Gold Ribbon (Accountants) P/L v Sheers & Ors

CORPORATIONS - MANAGEMENT AND ADMINISTRATION - DIRECTORS AND OTHER OFFICERS - CRIMINAL AND STATUTORY CIVIL LIABILITY OF OFFICERS - DUTIES TO ACT HONESTLY AND EXERCISE DUE CARE AND DILIGENCE - FIDUCIARY POSITION - where second defendant director of plaintiff company - plaintiff alleges second defendant in breach of statutory and common law duties as a director - whether the second defendant failed to ensure "accepted lending practice" and "due diligence" procedures were followed in the operation of the plaintiff company - whether the second defendant failed to ensure such procedures were administered by a person with the capacity to administer them competently - whether second defendant failed to exercise reasonable care and skill in the performance of his duties as a director of the plaintiff company - whether the second defendant was entitled to rely on other directors management and an independent contractor - duties of a director concerning attendance at board meetings

NEGLIGENCE - ESSENTIALS OF ACTION FOR NEGLIGENCE - DUTY OF CARE - REASONABLE FORSEEABILITY OF DAMAGE - STANDARD OF CARE - WHERE ECONOMIC OR FINANCIAL LOSS - where loss claimed by plaintiff company is unpaid principal of five defaulting loans - where plaintiff alleges that had second defendant exercised reasonable care and skill in the performance of his duties as a director loss could have been avoided - whether any breach of duty by the second defendant was causative of loss and damage

Corporations Act s 180(1), s 180(2) Corporations Law s 180

Australian Securities & Investment Commission v Adler (No 3) [2002] NSWSC 171; (2002) 20 ACLC 576

Australian Securities Commission v Gallagher (1993) 11 WAR 105

Bennett v Minister of Community Welfare [1992] HCA 27; (1992) 176 CLR 408

Biala Pty Ltd v Mallina Holdings Limited (No 4) (1993) 13 WAR 93

Daniels v Anderson (1994-1995) 16 ACSR 607

Dempster & Biala Ltd v Mallina Holdings Ltd (1994) 15

Duke Group Ltd (in liq) v Pilmer [1999] SASC 97; (1999) 31 ACSR 213

Gould Birbeck & Bacon v Mt Oxide Mines Ltd (in liq) [1916] HCA 81; (1916) 22 CLR 490

In re City Equitable Fire Insurance Company [1925] 1 Ch 407

March v E & M H Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506

Medlin v State Government Insurance Commission [1995] HCA 5; (1995) 182 CLR 1

Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109

Vrisakis v Australian Securities Commission (1993) 9 WAR 395

P H Morrison QC with him M D Martin for the second defendant

[1] The plaintiff was acquired in 1988 with a view to conducting a business of providing unsecured loans to practising accountants. The scheme, which the plaintiff commenced to implement in early March 1999, involved soliciting the borrowing from it by practising accountants, or their associates, of sums up to $1,000,000. Any such loan was not to exceed 80% of the fees generated by the accountant's practice for which accounts had been rendered but which remained unpaid.

[2] The plaintiff's "security" was based principally on the assumed reliability and financial stability of the class of borrowers participating in the scheme and on the provision by HIH Winterthur Casualty and General Insurance Ltd ("HIH") of an insurance policy indemnifying the plaintiff and the financier against any loss incurred as a result of default under the loans. The HIH policy also provided for repayment of the loan in the event of the death of an individual borrower.

[3] The promoters hoped to borrow $75,000,000 but were only able to obtain a bill facility from Colonial State Bank with a limit of $25,000,000. It was a term of the facility agreement that the policy of insurance provided by HIH indemnify the bank "in respect of any failure by [the plaintiff] to pay the bank amounts owing under the facility including fees and interest ...".

[4] In late 2000, HIH's credit rating was downgraded and the bank, as it was entitled to do, gave notice of termination of the facility in a letter dated 3 January 2001. The plaintiff, pursuant to its agreements with borrowers, gave 90 days termination of its loan agreements. On 15 March 2001, provisional liquidators were appointed to HIH.

[5] Five borrowers defaulted under their respective loan agreements and liquidators were appointed to the plaintiff. These proceedings were commenced with a view to recovering from the directors of the plaintiff moneys owing under the defaulting loans.

[6] The plaintiff's third further amended statement of claim, on which it went to trial, is a complex document of some 40 pages which made numerous allegations of negligence and breach of statutory duty. The case presented against the second defendant, Mr Dunn, in final submissions, however, was comparatively simple. It was that Mr Dunn breached his statutory and common law duties as a director in two principal respects. The first was his alleged failure to ensure that the scheme was administered by a person with the capacity to administer it properly. In that respect it is contended that the incompetence of the person appointed to administer the scheme, Ms Schweitzer, is revealed by, amongst other failings, her lack of appreciation of the "due diligence" inquiries which should have been carried out with respect to unsecured loans of the size of those involved in the scheme. Ms Schweitzer was the third defendant until the proceedings against her were discontinued.

[7] Ms Schweitzer's lack of competence, it is said, is further revealed by her unthinking application of the procedures prescribed in the administration agreement entered into between her company Austide Holdings Pty Ltd ("Austide") and the plaintiff and, regardless of the results of those procedures, by her failure to follow up matters which should have alerted her to the necessity to make further inquiries.

[8] A subsidiary contention is that Mr Dunn failed to cause the plaintiff to take any steps to replace Austide when it became apparent that Austide was not competent to carry out the administration of the scheme.

[9] The second category of complaint is that Mr Dunn, being the only person on the plaintiff's board with extensive lending experience, failed to ensure that the scheme was set up so as to comply with "accepted lending practice" and thus minimise the risk of borrowers' defaults. A related contention is that Mr Dunn was in breach of his duties in failing to ensure that "accepted lending practice" was followed once the scheme was set up.

[10] In paragraph 8 of the statement of claim it is alleged that it was an implied term of the administration agreement that Austide would conduct the administration of the program in accordance with "accepted lending practice". That term is defined as:

(a) "... the practice undertaken by professional lenders from in or about 1999 until 2001, being to undertake appropriate pre-lending due diligence which required the lender, before making a loan, to be firstly satisfied that the applicant, plus the asset base being funded, qualified for a loan under the terms of the facility; secondly, that the applicant had the financial capacity to both service the loan (in terms of making the required payments on the loan) plus repay the loan capital; and thirdly, that the requirements imposed on applicants by the terms of the loan application had been satisfied by the applicant;"

(b) the requirement that Austide "seek from applicants independent proof or verification of the following matters when [processing loan applications]:

A. the applicant was in fact a registered practising accountant;

B. the certified accounts receivable existed, in fact, and were comprised of professional fees rendered to the applicant's accountancy clients and did not include work in progress;

C. the applicant's credit history was appropriate in that the applicant was not currently experiencing and/or had not in the immediate past or repeatedly in the past, experienced financial difficulty;

D. the applicant had the existing financial capacity to service the loan (in terms of making the required payments on the loan) plus repay the loan capital in terms of the loan arrangements, preferably from demonstrated ongoing cash flow, but, at the very least, from available assets of the applicant and/or the guarantors;

E. the terms and conditions of the loan application were otherwise satisfied by the applicant;

A. seek[ing] independent proof or verification of, or mak[ing] inquiry of the borrower about, certified receivables when those receivables fluctuated significantly as compared with previous certifications and having regard to the circumstances of the borrower; and

B. if that proof was not provided or, if provided, deemed to be unsatisfactory by the fourth defendant, carry[ing] out an audit of the borrower's accounts receivable."

[11] As to Ms Schweitzer's and Austide's lack of competence, Mr Dunn contends that the evidence reveals that the directors of the plaintiff believed, on ample grounds, that Ms Schweitzer was properly qualified to implement the scheme. Furthermore, it is contended that Mr Dunn opposed Austide's appointment on the basis that the administrator should be Mr Dunn's company, Commercial Recovery Management Pty Limited ("CRM"). Other directors, however, thought otherwise and appointed Austide over Mr Dunn's opposition. It follows that if, contrary to Mr Dunn's contentions, Austide was not properly qualified, its appointment was none of Mr Dunn's doing.

