Instructed by: Mallesons Stephen Jaques, Sydney

Counsel for the Defendants: Mr. T.E.F. Hughes QC,

Mr. P. Hely QC, Miss R. McColl SC, Mr. J. Halley

Instructed by: Allen Allen and Hemsley, Sydney ORDER Orders made JUDGE1

1. INTRODUCTION HODGSON J: On 21st October 1988, the first plaintiff, Standard Chartered Bank Australia Limited (which I will call "SCBAL" or "Standard Chartered"), agreed to make available to Giant Resources Limited (which I will call "Giant") a bill acceptance/discount facility of $30 million, and this was drawn on progressively by Giant over the ensuing months. On 31st March 1989, by which time $30 million was owing by Giant to SCBAL under the October 1988 facility, SCBAL agreed to extend its facility to 30th June 1989. On 1st June 1989, pursuant to this facility, bills of exchange totalling $30 million and payable on 30th June 1989 were drawn by Giant and discounted by SCBAL, the proceeds (about $29.6 million) being used (together with about $400,000.00 provided by Giant) to pay out bills previously drawn and discounted under the facility. On 30th June 1989, Giant did not repay the $30 million which then became due to SCBAL under the bill/discount facility and the bills drawn on 1st June 1989, and SCBAL (pursuant to a term of the facility) opened an overdraft account of $30 million in the name of Giant. On 25th July 1989, SCBAL agreed to make available to Giant an overdraft facility under which the $30 million was repayable on demand after 31st August 1989, and in any event on 31st December

2. Interest was paid on the overdraft up to and including October 1989, and about $3.4 million was paid in reduction of principal in August 1989. However, no further payments were made; and on 27th April 1990, proceedings were commenced for the winding up of Giant, and a provisional liquidator was appointed. Giant was ordered to be wound up by the Supreme Court of Queensland on 27th June 1990.

3. In these proceedings, SCBAL claims that three directors of Giant, namely Sir Tristan Antico (who I will call "Antico"), Desmond Quirk (who I will call "Quirk") and Gregory Gardiner (who I will call "Gardiner") are liable to pay SCBAL about $26.6 million plus interest, and/or damages arising out of Giant's failure to pay these amounts. Similar claims are made against Pioneer International Limited (which I will call "Pioneer"), and Pioneer International Finance Limited (which I will call "PIFL"), which SCBAL claims to have taken part in the management of Giant and to be directors of Giant within the definition in s.5(1) of the Companies (Queensland) Code (which I will call "the Code"). These claims are brought on two main bases: first, s.556 of the Code, in relation to debts alleged to have been incurred by Giant on 31st March 1989, 1st June 1989 and 25th July 1989, in circumstances where there were reasonable grounds to expect that Giant would not be able to pay its debts as they fell due; and second, ss.52 and 75B of the Trade Practices Act, in relation to alleged misleading conduct concerning the financial position of Giant and/or knowing involvement in such conduct. SCBAL also claims against Pioneer and PIFL on the basis of negligent advice concerning the financial position of Giant.

4. There is also a claim in these proceedings brought by the second plaintiff, Standard Chartered Australia Limited (which I call "SCAL"), arising out of a Deed of Indemnity and Guarantee entered into by Giant on 25th January 1989, by which Giant guaranteed certain obligations of Torres Strait Gold Pty. Limited (which I will call "TSG"), amounting to about $US7.5 million or $A9.9 million as at 25th January 1990. (Generally, money will be given in Australian dollars unless stated otherwise.) SCAL claims $9.9 million (plus interest) under s.556 of the Code, on the basis that the debt was incurred on 25th January 1989 in circumstances where there were reasonable grounds to expect that Giant would not be able to pay its debts as they fell due. This claim is brought only against Antico, Quirk, Pioneer and PIFL, because Gardiner was not a director of Giant until February 1989.

2. LEGISLATION AND ISSUES 2.1 Companies (Queensland) Code Section 556
3. Section 556 of the Code was at material times in the following terms: "556(1) If -

(a) a company incurs a debt, whether within or outside the Territory,

(b) immediately before the time when the debt is incurred

(i) there are reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due; or

(ii) there are reasonable grounds to expect that, if the company incurs the debt, it will not be able to pay all its debts as and when they become due; and

(c) the company is, at the time when the debt is incurred, or becomes at a later time, a company to which this section applies,

any person who was a director of the company, or took part in the management of the company, at the time when the debt was incurred is guilty of an offence and the company and that person or, if there are 2 or more such persons, those persons are jointly and severally liable for the payment of the debt.

Penalty: $5,000 or imprisonment for 1 year, or both.

(2) In any proceedings against a person under sub-section (1), it is a defence if the defendant proves -

(a) that the debt was incurred without his express or implied authority or consent; or

(b) that at the time when the debt was incurred, he did not have reasonable cause to expect -

(i) that the company would not be able to pay all its debts as and when they became due; or

(ii) that, if the company incurred that debt, it would not be able to pay all its debts as and when they became due.

(3) Proceedings may be brought under sub-section (1) for the recovery of a debt whether or not the person against whom the proceedings are brought, or any other person, has been convicted of an offence under sub-section (1) in respect of the incurring of that debt.

(4) When sub-section (1) renders a person or persons liable to pay a debt incurred by a company, the payment by that person or either or any of those persons of the whole or any part of that debt does not render the company liable to the persons concerned in respect of the amount so paid.

(a) a company does any act (including the making of a contract or the entering into of a transaction) with intent to defraud creditors of the company or of any other person or for any other fraudulent purpose; and

(b) the company is at the time when it does the act, or becomes at a later time, a company to which this section applies, any person who was knowingly concerned in the doing of the act with that intent or for that purpose is guilty of an offence.

Penalty: $10,000 or imprisonment for 2 years, or both.

(6) A certificate issued by the proper officer of a court stating that a persons specified in the certificate -

(a) was convicted of an offence under sub-section (1) in relation to a debt specified in the certificate incurred by a company so specified; or

(b) was convicted of an offence under sub-section (5) in relation to a company specified in the certificate, is, in any proceedings, prima facie evidence of the matters stated in the certificate.

(7) A document purporting to be a certificate issued under sub-section (6) shall, unless the contrary is established, be deemed to be such a certificate and to have been duly issued."

6. The following five questions arise under that section: (1) Whether Giant incurred a debt on any of the dates alleged, namely 25th January 1989, 31st March 1989, 1st June 1989, and 25th July 1989; and if so, how that debt is to be quantified.

(2) Whether, at the time when any such debt was incurred, Pioneer and/or PIFL were directors of Giant or took part in the management of Giant. (It is common ground that Antico, Quirk, and from February 1989, Gardiner were directors of Giant). Relevant to this question is the definition of 'director' in s.5 of the Code which is in the following terms:

"Director", in relation to a corporation, includes -

(a) any person occupying or acting in the position of director of the corporation, by whatever named called and whether or not validly appointed to occupy or duly authorized to act in the position; and

(b) any person in accordance with those directions or instructions the directors of the corporation are accustomed to act."

(3) Whether, immediately before any such debt was incurred, there were reasonable grounds to expect:

(i) that Giant would not be able to pay all its debts as and when they became due; or (ii) that, if Giant incurred the debt in question, it would not be able to pay all its debts as and when they became due.

(4) Whether any of the defendants has proved that, at the time when any such debt was incurred, he or it did not have reasonable cause to expect either that:

(i) Giant would not be able to pay all its debts as and when they became due, or

(ii) if Giant incurred the debt in question, it would not be able to pay all its debts as and when they became due.

(5) Whether any of the defendants has proved that any such debt was incurred without his or its express or implied authority or consent.

7. Having regard to the answers which I give to some of these questions, it will not be necessary for me to answer certain other questions; but I will, as far as possible, give a decision on all the questions, so as to minimise the possibility that a re-hearing may become necessary in the event of an appeal which succeeds on points I have decided.

2.2 Companies (Queensland) Code Section 535 8. Section 535 of the Code is in the following terms:

"535(1) If, in any civil proceedings against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity by virtue of which he is such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that he has acted honestly and that, having regard to all the circumstances of the case, including those connected with this appointment, he ought fairly to be excused for the negligence, default or breach, the court may relieve him either wholly or partly from his liability on such terms as the court thinks fit.

(2) Where a person to whom this section applies has reason to apprehend that any claim will or might be made against him in respect of any negligence, default, breach of trust or breach of duty in a capacity by virtue of which he is such a person, he may apply to the Court for relief, and the Court has the same power to relieve him as it would have had under sub-section (1) if it had been a court before which the proceedings against the person for negligence, default, breach of trust or breach of duty had been brought.

(3) Where a case to which sub-section (1) applies is being tried by a judge with a jury, the judge after hearing the evidence may, if he is satisfied that the defendant ought pursuant to that sub-section to be relieved either wholly or partly from the liability sought to be enforced against him, withdraw the case in whole or in part from the jury and forthwith direct judgment to be entered for the defendant on

such terms as to costs or otherwise as the judge thinks proper.

(4) This section applies to a person who is - (a) an officer of a corporation; (b) an auditor of a corporation, whether or not he is an officer of the corporation; (c) an expert in relation to a matter in relation to which the civil proceedings has been taken or the claim will or might arise; or (d) a receiver, receiver and manager, liquidator or other person appointed or directed by the Court to carry out any

(5) For the purposes of this section, 'officer' in relation to a corporation, means - (a) a director, secretary, executive officer or employee of the corporation; (b) a receiver, or receiver and manager, of the property or part of the property of the corporation; (c) an official manager or deputy official manager of the corporation; (d) a liquidator of the corporation; and (e) a trustee or other person administering a compromise or arrangement made between the corporation and another person or other persons."

9. The following two questions arise under s.535: (1) Whether the present proceedings are proceedings for "negligence, default, breach of trust or breach of duty"

(2) Whether any defendant has acted honestly and, having regard to all the circumstances of the case, ought fairly to be excused - and if so, whether that defendant should be relieved wholly or partly from liability.

2.3 Trade Practices Act and Negligent Advice 10. The relevant sections of the Trade Practices Act are s.4(2), s.52, s.75B, s.82 and s.84. They are in the following terms: "4 (2) In this Act, (a) a reference to engaging in conduct shall be read as a reference to doing or refusing to do any act, including the making of, or the giving effect to a provision of, a contract or arrangement, the arriving at, or the giving effect to a provision of, an understanding or the requiring of the giving of, or the giving of, a covenant; (b) a reference to conduct, when that expression is used as a noun otherwise that as mentioned in paragraph (a), shall be read as a reference to the doing of or the refusing to do any act, including the making of, or the giving effect to a provision of, a contract or arrangement, the arriving at, or the giving effect to a provision of, an understanding or the requirement of the giving of, or the giving of, a covenant; (c) a reference to refusing to do an act includes a reference to - (i) refraining (otherwise than inadvertently) from doing that act; or (ii) making it known that that act will not be done; and (d) a reference to a person offering to do an act, or to do an act on a particular condition, includes a reference to the person making it known that the person will accept applications, offers or proposals for the person to do that act or to do that act on that condition, as the case may be."

"52(1) A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

(2) Nothing in the succeeding provisions of this Division shall be taken as limiting by implication the generality of sub-section (1)."

"75B. A reference in this Part to a person involved in a contravention of a provision of Part IV or V shall be read

as a reference to a person who - (a) has aided, abetted, counselled or procured the contravention; (b) has induced, whether by threats or promises or otherwise, the contravention; (c) has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) has conspired with others to effect the contravention."

"82(1) A person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV or V may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention. (2) An action under sub-section (1) may be commenced at any time within 3 years after the date on whch the cause of action accrued."

"84(1) Where, in a proceeding under this Part in respect of any conduct engaged in by a body corporate, being conduct in relation to which a provision of Part V applies, it is necessary to establish the intention of the body corporate, it is sufficient to show that a servant or agent of the body corporate by whom the conduct was engaged in had that intention.

(2) Any conduct engaged in or behalf of a body corporate by a director, agent or servant of the body corporate or by any other person at the direction or with the consent or agreement (whether express or implied) of a director, agent or servant of the body corporate shall be deemed, for the purposes of this Act, to have been engaged in also by the body corporate."

11. SCBAL alleges that it was caused damage by misleading conduct and negligent advice on two occasions: first, on or about 31st March 1989, when it did not require repayment of $30 million, but extended the facility to 30th June 1989; and second, on 25th July 1989, when it did not require repayment of $30 million, but granted an overdraft facility to 31st August 1989 or 31st December 1989. In relation to each occasion, the same five questions arise. (1) Whether Giant engaged in conduct which was misleading or otherwise within the terms of s.52.

(2) Whether any of the defendants were knowingly concerned

in any such misleading conduct, or otherwise fell within the terms of s.75B.

(3) Whether Pioneer or PIFL engaged in conduct which was misleading, or otherwise within s.52.

(4) Whether Pioneer and/or PIFL were under a duty of care in relation to communications to SCBAL, and whether any such duty or care was breached.

(5) Whether SCBAL was induced to refrain from requiring repayment and to extend the time for repayment of $30 million, and whether it thereby suffered damage.

2.4 Layout of Judgment 12. In order to give some context to the consideration of these issues, I will next give a brief history of Giant, dealing in particular with the period from October 1988 onwards.

13. I will then consider the credibility of the four main witnesses in the case, namely Antico, Quirk, Gardiner, and also Terry Campbell, the State manager of SCBAL in Brisbane from October 1988 (who I will call "Campbell"). I will then deal in turn with the issues I have identified. In doing so, I will not recount in detail the submissions which have been made. The parties have provided comprehensive written submissions, and their oral submissions have been recorded.

14. The judgment will conclude by summarising the findings on the various issues, and outlining the orders which I believe follow from those findings.

3. A BRIEF HISTORY OF GIANT 3.1 Introduction
4. Giant was incorporated in 1971 under a different name. In 1986, when it was named Carrick Holdings Limited, it came under the control of Ariadne Australia Limited (which I will call "Ariadne") as a result of the acquisition by Ariadne of 42% of its shares. It was re-named Giant Resources Limited, and became involved in mineral exploration and mining, with interests mainly in Australasia and Canada.

16. In early 1987, Robert Needham (who I will call "Needham") became its Chairman; Terrence O'Neill (who I will call "O'Neill") became Executive Director, Finance; Kevin Bourke (who I will call "Bourke") became Executive Director, Legal and Corporate; Adrian Fleming (who I will call "Fleming") became Executive Director, Exploration; and Maurice Driscoll (who I will call "Driscoll") became Executive Director, Human Resources. Before joining Giant, all had had successful careers with Placer Pacific Limited, a major gold mining company.

17. Between November 1987 and February 1988, Korbell Pty. Limited (which I will call "Korbell"), a wholly owned subsidiary of Ampol Limited (which I will call "Ampol"), which in turn was a wholly owned subsidiary of Pioneer, acquired Ariadne's 42% interest in Giant for around $300 million. Antico, the Chairman of Pioneer, was appointed a non-executive director of Giant in November 1987; and Quirk, the Managing Director of Pioneer, was appointed a nonexecutive director of Giant in March 1988. Gardiner, who subsequently became Deputy Managing Director and Finance Director of Pioneer, was appointed a non-executive director of Giant on 17th February 1989. Thereafter, the board of Giant comprised the five executive directors mentioned earlier, Ian Callinan QC (who I will call "Callinan"), and the three non-executive directors representing Pioneer. These three continued to be on the board of Pioneer, together with another eight directors, including Needham and Kevin McCann, solicitor of Allen Allen and Hemsley (who I will call "McCann").

3.2 Assets and Liabilities at around October 1988 18. Before outlining the events spanning Standard Chartered's involvement with Giant from about October 1988 until its winding up in 1990, it is convenient to identify the major assets and potential sources of income of Giant and its subsidiaries with which this case is concerned, and also its major liabilities and outgoings, as at about October 1988, although the discussion is not strictly limited to this time.

19. The balance sheet of Giant as at 30th June 1988 showed net assets of about $270 million, but since most of the assets were mining projects included on an historical cost basis, it was common ground that this was of limited relevance.

20. I will first set out the main assets and potential sources of funds.

(1) Australasian Gold Projects. 21. The Horn Island project was an open cut gold mine at Horn Island, a small island near Thursday Island in the Torres Strait, owned by Torres Strait Gold Pty. Limited. Giant had acquired about a 75% interest in TSG in about May 1987, with one wholly owned subsidiary, Polbury Pty. Limited holding 69.9% of TSG's shares, and another wholly owned subsidiary, Gemstay Pty. Limited holding 20% of the shares of Augold NL (which I will call "Augold"), which in turn held the remaining 30.1% of TSG's shares. Feasibility studies for a mine were carried out in 1987, and development was financed by a gold loan of 23,535 ounces of gold financed by SCAL and drawn down in February 1988. A further gold loan of 5,746 ounces of gold was drawn down in February 1989. Production commenced in late 1988, but not so as to produce a positive cash flow.

22. In late 1988 and early 1989, Giant, through Polbury Pty. Limited, acquired the remaining 80% of shares in Augold, this acquisition being financed by the $30 million bill acceptance/discount facility provided by SCBAL, which is the main concern of these proceedings. At the same time, Giant guaranteed a debt of $12 million owing by Augold to SCBAL; and it also, by the deed of 25th January 1989 mentioned earlier, guaranteed repayment by TSG to SCAL of the gold loan. Giant's offer of $2.25 per share for Augold shares put a value of about $100 million on TSG (after taking into account Augold's other major asset, apart from its TSG shares, namely 9.75 million shares in Giant).

23. Great Victoria Gold Limited (which I will call "GVG") was a public listed company which owned a number of leases, but whose main asset was the Great Victoria gold mine in Western Australia. Base Resources Limited (which I will call "Base") acquired an 80.1% interest in GVG in 1987, at 72 cents per share, putting a value of about $60 million on GVG. By mid-1987, Base was 99.9% owned by Keprose Pty. Limited, itself a wholly owned subsidiary of Giant. An open-cut mine operated at the Great Victoria mine from September 1984, and it was profitable in the years ended June 1986, 1987 and 1988. However, because of problems which developed in the open-cut mine during 1988, operations were closed in February 1989, and preparations were made for an underground operation, scheduled to commence in September 1989.

24. Grey River Gold Mining Limited (which I will call "GRG") was a company incorporated in New Zealand by R.A. Hanson and Co. Inc. (which I will call "RAHCO"), which commenced construction of a dredging operation in the South Island of New Zealand in August 1987. Also in August 1987, Giant, through its wholly owned subsidiary, Grey River (New Zealand) Limited, acquired a 50% interest in GRG, contributing $5 million to GRG and agreeing to pay RAHCO $7 million over two years, and to arrange a loan facility for $US13.5 million. The dredge was to be completed and operations to commence in 1989.

(2) Curragh 25. In 1985, a partnership, consisting of Clifford Frame (who I will call "Frame") and two others, acquired the mining assets of Cyprus Anvil Mining Corporation (which I will call "Cyprus Anvil"). In April 1987, Curragh Resources Inc. (which I will call "Curragh") was incorporated, originally under a different name; and in May 1987, Giant purchased 46 out of 100 shares in Curragh through its wholly owned subsidiary Rylega Pty. Limited (a company incorporated in New South Wales, which I will call "Rylega") and Rylega's wholly owned subsidiary 654922 Ontario Inc. (a company incorporated in Ontario, which I will call "654922") for about $22 million, and Giant also lent Curragh about $35 million. Also in May 1987, Giant (through 654922) entered into a "Unanimous Shareholders' Agreement" with Frame, Curragh Resources Corporation (a Frame-controlled company) and Curragh, which ensured that Frame had ultimate control of Curragh, but also ensured that Giant was represented on its board of directors. It also contained provisions giving Frame pre-emptive rights in relation to Giant's shares. By 1988, Curragh had become an extremely profitable producer of zinc, lead and silver. However, as at October 1988, it had not paid any dividends to Giant, and in September/October 1988 a dispute arose between Giant and Frame concerning repayment of Giant's $35 million loan to Curragh.

(3) Canadian Gold Projects 26. In 1987, Giant acquired an interest in Pamour Inc. (which I will call "Pamour") and Great Yellowknife Mines Limited (which I will call "GYK"), both being companies incorporated in Ontario, Canada, and listed on the Toronto Stock Exchange. In 1988, Giant acquired control of both companies through subsequent share issues. The structure of Giant's interest was as set out on the following page. Pamour had conducted a gold mining operation at Timmins in Ontario from 1934, and GYK had conducted gold mining operations at Yellowknife since 1948. In 1986, ownership of Pamour's Timmins operations was transferred to GYK, making GYK the group's principal operating company. Its operations were grouped under three headings: (i) Yellowknife conventional, an underground and open-pit mining complex, in continuous production since 1948; (ii) Yellowknife tailings, a tailings re-treatment plant to re-process tailings accumulated since 1948, which commenced operations around the end of 1988; and (iii) Timmins conventional, mainly an underground and openpit mine, the former in continuous production since

27. ERG Resources Inc. (which I will call "ERG") was incorporated in Quebec in 1938, and was at all relevant times listed on the Toronto Stock Exchange. In 1985, it entered into a joint venture with Pamour to re-claim gold from tailings in the Timmins area. In 1987, Pamour sold its interest in the joint venture to ERG, and acquired a majority (62.1%) interest in ERG, and became entitled to receive certain royalties on future production. Giant acquired a further 0.8% interest in ERG through a wholly owned subsidiary 728632 Ontario Inc. (a company incorporated in Ontario, which I will call "728632"). Construction of the tailings plant commenced in 1987, and operations commenced in September/October 1988. Funding for the development of the project was originally provided by Pamour and Giant, and by June 1989 their loans (including outstanding interest) amounted to $46.5 million and $21.8 million respectively. (Part of the money lent by Pamour was borrowed by Pamour from Giant, which in turn borrowed it from Westpac under what was called the "Motram facility"). In return, ERG agreed to pay a royalty to Giant. It was originally intended that part of these loans should be refinanced through a gold loan, arranged through Westpac Project Advisory Services Limited (which I will call "WPASL"); and in September 1988, a gold loan agreement was entered into between ERG, Giant and Westpac for 81,800 ounces of gold (about $C41 million), guaranteed by Giant. The first repayment of 3,500 ounces of gold was due in December 1988, was not made, and Westpac waived this default in February 1989.

28. The structure of Giant's holdings in Canada placed obstacles in the way of Giant accessing cash flow from the reasonably successful operations of GYK and from obtaining repayment of its loan to ERG; and by October 1988, some consideration had been given to an amalgamation of companies in the Pamour group with a view to ameliorating these problems. This question of amalgamation was pursued in 1989.

(4) QCT 29. In October 1988, Giant held at 11.7% interest in Queensland Coal Trust Resources Limited (which I will call "QCT") through its wholly owned subsidiary, Hepside Pty. Limited, for which it had paid about $88 million. The Bank of New Zealand (which I will call "BNZ") held 3.08 million of Giant's 61.49 million shares in QCT as security for a facility which it had provided, and Westpac Banking Corporation Limited (which I will call "Westpac") had a charge over the remainder of the shares as security for a $50 million bill endorsement facility which it provided to Giant. In August 1988, Giant received dividends of $1.789 million from QCT. Giant considered selling its interest in QCT in November 1988, and ultimately sold that interest in March 1989.

(5) Cirque 30. Due to lack of cash flow from its other assets, apart from QCT, in August 1988 Giant agreed to sell a number of assets to First Toronto Capital Corporation (which I will call "First Toronto") for a price of $C65 million. By 31st August 1988, Giant had received all but $A13.7 million of the price, being $12 million attributed to Giant's interest in the Cirque deposit, about $1.5 attributed to Central Murchison Gold Limited (which I will call "Central Murchison") and $160,000.00 attributed to an interest called Commissioner's Hill. There were problems concerning Central Murchison and Commissioner's Hill, but the major problem which led to delay in receiving the $13.7 million concerned Cirque. Cirque was a lead and zinc deposit comprised in 21 claims in British Columbia, owned by Curragh; and by the agreement with First Toronto, Giant agreed to sell its notional 46% interest in Cirque. It was to be effected by Curragh forming a new subsidiary, and Giant transferring its interest in the new subsidiary to First Toronto. Giant indemnified Curragh for any adverse tax consequences of this, and the sale in fact potentially exposed Curragh to capital gains tax of about $10 million. Payment of the $12 million for Cirque (and the other $1.7 million) was held up pending resolution of this problem.

(6) Others 31. Giant held, through its 89.96% subsidiary, Jimberlana Minerals NL (which I will call "Jimberlana"), 22.4% of the shares in West Witswatersrand Gold Holdings Limited (which I call "West Wits"), a South African gold mining company, and Giant had also lent to West Wits 4.3 million rand, or about $1.3 million. In September 1988, the Giant board of directors considered a proposal for disposing of this interest and the August 1988 cash flow provided for receipt of $10 million for this asset by November 1988. Ultimately, this asset was sold in October 1989 for $US3.5 million.

32. Giant also held an interest of about 46% in various gold exploration areas in Guyana, South America. By mid-1988, geological work and diamond drilling had shown some promising results, and work continued during 1988 and 1989 with a view to justifying a minable reserve.

33. Finally, Giant had oil and gas permits in Papua New Guinea. The completion of exploration work was a condition of Giant continuing to retain these permits, and during 1988 and 1989, Giant sought to farm out these permits: this would have involved a surrender of part of Giant's interests in these permits, in return for a commitment by another party to provide funding for the exploration work.

34. Now I will outline Giant's principal liabilities and outgoings as at around October 1988, apart from the facilities which were to be provided by SCBAL and SCAL.

(1) Westpac 35. Westpac was Giant's and Pioneer's principal banker. The principal facilities provided to Giant were: (i) revolving bill and discount bill facility, established to fund Giant's purchase of 1.4 million shares in GYK, and increased to $50 million to assist in Giant's purchase of shares in QCT, the whole facility being secured over Giant's

interest in QCT; (ii) a letter of credit facility for $14 million granted to Jimberlana Holdings (Canada) Corporation (which I will call "Jimberlana Holdings") to finance Jimberlana Holdings' acquisition of shares in Pamour, secured inter alia by charges over Jimberlana Holdings' shares in Pamour and Giant's interest in Curragh, and by an undertaking by Korbell (guaranteed by Ampol) to pay in respect of this and the next facility an amount of up to about $44 million;

(iii) credit facility for $25 million to Giant and on-lent to a 100% subsidiary, Giant Acquisitions Corporation (which I will "GAC"), to acquire shares in Pamour, secured inter alia by charges over GAC's shares in Pamour and Giant's interest in Curragh, and also by the Korbell undertaking;

(iv) a facility dated 5th September 1988 for $20.6 million granted to Motram Pty. Limited, a wholly owned subsidiary of Giant, which lent the advance to Giant which in turn lent it to Pamour for use in relation to the construction of the ERG plant, this facility being supported inter alia by a guarantee by Giant and a charge over Pamour's shares in GYK;

(v) the ERG gold loan, valued at about $41 million, guaranteed by Giant;

(vi) overdraft facilities to various companies in the Giant group, totalling about $18 million in January 1989.

(2) BNZ 36. In October 1988, BNZ had entered into the following facilities with Giant and related companies: (i) a commercial bill discount facility for $30.5 million,

(ii) a fluctuating overdraft and/or revolving bill discount facility amounting to about $27 million, advanced to Base to finance Base's investment in GVG;

(iii) a fluctuating overdraft of about half a million dollars to Central Murchison, guaranteed by Base.

37. The first two facilities were secured by charges over shares in various Giant group companies, including GVG, GYK, QCT, Jimberlana and Augold.

(3) Pioneer 38. Giant had anticipated repayment by Curragh of $9 million of its loan in September 1988, and a further $9 in December 1988. A cash flow shortage arose when the September payment was not made, and on 31st October 1988, Pioneer (on Quirk's authority), through PIFL, lent Giant $14 million to cover this shortage. At its meeting on 7th November 1988, the Pioneer board ratified Quirk's decision to provide this loan until 28th February 1989.

(4) Outgoings 39. During the six months July to December 1988, in addition to items of expense which appeared to be non-recurring, Giant's average monthly expenses included about $2 million for bank interest and fees, over $400,000.00 for operating expenses, and over $1 million for exploration. Although it seems that reduced exploration expenses were anticipated for 1989, it would appear reasonable to expect that, at least until bank loans were substantially reduced, regular outgoings would continue at around $2.5 to $3 million per month.

(5) Project Loans 40. In addition to loans to Giant, there were loans to companies operating the various projects, some of which were guaranteed by Giant. I have already mentioned the Westpac loans in relation to ERG. Other significant loans were: (i) a loan of $18 million by National Australia Limited (which I will call "NAL") to GRG, guaranteed by Giant; and (ii) a loan of $12 million by R. and I. Bank of Western Australia Limited (which I will call "RandI") to GVG (obtained in February 1989). (iii)a gold loan equivalent to about $48 million provided by Barclays Bank to GYK.

3.3 SCBAL, SCAL, Augold and TSG: 1987 to January 1989 41. In early 1987, SCBAL had advanced funds totalling $16 million to Yaramin Pty. Limited (which I will call "Yaramin") to enable it to take over Augold, and in late 1987 had advanced $10.8 million to Augold. Repayment of the Augold facility was secured by an underwriting agreement provided by SCAL. Both the Yaramin and the Augold facilities went into default. In 1988, SCBAL (Brisbane) and SCAL (Perth) devised an "exit strategy" to extricate SCBAL from these non-performing loans: this involved advancing $30 million to Giant to acquire all shares in Augold, other than those held by Giant (including shares held by Yaramin), on the basis that Yaramin would use the proceeds of sale of its shares to repay the amount it owed to SCBAL, and Giant would guarantee to SCBAL repayment of the Augold facility, with SCAL being released from its underwriting commitments.

Negotiations for this $30 million advance commenced in about May 1988, and culminated in a facility letter of 20th October 1988, which Giant accepted on 21st October 1988.

An earlier facility letter, written by SCBAL on 1st June 1988, had provided that the facility should terminate (by payment or re-financing with SCBAL) as at 31st December 1988, after being reduced by $10 million from the proceeds of sale of certain investments (the "Forsayth proceeds"), and a further $10 million from Ampol; and also that if Giant shareholders exercised certain share options at $2.50 per share, the receipts could be used to clear the SCBAL debt.

By 29th August 1988, the Forsayth proceeds had been used up, an undertaking and indemnity from Ampol was not available, and the prospect of any Giant share options being exercised was remote (Giant's share price then being about $1, and tending to fall); and a letter of that date from Giant to SCBAL (Brisbane) written by O'Neill advised that there would be no repayment under the proposed facility until 31st January 1989, when repayment would be sought from funds from an agreement to underwrite an issue of Giant's shares (the Morgan underwriting agreement, then already purportedly rescinded by the other party) or the underwriting and placement by "Standard Chartered" (presumably SCAL) of up to 10% of the issued capital of Giant; failing which, both parties would work towards a re-financing of the facility.

On 2nd September 1988, SCBAL wrote to Giant referring to discussion of a bid price of $1.15 per share for Augold, and advised that that bid price would be unacceptable to SCBAL because it would not clear the Yaramin debt; and advised that the offer of the facility was based on a bid price of $1.25 per share.

The facility letter of 20th October 1988 provided for repayment on 31st January 1989, but did not identify any source of repayment. (By this time, Giant had received an advice from Hely, QC that the prospects of succeeding on a claim based on the Morgan underwriting agreement were slight; although Giant's cashflow presented to its board meeting on 2nd November 1988 referred to an issue of 10% of the issued capital of Giant planned for January 1989 to repay SCBAL). The only security was effectively over the Horn Island project, to which SCBAL assigned a security value of $35 million (compared with about $100 million suggested by the offer of $1.25 per share), giving a net security of $20 million after a first charge of $15 million to SCAL. It was a term of the facility that (on acquiring 72% of the shares in Augold) Giant should guarantee repayment of the amount owing by Augold to SCBAL, now about $12 million; and it was expected that this would be repaid, or partly repaid, from the proceeds of sale of Augold's 9.75 million shares in Giant.

Giant's takeover offer in relation to Augold was successful, and, by January 1989, Giant had acquired the outstanding shares in Augold, including those held by Yaramin, for $1.25 per share; Giant had effectively guaranteed repayment of the $12 million Augold facility; and Yaramin's debt to SCBAL was repaid.

There is some conflict in the evidence as to the effect of communications between O'Neill for Giant and Campbell for SCBAL during November and December 1988, concerning repayment of Giant's $30 million facility and Augold's $12 million facility, now guaranteed by Giant. However, on 9th January 1989, SCBAL wrote to Giant advising that the Augold facility would be extended to 31st March 1989; and on 23rd January 1989, O'Neill saw Campbell in SCBAL's Brisbane office, and requested an extension of the $30 million facility to 30th June 1989, on the basis that it would be paid out in connection with the completion of a transaction whereby Giant was to acquire the mineral assets of the Pioneer group. On 25th January 1989, Campbell wrote to SCBAL's head office in Adelaide passing on this request and foreshadowing a submission in support of it. In fact, bills to the value of $29.05 million, maturing on 31st January 1989, had by then been drawn down under the facility; and on 31st January 1989, SCBAL discounted bills to the value of $29.5 million maturing 2nd March 1989, thereby effectively extending the facility to that date. By a letter dated 26th January 1989, but sent on 2nd February 1989, O'Neill for Giant requested SCBAL for an extension of the $30 million facility to 30th June 1989, to be repaid from proceeds of an anticipated public offering of shares by Giant. (A cashflow enclosed with this letter did not disclose the $14 million advanced by Pioneer, due for repayment by 28th February 1989).

Meanwhile, a meeting of three directors of Giant (Needham, Bourke and Driscoll) held on 24th January 1989, having been advised that SCAL had agreed to provide further accommodation to TSG, resolved in favour of Giant executing a guarantee of TSG's obligations under its gold loans, thereby effectively guaranteeing to SCAL repayment of a total of 29,281 ounces of gold. The execution of this guarantee on 25th January 1989 is the first incurring of a debt relied on in these proceedings, and the amount of the debt is alleged to be about $9.9 million, which I take to be the value of 29,281 ounces of gold as at 25th January 1990, when Giant's guarantee was called upon. Giant's execution of this guarantee was ratified by a full board meeting on17th February 1989.

3.4 Curragh Dispute and Settlement: October to December 1988 50. As mentioned earlier, repayment by Curragh of $9 million of the $35 million loan by Giant to Curragh, which had been expected in September 1988, was not effected. on 2nd November 1988, O'Neill reported to the Giant board meeting that, if the Curragh repayments were not received by the end of the year, the cash position would remain very tight. (Note that this was after Pioneer had advanced $14 million).

51. On 3rd November 1988, Giant wrote to Curragh requiring payment of the $9 million. On the same day, Curragh responded, resisting the demand. A further letter was sent by Giant on 9th November 1988 to Curragh, demanding repayment of the $9 million. Thereafter, Frame caused Curragh to commence proceedings in Canada seeking a declaration that the loan was not then repayable.

52. On 6th December 1988, there was a meeting of the executive directors of Giant, including Needham, Bourke and O'Neill, concerning a proposed settlement with Frame. Agreement was reached shortly thereafter, and this agreement was given effect to in a revised unanimous shareholders' agreement of Curragh dated 14th December 1988. As part of this settlement, Curragh was to repay $10 million of the loan on 14th December 1988, a further $10 million on 15th February 1989, and $14.7 million by 15th June 1989 (in fact, this was paid on 31st March 1989).

53. Article 2.1(c) of the revised unanimous shareholders' agreement stated that Curragh was to distribute 50% of its net profit by way of quarterly dividend, subject to the availability of cash, provided that: " ... such distribution is financially prudent and commercially reasonable having regard to the then current forecast and plans of Curragh, and such distribution is consented to by its bankers and other lenders. Any dispute as to whether any dividends could be paid shall be conclusively determined by the board of directors of Curragh". This meant that the Frame interest, having a majority on the Curragh board, retained control of whether dividends would be paid.

54. There was a further obstacle to the payment of dividends in what was known as the Cyprus Anvil warrant: this was a warrant indenture entered into by Curragh on 15th May 1987, under which Cyprus Anvil was entitled to acquire 20% of Curragh within sixty days after Curragh had completed its first public offering, at a cost of $1.00; which also contained a term prohibiting Curragh, without the prior written consent of Cyprus Anvil, from declaring any dividend unless Cyprus Anvil received from Curragh an amount equivalent to 20% of such dividend. During 1989, Curragh sought to buy out this warrant, initially for a cash payment of $C12 million. Ultimately, such a purchase was negotiated on 1st November 1989, for an aggregate purchase price of $C30 million (the purchase included another interest valued at approximately $C13.4 million).

55. The settlement of this dispute in December 1988 did not resolve the problem of obtaining the Cirque payment. At the Giant board meeting of 19th January 1989, O'Neill said that this payment was anticipated within two to three weeks. Similar statements were made from time to time during 1989, but the Cirque payment had still not been received on 25th July 1989.

3.5 Negative Reports on Projects and Finance: January to March 1989 56. At the Giant board meeting on 19th January 1989, in presenting his overview, Needham noted that GVG was a significant problem, that Horn Island was shut for modification and that its costs had increased, and that the ERG operation was frozen (in the Canadian winter). O'Neill reported on the Pamour operations that gold production in the year ended December 1988 was below budget, and that the cash flow was not as favourable as expected.

57. At the Pioneer board meeting of 31st January 1989, Quirk reported that Horn Island was disappointing, that GVG was having difficulties, with the open-cut mines closing down, that Giant was short of its budgeted profit, and that Giant's unutilised facilities were uncomfortably low.

58. At the Giant board meeting on 17th February 1989, Quirk expressed reservations concerning the Canadian gold projects, in that the operating costs, apart from the tailings projects, were over $500.00 per ounce. (The gold price at this time was around $450.00 per ounce, but there had been forward sales of gold from all of Giant's gold projects at a time when the price was over $500.00 per ounce, and this hedging had so far enabled the Canadian projects to continue to operate profitably). Needham noted that without this hedge, the Canadian projects would lose $27 million per year. The financial up-date in the agenda papers for this meeting reported that the net profit for the six months to 31st December 1988 was down $10 million on budget, and that it was evident from the cash flow that an immediate injection of cash was required to maintain a minimum level of liquidity. At the meeting, O'Neill reported that he expected the operating loss for six months to 31st December to be around $12 million. (In fact, the consolidated earnings statement produced on 24th February 1989 showed an operating loss of $12.4 million for the six months; and while it showed an overall net profit of $5.1 million, this was only obtained by including as income $17.5 million equity accounted profit from Curragh, from which Giant had actually received no cash income).

59. Quirk made a report to the Pioneer board, included in the agenda papers for the Pioneer board meeting of 22nd February 1989, that Giant's Canadian gold mines (with the exception of the tailings operations) suffered from cash costs in excess of $500.00 per ounce, and were viable only so long as the hedge existed, unless costs could be reduced. He went on to report that Needham had rejected budgets for these mines prepared by the mine management, and that he would return with "more acceptable budgets".

60. On 8th March 1989, SCAL wrote to Giant enclosing a report on Horn Island which it had obtained from its consultants, Project Advisory Services (which I will call "PAS"), which asserted that it was "apparent ... that the project should never have been developed ... It is totally uneconomic now, and is likely to remain so barring a doubling or tripling of the gold price". This letter was circulated to the Giant directors on 15th March, and Needham responded to the PAS report on 20th March 1989, attacking its arguments and conclusions.

3.6 Proposed Acquisition Of Pioneer's Mineral Assets: January and February 1989 61. When Pioneer obtained its controlling interest in Giant, it was contemplated that Giant would eventually become the mineral arm of the Pioneer group, and that it would purchase mineral assets already held by other companies within the group. Towards the end of 1988, the proposal that Giant should acquire Pioneer's mineral assets was considered at Pioneer board meetings on 10th October, 28th November, and 21st December. It was also considered at the Giant board meeting on 2nd November. on 9th November 1988, Societe Generale Australia Limited (which I will call "Societe Generale") wrote to Giant enclosing a proposal for financing the acquisition of Pioneer's mineral assets.

A memorandum from Quirk to Antico of 7th December 1988 concerning the financing of this purchase contained a hint of reservation about the proposal, since Quirk noted that he viewed Needham's profit forecasts for Giant with reservation; and the figures he quoted suggest that Pioneer's interests were central in his consideration of the proposal. However, the Giant board meeting on 21st December 1988 was told that the documentation for the asset sale was to be ready by 21st January 1989.

