the subjective awareness
42 The awareness required by cl 4.9 is the awareness of 'the trustees'. This term is defined in cl 5.10 of the policy to include a director or secretary of the trustee. This definition has the effect that the awareness of one director will satisfy cl 4.9, even if other directors do not have the same awareness. Cl 4.9 does not require the board of directors as a body to have a corporate awareness. Thus, whilst several directors of CCAS gave evidence, and each professed different levels of awareness, or lack of awareness, for reasons which I will explain, it is only necessary to come to a conclusion about the awareness of Mr Conde.
43 Mr Conde was initially employed by Correction Corporation of Australia Pty Ltd (now known as AIMS) on 24 November 1999. On 2 December 1999 he was appointed secretary of the company. On 6 December 1999, he was appointed secretary of CCAS. Then, on 12 October 2000, he was appointed a director of CCAS. He replaced Mr Anderson, who also gave evidence in this case. Mr Conde is an accountant by profession and holds a Bachelor of Business, Master of Business Administration, and a Graduate Certificate in Business Law. He is a certified practising accountant, Fellow of the Chartered Institute of Secretaries, and Associate of the Securities Institute of Australia. It seems that he was appointed a director of CCAS in October 2000 in order to steer CCAS through a very difficult period. His experience was needed. Mr Anderson did not have the experience necessary to address the situation.
44 Mr Conde filed a witness statement in this proceeding. The statement demonstrates that he was aware of the facts outlined in the previous section of these reasons. It also explains that the main concern of the directors of CCAS from July to November 2000 was to manage the liquidity crisis facing the fund in a way which was both legal and equitable. This principally involved arranging for the sale of the real property of the fund. But that primary concern did not exclude Mr Conde giving attention to the possibility that CCAS or its directors might be sued.
45 This thought seems to have first arisen shortly after the loss of the Borallon contract when, in early August, Pat Jennings estimated that Gardner Close would sell in the range of $5,200,000 to $5,400,000 if the leases could be extended. These prices would mean that the fund would have a significant loss for the year against the carrying value of Gardner Close. Mr Conde thought that even these prices may not be achieved and the loss would not be offset by any increases in the value of Fleet Street and Tottenham Parade given their relative size in the portfolio. Mr Conde concluded at this time:
In light of these matters I became concerned at that time that if the CCA Fund were to suffer a loss, as I expected, a legal case could be brought by members against CCAS and its directors in respect of the manner in which the CCA Fund's property investments were sold. While that was my primary concern I did have some concern that a legal case could be brought by members against CCAS and its directors regarding the structure of the CCA Fund, by which I mean the lack of diversification and liquidity of fund investments.
46 Then, in September 2000, after Mr Conde received the marketing submissions from Chesterton International showing a sharp drop in the value of Tottenham Parade and Fleet Street, he did a calculation which indicated a potential loss to the fund of 10 per cent for the year. Mr Conde said:
There was now the likelihood of significant losses in the CCA Fund and I was concerned at the possibility of a legal case being brought against CCAS and its directors. This concern was based on:
(a) The responsibility of the trustee to act properly in the current circumstances and to ensure that all members were treated equitably. In that regard it was of concern that the CCA Fund would, in the normal course of operation, accept new members and new contributions and pay out entitlements to departing members;
and
(b) The level of loss that the CCA Fund was likely to incur might provoke members to seek recovery based on the lack of diversification and liquidity of the fund, although there was nothing that the trustee could do at that time about the past investment decisions.
In light of the matters raised in the previous paragraph, I was mindful that if the members lost money, particularly if the losses were in excess of 10%, they may seek to recover any loss they incurred from CCAS and its directors. It was when I received the Chesterton International marketing submission and performed calculations similar to those set out above that I first realised there was a real prospect that legal proceedings could be brought by members against CCAS and its directors. I was particularly concerned with the investment in Gardiner Place and the fact the majority of the leases had expiry dates shortly after the Borallon contract was due to expire.
47 When Mr Conde received the news of the cancellation of the MWCC contract his concerns over the situation of the fund were increased. The decision of the directors at the meeting held on 12 October 2000 to revalue the assets of the fund heightened Mr Conde's concern that members may take action to sue CCAS and its directors for the losses incurred by the fund. He said:
In light of the matters discussed at that meeting on 12 October 2000, my earlier concerns with lack of diversification and liquidity of the CCA Fund investments, and the issue regarding the Gardiner Place property being poorly structured to enable its book value to be realised (particularly as no new leases had actually be entered into and, at most, only one tenant had said it would agree to extend their lease), were magnified.
48 After the meeting Mr Conde asked Mr Kidd from Aon to arrange a meeting with APRA, and also to recommend a lawyer for CCAS. He explained his reasons thus:
I wanted CCAS to obtain legal advice so that we could inform APRA of the situation being faced by the CCA Fund and, in light of the problems regarding a lack of diversity, a lack of liquidity and the expected realisable value of investments being less than their values as recorded in the financial statements for the year ended 31 December 1999, seek advice as to the risk of CCAS and its directors being sued and any potential liability to members. I also wanted advice regarding the appropriateness of the actions now being undertaken by CCAS.