[12] In response to the allegations of failure to ensure that proper procedures were implemented it is argued that the administrative procedures adopted by the plaintiff were approved by the bank and HIH and were "vetted by the bank's solicitors". The directors were entitled to rely on the expertise of these institutions and their legal advisors. Mr Dunn was a non-executive director and "the administration" was really in the hands of the executive directors, Howes, Sheers and Taylor. He was able to leave the detail of the documentation and administration to them whilst being kept abreast of the plaintiff's affairs.

[13] If the evidence of the plaintiff's expert, Ms Bundesen, is accepted, the administrative procedures, if followed, would have prevented all five of the problem loans being made. It is thus not open to find that there has been a breach of duty by Mr Dunn in not ensuring that "accepted lending practice" applied to the scheme. Nor can it be shown that if, contrary to this submission, Mr Dunn was in breach of his duties as a director, the breach caused the plaintiff's loss.

[14] The directors, other than Mr Dunn, made a conscious decision to develop and market the plaintiff's product without those procedures which the plaintiff contends are requirements of accepted lending practice. In particular, the directors, other than Mr Dunn, decided not to seek proof of receivables, financial statements or security from borrowers. The other directors were experienced in business and alert to the fact that lenders customarily required financial statements and other evidence supporting a borrower's ability to repay. Thus, in effect, Mr Dunn had nothing to contribute in that regard to directors' deliberations and did not breach any duty "by not speaking up".

[15] Mr Dunn, in relevant respects, had no power to impose his will on the board. Having regard to the association between Mr Sheers and Ms Schweitzer and the animosity which existed between Mr Dunn on the one hand and Messrs Sheers and Howes on the other, any attempt by him to replace Austide or to secure a different appointment in the first place would have been opposed by Messrs Sheers and Howes. And in any such contest, Mr Taylor would not have lent Mr Dunn his support.

[16] The five loans in question were made as a consequence of the fraudulent or improper activities of Messrs Sheers and Howes in collusion with the borrowers concerned. Ms Schweitzer either colluded with Messrs Sheers and Howes or turned a blind eye to their activities. In those circumstances, any loss in respect of the subject loans was caused, not by any act or omission by Mr Dunn, but by the actions of Messrs Sheers and Howes.

[17] The first defendants, Richard Sheers, Stephen Romp, Garry Howes and Robert Taylor were all directors of the plaintiff for most or all of the time during which the scheme was set up and implemented. Mr Dunn was also a director during most of this time and was the only defendant represented on the trial of the proceedings. Judgment by default was obtained against Howes in May 2003. The other first defendants are bankrupts. The proceedings against the third defendant have been discontinued.

[18] Mr Dunn was introduced to the scheme in about the middle of 1997. Its promoters at that stage were Messrs Sheers, Howes and Romp and a solicitor, Godfrey Stewart. Mr Dunn, born in 1943, has spent the whole of his working life in finance and debt collection. He was a bank clerk for two years after leaving school and then worked for Australian Guarantee Corporation Ltd ("AGC") for many years, finishing with that company in 1987 as a head office zone credit manager. Before that he was a divisional state manager of AGC in South Australia.

[19] Mr Stewart was a solicitor with lengthy experience in the area of insurance. Mr Howes was a former solicitor with banking experience and accounting qualifications. Mr Romp had spent most of his working life in the insurance industry in various capacities before joining in the founding of Park Lane Insurance Brokers in 1992. He ceased to be a director of the plaintiff on 28 May 1999.

[20] Mr Taylor was employed by Park Lane as finance manager in about 1997. He had been manager of a Master Locksmiths' Association and manager of a Commercial Teachers' Association. Mr Sheers was a former publican. He had owned and operated a substantial number of hotels and motels and had been a director of the Australian Hotels Association for several years.

[21] Mr Dunn claims that at an early meeting with the other promoters CRM was promised half the equity in the plaintiff and the right to manage "the funding program". That agreement in relation to equity, according to Mr Dunn, changed in the course of 1997, culminating in an agreement that CRM was to have 40% of the shares in the plaintiff and a further 10% of the shares in a related company, Gold Ribbon Corporate Services Pty Ltd.

[22] On 28 May 1998, Messrs Dunn, Romp and Stewart met with officers of the bank with a view to persuading the bank to fund the scheme. The bank's approval is contained in a letter dated 20 August 1998. The facility agreement entered into to give effect to the bank's approval is dated 24 February 1999. Under the facility agreement, the plaintiff was required to adhere to the terms of the "program documents". This was defined to mean:

[23] The "agreements" means the agreements between the plaintiff and scheme borrowers. The accountants' fee funding program, which was a schedule to the facility agreement, required the plaintiff to carry out "due diligence on [each] applicant accountant including" ASC searches, CRAA searches, membership searches, check guarantees and complete an application assessment form. The accountants' fee funding policy issued by HIH, also dated 24 February 1999, required that each agreement with accountants provide that:

(a) The plaintiff may carry out an audit of the borrower's fees at any time;

(b) The borrower must use care "in the selection of competent employees responsible for the accountant's participation in the program ...".

[24] Mr Romp, in a facsimile to Mr Dunn dated 22 May 1998, requested him to prepare a draft administration agreement between CRM and the plaintiff. If the draft was prepared it was never executed.

[25] Mr Romp, with the assistance of Mr Allen, a finance broker whose company, Arts Finance Pty Ltd, was involved in the marketing of the scheme, produced the first draft of a submission entitled "Accountants' fee funding program" in April 1998. It provided for a due diligence exercise by CRM at the request of Gold Ribbon Corporate Services ("GRCS") in respect of each application. Also required, if the borrower was a corporation, was an assets and liabilities statement of its directors. Borrowers of sums in excess of $250,000 were to be obliged to provide financial statements for the previous two years. Borrowers of $1,000,000 or more were to be required to provide financial statements for the previous three years, a business plan and other information which may be required by the insurer or the bank. Additionally, GRCS was to have the right to direct audits of borrowers at the expense of the borrowers. The document, or a slightly updated version of it, was presented to the bank as part of the plaintiff's loan application process. One of its paragraphs stated:

"GRCS will market and manage the scheme and the risk control mechanisms shall be put in place by CRM."

[26] Mr Stewart and Mr Taylor, together with Ms Schweitzer, were principally responsible for preparation of the scheme's operational documentation such as the application form and what were described as "rollover documents". Those documents were submitted to the bank's solicitors, Minter Ellison, and approved by them, presumably from the point of view of the bank.

[27] There are some differences between the witnesses on the extent to which Mr Dunn was excluded from or not kept informed of activities of the plaintiff from about the time of his attendance at the bank in May 1998 until about May 2000. Animosity between him and Howes and, to a lesser extent, Sheers continued. They were opposed to having CRM administer the scheme. Their choice as scheme administrator was Austide, a company managed by Ms Schweitzer. All the plaintiff's directors were aware that she was the de facto spouse of Mr Sheers but were not informed that Mr Sheers also had an interest in Austide.

[28] Minutes of a meeting between Mr Taylor, Mr Sheers and Ms Schweitzer on 24 November 1998 suggest that by that date Austide had been chosen as the scheme administrator. Other minutes reveal that directors, other than Mr Dunn, worked on settling the basis for the scheme and its detailed documentation between November 1998 and 16 April 1999. However, Mr Dunn was responsible for devising the "matrix" or template by reference to which the plaintiff decided the maximum amount of each loan to be made under the scheme. As a general proposition, participating accountants could borrow up to 80% of outstanding fees or "receivables". The matrix ranked prospective borrowers according to firm size and distribution of receivables over a specified period. For example, in the case of a large firm, some value would be attributed to invoices outstanding for more than 120 days, but such invoices would not be taken into account for small firms.

[29] There is in evidence a copy of a letter dated 10 March 1999 from Mr Dunn to the directors of a company related to the plaintiff stating that company searches conducted by him revealed that neither he nor any company of his had any shareholding in the plaintiff or the other company. The letter alleged breach of an agreement concerning shareholding and in it Mr Dunn tendered his resignation as a director of the plaintiff. The original of the letter was not put in evidence and the plaintiff contends that it may not have been sent.