The matter was considered at the Pioneer board meeting of 13th January 1989. A memorandum from Quirk in the agenda papers for this meeting mentioned a price of $242 million to be paid by Giant for the purchase, rejected the possibility that the purchase be associated with a full takeover of Giant by Pioneer, and recommended that there be a share placement by Giant at 80 cents, with Pioneer taking enough shares to put it just short of a 50% holding in Giant. (The price of Giant's shares on the stock exchange at that time was around 65 cents). At the board meeting, in the discussion of the proposal, it was suggested that there could be a rights issue by Giant at 50 to 55 cents.

A Giant board meeting was held on 19th January 1989, and it was noted in the agenda papers that that draft documentation for the asset acquisition, and the proposal for financing the acquisition, had not yet been received. In the discussion of the proposal at the meeting, it was noted that the asset acquisition needed Pioneer support.

In the board papers for the Pioneer board meeting of 31st January 1989, Quirk proposed that the financing of the asset sales should be by an equity raising by Giant, involving Pioneer, plus conventional borrowing, and Quirk went on to note that "well had a proposal from Societe Generale. In the discussion at the board meeting, it was noted that the sale of mining assets to Giant had become less attractive, due to a sentiment against equity accounted profits (presumably referring to Giant's profits in Curragh), and Giant's lag in profitability; but a committee, including Antico, Quirk and Needham, was authorised to approve terms for the acquisition within parameters set down by the meeting, including that Pioneer was prepared to take additional shares at a premium to the market, and to support Giant's financing of the acquisition, including giving a guarantee "if there are significant advantages".

The matter progressed somewhat in the early part of February. On 10th February 1989, in a memorandum to Antico, Quirk proposed that the funding of Giant's purchase should be wholly by a rights issue, with Pioneer underwriting any shortfall. on the same day, there was a meeting between David Leach, the General Manager, Finance and Administration, of Pioneer (who I will call "Leach"), with Societe Generale, in which Leach indicated that Pioneer was not attracted by their financing proposals.

On 17th February 1989, the Giant board resolved in principle to acquire Pioneer's mining assets, subject to certain conditions, including that there be a rights issue underwritten by Pioneer.

However, on 20th February 1989, there was a discussion between Antico, Quirk and Gardiner, in which Quirk and Gardiner recommended that the sale not proceed. In a memorandum confirming the discussion, Quirk asserted that the drop in Giant's share price (now to just over 50 cents) had all but eliminated the option of a rights issue. The memorandum noted that Giant "does not have enough cash to fund its existing operations", so that there were left only the alternatives of a full takeover by Pioneer, or doing nothing. The latter would involve "a public statement that for a number of reasons, the most significant of which is the substantial decline in the Giant share price", the acquisition was not practical. The memorandum went on to note that, until Horn Island, GVG, GRG and ERG substantiate their viability, "we can have no confidence in the sustainable bottom line profit of Giant". The memorandum asserted that it was not justifiable to commit major further Pioneer shareholders' funds to Giant, but that Pioneer would need to provide funds for existing pressing expenditure needs, say $25 million in the next six months. Accordingly, Quirk recommended that the sale not proceed. on 28th February 1989, the Pioneer board (with Antico absent) discussed this memorandum, and resolved that it was no longer in the best interests of either company to proceed with the sale.

It appears that this was actually notified to a meeting of the Giant board on 30th March 1989, and shortly thereafter there was a press release by Giant of the decision not to proceed. This press release stated that a major factor was the Government policy on uranium, especially the floor pricewell above the world's spot price. The factor particularly referred to by Quirk, namely the drop in Giant's share price, was not mentioned in this press release.

3.7 BNZ, Westpac, and the OCT Sale: February to March 1989 70. During February 1989, some problems with Giant's bankers, BNZ and Westpac, came to a head.

It was a term of the BNZ loan that a certain ratio between the amount of the loan and the value of the shares securing it should be maintained. BNZ had written to Giant on 24th October 1988 advising of a shortfall in the security; and on 23rd November 1988 (despite a cash top-up of $6.5 million provided on 28th October 1988), BNZ again gave notice of a shortfall in the security. On 9th January 1989, BNZ wrote to Giant that there still was a security shortfall. On 24th February 1989, BNZ wrote to Giant concerning arrangements to meet this security shortfall. A table of the market value of the securities lodged with BNZ, prepared on 22nd February 1989, indicated a shortfall of $13 million.

As far as Westpac is concerned, problems were caused by ERG's default of its gold loan from Westpac. On 6th February 1989, Westpac wrote to Giant noting ERG's default, and requiring $15 million from Giant. This was followed up on 7th February 1989 by a further letter in similar terms, requiring a cash injection of $15 million to cover the cost over-run on the development of ERG, this $15 million being made up by a waiver of $2 million due to GYK until ERG had a positive cash flow, and Giant itself putting in $13 million. These terms were accepted by O'Neill for Giant and ERG on 16th February.

On 21st February 1989, ERG wrote to Westpac to the effect that, if Westpac did not withdraw its notice of default, ERG would not be in a position to utilise a credit loan of $2.3 million from Barclays, and it was possible that Giant, through its guarantee, would be in technical default. Westpac responded on 22nd February to the effect that it was prepared to consider a formal waiver of its default subject to being able to re-instate the default on seven days' notice. On the same day, ERG wrote to Westpac concurring in the waiver of default, and accepting the condition that the obligation could be re-instated on seven days' notice.

An internal file note of Westpac of 1st March 1989, by Bruce Auty, Westpac Group Executive for Giant (who I will call "Auty"), noted constant excesses of overdraft by Giant and its subsidiaries.

A memorandum by O'Neill to the directors of Giant, dated 1st March 1989, noted that Giant's cash shortage problems of the last two years were not abating. It noted that Horn Island was unlikely to generate a positive cash flow this calendar year, that GVG needed $18 million over the next twelve months, that Curragh dividends were unlikely, that GYK was below budget, that ERG exceeded its capital budget by $15 million, with the shortfall having to be provided by the Giant group. The memorandum went on that, to alleviate Giant's cash crisis, it was necessary to sell QCT. If it realised $74 million, $50 million could be paid to Westpac and BNZ, leaving $24 million to fund Horn Island ($7 million), GVG ($6 million), GRG ($0.5 million), ERG ($6 million), and creditors ($3 million).

On that day, 1st March 1989, O'Neill, Driscoll and Bourke, met with Quirk, Gardiner and Leach to seek approval for the sale of QCT. O'Neill's memorandum of 1st March 1989 went to the Pioneer board on 4th March, and apparently approval was given.

On or about 7th March 1989, Santos agreed to buy 52.6 million of Giant's QCT shares, netting $65.75 million. In a press release, Needham said the company had taken the opportunity presented by an offer for its QCT shares to realise $65.7 million. It appears that, by about 14th March, agreement had been reached to sell all the QCT shares for a total of about $75.1 million.

The sale was settled on about 6th April 1989. $40 million was paid to Westpac, reducing the bill endorsement facility to $10 million. $12 million was paid to BNZ. The balance was held by Westpac, pending a decision on how much would be released to Giant.

3.8 Pioneer Agrees to Advance Cash: March 1989 79. At the meeting on 1st March 1989, referred to above, it became apparent that the sale of the QCT shares would not provide Giant with sufficient cash to meet its on-going liabilities, and that, to do this, it would be necessary for Pioneer to put in about $10 million.

Accordingly, a Pioneer board meeting was held on 4th March 1989, attended by Quirk and Gardiner, though not Antico, who had been away sick since 27th February. This meeting agreed that Pioneer was prepared to make financial support available to Giant, and to meet its cash requirements over the following four weeks, up to $10 million, on conditions that Giant immediately instruct outside consultants to prepare reports on the financial position and operations of Giant, that no new financial commitments be undertaken without Pioneer's approval, and that all payments by Giant be approved by Pioneer. The Pioneer board also resolved that, in consideration of Antico, Quirk and Gardiner continuing to serve on the Giant board, Pioneer would indemnify each of them, to the extent permitted by law, in respect of any liability under the Companies (Queensland) Code which they might incur from remaining nominees of Pioneer on the Giant board.

On the following day, Quirk spoke to Leach, and told him that the Giant directors, in particular the Pioneer representatives, were becoming concerned that Giant might be incurring debts which had no reasonable hope of being repaid, but felt that for them to resign would be calamitous; and that as a result, Pioneer had resolved to fund Giant on a drip-feed basis; and also that consultants would immediately be appointed to do a financial analysis and also technical and mining consultants would be appointed. Leach passed this on to Antico.

Originally, it had been suggested that the outside financial consultants should be Coopers and Lybrand; but on 6th March 1989, Antico strongly argued that the financial analysis should be performed by Giant's auditors, Arthur Andersen.

On 7th March 1989, Giant wrote to Brian Speechley, a Western Australian mining consultant (who I will call "Speechley") requiring a confidential technical appraisal of GVG by 17th March 1989; and to Graham Hancock, of Robertson Australia, requiring a confidential technical appraisal of the Horn Island mine by 17th March 1989.

On 8th March 1989, a meeting was held in the Pioneer board room in order to verbally brief Arthur Andersen; and on 9th March 1989, Giant wrote to Arthur Andersen requesting them to prepare a confidential report on the financial position of the company, by 17th March 1989.

These reports were received on or about 17th March 1989. The Speechley report on GVG generally supported the view that the underground mine, to be opened late that year, would be a viable project. However, the Robertson report on Horn island considered that the identification of the resource and the reserve was not a sufficiently reliable basis on which to produce a cash flow statement. The Arthur Andersen report drew attention, among other things, to possibly or likely deficiencies in the cash available to Giant. It expressed the view that the Cirque receipt was unlikely before 31st December 1989, it noted that the management believed that the sale of West Wits was unlikely in 1989, and asserted that it could not be presumed that Standard Chartered would re-finance on 31st March 1989.

On 22nd March 1989, notice was given to Giant's directors of a special board meeting on 30th March to consider these reports; but although the Speechley and Robertson reports were discussed at this Giant board meeting, the Arthur Andersen report was not discussed at any Giant board meeting; and none of the reports were considered at any Pioneer board meetings.

3.9 SCBAL Grants Extensions of Facilities: March 1989 87. On 28th February 1989, O'Neill for Giant wrote to Campbell for Standard Chartered, requesting an extension of the Augold bill facility for one month from 3rd March 1989 (sic: it appears that an extension had already been granted to 31st March 1989). The letter gave as the reason for the request that Pioneer was not willing to proceed with the purchase of Augold's Giant shares at $1.25, as they felt that would jeopardise a proposed rights offering later that year.

On 1st March 1989, Campbell for Standard Chartered wrote to Giant setting out the account balances, including $29.5 million of bills maturing 2nd March 1989, to be rolled over to 31st March 1989, and Augold's $12 million bills maturing 3rd March 1989, to be rolled over to 31st March 1989. In fact, when the $29.5 million were rolled over, a further $0.5 million was drawn down to cover, inter alia, the "interest" on $29.5 million to 31st March 1989: this was the final drawdown of the $30 million facility.

On 17th March 1989, Campbell for Standard Chartered wrote to Giant, stating that the Bank appreciated that there was a major re-structuring under way between Giant and Pioneer, and for this reason, agreed to the extension of the Augold facility until 31st March 1989. The letter asserted that, as a condition of the extension, the Bank requested a letter of comfort from Pioneer in relation to both the Augold and the Giant facilities. (It may be that the letter was there referring to a proposed extension of the Giant facility beyond 31st March 1989).

On 22nd March 1989, O'Neill for Giant wrote to Standard Chartered requesting a rollover of the Augold facility to 30th June 1989.

On 23rd March 1989, Campbell for Standard Chartered wrote to Giant offering to extend the existing bill acceptance/discount facility until 30th June 1989. The purpose of the offer was said to be to extend the existing facility to the customer pending purchase of Pioneer mineral resource operations, such purchase to be completed by 30th June 1989. The letter provided for repayment by 30th June 1989, from proceeds of a rights issue to be sub-underwritten by ultimate parents, Pioneer. Security required for the extension included a letter of comfort to be obtained-from Pioneer.

On 29th March 1989, a further letter was written by Standard Chartered to Giant, on this occasion by John Proudfoot, Senior Manager, Corporate Banking, SCBAL Brisbane (who I will call "Proudfoot"). It appears that Campbell was on vacation at this time. This letter confirmed that it was a firm condition of the extension that a letter of comfort be obtained from Pioneer.

O'Neill for Giant responded by a letter of 29th March 1989, addressed to Proudfoot, asserting that the offer was acceptable with the following exceptions: "(a) Under "repayment" - we do not wish to have any reference made to a rights issue by the company; (b) Under "security" - please delete paragraph (c); and (c) Under "special condition" clause 2 - the reference to the acquisition of the Pioneer mining assets should be on the basis of 'when and if the mining assets are acquired'."

The reference to paragraph (c) in exception (b) was a reference to the Pioneer letter of comfort.

A further letter sent by Proudfoot on 30th March 1989 deleted reference to the rights issue, but retained the reference to the letter of comfort. O'Neill responded by a fax advising that Pioneer was adamant that there would be no letter of comfort. Finally, a facility letter dated 30th March 1989 was sent by Proudfoot, deleting all reference to the rights issue, the purchase of Pioneer's mineral resource operations, and the letter of comfort. Proudfoot also sent a letter of 30th March 1989 to the directors of Augold, offering to extend the Augold facility to 30th June 1989.

A meeting of Giant directors (Needham, Driscoll, Bourke, Fleming and O'Neill) on 31st March 1989 authorised O'Neill to accept Standard Chartered's offer to Giant, and O'Neill signed the acceptance.

3.10 Pioneer Decides to Take Security: 13th March 1989 to 2nd May 1989 97. On 13th March 1989, the Pioneer board considered a request to increase the limit of advances to be made to Giant to $15 million. The board approved this, and continued that, in view of the considerable support given to Pioneer (advances $25 million plus the Korbell guarantee $44 million) "management was directed to use its best endeavours to obtain appropriate security from Giant

• second ranking security over Curragh shares may be a possibility".

A Pioneer board meeting, held on 30th March 1989, was attended by Quirk and Gardiner, but not Antico (however, Antico signed the minutes on 11th April 1989). It was noted that the repayment of the Augold $12 million was due the next day, and that Giant did not have the funds to make that payment; and that the co-operation of the banks was required to enable the re-structuring of Giant, probably involving the sale of Giant's 46% interest in Curragh. It was noted that Giant might require up to $50 million in the next three months, in addition to Pioneer's current exposure of $67 million, including the Korbell guarantee. It was resolved that Pioneer was not prepared to increase the approved level of lending, or to advance $12 million to repay Standard Chartered; that any further advances under the approved lending should, if possible, be secured by a mortgage over the Curragh shares; and Pioneer management was directed to strengthen the management team at Giant.

The finance documents in the agenda papers for the Giant board meeting of 6th April 1989 included consolidated financial results for the eight months to 28th February 1989. They indicated that Curragh was $8.5 million over budget; while the other operations were $19 million below budget. Taking into account the loss on the sale of the QCT shares, there was overall a $14 million loss, $33 million below the budget. It was noted that Curragh had declared its maiden dividend of $10 million on 30th March, Giant's share being about $4.6 million. The cash flow with the agenda papers showed a very large deficiency of funds in June 1989.

Following the Giant board meeting, a revised cash flow was prepared, and sent to Westpac in response to Westpac's request for a cash flow. This differed from the one presented to the Giant board by showing a $14 million reduction in Standard Chartered's debt in June, rather than the whole $44 million; no repayment of the Pioneer debt; Curragh paying quarterly dividends of $3.3 million; a GRG dividend of $1 million in December; $4 million from the sale of West Wits; GVG repaying advances at the rate of $0.5 million per month from October 1989; ERG making monthly payments of royalties and interest of $0.6 million per month from June 1989.

Quirk's report as Managing Director for the Pioneer board meeting of 11th April 1989 enclosed budgets for the operations at Yellowknife and Timmins for January to June 1989, and July 1989 to June 1990. It noted that there had been re-organisation of the operations there, with significant reduction in manning levels; and that big improvements had to take place to meet the budgets for the second half of this year, and an even more spectacular improvement for the following year. The report noted that "Management of Giant are committed to the budget. However, I believe that prudent financial planning should be based on actual performance less (sic) than on budgets".

At that board meeting, Needham as Managing Director of Giant and also a director of Pioneer, put to the meeting that Pioneer had not adequately supported Giant. Needham asserted that Pioneer had not provided a promised letter of comfort for Standard Chartered at the time of the original advance; and that on 17th January 1989, with Pioneer encouragement, Giant had resolved to purchase Pioneer's mineral assets, yet on 25th February, Quirk had advised that the deal was off. Pioneer's actions had jeopardised Giant in its failure to exercise options to the value of $96 million, blocking a sale of QCT in 1988 at $1.40 per share; failure to buy Augold's Giant shares at $1.25; failure to press on with a rights issue, thus forcing Giant to sell QCT for a big loss.

Quirk responded that there had been no formal undertaking by Pioneer regarding the exercise of options or the acquisition of Augold's Giant shares. Pioneer management had spent considerable time on the assets sale, and reluctantly came to the conclusion it was not viable. It considered increasing its investment in Giant, but concluded it was not warranted or in the best interests of Pioneer's shareholders. Pioneer management had been informed that Giant management would support the purchase only if there was a corresponding capital injection. Antico said that he believed Giant was still a viable proposition; and Gardiner said that he could not endorse lending more money to Giant unless it was secured.

In the second half of April, two papers were prepared for the Pioneer board, under Quirk's name, concerning Giant. Paper No.1, drafted by Gardiner and bearing the date 20th April 1989, noted Giant's structural imbalance, in that, firstly, its major operations were in Canada, but its head office in Australia; and secondly, in that it had few fully owned operations, causing inefficiencies, namely that it had only about $4 million in dividends from its major profit earner, Curragh, that its Canadian gold operations had not produced cash, and that there was no cash flow from the Australian operations. Giant had managed to pay its bills only by selling assets, such as QCT. Few saleable assets remained, and Pioneer had provided $24 million to pay bills. The only practical course was for Pioneer to continue to fund Giant "to allow the company to work its way out of the existing liquidity crisis". The paper made a number of recommendations, including that Pioneer obtain security, that Pioneer consider acquiring Giant's interest in Curragh for up to $125 million, and that Pioneer monitor Giant's performance and budgets.

Paper No.2, bearing date 24th April 1989, commented on the Canadian operations: it observed that the feasibility of the Canadian budgets was crucial, but that for prudent financial forecasting, "well should use a more conservative approach. It concluded that a re-structure, which involved the sale of Giant's interest in Curragh (for, say, $120 million), was necessary.

These two papers were sent to Pioneer board members on 28th April, and were considered at the Pioneer board meeting of 2nd May. This meeting was attended, inter alia, by Quirk and Gardiner, but not Antico; although Antico did sign the minutes on 30th May. Quirk tabled the two papers, and Gardiner proposed that, as Giant was likely to require further assistance from Pioneer, Pioneer should seek security, for the $24 million advance and $43 million guarantee, over Giant's interest in Curragh. The board concluded that Giant's interest in Curragh should be sold. McCann stated that he was opposed to further financial assistance to Giant, and noted that if the company was liquidated within six months of obtaining security, the security would be void as a preference in respect of past advances. It was resolved to advance a further $25 million on the security of Curragh, on the basis that Giant prepare a strategy for the sale of Curragh and re-structuring its Canadian interests.

3.11 Steps Towards Canadian Amalgamation and Sale of Curragh: March to June 1989 107. The re-structuring of Giant's Canadian interests, mentioned in the Pioneer board resolutions of 2nd May 1989, had been under consideration for some time. Canadian law provided for an amalgamation of companies, in which no new corporation is created, but rather there is a fusing or blending of the amalgamating corporations. The restructuring primarily contemplated by Giant during 1989 was an amalgamation involving the publicly listed gold mining companies in the Pamour group, which were not wholly owned by Giant. The perceived purpose of such an amalgamation was to access cash flow, and facilitate a re-financing of debt incurred by Giant in Australia to finance the acquisition and development of its Canadian gold operations. It was contemplated that the amalgamated company could pay debts owed to Giant, particularly $33 million owed by ERG, by using cash held by GYK and/or by borrowing in Canada against its Canadian assets.

By January 1989, two principal solutions had been identified to the problem of accessing cash flow from Canada, namely amalgamation and a takeover bid for Pamour, GYK and ERG. These options were outlined in a memorandum dated 11th January 1989 from Martha Deacon of Deacon Morgan McEwen Easson Limited, merchant bankers of Toronto (who I will call "Deacon") to Fleming; and also in an advice given by Borden and Elliott, Canadian solicitors, which was forwarded by Fleming to Needham on 25th January 1989. It was recognised that a disadvantage of the takeover option was that it would require the injection of substantial funds, which Giant did not have.

Between 5th and 10th March 1989, Quirk, Gardiner and O'Neill were in Canada, to see the Canadian operations and look into the matter of re-structuring. They met with Paul Mingay, solicitor of Borden and Elliott (who I will call "Mingay") to discuss the proposed amalgamation, and Gardiner raised the possibility of including Giant's interest in Curragh in the amalgamation. Mingay prepared a memorandum on 9th March 1989, considering an amalgamation of Giant's Canadian holding companies, and the operating companies in the Pamour group other than ERG. The proposal was that following the amalgamation, the amalgamated company "Amalco" would owe Giant $178 million which could be re-financed in Canada to enable Amalco to repay this debt.

In a memorandum dated 15th March 1989, Mingay set out in some detail the requirements for an amalgamation: inter alia, he noted that the amalgamation must be justified to the public shareholders of Pamour, GYK, etc., that it was necessary to consider tax consequences and that independent directors of the public companies had to approve. The memorandum also noted that if 654922 or Curragh was to be included in the amalgamation, it would be necessary to obtain access to the Curragh books in order to prepare a valuation. This memorandum was sent to Gardiner and O'Neill.

On 21st March 1989, a revised memorandum, elaborating on the previous one, was prepared by Mingay and Edward Merringer, another solicitor of Borden and Elliott (who I will call "Merringer") and sent to Gardiner and O'Neill.

By 28th March 1989, consideration was also being given within Pioneer to Pioneer purchasing Giant's interest in Curragh. On that day, Mingay wrote to William Glass, Pioneer's Group Taxation Manager (who I will call "Glass"), giving advice as to relevant provisions of Curragh's articles and unanimous shareholders' agreement; and also relevant provisions of Canada's Income Tax Act. The following day, Mingay wrote to Gardiner advising on 654922's right as a shareholder to obtain and use confidential information respecting Curragh.

At the Pioneer board meeting of 30th March 1989, Quirk and Gardiner reported to the effect that the sale of some of Giant's assets was almost certainly necessary - "most probably its 46% shareholding in Curragh as it appears to be the most immediately saleable asset".

At the Giant board meeting on 6th April 1989, the amalgamation was discussed, and it was agreed that a paper should be circulated to directors prior to the next board meeting. Gardiner commented at the meeting that the restructuring was very complex, and would need a concentrated effort. It would appear that O'Neill commented that it would take six months to implement, and that if ERG was positive in April, May and June 1989, the six months would start from July.

Around the middle of April, a further development occurred in Curragh, making the payment of dividends from Curragh less likely. Frame negotiated for the purchase of 20% of a zinc smelter, Asturiana de Zinc SA (which I will call "Asturiana") from Banco Espanol de Credito for $C140 million. Needham noted in a memorandum to Giant directors of 19th April that he would be looking at meetings with Frame in Toronto for "a firm commitment" to a "reliable and consistent dividend policy". However, it transpired that the finance obtained by Frame for the purchase expressly placed restrictions on payment of dividends by Curragh. At the Pioneer board meeting of 2nd May, the proposed acquisition of 20% of Asturiana was discussed, and it was noted that "the controlling shareholder ... wished to expand that company's operations rather than pay dividends ... as requested by Giant".

As noted in the previous section, Quirk's papers Nos.1 and 2 recommended that Pioneer consider buying Giant's interest in Curragh for up to $125 million, and asserted that a restructuring which includes the sale of Curragh for, say, $120 million was necessary; and at the board meeting on 2nd May 1989, the Pioneer board concluded that Curragh should be sold, and approved further advances to Giant on the basis that Giant prepare a strategy for the sale of Curragh and re-structuring the Canadian interests.

The amalgamation was discussed at the Giant board meeting on 18th May 1989, and it was resolved that preliminary steps should be undertaken towards implementing the amalgamation subject to directors being able to make suggestions prior to the next board meeting on matters arising from material to be provided by O'Neill. O'Neill commented on the difficulty of the amalgamation and suggested that it would probably not occur before March 1990. Gardiner at that meeting said that Curragh had to be sold, and it was agreed that Needham should approach Frame to obtain approval to reveal information about Curragh for this purpose. It was also resolved that the company object to the proposal that Bank of Nova Scotia provide a $145 million facility for Curragh's Asturiana purchase, especially the restriction which it placed on payment of dividends by Curragh.

A further memorandum from Merringer and Mingay, dated 19th May 1989, included a detailed timetable identifying steps that had to be taken, such steps beginning on 1st June 1989 and ending on 15th November 1989. This memorandum was circulated by O'Neill to Antico, Quirk and Gardiner on 22nd May 1989.

Also on 19th May 1989, Needham wrote to Frame conveying the concern of the Giant board over the Bank of Nova Scotia finance for the Asturiana purchase. Frame replied by a letter of the same day, expressing sympathy but asserting that restrictions on dividends of that kind were standard terms of bank finance. Frame followed this up by a letter of 20th May 1989 asserting it was his intention to recommend serious investigation of raising $C100 million on a longterm basis. The letter did not make it clear whether or not this was to replace the Bank of Nova Scotia finance, and thereby possibly overcome the restriction on dividends.

It would appear that the purchase of the interest in Asturiana was completed by 31st May 1989, and on that day, a new Curragh unanimous shareholders' agreement was entered into.

The minutes of the Pioneer board meeting of 30th May 1989 record that Needham reported that the board of Giant had approved the sale of Giant's interest in Curragh, and that he was to travel to Canada the following week to pursue the matter.

At the Pioneer board meeting on 2nd June 1989, it was resolved that Pioneer provide further financial support to Giant on certain conditions, one of these conditions being that O'Neill was to concentrate on the implementation of the plan for the re-construction of the Pamour group of companies to enable Giant to access cash flow; and that Needham proceed with the sale of Giant's interest in Curragh as soon as possible.

On 9th June 1989, Needham wrote to Auty enclosing information including a detailed report he had received from Canada concerning the proposed amalgamation. This report identified items which need to be resolved, including the approval of banks currently providing finance, the obtaining of valuations, and approval by two-thirds of the shareholders. It also included a timetable for the amalgamation covering a period of at least 157 days.

A report from O'Neill concerning the amalgamation was included in the agenda papers for the Giant board meeting on 22nd June 1989. O'Neill identified two proposals under consideration: the first was for all Giant's Canadian publicly listed companies to be amalgamated; and the second was similar, except that Pamour would remain outside the amalgamation. The memorandum indicated that there had been searches made of stock exchange and company code requirements, initial discussions with investments advisers concerning valuation, and discussions with bankers regarding their approval.

Meanwhile, some preliminary steps had been taken towards the sale of Curragh. On 12th June 1989, Needham and O'Neill were in Toronto with Fleming discussing strategies for the sale of Curragh. A memorandum dated 29th June 1989 from Needham to the Pioneer directors, included in the agenda papers for the Pioneer board meeting of 4th July, dealt with discussions with Frame, and the identification of parties who might be interested in purchasing Curragh.

On 30th June 1989, the Giant board resolved to sell Giant's interest in Curragh, subject to the obtaining of an appropriate purchase price.

3.12 Pioneer Obtains Security: May and June 1989 127. Following Pioneer's decision to seek security for its advances to Giant, Gardiner began negotiations with Westpac, initially asking that Westpac release its security over Giant's interest in Curragh. Early in May 1989, Auty of Westpac advised Gardiner that Westpac would not release its security over Curragh, and Gardiner asked if Westpac would consent to Pioneer having a second charge over the shares in Pamour and Curragh.

On 16th May 1989, Auty of Westpac wrote to Giant advising of Westpac's approval for a second charge over the shares in Pamour and Curragh, and for dealing with the 25 million retained from the QCT sale so as to cause a $10 million reduction of the term debt and to bring Giant group overdrafts within limits, leaving an estimated amount of $8 million available to be used by Giant, but to be used solely for working capital, and not for reduction of other loans.

At the Pioneer board meeting on 30th May 1989, attended by Antico, Quirk and Gardiner, Gardiner reported that Westpac was prepared to consent to a second charge to Pioneer over the Curragh and Pamour shares, and outlined Giant's further cash requirements over the next six months, which, if provided by Pioneer, would increase Pioneer's exposures to about $87 million plus the Korbell undertaking of $44 million. The meeting agreed to hold a special board meeting on 2nd June to consider the future funding requirements of Giant.

However, before that meeting, on 30th or 31st May 1989, Westpac withdrew its offer to allow the second charge. This arose out of a report from the Bank's consultants, Derry Michener Booth and Wahl (which I will call "DMBW") suggesting that the ERG project was seriously impaired, and that liquidation of the project should be considered. On 31st May 1989, Auty wrote to Giant withdrawing the offer.

Gardiner prepared a paper to go to the Pioneer board members for the meeting of 2nd June. This paper, dated 31st May 1989, reported the withdrawal of Westpac's offer, pending clarification concerning ERG. It noted that Giant's total bank and Pioneer debt was $162 million, that it was owed $33 million by ERG, that in addition there were gold loans, and that there were cross-default provisions in all bank loans. It noted that Westpac enjoyed the largest security, that Standard Chartered's security (effectively Horn Island) was questionable, that BNZ's security ratio was breached. Giant was unable to raise funding from any other bank, so any shortfall could only be met by Pioneer. At worst, Pioneer's exposure would be $70 million in July, including repayment of Standard Chartered's $30 million. The paper annexed three cash flows prepared by O'Neill, giving the worst case, most likely case and best case. The worst case cash flow showed a deficiency of $65 million in July, to be added to the existing $24 million. The paper proposed that a second charge be taken over the Curragh and Pamour shares, and noted that for security in relation to the existing $24 million, it was necessary for Giant to remain viable for six months.

The Pioneer board meeting held on 2nd June 1989 discussed Gardiner's paper, and resolved that Pioneer provide further financial support to Giant as required, conditional on obtaining security over Giant's shares in Curragh and Pamour, and on there being tighter management and financial control over Giant.

On 5th June 1989, in a memorandum to Quirk, Antico indicated that Quirk should agree with Needham concerning a reconstruction of the Giant board. on 14th June 1989, Antico was advised that Gardiner, Quirk and Needham had agreed that O'Neill, Bourke and Driscoll should be asked to resign in September.

On 6th June 1989, Auty of Westpac wrote to Needham, advising that the overdrafts of the Giant group had gone to $21.5 million against a limit of $11 million, and that Westpac was prepared to allow them to go to $23 million and no further.

On 9th June 1989, Bourke of Giant wrote to Pioneer, indicating that $4.5 million was required that day for deposit in Giant's Westpac account. The letter offered an interim security, to be given by Giant's subsidiary, Keprose Pty. Limited. By a letter of the same day, Pioneer offered Keprose a loan of $4.5 million, the offer was accepted by Bourke, and this amount was advanced.

A memorandum of 8th June 1989 from Ken Picard, Financial Controller of Giant (who I will call "Picard") listed a number of items totalling $5.98 million which had to be paid by 16th June, including $4 million to BNZ. Apparently this amount was paid to BNZ on 9th June, but on 14th June, BNZ wrote to Giant advising that even after that payment, there was still a $3.2 million security shortfall.

On 9th June 1989, Gardiner signed on behalf of Pioneer a letter to Westpac, confirming that Pioneer had resolved on 2nd June 1989 to support the immediate cash needs of Giant subject to obtaining security acceptable to Pioneer and to the Giant board resolving to sell Giant's interest in Curragh (which had been done). The letter continued that the board of Pioneer had noted the worst, most likely, and best case cash flow projections of Giant (which were attached) and that all projected cash shortfalls until 31st December 1989. The letter concluded: "PIL support of the cash needs of GRL in the immediate future is provided in the full knowledge of these projections". The letter was in fact based on a draft provided by Westpac, but altered from that draft, which had included an assertion that Pioneer would continue to support Giant until 31st December 1989.

An internal Westpac credit application/review, dated 14th June 1989, proposed renewal of the offer to allow a second charge to be given to Pioneer over the shares in Pamour and Curragh, setting the bank's priority at $84 million plus interest. It also recommended that $10 million of the $25 million held from the QCT proceeds be applied in permanent reduction of the term debt, with the bulk of the remaining $15 million being applied to reduce the excess overdraft position. It also recommended waiver of ERG's event of default in failing to pay an instalment of its gold loan on 30th June 1989.

Further sums of $1.5 million and $3 million were advanced by Pioneer to Keprose (for Giant) on 15th June and 21st June respectively.

The Giant board meeting of 22nd June 1989 resolved to approve the granting of a second charge to Pioneer over the Pamour and Curragh shares. The cash flow in the agenda papers for that meeting showed receipts in June of $17.7 million, being the Cirque payment (presumably $13.7 million) and the proceeds of Augold's shares in Giant (presumably $4 million); receipts of $2 million in each of August, October and December (sale of West Wits); yet showed a cash deficit of $17 million in September (against an overdraft limit of $13.5 million) and $51 million in December (after repaying Standard Chartered's $30 million). At the meeting, which was not attended by O'Neill, Bourke said O'Neill was confident that the Cirque payment would be received by about 30th June. Gardiner asked to be advised what funds would be necessary to get back to a sixty day creditor system.

By a letter dated 26th June 1989, Auty of Westpac re-offered to Giant second charges to Pioneer over the shares in Pamour and Curragh, with the Bank's priority set at $84 million plus interest; and to release $25.2 million held on trust so as to bring about a $10 million permanent reduction in the term debt and to bring overdrafts in the Giant group within limits. The offer was conditional on receipt of the Giant board minute wherein a commitment was made to sell Giant's interest in Curragh.

Meanwhile, on 22nd June 1989, Campbell of Standard Chartered had written to Giant effectively requiring repayment on 30th June 1989 of the Augold facility and $15 million of the Giant facility. On 29th June 1989, Bourke wrote to Antico, with copies to Quirk and Gardiner, that the Cirque settlement was now unlikely by 30th June, but was envisaged early in July, and that Giant had agreed to assign to Pioneer the interest in the $12 million proceeds of that settlement. The letter asserted that "well were taken by surprise by Standard Chartered's requiring repayment of $15 million of Giant's $30 million facility, and that O'Neill had met Standard Chartered representatives on 26th June, with the result that Standard Chartered had withdrawn that particular demand. The letter also asserted that long hours were being worked to settle the security documentation. (This was with a view to having security in place so that Pioneer could provide the funds to repay the Augold facility on 30th June).

A meeting of the board of PIFL on 29th June 1989 approved the security documents. A meeting of Giant directors (Needham, O'Neill and Bourke, with apologies including Antico, Quirk and Gardiner) on 30th June 1989 resolved to accept Westpac's offer of 26th June 1989, and execute security documents to PIFL; and, subject to obtaining an appropriate purchase price, that the company dispose of its interests in Curragh forthwith.

By a letter dated 30th June 1989, PIFL confirmed to Giant that $33.05 million was due for repayment that day, and offered a further advance of $14.5 million on conditions, including the execution of security documents. This was accepted by O'Neill on behalf of Giant.

The security documentation was in fact completed on 30th June 1989; and the funds necessary to pay out the Augold facility were provided by Pioneer, and the Augold facility was paid out.

3.13 SCBAL Extends Its Facility: June and July 1989 146. Before continuing with the events of July 1989, it is necessary to go back to recount dealings between Giant and Standard Chartered following the extension granted by Standard Chartered on 31st March 1989.

By a letter dated 3rd April 1989 from Proudfoot, Standard Chartered advised Giant that it wished to conduct a comprehensive review of the Giant group by 15th April 1989, requiring cash flow, financial statements of Giant and Augold to 31st December 1989, and comments on the clearance of the facilities and the timing of this.

At the Giant board meeting of 6th April 1989, O'Neill advised that Standard Chartered had extended the facilities totalling $44 million to the end of June, and that he believed that if the Augold facility of $14 million was then repaid, the $30 million would be extended.

On 14th April 1989, O'Neill of Giant wrote to Campbell of Standard Chartered enclosing $100,000.00 being the extension fee re Augold, a cash flow for twelve months to January 1990, and financial statements as at 31st December 1988. it stated that Giant's intention was to clear the Augold facility by 30th June, that the Giant facility was anticipated to be partly cleared as at 1st June, and that Giant would like its facility established on a more permanent basis for a lesser amount. The cash flow enclosed showed payment of $30 million to Standard Chartered in June; "PNCS" advances totalling $24 million; and also Curragh dividends of $3.3 million in each of July, October and January, asset sales $8 million in May (being Augold's Giant shares), $13 million in June (the Cirque payment), and an amount of debt re- financing of $33 million in June. The closing cash from June onwards was a debit of over $21 million, against an overdraft limit of $16.5 million.

On 21st April 1989, Campbell of Standard Chartered wrote to O'Neill of Giant, advising that, to enable a full and complete review of Giant, a number of questions needed to be answered. Those questions included: 1. Will Pioneer continue its current investment in Giant? 2. Will the Morgan dispute progress to Court? 3. Will the sale of the Pioneer Mineral assets be reviewed, for example, in six to twelve months? 4. What was Giant's full year expected result? 5. Details of banking facilities in force for Giant, and the security supporting them. 6. Balance sheet as at 31st December 1988 showed $67 million cash and short term deposits: why was clearance of the Augold facility not effected from these?

Additional matters in the letter included a request for details concerning the cash flows.

O'Neill replied by a letter dated 8th May 1989 answering the questions as follows: 1. That he believed Pioneer would continue its current level of investment. 2. That he believed the Morgan dispute would proceed to a Court hearing. 3. That the sale of mineral assets was not postponed indefinitely but that it was too early to suggest when it would be re-considered. (That seems plainly misleading, in that the sale of the mineral assets had in fact been abandoned well before this time). 4. After a $15 million loss on the sale of the QCT shares, and a $5 million write down in respect of an asset referred to as form physics, he expected that the improved performance of the operating entities would not be enough to eliminate the $15 million loss from the first six months, and that the best estimate for the year was about an $8 million loss. 5. In addition to the Standard Chartered facilities, $25 million from BNZ supported by a charge over shares in public companies, and $88 million from Westpac supported by a similar charge. 6. Cash was held by the Canadian subsidiaries, it could not be lent to Giant, and the board did not regard dividends as being in the interests of Giant.

In a facsimile dated 9th May 1989 to O'Neill, Campbell raised, as a matter to be discussed at a meeting to be held the next day, concerning BNZ/Westpac facilities secured by charges over shares in public companies, what companies were involved, and could SCBAL participate on a pari pasu basis in lieu of having a letter of comfort? The evidence does not indicate what was said about these matters. However, a facsimile of 30th May 1989 from O'Neill to Ivan Jandricic, a credit analyst in SCBAL's Brisbane office (who I will call "Jandricic"), identified the shares charged to BNZ and Westpac, but did not comment on the request for participation. (This fax also asserted that O'Neill's estimated operating loss of $8 million still stood, although in fact O'Neill had reported to the Giant board meeting on 18th May that Giant's full year loss would probably exceed $20 million).

On 1st June 1989, the last set of bills under the bill/discount facility, to a face value of $30 million and maturing on 30th June 1989, were executed. In order to pay out the previous set of bills, Giant contributed an amount of $464,536.09, mainly to cover the discount on the new bills.

By a letter dated 22nd June 1989 from Campbell to O'Neill, SCBAL confirmed that its $30 million facility was to be fully cleared on 30th June, although SCBAL agreed to provide a temporary facility thereafter of $15 million. There was to be full clearance of the Augold facility no later than 30th June. On being satisfied that projections concerning TSG were realistic, the bank could recommend continuance of the $15 million facility.