49 As to the situation near the end of October Mr Conde said:
It was clear to me, especially since the CCA Fund was "frozen" and the number of member complaints increased dramatically, that there was a real possibility the members would get less than they felt they were entitled to and may be paid later than they expected to be paid. Given the level of angst expressed by members, both in phone calls to me and at the Borallon meeting, I thought there was an increased risk of members bringing an action against CCAS and its directors for the losses suffered.
50 On 8 November 2000, when Mr Conde saw the sale price estimate for Gardner Close from PRD Realty of $4,500,000 to $5,000,000, and became aware that only one of the tenants was prepared to agree to an extension of the lease, he was concerned that the likely loss to the fund would be greater than previously contemplated.
51 Although Mr Conde asked Mr Kidd on 12 October 2000 to arrange a meeting with a lawyer, this only occurred on 16 November 2000 because several solicitors who were approached were unable to act. Although this meeting occurred after the period of insurance ended, it throws some light on the state of mind of Mr Conde in the period before the meeting.
52 The meeting on 16 November 2000 was attended by Mr Conde, and another director, Mr Green, Mr Kidd from Aon, and Glenys Hodges and Erin Feros from Allen Allen and Hemsley (now Allens Arthur Robinson). Mr Conde's main concern was to obtain advice about the plan to realise the assets of the fund, and the legality of freezing the withdrawal of members entitlements. Mr Conde also wanted Allens to be involved in the consultations with APRA.
53 In his witness statement Mr Conde said that there was also discussion about the potential liability of CCAS and the directors, although most of the meeting was a briefing session for Allens and related to the current action being taken by the fund.
54 Ms Hodges was a senior associate who had worked at Allens for 11 years. She acknowledged in oral evidence that the major focus of the meeting was directed to the issues of immediate concern in the administration of the fund. However, in her witness statement she said that there was discussion at the meeting that the expected large negative returns of the fund made it highly likely that there would be complaints from unhappy members and that the matter could end up in court. She also said that Mr Conde asked whether any potential liability which Lawson had to the fund for past decisions made as a director could be set off against his entitlement as a member of the fund. Ms Hodges replied that all directors involved in the investment decision making process and CCAS were potentially liable. Ms Hodges said in cross examination that her recollection of these discussions came from reading her file note of the meeting. A number of the facts referred to in the witness statement are expressly referred to in the file note. As to the other facts recalled in oral evidence, I am satisfied that Ms Hodge's recollection is generally accurate. There is strong confirmatory evidence in the written advice provided by Allens on 23 November 2000. The advice included the following:
We have not considered whether there have been any past breaches of duty by the trustee or directors and we do not have sufficient information about the background and circumstances to advise what those breaches and the potential liability of the trustee and directors might be. This would involve examining in depth the complete history of the fund and the trustee's decisions.
At this stage this is premature to consider this issue other than to be aware of it. After the GP property is sold and all benefits have been paid, it would then be appropriate to consider whether the assets remaining in the fund are sufficient to justify investigating and pursuing this issue further.
55 Ms Hodge's evidence is significant. She is independent of the parties. She had no personal interest in giving her evidence. Her recollection was clear, firm and consistent. It was supported by contemporaneous written material. I found her an impressive and convincing witness. I am satisfied from her evidence that the issue of liability of CCAS and the directors for losses resulting from past investment decisions concerning the diversity of the assets of the fund were raised as matters of concern by Mr Conde in mid November 2000. Ms Hodge's evidence supports Mr Conde's evidence that he was aware before the end of the period of insurance that CCAS and the directors might be sued by members who felt that CCAS and the directors were responsible for the losses incurred by the fund.
56 On the day after the meeting with Allens, 17 November 2000, Mr Conde and another director, Mr Cooper, signed a proposal for renewal of the policy with CGU. Question 7(c) of the proposal asked: "Have there been any claims made or claims circumstances that have not been reported to CGU professional risks insurance?". Mr Conde indicated an affirmative answer to the question, and wrote "refer attached" next to the question. Attached was a letter signed by Mr Conde which included the following answer:
Item 7(c)
Whilst the fund is in a position to meet current claims from current liquid funds available it is aware that there will be additional large amounts of member withdrawals from the fund within a short time period. These have occurred as a result of the loss of the employer company's operating contracts and the resignation of a number of employees.
The fund has taken the following action:
1. It entered into a program of realisation of its property investments.
(i) Two properties in Victoria are now under contract, and
(ii) A commercial property held by the fund in Queensland is currently being marketed to go to auction on 14 December. It is expected to be sold on a 30 day contract.
2. Fund payments are currently being held pending realisation of the above property to ensure that the fund is able to meet all member obligations.
3. APRA have been advised of the current situation being faced by the fund and are being kept informed on developments.
Attached is a cash flow schedule covering the period to March 2001 showing how the fund is expecting to meet the member obligations.
The fund has received one demand letter from a former employee's solicitor, that has been referred to the fund's solicitor.
