Reasonable grounds to suspect the commission of offences
164 Section 3E of the Crimes Act empowers an issuing officer to issue a warrant to search premises if the officer is satisfied by information on oath that there are reasonable grounds for suspecting that there is, or there will be within the next seventy-two hours, any evidential material at the premises. When account is taken of the various definitions the issuing officer must be satisfied that there are reasonable grounds for suspecting:
- the commission of an offence against the Corporations Law;
- that there are or will be at the premises to be searched things which will afford evidence as to the commission of such an offence.
165 Suspicion is a "state of conjecture or surmise" or a "slight opinion but without sufficient evidence": George v Rockett (supra) at 115. However, some factual basis for the suspicion must be shown (George v Rockett (supra) at 115); it must be something which in all the circumstances "would create in the mind of a reasonable person an actual apprehension" of the relevant fact (Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 303). The Privy Council has described the requirement of "reasonable grounds for suspicion of guilt" as a very limited requirement: Shaaban Bin Hussien v Chong Fook Cam [1970] AC 942 at 949.
166 It is the issuing officer who is required to be satisfied that there are reasonable grounds for suspecting the relevant matters. The notion of reasonable grounds for a suspicion imports an objective test, but "reasonable" involves a value or normative judgment (Greiner v Independent Commission Against Corruption (1992) 28 NSWLR 125 at 167), and there may well be legitimate differences of opinion as to what falls within the term, particularly when it is used in relation to a nebulous expression such as "suspicion". A Court is not entitled to substitute its own opinion on that question for the opinion of the issuing officer. That does not mean that the issuing officer has an unexaminable discretion; it does mean, however, that the issuing officer's decision is only impeachable if the decision was one which the officer could not lawfully reach on the materials before him: Minister for Immigration & Ethnic Affairs v Wu Shan Liang (1996) 185 CLR 259 at 275-276.
167 In George v Rockett (supra) at 111, the High Court said that it was implicit in the precursor to s 3E, which was under consideration in that case, that the applicant for the search warrant should entertain the suspicion to which the section refers. The issuing officer must be satisfied that there are reasonable grounds for entertaining the relevant suspicion, without any requirement that the issuing officer must also entertain the relevant suspicion. However, it must appear to the issuing officer, not merely to the person seeking the search warrant, that reasonable grounds for the relevant suspicion exist: George v Rockett at 112.
168 The application by Mr Unicomb for the search warrant was sworn to by him. Paragraph 5 of the application states:
"By reason of the matters set out below an issuing officer may properly be satisfied that there are reasonable grounds for suspecting that there are at the premises ... evidential material that satisfies [the first, second and third conditions of the warrant]."
Thereafter a number of "facts" are stated and, under the heading "grounds for suspicion", the foundational material relied upon to support the requisite suspicion is specified, often accompanied by an observation on the part of Mr Unicomb that based on the information referred to in identified paragraphs he has reason to suspect that one or more of the applicants has breached a specified provision of the Corporations Law.
169 The applicants submit that the information on oath did not disclose reason to suspect the commission of the identified offences, and that the repeated incantation by Mr Unicomb of the formula "I have reason to suspect" throughout pars 45-84 of the application distracted the issuing officer away from the real task of identifying whether there were reasonable grounds for suspecting the commission of the alleged offences. In order to assess this submission, it is necessary to deal with each offence in relation to which this complaint is made in turn. But first I should observe that the statement by Mr Unicomb that he has reason to suspect that one or more of the applicants has breached a specific provision of the Corporations Law is not an irrelevant distraction in the light of the High Court's observations that it is implicit in the precursor to s 3E that the applicant for the warrant should entertain the suspicion to which the section refers.
170 Paragraph 8(a) of the third condition of the Williams warrant alleges an offence against s 184(1) of the Corporations Law, namely that between 15 June 2000 and 30 June 2000, Adler, being a director of PEE, was reckless and failed to exercise his powers and discharge his duties in good faith in the best interests of the corporation or for a proper purpose in that he caused PEE to acquire 3,924,545 shares in HIH.
171 The foundational facts relied upon with respect to this offence are:
- Adler was the sole director of PEE;
- Adler was a director of HIH;
- on 15 June 2000 an HIH subsidiary drew a cheque for $10 million in favour of PEE, which Adler acknowledged;
- PEE applied about $3.992 million of the funds received in acquiring HIH shares which it sold about three months later at a loss of $2.121 million;
- at about this time there was a report in The Australian Financial Review of statements allegedly made by Adler that:
"People think I sold out and I've got my money and gone and that's not true ... I want people to know that I'm a committed insurance person.
