XI THE FOURTH CONTRAVENTION: THE MANAGEMENT SIGN OFF AND DRAFT PART B
421 Included in the Part B Statement was a statement signed by the Appellant dated 8 December 1998 headed "Management Sign-Off":
"Management Sign-Off
I have reviewed the due diligence questionnaires completed by senior management and the statement of issues identified in responses to those questionnaires. To the best of my knowledge, information and belief the answers given to those questionnaires are true and correct in respect of that part of the GIO Group business and affairs for which I have responsibility.
I have drawn the attention of the due diligence committee to any other matter of which I am aware which has occurred in the period since 1 July 1998 and which I consider may be material to a decision by a GIO Australia Holdings Limited shareholder whether or not to accept the takeover offer by AMP Insurance Investment Holdings Pty Limited. I am not aware of any other matter of such a nature which I have not already drawn to the attention of the due diligence committee or which is not contained in responses to the due diligence questionnaires."
422 The pleading with respect to this matter is par [126]:
"[126] The First Defendant signed and delivered to the DDC the First Defendant's management sign-off, as pleaded in para 88 hereof, without advising the DDC that, by reason of the matters of which the First Defendant then knew, or ought to have known, it was improbable that GIO Re would achieve the $80m profit forecast in the 1999 financial year."
423 Paragraph [88] of the Statement of Claim referred to is a paraphrase of the document signed by the Appellant, which I have quoted above.
424 His Honour considered par [126] together with par [125]. However, on this appeal ASIC abandoned any reliance on [125] and it is unnecessary to set it out.
425 His Honour had found, with respect to the Management Sign-Off:
"[925] Mr Vines completed a 'Management Sign-Off', dated 8 December 1998. His document certified to a review of the due diligence questionnaires completed by all senior management, as well as the statement of issues identified in responses to those questionnaires. He said that to the best of his knowledge, information and belief the answers given to those questionnaires were true and correct 'in respect of that part of the GIO Group business and affairs for which [he had] responsibility'. There was no definition of the part of the business for which Mr Vines had responsibility. I take it, however, that his area of responsibility was a large one, because his certification related to the answers to the questionnaires given by all senior management, and he was, under the planning memorandum, in a position of central responsibility, as I have explained. As in the case of the documents signed by Mr Robertson and Mr Fox, Mr Vines' document certified that he had drawn the attention of the DDC to any other material matters occurring since 1 July 1998, and said he was not aware of anything which he had not drawn to the attention of the DDC."
426 His Honour's findings with respect to the Fourth Contravention were as follows:
"[1160] ASIC made three submissions about Mr Vines' management sign-off. One of them can be despatched summarily. ASIC submitted that Mr Vines should have told the DDC that according to Mr Schneider's opinion, based upon a contract-by-contract analysis, Hurricane Georges was likely to be a $100 million type event, and further, that claims to the end of November 1998 had reached $85 million. I do not accept this submission, because I have preferred Mr Vines' evidence to the evidence of Mr Schneider with respect to their relevant conversations.
[1161] The first of the other two submissions was that Mr Vines ought to have formally advised the DDC that until 7 December, GIO Re had proceeded on the basis that the American Re agreement would effectively limit Hurricane Georges losses in the 1999 year to $25 million, but on that day PwC had refused to agree with the accounting treatment that would produce this result. ASIC said Mr Vines should have explained that the first four months' profit figures had been prepared on the basis of the same assumption.
[1162] I agree with this submission, in the sense that this information should have been conveyed to the DDC either by addendum to the management sign-off, or in some other fashion before the sign-off was made operative. The management sign-off invited Mr Vines to consider whether the DDC had been told everything material for the purposes of the Part B statement, which included the profit forecast. While his certification of the accuracy of answers to the questionnaire was confined to the part of the GIO Group business for which Mr Vines was responsible, and the scope of that responsibility might have been open to interpretation, the second paragraph of the document related to all matters of which he was aware, whether within his field of responsibility or not. The question that he was required to address was whether he was aware of something not reported to the DDC which he considered might be material to a shareholder's decision whether or not to accept the AMP takeover offer. Information known to Mr Vines, going to the question, whether the American Re agreement protected GIO Re from Hurricane Georges losses in excess of $25 million, was obviously material in that sense, because if there was no protection, then the ultimate Hurricane Georges net loss would be likely to reduce the profit forecast, and hence the value of the shareholding, to a material degree.
