DUKE GROUP LTD (IN LIQ) v PILMER & ORS No. SCGRG-92-1874 Judgment No. S6529 [1998] SASC 6529 - SASC 1998 case summary — Zoe

SASASC

DUKE GROUP LTD (IN LIQ) v PILMER & ORS No. SCGRG-92-1874 Judgment No. S6529 [1998] SASC 6529

[1998] SASC 6529

Supreme Court of SA|1998-01-30|Before: Mullighan J

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At a glance

Source facts

Court

Supreme Court of SA

Decision date

1998-01-30

Before

Mullighan J

Source

Original judgment source is linked above.

Judgment (2734 paragraphs)

[1]

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.

[2]

[52]

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.

[132]

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.

[1484]

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.

[1695]

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.

[1798]

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.

[1894]

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:

[2056]

"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."

[2234]

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".

Parties

Applicant/Plaintiff:

# DUKE GROUP LTD (IN LIQ)

Respondent/Defendant:

PILMER & ORS No. SCGRG-92-1874 Judgment No. S6529 \[1998\] SASC 6529

Legislation Cited (22)

Business Names Act 1962(WA)

Securities Industry Act 1976(NSW)

Supreme Court Rules 1947

Companies and Securities Commission Act 1979

Supreme Court Rules 1987

Stock Exchange and National Guarantee Fund Act 1987

'The Companies Act 1934

Wrongs Act 1935

Companies Act 1862

Securities Exchange Act 1934

Tax Assessment Act 1936

Business Names Act 1962(WA)

Supreme Court Rules 1947

Companies and Securities Commission Act 1979

Supreme Court Rules 1987

Stock Exchange and National Guarantee Fund Act 1987

Wrongs Act 1935

Companies Act 1862

Securities Industry Act 1976(NSW)

'The Companies Act 1934

Securities Exchange Act 1934

Tax Assessment Act 1936

Cases Cited (113)

DUKE GROUP LTD (IN LIQ) v PILMER & ORS No. SCGRG-92-1874 Judgment No. S6529 [1998] SASC 6529 (30 January 1998)

"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.