MSPR Pty Ltd and Phyro Holdings Pty Ltd v Advanced Braking Technology Ltd

For the Defendant: Claude Solitario sworn 14 March 2012 and exhibit (CB 243) Kenneth Johnsen sworn 14 March 2012 and exhibits (CB 294)

Issues 3It is agreed that Phyro Holdings Pty Ltd ("Phyro") made payments of $300,000 to the Defendant in June/July and September 2003. The central issue in the proceedings between the parties is the nature of that advance - in particular, whether it was a loan (as alleged by the Plaintiff) or a cash for equity investment as alleged by the Defendant. A subsidiary issue is, if there was an agreement, what were the documents or representations which give rise to that agreement and the terms and effect of the agreement? 4The pleadings set out the terms of the agreement alleged by each side. 5The amount claimed ($566,477.81) essentially represents the monies advanced ($300,000) plus interest at 10% or, in the alternative, at court rates - see below "Monies subject of dispute" (para 30 ff).

Parties 6Mr Roger Cowan ("Mr Cowan") was the principal and director of Phyro and another relevant company, Fingora Pty Ltd ("Fingora"). Phyro was Mr and Mrs Cowan's family investment company. Fingora was a wholly owned subsidiary of Phyro. For all relevant purposes the First and Second Plaintiffs and Fingora were owned and operated by Mr Cowan. 7Mr Cowan was also a director of other companies including the Defendant, Advanced Braking Technology Ltd ("Advanced Braking"). Mr Cowan became Chairman and director of the Defendant from 25 October 2004 until he resigned in August 2006. 8Mr Cowan is, and was, a businessman experienced in commercial matters. At the relevant times, Mr Cowan was the Secretary Manager of the Penrith Panthers Rugby League Club, a position he held until July 2005. He signed a report stating that the Panthers were then the largest club in Australia with "assets of nearly $300,000,000, total sales of $170,000,000 and 160,000 members". He was also the President of the Registered Clubs Association for two years and Chairman of the Club Industry Advisory Council. 9It is agreed that Mr Cowan became bankrupt on 30 April 2010. 10The Defendant was at relevant times a public company (see below "Background": para 20 ff).

Officers of the Defendant 11Mr Kenneth Johnsen ("Mr Johnsen") is and has been the Chief Executive Officer of Advanced Braking from 12 September 2005. Mr Vin Morley ("Mr Morley") was Chief Executive Officer and Director of the Defendant before that time. 12Mr Claude Solitario ("Mr Solitario") was the Company Secretary of Safe Effect until 12 July 2004. 13Dr Dorota Kieronska was at all relevant times an executive director of Safe Effect and previously, Advanced Braking. Dr Kieronska died in early January 2012. A Jones v Dunkel (1959) 101 CLR 298 inference was sought to be drawn in relation to the absence of evidence from Dr Kieronska presumably prior to her death - see below "Inferences sought to be drawn: Jones v Dunkel". 14Mr Roger Cowan became Chairman and director of the Defendant from 25 October 2004 until he resigned in August 2006 or 30 November 2006 as pleaded by the Defendant in the Further Amended Defence. 15Mr Stanley Holmes ("Mr Holmes") was, at all relevant times, the principal of Hood Group Holdings Limited ("Hood Group"), an underwriter of the share issues in the Defendant at the relevant time. 16Mr Holmes did not give evidence. It was originally asserted that he had an acrimonious dispute with the Defendant. This becomes relevant in relation to the respective submissions that a Jones v Dunkel inference should be drawn in these circumstances as to what evidence Mr Holmes could have given - see below: "Inferences sought to be drawn: Jones v Dunkel" (para 133 ff). 17Ultimately, Hood Group was sued by the Defendant.

Names of entities as the relevant parties to the proceedings 18Neither party takes any issue as to the names of the relevant parties to the proceedings nor their relevant capacities to either sue or be sued in accordance with the background detailed and the evidence adduced. 19Leave was sought and granted for the filing of an Amended Statement of Claim during the hearing. That amendment had the effect, inter alia, of joining Phyro as the second and alternative Plaintiff. Subject to the key question of limitation period in relation to Phyro being joined as a Plaintiff, the Defendant did not oppose the joinder of the additional Plaintiff nor its relevant ability to sue on the causes of action pleaded in the Amended Statement of Claim.

Background 20The Defendant is a company which was previously known as Safe Effect Technologies Limited ("Safe Effect"). The Defendant was, under both its corporate names, a 'startup' technology company. It had devised and invented a different system of braking technology. The effect of the technology was to extend the brake-life of vehicles - particularly heavy vehicles. It was anticipated that the new technology owned by Advanced Braking would be commercially viable and, hopefully, highly profitable. It was clearly contemplated as being a high-risk venture. 21Safe Effect was incorporated on 19 December 2001. There were a series of discussions between 2001 and June 2003 between Mr Roger Cowan and officers of Safe Effect relating to the capitalisation of the company. The company needed capital to pursue its new technology plans and was listed in May 2002, a float of the company being undertaken after that date. 22In December 2001, Roger Cowan purchased 3.5 million shares and options which were held in escrow in anticipation of the public float of the company. These shares were issued in two parts. On both 18 February 2003 and 28 September 2004, 1.75 million shares were issued to Fingora (Affidavit of Roger Cowan, 1 February 2012, CB 18 and 30). The money was provided by Phyro for Fingora.

Share Issue 23There was an attempt in the period February-May 2002 to raise capital for Safe Effect through a share issue. That attempt was underwritten by London Partners Australia Pty Ltd and was under-subscribed. 24On 21 May 2002, the Defendant was listed on the ASX. Mr Cowan was aware by late 2002 that the Defendant needed more capital or it would 'go under'. The Defendant recorded negative cash flows for the years ending 30 June 2002 and half year ending 31 December 2002. (Affidavit of Roger Cowan, 1 February 2012, CB 18).

Underwriting by Hood Group 25Mr Cowan then introduced Mr Holmes/Hood Group to the Defendant as an underwriter. 26A further rights issue (only open to shareholders) was underwritten by Hood Group, of which Mr Holmes was the principal. 27The offer was made through a rights issue prospectus dated 26 February 2003. That issue closed on 1 April 2003, although the precise details are contested. Again, the offer was under-subscribed. Mr Cowan was notified of that. The effect of the unsuccessful rights issue was that those involved in the underwriting were exposed to the extent of about 28,569,031 shares (approximately $4.2 million with the unsubscribed shares and the associated unsubscribed capital (CB 323)).

Related Share Issue 28Fingora subscribed for further shares in the Defendant. On 2 and 16 April 2003 it made two payments totalling $80,000. This purchase was not as an applicant for shares under the rights issue. There is an issue as to what are said to be the dates of the discussions leading up to the investments and the close of rights issue. 29Mr Cowan's shares were issued accordingly on 6 May 2003. There is no dispute in relation to those amounts or payments. The Defendant contends that the $80,000 (by two payments) was part of the rights issue shortfall. 30In accordance with the prospectus and the Replacement Underwriting Agreement dated 26 February 2003 (Exhibit 10), the company received an application from Hood Group for the shortfall shares on 24 April 2003. On 6 May 2003, following a company resolution on 2 May 2003, approximately 28 million shares were issued to Hood Group (Exhibit 14). 31Exhibit 13 shows a Computershare record of the transfer of 666,667 shares on 6 May 2003 to Fingora (CB 71). That would correspond to a price of 12 cents per share.