[1163] Secondly, ASIC submitted that Mr Vines should have told the DDC that on 7 December PwC had been given information concerning the effect of Hurricane Georges in circumstances where he had no evidence that the information had been supported by reasonably reliable investigations. I disagree with this submission, as framed, although in my view there was something else that should have been disclosed, in responding to the second paragraph of the sign-off document.
[1164] The developments on 7 December had made the accuracy and reliability of Mr Fox's statements to PwC matters of crucial importance to maintaining the profit forecast, but it was not Mr Vines' role to accumulate evidence to support or undermine Mr Fox's statements. On the other hand, just as he ought to have told the DDC what he knew about the American Re agreement, he should also have told them that in the new circumstances, the accuracy and reliability of management's best estimate of the Hurricane Georges liability had become especially important.
[1165] The presence of 'unders and overs' was also a material matter for disclosure. The fact that there were redundancies that might or would protect the profit forecast in the absence of the American Re agreement was no justification for non-disclosure of the material facts to the DDC. It was not appropriate for Mr Vines to deprive the DDC of the information necessary for it to make an informed decision as to whether to adhere to the profit forecast or alter the Part B disclosure, in light of the accounting treatment of the American Re agreement and the presence of unders and overs.
[1166] Mr Hogendijk gave evidence to the same effect. He said (affidavit para 195) that a competent CFO in Mr Vines' position would have explicitly noted the basis upon which the profit forecast was maintained in the 8 December management sign-off. This was because a competent CFO would have understood that the makeup of the profit was very significant to the market, and investors were likely to be misled if they were allowed to believe that the GIO Re profit forecast was likely to be achieved on the basis upon which it was originally estimated as a result of the ordinary operations of the business. He said that a competent CFO would have regarded it as being part of his or her duty explicitly to bring the issue to the attention of the DDC and PwC Securities. I do not agree, as far as PwC Securities were concerned, because they were already aware of the relevant matters, but my view is that Mr Vines had a duty to inform the DDC regardless of what PwC said to them.
[1167] A reasonable person in like position to Mr Vines in a corporation in GIO Australia Holdings' circumstances would have exercised care and diligence to ensure that the DDC was properly informed of all material aspects of the maintenance of the reinsurance profit forecast, before or in the course of giving the management sign-off. In terms of the pleading, such a person would have informed the DDC that the achievement of the $ 80 million profit forecast was improbable, given the unavailability of the American Re agreement, unless the unders and overs analysis that had been considered at the PwC meeting, and the estimate of Hurricane Georges liability made by Mr Fox, were correct.
[1168] A corollary to these findings is that a reasonable person in the position of Mr Vines would have drawn the attention of the DDC to those parts of the draft Part B statement that implied that the reinsurance profit forecast, as part of the Group forecast, would be achieved on the basis of assumptions that did not spell out the position known to Mr Vines. In other words, Mr Vines ought to have invited the DDC to consider some redrafting of the Part B statement in light of the matters of disclosure that he was obliged to bring to their attention. Mr Hogendijk reached a similar conclusion (affidavit para 192), drawing attention to a statement on page 14 of the booklet that spoke of GIO's 'strong performance' in the first four months, and said that the company was 'well on track to achieve a significant profit in the current year'. The booklet referred to 'key highlights' of the first four months' result, one of which was 'a solid profit achieved by GIO's reinsurance business as recent changes to personnel and management practices took effect …'.