By a letter dated 27th June 1989 from O'Neill to Campbell, Giant advised SCBAL that the terms and conditions in the letter of 22nd June were unacceptable. Two significant changes had occurred since the preparation of the cash flow to 31st January 1990, namely Westpac's retention of $15 million from the QCT proceeds, arising from concerns over the ERG project, and second, Giant's inability to sell Augold's Giant shares for more than $3 million. The letter indicated that Giant would like Standard Chartered to reconsider its offer on the basis that the $30 million facility would be extended to December 1989, at which time it would be reduced to $15 million.

Giant did not pay out the $30 million bills drawn on 1st June 1989 when they matured on 30th June 1989, and by a letter of that date to Giant, SCBAL confirmed having that day transferred the outstanding balance of $30 million to an overdraft account.

The Pioneer board meeting of 4th July 1989 agreed that Needham should proceed with negotiations for the sale of Curragh, but concluded that it required further information from Giant before deciding whether further loans should be made.

A memorandum dated 7th July 1989 from Needham to Antico, Quirk and Gardiner, enclosed a budget summary of a three year plan for Giant. It made a number of assumptions, including that the amalgamation of the Canadian gold companies would be finalised by December 1989, and that ERG would be able to repatriate its loan within that month, that no provision was necessary for funding the Papua New Guinea oil projects, and that the Cirque proceeds would be received in July to reduce the Pioneer loans. On the basis that the funds from ERG enabled repayment of Standard Chartered, the plan still showed Giant as over its overdraft limit from March 1990. However, it did not provide for continued funding by Pioneer, or receipts from the sale of Curragh.

On 11th July 1989, Campbell wrote to O'Neill a letter enclosing a facility letter, and requesting that the corporate lenders to Giant be approached with a view to Standard Chartered taking a second charge over the security held by Westpac and BNZ. The facility letter offered an overdraft facility of $30 million, repayable on demand, but available until 31st August 1989, and renewable monthly to 31st December 1989 when it should be fully cleared. The letter provided for a reduction of $5 million on 30th September 1989, and among its conditions were the condition (iii) that no further debt be incurred without Standard Chartered's approval, and condition (x) that Curragh be disposed of by 31st December 1989 sufficient to clear the Bank's debt. This letter came to the attention of Quirk and Gardiner on or about 21st July, and of Antico on 27th July.

On 19th July 1989 Giant requested PIFL to advance $2 million, and this was given effect to on 21st July.

Meanwhile, on 18th July 1989, Gardiner prepared a memorandum to Pioneer directors concerning loans to Giant. It noted that, up to 21st June 1989, $33.05 million had been advanced, and that security for this might be a preference if Giant went into receivership before six months from 30th June 1989. It noted the payment of $14.5 million on 30th June, secured against the Cirque proceeds. It noted also the Korbell guarantee (now taken over by PIFL) of $42 million. It noted that the current intention of Pioneer was to meet the day to day cash flow needs of Giant, and that this policy would need to be continuously reviewed in the light of Giant's performance. It put a value of $125 million on Curragh and $45 million on Pamour. Assuming $73 million was owing to Westpac (excluding the $42 million guarantee) this left $49.45 million worth of security remaining.

O'Neill's letter replying to Campbell's letter of 11th July was dated 21st July, but apparently not sent until 25th July 1989. It asserted that approaches had been made to other bankers with a view to having them grant a second charge to Standard Chartered, and that they were not willing to do so. (Having regard to the terms of Campbell's letter of 11th July 1989, and to the fact that Pioneer had itself taken a second charge over the relevant asset, this was plainly misleading; and I can only conclude that it was deliberately so). The letter referred to the condition that no further debt be incurred without Standard Chartered's approval, and noted that O'Neill's understanding was that it did not extend to debts in the ordinary course of business.

On 24th July 1989, there was a meeting of Giant directors (Needham and Bourke in Sydney, O'Neill in Toronto) which resolved to accept the Standard Chartered offer in the facility letter of 11th July. A copy of these minutes was sent to Standard Chartered along with O'Neill's letter of 21st July. 3.14 The Last Months of Giant: July 1989 to June 1990

On 27th July 1989, a meeting occurred between Antico, Quirk and Gardiner, and attended by the Pioneer secretary, Michael Newsom (who I will call "Newsom"), called to discuss proposals formulated by Quirk concerning Pioneer's disposal of its mineral assets. Antico did not agree with these proposals, and the purpose of 27th July meeting was to determine whether a joint approach could be formulated as between Antico, Quirk and Gardiner to the question of the sale of Pioneer's mineral assets, which could then be put to the Pioneer board. At that meeting, there was considerable discussion of Giant, in which Quirk and Gardiner quite forcefully put negative views concerning Giant, while Antico put rather more optimistic views.

A Giant board meeting was held on 28th July 1989. O'Neill's letter of 25th July was available at that meeting, and Gardiner commented that the letter contained half truths, and that Standard Chartered had to be told that Pioneer had taken security. It appears that Needham said that he would do this. Also at the meeting was a report by Needham concerning his efforts to sell Curragh, which reported that he had held discussions with Poseidon, Corona, Amex, Metallgesellschaft, and the Finck family; and that the preemptive rights of Frame had been raised as a serious concern by most of them. This report concluded, however, that sufficient interest had been raised to make Needham hope that some proposal would eventuate in the near future.

A Pioneer board meeting was held on 1st August 1989, to which Needham reported that Frame was a possible buyer of Giant's interest in Curragh; and that he expected Giant would receive an offer for this within one month.

On 15th August 1989, pursuant to requirements of the Standard Chartered facility letter of 11th July, O'Neill sent a cash flow to Campbell, which showed for July a cash raising of $2 million from Pioneer, and a budgeted repayment of $14 million. Campbell responded on 17th August with a letter asking about these matters, including a request for details of Pioneer's loan. O'Neill replied on 29th August, advising that Pioneer had undertaken to provide the cash shortfall until the sale of Curragh was completed. This reply did not advise that the amount of the loan then totalled $53 million, or that security had been taken.

I interpolate here that Campbell's evidence was that, up to this time, he had known that Pioneer had funded the payment of the Augold facility on 30th June, and that in return the proceeds of the Cirque settlement had been earmarked for Pioneer; but Campbell asserted that otherwise, notwithstanding the reference to PNCS in the cash flow sent on 14th April 1989, he did not know of Pioneer funding Giant, much less that it had taken security.

By a letter dated 23rd August 1989 from an entity called Gordon Capital Corporation, an offer was made on behalf of a syndicate to acquire from Giant the Curragh shares and certain other assets, including 39% of Cirque, loans owing to Giant by Pamour and ERG, and 1.4 million GYK shares. It was calculated that this offer could mean a minimum of around $248 million to Giant, and a maximum of $290.7 million. The offer provided for a period of due diligence extending from 15th September to 31st October.

This offer was discussed at a Giant board meeting on 25th August, and at a Pioneer board meeting on 29th August. The latter meeting resolved that Pioneer agree to Giant accepting this offer.

However, on 27th September 1989, Quirk reported on the progress of the transaction, and noted that there was a shortfall of $C35 million because a party had withdrawn from the syndicate. He recommended an alternative in which Giant would contribute $C30 million and acquire an interest in the consortium; that Pioneer be prepared to finance this involvement of Giant; and that, in circumstances where this alternative involved payment for the purchase occurring in two stages, that Pioneer wait until the second stage for full payment of its debt.

On 3rd October 1989, the Pioneer board resolved that Pioneer be prepared to finance Giant's possible involvement for a possible cost of $33 million.

An altered proposal for the purchase of Canadian assets was received on 6th October 1989, and then on 7th November 1989 another letter of intent, this time from Frame Mining Corporation. This letter was accepted on 10th November 1989, but as it provided, among other things, for due diligence, this did not give rise to a binding contract of sale.

On 27th November 1989, a letter from Frame Mining Corporation advised that it was not prepared to enter into a firm agreement to purchase the Canadian assets.

On 28th November 1989, the Pioneer board resolved that no additional financial support be given to Giant. At that time, it had advanced a total of $91.4 million to Giant since 31st October 1988.

Meetings were arranged with Giant's creditors, especially its bankers, and held on 1st December 1989; and they were advised that Giant could no longer meet its debts as they fell due. There were attempts during December to negotiate a moratorium, but ultimately a summons to wind Giant up was presented in April, a provisional liquidator appointed, and Giant was ordered to be wound up in June 1990.

Neither side led evidence as to amounts realised on the disposal of Giant's various assets, apart from some evidence concerning the sale of Giant's interest in GYK and Pamour, and some of the shares in Curragh. I did not think I should give much weight to the latter, in the absence of evidence of the total amount received for the whole of Giant's interest in Curragh. It is clear that SCBAL and SCAL received nothing from the winding up. There is some evidence that, nothwithstanding its security, Pioneer also received nothing; but having regard to the way that evidence emerged (a comment by Antico) and to the absence of better evidence which could have been called, I make no finding on this matter.

CREDIT 179. Before considering the issues in the case, it is necessary to say something about the credit of the four main witnesses, Campbell, Antico, Quirk and Gardiner. There was some attack on the credit of each of these witnesses, and their credit is relevant to issues in the case in ways which I will outline. As regards other witnesses, there was no appreciable attack on their credit, and I see no reason why I should not accept them as generally reliable. In this section I will also identify certain possible witnesses who were not called, and briefly comment on the significance of that.

180. The relevance of Campbell's credit relates to the question of how SCBAL would have acted in certain circumstances.

181. First, the plaintiffs claim that Giant was unable to pay SCBAL's debt, particularly when it fell due on 31st March 1989 and 30th June 1989; and that insofar as insolvency, or grounds to expect insolvency, may be avoided by reason of SCBAL extending the time for payment, these extensions occurred, and could have been expected, only because SCBAL was misled. And it is the plaintiffs' contention that extensions occurring because the creditor is misled would not count in the defendants' favour for the purposes of s.556. Whatever other problems there may be with this contention, it does depend upon the assertions that SCBAL was misled, and would not have extended time for payment if it had not been misled. Campbell's credit is relevant to both.

182. Second, the plaintiffs claim that but for the defendants, misleading conduct and negligence, SCBAL would not have entered into agreements on 31st March 1989 and 25th July 1989 effectively giving Giant further time to repay the $30 million, but rather would have called up the facility and would thereby have been better off. This contention also requires a finding that SCBAL was misled, and a finding as to how SCBAL would have acted if it had not been misled.

183. The credit of Antico, Quirk and Gardiner is directly relevant to questions under s.556, and to the issue of knowing concern in alleged misleading conduct.

Antico, Quirk and Gardiner were all ostensibly successful and capable businessmen; and they say in effect that they conscientiously attended to their duties, and that at material times, they believed that Giant would be able to pay its debts as they fell due. If I accept them as honest and reliable witnesses, then I believe this evidence carries weight as to what a director of appropriate ability and prudence ought to have expected, on the facts known to them; and in my view this has some relevance to the objective question of reasonable grounds under s.556(1), as well as being clearly relevant to the question of reasonable cause under s.556(2).

4.1 Campbell 185. The attack on Campbell focuses particularly on discrepancies between information about Giant and its affairs which he had or ought to have had, and information passed on by him to SCBAL's head office in Adelaide, and to the London office of the Standard Chartered Bank where the ultimate decisions on important questions were made.

In order to come to a view about Campbell's credit, it is necessary to discuss O'Neill, the person who primarily dealt with Campbell on behalf of Giant. O'Neill did not give evidence in the case, and was not represented for the substantial part of the hearing of the case - a claim against him and other executive directors of Giant was settled at an early stage of the hearing. However, in order to assess Campbell, it is necessary for me to reach a view as to the reliability of information which O'Neill conveyed to Campbell. I have to reach this view for the purposes of deciding the issues between these parties, but it is a view arrived at without the benefit of evidence and submissions which might have been made on behalf of O'Neill. on the material before me, which the parties before me have chosen to present, I come to the conclusion that the material provided by O'Neill to Campbell was by no means reliable.

In coming to this view, I rely particularly on the terms of the letter dated 21st July 1989, responding to Campbell's request, in his letter of 11th July, that corporate lenders to Giant be approached with a view to Standard Chartered taking a second charge over security held by Westpac and BNZ. Quite apart from the point that, in my view, Giant was obliged by the terms of the Standard Chartered facility to disclose the taking of security by Pioneer, O'Neill's reply that approaches had been made to other bankers with a view to having them grant a second charge to Standard Chartered was positively misleading, when Pioneer had already taken a second charge over shares charged to Westpac. In my view the absence, in the whole of Standard Chartered's records until about December 1989, of any reference to Pioneer's taking security (along with Campbell's evidence that, except to the extent that he understood that the Cirque proceeds were somehow earmarked for Pioneer after 30th June 1989, he knew nothing of Pioneer taking security) make it clear that Standard Chartered did not know that Pioneer had taken this security over the interests in Pamour and Curragh. On the material before me, I have to conclude that the letter of 21st July was framed as it was, deliberately, in order to conceal from Standard Chartered that this security had been taken.

One other particular matter leads me to believe that the material provided by O'Neill to Campbell was not reliable was his assertion, in a fax addressed to Campbell's associate, Jandricic on 30th May 1989 that his estimated operating loss of $8 million still stood. That in effect confirmed that an estimate of a full year loss for Giant of $8 million, previously given, still stood; and it was given in circumstances where, on 18th May, O'Neill had told the board of Giant that the full year loss was expected to be in excess of $20 million. It could be suggested that the assertion might be justified because the loss of over $20 million included a loss of $13 million or more of the sale of the QCT shares; but, if one was strictly talking about operating loss, one should also exclude the equity account profit of Curragh which would have more than balanced the QCT loss. In any event, the question was directed to confirming an estimated loss given previously, which was not given in terms of operating loss.

Accordingly, in assessing Campbell's reliability, I do so on the basis that information provided to him by O'Neill may well have been misleading, and misleading so as to present to Standard Chartered a picture more favourable to Giant than the facts justified.

The main attacks on Campbell centred around his assertions to his superiors that Pioneer was to underwrite a share issue in order to repay $30 million on 31st January 1989; an assertion made in a memorandum of 13th December 1988 to head office in Adelaide that Giant had confirmed that the $30 million facility would be able to be repaid by 31st January 1989; and an assertion to his superiors following the repayment of the Augold facility on 30th June 1989 that this had been paid from cash flow arising from the sale of Canadian assets.

As regards the first of these, there are grounds for saying that material in Standard Chartered's file should have raised very serious doubts in Campbell's mind about that assertion. As regards the second, there is some force in Mr. Hughes' submission that it is inconsistent with the terms of a letter from O'Neill dated 7th December 1988, and also does not fit well with notes made by Campbell on a memorandum of his dated 24th November 1988. As regards the third, Campbell accepted that, at the time when the document with this assertion was signed by him, he knew that the Cirque settlement, from which it was expected the Augold facility would be repaid, had been delayed and that Pioneer had provided the funds.

However, it seems probable that the assertion concerning the Augold repayment was drafted by Jandricic and only signed by Campbell; and although Campbell was unable to explain the terms of it, it seems possible that either he did not notice the assertion, or else regarded it as substantially correct on the basis that the cash from the Canadian asset (i.e. Cirque) was expected very shortly and the provision of funds by Pioneer was only a temporary stop-gap measure. Similarly, I am not satisfied that there was any actual dishonesty in the other two matters; it may be that there was some misinterpretation by Campbell of the letter and of his own note concerning Giant's ability to repay the $30 million on 31st January 1989, and he may not have picked up the problems concerning the Pioneer underwriting. It is also possible that on both matters he was positively misled by O'Neill.

I think it is a fair conclusion that Campbell was something of an advocate on behalf of Giant to his superiors, and was anxious to present a favourable picture to them; and that sometimes he presented a picture which was more favourable than a balanced objective assessment would justify. But I do not believe that he set out to mislead his superiors, and I do believe he gave any deliberately false evidence before me.

4.2 Antico 194. The plaintiffs submitted that Antico's evidence should not be accepted except to the extent to which it was corroborated by contemporaneous documents; and that I should find that he was prepared to say what he perceived as promoting his case, and in doing so was prepared to say what he knew to be untrue or to be reckless as to the truth of what he was asserting. In my view that would be too harsh a judgment on Antico's evidence; but, for reasons I will give, I will be giving greater weight to contemporary documents, and inferences that can be drawn from contemporary documents, than to Antico's evidence.

195. Certainly, Antico gave the impression of being more used to asking questions than answering them, and tended to give the Court material which he thought was important or advanced his case, rather than squarely answering the questions which were put to him. This attitude was perhaps consistent with Antico's long and successful career, during which he was the chief executive of Pioneer from its very small beginnings in 1956 until April 1988, when it had become a very large company with interests in many parts of the world. He gave the impression of being a person of considerable drive, entrepreneurial spirit, and confidence.

196. Of the three personal defendants, Antico was certainly the most optimistic as to the future of Giant throughout 1989: this emerges from the contemporary documents as well as from Antico's evidence. I believe that Antico's confidence in the ability of himself and his colleagues to find solutions in difficult circumstances has been a factor in his success, and it would seem that often his confidence has turned out to be justified.

197. However, particularly in relation to the objective test in s.556(1), I believe that I have to form my own opinion as to whether reasonable grounds existed; and in doing so, I would take into account that, in certain respects, it seems to me that Antico's confidence and optimism were misplaced: for example, his view that Standard Chartered was under an obligation to continue to extend the $30 million facility, and would do so if they were reminded of this obligation. In general terms, it does seem to me that Antico was prepared to rely on his business instincts more than on close and careful consideration of the issues facing Giant from time to time, and also tended to identify Giant's interests with those of its shareholders, and in particular Pioneer. In circumstances where there was, at least from about March 1989 onwards, a risk of insolvency, in my view Antico was not sufficiently aware that the directors of Giant had a duty also to take account of the interests of creditors, who did not stand to gain from any ultimate success of Giant otherwise than simply by having their debts and interest repaid.

198. In a case such as this where, some time after the event, very close attention is focused on matters of subjective opinion concerning the ability of Giant to pay its debts, when this was not the prime matter of concern at the time of the event, I think there is a very great danger of reconstruction and rationalisation; and I think there has been substantial reconstruction and rationalisation of these matters by Antico. For example, I think this was the case in relation to Antico's evidence concerning the likely sale price of Curragh, and I do not accept that he held the belief about that which he claimed to have held.

4.3 Quirk 199. In relation to Quirk, the plaintiffs' submission was that because of memory problems and his tendency to confusion, his evidence also should only be accepted where corroborated by contemporary documents. There were also allegations of dishonesty in relation to certain of his evidence.

200. Again, I believe those submissions go too far. As Quirk admitted, he had some memory problems, and I think they did go beyond mere short-term memory problems. There was some tendency to confusion in his evidence. But, in my view, he was attempting conscientiously to give truthful evidence to the best of his ability.

201. However, at the time of the events in question, Quirk's concerns were directed more to the interests of the shareholders of Giant, and in particular Pioneer, than to the creditors of Giant. For that reason, and because of memory problems, I think the danger of reconstruction and rationalisation was considerable in Quirk's case as well. I give weight to his evidence, as indeed I do to Antico's evidence; but (particularly in relation to matters such as his belief as to the value of curragh) I give greater weight to what appears from the contemporary documents and to reasonable inferences from those documents.

4.4 Gardiner 202. The plaintiffs submitted that Gardiner was less than frank with the Court in a number of respects, and that his evidence should not be accepted on the issue of reasonable cause except to the extent to which it is corroborated by contemporaneous documents. Again, I believe those submissions go too far.

203. Gardiner did not have the memory difficulties that Quirk had, and was less liable to be confused. However, I think, in his case as well, there was considerable rationalisation and reconstruction, arising from the very great attention now given to matters to which there was less attention at the time. As with Antico and Quirk, I believe Gardiner's main concerns were for the shareholders of Giant, and in particular for Pioneer, and that the interests of creditors of Giant were not given particular attention, except insofar as they coincided with those of the shareholders.

204. I think this tendency to rationalise and reconstruct led Gardiner to claim beliefs in higher values for Giant's interests in Curragh than he actually held at the time, and to claim greater confidence that Giant was solvent than indicated by documents showing a concern that Giant should survive for at least six months after giving security to Pioneer, in order to perfect the security for pre-existing advances. So as with the evidence of Antico and Quirk, I give greater weight to contemporary documents and reasonable inferences from those documents than to Gardiner's oral evidence.

4.5 Witnesses Not Called 205. Submissions have been made in relation to the plaintiffs' failure to call Jandricich, John Patton, the National Manager, Advances, SCBAL Adelaide (who I will call "Patton"), Proudfoot, and various decision-makers from the London office. These submissions relate primarily to the question of how SCBAL would have acted in various circumstances, and I will deal with them when I come to deal with that question.

206. On the other hand, the plaintiffs have commented on the defendants, failure to call Needham. His evidence could also have been relevant in relation to the disclosure to Standard Chartered of the security taken by Pioneer; and I will deal with the failure to call Needham in relation to that question.

5. INCURRING A DEBT
6. It is common ground that a debt to SCAL was incurred on 25th January 1989, so in setting out the facts and submissions, I will deal only with those concerning the $30 million SCBAL facility. The essence of the problem is that on each of the dates 31st March 1989, 1st June and 25th July 1989, Giant already owed SCBAL $30 million, and the obligation undertaken by Giant on those dates to pay $30 million plus interest merely varied, supplemented, or displaced an existing obligation to pay $30 million. On none of these three dates was any "new" money advanced. There appears to be no authority whatsoever on whether a debt is incurred in these circumstances. The question is not adverted to in the article on incurring a debt by Noble in Company and Security Law Journal, Vol.12, No.5, August 1994, pp.297-309.

5.1 Facts 208. The $30 million (or at least $29.05 million of it) first became due to SCBAL pursuant to the terms of SCBAL's facility letter dated 20th October 1988, which Giant accepted pursuant to a resolution passed by directors of Giant on 20th October 1988. The terms of that facility included the following.

209. The letter itself contained the following terms: "Bill Acceptance/Discount Facility We ... are pleased to confirm that SCBAL ("the Bank") hereby offers financial accommodation ("the facilities") to Giant

..., subject to the following terms and conditions. Borrower Giant Resources Limited ("Customer") Facility Bill acceptance/discount facility to an amount of $30,000,000 Availability

The facility is available at the Bank's Brisbane branch within the abovementioned facility amount by presentation of Bills of Exchange at least two business days prior to requirement (the Bank will draw up the bills when required).

The Bank may review the Facility annually and may at its discretion, continue or vary the terms of the Facility by notifying the Customer in writing.

Subject to the Annual Review Clause above the Customer will repay all amounts outstanding under the Facility on 31 January 1989 ...

The Customer may pay all amounts outstanding under the Facility without penalty.

As a condition precedent to the availability of the Facility to the Customer and to secure the Customer's obligations under the Facility the Bank requires the following security in a form and substance acceptable to the Bank:

.First Registered Equitable Share Mortgage over 100% of Share Scrip acquired in Augold NL, including the portion currently held by Gemstay Pty. Limited as and when required by Polbury Pty. Limited.

.Second Registered Fixed and Floating Charge ranking behind

Standard Chartered Australia Limited over the assets and undertakings of Polbury Pty. Limited.

.Any other security documentation that may be required by the Bank or its solicitors.

Documentation In addition to the Securities, the documentation governing the terms and conditions of the Facility includes: (a) this Letter of Offer; (b) the Standard Terms and Conditions annexed hereto; and (c) the additional Terms and Conditions annexed hereto, which are accepted by the Customer and signed by the Bank.

The Bank will discount Bills of Exchange having a term of up to 180 days and a face value of up to $30,000,000 Australian dollars ... at the Bank's Bill Buying Rate

Subject to any rate specified to apply in default elsewhere herein applying to any Facility, interest Will be calculated at a rate equal to 2% above the Bank's base rate on all amounts outstanding under the Facility and not paid on due date.

.an Establishment Fee of $50,000 Australian dollars payable on the acceptance of our offer

.upon any bill being accepted hereunder an Acceptance Fee of 1.5% per annum calculated on the first value of each bill so

... if for any reason this facility is not completed after acceptance by the Customer of this offer, the Customer will reimburse the Bank for any expenses paid or payable by it in respect of the preparation of the Facility.

This offer will lapse if not accepted on or before 21 October 1988.

If these terms are acceptable to you will you kindly arrange for the passing of a Resolution of company directors in the

form enclosed and execution of the enclosed Certificate of Acceptance

210. Those provisions incorporated standard terms and conditions annexed to the letter; and those standard terms and conditions included the following material: "Definitions and Application.

1. These terms apply to any Facility subsisting between the Bank and a Customer and form part of the Facility Documents as defined ...

"Accommodation" when used in relation to the acceptance of a Bill by the Bank, has the meaning given to it by the Bills of Exchange Act 1909 of the Commonwealth of Australia ("the Act") irrespective of whether the Bank has received or will receive value from the Customer for the acceptance ...

"Availability Period" means the period commencing on the date of acceptance of the Letter of Offer and ending on the Repayment Date specified in the Letter of Offer ...

"Facility Documents" means the Letter of Offer, the Standard Terms for Banking Facilities and any Additional Terms applying to the Facility and all other attachments to the Letter of offer ...

"Repayment Date" means the date specified in the Letter of Offer or such later date as the parties agreed in writing.

8. If an Event of Default occurs, the Bank ... may terminate

the Facility by serving a notice of termination on the Customer. Upon termination of the Facility, the Customer's rights to be provided with any financial accommodation shall cease and all amounts payable and all financial accommodation provided under the terms of the Facility Documents ... shall become immediately due and payable and reimbursible by the Customer to the Bank ...

9. In the event that the Customer fails to pay any amount due or meet any liability under the Facility, the Bank may: (a) debit any existing account at the Bank in the name of the Customer ... ; or (b) if the Customer has no existing account at the Bank, open an account in the name of the Customer (which the Customer hereby authorises the Bank to do) and debit that account, with the amount so due ... The overdrawn balance of such account shall bear interest ... at the default rate calculated in accordance with the Letter of Offer from time to time.

10. At any time after a notice of termination is served ... the Bank may: (a) combine the balance of any account ... opened under clause 9(b) of these Terms with the balances of all or any of the Customer's other accounts now or in the future held at the Bank and treat those accounts as one account; and

after combining those accounts, the Bank may refuse to pay cheques or to make advances or to meet any obligations to, for or for the accommodation of the Customer to the same extent as if the combined accounts had at all times been a single account.

11. The Customer shall pay or reimburse the Bank on demand ... an indemnify the Bank for any costs, expenses and outgoings which may arise or which the Bank may incur in connection with: (a) the preparation, administration, execution and stamping of the facility documents and any security ...

15. The Facility Documents contain the entire agreement between the Bank and the Customer in relation to the Facility ...

17(a)the Bank's rights to payment of any moneys arising in

respect of the provision of any accommodation, any bill, promissory note or other negotiable instrument ... in any ... way shall not merge with the Customer's undertakings in the Facility Documents and the Bank may exercise its rights under the Facility Documents even if any negotiable instrument, contract or other obligation relating to moneys due or accommodation provided under the Facility Documents is still current or has not matured or fallen due ...

18. The Customer agrees to pay to the Bank on demand

21(a) The customer shall give notice in writing to the Bank if no drawing at all of the Facility is to be made. Upon the Bank receiving any such notice its obligation to make the Facility available shall immediately cease but without prejudice to any fees and costs then due and payable pursuant to the Letter of Offer continuing to be so due and payable by the Customer.

21(b) The Bank may withdraw its offer or terminate the agreement constituted by the Customer's acceptance of the offer contained in the Letter of Offer if the Customer fails to draw the Facility in full within two months from the date of the Letter of offer. Upon the Bank withdrawing its offer or terminating the agreement, its obligation to make the Facility available shall immediately cease and the outstanding balance of the Facility (if any) together with any interest, fees and costs then due and payable pursuant to the Letter of Offer shall be immediately due and payable by the Customer."

The facility letter also incorporated additional terms and conditions annexed thereto, which were expressed to be of supplementary to and be read in conjunction with the Bank's standard terms for standard banking facilities". Those additional terms included the following: "Conditions Precedent 1. The Bank shall accept and (at the Customer's option) discount Bills drawn by the Customer during the Availability Period (as defined) for the accommodation of the Customer ...

2(a) Subject to clause 1, on each date upon which the Customer presents Bills to the Bank for acceptance and discount, the Bank shall:

(i) accept those Bills; and (ii) at the Customer's option discount those Bills ... and pay the Net Bill Proceeds by deposit or transfer to the Customer's Account (if any) specified in the Letter of Offer or otherwise as the Customer may, with the Ban's approval, direct ...

3. The Customer shall draw Bills with such face values ... as specified in the Letter of Offer or otherwise as the Customer and the Bank agree (or in the absence of agreement, as specified by the Bank). The Bills are to be prepared by the Bank ... and signed for and on behalf of the Customer

4. The Customer indemnifies the Bank against any liability which the Bank may incur on, and for any moneys the Bank may pay under, any Bill accepted under this Facility or in connection with any such Bill. This indemnity is in addition to and not in substitution for any other indemnity or obligation in favour of the Bank contained in the Facility Documents or given by the Bills of Exchange Act or at law or in equity.

5(a) The Customer shall pay to the Bank the face value of any Bill drawn and discounted under this Facility on its maturity date in such manner as the Bank may specify ... 5(b) As between the Bank and the Customer, the Customer shall be primarily liable on all Bills and the obligations and liabilities of the Customer under the Facility Documents and in relation to each Bill discounted under the Facility Documents shall continue notwithstanding that the Bank becomes the holder of the Bill in its own right before, on or after its maturity date.

6(a) Subject to the foregoing conditions, the Bank at the option of the Customer shall accept and at the Customer's option discount on any Rollover Date the Bills replacing Bills discounted by the Bank and having an aggregate face value equal to all Bills discounted by the Bank and which mature on such Rollover Date ...

6(b) Clauses 2 to 5 above shall apply mutatis mutandis in relation to the preparation, delivery, execution, acceptance and discount of Replacement Bills. 6(c) The Bank shall discount the Replacement Bills at the Bank Bill Buying Rate applicable on the Rollover Date ... and ... on the relevant Rollover Date apply the Net Proceeds of each Replacement Bill in or towards discharging the obligation of the Customer to indemnify the Bank pursuant to clause 5 in respect of Bills accepted and discounted by the Bank and maturing on that Rollover Date. 6(d) In this clause "Replacement Bill" means any bill drawn pursuant to clause 6.

"Rollover Date" means any day during the availability period other than the last day of the Availability Period on which any Bill falls due for payment.

7. ... the Customer hereby irrevocably appoints the Bank the Customer's attorney to do or perform any Act, matter or thing which the Customer is obliged to do or perform under these Additional Terms including, without limitation, the drawing or negotiation of any Bills or Replacement Bills."

Thus, the effect of the contract entered into on 20th October 1988 was that the Bank agreed to make available a "bill acceptance/discount facility to an amount of $30 million" until 31st January 1989. Under that facility, Giant could, at its option, draw bills of exchange up to a maximum face value of $30 million, which the Bank was obliged to accept and, at the option of Giant, discount. Giant could choose the maturity date of the bills, provided that they did not mature after 31st January 1989. Giant could also determine the face value of bills to be drawn, subject to bills not being drawn with an aggregate face value over $30 million. Giant was not obliged to draw on the facility, and had no obligation to SCBAL to pay anything other than SCBAL's fees and costs, if no draw down was made. In the case of bills discounted by SCBAL which were due to mature before 31st January 1989, Giant could discharge its obligations on those bills by making payments to SCBAL from its own funds. Alternatively, Giant could choose to draw replacement bills, maturing no later than 31st January 1989, which the Bank would have to accept and, at Giant's option, discount; and then the net proceeds of such discounting would be applied towards discharging Giant's obligations under the previous bills, fulfilment of those obligations requiring payment in addition from Giant's funds of the amount of the discount and relevant bank fees.

By 31st January 1989, bills with a face value of $29.05 million had been drawn by Giant, and had been accepted and discounted by SCBAL. Bills with a face value of $23.85 million had been sold by the Bank to third parties.

On 31st January 1989, the term of the 20th October 1988 facility agreement expired. O'Neill had, on 23rd January 1989, seen Campbell in SCBAL's Brisbane office, and requested an extension of the $30 million facility to 30th June 1989. This request was repeated in a letter dated 26th January 1989 from O'Neill to Campbell, although this letter was apparently not sent until 2nd February 1989.

In any event, on 31st January 1989, replacement bills with a face value of $29.05 million were drawn by Giant and accepted and discounted by the Bank. Those bills had a term of thirty days, and matured on 2nd March 1989. The amount of the discount was met by a further drawn down on that date of $450,000.00 with bills having a face value of that sum, also maturing on 2nd March 1989. of the bills drawn on 31st January 1989, with a face value of $29.5 million, the Bank sold bills with a face value of $1.5 million in the market.

On 1st March 1989, Campbell and O'Neill agreed that replacement bills would be drawn, accepted and discounted, to discharge the bills maturing on 2nd March 1989. These replacement bills would mature on 31st March 1989. Replacement bills with a face value of $29.5 million were drawn by Giant on 2nd March 1989, and accepted and discounted by the Bank. The amount of the Bank's discount was covered by further bills, with a face value of $500,000.00, drawn by Giant on 3rd March 1989. All the bills drawn on 2nd and 3rd March 1989 matured on 31st March 1989. The Bank sold $29.5 million of these bills in the market.

On 30th March 1989, SCBAL wrote to the directors of Giant offering further financial accommodation. This letter referred to the facility letter of 20th October 1988, and provided that the offer was subject to amended terms and conditions. Relevantly the letter provided as follows. "We refer to our Facility Letter dated 20 October 1988 and are pleased to confirm that SCBAL hereby continues to offer financial accommodation to Giant, subject to the following Amended Terms and Conditions:

... the Customer will repay all amounts outstanding under the Facility by 30 June 1989.

(a) First Registered Equitable Share Mortgage over 100% of share scrip acquired in Augold NL including the portion currently held by Gemstay Pty. Limited as and when acquired by Polbury Pty.Limited; and (b) Second Registered Fixed and Floating Charge ranking behind SCAL over the assets and undertakings of Polbury Pty. Limited; (c) First Ranking Third Party Equitable Share Mortgage given by Gemstay Pty. Limited over share scrip held in Augold NL; (d) Such other security that the Bank or its solicitors may

Subject to any rate specified to apply on default elsewhere herein applying to any Facility interest will be calculated at a rate equal to 3% above the Bank's Base Rate on all amounts outstanding under the Facility and not paid on the due date.

The Customer shall pay the following Fees:- ... An Extension Fee of $50,000 payable upon acceptance of this offer.

5. In all other respects the terms and conditions as contained in our Facility Letter dated 20 October 1988 remain in full force and effect.

6. If there is any conflict between the terms and conditions as contained in our Facility Letter dated 20 October 1988 and our current Facility Letter dated 30 March 1989 then the terms and conditions of our current Letter shall be deemed to apply ...

Please advise acceptance of this offer on or before 31 March 1989."

On 31st March 1989, directors of Giant passed a resolution accepting the offer contained in the letter of 30th March 1989, and the certificate of acceptance was signed on behalf of Giant and sent to SCBAL.

On 31st March 1989, bills with a face value of $30 million were rolled over. The bills drawn by Giant, and accepted and discounted by SCBAL, had a maturity date of 2nd May 1989. All of the bills discounted were sold by SCBAL to NSW Treasury Corporation.

Thus, by 31st March 1989, the term of the 20th October 1988 facility had expired. It had formally expired on 31st January 1989. Ad hoc extensions had been granted between 31st January 1989 and 31st March 1989. On 31st March 1989, SCBAL was obliged to pay the holders of those bills which it had sold which matured on 31st March: the face value of those bills totalled $29.5 million, and the Bank paid this amount to the holders of those bills. Also on 31st March 1989, the Bank entered into a further contract with Giant, in which it agreed to continue financial accommodation with Giant. This agreement in effect created a mechanism which Giant could use, if it wished, to draw replacement bills to be accepted and discounted by the Bank to provide Giant with funds necessary to discharge its obligations in respect of bills which matured on 31st March 1989. Giant did this, by drawing replacement bills pursuant to the new facility, which bills SCBAL accepted and discounted; and Giant paid to the Bank, from its funds, the difference between the face value of the replacement bills and the discounted value paid by the Bank.

On 2nd May 1989, the bills drawn on 31st March 1989 matured. The Bank, as acceptor, paid the holder of those bills the sum of $30 million. Giant drew replacement bills, with a face value of $30 million and a maturity date of 1st June 1989; and at Giant's request, these were accepted and discounted by the Bank. Giant paid the Bank the difference between the face value and the discounted value. The Bank sold all of these bills in the market.

On 31st May 1989, Giant notified the Bank that it wished to exercise its option to draw and require the Bank to accept and discount replacement bills for those bills maturing on 1st June 1989. Replacement bills to a face value of $30 million were drawn on 1st June 1989, and were accepted and discounted by the Bank. These replacement bills had a face value of $30 million, and a maturity date of 30th June 1989, being the expiry date of the 31st March 1989 facility. Giant paid to the Bank the difference between the face value of the maturing bills and the discount value of new bills, an amount of about $450,000.00.

Of the replacement bills drawn on 1st June 1989, the Bank sold bills with a face value of $25 million, $20 million to Queensland Treasury Corporation, and $5 million to Nickel Resources.

On 22nd June 1989, Campbell wrote to O'Neill confirming that on 30th June 1989 the $30 million bill facility was to be fully cleared, but stating that the Bank agreed to provide a temporary facility of $15 million on an overdraft basis. On 27th June 1989, O'Neill replied that the terms and conditions outlined in the letter of 22nd June were unacceptable to Giant, and requested that a $30 million facility be extended until December 1989.

On 30th June 1989, the term of the 31st March 1989 facility expired, and the bills which had been drawn by Giant and accepted by SCBAL on 1st June 1989 matured. The Bank paid the holders of the bills, to a total face value of $25 million. The Bank retrieved bills from safekeeping and stamped the bills "paid", to safeguard against unauthorised use of the bills after maturity. However, Giant did not, in accordance with its obligations, pay the Bank the face value of the maturing bills on 30th June 1989; and the Bank, as was its entitlement under cl.9 of its Standard Terms for Banking Facility, opened an account in the name of Giant and debited that account with $30 million; and it wrote to the directors of Giant confirming that it had that day "transferred the outstanding balance of $30 million Australian to an overdraft account".

On 11th July 1989, the Bank wrote to the directors of Giant, and offered Giant an overdraft facility on the terms of an enclosed facility letter. The relevant terms of that facility letter were as follows: "Re Credit Facility

We ... advise that SCBAL (the Bank) hereby agrees to continue to provide financial accommodation (the Facility) to Giant ... subject to the following terms and conditions:

A fully drawn overdraft facility of $30,000,000 repayable on demand.

The Bank may review the facility from time to time and may at its discretion, continue or vary the terms of the facility by notifying the Customer in writing.

Subject to clause 5 above, the Customer will repay on demand all moneys outstanding under the Overdraft Facility.

Notwithstanding the foregoing the facility is available until 31 August 1989 and renewable on a monthly basis thereafter until 31 December 1989, at which time the

A reduction of $5,000,000 is to be made by 30 September 1989 from internal cashflow.

As a condition precedent to the availability of the Facility to the Customer and to secure the Customer's obligations under the Facility, the Bank requires the following securities in a form and substance acceptable to the Bank: (i) First Registered Third Party Scrip lien over 100% of the Augold Shares owned by Polbury Pty. Limited. (ii) First Registered Third Party Scrip lien over 100% of the Augold Shares owned by Gemstay Pty. Limited. (iii) All share certificates in Augold owned by Gemstay Pty. Limited and Polbury Pty. Limited are to be held by the Bank together with blank transfer forms to be executed. (iv) Second Registered Third Party Mortgage Debenture over the assets and undertakings of Polbury Pty. Limited. (v) Second Registered Third Party Mortgage Debenture over the assets and undertakings of Augold NL.

In addition to the Securities, the documentation governing the terms and conditions of the Facility includes: (a) This letter of offer; (b) The standard terms and conditions annexed hereto; which are accepted by the Customer and signed by the Bank.