Monies Subject of Dispute 32The relevant sum of $300,000 is attributed in the Defendant's spreadsheet as follows (CB 246 ff): -5 June 2003 ($50,000 by "Fingora Pty Ltd") -24 June 2003 ($50,000 by "Fingora Pty Ltd") -1 July 2003 ($150,000 by "Fingora Pty Ltd") -19 September 2003 ($50,000 by "Roger Cowan") 33There is no dispute between the parties that the $300,000, which was paid directly to the Defendant, came from Phyro. However, the Defendant's records on some occasions attribute the payments to Fingora. The dispute between the parties is as to the purpose of the payments: whether they were a loan or for the issue of shares. 34If, ultimately, the arrangement was for shares, the parties are in dispute about whether the agreement has been fulfilled by the Defendant by the transfer of 3,969,228 shares on 20 April 2004 or whether that transfer was for another purpose, as alleged by the Plaintiffs. 35There was an additional transfer to Safe Effect of $100,000 on 1 July 2003 which is noted on the Defendant's spreadsheet as by "Fingora Pty Ltd". It is common ground that that was received for the purposes of the Cowan superannuation fund obtaining shares in the Defendant and that transaction has no connection or relevance to the disputed transactions. 36Bank statements and transfer documents were tendered in relation to that advance. It is also clear that: (i)in relation to the Plaintiffs' case, there is no contemporaneous documentation of any loan. There are subsequent notifications of what was asserted to be assignments of debts owing in 2008. The existence of that debt was disputed immediately after the notice of the assignment of debt was provided to the Defendant in 2009. (ii)in relation to the Defendant's case, there are no share transfers directly to Mr Cowan, or any of the Cowan Companies (including Fingora) in consideration of, or acknowledging, the relevant cash advance. However, there were 3,969,228 shares issued to Hood Group and those were transferred to Fingora on 20 April 2004 - (Computershare record of transfer 20 April 2012, CB 219). 37There is no dispute by the Plaintiffs that the 3,969,228 shares issued were received by Fingora. The Plaintiffs contend they were not an allocation for the relevant $300,000 but were transferred for the purpose of transfer to the "New Investors".

Assignment of Debt 38The Plaintiffs allege that the debt owed to Phyro Pty Ltd by the Defendant was assigned to the sons of Mr Roger Cowan on 6 July 2008 and notice given on 25 May 2009 (CB 168). They, in turn, assigned the loan to the First Plaintiff, MSPR Pty Ltd ("MSPR") on 15 June 2009 (CB 170). Notice was given on the same date.

Price of 3,969,228 Shares: Relevance 39Much of the hearing was taken up with evidence as to the amount agreed or struck as to the value of shares, to whom those shares were allocated and when. 40The parties disagree as to whether those shares represent: (iii)the entire amount of shares owing to Mr Cowan and the "New Investors" at 15 cents per share (3.3m shares) (iv)the amount owing to Mr Cowan and the New Investors at 12 cents (4,125,000 shares) (v)the amount owing to Mr Cowan at 10 cents per share with one million bonus shares or (vi)the entire amount of shares provided to New Investors via Mr Cowan at 5 cents per share (3.9m shares). 41The use of the final figure suggested - that is, 5 cents per share - would mean that Fingora has not been allocated shares for the relevant $300,000 paid. 42The Defendant asserts that any deficiency, regardless of the value of the shares, is a matter between Hood Group and Mr Cowan. The Plaintiffs assert that, as Hood Group was the agent of the Defendant, Advanced Braking is liable for the shares owing. That agency argument ultimately did not proceed - see below: "Agency": para 214 ff.

The New Investors 43One of the major issues in the dispute was whether other amounts were invested by other persons who were introduced to the Defendant by Mr Cowan and, further, whether share scrip was prepared for those amounts. 44Mr Cowan introduced a group of investors who paid $195,000 to the Defendant pursuant to individual agreements with Hood Group that shares be transferred at 12 cents each on 1 August 2003. 45In November 2003, the purchasers were to be entitled to receive from Hood Group a refund of all monies paid plus interest at the rate of 10%. If Hood Group did not refund the monies as agreed, then a further 1,400 shares per 1,000 held were to be issued to the purchasers at no cost, thereby reducing the effective price to 5 cents per share and the New Investors being entitled to 3.9 million shares. 46The identity of the New Investors is set out at in the affidavit of Mr Cowan, affirmed 11 April 2012, para 6.6 (CB 32). Those persons were either members of Mr Cowan's family or his friends. Several of these agreements, signed by Mr Holmes, are at CB 213 to 219B. Payments were made either directly or through Phyro - for example, for the shares of Lynette Cowan and Mr and Mrs Birch (Affidavit of Roger Cowan, 11 April 2012, CB 32). 47It is agreed that between 30 April and 21 September 2004 Fingora transferred 3.8 million shares in the Defendant to third party investors. No shares were transferred to Mr Ferguson, one of the New Investors. 48It is clear that 3,969,228 million shares were received by Fingora and then transferred to the New Investors as at 20 April 2004 - see Affidavit of Roger Cowan, 11 April 2012, [6.6]; [6.23]. However, both sides rely on these transfers for different purposes.

Issue of Shares 49The Plaintiff's case is that the share issue was carried out pursuant to an arrangement initiated and pursued by the Defendant where the shares would be transferred to Fingora then to the New Investors. The Plaintiffs submitted that the 3,969,228 shares almost exactly corresponded to the 3.9 million shares owed to the New Investors by April 2004. 50The essence of Mr Cowan's evidence (Transcript p 126, line 131) was that 3.996,228 shares were transferred from Hood to Fingora. The transfer was shown as being at 10c per share. That price was not correct. Mr Cowan said "they should never have gone to Fingora" (Transcript p 129, line 32). 51Fingora then transferred those shares out at 5c per share - Mr Cowan did that (Transcript p 130) - to the other investors. He said those shares involved were from "his other shares" (Transcript p 131). Mr Cowan then signed a blank share transfer form which was sent off to Computershare for share registration (CB 219 ff). 52The Defendant submits that those were separate and distinct arrangements from the cash advances made by Phyro, on behalf of Fingora, which are the subject of the litigation. 53The Defendant contends that the transfer of the shares was consideration for the cash for equity investment by Phyro for Fingora and corresponded with the amount of his investment. The Defendant's position is that what arrangements took place between Hood Group and the New Investors - and, in particular, the price of any share transfers - were between those parties and were not the concern of the Defendant. 54The Defendant's submission is that Mr Cowan transferred 3.8 million of his own shares as part of his concern for the New Investors: they were people who he "talked into" purchasing shares in the Defendant.

Parties' Cases on Primary Issue 55Against this background the parties' respective cases and submissions are:

Plaintiffs 56The Plaintiffs' case is that in early June 2003, Mr Cowan received a telephone call from Mr Holmes asking for a loan to the Defendant of $250,000. After speaking to Dr Kieronska, the then Executive Director of the Defendant, Mr Cowan agreed to provide a loan at interest, repayable at the end of July 2003 - see affidavit of Mr Cowan February 2003 - in relation to the agreement for the loan. The Plaintiffs also refer to the emails between Dr Kieronska and Mr Cowan. 57On Mr Cowan's evidence (Affidavit of Roger Cowan, 1 February 2012 at [3.21], CB 21-22) Dr Kieronska made a further approach for funds, asking for a further loan at 10% repayable at the end of the year. That resulted in the further amount of $50,000 paid on 19 September 2003. 58The Plaintiffs contend that the monies advanced were a loan (the Statement of Claim refers to the '2003 Loan Debt') through Phyro to the Defendant. That asserted debt was ultimately assigned to the First Plaintiff. The Plaintiffs point out that the funds were provided in a commercial context. They were not a gift. Absent any other basis or contrary assertion, the Plaintiffs submit the monies advanced should be regarded as a loan. 59In the alternative, the Plaintiffs submit that, if the monies advanced were to be for the issue of shares, that agreement has never been performed by the Defendant and there has been a total failure of consideration. 60The first documentary assertion of a loan by Mr Cowan took place in a fax dated 6 February 2004. The Plaintiffs submit that this fax did not provoke any denial by Dr Kieronska or the company. 61The Plaintiffs dispute that the share issue was in consideration for the monies advanced. It is submitted that the best evidence that the monies advanced did not constitute a 'cash for equity' investment was that neither Mr Cowan nor his companies were ever issued with the shares.

Defendant 62Advanced Braking alleges that between 5 June 2003 and 19 September 2003 Fingora, or alternatively, Phyro, agreed to deposit $300,000 as consideration for the shares to be issued by the underwriter to Fingora. 63The Defendant contends that the monies were advanced and received as a 'cash for equity' payment for the purchase of shares in the Defendant, albeit in an earlier corporate name or in the name of Fingora. The monies were part of an agreement to invest and were advanced in a context and against a background whereby there had previously been advances made for equity investments. 64It is asserted that the monies were at all relevant times recorded in the Defendant's relevant emails and internal correspondence as well as company documents as an equity investment. Further, that pursuant to the agreement to advance monies as part of an equity investment, shares were transferred to Fingora at a figure which almost corresponded to the amount of monies advanced: 3,969,228 shares at either 10 cents or, alternatively, a 5 cent valuation. Regardless of whatever share value was used, the Defendant emphasizes that Fingora received those shares or, alternatively, that any discrepancy is an issue between Hood Group and the Plaintiffs.