[30] Whether or not the resignation was actually made or if made, formally withdrawn by Mr Dunn, he subsequently acted as a director and continued to be regarded as such by the other directors. On 19 January 1999 he wrote to the plaintiff's accountants requesting copies of minutes of meetings of directors of the plaintiff asserting that he was a director. He sent a copy of the letter to Mr Romp and raised with him a question concerning the role of the company secretary. Minutes of a meeting of the directors of the plaintiff dated 28 May 1999 revealed that he attended a directors' meeting with Messrs Howes, Romp and Stewart on that day. Mr Taylor, who had been company secretary, was appointed a director as was Mr Sheers. Mr Stewart resigned as a director in the course of the meeting.

[31] In January 1999, CRM executed an agreement between it and the plaintiff under which the plaintiff appointed CRM to conduct specified debt recovery services in connection with the scheme. The document was prepared by solicitors acting for the bank and sent to Mr Dunn by Mr Romp with a request that he execute it in order to satisfy the bank's requirements.

[32] At a meeting on 5 February 1999 it was resolved that Messrs Romp and Howes "liaise to finalise the content and distribution of marketing materials". It was in this month that the business of the plaintiff effectively commenced.

[33] On 16 April 1999 the directors, at another meeting, considered a draft of the brochure to be provided to prospective borrowers and decided on a number of changes. For reasons which the evidence does not make clear, the administration agreement between the plaintiff and Austide was not entered into until 7 June 1999, well after the plaintiff commenced lending under the scheme.

[34] By the end of 1999, Mr Romp had become concerned about Austide's administration of the scheme and about whether the lending criteria and procedures were sufficiently exacting. He discussed the matter with Mr Dunn who informed Ms Schweitzer on 10 November 1999 that he had been instructed by Mr Romp to conduct a random audit of the administration of the scheme. Mr Howes strongly objected to this course of action and discussion ensued about the need for an independent auditor.

[35] Ms Schweitzer, in a facsimile to Mr Taylor on 2 December 1999, stated that whilst she did not have a problem with the appointment of an auditor she was opposed to any audit by Mr Dunn as he wanted his company to be the administrator. Ms Schweitzer suggested that an employee of the bank could perform the audit. No auditor was appointed, however, as no one nominated a proposed auditor or otherwise took action to progress the matter.

[36] On 6 April 2000, Messrs Romp and Taylor sent a facsimile to the other directors and Ms Schweitzer in which they referred to the receipt of legal advice concerning scheme documentation. They suggested that no further loans be made until after the implementation of the solicitor's advice. They also asserted that:

(a) the board should reconsider the question of whether a loan should be made to prospective borrowers who had a charge over their assets;

(b) work in progress should not be taken into account in determining the extent of clients' book debts;

(c) there was no need for the book debts to be listed at the time of making a loan application.

The evidence did not disclose the substance of the legal advice.

[37] Minutes of a meeting of directors of 17 May 2000 record the presence of Messrs Romp, Sheers, Howes, Dunn and Taylor, as directors. The attendance of Ms Schweitzer and Mr Allen are noted as is Mr Taylor's appointment as company secretary. There was discussion at the meeting as to whether there should be a requirement that the plaintiff take a charge over borrowers' assets. Mr Howes was opposed to the taking of any security on the grounds that this would have an adverse impact on marketing. It was resolved that a committee, consisting of Mr Dunn, Ms Schweitzer and Mr Allen, be formed to make recommendations to the board in respect of the adoption of more stringent lending requirements. The committee was requested also to consider the imposition of a requirement that borrowers provide a list of client receivables.

[38] The minutes of a meeting of directors held on 7 August 2000 reveal that the committee had not met by that date. In a facsimile to Mr Dunn of 2 June 2000, Ms Schweitzer referred to discussions at recent board meetings "regarding taking charges over assets" and suggested that Mr Dunn, as convenor of "our sub-committee" might like to state his views prior to any further discussion. Mr Dunn does not appear to have acted on the invitation.

[39] In mid-2000, considerable discussion took place concerning the tightening up of the plaintiff's lending policies by imposing a requirement that borrowers produce lists of debtors. For loans between $250,000 and $500,000, financial statements were to be provided also. For loans over $500,000 the borrower was to be required, in addition, to give a first charge over the subject debts, provide tax returns for the preceding two years and also directors' guarantees. There was a dispute over whether these conditions should be applied to existing as well as new loans.

[40] Mr Taylor, in particular, was advocating a more active monitoring of outstanding loans and wanted the new credit procedures applied to existing borrowers. Mr Dunn was of a like mind but Mr Howes was asserting vociferously that existing borrowers could not be required, or even asked, to supply additional information. Mr Dunn obtained a solicitor's advice on the point in September 2000 but as a result of the differences of opinion, the proposed alterations to the credit policy were not implemented.

[41] There was also friction amongst the three men arising from their participation in another unsecured lending scheme in relation to real estate agents.

[42] The impending demise of the scheme was foreshadowed on 11 October 2000 when HIH issued a notice stating, in effect, that no claims could be made against the policy unless HIH had been advised of the extent of such claims prior to the expiry date. In November, the bank intimated to Mr Romp that it was reviewing its participation in the scheme. He concluded that the bank was preparing to give 180 days notice terminating its facility. The bank in fact gave six months notice of termination on 3 January 2001.

[43] The plaintiff's failure to appoint CRM as administrator of the scheme was a constant source of annoyance to Mr Dunn and contributed to the difficulty he experienced in working with Messrs Sheers and Howes. This difficulty was compounded by the personalities and agendas of Messrs Sheers and Howes. They both wanted Mr Dunn out of the project and worked to secure that objective. Neither was inclined to compromise or conciliation and Howes exhibited a degree of aggression in his dealings with other directors which inhibited any calm exchange of views and dispassionate decision-making.

[44] Some of Mr Dunn's contentions depended on his inability to "impose his will" on the board. It is submitted, and I accept that, broadly speaking, after Mr Stewart ceased to be a director, the board was divided into two factions: Messrs Romp and Dunn in one and Messrs Sheers and Howes in the other. Messrs Sheers and Howes felt no particular animosity towards Mr Romp and vice versa, but they both, particularly Howes, disliked Mr Dunn.

[45] Mr Taylor was unaligned, industrious and principled. He was anxious, wherever possible, to avoid confrontation or conflict between board members and, because of this, could not be relied on to support a proposal put forward by either Mr Romp or Mr Dunn, even if it met with his approval. However he was quite active in his endeavours to tighten and improve scheme administrative procedures.

[46] Mr Stewart was not aligned with Messrs Sheers and Howes and there is no reason to suppose that he would not have given careful and intelligent consideration to any proposal put before the board. I consider it probable also that Messrs Sheers and Howes would have perceived Mr Romp to be a successful, capable businessman whose views on matters pertaining to the plaintiff's business were worthy of consideration.

[47] Schedule 2 to the bill facility agreement is a document entitled "ACCOUNTANTS' FEE FUNDING PROGRAM". It commences by stating that it is for inclusion in the administration agreement between Park Lane Insurance Brokers Pty Ltd and Gold Ribbon (Accountants) Pty Ltd. Its purpose is to set out the functions to be fulfilled by the administrator of the scheme and it relevantly provides:

(b) GRA to carry out due diligence on the applicant Accountant including:

ASC searches

CRAA searches

Any other relevant searches

Memberships of Accountants organisation/s

GRA to check guarantees provided by relevant parties (directors of shareholder companies, shareholders if a major shareholder is not a director)

GRA completes Application Assessment Form and determines whether applicant is successful." (Emphasis added)

[48] Attached to the HIH policy but not referred to in the body of the policy is a document entitled:

It is divided into two parts, one headed "Imposed by HIH" and the other headed "Self imposed by GRA". The second part of the document concerns the procedures to be followed by the plaintiff, or the scheme administrator on its behalf, in connection with loans. It relevantly provides:

"GRA to carry out due diligence on applicant accountant in accordance with Administrative Procedures and shall determine:

. Whether the documentation received is in order,

. Whether Application should proceed to registration of accountancy firm and, if so

. The correct classification for the Applicant according to the calculation table.

Where an Application does not satisfy criteria, GRA shall refer it to Directors with a recommendation to:

. request further information from applicant, or

[49] The term "administrative procedures" is undefined but it is probable that it refers to the administrative steps set out in Schedule 2 to the bill facility agreement which is headed "ACCOUNTANTS' FEE FUNDING PROGRAM".

