Reported Decision : (2001) 19 ACLC 1006 New South Wales Supreme Court CITATION : Aequitas v AEFC [2001] NSWSC 14 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 5532/91 HEARING DATE(S) : 23, 24 & 30 June, 1 & 2 July, 3 August, 1, 20 & 23 September 1999 JUDGMENT DATE : 9 April 2001 Aequitas Limited and Aequitas No.1 Limited (P) PARTIES : Sparad No.100 Limited (formerly Australian European Finance Corporation Limited) (D1) AEFC Leasing Pty Limited (D2) John Gledhill (D3) JUDGMENT OF : Austin J COUNSEL : S Rares SC and N Perran (P) A J Meagher SC and P Brereton (D) SOLICITORS : Cutler Hughes & Harris (P) Holman Webb (D) CATCHWORDS : COMPANY LAW - financial adviser's and promoter's fiduciary duties - directors' duties - breach of duty - EQUITY - negative content of fiduciary duties - remedies for breach of fiduciary duties - where rescission not available - equitable compensation for causally connected but unforeseeable losses - PRINCIPAL & AGENT - secret commission - ingredients - element of inducement - knowledge by principal, where principal is a fledgling company controlled by promoters LEGISLATION CITED : Fair Trading Act (NSW) 1984, ss 42, 68 Trade Practices Act (Cth) 1974, ss 52, 82 Alati v Kruger (1955) 94 CLR 216 AM Spicer & Son Pty Ltd (In Liq) v Spicer (1931) 47 CLR 151 Anderson's (Pacific) Trading Co Pty Ltd v Karlander New Guinea Line Ltd [1980] 2 NSWLR 870 Armstrong v Jackson [1917] 2 KB 822 Astley v Austrust Ltd (1999) 73 ALJR 403 Attorney-General for Hong Kong v Reid [1994] 1 AC 324 Australian Breeders Co-operative Society Ltd v Jones (1997) 150 ALR 488 Barnes v Addy (1874) LR 9 Ch App 244 Beach Petroleum NL v Johnson (1993) 115 ALR 411 Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 Bernard Elsey Pty Ltd v Commissioner of Taxation (1969) 121 CLR 119 Bonds & Securities (Trading) Pty Ltd v Glomex Mines NL [1971] 1 NSWLR 879 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 Breen v Williams (1986) 186 CLR 71 Brickenden v London Loan & Savings Co [1934] 3 DLR 465 Briginshaw v Briginshaw (1938) 60 CLR 336 Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129 Chan v Zacharia (1984) 154 CLR 178 198 Citicorp Australia Ltd v O'Brien (1996) 40 NSWLR 398 Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285 Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 Cook v Deeks [1916] 1 AC 554 Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 370 Derry v Peek (1889) 14 App Cas 337 Duke Group Ltd (in liq) v Pilmer (1999) 31 ACSR 213 Elders Trustee and Executor Co Ltd v EG Reeves Pty Ltd (1987) 78 ALR 193 Emma Silver Mining Co Ltd v Lewis & Son (1879) 4 CPD 396 Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 Ex parte James (1803) 8 Ves Jn 337 Farrington v Rowe McBride & Partners [1985] 1 NZLR 83 Federal Supply & Cold Storage Co of South Africa v Anghern & Piel (1910) 80 LJ(PC) 1 Ford v Andrews (1916) 21 CLR 317 Furs Ltd v Tomkies (1936) 54 CLR 583 Gibson v Jeyes (1801) 6 Ves Jn 266 Gluckstein v Barnes [1900] AC 240 Gray v New Augarita Porcupine Mines [1952] 3 DLR 1 Hamilton v Whitehead (1988) 166 CLR 121 Hawkins v Clayton (1988) 164 CLR 539 Haywood v Roadknight [1927] VLR 512 Henderson v Merrett Syndicates Ltd [1994] 3 WLR 761 Herron v McGregor (1986) 6 NSWLR 246 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 CASES CITED : Hovenden & Sons v Millhoff (1900) 83 LT 41 Humphris v Jenshol (1997) 160 ALR 107 Imperial Mercantile Credit Association v Coleman (1873) LR 6 HL 189 In re a Solicitor; Ex parte Incorporated Law Society [1894] 1 QB 254 Jacobus Marler Estates v Marler (1913) 85 LJPC 167n JC Houghton & Co v Nothard, Lowe & Willis Ltd [1928] AC 1 Jones v Dunkel (1959) 101 CLR 297 Ladywell Mining Co v Brookes (1887) 35 ChD 400 Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 Lamb v Cologno (1987) 163 CLR 1 Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 Liquidators of Imperial Mercantile Credit Association v Coleman (1873) LR 6 HL 189 Livingston v Rawyards Coal Co (1880) 5 App Cas 25 Maguire v Makaronis (1997) 188 CLR 449 Mayor & c of Salford v Lever [1891] 1 QB 168 McInerney v McDonald [1992] 2 SCR 138 McPherson v Watt (1877) 3 App Cas 254 Nocton v Lord Ashburton [1914] AC 932 Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1 O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 Panama & South Pacific Telegraph Company v India Rubber Gutta Percha & Telegraph Works Co (1875) LR 10 Ch App 515 R v Byrnes (1985) 183 CLR 501 R v Ghosh [1982] QB 1053 Re Hampshire Land Co [1896] 2 Ch 743 Re Kape Breton Co (1885) 29 ChD 795 Re Morvah Consuls Tin Mining Company (McKay's Case) (1875) 2 ChD 1 Rejfek v McElroy (1965) 112 CLR 517 Richard Brady Franks Ltd v Price (1937) 58 CLR 112 Royal Brunei Airlines v Tan [1995] 2 AC 379 Salomon v Salomon [1897] AC 22 Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 Spence v Crawford [1939] 3 All ER 271 T Mahesan S/O Thambia v Malaysia Government Officers' Co-operative Housing Society Ltd [1979] AC 374 Target Holdings Ltd v Redferns [1996] 1 AC 421 Tesco Supermarkets Ltd v Nattrass [1972] AC 153 Tracy v Mandalay Pty Ltd (1953) 88 CLR 215 United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 182 CLR 102 Wagon Mound (No 1) [1961] AC 388 Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 Warman International Ltd v Dwyer (1994) 182 CLR 544 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 White v Jones [1995] 2 WLR 187 DECISION : See last two paragraphs. INDEX Introductory outline Paragraphs 1-13 Evidentiary difficulties 14-22 The formation of AEFCAS and its relationship with AEFC 23 The joint venture agreement 24-28 The retainer of AEFCAS to provide corporate advice to the Rendell group 29-32 The acquisition by AEFC Leasing of 74.8% of the shares in Rendell Industries 33 Development of the restructuring proposal 33-38 AEFC agrees to the proposal 39-40 Implementation of the proposal 41-45 Documentation of the purchase by AEFC Leasing 46-49 The consideration supplied by AEFC Leasing 50-51 The acquisition and starting up of Aequitas and Aequitas No 1 52 Mr Gledhill's strategy for AEFC 52-58 The formation of Aequitas and Aequitas No 1 59-62 Early decisions 63-67 Did Aequitas retain the joint venture for advisory work, and if so, what was scope of the retainer? 68-86 The acquisition by Aequitas No 1 of the 74.8% shareholding in Rendell Industries 87 Calculations of purchase price 88-90 AEFC's decision to sell to Aequitas No 1 91-100 Settling the text of the sale of shares agreement 101-104 The sale of shares agreement 105-107 The role of Law & Milne 108-114 Payment of $69,400 to CASO as a 'commission' 115 The financial difficulties of the Rendell group during the period from 3 October 1985 to 1 April 1986 116-121 The financial crisis of December 1985 122-129 AEFC declines to re-negotiate the deficiency guarantee 130-132 The Turner report 133-135 AEFC's information about Rendell in December 1985/January 1986 136-145 Rendell's further decline in February/March 1986 146-152 The private placement of shares in Aequitas 153 Planning for capital raising 153-158 The Aequitas private placement memorandum 159-166 Fundraising under the private placement memorandum 167-173 Mr Gledhill's report of April 1986 and the formation of AEFC Equities 174-179 Consequences of AEFC's decision not to invest in Aequitas No 1 180-182 The capitalisation and preparations for listing of Rendell Industries 183 The issue of shares to Rendell employees 183-188 Private placement of Rendell shares and options 189-191 The Pond Report and Mr Pond's appointment as executive chairman 192-199 Planning for the flotation of Rendell Industries, and the rights and options issue 200-209 Difficulties between Mr Pond and Mr Griffin 210-212 The listing of Rendell Industries 213-218 The failure of the Rendell group 219-229 Responses to the Rendell failure within AEFC 230 Enforcement of AEFC's security over Rendell assets 231-236 Termination of the joint venture and dissolution of AEFCAS 237-244 Internal review of AEFC procedures 245-250 The effect of Rendell's failure on Aequitas and Aequitas No 1 251-256 Claims and legal proceedings 257-260 What did AEFC and AEFCAS know about the financial plight of Rendell group at the time of the purchase of shares by Aequitas No 1, and the issue of the Aequitas private placement memorandum? 261-275 The plaintiffs' causes of action 276-277 The content of fiduciary duties 278-288 Whose informed consent would avoid breach of fiduciary duty by AEFC and AEFC Leasing? 289-290 Discharge of the duty by informed consent 291-295 Can the knowledge and consent of Messrs Mullins and Rees be attributed to Aequitas and Aequitas No.1 296-306 Breach of the fiduciary duty of financial advisers 307 The scope and nature of the duty 307-310 To whom was the duty owed? 311 Who owed the duty? 312-320 The content of the fiduciary duty, and the breaches of duty 321-322 Disclosure and informed consent 323-325 Breach of the fiduciary duties of directors of Aequitas and Aequitas No 1 326 Breaches of duty by Mr Mullins and Mr Rees by their overall conduct 327-334 Breach of duty by Mr Mullins' failure to disclose $69,400 commission 335-340 Conclusions as to breach of directors' duties 341 Breach of the fiduciary duty of promoters 342 The fiduciary duty of promoters 343-345 Identifying the promoters 346-362 Conclusions as to breach of directors' duties 363 Secret commissions (bribes) 364-366 The nature of a bribe 367-370 Were bribes given in the present case? 371-377 Conclusions as to bribes 378-379 Remedies in respect of bribes 380-382 Liability for knowing involvement in breaches of equitable duties 383-404 Fraudulent misrepresentation and misleading or deceptive conduct 405-409 Conspiracy 410-412 Breach of contract 413-420 Negligence 421-422 Measure of recovery 423-424 Rescission 425-433 The plaintiffs' losses 434-439 Account of profits 440 Measure of recovery at common law and in equity 441-456 Interest 457-464 Exemplary damages 465-466 Conclusions 467-468 THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION AUSTIN J MONDAY 9 APRIL 2001 5532/91 AEQUITAS LIMITED & ANOR V SPARAD NO.100 LIMITED (FORMERLY AUSTRALIAN EUROPEAN FINANCE CORPORATION LIMITED) & 2 ORS JUDGMENT HIS HONOUR: Introductory outline 1 Australian European Finance Corporation Ltd ('AEFC') was a merchant bank, owned at all relevant times by the Commonwealth Bank of Australia (51%) and some foreign banks (Banque Nationale de Paris as to 19%, Banca Nazionale del Lavoro as to 15% and Dresdner Bank AG as to 15%). Its general manager and principal executive officer, at all relevant times, was Mr J B Gledhill, who was also a director. In 1984 AEFC entered into a joint venture agreement with Corporate Advisory Services (Operations) Pty Ltd ('CASO'), a company controlled by Mr G E Mullins, to conduct the business of providing corporate advisory services. Under that agreement a company called AEFC Advisory Services Pty Ltd ('AEFCAS'), owned by AEFC (51%) and CASO (49%), was constituted as the manager of the joint venture business on behalf of the venturers. 2 During 1985, following deregulation of the Australian financial markets, AEFCAS (and through it, the joint venture) became involved in a series of transactions relating to the affairs of a building group, the Rendell group. Three of the main individuals involved in the affairs of AEFCAS and the joint venture were Mr Mullins, Mr G L Rees and Mr RG Porteous. During the period between May 1985 and August 1986, Mr Mullins was a director of AEFCAS, Mr Rees was a consultant to AEFCAS and Mr Porteous was a director of AEFCAS. Mr Gledhill, the general manager of AEFC, was a director of AEFCAS, and was also a director of AEFC Leasing Pty Ltd, a wholly-owned subsidiary of AEFC. Mr Mullins, Mr Rees and Mr Porteous were not directors or employees of AEFC, and had no financial interest in AEFC. 3 In July 1985 the joint venture (through AEFCAS) was retained by the Rendell group, then privately owned by the Rendell family, to assist with the restructuring of Rendell's finances. It advised that the Rendell group's interest-bearing debt should be replaced with equity. In October 1985, in consequence of that advice, a company called Rendell Industries Ltd acquired control of the Rendell group from the Rendell family, and AEFC Leasing became the owner of 74.8% of the shares of Rendell Industries. The cash consideration which AEFC Leasing provided for those shares was $250,000. Additionally it was said to have 'procured' AEFC to provide a deficiency guarantee to the ANZ Bank so as to allow the cancellation of some personal guarantees given by the former owner of the Rendell group, and to provide finance facilities to the Rendell group. 4 Mr Mullins became chairman and a director of Rendell Industries, as well as a director of the main operating company, Rendell Industries (Holdings) Pty Ltd ('RIH') . Mr Rees became a director of Rendell Industries, and the deputy general manager of AEFC, Mr J N Gallois, became a director of RIH. 5 The idea was conceived that Aequitas, originally a shelf company, would become a listed company, which would (through a subsidiary eventually known as Aequitas No 1) make investments introduced to it by the joint venture. It is not clear whether the idea came from Mr Mullins, Mr Rees or Mr Gledhill, but it was developed in discussions and memoranda by all three of them. The selected investments were intended to be desirable investments of a kind too risky to meet the prudential guidelines under which AEFC had to work as a merchant bank. 6 Prior to 16 October 1985, Mr Mullins was the managing director and Mr Rees was a director of Aequitas. From 16 October 1985 Mr Rees was managing director and Mr Mullins continued as a director. Messrs Mullins and Rees and their wives were directors of Aequitas No 1. 7 As it happened, the first and only investment made by Aequitas, through its wholly-owned subsidiary Aequitas No 1, was the acquisition of AEFC Leasing's 74.8% shareholding in Rendell Industries. The purchase price was $960,000, the agreement for purchase being made on 25 November 1985. Of that purchase money $50,000 was to be 'passed through the joint venture accounts'. The plaintiffs say this was a secret commission. 8 Subsequently arrangements were put in place, principally by Mr Rees and Mr V M Kelly (Senior Manager Project Finance, AEFC) acting under the guidance of Mr Gledhill, for shares in Aequitas to be distributed by stockbrokers Bache Cortis & Carr ('Bache'), using a private placement memorandum. Sufficient funds were raised to permit settlement of the purchase of the Rendell Industries' shares to take place on 1 April 1986. AEFC Leasing made a profit of $710,000 (less the $50,000 fee to AEFCAS and some interest costs) on the transaction, having bought the shares for $250,000 in October 1985. AEFC agreed to pay a commission of $69,400 to CASO on receipt of the $960,000. The plaintiffs say this was another secret commission. 9 In June 1986 Rendell Industries was floated on the second boards of the Sydney and Melbourne Stock Exchanges. Very shortly afterwards, its managing director, Mr Griffin, resigned. By August 1986 the Rendell group was clearly insolvent and AEFC appointed a receiver to assets of Rendell Industries. Subsequently the Rendell group failed and Aequitas' shareholding was valueless. The plan for stock exchange listing of Aequitas was abandoned. Amidst recriminations, AEFCAS was dissolved, to prevent it from becoming a defendant in legal proceedings. 10 By a statement of claim filed in 1991 and subsequently amended several times, Aequitas and Aequitas No 1 have sought relief against AEFC (which subsequently changed its name to Sparad (No 100) Ltd), AEFC Leasing and Mr Gledhill. They seek to rely on causes of action based on: the fiduciary duties of financial advisers; directors and promoters; secret commissions; fraudulent misrepresentation; misleading and deceptive conduct; conspiracy; negligence; breach of contract; and (in the case of AEFC Leasing and Mr Gledhill) liability for knowing involvement in breaches of equitable duties. 11 Much of the hearing time was taken up by the submissions of the parties on questions of law relating to the scope and application of the various causes of action asserted by the plaintiffs. The availability of these causes of action depends on a close analysis of the facts. 12 I shall first make some observations about evidentiary difficulties that have arisen in the case. I shall then make my findings of fact under the following headings: · the formation of AEFCAS and its relationship with AEFC; · the retainer of AEFCAS to provide corporate advice to the Rendell group; · the acquisition by AEFC Leasing of 74.8% of the shares in Rendell Industries; · the acquisition and starting up of Aequitas and Aequitas No 1; · the acquisition by Aequitas No 1 of the 74.8% shareholding in Rendell Industries; · the financial difficulties of the Rendell group during the period from 3 October 1985 to 1 April 1986; · the private placement of shares in Aequitas; · the capitalisation and preparations for listing of Rendell Industries; · the listing of Rendell Industries; · the failure of the Rendell group; · responses to the Rendell failure within AEFC; · the effect of Rendell's failure on Aequitas and Aequitas No 1; and · claims and legal proceedings. 13 I shall then analyse and apply the law with respect to each of the causes of action relied upon by the plaintiffs. Evidentiary difficulties 14 The case was heard over a relatively short time. Very few affidavits were read and oral evidence was given only by Mr Gledhill. The defendants did not call Mr Kelly or Mr Gallois, who were officers of AEFC involved in the affairs of the Rendell group and the Aequitas companies. It appears that Mr Gallois is in Egypt and the absence of evidence from him can therefore be explained. However, the evidence indicates that Mr Kelly is in Sydney and could have been called. I infer from the facts that his evidence would not have assisted the defendants' case: Jones v Dunkel (1959) 101 CLR 297. 15 The position of Messrs Mullins and Rees has given me some concern. They were central players in the affairs of the parties and the Rendell group. Inevitably I must make findings with respect to their conduct. In the nature of this case, my findings must relate to questions of propriety and honesty, as well as prudence. Their conduct has been trenchantly criticised by the plaintiffs, and it has not been in the interests of the defendants to protect or defend them. They are not parties to the present proceedings. However, they are defendants in proceedings 5874 of 1991, in which the defendants in the present proceedings seek to protect themselves by claiming recovery against Messrs Mullins and Rees in the event that I find them to be liable. They have not given evidence in the present case, but given the allegations made against them by the present defendants as plaintiffs in the other proceedings, it is not surprising that they have not been called. They are likely to be seriously prejudiced, in a practical sense, by the findings I shall make against them, even though my findings will not set up any res judicata or estoppel against them. In these circumstances, I have tried to limit my findings against Messrs Mullins and Rees to the matters necessary to be determined for the purposes of the present case. 16 Serious allegations have been made by the plaintiffs against Mr Gledhill, including allegations of dishonesty and participation in fraud. These are archetypally circumstances in which one must bear in mind Dixon J's explanation of the standard of proof in Briginshaw v Briginshaw (1938) 60 CLR 337, 362-3. This is a case where the seriousness of the allegations made, and the gravity of the consequences flowing from a finding against Mr Gledhill, are considerations that affect the question whether the issue has been proved to the Court's reasonable satisfaction. As his Honour said, in such matters 'reasonable satisfaction' should not be produced by inexact proofs, indefinite testimony, or indirect inferences. In some older cases, it was said that allegations of fraud must be 'clearly' proved: for example, Panama and South Pacific Telegraph Co v India Rubber, Gutta Percha and Telegraph Works Co (1875) 10 Ch App 515, 530. The High Court explained such observations in Rejfek v McElroy (1965) 112 CLR 517, 521, observing that 'the 'clarity' of proof required, where so serious a matter as fraud is to be found, is an acknowledgment that the degree of satisfaction for which the civil standard of proof calls may vary according to the gravity of the fact to be proved'. 17 Mr Gledhill gave affidavit and oral evidence. I do not accept his evidence on certain specific points, as I shall indicate during the course of this judgment. My overall impression of Mr Gledhill in the witness box is that he was not consciously dishonest, rather that he had a strong conviction of his innocence in a moral sense of the charges made against him. His recollection of events was highly selective - for example, he clearly recollected an approach by Mr Mullins for purchase of the Rendell Industries shares in November 1985 and what he said in that approach, and he recalled telephoning Mr Griffin to discuss the proposal, and yet he cannot recall why he agreed to the payment of $69,400 to CASO after having already agreed to a commission of $50,000 to AEFCAS. This selective recollection of events appears to have operated, conveniently, in Mr Gledhill's favour. 18 His evidence brings to mind some remarks on the psychology of recollection by Street CJ, in his Report of the Royal Commission of Inquiry into Certain Committal proceedings against K. E Humphreys (July 1983): 'In the intervening five or six years, rumours waxed and waned. In some cases suspicion underwent subtle change to belief, which itself progressed to reconstruction, which in turn escalated to recollection. No presently stated recollection could be safely assumed not to have progressed upwards and not to be the product of one of these earlier stages. The sheer frailty of human memory of necessity required a most anxious and critical appraisal of the evidence of the witnesses, no matter how credit-worthy they might be. It became apparent that in the years since August 1977 the recollections even of those with undoubted first-hand knowledge have in some instances faded, in some instances fermented, and in some instances expanded. Moreover, in many cases the realisation of the significance - indeed, the enormity - of what had occurred has tended to transmute into a more or less cynical acceptance of what had, or was believed or rumoured to have, taken place.' 19 In the present case, I believe that Mr Gledhill's steady conviction about his own innocence fermented to reconstruction, which in turn escalated to selective recollection. I therefore regard his evidence as having little weight, compared with the documentary evidence which, to a substantial degree, speaks for itself. 20 A great deal of documentary evidence was adduced. The plaintiffs' case relies on those documents and invites the Court to construe them and make inferences favourable to their contentions. The Court is asked to reconstruct from the documents evidence which occurred about 15 years ago. The plaintiffs' delay of nearly five years in commencing proceedings, and the further delay of over eight years between the commencement of the proceedings and the hearing, have not been fully explained. (I shall return to this point when considering the availability of interest.) The delays have made my task a difficult one. 21 Courts have frequently warned about the risk of prejudice and injustice that delay in bringing proceedings to hearing may create. For example, in Herron v McGregor (1986) 6 NSWLR 246, McHugh JA described the consequences of delay in these words: 'Memories fade. Relevant evidence becomes lost. Even when written records are kept, long delay will frequently create prejudice which can never be proved affirmatively.' He warned that in some cases delay may simply make it impossible for justice to be done. 22 The difficulties presented by such a long delay between the events and the hearing should not be understated. However, in the present proceedings the Court's findings are less dependent on the recollections of witnesses, and therefore the frailties of human memory, than is commonly the case. Although some of the documents are ambiguous, the Court at least has before it, in the documents, the actual words that were used so many years ago. That being so, it appears that it is possible to do justice notwithstanding the long delay, by a process of reconstruction of past events on the basis of and by inference from the documents, and such other evidence as is credible. Except to the extent that claims may be statute barred, I see no ground for preventing the plaintiffs from making out their case simply by reason of the delay. The formation of AEFCAS and its relationship with AEFC 23 Prior to May 1984, Mr Mullins and others carried on business in the field of corporate advisory services under the registered firm name of 'Corporate Advisory Services'. Their business was acquired at that time by their company, CASO. On 9 May 1984 CASO entered into a joint venture agreement with AEFC and with the company that was to be the manager of the joint venture business, which changed its name to AEFCAS. The agreement recited that AEFC was desirous of becoming involved in the field of corporate advisory services and believed that because of its reputation and standing it could influence and direct business. The agreement established an unincorporated joint venture between AEFC and CASO ('the venturers'), managed by AEFCAS. The joint venture agreement 24 Some of the key provisions of the joint venture agreement were as follows: (i) the assets of the corporate advisory business would be owned by the venturers in the proportions, 51% to AEFC and 49% to CASO; (ii) the venturers would own the issued share capital of AEFCAS in those same proportions, but the board of AEFCAS would reflect equal representation of the venturers and all decisions of the manager would require unanimity; (iii) the benefits and obligations of the venturers would be separate rather than joint and several; (iv) the annual income of the joint venture would be shared between the venturers according to a formula, under which AEFC would receive certain priority payments and the remainder of the income would be apportioned in bands, in a ratio which varied from 60% (AEFC) to 40% (CASO) for the lowest band, to 80% and 20% for the highest band; (v) CASO would provide to the joint venture the services of Mr Mullins and certain others (including, as it happened, the services of Mr Rees as a consultant), and would pay their remuneration; (vi) AEFC would pay CASO $50,000 for the goodwill of the advisory business and would pay a monthly amount to CASO as consideration for CASO providing the full-time services of Mr Mullins and others; (vii) AEFC would also pay the reasonable and proper expenses of the joint venture and provide office accommodation and equipment; (viii) the venturers appointed AEFCAS to act as manager, agent and nominee for them for the purposes of the business, and AEFCAS undertook to provide such agency services as it might be directed by both venturers to provide, and the venturers jointly and severally indemnified AEFCAS in respect of losses which might arise in connection with its management; (viii) AEFCAS would hold all property assets that came to it, as manager for the venturers as beneficial owners in proportion to their holdings of its issued share capital; and (ix) the chief executive of AEFCAS would have no power to enter into any contract on behalf of AEFCAS or bind it in any manner, except as may be authorised by resolution of the board of AEFCAS. 25 The joint venture agreement provided for six directors of AEFCAS, with three representing each venturer. The board initially comprised Mr Gledhill (chairman), Mr C E Peysson and Mr C W Gallagher (for AEFC), and Mr Mullins, Mr R G Porteous and Mr K S McMorrine (for CASO). 26 The full-time services of Mr Mullins and Mr Porteous were provided by CASO under the joint venture agreement, 'for purposes of the [corporate advisory] Business and the Joint Venture'. Mr Rees was not a director of AEFCAS, but was a consultant whose services were provided in the same way by CASO under the agreement. Mr Mullins, Mr Porteous and Mr Rees performed their services for the joint venture, rather than for AEFCAS as manager. This is a point of some importance, as I shall explain later. 27 The directors' report of AEFCAS for the year ended 30 June 1986 records that the principal activity of the company was to act as manager, agent or nominee for the purposes of the joint venture for the provision of corporate advice, and that the company had not carried out any operation other than as manager of the joint venture. I infer, therefore, that contractual commitments undertaken by AEFCAS were joint venture commitments, assuming that AEFCAS had the requisite authority of the venturers. 28 At some time late in 1985 or early in 1986, the management of the joint venture prepared a lengthy document entitled 'Proposed Restructuring & 1986 Corporate Plan'. The document reviewed the operations of AEFCAS as manager of the joint venture, after the acquisition of shares in the Rendell group and their subsequent sale to Aequitas. Management recommended to Mr Gledhill that some changes be made to the joint venture agreement, particularly relating to the remuneration of senior executives of the joint venture and the relationship between AEFCAS as manager of the joint venture and the Project Finance Division of AEFC. It was suggested that AEFCAS should contact private clients of AEFC to interest them in equity investment opportunities and that AEFCAS should broaden its activities in various ways, including an extension to underwriting. These proposals led to a written agreement dated 13 March 1986, which varied the joint venture agreement, principally with respect to the distribution of profits. The retainer of AEFCAS to provide corporate advice to the Rendell group 29 The Rendell group was a private corporate group owned by interests associated with Mr Norman Rendell. In late 1984 and 1985 the group was looking for assistance to overcome what management perceived to be a liquidity problem produced by rapid growth of the group's business. The board had prepared a document entitled 'A Blue Print for Survival & Growth' in November 1984. That and other documents were supplied to AEFCAS. The 'Blue Print' identified a pressing need to rearrange the borrowing structure of the group to lessen the group's dependence on an expensive secondary line of credit. 30 The Rendell group had attained valuations of a property at 55-57 Halstead Street South Hurstville, owned by one of the group companies. On 20 July 1984 Mr J C Elvy of Finch Freeman Associates Pty Ltd had valued the property on a basic land value and replacement cost basis, at 'in the vicinity of' $1.75 million. He expressed the opinion that if the property was sold and leased back 'the property value could be between $1.9 - $1.95 million'. In October 1984 Baillieu Hardie Gorman Pty Ltd had valued the property 'for mortgage purposes' at $950,000, on behalf of ANZ Mortgage Fund. 31 Mr Mullins and Mr Porteous embarked on discussions with the Rendell group which culminated in a retainer for the joint venture. A letter to AEFCAS from the managing director of RIH, Mr R M Griffin, dated 6 June 1985 proposed to retain the services of AEFCAS as corporate adviser to the Rendell group. According to the letter, 'the principal purpose of the appointment [was] to assist with the restructuring of Rendell's finances, improving its leverage and enabling management participation in equity, to assist management in achieving the Board's corporate strategy …, enabling the company to achieve a Public Listing at an appropriate time'. Mr Mullins responded on behalf of AEFCAS by letter dated 18 July 1985, accepting the appointment and setting out the terms and conditions of the engagement. One of the conditions was that AEFCAS would have the right of first refusal on future fundraising opportunities for the duration of its appointment. 32 On the face of the documents, the entity undertaking to provide corporate advisory services was AEFCAS. However, in contracting to do so, AEFCAS was acting as the agent of the venturers under the joint venture agreement of 9 May 1984. Mr Mullins and Mr Rees, who worked on the Rendell assignment, did so pursuant to their retainer by the joint venture, rather than on behalf of AEFCAS. The principals to the contract for provision of corporate advisory services, apparently not disclosed as such to the Rendell group, were therefore AEFC and CASO. The acquisition by AEFC Leasing of 74.8% of the shares in Rendell Industries Development of the restructuring proposal 33 Mr Mullins and Mr Rees set to work on the joint venture's retainer by the Rendell group over the ensuing weeks. It appears that from the outset, the intention of Mr Mullins and Mr Rees was that AEFC would become financier to, and investor in, the Rendell group. On behalf of the joint venture, Mr Rees negotiated with Mr N Rendell and AEFC, with a view to developing a proposal in which AEFC would take a significant equity position in the Rendell group. Once he had substantially negotiated an agreement in principle with Mr N Rendell, he submitted his proposal in written form to Mr Kelly of AEFC. 34 Mr Rees assessed the business of the Rendell group favourably, observing that it had an unbroken history of increasing profitability until 1981, but subsequently some business errors (principally the funding of construction of a grand new head office from retained earnings) had an impact on results. He proposed that the business be acquired by an entity in which AEFC would have the majority interest. This would be achieved in several steps. 35 First, a new company would be formed, majority owned by interests associated with AEFC. An AEFC entity would subscribe $250,000 by way of share capital and share premiums to the new company. The minority interests in the new company would be associated with existing management of Rendell. When the proposal was eventually taken up and acted upon, the new company was formed which was eventually named Rendell Industries Ltd, although it retained its shelf company name (Janam Holdings) for a while and a different corporate name was envisaged at first. For convenience, I shall refer to the new company, at all stages, as Rendell Industries. Next, Rendell Industries would buy all the issued shares in the holding company of the Rendell group (RIH) for $250,000. The purchaser would assume guarantees to the ANZ Bank that had been given by interests associated with Mr N Rendell. Equity up to $500,000 would be offered to staff on commercial terms. 36 Mr Rees developed the proposal for AEFC to make an equity investment in the Rendell group on the basis of information supplied to him by the Rendell group. One of the documents supplied to AEFCAS upon its appointment was an audited balance sheet for the Rendell group as at 31 March 1985, which gave an excess of assets over liabilities of $ 1,607,000, compared with $796,000 as at 30 June 1985. The difference is explained principally by an upwards revaluation of land and buildings from $1,454,000 to $ 2,454,000 and an increase in bank debt. 37 Some discussion notes dated 16 July 1985, the author of which is not identified, appear to have been prepared as a basis for interesting AEFC in the proposal for it to inject equity capital into the Rendell group. The notes refer to the Rendell group as having a net worth on a going concern basis of $900,000 excluding goodwill, according to the managing director's advice. They appear to assume that an asset liquidation would realise $2,320,000, although no attempt was made to justify that figure. Mr Rees' written submission to Mr Gledhill dated 23 July 1985 stated that according to 'preliminary figures', the group had a minimum going concern value in excess of 3.5 times the initial purchase cost ($250,000). Mr Rees envisaged a revaluation and an equity injection of up to $500,000 by employees, leaving AEFC with 50.5% of the restructured group at a value of $910,000. 38 The existing owners were said to be prepared to sell at $250,000 in order to release the burden of personal guarantees. The proposal noted that the plan was to list the new holding company within 12 months, and this would provide liquidity. The implication of 'liquidity' was that AEFC would be able to sell down its interest in the market. The document noted that, in addition to the potential equity return and advisory fees, lending opportunities would be available to AEFC. AEFC agrees to the proposal 39 Mr Kelly took up the proposal as noted in an internal AEFC memorandum dated 25 July 1985. The memorandum noted that the proposed guarantee of ANZ credit lines would be for an amount of $1.64 million, and that the ANZ credit lines were secured over the freehold property owned by the company which had a book value of $1.9 million and a market value of approximately $2.2 million. These figures are higher than the valuations referred to above. The memorandum noted that the public listing of the company within six to 12 months would provide the opportunity for AEFC to on-sell its shareholding at a profit. This implies that at 25 July 1985, the early on-sale of the shares to be acquired by AEFC was in contemplation, but through the listing of the Rendell group rather than by sale to Aequitas. The memorandum noted that the guarantee would be terminated within 12 months, either through reduction of the ANZ credit lines or through the sale of the freehold to extinguish the ANZ debt. The memorandum estimated that AEFC could expect to recoup conservatively in the range of $910,000 to $1.234 million from the sale of shares on the market. It observed that approval for AEFC's investment in Rendell would probably be required from the Foreign Investments Review Board. 40 Mr Gledhill added some handwritten notes to Mr Kelly's memorandum on the same day. Mr Gledhill noted that the proposal had been discussed with the chairman of AEFC, who was willing for the investment to be handled under management delegated authority. It was noted that approval was given to the investment of $250,000 on the basis proposed by Mr Rees, subject to resolution with Holman Webb (AEFC's solicitors) of the appropriate investment vehicle. Mr Gledhill's note identified a significant problem with the transaction, namely that it would require Foreign Investments Review Board approval because of AEFC's non-Australian status, but evidently Mr Gledhill believed that the need for approval could be avoided if the investment was appropriately structured. Implementation of the proposal 41 Having obtained AEFC's approval to the proposal, Mr Rees and Mr Mullins then went about implementing it. Mr Mullins secured the approval of the Rendell group and the vendors, the interests associated with Mr Norman Rendell. Mr Rees sought and obtained the consent of the ANZ Bank to the conversion of the collateral securities into a 'deficiency guarantee' under which ANZ would agree with AEFC to pursue its other securities first (namely its first mortgage on the South Hurstville property and a first floating charge over the Rendell group assets). He and Mr Kelly contemplated that once the deal had been consummated, further approaches would be made to the ANZ to completely extinguish the guarantee (see Mr Kelly's internal memorandum dated 2 August 1985). 42 Early in August 1985 AEFC provided the Rendell group with unsecured short-term financial accommodation of $350,000 to reduce its ANZ overdraft, because the group was experiencing 'liquidity problems'. The facility was provided on the basis that it would be repaid from the proceeds of the issue of Rendell shares to staff, which was anticipated to take place no earlier than late August 1985. Mr Kelly's internal memorandum dated 2 August 1985, which recommended that the facility be granted, calculated that with the additional loan AEFC's exposure to the Rendell group by way of equity investment, loan and guarantee would be $1,171,000. This was on the basis that the borrowings guaranteed to ANZ stood at $2,171,000 and the maximum realisation of the Hurstville freehold under a forced sale would be $1,600,000. Evidently Mr Kelly did not rely on a formal valuation for his estimate of realisation on a forced sale, using instead the book value of the freehold, then recorded as $2 million, and allowing a 20% margin to reflect the forced sale situation. He estimated the net worth of the Rendell group on a 'going concern' basis as $1,454,000. 43 Upon documentation of the purchase transaction on 3 October 1985, AEFC made a revolving term loan of $1.17 million to the Rendell group, charged over the assets and undertaking of the group, to replace an existing external loan of $750,000, retire AEFC's short-term financial accommodation of $350,000 and provide additional working capital to Rendell. This took AEFC's total exposure to the Rendell group to $1,991,000. 44 Holman Webb advised that an AEFC entity should make the investment after obtaining the approval of the Foreign Investments Review Board, on the assumption that the approval would be subject to a requirement that the investing entity divest itself at a later time. But another structural problem arose. If AEFC came to hold indirectly more than 50% of the shareholding in the Rendell group as at 30 June 1986, it would be necessary for the Rendell group to be consolidated into AEFC's balance sheet, and that would ultimately lead to consolidation into the Commonwealth Bank's balance sheet. That was thought to be an undesirable outcome. Therefore, it was proposed that a separate company be set up that would be owned 50% by AEFC and 50% by the management of CASO. But in a handwritten note dated 21 August 1985, Mr Gledhill said that the acquisition should be made through a wholly-owned subsidiary of AEFC called AEFC Leasing (which was a 'clean' AEFC subsidiary not being otherwise used) and that the ownership of AEFC Leasing could be addressed at a later stage. 45 A shelf company called Janam Holdings Ltd was acquired early in September 1985 and was set up to become the new holding company of the Rendell group. As I have mentioned, it was eventually re-named Rendell Industries Ltd. AEFC Leasing subscribed for 100 shares of $1 each at a premium of $2,499 per share, constituting its investment of $250,000 in the new entity. The company's five other shares were acquired by individuals. The shares were later split into 20 cent shares (some documents in evidence indicate that the share-split resolution was passed on 27 September 1985, while others suggest that the resolution was passed on 3 October 95). A new board was appointed, which included Mr Mullins and Mr Rees. The new board set about implementing the transaction, planning for an issue of shares to employees and a stock exchange listing, and also planning an acquisition with a view to expanding the business to become a conglomerate in the building industry. Documentation of the purchase by AEFC Leasing 46 Documentation for the purchase of the Rendell group by Rendell Industries was executed early in October 1985. There were three principal agreements. By a Deed of Agreement dated 2 October 1985 Rendell Industries agreed to issue an additional 1,299,895 fully paid shares of $1 each to AEFC Leasing or as it may direct, said to be in consideration of AEFC Leasing procuring short-term financing and a guarantee of the ANZ lines of credit by AEFC. AEFC Leasing directed that 972,645 of the shares be issued to it, 38,500 be issued to AEFCAS, 96,250 be issued to a company related to Mr Griffin called Daranlas Pty Ltd and 192,500 be issued to a company related to Norman Rendell called WNR Nominees Pty Ltd. It was later asserted that the shares issued to WNR Nominees were part of the consideration for the purchase of the RIH shares, and the shares issued to AEFCAS were in lieu of payment of advisory fees. 47 The evidence indicates that this document was drafted at a later time and backdated to 2 October 1985, to reflect a non-written agreement recited in a notice of meeting of the shareholders of Rendell Industries held on 3 October 1985. 