Agreement Pleaded 65The Defendant's pleading in the Further Amended Defence filed on 21 May 2012, alleges: (i)an agreement between Fingora (by Mr Cowan) and the Defendant (by Dr Kieronska) in about February 2004; (ii)to the effect that the loan would be satisfied by the issue of nearly four million shares; (iii)the Further Amended Defence says 3,969,288 shares were transferred "as consideration for the Cowan Payments which had been made to the Defendant in reduction of the shortfall debt"; and (iv)that those shares were issued to Fingora in about April 2004. 66The Defendant's further pleading is that the shares were in effect transferred to Mr Cowan in that Fingora either received those shares or was entitled to them. There was no failure of consideration.

Plaintiff's Reply 67In reply, the Plaintiffs submit that the "cash for shares" proposal as asserted by the Defendant: (a) never reached the status of a concluded contract; and (b) the Defendant never sought to issue any shares, nor did it receive any shares appropriate to the monies advanced.

Approach to Determination of Existence and Terms of Any Agreement 68The Plaintiffs submit that the creation and terms of the agreement should be viewed in the light of the commercial reality existing at the time between the parties and the relevant individuals at the time. The Plaintiffs further submit that there is no evidence of an agreement to the effect alleged by the Defendant. 69Conversely, the Defendant submits that: (i)the course of conduct of all relevant parties; (ii)the prior history of cash for equity investments by Mr Cowan; and (iii)the terms and effect of the contemporaneous documents support the contention that the monies advanced were as an investment for shares not a loan. 70This, it is submitted, should be considered against the background of the details of "Monies subject of dispute", para 30 ff.

2005 Debt 71There is a subsidiary issue in relation to a 2005 debt as defined in the Statement of Claim. That has been resolved by consent orders made on the first day of the hearing. It is agreed that neither those orders, nor the settlement, has any relevance to the outstanding issues before the court on this hearing.

Preliminary Ruling: Admissibility of Documents 72At the outset of the proceedings the Plaintiff's counsel objected to: (i)the general ledgers of the Defendant and emails with Dr Kieronska; and (ii)the accounts and, in particular, the directors' accounts and ledgers as well as the documents giving rise to those accounts and ledgers on the basis those were not relevant and they did not constitute a business record. This was an objection strongly taken at the outset of the hearing. The ruling and submissions are set out in these reasons because the Plaintiffs submitted at the conclusion of the submissions that they did not regard the tender of any documents supportive of the 'loan' nature of the monies advanced as being relevant. There was no basis on which that attitude could be maintained. 73Mr Lynch for the Plaintiffs submitted that: (a)the general ledger and the email were not evidence of the content of the Holmes/Cowan conversation - even if they were admissible; (b)the documents did not, in any event, tend to prove an agreement to the effect alleged by the Defendant; and (c)the documents in any event, were not relevant. 74Mr Lynch further submitted that the statements are not shown to be based on representations made to Dr Kieronska. He submitted that the emails, even if they are records of the representations made, are not records of the truth of those representations by, for example, Mr Holmes. Nor, it is submitted, could they be relevant against Mr Cowan or the Plaintiff. Those company records, he submitted, are effectively second-hand hearsay of what Dr Kieronska recorded of what Mr Holmes said. Her understanding was based on the documents provided. Mr Lynch submitted she, Dr Kieronska, had no direct knowledge of the representations said to be contained or set out in those records and, accordingly, both the documents and the associated representations should be excluded. 75In reply, the Defendant relied on that evidence to establish that there was evidence of an agreement as to a share issue. The Plaintiffs disputed that and submitted that the documents should be excluded. That would mean that the Court would be left only with the evidence of Mr Cowan as well as the overall circumstances, both of which point to the monies advanced being a loan, rather than a cash for shares transaction.

Ruling 76I ruled that the documents were a business record pursuant to the provisions of s 69 of the Evidence Act 1995. I regard them - including the reconciliation document and emails (CB 344 ff) - as relevant to the substantive issue in the proceedings, namely, determining the existence of any agreement and the terms, nature and effect of any agreement. 77The fundamental guide to my ruling was that this provision of the Evidence Act should be interpreted liberally to assist the court in determining the reality of the issues. That should be done by simply and inexpensively proving relevant matters and considering relevant and contemporaneous business records which were not brought into existence for the purposes of the litigation. Both the inclusive and the exclusionary provisions of s 69 of the Evidence Act should be regarded as being of wide import and construed accordingly - see Lewis v Nortex Pty Ltd [2002] NSWSC 1083 (Hamilton J) at [43]. See also Thomas v State of NSW (2008) 74 NSWLR 34 at [44].

Nature of Records 78The affidavits of the Defendant's officers make it clear that the general ledgers and the loan entries in the company accounts and returns are, and were, part of the records of the company maintained for the purposes of the business of the company. 79Mr Solitario's evidence makes it clear that the information contained in the ledgers was acquired by him in the course of his duties as company secretary. His records were also based on information supplied to him both directly and indirectly - by Mr Holmes and, through Mr Holmes, Mr Cowan to Dr Kieronska - by a person or persons who might reasonably be supposed to have knowledge of the asserted agreement, its terms and effect. The records were contemporaneously made during 2003 - see affidavit of Mr Solitario 14/3/12 [16] ff. He also sets out the kind of documents which he prepared - see [19] - which were brought into existence and not for the purposes of these proceedings. 80The affidavit of Mr Johnsen (sworn 14 March 2012) in relation to, inter alia, the emails between Mr Holmes and Dr Kieronska as well as all the subsequent and related documentation are admissible on the same basis. 81They were internal records and seem to me to come entirely within the definition provided by Sperling J in Roach v Page (No 15) [2003] NSW SC 939. There is no attack on the validity of those documents, as I understand the position although there is on their accuracy and, consequently, reliability. 82In my view it is a matter of overwhelming inference that the effect of the representations - and the implicit nature of the advances made - were reflected in the company records: specifically, for example, the document headed "Reconciliation of Right Issue Shares" which records the monies advanced. Those are also all supported by the contents of the emails set out at CB 246 ff; 326 ff. There are minor errors as to amounts recorded but I do not regard those as significant: see below paras 123; 182 ff. 83The fact that the representation has been made by Mr Holmes - who was not an officer of Phyro - not by Mr Cowan - does not diminish the evidence. Documents prepared by the maker of a business record relating to what is said to him by another party in relation to the future management of the business are part of the Defendant's business records - see Australian Competition and Consumer Commission v Advanced Medical Institute Pty Ltd (No 2) (2005) 147 FCR 235 at 239 [25] - [27]. The representations referred to are the defendant's representations and in my view are both relevant and admissible: Gordon v Ross [2006] NSWCA 157 at [37]-[38]. 84The phrase "personal knowledge of a fact" is defined in s 69(5) in the same terms as the phrase "personal knowledge of an asserted fact" is defined in s 62(2). The fact that the person who made the representation in a business record is not an employee of the business does not necessarily lead to the conclusion that it was not made for the purposes of the business: Ringrow Pty Ltd v BP Australia Ltd (2003) 130 FCR 569 per Hely J at [12]. 85It is enough that the court is able to conclude, on the balance of probabilities, that the representation was made by, or on the basis of information supplied by, someone (not necessarily identified) falling within one of the alternative descriptions in s 69(2). Here I was so satisfied. 86As far as any residuary discretion I may have is concerned under s 135 of the Evidence Act, I should add that, from the documents I have seen, all those documents were, and are, consistent with the course of conduct between the parties and a cash for equity arrangement. They are consistent with the chronology of actions taken - including the preparation and maintenance of records - to meet the requirements of independent institutions such as the ASX. Further, none of the documents (accepting that they are the Defendant's documents) support the nature of the agreement as a loan agreement. 87The Plaintiff's documents - such as the loan assignments - are very much later in time and executed just prior to the commencement of the proceedings. They were also some two to three years (in 2008 and 2009) after the dispute about the nature of the monies advanced was first raised in the context of Director's discussions at a Board meeting at which Mr Cowan was present. 88In my view all relevant tests were satisfied. Accordingly, I admitted those documents and records. The question of weight to be given to those documents was noted as being a separate issue.