[50] The agreement between the plaintiff and Austide for the administration of the scheme, entitled "Heads of Agreement":

(a) grants exclusive rights to Austide to perform the duties set out in an accompanying document entitled "Summary of Administrative Procedures for the Management of the Accountants' Funding Program";

(b) confers on Austide a right to assign its interests under the agreement;

(c) provides for Austide's fee.

[51] The administrative procedures are, in essence, those set out in the "ACCOUNTANTS' FEE FUNDING PROGRAM" document.

[52] Clause 1 of the document annexed to the heads of agreement provides, however, for the plaintiff to "perform a due diligence assessment of the applicant. Such assessment shall involve but shall not be restricted to: [There are then listed the searches and matters set out in paragraph ‎[47] above]".

[53] Generally speaking, Ms Schweitzer and other employees of Austide carried out the administrative steps required by the heads of agreement (which I have referred to generally as the "administration agreement") except that any enquiry or assessment which may have met the description of "a due diligence assessment" was restricted to the matters expressly set out in clause 1.

[54] The application form used throughout the life of the scheme consisted of four pages. The first page contained provision for the name and address of the applicant, details of professional indemnity insurance, and membership of professional associations. Also required was the description of the applicant's bank account from which interest payments could be directly debited. Page 2 contained a request for funding and a statement of the accountant's "receivables" in respect of which the advance was to be made. It was broken up into fees which were current, outstanding for less than 30, 60, 90 and 120 days, and for more than 120 days. It had provision for the applicant to declare such information to be true. The terms and conditions of loan and a Consumer Credit Code application occupied virtually all of the third and fourth pages.

[55] Clause 10 of the terms and conditions provided:

"The Applicant acknowledges that GRA may carry out an audit of the Applicant's outstanding fees at any time it deems appropriate at the Applicant's expense."

Austide's obligations in relation to due diligence

[56] The expression "due diligence" is nowhere defined in the documentation but, in the annexure to the Austide agreement, its meaning can be ascertained from the context in which it is used. "Due diligence" qualifies "assessment of the Applicant". The words which follow explain that "such ... assessment" involves but is not restricted to the listed searches, confirmation of the applicant's membership of professional organisations and confirmation that the applicant holds a current professional indemnity insurance policy. Also listed is "Any other relevant searches". Some of these matters are directed to establishing that the applicant qualifies for admission to the scheme and/or that it satisfies the terms of the proposed loan agreement. The CRAA searches, however, are directed to establishing the creditworthiness of the applicant. The ASC searches, in part, would fulfil this role as well.

[57] Consequently, what was contemplated by the obligation imposed on Austide to perform a "due diligence assessment of the Applicant" was not something purely formal and directed to showing that the applicant qualified for a loan and had completed the requisite forms. The required assessment also concerned the ability of the applicant to meet its obligations should a loan be made. In other words, it included a risk assessment. Austide did not conduct due diligence inquiries of this nature and the directors of the plaintiff who had contact with Ms Schweitzer concerning the administration of the scheme had no expectation that it would do so.

Did Mr Dunn fail to ensure that the scheme was set up so as to comply with accepted lending practice?

[58] The scheme as devised failed to comply with accepted lending practice. The essence of the failure was not establishing a set of procedures under which the plaintiff would conduct inquiries and obtain evidence with a view to ensuring that loan applicants had the financial capacity to service the loan and repay loan capital. There was a failure also to take measures to ensure that the certification of debts by the borrower was accurate in all relevant respects and that the debts actually existed. These deficiencies also existed in respect of loan increases and extensions.

[59] Mr Dunn, after having some involvement in the formulation of the terms and conditions under which the scheme would operate, failed, after about May 1998, to further consider the matter. Generally speaking, the scheme and its administrative procedures were devised and implemented after that date and before about November 1999 without involvement by him. Mr Romp gave extensive oral and written evidence concerning Mr Dunn's lack of involvement in the affairs of the plaintiff during this important formative period. I found Mr Romp to be a careful credible witness and regard his evidence as generally reliable.

[60] I find that Mr Dunn failed to ensure that the scheme was set up so as to comply with accepted lending practice.

Did Mr Dunn fail to ensure that "accepted lending practice" was followed in the operation of the scheme?

[61] Austide, in administering the scheme, failed to follow "accepted lending practice" as defined in the statement of claim. In particular, Austide, contrary to the terms of its agreement concerning due diligence, conducted no due diligence inquiries with a view to satisfying itself that the applicant had the financial capacity to service and repay the loan. Nor did Austide seek independent proof, or some other means of verification, of the debts certified in the application for loan, or have in place a system under which fluctuations in the amount of the debts was considered and appropriate inquiries made of the borrower or prospective borrower. In so doing, Austide followed the procedures expressly required by the bill facility agreement and the policy of insurance. Generally speaking, it did no more than what was required to process the application forms settled by Ms Schweitzer in conjunction with representatives of the plaintiff.

[62] Austide's approach conformed with the understanding of the directors, other than Mr Dunn, at least before mid-2000, that it was unnecessary to make inquiries and obtain information of the nature of that under discussion. It is relevant also that the Austide agreement was not entered into until June 1999, well after the scheme had commenced to operate.

[63] Although some of the directors believed that the existence of the certified outstanding fees represented a form of security, the administrative procedures did not contemplate an inquiry into whether the borrowers' rights in respect of the outstanding fees were the subject of a charge or assignment, whether the fees were as represented or even whether the borrower had any interest in the relevant debts. There was also no obligation on Austide to put in place any program of checks or audits with a view to verifying the bona fides of the borrower, or the truth of the borrower's representations.

[64] Mr Dunn did not involve himself to any significant degree in the setting up of the scheme after his contact with the bank. Nor did he apply himself to identifying deficiencies in the administration of the scheme with a view to remedying them. I find that he failed to ensure that "accepted lending practice" was followed in the operation of the scheme.

Did Mr Dunn fail to ensure that the scheme was administered by a person who had the capacity to administer it properly?

[65] Although Ms Schweitzer and Mr Ronald Schweitzer appeared sufficiently qualified to administer the scheme, the inadequacy of their administration, as earlier discussed, revealed their lack of competence. If appropriate administrative procedures had been devised from the outset, Austide and Ms Schweitzer were capable of carrying them out. Ms Schweitzer and her company, however, did not prove capable of devising and establishing such procedures.

[66] Ms Schweitzer had had 16 years experience with Custom Credit Corporation, including experience as a loans assessor and a relieving branch manager. She had also spent 10 years in administration at a private hospital and in managing a medical day procedure centre. Her former husband, Ronald Schweitzer, who was employed by Austide at relevant times, had also worked in reasonably senior positions at Custom Credit. Prior to the making of loans under the scheme, Ms Schweitzer had extensive dealings with the directors, particularly Mr Taylor. She discussed the proposed administrative procedures with Mr Taylor who formed a favourable view of her competence. That view did not change as the scheme commenced to be implemented. None of the other directors, apart from Mr Dunn, had reservations about Ms Schweitzer's abilities and expertise. But Mr Taylor, in common with Howes and Sheers, had no expertise in finance. Mr Dunn did, and the relevance of that is discussed later.

[67] Ms Schweitzer's background appeared adequate to enable her to perform her duties, particularly when regard is had to the fact that Austide also employed Mr Ronald Schweitzer. No doubt was cast upon her general administrative efficiency or the efficiency of any employee of Austide. But what is apparent is that Austide failed not only to implement "accepted lending practice" in the way described under the preceding heading but to recognise the desirability of implementing procedures of that nature. Yet if any prompting or reminder of the desirability or necessity of such procedures was required, it was to be found in the Austide agreement. As subsequent discussion of the five defaulting loans shows, Ms Schweitzer and/or her employees failed to pick up and follow up on matters which should have alerted a competent loan administrator to the need for further enquiry.

[68] In establishing the administrative procedures, Ms Schweitzer worked closely with Mr Taylor. His understanding of the concept of due diligence was somewhat limited and that resulted in his failing to perceive any necessity to address the extent of the required due diligence assessments in the administrative procedures. The fact that Ms Schweitzer, working with apparent industry, succeeded in devising manifestly deficient procedures suggests that a director exercising appropriate care, in ensuring that a safe lending scheme was put in place and carried out, may well have detected her and Austide's failings.

