corporate personality that there should be rules by which acts are attributed to the company. These may be called the 'rules of attribution'."
He went on to say that there were primary rules of attribution, which are generally found in the constitution of the company, and also which are implied by company law. In addition there are general rules of attribution which are equally available to natural persons, namely the principles of agency. Servants and agents are appointed whose acts, by a combination of the primary and general rules of attribution count as the acts of the company. Lord Hoffman said at p3249:
"It is worth pausing at this stage to make what may seem an obvious point. Any statement about what a company has or has not done, or can or cannot do, is necessarily a reference to the rules of attribution (primary and general) as they apply to that company. Judges sometimes say that a company 'as such' cannot do anything; it must act by servants or agents. This may seem an unexceptionable, even banal remark. And of course the meaning is usually perfectly clear. But a reference to a company 'as such' might suggest that there is something out there called the company of which one can meaningfully say that it can or cannot do something. There is in fact no such thing as the company as such, no ding an sich, only the applicable rules. To say that a company cannot do something means only that there is no one whose doing of that act would, under the applicable rules of attribution, count as an act of the company.
The company's primary rules of attribution together with the general principles of agency, vicarious liability and so forth are usually sufficient to enable one to determine its rights and obligations. In exceptional cases, however, they will not provide an answer. This will be the case when a rule of law, either expressly or by implication, excludes attribution on the basis of the general principles of agency or vicarious liability."
So it is that usually the knowledge and acts of the directors and of senior management are attributed to the Company. Indeed, the knowledge and acts of servants of the company who are acting within their authority albeit, for example negligently, are usually attributed to the company. Nevertheless, in some cases the Court must fashion a special rule of attribution. Lord Hoffman said at p3249:
"This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy."
Difficulties may arise where those acting within the scope of their authority, such as directors and senior managers, embark upon a course of conduct in the name of the company which is unlawful or constitutes criminal conduct and it is necessary to determine if such conduct should be attributed to the company. Similar problems may arise where a senior officer of the company has knowledge which, if treated as knowledge of the company, may have important consequences for the legal position of the company. These types of problems are discussed by Lord Hoffman in Meridian and the first defendants, relying upon observations made by him, contend that the knowledge and acts of the common directors Quilty, Singleton, Gary Abbott, Gardiner and also Green and Roberts, must be attributed to Kia Ora. This contention is of considerable significance because it is relevant to all aspects of the plaintiff's case against Nelson Wheeler, including breach of contract, duty of care, reliance, causation, contribution and damages.
Having concluded that the directors acted in breach of fiduciary and statutory duty, that Gardiner acted contrary to the interests of Kia Ora probably motivated by personal gain as well as the desire to assist Harold Abbott and Gary Abbott and that Kia Ora was the victim in the sense mentioned, it is, to my mind, an affront to common sense to attribute, or impute, their knowledge and acts to Kia Ora. I have excluded Gary Abbott because he was only an alternate director of Kia Ora and held no executive position in the company, although I have no doubt that he encouraged and supported the others entirely.
This view is clearly established by abundant authority. When the company is the victim of the conduct of the particular officers or servants, their knowledge and conduct may not be imputed or attributed to the company.
It is appropriate to begin with In re Hampshire Land Company [1896] 2 Ch 743. That case involved the borrowing of money by directors on behalf of a company at a level which required the consent of a general meeting of the shareholders. That consent was given but the meeting was irregular due to inadequate notice. The money was borrowed from a building society. Mr Wills was the secretary of the society and the company. Four of the directors of the society were directors of the company. It became necessary to determine whether the knowledge of the secretary could be imputed to the society. This was not necessarily a case of fraud on the part of Wills. Vaughan Williams J rejected the contention that because Wills was secretary of both the company and the society, his knowledge in his former capacity could be imputed to the society. Vaughan Williams J said, at pp749-750:
"The case is very much more like the one which Mr Bramwell Davis and Mr Jenkins had to admit was an exception to the general rule that they sought to lay down, for they admitted that if Wills had been guilty of a fraud, the personal knowledge of Wills of the fraud that he had committed upon the company would not have been knowledge of the society of the facts constituting that fraud; because common sense at once leads one to the conclusion that it would be impossible to infer that the duty, either of giving or receiving notice, will be fulfilled where the common agent is himself guilty of fraud. It seems to me that if you assume here that Mr Wills was guilty of irregularity - a breach of duty in respect of these transactions - the same inference is to be drawn as if he had been guilty of fraud. I do not know, I am sure, whether he was guilty of actual fraud; but whether his conduct amounted to fraud or to breach of duty, I decline to hold that his knowledge of his own fraud or of his own breach of duty is, under the circumstances, the knowledge of the company."
This view was accepted by the House of Lords in J.C. Houghton & Co v Nothard, Lowe and Wills Ltd [1928] AC 1. The facts of the case are a little complicated but in essence three men, two directors and the secretary of a company, were in breach of fiduciary duty by reason of a conflict of interest by reason of certain financial advances to another company. An issue of the knowledge of the company arose. Viscount Dunedin said at p14:
"It may be assumed that the knowledge of directors is in ordinary circumstances the knowledge of the company. The knowledge of a mere official like the secretary would only be the knowledge of the company if the thing of which knowledge is predicated was a thing within the ordinary domain of the secretary's duties. But what if the knowledge of the director is the knowledge of a director who is himself particeps criminis, that is, if the knowledge of an infringement of the right of the company is only brought home to the man who himself was the artificer of such infringement? Common sense suggests the answer, but authority is not wanting."
After citing the passage of the judgment of Vaughan Williams J in Hampshire Land Company op cit, he went on to say at p15:
"The same view is to be found in the case of Lacey v Hill (1876) 4 Ch D 537. This law, in my view, applies to the present case. The only knowledge brought home to the company is through the Lowes and the secretary. They were all parties to the arrangement, which was a fraud on the true interests of the company."
In Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250, the Court of Appeal held that a company was not to be imputed with knowledge of directors of a conspiracy relating to the sale of shares at inflated price since the company was the victim of the conspiracy. Buckley LJ, at p261, noted that if the allegations were made good the directors of the plaintiff company must then have known that the transaction was an illegal transaction. He went on to say at p261-262:
"But in my view such knowledge should not be imputed to the company, for the essence of the arrangement was to deprive the company improperly of a large part of its assets. As I have said, the company was a victim of the conspiracy. I think it would be irrational to treat the directors, who were allegedly parties to the conspiracy, notionally as having transmitted this knowledge to the company; and indeed it is a well-recognised exception from the general rule that a principal is affected by notice received by his agent that, if the agent is acting in fraud of his principal and the matter of which he has notice is relevant to the fraud, that knowledge is not to be imputed to the principal.
So in my opinion the plaintiff company should not be regarded as a party to the conspiracy, on the ground of lack of the necessary guilty knowledge."
"So for my part I do not feel able to accept Mr Browne-Wilkinson's contention that the conspiracy here is founded on the illegal agreement. It is quite true that the illegal agreement was part and parcel of the implementation, but it seems to me that the allegation of a conspiracy relates to something different. The plaintiff company, not being shown to have knowledge of the facts relevant to the illegality of the agreement, is not in my judgment debarred from suing the defendants for damages for the conspiracy, because the plaintiff company is not shown to have been a party to the conspiracy or to guilty knowledge about the illegality of the transaction which was to be carried out under the agreement. On these grounds it seems to me that it is mistaken to regard the plaintiff company as being in law party to the conspiracy. I feel glad to be able to reach that decision because, for reasons that I indicated at the beginning of this section of my judgment, it seems to me to be completely unreal to regard the plaintiff company as party to the conspiracy. Accordingly, in my judgment, the judge was wrong in dismissing the action on that ground."
Orr LJ, at p270 and Goff LJ at pp270-271 expressly agreed with those observations.
In R v Rozeik [1996] 3 All ER 281, the Court of Criminal Appeal was concerned with the obtaining of advances of money from two finance companies by false representations. The managers of those finance companies were aware that the representatives were false. Leggart LJ, who delivered the judgment of the Court, held that the knowledge of an employee with the required status and authority in relation to the particular act or omission in point, could only be disregarded if it were proved that the employee was himself a party to a fraud on the company, otherwise his knowledge would be imputed to the company. He said at p286:
"Whether or not a company is fixed with the knowledge acquired by an employed or officer will depend on the circumstances. It is necessary first to identify whether the individual in question has the requisite status and authority in relation to the particular act or omission in point (see El Ajou v Dollar Land Holdings plc [1993] EWCA Civ 4; [1994] 2 All ER 685 at 696). It follows from this that information given to a particular employee, however senior, may not be attributed to the company if that employer is not empowered to act in relation to that particular transaction. An employee who acts for the company within the scope of his employment will usually bind the company since he is the company for the purpose of the transaction in question (see Ready Mixed Concrete [1995] 1 All ER 135 at 142, [1995] 1 AC 456 at 465 per Lord Templeman).
The company may be liable to third parties or be guilty of criminal offences even though that employee was acting dishonestly or against the interests of the company, or contrary to orders. But different considerations apply where the company is the victim and the employee's activities have caused or assisted the company to suffer loss. The company will not be fixed with knowledge where the employee or officer has been defrauding it. This has long been the law and it is accepted by Mr Shaw that this is so."
"In cases in which the company is the victim, the person or persons who stand for its state of mind may differ from those who do so in cases in which a company is charged with the commission of a criminal offence. The latter are more likely to represent what Viscount Haldane LC called 'the directing mind and will of the company' (see Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 at 713, [1914-15] All ER Rep 280 at 283). In DPP v Ray [1973] UKHL 3; [1973] 3 All ER 131, [1974] AC 370 the defendant was charged with dishonestly obtaining by deception a pecuniary advantage in the form of a meal for which he evaded payment."
The next case is Attorney-General's Reference (No 2 of 1982) (1984) 2 All ER 216. Two men were the only directors and shareholders of various companies engaged in property development and money lending. They were charged with theft from the companies by drawing cheques on the bank accounts of the companies for their own private use. It was accepted that they did so with the consent of each other, which they claimed was to be taken as the consent of the companies. It was held by the Court of Appeal that as they had acted illegally or dishonestly in relation to the companies, their knowledge of, or consent to, the illegal or dishonest acts was not to be imputed to the company. The same view was taken in Southern Cross Commodities Pty Ltd (In Liq) v Ewing (1988) 91 FLR 271: see White J at p273, pp281-283, Legoe J at p293 and von Doussa J at p303.
In Attorney-General's Reference No 1 of 1985 (1985) 41 SASR 147, the Full Court of this Court was concerned with the conduct of a director of a company who had been charged on information alleging three offences that he had fraudulently applied for his own use cheques drawn on the bank account of a company. One of the questions referred was whether a man in dominant control of a limited liability family company by reason of his shareholding and directorship is capable of fraudulently applying the property of the company on a proper construction of s189 of the Criminal Law Consolidation Act. This question was answered in the affirmative. Prior J, with whom King CJ and Bollen J agreed, said at p153:
"The accused was not, and is not, the company. The fact that he is in dominant control of it, does not make the company property his property. The fact that he is in dominant control does not render him incapable of fraudulently applying the property of the company in breach of s.189. Roffel's case [1985] VicRp 51; [1985] VR 511 seems to have diverted the trial Judge from what should have been a plain straight forward course. Yet, there, the fundamental principal that a company is a separate legal entity from its directors, whether any of those directors are in dominant control of the company or otherwise, was acknowledged. Young CJ said:
'That a company is a legal entity separate from its corporators has been trite law at least since Salomon v A Salomon & Co Ltd [1896] UKHL 1; [1897] AC 22. Thus there is no doubt that a natural person can steal from a company. Nor is there any reason in logic or in legal theory why a person should not be guilty of stealing from a company of which he was the dominant shareholder and director, although it will not often be possible to prove that he has done so. It is also true that a company which gives property to one of its shareholders or to one of its directors does not by that act alone, without more, commit any offence against the criminal law. Nor is a person who receives a gift from a company by that act alone, without more, guilty of theft from the company even if he owns almost all of the shares and is the governing director with plenary powers.'
Bray CJ in The Queen v Goodall (1975) 11 SASR 94, at p101 said:
'the logical consequence of Salomon's case [1896] UKHL 1; [1897] AC 22 is that the company, being a legal entity apart from its members, is also a legal person apart from the legal personality of the individual controller of the Company.' "
I mention the decision in R v Roffel [1985] VicRp 51; [1985] VR 511. There the Full Court of the Supreme Court of Victoria, by a majority, held that a director of a company who had drawn cheques on the bank account of the company was not guilty of theft from the company. He and his wife were the sole directors and shareholders of the company and it was open to the jury to conclude that the cheques had been drawn for his personal benefit and not that of the company. Young CJ and Crockett J held that as the company was a separate legal entity and in the particular circumstances the director was the directing mind and will and had, through him consented to the drawing of the cheques. Brooking J dissented and adopted much the same view as expressed by the Court of Appeal in Attorney-General's Reference No 2 (1984) (supra), and this Court in Attorney-General's Reference No 1 (1985) (supra) and I say respectfully that in my view those cases were correctly decided. I prefer to follow them and the dissenting view of Brooking J. Of course I am bound to follow the decision in Attorney-General's Reference No 1.
The approach of the majority in Roffel was not accepted by the House of Lords in R v Gomez [1992] UKHL 4; [1993] 1 All ER 1. The assistant manager of an electrical retail shop business pretended to have followed instructions and ascertained that two cheques would be met on presentation and then received them in payment for certain goods. He told the manager that the cheques were "as good as cash". The assistant manager and others were charged with theft of the goods. It is sufficient to cite a passage from the judgment of Lord Browne-Wilkinson at p40:
"Turning to the company cases, the dictum in Morris has led to much confusion and complication where those in de facto control of the company have been charged with theft from it. The argument which has found favour in certain of the authorities runs as follows. There can be no theft within s1 if the owner consents to what is done: Morris. If the accused, by reason of being the controlling shareholder or otherwise, is 'the directing mind and will of the company' he is to be treated as having validly consented on behalf of the company to his own appropriation of the company's property. This is apparently so whether or not there has been compliance with the formal requirements of company law applicable to dealings with the property of a company and even to cases where the consent relied on is ultra vires: see R v Roffel [1985] VicRp 51; [1985] VR 511 and R v McHugh (1988) 88 CrAppR 385.
In my judgment this approach was wrong in law even if the dictum in Morris had been correct. Where a company is accused of a crime the acts and intentions of those who are the directing minds and will of the company are to be attributed to the company. That is not the law where the charge is that those who are the directing minds and will have themselves committed a crime against the company: see A-G's Reference (No 2 of 1982) [1984] 2 All ER 216, [1984] QB 624 applying Belmont Finance Corp Ltd v Williams Furniture Ltd [1979] 1 All ER 118, [1979] Ch 250.
In any event, your Lordships' decision in this case, re-establishing as it does the decision in Lawrence, renders the whole question of consent by the company irrelevant. Whether or not those controlling the company consented or purported to consent to the abstraction of the company's property by the accused, he will have appropriated the property of the company. The question will be whether the other necessary elements are present, viz was such appropriation dishonest and was it done with the intention of permanently depriving the company of such property? In my judgment the decision in R v Roffel and the statements of principle in R v McHugh (1988) 88 CrAppR 385 at 395 are not correct in law and should not be followed. As for A-G's Reference (No 2 of 1982), in my judgment both the concession made by counsel (that there had been an appropriation) and the decision in that case were correct, as was the decision in R v Philippou (1989) 89 CrAppR 290.
I am glad to be able to reach this conclusion. The pillaging of companies by those who control them is now all too common. It would offend both common sense and justice to hold that the very control which enables such people to extract the company's assets constitutes a defence to a charge of theft from the company. The question in each case must be whether the extraction of the property from the company was dishonest, not whether the alleged thief has consented to his own wrongdoing."
Moynihan J in Romano v Chapple [1993] 1 Qd R 461 was concerned with whether companies should be fixed with the consequences of fraudulent misappropriation by a director of money of another which was used on the companies behalf in the acquisition of assets. He said at p463:
"Knowledge acquired by a person who simply happens to be a director or who otherwise controls or manages a company is not necessarily to be imputed to the company: R Marseilles Extension Railways Company; Ex parte Credit Foncier and Mobilier of England (1871) LR 7 Ch App 161; In re Hampshire Land Company [1896] 2 Ch 743 particular at 748. Where however a director acquires knowledge in circumstances in which he is under an obligation to communicate it to the company's board and the company is under an obligation to receive that communication the court will assume that the obligations have been carried out and will impute knowledge to the company: In re Hampshire Land Company; Kettlewell v Watson (1882) 21 ChD 685 particularly at 704; In re Fenwick Stobart & Co Limited [1902] 1 Ch 507.
It is not however difficult to imagine that different considerations may intrude when what the director is to be taken to have communicated to the company, in the sense being considered, is knowledge of his own fraud. There is what may for the moment be accepted as a fairly well credentialled view that where a director is perpetrating a fraud on the company there is an exception to the general rule and the director's knowledge will not be imputed to the company: In re Hampshire Land Company at 749. This is on the basis of what might be thought to be the common sense view that contrary to assuming the director would communicate to the Board that he was defrauding the company he would conceal it."
Lastly, I mention Beach Petroleum NL & Anor v Johnson & Ors [1993] FCA 283; (1993) 43 FCR 1. Von Doussa J reviewed the authorities extensively and accepted the principles expressed in In Re Hampshire Land Company, Houghton & Co and Belmont Finance. He said at pp28-29:
" I return to the Houghton principle. It is one which may be applied without difficulty where the company is the victim of the fraud or misfeasance of a director and does not gain any benefit from the transaction, as was the situation in Re Hampshire Land Co, Houghton and the Belmont Finance cases. In the Belmont Finance cases the common officers of the plaintiff and the two defendant companies who organised the illegal transaction would have been in breach of fiduciary duty to the defendant companies in that they caused them to enter into an illegal transaction. Yet this fact was not addressed in the judgments. What insulated the plaintiff, but not the defendants, from having the knowledge of those officers imputed to them was the fact that only the plaintiff company was treated as a victim. The defendant companies were parties who benefited by reason of the transaction."
"Provided that the director is acting within the scope of his or her authority, in civil proceedings the state of mind of a director ordinarily will be attributed to the company where there is a duty on that director to communicate his or her knowledge to the company. The exception to this rule is where the director is acting totally in fraud of the company, that is, where all the director's activities are directed against the interests of the company, and not partly for the benefit of the company. If the director is guilty of fraudulent conduct which is not totally in fraud of the corporation, and by design or result the fraud partly benefits the company, the knowledge of the director in the transaction will be attributed to the company."
It is beyond question that the actions of the directors and senior management in the takeover process did not partly benefit Kia Ora.
As I understand the position, the first defendants contend that these exceptions to the general rule of attribution may not be applied to Kia Ora because there has been no allegation of fraud against any of the director defendants.
The first defendants contend that the knowledge and acts of the director defendants must be attributed to Kia Ora unless fraud on their part is established. Fraud may not even be considered because no allegation of fraud has been made against them on the pleadings by the plaintiff. It may not be raised in any way or for any purpose. Reliance is placed upon well known rules of pleadings and Akhil.
It is convenient to first mention R46.04 of the Supreme Court Rules. This Rule relates to requirements of pleadings and provides that a pleading shall be as brief as the nature of the case permits and must contain a statement in summary form of the material facts on which the party relies, but not the evidence by which the facts are to be found and state the specific relief claimed: R46.04(a), (b) and (c). R46.04(f) provides that a pleading must contain sufficient particulars of the claim, defence or other matter pleaded including particulars of any fraud on which the party pleading relies.
The plaintiff has not used the word "fraud" in any of the allegations against the director defendants in the statement of claim. They and the first defendants contend that therefore the plaintiff is not permitted to raise any allegation of fraud against them.
In Akhil the High Court, by a majority, held that where a party sought to take advantage of fraud as excepting the operation of a period of limitation, it had to be specifically pleaded and if not the exception could not be employed. However, that is not to say that the word "fraud" must be used in the pleading. Indeed to do so, without adequate particulars of the conduct said to constitute fraud, could be of little use. As Mason CJ and Gaudron J said in Akhil at p285:
".... fraud may take a variety of forms and is, on that account, incapable of precise definition."
Their Honours went on to make some observations about the functions of pleadings at pp286-287:
"The function of pleadings is to state with sufficient clarity the case that must be met: Gould and Birbeck and Bacon v Mount Oxide Mines Ltd (In Liq) [1916] HCA 81; (1916) 22 CLR 490 at p517, per Isaacs and Rich JJ. In this way, pleadings serve to ensure the basic requirement of procedural fairness that a party should have the opportunity of meeting the case against him or her and, incidentally, to define the issues for decision. The rule that, in general, relief is confined to that available on the pleadings secures a party's right to this basic requirement of procedural fairness. Accordingly, the circumstances in which a case may be decided on a basis different from that disclosed by the pleadings are limited to those in which the parties have deliberately chosen some different basis for the determination of their respective rights and liabilities. See, e.g., Browne v. Dunn (1893) 6 R, at p76; Mount Oxide Mines (1916) 22 CLR, at pp517-518."
So, it may be accepted that what the parties must know, by reason of the Rules of Court and the case law, is what is alleged against them with appropriated particularity and what relief is sought.
It is not necessary to use the word "fraud" in the pleading even though the allegation may be described in that way provided that the case against the party concerned is adequately pleaded. Dawson J, in Akhil, was in dissent but his observations about this matter are not to be doubted. He said at pp294-295:
"The mere labelling of an allegation as fraud amounts to little As Lord Hatherley said in Wallingford v Mutual Society (1880) 5 App Cas 685, at p701:
'Now I take it to be as settled as anything well can be by repeated decisions, that the mere averment of fraud, in general terms, is not sufficient for any practical purpose in the defence of a suit. Fraud may be alleged in the largest and most sweeping terms imaginable. What you have to do is, if it be matter of account, to point out a specific error, and bring evidence of that error, and establish it by that evidence. Nobody can be expected to meet a case, and still less to dispose of a case, summarily upon mere allegations of fraud without any definite character being given to those charges by stating the facts upon which they rest.'
Whilst fraud must be pleaded with some particularity, it is not necessary that the word 'fraud' be actually used if the conduct relied upon and its fraudulent nature be otherwise sufficiently apparent: Blay v Pollard and Morris [1930] 1 KB 628, at pp634, 636, 641; Davy v Garrett (1877) 7 Ch D 473, at p489; Reddaway v Banham [1896] AC 199, at p219; Angelides v James Stedman Hendersons Sweets Ltd [1927] ArgusLawRp 74; (1927) 40 CLR 43, at pp82-83."
In Davy v Garrett (1877) 7 Ch D 473, referred to by Dawson J, the word "fraud" was not used in the pleading. Thesiger LJ said at p489:
"It may not be necessary in all cases to use the word 'fraud' - indeed in one of the most ordinary cases it is not necessary. An allegation that the Defendant made to the Plaintiff representations on which he intended the Plaintiff to act, which representations were untrue, and known to the Defendant to be untrue, is sufficient. The word 'fraud' is not used, but two expressions are used pointing at the state of mind of the Defendant ..."
In Reddaway v Banham [1896] AC 199, also referred to by Dawson J, Lord Macnaghten stated at p219:
"It is stated in the judgment of the Master of the Rolls that the learned counsel ... did not appear to have asked the judge to leave to the jury the question whether the defendants had done anything fraudulently. 'Indeed', his Lordship adds, 'no such question seems to have been raised by the pleadings'. If your Lordships turn to the pleadings, you will observe that the question was raised directly. It is quite true that the word 'fraud' is not to be found in the statement of claim. But the whole gist of the action was that the defendants were endeavouring to palm off their goods as the goods of the plaintiffs ... That is, as it seems to me, a charge of dishonesty, and I must say I think the charge was established."
That passage was quoted with approval by Rich and Stoke JJ in Angelides v James Stedman Hendersons Sweets Ltd [1927] ArgusLawRp 74; (1927) 40 CLR 43 at p82. In a case involving an action for damages for deceit, Watkin Williams J, with whom Cox J agreed, in Joliffe v Baker (1883) 11 QBD 255, said at p270:
"In other words, ever since 1845 it has been clear and established law that, in considering the principles governing this class of cases, the term 'fraud' must be used and understood in the common meaning of the word, as it is ordinarily used in the English language, and as implying some base conduct and moral turpitude."
"Perhaps it is scarcely necessary to add that there can be no doubt that, if a man affirms something as a positive fact concerning which he has no knowledge whatever, knowing neither whether it is a fact or not, and does so intending to induce another person to act upon it as a fact and for his own benefit, regardless of whether the fact is so or not, then that is the strongest possible evidence of fraud in the plain meaning of the word, because by the hypothesis he could not have known that to be true as a fact which he pretended to know, and which he represented that he knew to be a fact. Still, even in such a case as that, the fraudulent element must be found to exist as a fact, and cannot be adopted as a mere inference of law."
"I wish to add upon the point which was much argued at the Bar on behalf of the respondent, viz., as to what constitutes fraud, that in my judgment an action for damages for deceit cannot be maintained unless the plaintiff establishes that the defendant has made a statement false in fact and fraudulent in intent.
If a man makes a statement knowing it to be untrue with the intention that another should act upon it, that obviously is fraud: so also if a man recklessly, not caring whether it be true or false, makes a statement with the intention that another should act upon it, that also is fraud. In both cases there is the moral turpitude which in my opinion is necessary to maintain an action for damages for deceit. If a man makes a statement which he believes to be true, but which is in fact untrue, even though made with the intention that another should act upon it, this, in my judgment, will not suffice to maintain an action for damages for deceit."
The case against the director defendants has been pleaded by the first defendants in considerable detail and adopted by the plaintiff in its entirety. Whilst the word "fraud" is not used, as has been seen, it is specifically alleged that each of them did not act in good faith, exercise their powers for proper purposes, avoid conflicts of interest and that they failed to act in the best interests of Kia Ora as a whole. The pleading as to breach of statutory duties alleges failure to act honestly in the exercise of their duties. Also there are the allegations of failure to exercise care, skill and diligence and to exercise a reasonable degree of care and diligence. Also pleaded against Harold Abbott, Lee-Steere and Somes is that they made improper use of their position as directors to gain directly or indirectly an advantage for themselves. Considerable particularity of these various allegations is given.
Each of the director defendants was well aware of the case he had to meet. He knew what allegations or breach of fiduciary and statutory duty have been made against him. Liability did not depend upon whether this alleged conduct was said to be fraudulent.
So far as Harold Abbott, Lee-Steere and Somes are concerned, the pleading clearly raises the question of fraud as discussed in the cases. Furthermore, the findings which I have made establish fraud in that sense on their part even though it has not been necessary to describe their conduct in that way when deciding the issue of liability against them. In their cases, even though their respective degrees of culpability differ, it is sufficient to say that they all failed to act in good faith. They preferred their interests to those of Kia Ora and profited handsomely in consequence. They were clearly in breach of s229(1) of the Companies Code with the intent to deceive and defraud Kia Ora. Each of them was in breach of s229(4) of the Companies Code in circumstances which, in my view, were dishonest by objective standards and, indeed, to their own knowledge.
It is unnecessary to repeat the findings made against them, but they are of the character and gravity to constitute fraud by any standard. None of them could have been in any doubt about the nature of the case alleged and particularised against them.
Quilty and Singleton fall into a different category. They did not benefit personally in a direct financial sense from the takeover. They had much less knowledge of Kia Ora and Western United than the others. Nevertheless, they were not acting honestly in the discharge of their powers in the interests of Kia Ora and were, in my view, acting with an improper motive, probably to assist Harold Abbott. They did not act bona fide in the interests of the company as a whole: Howard Smith Ltd v Ampol Petroleum op cit. Their conduct clearly came within the definition of fraud discussed by Viscount Haldane in Norton v Lord Ashburton cited by King CJ in Australian Growth Resources Corp Pty Ltd v Van Reesema op cit. At the least, in that sense they were dishonest. In preferring interests of another or others to those of Kia Ora, they were not acting honestly. Bound as I am by the decision in that case they did not act honestly in the discharge of their duties. Without question, Quilty and Singleton were at best indifferent to the interests of Kia Ora and given their circumstances of responsibility, were recklessly so. That too is a species of fraud: Joliffe v Baker. Also in this context the observations of the Privy Council in Royal Brunei Airlines SDN.BHD v Philip Tan Kok Ming [1995] UKPC 4; [1995] 2 AC 378 are instructive. There the question was whether the managing director of a company, and therefore the company, had been guilty of fraud or dishonesty in the appropriation of money held in trust for another for its own purposes. Lord Nicholls, who gave the judgment of the Privy Council, said at p389:
Before considering this issue further it will be helpful to define the terms being used by looking more closely at what dishonesty means in this context. Whatever may be the position in some criminal or other contexts (see, for instance, Reg. v. Ghosh [1982] EWCA Crim 2; [1982] Q.B. 1053), in the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another's property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.
In most situations there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others' property. Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless."
In my view, they too were guilty of fraud in the sense discussed in the cases. As Kia Ora was the victim, the knowledge and acts of the directors is not to be attributed to Kia Ora.
However, in my view, it is not necessary to find fraud to reach the same result. As has been seen, the following circumstances have the same consequence: irregularity in the discharge of fiduciary duty, In re Hampshire Land Company, and JC Houghton, reckless indifference Joliffe v Baker and misfeasance Beach Petroleum. Clearly, the conduct of all of the director defendants falls within these categories, including Quilty and Singleton. It is unnecessary to categorise knowledge and conduct of Gardiner in this way as the evidence establishes that he acted in administrative and procedural matters and under the direction of Harold Abbott. There is no evidence to suggest that he made any of the crucial decisions or undertook any of the essential acts of Kia Ora in the takeover process beyond these matters of procedure.
The proven circumstances clearly justify the conclusion that particular knowledge and acts of the directors should not be attributed to Kia Ora. Perhaps it is those types of circumstances which Lord Hoffman had in mind when he acknowledged that in some cases the Court must fashion a special rule. If that understanding is correct, the special rule would be where the company is the victim and did not benefit or partially benefit.
Of course, common sense must prevail. This result does not mean that all acts or all items of knowledge cannot be attributed to Kia Ora. Clearly, those procedural steps in the takeover, such as instructing Hayward and Nelson Wheeler Perth, calling the extra-ordinary general meeting, sending the Nelson Wheeler report to the shareholders, lodging and serving the Part A statement and making the offer are to be attributed to Kia Ora. They occurred and it would be nonsense to say that they did not, or that they were not, acts of Kia Ora. However, certain acts and knowledge cannot be attributed to Kia Ora, such as knowledge of the true financial position and value of Western United, the real purpose of the takeover, proceeding with the takeover and removing the condition and extending the offer in the knowledge that the price was inflated and contrary to the interests of Kia Ora. Similarly, the fixing of the takeover price, knowing it to be inflated and failing to take steps to bring the takeover to an end, cannot be attributed to Kia Ora.
As has been mentioned, the first defendants acknowledge that pursuant to the contract of retainer they were under an obligation to prepare the Nelson Wheeler report competently and independently. It is their case that they did so independently but, as has been seen, they concede that they did so incompetently. Consequently they accept that in that respect they were in breach of the contract of retainer and that the plaintiff is entitled to damages which flow from that breach. Those damages, they contend, are limited to the amount of the fee paid by Kia Ora to Nelson Wheeler Perth pursuant to the contract of retainer and expenses incurred in calling the extra-ordinary meeting to consider the takeover proposal. In all, those damages would probably not exceed $20,000.
The plaintiff's claim is that the first defendants were in breach of the duty to Kia Ora which duty is the same in contract as in tort. The damages which flow from the breach of contract are, in essence, the same as the damages which flow from the breach of duty in tort and are not limited as contended by the first defendants. As has been seen, it is my view that the first defendants were also in breach of the implied term of the contract of retainer to prepare the valuation and the Nelson Wheeler report independently. Before considering the effect of the breach of contract, it is necessary to resolve the issues raised by the defendants about the claim of the plaintiff in tort.
Substantive issues arise with respect to the plaintiff's claim in tort. The plaintiff claims that the first defendants owed a duty of care to Kia Ora and its shareholders in tort of the same nature as under the contract of retainer, that is to prepare the valuation of Western United and to prepare the Nelson Wheeler report competently and independently. It is alleged that they were in breach of that duty which was owed to Kia Ora. The plaintiff alleges that Kia Ora relied upon the Nelson Wheeler report for the purposes of the takeover with the consequence that the first defendants were guilty of negligence in the valuation of Western United and the preparation of the report and that there is a causal link between their negligence and the losses sustained by Kia Ora in consequence of the takeover. The first defendants contest liability in negligence. They say that they did not owe a duty of care to Kia Ora, but only to the unassociated shareholders, Kia Ora did not rely upon the Nelson Wheeler report and there was no causal link between their incompetence and any loss sustained by Kia Ora. Each of these issues involve matters of substance and are considered separately. Before doing so it is appropriate to consider two matters which are of importance in the resolution of all of these issues:
In their defence the first defendants admit that they owed a duty of care to Kia Ora. During the final address of Mr Myers, he sought leave to withdraw that admission on the basis that it was unsound in law. That application was opposed by the plaintiff. Mr Gray contended that the plaintiff would suffer considerable prejudice if such leave was granted as it had conducted its case throughout this long trial on the basis of the admission. Consequently, he argued, it had not been necessary to cross-examine any of the first defendants or any other parties or witnesses on this topic. Furthermore, it may be said that by reason of the admission, it was unnecessary for the plaintiff to consider what pre-trial procedures which may have been appropriate to obtain proof of a factual basis to support the existence of such a duty. Also, it is submitted by the plaintiff that it will be prejudiced in any appeal processes in that leave to appeal, where necessary, would be less likely to be given if the existence of a duty of care is admitted on the pleadings.
The first defendants contend that the basis of the application was that the existence or otherwise of a duty of care was entirely a question of law which did not admit of the sort of evidence postulated by Mr Gray. There is no application for leave to withdraw any admission of fact. I accepted that submission and indicated that I would consider the argument of the first defendants on its merits and if I found it acceptable, I would hear the plaintiff on matters which go to the exercise of the discretion to grant leave to withdraw the admission including prejudice. In my view, no party should, in the circumstances, be denied the opportunity to present an argument in law which would advance the justice of the case.
The first defendants did not acquiesce in the approach I have taken. They submitted that I should grant leave and then decide the matter on the merits. In my view, the merits should be considered upon the application for leave to the extent that if there is no merit in the point, leave should not be granted, and I do not think either the plaintiff or the first defendants suffer any relevant prejudice in the course I have adopted. If I had adopted the course advocated by the first defendants, I would have been required to consider all of the matters going to the exercise of discretion before having heard argument and reaching a conclusion on the merits. If I had decided that issue against them, there would have been considerable delay and waste of time.
In essence, it is the submission of the first defendants that, given the law relating to the decision making of the company and the purpose of the Listing Rule, they did not owe a duty of care to Kia Ora but only to the unassociated shareholders of Kia Ora. The regime of the takeover process was for their protection. They were not an organ of Kia Ora in a relevant sense. The relevant organ of Kia Ora in the takeover process was the directors and they did not rely upon the Nelson Wheeler report. Reliance by individual shareholders is not reliance by the company. Furthermore, their conduct and knowledge under the rules of attribution is the conduct and knowledge of Kia Ora and it follows that by reason of such conduct and knowledge, it was never in contemplation that the directors would rely upon the Nelson Wheeler report. This is a matter of importance because unassociated shareholders are not parties to this action.
Before considering the contentions of the first defendants, it is appropriate to mention the position of the plaintiff. As has been seen, it is the plaintiff's case that the first defendants owed the same duty of care to Kia Ora in tort as under the contract of retainer. Furthermore, that contract, in the circumstances, resolves any question of whether a duty of care was owed by the first defendants to Kia Ora in tort. By reason of the contract of retainer, the relationship of chartered accountant and client existed. It existed in the context of a truly professional situation with the first defendants accepting serious responsibilities of crucial importance to Kia Ora which was clearly understood by them. The plaintiff contends that the duty of care to Kia Ora in tort is implicit in the professional relationship.
The first defendants advance various reasons in support of the contention that they did not owe a duty of care to Kia Ora.
The plaintiff pleaded that the takeover could not proceed by reason of Listing Rule 3J(3) without the approval of Kia Ora's shareholders in general meeting (para 14B of S of C) and as has been seen that meeting could not be called without a favourable valuation or report of an appropriate expert. Also it is pleaded that in consequence of the Nelson Wheeler report and in reliance upon that report the shareholders of Kia Ora at the extra-ordinary general meeting passed the resolution approving the takeover. The first defendants contend that those matters support the contention that no duty of care was owed to Kia Ora, only to the unassociated shareholders. If Kia Ora became insolvent and the duty of care was owed to the company, the unassociated shareholders might not benefit whereas if the duty is owed to them, they would have a cause of action regardless of the insolvency of the company. Implicit in this argument is that the purpose of Listing Rule 3J(3) is to protect the unassociated shareholders. Consequently it should be assumed that there is a duty of care owed to them by the expert.
I reject these contentions. As I have said, I do not think that the purpose of Listing Rule 3J(3) is to protect the unassociated shareholders. It is to protect the company. If insolvency occurs as is postulated in the argument, the company may recover damages for the loss sustained if there is a breach of the duty of care and the other elements of the tort of negligence are established. The shareholders will benefit as they may be entitled. The fact that some may have sold at a loss occasioned by the detriment caused by the negligence of the expert, is of no assistance in determining whether a duty of care to the company exists. It is to be remembered that all shareholders will be affected in the same way and it cannot be assumed that the interests of all associated shareholders are the same as those controlling the company. A simple example will suffice. A shareholder of Kia Ora may own 1m shares in the company and own 100 shares in Western United and is thereby an associated shareholder. It is not in the interest of that shareholder for Kia Ora to pay an excessive price for Western United shares in the takeover. He or she is prevented from voting at the extra-ordinary general meeting but it could not be said that the qualified independent expert retained for such an important task owed a duty of care to others and not even to the company of which he or she is such a substantial shareholder. If the report or valuation is prepared competently, his substantial investment is protected. If Kia Ora is protected, then so is his investment. That is not to say that a duty of care is owed to him or her personally, it simply means that if the company is protected, so are its members.
The first defendants contend that the unassociated shareholders have a remedy as individuals should a duty of care be owed to them. The damages to which they would be entitled would be for the diminution in the value of their investment by reason of the takeover, assuming all of the other elements of the tort were established. However, that proposition is doubtful.
The rule in Foss v Harbottle [1843] EngR 478; [1843] 2 Hare 461: 67 ER 189 is that normally the company is the proper plaintiff to sue in respect of wrongs done to it. The losses which shareholders suffer is by reason of being shareholders of the company. There is no separate loss as an individual. The company suffers the loss with the consequential loss to the shareholders. Shareholders in this context includes both associated and unassociated shareholders. The remedy is for the company to take action to recover the loss. The same is the case where the company is in liquidation. As McHugh J said in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 142 ALR 750, at p785, shareholders have an indirect remedy. That was a case involving auditors of a company and whether they owed a duty of care to a financier who lent money to associates of the company and in reliance upon the auditor's report. In discussing whether a duty of care was owed to persons other than the company, such as the financier, McHugh J discussed the position of creditors and shareholders. He said at p784:
"Thirdly, creditors and shareholders already have an indirect remedy against auditors in many cases. The liquidator or receiver can bring an action on behalf of the audited client. Situations may arise where the client has a cause of action but suffers no loss, but these situations are likely to be rare. Damages covered by the liquidator or receiver from the auditor become assets of the client and are available to be paid to the creditors and, on a winding up, to the shareholders."
The implication of the rule in Foss v Harbottle were discussed in Prudential Insurance Co Ltd v Newman Industries Ltd & Ors (No 2) [1982] Ch 204. That was a case where shareholders of a company brought an action on behalf of themselves and other shareholders against directors of a company on appeal, it being alleged that losses had been sustained by the company in which they were shareholders due to the conduct of the directors. The shareholders sued in their own direct capacity, in a derivative capacity for one shareholder and in a representative capacity for all of the other shareholders.
".... a shareholder will have a right of action to recover any loss which he has been personally caused in consequence of the fraudulent circular; this might include the expense of attending the meeting. But what he cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a 'loss' is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only 'loss' is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent, shareholding. The plaintiff's shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his right of participation, are not directly affected by the wrongdoing. The plaintiff still holds all the shares as his own absolutely unencumbered property. The deceit practised upon the plaintiff does not affect the shares; it merely enables the defendant to rob the company."
A similar view was taken by the House of Lords in Caparo Industries PLC v Dickman & Ors [1990] UKHL 2; [1990] 2 WLR 358 and by the Supreme Court of Canada in Hercules Management Ltd & Ors v Ernst & Young & Ors (1997) 146 DLR 577.
In Zempilas v JN Taylor (In Liq) (No 6) (1991) 5 ACSR 28 Debelle J had to consider the appropriate plaintiff to bring an action in s229 of the Companies Code for breach of duty against directors in circumstances where the company had been placed in liquidation. The original plaintiffs were minority shareholders. Later in the proceedings the liquidator applied to be substituted as the plaintiff. He held that the liquidator should be the plaintiff and said at p30:
"The general principle is that in an action to redress a wrong done to a company or to recover money or damages alleged to be due to it, the company is the only proper plaintiff. The company's name should only be used as plaintiff by direction of the company or its directors or, where the company has been placed in liquidation, by the liquidator: see Halsbury's Laws of England, 4th ed - Reissue, Vol 7(1), para 1012, and Vol 7(2), paras 1575 and 1578. Where a company is in liquidation both the directors and the shareholders cease to have authority to institute or continue litigation by the company: see McPherson, The Law of Company Liquidation, 3rd ed, 171, 172, 179, and 231-2. The ordinary rule, therefore, is that the liquidator in the ordinary case is the appropriate person in whom is vested the authority to decide whether the company should take or continue an action to recover damages or secure other relief for an injury done to the company. This is a necessary consequence of the powers and duties of a liquidator as set out in ss 374(1) and 377(2)(a) and (b) of the Companies Code: see Scarel Pty Ltd v City Loan & Credit Corp Pty Ltd (1988) 12 ACLR 730 and Partnership Pacific Ltd v Aliprandi (1991) 4 ACSR 51. In certain circumstances, these general principles might be qualified, circumstances which are noted by Gummow J in Scarel Pty Ltd v City Loan & Credit Corp Pty Ltd. So it follows that a minority shareholders' action will not lie if a company is in liquidation. The appropriate procedure in such a situation is for the liquidator to bring the action on behalf of the company or, if he refuses to do so, a contributory may apply to the court for an order authorising him to bring an action in the company's name or compelling the liquidator to do so on such terms as to indemnity as the court considers appropriate: see Fargro Ltd v Godfroy [1986] 3 All ER 279."
Also I mention the observation of the Full Court of the Federal Court in Christianos v Alleridge Pty Ltd (Provisional Liquidator Appointed) (1995) 18 ACSR 272 at p280:
"It is well established that in an action for damages to redress a wrong close to a company, or to recover money or damages alleged to be due to it, the company is the only proper plaintiff; and the company's name should only be used as a plaintiff by direction of the company or its directors or where the company has been placed in liquidation by the liquidator ....".
The first defendants place considerable reliance upon Esanda. As has been seen, that case involved whether an auditor was liable to someone other than the company for pure economic loss occasioned by negligent misstatement. All members of the Court, although expressing themselves at times a little differently, held that foresight or reasonable foreseeability that a member of a class might rely upon the statement or advice and thereby suffer loss, had never been held sufficient to support recovery. Brennan CJ said at p757:
"The uniform course of authority shows that mere foreseeability of the possibility that a statement made or advice given by A to B might be communicated to a class of which C is a member and that C might enter into some transaction as the result thereof and suffer financial loss in that transaction is not sufficient to impose on A a duty of care owed to C in the making of the statement or the giving of the advice. In some situations, a plaintiff who has suffered pure economic loss by entering into a transaction in reliance on a statement made or advice given by a defendant may be entitled to recover without proving that the plaintiff sought the information and advice. But, in every case, it is necessary for the plaintiff to allege and prove that the defendant knew or ought reasonably to have known that the information or advice would be communicated to the plaintiff, either individually or as a member of an identified class, that the information or advice would be so communicated for a purpose that would be very likely to lead the plaintiff to enter into a transaction of the kind that the plaintiff does enter into and that it would be very likely that the plaintiff would enter into such a transaction in reliance on the information or advice and thereby risk the incurring of economic loss if the statement should be untrue or the advice should be unsound. If any of these elements be wanting, the plaintiff fails to establish that the defendant owed the plaintiff a duty to use reasonable care in making the statement or giving the advice. The statement of claim does not plead these elements."
Dawson J accepted that reliance is a cornerstone of liability for negligent misstatement and that it must be reasonable in all the circumstances: pp759-761: Toohey and Gaudron JJ expressed the same view and said at p767:
"More precisely, it should be understood as the assumption of responsibility for providing information or advice in circumstances where it is known, or ought reasonably be known, that it will or may be acted upon for a serious purpose, and loss may be suffered if it proves to be inaccurate."
McHugh J expressed his view in similar terms. He concluded that liability of auditors should not be extended 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."]
Also Gummow J accepted that what was required was "foreseeability and reliance": p796.
The first defendants contend that Nelson Wheeler Perth did not owe a duty of care to Kia Ora because there was no evidence of any circumstances which would justify the conclusion that Kia Ora would be very likely to enter into the takeover in reliance upon the information or advice contained in the Nelson Wheeler report. There is no evidence to conclude that Nelson Wheeler Perth should have expected Kia Ora, acting through its directors, would use or rely upon the report for any purpose other than satisfying the requirement of Listing Rule 3J(3) that an independent report be placed before the meeting at which unassociated shareholders would vote. The directors had already decided upon the takeover proposal when Nelson Wheeler Perth were engaged. The directors, as Nelson Wheeler Perth knew, had access to all information which was available to them and probably additional information. The Nelson Wheeler report was expressed to be for the purpose of the meeting pursuant to the Listing Rule which, as everyone knew, was a meeting at which only unassociated shareholders could vote. The fact of reliance is irrelevant to this question of duty.
These propositions must be examined in the context of the contract of retainer and the purpose of the Listing Rule. If they are accepted then the likely consequence is that an expert undertaking a report pursuant to the Listing Rule in circumstances of a friendly takeover involving common directors who are dishonest and are motivated by self interest could never be held liable in negligence for the loss sustained by the offeror company in the takeover. Such a consequence would be surprising.
It has already been established that Nelson Wheeler Perth knew the valuation and the Nelson Wheeler report would be communicated to Kia Ora. Pursuant to the terms of the retainer, Nelson Wheeler Perth had to provide the valuation and the report to Kia Ora and that is what occurred. The valuation in the draft report and the Nelson Wheeler report are both addressed to the directors of Kia Ora. They were not to be provided to anyone else except the individual shareholders. Without question, Nelson Wheeler Perth knew that the valuation and the Nelson Wheeler report would be very likely to lead Kia Ora to enter into the takeover transaction and in reliance upon the valuation and the opinions expressed in the report. Nelson Wheeler Perth knew, or ought to have known, that the valuation was very likely to be used by Kia Ora for the purpose for which it was used, to enable Kia Ora to set the takeover price at the level which it did. They knew that the Nelson Wheeler report which contained the valuation would be sent to all of the shareholders for the specific purpose provided in the Listing Rule and that it was very likely that the shareholders would rely upon it for the purpose of the takeover. It has been established that Nelson Wheeler Perth knew, or ought to have known, that Kia Ora would enter into the takeover transaction in reliance upon the valuation and the opinions contained in the Nelson Wheeler report and thereby run the risk of economic loss if the valuation and opinions were unsound.
Nelson Wheeler Perth knew, or ought to have known, that both organs of Kia Ora would rely upon the valuation and the Nelson Wheeler report in these respects. The directors would rely upon the valuation to fix the takeover price in the sense previously mentioned and as an essential requirement of the takeover process and the shareholders, associated and unassociated, present at the extra-ordinary general meeting or absent, would very likely rely on the valuation and the Nelson Wheeler report to make important decisions about the takeover proposal. These decisions include whether to attend the meeting or not, whether to vote or not personally or by proxy and above all to vote in a particular way, namely in favour of the takeover proposal. Nelson Wheeler knew that both organs of the plaintiff would very likely to decide to enter into the takeover transactions in reliance upon the valuation and the Nelson Wheeler report and would suffer economic loss if they were unsound.
In consequence, the essential requirement of foreseeability of reliance, as explained in Esanda, is established and Nelson Wheeler Perth did owe a duty of care to Kia Ora. In my view, it is erroneous to approach the matter on the basis that only the unassociated shareholders could rely upon the valuation and the Nelson Wheeler report.
Whether there was actual reliance is another question.
Looking at the matter objectively, it is plain that Nelson Wheeler Perth, upon accepting the contract of retainer, were well aware of the purpose of the valuation and of the Nelson Wheeler report. They knew that the latter was essential to the takeover of Western United. They knew that Kia Ora would place reliance upon the valuation and the report in the respects previously mentioned. An adverse valuation would have cruelled the pitch of the dishonest directors. They needed, and therefore relied upon, a favourable valuation.
Furthermore, it was plainly foreseeable that the directors would rely upon the valuation and the report for the purpose conceded by the first defendants, namely as an essential part of the process, the sending of it to the shareholders so that the extra-ordinary meeting could be held.
In my view, the evidence establishes that upon the application of the principles stated in Esanda, the first defendants owed a duty of care to Kia Ora. Of course, in the present case, unlike in Esanda and cases of that nature, the plaintiff specifically requested the valuation and the Nelson Wheeler report. Reliance in economic loss cases due to negligent misstatement is a means of establishing the necessary proximity for there to be a duty of care. However, it is not to be considered in isolation, although it is essential. Here, the relationship of a qualified expert as a chartered accountant and client existed between Nelson Wheeler Perth and Kia Ora for the particular purposes of the valuation and the Nelson Wheeler report in consequence of which Nelson Wheeler Perth owed a duty to Kia Ora in both contract and in tort. It was the same duty as earlier described.
The contractual relationship is, in my view, of particular importance which was accepted by the Full Court of the Supreme Court of Victoria in Pullen & Anor v Gutterdige Haskins & Davey Pty Ltd [1993] VicRp 4; [1993] 1 VR 27, a case involving a claim for damages against the civil engineer for breach of duty to take reasonable care in the performance of its tasks. It was argued that the engineer did not owe a duty of care in tort and that before it could be said that such a duty existed, proximity must be proved which meant that the person to whom the duty was allegedly owed must allege and prove he had relied upon the engineer. Their Honours said at p39:
"In any event ever since Voli v Inglewood Shire Council [1963] HCA 15; (1963) 110 CLR 74, it has been clear that an architect or engineer may be liable to his client in tort as well as in contract. We refer also to MacPherson & Kelley v Kevin J Prunty & Associates [1983] VicRp 53; [1983] 1 VR 573, especially at p580, per Lush J, where it is said that the view is no longer tenable that concurrent liability in tort exists only where some physical injury or damage is likely to result. Moreover, it is apparent that the matter of 'reliance', which will often be important in determining the existence of relevant proximity, need not be pleaded or proved where there is a relationship of a professional man and his client. A duty of care is implicit in such a relationship, as is perhaps reliance itself: Sutherland Shire Council v Heyman [1985] HCA 41; (1985) 157 CLR 424, at pp497 and 502 per Deane J. It is, in any event, manifest beyond argument that the appellant, as a client, in fact relied on the respondent as the designer of the centre."
I do not propose to set out the instructive observations of Deane J in Sutherland Shire Council v Heyman particularly at pp497-498, but he accepted that the required proximity existed in what he described as the "circumstantial proximity", such as an overriding relationship of employer and employee or of a professional man and his client.
In my view, the required relationship of proximity has been established. In the relevant sense, the first defendants owed responsibility to Kia Ora and intended that the company would rely upon the report.
Another argument of the first defendants is that if the duty of care was owed to Kia Ora, the very persons whose negligence or dishonesty gives rise to the purpose of the report, would benefit by Kia Ora recovering damages against the author of the report. Such a result is said to be nothing short of bizarre. At first sight, this argument causes concern. Clearly, dishonest directors, for example, who executed the takeover, should not profit from their own misconduct. However, if the damages awarded to the company are no more than that to which the company is entitled, on the restitutio in integrum principle no injustice will occur. In cases such as the present where the directors are also sued, it is to be expected that apportionment of responsibility will be fairly determined which will avoid injustice. Procedures may be available to ensure that dishonest directors do not receive any part of the damages in a distribution to shareholders upon a winding up of the company if their proportion has not been paid by them. However, that is a matter which must be determined elsewhere.
The next argument is based upon the consequences of the issue of new shares for the purpose of the takeover. It is the case of the first defendants that Kia Ora suffered no loss by issuing the shares and allocating them to the vendors of Western United shares in the takeover. However, the shareholders who do not participate in that issue, that is, suffer a loss by diminution in value of their shares. This matter is considered later but its relevance for present purposes is that if the proposition is correct, this consequence suggests a reason for not attributing a duty owed to the company only to those shareholders who suffered such a loss. I do not accept this contention. Even if the basic premise is correct, and Kia Ora did not suffer any loss by issuing the shares, the loss to Kia Ora, upon receiving less than value in the takeover, if it is a loss to shareholders, is a loss to all shareholders and not only the unassociated shareholders. Given the nature of the takeover and the purpose of the valuation and report of the expert, it is wrong in principle to say that the duty of care should be owed only to a limited group of the shareholders.
The next argument is that because the company, through its directors, proposed and gave effect to the transaction to which the Nelson Wheeler report relates, they are primarily responsible for any loss that the company suffers. It is said that the report does no more than comment upon the proposal which the directors intend to advance to a meeting of shareholders. Consequently, it is unfair to impose upon the author of the report responsibility for matters which are primarily the responsibility of the directors. This is said to be a reason for concluding that the duty of care is not to the company. In my view, this submission misunderstands the true purpose of the Listing Rule procedure. That procedure acknowledges that persons controlling a listed company may well act contrary to the interests of the company for personal benefit. They may provide false information to shareholders or mask the true position about important matters concerning the company or the proposed transaction. In that sense they are primarily responsible for what happens or, more relevantly, what could happen. That is why such procedure under the Listing Rule is imposed upon the company without which the transaction cannot take place. There must be a meeting, there must have been an investigation by a qualified and independent expert whom the shareholders are entitled to trust. That expert must genuinely and competently reach a favourable conclusion. The importance of this procedure and the role of the expert cannot be understated. The measure of "fault" of those controlling the company does not lead to the conclusion that the duty is not owed to the company. In my view, that matter is irrelevant.
In reaching these conclusions, I have not found it necessary to resolve the competing arguments of the plaintiff and the first defendants based upon the cases involving breach of tortious duty by auditors to the company and to shareholders. These matters were considered in Caparo and Hercules as well as in other cases cited in argument. Auditors have a special relationship with shareholders by reason of being auditors and the role which they must play in the interests of the company and the shareholders: see Lord Bridge in Caparo at p372. However, there is some analogy with an expert acting pursuant to the Listing Rule 3J(3) because the object is to inform the shareholders so that they may exercise their powers in general meeting to control the directors in the context of a proposed takeover. Otherwise, the auditor cases are of little assistance given the principles stated in Esanda.
