Ingot Capital Investments & 5 Ors v Macquarie Equity Capital Markets Ltd & 12 Ors

JURISDICTION: Equity Division Commercial List JUDGMENT OF : Einstein J DECISION : Leave to cross claim granted.

CATCHWORDS : Corporations Law - Application for leave to cross claim against company in liquidation - Discretion to grant leave - Associated curial proceedings Australian Securities and Investments Commission Act 1989 (Cth) Corporations Act 2001 (Cth) LEGISLATION CITED : Fair Trading Act 1987 (NSW) Supreme Court Act 1970 (NSW) Trade Practices Act 1974 (Cth) BHG Nominees Pty Ltd v Ellis Young Investments [Federal Court, Weinberg J 14 August 1998) Capita Financial Group Ltd v Rothwells (1989) 15 ACLR 348 Century Mercantile Co v Auckland Provincial Fruitgrowers" Co-operative Society Ltd [1921] NZLR 272 Crema (Vic) Pty Ltd v Aslor Pty Ltd (in liq) Mandie J Supreme Court of Victoria, 6 August 1997, SCVic 2045/97 Kentwood Constructions Ltd [1960] 1 WLR 646 CASES CITED : Ogilvie-Grant v East, (Liquidator of Gordon Grant and Grant Pty Limited) (1983) 7 ACLR 669 Phoenix Oil & Transport Co Ltd (No 2) [1958] 1 Ch 565 Simto Pty Ltd v Court as Liquidator of Carob Industries Pty Ltd (in liq) (1987) 138 FLR 232 Stewart v Intercity Distributors Ltd [1960] NZLR 944 The Queensland Mercantile Agency Co Ltd (1888) 58 LT 878, 879 Vagrand Pty Ltd (in liq) v Fielding (1993) 10 ACSR 373 Ingot Capital Investments Pty Limited (1st Plaintiff) AOIT Limited Company No. 3241668 (2nd Plaintiff) ASC Pty Limited (3rd Plaintiff) Australian Opportunities Investment Trust PLC (4th Plaintiff)

Eastern States Securities Limited (5th Plaintiff) Ingot Capital Management Pty Limited (6th Plaintiff) Macquarie Equity Capital Markets Limited (1st Defendant) Macquarie Equities Limited (2nd Defendant) Macquarie Bank Limited (3rd Defendant) PARTIES : Udayan Daniel Ghose (4th Defendant) Jonathan Paul Beach (5th Defendant) Azmin Firoz Day (6th Defendant) Craig Deery (7th Defendant) Michael J Morrisey (8th Defendant) William Peck (9th Defendant) Paul Laurence Williams (10th Defendant) Peter Arone (11th Defendant) John Trowbridge Consulting Pty Limited (12th Defendant) Patrick Murray and the persons listed in Schedule "B" to the Summons (13th Defendant) Andrew Mutton and the persons in NSW listed in Schedule "A" to the Summons (14th Defendant) FILE NUMBER(S) : SC 50169/01 MR MATHAS appeared for the Plaintiffs MR BELL appeared for the First Three Defendants COUNSEL : MS COLLINS appeared for John Trowbridge Consulting Pty Limited MR BRERETON appeared for PricewaterhouseCoopers MR COLES QC appeared with MR PRITCHARD and MR MUSTON for New Cap Reinsurance Holdings Limited (In Liquidation) Deacons (Plaintiffs) Mallesons (First Three Defendants) SOLICITORS : Minter Ellison (John Trowbridge Consulting Pty Ltd) Blake Dawson Waldron (PriceWaterhouseCoopers) Henry Davis York (New Cap Reinsurance Holdings Limited (In Liquidation)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