48 Secondly, there was a Sale of Shares Agreement dated 3 October 1985. By that agreement Mr Norman Rendell and interests associated with him sold all of the issued shares in RIH to Rendell Industries for $250,000. The agreement provided for the Rendell interests to lend $200,000 to RIH, guaranteed by Rendell Industries and repayable when Rendell Industries raised $500,000 by private placement (contemplated to be made to employees) or on 3 April 1986. Rendell Industries undertook to arrange for the release of the personal guarantees given by the vendors to the ANZ Bank. 49 Thirdly, there was a Shareholders Agreement between the shareholders of Rendell Industries and that company. The agreement set out the final shareholdings in Rendell Industries. AEFC Leasing was to hold 74.83%, AEFCAS 2.96%, WNR Nominees 14.81%, and Daranlas 7.40%. The agreement made provisions for the corporate governance of Rendell Industries and for the constitution of the boards of that company and RIH. It provided for the repayment of a loan account to Mr and Mrs Rendell and the issue of 3,125,000 shares to the employees at par, 16 cents per share payable on application and the balance of four cents per share to be satisfied out of the company's share premium account. (Completion of the issue of the shares would dilute AEFC Leasing's interest to 50.5%.) The proceeds of the share issue would be applied to repay the loan of $200,000 made by the Rendell interests to RIH. The agreement also provided for Rendell Industries to appoint AEFCAS as corporate adviser for the issue of the shares to employees and the admission of the company to stock exchange listing. The consideration supplied by AEFC Leasing 50 As we shall see, the Rendell Industries shares were later sold to Aequitas No 1 for $960,000. It is therefore of some importance to identify the true consideration paid by AEFC Leasing to acquire the shares. Part of the overall transaction involved Norman Rendell being relieved of his guarantee obligations to the ANZ Bank, by AEFC undertaking liability under what became a deficiency guarantee. Another part of the overall transaction was that AEFC would provide loan facilities to the Rendell group. In my opinion, these elements of the overall transaction were commercially necessary, in the sense that the acquisition by AEFC Leasing would have been otherwise unlikely. It is somewhat artificial to say, as the Deed of Agreement dated 2 October 1985 does, that AEFC Leasing 'procured' these commitments by AEFC. However, that proposition is true if it simply means that AEFC Leasing's participation in the transaction brought along with it the additional commitments by AEFC. In that sense, AEFC Leasing provided a consideration that was real and not illusory. 51 This is not to say, however, that these additional elements of the consideration are to be offset against the higher sale price obtained by AEFC Leasing, in order to calculate AEFC Leasing's profit on the Rendell transaction. At the time, Mr Kelly's calculations indicated that there was very little risk to AEFC in undertaking the deficiency guarantee, and adequate protection for AEFC in respect of its loan facilities. Events later took a turn decidedly for the worse, but the contemporaneous assessment by Mr Kelly, shared by Mr Gledhill, Mr Mullins and Mr Rees, was that AEFC Leasing stood to make a very substantial profit if could dispose of the Rendell Industries shares for a price reflecting the value they attributed to the shares. This is confirmed by the fact that when the transaction was completed, AEFC Leasing lodged $690,000 in a Lloyds' account as the amount representing the profit on sale of the Rendell Industries shares. That amount was not taken directly to profit, in order to allow 'maximum flexibility in accounting/tax strategies'. The acquisition and starting up of Aequitas and Aequitas No 1 Mr Gledhill's strategy for AEFC 52 As early as August 1985, before completion of the acquisition of the Rendell group, the joint venture and the management of AEFC were developing plans which ultimately led to the establishment of Aequitas and Aequitas No 1. Mr Gledhill prepared a board paper, dated 2 September 1985, which he presented to the October 1985 meeting of the board of AEFC. The paper outlined a strategy of 'equity investment/funding by specially structured company vehicles'. Several generic situations were identified in which it could be appropriate for AEFC to subscribe for shares, with AEFCAS and the joint venture earning fees on the restructure of the company and AEFC providing loan finance to the restructured group. 53 Mr Gledhill put forward two structures for equity investments. In some cases, it would be appropriate, he thought, for AEFC to make a 'direct' investment. However, where the investment gave rise to a majority holding, it would be necessary to avoid consolidation of the acquired entity in AEFC's balance sheet. This would be done by using AEFC Leasing (to be re-named AEFC Equities) as the investment vehicle, funded by loans from AEFC, and reconstituting that company so that 50% of its shares would be held by CASO, with AEFC holding only 50%. AEFC's shares would have preferred dividend rights and CASO's holding would give it no returns on the investment save for a management fee paid to AEFCAS. I shall refrain from commenting on whether this highly artificial structure would successfully avoid the accounting consolidation requirements of the time, but I note that it certainly would not do so under the legal and accounting requirements in force today. 54 Mr Gledhill noted that management and 'the resources of the Advisory Service' (by which he meant, presumably, the joint venture) were investigating the feasibility of forming a listed public company, for the purpose of medium to long term corporate equity investment, with AEFC having a shareholding of not more than 15% in the public company (the limit apparently being intended to avoid foreign investment problems for the public company). An Australian investment committee would assess the suitability of investment proposals for AEFC Equities and for recommendation to the public company. 55 Mr Gledhill stated: 'Management is attracted to the concept of the publicly listed company as it could play an important role in the functions of AEFC Equities, as follows: Should an investment proposition be considered unsuitable for AEFC Equities, by the Australian Committee, it could then be referred to the public company whose wider investment criteria might permit acceptance. AEFC Equities could offer to the public company options over its various investments in order to ensure that its gain from such investments is realised within the short-term, thereby releasing funds for further investments and locking in acceptable rates of return. The public company would augment the activities of the Advisory Service by providing an alternative repository of equity funds, to assist its advisory clients. Essentially, the objectives of the public company would be inclined towards long-term returns from stable investment opportunities and would therefore not compete with AEFC Equities. However, it could provide a valuable source of liquidity for AEFC Equities.' 56 Mr Gledhill then noted the foreign investment problem. He observed that each investment made by AEFC Equities would require approval from the Foreign Investments Review Board. He said it was impracticable to turn AEFC Equities into an Australian company for foreign investment purposes, but he noted that the proposed publicly listed investment vehicle would be an Australian company. If it took an option over an AEFC Leasing investment, the case for Foreign Investments Review Board approval would be greatly strengthened. 57 The flavour of Mr Gledhill's discussion of the proposal for a publicly listed investment vehicle was to emphasise the advantages to AEFC and the joint venture, without paying any attention to the attractiveness of the listed vehicle to its potential shareholders, beyond the observation that it would look for long-term returns from stable investment opportunities. It is hard to see how the uses which Mr Gledhill contemplated for the listed entity would assist its board to pursue such an investment strategy. 58 Mr Gledhill's board paper was debated by the directors of AEFC at their meeting in October 1985. It appears, though the evidence is not clear, that the board gave Mr Gledhill's views some cautious support, given they resolved that a further report be prepared for the May 1986 meeting covering developments in this area during the intervening period, impliedly sanctioning the proposition that such developments were authorised. The formation of Aequitas and Aequitas No 1 59 The publicly listed investment vehicle contemplated by Mr Gledhill's board paper came to life as Aequitas Ltd. Aequitas was originally a shelf company called Elonhay Ltd and its wholly owned subsidiary, Aequitas No 1, was a shelf company called Marktan Nominees Pty Ltd. The cost of acquiring Elonhay was paid by Aequitas itself from an amount of $1,500 advanced to it by a company associated with Mr Mullins and two other companies (probably associated with Mr Rees and Mr Elvy). 60 The shareholders of Aequitas between 10 September 1985 and 10 March 1986 were Mr Mullins and Mr Rees, their respective wives and Mr J Elvy, a consultant provided to Aequitas by CASO. Mr Mullins was appointed managing director on 18 September 1985, and he remained in that position until 16 October 1985, when Mr Rees replaced him. Mr Elvy ceased to be an employee of CASO in February 1986. He agreed with CASO at that time to resign as a director of Aequitas and to transfer his share in it to Mr Porteous or such other person as CASO should direct. 61 On 10 March 1986 Mr H M Rich, a director of various public companies including News Corporation Ltd and Ansett Transport Industries Ltd, became a shareholder. On 12 March 1986 Mr R A Donohoe (a former banker and stockbroker) and Mr A C Pond (a director of various Australian companies including Hunter Douglas and City Mutual Life Assurance Ltd, and by that time executive chairman of Rendell Industries) became shareholders. Companies associated with Mr Mullins and Mr Rees (Shop Two Pty Ltd and Morespeach Pty Ltd respectively) became shareholders on 12 March 1986. 62 Aequitas and Messrs Mullins and Rees and their respective wives were the shareholders in Aequitas No 1 from 31 October 1985. The directors of that company were Messrs Mullins and Rees and their respective wives during the period from 31 October 1985 to 12 March 1986. On 12 March 1986 the wives resigned and Messrs Rich, Pond and Donohoe were appointed directors in their place. Early decisions 63 The minutes of the meeting of directors of Aequitas held on 18 September 1985 record various decisions of a kind necessary for a newly launched company to take. The minutes indicate that preparatory work had been done by Mr Mullins and Mr Rees. For example, they met with Law & Milne and the board accepted their suggestion that this firm be appointed as lawyers to the company. Mr Rees established a cheque account for the company. Mr Mullins told the board that he would meet with Law & Milne regarding the preparation of an option agreement in respect of the shares held by AEFC Leasing in Rendell Industries. The board agreed that discussions be held with representatives of various accounting firms with a view to the appointment of auditors. It was agreed that Mr Porteous would contact, amongst other firms, Arthur Young & Co, and it was agreed that the accounting firms would be interviewed by Mr Rees and Mr Porteous. 64 Prior to 3 October 1985 someone on behalf of Aequitas (probably Messrs Rees and Porteous) met with representatives of Arthur Young & Co, a firm that was independent of AEFC and AEFCAS. On 3 October 1985 Arthur Young submitted a proposal addressed to Mr Mullins as managing director of Aequitas. The proposal was prepared on the basis that opportunities for business would come to Aequitas from AEFC and from external opportunities; that the business of Aequitas would be separate from but would complement the corporate advisory business of AEFCAS; and that Aequitas would take a longer term view of investments than AEFC, whose investment positions would be taken for only about 6 to 18 months, so there would be opportunities for Aequitas to invest by taking out existing AEFC positions. 65 A meeting of representatives of Aequitas, Arthur Young and Law & Milne took place on 30 October 1985. Messrs Mullins, Rees and Porteous were there. There was discussion about the establishment of Aequitas No 1, and concern was expressed that if the acquisition of the Rendell Industries shares took place after Rendell Industries had distributed shares to staff, the acquisition would be subject to the Companies (Acquisition of Shares) Code, the predecessor of Chapter 6 of the Corporations Law. This was because, after the employee share issue, Rendell Industries would have more than 15 members and would hence be subject to the provisions regulating an acquisition that causes an entitlement to voting shares to exceed 20 percent. 66 Subsequently to that meeting, Aequitas No 1 was acquired and an offer was made to purchase the Rendell Industries shares owned by AEFC Leasing. 67 AEFCAS prepared a brochure which referred to the 'close association' between Aequitas and AEFC, saying that the formation of Aequitas was strongly supported by AEFC and referring to their 'unique relationship'. The brochure quoted Mr Gledhill and referred to a relationship with AEFC 'and it shareholders'. Adjacent to those remarks there was a picture of Martin Place including the Commonwealth Bank head office. Eventually the brochure was withdrawn, after Mr Mullins referred it to Mr Gledhill for review on 15 May 1986. Did Aequitas retain the joint venture for advisory work, and if so, what was scope of the retainer? 68 A crucial issue in this case is whether the joint venture was ever retained by Aequitas for corporate advisory work, and if it was, what was the scope of the retainer. The principal evidence is in three categories. 69 First, there is a letter from Mr Porteous as a director of AEFCAS to the managing director of Elonhay dated 23 August 1985. It is a submission for the appointment by Elonhay of AEFCAS for a period of 12 months 'to provide specialist advice on structure and approach to the raising of equity, initially by private placement and subsequently through Stock Exchange listing'. At the time, AEFCAS was acting only in its capacity as manager for the joint venture. 70 The defendants submit that this letter must have been prepared after 10 September 1985. This is because the letter was addressed to Elonhay, which was not acquired from the shelf company provider until 10 September 1985. However, I do not regard this as sufficient for me to find that the letter was not authentic, or (if authentic) was not entered into on the date that it bears. The formation of the public company that became Aequitas was a subject of active consideration by Mr Gledhill, and (I infer) Mr Mullins and Mr Rees as well, in August 1985, since the idea was sufficiently mature to be included in Mr Gledhill's board paper of 2 September 1985. Consistently with the external facts, it would have been open to Mr Porteous or someone else to contact the shelf company provider and ascertain the name of the available shelf company on 23 August, even though the transaction to acquire the company was not completed until 10 September. The evidence provided by Mr Porteous' letter of 23 August implies that this occurred. 71 It appears that no contract of retainer was entered into before 10 September, since the letter of 23 August is an offer rather than confirmation of an existing agreement, and the shelf company provider certified on 10 September that Elonhay had not entered into any agreements or transactions. The letter of 23 August invited the managing director of Elonhay to accept the offer by signing and returning an enclosed copy of the letter. There is no direct evidence that this was done, or that the offer was otherwise formally accepted. The question is whether it was accepted informally, for example by conduct. It is difficult to answer this question, because Mr Mullins and Mr Rees were the principal embodiment of the joint venture, and AEFCAS, and also Aequitas at this time. 72 There is some evidence that Mr Mullins and Mr Rees regarded themselves as providing corporate advice to Aequitas as well as to the joint venture during the period from September to November 1985, and that Mr Gledhill regarded them as doing so. Mr Gledhill's memorandum of 12 November 1985 refers to the Rendell Industries investment, and says that since that time AEFCAS had formed 'an independent equity vehicle to be known as Aequitas Ltd'. The same memorandum refers to the sum of $50,000 being passed through the joint venture accounts of AEFCAS 'in recognition of the part played in structuring the transaction'. Obviously AEFCAS was acting for the joint venture, and was being rewarded accordingly. But the language of Mr Gledhill's memorandum implies that, in his view, AEFCAS was also involved in the formation of Aequitas and the 'structuring' of the transaction from the viewpoint of Aequitas. 73 Similarly, when Mr Kelly wrote to Arthur Andersen & Co for advice as to the tax consequences of the Rendell transaction on 26 February 1986 (a letter specifically approved by Mr Gledhill), he described Aequitas No 1 as a 'public investment company managed by AEFCAS'. An application for approval of an Australian currency facility, directed to AEFC's Sydney office by management (perhaps Mr Kelly) in about January 1986, describes Aequitas as a company formed by AEFCAS. Law and Milne, who had been appointed the solicitors of Aequitas on 18 September 1985, appear to have dealt with Mr Rees at AEFCAS, submitting drafts of the sale of shares agreement to him. 74 Secondly, there is evidence concerning various payments by Aequitas to AEFCAS. On 30 April 1986 Aequitas drew a cheque in favour of AEFCAS for $28,357.12, requisitioned by Mr Rees and approved by Mr Porteous by a cheque requisition which stated that the payment was for AEFCAS' services in negotiating a lease of premises and the employment of Mr Hinton, and for 'general matters and advice'. A memorandum of fees for that amount was directed by AEFCAS to Aequitas on 10 June 1986. It was expressed to be for the period 23 September 1985 to 31 March 1986, for work which included the matters noted on the cheque requisition and also 'general advice in relation to structure of the Aequitas group including composition of Board of Directors, discussions with Lawyers, Accountants and Stockbrokers', and 'advising on the proposed public flotation of Aequitas including private placement to selected institutions'. 75 Two further memoranda of fees were rendered by AEFCAS to Aequitas on 10 June 1986. The first related to advice during May on various matters concerning Rendell and other proposed investments, in the sum of $7,811.20 (including disbursements). The second related to general advice during April regarding fundraising by private placement memorandum, and discussions with brokers and institutional investors, as well as assisting in a marketing program to promote the company's name in the marketplace and preparation of papers on potential equity opportunities for presentation to the directors, in the sum of $3,805 (including disbursements). A cheque requisition dated 16 June 1986 for payment of both accounts was signed by Mr Rees and Mr Porteous. The audited financial statements of AEFCAS for the year ended 30 June 1986 showed no income or profit for the company, presumably because these receipts were accounted for as joint venture receipts. 76 The defendants draw attention to the fact that the period stated in the memorandum of fees dated 10 June 1986 began five days after the directors of Aequitas, at their meeting on 18 September 1985, resolved to appoint Law and Milne as solicitors to the company and to authorise Mr Mullins to meet with them concerning the preparation of an option agreement over the shares held by AFEC Leasing in Rendell Industries. In other words, they say, the occasion for providing advice with respect to the Rendell Industries acquisition had already passed before the joint venture commenced work for Aequitas. Additionally, they submit, the description of work done in the memorandum of fees makes no specific mention of Rendell Industries, a matter sufficiently important to have been expressly recorded if work had actually been done on it. 77 I do not accept these submissions, having regard to the contrary evidence to which I have referred. The meeting of 18 September 1985 was the first meeting of the directors of Aequitas after the company had been acquired from the shelf company provider and the board had been reconstituted accordingly. The directors did not decide at that meeting to commit the company to the acquisition of the Rendell Industries shares. They simply authorised Mr Mullins to have discussions with Law and Milne. The occasion for corporate advice on the acquisition of the Rendell Industries shares had not expired prior to 23 September, when (according to the memorandum of fees) advisory work commenced. 78 Even if (contrary to my view) the directors of Aequitas decided to acquire the Rendell shares before AEFCAS commenced to provide advisory services to Aequitas, there was still a great deal of advisory work needed, covering the raising of money to permit Aequitas No 1 to complete the purchase of the Rendell shares, the contents of the private placement memorandum to be issued by Aequitas, and the structure of the purchase. 79 It is true that the memorandum of fees did not expressly refer to Rendell Industries, but it would be dangerous to base inferences on the omission, for which there are various possible explanations - for example, given that by 10 June 1986 the acquisition had turned sour and the Rendell group was in severe financial trouble, the drafter of the memorandum of fees may have thought it politic not to refer specifically to that assignment. 80 Thirdly, the private placement memorandum issued by Aequitas in March 1986 contains a section headed 'Company Particulars', with a subheading 'Retained Advisers'. Under those headings AEFC is described as 'Merchant Banker' and AEFCAS is described as 'Corporate Adviser'. This suggests, though not conclusively, that AEFCAS had the status of corporate adviser as a general matter, without the limitations contended for by the defendants. The defendants submit that there is no evidence that AEFC (and more specifically Mr Gledhill) approved or was asked to approve the terms of the memorandum before it was distributed. However, the private placement memorandum contained an open letter by Mr Glenfield on behalf of AEFC, dated 10 March 1986, in which Mr Gledhill referred to the formation of Aequitas by Mr Mullins (whom he described as managing director of AEFCAS) and Mr Rees (whom he described as a consultant to that company). The letter referred to Aequitas as a valuable adjunct to the operations of both AEFC and AEFCAS. At the very least, the letter was an implied endorsement by AEFC of the private placement memorandum, in terms that were consistent with the proposition that AEFCAS was corporate adviser to Aequitas. 81 On balance, I find that the evidence supports the conclusion that Mr Mullins or Mr Rees, on behalf of Aequitas, accepted the AEFCAS offer of 23 August 1985 by their conduct, at some time between 10 and 18 September 1985. Thereafter there was a contract of retainer for the provision of corporate and financial advice between the joint venturers by their agent, AEFCAS, as adviser and Aequitas as client. 82 The defendants submit that if (contrary to their submission) there was a contract of retainer in the terms of the letter of 23 August 1985, it did not extend to advice on investments generally, or on any investment in Rendell Industries. By its terms, the letter was limited to the provision of advice 'on structure and approach to the raising of equity ... by private placement or through stock exchange listing'. In my opinion, if a company with some ideas but no assets seeks advice on its structure and the correct approach to raising equity and listing, advice on the acquisition of assets would be part of an appropriate and comprehensive response. Such a company would need to acquire one or more businesses or investments to make it attractive to private and public investors. Advice about the kinds of assets likely to appeal to investors would fall within the terms of such a retainer. While such a retainer would probably not require the adviser to seek out investment opportunities, it would be within the scope of the retainer for the adviser to draw the company's attention to an investment opportunity of which it was aware, and make an assessment of that opportunity accordingly. 83 In summary, my view is that the contract of retainer contained an implied undertaking by the joint venturers, by their agent AEFCAS, to provide objective advice on the acquisition of assets appropriate to permit the company to raise equity by private placement or through stock exchange listing, including advice about the kinds of assets likely to appeal to investors, and advice about and assessment of any investment opportunities known to the adviser. I regard such an implied term as reasonable and equitable, necessary to give business efficacy to the contract of retainer, so obvious that it 'goes without saying' capable of clear expression, and consistent with the express terms of the letter of 23 August 1985. Hence the condition stipulated by the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 283, are satisfied. 84 I do not accept that the further amended statement of claim, which referred only to 'the opportunity to invest in shares in Rendell Industries', was limited so as to prevent the plaintiffs from asserting at the hearing that the retainer covered specific advice about the Rendell transaction. I find that it did. 85 The defendants say that there was no 'opportunity' to invest in the shares in Rendell Industries in October/November 1985, since (according to a memorandum by Mr Kelly dated 10 October 1985) AEFC Leasing was at that time proposing to retain the shares until after the listing of Rendell Industries. However, in my view, AEFC had not made any firm decision on the matter. Mr Gledhill's board paper of 2 September 1985 indicates that the prospect of passing on such an investment to Aequitas was an available alternative. 86 Considered together, the evidence establishes that Aequitas engaged AEFCAS, which acted as manager for the joint venture, to provide corporate advice on matters including the acquisition and financing of the purchase of Rendell Industries shares from AEFC Leasing. The venturers, AEFC and CASO, were liable as principals to supply AEFCAS with corporate advice on these matters, through the personnel of the joint venture. The acquisition by Aequitas No 1 of the 74.8% shareholding in Rendell Industries 87 On 6 November 1985 Law & Milne, solicitors, submitted to Mr Rees a draft agreement for the sale by AEFC Leasing of its shareholding in the Rendell group to Aequitas No 1 Ltd, which did not include the number of shares to be sold nor the consideration to be paid. A further draft including this information was prepared on 7 November, the draft agreement being dated 8 November. The document envisaged sale for $910,000, of which $1,000 would be paid on settlement not later than 11 November 1985, and the balance would be postponed to 31 March 1986. Calculations of purchase price 88 Mr Rees made some notes about the purchase price, presumably between the time of the first and second drafts. His notes do not indicate any re-assessment of calculations that had been made for the purpose of the acquisition by AEFC Leasing in the previous month. The notes take the par value of the shares, and make a deduction for dilution, to take into account the proposed employee share issue. The notes identify the price of $910,000 as the figure 'incorporated in the submission'. This appears to be a reference to Mr Rees' submission to AEFC dated 23 July 1985, recommending the initial purchase by AEFC Leasing. Mr Rees' notes give the impression that the purchase price was to be $910,000 because that was the figure AEFC had been encouraged to expect, at that time of AEFC Leasing's acquisition of the shares. 89 On 8 November 1985 Mr Rees prepared an analysis of the value of a 50.5% shareholding in Rendell Industries 'post committed employee issue'. According to that analysis, the 'on market' range of values of that holding was between $1.768 million and $2.273 million. This suggests that Mr Rees regarded the acquisition price for Aequitas No 1 as below the market price, but on the other hand, the valuation makes some significant though unstated assumptions about the Rendell group being successfully floated by stock exchange listing. It does not appear to have been a rigorous assessment, and does not rely on any external valuation of the Hurstville property. 90 Mr Gledhill gave evidence that he was unaware of these calculations by Mr Rees. The defendants say that in those circumstances, Mr Rees cannot have been acting in the interests of AEFC or the joint venture, because if he were, he would have disclosed his calculations to Mr Gledhill in case Mr Gledhill wanted to increase the purchase price in accordance with them. I do not accept this submission. Given the nature of the calculations, I regard them as part of the planning by Mr Rees to ensure that investors would subscribe for the shares in Aequitas, in order to achieve the overall objectives of AEFC and the joint venture. They formed part of the pattern exhibited, as well, by Mr Rees' analysis dated 18 December 1985, in which he concluded that on the basis of maintainable future earnings after tax, Rendell Industries had a value of between $1.484 million and $1.855 million, and consequently that a revaluation of Aequitas No 1's interest by $700,000 was 'reasonably justified'. Similar calculations were prepared in January 1986. AEFC's decision to sell to Aequitas No 1 91 At Mr Gledhill's request, Mr Rees prepared a discussion paper dated 11 November 1985, setting out the case for AEFC to sell its shares in the Rendell group as opposed to continuing to hold the shares in the expectation of increased value after listing. In it, Mr Rees observed that the net assets of Rendell had been purchased at a 'steep discount', and calculated that the profit on sale would be 5,400% on an annualised basis. Amongst the advantages of selling, in his view, were that profit would be crystallised before the year-end, releasing funds for further deals and setting a successful example by achieving the 'corporate goal of higher profit from asset base', while giving Aequitas the impetus to raise funds. However, a measure of control over the financing of Rendell would be lost and the possibility of further profits from the investment would be forgone. 92 The assessment by Mr Rees of the threats to the value of the investment in the Rendell group is interesting, especially in light of the information he possessed about Rendell's financial position (discussed below). He observed that the Rendell group was 'one sector based' and the building sector was in decline and carried a stigma with the market, that sub-contractors were high-risk, that there was a loss history, that management was too thin and new, that one debtor (presumably Concrete Constructions, for whom Rendell was doing substantial work) dominated the company's receivables, that Rendell would be listed 'only to allow the investor to sell', that overall the market was in decline, and that there was a high risk from supplier support to Rendell's competitor. He expressed the opinion that the risks would be heavily weighted by the market, and that the role of passive investor (a role, it is noted, that was envisaged for Aequitas) would be easier for AEFC if risks were spread. These observations imply that an equity investment in the Rendell group in November 1985 would be imprudent. 93 On the basis of Mr Rees' notes and a discussion with Rendell's managing director, Mr Griffin, Mr Gledhill prepared an internal memorandum dated 12 November 1985. He noted that AEFC's strategy had been to dispose of the Rendell investment once the company had been floated on the Second Board of the Stock Exchange in 1986. However, AEFCAS had formed Aequitas as the listed investment entity that had been foreshadowed in his board paper for the October 1985 board meeting. He noted that AEFC would not now be a shareholder in Aequitas, but CASO would hold a B class share giving it 60% of the voting rights, and accordingly, management control. A public capital raising for Aequitas was proposed, raising some $5 million, initially to be subscribed to $2 million. Aequitas No 1 had been formed as a wholly-owned subsidiary of Aequitas as part of a strategy to keep Aequitas 'takeover-proof'. 94 Mr Gledhill reported that Aequitas had made an offer to buy AEFC's Rendell investment, the offer being contained in the Sale of Shares Agreement prepared by Law & Milne. He noted that it would be necessary for Aequitas to purchase the shares before the proposed private placement of shares to management took place, because if the sale to Aequitas was delayed, Aequitas would have to offer to purchase the management shares. I assume this was because the issue of the management shares would take the number of shareholders in Rendell Industries above the threshold at which the takeover legislation of the time would have become applicable. 95 Referring to Mr Rees' background notes and his discussion with Mr Griffin, Mr Gledhill said he was satisfied that it was in the best interests of AEFC to dispose of its shareholding in Rendell and crystallise its profit. He said: 'I believe it is it in AEFC's best long-term interests for Aequitas to get off the ground as a viable equity investment company as this will provide the vehicle for the on-selling of equity investments taken by AEFC as they are fed to us by the Advisory Service.' 96 Mr Gledhill decided that AEFC would proceed with the sale subject to the consideration being increased to $960,000, and some slight amending of the draft in other respects. He said: 'I have indicated to Mr Mullins that, when settlement takes place, an amount of $50,000 will be passed through the joint venture accounts of AEFC Advisory Services in recognition of the part played in structuring the transaction.' 97 Mr Gledhill gave some evidence, orally and by affidavit, about the circumstances leading up to AEFC Leasing's sale of the Rendell Industries shares to Aequitas No 1. His evidence was that Mr Mullins approached him and proposed 'that the investment company he was forming acquire all the [Rendell Industries] shares held by AEFC Leasing'. He said Mr Mullins had a draft share sale agreement, which provided for a purchase price of $910,000. This appears to be the draft prepared by Law & Milne on 7 November 1985. Mr Gledhill said he responded by suggesting a figure of $960,000, which was closer to the par value of the shares (approximately 4.8 million shares of a par value of 20 cents each), and that he asked Rees for the discussion paper to which I have referred. He said he asked Mr Rees to prepare a discussion paper on the arguments for and against AEFC Leasing holding its equity investment in Rendell Industries. 98 Mr Gledhill's evidence gives the impression that Mr Mullins and Mr Rees were the driving forces behind the formation of Aequitas and Aequitas No 1, and the development of the proposal for Aequitas No 1 to buy AEFC Leasing's shareholding in Rendell Industries, to the exclusion of Mr Gledhill. On this view, Mr Gledhill was in the position of an arm's-length purchaser, and Messrs Mullins and Rees were acting independently of AEFC and AEFCAS in forming Aequitas and developing the purchase proposal. I reject Mr Gledhill's evidence to the extent it creates this impression. It is at odds with the documentary evidence, especially Mr Gledhill's board paper of 2 September 1985 (which shows that Mr Gledhill was closely involved with the development of the concept of Aequitas) and his memorandum of 12 November 1985, in which he regards the formation of Aequitas as a task implemented by the Advisory Service as foreshadowed by the September board paper, and discloses that substantial planning had taken place as to a proposed equity stake in Aequitas for AEFC. 99 I also reject Mr Gledhill's evidence that he increased the purchase price from $910,000 to $960,000 to bring it closer to the par value of the shares. As I have indicated, Mr Rees had previously made calculations in which he took into account the diluting effect of the proposed share issue to Rendell employees. Nothing in Mr Gledhill's evidence indicates that he questioned that calculation. And the increasing purchase price was exactly the amount to be passed through the joint venture accounts, implying that Mr Gledhill made the increase for that purpose. 100 It appears that under the joint venture agreement as it stood at that time, AEFC would receive first $240,000 of the joint venture income after payment of expenses. As at 12 November 1985 the income of the joint venture was at such a level that any profits passed through the joint venture accounts would be for the benefit of AEFC alone. If Mr Gledhill and Mr Mullins were aware of that on 12 November, they would nevertheless have had a motive for passing an amount through the joint venture accounts. By doing so, they would generate a profit for the joint venture and, to that extent, justify its activities more effectively than by simply increasing the price payable to AEFC Leasing. Settling the text of the sale of shares agreement 101 Mr Gledhill handed over to Mr Kelly the responsibility for finalising the draft contract on behalf of AEFC Leasing. In his memorandum dated 12 November 1985, Mr Kelly recommended a variation to the terms of the proposed agreement, to the effect that if the ANZ Bank would not release AEFC from its deficiency guarantee, the new shareholder should take over the guarantee. Mr Kelly also made a number of comments on the drafting of the agreement, and he recommended that advice be sought from Holman Webb. However, Mr Gledhill added a handwritten note dated 14 November 1985 to Mr Kelly's memorandum accepting Mr Kelly's comments but saying that he was 'still prepared to regard this as an in-house matter and rest on understandings reached with Geoff Mullins' and therefore clearance of the document with Holman Webb was not required. The 'understandings' were not explained. 102 I have received conflicting submissions on the significance of Mr Gledhill's handwritten notes. In my view, the notes imply that Mr Gledhill trusted Mr Mullins to act consistently with the interests of AEFC. This implies, in turn, that, to the extent that AEFC and Aequitas might have had divergent interests, Mr Gledhill expected Mr Mullins to prefer the interests of AEFC. His statement that a clearance was not required from Holman Webb was not, in my view, an acknowledgment by him that Law & Milne were not acting for AEFC Leasing. It suggested only that there were some corporate governance arrangements within AEFC requiring certain matters to be reviewed by Holman Webb as the designated solicitors for that purpose. This would not prevent other solicitors from being appointed to represent the interests of AEFC or a subsidiary in a particular transaction. 103 Mrs Mullins and Mr Rees met on about 15 November 1985 to 'review progress and plan future action and strategy' for Aequitas. At some time in the next few days there were exchanges between Mr Rees and Mr Kelly with respect to the contents of the draft contract. There does not appear to have been any process of negotiation between them, but instead, the increased purchase price and other amendments suggested by Mr Kelly (including an amendment to require the purchaser to assume responsibility for the ANZ guarantee) were incorporated in the new draft. On about 19 November Mr Rees instructed Law & Milne with respect to the agreed amendments to the draft. A re-engrossed draft was submitted by Law & Milne to Mr Rees on 19 November 1985. 104 It does not appear that anyone in the drafting process thought to protect the interests of the proposed investors in the purchaser by including a right of rescission or review of the terms of purchase after the appointment of independent members to the board of directors of Aequitas. Indeed, clauses 4(f) and (g) of the draft agreement, which would have been warranties by AEFC Leasing that there was no material dispute with any governmental authority and that Rendell Industries had paid its taxes, were deleted from the final draft. Some pencil notes on the draft suggest that AEFC was not prepared to give those warranties. There is nothing to show that there was any negotiation about them. The plaintiffs complain that such clauses might have protected Aequitas No.1's interests given the difficulties experienced by the Rendell group in respect of the Australian Defence Force Academy site in Canberra and the difficulties with respect to payment of group tax in December 1985. Mr Gledhill says that the contract would not have been enforced had Aequitas decided not to go ahead, after the appointment of independent directors. That evidence is implausible and inconsistent with the documents, and there is no independent foundation for it. I reject it. The sale of shares agreement 105 The agreement was executed on 25 November 1985 and provided for the settlement date to be the same day. In summary, the key terms were: · the purchase price was $960,000; · $1,000 was payable by Aequitas No 1 to AEFC Leasing on the settlement date, at which time the shares would be transferred to Aequitas No 1 (although in fact the shares were not transferred until the balance of purchase money was paid); · payment of the balance of the purchase price was postponed to 31 March 1986 or such other date as the parties might agree, but if a later date was agreed, interest would be payable as from the settlement date; · payment of the balance of the purchase price was secured by a fixed charge over the shares; · Aequitas No 1 agreed, if requested by AEFC Leasing, to assume liability under the deficiency guarantee to the ANZ Bank and indemnify AEFC Leasing and AEFC against any claims made under the guarantee; · until the due date for payment of the balance of the purchase price, the nominee of AEFC Leasing on the board of RIH (Mr Gallois) was to retain his position, and Mr Mullins was to be the nominee of Aequitas No 1 at all meetings of Rendell Industries. 106 The net effect of this transaction was that AEFC Leasing disposed of its Rendell shares on 25 November 1985 for $960,000, having paid only $250,000 for them on 3 October 1985. $50,000 went to AEFCAS as a fee, the resulting profit being $660,000 less interest costs on the $250,000 investment. It is true that the October documentation referred to AEFC Leasing providing consideration by procuring finance from AEFC for the Rendell group. Indeed, on 26 February 1986 AEFC wrote to Arthur Andersen & Co for taxation advice as to whether AEFC Leasing had made a deductible loss out of the transaction, on the basis that the consideration which it provided for the acquisition of the shares included $1,671,000 in loan finance. However, as I have said, contemporaneous assessments by AEFC and AEFCAS were to the effect that the commitments undertaken by AEFC in connection with the transaction were not costs - indeed, they were regarded as an opportunity for AEFC to do some lending business, collaterally realising a profit on the equity investment. 107 The defendants seek to make something out of the fact that the position of Mr Gallois on the board of RIH was expressly protected by the agreement, but there was no similar protection in respect of the AEFC nominees to the board of Rendell Industries. But at the time of the agreement the only directors of Aequitas were Mr Mullins, Mr Rees and Mr Elvy, all of whom were provided to the joint venture by CASO. It appears that there was no perceived need to protect their positions, because they were expected to remain loyal to the joint venture. The role of Law & Milne 108 There was a dispute at the hearing as to the role of Law & Milne. The evidence does not clearly indicate the identity of Law & Milne's client. There does not appear to have been any written retainer, and the evidence from company minutes and memoranda of fees is inconclusive. 109 Minutes of directors' meetings of Aequitas show that Law & Milne were appointed solicitors to the company shortly after 18 September 1985, and the minutes of a board meeting of 12 March 1986 referred to them as having drafted the share sale agreement as the lawyers of Aequitas. This evidence establishes that they were acting for Aequitas No 1 on the share sale agreement, but does not show that they were not acting for AEFC Leasing as well. 110 Law & Milne's account dated 17 April 1986 was directed to AEFC Leasing. However, the party to whom the account was addressed was changed by hand (evidently by Mr Rees) to Aequitas No 1 and the account was paid by that company. The narrative to the account indicates that Law & Milne were acting for the purchaser or acquirer of the shares from AEFC Leasing. Other accounts rendered by the firm were directed to and paid by Aequitas. 111 There is no evidence to show that the solicitors took the normal precaution of establishing their retainer in clear terms from the outset: generally, see Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1, 48ff. They dealt directly with Mr Mullins and Mr Rees, but they cannot have believed that their clients were Mr Mullins and Mr Rees in their personal capacities. They must have believed that Mr Mullins and Mr Rees were representing some entity or entities. On the face of it, they appear to have taken their instructions from AEFCAS. The first draft was forwarded to Mr Rees care of AEFCAS, and at the time Aequitas was still a shelf company with no independent board. 112 AEFCAS occupied the dual roles of manager of the joint venture and promoter (as we shall see) of Aequitas. The transaction proceeded without the involvement of any other lawyer, as Mr Gledhill decided on behalf of AEFC that the transaction was an in-house one and so it was unnecessary for the sale agreement to be vetted by AEFC's usual external lawyers, Holman Webb. The lack of any specific retainer arrangements, and the solicitors' willingness to deal with Messrs Mullins and Rees alone, suggest that they shared Mr Gledhill's notion that the transaction was 'in-house'. 