[1169] A reasonable person in the position of Mr Vines would not have relied upon Mr McClintock's presentation to the DDC as a means of discharging his or her duty of care and diligence. Mr Vines was personally required, by the terms of the management sign-off, to commit his name to the opinions that it contained. By that document the DDC looked to Mr Vines to take personal responsibility."
427 The reference to "Mr McClintock's presentation" is a reference to his "unders and overs analysis" that I have referred to above.
428 In the Honesty Judgment, his Honour summarised the aspects of this lengthy passage which relate directly to the Fourth Contravention as follows:
"Before or in the course of giving his management sign-off on 8 December 1998, Mr Vines failed to ensure that the DDC was properly informed of all material aspects of the maintenance of the reinsurance profit forecast. He failed to inform the DDC that the achievement of the $ 80 million profit forecast was improbable, given the unavailability of the American Re agreement, unless the unders and overs analysis that had been considered at the PwC meeting and the estimate of Hurricane Georges liability made by Mr Fox, were correct (August judgment at [1167])."
429 The declaration relevant to this contravention was:
"1 The First Defendant contravened section 232(4) of the Corporations Law as carried over into the Corporations Act 2001 (Cth) in relation to GIO Australia Holdings Limited by his failure, as an officer of that corporation, to ensure that the Due Diligence Committee ('DDC') was properly informed of all material aspects of the maintenance of the reinsurance profit forecast in the course of giving his management sign-off on 8 December 1998, and failed to inform the DDC that the achievement of the $80 million profit forecast was improbable."
430 The focus of attention in [126], of the pleading as it is in [127] and [127A], which I call the Fifth and Sixth Contraventions, is on the improbability of the $80 million profit forecast being achieved. It states that by reason of certain matters that the Appellant knew or ought to have known, he should have advised DDC, before executing the Management Sign Off, "it was improbable that GIO Re would achieve the $80 million profit forecast". I deal first with the submission that his Honour went outside the pleaded case in this respect.
431 The Appellant advanced the proposition that pars [126], [127] and [127A] asserted that Mr Vines "knew or ought to have known that it was improbable that GIO Re would achieve the $80 million profit forecast". That is not what the paragraphs state. Paragraph [126] says that he ought to have advised the DDC that such achievement was improbable, "by reason of matters which Mr Vines knew or ought to have known".
432 The Appellant submitted that Austin J did not make a finding that Mr Vines knew that it was improbable that GIO Re would achieve the $80 million profit forecast. The reference to "knew" in this submission is, to say the least, ambiguous. An understanding or appreciation of improbability is implicit in the pleading. The Appellant's submission that the pleading required actual "knowledge" of improbability should be rejected. Indeed it is not a natural use of language to talk of "knowledge" of a statement of probability. In any event, the pleading cannot be so confined. It expressly extends to matters of which the Appellant "ought to have known". The pleading is that, in view of matters he knew, or ought to have known, he should have advised of such improbability before delivering his sign off letter.
433 In the second sentence of par [1167], his Honour expressly refers to the "terms of the pleading" and finds that a person in Mr Vines' position should have informed the DDC "that the achievement of the $80 million profit forecast was improbable". That is an accurate statement of the charge in par [126]. His Honour goes on, in that second sentence of par [1167], to identify facts and matters, or at least the most significant ones, which constituted the matters which the Appellant "then knew or ought to have known". There was no departure from the pleading. Paragraph [126], unlike other paragraphs, does not identify or confine the facts and matters to those of which Mr Vines had actual knowledge.
434 The first matter of knowledge to which his Honour referred was the unavailability of the American Re agreement. Retrocession cover had played an important role, indeed a determinative, role in the formulation of the profit forecast for most of the period that it was under consideration. Once it was removed as a pertinent factor, finally on 7 December, that was a matter appropriate to be considered as part of the knowledge of Mr Vines for the making of the judgment by his Honour contained in par [1167]. I have already set out the relevant findings by his Honour that identify this consideration.
435 The second matter to which his Honour referred in [1167] was the unders and overs analysis. This was a matter to which his Honour had expressly referred in par [1165] and which his Honour had found also required disclosure to the effect that a judgment had to be made that it had to be correct.