Interest of any amounts outstanding under the overdraft facility will be computed on daily balances and will be calculated at an annualised rate equal to the aggregate of the Bank's base rate and a margin of 1.25% ...

The Customer shall pay fees calculated as follows: (a) A facility fee of $20,000 Australian dollars payable

A Customer shall reimburse the Bank for all expenses, including stamp duty and legal fees, paid or payable in respect of the Facility ...

15. Special Conditions (i) Giant Resources Limited, will covenant that it will not reduce its shareholding in Augold NL. (ii) Total liabilities to total tangible assets of Giant Resources Limited is not to exceed 60% at any point in time. (iii)Giant Resources Limited is not to incur further debt

without the prior approval of the Bank (Debt is to include Banking facilities, guarantees or contingent liabilities). (iv) No further capital expenditure nor distribution including no further reduction in debt facilities presently provided by (Giant's) other Bankers without the Bank's prior consent. (v) (Giant's) other Banks must continue their support while this facility exists. (vi) (Giant) is to provide to the Bank quarterly (September, December, March and June) management accounts for the following major operations by the 15th day of the month following the end of the quarter: (a) Canadian operation

(b) Great Victoria Gold (Prime Australian Mine) (vii) The Customer is to provide monthly reports as follows by the 10th day of the following month with the first report due on 10th August 1989: (a) Developments regarding sale of Curragh and amalgamation of Canadian assets. (b) Cashflow actuals of Giant Resources Limited versus cashflow projections with comment on variations. (viii)Should the performance and information be acceptable to the Bank each month, a further one month's extension will

be granted with an evergreen facility extended each month until 31 December 1989.

(ix) The Torres Strait Gold Pty. Ltd., Gold Loan is to be full serviced each month. (x) Giant Resources Limited is to dispose of its investment in Curragh Resources by 31 December 1989, sufficient to clear the Bank's debt. (xi) The Facility is to remain on an On Demand basis. (xii) This Facility Letter replaces our Facility Letters dated 20 October 1989 and 30 March 1989.

16. Please arrange acceptance of the Facility on or before 21st July 1989.

If these terms are acceptable to you will you kindly arrange for the passing of a resolution of Directors in the form enclosed and execution of the enclosed

Certificate of Acceptance. Please return a certified copy of the Resolution and the executed original Certificate of Acceptance..."

On 24th July 1989, a meeting of some of Giant's directors passed a resolution that Giant accept the Bank's offer of accommodation dated 11th July 1989, and execute the securities referred to in the letter of that date. The certificate of acceptance was signed on behalf of Giant on 24th July 1989. On 25th July 1989, Bourke sent Campbell a facsimile attaching a copy of the certificate of acceptance and the minutes of the meeting of 24th July 1989; and on the same day, O'Neill sent Campbell a letter (bearing dated 21st July 1989) enclosing duly executed offer letter of 11th July 1989 and a cheque for $20,000.00 in payment of the facility fee for the month of July.

Interest of the order of $500,000.00 accrued on the account on the last day of each of the months of July, August, September, October and November. Giant paid the interest which accrued on each of those days up to and including that which accrued on the last day of October 1989. It also paid into the account about $3.4 million, on 15th and 17th August 1989, being the proceeds of sale of Augold's shares in Giant.

5.2 Outline of Submissions (a) Submissions for Plaintiffs 229. In their submissions, both parties referred quite extensively to a number of cases relating to providing finance by means of bills of exchange, and the nature of related debts and obligations, namely: R. v. Pierce (1887) 56 LJMC 85; K.D. Morris and Sons v. Bank of Queensland [1980] HCA 20; (1979-80) 146 CLR 165; Coles Myer Finance v. Commissioner of Taxation [1993] HCA 29; (1992-3) 176 CLR 640; and Commonwealth Bank of Australi v. Grubic, Full Supreme Court of South Australia, 27/8/93. They also referred extensively to Hawkins v. Bank of China (1992) 26 NSWLR 562. In giving a very brief outline of the parties' submissions, I will omit references to these cases: I will look at these cases in giving my conclusions.

Mr. Jucovic QC for the plaintiffs submitted that on each occasion that bills were drawn by Giant, and accepted and discounted by SCBAL, Giant incurred a debt. Giant was under no obligation to draw bills: it could simply go into default of its existing obligations, or alternatively could pay them out from other funds. By drawing the bills, and having them accepted and discounted by SCBAL, Giant obtained funds which enabled it, by contributing around $450,000.00 of its own funds, to discharge existing obligations. By doing so, it incurred the obligation to pay SCBAL the face value of the bills on maturity (whether as accommodation bills or pursuant to the terms of the facility), and also incurred potential liability to third parties to whom SCBAL might sell the bills. Although there was repayment of bill debts incurred on earlier occasions, there was no repayment of the debt incurred on 1st June.

Furthermore, the plaintiffs submitted that the agreement of 25th July 1989 was a new agreement, in substitution for an existing situation where Giant was in default under previous obligations with $30 million on overdraft. It discharged the existing obligations under the facility letter of 31st March 1989 and bills drawn thereunder, which had resulted in an overdraft of $30 million repayable on demand from 30th June 1989 onwards. In order for such a discharge to be effected, there was no need for a formal exchange of cheques: Federal Commissioner of Taxation v. Steeves Agnew [1951] HCA 26; (1951) 82 CLR 408 at 421.

The agreement of 25th July 1989 differed in a number of respects from the previous contractual arrangements: the financial accommodation was provided by an overdraft facility, not a bill acceptance/discount facility; the overdraft was available until 31st August 1989, renewable on a monthly basis until 31st December 1989, and a reduction of $5 million was to be made by 30th September 1989; the interest rate was the Bank's base rate plus 1.25%; there was a facility fee of $20,000.00 payable monthly in advance; further security was required; and there were various other differences in the terms and conditions.

The obligations under the bills, and the obligations of 25th July agreement, were incurred by Giant in the sense of being brought upon itself; and they involved engagements to pay sums of money in the future as a debt. In those circumstances, on each occasion, Giant incurred a debt.

This was in accordance with the purposes of s.556, which were not merely to protect particular creditors, but also to protect creditors generally and to ensure that assets are not dissipated (or, as in this case, encumbered): see Group Four Industries v. Brosan (1992) 8 ACSR 463 at 405, Metal Manufactures Limited v. Lewis (1988) 13 NSWLR 315 at 315, 318-9, 328; Morley v. Statewide Tobacco Services [1993] VicRp 32; (1993) 1 VR 423 at 428-9, 439, 448-9.

There was no difference in principle between paying out an existing loan from A with a loan from B (in respect of which undoubtedly a debt was incurred), and paying out an existing loan from A with a further loan from A.

Furthermore, in the case of a current account, debts are incurred as cheques are debited by the Bank, even though they may be offset by deposits made from time to time. The situation is not the same as determining whether a payment has the effect of giving a preference, as in Richardson v. Commercial Banking Co. of Sydney (1952) CLR 110, Queensland Bacon v. Rees [1966] HCA 21; (1966) 115 CLR 266.

(b) Submissions for defendants 237. Mr. Hughes QC for the defendants submitted first that s.556 created a criminal offence, and so should not be given an unduly wide construction (see Scott v. Causey [1907] HCA 80; (1907) 5 CLR 132 at 154-5; Metal Manufactures v. Lewis (1986) 11 ACLR 122 at 126; Murphy v. Farmer (1988) 165 CLR 19 at 28-9; Hussein v. Good (1990) 1 ACSR 710 at 719; Commonwealth Bank v. Freidrich (1991) 5 ACSR 115 at 182; Macquarie Bank v. Fociri (1992) 9 ACSR 553 at 559.

Furthermore, the section should not be interpreted so as to cause unfairness: see Hawkins, Russell Halpern Nominees v. Martin (1987) WAR 150 at 153. The construction urged by the plaintiffs would be unfair and unreasonable, having regard to the circumstances that the operation of s.556 is inexorable (subject to the possibility of a defence under s.535); there was no difference in substance in this case between the positions of the company before and after the alleged incurring of the debt; it would be unreasonable if a debt can be incurred again and again without ever being discharged; s.556 would be arbitrary in its operation, and sometimes cause unjust enrichment to creditors; it would prevent the granting of a moratorium for creditors which could give rise to best results for all.

There was a distinction between making a loan and extending a loan: Commissioner of Taxation V. Mercantile Credits (1986) 10 FCR 302 at 344; Attorney-General v. NSW Electrical Power Distribution (1920) 1 KB 552; Burns v. Trade Credits (1981) 1 NSWLR 93 at 95. The alteration of the date for repayment of a debt could not amount to the incurring of a debt: Zoverton v. Commissioner of Stamp Duties (1988) 89 ATC 4339; Caltex v. Federal Commissioner of Taxation [1960] HCA 17; (1961) 106 CLR 205 at 218, 227, 231; Tallerman and Co. v. Nathans Merchandise [1957] HCA 10; (1957) 98 CLR 93 at 122-3, 135, 142.

A director not in office at the time of incurring a debt was not liable under s.556: John Graham Reprographics v. Steffens (1987) 12 ACLR 779 at 780. In those circumstances, it would be unfair if s.556 applied to a director who was appointed subsequently to the incurring of a debt, simply because the time for paying that debt was extended after his appointment. Similarly, it would be unfair if it applied where the company was solvent when the debt was incurred, but financial incapacity arose later, and then there was an agreement extending the time for repayment.

The incongruity of the proposition that the extension of time for payment of a debt could amount to the incurring of a debt was demonstrated by the authority in favour of the view that in determining whether a company is able to pay its debts as they fall due, a Court is entitled to have regard to extensions granted by creditors: see 3M Australia v. Kemish (1986) 10 ACLR 371 at 378; Calzaturificio Zenith v. NSW Leather and Trading Co. [1970] VicRp 80; (1970) VR 605 at 609; Re Newark v. Carroll (1993) 1 QdR 409 at 413-15, 421; Heide v. Lester (1990) 3 ACSR 159 at 165, Taylor v. ANZ Banking Group (1988) 13 ACLR 780 at 784; Monsoon Industries v. Simpson, Supreme Court of Queensland Court of Appeal, 25/9/92; Taylor v. Powell [1993] FCA 87; (1993) 113 ALR 374 at 381; Carrier Airconditioning v. Kurda (1993) 11 ACSR 247 at 253-5; Pioneer Concrete v. Ellston (1985) 10 ACLR 289 at 301; Re Toowong Trading (1988) 13 ACLR 121 at 125; Norfolk Plumbing Supplies v. Commonwealth Bank of Australia (1992) 6 ACSR 601 at 615-6.

In the present case, the bills of exchange drawn had no function as bills in regulating the rights and obligations inter se of Giant and SCBAL. They were not accommodation bills, since they were not drawn to Giant or order, but rather to SCBAL or order; and even if they had been, they would not give rise to rights in favour of SCBAL against Giant. It was conceptually incorrect to consider that there was a series of free-standing contracts which were made as bills were drawn and accepted.

The commercial reality was that Giant required $30 million, SCBAL met that requirement on the basis that it should be repaid on 31st January 1989, or such later date as might be agreed or fixed pursuant to the letter of 20th October 1988 or amendments to it. The promise of ultimate payment attached, and a debt was incurred, as each drawdown was made. There was then an unconditional, unavoidable obligation, which subsisted until the money was actually repaid.

This unavoidable obligation was not abrogated by replacement bills. Giant remained liable under the letter of 20th October 1988, and 30th March 1989 variation, to pay $30 million on expiry of the facility, and (as a subsidiary obligation) on the maturity date of the last set of bills.

The $30 million was placed on overdraft on 30th June pursuant to the terms of the 20th October 1988 letter; and the variation agreed to on 25th July merely varied some terms on which the debt was held on overdraft, by removing certain terms concerning bills and varying certain special conditions and extending the final date.

Finally, Mr. Hughes submitted that if, contrary to his submissions, I should hold that a debt was incurred by the drawing, acceptance and discounting of bills on 1st June, then SCBAL could no longer rely on that debt, because it had elected not to sue on the bills, but to rely on its rights under the facility by placing the moneys on overdraft: see Sargent v. ASL Developments [1974] HCA 40; (1974) 131 CLR 634 at 641-2.

Mr. Jucovic responded to this last point by submitting that there could be no estoppel to prevent the exercise of rights granted by statute for the protection of a section of the public, in this case, persons trading with insolvent companies: see Maritime Electric v. General Dairies (1937) AC 610 at 620; Re Hearn Estates (1967) 14 LGRA 102; Attorney-General v. Gray (1977) 1 NSWLR 406; Prospect County Council v. Australian Blue Metal (1965) 11 LGRA 331; Chamberlain v. DCT (1988) 165 CLR 502; Spencer Bower on Estoppel By Representation, (3rd Ed.) 139-142.

5.3 Submissions on Interest 248. During the course of submissions, the plaintiffs sought to amend paragraphs of the statement of claim, so as to allege that the debt incurred on 25th July 1989, and also the debt incurred on 1st June 1989, extended to the liability to pay interest; and, in relation to the debt incurred on 25th July 1989, an alternative contention that the quantum of the debt was the amount of principal and interest under the agreement of 25th July less the amount actually owing on 25th July.

That application to amend was opposed, but I indicated that I was minded to grant it, unless prejudice could be established. There was a suggestion that the defendants were prejudiced because they had not looked into and prepared for a question of calculation of interest after November 1989; but interest under s.94 of the Supreme Court Act was clearly claimed in the statement of claim, and I took the view that arrangements or factors concerning payment of interest arising after November 1989 would be relevant to the allowing of interest under s.94 as much as to inclusion of interest in any debt incurred under s.556. Accordingly, I have taken the view that, if I am otherwise in favour of the plaintiffs, I would allow for a further hearing confined to the question of the quantum of any interest, on either basis, after November 1989; and I do propose to allow the amendment.

In relation to the claim for interest, Mr. Hughes submitted that Giant incurred an obligation to pay interest only once, namely under the agreement of October 1988 and the draw-downs under that agreement. If that submission was not accepted, Mr. Hughes made the alternative submission that interest was not incurred until it accrued by the passage of time. He referred to an obiter remark of Zelling, AJ in B.L. Lange and Co. v. Bird (1991) 9 ACLC 1015 at 1017, to the effect that interest was not incurred when the principal debt was incurred, but rather flowed from later non-payment. He also referred to the provisions of s.144 of the Conveyancing Act, relating to the accruing of interest from day to day.

Mr. Hughes also drew my attention to authorities which could point the other way.

Firstly, Russell Halpern Nominees v. Martin (1986) 10 ACLR 539. In that case, on an assumption that a lease involved in that case was for an unexpired term (see p 541), a majority of the Western Australian Full Court held that a debt for rent was not incurred by the mere passage of time operating on a liability created by a covenant to pay rent in the original lease. (See also Bans v. Ling (1995) 16 ACSR 404). That case was referred to in Lange v. Bird, although it seems to be against Zelling, AJ's obiter.

The case of John Graham Reprographics v. Steffens (1987) 12 ACLR 779 at 784 contained a holding by Connelly, J in the Supreme Court of Queensland that a debt in respect of interest was incurred when the contract to pay interest was made. That case was not referred to in Lange v. Bird.

The other case perhaps bearing on this issue referred to by Mr. Hughes was Commissioner of State Taxation v. Pollock (1994) 12 ACLC 28. In that case, the Full Supreme Court of Western Australia allowed an appeal against an order striking out a statement of claim, which claimed on the basis that payroll tax was a debt incurred by a company under s.556. The Full Court held that it was arguable that a company incurred liability for payroll tax not only when it engaged an employee, but also where it continued to employ the employee, in circumstances where it could lawfully terminate that employment. It suggested that it might even be arguable that a debt was incurred where the company refrained from repudiating a contract of employment.

In support of his subsidiary submission that interest was not incurred until it accrued through the passage of time, Mr. Hughes submitted that there was in these cases a voluntary act by the company, namely its refraining from paying the debt or putting itself into liquidation. Either of those actions would stop interest accruing.

On the plaintiffs' alternative position, that a debt was incurred on 25th July but the quantity of that debt was the difference between the total liability for principal and interest under the agreement of 25th July and the $30 million which was owing on that date, Mr. Hughes submitted that, if it was appropriate to make any comparison of that kind, the comparison should be of like with like, i.e., the total liability before with the total liability after. It was unreasonable to compare the new debt with the accruing interest, and the old debt without the accruing interest. He submitted that such an approach would raise problems with later payments, such as the $3.4 million paid in this case. He also pointed to the qualification expressed by Sheller, JA in Hawkins at 26 NSWLR at 578, as to whether there would be a debt incurred by a guarantee where there was no quantification of the debt at the time the guarantee was entered into.

Mr. Jucovic submitted that a liability to pay interest was incurred at the time of agreement to pay interest, in that the accruing of interest was unavoidable as a practical matter. It was not a practical option to Giant to avoid the paying of interest by going into liquidation or paying $30 million.

5.4 Decision on Legal Principles 258. I accept that s.556 should not be given an unduly wide construction, as it is a criminal provision; and I accept that it should not be given a construction which causes unfairness. There is force in Mr. Hughes' submissions that a transaction which, in substance, does no more than alter the terms on which an existing debt is to be paid should not be regarded as incurring a debt; because the creditor is not disadvantaged, because it could operate unfairly where financial incapacity has arisen after the original debt was incurred and where the composition of the board of directors has changed, and because it could unreasonably inhibit useful arrangements for moratoriums. On the other hand, I think there is also force in Mr. Jucovic's submission that where directors, who know or ought to know that the company cannot pay its debts, secure the continued trading of an insolvent company by entering into a new agreement with an existing creditor, and thereby promote the incurring of further debts by the company, the dissipation of its assets, and perhaps the encumbering of its assets, it would be consonant with the purpose of s.556 to regard the transaction as the incurring of a debt.

In my view, the appropriate approach is to construe the language of the section, according to the natural meaning of its words, but with due appreciation of the practical implications.

In my opinion, a company incurs a debt when, by its choice, it does or omits something which, as a matter of substance and commercial reality, renders it liable for a debt for which it otherwise would not have been liable. This formulation has three aspects which could cause difficulty in particular cases: first, as to whether the company has a choice whether to do (or omit) the act or not; second, as to whether it is the act or omission, or something else, which renders the company liable for the debt; and third, as to whether the company would otherwise (in any event) have been liable for the debt.

In the case of a lease, this formulation suggests that entry into a lease for a term does incur a debt for the rent for the whole term of the lease, as found in Russell Halpern Nominees v. Martin and Bans v. Ling. However, where there is a periodic tenancy, or a holding over after expiry of a term, the company can put a stop to the accrual of rent liability by giving a notice to quit and/or giving up possession; so in those cases, in my opinion, it would be the failure from time to time to take those steps which, as a matter of substance, would make the company liable for each rent instalment accruing from a time when such a step would have stopped the rent accruing. on each occasion when the company could terminate the lease but does not do so, it would incur the rent for the period to which this omission committed the company.

In relation to employment, the formulation would confirm that a debt for payroll tax is incurred when a company engages an employee, though the period covered by that debt would depend on the circumstances. It would suggest that a debt for payroll tax could in some circumstances be incurred by a failure to lawfully terminate employment, as suggested in Commissioner of State Taxation v. Pollack. On whether a debt for payroll tax could be incurred by failing to repudiate a contract of employment, my formulation would focus on the questions whether the company had a choice, and whether it would otherwise have been liable for the debt. On the former, should a company be considered to have a choice whether to commit a breach of contract? And on the latter, would its liability for damages to the employee somehow offset its liability for the debts of wages and payroll tax?

In relation to guarantees, Hawkins v. Bank-of China establishes that liability under a guarantee, at least of an existing debt, is incurred at the time the guarantee is given; and that is generally in accordance with my suggested formulation. In relation to the question raised by Sheller, JA at 26 NSWLR at 578 as to whether there would be a debt incurred by a company giving a guarantee, where there was at the time no quantification of the debt, this would appear to focus on the second of my questions, whether it is the act or omission of the company, or something else, which, as a matter of substance and commercial reality, renders the company liable. In my opinion, at least so long as the nature and extent of the debt as ultimately quantified is broadly within what was or would have reasonably have been contemplated at the time the company gave the guarantee, it is the giving of the guarantee and not anything else which in substance renders the company liable; so that the company does, by giving the guarantee, incur that debt.

In relation to interest, I note that in Bans v. Ling Bryson, J held that liability under a lease for a term for interest on unpaid rent was not incurred until the failure to pay rent gave rise to the liability for interest, relying on the approach of Gleeson, CJ in Hawkins. In my opinion, in such a case, it is the company's failure to pay rent, rather than mere entry into the lease, which, as a matter of substance and commercial reality, renders the company liable to pay that interest; so I would respectfully agree with Bryson, J that the company does not incur a debt for that interest by entering into the lease. The quantum of the debt for interest incurred by the company each time it defaults in payment of rent is a further question. Bryson, J held in effect (16 ACSR at p.419) that interest accruing on unpaid rent after the company went into liquidation was not incurred by the company before liquidation, so that directors were not liable for that interest: this would suggest that the company incurs the debt for interest from day to day as it continues its default.

Turning to loans, a number of questions can arise. For example, if a company enters into and draws down a loan for a fixed term, does it then incur a liability for the whole of the interest for that term as well as for the principal? If there is a reduction of interest for prompt payment of interest, is a debt at the lower rate incurred at the time of taking the loan, and a debt for the additional interest incurred each time the company fails to pay interest on time? If the company fails to repay the principal when due, does it then incur a debt for interest thereafter; or was such a debt incurred when the loan was originally taken? Does it make any difference if the loan is for an indefinite term, or repayable on demand?

In my opinion, such problems as these are likely to involve some or all of the three questions identified in connection with my formulation. In general terms, I am inclined to think that in the case of the loan for a fixed term, the company does by taking the loan incur a debt for the principal and interest for the term of the loan (at least at the prompt payment rate, if there is one); and that it incurs a debt for the difference between the prompt payment rate and the higher rate each time it fails to pay on time: this is broadly consistent with Bryson, J's approach to rent in Bans v. Ling.

However, if the loan contract in question permitted early repayment of principal, with interest ceasing upon or a short period after repayment, it could be argued (in terms of my first two questions) that the company had the choice of early repayment, and that it was its failure to adopt this option rather than its initial taking of the loan which in substance rendered the company liable for the interest. It may be that the resolution of this argument would depend on the circumstances. For example, if when the loan was taken it was contemplated that the company would require the finance for the term of the loan, and this turned out to be the case, I believe that generally it would be the taking of the loan rather than failure to effect an early repayment which in substance rendered the company liable for the interest for the term of the loan.

If the company failed to repay the principal at the end of the term of the loan, and the contract of loan provided that interest continue in that circumstance, when would the debt for interest after the end of the term be incurred? Here again, I think it could be relevant to consider the circumstances, both at the time of taking the loan and at the time when repayment should have been made, in order to decide whether or not the company really had a choice at the latter time, whether or not it was still the entry into the loan which in substance and reality rendered the company liable for this interest, and whether or not the company would in any event have been liable for it (for example, if it had negotiated a further loan from the lender). Rather similar considerations could arise where the original loan was for an indefinite term.

What is directly involved in this present case is a situation where finance is taken by a company, and then the company enters into a further transaction with the lender which affects the terms on which the finance continues. Two broadly different situations arise. First, where the original loan agreement contemplates subsidiary transactions (here, drawing, acceptance and discounting of bills) which affect the rights of the parties; and second, where the principal is left outstanding on the basis of the further agreement.

As regards the former, it seems to me that, accepting that the company had a choice whether or not to enter into each of these subsidiary transactions, the second and third of my questions arise: does the subsidiary transaction in substance and reality render the company liable for a debt, which is a debt for which it otherwise would not have been liable? Where, as here, the proceeds of the bills are used to pay out a pre-existing liability, it seems to me that this would depend on the circumstances: if both the pre-existing liability and that arising under the subsidiary transaction are of the same amount and to the same creditor, and are equally contemplated by the original loan agreement, then it may well be that in substance and reality the subsidiary transaction does not render the company liable for a debt for which it otherwise would not have been liable.

As regards the latter, again the circumstances are important. If the further agreement imposes an additional debt on the company, for example by increasing interest, then certainly the company incurs a debt to that extent. Generally, in my opinion the further agreement could not be regarded, as a matter of substance and reality, as rendering the company liable to the creditor for the principal, for which it otherwise would not have been liable; at least unless there is some strong reason for regarding the debt for principal under the further agreement as a different debt from that which existed under the original agreement.

In my opinion, the difficult question concerns interest under the further agreement, insofar as it is no greater in amount than that which would have been payable under the original agreement. In broad terms, the company would have had two alternatives to entering into the further agreement, namely repayment of the loan, or leaving it (or at least some of it) outstanding without making a new agreement. If it adopted the former alternative, no interest would have been payable; if the latter, as much interest would have been payable as under the further agreement. Three views seem possible: the company incurs the debt for the interest under the agreement (a) by entering into the original agreement; (b) by entering into the further agreement; or (c) from day to day, by failing to repay the principal. In my opinion, the answer must depend on the circumstance of each case, considered in the light of the three questions I suggested earlier.

If the original agreement was for a fixed term, and repayment at the end of the term was contemplated when the original agreement was made, that would weigh against alternative (a). If the further agreement was for a fixed term, then that would tend to support alternative (b), at least for that fixed term. Where at relevant times, repayment of the principal is not a realistic option, that would tend to weigh against alternative (c).

Although the question must always depend on whether, by a particular act or omission, the company incurred a debt, and if so, what debt, and thus, in my opinion, on the three questions I identified, I would suggest the following broad guidelines in relation to loans. (1) A debt for the principal of a loan (or each part thereof) is incurred when the principal (or such part) is first received by the borrower: generally, no debt for the principal is incurred either by nonrepayment of the principal, or by entry into a new agreement to repay the principal.

(2) Where the loan is for a fixed term, a debt for the interest (at the prompt payment rate, if any) for the term of the loan is incurred when the agreement is made or the loan is received; at least unless it is possible to escape from interest by early repayment of principal, and early repayment is a realistic option, in which case interest may be incurred from day to day by the borrower choosing not to repay.

(3) Where the loan is not for a fixed term, or a fixed term has expired, in relation to periods where repayment is a real option for the borrower, the borrower generally incurs interest from day to day by choosing not to repay. However, in relation to periods where repayment is not a real option for the borrower, it may be reasonable to say that the debt for interest was incurred either when the loan was taken, or when the borrower last chose not to make a repayment which it could have made.

(4) Where a borrower enters into a new agreement to pay interest on a loan which is due or overdue for repayment, it generally incurs a debt for interest to the same extent as when it made the original agreement and took the loan. However, this may not be so. For example, if the borrower is unable to repay, and the new agreement is in substance merely an extension of time for repayment of principal, it may be reasonable to consider the original taking of the loan as having in substance and reality rendered the company liable for the interest under the new agreement. In general terms, the more of a option repayment is, the stronger is the case for saying that the debt for interest is incurred by entering into the new agreement; and similarly, the more different the new agreement is from the original agreement, the stronger is the case for saying that the liability for interest under the new agreement is not the same liability as it would otherwise (in any event) have had.

In my view, this approach is in accordance with the natural meaning of the words "incurring a debt", and does give effect to the practical considerations advanced on both sides.

Turning to the particular case of the drawing of bills under a bill acceptance/discount facility, I do not think that the cases referred to require any different approach.

In R. v. Pierce (1887) 56 LRMC 85, Pierce was charged with obtaining money by false pretences, in incurring a debt or liability by fraudulently representing that a bill of exchange had been endorsed by a certain person. The bill of exchange was given in renewal of an earlier bill of exchange, and the objection was taken that there was no evidence that, if credit had been obtained, it was "in incurring a debt or liability" within s.13(1) of the Debtors Act. A case was stated to the Court of Crown Cases Reserved, and it was held that a new debt was incurred by the giving of a new bill in renewal of an old one, and such new debt was a debt or liability within s.13(1).

That case is some authority that a debt is incurred by drawing a new bill to replace an earlier one; but it is not determinative of the question of construction of s.556 of the Companies Code.

In K.D. Morris and Sons v. Bank of Queensland [1980] HCA 20; (1979-80) 146 CLR 165, a bank and a building company agreed on a commercial bill acceptance facility with a limit of $1 million to be available for five years. The company drew bills, with terms up to about six months, which the Bank accepted; and these bills were then discounted by a merchant banker. As each set of bills approached maturity, the company drew replacement bills, had them discounted by the merchant banker, and paid the proceeds plus the amount of the discount to the bank, so that the bank could pay out the maturing bills. After the second series of bills had been drawn, but before they matured, a provisional liquidator of the company was appointed. The bank and the provisional liquidator agreed that the current bills should be rolled over as before; and after the company was ordered to be wound up, two further series of bills were drawn and accepted. Then the bank cancelled the facility, paid out the merchant banker in respect of the last series of bills, and claimed $1 million against the liquidator as part of the costs and expenses of winding up; so that, under s.292(1)(a) of the Companies Act 1961 (Qld), this should be paid in priority to all other unsecured debts.

A majority of the High Court decided against the bank. Stephen and Wilson, JJ held that the dealings between the bank constituted one entire transaction, having its origin before the commencement of the winding up. Murphy, J held that the agreement between the liquidator and the bank was a compromise or arrangement within s.236(1) of the Companies Act, and since it was not authorised by a committee of inspection, payment under such an arrangement could not be costs or expenses of the winding up. Aickin, J, with whom Mason, J agreed, dissented, holding that liability arose upon the bills, not the existence of the bill facility; so the liability under the last series of bills was incurred in the course of and for the purposes of the winding up. He also held that the original agreement was brought to an end by the agreement between the provisional liquidator and the bank, but he did not consider the point about compromise or arrangement within s.236.

Mr. Hughes submitted that, as between Stephen and Wilson, JJ, and Aickin and Mason, JJ, the case was treated as turning on whether the bank's claim was for a pre- or post-liquidation debt; and that insofar as Aickin, J's judgment depended upon the view that it was the bills that gave rise to liabilities, and not the making of the agreement, it was flawed. It was the agreement operating on the fact of the bills which gave rise to the liability. Mr. Hughes submitted that the reasoning of Stephen and Wilson, JJ was preferable: namely, that once the original series of bills was drawn and accepted, the company had a continuing existing liability to the bank, and that it was inevitable that, either at the end of the five year facility or sooner, the company would become presently indebted to the bank for the bank's payment of bills on maturity. It was a mistake to regard any of the rollovers as involving the incurring of a new liability of $1 million.

It does seem to me, with respect, that the result of the case as decided by the majority was correct. The minority view seems to endorse payment in full of the company's pre-liquidation liability to the bank where, if it had been made in circumstances of insolvency within six months before the commencement of the winding up, it would have been a preference. In any event, it is not clear to me why Aickin, J did not see it as necessary to consider the point on which Murphy, J decided the case. However, I do not think either view in that case is determinative of the problem before me. I think it is simplistic to say that the case turned upon whether the bank's claim was a preor post-liquidation debt: the question was rather whether it was a cost and expense of the winding up; and that, in my view, invited a wider enquiry.

The case of Coles Myer Finance Limited v. Commissioner of Taxation [1993] HCA 29; (1992-3) 176 CLR 640 concerned a finance company which drew bills of exchange during the taxation year ending 30th June 1984, had them accepted by a bank, and then sold them for a discounted price. The High Court held that the amounts of the discount were losses or outgoings within s.51(1) of the Income Tax Assessment Act. In respect of bills drawn and discounted in the taxation year ended 30th June 1984, but maturing in the taxation year ending 30th June 1985, Mason, CJ and Brennan, Deane, Dawson and Gaudron, JJ held that the amount of the discount should be apportioned between the two years on the basis of the term of the bills; while McHugh, J held that the whole discount was deductible in the year ended 30th June 1984. All of them held that once the company received payment for the bills, it immediately owed the face value of the bill to the acceptor, even though this was not payable until maturity. They rejected the view that there was no liability to the acceptor until the acceptor made a payment to the holder.

The majority in the case, in reaching their views, relied on both the approaches in K.D. Morris; and it does not seem to me that the Coles Myer decision particularly supports either side in the present case.

Finally, there is the decision of the Full Supreme Court of South Australia in Commonwealth Bank of Australia v. Grubic, 27th August 1993. In that case, a mortgagor was granted a bill facility by a bank for three years, the bills to be rolled over at ninety day intervals, with the bank taking a first mortgage to secure the mortgagor's liability. The mortgagor granted a second mortgage, and subsequently bills were rolled over under the bank bill facility. The Court had to decide whether the second mortgagee was entitled to the proceeds of sale of the mortgage property in priority to the bank, on the basis that there was a fresh advance by the bank at the time of the rollover. Debelle, J, with whom Cox and Duggan, JJ agreed, referred to the continuing obligation on the mortgagor to draw bills (that is, unless the mortgagor paid out the bank from other funds), and on the bank to accept and discount them. He said that the rule in Hopkinson v. Rolt was grounded on principles of justice and fair dealing between mortgagor and mortgagee, and as between competing mortgagees. In cases where it had been applied against first mortgagees, there had been a fresh loan, in addition to existing advances. In this case, when, at each rollover, the bank accepted a bill, it was not advancing an additional sum, but was giving effect to an arrangement by which the bank agreed to make available $645,000.00 to the mortgagor. Accordingly, the bank did not lose its priority to the second mortgagee. To hold otherwise, would ignore the substance and emphasise form.

That case did not turn on the question as to whether a debt was incurred when a fresh bill was drawn and accepted, but rather on broader questions of justice and fair dealing as between competing mortgagees. It did not say that no debt was incurred in that situation, much less did it come to a decision affecting the interpretation of s.556.

I must say however that none of these cases give any particular support to my view that there may in such circumstances be the incurring of a debt for an additional liability or interest. I note that it could in fact have been argued in K.D. Morris that the agreement by the provisional liquidator, which provided for the amount of the discount on each rollover to be debited to an overdraft, instead of being paid by the company, was the incurring of a debt for this amount, which pro tanto was a cost and expense of the winding up. This was apparently not argued in the case, and not considered by any of the Justices of the Court; and it may have not made any difference to the result, even if otherwise a valid argument, because it may have involved an unapproved compromise or arrangement as considered by Murphy, J.

5.5 Application of Legal Principles (a) 25th January 1989 288. As I mentioned before, it was common ground that a debt was incurred by Giant's execution of the guarantee in favour of SCAL. This does indeed seem to follow directly from the case of Hawkins v. Bank of China.

(b) 31st March 1989 agreement 289. The agreement entered into by Giant's acceptance of the Bank's facility letter dated 30th March 1989 was expressed as an extension of the existing facility, on the terms of the facility letter of 20th October 1988, except as varied by the new facility letter. The original agreement contemplated repayment of principal on 31st January 1989, and there had been an informal extension of this to 31st March 1989. Giant at that time had a choice whether or not to make the agreement of 31st March 1989; so in my opinion, the question is whether that agreement, in substance and reality, rendered Giant liable for a debt for which it otherwise would not have been liable. As regards the principal, in my opinion the answer is clearly no.

290. As regards interest, in accordance with my guidelines, I would hold that, by the agreement of 31st March 1989, Giant incurred a debt for interest, unless in substance and reality this debt can be considered as having been incurred by the original taking of the loan or some other intermediate act or omission. In support of such a view, it can be said that Giant did not then have a real option to repay the principal; and that the agreement was in substance merely an extension of time.

291. Although SCBAL had requested a letter of comfort from Pioneer as a condition of the extension, in the event there was only a minor change in the security. However, default interest was increased from 2% above the Bank's base rate to 3% above that rate; and an extension fee of $50,000.00 was charged. On the whole, with some hesitation, I conclude that this agreement altered the situation sufficiently to make it reasonable to hold that the whole liability for interest under the agreement was not a liability which Giant would otherwise, in any event, have had. It is in fact difficult, if not impossible, to say exactly what would have happened if Giant had not made the agreement (paying the extension fee and accepting the higher interest rate), and thus to say exactly what liability for on-going interest Giant would have had in those circumstances. In any event, it would have been a different liability, at a lesser rate, under a somewhat different agreement. Accordingly, I hold that, by entering into the agreement of 31st March 1989, Giant incurred a debt for the interest payable under that agreement.

292. Even if I were wrong in reaching that conclusion, it is clear that, if the increased interest rate translated into any debt liability, to that extent at least a debt was incurred by Giant by entering into the 31st March 1989 agreement.

293. The period for which this liability for interest was incurred on 31st March 1989 would, in accordance with my guidelines, be until 30th June 1989, and possibly thereafter if repayment of principal was not a real option at 30th June 1989. However, on 25th July 1989, a new agreement was made, and in my opinion, that put an end to any liability for interest incurred by the agreement of 31st March 1989. All interest was paid up to 25th July 1989, so no debt incurred by the company on 31st March 1989 has been owing since 25th July 1989.

(c) 31st March 1989 bills 294. Paragraph 24A of the Fifth Further Amended Statement of Claim alleges that Giant incurred a debt of $30 million when it drew bills of exchange and had them accepted and discounted by SCBAL in accordance with the terms of the facility. I need not consider in detail whether such a debt was incurred, because I think it is clear, and, as I understand it, the plaintiffs concede, that if there was such a debt, it was repaid on or about 2nd May when the bills drawn on 31st March were paid out by the Bank, and the Bank was reimbursed with proceeds of fresh bills plus Giant's payment of the amount of the discount on the fresh bills.

(d) 1st June 1989 bills 295. Under the proposed amendment to paragraph 24F of the statement of claim, the plaintiffs claim that on or about 1st June 1989, Giant incurred a debt to SCBAL of $30 million; and, in the event that the debt was not paid on the maturity of the bills on 30th June 1989, a debt for default interest from 30th June 1989 at the default rate was also incurred.

296. However, the acts relied on for this, namely the drawing, acceptance, and discounting of bills, was a transaction subsidiary to the agreement whereby SCBAL financed Giant to the extent of $30 million, entered into on 20th October 1988 and extended on 31st March 1989; and it gave rise to about $29.55 million which was applied to paying out previous bills.

297. In my opinion, since this discharged a pre-existing liability to SCBAL of $29.55 million, in a manner contemplated by the previously-made agreement, to that extent at least it cannot be considered to have, in substance and reality, rendered the company liable for a debt for which it would not otherwise have been liable.

298. It is arguable that, as regards the balance of the $30 million, that is about $450,000.00, a debt of this amount was incurred. However, despite this matter being discussed during submissions, the plaintiffs did not allege the incurring of a debt in those terms; so that I must find that no debt as alleged by the plaintiffs was incurred on 1st June 1989.

(e) 25th July 1989 agreement 299. In relation to the agreement made by Giant's acceptance, on 25th July 1989, of the offer contained in SCBAL's letter of 11th July 1989, similar issues arise as in the case of the 31st March 1989 agreement. As with that agreement, in my opinion it is clear that Giant did not incur a debt in respect of principal.

As regards interest, the argument for the view that Giant did incur a debt by making this agreement is stronger than in the case of the 31st March agreement. The 25th July agreement was expressed in terms appropriate to displace all earlier agreements. It was not expressed in terms to suggest it was a mere extension of time, or variation of existing agreements. Whereas the previous agreements were for a bill acceptance/discount facility, this was for an overdraft facility. In substance as well as in form, I consider that this was an agreement displacing earlier agreements, rather than a mere variation.

301. In those circumstances, in my opinion, Giant did, by entering into the agreement of 25th July 1995, incur a debt for interest payable under that agreement. As will appear later, I am satisfied on the balance of probabilities that, but for that agreement, Pioneer would not have provided the $30 million to pay out SCBAL, except as a last resort to prevent receivership or liquidation, so in that sense, repayment of the $30 million was not an option open to Giant; but it is not possible to say exactly what would have happened if Giant had not made the agreement, and thus exactly what liability for on-going interest Giant would have had in those circumstances. In any event, it would have been a different liability, under a substantially different agreement; an agreement which the 25th July agreement in fact completely displaced.

302. Accordingly, I believe it is reasonable to hold that Giant's liability for interest under the 25th July agreement is not, in substance and reality, a liability which it otherwise would have had.

