New South Wales Supreme Court CITATION : I-Achieve Technology Limited v Sojo (NSW) Pty Limited & Ors [2001] NSWSC 16 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 3469 of 2000 HEARING DATE(S) : 20, 21, 22 and 23 November 2000 JUDGMENT DATE : 31 January 2001 I-Achieve Technology Limited (Plaintiff) PARTIES : Sojo (NSW) Pty Limited (First Defendant) Gregory Joseph Fisher (Second Defendant) Jonathan Owen Broster (Third Defendant) JUDGMENT OF : Bergin J COUNSEL : JW Stevenson (Plaintiff) FM Douglas QC/S Burley (First and Third Defendants) SOLICITORS : Deacons (Plaintiff) Holding Redlich (First and Third Defendants) CATCHWORDS : [TRADE PRACTICES] - Whether share sale agreement should be set aside on the basis of false or misleading representations upon which the plaintiff claims it relied and was induced to purchase the shares. [AGENCY] - Whether vendors of shares authorized the maker of the representations to negotiate with the plaintiff on their behalf - Whether the maker of the representations was authorized by the vendors of the shares to make the representations - Vendors knew that maker of representations was in the habit of making optimistic and sometimes false statements about the performance of the relevant corporation and did not place any limit or restraint on maker of representations in the negotiations. LEGISLATION CITED : Trade Practices Act 1974 (Clth) Fair Trading Act 1987 (NSW) Argy v Blunts and Lane Cove Real Estate (1990) 26 FCR 112 Barwick v English Joint Stock Bank (1867) L.R. 2 Ex 259 Colonial Mutual Life Assurance Society Ltd v The Producers and Citizens Co-operative Assurance Company of Australia Ltd (1931) 46 CLR 41 MacKay v Commercial Bank of New Brunswick (1874) L.R. 5 P.C. 394 CASES CITED : March v Stramare (E & MH) Pty Ltd (1991) 171 CLR 506 Scott v Davis (2000) 74 ALJR 1410 South Sydney District Rugby League Football Club v News Ltd [2000] FCA 1541 Trade Practices Commission v Queensland Aggregates Pty Ltd (No.3) (1982) 61 FLR 52 Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 DECISION : Plaintiff's application refused. THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BERGIN J DATE: WEDNESDAY 31 JANUARY 2001 3469/00 - I-ACHIEVE TECHNOLOGY v SOJO (NSW) PTY LTD & ORS JUDGMENT 1 This litigation arises out of a dispute in relation to the plaintiff's purchase of shares in the Satellite Group Ltd (Satellite) in June 2000. The plaintiff purchased the first defendant's, Sojo (NSW) Pty Ltd's (Sojo), parcel of shares in Satellite for $2,744,178.60 and the third defendant's, Jonathan Owen Broster's, (Broster) parcel of shares for $635,679, a total price of $3,379,857.60. 2 The plaintiff claims that Sojo, Broster and Gregory Joseph Fisher (Fisher), the second defendant, made certain representations to the plaintiff upon which it relied and by which it was induced to enter into the agreement to purchase the shares. The plaintiff claims that each of the representations were representations in trade and commerce in New South Wales with respect to future matters and were misleading or deceptive in contravention of s 52 of the Trade Practices Act 1974 (Clth) and s 42 of the Fair Trading Act 1987 (NSW). It is alleged that there was no reasonable basis for making the representations and that the representations were false. 3 The plaintiff claims that it has rescinded the purchase or stands ready, willing and able to do so and to deliver up to Sojo and Broster the shares it purchased from them. The plaintiff has demanded the return of the purchase price from Sojo and Broster with which they have not complied. Background 4 The companies which were ultimately subsumed into Satellite commenced operations in 1996. The initial market towards which particular products and services were directed was the Australian gay and lesbian community (the gay community). Satellite's operations included investment and property development and the publication of newspapers and magazines. 5 On 13 August 1999 Satellite lodged a prospectus with ASIC which was issued for the offer of 50 million shares at a price of 50c per share to raise $25 million (the prospectus). The prospectus advised the reader that: · Satellite had established a successful track record in the areas of media, publications, property and financial services; · Satellite Media, a Satellite subsidiary, published newspapers and magazines nationally and had a monthly readership of 600,000; · Satellite Media was moving into internet publishing which it believed would provide expansion opportunities; · Satellite Media intended to establish an e-commerce business with the proceeds of the offer which would incorporate electronic sales and the licensing of its brand to other electronic retailers; · Satellite's investment division included the freehold acquisition of two hotels in the Darlinghurst and Surry Hills areas which were popular with the gay community. These hotels had an annual rental income of $1.45 million and market value of $11.6 million; · Satellite had investments in six property developments with in excess of 500 residential apartments under development or construction with an estimated gross value of $161.8 million; · Satellite had been contracted to manage three property developments; · Satellite forecast net profit (after tax) of $4 million at 30 June 2000 and $4.8 million at 30 June 2001; · the use of the funds raised would be as follows: Property development and investment opportunities. $10.7 million Financial services division. $5.6 million Acquisition of Young & Co. $.3 million Media Infrastructure and investment and acquisition of new titles including development of a related internet and e-commerce based business. $3.5 million New business opportunities and working capital. $1.9 million Listing and other expenses. $3 million Total $25 million · The internet and e-commerce capability as a worldwide communications and distribution network was the logical extension for Satellite; · Listing on the Australian Stock Exchange (ASX) presented an opportunity for the public and in particular the gay community to participate in the expected profits and growth of its activities; · growth was expected in gay community advertising; · there were six properties in the property development division, two of which were under construction (Powerhouse Apartments in Ultimo estimated completion October 1999; Bauhaus Apartments in Pyrmont estimated completion December 2000) and the other four of which had various dates for estimated completion (the Harold Park Hotel in Glebe at May 2000; the Beresford Apartments in Surry Hills at July 2000; the Avenues Apartments in Rushcutters Bay at December 2000 and the Airlie Beach International Resort at December 2001). The total gross value of these properties was estimated at $161,840.000; · Fisher, as managing director, was responsible for the overall management and strategic direction of Satellite and the overall integration of Satellite Media with the other products and services of Satellite; · Broster, as executive manager, brought experience in design, town planning and development management and was responsible for identifying and fostering new opportunities for business, particularly in the areas of property development and investment; · the profit before interest and income tax for the twelve months ending 30 June 2000 was $10.725 million and $4.265 million after income tax; · risk factors included the risk that the Land and Environment Court proceedings in relation to the liquor trading hours at the Beresford Hotel may be unsuccessful. 6 Satellite was listed on the ASX on 24 September 1999 and produced its first annual report on that day. The Chairman, Dr Kerryn Phelps, advised that Satellite "entered the equities market at a volatile time, with the Australian Stock Exchange absorbing a market correction and other seasonal factors inducing a level of wariness among investors". The share issue price of 50c had dropped to 38c by December 1999. 7 Between August 1999 and June 2000 there were a number of articles in the press that were critical of Satellite's performance. The Australian Financial Review of Friday 14 January 2000 reported as follows: Satellite Group raised $25 million in an offering of shares at 50c each, but since listing in September the stock has never traded above issue price and as Pierpont writes has sagged to 39c. A company designed to tap the wealth of the homosexual market sounded promising. Most of the publicity that surrounded Satellite's launch concentrated on its dominance of Australia's gay publications. Indeed, one announcement said Satellite was "the largest gay and lesbian publisher in the world in terms of national penetration". Maybe in the long run Satellite Group will indeed become a new force in media. But in the short term - as the Prospectus makes perfectly clear - it's a property developer. Its core is a group of companies bearing the Satellite name, in which the prime mover is Sydney businessman Greg Fisher. These companies, which have been vended in to Satellite Group, mostly own inner city residential developments close to the Sydney CBD. It also holds investment properties. But the word on the grapevine is that the group is looking to do some big media deals and that it hopes to be bigger in media than in property by the end of this year. There will need to be a pretty large expansion in media for that to happen because up until now some 99 percent of the assets have been in property. 8 The article in the Australian on Friday 28 January 2000 entitled "Blush for Pink Float" stated: Though it bills itself as a "pink" company providing all manner of services to the gay and lesbian community, the bulk of Satellite's revenue comes from property. And that property was vended into the float at fairly extravagant prices. So Satellite has been deflecting criticism ever since; the PR's have been driving its media assets hard as blue sky. 9 In March 2000 Fisher set out to raise funds as seed capital for the media subsidiary, Satellite Media. During the period 1 June 2000 until 28 June 2000 there were further articles referring to the performance of Satellite. These included an article in the Daily Telegraph on 16 June 2000 entitled "Vultures Spin Round Satellite" which referred to Fisher's admission that he contemplated stepping down as Managing Director of Satellite after the groups shares tumbled in the April sell down. It went on to report: This week they hit a new low of 14c - less than a third of their 50c issue price when they listed last September. Mr Fisher said an "International Media Group" and a "local property player" had called with initial offers. "I can't deny there is competitive action around the place" "Satellite is obviously a very tasty opportunity considering we have more than $40 million in assets." Mr Fisher said despite the share slide, Satellite was on target to meet profit forecasts of $4 million for 1999 - 2000. 10 A further article in the Daily Telegraph on Monday 19 June 2000 "Hold on, its a 'Buy'" reported that the sponsoring broker of Satellite had recommended to its clients that they should "hold" on any future investments in Satellite because it doubted the company's ability to raise funds for its media division expansion. That recommendation had been made on May 11, 2000 apparently two days after Satellite announced it was seeking $10 million in seed capital to develop its on line media business. The article reported that Fisher claimed that Satellite's share malaise was largely due to "tax-loss selling". 11 There were also a number of ASX announcements relating to the performance of Satellite which demonstrated that Satellite was not going to meet its forecast and was substantially divesting itself of its property interests. In an announcement on 14 June 2000 the company acknowledged the falling share price and announced that it had been advised that the reason for the selling of the stock was mainly due to the upcoming financial year end and "the selling is therefore tax driven". 12 On 20 June 2000 Satellite announced that it intended to sell three of its properties and look closely at finalising a proposed aged care facility. Fisher advised that it was the company's intention to focus on expanding the media interest locally and globally and that it would trade as a media company with property and finance divisions, rather than the other way around. Fisher also announced that Satellite would be unlikely to achieve its forecasts to 30 June 2000. 13 On 22 June 2000 a further ASX announcement dealt with the status of the property portfolio. It advised that one project was not going to proceed because of "ongoing litigation". It advised that site management was working actively with the "current mortgagees". It also advised that a second project was expected to be sold in consultation with mortgagees due to "an ongoing dispute" with the second mortgagee and that a third project was to be sold with contracts to be exchanged "in the near future". 14 Further information provided in the ASX announcement of 22 June included detail of construction delays at Rose Bay, practical completion of one property (Ultimo) with a reduction of debt from $24 million to $5 million which would be "extinguished as further apartments settle". It also advised that the Beauchamp Hotel was to be refinanced. The Broker and Mr Lee Ming Tee 15 Albert Yue-Ling Wong (Mr Wong) is a director of Barton Capital Holdings Ltd and Barton Capital Securities Pty Ltd (Barton Capital). Most of Mr Wong's work is in the corporate area and he described himself as an investment banker and corporate adviser. He practices as a stock broker from time to time. 16 Prior to the Satellite float in 1999 Barton Capital was approached by Satellite through a third party, Intech, to ascertain its interest in acting either as a broker to the issue or as underwriter to Satellite. After numerous discussions an "understanding" was reached that Satellite would appoint Barton Capital to act as sponsoring broker. Satellite did not proceed with this understanding but appointed Shaw Stockbroking Ltd as the underwriter and sponsoring broker. 17 Mr Wong had no further dealings with Satellite until March 2000 when he met with Fisher who informed him that he needed to raise $10 million "seed capital" for Satellite's media subsidiary. Mr Wong informed Fisher that people would not want to invest in an unlisted company and said "that sort of money should go into a listed company". 