113 I note that in about November 1986 the firm accepted instructions to advise Aequitas and Aequitas No 1 concerning potential recovery from, amongst others, AEFC Leasing and AEFCAS. The firm gave some advice by letter dated 27 November 1986. The defendants submit that if Law & Milne had acted for AEFC Leasing in the share transaction, one might reasonably assume that the firm would not have undertaken to advise Aequitas and Aequitas No 1 of possible actions against it. But the advice was given a year later than the execution of the agreement, and in my view those facts are less significant, in overall terms, than more contemporaneous events - such as, for example, the fact that the firm saw fit to direct its account of 17 April 1986 to AEFC Leasing. 114 All in all, the circumstances lead me to conclude that Law & Milne were acting for the joint venture, AEFC and AEFC Leasing, and also the Aequitas group in the transaction. Payment of $69,400 to CASO as a 'commission' 115 A report to the May 1986 board meeting of AEFC noted that a commission would be payable to CASO after 1 July 1986 on the purchase and sale of the Rendell shares of approximately $70,000. Early in July 1986 Mr Porteous sent a memorandum to Mr Gledhill drawing attention to a provision in the joint venture agreement between AEFC and CASO, according to which AEFC was required to pay CASO 10% of the pre-tax net profit earned and collected by AEFC during the immediately preceding fiscal year, which resulted directly or indirectly from business introduced by AEFCAS. Mr Porteous said that the amount due to CASO under the joint venture agreement for AEFC Leasing's profit on the sale of its Rendell shares was $71,000, since AEFC had made a profit of $710,000. Mr Gledhill endorsed the memorandum in a handwritten note dated 2 July, saying he had no problem with the claim but a 'cost of funds' factor on the $250,000 invested should be taken into account. In a memorandum dated 10 July 1986 AEFC's company secretary calculated the cost of funds factor and consequently CASO's 10% fee. The fee as calculated was $69,400. That amount was paid by a cheque requisitioned on 14 July 1986. The financial difficulties of the Rendell group during the period from 3 October 1985 to 1 April 1986 116 When AEFC and AEFCAS first became involved with the Rendell group, it became apparent that the group was suffering from 'liquidity problems'. The sale of the group for $250,000 (a price thought by AEFC to be low) by interests associated with Norman Rendell was said to be attractive to Mr Rendell because AEFC would relieve him of his guarantee obligations to the ANZ Bank. This suggests that Mr Rendell may have been concerned about the solvency of the group in mid-1985. Some confirmation of this is found in an internal memorandum prepared by Mr Kelly of AEFC on 10 October 1985, shortly after the documentation of the purchase of a majority shareholding from the Rendell group by AEFC Leasing. In that memorandum Mr Kelly, explaining the purchase transaction, said 'Mr Rendell had incurred considerable personal liabilities for the company's debts, which he was anxious to see removed, when it became apparent his group was heading towards insolvency'. 117 It appears that the management of AEFC and AEFCAS believed that the purchase transaction would alleviate the liquidity problem and enable the Rendell group to enhance its profit and to expand. However, in a memorandum dated 7 November 1985 the managing director of Rendell Industries, Mr R M Griffin, reported to his board that management was concerned with the group's high rate of growth, because of the strains it placed on liquidity and the risk of increased payroll costs. He said that the company was vulnerable to even a minor downturn in the industry, and that 25% of the group's overheads were funding costs. 118 Concern about the financial viability of the Rendell group seemed to increase during November 1985. In his internal memorandum analysing the proposed sale to Aequitas, dated 14 November 1985, Mr Kelly referred to AEFC's exposure to the Rendell group as a lender. He observed that the term loan of $1.17 million was 'reasonably secured although the security could not be regarded as strong bearing in mind the financial position of the Rendell group and the current tight cash position'. 119 That was the context in which the Rendell group approached the ANZ Bank for an increase of $105,000 in its overdraft (which would take the overdraft to $200,000) and a short-term increase in a bill facility of $500,000, taking that facility up to $1.55 million. The group also approached AEFC for additional loan funds. The bank wrote to Mr Griffin on 27 November 1985 approving the increased facilities on certain conditions, one of which was that AEFC must consent as guarantor to the increased arrangements before drawdown. 120 Mr Griffin reported to the board of RIH as managing director on 27 November 1985, at a meeting attended by Mr Gallois and Mr Rees. He said that the industry was extremely buoyant, but margins remained low. The company's revenue and profits were above budget, but the high level of activity continued to place a severe strain on the company's liquidity. (In some discussion notes which appear to have been prepared by Mr Griffin for the board meeting, there is a reference to management's attempt to 'stretch creditors now to a dangerous position'.) None of the major builders was prepared to provide meaningful assistance to the company, while they were nonetheless pressing Rendell to perform in excess of contract requirements. Concrete Constructions, a large client, had a present debt in excess of $1.2 million which was growing, and further work with that company would be declined unless they reviewed their payment policy. The activity of the company would be wound back to a more acceptable level, about 75% of current activity. Arrangements were also being implemented to reduce the size of the management team, at an annual saving of $550,000. 121 It does not appear that Mr Griffin's written report, or any of the other reports by management to the board meeting of 27 November, made reference to the proposed increased borrowing from ANZ. However, some concern was expressed at the board meeting, probably by Mr Griffin, that AEFC may not be dedicated as a shareholder of the Rendell group. The financial crisis of December 1985 122 AEFC did not give its consent as guarantor to ANZ's proposed increase in lending to the Rendell group, as requested by the bank. ANZ then refused to provide the additional financial accommodation. Late in November ANZ informed Rendell that it would not meet a substantial payment to the Australian Taxation Office because AEFC was not complying with the arrangements as understood by ANZ. This caused considerable disruption to the Rendell business and created disquiet amongst Rendell's senior staff, who were then considering whether to take equity positions in the company. 123 Evidently by 2 December 1985 something of a financial crisis had developed in the Rendell group. AEFC wrote to ANZ proposing that it be released from its guarantee, and that instead ANZ take a second-ranking mortgage debenture over the assets and undertaking of the group. AEFC would give that second-ranking mortgage debenture priority over its first mortgage for up to $2.4 million, so that ANZ would have, in effect, a first ranking security up to that amount. 124 The bank's area manager, Mr Austin, responded to AEFC's offer with puzzlement. He said he did not understand why AEFC was unwilling to provide a letter of consent as guarantor, given that it was considering an increase in its direct financial assistance to the group. He asked for the reason why AEFC requested to be released from the guarantee, so soon after the guarantee arrangements had been re-negotiated. These views were communicated at a meeting Mr Austin had with Mr Griffin, Mr Kelly, Mr Rees, Mr Gallois and a Mr Gray on 3 December 1985, and in writing to Mr Kelly on the same day. Mr Austin withdrew the bank's offer of increased facilities. 125 By 3 December, therefore, the management of the Rendell group was in a very serious situation. A large tax payment would shortly become due, and cash was needed for salaries and other payments. Notwithstanding positive responses by both ANZ and AEFC to the group's request for additional funding in mid-November, no funding had materialised from either source. The issue was bound to be a topic for debate at the board meeting of Rendell Industries which was due on 5 December. 126 On 4 December 1985 Mr Rees prepared some notes analysing AEFC's exposure under the deficiency guarantee. The notes took into account the Turner valuation of the Hurstville building (discussed below), which substantially increased AEFC's exposure, but Mr Rees developed a sale and lease back proposal that would improve the position. He concluded that AEFC's exposure was still under $2 million, and contemplated a further cash injection of $500,000 by AEFC if ANZ would agree to rearrange its facilities to take a mortgage debenture in substitution for the guarantee. In hindsight, his assessment seems to have been excessively optimistic. 127 Mr Rees also prepared some notes about the Rendell group's cash flow crisis on the same day. He noted that creditors were pressing, and tax and salary payments had to be made. He pointed to low morale of management, and to the adverse consequences if additional funds were not made available. One of these was that the emphasis on cash generation would cut profits and make the proposed float of the group less attractive. 128 Also on that day Mr Rees made a file note of his telephone conversation with Jose Blanco, a solicitor who was a director of RIH. Mr Blanco expressed the view that the directors must look at every available source to raise funds, if they believed the company to be profitable. He was concerned that creditors may claim against the directors if matters were to deteriorate. 129 AEFC eventually yielded to pressure on 5 December 1985, the day of the Rendell Industries board meeting, after a conference attended by Messrs Gledhill, Gallois, Rees and Kelly on that day. It agreed to grant a secured short-term money market facility of $525,000 to the Rendell group immediately. But it continued to press ANZ with the proposal to replace the deficiency guarantee with a mortgage debenture. AEFC declines to re-negotiate the deficiency guarantee 130 Eventually on 19 December 1985 ANZ wrote to Mr Kelly saying that it had agreed to release AEFC from the deficiency guarantee subject to a number of conditions, broadly on the lines of AEFC's proposal for a mortgage debenture and priority agreement. But AEFC did not implement the transaction. This appears to have been partly because Mr Rees and Mr Kelly were making increasingly optimistic assessments of AEFC's exposure under the deficiency guarantee, and perhaps they were correspondingly unwilling to give ANZ the substantial advantage of a priority security over the assets and undertaking of the business; and partly because concern about the deficiency guarantee became less pressing when Aequitas granted an indemnity in respect of it as part of the sale of the Rendell Industries shares. The bank followed up the matter in March 1986, and after discussions it was arranged that AEFC would write to ANZ saying that the proposed arrangement was no longer relevant and that the deficiency guarantee was still in force. 131 Mr Kelly wrote to ANZ on 8 April 1986, saying that because ANZ was not prepared to release the guarantee upon substitution of the new security (meaning, I take it, that ANZ was imposing conditions), AEFC would prefer to allow the current security arrangements to stand. ANZ had sought confirmation from AEFC that the deficiency guarantee continued to apply to the funding arrangements for the Rendell group. Instead, Mr Kelly merely said that 'the deficiency guarantee was forwarded to your office on 3 October 1985'. 132 That statement caused some consternation within the bank. The bank drew the inference from the letter that in AEFC's view, the deficiency guarantee was limited to the extent of the overdraft facilities as they stood at 3 October 1985. In the meantime the overdraft had increased from $95,000 to more than $200,000. Mr Austin of the bank wrote to Mr Kelly on 11 April 1986, setting out the history of the matter and the bank's concerns, and seeking formal confirmation that the guarantee could continue to be relied upon to cover all liabilities of the Rendell group to the bank on a deficiency basis, 'to ensure that the progress of the current financial reorganisation of the group is not stifled'. But AEFC did not give the bank the reply it sought, and the disagreement between them was not resolved until December 1997, after extensive negotiations in the wake of the Rendell collapse. The Turner report 133 In November 1985 Ian Turner & Partners (NSW) Pty Ltd, property consultants ('Turner'), were engaged to assist the Rendell group to decide whether to re-develop the Hurstville site. They produced a 'status report' dated 26 November 1985. The report discussed a range of options available for development or disposal of the Hurstville property. It stated that if Rendell Industries desired to liquidate its investment in the site, the most appropriate course of action would be to sell the property 'as is', and it could be expected to realise between $750,000 and $1 million. This estimate was dramatically below the previous valuations, the book value of the site ($2 million) and even AEFC's estimated recovery on realisation by forced sale ($1.6 million). 134 Turner's report was considered at the board meeting of Rendell Industries on 5 December 1985, when Mr Griffin advised that the report did not correspond to the brief that was given, and after discussion the board agreed that the group would not proceed with the re-development of the site and that the brief of Turner would be terminated. After Mr Griffin had instructed Turner to cease any further work on the assignment, Mr Turner wrote a letter dated 24 December 1985 to Mr Kelly at AEFC, explaining that their report had been a first interim report and they had expected to present a second interim report and a final report. The letter enclosed an invoice directed to AEFC. Mr Kelly forwarded the invoice to AEFCAS with a request for them to arrange for payment by the Rendell group. 135 The evidence does not indicate the terms of Turner's retainer, nor how it could be said that their report did not correspond with their brief. However, there is at least a ground for strong suspicion that the true reason for cancellation of the retainer was that Turner's estimated value of the Hurstville property was very inconveniently much lower than the valuation on which AEFC and AEFCAS had based their assessments of risk exposure to the Rendell group. AEFC's information about Rendell in December 1985/January 1986 136 Mr Griffin made three reports to the board of Rendell Industries on 5 December. He called the first a 'special report'. Given the crisis that had just been averted for the time being, the report was amazingly positive. It asserted that improvements that had commenced in the last quarter of the 1985 financial period were being sustained. It referred to reductions of cost of sales, debtors and creditors and management costs, and increases in revenue and margins, as well as the making of profits after two years of losses. The report said that there had been insufficient funding to cover cash losses prior to October 1984 and during the December-February period in 1984/85, when the Centrepoint project impacted on cash flow. It expressed the opinion that bridging finance was required. 137 The second report was Mr Griffin's report as managing director with respect to the October trading results for the Rendell group. He recorded that revenue and profits exceeded budget, and staff had been reduced by 14 with an additional reduction of 30 anticipated before Christmas. Revenue funding requirements had exceeded resources, and arrangements were being made with AEFC and ANZ to provide relief. He remarked that earlier commitments made by AEFC had not been met, and the effect had been very damaging. 138 The third report was a brief description of the difficulties encountered in attempting to raise short-term finance from ANZ and AEFC. The report noted that concerns had been expressed at the meeting of the board of RIH on 27 November that AEFC may not be dedicated as a shareholder, and it suggested that the Rendell Industries board should consider whether there was a conflict of interest on the part of AEFC as principal shareholder and substantial lender to Rendell. 139 At the board meeting Mr Rees responded to the allegation of conflict of interest by explaining the investment policy of AEFC, and by informing the board that AEFC's shares had been purchased by Aequitas. He explained the reasons for setting up Aequitas and the position in relation to the deficiency guarantee. He reported that AEFC had put $525,000 into the group earlier that day on a short-term basis. Mr Griffin responded by saying that $1.5 million was needed to fund the company effectively, and that management felt there was a lack of shareholder support. Mr Rees said that AEFC and AEFCAS had to take some of the responsibility for the recent funding problems, and explained that AEFCAS had left the negotiation of the funding arrangements directly to Rendell and AEFC. He agreed to meet with key management staff of Rendell, who were said to be very disillusioned. 140 It is clear that Mr Gledhill, Mr Gallois and Mr Kelly were closely following the events at Rendell, and were well aware of the information communicated to the 5 December board meeting. Mr Kelly's internal memorandum of 6 December 1985 referred to the 'considerable liquidity pressures' on Rendell. Nevertheless he made a very optimistic assessment of AEFC's exposure. He explained that AEFC had agreed to provide an additional $525,000 pending rearrangement of Rendell's finances, because it was not in AEFC's interest or the interest of Aequitas to increase the ANZ facilities while the guarantee still applied. He supported Mr Rees' suggestion of a sale and lease-back arrangement which would provide $1.9 million in cash to Rendell, which could be used to extinguish the cash facilities provided by ANZ. He calculated AEFC's exposure to the Rendell group on a basis that eliminated the equity investment of $250,000 because of the sale to Aequitas, and eliminated the deficiency guarantee as a risk exposure. Mr Gledhill appears to have accepted Mr Kelly's very optimistic assessment. 141 Mr Griffin reported to the board of RIH on 16 December 1985, dealing with the trading results for the five months ended 30 November 1985. Once again, profits and revenue exceeded budget, but the revenue included $875,000 of contract claims, without which revenue and profits would have been substantially reduced. The company's liquidity problems continued and the number of days outstanding for the company's debtors increased from 57.1 in October to 67 in November. He anticipated poor results for December and January. 142 On the same day Mr Griffin wrote a memorandum to management establishing a task force for cash control in order to avoid a 'constant cash shortfall'. He said that the company was owed $3.5 million and that it owed $2.3 million, but it was falling behind on collections. The task force would communicate daily and would implement some drastic remedies - for example, cash would only be paid on Fridays. 143 Mr Griffin's report on trading results to the board of RIH on 17 January 1986 continued this theme. Revenue and profits were both said to have exceeded budget, but management was under considerable pressure because of a negative cash position caused by inadequate funding and substantial growth. However, the board papers for the January 1986 meeting contained some ominous information about difficulties with suppliers, who had cancelled credit to Rendell and refused trade discounts. Clearly the company's liquidity problem was seriously damaging its business. Indeed, on 13 February 1986 Colin Campbell, a senior executive of the company, endeavoured to quantify the financial impact of the delay in meeting the company's equity funding requirements, and came up with the figure of $148,403. His report was considered at the February 1986 meeting of the board of RIH. 144 Mr Griffin continued to press Concrete Constructions to address its unpaid account of well over $1 million. Eventually Concrete Instructions offered to pay by instalments, and that offer was accepted. 145 Mr Griffin's optimistic assessments of profit appear to have been based on a fragile foundation. A memorandum to the executive committee from the accountant dated 18 December 1985 stated that, according to the November accounts, the group had made a loss to date for the financial year of $759,597.90. If advance billings were taken into account, the trading loss would be $1,227,957.90. While it is clear that Mr Gledhill and Mr Kelly, as well as Mr Rees and Mr Mullins, were aware contemporaneously of the information contained in documents presented to the Rendell Industries and RIH boards, the evidence does not show that they were aware of the accountant's calculations. Rendell's further decline in February/March 1986 146 By 17 February 1986 even Mr Rees was noting that 'excess debt is eroding profit margins' and affecting senior staff morale. In the same memorandum he observed that there were no net assets and that cash starvation was inhibiting the business. He said that an investment of $1.5 million in equity was needed. He discussed his assessment with Messrs Gledhill, Kelly and Gallois on 18 February. They considered possible short-term support by AEFC but decided that this would be conditional upon a positive response to the underwriting of Rendell's flotation, and the outcome of discussions with Concrete Constructions. At that meeting an assessment was made of Rendell's short-term cash needs and short-term cash flow expectations. The cash needs included tax and salaries, insurance and payments to 'difficult' suppliers. The shortfall by the end of February was calculated at approximately $495,000. 147 Mr Griffin's report dated 18 February 1986 on January trading results, made to the February board meeting of RIH, was more guarded than his previous board reports. He reported that revenue and 'gross margin' exceeded the forecast figures but he noted that the forecasts may have been distorted because they were calculated on an annual basis. Administration costs exceeded budget figures. He reiterated the need for better cash flow and noted that Rendell's pricing on quotes in recent months had exceeded the available market price. He said that the 'over-aggressive' collection methods used by the company were impacting adversely in the market place, and resistance was developing between builders and Rendell. Supply had been stopped on a number of jobs, with catastrophic effects. 148 According to the minutes of the meeting of 26 February 1986 at which he delivered that report, the board was advised that group tax payments were three months in arrears and that payroll tax was also considerably in arrears, and Mr Griffin said that the company's financial position had become 'parlous'. Mr Rees said that AEFC would not let Rendell down, but it was waiting for an underwriting agreement before making any commitment for further funding. 149 In about late February 1986 (but presumably after Bache's letter of 26 February 1986 offering to underwrite the Rendell fundraising) AEFC considered an application by Rendell for an extension of loan facilities from $1,695,000 to $2,700,000. An undated and unsigned memorandum, evidently prepared within AEFC, recommended that the additional facilities be granted. This was on the basis that the exposure to ANZ on the deficiency guarantee was negligible, since the net recovery on the Hurstville property would be $1.9 million. That memorandum was followed by a memorandum by Mr Kelly dated 3 March 1996 for the May meeting of the Australian Committee of AEFC. Mr Kelly recommended that loan facilities be extended to a total of $2,500,000 (disregarding the equity investment of $250,000), secured by a charge over the assets and undertaking of the group. The recommended facilities were a revolving term loan of $2 million for working capital and a bridging loan of $500,000 for short-term funding pending receipt of the proceeds of the public float. Mr Kelly noted that the proposed share issue upon flotation had been underwritten, and that the underwriter expected that the listing and capital raising should be completed within six to eight weeks. 150 Mr Kelly's recommendations were approved and implemented on 5 March 1986, evidently under executive authority. $700,000 was credited to Rendell's account and some $95,000 was withheld to cover unpaid interest, unpaid AEFCAS fees and other expenses. 151 Mr Griffin's report dated 26 March 1986 to the board of Rendell Industries on trading results to February 1986 said that both revenue and profit had fallen below forecast levels for February. He expressed concern that the forward sales program had not been achieved because Rendell had priced itself out of the market, and he also identified a lack of performance by the marketing manager. He said that the forecast year end results were becoming more difficult to achieve, although there was a better than even chance of success. 152 Mr Rees conceived the idea that the Rendell group balance sheet would be improved if AEFC's term loan of $2 million could be converted into preference shares. This would reduce interest costs and enable Rendell to use tax losses more effectively. He wrote a memorandum to Mr Kelly on the subject on 2 April 1986, but Mr Kelly annotated the memorandum to the effect that Mr Gledhill had already approved the conversion of the term loan to preference shares, and that appropriate documentation should be prepared. Another short-term loan of $200,000 repayable at call was obtained by Rendell from AEFC on 3 April 1986. The private placement of shares in Aequitas Planning for capital raising 153 Once Aequitas had contracted to purchase the Rendell Industries shares from AEFC Leasing, Mr Mullins and Mr Rees moved towards raising capital for Aequitas. Thus, Mr Mullins met with partners of Law & Milne on 11 December 1985 to discuss the proposed capital structure for Aequitas and the steps to be taken in any Aequitas capital issue. It appears that at that time, Messrs Mullins and Rees were proposing to subscribe for substantial quantities of shares in Aequitas, but AEFC was not. 154 Mr Mullins and Mr Rees engaged Charlton & Charlton, media consultants, to assist Aequitas. They reported some preliminary thoughts to Mr Mullins on 9 December 1985, seeing it as a principal objective to prepare the media, investors, the public and the financial community for the launch of Aequitas. They had discussions with Arthur Young, and with potential underwriters and directors. It appears that they were careful to do so on behalf of Aequitas rather than AEFCAS. 155 Versions of a document called 'Aequitas Limited Background Briefing Paper' were prepared in January 1986. According to the first version, Aequitas management were to retain 60 percent voting control of Aequitas. By the time of the second version, Messrs Rich, Pond and Donohoe had been proposed as independent directors and the investment proposed for Messrs Mullins and Rees was for a more limited number of fully and partly paid shares. Each version of the paper refers to opportunities available to Aequitas as a result of its association, through its directorate, with AEFC, which would 'initially provide a significant stream of opportunity for investment'. The paper claimed that potential investments would be closely evaluated, with commentary by Arthur Young. 156 Planning reached a level of maturity during January 1986. By the time of the board meeting of Rendell Industries on 29 January 1986, Mr Rees was able to report that Aequitas would be floated on the Primary Board of the Sydney Stock Exchange, and he advised on the board composition and the high profile that the company would have. 157 As previously mentioned, Bache agreed on 26 February 1986 that they would underwrite a rights and options issue for Rendell Industries immediately after its listing. Mr Rees also explored with Bache the possibility of an underwriting for Aequitas, and when Bache responded favourably, an information memorandum was drafted for review. A draft was submitted by AEFC to Bache on 5 March 1986. On 6 March 1986 representatives of Bache and Law & Milne met with Messrs Mullins and Rees (representing AEFCAS) and Mr Gallois (representing AEFC). The purpose of the meeting was to plan for the listing of Rendell and also for the listing of Aequitas. A draft information memorandum for Aequitas was reviewed. 158 Mr Rich became a director on 10 March 1986, and Messrs Pond and Donohoe became directors on 12 March. There was a board meeting of Aequitas on 12 March at which there was discussion about Mr Rees' proposal to revalue the holding of Rendell Industries shares by Aequitas No 1 by $72,000, and it was decided that the advice of Arthur Young as auditor be sought. The Aequitas board resolved to revalue its shareholding in Aequitas No 1 by $72,000 on 1 April 86, although Arthur Young's report of 12 March 1986 recorded that this had already taken place. The Aequitas private placement memorandum 159 The Aequitas information memorandum was finalised no earlier than 12 March 1986, since it contains a report by Arthur Young bearing that date. It was described as a 'private placement memorandum' for an equity capital raising of $5 million. The document was expressed to be for limited circulation to institutions and private clients of Bache whose ordinary business included buying and selling securities. It was said not to be an offer to the public. Hence the document did not purport to comply with the prospectus requirements of the day. 160 It contained a directors' statement which said that Aequitas had been formed to provide opportunities for small to medium sized commercial companies to expand their equity base prior to listing. Aequitas had already purchased equity in companies which met its objectives and had plans in train for the listing of one of its purchases (presumably Rendell). An advantage said to be enjoyed by Aequitas was the sourcing of opportunities through its special relationship with AEFC, which would provide valuable referral business flows. It was said that Aequitas intended to raise $5 million by way of private placement, to be followed immediately by a public issue to raise an additional $2 million, and then Aequitas would seek listing and official quotation, hoped for later in 1986. 161 An open letter from Mr Gledhill on behalf of AEFC dated 10 March 1986 was included in the memorandum. It said: 'Australian European Finance Corporation Limited supports the formation of Aequitas Limited by Mr Geoffrey Mullins, Managing Director of AEFC Advisory Services Pty Ltd and Mr Graham Rees a consultant to that company. 'In endorsing Aequitas' objectives Australian European Finance Corporation confirms that it will be working closely with the company by referring to it suitable investment propositions and joining with it in mutually beneficial business ventures. Over the next few years Australian European Finance Corporation is planning to expand its involvement in equity investment and Aequitas is seen as a valuable adjunct to the operations of both Australian European Finance Corporation and AEFC Advisory Services.' 162 Mr Gledhill's letter does not disclose the substantial role of AEFC itself in the formation of Aequitas, nor the detailed strategy developed in his paper dated 2 September 1985. Nor does the letter explain what would constitute suitable criteria for the referral of investments to Aequitas, or how Aequitas would be a 'valuable adjunct' to AEFC and AEFCAS. 163 The private placement memorandum contained a section entitled 'Corporate Objectives', saying that the principal objective was to provide long-term development capital to growing commercial concerns with good prospects and defined future plans. A 'Management Overview' outlined some proposals for the management of Aequitas by a 'small-overhead investment service organisation'. Then the memorandum described the 'Initial Investments' which had been made by Aequitas No 1. Of Rendell Industries it said only this: 'Aequitas No 1 has a commitment to complete the purchase from AEFC Leasing Pty Ltd of 74.8% of Rendell. Rendell is a group involved in ceiling subcontracting and general building services, with advanced plans to move into merchandising and other related fields. Rendell has a budgeted turnover in excess of $20 million for the 1985/86 financial year with an estimated pre-tax profit of $750,000 (tax losses will shelter this income). Rendell has been in business for approximately 58 years, has 300 employees and dominates its business segment. AEFC Advisory Services Pty Ltd currently is overseeing and managing a programme which will list Rendell on the Second Board, Melbourne and Sydney, by mid May, 1986. An Underwriting Agreement between Rendell and Bache Cortis & Carr Ltd has been entered into agreeing to underwrite a rights issue, upon Rendell's listing. This and other issues will dilute the position of Aequitas No 1 to approximately 30% of the issued ordinary shares. Aequitas No 1 is purchasing the shares in Rendell for $960,000, satisfied by debt repayable on or before 1st April, 1986.' 164 The report by Arthur Young, attached to the memorandum, did not purport to consolidate the Rendell group or give information about it. However, it recorded that Aequitas had resolved to revalue its investment in Aequitas No 1 by $72,000 and to issue partly paid shares to companies associated with Mr Rees and Mr Mullins. The memorandum showed that over 7.2 million shares of 25 cents each, most of them paid out to only one cent each but ranking equally for bonuses and rights, had been issued to interests associated with Mr Mullins and Mr Rees. An additional 5 million shares were now offered, the minimum overall level of subscriptions being set at 4 million shares. 165 The memorandum listed the directors as Mervyn Rich (Chairman), Geoffrey Mullins (Deputy Chairman), Graham Rees (Managing Director), and Alan Pond and Robert Donohoe, and gave biographical information about each of them. Mr Rees resigned as a director of Rendell Industries on 2 April 1985. 166 There is no hint in the memorandum of the liquidity problems that had plagued Rendell over the previous months, or the downsizing of staff, and the estimated pre-tax profit is presented without qualification. No information is given about AEFC's loans to Rendell. Nor is there any mention of the fact that AEFC Leasing had acquired the shares in Rendell Industries less than two months before selling them to Aequitas No 1, for a consideration of only $250,000 (plus the alleged but illusory consideration of procuring loan funds from AEFC). Finally, the memorandum does not mention the $50,000 fee received by AEFCAS out of the sale. Fundraising under the private placement memorandum 167 The memorandum was distributed to various prospective investors in March 1986. For example, on 24 March 1986 Mr Mullins on behalf of Aequitas wrote to the Commonwealth Bank of Australia enclosing copies of the memorandum and inviting the Bank to take up shares. The letter asserted that Aequitas was 'independently managed' and that its objectives had been set to achieve its own goals, not to meet objectives set by the network of relationships which it had. I regard those assertions as self-serving and far from conclusive. 168 Mr Gledhill submitted a memorandum dated 19 March 1986 to the Australian Committee of AEFC for consideration at its May 1986 meeting. The memorandum recommended that AEFC should take up 400,000 fully paid ordinary 25 cent shares in Aequitas for $100,000, with an option to subscribe for an additional 1.6 million shares exerciseable by 31 May 1986 for an additional $400,000. He drew attention to the utility of Aequitas for AEFC, in much the same words as he had used in his strategy paper of 2 September 1985. He said that it would assist the stockbrokers in the flotation of Aequitas if AEFC were to take a direct investment in the company. 169 He said that Aequitas was 'conceived and structured' by Mr Mullins. That observation does not give enough credit to Mr Gledhill himself, for if he did not conceive the Aequitas idea, he was involved in its development from a very early time. 170 Rather than waiting for the May meeting of the Australian Committee, Mr Gledhill circulated his memorandum to the members of the Australian Committee immediately in March, inviting them to give their decision on a 'round-robin' basis. The Chairman of the Committee, Mr Christie, made it clear that he did not favour AEFC investing in Aequitas, because the investment could be interpreted by the investing public as an endorsement of Aequitas by the Commonwealth Bank. In a memorandum dated 26 March 1986 Mr Gledhill remarked that Mr Christie 'obviously still holds reservations as to how successful this company might be and does not want to provide any suggestion that the CBA will be used as a source of feedstock to supply Aequitas with investment opportunities'. In view of Mr Christie's attitude, the proposed investment was deferred for discussion by the Committee at their meeting in May. 171 Notwithstanding the absence of support by AEFC, Bache was able to place $2.35 million of the initial private placement by late March 1986, including an investment of $750,000 by AMP which would be settled on 1 April, in time for completion of the Rendell purchase. Sufficient money must have come in by 1 April, because on that day Aequitas forwarded to Mr Gledhill a cheque for $960,000 in full settlement of moneys owing under the agreement of 25 November 1985. This was in fact an overpayment of $1,000, since that amount had been paid on 25 November 1985. The $1,000 was duly refunded on 3 April. 172 The Australian Committee of AEFC met on 30 April 1986, and agreed unanimously that AEFC should not take up the investment of $500,000 in Aequitas that had been recommended by management. The Committee's reasoning was that an investment by AEFC referred to in Aequitas' prospectus might incorrectly imply that AEFC's shareholder banks were committed to support Aequitas. The Committee instructed management to ensure that the public prospectus and media launch of Aequitas made it clear that AEFC and its shareholders had no financial interest in Aequitas. 173 Of course, by that time Aequitas had issued a private placement memorandum and had attracted significant investments. But the proposed prospectus for a public offer of shares was still in course of preparation. Mr Gledhill sent a memorandum to Mr Mullins on 2 May 1986 reporting the Australian Committee's decision and indicating that the Committee had criticised AEFC's letter of 10 March 1986 which had been included in the private placement memorandum, principally because the AEFC letterhead identified its shareholder banks. He proposed a redrafting of the letter, on a different letterhead, for the public prospectus, in which the letter would point out that AEFC did not hold any financial interest in Aequitas. Mr Gledhill's report of April 1986 and the formation of AEFC Equities 174 Mr Gledhill prepared a further board paper dated 16 April 1986. He said that management's experience and investigations since the earlier paper had only served to confirm the desirability of gradually building up an involvement in equity investment. The objectives would be to 'broaden the range of AEFC's financial services, gain increased recognition as an innovative financier and provide an attractive return on the funds invested'. Mr Gledhill proposed that a special purpose funding vehicle to be known as AEFC Equities Ltd would be used to make equity investments. AEFC Equities Ltd would be a new unlisted public company rather than the existing entity, AEFC Leasing. It would be wholly owned by AEFC and therefore individual transactions would need to be approved or ratified by the Foreign Investments Review Board, as AEFC had not been able to obtain a blanket approval for its investments. AEFC Equities would be funded predominantly by loan moneys from AEFC. Its investments would be realised by sale to other investors, facilitated in many cases by the intention to float the relevant company on the Stock Exchange. 175 Mr Gledhill's paper also reported on the formation and flotation of Aequitas. He said that an initial capital raising of $7 million had been arranged by a leading Melbourne stockbroker by way of a $5 million private placement, which had been filled in less than three weeks, with the balance to come from a public float, probably in August 1986. He said that Aequitas would be managed by the directors of AEFCAS and would play an important role in the activities of AEFC Equities and the merchant bank, as follows: 'Any investment proposition considered unsuitable for AEFC Equities could be referred to Aequitas, whose wider investment criteria might permit acceptance. AEFC Equities will be able to offer Aequitas options over its investments where it desires to realise a short term profit and fulfil its policy of being a short term investor. Aequitas is capable of removing much of the primary risk of equity investment positions from AEFC. Aequitas is an Australian owned company, not subject to FIRB guidelines. Accordingly, once it accepted an option to acquire shares held by AEFC Equities any case for investment presented by AEFC Equities to the FIRB could be greatly strengthened. Aequitas will augment the activities of the Advisory Service by providing an alternative source of equity funds, thereby assist the advisory clients. Aequitas will be able to secure additional clients for AEFC through its interaction with the Advisory Service.' 176 These observations give a clear insight into Mr Gledhill's thinking. He saw the formation of Aequitas as an integral part of a strategy (the other principal part being that AEFC's investments must be short term and therefore capable of being disposed of quickly) for laying off the risk to AEFC of moving into the field of equity investment. Implied in this strategy is the proposition that Aequitas would operate in AEFC's interests. 177 Mr Gledhill reported that, since the October board meeting, 14 proposals had been considered but only four had received serious consideration, including the Rendell Industries investment. He reported briefly on the Rendell Industries investment, noting the 'substantial capital gain' to AEFC Leasing and observing that the company had been given 'a fresh sense of direction through the introduction of new management'. 178 The April paper was considered by the AEFC board at its meeting on 23 May 1986. The board resolved to permit management to proceed with a gradual and selective expansion of equity investments on the basis outlined in the paper. The minutes noted that there was discussion of the 'potential conflict of interest within the AEFC Group arising from the establishment of Aequitas Ltd and the possible moral obligations flowing from AEFC's association and identification with that company', but no particulars of that discussion were given. The board resolved to seek further details of the need to establish AEFC Equities as a separate subsidiary, and it delegated authority to approve the incorporation of AEFC Equities, in light of additional information, to its Australian Committee. 179 In fact, management had put the formalities in train before the board's decision, with the result that AEFC Equities was incorporated on 3 June 1986. Mr Gledhill wrote a further paper about AEFC Equities, dated 15 July 1986, for the Australian Committee. Although the paper did not contain much in the way of new information, it concluded with a recommendation that the Committee confirm management's action in incorporating AEFC Equities. Consequences of AEFC's decision not to invest in Aequitas No 1 180 AEFC had thus succeeded in launching Aequitas into the private placement market without committing itself to any investment in the company, while creating the impression that there was a close relationship between Aequitas and AEFC, and that AEFC strongly supported Aequitas. Of course, this was not an outcome satisfactory to everyone, least of all the Aequitas board. At their meeting on 10 June 1986 one of the directors, Mr Donohoe, raised the question as to where AEFC now stood in relation to Aequitas. Mr Mullins gave a non-committal reply. 181 In a letter to Mr Grieve of the Sydney Stock Exchange dated 23 June 1986, evidently in response to concerns expressed about the vendor securities requirements of the listing rules, Mr Mullins described the relationship between AEFC and Aequitas as an arm's length relationship, emphasising that AEFC had not acquired shares in Aequitas. The letter claimed that Mr Mullins and Mr Rees had 'formulated the concept and entity of Aequitas' and that AEFC 'preferred the two companies to be at arm's length'. The letter gave a false impression because it understated the functional relationship which had been highlighted in Mr Gledhill's board paper. 