303. The next question is the period for which liability for interest was incurred on 25th July 1989. Although that liability could have been terminated by repaying $30 million, that was never a real option for Giant. Accordingly, in my opinion the relevant period extends at least to 31st December 1989. I am tentatively of the view that it would extend beyond that period, for so long as Giant was unable to repay the $30 million, at least until the commencement of the winding up on 27th April 1990. It may be that the period continues thereafter to the present: there is authority that the winding up of a company does not stop the accrual of interest (see Midland Montagu Australia v. Harkness, McLelland, CJ in Eq., 29/8/94, pp 15-16; and cf. Mackenzie v. Rees [1941] HCA 21; (1941) 65 CLR 1); and it may be a fortiori that it would not stop interest accruing in respect of the calculation of a debt for the purposes of s.556. However, the decision of Bryson, J in Bans v. Ling may be to the contrary.

304. As I indicated earlier, I cannot resolve these questions now: all questions concerning calculation of interest after November 1989 are, if necessary, to be the subject of a further hearing.

305. However, it may be of assistance in understanding the practical effect of my decision to note the following. Interest was in fact paid to the end of October 1989. A further sum of about $3.4 million was paid in August 1989, but that was clearly a reduction of principal, so would not be credited against the liability for interest. Accordingly, if the debt for interest incurred by the company on 25th July 1989 is for the period to the commencement of the winding up, it is effectively for interest for the months November 1989 to April 1990 inclusive, that is, about six months at about $0.5 million per month or $3 million. If it is, in addition, for the period May 1990 to the present, that would be for a further period of about sixty months: I am not aware of whether interest would have continued at or about $0.5 million per month, but clearly a very substantial amount would be involved.

6. PIONEER AS A DIRECTOR OR PARTICIPANT IN MANAGEMENT
7. It is common ground that Antico, Quirk and (from 17th February 1989) Gardiner were directors of Giant, and so were persons to whom s.556 applied. The question to be considered here is whether either Pioneer or PIFL was at material times either a director of Giant, or a person who "took part in the management of Mani." within s.556. Since the effective decisions on behalf of Pioneer and PIFL appear to have been taken at Pioneer board meetings, I will confine myself to considering Pioneer's position: there seems no purpose in considering PIFL separately, and I will not make any finding in relation to PIFL unless asked to do so.

6.1 Legal Principles 307. On the question of whether Pioneer was a director of Giant, it is clear that it was never appointed a director; so the question is whether it was, in terms of the definition of director in s.5 of the Code, a person occupying or acting in the position of director, or a person in accordance with whose directions or instructions the directors of Giant were accustomed to act.

308. On the question whether Pioneer took part in the management of Giant, I accept the view of Burchett, J in Holpitt v. Swaab (1992) 33 FCR 474 that this expression is limited to persons whose management role in the company may be likened to that of a director. This view was accepted in Taylor v. Darke [1992] FCA 428; (1992) 10 ACLC 1516 at 1522; and also in Sycotex v. Baseler, Gummow, J, Federal Court of Australia, 26th May 1994 at p 35, where Gummow, J added that this meant that the person must have some decision- making role in the company.

309. On both questions, the Privy Council decision in Kuwait Asia Bank v. National Mutual Life Nominees (1991) 1 AC 187 is of some relevance. In that case, the bank owned shares in a New Zealand company. The company had five directors of whom two were employees of the bank and nominated by the bank to the board. National Mutual, as trustee for the depositors, sought contribution from the bank to payments it had made to settle certain claims made against it by depositors. National Mutual claimed that (1) the bank was vicariously liable for the acts and omissions of the two directors who were its employees; (2) those directors were agents of the bank, so that the bank was responsible for their acts or omissions; (3) the bank owed depositors a duty of care; and (4) those two directors acted in accordance with the bank's instructions, so that the bank itself was a director within the definition in the New Zealand Companies Act (relevantly similar to that in the Code). The Privy Council held, as regards the first two contentions, that the two directors, acting as directors of the company, were agents of the company, and not of the bank; so that the bank was not liable for their acts either as employer or principal. The Privy Council went on to say that it would have been otherwise, if the bank had exploited its position to obtain some improper advantage, but this was not suggested. The Privy Council held that there was no duty of care owed by the bank; and in relation to the fourth contention, it held that the employees were only two out of the five directors, and there was no allegation that the other directors were accustomed to act on the direction or instruction of the bank. In those circumstances, the bank could not fall within the definition of director.

310. I was also referred to the cases of Tesco Supermarkets v. Nattrass [1971] UKHL 1; (1972) AC 153 at 199-200, and Nissho Iwai Australia v. Malaysian International Shipping Corporation [1989] HCA 32; (1989) 167 CLR 219, at 229-230 to support the proposition that none of Antico, Quirk or Gardiner could be considered to be the directing minds of either Pioneer or of Giant.

311. It is clear that the mere fact that Pioneer owned indirectly 42% of the shares of Giant, and had three nominees on its board, is insufficient to make Pioneer either a director or a person who took part in the management of Giant. Furthermore, in general, in the absence of evidence to the contrary, the Court would take it that actions performed by Antico, Quirk and Gardiner, as directors of Giant, were actions undertaken by them on behalf of Giant, and not as officers or agents of Pioneer. 6.2 Relevant Circumstances

312. However, in this case, there are circumstances in addition to the basic facts which I have already mentioned.

(a) Effective control 313. Pioneer had effective control of Giant. It had this by virtue of its 42% shareholding, where the only other significant shareholders held respectively about 10%, 6%, 6% and 3% of the shares (the 3% shareholder being Augold). The position was very different from that in Curragh, where although Giant indirectly held 46% of Curragh's shares, the other shares were all held by a single shareholder, who had effective control of Curragh. The exercise of Pioneer's control of Giant was indicated in the other circumstances which I will outline. The fact of control was acknowledged in Giant's 1988 annual report, where it is noted that control of Giant had moved from Ariadne to Pioneer.

(b) Financial reporting 314. Pioneer imposed on Giant requirements for financial reporting consistent with the financial reporting required for the Pioneer group. This is illustrated by a memorandum from Mr. Quirk of 19th February 1988, a letter of 31st March 1988 enclosing the cash flow form to be used, and a memorandum from Leach to O'Neill of 18th October 1988 requiring monthly reports; and the papers in this case contained many examples both of financial reporting from Giant to Pioneer and Pioneer's statements of its requirements in that regard. The Pioneer board on 28th February 1989 directed management to ensure that there would be proper financial reporting by Giant, and also full Pioneer access to all financial records; and it was noted that this might involve changes in the management of Giant.

(c) Augold and OCT 315. There is evidence, which is slight but uncontradicted, that the views of Pioneer delayed both the Augold takeover, and the sale of the QCT shares, it being a complaint of Giant that the latter delay meant that the ultimate proceeds of that sale were substantially reduced.

(d) Acquisition of Pioneer's mineral assets 316. On the three major strategic questions concerning Giant decided during the period with which we are mainly concerned, namely the abandonment of Giant's acquisition of Pioneer's mineral assets, the mode of Pioneer assistance of Giant involving the taking of security, and the decision to sell Curragh, the effective decisions were taken by Pioneer.

317. Dealing first with the acquisition of Pioneer's mineral assets, the main consideration of that transaction in the latter part of 1988 and early part of 1989 had been by the Pioneer board, and the negotiations for finance to be provided to Giant for the purchase were mainly conducted by Pioneer. Antico had discussions with Societe Generale with a view to arranging this finance; and it seems clear that he was acting on behalf of Pioneer, since he was chairman of Pioneer but a non-executive director of Giant; and Societe Generale's proposal dated 11th November 1988was addressed to Antico as chairman of Pioneer. A note concerning Westpac finance for the asset acquisition was made by Leach, of Pioneer, with a copy to Quirk. A report in the agenda papers for the Pioneer board meeting of 31st January noted that "we" have had a proposal for financing from Societe Generale, and that "we" are following up an alternative with Westpac. There is also a record of a meeting between Leach and Societe Generale on 10th February 1989.

318. The Pioneer board on 31st January 1989 authorised a committee to approve terms on which the asset sale could go ahead; and on 17th February 1989, the Giant board resolved in principle to acquire these assets. However,the decision not to proceed with the acquisition followed a discussion between Antico, Quirk and Gardiner, and a detailed memorandum from Quirk to Antico of 20th February 1989 discussing the matter, and concluding with a recommendation not to proceed: this memorandum went to the board of Pioneer, not of Giant. On 28th February 1989, the Pioneer board resolved that it was not in the best interests of either company to proceed; thereby apparently making a decision, not only as to what was in Pioneer's interests, but also as to what was in Giant's interests. There was no further consideration of the matter by the Giant board.

319. Of course, once Pioneer as vendor decided not to sell, Giant as purchaser could not buy. However, in my view, the circumstances I have outlined indicate that Pioneer was really developing, and ultimately abandoning, this transaction on behalf of both parties.

(e) Management and financial control 320. The Pioneer board decision of 4th March 1989 to make up to $10 million available to Giant was made on a number of conditions, including the condition that Giant instruct outside consultants, that no new financial commitments be entered into without Pioneer's approval, and that all payments were to be approved by Leach.

321. Pioneer was closely involved in the briefing of the outside consultants. Antico effectively made the decision that the accountants to be briefed should be Arthur Anderson and not Coopers Lybrand. The brief to Arthur Anderson was discussed in a meeting at Pioneer's office attended inter alia by Antico and Leach. Antico reported, on 10th March 1989, to Pioneer directors that he instructed Folwell (that is, Keith Folwell, Giant's Executive General Manager, Mining) "to make available all information" to the technical consultants. The Pioneer board on 13th March resolved that representatives of Pioneer should be involved in briefing the consultants.

The Pioneer board on 30th March directed Pioneer management to strengthen the management team at Giant, and was critical of Giant's failure to provide timely financial information.

323. At the Pioneer board meeting of 2nd June 1989, Antico said that Pioneer management recommended that Pioneer provide further financial support to Giant, subject to conditions including a condition that the Giant board be reconstructed, with Antico as chairman, and the overrepresentation on the board of Giant management addressed. The Pioneer board resolved to provide the further support, conditional inter alia on tighter management and financial control. Following this, on 5th June 1989, Antico sent a memorandum to Quirk that Quirk was to agree with Needham concerning the Giant board reconstruction. on 14th June 1989, Gardiner sent a memorandum to Antico, Quirk and Needham, advising that Quirk, Needham and Gardiner had agreed to ask O'Neill, Bourke and Driscoll to resign in September.

(f) Taking security 324. The decision to fund Giant, on the basis of security provided by Giant, was effectively made by Pioneer, and simply accepted by Giant.

325. At the Pioneer board meeting of 13th March 1989, the management were directed to use their best endeavours to obtain appropriate security from Giant.

On 30th March 1989, Leach and Gardiner (acting, it may be inferred, on behalf of Pioneer) met Anthony Sherlock of Coopers Lybrand to discuss how to deal with the banks in relation to taking security over Curragh.

327. The matter was given detailed consideration in the paper No.1 presented to the Pioneer board of 2nd May 1989, in which Gardiner and Quirk recommended that security be obtained, and that Giant's performance be monitored against the budgets. on the basis of that paper, on 2nd May 1989, the Pioneer board resolved to advance a further$25 million on the security of Curragh, on the basis that Giant prepare a strategy for the sale of Curragh and restructuring the Canadian interests.

328. Meanwhile, Gardiner and Leach had commenced negotiations with Westpac to obtain Westpac's co-operation in obtaining security; and the first indication in writing of Westpac's attitude to this is a fax of 5th May sent by Auty to Leach, advising that he had recommended consent to a second charge being given over the shares in Pamour and Curragh. This fax was acknowledged by Leach and Gardiner. This consent, which had been negotiated by Gardiner and Leach on behalf of Pioneer, was ultimately signified in a letter of approval on 16th May to Giant. (It will be recalled that this was withdrawn on 31st May, and renewed on 20th June).

329. On 2nd June 1989, the Pioneer resolved that further financial support was conditional on security being granted over shares in Pamour and Curragh. The granting of security was resolved upon by the Giant board only on 22nd June, shortly before the actual documents were executed on 30th June.

330. Again, the very strong indication is that Pioneer carried this matter forward on behalf of both itself and Giant, and it was ultimately accepted as a fait accompli by Giant on 22nd June.

(g) Sale of Curragh 331. The origins of the decision to sell Curragh, the negotiations and investigations of it, and the major decisions, were taken by Pioneer rather than by Giant.

The origin of the proposal seems to be found in considerations given to various options by Gardiner and Leach in the first part of March 1989. Gardiner's notes from around this time concerned questions about tax on the sale of Curragh, and the question whether Pioneer should buy Curragh; and one of his options was expressed in the terms "having Giant sell all its immediately saleable assets".

Later in March, there were communications between Glass and Borden and Elliott, concerning legal and taxation issues relating to the sale of Curragh; and the sale of Curragh was raised by Quirk and Gardiner at the Pioneer board meeting of 30th March 1989.

The first of the two papers presented to the Pioneer board on 2nd May 1989 recommended that Pioneer consider acquiring Giant's interest in Curragh for up to $125 million; and the second paper concluded that a restructure, which involved the sale of Giant's interest in Curragh (for, say, $120 million) was necessary. At the meeting, the Pioneer board concluded that Curragh should be sold.

At the Giant board meeting of 18th May, Gardiner said that Curragh had to be sold, but the board did not pass a resolution to that effect. Rather, it agreed that Needham should approach Frame to obtain approval to reveal information "to parties who may be interested in taking up a placement of shares in" Giant.

The Pioneer board minutes of 30th May 1989 record that Needham reported to the board that Giant had approved the sale of its interest in Curragh. This advice from Needham was apparently repeated to the Pioneer board meeting of 2nd June 1989, although Needham there spoke in favour of retaining Giant's interest in Curragh. The Pioneer board resolved that Needham proceed with the sale of Giant's interest in Curragh as soon as practicable.

Needham's report concerning his efforts to sell Curragh during June was made to the Pioneer directors. On 4th July 1989, the Pioneer board resolved that Needham should continue negotiations for the sale of Curragh, and refer back to the Pioneer board any other possibilities.

Despite the reports by Needham to the Pioneer board meetings of 30th May and 2nd June, it does not appear that the Giant board resolved to sell Curragh until 30th June. It did so following receipt of a Westpac requirement of a Giant resolution to that effect.

6.3 Application of Principles 339. I accept that a holding company is not a director of its subsidiaries, merely because it has control of how the boards of its subsidiaries are constituted; that it is not uncommon for lenders to impose conditions on loans, including conditions as to the application of funds and disclosure of the borrower's affairs; and that it is even less uncommon for lenders to require security for a loan, and then to require the sale of property over which the security is given. Certainly, these factors on their own would not amount to assuming the position of a director, or taking part in the management of a borrower company.

However, the circumstances in this case go far beyond these matters.

In my view, the conditions imposed following the decision to fund Giant in March 1989 show a willingness and ability to exercise control, and an actuality of control, over the management and financial affairs of Giant.

In my view also, the decision as to how Giant was to be funded by Pioneer, and as to the taking of security, was never the subject of careful consideration by the Giant board, but was accepted by the Giant board as something necessary or as a fait accompli. The matter of granting security was not the subject of any resolution until as late as 22nd June 1989.

These matters were given careful consideration by Antico, Quirk and Gardiner, who were directors of Giant; but the consideration which they gave was in the context of reports to and decisions by the Pioneer board, and so, in my view, was given by them as directors of Pioneer.

Very much the same comments apply in relation to the decision to sell Curragh.

Antico, Quirk and Gardiner all say that they recognised their duty, as directors of Giant, to act in the interests of all Giant's shareholders; and they all say they had no instructions from Pioneer as to how they should act in that capacity. Antico and Gardiner said that, if any question arose when they were acting as shareholders of Giant which involved a conflict of Pioneer's interest, they would abstain from voting on that matter. Quirk asserted that he did not see any conflict, because he considered what was in the best interests of Giant would also be in the best interests of Pioneer, by reason of its 42% shareholding.

This evidence does not lead me to the view that, having carefully considered, in their capacity as directors of Pioneer, these strategic decisions concerning the affairs of Giant, they gave any separate consideration to them in their capacity as directors of Giant. In my view, the directors of Giant, including Antico, Quirk and Gardiner, simply accepted the decisions which had effectively been made by Pioneer.

For these reasons, although I am not satisfied that Pioneer's activities prior to 4th March were sufficient to constitute it a director of Giant, or a person who took part in the management of Giant, I do consider that as from 4th March, Pioneer was a person who took part in the management of Giant, and was also a director of Giant.

7. REASONABLE GROUNDS 7.1 Legal Principles
8. It is necessary for the plaintiffs to prove, in terms of s.556(1)(b), that: "immediately before the time when the debt is incurred - (i) there are reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due; or (ii) there are reasonable grounds to expect that, if the company incurs the debt, it will not be able to pay all its debts as and when they become due".

349. It is necessary in this case to look closely at a number of questions concerning the interpretation and application of this provision. First, there is the meaning of the words "able to pay all its debts as and when they become due". Then, there are four questions involved in "reasonable grounds to expect": what standard of reasonableness is to be applied; what facts are to be taken into account; what is the nature of the expectation; and what is the difference between the expectation in paragraph (i) and that in paragraph (ii). Then, there is the question of the standard of proof. Finally, there is the place of expert evidence.

350. I will look in turn at these seven questions.

(a) Ability to pay debts as and when they become due 351. This is a question of fact, to be decided as a matter of commercial reality, in the light of all the circumstances: it is necessary to consider the company's financial condition in its entirety, including its activities, assets, liabilities, cash, money which it could procure by sale or on the security of its assets, and its ability to obtain financial assistance by way of loan or subscription for share capital: see Rees v. Bank of NSW [1964] HCA 47; (1964) 111 CLR 210 at 218-19; Sandel v. Porter [1966] HCA 28; (1966) 115 CLR 666 at 670; Calzaturificio Zenith v. NSW Leather and Trading [1970] VicRp 80; (1970) VR 605; Dunn v. Shapowloff (1978) 2 NSWLR 235 at 244-5; Pioneer Concrete v. Ellston (1985) 10 ACLR 289 at 299-300; Taylor v. ANZ Banking Group (1988) 13 ACLR 780 at 784; Re Newark (1993) 1 Qd R 409 at 413; Sycotex Pty. Limited v. Baseler, Federal Court of Australia, Gummow, J, 26th May 1994.

The question is one of ability to pay, not fact of payment; so even if, for some reason, there were reasonable grounds to expect that the company would not in fact pay all its debts as and when they became due, this would not, of itself, be enough. So long as there were not reasonable grounds to expect that the company would not be able to pay its debts as and when they became due, it would not matter that there were reasonable grounds to expect that the company would not in fact pay its debts, because, for example, it saw it as being to its own advantage to delay payment.

Next, there is no requirement in this provision that the payment of debts should come from the company's "own money", as in certain provisions of the Bankruptcy Act. In Norfolk Plumbing Supplies v. C.B.A. (1992) 6 ACSR 601 at 615, Kearney, J held that it was not sufficient to exclude insolvency, for the purposes of the application of s.122 of the Bankruptcy Act in relation to preferences, that the company had an overdraft facility available to it. Whether or not that is correct in relation to s.122, clearly, in my view, it would not apply in relation to the test prescribed by s.556. Indeed, it has been held in two cases that proof that a company did not have assets, from which it could pay its debts as they fell due, may not be sufficient for a prosecution under s.556 to succeed; where money had, from time to time, been provided to the company, either by other companies in the same group or by a principal of the company, and the prosecution did not establish that there were reasonable grounds to expect that the debts of the company would not be paid in this way: see Deputy Commissioner for Corporate Affairs v. Caratti (1980) 5 ACLR 119; Flavel v. Day (1984) 9 ACLR 502. In the latter case, it was the accused director himself who had previously injected funds into the company in order to pay its debts, and it was held that it had not been established that he had reasonable grounds to expect that he himself would not do so in relation to the debts of the company which existed at the time when the relevant debt was incurred.

So far as the present case is concerned, this means that it is necessary for the plaintiffs to establish that there were reasonable grounds to expect that Giant would not be able to pay its debts as and when they became due, either from its own resources or from funds provided by Pioneer.

A very significant matter in this case is the question of when debts are to be regarded as becoming due, for the purposes of this provision; and the associated question, when does inability to pay debts strictly when they become due, in circumstances where there may be reason to expect some forbearance by creditors, amount to the inability to which the provision refers.

In Dunn v. Shapowloff (1978) 2 NSWLR 235 at 244, Mahoney, JA said this, in relation to a predecessor of s.556: "The time for payment of the debt is not determinative in the sense that, if there is no ground of expectation that the debt can be paid on the date on which it will fall due for payment, but there is a reasonable ground of expectation that it will be paid on the following day, the prosecution must succeed on this aspect of the subsection. On the other hand, the fact that there is a reasonable or probable ground of expectation that the company will be able to pay the debt at a time distant from the time when the debt falls due will not normally be an answer to a prosecution. It will be necessary in each case to take into account the particular facts; I think the words "being able to pay the debt" admit of some flexibility in this regard."

In 3M Australia v. Kemish (1986) 10 ACLR 378, Foster, J said this: "I am equally of the view that Mahoney, JA's remarks as to some flexibility being imported into the question of time for payment are applicable to the construction of the new section. I am satisfied that a debt does not necessarily become "Due", within the meaning of the section, upon the date originally stipulated for its payment. I consider that it is proper to take into account arrangements made by the company with the creditor for extended time for payment, even where such arrangements would not be contractually binding upon the creditor. Even where there is no express arrangement for extension of credit beyond the time originally stipulated, I think it appropriate to take into account in determining whether the section has been satisfied, whether a course of dealing between the company and a particular creditor would reasonable lead to an expectation on the part of the defendant that some reasonable extension of a period of credit would be allowed by the creditor as a matter of grace. Clearly, nice questions of fact must be involved in such considerations and the question of whether the "Due" date for payment of a company's debt has been extended, will depend upon the precise circumstances relating to the individual debt, and the particular creditor."

This approach of Foster, J was supported in Group Four Industries v. Brosnan [1991] SASC 2986; (1991) 5 ACSR 649 at 652, and Monsoon Industries v. Simpson, Queensland Court of Appeal, 25th September 1992.

However, in Pioneer Concrete v. Ellston (1985) 10 ACLR 289 at 301, Carruthers, J stated that: "Whether a debt has or has not become due is to be determined by reference to the legal agreement between the parties". He continued: "Hesitation on the part of the creditor (probably for commercial reasons) to take immediate steps to enforce its rights against the customer, can have no bearing on this question".

That approach was supported in Re Toowong Trading (1988) 13 ACLR 121 at 125; Norfolk Plumbing Supplies v. C.B.A. (1992) 6 ACSR 601 at 615; and Carrier Airconditioning v. Kurda (1993) 11 ACSR 247 at 254.

In Sycotex v. Baseler, Federal Court of Australia, 26th May 1994, Gummow, J at pp 18-19 said this: "There is some dispute in the authorities as to whether a debt falls due when it is legally required for payment or whether the court can take into account normal or likely indulgences granted to the company by its creditors: see Pioneer Concrete Pty. Limited v. Ellston (1985) ACLR 289 at 301; Carrier Air Conditioning Pty. Limited v. Kurda (1993) 11 ACSR 247; c.f. 3M Australia Pty. Limited v. Kemish supra at 378. The issue is relevant in the present case because Mr. Baseler conceded that if New World had been required to pay all its creditors according to their stated terms in July, August and September 1991 it could not have done so.

Any conflict between the authorities may be more illusory than real and factual rather than legal. I would not consider such an issue to be a question of law to be decided by the application of a rigid rule. Rather, the statute appears to focus attention upon what it is reasonable to expect in a given set of circumstances, such a consideration necessarily being made by someone operating in a practical business environment. Attention is focussed at whether a person would expect that at some point the company would be unable to meet a liability. Such a question is necessarily a factual one to be decided in light of all the circumstances of the case. At one end of the spectrum a company may be operating in an industry where a code of practice of paying 60 days after invoicing has arisen, despite stated terms of 30 days. If the company has a large number of creditors, it may be reasonable to expect that all of them would not suddenly insist on being paid in 30 days. At the other end of the spectrum would be a case where a single creditor had granted an indulgence on one occasion. It may well not be reasonable to expect a repetition of that event."

This approach, tending to reconcile the views of Foster, J and Carruthers, J has some support from Taylor v. Powell [1993] FCA 87; (1993) 113 ALR 374 at 381, and Re Newark (1993) 1 QdR. 409 at 414-5, 420-21.

I agree with Gummow, J that the differences between these two lines of cases can largely be reconciled by regarding the question of ability to pay debts as and when they become due as a matter of substantial commercial reality, rather than on the basis of forms or technicalities. And I accept that there is a spectrum of cases to be considered, not just one or two different classes of case.

I agree with the view of Carruthers, J in Ellston that if a debt is legally due, the mere fact that the creditor refrains from taking enforcement action (whether by suing for the debt, seeking to bankrupt or wind up the debtor, or seeking to enforce any security) does not negative the debt being "due" for the purposes of the provision.

If as a matter of substance, the company is not able to pay its debts as they become due, the circumstance that the relevant creditors may give the company some time before they actually seek to enforce their remedies, and that the company may well be able to pay them out given that time, will not negative application of the section.

On the other hand, if a relevant creditor becomes bound by contract or estoppel to extend the date when the debt is due for payment, then the debt will not be due for the purposes of the provision. Furthermore, if there is a practice of granting indulgences, even though this practice may fall short of giving rise to a contract or an estoppel, it may be appropriate, as a matter of commercial reality, to test the company's ability to pay its debts as and when they fall due against the extended times for payment which are given by this practice: whether or not this is appropriate would depend upon the circumstances and the commercial reality of the situation.

If, however, the ground for expecting that the creditor will not insist on payment is not some regular practice of this kind, but rather is that the creditor will recognise that the debtor cannot pay the debt and will delay enforcement action just to give the debtor a chance to pay, then it seems to me that this would generally not negative application of the section: it would not preclude an expectation that, as a matter of commercial reality, the debtor will be unable to pay this debt as it falls due.

Furthermore, I accept the view of Mahoney, JA that a short temporary inability to pay a particular debt may not negative ability to pay debts as they fall due. The fact that a company is unable to pay debts for a time, perhaps only a matter of days, after they become due, may not mean that, as a matter of commercial reality, it should be regarded as being unable to pay its debts as they fall due.

If a creditor does agree to give an extended time for payment, then, as I have said, that will mean that that particular debt has not fallen due; and normally it will not matter what the creditor's reason for doing so was: in particular, it would not matter that the creditor made this agreement because the creditor believed that otherwise the debtor would be unable to pay the debt, because of insolvency. However, if such an agreement toextend the time for payment is vitiated by some conduct of the debtor, for example, if it is induced by misleading conduct by the debtor, then this agreement cannot be relied on as negativing inability to pay debts as they fall due. In the present case, part of the plaintiffs' case is that the agreement by SCBAL on 25th July 1989 to extend the time for payment of the debt of $30 million to 31st August 1989, and from then renewable monthly to 31st December 1989, was induced by Giant's misleading conduct. It seems to me that, if that allegation is made out, and if, but for Standard Chartered's agreement on 25th July to extend the time for repayment of the $30 million in this way, this $30 million was due and payable on 25th July and Giant was unable to pay it, then the making of the agreement would not preclude a finding that Giant was then unable to pay its debts as and when they became due.

(b) Standard of reasonableness 370. The standard of reasonableness to be applied is that of a director of reasonable competence, exercising the care and diligence that a reasonable person might be expected to take in the same circumstances, acting on his or her own behalf: cf. In Re Brazilian Rubber Plantations and Estate (1911) 1 ChD 425 at 437. The director is not expected to have any particular expertise or qualifications: Barnes v. Andrews (1924) 298 Fed. 614 at 618; In Re Forest of Dean Coal Mining Co. (1878) 10 ChD 450 at 452. But the director is expected to be capable of understanding the company's affairs, to the extent of reaching a reasonably informed opinion of its financial capacity: see Commonwealth Bank of Australia v. Friedrich (1991) 5 ACSR 115 at 126; Re Australasian Venezolana (1962) FLR 60 at 66. So in this case, the level of competence and care of a director to be assumed for the purposes of this provision is that appropriate to the complexity of Giant's affairs, and having regard to the constitution and organisation of that company: cf. Daniels v. Anderson (Court of Appeal, 15th May 1995). The degree of involvement assumed is that of a non-executive director: see Friedrich 5 ACSR at 125-6.

371. I accept that the standard must be applied with due regard to the exigencies of business, although it should not be assumed that the reasonable director has other commitments with prevent due attention being given to the affairs of the company in question. I accept also that undue effect should not be to the wisdom of hindsight.

372. It was submitted for the defendants that the Court should not review the business judgment of directors, and substitute its own judgment, merely on the ground that the decision seems to the Court, with hindsight, to be imprudent: see, for example, Harlow Nominees v. Woodside Oil [1968] HCA 37; (1967) 121 CLR 483 at 493; Howard Smith v. Ampol Petroleum (1974) AC 521 at 832.

373. Those cases related to allegations of breach of a director's fiduciary duty, and are not directly applicable to s.556(1), or even s.556(2). In applying those provisions, the Court is not reviewing a decision made by directors, but rather is attempting to decide what a reasonable director would expect. Of course, insofar as reasonableness is consistent with a range of expectations, the onus is on the plaintiffs to show that the circumstances referred to in s.556(1)(b) lie within the whole of that range. If any of the range of reasonable expectation falls outside what is specified in s.556(1)(b), then the plaintiffs must fail.

374. The defendants also submitted that the Court should take account of the tightrope walked by directors of a company in financial difficulties, where for them to decide that the company should cease business may render the assets of the company worthless, so that creditors as well as shareholders suffer.

375. This consideration is not directly relevant to the question of whether there are reasonable grounds to expect that the company will not be able to pay its debts. if there are such reasonable grounds, then, however disastrous the decision not to incur them would have been, s.556 applies. However, I do accept that this kind of problem is one of the exigencies in the context of which the hypothetical reasonable director is supposed to reach an expectation.

(c) What facts are to be taken into account 376. In many of the cases, it is asserted that the test under s.556(1)(b) is an objective test: see 3M 10 ACLR at 3723; Friedrich 5 ACSR at 123; Group Four 5 ACSR at 652. In Morley v. Statewide Tobacco Services [1993] VicRp 32; (1993) 1 VR 423 at 328-9, Ormiston, J said that the Court should consider the company's objective circumstances, and consider what expectation the reasonable director would have, having regard to those circumstances.

In Freidrich 5 ACSR at 124, Tadgell, J stated his understanding of the proof required of a plaintiff under s.556(1)(b)(i): "The plaintiff must prove facts which, immediately before the time when the company incurred the relevant debt, gave a person seeking properly to perform the duties of a non-executive director of that company reasonable grounds to say: 'I expect that the company will not be able to pay all its debts as and when they become due'."

I note that his Honour does not there say "facts which, if known to a non-executive director of that company, would have given ...". On one interpretation, therefore, the facts referred to by Tadgell, J could be limited to facts which a person seeking properly to perform the duties of a non-executive director should have known. I would not accept such an interpretation as correct.

It would mean, for example, that s.556(1) would not apply where directors actually knew of a fact which clearly showed that the company would not be able to pay its debts as they became due, so long as this was not a fact which they should have known simply by performing their duties as non-executive directors; whereas I think it is clear that s.556(1)(b) should apply in those circumstances. For example, a company's ability to pay debts may depend upon the ability of one highly reputable debtor to pay its debts to the company, and there may be no adverse information about that debtor which the directors ought to have ascertained simply by performing their duties as directors; but it may be that some or all of the directors have, by chance, learnt that this apparently reputable debtor has just sought to be wound up by the Court on the ground that it is hopelessly insolvent. I do not think a reasonable view of s.556(1)(b) would exclude that circumstance from the reasonable grounds to which the provision refers.

On the other hand, I think there must be some limits upon the existing factual circumstances which are relevant to reasonable grounds. Internal deliberations of debtors or creditors of the company, which have some bearing on whether the debtor would have paid debts to the company or whether the creditor would have extended time to the company for the payment of its debts, would be relevant to the question of whether the company would be able to pay its debts as and when they become due; but, at least unless these deliberations would have been disclosed to directors of the company upon enquiry, it is difficult to believe that they could be included in the reasonable grounds to be taken into account. In my view, the facts to be taken into account include all facts reasonably capable of being known to any of the directors of the company: accordingly, they extend to all facts actually known to any director, and also to facts not actually known by any director, if they are facts reasonably capable of being known by a director.

In this case, a question also arises as to whether the facts to be taken into account include the actual values of property of the company, suggested by valuations made for the purposes of the hearing: in this case, the Orchard valuations of Giant's interests in Curragh, and in Pamour, GYK, and ERG; and the Westphal valuations of Giant's interests in Horn Island, GVG, GRG, West Wits, and the PNG oil and gas permits.

In my view, valuations which actually existed at the time, estimates of value made by company officers or otherwise available to directors, and market facts capable of being known to directors would be facts to be taken into account. Insofar as a subsequent valuation established facts concerning the market which could have been known to directors, and on which an opinion as to value and saleability could be based, then those facts are among the facts to be taken into account.

However, the actual valuation opinion itself is in a different category, particularly if it concerns a difficult case of a unique piece of property, where there is no ascertainable market price, such as Giant's interest in Curragh. I do not think the Court should hold, even if it is convinced by that valuation that it establishes the true value of a particular piece of property, that the fact that the piece of property had that value was a fact to be taken into account for the purposes of s.556(1). But I think it can be taken into account for a different purpose, namely that it is some evidence of what a reasonable director may have taken the value to be.

(d) Nature of expectation 384. I note that the relevant words are "expect", not "suspect", and "will", not "may". This was noted by Foster, J in 3M 10 ACLR at 378, and he went on to say that the plaintiff had "to prove the existence of facts ... which would induce a director or manager of ordinary competence to anticipate or predict that the company would clearly be unable to pay all its debts as and when they became due". I do not think the words of the section justify the use of the word "clearly" there. I do accept that the expectation must go beyond "mere hope or possibility": see Dunn (1978) 2 NSWLR at 249. I also accept that it implies a "measure of confidence": see Friedrich 5 ACSR at 127; and cf. Peabody v. Commissioner of Taxation [1993] FCA 74; (1993) 40 FCR 531 at 541.

385. It seems to me that there are three possibilities in relation to the expectation that a reasonable director could have. He or she could: (i) expect that the company will be able to pay its debts as they become due; (ii) expect that the company will not be able to pay its debts as and when they fall due; or (iii) not have an expectation one way or the other. Only the second of these alternatives will satisfy the provision.

386. Many of the plaintiffs' submissions in this case are in terms that the directors had no reasonable grounds to expect that debts would be paid, as anything more than a hope or possibility. Even if I accept those submissions, this does not get the plaintiffs far enough: the third of my three alternatives would not be excluded. Submissions along those lines are not irrelevant to the question; but undue focussing on the formulation involved in those Submissions could distract attention from the real question.

387. I do accept that a reasonable director would try to reach an expectation one way or the other, so that he or she would try to avoid the situation where there was no expectation one way or the other. This is especially the case where there is a risk of insolvency, so that directors have a duty to consider the interests of creditors as well as of shareholders: see Kinsella v. Russell Kinsella (1986) 4 NSWLR 722 at 733. Furthermore, the greater the debts involved, and the greater the possible risks, the more would it be incumbent upon a reasonable director to try to reach a definite expectation one way or the other as to whether the company would be able to pay its debts.

388. Nevertheless, he or she may not be able to arrive at a definite expectation, in relation to when individual debts will become due, or what sources of payment will be available at various times, or as to the overall position.

389. To some extent, it seems to me that the plaintiffs' approach is also fallacious in that the plaintiffs seem to suggest that if the directors do not have reasonable grounds to expect, in relation to any one of a number of possible sources of payment, that that source of payment will eventuate, then they do not have reasonable grounds to expect that payment will be forthcoming from any source.

390. In assessing that approach, it is necessary to have regard to the circumstance that the mining business is a business of some risk, and that, if there is some chance of each one of a number of projects providing a source of payment, then there is a greater chance that one at least of these many possible sources will eventuate. Although I do not suggest that either reasonable directors or courts should normally proceed by applying mathematical rules of probability, it is not irrelevant to note that, if there is a 20% chance of each of four independent events occurring, then there is about a 59% chance that one at least of these four events will occur; and that if there is a 10% chance of each of seven independent events occurring, there is about a 52% chance that at least one of these seven events will occur. To establish that there were no reasonable grounds for a reasonable director to expect that, in respect of each of a number of possible sources of payment, that it would provide resources for payment, does not establish that there were no reasonable grounds to expect that resources for payment would not be forthcoming from any of them; much less that there were reasonable grounds to expect that they would not be forthcoming from any of them.

(e) The difference between (i) and (ii) 391. Usually, there would appear to be little difference between the expectations referred to in paragraph (i) and paragraph (ii) of s.556(1)(b).

392. Immediately before the debt in question is incurred, there are presumably reasonable grounds to expect that it will in fact be incurred; and accordingly, the test in paragraph (i) will usually involve the same question as the test in paragraph (ii). I believe this follows as a matter of language, and also as a matter of reasonableness. For example, suppose that a company needed to enter into a particular loan transaction to save it from insolvency; that transaction being one which both would provide the company with the finance to pay debts that were then due but otherwise unable to be paid, and also would itself give the company time in which it could, through profitable trading, repay the loan debt then being incurred. If, in applying the test in (i), one disregarded the reasonable expectation that the company would enter into the beneficial transaction, the section would apply; and that would be unreasonable.

393. However, this very example does provide the basis for one circumstance which, in my view, does give a different result as between the two paragraphs. Suppose that the debt being incurred is for a loan which will enable other debts to be paid out, and which gives the company time in which to acquire resources to pay out the particular loan: in that case, the reasonable director would not have the expectation in paragraph (ii). However, if (as a reasonable director would have known) that particular loan transaction itself is vitiated by some action of the company, for example, if it has been induced by misleading conduct of the company, then in my view, the directors cannot rely on the existence of that transaction to escape the effect of paragraph (i). The reasonable grounds to expect that the company would not be able to pay its debts as they fall due, under paragraph (i), would not be negatived by the expectation of this particular transaction, because (as a reasonable director would have known) it was only obtained by misleading conduct.

(f) standard of proof 394. The onus of proof is on the plaintiffs, and the standard of proof is the ordinary civil standard, but bearing in mind the gravity of the fact to be proved as affecting the degree of satisfaction required: see 3M 10 ACLR at 376; Reifek v. McElroy [1965] HCA 46; (1965) 112 CLR 517 at 521; Helton v. Allen [1940] HCA 20; (1940) 63 CLR 691.

(g) Expert evidence 395. I have already expressed a view as to the relevance of expert evidence of value.

396. So far as expert accounting evidence is concerned, it is admissible: see 3M 10 ACLR at 384; Grimm v. Galvin and Co. (1988) 6 ACLC 852 at 854, 858-9, 862; Southern Star Group v. Taylor (1991) 9 ACLC 1211 at 1215; Taylor v. Darke (1992) 10 ACLC at 15-16.

397. However, as the foregoing discussion has indicated, there are serious questions of statutory interpretation involved in applying the formula in s.556. Accordingly, the expert evidence is useful in helping the Court to understand the financial affairs of the company, and as to what the company was or was not able to do, and what a reasonable director may have expected; but it is not admissible on the actual application of the statutory formula, which is a mixed question of fact and law which has to be decided by the Court.

398. In this case, there is also some expert evidence concerning foreign law, particularly taxation law, and clearly that is relevant, where a possible source of payment of debts was the sale of a foreign asset in circumstances where there could be liability for taxation.

7.2 Approach to Facts 399. In this case, I have heard months of evidence, and read thousands of pages of exhibits and hundreds of pages of submissions. The greater part of this evidence and submissions has been directed to the question of reasonable grounds, and the related question of reasonable cause. Both questions concern expectations which should have been held, by hypothetical or actual directors of Giant, at particular instants in the history of the company; being expectations which they should have formed during and on the basis of their on-going activities as directors. In forming those expectations, the hypothetical or actual directors could not possibly have had available to them (much less present to their minds) the details which the evidence and the submissions have provided to me - not to mention the time which I have had for assimilating them and considering their implications.