18 Sometime after this meeting Mr David Chapman, a non-executive director of Satellite, informed Mr Wong that Broster "may be prepared to sell his shares to allow another strategic investor to come on board". Mr Wong then spoke to Fisher who confirmed that "if the right deal comes along" Broster may sell his shares. 19 Between March and June 2000 Mr Wong introduced a number of potential investors to Fisher, had a number of meetings and conversations with Fisher and one or two conversations with Broster. Mr Wong said that Fisher informed him that Satellite was "trading well", that it was "reasonably cashed up" and that it was "performing". He agreed that Fisher had informed him of a change in Satellite's strategy including the possible sale of a number of properties, the development of which had formed the basis of Satellite's forecasts for the years ending 30 June 2000 and 2001. Mr Wong informed Fisher if he could get 75% majority, he thought it was appropriate to dispose of the properties. He also advised Fisher he should announce to the market that Satellite was changing its forecasts. 20 One of Mr Wong's clients is Mr Lee Ming Tee (Mr Lee), a successful businessman and "seasoned investor" from Hong Kong, who comes to Australia from time to time. The investments of Mr Lee's group, the Allied Group, are in property related investments. Mr Lee informed Mr Wong that he was looking to invest in a property related company with tax losses in it. He has an interest in Mulpha Australia Ltd which is a subsidiary of a Malaysian company, Mulpha International Bhd. 21 Mr Wong informed Mr Lee that Satellite may be an opportunity because its shares had been performing "dismally" and that he understood that Satellite had some tax losses and media assets which could be quite valuable and it needed finance to expand and develop its media business. He also informed him that there was a "catch" or a "twist" in that it was a "pink" company - associated with the gay community. 22 On 21 June 2000 Mr Wong introduced Mr Lee to Fisher and Mr Greg Gahl, executive director of Satellite's publishing business, at the Satellite offices. Fisher and Mr Gahl took Messrs Wong and Lee on a tour of the office during which they were shown the operations of Satellite Media and the property group. In a meeting in one of the offices Fisher informed Mr Lee of his involvement in founding Satellite and the aim to "capture" the gay community, not only for media publications but also for insurance, financing and other areas of Satellite's operations. 23 On 22 June 2000 Sojo wrote to Mr Wong at Barton Capital in the following terms: Please effect the following sell order: Sell The Satellite Group shares (SAT) Name of holder: Sojo (NSW) Pty Ltd -ACN 065634899 Number of shares 13,720,893 SRN: 5518557418 SIN: 58892 A further 2,850,000 shares will be made available to the same buyer at 20 cents per share within one week (subject to approval of the Board tomorrow afternoon). Mr Fisher, managing director of The Satellite Group has advised that he will put this before the Board meeting tomorrow once he received confirmation from you that the buyer has been confirmed. The Board meeting commences at 2.00 pm. All shares will be sold at 20 cents per share. Please contact either Mr Greg Fisher or the writer to assist in this sale. This letter was signed by Broster. 24 Barton Capital (Mr Wong) wrote to Fisher on 23 June 2000 as follows: I refer to our recent discussions and confirm at your request the intention of our clients to purchase up to 19.9% of the ordinary shares in The Satellite Group Ltd, at $0.20 per share. It is anticipated that this transaction would take place next Monday, 26 June 2000. Whilst we are confident that our clients will proceed with the above transaction next week, your Board should be advised that there is no certainty that this is the case. However you can be assured that we will use our best endeavours to consummate the said transaction. 25 Mr Wong had further discussions about the possible investment with Mr Lee and an associate of Mr Lee's, Mr Alan Jones, the Managing Director of Mulpha Australia, which may have occurred on the telephone whilst he was overseas, for which he left on 25 June 2000. Either Mr Lee or Mr Jones informed Mr Wong that there was a problem for the company purchasing a substantial parcel of shares in Satellite because, if it did so, it would have to make a public announcement. 26 The problem arose from the fact that the holding company of Mulpha Australia Ltd, Mulpha International Bhd, was having a "rights issue in Malaysia" in relation to the publicity about Dr Mahatir and Anwar Ibrahim. If it made an investment which required a public disclosure Satellite's involvement with the gay community would cause a problem for Mulpha. The plaintiff's transaction 27 Savio Chi Shing Kwong (Mr Kwong) is an executive director and the chief executive officer of the Millennium Group Ltd (Millennium) and a director of Millennium's wholly owned subsidiary, the plaintiff. Millennium was incorporated in Hong Kong and the plaintiff was incorporated in the British Virgin Islands. Mr Kwong acquired Millennium from his "very good friend", Mr Lee. 28 Mr Kwong has had more than 17 years broad based experience in financial management, international business, mergers and acquisitions and strategic planning. He has had extensive involvement in property development and business investment, in particular in Hong Kong and the Peoples Republic of China. He is an associate member of the Institute of Chartered Accountants of Australia. 29 Mr Kwong travelled to Australia for a holiday in June 2000 arriving in Sydney on Friday 24 June 2000. When he arrived in Sydney he telephoned Mr Lee, it seems, because of a message that was left for him to do so whilst he was in Hong Kong. 30 Mr Lee informed Mr Kwong of Satellite's existence referring to it as a "media and property company" which was trying to raise $10 million "to fund its e-media projects which are run through a subsidiary". He informed him that it was "a good area with potential". Mr Lee also informed Mr Kwong that if he was interested, rather than buying into the e-media company "it would be better to acquire a stake of approximately twenty percent in Satellite Group itself, the holding company of the e-media subsidiary". Mr Lee continued: You can acquire this stake from an existing significant shareholder. There are currently two significant shareholders. One is Greg Fisher who is the company's managing director. Greg will continue with the company. The stake that is available belongs to the other significant shareholder. It is slightly less than 17 million shares, a bit less than twenty percent of the holding company. 31 Mr Kwong expressed interest and an arrangement was made for him to attend the offices of Mulpha Australia Ltd on Monday 26 June 2000. Mr Kwong contacted the Chairman of Millennium, Dr Lincoln Chee (Dr Chee) in Hong Kong and informed him of "an investment opportunity in an e-media company in Australia". Dr Chee suggested that Mr Kwong should "explore it further". 32 On Monday 26 June 2000 Mr Kwong attended Mulpha's offices and met with Mr Lee and Mr Jones. During the meeting Mr Jones handed Mr Kwong a bundle of documents and said: Here are the prospectus and annual reports for the year ended 30 June 1999, half yearly financial reports for the period ended 31 December 1999, and a performance update dated May 2000 by The Satellite Group as well as some business plans, detail of property projects and a copy of promotional brochures relevant to The Satellite Group. The company is a newly listed company, having only been listed in the second half of 1999. It is a company focusing on the gay and lesbian community with a control over eighty percent of media interests relevant to that community. It is now thinking of going into e-media and wants to raise A$10 million which is roughly equivalent to twenty percent of the value of one of its subsidiaries. Australia has a huge population of gays and lesbians. This is a closely held community and consists mostly of high income, highly educated couples with no kids and very high disposable incomes. The community can also be said to be frequent users of computers - "netizens" [that is net citizens]. 33 Mr Jones also said: Instead of buying an interest in its e-media subsidiary, which is unlisted and has a value of between $40-50 million, why not acquire an interest in the holding company, a publicly listed company. This will give you a similar interest in the subsidiary at a cost of only $3.4 million. Further, because The Satellite Group is a public company, you will have an exit mechanism. Initially a friend of mine, Albert Wong of Barton Capital Holdings Ltd, approached me and asked me whether I would be interested in investing in The Satellite Group. I met with management of The Satellite Group and I decided to purchase a shareholding in the holding company. Then because there was a concern about a potential negative reaction from the Malaysian government regarding The Satellite Group's relationship with the gay and lesbian community, I pulled out of the transaction at the last minute. So this leaves an opportunity for you to come in. 34 The following conversation then ensued: Mr Kwong: This is too good to be true. What is the financial position of the company? Mr Jones: There is going to have to be some write down of The Satellite Group's property portfolio. However, on a conservative basis the company should have a net asset value of $25-30 million. It still has approximately $3-4 million of cash in the bank. Further, the media business has started to make money. Mr Kwong: Does the company need any further funding for its property investments? Mr Jones: The financing for the property development has been arranged through the bank. Mr Kwong: I need to digest the information. May I borrow this information package? In the meantime please arrange a meeting because I want to speak to Satellite's management. At the conclusion of this discussion Mr Jones left the room and returned shortly afterwards. He informed Mr Kwong that a meeting was being held the following afternoon and "you can come to that if you wish". 35 The documents given to Mr Kwong were : (a) The prospectus; (b) Satellite's First Annual Report; (c) Satellite's Director's Report dated 15 March 2000; (d) A document entitled "Satellite Development" dated June 2000; (e) A document entitled "Satellite Home Loans - Strategic Business Plan" dated June 2000; (f) A document entitled "Satellite Media - Strategic Business Plan" dated June 2000; (g) A media release dated 9 May 2000 "Satellite pursues equity raising from media business - appoints PricewaterhouseCoopers as advisors"; and (h) A document entitled The Satellite Group Ltd Report dated May 2000. 36 Mr Kwong considered the information in the documents overnight. In considering this material he particularly noted: (a) that according to the prospectus Satellite had: (i) a proforma net asset value of $37,080 million as at 30 April 1999; (ii) on a proforma combined basis as at 30 April 1999 a total shareholders equity of $37.080 million; (iii) forecast a profit (on a proforma basis) of $4,021,000 for the period ending 30 June 2000; (b) that according to the Director's Report of 15 March 2000 Satellite had: (i) $207,000 profit before amortisation of goodwill or $41,000 profit after tax attributable to members for six months to 31 December 1999; (ii) consolidated net assets of $35,567 million as at 31 December 1999; (iii) cash on hand and at bank amounting to $4.526 million as at 31 December 1999; and (iv) a net tangible asset backing of $0.34 per ordinary share as at 31 December 1999. (c) That according to the document "Satellite Media- Strategic Business Plan", PricewaterhouseCoopers Securities had valued Satellite's electronic media business at $35 million and the print media business at $7.2 million; and (d) that according to the prospectus, BDO Nelson Parkhill had expressed an opinion in a report dated 12 August 1999 that, to the best of their knowledge, there had been no material transactions or events subsequent to 30 April 1999 other than those contained in the report. 37 Mr Kwong attended Satellite's offices on 27 June 2000. At the commencement of the meeting Mr Kwong was introduced to two people, Mr Lee Sing Huang (Lee Jnr) whom he had previously met and knew as the son of Mr Lee Ming Tee and the Director of the Lippo Group and Mr James Chen. Both were introduced to him as potential investors. 38 Mr Jones introduced Fisher and Mr Gahl to Messrs Kwong, Chen and Lee Jnr and then left the meeting. Messrs Kwong, Chen and Lee Jnr were then shown around Satellite's offices and returned to the Boardroom. The following conversation then took place: Fisher: Mr Gahl is in charge of the media side of the company. Greg, can you tell us about the business plans for the company. Mr Gahl: We are going to build a portal, initially providing financial services, home loans and on line share trading as well as insurance and travel. We have in place arrangements with ABN Amro to provide the home loans and the on line trading has been arranged with Sanford Securities. The majority of our clients, the affinity community, are sensitive and do not want to go to banks. They prefer to deal with Satellite. This business will be ready to be launched soon. That means that income will start flowing in quickly. Mr Kwong: Is the company in good financial position? Fisher: Yes. Mr Kwong: Are there any liabilities as far as the holding company is concerned, either by itself or with its subsidiaries? Fisher: No. The liabilities are all with the subsidiary. Further, most of the liabilities are related to the property division. There are no cross guarantees between the subsidiaries and there is no corporate guarantee from the holding company to the subsidiaries. Mr Kwong: What is the current 'burnrate'? Fisher: On a prudent basis, the company requires $2 million. Mr Kwong: How much money do you have in the bank? Fisher: A few million. Mr Kwong: What is the latest status of the fundraising for your e-media subsidiary? Fisher: Out of the $10 million required, $6 million has been filled up: $4 million from a South African bank and $2 million from our friends. Mr Kwong: How did you come up with a figure of $10 million? Fisher: $10 million is equal to approximately twenty percent of the value, on a diluted basis, of the media subsidiary. There was a valuation by Price Waterhouse. It showed the value of the existing business to be approximately $7 million and the e-media business was valued at approximately $35 million. Mr Kwong: Has there been any adverse changes to the financial position of the company since the initial public offering? Fisher: No. Mr Kwong: Will there be any fund raising by rights issue or placement in the near future? Fisher: No. The company does not need to do that. 39 Mr Kwong then asked Fisher if he was willing to increase his shareholding in the future. Mr Kwong said that he asked that question "because Satellite's shares having initially been issued at 50c were trading at 16c - 17c" and if Fisher "replied in the affirmative" it would "indicate that he believed the shares were trading at a good value". Fisher said "I'll be increasing my shareholding in due course". Mr Kwong said "as a significant shareholder and a Managing Director, do you think that the shares are currently trading at an undervalue, so that you should not do the fundraising by rights issue or placement? Fisher replied "Yes". 