436 The third matter to which his Honour referred in [1167] was the enhanced significance of the extent of liability for Hurricane Georges, as estimated by Mr Fox, which his Honour mentioned in pars [1161], [1162] and [1164]. This drew on his Honour's analysis elsewhere in his judgment, particularly his further summary of his findings at par [1183]. There is a convincing basis for his Honour's finding that this was one of the matters of which Mr Vines had knowledge and was a reason for informing the directors that the achievement of the profit forecast was improbable unless the estimate was correct.
437 His Honour's reference to Mr Fox's estimate being correct is clearly a reference to the passage at par [1164], where his Honour indicates why it was that the accuracy and reliability of Mr Fox's statements were "matters of crucial importance to maintaining profit forecast". These estimates had, he said, "become especially important". His Honour's conclusion in this respect, in the context of a "tight" unders and overs analysis, was clearly correct.
438 What his Honour did in this passage was to express a conclusion, after having made many interrelated findings of fact and drawing inferences elsewhere in his judgment, that the Appellant should have informed the DDC that the $80 million profit forecast was "improbable". This was expressed in terms of the pleading in par [126], together with the reasons, or at least the ones his Honour regarded as critical, why that was so.
439 In this respect it does not appear, as expressed, that his Honour was relying upon his earlier finding at par [916] to the effect that Mr Vines ought to have understood at the meeting on 7 December that Mr Fox was proceeding on the basis that the American Re agreement could be relied upon and that he could not infer that Mr Fox was taking into account some kind of unders and overs analysis. This finding was challenged by the Appellant and relied upon by ASIC, but I do not need to deal with this challenge. Nor did his Honour rely on his finding that Mr Vines sought opinions from KPMG and Arthur Andersen as a strategy to put pressure on PwC.
440 One purpose of the management sign off was to enable the DDC and the Board to make a fully informed judgment with respect to the profit forecast. His Honour's analysis, in this respect, was expressed by reference to the particular assurances given by Mr Vines in the Management Sign Off that he had drawn the attention of the DDC to matters of which he was aware and which he considered material to a decision by a shareholder whether or not to accept the offer and the express statement that he was not aware of any such matter which had not been drawn to the attention of the DDC.
441 The submission of the Appellant that in some way Austin J had recast par [126] and answered a different question should be rejected.
442 With respect to the third matter identified in the passage, namely the significance of Mr Fox's estimate of exposure to Hurricane Georges, the Appellant relies on findings by his Honour in other passages of the judgment that held Mr Vines was entitled to rely upon the computations of exposure made by, in particular Mr Fox, by reason of the fact that these matters were not matters for which Mr Vines had direct responsibility.
443 The 8 December events constituted the final exchange of advice and opinions amongst and between the directors, senior management, the auditor and the independent expert. All of this was designed to finalise each component part of the Part B Statement. The consequences of any failure to comply with the duty of diligence and care were high, which his Honour set out and summarised metaphorically as "solemn circumstances" [1179]. The standard of care was at its height.
444 It was by reason of these circumstances that his Honour found that, as it had become clear that the American Re agreement was ineffective and the "unders and overs" produced a "tight" result, any increase in exposure to Hurricane Georges over $60 million must adversely impact on the profit forecast. For that reason, his Honour indicated, Mr Vines' duty of diligence and care required a different level of attention to that exposure on his part.
445 The Appellant's submission that Austin J did not provide adequate reasons for holding that Mr Vines could no longer rely on those with direct responsibility to bring the extent of exposure to his attention, should be rejected.
446 His Honour had summarised at [135] and [138], set out at [157] - [158] above and [914]-[915], set out at [394] above, the frequency with which Mr Vines had directly intervened in matters within the operational responsibility of Mr Fox at GIO Re, including increasing profit forecasts and determining profits or determining reserves. As his Honour concluded he "had the capacity and inclination to intervene at the divisional level when he thought, from his perspective at the Group level, that intervention was needed" [915]. (See his finding at [165], set out at [159] above).