Reliance is an essential ingredient of the tort of negligent misstatement. If Kia Ora did not rely upon the valuation of Western United by Nelson Wheeler Perth and the Nelson Wheeler report, the first defendants are not liable in negligence even though the valuation and the report were prepared incompetently and the plaintiff cannot recover damages from them. Similarly, even though the valuation and the Nelson Wheeler report were prepared in breach of the contract of retainer, no damages are recoverable for that breach unless Kia Ora relied upon the work of the first defendants. Without reliance there is no causal link between the breach of contract by the first defendants and the loss sustained by Kia Ora. The onus of proving relevant reliance is upon the plaintiff.
I accept that for the purpose of the plaintiff's claim, there is no distinction between contract and tort.
The plaintiff contends that relevant reliance has been established under both heads of claim. The first defendants contend to the contrary on various grounds and it is necessary to consider this matter in some detail.
It is appropriate to consider the question of reliance both in the context of the extra-ordinary general meeting and of the directors.
As the first defendants submit, there is no direct evidence that any shareholder of Kia Ora relied upon the Nelson Wheeler report. No shareholders were called. No-one said "I relied upon the Nelson Wheeler report". They contend that in fact the only direct evidence of the attitude of a shareholder is to the contrary and that is the evidence concerning Autocure which has been mentioned. I do not regard the attitude of Autocure as of much assistance. It was advised by Hambros, which was an expert in its own right, and consequently was in a very different position from the ordinary shareholder.
There is evidence and admissions as to the expectation of Nelson Wheeler Perth which is of some assistance.
It will be remembered that the Nelson Wheeler report was sent to the shareholders along with the notice of meeting and the letter signed by Quilty which not only argued strongly in favour of the takeover but expressly referred, and drew the shareholders attention to, the Nelson Wheeler report. I repeat that part of the report:
"A detailed valuation prepared by Messrs Nelson Wheeler, an international firm of Chartered Accountants, is enclosed for your consideration. This report values each Western United share at $3.22. However, in the opinion of Nelson Wheeler, it is reasonable to pay a premium to acquire all of the shares in Western United and they have advised that the price being offered is fair and reasonable from Kia Ora's point of view."
It may be seen that prominence was given to the Nelson Wheeler report.
The memorandum of fees sent by Nelson Wheeler Perth to Kia Ora, previously mentioned, reveals that they were aware that the Nelson Wheeler report was to be used "for the purpose of making an offer to the shareholders". In his s541 examination, Pilmer said that he knew that the Nelson Wheeler report would be sent to shareholders with the notice of meeting and that it was an important document as far as the shareholders were concerned. He rejected the proposition that the Nelson Wheeler report would be the principal information upon which they would rely and said that they would also rely upon Quilty's letter and the conflicting interests of the common directors. This evidence continued:
"Q I didn't suggest singularly rely on it. You recognised your experts' document was an important document as far as shareholders were concerned.
Q On which you expected them to place, not exclusive, but certainly substantial reliance.
Also, he said that he expected that the directors in recommending the transaction would also rely on the Nelson Wheeler report coupled with their own views.
Newman also gave evidence to similar effect at his s541 examination but I do not regard his evidence to be of much value as it was not clear if he is simply expressing opinions based upon his knowledge at the time he gave the evidence.
In their Defence, the first defendants admit that the Nelson Wheeler report would be sent to the shareholders of Kia Ora and would be "sufficient to establish that the price was a fair price". Also, they admit that the Nelson Wheeler report was to be used for the purpose of the Listing Rule.
This awareness of Nelson Wheeler Perth is not without significance. It is certainly not conclusive of the issue but it is evidence of the importance of the Nelson Wheeler report, and the valuation contained in it, in the process and to their knowledge. Also, it is, in the circumstances, some evidence that the Nelson Wheeler report had the tendency to induce the shareholders to rely upon it: see Ansett Transport Industries (Operations) Pty Ltd & Ors v Australian Federation of Air Pilots & Ors (1989) 95 ALR 211 per Brooking J at pp271-272 to which further reference is shortly to be made.
However, this aspect of the issue of reliance must be determined by the drawing of appropriate inferences from the relevant circumstances.
In my view, the failure to call any shareholder to give direct evidence about the issue of reliance is a matter of no consequence. I refer to the observations of Lord Halsbury LC in Arnison v Smith (1889) 41 Ch D 348 at p369:
"The second requisite is that the fraud was an inducing cause to the contract. It is an old expedient, and seldom successful, to cross-examine a person who has read a prospectus, and ask him as to each particular statement what influence it had on his mind, and how far it determined him to enter into the contract. This is quite fallacious, it assumes that a person who reads a prospectus and determines to take shares on the faith of it can appropriate among the different parts of it the effect produced by the whole. This can rarely be done even at the time, and for a shareholder thus to analyse his mental impressions after an interval of several years, so as to say which representation in particular induced him to take shares, is a thing all but impossible. A person reading the prospectus looks at it as a whole, he thinks the undertaking is a fine commercial speculation, he sees good names attached to it, he observes other points which he thinks favourable, and on the whole he forms his conclusion. You cannot weigh the elements by ounces. It was said, and I think justly, by Sir G Jessel in Smith v Chadwick 20 Ch D 27, 44, that if the Court sees on the face of the statement that it is of such a nature as would induce a person to enter into the contract, or would tend to induce him to do so, or that it would be a part of the inducement to enter into the contract, the inference is, if he entered into the contract, that he acted on the inducement so held out, unless it is shewn that he knew the facts, or that he avowedly did not rely on the statement whether he knew the facts or not. I think, therefore, that the second proposition is proved - that the Plaintiffs were induced to take stock by the misrepresentation."
May the inference be drawn that the shareholders who voted in favour of the takeover in person at the extra-ordinary meeting or by proxy relied upon the Nelson Wheeler report?
It is well established that if a representation is of such a nature as to be likely to induce the representee to act upon it, the inference that he or she did so may fairly be drawn: Arnison v Smith. The representation need not be the only inducement. It is sufficient so long as it plays some part, even a minor part: Gould v Vaggelas (1985) 157 CLR 215 at p236. This statement was expressly approved and applied by King CJ in Grantwell Pty Ltd v Franks (supra) at pp400-401. He said at p401:
"It is often difficult for witnesses to recall and analyse their states of mind at relevant times and to determine precisely what operated upon their minds. These appellants were clear that they relied upon Kephala and were mainly concerned about whether they could finance the transaction. It seems to me, however, that the inference is strong that they were mainly concerned about finance because there was no question in their minds about the price. There was a valuation to support the price and they trusted Kephala to protect their interests. It would defy common sense to suppose that they were uninfluenced by the valuation. It must have lulled them into a false sense of security as to the price which they were to pay. It is impossible to accept that if they had known that the Milne valuation was 40 per cent higher than the true value, they would have agreed to buy at the price."
In Elders Trustee & Executor Co Ltd v EG Reeves Pty Ltd & Ors [1987] FCA 332; (1987) 78 ALR 193 Gummow J expressed the position as follows at p242:
"If a representation is of such a nature as to be likely to induce a representee to act upon it, the inference may be drawn, if the representee does act, that the representee has acted in reliance on the representations, but the inference is one of fact and may be rebutted by other, inconsistent evidence (Jones v Acfold Investments Pty Ltd (1985) 59 ALR 613, Nobile v National Australia Bank Ltd (1987) ATPR 40-787 at 48,586)."
In Monroe Schneider Associates (Inc) & Anor v No 1 Raberem Pty Ltd [1991] FCA 592; (1991) 104 ALR 397 at p401, Beaumont J accepted that a misrepresentation need not be the sole inducement and applied the observation in Gould v Vaggelas as did Shepherd J in Spreag v Paeson (1990) 94 ALR 679 at p713. Brooking J in Ansett Transport Industries (Operations) Pty Ltd & Ors v Australian Federation of Air Pilots & Ors was concerned with an issue as to whether airline pilots were induced not to accept employment as a result of a notice published by the Federation. He said at p271:
"There is no direct evidence that any pilot was induced not to accept employment with one of the plaintiffs as a result of the notice that was published in Flight International and the Australian. The question is whether an inference may and should be drawn in the absence of direct evidence. In the case of each plaintiff it will suffice if I am satisfied that it is more probable than not that, in consequence of the published warning, one or more pilots either did not take a position with an identifiable plaintiff or did not take a position with an identifiable plaintiff for a significant period of time."
He went on to say that the question was one of sufficiency of the circumstantial evidence and said at pp271-272:
"Even though a party to a contract gives no evidence about what induced him to enter into it, it may be permissible to infer on all the evidence that he was induced to do so by a misrepresentation: Gould v Vaggelas (1985) 62 ALR 527; 157 CLR 215 at 238 per Wilson J (with whose judgment Gibbs CJ agreed) and at 250-2 per Brennan J. It may be inferred that something which had a tendency to induce an act or omission did in fact have the effect. Moreover, the law appears to permit a tribunal of fact, in considering whether inducement has been proved, to use against the party said to have provided the inducement his own intention. It is difficult to find an express statement of the basis on which this is done, but I suspect that the law's approach here is founded on an admission by conduct. Compare Australian Woollen Mills Ltd v FS Walton and Co Ltd [1937] HCA 51; (1937) 58 CLR 641 at 657 per Dixon and McTiernan JJ. If the person who has done something alleged to be an inducing cause did that act with the intention that it operate as an inducement in the way alleged, then he is by his conduct admitting that the supposed inducement does have the tendency suggested. If a man makes a particular representation about his business with a view to inducing a prospective purchaser to buy it, then he is by his conduct in adopting the means admitting that it has at least some prospect of being efficacious."
He drew an analogy with passing off cases and said:
"The approach is not one of publishing fraudulent conduct by drawing inferences at the expense of one who is prima facie a wrongdoer; it is simply a matter of saying, as a matter of common sense, that in deciding whether conduct has a certain tendency or has had a certain effect one can have regard to and use against the actor the fact that he evidently thought that his act was sufficiently likely to have the desired result to make it worth doing."
Many other cases were cited in argument in which the approach was applied in different situations. It is unnecessary to mention these cases as to do so is mere reinforcement of an obviously acceptable way of assessing evidence and drawing inferences. However, I do mention a passage in the joint judgment of Lockhart, Gummow and French JJ in Ricochet Pty Ltd & Ors v Equity Trustees Executor & Agency Company Limited & Anor [1993] FCA 99; [1993] ATPR 41-236 which makes that plain. Their Honours said at pp41-226-7:
"Gould & Anor v Vaggelas & Ors lays down no exhaustive rule for the approach to evidence of inducement in misrepresentation cases. In particular, it lays down no rule in claim for damages ....
On the question of proof of inducement, the judgment of Wilson J in Gould & Anor v Vaggelas & Ors makes the point that a combination of factors may, if unanswered, lead to the conclusion that a person was induced by the representation of another to make the relevant decision. Where, for example, it is shown that a false representation has been made which the representor intended should induce the representee to enter into a contract, and where it is shown that the representation is of a kind likely to provide such an inducement and that the representee entered into the contract, then, as Wilson J said:
'... common sense would demand the conclusion that the false representations played at least some part in inducing the plaintiff to enter into the contract.'
The statement provides a practical guide to the way in which inferences can and should be drawn in such cases. It remains for the tribunal of fact, as his Honour pointed out, to determine, when all the evidence has concluded, whether the misrepresentation in question contributed to the decision to enter the contract. The unremarkable logic of these propositions is more likely to be obscured than illuminated by reference to notions of presumptions of fact or the incidence of the evidentiary onus."
In considering whether to draw the inference the likely effect of the representation on the representee must be assessed objectively in the context of the particular circumstances: Sutton v AJ Thompson Pty Ltd (In Liq) (1987) 73 ALR 233.
The first defendants' question whether the authorities dealing with cases of deceit, cited by the plaintiff, are apposite in cases of negligent misstatement. Reference is made to the dictum of Wilson J in Gould v Vaggelas at p238:
"At the same time, one can readily understand why it is in cases of deceit that a tribunal whose duty it is to find the facts may require a defendant to make some answer to the case that is put against him. Such cases are of a kind where in the general experience of mankind the facts speak for themselves. Where a plaintiff shows that a defendant has made false statements to him intending thereby to induce him to enter into a contract and those statements are such a nature as would be likely to provide such inducement and the plaintiff did in fact enter into that contract and thereby suffered damage and nothing more appears, common sense would demand the conclusion that the false representations played at least some part inducing the plaintiff to enter into the contract. However, it is open to the defendant to obstruct the drawing of that natural inference of fact by showing that there were other relevant circumstances."
Of course, whether a person is induced to act in respect of a representation is a matter of fact. It is not suggested that the approach taken in the cases cited is a principle of law with the effect of reversing the onus of proof. These cases discuss no more than the drawing of an inference in appropriate circumstances. The cases involving deceit do not stand apart from other cases, although it may be easier to draw the inference in cases of that nature as is suggested by Wilson J in Gould v Vaggelas in the passage cited. Nevertheless the cases involving deceit are of use in the present circumstances merely because they discuss the approach and illustrate how it may be used.
As with the drawing of any inference, an appropriate factual foundation must exist in the evidence. In my view, that foundation has clearly been established. Each shareholder received the Nelson Wheeler report. Its importance was highlighted in Quilty's letter. Its purpose and importance was correctly understood by Nelson Wheeler Perth. It was fundamental to the calling of the meeting and the resolution. It contained the opinions necessary to justify a price far above the current market price of Western United shares.
It was not a report about a peripheral matter. The Nelson Wheeler report was crucial to the takeover process and it is appropriate, in all the circumstances, to draw the inference that the shareholders relied upon the report in the relevant sense.
Attention was drawn to Hall & Ors v Foong [1995] SASC 5381; (1995) 65 SASR 281 and Strategic Minerals Corporation NL v Hendry Rae & Court (1996) 14 ACLC 485. These cases state the correct principles. Without actual reliance being proved, the claim must fail. Otherwise they are of little assistance. In both cases it was held that reliance had not been established in the circumstances which is, of course, a question of fact.
The takeover proposal represented a fundamental departure from the historical activities of Kia Ora. Common sense suggests that the shareholders would have relied upon the Nelson Wheeler report.
Before parting with this aspect of the matter, I mention two other cases. In re London & General Bank (No 2) [1895] 2 Ch 673 was a case involving a report from the auditor of a company which had the effect of deceiving the shareholders as to the financial condition of the company with the consequence that a dividend was declared by them out of capital and not income. Lindley LJ said at p688:
"Not a word was said to inform the shareholders of the true state of affairs. It is idle to say that these accounts are so remotely connected with the payment of the dividend as to render the auditors legally irresponsible for such payment. The balance-sheet and account certified by the auditors, and shewing a profit available for dividend, were, in my judgment, not the remote, but the real operating cause of the resolution for the payment of the dividend which the directors improperly recommended. The auditors' accounts and certificate gave weight to this recommendation, and rendered it acceptable to the meeting. It was wholly unnecessary for the official receiver to call a shareholder to say that he was induced by the auditors' certificate to concur in the resolution to pay a dividend. As to this part of the case res ipsa loquitur."
Giles J in Segenhoe Ltd v Akins & Ors (1990) 1 ACSR 691, at p696, cited this passage with approval.
In my view, this is a clear case where the inference of reliance by the shareholders should be drawn. I find that the shareholders of Kia Ora and in particular those unassociated shareholders who voted, in person and by proxy, in favour of the proposed takeover, relied upon the Nelson Wheeler report at least in part.
I now turn to the directors. Each of them should be considered separately. As has been seen, they decided to make the takeover bid and caused that decision to be implemented.
In a relevant sense they all relied upon the Nelson Wheeler report because without it there could be no takeover. Harold Abbott relied on it in that sense. He was determined that Kia Ora acquire the issued capital for financial gain. He acted arbitrarily and at times perhaps unilaterally with respect to important matters. He had considerable power and influence in a practical and real sense within Kia Ora. However, he could not succeed in his plans without the Nelson Wheeler report any more than he could succeed without Quilty and Singleton. He knew the required process. He engaged Nelson Wheeler Perth to undertake the valuation and the Nelson Wheeler report. He arranged for the other directors to see the draft with the valuation and eventually the final report. Because the valuation was favourable, he was able to fix the takeover price consistent with the general level he had in mind. If it had been unfavourable, he would not have been able to proceed. He relied upon the valuation and the Nelson Wheeler report to advance his own purpose and, in my view, that is relevant reliance. He participated in sending it to the shareholders. In that sense he relied upon the valuation and the Nelson Wheeler report.
I accept that he did not rely upon the valuation or the Nelson Wheeler report for the purpose of his participation in the decision to embark upon the takeover and in fixing the price, except in the sense I have mentioned, because those decisions were made by him independently of the Nelson Wheeler report and for improper purposes.
Much the same can be said about Lee-Steere and Somes but to different degrees. As I have found, both knew that the valuation and the Nelson Wheeler report were wrong. Somes claimed to have made his own assessment of value of Western United shares but I think that evidence is merely an attempt by him to justify his participation in the relevant decisions. Like Lee-Steere, Somes merely accepted the valuation and Nelson Wheeler report as being sufficient to justify the takeover at the price which Harold Abbott wished to fix and with which he agreed. They relied upon the valuation and the Nelson Wheeler report for those purposes.
Quilty and Singleton claimed to have relied upon the valuation of the Nelson Wheeler report in justification of their actions in the takeover process. As has been mentioned, the Nelson Wheeler report was concerned with only one matter, the valuation of Western United and its subsidiaries and the price. It was not concerned with whether the takeover was otherwise in the best interests of Kia Ora. Nevertheless I accept that both Quilty and Singleton relied upon the Nelson Wheeler report in the sense of accepting the valuation of Western United and its subsidiaries and the opinion about the price as being fair and reasonable. Neither Quilty nor Singleton had much knowledge about Western United and its subsidiaries, certainly very little compared with the other directors. I accept that they both regarded Nelson Wheeler Perth as suitably competent and expert for the purpose. Unlike the other directors, it has not been established that they had sufficient knowledge of Western United and its subsidiaries to know that the proposed price was grossly inflated and that the Nelson Wheeler report was wrong, although they must have suspected as much in view of the share market price history of Western United shares. Certainly, simple enquiry would have revealed the true position to them. I find that they did rely upon the valuation and the Nelson Wheeler report.
Also, in this context of reliance the first defendants contend that the stock market crash is of crucial significance both on the issue of whether there was actual reliance by Kia Ora and whether that reliance was reasonable. Liability cannot attach to the first defendants unless reliance on the Nelson Wheeler report by Kia Ora was reasonable: The Council of Shire of Sutherland v Heyman [1985] HCA 41; (1985) 157 CLR 424 at pp461-462, L Shaddock & Associates Pty Ltd v The Council of the City of Paramatta [1981] HCA 59; (1981) 150 CLR 225 at p231 and Curran v Greater Taree City Council (1992) Aust Torts R 81-152. I have already made observations about the share market crash but I mention one matter of importance. Although the share market crash turned out to be of very substantial proportions and was in fact known to have been considerable in its effect by the time of the extra-ordinary general meeting on 26th October 1987, the evidence establishes that there was caution and a wait and see attitude abroad at that time. It is submitted that the Nelson Wheeler report bore the date 22nd September 1987 and was sent to the shareholders well before the share market crash and consequently it was based upon very different market and economy conditions than those existing at the time of the meeting. Therefore, it could not reasonably be said that anyone relied upon the Nelson Wheeler report when voting at that meeting. The Nelson Wheeler report was, by that time, irrelevant. I expect that many of the votes in favour of the takeover were cast by proxy. Some may well have been marked in favour of the takeover before the share market crash given the substantial number of overseas shareholders, but there is no precise evidence about those matters. I do not think the share market crash rendered the Nelson Wheeler report irrelevant. Obviously, the mere difference in the dates of the report and the meeting could not be decisive because, in the nature of things, there would usually be such a difference. A report of this nature is necessarily given well before the requisite meeting is held. Given the perception of the share market crash at that time, as has been mentioned, I do not think the crash negated the Nelson Wheeler report and is a reason for concluding that there was no reliance upon it. Also, it must be remembered that Nelson Wheeler Perth had not withdrawn the report after the share market crash.
The first defendants contend that for the plaintiff to succeed, the reliance by Kia Ora must have been continuous and existing at the time of each action causing loss. Consequently, it is argued, any reliance by Kia Ora in connection with the requirements of the Listing Rule and the extra-ordinary general meeting is not relevant, because it was not causative of the loss alleged. That loss was caused as a result of the separate decisions of Kia Ora, through the organ of the directors, to make, pursue and complete the takeover offer. In doing so they did not rely on the Nelson Wheeler report.
I shall not repeat what has already been said, but it is plain that the directors did rely upon the Nelson Wheeler report in the sense I have mentioned. The Nelson Wheeler report was crucial to the takeover process. Without it, and the reliance by the directors and the shareholders as I have found, the takeover could not proceed and the loss could not have occurred. Without the Nelson Wheeler report, the common directors could not have achieved their purpose. Given the true purpose of the Listing Rule, namely the protection of the company from the decisions of directors with conflicts of interest, the Nelson Wheeler report made the whole transaction possible. I am not yet embracing the concept of causation. I am merely saying that the reliance on the report could not be turned on and off like a tap. Once Kia Ora relied on the Nelson Wheeler report for the purpose of the takeover and decisions were made on that basis, the reliance continued throughout.
To succeed the plaintiff must establish that the losses sustained by Kia Ora were caused or flowed from the breach of duty by Nelson Wheeler Perth whether in contract or tort. It is submitted by the first defendants that the losses claimed by the plaintiff are not causally connected to reliance upon the Nelson Wheeler report by Kia Ora.
It is now well established that questions of causation are questions of fact which must be resolved by applying common sense: March v I & MH Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506 per Mason CJ at p515 with whom Toohey and Gaudron JJ agreed, per Deane J at p522 and Bennett v Minister for Community Welfare [1992] HCA 27; (1992) 176 CLR 408, at pp412-413. Nonetheless, whilst it was acknowledged that the "but for" tort is not an exclusive test, it may provide the answer in the particular circumstances. As was said in Bennett v Minister of Community Welfare by Mason CJ, Deane and Toohey JJ at p413:
"... the 'but for' test, applied as a negative criterion of causation, has an important role to play but it is not a comprehensive and exclusive test of causation; value judgments and policy considerations necessarily intrude, March v Stramare (E & MH) Pty Ltd."
The approach to causation is no different for breach of contract than for tort in cases like the present case: Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 per Glass JA at p315 and McHugh JA at p352.
In brief terms, the plaintiff contends that Kia Ora's losses were caused by the breach of duty of Nelson Wheeler Perth or, at the least, that such breach of duty was a contributory cause in a material sense. It is the first defendant's case that taking all matters into account and applying common sense and experience, the breach of duty of Nelson Wheeler Perth was not causative in any way of the loss sustained by Kia Ora, which flowed entirely from its own acts.
Obviously the acts of Harold Abbott, other directors and senior management were a cause of the loss sustained by Kia Ora in the takeover. Without those acts, such loss would not have occurred. As has been seen, those controlling Kia Ora, including the directors, could have aborted the takeover process at various stages and as late as December 1987. However, what must not be overlooked is that without the Nelson Wheeler report in its favourable terms, there would have been no takeover. But for the incompetence of Nelson Wheeler Perth, the takeover process would have stopped dead in its tracks. The breach of duty of Nelson Wheeler was a cause of, and materially contributed to, the loss.
In Alexander v Cambridge Credit Corporation Ltd Glass JA at p315, considered that it was sufficient if the breach of duty was "a cause" of the loss. McHugh J, at p357, spoke of the need for the breach to "materially contribute" to the loss which, he said, exists when the contribution is not "de minimis". The responsibility could be only 10 percent. In March v Stramare Mason CJ stated the position to be that "a person may be responsible for damage when his or her wrongful conduct is one of a number of conditions sufficient to produce that damage: see McLean v Bell (1932) 147 LT 262 at p264 per Lord Wright, Sharman v Nymboida Colleries Pty Ltd [1963] HCA 63; (1963) 109 CLR 580 at pp590-591".
Once it is accepted that those controlling Kia Ora were determined to have the company takeover Western United for improper purposes and for personal gain, the importance of the valuation of Nelson Wheeler Perth and the Nelson Wheeler report is apparent. All the more so, when it is appreciated that the conduct of the directors of Kia Ora involved breach of fiduciary and statutory duties. Furthermore, once it is accepted that the knowledge and acts of Harold Abbott and the other directors cannot be attributed to Kia Ora, the true position is even more apparent.
In my view, the breach of duty of Nelson Wheeler was causative of the loss sustained by Kia Ora in consequence of the takeover process.
The first defendants also contend that even accepting that Kia Ora relied upon the Nelson Wheeler report which was causative of loss, the chain of causation was broken by the stock market crash and subsequent events, any one of which constituted a novus actus interveniens. To some extent these contentions have already been considered. For the reasons clearly expressed, that stock market crash did not render the Nelson Wheeler report obsolete by the time of the extra-ordinary general meeting and it was reasonable for the shareholders to rely upon it during that short time after the share market crash. At the time of that meeting the Nelson Wheeler report secured its purpose. It enabled those determined to proceed with the takeover to proceed. The effects of the share market crash by that time did not constitute a breach in the chain of causation.
As has been seen, without question, the directors of Kia Ora could have aborted the takeover at any time after the stock market crash. They could have suggested that the extra-ordinary general meeting be adjourned, spoken out against the takeover, sought another report from Nelson Wheeler and legal advice, acted upon the Horwath & Horwath report, resolved not to make the offer, not to extend it or not to remove the conditions. The first defendants contend that each of these matters is a novus actus interveniens. I do not think so. These acts and omissions of the directors may not be attributed to Kia Ora as it was the victim for the reasons already expressed. By acting or not acting in these ways as the case may be, the directors, or those of them who participated in each decision, were acting improperly in the sense earlier discussed and Kia Ora was the victim. Consequently, for present purposes, it was not Kia Ora which acted in those ways, but the director defendants. Undoubtedly they caused loss to Kia Ora by reason of that conduct, but they could not have done so without the valuation and Nelson Wheeler report which was crucial to those men acting as they did.
Perhaps the real question is whether the breach of duty of Nelson Wheeler Perth was no more than "an antecedent condition not amounting to a cause". Something as fundamental and crucially important as a favourable valuation and report under the Listing Rule could not be so described given its true purpose, the protection of the company. Nelson Wheeler Perth was well aware of its importance and the use to which it would be put. They were well aware of the circumstances giving rise to the need for the valuation and such a report, the conflict of interest among the common directors, and the desire of those controlling Kia Ora to takeover Western United. It is obvious in the circumstances that upon such a report being given, the takeover process would be likely to continue. I refer to the observations of Mason CJ in March v Stramare at pp517-518:
"The fact that the intervening action is deliberate or voluntary does not necessarily mean that the plaintiff's injuries are not a consequence of the defendants' negligent conduct. In some situations a defendant may come under a duty of care not to expose the plaintiff to a risk of injury arising from deliberate or voluntary conduct or even to guard against that risk: see Chomentowski v Red Garter Restaurant Ltd (1970) 92 WN(NSW) 1070. To deny recovery in these situations because the intervening action is deliberate or voluntary would be to deprive the duty of any content.
It has been said that the fact that the intervening action was foreseeable does not mean that the negligent defendant is liable for damage which results from the intervening action: see Chapman v Hearse (1961) 106 CLR at p122; M'Kew [1970] SC(HL) at p25; Caterson v Commissioner of Railways [1973] HCA 12; (1973) 128 CLR 99 at p110. But it is otherwise if the intervening action was in the ordinary course of things the very kind of thing likely to happen as a result of the defendant's negligence. In Dorset Yacht [1970] AC at p1030, Lord Reid observed:
'But if the intervening action was likely to happen I do not think that it can matter whether that action was innocent or tortious or criminal. Unfortunately, tortious or criminal action by a third party is often the "very kind of thing" which is likely to happen as a result of the wrongful or careless act of the defendant.'"
"As a matter of both logic and common sense, it makes no sense to regard the negligence of the plaintiff or a third party as a superseding cause or novus actus interveniens when the defendant's wrongful conduct has generated the very risk of injury resulting from the negligence of the plaintiff or a third party and that injury occurs in the ordinary course of things. In such a situation, the defendant's negligence satisfies the 'but for' test and is properly to be regarded as a cause of the consequence because there is no reason in common sense, logic or policy for refusing to so regard it."
In my view, the observations apply in the present case. Although these various acts and omissions are not to be regarded as the conduct of Kia Ora, they were acts and omissions of all or some of the director defendants, as the case may be. However, they did not break the chain of causation and I reject the contention that the chain of causation was broken by any novus actus interveniens.
It follows that the first defendants were negligent in the discharge of their obligations to Kia Ora with respect to competence. They are liable to the plaintiff in damages for breach of contract and in tort. In my view, in the circumstances, the extent of that liability is the same in contract and in tort. I reject the argument that the plaintiff's damages for breach of contract are limited as submitted by the first defendants.
I have found that Nelson Wheeler Perth were not independent and were in breach of their duty to act independently in the preparation of the valuation and the Nelson Wheeler report. However, in view of the conclusions which I have reached as to the liability of the first defendants to the plaintiff for breach of contract and in tort by reason of their incompetence, it is unnecessary to consider if breach of duty to act independently in contract or in tort could, standing apart of breach of the duty to act competently, have sounded in damages. In the present circumstances, the breach of duty to act independently adds nothing, in my view, to the breach of duty to act competently or to the damages to which the plaintiff is entitled for breach of contract or negligence.
Of course, if the evidence had not established incompetence, it would have been necessary to consider the matter. However, the lack of independence and breach of duty to act independently could be relevant in consideration of the plaintiff's claim that Nelson Wheeler Perth were in breach of fiduciary duty.
It is fair to say that by the end of the trial the plaintiff put its primary case against the first defendants as breach of fiduciary duty. The first defendants assert that this case is not open to the plaintiff because it is not pleaded, but in any event it is not established.
The plaintiff has pleaded a cause of action against the first defendants of breach of fiduciary duty but only in brief terms. Complaint is made about the adequacy of the pleading, including that it does not particularise the duty. The stance of the plaintiff is that when the pleading is read as a whole, it is seen to be adequate in all respects. After considering the argument, I have not felt it necessary to resolve the point about the pleading.
The first question is whether the first defendants owed fiduciary obligations to Kia Ora. Thus far it has been seen that the relationship between them was that of chartered accountant and client or professional person and client. In brief terms, the plaintiff's case is that in undertaking the valuation of Western United and the Nelson Wheeler report, the first defendants acted with a lack of independence and a conflict of an interest which it is said are the hallmarks of fiduciary duty. The factual circumstances said to give rise to the existence and the breach of fiduciary duty are the association between Nelson Wheeler Perth and Kia Ora and Western United directly and through the various persons as has been discussed earlier. It is said that Nelson Wheeler Perth served various masters, Kia Ora, Harold Abbott and themselves and that the role undertaken by them in the context of the takeover involved trust and confidence on the part of Kia Ora. In consequence, it is said, fiduciary obligations were imposed upon Nelson Wheeler Perth. The first defendants dispute that Nelson Wheeler Perth owed any fiduciary obligations to Kia Ora.
The relationship between Kia Ora and the first defendants prima facie is not one of the well established relationships which usually involve fiduciary obligations. However, as Mason J said in Hospital Products Ltd v United States Surgical Corporation & Ors [1984] HCA 64; (1984) 156 CLR 41 at p96, it must be recognised that the categories of fiduciary relationship are not closed and that where it does exist, the scope of the fiduciary duty must be moulded according to the nature of the relationship and the facts of the case; p102: see also Gibbs J at p73, News Limited & Ors v Australian Rugby Football League Limited & Ors [1996] FCA 870; (1996) 64 FCR 410 at p539 and the cases referred to therein. It is necessary to consider some of the case law in a little detail.
There has been considerable judicial attention to the circumstances in which fiduciary obligations may arise and to their nature and extent. These obligations are said to arise out of fiduciary relationships which are referred to as relationships of trust and confidence: Hospital Products per Mason J at p96. His Honour referred to well recognised fiduciary relationships such as trustee and beneficiary, agent and principal, solicitor and client, director and company and partners and went on to say at pp96-97:
"The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position
It is partly because the fiduciary's exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed."
Mason J said that contractual and fiduciary relationships may co-exist between the same parties and went on to say at p97:
"Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction."
Recently in Breen v Williams (1996) 186 CLR 71, the High Court considered the case law and stated the relevant principles. Brennan CJ said at p82:
"Fiduciary duties arise from either of two sources, which may be distinguished one from the other but which frequently overlap; (see eg United Dominions Corporation Ltd v Brian Pty Ltd [1985] HCA 49; (1985) 157 CLR 1 at 12-13). One source is agency (Birtchnell v Equity Trustees, Executors & Agency Co Ltd [1929] HCA 24; (1929) 42 CLR 384 at 408-409); the other is a relationship of ascendancy or influence by one party over another, or dependence or trust on the part of that other (Johnson v Buttress [1936] HCA 41; (1936) 56 CLR 113 at 134-135). Whichever be the source of the duty, it is necessary to identify 'the subject matter over which the fiduciary obligations extend' (Birtchnell [1929] HCA 24; (1929) 42 CLR 384 at 409, per Dixon J). It is erroneous to regard the duty owed by a fiduciary to his beneficiary as attaching to every aspect of the fiduciary's conduct, however irrelevant that conduct may be to the agency or relationship that is the source of fiduciary duty. As Fletcher Moulton LJ pointed out in In re Coomber ([1911] 1 Ch 723 at 728-729, fiduciary relations are of many different types (Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178 at 195) and where there is a fiduciary relation the court may interfere and set aside acts which, between persons in a wholly independent position, would have been perfectly valid."
It may be seen from these observations and from those of Dixon J in Birtchnell v Equity Trustees & Agency Co Ltd that it is necessary to identify the subject matter of the fiduciary obligations. Even if a fiduciary relationship exists, it does not follow that the Court will interfere in every aspect of it. In the passage of his judgment cited by Brennan CJ in Breen v Williams at p82, Fletcher Moulton LJ in In re Coomber [1911] 1 Ch 723 at pp728-729 said:
"Thereupon in some minds there arises the idea that if there is any fiduciary relation whatever any of these types of interference is warranted by it. They conclude that every kind of fiduciary relation justifies every kind of interference. Of course that is absurd. The nature of the fiduciary relation must be such that it justifies the interference."
The same point is made in Breen v Williams: see Brennan CJ at p83, Dawson and Toohey JJ at pp107-108, Gaudron and McHugh JJ at p107-108.
Dawson and Toohey JJ in Breen v Williams contrast the nature and extent of fiduciary duty with duties in contract and tort. They said, at pp93-94:
"A doctor is bound to exercise reasonable skill and care in treating and advising a patient, but in doing so is acting, not as a representative of the patient, but simply in the exercise of his or her professional responsibilities. No doubt the patient places trust and confidence in the doctor, but it is not because the doctor acts on behalf of the patient; if is because the patient is entitled to expect the observance of professional standards by the doctor in matters of treatment and advice and is afforded remedies in contract and tort if those standards are not observed and the patient suffers damage.
Equity requires that a person under a fiduciary obligation should not put himself or herself in a position where interest and duty conflict or, if conflict is unavoidable, should resolve it in favour of duty and, except by special arrangement, should not make a profit out of the position (see Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178 at 198-199). The application of that requirement is quite inappropriate in the treatment of a patient by a doctor or in the giving of associated advice. There the duty of the doctor is established both in contract and in tort and it is appropriately described in terms of the observance of a standard of care and skill rather than, inappropriately, in terms of the avoidance of a conflict of interest. It has been observed that what the law exacts in a fiduciary relationship is loyalty, often of an uncompromising kind, but no more than that (see Finn, "The Fiduciary Principle" in Youdan (ed), Equity, Fiduciaries and Trusts (1989) 1, at p28). The concern of the law in a fiduciary relationship is not negligence or breach of contract. Yet it is the law of negligence and contract which governs the duty of a doctor towards a patient. This leaves no need, or even room, for the imposition of fiduciary obligations. Of course, fiduciary duties may be superimposed upon contractual obligations and it is conceivable that a doctor may place himself in a position with potential for a conflict of interest - if, for example, the doctor has a financial interest in a hospital or a pathology laboratory - so as to give rise to fiduciary obligations (cf Moore v Regents of the University of California (1990) 793 P 2d 479). But that is not this case."
Gaudron and McHugh JJ made the following observations at p107:
".... and the courts have identified various circumstances that, if present, point towards, but do not determine, the existence of a fiduciary relationship. These circumstances, which are not exhaustive and may overlap, have included: the existence of a relation of confidence (Hospital Products [1984] HCA 64; (1984) 156 CLR 41 at 69, citing Tate v Williamson (1866) LR 2 Ch App 55 at 61, Coleman v Myers [1976] NZHC 5; [1977] 2 NZLR 225 at 325); inequality of bargaining power (Hospital Products at 69-70 (supra)); an undertaking by one party to perform a task or fulfil a duty in the interests of another party (Reading v The King [1949] 2 KB 232 at 236); the scope for one party to unilaterally exercise a discretion or power which may affect the rights or interests of another (Frame v Smith (1987) 42 DLR (4th) 81 cited in LAC Minerals Ltd v International Corona Resources (1989) 61 DLR (4th) 14 at 62-63); and a dependency or vulnerability on the part of one party that causes that party to rely on another (Johnson v Buttress [1936] HCA 41; (1936) 56 CLR 113 at 134-135)."
"The law of fiduciary duty rests not so much on morality or conscience as on the acceptance of the implications of the biblical injunction that '[n]o man can serve two masters' (Matt: 6:24). Duty and self-interest, like God and Mammon, make inconsistent calls on the faithful. Equity solves the problem in a practical way by insisting that fiduciaries give undivided loyalty to the persons whom they serve. In Bray v Ford ([1986] AC 44 at 51-52; and see Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178 at 198-199), Lord Herschell said:
'It is an inflexible rule of a Court of Equity that a person in a fiduciary position, such as the respondent's, is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based on the consideration that, human nature being what it is, there is danger in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect. It has, therefore, been deemed expedient to lay down this positive rule.'"
Also, it is important to note, their Honours, accepted the observations of Sopinka J in Norberg v Wynrib [1992] 2 SCR 226 at 312:
"Fiduciary duties should not be superimposed on those common law duties (in contract and tort) simply to improve the nature or extent of the remedy."
The position is summarised by their Honours at p113:
"In this country, fiduciary obligations arise because a person has come under an obligation to act in another's interests. As a result, equity imposes on the fiduciary proscriptive obligations - not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. If these obligations are breached, the fiduciary must account for any profits and make good any losses arising from the breach. But the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed (see Parkinson, "Fiduciary Law and Access to Medical Records: Breen v Williams", Sydney Law Review, vol 17 (1995) 433, at pp441-442). If there was a general fiduciary duty to act in the best interests of the patient, it would necessarily follow that a doctor has a duty to inform the patient that he or she has breached their contract or has been guilty of negligence in dealings with the patient. That is not the law of this country."
Gummow J in Breen v Williams at p133, adopted the observation of Dixon J in Johnson v Buttress [1936] HCA 41; (1936) 56 CLR 113 at pp134-135:
"It [fiduciary duty] applies whenever one party occupies or assumes towards another a position naturally involving an ascendancy or influence over that other, or a dependence or trust on his part. One occupying such a position falls under a duty in which fiduciary characteristics may be seen. It is his duty to use his position of influence in the interest of no one but the man who is governed by his judgment, gives him his dependence and entrusts him with his welfare. (Emphasis added)"
He also cited the following passage of the judgment of La Forest J in Hodgkinson v Simms (1994) 3 SCR 377 at p406:
"The concepts of unequal bargaining power and undue influence are also often linked to discussions of the fiduciary principle. Claims based on these causes of action, it is true, will often arise in the context of a professional relationship side by side with claims related to duty of care and fiduciary duty ... Indeed, all three equitable doctrines are designed to protect vulnerable parties in transactions with others. However, whereas undue influence focuses on the sufficiency of consent and unconscionability looks at the reasonableness of a given transaction, the fiduciary principle monitors the abuse of a loyalty reposed ... Thus, while the existence of a fiduciary relationship will often give rise to an opportunity for the fiduciary to gain an advantage through undue influence, it is possible for a fiduciary to gain an advantage for him or herself without having to resort to coercion ... Similarly, while the doctrine of unconscionability is triggered by abuse of a pre-existing inequality in bargaining power between the parties, such an inequality is no more a necessary element in a fiduciary relationship than factors such as trust and loyalty are necessary conditions for a claim of unconscionability. (Emphasis added)"
Gummow J went on to say that it is necessary to consider not only whether the relationship between the parties is such as to give rise to fiduciary obligations, but also the extent of those obligations in the particular case and the subject matter over which they extend. The second matter is expressed in this way at p135:
"Secondly, the discussion of the principle by Deane J in Chan v Zacharia ((1984) [1984] HCA 36; 154 CLR 178 at 198-199) identifies the fundamental objection by equity to the pursuit by the fiduciary of personal interest in conflict with the interests of those whom the fiduciary is bound to protect. Likewise, the fiduciary is obliged not to enter upon conflicting engagements to several parties. This is because the fiduciary (for example, a solicitor acting for vendor and purchaser) may be unable to discharge adequately the one obligation without conflicting with the requirement for observance of the other obligation (Commonwealth Bank of Australia v Smith [1991] FCA 375; (1991) 42 FCR 390 at 391-393; Haira v Burbery Mortgage Finance & Savings Ltd [1995] 3 NZLR 396 at 404-407)."
"Fiduciary obligations arise (albeit perhaps not exclusively) in various situations where it may be seen that one person is under an obligation to act in the interests of another. Equitable remedies are available where the fiduciary places interest in conflict with duty or derives an unauthorised profit from abuse of duty. It would be to stand established principle on its head to reason that because equity considers the defendant to be a fiduciary, therefore the defendant has a legal obligation to act in the interests of the plaintiff so that failure to fulfil that positive obligation represents a breach of fiduciary duty."
It is the plaintiff's case that careful analysis of the relationship between the first defendants and Kia Ora in the circumstances of the Listing Rule and the proposed takeover is that of financial adviser and client which, in appropriate circumstances, is a relationship which can give rise to fiduciary obligations on the part of the financial adviser.
In certain circumstances a financial adviser may owe fiduciary obligations to a client: Commonwealth Bank of Australia & Anor v Smith & Anor [1991] FCA 375; (1991) 102 ALR 453; Daly v Sydney Stock Exchange [1986] HCA 25; (1986) 160 CLR 371.
In Commonwealth Bank v Smith customers of the Bank in a country town sought assistance from the manager of the local branch of the Bank with respect to purchasing the licensed leasehold of one of several hotels in the vicinity of the town, which was a new type of venture for them. The Bank, through successive managers, had been the banker and financial adviser to those customers for about 24 years. The manager advised the customers that the proposed purchase was a good one, including with respect to price and that it was better than other options being considered by them. Prior to completion of the purchase and during the period in which the customers could have rescinded the contract under the cooling-off period, the manager had available to him a valuation of the leasehold which was considerably lower than the value of the leasehold allocated in the purchase price and did not disclose that valuation to the customers even when one of them queried the price. The vendor was also a customer of the Bank with an account in overdraft. The manager had brought the vendor and the customer together without a hotel broker. He told the customers that he was in a position of conflict because the vendor was a customer of the Bank and that would affect what confidential information he could disclose to them but he did not disclose anything further apart from some statutory information. The Full Court of the Federal Court, Davies, Shephard and Gummow JJ, in a joint judgment, held that the totality of the evidence established that the manager acted as the financial adviser of the customers and that because of his advice they had not sought advice elsewhere. They held that the Bank had assumed a fiduciary responsibility towards the customers. Their Honours said at p477:
"In our view, the primary judge was correct in concluding on the facts that the bank became the investment adviser of the respondents in the matter of the purchase of the Weeroona Hotel and that a fiduciary relationship arose. The question then was one of (i) identifying the relevant incidents of that relationship and duties arising from it, and (ii) determining whether there had been a breach of duty leading to loss for which there was an obligation upon the bank to compensate the respondents.
The crucial incident of the fiduciary relationship in this case arose from the conflicting interests between the two sets of customers of the bank. As von Doussa J put it, and we agree, Mr Dungan had become the representative of one customer of the bank, No Justice Pty Ltd, that is to say, in substance, of two other customers, Messrs Gwynne and Hart, in helping to bring about the sale of their business to two other customers of the bank. Not only must the fiduciary avoid, without informed consent, placing himself in a position of conflict between duty and personal interest, but he must eschew conflicting engagements. The reason is that, by reason of the multiple engagements, the fiduciary may be unable to discharge adequately the one without conflicting with his obligation in the other. Thus, it has been said, after ample citation of authority, that where an adviser in a sale is also the undisclosed adviser of the purchaser, an actual conflict of duties arises: Finn, 'Fiduciary Obligations', pp253-4.
In such a case, it is not to the point that the fiduciary himself may not stand to profit from the transaction he brings about between the parties. The prohibition is not against the making of a profit (though many cases of breach of fiduciary duty involve the wrongful acquisition of a profit, rather than the infliction of a loss) but of the avoidance of conflict of duties, something described in forceful terms by Lord Cozens-Hardy MR in Moody v Cox and Hatt [1917] 2 Ch 71, at 81-2."
In my view, this case is a good example of the observation that it is not the relationship of financial adviser and customer which necessarily gives rise to fiduciary obligation, but the particular circumstances of that relationship. The Bank was a long time financial adviser of the customers. It acted as their only financial adviser and specifically advised them not to seek other advice. It advised them on the soundness of the proposed investments. It withheld crucial information from them and it acted with a conflict of interest of the customer and the interest of the vendor. However, that decision does illustrate that the duties in conflict need not involve self interest and that a fiduciary cannot act once he or she has two masters. At p478 the Court said:
"We agree with the following statement by the learned primary judge:
'Even if Mr Dungan had disclosed to the applicants that he was acting for the vendor in presenting form 6 and then giving particulars of the hotel business he would still have been placed in an impossible position when the applicants sought his advice on the merits of the transaction, and inquired whether they should offer less than the vendor's asking price. He could give no answer on these matters without running into conflict with his duty to at least one side in the negotiations. In the circumstances of this case Mr Dungan ought never to have advised the applicants at all on the merits of the transaction ... He should have explained to them the need to get advice on the questions raised by them from someone who is independent. When Mr Smith asked if he should seek accounting advice, he should have been told to do so.'
The failure of Mr Dungan to act in the manner indicated in that passage leads equity to afford its remedies for breach of duty, including that of compensation."
In Daly's case Dr Daly sought advice from a stockbroker, Patrick Partners, on the investment of his money in shares and they advised him. At the time the firm was in a parlous financial position known to the partners but not the employee who advised Dr Daly. He was advised that it was not a good time to invest in shares and he should place his money or deposit with the firm. Dr Daly did so. The firm subsequently ceased trading and was unable to pay the loan. Dr Daly brought proceedings for recovery of his money. It was held that the firm owed a fiduciary duty to Dr Daly. Gibbs CJ said at p377:
"It was right to say that Patrick Partners owed a fiduciary duty to Dr Daly and acted in breach of that duty. The firm, which held itself out as an adviser on matters of investment, undertook to advise Dr Daly, and Dr Daly relied on the advice which the firm gave him. In those circumstances the firm had a duty to disclose to Dr Daly the information in its possession which would have revealed that the transaction was likely to be a most disadvantageous one from his point of view. Normally, the relationship between a stockbroker and his client will be one of a fiduciary nature and such as to place on the broker an obligation to make to the client a full and accurate disclosure of the broker's own interest in the transaction: In re Franklyn; Franklyn v Franklyn (1913) 30 TLR 187; Armstrong v Jackson [1917] 2 KB 822; Thornley v Tilley [1925] HCA 13; (1925) 36 CLR 1, at p12; Glennie v McDougall & Cowans Holdings Ltd (1935) 2 DLR 561; Burke v Cory (1959) 19 DLR (2d) 252; Culling v Sansai Securities Ltd (1974) 45 DLR (3d) 456. The duty arises when, and because, a relationship of confidence exists between the parties: see Tate v Williamson (1866) LR 2 Ch App 55, at pp61,66; and see also McKenzie v McDonald [1927] VicLawRp 19; [1927] VLR 134, at pp144-145; Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41, at pp 67-75, 141-142."
" 'Wherever two persons stand in such a relation that, while it continues, confidence is necessarily reposed by one, and the influence which naturally grows out of that confidence is possessed by the other, and this confidence is abused, or the influence is exerted to obtain an advantage at the expense of the confiding party, the person so availing himself of his position will not be permitted to retain the advantage, although the transaction could not have been impeached if no such confidential relation had existed.'
A fiduciary relationship in respect of a transaction may arise though there has been no anterior relationship between the parties to that transaction: Tufton v Sperni ([1952] 2 TLR 516, at p522). In Lloyds Bank v Bundy ([1975] 1 QB 326, at p341), Sir Eric Sachs, referring to the cases in which a relationship giving rise to a fiduciary duty had been held to exist, said:
'Such cases tend to arise where someone relies on the guidance or advice of another, where the other is aware of that reliance and where the person upon whom reliance is placed obtains, or may well obtain, a benefit from the transaction or has some other interest in it being concluded. In addition, there must, of course, by shown to exist a vital element which in this judgment will for convenience be referred to as confidentiality. It is this element which is so impossible to define and which is a matter for the judgment of the court on the facts of any particular case.'
Whenever a stockbroker or other person who held himself out as having expertise in advising on investments is approached for advice on investments and undertakes to give it, in giving that advice the adviser stands in a fiduciary relationship to the person whom he advises. The adviser cannot assume a position where his self-interest might conflict with the honest and impartial giving of advice: see In re a Solicitor; Ex part Incorporated Law Society [1894] 1 QB 254, at p256; Armstrong v Jackson [1917] 2 KB, at pp824-825.
The duty of an investment adviser who is approached by a client for advice and undertakes to give it, and who proposes to offer the client an investment in which the adviser has a financial interest, is a heavy one. His duty is to furnish the client with all the relevant knowledge which the adviser possesses, concealing nothing that might reasonably be regarded as relevant to the making of the investment decision including the identity of the buyer or seller of the investment when that identity is relevant, to give the best advice which the adviser could give if he did not have but a third party did have a financial interest in the investment to be offered, to reveal fully the adviser's financial interest, and to obtain for the client the best terms which the client would obtain from a third party if the adviser were to exercise due diligence on behalf of his client in such a transaction. Such a duty has been established by authority: see Haywood v Roadknight ([1927] VLR 512) and the cases therein referred to at p 521, especially Gibson v Jeyes ([1801] [1801] EngR 379; 6 Ves Jun 266, at pp 271, 278 [1801] EngR 379; [31 ER 1044, at pp1046-1047, 1050]) and McPherson v Watt ([1877] 3 App Cas 254, at p266)."
In News Ltd v Australian Rugby League the Full Court of the Federal Court reviewed various authorities relating to fiduciary duties but was apparently not aware of Breen v Williams which had been decided only about a month before. In considering the indicia of fiduciary relationships, the Court concluded at p541:
"In the end, an important question - if not the question - is whether, in the words of Professor Finn:
'the actual circumstances of a relationship are such that one party is entitled to expect the other will act in his interests in and for the purposes of the relationship. Ascendancy, influence, vulnerability, trust, confidence or dependence doubtless will be of importance in making this out, but they will be important only to the extent that they evidence a relationship suggesting that entitlement.'
Grantwell Pty Ltd v Frands& Ors (1993) 61 SASR 390 is another example of a long term relationship of a particular nature resulting in fiduciary obligations. The person held to be a fiduciary was a land agent who had advised and acted for the customer over many years. The relationship was described as one of friendship through business contact and association and the customers had placed their trust in the land agent. They relied upon him for guidance and advice as to a suitable investment and as to a scheme by which the investment could be financed within their means. They also relied upon him to look after their interests. It was held that these circumstances gave rise to a situation of confidence and to a fiduciary obligation. It was all the circumstances which led to that result, not merely the tag of financial adviser.
A number of cases were cited which do not advance any new or different principles but illustrate the application of the principles to particular circumstances. Given the existence of a fiduciary relationship, failure to disclose a conflict of interest including any material information bearing upon the transaction to be entered into may amount to breach of fiduciary duty: Spector v Ageda [1973] Ch 30, Farrington v Rowe McBride & Partners [1985] NZCA 21; [1985] 1 NZLR 83, Wan v McDonald [1992] FCA 4; (1992) 33 FCR 491. However, it is not the failure to disclose the information which gives rise to the fiduciary obligation, but its breach. These cases were concerned with the relationship of solicitor and client where the existence of fiduciary obligations will usually be obvious but they illustrate the importance of confidence and disclosure and the manner in which the obligations must be discharged. In Wan v McDonald Burchett J at p511 cited with approval a passage of the judgment of Wooten J in Thompson v Mikkelsen (unreported, Supreme Court of NSW, 3rd October 1974):
"It seems to me that the practice of a solicitor acting for both parties cannot be too strongly deprecated. It is only because of the possibility that something may be wrong in a transaction, or may go wrong during its implementation, that the employment of highly trained professional people at professional scales of remuneration can be justified. To scrutinise a transaction to discover whether something is wrong in a way that may affect his interests, or to notice and deal with something that goes wrong during the transaction, is what a party employs such a person for. He is entitled to assume that that person will be in a position to approach the matter concerned with nothing [in mind] but the protection of his client's interests against [those] of the other party. He should not have to depend on a person who has conflicting allegiances and who may be tempted either consciously or unconsciously to favour the other client, or simply to seek a resolution of the matter in a way which is least embarrassing to himself."
With these principles in mind, the plaintiff's allegation of the existence of fiduciary obligations and breach of fiduciary duty are to be considered.
The plaintiff argues that the features of the relationship in Daly which gave rise to the fiduciary obligation exist in the present case.
The obligation is said to have arisen in this way. It is alleged that Nelson Wheeler Perth did carry on business as financial advisers. In the annexure to the Nelson Wheeler report, the following appears:
Nelson Wheeler, Chartered Accountants, are a national firm of practising accountants with worldwide affiliates and associates. The firm provides a full range of professional services including financial and corporate advice and company appraisals and valuations. Mr A.C. Pilmer the partner responsible for this report is a Fellow of the Institute of Chartered Accountants and is managing partner; Perth." (The underlining is mine.)
It is argued that pursuant to the contract of retainer, the first defendants undertook to advise Kia Ora about the takeover of Western United. It is convenient to again set out the memorandum of fees sent by the first defendants to Kia Ora on 15th October 1987. It is addressed to the directors of Kia Ora:
"Our fee for professional services rendered to 30th September 1987 in respect of the special assignment to prepare a report as to the fairness of the valuation of the Company Western United Limited for the purpose of making an offer to the shareholders of that company $19,500
There were two tasks, the valuation of Western United and the Nelson Wheeler report for the purpose of the Listing Rule. It is the plaintiff's case that these matters establish the nature of the relationship and that the first defendants owed fiduciary obligations to Kia Ora in respect of the undertaking of these two tasks. They were in breach of these obligations by reason of conflict of interest. They were obliged to serve the interests of Kia Ora. However, they preferred the interests of Harold Abbott and his associates. As has been seen in Commonwealth Bank v Smith, the conflict of interests does not have to involve a personal interest. There does not have to be the obtaining of a personal benefit. So, if the fiduciary obligations existed, the preferring of the interests of Harold Abbott to those of Kia Ora would necessarily mean a breach of fiduciary duty owed to Kia Ora.