FRIDAY 4 APRIL 2003 EX TEMPORE REVISED 16 APRIL 2003

50169/01 INGOT CAPITAL INVESTMENTS & 5 ORS v MACQUARIE EQUITY CAPITAL MARKETS LIMITED & 12 ORS JUDGMENT 1 In proceedings No. 50169 of 2001 there are before the court three notices of motion. Each notice of motion is an application for leave by a defendant to the proceedings pursuant to section 471B of the Corporations Act 2001 to commence a cross-claim in the proceedings against NewCap Reinsurance Corporation Holdings Limited (in liquidation) ["NCRH"]. 2 The motions are filed by the first three defendants ["the Macquarie Bank interests"] on 20 February 2003, the twelfth defendant John Trowbridge Consulting Pty Limited on 14 February 2003, and the thirteenth defendant effectively PricewaterhouseCoopers on 17 February 2003. 3 The proceedings proper are complex in the extreme. The fourth further amended summons runs for some 88 pages and joins 14 defendants, the fourteenth defendants being Phillips Fox, solicitors, by that firms identified partners. 4 It is inappropriate to do more at this stage in determining these motions than to note that the issues likely to arise concern the extent of the duties owed by each of the defendants to the plaintiffs in respect of the issue of convertible notes in NCRH. 5 The issues further include whether statements made or conduct engaged in by any of the defendants was in breach of the duties owed to the plaintiffs by those defendants; whether statements made or conduct engaged in by any of the defendants were or was false or misleading or likely to mislead or deceive; whether any of the defendants have engaged in conduct in breach of the Corporations Law, the Australian Securities and Investments Corporation Act 1989, the Trade Practices Act 1974, the Fair Trading Act 1987; and the extent to which the losses suffered by the plaintiffs are recoverable against the defendants. 6 The position of each of the putative cross-claimants is somewhat different, for obvious reasons, in terms of the claims pursued against those defendants in the statement of claim. In so far as the applications presently before the court are concerned, Mr Coles QC, who appears for NCRH made plain at the commencement of his submissions for the purpose only of the hearing of the motions, that no issue was sought to be raised as to each of the putative cross-claimants raising a serious question to be tried by the proposed cross-claims. 7 Mr Coles further made plain that it was not necessary for the court to take into account as a parameter or integer or fact or circumstance of relevance to the hearing or determination of the motions, the period of time which remains between the occasion when the motions are heard and the hearing of the proceedings now fixed to commence early next year [ie antecedent delay]. Mr Coles further accepted that it was unnecessary to distinguish between the different positions of each cross claimant applicant - if the Macquarie Bank interests succeeded on their motion, there would seem to be no reason why all of the motions should not succeed. 8 The position with respect to the claims of each of the cross-claimants, putative cross-claimants against NCRH may be conveniently seen from the detailed affidavits of Mr Black of 22 February 2003, Mr Tan of 14 February 2003 and Mr Beattie of 11 March 2003. 9 As to the Macquarie Interests:

"The first defendant, Macquarie Equity Capital Markets Limited (" MECM "), acted as the underwriter to the issue by New Cap Reinsurance Corporation Holdings Limited (" NCRH ") of approximately 56.15 million converting notes at an issue price of $1.30 to existing NCRH shareholders under a prospectus dated 18 November 1998 (" Prospectus ") and a concurrent placement by NCRH of a further 5.6 million converting notes to institutional investors. Exhibited to me and marked "AJB1" is a copy of the Prospectus. MECM and NCRH entered into an Underwriting Agreement on 18 November 1998 (" Underwriting Agreement ") under which MECM agreed to underwrite the issue of converting notes referred to in paragraph 2 above. Exhibited before me and marked exhibit "AJB2" is a copy of the Underwriting Agreement. The Fourth Further Amended Summons (" Summons") filed by the plaintiffs in these proceedings alleges, inter alia, that the Macquarie Parties, in providing to the Sixth Plaintiff a draft of the Prospectus prepared by NCRH, made certain representations which were false or misleading or likely to mislead or deceive (Summons paragraphs 51 - 55); were knowingly involved in NCRH's conduct in issuing a misleading or deceptive prospectus (Summons paragraphs 147-154); and acted negligently in breach of a duty of care owed to the plaintiffs in making representations to them by providing them with a draft of the Prospectus and failing to correct those representations (Summons paragraphs 155 - 160).