182 This functional relationship was developed further after the float of Rendell Industries. On 29 May 1986 a Deed of Priority was entered into by AEFC, Aequitas No 1, Rendell Industries and RIH. The deed contemplated that Aequitas No 1 would make advances to Rendell Industries totalling $486,375, and would take a second equitable mortgage (after AEFC) over the assets of Rendell Industries. On 26 June 1986 Aequitas No 1 lent Rendell $250,000, secured by an equitable charge. In a file note of the same date Mr Rees recorded that 'the short term arrangement is to be channelled through Aequitas No 1 Ltd in what has become the usual manner'. The principal sum was later increased to $600,000, and Aequitas No 1 agreed that repayment would be postponed until 31 December 1986, the debt being secured by an equitable charge executed on 16 July 1996. The capitalisation and preparations for listing of Rendell Industries The issue of shares to Rendell employees 183 After AEFC Leasing acquired a majority interest in the Rendell group on 3 October 1985, Mr Rees set about planning the private placement of shares to employees. Evidently one of his purposes was to avoid the prospectus requirements of the Companies Code. He took advice from Holman Webb. On 18 November 1985 he wrote to Mr Griffin as managing director of Rendell Industries, confirming the steps to be taken in order to complete the issue of shares as contemplated by the Shareholders Agreement. First, senior management would be invited to subscribe up to $250,000 for 1,562,500 shares as soon as they had arranged funding. Secondly, AEFCAS would subscribe for a sufficient number of shares to enable it to direct Rendell Industries to issue one share to each employee. (It may have been thought that, once the employees became shareholders in this way, any subsequent offer of shares would be to existing shareholders and, under the law of the day, no prospectus would be required.) Thirdly, once a share had been issued to each employee, 1,562,500 shares would be offered to the employees by non-renounceable issue. AEFCAS would procure an underwriter for both tranches. 184 The plan was never fully implemented. The initial single share was issued out of the share premium account to approximately 300 employees on 5 December 1985. Those shares were distributed to employees with a covering letter from Mr Griffin dated 12 December 1985. The letter referred to the proposed stock exchange listing and foreshadowed that employees would be given the opportunity to acquire further shares of 20 cents each, discounted to 16 cents. On 16 December 1985 Mr Griffin reported to the board of RIH that a media consultant would implement 'an incremental program of creating awareness' amongst employees so that by the end of January the staff's morale would have been 'conditioned ... to be receptive'. The company would then 'test the water' in the first week of February. 185 The documentary evidence indicates that problems with the proposed placement to employees were emerging by January 1986. In his report to the board of RIH dated 17 January 1986 Mr Griffin reported that the planned promotional campaign was continuing, but said that he expected senior executives to be 'less than enthusiastic' about the placement. 186 This lack of enthusiasm was articulated forcefully by Mr Norman Rendell. He had a meeting with Mr Rees on 12 February 1986. Mr Rendell complained that he had agreed to sell his shares on the basis that there would be a further equity injection to ensure continued viability of the business and the security of employment of the majority of the employees. In fact, he said, the sale had achieved nothing except to increase the debt burden of the organisation beyond reasonable measure. He was concerned that AEFC had subsequently sold its interest at a profit to a company that had no money. He expressed the view that a proportional equity injection by all shareholders should be made before any invitation was made to the staff to subscribe for shares. That would demonstrate the continuing interest of the majority holder. Without such a demonstration, he said, he and other senior executives would have no interest in subscribing for shares. 187 Concurrently some difficulties were emerging about the proposed flotation of the Rendell group. In a paper dated 23 January 1986 Mr Rees reported that the Second Board stock exchange was suffering from lack of trading liquidity and he hinted that a direct listing on the Primary Board or an indirect listing by reverse takeover may be preferable. Nevertheless Mr Rees met with Bache on 19 February 1986 to discuss an underwritten fundraising of $1.5 million for Rendell. What emerged were proposals, considered by the Rendell Industries board on 21 February 1986, to raise funds by a rights issue after the flotation of Rendell Industries, rather than to raise funds from employees. The new proposal was to issue some shares to selected employees out of the share premium account (perhaps this was to obtain a sufficient shareholding spread to permit listing); to create an ongoing executive share options scheme; and to make an underwritten non-renounceable rights issue of 7,950,325 shares (6.5 million shares being on issue at that time); and an option issue, which would raise $1,590,065. 188 The board meeting of RIH of 26 February 1986 was informed that 102 employees had been nominated as recipients of shares on the basis of length of service, each receiving 200 shares, but the certificates would not be issued until taxation implications had been considered. By March 1986, 100 employees had made applications for employee shares to be issued out of the share premium account. The Rendell Industries board was informed on 26 March 1986 that the only matter outstanding was for the company to obtain advice in relation to the taxation implications of issuing the shares. Evidently appropriate advice was obtained in due course and the 200,000 fully paid ordinary shares were issued to 200 employees prior to flotation. Private placement of Rendell shares and options 189 It appears that the private placement of 1,970,000 fully paid ordinary shares of 20 cents each to professional investors was also approved in February 1986, though there is no board minute in evidence. The placement was successful and was completed by allotment on 6 May 1986. 190 It also appears that on 26 February 1986 Rendell Industries issued 3,250,325 free options to the existing shareholders, proportionately to their holdings. 2,431,873 options were issued to Aequitas No 1. On 6 May 1986 an additional 985,000 options were issued on the same terms to the investors in the private placement. The options entitled the holders to subscribe for one share per option at an exercise price of 20 cents per share. The options expired on 15 June 1989 and were first exercisable on 15 June 1986, by notice served within the preceding ten days. 191 On 26 February 1986 Bache confirmed in writing that it would underwrite the rights and options issue, on condition that the company would be first listed and its existing shares admitted to quotation. A draft information memorandum was then prepared. The Pond Report and Mr Pond's appointment as executive chairman 192 Alan Pond had an engineering background and had worked for 20 years as managing director of Hunter Douglas, a home improvement and building company. He was appointed a director of Aequitas on 12 March 1986, as one of the 'independent' directors recruited to the Aequitas board with a view to public listing and fundraising. He was the only director of Aequitas with practical and technical knowledge of Rendell's business. 193 After his appointment to the board of Aequitas, he was immediately retained by Aequitas (through his consulting company Iluka Holdings Ltd) to provide consulting services and a report in relation to the company's investment in Rendell Industries. His report is undated but seems to have been completed late in March 1986, judging from the dates of the various exhibits to it. In the report Mr Pond noted that the proposed share float of Aequitas by way of a private placement memorandum relied heavily on its major asset, Rendell Industries. He said that the purpose of the consultancy assignment was to determine independently the present viability of Rendell and provide an assessment of its future potential. 194 Mr Pond had several meetings with Mr Griffin in which the latter explained the business and his business strategy. Mr Pond was given copies of pertinent documents, including: business strategies; budgets; board reports; and external consultant reports. They discussed the accounting policies of the group and visited some building sites. 195 Mr Pond reached a very favourable assessment of Rendell's prospects. He found that the present outlook for 1985/86 results was good, predicting a profit between $650,000 and $750,000 before tax, and he said that the short-term projections for the following year showed good growth in current contracting business and new business prospects. He observed that the funding of Rendell was of critical importance. A budget was due to be considered and its approval would be subject to funding being provided by the public float, by Rendell's shareholders (mainly Aequitas) and by Rendell's financial consultants, AEFCAS. He said that prospects for this funding appeared to be favourable. Provided funding was obtained, Rendell's future was limited only by the limitations and imagination of its management. 196 Mr Pond's assessment of the prospects of the Rendell group is surprising, given the information to which he had access. It is not easy to understand how he could have reached such positive views after reading, for example, the board papers for the directors' meeting of Rendell Industries of 5 December 1985, which (according to the index of his report) were provided to him. He was also given copies of the agreements of 3 October 1985 by which AEFC Leasing acquired the Rendell Industries shares, and therefore he was aware, or was able to find out, that AEFC Leasing paid only $250,000 for the shares. Yet he made no comment about that subject. 197 Mr Pond impressed Mr Griffin with his thorough understanding of the industry and his knowledge of Rendell. On 17 March 1986 Mr Griffin wrote to Mr Mullins recommending that Mr Pond immediately join the board of Rendell Industries, and that the board of Rendell Industries (rather than the board of RIH) should become the principal board for the group. Mr Pond met with Mr Mullins and Mr Rees on 20 March 1986 to brief them on his review. He told them he was comfortable with middle management and the employees, but saw room for improvement in senior management. 198 After that discussion there was a change to the composition of the boards of Rendell Industries and RIH, confirmed at the meeting of the Rendell Industries board on 6 May 1986. The RIH board (which was an intermediate subsidiary board) was made less significant and the Rendell Industries board (the board of the holding company of the group) was expanded and rearranged. Mr Pond became Executive Chairman of Rendell Industries, with Mr Griffin as Managing Director and Mr Mullins as Deputy Chairman. 199 Mr Pond's report was not presented to the Aequitas board until 13 May 1986, but the board was informed of its preparation at a meeting on 1 April 1986, when Mr Pond informed the board that his report was 'presently being typed', and that it would be presented at the next board meeting. On the same day the board resolved that Aequitas advance $200,000 to Rendell Industries. Aequitas No 1 advanced $486,375 to Rendell Industries pursuant to a board resolution made on 23 May 1986. Planning for the flotation of Rendell Industries, and the rights and options issue 200 By early April 1986 Rendell Industries was planning for a public listing on 16 May 1986. On 8 April 1986 Mr Griffin wrote to Mr Rees instructing him as financial adviser to examine alternative banking and funding arrangements for the Rendell group, because Mr Austin of ANZ had been promoted and so there was no assurance that the special relationship that had existed with ANZ would continue. The letter stressed that the group's growth plans required adequate long term and short term funding. Mr Rees pursued the proposal for a preference share issue to AEFC, noting in a memorandum dated 18 April 1986 that Rendell Industries had advised AEFCAS that a standby line of $1 million in addition to present funding would be needed by 30 June. Mr Rees remarked that this would not be difficult to achieve, given the proposed conversion of options by Aequitas and the injection of placement moneys, the confirmed this view by a memorandum dated 29 April 1986. 201 In his memorandum of 29 April Mr Rees reviewed the Rendell group's banking relationships with ANZ and AEFC. He developed the argument that the quantification of AEFC's guarantee position was difficult and therefore the current funding arrangements may not be the most efficient, and that the most appropriate approach would be to negotiate with ANZ for a fixed amount for the deficiency guarantee. He believed that those negotiations should be opened after Rendell Industries had listed. 202 There was a flurry of activity when the 16 May deadline for flotation of the Rendell group approached. Final changes to the information memorandum for the float were prepared, as noted in a memorandum of a meeting of Messrs Pond, Mullins and others on 7 May 1986. The company's marketing campaign was reviewed at a meeting of the directors of Rendell Industries on 8 May 1986. But it seems that too much still needed to be done to make the 16 May deadline feasible, and it was abandoned. 203 By 20 May 1986 relations between Mr Griffin and Mr Rees (by then the managing director of Aequitas) had deteriorated substantially. On that day Mr Griffin wrote to Mr Rees to update him on the cash forecasts of Rendell Industries for the period to 30 June 1987. The tone of the letter was critical of the failure of Aequitas, AEFCAS and AEFC to provide adequate funding in the past, leading to an estimated increased cost burden of about $1 million for the current financial year and a management turnover of 50% during the year, as well as diminished confidence in Rendell which Rendell on the part of employees, suppliers and builders. He insisted that Rendell's management must have an adequate level of reliable and regular funds, with a better balanced gearing, to ensure forecast profits and growth. The letter enclosed several papers which recommended that AEFC should convert its short-term loan into a three-year loan at a more equitable rate of interest, and that Aequitas should exercise the options it held in Rendell Industries as soon as possible to improve the equity and gearing of the company as well as to provide working capital to enable budget projections to be met. 204 A new deadline was set for an information memorandum to be presented to the Stock Exchange by noon on 2 June. But even by 1 June 1986 a great deal of administrative work was needed, as recorded by Mr Griffin in his letter to Mr Pond of that date, in which Mr Griffin recommended that no application be lodged with the Sydney Stock Exchange until a long list of administrative matters had been attended to. 205 The investigating accountants delivered their report to Law & Milne, solicitors for Rendell in the float, on 2 June 1986. A covering letter recorded that the report had been amended to give effect to the receipt of 2,431,875 options (presumably this refers to the shares issued upon exercise of the options) by Aequitas No 1 on the '15th instant', thus increasing issued capital by $486,395. The report was undated and was apparently prepared in the expectation that certain transactions, including the exercise of options by Aequitas, would subsequently take place. The date for the allotment of the 1.97 million privately placed shares was for some reason left blank. 206 In May 1986 the company had opened negotiations for a distribution agreement with Dryvit Systems Inc, a US corporation. The negotiations contemplated that Dryvit would take a placement of shares in Rendell and the president of Dryvit would join the board of directors of Rendell. The placement would not exceed 10% of the total issued capital of Rendell after the rights issue had been made. These negotiations were not finalised prior to the issue of the information memorandum, and therefore the information memorandum disclosing the negotiations had to be reviewed by Dryvit. By memorandum dated 2 June 1986 Mr Rees reviewed the position and noted the work still to be done, and noted that an executive decision had been made to lose a further week on the timetable. 207 An additional source of concern was the fate of the rights issue underwritten by Bache. In a memorandum to Mr Mullins dated 2 June 1986, Mr Rees said that it was time to indicate to the underwriters the likely take up under the rights issue. His review indicated that Aequitas and interests related to management would not take up their rights, but that employees were likely to do so to the extent of about $75,000 to $100,000. Investors in the private placement of 1.97 million shares would, he said, take up their rights. 208 On 3 June 1986 Aequitas No 1 wrote to notify Rendell Industries that it would exercise its 2,431,875 options and would pay by converting its loan to Rendell Industries in the amount of $486,375 into equity. The notice of exercise of option was subsequently submitted, bearing the date 13 June 1986. 209 Mr Rees reviewed the position of Rendell Industries in a file note dated 12 June 1986. He noted that the company owed approximately $30,000 to Law & Milne and approximately $150,000 to Charlton & Charlton (media consultants). He recorded some points made to him by Mr Griffin: suppliers were a problem and it was necessary to find $50,000 in the ensuing week otherwise no more tiles would be delivered; profit would exceed the targeted minimum of $650,000; total float costs would be approximately $250,000 but that figure had not been budgeted for; and Mr Griffin expected that approval of refinancing by ANZ would be given within the following week. Mr Rees' memorandum also shows that administrative arrangements for the float were still being completed, with some discussion as to whether the timetable could be altered. Difficulties between Mr Pond and Mr Griffin 210 Mr Pond's appointment as Executive Chairman did not resolve the difficulties within the Rendell group, and added some new ones. He asked Mr Griffin for a report summarising the matters which were adversely impacting on Rendell's performance, and the matters that were bothering Mr Griffin in particular. Mr Griffin replied by means of a personal and confidential letter dated 2 May 1986. He said that Rendell's growth during the previous 12 months had been excellent, and that its performance had been hampered only by liquidity difficulties. He expressed the view that the company had sound plans for achievable growth, and had successfully introduced contemporary management methods. In his view Rendell had been dogged by broken commitments, irrational changes of direction, inadequate shareholder support and the creation of a highly political corporate environment, all brought about because the new owner (Aequitas) was unclear of its strategies, which were still evolving. He complained of delays in achieving listing, and the involvement of too many people in the pre-listing procedures without adequate accountability. He said that he had been excluded from discussions and decisions relating to Rendell's capital, board structure and business acquisitions. He expressed the view that decisions and strategies had been undertaken with emphasis upon Aequitas's strategic needs rather than Rendell's, creating a possible conflict of interests. Referring to difficulties raised by Mr Pond as to the respective roles of the executive chairman and managing director, Mr Griffin said that perhaps all that would be needed to remove doubts would be a board resolution to the effect that Mr Pond had been appointed executive chairman to ensure that Aequitas' interests were adequately looked after and to provide a means communication between both companies. This would leave Mr Griffin with the responsibility for executive management of the group. 211 Prior to or after the letter of 2 May 1986, the relationship between Mr Pond and Mr Griffin broke down, and Mr Pond took the view that Mr Griffin should resign. He discussed his view with Mr Mullins, and at a meeting of Aequitas board of directors on 10 June 1986, not long before the listing of Rendell Industries. At that meeting Mr Pond complained that Mr Griffin had not kept him informed about Rendell's operations, especially in relation to the financial position of the group. He said he had no confidence in Mr Griffin, and that Mr Griffin's appointment as managing director of Rendell should be terminated. Mr Mullins endorsed those comments and said he believed there had been a deliberate attempt to distance Mr Pond from the company, instigated by Mr Griffin. Mr Mullins said he no longer had confidence in the managing director. 212 In a later handwritten commentary on a minute of the Aequitas board meeting, Mr Rees said that the discussion came across as a boardroom power struggle of personalities, rather than a fundamental concern on figures and financial records, and that to sack Mr Griffin just before the float would be destabilising, in the absence of specific knowledge of wrongdoing. Perhaps for those reasons, it was decided only that Mr Griffin's performance should be closely monitored. It is probable that the events at the Aequitas board meeting of 10 June were not disclosed to Mr Gledhill until much later, since he expressed surprise when he found out, on 14 July 1986, that the services of Mr Griffin had been terminated. The listing of Rendell Industries 213 Rendell Industries was admitted to the list of the second boards of the Sydney and Melbourne Stock Exchanges on 27 June 1986. Its information memorandum was issued on 20 June 1986. 214 The information memorandum showed that the company's issued capital was 11,102,200 shares of 20 cents each, mostly paid for by consideration other than cash. This included the options recently exercised by Aequitas No 1, but other option holders had not yet exercised their options. It stated that Aequitas No 1 held 65.71% of the issued shares, but the holding would be diluted as a result of the planned non-renounceable rights issue and the exercise of options. The rights issue would be a 3 for 4 issue with attaching options, underwritten by Bache. The funds raised would be used for formation and listing expenses, and working capital for further development and expansion of the business. A total of 6,502,744 ordinary shares and 3,251,372 options would be offered. 215 The investigating accountant's report by McClenaughan, Wilkinson & Co dated 17 June 1986, said that the operating profit of RIH before income tax for the 11 months to 31 May 1986 was $598,594, with no provision for income tax because of accumulated losses. A statement of assets and liabilities for RIH as at 31 May 1986 showed net assets of $1.4 million. A consolidated balance sheet for the group as at 31 May 1986 showed net assets of $2.747 million, and a pro forma consolidated balance sheet showing the effect of the rights issue stated the net assets to be $4.047 million. 216 The information memorandum disclosed that Aequitas No 1 had acquired the shares and options held by AEFC Leasing for $960,000 on 1 April 1986. But the document was much less clear as to the consideration provided by AEFC Leasing when it acquired its Rendell Industries shares in the previous October. Only a careful reading of the disclosure of material contracts in the section of the document dealing with 'additional information', together with the section dealing with 'share capital details', or the investigating accountant's report, would inform the reader that the consideration comprised subscription for 100 shares at a premium of $2,499 per share and AEFC Leasing's 'procuring a short-term debt facility for Rendell and further arranging for the guarantee by AEFC of certain lines of credit'. 217 The document gave a very rosy account of the business prospects of the group. The document said that because of its specialist ability, Rendell continued to be involved with some of Australia's largest and most prodigious projects, with a forward workload in excess of $17 million and active marketing of its services to ensure that budget revenue targets were met. The document set out a summary of the two-year budget forecast, painting a picture of a stronger and buoyant company with considerable growth and diversification. The disclosed loss in RIH was said to be 'due to increased interest charges on borrowing made to finance the operating losses and increased working capital requirements'. Anticipated net profit for the year ended 30 June 1986 was said to be between $650,000 and $780,000, and the budget estimate for net profit (after the absorption of tax losses) for the 1986/87 financial year was said to be in excess of $1 million. It was recorded that the directors believed, and had every reason to be confident, that the forecasts were achievable. 218 There was no mention of the concerns, constantly reiterated in private memoranda, about cash flow and the poor relationships of the group to its builders and suppliers. There is a stark contrast, for example, between the 'business prospects' section of the information memorandum and the memorandum by Mr Rees dated 12 June 1986. It is hard to believe that the information memorandum was talking about the company so anxiously portrayed by Mr Griffin in his board reports of December1985/March 1986. The failure of the Rendell group 219 On 30 June 1986 Mr Griffin's services were terminated. Not surprisingly, such a major corporate event, following so soon after listing, attracted comment in the financial press. It was also 'something of a surprise' to Mr Gledhill, who said (in a memorandum dated 15 July 1986) that AEFC had always been under the impression that Mr Griffin was a key element in the revival of Rendell. Mr Gledhill had expected that after the listing of Rendell on 27 June, there would be a public capital raising of $1.5 million to overcome the group's pressing liquidity problems. Obviously that prospect was fading rapidly. 220 It appears that Mr Griffin was effectively forced to resign by his co-directors. An accountant formerly employed by the Rendell group had complained to the Corporate Affairs Commission, alleging manipulation or falsification of the financial records of group companies. Mr Pond also discovered some matters that he regarded as disturbing, suggesting that Mr Griffin had deliberately withheld the true financial position of the group from its directors, and that he had embarked on very costly programs without the full knowledge and consent of the board. Arthur Young was engaged to conduct an independent audit. Mr Pond replaced Mr Griffin as managing director. 221 On 22 July 1986 Mr Mullins informed Mr Gledhill that Arthur Young had located serious errors in the Rendell group's work in progress for April/May 1996. The result was that instead of the projected profit of $750,000 contained in the Rendell offering memorandum, the true result for the year ending 30 June 1986 was a loss of $1.5 million. Recriminations were not slow in coming. At a meeting on 24 July 1986, representatives of Bache expressed the opinion that the position regarding Rendell was very serious, implying that there had been fraud, and stating that the directors of Rendell Industries could be held liable. Bache were inclined to place primary responsibility on the shoulders of Mr Mullins and Mr Rees. As Mr Gledhill remarked in a memorandum dated 24 July 1986, that did not reflect favourably on AEFC. 222 On 23 July 1986 the stock exchanges were requested to suspend trading in the shares of Rendell Industries pending a report by the directors, and they did so on 24 July. Trading was never resumed. At about the same time Mr Gledhill alerted the Chairman of AEFC to the situation; he urgently had an assessment made of AEFC's financial exposure to Rendell; and he sought advice as to AEFC's exposure to liability, and as to its ability to appoint a receiver to protect its securities. He raised the question whether AEFC should obtain a separate independent accountant's report, but decided to rely on Arthur Young. 223 The Rendell group was clearly, by early July, in a desperate financial position. Mr Pond told Mr Gledhill that the group could not continue trading unless further funds were injected in the week beginning 14 July. According to Mr Gledhill's memorandum of 15 July 1986, he made it clear to Mr Pond that AEFC was in no position to put further funds into the group and that unless Aequitas was able to assist, the directors of Rendell had little option but to 'appoint a receiver', and 'this would have horrendous implications for Aequitas which would virtually write off its investment'. He was aware that Aequitas had been placed in a difficult situation, 'being a fledgling company with funds of $2 million already being tied up in Rendell'. 224 It was indeed a difficult situation for the board of Aequitas. At their meeting on 11 July 1986, Mr Pond and Mr Mullins announced that they would resign as directors of Aequitas at the end of the meeting. They informed the board that if Aequitas would not advance further funds to Rendell, then they would both resign as directors of Rendell, as they could not be put in the situation as directors whereby the Rendell group was unable to pay its debts as and when they fell due. It was resolved that in view of the urgent liquidity situation of Rendell, Aequitas would advance Rendell $1 million on 14 July 1986 and $0.5 million on 14 August 1986 for a period of one year, and that this loan would be subordinated to all other debts of the Rendell group. It was also resolved that Aequitas make an application to AEFC for a $2 million line of credit. 225 The meeting was not completed on 11 July (which was a Friday), and it continued on Sunday 13 July. The exact sequence of events is unclear, since the minutes are somewhat repetitive. It appears that Mr Rich explained to Mr Pond that the availability of funds to Rendell on 14 July would depend on Aequitas first obtaining a line of credit from AEFC or elsewhere. It was agreed that every effort would be made to make funds available. 226 There was a further meeting of the Aequitas board on 15 July. According to the minutes: 'Originally it was the recommendation of Richard Green of Bache (speaking for major shareholders) that Aequitas should fully support Rendell in meeting its debts. However, this was not the considered opinion of the Aequitas board in the absence of full information as to Rendell's financial position and particularly having regard to the need of Aequitas for prudent cash reserves and to its own financial commitments.' I infer that the board rescinded its earlier decision. The board then resolved to make a line of credit of $500,000 available to Rendell. According to the minutes, the loan was made on the recommendation of Bache so that wages could be paid, supplies obtained and time gained for completion of the Arthur Young report. The amount of the loan was subsequently increased to $600,000 to take account of the need for immediate supplies to a Canberra site of $50,000 and the accounts listed by Mr Mullins which added up to $535,000. On 16 July 1986 Rendell Industries granted an equitable charge to Aequitas No 1. It was a fixed charge as to certain assets and a floating charge as to the remainder. 227 Mr Pond purported to resign from the Rendell board as from 14 July 1986, while continuing as a consultant to the company. In a letter to Mr Gledhill dated 17 July 1986, he spoke of Rendell's fragile state but referred to the possibility of salvage, and said that Rendell was paying the price of not getting rid of Mr Griffin, contrary to advice he had given some months previously. 228 By late July 1986 Arthur Young had reached the provisional conclusion that the Rendell group was facing liquidation unless a rescue plan could be mounted. Barry Glover, former chief executive of Hooker Corporation Ltd, agreed to head a rescue plan subject to AEFC and Aequitas agreeing to certain conditions. Those conditions provided for Mr Glover's investment company, Barlile Corporation Ltd, taking 25% of Rendell for nominal consideration, AEFC and Aequitas converting their loans to equity, Barlile having an option to purchase 50% of the shareholding in Rendell exercisable within three years, and AEFC providing subordinated debt of $500,000 interest-free for 12 months and an additional facility of $1 million on existing terms and conditions for three years. Mr Gledhill reported Mr Glover's offer to the Australian Committee of AEFC, in a paper dated 29 July 1986. 229 Heads of agreement were entered into on 28 July 1986 between AEFC, Aequitas, Barlile and Rendell for a rescue plan. However, on 8 August 1986 AEFC wrote to the other parties purporting to rescind the agreement. The rescission was said to be as a result of information received by AEFC, subsequently to the heads of agreement, from officers of Rendell and Arthur Young. According to AEFC's letter, Rendell was insolvent and so some conditions precedent to the arrangements were incapable of implementation. Additionally, false representations had been made as to the financial position of Rendell (including a balance sheet claiming assets of $22 million, whereas the true asset position was approximately $4 million). AEFC claimed that there had been mutual mistakes of fact, and that the consideration it would receive in the transaction was illusory because shares to be issued by Rendell under the agreement were valueless. AEFC also alleged breach of fiduciary duty by Rendell, which was said to be in a fiduciary position by virtue of the heads of agreement and was said to have breached its fiduciary duty by not fully and accurately disclosing its financial position. Responses to the Rendell failure within AEFC 230 Three kinds of responses were developed within AEFC after the Rendell disaster became public: enforcement of its security over Rendell assets; termination of the joint venture and dissolution of AEFCAS; and internal review of AEFC procedures. Enforcement of AEFC's security over Rendell assets 231 After it had terminated the rescue plan, AEFC was evidently placed under considerable pressure by creditors of Rendell to support the company. One creditor contacted AEFC claiming that Mr Mullins had represented that AEFC would stand behind Rendell. Mr Gledhill issued instructions to respond to any such claim on a 'no comment' basis. 232 On 13 August 1986 AEFC exercised its security rights by appointing a partner of Arthur Andersen & Co as receiver and manager to certain assets of Rendell Industries under its equitable charge. Arthur Andersen decided that Rendell would cease trading, except for work in progress. Their preliminary assessment was that the prospect of recovery of more than 20 percent of secured indebtedness was slight, but that the final position would depend on asset realisations, the outcome of a claim by the Commissioner of Taxation and certain claims made on performance bonds. Mr Gledhill reported, accordingly, to the Australian Committee on 20 August 1986. He also noted the disagreement between AEFC and the ANZ Bank as to the scope of the deficiency guarantee. 233 Subsequently there were extensive negotiations between AEFC and the ANZ Bank with respect to AEFC's liability on the deficiency guarantee. It is unnecessary, for the purposes of this decision, to set out fully the evidence concerning these negotiations. It is sufficient to say that eventually (on 11 December 1987) AEFC and the ANZ Bank agreed to settle their dispute on the basis that AEFC would pay the bank $1.745 million. I should note that in addition to this payment, AEFC wrote off $1 million against a provision for the loss on loans to Rendell, on 30 September 1986, a further $1 million on 21 March 1988 and eventually a further sum of $500,000. 234 After Arthur Young made their preliminary report, which expressed the opinion that shareholders' funds of Rendell Industries should be adjusted downwards by $7.2 million, a provisional liquidator was appointed to Rendell Industries on 18 August 1986, less than two months after listing. 235 The receivership continued during the period 1986-88, and the receiver eventually reported in about February 1989. AEFC received regular reports from the receiver during this period, the substance of which was passed on to the Australian Committee. By November 1988 the position was that the funds available for distribution from the receivership would be $115,400 if a claim by the Commissioner of Taxation succeeded, but if the Commissioner's claim was unsuccessful, the amount available for distribution would be $629,800. There would be no funds available for the provisional liquidator. 236 In a report to the Australian Committee dated 20 October 1986, an officer of AEFC called Mr Balmforth gave an account of the work of Arthur Andersen as receivers and managers, concluding that net funds of $414,000 would be likely to result from the receivership. The report noted in passing that one of the objectives of the appointment of the receiver had been to reduce funds available to the provisional liquidator, thereby restricting the latter's ability to institute proceedings to set aside the receiver's appointment and to enforce the heads of agreement against AEFC. The report said that no surplus would be passed back to the provisional liquidator, who was inactive because of lack of funds. Termination of the joint venture and dissolution of AEFCAS 237 A principal part of Mr Gledhill's response to the Rendell disaster, after his initial surprise, was to place considerable blame on the shoulders of Mr Mullins. In a paper dated 15 July 1986, he expressed concern that Mr Mullins had not mentioned Rendell's financial difficulties in a memorandum written by him on 9 July 1986, seeking conversion of AEFC's bridging loan of $500,000 to an increase revolving term loan of $2.5 million. He observed that 'Mr Mullins is aware that, as AEFC Advisory Services are advisers to Rendell, we are relying on him to keep us fully informed of developments'. 238 Mr Magill, an officer of AEFC, made a note on 28 August 1986 of a conversation on 27 June 1986, during which Mr Mullins was said to have remarked that there were serious management problems at Rendell and there were doubts/reservations regarding Rendell's accounts. Mr Gledhill endorsed this note on 29 August 1986, querying why Mr Mullins allowed the listing of Rendell to proceed, and saying that it was 'almost incomprehensible that Mr Mullins did not have some insight into the Rendell problems long before 27 June 1986'. 239 By August 1986 AEFC had developed plans for the termination of the joint venture. The plans included reversal of the payment of $69,400, said to have been made in error. It appears that this amount had been paid on 14 July, which was the same day Mr Mullins announced discrepancies in the Rendell accounts. Evidently someone at AEFC had told the directors of CASO not to distribute this money through family trusts, but staff of AEFC suspected that the money had been disbursed, and that Mr Mullins' share of it had been used as part of the purchase price for a house which Mr Mullins acquired. However, it does not appear that the reversal of the payment was in fact implemented. 240 A draft resolution for a proposed meeting of directors of AEFCAS referred to serious allegations made against the managing director of AEFCAS (Mr Mullins) in relation to Rendell and his failure to recognise the parlous financial position of Rendell, and loss of confidence in him in relation to the joint venture. Mr Gledhill had a discussion with Mr Mullins, without prejudice, in a final attempt to negotiate a mutually accepted termination of the joint venture. 241 The joint venture was in fact terminated, evidently by consent, on 29 August 1986. AEFC acquired CASO's shares in AEFCAS. AEFCAS was recorded as the holder of 192,500 shares in Rendell, which Mr Gledhill described in a note to a memorandum of 24 September 1987 as in the nature of a 'success fee'. 242 A memorandum by Messrs Gledhill and Magill dated 14 October 1986 for the Chairman of AEFC referred to advice from Holman Webb that 'it would be prudent to place [AEFCAS] into members' voluntary winding up as soon as possible', as the winding up might prevent future claims against the company arising out of advice given or work done. The memorandum proposed that the directors of AEFC should appoint a representative for a meeting of the shareholders of AEFCAS to resolve that the company be wound up voluntarily and that Arthur Andersen be appointed liquidator. The memorandum recommended that AEFC should proceed with the winding up of AEFCAS 'as soon as possible'. 243 AEFCAS changed its name to Terralion No 8 on 25 November 1986. According to a memorandum by Mr Magill dated 23 February 1987, the change of name, like the winding up, was undertaken as a defensive measure against claims being lodged against AEFCAS for services provided or work done. 244 An extraordinary general meeting of the members of AEFCAS resolved on 19 December 1986 that the company be wound up voluntarily. On 29 December 1986 the liquidator of AEFCAS wrote to Mr Gledhill confirming an arrangement for the distribution of the assets of AEFCAS upon payment of his fees. The final meeting of the company was held on 9 February 1987 and a return of that meeting was lodged with the Corporate Affairs Commission on 16 February 1987. Consequently, in the absence of intervention the company would be deemed to be dissolved on 16 May 1987. A concern arose in February 1987 when the Commission issued a notice for the production of books extending to AEFC and all its subsidiaries, since it was apprehended that this might lead to postponement of the dissolution of AEFCAS. But it did not, and AEFCAS was dissolved in May 1987. Internal review of AEFC procedures 245 As one would expect, Rendell's failure had sufficiently deleterious financial consequences for AEFC, that it was noted and responded to by the company and its shareholder banks at the highest level. A person identified as 'managing director' (perhaps the chief executive of the Commonwealth Bank) wrote a memorandum dated 31 July 1986 which indicated that he had been personally involved in in damage control after Rendell's difficulties had become public. He said that Rendell's chances of survival could not be assessed until an auditor's report became available within the next two or three weeks (presumably this refers to the report of Arthur Young). He noted that Mr Glover was of the opinion that an additional $850,000 would need to be written off. He said that he informed Mr Rich of Aequitas that AEFC's board had asked him to stress that neither AEFC nor the Commonwealth Bank of Australia would become financially involved with Aequitas if that company ran into liquidity difficulties. He said that the Mr Rich had responded that this approach was predictable and reasonable. He said that after speaking with Mr Gledhill, he had commissioned Mr Cleary (who belonged to AEFC's Corporate and International Head Office) to conduct an inspection of AEFC looking in particular at the advisory service area and the 'moral obligations that AEFC's shareholders [the Commonwealth Bank of Australia and the European banks] may have inadvertently 'assumed''. 246 Mr Cleary reported to the Chairman of AEFC, Mr Christie, on 29 August 1986, with respect to moral obligations that the AEFC shareholders may have inadvertently 'assumed'. He noted that the briefs undertaken by AEFCAS had been singularly unsuccessful, but that he had not identified any instances which might embarrass the shareholders of AEFC, except for the cases of Aequitas and Rendell. Mr Cleary reviewed the control measures over AEFCAS for protection of the interests of AEFC and the shareholders. He noted that Mr Gledhill was greatly dependent on Mr Mullins for information, and that Mr Mullins was a difficult man over whom to exercise effective control. In Mr Cleary's view, the lack of success of AEFCAS was a combination of some lack of effectiveness of Mr Mullins, unrealistic expectations on the part of clients, incorrect assumptions about likely avenues of equity capital, and lack of selectivity in taking on briefs. He said that in hindsight, Mr Gledhill would exercise closer supervision of joint ventures in future. He recommended the termination of the joint venture, and that in future AEFC should offer only a limited and highly selective corporate advisory service, as a division under the direct supervision of the general manager or his delegate. 247 Mr Cleary produced a further report, addressed to Mr Christie, who was the chairman of AEFC. After observing that no unwelcome developments or legal action had occurred since his earlier report, and that the damage to the names and reputations of AEFC and CBA through the Rendell collapse had so far been minimal, Mr Cleary reviewed procedures with respect to loan processing and other matters. He criticised the balance of AEFC's loan portfolio, which (he said) 'fell away quickly' to loans to relatively weak companies with a strong property development bias. He expressed misgivings about AEFC going down market, and identified conflicts of interest when AEFC combined equity and funding interests in property development projects. The report also criticised procedures for decision-making and the lack of talent in the staff of AEFC. 248 Both the managing director and the chairman of AEFC responded in writing to Mr Cleary's report. The managing director wrote a memorandum for the general manager (Mr Gledhill) and for the personnel division dated 22 October 1986. The document criticises Mr Kelly, who is said to have been overenthusiastic to write business without due regard, or perhaps the necessary background, for penetrating and fundamental consideration of the lending risks involved. Mr Kelly's secondment to AEFC was terminated. 