40 Mr Kwong gave evidence that from these conversations he understood that there had been no material changes to Satellite's financial situation since the public offering in August 1999. He also reached an understanding that Satellite: (a) was in a good financial business; (b) had no liabilities; (c) had provided no guarantees to it subsidiaries and there were no cross guarantees between Satellite's subsidiaries; (d) estimated that it would incur in the forthcoming year, expenses totalling $2 million; (e) had a few million dollars in the bank; (f) had an e-media subsidiary which had an existing business value of $7 million and which had an e-media business valued at around $35 million; (g) did not, other than to finance expansion by its e-media subsidiary, require any money; and (h) shares were currently trading at an undervalue. 41 Mr Kwong gave evidence that based on the representations made in the conversation at Satellite's offices and the information in the documents provided to him he decided it would be worthwhile to invest in Satellite. Mr Kwong then said: We want to come in to help roll out the company's business in e-media. We believe we have the Asian contacts and the funding capacity. So it will be a good mix. You have the content, knowledge, skill, experience and vision and we have the contacts and funding. We complement each other. How many board seats will we get if we decide to acquire a twenty percent shareholding in the holding company. Fisher replied: "You would have two seats" to which Mr Kwong asked: "Is that all"? and Fisher replied: "Yes". Mr Kwong informed Fisher that he needed to go back to his Board and he would get back to him "in a few days". 42 Mr Kwong returned to his hotel and telephoned Dr Chee. He informed Dr Chee that based on what he had heard from the two executive directors and based on the information provided it looked like "a good buy". He continued: For $3.4 million we will get twenty percent of a holding company with a subsidiary which has been valued at $35 million. There is a lot of potential. There are no cross guarantees and no corporate guarantees. Most of the debt is with the property division. Dr Chee agreed that it sounded like a good idea and said that he would arrange a Director's meeting of the plaintiff the following day to discuss the purchase of the shares. The following day, 28 June 2000, a Director's meeting was held on a conference call from Hong Kong. Present were Dr Chee, Mr Kwong and Mr Fung, the plaintiff's financial controller. The minutes record that it was resolved that the "acquisition by (the plaintiff) of 16,889,288 shares in the Satellite Group Ltd, a company listed in the Stock Exchange of Australia, at a consideration of AUD 3,410,277 be hereby approved". 43 Mr Wong arrived back in Australia from overseas on 28 June 2000. On that day he had a telephone conversation with Mr Lee who asked him to contact Mr Kwong. Mr Lee informed Mr Wong that he had introduced Mr Kwong to Fisher and that Mr Kwong appeared to be interested in the Satellite Group and he should contact him. 44 Mr Wong telephoned Mr Kwong and the following conversation took place: Mr Wong: Do you want to proceed with the Satellite share purchase? Mr Kwong: Yes. I'll be setting up a special purchase vehicle for the shares. My chief financial officer will get in touch with you tomorrow with the details of the company. Mr Wong: What is your or your company's relationship with Lee Ming Tee? Mr Kwong: There is no association between me or my company with Lee Ming Tee other than the fact that we purchased this company from Lee Ming Tee and as a result of this transaction we have remained friends. Mr Wong: Good. I am glad because I want to be absolutely sure that there's no linkage between you and Mee Ling Tee given what has occurred in the past. Do you want the transaction to proceed today? Mr Kwong. Yes today is fine. Mr Wong: I will forward a copy of the contract note and our trust account details to you. Given the large amounts of monies involved, we have to be sure that the funds are in our account on the date of settlement. 45 This is a curious conversation. Mr Kwong gave evidence that the telephone Board Meeting of the plaintiff took place on 28 June 2000 when the plaintiff decided to purchase the shares. However Mr Kwong's evidence is that on the same day he informed Mr Wong that he "will be setting up a special purchase vehicle" to purchase the shares and the details of the company would be provided the following day. This evidence does not sit comfortably with Mr Kwong's evidence that the "vehicle" had already had a Board Meeting. 46 Mr Wong then telephoned Fisher and informed him that a company associated with Mr Kwong would buy the shares and that he required written instructions from Broster to proceed, including the fees involved. Mr Wong received the following letter later that day from Sojo: Please note that as of the 28th June 2000 there are 84,921,049 shares issued in The Satellite Group Ltd. A 19.9% shareholding in The Satellite Group Ltd would equate 16,899,288 shares. Would you please therefore effect the following sell order: Sell the Satellite Group shares (SAT) Name of holder: Sojo (NSW) Pty Ltd - ACN 065634899 Number of shares: 13,720,893 SRN: 5518557418 SIN: 58892 And on behalf of Jonathon Broster would you please effect the following sell order: Sell the Satellite Group shares (SAT) Name of holder: Jonathon Owen Broster SRN: 5522329730 Number of shares: 3,178,395 I also wish to confirm that I am prepared to pay 2½% brokerage fee on both transactions. 47 A few hours later Mr Wong telephoned Mr Kwong and informed him "the deal is done". Mr Kwong asked Mr Wong to send the details to his chief financial officer so that a remittance advice could be arranged. That afternoon Mr Wong received an e-mail from Fisher in the following terms: RE SALE OF BROSTER SHAREHOLDING We refer to the transaction today which was brokered by you. We would like to take this opportunity of thanking you for your diligent assistance in this matter and the extra effort that you went to to ensure the successful completion in a fairly short space of time. The party that you have brought to us will no doubt be of great value to The Satellite Group as we move ahead with our plans and you may be assured that we will work diligently as ever to provide an excellent return for them. We look forward to working with you on the underwriting for the Media division and beyond. 48 Mr Kwong returned to Hong Kong on 2 July 2000. On 3 July 2000 he received a telephone call from David Chapman and Greg Gahl. The conversation proceeded as follows: Chapman: Good afternoon. My name is David Chapman and I am non-executive officer of The Satellite Group Ltd. I understand that your company is currently our single largest shareholder. I am calling you regarding your investment intention and background of your company. First of all, I would like to know if your company is associated with Mr Lee Ming Tee? Mr Kwong: No. Mr Chapman: I understand Fisher promised you two Board seats. The board never authorised that. Fisher has resigned. 49 After this conversation Mr Kwong telephoned Fisher who informed him that he had not resigned willingly. Fisher contacted Mr Kwong on 5 July 2000 and arranged a meeting in Hong Kong on 6 July 2000. Mr Kwong advised Mr Bruce Kang Tong Cheung (Mr Cheung), the President of Millennium Technology Ltd, a subsidiary of Millennium, of the emergency meeting, and gave him a copy of the prospectus and asked him to bring himself "up to speed" for the meeting on 6 July 2000. 50 On 6 July 2000 Fisher and Broster arrived in Hong Kong and met with Mr Kwong and Mr Cheung. The following conversation took place: Fisher: May I introduce Mr Jonathon Broster who sold the shares to you last week. We have been partners together for several years. We have come here to explain the situation to you. There has been some in fighting. I should not have resigned. I made a mistake. The Directors can't force me to resign. The Directors don't represent the shareholders. They have stirred up a lot of dirt with all this publicity and with ASIC. I need your support so that I can go back and clean up the mess. I can prove that the allegations against me are false. Besides, we are still convinced that the media business has very good potential. Mr Kwong: On the assumption that there are no findings against you, I will support you. However, I want to know why you sold the shares to us if you are so convinced about the future of the company. Broster: The reason I sold the shares to you was to assist the company to line-up with a good standing partner to enable the company to launch its e-media plan. Besides, I didn't really sell my interest because there is an arrangement between Greg and I that we would sort out between ourselves how to share the proceeds of the sale as well as the remaining shareholding interest. 51 Mr Cheung recalled the conversation as follows: Fisher: I built up the company from the very first day. I wanted to build a media group that would cater for the gay and lesbian community, as well as providing other services. I hoped that a business would be generated from this because it is a close knit community and I wanted to help serve that community. Broster: He is the visionary behind the group. Fisher: The vision can be maintained. It is not too late. I need your support to get back on the Board right away. Kwong or Cheung: Why would you sell such a big block when you see so much potential for the company. Broster: Because we felt that Millennium was doing a lot of IT deals in the region and that Millennium would have joint ventures set up in the Asia Pacific region. Cheung: Well, Malaysia could be sensitive. We could help with Japan and Singapore. In Japan there is a language barrier. Cheung: How is Mr Broster involved in the company? Fisher: Broster has always been my partner and a supporter. Kwong: Well how do we get the company working harmoniously? How do we fit Mr Broster in? We don't want to waste any talent. Now that Mr Broster has sold his interest, what is his incentive for helping us? How can we get him committed to working for the company? Fisher: Don't worry. We have worked together for many years. We have, between us, an arrangement on the shareholding and the sale so Broster has an interest in the company. 52 On 13 July 2000 Mr Kwong was provided with a copy of an article in the Australian Financial Review describing an ASIC investigation into Satellite and Fisher. Mr Kwong returned to Sydney on 17 July 2000 and met with Dr Phelps, Mr Gahl, Mr John Canning (a lawyer) and Mr George Markos, the acting chief operations officer and alternate director. The following conversation took place: Mr Kwong: I am interested in helping the company to achieve its e-media plan. I saw in the newspaper that Mr Fisher has resigned and is under investigation by the ASIC. I would like to know what's going on. Mr Canning: ASIC is investigating Fisher and there has also been an independent report by Horwath and Horwath. We believe that Fisher and Broster have done something terrible which has significantly affected the finances of the company. Kwong: What is the ball park figure? Mr Canning: I can't say but it is very significant. So much so that ASIC has frozen the assets of Broster and Fisher. We are scared that there may not be enough there to cover the company. Kwong: Are you going to accept the Millennium as an active partner by giving us two Board seats. Mr Markos: Why don't we wait for the reports and then assess the situation before answering. Kwong. I will get back to you. 53 Mr Kwong returned to Hong Kong on 19 July 2000. On 26 July 2000 Mr Markos sent Mr Kwong a copy of the draft Horwath and Horwath report dated 14 July 2000. Matters that Mr Kwong noted in the report were that: (i) the group could not survive without a cash injection of approximately $3 million; (ii) the parent company had guaranteed certain, but not all, of the liabilities of the subsidiary companies in the group; (iii) the group had only $212,000 in the bank; (iv) the "going concern" value of the Media subsidiary of $7.2 million was subject to a charge of approximately $770,000; and (v) management forecast disclosed a need of cash balance in July or August 2000 of approximately $1.3 million or $1 million on the basis of material shareholder and other recovery in the period to 30 September 2000. 54 On 26 July 2000 Mr Markos telephoned Mr Kwong and confirmed that the company had financial problems and that the Board members were happy to meet with him to discuss the various alternatives. That meeting was held on 28 July 2000 with Dr Phelps, Mr Markos, Mr Gahl , Mr Kwong and Mr Cheung. 