Further, clause 15 of the Underwriting Agreement (Exhibit "AJB2") contains an indemnity from NCRH in favour of MECM, its directors, officers, employees and advisers against all losses, expenses, damages and costs that may be sustained or incurred as a result, directly or indirectly, of MECM acting as underwriter, including in relation to the issue of converting notes, the Prospectus and any other offer documents. Clause 15.3 of the Underwriting Agreement provides that that indemnity does not apply to any losses incurred as a result of the wilful misconduct or negligence of MECM, its directors, officers, employees or advisers in relation to the issue of the Prospectus, or the placement of the offer documents, where such wilful conduct or negligence is shown to be the direct and primary cause of such losses. " [Affidavit of Mr Black of 20 February 2003 paragraphs 2, 3, 4, 6] 10 John Trowbridge wishes to assert in these proceedings that to the extent that the plaintiffs did suffer any loss as a result of Trowbridge's conduct, then Trowbridge is entitled to contribution and indemnity from NCRH by reason of its negligence, misleading and deceptive conduct and contravention of the Corporations Law. 11 Likewise PriceWaterhouse Coopers maintain that if they are liable to the plaintiffs in the manner alleged in the Fourth Further Amended Summons then NCRH is obliged to indemnify them against the claim brought against them in the proceedings. 12 The evidence before the court makes the following matters plain: · The proceedings are fixed for final hearing for three months, commencing at the beginning of term in 2004; · The proceedings currently involve claims totalling $41,466,474.30 plus interest, and costs by note holders against various parties associated with the raising of capital by NCRH through the issue of convertible notes in NCRH. · Macquarie provided merchant banking services in relation to the issue, and PWC provided accounting services in relation to the issue; · Trowbridge provided actuarial services in relation to the issue or at least in relation to each of those propositions; · NCRH was incorporated in Bermuda on 30 August 1996 and on 13 December 1996 it was listed on the Australian stock exchange. It was the holding company of the NewCap Re group of companies and, amongst others in the group, wrote international reinsurance contracts; · On 21 July 1999 NCRH was ordered to be wound up by the Supreme Court of Bermuda, and Messrs McKenna of Bermuda and Hughes of the United Kingdom were appointed liquidators; · On 9 November 1999 the Supreme Court of New South Wales ordered that NCRH be wound up under section 583 of the Corporations Law and that Mr Gibbons be appointed liquidator. 13 It is common ground that the plaintiff has eschewed joining NCRH as a defendant to the proceedings. 14 It is common ground that, pursuant to an arrangement or agreement sanctioned by a judge of this court, the plaintiffs undertook not to prove in the NCRH liquidation in the event that the plaintiffs would be successful. This was in return for the plaintiffs being given access to various documents and materials by the liquidator. No question has been raised as to the propriety of the liquidator's extracting such an undertaking from the plaintiffs, but the fact that the plaintiffs have given that undertaking to my mind represents an important parameter to be weighed, together with the other facts, matters and circumstances in determining these current applications. 15 This is not to suggest for a moment that the liquidator has been partisan in any fashion or has acted inappropriately. It is simply a fact. 16 The further position which obtains on the hearing of the motions concerns the respective stances taken by the parties at the bar table in relation to why, from the perspective of the company in liquidation, the motions should be dismissed. 17 The summary of the financial position in so far as the impact of the success that the current applications may have on NCRH, appears to be somewhat in contest in terms of the evidence before the court. 18 The submissions put by Mr Coles QC, for NCRH have sought to have the court accept that irrespective of the ultimate outcome of the proceedings, the entirety of what is referred to as the limited funds held by NCRH are likely to be expended or, it is submitted, unnecessarily materially depleted, if these applications are granted. In that regard, the submission has been that the court should take into account that NCRH does not have the benefit of any policy of insurance in respect of any of the claims made by the applicants. The submission has been that NewCap currently holds $US472,061.84, [$A781,026.31], and that no further recoveries are expected. 19 The submission has been that the court should accept that on the evidence, NCRH will incur estimated legal costs of $A952,104.50 together with liquidator's costs of $A225,000, totalling $A1,177,104.50. The submission, whilst suggesting that a legal costs estimate of $919,379.50 may appear significant, seeks to draw the court's attention to the fact that pursuant to orders made by Justice Bergin on 9 July 2002 [2001] NSWSC 609, the benefit of very significant orders for amounts of security were received by Macquarie, the fifth defendant [Beach], Trowbridge, and Phillips Fox. 20 The submission then is that there will be a resultant shortfall of $A396,077.70 of likely costs of NCRH being involved in the proceedings. 