Evidence 89In addition to the documentary evidence, oral evidence was given at the hearing by: For the Plaintiff: Mr Roger Cowan (Affidavits affirmed 1 February and 11 April 2012) 90Mr Cowan agreed that in some respects he had changed his recollection of the matters in the first and second affidavits based on a review of the bank statements. 91Mr Cowan gave evidence that he had known Mr Holmes from about 2002 - about a year prior to the advance of the monies. He referred Mr Holmes to the Defendant as someone who was honest and who could assist as an underwriter in the float of the company. 92In cross-examination, Mr Cowan agreed that he was aware of his obligations as a director of companies to provide accurate statutory information - particularly of public companies - and continuing disclosure and compliance with other ASX requirements. At the relevant time he understood the distinctions between 'debt' and 'equity'. 93Mr Cowan gave evidence that he primarily dealt with the Defendant through Dr Kieronska and Mr Morley and that he was involved in the termination of the employment of Dr Kieronska and Mr Morley in March 2005. He disagreed that the parting was acrimonious. 94In 2006, the Defendant sued Dr Kieronska and Mr Morley for, among other matters, breaches of fiduciary duties, in the same Federal Court proceedings in which Hood Group were sued for the outstanding rights issue liability. Mr Cowan gave evidence that he was against the company's decision to commence litigation against Hood Group. 95Mr Cowan agreed that he was issued shares in May in accordance with an agreement for 12 cents per share. Mr Cowan stated he was uncertain of the date that the Hood underwritten rights issue closed and therefore whether the $80,000 payments in April were part of the rights issue. He stated he "did not really have any interest in the rights issue...fifteen cents was ridiculous" (Transcript p 89). 96Mr Cowan gave evidence that he did not recall signing any paperwork in relation to the other payment comprising the $80,000 investment. Nor was he certain with whom he discussed that investment. 97Mr Cowan gave evidence that the four June, July and September payments totalling $300,000 occurred after he went to Perth and saw the operation of the truck brake which was central to the new technology the Defendant wished to develop. His evidence at transcript page 92, lines 16-21, was to the effect that he could not remember when he was in Perth nor when the initial conversation with Mr Holmes took place, only that the conversation would have occurred before the first investment. 98Mr Cowan denied that the $300,000 advanced was an investment in shares. He said that each of the investments was made following conversations with Dr Kieronska or Mr Holmes. He agreed he made no notes of those conversations. He also denied that the record of Hood Group (CB 324) of 24 April 2003, showing Fingora as having promised to invest a further $150,000 in the Defendant was accurate. 99Mr Cowan agreed that there was no repayment of $250,000 when that was, on his evidence, a repayment to be made by mid-July 2003. The $300,000 was not repaid at any stage and certainly not by any of the dates which were said to be the dates for repayment in 2003. 100Mr Cowan denied that the record of the shares issued to Fingora as shown at CB 71 - 6 May 2003 - was accurate in terms of the classification of the 666,667 shares, in the sense that the description "shortfall allotment" did not correspond with his belief that he did not have anything to do with the rights issue and he, "wasn't really interested. It didn't matter what they called it, as long as I got my shares" (Transcript p 95-96, line 46). 101Mr Cowan gave evidence that after the dismissal of Dr Kieronska and Mr Morley, he had to run the company himself while a new board was formed. He agreed that he was unable to convince the new board of directors, constituted in late 2005, of any loan agreement. He confirmed that he had made no contemporaneous notes of any conversations with the previous directors about the loan. Mr Cowan gave evidence that he requested written confirmation regarding the loan agreement from Dr Kieronska, which he never received. He stated he did follow it up but not very conscientiously (Transcript p 107). 102Mr Cowan was cross examined about the undated letter sent to the ASX in which he stated that on 30 June 2003, he had arranged to pay Safe Effect Technologies the sum of $250,000 (CB 105). He did not agree that the letter was false, despite there being no arrangements to pay the sum on that date and the omission in the letter that the monies to be provided were a loan (Transcript pp 109-113).

Mr Cowan's Evidence: the New Investors 103Mr Cowan agreed that he prepared and sent out a document to a group of his family and friends in August 2003 as part of the overall commercialization strategy (CB 206). The document stated that "the company has no debt." Mr Cowan says he made a mistake in that document. He said he forgot that he was owed money - specifically, the monies said to be his loan to the Defendant. 104Mr Cowan gave evidence that he did not know that Hood Group had obtained a substantial amount of shares following the rights issue, simply that he was asked if he could help raise half a million dollars by this "special deal, which sounded like a fantastic deal" (Transcript p 120, line 11). He denied knowing at the time that Hood Group were seeking to sell some of the shares that they were required to take because of the rights issue shortfall and that the shares owned by Hood Group had been transferred to 3D Capital. 105Mr Cowan gave evidence that he became aware in late 2003 that the New Investors had not received their shares and began to receive complaints from some of them. 106He said that, as at February 2004, he believed he was due to receive 3,000,000 shares at 10 cents plus a 1,000,000 bonus issue but denied that he received those shares, in effect, on 20 April 2004. At that stage he did not want to accept the shares but knew the company could not pay him. He stated that the shares were transferred, not for him but for the New Investors. 107Mr Cowan's second affidavit at (CB 34 at [6.23]) states that Fingora transferred 3.8 million shares to the New Investors at a different price per share (5 cents per share). They were all off-market transfers. 108Mr Cowan denied that the 3.8 million shares were transferred out of a personal obligation to the New Investors, having been the person to "tip them into" the investment. He stated that he was given the shares for the purpose of distributing them. He said he was told by Mr Holmes that the transfers to the New Investors had to be made through him because Mr Morley and Dr Kieronska were concerned about a number of small investors getting off-market transfers at 5 cents. 109Mr Cowan signed a share transfer form (CB 219) of 3,969,228 shares from Safe Effect Pty Ltd to Fingora Pty Ltd as at 25 March 2004.

Share Transfer Form 110Mr Cowan says that he sent the transfer signed by him but blank as to various details. He says that the remaining details were inserted by someone else. He agreed in cross-examination that the date of 15 March 2004 must have been false. He gave evidence that the share transfer form was partially completed, signed, sealed and sent to Mr Holmes. He stated he wasn't aware of certain other content of the form such as the number of shares to be received. Mr Cowan said he did that at the request of Mr Holmes (Transcript p 134). Mrs Cowan was present at that time. 111Mr Cowan gave evidence that he saw the share transfer order form much later and only knew the number of shares issued to him, not their value. He stated that he shouldn't have received the 3.965 million shares but took them because Mr Holmes convinced him to take the shares. He stated he was expecting 3.9 million shares to be transferred at 5 cents to the New Investors.

Financial Statements 112Mr Cowan was cross-examined about the half-yearly financial statements for the period ending 31 December 2005, which were prepared in March 2006. These statements were being prepared to comply with ASX requirements. Draft accounts were prepared and given to Mr Cowan as a director. The half-yearly report that Mr Cowan signed omitted any loan or debt of $300,000. Mr Cowan said that he went through them "to some extent." There were discussions about amounts owing. Mr Cowan certified documents which set out amounts owing to him (CB 347). 113That was never accepted by the Defendant, nor its officers: see email of Dr Kieronska dated 4 December 2004 (CB 110). That is relied on as an admission by the Defendant of a loan arrangement. 114Mr Cowan was cross-examined about the minutes of meetings of the Defendant Board during 2006 at which he was present. The last page of the minutes of the meeting on 28 August 2006 (exhibit 6) sets out discussions at that date and at that meeting about Mr Cowan's claim. Mr Cowan was present. The minutes noted that: "It appeared that Hood Group has issued shares to Roger in satisfaction of the amounts deposited with the company." 115Mr Cowan says that he either challenged or clarified the assertions by an earlier note which was emailed - in particular, through exhibit 7.