55 Mr Kwong was informed that Satellite was "technically insolvent" and unless an arrangement could be made within 24 hours the Board would have no alternative but to go into voluntary administration. Mr Kwong made an offer that his company would provide a $3 million convertible loan on terms and conditions to be agreed upon but he wanted Board control in order to protect his "risk money". Mr Markos replied that they did not like the idea and that "we can't give in to a twenty percent shareholder". Mr Markos said that they would talk about it and get back to Mr Kwong. 56 Further discussion occurred between 29 July 2000 and 1 August 2000 but Mr Kwong's offer was apparently not accepted. Proceedings commenced 57 The plaintiff commenced these proceedings on 7 August 2000 seeking declarations that the sales by Sojo and Broster are void from their inception and orders setting aside the sales and for repayment of the purchase prices to the plaintiff. 58 In the Amended Statement of Claim the plaintiff pleaded that on 27 June 2000 in Sydney Sojo, Broster and Fisher represented that: (a) Satellite was in a good financial position; (b) Satellite had no liabilities; (c) the liabilities of The Satellite Group of companies were all in subsidiaries of Satellite, mostly its property subsidiary; (d) there were no guarantees between subsidiaries of Satellite; (e) Satellite had no liability as guarantor of any of its subsidiaries; (f) Satellite would incur expenses totalling approximately $2 million over the next 12 months; (g) Satellite had a few million dollars in the bank; (h) there had been no adverse change to the financial position of Satellite since the initial public offering of its shares; (i) Satellite had no need to raise further funds, other than to finance expansion by its e-media subsidiary; (j) Satellite's shares were currently trading at an undervalue; and (k) if the plaintiff purchased Sojo's Satellite parcel and Broster's Satellite parcel it would be entitled to control the appointment of two directors to the Board of Satellite. 59 The plaintiff alleged that the representations were made by Fisher on his own behalf and on behalf of Sojo and Broster. Mr Kwong gave evidence that he relied upon the representations and if Fisher had not told him that Satellite was in a good financial position he would not have recommended that the plaintiff purchase the Satellite shares. The same position pertained in respect of Fisher's statement that Satellite had a few million dollars in the bank. 60 Mr Kwong gave evidence that he did not rely upon any information provided to him by Mr Lee or Mr Jones. He said: "I know that these gentlemen were not directors of Satellite and did not consider their statements to be more than a referral to consider the company". 61 The matter was expedited and heard on 20, 21, 22 and 23 November 2000. Mr J Stevenson, of counsel, appeared for the plaintiff and Mr FM Douglas QC leading Mr S Burley, of counsel, appeared for Sojo and Broster. Fisher did not take part in and was not represented in the proceedings. 62 The plaintiff abandoned reliance on a number of the representations alleged to have been made by the defendants and in final submissions relied only upon the following representations: (a) Satellite was in a good financial position; (e) Satellite had no liability as guarantor of any of its subsidiaries; (g) Satellite had a few million dollars in the bank; and (h) there had been no adverse change to the financial position of Satellite since the initial public offering of its shares. 63 Mr Fisher did not file affidavits and was not called to give evidence. In these circumstances there is really no reliable evidence to contradict Mr Kwong's sworn evidence. In these circumstances and having regard to Broster's evidence I am satisfied that it is more probable than not that Fisher made each of these representations in the meeting with Mr Kwong on 27 June 2000. Falsity/no reasonable basis 64 The plaintiff relied upon the evidence of Mark Brinley Bryant (Mr Bryant) a Chartered Accountant and partner of Arthur Anderson in relation to the falsity of two of the representations, (e) and (g). 65 Mr Bryant detailed the various documents upon which the plaintiff claimed that there were guarantees in place inconsistently with the representation made by Fisher. The documents annexed to Mr Bryant's report and the details set out on pages 3 to 5 of his report lead me to the conclusion that representation (e) was false. I am also satisfied that Fisher had no reasonable basis for making the representation having regard to his position as managing director and that he had signed one of the guarantees on 1 June 2000 in relation to the Airlie Beach project. 66 Similarly the material at page 7 of Mr Bryant's report and the appendices thereto persuade me that the representation (g) that Satellite had a few million dollars in the bank was false and that Fisher had no reasonable basis for making the representation. 67 The representation (a) that the company was in a good financial position was made at a time when the shares had plummeted from 50 cents and were then trading at 16 cents, having been as low as 14 cents. The total market capitalisation of the company was less than half of what it was when the company was floated. Only $41,000 profit had been achieved in the first six months of a 12 month period in which a forecast of $10 million profit had been made. 68 The valuation of the Media Subsidiary had increased from $800,000 to $7.2 million in less that 12 months with some of the assumptions for future profits proving to be "pie in the sky". The portal to the Internet had yet to be developed and the property side of the company was experiencing such difficulties that attempts were being made to negotiate with mortgagees for the sale of some of the properties. The forecasts were not going to be able to be met and Fisher was trying to obtain funding from Broster in circumstances where his loan account was in the vicinity of $700,000. I am satisfied that in all the circumstances, as at 26 June 2000, there was no reasonable basis for Fisher to tell Mr Kwong that the company was in a "good financial position". 69 Similarly in the circumstances it was false for Fisher to tell Mr Kwong that there had been no adverse change to the financial position of the company since the initial public offering of its shares. Sojo and Broster 70 Broster holds a Bachelor of Arts degree in English Literature and a Masters degree in Land Management from Universities in England. His employment history is predominantly in development management and marketing of property developments. 71 Broster first met Fisher in November 1996 when Broster was working for a company that was looking to purchase a property. Fisher had a company which was later renamed The Satellite Group. Fisher's mother was the other director of that company and was replaced with Mrs Broster when a company associated with Broster and a company associated with Fisher went into a joint venture to develop some apartments in Ultimo. 72 After this first project Fisher and Broster or their associated entities went into further joint ventures together and with others. They did not socialise together very much with Fisher only dining with the Brosters at their home twice in four years. 73 Broster became bankrupt on his own petition on 27 March 1996 and was discharged from bankruptcy on 28 March 1999. 74 Broster and his wife were appointed Directors of Sojo on 13 July 1994. Broster ceased to be a director on 4 March 1996 and resumed Directorship on 7 August 2000. Mrs Broster resigned as a Director on 7 August 2000. 75 Sojo is a trustee company of the Tamsin Investment Trust and The Valley Trust which are family trusts, the beneficiaries of which are the Broster family members as defined in the trust deeds and the supplemental deeds. It is apparent that Broster and his wife have been excluded as beneficiaries of those trusts. 76 From time to time Sojo entered into guarantees in relation to Satellite's obligations. Although Broster was not a director during the period 1996 to 2000, in practice, he acted as if he was a Director. He did not consult Mrs Broster on the day to day management of the company and only consulted her on major matters. 77 Broster was employed as the executive manager of Satellite between August 1999 and July 2000. He provided property management and marketing services to Satellite and was also primarily responsible for providing instructions to Satellite's lawyers regarding litigation to which Satellite was a party. 78 In the early months of 2000 Broster became unhappy in his employment with Satellite finding it "very stressful" to work with Fisher's dictatorial style of running the company. Broster was looking around for opportunities to "exit" Satellite. 79 In March or April 2000 Broster had a conversation with Mr Chapman in which Mr Chapman informed him that he and some other shareholders were "not happy" with Fisher and that he needed to be replaced. Mr Chapman asked Broster how he would vote if it came to that. Broster informed him that he was not prepared to vote against Fisher but was willing to sell his shares. After February 2000 Sojo gave Fisher a right to vote on its behalf when it did not attend shareholders's meetings. 80 At an internal manager's meeting in May 2000 Fisher advised Broster that consideration was being given to floating the Satellite Media subsidiary to raise money to create the portal for Satellite Media. In the last week of May 2000 Fisher informed Broster that he would be meeting with potential investors to see if they were "interested in either investing in Satellite directly through a share placement or being part of capital raising for Satellite Media". On a couple of occasions in late May Broster was asked to and did gather together documents as an information/marketing kit for potential investors. 81 Broster was not asked to and did not take part in any of the discussions with the potential investors. 82 On 15 June 2000 Broster had lunch with Peter Hannah, an employee of Barton Capital and shareholder in Satellite, and Ian Hume, an AMP consultant and also a shareholder in Satellite. The following conversation took place: Hannah: Have you seen Satellite's share price recently - its only going to get worse until you replace Greg Fisher. I do not believe that Greg is a good Managing director, if he is half decent he would resign now and if he will not, he should be made to resign. No one believes a word of what he says. He has absolutely no credibility in the market place. I have been speaking to the top 20 shareholders of Satellite and they all agree that Greg has got to go and he has got to go now. If he does not they have said to me they will all dump their stock. And let me tell you I will be doing the same. The problem is that if we put it to a vote, and it is soon going to come to that, you and Greg hold nearly 35% of the company. Where would your loyalties lie? Broster: I am not getting into any backstabbing exercises, but if you can find somebody who wants to buy out my shareholding, that person would, of course, have the associated voting rights which they could exercise if they wanted to tackle the Greg Fisher issue. But whilst I am there I will not vote against him. Hannah: I will think about it and discuss it with my colleagues in the office. If we had someone, you know it would only be at market rates don't you? Broster: Fine. Just come back to me if you have someone interested. 83 On 20 June 2000 Fisher informed Broster that Mr Wong was attending Satellite's office the following day with an "Asian investor", whose name he could not recall, who was interested in investing in Satellite. 84 After the meeting on 21 June 2000, which Broster did not attend, Fisher informed Broster that the investor was Mr Lee who had an office in Sydney, Mulpha Australia, and he was "really keen to invest in Satellite". Later that afternoon Fisher informed Broster that Alan Jones, the managing director of "Lee Ming Tee's interest in Australia wanted to have a meeting and a walk through the office" on 22 June 2000. 85 On 22 June 2000 Broster observed Fisher walk past his office with a gentleman he did not know and to whom he did not speak. At about 1 pm Fisher went into Broster's office and the following conversation took place: Fisher: I have heard from Albert Wong that you have said to someone at Barton Capital recently that you want to sell out and leave. Broster; Well? Fisher: It's okay, I am not angry that you want to leave, it's just that I have someone who will buy you out now if you want. I have Albert Wong on the telephone who is in contact with or is with Lee Ming Tee, who wants to agree to a price now for your shareholding so what do you want to do, sell and walk away? Broster: Why do they want to buy my shares? Fisher: Because it is the quickest way for them to buy a 19.9% stake in Satellite without moving the share price up and it is the maximum that can be bought without going for a full takeover. They want exactly 19.9%. Your shareholding is the obvious choice - it's good for you because you can cash up now and leave and its good for them because they get the amount they want immediately. Now what price will you sell at? You will have to be quick because they want to know now. Albert says you must strike while the iron is hot. Broster: Tell them I will sell at 25 cents. Fisher: Okay, I will put it to them. 86 Fisher left Broster's office and returned approximately five minutes later when the following conversation took place: Fisher: They wanted to pay only 18 cents a share but I can get them to pay 20 cents, will you accept that? I need to know that you are happy with that. Tell me now if you are not because this is the point of no return. You can not say "yes" now to them and then change your mind later because you can't mess these people around. Broster: OK I will accept 20 cents. Fisher: OK I'll tell them that. 87 Fisher once again left Broster's office returning approximately five minutes later: Okay the deal's done, he will buy you out for 20 cents a share. I want this to remain confidential until the actual sale. I will then tell the staff. How many shares has Sojo got in Satellite? Broster made some telephone enquiries and then informed Fisher that Sojo had 13,720,893 shares in Satellite. Fisher informed Broster that was less than he thought Sojo had and asked Broster what was 19.9% of Satellite's issued shares. Broster calculated the figure and gave it to Fisher. Fisher then made some calculations and said: Sojo has less than 19.9% of the shares in Satellite but that is fine because now that you've agreed to sell your shareholding, there seems to be little point in staying at Satellite, but I want you to assist me in finishing off your legal work for another year. I will propose to the Board Meeting on Friday that subject to this deal going through with Lee Ming Tee, that Satellite buys out your existing five year employment contract for an amount that will be paid to you in Satellite shares issued at 20 cents. That will also mean that you will have enough shares to sell the 19.9% stake that Lee Ming Tee requires. Satellite will then give you a fixed one year contract but at a reduced wage. I'll put to the Board that you should get $975,000 worth of Satellite shares at 20 cents a share. Your current employment to continue until 1 August 2000 and a new employment contract for a fixed one year period at a remuneration of $200,000. 