21 Mr Coles' submissions have been that as against current assets of $A781,026.31, NCRH has current liabilities of $A80 million and that the current likely dividend distribution to creditors is likely to be less than one cent in the dollar. The submission is that the interests of the general body of unsecured creditors of NCRH need to be considered, not just the plaintiffs or the applicants. The submission then refers to the fact that there is another approximately $A40 million of unsecured creditors. 22 It is common ground that the liquidator has not yet called for proofs and only expects to call for final proofs of debt apparently within the next 12 months. 23 Mr Coles' submissions have been that the applicants to the motions will only lodge proofs of debt if they fail in their defence in the proceedings; that they will only appeal against a rejection of their proof if, in fact, their proofs of debt are in whole or in part rejected; and that they will only succeed in those appeals if the rejection by the liquidator in whole or in part was unreasonable. 24 The further submission is that at the present time, even any investigation into possible proofs of debt which may be lodged by the applicants would be premature and wasteful on the part of the liquidator. 25 Mr Coles has submitted that the liquidator is shown not to currently be in a position to admit proofs of debt from the applicants because final proofs have not been called for or lodged. The submission is that it is not known what information or evidence may support the proofs of debt or constitute sufficient grounds to reject the proofs in whole or in part. 26 The submission is that there has not been an investigation of the liabilities of NCRH, for example, by interviewing relevant directors and employees. 27 The submission is that there is every reason to believe that the liquidator will consider any proof of debt lodged by the claimants on their merits in accordance with his duties and obligations as a liquidator of the court and to unsecured creditors, and, further, that he would have close regard to the reasons for judgment in these proceedings in that regard. 28 The submission is that it is reasonable to suppose that in evaluating the proofs of debt the liquidator would have regard to the factual findings in the contested proceedings and would be unlikely to seek to re-litigate matters already determined, even if resources to do so were to hand. 29 Clearly enough, the provisions of section 471B of the Act provide that while a company is being wound up in insolvency or by the court, a person cannot begin or proceed with (a) proceedings in a court against the company or in relation to the property of the company, or (b) enforcement proceedings in relation to such property, except with the leave of the court in accordance with such terms, if any, as the court imposes. 30 Mr Black the solicitor having the carriage of these proceedings on behalf of the Macquarie Bank interests, has deposed to an apprehension that if the Macquarie parties were to lodge a proof of debt the liquidator for NCRH may contest, or not be prepared to accept, the factual basis of that proof of debt so far as it relies on matters at issue in the proceedings if NCRH is not joined as party to the proceedings and bound by their outcome. 31 His further apprehension is that if the Macquarie parties were to lodge a proof of debt relying on the indemnity under clause 5 of the underwriting agreement, the liquidator may seek to contend that the indemnity does not apply to any loss suffered by the Macquarie parties by reason of any wilful misconduct or negligence of the Macquarie parties. In that event, as he deposes, the entitlement of the Macquarie parties to indemnity under clause 15 of the underwriting agreement would turn upon a factual inquiry into whether the Macquarie parties engaged in wilful misconduct or were negligent and, if so, whether that wilful misconduct or negligence was causative of the plaintiff's losses. He further deposes that the very same factual issues would need to be resolved in the determination of the plaintiffs' principal claims against the Macquarie parties and other defendants in the proceedings. 32 The burden of Mr Coles' submissions has been that a well-known review of the history and purpose and function of section 471B and its predecessors, and of the circumstances in which a plaintiff should be permitted to proceed by way of action in the courts rather than by making an application directly to the liquidator by lodgement of proof of debt, is contained in the judgment of McPherson, J. in the decision of the Full Court of the Supreme Court of Queensland in Ogilvie-Grant v East, (Liquidator of Gordon Grant and Grant Pty Limited) (1983) 7 ACLR 669, at 671. 33 The judgment included the following:

"As a matter of history, a winding up by the court was and remains today an administration conducted by the court: Re Phoenix Oil & Transport Co Ltd (No 2) [1958] 1 Ch 565, 570. Both because of this, and because it was before the Judicature Act an administration conducted in Chancery, it was inevitable that there should be restrictions on the bringing of proceedings, whether at common law or otherwise, during the course of that administration. What is substituted for litigation in the ordinary form is a procedure by which a claimant lodges a verified proof of debt with the liquidator, who admits or rejects it wholly or in part, and from whom an appeal lies to a judge, who determines that appeal de novo primarily on affidavit material: RE Kentwood Constructions Ltd [1960] 1 WLR 646. There can be no doubt that ordinarily such a procedure is, and is designed to be, much more expeditious and less expensive than ordinary proceedings by way of action. If this means that it occasionally has the consequence that the attainment of perfect justice is sacrificed to expedience, it may be justified by the circumstances that on appeal it is possible under modern rules of procedure for the judge in appropriate cases to make orders for discovery and even for the delivery of pleadings where it appears necessary or desirable to do so. The question whether a claimant should be permitted to proceed by action, or should be required to submit his proof of debt and, if dissatisfied, appeal to a judge, is therefore reduced largely to one of choosing between alternative forms of procedure. The effect of s 230(3) is to require the claimant to adopt the course of lodging proof of debt unless he can demonstrate that there is some good reason why a departure from that procedure is justified in the case of the particular claim in dispute. This is really all that is meant in this context by expressions such as "convenience" and "balance of convenience" that appear in judgments on the matter: see, for example, Re The Queensland Mercantile Agency Co Ltd (1888) 58 LT 878, 879; Stewart v Intercity Distributors Ltd [1960] NZLR 944, 946; and cf Century Mercantile Co v Auckland Provincial Fruitgrowers" Co-operative Society Ltd [1921] NZLR 272, 276. It, of course, follows that it is quite impossible to state in an exhaustive manner all the circumstances in which leave to proceed may be appropriate, but in the past they have been said to include factors such as the amount and seriousness of the claim, the degree of complexity of the legal and factual issues involved, and the stage to which the proceedings, if already commenced, may have progressed.