It is appropriate to first consider the nature of the relationship between Kia Ora and Nelson Wheeler Perth. Clearly it was contractual with the consequence that the first defendants owed duties to Kia Ora to undertake the work which was the subject matter of the contract independently and competently. Also, as I have concluded, the relationship between them was such that they owed a duty of care to Kia Ora in tort. However, I do not think the proven circumstances justify the erection of fiduciary obligations upon that contractual relationship.
The decisions in Commonwealth Bank v Smith and Daly v Sydney Stock Exchange do not stand for the proposition that if a person is a financial adviser then, ipso facto, fiduciary obligation to the customer exists. As has been seen in the former case, the fiduciary relationship existed because of the particular circumstances, not merely because the Bank was a financial adviser. In the latter case, it was accepted that the relationship of stockbroker and customer was an established fiduciary relationship which carried fiduciary duties and subject matter existed, namely financial advice which, in the circumstances, admitted of fiduciary obligations. This is the approach adopted in those cases and in Hospital Product; see also Pavan & Anor v Ratnam [1996] NSWSC 571; (1996) 23 ACSR 214 per Beazley JA at p224.
The circumstances do not establish the existence of a fiduciary relationship between Nelson Wheeler Perth and Kia Ora.
The statement in the annexure of the Nelson Wheeler report may be regarded as evidence that the first defendants did, at times, undertake work as financial and corporate advisers. It also is evidence that they undertook the work of company appraisals and valuations. Having heard the evidence of Martino, Messer, Crawford, Gray and Newman and considered the many documents admitted into evidence, it may safely be concluded that the first defendants, including Pilmer, did undertake each of those types of work, including as financial advisers, at relevant times. However, the evidence does not justify a finding that they acted in that capacity for Kia Ora. The memorandum of fees does not establish they did. The "fairness of the valuation of the Company Western United" is an expression which sits comfortably with the tasks of valuing Western United and giving a report that the takeover price was fair pursuant to the Listing Rule. There is no evidence to suggest that the first defendants gave any advice, or made any representation to, Kia Ora about the efficacy or wisdom of the takeover. Indeed, there is no evidence to suggest that the first defendants advised, or even suggested to Kia Ora, that the takeover of Western United be undertaken. In fact the evidence suggests the contrary. As has been seen, those controlling Kia Ora were determined that Kia Ora takeover Western United and the first defendants were required to undertake the valuation and having done so were to give a report under the Listing Rule. It is submitted that the expression in the Nelson Wheeler report, which for convenience is repeated:
"In our opinion it is reasonable for Kia Ora to pay a premium to acquire all of the shares in Western United. Further, we are of the opinion that, from the point of view of Kia Ora, the price proposed to be offered is fair and reasonable in all of the circumstances"
is advice given as a financial adviser. It is the nature of advice to Kia Ora to enter into the takeover transaction. I reject that contention. That part of the Nelson Wheeler report is an expression of opinion given pursuant to the contract of retainer. Nelson Wheeler Perth were obliged to value the issued capital of Western United and to express an opinion as to whether the purchase price was a fair price: Listing Rule 3J(3)(b). That is what they did albeit incompetently and in breach of duty in contract and tort but they did not give advice in the relevant sense.
There is no other reason to suggest that Nelson Wheeler Perth were fiduciaries. They were not agents of Kia Ora. It was not a relationship of ascendancy or influence of them over Kia Ora or dependence or trust on the part of Kia Ora: Breen v Williams per Brennan CJ at p82 and Gummow J at p133. The relevant subject matter of the relationship was the valuation and the opinions expressed in the Nelson Wheeler report. It is to be expected that Kia Ora would have placed its trust in Nelson Wheeler Perth to do their work competently and independently, but they were not guiding or influencing Kia Ora in the sense discussed in the cases which results in a fiduciary relationship. The position is no different than that expressed by Dawson and Toohey JJ in Breen v Williams in the first paragraph of their joint judgment which I have cited. The professional relationship between Kia Ora and Nelson Wheeler Perth no doubt meant that those relying on the Nelson Wheeler report as Kia Ora placed their trust and confidence in them but not because they acted on behalf of Kia Ora but in the sense that Kia Ora was entitled to expect the observance of professional standards by them. Their failure to do so afforded remedies in contract and tort. The first defendants were not in any of the categories of position Kia Ora referred to by Gaudron and McHugh JJ in Breen v Williams in the passage of their joint judgment to which I have referred. Once the notions of trust and confidence and discretion and power is understood in their correct context, what remains is the relationship in contract and tort.
It is likely that Harold Abbott and Green influenced Pilmer considerably which played a part in such an incompetent valuation and report because of Pilmer's willingness to please, but that does not establish a fiduciary relationship. At most, it may show that Pilmer was a "tame" expert. It does not show that he was in a position of ascendancy with "the scope to unilaterally exercise a discretion or power which might affect the rights or interests" of Kia Ora: Gaudron and McHugh JJ at p107. The first defendants were obliged to act in Kia Ora's interests but in the sense of discharge their contractual obligations competently and independently. Kia Ora, in the relationship with the first defendants, was no more vulnerable than any person in a relationship which requires professional duties to be discharged competently.
In my view, it has not been established that there was a fiduciary relationship between Kia Ora and the first defendants and the plaintiff's claim for damages for breach of fiduciary duty must fail. It is unnecessary to consider the many ways in which the plaintiff contends that the first defendants were in breach of such duty to Kia Ora.
The first defendants contend that any damages assessed for the loss sustained by Kia Ora in consequence of the takeover of Western United and its subsidiaries should be reduced to take account of the negligence of Kia Ora which contributed to its own loss.
In Austrust Ltd v Astley & Ors [1996] SASC 5681; (1996) 67 SASR 207 at p231 the Full Court of this Court declined to express an opinion as to whether, as a matter of law, contributory negligence is a plea available where the duty of care is the same in contract and in tort and both causes of action are pleaded because it was unnecessary to do so in order to decide that case. I was the trial Judge in that case and I accepted that the plea of contributory negligence was available in those circumstances: Austrust Pty Ltd v Astley & Ors [1993] SASC 3969; (1993) 60 SASR 354 at p380. For present purposes, I adopt the same view.
The factual basis of the plea may be briefly summarised as follows. Kia Ora, through Green and Roberts, provided information to Nelson Wheeler in relation to the retainer which was incorrect, misleading or unreliable and thereby contributed to deficiencies in the report. That bare statement of the position may be accepted for present purposes without any discussion as to the obligations of an expert under the Listing Rule when information is provided by the object of a friendly takeover. This matter cannot amount to contributory negligence because it was not conduct of Kia Ora in view of my findings that Kia Ora and Western United were not a merged entity at this time and Green and Roberts were not acting as agents for Kia Ora.
The remaining matters have also been canvassed in other contexts. They are that Kia Ora had, or ought to have had, knowledge of information about Western United that was relevant to the preparation of the Nelson Wheeler report which it did not provide to Nelson Wheeler Perth, that reliance by Kia Ora upon that report was unreasonable because Kia Ora knew that it had been prepared using information about Western United that was inaccurate, misleading or unreliable and that Kia Ora persisted with the takeover after the extra-ordinary general meeting notwithstanding the share market crash and the change in the value of Western United.
For the reasons already expressed, these acts and omissions were not those of Kia Ora because the conduct of Harold Abbott in particular, and the other directors regarding those matters, may not be attributed to Kia Ora.
Section 27A of the Wrongs Act 1936 governs the questions of contributory negligence. It permits reduction of damages where a person has suffered damage as the result partly of his own fault. Because the conduct of these men may not be attributed to Kia Ora, the company was not at fault and the question of contribution does not arise. The present case is to be distinguished from AWA v Daniels (supra). In that case the company was not the victim as was Kia Ora.
In my view, there is no basis for a finding that Kia Ora was guilty of negligence which contributed to its loss and the plea is rejected.
Undoubtedly Kia Ora assumed obligations under the contract of retainer as did Nelson Wheeler Perth.
The first defendants contend that it was an implied term of the contract of retainer that Kia Ora provide Nelson Wheeler Perth with all information in its possession, custody or power which might be relevant to the preparation of the Nelson Wheeler report. They argue that this term is to be implied to give business efficacy to the contract and meets established criteria: BP Refinery (Westernport) Pty Ltd v Slice of Hastings (1978) 52 ALJR 20 at p26 and Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at p347.
It is unnecessary to decide whether this or any other term should be implied for much the same reasons as expressed regarding the plea of contributory negligence. Green and Roberts were not acting as agents of Kia Ora. In this context it is also contended that Nelson Wheeler Perth did, and were entitled to, rely upon the information which they received from them. I reject that submission. I have already made some observations about this matter in the context of whether Nelson Wheeler Perth discharged their duties competently. It is appropriate to say a little more. An independent expert for the purpose of giving a report pursuant to the Listing Rule is not entitled to take at face value information supplied, particularly in the context of a friendly takeover with conflicts of interest such as existed in the present case. Such an expert intending to rely on information supplied should satisfy himself or herself that it is reasonable to do so. In the case of financial accounts which have been audited, little by way of further enquiry may be required but what is required depends upon the particular circumstances. For example, in the present case, the 1987 financial accounts of Western United were audited. However, they revealed substantial growth in assets and income as has been mentioned. Given the statement by Lee-Steere, in his annual report which has also been mentioned, an expert undertaking a valuation and report under the Listing Rule, should make enquiries to see the reason for that growth as it was relevant to the assessment of future maintainable earnings. In the case of such information which is not audited and upon which conclusions must be made as a basis for a valuation, it is to be expected that inquiry and investigation would be necessary. Projections of income and expenditure to be used to establish future maintainable earnings fit into that category. Of course, what work the expert must do will depend upon the circumstances of the particular company and the purpose of the takeover. However, it may not be said that such an expert is entitled merely to rely upon such information without any checking or assessment. However, in the present case, Nelson Wheeler Perth had every reason not to merely accept the information which had been given to them. To Pilmer's knowledge, the financial position of Western United had been inflated by back to back transactions. Some of his partners were also aware of this practice. Given that knowledge, he could not merely rely upon information given to him. Also, he was aware, directly or constructively, of the acquisition of the interest in Ray Porter & Partners in April 1987. For that reason, he could not rely upon the income projections.
As with the plea of contributory negligence, the first defendants contend that Kia Ora knew information supplied to Nelson Wheeler Perth was inaccurate or misleading and also that it failed to provide information which was relevant.
It is submitted that Kia Ora must have known, or must be deemed to have known, that the Nelson Wheeler report incorporated the inaccuracies and misleading impressions conveyed by the information provided by Kia Ora. Consequently, it would be unfair to allow the plaintiff to advance its contentions and thereby profit from its own misdeeds and omissions. The first defendants contend that the plaintiff is, and should be, estopped from advancing its case based upon any presumption of reliance or reliance in fact.
It is unnecessary to explore the circumstances in which such a plea of estoppel would succeed in proceedings of this nature because there is no sound factual basis for the plea. As I have said Kia Ora did not provide the information. It may be accepted that it was provided upon the instruction of Harold Abbott and others, perhaps Gary Abbott and Gardiner. I am satisfied that none of the directors of Kia Ora, apart from Harold Abbott, were in any way involved in the giving, or withholding, of information to Nelson Wheeler Perth. The evidence does not suggest that Harold Abbott was personally involved in actually providing the information although, as I say, he gave the initial instructions. Nevertheless, it is likely that he was aware of what information was, and was not, given.
I reject these contentions of the first defendants.
The Nelson Wheeler defendants contend that the plaintiff is not entitled to maintain this action because the acts of Kia Ora in undertaking the takeover process and in acquiring the issued capital of Western United were ultra vires, to the capacity and powers of Kia Ora.
Kia Ora was incorporated as a no liability company and continued as such at all material times. The memorandum and articles of association provide:
"The objects for which the company is established are for 'Mining Purposes' within the meaning of 'The Companies Act 1934-1952'."
There is no other object and so it may be seen that the company was incorporated only for mining purposes. "Mining purposes" was defined in the Companies Act under which Kia Ora was incorporated as for the purposes of:
"... obtaining any metal, mineral or other product, including oil, by any mode whereby soil, earth, rock or stone may be drilled, disturbed, smelted, refined, crushed or otherwise dealt with."
The definition is specifically adopted in the Articles of Association of Kia Ora. As has been seen, the activities of Western United and its subsidiaries were merchant banking, stockbroking, insurance broking and the provision of mining services.
So, it is alleged that in acquiring the issued capital of a company, such as Western United, Kia Ora was acting outside the objects for which it was established. The definition of "mining services" under the Companies Code is in different, but similar, terms and also includes the carrying on of any business or activity necessary for, or incidental to, the similar purposes. However, it is contended that it is the provisions of the Companies Act in September 1954 which govern the matter. According to Somes, the takeover was a fundamental change in direction of Kia Ora which was known to the other directors.
Under the Companies Code, a company may be designated a no liability company if it is a mining company: s33(2). Kia Ora is clearly a mining company within the definition of that expression in s5 of the Companies Code. It is unnecessary to set out that definition for present purposes. So, only a mining company with the appropriate objects could be a no liability company.
The argument advanced on behalf of the Nelson Wheeler defendants is that the legislative scheme relating to the legal capacity, powers and status of a company is embodied in s66A to s68D of the Companies Code. Prior to the enactment of that scheme, the traditional doctrine of ultra vires rendered null and void any transaction entered into by a company which was beyond its capacity as derived from its objects as stated in the memorandum and articles of association. Such ultra vires transactions were void as against third parties, including parties to the transaction: Rolled Steel Products (Holdings) Ltd v British Steel Corporation & Ors [1986] 1 Ch 246 per Slade LJ at p297 and per Browne-Willliam LJ at p303. It may be noted that the expression "ultra vires" has also been used in a wider sense to encompass acts, dealings or transactions of a company which, although within the capacity of the company, are outside the powers conferred on the company to carry out these objects: per Browne-William LJ at pp302-3 and Northside Developments Pty Ltd v Registrar-General & Ors [1990] HCA 32; (1990) 8 ACLC 611 per Mason CJ at p621.
The legislative scheme described by the Nelson Wheeler defendants and to which they refer was introduced in 1985 and came into operation on 1st January 1984: s66A of the Companies Code. S66B provides that these sections apply to a company whether or not it was incorporated before, on or after 1st January 1984. S66C is as follows:
(a) to abolish the doctrine of ultra vires in its application to companies; and
(b) without affecting the validity of the dealings of a company with outsiders, to ensure that provisions of the rules of a company relating to objects or powers of the company are given effect to by the company's officers and members,
and those sections shall be construed, and have effect, accordingly."
Section 67 deals with the legal capacity of a company which is the same as that of a natural person. Section 68(1A) provides that the rules of a company may contain an express restriction on, or an express prohibition of, the exercise by the company of a power of the company. Rules of a company means the memorandum and articles of the company: s66B(2). Section 68(1) provides that where a company exercises a power contrary to an express restriction, or the company does act otherwise than in pursuance of the objects of the company contained in the memorandum and articles, the company contravenes the section but, pursuant to s68(3), is not guilty of an offence.
Section 68(4) provides that where, by exercising a power or by doing an act as mentioned in s68(1) which contravenes that section, the exercise of the power, or the act, is not invalid by reason only of the contravention. S68(6) provides that those contraventions may only be relied upon for limited purposes which do not include avoidance of the dealing or transactions which constitute the act.
It may be seen from these provisions that as from 1st January 1984, the doctrine of ultra vires does not apply to a company as a doctrine about corporate capacity: see Ford's Principles of Corporations Law, para 12.090. Nevertheless the Nelson Wheeler defendants contend that where the validity of a company's dealings with third parties is not called into question, this legislative scheme will not disturb the fundamental rule that the powers and objects or capacity of the company must be observed. Plainly that is so as may be seen from the provisions of s68(1). However, it is the consequence which is significant. No longer does the doctrine of ultra vires apply. The consequences of contravention are limited to those set out in s68(6) in the sense that reliance of that fact can only be made for those purposes which do not include rendering the act, dealing or transaction void or voidable.
It is contended that a company cannot seek to assert the statutory validity of its ultra vires acts for its own benefit and to the detriment of third parties as to do so would contravene the express legislative purpose of the legislative scheme and would encourage companies and their officers to contravene s68(1) and s68(2) or where there was an advantage to the company in so doing. It is said that arguably the case is even stronger where the company is a no liability company and seeks to gain benefit from acting outside the designated objects of the company. The effect of validating a transaction made ultra vires of the capacity of a no liability company would be to subvert the intended purpose and effect of the Companies Code in respect of such companies. The provisions of the Companies Code should not be construed so as to permit a company which has acted beyond power or outside its capacity to approbate and reprobate. The company would be permitted to rely upon its ultra vires conduct in certain proceedings pursuant to s68(6)(g) and should not be permitted to hide behind an alleged statutory validation of its ultra vires act for the same purpose in proceedings against a third party. The reference to s68(6)(g) is the provision that an ultra vires act may be asserted or relied upon in proceedings by a company or a member of a company, against present or former officers of a company.
It is accepted that there is no authority in support of these contentions. In my view they cannot be accepted. The legislative provisions are plain. The doctrine of ultra vires has been abolished without exception. Indeed it is made plain in s66C that the validity of dealings of a company with outsiders is not affected.
The plaintiff is entitled to bring and maintain these proceedings.
Mention has been made of the third party proceedings by the first defendants against the director defendants. The first defendants seek indemnity for the damages to be paid by them to the plaintiff or contribution to those damages.
As has been seen, the proceedings against Quilty and Singleton and the first defendants claim indemnity or contribution by reason of breach of fiduciary and statutory duties. The same basis of claim is also made against Harold Abbott, Lee-Steere and Somes as well as a claim in negligence, it being alleged that they were in breach of a duty of care to the first defendants. No proceedings for indemnity or contribution have been instituted by any of the director defendants against the first defendants.
It has been seen that the claims against the director defendants for breach of fiduciary and statutory duties involve conduct which is clearly tortious even though the conduct of Quilty and Singleton has not been categorised in that way. An example is that all of the director defendants are alleged to have been in breach of the duty to exercise a reasonable degree of care and diligence in the exercise of their powers and the discharge of their duties. However, they are duties which the director defendants owed to Kia Ora, not to Nelson Wheeler Perth.
In order to decide if the first defendants are entitled to relief in the third party or contribution proceedings, it is necessary to determine the extent of the responsibility of each of the first defendants and the director defendants for the loss sustained by the plaintiff.
Without question, the major share of the responsibility for the loss to Kia Ora must fall upon Harold Abbott. He had intimate knowledge of the relevant information and circumstances. He was the driving force behind the takeover. He well knew it was contrary to the interests of Kia Ora and that the valuation of Western United by Nelson Wheeler Perth was grossly inflated and that the Nelson Wheeler report was wrong. He was in breach of his fiduciary and statutory duties in a serious way and he benefited substantially from the takeover of Western United which was his clear object. He must bear fifty per cent of the responsibility.
Nelson Wheeler Perth were in a special position and had a crucial role to play which they well understood. The valuation and the Nelson Wheeler report were prepared incompetently and to a very serious extent. As has been seen, they failed to discharge their duties in almost every respect and furthermore they had, through Pilmer and other partners, actual knowledge of Western United which should have caused them to reject the retainer, but upon having accepted it, realise that features of the manner of business of Western United rendered the projections inaccurate and unreliable. They must bear thirty per cent of the responsibility.
I see no reason to distinguish between each of the other director defendants. Whilst it is true that some knew more and had more experience than others, each had a very important role to play and was in breach of duty in a serious manner. Lee-Steere had been chairman of directors of Kia Ora and Western United since they were re-activated. He was an experienced public company director and had considerable knowledge about the two companies and of matters of commerce generally. If he had discharged his duties, it is likely that the takeover would not have proceeded. The same must be said about Somes. Despite the experience of Lee-Steere, Somes knew more about Kia Ora and Western United than Lee-Steere and was well aware that the takeover was not in the interests of Kia Ora. Because of their knowledge of Western United and how it conducted its business affairs, they were well aware of the inaccuracy of the valuation of Western United by Nelson Wheeler Perth and that it was grossly inflated. They knew that the opinions expressed in the Nelson Wheeler report could not be accurate and reliable. Both men profited handsomely from the takeover and improperly so.
Quilty and Singleton knew much less than Lee-Steere and Somes and did not profit personally from the takeover in the direct sense. Nevertheless, they accepted the crucial role of independent directors. Their decisions and actions were essential to the success of the takeover. In some respects, their roles were more significant than those of Lee-Steere and Somes. Each of those four defendants must bear five per cent of the responsibility.
In view of these conclusions, the first defendants are not entitled to indemnity for the damages which they must pay to the plaintiff, but they are entitled to contribution.
Section 25 of the Wrongs Act 1935 provides for contribution between joint tort-feasors, which is an apt description of the first defendants and the director defendants. However, there is no allegation of any liability in tort against Quilty and Singleton. Also, there is no allegation of liability in tort on the part of Harold Abbott, Lee-Steere and Somes to the plaintiff. Nonetheless, there has been no suggestion that the first defendants are not entitled to contribution from the director defendants as a matter of law. Their conduct clearly constitutes a tort and s25 provides for contribution where damage is suffered by any person as a result of a tort. It is appropriate to categorise all of the director defendants as tort-feasors.
On that basis, I apportion responsibility for the loss sustained by the plaintiff as indicated and the first defendants are entitled to contribution accordingly.
As far as I can determine, the director defendants have not formally sought contribution from the first defendants or from each other through reciprocal proceedings. I give liberty to each of them to apply in case they seek any order or judgment against the first defendants or any of the others of them to which, at this stage, they are entitled.
I turn now to the assessment of the damages to which the plaintiff is entitled.
Kia Ora paid out of its own funds $26,178,135.81 in the acquisition of the issued capital of Western United and issued 67,951,754 new shares at a par value of $1 each which were allocated to the Western United shareholders. It has been seen that Kia Ora paid $25,696,000 to shareholders of Western United. The additional amount was paid by way of expenses properly incurred in the takeover. It is the plaintiff's case that the primary loss of the plaintiff in consequence of the breach of contract and negligence of Nelson Wheeler Perth and the breach of fiduciary and statutory duty of the director defendants is the greater cash sum, together with the value of the issued shares, less the value of what Kia Ora obtained, ie the true value of all of the issued capital of Western United at the time the transaction was effected. In addition the plaintiff claims damages for loss of use of money in accordance with the principles discussed in Hungerfords & Ors v Walker & Ors [1989] HCA 8; [1990] 171 CLR 125 and that the true measure of those damages is compound interest, at appropriate rates and rests, from the times when the money was paid and the shares allocated until the time of judgment. In the alternative, the plaintiff claims interest on the various losses pursuant to s30c of the Supreme Court Act. Lastly the plaintiff claims damages for the amount of capital gains tax which may be assessed on the judgment sum.
The claim is formulated on the basis that the cost to Kia Ora of issuing the shares should be assessed at the value of those shares at the times Western United shares were acquired. As has been seen, such shares were acquired at different times commencing on 15th December 1987 and continuing until 10th February 1988. Calculation of the value of Kia Ora shares on each occasion Western United shares were acquired is unnecessarily precise. It is sufficient to achieve justice between the parties to take the value of the shares as at 31st December 1987. I accept the evidence of Easton that the value of Kia Ora shares at that time was 82 cents each. That is not to say that I accept the basis of the plaintiff's claim. At this stage I simply mention it to explain the way in which it has been formulated.
Also, the claim is formulated on the basis that the issued capital of Western United was in reality valueless and consequently no deduction is made on account of acquiring assets of value.
The plaintiff contends that the correct method of assessment of damages is to effect restitution. On that basis the claim is:
If statutory interest only is appropriate, the claim is formulated in the same way except that the interest component to 1st September 1997 is $111,260,334.42 making a total claim of $193,158,908.23. If either of the plaintiff's claims with regard to interest is correct, a further allowance must be made for the period since 1st September 1997.
The first defendants contend that the amount of damages to which the plaintiff is entitled is relatively modest. No damages can be awarded on account of the issuing of the shares and the allocation of them to Western United shareholders in payment of the purchase price as it did not amount to any loss on the part of the company. Any loss by reason of the share issue was a loss of the shareholders. Furthermore, in assessing the damages to which the plaintiff is entitled, no account may be taken of the diminution in value of the issued capital of Western United by reason of the stock market crash as that event was not reasonably foreseeable by Nelson Wheeler Perth when the report was provided.
It is necessary to consider the principles relevant to the assessment of damages in the context of the unusual circumstances of this case.
I do not understand the parties to be at issue as to the general principles to be applied in the assessment of damages in contract and tort. Consequently it is unnecessary to repeat the extensive reference to authority. It is the application of those principles which is in contention.
The plaintiff is entitled to be compensated upon the principle of restitutio in integrum, that is be returned to its position before the takeover of Western United so far as that is possible. In the present circumstances, there is no difference in the manner of assessment of the plaintiff's damages in contract and in tort. As in the present case, Hungerfords v Walker is a case where accountants were sued in both contract and tort for breach of the same duty. King CJ, upon the appeal to the Full Court of this Court (Walker v Hungerfords (1987) 49 SASR 93), said at p97:
"'The principle which underlines the award of damages in tort is, generally speaking, that of restitutio in integrum. The object is to restore the plaintiff to the position in which he would have been placed if the wrongful act had not been committed': South Australia v Johnson (1982) 42 ALR 161 at 169-170. The principle is the same for damages in contract (Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd [1981] HCA 3; (1981) 145 CLR 625 per Gibbs J at 637-638), except that in the case of contract the principle of restitution requires that the injured party be put in the same position as if the contract had been performed: Butler v Egg and Egg Pulp Marketing Board [1966] HCA 38; (1966) 114 CLR 185 per Taylor and Owen JJ at 191."
The same approach was taken in another professional negligence case, involving a solicitor, in Haines v Bendall [1991] HCA 15; (1991) 172 CLR 60 per Mason CJ, Dawson, Toohey and Gaudron JJ at p63:
"The settled principle governing the assessment of compensatory damages, whether in actions of tort or contract, is that the injured party should receive compensation in a sum which, so far as money can do, will put that party in the same position as he or she would have been in if the contract had been performed or the tort had not been committed: Butler v Egg and Egg Pulp Marketing Board [1966] HCA 38; (1966) 114 CLR 185, at p191; Todorovic v Waller [1981] HCA 72; (1981) 150 CLR 402, at p412; Redding v Lee [1983] HCA 16; (1983) 151 CLR 117, at p133; Johnson v Perez [1988] HCA 64; (1988) 166 CLR 351, at pp355, 386; MBP [SA] Pty Ltd v Gogic [1991] HCA 3; (1991) 171 CLR 657; Livingstone v Rawyards Coal Co (1880) 5 App Cas 25, at p39; British Transport Commission v Gourley [1955] UKHL 4; [1956] AC 185, at pp197, 212. Compensation is the cardinal concept. It is the 'one principle that is absolutely firm, and which must control all else': Skelton v Collins [1966] HCA 14; (1966) 115 CLR 94, at p128, per Windeyer J. Cognate with this concept is the rule, described by Lord Reid in Parry v Cleaver [1969] UKHL 2; [1970] AC 1, at p13, as universal, that a plaintiff cannot recover more than he or she has lost."
This principle was applied by the Full Court of this Court in Copping & Ors v ANZ McCaughan Ltd & Ors (21st March 1997, Judgt No S5995.1, unreported). At pp6-7 of his reasons for judgment, Doyle CJ said:
"The object of an award of damages in tort is, generally, to restore the plaintiff to the position in which the plaintiff would have been placed if the wrongful act had not been committed: South Australia v Johnson (1982) 42 ALR 161 at 169-170 Gibbs CJ, Mason, Murphy, Wilson and Brennan JJ; Gates v City Mutual Life Assurance Society Limited (1986) 160 CLR 1 at 13 Mason, Wilson and Dawson JJ; Haines v Bendall [1991] HCA 15; (1991) 172 CLR 60 at 63 Mason CJ, Dawson, Toohey and Gaudron JJ. The significance of this proposition emerges in part from the contrast between the object of an award of damages in contract and an award of damages in tort. In contract the wrong is the breaking of the contract, and damages are assessed on the basis that the contract was performed. In tort, putting things generally, the wrong is a '..... failure to leave him [the plaintiff] alone .....'; McGregor on Damages (14th ed) para 573. To be more specific, in the case of a misrepresentation which induces the plaintiff to enter into an agreement, the wrong is the loss resulting from the change of position which the misrepresentation induces.
Usually, in tort, rescission of the relevant transaction, and a mutual restoration of the parties to the position in which they were before the tort occurred, will either not be relevant, because of the nature of the tort, or not be available, because contractual rescission is not pursued or is not possible (as it often will not be in the case of misrepresentation inducing a contract).
The award of damages focuses upon compensation for the wrong sustained rather than a restoration of the parties to the position that they were in before the wrong occurred. The damages are intended, from a monetary point of view, to place '..... the plaintiff in the position in which he would have been had the tort not been committed ....': Gates (supra) at 12 Mason, Wilson and Dawson JJ.
When a misrepresentation causes a plaintiff to acquire property or to enter into a transaction, the measure of damages in deceit and in negligence has been said to be the difference between what the plaintiff paid and the value of what the plaintiff received by way of property or under the transaction: Potts v Miller [1940] HCA 43; (1940) 64 CLR 282 at 297 Dixon J: South Australia v Johnson (supra) at 170; Gates (supra) at 12.
However, this principle is no more than an application of the fundamental principle that damages are intended to compensate for the loss or expenditure incurred by the plaintiff in consequence of an alteration of position induced by the relevant inducement: Potts v Miller (supra) at 297; Toteff v Antonas [1952] HCA 16; (1952) 87 CLR 647 at 650 Dixon J; Gates (supra) at 12."
In my view, there cannot be any difference, for practical purposes, in the assessment of damages for breach of contract or breach of tortious duty in cases of this nature. There is a limitation on damages for breach of contract in cases such as the present, namely the rule against remoteness which, as King CJ observed in Walker v Hungerfords at p97 is the rule in Hadley v Baxendale [1854] EngR 296; (1854) 9 Ex 341, 156 ER 145, which he expressed as follows at pp97-98:
" The rule as to remoteness of damage in the law of contract is the celebrated rule in Hadley v Baxendale [1854] EngR 296; (1854) 9 Ex 341; 156 ER 145. That rule is commonly said to consist of two limbs. The 'general' limb limits damages for breach of contract to that which may reasonably be supposed to have been in the reasonable contemplation of the parties at the time of the making of the contract as damage which would flow from its breach in the ordinary course of things. The 'special limb' qualifies that limitation by extending the scope of the loss for which damages will be awarded to that which would be in the reasonable contemplation of the parties in consequence of special circumstances known to them at the time of the making of the contract."
The rule against remoteness in tort is that the injured party may only recover those losses which are reasonably foreseeable. For all practical purposes, in circumstances such as the present, there is no difference. The subject is the same and the interest protected is the same. The limitation of the award of damages for breach of contract is discussed by Carter and Harland in Contract Law in Australia 3rd Ed (1996) at p775 where they say:
"Methods of limiting the award. The view is taken, in the law of contract as well as tort, that a defendant should not be held responsible for every loss suffered by a plaintiff and is some way associated with the defendant's wrong. There are two main ways by which the courts' award is limited, namely, requirements of causation and remoteness. Other factors, such as mitigation of loss, also operate, in most cases, to reinforce the requirements of causation and remoteness and to keep the defendant's responsibility within acceptable bounds."
The object of the award of damages in the present case, in contract or tort, is to restore the plaintiff to the position in which it would have been placed but for the breach of contract and negligence of Nelson Wheeler Perth.
It is the plaintiff's case that but for the breach of contract and negligence of Nelson Wheeler Perth, Kia Ora would not have entered into the takeover transaction and it is entitled to damages to be assessed on the basis of what would have been the position had the transaction not occurred. It is a "no transaction" case. The case of the first defendants is that the plaintiff is not entitled to all losses which flow in consequence of the breach of contract and negligence. To say it is a "no transaction" case is only the commencement of consideration of the correct method of assessment. It is only in cases of deceit that a party may recover all consequential losses flowing from reliance upon the actionable misstatement. In cases not involving deceit, there is a limitation imposed by what may compendiously be called the rules of remoteness. Clearly this is not a case of deceit.
Whilst it is unnecessary to consider damages for breach of fiduciary duty so far as the first defendants are concerned in view of my rejection of that claim against them, it is necessary to consider whether damages to be paid by the director defendants should be assessed on a different basis.
The contention is that a different approach is taken to the assessment of damages for breach of fiduciary duty than for breach of contract or negligence. As has been seen there is a cap placed upon damages for breach of contract and negligence. The damages are limited by the requirement of causation and the rule against remoteness. It is unnecessary to decide for present purposes, but it may be expected that damages for breach of statutory duty under s229 of the Companies Code, are to be assessed on the same basis as damages for breach of fiduciary duty as usually the conduct constituting each will be the same.
As a matter of principle the approach to assessment of damages for breach of fiduciary duty is not so restricted. There has been wide acceptance of the statement of Lord Thornburton in Brickenden v London Loan & Savings Co [1934] UKPC 25; [1934] 3 DLR 465 at p469:
"When a party, holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction, he cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the constituent's action would be solely determined by some other factor, such as the valuation by another party of the property proposed to be mortgaged. Once the Court has determined that the non-disclosed facts were material, speculation as to what course the constituent, on disclosure, would have taken is not relevant."
See Farrington v Rowe McBride & Partners [1985] NZCA 21; [1985] 1 NZLR 83 at p93; Commonwealth Bank v Smith (supra) at p479, Wan v McDonald [1992] FCA 4; (1992) 33 FCR 491 at p520; Gemstone Corporation of Australia Ltd v Grasso [1993] SASC 4211; (1994) 62 SASR 239 at p243, p 245 and pp252-253. The same approach was taken by Lord Radcliffe in giving the judgment of the Privy Council in Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1. He said at p15:
"It is said that it would have made no difference if he had told them. They had decided on the basis of settlement that they were going to impose upon him, they did not think that they could get any more out of him, and their main concern for the Company was to recover for it some cash that would keep it running and to achieve an agreement that would regularize its disordered affairs. There may be an element of truth in all this, but in fact it constitutes an irrelevant speculation. If a trustee has placed himself in a position in which his interest conflicts with his duty and has not discharged himself from responsibility to account for the profits that his interest has secured for him, it is neither here nor there to speculate whether, if he had done his duty, he would not have been left in possession of the same amount of profit. It has often been said that a trustee who is accountable is not the less accountable if he shows that the transaction impugned is both reasonable and fair (Parker v McKenna (1874), LR 10 Ch 96; Costa Rica R Co v Forwood [1901] 1 Ch 746), and the principle is the same."
It is the plaintiff's contention that damages assessed upon the application of these principles would result in a higher award than if assessed in accordance with common law principles but, in the circumstances of the present case, I do not think that is so. In the present case, the consequences of the breach of fiduciary duty are plain. There is no reason to speculate. The loss to Kia Ora is the same. The measure of damages for breach of fiduciary duty by the director defendants is from a practical point of view, the same as for breach of contract and negligence. I accept the observation of von Doussa J in Commonwealth Bank v Smith as repeated by the Full Court on appeal, when he said that the obligation of a defaulting fiduciary is essentially one of effecting restitution although that obligation is "of a more absolute nature than the common law obligation to pay damages for tort or breach of contract": see pp479-480.
Here, as in Commonwealth Bank v Smith, the default of the director defendants, like that of Nelson Wheeler Perth, caused immediate pecuniary loss to Kia Ora which could be quantified by the difference between the price paid and the value of the issued capital of Western United. If that loss was foreseeable, then, in my view, the measure of damages is the same. In the present case, the real issue is only that of foreseeability and remoteness. This is not the type of case which admits of speculation as to what Kia Ora might have done if the director defendants and Nelson Wheeler Perth had discharged their respective duties. The position is clear. The takeover would not have occurred.
Also, in the present circumstances, I do not think there should be any different approach in assessing damages for loss of use of money in cases of breach of fiduciary duty from that in breach of contract and negligence, because the rates of interest which Kia Ora received, and would have continued to receive, are known.
In my view, measure of the damages to be paid by each defendant is the same.
An important issue in the assessment of damages, certainly for breach of contract and negligence, is the significance of the share market crash.
It will be remembered that the valuation of Western United by Nelson Wheeler Perth and the Nelson Wheeler report were undertaken and completed before the share market crash. The report was sent to the shareholders of Kia Ora on 9th October 1987.
It is the plaintiff's case that the loss which it sustained occurred when the money was paid and the shares in Kia Ora allocated to the shareholders in Western United which occurred well after the share market crash. Damages should be assessed on the basis of the loss incurred at that time. The first defendants' case is that damages should be assessed at the time of the breach of contract, not later than 9th October 1987. The share market crash caused loss to Kia Ora which was not foreseeable at the time of the breach of duty of Nelson Wheeler Perth.
The time at which the assessment is to be made has critical consequences. According to Easton, the value of the issued capital of Western United at 9th October 1987 is a low of $14,198,819 (55 cents per share) and a high of $15,545,728 (61 cents per share). Hall valued Western United as at 9th October 1987 at a low of $17.4m (81 cents per share) and a high of $20m (91 cents per share). Both Easton and Hall expressed their opinions in evidence after reviewing their earlier, and higher, valuations in light of matters relating to Western United canvassed at the trial. Their valuations at 31st December 1987 are substantially lower. According to Easton, the value is a low of $4,649,293 (66 cents per share) and a high of $6,439,339 (68 cents per share). Hall's valuation at that time is a low of $7m and a high of $8.7m.
It is not possible to say if all of the reduction in value was due to the share market crash. The manner in which Western United conducted the merchant bank business, through the charging of fees and commissions, and questionable transactions, clouds the true picture because it is highly unlikely that some of that type of revenue would have continued. However, it is safe to conclude that the share market crash did have a significant adverse effect upon the value of the issued capital of Western United and for the purpose of considering the argument of the first defendants, I assume that it was substantial.
It is the case of the first defendants that it is the loss which Kia Ora had suffered as at 9th October 1987, or at all events before the share market crash, which is to be compensated by an award of damages. The subject matter of the Nelson Wheeler report was the value of the Western United shares before the share market crash. It is argued that the risk of a decline in value extraneous to the subject matter of the report should not fall on the first defendants. The author of the report could not have reasonably foreseen or predicted the share market crash and consequently any loss occasioned by the crash is too remote. The first defendants are only liable for damages assessed excluding the effect of the crash, ie on the primary basis of the difference between the price paid and the true value of Western United prior to the crash.
Reliance was placed upon the decisions of the House of Lords in the cases known as Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1996] UKHL 10; [1996] 3 WLR 87. In the three cases, the subject of the appeals, the defendants, as valuers, were required by the plaintiffs to value properties on the security of which they were considering advancing money on mortgage. In each case the valuers considerably overvalued the properties. Following the valuations, loans were made which would not have been made if the plaintiffs had known the true values of the properties. The borrowers subsequently defaulted and, in the meantime, the property market fell substantially, greatly increasing the losses eventually suffered by the plaintiffs. They brought actions against the valuers for damages for negligence and breach of contract. They claimed as damages the outstanding amount of the loan less the net amount recovered from realisation of the security together with unpaid interest. The trial Judge assessed damages on the basis that the plaintiffs were entitled to recover all losses, including that attributable to the market fall. On appeal to the Court of Appeal [1995] QB 375,it was held that in a "no transaction" case, ie a case in which the lender would not otherwise have granted the loan, the lender is entitled to recover the difference between the sum which he lent, together with a reasonable rate of interest, and the net sum which he actually recovered. The Court held that the valuer bears the whole risk of a transaction which, but for his negligence, would not have happened. Consequently, he is liable for all the loss attributable to a fall in the market.
This approach was rejected by the House of Lords. It was held that where a person was under a duty to take reasonable care to provide information on which someone else would decide on a course of action, he was, if negligent, responsible not for all the consequences of the course of action decided on but only for the foreseeable consequences of the information being wrong. The measure of damages was the loss attributable to the inaccuracy of the information suffered by the plaintiff through embarking on the course of action on the assumption that the information was correct. The damages should be assessed as the difference between the valuation and the true value at the date of the valuation and should not include the loss subsequently incurred by reason of the fall in the market. Lord Hoffman, with whom all of the other members of the House of Lords agreed, concluded that the correct starting point in consideration of the appropriate measure of damages is to decide for what kind of loss the lender is entitled to compensation. He accepted that in contract the loan implies a term that the valuer will exercise reasonable care and skill and that the relationship between the parties also gives rise to a concurrent duty in tort. The scope of the duty in tort is the same as in contract. He went on to say at p93:
"A duty of care such as the valuer owes does not however exist in the abstract. A plaintiff who sues for breach of a duty imposed by the law (whether in contract or tort or under statute) must do more than prove that the defendant has failed to comply. He must show that the duty was owed to him and that it was a duty in respect of the kind of loss which he has suffered. Both of these requirements are illustrated by Caparo Industries Plc v Dickman [1990] UKHL 2; [1990] 2 AC 605. The auditors' failure to use reasonable care in auditing the company's statutory accounts was a breach of their duty of care. But they were not liable to an outside take-over bidder because the duty was not owed to him. Nor were they liable to shareholders who had bought more shares in reliance on the accounts because, although they were owed a duty of care, it was in their capacity as members of the company and not in the capacity (which they shared with everyone else) of potential buyers of its shares. Accordingly, the duty which they were owed was not in respect of loss which they might suffer by buying its shares. As Lord Bridge of Harwich said, at p627:
'It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless.'
In the present case, there is no dispute that the duty was owed to the lenders. The real question in this case is the kind of loss in respect of which the duty was owed.
The scope of the duty, in the sense of the consequences for which the valuer is responsible, is that which the law regards as best giving effect to the express obligations assumed by the valuer: neither cutting them down so that the lender obtains less than he was reasonably entitled to expect, nor extending them so as to impose on the valuer a liability greater than he could reasonably have thought he was undertaking."
Lord Hoffman then went on to consider what should be the extent of the valuer's liability. He said, at p94:
"Normally the law limits liability to those consequences which are attributable to that which made the act wrongful. In the case of liability in negligence for providing inaccurate information, this would mean liability for the consequences of the information being inaccurate."
"It is that a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties. It is therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them.
The principle thus stated distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that the information is correct and, if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong."
It may be accepted that Nelson Wheeler Perth was under a duty to provide information, namely the valuation and the opinion in the Nelson Wheeler report. They were not under a duty to advise about the takeover, except in the limited sense that the price was fair which may be more than merely providing information.
Lord Hoffman then addressed the measure of damages. He said at p97:
"The measure of damages in an action for breach of a duty to take care to provide accurate information must also be distinguished from the measure of damages for breach of a warranty that the information is accurate. In the case of breach of a duty of care, the measure of damages is the loss attributable to the inaccuracy of the information which the plaintiff has suffered by reason of having entered into the transaction on the assumption that the information was correct. One therefore compares the loss he has actually suffered with what his position would have been if he had not entered into the transaction and asks what element of this loss is attributable to the inaccuracy of the information. In the case of a warranty, one compares the plaintiff's position as a result of entering into the transaction with what it would have been if the information had been accurate. Both measures are concerned with the consequences of the inaccuracy of the information but the tort measure is the extent to which the plaintiff is worse off because the information was wrong whereas the warranty measure is the extent to which he would have been better off if the information had been right."
Mr Myers contended that this is the correct approach and that which must be applied here. Nelson Wheeler Perth was asked to say whether the takeover price was fair or not at the date of the report. Unforeseen and unforeseeable and dramatic losses caused by other circumstances after that date are not to be laid at their door as they were not within the scope of their duty of care. Their duty was not to prophecy the crash or the value of the shares at the date when the transaction was completed and the price paid. The true measure of damages therefore is the amount paid by Kia Ora less the value of the company as at 9th October 1987, when the report was given.
It is appropriate to mention one aspect of the reasoning of the Court of Appeal in Banque Bruxelles. The Court said at p405:
It is trite law that a plaintiff may not recover damages which are held to be too remote from the breach of duty of which he complains. Somewhat different language has been used to define the test in contract and tort, but the essence of the test is the same in each case. The test is whether, at the date of the contract or tort, damage of the kind for which the plaintiff claims compensation was a reasonably foreseeable consequence of the breach of contract or tortious conduct of which the plaintiff complains. If the kind of damage was reasonably foreseeable it is immaterial that the extent of the damage was not.
These principles call for no detailed consideration or analysis in these appeals since it has not been argued that L's claim for any part of his loss, including that part attributable to the fall in the property market, is too remote. The reason is obvious. L and V know, as everyone knows, that in any market prices may move upwards or downwards. That is the essence of a market. No one in recent times has expected property prices to remain stable over a prolonged period. It was plainly foreseeable that if, on the strength of an overvaluation by V, L entered into a mortgage transaction he would not otherwise have entertained, his risk of loss would be increased if the market moved downwards or reduced if it moved upwards."
In my view, these observations are of importance in the present case. A share market correction is a common enough event and is clearly foreseeable including a fall in the market, perhaps even more so than a fall in real estate values which is also foreseeable. That is the type of damage being considered in cases of this nature and as the Court of Appeal said "if the kind of damage was reasonably foreseeable, it is immaterial that the extent of the damage was not".
The Court of Appeal correctly identified each transaction in Banque Bruxelles as no-transaction cases. It followed that no advance would have been made on a correct valuation. In those circumstances, it was held that the lender was entitled to recover the difference between the sum lent together with a reasonable rate of interest and other amounts outlaid in reliance upon the valuation, and the net sum recovered.
The decision in Banque Bruxelles was considered by Lindgren J in MGICA [1992] Ltd (formerly MGICA Ltd) v Kenny & Good Pty Ltd & Anor [1996] FCA 766; (1996) 140 ALR 313. Lindgren J examined the whole question of foreseeability and the nature and extent of the relevant duty in considerable detail. MGICA provided mortgage insurance with respect to a loan of $3.575m from a financier on security of a mortgage over property which had been valued at $5.35m "as is" and $5.5m "on completion". A little over a year later the borrower defaulted and the property was sold early the following year for $2.65m. MGICA incurred a liability to the lender in respect of its loss and sought to recover damages from the valuer on the basis that it would not have provided the mortgage insurance if the property had not been valued at $5.5m and the valuer had not been negligent in providing the valuation, that it had grossly overvalued the property and that the true completed value was substantially less than $5.5m. Lindgren J held that the valuer acted in breach of duty of care and skill in the valuation. The true value of the property was only in the order of $3.9m to $4m, which would have been revealed by a valuation resulting from the exercise of due care and skill. MGICA had relied upon the valuation and would not have agreed to indemnify the lender if the valuation had been carried out with due care and skill. As to damages, he held that the valuer was liable to MGICA. Lindgren J found that had the property been sold at the time immediately following the making of the advance it would have realised about $4m. After allowing for completion of the outstanding work and other expenses, the lender and therefore MGICA would have suffered no loss. Therefore the whole of the loss in fact suffered could be viewed as having been caused by the subsequent fall in the market. Lindgren J considered Lord Hoffman's speech in Banque Bruxelles in considerable detail. Also he reviewed decisions of the Supreme Court of Canada, the English Court of Appeal and the Supreme Courts of New South Wales and Victoria, the New Zealand Court of Appeal and the Federal Court of Australia. His examination of the authorities and his reasoning has been of great assistance for which I am grateful. It is sufficient to simply refer to his judgment and to adopt what he has said. He observed that the Australian cases, like the Court of Appeal in Banque Bruxelles, appeared to have accepted that the restitutionary approach is applicable to a "no transaction" case, including where the loss, or part of the loss, suffered arises immediately from a fall in the market but he acknowledged that those decisions preceded the decision of the House of Lords in Banque Bruxelles. He concluded that the "pure fall in market loss" sustained by MGICA was sufficiently linked to the breach of the particular duty to merit recovery in all the circumstances, referring to McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39 per Cooke P at p41. Lindgren J said at p370:
"In the present case, the respondents negligently arrived at a valuation which foreseeably caused MGICA to grant mortgage insurance in respect of the mortgage and caused PCL, and therefore MGICA, to have the benefit of a security of less value than $5.5 million. The respondents did not know of any lending or insuring margin policy which might operate. They did not know whether the margin between the amount of financial accommodation to be provided and the valuation figure of $5.5 million was large or small. They did not know, as was the fact, that the first year's interest was to be paid in advance and that the first occasion on which monetary default might occur would be 12 months into the term of the mortgage.
On the other hand, all parties knew that the market value of the property from time to time would fluctuate and that changes in the property's market value over time might, according to when default and realisation occurred, cause PCL and/or MGICA to suffer loss or greater loss or to escape the suffering of loss. The real estate market in which property, the subject of a valuation is located, may be stable or mercurial at the time of the valuation or may develop into either of those states subsequently. Fluctuation in the market value of a security may be seen to be the direct cause of most or, as in the present case, all, of the loss suffered. In a no-transaction case, the negligently prepared valuation influences the mortgagee or mortgage insurer to enter into the transaction and thereby to subject its fortunes, to greater or lesser extent, to these well recognised risks of the market. The valuer knows that the valuation which he or she prepares for a mortgagee or mortgage insurer will have this effect."
He went on to discuss policy questions and then turned to the speech of Lord Hoffman. He went on to say at pp371-372:
"At base, their Lordships have redefined the valuer's duty in a manner which purports to foreclose questions of causation, remoteness and measure of damages, which have, at least conventionally, been treated as distinct from the formulation of duty. In my opinion, the valuer's duty is a duty to exercise an appropriate level of care and skill in arriving at, and reporting, an opinion as to market value which will be, after allowing for the degree of latitude called for by the nature of the subject matter and by the process and nature of valuation, safe to be relied on by the intending mortgagee or mortgage insurer.
Unlike their Lordships, but like the English Court of Appeal, I think that the starting point must, as a matter of principle, be to identify the legal wrong done and to inquire what the loss-sufferer's position would have been if that wrong had not been done; cf Robinson v Harman [1848] EngR 135; (1848) 1 Exch 850 at 855; Livingstone v Rawyards Coal Co (1880) 5 App Cas 25 at 39; British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 at 688-9. This is so in both contractual and tortious context, although the nature of the wrong done differs as between the two. In the case of contract, the wrong would not have occurred if the contract had not been breached; a tortious wrong on the other hand would not have occurred if the tortious act or omission had not occurred. To take a different starting point from these seems to me to be, with respect, radically novel.
In the present context, in the absence of special circumstances, breach of the contractual duty and tortious negligence are of the same nature. It is an implied term of the contract by which a valuer is retained that the valuer undertakes to provide a valuation report which will be the product of the exercise of the level of skill and care referred to above. And apart from contract, where a valuer in fact provides a valuation report in circumstances in which there is a duty of care and skill incumbent on the valuer in favour of another person, again the valuer will incur liability if the report is not the product of the exercise of the level of care and skill described above. In both classes of case, if damages are not to be awarded in respect of a particular loss or class of loss 'caused' by the contractual or tortious negligence, this result should be achieved by the application of principles which deny recovery where the particular loss or class of loss is considered 'too remote', or is the result of what is regarded as a new intervening cause or as a claimant's failure to mitigate loss.
In my view, in a no-transaction case such as the present one, a mortgagee's or mortgage insurer's loss arising from a fall in the market value of the security is not too remote a consequence of a valuer's negligence to be properly compensable by an award of damages."
As can be seen, Lindgren J reached different conclusions from those of Lord Hoffman. He held that this type of loss was not too remote and that it was contrary to principle to limit recovery on the ground that the precise course of events by which the loss was suffered or the extent of the loss suffered was not foreseeable, see p373, and said:
"In cases of 'contractual negligence' and cases of tortious negligence in which not all the loss suffered was due to a fall in the market, it cannot be said that the cause of action accrues at the time when loss attributable to fall in market is sustained. In the case of contractual negligence, the cause of action accrues when the implied contractual undertaking to exercise care and skill is breached, nominal damages being awardable in any event. In such a case, substantial damages are recoverable for loss arising from a fall in the market alone or from such a fall coupled with loss arising from any initial deficiency of the security. In the case of tortious negligence of the category described, the cause of action accrues when the loss attributable to either kind of immediate cause is suffered."
"In my view, the fall in the market is akin to the familiar 'egg-shell skull' analogy of personal injury cases. In both situations, the extent of loss caused by the wrongdoer may be greater, indeed much greater, than anticipated because of circumstances for which he or she is not responsible. Nonetheless, the general nature of the loss is foreseeable in each case. There is no good reason for distinguishing the suffering of financial loss by a mortgagee or mortgage insurer in this respect from losses of the kinds suffered by a peculiarly vulnerable plaintiff from injuries to his or her person."
I respectfully adopt the reasoning and the conclusions of Lindgren J in MGICA v Kenny. The Full Court of the Federal Court on appeal in Kenny & Goode Pty Ltd & Anor v MGICA (1992) Ltd (1997) 147 ALR 568, did likewise. The first defendants contend that this decision is of little use in the present context because there was no issue that the fall in the market was foreseeable. I do not agree. It is an important decision and it confirms that the law in Australia is as stated by Lindgren J.
Banque Bruxelles and MGICA v Kenny were referred to by Doyle CJ in Copping, a case concerning the measure of damages for negligent misstatement by a financier regarding the consequences of a fall in the value of the Australian dollar in the contract of a loan off-shore of Swiss Francs by an Australian resident, partly to cover existing debt. On appeal it was argued that the correct approach to damages was to compare the actual cost of borrowing, including the decline in the Australian dollar, with the cost of borrowing on-shore at the pre-existing debt level. The consequence would be to put upon the maker of the negligent misrepresentation the risk and consequences of the decline in the Australian dollar, even though that was not a risk or matter in relation to which the maker of the statement was negligent or made a representation.
The majority of the Full Court did not have to decide whether the financier was liable for the consequences of the fall in value of the Australian dollar as they concluded that there was no causal link between the misrepresentation and the losses sustained by the borrower. However, Doyle CJ did refer to Banque Bruxelles and MGICA and noted that Lindgren J in MGICA had rejected the approach of Lord Hoffman. He said that he did not have to decide if the House of Lords should be followed but he thought that Lindgren J may well be correct "but that is not to say that identifying the relevant duty does not involve some consideration of the scope of the risk to which that duty extends".
Having carefully considered these cases, I accept the conclusion of Lindgren J in MGICA v Kenny as correctly stating the law in this country. The fall in the share market was reasonably foreseeable and any loss caused to Kia Ora by the share market crash is not too remote and must form part of the damages to be awarded. This was a no transaction case and the fall in the market was "sufficiently linked to the breach of duty (by Nelson Wheeler Perth) to merit recovery".
The time at which the loss, the subject of the award of damages is to be calculated, is not confined to the occasion of the breach of duty. In tort the cause of action does not arise until the loss is sustained. In contract the appropriate time is usually the date of the breach but that is not an inflexible rule. In Johnson v Perez [1988] HCA 64; (1988) 166 CLR 351, Mason CJ said at p355:
"There is a general rule that damages for torts or breach of contract are assessed as at the date of the breach or when the cause of action arises. This rule is not universal; it must give way in particular cases to solutions best adapted to giving an injured plaintiff that amount in damages which will almost fairly compensate him for the way he has suffered."