88 The following conversation then took place. Broster: But are you happy that Lee Ming Tee is coming into Satellite, I have never heard of him, is it good for the company? Fisher: Yes, as I have told you he must be wealthy because he owns a big building in the city called Mulpha House, has other properties and even has an office here in Sydney. There will be great synergies between the two companies. Broster: What did they ask you about Satellite at your meeting? Fisher: Alan Jones asked me what loss Satellite is going to make this year. I told him $8-10 million. He said that's no problem, that's fine. He told me their Australian company makes a profit of $40 million every year from their property investments in Australia alone. He said that they would be keen to help Barton Capital underwrite our $10 million fundraising and put Satellite Media into Asia, especially into China. But it's not fair that you leave now with lots of money. I should have sold them half of yours and half of my shareholding instead. Broster: But the deal is done now. Fisher: What if you buy $1.5 million of my shareholding at 20 cents from some of your proceeds, but I don't want you really to buy my shares but just have a mortgage over it, so that I can retain the voting rights. I must have the voting rights. Broster: I'll get some advice and get back to you. 89 Later that afternoon Fisher informed Broster that Mr Wong wanted a letter from him stating that Sojo would sell its shares in Satellite. Fisher's personal assistant gave Broster a draft of the letter for which he provided further details including the number of shares and returned it to Fisher's personal assistant who completed the letter. Broster then signed the letter and observed the personal assistant fax it to Barton Capital's fax number. 90 On 23 June 2000 further conversations took place between Broster and Fisher in the following terms: Broster: I have got some advice. I cannot do what you're proposing. That is, purchase some of your shareholding at 20 cents a share. Proceeds of the sale will be partly going to Sojo which is a trustee for my children. I cannot touch that money. Fisher: That's fine. I have just spoken to Albert Wong who has told me that he has received your fax and that everything is fine and he will cross the shares on Monday or Tuesday of next week but someone in Barton Capital's office has done some calculations and the figures that you gave in your 22 June 2000 fax are not exactly correct. They don't make up 19.9% of Satellite's shares. But don't worry, Albert will give me the exact figures just before the cross over takes place next week. I am also getting a letter from him for me to show to the Board stating that the sale will proceed. 91 Later that afternoon Broster received a telephone conversation from Fisher and the following conversation took place: Fisher: I have just left the Board meeting and I am telephoning from my car. I am rushing to the Airport to catch a plane. The Board has discussed buying out your employment contract and has given me a mandate to execute a deal at a lesser amount than what we had discussed yesterday. Rather than giving you $975,000 worth of Satellite shares at 20 cents, the Board will only agree to a maximum of $900,000 worth of Satellite shares at 20 cents. If you agree now to the lesser amount, the matter will not have to go back to the Board for further approval. Broster: Okay, I agree. Fisher: I have spoken with Albert Wong after the Board meeting and told him of the Board's decision. He said that everything was fine and that your shares would be crossed on either Monday or Tuesday. After this telephone conversation Broster calculated that he would receive 4.5 million shares in Satellite for the buy out of his contract and confirmed this in writing to Fisher. 92 By 27 June 2000 Broster had heard nothing further and asked Fisher "when are my shares going to be sold". Fisher informed him that "they want another meeting today. It will be fine. Lee Ming Tee just wants his son to come and see the offices for himself". Fisher asked Broster to prepare another marketing kit. 93 After the meeting, which Broster did not attend, Mr Gahl informed Broster that the meeting was "really good". Gahl also advised Broster that someone from Millennium and someone from Lippo had attended the meeting. Fisher said "they have said they will go ahead and buy the shares tomorrow". This statement to Broster by Fisher is at odds with the evidence of Kwong that he told Fisher and Gahl he would get back to them in a few days. 94 On 28 June 2000 the following conversation between Fisher and Broster took place: Broster: What is happening? Fisher: Albert Wong wants you to send a letter to him. He wants you to confirm payment of a brokerage fee of 2.5% and the number of shares to be sold by yourself and Sojo. Albert does not want the fax sent until he is back in the office. He wants to be at the fax machine when it comes through. Albert Wong is going to do the sale himself. He is on his way back from Hong Kong and will be in the office at lunch time. Broster then drafted and signed the 28 June 2000 letter from Sojo to Barton Capital and that afternoon received a call from Mr Wong who informed him "I have sold your shares for you". Broster then thanked Mr Wong for his help. 95 Broster gave evidence that the first time he became aware that the purchaser was not Mr Lee was the day after the shares were sold. Fisher informed him: Albert has said the actual purchasing identity is the Millennium Group. Lee Ming Tee does not want any publicity. He does not want his name mentioned at all. They're trying to get Capital PR to get information on who the Millennium Group actually are and what they do. 96 There was further discussion about the identity of the purchasers of the shares after the press announced it was Lee Ming Tee. Mr Hannah asked Broster who the purchaser was as he claimed Mr Wong would not tell him. Later on 30 June 2000 Fisher informed Broster that it was not Millennium but a company associated with Millennium. Did Sojo and Broster authorise Fisher to act as their agent 97 The letter of 22 June 2000 from Sojo to Barton Capital refers to the sale of Sojo shares and to the "further 2.85" million shares which Broster was to sell and concludes "please contact Mr Greg Fisher or the writer to assist in the sale". 98 The negotiations with Mr Lee were via Fisher who asked Broster whether he was willing to sell the shares and Broster instructed or requested Fisher to "tell them I'll sell for 25 cents". 99 Broster and Sojo left the negotiations to Fisher asking only the most cursory questions and hoping that the deal would be concluded at 20 cents notwithstanding the shares were dropping below that price. 100 Broster was aware that Fisher was in the habit of speaking optimistically about Satellite and was also of the view that Fisher had previously made false statements to "business folk". In particular he was "extremely unhappy" that Fisher had made statements to the press that Satellite was on track to make its forecast when Broster believed Fisher would know that not to be the case. 101 Notwithstanding this knowledge and concern Broster did not at any stage limit what Fisher could say about the sale of Sojo's or Broster's shares. In this regard Fisher had carte blanche to negotiate the sale and I am satisfied that Sojo and Broster let him have that freedom in the hope that they would get the deal at 20 cents. 102 Sojo conducted itself allowing Broster to have the day to day management of the business and it is clear from the evidence that Mrs Broster was as keen as Broster was for Sojo and Broster to "exit" Satellite. Broster did not consult with Mrs Broster prior to agreeing to sell the Sojo shares even when Fisher told him it was at the "point of no return". I am satisfied that Sojo authorised Broster to act on its behalf in the sale of its Satellite shares. 103 I am further satisfied that by his conduct outlined above Broster authorised Fisher to negotiate on Sojo's and on his behalf in the sale of the shares. I am also satisfied that such authority was unfettered including, allowing or authorising Fisher to make statements that were true to form, that is, optimistically and/or false statements to business folk. Colonial Mutual Life Assurance Society Ltd v The Producers and Citizens Co-operative Assurance Company of Australia Ltd (1931) 46 CLR 41 per Gavan Duffy CJ and Starke J at 46-47; Scott v Davis (2000) 74 ALJR 1410 at par. 67-68 per McHugh J and par 354 per Callinan J; South Sydney District Rugby League Football Club v News Ltd [2000] FCA 1541 Finn J at pars 131 - 137. 104 Broster for his part and on behalf of Sojo authorised Fisher as agent for each of them to negotiate the sale so that each became answerable for the manner in which Fisher conducted himself in performing that role: Barwick v English Joint Stock Bank (1867) L.R 2 Ex 259; MacKay v Commercial Bank of New Brunswick (1874) L.R. 5 P.C. 394; Trade Practices Commission v Queensland Aggregates Pty Ltd (No.3) (1982) 61 FLR 52 at 63. Reliance 105 The defendant submitted that Mr Kwong's qualifications and experience would and should have alerted him to the need to make a far more detailed analysis for what was a not insignificant investment in Satellite. He made his decision to purchase these shares in less than 48 hours when there was no rush and no necessity for him to make up his mind in a hurry. In these circumstances it is odd that on 27 June 2000 he would tell Fisher and Mr Gahl he would get back to them in a few days and yet finalise the deal the following day. 106 Mr Kwong's approach to the disclosure about his relationship with Mr Lee was curious. In his affidavit of 4 August 2000 he described him as "an acquaintance of mine". When he was called to give evidence he was asked about a conversation about which Mr Broster had given evidence, in which Mr Broster claimed that Mr Kwong had referred to Mr Lee as a "good friend of the company". Mr Kwong gave evidence that what he said to Mr Broster was that Mr Lee was a "very good friend of mine". Mr Kwong purchased the company, Millennium, from Mr Lee and he claimed that his friendship developed after that purchase. 107 One theory put forward by the defendants was that the rushed nature of this purchase without any proper analysis by Mr Kwong was because this was a purchase by the plaintiff for Mr Lee, who had already made up his mind to purchase the shares the previous week. 108 This "theory" is the subject of a careful analysis in a written outline of the corporate and personal relationships between Mr Lee and his company and Mr Kwong and his company. There is no doubt that Mr Lee's company was on the verge of purchasing Sojo's and Broster's shares only days and perhaps hours before the plaintiff's purchase. There is also little doubt on the evidence that Mr Lee pulled out of the purchase because of the possible adverse consequences for his company and for him should it become public knowledge in Malaysia that it was involved with Satellite which had an association with the gay community. 109 Although there may be a very proper basis for having suspicions that Mr Lee was the silent and/or joint purchaser with the plaintiff such a case is not made out on the evidence. Of more relevance is the weight and reliance Mr Kwong and the plaintiff placed upon the meeting with Mr Lee and Jones and whether Mr Kwong is to be accepted when he rejected the defendants' suggestions that it was their representations that convinced him that he should purchase the shares in Satellite. 110 In the conversation of 26 June 2000 with Messrs Lee and Jones it appears that Mr Kwong was so impressed with what they had to tell him, in particular what Mr Jones said, that he was of the view it was "too good to be true". Mr Jones informed Mr Kwong that on a conservative basis the company would have a net asset value of between 25 and 30 million dollars. He also told him that the company had 3 to 4 million dollars of cash in the bank and that the Media business had already started making money. 111 The defendants also relied on the plaintiff's abandonment of the majority of representations it pleaded submitting that such abandonment is telling in the circumstances of this case. It is submitted that the four remaining representations upon which the plaintiff proceeds could not have been relied upon by it in the circumstances. It is therefore necessary to analyse each of those representations as to whether it is more probable than not that the plaintiff relied upon those statements. 112 Before turning to the individual representations there is one matter with which I should deal which I regard as important in the assessment of the plaintiff's evidence that it relied upon representations made by the defendants. The price of the shares 113 During the period 1 June 2000 to 22 June 2000 inclusive the closing price of the shares fluctuated between 20 cents at the beginning of the month to as low as 15 cents on 14 June 2000 and up to 21.5 cents on 22 June 2000. 114 On 22 June 2000 when the proposed purchaser was Mr Lee (or Jones) and/or his company the "deal" was structured on a price of 20 cents per share, although Broster had originally sought a price of 25 cents per share. On that day the shares opened at 19 cents, traded to a high of 21.5 cents and closed at 21.5 cents. The shares dropped to 20 cents on 23 June 2000. 