The third party proceeding proposed in the present case has, superficially at least, some claim to be regarded as sufficiently special to attract an exercise of the court's discretion under s 230(3) to grant leave to proceed. A principal object of the third party procedure is to ensure, in the words of rules of the Supreme Court O 17, r 1(c), that " any question or issue relating to or connected with the original subject-matter of the action should be determined not only as between the plaintiff and the defendant but also as between either or both of them and a person not already a party to the action ". Clearly enough, the underlying purpose is to avoid the costs of two or more independent actions, as well as to exclude the possibility of separate conflicting decisions on the same matter. 34 The manner in which the applications were treated with at the bar table was generally for Mr Bell to adopt the position of the three applicants and for brief submissions then to be addressed from the bar table by Ms Collins appearing for Trowbridge and Mr Brereton appearing for PricewaterhouseCoopers. 35 There does not seem to be any issue at the bar table but that the well-accepted principle is that for companies in liquidation, the Corporations Act substitutes litigation in the ordinary form with a procedure for lodgement of a verified proof of debt, which the liquidator can admit or deny, with an aggrieved creditor having a right of appeal to the court for a de novo hearing of its claim. Ordinarily, of course, this procedure is to be preferred to creditors commencing litigation, and, as Ogilvie-Grant makes clear, a party seeking leave to commence will generally need to show some reason to depart from the ordinary procedure. Mr Bell, Ms Collins and Mr Brereton have therefore adopted the evidentiary onus of requiring to show some reason for a departure from the ordinary procedure. 36 It seems clear that, as Mr Bell has submitted, if found liable to the plaintiffs in the proceedings, the Macquarie parties would have against NCRH, an entitlement to pursue the rights claimed in their proposed cross-claim, including a wide-ranging indemnity under the underwriting agreement between MECM and NCRH [see affidavit of Mr Black, 20 March 2003, paragraph 5, annexure A]. Further, if found liable for the full amount of the plaintiff's claims, the Macquarie parties' claim against NCRH would be in the order of $41 million plus costs. 37 Mr Bell submits that on the basis of the liquidator's evidence that NCRH has assets of $472,061.84, (equivalent to $A781,026), and total liabilities of approximately $A80 million, the Macquarie parties would expect a distribution of approximately $400,000 in the winding up of NCRH. As Mr Bell submits, these are clearly not trivial amounts. 38 Equally clearly, the Macquarie parties are entitled to and may pursue their rights against NCRH in two of the well-trodden paths, first by lodgement of a proof of debt under section 553 of the Corporations Act as a contingent creditor, (which the liquidator must admit, reject or require further substantiating evidence within 28 days of a request to admit the claim - regulation 5.6.53) and secondly by suit. 39 Clearly enough, the liquidator's duty to deal with the proof of debt is not dependent on him having called for formal proofs of debt: Simto Pty Ltd v Court as Liquidator of Carob Industries Pty Ltd (in liq) (1987) 138 FLR 232. The Macquarie parties will then have a right of appeal to the court from a rejection of such a proof of debt - regulation 5.6.54(2). If the liquidator decides to admit the proof of debt, he must make an estimate of the value of the debt or claim or refer that question to the court - section 554A. The Macquarie parties would have a right of appeal to the court from the liquidator's estimate - section 554A(3). 40 The alternate route is by action against NCRH in these proceedings, which are concerned with the same facts and issues that would be involved in the Macquarie parties' claims against NCRH and which will determine the contingency involved in the Macquarie parties' claim against NCRH. 41 As Mr Bell has submitted, the fundamental question is which of these is the preferable course in terms of the proper exercise of the court's discretion. Putting the matter in the terms of principle, why is there some good reason why a departure from the usual proof of debt procedure is justified in the case of the particular facts, matters and circumstances here before the court? 42 The evidence discloses, and the parties have accepted in submission, that the Macquarie parties have requested the liquidator to indicate that NCRH would admit their right of indemnity against it so that they could proceed by proof of debt without being exposed to the risk that an appeal from the refusal of that proof would have to canvass the matters in issue in the proceedings. 43 Equally clearly, the liquidator has not admitted this claim. He has, on the evidence, not entered into any dialogue as to the merits of the claim. Mr Bell submits that the liquidator has had ample time to admit the claim. The submission is that it may reasonably be inferred that if the Macquarie parties were to lodge a proof of debt, the liquidator would not admit the claim in full and that in those circumstances it is inevitable that the Macquarie parties' claim would be ventilated in proceedings in the court either on an appeal from a rejection of the proof of debt or the liquidator's estimate of the claim or by referral by the liquidator on the question of value. 44 In the submission pressed by Mr Bell and the other two applicants in whose interests he has also addressed, the most efficient course is for the claims against NCRH to be determined in these proceedings rather than separate proceedings arising out of the proof of debt procedure dealing with the same issues. The submission is that where an appeal from a disputed proof of debt would raise the same issues as the proceedings already on foot to which the company has sought to be joined, there is good reason to grant leave to proceed to avoid the situation that liability and quantum could be decided in relation to the same facts differently against different parties: reference being made to the Crema Vic Pty Ltd v Aslor Pty Ltd (in liq) Mandie J Supreme Court of Victoria, 6 August 1997. 45 The submission is that this principle should apply a fortiori, where the proceedings currently on foot not only involve the same issues but will determine the contingency involved in a contingent claim against the company. 46 It is further submitted that where it will be necessary for the claimant to appeal against a refusal of its proof of debt unless its entitlement to claim is determined by proceedings, leave to proceed by action should be granted; Capita Financial Group Ltd v Rothwells (1989) 15 ACLR 348; BHG Nominees Pty Ltd v Ellis Young Investments [Federal Court, Weinberg J 14 August 1998). The submission is that the grant of leave in those circumstances is consistent with the general obligation under section 63 of the Supreme Court Act to avoid a multiplicity of proceedings in relation to the same matters in controversy. 47 Clearly, as Mr Bell makes plain in his submissions, an applicant for leave must establish that its claim raises a serious question to be tried in the sense that the claim has a solid foundation and gives rise to a serious dispute - Vagrand Pty Ltd (in liq) v Fielding (1993) 10 ACSR 373. 48 To my mind there is substance in the reasoning processes adopted by Mallesons in paragraph 4(a) and (b) of the letter from Mallesons to Henry Davis York and to Minter Ellison of 19 March 2003. Whilst the figures set out in those paragraphs may not be precisely accurate in terms of the present evidence, the reasoning processes seem to me to be of real substance:

"(a) First, if the plaintiffs were successful against our clients in the Ingot Proceedings, our client would have a potential claim against your client of up to $40 million plus interest and costs. In that situation, on the assumption that your client has net liabilities of US$80,522.309 including the plaintiffs' claims (from which an amount of A$40m would be excluded by reason of the plaintiffs' undertaking that they would not prove in the liquidation of NCRH if successful in the proceedings against our clients, and an amount of A$40m, interest and costs would be included by reason of our clients' claim), our client's claim against your client would constitute approximately 30% of the total liabilities of your client. Even assuming that your client had only US$400,000 in "recoveries" which are presently available to it (and making no allowance for future recoveries by NCRH and its subsidiaries on the one hand or the costs of defending the cross-claim on the other), our clients would reasonably expect a distribution of approximately US$120,000 when the liquidation of NCRH is complete. By way of comparison, if a distribution of 1 cent in the dollar were to be made, as suggested by your client's counsel in Court last Friday, our clients would reasonably expect a distribution exceeding A$400,000 on a winding up. Clearly, these are not trivial amounts and our clients cannot be expected to abandon their entitlements in that regard.

(b) Second, if your client were successful in resisting leave to bring a cross-claim in these proceedings, our client would then proceed, as of right, by proof of debt and appeal from any decision by your client to reject that proof of debt. This would not minimise the costs incurred in that process, but would very likely increase them, since our respective clients may then not be able to rely on the evidence led in the Ingot Proceedings in that appeal. If your client were to achieve that result, it would not thereby prevent our client from pressing its entitlements in the winding up, but merely require that they be established in a less efficient and more expensive way." 49 Clearly enough, the court in terms of any application for leave to proceed against a company in liquidation, must, as Justice McPherson recognised, pay the closest of attention to the particular litigation into which a plaintiff or a defendant/cross-claimant seeks to join the company in liquidation. Equally clearly, as it seems to me, a particular parameter of significance to the current applications is the circumstance that it may be open to the liquidator, as Mr Black has deposed, to contend that by reason of wilful misconduct or negligence of the Macquarie parties, the clause 15 underwriting indemnity does not apply to any loss suffered by the Macquarie parties. 50 When one examines the possibility that the apprehensions of the applicants, and in particular of the Macquarie Bank parties, in terms of the time line, may turn out to be accurate, so that proofs of debt were rejected and to examine the appellate procedure required to be mobilised, clearly the types of issue which raise questions of wilful misconduct or negligence would involve the most intensive investigation of matters which would, by definition, be otherwise determined in the proceedings which are now fixed for hearing. 51 Mr Bell has sought to submit that in defending a cross-claim brought by his clients against NCRH a prudent practitioner would determine that a prudent course was not to fully contest the proceedings even relying on evidence and submissions of other parties and to seek to be excused from filing a defence and from leading evidence in accordance with the approach adopted in other cases where leave has been granted to proceed against a company in liquidation. 52 The submission is that a prudent liquidator would allow the matter to be determined on the basis of the evidence led by other parties and the submissions made by them on the basis that any evidence which could possibly have been led by the liquidator would, in fact, be led by other parties to the proceedings having the same interest in respect of the relevant issues, given the matters in dispute between them. 53 Further, Mr Bell has sought to submit that, even if instructed to fully contest the proceedings, a prudent practitioner would rely on evidence and submissions made by other parties and would be able to conduct a defence at limited cost in that way and has been so bold as to put forward a mode of operation for such prudent practitioner. Here the suggestion is as follows:

(a) First, he would consider the position as to MECM's claim for indemnity since, if NCRH cannot successfully defend that, there is no point in defending the cross-claim brought by the Macquarie parties on other grounds. As to that claim, the only defence is to establish negligence or wilful misconduct which is causative of the relevant loss. There is no basis, it is submitted, for properly alleging the latter. As to the former, the submission is that a practitioner would form the view that the Macquarie parties are likely to admit that a duty of care was owed to NCRH. The submission is that an allegation of breach of that duty would depend on the matters alleged by the plaintiffs and the evidence led by them and that NCRH would simply adopt the plaintiffs' evidence and submissions in that regard.

