Supreme Court of NSW|1995-09-06|Before: Hodgson J

Standard Chartered Bank of Aust. Ltd. v Antico and Ors. No. 5965 of 1990 Corporations [1995] NSWSC 31 (6 September 1995)

COURT IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION HODGSON J HRNG SYDNEY, 18th October to 15th December 1993, 31st January to 1st September 1994, 3rd to 5th April 1995 (128 hearing days in total) #DATE 31:5:1995 (Reserved) #ADD 6:9:1995

Counsel for the Plaintiff: Mr. M. Tobias QC, Mr. B. Oslington QC,

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

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

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.

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.

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.

LEGISLATION AND ISSUES 2.1 Companies (Queensland) Code Section 556
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."

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.

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."

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."

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.

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.

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

A BRIEF HISTORY OF GIANT 3.1 Introduction
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.

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.

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.

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.

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.

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).

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.

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

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.

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.

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.

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.

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.

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).

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.

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).

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.

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).

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.

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.

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).

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".

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
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

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

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.

Standard Chartered Bank of Aust. Ltd. v Antico and Ors. No. 5965 of 1990 Corporations [1995] NSWSC 31

At a glance

Court

Decision date

Before

Source

Judgment (794 paragraphs)

Standard Chartered Bank of Aust. Ltd. v Antico and Ors. No. 5965 of 1990 Corporations [1995] NSWSC 31 (6 September 1995)

Parties

Legislation Cited (8)

Cases Cited (36)