400. Accordingly, while I have carefully considered the details of the evidence and the submissions, and have tried to assess what expectation could or should reasonably have been based on the material they deal with, I have to say that the very detail and complexity of this material makes that exercise seem to me to be somewhat artificial and inappropriate. For this reason (as well as for reasons of practicality in terms of the length, complexity and clarity of this judgment), I will in these reasons be taking a fairly broad approach to these issues, more in line with what might have been possible for hypothetical or actual directors, trying to form expectations at the relevant times. However, I do regard the views I express, and the reasons I give, as being generally in accordance with (and certainly not inconsistent with) my assessment of the mass of material which I do not discuss in detail.

401. Subject to the matter dealt with in section 7.9, my broad conclusions, concerning reasonable grounds at 25th July 1989, which is both the most important date (because of my decision on incurring a debt) and also the date as to which SCBAL's case is the strongest, are as follows. 1. I am satisfied that there were reasonable grounds to expect that, if Giant accepted SCBAL's offer of 11th July 1989, then: (a) if Giant would be able to pay all its debts as they fell due, then this would be only by the barest of margins; and (b) there was a very substantial risk that it

2. I am satisfied that there were not reasonable grounds to expect that it would be able to pay all its debts as they fell due.

3. However, this does not mean I am satisfied that there were reasonable grounds to expect that it would not be able to do so; and while there have been times, in considering the detail of the evidence, when I have inclined towards the view that there were such grounds, my ultimate conclusion, particularly having regard to the limitations on the detail which could be absorbed by directors in the course of their on-going activities, and on the time available for analysis, is that I am not satisfied that there were such grounds.

402. However, for reasons which I consider in section 7.9, that is not the end of the matter.

403. I should note here that I reach conclusions I and 2 notwithstanding evidence by Antico, Quirk and Gardiner that each of them believed, as at 25th July 1989, that Giant was able to pay all its debts as they fell due; and notwithstanding my view that each of them is a conscientious and capable businessman who is more qualified than I am to make judgments in business matters. I feel able to come to a different opinion on this matter because I believe that, at critical times, they were actually having regard to Pioneer's interests rather than the interests of Giant and its creditors; that they did not at those times give the careful consideration which they should have given to the interests of Giant's creditors, and whether their debts would be paid as and when they fell due; that their evidence on these matters inevitably involves substantial reconstruction; and (particularly) that they did not (and do not) appreciate or have regard to the important distinction between paying debts as they fall due (on the one hand) and inducing a creditor to refrain from taking enforcement proceedings (on the other). I would add that the record of the meeting of 27th July 1989 tends to suggest that the actual beliefs at the time of Quirk and Gardiner (at least) were generally in accord with my conclusions.

7.3 Contributions from Assets 404. Before considering the question of reasonable grounds as at each of the relevant dates, it is convenient to state my views concerning the various assets which could have provided resources for paying Giant's debts. In this review, I will not deal with the QCT shares, because they were actually sold for about $75 million by about the middle of March 1989; and there seems no reason to doubt that there were reasonable grounds, as at the only prior relevant date, 25th January 1989, to expect that this asset could be sold for something like this amount. Also, I will not deal with Giant's interest in Curragh, because that is a matter deserving of special consideration in relation to 25th July 1989, the date as to which this asset has most relevance.

(a) ERG 405. I accept SCBAL's submission that ERG was important because it owed Giant something like $33 million; Giant had a $41 million contingent liability to Westpac under the completion guarantee; the performance of ERG was critical to achieving a full amalgamation of the Canadian gold companies; and Giant was looking to ERG for cash flow to be provided by royalties on its gold production and interest on its loans.

Broadly, I also accept SCBAL's submission that, at each of the relevant dates, there were not reasonable grounds to expect that ERG would perform sufficiently well to achieve completion and procure the release of Giant from its guarantee to Westpac by the end of 1989; to enable an amalgamation which including ERG to be completed in 1989; to repay any of its loan to Giant before the end of 1989; or to produce cash flow for Giant before the end of 1989. I accept the submission that, in relation to ERG as in relation to other projects, its repeated failures to meet budgets meant that, at least by about the middle of 1989, it would not have been reasonable to rely on budgets, and it was reasonable to doubt whether management could solve the problems which stood in the way of adequate performance. I accept also that, increasingly during 1989, the variability and unreliability of the cash flows made it reasonable for even non-executive directors to give consideration to the actual sources from which payments of debts were to come, and not simply rely on the assertions of management.

I accept that it would not have been reasonable for the defendants to have confidence that ERG would perform satisfactorily, until there was some track record of reasonable performance; and that there was no such track record prior to the end of July 1989.

I accept that, as at 25th January 1989, there were no reasonable grounds for confidence that ERG would be a source of funds during 1989. I accept that, as at 31st March 1989, ERG had performed poorly, and that it was still not reasonable to be confident that it would provide funds in 1989: it had defaulted on the Westpac gold loan, and its continuing operation was, in a sense, at the grace and favour of Westpac in continuing to waive that default. I accept that, as at 1st June, it would not have been reasonable for the directors to rely on assurances that ERG's problems had been solved.

I accept that, by 25th July 1989, as the directors should have realised, ERG was in a serious cash position; it was likely that several more millions of dollars would be required to be put into ERG in the ensuing months, perhaps as much as $11 million; it was highly likely that it would fail its completion test before the end of 1989, making it possible for Westpac to call on Giant to pay $41 million under the completion guarantee; and it was likely that it would not perform sufficiently well to make scheduled payments to Westpac, make any payments to Giant or justify its inclusion in a Canadian amalgamation which could be completed before the end of 1989.

Furthermore, there was no prospect that it could repay any of its loan to Giant prior to the end of 1989, at least unless a successful amalgamation could have been concluded by then; and even then, for reasons which I will discuss in relation to the amalgamation, it was unlikely that such a payment could be made before the end of 1989.

On the other hand, I accept the submissions for the defendants that, even at 25th July 1989, it was too early to write ERG off; and I am not satisfied that, even at that date, there were reasonable grounds to expect that it would not ultimately be viable. I accept that there could still have been said to be a reasonable possibility of it producing income in future years.

The Orchard valuation of the Pamour group included about $60 million representing "equity interests in, advances to, and NSR (Smelter) royalties payable by ERG". This was on the basis that the company would achieve its five year plan, produced in mid- 1989. In my view, the chances of ERG achieving this five year plan as at 25th July 1989 were small; and in my view, this would justify a discounting of the Orchard valuation of the Pamour group by at least $40 million. In any event, this valuation does not affect the situation that ERG was unlikely to yield any cash for Giant before the end of 1989, and ERG could not reasonably have been regarded as a saleable asset which could have yielded any significant price on sale before the end of 1989.

(b) GYK and Pamour 413. It was submitted for SCBAL that there were no reaonable grounds, at any time during 1989, for a belief that dividends from Pamour or GYK would be received by Giant during 1989; and indeed, it was conceded by the defendants that it was unlikely, as at any relevant date, that a dividend would be received from this source.

It was also submitted for SCBAL that the sale of Giant's shares in GYK and Pamour was not considered as an option, prior to the end of July 1989, by which Giant might have obtained cash. This also was conceded for the defendants, who pointed out that the directors of Giant had been concentrating on the proposal for amalgamation of theCanadian interests, with a view to promoting the repayment of loans to Giant. So it appears to be common ground that there were no reasonable grounds to expect that proceeds of sale of these interests would have been received before the end of 1989. Indeed, I am prepared to hold that, as at 25th July 1989, there were reasonable grounds to expect that no dividends, and no proceeds of sale, in respect of these assets would be received by Giant before the end of 1989.

Although the shares in GYK and Pamour were listed on the stock exchange in Canada, it appears to be common ground that they were very lightly traded, and that there was no prospect of Giant's large parcels of shares in these companies being sold through the stock market.

On the other hand, it seems clear that these interests were substantial and valuable assets, which could ultimately have been sold to produce funds for payment of debts. However, the shares in Pamour, and the shares held by Pamour in GYK, ERG and Pamourex, were the subject of a first charge securing about $70 million owing to Westpac (as at 25th July 1989); and the other shares in GYK, held through 728632 Ontario Inc., were charged in favour of BNZ, to which about $26.5 million was owing as at 25th July 1989.

The Orchard valuation of these interests, tendered by the defendants, put a value on them of $C114.7 to $C122.3 million as at 30th June 1989, and also as at 25th July 1989. ($A1.00 equalled about $CO.90 at material times). However, this included $60 million in respect of shares and debt of ERG, and on that basis needs to be discounted by at least $40 million. It was submitted for SCBAL that the valuation was also excessive in that it assumed a willing vendor and purchaser, whereas any sale by Giant would be likely to involve an over-anxious vendor; it assumed a capacity to meet budgets; and it assumed a dramatic improvement as regards management costs. I think there is some force in the defendants' submission that these matters should have been put to Mr. Orchard in cross-examination, but I think they do indicate that the valuation is over-generous.

I note that in Gardiner's memorandum of 31st May, on the basis of estimates given by Needham and O'Neill, Pamour and GYK were put at $63 million, and ERG debt and royalty at a total of $30 million. In Gardiner's memorandum of 18th July, Pamour was put at $45 million, this excluding the separately-held GYK shares.

The offer of August 1989 for Giant's Canadian interests included a term that Giant could put the Pamour shares for $C48 million, and Frame could call for them for $C58 million. The Nesbitt Thompson draft valuation of December 1989 put the total Canadian gold assets in the range $C56.7 million to $C59.1 million.

Ultimately, it appears that an agreement was made to sell this interest in May 1990 for $C33 million.

In my view, it would not have been unreasonable, as at 25th July 1989, to expect that these assets would have realised something like $A70 million in other than a forced sale situation, and if necessary could have done so during the first half of 1990.

(c) Canadian Amalgamation 422. It was submitted for SCBAL that, as at each relevant date, there were no reasonable grounds to expect that the amalgamation of the Canadian operating companies (Pamour, ERG, GYK and Pamourex) could be achieved prior to 31st December 1989, or at all; or that any such amalgamation would enable payment of cash to Giant, especially repayment of the ERG loans. Quite apart from the performance of ERG, the amalgamation was complex and difficult; it required justification to independent shareholders and directors; there was a timetable of at least five to six months; and as late as 22nd June, very little had been done, there were still two alternative proposals, and no decision between them had been made.

423. For the defendants, it was submitted that there were reasonable grounds to believe that, once ERG had established it was viable, the amalgamation would proceed. The five to six month timetable could overlap the proof of viability of ERG. In those circumstances, there were not reasonable grounds to expect that the amalgamation would not be achieved by the end of the year.

424. In my view, having regard to the matters discussed earlier concerning ERG, there were, as at 25th July 1989, reasonable grounds to expect that no amalgamation which included ERG could be achieved prior to the end of 1989.

425. On the question whether an amalgamation which included ERG would lead to the repayment of some or all of the loan money to ERG, it was pointed out for SCBAL that, out of $63 million cash shown in the Pamour consolidated balance sheet in the Arthur Anderson report, $30 million was in trust in GYK, and $13 million was in trust in ERG. This left about $20 million cash which, along with $9.9 million in account and bullion settlements, had to be set against accounts payable and accruals of $26 million.

426. Accordingly, no cash would be available to repay loans, even if an amalgamation which included ERG was achieved.

427. The defendants submitted that amalgamation would require the consent of lenders, so that the trust restrictions on cash in Pamour and ERG would also be up for negotiation.

428. In my view, as at 25th July 1989, there were reasonable grounds to expect that the lenders would not agree to the expenditure of this money held in trust for the purpose of repaying loans to Giant. On this ground also, in my view, it was, as the directors should have realised, highly unlikely that any Canadian amalgamation would make substantial sums of money available to Giant before the end of 1989. I accept SCBAL's submission that there were no reasonable grounds to expect that an amalgamated company could borrow or sell assets to enable the payment of funds prior to the end of 1989.

(d) Horn Island 429. SCBAL contended that, at each of the relevant dates, there were not reasonable grounds to expect that Horn Island would, within any meaningful time frame, and especially not prior to 31st December 1989, perform to budget, or sufficiently well to provide cash flow for Giant, to provide meaningful security for SCBAL, or to be saleable. At each date, it had no track record of successful production, there had been consistent failure to meet projections, and on-going technical difficulties had not been solved. In addition, at 31st March 1989, the estimates of necessary funding were continually and significantly increasing; the PAS report to SCAL asserted that the project was totally uneconomic and likely to remain so, barring a doubling or tripling of the gold price; and the Robertson report advised that the testing of the resource and reserve had not been sufficiently reliable to base any cash flow predictions. As at 1st June 1989, there was still insufficient data to base any cash flow predictions, and the cash flows produced by management forecast no cash receipts, but additional cash funding. As at 25th July 1989, a theoretical break-even point of 3,500 ounces in one month had been achieved in June, but even in that month there was still an operating loss, and that theoretical break-even production was not achieved before or since. Otherwise, the same problems remained.

430. For the defendants, it was submitted that the project was a substantial asset, which still, even at 25th July 1989, had a reasonable prospect of becoming viable. The Westphal valuation as at 25th July 1989 was not that the project had no value, but that the material did not justify any particular valuation being put on it.

431. I substantially accept SCBAL's submissions on this asset. There may have still been some small prospect that it would become viable in the future; but, as at 25th July 1989, it was, as the directors should have realised, very unlikely that it would give rise to any cash inflow in 1989, and very likely that it would require further cash funding. As at that time, the asset was completely unsaleable; and this has the further important consequence that, as the directors should have realised, SCBAL's $30 million loan was then as a matter of substance virtually unsecured.

(e) GVG 432. SCBAL submitted that, at each of the relevant dates, there were no reasonable grounds to expect that GVG would contribute cash flow to assist Giant paying its debts; particularly where GVG was not wholly owned, so that cash could be expected only from dividends.

433. Although the January cash flow predicted receipts during 1989, before the end of January a decision had been made to close the open-cut mine, with the result that GVG would require funding until the underground was open in about September 1989. In February, a project loan of $12 million was obtained from the R. and I. Bank, and it appeared that, in addition, a further $6 million would be needed from Giant. A report from Folwell in 1989 suggested that, for the project to break even, the gold price would have to be $520.00 per ounce; while a slightly later report by Antor of Pioneer suggested that $550.00 per ounce would be needed. Generally, during 1989, the gold price fluctuated between about $435.00 and $490.00 per ounce.

434. For the defendants, it was submitted that there were reasonable grounds to expect that GVG would be viable when it re-opened by about October 1989. The Westphal valuation, made for the purposes of these proceedings, put a value on Giant's interest in GVG as at 30th June 1989 of between $5.37 million and $13.84 million. Its value should be regarded as something between this and the $20 million estimated by Needham and O'Neill, as disclosed in Gardiner's report of 31st May 1989.

435. In my view, it was, as the directors should have realised, highly unlikely that anything would be received from GVG during
436. There was still some chance that GVG may be viable in later years. Although I do not believe that Giant's interest in GVG would have been a saleable asset unless and until the operation proved to be viable after re-opening, it may have been reasonable to put a value of something like $10 million on it as an amount which might be realised on a sale in future years.

(f) GRG 436. It was submitted for SCBAL that, at each relevant date, there were no reasonable grounds to expect that the GRG project would provide cash flow for Giant, and that it should have been apparent that Giant would be required to contribute funding.

437. The defendants accepted that it was unlikely that Giant would receive dividends from GRG in 1989, but submitted that there were reasonable grounds to believe it would be viable and would produce cash in 1990 and beyond. The defendants submitted that there was no reason to believe that NAL would call on Giant's guarantee. Westphal valued Giant's interest in GRG, as at 30th June 1989, at $17.73 to $19.23 million, and was not cross-examined on this.

438. In my view, it was, as the directors should have realised, highly unlikely that Giant would receive any cash from GRG during 1989. There was some chance that it would produce cash flow in later years. The asset was not saleable as at 25th July 1989, but its potential may have justified regarding it as being worth something like $10 million, as suggested in Gardiner's report of 31st May 1989, if not as much as the Westphal valuation. However, for the asset to be saleable, there would have to be some favourable results, which had certainly not been achieved as at 25th July 1989.

(a) Cirque 439. It was submitted that SCBAL that, at all relevant times, there were no reasonable grounds to expect that Giant would receive the Cirque payment in the near future, or at all. It was continually predicted for about the next month in all cash flows from late 1988 to July 1989, and these predictions had always turned out to be wrong. By 25th July 1989, the original settlement date was long past, and at least two different schemes to overcome obstacles to receiving the payment had been mooted and had failed.

440. For the defendants, it was contended that there were reasonable grounds to expect that it would be received within a short period. The Central Murchison payment was in fact received in November 1989, while the Cirque interest was caught up in the offer for the Canadian assets of August 1989.

441. In my view, there were not, as at 25th July 1989, grounds to be confident that the Cirque payment would be received within a short period. On the other hand, I think it would have been reasonable to expect that it would quite probably have been received before the end of 1989; and I am not satisfied that there were reasonable grounds to expect that it would not be received before the end of 1989.

(h) West Wits 442. It was submitted for SCBAL that, at each date, there were no reasonable grounds to believe that any significant or timely cash flow would be received from the sale of Giant's interest in West Wits. It had been decided by 24th May 1988 that this asset was to be sold at the earliest opportunity. Cash flows between August 1988 and July 1989 generally contained predictions for the receipt of varying amounts for this asset, ranging from $10 million down to $3 million, with instalments in some cases to be received as early as January 1989.

443. For the defendants, it was submitted that there were reasonable grounds to expect the receipt of at least $3 million by November 1989. In fact, an agreement was made to sell the asset in October 1989 for $US3.5 million.

444. In my view, despite the checkered history, there were not, as at 25th July 1989, reasonable grounds to expect that nothing would be received for this asset before the end of 1989. It may well have been reasonable to expect something like $3 million by November 1989.

(i) Sale of Guyana Project to Pamorex 445. It was submitted for SCBAL that there were no reasonable grounds to believe Giant could access $3 million or any cash through the sale of its interest in Guyana to Pamourex or any other party. Antico, Quirk and Gardiner assert that, as at 25th July 1989, they believed $3 million would be received for this by September 1989; but in March 1989, O'Neill had stated to Leach, Quirk and Gardiner, that Guyana should be written off. It was reported to the Giant board on 6th April 1989 that any receipt of this asset of $3 million depended upon approval by independent directors and exploration results over the next few months; and there were no references to the sale in reports during June and July 1989 until a report from Fleming to the 28th July board meeting, which referred to a valuation being undertaking.

446. For the defendants, it was submitted that there were reasonable grounds to expect that Giant would receive $3 million for this asset in the second half of 1989.

In my view, the history did not give reasonable grounds to expect that $3 million would be received in the second half of 1989. However, such a receipt was distinct possibility, and I would not be prepared to say that there were reasonable grounds to expect that nothing would be received for this asset before the end of 1989.

7.4 Reasonable Grounds at 25th January 1989 448. As at 25th January 1989, there were some grounds for concern about short term liquidity problems but, apart from the circumstance that $44 million was due to be repaid to Standard Chartered on 31st January 1989, I do not believe it can be suggested there were reasonable grounds to expect that Giant would not be able to pay its debts as they fell due.

449. I note, in particular, that under the agreement for repayment of the Curragh loan, $10 million was due to Giant on 15th February 1989, and another $14.7 million due by 30th June
450. The QCT shares were available to be sold. There appeared to be no grounds to believe that Westpac and BNZ were about to call up their loans. Pioneer had shown itself to be willing to advance money to overcome short term liquidity problems, and had already advanced $14 million: this was due on 28th February 1989, but it was reasonable to expect that Pioneer would extend this date. The audited accounts of Giant as at 30th June 1988 showed net assets of $270 million, and the audit opinion dated 9th November 1988 did not note any substantial change in circumstances. There had been negative reports concerning the performance of Giant's assets, for example at the Giant board meeting of 19th Janaury 1989, but in my view, these were not enough to suggest that Pioneer would not give further support, if necessary.

450. As regards the $44 million falling due to Standard Chartered on 31st January 1989, SCBAL had written on 9th January 1989 advising that the $14 million Augold facility would be extended to 31st March 1989. on 23rd January 1989, O'Neill went to see Campbell, and requested that the $30 million facility be extended to 30th June 1989. Campbell presumably gave a reasonably favourable response, because on 25th January 1989, he wrote to Adelaide foreshadowing a submission in support. However, it could be suggested that SCBAL's willingness to extend the date for payment of the $44 million was induced by misleading conduct, so that the question of reasonable grounds as at 25th January 1989 should be approached on the basis that the $44 million was in fact due to be repaid on 31st January 1989. There were two possible areas of misleading conduct: first, concerning security shortfalls with BNZ, and second, representations as to how the $30 million was to be repaid.

(a) BNZ security shortfall 451. In its facility letter dated 4th May 1988 addressed to the Giant Resources Group, BNZ approved a credit facility for Giant of up to $30.5 million on a number of terms set out in that letter including the following: "Receipt of the following securities, in form and substance satisfactory to the Bank in its absolute discretion are a condition precedent to any drawing on this facility:

A charge/pledge and a Power of Attorney from the registered holder over shares in companies acceptable to the Bank,

together with transfer form signed in blank. The market value of such shares to be at all times at least equal to 1.54. The said shares, Power of Attorney, and blank transfer forms will be deposited with the Bank.

Should the market value of the shares lodged with the Bank fall below the required value, this shall constitute a event of default (refer attached Standard Terms and Conditions)."

Clause 2(n) in the Standard Terms and Conditions specified the following event of default: "If, in the case of shares being lodged as security, the market value of the shares falls below the amount stated in the letter of offer under the heading "Security" and the company fails to rectify such default in a manner satisfactory to the Bank within three (3) business days."

Similar letters were sent on the same day to Giant Resources Group concerning the $25 million facility for Base Resources Limited, and the $500,000.00 facility for Central Murchison Gold Limited.

Turning to the terms of SCBAL's agreement with Giant, cl.4 of the Standard Terms and Conditions accompanying the facility letter of 20th October 1988 was relevantly in the following terms: "Customer's Representations and Warranties 4. The Customer represents and warrants to the Bank that:

(e) the Customer is not in default under and no event has occurred which is, or upon the lapse of time or giving of notice would constitute, an event of default under: (i) the Facility Documents; or (ii) any other agreement between the Customer and the Bank or between the Customer and any other person in respect of moneys or other financial accomodation (sic) borrowed or raised (including guarantees);

(f) any balance sheet, profit and loss statement or other financial statement, report, return or information given by the Customer to the Bank prior to the Customer's acceptance of the offer contained int he Facility Documents is not misleading, whether through omission or inclusion, in any material particular and fairly presents the Customer's financial position and the results of its operations (and the financial position and operating results of its subsidiaries, if any) for the period ended on that date and there has been no material adverse change in the business, assets or financial condition of the Customer (or its subsidiaries) since that date; and

(g) the Customer has disclosed to the Bank all information which is material to the provision of the Facility by the Bank and there are no other material facts or considerations, the omission of which would render any such information misleading."

Clauses 5 and 6(a), (b) and (c) were of the Standard Terms and Conditions were in the following terms: "5. Each request by the Customer to the Bank to accept a Bill or to provide financial accomodation (sic) pursuant to the Facility Documents constitutes confirmation by the Customer that at the date of such request no Event of Default, and no event which upon the giving of notice or

with the passing of time or both would constitute an Event of Default, has occurred and that the representations and warranties of the Customer contained in these Terms remain true and correct as at that date.

6. During the term of the Facility, each of the following events is an Event of Default:

(a) failure by the Customer to pay on the due date any amount payable under the Facility Documents;

(b) failure by the Customer to comply with any of his undertakings or covenants in or any event occurring which is (whether of itself or at the option of any person) an event of default under the: (i) Facility Documents; (ii) any Security; or (iii)any other agreement between the customer and the Bank or between the Customer and any other person in relation to moneys borrowed;

(c) any representation or warranty contained in the Facility Documents or any Security or in any notice or other document, certificate or statement delivered by the Customer pursuant to or in connection with Facility Documents or any Security being or becoming substantially incorrect, misleading or untrue; ..."

Thus, it may be said, when it accepted the terms of the facility letter, and when it made each draw down and rollover under the facility letter, Giant represented to Standard Chartered that it was not in default under any agreement between Giant and any other person in respect of financial accommodation, including BNZ. However, by reason of security shortfalls which existed almost continuously between 20th October 1988 and about 6th April 1989, Giant was in default under its agreement with BNZ.

Mr. Hughes submitted that there was no default under the agreement with BNZ, because the provision about the security ratio was void for uncertainty, and because the alleged shortfall was in respect of the totality of the advances by BNZ to Giant, Base Resources, and Central Murchison Gold, as against the totality of the securities held by BNZ. Further, Mr. Hughes relied on a letter dated 14th November 1988 from BNZ to Giant advising amendments to the letter of offer of 4th May 1988, namely that the facility would expire on 30th November 1988, and containing the following additional term re "Fee Structure: Acceptance Fee": "An excess rate of 3% per annum shall be applicable, where the market value of the shares held as security is not at least equal to 1.54 times the outstanding liability to the Bank and the company fail to adjust such position, within three days of receiving a formal request from the Bank. Such excess rate shall be charged monthly in arrears on the portion of liabilities not covered 1.54 times by the market value of the shares."

Thus, he submitted, BNZ did not treat the security shortfall as a default but only as a basis for charging extra interest; or at least, waived any default.

However, as pointed out by Mr. Robertson for SCBAL, the 4th May letter referred to an earlier letter of 28th September 1987, which it replaced, which stated a security ratio of "not less than 1.54 (154%) times the aggregate of the all moneys outstanding under the facility and the face amount of all bills the borrower proposes to draw on the relevant proposed drawing date". It may well be falsa demonstratio that the reference to 1.54 in the 4th May letter is to be applied to the amount of all moneys outstanding under the facility; but, even if it is not, I think the previous dealings between the parties can be looked at to give it meaning. The parties certainly took this view, in their communications concerning the matter of security shortfall. Furthermore, I accept Mr. Robertson's submission that, in the absence of specific agreement controlling the allocation of security, it was open to BNZ to treat the security as distributable across all facilities. And finally, I do not think that the provision of 30th November 1988 displaced the express provision about default in the earlier letter of offer, or amounted to a waiver of defaults unless and until such time as the excess rate was charged and paid; and in any event, once there was a default, waiver of it by BNZ did not amount to waiver of the consequent default under the SCBAL facility.

Accordingly, in my view, Giant was, at the time of drawdowns under the October 1988 facility and at the time of the 31st January 1989 rollover obliged to inform SCBAL of the security shortfall under the BNZ facility. However, on each occasion, Giant in effect represented that it was not in default under any agreement between Giant and BNZ; and this representation was false and amounted to misleading conduct.

(b) Misrepresentation as to Source of Repayment 461. Campbell's memorandum to head office of 25th January 1989 asserted that the facility would be repaid by a full rights issue which would achieve the goal of both funding Giant's acquisition of Pioneer's mining assets and clearing SCBAL's debt. Campbell asserted in evidence that he was told on 23rd January that this transaction was a certainty; but, in cross-examination, he agreed that he was not certain whether the price at which the assets were to be acquired was agreed, that the finance which was necessary to enable the transaction to proceed had not been put into place, and that he recognised that the transaction was a substantial one which, as far as he was aware, was a recent conception which required general meetings to be held of both companies, with Pioneer being unable to vote at the general meeting of Giant.

462. In those circumstances, I cannot make a firm finding as to exactly what O'Neill said at this meeting, and I am not satisfied that there was misleading conduct in that regard.

(c) Inducement 463. The finding as to misleading conduct concerning BNZ is relevant only if it justifies a conclusion that there were reasonable grounds to expect that the due date for payment of the SCBAL debts would not (without misleading conduct) be extended from 31st January 1989.

464. It seems to me unlikely, as a matter of fact, that disclosure to SCBAL, as at 25th January 1989, of the BNZ security shortfall and of previous non-disclosures thereof would have resulted in SCBAL not extending the due date from 31st January 1989. I do not believe SCBAL would have regarded the BNZ security shortfall, which appeared to be of little concern to BNZ, as a serious matter: objectively, it seems far less serious than the on-going deficiencies in Giant's identification of the source(s) for repayment of the $30 million, which SCBAL tolerated and indeed apparently barely noticed. Furthermore, the progressive abandonment by SCBAL, at the end of March 1989, of requirements for the extension of the loan from 31st March 1989 (including its "firm condition" of a letter of comfort from Pioneer) confirms that it is unlikely that disclosure of the BNZ default would have affected the extension from 31st January 1989.

465. Where that is my view of the objective probabilities, and particularly where the substance of the relevant facts (other than those relating to SCBAL's actions at the end of March 1989) was or could have been known to the directors of Giant as at 25th January 1989, I would not find there were reasonable grounds to expect otherwise. Accordingly, I do not think that any question of misleading conduct meant that there were reasonable grounds to expect that the $44 million owing to SCBAL would not be rolled over on 31st March 1989. Accordingly, I do not consider that the issue of reasonable grounds is made out as at 25th January 1989.

7.5 Reasonable Grounds at 31st March 1989 466. Between 31st January 1989 and 31st March 1989, Giant's purchase of Pioneer's mineral assets was abandoned, largely because of the decline in Giant's share price; and there was the cash crisis of March 1989 involving the sale of QCT and Pioneer's provision of funds. However, steps were under way to improve the profitability of the Canadian operations, and to reorganise them in order to provide access to cash flow. And the Arthur Andersen report, while stressing Giant's liquidity problems, did not assert insolvency.

467. Accordingly, given that SCBAL was willing to extend both the Giant and the Augold facilities to 30th June 1989, it seems to me that there are only two possible bases for asserting reasonable grounds as at 31st March 1989: first, that this extension was vitiated by misleading conduct; and second, that there were reasonable grounds to expect that the SCBAL debts would neither be extended or repaid on 30th June 1989.

(a) Misleading conduct as at 31st March 1989 468. Default under the BNZ facility continued until about 6th April 1989, when Giant's debt was paid out. (Thereafter, BNZ's debt was owed by Base and Central Murchison.) Giant's failure to disclose both this and its previous failures to disclose it, on each rollover and on its request for the extension to 30th June, amounted to misleading conduct.

469. It could be suggested that the cash crisis of March 1989, and Pioneer's lending money, was also information which should have been disclosed: cl.4(g) of the standard terms and conditions warrants that Giant has disclosed to SCBAL "all information which is material to the provision of the facility by the Bank". However, I do not understand SCBAL to have submitted that the March cash crisis and Pioneer's response was caught by this; and on the whole, I am not satisfied that it was.

470. Insofar as there was misleading conduct concerning the BNZ defaults, the same considerations apply as at 25th January 1989 (see paragraph 7.4(c) above). I am not satisfied it induced the extension of the facility, in fact; and I am not satisfied there were reasonable grounds to expect that, but for the misleading conduct, the facility would not have been extended.

(b) Extension or repayment at 30th June 1989 471. Having regard to Giant's balance sheet surplus, the steps being taken to overcome problems in Canada, and the continuing possibility that the Australasian ventures could turn around, I do not think a reasonable director would have expected that SCBAL's debts would not be extended or repaid on 30th June 1989.

7.6 Reasonable Grounds at 1st June 1989 472. By 1st June 1989, Pioneer had decided to take security, and it had obtained Westpac's consent to a second charge over Giant's interests in Curragh and Pamour (temporarily withdrawn on 30th or 31st May). The performance of the Australasian projects had made it extremely unlikely that they would provide any cash flow in 1989, or that they could be sold, or that they could be a security for any further borrowing in 1989. The performance of the Canadian gold mines meant that little, if any, cash flow could be expected from them, at least unless amalgamation took place - and amalgamation giving access to $33 million owing by ERG required both some satisfactory performance by ERG (which had become very doubtful) and a further period of about five to six months. Curragh's Asturiana purchase made any dividends from Curragh unlikely in the short or medium term - and Pioneer had decided that Curragh should be sold. The continued non-receipt of the Cirque payment made it impossible to be confident that it would be received at any particular time.

473. In these circumstances, it seems to me that there are two main questions concerning reasonable grounds as at 1st June 1989: first, were there reasonable grounds to expect that SCBAL would require repayment of $44 million on 30th June 1989 and that Giant could not pay it; and second, were there reasonable grounds to expect that proceeds from the sale of Curragh would not be sufficient and/or not available soon enough to pay debts falling due in the remainder of the year?

(a) Repayment of SCBAL at 30th June 1989 474. It was made clear by SCBAL that the Augold facility had to be cleared on 30th June 1989; and it was also clear that this amount could not be paid by Giant (without Pioneer's assistance) unless the Cirque payment was received. In any event, it must have been apparent by 1st June 1989 that Giant would need at least a substantial part of the $9 million which Pioneer in fact advanced during June 1989. The Gardiner paper of 31st May 1989 gave reasonable grounds to expect that Pioneer would move quickly to obtain security over Giant's interests in Curragh and Pamour, for advances which it was recognised could amount to $40 million, not including repayment of SCBAL's $30 million. Further, Giant had in fact been in default under SCBAL's facility for most of the period 20th October 1988 to 6th April 1989, due to its default under the BNZ facility; and Giant had not disclosed this to SCBAL on any of the occasions when it should have, including 31st March 1989.

475. As noted earlier, Giant by SCBAL's standard terms warranted that it was not in default (and default included any warranty becoming untrue), so in my opinion it was obliged to disclose its default: the default and failure to disclose was in effect expressly made a matter material to the provision of the facility. As regards Pioneer's intention to take security over Giant's interests in Curragh and Pamour, this does not fall under any of SCBAL's standard terms, other than that requiring disclosure of information material to the provision of the facility; and it is necessary to consider if this was such information.

476. Gardiner gave evidence that, but for the half-truth in O'Neill's letter of 21st July 1989, he would not have regarded it as necessary for SCBAL to be advised about Pioneer's security. In my opinion, this view is incorrect, certainly as the situation had become by 30th June 1989, when Pioneer actually had security over Giant's interests in Curragh and Pamour, securing a debt to Pioneer of $47.55 million. By that time, as Giant's directors should have known, Horn Island's problems had made it unsaleable, so that SCBAL's debt for $30 million was virtually unsecured. Further, SCBAL had in April 1989 enquired about Pioneer's investment in Giant and about details of Giant's banking facilities; and been given answers which were silent about Pioneer's funding of Giant. Pioneer, a de facto director of Giant, had taken Giant's only remaining worthwhile asset available to give security, in order to secure large past as well as future advances, thereby greatly reducing property available for unsecured creditors including SCBAL. In those circumstances, I find it difficult to understand, let alone agree with, a contention that this information was not material to the provision by SCBAL of continued virtually unsecured finance of $30 million.

477. The situation is perhaps not quite so clear as at 1st June 1989, when the advances amounted to just $24 million, and the actual taking of security had not yet occurred. However, in my opinion, having regard to what was known even then about Horn Island, and what was anticipated in the Gardiner paper of 31st May, Pioneer's intention as at 1st June 1989 to obtain security over Giant's last available worthwhile asset was material to the provision of the facility as at 1st June; and certainly, as at 1st June, there were reasonable grounds to expect that Pioneer would actually have taken the security by 30th June, and that this fact would be material to the provision of the facility as at 30th June.

478. Thus, Pioneer's intention to obtain security, and Giant's default and failure to disclose it, was information material to the provision of the facility on 1st June 1989; yet when, on that date, by having SCBAL accept and discount bills, Giant represented and warranted to SCBAL that it had disclosed all information material to the provision of the facility, it had not disclosed these matters. Further, if Giant wished to avoid being under a liability to pay $30 million on 30th June 1989, it would, having regard to SCBAL's standard terms and conditions, which would be the assumed basis of a negotiation for any extension, be obliged to disclose these matters (and their non-disclosure on 1st June 1989) by 30th June 1989. To decide the question of reasonable grounds as at 1st June 1989, the expectation as to whether $30 million would or would not be due on 30th June 1989 would require an assumption that these matters were disclosed to SCBAL by 30th June 1989. The question then is, would the reasonable director expect, on that basis, that SCBAL would not extend the time for repayment of the $30 million beyond 30th June 1989, and that Pioneer would not provide the money to pay it?

479. Certainly, these matters mean that there was at least a very substantial risk, as at 1st June 1989, that SCBAL would not extend beyond 30th June 1989 the time for payment of the $30 million; and there was also a very substantial risk that Pioneer would not pay it. However, I am doubtful whether this is enough to justify a finding that these matters meant there were reasonable grounds for a positive expectation that both time would not be extended and Pioneer would not pay. I will consider the relevant factors in more detail when I come to 25th July 1989, at which time the grounds for the relevant expectations were stronger; and which is more directly relevant to my decision, because I have found that a debt was incurred on 25th July 1989, but not on 1st June 1989.

(b) Proceeds of sale of Curragh 480. Assuming that SCBAL would extend the $30 million facility beyond 30th June 1989, I am not satisfied that the objective circumstances as at 1st June 1989 amounted to reasonable grounds to expect that the proceeds from the sale of Curragh would not be sufficient and/or not available soon enough to pay debts falling due in the remainder of the year. As before, I will consider the relevant factors in more detail when I come to 25th July 1989.

7.7 Reasonable Grounds at 25th July 1989: Overview 481. By 25th July 1989, Pioneer had taken a second charge over Giant's interest in Curragh and Pamour, securing advances totalling $49.55 million. Pioneer and Giant had resolved that Giant's interest in Curragh be sold, and Pioneer was proposing to meet Giant's day to day expenses in the immediate future. Reports of the Australasian projects confirmed that they would not provide cash flow in 1989, that they could not be sold in 1989, and that they could not count as security for any further borrowing in 1989. No real progress had been made towards amalgamation of the Canadian gold companies, and the prospects of receiving cash flow from that source before the end of 1989 were very small. ERG showed no signs of performing to a standard which would make it possible to include it in any amalgamation, and thus give access to the $33 million owing to Giant. There was no real prospect of dividends from Curragh. The Cirque payment had still not been received, despite confident predictions by O'Neill around the end of June that it would be received in a matter of days.

482. SCBAL had offered to extend the $30 million facility to 31st August 1989, and then to 31st December 1989, on the basis that Curragh was to be disposed of by 31st December 1989 sufficient to clear the debt.

483. It was submitted for the defendants that it was reasonable to expect that SCBAL would continue to extend the facility until Giant was able to repay, at least so long as there was a reasonable prospect of repayment. However, in my opinion, having regard to the history of the relationship and the terms of SCBAL's offer of 11th July 1989, there were reasonable grounds to expect that SCBAL would not grant any further extension of the facility (as distinct from merely refraining from exercising remedies) after 31st December 1989, except perhaps a short extension for the purpose of completing a satisfactory sale of Curragh which had been negotiated by that time. Certainly, in my opinion, there were reasonable grounds to expect that no other extension would be granted, if proper disclosure of material information was made to SCBAL.

484. Both sides in this case have treated the question whether there were reasonable grounds to expect that Curragh would not be sold in time, or would not realise sufficient proceeds, to pay the debts due at around the end of 1989, as being a critical question in this case; and I will consider that in some detail in the next section.

485. The other main question concerning reasonable grounds as at 25th July 1989 is whether it is appropriate to regard SCBAL's debt of $30 million as being presently due as at 25th July 1989, so that inability to pay it on that day or shortly thereafter would amount to inability to pay debts as they become due. I will consider that question also in some detail.

7.8 Reasonable Grounds at 25th July 1989: Proceeds of Curragh 486. SCBAL's contention was that Giant would be unable to pay its debts from the sale of Curragh, unless the net proceeds were sufficient to enable payment in full of the debts of Westpac, SCBAL, BNZ, and Pioneer. As at 25th July 1989, those debts amounted respectively to $73 million, $30 million, $26.5 million, and $49.55 million. By the time proceeds of any sale of Curragh could be expected, say towards the end of the year, Westpac would probably have advanced a further $11 million to ERG, and Pioneer would have advanced a further $20 million or so to Giant; so that a total of $210 million would be required. In addition, Westpac would probably require repayment of the ERG gold loan, and would call on Giant's guarantee for $41 million. But even without this, SCBAL contended that there were reasonable grounds to expect that debts of $210 million would be due for payment from the proceeds of sale of Curragh.