I'm making a number of statements by buying these shares. It shows I believe in the company and I'm putting my money up which shows I believe in the industry."
172 The applicants contend that these "facts" do not disclose that there was anything untoward about the acquisition by PEE of the shares in HIH, let alone a reckless failure on the part of Mr Adler to exercise his powers and discharge his duties in good faith in the best interests of PEE. I agree that proof of the foundational facts would not make out the offence alleged in par 8(a). The facts alleged fall well short of making out a prima facie case of the commission of that offence. But the statutory test is one of reasonable grounds for suspicion, and it is the satisfaction of the issuing officer as to the existence of those grounds which is relevant. An issuing officer could properly form the view that there are reasonable grounds to suspect the commission of an offence on the basis of materials falling well short of a prima facie case: Hussien v Cam (supra) at 948; Grollo v MacAuley (supra) at 542. It is only if the issuing officer could not lawfully be satisfied that there are reasonable grounds for suspecting the matters earlier referred to that the warrant would be invalid and would thus be set aside: Puglisi v Australian Fisheries Management Authority (1997) 148 ALR 393 per Hill J. At 398 his Honour said:
"... the requirement is that the sworn complaint should contain sufficient facts to show that there are reasonable grounds for the suspicion to which s 3E of the Crimes Act refers. As George v Rockett makes clear, there is a distinction between suspicion and belief. The former is 'a state of conjecture or surmise where proof is lacking'. As is said at 115 of the CLR report 'the facts which can reasonably ground a suspicion may be quite insufficient reasonably to ground a belief, yet some factual basis for the suspicion must be shown'."
173 Given the "facts" that funds were obtained by PEE from HIH which were used by PEE to acquire shares in HIH which substantially decreased in value within a short space of time, it cannot be said that it was not open to the issuing officer to form the opinion which he did.
174 Paragraph 8(b) of the third condition of the Williams warrant alleges an offence against s 999 of the Corporations Law, namely that between 19 June 2000 and 21 June 2000 Adler made a statement, namely that he was buying HIH shares, that was materially misleading which was likely to induce the purchase of shares in HIH by other persons when he knew that the statement was materially misleading in that he was not personally purchasing the shares.
175 The foundational facts relied upon with respect to this offence are:
- between 19 June and 21 June Adler did not himself purchase any shares in HIH. The only shares in HIH acquired during that period in which Adler had a relevant interest were the shares acquired by PEE;
- the report in The Australian Financial Review earlier referred to.
176 Suspicion can take into account matters that could not be put in evidence at all: Hussien v Cam (supra) at 949. The applicants submit that the allegation concerning s 999 "appears to be based on a newspaper article! There is no basis for suspecting the alleged offences."
177 It was open to the issuing officer to accept the contents of the newspaper article as apparently truthful. It was open to the issuing officer to form the opinion which he did upon the basis of the facts alleged in the application.
178 Paragraph 8(c) of the third condition of the Williams warrant alleges an offence against s 184(1) of the Corporations Law, namely that on 26 September 2000 Adler, being a director of PEE was reckless and failed to exercise his powers and discharge his duties in good faith in the best interests of the corporation or for a proper purpose in that he caused PEE to acquire from Adler Corporation shares in Nomad.
179 The foundational facts relied upon with respect to this offence are:
- Adler was at relevant times a director of Adler Corporation and sole director of PEE;
- The Nomad shares were sold by Adler Corporation to PEE on 26 September 2000 at the same price as Adler Corporation paid to acquire those shares on 2 August 1999;
- there was a negative cash balance of about $6 million in Nomad as at 31 May 2000 with a forecast of a further deterioration in the cash balance position by 30 June 2000;
- an initial public offering was proposed to raise further capital was cancelled on 20 July 2000 because of the "continuing negativity of the stockbroking and investment community";
- in January 2000 Nomad was placed into insolvency administration.
180 The applicants complain that the only information provided to the issuing officer is the fact of the investment and that its value may have declined. There is no probative information or factual basis for the suspicion of the offences. Further, Mr Hammerschlag submitted that the conduct referred to in the application for the warrant is that of Adler Corporation Pty Ltd; no act or omission on the part of Mr Adler is alleged.