Mr Kenneth Johnsen (Affidavit 14 March 2012 CB 294) 116Mr Johnsen's oral evidence was to the effect that he is now the Chief Executive Officer of the Defendant and has been since 12 September 2005. He was dealing with Mr Cowan as the Defendant's then Chairman up until March 2006. 117The company has consistently maintained its position that there is, and has been, no evidence of a loan by Phyro. Mr Johnsen told Mr Cowan at the meetings he had in 2005/2006 that there was no evidence of that loan. That is consistent with the body of emails at CB 115 ff. Further, that his advance was a cash for equity investment recognized by the issue of shares to Hood Group. 118Mr Johnsen's evidence was: "Q. Mr Blakely's reaction was to describe Mr Cowan's assertion as a remembered claim, wasn't it? ... "A. ... look, let's make it clear, we were dealing with Mr Cowan on almost a daily basis during January/February/March [2006] on the finalisation of the accounts where he was copied in on emails to and from the auditors about amounts outstanding about interest due on his other loans that we've not disputed. He was involved in every part of it at the board level and in general correspondence with...it came as a complete and utter surprise to Mr Blakely and myself that on the eleventh hour before signing off on the accounts Mr Cowan made the assertion for the 300,000. He had previously made the assertion for the 80,000 for the 2005, and we took that on board and we subsequently found evidence of that and we subsequently paid it..." (Transcript pp 248-9) 119Mr Johnsen was cross-examined to the effect that the shares issued to Hood Group were in its control as they were "not issued to the Plaintiff." His evidence was to the effect that, as far as the Defendant was concerned, the shares had been allocated to Hood Group. The actions - or inactions - of Hood Group were a matter between Hood Group and those it dealt with. All allocations to Hood Group by the Defendant were at the rate of 15c. What prices were applied to the transfer of those shares - for example, to Fingora - were matters for Hood Group. Further, what happened between Hood Group and Mr Cowan or the Plaintiffs (or Mr Cowan's companies) was also a matter for Hood Group and those parties or entities: not the Defendant. 120Mr Johnsen's evidence confirmed his - and the company's - documents and understanding to support the pleaded allegation in para 4(c)(ii)(C) and (E) of the Further Amended Defence. That included that the relevant 3,969,228 shares were transferred by Hood Group on 20 April 2004 at 12 cents in consideration for the payments by Mr Cowan. 121Mr Johnsen said that at the relevant times the ASX and other regulatory bodies were scrutinizing the Defendant's company books and records closely and regularly. Against that background there was no documentation of the loan asserted by Mr Cowan. The bank statements showed an advance.

Mr Claude Solitario (Affidavit 14 March 2012, CB 243 ff) 122Mr Solitario's evidence was that at the relevant times he was the company secretary for Safe Effect and then Advanced Braking. He was part-time, effectively - usually working about three days per week. His affidavit sets out his understanding of the fund-raising efforts by the Defendant, the underwriting of the rights issue, the shortfall of funds and subsequent actions. He was responsible for documentation relating to share issues. 123Mr Solitario's affidavit and exhibits set out the documents, records and ledgers he prepared and maintained. That included the document "Reconciliation of Rights Issue Shares" (CB 246) which sets out in the Defendant's comparable records, the receipts of the relevant monies and the allocation of shares to either Mr Cowan or Fingora. He was recording matters on the basis of primary records of what he was told - particularly by Dr Kieronska (transcript 197-205). It is accepted by Mr Pike SC that some of his details were in error as to the share price and amounts (see below). However, those errors do not affect the essential point of his evidence, namely, that he was recording what were advances for shares. 124In his cross-examination, Mr Solitario agreed that the failure of the rights issue and related public listing matters were a significant blow to the operation of the Defendant. He was aware at, or shortly after, 28 April 2003 of the shortfall of the underwriting. That becomes relevant to the state of knowledge of Mr Solitario and other of the Defendant's officers from 2 May 2003 and subsequently. 5 May 2003 was the date on which the Defendant announced it had completed its share rights issue allotment. 125Thereafter Phyro made the advances set out at CB 246. That document was prepared over the period of December 2003 to January 2004. It was sent to the auditors on 15 January 2004. No share scrip or certificates were issued. Mr Solitario had no firm explanation of why that did not happen - even through it was normal practice for shares to be issued, usually within 48 hours of the receipt of funds. 126That is answered by Mr Pike SC on behalf of the Defendant by the submission that the document clearly showed that the relevant scrip was issued and that the evidence of his witness, Mr Solitario, was wrong in that respect. (Transcript 23.05.12, p 211-12; 24.05.12, pp 2) 127Mr Solitario detailed those of the background conversations he could recall with the other company officers, especially Dr Kieronska. The cross-examination was conducted on the premise that the Defendant and its officers were so concerned about the absence of capital and the under-subscription of the float, that that concern effectively led them to prepare the company records and ledgers on that basis. That does not appear to have affected the Defendant's witnesses.

Plaintiff's Alternative Submission 128The Plaintiffs submit in the alternative, that, even if there was a legally binding agreement to take shares in lieu of cash, it has never been performed by the Defendant. That non-performance to convert any agreement for the cash advance being a purchase of shares, entitles the Plaintiffs to the sum of $300,000. The share allocation was not received in satisfaction of the monies but rather as part of a separate arrangement between Mr Cowan and the New Investors. 129Fingora did not receive those shares for itself; they were received by it for a distribution to a number of persons introduced to the Defendant by Mr Cowan in around August 2003 (the "New Investors"), Mr Cowan having been asked by the Defendant to further assist it to raise (further) funds. 130If no specific terms for the $300,000 transactions are proved, the Plaintiffs submit that, because they were not a gift, it should be inferred that those funds were loans. It is submitted further that the inference arises independently of Mr Cowan's evidence. 131Further, that the 'cash for shares' categorisation of the loan was first raised as a defence on 11 May 2012. Counsel criticises that amendment as being an opportunistic attempt to exploit the circumstance that, on 20 April 2004, Fingora became the holder of 3,969,228 shares. It is unclear to me how that submission can be maintained in the light of, at least, the Defendant's Board minutes of August 2006. 132Conversely, the Defendant submits that the categorization is not only accurate, it was also what was intended by the parties and evidenced in the documents at all relevant times.

Inferences Sought to be Drawn: Jones v Dunkel Submissions 133Against the background of the evidence given, each party submits that a Jones v Dunkel inference ought to be drawn against the other side based on the absence of evidence which could have been anticipated. 134The Plaintiffs submit an inference should be drawn against the Defendant by virtue of its failure to call Mr Holmes. It also refers to the absence of evidence given from Dr Kieronska. 135The Defendant submits there is no obligation on it to call Mr Holmes. Mr Holmes, it submits, is, and was, in Mr Cowan's 'camp'. It is clear that there has been litigation between the Defendant and Hood Group. 136Mr Pike SC also submits that all the documents and evidence required to establish the agreement have been produced and that the Defendant's case is not dependent on Mr Holmes. 137The drawing of a Jones v Dunkel inference depends on the closeness of the relationship of the absent witness with the party who did not call him: Hospitality Group Pty Ltd v Australian Rugby Union Ltd [2001] FCA 1040; (2001) 110 FCR 157 at [64] per Hill and Finkelstein JJ. See also Cross on Evidence 6th Australian edition (J D Heydon, 2000, Sydney: Butterworths) at para 1215. "The significance of the inference depends on the closeness of the relationship of the absent witness with the party who did not call the witness". 138Mr Holmes and Hood Group were involved in the crucial issues of the transfer of 3,969,228 shares to Fingora on 20 April 2004. On Mr Johnsen's evidence, those shares were transferred from Hood Group to Fingora in the Computershare Records - see his affidavit (CB 295A at [22]) and the Computershare records (CB 71). They were referred to as "shortfall shares."

Absence of Evidence: Dr Kieronska 139Mr Cowan was involved in the termination of the employment of Dr Kieronska in March 2005. The Defendant sued Dr Kieronska thereafter in the Federal Court for breach of fiduciary duty. 140Similiarly, Mr Cowan relies on a conversation he had with Dr Kieronska in July 2003. Mr Cowan's account is that he was told by her and he knew that the ASX required a document stating that he had arranged to pay $250,000 on 30 June 2003. Mr Cowan argues that letter was not misleading and maintains it was not false. What is clear is that the letter omits any reference to a debt. In the context where Mr Cowan says that he was seeking documentation/confirmation about a loan, it would have been an opportunity for him to state his position. 141Mr Cowan further relies on the conversation with Dr Keironska and Mr Morley in November 2004 (Affidavit of Roger Cowan affirmed 1 February 2012, para 4.12) in which it is agreed that Mr Cowan would receive 4 million shares after they were received from London Partners. 142It is submitted that it must have been clear to him that he would not have been able to make the payment of $250,000. Nothing was said in that letter that the amount involved was a loan. Mr Cowan agreed he could have written a letter confirming the money advanced was a loan. 143Mr Cowan's affidavit of 1 February 2012 (CB 26 at [4.13]) says he was provided with a reconciliation of the shares owing to Fingora on 4 December 2004 by Dr Kieronska. He said it did not make any sense to him at [4.14]. It is submitted it must have been clear to him that it was a true reflection of his shareholding at the time. 144Not only has Dr Kieronska died but I am not satisfied on the material to which I have been taken that any evidence she could have given would have been adverse to the Defendant. 145In submissions Mr Lynch has placed great weight on the fax from Mr Cowan to Dr Kieronska of 6 February 2004. He submits that there is no evidence of any response. Even if that is correct, that of itself does not constitute an agreement that the monies advanced constituted a debt. 146I do not consider the evidence such that it can support either a finding or an inference that Mr Cowan and Dr Kieronska agreed that Phyro would loan the Defendant $250,000 nor a subsequent variation to loan an additional $50,000.