487. As regards the likely proceeds of sale, SCBAL's contention was that there were reasonable grounds to expect the sale price would be no more than about $125 million; or, at the very most, no more than about $150 million, yielding net proceeds after expenses and tax of no more than about $120 million. In support of this contention, SCBAL pointed to the great problems with the asset (voting rights, Unanimous Shareholders' Agreement re dividends and preemptive rights, Cyprus Anvil warrant, ADZ transaction, sensitivity to zinc prices, Frame's personality) and to Giant being an anxious vendor; to contemporary estimates suggesting no more than $100 to $125 million; to Arthur Andersen's discount of 50% for Giant's minority disadvantages; to lack of justification for the much lesser discounts (20-27%) allowed in the Orchard valuation; and to a Deacon Morgan valuation made 16th August 1989 of $C143 million without discount, giving $C114.4 million ($A126.6 million) with even just a 20% discount. SCBAL also submitted there were no reasonable grounds to have expected the sale to be completed by the end of 1989. Accordingly, since no other source of funds could reasonably be expected, there were reasonable grounds to expect that Giant would be unable to pay its debts as they fell due.

488. Broadly, the defendants' contention was that there were not reasonable grounds to expect that Westpac would require payment of more than about $35 million from the proceeds of Curragh; or that BNZ would require any payment; or that Pioneer would require payment in full of its debt. The proceeds of sale of Augold's Giant shares would come off SCBAL's debt. (In fact, as we have seen, $3.4 million was repaid from that source in August, so one may readily consider that there were reasonable grounds to expect at 25th July that only $26.6 million would be required for SCBAL from the proceeds of Curragh). Thus, even if Pioneer required payment in full, net proceeds of a little over $130 million would be sufficient:

Westpac $ 35 million SCBAL $ 26.6 million Pioneer $ 70 million Total
$131.6 million

489. The defendants contended that there were not reasonable grounds to expect that the sale of Curragh would not yield this much. In particular, if SCBAL had wished to contest Orchard's discount figures, on the basis that his assumptions about Frame wanting to take Curragh public were unsound, this should have been put in cross-examination.

490. A number of issues arise. I think it is reasonable to put SCBAL's expected debt at $26.6 million, and (subject to a question concerning funding ERG) Pioneer's at $70 million. So the main questions concerning reasonable grounds are the following: how much would Westpac require to be paid out of the proceeds of sale of Curragh; how much would BNZ require; how much would Pioneer require; what would the net proceeds of sale be; and how are these factors to be combined?

(a) Westpac 491. The defendants' contention is that Westpac's debt as at 25th July was $70.1 million, and that it did not thereafter increase; and that, although ERG would need a further $11 million for its project, that amount was available as part of the $41 million gold loan, so would not involve further advances by Westpac.

It appears in fact that $70.1 million, not $73 million, was the correct figure as at 25th July; but it also seems that ERG would need substantial additional funds not covered by the gold loan, because, when in August Westpac refused to fund ERG further, Pioneer provided funds (apparently about $5.5 to $7 million) to ERG between about September and November 1989. So, while I accept that Westpac's debt was, at material times, $70.1 million, I also accept that there were reasonable grounds to expect that ERG would require further funds, which would have to come from either Westpac or Pioneer; and that if it came from Pioneer, it would put the potential Pioneer debt up to around $75 or $80 million.

493. The defendants, contention is that Westpac would not require to be paid in full from the sale of Curragh: although Westpac realised that Curragh was probably Giant's most valuable asset, it placed limited value on it for security purposes, because of the problems of valuing or selling such a minority interest in an unlisted company. Westpac placed greater weight on its security over Pamour and on the Korbell undertaking. For that reason, on 30th June 1989, Westpac had agreed to extend all its remaining facilities for an indefinite period.

494. Despite a concession made by Quirk in cross-examination, I am not satisfied that there were reasonable grounds to expect that Westpac would seek to recover more than about half its debts from the proceeds of sale of Curragh. This is confirmed by an internal Westpac document of 14th June 1989, which referred to reducing its debt by one half out of the proceeds of the sale of Curragh.

495. Furthermore, although there were reasonable grounds to expect that ERG would fail the completion criteria required by the end of the year by the terms of the gold loan, and that it would default in repayment of another instalment of the gold loan, Westpac had shown a flexible attitude to ERG; and I am not affirmatively satisfied that there were reasonable grounds to expect that Westpac would call on Giant's guarantee of ERG by the end of the year.

In all the circumstances, I am not satisfied that SCBAL has shown reasonable grounds to expect that Westpac would require more than about $35 million from the proceeds of sale of Giant's interest in Curragh, or perhaps around $40 million if it were to advance a further $11 million for ERG.

(b) BNZ 497. BNZ had not required repayment of all, or part of, its security up to 25th July 1989. It had obtained reductions of the debt when the value of the security it held fell below the required percentage of the amount outstanding. There are internal documents of BNZ suggesting that it would look for a reduction of $5 million when the facility was due to be reviewed on 30th November 1989; but this is not shown to have been communicated by letter to Giant, although it appears to have been discussed with O'Neil in April 1989. I am not satisfied that reasonable grounds have been shown to expect that BNZ would require repayment of its facility from the proceeds of sale of Curragh, or even payment of $5 million.

(c) Pioneer 498. The defendants contend that it was reasonable to expect that Pioneer would not require payment of the whole of its debt from the proceeds of Curragh because, like Westpac, it also had security over Pamour. It still had a substantial interest to keep Giant going, if it could be viable; and Quirk's memorandum of 27th September 1989 contemplated Pioneer waiting for some of its money so that SCBAL could be paid in full from the first instalment of the proceeds of the sale then being considered.

499. However, in my view, to leave part of its debt outstanding until the receipt of the second instalment of the price of a sale which has been agreed upon, is very different from not being fully paid from the whole of the proceeds of sale of Curragh. And, in my view, if Westpac left $35-40 million outstanding on the security of Pamour, it would not have been reasonable to expect that Pioneer would have been content to leave any substantial amount owing to it on that security.

500. I consider that there were reasonable grounds to expect that Pioneer would require payment in full of its debt from the proceeds of sale of Curragh, at least unless the results received between July and December from some of Giant's projects improved sufficiently to give Pioneer a strong incentive to keep Giant going. This was not likely as at 25th July; but in considering the questions of reasonable grounds globally, it is a possibility which cannot be left out of account.

(d) Proceeds of Curragh 501. Giant's interest in Curragh was and is very difficult to value, because it was a minority interest in a private company, which was controlled by the majority shareholder, and with unusual provisions concerning voting, preemption, and dividends. Most of the contemporary estimates of value by persons such as Antico, Quirk and Gardiner put the value of Giant's interest at around $125 million. Although Antico, Quirk and Gardiner in their evidence in the case gave estimates of greater values, I am not satisfied either that they actually believed that Curragh had those values at the time, or that there were reasonable grounds to expect that it would sell for more than $125 million.

502. On the other hand, and more importantly on this particular issue, I am not satisfied that there were reasonable grounds to expect that Curragh would not sell for as much as $150 million, or even $C150 million. Nor am I satisfied that there were reasonable grounds to expect that proceeds of sale would not be received by the end of 1989.

503. Although I do not consider that the value of an asset like Curragh, as evidenced by a subsequent valuation, is itself a fact on which reasonable grounds can be based, I think such a valuation is relevant to what might reasonably have been expected; and the Orchard valuation made for the purpose of this case put the value of Giant's interests in the range $C111-156 million. There is force in SCBAL's criticisms concerning his assumptions, which is not entirely lost by the lack of cross-examination; but this does not greatly affect its being some evidence of what might reasonably have been expected. A draft valuation of December 1989 by Nesbitt Thompson Deacon Inc. put the value of the range $C136.4-167.9 million, after a 25% discount for Giant's minority interest.

504. The offer made in August 1989 for Giant's Canadian assets, including Curragh, put a value on Curragh of something like $C140 million or perhaps a little more; since the offer of $C170 million included the Cirque interest, the ERG debt less $C15 million, shares in GYK, and $C5 million to be spent on ERG.

505. Neither side has led evidence showing the ultimate realisation produced by this asset. There is some force in SCBAL's submission that the details of this would be known to Pioneer, as holder of a second charge; but against this, the onus on reasonable grounds is on SCBAL, and SCBAL could, in preparing this case, have ascertained these details. Accordingly, I do not think this lack of evidence materially assists either side.

506. I accept the defendants' submission, on the basis of evidence by a tax expert, Mr. Crassweller, that if Curragh was sold for $C150 million, capital gains tax could be minimised by either selling Giant's shares in Rylega, or Rylega's shares in 654922, so that losses in Australia could be set off; or (more probably) by amalgamating the Canadian companies excluding ERG, so that the capital gains in Canada on Curragh could be diluted. In the former case, the net proceeds of a sale at $C150 million would have been about $A138 million, in the latter about $A131 million.

(e) Conclusion 507. I am not affirmatively satisfied that there were reasonable grounds to expect that more would be required from the proceeds of sale of Curragh than the $131.6 million contended for by the defendants, plus perhaps (say) $5 million in respect of the funding of ERG. Nor am I affirmatively satisfied that there were reasonable grounds to expect that the net proceeds of sale would not amount to $131 million, or possibly even $138 million. There was the possibility of additional expenses, such as the demand by BNZ to reduce its facility by $5 million, or even repay it in full. There was the necessity to continue Giant's operations after December 1989, because without this, Westpac would require immediate payment of the balance of its debt. There was the possibility that ERG or another project might fail completely, so that the project loan was called up and Giant's guarantee called on. However, against this, there was a reasonable prospect of recovering the Cirque payment of $13.7 million, and of successfully selling Giant's interest in West Witswatersrand (in fact, an agreement to sell this interest for $US3.5 million was made in October 1989). And there was also the possibility that between July and December, one or more of the Australian projects would start performing, and that ERG would start performing well enough to justify including it in an amalgamation so as to permit the repayment of some of its debt. The Canadian gold interests in any event remained a substantial asset, which might reasonably have been valued at about $70 million, subject to the continuing Westpac charge of $3540 million.

508. Putting all these matters together, I am not satisfied that there were reasonable grounds to expect that, if Giant made the agreement with Standard Chartered to extend its facility beyond 25th July 1989, Giant would not be able to pay its debts as they became due. If it would be able to do so, it would be by the barest of margins, and there was a very substantial risk that it would not be able to do so, but this is not enough.

7.9 Reasonable Grounds At 25th July 1989: Misleading Conduct 509. In the previous section, I decided that I was not satisfied that there were, within s.556(1)(b)(ii), reasonable grounds to expect that, if Giant and SCBAL agreed in terms of 11th July 1989 letter, Giant would not be able to pay its debts as they became due. What I consider in this section is whether there were, nevertheless, within s.556(1)(b)(i), reasonable grounds to expect that Giant would not be able to pay its debts as they became due - on the basis that there were reasonable grounds to believe and expect: (1) SCBAL's $30 million became due on 30th June 1989 and remained due on 25th July 1989; (2) any extension of time by SCBAL on and from 30th June 1989, including that contemplated by the offer of 11th July 1989, was induced by misleading conduct, so cannot be relied on as negativing the debt being due; and (3) Giant was unable to pay $30 million between 30th June 1989 and 25th July 1989 and for some time thereafter.

510. This line of argument depends crucially on the existence of reasonable grounds concerning inducement by misleading conduct in (2) above, and inability to pay $30 million in (3) above.

(a) Misleading conduct 511. In order to consider whether there was misleading conduct by Giant, it is necessary to review what information was material to the provision of the security at relevant times (and thus covered by Giant's warranty of disclosure), and what relevant disclosures and representations were actually made by Giant.

In my view, it was information material to the provision of the facility on 1st June 1989 that: (1) Giant had been in default of SCBAL's facility for most of the period 20th October 1989 to 6th April 1989, due to its default under the BNZ facility; (2) Giant did not disclose this default on any of the occasions it should have, including 31st March 1989; and (3) Pioneer had resolved in May 1989 to take security for its advances (then about $24 million), and had obtained Westpac's consent to having second charges over Giant's interests in Curragh and Pamour.

On 1st June 1989, Giant relied on its facility to have SCBAL discount bills; and accordingly, pursuant to c1.5 of SCBAL's Standard Terms and Conditions, Giant thereby confirmed to SCBAL that its representations and warranties remained true and correct and 1st June 1989, and thus that it had disclosed to the Bank all information which was material to the provision of the facility. However, Giant had not in fact disclosed the default referred to above, or Pioneer's resolution to take security and its obtaining of Westpac's consent.

Furthermore, in my view, it was information material to the provision of SCBAL's facility on 25th July 1989 that Giant had not disclosed the information referred to above on 1st June 1989 or thereafter; and that Pioneer had on 30th June 1989 obtained security over Giant's interest in Curragh and Pamour, for advances totalling $47.55 million on 30th June 1989, increasing to $49.55 million on 21st July 1989.

Between 30th June 1989 and 25th July 1989, Giant sought the extension of SCBAL's $30 million facility, and on 25th July 1989, it accepted SCBAL's offer dated 11th July 1989. By doing so, Giant again confirmed that its representations and warranties remained true and correct, and thus that it had disclosed all information material to the provision of the facility. However, Giant did not disclose the matters referred to in the previous paragraph.

Furthermore, in my view, SCBAL's letter of 11th July 1989 confirmed that information about Pioneer's security was material to the provision of the facility, and was unknown to SCBAL; and it called for a response from Giant which disclosed Pioneer's taking of security over the very assets in respect of which SCBAL was requesting security.

The responsibility for dealing with this matter on behalf of Giant fell upon O'Neill, one of Giant's directors. He drafted the letter dated 21st July 1989, ultimately sent on 25th July 1989, which in my view, having regard to the terms of SCBAL's letter of 11th July 1989, was positively misleading, and must have been deliberately so on the part of O'Neill. It follows that Giant's failure, between 11th July 1989 and 25th July 1989, to respond to SCBAL's letter of 11th July 1989 by disclosing Pioneer's taking of security, was both misleading and not inadvertent. Furthermore, it was material relevant to the provision of the facility that, immediately before the offer of 11th July was accepted by sending Giant's letter dated 21st July, Giant intended by its response to positively mislead SCBAL in relation to Pioneer's taking of security.

One factor bearing on the significance of the misleading conduct is that I accept the evidence on behalf of SCBAL that, although it was aware through Campbell of Pioneer's payment of the Augold facility on behalf of Giant, and of some kind of earmarking of the Cirque payment to repay Pioneer for this, SCBAL did not know of other Pioneer funding of Giant, much less of the taking of security by Pioneer, until well after 25th July 1989.

It is clear that a cash flow was sent to SCBAL in April 1989, showing advances to Giant by "PNCS" totalling $24 million; and that this should have at least raised a question in the mind of a careful and competent bank officer as to who was making these advances and on what terms. I accept that this cash flow was analysed by a number of officers of SCBAL, including not only Campbell, who was called to give evidence, but also Jandricic and Patten, who were not called. However, I think that the reference to "PNCS" could not be regarded as anything like a clear reference to Pioneer: even if PNCS could have been understood as referring to Pioneer Concrete Services, Pioneer had not had that name for many months by April 1994, and there seems no reason why it could not have been referred to by the word "Pioneer" or the initials "PIL" for Pioneer International Limited. In giving oral evidence, even Antico did not understand to which entity the initials "PNCS" referred. Furthermore, there is not a single document out of all the documents discovered on behalf of SCBAL to suggest that SCBAL knew that Pioneer was funding Giant, until it received the cash flow of 15th August 1989 showing a cash raising of $2 million for Pioneer and a budgeted repayment to Pioneer of $14 million; and that brought about a quick response seeking details of Pioneer's loan. Even then, despite the request for details of Pioneer's loan, O'Neill did not advise that the loan then amounted to $53 million, or that security had been taken.

There was evidence given on behalf of the defendants that Needham had said that he had told Kenneth Clemens, the Managing Director of SCAL and an alternate director of SCBAL (who I will call "Clemens") that Pioneer had taken security; that he was instructed to convey this more formally; and that he reported that he had done so. Mr. Clemens gave evidence that he was not told by Needham that Pioneer had taken security, and I see no reason not to accept Mr. Clemens' evidence. The first communication was supposed to have taken place at a cocktail party on or about 5th July 1989; and even if something had then been said by Mr. Needham, I entirely accept Mr. Clemens' evidence that he did not understand any such communication to have been made to him, and I consider that, if anything had been said, it must have been an entirely inappropriate and inadequate attempt to communicate such a significant matter as Pioneer's taking of security. The other occasion on which, it is suggested, the matter was communicated to Mr. Clemens was a more formal meeting on 9th August 1989; and a fairly substantial note of that meeting makes no reference to Pioneer taking security. Furthermore, although there is some evidence of attempts by the defendants to have a conference with Needham with a view to calling him to give evidence, I do not consider that that evidence is sufficient to relieve the defendants from the Jones v. Dunkel comment, to the effect that Needham's evidence could not have assisted them.

(b) Inducement 521. The question then is, what difference would it have made if Giant's misleading conduct identified above had not taken place or if SCBAL had become aware of it; or, perhaps more accurately, what difference to SCBAL's conduct would it have been reasonable for a director, aware of these facts, to have expected.

The plaintiffs in effect submitted that there were reasonable grounds to expect that SCBAL, but for the misleading conduct (or on becoming aware of it), would have called for repayment of its loan, but not threatened liquidation so long as there were prospects of being paid from the sale of Curragh.

The defendants pointed out that this is inconsistent with the plaintiffs' case under the Trade Practices Act (that is, that SCBAL would have demanded repayment, and either would have been paid in full or would have precipitated the winding up of Giant): it was submitted that this contention of the plaintiffs is in fact an untenable "half-way house" between, on the one hand, their case under the Trade Practices Act and, on the other hand, what actually happened (SCBAL extending the $30 million facility until it had an indication of the likely results of the sale of Curragh). The defendants referred to the evidence of Mr. Watson, who on the plaintiffs' case was the relevant decision- maker for SCBAL (in London) as at 25th July 1989, to the effect that he expected Pioneer would probably have advanced money to Giant to keep it going pending the sale of Curragh, and could possibly have taken security for this, but that nevertheless, he recommended that the facility be extended because it was in SCBAL's interest to allow Curragh to be sold. They submitted that the plaintiffs' witnesses were not asked to give evidence that they would have taken the "half-way house" option, so the Court can conclude that their evidence on this point would not have assisted the plaintiffs: see Commercial Union Assurance Co. of Australia v. Fercom (1991) 22 NSWLR 339 at 418-9, R. v. Beserik (1993) 30 NSWLR 501 at 532. It was also submitted that once the $30 million had been placed on overdraft on 30th June 1989, it was no longer due but rather was payable on demand; and that I should not find there were reasonable grounds to expect that a demand would be made.

Although the issue relates to reasonable grounds, it is convenient to consider first what SCBAL would in fact probably have done, but for the misleading conduct or on becoming aware of it. I accept the evidence of SCBAL witnesses that they would have expected to have been told of Pioneer taking security, and that they regarded the honesty and integrity of customers as of vital importance. I note that O'Neill, the person actually negotiating with SCBAL and in the best position to judge its likely responses, felt it necessary to engage in deliberate misleading conduct in order to conceal from SCBAL Pioneer's taking of security.

The misleading conduct was calculated (in the sense of being such as was likely) to induce SCBAL to extend the facility, supporting an inference of fact that it did so: Gould v. Vaggelas (1985) 157 CLR 215 at 236, Huntsman Chemical Co. Aust. v. International Pools Aust. (N.S.W. Court of Appeal, 16th March 1995).

In all those circumstances, although SCBAL had in the past tolerated deficiencies in Giant's applications for accommodation, and although it is likely SCBAL would still have regarded its best prospects for repayment as being from the sale of Curragh, I consider SCBAL would have acted differently if the misleading conduct had not occurred (that is, if it had known Pioneer had advanced $47.55 million by 30th June, increasing to $49.55 million by 25th July, and had taken security for it over Curragh and other assets), and particularly if SCBAL had become fully aware of deliberate misleading conduct before the agreement of 25th July 1989 had been made.

It is not possible to make definitive findings as to exactly what would have occurred in all the possible circumstances of the misleading conduct not occurring or of SCBAL becoming aware of it. However, I believe it is clear that SCBAL would not have negotiated for and made the agreement of 25th July 1989, but would have attempted to get Pioneer to pay the $30 million, or at least to obtain some concession from Pioneer such as a share of Pioneer's security, or limitation of Pioneer's security to future advances.

I believe Pioneer would have strongly resisted such attempts, and that more probably than not would neither have paid SCBAL (at least unless SCBAL made a credible threat to liquidate Giant - see later) or have given up any of its security. I believe, as suggested by Antico at the Pioneer board meeting of 4th July 1989 (see later) and elaborated by him in evidence, Antico would have sought discussions with SCBAL to try to convince SCBAL that, by reason of the favour Antico supposed to be owed by SCBAL arising out of Giant's assistance in resolving the Yarramin bad debt situation, it should stay its hand.

In these circumstances, I believe that no agreement to extend the due date for payment of the $30 million would have been made; that SCBAL would have tried and failed to make a better arrangement with Pioneer (not dealing just with Giant); but that SCBAL would not have moved to liquidate Giant so long as it believed its best prospect for payment was from the sale of Curragh. And in my opinion, this would mean that the debt of $30 million, which became due on 30th June 1989, would have continued to be due as at 25th July 1989 and beyond.

I reject the submission that the $30 million would not have been due because placing it in an overdraft account on 30th June 1989 made it no longer due, but payable on demand, and no demand would have been made. In my opinion, SCBAL's placing the $30 million in an overdraft account on 30th June 1989 did not mean that it ceased to be due unless and until a demand was made. I do accept that it would not commercially be regarded as due for so long as there were legitimate and genuine negotiations for an extension of the due date, which could reasonably be expected to be successful; but the negotiations which in fact occurred were induced by misleading conduct and would have been ended by disclosure of that conduct; and this would have led to SCBAL making it clear that it did require the $30 million to be repaid. Taking the broad commercial approach suggested by Gummow, J in Sycotex, I find that, but for the misleading conduct, the debt of $30 million would have been due from 30th June 1989 to 25th July 1989 and beyond.

All the relevant facts concerning misleading conduct were actually known to O'Neill, one of Giant's directors, and many or most of them were probably known to the other executive directors of Giant as well. I believe that a reasonable director, although not having the evidence led before me by SCBAL personnel, would have come to substantially the same conclusions as I have as to the probabilities of what SCBAL would have done, but for the misleading conduct or upon becoming aware of it; that is, would have expected that SCBAL would not have agreed to give any extension to the due date for payment of the $30 million.

Putting the matter specifically, I am satisfied that, as at 25th July 1989, there were reasonable grounds to believe and expect that if Giant had disclosed to SCBAL: (1) on 30th June 1989, so much of the material information referred to in paragraph 7.9(a) above as was then available, SCBAL would not then have negotiated as it did for any extension of the due date for payment of the $30 million;

(2) by 11th July 1989, so much of the above material information as was then available, SCBAL would not have made the offer of 11th July 1989; and

(3) by 25th July 1989, so much of the above material information as was available immediately before Giant's acceptance of 11th July letter, SCBAL would have withdrawn its offer.

Accordingly, in my view, it is appropriate to approach the question of reasonable grounds under s.556(1)(b)(i) on the basis that SCBAL's $30 million debt was due on 30th June 1989, and remained due from then until 25th July 1989, and continued to remain due thereafter.

(c) Giant's ability to pay $30 million 534. It is clear that, as at 25th July 1989, that Giant was unable to pay $30 million between 30th June and 25th July 1989, and thereafter, unless Pioneer provided the $30 million.

Since Antico, Quirk and Gardiner were directors of Giant, and also since I have held that Pioneer was a director of Giant, it is clear that the facts on the basis of which reasonable grounds are to be assessed would include the transactions occurring at Pioneer board meetings. The question of Pioneer providing $30 million to repay SCBAL was in fact discussed at the Pioneer board meeting of 4th July 1989, and the minutes record the following: "The board discussed the possibility of further loans being

required to be made to Giant if Standard Chartered required repayment of its loan of $30 million.

Mr. Gardiner indicated his view that the company should lend up to a further $30 million to Giant if Standard Chartered called its loan, although he indicated the company would run out of security after such further loan had been made.

Mr. Cameron indicated that on the information available to him at the moment he could not support a further loan of $30 million being made to Giant at this time.

The Chairman summarised the circumstances of Standard Chartered providing finance in relation to the takeover of Augold and requested that, if necessary, Pioneer senior management hold discussions with Standard Chartered in relation to its call on Giant for the repayment of its $30 million facility.

The board concluded that it required further detailed information from Giant prior to deciding whether further loans would be made. The board requested that individual directors be circulated with the latest available information from Giant with a Pioneer management recommendation in relation to further funds being made available to Giant. It was noted that it may be necessary to hold a special board meeting on the matter, with those directors unable to attend indicating their views on management's recommendation."

The matter was not put to the test, because Standard Chartered did agree to extend the date for repayment of the $30 million. This was recorded in a memorandum to the Pioneer directors dated 18th July 1989, prepared by Gardiner. This memorandum noted: "As at today's date, the previous request by the Standard Chartered Bank for repayment of its $30 million loan to Giant, advanced against the Horn Island project, has been withdrawn. From advice received from Giant executives the loan now appears to be in place until 31st December 1989, subject to daily review. ...

On the basis of earlier Pioneer board approvals, and particularly in the light of the apparent stabilisation of the Standard Chartered loan, it is our understanding that the current intention of Pioneer is to meet the normal day to day cash flow needs of Giant as and when that company formally requests support. This policy will obviously be continuously reviewed at each Pioneer board meeting in light of Giant's on-going performance. Any subsequent advances will of course be against the existing second mortgage umbrella."

Five directors of Pioneer, apart from Antico, Quirk and Gardiner, namely Mr. R.C. Cameron, Mr. H.K. McCann, Mr. R.F. Croker, Mr. J.W. Hunter and Mr. M.R.G. Johnson, gave evidence as to what they would have done if SCBAL had required payment of $30 million. In my opinion, the correct conclusion from this evidence is that they would have voted in favour of making the payment, as a last resort, in order to prevent Giant going into liquidation. As McCann put it, he "would have done so very reluctantly and only after Giant and Pioneer management had taken a hard line with SCBAL in the first instance to establish whether SCBAL was determined to require repayment and it was not prepared to await the orderly sale of Giant's shares in Curragh to enable repayment of its remaining loan".

I do not believe the payment would have been made unless SCBAL made a credible threat to wind up Giant, or at least to appoint a receiver; and I am certain Pioneer would have been very careful not to convey to SCBAL that it would make the payment if such a threat was made. I believe that the history of SCBAL's relationship with Giant and Pioneer suggest that SCBAL was more likely to concede than Pioneer; and that it is most unlikely that, so long as there was a reasonable prospect that the sale of Curragh would pay out all or most of its loan, SCBAL would have forced the issue by threatening liquidation or appointment of a receiver.

In my opinion, the same assessment would have been made by a reasonable director of Giant, with knowledge of the broad history of SCBAL's loan, and with or without knowledge of actual proceedings at Pioneer's board meetings. I conclude, that as at 25th July 1989, there were reasonable grounds to expect that, although SCBAL would not have extended the due date for payment of $30 million, it would not, for some weeks or months, have made a credible threat to wind up Giant or to appoint a receiver; and that accordingly Pioneer would not have provided the $30 million to pay this debt.

Miss McColl SC for the defendants, submitted that this was an illogical result: namely, that if SCBAL called up the loan but did not threaten liquidation, Giant was unable to pay its debts as they fell due; whereas if SCBAL did threaten liquidation, Giant was able to pay its debts as they fell due. Similarly, she submitted that it would be commercially unrealistic to hold that the directors could not rely on the circumstances (1) that SCBAL was prepared to allow Giant to continue, and to wait for payment, and (2) that Pioneer would pay when SCBAL was no longer prepared to wait.

In my opinion, this submission glosses over the vital distinction between a debt being due, and a creditor moving to wind up a company. Section 556 of the Code does not proceed on the basis that a debt is only due when a creditor moves to wind up the debtor or even to enforce the debt in other ways: a debt is due when the relevant contract says it is due, subject to any relevant practices or agreements or other commercial considerations which make it reasonable to regard the debt as not being due. The mere circumstance that SCBAL would have seen it as counter-productive to move to liquidate Giant rather than wait for the sale of Curragh would not prevent the $30 million being due; so the section can apply in circumstances where, as the directors would or should have known, Giant could not pay it and Pioneer would not pay it unless liquidation was threatened.

For those reasons, I find that there were reasonable grounds, as at 25th July 1989, to expect that Giant would not be able to pay its debts as they fell due, in that the Standard Chartered debt of $30 million must be considered as having been due since 30th June 1989 and continuing due as at 25th July 1989; and there were reasonable grounds to expect that Giant's inability to pay that debt from its own resources would not be overcome by Pioneer providing Giant with the money to pay it.

8. REASONABLE CAUSE 8.1 Legal Principles
9. There was no significant dispute as to the legal principles applicable to s.556(2)(b). It seems clear that, whereas under s.556(1)(b) there is an onus on the plaintiff to prove objective facts which would give a director who knew such facts reasonable grounds for having the requisite expectation, under s.556(2)(b) there is an onus on the defendant to prove that the facts which the particular defendant actually knew or ought to have known did not give that defendant reasonable cause to have the requisite expectation. Accordingly, s.556(2)(b) seems to be different from s.556(1)(b) in three significant respects: (1) the onus is on the defendant, not the plaintiff;

(2) the facts are limited to those which the particular defendant actually knew, or should have known by reason of the director's duties, but also having regard to such matters as reasonable allocations of responsibilities, and to valid reasons for nonperformance of duties (such as illness or justified absence); and

(3) in deciding whether those facts gave reasonable cause for the expectation, one can have regard to matters specific to the particular defendant, though not inconsistent with the appropriate skill and care, such as illness or justified

544. In assessing these matters, I accept the defendants' submissions that a director is not required to be omniscient, and may rely on the judgment, information or advice of officers of the corporation entrusted with management, at least unless and until there are reasonable grounds not to do so; and I accept that Antico, Quirk and Gardiner, as non-executive directors, had limited but appropriate information as to the detailed affairs of Giant, and were (at least until about mid-1989) entitled to rely on management.

545. I have found that the plaintiffs have not shown reasonable grounds, except as at 25th July 1989. I do not believe there is any point in considering whether the defendants have shown reasonable cause as at other dates.

546. In relation to 25th July 1989, I have found reasonable grounds under s.556(1)(b)(i) and not under s.556(1)(b)(ii). However, the onus is on each defendant to show lack of reasonable cause both under s.556(2)(b)(i) and under s.556(2)(b)(ii): in a case as complex and as near the borderline as the present, the onus of proof is particularly significant. In fact, as will appear, although I did not find reasonable grounds under s.556(1)(b)(ii), I am not satisfied that any defendant has proved lack of reasonable cause under s.556(2)(b)(ii).

8.2 Reasonable Cause as at 25th July 1989 (a) Reasonable cause under s.556(2)(b)(ii) 547. In relation to reasonable grounds as at 25th July 1989, apart from the question of misleading conduct - that is, under s.556(1)(b)(ii) - I was satisfied that a reasonable director would have tried to reach an expectation as to whether Giant would be able to pay all its debts as they fell due, and also that such a director would not have expected that Giant would be able to pay all its debts as they fell due. But I was not satisfied that he or she would have expected that Giant would not be able to pay all its debts as they fell due; which means that I was not satisfied that he or she would have been able to reach an expectation on that matter.

548. It is obvious that, in borderline cases such as this, the onus of proof (and the correct placing of negatives) can be crucially important. On the question of reasonable cause apart from misleading conduct, I do not believe that the facts known to any of Antico, Quirk or Gardiner (and thus to Pioneer) would have been relevantly different from the objective facts which I considered in relation to reasonable grounds. The essential difference is on the question of onus. Have any of Antico, Quirk or Gardiner satisfied me affirmatively that he did not have reasonable cause to expect that Giant would not be able to pay all its debts as they fell due? It is consistent with my findings on reasonable grounds that each of them has not satisfied me that he had reasonable cause to expect that Giant would be able to pay all its debts as they fell due; so essentially the question is whether each of them has satisfied me that he did not have reasonable cause to form the other expectation; that is, that Giant would not be able to pay its debts as they fell due. And the same question arises concerning Pioneer. My finding, that I was not satisfied a reasonable director would have had that expectation, by no means requires me to be satisfied that a reasonable director would not have had that expectation.

(b) The evidence of Antico, Quirkand Gardiner 549. Antico gave evidence that, as at 25th July 1989, he believed that Giant was able to pay all its debts as and when they became due. He relied on the budget summary and associated cash flow enclosed with Needham's memorandum of 7th July 1989. He believed that Pioneer would continue to fund Giant's short term cash requirements pending the amalgamation of the Canadian gold operation and the sale of Curragh. He believed the Canadian amalgamation would proceed and enable Giant to obtain repayment of $33 million from ERG and ultimately to access cash flows from the Canadian operations. He believed that Giant's conventional Canadian gold operations were operating satisfactorily, and that problems with the tailings retreatment projects were being dealt with. He believed that Giant would be able to sell its interest in Curragh within a relatively short time period, for an amount between $200 million and $250 million. He was confident that SCBAL would continue to extend the term of its facility and not demand repayment until Giant had sufficient cash to meet such a demand for payment. He was confident that the Cirque payment would be received by Giant. He believed that the development of Horn Island, GRG, and the underground GVG projects was progressing satisfactorily, and that any problems were being dealt with.

Quirk gave evidence that, as at 25th July 1989, he believed that Giant was able to pay all its debts as and when they became due. Like Antico, he relied on the budget summary and cash flow with Needham's memorandum of 7th July 1989. He too believed that Giant would continue fund Giant's short term cash requirements. He believed the amalgamation of the Canadian gold assets would proceed and enable Giant to obtain payment of $33 million from ERG and utlimately to access cash flows. He believed Giant would be able to sell its interest in Curragh within several months for at least $150 million. He was confident that SCBAL would continue to extend the term of its facility until Giant had sufficient cash to meet such requests for payment. He was confident that the Cirque payment would be received.

551. Gardiner gave evidence that, as at 25th July 1989, he believed that Giant was able to pay all its debts then known to him as and when they became due, from one or more of the following: proceeds of the amalgamation of the Canadian gold assets, which would allow Giant to access at least $33 million from Canada; the sale of Curragh for, at a minimum, $125 million; a placement of shares; the proceeds of sale of Giant's Canadian gold assets; funding from Pioneer and PIFL. He relied on the budget summary and cash flow with Needham's memorandum of 7th July 1989.

552. He believed Giant's net asset position was positive. He believed Pioneer would cause PIFL would continue to fund Giant. He believed the amalgamation of Giant's Canadian gold assets would proceed and enable Giant to obtain repayment of $33 million and ultimately give Giant better access to cash flows. He believed that if the amalgamation did not take place, Giant would sell its shares in the Canadian gold assets for at least $63 million. He believed Giant could sell its interest in Curragh relatively quickly, for at least $150 million. He was confident that SCBAL would continue to extend the term of its facility until Giant had sufficient cash to meet a request for payment. He was confident that the Cirque payment would be received.

(c) Finding 553. Substantially for reasons I have already given, I am satisfied that each of these persons had reasonable cause to expect that neither ERG's $33 million nor any other cash from Canada would be received by the end of 1989; and that SCBAL would not extend its loan beyond the end of 1989, expect perhaps to enable completion of a satisfactory sale of Curragh that had been negotiated by that time. I believe that all these defendants approached the question of repayment of SCBAL by considering whether SCBAL could be persuaded to withhold enforcement action, rather than from the point of view of whether there would be a genuine and properly obtained agreement whereby the due date for payment would be extended. On the other hand, I accept that each of these persons had reasonable cause to expect that the Cirque payment would be received by the end of 1989; and that each of them had reasonable cause to expect that Giant's interest in West Wits would be sold before the end of the year for something like $4 or $5 million.

554. However, it is clear that many elements relevant to the question whether SCBAL would be paid from the proceeds of Curragh are affected by the onus of proof. In relation to each of these directors, I am prepared to accept that he did not have reasonable cause to expect that Westpac would seek to recover more than half its debt from the proceeds of sale of Curragh, apart from the question of ERG default (this despite Quirk's concession to the contrary); but, as I previously found, there were reasonable grounds to expect that ERG would fail the completion test and would default in repayment of another instalment, and I am not affirmatively satisfied that any of Antico, Quirk or Gardiner did not have reasonable cause to expect that Westpac would, by the end of 1989, call on Giant for some payment arising out of this. Nor am I affirmatively satisfied that any of them did not have reasonable cause to expect that BNZ would call up at least $5 million of its loan on 30th November
555. And, perhaps most importantly, I am not affirmatively satisfied that any of them did not have reasonable cause to expect that Curragh would sell for no more than $150 million or about $C135 million.

555. In those circumstances, I am not satisfied that any of these defendants did not have reasonable cause to expect that the net proceeds of sale of Curragh (after expenses and tax) would be no more than about $118 million (I assume here the second of Mr. Crassweller's alternatives); and that the debts required to be paid out were at least $131.6 million, plus $5 million for ERG funding and $5 million to BNZ, and further payment to Westpac arising out of ERG default. Against this, there was the probability of receipt of the Cirque payment and sale of West Wits, and the possibility of improved performance by any of the projects; but, taking these into account, I am still not satisfied that any of these defendants did not have reasonable cause to expect that Giant would not be able to pay all its debts as they fell due.

556. Because none of Antico, Quirk or Gardiner has satisfied me that he did not have reasonable cause under s.556(2)(b)(ii), it must follow that Pioneer has not satisfied me of that either.

(d) Reasoanble cause under s.556(2)(b)(i) 557. Since I have found that each defendant has not made out the defence under s.556(2)(b)(ii), it is not necessary for me to deal with their defence under s.556(2)(b)(i); but I will do so. This involves considering, in relation to reasonable cause, the questions of misleading conduct, inducement, and ability of Giant to pay $30 million, which I considered (and found proved) in relation to reasonable grounds.

(e) Misleading conduct and inducement 558. On this matter, there was detailed evidence on the question of disclosure of the BNZ default only from Gardiner, who said that he considered the matter, discussed it with at least two lawyers, and concluded it did not need to be disclosed. His explanation was that BNZ's charging of 3% penalty interest ameliorated the situation. I have the clear view that disclosure was required; but that does not necessarily mean that it was unreasonable for a director to have the contrary view, or not to seek formal legal advice on the matter. In any event, in my opinion this was at most a minor factor in inducing SCBAL to extend the due date for the repayment, and I will not refer to it further.

As regards disclosure of Pioneer taking security, Gardiner took part in a conference with Leach and Sherlock on 30th March 1989, in which it appears that there was discussion which questioned whether Pioneer funding of Giant should be disclosed to SCBAL. However, Gardiner said in evidence that he did believe SCBAL had been informed at least of the $14 million loan made on 30th June, because SCBAL had to keep its books open late to enable that payment to be made, and he had informed O'Neill and others that he (Gardiner) was willing to talk to SCBAL about the matter. Gardiner also said in evidence he would not have regarded it as necessary that SCBAL be advised about Pioneer's security, but for the half-truth in O'Neill's letter of 21st July 1989. Antico, at the 28th July board meeting, asked why there was a fuss about this letter.

However, Antico said in effect that, as at 25th July, he did not know whether or not SCBAL had been told of Pioneer advances and security; Quirk said he would have expected Giant management to keep SCBAL informed of Pioneer advances and security; and Gardiner said that, prior to 21st July, he believed SCBAL was aware in general terms of Pioneer funding and security.

On 21st July 1989, Quirk and Gardiner saw SCBAL's letter of 11th July, which made it clear that SCBAL did not know of Pioneer taking security: however, they say they did not see O'Neill's reply of 21st July until 28th July. It seems that Antico did not see SCBAL's letter until after 25th July.

I am satisfied that Antico, Quirk and Gardiner were not aware of O'Neill's letter of 21st July until after 25th July 1989; and I am not satisfied that, as at 25th July 1989, Antico actually knew that SCBAL had no knowledge that Pioneer had taken security for its debt. I am also satisfied that, on becoming aware of the contents of O'Neill's letter, the Pioneer directors did instruct Needham to take steps to advise SCBAL of the taking of security. However, I do not consider that this is the end of the matter.