249 On the same day the Chairman wrote a note for Mr Gledhill expressing disappointment that greater care had not been taken to ensure that equity investments were set up on a firmer and more commercial basis from AEFC's point of view. The Chairman expressed the opinion that AEFC, in its thrust for new business, had become involved at the low end of the market with some companies and individuals whose reputations were at best questionable. Much time and money would have been saved if fundamental lending practices had been followed. The Chairman demanded strenuous efforts directed to ridding AEFC's books of any clients whose reputations could be said to be questionable, and restricting business to first-class names in the future. 250 A note by Mr Gledhill says that he had not been consulted before the managing director and Chairman accepted Mr Cleary's report, and that some of the conclusions of the report were not based on facts. The effect of Rendell's failure on Aequitas and Aequitas No 1 251 In April 1986, having successfully completed the private placement to investors, management and the board of Aequitas proceeded with plans for public flotation and listing on the Stock Exchange. New articles of association were adopted, and plans were made for the audit date for the investigating accountant's report to be 31 May 1986. 252 The Aequitas board had good access to information about Rendell because of the presence of Mr Pond, Mr Rees and Mr Mullins on both boards. They also had good access to information about AEFC, through Mr Mullins. When AEFC decided not to make an equity investment in Aequitas, Mr Donohoe raised the question (at the Aequitas board meeting of 10 June 1986) as to where AEFC now stood in relation to Aequitas. Mr Mullins gave a noncommittal reply. 253 Aequitas Asset Management Pty Ltd ('AAM') had been proposed in the placement memorandum as an entity which would sponsor and underwrite corporate investments, and also take positions in placements. By July 1986 AAM had negotiated to set up a share broking entity and purchase a unit trust management company called Key Securities. Mr Rees told the board on 10 June 1986 that AAM would probably need around $4-5 million of equity to become fully operational. His report to the board meeting of 11 July 1986 set out a plan for raising capital for AAM, on a basis that would require Aequitas to invest $750,000 in equity and $1.25 million in short-term debt, but prevent AAM from being a subsidiary of Aequitas. The plan involved granting options and issuing contributing shares. One of the investors was to be Cascade Finance Pty Ltd, which was also engaged to provide consulting services in respect of 'business development opportunities' for AAM. 254 In his report as managing director for the Aequitas board meeting of 11 July 1986, Mr Rees gave an account of progress towards implementation of various strategies. His report set out some figures as to usage and commitment of funds raised to that time. He said there was a small uncommitted balance of funds, not sufficient to cover potential loan positions to Rendell and another proposed borrowing company. He suggested it was necessary for Aequitas to begin a borrowing programme. He noted that Rendell Industries had been listed on 27 June 1986, but there had been subsequent material events, as to which he was preparing a separate report. He noted that there would be increased involvement by Arthur Young in coordinating the prospectus and helping to structure AAM. A draft investigating accountant's report had been prepared for the prospectus, which did not consolidate the Rendell investment. 255 Evidently the financial crisis at Rendell came to be known to the directors of Aequitas by the time they met on 11 July 1986. As I have indicated, the board initially resolved to provide finance to Rendell of $1.5 million, and then they rescinded that decision and made available only $600,000. At their meeting on 15 July 1986, they instructed Mr Green of Bache to endeavour to find a buyer for Rendell Industries or Aequitas No 1, and to investigate the possibility of a reverse takeover of Aequitas. Effectively, the plans for a public share offer and flotation of Aequitas had been shelved, in view of the position at Rendell. 256 The board subsequently authorised Aequitas to enter into the heads of agreement with Mr Glover's Barlile Corporation. However, after AEFC appointed a receiver to some of the assets of Rendell Industries, the board resolved to rescind the heads of agreement. On 13 August 1986 the board authorised the company to be a plaintiff in proceedings for the appointment of a provisional liquidator to Rendell. Subsequently they took advice from Law & Milne as to their available courses of action with respect to Rendell, and in due course they resolved to make a demand on, and take proceedings against, AEFC, AEFC Leasing and Mr Gledhill. Claims and legal proceedings 257 Bache commenced proceedings against the company and certain of its officers, and the company's auditors, quite soon after the Rendell collapse. The evidence does not indicate the outcome of those proceedings. 258 On 17 September 1991 Aequitas wrote to Mr Gledhill regarding Rendell. The letter referred to the purchase of shares in Rendell and put him on notice that Aequitas had grave concerns regarding certain aspects of that transaction and the involvement of AEFC and the Commonwealth Bank of Australia. The letter referred to a written opinion from counsel stating that Aequitas No 1 had a strong cause of action against AEFC for at least, but not limited to, $710,000 plus interest. The letter said that on the basis of this advice, the board of Aequitas No 1 felt duty-bound to pursue the matter. The letter proposed a meeting in a bid to resolve the matter without litigation. The matter was not resolved and the present proceedings ensued. 259 Other proceedings were commenced in this Court with respect to the subject matter of the present action. The other proceedings are No 5874 of 1991, commenced by a statement of claim filed on 25 November 1991. The plaintiffs in those proceedings are AEFC, AEFC Leasing and Mr Gledhill. The defendants are Mr Mullins, Mr Rees, Mr Griffin, Mr William Rendell, and the accountants McClenaughan, Wilkinson and Bonner. The statement of claim alleges negligent advice, including misrepresentations to the effect that investment in Rendell would be worthwhile, advice about restructuring the transaction, representations that Rendell was financially viable, and advice about the desirability of selling to Aequitas No 1. The damages claimed include the amount paid by AEFC to ANZ under the deficiency guarantee, the writing off of debts in the sum of $2.5 million, and any liability that may arise in the present proceedings. 260 As to the latter point, the statement of claim alleges that if (which is denied) the plaintiffs are liable to Aequitas and Aequitas No 1 for participating in breaches of fiduciary duty by Mr Mullins and Mr Rees as pleaded in the statement of claim of the present proceedings, the plaintiffs in those proceedings say that Mr Mullins and Mr Rees are liable to indemnify and/or contribute to any liability so arising. Similarly if the plaintiffs are found to be liable in the present proceedings for breach of a duty of care, they say that they were relying on the defendants to provide accurate and full information concerning the transactions and there was a duty of care that has been breached. What did AEFC and AEFCAS know about the financial plight of Rendell group at the time of the purchase of shares by Aequitas No 1, and the issue of the Aequitas private placement memorandum? 261 It can be taken that AEFCAS knew what was known by Mr Rees, and AEFC knew what was known by Mr Gledhill. It emerged in July 1986 that Mr Griffin had misled the Rendell boards, and that the true financial position of the Rendell group was much worse than he had told the boards. I infer that Mr Gledhill and Mr Rees, and therefore AEFC and AEFCAS, were just as much misled by Mr Griffin as were the directors (other than Mr Rees) of the Rendell boards and Aequitas. 262 However, Mr Rees and Mr Gledhill did have the information about Rendell's difficulties that was provided to the boards. By 12 March 1986 (the approximate time of issue of the private placement memorandum), this information disclosed that the Rendell group had experienced severe cash flow difficulties throughout the period from the commencement of involvement of AEFCAS with the group. Much of the information related to cash flow difficulties which, though serious, could be overcome by the injection of adequate equity or loan funds. However, there was also some information going beyond cash flow difficulties. By mid-March 1986 it had become clear that the Rendell group had reduced its business by declining to tender for certain kinds of work; that it had reduced its staff; that by pressing to recover unpaid accounts it had antagonised builders for whom it worked, including its major customer; and that it had encountered significant problems at some sites. 263 This was information about emerging business issues which might impact upon the achievement of the budgets and profitability of the group. The significance of the information needed to be assessed by an expert in Rendell's business and industry rather than an expert in financial analysis. Mr Griffin, who knew Rendell's business very well, provided such assessments regularly. Mr Pond was an expert in the building industry. It is significant that, although he was supplied with the documents (principally board papers) that contained the information to which I have referred, he was able to make a strongly positive assessment of the prospects of the Rendell group in March 1986, concluding that the 1985/6 profit before tax would be between $650,000 and $750,000. It is also significant that in their report of 12 March 1986, Arthur Young noted without disagreement that Aequitas had recently revalued the Rendell shareholding by $72,000. 264 The knowledge about the Rendell group that was accumulated by Mr Rees and Mr Gledhill during the period from July 1985 to March 1986 told them, in short, that Rendell had serious and recurring cash flow difficulties of a kind that could be alleviated by a substantial injection of equity or loan capital, and that there were some emerging business issues that had not yet impacted upon profits. But given the favourable expert assessments by those who were knowledgeable in the business, and the fact that both the ANZ Bank and AEFC had provided loan funds during that time, they were not on notice that the group was insolvent. 265 I accept that Mr Gledhill subjectively believed, on 25 November 1985 when the sale agreement was executed, that the price to be paid by Aequitas No 1 was a fair price, and that there was a probability that the market price of Rendell Industries shares would exceed the price paid after listing. But even then, developments within the Rendell group should have made him apprehensive (see, for example, Mr Kelly's memorandum dated 14 November 1985). Developments shortly after execution of the sale agreement should have caused him serious concern. The Rendell group's difficulties were sufficiently acute that, in my view, a reasonable person in the shoes of Mr Rees or Mr Gledhill would have had serious concern as to the insolvency of the group, as from the financial crisis of early December 1985. 266 These conclusions have particular implications for two matters: namely, the veracity of the calculations by Mr Rees of the value of the Rendell group; and the adequacy of the disclosure in the Aequitas private placement memorandum. 267 As to the first matter, Mr Rees made several calculations of the value of the Rendell group during the period from July to December 1985, as I have noted. In July 1985 his view was that, once the group had been adequately financed by AEFC, it would have a value of between $1.3 million and $1.7 million. According to his calculations made in July 1985, to which he subsequently adhered, if AEFC Leasing's 74.8% interest was diluted to 50.5% by the issue of shares to employees, it would be worth $910,000. Mr Mullins and Mr Gledhill were aware of these calculations. Mr Gledhill acted upon them, for the purpose of recommending the acquisition of Rendell Industries shares to AEFC's chairman and then authorising the transaction, and also for the purpose of lending decisions. 268 The defendants have urged me to find that the views expressed by Mr Rees on the value of the Rendell group amounted to a 'bona fide and considered view' shared by Mr Gledhill. I have no reason to doubt that the views expressed by Mr Rees in July 1985 were genuinely held by him at that time, and that he believed he had calculated the value of the group in good faith on the basis of reliable information - nor that he adhered to this belief until March 1986 or even later, notwithstanding the financial crisis of early December 1985 and later events. It was open to him to believe that the events that had occurred since his various valuations of the Rendell group had not provided a good reason for him to change his valuation opinion, but the assumptions upon which his valuation opinion was based would need to be carefully stated or else the opinion would be misleading. If he were asked to expand his valuation into a comment on the prospects of the group, it would have been incumbent upon him to explain that the group's future viability depended on the accuracy of the information supplied by Mr Griffin, and on the assumption that adequate funding would be available to avoid future cash flow problems. The greater the grounds for serious concern as to the group's future prospects, the more meticulous the qualifications to the opinion would have to be. In other words, the objective basis for serious concerns about the future of the group should have made him extremely careful about any information he supplied about the group. 269 Mr Gledhill was aware of the valuation opinions by Mr Rees that had been made available to AEFC, and appears to have believed them, and to have understood the assumptions and qualifications upon which they were based. That being so, the existence from December 1985 of an objective basis for serious concern about the prospects of the Rendell group should have made him, like Mr Rees, extremely careful about any information he supplied about the group. However, in Mr Gledhill's case there was an additional reason for concern about expressions of valuation by Mr Rees, arising out of the conflicts of interest to which Mr Rees was subject. 270 Mr Rees was subject to acute conflicts of interest during this period, which were a substantial obstacle to his making an objective assessment, and accurate disclosure, of Rendell's prospects. As a consultant working for the joint venture, whose success depended on AEFC, it was in his interest to make the joint venture look good in the eyes of AEFC, by delivering a substantial profit to AEFC Leasing on the Rendell transaction. That depended on persuading AEFC that the cost of acquisition of the Rendell Industries shares was well below their true worth. As an adviser to Aequitas, it was in his interest to support the acquisition of the shares at a much higher price by demonstrating that the price represented fair value. As an adviser to the Rendell group, it was in his interest to support a positive valuation in order to show that his restructuring strategy was working. 271 I regard as significant, for the purposes of these findings, the events surrounding termination of the retainer of Turner. Mr Rees was present at the board meeting of Rendell Industries on 5 December 1985 when the decision was made to terminate Turner's brief. Mr Turner wrote to Mr Kelly on 24 December 1985, and it is probable that the substance of that letter was communicated to Mr Gledhill. As I have said, the circumstances surrounding termination of the brief provide a ground for strong suspicion that the true reason for cancellation of the retainer was Turner's low estimate of the Hurstville property's value. A reasonable bystander would have been concerned that the valuation of the Rendell group may have been overstated, and would have expected a new independent valuation to be prepared. 272 I turn to the second matter. Mr Rees was closely involved in the preparation of the Aequitas private placement memorandum, and in reviewing it as a director of that company. The objective basis for serious concerns, to which I have referred, should have made him extremely careful about the document's disclosure of the prospects of the Rendell group. Instead, he allowed the document to go forward with a glowing account of Rendell Industries' financial position and future, without insisting that the disclosure be supplemented by an account of the matters of concern which had been disclosed to the Rendell boards and to him personally. 273 Mr Gledhill was not directly involved in the preparation and issue of the Aequitas private placement memorandum. However, he knew that Aequitas was to issue a private placement memorandum to attract external investors, and that by far the most substantial asset of Aequitas was its holding (through Aequitas No 1) of Rendell Industries shares. He was also aware of the various positions occupied by Mr Rees, and should have realised that those positions placed Mr Rees in a position of acute conflict of interest. He had knowledge of these matters in his position as general manager of AEFC, and therefore AEFC had the same knowledge. For reasons I shall explain, AEFC as a member of the joint venture that provided financial and corporate advice to Aequitas, and as a promoter of that company, owed it fiduciary duties. In all these circumstances, AEFC was in a position to insist, through Mr Gledhill, that an independent review of the valuation of Aequitas be prepared, and that the Aequitas private placement memorandum be drafted to reflect the conclusions of that independent review. 274 Mr Pond's report cannot be regarded as the independent review that should have been undertaken before the issue of the private placement memorandum, for at least two reasons. First, Mr Pond was not required to review specifically the valuations of the Rendell group that have been made by Mr Rees. Secondly, although the dates are not entirely clear, it appears likely that the private placement memorandum was issued and distributed on or shortly after 12 March 1986, and Mr Pond's report was probably not completed until late in March. It was not considered by the Aequitas board until 13 May 1986. I find that the Pond report was not available (and was therefore not in fact relied upon by the drafters) until after the private placement memorandum had been issued and significant investments had been made in reliance upon it. 275 I do not find that Mr Gledhill actually disbelieved the contents of the private placement memorandum at the time of its issue, or that he was recklessly indifferent as to its truth or falsity. My finding is that at the time of distribution of the private placement memorandum, Mr Gledhill was aware of serious grounds for concern about the future solvency of the Rendell group, and that he did not instigate or require any further inquiries as to the financial position and valuation of the group before the private placement memorandum was issued, notwithstanding that (to his knowledge) the document contained a positive assessment of the Rendell group and a supportive letter by him as general manager of AEFC. The plaintiffs' causes of action 276 In their further amended statement of claim, filed pursuant to an order made by me on 24 June 1999, the plaintiffs put forward causes of action that rely upon: · breach of the fiduciary duty of financial advisers, · breach of directors' duties, · breach of promoters' duties, · unlawful payment of a secret commission, · knowing involvement by the defendants in breaches of fiduciary duties by Messrs Mullins and Rees, · the tort of deceit, and misleading or deceptive conduct under s 52 the Trade Practices Act or s 42 of the Fair Trading Act, · conspiracy, · negligence, and · breach of an implied term of a contract. The defendants deny that they are liable on any of these grounds. I shall consider each ground in turn. However, since there are some recurring issues with respect to the application of the equitable grounds of liability, I shall first make some observations and findings about the equitable obligations generally. 277 Later in this judgment I shall find that AEFC breached the fiduciary duty of a corporate and financial adviser, that AEFC and AEFC Leasing breached their fiduciary duty as promoters, and that AEFC Leasing paid a bribe or secret commission to AEFCAS for the benefit of AEFC. The payment of a bribe is, relevantly, a form of breach of fiduciary duty. My findings as to these three breaches of fiduciary duty raise some common questions, as follows: · What is the content of a fiduciary duty - do fiduciary duties go beyond the negative duties to avoid conflicts and unauthorised profits, to the positive duties to act in good faith in the interests of the principal, and with prudence, and to make accurate and full disclosure? · In a case such as the present, where the principal is a fledgling company under the control of its promoters, whose informed consent should be obtained to avoid breach of fiduciary duty? · Should the knowledge and consent of Messrs Mullins and Rees be attributed to Aequitas and Aequitas No 1 in the present case? I shall consider these common questions before turning to the individual equitable duties. The content of fiduciary duties 278 The further amended statement of claim pleads that Mr Gledhill, AEFC and AEFCAS owed fiduciary duties to Aequitas and Aequitas No 1 by reason of Aequitas retaining AEFC by its agent AEFCAS, to provide corporate and financial advice. The pleading sets out the content of the fiduciary duty, evidently relying on the observations of Brennan J in Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 370, 385. His Honour said: 'Whenever a stockbroker or other person who holds himself out as having expertise in advising on investments is approached for advice on investments and undertakes to give it, in giving that advice the adviser stands in a fiduciary relationship to the person whom he advises. The adviser cannot assume a position where his self-interest might conflict with the honest and impartial giving of advice: see In re a Solicitor; Ex parte Incorporated Law Society [1894] 1 QB 254, 256; Armstrong v Jackson [1917] 2 KB at 824-5. 'The duty of an investment adviser who is approached by a client for advice and undertakes to give it and who proposes to offer the client an investment in which the adviser has a financial interest, is a heavy one. His duty is to furnish the client with all the relevant knowledge which the adviser possesses, concealing nothing that might reasonably be regarded as relevant to the making of the investment decision including the identity of the buyer or seller of the investment when that identity is relevant, to give the best advice which the adviser could give if he did not have but a third party did have a financial interest in the investment to be offered, to reveal fully the adviser's financial interest, and to obtain for the client the best terms which the client would obtain from a third party if the adviser were to exercise due diligence on behalf of his client in such a transaction. Such a duty has been established by authority: see Haywood v Roadknight [1927] VLR 512 and the cases therein referred to at p 521, especially Gibson v Jeyes (1801) 6 Ves Jun 266, 271, 278 [31 ER 1044, 1046-7, 1050] and McPherson v Watt (1877) 3 App Cas 254, 266.' 279 Thus, the plaintiffs' pleading asserts fiduciary duties to (a) furnish Aequitas with all relevant knowledge which the fiduciaries possessed, concealing nothing that might reasonably be regarded as relevant to the making of an investment decision; (b) give Aequitas the best advice which they could give if they did not have, but the third party did have, a financial interest in a proposed investment; (c) reveal fully their respective financial interests in a proposed investment; (d) obtain from a third party the best terms which Aequitas would obtain from a third party if AEFC, by itself or by its agent AEFCAS were to exercise due diligence on behalf of Aequitas in such a transaction; (e) disclose information in their possession which would indicate that a transaction was likely to be a most disadvantageous one from Aequitas' point of view; (f) make a full and accurate disclosure of AEFC's own interest in the transaction; and (g) make full and accurate disclosure of any improper inducement that was to be paid to AEFCAS or any person who was a director of AEFCAS or any entity in which any such person had an interest. 280 It will be seen that the pleading closely tracks Brennan J's remarks. Analytically, the pleading asserts positive duties of two kinds: duties to disclose various sorts of information (paragraphs (a), and (c), (e), (f) and (g)), and duties to act in the best interests of another in the provision of advice (paragraphs (b) and (d)). The pleading does not expressly articulate the negative fiduciary duties of avoiding positions of conflict between interest and duty or between duties, and avoiding any unauthorised profit. 281 The defendants submit that none of the positive duties alleged in the pleading is properly to be described as a fiduciary duty. The only fiduciary duties, they say, are the negative duties, and these are not pleaded. Disclosure of information, leading to informed consent, may absolve a fiduciary from what would otherwise have been a breach of duty, but (the defendants submit) there is no fiduciary duty of disclosure as such. 282 The defendants' point is not merely pedantic. If the positive duties are not fiduciary duties, their true source may be in contract or tort. As we shall see, the measure of recovery at common law differs from the measure of recovery for breach of fiduciary duty in equity. 283 It may seem surprising that a pleading based closely on Brennan J's considered words should be challenged as misconceiving the nature of fiduciary duties. But judicial thinking about the content of fiduciary duties has changed significantly over the last decade, especially in cases where the fiduciary and the principal are in a contractual relationship, or where the fiduciary owes the principal a duty of care. In England, courts have resisted the idea that there is a special standard of care for fiduciaries, to which a special equitable measure of damages is attached: for example, Henderson v Merrett Syndicates Ltd [1994] 3 WLR 761; White v Jones [1995] 2 WLR 187. In Australia, after acknowledging the co-existence of contractual and fiduciary rights in Hospital Products Ltd v US Surgical Corporation (1984) 156 CLR 41, the High Court has decided to confine the fiduciary component of the overall relationship to a number of specific duties: Breen v Williams (1986) 186 CLR 71. The question in that case was whether a patient had the right to demand access to her medical records. In McInerney v McDonald [1992] 2 SCR 138, the Supreme Court of Canada had held that a patient was entitled to access to medical records partly because the doctor-patient relationship is fiduciary. The High Court rejected that reasoning. 284 In the High Court's view, the essential fiduciary obligations were to avoid conflicts between interest and duty or between duty and duty, and profits arising out of the fiduciary office, in the absence of fully informed consent. Obligations to act in the interests of another, or to act prudently, are not fiduciary obligations. According to Dawson and Toohey JJ (at 93), what the law extracts from a fiduciary relationship is loyalty, often of an uncompromising kind, but no more than that. Gaudron and McHugh JJ (at 113) held that a fiduciary is obliged not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict, but 'the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed'. Gummow J (at 137) said that the special position of the trustee does not provide a proper foundation for 'the imposition upon fiduciaries in general of a quasi-tortious duty to act solely in the best interests of their principals'. Fiduciary obligations often arise in cases where one person is under an obligation to act in the interests of another, but that does not mean that the obligation to act in the interests of another is a fiduciary obligation. 285 In fiduciary law, 'informed consent' is 'an answer to circumstances which otherwise indicate disloyalty, not a mainspring of equitable liability': Breen v Williams, at 125 per Gummow J; see also Maguire v Makaronis (1997) 188 CLR 449, 467 per Brennan CJ, Gaudron, McHugh and Gummow JJ. Australian law is to be contrasted with the law of the United States, where 'informed consent' represents some assumed synthesis between the tort of negligence and principles of fiduciary duty law giving rise to a 'free-standing' action in damages. 286 The reasoning in Breen v Williams is quite a distance away from Brennan J's dictum in Daly v Sydney Stock Exchange, and yet Daly v Sydney Stock Exchange was cited by Gummow J (at 134) without any hint of disapproval. It would be possible to reconcile the cases by orienting each case to its facts, on the basis that the doctor-patient relationship is less comprehensively fiduciary than the financial adviser-client relationship. But that distinction would not give effect to the conceptual analysis which found favour with five of the six judges who decided Breen v Williams. The logic of their analysis is that most of the observations of Brennan J do not relate to the fiduciary character of the adviser's position. 287 In my opinion, in light of the reasoning in Breen v Williams, Brennan J's dictum should be taken to refer, for the most part, to the contractual aspects of the adviser-client relationship. The duty to provide 'best advice' and to disclose knowledge and information arise out of the adviser's 'undertaking', and are therefore implied terms of the contractual retainer. And disclosure may also relieve the adviser from the fundamental fiduciary duty not to 'assume a position where his self-interest might conflict with the honest and impartial giving of advice'. 288 On this reasoning, the further amended statement of claim is defective, in that it fails to plead expressly the central fiduciary duty and its breach, and wrongly treats various contractual duties as fiduciary. However, I take the view that it is open to the Court, on the pleadings, to find that there was a breach of the central fiduciary duty. That finding emerges from the pleaded facts, and does not raise any new issues of fact. The conflict of interest is inherent in the retainer of the joint venture to provide advice at a time when it was in the personal interests of AEFC and Messrs Mullins and Rees that the sale of the Rendell Industries shares should go ahead. 289 Whose informed consent would avoid breach of fiduciary duty by AEFC and AEFC Leasing? 290 The central facts in this case are that the breaches of fiduciary duty occurred at a time when Aequitas and Aequitas No 1 were owned by Messrs Mullins and Rees and their wives, and Mr Elvy, and were effectively controlled by Messrs Mullins and Rees. The interests which the law of fiduciary duties should protect in such circumstances are not the interests of the present shareholders, but the interests of the investors who acquire shares during or after the promotion and flotation of the company. The law of promoters' duties is the most developed in this area. In principle, however, there is no difference in this respect between the informed consent needed in the case of the promoter, and the informed consent needed to relieve a financial adviser of a fiduciary duty or to avoid a secret commission or bribe, where the relevant duty is owed to a fledgling company controlled by persons connected with the fiduciaries. Discharge of the duty by informed consent 291 The fiduciary duty of promoters may be discharged by obtaining the informed consent of a fully independent board of directors, once such an independent board has been appointed. In Erlanger's case Lord Cairns LC described the position of promoters with reference to their company as follows (at 1236): 'They stand, in my opinion, undoubtedly in a fiduciary position. They have in their hands the creation and moulding of the company; they have the power of defining how, and when, and in what shape, and under what supervision, it shall start into existence and begin to act as a trading corporation. If they are doing all this in order that the company may, as soon as it starts into life, become, through its managing directors, the purchaser of the property of themselves, the promoters, it is, in my opinion, incumbent upon the promoters to take care that in forming the company they provide it with an executive, that is to say, with a board of directors, who shall both be aware that the property which they are asked to buy is the property of the promoters, and who shall be competent and impartial judges as to whether the purchase ought or ought not to be made.' 292 The company's approval may be given by an independent board of directors, as envisaged by Lord Cairns. However, it has been recognised ever since Salomon v Salomon [1897] AC 22 that disclosure to the shareholders is equally effective. Lindley MR observed in Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392, 426 that 'after Salomon's case I think it impossible to hold that it is the duty of the promoters of a company to provide it with an independent board of directors if the real truth is disclosed to those who are induced by the promoters to join the company'. But disclosure to the initial shareholders, the 'cronies' of the promoters, is obviously inadequate. In Gluckstein v Barnes [1900] AC 240, Lord Halsbury said (at 247) that it would be 'too absurd' to suggest that disclosure to the very people who were working to hoodwink the shareholders would be treated as disclosure to the company. 293 Professor LCB Gower (Principles of Modern Company Law, see now 6th ed by PD Davies (1997), 134) summarised the law in a passage with which I respectfully agree: 'The position therefore seems to be that disclosure must be made to the company either by making it to an entirely independent board or to the existing or potential members as a whole. If the first method is employed the promoter will be under no further liability to the company, although the directors will be liable to the subscribers if the information has not been passed on in the invitation to subscribe; indeed, if the promoter is a party to this invitation, he too will be liable to the subscribers. If the second method is adopted disclosure must be made in the prospectus, or otherwise, so that those who are all or become members, as a result of the transaction in which the promoter was acting as such, have full information regarding it. A partial or incomplete disclosure will not do; the disclosure must be explicit.' 294 Where the relevant duty is owed to a fledgling company with no independent board or external shareholders, it would be just as absurd to suggest that disclosure to the cronies of a financial adviser, or of the recipient of a secret commission, would exonerate the adviser or donor of the payment, as to suggest that disclosure to the cronies of the promoter would exonerate the promoter. In my opinion, therefore, these principles apply to all the breaches of fiduciary duty that I have found to have taken place (including the payment of the secret commission). 295 In the present case there was no fully independent Aequitas board at any relevant time. Accurate and full disclosure to the board after the appointment of some independent directors in March 1986 would not have sufficed, because some non-independent directors remained at that stage. But accurate and full disclosure to the board was, in my opinion, nevertheless required, because the directors were responsible for the distribution of the private placement memorandum and the fundraising process, and were entitled to be given all the information relevant for those purposes. Therefore, in this case fully informed consent could be achieved only after accurate and full disclosure to the Aequitas board after the appointment of the independent directors, coupled with accurate and full disclosure in the private placement memorandum. 296 Can the knowledge and consent of Messrs Mullins and Rees be attributed to Aequitas and Aequitas No 1? 297 The defendants submit that there can be no breach of fiduciary duty or secret commission in the present case because Messrs Mullins and Rees were aware of all relevant facts regarding the share transaction, the alleged secret commissions and the financial situation of the Rendell group at all relevant times. In my opinion, the short answer to this submission is that the law requires disclosure to and consent by a fully independent board or external shareholders before it will regard the fiduciary as absolved. It is therefore not necessary to consider the principles that would apply if the company was not a fledgling. However, there has been full argument on the point, and I shall express my view, in case I am wrong on the proposition just stated. 298 Mr Rees was well aware of the facts relating to the breaches of fiduciary duty. He was the managing director and chief executive officer of Aequitas at the relevant time. Therefore, in the defendants' submission, his knowledge was the knowledge of Aequitas. This was either because he was the directing mind and will the company, or because the company is treated as having his knowledge because he was an executive director of the company with authority to receive information for the company on matters concerning its affairs. I shall consider each limb of this submission. 299 The concept of the directing mind and will is used in company law (typically where the court's task is to apply general statutory language to a body corporate) so as to treat the conduct of an individual as the conduct of the company that he or she controls. The concept becomes relevant, typically in the criminal law (cf Beach Petroleum NL v Johnson (1993) 115 ALR 411, 571), if it is necessary to attribute some conduct to the company as an entity, rather than to treat it as vicariously liable for the conduct of its agent. 300 Thus, in Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 the statutory question was whether damage had occurred without the 'actual fault or privity' of the owner of the ship. The owner being a company, the House of Lords held that if the individual who was the directing mind of the company had been at fault, the company could not dissociate itself from him so as to say that there was no actual fault or privity on the part of the company. In Tesco Supermarkets Ltd v Nattrass [1972] AC 153 the question was whether a company owning supermarket stores could invoke a statutory defence to a charge brought under the Trade Descriptions Act 1968 (UK) by proving, inter alia, that the commission of the offence was due to the act or default of another person, the other person being a store manager who was not a director of the company. It was held that the store manager was 'another person' for the purposes of the statutory defence. In Bernard Elsey Pty Ltd v Commissioner of Taxation (1969) 121 CLR 119, where the company existed simply to do the bidding of an individual and he personally carried out its undertakings, the High Court concluded that his mind was the company's mind; accordingly when the statutory question related to the purpose of the company, it was the individual's purpose that was to be ascertained. In Hamilton v Whitehead (1988) 166 CLR 121 it was held that the managing director of a company was the company for the purpose of advertising and dealing in contravention of the fundraising provisions of the Companies Code. In the circumstances, his mind was the mind of the company, and when he acted in contravention of the Code the company was liable as a principal, directly rather than vicariously. 301 It has not been not established that Mr Rees was the 'directing mind and will' of Aequitas in any sense relevant to this case. Although he was the manager director and chief executive of Aequitas from October 1985, he was not in a position of autonomy, since he worked with Mr Mullins, who was in some ways senior to him. Thus, Mr Mullins rather than Mr Rees was the person to whom Mr Gledhill primarily looked for information and advice about joint venture affairs, and it was Mr Mullins' company, CASO, that was the joint venturer with AEFC. It is probable, in my view, that the relationship established by these facts extended to the conduct of the business and affairs of Aequitas. In reaching this conclusion, I accept that an individual may be the directing mind and will of a company within a limited field of operation. My finding is that, on the limited evidence before me on this point, Mr Rees was not, because of his relationship with Mr Mullins, the directing mind and will of Aequitas in respect of any field of its operations. 302 However, it is not necessary to decide that Mr Rees was the directing mind and will of Aequitas in order to reach the conclusion for which the defendants contend. It is enough, for the purpose of deciding whether Aequitas had knowledge of the matters relevant to the breaches of fiduciary duty, to ascertain whether knowledge was possessed by an agent of Aequitas acting non-fraudulently within the scope of his or her authority: cf Beach Petroleum at 571. In other words, a 'vicarious' attribution of knowledge is enough, for present purposes. 303 According to Bowstead & Reynolds on Agency (16th ed, 1996) Article 97: '(1) A notification given to an agent is effective as such if the agent receives it within the scope of his actual or apparent authority, whether or not it is subsequently transmitted to the principal, unless the person seeking to charge the principal with notice knew that the agent intended to conceal his knowledge from the principal. (2) The law imputes to the principal and charges him with all notice or knowledge relating to the subject-matter of the agency which his agent acquires or obtains while acting as such agent. (3) Where an agent is authorised to enter into a transaction in which his own knowledge is material, or where the principal has a duty to investigate or make disclosure, the knowledge of the agent may be attributed to the principal whether it was acquired in connection with the agency or not.' 304 The information acquired by Mr Rees about the breaches of fiduciary duty was relevant to Aequitas because it potentially affected the net amount of the purchase price that Aequitas No 1 would eventually be required to pay for the Rendell Industries shares. It was within the actual authority of Mr Rees as managing director to investigate and receive information relevant to such a matter. Consequently, subject to the question of fraud, the knowledge of Mr Rees about the breaches of fiduciary duty should be attributed to Aequitas under Bowstead's first and second principles. 305 There is a principle emerging from cases such as Re Hampshire Land Co [1896] 2 Ch 743, 749 and JC Houghton & Co v Nothard, Lowe & Willis Ltd [1928] AC 1, 14-15, to the effect that the knowledge of a corporate agent is not attributed to the company if the agent is engaged in a fraud on the company. In the Beach Petroleum case, von Doussa J expressed the principle in this way (at 574): 'Provided that the director is acting within the scope of his or her authority, in civil proceedings the state of mind of a director ordinarily will be attributed to the company where there is a duty on that director to communicate his or her knowledge to the company. The exception to this rule is where the director is acting totally in fraud of the company, that is where all the director's activities are directed against the interests of the company, and not partly for the benefit of the company. If the director is guilty of fraudulent conduct which is not totally in fraud of the corporation, and by design or result the fraud partly benefits the company, the knowledge of the director in the transaction will be attributed to the company.' 