181 Mr Adler was the sole director of PEE. It was open to the issuing officer to conclude that there were reasonable grounds to suspect that Mr Adler had himself been involved in the transaction. The material in the application is capable of supporting a reasonable suspicion that between the date of acquisition of the shares in Nomad by Adler Corporation, and the date of the acquisition of those shares by PEE, the financial position of Nomad had substantially deteriorated to the knowledge of Mr Adler thus founding an inference that Mr Adler had committed an offence against s 184(1).
182 Paragraph 8(d) and (f) of the third condition of the Williams warrant allege further contraventions of s 184(1) in relation to the acquisition by PEE from Adler Corporation of shares in dstore and Planet Soccer. The applicant submits that the only information given is the fact of the investment and that its value may have declined. The point is also taken that the conduct referred to is not that of Mr Adler, rather it is that of Adler Corporation. The applicants' claims in this respect fail for similar reasons to those given in relation to the acquisition of shares in Nomad. In addition, it was open to the issuing officer to take into account a pattern of conduct, if he perceived one, under which Adler Corporation disposed of shares in three companies to PEE at cost even though the material suggested a substantial deterioration in the financial position of the company to the knowledge of Mr Adler in the meantime.
183 Paragraph 8(e) of the third condition alleges an offence against s 184(2) of the Corporations Law, namely that on 25 July 2000 Adler, being a director of PEE, used his position, dishonestly and recklessly as to whether the use may result in himself, Morehuman or Salman Ghassan Bayni obtaining an advantage in that he caused PEE to lend $160,000 to Morehuman.
184 The foundational facts relied upon with respect to this offence are:
- on 25 July 2000 PEE advanced the sum of $160,000 to Morehuman for three weeks for short term working capital requirements;
- repayment of the loan was guaranteed by Ghassan Bayni but was otherwise unsecured;
- Mr Adler and Mr Bayni were directors of Morehuman;
- the loan has not been repaid despite a request for repayment on 24 August 2000.
185 The foundational facts in relation to this offence are thin. However, particularly as a pattern of conduct is relied upon as the basis for drawing the relevant inferences, it cannot be said that it was not open to the issuing officer to form the opinion which he did in relation to these events.
186 Paragraph 8(g) of the third condition of the Williams warrant alleges an offence against ss 588G and 1317FA of the Corporations Law, namely that between 1 July 1998 and 12 March 2000 Williams and the other directors of HIH recklessly and dishonestly and intending to gain an advantage for HIH failed to prevent HIH incurring debts when at the time such debts were incurred HIH was insolvent and Williams and the other directors of HIH suspected that HIH was insolvent or would become insolvent as a result of incurring those debts. Paragraph 8(h) of the third condition alleges similar offences, taking into account legislative amendments, but in relation to the periods 13 March 2000 to 15 December 2000, and 13 March 2000 to 15 March 2001.
187 The foundational facts relied upon in relation to this offence are:
- an internal memorandum by the auditors of the HIH Insurance Group to the effect that underwriting losses for the group were sustained in each of the years ended 31 December 1995 up to and including 31 December 1998, rising from $7.4 million in 1995 to $73.4 million in 1998. The underwriting loss for the 18 months ended 30 June 1999 was $173.7 million;
- the memorandum reported negative cash flow from operations of $48.6 million for the period ended 31 December 1998 and $341 million for the 18 month period ended 30 June 1999;
- the provisional liquidator of HIH has given an early estimate of the total deficiency for HIH and seventeen of its subsidiaries in the range of $2.7 billion to $4 billion;
- the auditor's memorandum records that HIH had positive operating cash flows for the years ended 31 December 1995, 1996 and 1997 and that HIH had produced a total insurance profit for the 18 month period ending 30 June 1999. Whether the reference to HIH is a reference to the parent company alone, or to the group, is perhaps unclear.
188 The applicants contend that the figures given were group figures; the only other information is that after the event an "early estimate" of the total deficiency for the entire group as at 15 June 2001 is given; none of the elements of s 588G of the Corporations Law are addressed for HIH, yet the suspected offences are with respect to HIH.
189 Again, proof of the foundational facts would be insufficient to establish the offence alleged, and it is pellucidly clear that it is the insolvency of HIH which has to be established, rather than that of some "group" of which it forms part. The position of the group could, however, be relevant to, although not necessarily determinative of, the solvency of HIH itself.