See also Hungerfords v Walker per Mason CJ and Wilson J at p146.
In the present case, the time when the loss should be determined is when the takeover occurred which should be fixed at 31st December 1987.
It has been accepted that a fall in the market is foreseeable as a matter of common knowledge. However, evidence at the trial establishes as much and that this was also the state of knowledge of the first defendants.
As has been seen, Easton and Hall expressed different opinions as to value of the issued capital of Western United at different times. Easton's valuations are lower than those of Hall and if Easton's opinions are to be preferred, the consequence is a higher award of damages.
Both men were impressive witnesses and there is no reason to prefer one to the other because of a matter of credit.
None of the defendants called any expert evidence on any matter including the valuation of Western United and Kia Ora.
The first defendants rely upon the evidence of Hall. They submit that his evidence should be preferred to that of Easton. They contend that he was more objective than Easton who was closely involved with the plaintiff and its advisers over a long period of time, including before trial. They contend that he was not truly independent and his evidence, where in conflict with that of Hall, should be rejected.
Easton had considerable involvement with the plaintiff's advisers before trial. He acted not only as an expert for the purpose of preparing valuations of Kia Ora and Western United and a critique of the Nelson Wheeler report, but he assisted the liquidator and legal advisers of the plaintiff in various ways in the preparation of the plaintiff's case. He gave advice as to matters which might be pursued in the s541 examinations and in the preparation of an affidavit to be sworn by Newman in the context of his s541 examination. He reviewed Newman's evidence at the examination with the plaintiff's solicitors. He assisted in the preparation of the statement of claim in these proceedings with respect to technical matters within his expertise. He considered some possible defences which the first defendants might raise. The plaintiff's solicitors discussed with him the application of the plaintiff for summary judgment. He assisted the plaintiff's solicitors in preparing and acquiring evidence for trial in the context of advising about the content of the affidavit of Newman.
He gave advice and prepared calculations on some aspects of the plaintiff's contentions about damages which concerned the issue of shares in Kia Ora and the cost of bringing them back and the quantification of the claim for loss of use of money. He received advice from the plaintiff's solicitors as to the meaning of "fair" in the Listing Rule and "fair and reasonable" in the Policy Release and the Nelson Wheeler report. He caused some enquiries to be made about the experience of an expert retained by the first defendants of preparing reports under the Listing Rule. He had many discussions with the plaintiff's solicitors during the course of preparing his reports. He was called as an expert witness in the first Duke case and was involved in a similar manner in the preparation of that case by the plaintiff. Hall had not much involvement with the plaintiff's legal advisers prior to trial and did not assist in the pre-trial preparation to any significant extent.
These criticisms of Easton by the first defendants are not to be understood as an attack upon his personal integrity. It is said that he was engaged to help prepare and run the plaintiff's case and consequently is not truly independent.
I commence consideration of this submission by saying that Easton is a highly qualified expert of considerable experience. I regard him as an excellent witness and he gave not the slightest hint of bias or lack of independence at any stage of his evidence. Indeed, it can safely be said that he gave his evidence, including under cross-examination, without any regard for the consequence to any party of what he was saying. He carefully considered various hypotheses and suggestions and expressed opinions and made concessions appropriately.
At no stage did he exhibit any of the apparent characteristics of lack of independence or bias, such as lack of objectivity, defensiveness, assertiveness, obduracy, stubbornness, barracking, or the making of statements about matters outside his expertise.
This is a very unusual case. There are many issues which may only be resolved with the assistance of true experts. Obviously the plaintiff, and the first defendants for that matter, required assistance of experts at all stages of the proceedings, including deciding whether to sue or defend. The liquidator of the plaintiff and the plaintiff's legal advisers needed someone like Easton to advise at all stages, except perhaps when he was giving evidence-in-chief and certainly not whilst under cross-examination. None of the work undertaken by Easton was inappropriate. It was essential and, I expect, of considerable value.
The question is whether he became contaminated, influenced or biased, so as to affect the reliability of his evidence. It has not been suggested that his evidence was inadmissible due to lack of independence and no objection to his evidence was taken on that account. In some cases the state of lack of independence and the consequence of unreliability may not be readily apparent and may not even be appreciated by the witness. Working "in the team" can have the effect of the witness subsuming the work, attitudes and opinions of others, even unwittingly with an obvious contaminating effect. Valuation cases pose added difficulty because valuation is essentially a matter of personal opinion and judgment. Ranges of value are common as has been seen in the present case. In his text to which I have referred, Lonergan writes at p6:
"Owing to the complexities and inter relationships of the meaning of 'value', the purpose of a valuation and the methodologies used, and the information available, only rarely will two different valuers value the same business, or shares in the same company, at precisely the same amount. This subjective component, although mitigated by professional judgment and experience, can never be eliminated."
Both Easton and Hall accepted that valuation was an art not a science. Perhaps a valuer working closely with the legal advisers may be more susceptible to subtle influences more so that many other types of expert.
Legal advisers who engage an expert to assist in the assessment of information and the preparation and presentation of cases assume a responsibility of ensuring that the expert does remain objective and that his or her opinions are reliable. In an ideal world perhaps two experts could be engaged, one to assist and prepare and the other to give evidence. However, in a case like the present where the valuation of Kia Ora and Western United was in issue until after the close of the plaintiff's case, even though two experts had been retained, it is to be expected that both would be called.
The issue about Easton is to be resolved by the consideration of two matters. First, his qualifications, manner of undertaking his work and giving evidence, the quality of his work and the soundness of his approach and opinions and, secondly, the particular tasks which he undertook by way of advice and assistance in the preparation and presentation of the plaintiff's case. As to the first matter, I have no hesitation in accepting his evidence. It can readily be seen that he is a highly and suitably qualified expert for the task. He has worked extensively in the field over many years. He has been a chartered accountant for about 40 years. He qualified in 1958 at a university in South Africa after five years of training. He was admitted to the Institute of Chartered Accountants in 1959 and subsequently as a Fellow of the Institute in the United Kingdom. He came to Australia in 1974 and worked throughout his professional life extensively in fields of practice relevant to his tasks in the present case and at a senior level. He gave extensive evidence about his background, training and experience. As to the second matter, I do not think any of the tasks undertaken by him were likely to influence him in any inappropriate way. Observation of Easton suggests strongly that he is not the type of person who would be deflected from his task by the influence of others. I find that he remained truly independent through his long association with this matter and there is no reason to reject his evidence for the reasons advanced by the first defendants.
It is necessary to consider which of Easton and Hall to accept. Both witnesses adopted the same approach to valuations with some minor exceptions.
The plaintiff contends that in essence the only issue on the valuation evidence is whether the issued capital of Western United had no value or all, perhaps even a negative value, or whether the revised opinion of Hall should be preferred to that of Easton. Consequently it is not necessary to examine in detail the basis of the various valuations but only sufficiently to determine which should be preferred if the plaintiff's submission of no value is rejected.
That submission necessarily involves taking the basis of Easton's revised valuation, understanding how he has taken into account questionable practices of senior management such as inappropriately charging consulting fees and commissions to associates and the income earned from some back to back loans, and then adapting that approach to other transactions. That is a task which is inappropriate. It involves knowledge about each transaction beyond that disclosed in the loan book of Western United and other documents admitted into evidence. It involves making assumptions about the commercial unreality of the transactions. These are essentially matters for competent valuers after consideration of all relevant evidence. I reject the submission that I should undertake that task or that, if I did, I could do so effectively and reliably. The value of the issued capital of Western United must be determined from the evidence of Easton and Hall.
Both experts adopted the same approach to the value of Western United, namely the capitalisation of future maintainable earnings. Mention has been made of the differences in their valuations at different times. In view of the conclusion which I have reached that the appropriate time to determine the primary loss incurred by Kia Ora is the time of the takeover, I confine my consideration to their respective valuations as at 31st December 1987.
Even though Easton and Hall adopted the same basic approach in reaching their conclusions, there were some differences not only in approach but in judgment. The plaintiff submits that I am to be assisted by both witnesses and that I must reach my own conclusion. Of course, as a matter of principle that is true particularly when both experts are suitably qualified and experienced and are not in error. However, these valuations are different. It is wrong in principle to take the mean of their valuations and adopt it as my conclusion. I must make a choice. I am unable to discern any error in the work of either of them and so it comes down to the matter of their judgment.
I make no criticism of Hall of any nature but I prefer the conclusions of Easton. He was more intimately aware of Western United and Kia Ora. He has greater experience. I was greatly impressed by him and his evidence. I am more inclined to rely on his judgment about the appropriate price earnings multiples and the assessment of maintainable earnings than that of Hall and I do so.
That then leaves a range of $4,649,293 to $6,439,339 as the value of the issued capital of Western United at 31st December 1987. Variation in that value at December 1987 and January and February 1988 when Kia Ora acquired the shares would have been insignificant.
Which of these values should be selected? As both are clearly open, I think fairness dictates that damages should be assessed on the basis of the higher value. I find that at the time of the takeover, the value of the issued capital of Western United was $6,439,339.
The next issue is whether Kia Ora suffered a compensable loss by issuing the 67.9m shares in Kia Ora and allocating them to the Western United shareholders as part of the purchase price. It must be accepted that, but for the breach of contract and negligence of Nelson Wheeler Perth, the shares would not have been issued and allocated to the Western United shareholders. The plaintiff contends that if the principle of restitutio in integrum is to be applied and the plaintiff is to be returned to the position it would have been in but for the breach of duty and negligence of Nelson Wheeler Perth and the breach of fiduciary and statutory duty of the director defendants, damages must be awarded for the issue and allocation of shares to achieve that result.
On the plaintiff's case the true measure of that loss is the value of Kia Ora shares at the relevant time, which, as I have said, I accept as 31st December 1987. According to Easton, the value of the shares at that time was 81 cents. Hall's valuation was 89 cents. The share market price was 45 cents.
Of course, the valuations of Easton and Hall are based upon the number of issued shares before the new issue and allocation to Western United shareholders. At that time the issued capital was 68,063,000 shares. Their share valuations are made at the time immediately before the acquisition of the Western United shares and before the new issue. Once the new issue, 67.9m shares, was made and those shares were allocated, the issued capital of Kia Ora almost exactly doubled in terms of the number of shares which would be of no consequence in terms of value if Kia Ora received comparable value in the transaction. However, as has been seen, it did not. The value of the issued capital of Western United was not $82.6m or $3.22 per share. It was $6,489,339 or about 25 cents per share. Consequently the new share issue by Kia Ora diminished the true value of the shares by nearly fifty per cent although some small adjustment has to be made for the true value of the issued capital of Western United which had been acquired. That adjustment would be almost five cents per share in Kia Ora. On that basis the value of the shares in Kia Ora employed in the takeover transaction was about half of Easton's valuation, together with about five cents, making a total of about 45 cents which is $30.55m. Coincidentally, as has been seen, this value accords with the share market price at the time.
Earlier, in the context of whether Nelson Wheeler Perth owed a duty of care to Kia Ora, I briefly mentioned the argument of the Nelson Wheeler defendants to the consequence of the issue and allocation of new shares. That argument is that the issue and allocation of the shares is not capable of constituting a loss to Kia Ora, only to the shareholders at the time immediately prior to the issue and allocation of the new shares. As they are not parties to this action, no damages may be awarded to them. It is agreed that when a company issues and allocates new shares, it suffers no loss. If the allocation is consideration for the acquisition of property and less than full value is received by the company, the company does not suffer a loss. The only loss is diminution of the value of the issued capital which is a loss suffered by the shareholders. The plaintiff disputes these contentions.
A useful starting point is some basic principles. A company is a corporation which, in the common law sense, is the legal device by which legal rights, powers, privileges, immunities, duties, liabilities and disabilities may be attributed to a fictional entity equated for many purposes to a natural person: Ford and Austin Principles of Corporation Law 7th Ed at p5. Corporations are incorporated pursuant to company statute law. Generally, any cause of action available to natural persons in contract, tort or otherwise is available to a company. For present purposes it is unnecessary to explore the exceptions to that general principle. A company is a legal entity separate from the individual shareholders and like a natural person has legal rights and obligations. A typical commercial company is a company limited by shares. Its members contribute capital and are issued with a share or shares in proportion to their respective contributions. Such a company has a share capital. A no liability company such as Kia Ora must also have a share capital. The authorised capital of a company is the limit up to which subscriptions of share capital can be received. The authorised capital must have been divided into a number of shares of fixed amount, eg $1 each. This value, known as par value, has a number of functions. It marks the upper limit of liability of a shareholder and it provides a measure of the relative interests of the shareholders: see Ford and Austin at pp615-617.
A share has been defined by Farwell J in Borland's Trustee v Steele Bros & Co Ltd [1901] 1 Ch 279 at p288:
"A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with s16 of the Companies Act 1862. The contract contained in the articles of association is one of the original incidents of the share. A share is not a sum of money settled ..., but is an interest measured by a sum of money and made up of various rights contained in the contract, including the right to a sum of money of a more or less amount."
Professor Pennington in (1989) Company Lawyer 140 writes that shares "are a species of intangible personal property" which acquire a collection of rights and obligations relating to an interest in a company of an economic and proprietary character, but not constituting a debt. Mr Oditah, barrister and lecturer in Corporate Finance Law at the University of Oxford, in his article entitled "Takeovers, Share Exchanges and the Meaning of Loss" (1996) 112 LQR 424, expresses the position in similar terms at p426:
"Shares are a bundle of intangible property rights which shareholders receive from the company in return for their contribution of cash or non-cash assets to the company. Shares define and allocate (a) income rights i.e. rights of participation in the company's cashflow, usually in the form of dividend; (b) the incidence of the risk of loss, usually in the form of priority rights in relation to capital; and (c) power of control, principally through voting rights. Shares are classified according to income, capital and control rights. The definition and allocation of these rights is an integral part of shares. By reason of ownership of a share, a shareholder becomes the owner of an intangible property right in a company made up of income, capital and voting rights, all determined by the terms of the issue of the share, the company's articles and memorandum of association, the general law and applicable statutes of the place (i.e. country) of incorporation of the company. Shares are the units into which shareholders' rights of participation in the company's cash flow, management and on a return of capital, are divided. Although shareholding may have a contractual aspect, this is entirely in aid, and as a means, of enforcing the property rights."
In Colonial Bank v Whinney (1885) 30 ChD 261 Fry LJ said at p286:
"What, then, is the character of a share in a company? Is it in its nature a chose in possession, or a chose in action? Such a share is, in my opinion, the right to receive certain benefits from a corporation, and to do certain acts as a member of that corporation; and if those benefits be withheld or those acts be obstructed, the only remedy of the owner of the share is by action."
A share in a company is clearly a chose in action and therefore a species of personal property: see Re VGM Holdings [1942] 1 Ch 235. The chose in action comes into existence when the share is issued and allotted. Title is then given to the allottee: Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd [1981] HCA 4; (1980) 146 CLR 336 per Gibbs J at pp356-357, Atkin J at p434. At p443 Atkin J went on to say:
"It was also submitted that an executory contract was not included in any part of the definition of disposition of property. Executory contracts, generally speaking, and perhaps always, create property in the sense that they create choses in action. When a complete allotment is made in discharge of obligation there is necessarily full consideration because it is in satisfaction of discharge of the existing obligation and it is the counterpart of the right of the subscriber to compel the company to make the complete allotment. Conversely there is a right of the company to compel the subscriber to pay. Such consideration could properly be regarded as passing from company to allottee and vice versa."
Thus far it may be seen that not only does the shareholder have rights and obligations but that rights may be enforced and when appropriate against the company. Conversely, when a company issues shares and allocates them to a new or existing shareholder, it acquires corresponding obligations with which it must comply. Those obligations are to be found in the memorandum and articles of the company, in the relevant statute law and in the rules of common law and equity. They include the obligation to provide information to the shareholders, notices of general meetings, financial statements and directors reports and those sorts of things at one level and to conduct the company through the directors in the interests of the company and not to oppress any section of the shareholders at another level. Of course, directors may well assume these obligations personally by reason of their office but they are nonetheless obligations of the company to the shareholders. The position, in this respect, is stated by the High Court in Ngluri v McCann [1953] HCA 39; (1953) 90 CLR 425 at pp447-448:
"The right to issue new capital is an advantage which belongs to the company. Any attempt by directors or by the company to exercise this right not for the benefit of the company as a whole but so as to benefit the majority to the detriment of the minority could be restrained in a suit brought by the minority against the company and the majority: Cook v Deeks [1916] UKPC 10; (1916) 1 AC 554."
Thus it may be seen that the issuing of shares is a right of Kia Ora for its advantage and, of course, it was used in that way in the present case.
When shares are issued and allocated, it must be for a proper purpose, in the interests of the company as a whole. In circumstances such as the present, the shares are issued and allocated for the purpose of acquiring property of value. If the value of that property equates with the value of the shares allocated, the company has raised additional capital in that way and has obtained value. There is no loss to the existing shareholders because the assets of the company have increased proportionately to the extent of the dilution of their shareholding. Nonetheless, the company has acquired additional obligations of the nature already mentioned. If the company issues and allocates new shares of a particular value and receives less than that value, there is a loss in addition to the loss occasioned by the obligations incurred by the company by reason of the issue and allocation of the new shares. Clearly, the value of the shares has diminished which is a loss to the shareholders including, perhaps, those to whom the new shares were allocated. The question is whether this loss is also a loss to the company.
This very issue was considered by Olsson J in an application for leave to amend in Health & Life Care v Price Waterhouse & Ors (unreported, 7th July 1997, Judg No S6240) and by the Supreme Court of Western Australia in Strategic Minerals Corporation NL v Hendy Rae and Court (1996) 14 ACLC 485 by Scott J at first instance and by the Full Court of that Court at (1997) 15 ACLC 1156. Scott J accepted the proposition that the issue and allotment of new shares to acquire assets does not represent a loss to the company; see p501. He gave brief reasons and appears to have relied upon the decision of the Full Court of the Federal Court in Poseidon Ltd v Adelaide Petroleum NL & Ors [1991] FCA 663; (1991) 105 ALR 25. However, in that case, the Court was concerned with a proposed transaction that did not proceed. The share placement did not occur and consequently there could be no allowance for capital losses and the Court was concerned only with loss of opportunity.
Olsson J in Health & Life Care had to consider much the same arguments as have been put to me in the present case but he did not have the benefit of the decision of the Full Court in Western Australia in Strategic Minerals Corporation. He was concerned with an application to amend to seek damages on this basis and concluded that a company, when issuing new shares and allocating them as part of the purchase price of an asset, suffers no loss with the consequence that the matter was not "fairly arguable" and the position was foreclosed. Consequently he refused the application.
The Full Court of Western Australia took a different view in Strategic Minerals Corporation. It was unnecessary for the Court in that case to resolve the issue because the appellant company which had issued and allocated shares in the acquisition of an asset failed on the question of liability. However, White J, with whom the other members of the Court agreed, said that in the interests of fully answering the appellant's claim, he would deal with the issue briefly. He held that Poseidon Ltd v Adelaide Petroleum was not an authority for the proposition that the issue of unallotted share capital by way of acquisition of assets does not represent a loss to the company. He went on to say at p1190:
"Rather, it is authority for the proposition that where a company has agreed to allot shares for a consideration pursuant to a transaction which does not proceed, the resultant loss to the company by reason of the failure of that transaction is not the capital sum represented by the shares to be allotted but, rather, the loss of the use of the consideration, in other words, the loss of the revenue which might have been derived by the investment of the agreed price. That case is distinguishable on its facts from the one under consideration in this Appeal, where the plaintiff did allot shares for a consideration which, it says, was, in effect, valueless.
Accordingly, I would find in favour of the appellant in relation to the limited contention set out in this ground of appeal."
It may be seen that the Court in that case had no occasion to consider the issue in any detail. Nevertheless, it is obiter dicta which supports the plaintiff's contention in the present case.
Before turning to the various cases cited in argument, it is appropriate to consider the nature of the transaction involving the share issue a little further. Kia Ora proposed to acquire the issued capital of Western United. It had to pay a price for those shares. It would make an offer, at a price authorised by the shareholders of Kia Ora, to each shareholder of Western United. The price could be paid in cash or in some other way or a combination of both. Kia Ora had insufficient cash to pay the price which had been fixed. It could borrow money for that purpose and acquire a liability or it could raise capital by an issue of new shares. If Kia Ora had sufficient cash and paid the consideration in that manner, it would have used its own capital and it could not be suggested that if it received less than full value, it did not suffer a loss. If Kia Ora used money which it had borrowed, it would nevertheless be using its own funds, although having incurred a liability and it could not be suggested that it did not suffer a loss if less than full value was received. If it raised capital by a share issue to its members, or the market generally or to a specific person or persons and employed that capital in the takeover and received less than value, it could not be suggested it did not suffer a loss. The share issue by Western United to Parry Corporation is an example of raising capital from a specific person. That capital is the property of the company.
Kia Ora had to raise the necessary capital to acquire the issued capital of Western United. It had some, but insufficient, cash and so it raised the balance of the capital required by an issue and allocation of new shares to selected persons, namely the Western United shareholders. That was the means of raising the necessary capital so that Kia Ora could complete its bargain with the Western United shareholders which was to pay $3.22 per share and, apparently, a premium. Kia Ora, not its shareholders, had to pay the purchase price, and chose this method with the necessary approval of the shareholders. It makes no difference that Kia Ora chose to raise the necessary capital from one class of persons as opposed to another or the public generally. The Western United shareholders were contributing capital to Kia Ora and in return were being issued with shares in Kia Ora proportionate to their respective contributions. Of course they did not contribute this capital in money but in money's worth but as will be seen that is a matter of no consequence. That money's worth was their shares in Western United, which became an asset, and part of the capital, of Kia Ora. The issue and allocation of the new shares is not the entire transaction. It is no more than the "bundle of intangible property rights ... (received) from the company in return for their contribution of cash or non-cash assets to the company": Mr Oditah at p426.
When the transaction is analysed and correctly understood, it may be seen that in the takeover process Kia Ora was employing its own capital in this way and if it did not receive full value, it suffered a loss, in the same way as a loss would have been incurred if only cash had been paid.
So, it may be seen that in a transaction such as the present, the bidding company suffers a loss in each of three ways, by the incurring of the obligations to the new shareholders, by the loss of the opportunity to issue the same shares again to raise capital and by the loss of the capital raised in that manner described. In my view, the issue is not whether Kia Ora suffered a loss but how that loss should be measured.
It is necessary to see if the cases support or reject these views. As I have said, like the Full Court in Strategic Minerals Corp NL, I do not think Poseidon Ltd v Adelaide Petroleum NL & Ors is a decision on point but the observations of Burchett J on appeal[1991] FCA 663; , (1991) 105 ALR 25, are of assistance. In expressing his agreement with the learned trial Judge, he said at p42:
"The principal point raised in the argument on the cross-appeal was the proposition that Adelaide was deprived of some $4 million of capital which would have been raised pursuant to the proposed Pagini agreement, had it proceeded. His Honour declined to allow this capital sum, taking the view that the loss was a loss of revenue which might have been obtained by the use of the money, and not a loss of the capital. In my opinion, his Honour's approach was right. There was no evidence that the capital sum was irrevocably lost. It remained open to the company to make a share issue. I do not accept that the share price, at some arbitrary date in the future, can be selected in order to enable a calculation to be made of how much less capital could be raised at that date, by an issue of the same number of shares as would have been issued pursuant to the Pagini agreement had it been calculated."
These observations support the view that in circumstances such as in the present case when new shares are issued and allocated, the company raises capital and when that capital is expended in a transaction which proceeds for less than adequate consideration, capital is lost and it is a loss of the company. That is not to say that the company loses capital in every case when new shares are issued and allocated. That was held not to be the case in Lowry v Consolidated African Selection Trust, Limited [1940] AC 648. There the House of Lords was concerned with implications of a share issue to employees of a company for income tax purposes. The company, in showing appreciation of services rendered to it by its staff, allocated to them 6,000 shares at their face value of 5s each. The market value was ú2.3.9. If the shares had been issued in the market, the company would have received a premium of ú1.18.9, making a total of ú11,625. The company claimed that amount as a deduction in computing profits for income tax purposes. It was held that the company had neither transferred money nor money's worth to the staff and therefore there was no deduction. Viscount Caldecote LC, at p657, when considering whether the transaction had occurred for the purposes of its trade noted:
"Its capital was intact after the issue of the shares: not a penny was in fact disbursed or expended. Its trading receipts were not diminished, nor do I think it is a right view of the facts to say that the respondent gave away money's worth to its own pecuniary detriment. The company was entitled to issue its shares at par. It did so, and the company never received, and never elected to receive, anything more than the par value of the shares. Quite apart from any desire to let the employees have a share interest in the company, the directors might have had very good reasons for deciding not to issue shares to the company's employees at a price which could only be justified by an expectation of very high dividends over a long period of time."
I do not understand this observation to be contrary to the views which I have expressed. In Lowry the company did not issue shares to acquire an asset. It was not raising capital in that way.
"If money or money's worth in any form, whether from capital or income, is given to an employee in discharge of an ordinary trading obligation or debt due to him incurred in the course of the trade and is accepted as such, I am quite ready to accept the view that the amount of the debt or liability so discharged will find its way into the profit and loss account on ordinary commercial principles and will pro tanto reduce the profits for the year for income tax purposes. A man's salary with his consent can be paid in meal or malt as well as in money, and that salary is one of the items of expenditure which go to reduce the amount of the profits and gains. If in this case the employees were paying the par value of the shares and also releasing to the company some amounts of salary due to them the case would be very different from what it is. All we really have before us is that the company has chosen to issue 6000 shares at par to the employees and that they have received the benefit of that issue. There is really nothing more. The employees have given up nothing. The company has not lost or parted with any asset."
It will be seen that in circumstances when the shares are issued and allocated in discharge of an ordinary trading obligation, Viscount Maugham acknowledged that the company would made a profit or a loss as the case may be depending upon the circumstances. It was the particular circumstances of Lowry which led to the conclusion that the company had not parted with any asset. It had merely gratuitously rewarded employees by the allocation of new shares. However, unlike the servants in Lowry, the Western United shareholders did give up something. They parted with their shares in Western United, which was personal property of value.
"It is true that unissued shares are not an asset in any sense of the company. What value they have only comes when, and by the fact that, they are issued, just as a deed has no value or indeed existence until it is signed, sealed and delivered, or a negotiable instrument until it is issued. Unissued share capital was described by Lord Davey in Hilder v Dexter [1902] AC 474, 480 as potential capital. The power to issue further capital is only a potentiality. But the fact of issue makes it actual capital, and creates the fasciculus of rights and liabilities between the company and the shareholder which flow from the share when issued."
Lord Wright is not expressing any contrary views. He makes the obvious point that the fact of issuing new shares is making capital in the company but that is in the sense of issued capital which is owned by the allottee. He acknowledges that any capital raised by a new issue is the capital of the company.
Lastly I mention the observation of Lord Romer at p692:
"The directors may, if they think fit, and if they act in good faith, issue the shares at par. In such a case they in effect voluntarily release the power of the company to acquire the premium. The company parts with none of its money; but it is nevertheless the poorer for the release. For not only does the company give up by the release the opportunity of adding to its assets a sum in cash, it also gives up the opportunity of utilizing the possession of the power for the purpose of preventing a diminution of its existing assets. Where a company issues its shares at a premium, the premium is a receipt on capital account. It is not a trading profit and it is not chargeable with income tax. It can, nevertheless, be distributed as dividend among the shareholders, or spent in purchasing stock or machinery, or in any other way that the company thinks fit. But the company may equally well utilize its power of realizing the premium by purchasing (say) stock in trade, or by discharging a liability without any cash passing through its hands at all."
Lord Romer was also in dissent but doubtless this observation is correct. He is acknowledging the loss to the company in the nature of a loss of opportunity.
Osborne v Steel Barrow Co Ltd [1942] 1 All ER 634 is also a case involving income tax. Assets of a company in receivership were acquired by a purchaser who, in turn, assigned them to a company not in existence at the time of the purchase and in return received cash and fully paid shares in the company. The Crown had contended that the shares had cost the company nothing but the Court rejected that contention and held that in computing the price paid by the company for the assets, the shares must be taken at their par value which, for revenue purposes, was relevant to the opening value of stock.
In considering this contention of the Crown, Lord Greene MR said at pp637-638:
"This is a remarkable contention, and it would require conclusive authority before we could accept it. The cases relied on in its support were Inland Revenue Comrs v Blott [1921] 2 AC 171 and Lowry v Consolidated African Selection Trust, Ltd [1940] AC 648, neither of which, in our view, has any bearing on the point. The argument really rests on a misconception as to what happens when a company issues shares credited as fully paid for a consideration other than cash. The primary liability of an allottee of shares is to pay for them in cash; but, when shares are allotted credited as fully paid, this primary liability is satisfied by a consideration other than cash passing from the allottee. A company, therefore, when, in pursuance of such a transaction, it agrees to credit the shares as fully paid, is giving up what it would otherwise have had - namely, the right to call on the allottee for payment of the par value in cash. A company cannot issue ú1,000 nominal worth of shares for stock of the market value of ú500, since shares cannot be issued at a discount. Accordingly, when fully-paid shares are properly issued for a consideration other than cash, the consideration moving from the company must be at the least equal in value to the par value of the shares and must be based on an honest estimate by the directors of the value of the assets acquired."
"In our opinion, what had to be found in the present case was the price paid for the stock. Since this price was cash plus shares, it is necessary in the first instance to ascertain what payment in cash was represented by the issue of the fully-paid shares. In our opinion, on the facts of the present case, it must be taken as a sum of cash equal to the par value of the shares. It would have been illegal for the appellant company to issue the shares at a discount, and there is no ground for suggesting that this was done. Accordingly, we must proceed upon the basis that the various benefits obtained by the appellant company under the agreement of Oct. 15, 1932, were together of a value at least equal to the nominal amount of the shares which it issued to Hood Barrs."
This decision should not be disregarded for present purposes because the Court was dealing with income tax implications of a particular transaction. In my view, it is a decision on point. What is discussed is the nature of the transaction which is not dissimilar to that in the present case. The decision supports the view that upon the issue and allotment of new shares the company is, in reality, raising capital, but the allottee does not have to pay for them in cash. Instead of money, money's worth is paid. As Lord Greene MR said, the liability to contribute to the capital of the company is satisfied by a consideration other than cash passing from the allottee. In the present case the Western United shareholders were giving consideration in the form of Western United shares.
I now turn to the decision of the Full Court of this Court in Gemstone Corporation of Australia Limited v Grasso. Gemstone issued partly paid shares to directors in connection with a public float. The uncalled capital was to be an asset available to the company if required. One of the directors, Grasso, caused his shares to be taken up by a company, Star Corporation, which he controlled and had nominal assets. Grasso did not disclose to Gemstone that Star Corporation was without assets. In due course Star Corporation was unable to meet the call made by Gemstone on the shares. The Court held that Grasso was in breach of fiduciary duty to Gemstone and personally liable to meet the call.
The plaintiff correctly relies upon Gemstone as authority for the proposition that upon the call not being paid, there was a loss to the company. It had not received money to which it was entitled which is the same in principle as not receiving money's worth. In both cases there is a loss to the company, one is measured by money due and the other by money's worth due. Because of the particular circumstances which resulted in Grasso owing fiduciary duties to Gemstone, liability to make the call fell upon him. However, Gemstone is authority for the obvious proposition that when the company issues shares, it does so to raise capital and the amounts due by the allottee are the property of the company. If those amounts are not paid and the full amount of the consideration does not pass, the Company may recover the balance. It matters not if the consideration is money or money's worth.
In the New Zealand case Scott Group Ltd v McFarlane & Ors [1977] NZCA 8; [1978] 1 NZLR 553, a case not dissimilar to the present case, it was accepted that the measure of damages where shares are issued and allotted to acquire assets is the difference between the value of the shares allotted and the value of the property acquired: see Woodhouse J at p577 and Cooke J at pp586-587. Although damages were not awarded for differing reasons, it was not suggested that where such a loss occurred it was not the loss of the company.
I now turn to some American cases. In Hooper v Mountain States Securities Corp (1960) 282 F 2nd 195, an action was brought by a trustee in bankruptcy to recover the loss sustained by a corporation which misled by fraud issued and allotted shares in return for assets said to be valueless. Judge Brown of the United States Court of Appeal Fifth Circuit held that the corporation had sustained a loss which could be the subject of proceedings for recovery. He said at pp202-203:
"To the corporation it had the same economic value as would the proceeds received from a public issue of like shares to acquire property which it derived and which it had been led to believe was valuable. Before the transaction Consolidated had 700,000 shares of stock. After the transaction it no longer had the stock, but it had, or thought it had, the property. If this is not a sale in the strict common law traditional sense, it certainly amounted to an arrangement in which Consolidated 'otherwise dispose[d] of' its stock. ss 3(a) (14), 15 USCA, ss78c(a) (14).
Even in our remote position, we would be blind to all we hear and read about were we to succumb to the artificial contention that the issuance of this stock made the corporation no poorer so that the only persons who suffered were the stockholders for whom the suit cannot be brought by the Trustee. It may be that Cash McCall is a fictional character, but his story is that of the postwar business community in which from the ubiquitous quest for capital gains, the larger swallows up the small to become big only to become shortly swallowed up by the biggest. In this process, the thing of value transferred in exchange for assets or the capital stock of the enterprise being acquired is the capital stock of the acquiring corporation. Considering the purpose of this legislation, it would be unrealistic to say that a corporation having the capacity to acquire $700,000 worth of assets for its 700,000 shares of stock has suffered no loss if what it gave up was $700,000 but what it got was zero. If - as we very much doubt - accountants would support any such contention as a consequence of the esoteric mysteries of the double entry system, Liston Zander Credit Co v United States 5 Cir[1960] USCA5 130; , 1960, 276 F 2d 417, 422, the law with its eye on reality would have to part company with such purists."
"For the reasons we have set forth in so much detail, Consolidated as a seller sustained a substantial loss measure at least in terms of properties which could have been acquired by the corporation through the issuance of 700,000 shares of its own stock. Such a claim is not one personal to the bankrupt excluded either under express terms of the bankruptcy statute or by general considerations of the law. In any event, since a corporate bankrupt is an inanimate entity, there is respectable authority that an action based on fraud as to a corporation plaintiff is as a matter of law an injury to property. 4 Collier, Bankruptcy, ss 70:28(6); see also Empire Tractor Corp v Time, Inc, DCEDPa, 1950, 91 Fsupp 311; Thomason v Miller, Tex.Civ.App., 1928, 4 SW 2d 668 (writ dism'd). The objection of the absence of any 'property' to be transferred fares no better as it is established that a Trustee may enforce liability under state statutes where watered stock has been issued even though no asset was transferred. In re Pipe Line Oil Co, 6 Cir, 1923, 289 F 698; 4 Collier on Bankruptcy, ss 70:29.
By reason of the alleged fraud Consolidated parted with that which on its current value could have enabled the corporation to acquire property of substantial value. Instead of getting like value by the purported transfers from Mid-Atlantic, it got nothing. This action seeks damages, accounting for profits and other relief to compensate for that loss sustained by the corporation. That it accrued from fraud makes it no less a loss thought of in terms of property. As to such corporate loss, the Trustee is the sole representative."
It will be seen that in this case a loss to the company was not doubted. The measure of that loss was seen to be the amount which could have been acquired by an issue of the stock to the market which is, of course, the raising of capital and is another way of describing the loss of opportunity to which I have referred.
The same approach was taken in Pettit v American Stock Exchange 217 F Supp 21 (1963) 21 by Palmieri J of the United States District Court in New York. In that case a company issued shares upon being defrauded in securities transactions. Palmieri J approved the passage of the judgment of Judge Brown in Hooper to which I have referred.
In Frankel v Slotkin [1993] USCA2 113; 984 F 2d 1328 (1993), the same issue was considered by the United States Court of Appeals Second Circuit in an action brought by minority shareholders. In this case a corporation had been fraudulently induced into issuing shares and obtained property of less than comparable value. In the District Court below it was held that it was the minority shareholders "who conceivably were injured by the dilution of their interests". The Appeals Court rejected that contention and adopted the view expressed in Hooper. Judge Heaney, who gave the judgment of the Court, said at p6:
"... a corporation is injured when it is fraudulently induced into issuing its own securities for less than their fair value because of misappropriation of inside information. Though a corporation's minority shareholders are also injured by dilution of their interests in the corporation, the corporation itself as seller of its own securities suffers an independent injury sufficient to support an action for damages, derivative or otherwise, under s10(b) and Rule 10b-5."
The proceedings in each of these three cases were brought pursuant to s10(b) of the Securities Exchange Act 1934 which is Federal Legislation permitting relief to corporations in those types of circumstances. However, the principle expressed in these cases does not turn on any provision in that legislation.
I return to the decision of Olsson J in Health & Life Care. He regarded the views of Mr Oditah in his article already mentioned as providing the complete answer to the contention that a company suffers a loss when it issues and allocates shares in the acquisition of property which is of lesser value than that of the shares. Consequently, it is necessary to consider the article in some detail. Due respect must be given to Mr Oditah's views but I do not think he recognises the crucial part of the transaction. His focus seems to be upon the allocation of the shares and the consequence to the company of that allocation and not the purpose of the issue and allocation of the shares and the whole transaction. In his carefully reasoned consideration of the question, Mr Oditah resolved the issue by concluding that the bidding company which finances the takeover by the exchange of its shares for those of the target company does not suffer a loss if the acquired shares are less valuable than purchase price. His reasoning is that shares are not an asset of the company. When shares are issued to raise capital for the company or to acquire an asset, that capital or asset is an asset of the company not the shareholders, but the shares which are issued are the property of the shareholders or prospective shareholders who receive them. He writes at p428:
"When, therefore, a bidder acquires shares of a target and in return issues its own shares to the target's shareholders, it is in effect acquiring a bundle of intangible property rights. This bundle of rights consists of the right to income or cash flow produced by the target's assets, a right to capital, if and when there is a return of capital, and a right to exercise control over the target through the exercise of voting rights. In return, the target's shareholders acquire contingent rights to income and capital in the bidder and the right to vote. These rights are not acquired at the expense of the bidder, the bidder has never been entitled to income, capital and voting rights in itself. Nor are they liabilities: the bidder is not a debtor to share capital; it is generally under no enforceable obligation to repay to all its shareholders the capital contributed, in the way in which it may owe enforceable interest and repayment obligation to its bondholders. The income and capital rights of the existing and new (i.e. the target's) shareholders are contingent and are not enforceable entitlements unless and until the contingencies to which they are subject have been satisfied. To put the point another way, what the bidder acquires when it allots shares in itself to the target's shareholders in return for their shares in the target is a contingent entitlement to income and capital from the target and, depending on the circumstances, an immediate right to control the target. In return, the target's shareholders acquire a contingent entitlement to income and capital from the bidder and, depending upon the circumstances, a proportionate right of control of the bidder. The rights acquired by the target's shareholders are not acquired at the expense of the bidder."
This analysis overlooks what the company is doing when it issues the shares. As I have said, it is raising capital. It matters not that it receives moneys worth of some type of property. In circumstances such as the present, it is raising capital for the specific purpose of the takeover and is raising that capital from a limited group of persons, namely the Western United shareholders. The allocation of the shares is the property, the chose in action, which the Western United shareholders receive in return for the capital which they have contributed in that way. Also the company upon the allocation of the shares assumed the obligations which have been mentioned and in doing so incurs a loss.
In his article Mr Oditah considers the question of loss to the company occasioned by diminution of post takeover net assets, by impairment of future share issuing capability and the loss of opportunity of selling the shares for value to others. He concludes that the diminution in the net assets of the company should not be attributed to the result of the adviser's negligence. It is unnecessary to set out his reasoning as it is appropriately concerned with issues of causation but the loss of opportunity type of loss is accepted. As to this type of loss, Mr Oditah writes at p437:
"........ unissued shares are not an asset of any company. However, it may be argued that issued shares are assets and that it is allotment and issue which gives value to the shares which, prior to the allotment and issue, they lacked. To the extent that this value is not received, the company allotting and issuing the shares arguably suffers loss. The question, however, is whether this loss is the cash value of the shares as at the date of their allotment. One difficulty with using the cash value to measure the bidder's loss is that it has parted with no cash. Giving it the cash value would merely fulfil its expectation regarding the value of the target shares - a measure of loss allowable only where the adviser gave the bidder a warranty of the value of the target's shares. Where no such warranty was given, it is impermissible to give the bidder the cash value, for that would give it expectation damages to which it is not entitled. Another is that the income, capital and control rights which are given to the target's shareholders when the shares are allotted did not belong to the bidder prior to the allotment. The bidder's capacity to issue the shares is not an asset in any meaningful sense. In issuing shares, therefore, a bidder does not suffer substantial pecuniary loss in the same way that a shareholder does when he sells his shares at an undervalue because of a negligent valuation."
It may be seen that at this stage Mr Oditah has approached this matter from the point of view of the measure of the loss not whether a loss has been sustained. He did not consider the American cases to which I have referred.
The observations of Mr Oditah do not persuade me that in circumstances such as in the present case, the company issuing and allocating new shares in a transaction where it receives less than full value does not suffer a loss. The cases referred to support the contention that such a loss is sustained. As has been mentioned, the question is how to measure that loss.
A fundamental principal applicable to the restitutio in integrum approach is expressed by Mason CJ and Dawson J in The Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 at p80:
"The general rule at common law, as stated by Parke B in Robinson v Harman ((1848) [1848] EngR 135; 1 Ex 850 at p855 [1848] EngR 135; [154 ER 363, at p365]) is 'that where a party sustains a loss by reason of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed'. This statement of principle has been accepted and applied in Australia (Western v Ellis [1972] HCA 43; (1972) 127 CLR 454, at p471, per Gibbs J)."
It applies equally to loss occasioned in tort: Walker v Hungerfords per King CJ, op cit.
How then is this loss to be measured in terms of money. The share issue occurred and cannot be undone. The shares could not be purchased by Kia Ora even if the shareholders at the time were now known.
The correct approach is to establish the value of shares at the time of the takeover transactions. It is not to the point that Kia Ora could have issued other shares at that time. It is not correct to say that for that reason the shares actually issued and allocated had no value or only nominal value.
The principle to be applied is expressed by the House of Lords in Banco de Portugal v Waterlow & Sons Limited [1932] UKHL 1; [1932] AC 452. A summary of the facts of the case sufficient for present purposes may be taken from the headnote of the case.
A firm of printers, Waterlow, employed by the Bank of Portugal to print a series of bank notes known as Vasco da Gama 500 escudo notes delivered to the Bank 600,000 notes which were put into circulation in Portugal. Subsequently, in breach of their contract of employment, the printers unwittingly delivered to M., the head of a band of criminals, 580,000 notes of the same type, printed from the original plates or from plates made from the same die, in the belief that he had the authority of the Bank. He and his associates introduced these false notes into Portugal and put a large number of them into circulation. The Bank on discovering that unauthorized notes were in circulation issued notices withdrawing the whole of this issue of Vasco da Gama notes and undertook, within a limited time, to exchange all notes of this type presented to the Bank for other notes. The Bank had an exclusive licence to issue bank notes as legal tender in Portugal, but the amount of the notes to be issued was controlled by law. At all material times the currency was inconvertible.
The Bank brought an action against the printers for breach of contract. They maintained that the loss suffered by the Bank was due to its own voluntary action in paying the unauthorized rates and that the loss to the Bank was limited to the cost of printing and paper in regard to the new issue. It was held that the loss arose naturally from the breach of contract and by the majority that the proper measure of damages was the exchange value expressed in sterling of the genuine currency given in exchange for the spurious rates together with the cost of printing the genuine notes withdrawn.
The majority held that the true measure of the loss of the Bank was the face value of the new notes which it had issued, not merely the cost of printing new notes. Viscount Sankey LC said at p478:
"It is not possible to say that in the second case the Bank has suffered no damage because it could print and issue a third 500 escudos note should it so desire to do. For that note it could have obtained value. In truth it has lost the face value of the second note by reason of the fact that it has only got a worthless note in exchange.
"If a person is wrongfully induced to part with a valuable thing, whether it be goods or choses in action, his measure of damages is the value of the thing at the time he parted with it. The cost of replacement does not enter into the measure of damages at all. If a man is fraudulently induced to part with 500 standards of timber he recovers the value at the time; it is quite immaterial that he could have replaced the timber - say, from the Russian market - at a small portion of the value. If he manufactures for 1d. articles which can sell for 6d., the measure of damages against the wrongdoer is 6d., not 1d. So if he was by fraud induced to promise to deliver 500 of the 6d. articles so that the contract could be enforced by an innocent holder of the contract, it appears to me that on well established authority the damages would be 12l. 10s., not 2l. 1s. 8d. This means that, whether he parts with goods or parts with an obligation, the measure of damages is the market value of what he parts with, which means what it will exchange for; and this necessarily means in the case of an obligation expressed in currency of the country the face value of the obligation. If he incurs an obligation to pay pounds sterling, you do not inquire at what cost he will acquire the pounds sterling necessary to fulfil the obligation; he may get them by getting some one to produce an article at much less cost which he can sell for the equivalent sterling; he may get them from a benevolent uncle or from some one who for a small premium has undertaken to make good his loss. Whatever the liability incurred, the measure of damages is market value, which in the case of an obligation to pay currency is face value.
See also Lord MacMillan at p511, who was the other member of the majority.
Mr Oditah acknowledges that his thesis confronts the decision in Banco de Portugal. He rationalises the decision of the majority in Banco de Portugal and contends that it should not be taken to govern the assessment of loss in other areas, "in particular, the loss which a bidder suffers when it exchanges its own shares for shares in a target company", p439. Banco de Portugal establishes the principle which has been mentioned, namely that the measure of damages is the value of the property at the time the relevant person parts with it, not the cost of replacement. In my view that principle is appropriate in the present case. The correct measure of damages depends upon the circumstances and the type of loss suffered. In the present case the principle expressed by Lord Atkin in Banco de Portugal is appropriate; the loss is the value of Kia Ora shares at the time of the allocation, not the par value or the replacement value.
Unlike Olsson J in Health & Life Care, I do not accept that Mr Oditah provides the answer to the contention that the plaintiff suffered a loss and consequently, with regret, I am unable to follow his decision in that case.
In my view, Kia Ora did suffer a loss by the issue and allocation of its shares in that takeover of Western United and that loss is to be measured by having regard to their value at the time they were allocated, namely $30.55m, representing 45 cents per share.
I have not found it necessary to consider the argument of the plaintiff that the position is similar to the approach of the courts with respect to the oppression of minority shareholders, namely that the oppressor is required to buy their shares at a fair price which may be different from the share market price on the par value.
The plaintiff claims that in accordance with the principle of restitutio in integrum, the amount of damages must necessarily involve an assessment of the loss sustained by Kia Ora in consequence of loss of use of money and other assets by reason of paying excessive consideration in the takeover of Western United. It is beyond question that expenses incurred and opportunity costs arising from money being paid away or withheld as a result of breach of contract or negligence are pecuniary losses and may be compensated by an award of damages: Hungerfords v Walker. In view of the nature and extent of the claim of the plaintiff under this head of damages, it is necessary to consider the rationale of such a claim and the measure of the loss. In Hungerfords v Walker Mason CJ and Wilson J, in their joint judgment, expressed the position thus at p142:
"If a plaintiff sustains loss or damage in relation to money which he has paid out or forgone, why is he not entitled to recover damages for loss of the use of money when the loss or damage sustained was reasonably foreseeable as liable to result from the relevant breach of contract or tort? After all, that is the fundamental rule governing the recovery of damages, according to the first limb in Hadley v Baxendale Ltd (see Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 at p539) and, subject to proximity, in negligence. The object of the second limb in Hadley v Baxendale was to include loss arising from special circumstances of which the defendant had actual knowledge when that loss does not fall within the first limb because it does not arise from 'the ordinary course of things' of which the defendant has imputed knowledge: see Victoria Laundry. To allow a plaintiff to recover special, but not general, damages, is illogical, subverts the second limb in Hadley v Baxendale from its intended purpose and introduces a new element into the general measure of damages for negligence."
They mentioned the notion of a policy which encouraged recovery of expenses actually incurred and discouraged or denied recovery of opportunity cost, which they rejected. They went on to say, at p143:
"Indeed, such a policy would be at odds with the fundamental principle that a plaintiff is entitled to restitutio in integrum. According to that principle, the plaintiff is entitled to full compensation for the loss which he sustains in consequence of the defendant's wrong, subject to the rules as to remoteness of damage and to the plaintiff's duty to mitigate his loss. In principle he should be awarded the compensation which would restore him to the position he would have been in but for the defendant's breach of contract or negligence. Judged from a commercial viewpoint, the plaintiff sustains an economic loss if his damages are not paid promptly, just as he sustains such a loss when his debt is not paid on the due date. The loss may arise in the form of the investment cost of being deprived of money which could have been invested at interest or used to reduce an existing indebtedness. Or the loss may arise in the form of the borrowing cost, i.e., interest payable on borrowed money or interest foregone because an existing investment is realized or reduced."
"The cost of borrowing money to replace money paid away or withheld, in consequence of the defendant's breach of contract or negligence, is directly related to the wrong and is not too remote in the sense in which the common law regarded the loss attributable to late payment of damages as being too remote. We reach this conclusion more readily, knowing that legal and economic thinking about the remoteness of financial and economic loss have developed markedly in recent times. Likewise, opportunity cost should not be considered as being too remote when money is paid away or withheld.
Once it is accepted that the cost of borrowing money to replace money paid away or withheld is not too remote, it is pointless to insist on a distinction between the award of damages for loss of the use of money in the case of a liquidated claim and the award of such interest in an unliquidated claim. The award of damages in accordance with Hadley v Baxendale is unrelated to, and free from, any requirement that there is, or should be, any 'wrongful' withholding of money, be it a debt or damages."
Their Honours concluded that an appropriate measure of the loss is compound interest as simple interest would not reflect accurately the extent of the loss. Brennan and Deane JJ, in brief reasons for judgment, expressed agreement with the reasons and conclusions of Mason CJ and Wilson J; see p152.
These are the principles which were applied upon the appeal in that case to the Full Court: Walker v Hungerfords per King CJ at p96ff with whom the other members of the Court agreed.
However, it is plain from these decisions that an award of damages for loss of use of money or some other opportunity does not follow as a matter of course even if foreseeable. As can be seen from the consideration of the facts found in Walker v Hungerfords, necessary circumstances must exist and be established by the evidence. It is not permissible to speculate in the absence of evidence: see also Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 at pp363-364; Pooraka Holdings Pty Ltd v Participation Nominees Pty Ltd & Ors (1991) 58 SASR 184 at p196 and pp211-212.
To justify an award it must be established how the money or assets would have been used if the payment away or detriment had not occurred so that the assessment can be made. The burden of proof is upon the plaintiff: Pooraka Holdings v Participation Nominees per King CJ at p196. In this respect the history of Kia Ora and Western United and the events of 1987 and 1988 are of importance.
It will be remembered that up until the sale of the Marvel Loch mine, Kia Ora operated a gold mine and made speculative investments. It paid only modest, although increasing, dividends and there was a steady increase in the value of net tangible assets but the fundamental nature of the company did not change. Any cash reserves were channelled into Western United. Historically, Kia Ora had entered into a number of questionable transactions which benefited directors and, in particular, Harold Abbott and Schneider-Paas at the expense of the company. The transactions involving Kia Pacific and Mineral Estates, Aurex and the "Puzzle Prospect", Ogram, Kal Assay, Western Drilling and Rotair are all examples of these benefits. The tenement transactions in early 1987 and the Autocure transaction are examples of the management style and purpose of Kia Ora. Decisions were made in the interests of the few at the centre of things, rather than in the interests of the company and all of the shareholders and to advance the prosperity of the company. Western United was a company of modest achievements heavily reliant upon the cash reserves of Kia Ora. The merchant bank was of small proportions and very modest success without Kia Ora and its associates.
The evidence also discloses what Kia Ora did with the proceeds of the sale of the first half of the Marvel Loch mine, at least initially and in part. In the period from December 1986 to February 1987 the deposits of cash by Kia Ora in the merchant bank varied from a low of $721,047 to a high of $1,039,000. Kia Ora deposited the proceeds of the sale of the first half of the mine, or most of them with Western United until needed in the operation of the mine and continued to invest its cash reserves with the merchant bank. By the end of August 1987 those reserves had reduced to about $10.4m, and to about $8.5m in September 1987. By 31st December 1987 the deposits amounted to about $13.5m even after the injection of cash from the sale of the second half of the mine. In 1988 Kia Ora continued to support the merchant bank and Western United and its subsidiaries financially. Nevertheless, Western United fell on hard times and was not financially viable without the assistance from Kia Ora and even then barely so. The cash available to Kia Ora was largely disbursed in this way. As has been seen, the takeover of Western United by Kia Ora was a means of transferring a substantial amount of cash of Kia Ora into the hands of those controlling Kia Ora and their associates. It may be seen that motives of management of Kia Ora were questionable and, at times, there was every reason to doubt its competence. Finally Kia Ora entered into the reverse takeover transaction with the Duke Group which brought to an end in May 1988 its previous style and purpose. According to Easton, the financial position of Kia Ora was sound before the reverse takeover despite the losses sustained in the takeover of Western United. The reverse takeover was a financial disaster for Kia Ora. Clearly, it was not the product of sound management. It is reasonable to conclude that the reverse takeover or something like it would have occurred in any event.
Those matters are but a brief and somewhat inadequate summary of the history and practices of Kia Ora and Western United which are related in the early part of these reasons for judgment, but is sufficient for present purposes.
What then may be safely found would have happened if the takeover of Western United had not occurred? The past history of the two companies suggests that Western United and its subsidiaries would have continued to operate as before but in the difficult climate following the share market crash, and received financial support to a substantial extent from Kia Ora. Kia Ora would not have made wise and successful investment of the proceeds from the sale of the Marvel Loch mine or its other assets. It would have remained as a speculative investor and eventually its cash reserves would have been dissipated.
The plaintiff submits that in reaching conclusions about what would have happened if Kia Ora had not parted with money in the takeover of Western United, sound management of the company should be assumed. I do not think that is so. These judgments should not be made on the basis of fraudulent conduct on the part of those controlling the company, but it is unrealistic to inject into Kia Ora a standard and style of management which it had never previously experienced. Leaving aside breaches of fiduciary duty and fraud, assessments must be made on the basis that Kia Ora would have continued as a speculative company with an entrepreneurial and risky style. Management would have continued to operate as it had in the past.
Having reached that conclusion, it is not possible to find on the evidence that there would have been a prudent investment of Kia Ora's cash had the takeover not occurred. However, in the short term, it is probable that but for the takeover Kia Ora would have invested the proceeds of the sale of the second half of the Marvel Loch mine, initially on deposit with the merchant bank of Western United at the same rate of interest as it was receiving on other deposits with that bank at the time. Consequently the cash component of the takeover price would have been used in that manner. That investment would have continued until it was dissipated by propping up Western United and its subsidiary and in the reserve takeover or in similar speculative ventures.