306 In my opinion, Mr Rees was acting, in respect of the share transaction, 'totally in fraud of' Aequitas and Aequitas No 1, for the purposes of this principle. The 'fraud' of which von Doussa J speaks is capable of including equitable fraud arising out of a breach of fiduciary duty, in my opinion, at least where the fiduciary's conduct is morally reprehensible. Messrs Rees and Mullins had deliberately placed themselves in a position of serious and irretrievable conflict of interest. They had undertaken, on behalf of AEFCAS and the joint venture, to provide corporate advice to the Aequitas group. They were obliged by that undertaking to provide corporate advice to Aequitas in respect of the purchase of the Rendell industries shares. They were aware that the purchase price was very substantially higher than the amount paid by AEFC Leasing only seven weeks earlier. They were also aware that the final price included $50,000 which would be treated as a fee to AEFCAS passed through the joint venture accounts. Although they believed that the shares would be worth more than the amount paid by Aequitas No 1 once they were quoted on the stock exchange, their belief was affected by their position of conflict, which they did not address by providing Aequitas with all information material to the investors' decision. The conduct of Messrs Mullins and Rees in respect of the share transaction was therefore in fraud of Aequitas and Aequitas No.1. Breach of the fiduciary duty of financial advisers The scope and nature of the duty 307 The fiduciary relationship between financial adviser and client arises because the financial adviser, having held itself out as an adviser on matters of investment, undertakes a particular financial advisory role for the client: Daly v Sydney Stock Exchange Ltd, 160 CLR at 377 per Gibbs CJ; 384-5 per Brennan J. The advisory fiduciary relationship may arise whether or not there is an anterior fiduciary relationship between the parties, such as the relationship of broker and client. The relationship can arise even where parties are dealing with one another in a transaction in which the adviser has an obvious commercial self-interest. Thus, 'a bank may be expected to act in its own interests in ensuring the security of its position as lender to its customer, but it may have created in the customer the expectation that it will nevertheless advise in the customer's interests as to the wisdom of a proposed investment': Commonwealth Bank of Australia v Smith (1991) 42 FCR 390, 391. But unless there is, in all the circumstances, the requisite undertaking, the adviser is under no fiduciary duty and is free to pursue its own interests: Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1, 15-17. 308 In some cases, a breach of duty arises because the adviser assumes duties to two sets of clients who have conflicting interests. As the Full Federal Court said in Commonwealth Bank of Australia v Smith (at 392), 'not only must the fiduciary avoid, without informed consent, placing himself in a position of conflict between duty and personal interest, but he must eschew conflicting engagements'. The Court explained that the reason for the rule is that where there are multiple engagements, 'the fiduciary may be unable to discharge adequately the one without conflicting with his obligation in the other'. The prohibition is not against the making of a profit, but the avoidance of conflict of duties, in the absence of fully informed consent. The Court added that if an adviser in a sale is also the undisclosed adviser of the purchaser, an actual conflict of duties arises. 309 I have found that Aequitas engaged AEFCAS, which acted as manager for the joint venture, to provide corporate advice on matters including the acquisition and financing of the purchase of Rendell Industries shares from AEFC Leasing. The venturers, AEFC and CASO, were liable as principals to supply AEFCAS with corporate advice on these matters, through the personnel of the joint venture. Having held the joint venture out as having expertise in corporate advising, and having undertaken through their agent AEFCAS to provide corporate advice to Aequitas, the joint venturers stood in a fiduciary relationship to Aequitas. The subject matter of the corporate advice included the purchase of Rendell Industries shares by Aequitas No 1 from AEFC Leasing. The joint venturers were under a fiduciary duty to avoid a conflict between interest and duty. The fiduciary duty could be discharged by furnishing Aequitas with all the relevant knowledge which each of them possessed about that transaction, and revealing fully their financial interest, and obtaining the principal's fully informed consent. 310 Advice on the Rendell transaction included 'financial advice' of the kind that Brennan J had in mind, but the joint venture's retainer extended to corporate advice as well. However, there can be no material difference, in terms of fiduciary obligation, between an arrangement for the provision of financial advice and an arrangement for the provision of corporate advice, since in both cases the adviser undertakes to act in the interests of the client and not solely in the adviser's own interests, and the client is in a position of vulnerability: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, per Mason J. To whom was the duty owed? 311 The application of the High Court's reasoning in Daly v Sydney Stock Exchange leads to the conclusion that the joint venturers owed the fiduciary duty of a corporate adviser to Aequitas. It seems to me that they stood in an equivalent fiduciary relationship with Aequitas No 1. Aequitas No 1 was an effectively wholly-owned subsidiary of Aequitas, to be used by Aequitas as an investment vehicle. There was no independent board. Aequitas No 1 was entitled to rely on, and have the benefit of, the corporate advice provided to its parent, especially as the advice extended to structuring the transaction, a question which must have included whether it was appropriate for the investment to be made by the parent or the subsidiary. Who owed the duty? 312 I have expressed the view that the fiduciary duty of a corporate adviser was owed to Aequitas by the joint venturers, AEFC and CASO. AEFCAS offered in writing to provide the advice, acting as manager for the joint venture, and Messrs Mullins and Rees provided the advice in their capacity as a full-time executive and a consultant, respectively, of the joint venture. Since the joint venture was unincorporated, the contractual liability to provide advice fell upon the entities which constituted the joint venture, AEFC and CASO. Is it right to conclude that they also were responsible to Aequitas, as principals, to discharge the fiduciary duty of a corporate adviser? 313 When they discuss the criteria to be applied in judging whether a fiduciary relationship has arisen, courts frequently speak in terms of the vulnerability of the beneficiary, who has trusted another and has placed himself or herself in the hands of that person: for example, United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1; Farrington v Rowe McBride & Partners [1985] 1 NZLR 83. If these are indicia of a fiduciary relationship (cf Hospital Products, 156 CLR at 69 per Gibbs CJ; Breen v Williams, 186 CLR at 134; PD Finn, 'The Fiduciary Principle' in TG Youdan (ed), Equity, Fiduciaries & Trusts (1989), p 46-7), there is room for doubting whether a principal comes under a fiduciary obligation when a third person reposes trust or confidence in his or her agent, if the third person is unaware of the principal's role and therefore cannot have personally trusted or relied upon the principal. 314 In the present case, however, the third person was Aequitas, the directors of which included Messrs Mullins and Rees, who were well aware of the roles of AEFC and CASO as joint venturers. In their capacity as directors of Aequitas, they placed the welfare of that company and its future investors in their own hands as executives of the joint venture, for the purpose of providing corporate advice. They did so on the basis that their corporate advice to Aequitas would be given on behalf of the joint venture, and therefore on behalf of the joint venturers as principals. Therefore, the interests of the company and its future investors were placed not only in the hands of Messrs Mullins and Rees, but also in the hands of AEFC and CASO. Aequitas was aware of all relevant facts, through Messrs Mullins and Rees. 315 The Hospital Products case makes it clear that a fiduciary duty may be of limited scope, depending on the nature and extent of the undertaking of one party to act in the interests of another. Consistently with that approach, one can conceive of a fiduciary relationship for provision of financial advice in which it is understood that, just as responsibility for preparing the advice is to be borne by an agent and not the principal, the only conflicts of interest allowed to matter are those involving the agent, and the only requisite disclosure relates to information possessed by the agent. But there would need to be clear evidence that the limited nature of the fiduciary relationship was understood and accepted by the beneficiary before a court could conclude that a relationship, which would otherwise carry broader duties, would be subject to such limitations. 316 In the present case there is nothing to suggest that the joint venture's fiduciary obligations were limited so as to render irrelevant the knowledge, intentions and personal interests of the joint venturers. The letter of 23 August 1985 was written by AEFCAS without disclosure that it was the manager of a joint venture, and that the joint venture would provide the corporate advice which the letter offered. There was nothing in the letter which could be taken to limit the fiduciary obligations of the adviser so as to exclude the knowledge and interests of the venturers. 317 The plaintiffs contend that the fiduciary duty of a corporate adviser extended beyond the joint venture to Messrs Mullins and Rees personally. In my view, the legal principles applicable on the facts of this case do not allow the extension of the corporate adviser's financial duty to these two individuals. Messrs Mullins and Rees were engaged by CASO, who provided their services to the joint venture for the purposes of the joint venture business. They provided corporate advice to Aequitas, but they did so in the capacity of executive personnel of the joint venture, on secondment from CASO. Regardless of whether they were, together, the 'controlling mind and will' of the joint venture or AEFCAS, the corporate advisory work that they did was undertaken on behalf of the joint venture rather than by them personally. In performing that work, they owed contractual and fiduciary duties to the joint venture, but did not owe any personal duty to Aequitas. They also owed fiduciary duties to Aequitas in their capacity as directors of that company. The scope and content of those duties was necessarily different from the scope and content of the duties of a corporate adviser. I shall return to their duties as directors later. 318 The plaintiffs also contend that the fiduciary duty of a corporate adviser extended to Mr Gledhill personally. Mr Gledhill acted, at all relevant times, as general manager of AEFC. The plaintiffs submit that Mr Gledhill was the controlling mind of AEFC and AEFC Leasing, citing Hamilton v Whitehead (1988) 166 CLR 121, 127, 128. However, I have found, for the purposes of the equitable obligations generally, that Mr Gledhill was not the controlling mind of AEFC and AEFC Leasing. He was an employee of AEFC exercising delegated authority in his activities for the development of AEFC's equity investment business. 319 Mr Gledhill was closely involved in the planning for the establishment of Aequitas and also in the transactions for the purchase of shares in Rendell Industries by AEFC Leasing, and the subsequent sale of those shares by AEFC Leasing to Aequitas No 1. He knew that Messrs Mullins and Rees would cause Aequitas No 1 to enter into the purchase of the Rendell Industries shares because it was under their control at the time. But his involvement was at all times the involvement of the general manager of AEFC. It cannot be said that he gave any advice to either the Rendell group or Aequitas with respect to the Rendell transaction. The duty undertaken by the joint venturers to provide corporate advice to Aequitas was discharged on their behalf by Messrs Mullins and Rees. Mr Gledhill as not personally in a fiduciary relationship to provide corporate or investment advice to Aequitas. 320 There is a separate question, considered below, as to whether Mr Gledhill became liable for assisting the joint venturers to breach their fiduciary duty, under the so-called 'second limb' of Barnes v Addy (1874) LR 9 Ch App 244, at 251-2. I should note, for completeness, that there is no ground for finding that AEFC Leasing owed Aequitas the fiduciary duties of a corporate or financial adviser, though there is an issue as to whether it is liable as a promoter or under the second limb of Barnes v Addy. The content of the fiduciary duty, and the breaches of duty 321 The joint venturers were obliged as fiduciaries to avoid placing themselves in a position in which their duty to provide corporate advice to Aequitas conflicted, or there was a real sensible possibility that it may conflict, with their personal interest, in the absence of full disclosure to and consent by Aequitas. From the time of Aequitas' conception, AEFC saw Aequitas as a convenient means of furthering the business aspirations of AEFC. Once AEFC became responsible, as a principal, to provide corporate advice to Aequitas in respect of transactions referred to it by AEFC, there was a very real possibility of conflict between interest and duty. Further, both AEFC and CASO were in a position of conflict once they undertook to provide corporate advice to Aequitas, because their joint venture stood to gain fees from other parties in respect of transactions involving Aequitas. Further still, AEFC as a joint venturer was in a position of real conflict of interest throughout the transaction for the sale of shares in Rendell Industries to Aequitas No 1, because of the large discrepancy between the purchase price paid by AEFC Leasing and the proposed sale price to Aequitas. 322 These conflicts of interest could have been overcome by full disclosure of all relevant circumstances in the private placement memorandum, so that by applying for shares on the faith of that memorandum, investors in Aequitas could be taken to have assented to the benefits which were to flow to AEFC and CASO. However, the private placement memorandum fell far short of the kind of disclosure which would suffice for this purpose. Apart from the misleadingly optimistic assessment of the position of the Rendell group, the memorandum failed to disclose the true attitude of AEFC to Aequitas. There was a stark contrast between the vagueness of Mr Gledhill's open letter of 10 March 1986 and the specific and self-interested strategy of AEFC which was disclosed in Mr Gledhill's board paper dated 2 September 1985. Nor did the memorandum disclose the fees which AEFCAS and CASO were to derive from the Rendell Industries transaction. It did not disclose that the vendor of the Rendell Industries shares, AEFC Leasing, had acquired them, less than two months before selling them to Aequitas No 1, for a consideration of only $250,000, a much lower consideration than Aequitas No 1 had undertaken to provide. Disclosure and informed consent 323 The principal personnel of the joint venture, for the purpose of discharging the contractual obligations of the joint venturers to provide corporate and financial advice to the clients of the joint venture, were Mr Mullins and Mr Rees. On 25 November 1985, when Aequitas No 1 contracted with AEFC Leasing to acquire its shares in Rendell Industries, Aequitas and Aequitas No 1 were owned and controlled by Mr Mullins and Mr Rees, their respective wives and Mr Elvy. There was no independent entity in whose favour Mr Mullins and Mr Rees, acting as executive personnel of the joint venture, should or could perform the joint venturers' fiduciary duty of disclosure to Aequitas. 324 Independent shareholders and directors were brought into the Aequitas group only in March 1986. At that stage the joint venture was providing corporate advice to the Rendell group, while concurrently providing corporate advice to Aequitas. To avoid their position of conflict, the joint venturers needed to disclose to the independent directors of Aequitas, as soon as they took office, and to prospective investors in Aequitas, everything that might reasonably be regarded as relevant to the making of the decision by Aequitas No 1 to acquire the Rendell Industries shares. 325 The disclosure obligation extended, at the very least, to the discrepancy between the amount paid by AEFC Leasing for the shares only seven weeks earlier, and the negotiated purchase price to be paid by Aequitas No 1, and also the nature and amounts of the benefits which the joint venturers would receive from the transaction. Insufficient information on such matters was included in the private placement memorandum for potential investors in Aequitas. I shall return to the inadequacy of the private placement memorandum later. There is no evidence that the requisite information was specifically provided or drawn to the attention of the independent directors, Messrs Rich, Pond and Donohoe. It is true, as I have found, that substantially all of the information available to the Rendell Industries board about the financial difficulties of the Rendell group was supplied to Mr Pond in about mid-March 1986, to permit him to prepare his report. The document supplied to Mr Pond included information about the purchase price for the Rendell Industries shares paid by AEFC Leasing. But it was not drawn to his attention and the documents were given to him for a different purpose. On the evidence I am unable to find that Mr Pond made all of the information in his hands available to Mr Rich or Mr Donohoe. I conclude, therefore, that the joint venturers failed to perform their fiduciary duty to Aequitas by their non-disclosure. Breach of the fiduciary duties of directors of Aequitas and Aequitas No 1 326 Messrs Mullins and Rees were directors of both Aequitas and Aequitas No 1, on the one hand, and AEFCAS on the other hand. The plaintiffs contend that they breached their fiduciary duties to Aequitas and Aequitas No 1, having regard to R v Byrnes (1985) 183 CLR 501, in which Brennan, Deane, Toohey and Gaudron JJ said (at 516-7): 'A director of a company who is also a director of another company may owe conflicting fiduciary duties [citing Ford v Andrews (1916) 21 CLR 317 at 322]. Being a fiduciary, the director of the first company must not exercise his or her powers for the benefit or gain of the second company without clearly disclosing the second company's interest to the first company and obtaining the first company's consent. Nor, of course, can the director exercise those powers for the director's own benefit or gain without clearly disclosing his or her interest [citing Liquidators of Imperial Mercantile Credit Association v Coleman (1873) LR 6 HL 189 at 205-7] and obtaining the company's consent [citing Chan v Zacharia (1984) 154 CLR 178 198, 204; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 103-4]. A fiduciary must not exercise an authority or power for the personal benefit or gain of the fiduciary or a third party [a term used by their Honours to mean a party whose interests are not coincident with the interests of the fiduciary's beneficiary] to whom a fiduciary duty is owed without the beneficiary's content. 'However, the articles of a company may permit - they frequently permit - a director who is interested in a proposed transaction to take the benefit of the transaction if he discloses his interest to the other members of the board and takes no part in the decision of the board on the transaction. In such a case, the quorum of the board required to deal with the transaction will ordinarily be interpreted as excluding directors whose interests preclude them from voting [citing AM Spicer & Son Pty Ltd (In Liq) v Spicer (1931) 47 CLR 151 at 186-7; Richard Brady Franks Ltd v Price (1937) 58 CLR 112 at 140]. If the director makes that disclosure and abstains from taking part in the decision, the validity of the transaction is not impaired. But a director who takes part in a decision to enter into a transaction in which the director or a third party in whom the director has an interest or to whom the director owes a fiduciary duty stands to gain an advantage or benefit but who does not make an adequate disclosure of his interest acts improperly.' Breaches of duty by Mr Mullins and Mr Rees by their overall conduct 327 In my view, there was no failure to disclose the sheer facts of the dual directorships and the positions of Messrs Mullins and Rees with respect to the joint venture. These matters were adequately disclosed to potential investors in the private placement memorandum. AEFCAS was described in the document as 'Corporate Adviser', Mr Mullins was described as managing director of AEFCAS who founded CASO (which was described as having 'joint ventured' with AEFC to form AEFCAS), and Mr Rees was described as providing consultancy services to AEFCAS. In my opinion, these disclosures made it clear that Mr Mullins and Mr Rees, although directors of Aequitas, were engaged on behalf of the joint venture in the provision of corporate advice to Aequitas. 328 However, the private placement memorandum did not explain the full consequences of the dual positions of Messrs Mullins and Rees. As I have explained, Mr Gledhill planned to develop an equity investment business for AEFC. The corporate advisory business of the joint venture was a crucial component of his plans. His idea was that investment opportunities for AEFC would be identified by the joint venture, taken up by AEFC and then passed on to Aequitas, after AEFC had made a handsome investment profit and the joint venture had earned advisory fees. It is clear from the evidence as a whole that Messrs Mullins and Rees were well aware of the plans of Mr Gledhill and collaborated in them. The involvement with the Rendell group was seen by all concerned as the first project in AEFC's new business. Therefore, it was to be expected that AEFC would co-operate with the joint venture on future transactions, if the Rendell transaction could be brought to a satisfactory conclusion in which a profit would be crystallised for AEFC and fees would be earned for the joint venture. AEFC's co-operation in future transactions would be for the mutual benefit of the joint venturers and for the benefit of Messrs Mullins and Rees, whose future engagement in the joint venture's corporate advisory business would no doubt depend upon AEFC regarding it as worthwhile to participate in further transactions. 329 In my view, their position of conflict of interest led Messrs Mullins and Rees to take an excessively over-optimistic view of the financial position of the Rendell group during the period from November 1985 to April 1986, while they were negotiating the acquisition of the Rendell Industries shares on behalf of Aequitas No 1 and assisting in the preparation of a private placement memorandum for investments by external investors into Aequitas. The recurrent financial difficulties experienced by the Rendell group in the period from November 1985 (when the share sale deed was entered into) and March/April 1986 (when substantial investments were made into Aequitas) were well known to Mr Mullins and Mr Rees. Both of them were directors of Rendell Industries, and Mr Rees was a director of RIH, the intermediate holding company which dealt in detail with the group's business operations. 330 I have given a detailed account of the development of the Rendell group's financial difficulties during the period from October 1985 to April 1986. It must have been evident to Mr Rees, by the time of the meeting of the board of RIH on 27 November 1985, that the financial difficulties of the group gave grounds for serious concern about future solvency. Messrs Mullins and Rees were aware of the financial crisis that led the ANZ Bank to refuse to meet a substantial payment to the Australian Taxation Office late in November 1985, and Mr Rees was very much involved in subsequent events concerning Rendell, busily preparing notes about AEFC's exposure to the Rendell group and about the group's financial problems generally. Mr Rees was a principal conduit between the Rendell group and AEFC, defending AEFC's position at the Rendell Industries board meeting on 5 December 1985 and writing frequent memoranda for Mr Gledhill and Mr Kelly on the developing financial position of the group. It eventually emerged that the Rendell group was in a worse position than Messrs Rees and Mullins believed, because Mr Griffin had failed to disclose various matters and, it was said, had engaged in fraudulent activities. But even on the basis of what was known, it was plain that during the period from November 1985 to April 1986 the Rendell group suffered recurrent and serious liquidity difficulties. 331 Messrs Mullins and Rees, together with Mr Gallois (AEFC's appointee to the board of RIH), were the sources of information for Bache when the underwriting and draft information memorandum were negotiated in March 1986. There is very little information in evidence about the nature and extent of the disclosure made by them to Bache, apart from the private placement memorandum itself. The statement in the private placement memorandum about the Rendell group is, as I have noted, very different from the information constantly accumulating, to the knowledge of Messrs Mullins and Rees, about the worsening financial affairs of the group. There is no hint in the private placement memorandum about Rendell's liquidity problems, reduction in staff numbers, difficulties with customers or uncertain financial arrangements. Instead, the private placement memorandum refers to a budgeted turnover for Rendell in excess of $20 million for the 1985/86 financial year and an estimated pre-tax profit of $750,000, to be sheltered by tax losses. 332 I infer, from the evidence, that the overriding interest of Messrs Mullins and Rees was to complete the transaction with Aequitas so that they, and Mr Gledhill, could point to the Rendell transaction as a model for the future. That, indeed, is what they did, in memoranda and papers to the Australian Committee of AEFC, until disaster befell Rendell. Driven by their overriding interest, Messrs Mullins and Rees failed to provide Aequitas with the 'unbiased and independent judgment' which, according to the Byrnes case, it was entitled to have from them: 183 CLR at 516-7. Instead, the private placement memorandum gave an unrealistically rosy view of the Rendell group. In allowing this to occur, Messrs Mullins and Rees either behaved in a knowingly deceptive fashion, or grossly failed to exercise sound judgment in circumstances of clear conflict of interest. 333 It was not open to Messrs Mullens and Rees to relieve one another from performance of their fiduciary obligations, in their capacity as directors of Aequitas. As Wilcox and Lindgren JJ said in Australian Breeders Co-operative Society Ltd v Jones (1997) 150 ALR 488, 512: 'If one fiduciary could absolve another from performance of the latter's obligation, serious consequences might ensue. The absolving fiduciary might be corrupt, profiting from the very circumstance that the other fiduciary was absolved from investigating or disclosing.' Nor was it open to the board of Aequitas or Aequitas No 1 to relieve Messrs Mullins and Rees from the consequences of the positions of conflict into which they had placed themselves, after the appointment of some independent directors in March 1986, and certainly not earlier. The position was explained (in rather different circumstances) by Rich, Dixon and Evatt JJ in Furs Ltd v Tomkies (1936) 54 CLR 583, at 599: 'But the board could not relieve him of the equitable obligations which arose out of this conflict of duty and of private interest. His one resource, if he was resolved to adopt the unwise course of acting in the transaction on behalf of his company and yet seeking a profit for himself, was complete disclosure to and confirmation by the shareholders. But complete disclosure he was not prepared to make. 'We are unable to agree with the view that the respondent's principal placed him in a position in which his duty and interest conflicted and thus waived the right to the performance of an undivided duty. The board of directors could not do this in the case of a fellow director and, even if it could, no one contemplated anything but an ordinary agreement of employment is a salary.' 334 No adequate disclosure was made by Mr Mullens or Mr Rees to the shareholders disclosure to themselves and their wives cannot have been adequate when it was envisaged that external investors would be brought in: Gluckstein v Barnes (1900) AC 240, 247; Australian Breeders Co-operative Society Ltd v Jones (1997) 150 ALR 488, 510-12. For reasons already given, there was no adequate disclosure to the investors through the private placement memorandum. Breach of duty by Mr Mullins' failure to disclose $69,400 commission 335 Mr Mullins was affected by another, more specific conflict of interest. He was a director and shareholder of CASO, which stood to gain a commission of $69,400 through the sale of the Rendell Industries shares to Aequitas No 1, although that commission was not arranged until settlement of the transaction in April 1986. If there was no adequate disclosure of this benefit, then Mr Mullins would be in breach of his duty. 336 As the statement of principle in the Byrnes case makes clear, the fiduciary duty of a director which arises out of having a personal interest or conflicting duty in respect of a contract with the company is capable of being, and frequently is, attenuated by the corporate constitution. 337 Article 36 of the constitution of Aequitas No 1 stated: 'No Director shall be disqualified by his office from contracting with or holding any other office under the Company, nor shall any such contract or any contract entered into by or on behalf of the Company in which any Director shall be in any way interested be avoided, nor shall any Director so contracting or being so interested be liable to account to the Company for any profit realised by any such contract by reason only of such Director holding that office or of the fiduciary relationship thereby established, provided that the nature of his interest must be disclosed by him at the meeting of Directors at which the contract is determined on if his interest then exists and has not been disclosed in accordance with the Code [the Companies Code], or in any other case at the first meeting of the Directors after the acquisition of his interest. A Director (or his alternate Director) may not vote in respect of any contract or arrangement in which he is interested, but shall be counted for the purpose of any resolution regarding the same in the quorum present at the meeting and may notwithstanding his interest participate in the execution of any instrument by or on behalf of the Company and whether through signing or sealing the same or otherwise.' 338 The requirement of article 36, that the director must disclose 'the nature of his interest', is a substantial one, and the director bears the onus of proving that proper disclosure has occurred. The matter was explained by the Privy Council in Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1, 14: 'There is no precise formula that will determine the extent of detail that is called for when a director declares his interest or the nature of his interest. Rightly understood, the two things mean the same. The amount of detail required must depend in each case upon the nature of the contract or arrangement proposed and the context in which it arises. It can rarely be enough for a director to say 'I must remind you that I am interested' and to leave it at that, unless there is some special provision in a company's articles that makes such a general warning sufficient. His declaration must make his colleagues 'fully informed of the real state of things' (see Imperial Mercantile Credit Association v Coleman (1873) LR 6 HL 189 at 201, per Lord Chelmsford). If it is material to their judgment that they should know not merely that he has an interest, but what it is and how far it goes, then he must see to it that they are informed (see Lord Cairns in the same case at p.205).' 339 The minutes of meetings of directors of Aequitas and Aequitas No 1 are in evidence. The meeting of the directors of Aequitas No 1 at which the contract for the purchase of Rendell Industries shares from AEFC Leasing was determined was the meeting of 25 November 1985. There is no record of any disclosure of interest at that meeting, or any previous meeting of the directors of Aequitas No 1 or of Aequitas. Nor is there any record of disclosure of the CASO commission in the minutes of any later board meeting of either company. There is no other evidence to suggest that disclosure was made. I find, therefore, that Mr Mullins failed to comply with his fiduciary duty to Aequitas No 1 and the requirements of the constitution of that company. 340 I note that according to article 49, the quorum for a meeting of the directors of Aequitas No 1 was three, unless otherwise fixed by the directors. There is nothing in the minutes to indicate that some other quorum was adopted. The minutes indicate that only Mr Mullins and Mr Rees were present at the meeting of directors held on 25 November 1985, at which the sale of shares agreement was executed (and, presumably, approved). Under article 36 Mr Mullins could be counted for quorum purposes, but there were still only two directors at the meeting. The plaintiffs note this discrepancy in their submissions, but they have not sought any relief in respect of it, treating it instead as merely an aspect of the directors' alleged failure to discharge their fiduciary duty. It would the surprising if, after all this time, it were possible for them to avoid the purchase of the Rendell Industries shares on this ground. Apart from questions of estoppel and the like, any deficiency of quorum may well have been cured by s 539 of the Companies Code (now s 1322 of the Corporations Law). But since no case was developed upon the specific basis of a lack of quorum, I need not explore such matters further. Conclusions as to breach of directors' duties 341 My conclusions are that: · during the period from November 1985 to April 1986 Messrs Mullins and Rees breached their fiduciary duty as directors of Aequitas and Aequitas No 1 by placing their personal interest in making and completing the sale of the Rendell Industries shares above their duty to act in good faith for the benefit of those companies; and · Mr Mullins breached his fiduciary duty as a director of Aequitas No 1, and contravened the constitution of that company, by failing to disclose the nature of his interest in the commission of $69,400. Breach of the fiduciary duty of promoters 342 The plaintiffs allege that those who controlled Aequitas and Aequitas No 1, and certain others, owed fiduciary duties to those companies as promoters. The promoters are alleged to have included AEFC, AEFC Leasing and Mr Gledhill. I permitted the plaintiffs to amend their statement of claim to include the pleading of breach of promoters' duty, at the hearing. I took the view that the pleading of breach of promoters' duty did not raise any new factual matters, and that prejudice to the defendants was unlikely (although I offered them a short adjournment). The defendants, wishing to preserve their rights with respect to any relevant limitation period, have not applied to have the leave rescinded on the basis, they say, that the plaintiffs are to be kept to their pleaded case. In that spirit, the defendants wish to confine the plaintiffs' case under this heading to the 'birth, formation and floating' of Aequitas, and they say that the plaintiffs have not pleaded that any of the defendants were promoters of Aequitas, but only Aequitas No.1, and that the specific duties pleaded are all positive duties falling foul of the principle in Breen v Williams. I agree with the third point but not the other two. In my opinion, a fair reading of the pleading discloses that the words 'birth, formation and floating' are wide enough to extend to matters such as the preparation of the private placement memorandum. And the gist of the allegations implies that the plaintiffs claim that the defendants were promoters of Aequitas. In any event, the pleading does not, in my view, raise new factual matters. The fiduciary duty of promoters 343 The promoters of a company or other business enterprise are treated as a category of 'accepted' fiduciary relationships: Elders Trustee and Executor Co Ltd v EG Reeves Pty Ltd (1987) 78 ALR 193, 228. As fiduciaries, they are required to act in good faith for the benefit of their fledgling company, and to avoid placing themselves in a position where there is a real sensible possibility of conflict between their duty and their personal interest. 344 Promoters who sell property to the fledgling company are placed under a particularly onerous duty in respect of that transaction. As Lord Blackburn said in Erlanger v New Sombrero Phosphate Company (1878) 3 App Cas 1218, at 1269-70: 'Where, as in the present case, the company is formed for the purpose of becoming purchasers from the promoters as vendors, the interests of the promoters and of the company clash. It is the vendor's interest to get as high a price as possible, and they have a strong bias to overvalue the property which they are selling; it is the purchasers' interest to give as low price as possible, and to secure that the price actually given is not more than the property is really worth to them. 'Lord Eldon, in Gibson v Jeyes (1801) 6 Ves Jn 278 [31 ER 1044, 1050], says that 'it is a great rule of the Court that he who bargains in matters of advantage with a person placing confidence in him, is bound to show that a reasonable use has been made of that confidence - a rule applying to trustees, attorneys, or any one else.' I think persons having property to sell may form a company for the purpose of buying it in such a manner as to shew this, and when they do so, the sale will be unimpeachable.' 345 A transaction by which promoters sell property to their company, without the approval of the company after full disclosure, is voidable at the option of the purchaser: Tracy v Mandalay Pty Ltd (1953) 88 CLR 215, 241. The promoters' duty may be discharged by the fully informed consent of a fully independent board, or the shareholders, as we have seen. Identifying the promoters 346 Who is a promoter, for the purposes of the law of fiduciary duties? Although the word has no very definite meaning (Tracy v Mandalay, at 241), it includes those who actively participate in the getting up and starting (or floating) of the company: Emma Silver Mining Co Ltd v Lewis & Son (1879) 4 CPD 396. As Lord Cairns pointed out in Erlanger's case (at 1236), they may owe duties before the company comes into existence. It also includes those who actively participate in the work of raising equity capital for the new company after it has been incorporated but before an independent board has been appointed: Emma Silver Mining, at 408. Additionally, the concept of a promoter extends to some whose involvement is passive: 'But it is not only the persons who take an active part in the formation of a company and the raising of the necessary share capital to enable it to carry on business who are promoters. It is apparent from the passage cited [from the Emma Silver Mining case, at 407-8] that persons who leave it to others to get up the company upon the understanding that they also will profit from the operation may become promoters': Tracy v Mandalay , at 242. 347 These principles require the Court to undertake a close examination of the facts, to determine the precise roles played by various individuals and entities with respect to the fledgling company. As Gummow J remarked in the Elders Trustee case (at 234), 'the end result is that although undoubtedly once identified as a promoter the defendant is ipso facto stamped as a fiduciary, the process required in order to identify him as such in most cases probably will differ very little from that involved in deciding whether, independently of any acknowledged category of fiduciary, the defendant was in the circumstances of the case a fiduciary and, if so, what were the incidents of his fiduciary duty.' 348 Relying on the Elders Trustee case, the defendants submit that it is necessary, in the case of each alleged promoter, to identify precisely what was done or undertaken to be done, because ultimately a fiduciary relationship arises only when one person undertakes or agrees to act in the interests of another. I do not regard Gummow J's reasoning in that case as requiring such an approach. His Honour acknowledged (78 ALR at 228) that the promoters of a company are treated as a category of 'accepted' fiduciary relationships. That being so, once a person is identified as a promoter according to the legal definition of that term, fiduciary duties automatically attach to that person, and it is not necessary to find a specific undertaking of a kind that would constitute a fiduciary relationship 'on the facts'. I should add that the facts of the Elders Trustee case are so far removed from the present case, that I do not regard it as a helpful analogy at that level. 349 In the present case it is clear that Messrs Mullins and Rees were promoters of Aequitas and Aequitas No 1. They described themselves as promoters. They were actively involved in every aspect of formation of the company, and of the capital-raising by the private placement memorandum. But that conclusion is of no consequence. As the defendants point out, Messrs Mullins and Rees were not selling anything to Aequitas or Aequitas No 1, and were not acting on behalf of AEFC Leasing as vendor in their personal capacities. The more difficult question is whether AEFCAS, AEFC, AEFC Leasing or Mr Gledhill was a promoter. The defendants have invited me to make a number of specific findings relevant to this issue. I find that: · the expenses incurred in the formation of Aequitas and Aequitas No 1 were not borne by AEFC or AEFCAS but were borne by Mr Mullins, Mr Rees, and possibly Mr Elvy, through their private companies; · when Aequitas and Aequitas No 1 were purchased from the shelf company provider, the shares were acquired legally and beneficially by Messrs Mullins and Rees, their respective wives and Mr Elvy; and · the initial directors of Aequitas and Aequitas No 1 were not nominees or agents of, or appointed by, AEFC or AEFCAS. These findings are relevant, but far from decisive. 350 I agree with the defendants that Arthur Young were independent of AEFC and AEFCAS when they were retained as the auditors for the Aequitas group, though they were subsequently retained by the Rendell group as well. However, Law & Milne did not act solely for the Aequitas group at any stage. I have found that their work on the sale of the Rendell Industries shares by AEFC Leasing to Aequitas No 1 was undertaken on behalf of AEFC, the joint venture and AEFC Leasing, as well as Aequitas and Aequitas No 1. Subsequently they acted for Rendell Industries. The fact that Law & Milne acted for both sides of the share sale transaction points significantly, though not conclusively, towards the conclusion that the vendor (and its holding company) were engaged in the exercise of getting up and launching the purchaser (and its holding company). That fact establishes that the purchaser could not have received independent legal advice at the time of the transaction. 351 The defendants submit that participation in the formation and promotion of Aequitas and Aequitas No 1, other than as a supplier of corporate advisory services, was not within the business of the joint venture or the business which AEFCAS was authorised to carry on. In my view, however, the provision of corporate financial advice in a commercial context encompasses a degree of assistance, ancillary to the advisory task. 352 It is clear that, in communicating with third party advisers such as Arthur Young, Messrs Mullins and Rees described themselves as promoters of Aequitas and Aequitas No 1 and made no reference to any comparable role by AEFCAS or the joint venture. The internal memoranda of Arthur Young, as well as memoranda by Messrs Mullins and Rees, indicate that Messrs Mullins and Rees were the persons making decisions concerning the creation and formation of the two new companies. In some of their private and public statements, Messrs Mullins and Rees described their role as promoters, undertaken on their own behalf rather than on behalf of the joint venture (for example, in the briefing of Arthur Young which led to that firm's tender for the Aequitas audit work). 353 However those claims, generated by Messrs Mullins and Rees, are outweighed by the objective facts. I have found that Aequitas engaged AEFCAS, which undertook the assignment in its capacity as manager of the joint venture, to provide corporate advisory services which included advice on the raising of equity capital by private placement and through stock exchange listing. In taking up that role on behalf of AEFCAS, Messrs Mullins and Rees became actively involved in the formation and capital raising process. The opportunity for that involvement came through their positions with AEFCAS, which gave them connections with AEFC and the Rendell group. If they had acted purely as advisers, they may not have been promoters. But they went beyond a purely advisory role, taking up the opportunity to do so provided by their positions with AEFCAS. In my view, it is not possible to draw any sharp distinction between their advisory work for AEFCAS and their promotional work. Their work for AEFCAS (especially the work of Mr Rees) included activities of a kind carried out by promoters. Specifically, while it may be that the acquisition of the shelf companies was not an AEFCAS activity, the development of the private placement memorandum was an activity in which Mr Rees participated in his role of providing corporate advice on behalf of AEFCAS, as well as in his role as a director of Aequitas. 