115 On 27 June 2000 the shares opened at 17 cents traded as low as 16.5 cents and closed at 17.5 cents. On 28 June the shares opened at 17 cents traded as low as 16.5 cents and closed at 18.5 cents after reaching a high of 19 cents. 116 After 28 June 2000 to 5 July 2000 the closing price of the shares was as follows, 16.5 cents on 29 June 2000, 16.7 cents on 30 June 2000, 16.5 cents on 3 July 2000, 15.5 on 4 July 2000, and 15 cents on 5 July 2000. 117 Mr Kwong's affidavit did not suggest that he had any discussions with Fisher about the price the plaintiff was to pay for the Sojo/Broster shares. Mr Kwong did deal with his knowledge of the price at which the shares had been trading in recounting his conversation with Fisher on 27 June 2000. 118 In paragraph 16 of his affidavit of 4 August 2000 Mr Kwong gave evidence that he asked Fisher whether he was willing to increase his, Fisher's, shareholding in the future. He then deposed: I asked this question because Satellite's shares having initially been issued at 50c, were trading at 16-17c. I consider that if Mr Fisher replied in the affirmative, this would indicate that he believed the shares were trading at a good value. 119 It was clear as at 27 June 2000 Mr Kwong was aware of the price at which the shares were trading. Mr Kwong did not give any evidence in his affidavit as to how he became aware of the trading price of 16-17 cents. He was cross examined in relation to this matter as follows: Q (The shares) had, as you know, been as low as 14 cents? A You mean at the time of.. Q Prior to your purchase at 20 cents? A I didn't know that. Q You did not know about that? A I didn't know that it went down to 14 cents. Q You are quite sure about that answer? A Yes. Q What about 16 or 17 cents? A From my recollection of my memory it would be approximately at that time I got the impression it was around 18 cents. Q But they had been down as low as 16 cents. You knew that, didn't you? A I didn't know about it. Q Didn't you? A No. Q If you could go to page 9 of your affidavit? A Page 9? Q 9. You will see what you have in parentheses there, "I asked this question because Satellite shares having initially been issued at 50 cents were trading at 16 to 17 cents. I considered that if Mr Fisher replied in the affirmative, this would indicate that he believed the shares were good value"? A Hmm. Q Do you want to revise your previous answer? A Yes in which case probably I think mentioned by somebody else that it was trading at 16 to 17 cents. (Tr. 33) And later: Q Now nowhere previously in your affidavit do you show how you learned that fact. A I asked him during the conversation. Q Well you do not in your affidavit prior to this point - A Yes. Q - say either that you asked Mr Fisher that, and that is what he told you, or that someone else told you about that? A I asked him. Q No, how did you find out? A I asked him during the conversation. Q How did you find out it was trading at 16 or 17 cents? A No as I said, I asked Mr Fisher how much - what is the market price. Q Nowhere in your affidavit, either in your conversation with Mr Fisher as you set it out, or in any other conversation, do you tell the Court how you found out that fact, do you? A No. Q I want to suggest to you that you found out by some means other than Mr Fisher telling you that matter? A No. Q Did you read the papers when you were in Australia? A No I didn't. Q You didn't? A No I didn't. Q You didn't for example look up the stocks and shares on the Sydney Morning Herald or the Financial Review? A I only read it after I bought the company. Q You didn't look at the historical information provided in the columns of the Financial Review or the Sydney Morning Herald? A No I didn't. Q You could have done that, couldn't you? A Yes. Q In answer to me yesterday at page 33 line 35, when I asked you about the same subject matter, when you didn't recall that shares were worth 16 or 17 cents, I drew your attention to this passage in the affidavit and asked you if you wished to revise your previous answer and you said in answer to that "yes", in which case probably I think mentioned by somebody else that it was trading at 16 to 17 cents? A Yes. Q Now you did not say yesterday that somebody else was Mr Fisher, did you? A So I want to be specific now that it was Mr Fisher. Q I want to suggest to you that you're making it up when you say it is Mr Fisher? A I am sorry that is not the case. (Tr. 98-99) 120 Whatever be the means by which Mr Kwong found out about the price of the shares at 27 June 2000, it is clear that when he was speaking to Fisher and considering a substantial investment in Satellite, he knew that the share price was 16-17 cents. Notwithstanding this knowledge his company paid 20 cents per share. The only evidence in Kwong's affidavit about how that price was reached was in paragraph 9 in which Mr Kwong recounted a conversation with Messrs Jones and Lee on 26 June 2000 in which Mr Jones said: Instead of buying an interest in its e-media subsidiary which is unlisted and has a value of between 40-50 million, why not acquire an interest in the holding company, a publicly listed company. This will give you a similar interest in the subsidiary at a cost of only $3.4 million. 121 It was the substance of that conversation in relation to price that Mr Kwong passed on to Dr Chee when he telephoned him after his meeting with Mr Fisher on 27 June 2000. Mr Kwong told Mr Chee that "for $3.4 million we will get twenty percent of a holding company with a subsidiary which has been valued at $35 million". 122 The only other evidence given by Mr Kwong in relation to the 20 cents per share price the plaintiff paid for shares trading on 27 June 2000 between 16 and 17 cents was in cross examination as follows: Q Did you bargain in relation to the price of the -? A I did. Q Tell me this, you don't relate any bargaining which took place in relation to the price of the shares in your affidavit, do you? A Because I don't think it's relevant to the representation that Mr Fisher made. (Tr. 101) And in re-examination as follows: Q Do you recall in the course of asking those questions Mr Douglas asked whether there was any discussion of share sale price in the course of the discussion. Do you recall that topic been raised? A Yes. Q In response to that line of questions you said something to the effect that you had bargained in respect of share price? A Yes. Q What was said? A I asked Mr Fisher "how much is the share price the seller wanted to sell the shares", and he said "20 cents". I asked, "what about 16 cents?". He said, "20 cents, that's it". Q Nothing more was said about that? A No. (Tr.121) 123 Broster was in the habit of asking Fisher about the discussions he was having with potential investors and purchasers of his shares. Broster said that Fisher was "open" about the meetings and whether they went well or not. 124 On the occasion of the negotiation with Messrs Jones and Lee, Broster said to Fisher "tell them I will sell at 25 cents". After Fisher had further discussions with Lee and Jones he returned to Broster and said "they wanted to pay you only 18 cents but I can get them to pay 20 cents" to which Broster replied "Okay, I'll accept 20". This was at a time when the shares were trading at between 19 cents and 21.5 cents. 125 In stark contrast to these negotiations and reporting back Fisher did not mention "one word" about any negotiations with Mr Kwong about the share price. It is curious that Mr Kwong would merely say to Mr Fisher what about 16 cents with no more bargaining in circumstances where it was obvious that the shares were at 17 cents. 126 A question arises as to whether it is more probable than not that the price of "the deal" Mr Lee and Jones told Mr Kwong about was the one at which Mr Kwong agreed to "buy the company" or whether he tried to negotiate with Fisher in respect of the share price. On all the evidence before me I am satisfied that when Mr Kwong heard that he could obtain just less than twenty percent interest in this company for $3.4 million he was satisfied that it was "too good to be true" and more probably than not relied upon Mr Jones suggested sale price as the one that would be the deal. From what I can glean from the evidence of Fisher's nature I am satisfied that if Mr Kwong had tried to negotiate the price down to 16 cents Fisher would have effectively boasted to Broster that notwithstanding Mr Kwong's desire to obtain a lesser price he, Fisher, was able to secure the deal at 20 cents. This is more so in the light of the fact that the shares had dropped to 17 cents at the time Fisher had the discussions with Mr Kwong. 127 The four remaining representations upon which the plaintiff proceeds overlap in many respects. I shall deal firstly with the representations that Satellite was in a good financial position and that there had been no adverse change to that financial position since the initial public offering of its shares. Financial position/no adverse change 128 Mr Kwong agreed that he read carefully the projections as to profitability in the prospectus. The forecast profit was $10.7 million, before interest and income tax, for the period ending 30 June 2000. Mr Kwong agreed that in contemplating the plaintiff's investment it was a matter of importance to him that the company was meeting its forecast profit. 129 Mr Kwong agreed that as an experienced and trained accountant he was concerned to look at the material provided to him to find out what profit figures were disclosed in the half yearly or preliminary final report of Satellite. He agreed that the documents disclosed that Satellite made a profit of $41,000 for the six month period ending 31 December 1999. He accepted that to meet its forecast Satellite was going to have to make virtually all of the $10.7 million in the period 1 January 2000 to 30 June 2000. 130 Mr Kwong accepted that such profit would have to be made from the property development side of the company's activities and was asked: Q …you must have been inquisitive as to which of the development properties was likely to yield that profit? A May be but I don't think it is absolutely necessary. Q So you did not then seek to find out which of the development properties was likely to yield that profit? Is that the answer you give? A No I didn't. Q You trusted the forecast in the prospectus? A Yes and also the representations made by Mr Fisher. (Tr.28) 131 Mr Kwong was cross examined further on this topic as follows: Q It must have been apparent to you, may I suggest to you… that all of the profit, or virtually all of the profit of this company was going to have to be earned in the second six months of the financial year? A That's right. Q And what I suggest to you is that would have alarmed you at the time? A Yes, that's right but by the time I read the May 2000 report, and there isn't profit warning signalled to be mentioned in here, so I assumed that there shouldn't be any problem in reaching the projected profit. Q What I want to suggest to you that you realised that the price at which you were buying these shares as you said had the possibility, either alone or together with Mr Lee, of acquiring a portfolio of property assets from a company which was financially distressed? A No. Q You realised that, didn't you? A But that wasn't my impression or conclusion. Of course I realised that that could be the possibility. (Tr.83) 132 Mr Kwong agreed that since flotation the total current liability of the company had increased by some $4 million. He accepted that the global market analysis of the use of the services of the media subsidiary once the portal was established was "pie in the sky". He also accepted that the value of the media assets had increased by a factor of almost ten from $800,000 to $7.2 million in less than a year. In respect of this valuation he said that he did not know whether the $7.2 million was the value of the actual business or whether certain assumptions had been made which may or may not have been valid. He said that he did not read the valuation. 133 He knew that the stock had dropped from 50 cents to 16 cents and he knew that the total market capitalisation of the company was less than half of what it was at the time of the float. 134 Mr Kwong was at pains to stress that "the share price does not have any direct bearing on the financial position of the company". The evidence continued: A …I am not quite sure whether you are fully aware of the financial market at the time or not so there was a huge market correction overall on the high tech stocks starting from the US and those credible stocks such as AOL Yahoo, dropped significantly, within a two month period and not to say this penny stock like the Satellite Group. So that doesn't mean that the company always has done something wrong, significantly. Q But you knew from the financial information that had been provided to you that it was company which had $35 million in borrowing? A Yeah. Q As disclosed in the prospectus? A Yes. Q On a consolidated basis. A Yes. Q It had received $25 million from the public? A Yes. Q It did not appear from the half-yearly accounts to have repaid any indebtedness? A It may have repaid parts of it and it borrowed once again from some other projects. Q But it's liabilities have not declined since the float? A No. Q You knew that a significant part of its assets consisted of development properties which could require further borrowings in order for them to realise a value suggested in the prospectus? A Yes. Q So you realised at the time when you were thinking of acquiring an interest in the company that it was precisely the sort of company which may be affected by the sort of downturn in the market? A Yes, that is why I asked the company, is the company in good financial position, if I concluded that it is already in good financial position then no point for me to ask the question. Q Really what I want to suggest to you is that because of the position you were in and possibly with the support of Mr Lee you would have been able to obtain alternative sources of finance for the development projects which this company had ongoing? A No. Q And realised their true potential? A No, no, so this is why I am very concerned about the holding company's liabilities and also whether they have any guarantees to the subsidiary. (Tr 87-88) 135 On this evidence it is apparent that the reliance upon the representation that the company was in a good financial position and experienced no adverse change since the float was dependent upon and very relevant to Mr Kwong's claimed reliance on the representation made by Mr Fisher that Satellite had no liability as guarantor of any of its subsidiaries. No liability as guarantor 136 Mr Kwong agreed that as an accountant and with his experience he is well familiar with the concept of a group of companies and that major public companies usually use their funds in a way whereby the parent or another company in a group performs a treasury operation and loans money to other companies in the group as and when they need it. 137 He accepted that if, for example, a parent company raised $25 million from the public by way of a float he would expect that money to be on loaned to the subsidiaries to enable them to carry on their activities. He agreed this is done in preference to outside financing which can often be much more expensive. He accepted that the solvency of the parent company does not only depend upon the absence of guarantees but a relevant factor is also the amount of inter-company loans. 