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

MSPR Pty Ltd and Phyro Holdings Pty Ltd v Advanced Braking Technology Ltd - [2012] NSWDC 140 - NSWDC 2012 case summary — Zoe

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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".

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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.

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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.

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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).

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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Judgment (55 paragraphs)

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Cases Cited (19)