Conclusion: Plaintiff's Submissions on Jones v Dunkel Issue 147I consider that proper evidence has been led as to why Mr Holmes and Dr Kieronska did not give evidence on behalf of the Defendant. I do not accept that a Jones v Dunkel inference can be drawn against the Defendant by virtue of the fact that neither Dr Kieronska nor Mr Holmes gave evidence on its behalf nor that any relevant matters should have been led as to the late Dr Kieronska's actions or conversations.

Dr Kieronska 148Dr Kieronska was a senior executive of the Defendant who was removed from the Defendant - to Mr Cowan's knowledge - in March 2005. There was Federal Court litigation in 2006: Exhibits 2A and 2B. 149In Claremont Petroleum NL v Cummings (1992) 110 ALR 239 (per Wilcox J) it was held that a former director is not necessarily regarded as being within 'the camp' of the relevant company. See also Shum Yip Properties Development Co Pty Ltd v Chatswood Investment and Development Co Pty Ltd [2002] NSWSC 13; (2002) 166 FLR 451; (2002) 40 ACSR 619 at 631-632. 150In my view there was no obligation on the Defendant to call evidence- other than that which is already before the court - in relation to Dr Kieronska or to explain documents with which she was involved or which recorded what she said.

Absence of Evidence: Mr Holmes 151There is a separate issue as to whether an adverse inference can be drawn against the Plaintiff. That arises from the fact that Mr Holmes did not give evidence nor did any officer of Hood Group in relation to the transfer of shares received by Fingora and which were the shares it had received for which investors. 152Crucial to the corroboration of Mr Cowan's evidence is the assertion that he had a series of conversations with Mr Holmes (CB 22 at [3.7] - [3.9] ff) when the monies advanced were referred to as loans. Those conversations are strongly disputed. 153The absence of evidence by Mr Holmes or Hood Group leaves a real lacuna in the evidence about this crucial issue of the understanding on which the monies were advanced. It was pleaded specifically - see para 4(C)(ii)(E) of the Further Amended Defence filed 21 May 2012. Even though that is a late amendment, it is clear that that has always been a central part of the dispute between the parties. Absent such evidence from Mr Hood, the conversations said to have taken place between Mr Cowan and Mr Hood are inconsistent with a loan having been made. 154That evidence could - and should - have addressed the issues about the difference in the share price (of either 15 cents or 12 cents per share) and the corresponding discrepancies in the number of shares transferred. 155Here, there is on the evidence, a good and continuing relationship between Mr Cowan and Mr Holmes. Mr Cowan has maintained contact with Mr Holmes and last spoke to him about a week prior to the hearing. His practice in about 2006 was to speak to Mr Holmes very frequently, sometimes daily (transcript pp 81-83). Mr Cowan was aware of litigation between the Defendant and Mr Holmes in the Federal Court from March 2006. There was a falling out between the Defendant and Mr Holmes as far back as 2003 (Transcript p 81). There is no reason advanced why Mr Holmes was not called in the Plaintiff's case other than the Plaintiff's loss of a right to cross-examine him.

Conclusion: Defendant's submissions on Jones v Dunkel Issue 156In my view it is appropriate that a Jones v Dunkel inference be drawn against the Plaintiffs in terms of the absence of corroborating evidence from Mr Holmes or an officer of Hood Group. 157On the evidence I find that Mr Holmes could be expected to have given a relevant and accurate complexion on the relevant facts. I infer that Mr Holmes' evidence would not have assisted the Plaintiff, in particular, as to whether the monies advanced were a loan or not. 158That evidence could be anticipated to have included the discussions between Mr Cowan and Mr Holmes about the basis on which Mr Cowan's cash advances were made, the conversations which occurred, the documents exchanged and the circumstances surrounding the absent share transfer date. In that regard I note also that Mrs Phyllis Cowan was not called, notwithstanding that she was present at the time the share transfer forms were completed and she signed the share transfer form (Affidavit of Roger Cowan, 11 April 2012 CB 34). 159On the evidence there were two dates placed on the document which were said to be either incorrect or false: the date of the alleged transfer and the date of execution by Hood. In the absence of evidence by Mr Holmes (see findings at para 193 ff) I infer that the transfer was executed by Hood on 15 March 2004 with the details of the shares to be transferred was the consideration. It was then sent to Mr Cowan for execution on behalf of Fingora - the document shows it was executed on 25 March 2004. 160I do not accept Mr Cowan's evidence in this regard, specifically, that the 3,969,228 shares were to be received for the New Investors and not Fingora. 161The absence of evidence from Mr Holmes also becomes crucial given the importance attached to the conversations and arrangements between Mr Cowan and Mr Holmes. The evidence of the loan alleged is based on the conversation between Mr Cowan and Mr Holmes set out in Mr Cowan's affidavit of 1 February 2012 at 3.3 and as set out above: para 152 ff. It is submitted that Mr Cowan was an honest and credible witness. Further, it is submitted that there should be no reliance on the Defendant's documents to the extent they are inconsistent with Mr Cowan's evidence. 162The Plaintiffs allege that the $300,000 was provided pursuant to the request by Dr Kieronska for a request for a loan. Further, if a loan is found to exist, then the Plaintiffs submit that the onus shifts to the Defendant to provide a repayment or discharge - Young v Queensland Trustees (1956) 99 CLR 560 at 562; 569-570. 163The onus rests on the Plaintiffs to establish that there was an extant loan. The nature of that advance as a loan is disputed and is inconsistent with the documentation.

Consideration 164Here the position of the parties is diametrically opposed. There is a clear conflict between the accounts and recollections of each side as well as the documentation relied on by each side. There are three relevant matters of transactions: (i)the advance of monies; (ii)the issue of shares and the relevant scrip; and (iii)whether there was an agreement in relation to the monies advanced and, if so, the effect and terms of that agreement and the purpose for which the monies were advanced.

Approach to be Adopted 165Absent any formal document specifically creating the agreement between the parties - and here there is no formal agreement as to the monies advanced - the matter needs to be considered against the background of: a)The evidence of the parties; b)The contemporaneous documents; c)The course of conduct between the parties; and d)Relevant aspects of the evidence and chronology - particularly as those are referable to the actions and requirements of other institutions which were either auditing or investigating the records of the Defendant. 166In terms of the evidence of the conversations relied on, it is clear that the majority of those conversations took place in 2002 - 2003, almost ten years ago. Mr Pike SC submits that, in those circumstances, the contemporaneous documentation and objective conduct provides the most reliable guide to the Court as to what occurred. He relies on Watson v Foxman (1995) 49 NSWLR 315 at 319 per McLelland CJ in Eq.; Aneve Pty Ltd v Bank of Western Australia Ltd [2005] NSWCA 441 at [49] per Hodgson JA; McMurtrie v Commonwealth [2006] NSWCA 148 at [5] per Hodgson JA. 167The precise formulation by McClelland CJ at CL at [319] ff is that: "...ordinarily the degree of the fallibility of human memory increases with the passage of time, particularly where disputes or litigation intervene and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said." and "In the absence of reliable contemporaneous record or other satisfactory corroboration, these consideration can pose serious difficulties of proof for a party relying on spoken words as the foundation of a cause of action..."