When Kia Ora invested money with Western United after 31st December 1987, it received an interest rate of 10.25 percent in January, February and March 1988 and the following rates thereafter; 10.75 percent in April, 11.25 percent in May and 11.5 percent in June 1988. For these last three months the average interest rate was 11.2 percent. The total amount of cash paid out by Kia Ora in consequence of the takeover was $26,178,135.81. It is likely that this amount would have been invested with the merchant bank at those rates until about the end of the financial year. The plaintiff is entitled to compound interest on this sum for a period of six months at three monthly rests at the interest rates of 10.25 percent and 11.2 percent respectively. The end result is an amount of $1,303,802.
I have not overlooked the contentions of the plaintiff that higher rates of interest should apply but the simple answer is that in the present case the actual investment rates paid to, and accepted by, Kia Ora are known and it is highly likely that such rates would have been employed in any further investment. The position is not dissimilar to that in Hungerfords v Walker where it could be said with some certainty the rate of interest which would have been saved if the Walkers had not been deprived of their money.
I turn now to the damages to be awarded for that part of the purchase price paid by the share issue. The plaintiff claims that compound interest should also be awarded on this amount and from the period from 31st December 1987 until the present time. It is suggested that by adopting that approach Kia Ora would be adequately compensated for the opportunities which it lost by reason of having issued the shares for the purpose of the takeover of Western United. I do not agree for several reasons.
There is no evidence to suggest that Kia Ora would, or even might, have issued the shares otherwise than for the takeover of Western United. It is very unlikely that it would have done so. But for the takeover, it would have had substantial cash reserves, in excess of $40m, and it is hardly likely that it would have seen the need for a new share issue to raise capital. Furthermore, after the resolution of the shareholders in general meeting on 30th November 1987, it had authorised capital of 250m shares of $1.00 each and issued capital of 67,693,130 shares. Evidence was led from Easton as to investment opportunities for investors after the share market crash when valuable securities were available at prices well below their value. That evidence may be accepted provided it is acknowledged that there was considerable nervousness in the market and caution among investors. If Kia Ora was minded to take advantage of these investments, it had some considerable cash but also the capacity to issue new shares even after the takeover. The fact that it did not take advantage of these opportunities strongly suggests that it would not have done so if the takeover did not proceed. Also, to allow damages for this reason would result in double dipping. By making an award for the loss sustained by Kia Ora for not receiving value when allotting the shares necessarily redresses that loss with the consequence that there has, notionally, not been any loss.
One further matter on damages needs to be addressed. As damages of this nature are to be awarded for loss of use of the money which Kia Ora expended in the takeover but not for the new shares issued and allotted as part of the purchase price, the value received by Kia Ora in the takeover must be brought to account. It would be wrong to bring it to account only with respect to one type of consideration, money or shares. It must be brought to account with respect to both. As only the cash component is to attract compound interest, the effect of the value received must be brought to account proportionately between the two. The proportion of the value of Western United to be attributed to the cash paid by Kia Ora is about 46 percent. Consequently the damages measured by compound interest must be reduced to $599,748.92 which I round off at $600,000.
The plaintiff's damages are assessed at $50,393,797 which is calculated as follows:
Interest must be included in the judgment unless good cause is shown to the contrary: s30c of the Supreme court Act 1935.
The first defendants contend that there should be no award of interest for the same reason that there should be no damages for loss of use of money. In the alternative, it is submitted that the period of interest should be confined to the period up until the reverse takeover.
I do not think that approach is correct. Damages under the Walker v Hungerford's principle is for loss of use of money or assets or the loss of use of opportunity by reason of being deprived of the use of money or assets. It is a head of damage. Interest pursuant to s30c is to compensate a person for being kept out of the damages to which he or she is entitled: Batchelor v Burke [1981] HCA 30; (1981) 35 ALR 15 at p19; Wheeler v Page (1982) 31 SASR 1; MBP (SA) Pty Ltd v Gogic [1991] HCA 3; (1991) 171 CLR 657. As Mason CJ and Wilson J said in Hungerfords v Walker at p147:
"The section is not intended to meet a comprehensive and exclusive code governing the award of interest. It is a provision intended to provide a plaintiff with some protection against the late payment of damages. The section does not attempt to regulate the measure of compensation to be awarded for a specific head of loss. The provisions of s30c(4)(b) and (e) expressly recognise that interest may be recoverable at common law quite apart from the statute."
Their Honours were, of course, referring to the South Australian legislation. The difference was succinctly explained by Lord Denning in Jefford v Gee [1970] EWCA Civ 8; [1970] 1 All ER 1202 at p1208:
"Interest should not be awarded as compensation for damage done. It should only be awarded to a plaintiff for being kept out of money which ought to have been paid to him."
See also Sager v Morten and Morrison (1972) 5 SASR 143.
It is immaterial that Kia Ora was taken over by the Duke Group or that the company became insolvent. In accordance with my findings and conclusions, Kia Ora was entitled to damages including under the Walker v Hungerfords principle, albeit for a limited time, due to the conduct of the defendants. Those damages are for past economic loss entirely and all of the loss had been incurred by the end of the 1988 financial year. They are payable regardless of the financial position of the plaintiff then at the time of the appointment of the liquidator or now. There must be no overlap between damages under the Walker v Hungerfords principle and interest payable pursuant to s30c.
From when should interest run? The section was amended in 1993 and came into operation on 28th October 1993. Section 30c(2) of the previous legislation provided:
(a) shall be calculated at such rate of interest as may be fixed by the court;
from the date of the commencement of the proceedings to the date of the judgment;
(i) where the judgment is given upon an unliquidated claim -
(ii) where the judgment is given upon a liquidated claim - from the date upon which the liability to pay the amount of the claim fell due to the date of the judgment,
or in respect of such other period as may be fixed by the court;
(c) shall be payable in respect of the whole or any part of the amount for which judgment is given in accordance with the determination of the court."
It may be seen that with respect to unliquidated claims, interest was to be calculated from the date of the commencement of the proceedings although the Court had the power in the exercise of discretion to award interest from an earlier date.
King CJ in Wheeler v Page discussed the relevant principles under this section at pp4-5:
"The first and second questions relate to period. The prima facie period provided in the section is from the issue of the writ until the date of judgment but there is a discretion to fix some other period. In Fire and All Risks Insurance Co Ltd v Callinan [1978] HCA 31; (1978) 21 ALR 375, at p377, the High Court said that 'a proper exercise of discretion must necessarily involve the paying of due regard to the time of manifestation and to the duration of the various detriments in question'. Logically interest should run during the whole of the period for which a particular detriment is suffered. However, although it has never been decided that the section precludes the fixing of a period commencing at a date earlier than the issue of the writ, the intention is clear that in the generality of cases the commencing date of the period should be the date of the commencement of the action. If interest is allowed on the whole of the pre-trial loss for a period beginning at the date of the issue of the writ, the effect is that the plaintiff is not fully compensated for being kept out of that part of the damages which relates to detriments incurred before the issue of the writ, but is over-compensated in respect of the detriments occurring between the issue of the writ and judgment. Fairness requires that the discretion be exercised in a way which takes that into account. If the writ is issued soon after the injury is sustained or if for some other reason only a minor part of the pre-trial loss is sustained before the issue of the writ, it may be necessary to fix a sum by way of or in lieu of interest on the basis of a reduced period. In these circumstances judges sometimes calculate interest on the pre-writ loss for the whole period and interest on the post-writ loss for a reduced period. If, however, a substantial part of the pre-trial loss is sustained before the issue of the writ, fairness may require that interest be awarded on the whole of the pre-trial loss for the whole period between the commencement of the proceedings and judgement, the under-compensation in respect of the pre-writ loss cancelling out the over-compensation in respect of the post-writ loss."
In consequence of the 1993 amendment, the section now provides:
"2(a) The interest shall be at a rate calculated by the court; and
(b) will be calculated in respect of a period fixed by the court (which must, however, in the case of a judgment given on a liquidated claim, be the period running from the liability to pay the amount of the claim fall due to the date of judgment unless the court otherwise determines); and
(c) payable in accordance with the courts' determination, in respect of the whole on the part of the amount for which judgment is given."
It may be seen that the provision of the date of commencement of the proceedings as the starting date has been removed. His Honour Judge Lunn of the District Court of South Australia held in Franks v Smith & Leaney (1993) 173 LSJS 383, in the context of a similar amendment to a like provision in s39(2)(b) of the District Court Act, that the operation of the amended provision is retrospective, relying upon Sager v Morten & Morrison; Turley v Saffin (1975) 10 SASR 463 and Foyster v Gayrisk (No 2) (1984) WAR 91. Those cases support the conclusion expressed by Judge Lunn and I accept that the interest on past economic loss may be awarded from a date earlier than the commencement of the proceedings. The position is now left entirely to the discretion of the Court.
Unlike the pre-judgment losses considered in Wheeler v Page, some of which occurred after the commencement of the proceedings, all of the losses incurred by Kia Ora occurred before the commencement of proceedings. As King CJ observed in Wheeler v Page, "logically interest should run during the whole period of the detriment". It appears that Wells and Jacobs JJ did not disagree with that observation.
The commencement date of the period during which interest is to be calculated is of significance in the present proceedings as they were commenced on 19th August 1992. I am satisfied that there has been no delay in the prosecution of the proceedings by the plaintiff since that date which should reduce an award of interest. As has been seen, the plaintiff was placed in liquidation on 11th July 1989. The proceedings were not instituted until a little over three years later. The evidence discloses that during that time the plaintiffs commenced and prosecuted the proceedings against Arthur Young with respect to the reverse takeover and no doubt there was some time occupied in the investigation, collection of evidence and preparation of pleadings before this action was commenced. The investigations included s541 examinations of various persons including Pilmer and Newman. Otherwise there is no evidence to explain the delay in the commencement of the proceedings after the liquidator was appointed. It seems clear that those advising the liquidator decided to stand this matter aside until the case against Arthur Young was concluded. There is no reason to criticise the liquidator for taking that course. The case against Arthur Young was also very complex and occupied some eighteen months of hearing time.
The plaintiff contends that I should exercise my discretion and award interest from the date of the loss being suffered, ie well before the commencement of the proceedings.
If that is the correct approach, no interest could be awarded with respect to the loss occasioned by the cash paid by Kia Ora prior to 30th June 1988 because of the award of damages for loss of use of money. Strictly speaking, that is not so with respect to the component of the award regarding the issue and allocation of shares because no damages under the Hungerfords v Walker principle have been awarded for that loss. There can only be one period in respect of which interest is awarded and only one award. If the approach suggested by the plaintiff is correct, I do not think it is unfair, in all the circumstances, to fix the commencement date at 1st July 1988. Under s30c only one rate of interest can be fixed. During and since 1988 there has been a wide fluctuation in interest rates. An award of interest under the section seldom accurately reflects what interest or money a plaintiff would have received had damages been paid promptly. Usually, it is at best an estimate. In fixing one period, I think a reasonable estimate will be achieved if the period commences on 1st July 1988, assuming the contention of the plaintiff is correct.
The Nelson Wheeler defendants contend that if interest is to be awarded, the commencement date should be when these proceedings were commenced.
Before resolving that issue, I turn to the rate or rates of interest to be applied. The rate of interest applicable for economic loss is the prevailing market rates. During the period in respect of which interest is to be awarded, this rate has varied enormously. In Wheeler v Page, King CJ at pp7-8, said that the rate of interest for past economic loss should approximate the prevailing market rate. The average of the money market rates during the second half of 1988 was about 13 percent. In the succeeding years that average was about 17 percent in 1989, about 15 percent in 1990, about 10.5 percent in 1991, about 6.5 percent in 1992, about 5.15 percent in 1993, about 5.4 percent in 1994. about 7.5 percent in 1995, about 7.2 percent in 1996 and about 6.0 percent in 1997. There were very high rates for only two years or so and lower rates for about three years.
If the interest is to be allowed over the period from 1st July 1988, an appropriate rate would be 9 percent. If interest is only to be allowed since the commencement of the proceedings, an appropriate rate is 6 percent. The two calculations rounded off are $43,470,000 for the longer period and $16,380,000 for the shorter period.
I see no reason why the plaintiff should not have interest over the longer period. As has been mentioned, the total detriment occurred at much the same time and before 30th June 1988. The plaintiff has been kept out of all of its damages since that time. That, in itself, is sufficient reason. However, I think it is also appropriate to recognise that three of the defendants, Harold Abbott, Lee-Steere and Somes, have had the use of some of the money paid by Kia Ora in the takeover since that time. I do not regard that matter as a reason to award interest but in exercising the discretion to fix the period, this matter confirms the fairness of the course I have taken. I award $43,470,000 by way of interest on the judgment sum.
In consequence the plaintiff is to have judgment for $93,485,796.81, including interest.
The plaintiff claims that pursuant to s160A of the Income Tax Assessment Act 1936 (Cth) as it stood at relevant times in 1987, its claim against the defendants is an asset and any award of damages may be subject to capital gains tax.
I do not embark upon any consideration of whether capital gains tax will be payable on any award of damages. Such a consideration would involve careful analysis of the relevant legislation, which is complex, the relevant rulings of the Commissioner of Taxation and the case law. The submissions of the plaintiff cannot proceed beyond a contention that as the law presently stands and is understood, there is a real possibility that capital gains tax may have to be paid by the plaintiff. The amount of the tax cannot be ascertained. There is no evidence before me of any calculations based on particular hypotheses. However, I accept the contention of the plaintiff based upon the decisions in Hepples v Federal Commissioner of Taxation of the Federal Court (90 ATC 4808), Provan v HCL Real Estate Limited & Ors (1992) 24 ATR 238, Tuite v Excelby & Ors (1993 ATC 4,293), and consideration of various provisions of the Act that the imposition of the tax in the present case is no mere chance. It is a real possibility and therefore forms part of the plaintiff's damages.
An obligation to pay capital gains tax is reasonably foreseeable. In Provan Rolfe J made a declaration to the effect the defendants indemnify the plaintiff for any capital gains tax assessed and payable having found that damages were payable in equity for breach of fiduciary duty. He expressed the view that such damages were not too remote under either the contractual test for remoteness in Hadely v Baxendale or the test for remoteness in tort. He considered the matter in detail and expressed his conclusion as follows at p255:
"Therefore, in my opinion, once financial loss was reasonably foreseeable the fact that the precise nature of that financial loss, ie the requirement to pay capital gains tax, and the fact that the defendants were not aware of the obligation to pay capital gains tax, are not matters which preclude the defendants' being liable."
The rationale of his conclusion that such tax may be the subject of an award is expressed at p255:
"The capital gains tax is payable because the negligence of the defendants has changed the essential character of the asset. Had the property been sold for its proper value in October 1988, the moneys received would have represented the realisation of an asset, which for all presently relevant purposes, was obtained before 20 September 1985 and on which capital gains tax was not payable. But the judgment represents the fruits of the legal action, in respect of a cause of action which did not arise until October 1988. The plaintiff submits that as assets are defined to include 'a chose-in-action' or 'any other right' and as there is deemed to be a 'disposal' of such assets of 'the release, discharge or satisfaction at law or in equity of the asset', from which only actions for personal injury and defamation are excluded, the obtaining of the judgment amounts to the disposal of an asset, which, in the circumstances of this case is liable to capital gains tax."
In Tuite & Anor v Excelby Shepherdson J also concluded that the tax liability was reasonably foreseeable by the defendants, see p4,301.
Harper J in Compendum Realty Pty Ltd v RAA Architecture Pty Ltd & Anor (1993) Aust Torts Reports 62,353 took a different view. He distinguished both Provan and Tuite v Excelby. He took the view that the circumstances of those cases should not attract the relevant provisions of the Income Tax Assessment Act:
"... that capital gains tax is not payable on the basis of a judgment which does no more than restore to his previous position a plaintiff made worse off by the commission of a wrong and he seeks to recover a gain but simply his restoration to a position which may for present purposes be described as one of 'neutrality' neither less nor gain."
However, Harper J acknowledged that the Commissioner of Taxation was not bound by the opinion which he expressed and that his conclusion could cause hardship to the plaintiff if the Commissioner of Taxation took a different view and assessed capital gains tax which, after review, remained payable and the plaintiff paid the tax without being indemnified by the defendant, so the loss for which he had been compensated would reappear albeit in part: p62,368. He concluded that the liability to pay capital gains tax was not in contemplation of the parties when the contract was entered into, nor was it a probable result of breach. Also, in relation to tort, it was not reasonably foreseeable that damage caused was the defendants' negligence would include liability for capital gains tax.
With respect to Harper J, I prefer the views expressed in Provan and Tuite v Excelby. Whilst Harper J has pointed to the logic of the consequence of the restitution approach to damages that logic appears to have been replaced by obligations imposed by the statute even though perhaps somewhat artificially. A liability for the tax is a real possibility.
The first defendants oppose any damages or order in favour of the plaintiff under this head. They contend that there has been no attempt to establish whether, in law or in fact, there is a liability for capital gains tax. It is submitted that the plaintiff may have losses to offset any relevant capital gain. The plaintiff was in a position to establish the necessary facts and did not offer any evidence. Consequently no basis for liability has been established. In Tuite v Excelby detailed evidence, including opinion evidence, was placed before the court and the claim was quantified.
I reject the contention of the first defendants. It is true that the plaintiff did not adduce particular evidence on this issue and there was no expert evidence as to how capital gains tax is likely to be assessed. However, I expect that for such evidence to have been of any assistance it would have been necessary to embrace detail sufficient for an assessment of the tax based upon many hypotheses to cover many possible conclusions of fact which could be reached by me and many approaches which I may have adopted. Such an exercise would have been very time consuming and of little value. In the present case a much more sensible approach is that suggested by the plaintiff. Once it is established that the head of damage is available to the plaintiff, an order in the form of a declaration of the type made in Provan is the best and most practical solution. In that case, Rolfe J made the following declaration at p259:
"I declare that if the plaintiff is held liable to pay to the Commissioner of Taxation capital gains tax on the judgment, in circumstances the defendants acknowledge as constituting a proper defence by the plaintiff on any such claim made against him by the Commissioner of Taxation, the plaintiff is entitled to be indemnified for such amount together with costs, on a solicitor and client basis, the plaintiff is required to pay in pursuing or defending any such proceedings in consequence of the defendants not making the acknowledgment to which I have referred."
I take a similar approach. The defendants should pay any capital gains tax which is assessed by reason of the award of damages to the plaintiff. Should the Commissioner of Taxation make a claim for capital gains tax and the plaintiff has a defence, or a partial defence, which is acknowledged by the defendants, the plaintiff should use its best endeavours to reasonably defend the claim if requested to do so by the defendants or any of them. Those defendants making that request should bear any reasonable costs of the plaintiff in making that defence. If the defence is successful, all of the defendants against whom judgment is entered must contribute to the reasonable costs of that defence not recovered by the plaintiff. I shall hear the parties as to the form of the declaration or order which should be made.
Having concluded that the first defendants are liable in damages for the loss sustained by the plaintiff, it is necessary to consider the case against the fifth defendants who are said to be also liable by reason of the law of partnership.
At relevant times firms of accountants carried on practice under the name of Nelson Wheeler in Perth, Adelaide, Melbourne and Sydney. There was also a firm of accountants which carried on some accountancy work under the name of Nelson Wheeler in Brisbane but there is an issue as to whether that occurred at relevant times, namely in the months of August, September and October 1987 inclusive. The plaintiff alleges that although each of the accountants in each city carried on practice as partners among themselves, all of them carried on practice in partnership as a national firm of accountants under the name of Nelson Wheeler. Those accountants, apart from the first defendants, are the fifth defendants. I refer to them together as the Nelson Wheeler defendants.
The plaintiff commenced proceedings against them in a separate action on 8th October 1993 and sued those members of the firms who, it was alleged, were partners between 1st July 1987 and 31st December 1987. There were 50 defendants in that action. Subsequently the proceedings were discontinued against four of them, Messrs Higgs, McGovern, Harrison and Robinson upon the plaintiff having been satisfied that they were not partners of any of the firms at the relevant time. A sequestration order was made against another of the fifth defendants, Neil James, prior to the institution of the proceedings. There has been no application for leave to proceed against him and so I have not regarded him as a party for any practical purpose. When referring to the fifth defendants, I exclude these five men.
On 15th April 1994, upon the application of the Nelson Wheeler defendants, the action against the first defendants and the action against the fifth defendants were consolidated.
The plaintiff's case is that at relevant times each of the Nelson Wheeler defendants carried on business in partnership with each other in Australia as a national and international firm of chartered accountants under the style or firm name of Nelson Wheeler and consequently the fifth defendants are jointly and severally liable for the breach of duty by the first defendants with respect to the valuation and the Nelson Wheeler report and the consequential loss sustained by the plaintiff. Further, and in the alternative, the plaintiff claims that each of the fifth defendants is estopped from denying that at all relevant material times they were carrying on business in such national and international partnership and are accordingly liable because they and the first defendants held themselves out to the plaintiff as carrying on business in such a partnership and the plaintiff relied upon that holding out.
It will be remembered that in the annexure to the Nelson Wheeler report, the following appears
Nelson Wheeler, Chartered Accountants, are a national firm of practising accountants with worldwide affiliates and associates. The firm provides a full range of professional services including financial and corporate advice and company appraisals and valuations. Mr. A.C. Pilmer, the partner responsible for this report, is a Fellow of the Institute of Chartered Accountants and is managing partner, Perth."
It is this statement which is said to include the relevant holding out to Kia Ora. The Nelson Wheeler defendants deny that such a partnership existed or that there is any basis for liability of the fifth defendants under partnership law as alleged, or at all. It is their case that there was an association between the various firms but its nature was not that of a partnership but of a federation of separate and distinct firms. Furthermore, they deny liability on the basis of holding out that they were members of a national or international firm.
During the course of the trial the members of the firms in Brisbane and Adelaide sought leave to withdraw certain admissions in their Defence. Mr AK Lavis, Mr K Gay and Mr I Taylor ("the Brisbane defendants") admitted that during July to December 1987 they carried on practice in partnership in Queensland as a firm of chartered accountants under the name Nelson Wheeler but denied that they did so in partnership with Arnold and Wenham. Mr GR Ashby, Mr CJ Atkins Mr R Huntley, and Mr SW Vine ("the Adelaide defendants") admitted that they carried on business in partnership as chartered accountants with Wenham, Grellman, Mr D Bryden of Nelson Wheeler Sydney and Mr B Simmons and Mr D Pratt, members of Nelson Wheeler Melbourne at all material times during the period from July 1987 to December 1987.
All of these defendants denied that there was any national partnership but the Brisbane defendants' claim was that they wrongly made these admissions because whatever was the true character of the association between all of the Nelson Wheeler defendants at relevant times, they had ceased to be part of it prior to the relevant period. The Adelaide defendants assert that they were never in partnership with Wenham, Grellman, Bryden, Simmons and Pratt. They and those men participated in the registration of the business name Nelson Wheeler in South Australia but they were not in partnership together.
The respective applications for leave to withdraw the admissions were opposed by the plaintiff. It was asserted by the Brisbane defendants and the Adelaide defendants that the admissions were wrong in fact and had been made without their knowledge or instructions. The applications were referred into the trial so that evidence in support of them, which was plainly also relevant to the substantive issue, need not be duplicated. It is appropriate to decide the substantive issue in the interests of justice. If the admissions do not represent the fact of the matter, liability should not attach to a defendant because an admission was incorrectly made if that is what occurred.
Not all documents relevant to the national partnership issue were available at the trial and admitted into evidence and not all relevant witnesses gave evidence. The plaintiff frequently alleged that the Nelson Wheeler defendants were in default of their obligations to discover and produce relevant documents which allegations were denied except that it was acknowledged, on occasions, that further consideration and search had resulted in additional documents being available.
The National "Partnership" aspect of the case occupied a considerable part of the trial. The plaintiff was obliged to prove its allegations largely through the use of documents which had been obtained from the Nelson Wheeler defendants through the discovery process. I have mentioned the first defendants who gave evidence. In addition, Lavis, Gay and Taylor, all of the partners of the firm in Brisbane, gave evidence. Ashby of Nelson Wheeler Adelaide also gave evidence but none of the other partners in that city. Robinson, who was a member of Nelson Wheeler Melbourne for a time before the relevant period, also gave evidence. However, he was not involved with Nelson Wheeler at the national level to any great extent and his evidence is of limited value in deciding whether the national association was in fact a partnership. Mr Pastellas of Brisbane gave evidence which was linked to events in l987 when Lavis, Gay and Taylor say they were no longer involved in Nelson Wheeler national.
Wenham, Pilmer, Arnold and Simmons were the persons most prominently involved in the affairs of the national body. None of them gave evidence despite Mr Mansfield having opened that they would do so. There was a change of mind and their failure to give evidence is unexplained. It is asserted that the plaintiff suffered prejudice because cross-examination of witnesses who were called was fashioned on the basis that these absent witnesses would be giving evidence. It is difficult to say to what extent the plaintiff has suffered prejudice but it is not a matter which may be brought to account in favour of the plaintiff. The Nelson Wheeler defendants may call or not call witnesses, including some of themselves, as they see fit, and the obligation remains on the plaintiff to prove its case. The use which may be made of the absence of these men from the witness box can be no greater than as discussed earlier in these reasons for judgment.
If there has been inadequate discovery, that matter may not be used adversely to the Nelson Wheeler defendants except, if appropriate, on the question of credit. In the circumstances, I have not found it appropriate to use inadequacies in discovery in that way. I am simply unable to say if any particular Nelson Wheeler defendant has deliberately obstructed the discovery process.
Despite the failure of important witnesses to give evidence and the unavailability of some documents, it has been possible to obtain a clear understanding as to the formation of the national association which is alleged by the plaintiff to be a partnership, the manner in which it was developed and varied and its purpose and method of operation.
Because of the absence of important witnesses of the plaintiff having to prove allegations largely through documents, it is necessary to pay considerable attention to the large number of documents admitted into evidence and to mention many of them in these reasons for judgment because they establish the true nature of the national association.
The national body of Nelson Wheeler commenced on 14th July 1972. I shall refer to it as "Nelson Wheeler national". The founding members were members of firms of accountants in Sydney, Melbourne, Brisbane and Adelaide. As has been mentioned, AC Pilmer & Co joined Nelson Wheeler national in May 1977.
The origin and development of Nelson Wheeler Perth has been mentioned. In Sydney, two firms R.W. Nelson Wheeler and Barton, which had been in existence since 1915 and Ward, Harriman & Co merged in 1972 and practised under the name Nelson Wheeler Harriman for a short time and then under the name Nelson Wheeler. Prior to 1972, R.W. Nelson Wheeler and Barton also had an office in Melbourne. In Melbourne, the firm A.A. Armitage and Partners which had practised for some years, changed its name to Nelson Wheeler in 1972 and conducted the practice under that name thereafter at all material times.
In Brisbane, the firm Peden Lavis & Co was formed by a Mr John Peden, Lavis and Mr Alec Peden in 1958. John Peden retired in 1967. Gay joined the firm as a partner in 1967 having been employed as a senior clerk since 1959. Alec Peden retired in 1974 and Taylor joined the firm in 1979. The firm continued to practice under the name of Peden, Lavis & Co at all material times but after about 7th February 1978, they joined the Nelson Wheeler national and became entitled to carry on practice under the name of Nelson Wheeler in the State of Queensland. They did so with respect to some of their work, which is discussed later, but continued to carry on the major part of their practice under the name of Peden, Lavis & Co.
The predecessor of Nelson Wheeler Adelaide was the firm Fleming Mann & Co which commenced in January 1972. Mr P.M. Fleming and Mr R.L.S. Mann were the partners. Ashby joined the firm in 1973 as an employee. He became a partner on 1st January 1978. By that time, Mann had left the partnership. Fleming left the partnership on 1st July 1984 and Vine and Atkins joined the firm on the same date. Huntley joined the firm on 1st May 1986 and at all material times the partners were Ashly, Vine, Atkins and Huntley. After joining Nelson Wheeler national, the firm continued to practice under the name Fleming Mann & Co until 31st August 1975 when the name Peter Fleming & Co was used, but, as from the day of joining the national body, it also practiced under the name Nelson Wheeler, probably when undertaking national assignments. According to Ashby, as from late 1978 or early 1979, all work, local or national, was undertaken under the name Nelson Wheeler.
In order to understand the factual basis for the rival contentions of the plaintiff and the first defendants and the fifth defendants, it is necessary to say something about the origin and development of Nelson Wheeler national and its international associations.
There was a meeting of representatives of the firms held at Tullamarine near Melbourne on 28th April 1972 which was attended by Mr John Albian Wyatt representing John A Wyatt & Co of Brisbane, Mr P.G. Harriman and the defendant Arnold, representing Ward Harriman & Co of Sydney, Mr Alvin Adem Armitage and Simmons representing A.A. Armitage and Partners of Melbourne, Fleming and Mann representing Fleming Mann & Co of Adelaide and Mr Malcolm Morgan representing Morgan Priddy & Keogh of Perth. Minutes of the meeting were kept and they record that:
A general discussion was held regarding the legal implications of a national and international partnership (or licensee) arrangement. It was agreed that the opinion of Messrs. Allan Allan & Hemsley as contained in their letter of 16th December, 1971 be accepted."
Also, those present were informed of certain firms of accountants overseas which were interested in forming an international association.
At this meeting no name for the national association was selected and the following was also resolved:
The draft partnership agreement as prepared by Messrs Allan Allan & Hemsley was reviewed and a number of alterations were proposed.
It was decided that each country should have its own national agreement and a separate international agreement be drawn up to link each country.
It was agreed that the Secretary would re-draft the agreement and have a copy available for Mr Wyatt to take abroad."
It was also resolved that each firm contribute $100 and that a "national partnership" bank account be opened, that administration and other related expenses should be showed by each firm on the basis of the number of partners in each firm at the 1st January each year, that a national budget should be prepared and that the possibility of a national indemnity insurance cover be investigated. Following this meeting, solicitors in Sydney were instructed, and they prepared, a deed.
The next meeting occurred on 14th July 1972 when a Deed was executed after some amendment. At this meeting there was no representative of Morgan Priddy and Keogh which later became a participating firm. Minutes of the meeting were kept. The meeting was attended by Armitage, Wyatt, Harriman, Arnold and Fleming representing their firms. Also, others from Sydney and Melbourne attended, including Wenham, Grellman and Simmons. The meeting agreed that the national name should be Nelson Wheeler and that the representatives of each participating firm should seek registration of the name in his own State. Grellman was to register the name in Western Australia. The meeting then resolved that each firm adopt a particular uniform procedure with respect to national audits, that they use uniform information and style on letterhead, eg "John A Wyatt & Co (in association with Nelson Wheeler)", that each firm erect a "national sign board" outside its place of business and arrange to insert national telephone numbers in the directory in their respective States. None of the persons who attended that meeting gave evidence at the trial with the consequence that what was agreed at the meeting can only be discerned from the minutes. It seems that at this stage, the firms intended to continue to practice under their own names and autonomously.
It was also resolved to investigate professional indemnity insurance direct from an underwriter and to establish national committees. The audit committee was comprised of Simmons, Ralph Kooymas from Brisbane, Grellman and Fleming. Wenham and Mr J Warton from Sydney and Pratt from Melbourne comprised the taxation committee. It seems, from subsequent events, that the purpose of those committees was to share information among the members of all of the firms, to improve the standard of work in these areas and, where appropriate, to develop uniformity.
I turn to the Deed. The parties to the Deed were Armitage, Arnold, Wyatt and Fleming who represented their respective firms. They were collectively referred to as "the Licensors". The preamble of the Deed is as follows:
A. The Licensors are each a member of one of the firms listed in the Schedule hereto which carry on in their respective States the business of chartered accountants.
B. The Licensors are desirous of establishing an arrangement between the said firms with the object of promoting service to clients, quality of work, status of the firms and facilitating the use of uniform procedures, standards and reporting.
C. The Licensors have agreed that they shall arrange for the use of the said firms or other firms which from time to time have representatives who are parties to this Deed of the name Nelson Wheeler (hereinafter called 'The Licensed Name') but subject always to the terms and conditions hereinafter appearing and firms so licensed are hereinafter called 'Participating Firms'."
(a) The Licensors shall be and become partners but only for the limited purposes hereinafter appearing, as from the fourteenth day of July 1972.
(b) The object of the arrangement constituted by this Deed shall be -
(i) to facilitate the achievement of the objects set out in Recital B hereof;
(ii) to grant permission to Participating Firms to use the Licensed Name and shall not be the derivation or sharing of profits.
(c) The Licensors shall procure the establishment in Australia of a secretariat staffed by one or more persons upon terms agreed with him or them for the purpose of the administration of the affairs of the partnership and the secretariat shall attend to the opening of all necessary bank accounts setting up and maintenance of the usual books of account and minutes, sending of notices between the Licensors and Participating Firms and registration under business names Acts and other such legislation.
(d) Each Licensor shall be a member at all times of a Participating Firm; no Licensor shall be a member of more than one Participating Firm and no more than one Licensor shall be a member of the same Participating Firm; if any Licensor ceases to be a member of the Participating Firm he will cease to be a Licensor and a new Licensor representing the Participating Firm will be appointed by it.
(e) The capital of the partnership shall be $400.00 contributed equally by the Licensors; all partnership moneys shall immediately upon receipt by the secretariat be paid into the appropriate banking account of the partnership.
(f) All cheques drawn on the banking account of the partnership shall be signed by one member of the secretariat and at least one Licensor.
(g) The partnership is not carried on with a view to the making of any profit by the Licensor."
The firms referred to in the Deed are the four firms in Adelaide, Melbourne, Sydney and Brisbane. Clause 2 of the Deed provides:
Upon application by any of the firms described in the Schedule hereto and an undertaking that it will observe the conditions contained in this Deed, the Licensors shall grant it a licence as a participating Firm to carry on business in the jurisdiction in which it presently carries on business but under the Licensed Name as follows -
(a) the licence shall be for the period of five years from the day of grant by the Licensors provided that if it shall have given six months notice expiring before the end of the said five year period a Participating Firm may continue to use the Licensed Name for a further period of five years;
(b) each Participating Firm shall have the right at any time during the period of its licence or any extension thereof to terminate such licence upon the expiration of six months notice by such Participating Firm to the secretariat and such notice will immediately be given to the other Licensors by the secretariat;
(c) no Participating Firm shall hold or use the Licensed Name or any name which is substantially identical or deceptively similar thereto in any country or political sub-division thereof in which it does not carry on business at the date of commencement of its licence, unless it has first received the approval of the Licensors;
(d) each Participating Firm may as an interim measure after the commencement of its licence continue to carry on business under its name immediately before the commencement of the licence, provided that it does so in association with the Licensed Name;
(e) each Participating Firm shall produce to the Licensors not later than the twenty seventh day of October in each year full particulars of its indemnity insurance which will be in an amount previously approved by the Licensors, together with a copy of the police issued to it or the latest application for renewal and renewal certificate;
(f) each Participating Firm will promptly upon becoming such a Participating Firm and upon all subsequent changes in its composition, disclose to the Licensors the name, address and qualification of each member of that firm or each new member, together with (if appropriate) particulars of any members who have retired or died in office;
(g) the authority granted hereunder to each Participating Firm shall in no way render any Participating Firm the agent of any one or more of the other Participating Firms or of any one or more of the members thereof and no Participating Firm will have the express implied or ostensible authority of any of those parties to enter into or incur obligations or create rights on behalf of any one or more of those parties;
(h) each Participating Firm shall promptly pay to the Licensors at the place of business of the secretariat, all licence fees and levies struck by the Licensor as described in Clause 3 hereof;
(i) the licence hereby conferred may be immediately terminated without prior notice, by notice in writing given by the Licensors to the Participating Firm concerned, if:
(i) that Participating Firm makes default in observing any obligation on its part contained in its licence or the Licensor who is a member of that Participating Firm makes default in observing any obligation on his part contained in this Deed;
(ii) a petition is lodged for or a sequestration order is made by any bankruptcy court of competent jurisdiction against any one or more members of that Participating Firm;
(iii) any execution or other process of any court or authority is levied upon any property of or the property of any members of that Participating Firm and is not paid out satisfied or withdrawn within fourteen days; or
(iv) that Participating Firm stops payment of its debts or ceases or threatens to cease to carry on its business.
(j) the licence hereby conferred shall be terminated upon the expiration of three months notice given by the secretariat under the direction of at least three quarters in number (or the next multiple above three quarters of the Licensors present at the meeting issuing such direction;
(k) each Participating Firm will agree with the Licensor and each of them and the other Participating Firms and each of them that upon any termination of its licence hereunder upon any ground it will not and none of its members will at or subsequent to such termination be directly or indirectly concerned or interested in any firm of accountants carrying on business under a name which is or includes the words Nelson Wheeler in any country or political sub-division thereof whether or not any Participating Firm has carried on or carries on thereafter business thereunder that name at any time after the date of this Deed PROVIDED THAT nothing in this paragraph (k) shall prevent the firm of Nelson Wheeler & Harriman carrying on business in New South Wales under any name comprising or including the words 'Nelson Wheeler' and while the firm of Nelson Wheeler & Harriman carries on business in New South Wales the Licensors shall not appoint any Participating Firm to carry on business in New South Wales under any name comprising or including the words 'Nelson Wheeler'.
(l) each Participating Firm will indemnify the other participating Firms and the Licensor and each of them against all claims, suits and demands which may be made against them or any of them by reason of any assertion, whether express or implied by conduct on the part of that Participating Firm, that the other parties or any of them are the principal of or in any way liable for or responsible for the acts, omissions or defaults of that participating Firm."
Clause 3 provides for the procedures for the conduct of the partnership including that the Licensors meet each year, that a Licensor may be represented by another member of his participating firm, the fixing of the licence fee to be paid by the participating firms and for levies to be paid by them. Clause 4 provides for the admission of new participating firms with the unanimous agreement of the member firms.
It was in consequence of these arrangements that each of the firms in Adelaide, Melbourne and Sydney commenced to practice under the name of Nelson Wheeler. When AC Pilmer & Co in Perth became a participating firm Pilmer was nominated as a Licensor under the Deed.
The involvement of John A Wyatt & Co did not prove satisfactory to some and that firm left the arrangement to be replaced by Peden Lavis & Co in early 1978. On 24th January 1978 Arnold wrote to Lavis enclosing a copy of the Deed which he described as "our original Nelson Wheeler agreement". On 7th February 1978 Lavis and Gay wrote to the licence holders Simmons, Arnold, Pilmer and Fleming. They referred to the agreement and pursuant to Clause 4 made an application for Peden Lavis & Co to be admitted as a new participating firm to be licensed upon the terms and conditions appearing in the agreement and, upon being accepted, nominating Lavis as a Licensor under the terms of the agreement.
After becoming a participating firm at that time, Peden Lavis & Co continued to undertake much of its own work under that name but used the name Nelson Wheeler for work which was generated by reason of the Nelson Wheeler association.
No other written agreement came into existence. Although Clause 2 provided that the licence to carry on business under the name Nelson Wheeler for a period of five years from the day of the grant by the Licensors, each of the original participating firms still carrying on practice and joined to the association, Nelson Wheeler Sydney, Nelson Wheeler Melbourne and Nelson Wheeler Adelaide and the two new participating firms Nelson Wheeler Perth and Nelson Wheeler Brisbane (Peden Lavis & Co) continued to regard the licences and the Deed as extant after the expiration of five years from the dates of the respective grants. Indeed, the members of Nelson Wheeler Sydney, Nelson Wheeler Perth, Nelson Wheeler Adelaide asserted on 5th February 1988 that the partnership described in the 1972 Deed had continued ever since although varied as to terms and parties from time to time. It was on that date that Wenham, Pilmer and Ashly, on behalf of those respective State firms, gave notice to the partners of Nelson Wheeler Melbourne, that by reason of breaches by them of terms of the Deed, their licence conferred by the Deed was terminated as from 9th May 1988.
It is appropriate at this stage to make a few observations about the Deed and the evidence as to the manner in which each participating firm carried on practice after the Deed was executed.
As has been seen in the reasons for judgment relating to the composition of the firm Nelson Wheeler Perth, there are essential elements of a true partnership relationship. They include the relationship of agency and the carrying on a business in common with view of profit. It will be seen that the draftsman of the Deed purported to exclude the sharing of profits in cl.1(b)(ii), and the carrying on of the arrangement with a view of profit in cl.1(g). Also in cl.2(g), it is provided that the relationship of agency does not exist. It may be said that when the four men executed the Deed on behalf of their firms, they were attempting to exclude the operation of the law of partnership from their arrangement. Whether they were effective in that attempt must be judged from all of the circumstances of their relationship, not merely by what they said or how they regarded themselves.
Also, it may be seen that the Deed provides that it is the licensers which became partners and only for a limited purpose, not the members of the participating firms.
As has been mentioned, it was asserted in early 1988 that the "partnership described in the Deed continued ever since although varied as to terms and parties from time to time". That assertion was made by Wenham, Pilmer and Ashby, but no evidence has been adduced by the Nelson Wheeler defendants as to the nature of the variation of the terms. Wenham, who was intimately involved in the establishment and development at all stages of Nelson Wheeler national did not give evidence or explain what he meant by that assertion. Nor did Pilmer. Ashby, in his evidence, described Nelson Wheeler national from his point of view and the precise nature of the variation is not disclosed.
It may be seen that the Deed is in more restrictive terms than the resolution of the representative of the firms at Tullamarine on 28th April when they decided that "a partnership and an international partnership be formed to co-ordinate all national and international business". This resolution may be interpreted that at that time the clear intention of those representatives was to form a partnership between those whom they represented. The Deed speaks only of establishing an arrangement between the firms "with the object of promoting service to clients, quality of work, status of the firms and the facilitating of the use of uniform procedures, standards and reporting" (Recital B) and the granting and regulation of the use of the name Nelson Wheeler.
Various documents admitted into evidence establish the true purpose of Nelson Wheeler national. In late 1987 Nelson Wheeler Melbourne decided to leave Nelson Wheeler and merge with a firm of accountants known as Parnell Kerr Forster as from 1st January 1988. An issue arose as to whether this new firm could use the name Nelson Wheeler in Victoria. The members of Nelson Wheeler Victoria said that they owned the name in that State. Mention has been made of Wenham, Pilmer and Ashby giving notice to the members of Nelson Wheeler Melbourne of alleged breaches by them of the 1972 Deed and of termination of the licence to carry on business under the name Nelson Wheeler in Victoria. Legal proceedings were instituted in the Supreme Court of Victoria and in the Federal Court of Australia to protect the use of the name Nelson Wheeler in that State.
In the proceedings in the Supreme Court of Victoria, Arnold swore an affidavit in which he deposed, inter alia:
1 That the purpose of the 1972 Deed was to set up a framework for a national partnership to operate throughout Australia under the name "Nelson Wheeler" and to protect the use of the name Nelson Wheeler for their national firm.
2 That it was recognised by the participating firms that the name Nelson Wheeler was to be used in a national context and promoted to achieve recognition of a firm of chartered accountants known throughout Australia as Nelson Wheeler.
3 That in pursuing the promotion of Nelson Wheeler as a national entity, meetings involving representatives from each State office were held from October 1972 until the present time. The purpose of the meetings was varied but there was the constant and central them of achieving greater market recognition for Nelson Wheeler in the Australian market place.
4 Throughout the history of Nelson Wheeler since1972 the goal had been to establish a uniform and coordinated system to enable work to be carried out Australia wide under the name Nelson Wheeler. Each State office was committed to the promotion of the national firm of Nelson Wheeler in order that the clients, both existing and potential domestic, interstate, national and international may have reference to a single identity, namely Nelson Wheeler.
5 Due to the loss of the Melbourne office practice it was essential in order to maintain "both a national and coordinated practice" to secure the services of another practice of Chartered Accountants in Melbourne.
Grellman filed an affidavit in similar terms in the same proceedings. He deposes that over the years Nelson Wheeler had desired to secure for itself greater market place recognition and there had been a number of efforts to achieve that recognition including "the promotion and presentation of Nelson Wheeler as a national firm together with forming associations with firms of chartered accountants in regional and other population and industrial/commercial centres". He was, of course, referring to the Nelson Wheeler Associates. He went on to describe the development of the Nelson Wheeler Associates. Later in his affidavit he deposed:
"21. During my period of association with Nelson Wheeler which historically pre dates the creation of the national image of Nelson Wheeler it has always been a desire that the practice continues to grow. The events of 1972 were such that an opportunity arose whereby individual participating firms were given access to the use of a name which had long standing and well recognised roots in the professional world by reason of the name Nelson Wheeler being derived from R W Nelson Wheeler & Barton.
22. It has always been an objective of the firms operating under that name to promote and create a national image and as often described by partners such as Bruce Simmons and Paul Wenham the idea of the national promotion of Nelson Wheeler was to establish our own place as an alternative to the big 8 firms.
23. The market recognition of Nelson Wheeler has been assisted and cultivated by the use of many varied tools. In 1975 a national logo was adopted and became used throughout advertising and stationery used in connection with the Nelson Wheeler practices. Further examples of how Nelson Wheeler was promoted nationally included the appointment of persons over the years as national co-ordinators, the formation of a number of national committees in respect of specific areas of the practices operating under the name of Nelson Wheeler, and the presentation and promotion of the name of Nelson Wheeler by the various offices of Nelson Wheeler.
24. I believe that Nelson Wheeler as a result of the unified and varied promotion activities and presentations of the offices of Nelson Wheeler, is perceived both in the accounting profession and in the public arena as a national firm allowing for continuity of service to a client throughout Australia and with the ability to undertake work in the international arena on the basis of an intergrated (sic) and co-ordinated national practice.
25. The perception of Nelson Wheeler as a national firm within the accounting industry is verified by reports which appear such as in the professional journal "Chartac" and particularly in respect of articles and media comments, such as in the Financial Review, which reflect the substantial growth of Nelson Wheeler over the years."
These assertions and observations by Arnold and Grellman in so far as they go may be accepted. They were made in a formal and serious context, namely on oath in legal proceedings. Both are defendants in these proceedings and chose not to give evidence. They have not explained or qualified that to which they deposed. They positively assert the existence of a national partnership and a national practice and the promotion of it on a national level.
What in fact happened was more in the nature of what was resolved at Tullamarine rather than only what is expressed in the Deed, as will be seen upon consideration of the evidence.
In my view, the absence of Wenham, Simmons, Arnold, Pilmer and Grellman from the witness box has prevented the exploration of precisely what type of relationship did eventuate and was in existence in the second half of 1987. The nature of that relationship must be discerned from all the evidence and from inferences to be drawn from the evidence. In relation to some matters, the failure of these men to give evidence permit certain inferences to be more readily drawn.
It is reasonable to infer from the evidence that the Deed does not totally represent the nature and extent of the arrangement between the members of Nelson Wheeler national at the relevant time. That arrangement was much broader and extensive than is expressed in the Deed.
Some important matters are not in dispute and may readily be accepted. From the outset, members of the participating firms from time to time and their representatives at the national level consistently said that there was a national partnership and that they were members of that partnership. They described Nelson Wheeler national and themselves in that way, both internally and externally.
The vast body of documentary evidence establishes those matters conclusively. The Nelson Wheeler defendants are all chartered accountants with the extensive education and training required to achieve that professional status. It may be accepted that they were well aware of the legal consequences of a partnership relationship. There is no evidence from any of them to the contrary, and yet they regularly and consistently regarded themselves as members of a national partnership and held out to the world that Nelson Wheeler national was a partnership and they widely promoted it as such.
The other matter which is clearly established by the evidence is that the members of each participating firm carried on practice independently and separately from the other firms, except in the respects which are later mentioned. They decided who would be members of their own firms. Each firm evolved and developed separately. No one firm had any direct interest in another firm. No firm was answerable to any other firm or firms with respect to any aspect of its affairs. They each made and shared their own profits. Each firm was responsible for its own liabilities. Except as is mentioned later, there was no pooling of income or sharing of expenses.
With these matters in mind, it is necessary to review all of the evidence to determine whether in fact Nelson Wheeler national was a partnership at the relevant time.
After the execution of the Deed, representatives of the participating firms met periodically throughout the years. Minutes of those meetings were kept and confirmed at subsequent meetings. At all times they were described by the participants as "National Partnership Meetings". Matters of mutual interest were considered. Initially, Armitage was elected chairman and Arnold as minute secretary. It is unnecessary to set out in detail all of the matters discussed and resolved at those meetings. A brief summary will suffice. The name Nelson Wheeler was registered in New South Wales, Victoria, South Australia and subsequently in Queensland, the Australian Capital Territory and Tasmania. Morgan, Priddy and Keogh became members of Nelson Wheeler national. Each office used Nelson Wheeler signs and that name appeared in all telephone directories. Each participating firm contributed to the capital of the national association as provided in the Deed and a levy was raised against each firm to contribute to travelling expenses of the representatives. A national secretariat was established (BV).
At times the minutes of the meetings record that certain persons retired from, or joined, the participating firms and lists of charges for standard services of a minor and routine manner were fixed. Levies for purposes other than travelling were raised and expended in the promotion of the national association (BS). Those present also considered whether the use of the expression "offices in all states in Australia" and international affiliation" could amount to a holding out of a partnership between the participating firms and decided to seek legal advice.
In the early years after the execution of the Deed, each participating firm had its own professional indemnity insurance cover. The national meetings regularly considered a common policy of insurance. Also at the meetings, the establishment of international associations was frequently discussed. On 29th March 1974, it was resolved that partners' names not be shown on the letterhead and that reference be made to "Affiliated Firms" in all States, presumably to overcome concern about holding out that a national partnership existed.
At the meeting on 23rd August 1974 the representatives of the participating firms discussed the future of the "national firm". The minutes record that "each firm" should be actively considering the amalgamation with, or takeover of, other accounting firms and should keep the other national firms informed of any negotiations. It was resolved at the meeting on 22nd November 1974 that the Nelson Wheeler name should be used for all audit and accounting work. On 30th May 1975 it was resolved to prepare a Nelson Wheeler bulletin for national distribution. At this meeting it was noted that Priddy had resigned from the Perth partnership and Mr Kevin Williams had entered into partnership with Morgan. It was resolved to approve the appointment of Williams to the National Partnership. Presumably that appointment was made by the Perth firm.
Up until this time, Armitage had continued to act as chairman of the national body but on 30th May 1975 Mr R.B. Raines was appointed as an "independent" chairman. He was not a member of any of the participating firms.
By late 1975 Nelson Wheeler national was considering undertaking more public relations and marketing activities and was promoting associations with firms and businesses overseas. Also, promotion of Nelson Wheeler in Australia was undertaken and developed generally and through the activities of committees. Each participating firm made reports to the national meeting and periodic meetings were held. Attempts to expand by merger with other accountants' practices continued with some success. It was agreed that there be a professional indemnity insurance cover for all partners of participating firms to commence on 1st January 1978. The premium was to be apportioned on the basis of gross fees attributed to each participating firm and the excess was to be shared on the basis of the proportion of the gross fees of the preceding year attributed to each firm. It seems that there had been some concern about potential liability on the basis of the participants being held out as partners. Arnold obtained advice from Allen, Allen and Hemsley in Sydney. That firm wrote to Arnold on 2nd June 1976 with advice about liability for the acts or omissions of others. The letter reads, in part:
"1. In paragraph 1 of our letter of the 16th December 1971 we advised that if the Nelson Wheeler firm with which a particular client had dealt, was acting as an agent of another Nelson Wheeler firm, then the client's contract would be with the principal, rather than the agent; it would always be an issue whether one particular Nelson Wheeler firm had the actual implied or ostensible authority to act as the agent of another Nelson Wheeler firm in entering into contracts with clients. The difficulty here is with implied or ostensible authority; the question becomes one of whether one party held out another as having authority to act on its behalf.
Circumstances being infinite in variation, it is [im]possible to define criteria universally applicable for the avoidance of these problems, but clearly, for example, care should be taken to avoid the suggestion that there is but one Nelson Wheeler firm with a number of branches or departments. We have been supplied with the Australian Nelson Wheeler Directory for 1975 which, whilst it goes some way towards avoiding the misconception to which we have referred, may fairly be said to support the inference that there is one Nelson Wheeler partnership, but that it has groups of partners each resident in particular States. Difficulty is avoided only with a clear statement in such publications to the effect that there are separate partnerships operating under the name Nelson Wheeler in each State (except Tasmania) and in the A.C.T. but that arrangements exist between them for the handling on an agency basis of the work of clients of one or more particular Nelson Wheeler firms.
2. We have also been handed the Annual Report for 1975 of Bendix Consolidated Industries Limited. This contains an Auditors' Report dated 14th October, 1975 and gives the impression that the one Nelson Wheeler firm acted as Auditor for all companies in the Group, whereas this may not have been the case. In such Reports, care should be taken to explain the true legal position in terms indicated above." (The underlining is mine)
It may be seen that at this early stage, clear advice had been received about the implications of legal responsibility for the acts of partners and for a holding out. As will be seen, the advice about avoiding the suggestion that there was but one Nelson Wheeler firm was not followed.
At about this time Nelson Wheeler national decided to undertake further publications for distribution to the clients of the firm, the "Accounting Review" and "The Newsletter", were to be published each year in the months of March, August and November. Some work undertaken by the participating firms was of a national nature. Audit work for a truly national company is an example. The obtaining of this work was encouraged and decisions were made about uniform procedures and ensuring that each firm was aware of the fee structure and budgeted fees to be implemented. At the meeting on 31st October 1977 it was resolved that "national assignments should be approached on a national partnership basis".
At the meeting on 20th March 1978, after A.C. Pilmer & Co and Peden, Lavis and Co had become participating firms, it was resolved that Wenham, Simmons and Arnold should investigate establishing a new association in Hong Kong or strengthening the old association. It is not clear what was the old association.
At the meeting on 20th March 1978 it was resolved to incorporate nominee companies in South Australia and Queensland and the name "Nelac Nominees" was used. Companies with this or a similar name were used by all of the participating firms. At this time a single professional indemnity policy was written for all members of the participating firms with the exception of Brisbane which was independently covered until September 1978. Levies were increased to cover the cost of printing a national directory for the firm and the "Accounting Review" publication. It was also resolved that each office should have the expression "Resident Partners" on the Nelson Wheeler letterhead. Apparently, the earlier concern as to potential liability in consequence of holding out that a national partnership existed had abated to some extent by this time.
At the meeting on 6th November 1978 a report from Wenham, Simmons and Arnold was received about their overseas trip on 5th and 6th October 1978 when they promoted Nelson Wheeler to various companies and organisations in Europe, Asia and North America. The representatives of the participating firms agreed that Nelson Wheeler should establish its own office in Hong Kong. It was also resolved that the Nelson Wheeler name be inserted in each State telephone directory and that "each office should have a Nelson Wheeler telephone". The minutes go on to record:
"The importance of presenting a national image to overseas parties and a national image to national clients was particularly stressed. Reference was made to the comments of Mr Van der Hoeven of Moret & Linpeng which emphasised the importance his firm placed upon dealing with one firm."
Wenham, Simmons and Arnold met Van der Hoeven during their trip overseas.
By this time the name Nelac Nominees was used for nominee companies by the participating firms in Sydney, Melbourne and Adelaide and was to be used in Brisbane. It was also resolved to investigate the possibility of using a public relations firm to promote the Nelson Wheeler name to the public.
Wenham was appointed "managing partner" of Nelson Wheeler national at the meeting on 5th November 1979. He tabled and read a paper to the meeting entitled Nelson Wheeler in the 1980's. That paper was not admitted into evidence as it is not now available but the minutes record that points made in the paper were national unity and ways of ensuring such unity, "security of tenure for all clients under our care", and expansion through acquisition and merger. Nelson Wheeler was promoted in Asia and locally through the publication of the Pacific Area Directory.