138 Mr Kwong gave evidence that he read the whole of the Satellite Annual Report carefully. An important part of that report appears on page 18 under the heading "Contingent Liabilities". It reads as follows: (v) The Company has provided a guarantee in respect of the contractual obligations of a subsequent controlled entity, The Satellite Group (Ultimo Pty Ltd) amounting to $17,800,000. Mr Kwong agreed this was a "matter of significance". His evidence in cross examination continued: Q You say you obtained an assurance from Mr Fisher that the holding company had not guaranteed the obligation to any subsidiaries? A Yes. Q But this item details that in fact it had? A Yes. Q For $17.8 million? A Yes. Q So either Mr Fisher was not telling you the truth or the annual report was inaccurate, would you not agree with me? A But you were talking about different timing, right? I asked questions whether there is any as at the date of 26 June 2000 and the date of reporting of this is 30 June 1999, before the IPO, and then the company has $25 million from the deposit on the placement of 50 million shares. Q We have been before as to whether the $25 million was going to be spent? A Yes, they were planning to spend, not necessarily that they would follow suit. Q There was no suggestion that they were going to spend $17.8 million on reducing indebtedness? A It wasn't mentioned, the use of the deposit, in the prospectus to repay the whole $17 million, yes. Q I am sorry? A It didn't mention in the prospectus attached of the $25 million, that they would use $17 million to repay the loan. Q In fact previously in answering questions which I put to you you expressed no interest at all in what was done with the $25 million which was raised, do you remember questions and those answers, and the transcript will correct me if I am wrong, that you did not even consider the application of funds in that respect? A No. Q Do you agree with that? A Yes. Q So you could not have thought, when and if you read the entry of the annual report that that $25 million had been raised to repay the $17.8 million obligation to The Satellite Group at Ultimo? A No. Q So how, may we ask you, could you have thought when you were having your discussions with Mr Fisher that that guarantee had been released or discharged? A I assumed that the guarantee had been released and discharged in some way or another. Q So you did not say to Mr Fisher, "I know what you are telling me, you say that the holding company has not guaranteed any of the obligations of its subsidiary, but what about this entry here? I read this last night back in my hotel room. On page..there is a guarantee for $17.8 million. What have you done about that?"? A I don't try to ask the questions in a very offensive way. Q I will put them in a much gentler way, "what about that?"? A So normally it would be specific questions relating to those matters but on the other hand wouldn't you agree that if I asked him whether there is any guarantees given by the holding company to the subsidiary, would have covered this issue? Q Mr Kwong, you may be more trusting than I am, but you are just on the verge of putting in something in excess of $3 million into a company, the share price of which has dropped from 50 cents to 16 cents in the space of some nine months. Could I suggest to you that in those circumstances you would have been more insistent in your questions if you were genuinely concerned about the guarantees which had been given by the holding company to its subsidiaries? A No, I don't think it would cause my concern, because at 19 June there was basically a sort of market correction expressly for the high tech company. Q You would have been interested to find out, wouldn't you, what investment property the Satellite Group Ultimo Pty Ltd owned. A No I don't in particular. Q And what had happened in relation to that development to enable that guarantee to be discharged? A No. Q Wouldn't that be the way it would have happened? A Of course I did but, as I said, I asked the questions, I believe I asked the questions that would cover this issue already. Q And you had no specific conversation concerning this particular reference…to the 17.8 million guarantee of The Satellite Group Ultimo Pty obligations? A No. (Tr 46-47) 139 His further evidence was as follows: Q Would you agree with me that you knew of no circumstance that could have given rise to the discharge of that obligation? A No. Q So you agree with me? A Yes. Q You did not make enquiries as to whether there were any such circumstances? A I did not make such a specific enquiry. Q You did not make any enquiries at all about that specific entry? A No. Q Any you are a trained accountant you would readily assimilate that information? You agree with that, don't you? A Yes. Q You must have recognised if the company was one as I have suggested to you before where there were inter group balances that from time to time the company would have had liabilities to other companies in the group and other companies in the group would have liabilities to it? A Yes. (Tr.57) Q …the information in the prospectus and in the first annual report showed that the group of companies which were acquired by Satellite in consideration of the issuings of vendor shares to Mr Fisher and Mr Broster had separate liabilities in respect of separate companies? A Yes. Q But there was information which showed that at least in the case of the Ultimo subsidiary it guaranteed $17.8 of debts? A Yes. Q And that was about half of the total indebtedness. A Yes, approximately. Q And you would have recognised, can I suggest to you, of the $25 million which had been raised in the float sum that would have been on loaned to other companies within the group to enable them to carry out their development activities? A Yes. Q So that the ability of Satellite to get that money back would depend upon the continued viability and solvency of the subsidiaries to whom that money had been provided? A Yes. Q You next say there was a representation by Mr Fisher…that there were no guarantees between subsidiaries of Satellite but there was a reference, which I took you to before to third party security. Do you recall that? A Yes. Q What I want to suggest to you is that if you had read that material you must have been aware of that fact? A Aware of the fact? Q That there were third party securities or proposed to be third party securities? A Yes. Q That you made no specific enquiries in relation to the subject? A No. Q You agree with me? A Yes. Q Then…the next representation is that Satellite had given no guarantee as guarantor of any of its subsidiaries but clearly there was a reference in the annual report to the fact that it was at the time when the report was drawn up liable as guarantor of Satellite Ultimo. A Yes. (Tr. 58) Finally on this topic: Q ..you then say that you said to Mr Fisher "I said are there any liabilities as far as a holding company are concerned either by itself or with its subsidiaries"? A Yes. Q And he replied "no, the liabilities are all with the subsidiaries, most of the liabilities are related to the property division, there are no cross guarantees between the subsidiaries and there is no corporate guarantee from the holding company to the subsidiaries"? A Yes. Q No I want to suggest to you that if your evidence is to be accepted that you carefully read the financial information which you were provided with, those answers could not have given you any comfort? A Why not? Q Firstly because, as I suggested to you yesterday, there was evidence that there was a guarantee given by the holding company for $17.8 million for the Ultimo holding? A Yes. Q There was no evidence that it had been discharged? A So the representations made by Mr Fisher, isn't it part of the evidence that indicating that he may be discharged? Q More importantly I want to suggest to you that you don't appear to have raised that directly with Mr Fisher if your account of his conversation is to be accepted? A Yes, as I said to you, I want to ask in a more general way, I don't want to be specific if I can in such a way, sounds like too offensive. Q Secondly, I want to suggest to you that it must have been your understanding at the time that the moneys which had been obtained from the holding company on the float would have been on-lent to the various companies within the group to enable them to carry on their development activities. A Yes. Q And that the recoverability of these moneys would depend upon the viability of those development activities? A Yes. Q And so therefore the assurances which were given to you or which you say were given to you in those parts of the conversation could not have provided you with any comfort at all? A In a way, yes. (Tr. 90-91) 140 The acceptance of Mr Kwong's evidence would require the Court to accept that the general question was asked so as not to appear to be offensive. It would also require the Court to accept that notwithstanding the contingent liability disclosure in the prospectus Mr Kwong was comforted by Mr Fisher's bland response that there were no guarantees. The final representation relied upon by the plaintiff was the statement that Satellite had a few million dollars in the bank. A few million dollars in the bank 141 Mr Kwong agreed that Satellite was essentially a property investment company which owned a few free magazines which were distributed to the gay community. 142 His evidence in cross examination in relation to his reliance on the representation made by the defendant that Satellite had a few million dollars in the bank was as follows: Q Then you say you asked Mr Fisher "how much money do you have in the bank?", and he said "a few million"? A Hmmm. Q For a property development company that is really not a very meaningful figure…? A No but they have lined up all the facility with the bank to fund the ongoing commitment, so. Q But they may have for example just settled on a few units. A They might, as you said they might, it is speculation, right. Q I am putting to you a hypothetical situation, they may for example that week settled on several units and for this reason had several million dollars in the bank? A Yes. Q On the other hand, the following week that money may be required to pay an interest bill or some other expense relating to the development project being undertaken by the group? A May be. Q So that figure of itself is not very meaningful, is it? A May be. Q Do you agree with me it is not by itself a very meaningful figure? A It may not be. Q Certainly you made no enquiries at the time which would have satisfied you that it was in any way a meaningful figure? A Hmmm. Q You agree with that. A It may not be, yeah. Q Do you agree with me that you made no enquiries at the time that would have made the figure in any way meaningful to you? A No. Q You don't agree. A No. Q What is the basis of your disagreement? A The basis would be, right, I am quite satisfied that they have a few millions in the bank, that if it is a responsible businessman he should know how to spend his money and then on the worst case scenario he should make sure the company survive to meet his ongoing overhead first rather than paying all the projects commitments if you don't have the appointed cash flow to meet your future spending eventually. Q So that is the explanation you wish to provide the Court? A Hmmm. Q That is the explanation you wish to give the Court? A Explanation that I… Q Would wish to give the Court as to why that gave you comfort? A Yes. (Tr. 93-94) Generally 143 The plaintiff's plan through Mr Kwong was that it, with Fisher, would have control of the Board of Satellite and would be able to make any additional cash injection into the company which was required. 144 Mr Kwong is a very experienced businessman and a qualified accountant. His qualifications were obtained at Australian Universities, Macquarie University and the University of New South Wales. He spent approximately six years in Sydney and worked for the accounting firm Ernst & Whinney, as it was then constituted. 145 Mr Kwong was aware of the financial and general press clipping service by which he would be able to ascertain recent events noted in the press in relation to Satellite. 146 Mr Kwong was aware that there was an obligation on Satellite to make ASX disclosures if there were matters of materiality affecting Satellite's performance. He was also aware that he could obtain copies of ASX announcements in relation to Satellite's performance since the float in September 1999. He agreed that such information released to ASX is an important source of up-to-date information covering the affairs of a company. 147 Mr Kwong gave evidence that there was "no rush" to finalise this investment and that he did not have to make up his mind in a hurry. He said that he finds it easy to read and understand financial reports. Mr Kwong claimed that the plaintiff was not interested in the potential or the future of the property side of Satellite and was looking principally at the potential of the media side of Satellite. 