57 Mr Murdoch QC, who appeared with Ms Brimer for CGU, placed particular emphasis on this response in connection with the question of the awareness of Mr Conde. He argued that the answer was given immediately after the meeting with Allens when current issues were under scrutiny, and the question directed Mr Conde's mind directly to the question about claims circumstances. The answer, it was argued, contained no reference to potential claims against CCAS or the directors arising out of the losses caused by investment decisions made in breach of duty. Consequently, the answer showed that Mr Conde had no awareness of such potential claims at this time.
58 Mr Conde was challenged in cross examination on this issue. His response was frank and compelling. He said that in retrospect he would have added more details, and if he had had a fuller appreciation of the meaning of claims circumstances he may have been more expansive. He said that the answer was 'done under the pressure of the work at the time … there was a lot of things on at the time'.
59 Mr Conde is no longer employed by AIMS and does not hold any position in CCAS. He had no reason to give false evidence. He was strongly pressed in cross examination. His evidence was careful and considered. He impressed me as a conscientious and professional person. I regard his evidence as honestly given and I accept his explanations as to why there was no reference in the answer to question 7(c) on the proposal to the possibility that CCAS or the directors might be sued for breach of duty. In part, the absence of such reference was a result of Mr Conde's lack of familiarity with the requirements of such policies, but, primarily, it was the result of the pressure of the circumstances existing at the time and the need to address immediately pressing issues including selling the real estate assets of the fund and implementing a freeze on the entitlements of members. The fact that these were the overriding concerns explains why they figure in the answer to the question. The potential liability of CCAS and its directors for past conduct was a matter of concern, but did not call for any immediate action.
60 In cross examination Mr Conde was also asked why, if he was aware of the risk of litigation as he claimed, there was no reference to any discussion of the subject in the minutes of the board meetings. As with the subject of his answer to question 7(c) in the proposal, Mr Conde explained that the focus of attention at the time was on taking steps to address the pressing issues of the sale of assets and the liquidity crisis. These matters were extensively reported in the minutes. The pressure of the situation is captured in an exchange between Mr Conde and the Court as follows:
HIS HONOUR: And your explanation for that, Mr Conde, as I understand it is that there was so much happening at the time that you simply didn't give enough attention to the response to question 7C?‑‑‑Yes, your Honour. It is difficult to explain the enormity of things that were happening at the time but ‑ ‑ ‑
Well, it is important that you try and do that for me because at the moment Mr Murdoch is making a case that, if you really had the belief you say you did, it would appear somewhere ‑ ‑ ‑?‑‑‑Mm.
‑ ‑ ‑ and what he is saying is that it doesn't appear anywhere. Therefore Mr Conde must be reconstructing that, "He had the belief, he might have had it - it might have developed at a later time but it certainly wasn't there then." So I need to understand from you, if you would like to explain it to me, how you do explain those circumstances?‑‑‑Well, the company was under considerable stress at the time. There was the disposal, well, the Borallon contract ‑ ‑ ‑
Mm?‑‑‑ ‑ ‑ ‑ that put the company into what they call the transition period and that required a lot of negotiations with the state over how a range of assets would be valued and dealt with, with the state and with the incoming operator. Borallon had been conducted by the company for a considerable amount of time and, whilst it was a state facility, there were various assets, and quite a number, that had been put in by the company during that time. And with some of them the ownership aspect of them was indeed a little clouded, in that it hadn't been adequately documented whether it was to become a state asset or whether we had some entitlement with it. I can't recall precisely but it was in the vicinity of, well, over $1 million and so it had some significance for the company and there was a lot of negotiations going on. I had responsibility for that. There was the loss of the NWCC [sic] contract and various ramifications, one of which was the Department of Justice in Victoria had a belief that we could separate the NWCC [sic] creditors from our complete creditor list. It was only one company and they wanted continual reports as to our payment of staff and our payment of creditors. They had engaged PricewaterhouseCoopers into our office. We had also just commenced one new contract in Western Australia and another one was pending commencement. The one that has just commenced was the court securities and custodial services. It was the court services, prisoner and prisoner transport. It had been negotiated over a long period with the Department of - sorry, it was then the Ministry of Justice of Western Australia and it had set certain criteria of kilometres to be covered and hours of service. When it started, in fact from day one, the Ministry of Justice was demanding additional services but in fact refusing to pay for them and that was placing considerable stress on our resources in Western Australia. Well, when I say they were refusing to pay; they weren't immediately refusing to pay but they were demanding variation statements and that was putting us to a lot of work in analysing hours of service that were originally estimate per court and those that were actually being provided and transport to try to justify a variation with the Ministry of Justice. We only had - the company only had small resources in finance staff and we were spread very thinly at that regard and had very little time to devote to each of those activities.
61 Again, I accept Mr Conde's explanation for the fact that there is no reference in the minutes of the directors' meetings about the risk of litigation against CCAS and its directors for past breaches of duty. There was too much happening at the time which was of more immediate concern. An appreciation of the liquidity crisis which arose with the loss of the Borallon and MWCC contracts and the need to sell the fund's assets quickly to meet payment of the members' entitlements make this readily understandable.