Findings as to Witnesses 168In those circumstances, I then turn to the evidence of Mr Cowan. 169Mr Cowan was an investor and experienced businessman who had been Chief Executive Officer and Secretary/Manager of the Penrith Panthers Rugby League Club. That was a large enterprise which would have required him in that position to have considerable financial experience and knowledge as to the reality of the nature of his investment. Mr Cowan is clearly an astute and intelligent individual, who was, and is, well aware of the nature of the transactions in which he was involved. He was involved in a high-risk/high profit venture where there was a need for a considerable financial injection at the relevant time. 170Mr Cowan introduced either Mr Holmes or the Hood Group to the Defendant as the person or entity who would be involved in the underwriting. He persuaded a number of members of his family and friends to invest in the technology enterprise being pursued by the Defendant. 171What is also relevant in terms of the background at the relevant time is the difficult financial situation of the company and the motivation there would have been for Mr Holmes to try to diminish Hood's liability by selling shares. Securing a loan for the company would not necessarily have assisted Holmes with his large shortfall liability. Mr Cowan must have known the function, responsibilities and potential liabilities of someone such as Mr Holmes in that position. 172For someone with Mr Cowan's commercial experience, it is to be noted that he did not, at any contemporaneous time, follow up the advance of monies with any confirmatory documentation as to what he asserted to be the essential loan nature of the monies. 173This is apposite given that Mr Cowan has recorded a series of detailed conversations with corporate officers over a period of months and going back to 2003. His recollections were not assisted by contemporaneous notes or records and, in some areas, were in clear conflict with the contemporaneous documentation. For example, in the document (CB 206 ff) he prepared and sent out to attract investment in the Defendant, he stated that "the company has no debt. The only creditor of any size is its solicitor." Mr Cowan did recollect this statement - in evidence he said at the time he forgot that the debt was owed - transcript p 118, line 2. 174There is a fax from Mr Cowan as at 6 February 2004 asserting a loan on that date and after the amounts were advanced he asserted that he loaned "the company without security $300,000" (CB 108). I have dealt with that earlier: paras 60; 145. 175There are also some conflicts between his two affidavits which set out his recollection and those areas have been the subject of extensive cross-examination. I did not, and do not, regard his explanations of those areas of conflict as convincing - for example CB 136; 142-3. In some areas he was reluctant to accept that his presence at meetings as a director indicated knowledge or awareness of the contents of the meetings and action taken such as relevant certification that there was no recording of the loan he alleged was then in existence.

Evidence: Mr Johnsen and Mr Solitario 176That interpretation is also inconsistent with the favourable impression I had of the veracity of both Mr Johnsen and Mr Solitario. 177Mr Johnsen was fully aware of the nature of the claim going back to 2005/early 2006. He had been involved in various corporate/public company offices for 26 years and was, and is, fully aware of his statutory obligations for reporting and documentation. He, Mr Johnsen, was in a difficult position in that his then superior, Mr Cowan, was asserting a loan which he, Mr Johnsen, could see no evidence to support. Mr Johnsen and the other relevant company officers maintained that view and carried out an investigation of the relevant documents and assertions. 178Mr Johnsen said he was only prepared to recognise or accept a debt of that magnitude if there was written evidence to support it. That was a proper and appropriate attitude for the Chief Executive Officer of a public company. It is consistent with the view I take as to Mr Johnsen's veracity. Certainly the correspondence and communications of Mr Johnsen postdate the events relating to the allowance of the $300,000. However, his consistent position - and that of the Defendant - was to deny the existence of a loan. 179I accept the evidence of both Mr Johnsen and Mr Solitario (affidavits CB 243 ff) that the recording of loans and loan agreements was an important requirement for reporting, disclosure and statutory compliance reasons. It is also clear that loans, if made, would have been reflected in the company's financial statements. I also accept Mr Solitario's evidence that he was never aware of any suggested loans by, or from, Mr Cowan either directly or as a result of conversations with others. 180I do not consider the attack on Mr Johnsen and Mr Solitario - to the effect that there was a systematic and calculated drafting and circulation of a set of corporate records and documents to retrospectively fit the prior situation - has been made out to the relevant standard. Such an attack is a serious allegation to be made against such officers with other implications. The underlying premise is inconsistent with at least some of the subsequent documents - eg CB 225 ff - where Mr Johnsen at least was concerned about the proposals Mr Cowan had made about the payments. 181The evidence of the Defendant's officers is supported by the reconciliations as to the rights issue (CB 246). That reconciliation was part of a proper and expected audit and accounting requirements, particularly where a public company was involved. 182That cash for equity arrangement is consistent with the contemporaneous documents - specifically the general ledgers - prepared by Mr Solitario for audit and reporting purposes. There are some errors in those records. In particular, the running internal records of the amounts paid - see CB 327 ff. They were not, in my view, errors of substance and were consistent with attempts being made to record the amounts received and the entities from which those amounts had been received. They were certainly not errors or alterations done to falsify the true position. Nor do I accept the submission that, because there are some errors in those records, I cannot rely on them or that I should prefer Mr Cowan's account. 183I also accept the evidence of Mr Johnsen which is supported by the relevant payment schedules (CB 299; 300; 301) which consistently refer to "share/options arrangements" against the list of payments made. 184Specifically, I note that (CB 404) where there are recordings of loans to Mr Cowan the relevant figure of $300,000 is recorded under the heading of "Changed to convertible note" That was part of the half-yearly report by Safe Effect as at 31 December 2005 at a time when Mr Cowan was, and was shown as, the Executive Chairman of Safe Effect. He signed off on the Director's report (CB 385) with that annexure (CB 404). 185Further, that investment was recognized and embodied in the allotment of 3,969,228 shares. There is a relatively minor discrepancy in the number of shares allotted and the amounts advanced. However, as submitted, I consider that discrepancy is a matter between Phryo and Hood Group/Mr Holmes. In my view that is a proper submission.

Documents Inconsistent with Loan 186Further, Mr Cowan's recollection of his advance being, and being said to be, a loan is inconsistent with: (i)The prior dealings in 2001 and 2003 substantially involved equity investment on a similar financial arrangement between Fingora and Phyro. There had been a clear prior course of dealings between Mr Cowan and the Defendant whereby monies ([$358,750 in 2001 and] $80,000) had been advanced as part of a series of equity investments. Shares were issued to Mr Cowan or his companies - such as Fingora - in consideration of the monies advanced. There was nothing in the way of documentary evidence which supports the classification of this particular course of advances as being set apart, or as being differently regarded, from the earlier equity investments. (ii)The Defendant's general ledgers contain no reference to the loan, nor do the annual reports for 2003 of the Defendant - nor, I infer, do the relevant reports of either Fingora or Phyro for either 2003 or 2004. (iii)The assertion of the debt is inconsistent with Mr Cowan's statement in August 2003 that the company was debt free (CB 206-207). (iv)There is no subsequent documentation on the records of the Defendant which I find supports the loans: neither the Board minutes, the internal email correspondence, the annual reports, nor supporting documentation. I do not regard the alteration to the spreadsheet of Mr Solitario as being other than consistent with an updated running record for a public company. (v)The letter from Mr Holmes to Dr Kieronska of 24 April 2003 (CB 324) made it clear that Hood was allocating shares to Fingora for $150,000 advanced by 2 May 2003. That was relevant to the amounts advanced by Mr Cowan which were ultimately expanded to $300,000. If that was not an accurate interpretation or inference, it was incumbent on the Plaintiffs to call evidence from Mr Holmes to refute it. That did not happen. 187By contrast, the documents on which the Defendant relied were all either contemporaneous and independently verifiable or consistent with the Defendant's case.

Issue of Share Scrip 188The second category of relevant documentation is the share scrip issued to Hood Group which, on the Plaintiffs' submissions, raises the related issue of the absence of share scrip or, if share scrip was issued, why those shares were not transferred to Fingora or Mr Cowan. 189I find that the evidence establishes that the shares relevant to the monies advanced were allocated to Hood Group. Why those shares were not then allocated to the either Fingora (or Mr Cowan) is unclear on the evidence called by the Plaintiffs. The Plaintiffs bear the onus in establishing the failure of consideration as between the Defendant and Mr Cowan/Phyro/Fingora. That has not been made out. The allocation of shares was the consideration for the monies advanced. What happened to those shares was the responsibility of Hood Group.