[69] Mr Dunn, with his experience and knowledge of what was originally contemplated, probably would have detected Mr Taylor's and Austide's inability to establish sound procedures had he involved himself in its affairs. On balance, I find that this allegation has been made out, but it does not appear to me that the finding is central to the question of liability. The real issues are whether proper loan administration procedures were put in place and implemented, whether, if they were not, Mr Dunn bears responsibility in that regard or whether he was entitled to rely on others.

Did Mr Dunn fail to cause the plaintiff to replace Austide when it became apparent that Austide was not competent to administer the scheme?

[70] Austide was not replaced and I have found that it was not competent to administer the scheme in the sense described under the last heading. I have found also that such lack of competence should have been apparent to a person with expertise in finance. I conclude that the allegation under consideration is made out.

[71] The submission is made again that Mr Dunn had objected to the appointment of Austide and had "attempted to alter those arrangements, discuss them at great length and had been told there would be no changes to the policies". The submission proceeds that Mr Dunn took the position that it would not be in the interests of the plaintiff "to continue to rock the boat" and that his decision was reasonable having regard to "the dynamics of the board" and the fact that "apparently competent professional people had the day to day running of the operation of the business".

[72] There is little merit in a decision to avoid dealing with deficient procedures and incompetent administration on the grounds that it might "rock the boat". Mr Dunn's duty surely required that, at the least, he place a reasoned submission before the board. But, again, it seems to me that this "issue" is peripheral to the central questions in the case concerning liability.

[73] A director has a duty to attend all meetings of directors unless there is a reasonable excuse for failure to attend a particular meeting or meetings. Malcolm CJ stated the duty in terms which perhaps imposed an even more onerous obligation in the following passage in his reasons in Vrisakis v Australian Securities Commission:[1]

"Today, a director is expected to attend all meetings unless exceptional circumstances, such as illness or absence from the State prevent him or her from doing so: cf Harper & Brown, The Duties and Liabilities of a Director in 1973 (1973) 47 ALJ 447 at 451-452."

[74] That duty is an instance of the general duty of a director to exercise reasonable care and skill in the performance of his or her duties.[2] Unless a director regularly attends board meetings he or she will be unable to participate in the governance of the company and thus fulfil one of a director's primary responsibilities. It is now established that directors are obliged to "take reasonable steps to place themselves in a position to guide and monitor the management of the company".[3] That role is normally and appropriately fulfilled by the board rather than by directors acting independently.

[75] Santow J, in Australian Securities Investment Commission v Adler (No 3)[4] summarised aspects of a director's duties in the following terms:

"(a) a director should become familiar with the fundamentals of the business in which the corporation is engaged;

(b) a director is under a continuing obligation to keep informed about the activities of the corporation;

(c) directorial management requires a general monitoring of corporate affairs and policies, by way of regular attendance at board meetings; and

(d) a director should maintain familiarity with the financial status of the corporation by a regular review of financial statements. Indeed, he or she will be unable to avoid liability for insolvent trading by claiming that they had never learned to read financial statements: Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946 at 955; (1991) ACSR 115 at 125."

[76] As a non-executive director, Mr Dunn had no duty to "give continuous attention to the affairs of his company. His duties (were) of an intermittent nature to be performed at periodical board meetings and at meetings of any committee of the board upon which he happened to be placed".[5] For the day to day management of the plaintiff, Mr Dunn was entitled to rely on those appointed by the board of the plaintiff to fulfil that function. He was also entitled to rely on his co-directors or executives who were appointed to perform specific functions.[6] But a director's ability to rely on others is subject to qualification.

[77] In Daniels v Anderson,[7] Clark and Sheller JA rejected the observations of Lord Hatherley LC in Overend & Gurney Company v Gibb to the effect that:

"Reliance [by directors upon officers of the company] 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 are deceiving him or her."

[78] Their Honours then proceeded to discuss, with approval, a number of United States authorities which establish that the duties of directors to exercise due care, skill and diligence in performance duties include: a duty to acquire an understanding of the business of the company; a duty to keep themselves informed about the activities of the company; and a duty to supervise managers and practices to determine whether business methods were safe and proper. The latter duty is identified as one which requires "a general monitoring of corporate affairs and policies" rather than "a detailed inspection of day-to-day activities".

Was Mr Dunn in breach of his duties as a director?

[79] As the scheme concerned unsecured lending, there was an inherent risk that impecuniosity on the part of a borrower would result in the loss of all the moneys advanced to it, subject to the right of recourse to HIH. The interest rate to be charged for scheme loans was close to twice the prevailing bank interest rate for comparable secured loans. It was therefore not in contemplation that accountants who had established relationships with a bank and were in a position to borrow from it would borrow under the scheme. The scheme therefore was likely to attract those accountants experiencing either temporary or long-term difficulty in obtaining bank loans. The product was pitched at the lower end of the profession thereby, one would think, minimising or even negating any assurance to be gained from the occupation of the borrowers.

[80] It was not even the case that all borrowers would be practising accountants. A qualifying factor was that there be fees outstanding from an accountant's practice, but the borrower could be a corporation and there was no requirement that it own or operate the accounting practice generating the fees. Nor was there a requirement that the borrower be controlled by the accountant responsible for generating the subject fees, that the fees be unencumbered or even that the borrower be solvent.

[81] It should have been apparent to the directors that any assurance to be derived from the certification process was dependent upon the honesty and competence of the certifier. The scheme, by not requiring the giving of security and by setting an interest rate almost twice that charged by the banks, put the plaintiff in the position of a last resort lender or very nearly so. That fact alone should have suggested to the directors of the plaintiff the lack of wisdom in having no mechanism for verifying the accuracy of the borrower's certificate.

[82] The plaintiff was proposing to effect an initial borrowing of $25,000,000 which was to be increased over time to $75,000,000 or more. The concept involved in the scheme was relatively simple. The plaintiff had the protection of the HIH policy and Mr Dunn places much reliance on the security provided by it, particularly as the bank appears to have regarded the policy as sufficient security for its loan.

[83] Although the plaintiff had HIH as its backstop, no lender exercising reasonable prudence, would, in reliance on that fact, ignore fundamental lending precautions. If the scheme was to succeed, great care had to be taken to ensure that the risk of defaults by lenders was reduced to the maximum extent possible consistent with the operation and marketing of the scheme as a source of a high interest, but simply administered and expeditious, unsecured loans. Although an insurer had been persuaded to come into the scheme, its participation was unlikely to continue unless claims under the policy were kept to a level which provided it with an acceptable level of profit.

[84] I conclude that the directors, including Mr Dunn, failed to exercise due skill and diligence in the setting up and implementation of the scheme. Their principal failure lay in not ensuring that the terms and conditions of loan and the administrative procedures were such as to minimise the risk of defaults by borrowers.

[85] Prudence dictated that some assurance be obtained as to borrowers' capacity to service and repay the loan from cash flow or available assets. An obvious starting point in this regard was to require the production of financial statements of the borrower. If the certification of the relevant accounting firm's debts was to have much value, the debts needed to be verified in some practical way. Financial statements of the firm should have been obtained also. The latter precaution would have permitted some check to be made on the veracity and reliability of the certified figures.

[86] But establishing that the book debts were as verified meant very little if the borrower had encumbered them, had no title to them, or generally lacked the capacity to meet its obligations under the loan agreement.

[87] It was argued on behalf of Mr Dunn that he laboured under the belief that the documentation eventually put in place in respect of the scheme embodied the requirements imposed on potential borrowers in Mr Romp's April 1998 draft.

[88] I do not accept that Mr Dunn held such a belief. He would have been aware that Mr Romp's document was a draft and that the final, and more formal, documentation in relation to the scheme remained to be prepared. Mr Dunn could not have had a reasonable expectation that the proposals contained in the draft would remain unchanged. For example, the draft submission contemplated that CRM would administer the scheme and that it would be operated, not by the plaintiff, but by GRCS.

[89] If, contrary to my conclusion, he entertained such a belief at any time, it was only because he failed to peruse, let alone consider, the contents of the documentation pertaining to the scheme and it is unlikely that he continued to entertain it for long.