447 I agree with Austin J, that such intervention was not only "needed" by 8 December, it was required by his responsibilities with respect to the Part B Statement. He could not simply accept Mr Fox's estimate of $60-65 million without further inquiry. In my opinion, his duty at that time was to be proactive. This was not an "operational" issue. By reason of the Part B Statement it was a Group issue and one for which he had express responsibility.
448 It was not, in my opinion, necessary for there to be any particular event indicating that Mr Fox's estimate should be checked. In any event, there were such matters - for example the past doubts expressed by Mr Schneider and the substantial increase in exposure over the month of November, reaching $60-65 million at sometime before the 7 December meeting [872]. Furthermore, as I have outlined in par [406] above, the negative adjustments required on the auditor's unders and overs analysis, taking into account the full range of matters required to be adjusted, was $15 million which was above the level of $12.5 million at or below which a variation in the profit forecast would be presumed not to be material. It was, however, below the amount of $25 million which was presumed to be material. That analysis was based on the lower of Mr Fox's estimated range of an exposure to Hurricane Georges of $60-65 million. If the top of the range, i.e. $65 million, was included then the negative adjustment of $15 million would increase to $20 million. This was high in the range where a decision had to be made about materiality. See also [539] and [863]-[874] below.
449 Whatever may have been Mr Vines' previous entitlement to rely on Mr Fox, his Honour's conclusion that the position had changed on 8 December was, in my opinion, open. Indeed, as indicated above, I would have concluded that it changed before that, but nothing turns on this.
450 If Mr Vines had instituted inquiries on 8 December as to the extent of exposure to Hurricane Georges, he would have discovered that the Register on 7 December already recorded claims at $91.9 million ($74 million net) [548]. (I do not suggest he had to personally inspect the Register.) He would also have discovered Mr Schneider's long held opinion that it was a $100 million event, and that he had conducted a contract by contract analysis to confirm his opinion. These were matters which, in my opinion, Mr Vines ought to have known.
451 His Honour was correct to conclude that Mr Vines' responsibility required him to be proactive, as he had been with other aspects of the accounts of GIO Re, as set out at [446] above, referring to [135]-[138] and [914]-[915] of his Honour's judgment set out at [157]-[158] and [394] above. As his Honour observed at [1085], set out at par [76] above, the due diligence process required the Appellant and others "to take particular care" and "that it would not be enough for them to confine their attention to what they knew, in circumstances where they could uncover material information by appropriate inquiry".
452 The Appellant's duties, particularly when the Board had directed a due diligence process occur, did not entitle him to fail to take the initiative unless some reason to do so had come to his attention. In any event, there were such reasons: exposure to Hurricane Georges had increased to $60-65 million in the month of November and there was no basis on which it could be assumed that the process had stopped. Indeed, as his Honour found at [241], set out at [180] above, as early as the First Quarter Highlights document: "reasonable persons in the shoes of those responsible for the profit forecast would have thereafter treated the development of the Hurricane Georges loss as a matter to be kept under particular review".
453 In the context of a "tight" unders and overs analysis the Appellant's responsibilities required him, in my opinion, to take steps to ensure that the monitoring process was continuing and was up-to-date.
454 With respect to the first and second matters to which his Honour referred, namely the unavailability of the American Re agreement and the unders and overs analysis, the Appellant challenges his Honour's conclusion that it was negligent of Mr Vines not to have advised the DDC, on the basis that the DDC was already aware of them. The Appellant submits that his Honour's conclusion was based on the false premise that the DDC did not know about the unavailability of the American Re agreement or of alternative unders and overs analysis, particularly Mr McClintock's exercise and in any event did know of the reserves available in MIPI.