(b) A practitioner, it is submitted, would then consider the claim by NCRH for misleading and deceptive conduct arising from the provision of the draft prospectus and final prospectus by NCRH to MECM. It is submitted that he would recognise that each of the Macquarie parties, PricewaterhouseCoopers and Trowbridge Consulting and the NCRH directors contest the allegation that the prospectus, which stands at the centre of the principal proceedings, was misleading and deceptive and would conclude that there was no evidence that was available to NCRH which would not be led by those parties to disprove that allegation. The submission is that the prudent practitioner would do nothing other than adopt the evidence and submissions of those parties.

(c) The submission is that the prudent practitioner would consider Macquarie parties' claim for breach of the underwriting agreement, which essentially depends on inadequacy in NCRH's audited accounts or in the prospectus. The submission is that he would take the view that the other defendants would also seek to establish that there was no such inadequacy consistent with their defences and would need to lead no evidence beyond the evidence which the other defendants led as to that matter and could adopt their submissions. 54 Whilst I would not necessarily accept each of Mr Bell's suggested prudent approaches by the liquidator, suffice it to say that there is sufficient substance in those submissions as to my mind to make quite plain that there is certainly a real prospect that the liquidator would not, if the leave now sought was granted, fully contest the proceedings. Of course, the issue of the liquidator's likely forensic steps is a matter which the liquidator would have to determine according to principle. Liquidators may obtain judicial advice or imprimatur from time to time even in very unusual circumstances. 55 I return then to the weighing exercise before the court. Many of the facts to be taken into account in the weighing exercise have already been outlined. In a close analysis Mr Bell submitted that the plaintiffs claim against the company was for $41 million. The plaintiffs have foregone the possibility of making that claim in the event that they are successful in the proceedings. Postulating success of the plaintiffs against the Macquarie interests, such success will then likely, it is suggested, lead to the Macquarie interests being entitled to prove against the company in the very same amount, namely $40 million, in terms of a pool of creditors of $80 million. In short, as to approximately 50 percent of the pool of money recovered of about $800,000, the Macquarie interests would be entitled to some $400,000. This amounts to the effective potential substitution of the Macquarie interests, for the plaintiffs, as creditors claiming against the pool of recovery. The proposition is that in short the outcome of the principal proceedings in which the present application to join NCRH is concerned ought be a matter of indifference in net money terms, not only to the other unsecured creditors [this amounting to no more than a substitution in place of the plaintiffs by the Macquarie interests], but also to the liquidator. 56 It seems to me that there is some substance in this analysis, although here again this is simply one of the facts, matters, circumstances and hypothetical predicted results to be taken into account of way of and in the course of the weighing exercise, leading to a determination of the proper approach to the ultimate exercise of the courts discretion. 57 It seems to me that, in the particular circumstances of these particular proceedings, the applicants have some entitlement to have the apprehensions that Mr Black has indicated, where at least two letters have not received any or any informative response from the liquidator. 58 The proceedings involve not only the questions of contractual indemnity and general liability thrown up by the plaintiffs' newest version of the fourth amended summons but also involve, as has been made plain from the bar table, the misleading and deceptive conduct claims. 59 Where counsel for parties appearing at the bar table seeks to persuade the court of what a liquidator acting prudently would or would not do, the court obviously must assume that the liquidator will act in a rational fashion and in the best interests of those whom the liquidator is appointed to protect, principally creditors and members. 60 Standing back from the detailed litigation and bearing in mind the strictures of Justice McPherson, it does seem to me that the overwhelming weight to be given to the tremendous complexity to be anticipated as being litigated in the proceedings, means that the proper exercise of the court's discretion is to accept that reasons have been demonstrated for a departure from the usual procedure in terms of there being substituted for litigation the proof of debt and appeal procedure. That departure is justified in the case of the particular claims in dispute. Indeed any prospect, even if, to use Mr Coles' submission, it was "unlikely" that the liquidator would seek to re-litigate mattes already determined, is where practicable, to be avoided in this class of massive litigation. 61 For those reasons, leave will be granted in the terms sought by each of the putative cross-claimants.

I certify that paragraphs 1 - 61 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on 4 April 2003 and revised on 16 April 2003

      Susan Piggott
      Associate

16 April 2003

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