[90] In common with his co-directors, apart from Mr Dunn, Mr Taylor had no experience in the finance industry. It is argued on behalf of Mr Dunn that this lack of experience did not matter, having regard to the participation of the bank, its solicitors and HIH. I do not accept that contention. A company is entitled to have all its directors attend to its affairs and to fulfil their respective duties as directors. General business experience and "knockabout commonsense" cannot, of themselves, in circumstances such as those under consideration, equip a director, in the absence of detailed advice based on a full appreciation of the facts, to understand fully the risks inherent in financing and the procedures and mechanisms best suited to overcoming them.

[91] As the only member of the board with appreciable experience in commercial lending, Mr Dunn had a duty to give the company the benefit of that experience and the expertise which accompanied it.[8] The fact that the other directors were, or could reasonably have been considered by him to be, competent businessmen with a general understanding of basic concepts in relation to finance hardly served to relieve him of such obligations. Nor did the fact that the bank and HIH, from their own perspectives, gave consideration to the scheme documentation generally, relieve Mr Dunn of his responsibilities in this regard.

[92] Mr Dunn was entitled to derive a considerable degree of comfort from participation of the bank and the insurer but those bodies had no responsibility to examine the details of the scheme from the company's perspective. Mr Dunn could accept that they regarded the documentation contained in their respective agreements to be sound, but he would also have been aware that these institutions were placing reliance on the expertise and competence of the plaintiff's board and those appointed to administer the scheme. Mr Dunn was aware also that his own participation was being portrayed to the bank and HIH as a form of assurance that the plaintiff and the scheme administrator had appropriate expertise.

[93] A further aspect of this argument is that Messrs Howes, Sheers and Taylor, particularly Taylor, were effectively exercising executive functions in relation to the scheme and Mr Dunn was entitled to rely on them. It is contended that he was also entitled to rely on Austide which was held out as having appropriate expertise. But the fact that some directors were in executive or managerial roles could not relieve the others of their continuous duties discussed earlier. Mr Dunn in particular, without properly assuring himself that the scheme had been properly structured, could not relieve himself of liability by leaving matters in the hands of the other directors or in the hands of Austide, the expertise of which had not been considered, let alone investigated, by him.

[94] Any delegation by a director of one of his functions as a director would not fulfil his duty if he did not believe on reasonable grounds that the persons to whom the duty was delegated had appropriate expertise and competence and were appropriate repositories of his trust.[9] In this case, Mr Dunn had no reason to suppose that any of Messrs Howes, Sheers, Romp, and Taylor had relevant expertise. He was entitled to conclude that they were competent, successful businessmen but he knew that he was the only director who had any expertise in finance. Also, having regard to his dealings with Howes and Sheers, he had no grounds for a reasonable belief that he could place reliance on them.

[95] Mr Dunn could have set some store by the qualifications of Ms Schweitzer and her husband, had he known of them. But, even if he was impressed by their qualifications (and there is no evidence of that), he was obliged to take steps to ensure that appropriate procedures were put in place to cause the scheme to be duly administered. I find that Mr Dunn was in breach of his duty in that regard also.

[96] The agreements with the bank and HIH were not particularly voluminous or complex, and as Mr Dunn would have been aware, they and the Austide administration agreement contained requirements for the manner in which the plaintiff's business was to be conducted. It should have been apparent to Mr Dunn that deficiencies in these agreements, including deficiencies in respect of the bases on which loans were to be made and administered, could weaken the scheme, cause its failure and expose the plaintiff to substantial losses.

[97] It was therefore incumbent on Mr Dunn to familiarise himself with this documentation, consider its adequacy and seek expert legal or other advice where appropriate. Mr Dunn did not act in this way. He did not obtain copies of these documents to peruse. Nor did he ensure that they had been settled or approved by lawyers with appropriate commercial expertise. He failed also to peruse or obtain a copy of the scheme's application form, administrative documents and promotional materials.

[98] In cross-examination Mr Dunn admitted that, to this day, he has not read either the bill facility agreement or the HIH policy. He did see the front page of the Austide agreement but did not trouble to read the rest of it.

[99] It may be that copies of such documents and the promotional materials were not sent to him at a time when he was more out of favour than usual with the Howes/Sheers camp. But the evidence does not suggest that the company secretary Mr Taylor, or Mr Romp, would not have provided Mr Dunn, from time to time, with any company documentation requested by him. In fact, on 6 April 2000, Mr Taylor and Mr Dunn requested Ms Schweitzer and the other directors provide Mr Dunn with a copy of all materials provided to the other directors.

[100] Mr Dunn's lack of knowledge as to the contents of these documents was as a result of his own disinterest.

[101] The plaintiff alleges that the breaches of the common law duties on which it relies also constitute breaches of Mr Dunn's duties under s 180 of the Corporations Law. Those provisions are identical to the provisions of s 180(1) of the Corporations Act. I do not propose to give discrete consideration to these statutory duties as, at least in the circumstances now under consideration, they do not materially differ from directors' common law duties.

[102] Section 180(2) of the Corporations Act provides:

"(2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:

(a) make the judgment in good faith for a proper purpose; and

(b) do not have a material personal interest in the subject matter of the judgment; and

(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

(d) rationally believe that the judgment is in the best interests of the corporation.

The director's or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold."

[103] Subsection (1) states the statutory duties of directors to exercise a degree of care and skill that a reasonable person would exercise if they:

"(a) were a director or officer of a corporation in the corporation's circumstances; and

(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer."

[104] Mr Dunn gave evidence that in about May 1999 he had no basis to interfere with the concluded arrangements in relation to the scheme made by other directors given that:

(a) they had reached concluded agreements with the bank and HIH;

(b) they had selected Austide as administrator and had entered into an agreement with it;

(c) they had spent time setting up administrative procedures in conjunction with Ms Schweitzer;

[105] Mr Dunn had objected to the appointment of Austide and had "attempted to alter those arrangements, discuss them at great length and had been told there would be no changes to the policies". The submission proceeds that Mr Dunn took the position that it would not be in the interests of the plaintiff "to continue to rock the boat" and that his decision was reasonable having regard to "the dynamics of the board" and the fact that "apparently competent professional people had the day to day running of the operation of the business".

[106] Subsection (2) of s 180 does not assist Mr Dunn. For the reasons advanced earlier, if Mr Dunn made a judgment to leave matters as they stood, he did not inform himself about the subject matter of it. Mr Dunn did not concern himself at all with the contents of the Austide agreement or with the administrative procedures applicable to the scheme. Nor if, which I rather doubt, he made the judgment he alleges, did he turn his mind to whether "the judgment" was in the best interests of the plaintiff. Because CRM was denied the administration agreement, Mr Dunn washed his hands of responsibilities relating to it and in relation to the affairs of the company generally.

[107] I accept that Mr Dunn would not have been able to persuade the board to replace Austide with CRM, but I do not accept that other directors were not open to persuasion about the adoption of lending criteria and administrative procedures calculated to minimise the risk that loans would be made to borrowers lacking the prescribed qualifications and the capacity to service and repay their respective loans. I consider it probable that the board of the plaintiff could have been persuaded to oblige Austide to adopt such practices and procedures had Austide's deficiencies been uncovered and brought to the board's attention. Even if, contrary to my conclusions, Mr Dunn may have been outvoted had he attempted to bring about such improvements, it does not follow, necessarily, that he would escape liability.[10]

[108] The loss for which the plaintiff claims is the unpaid principal of the five defaulting loans. The first step in determining whether the loss was caused by Mr Dunn's breach of his common law or statutory duties is an analysis of each loan transaction.

[109] An application for loan by Jumarsh Pty Ltd ("Jumarsh") dated 22 February 1999 was approved by letter from the plaintiff dated 12 March 1999 and the loan of $342,000 was made on or about that date. Further advances of $100,000 and $420,000 were made on 14 July 1999 and 8 September 1999 respectively. The directors of Jumarsh at the time of the making of the advances were Julian Norton-Smith and Mr Sheers. Mr Sheers resigned as a director with effect from 1 November 1999.

[110] The application for loan form showed the applicant to be Julian Norton-Smith trading as Jumarsh Pty Ltd. In another part of the form the "authorised person" was said to be Michael Norton-Smith and Julian Norton-Smith. In the space in which the name of the professional indemnity insurer was to be inserted "Michael Norton-Smith" is inserted and the bank account nominated in the form as the account to be debited with relevant charges and repayments identified as that of Julian Norton-Smith.