190 Proof of the following matters is required in order to secure a conviction for this offence:
- that HIH was insolvent in the relevant period;
- that Adler and Williams suspected this was so;
- that they nonetheless acquiesced in HIH incurring debts in the relevant period;
- recklessly and dishonestly and intending to gain an advantage for HIH.
191 It would be open to the issuing officer to infer that Messrs Adler and Williams were aware of the matters in the auditor's memorandum. The continuing and escalating underwriting losses sustained by the group and the escalation in the negative cash flows experienced by the group could provide a reason to suspect that HIH was itself insolvent during the relevant period. It is obvious that HIH continued to incur debts in that period and that the Board at least acquiesced in HIH's continued trading. Those matters could provide reason to suspect that the HIH Board acted dishonestly and intending to gain an advantage for HIH in allowing it to continue to trade whilst insolvent.
192 It may be that the suspicions held by the applicant for the warrant in relation to this or other suspected offences will turn out not to have been well founded. Documents seized pursuant to the search warrants might themselves establish this to be so. But the requirement is only that the issuing officer be satisfied that there be reasonable grounds for suspecting - a requirement which may be satisfied even though it may later emerge that the suspicions were not well founded.
193 Paragraph 8(i) of the third condition of the Williams warrant alleges an offence against s 184(1) of the Corporations Law, namely that on 15 June 2000 Williams and Adler, being directors of HIH, were reckless and failed to exercise their powers and discharge their duties in good faith in the best interests of the corporation or for a proper purpose in that they caused HIH Casualty & General Insurance Ltd ("HIHC") to pay to PEE $10 million.
194 The foundational facts relied upon in relation to this offence are:
- Williams and Adler were directors of HIH at relevant times;
- Williams was a director of HIHC;
- Adler was the sole director of PEE;
- on 15 June 2000 HIHC paid $10 million to PEE, apparently as an unsecured loan;
- by a subsequent trust deed HIH acquired units in the Australian Equities Unit Trust;
- $3.992 million of the funds acquired by HIHC were applied by PEE in the acquisition of HIH shares which substantially decreased in value shortly thereafter;
- HIH's investment guidelines required ratification of this transaction by the investment committee, of which Adler was a member;
- the payment was not approved by the investment committee in accordance with the investment guidelines.
195 Again, proof of the foundational facts would not of itself establish a prima facie case of a contravention of s 184(1) in the respect alleged. But they do provide some factual basis for a suspicion, hence it cannot be said that it was not open to the issuing officer to form the opinion which he did.
196 Paragraph 8(j) of the third condition of the Williams warrant alleges a further offence against s 184(1) of the Corporations Law by Williams and Adler in relation to the acquisition by HIH from HSI of a 49 per cent interest in Ness Security for $17.5 million effective between 1 September 2000 and 31 December 2000.
197 The foundational facts relied upon with respect to this offence include:
- HIH paid $17.5 million to acquire the 49 per cent interest;
- a deal summary sheet signed by Williams and Adler recorded that the NTA (Net Tangible Assets) of 49 per cent of the assets of Ness at the time of purchase was $6.2 million (recorded in the books at a cost of $8.892 million);
- HSI used part of the purchase price to pay off debts of $13 million to HIH;
- this was one of three transactions involving Brad Cooper which caused HIH's internal auditor "some substantial concerns".
198 It is true that the foundational material included a newspaper article, but the submission put on behalf of Mr Williams that: "one has information as to the fact of the purchase and then no other probative information", is an understatement of the position. The foundational material provided reason to suspect that HIH had acquired an investment in Ness Security from HSI at an overvalue, in order to put HSI in funds to discharge liabilities which it owed to HIH. It cannot be said that it was not open to the issuing officer to form the opinion which he did.
199 Paragraph 8(k) and (l) of the third condition of the Williams warrant allege the commission of various offences on the part of Mr Williams in that he dishonestly caused bank accounts of HIH and its subsidiaries to be used for his own private purposes.
200 The foundational facts relied upon in support of these offences consist of a report on the part of HIH's internal auditor which identified transactions in HIH's bank accounts as credits and payments made on behalf of Mr Williams as part of some form of tax planning undertaken by Peter Hunt & Associates who charged HIH $97,654 for professional services being "extensive advice to senior executives".
201 The fact that HIH's internal auditor had raised concerns as to the use of the company's bank accounts for Mr William's private purposes is capable of sustaining a suspicion that Mr Williams was dishonestly using his position as a director to gain an advantage for himself through the use of HIH's accounts for his own private tax planning, and through the payment by HIH of fees to Hunt & Associates in respect of that private tax planning work done on Mr Williams' behalf. I reject the submission put on behalf of Mr Williams that the only information is that money went in and went out when there was some form of tax planning involved, which discloses no factual foundation for a suspicion of contravention of the sections identified.