455 This submission does not place sufficient weight upon his Honour's findings about the significance of Mr Vines' role, relevantly, in the Part B Statement process. That role went beyond the scope of the role of chief financial officer. The submission also does not give appropriate weight to the express assurances contained in the Management Sign Off which he had to execute, clearly of great significance to all of the other parties to the Part B Statement including the auditors, but most significantly, the directors. Furthermore, this submission ignores the finding of just how "tight" the profit estimate was at the end of the process.
456 That some of the directors may have had other sources of information with respect to the matters, which indicated that the profit forecast was improbable of achievement, did not absolve Mr Vines, in the exercise of due care and diligence, from adding the weight of his particular authority to the relevant proposition, even on the basis of facts that were known to others. What was involved was a matter of judgment that required a number of considerations to be balanced. The directors were not relying simply on Mr Vines to draw their attention to facts. The directors were entitled to expect a properly formed judgment, most relevantly about the enhanced significance of exposure to Hurricane Georges.
457 As his Honour put it at par [1169], Mr Vines was required by the terms of the Management Sign Off "to take personal responsibility". His role was such that he ought to have "drawn the attention of the DDC" to the fact that the reinsurance profit forecast had been made "on the basis of assumptions that did not spell out the position known to Mr Vines" (at [1168]). As his Honour further put it, that obligation was such that "Mr Vines ought to have invited the DDC to consider some redrafting of the Part B Statement" in the light of those matters of disclosure that he was obliged to bring to the attention of the committee (at [1168]).
458 These findings constitute a clear, and in my opinion justified, finding of contravention of the duty of care and diligence that does not turn on an assumption that the persons to whom such a statement was required to be made were unaware of the facts and matters upon which Mr Vines should have acted in order to discharge his own responsibility in this regard.
459 Obviously, there will be circumstances in which such knowledge has the result that the consequence of the relevant act or omission is not such as to constitute a breach. In view of Mr Vines' responsibilities that was not the case here. His opinion could, indeed it appears to be clear, would have influenced the directors' decision-making process.
460 For the reasons given by Austin J and the additional reasons outlined above, the Appellant contravened his statutory duty. The appeal from this contravention should be rejected.
461 In par [1168] of his judgment, set out above, his Honour set out what he described as a "corollary to" the findings in the preceding paragraphs. This passage was summarised, in the Honesty Judgment, as:
"On 8 December 1998, Mr Vines failed to draw the attention of the DDC to those parts of the draft Part B statement that implied that the reinsurance profit forecast would be achieved on the basis of assumptions that did not spell out the position known to him, and he failed to invite the DDC to consider some re-drafting in light of the matters of disclosure that he was obliged to bring to their attention (August judgment at [ 1168])."
462 This formed the basis of the following declaration:
"2 The First Defendant contravened section 232(4) of the Corporations Law as carried over into the Corporations Act 2001 (Cth) in relation to GIO Australia Holdings Limited by his failure on 8 December 1998, as an officer of that corporation, to draw the attention of the DDC to those part of the draft Part B statement that implied that the reinsurance profit forecast would be achieved on the basis of assumptions that did not spell out the position known to him, and his failure to invite the DDC to consider some redrafting in light of the matters of disclosure that he was obliged to bring to their attention."
463 Paragraph [1168] and Declaration 2 make no reference to the management sign off. The declaration refers to advice to the DDC, but it is not dealt with as pertinent to par [127] of the pleadings, considered as the Sixth Contravention.
464 ASIC sought to support the declaration made as falling within [126], notwithstanding the absence of any of the language of that paragraph. This is a matter which also arises with respect to a number of the declarations made with regard to the Fifth Contravention.
465 In the case of Declaration 2, ASIC submitted that, as a "corollary" the finding in [1168] should be regarded as a natural consequence of the earlier analysis.
466 In my opinion, it is appropriate for a court, having found and declared there to have been a contravention in accordance with the pleaded case, as Declaration 1 does, to also make associated declarations which identify the conduct which, if it had occurred, would have ensured that there was no contravention. In any event, the Appellant did not separately challenge Declaration 2 or, indeed, the formulation of any declaration.