[111] Michael Norton-Smith was a certified practising accountant and his professional membership and practice were relied on to obtain the loan. However, he was a bankrupt when the application was made and the loan moneys advanced. It would seem that no credit check was done on him or, if it was, it was not acted upon. A guarantee by Julian Norton-Smith was accepted.

[112] The purpose of Jumarsh in borrowing the subject moneys was to re-lend them to persons and companies, including Mr Howes, and companies in which Mr Sheers had an interest. Mr Sheers witnessed Julian Norton-Smith's signature on the original loan application and I infer that Mr Sheers and Mr Howes were aware of the purpose for which Jumarsh was borrowing the subject moneys. I infer also that Mr Sheers was aware that Julian Norton-Smith's certification of receivables bore little, if any, relation to reality. Guarantees of the loan were given by each of Michael and Julian Norton-Smith but not by Mr Sheers.

[113] Venola Pty Ltd ("Venola") applied for its loan by application dated 10 May 1999 and the application was approved by Mr Howes. $350,000 was advanced in May 1999 and a further $450,000 advanced on 22 July 1999. The application form gave the name of the applicant as Venola P/L t/as (Qld) Assets Group. Venola was not carrying on an accounting practice at any material time. The authorised person and the person who signed as director on behalf of the applicant was one Darryl Loane. He gave a guarantee to the plaintiff for the obligations of Venola but became bankrupt on 11 February 2000, after filing a debtor's partition.

[114] Mr Loane was the sole director and shareholder of Venola but no evidence was obtained from him of his membership of any relevant, professional accounting body.

[115] On 3 July 2000 Ms Schweitzer, on the letterhead of the plaintiff, wrote to Mr Loane's wife, Ms Caerdinael, approving her application for extension of the loan facility. By that time, she had replaced him as director of Venola. On 15 August 2000 Ms Caerdinael provided a guarantee of Venola's obligations to the plaintiff.

[116] In 1999 and 2000 Venola did not have or operate an accountancy practice. Nor did it have the receivables certified by it from time to time.

[117] Spiller Holdings Pty Ltd ("Spiller") applied for its initial loan in an application dated 28 May 1999. The application form described the applicant as David Ryland having a trading name of "Spiller Holdings Pty Ltd Manly Business Services". The person indicated as having authority to make the application was David Ryland. At the time of the application, Mr Ryland was Spiller's sole director and gave a guarantee to the plaintiff as to the obligations of Spiller. The application was approved by Mr Sheers.

[118] The following further advances were made by the plaintiff to Spiller:

[119] Austide did not obtain a search of the name "Manly Business Services" which was registered in the name of Ryland. The principal business activities of Spiller Holdings Pty Ltd were "service company and property investor". It does not appear that it carried on any accountancy practice.

[120] By application dated 11 October 1999, Garry Moss applied for a loan which was approved on 15 October 1999. The first advance of $350,000 was made on 21 October 1999 and further advances of $300,000 and $85,000 were made on 17 November 1999 and 28 April 2000, respectively. The application by Mr Moss was signed by him. He failed to complete the part of the form which made provision for identification of particulars of the borrower's professional indemnity insurance. Mr Howes witnessed Mr Moss's signature on the form and also approved the application. Howes was aware that false information was being submitted and he and Sheers stood to benefit indirectly from, at least, the initial advance.

[121] The CRAA search obtained by Austide showed that Mr Moss had become self-employed as an accountant on 14 October 1999, three days after he signed the application form. It may be inferred from these facts that the fees certified by Mr Moss were highly unlikely to have existed. At the very least, this fact suggested that a careful investigation of the applicant's certificate was warranted. There was no such investigation.

[122] Mr McCouat's application dated 12 March 2000 was approved by Mr Sheers. The approval was notified by letter dated 13 April 2000 and the first advance of $100,000 was made to him on 19 April 2000. A further advance of $700,000 was made on 15 May 2000. In the application form Mr McCouat gave no "trading name" but provided a "practice address" of "Manly Business Services ... Stratton Terrace Manly". Mr Loane witnessed his signature on the application form. Mr McCouat did not have receivables certified in his application or in any of the applications for further loans or further extensions of loans.

[123] A search conducted by Austide showed that Mr McCouat had obtained membership of the National Institute of Accountants and taken out professional insurance only at about the time of making his loan application. The application listed outstanding practice debtors of $1,707,023. These matters ought to have suggested that the facts certified by the applicant be investigated carefully. There was no such investigation.

The connection between the defaulting borrowers

[124] There appears to have been a close connection between Venola, Spiller and Mr McCouat. There is a file note on the plaintiff's file in respect of Spiller, recording a conversation, it would seem, between a director or employee of Austide (probably Ms Schweitzer) in which Mr Sheers advised that a contract for the sale of a property had been entered into in order to raise finance to pay out the first mortgage on the property and also the outstanding interest payments on Spiller's account. The note further records:

"File handed over to Directors of the company and Board advised of security held.

This client is in partnership with other GRA clients - Spiller Holdings and J. McCouat on this project."[11]

[125] In a facsimile dated 21 December 1999 to Mr Howes, Mr Ryland referred to discussions with Mr Sheers and stated that he had agreed to meet Venola's and Spiller's "monthly draw downs until at least the April 2000 draw downs". Mr Ryland paid the plaintiff $36,624 on account of Venola. There is evidence also that Mr Sheers was an acquaintance of Spiller, Mr McCouat and Mr Loane and that he had had some form of business dealings with them.

[126] The evidence though does not support the conclusion that Messrs Sheers or Howes stood to gain financially from the loans to Venola, Spiller, Moss or McCouat.

[127] It is argued on behalf of Mr Dunn that the evidence of Ms Bundesen is that if the procedures specified in the contractual documents had been followed, the five defaulting loans would not have been made, extended or renewed. It follows, so the argument goes, that any alleged failure on the part of Mr Dunn to ensure that accepted lending practice was established for the scheme, was not a cause of the loss. The cause was Ms Schweitzer's misapplication of the existing procedures.

[128] In her report dated 8 March 2005, Ms Bundesen answered the question, "was the Program administered in accordance with each of the procedures agreed with each of HIH and the bank?" in the negative. She explained at some length the reasons for this conclusion.

"If the program had been administered in accordance with the procedures agreed with HIH and the bank and in relation to each of the five loans,

(b) would the loan have been extended on each occasion that it was or would something else have occurred, and if so, what?"

She gave the opinion that none of the five loans under consideration would have been made had the administrative procedures been followed. She concluded also that the loans would not have been extended, or more relevantly, increased.

[130] The parts of the report upon which Mr Dunn relies were admitted into evidence without objection. They amount, however, to findings of fact and, in my view, are not properly the subject of expert opinion evidence. Ms Bundesen's lack of relevant expertise was criticised by Mr Dunn's counsel in the course of addresses and, in my view, that criticism is substantially justified. For this reason, I do not place much weight on Ms Bundesen's evidence as to what constitutes "accepted lending practice" or on the matters now being addressed. Her report though is valuable for her careful examination of the facts in relation to each of the subject transactions. Generally speaking, there was no objection to assertions of fact in the report and their accuracy was not questioned.

[131] The argument advanced on behalf of Mr Dunn, in my view, is unduly simplistic. The evidence establishes that there was some failure to apply the established administrative procedures in relation to each of the subject loans. But the evidence shows also that the procedures, as understood by the plaintiff and Austide, did not require "accepted lending practice" to be followed. In particular, the due diligence inquiries which would enable the plaintiff to be satisfied that the borrower had the financial capacity to service and repay the loan and to be satisfied that the certified debts actually existed, were not undertaken or contemplated. The negligent failure to incorporate these requirements in the administrative procedures and to ensure their implementation as part of the due diligence requirements of the Austide agreement contributed also to the entering into of the defaulting loans. The argument is therefore based on a false premise, namely that there was no negligence in the formulation or the putting in place of appropriate administrative procedures.

[132] The inadequate loan application procedures and the general lack of rigour applied in assessing applications greatly enhanced the likelihood that bogus or unmeritorious applications would be approved. Whilst the adoption of procedures which conformed with "accepted lending practice" may not have ensured that all such applications were detected, the prospects of detection, and deterrence, would have been substantially enhanced.