202 Paragraph 8(m) of the third condition of the Williams warrant alleges an offence against ss 232(2)and 137FA, namely that between 19 August 1999 and 9 September 1999 Williams and other directors of HIH knowingly and dishonestly and intending to gain an advantage for HIH failed to act honestly in the discharge of their duties of their office in that they improperly accounted for a reinsurance agreement with Hannover Re, namely recognising an increase in profits of $60 million.
203 The foundational facts relied upon in support of this offence include:
- on 19 August 1999 HIH entered into a contract with Hannover Re which had the effect of allowing HIH to record a $60 million profit in its accounts for the financial period ended 30 June 1999, those accounts being signed by the directors on 9 September 1999;
- without this transaction HIH would have recorded an operating loss of $2.5 million for the period;
- an auditor from Arthur Anderson, the auditors of the HIH Group, stated during the course of an examination that the Hannover Re contract did not make commercial sense because Hannover Re was entering into a contract where a level of losses was already determined.
204 The question which the issuing officer had to confront was whether, on those facts, there were reasonable grounds for suspecting that HIH directors failed to act honestly by improperly accounting for the reinsurance agreement. There is some force in Mr Beach's submission that there is nothing showing that the contract was not valid and binding, nor are any facts alleged which would enable a conclusion that the transaction did not result in a profit. But the issuing officer had before him information that a post balance date agreement, which did not make commercial sense, was said by the directors to have the effect, apparently retrospectively, of converting what would otherwise have been a loss for the period into a $60 million profit. That material was capable of providing reasonable grounds for a suspicion that the directors had improperly accounted for the reinsurance agreement with Hannover Re, and were dishonest in so doing.
205 Paragraph 8(n) of the third condition of the Williams warrant alleges a similar offence in relation to the improper accounting for a reinsurance agreement entered into with Swiss Re on 21 January 2000.
206 The foundational facts with respect to this allegation include the following:
- on 21 January 2000 HIH entered into a reinsurance contract with Swiss Re under which the premiums payable and recoveries receivable were dependent upon subsequent events;
- a reinsurance recovery of approximately $220 million and a reinsurance premium of $105 million were recognised in HIH accounts. This resulted in the recording of a $115 million profit for the year ended 30 June 2000;
- without this transaction HIH would have recorded an operating loss of $42.2 million;
- the form, nature, and effect of the transaction was similar to the Hannover Re agreement.
207 Particularly having regard to the last matter, it was open to the issuing officer to form the opinion which he did in relation to this transaction.
208 Paragraph 8(m) of the third condition of the Adler warrant alleges an offence against ss 588G and 1317FA of the Corporations Law, namely that between 1 July 1997 and 30 June 1998 Adler and the other directors of FAI recklessly and dishonestly and intending to gain an advantage for FAI failed to prevent FAI incurring debts when at the time such debts were incurred FAI was insolvent and Adler and the other directors of FAI suspected that FAI was insolvent or would become insolvent as a result of incurring those debts.
209 The foundational facts relied upon in relation to this offence are:
- statements by an HIH executive that evidence gathered to date suggests that FAI may well have been insolvent on 30 June 1998;
- HIH paid $300 million to acquire the FAI group, mainly on the basis of the 30 June 1998 accounts. It subsequently emerged that provisions were under-reported to the extent of $55-95 million and that officers of FAI, perhaps including Mr Adler, knew of this;
- At 30 June 2000 HIH recognised a $240 million deterioration in the financial position of FAI, largely in respect of the period prior to acquisition.
210 Mr Hammerschlag SC submits that there is no direct reference to insolvent trading by FAI per se, and no reference to FAI being insolvent before a time immediately before its purchase by HSI, let alone as early as 1997. In Mr Hammerschlag's submission, the only basis for taking this information as applying earlier in time is Mr Unicomb's suspicion.
211 I do not think this is right. The submission overlooks the problem identified with the understatement of the reserves in the FAI financial accounts for the year ended 30 June 1998. In my view, it was open to the issuing officer to form the opinion which he did upon the basis of the facts alleged in the application. That opinion, of course, is only that there are reasonable grounds to suspect, which as I have already indicated, is a low threshold requirement.