Up until 1980 the national body was developing and expanding The participating firms had come to use the name Nelson Wheeler, although not exclusively in Brisbane and Sydney. Activities to promote the participating firms and Nelson Wheeler nationally and internationally were increasing. Each participating firm paid a levy to meet the expenses of these activities and promotions. Information relevant to aspects of accountancy practice was collated and shared among the members of the national body.
At the meeting on 4th June 1980 it was resolved that the chairman of the national meetings should be a member of Nelson Wheeler and Wenham was appointed to replaces Raines. Consideration was given to the structure of the national body. The minutes record that the participating firms "were members of the Nelson Wheeler National Partnership" and would be represented by two representatives from each of Sydney and Melbourne and one representative from each of the other participating firms. Those representatives formed the "National Partnership Executive Committee". It was resolved that they would "represent the partners in each office". The minutes go on to record:
A discussion was held regarding the presentation of Nelson Wheeler nationally. It was agreed that it was vital to present Nelson Wheeler as a national firm trading under the Nelson Wheeler name both nationally and internationally."
Proposals for national staff training were discussed. Charge-out rates were to be collated and distributed. Methods of strengthening the national body in Australia were discussed, including peer review (presumably of professional work) and use of the Nelson Wheeler logo on all letterhead and advertising for staff.
On 23rd March 1981 the national body issued a National Policy Statement to all participating firms to which they were required to respond and did so. Only a draft of the Statement was available and admitted into evidence but as the collation of responses was admitted into evidence, it is possible to determine the probable terms of the Statement which included:
The objectives of this National policy statement are:
(i) To promote the firm and its services and ensure future growth.
(ii) To increase communication with current and potential clients.
(iii) To set the direction of the National firm and individuals in a co-ordinated effort.
(iv) To establish procedures for monitoring performance of progress of the firm and individuals.
(v) To provide motivation in the way of reward for effort.
The policy and procedures are to be uniform throughout the National firm, however the maintaining of performance and provision of reward is the responsibility of each local office. The exchange of ideas and information between the offices is to be encouraged in the promotion of practice development within the National Firm.
Nelson Wheeler national became a member of Grant Thornton International, an international group of accountants from many countries, as from 1st January 1982. At about this time, Nelson Wheeler Sydney and Nelson Wheeler Melbourne acquired a 40 percent interest in the accountancy firm of Speakman & Co in Hong Kong. The firm was known as Nelson Wheeler Speakman &Co. These matters were reported to the meeting of the National Executive on 14th December 1981. At that meeting it was resolved:
"... a person should be employed by the national partners for the purpose of promoting Nelson Wheeler and the co-ordination of national activities."
The operating costs of Nelson Wheeler national had reached $40,000 to $50,000 per annum and in order to meet this expense, the levy system was changed. It was resolved to raise a levy of 10 percent of billings in respect of national and international referral work to be paid to the national secretariat quarterly, and further, that the anticipated shortfall would be met by levies raised on the basis of fees rendered, to be calculated in the same way as for professional indemnity insurance purposes.
The minutes of this meeting also record that consideration was given to a Nelson Wheeler national constitution and Pilmer, Lavis and Fleming were to prepare a submission "with the purpose of ensuring the continuing and close association of the Nelson Wheeler firms". Minutes of subsequent meetings reveal that the word "constitution" was used in the sense of a written document, but no such constitution was ever prepared.
At about this time, the national body established the concept of Nelson Wheeler Associates. A firm name was registered in New South Wales. The concept was for suburban and country firms of accountants around Australia to become associated with Nelson Wheeler in their respective States and for the city firms and Nelson Wheeler national to provide advice, materials and other assistance as required. This concept was implemented in each State to varying extent. Following further advice about potential liability for the acts and omissions of accountants who became Nelson Wheeler Associates, a unit trust structure was implemented in late 1984 known as the Nelson Wheeler Associates Trust. A Trustee company was formed and was NWA Nominees (Australia) Pty Limited. Wenham, Harriman, Simmons, Pratt, Pilmer, Ashby and Lavis were the directors and shareholders. The business name Nelson Wheeler Associates was registered in each State. A Trust Deed was made on 29th October 1984. The Nelson Wheeler Associates acquired assets in the Trust. The Deed was expressed in terms so as to exclude the relationship of principal and agent between the Trustee and the unit holders and the relationship of partners between the unit holders.
In late 1982 even more attention was given to the promotion of Nelson Wheeler national. Various publications were prepared and distributed, some of which are referred to later. A draft book entitled "Nelson Wheeler in the 80's" was prepared but not printed until later due to cost. It may be seen from the minutes of meetings in the ensuing years that there was a heavy emphasis on this type of promotion which was for the purpose of attracting clients to the Nelson Wheeler offices and retaining existing clients.
At the meeting on 21st November 1983, participating firms through Nelson Wheeler national introduced standardised stationary and advertising which generally occurred about a year later. It was agreed that a schedule of clients of each firm would be compiled but "would be strictly confidential and only available to national partners". The Nelson Wheeler Associates scheme had developed to the point that some participating firms were receiving work referred from the associates. Simmons informed the meeting that "Nelson Wheeler's standing as a national firm had increased". The minutes then record that Nelson Wheeler national includes other services and initiatives, including corporate services, being placed on a tender list, writing articles and expressing opinions on professional matters in the media and using the newly appointed recruitment officer for these purposes.
Thereafter considerable attention was directed towards marketing Nelson Wheeler in Australia and, to a lesser degree, overseas. It was in the context of the Nelson Wheeler Associates that the issue of holding out was again considered at the meeting on 30th April 1984. Concern was expressed in this context over Nelson Wheeler Associates displaying the Nelson Wheeler logos.
The co-ordinator of Nelson Wheeler national and of the Nelson Wheeler Associates sought advice from the professional indemnity insurer which wrote on 23rd July 1984 as follows:
"... It is a pleasure to reiterate the advice given at our meeting on that day.
(1) The partners of Nelson Wheeler are definitely exposed to Professional Liability arising from the activities of Nelson Wheeler Associates.
- Actual advice or services provided by Nelson Wheeler to Nelson Wheeler Associates or their clients.
- Vicarious liability arising from the activities of a Nelson Wheeler Associate either because of the 'holding out' exposure or by virtue of the fact that an action is brought against Nelson Wheeler Associates as an entity and Nelson Wheeler."
The advice was to resolve the matter by insurance cover rather than by prevention.
The minutes of this meeting also record the following:
Mr Arnold was asked to look at a suitable penalty clause (percentage wise) based upon fees, in the case where any State firm withdrew from the Nelson Wheeler Partnership and to consult the firms' solicitors in this matter."
At those meetings there would be discussion from time to time about the sharing of work and fees. An example is the decision at this meeting which is recorded in the minutes:
"It was decided that Messrs Pilmer, Ashby and Tremain have further discussions with regard to the Adelaide office assisting the Perth office in the Roxby Downs area and present a report by 30th June 1984."
Efforts to expand Nelson Wheeler in each State through merger or takeover of accountants' practices and the Nelson Wheeler Associates scheme continued. Each office expanded in this way with the exception of the Brisbane office.
Most of the partners of the smaller participating firms and partners of Nelson Wheeler Sydney and Nelson Wheeler Melbourne served on the various committees which, by 1985, were the Audit, Tax, Management Advisory Services and Associates committees. Representatives of each participating firm attended the national meetings which were heavily involved in the marketing of Nelson Wheeler. Strategies were discussed and developed at the national level to increase the client base and to provide a greater variety of services. An example of those strategies is to be found in the minutes of the meeting of the national body on 27th August 1985. The establishment of a national data base was proposed. Each office was requested to supply details of clients falling into the following categories: public companies, sharebrokers, law firms, architects and builders, major important clients, ie directors of public companies, major clients of $10,000 or more and trades unions. It was proposed to increase services and specialisation in the following areas: financial consulting, superannuation, management consulting, secretarial services, share registry and computer services. It was resolved to establish additional committees and partners of participating firms were assigned to them. The full complement of committees was Audit, Tax, Share Registry, Secretarial, Management Advisory Services, Computers, Insolvency and Associates. A document was prepared with respect to the committees and was signed by Wenham and Simmons and adopted by Nelson Wheeler national. The matters resolved included terms of reference, reporting to the National Executive, implementation of the policy of Nelson Wheeler national, staff training, increasing the profile of Nelson Wheeler national in the media and public awareness of the firm. Other matters included making government bodies aware of the firm's capacities, targeting of clients on a national basis with emphasis upon the mining industry, the financial industry and trades unions. With respect to national marketing, it was resolved to use a slogan to employ outside consultants and to target particular areas of work. National publications were to be prepared and published and the image to be promoted was "Upmarket, Up-to-date, Progressive, Professional" and that of a "National firm that is part of an international organisation".
The document signed by Wenham and Simmons concluded as follows:
As a consequence of the above the partners must be aware that an extra cost will be involved in development of the firm and this has been estimated over and above the present budget for national for 1985-86 which was $65,000 to $130,000.
The national executive understands the requests of the partners and have scheduled bimonthly meetings beginning 26 August. By the establishment of more committees and the requirement that the committee chairmen be responsible for their areas of endeavour, we expect that more information regarding the running of the firm will be available to partners in general."
It may be seen from this document the stage which had reached in the development of Nelson Wheeler national. Apart from the increasing national marketing activity, it may be seen that Nelson Wheeler national was seeking to impose uniformity in undertaking work by staff training and in other ways and to obtain clients on a national basis.
Arrangements between the participating firms with respect to the common professional indemnity insurance cover were changed in 1986. It was agreed that in the event of a claim up to the excess of $200,000 or less, that 50 percent of the excess be borne by the offending office and the balance by all of the firms on a pro-rata basis determined by fee earnings. By this time, it was reported that there were 139 Associates of Nelson Wheeler covering 159 locations with most in New South Wales and Victoria but none in Queensland. Also, by this time the practice had developed of each participating firm informing the national body of all significant new clients by name and type of business activity and of their projected fees in the coming year.
It may be seen that the national body developed over the years since July 1972. It appointed a managing partner in Wenham. He was also appointed chairman of the National Executive. He was also referred to as the Chairman and Managing Partner of the Australian firm in the information provided by Nelson Wheeler Sydney to the organisers of the Grant Thornton International Conference in Hong Kong in October 1987. Arnold was appointed as secretary of the Nelson Wheeler national.
The National Executive was formed in June 1980 and a national co-ordinator was first appointed in 1982. Later, in 1985, there were two national co-ordinators. The duties of the national co-ordinators included administration, bringing into existence the various publications, and the keeping of the various records. In brief terms, the national co-ordinator undertook a central administration for Nelson Wheeler national, co-ordinated most of the activities of that body and kept the national executive and the participating firms informed of the activities of the committees and the national body.
It was well understood by the members of the participating firms that the name Nelson Wheeler was used in a national context and promoted to achieve recognition of a national firm of chartered accountants known throughout Australia by that name.
The members of the participating firms were encouraged to attend National Conferences which were held from time to time by Nelson Wheeler national.
The first conference was held in Victoria in 1976 but little evidence was adduced as to what happened at that conference.
The next conference was held in Canberra in November 1980. It was attended by members of participating firms. The themes of the conference were "National" and "Nelson Wheeler in the 80's". The conference administrator, Mr E.J. Pippet, prepared materials for those attending which included a welcoming letter containing the following:
"The firm has developed rapidly over the last few years and we hope that this conference will achieve similar success that will give participants enthusiasm to meet the challenge of the 80's.
Nelson Wheeler is striving to be the unchallenged best of the 'Non-big eight' firms of Chartered Accountants both on a national and international level and this obviously cannot be achieved unless the personnel of the firm are the best. It is hoped that the conference will assist us in achieving this goal by:-
(a) Examining ideas and ways in which we can promote the firm and offer better services to our clients.
(b) Further updating our standards, ideas and systems on a national level.
(c) Enabling personnel from the various states to meet each other both at technical sessions and informally, thereby giving them a better understanding of the national organisation and facilitating them working together more closely on national clients and standards."
Those present expressed the view that whilst they did not want to be a "big eight" firm, they intended to be, and would be, "number 9" in the next few years. The reference to "big eight" is, of course, the eight largest practices of accountants in Australia. The conference also discussed international associations and how they could be achieved. It was reported in a subsequent newsletter that the following summarized the impressions at the conference:
2 We will have a strong international connection within the next two years.
3 We will shortly be number 9 in size and number 1 in professionalism, technical expertise and reputation.
4 Everyone in our organisation has a role to play in promoting Nelson, Wheeler and ensuring it all happens."
Subsequently Mr D.R. Crane, a partner of Nelson Wheeler Melbourne and one of the fifth defendants wrote to Wenham in favourable terms about the conference and expressed the view that "everyone got the feeling of Nelson Wheeler being one firm".
The next conference was held in Leura in New South Wales in 1982. Little about this conference is disclosed by the evidence but it was attended by partners from each firm.
The next conference was held at the Menzies Hotel in Sydney on 14th and 15th June 1985. The matters discussed included Nelson Wheeler National, Individual Offices, Amalgamation, National Clients, Marketing of Nelson Wheeler, National Projects and International Matters.
At the outset, the conference was addressed by Wenham. A document purporting to be the text of his speech was admitted into evidence and I accept that he gave his speech in those, or substantially those, terms. Excerpts of what he told the conference are:
"Nelson Wheeler was formed nationally in July 1972. At that time it comprised some 18 partners and 100 staff and had no firm international affiliations. Today we total, excluding Hong Kong, 54 partners and 350 staff. I am sure we are all proud of our current position in the market place, but in my mind, it raises a particular question - who will be the leading firms in the market place in a few years time and what will be the major characteristics of these firms? Note, I say, leading firms, not biggest firms.
To my mind the words are not necessarily synonymous. By leading firms I mean firms that people are aware of, firms that have achieved recognition in the market place. For this to happen they must be doing things right - both internally and externally. And if this is the case, something else follows on - they grow and are profitable.
If we were starting a new firm it would be easy to implement this perspective but to a firm like ourselves in transition from being possibly a collective of partners to a group determined to become a leading firm it may be a difficult process that we will have to work hard at achieving. I say difficult because if you agree with me we should make our major objective to 'become a profitable leading firm', we are going to have to initiate and implement a new basis of management."
In viewing the firm - Australia wide - as one entity, we must come up and agree on some basic concepts. Not necessarily in any particular order, I'd list them as - First. We must have a recognised business definition of ourselves. We cannot simply be regarded as an accounting firm. One definition I'd suggest we give ourselves is 'a developer and marketer of accounting and business related services' but other thoughts are welcome. If we agree with that basic concept, it puts certain directions upon us. It means we do not merely proceed by attracting clients and then doing what clients want done. It also means we consciously decide what services we will offer, staff them accordingly and then go out and sell them. We make ourselves service orientated rather than client orientated. We target for clients who want those services and we do not take up jobs we cannot efficiently, professionally and profitably handle.
All it takes is willingness to impose and accept this discipline everyone.
Maybe we've got to have in each office and linked up nationally and internationally, partners devoted primarily to practice development. I would prefer to call them 'marketers and managers of the firm's services to clients'. Maybe these partners not only focus on new clients but canvass existing clients to reinforce existing partners and ensure we are maximising our existing services and anticipating the clients future needs. It is my honest belief that the traditional structure and operation of professional firms obstructs and frustrates them from being truly market and marketing orientated.
Within the advantages and disadvantages of our 'Federation' structure I'd like to propose a framework for planning that could possibly meet our needs. Incidentally, a similar framework could be applied in each State. Under this framework the planning and control process is broken down into three segments:
From the national viewpoint, I see the need for strong planning and decision making committees in, for example, the following areas - audit, small business, tax, MAS, computers, human resources, liquidations and marketing.
I also believe that on both a state and national level, we need to have specific action plans that ensure we develop our range of contacts with young, aggressive entrepreneurial businessmen and high technology orientated organisations.
Whilst the international scene is intrinsically linked with my previous comments - I'd just like to make a few observations.
There is considerable opportunity overseas for the sale of Australian services, particularly in Asia. I trust this is more fully investigated in future rather than looking only at business from overseas to Australia.
I would suggest we look at Asia in this way. Each country should be regarded very much as a sales territory in the commercial sense, and as in the commercial approach, each territory should have a sales representative responsible for producing results out of it. I trust that somewhere in our future planning this concept could be reviewed.
In the past year. Nelson Wheeler were invited to become a member firm of Grant Thornton International as opposed to being a representative firm. The advantages of being a member firm are that we have a say in the running of Grant Thornton International and also an opportunity to foresee the future of the international practice.
At the same time, Nelson Wheeler have taken the lead role in the Asia/Pacific area and have already chaired two international conferences for the Asia/Pacific area and conducted an in-house workshop for representatives from the area.
The representation in South-East Asia has now developed into a solid uniform driving force which is to be supported by the addition of a full time director from the United Kingdom who will be stationed in Hong Kong and who will assist me as the regional director for the area in the development of the Grant Thornton International practice in each country, the conduct of technical reviews of each firm within the area on a rotating three-year basis and who will be, more importantly, involved in organising the transfer of clients from opposition firms to Grant Thornton firms in each country.
With the present Associates using the Nelson Wheeler name more prominently in the business, we would present a more unified public image."
There can be little doubt about the thrust of this speech. Wenham was asserting the existence of a national firm, even though at one stage he used the expression "our 'Federation' structure".
Whilst it must be acknowledged that this speech is the words of one man, albeit the Chairman of Nelson Wheeler national, and is not a policy manifesto, or some such document, adopted by all those present, it was part of the conference and highlighted the perception that Nelson Wheeler national was a firm or a partnership, and one of its primary purposes was to expand and market Nelson Wheeler throughout Australia and overseas and to improve and increase services to clients. The motive was clearly profits. According to Ashby, the use by Wenham of the expressions "national firm" and "national partnership" evoked quite a deal of comment amongst those attending the conference and they "privately took issue with a number of the terms used by Wenham". This evidence is not supported by any of the other persons who attended the conference who gave evidence. If true, it would be a surprising reaction because members of the participating firms were aware of the widespread use of those expressions by Nelson Wheeler national and in the many publications issued by Nelson Wheeler national. I do not accept that there was such a reaction.
The plaintiff submits that the speech emphasised the importance of "brand recognition" and the need to present a "unified public image" so that the public become aware of Nelson Wheeler and its achieved recognition in the market place. It is submitted that the gaining of this "brand recognition" is an asset of value, namely goodwill which was owned and enjoyed by all of the partners around Australia. I accept that submission. The promotion of Nelson Wheeler national was for a purpose, to increase profits by attracting clients, including those who required a national firm, to improve the quality of service, to improve expertise and efficiency and to provide an alternative to the Big Eight.
The Nelson Wheeler defendants submit that little should be made of this speech. It contains exaggeration and is simply Wenham's message to those assembled. It lacks substance and contains inaccuracies. It is true that Wenham used expressions such as "our Federation structure" and "the group" but the thrust of the speech was plain. He was speaking of a national partnership and by inference a national practice.
It would be a surprising way to address those present if that was not the general understanding.
The evidence clearly establishes that Nelson Wheeler national recognised the need for a national approach to the work of certain clients and potential clients if that work was to be obtained and retained. This is one of the reasons for the references to the Big Eight and the desirability of being recognised as just outside that group. Many companies were truly national in their spread of operation and traditional work such as public company audit had to be undertaken in more than one location. One of the group of companies mentioned in evidence, Woolworths, is a good example. This group required audits in probably each State, all undertaken in the same or a similar manner. There was a perception within Nelson Wheeler that this type of client could only be obtained if there was a national approach to the work and Nelson Wheeler was seen to be a national firm with similar reach, reputation and services to the Big Eight firms, albeit on a smaller scale.
Work from this type of client was obtained and undertaken by various of the participating firms. The question is whether this activity is an indicator that there was a national partnership.
The minutes of the meeting of Nelson Wheeler national on 31st October 1977, the first attended by Pilmer, after his firm became a participating firm, record that there was a discussion about the ability to recover costs on "national assignments" and "the importance of initiating offices keeping interstate offices aware of budgeted fees and the fee structure". It was resolved:
"That national assignments should be approached on a national partnership basis."
Promotional costs in particular relating to national assignments was then discussed and it was resolved to form a sub-committee comprised of Simmons, Wenham, Fleming, Mr M Rowley and Pilmer, none of whom gave evidence.
On 18th October 1979 Arnold sent a memorandum to the "National Partners" on the subject of the marketing of Nelson Wheeler nationally. He requested the representatives of the participating firms to bring lists of various types of corporate clients for which audits work was done to the meeting on 5th November 1979. He went on:
"The purpose of this exercise is in an endeavour for Nelson Wheeler as a national firm to be in a position to present itself properly, should the occasion arise, as to the number of national audits handled which are listed on the stock exchange and other audits of a similar category, we believe that we should know the names that our audits are carried out on a national basis and what they are.
It is not intended that this information be made public, but it is becoming more apparent that unless we are seen to be amongst national firms by both our size and the number of substantial clients we audit, then we could find that either we fail to be appointed when the time arrives or one of our existing clients could become disillusioned in not being with an apparent strong national firm."
Already by this time, there were nine public companies which had been identified by the Audit Committee as falling into this category. That committee had earlier in the year conducted a conference of audit partners from the participating firms regarding practical problems of national audits and the need to adopt suitable programmes, to avoid duplication of work between the participating firms, for liaison between the firms, and for budgets and cost control.
Again, on 21st November 1983, the national body resolved to compile a schedule of national and international clients on a confidential basis for the "national partners".
Tenders for work were made on a national basis. At the meeting of Nelson Wheeler national on 30th April 1984, Wenham reported that during the previous two weeks "the firm" had been involved in a number of government tenders, in particular one involving an analysis of the electronic data processing needs of about 300 hospitals. The minutes record:
"With regard to tenders, it was stressed that national co-ordination must take place. Peter Rayner to organize and co-ordinate."
The minutes of the Audit Committee on 4th June 1984 record:
"The committee considered that Nelson Wheeler was on a learning curve as far as tenders were concerned and that utilisation of knowledge gained from tenders to date should be collated and made available on a national basis. The committee also expressed its concern that any consultants employed by the firm should be made aware that they should hold themselves out as Nelson Wheeler and not on a sub-contracting basis in any other name. Eddie Pippet advised the meeting on the current situation regarding the successful government tender of the nursing homes investigation (see notes and report compiled by E. Pippet). The committee saw merit in the nationalisation of audit tender quotes and activities and that sharing of costs on a national basis should also be examined."
There were other clients whom the plaintiff submits were national clients of Nelson Wheeler. The audit of the companies within that group were handled on a national basis. In July 1987 the Woolworths Group sought statements of qualifications from firms of accountants undertaking audit work. It proposed to review those statements and then select firms to present a proposal for appointment as auditors. A basis of charges had to be included in the proposal. A senior officer of Woolworths wrote to Wenham on 2nd July 1987 providing detailed information as to what was required. The appointed auditor would have to undertake extensive work in each State and the Northern Territory and the Australian Capital Territory and with respect to some subsidiaries in New Zealand. Wenham sent this information to Pilmer, Ashby and Simmons seeking assistance. Nelson Wheeler Adelaide responded on 7th August 1987 giving information for the statement of qualification.
Gray acknowledged that a major commercial reason to market Nelson Wheeler as a national unified body was to improve the chance of obtaining clients of this nature and that there had been a successful tender for the Woolworths work.
In late 1986 Nelson Wheeler, on a national basis, had discussions with Elders Finance Group about undertaking a joint venture in the provision of certain services. Simmons, Wenham and Pilmer were the representatives of Nelson Wheeler. A representative of Elders Finance Group described the proposal as an exciting opportunity for both organisations. It is unnecessary for present purposes to set out the detail of the proposal. It is sufficient to say that it envisaged Nelson Wheeler, which is described as a partnership, continuing to perform traditional accounting roles in audit, taxation and management and corporate advice, but that the two organisations would together provide services as partners in the one entity or in some other way. The conclusion expressed in the written proposal submitted by Elders Finance Group was:
EFG views this proposal as an exciting and innovative development for its domestic and international business and client base. It offers NW access to a capital base vital for a firm wishing to aggressively grow in the financial services section at home and abroad. Together, the two firms can steal a march on the competition and concoct a financial organisation which will attract the growth companies and individuals of the future and offer a unique, Australian based, international service."
On 24th March 1987 Simmons wrote to Atkins informing him that "matters are still proceeding with Elders ..." and requesting information concerning Nelson Wheeler Adelaide about fees, staff, profits and the like. On 30th June 1987 Simmons wrote to Wenham, sending copies to Pilmer and Arnold, about Wenham's contact with a potential audit client and went on to say:
"I am surprised that you did not keep me informed of this development as it flows from:
2. our discussions with Elders on a National basis.
As you are aware a substantial amount of time and effort has been put into these discussions and I think we should have an understanding as to what pans from it and what is co-ordinated for the benefit of Nelson Wheeler, National."
Other clients treated on a national basis were Kockums and the Australian National Submarine Corporation. On 15th December 1987 Simmons wrote to Wenham with copies to Pilmer and Ashby as follows:
"The National Executive meeting held on July 17 was advised that Kockums was a new client to be handled on a national basis, including all states. The meeting was further advised that Kockums were presently in their embryonic stages but a significant volume of both direct and referred work could be expected as a result of this association.
I would be grateful if you could provide me with a report, including fee levels, on the present position of Kockums and the Australian Submarine Corporation. Further, I would be pleased to receive information, including fee levels, pertaining to the current assistance and continuing support we are being able to offer to other referred Swedish companies, associated with this project who have or will be, establishing operations in Australia."
Further information as to the nature of the arrangements within Nelson Wheeler for the undertaking of the work is contained in the memorandum from Wenham to Ashby on 29th October 1987 entitled "Interstate Arrangement". Nelson Wheeler Sydney did not take a financial interest in Nelson Wheeler Adelaide:
"I have now had an opportunity to discuss this matter with my Sydney Partners and confirm our arrangement which is particularly associated with ASC/Kockums Submarine contract.
As agreed Nelson Wheeler, Sydney office would take up a small - say 1 percent interest in the Adelaide practice and I would suggest partners such as myself, Eddie Pippet, Michael Hilliard and Warwick James would be representatives of the Sydney partnership. This would show a strength to the Adelaide practice from those people who are already associated with the Submarine contract. As you know we have been working on this matter for some three years and have developed a very close working relationship with the principal directors and personnel of ASC and Kockums. Accordingly, direction with regard to the carrying out of the Audit, Tax Consulting and Consulting on Business Flotation will emanate from the Sydney office and will be handled in conjunction with the Adelaide office. It is important that the Sydney office is kept fully informed on all occasions where advice may be sought from the Adelaide office in order that we are not giving advice at variants (sic) with one another.
As agreed with you all costs, expenses and normal charge out incurred by the Sydney office will be charged directly to our client and with regard to matters undertaken in South Australia using Adelaide personnel a referral fee of 10 percent of the gross fee after 'out of pockets' will apply.
I trust this is satisfactory to you and would ask that you confirm this matter by signing the attached and returning it to me at your early convenience.
I will be travelling to Finland and Sweden at the middle of November to carry out further discussions regarding new clients."
In a letter which members of Nelson Wheeler Melbourne sent to Fleming in about April 1988 they wrote:
"1. Nelson Wheeler was established in Canberra in February 1983 with all the partners of Nelson Wheeler nationally being registered as the owners of the name.
3. It is, and always has been, our understanding that both Kockums and the Australian submarine Corporation were national clients of Nelson Wheeler via the practice established in Canberra."
7. We believe that because Kockums/Australian Submarine Corporation is a national assignment that a committee of 3 partners, one of whom should be from Melbourne, should be established to co-ordinate and review the job, including the relevant working paper files, for the 1988 year.
Having regard to the responsibilities and professional negligence risks associated with the Australian Submarine Corporation/Kockums audit, we are sure that you appreciate our concern that proper procedures be established for the Canberra practice forthwith."
Nelson Wheeler Perth and Nelson Wheeler Adelaide shared some clients. Nelson Wheeler Perth provided the share registry for Celtainer Limited and Technical Equities Ltd and Nelson Wheeler Adelaide undertook accountancy work for those companies in Adelaide.
In 1987 Nelson Wheeler offices around Australia undertook audit work for Beasley Industries in that where there was a subsidiary in a particular State, the audit work was carried out by the Nelson Wheeler firm in that State.
Whatever may be the view expressed at the trial by some of the Nelson Wheeler defendants, it is plain that one of the important functions and activities of Nelson Wheeler national was to market Nelson Wheeler to attract national clients who wanted to deal with one organisation as was readily acknowledged by Taylor. It was thought that firms which were seen to be truly national had an advantage. According to Taylor, he and his Brisbane partners were not happy with this type of marketing and the name Peden, Lavis & Co was not used. According to Taylor, Nelson Wheeler national provided the interstate service benefit. During the 1980's companies in the smaller States, Queensland, South Australia and Western Australia, were being taken over by companies based in Sydney and Melbourne with the result that audit work went to the Big Eight firms, and was lost to the smaller firms in the smaller States. Consequently, the purpose of the promotion of Nelson Wheeler as a national firm was to counteract that trend. Taylor acknowledged that work was in fact lost to the big firms which was replenished to some extent by the work referred through Nelson Wheeler national. Nelson Wheeler offices in each State undertook audit work for national companies and did so on a uniform basis using a manual prepared for that purpose.
The arrangement was that when a national organisation instructed a particular Nelson Wheeler participating firm to undertake an audit, the work to be done in other States would be undertaken by local Nelson Wheeler offices. Each office would submit a certificate to the initiating firm and a partner of that firm would sign off the audit as Nelson Wheeler. The Audit Committee of Nelson Wheeler undertook the task of uniform standards and systems and education of those involved in audits of national companies.
Work was not referred to a firm in another State which was not a Nelson Wheeler firm.
As has been seen it was part of the strategy to develop a national image and market that the participating firms were required to send lists of certain types of clients to the national secretariat. It is unnecessary to set out in detail the history of the implementation of this proposal. It is sufficient to mention a few of the relevant incidents. On 18th October 1979 Arnold wrote to the national partners requesting that they bring for the next meeting a list of public and foreign company audit clients under various categories. He wrote:
"The purpose of this exercise is in an endeavour for Nelson Wheeler as a national firm to be in a position to present itself properly, should the occasion arise, as to the number of national audits handled which are listed on the stock exchange and other audits of a similar category, we believe that we should know the names that our audits are carried out on a national basis and what they are.
It is not intended that this information be made public, but it is becoming more apparent that unless we are seen to be amongst national firms both by our size and the number of substantial clients we audit, then we could find that either we fail to be appointed when the time arrives or one of our existing clients could become disillusioned in not being with an apparent strong national firm."
The participating firms were, from time to time, supplying lists of clients by name and nature of business to the national coordinator for purposes which included promotion of Nelson Wheeler nationally.
On 7th May 1984 Leaver, who was seconded to the Sydney office to assist with "National Partnership" matters, wrote to the national "partners" in the following terms:
"PARTNERSHIP PROFILE AND CLIENT BASE CLASSIFICATION
You will be aware the recent National Partners meeting resolved that we should build a profile of the firm nationally.
1. the submission of details readily to hand/easily accessible in relation to composition of each office and broad client identification by industry type by major clients
2. refinement of detail on industry classification. Dissection of billings by service provided by industry type.
If any office is able to complete both stages easily/readily all to the good.
I don't believe at this stage it is necessary to define what we consider a major client, provided the following information is captured:
* Clients billing over $10,000 in Victoria, NSW and $3,000 in other states.
* Prestigious clients, be they national or intra state, irrespective of billing.
We have set up a computer programme in Sydney to store this market detail and make it readily accessible. In addition we will compile broad base data of the practice and issue it in booklet form for each offices/partners confidential use.
We would request the attached form be completed and returned in relation to your states details by the 18th May latest."
On the next day Leaver wrote to Simmons, Pilmer, Lavis and Ashby setting out the manner in which the information should be compiled and the types of information required which included the approximate fees received from each client annually, the nature of the service provided, and the partners involved with the client. The participating firms responded and by late 1986 the information was being entered into a data base.
It is the plaintiff's case that all of the members of the participating firms, and their representatives on the national body in particular were, as qualified accountants, well aware of their obligations with respect to client confidentiality. They could only disclose this sort of information without the consent of the clients to partners or they would be in breach of professional obligations.
It may be expected that qualified professional people carry on practice professionally and ethically. Disclosure of clients affairs without express or implied consent is usually a breach of confidence.
Messer acknowledged in his evidence that if there was not a partnership the disclosure of this information was usually improper without the consent of the clients. According to Ashby, he understood it had been agreed that the information about clients would go into a data base so that the executive member in each State could see the areas of expertise of each partner for the purpose of referral of work. He provided such information on the basis that it was confidential to the executive partners. He acknowledged that he had not obtained permission of the clients before the disclosure.
According to Taylor there was no reason why the executive should not have this information. Nelson Wheeler Brisbane provided information to the national body about new clients, including those who were clients of Peden, Lavis & Co. He did not consider it to be confidential information because the disclosure was within the Nelson Wheeler context. He thought the information would be kept confidential within Nelson Wheeler national. He did not regard the other participating firms as competitors.
Gay was aware of the obligation of confidentiality. According to him, when requested by Lavis for information he gave only the names of the clients because he did not regard that disclosure as a breach of confidence since that information would have been public knowledge. However, he said he would not have given that information to anyone who was not associated with Nelson Wheeler. He did not regard the other participating firms as competitors. Lavis regarded the provision of some of the information about clients to the national body as improper because it amounted to a breach of confidence. At all times Lavis denied that any member of a Nelson Wheeler firm outside Queensland was in partnership with him, Gay or Taylor. However, Lavis, Gay and Taylor did provide information about their clients to the national body and after 1979 and did so routinely. Careful consideration of the evidence of Lavis suggests that he did not see any reason not to disclose that information. When pressed, Lavis attempted to justify the disclosure of information about some clients on the basis that they were public companies or organisations and what was disclosed was already in the public domain. I find that explanation a little specious. The true position is that Lavis willingly disclosed to the national body information about the clients of his firm regardless of whether they were public companies or organisations because the disclosure was to the national body of which he was a member.
A purpose of the disclosure was obviously to permit each member to be aware of the expertise of the others interstate and to enable sensible referral arrangements. Also the client data base enabled members to target potential clients for whom other participating firms were already carrying out work.
I think the plaintiff makes a valid point. The disclosure of the information about clients does not, in itself, establish the existence of a partnership between the members of the various firms but the willingness to disclose the information suggests that these men did not regard doing so as a breach of confidence because of the nature of their relationship. It is consistent with their having regarded themselves as partners and of Nelson Wheeler national being a partnership.
Standard fees were introduced by Nelson Wheeler national for the first time on 16th November 1973 for some work of a routine nature such as the filing of annual returns for companies, the registration of business names and some corporate secretarial work. The evidence does not disclose all of the standard fees. They were reviewed and approved by the national body on 6th November 1978, 21st November 1980 and in March 1986. All of the participating firms assisted in these decisions and reviews.
There is no evidence to suggest that any other type of fees charged by the participating firms were uniform or standard.
As has been mentioned, each participating firm carried on practice locally without the sharing of fees or profits between them except in the limited way which will be mentioned shortly. Each firm undertook its own work, charged and received fees, paid expenses and distributed profits to the members of that firm. No one participating firm shared in the profits, or losses, made by another or others. Balance sheets and profit and loss statements, levels of capital and debt were not exchanged. No firm had capital or a direct financial interest in another.
However, some expenses were treated as common expenses and were paid out of income specifically collected for that purpose and paid to Nelson Wheeler national. These were the expenses incurred by or through Nelson Wheeler national.
As has been seen the sources of income for Nelson Wheeler national were referral fees, levies on the participating firms and fees raised for the purpose of professional indemnity insurance. In addition, each participating firm contributed to the cost of certain publications from time to time and the levies raised by Grant Thornton International. The income was paid into the bank account of Nelson Wheeler national and the expenses were paid from that account. They included advertising fees, bank charges, professional indemnity insurance premiums, membership fees paid to Grant Thornton International, travelling expenses for some members of the National Executive, the cost of publications and national advertising.
Nelson Wheeler national periodically prepared budget statements of receipts and payments and summaries of income and expenditure. The financial statements were tabled at meetings of the National Executive.
Work was referred from participating firms to other participating firms. It was the policy that the work would be referred to a participating firm and not to an outside firm whenever possible. Generally speaking, the arrangement came to be, that the participating firms paid 10 percent of the fees earned on referrals to them, to Nelson Wheeler national. The referred fees were calculated each quarter and had to be paid within 30 days. Levies also had to be paid by each participating firm. Initially the levies were modest as were the expenses of the national body, but as those expenses increased, so did the amount of the levy. At first the amount was based upon the number of partners in each participating office. Subsequently, the levies were based upon the gross fees raised by each participating firm. Levies were also paid by Nelson Wheeler Hong Kong, a firm which is discussed later. The way in which the arrangement worked was that after the levies had been raised against the smaller firms and the extent of the other income and all expenditure was known, the amount of the levies raised against Nelson Wheeler Sydney and Nelson Wheeler Melbourne was determined so as to meet the shortfall.
A summary of income and expenditure of Nelson Wheeler national for the period from 1st July 1987 to 29th January 1988 reveals the nature and extent of the income and expenditure during that period. Total receipts were $37,681.79 and included modest contributions for the cost of a directory entitled "Australian Business Communications Directory". Levies on Nelson Wheeler Brisbane and Nelson Wheeler Perth were not included but would have been relatively small amounts. Total expenditure was $30,101.00. A significant part of the expenditure was for promotional publications. Also there was an outstanding amount of US$15,199.00 due to Grant Thornton International.
Each month the national coordinator forwarded copies of the bank reconciliation of Nelson Wheeler national to the participating firms.
The plaintiff contends that these arrangements are an indication of the existence of a national partnership in law. The referral of work to other participating firms had the consequence of part of the fee being applied for the benefit of the whole group which, on the plaintiff's case, is a manifestation of the conduct of a single national business with a view of profit to all.
Clearly the referral fees were used in administering Nelson Wheeler national and in the promotion of Nelson Wheeler nationally for the benefit of everyone. Taylor, Lavis and Gay acknowledged that such was the case.
A referral register was maintained by each participating firm recording the firms involved in each case, the name of the client, the nature of the work and, in some instances, the names of the partners involved.
It is not possible, from the evidence, to reach any conclusion as to the true extent of the referral work throughout all of the participating firms and the level of profits for each firm gained from such work, particularly as members of Nelson Wheeler Sydney and Nelson Wheeler Melbourne did not give evidence. However, it is likely that the profits were significant. There is some available evidence.
Nelson Wheeler Adelaide regarded itself as one of the smaller participating firms. Fees charged for referral work in the year ending 30th June 1982 amounted to about $62,000. In the year ending 30th June 1987 the fees were about $80,000. According to Ashby the amount of audit work undertaken by his firm was in percentage terms about 25 percent of all work and about half of that work was referred from other participating firms. There was not much work of any other type referred to the Adelaide firm.
According to Lavis, Nelson Wheeler Brisbane received about $50,000 to $60,000 per year in gross fees from referral work. This work was undertaken in the name Nelson Wheeler and not Peden, Lavis & Co but the firm used both names and all earnings were absorbed into the one account. In the year ending 30th June 1986 referral fees amounted to $66,804. The plaintiff's advisers prepared an analysis of the income, expenditure and profit of Peden, Lavis & Co in that year as well as the distribution of taxable income to the three partners. The conclusion expressed in that analysis is that referral fees in that year amounted to about half of the taxable income of each partner on the basis that all expenditure was against other income and other sources of income associated with the practice are excluded. Taylor accepted this analysis. It is unnecessary to set out this analysis or to consider it in detail. Clearly the referral system provided significant income and profits to Nelson Wheeler Brisbane.
Fees to be charged for referral work were set by the firm referring the work. That was the case with work referred to Nelson Wheeler Brisbane and it may be accepted that generally speaking such was the case regarding work sent to other firms. The firm receiving the work usually charged the initiating firm which, in turn, sent a composite account to the client and then paid the referral firm. In this way there was a sharing of fees. Also, there was a sharing of the 10 percent referral fees by all members of Nelson Wheeler national because they were paid to Nelson Wheeler national to meet common expenses.
On occasions members of the referring firm would travel to the firm undertaking the referral work and would assist in undertaking the work.
Mention has been made of the committees and that there were eight of them by August 1985. In his affidavit filed in the legal proceedings in 1988, to which reference has been made, Grellman deposed that the committees were formed:
"Pursuant to the desire of the firms conducting business under the national name of Nelson Wheeler ... to co-ordinate and improve the individual practices, abilities and understandings in particular areas" and "... were established in order to co-ordinate systems and procedures used in the various Nelson Wheeler offices.".
In his affidavit in the same proceedings Arnold described the purpose of the committees as to "adopt uniform and standard procedures among all of the participating offices" and to achieve improved office practices. The documentary evidence supports this description.
The committees which were operating had representatives from participating firms although not every firm was represented on every committee. They reported routinely to the National Executive. It is appropriate to say something about each of the committees.
The audit committee was established on 14th July 1972 with representatives from each of the participating firms. It was formed at the meeting on the day the deed was executed.
At the meeting of the committee on 19th and 20th June 1983, it was recognised that the committee was "a principal means of co-ordination of effort in the National Firm and that it was important that the committee met at regular intervals".
The committee met from time to time and produced publications for the various offices. It was to formulate statements which could be made by the national firm in the business arena. It produced common audit stationery and audit manuals. It produced a business plan which included marketing strategies, and public awareness of Nelson Wheeler programmes. It considered staff training, audit materials consistent with those of Grant Thornton International.
The minutes of the meeting on 14th June 1985 set out in some detail the matters under consideration by the Audit Committee. The Committee accepted that it had been successful in establishing a forum for communication between the participating firms on a national basis. The minutes record:
"Its initial role covering such matters as audit stationery and audit manuals is now changing and the general view is that the Committee should look at matters which could best be handled on a national basis or where national policy was required. Examples would be technical publications, approach to EDP [electronic data processing] audit, changes to audit manual, technical releases, etc.
It provides an opportunity for the members of the Committee to get together and discuss common audit problems and approaches on such matters as audits of building societies, solicitors trust accounts, stockbrokers, etc. It is felt that this regular contact ensures that we are more aware of what each other office is doing and helps to identify new areas of audit service. It was considered that full meetings of the Committee should be restricted to one per annum and acknowledged that more effective arrangements could be made by holding regular meetings every couple of months between active members of the Committee in Sydney and Melbourne in order to progress items under consideration and take prompt action."
Other matters considered at this meeting were audit stationery, the audit manual, compulsory professional education, new accounting standards, staff training and marketing.
Soon after the formation of the national body, the audit committee developed and periodically reviewed a common audit manual which was distributed to each of the participating firms. The Grant Thornton International audit manual was distributed to each firm in June 1985. By 1981 the audit manual included an appendix setting out the names of key partners with specialised knowledge on particular topics who could be contacted by another partner seeking assistance. Common audit stationery was introduced in July 1981 and was thereafter updated and compiled into the "Nelson Wheeler Stationery Package". The committee also considered the establishment of a data base of all specialised valuation reports, prospectuses and investigating accountants' reports to provide a source of reference for staff members who were requested to provide experts' reports in specialist areas. However, the evidence does not disclose if any such data base was ever established.
It may be seen that the Audit Committee undertook ways and means of improving professional standards but also of attracting audit work to the members of Nelson Wheeler national through common approach to work and marketing. A profit motive was clearly evident.
The tax committee was formed on 14th July 1972. It met occasionally and was comprised of representatives of each of the participating firms. The evidence does not disclose whether Nelson Wheeler national adopted a business plan for the tax committee but such a plan was discussed by the committee at a meeting on 12th November 1985. That discussion included the promotion of the name Nelson Wheeler, including by ensuring that the firm was promoted to professional associates, and by a more consistent effort in exposure of Nelson Wheeler to the media and by the development of contact points at national and state level. Various publications with national circulation were mentioned.
From time to time the committee collated and distributed, presumably to the members of the participating firms, material on various topics which was designed for their own use and for distribution to clients. Examples of the topics are Foreign Investment Rules (debt equity ratio), Negative Gearing - Foreign Investments, International Transactions, Substantiation Rules, Private Company, Sufficient Distribution Requirements and Investment in Australia and Bulletins containing important tax information for clients. On one occasion in 1987 a feature article was prepared for inclusion in a monthly magazine "commenting on general taxation considerations and year end tax planning". It was recorded that the article "should give significant prominence to Nelson Wheeler". In 1984 it was proposed to collect information about Sales Tax and Payroll Tax on a national basis.
Staff training programmes were undertaken, including for Nelson Wheeler Associates but, it would seem, infrequently and mainly in 1983.
Reports of the tax committee were supplied to the National Co-ordinator and to the members. It was proposed to establish a national precedent file.
The Management Advisory Services ("MAS") Committee was formed and had its first meeting on 5th June 1984. It was attended by representatives of all of the participating firms and by the national co-ordinator Rayner. At that meeting consideration was given to national tasks to be undertaken and by whom. These tasks included acquiring industry profiles, the establishment of a nationally based micro-computer system for general accounting and legal accounting and the production of a national "Business Opportunity Newsletter".
The Committee met periodically and reported to the national body. At a meeting on 13th November 1985 it considered the following as the types of services which would be offered: client accounting, client management, client "problem solving", client appraisal, organisational appraisal, corporate planning, marketing control, human resources, financial planning, cost reduction, credit control, production, stock and quality control, corporate secretarial services and special assignments. Some of this type of work was undertaken by some of the participating firms but perusal of the minutes of the meetings of the committee reveals that the purpose of the committee was to co-ordinate and develop these types of activities and to promote them as services of Nelson Wheeler within the States and nationally. At this meeting it was accepted that management advisory services "would appear to be the promotion of ... Nelson Wheeler services to the public and large private companies".
By the middle of 1986 the name of the committee changed to the National Management Consulting Committee. The committee reported to the National Executive meeting on 6th June 1986 that there were reasons to believe that Nelson Wheeler was already recognised, in some areas of the commercial world as having "a very professional M.C. practice" and that the growth of management consulting was a growth area "of major importance to the future development of Nelson Wheeler as a known force in the Commercial/Financial world". The report went on to discuss the need for development of this activity and the lack of co-ordination between the State offices. It was reported:
"As a consequence of this we are not getting the best usage of the skills that we have available in-house. With no one person co-ordinating our efforts, we cannot possibly be marketing our true potential.
This factor compounds when you look at our ability to promote ourselves as a national M.C. consulting group. The problem here is although we know that in individual States that we can compete with P.A., McKinney and 'Big 8' firms, we cannot yet on a national basis. The reason is because we are not co-ordinated nor do we have a track record for co-ordinating to our mutual benefit.
In order for M.C. to be really successful for Nelson Wheeler, it must have a national reputation. To date we have only attempted to build a national reputation for our audit services and even this has not been as fully developed as it should be. Each of the larger offices Melbourne, Sydney and Perth must develop a full time M.C. section headed by a partner and manager. This section would be involved in all M.C. assignments (if only in a monitoring role) and work in with the other States for National briefs."
At a meeting held on 5th June 1984 this committee agreed upon a number of projects. They included the acquisition of national industry profiles from New England University and to approach the University regarding the inclusion of Nelson Wheeler in those profiles for the purpose of promoting the firm. Also, it was agreed to acquire a national micro computer based general accounting system and legal accounting system, and develop a national register of Nelson Wheeler staff with management advisory services skills and produce a national business opportunity newsletter.
The committee met on about nine occasions between 1984 and 1987 and the last meeting was on 4th February 1987. Lavis said that he thought the committee never got off the ground, but his recollection is incorrect. Martino said that he thought the committee was a farce. That description is not correct but I do not think a great deal was achieved by the committee. The minutes of the meeting of the committee on 24th November 1986 record that it was felt that management consulting within the Nelson Wheeler national committee "was not considered to be of high priority" but the committee resolved to press on.
At the meeting of the committee on 6th June 1986, consideration was given to acquiring the exclusive rights to a "Profit Improvement Plan "which had been developed by an unassociated accountant to analyse businesses of selected clients with a view to improving their profitability. It was proposed that the Plan should be owned equally by all of the Nelson Wheeler firms which would best be achieved by the creation of a new partnership known as Nelson Wheeler Management Consultants, with each state partnership holding a one fifth interest.
The Nelson Wheeler defendants contend that this decision itself reveals that members of each firm did not consider themselves to be in partnership together. It is submitted that if there was already a partnership in existence, each of the participating firms would have an interest and there would be no need for a new partnership to be created. That may be so. However there is no evidence from the authors of the report which explains the purpose of the proposal. At that time the committee was comprised of Mr A.J. Laidler, Mr D.O. Kew, Atkins and Mr J.R. Warton, all of whom are fifth defendants and Lavis. It seems that Lavis did not attend meetings because the report refers to the failure of Nelson Wheeler Brisbane to attend any meetings. The failure of the other men to give evidence is unexplained. It is not known why they made this proposal. It may be for the reason the Nelson Wheeler defendants suggest. It may be that such an arrangement would achieve equality among the firms which had not been achieved by the existing arrangements. There may be some other reason. Without an explanation little may be made of the matter.
The Associates Committee was formed on 14th June 1985 and each of the participating firms were represented. Periodic reports were made to the National Executive. There was a reunion for associates in Sydney on 7th November 1986 which, I assume, was attended by the associates practising in New South Wales. A draft national policy and objectives statement for associates was drafted. A separate "cost centre" was established in that State and the value of referral work from associates for, I expect, the associates in New South Wales was $135,000.00 gross in the 1986 financial year.
However it appears that the Associates Committee did very little. The reports seem to have been made by State firms direct to the National Executive.
There is no evidence to suggest that the other four committees which were established, namely, the share registry, secretarial, computers and insolvency committees ever met.
The evidence concerning the committees establishes that the primary purposes were profit and improvement of professional standards and service. They were to advance the interests of the members of the various Nelson Wheeler firms by publicizing Nelson Wheeler national and developing of facilities and materials with a view to attracting new clients and improving services. The committees which did function advanced these objects to varying degrees and provided some benefits to the members of the firm. It appears that none of the committees controlled the practice of any of the firms or had authority to direct any of them as to how to undertake work and charge for it, but there was general acceptance of common forms, methods of work and stationery in some areas of practice. The power to control a client was not an issue.
There is some evidence to suggest that Nelson Wheeler Perth was not entirely autonomous in its structure and perhaps method of operation. In October 1982 Wenham, Arnold and Simmons were requested to sign a form so that Nelson Wheeler Perth could open a bank account as soon as possible. There was no evidence from any of the partners of Nelson Wheeler Perth about this matter and it remains unexplained.
On 19th July 1985 Pilmer wrote to Wenham, Arnold and Simmons about the registration of the name Nelson Wheeler in Western Australia which included:
"The reason for the release is so that we can proceed to arrange the Western Australian Practice finance requirements without having to include any of the nominal partners as jointly and severally liable."
He proposed the preparation of a Deed to be executed by the partners of the Perth firm (and presumably others) in which the right to use the name Nelson Wheeler would be preserved and for:
"... the approval of Messrs Wenham, Arnold and Simmons or their respective nominated convenors to any change in the registered particulars of any name including the words 'Nelson Wheeler' either existing or prospective."
I do not think that these matters assist in the resolution of the issue of whether there was a national partnership. Evidence from Wenham, Simmons, Pilmer and Arnold may have explained the reason for the arrangements about the bank account and the reason for changes in the registration of the business name. However, these matters are consistent with the perceived need to preserve the rights to the business name and to some requirement of the Bank at that time.
The participating firms, from time to time, provided information to each other about a variety of matters during the course of their involvement in the national body. Such information was about businessmen and companies carrying on business the use of consultants and investment opportunities for clients. In 1984 the firms in Sydney, Melbourne and Perth informed each other of the partners within their firms who were responsible for particular areas of practice. There was contact regarding national matters of an administrative nature. On 22nd November 1983 Wenham requested the co-ordinator Rayner as follows:
"2. Please have a system of people-to-people management for the practice nationally, i.e. office managers-to-office managers, decisions or inter-firm billings, corporate people-to-corporate people for matters with regard to companies functions, business names, etc. Please prepare a paper and have this distributed to all offices and ask each office to nominate who is to be referred to for those matters."
On occasions members of participating firms sought assistance from members of other firms to resolve problems of clients. The extent of this activity is not revealed by the evidence but it may be expected that it happened from time to time.
The participating firms informed Nelson Wheeler national of the introduction and resignation of partners, but there is no suggestion that the permission or consent of the national body, or other participating firms, was sought or required. Indeed, it will be remembered that cl.2(f) of the Deed of 14th July 1972 required the participating firms to provide this information.
Members of participating firms, when travelling, visited other firms interstate and associated firms overseas, but the extent of this activity is not known. The participating firms were encouraged to promote Nelson Wheeler and the evidence suggests that they did so, to varying degrees, when the opportunity arose. I accept that Pilmer, Wenham and Simmons did so as did some other members of their firms but Lavis, Gay and Taylor were less active in this respect as were other members of the various firms.
On 25th May 1984, Rayner wrote to all of the participating firms informing them that at a recent meeting of the national committee it was decided that each participating firm be provided with two copies of the published annual reports or accounts of each Nelson Wheeler client company and requesting that each firm send to him eight copies of any published annual reports for distribution through Nelson Wheeler Sydney. Also, copies of the prospectuses for various companies were sent from office to office.
An example of the possible benefit to the participating firms is to be seen in the memorandum which Wenham wrote to Munachen on 3rd December 1984 after Munachen had sent to him a prospectus for each of two mining companies. He wrote:
"I note that Peat Marwick have been appointed auditors in both cases. Please advise if and when we have any say in the matter should we try and appoint a firm with whom we can have some offset in future transactions."
Whilst the extent of this type of exchange is not revealed by the evidence, some instances are established.
Mention has been made of the composite professional insurance cover which was accepted by all of the participating firms and continued since 1st January 1978 with the exception of the Brisbane office which joined the scheme on 1st January 1979. For obvious and good reasons, no evidence was adduced as to the extent of the total cover at times relevant to the issues in these proceedings.
The insurance cover was negotiated by Grellman, on behalf of the National Executive, who arranged for each participating firm to complete a proposal form which was sent to him. Having arranged the policy, Grellman sent a copy of the policy, including any endorsement documents to each firm. In the course of arranging the policy each year Grellman corresponded with each of the participating firms and the National Executive. When he sought to relinquish this role, he wrote to Wenham on 11th March 1987 indicating that he did not see that professional indemnity insurance was his responsibility "in that the National Partners have that responsibility and indeed have exercised it in meetings from time to time". He referred to the brokers involved in securing the policy, Marsh and McLennan, as "the National Partnership brokers". He went on to say that:
"Once again, it is of course a matter for the National Partners to direct such cover as is deemed technically and politically expedient."
In this memorandum he suggested that the National Partners consider cancellation of the "National Policy" and that each State office obtain its own cover and that "all locations agree a procedure for reacting to any claim as is made on a holding out basis against all Nelson Wheeler locations". He concluded by mentioning that there could be a need to appoint a replacement for him. Once again it may be seen that the question of a holding out as a basis of liability was raised.