I have found that Pioneer was a de facto director of Giant. Pioneer had taken security from Giant, a company of which it was in the position of a director, to secure both past advances and future advances. At least in relation to past advances, if not also future advances, this was a benefit taken by a director, which would require full disclosure to and consent from Giant, either through the board of directors or through the general meeting, depending on the articles. However, in a situation of at least near-insolvency, such as Giant was in by July 1989, directors are required to have regard to the interests of creditors as well as members; and Giant itself was obliged by its contract with SCBAL to advise SCBAL about Pioneer's taking of security and the level of debt secured. This raises a real question whether Pioneer itself, as well as Giant, had an obligation to make a full disclosure of the taking of security to SCBAL; and thus whether Antico, Quirk and Gardiner, as Pioneer's representatives on the board of Giant, should themselves have taken the initiative in relation to this matter. The onus lies on the defendants on all aspects of reasonable cause, and they have not satisfied me that Pioneer could simply assume that Giant would make the appropriate disclosure.

I am not satisfied that, as at 25th July 1989, any of Antico, Quirk or Gardiner had reasonable cause to believe that SCBAL had been informed properly or at all of Pioneer's taking of security (except possibly for the $14 million Augold payment); and by 21st July, the terms of SCBAL's letter of 11th July should have made it quite clear, at least to Quirk and Gardiner, that SCBAL had not been so informed. What each of Antico, Quirk and Gardiner has to prove under s.556(2)(b) is that he did not have reasonable cause to expect that Giant would be unable to pay all its debts as they fell due - and relevantly here, he has to prove that he did not have reasonable cause to expect that SCBAL's $30 million debt was due as at 25th July 1989, and would continue to be due thereafter. Each of them knew it had been due since 30th June 1989, subject to negotiations to extend the due date; and that, as at 25th July, it would be due and continue to be due, unless an extension was properly and legitimately negotiated with SCBAL. Each of them, I am satisfied, had reasonable cause to believe that proper and legitimate negotiations involved making proper disclosures, including disclosure that Pioneer had a debt (amounting to $47.55 million as at 30th June and $49.55 million as at 25th July) secured inter alia by a second charge over Curragh; and that failure to disclose this was likely to be a material inducement, causing SCBAL to extend the due date. They were given reason by Giant management to expect that negotiations would be successful; but not to believe that disclosure had been made.

In all these circumstances, I do not believe that any of Antico, Quirk or Gardiner has discharged the onus of proof which he bears. I am not satisfied that any of them did not have reasonable cause to believe or expect that SCBAL's debt was due as at 25th July and would continue to be due thereafter

• because I am not satisfied that any of them did not have reasonable cause to believe that the negotiations for extension of the due date were being conducted without disclosure of Pioneer's debt and security, where non-disclosure was likely to be a material inducement causing SCBAL to extend the due date. The reasonable cause which, to my mind, has not been excluded is that which could arise from Giant's obligation of disclosure, Pioneer's involvement in that obligation by reason of its taking (while a director) of a substantial benefit from Giant in circumstances of (at least) nearinsolvency, and the absence of reasonable cause to believe that such obligation had been discharged.

(f) Giant's ability to pay $30 million 566. The other aspect of reasonable cause in relation to Giant's misleading conduct concerns expectation that Giant would be unable to pay the SCBAL debt, because Pioneer would not supply the $30 million. on this aspect, my view is similar to that concerning reasonable grounds. on the facts known to each of Antico, Quirk and Gardiner, I consider that each of them in fact had reasonable cause to expect that Pioneer would pay $30 million only as a last resort, on threat of liquidation or receivership, after taking a hard line with SCBAL; and to expect that SCBAL, while not (without being induced by misleading conduct) extending the due date, would for some considerable time refrain from making a credible threat of liquidation. So I am certainly not satisfied of the converse, that any of Antico, Quirk or Gardiner did not have reasonable cause to expect that Pioneer would not pay SCBAL's $30 million debt on behalf of Giant as and when it fell due.

It follows that none of Antico, Quirk or Gardiner has established absence of reasonable cause as at 25th July 1989.

(g) Pioneer 568. Insofar as none of Antico, Quirk or Gardiner have established absence of reasonable cause as at 25th July 1989 under s.556(2)(b)(i), this counts against Pioneer establishing absence of reasonable cause. However, it is necessary to consider in addition the position of Needham, and the evidence given by the other five directors of Pioneer.

569. Needham was not called, and the five other directors gave evidence only on the question of whether Pioneer would pay the $30 million. I believe their evidence on this confirms that Pioneer had reasonable cause to expect that Pioneer would pay $30 million only as a last resort, in response to a credible threat of winding up or appointing a receiver to Giant.

570. On other aspects, despite absence of evidence on this point, I am satisfied the five other directors did not know of O'Neill's misleading conduct: it is inherently unlikely that they knew any more about this than Antico, Quirk or Gardiner. I do not think there is any inference I could draw about their knowledge concerning Giant's or Pioneer's dealings with SCBAL which would cause me to make any different finding as to reasonable cause in relation to Pioneer than I made in relation to each of Antico, Quirk and Gardiner.

571. As regards Needham, I would infer that he was aware that SCBAL was deliberately being kept in the dark about Pioneer's security over Curragh and the amount which it secured. This is confirmed by his advice to Pioneer directors that he had disclosed the taking of security to Mr. Clemens at a cocktail party in July: if there were any truth in this advice, having regard to my acceptance of Mr. Clemens' evidence, this would indicate that Needham was aware that the only disclosure to SCBAL had been a totally inadequate and colourable disclosure, in an inappropriate manner, to an inappropriate person, and on an inappropriate occasion; and if there were not any truth in the advice, then it would indicate that Needham was aware that no disclosure at all had been made. However, Needham was managing director of Giant, and in effect Giant's representative of Pioneer's board - and I would regard Needham's knowledge and activities in this matter as being in his capacity as an agent of Giant rather than an agent of Pioneer. Accordingly, I would not attribute Needham's knowledge to Pioneer: cf. Harkness v. Commonwealth Bank of Australia (1993) 32 NSWLR 543 at 552-5.

572. For these reasons, Pioneer has not established that, as at 25th July 1989, it did not have reasonable cause to expect that Giant would be unable to pay all its debts as and when they fell due.

9. AUTHORITY OR CONSENT
10. Section 556(2)(a) provides that it is a defence if the defendant proves the debt in question was incurred without his express or implied authority or consent. The defendants rely on this defence in relation to the debts allegedly incurred on 25th January 1989 and 25th July 1989.

9.1 Legal Principles 574. There is some conflict in the authorities, between the New South Wales decision of Metal Manufactures v. Lewis (1988) 13 NSWLR 315 on the one hand, and the Victorian decision of Morley v. Statewide Tobacco Services [1993] VicRp 32; (1993) 1 VR 423 and the South Australian decision of Group Four Industries v. Brosnan (1992) 8 ACSR 463 on the other hand. The first and last of these were cases involving a company of which a husband and wife were directors, and the husbands substantially conducted the business; and the question arose whether a particular debt was incurred without the authority or consent of the wife. The second case was similar, except that the husband had died before the debt was incurred, and a son of the husband and wife had taken over the conduct of the business. In the first case, it was held that the debt was incurred without the wife's authority or consent; and in the second and third, it was held that, although the wife had little participation in or knowledge of the company's business, she had not shown that the debt was incurred without her authority or consent.

575. I am bound by decisions of the New South Wales Court of Appeal, though not necessarily by the reasons of individual judges, and I must also give considerable weight to the decisions of appellate courts of other States. However, in my view, the present problem does not come down to a simple matter of saying which decision is to be accepted. There are a number of particular questions to be considered.

576. There is no doubt that, if a director actually participates in the incurring of a debt, he or she cannot succeed on this defence. Otherwise, in my view, the question must be asked, did he or she expressly or impliedly authorise or consent to the incurring of the debt; and if the defendant satisfies the Court that this question should be answered no, then the defence is made out. Although there is a negative to be proved by the defendant, it is easier to discuss the positive; recognising that this is what has to be excluded by the defendant. (a) Does Participation in the appointment of an officer, without more, authorise debts subsequently incurred by that officer within the scope of his or her authority?

577. To this question, in Lewis, Mahoney and McHugh JJA in the New South Wales Court of Appeal gave a clear negative answer. Ormiston, J, at first instance in the Victorian Supreme Court in Morley (with whom the Appeal Division of the Victorian Supreme Court, and also Matheson and Olsen JJ in the South Australian Full Court in Group Four Industries, agreed) seems to suggest that participation in appointment of an officer is, itself, sufficient to authorise all debts subsequently incurred.

578. On this question I think, with respect, that Mahoney and McHugh JJA. are clearly correct. I agree with Ormiston, J that the mere fact that an authority may be given by a board of directors, of which the defendant director is only one member, does not mean that the defendant has not given authority; but this is a different question. The main elements of s.556 are directed to the time when the debt is incurred; and in my view, the essential question under s.556(2)(a) is the existence of authority or consent at that time. I do not think the fact that a defendant director was part of a board which in the past employed a manager or appointed a managing director, perhaps some years before at a time when the company was clearly solvent, should preclude reliance on s.556(2)(a). I do not see that such a defendant director should have substantially greater responsibility concerning debts when the company becomes insolvent than, for example, a director who happened to be absent from that particular board meeting or who was appointed later. Again, suppose that a defendant director was part of a board which appointed a managing director, and that, while all directors expected on reasonable grounds that the managing director would incur debts only in the ordinary course of business, the actual authority of the managing director extended to incurring debts not in the ordinary course of business; and that much later the managing director secretly incurs a large debt outside the ordinary course of business. or suppose that this defendant director is ill in hospital at the time a debt is incurred, is informed of grounds to expect the company would be unable to pay its debts, but is totally incapable of taking any action. In either case, I believe it should be possible for that defendant to make out the defence.

(b) Must the authority or consent extend to the debt in question? 579. McHugh, JA. in Lewis gives a clear answer that it must do so, while Mahoney, JA. is perhaps less clear on this point. With respect, I think the discussion of this matter in the other cases confuses this question with the question of whether an authority or consent must be expressly or specifically directed to the debt in question. Quite clearly, in my view, that is not necessary; and I do not think that McHugh, JA. or any other judge has suggested that it is. I certainly did not do so, at first instance in Lewis. What I did say was that, if the authority or consent is general, it will be a question of construction whether it extends to the particular debt. Clearly, if the authority or consent is to a specific debt, there is no problem. If the authority or consent extends to (say) all debts incurred in the ordinary course of business, and a specific debt is so incurred, again there will be no problem. A problem may arise if a debt is incurred otherwise than in the ordinary course of business; or if there is a real question whether such general authority or consent as was given does in fact extend to all debts incurred in the ordinary course of business.

580. In any event, I think it is clear that if an authority or consent does not, on its true construction, extend to incurring the debt in question, for example because the authority or consent is limited as to amount, and the debt is above that amount, then the defence can be made out.

(c) Must the authority or consent be communicated? 581. In Lewis at first instance, I said that it must be communicated expressly or impliedly to the person or persons incurring the debt. However, as Kirby, P. pointed out in his dissenting judgment in the Court of Appeal, it would be sufficient if the authority or consent be to the company incurring the debt, irrespective of what persons actually participate. Accordingly, I now think it is sufficient if the defendant manifests consent, in the sense of approving or assenting to the incurring of the debt. However, I consider that what must be communicated or manifested, in the case of consent as well as authority, involves a mental element: an intention to consent or authorise.

(d) Does acquiescence amount to consent? 582. In the South Australian Full Court in Group Four Industries, Debelle, J said that it does. I would prefer to say that acquiescence is evidence of consent, and may amount to consent, or at least prevent the defendant negativing consent. This question merges into the next one.

(e) Can authority or consent be implied from inactivity? 583. It is common ground that authority or consent can be implied from inactivity, where the defendant knows or has reason to suspect that a debt will be incurred, has power to prevent it, and does not do so. But the judgments of Mahoney and McHugh JJA. in Lewis seem to suggest that it cannot be implied from inactivity by a person who does not have power to prevent the incurring of the debt. On the other hand, Ormiston, J says in Morley that it is irrelevant that a single director has no power to prevent the incurring of a debt. This view seems to follow from his opinion that the original appointment of itself gives authority or consent, a view with which I have disagreed. But while, on the one hand, I cannot agree with Ormiston, J that the absence of power to prevent the incurring of a debt is irrelevant, on the other hand, if I am free to say so, I do consider that there may be circumstances in which the failure of a single director to seek to persuade a managing director not to incur a debt, or to call a directors' meeting with a view to stopping the incurring of debts, or to resign, or to seek to have the company wound up, could amount to giving authority or consent to the incurring of a debt. If and insofar as Mahoney and McHugh JJA. say otherwise, I would (if I may do so) respectfully disagree with them.

584. In the case of so-called sleeping directors, I think it is largely a question of fact in each case whether inactivity does or does not imply authority or consent. If the circumstances are that a director knows or should know that the company is incurring debts which it will not be able to pay as they fall due, and does not try to prevent this by persuasion, calling a meeting, etc., then authority or consent may well be implied, even if the debts are being incurred by a managing director, and the defendant director has not the power, according to the constitution of the company, to override the managing director's decisions. To that extent, as I have suggested, I disagree (insofar as I may do so) with some of the reasons of the majority of the Court of Appeal in Lewis. However, I think it is incorrect to equate acquiescence absolutely with authority or consent, and incorrect to say that in all such cases authority or consent will be implied: to that extent, I disagree with some of the reasons in Morley and Group Four Industries.

585. However, I have no reason to suppose the actual decisions in Morley or Group Four Industries were incorrect. Nor do I suggest that the actual result in Lewis was incorrect: a director's lack of understanding of directors' duties and of the affairs of a company may be such that it would do violence to language to say that, by reason of inaction, that director "authorised" or "consented to" the incurring of the debt.

586. In Lewis, Kirby, P. at p.322 commented that Parliament would not have intended the defence to operate "by the simple expedient of a director's surrendering all of his or her powers to a co-director or managing director". I entirely agree. But in those cases (which may be rare) where such a director can satisfy the Court that he or she had, to the knowledge of the co-director or managing director, no understanding of the duties of a director or the affairs of the company, there will be a real question of whether implied authority or consent is excluded. Of course, anyone who becomes a director should acquire an understanding of their duties, and failure to do so may result in the commission of various offences, not just under s.556; but I do not think that that consideration completely controls the interpretation of s.556(2)(a). Furthermore, the law now shows some flexibility towards vulnerable persons who are induced by the overbearing conduct of others to enter into transactions of which they have no understanding: I do not see that this consideration becomes altogether irrelevant simply because the transaction happens to be acceptance of the office of director of a company.

(f) Ratification 587. A question which does not appear to have arisen before is whether authority or consent can be excluded if a defendant is involved in a subsequent ratification of the incurring of the debt. The suggestion in the present case is that the defendants had no prior knowledge that Giant was on 25th January 1989 to give the guarantee of payment by TSG of moneys due to SCAL; and the defendants claim that they did not authorise or consent to the giving of that guarantee. However, on 17th February 1989, a board meeting of Giant, attended by Antico, Quirk and Gardiner, ratified the affixing of Giant's common seal to the relevant documents.

588. In my view, if a defendant director proves that the relevant debt was incurred without his or her authority or consent at the time of its being incurred, then that defendant's involvement in a later ratification will not negative the defence. As mentioned above, I consider that the main elements of the section are directed to the time of incurring the debt. If, subsequently to the debt being incurred, a director is faced with a fait accompli of a debt already having been incurred and binding the company (as a result of ostensible authority, if not actual authority), I do not believe that participation in ratification at that stage alters the fact that the debt was incurred without his or her authority or consent. Although ratification of an unauthorised act of an agent may relate back to the time of that act for the purposes of the law of contract, this does not mean that it should do so in relation to a criminal offence, elements of which (apart from the winding up of the company, or other events concerning the company making the section applicable) occur at the time the debt is incurred.

9.2 Authority or Consent At 25th January 1989 589. I accept the evidence of Antico and Quirk that they did not receive notice of the (purported) meeting of directors of 24th January 1989 which passed a resolution authorising execution by Giant of the guarantee; and that they were not aware of Giant's intention to provide that particular guarantee.

590. It is contended for SCBAL that Antico and Quirk knew and had reason to suspect that debts were being incurred on behalf of Giant, and took no steps to prevent this; so, in accordance with Morley and Group Four Industries, they cannot show that this debt was incurred without their authority or consent. It was submitted that giving guarantees in this manner was in the normal course of conducting Giant's business, and that executives had the board's authority to conduct business in this way. Subsequent ratifications were common: they were contained in minutes of meetings of 25th March 1988, ratifying the affixing of Giant's seal to guarantees concerning Augold; of 28th September 1988, ratifying guarantees re TSG; of 2nd November 1988, ratifying the affixing of the seal to a deed with subsidiaries; and of 19th January 1989, ratifying affixing the seal to a guarantee re GVG. Also, the holding of mini board meetings of a quorum of three directors, for resolutions concerning particular transactions, were common, being held, for example, on 1st September 1988, and 20th and 21st October 1988. The subsequent ratification and lack of protest about these meetings confirmed that it was normal procedure.

591. I accept SCBAL's submission in relation to debts incurred in the ordinary course of business, and also in relation to debts not in the ordinary course of business but of the general nature and amount which the defendants knew or had reason to suspect were being incurred. Taking into account the circumstances referred to by SCBAL, I am not satisfied, on the balance of probabilities, that as at 25th January 1989 Antico and Quirk did not know or have reason to suspect that debts of the general nature and amount of the guarantee in question were being incurred without notice to them.

592. SCBAL also relied on the ratification on 17th February 1989, but as discussed above, I do not think later ratification negatives the defence. However, for the reasons I have given, I hold that the s.556(2)(a) defence is not made out in respect of the debt incurred on 25th January 1989.

9.3 Authority Or Consent At 25th July 1989 (a) Antico, Quirk and Gardiner 593. The defendants' case is that SCBAL's offer of 11th July 1989 requested that, if the terms were acceptable, the directors of Giant should "arrange for the passing of a Resolution of Directors in the form enclosed"; and that Antico, Quirk and Gardiner were not given any notice of the purported meeting of directors of Giant (that is, of Needham, Bourke and O'Neill) on 24th July 1989, which resolved to accept the offer and authorised O'Neill to sign the certificate of acceptance. Antico did not see the letter of 11th July until 28th July; while Quirk and Gardiner saw it on 21st July, but claim that they did not believe it could be accepted without further notice to them, because of the stipulation about a board resolution, and because SCBAL's request in its letter of 11th July for a second charge would need to be resolved before the offer could be accepted. None of these defendants saw O'Neill's letter dated 21st July 1989 until 28th July 1989. Accordingly, these defendants contend that the incurring of the debt, by sending the letter dated 21st July 1989 on 25th July 1989, and thereby accepting SCBAL's offer of 11th July 1989, was without their authority or consent.

594. SCBAL relies on the circumstances that all defendants were aware that SCBAL's $30 million debt became due on 30th June 1989, and that Giant management were negotiating for an agreement having the effect of postponing the date for repayment; and that all defendants knew or had reason to expect that such an agreement would be made if it could be negotiated. Indeed, this was exactly what they were aiming and planning for. O'Neill told Gardiner on 18th July that SCBAL had extended the loan to 31st December, subject to daily review, and Gardiner prepared a note which in substance recorded this, and which was read by Antico and Quirk on 20th July. When, on 28th July, Antico, Quirk and Gardiner became aware of the acceptance, they raised no objection. The practice of subsequent ratifications had continued (for example, in board meetings on 17th February 1989, 18th May 1989 and 22nd June 1989), and also mini board meetings to approve particular transactions (for example, on 24th January 1989 for the guarantee given on 25th January 1989, and on 31st March 1989 for acceptance of SCBAL's offer to extend the facility to 30th June 1989). There was evidence that Antico, Quirk and Gardiner did not receive notice of these meetings, but did not object when they later found out about them. Also, when Quirk and Gardiner saw the letter of 11th July 1989, they would have seen that it required acceptance by 21st July 1989, yet took no steps to bring about a board meeting to ensure that it was accepted in time.

595. In my view, insofar as Quirk and Gardiner claim that they believed SCBAL's offer could not be accepted without a board meeting and without resolving the request for a second charge, this is a matter of reconstruction rather than accurate recollection of their state of mind at the time. I do not think that Antico, Quirk or Gardiner can make out the defence under s.556(2)(a), having regard to the circumstances relied on by SCBAL. Each of them knew or had reason to suspect that an agreement was being negotiated (indeed, they all encouraged this), and could well be made without further reference to him, and he did nothing to prevent it. In those circumstances, in my view, none of them has negatived authority or consent.

596. One matter which I have considered is that the agreement with SCBAL could have been a mere extension of time, and thus possibly not, on my understanding of the law, the incurring of a debt; whereas, inter alia because the agreement actually made wholly displaced the old agreement, I have held that it did amount to the incurring of a debt. I do not think that Antico, Quirk or Gardiner would have placed any importance on this at the time, and there is no suggestion of any limit as to what form of agreement could be negotiated by the executives. Accordingly, I do not think this consideration assists the defendants. Thus, I find that none of Antico, Quirk and Gardiner has made out the s.556(2)(a) defence in relation to the debt of 25th July.

597. Needham, a director of Pioneer, took part in the mini board meeting of 24th July 1989; and he and seven other directors of (b) Pioneer Pioneer have not been called on this point. So even if I were not correct in holding that Antico, Quirk and Gardiner have not made out the s.556(2)(a) defence, I think it is clear that Pioneer have not made out that defence. 10. RELIEF FROM LIABILITY: SECTION 535

598. It is necessary to decide whether s.535 empowers a court to grant relief to a person who would otherwise be liable under s.556 for a debt of a company; and then, if it does, to consider whether any of the defendants should be relieved wholly or partly from liability in this case.

10.1 Applicability of Section 35 to Section 556 599. Section 535 applies relevantly in cases of civil proceedings against a director of a company "for negligence, default, breach of trust or breach of duty" in his capacity as a director. In Friedrich (1991) 5 ACSR 115 at 191 ff., Tadgell, J held that proceedings under s.556 were not such proceedings, because they were plainly not for negligence or breach of trust, and also were not proceedings for default or breach of duty by a director. The liability under s.556 did not arise on account of performance of some act forbidden or omission of some required by s.556 or any other provision of the Code. Tadgell, J said that there were no cases directly in point, but found some relevance in two English cases: Customs and Excise Commissioners v. Hedon Alpha (1981) 1 QB 818, and Re Produce Marketing Consortium (1989) 1 WLR 745.

600. Hedon Alpha concerned whether s.448 of the Companies Act 1948 (similar to s.535 of the Code) could apply to enable relief to be granted to a director made personally liable in that capacity under a taxing Act for betting tax incurred but not paid by a company that was a bookmaker. The Court of Appeal held that-the proceedings in question were for a debt arising in circumstances provided by the taxing Act which did not depend on any default or breach of duty by the director, so that s.448 did not apply.

601. Produce Marketing concerned whether s.727 of the Companies Act 1985 (the successor to s.448 of the 1948 Act) could provide a basis for relief against liability under s.214 of the Insolvency Act, which provided that a court might make a director of a company liable to make a contribution to the company's assets, where the company had gone into insolvent liquidation, and where before commencement of the winding up, the director "knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation". Knox, J held there were indications in the Insolvency Act which showed that s.727 was not to be a defence; but he was less impressed with the argument that there was no default or breach of duty involved, saying that there was force in the submission "that a duty in fact exists at the back in the shape of a director's obligation in relation to which s.214 imposes a sanction.

602. For the defendants, it was submitted that Tadgell, J was wrong, especially because he failed to take account of the circumstance that s.556 created an offence which, having regard to s.556(2), could be described in general terms as the offence of being involved in the incurring by a company of a debt in circumstances where the company will be unable to pay its debts as they become due. Such involvement is presumed if the circumstances in s.556(1) are established, but the defendant can negate it by proving a defence under s.556(2). The imposition of criminal liability was predicated on some default or breach of duty, and the statutory imposition of a rebuttable presumption of such default or breach of duty did not mean that they were not elements in the offence. Hedon Alpha could and should be distinguished, because there was no criminal liability in the relevant section in that case, and there was no provision for any defences which negated a breach of duty.

603. I believe I should follow Tadgell, J, unless I am satisfied he was wrong. I am not so satisfied. I believe there is force in the defendants' argument that, on a broad view, one can regard s.556 as imposing criminal and civil sanctions on certain conduct, which could loosely be described as involvement in insolvent trading, and which in general terms could be regarded as a default or breach of duty by a director; and that Hedon Alpha can be distinguished on the ground that it dealt with a section which created no offence and did not suggest, even in general terms, a category of conduct by directors which could be called a default or breach of duty. But I am not satisfied that Tadgell, J was wrong in his view that s.556 simply imposes a liability for debt on directors and participants in management in certain circumstances spelt out in s.556(1), which do not involve default or breach of duty; or that it is incorrect to regard s.556(2) as simply specifying circumstances in which a defendant can escape liability, again without reference to questions of default or breach of duty.

I am confirmed in my view that I should follow Tadgell, J by two further considerations advanced for SCBAL. First, s.556 imposes liability on persons who took part in the management of the company, and such persons may not be officers within s.535, or indeed within any of the categories to which s.535 applies; and so s.535 could have capricious operation if it applied to proceedings under s.556. Second, s.556(2) gives some appearance of being a full elaboration of the circumstances in which the legislature considered that persons falling within s.556(1) ought to escape liability, and to that extent, does not sit well with the broad power in s.535 to give relief.

10.2 Relief 605. On my view of s.535, the question of whether relief should be granted does not arise. However, I believe that a defendant who has failed to establish a defence under s.556(2) would need to show more than has been shown in this case to justify relief under s.535.

11. MISLEADING CONDUCT AT 31ST MARCH 1989 11.1 Misleading Conduct By Giant
12. In paragraphs 7.4(a) and 7.5(a), I have held in effect that there was misleading conduct by Giant through its failure to disclose its own default of SCBAL's facility, arising from the security shortfall default of the BNZ facility. SCBAL also alleges misleading conduct in failure to disclose Giant's true financial position, in particular that there were reasonable grounds to expect that Giant would be unable to pay all its debts as they became due. In section 7.5, I have held that SCBAL has not established that there were such reasonable grounds at 31st March 1989, and no other particular aspect of Giant's financial position has been relied on. Accordingly, I do not find misleading conduct by Giant in that respect.

11.2 Knowing Concern 607. The plaintiffs allege that the defendants were, within s.75B(c), knowingly concerned in or a party to Giant's misleading conduct: they do not rely on any of the other paragraphs of s.75B. They accept that, for this, there must be knowledge of the essential matters constituting the misleading conduct; although they submit that constructive knowledge is sufficient, at least in relation to being a party to the contravention (Yorke v. Lucas [1983] FCA 230; (1983) 80 FLR 143 at 153) and that a failure to enquire may be a step on the way to establishing liability under S.75B (Bell v. Australian Recyclers (1986) 8 ATPR 40-644 at 47,222).

608. There is binding authority that, in relation to aiding, abetting, counselling, or procuring under the criminal law, knowledge of the essential elements of the offence is necessary, and that while wilful shutting of eyes is equivalent to knowledge, mere negligence or recklessness is not enough (Giorgianni v. R. (1984-5) 156 CLR 747); and that this applies to corresponding expressions in s.75B (Yorke v. Lucas [1985] HCA 65; (1985) 158 CLR 661). In dealing with s.75B(c) in Yorke v. Lucas, the High Court held that knowledge of the essential elements of the contravention was required; and in my view, did so in such a way as to suggest that the Full Federal Court's reference to constructive awareness was not approved. I think the better view is that negligent failure to enquire would not be enough, and that at least recklessness, but probably wilful shutting of eyes, would be necessary.

609. In my view, the plaintiffs have not shown that Antico, Quirk or Gardiner knew of the only misleading conduct which I have found, namely that arising from nondisclosure of Giant's default associated with its BNZ default. I could infer that Needham knew of this; but I do not think that such knowledge should be attributed to Pioneer; see Harkness v. Commonwealth Bank of Australia (1993) 32 NSWLR 543 at 552-5. The issue here is not one where the onus lies on Pioneer to prove something, as was that considered in section 8.2 above.

610. Accordingly, the plaintiffs fail on s.75B against all defendants.

11.3 Misleading Conduct By Pioneer and PIFL 611. The plaintiffs' allegation here is that Antico, Quirk and Gardiner on behalf of Pioneer impliedly represented to SCBAL that there were reasonable grounds to expect that Giant would be able to pay its debts as they fell due. In my view, it would put the plaintiffs' case at its highest to say that Pioneer, as itself a director of Giant, represented to SCBAL (in terms of s.556(l)) that there were not reasonable grounds to expect that Giant would not be able to pay its debts as they fell due. I have not found that such a representation would have been untrue.

11.4 Negligence 612. The negligence relied on is not based on any duty of care owed by directors to creditors: the plaintiffs have accepted that, as held by Gummow, J in Sycotex, there is no such duty. What is suggested is a more general duty to exercise due skill and care in giving advice. I do not see any basis for finding such a duty in this case; and, insofar as the advice alleged to be negligent is along the lines of negativing s.556(1)(b), I would not find any breach.

11.5 Inducement And Damages 613. Even if I had found one or more of the defendants covered by s.75B in respect of Giant's misleading conduct, I would not have been satisfied that SCBAL was (as alleged in pars.52, 79 and 86 of the Statement of Claim) thereby induced to refrain from insisting on repayment of 20th October 1988 facility, and (as alleged in pars.53, 80 and 87 of the Statement of Claim) suffered loss in that the facility would have been repaid or SCBAL would have received a greater dividend in the winding up.

12. MISLEADING CONDUCT AT 25TH JULY 1989 12.1 Misleading Conduct By Giant
13. In paragraph 7.9(a) above, I decided in effect that there was misleading conduct by Giant as at 25th July 1989 associated with failure to disclose previous default (and non-disclosure of default) concerning its BNZ default, failure to disclose the Pioneer security, and its nonresponse and intended misleading response to SCBAL's letter of 11th July 1989. Insofar as Giant represented that there were not reasonable grounds to expect that it would not be able to pay its debts, this has been proved to be misleading only insofar as it was made so by the consequences of the misleading conduct referred to in the previous sentence: I have held in section 7.7 and 7.8 that such a representation has not been shown otherwise to be untrue.

12.2 Knowing Concern 615. My findings in paragraph 8.2(e) would mean that s.75B(c) is not satisfied concerning Antico, Quirk and Gardiner on these matters, except possibly insofar as Quirk and Gardiner became a party to or knowingly concerned in misleading conduct as a result of seeing SCBAL's letter of 11th July 1989 on 21st July 1989. However, I cannot be satisfied that Quirk and Gardiner knew, prior to 25th July, that Giant would accept SCBAL's offer without first disclosing the Pioneer security. So I am not satisfied that Antico, Quirk or Gardiner are caught by s.75B. As for Pioneer, while I would be prepared to infer that Needham knew the substance of Giant's misleading conduct, I am not satisfied that this should be attributed to Pioneer, for the reasons discussed in Harkness v. Commonwealth Bank of Australia. This issue is not, as was that in section 8.2, one where any onus lay on the defendants.

12.3 Misleading Conduct By Pioneer and PIFL 616. Again, it would put SCBAL's case at its highest to say that Pioneer, as a director of Giant, represented to SCBAL that there were not reasonable grounds to expect that Giant would not be able to pay its debts as they fell due; and I have found that to be untrue. So, even though it is not affirmatively proved that Pioneer knew of Giant's misleading conduct which made the representation untrue, Pioneer's conduct could be held to be misleading. However, this would depend upon finding that Pioneer itself had such a duty of disclosure, or such involvement in the actual incurring of the debt, that it could be found to have made a representation; and although I have found that Pioneer has not established a defence under s.556(2), that is not the same question. On the whole, I am not satisfied that Pioneer had such a duty of disclosure or involvement in the incurring of the debt as to justify a finding that it made a representation negativing s.556(1)(b). I note that a factor which I considered to be relevant in my decision on Pioneer's defence, namely the question of its obligation as a de facto director of a near- insolvent company to disclose to creditors a benefit which it had taken from the company, was not particularised by the plaintiffs in support of this claim.

12.4 Negligence 617. As before, I am not satisfied that there was any relevant duty of care.

12.5 Inducement And Damages 618. If I am wrong under section 12.3 above, a question arises of whether SCBAL were induced to act and caused damage by Pioneer's misleading conduct. I have held that, but for similarly described misleading conduct, SCBAL would not have extended the time for payment of the $30 million, but I also held, in effect, that Pioneer would not have then paid this money, and that SCBAL would not have precipitated Giant's liquidation. However, it was argued for SCBAL that, even if I was not satisfied that Pioneer would have paid the $30 million, I should award damages to SCBAL for the loss of the chance that it may have done so. I think that this was a commercial advantage or opportunity of some value, as discussed in Sellars v. Adelaide Petroleum [1994] HCA 4; (1992-4) 179 CLR 332; and doing the best I can, I would assess the chance that Pioneer would have paid as 20%, suggesting damages of $6 million as at (say) the end of August 1989.

619. The only question of damages which is excluded from this hearing is the quantum of recovery from an earlier, as against a later, liquidation; and I do not think it would be appropriate to award any additional damages on the loss of a chance of an earlier liquidation.

620. In any event, there will be no damages, because I have not found that Pioneer engaged in misleading conduct.

13. CONCLUSION 13.1 Basis Of Finding for Plaintiffs
14. It follows that SCBAL succeeds against Antico, Quirk, Gardiner and Pioneer on the s.556 claim on the following basis: (1) Giant incurred a debt on 25th July 1989, amounting to the interest on a facility from SCBAL of $30 million (subsequently reduced to about $26.6 million). Giant had owed SCBAL $30 million plus some accrued interest prior to making the agreement of 25th July 1989, under an agreement according to which interest would have continued to accrue; but the agreement of 25th July 1989 wholly displaced that prior agreement. Although Giant's liability under the new agreement of 25th July 1989 was for $30 million plus interest, I considered that the debt incurred by entry into this agreement was for interest only. I considered that this was consonant with the language of s.556, and also with the policy of the section: on the one hand, directors should not be responsible under s.556 for debts incurred earlier than the transaction in question; but on the other hand, directors, who have brought about the continued trading of an insolvent company by causing or permitting it to enter into a new agreement, should be responsible for honouring that agreement.

(2) At that time, Pioneer was a director of Giant or a person involved in the management of Giant. From March 1989, it had made the major policy decisions for Giant and had exercised close control over its management and financial affairs, and the directors of Giant were accustomed to act in accordance with its directions or instructions.

(3) Immediately before the debt was incurred, there were reasonable grounds to expect, within s.556(1)(b)(i), that Giant would not be able to pay its debts as and when they became due. In particular, its debt of $30 million to SCBAL had been due since 30th June 1989, and would continue to be due unless SCBAL was induced to make an agreement under which it was no longer due, or otherwise to extend the time for payment. There were reasonable grounds to expect that SCBAL would not do this, except as a result of misleading conduct by Giant: Giant had not disclosed defaults associated with its BNZ defaults; had not disclosed giving security to Pioneer; had deliberately continued not to disclose this, although disclosure was called for by SCBAL's letter of 11th July 1989; proposed to and did send a positively misleading response to this letter; and yet, in all those circumstances, represented and warranted to SCBAL on 25th July 1989 that it had disclosed all matters material to the granting of the facility. And there were reasonable grounds to expect that had all these matters been disclosed, SCBAL would not have agreed to extend the time for payment, but probably would have merely withheld enforcement while negotiating with Giant and Pioneer for the best terms it could obtain. There were reasonable grounds to expect that Giant was, and would for some time be, unable to pay this $30 million, because it clearly could not do so from its own resources; and because there were reasonable grounds to expect that Pioneer would not pay it, except as a last resort to stave off threatened liquidation or receivership.

(4) None of these defendants has discharged the onus under s.556(2) of proving that the debt was incurred without his

(or its) authority or consent, or that he (or it) did not have reasonable cause to expect that Giant would be unable to pay its debts as and when they became due. The debt was one which Pioneer (and its directors, Antico, Quirk and Gardiner) knew or had reason to suspect Giant would incur, and each of them encouraged, and did nothing to prevent, its being incurred. None of the defendants discharged the onus under s.556(2)(b)(ii). And each of them had reasonable cause to believe that the SCBAL debt had fallen due on 30th June 1989, and would continue to be due, except insofar as proper negotiations for and/or grant of an extension might mean otherwise; that failure to disclose to SCBAL the Pioneer security over Curragh and the debt it secured was likely to induce SCBAL to negotiate for and grant such an extension; and that Giant was contractually obliged to make this disclosure. I am not satisfied that any of them did not have reasonable cause to believe that Pioneer was also obliged to make this disclosure, or had reasonable cause to believe that the disclosure had been made. In those circumstances, I am not satisfied that any of them did not have reasonable cause to believe and expect that the SCBAL debt was due as

at 25th July and thereafter, that Giant could not pay it, and that Pioneer would not pay it except as a last resort.

(5) Section 535 does not apply to claims under s.556.

622. In one sense, this may seem to give SCBAL a more favourable outcome than if Giant had not incurred the debt, and if SCBAL had merely withheld enforcement while negotiating with Giant and Pioneer for the best terms it could obtain. However, Pioneer was fully aware of the existence of the risk of liability under s.556, having given an indemnity to Antico, Quirk and Gardiner in March 1989; and it sought to gain an advantage for itself over SCBAL by taking security, not only in respect of future advances but extending also to past advances, without ensuring that this was disclosed to SCBAL. I have not been satisfied that there were reasonable grounds to expect, at relevant times, that Giant would not be able to pay all its debts, including SCBAL's, otherwise than on one particular basis; but clearly there was a substantial risk that it would not, and Pioneer chose to minimise that risk for itself and to put itself in a better position than SCBAL, even in respect of past advances.

623. There would not have been reasonable grounds under s.556(1) but for the conduct of O'Neill and possibly others for which these defendants were not responsible. However, that conduct having occurred, s.556(2) places the onus squarely on these defendants to establish matters of exoneration. As I suggested previously, one basic reason they have not been able to do so, in my opinion, is not that Antico, Quirk and Gardiner were less than conscientious and capable, or that they made business judgments which I would regard myself as qualified to disagree with; but rather that, at critical times, when Giant was at least on the borderline of insolvency, they had regard to the interests of Pioneer rather than those of Giant and particularly Giant's creditors. I believe that, in various ways, the law now does require that directors of insolvent or near-insolvent companies do pay careful regard to the interests of creditors, not merely to those of shareholders or (particularly) a particular shareholder who they happen to represent. Although the course of holding creditors at bay and having Pioneer, on a secured basis, fund Giant so as to give it a reasonable chance of selling Curragh, was (apart from the effect of s.556) probably in Pioneer's best interests, I do not believe these defendants gave appropriate (if any) consideration at the time to whether this was in the interests of Giant's creditors or whether their debts would be paid in full as and when they fell due.

13.2 Other Matters 624. SCBAL has failed on all other claims. In particular, it has failed on the incurring of a debt, except as at 25th January 1989 and 25th July 1989. It has failed on reasonable grounds on all dates, except as at 25th July 1989 on the particular basis stated above. In general terms, I was not satisfied otherwise that the plaintiffs had shown there were reasonable grounds to expect that Giant would not be able to pay all its debts as and when they became due: they did show that there was a substantial risk of this, and I may well have found that there were, in other respects as well, not reasonable grounds to expect that Giant would be able to pay all its debts as and when they became due - but that is not enough. I considered Antico, Quirk and Gardiner were conscientious and capable directors, and I gave weight to their views; and, although I believe that in 1989, in deference to Pioneer's interests, they gave less weight than they should have to the interests of Giant's creditors, and that they all at times presented in Court a picture of Giant's affairs more favourable than they in fact perceived it to be back in 1989, I think they were giving evidence which they believed to be true, even though there were some reconstructions and re-interpretations which accorded with their interests.

625. There will need to be a further hearing to quantify the amount for which the defendants are liable, and it would probably be best to leave all questions of costs until that has been concluded. Having regard to the length of time spent on matters on which the plaintiffs were not successful, this may be a case where the plaintiffs are not entitled to an order for the whole of their costs.