354 Consequently AEFCAS, as well as Messrs Mullins and Rees became a promoter. Since AEFCAS acted only in the capacity of manager of the joint venture, the consequence was that the joint venturers also became promoters. That conclusion is reinforced by the fact that Mr Gledhill was well aware of the activities of Messrs Mullins and Rees with respect to the promotion of the Aequitas companies, and by the presence of a close connection between that work and other work of the joint venture, undertaken in the interests of the venturers. 355 The defendants submit that AEFC was merely a financial institution which, in the context of the private placement, was regarded as a prospective investor rather than a promoter. They say that the relationship between AEFC Leasing and Aequitas No 1 was that of vendor and purchaser of the Rendell Industries shares, and in the negotiations for that transaction Mr Gledhill spoke on behalf of AEFC Leasing and Messrs Mullins and Rees spoke only on behalf of Aequitas No 1. 356 The defendants' analysis of the facts overlooks two matters of cardinal significance. The first relates to the position of AEFC as a joint venturer. AEFCAS, as I have said, became a promoter by virtue of the activities of Messrs Mullins and Rees. But AEFCAS was only ever an agent, acting as manager of the joint venture. AEFC was a principal, as joint venturer. The acts of Messrs Mullins and Rees by way of promoting the Aequitas companies were undertaken, therefore, for AEFCAS as agent for the venturers, and those acts are to be attributed to the venturers as principals. As a venturer, AEFC became a promoter in this way. 357 Secondly, the defendants' analysis overlooks the active role played by Mr Gledhill in developing the Aequitas concept. I have given an extensive description of the contents of Mr Gledhill's board paper dated 2 September 1985. In that paper he advocated the establishment of a publicly listed company that would take options over AEFC's short-term investments, and would augment the activities of the Advisory Service by providing an alternative repository of equity funds, to assist advisory clients. As I have shown, he returned to the same themes on subsequent occasions. Most importantly, he wrote an open letter on behalf of AEFC dated 10 March 1986 declaring that AEFC supported the formation of Aequitas and endorsing the company's objectives. 358 Mr Gledhill was actively involved in the formation and flotation of the Aequitas companies from the outset, at this conceptual level. His activity was that of a promoter, undertaken in his capacity as general manager of AEFC. That would be enough to make AEFC a promoter, even apart from the fact that it was a principal in the promotional activities undertaken by AEFCAS as agent. 359 The personal position of Mr Gledhill is in some ways the most difficult question to address. Clearly he was very active, as I have said, in developing the Aequitas concept, and in ensuring that the interests of AEFC were advanced by the implementation of the concept. But his activities were undertaken as general manager of AEFC, rather than in any personal capacity. Unlike Mr Griffith and Miss Withy in Tracy v Mandalay, he did not stand to gain personally from the promotion of the Aequitas companies, except in the sense that success would enhance his reputation within AEFC and advance his career in that company. 360 In my opinion he did not personally place himself in a fiduciary relationship with the fledgling companies, although his activity caused his employer to become a fiduciary. His activities were all undertaken within the scope of his employment and with the express or implied actual authority of AEFC. But he was far from autonomous in his decision making on behalf of the company. In particular, he was answerable to the AEFC Board and the Australian Committee, to whom he reported regularly. Through the board and the Australian Committee, the bank shareholders of AEFC exercised considerable influence on the company's policy and decisions. When Mr Gledhill recommended that AEFC take an equity position in Aequitas, the chairman of the Australian Committee, Mr Christie, effectively overruled the proposal. The board's attitude to Mr Gledhill's strategy of involving AEFC in equity investments was supportive but cautious. In all the circumstances, it could not be said that he was the directing mind and will of AEFC, either generally or in any particular field of operations. 361 Mr Gledhill's activity, along with the activities of Messrs Mullins and Rees on behalf of AEFCAS, led to AEFC occupying a fiduciary position with respect to the Aequitas companies, for the reasons I have given. AEFC became a fiduciary 'vicariously' rather than directly (cf Hamilton v Whitehead (1988) 166 CLR 121), as Mr Gledhill was not its directing mind and will. 362 I turn finally to the position of AEFC Leasing. In my view that company was a promoter of Aequitas and Aequitas No 1, because (like Mr Griffith and Miss Withy in Tracy v Mandalay) AEFC Leasing left it to others to get up those companies upon the understanding that it would profit from the operation. It profited in the most direct way, by selling its Rendell Industries shares for $710,000 more than it had recently paid them. It was under the control of AEFC, and therefore was affected by Mr Gledhill's knowledge of the arrangements for formation and capital raising for those companies, and of the relevant circumstances of the purchase transaction. Conclusions as to breach of promoters' fiduciary duties 363 My conclusions are that Messrs Mullins, Rees, AEFCAS, AEFC, CASO and AEFC Leasing were all promoters of Aequitas No 1, but Mr Gledhill was not. The promoters failed to discharge their fiduciary duty to the fledgling companies because they did not accurately and completely disclose, to the independent directors and in the private placement memorandum, all material facts with respect to the sale of the Rendell Industries shares to Aequitas No 1 and the financial position of the Rendell group; and they did not give the independent directors the opportunity to review the participation by Aequitas No 1 in that transaction. The provision of information to Mr Pond was inadequate to constitute discharge of the promoters' duty, for the reasons I have already given. Secret commissions (bribes) 364 There were two payments that, according to the plaintiffs, were bribes or secret commissions. The first was the payment of $50,000. To recapitulate, the relevant facts were that: · Mr Gledhill and Mr Rees regarded $910,000 as the figure to be recouped to AEFC Leasing from its disposal of the Rendell Industries shares; · in his memorandum dated 12 November 1985, Mr Gledhill recorded his decision on behalf of AEFC and AEFC Leasing that the sale to Aequitas No 1 would go ahead at an increased price of $960,000, and the extra $50,000 would 'be passed through the joint venture accounts of AEFC Advisory Services in recognition of the part played in structuring the transaction'; · under the terms of the joint venture agreement, the $50,000 was part of the first tier of profits, therefore AEFC was entitled to it; · Messrs Gledhill, Mullins and Rees were aware of these arrangements; · in his letter to Arthur Anderson & Co dated 26 February 1986, approved by Mr Gledhill, Mr Kelly referred to the $50,000 as a 'fee'. 365 The facts relevant to the payment of $69,400 were that: · when the joint venture agreement was amended by agreement dated 13 March 1986, a provision was included (clause 7A .04) to the effect that within 30 days after 30 June each year, AEFC would pay to CASO 10% of the pre-tax net profit earned and collected by AEFC during the preceding financial year, which resulted directly or indirectly from business introduced by AEFCAS, but the first year for the purposes of these arrangements was the period of 1 April 1986 to 30 June 1987; · notwithstanding the terms of the amended agreement, AEFC agreed to make a special payment under this clause, after 1 July 1986, by reference to the profit made by AEFC Leasing on the sale of the Rendell Industries shares; · the amount paid to CASO was 10% of the profit on the transaction, which was calculated by deducting from the sale price of $960,000 the subscription price of $250,000 and a 'cost of funds' factor on the latter amount; · the amount of $69,400 was paid on 14 July 1986; · Messrs Gledhill, Mullins and Rees were aware of these arrangements. 366 Neither payment was disclosed in the Aequitas private placement memorandum, nor to the independent members of the Aequitas board. In these circumstances the plaintiffs argue that both payments were bribes or secret commissions in respect of which they claim civil remedies. The nature of a bribe 367 In Hovenden & Sons v Millhoff (1900) 83 LT 41, 43, Romer LJ gave the following statement of what constitutes a bribe: 'If a gift be made to a confidential agent with the view of inducing the agent to act in favour of the donor in relation to transactions between the donor and the agent's principal and that gift is secret as between the donor and the agent - that is to say, without the knowledge and consent of the principal - then the gift is a bribe in the view of the law.' 368 The Privy Council explained the concept of a bribe somewhat more widely in Attorney-General for Hong Kong v Reid [1994] 1 AC 324, 330: 'A bribe is a gift accepted by a fiduciary as an inducement to him to betray his trust. A secret benefit, which may or may not constitute a bribe, is a benefit which the fiduciary derives from trust property or obtains from knowledge which he acquires in the course of acting as a fiduciary. A fiduciary is not always accountable for a secret benefit but is undoubtedly accountable for a secret benefit which consists of a bribe.' 369 Once the giving of a bribe, in this sense, is shown, it is unnecessary to establish a subjective intent to defraud: T Mahesan S/O Thambia v Malaysia Government Officers' Co-operative Housing Society Ltd [1979] AC 374, 383 . According to Romer LJ in the Hovenden case, if it is shown that a bribe has been given, the Court will not inquire into the donor's motive, and will presume irrebuttably in favour of the principal and against the donor and the agent bribed, that the agent was influenced by the bribe. There is also a presumption, apparently irrebuttable, that the true price was no greater than the price charged less the value of the bribe: Mahesan's case, at 383 (dealing with the elements of fraud). It does not matter that the recipient may have behaved honestly: Ex parte James (1803) 8 Ves Jn 337, [32 ER 385, 388], per Lord Eldon LC. In Attorney-General v Reid their Lordships explained that although the legal title to a bribe passes to the recipient, equity insists that it is unconscionable for the fiduciary to obtain and retain a benefit in breach of duty, and will therefore grant proprietary remedies to aid recovery of the bribe. 370 At least for the purposes of the present case, the following elements emerge as the ingredients of a bribe: (a) a donor makes a gift to a fiduciary; (b) the gift relates to the fiduciary's position, in the sense that it is an inducement to the fiduciary to use his or her position in a particular way; and (c) the gift is secret between the donor and the fiduciary, in the sense that the principal is not aware of it. Put together, these three elements give rise to an undisclosed conflict of interest: Panama and Southcap Pacific Telegraph Co v India Rubber, Gutta Percha, and Telegraph Works Co (1875) LR 10 Ch App 515, 530-1 (James LJ), 533 (Mellish LJ). Were bribes given in the present case? 371 Ingredient (a) is satisfied in the present case. I have found that AEFC and CASO, as joint venturers, and AEFCAS as their agent, owed fiduciary duties to Aequitas in respect of the provision of corporate advice. The first payment in the present case was made by AEFC Leasing as 'donor', out of the proceeds of sale of the Rendell Industries shares to Aequitas No 1. The payment of $50,000 was made to AEFCAS, and AEFC became entitled to it under the terms of the joint venture agreement. The second payment of $69,400 was made by AEFC as donor to CASO. Thus, both payments were received by fiduciaries. Both payments in the present case were 'gifts' for the purposes of determining whether they were bribes. The payment of $50,000 arose out of Mr Gledhill's decision to increase the purchase price payable by Aequitas by that amount, and to pass the proceeds through the AEFCAS joint venture accounts - there was no obligation to do so. The payment of $69,400 was purportedly made under the amended joint venture agreement, but the amendment which provided for it was made after AEFC Leasing had sold the Rendell Industries shares to Aequitas No 1, and further, the payment was made earlier than the amended clause required. Again, therefore, it was a payment which AEFC was not obliged to make. 372 In my view, ingredient (b) was satisfied in respect of the payment of $50,000 but not the payment of $69,400. The payment of $50,000 was made at a time when it was capable of being an inducement to AEFCAS, Mr Rees and Mr Mullins to effectuate the sale of the Rendell Industries shares to Aequitas No 1. As I have explained, that transaction was in breach of AEFCAS' fiduciary duty, as agent for the joint venturers and as a promoter, to avoid conflicts between interest and duty. According to Mr Gledhill, whose purpose (expressed in his memorandum of 12 November 1985) should be attributed to AEFC, the payment was to be made to recognise the part played, presumably by AEFCAS, in structuring the transaction. It was, therefore, a reward for a transaction structure which involved a breach of fiduciary duty. The promise of payment of such a reward, to be made out of the proceeds of a sale that had not been completed, from money to be raised from external investors who had not yet invested, was an inducement to AEFCAS, Mr Rees and Mr Mullins to complete the transaction in order to secure the payment. The fact that AEFCAS itself would not be the ultimate beneficiary of the payment was not decisive. It was in the interests of AEFCAS, and Mr Rees and Mr Mullins, to see the transaction through to its completion and secure the fee for AEFCAS, so that AEFCAS could be regarded as successful and profitable and worthy of further support from AEFC. 373 The arrangements which led to the payment of $69,400 were made after AEFC Leasing had contracted to sell the Rendell Industries shares to Aequitas No 1 for $960,000. The amendments to the joint venture agreement, dated 13 March 1986, were effectively contemporaneous with the issue of the private placement memorandum, under which investment funds were raised and used to complete the share transaction. It might be argued that AEFC agreed to the amendments in order to induce Mr Mullins, through his company CASO, to ensure that sufficient funds were raised so that the share transaction (which, as I have said, involved a breach of fiduciary duty) could be completed. However, the evidence falls short of establishing that AEFC or Mr Gledhill had such a purpose in agreeing to the joint venture agreement amendments. The amendments covered a wide range of matters, including the way in which CASO would be remunerated in respect of profits. I accept, as the plaintiffs submit, that Messrs Gledhill, Rees and Mullins must have realised on 13 March 1986 that clause 7A.04 would give CASO an eventual entitlement to approximately $70,000 in respect of the purchase of the Rendell shares by Aequitas No 1. That conclusion was drawn in a paper for the May 1986 meeting of AEFC's board. But the evidence does not indicate that any of the amendments to the joint venture agreement were made for the specific purpose of providing an inducement to CASO in respect of the share transaction. 374 Nor, it seems to me, could they have done so. Bache had already agreed to underwrite the private placement of shares in Aequitas to an amount of $1 million, an amount sufficient to cover the payment due to AEFC Leasing. The payment was made a year earlier than the amended joint venture agreement required, by arrangements made in May 1986, well after completion of the share transaction. 375 In these circumstances I find that neither the payment of $69,400, nor the promise to pay it, operated as an inducement to CASO to give effect to the share transaction in breach of its fiduciary duty. I should add that, notwithstanding an ambiguous answer by Mr Gledhill in cross-examination, I do not regard the payment of $69,400 as capable of being an incentive to ensure that Aequitas No.1 did not walk away from the deal. I have rejected Mr Gledhill's evidence that they would have been allowed to do so; further, the transaction was settled well before the payment was calculated and made. 376 Ingredient (c) raises the question whether Aequitas or Aequitas No 1 was aware of the payments. The arrangements for the payments were well known to Messrs Rees and Mullins. Mr Rees was managing director and chief executive officer of Aequitas at the relevant time. In the defendants' submission, his knowledge was the knowledge of Aequitas, either because he was to be regarded as the directing mind and will of the company, or on the basis that, as an executive director of the company, his knowledge was the knowledge of Aequitas because he had authority to receive information for the company on matters concerning its affairs. For the reasons given earlier, I find that Mr Rees was not the directing mind and will of Aequitas and his knowledge is not to be attributed to Aequitas because he was acting in fraud of the company. 377 The plaintiffs submit that once a prima facie case of an agreement to pay a bribe has been established, the onus is on the defendants to prove that full and frank disclosure was made: Federal Supply & Cold Storage Co of South Africa v Anghern & Piel (1910) 80 LJPC 1, 4; Hayward v Roadknight [1927] VLR 512, 517 (Dixon AJ), 521 (Full Court). But in the present case there is no evidence to suggest that anything like adequate disclosure was made to the independent directors of Aequitas or in the private placement memorandum, so it is unnecessary to rely on any proposition about onus of proof. Conclusions as to bribes 378 My conclusion is that, while ingredients (a) and (c) are satisfied with respect to both payments, ingredient (b) is satisfied only in respect of the payment of $50,000. Therefore the payment of $50,000 was a bribe, but the payment of $69,400 was not. 379 The plaintiffs submit that the fact that the arrangements for the second payment varied from those for the first payment did not palliate the wrong, or the consequences of it. They refer to Re Morvah Consuls Tin Mining Company (McKay's Case) (1875) 2 ChD 1. I agree with this submission in principle, but it does not apply to the present case, in view of my finding that the second payment lacked one of the characteristics of a bribe. Remedies in respect of bribes 380 I turn to the question of the most appropriate remedy in respect of the bribe. At common law, the principal has alternative remedies, both against the donor and against the fiduciary agent, as the Privy Council explained in T Maheson S/0 Thambiah v Malaysia Government Officers' Cooperative Housing Society Ltd [1979] AC 374, 383. The principal may recover the amount of the bribe in an action for money had and received or, alternatively, sue for damages for fraud to recover the amount of the actual loss sustained in consequence of entering into the transaction in respect of which the bribe was given. 381 In equity, however, the giving of a bribe is treated as a species of equitable fraud, for which the remedies include rescission of the transaction induced by the bribe. As James LJ said in Panama & South Pacific Telegraph Company v India Rubber Gutta Percha & Telegraph Works Co (1875) LR 10 Ch App 515, 526: 'According to my view of the law of this Court, I take it to be clear that any surreptitious dealing between one principal and the agent of the other principal is a fraud on such other principal, cognisable in this Court. That I take to be a clear proposition, and I take it, according to my view, to be equally clear that the defrauded principal, if he comes in time, is entitled, at his option, to have the contract rescinded, or, if he elects not to have it rescinded, to have such other adequate relief as the Court may think right to give him.' 382 The 'other adequate relief' to which James LJ referred includes equitable compensation in a measure designed to restore the plaintiffs to the position they would have occupied had the bribe not been given. It might seem harsh that the payment of a bribe of only $50,000 should lead to the rescission of a contract producing an obligation to pay $960,000 plus interest and other adjustments, or equitable compensation requiring a money payment of the same order. That, however, simply reflects the fact that, as Romer LJ said in the Hovenden case, at 43, the courts have always 'strongly condemned' the giving of bribes. The Privy Council put the point even more strongly in Attorney-General for Hong Kong v Reid, at 330: 'Bribery is an evil practice which threatens the foundations of any civilised society'. I shall return to the measure of recovery later. Liability for knowing involvement in breaches of equitable duties 383 A third party (a 'stranger') who becomes involved with fiduciaries who breach their duty to their principal may also be liable to the principal, as a constructive trustee. In Barnes v Addy (1874) LR 9 Ch App 244, 251-2, Lord Selborne LC said: '[The responsibility of a trustee] may no doubt be extended in equity to others who are not properly trustees, if they are found ... actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But ... strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps, of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. ... If those principles were disregarded, I know not how anyone could, in transactions admitting of doubt as to which view a Court of Equity might take of them, safely discharge the office of solicitor, of banker, or of agent of any sort to a trustee. But, on the other hand, if persons dealing honestly as agents are at liberty to rely on the legal power of the trustees, and are not to have the character of trustees constructively imposed upon them, then the transactions of mankind can safely be carried through; and I apprehend those who create trusts do not expressly intend, in the absence of fraud and dishonesty, to exonerate such agents of all classes from the responsibilities which are expressly incumbent, by reason of the fiduciary relation, upon the trustees.' 384 The principles of that case apply where a stranger becomes involved in a breach of duty by a fiduciary who is not an express trustee: Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373. I have referred to the 'second limb' of Barnes v Addy. That expression is commonly used to refer to the category of liability of someone who has not received trust property but has become involved with knowledge in a dishonest and fraudulent design. The first limb of Lord Selborne's formulation is concerned with 'the liability of a person as a recipient of trust property or its traceable proceeds'; while the second limb 'is concerned with what, for want of a better compendious description, can be called the liability of an accessory to a trustee's breach of trust': Royal Brunei Airlines v Tan [1995] 2 AC 379, 382. Although Lord Selborne's formulation has been described as a 'straitjacket' that has been interpreted as if it were a statute, inimically to analysis of the underlying concept (Royal Brunei Airlines, at 386), the Barnes v Addy apothegm still usefully describes the general territory of third party liability for breach of fiduciary duty. 385 Lord Selborne referred to an agent who 'assists' in a dishonest and fraudulent design. But if a stranger can be said to have procured or knowingly induced the fiduciary's wrongdoing, the case against the stranger is even stronger: see Royal Brunei Airlines, at 384; and note generally C Harpum, 'The Stranger as Constructive Trustee', (1986) 102 LQR 114, 141. The assistance or procurement or inducement must relate to 'a dishonest and fraudulent design on the part of the trustees [or other fiduciaries]'. The meaning of these words was considered by the Privy Council in the Royal Brunei Airlines case. 386 In that case the airline appointed a company called Borneo Leisure Travel ('BLT') to act as its general travel agent in Borneo for the sale of passenger and cargo transportation, by a written contract signed on behalf of BLT by Mr Tan. BLT was required by the contract to hold money received for the sale of passenger and cargo transportation in trust for the airline, and pay that money to the airline within 30 days. In practice, the money received by BLT was paid into its general account rather than any separate bank account. Mr Tan and his wife were the directors of BLT and its sole shareholders, and the company was effectively controlled by Mr Tan. BLT failed to pay the airline as required by the contract, and the airline terminated the contract and took proceedings against Mr Tan to recover the unpaid money. The trial judge found Mr Tan liable under the accessory limb of Barnes v Addy, since he authorised the wrongful use, for ordinary business purposes, of money that he knew to be subject to an express trust in favour of the airline. It was not necessary, according to the judge, to show that Mr Tan had personally gained from the breach of trust. The Court of Appeal of Brunei Darussalam allowed Mr Tan's appeal on the ground that, although there had been a sorry tale of mismanagement and broken promises, it had not been established that BLT was guilty of fraud or dishonesty in relation to the amounts it held in trust for the airline. Consequently there was no 'dishonest and fraudulent design'. 387 The Privy Council reversed the Court of Appeal's decision, holding that it was not necessary for the breach of trust to be a dishonest and fraudulent breach by the trustee, but it was necessary to show dishonesty on the part of the accessory. The principle adopted by their Lordships was that 'a liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation' (at 392). Mr Tan was liable to the airline because he caused or permitted his company to apply money collected in trust for the airline in a way he knew was not authorised by the trust of which the company was trustee (at 393). He used the airline's money to relieve cash flow problems, treating it as a rolling 30-day credit. That was sufficient to render his conduct dishonest, even though he hoped to be able to repay the money. It was not necessary to establish that he intended to defraud the airline. 388 Their Lordships made some pertinent observations on the meaning of 'dishonesty', as follows (p 389-90): 'Whatever may be the position in some criminal or other contexts (see, for instance, R v Ghosh [1982] QB 1053), in the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonestly are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be acquainted with conscious impropriety. However, the subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. And honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another's property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour. 'In most situations there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others' property. Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless.' 389 Their Lordships applied these observations to the area of commercial risk-taking. They observed (at 389) that all investment involves risk, and that 'imprudence is not dishonesty, although imprudence may be carried recklessly to lengths which call into question the honesty of the person making the decision', this being especially so if the transaction serves another purpose in which that person has an interest of his own. They referred to 'commercially unacceptable conduct' and added (at 390) that 'acting in reckless disregard of others' rights or possible rights can be a tell-tale sign of dishonesty', concluding (at 391) that 'ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct'. 390 As to the relevance of the personal characteristics of the third party, their Lordships said (at 391): '... when called upon to decide whether a person was acting honestly, a court will look at all the circumstances known to the third party at the time. The court will also have regard to the personal attributes of the third party, such as his experience and intelligence, and the reason why he acted as he did'. 391 Finally, I should note their Lordships' discussion as to whether mere negligence is sufficient to generate accessory liability. As I read their advice, the question for their Lordships was whether the accessory owes a common law duty of care to the beneficiaries, the assumption apparently being that equitable liability is confined to cases where the accessory's conduct is dishonest. In most cases, in their Lordships' opinion, no such duty of care will be owed. 392 Although various Australian courts have applied the Royal Brunei Airlines case (for example, Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1; Humphris v Jenshol (1997) 160 ALR 107; Duke Group Ltd v Pilmer (1999) 73 SASR 64), the High Court of Australia has not yet had the opportunity to consider it. However, in my opinion those principles are generally consistent with the High Court's judgment in the Consul Development case. Indeed, the Privy Council in Royal Brunei Airlines treated the Consul Development case as broadly in line with the dishonesty test which their Lordships enunciated (at 388). The singular contribution of the Royal Brunei Airlines case to the development of law is that their Lordships treat the accessory's liability as dependent on dishonesty rather than knowledge, and therefore consign to legal history the numerous cases that had identified increasingly refined sub-categories of actual and constructive knowledge. The High Court did not take that step in Consul Development, but by adopting a narrow view of 'knowledge', the practical effect of which is similar to a test of dishonesty, they paved the way for that step to be taken. It is therefore clear, in my opinion, that the Royal Brunei Airlines case is a statement of the modern Australian law. 393 I have dealt with the Royal Brunei Airlines case extensively because, in my opinion, it is a case of particular importance with respect to the position of Mr Gledhill. In the further amended statement of claim, the plaintiffs seek to invoke the principles of accessory liability under Barnes v Addy with respect to the breaches by Messrs Mullins and Rees of their fiduciary duties as directors of Aequitas and Aequitas No 1. They contend that Mr Gledhill dishonestly procured or assisted in those breaches. It is clear, first, that Mr Gledhill did not procure or induce or assist the breach of fiduciary duty which arose when Mr Mullins failed to disclose his interest in the $69,400 commission to the board of directors of Aequitas No 1. He had no actual knowledge that disclosure had taken place, and it could not be said that his connection or relationship with Aequitas No.1 was such that he ought to have known that there had been no disclosure: Companies (NSW) Code, s 68A(4). He was therefore entitled to assume that the constitution of the company had been complied with, and that Mr Mullens as a director had properly performed his duty to the company: ss 68A(3)(a) and (f). As to that breach of duty, the question of dishonesty does not even arise. 394 I have also found that Messrs Mullins and Rees breached their fiduciary duty as directors of Aequitas and Aequitas No 1 by virtue of their overall conduct during the period from November 1985 to March/April 1986. My findings on this point disclose a substantial level of involvement by Mr Gledhill. The seed of the problem leading to the breach of duty by Messrs Mullins and Rees was Mr Gledhill's plan to develop an equity investment business for AEFC, through the establishment of a joint venture corporate advisory business and a publicly listed vehicle to which AEFC's short-term equity investment could be sold. Whether the idea was conceived by Mr Gledhill or someone else, it was clearly developed by him very actively, in his board paper of 2 September 1985 and subsequently. Mr Gledhill's plan was inherently defective, because inevitable irretrievable conflicts of interest were built into it. One of those inevitable conflicts arose out of the position in which Messrs Mullins and Rees were placed, working for the corporate advisory business of the joint venture, becoming involved in directorships of target companies such as the companies of the Rendell group, providing corporate advice to Aequitas, and in all of these activities seeking to secure their future welfare by producing handsome profits for AEFC. 395 My analysis of the facts demonstrates that Messrs Mullins and Rees, influenced by their desire to produce profits by AEFC, took an over-optimistic view of the potential position of the Rendell group during this whole period, failed to make proper disclosure of the Rendell group's difficulties to the Aequitas companies, failed adequately to protect those companies, and failed to make proper disclosure of relevant matters in the private placement memorandum. The consequence was that the Aequitas companies did not receive an independent judgment to which they were entitled. 396 It is undeniable, in my view, that Mr Gledhill induced, assisted and (to a degree) procured these breaches of duty. As I have said, the breaches flowed from structural deficiencies in Mr Gledhill's own plan for the expansion of the business of AEFC, a plan which he actively promoted and implemented. He was well aware of the position in which Messrs Mullins and Rees were placed, and he took no steps to ensure that the independent directors and potential investors in Aequitas were fully informed of all the facts and circumstances. On the contrary, he contributed an open letter to the misleading private placement memorandum. 397 The more difficult question is whether Mr Gledhill's conduct was 'dishonest' in the relevant sense. Mr Gledhill knew all the facts that constituted the breaches of fiduciary duty by Messrs Mullins and Rees as a result of their overall conduct during the period from November 1985 to March/April 1986. But I do not believe that, in developing his plan for AEFC to make equity investments, and in contributing his letter to the private placement memorandum, he intended to deceive anyone. 398 A plan involving such obvious conflicts of interest was improvident, but it was not developed to serve an ulterior purpose of conferring a personal interest on Mr Gledhill, who would benefit from the success of the plan only in his capacity as general manager of AEFC. However, in my view Mr Gledhill's plan showed a kind of moral obtuseness, in disregard for the rights of potential investors in Aequitas. Its structure ensured that the interests of those investors would be subordinated to AEFC's desire to make short-term profits. Though Mr Gledhill believed that the Rendell Industries shares were not overpriced, he knew that their valuation depended on assumptions that had not been independently verified and were increasingly open to question. 399 However, looking at the circumstances objectively but taking into account Mr Gledhill's characteristics as a observed in the witness box, I do not regard him as having acted dishonestly. His was an abject failure to act prudently and with due diligence, a but it was not so reckless as to be tantamount to dishonesty. His conduct may have rendered him liable to his company for want of care (it is not for me to decide that question), but it di not render him an accessory to the breaches of fiduciary duty of others. 400 I turn now to consider whether Mr Gledhill has accessory liability in respect of other breaches of fiduciary duty. I have found that AEFC (as well as AEFCAS and CASO) was in breach of the fiduciary duty of a corporate or financial adviser, and that AEFC and AEFC Leasing (as well as AEFCAS and CASO) were in breach of the fiduciary duty of promoters. But I have taken the view that Mr Gledhill did not personally occupy a fiduciary position, even though his conduct and omissions were amongst the facts which gave rise to the fiduciary duties of AEFC and AEFC Leasing and their breach. Those findings raise for consideration the question whether Mr Gledhill is liable as an accessory to those breaches of fiduciary duty. 401 In my opinion the inevitable result of my findings is that Mr Gledhill procured or induced the breach by AEFC of its fiduciary duty as a corporate or financial adviser, as a principal in the joint venture. But he did not do so dishonestly. My reasoning with respect to Mr Gledhill's accessory liability for breach of directors' duty is equally applicable here. He was in a position to ensure that the private place memorandum was not misleading, although he was not directly responsible for or involved in drafting it. Had he done so, AEFC would have avoided liability for breach of its fiduciary duty. But his failure to intervene to correct and perfect the document was a failure to act prudently or carefully, rather than a failure to act honestly. While there were grounds for serious concern about the Rendell group's future solvency, the evidence does not indicate that he in fact held those concerns and deliberately suppressed them. He appears to have believed, though without any solid foundation, that the price paid by Aequitas No.1 for the Rendell Industries shares was fair, and that the group would overcome its financial difficulties. 402 Mr Gledhill also procured or induced the breaches of fiduciary duty by AEFC and AEFC Leasing. His conduct was an important ingredient in the circumstances leading these companies to be promoters. Again, he was not dishonest, although his conduct was highly improvident. 403 Although the plaintiffs were given ample opportunities to amend the statement of claim, their pleading of Mr Gledhill's accessory liability was, until the end, limited to accessory liability for breach of the fiduciary duty of Messrs Mullins and Rees as directors. I have nevertheless considered whether Mr Gledhill has accessory liability with respect to the breaches of the fiduciary duties of AEFC as corporate adviser and promoter, and of AEFC Leasing has promoter. As it happens, I have regarded it as open to me to find against Mr Gledhill on these matters, although in the end I have not done so. In Gray v New Augarita Porcupine Mines [1952] 3 DLR 1, the pleadings alleged fraud in the sense of deceit or misrepresentation, rather than breach of fiduciary duty. But the Privy Council took the view that enough was said in the statement of claim to show that special reliance was intended to be placed upon the defendant's obligations as a director and upon his breaches of fiduciary duty, and consequently a claim based on 'equitable fraud' was open on the pleadings. Their Lordships said (at 13-14) that 'what matters is that a defendant should have had adequate warning by the pleadings as to the issues of fact that are to be raised against him ...'. In my opinion, the further amended statement of claim gave Mr Gledhill ample warning of the issues of fact in this case. The question of his potential accessory liability, with respect to the breaches of fiduciary duty by AEFC and AEFC Leasing, does not raise any new issues of fact, especially given that the pleadings alleged that Mr Gledhill was a primary fiduciary along with AEFC and AEFC Leasing. 404 The accessory liability of AEFC and AEFC Leasing also depends upon establishing that they have been dishonest. Although Mr Gledhill was not the directing mind and will of those companies, he was their primary agent in all relevant matters. I have found that he was not dishonest. It follows that neither of the companies was dishonest, and consequently they have no accessory liability for the breaches of directors' duty by Messrs Mullins and Rees. But I have found them to be liable as primary fiduciaries. Fraudulent misrepresentation and misleading or deceptive conduct 405 The further amended statement of claim alleges that AEFC and Mr Gledhill failed to disclose various matters with respect to the financial condition of the Rendell group, allowing representations to be made to Aequitas and Aequitas No 1 which they knew to be false. Thereby, it is alleged, they engaged in conduct which amounted to deceit at common law and fraud in equity, and conduct which was misleading and/or deceptive or likely to mislead or deceive contrary to s 52 of the Trade Practices Act 1974 (Cth) and s 42 of the Fair Trading Act 1987 (NSW). 406 To succeed in an action of deceit, the plaintiffs must prove, inter alia, that Mr Gledhill and AEFC knew that the misrepresented material was false, or did not care whether it was true or false: Derry v Peek (1889) 14 App Cas 337. I have found (for the purposes of accessory equitable liability) that Mr Gledhill was not dishonest, but he acted very imprudently, and even showed a kind of moral obtuseness, both with respect to making a realistic assessment for himself of the position of the Rendell group, and ensuring that the true position was disclosed to Aequitas and its external investors. He appears to have believed that the Rendell group would survive and that the private placement memorandum was not misleading. Assuming that he can be said to have made the representations alleged in the pleading, he neither knew that those representations were false, nor made them without caring whether they were false or true. Consequently the ingredients for deceit have not been made out. The position is no different with respect to the allegation of equitable fraud in the active sense, as opposed to the extended category of equitable fraud which includes breaches of fiduciary duty: RP Meagher, WMC Gummow and JRF Lehane, Equity Doctrines and Remedies (3rd ed, 1992), p 335. 407 The action based on statutory misleading or deceptive conduct must fail, in my opinion, because it is clearly statute barred. Section 82(1) of the Trade Practices Act says a person who suffers loss or damage by conduct of another person that was done in contravention of, inter alia, s 52, may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention. The equivalent provision in the Fair Trading Act is s 68(1), relating to proceedings based on contravention of s 42. That is the cause of action asserted in the pleading. 408 Section 82 (2) (s 68 (2) of the Fair Trading Act) states that an action under subsection (1) may be commenced at any time within 3 years after the date on which the cause of action accrued. In this case the losses suffered by the misleading conduct arose out of payments made by Aequitas and Aequitas No 1 during the period from 25 November 1985 to 15 July 1988, allegedly induced by the defendants' misleading conduct. The most recent of these payments was more than three years before the proceedings were commenced on 6 November 1991. The cause of action was complete when the loss was ascertained and quantified: Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514. 409 In my opinion, the evidence is that the plaintiffs' loss in respect of its equity investments had been ascertained and quantified, at the latest, when a provisional liquidator was appointed on 18 August 1986, shortly after the appointment of a receiver and manager and the delivery by Arthur Young of their preliminary report, which demonstrated that Rendell Industries was insolvent. By virtue of those events, it had become clear that there would be nothing available for contributories. There may have been some slight prospect for Aequitas and Aequitas No 1 to receive a distribution in the winding up of Rendell Industries in respect of their loans after those events, but it appears on the evidence that this prospect faded outside the three-year limitation period. I therefore conclude that the misleading conduct claims are statute-barred. Conspiracy 410 I have found that the payment of $69,400 by AEFC to CASO on 14 July 1986 was not a bribe or secret commission because it was not paid or promised as an inducement for a breach of fiduciary duty. Nevertheless the plaintiffs submit that the agreement to pay that amount was a conspiracy to defraud at common law, relying on Mayor & c of Salford v Lever [1891] 1 QB 168, 176. This is because, they say, the corporate adviser of Aequitas (and for that matter, the Rendell group) was being paid a secret profit without giving Aequitas the opportunity of knowing that AEFC Leasing only wanted to retain about $890,000 of the price for the shares in a transaction in which AEFCAS was also, openly, charging over $28,000 in fees to Aequitas. Similar allegations are made with respect to the payment of $50,000. 