The premiums were calculated upon the total of the fees of all of the participating firms. Each firm contributed proportionally on the basis of their fees. As has been mentioned each participating firm paid their share of the premium to the National Secretariat which paid the broker.
Initially there was an excess of $50,000 to be shared on the same proportional basis. On 11th February 1986 Grellman wrote to the members of the National Executive with a suggestion that the excess should be increased up to $200,000. He wrote:
"In regard to the increase in the excess, it is to be recognised that the national firm now has 51 partners and thus provides an enlarged base in which to absorb the uninsured amount of any claim.
Our present arrangements are for the bearing of an excess and indeed the premium on the basis of the proportion of fees generated in each state. Thus, regardless of where a claim arises, the larger states will bear the greatest burden."
Lavis' response indicates that he was not entirely happy with these arrangements. He wrote that his partners in Brisbane were not particularly comfortable with the excess at $200,000 but the National Executive had agreed to share the excess should the occasion arise.
The arrangement about sharing the excess was altered as from the beginning of 1987. In a memorandum from Grellman to the National Partners on 8th January 1987 he wrote:
"It is appropriate to set out the understanding reached by the National Partners relative to the absorption of any excess as between various offices of Nelson Wheeler in the event of a claim.
The present self insured amount of $200,000 is to be borne wholly as to $50,000 by the state office wherein the claim arises with the remainder being contributed by all states in the ratio in which the premium of that year was shared i.e. pro rata to aggregate Nelson Wheeler Australia fees billed."
The National Executive meeting resolved in those terms on 27th August 1986. At that meeting Pilmer raised the question of whether each State could consider getting its own cover. It is recorded in the minutes that Grellman acknowledged that while such a course would be cheaper "it would probably make very little difference overall because of the number of joint audits carried out".
According to Messer, Nelson Wheeler Perth could have negotiated a better premium and a lower excess locally but did not do so because it was part of the national arrangement that professional indemnity insurance would be covered on a national basis. Crawford said that the position was the reverse .
One policy document was produced at the trial and admitted into evidence. It covers the period from 31st January 1986 to 31st January 1987 and shows the insured to be Nelson Wheeler and various companies and entities of Nelson Wheeler, eg Nelson Nominees Pty Ltd, Nelson Wheeler Associates and various entities controlled and run by the participating firms. Also it shows the insured to include Nelson Wheeler Queensland and Peden Lavis & Co. The other participating firms are not separately named. The addresses of the insured are shown and include the addresses of the participating firms. The policy sets out the partners of the firm Nelson Wheeler in a schedule, as all of the partners in each of the States.
Given the evidence of Messer that better options were available locally, it is not clear why some of the firms participated in the national scheme of insurance. Indeed when the policy was being re-negotiated in early 1987 Lavis wrote to Mr A Brown of Marsh & McLennan and expressed his dissatisfaction with the insurance scheme and informed him that he could make better arrangements for his firm. At all events Lavis and his partners participated in the 1987 year.
It is the plaintiffs' case that these professional indemnity insurance arrangements were an indication of a national partnership, otherwise there would be no need for the sharing of the excess in the manner agreed. I think these arrangements are consistent with there being a national partnership and otherwise. If a partnership was in existence, it is to be expected that the partners would all require cover with respect to the conduct of every other partner. That is how the policy is worded. The schedule does not mention the participating firms, but each member individually as the "Partners". On the other hand, the purpose of the arrangement may have simply been to achieve savings for some of the participating firms or for some other reason, but once the policy was effected it is reasonable to expect that those participating would want to establish a fair basis for payment of the excess.
It is the Nelson Wheeler defendants' case that careful scrutiny of the arrangement demonstrates that the inference of a national partnership should not be drawn. In proposal forms completed by Nelson Wheeler Adelaide the only information about the firm and the number of partners is local information. They reveal that there are no branches of the firm but "associations" with the various firms interstate.
Also it is contended by the Nelson Wheeler defendants that there is no evidence that the policy document and the schedule in particular was prepared by the participating firms and therefore it cannot reveal the state of mind of any of the partners at the time. It is very likely that the policy document including the schedule was not prepared by any of the participating firms. However it was sent to each firm. Grellman must have seen it. The broker Marsh and McLennan probably prepared it but the person in each firm handling the matter would almost certainly have examined it. No one took issue with the description.
The Nelson Wheeler defendants contend that the likely reason for the one policy was the appreciation of the potential liability of the participating firms on the basis of a holding out, particularly with regard to the Associates. Mention has been made of awareness of that problem.
There was no evidence from Grellman or the representative of Marsh and McLennan which could have explained why the insurance arrangements were undertaken in this way. It seems likely that options other than a composite policy in this form would have been available. Separate policies for each participating firm with attractive premiums and terms by reason of all members being involved may have been an option. It may have been possible to guard against the potential liability of a holding out with appropriate separate policies. What is puzzling is why men of the training and experience of qualified accountants well aware of the potential liability of the acts of others through partnership law, including holding out, would allow themselves to be described as partners of each other if they did not regard that to be the true position.
As has been mentioned, from late 1978 or early 1979, all work at Nelson Wheeler Adelaide was undertaken in the name of Nelson Wheeler. The telephone was answered in that name and the stationery and signage bore the name of Nelson Wheeler. That name was registered in South Australia under the Business Names Act as from the 28th July 1972. When the application was made for renewal of registration of that business name, Fleming and Mann were said to be the persons carrying on the practice in South Australia under that name. Ashby joined Fleming in that registration on the 1st January 1978. Boyle joined them in that way on the 1st July 1979.
It seems that there were discussions between the members of the various participating firms during 1980. In that year Wenham and Simmons also joined in the registration of the name Nelson Wheeler in South Australia. Their names, along with those of Fleming, Ashby and Boyle, are recorded in the appropriate document as carrying on the business. It will be remembered that with respect to Nelson Wheeler Perth, Wenham, Simmons and Arnold became registered as the proprietors of the business name Nelson Wheeler along with the local partners. The same occurred with Nelson Wheeler Brisbane. The name Nelson Wheeler was registered as a business name in Queensland on the 20th November 1972. In 1978 Wenham and Arnold became proprietors of the business name.
In July 1984 the registration of the business name of Nelson Wheeler in Adelaide was renewed. Boyle had left the firm and Vine and Atkins had joined. The business name of Nelson Wheeler was registered in the name of Fleming, Ashby, Wenham, Simmons, Atkins, Grellman, Pratt and Mr D.G.A. Bryden. Bryden was a member of Nelson Wheeler Sydney. The form signed by those men indicated that they were carrying on the business of Nelson Wheeler in Adelaide.
Fleming wrote to Arnold on the 24th February 1982 to the effect that costs exceeded income from referral work but that he accepted that position:
"... on the basis that the prime concern was to have a sound, well-operated office in Adelaide to cater for the needs of interstate requirements. If anything, the position is more acute and with the present trend of company mergers and takeovers, South Australian businesses are being controlled from interstate."
Obviously, Fleming is expressing a reason for the establishment of Nelson Wheeler national.
Ashby knew that "national firm" was the expression used by partners of Nelson Wheeler to describe the national association and he never expressed any objection to that expression or to the expression "national partnership". The letterhead of the Adelaide office was arranged through the national co-ordinator and obtained from Sydney.
On the 9th May 1980 Fleming wrote to Wenham. He expressed his view of a purpose of Nelson Wheeler national:
"The National Partners' Meeting in Melbourne in November 1979 recognised that Nelson Wheeler in Australia needed a complete national image, a united commitment and forward policies, planned to cope with the 1980's and the movement within the profession towards strong, soundly based medium to large National firms. It was evident that some of our partners saw a very real danger in being 'out gunned' and 'over-run' if a National Partnership was not formed within the period of 12-18 months after that date."
Fleming went on to write that the Adelaide partners recognised the need for National Partnership and discussed at length the various avenues available. He mentioned their conclusions. Full National Partnership in the first instance would be fraught with too many obstacles within the practice of each State. However, he wrote that a partnership for all "National work" incorporating all partners should be attempted. Nominated 'National work" was to include all clients which required work to be done outside the State regardless of the fee and should be undertaken by a National Partnership. He mentioned financial matters which need not be recited. According to Ashby this suggestion was never implemented.
Fleming wrote another memorandum to Wenham on the 9th June 1990 following a meeting of national partners a few days earlier. It includes:
"3. I believe that in the final assessment of the international proposition we must be "National" or at least appear to be "National". This is most certainly the case in Adelaide, where everything is done in the name of Nelson Wheeler, and the national image is projected as a matter of courses (sic).
We believe that we have played our part in the national scene and completed national assignments to the satisfaction of all concerned. We are endeavouring to expand the local content, but this will be a slow process in the Adelaide commercial climate.
On the 18th December 1980 Ashby wrote to Wenham and informed him of decisions which he, Fleming and Boyle had made in Adelaide following the National Conference in Canberra:
"The partners of Nelson Wheeler - Adelaide agree that all decisions emanating from Adelaide affecting Nelson Wheeler Nationally shall be joint decisions of the resident Adelaide partners, and Messrs. Wenham and Simmons representing the National Partnership including any matters relating to the licence to operate and use of the name Nelson Wheeler in South Australia; such joint decisions to be accorded the following voting rights. 75 percent resident Adelaide partners; and 25 percent Messrs. Wenham and Simmons. It is further agreed that Messrs. Wenham and Simmons shall continue to be two of the registered owners of the registered business name Nelson Wheeler, along with the resident Adelaide partners whoever they shall be. Finally, it is agreed that Messrs. Wenham and Simmons shall be kept informed at regular intervals of not more than three months, either by letter or verbally of the plans and development of the Adelaide partnership."
Nelson Wheeler Adelaide informed Wenham of various matters concerning the composition of the firm from time to time. In June 1984 there had been discussions about Atkins and Vine joining the firm from 1st July 1984. Fleming was to become a non-equity partner. Ashby wrote to Wenham about these matters and also wrote:
"Mr. Gordon Tremain of the Sydney office has been kept totally informed of the position and visited Adelaide with Peter Rayner to meet Chris and Simon in late May. Both Gordon and Peter were very enthusiastic about the two new partners and the merger in general."
This evidence is consistent with compliance with the provision in the Deed already mentioned. I do not think it should be regarded as an indicator of a national partnership.
I pause to mention that in memoranda written by Ashby, he did not have any difficulty in referring to Nelson Wheeler national as a national partnership. He eschewed that expression in his evidence and he referred to Nelson Wheeler national as a federation.
Nelson Wheeler Perth also advanced the interests of the national association. On the 11th March 1981 Pilmer wrote to Wenham informing him that:
"We are constantly promoting Nelson Wheeler and most new work of any importance is conducted in that name."
All of the offices of each State had access to the national materials of Nelson Wheeler. According to Crawford, Nelson Wheeler Perth was the local representative of a national firm. They acted for "their national clients on the basis that they could perhaps attract bigger clients by saying 'Look, we have one organisation that can act for you throughout Australia'." He went on to say that it was his understanding of how "they were looking at promoting it, they could offer services in all States for any clients they might be able to attract.". Crawford agreed that he and Nelson Wheeler Perth held themselves out as being members of a national firm.
The position of Brisbane was different. As has been mentioned the partners Lavis, Gay and Taylor continued to practice under the name Peden, Lavis and Co. They did so for all but the work referred to them by Nelson Wheeler offices interstate. They undertook that work in the name of Nelson Wheeler.
On the 3rd June 1981 Taylor and Gay applied for registration as public accountants and company auditors in New South Wales and gave as their address the office of Nelson Wheeler Sydney.
In June 1982 Lavis advised Alison Spicer of the national body that the partners who were currently registered as public accountants in Queensland would have to lodge fresh registration forms. She in turn informed the other state offices. Obviously partners in firms in other States had registration in Queensland.
The letterhead of Nelson Wheeler Brisbane showed Lavis, Taylor and Gay as resident partners, and as was the case with Nelson Wheeler Adelaide, this letterhead was obtained from Sydney. The decision to use the expression "Resident Partners" and their names on the letterhead was made at a national partners meeting in 1978. Lavis was not at that meeting. Lavis informed the national partners meeting on 14th March 1986 that in "relation to stationary we will continue to present the National image".
Each of the participating firms had business cards including Nelson Wheeler Brisbane which were used by the firms. In Brisbane the firm also had business cards in the name of Peden Lavis and Co and with both names. Lavis sought advice from Arnold about both names being on the one card. At the Brisbane office the telephone was answered by "Peden Lavis/Nelson Wheeler" as there was no separate telephone for each firm. The notice board at the office contained the name of both firms. Arnold expressed the view that the business card with both names "would be most suitable". There was an entry in the telephone book under Nelson Wheeler. Each of the partners in Brisbane accepted that they were carrying on practice in partnership as Nelson Wheeler and Peden Lavis & Co.
The story with regard to the office in Canberra is not entirely clear. Mr J Kent had been a licensee as from 31st December 1975, and attended some meetings in 1976 and 1977 but the evidence does not disclose what occurred in Canberra in relation to Nelson Wheeler at that or any time.
However, it seems that office was established in Canberra in February 1985 under the name of Nelson Wheeler. The decision had been made in June 1980 by the national partnership to establish the office in Canberra but there had been a delay. All partners of Nelson Wheeler around Australia were registered as the proprietors of the name Nelson Wheeler in the Australian Capital Territory. It is likely that the office was established for the purpose of the Kockums and Australian Submarine Corporation work. Those clients were regarded by Nelson Wheeler Melbourne as "national clients of Nelson Wheeler".
A matter of significance is that Nelson Wheeler Melbourne viewed the two clients as national clients. It is likely that the other firms also regarded them as national clients and hence the establishment or re-activation of an office on Canberra.
The history of the firms in Melbourne and Sydney has been mentioned. At all times the registered proprietors of the business name Nelson Wheeler in each of those States were the partners of the local firms and no one else.
Brief mention has been made of the legal proceedings in the Supreme Court of Victoria and in the Federal Court of Australia and the merger of Nelson Wheeler Melbourne and Pannell Kerr Forster. This followed a long history of friction between Nelson Wheeler Melbourne and Nelson Wheeler Sydney.
Mention has also been made of the Notice given by Wenham, Pilmer and Ashby to Nelson Wheeler Melbourne and to the assertion in it that a partnership had been formed.
The plaintiff contends that this Notice is a clear admission by Wenham, Pilmer and Ashby on behalf of the partners of their firms that a partnership was formed pursuant to the Deed on 14th July 1972, the Deed was varied as to terms and parties from time to time and that as at the 5th February 1988 each of the firms, including Nelson Wheeler Melbourne, were in partnership together. The only signatory of the Notice to give evidence was Ashby and he said that he read the Notice and the Deed before signing the Notice.
The Nelson Wheeler defendants contest that submission and say that this matter suggests that there was not in fact a partnership because there was uncertainty about the ownership of the name Nelson Wheeler. The legal proceedings were settled and one of the terms of settlement was that the partners who had practiced under that name in Victoria were entitled to continue to do so until 31st December 1991.
One matter of significance is that it was acknowledged, and asserted by Crane as a representative of the firm in Melbourne, that goodwill from the name existed. He said at a meeting on 29th February 1988:
"This is a serious situation. Goodwill from that name in Victoria has emanated from our office. We own the name in Victoria. We are prepared to talk about it and come to an agreement. We are not prepared just to walk away."
Goodwill may of course be an asset of a partnership.
The registration of the business name in various States in the manner described does not in itself establish that there was a national partnership despite the wording of the forms in Western Australia and South Australia as mentioned. I accept that the participation of members of the firms in Melbourne and Sydney in the registration of the name in Western Australia, South Australia and Queensland was to protect the use of the name in the interest of Nelson Wheeler national. It is to be noted that representatives of the firms in these States did not participate in the registration of the name in Victoria or New South Wales. However, it has been seen that members of each firm represented themselves as being part of a national partnership and that such a partnership existed. Clearly there was to be a national partnership activity in Canberra, but it did not progress very far. Also, Wenham, Pilmer and Ashby, who were representatives of the remaining firms, did assert in early 1988 that the nature of the national arrangement was a partnership.
It is appropriate to say a little more about the Nelson Wheeler Associates.
The national co-ordinator was also co-ordinator of the Associates. The object of the Associates network was to offer a viable alternative to the Big Eight firms by, inter alia, offering the expertise of the member firms, to assist when necessary in the servicing of the clients of the Associates, to provide professional information to them and, according to Messer, to provide a broad range of expertise and back-up assistance to the firms "who can then more readily accept assignments previously not included in their range of work" according to a letter from the co-ordinator to prospective Associates dated 12 January 1984.
The Associates concept was promoted by all firms except Nelson Wheeler Brisbane. Letters and publications were sent to the Associates on a regular basis.
The Nelson Wheeler defendants contend that the Associates concept was an activity implemented by each of the participating firms in their separate capacity and benefits derived from the Associates were retained by each of the firms in their own capacity. The evidence does not justify such a conclusion. The concept originated at the national level. It was administered by the national co-ordinator. Participating firms did secure Associates, promote the concept and service them. However that is not the complete picture. There is evidence of Wenham attempting to attract an associate to Nelson Wheeler Adelaide in late 1982. He wrote to an interested firm in the following terms:
"We thank you for your interest in joining Nelson Wheeler Associates and advise that Nelson Wheeler in Adelaide is conducted through our partnership with Peter Fleming and Robert Ashby.
We have contacted Robert Ashby and asked that he make contact with you in terms of forming Nelson Wheeler Associates in Adelaide. The full services which are applicable to the Associates in other States will be made available in Adelaide through the Nelson Wheeler office, which will require people to travel on occasions from Sydney and/or Melbourne to conduct seminars and like programmes." (The underlining is mine)
On 2nd March 1983 Nelson Wheeler Adelaide wrote to a prospective Associate as follows:
"Thank you for your telephone call in relation to Nelson Wheeler Associates. I set out below a summary of the details and operation aspects of the Association.
We are a national firm of chartered accountants with a strong international association.
It is our desire to extend our association with other professional accounting firms throughout city and country areas of all States. To this end Nelson Wheeler Associates has been formed and to date ten professional accounting firms have joined in New South Wales and Victoria ...
5. Through our national and international affiliations, representation and technical information services are available if required. Our offices are in Sydney, Brisbane, Adelaide Perth and Melbourne with Associates in Canberra, Darwin, Hobart and Launceston. We are member of Grant Thornton International and have strong connections throughout the South Pacific, United Kingdom, Europe and the United States of America. Nelson Wheeler has its own Hong Kong office." (The underlining is mine)
Ashby wrote a number of letters in much the same terms on 6th April 1983.
It may be seen that it was represented to the Associates that Nelson Wheeler was a national partnership and by Ashby.
The only evidence as to the financial structure of the national association, which has been mentioned, suggests that any fees earned by a local firm from a local Associate were retained by that firm. What is not known is the extent of referral work to other offices interstate from these local Associates. Also it may be seen that the offices in Sydney and Melbourne proposed to play an active role with the Nelson Wheeler Associates in other States.
The national body and local firms advertised the services of Nelson Wheeler from time to time.
Entries for Nelson Wheeler were placed nationally in the Australian Business Communication Directory for telex, telegram and facsimile services. The cost was met by Nelson Wheeler national which then rendered accounts to the participating firms. The advertisements were placed after the national co-ordinator advised the national executive of his intention to do so and after each participating firm had furnished relevant information for the advertisement.
Entries were placed in a publication entitled "Graduate Outlook" in 1987. The cost was met in the same way. In the August and September 1985 edition of Women Australia, Nelson Wheeler national placed an advertisement which included:
"Nelson Wheeler is a national firm of Chartered Accounts with offices in each of the capital cities and a network of Associates in major urban and rural centres."
This advertisement included the logo and style shared by all of the Nelson Wheeler offices and mentioned that Nelson Wheeler had offices in Melbourne, Adelaide, Sydney, Brisbane, Hong Kong, Perth and Canberra. It was referred by the national co-ordinator to the national executive before it was published.
Nelson Wheeler national published an advertisement in the Australian School Leavers Year Book in 1985 which included the logo and featured the name Nelson Wheeler prominently. The advertisement included the following:
"Nelson Wheeler is a national firm of Chartered Accountants with offices in each of the capital cities and in several major urban and rural commercial centres ... Over approximately 70 years, Nelson Wheeler has emerged as a national and international organisation through the amalgamation of firms throughout Australia and through the establishment of an office in Hong Kong."
The address of each city office and some others were included. The text of the advertisement outlined the services which were provided.
Nelson Wheeler firms advertised from time to time in the national press including the Financial Review and the Australian newspaper. Usually the advertisements were placed by local offices but the other firms were kept informed.
The evidence does not disclose whether the cost was paid by Nelson Wheeler national on all occasions although that did occur on some occasions.
The announcement of the admission of new partners was a common feature of the national press advertising. The logo and the same style was always used and a common feature was the address and telephone number of each city office.
On the 27th May 1984 the national body inserted a feature advertisement in a publication known as "Personal Investment" and it contained the same information about each city office. The cost was shared by each participating firm. Advertisements were inserted in the telephone books in each state.
In July 1985 a full page advertisement was inserted in a publication entitled "Interdata Financial Handbook". It was distributed to the "top 2,000 companies" in Australia. It made no mention of a national partnership but asserted that Nelson Wheeler "today sets the pace in corporate accounting. A linked, worldwide network with more owned and affiliated offices in Australia than any other" (presumably firms). The telephone number of each city office and of Canberra and Hong Kong was published.
Standardised advertising was a goal and was usually undertaken and Nelson Wheeler had a national press advertisement format.
Some mention has been made of signage in some city offices. The name Nelson Wheeler was displayed on signs at all offices. The signs were displayed prominently including in Brisbane.
At the national level Nelson Wheeler prepared a policy with respect to publications of materials which was adopted at the National Partners meeting at Leura on the 18th November 1982. The policy provided that the offices of Nelson Wheeler in Australia would make increasing use of publications to clients and staff. The responsibility for the administration of these publications was vested in the National Co-ordinator and the final approval of the publications was the responsibility of the national partners. If any member of a participating firm proposed to write a publication, consideration had to be given as to whether it was a local document or a national publication. If the former, responsibility for the document was with the participating firm alone. If the latter, the intending author had to contact the National Co-ordinator who would keep a register of all publications and check if a similar document was being prepared elsewhere. The National Co-ordinator would contact the managing partner of the firm to select a partner with appropriate expertise to check the publication for technical accuracy. The publication then had to be approved by Wenham and Simmons and in the absence of either of them, another of the national partners. I expect that expression is used in the context of the national executive.
Nelson Wheeler issued a number of publications over the years on a national basis. One publication was entitled "Current Affairs". It was produced with Nelson Wheeler's name, logo and style. It included the services provided by Nelson Wheeler and listed the Australian and Hong Kong offices. It was issued to clients, associates and staff. Contributions to the publication were made from partners and staff.
Copies of the publication were sent to each of the participating firms and to the Nelson Wheeler Associates. Nelson Wheeler Adelaide used the publication extensively by sending it to clients. In Queensland the publication was left in the office for clients to read and some were sent to clients who had been referred by Nelson Wheeler offices. In the absence of evidence from defendants from Nelson Wheeler Sydney and Nelson Wheeler Melbourne, it may be inferred that the publication was sent by those firms to clients. The evidence does not disclose how often the publication was produced but it seems to have been at least a few times each year. Nelson Wheeler also published "A Guide to Investment in Australia". It was produced featuring the name of the firm and the logo and was produced for the benefit of clients, Associates and staff. It contained the address and telephone numbers of each office in Australia including some regional offices and Nelson Wheeler Hong Kong. The introduction of the May 1987 edition contained the following:
"This Guide to Investment in Australia has been prepared by Nelson Wheeler, a firm founded by Robert William Nelson in 1915 which has offices in each state of Australia and Hong Kong. The firm has developed close associations with firms throughout Australia called the Associates Network as well as close associates in the Pacific area and has worldwide affiliations through Grant Thornton International.
The Guide has been prepared primarily for the use of non-Australian residents who are interested in investing or establishing a business in Australia. It covers, in broad terms, the geographic, social, legislative and financial structure of the country.
It is not intended that the guide should do any more than draw the attention of readers to the more important areas of business law and practice."
Copies of the publication were sent to the various firms. Advertising brochures were also prepared. They were published under the name of Nelson Wheeler and on various topics and on occasions for particular offices. These brochures advertised the services of Nelson Wheeler and provided the address and contact information for each of the participating firms and Nelson Wheeler Hong Kong. Brochures were prepared for taxation consulting services, management information services, insolvency and advisory services, human resource consultancy services, corporate secretarial services, business services, computer services, financial modelling services, rural services and audit services.
Publications entitled "Investing in Hong Kong", "Doing Business in Hong Kong", and "Guide to Investment in Hong Kong" were published and made available to clients and potential clients. These publications were produced in 1982, or thereabouts, except the publication "Doing Business in Hong Kong" which appears to have been published in early 1987. These publications were sent to all of the participating firms for use as they saw fit.
In 1985 Nelson Wheeler national produced a publication which was eventually entitled "Going Public, A Guide to Listing on the Second Board Market". It was sent to the participating firms. It also produced a publication entitled "Directors Duties Under Australian Law". This publication was produced in 1985 and I expect was circulated in the same way as the other publications.
Nelson Wheeler national published Federal Budget updates and a publication known as "Budget Highlights" each year, which were circulated to the various offices and made available to the clients.
Also, on a national basis, Nelson Wheeler national contributed to an industry magazine known as Rydges in April 1987.
Over the years Nelson Wheeler national produced a variety of directories listing the various Nelson Wheeler offices and partners. These directories were first produced in 1972 and continued throughout the years.
With the exception of the first directories they contained the following:
"This directory has been prepared for the convenience of our clients and you will be welcomed at any office that you may visit. We will ensure that the people most suitable to your requirements are available and suggest that the partner with whom you normally consult should be advised of your plans so that the necessary introduction may be arranged.
Nelson Wheeler, was founded by Mr R.W. Nelson in 1915. There are now offices in each state of Australia which are closely connected throughout the Pacific area and which are internally affiliated throughout the world.
We offer a large range of services including auditing, accounting, taxation, secretarial, management consulting etc, which are aimed at fully satisfying the requirements of our national and international clientele."
It may be seen that these directories represented Nelson Wheeler as one firm.
At a national level Nelson Wheeler prepared advertising brochures over a number of years for distribution to clients, prospective clients and to the public in general. It seems that the first of these brochures was considered at the national Partners Meeting on the 31st October 1977. They disclosed directory information about each of the Nelson Wheeler offices in Sydney, Melbourne, Perth, Adelaide and Brisbane and in other locations including the Australian Capital Territory and Hong Kong. A brief history of the firm was included and Nelson Wheeler was promoted in the document as one firm. The various services provided were listed and a diagram of the management structure of Nelson Wheeler was included. The diagram showed the national partners at the apex followed in descending order by the national executive, a managing partner in each office and then the office partners in charge. Clearly this structure showed Nelson Wheeler as one firm with the various offices in the States and other places as offices of that firm.
Copies of the brochures were available to the public in the offices of the various firms and on occasions they were used when tendering for work. On occasions brochures were sent to clients and the purpose was to promote Nelson Wheeler. The National Executive regarded the brochures as an important part of the promotion of Nelson Wheeler. At the meeting of the National Executive on the 17th August it was resolved that all partners should be promoting brochures, magazines and publications along with presentation folders to new clients, potential clients and business contacts.
It was accepted at the national level that stationery should be uniform. Stationery was reviewed on a national basis and the National Co-ordinator made the necessary arrangements for the printing and distribution of stationery including letterhead, invoices, statements, cards, binders and other documents. There was much discussion about the letterhead but it was accepted that all stationery should be uniform even though there was an issue between Nelson Wheeler Sydney and Nelson Wheeler Melbourne.
Wenham wrote to Simmons on the 24th October 1985 about the perceived problem of Nelson Wheeler Melbourne having produced its own stationery. He wrote:
"However it does not absolve the fact that none of this has been approved by the national executive. As a national practice any change from the national ideal can only be accepted as detrimental to the practice.
If we all acted in the manner you have acted then we may as well not be in practice together. I am afraid your memorandum only services as an excuse and not an honourable suggestion in the matter. It was not necessary for change for change sake.
If the national practice decides it is worthy of a change then that will prevail. It is not up to Sydney office or any other office to consult individually and make change. Thus, your actions have not been in the best interests of the national practice and can only have destroyed some part of our national image for which you must take responsibility."
A copy of this memorandum was forwarded to the National Executive. It may be seen that there is little doubt that Wenham regarded Nelson Wheeler national as a national partnership and carrying on a national practice as is illustrated by the expression in his letter to Simmons "we may as well not be in practice together".
Simmons responded with a long memorandum bearing the same date in which he sought to justify the position taken by Nelson Wheeler Melbourne. He used the expression "the firm" in the national context and also referred to a national partners meeting.
In the minutes of the meeting of the National Executive held on the 26th August 1986, the following appears:
Discussions again continued in an effort to resolve the position of all offices having one letterhead. Ron Arnold expressed his concern that we should be seen to be a national firm and that one letter head was essential for that to be seen to be done."
The new letterhead was accepted by Nelson Wheeler Melbourne and it was resolved that it be adopted by all offices including Hong Kong.
During 1985 Nelson Wheeler adopted a national slogan as a result of a competition within all of the Nelson Wheeler offices in the capital cities. The slogan was "Accounting for your Needs".
In 1984 Nelson Wheeler Melbourne engaged public relations consultants to promote Nelson Wheeler on a national basis. Although the evidence discloses that various press releases were prepared and issued to the print media in capital cities, those press releases were not admitted into evidence. The documents which were admitted into evidence indicate that the activity was to promote Nelson Wheeler on a national basis.
Grant Thornton International was an international group of accountants. Nelson Wheeler at a national level became a member of Grant Thornton on the 1st January 1982. The relationship with Grant Thornton was seen to be beneficial to Nelson Wheeler in Australia and Hong Kong. There was some referral work from members of Grant Thornton to Nelson Wheeler offices in Australia. Wenham signed a memorandum of agreement on behalf of Nelson Wheeler in Australia upon the joining of Grant Thornton. That agreement is dated 21st August 1981.
Nelson Wheeler national had to make an annual financial contribution to Grant Thornton based upon fees rendered from referral work and Nelson Wheeler national had to provide statistical information to Grant Thornton. Representatives of Nelson Wheeler attended international conferences including a Grant Thornton International Conference in October 1987. They were represented by Nelson Wheeler national as "Australian partners". The biographical information which was provided about them indicated that Pilmer, Messer and Martino were partners in Western Australia and a reference was made to the Western Australian practice. Information provided about the partners from Adelaide, Ashby, Vine and Huntley, was that they were partners of Nelson Wheeler Adelaide. With respect to partners from Sydney they were described as "partner of Nelson Wheeler Sydney office" or "partner with Nelson Wheeler Sydney" or "a Sydney partner". Wenham was described as "Chairman and Managing Partner of the Australian firm". It was said of Arnold that he served "on the firm's national executive".
In the various publications of Nelson Wheeler, in the nature of brochures and directories and the like, membership of Grant Thornton was included.
Nelson Wheeler had a logo which was used by all of the offices. It was designed in 1975 and was regarded as an important feature of Nelson Wheeler. It was used on letterhead, stationery and in the various publications. The logo was also displayed at the premises of the various Nelson Wheeler offices including those of the Associates. Once again there was some concern about potential liability on a holding out basis with respect to the Associates through the use of the logo which was discussed at a National Executive meeting on the 30th April 1984. It was sought, subject to legal advice, to overcome this difficulty by printing the logo under the name "Nelson Wheeler Associates Pty".
Chartac Accounting Report is a monthly publication of accounting news published by Professional Information Pty Ltd in Melbourne. It provided information about firms of accountants in Australia. In the publication of November 1986 it was reported that "Nelson Wheeler is Australia's fastest growing large firm". The article contained financial information about the firm including its gross revenue and also information about the number of partners and staff and offices. This brief article referred to Nelson Wheeler as the one firm and also as "the Nelson Wheeler group", but that expression included Associates.
Nelson Wheeler compiled information about the various offices in Australia for this publication. It contributed to the publications of Chartac.
In his affidavit filed in the Supreme Court of Victoria Grellman deposed as follows:
"The perception of Nelson Wheeler as a national firm within the accounting industry is verified by reports which appear such as in the professional journal 'Chartac' and particularly in respect of articles and media comments, such as in the Financial Review, which reflect the substantial growth of Nelson Wheeler over the years."
The presentation and marketing of Nelson Wheeler as a single firm on a national basis was regularly discussed at National Partners' meetings. At the meeting on the 4th June 1980 the minutes record "that it was agreed that it was vital to present Nelson Wheeler as a national firm trading under the Nelson Wheeler name both nationally and internationally". Perusal of the minutes of the national partners meetings over the years reveals that a good deal of time was taken in discussing promotion of Nelson Wheeler nationally.
At the meeting of the National Executive on the 30th April 1984 the discussion was about marketing "the firm" and where it was going. Simmons wrote a memorandum on the 30th April 1984 on this topic. He made some suggestions and then wrote "I hope this will then lead to a more meaningful discussion amongst us all so that we can achieve a strong National Structure and understand better where we can assist to build N.W. National structure which will contribute more positively to our own state practices". Later in his memorandum he went on:
"In my opinion we have not utilised Nelson Wheeler National in a proper marketing sense even though we have made numerous attempts to do so, for instance we have put in place a Nelson Wheeler National Co-ordinator, Peter Rayner and also supported by Michael Leaver, yet in the last six months I have not been asked by his support staff to make a decision on Nelson Wheeler National (other than on our advertising layout) nor had one matter referred to me for consideration that would contribute positively towards a Nelson Wheeler National marketing exercise. Unless Nelson Wheeler is moving forward as a team and as a group then we can't expect the support of all the partners involved in Nelson Wheeler National. I consider we can then lose the momentum that could be gained by involving all the partners of Nelson Wheeler National and the various abilities of these partners have even in though in some cases the contribution would be different from others. We must provide the base to tap these efforts and get the momentum of all parties involved behind Nelson Wheeler National".
The importance of Nelson Wheeler national to members of Nelson Wheeler is revealed in a memorandum from Arnold dated 18th October 1979 to the National Partners on the subject of "Marketing Nelson Wheeler National".
He requested that information about public company and foreign company audits be brought to the meeting of the National Partners on 5th November 1979. He wrote:
"The purpose of this exercise is in an endeavour for Nelson Wheeler as a national firm to be in a position to present itself properly, should the occasion arise, as to the number of national audits handled which are listed on the stock exchange and other audits of a similar category, we believe that we should know the names that our audits are carried out on a national basis and what they are.
It is not intended that this information be made public, but it is becoming more apparent that unless we are seen to be amongst national firms both by our size and the number of substantial clients we audit, then we could find that either we fail to be appointed when the time arrives or one of our existing clients could become disillusioned in not being with an apparent strong national firm."
As has been seen there was a commercial reason for the establishment and promotion of a national firm. The promotion of the national firm was known and understood by the members of the participating firms as a marketing exercise. Messer said that without a national identity national clients wouldn't go to Nelson Wheeler but to one of the Big Eight firms with a national presence. He went on to say that whilst Nelson Wheeler couldn't be one of the Big Eight it was thought desirable that it be seen to be of the next three in order to attract clients who were national clients and larger local clients. It is unnecessary to review the considerable body of documentary evidence and oral testimony about this matter. It supports the observations of Grellman and Arnold as set out in their affidavits and must be accepted as accurately describing the true position. Consistently Nelson Wheeler promoted itself as a national and single firm for the reasons which have been mentioned.
Mention has been made of Nelson Wheeler Hong Kong in the context of considering the composition of Nelson Wheeler Perth. It may be seen from the promotional publications that Nelson Wheeler Hong Kong was represented as being part of Nelson Wheeler national. Pilmer, Wenham and Simmons were described as non resident partners of Nelson Wheeler Hong Kong. However the evidence clearly establishes that at relevant times the partners of Nelson Wheeler Melbourne, Nelson Wheeler Sydney and Nelson Wheeler Perth came to own 80 percent of the equity in Nelson Wheeler Hong Kong. The remaining interest was in the hands of partners resident in Hong Kong. There is no evidence to suggest that Nelson Wheeler Adelaide or Nelson Wheeler Brisbane had any financial interest in Nelson Wheeler Hong Kong, including in the capital of that practice. Each of the partners of those participating firms was jointly and severally liable for the borrowings and guarantees with respect to Nelson Wheeler Hong Kong. The partners of each of Nelson Wheeler Sydney, Nelson Wheeler Melbourne and Nelson Wheeler Perth borrowed monies in order to acquire their respective interests in Nelson Wheeler Hong Kong and paid the expenses of that loan in the proportions of their respective interests in the practice. There were attempts to market the practice in Hong Kong in that city and the Australian partners were kept informed of those activities. By May 1986 41.76 percent of the clients of the practice in Hong Kong were located in Australia. Consequently there was seen to be the need to market the practice in Hong Kong. Also the Hong Kong practice was marketed to the partners of the various firms and offices in Australia with a view to increasing the work of the practice in Hong Kong. Publications were prepared for that purpose. They were entitled "Services and Opportunities in Hong Kong" and "Doing Business in Hong Kong".
Nelson Wheeler national published a brochure identifying the services offered by the Hong Kong practice. In the introduction the following appears:
"The practice was founded in Hong Kong in 1975 and in 1981 became part of Nelson Wheeler, an Australian national firm of chartered accountants. In 1984 Nelson Wheeler, Hong Kong, joined Grant Thornton International, an international affiliation of accounting practices throughout the world."
It may be seen that the author of that paragraph drew a distinction between a firm and an affiliation of accounting practices. The brochure contained the logo of Nelson Wheeler and mentioned that the principal Australian offices of Nelson Wheeler were Sydney, Melbourne, Adelaide, Brisbane, Hobart, Canberra and Darwin and that there were more than 100 locations Australia wide.
The evidence discloses that many clients were referred to Nelson Wheeler Hong Kong by offices of Nelson Wheeler in Australia. The percentage of the clients of the practice who were resident in Australia has been mentioned and mention has been made of some clients who were referred by Nelson Wheeler Perth.
Meetings of the partners occurred in Hong Kong and in Australia. Usually the meetings in Hong Kong were attended by representatives of the Australian partners. Minutes of all meetings of partners and principals were sent to both Sydney and Melbourne offices. The nominee company of Nelson Wheeler Hong Kong eventually became Nelac Nominees Ltd, the name used by Nelson Wheeler in Australia. Matters relating to Nelson Wheeler Hong Kong were regularly discussed at National Partners Meetings.
The plaintiff's case as pleaded is that Nelson Wheeler Perth, Nelson Wheeler Adelaide, Nelson Wheeler Melbourne, Nelson Wheeler Sydney and Nelson Wheeler Brisbane all carried on business under the name and style of the national and international firm of chartered accountants known as Nelson Wheeler operating an accountancy practice in Australia and Hong Kong. As has been mentioned there is no evidence to suggest that Nelson Wheeler Adelaide or Nelson Wheeler Brisbane had any interest in Nelson Wheeler Hong Kong of any nature. The Nelson Wheeler Hong Kong practice was held out as part of the national firm of Nelson Wheeler but that was not the fact. As has been mentioned it was a partnership involving the partners of Nelson Wheeler Perth, Nelson Wheeler Melbourne, Nelson Wheeler Sydney and resident partners in Hong Kong. There is no suggestion in the evidence that any of the resident partners of Nelson Wheeler Hong Kong shared in the profits or losses of any of the Australian firms. There can be no suggestion that the Nelson Wheeler report was part of the work undertaken by the Hong Kong practice. The plaintiff has not brought any proceedings against the resident partners in Hong Kong on the basis of liability under partnership law for acts of a partner in Nelson Wheeler Hong Kong. In my view Nelson Wheeler Hong Kong is not of relevance to any matter at issue in these proceedings and the existence of their partnership does not assist in the resolution of issues of liability in these proceedings. The case against the partners of Nelson Wheeler Sydney and Nelson Wheeler Melbourne falls to be determined upon whether there was a national partnership or a relevant holding out.
Apart from the affiliation with Grant Thornton, Nelson Wheeler national entered into various agreements with firms of accountants overseas, in New Zealand, Singapore and Taiwan.
Between 1971 and 1978 there were affiliations with international firms in the Asia Pacific region, the United States of America, the United Kingdom and Europe. The most significant of these affiliations were with Grant Thornton, the Dearden Farrow Group and the Fryer Whitehill (later Clarke Whitehill) Group. In most cases the international affiliations were formalised by way of a written agreement and four such agreements were admitted into evidence. In each instance these agreements were entered into by the participating firms as individual parties. On the 1st January 1978 an agreement was entered into with Dearden Farrow. It was executed by Arnold on behalf of Nelson Wheeler Sydney and Nelson Wheeler Canberra, by Simmons on behalf of Nelson Wheeler Melbourne, by Lavis on behalf of Nelson Wheeler Brisbane, by Fleming on behalf of Nelson Wheeler Adelaide and by Pilmer on behalf of Nelson Wheeler Perth. The same occurred with respect to the arrangement with a firm in Korea. Arnold signed the Deed on the 11th January 1979 as the Australian representative of the Australian firms which were the participating firms, as well as Nelson Wheeler Canberra. That was also the position with regard to the agreement with the firm in Taiwan which was executed on the 30th June 1979 and the firm in Thailand. These agreements conferred and imposed rights and obligations on each of the Australian firms as separate entities and not as a partnership. There was no representation in any of these agreements that there was an Australian firm. According to Lavis none of these arrangements meant anything to his firm in Brisbane. He did not get work from any of the international firms. Taylor gave evidence to the same effect concerning Dearden Farrow and Grant Thornton.
The evidence also discloses that if any work was referred by international firms to an Australian firm the latter retained the fees for that work and those fees were not shared with the other Australian firms.
In April 1978 the Institute of Chartered Accountants was informed by Peden Lavis & Co that Lavis and Gay had entered into an arrangement with Nelson Wheeler to act as resident partners of that firm in Brisbane. This information was published in the Journal of the Institute in June 1978. Nelson Wheeler national was represented in sub-committees of the Institute or at least that was the perception of the National Executive.
Over the years at the meetings of the National Partners and the National Executive, as it became known, the representatives of each of the participating firms made reports about what was happening in their firms. These reports varied from time to time and between the firms as to detail but they included reports about office premises, possible mergers, numbers of partners, numbers of staff, the admission and retirement of partners, new clients and gross fees.
According to Lavis these reports were merely a way of providing information and were simply a reporting medium. Some information had to be provided by reason of the provisions of the 1972 Deed. Clause 2(f) required information to be provided as to changes in the composition of the firm to be given and Clause 2(e) required information as to particulars of indemnity insurance. Information as to fees had to be provided so as to form the basis for the calculation of levies and contribution to the insurance premium. I accept the submission of the Nelson Wheeler defendants that much of the information provided in these reports could not properly be characterised as confidential information.
The basic principles to be applied have been considered in the context of the composition of the partnership of Nelson Wheeler Perth. However, if Nelson Wheeler national was a partnership in law, it was not the usual type of partnership arrangement between professional people. In view of the rival contentions of the plaintiff and the Nelson Wheeler defendants, it is necessary to consider these principles in a little more detail.
In each of the States there is a Partnership Act which is based upon the provisions of the Partnership Act 1890 (UK). Prior to that legislation, laws governing partners were to be found in the common law and in equity. The legislation was little more than the consolidation of the common law and equity: Lindley on the Law of Partnership, 15th Ed, p4. However, it is not a comprehensive code as may be seen from the provisions of s46 of the South Australian legislation:
"46. The rules of equity and of common law applicable to partnership shall continue in force except so far as they are inconsistent with the express provisions of this Act."
This provision was explained by the Privy Council in Cameron v Murdoch (1986) 63 ALR 575 at p586:
"That section is in the nature of a sweeping-up provision designed to ensure that the rules of equity and common law applicable to partnership, which were in existence at the time that the Act was passed, should remain in force except in so far as they might be inconsistent with the express provisions of the Act. It is to be stressed that the rules of equity and common law so preserved are the rules of equity and common law relating to partnership, and to partnership only. The result of these matters is, in their Lordships' view, that, when a question of partnership arises, it is the express provisions of the Act to which regard should first be had, and that it is only after such regard has been had that consideration should be given to the effect, if any, of the sweeping-up provision in [that section]."
It may be seen that the law of partnership to be applied is comprised of the Partnership Acts of the respective States and the body of rules of equity and common law applicable to partnerships which are not inconsistent with the legislation. The Act in each State is in essentially similar terms. The differences are immaterial for present purposes. The law relating to partnership at relevant times was basically common through Australia. For practical purposes choice of law issues do not arise when considering whether Nelson Wheeler national was a partnership. When referring to particular provisions of the Partnership Act, I shall refer to the South Australian legislation.
Like the Western Australian Act, the South Australian Partnership Act defines partnership as follows:
"1.(1) Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.
The observations of Sir Montague Smith in Mollwo, March & Co v The Court of Wards as to the right to participate in the profits of trade and the real intention and contract of the parties, apply equally in considering whether Nelson Wheeler national was a partnership. As has been seen, a partnership has three elements:
"Business" is defined in s45 of the Act as including every trade, occupation or profession. It is unnecessary for present purposes to consider whether business in this context may mean more than "a commercial enterprise" as a going concern as the activities of Nelson Wheeler national clearly fall within that description: see Fletcher, The Law of Partnership in Australia and New Zealand, 7th Ed, pp45-46.
Whether or not a partnership exists is a question of fact and is to be determined by the substance of the relationship between the alleged partners and not only by the manner in which they describe their relationship. In Adam v Newbigging (1888 ) 13 Appeal Cases 308 at p315, Lord Halsbury said:
"If a partnership in fact exists, a community of interest in the adventure being carried on in fact, no concealment of name, no verbal equivalent for the ordinary phrases of profit or loss, no indirect expedient for enforcing control over the adventure will prevent the substance and reality of the transaction being adjudged to be a partnership; and I think I should add, as applicable to this case, that the separation of different stipulations of one arrangement into different deeds will not alter the real arrangement, whatever in fact that arrangement is proved to be, and no 'phrasing of it' by dexterous draftsmen, to quote one of the letters, will avail the legal consequences of the contract."
The same view is expressed in Weiner v Harris [1910] 1KB 285 by Couzens-Hardy MR at p290:
"Two parties enter into a transaction and say 'It is hereby declared that there is no partnership between us'. The Court pays no regard to that. The Court looks at the transaction and says 'Is this, in point of law, really a partnership?.' It is not in the least conclusive that the parties have used a term or language intended to indicate the transactions not that which in law it is."
The converse applies. Merely because partners assert that they are partners will not suffice. In Commissioners of Inland Revenue v Williamson (1928) 14 TC335 the same approach was taken with the consequence that a person who alleged that he was in partnership with his sons was found to be a sole trader. The Lord President said at p340:
"... you do not constitute or create or prove a partnership by saying that there is one. The only proof that a partnership exists is proof of the relations of agency and of community in losses and profits and of the sharing in one form or another of the capital of the concern."
It will be remembered that in the 1972 Deed the parties said that the licensors "shall be and become partners but only for the limited purposes" thereafter appearing in the Deed. Even if that provision in the Deed is to be interpreted as an intention to create a partnership among the participating firms or their members, that in itself could not be decisive of the question of whether a national partnership existed but it would be relevant. Similarly the provisions in the Deed to which reference has been made as to the object not being the sharing of profits or that the partnership is not carried on with a view to the making of any profit by the licensors and that the relationship of agency is not created, do not determine that there was no partnership but it may reflect the intention of the parties to the Deed at that time. However, I do not accept that the terms of the Deed define the nature and extent of the relationship of the members of Nelson Wheeler national. The Deed refers to a part of it at a particular time. The relationship developed over the years.
Also the constant assertion by the members of Nelson Wheeler national that there was a national partnership is not decisive but it is a matter of significance.
The intention of the parties is a relevant matter in determining whether a partnership exists as a partnership is a contractual relationship. However, the courts look to the substance of the relationship and not only the intention of the parties.
The parties may intend to establish a partnership but achieve something else. They may intend that there be no partnership, but partnership in law is the true nature of their relationship.
It is necessary to examine elements of a partnership a little more closely.
The evidence clearly establishes that Nelson Wheeler national carried on the business of the occupation of chartered accounts. It did so as a commercial enterprise constantly at all material times. Work was undertaken for clients and referred from office to office. The national body was widely promoted and advertised as the one firm with a view to retaining existing clients of members and obtaining new clients. Uniform procedures and standards were developed for the benefit of all of the members. Common facilities and materials were developed and provided. Financial contributions were made. These facilities, materials, procedures and standards were assets both tangible and intangible. Goodwill was established and enhanced. Money was received and expended in the course of these activities. Consideration of the merits of the first meeting of the representatives of the firms at Tullamarine of the terms of the 1972 Deed and of the many minutes, memoranda, reports, publications and documents already mentioned, establish that it was the intention of the members of Nelson Wheeler national to carry on a business. By reason of these matters Nelson Wheeler national carried on a business in the relevant sense.
Whilst it is essential that the participants carry on business in common it is not necessary that they all personally participate in the day to day work of the business or in the direction and management of the business. It is sufficient that the business is carried out on their behalf.
Carrying on a business "in common" requires a relationship of agency where each party carrying on business is acting on behalf of the others and the existence of a mutuality of rights and obligations between the parties: see Fletcher at pp29-32, Pooley v Driver and Cox v Hickman, both referred to earlier in the context of the composition of Nelson Wheeler Perth. It may readily be accepted that the commonality required of a partnership requires something more than separate businesses co-operating in some way for their individual profit. An example given by Prime & Scanlan, The Law of Partnership, is that several businesses may co-operate in a single project such as the building of a large bridge without creating a partnership even though each business intends to obtain a profit because no common business is created. Each business remains separate and is responsible for its own part of the operation and profits are separate and distinct. The authors contend:
"It follows from this that where commercial co-operation can be shown between businesses, the important consideration in determining whether or not a partnership is created as (1) whether capital is held in common, and (2) whether profits are achieved in common prior to division." (p10)
The test of agency is confirmed by Griffiths CJ in Lang v James Morrison & Co Ltd [1911] HCA 49; (1911) 13 CLR 1 at p11:
"Now in order to establish that there was a partnership it is necessary to prove that JW McFarland carried on the business of Thomas McFarland & Co on behalf of himself, Lang and Keates, in this sense that he was their agent in what he did under the contract with the plaintiffs - not that they would get the benefit, but that he was their agent."
See also Horne v Polland & Anderson [1935] NZLR s125 at p131.
The intention of the parties is essential in determining the scope of the agency relationship: Fletcher at p72. A mere relationship of agency alone does not constitute carrying on a business in common. There must also be mutuality of rights and obligations: Smith v Anderson (1880) 15 ChD 247.
These mutual rights and obligations are usually the subject of agreement but if not are contained in the Partnership Act. They include the right to partake in management, to share in the profits and assets, to make decisions about the composition of the partnership, to indemnity from partnership assets, to interest on capital contributions in certain circumstances, to retire at will and to assign a partnership share. The obligations include to bear losses equally, fiduciary obligations owed from partner to partner, to render accounts, only to use partnership property for partnership purposes, to keep the books at the place of the partnership.
These rights and obligations may be used as a guide as to whether a partnership exists but none is decisive. They may be varied or excluded by agreement, however the mutuality of rights and obligations serves as a way of distinguishing partnership from other obligations.
It is this mutuality of rights and obligations between persons who carry on business together, or by one party on behalf of others, which distinguishes partnership from other relationships: see Joske's Law of Partnership in Australia and New Zealand 2nd Ed p36. There the learned author contrasts partnership with various other relationships including the executor of a deceased partner and remaining partners who continue the business of a firm, (Brown v Fletcher (1884) LR (NSW) 393), the administration of a business by a trustee for the benefit of creditors (re Ruddock (1879) 5VLR (IP&M) 51), and an agreement between landlord and tenant for payment of rent by way of a share of the profits of a hotel business conducted on the lease premises (R v Willis (1879) 5VLR (L) 149).
In order to establish that the business is carried on in common in the relevant sense for the purpose of partnership, the rights and obligations which parties owe each other must be examined.
In the absence of evidence of Wenham, Simmons, Pilmer, Arnold and the national co-ordinators, the method of operation of Nelson Wheeler national must be ascertained from the many documents admitted into evidence because those Nelson Wheeler defendants who did give evidence were not closely involved in the day to day affairs of the national body.
It is clearly established that Nelson Wheeler national incurred various expenses which were recouped from the participating firms in addition to levies and referral fees. Expenses were incurred on a day to day basis which were met out of the common funds contributed through levies and referral fees. The National Executive was empowered to incur expense as, it seems, was the national secretariat.
The National Executive committed Nelson Wheeler national to membership of the international bodies and to international affiliations. The execution of various agreements by representatives of the participating firms does not deny this conclusion because Nelson Wheeler national was not a separate legal entity and the agreements had to be signed by the partners which, on these occasions, was by their representatives. Extensive promotional activity and tendering for the work of prospective clients was undertaken by Nelson Wheeler national.
These matters are examples. It could not be suggested that Nelson Wheeler national was not authorised to undertake these tasks and incur the expenses on behalf of all of the members of the participating firms or that they had to obtain permission from them.
It has been seen that Nelson Wheeler national spoke for the members of the participating firms from time to time and represented them in various ways. There is no suggestion that they were unauthorised to do so.
In my view, the requirement of agency is established. Furthermore, each of the Nelson Wheeler defendants who gave evidence acknowledged that the members of the participating firms did not act in competition with each other. There is no suggestion that they acted contrary to the interests of each other. The requirement of mutual rights and obligations is also established. They all shared in the benefits of Nelson Wheeler national and were entitled to do so. Each participating firm on behalf of its members contributed capital. Clearly, there was an obligation only to use partnership property for partnership purposes. A reasonable understanding of all of the evidence leads to the conclusion that they were mutually obliged to each other to work in the best interests of Nelson Wheeler national and each other and to advance those interests. In the relevant sense, mutual rights and obligations were created and continued.
The business must be a commercial venture with the object of making profits. During the course of argument considerable attention was given to the meaning of "profits". However it must be remembered that the test for partnership is the carrying on of the business with a view of profit.
In QBE Insurance Group Limited and Ors v Australian Securities Commission and Anor (1992) 38 SCR 270, Lockhart J had to consider the meaning of "profits" in the context of the Corporations Law. He said, at p284:
"It is an elusive concept and though discussed in many reported cases has not been extensively analysed or comprehensively defined. The reason is because the word is used in different contexts (income tax law is a notable illustration) ..."
There is no single definition of the word "profits" which will fit all cases: Bond v Barrow Haematite Steele Company [1902] 1 Ch 353 per Farwell J at p366. In Re Spanish Prospecting Company Limited [1911] 1 Ch 92 at p98, Fletcher Moulton LJ said at p98:
"The word "profits" has in my opinion a well-defined legal meaning, and this meaning coincides with the fundamental conception of profits in general parlance, although in mercantile phraseology the word may at times bear meanings indicated by the special context which deviate in some respects from this fundamental signification. "Profits" implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates."
That passage was cited with approval by Gibbs CJ in Federal Commissioner of Taxation (Cth) v Slater Holdings Pty Ltd [1984] HCA 78; (1984) 156 CLR 447, although he qualified his agreement by saying that the passage is not of universal application and each case must depend upon its own circumstances. He regarded the observations of Fletcher Moulton LJ as a guide : see p460.