148 Mr Kwong was aware that $25 million had been raised from the public in the float and he read the Chairman's letter in the prospectus that the purpose of raising the funds was to "expand the publishing business, invest in further property developments and selective developments and finance the growth of the financial services division" of the company. 149 Mr Kwong accepted that although he was of the view that it was not "the most important part", an experienced investor would want to find out what had happened to the $25 million subscribed by the public. His cross examination in relation to that matter was as follows: Q You will see that is a section which sets out the way in which the funds raised on the public float were to be used by the company? A Yes. Q Is that something which caught your attention when you read that document? A No. Q You did not read that? A What was your question again? Was that something that caught my attention? Q Was that something that caught your attention when you read that document? A No Q It shows that there was to be 25 million dollars raised from the public? A Yes. Q And the way in which it was to be spent? A Supposedly to be spent right. Q Yes. And apart from my having drawn that to your attention now, is that something that you had ever thought about before? A. No. Q And just looking at it, it makes it quite clear, does it not, that most of the money is to be spent in relation to the property development activities of the company? A Yes. (Tr. 23) 150 Mr Kwong agreed that for an investment of this nature it was important to carry out a thorough investigation. When the cross examiner focused upon the short period of time between finding out about the availability of the "deal" and finalising the "deal" Mr Kwong said: "I don't think two days will be considered as very little time, especially for an experienced accountant". He was asked: Q You could ascertain what comments have been made in the financial press? A Yes. Q You could analyse and scrutinise the financial information which had been provided publicly by the corporation in the way in which we have in Court yesterday? A Yes. Q All of those things could have been done and I suggest to you none of them were done by you? A Yes but I must stress, that I myself, right, as a trained accountant and work almost nine years in the credible accounting firm as well and also the situation like that which is a buying block from an existing shareholder I don't think they would allow you a company to do due diligence on to the company. (Tr. 88-89) 151 Mr Kwong's investigations and analysis consisted of meeting and speaking with Messrs Lee and Jones, meeting and speaking with Mr Fisher and reading the documents provided to him by Mr Jones and thinking about their content applying his experienced mind. He did not read the press, he did not read any of the ASX announcements and he did not ask any detailed questions of Fisher. 152 Mr Kwong was also cross examined about the risk factors which were disclosed in the prospectus. As to what analysis he carried out in respect of the disclosures Mr Kwong answered that it was based on his understanding of the nature of the business of the companies involved and it was a matter of "common sense and experience" (tr. 29). This was the first time that Millennium or the plaintiff had made any investment in Australia. 153 Mr Kwong volunteered that it would have been better to have additional information (tr.10) and copies of ASX announcements (tr. 36). Although he must have had the time to obtain this material as there was "no rush" he did not do this. He claimed he relied on Fisher's statements because he knew that it was a criminal offence for a director to make false statements about the financial position of the company. Reliance on Lee and Jones 154 The defendants submit that the lack of proper investigation, the rushed nature of this purchase, the failure to ask specific questions which to a trained mind would call out for attention, all lend credible support for the proposition that the plaintiff had decided to enter into this deal because of the "opportunity" that was offered to it by Mr Kwong's very good friend Mr Lee. In other words it mattered not what Fisher said to Mr Kwong. He saw this as a way of obtaining a substantial portfolio of property assets cheaply. He was asked: Q …what I suggest to you is either you or you in association with Mr Lee formed the view that there was a property which was in distress because the shares had declined substantially since floatation and you thought by acquiring the shares at the price you could obtain a substantial portfolio of property assets cheaply. What do you have to say? A I tend to disagree with you. Q You could actually acquire the property assets if the shares were trading at around about 20 cents for something in the order.. A Yes but the property portfolio isn't the main focus of our consideration. (Tr.34) 155 I find it very difficult to accept with the background in property development and knowing that the global assessment and valuation of the e-media business was "pie in the sky", this plaintiff was not interested in the property side of Satellite. 156 When Mr Kwong was asked about his conversations with Mr Jones and Mr Lee his evidence was as follows: Q May we take it that you relied upon Mr Jones told you? A Told me about what. Q In this conversation detailed in paragraph 9? A Rely upon. Q What Mr Jones told you? A Treat them as his comments and as a reference. Q What did you say? A I will treat them as his comments and as a reference. I wouldn't like to use the word "relied upon". (Tr. 74) 157 A further matter relied upon by the defendants is the alleged delay by the plaintiff in commencing these proceedings. It is also submitted that once Mr Kwong was informed by Mr Chapman that the Board had not agreed to giving the plaintiff two Board seats his conduct was inconsistent with the allegations he makes in these proceedings. Rather than ringing Fisher and demanding why it was that he told him that the plaintiff would have two Board seats when the Board had not approved it, he simply asked him whether he had resigned. He did not raise the matter at all with him even when Fisher travelled to Hong Kong to meet with him. 158 A further important matter is Mr Kwong's questioning of Broster in the Hong Kong meeting on 5 and 6 July 2000. He asked him why he sold the shares to the plaintiff if he was so convinced about the future of the company. This suggests a mind set in which the plaintiff, through Mr Kwong, knew it was a company in which a large shareholder wanted an exit because he may have had some concerns about the company's future. 159 To this is added two further matters. Mr Kwong was informed on 13 July 2000 that the Board of Satellite was of the view that Fisher and Broster had done "something terrible". On 26 July 2000 the Board informed Mr Kwong that Satellite was "technically insolvent". At neither stage did Mr Kwong protest that he had been duped into the purchase of Broster's shares by the rosy picture painted by Fisher that the company was in a "good financial position". There was not a word of protest that Fisher had made the representations which the plaintiff now claims it relied upon. 160 Mr Kwong's response was to make an offer of a $3 million loan in exchange for Board control. This was of course what the plaintiff was aiming for from the outset. The defendants submit that the plaintiff's and Mr Kwong's conduct is more consistent with an attempt to obtain a portfolio of property assets cheaply, knowing that the company was in distress, rather than seeking to invest in a company on reliance that the company was in "a good financial position". Conclusion on Reliance 161 Mr Stevenson submitted that I would take into account the possible cultural difference in Mr Kwong's approach to his questions of Fisher. In particular he highlighted the way in which Mr Kwong responded to some of Mr Douglas QC's questions in that he said "I tend to disagree with you". This may be characterised as a polite rejection of the propositions being put to him. However an interesting insight into Mr Kwong's capacity to deal with matters fairly directly and even bluntly is found in his cross examination as follows: Q You did not, at the meeting which you had Mr Broster and Mr Fisher in Hong Kong on 5 July 2000, make any complaint about any representations which Mr Fisher was alleged to have made to you, did you? A At that time, I also realised that it - the company was in deep shit. Q Please use - a. A Was in I am sorry your Honour, was in deep financial troubles. (Tr. 117) 162 Additionally if Mr Kwong realised as early as 5 July 2000, that Satellite was in "deep financial troubles" it is incredible that he would, as he did, offer Fisher support if he had relied on representations that the company was in a good financial position. Even accepting the existence of cultural differences one would at least expect some questioning, in an inoffensive manner, as to why he had been given inaccurate or false information the previous week. 163 I accept the defendants' submissions that there are a number of features in the evidence that point to the possibility that Lee Ming Tee was the real decision maker and purchaser behind the plaintiff. These include the admitted close personal association between Mr Lee and Mr Kwong; Mr Lee's close interest in the transaction and his subsequent purchase of 100,000 shares in Satellite, notwithstanding his concern about the consequences in Malaysia; the lack of any discussion between Mr Wong and Mr Kwong as to the affairs of Satellite; the curious presence of Mr Lee's son at the meeting between Fisher and Kwong on 27 June 2000, and the failure of Mr Kwong to consult with the experts within Millennium who would have been able to assist in understanding the internet aspects of Satellite which apparently was the focus for the purchase. 164 Notwithstanding these matters I am not satisfied that it is more probable than not that Mr Lee and his associated entities were the real purchasers in this case. 165 However I do not accept Mr Kwong's denials of his reliance upon Mr Lee and Mr Jones. This was a large investment for this plaintiff. The rudimentary and simple analysis, to use Mr Douglas QC's expression, is inexplicable in the circumstances. As a very easy and basic step the plaintiff could have obtained the very recent ASX announcements which would have alerted it to the difficulties of which he claimed he subsequently became aware. The plaintiff's failure to do that is not properly explained in the evidence. 166 To suggest, as Mr Kwong did in cross examination that notwithstanding the disclosure in the contingent liabilities section of the prospectus of the $17.8 million guarantee, he "assumed the guarantee had been released and discharged in some way or another" is in my view also quite incredible. I am satisfied that the plaintiff's failure to make the very basic enquiries in respect of this company was because it was satisfied that this was, as Mr Jones described it, a good "opportunity" and so good that Mr Kwong thought it was "too good to be true". I am satisfied that the plaintiff saw the opportunity to purchase a company in financial distress and seized it quickly. I am of the view that it mattered not what Fisher said to Mr Kwong in the circumstances of this case. 167 Additionally the judgment of Hill J in Argy v Blunts and Lane Cove Real Estate (1990) 26 FCR 112 at 138 is relevant. His Honour said: A case may perhaps be imagined where an applicant is so negligent in protecting his own interests that there will be a finding of fact that the representation complained of was not in the circumstances a real inducement to his entering into a contract. In such a case the element of causation between misrepresentation and damage will have been severed by the intervention by the negligence of the applicant. However, in my view, the present cannot be said to be that case. A somewhat similar view was recently expressed by French J in Kewside Pty Ltd v Warman International Ltd [1990] ASC 58821: The damages recoverable under s 82 of the Trade Practices Act for a contravention of s 52 are measured by the loss or damage suffered by reason of the contravention. The cause or connection is not that of the strict logician, but is to be understood according to common sense concepts - Yorkshire Dale Steamship Co Ltd v Minister of War Transport [1942] AC 691 at 706. Selection principles influenced by policy and not merely logic operate. Concepts such as contributory negligence and mitigation have no role as such in this process but analogous notions may apply to decide whether or not a claimed loss was truly caused by the contravention in question: Munchies Management Pty Ltd v Belperio (1988) 84 ALR 700 at 712; Elna Australia Pty Ltd v International Computers (Aust) Pty Ltd (No2) (1987) 16 FCR 410 at 418 - 419; Pavich v Bobra Nominees Pty Ltd (1988) 84 ALR 285. 168 In order for the plaintiff to recover damages it must prove that the loss or damage claimed to have been suffered was caused by conduct in breach of the Act: Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 525. In deciding causation in this case, by reference to commonsense and experience I have had regard to the attributes of Mr Kwong, the plaintiff and its holding company: March v Stramare (E& MH) Pty Ltd (1991) 171 CLR 506. This is not a gullible plaintiff. This is a plaintiff experienced, knowledgable and with the capacity to make careful investments. It is incredible that the plaintiff would not have made those enquiries and investigations and I am satisfied that the reason it did not do so is because it relied upon the fact that Mr Lee was ready to make the investment which was good enough for it and "too good to be true". 169 I am satisfied the plaintiff did not rely upon the conduct of the defendants in the relevant sense and Fisher's statements did not induce the plaintiff to purchase the shares. 170 The plaintiff's claims are dismissed. I will hear argument as to costs if a costs order is unable to be agreed between the parties. ******************* Last Modified: 01/31/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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