411 The defendants say there was no agreement to pay AEFCAS any secret commission to procure the purchase by Aequitas No 1; that Messrs Mullins and Rees entered into the share sale agreement because they regarded it to be in the best interests of Aequitas No 1, and did not regard it as improvident or the purchase price as excessive. They say that AEFCAS did not withhold any information from Aequitas or engage in fraud or misleading or deceptive conduct, and that AEFC by itself or its agent AEFCAS did not procure Aequitas No 1 to enter into the share sale agreement. 412 In my opinion, the claim based on conspiracy is unsuccessful, even though I have found the payment of $50,000 to be a bribe or secret commission. I am not persuaded on the evidence that the payment of $50,000 was related to the agreement, even in an extended sense. It appears to have been the product of a unilateral decision by Mr Gledhill. As regards the payment of $69,400, I have found that it was not related to the share transaction because it was made after that transaction was completed, and the evidence is insufficient to link the two events. Breach of contract 413 Since the contract between the joint venturers and Aequitas was for the provision of advisory services, it contained an implied term that the venturers would, by their agent AEFCAS, exercise reasonable care in the performance of those services: Astley v Austrust Ltd (1999) 73 ALJR 403, 414. Although in November 1985 Aequitas was a captured entity, wholly under the control of Messrs Mullins and Rees, they and Mr Gledhill intended that Aequitas would attract independent investors and have a relatively independent board in due course. In those circumstances, the joint venturers were required by the implied contractual term to give advice as corporate advisers (to be discharged by advice given to Aequitas by Mr Mullins and Mr Rees) with respect to whether, before the transaction of 25 November 1985 was entered into, it would be prudent for Aequitas No 1 to enter into it. They should also have considered, and probably implemented, arrangements to enable the contract to be reviewed once an independent board was in place. 414 The evidence does not provide an adequate basis for justifying a price of $960,000 for the Rendell Industries shares as at 25 November 1985, given that the shares had been acquired seven weeks earlier for $250,000. Nothing in the evidence indicates that Mr Mullins or Mr Rees, or anybody else at the time, conducted the kind of 'due diligence' investigation that would have established a fair price payable by an independent third party. The defendants submit that no basis has been established in the evidence for the conclusion that the transaction was not in the interests of Aequitas No 1, other than by reference to what happened after the event. But this submission misconceives the contractual duty of a corporate or financial adviser whose retainer extends to advice on a particular transaction. Knowing that AEFC Leasing had acquired the shares for a cash payment of only $250,000 seven weeks earlier, Mr Mullins and Mr Rees should have taken care to advise as to whether the proposed higher price was fair. 415 The pricing of the transaction seemed to have emerged from the work carried out in June and July 1985, principally (it seems) by Mr Rees. Thereafter, it appears, the figure of $910,000 was treated without further analysis as the amount that AEFC expected to realise from the sale of its investment, either after the stock exchange listing of Rendell Industries or by private agreement. It appears that Mr Rees adhered to his calculations during the period from July 1985 to April 1986, even though his assessment can only have been based on assumptions about the financial viability and prospects of the Rendell group that were placed under increasing strain. 416 Since the purchaser did not raise funds to complete the purchase until late March 1986, the implied contractual obligation of the joint venturers required them to keep the transaction under review until that time. An important component of the valuation of the Rendell group was the valuation of the Hurstville property. Messrs Mullins and Rees were aware that the status report by Turner of 26 November 1985 estimated that the property could be expected to realise between $750,000 and $1 million. This was much lower than the book value of the site, and also lower than the figure previously used by Mr Rees in his calculations. Mr Rees incorporated the lower end of the Turner estimates in his subsequent calculations (see his notes of 4 December 1985), but gave the high end of the valuation range as $1.9 million, and then proceeded on the basis that the high end of the range could be achieved through a sale and lease back. None of Mr Gledhill, Mr Mullins and Mr Rees saw the Turner estimates as raising an issue for further investigation, requiring an independent property valuation. Indeed, they acquiesced in the Rendell board sweeping the Turner report under the carpet. 417 I do not find that Mr Rees disbelieved his own calculations of value. The problem was that neither he nor Mr Mullins or Mr Gledhill considered the question of Rendell's value from an objective viewpoint. The evidence shows that they considered the transaction primarily from the viewpoint of AEFC. 418 The plaintiffs are highly critical of the conduct of Messrs Gledhill, Kelly, Mullins and Rees during the period from November 1985 to March 1986. They allege that AEFC's strategy was to support the Rendell group, even though they were aware of its financial difficulties, solely in order to keep it afloat until adequate funds had been raised by Aequitas to permit the settlement of the sale of shares to Aequitas No 1. That is too strong a proposition, but it is true that during this period, they were acutely aware of the connection between providing the Rendell group with sufficient funding to meet its pressing obligations, and deriving a substantial profit through the sale of shares transaction once Aequitas was put in funds by investors. Thus, in his memorandum dated 3 March 1986 to the Australian Committee of AEFC, recommending an increase in the Rendell facilities, Mr Kelly noted that it was 'critical that AEFC now provide further support to RIH pending the proposed share issue', and that 'the commercial risks associated with AEFC's involvement with Rendell are tempered by the substantial profit to be made from the equity investment transaction'. 419 My conclusion, on balance, is that during the period prior to the sale and up to completion Messrs Mullins and Rees, the principal executives of the joint venture who were responsible for the provision of financial advice to Aequitas, failed to give proper consideration to the interests of Aequitas, which are in substance to be equated with the investment interests of its potential investors. Moreover, in my opinion, no reasonable corporate advisers in the position of Messrs Mullins and Rees, and thus in the position of the joint venturers, could have concluded that the transaction was in the interests of Aequitas in this sense. 420 Mr Gledhill was in a position to direct their attention to the issues upon which Aequitas needed to be given advice, but he did not do so, because he saw Aequitas as an entity that had been created to serve the interests of AEFC. In the circumstances, through the failings of Messrs Mullens, Rees and Gledhill AEFC and CASO, and their agent AEFCAS, breached their implied contractual duty to exercise reasonable care in the performance of their advisory services. Negligence 421 My finding with respect to breach of contract provides a remedy for Aequitas against AEFC, but there is no contractual remedy for Aequitas No 1 against AEFC, because Aequitas No 1 was not a party to the advisory contract. However, in my opinion AEFC, as principal in the advisory contract (a focus of which was a purchase of shares by Aequitas No 1) owed a duty of care to that company: Hawkins v Clayton (1988) 164 CLR 539. In the circumstances, the content of the duty was equivalent to the content of the contractual duty of care: Astley v Austrust Ltd, 73 ALJR at 413. The duty of care of a corporate or financial adviser is relevantly broader than the duty of a solicitor retained on a particular conveyancing transaction: cf Citicorp Australia Ltd v O'Brien (1996) 40 NSWLR 398; see Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642. 422 In a sense, my findings with respect to breach of contract and negligence are academic because, as I shall explain, the measure of recovery in equitable compensation for breaches of fiduciary duties is more favourable to the plaintiffs. Measure of recovery 423 I have found that · AEFC breached its fiduciary duty as principal in a corporate and financial advisory relationship with Aequitas and Aequitas No 1; · AEFC and AEFC Leasing breached their fiduciary duty as promoters of Aequitas and Aequitas No 1; · AEFC Leasing paid a bribe or secret commission of $50,000 to AEFCAS for the benefit of AEFC; · AEFC breached its contractual duty of care to Aequitas under its contract for the provision of corporate and financial advice; · AEFC breached its common law duty of care to Aequitas No 1. 424 I turn now to the question of remedies with respect to those breaches. The prayers for relief in the further amended statement of claim seek damages, equitable compensation and an account of profits. Rescission is not sought. However, the plaintiffs directed some submissions to relief by way of rescission, and there is a question whether damages or equitable compensation can be ordered where rescission is available. Moreover, in a case such as this, an appreciation of the scope and limits of the remedy of rescission is an important part of understanding why a decree of equitable compensation is appropriate, and how far the compensation may extend into consequential losses. I shall therefore first consider the availability of rescission (although I do not intend, for reasons I shall give, to grant that remedy), and then turn to equitable compensation damages. Rescission 425 I have already noted that, where a transaction is induced by the giving of a bribe, rescission of that transaction is an available remedy in equity. Rescission in equity is also available in respect of breach of an adviser's fiduciary duty (Maguire v Makaronis, at 467) and of a promoter's fiduciary duty (as in Tracy v Mandalay). Rescission is not available in respect of a breach of contract or the duty of care. 426 Rescission in equity does not require precise restitution in integrum. A court of equity can require adjustments to be made inter parties of a kind not available to a court of common law: Alati v Kruger (1955) 94 CLR 216, to 223-4; Maguire v Makaronis (1997) 188 CLR 449, 467. The Court's decree is moulded to achieve 'what is practically just': Spence v Crawford [1939] 3 All ER 271, 288 per Lord Wright. Once a breach of fiduciary duty has been established, 'the nature of the case will determine the appropriate remedy available for selection by a plaintiff ': Maguire v Markaronis, at 467; see also Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218, 1278-9; Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 182 CLR 102, 113-5. 427 Rescission in equity is a more flexible tool than rescission at common law. The common law required the plaintiff to return in specie that which he had received under the contract, in the same condition as it was in when he received it; equity, having the means the common law lacked to ascertain and provide for adjustments necessary to restore the parties substantially to the status quo, was able to see the possibility of restitution in integrum in a much wider variety of cases: Alati v Kruger, at 223. In that case, the High Court found that rescission was available even though the business that was the subject of the contract of sale had effectively been destroyed when the landlord subsequently re-entered into possession of the business premises. In the present case, it is not clear to me on the evidence whether Rendell Industries has been dissolved, so that its shares no longer exist. However, if the shares do exist they are worthless, and as I understand the evidence, shareholders in Rendell Industries have not received any distribution in its winding up, and will not do so. Therefore 'restitution' would not involve the transfer of anything of value from the plaintiffs to the defendants, and consequently the effect of an order for rescission would be very similar (except with respect to the measure of recovery) to an order for the payment of money. On the authority of Alati v Kruger, these considerations would not prevent the Court from ordering restitution in this case, if it were otherwise appropriate to do so. 428 There is a question whether equitable compensation is available, as an alternative remedy, in a case where rescission might be sought. Tracy v Mandalay is authority for the proposition that, if the property on which the profit was made was acquired by the promoter before he or she became a promoter, there can be no claim for recovery of the profit, nor, it seems, for equitable compensation. By extension of that reasoning, if rescission is unavailable in such a case, neither is an account of profits or equitable compensation: cf Ladywell Mining Co v Brookes (1887) 35 Ch D 400. The reasoning appears to be that if the company elects to affirm the purchase, it would be unjust for the Court to intervene to 're-write the bargain between the parties'. Although it has an established pedigree (Re Kape Breton Co (1885) 29 ChD 795; Jacobus Marler Estates v Marler (1913) 85 LJPC 167n; Cook v Deeks [1916] 1 AC 554), I respectfully suggest that the reasoning underlying these cases is unsatisfactory, especially where rescission has become impossible. In such a case refusal of an account or compensation would work serious injustice: see Gower's Principles of Modern Company Law 6th ed by P L Davies, (1997) p137-8. In such a case an order for an account of profits or equitable compensation is not directed to re-writing the contract, but to addressing the consequences of conduct of the defendant that was collateral to the contract. 429 Moreover the reasoning is inconsistent with the modern approach to remedies, articulated in Maguire v Makaronis (at 467) and other cases, that 'the nature of the case will determine the appropriate remedy available for selection by the plaintiff'. In any case, the older cases acknowledge that the position is different if the promoter acquires property after he or she has become a promoter, and sells it to the fledgling company. That was the case here, since AEFC and AEFC Leasing had become promoters before 25 November 1985. 430 Another question is whether equitable compensation might be combined with an order for rescission. An examination of the relief granted in Tracy v Mandalay (at 245-6, 247) shows that an order for rescission of a contract may be accompanied by ancillary orders which enable the plaintiffs to recover costs that they have properly incurred in connection with the contract. In that case, the plaintiff was indemnified 'against all debts and liabilities (if any) whether for land tax, municipal water rates or in respect of proceedings against the plaintiff or otherwise for which the plaintiff has or may become liable to pay ...'. Similarly, in Maguire v Makaronis (at 467-8) the High Court observed that, in some circumstances, a purchaser seeking rescission of a contract for the purchase of a business, by reason of a vendor's fraudulent misrepresentations, may be entitled to an indemnity for trading losses incurred, both before the purchaser disavowed the transaction and thereafter whilst the business was maintained for the benefit of the vendor; but the indemnity will extend only to that part of the trading losses which were 'directly occasioned' by the falsity of the vendor's representations. 431 The plaintiffs say that if the Court orders the rescission of the contract for purchase of the Rendell Industries shares, it may couple that order with an order for equitable compensation for the further moneys which they invested in or lent to the Rendell group, subject to an assignment to the defendants of the loan securities and shares obtained by the plaintiffs when they made those further investments. As noted below, the further investments and loans amount to approximately as much as the purchase price for the initial shareholding. In their written submissions, the plaintiffs say that this would be 'restorative relief - Rendell Industries was benefited by - and strengthened by - these injections of money, albeit that they amounted to drops in a drain in the end'. 432 I would be going somewhat beyond the present case law if I were to order both rescission and equitable compensation in any general sense. As I understand the cases, the compensation orders that have accompanied a decree of rescission have been specific orders ancillary to the primary decree, directed to ensuring that the primary decree achieves its restitutionary purpose. It is not clear to me that I can both order that a contract be rescinded, and also make a series of specific orders for equitable compensation, if the theory underlying the compensation orders is only that the losses would not have been occurred but for the wrongdoing. Orders for compensation in respect of trading losses ancillary to rescission of a contract for the sale of the business, and in respect of taxes and duties ancillary to rescission of a contract for the sale of land, are much more closely related to the primary relief, than what is proposed by the plaintiffs in this case. 433 If, however, I order equitable compensation but not rescission, the law requires that the compensation be measured by reference to losses that would not have been incurred but for the breach. The relevant case law is discussed below. According to the Warman International case, the plaintiffs have the option of selecting the remedy of equitable compensation to the exclusion of rescission. They have exercised that election in the further amended statement of claim. The plaintiffs' losses 434 The plaintiffs claim damages or equitable compensation in the total sum of $2,569,651.90, together with interest to be calculated at Schedule J rates. Interest has not been calculated, but it will be substantial, since the losses were payments made during the period 1985-1988, now irrecoverable because of the collapse of the Rendell group. The capital sum comprises total losses suffered by Aequitas in the sum of $965,821.10, and total losses suffered by Aequitas No 1 in the sum of $1,603,830.80. The plaintiffs have broken down their claims into categories, in their written submissions. For the purposes of this judgment, the following summary will suffice: (1) the purchase price of $960,000, of which Aequitas paid $1,000 and Aequitas No 1 paid $959,000; (2) purchase costs in the sum of $11,296.50, relating to legal fees and stamp duty, paid by Aequitas No 1; (3) further share purchases on 3 June 1986 in the sum of $486,375 paid by Aequitas; (4) costs of further share purchases (stamp duty) in the sum of $ 1,911.10 paid by Aequitas; (5) loans to Rendell Industries and others related to the Rendell group, in April, June and July 1986, totalling $450,000 by Aequitas and $575,000 by Aequitas No 1 (the plaintiffs' schedule contains a typographical error in which the figure $400,802.80 should be $400,302.80); (6) cost of loans (stamp duty) in the sum of $ 3,291 paid by Aequitas No 1; (7) cost of enforcement against Rendell Industries (investigating accountants and solicitors) totalling $11,000 paid by Aequitas and $25,436.15 paid by Aequitas No 1; (8) flotation costs (accountants and solicitors) in the sum of $15,535 paid by Aequitas; and (9) extra payments to ANZ Bank in the sum of $29,807.24, paid by Aequitas No 1 in July 1988 (arising out of settlement of a claim by the Bank on a guarantee executed by Aequitas No 1 in favour of the Bank on 26 June 1986, of the indebtedness of Rendell Industries (NSW) Pty Ltd). 435 The defendants do not dispute these figures, except as to two matters. On these points I agree with the plaintiffs. First, the defendants say, as to category (5), that there is insufficient evidence of the circumstances surrounding the making of a loan of $11,200 to Mr Turner, to warrant any finding that they could be liable for this sum. But the evidence indicates that the loan was made at the direction of the Rendell Industries board. It is therefore a payment which Aequitas No 1 would not have made, but for its involvement with the Rendell group. Secondly, the defendants say, as to category (8), that there is insufficient evidence to warrant recovery of a payment of $3,000 to Law & Milne. It seems to me probable, however, that this account related either to the proposed flotation of Aequitas or to advice given by that firm on potential areas of recovery. In either case, it is a payment that would not have been made but for the involvement of Aequitas with the Rendell group. 436 Some of the plaintiffs' categories of loss are directly the result of the wrongful conduct of AEFC and AEFC Leasing. Some are categories of foreseeable loss. While it is doubtful in others whether the loss was foreseeable. 437 Thus, clearly categories (1) and (2) are recoverable as losses directly consequent upon the breaches of duty. Category (8) is recoverable as a foreseeable loss, since Aequitas No 1 was induced by breaches of duty to enter into a contract to purchase the Rendell Industries shares and it was foreseeable that, in consequence of that transaction, Aequitas would incur costs in preparing for flotation and stock exchange listing. The costs in category (7) were also foreseeable, since it could be predicted that if Aequitas No 1 became a major shareholder in Rendell Industries, which was known by the defendants to be in difficult financial circumstances and subsequently failed, it would be likely to incur some accounting and legal costs in connection with that failure, regardless of whether it also made loans to the group. 438 However, I do not regard the acquisition of further shares (categories (3) and (4)) or the making of loans to the Rendell group (categories (5), (6), and (9)) as foreseeable consequences of the defendants' wrongdoing. It is true that these events would not have occurred but for Aequitas No 1 becoming involved with the Rendell group in consequence of the purchase of shares induced by two of the defendants' breaches of duty. But it was not, in my view, foreseeable that Aequitas and Aequitas No 1 would voluntarily choose to make further investments in the Rendell group. At most, it could be foreseen that they would be under some pressure or temptation to do so. 439 To the extent, therefore, that the plaintiffs' entitlement to damages is limited by considerations of foreseeability, I would limit their recovery to categories (1), (2), (7) and (8). It thus becomes necessary to consider whether there is a basis for recovering the additional categories of loss in a manner that sidesteps the requirement of foreseeability. It appears, for reasons I shall now set out, that the plaintiffs are entitled to recover the additional categories of loss because of the fact that the wrongdoing of two of the defendants amounted to breaches of fiduciary duty entitling them to equitable compensation, not merely torts and breaches of contract entitling them to common law damages. Account of profits 440 It appears to me that the plaintiffs' submissions elect, in effect, to pursue equitable compensation rather than an account of profits. This they are entitled to do: Warman International Ltd v Dwyer (1995) 182 CLR 544, 559. In view of my findings concerning the consideration, there would be a recoverable profit on the sale of shares, measured by the difference between the purchase price of $960,000 and the amount paid by AEFC Leasing for the acquisition, less a cost of funds component for that amount. Mr Gledhill calculated the profit at $90,000, and the Court would accept that calculation. However, by seeking equitable compensation rather than an account for profits the plaintiffs will recover the whole $960,000, and much more besides. Measure of recovery at common law and in equity 441 Leaving aside the question of exemplary damages, the measure of loss for negligence is the restoration of the plaintiffs to the position they would have been in but for the defendants' tort: see, for example, Livingston v Rawyards Coal Co (1880) 5 App Cas 25, 29 per Lord Blackburn. The measure of damages for breach of contract is different in formal terms, since it includes expectation loss, but it produces a result identical in substance with the tort measure of damages in the present case. Both in tort and contract, the defendants are liable for the foreseeable consequences of their conduct: Wagon Mound (No 1) [1961] AC 388, 426. 442 Equity intervenes in a case of breach of fiduciary duty, not so much to recoup a loss suffered by the plaintiff as to hold the fiduciary to, and vindicate, the high duty owed to the plaintiff: Maguire v Makaronis (1997) 188 CLR 449, 465; Warman International Ltd v Dwyer (1994) 182 CLR 544, 557-8. Nevertheless breach of an equitable duty may lead, in an appropriate case, to an order for the payment of compensation rather than specific relief such as rescission. Equitable compensation, to be distinguished from common law damages, is available in the case of breach of the fiduciary duty of an adviser or promoter: Nocton v Lord Ashburton [1914] AC 932, 956; Warman International Ltd v Dwyer (1994) 182 CLR 544, 556-7. The order for the payment of compensation is designed to make good a loss in fact suffered by the person to whom the duty is owed and which, using hindsight and commonsense, can be seen to have been caused by the breach: Target Holdings Ltd v Redferns [1996] 1 AC 421, 439. Like the tort measure of damages, an order for the payment of equitable compensation is designed to restore the plaintiffs to the position they would have been in but for the defendants' equitable wrongdoing: Target Holdings, at 432. But it appears that there are some differences in the principles for the assessment of loss. Foreseeability and remoteness in the common law sense, and the doctrine of novus actus interveniens, are not applied in assessing equitable compensation: Maguire v Markaronis, at 470; Target Holdings Ltd v Redferns, at 434; O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262, 275. 443 It is essential, however, that the losses made good are only those which on a common sense view of causation, were caused by the breach: O'Halloran, at 273 per Spigelman CJ (citing Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129, 163 per McLachlin J, dissenting). The Court must identify 'the criteria which supply and adequate or sufficient connection between the equitable compensation claimed and the breach of fiduciary duty': Maguire v Makaronis, at 473; O'Halloran, at 276. The rules for recovery of equitable compensation are still developing, and there is a normative aspect to the determination of issues of causation: Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1, 90. 444 In some cases of equitable compensation, the courts adopt what Spigelman CJ referred to as 'a stringent test to the selection of those events preceding loss which are to be taken as causing the loss': O'Halloran, at 276-7. Where the fiduciary is a trustee who has been disloyal or has failed to observe the rules for due administration of the trust, the trustee must replenish the trust fund by restoring the assets that have been lost by reason of the breach, or compensation for the loss of those assets: Target Holdings Ltd v Redferns, at 434; Maguire v Makaronis, at 471. In this context, losses will be taken to have been caused by the breach if, but for the breach, the loss would not have occurred (Target Holdings Ltd v Redferns, at 434; Maguire v Makaronis, at 470), and no closer connection between the loss and the breach will be required. 445 The approach taken to trustees is also taken where a company director uses a power to dispose of company property for improper purposes, since in both cases the beneficiary of the duty is in the position of vulnerability: O'Halloran, at 277. An even stricter approach to causation was taken in Brickenden v London Loan & Savings Co [1934] 3 DLR 465. In that case Brickenden was a solicitor who acted for both a proposed mortgagor and a proposed mortgagee, in a transaction from which he would personally gain. He was found to have breached his duty by non-disclosure of material facts. The Privy Council held (at 91) that Brickenden could not 'be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the [client's] action would be solely determined by some other factor ...'. Their Lordships continued: 'Once the Court has determined that the non-disclosed facts were material, speculation as to what course the [client], on disclosure, would have taken is not relevant.' 446 If Brickenden's case governs the circumstances, it is not even relevant to inquire whether, but for the non-disclosure, the transaction would have been entered into. It might therefore be thought that Brickenden's case has dispensed entirely with the requirement of causation. However, in Beach Petroleum (at 91-94) the Court of Appeal carefully analysed the judgments at all levels in Brickenden, and concluded that it is not authority for the general proposition that in cases of breach of fiduciary duty, the Court cannot consider what would have happened if the duty had been performed. They said (93): 'Brickenden was concerned with a chain of events in which the alleged default of the fiduciary was a necessary component. The information which the solicitor was obliged to disclose was the very information upon which the third party had to act. It was such an act, necessarily linked to the performance of the fiduciary duty, about which 'speculation' was said to be inappropriate.' 447 In Maguire v Makaronis, at 470-4, the High Court did not express a concluded view on Brickenden's case, but took the view that there is no need to apply it to cases of rescission, where the equity to set aside the transaction is immediately generated by the breach of duty, and questions of causation do not arise. 448 The same 'but for' test of causation is applied to claims for equitable compensation for consequential loss. Here the courts do not hesitate to consider what the beneficiary of the duty would have done had there been no breach. Questions of foreseeability, remoteness, and novus actus interveniens are irrelevant. Thus, in Commonwealth Bank of Australia v Smith (1991) 42 FCR 390, 395, customers of the Bank relied on the Bank's advice as to the value of a hotel and its financial viability, and consequently purchased the hotel. It was held that the Bank had breached its fiduciary duty in giving the advice, because it had conflicting duties to the purchaser and seller of the hotel, the seller also being a bank customer. The court awarded the purchasers damages measured by the difference between the amount paid for the hotel and its true value, plus interest. The purchasers' claim for damages for consequential loss, measured as the difference between what the purchasers would have received had they stayed in the employment which they held immediately before purchasing the hotel, and the net profits of the hotel, was rejected. This was because the purchasers had already decided to leave their employment and conjecture as to what their position would have been had they not purchased the hotel was pure speculation. 449 In the present case, the breaches of fiduciary duty by AEFC and AEFC Leasing relate to conflicts between interest and duty. AEFC stood to derive substantial indirect benefits (through the increase in value of its subsidiary, AEFC Leasing, and through eventual receipt of the $50,000 commission), and AEFC Leasing stood to gain a substantial direct benefit (its profit), from the sale of the Rendell Industries shares to Aequitas No 1. AEFC was a principal of the joint venture which undertook to provide corporate and financial advice to Aequitas, and both AEFC and AEFC Leasing were promoters of Aequitas and Aequitas No 1. They did not make timely disclosure of all material facts relevant to the transaction, to the independent directors or potential investors. The undisclosed material facts included the profit that AEFC Leasing stood to gain on the transaction, and the declining financial circumstances of the Rendell group. They allowed a materially false and incomplete private placement memorandum to be issued. 450 Accurate and full disclosure to the Aequitas board prior to the sale transaction would not have prevented Aequitas No 1 from contracting to buy the shares, since at the date of the contract it was under the control of Messrs Mullins and Rees, who were aware of all relevant matters. Accurate and full disclosure immediately after the appointment of the independent board would probably not have brought the transaction to an end, since there was no right of review for termination in the contract and it was too late at that stage for the independent directors to have any influence over the content of the private placement memorandum. A fortiori, such disclosure as was made to Mr Pond in the second half of March 1986, for the purpose of preparation of his report, would not have brought the transaction to an end, even assuming that the same information was fully available to Messrs Rich and Donohoe. But in my opinion, it is very likely that accurate and full disclosure in the private placement memorandum would have dissuaded investors from applying for shares in Aequitas, as disclosure would have informed them that Aequitas No 1 would be paying much more for the Rendell Industries shares than had been paid by the vendor seven weeks before the contract of sale, and that the Rendell group was suffering from chronic and acute cash flow difficulties. Indeed, an accurate and full private placement memorandum would effectively have amounted to a warning against investment. 451 Aequitas No 1 would not have been able to complete the purchase transaction if investors had been discouraged from subscribing for shares in Aequitas. If that had occurred, it is unlikely that AEFC Leasing would have sought to enforce the contract against Aequitas No 1, but if it had done so, Aequitas would have had by that time sufficient independent directors that it could have taken proceedings for rescission of the contract for breach of duty. It is probable that, instead of completing the purchase transaction on 1 April 1986, the plaintiffs would have terminated the purchase by no later than that time. Consequently, Aequitas and Aequitas No 1 would not have suffered loss through the Rendell Industries transaction, but for the breaches of duty by AEFC and AEFC Leasing failing to ensure that accurate and full disclosure was made in the private placement memorandum. 452 These factual conclusions lead me to hold that the breaches of fiduciary duty by AEFC and AEFC Leasing caused Aequitas and Aequitas No 1 to suffer the losses of which they complain. It is not necessary for me to rely on Brickenden's case. However, it seems to me that the present facts fall within Brickenden's case, even on the narrow ratio ascribed to that case by the Court of Appeal in Beach Petroleum. In other words, in this case the element of causation between breach and loss is satisfied, for the purposes of equitable compensation, whether or not Brickenden remains good law in Australia. 453 On the state of the authorities, the plaintiffs are entitled to be restored to their position prior to 25 November 1985, and to recover all of the losses that they would not have incurred but for the defendants' breaches. If the breaches had not occurred, the plaintiffs would not have completed the purchase transaction on the 1 April 1986 and would have terminated the contract by that time. Therefore, they would not have made the short-term loan of 3 April 1986 or any of the subsequent loans, and they would not have made the loan of $486,375 and converted it into equity. All those steps have led to losses of the amounts invested, and consequential losses. They are all recoverable as equitable compensation. 454 The defendants say that contributing fault is to be taken into account when making a determination of the amount of equitable compensation to which a plaintiff is entitled: Duke Group Ltd (in liq) v Pilmer (1999) 31 ACSR 213, at 383-391, especially at 389. Assuming that this statement of principle is correct (notwithstanding dicta to the contrary, to which his Honour refers), it has no application in the present circumstances. There was no contributing fault, on the part of the plaintiffs, to their own loss. 455 It is true that, from late March 1986, the directors of Aequitas had available to them the information supplied by Mr Pond for the purposes of his report. That information showed the acute financial difficulties of the Rendell group, but (as I have said) it did not establish that the company was insolvent. It was open to a person in the position of Mr Pond, expert in the affairs of the building industry, to take the view that the problems of the Rendell group were cash flow problems (acute though they were), which could be overcome by the injection of additional funds. That, in effect, is the view Mr Pond in fact took. I have also found that the information supplied to Mr Pond provided grounds for serious concern about the solvency of the Rendell group in the future. But consistently with that finding, it was open for Mr Pond to believe, as he did, that the injection of further funds by Aequitas and others would enable the problem to be solved. Potential investors, as I have found, would be likely to take a more conservative view. 456 It follows, in my opinion, that while the plaintiffs would be entitled to recover the losses in categories (1), (2), (7) and (8), but not the losses in categories (3), (4), (5), (6), and (9) as common law damages for tort and breach of contract, all nine categories of loss are recoverable as equitable compensation for breaches of fiduciary duties. Interest 457 The plaintiffs seek interest at Schedule J rates on all of the losses recoverable by them from the time when the losses were incurred until the date of my orders. The defendants' submission on interest is as follows: 'Given that 'an order for the payment of interest at commercial rates extending for long periods into the past is prima facie productive of unfairness to the defendant', it would be inappropriate for the Court to make an order requiring the defendants to pay interest as from the dates on which the plaintiffs say they incurred the losses: Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 at 388 per Moffitt P; see also Anderson's (Pacific) Trading Co Pty Ltd v Karlander New Guinea Line Ltd [1980] 2 NSWLR 870 at 878.' 458 The defendants claim that the plaintiffs were responsible for the delay from 1986 to 1991, when the proceedings commenced. They point out that Aequitas resolved to obtain a review of 'litigation opportunities' in relation to Rendell Industries in September 1986, and Law & Milne identified AEFC Leasing and AEFCAS as possible targets in their letter of 27 November 1986. The defendants say no satisfactory explanation has been offered as to why proceedings were not commenced until 6 November 1991. In the circumstances, they say it would be unfair to impose interest with respect to the entire period from 1986 to date. 459 There is some evidence that, after the collapse of the Rendell group, Aequitas went about selling investments that had been made on the recommendation of AEFCAS, but none of them proved to be readily saleable. It appears that asset realisations were delayed by the receivership of the Rendell group, which was concluded in 1989. On 2 March 1990 a Mr Doolan was asked by the directors of Aequitas to investigate and report on the facts and circumstances of the purchase of the Rendell Industries shares. He reported on 13 June 1990, recommending that legal advice be obtained. The plaintiffs' solicitors were then retained and a statement of claim was filed on 6 November 1991. 460 While this evidence tends, to a degree, to explain the delay between 1986 and 1991, it does not justify that delay. It would not be fair, in my view, to require the defendants to pay interest in respect of the period beginning when, on a fair view of the circumstances, the plaintiffs might reasonably have been expected to commence proceedings, and 6 November 1991, when the proceedings in fact began. In my then, given that Law & Milne notified them of the prospect of recovery from AEFC Leasing and AEFCAS on 27 November 1986, the plaintiffs might reasonably have been expected to commence their proceedings by mid-1987. I would therefore not allow interest in respect of the period from 1 July 1987 to 5 November 1991 inclusive. 461 Interest is recoverable, in my view, in respect of the period from the date of incurring each individual loss (the respective dates of payment) and, in each case, 30 June 1987. The plaintiffs will have to make some calculations, with which (one hopes) the defendants will be able to agree, to avoid contention on matters of detail. 462 After the commencement of the proceedings, much of the delay seems to have been caused (perhaps not surprisingly) by the process of discovery. The plaintiffs' solicitors provided particulars on 13 April 1992, a verified defence was filed on 6 August 1992, and the defendants filed their first list of documents on 19 October 1992. The list did not include some important material. The defendants filed their second list of documents on 31 October 1995, comprising 185 pages specifying a total of 2,072 documents. Their third list of documents was filed on 14 February 1997, specifying that out of the total list of documents, 1017 documents were the subject of a claim of privilege. The defendants filed answers to interrogatories on 19 August 1997. Various amendments were made to the pleadings, and other interlocutory issues were addressed. The case was entered into the general list in April 1998. 463 As far as I can see, there is nothing in this chronology to suggest that the plaintiffs delayed the proceedings after they had been initiated. It is not inappropriate that the sum recoverable by the plaintiffs should bear interest during the period commencing on 6 November 1991, when the statement of claim was filed. 464 The further amended statement of claim seeks interest but does not specify whether the interest should be simple or compound. Generally interest is awarded at simple interest rates, even in cases where the plaintiff claims violation of equitable rights. However, compound interest may be ordered against a defaulting fiduciary: Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669; Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285, esp at 316-7. I do not regard the plaintiffs' submission for compound interest as too late. The defendants had the opportunity to respond to it, and did so. In my opinion, during those periods where interest is appropriate, I believe this is a case where compound interest should be ordered. The breaches of fiduciary duty that I have found to exist are serious breaches, although I have not found that Mr Gledhill was motivated by dishonesty. One of the breaches involves the giving of a bribe, a matter which the cases treat particularly seriously, as I have shown. Exemplary damages 465 The plaintiffs submit that the evidence demonstrates an attitude of contemptuous disregard of the plaintiffs' rights by Messrs Mullins, Rees, Gledhill, and AEFCAS, AEFC and AEFC Leasing. They draw attention to what they allege to be gross and serious breaches of fiduciary duty, and lay particular emphasis on the secret commission. They say that the conduct of the defendants merits punishment, citing Lamb v Cologno (1987) 163 CLR 1, 8-9. They say the defendants' behaviour is akin to the conduct in Gluckstein v Barnes [1900] AC 240, which, according to Lord Macnaghten (at 255), should have caused penal interest to be charged. 466 I disagree with these submissions. Although I regard AEFC and AEFC Leasing as having committed serious breaches of fiduciary duty, principally through the actions of Mr Gledhill, I do not regard their conduct as meriting punishment beyond the remedies that I have found to be available. Conclusions 467 Aequitas and Aequitas No 1 are entitled to recovery against AEFC for breach of its fiduciary duty as a corporate and financial adviser, and against both AEFC and AEFC Leasing for breach of their fiduciary duties as company promoters. They are also entitled to recovery in respect of a bribe or secret commission of $50,000 paid by AEFC Leasing to AEFCAS for the benefit of AEFC. In addition, Aequitas is entitled to recovery against AEFC for breach of its contractual duty of care, and Aequitas No 1 is entitled to recovery against AEFC for negligent advice. None of the other claims for recovery against AEFC and AEFC Leasing succeeds. No claims for recovery succeed against Mr Gledhill. 468 Aequitas and Aequitas No 1 are entitled to equitable compensation in the capital sums of $965,821.10 and $1,603,830.80, in the total sum of $2,569,651.90. Compound interest is to be ordered from the dates of individual payments to 30 June 1987, and from 6 November 1991 to the date of my orders. I shall direct the plaintiffs to prepare short minutes of orders and stand the matter over to a convenient date for the purpose of making orders and hearing argument as to costs. * * * * * * * * * Last Modified: 05/01/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.