Findings: Conversations and Transactions 190I find that the conversations between Mr Cowan and Dr Kieronska in early June 2003 were to the effect that there would be an investment by Mr Cowan in the Defendant through a purchase of shares through Hood Group on a cash for equity basis in the sum of $250,000. I find that that amount was increased by a further $50,000 in the conversation of 19 September, 2003. 191I find that that arrangement was a continuation or part of the share subscription arrangement then being underwritten by Mr Holmes through Hood Group. That involvement of Mr Holmes had been initiated by Mr Cowan. Mr Cowan's conversations with Mr Holmes were in the context of the raising of capital for equity. Mr Cowan was fully aware of the float of the company, the prospectus which had been issued and the capital requirements of the proposed company. The Defendant and its officers said that - and were entitled to regard - what Hood Group did as its concern: not the Defendant's. 192Mr Cowan had signed off on the financial statements which were prepared at the relevant time, including the Half Year report to 31 December 2005, which was finalised in March 2006. 193To the extent that there was any such conversation or arrangement with Mr Holmes, there is no evidence from him or anyone from Hood Group. The same matter arises in relation to the share scrip issued to Hood Group and the related issue of why those shares - if outstanding pursuant to an agreement between Hood Group and Mr Cowan - were not transferred to Fingora or Mr Cowan. 194Absent any evidence to the contrary, evidence as to any such agreement could have been called by the Plaintiffs and was not. Mr Cowan had and has been in frequent contact with Mr Holmes. The Defendant and Hood Group had been in litigation. Mr Cowan opposed the litigation against Mr Holmes (CB 223). 195In the circumstances I infer that any such evidence which could have been given by Mr Holmes or Hood Group would have been adverse to the Plaintiff. Absent Dr Kieronska, Mr Cowan's evidence would need to have been supported by Mr Holmes. 196The Defendant's evidence is also consistent with the exchange of emails from Mr Holmes and internally within the Defendant company in June 2003 which record the basis on which the monies advanced were to be treated and the shares allocated - see (CB 328A; 329A). 197Mr Lynch has referred me to a number of documents - for example, the email from Mr Cowan to Dr Kieronska - of February 2004. Not only was that conversation after the date of the advance of the monies, it does not record Dr Kieronska's response which, in any event, must be viewed against the background of the rest of the correspondence and records. 198Those were inconsistent with the company and its officers regarding the monies advanced as a loan. 199Similarly, I do not regard the letter sent by Mr Cowan to the ASX on 1 July 2003 as either conclusive or corroborative of a loan as urged by Mr Lynch. That simply records there was a payment made.

Agreement 200I find that the agreement was constituted by: (i)the conversations between Mr Cowan and (ii)the course of conduct by Mr Cowan and the Defendant consistently with the pleaded agreement as pleaded in the Further Amended Defence. 201The terms of agreement were that the monies would be advanced by the Plaintiffs and accepted as part of a cash for equity investment, the consideration for which would be - and was - the allotment of shares. I do not consider that the evidence is such as to warrant a different view of the monies advanced - as was suggested - that it was not part of the share subscription being underwritten. 202The documents to which I have been taken and relied on by the Defendant are consistent with the cash for equity agreement relied on and not a loan agreement. The chronology of the various documents and actions when viewed against the background of my findings as to credit and the evidentiary findings are also consistent with the Defendant's case. 203Conversely, I do not regard the documents advanced as consistent with the loan agreement alleged by the Plaintiff. Nor do I regard the totality of the evidence being such as to warrant an inference that the funds advanced were loans.

Subsequent Board Minutes and Records 204Subsequent Board minutes (inter alia) acknowledged that the company would have difficulty in recognizing any Directors' claims not recorded in the company's financial records as at 31 December 2005. A similar situation arises from the subsequent minutes of 24 April 2006 (CB 231). 205Mr Cowan did not accept that the position was as set out in the relevant Board minutes (Minutes of meeting 28 March 2006, CB 142-143). Mr Cowan said those minutes were "very suspect." However, he took no steps to rectify or correct them other than by sending out the clarification email set out in exhibit 7 on or about 17 August 2006. 206Mr Cowan had been the Executive Chairman of the Defendant from late 2004 and remained in that position until August 2006. He clearly had responsibilities in relation to the certification of documents and particularly financial documentation on matters where, equally clearly, he had an interest. Later minutes need to be viewed against the background of emails set out at CB 116 ff. as well as the absence of any correction of the minutes of the meeting which Mr Cowan had certified as correct. 207There was a subsequent file note of 15 August 2006 (exhibit 4) an email arising (exhibit 5) and a subsequent Board meeting on 28 August 2006 (exhibit 6). The monies advanced were not recorded in the Defendant's books as a loan - even at the time when Mr Cowan was the Executive Chairman of the Defendant.

Assignment of Alleged Debt 208Mr Lynch for the Plaintiffs then refers to the Notices of Assignment of Debt as evidence of documents said to support Mr Cowan's classification of the monies as a loan. 209I note that the advances occurred about two to three years prior to the assignments of debt on which the Plaintiffs rely. 210The various assignments of the debts said to be loan agreements occurred after the relevant date namely 23 April 2009 and 15 June 2009 and just prior to the filing of the first statement of claim (23 December 2009). By then (ie., by mid 2009) it was clear that there were very real financial problems with the Defendant's enterprise and disputes about respective liabilities. The Notices of Assignment were met with clear and immediate denials of the existence of the debts alleged (CB 177). 211Those assignments of what were asserted to be debts in 2008 and 2009 were clearly made against a background of the discussions that there had been at Board level and between Mr Cowan and the various company officers. They were immediately denied (CB 177). The Defendant's counsel has also noted that those assignments were not pleaded.

Absence of Documentation Classifying Monies as a Loan 212I accept the evidence of Mr Johnsen and Mr Solitiario - except that part of the evidence of Mr Solitario in relation to the non-issue of shares. I find that there was a share allocation by Hood Group to Fingora of shares concerning virtually all of the monies advanced by Fingora. What slight discrepancy there was in the relevant allocation was not such as to mean the allocation was relevant or appropriate to any other advance. 213On the material before me I see no reason why, had the advance been a loan, it would not have been so recorded in the Defendant's accounts at the time. There was nothing to be gained by the Defendant in wrongly or fraudulently recording or classifying the monies advanced. That is particularly the case given the auditing requirements to which the Defendant was subject.

Agency 214Agency by Hood Group was not pleaded and was strongly disputed. The Plaintiffs during final submissions did not proceed with this ground in the ultimate event. I do not consider that the evidence as it was (see CB 274 letter from Mr Holmes; CB 203, Exhibit 8 and CB 325) was such that a plea of agency by Hood Group on behalf of the Defendant could be maintained. At the time of the shortfall on the rights issue, the shares went across to various entities. The fact that the Defendant's consent was required to that issue or transfer did not raise the issue of agency. The letter from Hood Group of 5 may 2003 (CB 325) to the Defendant does not confirm an agency arrangement. These shares did not remain in the control of the Defendant; they were not to be transferred out until all the subscription monies had been received by the Defendant. 215I do not find that the assignments of debt in 2008 or 2009 were such as to create any rights or entitlement in the Plaintiffs against the Defendant nor to vary or alter the nature of the monies advanced as far as the Defendant was concerned.

Conclusion 216I do not accept the evidence of Mr Cowan that these particular monies were advanced as a loan rather than an equity investment. In particular, I do not accept his account of the conversations with both Mr Holmes and Dr Kieronska. I make that finding based on matter set out above including his oral evidence and the conflict between his evidence and the contemporaneous documentation. It also follows my comparison of relevant evidence by him and by Mr Solitario and Mr Johnsen set against the relevant agreed facts and all the background. 217I do not accept the evidence advanced by the Plaintiffs and, where there is a conflict, I prefer that of the Defendant. I find that the $300,000 advanced was on the basis that it was to be an investment in the Defendant for the consideration of the issue of shares. That issue has substantially occurred. To the extent that there is a discrepancy, or that that has not been affected by Hood Group to the Plaintiffs, that is a matter between Phyro/Fingora and Mr Cowan. 218The Plaintiff's amended statement of claim should be dismissed.

Costs 219The parties accept that costs should follow the event. I will reserve liberty to the parties to re-open the issue of costs should there be any other matters which should be brought to the Court's attention now these those reasons have been delivered.

Orders 1.The Plaintiff's Statement of Claim is dismissed. 2.Verdict for the Defendant. 3.Plaintiffs to pay Defendant's costs on the usual basis to be agreed or assessed. 4.Leave reserved to the parties to make a further application on the issue of costs. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 06 September 2012