As Lockhart J pointed out in Queensland Insurance Group, at p646, "this method of ascertaining profit was criticised in Ford - Principles of Corporations Law (6th Ed 1992) para 1009 as being quoted too crude". Ford said:
"For example, it fails to distinguish between on the one hand trading gains in the value of assets which are due to trading activity of the company (such as gains made by buying and selling stock on advantageous terms) and, on the other, capital gains in the value of fixed assets which have been acquired to be held rather than for constant turnover. Moreover, it would count as profit an unrealised gain on a fixed asset and, conversely a decline in value of such an asset would reduce profits."
In Webb (Commissioner of Taxes for Victoria) v the Australian Deposit and Mortgage Bank Limited [1910] ArgusLawRp 89; (1910) 11 CLR 223, Higgins J said at p241:
"The truth is, that the meaning of 'profits' is not rigid and absolute; it is flexible and relative - relative to each company; and in ascertaining the meaning of the word in any context, we must consider the whole context."
The flexibility of the meaning of profits was also discussed by Mahoney JA in Marra Developments v B.W. Rofe Pty Ltd [1977]2 NSWLR 616 at pp628-629:
"The term 'profits', in general, is one having a wide meaning, and it has been given different meanings according to the context in which it has been used. In its widest sense, it includes all the advantageous variations between the financial position of a person at a given earlier and later date: Re Spanish Prospecting Company Limited [1991] 1Ch 92 at 98; Webb v Australian Deposit and Mortgage Bank Limited [1910] ArgusLawRp 89; (1910) 11 CLR 223 at 234; McBride v Hudson [1962] HCA 5; (1962) 107 CLR 604 at 623. In particular contexts, the term has been given a more restricted meaning, e.g., in determining the competing rights of life tenants and remaindermen; McBride v Hudson [1962] HCA 5; (1962) 107 CLR 604. In the income tax context, it has been narrowed to exclude, in substance, profits arising merely from an increase in value of fixed capital assets and has been limited to revenue profits: see Russell v Town and Country Bank Limited (1888) 13 App Cas 418 at p424 ("annual profits").
In Read v Commonwealth of Australia [1988] HCA 26; (1988) 78 ALR 655 the majority of the High Court comprising Mason CJ, Deane and Gaudron JJ said at p660:
"The word 'profit' connotes a gain or increase measured by a comparison of the financial position at different points in time. As Gibbs CJ observed in FCT v Slater Holdings Limited (1984) CLR 447 at p460; [1984] HCA 78; 56 ALR 306, the starting point for determining the meaning of 'profit' can be found in the well known definition provided by Fletcher Moulton LJ in Re Spanish Prospecting Co Limited [1911] 1 Ch 92 at 98 ...
As profit is the measure of improved financial position, the question whether or not profit was made by the appellant cannot be determined merely on the basis of an increase in the number of units held by her, notwithstanding that the increase was in this case referable to an overall increase in the value of the assets of the trust. The question whether the additional units constituted a 'profit' must be assessed in terms of whether they resulted in any consequential financial gain to the appellant."
Lastly I mention the unreported decision of Wilcox J in Cummings v Lewis (1991) (unreported, Federal Court of Australia 2/8/91, G668/89). His Honour adopted the test in Re Spanish Prospecting Company as the appropriate yardstick of profit in the circumstances of that case in determining whether a joint venture was in fact a partnership. His Honour said:
"The syndicates offered the prospect for each party to increase their professional earnings. But, as is explained in Lindley on Partnership (15th ed.) at p12, the effect of this third element is that it 'is essential that what is to be shared is the profits of the business in the sense of the net gain resulting after payment of all outgoings'. Lindley cites In Re the Spanish Prospecting Company Limited (1911) 1 Ch 92 wherein Fletcher Moulton LJ said, at p98 ..."
His Honour then set out part of the observation of Fletcher Moulton LJ which has been cited.
"... the word 'profit' is used in this sense in the Partnership Act as is made clear in several of the provisions of s2. Notably, s2(iii) provides that:
'The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business ...' ".
Those provisions of s2 of the Partnership Act are:
"s2. In Determining whether a partnership does or does not exist regard should be had to the following rules:-
(ii) the sharing of gross returns does not of itself create a partnership whether the person sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived:
(iii) the receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business; but the receipt of such a share, or a payment contingent on or varying with the profits of a business, does not of itself make him a partner in the business ..."
It seems clear from the authorities and relevant provisions of the Partnership Act that profit connotes a pecuniary gain. Pausing at this stage I do not think it could be doubted that accepting that meaning of the word profit an object of Nelson Wheeler national was to achieve pecuniary gain for the members. Many of the documents which were admitted into evidence reveal in unequivocal terms that an object was to retain clients from leaving to go to bigger or national firms and to gain new clients who required the services of a national firm. That is but one example of carrying on business with a view of profit. The motivation was to expand the practices carried on by the participating firms but also to attract "national" and "international" work which, it was thought, would only go to a national firm.
The Nelson Wheeler defendants contend that it is essential for a partnership to have as its object not only the acquisition, but also the division, of profit. The editors Lindley and Banks on Partnership (17th Ed, 1995) at p12 state:
"... it is submitted that the division of profits is no more than a common incident of the partnership relation, rather than of its very essence".
Other learned authors disagree: see Fletcher at p60, Prime and Scanlan - The Law of Partnership at pp15-16 and Pollock on the Law of Partnership. In Cribb v Korn [1911] HCA 9; (1911) 12 CLR 205 at p216 Barton J said:
"To be partners, they must be shown to have agreed to carry on some business - in this case the business of farming - in common with a view of making profits and afterwards of dividing them or of applying them to some agreed object."
"... the argument in favour of the existence of a partnership runs into difficulty in regard to the third element of the definition: 'with a view to profit'. It is true that, in acquiring the horses and issuing the prospectuses both Mr Cummings and the accountants were profit motivated. The syndicates offered the prospect for each party to increase their professional earnings...
Although it is true that if the syndicates had succeeded, all parties would have profited by that fact (in the sense that the revenues of their own separate businesses would have been augmented), this is not enough. No case was cited to me, and I have not been able to find any case, wherein a relationship has been held to be a partnership simply because each party stood to gain a financial benefit, through the revenues of their own separate business, from a particular activity. An essential aspect of the notion of partnership is the sharing of jointly derived profits. In the present case, it cannot be said that the parties would have shared the profits of the 'business' of syndicating the horses."
The case went to the Full Court of the Federal Court on appeal but those observations by Wilcox J were not challenged [1993] FCA 96; (1993) 41 FCR 559.
In my view, the issue about whether the object of division of profit is an essential element of a partnership seldom arises. Commonly parties who are partners have in contemplation the sharing of the profits of their enterprise. Cummings v Lewis was an unusual case. It was never contemplated that there be any sharing of profits. Each party to the arrangement was to earn separate and distinct profits by reason of his own individual activity and was to retain those profits. The arrangement was very much like a joint venture by separate and distinct entities, not in the nature of a partnership.
In my view, it is unnecessary for present purposes to enter into the debate as to whether the division of profit "is merely an incident of a partnership relation or its very essence". The considerable body of evidence reveals a clear profit motive and there is no suggestion that any one person or group of persons was to benefit to the exclusion of others. There is no suggestion that the only object of the arrangement was to produce profits for say Nelson Wheeler Sydney or indeed merely for each individual firm, although that was clearly one of the objects. The object was to produce profits for all concerned. Obviously, if that object was achieved, the profits would be shared. Also, an object was to produce particular profits which would be shared by some or all of the firms as will be seen.
Of course profit sharing per se does not necessarily mean that there is a partnership, as may be seen from the partnership rules in s2 of the Partnership Act and in various cases: Badeley v Consolidated Bank (1888) 38 Ch Division 238, Fliway - AFA International Pty Ltd v Australian Trade Commission [1992] FCA 597; (1992) 39 FCR 446, Television Broadcasters Limited v Ashton's Nominees Pty Ltd (No 1) (1978) 22 SASR 552. Clearly the other essential elements must be present for a partnership to exist.
In my view the evidence clearly establishes that the members of Nelson Wheeler National entered into the arrangement with a view of profit and to share profits. Indeed they made profits through the arrangement which they did share.
True it is that a consequence of the marketing and promotion of Nelson Wheeler national was to enable participating firms to retain their own clients, and to obtain new clients for their own individual practices. Profits were engendered to those firms in that manner which were not shared by the other participating firms in the direct sense. However, even in those cases it may be said that the marketing and promotion at the national level which had that result and created profits for the individual firms was not at the sole expense of that participating firm but of all of the firms. Consequently they all contributed to the profit of that individual firm in that way.
The same situation occurred with respect to each participating firm, so that all firms contributed in that way to the profits of each firm. The consequence is that in that indirect manner they all shared in the profits generated by Nelson Wheeler national which in that sense were common profits.
However, there is a direct manner in which they shared in profits. When a national client was secured such as a group of companies, which required contemporaneous services in each State, one participating firm would manage the work. Each participating firm would undertake a particular task, say a local audit, and send the completed report to the managing firm. That firm would send the complete report to the client and charge the fee. The proportion of the fee due to each participating firm would be paid by the managing firm. In that way the participating firms and therefore the partners shared profits.
There is another way in which the participating firms shared profits, but not all of them with respect to the same fee for the same client. One participating firm would refer a client to another participating firm, or more than one firm but not to all firms. That firm or those firms would undertake the work and send an account to the referring firms which would send a composite account to the client, collect the fee and then pay the other firm or firms. Profits would be shared in that manner, but as I say not by all of the participating firms. However, over the year or so, it may be expected that all firms would share profits in that way to some extent. These are profits generated by the business of Nelson Wheeler national and not by the individual firms themselves.
The defendants who were members of Nelson Wheeler Melbourne and Nelson Wheeler Sydney chose not to place any evidence before the Court as to the financial implications of sharing work with other participating firms and each other. Consequently, it is reasonable to accept these conclusions which I have made.
In so far as the object of sharing profits is essential, what in fact occurred justifies the conclusion that the members of Nelson Wheeler had that object.
There is one other matter. As has been seen, the participating firms paid 10 percent of their fees earned on referral work to Nelson Wheeler national and after levies were paid Nelson Wheeler Melbourne and Nelson Wheeler Sydney made up the balance of the expenses of Nelson Wheeler national.
The evidence does not disclose if in any year a profit was made. It seems not because Nelson Wheeler national did not file a taxation return. However, not one member of the National Executive or the national secretariat gave evidence, except Lavis and Ashby and they were not as intimately involved in the financial affairs of Nelson Wheeler national as Pilmer, Wenham, Arnold, Simmons or the national co-ordinator. Consequently the full picture of the finances of Nelson Wheeler national in any given year are not known. However for present purposes I am prepared to assume that there was no excess of income over expenditure in any given year which was divided between the members.
The question may be asked, what would have happened to any profit if there had been such an excess? If there had been sufficient national clients or referral work to generate such an excess, to whom would it have belonged? It would clearly have constituted a profit in the hands of Nelson Wheeler national. Participating firms would have shared that profit. The basis of the sharing does not matter for present purposes, but it may be expected that it would have been the same basis upon which the participating firms contributed to the premium for the national indemnity insurance. It is possible upon such a profit arising it would not have been distributed among the participating firms but the method and basis for meeting the future expenses of Nelson Wheeler national may have been changed by reducing contributions. However, that would not deny that a profit had been made to which the participating firms were entitled and did, in that way, receive. Not drawing the profit is a matter of no consequence.
Also, the question must be asked what would have happened to any assets of Nelson Wheeler national had the arrangement been dissolved? As has been mentioned assets had been acquired and developed. The audit manual is an example. Client lists and brochures are other examples. It will be remembered that Crane asserted that goodwill from the name Nelson Wheeler existed. No doubt it did. It existed by reason of the activities of the participating firms in their own right in their own locations but also by reason of the activities of Nelson Wheeler national. The national and international associations and the Nelson Wheeler Associates were very likely to enhance goodwill. An increase in assets is an increase in the capital of Nelson Wheeler national. Goodwill is to be distinguished from some artificial method of calculation of value such as the amount of fees earned over a particular period. Presumably these assets, including goodwill could be sold. If they were sold, what would happen to the proceeds of the sale? They would be shared by the partners. An increase in the assets of the business of Nelson Wheeler national over a period of time is a profit: Re Spanish Prospecting Company Limited.
It was suggested at one stage in argument that the partners of the participating firms could not also be partners of Nelson Wheeler national. No authority was advanced for that proposition. It was suggested that a person such as a chartered accountant could not be a member of more than one partnership at the same time. I reject that contention. There may be circumstances in which membership of different partnerships at the same time may have consequences in terms of liability by reason of partnership law. In some circumstances that liability may be restricted to activity within a particular subject matter. However, that does not deny that the one person may be a member of different partnerships at the same time.
Without question the members of the participating firms regarded themselves as partners of their respective firms. Also they regarded themselves as partners of Nelson Wheeler national as may be seen from various documents previously referred to. I do not think it is a case of the participating firms being the partners of Nelson Wheeler national. They were not separate legal entities. The partners of Nelson Wheeler national were the individual members of the participating firms.
In my view, the evidence establishes that all of the elements of a partnership were present. The members of Nelson Wheeler national carried on business in common with a view of profit and indeed with a view of sharing profit.
In reaching this conclusion, I have not overlooked the oral testimony of each of the Nelson Wheeler defendants who gave evidence. They eschewed the existence of a national partnership. At times, expressions such as national association and national federation were used but that is not the way in which many Nelson Wheeler defendants described Nelson Wheeler national at relevant times. As has been seen, almost without exception, these men referred to their national body as a partnership, both amongst themselves and to the world. Their evidence as to the features of the relationship is significant and has been considered but the manner in which they chose to describe it during evidence is of little assistance.
I find that all of the fifth defendants against whom the plaintiff still proceeds, were members a national partnership and are liable to the plaintiff by reason of partnership law for the damages to which I have found the plaintiff is entitled. In reaching that conclusion I have not yet considered the position of Lavis, Gay and Taylor which is addressed shortly.
I have reached this conclusion without relying upon the admission that the Adelaide defendants carried on business in partnership as chartered accountants with Wenham, Grellman, Bryden, Simmons and Pratt. I am satisfied that the admission was made having been drafted upon the basis of the registration of the business name Nelson Wheeler in South Australia. As has been mentioned, that is not a matter of significance. Nonetheless, the admission is true. They did carry on business in partnership with these men as well as the other Nelson Wheeler defendants, except Higgs, McGovern, Harrison and Robinson and possibly Lavis, Gay and Taylor. Their position is considered shortly. In view of my conclusions that there was a national partnership and the members of Nelson Wheeler Adelaide were partners in that firm, it is unnecessary to consider the application for leave to withdraw the admission any further. It is dismissed.
The alternative claim of the plaintiff is that the fifth defendants are liable to the plaintiff by reason of having been held out as partners of Nelson Wheeler Perth in the national partnership which I have called Nelson Wheeler national. Section 14(1) of the Partnership Act provides as follows:
"14(1). Every one who by words spoken or written or by conduct represents himself, or who knowingly suffers himself to be represented as a partner in a particular firm, is liable as a partner to any one, who has on the faith of any such representation given credit to the firm, whether the representation has or has not been made or communicated to the person so giving credit by or with the knowledge of the apparent partner making the representation, or suffering it to be made."
According to Higgins and Fletcher, The Law of Partnership in Australia and New Zealand (7th Ed), this provision is a statutory application to the law of partnership of the rule of evidence known as estoppel. That rule is that where a person either expressly or by conduct represents to another person that a certain state of facts exists, and that other person acts on the representation in the belief that it is true, thereby suffering damage, the person who made the representation cannot be heard to say in evidence, that the representation was not true: see Chadwick v Manning [1896] AC 231 (PC) at p238, applying Jorden and Wife v Money (1854) 5 HL Cas 185; 10 ER 868.
Section 14(1) was considered by the High Court in Lynch v Stiff [1943] HCA 38; (1943) 68 CLR 428. There the court said, at p434:
(1) where a person has by words or by conduct represented himself or knowingly suffered himself to be represented as a partner in a firm;
(2) where another person has given credit to the firm;
(3) where that person has also given credit on the faith of the representation."
See also Hudgell Yeates and Co v Watson [1978] 2 All ER 363, and Nationwide Building Society v Lewis & Anor [1997] 3 All ER 498.
"In our opinion there is no justification for making any addition to the requirements of the section by holding that the person who has given credit must show that, apart from the holding out, he would not have given credit. The doctrine of holding out is a branch of the law of estoppel. So far as the element of action by the party relying upon an estoppel is concerned, it is sufficient if that party acts to his prejudice upon a representation made with the intention that it should be so acted upon, though it is not proved that in the absence of the representation he would not have so acted.
In the present case it is proved that Lynch held himself out and suffered himself to be represented as being a partner in a firm of John Williamson and sons. The heading of the letter paper is conclusive upon this point. Secondly, it is proved that the respondent gave credit to the 'firm' in that he entrusted the 'firm' with his money for purposes of investment. In the third place there is evidence that he so gave credit because he believed that Lynch, whom he trusted, was a partner."
It may be seen that the meaning of the expression "given credit to the firm" in the section is not restricted to credit in the direct financial sense. That expression includes merely continuing to deal with a particular "firm" because of a belief that the person was a partner : Higgins and Fletcher at p191.
As has been seen from the considerable body of documents admitted into evidence and referred to thus far all of the fifth defendants who were members of participating firms at the relevant time represented themselves, or knowingly suffered themselves to be represented as partners in Nelson Wheeler national and therefore as the partners of Nelson Wheeler Perth. As has been seen there was an extensive campaign over a long period of time conducted publicly and consistently which establishes that matter.
I do not think that there can be any doubt that the plaintiff gave credit to Nelson Wheeler national in the relevant sense. It will be remembered that in the Annexure to the Nelson Wheeler Report under the heading of "Qualifications" the following appeared:
"Nelson Wheeler, chartered accountants, are a national firm of practising accounts with worldwide affiliates and associates ..."
This part of the Annexure then went on to mention matters relating to the experience and expertise of Nelson Wheeler and of Mr Pilmer in particular. It was made to Kia Ora in the knowledge that it would be sent to shareholders. This statement must have been included for a reason. If it was not true, it must have been made to induce the reader to the conclusion that it was true. There is no evidence from Pilmer as to why he made this statement. Earlier in these reasons mention was made of the letter written by Quilty to the shareholders and of the references made in that letter to the Nelson Wheeler report. The emphasis was placed upon the importance of the Nelson Wheeler report and the attention of the shareholders was directed to it.
Also the front page of the Nelson Wheeler report states that Nelson Wheeler had offices at Kalgoorlie, Sydney, Melbourne, Adelaide, Brisbane, Canberra and Hong Kong and also that Nelson Wheeler had worldwide affiliations. All of the fifth defendants had held themselves out as a national firm. This holding out was a deliberate strategy by the fifth defendants for the reasons mentioned. There can be no suggestion that when Nelson Wheeler Perth held them out as members of a national firm it was acting in an unauthorised manner.
Earlier in these reasons I dealt with the issue of reliance upon the Nelson Wheeler report by the shareholders of Kia Ora generally and at the Extraordinary General Meeting on the 26th October 1987 and there is no need to repeat those conclusions. They apply equally to the holding out of Nelson Wheeler as a national firm. "Firm" is synonymous in this context with "partnership": s4 of the Partnership Act and McLeod v Trethowan [1965] VicRp 86; [1965] VR 672.
It was suggested in argument that the holding out has no application to an action in tort. I do not accept that contention. It is a type of estoppel and the cases do not suggest that it has limited application.
For the reasons I have given it may be inferred that the shareholders relied upon the representation that Nelson Wheeler was a national partnership. This statement in the Nelson Wheeler report was of the very nature calculated by Nelson Wheeler Perth to induce the reader of the Nelson Wheeler report to rely upon it.
In the absence of any evidence from Harold Abbott, it is not known whether he relied upon the holding out in the Nelson Wheeler report but it is possible that he would have seen that statement as beneficial to his purposes in that it could influence the shareholders and relied upon it at least for that purpose.
What of the Directors of Kia Ora? According to Lee-Steere, he knew of Nelson Wheeler prior to reading the Nelson Wheeler report. He had heard that they were an international firm with offices in all States. He said he had heard of their reputation which was beyond reproach and they had a reputation to uphold. He said they were responsible people - an international firm. Again he repeated that they were an international firm. I do not repeat my observations about Lee-Steere and his breach of duties. However, his evidence is relevant to establish that the holding out by Nelson Wheeler had a particular significance. It added credibility to their qualifications and therefore is the very type of representation which is likely to be relied upon by a genuine shareholder.
Quilty said that he understood Nelson Wheeler was a national firm. His evidence is that considerable expertise could be expected from such a firm. It is unlikely from his own evidence that Quilty ever considered that Nelson Wheeler was a national or international firm in fact. It is likely that he did not consider the matter at all. However, his evidence, so far as it goes, does confirm that it is the type of representation that a shareholder may rely upon.
It remains to consider the position of the Brisbane defendants. Like the other Nelson Wheeler defendants they deny the existence of a national partnership, however I have concluded that there was a national partnership and the Brisbane defendants were members of that partnership. The question is whether they remained members of the national partnership or were held out as such at the relevant time, namely in August, September and October 1987.
Despite the ruling which I gave with respect to the application of the Brisbane defendants to withdraw their admissions, they persist in the submission that even now I should deal with the application on a procedural basis and give leave to withdraw the admission which would necessarily involve considering all of the matters relevant to the exercise of discretion, and that I should do so before deciding the substantive issue. I see no good reason to change my approach and I reject that submission. The preferable approach is to decide the substantive issue first as though the admission had not been made and then determine the application having regard to that decision.
However, it is relevant to consider the circumstances in which the admission was made because it is a formal admission going to the substantive issue. None of Lavis, Gay or Taylor had any knowledge of the plaintiff's claim against them until they received letters from the plaintiff's solicitors dated the 12th and 13th October 1993. Those letters explained the nature of the proceedings by the plaintiff against them and in the letters the impression was given that the relevant period was "during 1987". The letter did not enclose a copy of the Statement of Claim.
The Brisbane defendants discussed the matter and on the 14th October 1993 Lavis spoke to Mr D'Arcy, a member of the firm of plaintiff's solicitors. Lavis made a note of that conversation as follows:
1. Advised that the only work we did for Nelson Wheeler at that time was business names or company registered offices. (That is recording the registration of companies care of our office).
Lavis also prepared a file note which he submitted to the professional indemnity insurance broker. In that note he recorded the conversation with Mr D'Arcy in more detail:
"I advised that the only work we did for Nelson Wheeler at that time was business names or maintaining company registered offices. I stressed that the association with Nelson Wheeler, but a federation and that we had withdrawn from the federation about that time. I also advised that following withdrawal from the federation we had effected our policy from renewal date, being 31 January 1988 through Marsh and McLennan.
At about this time Lavis also spoke to Martino and I accept that Martino told him that it would be better for the Brisbane defendants to be represented by the solicitors acting for Nelson Wheeler Perth. Lavis notified the insurers of Peden, Lavis and Co and did not respond any further to the letters from the plaintiff's solicitors. Solicitors in Adelaide were appointed by the insurance brokers to represent Peden, Lavis & Co and subsequently the solicitors for the other Nelson Wheeler defendants also came to act for the Brisbane defendants in late 1993. At that time Lavis was advised by those solicitors that the allegation of a national partnership had already been raised in the pleadings in the action against Nelson Wheeler Perth and had been denied. The letter was written in terms which were optimistic about the prospects of successfully defending the action brought by the plaintiff. It was also asserted by these solicitors that their instructions were that there was no national partnership and that Nelson Wheeler was a national federation of individual partnerships in Western Australia, South Australia, New South Wales, Victoria and Queensland. Lavis was informed that if his instructions were different then he must contact those solicitors immediately.
I think it is plain from this correspondence that the Brisbane defendants did not give any instructions to the solicitors in Western Australia, contrary to what Lavis had told D'Arcy. I accept that at no time were instructions given to make the admission. I expect that the admission was made following a search of the registration of the business name of Nelson Wheeler in Queensland. That registration showed that the Brisbane defendants were members of Nelson Wheeler throughout 1987.
According to Lavis he first became aware that the Brisbane defendants had admitted membership of Nelson Wheeler national during the period from July to December 1987 in March 1995 when he received a letter from his solicitors. Gay and Taylor became aware of that matter at the same time. Gay prepared a letter which he sent to the solicitors giving instructions dated the 8th March 1995. He drew attention to the error and said that the three men had practiced under the name of Peden, Lavis and Co for many years and in particular during July to December 1987. He gave instructions that they were not in partnership with Arnold and Wenham and their association with those two men was as owners of the business name Nelson Wheeler. He went on in his letter to write "It could be argued that there was no operating partnership in the name of Nelson Wheeler in Queensland". He set out the basis for that argument which need not be repeated because it has no substance. However he did go on to mention the appointment by Nelson Wheeler of Mr J.P. Pastellas who represented the firm in Queensland but indicated that he could not be sure when that had happened.
The Brisbane defendants made full disclosure of documents which were the subject of legal professional privilege and I am satisfied that they made available all documents relevant to the issue of the instructions which they gave to their solicitors.
I am satisfied that the Brisbane defendants did not give instructions to their solicitors in accordance with the admissions that were made. Those admissions having been made without instructions should not now be used against them.
It will be remembered that the name Nelson Wheeler was registered as a business name in Queensland on the 20th November 1972 and in 1978 Wenham and Arnold became proprietors of that business name. At that time Lavis, Gay and Taylor also became proprietors of the business name. I am satisfied that the inclusion of interstate members of the national partnership as proprietors of the business name in Queensland should not in itself be regarded as conclusive evidence that the Brisbane defendants were in partnership with Wenham and Arnold. Those two men became involved in the registration process so as to protect the "ownership" of the name. That is the effect of the evidence of Lavis who said that he thought the Sydney office owned the business name.
It is the case of the Brisbane defendants that however the relationship between them and other members of Nelson Wheeler national should be characterised that relationship was effectively terminated by April 1987. The evidence clearly establishes that there had been a deterioration in the relationship between the Brisbane defendants and certain members of the national executive of Nelson Wheeler national. As early as 1983 Wenham and Simmons were expressing their wish to Lavis that more work in Brisbane should be done in the name of Nelson Wheeler. The Brisbane defendants opposed that course and indicated that their clients were personal to them and wanted to retain an affinity with a local firm.
In 1984 the Brisbane defendants rejected the suggestion that Nelson Wheeler national should take over their practice. The same proposal was made in 1986.
On the 24th June 1986 Wenham wrote to Lavis and his letter included the following:
"As you know, for some time it has been the desire of the Sydney and Melbourne practices to have a more active role played by the Queensland practice not only in the development of the Brisbane practice but in Queensland generally through its development of associates and consequent development of the firm.
For a number of reasons we also understand that this has been difficult from your point of view."
Wenham went on to write that it had been proposed by Simmons that he and Wenham make a direct approach to Lavis on the basis that the Sydney and Melbourne practices acquire 50 percent of the practice in Queensland.
Nelson Wheeler had established an office at Surfers Paradise. The Brisbane defendants had no interest or involvement in that office. It seems that there was a considerable amount of work undertaken in Queensland on behalf of clients of Nelson Wheeler Melbourne and this was a factor which motivated Simmons to want to develop the Nelson Wheeler office in Brisbane. These matters were discussed at the National Partners' Meeting on 24th November 1986 which was attended by Lavis and Simmons. At this meeting Simmons raised for consideration the appointment of a senior person to be located in Nelson Wheeler Brisbane to assist with the seeking of new work. That person would have assistance from the staff of that office. Lavis indicated that he saw some difficulties in that proposal but that he would discuss it with his partners and report back to the next meeting.
According to Lavis he discussed the matter with Gay and Taylor and they considered whether they should continue their association with Nelson Wheeler. They took no action and attended no further meetings, although Lavis did send a report about his firm to the meeting of the national partners held on the 8th April 1987.
On the 16th December 1986 Wenham wrote to Simmons informing him of discussions that he had had with accountants in Queensland and of a suggestion he had made to one firm that it join Nelson Wheeler national. Simmons wrote to Wenham on the 22nd December 1986 on the same subject matter. He referred to Lavis "and his operation" as having been negative for ten years. He mentioned that approaches to Queensland had cost Nelson Wheeler a substantial amount of time and money. These memoranda reveal the dissatisfaction on the part of Wenham and Simmons with Lavis, Gay and Taylor.
By the 12th March 1987 an accountant by the name of Mr G. Johnstone wrote to Simmons, Mr N. Whiley of Nelson Wheeler Sydney and Mr S. O'Keefe the accountant carrying on the business of Nelson Wheeler at Surfers Paradise and indicated his interest in participating in the establishment of a new Nelson Wheeler office in Brisbane. He set out a proposal which would involve Johnstone, O'Keefe, Nelson Wheeler Melbourne and Nelson Wheeler Sydney being the owners of the new practice in equal shares. He made other suggestions and proposals. This memorandum was written following a meeting between Johnstone and the others on the 25th February 1987. Clearly by this time plans were underway to set up a new Nelson Wheeler office in Brisbane. Simmons responded to Johnstone on the 25th March 1987 which was expressed in terms basically favourable to Johnstone's suggestions.
The matter came to a head. At the National Partners Meeting on the 8th April 1987 which was attended by Wenham, Simmons, Arnold, Ashby, Pilmer, Crane and Pratt the position in Queensland was discussed. The minutes of the meeting record:
"The meeting reviewed the situation in respect of our offices in Queensland and after discussion, Paul Wenham was requested to write to Alan Lavis of Brisbane office giving six months' notice ending on the 31st December 1987 or earlier if desired in respect to the Nelson Wheeler Queensland agreement."
There is an annexure to these minutes which is marked "not for circulation to Alan Lavis". It is as follows:
The meeting discussed and reviewed the situation in respect to our office in Brisbane and noted the offer to place staff in the Brisbane office to deal with interstate work and to be paid for by interstate offices. As this has been rejected and the situation is not improving it was agreed to terminate the agreement with Brisbane by giving six month's notices (sic) ending 31st December 1987 or earlier if Brisbane agree. Paul Wenham was requested to convey the information to Alan Lavis.
Bruce Simmons reported on his recent meeting with Neville Whiley in respect to the setting up of new offices in Brisbane and the involvement if (sic) any of Surfers Paradise office. Matters to be resolved included a broad strategy involving Sydney and Melbourne, equities in the new practices, a local partner to be selected, as well as placement of staff and the work to be undertaken. A close co-operation of the new practice will be with the local law firm Hill and Taylor who are prepared to share the premises with us. It was further suggested and agreed that Paul Wenham speak to 'Accountancy placements' and for them to advertise to buy a small practice as a base for the new operation.".
Wenham wrote to Lavis on the following day. He referred to the National Partners' Meeting the previous day and went on:
"The executive committee of the national practice have indicated that they are dissatisfied with the progress being made by the Queensland representative office. As you know, offers have been made in the past to assist in developing the Queensland office which may well have been unacceptable to you but have, nevertheless, been made in the hope of advancing the Queensland office at a similar rate to that experienced by other offices. It is, unfortunately, my task to advise you that in view of the fact that the national practice does not seem able to come to a suitable arrangement with you, then the national committee formally gives notice to terminate our arrangements including the use of the Nelson Wheeler name not later than the 31st December 1987 and earlier if you should agree to same."
Wenham went to extend his personal thanks to Lavis for his contribution over the years.
It will be remembered that the Deed of 14th July 1972 provided for notice of termination of six months. None of the men who attended the meeting on 8th April 1987 gave evidence and so it is not known why the date of 31st December 1987 was selected. Lavis did not respond to this letter but he showed it to his partners and I accept his evidence that they were content to have the relationship come to an end. The Brisbane defendants discussed the professional indemnity insurance and agreed that it was best for them to leave the present arrangements in place. It will be remembered that they had arranged that insurance through Nelson Wheeler national and it was to expire on 31st January 1988. Discussions continued between Wenham and Simmons and others with a view to establishing a new office for Nelson Wheeler in Brisbane.
Simmons wrote to Arnold, Wenham and O'Keefe on 25th May 1987 indicating that the new office of Nelson Wheeler Brisbane could commence on 1st June 1987. The equity of the Brisbane office was to be shared between Nelson Wheeler Melbourne, Nelson Wheeler Sydney and Nelson Wheeler Surfers Paradise on an equal basis. The Brisbane defendants were not informed about these discussions and proposals.
On about 2nd June 1987 the Brisbane defendants received documents by way of facsimile transmission which were intended for Pastellas who was to be an associate at the new Nelson Wheeler office in Brisbane. The documents related to the salary package for Pastellas. I accept that this was the first indication that any of the Brisbane defendants had of what was happening. Lavis contacted the national co-ordinator who told him of Pastellas' appointment and of the new office in Brisbane and that Nelson Wheeler may wish to sever the relationship with the Brisbane defendants earlier than previously indicated. According to Lavis, he then phoned Grellman and informed him that he was content to sever the relationship and not stand in the way of the new Nelson Wheeler Brisbane arrangements. According to Lavis, there had not been any referral work for some time and he had no objection to bringing the arrangement to an end. On 2nd June Lavis wrote to Wenham and suggested that they meet for discussion about his letter of 9th April on 25th June when Lavis proposed to be in Sydney. That meeting did not occur. Grellman wrote to Wenham on 11th June and informed him that Lavis had indicated to Grellman that there "is still possible avenue for discussing the matter further". According to Lavis, Grellman may have wished to salvage the situation but Lavis had no interest. Lavis said that he did not want to continue with the arrangement. There was continual pressure on the Brisbane defendants to get bigger, to get associates and to promote themselves and he was not interested in any such proposals. According to him, Grellman had regret that Nelson Wheeler national had decided to sever the relationship with the Brisbane defendants and Lavis thought that Grellman might hope that he may be able to mediate in some way.
On 4th June 1987 the National Co-ordinator, Nicholas, wrote a memorandum to Pastellas about the Nelson Wheeler Brisbane office. By that time the premises for the new office had been selected, it was proposed that Grellman discuss with Lavis the transfer of the registration of the Nelson Wheeler name to Nelson Wheeler national. Arrangements were in hand for the telephone facilities, furniture and other equipment. On 9th June 1987 Nicholas wrote to all partners of Nelson Wheeler national. He informed them of the resolution of the National Executive on 8th April relating to the Brisbane defendants and went on as follows:
"As from Monday last, 1st June 1987, a new office has been opened as part of the Nelson Wheeler network. While a number of details remain to be organised, the following information is available for circulation."
He then gave the name of Pastellas, the new address of Nelson Wheeler Brisbane and other directory information. He completed his memorandum by indicating that Pastellas was available immediately to undertake any new work, referrals, stocktakes or business registrations. On 12th June 1987 Simmons wrote to Nicholas and asked him to alter his memorandum on 9th June and to recirculate it to the partners of Nelson Wheeler National. He wrote:
"As determination agreement to Allan Lavis and his other partners require six months' notice or until otherwise advised, the Nelson Wheeler office at Surfers Paradise has opened an office in Brisbane.
All matters will be conducted under the control of Nelson Wheeler Surfers Paradise. This covers both the factual situation and the legal situation."
Both Lavis and Ashby said that they did not see this memorandum.
It is plain from the documents admitted into evidence that the new Nelson Wheeler Brisbane office commenced as from 1st June 1987 and the Brisbane defendants had no association with Nelson Wheeler national after that date. That is also the effect of the evidence of Pastellas which I accept. At the meeting of National Partners on 17th July 1987, it was resolved, inter alia, that the new Brisbane practice be a fifty fifty joint venture between Nelson Wheeler Sydney and Nelson Wheeler Melbourne and it was noted that Lavis was to see Wenham to discuss matters in relation to the transfer of the "name rights in Queensland of Nelson Wheeler". There were other resolutions about such matters as to whom Pastellas was to be responsible, letterhead, expenditure, signatories on the bank account and reporting requirements by Pastellas. On 22nd July 1987, Nicholas sent a memorandum to members of Nelson Wheeler Sydney and Nelson Wheeler Brisbane and confirmed those matters which had been discussed at the partners' meeting.
On 17th August there was a meeting between Wenham, Simmons and Arnold which was referred to as the Sydney and Melbourne Executive as part of the National Executive. They discussed the Brisbane office. They had before them a profit and loss statement for the Brisbane office which appeared from 1st June 1987 to 31st July 1987 and a report from Pastellas. It showed that the new Nelson Wheeler Brisbane office commenced business on 1st June 1987 and operated continually. It ran at a loss during that period as expenditure exceeded fees received. At the meeting, it was resolved that Pastellas be a principal of the new Nelson Wheeler Brisbane and that signage be erected and be similar to that of Nelson Wheeler Sydney. It is recorded in the minutes of this meeting that "Allan Lavis to be associated with us until 31st December 1987 and is not concerned about what is being done". This record is in the context of signage. Also it is recorded that the letterhead was to be in the adopted national form and consented to by Lavis. According to Lavis, he did not recall any conversation about those matters although he had intimated during the month of June that he would not stand in the way of the new office.
Not only does the evidence clearly establish that the new Nelson Wheeler Brisbane office was operated as from 1st June 1987 and totally independently of the Brisbane defendants, but they undertook no work for any Nelson Wheeler firm and had no involvement with Nelson Wheeler national or any of the participating firms since before that date. They continued to practice under the name of Peden Lavis & Co.
On 20th November 1987 Lavis attended to the registration of the business name Nelson Wheeler in Queensland. The renewal of the business name was undertaken in the names of Wenham, Lavis, Gay, Arnold and Taylor and the application was signed by Lavis. Lavis said that he undertook that task because the registration would have expired on that day and so that it would not lapse. There is no reason why that explanation should not be accepted. On 9th December 1987 Grellman wrote to Lavis. The letter is in the following terms:
"I am currently arranging the quotation of a professional indemnity insurance to run from 31st January 1988 and in view of there being no further progress in our continued relationship, would suggest that you arrange professional indemnity insurance meeting your needs as from the final date of the current policy.
A further 'loose end' for tidying up is the business name registration in Queensland for which I would request the signature of the appropriate form indicating the change of ownership of Peden Lavis personnel to ourselves. I am unaware of the details as to whether any of our own people here are registered proprietors with you in the business name.
I am sorry that the revival of our association has not occurred, however, trust that we might continue the closeness which has existed in the past."
On 16th December 1987, Lavis wrote to Marsh and McLennan giving instructions for professional indemnity insurance. The letter includes the following "our present policy is that it is with American Home and expires on 31 January, 1988 through the Nelson Wheeler Association. We will be withdrawing from that Association within the next few weeks and will be requiring our own independent insurance cover from 31 January, 1988". On 16th December 1987 the Brisbane defendants submitted a professional indemnity insurance proposal form to Marsh and McLennan. That showed the name of their previous firm as Nelson Wheeler and that the date upon which they left (were to leave) that firm was as 31st January 1988. This information is in the handwriting of Lavis.
On 17th December 1987, Lavis wrote to Grellman on the subject of the business name registration and professional indemnity insurance. In that letter he wrote that it might be appropriate for all purposes to use 31st January 1988 "as the effective date of change" even though Wenham's letter in April had mentioned 31st December. He then dealt with the registration of various business names and concluded his letter as follows:
"I too am sorry that our association for the second time has been terminated and I hope we may be able to work together on various assignments from time to time. The partners of this firm have high principles and while we have enjoyed the association with the group, we do not believe the approaches and practices of some of the colleagues of the group are compatible with us. We have every respect for Sydney and will certainly maintain contact you and Paul."
On 31st January 1988 Lavis, Taylor, Gay, Wenham and Arnold signed a form indicating the change in particulars for the registration of the business name Nelson Wheeler, indicating that on 31st January 1988 Lavis, Taylor and Gay ceased to carry on business in Queensland under the name Nelson Wheeler.
It is the plaintiff's case that these matters relating to the registration of the business name and professional indemnity insurance, together with the correspondence at that time, indicate that the relationship between the Brisbane defendants and Nelson Wheeler was kept on foot and did not end until 31st January 1988 with the consequence that they remain partners of Nelson Wheeler national.
I do not think that is so. Clearly the arrangements between the Brisbane defendants and Nelson Wheeler which I have found constituted a partnership changed by April 1987 when it was decided by the National Executive to terminate that arrangement. Obviously it took time to put new arrangements in place. However, by 1st June 1987 there was a new Nelson Wheeler Brisbane office. There was no professional association between the Brisbane defendants and Nelson Wheeler of any nature. There were some outstanding matters. They included professional indemnity insurance arrangements and the registration of the name Nelson Wheeler and of other business names. When Wenham gave notice to the Brisbane defendants, he fixed the date of 31st December 1987 or such earlier date as may be agreed but the evidence does not disclose that the Brisbane defendants reached an agreement with Wenham or Nelson Wheeler national about that date. The fixing of the date was the unilateral act of the National Executive of Nelson Wheeler national and cannot be regarded as the date upon which the parties agreed to terminate the relationship. I accept the evidence of the Brisbane defendants that they were happy to end the relationship with Nelson Wheeler. The effect of all of the evidence is that date specified in the notice was varied by mutual arrangement. As soon as Nelson Wheeler national could establish the new Brisbane office of Nelson Wheeler, the arrangement was at an end. There was no feature of any relationship between the Brisbane defendants and Nelson Wheeler which was consistent with their membership of the partnership continuing beyond 1st June 1987. The matters relating to the business names and the professional indemnity insurance were dealt with on a common sense basis and could not effect the substance of the situation which was that the partnership arrangement had come to an end.
The plaintiff draws attention to some other matters. In 1988 proceedings were instituted in the Queensland Registry of the Federal Court of Australia by a Mr Mackman against Taylor, Wenham, Lavis, Gay and Arnold. The nature of those proceedings is of no importance for present purposes. On 24th November 1988 Taylor, Wenham, Lavis, Gay and Arnold filed a defence in which it is admitted that at all material times they had carried on business as chartered accountants under the name of Nelson Wheeler, including as at 30th December 1987. The Brisbane defendants discussed the Mackman proceedings. These proceedings had nothing to do with them. The subject matter of the proceedings arose out of work undertaken by the Surfers Paradise office. Obviously these five men had been sued following a search of the business name.
According to Lavis, he had no knowledge of the Mackman proceedings. He said that he had never seen the court documents and he knew nothing about the matter. Gay remembered the Mackman proceedings. He saw the statement of claim and realised that it related to the Surfers Paradise office and had nothing to do with the Brisbane defendants. He said that he discussed the matter with Taylor and that he would have discussed it with Lavis. He and Taylor attended to the matter but he did not think that Lavis was involved in resolving the matter. According to Gay, solicitors were instructed but he did not give any instructions.
It must be accepted that the Brisbane defendants were being asked to recall the matter in which they were not personally involved which occurred many years ago. It is likely that there would be inaccuracies in their recollection. However, I do not think any of these matters is significant. What obviously happened is that the wrong defendants were sued by Mackman. The matter was passed over to solicitors who were probably instructed through the professional indemnity insurer who then filed a defence without seeking instructions about the particular matter of the composition of the firm at the time. The Mackman proceedings is of no assistance in resolving matters in issue in these proceedings.
The next matter relates to a service company operated by the Brisbane defendants entitled PL Administration Pty Ltd. During the years 1980 to 1987 taxation returns were filed by that company. In those returns there was a note that administrative services were provided to the partnership of Peden Lavis & Co that the practice was a member of the national practice of Nelson Wheeler Chartered Accountants with associations throughout the Pacific area and overseas. The purpose of this disclosure was to justify travelling expenses. This disclosure is consistent with the finding that the Brisbane defendants were part of the National Partnership.
In the 1988 year there is a note that the practice was a member of the National Federation of Nelson Wheeler Chartered Accountants. The point made by the plaintiff is that if the partnership arrangement ceased as alleged by the Brisbane defendants, there would be no need for such a note and indeed such a disclosure to the Taxation Department would be incorrect. Lavis accepted responsibility for writing this note in the 1988 taxation return. He said that the note was inserted without much thought. Lavis said that he had no recollection as to why he changed the wording from the 1987 year as "a member of a National Practice" to the wording in the following year as "a member of a National Federation". He said that the only explanation he could give is that his firm had remained insured under the same policy into the 1988 financial year. He denied that the reason that he made the change from National Partnership to National Federation was because anticipation of the Mackman legal proceedings. Gay was aware of the Mackman proceedings but he could not say if that was the reason for the change of description in the taxation return of PL Administration. He said he did not know why there was any reference to Nelson Wheeler in the 1988 taxation return.
This evidence of Lavis is unsatisfactory but I do not think it reveals a lack of credit on his part. He was called upon to explain matters that have occurred eight years previously. The reference to Nelson Wheeler in the 1988 taxation return is puzzling. But I do not think it establishes that the partnership arrangement between the Brisbane defendants and Nelson Wheeler continued after June 1987. The evidence clearly establishes that there was no partnership relationship. The statement by Lavis in the taxation return of a continuation of the relationship is contrary to the fact of the matter. I find that the Brisbane defendants were members of the partnership Nelson Wheeler National that they ceased to be so as from no later than 1st June 1987.
There is no evidence to suggest that the Brisbane defendants were held out as partners of Nelson Wheeler National at any time thereafter. They practised only under the name Peden Lavis & Co and there was a new Nelson Wheeler Brisbane office.
In view of these findings, the application of the Brisbane defendants to withdraw their admission should be granted and I give leave to them to do so. As they were not in fact partners, no relevant prejudice to the plaintiff arises.
The action against the Brisbane defendants is dismissed.
There will be judgment for the plaintiff for $93,863,796.81, including interest, against each of the first defendants, the fifth defendants with the exception of the defendants Lavis, Gay and Taylor and each of the defendants Quilty, and Singleton, Harold Abbott, Lee-Steere and Somes. On the third party proceedings, there will be judgment for the first defendants for contribution in accordance with the apportionment of responsibility which has been made, that is fifty per cent by the defendant Harold Abbott and five per cent by each of the defendants Lee-Steere, Somes, Quilty and Singleton. I declare that if the plaintiff is held liable to pay to the Commissioner of Taxation capital gains tax on this judgment in circumstances where the defendants, excluding those excepted, acknowledge as constituting a proper defence by the plaintiff on any such claim made against it by the Commissioner of Taxation, the plaintiff is entitled to be indemnified for such amount, together with costs, on a solicitor and client basis. The plaintiff is required to pay in pursuing or defending any such proceedings in consequence of these defendants not making the acknowledgment referred to.
The action against the defendants Lavis, Gay and Taylor is dismissed.
In reaching my conclusions, I have thought it appropriate to disregard the possibility that all, or some, of the director defendants, or their associates, could be further enriched by a distribution to shareholders of the balance of the judgment sum after all debts of the plaintiff have been paid. I have only little information about the current financial position of the plaintiff and I do not know if such a distribution is a possibility. If such a distribution is to be made before the first defendants have enforced judgment on the third party proceedings against the director defendants, it is to be expected that they will seek appropriate protection and relief in independent or supplementary proceedings. If the first defendants have achieved recovery from the director defendants before any such distribution is made, no injustice should occur.
All of the parties are to have liberty to speak to the minutes of the judgment.
DUKE GROUP LTD (IN LIQ)
PILMER & ORS No. SCGRG-92-1874 Judgment No. S6529 [1998] SASC 6529
"The general rule is that 'the unexplained failure by a party to give evidence, to call witnesses, or to tender documents or other evidence may, not must, in appropriate circumstances lead to an inference that the uncalled evidence would not have assisted that party's case': Cross on Evidence (3rd Aust ed, 1986), par 1.43. The circumstances must be such as to make it natural for the particular party to call the witness in question: see generally the judgments of the High Court in Insurance Commissioner v Joyce [1948] HCA 17; (1948) 77 CLR 39; Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 and Brandi v Mingot (1976) 51 ALJR 207 and the discussion by Glass JA in Payne v Parker [1976] 1 NSWLR 191. The joint judgment in Brandi v Mingot established the rule for Australian courts in the moderate form repeated in Cross on Evidence (3rd Aust ed, 1986). The rule is frequently applied, in both criminal and civil jurisdictions, with respect to material witnesses as well as to the parties themselves. It is a specific application of the well-established principle that a party is expected, within reasonable limits, to produce at the trial all the evidence that is fairly available to him. The classical statements of that principle are to be found in the judgments of Lord Mansfield CJ in Blatch v Archer ; at 65; ; at 970, and of Best J in R v Burdett at 122; at 883. The rule is often applied in running down cases where the defendant chooses not to give evidence - or, to put it more realistically, where the insurer prefers to keep its driver out of the witness box: see, for example, Lopes v Taylor.
So far as a potential supporting witness is concerned, the court will first have to decide whether his absence should be regarded as telling against one party rather than the other - whether, in the nature of things, he should be put in a particular camp or simply seen as available equally to both sides. Even where that test is satisfied, an adverse inference cannot be drawn if there is an obvious or proved, and satisfactory, explanation for the failure to call the witness. That will depend upon the facts of the particular case. A reasonable apprehension of bias in favour of one party, notwithstanding an apparently close relationship with the other, will make an adverse inference against the latter inappropriate: cf Payne v Parker [1976] 1 NSWLR 191 at 197. It may be clear, in an industrial accident case, that the plaintiff's fellow employees are unlikely to be willing and co-operative witnesses for the defendant, although this may depend upon their seniority and other circumstances: cf Earle v Castlemaine District Community Hospital [1974] VicRp 86; [1974] VR 722 at 734."
It is abundantly clear from the cases, what use can be made of the unexplained absence of a party or witness from the witness box. In addition to the observations made by Cox J in Spence v Demasi (supra), the following is also clear. Evidence given might be more readily accepted because it is uncontradicted but the absence of a party or a witness cannot supply any gap in the evidence: Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 per Kitto J at p308. Once there is a proven factual basis from which an inference may be drawn, that inference may be more confidently drawn "when a person presumably able to put the true complexion on the facts relied on as the ground for the inference has not been called: per Kitto J at p308: see also Menzies J at p312 and Windeyer J at pp320-321, West v Government Insurance Office of New South Wales [1981] HCA 38; (1981) 148 CLR 62 at p69; Clayton Robard Management v Siu (1988) 6 ACLC 57 per Kirby P at p64 and ASC v AS Nominees Limited [1995] FCA 1663; (1995) 18 ACSR 459. However, in applying those principles it must be remembered that the burden of proving its case rests upon the plaintiff and that burden is not discharged because critical evidence is peculiarly within the knowledge of a defendant who is not called: Clayton Robard Management v Siu (supra) per Kirby J at p64. Furthermore, as Menzies J pointed out in Jones v Dunkel (supra) at p313 the failure to give evidence may not be used to "convert suspicion to inference".
Whilst I do not think that Quilty and Singleton were validly appointed as directors by Harold Abbott, clearly they regarded themselves as directors, Quilty as from 21st September 1987 and Singleton as from when he signed the consent in writing to act on 26th August 1987 and they acted as directors during the second half of September 1987 and in October 1987. They were directors of Kia Ora at relevant times because they acted as such: s5(1) of the Companies Code: see also Corporate Affairs Commission v Drysale [1978] HCA 52; (1978) 141 CLR 236. I do not propose to set out the many cases referred to in that case but I accept that even without the s5(1) of the Companies Code both Quilty and Singleton would be regarded by the general law as directors of Kia Ora at the relevant times: see Mason J at pp240-245, Murphy J at pp244-245 and Aitken J at pp250ff. Furthermore they did so with the knowledge and approval of the other directors. I except that Schneider-Pass was well aware of their acting and approved when Harold Abbott saw him in Germany. Whilst there is no direct evidence to that effect, it seems from other incidents that Schneider-Paas was consulted about important matters and action was not taken contrary to his wishes and it is likely that Quilty and Singleton were "appointed" with his knowledge and approval.
(1988) 48 SASR 536
(1948) 77 CLR 39
(1959) 101 CLR 298
(1976) 51 ALJR 207
(1981) 148 CLR 62
(1987) 46 SASR 99
(1988) 52 SASR 213
(1991) 56 SASR 455
(1976) 50 ALJR 666
(1990) 169 CLR 279
(1978) 141 CLR 236
(1979) 23 SASR 61
(1984) 37 SASR 345
(1988) 47 SASR 119
(1988) 54 SASR 151
(1989) 52 SASR 330
(1987) 45 SASR 111
(1985) 156 CLR 41
(1907) 5 CLR 418
(1995) 37 NSWLR 438
(1938) 69 CLR 150
(1988) 13 NSWLR 315
(1953) 90 CLR 425
(1990) 56 SASR 455
(1992) 173 CLR 626
(1995) 183 CLR 501
(1987) 9 NSWLR 464
(1991) 171 CLR 506
(1995) 182 CLR 1
(1988) 91 FLR 271
(1985) 41 SASR 147
(1975) 11 SASR 94
(1993) 43 FCR 1
(1916) 22 CLR 490
(1927) 40 CLR 43
(1997) 142 ALR 750
(1963) 110 CLR 74
(1985) 157 CLR 424
(1989) 95 ALR 211
(1985) 157 CLR 215
(1987) 78 ALR 193
(1985) 59 ALR 613
(1991) 104 ALR 397
(1990) 94 ALR 679
(1985) 62 ALR 527
(1937) 58 CLR 641
(1987) 73 ALR 233
(1995) 65 SASR 281
(1981) 150 CLR 225
(1992) 176 CLR 408
(1987) 9 NSWLR 310
(1963) 109 CLR 580
(1973) 128 CLR 99
(1984) 156 CLR 41
(1996) 64 FCR 410
(1996) 186 CLR 71
(1985) 157 CLR 1
(1929) 42 CLR 384
(1936) 56 CLR 113
(1984) 154 CLR 178
(1991) 42 FCR 390
(1991) 102 ALR 453
(1986) 160 CLR 371
(1925) 36 CLR 1
(1993) 61 SASR 390
(1992) 33 FCR 491
(1996) 67 SASR 207
(1993) 60 SASR 354
(1978) 52 ALJR 20
(1982) 149 CLR 337
(1987) 49 SASR 93
(1982) 42 ALR 161
(1981) 145 CLR 625
(1966) 114 CLR 185
(1991) 172 CLR 60
(1981) 150 CLR 402
(1983) 151 CLR 117
(1988) 166 CLR 351
(1991) 171 CLR 657
(1966) 115 CLR 94
(1986) 160 CLR 1
(1940) 64 CLR 282
(1952) 87 CLR 647
(1994) 62 SASR 239
(1996) 140 ALR 313
(1997) 147 ALR 568
(1980) 146 CLR 336
(1991) 105 ALR 25
(1991) 174 CLR 64
(1972) 127 CLR 454
(1991) 25 NSWLR 358
(1991) 58 SASR 184
(1981) 35 ALR 15
(1982) 31 SASR 1
(1972) 5 SASR 143
(1978) 21 ALR 375
(1975) 10 SASR 463
(1986) 63 ALR 575
(1911) 13 CLR 1
(1984) 156 CLR 447
(1910) 11 CLR 223
(1962) 107 CLR 604
(1988) 78 ALR 655
(1911) 12 CLR 205
(1993) 41 FCR 559
(1992) 39 FCR 446
(1978) 22 SASR 552
(1943) 68 CLR 428