[133] It is now necessary to consider whether these findings are sufficient to warrant a conclusion that the plaintiff's loss was caused by Mr Dunn's breaches of duty. Concurrent or successive tortious acts may each amount to a cause of the injuries sustained by a plaintiff,[12] and it may be sufficient to establish a defendant's liability in tort that the plaintiff's injury is directly materially contributed to by the defendant's wrongful conduct, at least where that conduct increases the risk of injury.

[134] The principle was expressed as follows by McHugh J in Bennett v Minister of Community Welfare:[13]

"It is 'a well settled principle that when separate and independent acts of negligence on the part of two or more persons have directly contributed to cause injury and damage to another, the person injured may recover damages from any one of the wrongdoers, or from all of them.'

If a doctor has negligently omitted to diagnose a condition which leads to a patient's death, it is no answer to a claim of actionable negligence that subsequently another doctor negligently failed to diagnose the condition at a time when its ultimate consequence could

have been avoided. Each negligent omission was a separate and independent cause of the patient's death."

[135] In Chappel v Hart,[14] McHugh J explained the role in causation of whether the wrongful acts increased the risk of injury in these terms:

"Before the defendant will be held responsible for the plaintiff's injury, the plaintiff must prove that the defendant's conduct materially contributed to the plaintiff suffering that injury. In the absence of a statute or undertaking to the contrary, therefore, it would seem logical to hold a person causally liable for a wrongful act or omission only when it increases the risk of injury to another person.

If a wrongful act or omission results in an increased risk of injury to the plaintiff and that risk eventuates, the defendant's conduct has materially contributed to the injury that the plaintiff suffers whether or not other factors also contributed to that injury occurring. If, however, the defendant's conduct does not increase the risk of injury to the plaintiff, the defendant cannot be said to have materially contributed to the injury suffered by the plaintiff."

[136] A similar question was addressed by Mason CJ in March v Stramare[15] in these terms:

"In similar fashion, the 'but for' test does not provide a satisfactory answer in those cases in which a superseding cause, described as a novus actus interveniens, is said to break the chain of causation which would otherwise have resulted from an earlier wrongful act.

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 defendant's 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 ... 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 ... 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."

[137] The following passage in the joint judgment of Deane, Dawson, Toohey and Gaudron JJ in Medlin v State Government Insurance Commission[16] further explains the principle to be applied:

"The ultimate question must, however, always be whether, notwithstanding the intervention of the subsequent decision, the defendant's wrongful act or omission is, as between the plaintiff and the defendant and as a matter of common sense and experience, properly to be seen as having caused the relevant loss or damage. Indeed, in some cases, it may be potentially misleading to pose the question of causation in terms of whether an intervening act or decision has interrupted or broken a chain of causation which would otherwise have existed. An example of such a case is where the negligent act or omission was itself a direct or indirect contributing cause of the intervening act or decision. ...

Nor can the question of causation of damage in a negligence action be automatically answered by classification of operative causes as 'pre-eminent' or 'subsidiary'. Regardless of such classification, two or more distinct causes, without any one of which the particular damage would not have been sustained, can each satisfy the law of negligence's common sense test of causation (See, eg, March v Stramare (E and MH) Pty Ltd [1991] HCA 12; (1991) 171 CLR 506). This can be most obviously so in a case where a 'subsidiary' cause operates both directly as a cause of the particular damage and indirectly as a contributing component of a 'pre-eminent' cause."

[138] The remaining argument on causation is that the five defaulting loans were made as a consequence of the fraudulent or improper activities between the borrowers on the one hand and Messrs Sheers and Howes on the other. It is said that even if there were some breach of duty on Mr Dunn's part it cannot be said to have caused the loss. The argument identifies the true cause of the loss as the improper conduct of Messrs Howes and Sheers.

[139] It may be accepted that, had proper procedures been in place, Messrs Howes and Sheers may nevertheless have attempted to obtain benefits from the making of loans. It does not follow, however, that it was inevitable or nearly so that the defaulting loans would have been made, renewed or extended. Nor does it follow that any loan made for the benefit of them would have become a defaulting loan. Implementation of proper lending practice would have made it much more difficult for loans to have been made to borrowers lacking proven capacity to repay. Proper due diligence inquiries, also, would have made it more difficult for borrowers to have satisfied the preconditions for a successful application. Additionally, the application of appropriate rigour in the loan application and approval process, and in the course of loan administration, would have greatly increased the prospect of exposing irregularities and fraud. That in itself would have acted as a deterrent to directors inclined to act dishonestly. So too would the knowledge that Mr Dunn was active in ensuring the proper loan administrative procedures were being carried out and that Mr Taylor was exercising a properly informed supervisory role.

[140] There are some further matters which bear on the question under consideration.

[141] Although there is evidence that Messrs Loan, Ryland, Moss and McCouat were known to each other, the evidence does not establish that they conspired, or otherwise joined with Sheers and Howes, to make bogus or irregular loan applications. Although there is evidence that all these persons were known to Mr Sheers and/or Mr Howes, the evidence does not establish that either stood to take any direct or significant benefit from the making of loans to them or their respective companies.

[142] The Moss loan provides an exception to these propositions. Howes participated in the fraudulent application and both Sheers and Howes through various companies stood to benefit from the loan. I also find it probable that Sheers was aware that false information had been supplied in respect of other loan applications.

[143] The evidence does not establish that Ms Schweitzer participated in any misconduct in relation to the Venola, Spiller, Moss and McCouat loans. Nor has it been established that Mr Howes or Ms Schweitzer engaged in any misconduct in respect of the Venola loan application. At the time of the Jumarsh and Venola loan applications, Mr Sheers was not a director of the plaintiff. That is not to say that he lacked influence through his association with Mr Howes and Ms Schweitzer, but the evidence does not disclose Ms Schweitzer would have approved an application had she been alerted to its failure to meet loan criteria or to the existence of obvious risks of default.

[144] It is apparent from the passage from the reasons of Mason CJ in March v Stramare quoted above that the fact that a supervening act is deliberate does not of itself relieve a tortfeasor from the consequences of its wrongdoing. Here loss through fraudulently obtained loans was "the very kind of thing likely to happen as a result of the defendant's negligence" if appropriate lending procedures were not implemented and maintained. Mr Dunn, by his breaches of duty in respect of fundamental aspects of the plaintiff's business, increased the risk that the plaintiff would suffer loss of the kind that eventuated and materially contributed to its loss.

[145] For the above reasons, I consider that Mr Dunn's breaches of his duty as a director of the plaintiff were causative of its loss.

[146] Apart from the above arguments directed to liability and causation, it was not argued that the total of the defaulting loans unrecovered by the plaintiff did not represent the plaintiff's recoverable loss. Accordingly, subject to any submissions the parties may make, it will be ordered that the plaintiff recover against the second defendant, Terence Michael Dunn, the sum of $3,629,000, together with the costs of and incidental to the proceeding against him including reserved costs, if any, to be assessed on the standard basis.

[1] (1993) 9 WAR 395 at 405.

[2] Daniels v Anderson (1994-1995) 16 ACSR 607 at 666 and Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109.

[4] [2002] NSWSC 171; (2002) 20 ACLC 576.

[5] In re City Equitable Fire Insurance Co [1925] 1 Ch 407 at 427-29.

[6] Biala Pty Ltd v Mallina Holdings Limited (No 4) (1993) 13 WAR 83 and Australian Securities Commission v Gallagher (1994) 11 WAR 105

[7] (1994-1995) 16 ACSR 607 at 665, 666.

[8] In re City Equitable Fire Insurance Company Ltd [1925] 1 Ch 407 at 427-429; Gould & Birbeck & Bacon v Mt Oxide Mines Ltd (in liq) [1916] HCA 81; (1916) 22 CLR 490 at 531; and Daniels v Anderson at 668.

[9] In re City Equitable Fire Insurance Company Ltd (supra) and Dempster & Biala Ltd v Mallina Holdings Ltd (1994) 15 ACSR 1 at 62.

[10] cf Duke Group Ltd (in liq) v Pilmer [1999] SASC 97; (1999) 31 ACSR 213 at 346 and Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109.

[12] March v E & M H Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506 at 514 per Mason CJ.

[13] [1992] HCA 27; (1992) 176 CLR 408 at 429.

[15] [1991] HCA 12; (1991) 171 CLR 506 at 517-8.

[16] [1995] HCA 5; (1995) 182 CLR 1 at 6-7.